Butterfield v Public Trust
[2017] NZCA 367
•24 August 2017 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA124/2017 [2017] NZCA 367 |
| BETWEEN | JOSEPH GORDON BUTTERFIELD, DEREK JOHN TAYLOR AND EUAN BOYD HILSON |
| AND | PUBLIC TRUST ATTORNEY-GENERAL |
| Hearing: | 17 August 2017 |
Court: | Kós P, Winkelmann & Clifford JJ |
Counsel: | J V Ormsby and S Campbell for Appellants |
Judgment: | 24 August 2017 at 11.00 am |
JUDGMENT OF THE COURT
A The appeal is allowed.
BThe application by the appellants for indemnity for reasonable costs and expenses in bringing and prosecuting the three applications in the High Court is remitted to that Court for reconsideration in accordance with the terms of this judgment.
CThe first respondent is to pay the appellants costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Kós P)
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 from the trust fund for reasonable costs and expenses incurred in bringing applications for directions from the High Court?
Background
The Burnett family have farmed Mount Cook Station and Cox’s Downs Station in the South Island of New Zealand since 1860. The sole owner in recent years was Mr Donald Burnett. In December 2009 when he was 94 years of age he made a will providing for the properties 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 the will, in November 2009. The purchase price was payable only on demand. The residue of the estate (including the loan to the Trust) would in due course vest in the Trust. 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 July 2010.
The initial trustees were Messrs Joseph Butterfield and Derek Taylor. For reasons that need not concern us, transfer of the farming properties from the estate to the Trust did not occur until 30 November 2015. Immediately prior to that Messrs Butterfield and Taylor purported to appoint Mr Euan Hilson as a third and further trustee. In March 2016 they entered into an agreement to sell the properties to a Mr David Gould of Guide Hill Station Ltd. In April 2016 they purported to appoint a Mr Michael Askin as a fourth and further trustee. He alone was then appointed interim trustee by the Court in July 2016.
Beneath all this activity lay an unappreciated problem: Messrs Butterfield and Taylor’s terms of appointment as trustees were limited to five years. Their terms had expired therefore in November 2014. That was not appreciated by the appellants (or their legal advisers) until early April 2016. Having already entered into an agreement to sell the properties to Mr Gould at a time when none of the purported trustees were validly occupying that position necessitated a series of applications for orders in the High Court.
In May 2016 the appellants and Mr Askin brought an originating application for orders and directions under ss 51 and 66 of the Trustee Act 1956, seeking:
(a)appointment of new trustees (Messrs Hilson and Askin);
(b)approval of variation to the objectives of the charitable trust;[1] and
(c)approval of the sale of the farming properties.
[1]This application being brought under s 21 of the Charitable Trusts Act 1957.
In an oral judgment delivered in September 2016 Gendall J found that:[2]
(a)Messrs Butterfield and Taylor were not trustees after November 2014 but thereafter were trustees de son tort;[3]
(b)Messrs Hilson and Askin had not validly been appointed trustees by Messrs Butterfield and Taylor. The Court declined to appoint them trustees under s 51 of the Trustee Act. To the extent they had acted as trustees without due appointment they too were trustees de son tort; and
(c)the Public Trust would instead be appointed sole trustee.
[2]Re Burnett Mount Cook Station Charitable Trust [2016] NZHC 2214 [September judgment].
[3]As to that characterisation, see below at [17].
The Public Trust abandoned the application for variation of the objects of the charitable trust, but took over and continued the application for approval of sale to Mr Gould.
That application was hotly contested by a number of parties served and by other interveners. The Attorney-General (represented by Mr Powell) served as primary contradictor. The appellants continued to appear by counsel in support of the application. Mr Powell told us that, given the very recent addition of the Public Trust, the appellants’ participation in effect prosecuting the application was very helpful. Gendall J eventually granted approval of the sale in a second judgment given in November 2016.[4] The details of that need not detain us. It followed Mr Gould’s offer of certain additional restrictive covenants.
