Davis v Mancer
[2015] NZHC 3005
•30 November 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-000687 [2015] NZHC 3005
BETWEEN KARLEEN ITA DAVIS
First Plaintiff
TANYA MARIE SMART Second Plaintiff
TONI WILLIAMS MANCER Third Plaintiff
AND
KERRY JOHN MANCER First Defendant
KEITH WILLIAM YOUNG and CAROL ANN CAULFIELD
Second Defendants
Hearing: 30 September 2015 Appearances:
P Craighead for the Plaintiffs
No appearance by or on behalf of the First Defendant
P Napier for Second DefendantsJudgment:
30 November 2015
JUDGMENT OF WOOLFORD J
This judgment was delivered by me on Monday, 30 November 2015 at 3:15 p.m., pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Alistaire Hall, Solicitor, Manukau City
Keegan Alexander, AucklandCounsel:
P Craighead, Manukau City
DAVIS & ORS v MANCER & ORS [2015] NZHC 3005 [30 November 2015]
Introduction
[1] The plaintiffs in this proceeding, Karleen Davis, Tanya Smart and Toni Mancer are three children of the late Mrs Doris Mancer. The first defendant, Kerry Mancer, is a fourth child of Mrs Mancer. The second defendants are lawyers who acted for the first defendant in his capacity as executor and trustee of his mother’s estate.
[2] Sometime before her death, Mrs Mancer transferred her home to the Mancer Family Trust with a deed of acknowledgement of debt in the sum of $373,000. Mrs Mancer’s will provided that the debt of $373,000 owed by the Mancer Family Trust was to be forgiven and that all her other assets were to pass to the first defendant. After their mother’s death, the plaintiffs brought a Family Protection Act claim against her estate in which they claimed that Mrs Mancer had not adequately provided for them in her will. The plaintiffs were successful in their claim against her estate. The Family Court directed that the $373,000 debt was not to be forgiven. The Court also awarded a percentage of the debt to each of the plaintiffs.
[3] In the current proceedings, the plaintiffs allege that the first defendant breached his duties as executor and trustee of their mother’s estate in that he has not arranged repayment of the debt from the trust, nor has he paid out the percentages of the debt that the Family Court ordered should be paid to the plaintiffs. The funds are apparently now irrecoverable.
[4] The second defendants, Keith Young and Carol Caulfield, are sued in their capacities as partners of the firm Young and Caulfield, based in Auckland. It is alleged that the law firm owed duties of care to the plaintiffs not to be negligent and that they breached these duties through the provision of inadequate advice to the first defendant.
[5] Young and Caulfield now apply to have the claim against them struck out as being untenable.
Factual background
[6] Although I set out my understanding of the factual background below, a fuller picture may emerge at trial.
[7] The late Mrs Mancer’s estate was structured in such a way that the majority
of her wealth was in the form of a debt owed to her by the Mancer Family Trust.
[8] Mrs Mancer and Kerry Mancer were trustees of the Mancer Family Trust. Kerry Mancer was also a beneficiary of the trust. In November 2007, Mrs Mancer transferred her home to the trust with a deed of acknowledgement of debt. That created a $373,000 debt from the trust to Mrs Mancer. That sum was still owing to Mrs Mancer on her death in October 2010. It then became a debt due to the estate.
[9] However, in terms of Mrs Mancer’s will, the debt owed by the trust was cancelled. Mrs Mancer also left her entire estate to Kerry Mancer. Kerry Mancer, who held the power of appointment of trustees following Mrs Mancer’s death, appointed his ex-wife as the other trustee of the trust.
[10] The transfer of Mrs Mancer’s home to the trust was effected at the same time as Mrs Mancer’s last will was signed by her. Both were undertaken by Mr Young, a partner in the firm of Young and Caulfield. In testimony to the Family Court, Mr Young stated that Mrs Mancer created this structure specifically with the intention of preventing her three estranged children having a share of her estate after her death.
[11] The plaintiffs filed Family Protection Act proceedings in June 2011. Judge Maud issued judgment on 10 November 2014 in favour of the three plaintiffs. The forgiveness of debt recorded in the will was cancelled and each plaintiff was awarded a percentage of the debt owed to the estate by the trust.
