Public Trustee v. Guaranty Trust, [1980] 2 SCR 931

Supreme Court of Canada

Public Trustee v. Guaranty Trust, [1980] 2 S.C.R. 931

Date: 1980-10-07

The Public Trustee, Trustee of the Estate of James Wilson Berry, deceased (Defendant) Appellant;

and

Guaranty Trust Company of Canada (Plaintiff) Respondent;

and

Edward Thomas Berry (Defendant).

1980: June 18; 1980: October 7.

Present: Ritchie, Dickson, Estey, Mclntyre and Chouinard JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Estates—Practice—Writ of summons—Action brought by company in its corporate capacity against co-executor and itself in its representative capacity as one of the personal representatives of an estate—Executors removed after writ issued—Whether or not the action was a nullity—If the writ of summons was irregular, whether or not the defect had been cured by the order removing the executors and trustees, including the company, and appointing the Public Trustee in their stead—Rules of Practice of the Supreme Court of Ontario, Rules 124 and 186—The Trustee Act, R.S.O. 1970, c. 470, ss. 38(2), 50(1).

An action was brought by Guaranty Trust, in its corporate capacity, in May 1975, against Guaranty Trust and Edward T. Berry as executors and trustees of the estate of James W. Berry, and Edward T. Berry, two of its former officers. The wrongful conduct of the Berrys as officers of the company had given rise to Guaranty Trust’s cause of action and was unknown to Guaranty Trust when letters probate were granted in September 1970. On Guaranty Trust’s application for removal as executor and trustee, Maloney J., in June 1977, ordered the removal of both Guaranty Trust and Edward T. Berry and appointed the Public Trustee in their stead. Edward T. Berry, who was also the principal beneficiary of the will, unsuccessfuly appealed that order to the Court of Appeal.

The proceedings on this appeal originated by an application to the Supreme Court of Ontario for its direction concerning certain questions arising under the pleadings.

This appeal was from a judgment of the Court of Appeal for Ontario varying the judgment at trial and

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concluding that the writ of summons was not a nullity but rather suffered from an irregularity cured by the order appointing the Public Trustee as executor and trustee.

Held (Ritchie J. dissenting): The appeal should be dismissed.

Per Dickson, Estey, Mclntyre and Chouinard JJ.: The trust company could not sue itself, but having done so, the result was still not a nullity but an irregularity that could be rectified by the substitution of the Public Trustee for the executors named in the writ and to whom letters probate had been issued. No authority was cited where the issuance of a writ in these circumstances was a nullity.

The twin doctrines of merger and retainer did not cause the trust company’s claims against the estate to merge or otherwise become extinguished on its acceptance of letters probate or with the issuance of the writ of summons. Retainer only operated in respect of ascertained debts or damages. The executor could not exercise his right of retainer in respect of the claims in issue because they were not susceptible of precise measurement. As to the doctrine of merger, the statutory scheme in The Trustee Act that a personal representative’s claims in a broad sense be treated on the same footing as any other claim against the estate was inconsistent with the notion that the personal representative’s claims were extinguished from the commencement of his administration. To this extent, the doctrine of merger was repealed by statute and the concept of retainer that had evolved to avoid it became unnecessary.

The trust company did not have to remove itself as executor as a condition precedent to the issuance of the writ by the trust company against the personal representative of the estate despite the principle that a trustee cannot allow himself to be put into a situation where his personal interest conflicts with his duty. The executor did not seek to profit from his position at the expense of the beneficiaries but simply moved to realize a claim unknown to it when the deceased died or when probate was granted. It would be grossly unjust to hold that the trust company’s action against the successor trustee was barred, especially when the deceased knew of his misconduct. No authority required the Court to arrive at that unjust solution.

Per Ritchie J., dissenting: A writ of summons issued by a plaintiff naming himself alone as defendant could not be regarded as the commencement of legal action. It

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would be on its face incapable of maturing into a judgment, still-born before any consequences could flow from its existence. The fact that a plaintiff may have had a dual capacity by reason of its appointment as an executor and trustee and that its suit was instituted against itself in the latter capacity would not extend any validity to its cause of action.

The defect occasioned by the attempt on the part of the trust company to sue itself was a fundamental one resulting in the proceeding never having started. This result flowed from two circumstances.

(1) The origins of the doctrine of retainer illustrated the inability of a personal representative to sue the estate that he was bound to administer. No authority cited supported the proposition that an executor was capable of suing himself for an unliquidated claim, and more particularly, that an executor could bring an action against himself or itself for “fraudulent breaches of trust” on the part of the deceased whose estate he was representing.

(2) The final circumstance fatal to the writ’s validity was that it was issued before the trust company had removed itself from the position of executor. The trust company adopted a position in which its duty to the estate was in conflict with its own interest; a trustee could not place itself in such a position.

The proceedings, adopted to cure the defect in the writ of summons, were instituted on the assumption that the defect was a mere procedural irregularity as contemplated by Rule 186 of the Ontario Rules of Practice.

After the appointment of the Public Trustee as executor, there was no impediment to that functionary being sued by Guaranty Trust in a new action, subject to any limitation periods that may have run. The operation of the concepts underlying retainer did not extinguish any claim of Guaranty Trust against the estate upon its accepting probate.

