Donovan v MacDonald

[2024] NZHC 3181

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-2949

CIV-2023-404-2018 [2024] NZHC 3181

IN THE MATTER OF

The Trusts Act 2019 and The Property (Relationships) Act 1976

BETWEEN

CHERRYL DONOVAN

Applicant

AND

SCOTT MACDONALD

Respondent

Hearing:

20 May 2024

Appearances:

Additional Submissions and evidence completed:

J C La Hatte for the Applicant

A R Gilchrist for the Respondent

8 October 2024

Judgment:

31 October 2024

JUDGMENT OF POWELL J

This judgment was delivered by me on 31 October 2024 at 11.30 am.

Pursuant to R 11.5 of the High Court Rules.

…………………..

Registrar/Deputy Registrar

CHERRYL DONOVAN v SCOTT MACDONALD [2024] NZHC 3181 [31 October 2024]

[1]                The applicant, Cherryl Donovan, has  sought  orders  under  both  the Property (Relationships) Act 1976 (“PRA”)1 and the Trusts Act 2019 (“Trusts Act”) following  the  conclusion  of  her  de  facto  relationship  with  the  respondent,  Scott MacDonald.

[2]                By the time the applications were heard, the issues between the parties had been substantially narrowed. Although issues had been identified in respect of vehicles, bank accounts, Kiwisaver and stock, those have now been substantially resolved, leaving three principal issues to be determined before the parties’ entitlement under the PRA can be decided:

(a)the value of the family home located on Inland Road, Helensville (“Inland Road”);

(b)the credit to which the parties are entitled as a result of their respective contributions to the purchase of Inland Road by the Macryl Family Trust (“the Macryl Trust”); and

(c)whether the company operated by Mr MacDonald at Inland Road, Height4Hire Limited (“H4H”) is relationship property.

[3]                Mr MacDonald and Ms Donovan are both trustees and beneficiaries of the Macryl Trust. Under the separation clause in the trust deed, Mr MacDonald has given notice that he wishes to buy out Ms Donovan’s share of Inland Road, but cannot do so until the value of Inland Road has been determined and the status of H4H confirmed.

[4]                In his written submissions, Mr LaHatte contended that Mr MacDonald had lost his chance to purchase the property pursuant to the separation claim. At the outset of the hearing before me, the parties confirmed that what was in fact sought after the issues identified had been determined was that Mr MacDonald would have a period of one month to investigate finance and to otherwise confirm whether he wished to complete the purchase of Ms Donovan’s  interest  in Inland Road  and, if  found to be

1      The PRA Proceedings CIV-2023-404-2949 originally commenced in the Family Court and transferred following the issue of the proceedings under the Trusts Act (CIV-2023-404-2018).

relationship property, in H4H. In the event that Mr MacDonald elected to proceed with the purchase of Inland Road, settlement would take place one month later. In the event Mr MacDonald decided not to proceed or failed to settle, Inland Road would then be sold on the open market, without further delay.

[5]                By memorandum dated 8 October 2024, Ms Donovan advised that, from      1 October 2024, H4H was no longer carrying on business from Inland Road. While this has implications for the payment of the mortgage by the Macryl Trust, it does not appear to have any implication for the three issues to be determined.

Issue one — The value of Inland Road

[6]                This first issue can be determined relatively briefly. As noted, Mr MacDonald has an option to purchase Inland Road pursuant to  cl  31.1  of the  Macryl Trust  trust deed, signed by the parties on 17 September 2013. Relevantly, cl 31.1(d)(iv) provides:

AThe value of the home shall be the current market valuation provided by a valuer or valuers agreed upon by the Class A Primary Beneficiary and the Class B Primary Beneficiary with the skills necessary to value the real estate.

BIf the Class A Primary Beneficiary and the Class B Primary Beneficiary cannot agree then the valuation shall be determined by a registered valuer appointed by the President for the time being of the New Zealand Institute of Valuers, and the Class A Primary Beneficiary and the Class B Primary Beneficiary shall share the cost of such valuations equally.

