Client Trustee Services Limited v Khodaverdi

[2023] NZHC 1772

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE

CIV-2022-412-000092

[2023] NZHC 1772

IN THE MATTER OF

THE LK FAMILY TRUST

AND IN THE MATTER OF

THE TRUSTS ACT 2019

BETWEEN

CLIENT TRUSTEE SERVICES LIMITED

Applicant

AND

LAURA MICHELLE KHODAVERDI

Respondent

Hearing:	5 July 2023
Appearances:	J M McGuigan and D R Weatherley for the Applicant
Judgment:	7 July 2023

JUDGMENT OF GENDALL J

Introduction

[1]                 The applicant Client Trustee Services Limited (CTSL) applies for orders under s 112 and 114 of the Trusts Act 2019 that it be removed as a trustee of the L K Family Trust (the Trust) and the Public Trust appointed in its place.

[2]In addition, in that application, CTSL specifically seeks at 1.1 a further order:

…pursuant to Section 133 of the Trusts Act 2019 and/or pursuant to the Court’s inherent jurisdiction that Client Trustee Services Ltd, or any trustee appointed in its place, abide the decision of the  Family  Court  in Khodaverdi v Khodaverdi (FAM-2021-012-000211).

CLIENT TRUSTEE SERVICES LIMITED v LAURA MICHELLE KHODAVERDI [2023] NZHC 1772 [7 July 2023]

[3]                 The  Trust  was  settled  on  28  February   2018   by   the   respondent,   Laura Khodaverdi (Laura). Laura and CTSL have been trustees since the Trust was settled.

[4]                 The sole asset of the Trust as I understand it is a property at 45 Hunt Street, Dunedin where Laura and her former husband, Darren Khodaverdi (Darren), used to reside. The property was purchased on 13 March 2018. Since that time, again as I understand the position, Laura has left New Zealand, has not participated in trustee decision-making and has failed to respond to CTSL’s or her former husband Darren’s attempts to contact her. In the meantime, Darren has paid all mortgage payments, insurance premiums, rates and other outgoings in relation to the property.

[5]                 Darren has brought the Family Court relationship property proceedings against Laura (FAM-2021-012-000211) noted in [2] above in the Dunedin Family Court. Laura has been served but has taken no steps in the proceeding. An issue arises in the Family Court as to the division of the Hunt Street property and whether it may even be relationship property. Orders of the Family Court directed the trustees of the Trust to be served. CTSL has advised the Family Court that it is seeking directions from this Court as to whether it is required to defend the Family Court proceedings.

[6]                 Counsel for CTSL, Ms McGuigan, confirms that numerous attempts have been made to contact Laura to have her engage in the Family Court proceeding and other Trust decisions but she has not responded. Consequently, CTSL has sought the orders from this Court as I have noted above:

(a)that CTSL (or the Public Trust in its place) abides the decision of the Family Court in the relationship property proceedings;

(b)removing CTSL as a trustee of the Trust; and

(c)appointing the Public Trust as a replacement trustee of the Trust.

[7]                 For some time these proceedings were on hold pending compliance with service directions, but now those directions have been complied with. Laura and

Darren have both been served. Some difficulties arose with service in  England on Ms Rogers-Holmes, Laura’s mother who is one of the beneficiaries of the Trust. This is now resolved, she being treated as having been served in accordance with an order to  this  effect  of  Eaton  J  in   this  Court  dated  2  December  2022.    And,  on    16 January 2023 the proposed new Trustee the Public Trustee was served (as directed by Dunningham J on 8 December 2022) this being confirmed in an Affidavit of Service dated 30 January 2023 by Greer Cameron Colinson.

[8]                 Also on 8 December 2022, Dunningham J in this Court directed that once confirmation of service of this proceeding on the Public Trustee was received, this matter was to be set down for a formal proof hearing. This has occurred and that formal proof hearing took place before me on 5 July 2023.

Formal Proof

[9]                 Formal proof for claims other than liquidated demands in money and for the recovery of land or chattels are addressed in r.15.9 of the High Court Rules 2016 as follows:

15.9 Formal proof for other claims

(1) This rule applies if, or to the extent that, the defendant does not file a statement of defence within the number of working days required by the notice of proceeding, and the plaintiff seeks judgment by default for other than a liquidated demand.

(2) The proceeding must be listed for formal proof and no notice is required to be given to the defendant.

