Easton v Larsen
[2016] NZHC 2234
•22 September 2016
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2014-454-102 [2016] NZHC 2234
IN THE MATTER OF the Trustee Act 1956 BETWEEN
IAN CHARLES EASTON First Plaintiff
EASTON AGRICULTURE LIMITED Second Plaintiff
AND
ALAN MCKENZIE LARSEN Defendant
Hearing: 17 June 2016
(Heard at Wellington)
Counsel:
J O Upton QC for Plaintiffs
S M Hunter for DefendantJudgment:
22 September 2016
JUDGMENT OF ELLIS J
I direct that the delivery time of this judgment is
4 pm on the 22nd day of September 2016
EASTON v LARSEN [2016] NZHC 2234 [22 September 2016]
Table of Contents
Background [2] The Moutoa Trust [4] IEL, IGBM and EAL [8] The 2009 proceedings against Mr Larsen [10] The 2014 proceedings against Mr Larsen [14] The third amended statement of claim [23] First cause of action [25] Second cause of action [27] Third cause of action [29] Fourth cause of action [30] Evidentiary matters [31] The grounds for Mr Larsen’s applications [34] Preliminary comment on tenability of the third amended statement of claim [36] Limitation [39] Section 21 [46]
Do the new claims involve allegations of fraud or fraudulent
breach of trust? [49] When did the rights of action accrue? [51] Section 28 [57] Clause 20 of the Trust Deed [59] Dishonesty [61] Wilful breach of trust [64] Abuse of process [69] Conclusions and result [70]
[1] Mr Ian Easton and his company, Easton Agriculture Ltd (EAL) have been engaged in a long-standing and tortuous dispute with Mr Alan Larsen, an accountant. The present matter for determination is whether the latest iterations of their claims made against Mr Larsen should be struck out or whether summary judgment should be issued in his favour.
Background
[2] The narrative which follows is undisputed.
[3] Mr Larsen was at material times the accountant for Mr Easton and entities associated with him and his family, namely EAL, the Moutoa Trust (MT), Ian Easton Ltd (IEL) and IG & BM Easton Ltd (IGBM). Mr Larsen was, until August 2012, a director of EAL, IEL and IGBM.
The Moutoa Trust
[4] The MT was settled by Mr Easton’s parents in 1997. Mr Easton and his two sisters are both discretionary and final beneficiaries. The Trust Deed contains two clauses that are presently of some relevance. First, cl 16 states:
Any Trustee may participate in the exercise by the Trustees of the powers conferred upon the Trustees by this Deed notwithstanding that such Trustee is associated as director, trustee or otherwise, or is in any other way interested in any company, trust or other entity to which the Trustees sell or lease any property forming part of the Trust fund, or in which the Trustees hold or propose to acquire shares or other investments as part of the Trust Fund, or with which the Trustees otherwise deal as Trustees of these presents; and notwithstanding that the interests or duty of such Trustee in any particular matter or matters may conflict with his or her or its duty to the Trust Fund or the Discretionary Beneficiaries; and notwithstanding that such Trustee is selling or leasing any real or personal property forming part of the Trust Fund to itself or himself or herself, or purchasing any such property to form part of the Trust Fund from itself or himself or herself, or otherwise deals as Trustee of these presents with itself or himself or herself in a personal capacity.
[5] And cl 20 provides that no Trustee shall be liable for “[a]ny loss not attributable to dishonesty or to the wilful commission by the Trustee of any act known to the Trustee to be a breach of trust”.
[6] The MT was the sole residuary beneficiary of the estates of Mr Easton’s parents, Ian and Bettina, who died within 11 days of each other in 2000. Their wills have proved contentious.
[7] Prior to 2011, the trustees of the MT were Mr Easton, one of his sisters and Mr Larsen. In 2008 Mr Easton’s sister applied to have the Guardian Trust (GT) appointed in their stead, due principally to conflicts that were said to exist between Mr Easton’s position as trustee and his business interests. Mr Easton opposed that application. His opposition effectively delayed the resolution of the matter for two and a half years until, more or less on the eve of trial, he consented to it.1 As a result, GT has been the sole Trustee of the MT from 20 March 2011.
IEL, IGBM and EAL
[8] The MT controls IEL and IGBM. Those companies, between them, own family farm properties near Shannon. EAL also owns and farms a 25 hectare block across the road. Mr Easton or entities controlled by him have been farming the family farm property and the 25 hectare block as one farming operation for many years. Since 2003 Mr Easton/EAL have leased the farm properties from IEL and IGBM for
the purposes of EAL’s cropping business.2 Clause 27.2 of the lease is unusual; it
provides:
It is acknowledged by the parties that the Tenant has entered into this Lease largely to facilitate the administration of the affairs of the Landlord and in determining the rental a representation was made to the Tenant that when the rental is paid, it will forthwith be distributed to the beneficiaries of the Easton family related entities, one of whom is the Tenant, and it is essential those payments be made without delay as they will form a fundamental part of the cash flow of the tenant.
