A v D and E Limited

[2022] NZHC 172

ORDER PROHIBITING PUBLICATION OF NAMES, ADDRESSES OR IDENTIFYING PARTICULARS OF PLAINTIFFS AND DEFENDANTS.

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE

CIV-2018-441-000060

[2022] NZHC 172

BETWEEN

A

First Plaintiff

B
Second Plaintiff

C
Third Plaintiff

AND

D AND E LIMITED AS TRUSTEES OF THE Z TRUST

Defendants

On the Papers
Counsel:	M Phillipps and N Dennison for the Plaintiffs M Wenley and B Ronberg for the Defendants
Judgment:	14 February 2022

SUPPLEMENTARY JUDGMENT OF GWYN J

(Date on which constructive trust becomes effective; effect on interim distributions; indemnification for trustees’ costs)

[1]The plaintiffs alleged that Z had physically and sexually (in relation to plaintiff

A) abused them during their childhood. In my judgment of 5 November 2021 (the judgment)1 I found that abuse was proved and amounted to a breach of the fiduciary duty Mr Z owed to his children at that time. The plaintiffs also pleaded that the proved

1      A, B and C v D and E Limited as Trustees of the Z Trust [2021] NZHC 2997.

A, B and C v D and E LIMITED AS TRUSTEES OF THE Z TRUST [2022] NZHC 172 [14 February 2022]

abuse created a vulnerability which meant that, in their adulthood, Mr Z owed them a fiduciary duty to provide economically for them from his wealth.2

[2]                 I found that Mr Z did owe a fiduciary duty to the children as adults and had gifted his property3 to the Z Trust in breach of that duty. I concluded that the Z Trust held the property on constructive trust for the plaintiffs.

[3]                 By memorandum of 10 November 2021, Mr Wenley, counsel for the trustee defendants, sought a Beddoe order in the following terms:

… notwithstanding the declaration that they hold the assets of the [Z] Trust on a constructive trust for the Executors of [Z]’s estate, they are entitled to be indemnified out of the assets of the [Z] Trust in respect of the reasonable and proper legal and associated costs of:

(a)Defending the claim in the High Court;

(b)The High Court costs award;

(c)Lodging and pursuing an appeal in the Court of Appeal.

[4]                 In my minute of 1 December 2021,4 I declined to grant a Beddoe order, either in respect of the High Court proceedings or the prospective appeal by the defendants to the Court of Appeal.

[5]                 The minute records two questions on which counsel for the defendants had sought clarification:

(a)The date that the declaration of a constructive trust becomes effective; and

(b)The status of the interim distributions of $21,000 already made to the beneficiaries of the trust prior to 5 November 2021.

2 At [119].

3      The Z Trust was settled on 22 December 2014. The property was gifted by Mr Z to the Z Trust in two tranches: the residential property on 22 December 2014 and the shares on 27 January 2016. In the judgment I defined the property and shares collectively as “the property”.

4      A, B and C v D and E Limited as Trustees of the Z Trust  HC Napier  CIV-2019-441-000060,    1 December 2021 (Minute of Gwyn J).

[6]                 As I noted in the minute, those questions are genuinely incidental to the judgment and I invited submissions on those two points before I issued a supplementary judgment.5

[7]                 I have now received submissions from counsel  for the defendants, dated     13 December 2021, and for the plaintiffs, dated 15 December 2021.

Date at which declaration of constructive trust becomes effective

[8]                 Mr Phillipps for the plaintiffs says that the constructive trust declared by the Court is properly characterised as an institutional constructive trust. Accordingly, it arises and is effective from the date of the receipt by the Z Trust of the property. Counsel relies on the Court of Appeal judgment in Fortex Group Limited (in receivership and liquidation) v MacIntosh6 (Fortex Group) where Tipping J for the Court analysed the distinction between an express trust, an institutional constructive trust and a remedial constructive trust.

[9]                 Mr Phillipps says that here the property was never beneficially held by the trustee recipients. The trustees of the Z Trust have been found to have known at the time they received the property that the transferor, Mr Z, was in breach of his fiduciary duty to the plaintiffs.

