Who is Entitled to Indemnity from a Trust Fund?
Is a former trustee entitled to an indemnity from a trust fund? What if they were not aware that their appointment had ended at the time the costs were incurred? Such a person is technically a trustee de son tort, or a stranger meddling in trust affairs. A meddler will not normally be indemnified, but what about an intended trustee whose appointment has for some reason failed? This issue was addressed in the recent case of Butterfield v Public Trust (2017) 4 NZTR 27,015.
Mr Burnett made a will providing for two farms, Mount Cook Station and Cox’s Downs Station, to be acquired at current market value by the Burnett Mount Cook Station Charitable Trust (“the Trust”). Mr Burnett was settlor of the Trust by a Trust deed made shortly before his will. The purchase price was payable only on demand. The residue of the estate (including the loan to the Trust) would vest in the trust under the will. The objects of the Trust were, broadly, to preserve the properties’ historical and natural heritage and environmental value for the benefit of the public.
Mr Burnett died in 2010. The initial trustees of the Trust were Messrs Butterfield and Taylor. Mr Hilson was appointed as a third trustee in November 2015, and Mr Askin as fourth trustee in April 2016. The transfer of the farming properties from the estate to the Trust occurred in November 2015.
The trustees struggled financially to maintain the properties, and in March 2016 they entered into an agreement to sell the properties to a neighbouring farmer, Mr Gould. Unfortunately however, Messrs Butterfield and Taylor did not realise that their terms of appointment under the trust deed were limited to five years and had expired in November 2014. Concerned that none of the purported trustees were validly occupying their positions at the time of the sale to Mr Gould, the trustees sought directions from the High Court, including approval of the sale.
The High Court held that Messrs Butterfield and Taylor had ceased to be trustees when their term expired and were therefore trustees de son tort. The trustees purportedly appointed by Messrs Butterfield and Taylor were also found to be trustees de son tort. The Judge ordered the Public Trust be appointed as trustee.
The Public Trust proceeded with the application to validate the sale of the properties. The sale was controversial but was ultimately approved after its terms had been amended.
The original trustees, who had commenced the application and had assisted the Public Trust, sought indemnification for their costs. This was rejected by the High Court on the basis that they had either ceased to be trustees or were not validly appointed in the first place.
The Court of Appeal proceedings
The original trustees appealed the costs element of the High Court’s decision to the Court of Appeal. The question put to the Court of Appeal was framed as:
“Should trustees whose terms have expired (but who have not been replaced), or who have been invalidly appointed to the trust, be entitled to an indemnity of the trust fund for reasonable costs and expenses incurred in bringing applications for directions from the High Court?”
The Court observed that most commonly the label ‘trustee de son tort’ is apt to describe a stranger meddling in the affairs of the trust who assumes trusteeship responsibilities. The Court acknowledged that this was not the case and noted that the label is also apt to describe an intended express trustee whose appointment has for some reason failed. It also thought it apt to describe a trustee whose appointment has ended by compulsory retirement but who nonetheless continues to assume the office of trustee on a de facto basis.
The Court commented that it is one of the fundamental rights of an honest, express trustee that costs and expenses properly incurred in the administration of the trust are compensable out of the assets of the trust and is an incidence of trusteeship. It confirmed that former trustees may claim costs and expenses from their successors or via the court and added that in its supervisory jurisdiction, the court will review such costs and expenses to ensure they are necessarily incurred and reasonable in extent.
The Court noted that applications to bring order to a distressed trust had to be made. No criticism can be made of the application to vary the objects of the Trust, which otherwise required retention of loss-making assets. It would be unjust if de facto trustees bringing responsible applications for directions to progress the administration of a distressed trust did not receive their reasonable costs and expenses. The right of indemnity does not necessarily end with the appointment of the Public Trust given the assistance the original trustees have given in prosecuting the application. The Court concluded that the High Court had misdirected itself and ordered that the matter be remitted for determination of the proper amount of indemnified costs for bringing and prosecuting the applications.
It seems only fair that honest de facto trustees assuming fiduciary duties not be left out of pocket once the deficiencies in the trust are remedied. However, one issue that was not canvassed by the Court in Butterfield is whether the extent to which those trustees may be to blame for the deficiencies might be taken into account in consideration of any request for indemnification. After all, the unavoidable conclusion in the circumstances of this case must be that this unfortunate issue would never had arisen had the trustees been familiar with the terms of the trust deed which they were charged with applying.
© G D Clews 2017