[9] In 2004 there were disastrous floods in the Manawatu. They had a devastating
effect on EAL’s cropping business. Mr Easton put the company’s losses at around
$1.5 million. As a result, he entered into an arrangement whereby the rent actually paid by EAL to IEL and IGBM was significantly reduced. That arrangement has continued from 2004 until quite recently. More will be said about it later.
1 The history is recounted by Dobson J in Gregory v Bason HC Palmerston North CIV-2008-454-
545, 8 March 2011.
2 The named lessee on the lease is Mr Easton personally. The rent is, however, paid by EAL.
The 2009 proceedings against Mr Larsen
[10] Mr Easton and EAL first issued proceedings against Mr Larsen in 2009. At that time both Mr Larsen and Mr Easton were trustees of the MT.
[11] There were two causes of action. The first was a claim by Mr Larsen and EAL for professional negligence. More specifically, it alleged that Mr Larsen had negligently used IEL as the vehicle for all the financial transactions of MT, IEL and IGBM. The second was a claim brought by Mr Easton alone and was for breach of fiduciary duty and breach of trust said to arise from Mr Larsen’s responsibilities as a trustee of the MT. More specifically, it was alleged that Mr Larsen had breached the unanimity rule, and had failed to deal with a conflict of interest.
[12] In October 2013, a week before trial, Mr Easton’s then lawyer filed opening submissions in which the first (negligence) cause of action was formally abandoned. Kós J recorded in a subsequent judgment that his lawyer had explained to the Court that expert analysis had established that the alleged negligence had caused the
plaintiffs no loss at all.3 So only the second was to be pursued.
[13] But on the first day of the trial, Mr Easton sought leave to amend the second cause of action. That application was declined by Kós J, who also declined Mr Easton’s application for an adjournment, which had been made to enable him to pursue the application for amendment. Mr Easton then discontinued the claim in its entirety.
The 2014 proceedings against Mr Larsen
[14] In August 2014 Mr Easton and EAL filed these, fresh, proceedings against Mr Larsen. As originally pleaded, the new proceedings concerned alleged breaches of fiduciary duty, which were said to have delayed the distribution of Bettina Easton’s estate. The pleaded loss was said to be “finance, rental and other expenses”.
[15] The claim was amended in February 2015 and in May 2015 Mr Larsen filed applications to strike out and for summary judgment. Following the filing of Mr Larsen’s evidence and submissions in support of his applications, an affidavit sworn by an accountant, Mr McGlinn, was filed by Mr Easton. Relevantly, Mr McGlinn noted that:
(a) the lease entered into in 2003 involved what might be called a “money-go-round” under which the rental paid by EAL was (pursuant to cl 27.2) to be immediately distributed to the beneficiaries of the MT (including Mr Ian Easton);
(b)there was a difficulty with this because early bank statements suggested that the distributions due to Mr Easton had in fact been made to EAL; and
(c) following the flood in 2004, the payments made by EAL amounted to only about 20 per cent of the full rental with the balance being recorded as an amount owing by journal entry.
[16] Then, Mr McGlinn deposed:
The correct transactional flow
What should have been done was to assume that each party was unrelated and at an arm's length distance from the other, and then to have full rent being paid on a proper basis in terms of the various leases. This was particularly important as it is clear from cl 27.3 of the lease agreement that there was a dispute. That clause states:
It is acknowledged that there is a disagreement between IAN CHARLES EASTON and the landlord, and the Landlords of certain other adjoining land, and with the trustees of the Easton Estates, so the entering into this Lease by the parties is in no way to be taken as a compromise of that dispute.
On that premise, actual cash would flow from the tenant to the lessor companies and then be distributed by dividends (after deduction of expenses and taxation) to the shareholders including the Trust. The Trust would then make distributions, after accounting for expenses and taxation, to the beneficiaries. That in turn would do away with the need for ever increasing current accounts, and significant interest charges and tax liabilities.
[emphasis added]
[17] In other words Mr McGlinn is critical of the arrangement that was entered into in 2004 at Mr Easton’s instigation. Then, he goes on to address the impacts of the accounting processes adopted by Mr Larsen. He says:
The key effect of this inappropriate methodology4 adopted was that very large current accounts developed between the parties, and those large balances in turn created ongoing and major issues for the parties. In particular, Easton Agriculture Limited was not paying the full lease amount and therefore became increasingly indebted to Ian Easton Limited and IG and BM Easton Limited. These companies in turn were unable to pay dividends to their shareholders.
