Douglas v Douglas HC Napier Civ-2010-441-552

[2010] NZHC 2390

For a Court ready (fee required) version please follow this link

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2010-441-522

IN THE MATTER OF     Section 145A Land Transfer Act 1952 and an Application that Caveat 8533866.1 Not Lapse

BETWEEN  PATRICIA FRANCES DOUGLAS Plaintiff

ANDDAVID JOHN DOUGLAS AND MALCOLM LAWRENCE WALKER Defendants

Hearing:         10 December 2010

Appearances: M.J. Wenley - Counsel for Plaintiff

D.M. Kennedy - Counsel for Defendants

Judgment:      15 December 2010 at 4.00 pm

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This decision is delivered by Associate Judge Gendall on 15 December 2010 at 4.00 pm under r 11.5 of the High Court Rules.

Solicitors:           Willis Toomey Robinson, Lawyers, Private Bag 6018, Napier

Bramwell Grossman, Solicitors, PO Box 500, Hastings

PF DOUGLAS V DJ DOUGLAS AND ML WALKER HC NAP CIV-2010-441-522  15 December 2010

Introduction

[1]      The plaintiff, Patricia Frances Douglas, applies for an order pursuant to s

145A Land Transfer Act 1952 that a caveat not lapse.

[2]      The defendants, David John Douglas and Malcolm Lawrence Parker, who are the registered proprietors of the land over which the caveat has been registered in their capacities as trustees of a trust known as the Mahanga Trust (“the Mahanga Trust”) oppose the application.

Background Facts

[3]      As I have noted, the defendants are trustees of the Mahanga Trust.  This trust was settled by the plaintiff’s mother in March 1984 and the plaintiff was originally a trustee together with the two defendants.

[4]      The plaintiff and the first-named defendant (“Mr David Douglas”) married on

5 November 1966, separated on 6 September 2002 and were subsequently divorced. They settled matrimonial property issues between them by Consent Order of the Family Court at Hastings dated 2 August 2006.   Clause 10 of this Consent Order specifically provided:

10       The wife (the plaintiff) shall resign as a Trustee of, and relinquish her interest as a beneficiary in, the (Mahanga) Trust for all purposes other than to decide how the corpus of the Trust is to be distributed.  The wife is to execute forthwith a transfer of her interest as a Trustee in the Mahanga Block being Certificate of Title HBB4/606 (Hawke’s Bay Registry).  The wife shall relinquish all powers she has to appoint new Trustees and/or beneficiaries for the Trust in return for the husband’s (Mr David Douglas’) covenant that he will not add any further beneficiaries to the Trust beyond the children of his marriage to the wife.  It is noted that at the date of these Orders the husband is in occupation of the homestead on the Own Block. The husband shall pay rent to the wife of $1,000.00 per month from 1

August 2006 in respect of his occupation until he vacates.

[5]      On 1 July 2006, the plaintiff had entered into a “Deed of Retirement and Partial Relinquishment of Trust” with the defendants relating to the Mahanga Trust which provided in part at clause 5:

5.          Power of Distribution of Capital

Notwithstanding anything else herein contained or implied and pursuant to the settlement/court order the powers of the Trustees to distribute capital pursuant to Clause 5 (but expressly excluding Clause 5(a)(i) as it relates to appointing an earlier date of distribution) of the Trust Deed or otherwise in law or in equity shall continue to be held jointly by the Retiring Trustee (the plaintiff) and  the  Continuing Trustees (the defendants) so  that no distribution of capital can be made to any beneficiary without the unanimous agreement of the Retiring Trustee and Continuing Trustees.  By way of further clarification the Continuing Trustees shall retain the sole power to appoint an earlier date of distribution pursuant to Clause 5(a)(i) of the Trust Deed.

[6]      The principal asset of the Mahanga Trust is a farm property at Middle Road, Havelock  North  which  is  now  subdivided  into  two  titles  comprising  2.96925 hectares and 174.92266 hectares respectively.  It is the title to the smaller 2.96925 block  which  is  the  subject  of  the  plaintiff’s  caveat  here.    As  I  understand  the position, a reasonably substantial homestead stands on this smaller 2.6925 hectare block (“the caveated land”), although it is said that this homestead is old and requires some renovation work.  From the evidence before the Court it would seem that the homestead and the smaller title sit in the middle of the larger 174.92266 farm block.

[7]      It is clear the Mahanga Trust was set up in 1984 for the benefit of the plaintiff, Mr David Douglas and the children of their marriage.   Originally, the discretionary beneficiaries of the Mahanga Trust were the plaintiff, Mr David Douglas and their children, Brian Douglas now aged 43, Sarah Douglas now aged 41 and Robert Douglas now aged 32.

