A. INTRODUCTION
On May 7, 2012, the Ontario Superior Court of Justice
issued an unreported decision concerning costs in the matter of Highfield v.
Murray (the “Costs Decision”). The Costs Decision followed an earlier unreported decision of the Ontario
Superior Court of Justice on November 25, 2011 in the same matter (the “Trial
Decision”). The decisions involved a dispute concerning the trustees of an unincorporated
rural church knows as Crossroads Christian Fellowship (“Crossroads”). Since the
dispute involved an unincorporated church, the individuals involved in the
dispute were trustees in accordance with the Religious Organizations Land
Act, R.S.O.1990, c. R.23 (“ROLA”), which permits unincorporated religious
organizations to hold land for purposes enumerated in the act. The decisions
provide guidance concerning behaviour that would constitute a breach of trust,
together with guidance for trustees involved in litigation which would apply
equally to directors of incorporated charities. This Charity Law Bulletin summarizes the decisions and provides comments on what trustees or directors
need to know as a result of these unreported cases.
B. BACKGROUND FACTS AND THE PARTIES
Crossroads was established in Sombra Township in the
County of Lambton, where Crossroads purchased property on October 30, 1995.
Crossroads is a registered charity.
One of the applicants in the case, Russell Murray, was the
pastor of Crossroads from inception (the “Pastor”), in addition to being a
trustee under ROLA. The other applicant was a fellow trustee at Crossroads whom
the Pastor had appointed, but the court later determined that this appointment
was not done in accordance with ROLA (collectively, the “Applicants”). The
respondents included attendees of the Church, as well as one of the trustees of
the Church under ROLA (collectively, the “Respondents”).
By 2006, attendance at Crossroads had declined to the point
where a decision was made to sell the church property. The dispute arose over
how the proceeds of that sale were to be used. An application was issued in
December 2006 and a cross-application was issued in February 2007. The proceeds
of the sale of the Crossroads property were ordered to be paid into the court
in 2007 and 4 years later the trial occurred after both applications were
combined.
The Applicants, who included the Pastor, alleged that
Crossroads had merely changed its name and moved to Sarnia, where the funds
were to be used for the Pastor’s new church. The Respondents, which included
one of the original trustees of Crossroads, argued that when the church lands
were sold and the church closed, a decision was made to distribute the proceeds
amongst other registered charities. Both parties also sought orders under
section 10 of the Charities Accounting Act concerning breach of trust
and requiring the Public Guardian and Trustee (“PGT”) to investigate and report
to the court.
C. ISSUES
The issues to be decided in the Trial Decision involved what
should happen to the money being held in court from the sale of the land owned
by Crossroads, as well as whether or not the allegations of breach of trust
raised by both parties had occurred and if so, what should be the appropriate
remedy.
The issue to be decided at the Costs Decision was how the
proceeds of the sale of the church were to be used to indemnify the costs of
both the Respondents and Applicants in the decision.
D. SUMMARY OF DECISION
1. Trial Decision
a) Breaches of Trust and Appropriate Remedy
The Respondents alleged several instances of breach of
trust concerning the conduct of the Pastor at Crossroads, including that he
bought and sold a motor home on behalf of Crossroads, that he attended mission
trips outside the country when he had no authority to do so, that he breached
an order of the court in 2007 in the manner in which a portable owned by
Crossroads was sold, improper increases to his housing allowance, that he
permitted items owned by Crossroads to be taken to Sarnia and that he
wrongfully kept some of these items in his home.
The court found that the Pastor’s conduct in the purchase
and sale of the motor home, and in increasing his housing allowance were
inconsistent with the obligations of a trustee or fiduciary.[3] Specifically, the court
found that he failed to both disclose and document the transaction related to
the motor home and profited financially by keeping the proceeds of the sale. He
also directed that his housing allowance be increased without obtaining
approval from the other trustees of Crossroads. Lastly, the court also found
that in keeping personal property belonging to Crossroads for the use of his
new church in Sarnia and for his home office, he was also in breach of trust.
In addition, the court also specifically applied the
decision of Public Trustee v. Toronto Humane Society noting that the Pastor, aside from his position as trustee, was also the
“Pastor/President” and “residing chairman” and therefore “was clearly in a fiduciary
position in terms of governance similar to a director of an incorporated
charity and could not put himself in a financial conflict of interest against
the interest of the charity”.[5] Furthermore, the court found that the Pastor had breached his obligations as
both a trustee and fiduciary in promoting the church in Sarnia by using the
Crossroads charitable registration number.
While section 35 of the Trustee Act (Ontario)
permits the court to excuse a fiduciary where a breach of trust has occurred
and the trustee “acted honestly and reasonable, and ought to fairly be excused
for the breach of trust”, the court found that the present circumstances did
not permit the Pastor to be excused.
In terms of the proper remedy in relation to the above
breaches of trust, the court first removed the Pastor as a trustee under ROLA
for Crossroads. As well, the court also ordered the Pastor to pay $2,000 to
Crossroads representing the value of property the Pastor had taken from
Crossroads for use in his new church in Sarnia, $100 for property he had kept
for his home office, and $2,000 for the motor home. Although the court found
that the Pastor had committed a breach of trust in using the Crossroads
charitable registration number for the church in Sarnia, the court left it with
the Minister of National Revenue to determine how the Income Tax Act (Canada) should be applied to the Sarnia church’s use of the Crossroad
registration number.