Should Easton Agriculture Limited fail, there would be losses suffered by the two companies’ shareholders and the Moutoa Trust beneficiaries. This placed the Directors of the landlord companies and the Trustees of the Trust in a position where their stewardship and fiduciary duties could be called into question. I note that Mr Larsen was the Chartered Accountant to all the entities. He was also a Trustee and Director of the Trust and companies throughout the period. He was also a director of Easton Agriculture Limited from April 2003 until February 2008.
I have also been given a copy of the financial statements for the entities involved for the 2008 financial year (which in turn provided comparisons with the 2007 financial year) showing the use of the one bank account and increasing current accounts. Those earlier accounts were prepared by Mr Larsen as I note in the Accountants Statement he states “We are not independent of IAN EASTON LIMITED because Alan M Larsen participates in the decision of management regarding the compiled financial information.” The other entities financial information had similar statements.
I note the methodology later employed by BDO followed exactly the same methodology in the 2008 accounts.
The methodology that Mr Larsen used to deal with the situation that he faced was inappropriate and created problems and risks that should have been avoided. He should have carefully considered the implications of the largely non arm’s length non-cash accounting system that he implemented, particularly as there were disputes between various members of the family as documented in the lease he signed as Landlord.
Given his position of trust as the Chartered Accountant for all the entities, as part of his duties he should have provided written advice to the various entities as to what he was doing and the impact of the increase in current accounts. I have seen no evidence that this occurred from the information presented to me. The Accountants Statement on the 2008 Financial Statements clearly indicated he was aware of the conflicted position he held.
What happened as a result of allowing the payment of rent by current account entry was a build-up of current account balances with parties who, in most cases, had insufficient ability to pay because of the ill-liquid nature of the respective balance sheets. I refer in particular to Easton Agriculture
Limited whose 2009 financial statements indicate a deficit in shareholder funds of $705,652. The company’s liabilities exceeded its assets. These accounts show the advances by Ian Easton Limited were not secured. On this basis, most of the current accounts with Ian Easton Limited would be lost if Easton Agriculture Limited failed at 31 March 2009. I note that Mr Larsen was a director of all entities for much of the preceding period.
That in turn placed the various entities at risk, particularly if for whatever reason Easton Agriculture Limited were to fail. What happened had the potential to create serious instability on financial structures, something of a “house of cards” effect, a substantial and unnecessary tax impact, and (underlying all of that, as I have mentioned) Easton Agriculture Limited being placed at risk and Mr Easton losing his livelihood. Additionally, the beneficiaries of the Trust and the shareholders of Ian Easton Limited also stood to lose significantly if Easton Agriculture Limited was to fail.
[18] Shortly after this evidence was filed, on 30 October 2015, a second amended statement of claim was filed on behalf of Mr Easton and EAL, along with submissions in opposition to Mr Larsen’s applications.
[19] Mr Larsen’s applications were not given a fixture for some time, but eventually were scheduled to be heard by me on 17 June 2016. On 13 May 2016
Mr Hunter for Mr Larsen filed a memorandum addressing the new (October) pleading and submitting that it, too, should be struck out (or summary judgment entered) on the grounds that:
(a) there was no causative link between the alleged errors in the accounts and the pleaded losses. In particular, there was no allegation that EAL had suffered any loss;
(b)although the new pleading was said to be for breach of fiduciary duty, the allegations that Mr Larsen’s accounting work was “flawed” and “inappropriate” suggested that the plaintiffs wished to resuscitate the negligence allegations that Kós J had recorded as abandoned and it was an abuse of process to try and rerun those claims; and
(c) on the basis that the claims were, in reality, claims in negligence, they were statute barred by analogy.
[20] But on the day of the hearing before me (17 June 2016) Mr Upton QC handed up written submissions attaching, in draft, a third amended statement of claim in which Mr Easton was the only named plaintiff. Mr Upton said that the October 2015 claim should not be struck out because the proposed amendments to the pleadings cured any previously identified defects in the claims.5
[21] Although taken by surprise at this turn of events, Mr Hunter was able to confirm that Mr Larsen wished to pursue his applications in relation to the new (draft) pleading.
[22] It is therefore the (draft) third amended statement of claim which is the focus of this judgment. I regard the second amended statement of claim as having been abandoned by the plaintiffs.