[12] This gave rise to an obligation on the trustees of the Mancer Family Trust to account to Mrs Mancer’s estate for the sum of $373,000.
[13] The trust had, however, sold the house in 2013 for approximately $500,000. Mr Young testified that he received instructions from the trustees (Kerry Mancer and
his ex-wife) to pay the proceeds to Kerry Mancer, who was a discretionary beneficiary of the trust. In cross-examination in the Family Court, Mr Young stated:
I was instructed to pay the funds to Kerry Mancer who was a it, it was a discretionary beneficiary under the trust. I expressed my concerns about that, but at the end of the day I had my instructions from the trustees. I could see what was going to happen.
Submissions
[14] The statement of claim alleges that Young and Caulfield owed a duty of care to the plaintiffs to not be negligent in their legal advice, because the plaintiffs were among those persons who were or ought to have been within their contemplation as persons likely to be injured by the second defendants’ breaches of duty of care.
[15] The specific breaches which are pleaded in the statement of claim are that
Mr Young for Young and Caulfield:
(a) Did not advise Kerry Mancer that the sum of $373,000 had to be deducted from the funds held in the firm’s trust account being the proceeds of the sale by the trust of Mrs Mancer’s former home.
(b)Did not advise Kerry Mancer that the sum of $373,000 had to be collected from the trust and held for those benefiting pursuant to Mrs Mancer’s will and the orders made in favour of the plaintiffs.
[16] In response to the current strike out proceedings, the plaintiffs say that they will file an amended statement of claim. The plaintiffs submit that Mr Young had a duty to the plaintiffs to take reasonable care to them in his work as solicitor for the estate and that he was specifically required to:
(a) Properly advise Kerry Mancer of his duties as executor and trustee of the estate including a duty to collect in Mrs Mancer’s assets which included the debt owed by the Mancer Family Trust.
(b)Get a charging order against the sale proceeds of Mrs Mancer’s home while the money was held in Young and Caulfield’s trust account or to
have the two trustees of the trust agree to pay the amount owed to the estate.
(c) Avoid getting into a conflict of interest between the estate and the trust.
(d) Act in the interests of the beneficiaries of the estate.
[17] As to policy reasons why a duty of care should be imposed on the second defendants, the plaintiffs submit:
(a) That solicitors instructed to prepare a will have been found to owe a duty of care to the potential beneficiaries and that there is no material difference between such potential beneficiaries and those in the plaintiffs’ position;1 and
(b)That if a duty of care is not found to exist here, an executor and trustee of an estate can make off with estate funds as long as the solicitor for the estate gives him or her bad advice. If the trustee has spent the money, gone bankrupt or left the jurisdiction, then the beneficiaries have no one to obtain the funds from unless the trustee decides to claim an indemnity against the solicitor who wrongly advised him or her.
[18] On the other hand, the second defendants submit that the claim is untenable and essentially requires the firm to provide advice based on the mere possibility of a successful claim under the Family Protection Act. This is said to be untenable because there is no way of determining whether such advice was given without breaching client confidentiality and because they were obliged to follow the direction of the trustees as to what to do with trust funds. They submit that in following trustee instructions there can be no duty on a solicitor to consider potential
creditors, as solicitors only owe duties to their clients.
1 Gartside v Sheffield Young & Ellis [1993] 1 NZLR 37 (CA).
[19] The second defendants also identify a number of policy reasons which militate against the creation of duty, namely:
(a) The duty would conflict with a solicitor’s advice as to how a party should arrange its financial situation to best advantage. Advising a client to incorporate to avoid personal liability could conflict with the alleged duty to keep money separate to pay creditors. The duty would therefore create a conflict of interest which would compromise a solicitor’s autonomy.
(b)The duty would represent a disproportionate burden of liability on a firm, because it would require them to become a guarantor of a client’s debts or potential debts. This would be aggravated by the inability of a firm to defend itself by outlining the advice given to the client.
(c) There is no reason why a person in the position of the plaintiffs should be protected at the expense of solicitors who did not act for them.