[Martin v. Martin, [1937] O.W.N. 444; In re Phillips, [1931] W.N. 271; Woodward v. Darcy (1555), 1 Plowd. 184, 75 E.R. 282; Attorney-General v. Jackson, [1932] A.C. 365; Kline v. Kline (1871), 3 Chamb. Rep. 161; Loane v. Casey (1775), 96 E.R. 569; Vyse v. Foster (1874), L.R. 7 H.L. 318; Re Mulholland’s Will Trusts. Bryan v. Westminster Bank Ltd., [1949] 1 All E.R. 460; Vachon v. Attorney General of the Province of Quebec, [1979] 1 S.C.R. 555; In re Pritchard, decd. Pritchard v. Deacon, [1963] 1 Ch. 502; Ryan v. Charlesworth, [1930] S.C.R. 427, referred to.]

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APPEAL from a judgment of the Court of Appeal for Ontario[1], varying the judgment in the first instance. Appeal dismissed, Ritchie J. dissenting.

J.E. Sexton, Q.C., and Andrew J. Pirie, for the defendant, appellant.

D.C. McTavish and Mary A. Porjes, for the plaintiff, respondent.

The following are the reasons delivered by

RITCHIE J. (dissenting)—This is an appeal from a judgment of the Court of Appeal for Ontario varying the judgment rendered in the first instance by Mr. Justice Henry and concluding that the action initially brought by Guaranty Trust Company of Canada against the Guaranty Trust Company of Canada and Edward Thomas Berry as executors and trustees of the estate of James Wilson Berry was not a nullity as Mr. Justice Henry had found but rather no more than an irregularity which had been cured by an order granted by Mr. Justice Maloney whereby the Public Trustee was appointed trustee of the said estate of James Wilson Berry in the place and stead of the two executors and trustees appointed under the terms of his will.

This action was brought by the Guaranty Trust Company of Canada for damages allegedly suffered by it as a result of the wrongful conduct of James Wilson Berry and Edward Thomas Berry who were two of its former officers and who allegedly concealed income of the trust company that should have been included in tax returns, as a result of which the company allegedly incurred loss by way of interest and penalties under the Income Tax Act. The plaintiff alleges as alternate grounds of the action fraudulent breach of trust, breach of fiduciary duty or breach of contract of employment on the part of the two Berrys. As I have indicated, the action is brought against the trustees of the estate of the late James Wilson Berry and against Edward Thomas Berry in his personal capacity. The plaintiff’s original pleading claimed that it had suffered damages amounting

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to $2,000,000 as a result of the actions of the two Berrys above referred to.

The following are the questions submitted for the advice and direction of the Court:

1. Was the Writ of Summons as issued on the 15th of May, 1975, commencing action number 3259 of 1975, wherein Guaranty Trust Company of Canada was Plaintiff and Guaranty Trust Company of Canada and Edward Thomas Berry as executors and trustees of the Estate of James Wilson Berry, deceased, and Edward Thomas Berry were Defendants, a nullity?

2. Was the said Writ of Summons irregular?

3. If the said Writ of Summons was irregular, was this irregularity cured by the Orders of Mr. Justice Maloney dated the 21st day of June, 1977 and Master Garfield dated the 14th day of February, 1978?

4. Does Guaranty Trust Company of Canada have the capacity, power and right to maintain this action against the Public Trustee, Trustee of the Estate of James Wilson Berry, deceased?

5. Does Guaranty Trust Company of Canada have the capacity, power and right to maintain this action against Edward Thomas Berry?

The answers to these questions given at trial and on appeal may be summarized as follows:

It is I think elementary to state that a writ of summons issued by a plaintiff naming himself or itself alone as defendant cannot be regarded as the commencement of a legal action. It is on its face incapable of maturing into a judgment and is consequently of no effect. The fact that the plaintiff has caused such a document to originate does not give it any legal life; it is still‑born before any consequences can flow from its existence which is and remains limited to its character as a piece of paper. In my opinion the fact that a plaintiff may

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have a dual capacity by reason of its appointment as an executor and trustee and that its suit is instituted against itself in the latter capacity does not extend any validity to its cause of action.

In the present case Guaranty Trust shared its role as executor and trustee with the brother of the deceased, but in my view this factor cannot be taken as initiating a cause of action by the trust company against itself.

There was in the present case the added complicating factor that a valid cause of action did exist by the trust company againts its co-executor in his personal capacity and this is not questioned in the present proceedings.

It will be seen that in my view the writ of summons in the present case is a nullity in so far as it purports to commence an action by the trust company against itself, but it is contended that the form of the writ constitutes nothing more than an irregularity which can be cured and in this case was cured by an order of the Court. In my view, the proceedings adopted in this case in order to cure the defect in the writ of summons were instituted before Mr. Justice Maloney on the assumption that the defect was a mere irregularity. In this regard it appears to me to be self-evident that such a proceeding was regarded in the nature of an irregularity as contemplated by Rule 186 of the Ontario Annual Practice (which can be traced back to Order 70, Rule 1 of the Rules of Practice in the Supreme Court in England), and which reads as follows:

186. Non-compliance with the rules does not render the writ or any act or proceeding void, but the same may be set aside, either wholly or in part, as irregular, or may be amended, or otherwise dealt with, as seems just.