The third amended statement of claim
[23] The allegations contained in the draft third amended statement of claim can be summarised as follows:
(a) Mr Larsen was at all material times the accountant for Mr Easton, the
MT, IEL and IGBM;
(b)Mr Larsen prepared the annual accounts for IEL, IGBM and the MT from the YE 31 March 2004 through to the YE 31 March 2009 (although the 2009 accounts were not completed until April 2010) and handled their financial affairs on a day to day basis;
(c) Mr Easton relied on Mr Larsen as both an accountant and as a
professional trustee to act “properly” in all such matters;
(d) IGBM and IEL own the farm properties;
5 See Commissioner of Inland Revenue v Chesterfield PreSchools Ltd [2013] NZCA 53, [2013]
2 NZLR 679. and Ng v Harkness Law [2015] NZCA 411.
(e) there was a meeting at Mr Larsen’s office on 28 January 2003 at
which it was agreed that:
(i)Mr Easton would lease properties owned by IEL and IGBM (both of which were controlled by MT);
(ii)all stock and plant owned by IEL would be sold to Mr Easton with a resulting debt back to IEL upon which Mr Easton would pay interest;
(iii)the rent and interest payable by Mr Easton to IEL would be paid out to Mr Easton and his two sisters in equal shares; and
(iv) the income earned by the MT would be distributed equally to
Mr Easton and his two sisters;
(f) a Deed of Lease was entered by Mr Easton in August 2003 (although it was deemed to have commenced on 1 April 2003) to the above effect;
(g)at Mr Easton’s direction EAL paid full rent on his behalf under the lease and the landlord distributed a third of that back to him on the same day in accordance with cl 27.2 of the lease;6
(h)as a result of the flood in February 2004 which adversely affected Mr Easton’s farming operations there was an oral variation to the lease whereby he was permitted to pay “net rent” (as defined in the pleading);7
(i)unknown to him at the time and “only recently discovered” Mr Larsen used “an inappropriate and unauthorised structure and methodology in his preparation of the financial statements” for IEL, IGBM and the
MT;
6 Set out at [8] above.
7 Mr McGlinn says that approximately 20 per cent of the rent was paid.
(j)all rent payments were made to IEL (the only one of the three relevant entities with a bank account) and transactions between the three entities were recorded as journal entries;
(k)the combined effect of the oral variation and the journal entries was “unnecessary and unauthorised ever-increasing current account balances on which interest was accrued on a compounding basis and on which as a result substantial tax liabilities were unnecessarily incurred”; and
(l)the methodology and structure used, and the implications were never explained to Mr Easton or approved by him.
[24] Four specific causes of action are then pleaded.
First cause of action
[25] The first is entitled “Annual financial statements structurally wrong”. It
alleges that:
(a) the landlords under the lease were contractually obliged (by cl 27.2)
to distribute the rent to Mr Easton and his sister “without delay”; and
(b)Mr Larsen’s failure to do so “as landlord trustee” constituted a breach of trust “in that it was a breach of the contractual duty that he owed to the plaintiff”.
[26] The relief sought includes:
(a) a declaration that Mr Larsen “as landlord trustee” was in breach of trust in failing to cause his obligations under cl 27.2 of the lease “to be recorded in the annual financial statements of the Easton entities that he administered”;
(b) a correction of the financial statements;
(c) damages being the difference between the tax assessed on the rental payable under the lease between 2004 and 2009 and any additional tax paid to IRD in those years;
(d)a declaration that Mr Larsen indemnify Mr Easton against all losses or liabilities caused by the breach of duty;
(e) an order for the taking of accounts and an inquiry into the quantum of such loss; and
(f) general damages of $50,000 for mental distress.
Second cause of action
[27] The second cause of action is entitled “Failure to acknowledge set-off between current accounts”. It alleges that Mr Larsen (again as “Landlord Trustee”) failed to meet his contractual obligations to distribute the rent under cl 27.2 and that:
(a) that obligation to distribute should have been recorded as a current account debt in favour of Mr Easton; and
(b)that current account debt should have been set off against the current account debt owed by him for unpaid rent; and
(c) only the net interest on the difference should have been charged
(which would have reduced the tax liability on the interest).
[28] A declaration that Mr Larsen is “in breach of trust for failure to present correct financial statements” to IRD in the years 2004 to 2009 is sought. The other relief claimed is as for the first cause of action.
Third cause of action
[29] The third cause of action is entitled “Duty to preserve the trust fund”. The alleged duty owed is Mr Larsen’s obligation as a “professional trustee” to preserve the fund by minimising the tax payable. More specifically it is said that Mr Larsen
“should have written to the plaintiff within a reasonable time” after the 2004 flood and advised that the original arrangement under cl 27.2 should be reactivated.
Fourth cause of action
[30] The fourth cause of action is entitled “Duty to explain” and alleges that as a professional trustee Mr Larsen had an obligation to Mr Easton (as beneficiary) to explain to Mr Easton (as tenant) that unless the rent was paid in full (and then distributed) a current account debt would be created with tax payable on the interest accruing on that debt.