[10]            Mr Phillipps poses the question as: does the trust arise directly from the transaction between Mr Z, the Z Trust and the property? The answer, in his submission, is yes.

[11]            Mr Wenley for the defendants does not directly address the question of when the constructive trust takes effect, but says:

The application of the equitable maxim that ‘one who seeks equity must do equity’ would allow for recognition of competing legal and equity interests of the trustees and the beneficiaries of the [Z] Trust. This would enable the Court to adjust those interests as at 5 November 2021 rather than retrospectively impose a blanket constructive trust.

5 At [40].

6      Fortex Group Limited (in receivership and liquidation) v MacIntosh [1998] 3 NZLR 171 (CA).

Discussion

[12]            In the judgment I found7 that the transfer by Mr Z of the property to the Z Trust was in breach of the fiduciary duties Mr Z owed to the plaintiffs. I also found that the Trust was imputed with Mr Z’s knowledge and received the gifts of the property knowing they were in breach of Mr Z’s fiduciary duties to the plaintiffs, that is, they were in knowing receipt of the property.

[13]            I found that the trustees therefore hold the property on constructive trust for the plaintiffs. As the author of Laws of New Zealand states:8

A stranger who receives property in circumstances where he or she has actual or constructive notice that it is trust property being transferred to him or her in breach of trust will, however, also be a constructive trustee of that property.

[14]            I agree with Mr Phillipps that to answer the question of when the constructive trust becomes effective, it is first necessary to establish the nature of the constructive trust.

[15]The analysis in the Fortex Group case is helpful:9

It [the case] concerns the law of trusts: specifically the circumstances when express trusts and institutional constructive trusts come into existence and when remedial constructive trusts may be imposed. For present purposes, these three types of trust can be described as follows. An express trust is one which is deliberately established and which the trustee deliberately accepts. An institutional constructive trust is one which arises by operation of the principles of equity and whose existence the Court simply recognises in a declaratory way. A remedial constructive trust is one which is imposed by the Court as a remedy in circumstances where, before the order of the Court, no trust of any kind existed.

The difference between the two types of constructive trust, institutional and remedial, is that an institutional constructive trust arises upon the happening of the events which bring it into being. Its existence is not dependent on any Order of the Court. Such orders simply recognise that it came into being at the earlier time and provides for its implementation in whatever way is appropriate. A remedial constructive trust depends for its very existence on the Order of the Court, such order being creative rather than simply confirmatory. This description should not be regarded as definitive or as precluding further developments in this area of the law when greater refinement may be necessary…

7      A, B and C v D and E Limited as Trustees of the Z Trust, above n 1, at [174].

8      Lindsay Breach Laws of New Zealand Trusts (online ed) at [462].

9      Fortex Group, above, n 6, at 172-173.

[16]            In Regal Castings v Lightbody the Supreme Court (also the judgment of Tipping J) referred with approval to the passage from the Fortex Group case.10 There, the Supreme Court imposed a remedial constructive trust against the property received by the trustees of the family trust in favour of the Official Assignee in Lightbody’s bankruptcy. I agree with Mr Phillipps that in this case the property was never beneficially held by the trustee recipient, unlike in Regal Castings, where the alienation of the property was described as “only voidable at best”.11

[17]            The difference between a remedial and an institutional constructive trust was also discussed by the Privy Council in Goldcorp Exchange Limited (in receivership): Kensington v Liggett:12

Finally, it is argued that the Court should declare in favour of the claimants a remedial constructive trust, or to use another name a restitutionary proprietary interest, over the bullion in the Company’s vaults. Such a trust or interest would differ fundamentally from those so far discussed, in that it would not arise directly from the transaction between the individual claimants, the Company and the bullion, but would be created by the Court as a measure of justice after the event.

[18]            As the author of Laws of New Zealand, Institutional Constructive Trusts, states:13

An institutional constructive trust is imposed upon a particular asset or assets, not because pre-existing property of the plaintiff has been followed in equity into those assets but because, quite independently of such considerations, it is, within accepted principle, unconscionable for the defendant to assert a beneficial title to the asset or assets, to the denial of the plaintiff.