Although the Applicants had also raised allegations of
breach of trust against the Respondents, the court stated that the allegations
were not pleaded, and that even if they were, the respondent trustee would have
been excused under section 35 of the Trustee Act (Ontario).
b) Distribution from proceeds of sale
The court was not persuaded by the argument from the Applicants
(which included the Pastor) that Crossroads had elected to move to Sarnia and
continue under a different name. The court concluded based on the evidence that
the membership of Crossroads had voted to sell or donate any inventory still
held by Crossroads and to distribute the proceeds of the sale to other
registered charities.
In this regard, the court agreed that the sale proceeds
should go to other registered charities. In terms of the procedure to be used
for selecting these other charities, the court declined to order a membership
meeting of Crossroads to let the members decide, because the constitution used
by Crossroads did not adequately address the issue of membership and because it
was likely that the hostility amongst the members could result in further
conflict if a meeting was ordered. As such, the court exercised its inherent
jurisdiction in determining the process to be used, subject to the PGT being
given an opportunity to make submissions regarding the charities before final
approval.
2. Costs Decision
The process for the selection of charities was followed.
As such, the court determined that there was $83,686.41 available for
distribution after determining the issue of costs from the Trial Decision.
The Applicants were entirely unsuccessful in the Trial
Decision. The Respondents sought their costs on a substantial indemnity basis (i.e.,
higher costs of a punitive nature), and the PGT agreed that costs on a substantial
indemnity basis was consistent with the fact that the Applicants were the
losing party. The Applicants also claimed costs to be paid out of the funds
held in court.
While the court agreed that the Respondents were entitled
to costs on a substantial indemnity basis, the court then struggled with the
issue of what is the proper amount for costs. In this regard, the court made
the following comments concerning the conduct of both parties:
This court case simply spun out of
control. Parties were investing time, effort and resources well beyond what
this case was worth. The combined substantial indemnity costs claimed by both
parties exceeded $190,000 representing approximately 275% of the value of the
net proceeds from the sale of the church.
After reviewing the applicable case law, the court
determined that the amount of costs that could be paid out of the funds held by
the court needs to be reasonable, and concluded that it would be unreasonable
to expect the entire substantial indemnity costs to be paid out of the funds
held in court. In addition, the court noted that this was particularly so in
light of the fact that the beneficiaries of the funds held in the court are
other charities.
As such, the court concluded that the Applicants would not
be entitled to any reimbursement of their costs from the money held in the
court. The court fixed the costs of the Respondents on a substantial indemnity
basis at $60,000, from which approximately $15,900 was to be paid out of the
money held in court. It is important to note that the Respondents had sought
$106,224 in costs on a substantial indemnity basis. The $40,000 balance after
the $15,900 was paid out of the court, together with the costs ordered against
the Pastor for his breaches of trust, was then split between the Applicant, in
that the Pastor was ordered to pay $20,000 to the Respondents, and the Pastor
and the other applicant Jason Vermeulen, whom the court characterized as merely
following the Pastor, were required to pay the remaining $20,000 on a joint and
several basis. The balance of the funds was then accorded to the selected charities
accordingly.
The fact that the court permitted some of the costs of the
Respondents to be paid out of the funds held by the court meant that the amount
the Applicants had to pay was reduced. However, the court refrained from having
the Applicants repay the funds because the organizing documents of Crossroads
were not satisfactory. The court noted that Crossroads lacked any kind of trust
document concerning how the proceeds of the sale of the church were to be
distributed, and that there were no clear rules concerning trustees or
membership criteria in Crossroads, which resulted in increasing the length of
time required at trial in order to fully canvass those issues.
E. CASE COMMENTS AND CONCLUSION
The Costs Decision highlights that although trustees and
directors of charities in Ontario can often be “right” in pursuing litigation
on behalf of their charity, they can also be “wrong” if they allow the costs
spent on litigation to go beyond the value of the charitable property in
question. As such, directors and trustees of charities in Ontario need to take
a prudent approach before deciding whether or not it would be in the best
interest of the charity to seek a remedy from the courts.
The Applicants and Respondents both sought payment of
their costs out of the funds held in court, i.e., the remaining charitable
property of the charity to which they acted as trustees. In this regard, in
dealing with an unincorporated church, and to some extent, an incorporated
charity, a trustee or a director can be indemnified for acts properly
undertaken in the administration of the charity or even undertaken in breach of
trust but under an honest and reasonable mistake. In this case, however, given
the Pastor’s various breaches of trust and misconduct, and given the fact that
the Respondents spent legal costs well above the value of the charitable
property in dispute, neither party was entitled to full indemnity from the
funds held in court.
In addition, the various breaches of trust found by the
court against the pastor of Crossroads highlights the fiduciary nature of the
relationship of a director, trustee, or like official of the charity. In
particular, the breach of trust concerning the charitable registration number
of Crossroads implies that a charity’s registration number is in fact
charitable property of the charity, and that directors must ensure that the
charitable registration number is used appropriately.