CThe amount to be paid by the Class A or Class B Primary Beneficiary who exercises the option shall be determined in accordance with the provisions of clause 31.1 d. vi B to E as if the current market value determined as detailed above is the sale price of the home.

[7]                Two valuations have been undertaken in respect of Inland Road, both by Russell Jones, who the parties accept is an appropriately qualified registered valuer. Mr Jones’s initial valuation of Inland Road was $1,940,000 as at 6 September 2022 (“first valuation”). Mr Jones provided an update of this valuation on 3 April 2024, in which he concluded that  Inland  Road  now has  a valuation  of $1,725,000  as  at  28 March 2024 (“second valuation”).

[8]                Ms Donovan disagrees  with the second  valuation and submitted that the  first valuation should be adopted by the Court. No issue with second valuation has, however, been identified, and no contrary  valuation  was  obtained  on  behalf  of Ms Donovan to support her position. Ms Donovan, however, gave evidence to the effect that both she and Mr MacDonald have not been maintaining the property as they had when they were living together.

Discussion — Issue one

[9]In one of her affidavits, Ms Donovan had previously confirmed:

We had a valuation done of the house on 6 September 2022 by RTJ Property Valuers (Russell Jones), which put its value of the house for the purposes of sale, but I am equally as happy for us to equally and jointly pay (mine would be paid for through my legal aid grant) for an updated valuation of the family home if it can be done quickly and efficiently and not delay things any further. I don’t think that we will be able to agree on the value of the house between ourselves.

[10]            It is clear from this comment that Ms Donovan’s objection with regard to the second valuation is not to Mr Jones’s valuation such that it would trigger cl. 31.1(d)(B) set out in [5] above and therefore require the appointment of another valuer. Nor was that course of action submitted by either party. Instead, I am required to determine which of Mr Jones’s valuations properly reflects the market value of Inland Road.

[11]            Having considered the valuation evidence available, I am unable to see any reason why the second valuation does not accurately represent the most up to date valuation for the purpose of these proceedings and the option sought to be exercised by Mr MacDonald pursuant to the Trust deed. It is, quite simply, exactly the type of updated valuation Ms Donovan had indicated would be appropriate.

[12]            Moreover, it is clear the second valuation differs only in Mr Jones’s assessment of the “market conditions and sales data”. In both valuations, Mr Jones considered:

Overall the property at the date of inspection was presented in an average condition commensurate with the age and nature of the improvements.

[13]            The only specific change to the condition of the property noted between the first and second valuations was that, in the second valuation, Mr Jones had identified

“some deterioration of the roof cladding, which may require painting or replacement in the near future”.

[14]            However, overall, the summary of the property  in  both  the  first  and  second valuations was almost identical, with a difference in value attributed solely to the change in the market conditions rather than any other factor.

[15]            In the circumstances, and particularly in the absence of any contrary valuation evidence, I find the value of Inland Road to be $1,725,000 as concluded by Mr Jones in his second valuation, for the purposes of the exercise of the option under the Macryl Trust trust deed.

Issue two — Value of the parties’ contributions to Inland Road

[16]            There is no dispute that the Macryl Trust purchased Inland Road for $864,000. The purchase price was made up of:

(a)an ASB home loan in the sum of $650,000 (“the ASB Home Loan”);

(b)ASB bridging finance in the sum of $174,000 (“the bridging finance”); and

(c)a contribution of $40,000 from Ms Donovan.