[19]            In Commonwealth Reserves I v Chodar Glazebrook J describes the two features generally used to distinguish institutional from remedial constructive trusts in the following terms:14

The first is that the institutional constructive trust is a mandatory consequence of certain events, while the remedial constructive trust is a discretionary remedy. The second is that the institutional constructive trust exists from the time the events giving rise to it occur, while a remedial constructive trust becomes effective at the time of

10     Regal Castings v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 at [162].

11 At [162].

12     Goldcorp Exchange Limited (in receivership): Kensington v Liggett [1994] 3 NZLR 385 (PC) at 400.

13     Charles Rickett Laws of New Zealand Equity (online ed) at [129].

14     Commonwealth Reserves I v Chodar [2001] 2 NZLR 374 (HC) at [39].

the Court Order. The second factor is confirmed by Tipping J in Fortex when he says at p 175 “this kind of trust does not exist at all until the Court imposes it”.

[20]            The constructive trust declared by the Court in the judgment is an institutional constructive trust imposed on the property in the hands of the constructive trustees (the trustees of the Z Trust). That is consistent with the case law and commentary set out above. Accordingly, the constructive trust arises and is effective from the date of receipt by the Z Trust of the property.

Distributions made to or for the benefit of the beneficiaries

[21]            Counsel for the trustees advises that distributions totalling $29,405 have been made:

23 Nov 2017	M, N and O15	Deeds of Distribution x 2	$5,000 each	$15,000
4 April 2018	M, N and O	Resolution and Deeds of Distribution	$3,000 each	$9,000
September 2018	Payment    of   legal fees for M, N and O	Trustee Resolution	$5,405	$5,405
$29,405

[22]            Mr Phillipps notes that on 8 November 2016 the solicitors for the Z Trust wrote to the plaintiffs’ solicitors:

…a level of goodwill has already been shown by the beneficiaries of [Z’s] Estate to your clients. That is certain items, which were in the home, have been handed over to family members…We are further requested to advise you that although the beneficiaries are prepared to consider proposal in relation to [Z’s] estate, they are not prepared to entertain any proposal that involves the family trust.

[23]            By email dated 29 November 2016 GM Legal, the solicitors for the plaintiffs, replied as follows:

In terms of the assets held by the trustees, I hope there is no momentum to sell those or make any distributions? I’m conscious of the fact the trustees are maintaining a position that the trust and transfers to trust are valid (putting it in simple terms) (and acknowledging they are entitled to maintain that stance) meaning they can deal with the assets as they see fit. However, I also hope they are taking the position of “wait and see” as to what happens with the proceedings and so don’t intend making any plans to sell or distribute.

15     The names of the beneficiaries are anonymised.

[24]            Subsequently, the plaintiffs’ Family Protection Act 1955 proceedings were filed in the Taupo Family Court on 23 December 2016. This proceeding was filed in the High Court on 2 July 2018.

[25]            It follows from my conclusion that the constructive trust declared in this case is an institutional constructive trust that arises and is effective from the date of receipt by the Trust of the property, that as a matter of law, the distributions cannot stand.

[26]            The plaintiffs seek to invoke general principles of equity to allow an adjustment of interests as between the plaintiffs and the beneficiaries of the Z Trust, as at the date of the judgment.16

[27]            Given my conclusion that the constructive trust in this case is an institutional constructive trust, that option is not open. But in any event, it is not clear that general equitable principles would assist the defendant trustees. I note that:

(a)the distributions of 23 November 2017 and 4 April 2018 occurred after GM Legal’s email of 29 November 2016 referring to assets of the Trust and warning against distribution.

(b)the plaintiffs’ statement of claim dated 2 July 2018 sought relief in the following terms: “An order that the First Defendants are holding the Property and the Shares as constructive trustees for the Estate of [Z] and an order for account”.