[4]Re Burnett Mount Cook Station Charitable Trust [2016] NZHC 2669 [November judgment].
The appellants then sought indemnity for their costs and expenses in bringing the three applications, under either cl 22 of the Trust Deed or pursuant to equity’s general jurisdiction. Before us Mr Ormsby for the appellants clarified that that application, the foundation of the present appeal, went no wider than that.
In a third judgment given in February 2017 Gendall J directed all costs and disbursements of the Public Trust in relation to the proceeding be paid from the funds of the Trust.[5] The costs of other parties were to lie where they fell. In relation to the appellants, the Judge noted:[6]
The original applicants, as I have noted, have sought that they be indemnified from the assets of the Trust for their costs and disbursements. As I understand it, this was not pleaded nor considered as part of the hearing in this matter. It is opposed at least by the Public Trustee and in my view in all the circumstances prevailing in this case, the original applicants should not be indemnified for their costs by the Trust.
[5]Re Burnett Mount Cook Station Charitable Trust [2017] NZHC 169 [February judgment].
[6]At [13].
The appellants appeal that order to this Court.
Submissions
Mr Ormsby submitted that the appellants were entitled to indemnity (for reasonable costs and expenses) under cl 22.3(a) of the Trust Deed. That provision, he submitted, continued to apply despite the fact that Messrs Butterfield and Taylor had ceased to be trustees and Mr Hilson had never validly been appointed one. The trustees had acted properly and so there were no public policy reasons disentitling them to indemnity. If that were not correct, then the appellants should still be entitled to costs notwithstanding any invalidity of appointment. Where the error was an innocent one, equity would still grant indemnity for reasonable costs and expenses incurred within the scope of trusteeship and for the benefit of the trust.
For the Public Trust, Ms Davenport QC submitted that the indemnity in the Trust Deed did not apply to the appellants as a matter of interpretation. It applied only to those persons actually trustees (duly appointed) or to former trustees (again duly appointed) in office at the time the costs and expenses were incurred. Equity, Ms Davenport submitted, provided no general principle that those invalidly appointed as trustees should be entitled to indemnity. Statutory basis for an order for ordinary costs existed under r 14 of the High Court Rules 2016, and the Judge had exercised that jurisdiction in rejecting the appellants’ costs application. Any appeal from it was one of discretion.
We also heard from two interveners, Messrs Cunningham and Lawry, who had participated in the High Court hearing concerning sale of the properties. Neither, however, is a beneficiary of the Trust. Mr Cunningham accepted trustees needed to be recompensed for necessary costs and expenses, otherwise no-one would accept appointment. But in this case, he submitted, the appellants had misconducted themselves and no costs should be awarded. Mr Lawry made a similar submission, noting that disciplinary complaints were being advanced against two of the appellants who are chartered accountants. He submitted that costs should not be determined until those matters are resolved.
Analysis
A trust had been created. Everyone is agreed it had important work to do in acquiring and running the two properties. The farming properties were loss-making; the Trust was distressed, on the verge of insolvency. Financing support could not be found.[7] As a result of the November 2015 transfer the farming properties became registered in the names of all three appellants. Two had been trustees; the third was appointed invalidly at a time when neither the appellants nor their legal advisers (who documented the appointment) appreciated the legal position as to the two appointing trustees. The effect of the transfer, made in good faith, was to convey legal ownership of the properties to the appellants.
[7]November judgment, above n 4 at [68]–[70].
It was common ground before Gendall J that in these circumstances the appellants were trustees de son tort. We agree with that characterisation. Most commonly that label is apt to describe a stranger meddling in the affairs of the trust who assumes trusteeship responsibilities and thereby acquires trust property. That is not this case. But it is also apt to describe an intended express trustee whose appointment has for some reason failed. That was the case in Pearce v Pearce where Romilly MR observed of the invalid appointee:[8]
She was never regularly appointed trustee, but acted as such, and may be said to have been in the nature of a trustee de son tort …
Mr Hilson falls in that category. Although no authority was cited for the proposition, we think it apt also to describe a trustee whose appointment has ended by compulsory retirement (which it is common ground occurred here with Messrs Butterfield and Taylor) but who nonetheless continues to assume the office of trustee on a de facto basis.[9]
[8]Pearce v Pearce (1856) 22 Beav 248, 52 ER 1103 at 1104.