[8]      The  final  beneficiaries  under  the  Mahanga  Trust  are  the  children  Brian Douglas, Sarah Douglas and Robert Douglas, there being no further children of Mr David Douglas and the plaintiff.

[9] As noted at para [4] above the plaintiff has relinquished her interest as a discretionary beneficiary in the Mahanga Trust and, subject to the provisions outlined at para [10] of the Consent Order (noted at [4] above) and para 5 of the Deed of Retirement (noted at [5] above), she has retired as a trustee.

[10]     Mr David Douglas currently occupies the homestead on the caveated land as a discretionary beneficiary.   He says that he has done some remedial work on the homestead to make it liveable but more is required.  He apparently lives there with

his current partner and their 5 year old child.   Mr David Douglas’ position, as I understand it, is that as the homestead requires extensive work and the expenditure of significant money to put it into a good state of repair and the Mahanga Trust is not in a position to pay for this work, he would be prepared to spend the money and do the work, but only if the property is transferred to him first.

[11]     That said, the defendants confirm now that, as trustees of the Mahanga Trust, in 2010 they resolved to subdivide the original farm which was then only in one title into two titles.  The larger of these titles noted above at 174.92266 hectares relates to the farm land and the second title for the caveated land containing 2.6925 hectares is the homestead block.  The defendants say that as trustees they then resolved to sell the caveated land to Mr David Douglas at what they contend was its market value. They also state that they had been assured that this transaction would not interfere with the larger farming unit nor impact on its value.   That is strongly disputed however by the plaintiff.

[12]     The  terms  of  the  sale,  as  I  understand  the  position,  include  a  price  of

$360,000.00, this price being satisfied as follows:

(a)As to $118,000.00 by the Mahanga Trust repaying a debt said to be owing for this amount to the purchaser, Mr David Douglas; and

(b)As to the balance of $242,000.00, this amount is to be secured by a vendor mortgage to the trust over the caveated land, repayable interest free upon demand.

[13] When the plaintiff learned of this proposed sale to her former husband she raised a substantial objection to it. She contended that the transaction constituted a de facto distribution of capital from the Mahanga Trust to Mr David Douglas as a discretionary beneficiary and that, despite the requirement in clause 5 of the Deed of Retirement noted at [5] above, she had not been involved in any decision to do this. The plaintiff then went on to complain that the proposal contained an additional objectionable element in that Mr David Douglas was making a decision as a trustee

of  the  Mahanga  Trust  to  benefit  himself  personally at  the  expense of  the final beneficiaries, their children.

[14]     In response, the defendants confirm that the final beneficiaries of the trust, namely the three children of the plaintiff and  Mr David  Douglas, had  all been consulted about the proposed transaction.  Clearly from the evidence before me, two of those three final beneficiaries (Brian Douglas and Sarah Douglas) have now objected to the proposed transfer of the homestead block to their father.  The third beneficiary and youngest of the three children, Robert Douglas, however, has consented.  Sadly in my view, each of these three children have either felt the need, or been encouraged, to file affidavits in this proceeding, a proceeding essentially related to what is no doubt a heated and determined dispute between their estranged parents, albeit one involving the property of the Mahanga Trust and their direct interests as both discretionary and final beneficiaries of the Trust.

[15]     Finally, two days before the allocated hearing date for the present application, the Court heard from the second defendant trustee, Mr Malcolm Lawrence Walker (“Mr Walker”) when he filed an affidavit sworn 3 December 2010 in support of Mr David Douglas’ position and in opposition to the present application.  Mr Walker is a solicitor of some 42 years standing and has been a trustee of the Mahanga Trust since its inception.  He deposes in his affidavit in part:

5.          In  2010  the  trustees  resolved  to  subdivide  the  Mahanga  block  as  the trustees believed it was in the best interests of the beneficiaries to the Trust.

...........................

7.          I understand the claim being made by the Plaintiff for sustaining her caveat is that she has a beneficial or legal interest in the land.

8.          I understand that this position has been taken by her as she believes the sale of the property is a distribution of the corpus of the Trust fund.

9.          I do not believe that the Plaintiff has a beneficial or legal interest in the land as I understand her right, as created by the Court Order dated 2 August

2006 and the subsequent Deed of Retirement and Partial Relinquishment of Trust dated 1 July 2006, is solely that the Plaintiff must be consulted on the distribution of the corpus of the trust. This does not translate in my mind to the Plaintiff having any interest whatsoever in the land in question.

