The recent Court of Appeal decision in McCabe v Kowalyshyn, 2022 SKCA 56, offers various lessons to Estate litigators. These include:
- The reality that court approvals of Estate land sales, under s. 50.5 of The Administration of Estates Act, SS 1998, c A-4.1, do not simply focus solely on market value. The court can also look at other considerations, such as whether the sale will reasonably reduce future litigation, wasted effort, or delay in the Estate.
- The reality that if parties agree in advance to a certain specified sale process, but do not later like the result, the court may not let them later challenge the outcome of that sale process.
McCabe arose out of a sale of farmland owned by an Estate. The background of McCabe informs some of the issues addressed by the Court. The background is summarized as follows:
- The deceased, Mike Kowalyshyn, died on July 1, 1996, ostensibly leaving a life interest in his estate to his wife and the remainder of it to their 12 adult children. The Estate owned, inter alia, eight quarter sections of farmland (“Farmland”), which had been leased to Nicky (a beneficiary of the Estate) and his wife, Debbie since the 1990s;
- Joseph Kowalyshyn was the executor of the Estate and was also one of its beneficiaries;
- There were a total of 12 adult siblings involved, who were the children and beneficiaries of their father’s estate, the estate of Mike Kowalyshyn;
- In 2017, certain of the Estate’s beneficiaries (the “Objecting Beneficiaries”) commenced proceedings against Joseph and the Estate, as well as against Nicky and Debbie, asserting that the Farmland had been leased at less than fair market rent (thus failing to maximize the Estate value);
- The focus of the parties turned to the sale of the Farmland. A variety of purchase offers were made:
- Nicky and Debbie offered to buy the Farmland for $987,121, which Joseph “conditionally accepted” as executor of the Estate (Queen’s Bench decision, McCabe v Kowalyshyn, 2021 SKQB 144, at para 8);
- This caused rancor amongst the Objecting Beneficiaries because they believed the Farmland was worth more than this price;
- On December 9, 2020, the Objecting Beneficiaries advised Joseph Kowalyshyn that some or all of them would be making an offer to purchase the land on more favourable terms, namely a purchase price of $1,000,000.00 (Queen’s Bench decision at para 8);
- On January 3, 2021, Nicky and Debbie Kowalyshyn increased their offer to purchase to $1,010,000.00 (Queen’s Bench decision at para 8);
The closed auction process:
- The parties could not agree, and the matter went to a court hearing on January 5, 2021, as well as various later conference calls with the Court. As a result of discussions, the parties agreed to a closed, inter-family auction. The process was reduced to writing, and set out a time-sensitive, process-detailed procedure whereby the land would be exposed to offers from the Kowalyshyn family;
- In accordance with the proposed method of sale, two groups (Nicky and Debbie Kowalyshyn on one hand, and Joyce Kowalyshyn, Walter Kowalyshyn, Eugene Kowalyshyn and Michael Kowalyshyn on the other hand) presented various back and forth offers on the Farmland;
- Nicky and Debbie Kowalyshyn presented the last and highest bid on February 8, 2021 in the amount of $1,325,000.00.
- No higher counter offer was received from Joyce Kowalyshyn, Walter Kowalyshyn, Eugene Kowalyshyn and Michael Kowalyshyn;
- However, the Objecting Beneficiaries then objected to any sale for $1,325,000.00. They asserted that they had gained evidence that the Land was worth more. For example, on February 24, 2021, Joyce Kowalyshyn contacted SAMA and learned that the Farmland had been newly assessed at $1,422,700.00, an increase from the former assessment of $1,150,681.50;
- Further, Joyce Kowalyshyn also contacted Wayne Berlinic, a realtor, and asked him to prepare a marketing plan for the estate land. Mr. Berlinic stated his belief that the most likely sale price for the land would be between $1,448,100.00 and $1,544,800.00 given recent market trends. Counsel for the Objecting Beneficiaries, in correspondence directed to the court, advised that later on March 26, 2021 he was advised that Mr. Berlinic had sold 120 acres of farmland near Buchanan, Saskatchewan for $2,083.00 per acre. If an equivalent price was received for the estate land, the total value of the land would approach $1,778,882.00;
- In reply, the executor, Joseph Kowalyshyn, responded by commissioning a formal appraisal of the land by Robin Johnson, a member of the Appraisal Institute of Canada. He appraised the land using a .86 multiple of the new SAMA assessments and provided a value of $1,209,000.00, including buildings on the home quarter.