(c)the further distributions, in December 2018, on 2 December 2019 and 24 February 2021, occurred after this High Court proceeding had been filed.

[28]            The trustees were on notice from at least 29 November 2016 of the risks in dealing with the Trust property before the plaintiffs’ claims were resolved. The decision of the trustees to make distributions in those circumstances would tell against the court’s discretion being exercised in the manner sought.

16     5 November 2021.

Costs

[29]            In my minute of 1 December 2021, having declined the defendants’ Beddoe application pursuant to Part 14 of the Rules, I suggested that costs should be dealt with by the filing of memoranda in the normal course. Both parties have filed memoranda in respect of the proceedings and I have issued a costs judgment simultaneously with this judgment.17 However, in addition, the defendants have, separately, sought to recover the trustees’ costs in defending the proceeding as “indemnity costs”, relying on r 14.6(4)(c) of the High Court Rules 2016 (the Rules). The costs sought total

$70,643.93.

[30]            Mr Wenley’s starting point is that the Z Trust is an express trust, created in compliance with s 15 of the Trusts Act 2019 (the Act) and with a duty to act for the benefit of the beneficiaries of the trust.18 The defendants rely on Pratley v Courtenay for the proposition that the trustees’ duty to protect the trust assets for the benefit of the beneficiaries extends to bringing and defending claims necessary to fulfil that duty.19

[31]            Both the Act20 and the Trust deed contain a right to indemnity for expenses and liabilities incurred by a trustee  when  acting  reasonably  on  behalf  of  the  trust.  Mr Wenley’s submission is that the defendant trustees acted honestly, reasonably and in good faith in defending the plaintiffs’ claim and are therefore entitled to an indemnity for all expenses reasonably incurred in doing so.

[32]            Mr Wenley submits that the assessment of whether the trustees have acted honestly and reasonably in pursuance of the duty should be judged “objectively” – that is, on the basis of what they actually knew or reasonably ought to have known – rather than on the basis of whether they knew that Z had breached his fiduciary duty to the plaintiffs when they received the property. The submission for the defendants is that the reasonableness of their action must be assessed having regard to factors such as: that the conventional position is that the transfer of property to a trust avoids the

17     A, B and C v D and E Limited as Trustees of the Z Trust (Costs) [2022] NZHC 173.

18     Trusts Act 2019, s 26.

19     Pratley v Courteney [2018] NZCA 436.

20     Trusts Act, s 81.

operation of the Family Protection Act 1955; commentary on the likelihood of a parent being found to owe a fiduciary duty to their adult children;21 and the judgment of Associate Judge Johnston in the summary judgment application brought by the defendants,22 where the Associate Judge said the plaintiffs’ claim would “certainly be breaking new ground”.23

[33]            Mr Wenley submits that this case is distinguishable from Alsop Wilkinson (a firm) v Neary24  (which I relied on in part to reach  the conclusion in my minute of    1 December 2021 that the trustees would likely not be entitled to be indemnified from the trust assets) because that case involved a statutory claim on the trust to set aside as transactions defrauding the creditors, the two settlements made by the first defendant. Here, the equitable remedy of constructive trust imposed by the court was entirely novel with respect to adult children.

[34]            The plaintiffs oppose the defendants’ application for indemnity costs on the basis that, first, although the trustees’ general rights of indemnity are not disputed, there is no right of indemnity against property that is not trust property. The Court has already found that the trustees hold the property on constructive trust for the estate of Mr Z. There is therefore no property for any indemnity to bite against.

[35]            Second, this is “hostile litigation” between two competing classes of beneficiaries: the executors of the estate of Mr Z and the express beneficiaries of the Z Trust and the situation was expressly addressed in my minute of 1 December 2021, in relation to the defendants’ application for Beddoe orders.