(3) After a proceeding is listed for a formal proof hearing, no statement of defence may be filed without the leave of a Judge granted on the ground that there will or may be a miscarriage of justice if judgment by default is entered, and on such terms as to time or otherwise as the Judge thinks just.

(4) The plaintiff must, before or at the formal proof hearing, file affidavit evidence establishing, to a Judge’s satisfaction, each cause of action relied on and, if damages are sought, providing sufficient information to enable the Judge to calculate and fix the damages.

(5) If the Judge before or at the formal proof hearing considers that any deponent of an affidavit filed under subclause (4) should attend to give additional evidence, the Judge may direct accordingly and adjourn the hearing for that purpose.

McGechan on Procedure at HR 15.9.07 in part comments on this procedure in this way:

HR15.9.07 “A Judge’s satisfaction”

Rule 15.9(4) requires that each cause of action be established “to a Judge’s satisfaction”. “Satisfaction” means the Judge makes up their mind –- it does not import notions of the burden of proof and of setting a particular standard of proof: R v Leitch [1998] 1 NZLR 420 (CA) at 428.

[10]             Laura, who has been regarded effectively as the defendant in this proceeding, as I note was served with this proceeding, this occurring in October 2022. She has done nothing since. She has not filed any statement of defence or other document relating to this proceeding in any way. Nor has her mother or any other party required to be served in this matter.

[11]             Affidavit evidence for the formal proof application and this proceeding generally has been filed by Craig Anthony Paddon, a Dunedin solicitor and the previous sole director and shareholder of CTSL, his legal practice’s formal trustee company vehicle. Mr Paddon has now retired from that legal practice and as I understand it, as shareholder and director of CTSL.

Removal of CTSL as Trustee and appointment of Public Trust as replacement Trustee

[12] It is convenient to deal first with the removal and appointment application I note at [1] above, which I now do. As I understand the position in the Trust, at present Laura alone holds the power to appoint and remove trustees. Where, as seems to be the case here, she is unwilling to act in relation to the Trust, including to exercise the power to remove trustees, the power to appoint and remove trustees is held by the trustees. However, 75% of the trustees must agree to the appointment and/or removal. In those circumstances, it is not possible to effect CTSL’s removal or resignation as trustee without the Court’s assistance.

[13]             Given the position it finds itself in, as Mr Paddon makes clear in his affidavit, CTSL wishes to resign as trustee. And I am satisfied from all the material before the Court, as matters presently stand, the Trust is essentially hamstrung. With Laura refusing to engage in, or even respond to, trustee matters, CTSL is unable to perform

any of its duties as trustee. In addition, I understand the Trust has no assets other than the Dunedin property, and the Trust is reliant on Darren to meet the property’s mortgage payments and all costs, which he is doing. Generally it would appear that this is not satisfactory or sustainable.

[14]Sections 112 and 114 of the Trusts Act 2009 provide:

112 Court may make order for removal

Whenever it is necessary or desirable to remove a trustee and it is difficult or impracticable to do so without the assistance of the court, the court may make an order removing a trustee.

114 Court may appoint or replace trustee

(1)   Whenever it is necessary or desirable to appoint a new trustee and it is difficult or impracticable to do so without the assistance of the court, the court may make an order appointing a new trustee.

(2)   However, this section does not empower the court to appoint an executor or administrator.

(3)  If the court proposes to appoint Public Trust as the replacement trustee, the court must, before making the appointment, give Public Trust an opportunity to be heard on the matter.

(4)   If the court (except on application by a supervisor within the meaning   of section 6(1) of the Financial Markets Conduct Act 2013) appoints Public Trust as the replacement trustee, Public Trust—

(a)  must accept the appointment; and

(b)  may charge fees for acting as trustee.

[15]             The Public Trust has been served with these proceedings and given an opportunity to be heard on this matter, but it has indicated that it does not wish to be heard. Despite this, I am told the Public Trust effectively accepts it would be happy to accept appointment as a replacement trustee here and has already received and is considering a range of Trust documentation, presumably in anticipation of being appointed.

[16]             The Trusts Act 2019 generally has made appointment and removal of trustees a more straightforward exercise. But it is clear that for retirement, pursuant to s 101 of the Act, a trustee may only be discharged:

(a)by a person with the power to remove trustees (here, Laura); or

(b)if Laura is unable or unwilling to act, by the remaining trustees; or

(c)if Laura and/or the trustees are unable or unwilling to act, and the trustee’s retirement will reduce the number of trustees below the minimum required by the deed, the retiring trustee and the replacement trustee can act together; or

(d)where the minimum number of trustees required by the terms of the trust will remain, by the retiring trustee alone.