(d)The duty would not operate coherently in the working of the legal system as a whole because, due to client confidentiality, solicitors could not defend themselves. Further, even if there was such a duty, it would almost inevitably not result in a successful claim because of a lack of causation. In almost all cases, including this one, the defaulting debtor would be aware of the debt or potential debt. The debt not being paid would demonstrate that the advice, even if it was correctly given, was not followed.
Law
[20] The question on a strike out application is simply whether it is arguable that such a duty is owed. Exercising the power to strike out part of a proceeding follows
established principles. In an application to strike out based on the pleadings disclosing no arguable cause of action, the following principles apply:2
(a) Pleaded facts, whether or not admitted, are assumed to be true, though this does not extend to pleaded allegations which are entirely speculative and without foundation.
(b)The cause of action must be clearly untenable. The Court must be certain that it cannot succeed.
(c) The jurisdiction is to be exercised sparingly and only in clear cases. (d) The strike out threshold is deliberately set high.
[21] In Couch v Attorney General in relation to strike-out applications based on proposed new duties of care the Supreme Court said:3
[W]hether the circumstances relied on by the plaintiff are capable of giving rise to a duty of care … If a duty of care cannot confidently be excluded, the claim must be allowed to proceed. It is only if it is clear that the claim cannot succeed as a matter of law that it can be struck out.
[22] Recently, in Carter Holt Harvey v Minister of Education, the Court of Appeal warned that where potentially new duties of care are raised in the strike-out context, there are a range of public policy questions to be considered, and special care is warranted since the enquiry is based on as yet untested pleaded facts.4
[23] A duty of care will be imposed by the Court when it is fair, just and reasonable to do so. That approach utilises a two-stage analysis involving considering the proximity of the parties, and the policy considerations at play that may tend to negate, restrict or strengthen the existence of a duty.5 This is a
framework to be drawn on, but is not to be taken as an overly rigid structure.6
2 See Couch v Attorney General [2008] NZSC 45, [2008] 3 NZLR 75 at [33]; Attorney General v
Prince [1998] 1 NZLR 262 (CA).
3 Couch v Attorney General, above n 2 at [2] and [35]-[38].
4 Carter Holt Harvey Ltd v Minister of Immigration [2015] NZCA 321, (2015) 14 TCLR 106.
5 Body Corporate No 207624 v North Shore City Council [2012] NZSC 83, [2013] 2 NZLR 297 at
[184].
6 North Shore City Council v Attorney General [2012] NZSC 49, [2012] 3 NZLR 341 at [149].
Proximity
[24] The first issue, therefore, is whether there is a sufficiently proximate relationship between the beneficiaries of the will and Mr Young. Considering their relationship, relevant factors include:7
(a) The degree of analogy with cases in which duties are already established.
(b)The nexus between the defendant’s alleged negligence and the plaintiff’s loss.
(c) The burden to the defendant of taking precautions against the risk.
(d)Whether those in the plaintiff’s position are vulnerable (for example, there are, or could realistically be other remedies for a plaintiff is relevant to the assessment of vulnerability).
(e) Whether the consequences to the defendant may be out of proportion to its fault.
[25] Although the statement of claim is unclear, it is apparent from the revisions proposed by the plaintiffs that they are focussed only on the role of Mr Young as solicitor for Mrs Mancer’s estate. This is presumably due to the lack of proximate relationship between the beneficiaries of the will and the trust (despite it being the transfer of trust money to Mr Mancer which has precluded the implementation of the Family Court decision).
[26] As solicitor, it appears Mr Young’s duty was to the estate and to the executor, not to the beneficiaries of that estate.8 There was thus no direct client relationship between the beneficiaries and the firm. This is analogous to the lack of duty on the
part of trust solicitors towards beneficiaries and the general reluctance of the Court
7 Rolls-Royce New Zealand ltd v Carter Holt Harvey Ltd [2015] 1 NZLR 324 at [48]–[65].
8 Lorretto School Ltd v MacAndrew [1992] SLT 615, Young v Hansen CA240/02, 16 September
2013.
towards extending solicitor’s duties to third parties.9 The loss here is primarily a loss to Mrs Mancer’s estate. It is the estate which has lost the $373,000 that was owed to it by the trust, although ultimately it is the plaintiff beneficiaries who feel the cost of that loss. Further, there is a clear relationship between the estate and Mr Young who acted for the estate generally.