[36]            Mr  Phillipps  says  the  defendants  have  misconstrued  the  application  of   r 14.6(4)(c): this is “self-interested” litigation as described in McCallum v McCallum (as trustees of the McCallum Family Trust),25 between the executors for the Z Estate

21  For example, Andrew Steele “Do parents owe fiduciary duties to their children?” [2019] NZLJ  315.

22 In A, B and C v D and E Limited [2019] NZHC 992, Associate Judge Johnston dismissed an application by the first defendants for summary judgment but entered summary judgment in favour of the second defendants. In D and E Limited v A, B and C [2019] NZCA 585, the Court of Appeal declined an application for leave to appeal the Associate Judge’s judgment declining the application for summary judgment.

23 At [36].

24 Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 (HC).

25 McCallum v McCallum (as trustees of the McCallum Family Trust) [2021] NZCA 237 at [42].

on the one hand, as beneficiaries of the constructive trust declared by the Court, and the express beneficiaries under the trust deed on the other hand. As Joseph Williams J held in Finlayson v Young,26 in cases concerning private trusts, the general rule is that costs in “hostile” proceedings are subject to the usual approach – that is, costs follow the event – and will not be awarded out of the trust funds.

Discussion

[37]            By way of a preliminary point I note that the submission for the defendants proceeds on a misreading of the judgment. The judgment does not, as counsel’s memorandum asserts, conclude that the settlement of the Z Trust was a breach of Z’s fiduciary duty to the plaintiffs. Rather, the breach was the transfer by Z of the property to the Z Trust.27

[38]            In addition, the application in effect seeks to relitigate some of the key findings in the judgment.28 Those are matters for any appeal not for submissions on a costs application.

[39]            The minute of 1 December 2021 addressed the Trustees’ application for a retrospective Beddoe order to cover their costs in defending the proceeding (and for a prospective Beddoe order for a proposed appeal). The discussion and conclusions in that minute are directly relevant to this application for costs.

[40]            In the Beddoe application counsel submitted that, until the judgment, the trustees had considered it appropriate to resort to the assets of the Trust for the costs of defending the plaintiffs’ claims, in reliance on Pratley v Courteney. I concluded there was no jurisdiction to make a retrospective Beddoe order but that, in any event, the defendants had not provided the court with the requisite information to make an assessment whether an order was appropriate – including independent legal advice as to whether such an order would be in the best interests of the Trust.

26     Finlayson v Young HC Wellington CIV-2009-485-717, 10 July 2009.

27     A, B and C v D and E Limited as Trustees of the Z Trust, above, n 1, at [174].

28     Memorandum of Counsel for Defendants to Gwyn J Regarding Costs, dated 13 December 2021, at [7] and [8], as to Z’s knowledge.

[41]            In this application the defendants continue to rely on Pratley v Courteney for the proposition that the trustees’ duty to protect the trust assets for the benefit of the beneficiaries extends to bringing and defending claims necessary to fulfil that duty. As in a Beddoe application, the court must be satisfied in relation to the application for an indemnity for costs, that it was reasonable for the trustees to defend the plaintiffs’ claim. So, for example, in McCallum v McCallum,29 the Court of Appeal said they must do so where the grounds for action or defence are reasonable. If there is doubt as to what they may do the trustees should take legal advice and may seek directions from the court. Costs must be reasonably and properly incurred.

[42]            The facts of Pratley v Courtenay were very different from this case and I do not think that decision assists the trustees. There the executor of the estates in question, Mr Pratley, had been recently appointed without knowledge of an imminent District Court hearing to determine a claim against one of the estates. The executor unsuccessfully sought to adjourn the court hearing to familiarise himself with the claim and assess whether it could be resolved. The adjournment application was declined. After judgment was given the executor sought indemnity for the costs incurred in defending the claim. In the High Court the Judge concluded it was not necessary for Mr Pratley to defend the claim and that he should not be indemnified. The Court of Appeal reversed the decision, holding that:30

In all the circumstances, we consider Mr Pratley acted reasonably in continuing the defence of the claim in accordance with the legal advice he received that there were good grounds for defence, a view we share.