[17]             Without Laura’s agreement, it is difficult for CTSL to retire, or be replaced by a new trustee. This is because Laura is a remaining trustee and the Trust Deed requires either unanimity, or at least 75 per cent agreement, on appointment and removal of trustees. Further, the Trust Deed does not have a minimum number of trustees, and so s 101(c) is not triggered. While the Trust Deed does provide specifically for a trustee corporation to be appointed as sole trustee, the practical reality is that a sole trustee company must be willing to take on the trusteeship in the current circumstances.

[18]             Section 112 of the Act as I note provides that, whenever it is necessary or desirable to remove a trustee and it is difficult or impracticable to do so without the assistance of the Court, the Court may make an order removing a trustee. And s 114 of the Act, in turn provides that the Court may appoint or replace a trustee, including by appointing the Public Trust.

[19]             From all the material before the Court, it appears clear that the Trust simply cannot function at present. For all the reasons I have outlined, and given too there is no opposition to these aspects here, I am satisfied first, in terms of s 112, that it is necessary and desirable an order be made removing CTSL as a trustee of the Trust, and secondly, in terms of s 114, that a new replacement trustee is necessary and that this should be the Public Trust.

[20]             As to the appointment of the Public Trust as replacement trustee, I observe that it is well-placed as a long-standing professional trustee to deal with the current situation the Trust finds itself in. This will include any future dealings with Laura, with the beneficiaries including Darren, Laura’s mother and any qualifying children, and ultimately with any Trust funds that may materialise, including in particular pursuant to its statutory regime in relation to unclaimed moneys.

[21]             Overall, then, I repeat that I am satisfied too that it would be prudent here and expedient for the proper execution of the Trust and all the remaining beneficiaries as a whole to remove CTSL as trustee, and to appoint Public Trust in its place. Orders to this effect will follow.

Application under s 133 Trusts Act for directions relating to the Trust’s position on the Family Court proceedings

[22] I turn now to that part of the Application before the Court outlined at [2] above. This is brought pursuant to s 133 of the Trusts Act which provides:

133 Trustee may apply to court for directions

(1)   A trustee may apply to the court for directions about—

(a)  the trust property; or

(b)  the exercise of any power or performance of any function by the trustee.

(2)   The application must be served, in accordance with the rules of court, on each person interested in the application or any of them as the court thinks fit.

(3)   On an application under this section, the court may give any direction it thinks fit.

(4)    This section does not restrict the availability of alternative proceedings within the court’s jurisdiction, including a declaration interpreting the terms of the trust.

[23]             Ms McGuigan for CTSL made clear before me, the order sought by CTSL under s 133 is one:

…directing the trustees of the LK Trust to abide the decision of the [Family] Court in the Family Court proceeding…

[24]             That Family Court proceeding was served on CTSL as a trustee of the Trust over 12 months ago on 14 June 2022. On 30 June 2022 CTSL filed a notice of appearance in the Family Court and foreshadowed a likely application for directions to the High Court as to whether the trustees of the Trust ought to defend the proceeding.

[25]             This part of the present application relies largely on s 133 which has replaced s 66 of the Trustee Act 1956, a similar provision.

[26]             As to s 66, in New Zealand Māori Council v Foulkes, Kos J described s 66 as “a robust, parallel source of jurisdiction to resolve any substantial question of law concerning the meaning or administration of a trust” and set out the parameters of the s 66 jurisdiction:1

(a)First, s 66 may be used to resolve any live question of interpretation of the trust deed, as well as any uncertainty as to the exercise of a power. Justice Kos referred to this passage in Re Allen-Meyrick’s Will Trusts:

Wherever trustees have some discretionary power of this kind, where it is properly described as a power or a pure discretion, and they are in doubt how, in the relevant circumstances, they ought to exercise their discretion, they are able to come to the Court and obtain directions what is the proper thing for them to do.

(b)Secondly, the existence of a dispute is not fatal to the exercise of the jurisdiction: “Indeed the existence of a dispute, or at least a doubt, is essential.” The Court’s function is not purely advisory, or to be invoked to resolve abstract hypotheses.

