Whistleblowers and Private Interests: Who do you trust?

April 30, 2021

By Brian Babcock

Non-beneficiaries are not allowed to sue to enforce trusts. This includes an ex-employee of a corporate trustee.

The Court of Appeal affirmed this in a judgment which reviews many essential concepts of trusts law and remedies, but should also be of interest to any employers at risk of extraordinary law suits from disgruntled employees. Standing is the legal term for having a right to sue, and if the ex-employee lacks standing for the remedies claimed, the lawsuit can be summarily dismissed right out of the gate. There is no valid claim that even needs to be defended.

The essential character of a trust is that there is an enforceable obligation owed by a trustee to the beneficiaries respecting property. Subject to only a few exceptions, a valid trust must have at least one beneficiary capable of enforcing the trust.

Because trust obligations are usually a private matter between the beneficiaries and the trustee, there is no room to allow outsiders to sue. This would affect the rights of the beneficiaries without their consent.

Despite this, Marion Carroll, a former senior employee of the Toronto-Dominion Bank (“TD”) tried to sue TD for alleged wrongdoing in how it administered mutual funds. TD had already settled with the Ontario Securities Commission regarding alleged regulatory breaches, but that was not enough to satisfy Carroll. Her action against TD was an effort to uncover the alleged wrongdoing, including a request that TD, as trustee of the funds, pass its accounts; an independent investigation of the trust accounts; an order indemnifying Carroll from any liability for breaches of trust; an accounting; and a declaring that TD had been unjustly enriched.

All of these are the sorts of remedies that trust beneficiaries could sue for, and if the court was satisfied that there was good reason to suspect a breach of trust, perhaps succeed.

But Carroll was not a beneficiary. Therefore she had no right to sue TD for the trust remedies.

Though her whistleblower status might protect her from a claim she breached a duty of confidence, that did not grant her a right to sue.

Contrary to Carroll’s argument, the court finds that there is a clear difference between allowing strangers to sue for a matter of public interest (in some situations) versus the test for enforcing private rights. To have private interest standing, a party must have a personal and direct interest in the issues.

The outcome of private interest litigation has a direct impact on those with a legal interest in the issue. Therefore, they are the proper parties to carry on any lawsuits.

It is a basic trust principle that if the beneficiaries do not wish to enjoy the benefit of the trustee’s obligations, the obligation will not be enforced. Though exceptions are made to protect children and the mentally incapable, the court would not extend that to allow a “stranger to the trust” to do what the beneficiaries did not chose to do.

The court’s inherent jurisdiction to supervise trusts does not extend that far.

Allowing an action to proceed would expose the financial information of the beneficiaries in the court proceedings without their consent or control. Their financial interests could be compromised by how she managed the law suit.

The court even dismissed Carroll’s claim for an indemnity, deciding that even on the facts that she claimed existed, she could not possibly have personal liability, so she could not use the indemnity claim as a way around her lack of standing.

If you an employer, this decision ought to provide some comfort that the ability of former employees to pursue issues in which they lack a personal interest. It does however also illustrate the risk that former employees may attempt to obtain satisfaction beyond the limits of what you might expect. It is not always possible to manage a smooth exit for departing employees, but this case reminds us that keeping issues out of court is a good result.

If you are an employee, this decision is a reminder that your rights to sue your former employer are usually limited to issues that affect you directly. Trying to do otherwise is likely a waste of your time, your money, and your energy.