Evidentiary matters
[31] I have already summarised or set out the passages from Mr McGlinn’s affidavit which, it seems to me, form the evidentiary basis for the allegations in the third amended statement of claim. Although Mr McGlinn’s affidavit was filed in October 2015 no reply was filed on the (quite correct) basis that its contents were largely irrelevant to the claim as it was then pleaded. The timing of the further amended pleading meant that Mr Larsen had not had an opportunity to file further evidence or submissions that address the matters raised. Mr Hunter was, however,
prepared to proceed on the basis of the material before the Court.8
[32] In addition to the background matters I have set out at the beginning of the judgment, and the extracts from Mr McGlinn’s affidavit above, other evidence before the Court relevantly indicates that:
(a) Mr Larsen acquiesced in the “oral variation” to the lease that was sought by Mr Easton/EAL following the 2004 floods, at least initially;
(b)Mr Larsen did, later, ask Mr Easton to make payment of the rent in order to enable him to make distributions. For example in a letter dated 23 May 2007 addressed to the lawyer for Mr Easton’s sister,
Jeanette, Mr Larsen noted that the enclosed 2006 Financial Statements
8 I acknowledge that in the context of a strike out the pleaded facts are, in general, assumed to be true. In a summary judgment context, evidence which is uncontentious may be considered.
for the MT and other Easton entities recorded that IEL’s current account for Jeanette showed that she was owed $35,045. Mr Larsen said:
I have requested Ian provide funds to enable payment. It is unfortunate that as a result of the flood etc., Ian has only been able to fund Ian Easton Limited with sufficient funds to meet expenditure with the result we have not been able to build up any reserve funds to enable me to make payment to Jeanette.
(c) the accounts did record the missed distributions as a debt owed to the beneficiaries (as can be seen from the same letter); and
(d) in 2009 EAL’s liabilities exceeded its assets.
[33] As well, although Mr McGlinn is critical of Mr Larsen’s practices on a number of fronts he does not say that Mr Larsen’s method of accounting in the circumstances was “wrong” or “incorrect”. Indeed he notes that:
To record the income that was not paid in cash, there must be journal entries raised in both the landlord and tenant’s books. The impact of these journal entries would be for the tenant to owe the landlord the rent that was not paid in cash.
The grounds for Mr Larsen’s applications
[34] Mr Larsen’s grounds for strike out or summary judgment (as orally amended at the hearing) were that:
(a) the claims are statute barred and are therefore vexatious and an abuse of process;
(b) there is no tenable cause of action against Mr Larsen as Trustee of the
MT because cl 20.0 of the Trust Deed relevantly provides:
No Trustee shall be liable for:
(a) Any loss not attributable to dishonesty or to the wilful commission by the Trustee of any act known to the Trustee to be a breach of trust;
and
(c) the new pleading is simply a resurrection of the previously abandoned negligence claim and thus an abuse of process.
[35] Before considering each of these in turn there are some general observations about the new claims which can usefully be made.
Preliminary comment on tenability of the third amended statement of claim
[36] Even putting to one side for the moment the overarching grounds on which Mr Larsen says that the new claims must fail, it seems to me that the pleading summarised above gives rise to a host of difficult issues for Mr Easton. These include that:
(a) the first and second causes of action fail to differentiate between the different Easton entities. In particular:
(i) the MT is not the Landlord and Mr Larsen cannot therefore be
a “Landlord Trustee”; and
(ii)it is difficult to see how the accounting “set off” that is said to have been required could occur when the relevant debt was owed by EAL to the Landlord companies and the distribution was owed to Mr Easton personally, by the MT;9
(b)to the extent the first and second causes of action might more properly be directed against Mr Larsen as either a director of the landlord companies or as their accountant, he cannot be in breach of any duty
owed to Mr Easton as a beneficiary of another entity (the MT);
9In fact, this is a point expressly made by Mr Easton’s accounting expert, Mr McGlinn, who said: A tax liability resulted from the additional income stream generated by the interest charged. The income stream from interest would, presumably be offset by a deduction in the other entity. This offset may however not be able to be used by the entity deducting the expense if that entity was loss making[.]
(c) if the first and second causes of action are, in reality, for breach of contract (which aspects of the pleading seem to suggest) I would have thought that the relevant parties should be the parties to the lease;
(d)to the extent cl 27.2 of the lease is enforceable10 it appears to require distribution to be made only when rent is actually paid (“when the rental is paid, it will forthwith be distributed to the beneficiaries”);
(e) any liability sheeted home to Mr Larsen as Trustee would be shared jointly and severally by Mr Easton as a co-Trustee, if Mr Larsen chose to join him in that capacity;
(f) on the basis of the evidence of Mr Easton’s own expert there is no foundation whatsoever for the claim that Mr Larsen was in breach of trust “for failure to present correct financial statements” to IRD in the years 2004 to 2009. Mr McGlinn confirms that, in the circumstances that existed, Mr Larsen was obliged to account for the non-payment of rent as he did;
(g)it is difficult to see how any unnecessary tax debt constitutes a recoverable loss to Mr Easton when his interest in the Trust Fund remains a future one (as to which see further the discussion below); and
(h)in terms of the third and fourth causes of action, it is difficult to see how Mr Easton could establish that Mr Larsen caused loss to the Trust Fund (by failing to persuade Mr Easton/EAL to pay rent or to explain the consequences of not doing so) given that the upshot of Mr McGlinn’s evidence is that EAL was not in a financial position
where it would have been able to pay rent.