10.       I do not believe the subdivision and sale of the property is a distribution of the trust and therefore the Plaintiff does not need to be consulted and clearly does not have any interest in the transaction and clearly no interest in the land.

11.       The  total  value  of  the  Trust  corpus  will  remain  the  same  after  this transaction.

12.       There is no distribution to David (Mr David Douglas) nor to any other beneficiary.

13.       The transaction is a sale and therefore conversion of land to money.

14.       The sale of the property to David is an arm’s length transaction allowable by the trust deed and is for market value.

15.The market value  was determined by a  registered valuation which the trustees obtained from Williams Harvey prior to reaching agreement.

Counsels’ Submissions and My Decision

[16]     Turning now to the application before the Court, as I have noted, it seeks an order under s 145A of the Land Transfer Act 1952 that the caveat in question not lapse. It is well accepted, however, that similar principles apply to applications under that section as do to applications made pursuant to ss 143 and 145 Land Transfer Act

1952.

[17]     The general approach to these applications was settled in Sims v Lowe [1988]

1 NZLR 656 at 660 (CA):

The caveator seeks to clog or fetter the proprietary interest of another. As a matter of principle it seems right that he must justify the continued existence of his caveat. He will do that if he can show he has a reasonably arguable case for the interest he claims.

[18]     A  person  seeking  to  sustain  a  caveat  has  the  burden  of  establishing  a “reasonably arguable case” that she/he has a caveatable interest in the property in question: Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 at 106 (CA). An order for removal of a caveat will not be made unless it is patently clear that the caveat cannot be maintained, either because there was no valid ground for lodging it, or no such ground now exists: Sims v Lowe at 659-660. The Court therefore should not finally determine the rights of the parties unless the facts are not in dispute and

the law has been fully argued: New Zealand Limousin Cattle Breeders Society Inc v

Robertson [1984] 1 NZLR 41 (CA).

[19]     A person seeking to establish the right to lodge and maintain a caveat must have a present interest in land.  A lesser right such as a contractual or personal right, will not suffice – Holt v Anchorage Management Limited [1987] 1 NZLR 108 at 117 (CA) and see also Hinde McMorland & Sim, Land Law in New Zealand para 10.010.

[20]     Similarly, a right that a Court may recognise as a mere equity, as distinct from an equitable interest in land, will not support a caveat – Hinde McMorland & Sim, Land Law in New Zealand para 10.010(d).  And it would also appear to be a general principle that a mere right to apply to the Court for an order vesting property in an applicant does not give rise to a caveatable interest – Hinde McMorland & Sim, Land Law in New Zealand para 10.010(e).

[21]     Effectively here the plaintiff’s caveat is said to protect an interest claimed by her as trustee of the Mahanga Trust as modified by the Deed of Retirement dated 1

July 2006 under which  the plaintiff and the defendants effectively agree not to dispose of the caveated land (being the capital asset of the Mahanga Trust) without the prior consent of the plaintiff.

[22]     As I understand it, the essence of the plaintiff’s argument here is that the caveated land is capital of the Mahanga Trust and therefore it forms part of the corpus of the trust and all decisions regarding disposition of that capital require the agreement of the plaintiff which has not occurred here.

[23]     What has occurred here (and it is acknowledged without reference to the plaintiff) is first, a sub-division of the original farmland held by the Mahanga Trust from one title into two and secondly, a purported transfer of the smaller homestead block, the caveated land to Mr David Douglas.  As I have noted, Mr David Douglas is one of the trustees and a discretionary beneficiary only (as opposed to a final beneficiary) of the Mahanga Trust.  The plaintiff maintains that all these subdivision and sale arrangements are unquestionably to the detriment of the children of the plaintiff and Mr David Douglas as ultimate beneficiaries.

[24]     Before  me,  Mr  Wenley  for  the  plaintiff  contended  that  this  transaction involving subdivision and a “sale” to Mr David Douglas had been entirely contrived throughout simply to circumvent the reservation of the plaintiff’s continuing rights as an effective (although partly limited) trustee of the Mahanga Trust.  In substance Mr Wenley argues that what we have here is, in fact, an unauthorised distribution of capital from the trust to Mr David Douglas.

[25]     In response to these arguments, the defendants’ position, as I understand it, is that no distribution of capital is occurring here.  Instead, what is proposed is a simple sale of one of the Mahanga Trust assets during the life of the trust and that sale is at fair market value.  Before me, Ms Kennedy for the defendants maintained that this sale does not have the effect of depleting the trust’s assets but simply changes the nature of one asset to  another.   It simply exchanges land for the equivalent in money’s worth.