[27] In ordinary circumstances, an executor who felt that negligent advice on behalf of their solicitor had caused the estate loss could bring a claim directly against the solicitor themselves. There would be no need for the beneficiaries to take action. In Worby v Rosser, the English Court of Appeal struck out a claim on the basis that “if the estate bears the cost thereby and suffers loss then, if there is to be a remedy against the solicitor it should be the estate’s remedy for the loss to the estate.”10
[28] This might be thought to also apply in the current case. Regardless of the merits of the claim, it is the estate who has suffered the loss and in theory it is the executor who should bring a claim for negligence if he considers that, for example, the failure to obtain a freezing order over the assets of the trust pending the Family Protection Act litigation prejudiced their later recovery.
[29] However, evidently, in the current case the executor was in a conflict of interest situation, between representing the interests of the estate and being the major beneficiary of the trust’s retained estate funds. There is no prospect of Mr Mancer bringing a claim against Mr Young on the basis of a failure to adequately secure the trust’s funds.
[30] Mr Young, on the facts as currently pleaded, must have known of the conflict of interest between Mr Mancer’s dual roles as executor and trustee of Mrs Mancer’s estate and trustee of the Mancer Family Trust. As a lawyer of some experience in family law matters Mr Young can be expected to have known of the obligations of executors to act even-handedly and to call in all debts. Further, he clearly had concerns over Mr Mancer’s action. Mr Young was asked in the Family Court about
the order to pay funds to Mr Mancer. He stated:
9 Brownie Wills v Shrimpton [1998] 2 NZLR 320 (CA) at 324; Slavic v Middlemiss [2012] NZHC
1909 at [39]-[40].
10 Worby v Rosser [1999] 2 Lloyd’s LR 972 (CA).
I was instructed to pay the funds to Kerry Mancer who was a, it was a discretionary beneficiary under the trust. I expressed my concerns about that, but at the end of the day I had my instructions from the trustees. I could see what was going to happen.
[31] Mr Young was also asked about his involvement in Kerry Mancer’s defence in the Family Protection Act proceedings. He stated that he “absolutely” had not had a part in preparing Mr Mancer’s affidavits in the Family Court saying:
No I was very – I quite frankly did not want to act for Kerry which is why I
referred him to Stephen Tee.
[32] In those circumstances, is there any basis for allowing the beneficiaries to bring this claim? In Nawisielski v Nawisielski, Bell AJ allowed a beneficiary to take a derivative action on the basis that beneficiaries, in special circumstances, may be allowed by equity to sue on behalf of an estate in cases of conflict of interest or collusion.11 It is evidently a possibility that such a procedure might be allowed in this case, although it would need to be explicitly pleaded by the plaintiffs.
[33] The approach taken by the beneficiaries in this case has been to attempt to show a proximate relationship between the solicitor and the beneficiaries themselves in order to found an independent duty of care. As I have noted, this raises a major problem in that the Court has been very reluctant to extend a duty on solicitors beyond their immediate duty to their clients.
[34] However, the courts have allowed such claims in situations where the duty pleaded to the third party was a manifestation of a solicitor’s existing duties to their clients. A notable example is the “disappointed beneficiaries” line of cases in which the Court held the duties could be owed to beneficiaries where a lawyer negligently failed to prepare wills as advised by their clients, leading to loss to the individuals who should have been beneficiaries under the will according to the client’s
instructions.12 In those cases, the underlying theory of liability is that the solicitor
had actually failed in their duty to their client, and allowing the potential beneficiary to sue was the only way for that duty to the client to be enforced.
11 Nawisielski v Nawisielski [ 2014] NZHC 2039, [2014] NZFLR 973.
12 Robb v Savage HC Invercargill CP17/01 at [26]; Clemett v Boyce HC Blenheim CIV-2004-406-
153, 25 February 2005 at [36].
