The Risk, the Remedy, and the Deterrent
Many Canadians are doing everything right in their estate planning. They hire lawyers to draft their testamentary documents, disclose all of their assets, provide clear direction on the administration of those assets and they appoint trusted and responsible colleagues, or friends, family, even professionals as their executors. However, what happens when those executors are not who they appear to be? What if they ignore their fiduciary duties and simply help themselves to the estate assets?
The Penna Estate
Paul Penna was a successful, wealthy and charitable businessman who died in 1996. Penna appointed three executors to administer his more than $24 million estate. One executor was Barry Landen, an employee of Penna's, whom he treated like a son. Having three executors, one would have thought, would safely lead one to conclude that they would keep each other in check and ensure an accountable administration. Unfortunately, Landen, the rogue executor, was left to operate of his own accord.
The Pennas were childless. Other than $1 million earmarked for his wife, Penna wanted his fortune to go to numerous charities. However, the executors, namely a scheming Landen, chose not to probate the Will; as such, none of the charities had notice of their bequests. Over the next seven years Landen helped himself to the money instead, all under the noses of the other executors, the banks, the lawyers, and the accountants involved in the estate. Landen purchased a mansion in Forest Hill in Toronto, leased luxury cars for all of his family members, purchased season's tickets to the Maple Leafs and Raptors, and lived an extravagant lifestyle, all out of the estate.
Why did it take seven years for the fraud to be exposed? There were likely a number of factors. The other executors chose not to ask questions, trusted Landen, or in the case of Mrs. Penna - alleged to be under disability - were unable to participate, and as such Landen was permitted to act without scrutiny. The bank destroyed the account records after six years. The accountants only filed tax returns and were not hired to verify assets. The massive fraud was only discovered in 2004 when the Ontario Securities Commission investigated Landen for insider trading involving a company owned by the estate. By this time, there was less than $1 million left.
The Court's Reation
When the fraud was finally revealed, litigation commenced; it lasted more than six years and included thirteen court orders and endorsements.
In The Estate of Paul Penna, 2010 ONSC 4730, Justice Greer found Landen to be in contempt of four of those orders, which included a mareva injunction and an order to account for the Estate administration or to "pass his accounts". Justice Greer found that "[t]he steps Landen took in the face of such Orders, were egregious in nature and showed the extent of Landen's sociopathy when he knowingly, deliberately and wilfully breached his fiduciary duties to the Estate and its beneficiaries. . ." Justice Greer sentenced Landen to 14 months incarceration for contempt. She noted that: "[d]eterrence plays a big role in how Landen is sentenced" the message is that "persons who have an obligation to keep accounts must realize the severity of sanctions against them if no accounts are kept and they have personally taken and used estate assets." Her Honor also ordered that on the completion of his sentence he was to return and tell the Court what he did with the rest of the money.
After Landen served his time he reappeared before Justice Greer as ordered. However, he chose not to file an affidavit explaining what he did with the rest of the money. Justice Greer was not impressed, commenting:
"….. I saw no remorse or regret by Landen in what he did. I found him to be untruthful in saying he did not know what happened to all the missing assets…Landen really did not purge his contempt……..He showed absolutely no remorse in the witness box and had a selected memory of events he did not wish to discuss, such as all the missing shares and the operation of Jakmin……..He is living alone in a friend’s house and is said to be in receipt of social assistance. His life has become a narrow existence in comparison to the salad days of living in Forest Hill, attending the Leaf’s games, and driving luxury cars, all on other people’s money.”
In the end, Justice Greer ‘reluctantly’ concluded in her reasons of December 2012, recently reported, that it would not serve the public's interest to sentence Landen to a further six months in prison. Landen was free to go and the missing millions nowhere to be found.
These cases provide powerful warning, not just to fiduciaries in the estate and trust context, rather also to banks, accountants and lawyers dealing with fiduciaries
The McMichael Estate
This next case is very similar in nature to Penna. Robert and Signe McMichael, a wealthy childless couple and founders of the McMichael Art Collection were befriended by Geoffrey Zimmerman, a reputable lawyer and former crown attorney. The McMichaels grew to trust and depend on Zimmerman. Mrs. McMichael, immediately after the death of her husband, appointed Zimmerman as her sole attorney for property and as the sole trustee of a trust established for her holding almost all of her assets of $5 million.
Unfortunately, Zimmerman was not to be trusted. Thereafter, between 2003 and 2009 (when he was removed as the sole trustee of the trust), millions of dollars went missing. When the paperwork was produced, Zimmerman had made almost one thousand unexplained withdrawals. These included over $40,000 in cash withdrawals, payment of restaurant meals, groceries, automobile and parking expenses, limousines, liquor, clothing and trips to Florida and the Caribbean. Zimmerman also helped himself to artwork from the Art Collection, hung in his own home and even lent some to friends. He lost a valuable sketch by Group of Seven artist Arthur Lismer.
The Court's Reaction
Zimmerman was wholly uncooperative in the litigation. In Zimmerman v. McMichael Estate, 2010 ONSC 2947, Justice Strathy found that "[t]he record of this proceeding shows defaults, delays and dilatoriness of Mr. Zimmerman in complying with court orders. . . his accounting of the discharge of his fiduciary duties is wholly unsatisfactory."
Justice Strathy concluded that Zimmerman's conduct fell well below the standard of care expected of a trustee and that "not only was he 'grossly indifferent' to his duty to account, he deliberately obstructed . . .attempts to obtain a proper accounting".
In the end, Zimmerman was ordered to re-pay over $1.1 million including over $300,000.00 in full indemnity costs. In the costs endorsement, Justice Strathy commented that "a trustee who presents accounts that are, as I described them, 'manifestly inaccurate, incomplete and false,' and who, as I found, delayed and obstructed the beneficiaries in their search for answers, should pay all costs involved in getting to the truth." The final court order was made in October 2010. Just four months later, Zimmerman was found dead at the age of 52, leaving behind a wife and two children, a pile of debt and likely facing various other professional misconduct proceedings. His cause of death was not made public.
Warnings of incarceration for Fiduciaries
These cases provide powerful warning, not just to fiduciaries in the estate and trust context, rather also to banks, accountants and lawyers dealing with fiduciaries, and who must increasingly be alert to suspicious behaviour. Also executors are now forewarned that our courts will not hesitate to incarcerate rogue executors who disregard orders. Justice Greer’s comments will not go unheard: "Proper penalties make the public sit up and take notice. The word goes out into the community that the Court will not tolerate disobedience of its Orders. . . . The specific community is that of estate trustees and other trustees, as well as persons in positions as fiduciaries, persons acting under powers of attorney or other positions of trust. When money held in trust disappears, the person who controls it has a legal obligation to account for its administration, if ordered to do so. Failure to so account is egregious conduct."
About the Author
Kimberly Whaley is the founder and principal of Whaley Estate Litigation.
Learn more about the Penna and the Zimmerman cases.