[17]            With regard to the parties’ contributions to Inland Road, the Macryl Trust trust deed relevantly provides in cl. 31.1(b):

Any loan made to the Trust by either the  Class  A  Primary  Beneficiary Scott Anthony MACDONALD or the Class  B  Primary  Beneficiary  Cherryl Ann DONOVAN shall be repayable to that party upon demand in writing made by that party, which shall be made only in the circumstances hereinafter detailed. The initial loans made to the Trust for the purchase of the home are $40,000.00 by the Class B Primary Beneficiary Cherryl Ann DONOVAN

[18]            On the same day the Macryl Trust trust deed was executed, Mr MacDonald and Ms Donovan, as trustees, formally passed a series of resolutions relating to the

purchase of Inland Road. As well as confirming the purchase of Inland Road for the sum of $864,000, Mr MacDonald and Ms Donovan relevantly resolved:

2.The Trust will borrow from ASB Bank Limited the sum of

$825,000.00 to assist with the purchase.

3.The Trust and Cherryl Ann Donovan acknowledge that the sum of

$40,000.00 paid by Cherryl Ann Donovan for the deposit is a loan from her to the Trust for that purpose.

[19]With regard to subsequent contributions, resolutions 8.1 and 8.2 recorded:

8.1The Trust and Scott Anthony MACDONALD and Cherryl Ann DONOVAN acknowledge that, unless otherwise recorded, future payments to the Trust by that beneficiary are loans by the beneficiary to the Trust, and shall be credited to that beneficiary’s beneficiary account.

8.2Future payments by the Trust to Scott Anthony MACDONALD or Cherryl Ann DONOVAN are, unless otherwise recorded, loan repayments to that beneficiary by the Trust to the extent that the Trust owes that beneficiary monies, with any excess being a loan by the Trust to that beneficiary repayable upon demand and interest free. Those amounts shall be debited or credited as the case may be to that beneficiary’s beneficiary account.

[20]            There were two further sets of minutes signed by Trustees on the same day. One of these recorded:

1.1The Trustees did on the 17th day of September 2013 accept from Scott Anthony MACDONALD a gift of $10.00 in reduction of the debt owing under the Deed of Sale of Assets dated the 17th day of September 2013 reducing the sum owing under that Deed to nil.

1.2The Trustees did on the 17th day of September 2013 accept from Cherryl Ann DONOVAN a gift of $27,000.00 in reduction of the debt owing under the Deed of Sale of Assets dated the 17th day of September 2013 reducing the sum owing under that Deed to

$13,000.00.

[21]            There is no dispute that the bridging finance was repaid shortly after settlement following an advance  by  the  Trustees  of  the  MacDonald  Family  Trust.  As  at 30 April 2024, $427,292.66 remains owing on the ASB Home Loan. At the same date, a further $81,448.48 was owing on a flexi account, the ASB Orbit Home Loan, (“Orbit Home Loan”).

[22]            There is equally no dispute that, apart from Ms Donovan’s initial contribution, she has not made any other payment in respect of the ASB Home Loan. Instead, payments of the ASB Home Loan have been made from the Orbit Home Loan following rental payment  by  H4H  and  personal  payments  made  variously  by  Mr MacDonald and H4H.

The position of the parties

[23]            Ms Donovan seeks return of her initial capital contribution of $40,000 out of the  purchase  price,  but  without  any  reason,  appears  to  suggest  that   neither  Mr MacDonald’s contributions nor any loan from the MacDonald Family Trust should be paid out of the sale proceeds of Inland Road.

[24]Conversely, Mr MacDonald relies upon Ms Donovan gifting the sum of

$27,000 to the Trust on 17 September 2013 so as to contend that Ms Donovan is only entitled to a return of $13,000 of her original contribution to capital. In turn, as I understand his position Mr MacDonald says that he is entitled to his own contributions since Inland Road was purchased which as at 11 May 2023 amounted to $205.384.68. Further, Mr MacDonald also appears to be seeking $174,000, paid by the MacDonald Family Trust, a trust originally settled by Mr MacDonald’s parents, and of which he is neither a trustee nor a beneficiary, as a result of the MacDonald Family Trust’s repayment of the bridging finance borrowed separately from the ASB in the course of acquiring Inland Road. Since the settlement of the purchase, Mr MacDonald’s position is that the Macryl Trust’s primary source of income has been rental payments received from H4H since it commenced business and which are paid into a flexi account (the Orbit Home Loan account) operated by the Macryl Trust. From there, payments of principal and interest are made to the ASB Home Loan account. Mr MacDonald’s position is that in addition to the rental paid by H4H he has personally advanced considerable sums through the Orbit Home Loan account which has been used for the repayments of principal, and in respect id which Mr MacDonald now seeks reimbursement.