The history of this rule and the practice under it clearly indicate that it is designed to provide for the rectification of procedural irregularities and this is borne out by reference to what is said in Archbold’s Practice in the Queens Bench Division (14th ed.) at p. 445:

It is difficult to define the distinction between an irregularity and a nullity. Where the proceeding adopted

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is that prescribed by the practice of the Court, and the error is merely in the manner of taking it, such an error is an irregularity, and may be waived by the laches or subsequent acts of the opposite party; but where the proceeding itself is altogether unwarranted, and different from that which, if any, ought to have been taken, then the proceeding in general is a nullity, and cannot be waived by any act of the party against whom it has been taken. Thus, an affidavit sworn before a person without authority to take it, is a nullity. A judgment entered up on a feigned issue as in an ordinary action was formerly a nullity. On the other hand, a pleading, dated on a day different from that on which it was delivered, cannot be treated as a nullity. A writ of execution sued out without obtaining leave for that purpose, after six years have elapsed from the time of signing the judgment, is not a nullity, though it may be set aside as irregular. Where a judge at chambers made an order to set aside a verdict, obtained under a writ of trial, on the ground of the insufficiency of the notice of trial, it was held that the order was not a nullity.

The limitations necessarily inherent in the application of Order 70 and similarly Ontario Rule 186, are described by Upjohn L.J. in In re Pritchard, decd. Pritchard v. Deacon and Others[2] at pp. 523-4 where it is said:

The authorities do establish one or two classes of nullity such as the following. There may be others, though for my part I would be reluctant to see much extension of the classes. (i) Proceedings which ought to have been served but have never come to the notice of the defendant at all. This, of course, does not include cases of substituted service, or service by filing in default, or cases where service has properly been dispended with: see, for example, Whitehead v. Whitehead (orse. Vasbar) [1962] 3 W.L.R. 884; [1962] 3 All E.R. 800, C.A. (ii) Proceedings which have never started at all owing to some fundamental defect in issuing the proceedings. (iii) Proceedings which appear to be duly issued but fail to comply with a statutory requirement: see, for example, Finnegan v. Cementation Co. Ltd. [1953] 1 Q.B. 688.

In my view the defect occasioned by the attempt on the part of the trust company to sue itself was a fundamental one resulting in the proceeding never having been started and this result flows from the following circumstances:

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(1) The inability of a personal representative to sue the estate which he is bound to administer is well illustrated by a consideration of the common law origins of the doctrine of retainer which was long accepted as affording the executor, in the administration of the estate, the right to retain the amount of liquidated debts owing to him by the estate because he was otherwise debarred from bringing an action against himself in his capacity as executor. In this regard the following paragraph from Williams and Mortimer on Executors, Administrators and Probate, at p. 703 is self-explanatory:

The real foundation of the right to retain is the inability of the personal representative to sue himself. In cases of deaths before 1926 a judgment creditor, where the estate was being administered out of court, had priority to specialty and simple contract creditors. A creditor by suing a personal representative might get priority by jugment obtained. But a personal representative being incapable of suing himself, could not obtain priority as a judgment creditor. It was in consequence of this hardship that the right of retainer arose.

In so far as I have been able to ascertain, none of the cases cited on behalf of the trust company is authority for the proposition that an executor is capable of suing himself for an unliquidated claim and more particularly I can find no authority to support the contention that an executor can bring an action against himself or itself for “fraudulent breaches of trust” on the part of the deceased whose estate he is representing.

(2) The final circumstance which is in my opinion fatal to the validity of the writ issued in this case is that it was issued before the trust company had removed itself from the position of executor and the writ accordingly constituted a manifestation of it having adopted a position in which its duty to the estate was in conflict with its own interests and was thus a breach of trust. It is an inflexible rule of trust that a trustee cannot place itself in a position where its duty and interest conflict, as is pointed out in Bray v. Ford[3].

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Like my brother Estey, whose reasons I have had the advantage of reading, I agree that after the appointment of the Public Trustee had been ordered by Mr. Justice Maloney there was no impediment to that functionary being sued by Guaranty Trust Company in a new action, subject to any limitation periods that may have run. It appears that the courts below have treated the case as if question four asked if a new action could be commenced after the writ was declared a nullity, and I propose to do the same. The Public Trustee claims that upon accepting probate, any claim Guarantee Trust had against the estate was extinguished, and to support this claim it points to the concepts underlying the doctrine of retainer. However, as is made clear in Kline v. Kline[4] at p. 170, an executor’s claim was only extinguished if it were for a liquidated amount and the executor possessed sufficient assets of the debtor to satisfy the debt. Duff J., speaking for this Court, agreed with that proposition in Ryan v. Charlesworth[5] at p. 432:

First, Mr. McCarthy’s principal contention was that the respondent’s claims against the estate of Peter Ryan were extinguished by operation of law upon the grant of letters of administration followed by the acquisition of assets by her as administratix. This, I think, is completely answered by the judgment of Lindley M.R., in In re Rhoades [1899] 2 Q.B., 347, at pp. 352, 353:

The older common law authorities go far to shew that if an executor was a creditor of his deceased testator and had assets in his hands sufficient to pay his debt (and all others of a higher degree, if any) such debt was treated as extinguished. Sufficient assets to pay his own debt and properly applicable thereto being in the executor’s hands, such assets were treated without more as applied by him to such payment. Blackstone says so distinctly. His words are (Bl. Com. by Kerr, 4th ed., vol. iii, p. 18): “So much as is sufficient to answer his own demand is, by operation of law, applied to that particular purpose.”