[43]            Unlike Pratley v Courtenay, there were no circumstances of urgency in this case. As to whether there were good grounds for the trustees to defend the claim, I have already referred to the factors that Mr Wenley says the trustees relied on in continuing their defence of the claim.31 He relies in part on the judgment in the summary judgment application. In the passages of the High Court judgment relied on by the defendants, AJ Johnston noted that the plaintiffs’ claim would “certainly be breaking new ground”; having acknowledged the force in the counterpoints put to him

29     McCallum v McCallum, above n 25, at [28].

30     Pratley v Courtenay, above n 19, at [26].

31     As discussed in [32] of this judgment.

by Mr Wenley,32 the Associate Judge said “but [it] appears to me not entirely beyond the bounds of possibility that the courts may accept [the duty contended for]”; “the contention is not one that can be dismissed on a summary basis”.33

[44]On appeal the Court of Appeal said:34

We agree with the Associate Judge that the respondents’ proceedings will require a careful evaluation of whether the evidence demonstrates the respondents’ claim that Z owed them a fiduciary duty at the time he transferred most of his assets to the Trust. While the claims by the respondents may be novel, they are very dependent upon whether or not they are able to establish the facts necessary to underpin their claim that Z owed them fiduciary duties.

[45]            In those circumstances, where both the High Court and the Court of Appeal had declined to dismiss the claim and the Court of Appeal had emphasised the significance of the particular facts in being able to establish the claimed duties – and where the lawyers for the plaintiffs had squarely put the trustees on notice in respect of the risks of distribution of trust funds35 – it is difficult to conclude that the trustees acted reasonably in continuing their defence of the claim without seeking further guidance, whether from the court by way of application for a Beddoe order, or from an independent legal adviser as to the reasonableness of continuing to defend the claim. Although counsel has referred in general terms to the factors relied on by the trustees in defending the proceeding, the specific legal advice to the trustees is not before the Court.

[46]            In any event, in the minute of 1 December 2021 I characterised this proceeding as a trust dispute of a hostile nature (Lightman J’s first category in Alsop Wilkinson) and therefore not a proceeding in respect of which the trustees would have been entitled to be indemnified from the assets of the trust.36 In reaching that view I also relied37 on the Court of Appeal’s analysis of the Lewin on Trusts classification in McCallum v McCallum.38 Mr Wenley seeks to distinguish Alsop Wilkinson, pointing out that the case related to a statutory claim. However, Lightman J’s categorisation of

32     A, B and C v D and E Limited, above n 22, at [36]-[38].

33 At [37].

34     D & E Ltd v A, B and C above n 22, at [10].

35     See [23]-[24] of this judgment.

36     A, B and C v D and E Limited as Trustees of the Z Trust, above n 4, at [31]-[33].

37     At [34]-[36].

38     McCallum v McCallum, above n 25, at [35].

the three kinds of dispute in which trustees may be involved was not limited to or dependent on that particular factual scenario.39

[47]            Similarly, in considering an application for indemnity costs under r 14.6 of the High Court Rules (which requires that the party claiming costs has acted “reasonably” in the proceeding), Joseph Williams J in Finlayson v Young, relied on Alsop Wilkinson and other English authority in concluding that in hostile litigation in a private trust context the usual principles (including that costs follow the event) apply and costs will not be awarded out of trust funds.40

[48]            I conclude that the trustees’ costs and expenses in relation to defending the proceeding should not be met from the Trust fund.

Result

[49]Accordingly, I confirm my findings as follows:

(a)The constructive trust imposed on the trustees of the Z Trust and declared by the judgment is an institutional constructive trust, effective from the date of receipt by the Z Trust of the property.

(b)The interim distributions made to the beneficiaries of the Trust were made after the date on which the institutional constructive trust came into existence. Therefore, they cannot stand.

(c)The defendants are not entitled to indemnity costs from the Trust fund, pursuant to r 14.6(4)(c) of the High Court Rules.

Gwyn J

Solicitors:

Vicki Ammundsen Trust Law, Auckland for Plaintiffs Willis Legal, Napier for Defendants

39     Alsop Wilkinson (a firm) v Neary, above n 24, at 1223-4.

40     Finlayson v Young, above n 26, at [27].