Lessons for Trustees - a Round Up of some Recent Cases
Dealing with trust assets following the breakdown of the settlors’ relationship is an area that is fraught with difficulty. Trustees need to be very careful differentiating between the rights of beneficiaries.
A recent example of the implications of the actions of trustees in this respect can be seen in Thompson v Thompson (2015) 4 NZTR 25,006, a relationship property dispute. At issue was whether an $8m payment for a restraint of trade agreement was relationship property or separate property. The restraint of trade agreement applied to the husband, but related to the sale of shares in a company owned by a trust established by husband and wife for their family’s benefit. The key to the Supreme Court, holding that the payment was relationship property, was the earlier agreement by the trustees to treat the trust assets and 50/50 for husband and wife. The existence of that agreement was effectively determinative.
Trustees must be acutely aware of the sensitivities concerning beneficiaries’ competing rights in relationship property matters. The trustees in Thompson dealt with this issue by agreeing and recording the terms on which the assets would be held by them. With no such agreement in place, the trustees in Irvine v Penney (2015) 4 NZTR 25,005 instead sought the approval of the court pursuant to section 66 of the Trustee Act 1956 (“TA 1956”) before they took any action to implement their proposal to resettle assets of a trust on two new trusts.
Irvine followed earlier proceedings in which the former husband and wife settlors of a trust were removed as trustees as they were in disagreement and the trust was dysfunctional. Following a judicial settlement conference in the current proceedings it had been agreed that the trust assets be divided and resettled onto two new trusts.
Notwithstanding that unlike the original trust, the new trusts would not include the spouses of the settlors’ children as discretionary beneficiaries, the court made the directions sought. The Court appointed representative of the unrepresented beneficiaries accepted that the trustees are empowered to make decisions that chose between beneficiaries, and that the trustees in this case had considered the interests of the beneficiaries and treated them fairly. Ultimately the Court was satisfied that given the “discord and dysfunction that has arisen between [the settlors]” the proposal was “the only realistic way forward”.
The trustees in Irvine would have been able to rely on the protection afforded by section 69 of the TA 1956. This provision indemnifies trustees acting in accordance with court directions provided that they have not been “guilty of any fraud or wilful concealment or misrepresentation in obtaining the direction”.
It is surprising that more trustees do not avail themselves of the protections that this provision can afford.
The trustees in Potter v Duffy (2015) 4 NZTR 25,002 ought perhaps to have followed the lead of those in Irvine and sought resettlement with the approval of the Court. Potter concerned an application by a trustee for the sale of trust property and the removal of her co-trustee. The trustees were a former de facto couple who settled a discretionary family trust for the benefit of themselves and their (now adult) children.
The application was made pursuant to section 339 of the Property Law Act 2007 (“PLA 2007”). However, the Court held that this provision cannot be used to order a division of property when the property is owned by a single trust and the trustees are in disagreement as to sale or retention. The provision applies in the case of co-ownership, but trusteeship is a form of collective ownership. Court-ordered division would not bring trusteeship to an end, the trustees would remain collectively responsible for the management of the divided assets.
The Court’s solution was relatively straightforward. It noted that the position would be different if two trusts co-owned the property – there would be co-ownership allowing division orders under section 339 of the PLA 2007. Pointing out that the trust deed enabled replacement of the existing trust by resettlement of two trusts, the appropriate remedy was to seek orders directed at resettlement.
It is noteworthy that the Court criticised the parties for not serving the proceedings on all interest parties, including the bank as mortgagee and the parties’ children who were discretionary and final beneficiaries. The Court considered that both had an interest in the trust property and so had a right of service. It added that in the absence of service, the orders sought could not be made.
The Court also declined to remove the applicant’s co-trustee on the basis that to do so would totally disempower him on any resettlement.