Discussion — Issue two

[25]            As at the date of hearing, little in the way of financial details had been provided by the parties, which made checking the contributions claimed to have been made, by Mr MacDonald in particular, difficult. Although more bank statements were provided following the hearing, these appeared to be incomplete. With one notable exception, a single bank statement covering the period from 19 November to 15 December 2015, there were:

(a)no statements for the ASB Home Loan available prior to 2 May 2022, at which time the balance outstanding on the loan was $455,065.58; and

(b)no statements for the Orbit Home Loan prior to 2 May 2018, when the balance on that account was $31,233.08.

[26]            I therefore sought further submissions from the parties but the position remains relatively opaque.

[27]            Bearing these issues in mind, I now work through the different issues identified with regard to contribution.

Ms Donovan’s contribution

[28]            There can be no dispute that Ms Donovan personally contributed $40,000 to the purchase of Inland Road. It is recorded in both the settlement documentation and acknowledged in the relevant Trustee resolutions signed by the parties.

[29]            It is, however, equally clear, as Mr MacDonald contended, that the Trustee resolution on 17 September 2013 signed by both parties records Ms Donovan gifting

$27,000 of her initial payment to the Trust. Ms Donovan accepts that she signed the resolution. Why she chose to do so is unclear at this juncture, particularly when, as noted, other resolutions made by Ms Donovan and Mr MacDonald at the same time specifically provided that their contributions to the purchase of Inland Road would otherwise be recognised as loans repayable on demand.

[30]            In the absence of any other explanation, I am not prepared to go behind the resolution, and to disregard the gifting that has been apparently documented. I therefore conclude that Ms Donovan’s contribution as a result of that gifting is

$13,000.

Mr MacDonald’s contribution

[31]            The rough rule of thumb adopted by Mr Gilchrist in the hearing and put to Ms Donovan in cross-examination was that just over $400,000 remains outstanding on their ASB Home Loan and Ms Donovan has not contributed towards the mortgage. This means Mr MacDonald has contributed some $400,000 in principal repayments (presumably in reference not only to the ASB Home Loan but also the bridging finance). This is to an extent reflected in the Trust register of unsecured loans, which relevantly records:

Date of Gift/Loan		Amount of Gift/Loan Repayment	Amount of Loan	Details	Running total
29		$174,000.00	Loan from	$174,000.00
October		Trustees in
2013		MacDonald
Family Trust to
repay ASB
bridging finance
79875-91-002
17 Sept	$205,384.68	Advances/Loans	$379,384.68
2013	to	made to reduce
11 May	the principle
2023	owed on ASB
mortgage
79875-91-001

[32]            At the outset, it is difficult to see why the repayment of the bridging finance by the trustees of the MacDonald Family Trust should be treated as a contribution on behalf of Mr MacDonald. While it is clear that the bridging finance loan was repaid, it appears to have been repaid by a third party who, on the face of it, stand as a creditor to the trust. Specifically, although there is only limited evidence about the MacDonald Family Trust before the Court, Mr MacDonald’s evidence was that he was not a beneficiary of that Trust and that it is his sister and brother-in-law who are the trustees. Any obligation on the Macryl Trust to pay this sum is therefore to the

MacDonald Family Trust as a creditor of the Trust and not to Mr MacDonald personally.

[33]            The remaining $205,384.68 recorded in the register is not particularised. Although, as noted, there are limited bank statements available, the records which are before the Court do however substantively support the approximate level of advances claimed to have been made by Mr MacDonald personally.