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Plowden goes further, and says that the property in the assets is changed: See Woodward v. Darcy (1 Plowd. 184, at p. 186). But this can only be true if the assets spoken of can be identified and appropriated to the debt which they have satisfied, and this presupposes the exercise of the right in fact; and in the case in Plowden it had been so exercised: See ibid., p. 184. [The learned judge then referred to the facts stated in the report of Woodward v. Darcy (1 Plowd. 184), and proceeded:—]

Until the executor does some act to shew which assets he retains, it is obvious that the property in them cannot be changed. This has been noticed before: See [1898] 1 Q.B. 286, and Wentworth’s Office of Executor, cited in the margin of 1 Plowden, p. 185a. But it was settled that an executor sued by a creditor could give a retainer by himself in satisfaction of his own debt in evidence under a general plea of plene administravit, and that he need not plead a retainer specially: 1 Wm. Saunders, 333, n.6. The extent to which the doctrine that his debt was extinguished was carried is further illustrated by the cases collected in Williams on Executors, vol. ii, p. 1180, which shew that an executor, having assets sufficient and properly applicable to pay a debt due to him from his testator, could not sue the testator’s heir nor any third person who might be liable with the testator for the debt in question.

There is nothing in this case to shew the existence of assets in the respondent’s hands “sufficient and properly applicable to pay” the judgments acquired by her, and, therefore, it is quite clear that, putting the doctrine in the form most favourable to Mr. McCarthy, it has no application here.

As well, the remedy provided by retainer and subsequent extinction of the claim, which only applied in the case of a liquidated debt, is certainly not applicable here. No authority has been cited which leads to claims being extinguished outside the operation of the doctrine of retainer.

It will be seen that I am of opinion that the writ issued by Guaranty Trust Company of Canada against the Guaranty Trust Company of Canada and Edward Thomas Berry as executors and trustees of the estate of James Wilson Berry deceased was a nullity although I take the view that the

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same considerations do not apply to the action brought against Edward Thomas Berry in his personal capacity and that accordingly I would answer the questions posed in this case as follows:

1. Yes.

2. No.

3. No answer required.

4. Yes.

5. Yes.

For all these reasons I would allow this appeal with costs to Edward Thomas Berry and the Public Trustee; the costs of the Public Trustee on a solicitor-client basis.

The judgment of Dickson, Estey, Mclntyre and Chouinard JJ. was delivered by

ESTEY J.—The proceedings in this appeal originated by an application under Rule 124 of the Rules of Practice of the Supreme Court of Ontario. The respondent trust company (hereinafter referred to as the “trust company”) made application under the rule for the advice, opinion and direction of the Court on five questions arising under the pleadings. The essential portions of the agreed statement of facts are as follows:

1. James Wilson Berry appointed Guaranty Trust Company of Canada (“Guaranty Trust”) and Edward Thomas Berry as Executors and Trustees under his last Will and Testament dated October 2, 1969.

2. James Wilson Berry died on March 30, 1970.

3. Letters Probate were granted to the said Executors and Trustees on September 8, 1970.

4. Edward Thomas Berry is the principal beneficiary under the terms of the said Will.

5. Guaranty Trust as plaintiff caused this action to be commenced against Guaranty Trust Company of Canada and Edward Thomas Berry as Executors and Trustees of the estate of James Wilson Berry, Deceased, and Edward Thomas Berry, as defendants, on May 15, 1975.

6. Pleadings have been delivered and are complete.

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7. On April 13, 1977, Guaranty Trust moved this Court by way of originating notice for an Order permitting Guaranty Trust to retire as an Executor and Trustee of the estate of James Wilson Berry. On June 21, 1977, the Honourable Mr. Justice Maloney ordered the removal of both of Guaranty Trust and Edward Thomas Berry as Executors and Trustees of the said Estate, and appointed the Public Trustee to act in the place and stead of the said Executors and Trustees.

8. On July 7, 1977, Edward Thomas Berry appealed the said order to the Court of Appeal which appeal was dismissed on January 16, 1978.

After a hearing on these facts, Henry J. gave judgment wherein he answered the five questions in the manner set out below. The Court of Appeal (May 31, 1979) allowed the appeal from Henry J. (December 1, 1978) and answered the questions in the manner I set out below. The questions and answers are as follows:

(1) Was the Writ of Summons as issued on the 15th day of May, 1975, commencing action number 3259 of 1975, wherein Guaranty Trust Company of Canada was Plaintiff and Guaranty Trust Company of Canada and Edward Thomas Berry as executors and trustees of the Estate of James Wilson Berry, deceased, and Edward Thomas Berry were Defendants a nullity?