Courts will however not hesitate to remove trustees in appropriate circumstances. This occurred in Yoffe v Yoffe (2015) 4 NZTR 25,004. This was an unsuccessful application by the trustee to vary a will to provide that one beneficiary’s share be held on trust on the grounds of that beneficiary’s incapacity. However, a cross-appeal by that beneficiary was successful in removing the trustee for failing in his duty to administer the will and for apparently preferring his own interest (he was also a beneficiary under the will).
The case concerned the will of Mrs Yoffe. The will left the major part of the estate to her former husband, son and daughter. Her former husband was appointed executor and trustee. The trustee originally sought to vary the will to provide that the son’s share be held on trust by the Public Trustee, asserting that as a result of his serious methamphetamine addiction he was incapable of managing himself and his finances.
The application was made pursuant to section 64A of the TA 1956. The Court noted that section 64A does not give the court the ability to vary a trust relating to a person on the grounds that he or she is generally lacking in capacity and is also incapable of consenting, rather it is to approve a variation of trust on behalf of a beneficiary lacking in capacity. The Court acts as ‘statutory agent’ in such circumstances. The relevant issue was therefore whether the beneficiary was incapable of consenting and whether the proposed variation was for his benefit and not detriment.
The Court ultimately considered that the trustee’s argument was not supported by the evidence. It said that the contention that the beneficiary lacked capacity was not founded on medical evidence but merely rested on the trustee’s own opinion.
The beneficiary’s counterclaim was founded on the basis that the trustee had failed to make any distribution and had used the properties comprising the estate without his consent. He sought (and was successful) in having an independent solicitor appointed in his place.
Re Rowallen Block Ahu Whenua Trusts; Marks v Orbell (2015) 4 NZTR 25,008 is another case where the actions of a trustee were impugned. In this case a former sole trustee was ordered to account to and make restitution to the trust for breaches of trust.
The trustee had made a substantial payment to himself under the guise of a “negotiator’s fee” in settling the trust’s claim for compensation with the Crown. Although the payment was disclosed to the beneficiaries, no reference was made to the fact that it was made to himself. Similarly, he had used a trust rental property for his own use, again without disclosing this to the beneficiaries. He had also made a gratuitous payment to a third party.
The Court considered that the trustee had breached trust and a number of fundamental duties in paying himself the fee including his duty to be familiar with the terms of the trust, comply with the terms of the trust, preserve the trusts’ assets, to act diligently and prudently and not to prefer his own interests over that of the beneficiaries. The Court also considered that the trustee had breached his duties to make prudent use of trust funds and fiduciary duty to act in the best interest of the beneficiaries by using the flat for his own benefit and that his conduct in making the payment to the third party was reckless, imprudent and in breach of his duty of loyalty to beneficiaries.
In considering an application for relief pursuant to section 72 of the TA 1956 (which allows for commission to be paid for services), the Court noted that a breach of trust did not necessarily disentitle a trustee to remuneration and the Court must weigh his conduct against the benefits of his work for the trust. However, the appropriate remuneration was significantly less than that which he had paid to himself.
The trustee also sought relief pursuant to section 73 of the TA 1956 on the basis that he had taken legal advice. However, the Court considered that the legal advice consisted of informal conversations and off the cuff advice that would support his intended actions. The Court held that a party cannot stand behind legal advice and it was the trustee’s responsibility to establish their actions were honest and reasonable.
Ultimately the Court’s position was that while the trustee had acted honestly, his conduct had not been reasonable given his duties. It suggested that (like Irvine, above) the difficulties could have been avoided if the trustee had sought directions from the Court.
Although there is no particular theme that draws these decisions together, they all contain some small lesson for trustees. Thompson reminds us that agreements between trustees may have far-reaching implications down the line. Irvine illustrates the benefits of utilising the protections available to trustees in the TA 1956. Orbell on the other hand highlights the limits of such protections. Potter and Yoffe both serve as a reminder that trustees must always and absolutely prioritise the interests of beneficiaries - even the smallest transgression will not be tolerated.
© G D Clews 2015