(c)Thirdly, the more profound the dispute, the more care must be taken that those with a legitimate interest in the outcome are represented. In particular, beneficiaries.

(d)Fourthly, the relief sought must not involve resolution of any disputed issue of facts. A s 66 application proceeds on the basis of affidavit evidence, or even an agreed statement of facts.

[27]             What is also clear is that generally a trustee has a duty to protect trust assets for the benefit of its beneficiaries. The duty extends to bringing, and defending, claims necessary to fulfil that duty. The grounds for action or defence must be reasonable

1 New Zealand Māori Council v Foulkes [2014] NZHC 1777 at [46] – [50].

and the trustees must exercise due skill and care. If there is doubt as to what they may do, trustees should take legal advice, and they may, as here, seek directions from the Court. So long as the trustee acts honestly and reasonably, he or she is normally entitled to an indemnity for all expenses incurred in the execution of the trust.2

[28] Importantly, as noted at [26](c) above, and worthy of repeating, is the requirement that the more profound a dispute, the more care is needed that those with a legitimate interest in the outcome, such as beneficiaries, are considered and represented if required.

[29]             Turning now to the Family Court proceeding, as I understand it Darren challenges the original transfer of the Hunt Street property into the Trust under s 44 of the Property (Relationships) Act 1976 as an improper disposition of property by Laura intended to defeat his rights. Whether or not that challenge might succeed is a matter for the Family Court, based upon all the evidence and background matters before it. Nevertheless, it does have an obvious impact on the Trust here.

[30]             In submissions advanced before me by Ms McGuigan for CTSL, she expressed the view relating to the Family Court proceeding that:

In the circumstances of this case, and on a necessarily provisional basis, it seems likely that Darren will be able to establish that the settlement of the Dunedin property on the Trust amounted to a disposition intended to defeat his interests.

[31]             Ms McGuigan then went on, in her submissions before me, to advance a conclusion expressed in her words that:

Even if Darren’s application is successful, the interests of the Trust’s beneficiaries are protected in circumstances where:

(a)The Trust could not expect to receive the benefit of Darren meeting all of its asset’s outgoings, including mortgage, rates, insurance and maintenance costs. Reimbursement of those costs to Darren is inevitable.

(b)Darren is a beneficiary of the Trust. The trustees may well have exercised their discretion to appoint half of the Trust’s assets to Darren in any event.

2      Pratley v Courtenay [2018] NZCA 436 at [18] and see McCallum v McCallum [2021] NZCA 237.

(c)50% of the net sale proceeds will be held for the benefit of Laura, Mrs Rogers-Homes and any children Laura may have. It is relevant that the Family Court proceedings seeks to preserve 50% of the value of the Trust’s assets.

[32]             Whether or not that “optimistic” conclusion suggested by Ms McGuigan proves to be accurate or not, the outcome for all these parties, including importantly

all the beneficiaries of the Trust, must remain to be seen.

[33]             That said, what position may be taken here by the Public Trust (as a new trustee of the Trust just appointed by this judgment and not an applicant before me) is quite unknown at this stage. No doubt it will be mindful of the beneficiaries’ interests as a fundamental position. This s 133 application before me as I note has been brought only by CTSL who is no longer to be a trustee. It is not appropriate as I see it for orders under s 133 to be made here until the Public Trust’s position and involvement as replacement trustee is expressly known.

[34]             In these circumstances, in my view at this point the appropriate course to follow on CTSL’s s 133 application for directions relating to the Trust’s position on the Family Court proceedings, is to adjourn the formal proof hearing on this part of the application to await the Public Trust’s response. This response should be available without delay. An order to this effect will follow.

Result

[35]For all the reasons outlined above, orders are now made:

(a)removing CTSL as a trustee of the Trust;

(b)appointing the Public Trust as trustee of the Trust to replace CTSL;

(c)adjourning the applicant’s s 133 application for directions relating to the Trust’s position on the Family Court proceedings for further consideration by this Court once the Public Trust’s position on this application is formulated and communicated.

(d)with respect to [35](c) the Registrar is to further list this matter for call in a Judge’s Chambers list in 10 working days’ time.

(e)as to costs, the applicant has largely succeeded here and is entitled to reasonable costs and disbursements of and incidental to this application on a solicitor-client indemnity basis as approved by the Registrar, to be paid to the applicant from the Trust.

Gendall J

Solicitors:

Young Hunter for the applicant