[34]            In  particular,  of  the  original  $650,000   borrowed   by   way   of   the   ASB Home Loan, the bank statements show that $441,615.32 was outstanding on both 30 April 2023 and 31 May 2023, indicating that principal repayments in the total sum of $208,384.68 had been made as at 11 May 2023. The bank statements also record that a further $14,322.66 principal was paid between 31 May 2023 and 30 April 2024, meaning the total repayments of principal come to $222,707.34.

[35] Apart from the rental paid by H4H, the only other funds received by the Trust through the Orbit Home Loan account were from Mr MacDonald and, at his direction, from H4H. Specifically, between 24 November and 15 December 2015, and removed on the single 2015 bank statement, it appears Mr MacDonald transferred $200,000 to the Macryl Trust through payments into the Orbit Home Loan account, being three payments of $40,000, $150,000 and $10,000 respectively. In addition, bank statements for the Orbit Home Loan account from 2 May 2018 onwards record further advances totalling $103,100 made by Mr MacDonald to the Macryl Trust, together with a one-off payment of $3,000 by H4H in addition to its regular rental payments. These contributions totalled a further $106,100. Against that, it appears Mr MacDonald also, during the same period, arranged for the transfer of $52,100 from the Orbit Home Loan account to H4H and a further $31,100 from the same account to himself, a total of $83,200. Given this position, and the net advance of $22,900 in the same period, the bank statements confirm that a total of $222,900 was advanced by Mr MacDonald to the trust. This almost exactly matches the total repayments of principal as calculated in [34].

[36]            Taking these various matters together, I am satisfied that Mr MacDonald is entitled to have his contribution of $222,900 recognised in accordance with the terms of the trust and the trustees resolution.

Issue three – Is H4H relationship property?

[37]            As a general rule, all property acquired after the beginning of a de facto relationship is relationship property.2 However, it is well established property acquired out of separate property is separate property,3 such as any increase in the value of separate property, as well as any income or gains derived from such property.4 These may become relationship property where they are attributable in whole or in part to the actions of the other party or the application of relationship property.5 However, even this only applies to the increase in value, income and gains, not the original asset itself.

[38]            Likewise, property acquired from a third person by succession or gift, and property acquired out of that property, is separate property unless it has been, with the recipient’s express or implied consent, so intermingled with other relationship property that it is unreasonable or impracticable to regard that property or those proceeds as separate property.6

[39]            Moreover, the presumption of advancement is that advances from a parent to a child are gifts, which can be rebutted by evidence there was no intention to make a gift.7

The position of the parties

[40]            In this case, Ms Donovan’s position was that H4H was purchased jointly during their de facto relationship and therefore, under the general rule, qualifies as relationship property.

2      Property (Relationships) Act 1976, s 8(1)(e).

3      Section 9(2).

4      Section 9(3).

5      Section 9A(1) and (2).

6      Section 10(1)(a)(i) and (iii), (c) and (2).

7      Johnson v Johnson [2023] NZCA 566, citing N v N [Relationship property: loan] [2010] NZFLR 161 (HC).

[41]In addition, Ms Donovan asserted:

(a)H4H conducted its business from the same property as the family home;

(b)she was jointly liable for a loan for the business;

(c)she signed a director’s certificate, despite Mr MacDonald refusing to make her a director; and

(d)she assisted in running the business as an employee (from 12 March 2018) and before becoming an employee (between 2015 and 12 March 2018).

[42]            Ms Donovan denied agreeing the business would be Mr MacDonald’s separate property, notes that Mr MacDonald has provided no proof of the oral agreement and argues that such an agreement would not comply with s 21F of the PRA.

[43]            Mr MacDonald’s evidence was that H4H was not purchased but rather was established by himself and a business associate. He states that the source of funds for H4H was his own separate property, being separate property received by loan, as amounts payable to him personally from an earlier business venture with his father, as well as his inheritance from his father.