[9]A compulsory retirement provision in a trust deed is unusual, though it is recommended practice in Geraint Thomas and Alastair Hudson Law of Trusts (2nd ed, Oxford University Press, Oxford, 2010) at [22.07].
The expression “trustee de son tort” is an archaic law French description for a de facto trustee under an institutional constructive trust.[10] Lord Millett described a trustee de son tort as a person though not appointed as trustee who takes it upon himself to act as such and to discharge the trustee’s duties on behalf of others.[11] Such a trustee is said to closely resemble an express trustee. Indeed Lord Millett called them “true trustees … fully subject to fiduciary duties”.[12] That is important because some of the incidents of express trusteeship may then apply to an honest de facto trustee. We will return to that point.
[10]Lynton Tucker and others Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [42-01].
[11]Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 1 All ER 97, at [138].
[12]At [138].
We agree, however, with Ms Davenport that the appellants are not entitled to indemnity under cl 22.3(a) of the Trust Deed. It is unnecessary to set that provision out. In our view it plainly confers an express right of indemnity only on an express trustee duly appointed and continuing, validly, in office at the time the expense is incurred.
Reliance might instead have been placed on s 71 of the Trustee Act. It is not confined to an award of litigation party and party costs, but extends to an indemnity for expenses of and incidental to an application. Permitted applicants are not confined to express trustees. However the provision was not relied on here. Perhaps that was because the appellants had in mind seeking costs other than in relation to the three applications. If so, that was no longer their position before us.
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. As Danckwerts J explained in Re Grimthorpe:[13]
It is commonplace that persons who take the onerous and sometimes dangerous duty of being trustees are not expected to do any of the work on their own expense; they are entitled to be indemnified against the costs and expenses which they incur in the course of their office; of course, that necessarily means that such costs and expenses are properly incurred and not improperly incurred. The general rule is quite plain; they are entitled to be paid back all that they have had to pay out.
[13]Re Grimthorpe [1958] Ch 615 (Ch) at 623. See also Turner v Hancock (1882) 20 Ch D 303 (CA) at 305.
The proposition is so fundamental that it need not be justified. It is a right, probably proprietary in nature, recognised by equity as an incident of trusteeship. The right is to an indemnity for reasonable costs and expenses incurred in the administration of the trust. That is not the same as an award of indemnity costs in litigation. The entitlement in the first instance is against the trust and its assets. A current trustee may therefore deduct reasonable costs and expenses incurred in the administration of the trust from the trust assets, in exercise of a right of exoneration.[14] Former trustees may claim such costs and expenses from their successors or, failing satisfaction, via the court. Exercising its supervisory jurisdiction the court will review costs and expenses incurred to ensure they are both necessarily incurred in the interests of the trust and reasonable in extent. The limitation was set out in New Zealand Māori Council v Foulkes:[15]
The limitation on a trustee’s right of indemnity is, however, that the expenses are “properly incurred”. The duty to seek advice does not extend, for instance, to pose questions the answers to which are perfectly obvious. Nor where no real and substantial dispute exists. Unnecessary proceedings, or the taking of unnecessary procedural steps needlessly increasing costs, may mitigate (or eliminate) the right of indemnity. Again, excessive costs lie beyond the scope of indemnity. Every dollar paid in trustees’ expenses is a dollar denied to beneficiaries of the Trust.
[14]Lewin on Trusts, above n 10, at [21-043].
[15]New Zealand Māori Council v Foulkes [2015] NZHC 489 at [31].
That then is the position concerning express trustees. It applies also to constructive trustees, acting reasonably and in good faith, who incur expenditure in administering a trust, albeit on a de facto basis. They are also entitled to an indemnity for reasonable costs and expenses. Lewin on Trusts puts it thus:[16]
Persons who have not been properly appointed as trustees, if they have acted in good faith, believing themselves to have been duly appointed, are entitled to indemnity in the same way as other trustees.