10 Putting to one side the odd wording of cl 27.2, can the lease impose an obligation on the MT to make distributions to its beneficiaries, given that the MT is not a party to it? No doubt there would be issues which needed to be explored under the Contracts Privity Act 1982.
[37] Some of these difficulties will become relevant later in this judgment. But for present purposes I do not need to decide whether, by themselves, they constitute separate grounds for concluding that one or more of the new causes of action is untenable. At the very least, however, they serve to fortify my subsequent conclusion that the claims should be struck out.
[38] I turn now to the specific matters advanced by Mr Larsen in that regard.
Limitation
[39] Counsel were agreed that it was the Limitation Act 1950 (the LA) which is applicable here.11
[40] As my summary above indicates, all four of the new causes of action are pleaded as breaches of trust. The limitation period for breaches of trust is governed by s 21 of the LA and, subject to various parts of that section, is six years.12
[41] Mr Upton submitted, however, that the concepts of breach of trust and breach of fiduciary duty are effectively interchangeable. I do not agree. The distinction between them is, in fact, critical for statute bar purposes because there is no prescribed limitation period for breach of fiduciary duty. The only statute bar issue arising in relation to such a claim would be whether a limitation period can be applied by analogy.
[42] The starting point must be that as a trustee of the MT, Mr Larsen did occupy a fiduciary position in relation to Mr Easton as beneficiary. But not every breach of duty owed by such a person is a breach of fiduciary duty; not every duty owed by such a person is fiduciary in nature. Many fiduciaries will also owe their beneficiary duties of care, in tort or contract and breaches of those duties will not necessarily also amount to breaches of fiduciary duty.
[43] Importantly, a trustee is under equitable duties to exercise reasonable skill, care, and diligence in the performance of their tasks. The fact that these are
11 The Limitation Act 2010 came into force on 1 January 2011.
12 The relevant parts of s 21 are set out at [45] below.
equitable duties of care does not render them fiduciary. They are duties of care, not of loyalty. Even where such duties of care are breached there will be no breach of fiduciary duty, unless the beneficiary can show that carelessness occurred in a setting of disloyalty, conflict of interest, or non-disclosure of material information. As the learned authors of Equity in New Zealand make clear:13
[I]n discharging his or her duty to preserve the trust property, a trustee must exercise the care, diligence, and skill that a prudent business person would exercise in managing the affairs of others. This is not a fiduciary standard; it is a standard of care, expressed in language different from, but reasonably similar to, the tortious duty of care. Hence, a breach of this duty will be treated in a manner similar to its analogue common law duties, rather than by reference to fiduciary law.
[44] Here, it seems to me that the essence of the newly pleaded allegations is that Mr Larsen, as either a “Landlord Trustee” or a “Professional Trustee”, failed to exercise reasonable skill, care and diligence in the administration of the MT. No disloyalty or conflict is alleged.14 Although the third and fourth causes of action in one sense allege breach of a duty to disclose, inform or explain, the disclosure and explanation said to be required was to Mr Easton in his capacity as a tenant, not in his capacity as beneficiary.15
[45] I note, as well, that the allegations here are of a similar kind to those made in a number of cases where trustees have been given the protection of the six year limitation period for breach of trust under s 21(2) of the LA.16 In my view the four causes of action are squarely and, subject to all the difficulties I have identified, appropriately pleaded as breaches of trust. It is therefore to s 21 that I now turn.
Section 21
[46] Section 21 relevantly provides:
13 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington
2009) at 497.
14 Claims of that kind have previously been brought by Mr Easton against Mr Larsen but have been abandoned.
15 The pleading is, essentially, that Mr Larsen should have told Mr Easton/EAL to resume paying rent and explained the consequences for the beneficiaries of not doing so.
16 Re Somerset [1894] 1 Ch 231, Re Swain [1891] 3 Ch 233 and Re Timmis [1902] 1 Ch 176 at 1049.
Limitation of actions in respect of trust property
(1) No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action —
(a) in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b) to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously
received by the trustee and converted to his use.
(2) Subject as aforesaid, an action by a beneficiary … in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:
Provided that the right of action shall not be deemed to have accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession.
…
[47] The following questions arise:
(a) Can it be said that one or more of the causes of action are in respect of some fraud or fraudulent breach of trust?17
(b) If not:
(i) on which date did each right of action accrue? and
(ii) were the actions brought within six years of that date? (c) If not, does the exception for fraud in s 28 of the LA apply?
[48] I deal with each in turn.