[26]     On its face, this argument for the defendants would seem to have some merit. Although neither the Agreement for Sale and Purchase between the Mahanga Trust and Mr David Douglas nor copies of any Trustee’s resolutions regarding the subdivision and sale are before the Court, the evidence is that the Agreement itself takes a normal form and involves a sale at what is said to be the independently verified market value of the caveated land.  As I have noted, the sale price is then satisfied by repayment of the $118,000.00 debt said to be due to Mr David Douglas, with the balance of $242,000.00 left in on mortgage interest free upon demand. Clearly the trust has power to sell assets and to do so leaving in unpaid purchase monies by way of mortgage.

[27]     Although that $242,000.00 vendor mortgage here is expressed to be interest free, and thereby it might be suggested that the trust is making some form of gift, distribution or “transfer of value” (as defined in s. HC 14(1) Income Tax Act 2007) by foregoing the interest on this debt it could otherwise achieve, the mortgage adopts the usual practice of being described as repayable upon demand.   The trustees of course can make demand on this mortgage at any time and either request interest in lieu of repayment or alternatively require full repayment from Mr David Douglas.

[28]     From  a  strict  legal  aspect,  it  appears  to  me  difficult  to  argue  that  the documented transaction with Mr David Douglas is anything other than a sale.  The wisdom of that transaction for the trust and all its beneficiaries, and issues as to whether the trustees have exercised their discretion in making the decision to sell to one of their number on a proper basis and on appropriate terms, are quite other matters from the issues before me.   They are not issues for consideration in the present caveat application.   On these aspects though, I would simply at this point draw attention to clause 9 of the 19 March 1984 Deed of Trust for the Mahanga Trust.

[29]     On its face, the transaction here would appear to be a sale of the caveated land and not a distribution of the capital even though the ultimate recipient of the land is Mr David Douglas, a discretionary beneficiary of the trust.

[30]     But I leave all these matters on one side here.   In one sense, as I see the position, a detailed analysis of the proposed sale of the caveated land to Mr David Douglas is irrelevant to my consideration of the caveat application before the Court.

[31]     That caveat application as I have noted will only succeed if the plaintiff has done enough here to satisfy the onus upon her to show a reasonably arguable case for the interest she claims.

[32]     I now turn to consider the plaintiff’s claim to an interest in the caveated land which she advances effectively as a trustee or quasi trustee of the Mahanga Trust. As an aside, I would note that if this claim succeeds, then presumably the plaintiff’s caveatable  interest  would  extend  to  the  balance  of  the  Mahanga  farm  as  the remaining major capital land asset of the trust.

[33]     On this, a preliminary argument was raised by counsel for the defendants. This was based on s 136(2)(b) Land Transfer Act 1952 which requires that a caveat contain details of the nature of the land or estate or interest claimed and the ground on which the claim is founded.   Here, the defendants contend that the plaintiff’s caveat is defective and should be discharged as she has not effectively stated the interest in the caveated land which she claims.

[34]     In my view this argument is quickly disposed of.   In Zhong v  Wang, 5

September 2006, CA282/05 the Court of Appeal warned against what it saw as too strict an approach being taken to the detail or form required to describe interests claimed in a caveat and their derivation from the registered proprietor.   Substance rather than form was emphasised and, at para [58] of that judgment the Court of Appeal noted:

[58]     The purpose of the caveat procedure is to enable those with proper claims to proprietary interests to protect themselves against loss by forbidding dealing with the land pending resolution of substantive claims.

[35]     In the present case, the plaintiff’s claim to the caveatable interest in question is described in the following terms:

An interest is claimed as Trustee of the Mahanga Trust created by Deed dated 19

March 1984 and modified by Deed dated 1 July 2006 between the Caveator and the Registered Proprietors David John Douglas and Malcolm Lawrence Walker under which the Trustees and Registered Proprietors agreed with the Caveator not to dispose of the land in Identifiers 516047 and 516048 without the prior consent of the Caveator (so as to prevent improper dealing with the land).

[36]     In  my  view  the  interest  claimed  here  by  the  plaintiff  is  sufficiently particularised  and s  136(2)(b)  Land Transfer  Act 1952 is complied  with.   That disposes of this preliminary argument.