[35] There is some analogy at this principled level to the proposed action in this case. If the solicitors are found to have been negligent in their advice to the executor of Mrs Mancer’s estate, the only people who can enforce that right in the absence of the executor doing so are the beneficiaries. The fact that the executor has disappeared and apparently abdicated his duties as executor should not mean that the beneficiaries have no recourse, if there are allegations that the solicitors failed in their duties to protect the estate’s position. Where a derivative action is not brought, or is not considered appropriate, it is not entirely untenable that tort might be expanded to protect the rights of beneficiaries in this situation.
[36] Again, analogously, the beneficiaries might be considered vulnerable in that they have little other recourse for protecting their interests other than relying on the executor to be even-handed. In situations where the executor is clearly conflicted, the solicitor for the estate is the only person with any ability to stop the beneficiaries’ interests being undermined.
[37] It is possible that a Court, faced with an executor being derelict in their duties because of a conflict of interest, could take the view that the solicitor advising the executor had duties to the beneficiaries as a corollary of their duty to the estate. This might require ensuring that independent advice was taken by the beneficiaries or that the executor understood fully the nature of his duties or that the conflict of interest was addressed by some other means. In a case such as this for example, although the plaintiffs’ claim that Mr Young should have obtained a charging order over the trust funds, recommending a freezing order be sought under r 32.2 of the High Court Rules might have been appropriate. The exact terms of the solicitor’s proposed obligations in such a situation will necessarily be refined when the plaintiffs amend their statement of claim.
[38] Ethically, in Dal Pont’s Lawyers’ Professional Responsibility the author states:
If a lawyer becomes aware that a client is engaging in an unlawful activity, the appropriate response is to counsel the client against it and to eschew any involvement in that conduct. … If a lawyer has reason to believe that a client will disregard the lawyer’s advice and thereby contravene the law or some legal obligation to a third party, again he or she should counsel the
client of the lawyer’s responsibilities and, if the client persists, terminate
instructions.
[39] If the solicitor advises the executor, and becomes aware that they do not intend to protect the estate’s position to their own benefit, this may affect the legal obligations that the executor has to third party beneficiaries. Ethically, at least, it appears that this raises duties on the part of the solicitor. Although an ethical obligation does not, of itself create legal duty,13 it demonstrates that the courts and profession have already taken a supervisory role over solicitors in this area. This supports both the view that there may be a sufficiently proximate relationship between solicitors and beneficiaries in some cases, and also that reasons of policy
support the creation of a duty.
[40] This is reinforced by the fact that, in New Zealand, courts have held that if a lawyer has had suspicions of trustee client’s intended misapplication of trust funds, and failed to make enquiries concerning his suspicions, they might become liable to the trust beneficiaries in dishonest assistance.14 A comparable duty in an executor context is not, therefore, inimitable to the solicitor-client relationship given this equitable intervention in very similar circumstances.
[41] The Court has taken a hard line on executors being derelict in their duties by favouring themselves over beneficiaries, or in the face of known claims against the estate by potential beneficiaries.15 In situations where there is a clear risk of harm to the beneficiaries due to the executor evading his duties to the estate, the estate’s solicitor’s relationship to those beneficiaries requires closer examination.
[42] Although it would be a significant liability for solicitors to have to bear the consequences of the errant executors, the burden on the defendant to take precautions in situations of evident conflicts of interest against the risk of an executor not protecting the interests of beneficiaries would be relatively low. I am not persuaded the burden or possible liability would be so disproportionate that this
Court should rule out even considering whether a duty should be imposed.
13 Phillips v Gould HC Auckland CIV-2003-404-5062, 1 July 2009.
14 Fletcher v Eden Refuge Trust [2012] NZCA 124; [2012] 2 NZLR 227 at [81]
15 McKenzie v McKenzie (1998) 16 FRNZ 487; Pabirowski v Pabirowski HC Auckland CIV-2008-
488-000555, 17 March 2009.
Policy
[43] Turning to consider policy, I note that in Couch v Attorney General, the majority expressed some scepticism as to when grounds of policy should be used at the strike-out stage to deny a claim. Tipping J stated that although claims in tort had been struck out on this basis, a claim should only be struck out at an early stage if the policy reasoning “undoubtedly” militated against a duty of care.16 It was necessary and more desirable in that case to wait until all the facts could be heard to make a full decision.