Do the new claims involve allegations of fraud or fraudulent breach of trust?
[49] The starting point is that no actual fraud or fraudulent breach of trust is pleaded or alleged. Rather, Mr Upton submitted that this was a case of equitable
17 There is no allegation that Mr Larsen has himself made off with Trust property and so no question of s 21(1)(b) being engaged.
fraud, which suffices for the purposes of s 21(1)(a). Citing Inca v Autoscript and Collier v Creighton he said that breach of fiduciary duty constituted equitable fraud.18
[50] I accept that the cases to which Mr Upton referred me confirm that a breach of fiduciary duty constitutes equitable fraud and that equitable fraud is encompassed by s 21(1)(a). But as I have already noted breach of fiduciary duty is not pleaded and, for the reasons I have given, does not arise on the alleged facts. Section 21(1) therefore has no application; this is therefore a s 21(2) case; a six year limitation period applies.
When did the rights of action accrue?
[51] A cause of action for breach of trust accrues on the commission of the breach, rather than on its discovery, unless the s 21(2) proviso applies. The proviso deems that the right of action does not accrue to “any beneficiary entitled to a future interest in the trust property” until that interest “falls into possession”.
[52] In Johns v Johns the Court of Appeal held that:19
(a) the proviso has no application to a discretionary beneficiary because he or she has only an expectation not an interest in the Trust property; but
(b)a right to share in the residue of an estate was a “future interest” in terms of s 21(2) and time did not begin to run until the interest fell into possession; and
(c) a future interest does not fall into possession until it can be tangibly enjoyed, namely on the distribution or vesting date.
[53] The fact that such an interest was contingent upon the beneficiary’s survival
to the date of distribution, and upon there being trust property, did not prevent it
18 Inca v Autoscript [1979] 2 NZLR 700 (SC) and Collier v Creighton [1993] 2 NZLR 534 (CA).
19 Johns v Johns [2004] 3 NZLR 202 (CA).
from being a future interest within the terms of the proviso. If the trustees had diminished the extent or value of the trust property by breaches of trust, that “future interest” had been contingently harmed.
[54] In the present case, the Trust Deed makes it clear that Mr Easton is both a discretionary and a final beneficiary of the MT. The vesting day is defined as either:
(a) fifty years from the date of execution of the Trust Deed; or
(b) such other date as the Trustees may in their absolute discretion by
Deed appoint (either in relation to all or part of the Trust Fund).
[55] The Trustees may, in its discretion, make payments during the Trust period to any of the discretionary beneficiaries out of the Trust’s income. The Trust may also make capital payments from the Trust Fund to any of the discretionary beneficiaries who are also final beneficiaries. So while it seems clear that Mr Easton has received certain distributions from the MT (including in the form of an amount equivalent to one third of the rent paid by EAL to IEL) such distributions must be distributions
made to him as a discretionary beneficiary.20 They are therefore of no present
relevance.
[56] But it seems to me that Mr Easton’s interest in the MT as a final beneficiary is capable of falling into possession as of right, but has not yet done so. The breach of trust causes of action are therefore deemed not yet to have accrued. 21
Section 28
[57] If that conclusion is correct then it does not matter when the actions were brought and there is no need to consider fraudulent concealment under s 28. In case
it matters, however, I record that in my view:
20 To the extent Mr Easton contends that he had a contractual entitlement to the distribution, then the six year contractual limitation period would apply. Any cause of action would accrue when the breach occurred which, as pleaded, was in 2004 or “within a reasonable time” after the flood. In my view such a claim would be clearly statute barred. In any event, Mr Larsen was not a party to the lease.
21 Mr Easton nonetheless faces a converse difficulty. Because his interest in the MT remains a future one it could not be said that he has (yet) suffered any loss from any of the alleged breaches of trust.
(a) the causes of action in the third amended statement of claim are wholly new pleadings and so, on the most generous view of the matter, they were not brought until June 2016 at the earliest; and
(b)had s 28 been in issue I would have found that it was not available to assist Mr Easton.22 Even assuming that Mr Larsen was under a positive duty of disclosure there is no basis for suggesting that he concealed the facts of the new claims. I accept Mr Hunter’s submission that Mr Easton (as co-Trustee) received some if not all of the Trust’s financial statements over the years and, indeed, has engaged expert accountants to interrogate the accounts of all the Easton entities since as early as 2005.
[58] But the application for summary judgment on limitation grounds must fail, for the reasons I have given.
Clause 20 of the Trust Deed
[59] As noted earlier, cl 20 states that no Trustee shall be liable for “[a]ny loss not attributable to dishonesty or to the wilful commission by the Trustee of any act known to the Trustee to be a breach of trust”.
[60] So Mr Larsen cannot conceivably be liable as a trustee of the MT unless Mr Easton alleges that Mr Larsen was either dishonest or wilfully committed an act that was known to him to constitute a breach of trust.