(2) Was the said Writ of Summons irregular?

(3) If the said Writ of Summons was irregular, was this irregularity cured by the Orders of Mr. Justice Maloney dated the 21st day of June, 1977 and Master Garfield dated the 14th day of February, 1978?

(4) Does Guaranty Trust Company of Canada have the capacity, power and right to maintain this action against the Public Trustee, Trustee of the Estate of James Wilson Berry, deceased?

(5) Does Guaranty Trust Company of Canada have the capacity, power and right to maintain this action against Edward Thomas Berry?

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In the pleadings which formed a part of the agreed statement of facts claims were made by the trust company against the deceased’s estate in the total amount of about two million dollars. These claims were said to arise out of a series of actions carried out by the deceased as an officer and director of the trust company. His alleged misdeeds have exposed the trust company to interest and penalties under the Income Tax Act of Canada, and forced the company to incur expenses in connection with the investigation of the transactions. The plaintiff also claims general damages with reference to the publicity attendant upon or resulting from the disclosure of evasion of income tax by the trust company, together with punitive damages, and damages for loss of good will, breach of contract, breach of fiduciary duty and breaches of trust.

The appellant, the Public Trustee, as trustee of the estate of the deceased, seeks the restoration of the disposition of the court of first instance on three separate bases.

Firstly, the appellant submits that the trust company may not sue itself and, having done so, the result is a nullity rather than a mere irregularity and may not be rectified by the substitution of the Public Trustee for the executors named in the will and to whom letters probate were issued pursuant to the order of Maloney J. two years after the issuance of the writ. All parties were in agreement that no person may bring a matter to trial by commencing an action against himself. Indeed, the trust company does not dispute the principle that the trust company may not, in its corporate capacity, bring an action to trial against itself in its representative capacity. The only issue is whether or not the issuance of the writ is a nullity, as alleged by the appellant. Counsel have not been able to direct this Court to any authority where the issuance of a writ in these circumstances is in law a nullity. Of course the writ of summons cannot be a nullity in toto because it is conceded that at least as against the defendant Edward Thomas Berry the writ is valid in so far as it includes claims against him in his personal capaci-

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ty. The appellant supports his submission of nullity by reference to Neale v. Turton[6]; Boyce v. Edbrooke[7]; and Ellis v Kerr[8] at p. 534. In each of these cases the court was concerned not with the status in law of the initiatory document but rather with the nature of the right allegedly arising in law which the plaintiff sought to put in issue. In all cases the document under litigation was one form of contract or another and these cases can be regarded as illustrations of the proposition that, at common law, a person could not contract with himself. There being no contract, the actions could not proceed.

This same issue was approached from a procedural viewpoint by Moss C.J.O. in Ontario Bank v. O’Reilly[9] where at p. 434 it was stated that:

…since the Judicature Act there exists no reason why if two firms have a common partner an action should not be maintained by one against the other…

The same learned justice in a later case also dealing with the law of partnership concluded that an action could be maintained by a partner against his fellow partners and in so concluding disposed of Ellis v. Kerr, supra, with the comment that:

The action failed because there was no covenant to sue upon, and not because of the form of the action.

See Bigelow v. Powers[10] at p. 35.

There would appear to be innumerable instances where courts in this country have entertained actions wherein natural and corporate persons find themselves on both sides of the same proceeding: Re MacNaughton[11]; Glatt v. Glatt[12]; Thompson (personally and as executor of Harry Alcroft Thompson, deceased) and Norris v. Lamport and

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Chartered Trust and Excutor Co. and Thompson (executors of Alexander Montgomery Thompson, deceased[13]). In Martin v. Martin et al.[14] the court faced circumstances approximating those before us in these proceedings. The plaintiff sought specific performance of a contract for the sale of land but before trial the defendant-purchaser died, and in order to execute judgment the plaintiff was finally required to cite the widow to take administration of the deceased defendant’s estate, and upon her refusal, the plaintiff had himself appointed administrator. Thereafter, a second action was instituted by the plaintiff against himself as administrator together with the deceased’s widow as defendants. Rose, C.J.H.C., stated at pp. 448-9:

It seems to be quite clear that this was irregular…

However the estate was not a necessary party… Mrs. Kellogg, the grantee, is in fact the only person interested in opposing the plaintiffs claim, and the difficulty arising from the form of the action could be got over by allowing the plaintiff to discontinue as against himself as administrator and to proceed against Mrs. Kellogg as the sole defendant.

Similar action was taken by Maugham J. in In re Phillips[15] where, on a motion for the construction of a will, the court struck out the Public Trustee as a defendant and substituted a person beneficially interested in the estate. Maloney J. accomplished the same end in 1977 by allowing the application by the trust company for replacement of the trustees of the deceased’s estate. I note in passing that this application was opposed by the appellant and the defendant Edward Thomas Berry.