This principle applies equally to a failed appointee to an express trust as it does to a fiduciary becoming a constructive trustee of property under the rule in Keech v Sandford.[17] It is also consistent with the principle that a fiduciary who improves trust assets may be entitled to a measure of compensation, even where he or she has acted in breach of fiduciary duty.[18]
[16]Lewin on Trusts, above n 10, at [21-038]. See also Travis v Illingworth (1868) Weekly Notes 206; and Provident Capital Limited v Augusta Pty Ltd [2011] NSWSC 258 at [47].
[17]Keech v Sandford (1726) Sel Cas T King 6; and Lewin on Trusts, above n 10, at [21-038].
[18]Boardman v Phipps [1967] 2 AC 46 (HL); and O’Sullivan v Management Agency & Music Ltd [1985] 1 QB 428 (CA).
The application for costs and expenses in the present case was confined to those associated with the three applications noted above.[19] Despite the reservations expressed by the interveners there is no word of criticism of the appellants by Gendall J in his various judgments for the steps taken in attempting to bring order to the affairs of this distressed trust by the making of these applications. It is plain that an application had to be made for the appointment of further trustees. Those previously appointed had expired by the effluxion of time; the purported appointment of Mr Hilson was invalid. An application was required. In due course it resulted in the Public Trust being appointed. No criticism can be made in our view of the application to seek variation to the objects of the Trust. That related directly to the difficulty confronted by any trustee in this situation from the apparent objects of the Trust arguably requiring retention of assets that were loss-making. The application for approval of sale of the property to Mr Gould followed a public tender process in which Mr Gould’s was the preferred bid. The Public Trust cannot (and does not) criticise the bringing of that application. After all, it continued the application through to the third judgment approving the sale.
[19]See above at [5].
Gendall J said in his costs judgment that the application for indemnity was neither pleaded “nor considered as part of the hearing in this matter”.[20] We do not understand that reservation. As the Judge himself noted, the Public Trust had continued the appellants’ application (at least insofar as it related to the major issue of approval of sale). Yet the Public Trust was awarded reimbursement of all costs and disbursements incurred by it out of the assets of the Trust. It had not pleaded for costs; it simply continued the appellants’ application. There is no basis for distinction between them based on pleading, and the appellants had made clear in argument that costs and expenses would be sought. Ms Davenport did not seek to uphold the distinction made on this point. No formal pleading was needed to engage the Court’s inherent power to approve trustee expenditure associated with the bringing of the proceeding the Court is seized of, as the award made to the Public Trust confirms. Nor is it needed to engage the Court’s power under s 71 of the Trustee Act.
[20]February judgment, above n 6, at [13].
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 in doing so. Ms Davenport accepted the appellants must be entitled to something. Just not the whole amount they seek. That being so, the refusal of costs altogether must be wrong.
We are satisfied therefore that the Judge has inadvertently misdirected himself as to the question of costs. The matter must therefore be remitted to the High Court for the determination of what amount should properly be awarded the appellants by way of reasonable costs and expenses in the bringing and prosecuting of the three applications. We do not see the right of indemnity necessarily ending in this case with the appointment of the Public Trust as express trustee, given the further assistance given by the appellants in prosecuting the s 66 application. Any costs other than in relation to the applications will need to be the subject of separate negotiation with the current trustee or, failing success, further application to the High Court. But we would hope that the good sense exhibited by all counsel before us will mean the High Court’s time will not be needed further on the subject of costs and expenses.
Result
The appeal is allowed.
The application by the appellants for indemnity for reasonable costs and expenses in bringing and prosecuting the three applications in the High Court is remitted to that Court for reconsideration in accordance with the terms of this judgment.
The first respondent is to pay the appellants costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Wynn Williams, Christchurch for Appellant
Public Trust, Auckland for First Respondent
Crown Law Office, Wellington for Second Respondent
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