Dishonesty
[61] It is trite that allegations of dishonesty must be clearly pleaded. There is no such pleading here. None of the facts alleged might ground a dishonesty claim. As I have said, their focus is very much on Mr Larsen’s competence in administering the MT.
[62] But Mr Upton again submitted that the concept of dishonesty here incorporates the concept of equitable fraud and therefore breach of fiduciary duty. And I have some sympathy with that position; it seems wrong in principle for a Trustee to be exonerated from liability for acting when conflicted or otherwise disloyally.23
[63] But I do not need to determine whether the indemnity clause applies to actions that amount to a breach of fiduciary duty. That is because no breach of fiduciary duty is pleaded or sensibly arises on the alleged facts.
Wilful breach of trust
[64] Clause 20 also excludes from its protection any wilful act known to the Trustee to be a breach of trust. From the claims as pleaded, the acts that are said to constitute such breaches are Mr Larsen’s alleged failure to:
(a) distribute the rent to Mr Easton and the other beneficiaries without delay pursuant to the lease;
(b) record the obligation to distribute as a set-off in the accounts;
(c) write to Mr Easton (as a tenant) at some “reasonable” point after 2004
requiring EAL to start paying rent in cash and in full again; and
(d)explain to Mr Easton (as tenant) the effect on the Trust of EAL not paying rent in cash and in full.
[65] I will assume for now that cl 20 can be interpreted to include omissions as well as commissions. And on the basis of the evidence before me (but noting again that Mr Larsen has not had the opportunity to file any in response to the latest iteration of the claims) I also proceed on the assumption that Mr Larsen did indeed omit to do all of these things.
[66] But it is not, and in my view cannot be, pleaded that Mr Larsen omitted to act knowing that the omissions constituted a breach of trust. It can hardly be said that the omissions (if proved) constitute obvious breaches of trust. It has, after all, taken Mr Easton and his experts 10 years to come up with this particular articulation of his claim.
[67] Moreover, a number of the conceptual difficulties which I have recorded at [36] above seem relevant here. I do not consider that it can, for example, tenably be suggested that Mr Larsen did know, or should have known, that his trusteeship of MT (which he shared with Mr Easton) required him to:
(a) ensure that other Easton entities (the landlord companies) demanded rent from Mr Easton/EAL (when he had acquiesced to their request for an “oral variation” and knew that EAL could not pay); or
(b)set off for accounting purposes the debt owed by EAL to other Easton entities (the landlord companies) against a distribution that was (on the wording of the lease) contingently owed by the MT to Mr Easton personally; or
(c) write to Mr Easton/EAL as a tenant of other Easton entities (the landlord companies) demanding that they recommence paying rent in full to those companies; or
(d)advise Mr Easton/EAL as a tenant of other Easton entities (the landlord companies) of the accounting and tax consequences for the MT of their continued non-payment of rent.
[68] In my view Mr Larsen is therefore covered by the cl 20 indemnity. The claims should be struck out on that basis.
Abuse of process
[69] There is therefore strictly no need to consider the abuse of process ground. But for completeness I record that I would not have struck out the claim on that
ground. I have held that the causes of action in the third amended claim were (despite their difficulties) properly pleaded as breach of trust claims. They are different from earlier pleadings, as Mr Hunter in fact strove to emphasise in relation to the issue of when the actions were brought. While I wholly accept that Mr Larsen has been for a long time vexed by Mr Easton’s many and varied attempts to sue him, I am unable to say that the present pleading is an abuse of process on the grounds advanced.
Conclusions and result
[70] In summary
(a) the second amended statement of claim is to be regarded as abandoned;
(b)there are numerous difficulties with the new causes of action as pleaded in the (draft) third amended statement of claim;
(c) the four new causes of action in the (draft) third amended statement of claim are, nonetheless, properly characterised as claims for breach of trust;
(d)no factual basis is pleaded that would support a claim for breach of fiduciary duty;
(e) there is (similarly) no pleading of common law or equitable fraud or dishonesty nor of any factual foundation for such a claim;
(f) the limitation period is therefore six years under s 21 of the LA;
(g)the causes of action have not yet accrued because Mr Easton’s interest in the MT remains a future one which has not yet fallen into possession;
(h) the causes of action are not statute barred by the LA; and
(i)clause 20 of the MT Deed nonetheless bars the claims against Mr Larsen. There is (as above) no pleading or potential pleading of dishonesty or of knowing breach of trust.
[71] The claim is struck out accordingly. Mr Larsen is entitled to 2B costs in the usual way. If costs cannot be agreed, memoranda may be submitted.
Solicitors: Rainey Collins, Wellington for Plaintiffs
Gilbert Walker, Auckland for Defendant
“Rebecca Ellis J”
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