If one were required to proceed further afield in search of similar circumstances where the courts have dealt with the question of the propriety of parties appearing as plaintiff or defendant or both, one might consider the position of the corporation in a derivative action brought by shareholders in connection with the enforcement of a corporate

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right. The derivative right is, of course, that of the company, and hence the need for the use of the company’s name as plaintiff. On the other hand, to make an effective order in many cases it must run against the company. In discussing these procedural conundrums the learned author Wegenast, in his book Canadian Companies (1931), states at p. 772:

But it has been said that it is merely a question of practice; and where the parties are before the Court any necessary amendment may be made in the form of action, allowing the company’s name to be struck out as plaintiff, or to be added as plaintiff, or defendant or to be shifted from one position to the other; with leave, where necessary, to plead anew.

There is obviously no question, in the author’s opinion, that any such misstep would result in nullity.

Secondly, the appellant submitted that the trust company’s claims against the estate had merged or otherwise become extinguished by operation of law automatically upon the acceptance by the trust company of letters probate in September 1970. This submission is made notwithstanding the fact that it is admitted that at the time of grant of letters probate, the trust company had no knowledge of the existence of any claims against its former president, director and chief executive officer. Alternatively, it is submitted that merger by operation of law occurred concurrently with the issuance of the writ of summons by the trust company against the estate. The root of this argument is said to be found in Woodward v. Darcy[16] wherein the twin doctrines of merger and retainer are discussed. In that case the doctrine of retainer was described as the executor’s right to withhold assets from the estate to satisfy debts owing him by the testator, notwithstanding that his action in debt was forever barred, according to the doctrine of merger, by his administration of the estate. In Attorney-General v. Jackson[17]. Lord Atkin referred to Woodward v. Darcy, supra, and went on to state at p. 370:

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The case shows the right of retainer well established, but does not refer to the limitation of the right to retain only against debts of equal degree. It did not arise in that case, where the action was in debt, and the plea averred a retainer of a debt due on a recognizance of the force of a statute staple. The limitation is, however, also well established. As stated by Blackstone, the law allows the executor to retain so much as will pay himself before any other creditors whose debts are of equal degree.

In cases where there were insufficient assets to meet all claims against the estate, the rule operated to elevate the executor’s claim above creditors of equal degree. Lord Westbury L.C. lamented in Boyd v. Brooks[18] at p. 606 that this principle of law was “a barbarous one”, but this branch of the retainer doctrine was abolished in Ontario in 1865 by s. 28 of The Property and Trusts Act, 29 Vict., c. 28 (U.C.), now s. 50(1) of The Trustee Act, R.S.O. 1970, c. 470. The section now reads:

50.—(1) On the administration of the estate of a deceased person, in the case of a deficiency of assets, debts due to the Crown and to the personal representative of the deceased person, and debts to others, including therein debts by judgment or order, and other debts of record, debts by specialty, simple contract debts, and such claims for damages as are payable in like order of administration as simple contract debts shall be paid pari passu and without any preference or priority of debts of one rank or nature over those of another; but nothing herein prejudices any lien existing during the lifetime of the debtor on any of his property.

However, where the assets are sufficient to satisfy all creditors, the executor’s right to retainer presumably still exists in order to avoid the extinction of his claim by the operation of the doctrine of merger. Master Boyd, later Chancellor Boyd, stated in Kline v. Kline[19] at p. 168:

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But the case is different where the assets are sufficient to pay all, or where the executor is the only creditor. The foundation of the doctrine of retainer consists in the union of the right to sue and the liability to be sued in one and the same person; and the principle is laid down that as the executor representing both debtor and creditor cannot sue himself, he may appropriate the assets in satisfaction of his demand. He can go, then, to the same extent in retaining as he could have gone supposing he were in a position to sue for his debt, Toller’s Executors, p. 297. He can retain in respect of any claim legal or equitable for which he could have sued at law or filed a bill in equity. As against creditors at law, the executor’s right to retain is a legal right, and is usually based upon a debt at law: as between the executor and the estate it is of the very essence of equity, that he be allowed to repay himself before accounting to the estate, and paying over the assets.

We have been referred to no authority suggesting that the type of retainer discussed by Master Boyd has been abolished in Ontario. Assuming for the moment that it does still exist, it is clear that such a retainer operates only in respect of ascertained debts or damages for which a certain standard or measure exists: Loane v. Casey[20]. In that case the executrix was allowed to retain sums due to her under a covenant which her late husband had made with a trustee on her behalf, but only because a sum certain (an annuity of £200 per annum) was involved. Blackstone J., then a judge of the Court of Common Pleas, observed at p. 570:

Damages, that are in their nature arbitrary, cannot be retained; because, till judgment, no man can foretell their amount. Such are damages founded upon torts. But where damages arise from the breach of a pecuniary contract, there is a certain measure for them; and such damages may well be retained. The remedy for a note of hand carrying interest is only in damages, but will any one say this shall not be retained?

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The Court of Appeal cited this passage with approval in Re Compton, Norton v. Compton[21] at p. 21.

