Family trusts - constructive trust strikes again!

Judd v Hawkes Bay Trustee Company Limited [2016] NZCA 397

In Judd v Hawkes Bay Trustee Company Limited [2016] NZCA 397, the Court of Appeal has held that Mr Hodgkinson’s family trust could not stand in the way of his wife’s claim to a share of the trust property which was used as their home during their relationship. In the latest case in the well-trodden path established by Lankow v Rose [1955] 1 NZLR 277, the Court had little difficulty in imposing a constructive trust (in favour of a wife) on an express trust (which did not benefit her). Imposition of a constructive trust has emerged as a way of ensuring that an express trust is not used as a means of defeating a claim by someone who has a reasonable expectation of receiving a benefit form property used by partners in a relationship, should that relationship break down.

Mr Hodgkinson and Ms Judd were married for six and a half years. Over that period, they lived in a substantial residential property located in Havelock North, which was owned by the Richard Hodgkinson Trust (“the Trust”). Following their separation, Ms Judd claimed that the Trust held a share in the property on trust for her, reflecting her contributions to it.

The High Court agreed ([2014] NZHC 3298), valuing Ms Judd’s contributions at $10,000 per year and totalling $65,000 in all. Although Ms Judd’s contributions were indirect, they were found to have prevented the house from going to “rack and ruin” which, when proof of enhanced value is not always required, was sufficient to establish that her efforts benefited the Trust.

Ms Judd’s claim was upheld on appeal. Following Lankow v Rose, the Court agreed that Ms Judd’s contributions to the property gave her a reasonable expectation of a share in it. This would not be surprising had the property been owned by Mr Hodgkinson in his own right, but neither the fact that the property was owned by a trust, nor that she knew this at the outset, prevented Ms Judd’s claim from succeeding. The Court noted that “Ms Judd’s understanding of the situation that pertained to the Trust did not mean she expected she was to contribute in the way she did but, if the marriage broke up, receive nothing” (paragraph 36). It was not sufficient that she knew she was not a beneficiary of the trust. In a way the existence of the principle in Lankow v Rose was used by the Court to rationalise Ms Judd’s position, somewhat along the lines of saying “she knew the property was held in trust but that did not prevent a constructive trust supervening on such express trust, therefore her knowledge of the express trust amounts to nothing.”
The Court was influenced by the fact that Mr Hodgkinson treated the property as his own and was given “carte blanche” by his co-trustee to do as he wished with the assets of the Trust. The co-trustee knew of Ms Judd’s contributions but nevertheless was content to allow the Trust – and Mr Hodgkinson as beneficiary – to take the full benefit of them. In this light the Court found that it would be unconscionable not to recognise the benefits freely accepted by the Trust.

Upholding the quantum of the award made by the High Court the Court of Appeal noted at paragraph 33:
“One means of cross-checking the approach is to note that the judgment sum amounts to an award of some $200 a week for the course of the marriage. If we assume that Ms Judd would have otherwise made rental payments of, say, $200 per week that means she has received overall a payment of $400 a week. We do not consider it is unreasonable or unrealistic to say that her contribution equated to about $400 a week.”

Quite apart from the debate this quantification is likely to give rise to as a benchmark for the valuation of spousal contribution, what does the case mean for trustees seeking to preserve the assets of their trusts for beneficiaries? Indeed, what does it mean for the spouse who is the beneficiary of a trust holding property which is used in the course of a relationship, when the non-beneficiary partner contributes to it?

Crucially, Mr Hodgkinson and Ms Judd did not enter into a relationship property agreement. If a trust’s primary purpose is to protect assets from becoming relationship property at least to the extent of improvement or maintenance provided by the other partner, it is vital to have relationship property agreement in place. Indeed, the Court of Appeal acknowledged that Mr Hodgkinson could have entered into a relationship property agreement with Ms Judd but noted that “absent such an adjustment of her expectations, where the contributions are to the matrimonial home and the trustees have encouraged or permitted these contributions, it would be wrong to treat a contributor like Ms Judd as a volunteer” (paragraph 47). A relationship property agreement which negatived any claim by her would have stood as a clear statement by Ms Judd that she was foregoing any claim despite her contributions and would have been upheld unless the Court considered that the circumstances between the parties had changed since the agreement was made so as to render the agreement "unfair or unreasonable". Reading between the lines of the case report it is doubtful that such a conclusion would have been reached and so, for want of a “pre-nup” reserving the status of trust property, Ms Judd was able to claim an interest reflective of her contributions, as determined by the High Court.

Further, a co-trustee cannot simply abdicate responsibility and allow the other to operate a trust for his own benefit. This behaviour is what led to Mr Hodgkinson’s downfall. He and his co-trustee could have taken advice on the issue at the time of the marriage, but didn’t. Trustees need to be alert to the possibility of a constructive trust claim and take proactive steps to preserve trust assets. The lack of engagement by the co-trustee in this case meant that the Court was able to see the case as more closely that of one spouse holding property to which the other had contributed, rather that property which was clearly held in a separate trust estate and outside the hands of the other spouse.

The decision is Judd is not without its critics. One has suggested that apart form the need for a relationship property agreement there are only two other ways of avoiding the problem that case raises - living ina tiny apartment with no need for gardening or ensuring that the trust pays for all housekeeping, gardening and other staff so there is no need for spousal services of the type Ms Judd relied on. Neither is a particularly practical response but both illustrate the difficulties that can arise when too much reliance is placed on a family trust deed to lock out constructive spousal claims when a marriage ends.   

© G D Clews, 2016

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