[44] This must be borne in mind in this case in which much of the argument and submissions have focussed on the policy underlying claims against solicitors by third parties.
[45] While the Court will be very reluctant to extend the solicitor’s duty beyond clients, that is because of the difficulty inherent in requiring solicitors to have a duty both to their client and to the third party whose views may be opposite to their clients.17 The current circumstances may be relatively unique in that sense in that an executor who was interested in protecting the estate and was not (arguably) in breach of their own duties as executor would have the same interest as the beneficiaries in
this case. There would be a very limited conflict of interest in that situation. While there may still, after a full hearing, be found to be too much of a potential conflict of interest to allow the claim to proceed, I consider it is possible that these overlapping interests lessen the policy reasons which typically prohibit third party claims against solicitors.
[46] Further, as I have foreshadowed in the assessment of the proximate relationship above, there are already some situations where solicitors must have at least some regard to the position of beneficiaries. The proposed duty is, therefore, not an entirely unusual intrusion into the solicitor-client relationship.
[47] Uniquely as well, the solicitor-client relationship with respect to executors of estates is not necessarily always a personal one. As noted by Mr Young in his
16 Couch v Attorney-General, above n 2, at [126].
17 Knox v Till [1999] 2 NZLR 753 (CA) at [5].
testimony in the Family Court proceeding, he did not represent Kerry Mancer in any personal capacity. In fact, he explicitly did not wish to represent Kerry Mancer separately despite being the solicitor for the estate. This again confers the level of distinction and distance from typical solicitor-client relationships.
[48] Most problematically, the second defendants complain that they will not be able to defend themselves against a claim for negligence due to the need to uphold legal privilege in respect of their communications and advice given to Kerry Mancer in his capacity as executor. However, to the extent that I consider this claim is tenable in so far as the beneficiaries are acting in lieu of a claim being brought by the estate, the issues relating to legal privilege do not appear insurmountable.
[49] Under r 8.4(g) of the High Court Rules disclosure is permitted where it is necessary to answer or defend any complaint, claim, allegation or proceedings against the lawyer by the client. Under r 8.2 of the Lawyer’s Conduct and Client Care Rules 2008, a lawyer must disclose confidential information where it is required by law or by an order of the Court or by virtue of the lawyer’s duty to the Court.
[50] In the circumstances of this proceeding, although the claim is not directly brought by the client, it is indirectly a complaint against the lawyer by a client. I consider it is likely that in the unique setting of this case, a Court might make such an order.
[51] Regardless, this policy issue can come to be reconsidered when the full scope of the claim against the solicitors is refined and the specific duties of care which are alleged are finally isolated. The plaintiffs will need to amend their current pleadings to support this claim.
[52] Finally, I note that although there may be causation issues if the proposed duty is simply to advise Kerry Mancer of his requirements, but if the duty is found to extend to the obligation to obtain a freezing order, causation may be more easily proved. In Couch v Attorney General, Elias CJ noted authority which suggested that causation was a matter for investigation, and a quintessential question of fact.
Elias CJ and Anderson J held that a claim should not be struck out as disclosing no duty of care unless there is clear legal impediment to it succeeding at trial.18 This issue is not expressly addressed by the majority, but has been supported in other cases.19
Conclusion
[53] The strike out jurisdiction is only to be exercised sparingly and in cases where the Court is certain the claim cannot succeed. Although this claim will face many barriers, I do not consider that the relationship between the second defendants and the plaintiffs is so distant as to preclude a claim being brought in negligence or that any policy reasons so definitively militate against the duty that the claim should be struck out at this preliminary stage. This claim raises novel issues, which warrant further exploration at trial.
[54] The application by the second defendants to strike out the claim against them is declined. Costs should follow the event.
……………………………….
Woolford J
18 Couch v Attorney-General, above n 2, at [40].
19 Batchelor Centre Ltd v Westpac New Zealand Ltd [2015] NZHC 272, [2015] 15 NZCPR 726 at [98] and [99]; EVR Holdings Ltd (in liq) v McLaren Guise Associates Ltd [2015] NZHC 1996 at [89].
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