It can readily be seen that the numerous claims in issue here are not susceptible of precise ascertainment. Indeed, a lengthy and involved trial will probably be necessary to determine the exact extent of the Berry estate’s liability. According to the case law the executor cannot exercise his right of retainer in respect of these claims. But does this conclusion oblige us to hold that the executor’s claim has been annihilated by the doctrine of merger? This may have been the case at common law, but I do not believe that such is now the law in Ontario. Two sections of The Trustee Act contemplate that an executor may launch an action for a personal claim against the deceased’s estate. Section 38(2) reads:

38.—…

(2) Except in cases of libel and slander, if a deceased person committed or is by law liable for a wrong to another in respect of his person or property, the person wronged may maintain an action against the executor or administrator of the person who committed or is by law liable for the wrong.

This section was passed in order to avoid the harshness of the common law rule enshrined in the maxim actio personalis moritur cum persona (a personal action dies with the person). Although the possibility of a suit by an executor wronged in his personal capacity against himself in his representative capacity was probably not uppermost in the mind of the legislator when the section was drafted, the words “person wronged” stand unqualified and apply as much to a wronged executor as to a stranger to the estate. This result accords with common sense, as there is no reason that an executor should be in a worse position than third parties to make good his claims against the estate.

Section 50(1) of The Trustee Act, supra, is also relevant, in that it contemplates that a personal representative will be able to assert his claim for a debt against the estate. While it may be said that

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this is no more than a legislative recognition of the rule in Woodward v. Darcy, supra, it should be noted that the mechanics of the statute and the case are different. Woodward v. Darcy justified the personal representative’s right to help himself to property from the deceased’s goods equal to the amount of his debt by means of the fiction that “the property of those goods is altered and vested in himself, that is, he has them as his own proper goods in satisfaction of his debt, and not as executor [,] [s]o that there is a transmutation of property, by the operation of law, without suit and execution”, at p. 285 E.R. This quaint doctrine of self‑help may have been necessary in 1555 to overcome the injustices inherent in a rigid system of procedure, but such a policy is no longer favoured by the law. Citizens are expected to vindicate their rights via established procedures in courts of law, not on their own initiative. Section 50(1) treats the personal representative’s debt on the same footing as all other debts due by the deceased. Although in a majority of cases the personal representative will be able to satisfy his debt directly from the assets over which he has control, s. 50(1) directs that any such claims are satisfied as debts, and not because of any “transmutation of property”. If a personal representative should become incapacitated before satisfying his debt, there is no doubt that s. 50(1) would allow his or her representative to take an action against the deceased’s estate to recover the amount in issue.

While I realize that s. 50(1) applies only to debts and not to claims for unliquidated damages as are in issue here, I have examined it along with s. 38(2) in order to show that The Trustee Act treats the claims (used in the broad sense) of a personal representative against an estate on the same footing as any other claim. Such a statutory scheme is inconsistent with the notion that a personal representative’s claims are extinguished upon the commencement of his administration. To this extent, the doctrine of merger has been repealed by statute and the concept of retainer which was evolved to avoid it is no longer necessary.

[Page 951]

Thirdly, I move to the submission made by Mr. Barnes, counsel for the defendant Edward Berry, that as a condition precedent to the issuance of a writ by the trust company against the personal representatives of the estate of the deceased, the trust company had to remove itself as executor. This argument he based on the principle that a trustee cannot allow himself to be put into a situation where his personal interest conflicts with his duty. It is said that had the writ issued after the order of Maloney J. it would have been valid and effective, but as it was issued before such order of removal the writ is a nullity. This submission of course conflicts with the second submission by counsel for the appellant to the effect that merger occurred upon the grant of letters probate. Counsel for the trust company agrees at once with the proposition that a trustee may not place himself in a position of conflict between his duties as a trustee and his personal position. The sole difference between the parties on this, and indeed on all points, is simply, what is the consequence of a trustee placing itself in such a position of conflict by issuing a writ in the circumstances here? The purpose for the conflict rule in the common law is obvious and has been so frequently enunciated in our law that I do no more than point to the speeches of Lord Herschell in Bray v. Ford[22] at p. 51 and Lord Eldon L.C. in Ex parte James[23] at pp. 344-5. See also Boardman v. Phipps[24] and, in a corporate setting, Canadian Aero Service Limited v. O’Malley[25] at pp. 608-10. It is not surprising therefore to find in the reports innumerable illustrations of the rule in instances where beneficiaries have proceeded against their trustee to cause him to disgorge profits wrongfully gained by him in his capacity as trustee at the expense of the estate and its beneficiaries. All these authorities of course are far from the point now before us. Here we have the case of an executor who, far from seeking to profit from his position at the expense of the beneficiaries, is simply moving to realize a claim the existence of which was unknown to the executor at the time of the death of the deceased or the grant of

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probate in his estate. Faced with circumstances not contemplated by the rule as enunciated by Lord Eldon in Ex parte James, supra, the courts have been quick to relieve against a harsh operation of the rule. Thus we see Harman L.J. declining to apply the rule in Holder v. Holder[26], being of the opinion that

…in a case where the reasons behind the rule do not exist I do not feel bound to apply it. (at p. 392)