[44]            Furthermore, he argues that there is no evidence of Ms Donovan having been involved in the establishment or management of H4H, or otherwise putting any money into  it.  Mr  MacDonald  also  denies  the  existence  of  the  loan  referred  to  by  Ms Donovan.

[45]            Mr  MacDonald  alleged  that  there  had  been  an  oral  agreement  with    Ms Donovan that H4H was his separate property and, even if it does not comply with s 21F, this is relevant to how the parties operated and what they agreed.

Discussion – Issue three

[46]            The records surrounding the establishment and operation of H4H are not comprehensive and there are some inconsistencies in the accounts of both parties. For example, Mr MacDonald’s initial position that H4H was not his company and it was owned by a third party was clearly not correct.

[47]            Despite this, I am ultimately satisfied that there is sufficient evidence to conclude that H4H was a business established by Mr MacDonald using his own separate property, namely monies advanced from various family sources or previous business interests that were unconnected to his relationship with Ms Donovan. I am equally satisfied that, while Ms Donovan was for a period an employee of H4H, she was never involved in the management of H4H and any contribution was appropriately remunerated while she was employed. It is likewise clear that H4H has always paid rental to the trust, and certainly consistent payment of rental is recorded in the    Orbit Home Loan bank statements from May 2018, starting at $460 per fortnight. That rental appears to have increased to $780 per fortnight in September 2020, and again to $1,150 per fortnight in December 2023.

[48]            The only significant evidence against that which suggests that H4H was relationship property was the fact that Ms Donovan and Mr MacDonald, as trustees of the Macryl Trust, provided a guarantee on its behalf over a flexi account operated by H4H, although there was no evidence put before the Court of any current liability. Likewise, as noted, it is clear that Mr MacDonald has on occasions transferred money from the Macryl Trust’s Orbit Home Loan account to H4H in the total sum of $52,100.

[49]            I do not consider those matters to be sufficient for me to conclude that the relationship property had become “so  intermingled” that  H4H had  ceased to be   Mr MacDonald’s separate property.

Relationship property orders

[50]Given the conclusions I have reached, I make the following orders:

(a)For the purposes of cl 31.1(d)C of the Macryl Trust trust deed, the current market value of Inland Road is $1,725,000.

(b)Mr MacDonald will have one month from the date of this judgment to elect to purchase Inland Road from the Macryl Trust.

(c)In the event Mr MacDonald elects to purchase Inland Road, settlement will take place one month after notice of election is given. Upon settlement:

(i)the ASB Home Loan and Orbit Home Loan are to be repaid;

(ii)the MacDonald Family Trust is to be repaid;

(iii)Mr MacDonald is entitled to a credit of $222,900;

(iv)Ms Donovan is entitled to a credit of $13,000; and

(v)the balance is to be distributed equally between Mr MacDonald and Ms Donovan.

(d)In the event Mr MacDonald decides not to purchase Inland Road as per (b) above, the parties are to work together to put Inland Road on the market within one month of notice being given by Mr MacDonald that he does not intend to purchase Inland Road.

(e)In the event that Inland Road is sold on the open market, the proceeds of settlement are to be divided as per (c) above after deductions of the costs of sale.

(f)Leave is reserved for the parties to seek such additional orders as may be necessary to facilitate the sale of Inland Road.

[51]            Parties do not dispute and confirmed at the hearing that all property categorised as separate property remains separate property, which is their respective vehicles

(Ms Donovan’s Dodge Calibre), bank accounts and Kiwisaver accounts. The values ascribed to these are as set out at [37] of the respondent’s submissions.

[52]            Given the nature of the orders made, I consider it is appropriate for costs to lie where they fall. In the event either party seeks to have costs determined, any memorandum is to be filed within four weeks of the date of this judgment and any response within a further two weeks. I will then deal with any costs issues on the papers.

Powell J