Queen’s Bench Ruling in McCabe v Kowalyshyn:
The Objecting Beneficiaries refused to consent to the sale of the land for $1,325,000.00.
The issue for the Queen’s Bench court (“Chambers judge”) was whether to approve the sale for $1,325,000.00, or to send it a future auction on the open market.
For context, s. 50.5(1) of The Administration of Estates Act, SS 1998, c A-4.1 holds that an executor shall not sell land in an Estate, for the sole purpose of distributing the estate among the beneficiaries, unless those persons concur in the sale. Thus, the executor either needed unanimous agreement of the beneficiaries to the $1,325,000 sale, or, he needed a court order to override the non-consent of certain beneficiaries.
- The Objecting Beneficiaries were reneging (in the view of the Court at least) on a method of sale that they had agreed to, and in which they actively participated;
- The Objecting Beneficiaries had changed their position on what was the appropriate value of the Farmland. The Objecting Beneficiaries all agreed in writing that the offer of $1,000,000.00 was “deemed to be in the interest and to the advantage of the Estate.” Notably, that price was not only $325,000.00 below the price offered just weeks later by Nicky and Debbie Kowalyshyn but, more significantly, below the SAMA assessment then in currency ($1,150,681.50);
- The sale for $1,325,000 was in the best interest of the Estate. True, such sum may not maximize total market value, but s. 50.5 did not focus solely on market value. It instead allows the Court to look at other facts as well, such as:
- What sale would avoid further legal fees and dispute;
- What sale would avoid further delay or limbo, for the Estate;
- What would avoid having the Farmland sit fallow and unused in 2021.
- The Court preferred the appraisal evidence of Mr. Johnson. He used approved methods of appraisal, including comparable land sales as late as April 2021. He had provided topographical photographs of the Farmland. The court said that it would always favour an appraiser’s report over an opinion of value offered by a realtor, particularly a realtor who proposes to be engaged in the sale of the land.
Issue at the Court of Appeal:
The Objecting Beneficiaries appealed to the Court of Appeal. They asked the Court of Appeal to overturn the Chamber judge’s approval of the sale for $1.325 million. They asked instead for the Court of Appeal to direct the Estate to sell the Farmland at public auction.
Court of Appeal decision in McCabe v Kowalyshyn:
The Court of Appeal held that the Objecting Beneficiaries were bound by the process they had helped negotiate, and agreed to. That is, the bidding process had been negotiated and agreed upon by all parties, it had been conducted fairly, and it had established a closed market restricted to Estate beneficiaries and their spouses. Its object was not to achieve a sale at fair market value; it was to resolve the dispute over the sale of the Farmland fairly and finally (Court of Appeal decision at para 35).
Nothing about the new evidence of market value, had impugned the agreed-upon bidding process or how that process had been managed by Joseph.
Thus, the Court of Appeal upheld the Chambers judge’s reliance on factors, which were not limited to market value. For example, the Chambers judge had considered such factors as:
- The reality that the Estate faced mounting legal fees due to sharp divisions amongst the beneficiaries and the continuing litigation;
- The Estate’s principal asset — the Farmland — would be left fallow in 2021 if not sold, producing neither rent nor crops, until the dispute was resolved;
- The Objecting Beneficiaries had not satisfied their burden of proving that the $1.325 million was under value;
- Moreover, even if $1.325 million was not the highest possible value, the price was not the sole consideration when giving approval under s. 50.5. Had the Legislature intended for s. 50.5 to solely hinge on market value, when approving a sale, the legislature could have said just that.
First, if beneficiaries agree to the method of sale and, participate in that method of sale, they will have a difficult time in later challenging the outcome.
Second, the criteria of highest “fair market value” is not the only consideration that the Court will consider, when approving a sale under s. 50.5.