[37]     Turning now to the substantive issue for consideration here, before me Mr Wenley indicated that the plaintiff is not claiming any beneficial interest in the caveated land.  Rather, he said she seeks a legal interest in the land itself by virtue of the 1 July 2006 Deed of Retirement, on the basis that the caveated land constitutes part of the “corpus” or capital of the trust.   On this, Mr Wenley referred me to Mozley and Whiteley’s Law Dictionary New Zealand Edition 1964 at p 88 which defines “corpus” as “the capital of a fund, as opposed to the income.”

[38]     As I understand Mr Wenley’s argument, it continues with the suggestion that, as the Mahanga farm including the homestead block is clearly a part of the capital and corpus of the trust, the plaintiff has legal rights over the property pursuant to clause 5 of the 1 July 2006 Deed of Retirement document.   This is because, notwithstanding the plaintiff’s acknowledgement in the Deed that she retires as a

trustee and relinquishes her claim as a beneficiary of the trust, cl 5 of that Deed in part provides:

The powers of the trustees to distribute capital pursuant to clause 5 .... of the Trust Deed or otherwise in law or in equity shall continue to be held jointly by the Retiring Trustee (the plaintiff) and the Continuing Trustees (the defendants) so that no distribution of capital can be made to any beneficiary without the unanimous agreement of the Retiring Trustee and Continuing Trustees.

[39]     Mr Wenley contends therefore that the plaintiff is effectively a trustee of the trust for the purposes of ultimate capital distribution and thus she must have a caveatable interest in the properties.  This is to preserve her legal right as effectively one of the trustees for capital distribution purposes.

[40]     With respect I disagree.  First, there is no contractual right to lodge a caveat over the trust land granted to the plaintiff pursuant to the 1 July 2006 Deed of Retirement or the 2 August 2006 Consent Order.

[41]     Secondly, the plaintiff in formally retiring as a trustee from the Mahanga Trust on 1 July 2006 and agreeing to transfer her interest in the Mahanga farmland to the defendants as Continuing Trustees, clearly relinquished her position as a trustee of the trust for almost all day-to-day purposes.   That clause 5 of the 1 July 2006

Deed of Retirement reserved to her a contractual right to participate with the defendants as Continuing Trustees in decisions concerning capital distributions, in my view merely provided the plaintiff with a right in the future to apply to the Court for an appropriate order if a capital distribution was proposed by the other Trustees without her unanimous agreement.   That does not, however, give her a legal or beneficial interest in the trust’s land.

[42]     In some ways, the position of the plaintiff here relating to the Mahanga Trust is analogous to the role of (and with the powers given to) a protector of a Trust – see Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 2 All ER 597 and Garrow and Kelly, Law of Trusts and Trustees at para [11.8].   But, she is not a Continuing Trustee of that Trust as such, having clearly resigned from that position on 1 July 2006.

[43]     It should be noted this does not mean that the defendants as Continuing Trustees are able to ignore the wishes of the plaintiff if any capital distribution from the trust is in mind.  To do this would clearly place them at risk of action being taken against them by the plaintiff.   The future potential of that action however, in my view, does not entitle the plaintiff in terms of s 137(1)(a) Land Transfer Act 1952 to a legal or beneficial interest in the caveated land at this point.   Nor is there any suggestion of the plaintiff being beneficially entitled to any interest in the land.

[44]     I conclude that the plaintiff’s interest here is not a proprietary interest in the caveated land nor an equitable interest which gives relief against the land itself.

[45]     I repeat that, in the present case, the defendants must accept that they have legally binding arrangements with the plaintiff under clause 5 of the Deed of Retirement and those arrangements are to make no capital distributions from the trust without unanimous agreement of all parties including the plaintiff.   I am satisfied, however, that this contractual right does not provide the plaintiff with any caveatable interest in the land.

Conclusion

[46]     Although some sympathy must be expressed for the position in which the plaintiff finds herself (given what seems to be an attempt by Mr David Douglas to acquire the homestead block in the centre of the Trust’s Mahanga farm and the only house serving the entire property on favourable terms for his own benefit), nevertheless, for the reasons outlined above, her present application to sustain the caveat must fail.

[47]     An order is now made that caveat 8533866.1 is to be removed from the title/s in question.

[48]     As to costs here, normally they would follow the event.  I am in some doubt, however, as to whether it can reasonably be stated that the defendants although successful in opposing the present application, have entirely “clean hands” in this whole matter.

[49]     That  said,  I  leave  it  to  counsel  to  endeavour  to  agree  costs  between themselves if they are in issue.   If that is not able to be achieved and the parties require  a  decision  from  the  Court  on  the  issue of  costs,  then  counsel  may file memoranda sequentially which are to be referred to me and I will make a decision based on the material then before the Court.

‘Associate Judge D.I. Gendall’