Sachs L.J. concurring at pp. 402-3 stated:

Thus the rigidity of the shackles imposed by the rule on the discretion of the court may perhaps before long be reconsidered as the courts tend to lean more and more against such rigidity of rules as can cause patent injustice…

These comments, it should be noted, relate to the request for relief against the appliation by rote of the substantive rule prohibiting certain acts on the part of the trustee when a conflict of interest exists. It is all the more important that the procedural trappings of the rule are not applied in a mindless way so as to strip the innocent of a clear right in law to make a claim against the estate. Thus we find in Vyse v. Foster[27] the court declining to apply the rule so as to prevent a fellow partner of the deceased making claim against the estate of the deceased in his capacity as a partner of the deceased. The articles of partnership provided for the eventuality of death by a devolution of partnership assets to survivors. Lord Cairns L.C. at p. 332 stated:

I apprehend it to have been perfectly clear that the testator could not, by appointing one of his partners as his executor, annul that partnership contract which he had deliberately entered into. I cannot admit that it was necessary for the person so appointed executor to disclaim the executorship in order to save his contract.

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These words are particularly apt in the light of the act of the deceased here in appointing the trust company to administer his estate with full knowledge of his own improprieties during his lifetime which had given rise, unbeknown to the trust company, to a cause of action by the company against him. For a more recent application of this principle, see Re Mulholland’s Will Trusts. Bryan and Others v. Westminster Bank Ltd.[28] per Wynn-Parry J. at p. 462.

Jessup J.A., speaking for the Court of Appeal in the present appeal, concluded:

On the facts of this case we are not prepared to hold that the plaintiff’s cause of action was irrevocably extinguished, as against a successor trustee, when it accepted probate. In this case the plaintiff embarked in good faith on probate of the estate without any knowledge of its cause of action. We think it would be grossly unjust to hold that its action against the successor trustee is barred and there is no binding authority which requires us to arrive at that unjust result.

With that answer I am, with respect, in complete accord. The trust company in my view has not suffered a merger of its rights upon the acceptance of letters probate, has not suffered a merger of its claim by reason of the commencement of these proceedings, and therefore is now in a position by reason of the order of Maloney J. to continue in the prosecution of its action against both the estate and the defendant Edward Berry. Those portions of the writ dealing with the claim by the trust company against the personal representative of the estate of James Wilson Berry in their representative capacity is, as regards the trust company in its representative capacity, an irregularity which is susceptible to rectification as was done in these proceedings and does not render a nullity those parts of the writ of summons relating to the claim by the trust company against the deceased’s estate. In the disposition of this claim and this portion of the appeal, I do not find it necessary to deal with the effect in law of service of such a writ of summons upon one of the personal representatives who is not a plaintiff. It may well be that this facet of the circumstances provides an additional answer

[Page 954]

to the submissions of the appellant but, having disposed of the submissions of the appellant on other grounds as set out above, I do not find it necessary to proceed with an examination of this further possible answer to the problems raised in this appeal.

Not only has no authority been advanced for the proposition that the inclusion of the trust company in its representative capacity as a defendant is more than an irregularity but a nullity invalidating that portion of the writ relating to the claim against the estate, but no submission was made of any hardship which would flow from a recognition that such defects are but irregularities capable of rectification by court order. A serious question arises in these proceedings as to whether all of the claims of the trust company are not now statute barred and hence no doubt the reason for these interlocutory proceedings. Clearly some of the claims are statute barred. This is not a controlling circumstance, of course, in the adoption of one principle or another in the solution of the issue raised in this appeal but it does draw attention to the irregularities in the operations of the courts. If on policy we adopt structured, invariable rules which frequently lead to harsh results for no demonstrated purpose, the effectiveness and the quality of judicial service is inevitably impaired. If the courts have here a free choice between these alternative dispositions of the claim, there is no doubt in my mind that fairness, justice and judicial administration all favour the conclusion of irregularity and not nullity. As Pigeon J. said, speaking for a unanimous Court in Vachon v. Attorney General of the Province of Quebec[29] at p. 563:

Except in the case of a nullity enacted by a specific statutory provision allowing the courts no power to remedy it, the Supreme Court of Canada never hesitates to intervene to reverse a decision which dismisses an action on the merits for a formal defect. To show how this is regularly done in cases from the common law provinces as well as from Quebec, the following exam-

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ples may be cited: Basarsky v. Quinlan; Ladouceur v. Howarth; Witco Chemical v. Oakville; Leesona v. Consolidated Textile Mills et al.; Pont-Viau v. Gauthier Mfg. [Footnotes omitted].

For these reasons, I would dismiss the appeal with costs in this Court to the respondent trust company against the appellant and the defendant Edward Thomas Berry; and would leave the order as to costs in the courts below as made by the Court of Appeal in its order dated May 31, 1979 undisturbed.

Appeal dismissed.

Solicitors for the defendant, appellant: Osler, Hoskin & Harcourt, Toronto.

Solicitors for the plaintiff, respondent: Day, Wilson, Campbell, Toronto.

Solicitors for the defendant: Wilson, Barnes, Walker, Montello, Beach & Morga, Windsor.