Eden Refuge Trust v Hohepa [Remedies] HC Auckland CIV-2003-404-000539
[2011] NZHC 730
•8 June 2011
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2003-404-000539
BETWEEN EDEN REFUGE TRUST First Plaintiff
ANDJOANNE LYDIA MALETINO Second Plaintiff
ANDCALLUM MACDONALD Third Plaintiff
ANDATTORNEY-GENERAL Fourth Plaintiff
ANDCHARLES HOHEPA First Defendant
ANDCHARLES FLETCHER Second Defendant
Hearing: (On the Papers)
Counsel: G Bogiatto for the First and Second Plaintiffs
J F Armstrong for the Third Plaintiff
R Berkeley for the Fourth Plaintiff
No Appearance of or for the First Defendant
D A Wood for the Second Defendant
M O Robertson for the Third Party
Judgment: 8 June 2011
JUDGMENT OF DUFFY J [Re Quantum]
This judgment was delivered by Justice Duffy on 8 June 2011 at 4.00 pm, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
EDEN REFUGE TRUST and ORS v HOHEPA and ANOR HC AK CIV-2003-404-000539 8 June 2011
[1] The third plaintiff is the trustee of the Peoples Worship in Freedom Mission trust (PWFM trust), a charitable trust. The fourth plaintiff is the Attorney-General. The first defendant is a former trustee of the PWFM trust. The second defendant is a solicitor who acted for the PWFM trust when the first defendant was the trustee.
[2] The PWFM trust owned a property at 44 New North Road, Auckland. The first defendant sold this property. Before the sale settled, the first defendant used the property as security for mortgage finance that he had obtained for his personal benefit. The first defendant then misapplied the sale proceeds by using them to discharge the mortgage securities on settlement of the sale. The balance of the sale proceeds were also misapplied for the personal benefit of the first defendant. This happened in two ways: first, funds that were received by the first defendant were then used by him for purposes that were inconsistent with the PWFM trust deed; secondly, funds were used to discharge personal loans owed by the first defendant to the second defendant.
[3] The second defendant acted on instructions from the first defendant regarding the conveyance of the New North Road property and on the raising of mortgage finance that was secured against that property’s title. In doing so, he saw trust funds being made available for the first defendant to use for his personal benefit. In addition, the second defendant made personal loans to the first defendant, which were repaid from trust funds.
[4] The conduct of the first and second defendants led to the PWFM trust losing trust funds, which has lead to this proceeding.
[5] In an interim judgment delivered on 17 March 2010, I found that the third and fourth plaintiffs had proven their claims of breach of trust, breach of fiduciary duty and conversion against the first defendant: see Eden Refuge Trust v Hohepa [2011] 1 NZLR 197 (“Eden Refuge Trust”). I also found that the third and fourth plaintiffs had proven their claims of breach of fiduciary duty, knowing receipt and dishonest assistance against the second defendant. I deferred attempting to quantify the equitable remedies which I considered were available to the third and fourth
plaintiffs. I also deferred making findings on awarding compound interest or exemplary damages, as was sought by those plaintiffs.
[6] The parties agreed that those outstanding issues could be resolved on the papers. This decision on those issues should be read with the judgment of 17 March
2010 on liability. I do not propose to repeat the reasoning for the findings on liability.
Equitable relief
[7] In the judgment on liability I found that there was no prospect of the third plaintiff receiving restitution of the New North Road property as it has now passed into the hands of third parties, who had acquired the property in good faith. I also found at [226] that the PWFM trust had lost the New North Road property and the sale price it would otherwise have received in return. And I found that because the first defendant had authority to sell the New North Road property and because the sale was to a bona fide purchaser for value, the sale price should form the basis for acertaining the relief to be awarded to the third defendant (see Eden Refuge Trust at [225]-[227]).
[8] The first defendant is apparently beyond the jurisdiction of this Court. The evidence at the time of the trial showed him to be in Spain. Nothing is known about how he has personally applied the proceeds of the sale of the trust property. It can be assumed that those funds have now mixed with his personal funds. He may have profited from having access to the trust funds, or he may have dissipated them without enjoying any personal benefit in return. In such circumstances, an account of profits, the primary remedy for breach of fiduciary duty (see Chirnside v Fay [2007] 1 NZLR 433 (SC)), is not a suitable remedy.
[9] Where a plaintiff who has established a breach of fiduciary duty has suffered loss, but there has been no profit for the errant beneficiary, the plaintiff may be awarded compensatory damages in equity: see Chirnside at [20]. Payment of monetary relief to remedy equitable wrongs is now well established, and the parties have not sought to argue otherwise: see Premium Real Estate Ltd v Stevens [2009] 2
NZLR 384; Equiticorp Industries Group Ltd v Attorney-General (No 47) [1998] 2
NZLR 481; Aquaculture Corp v NZ Green Mussel Co Ltd [1990] 3 NZLR 299; and
Day v Mead [1987] 2 NZLR 443.
[10] Premium Real Estate v Stevens identifies how to quantify monetary relief in equity where there has been a breach of fiduciary duty but the errant fiduciary has not profited. In that judgment (at [102]), Tipping J divided monetary relief into three categories: compensatory damages, disgorgement damages and restorative damages. Compensatory damages were loss-based; disgorgement damages were based on giving up a gain; and restorative damages were based on restoring value transferred to the plaintiff. A flexible approach is taken as to the choice of monetary remedies; with a focus on ensuring that there is no double counting.
[11] Whilst in some cases the outcome may differ depending upon the category of damage that is applied, I do not think that is the case here. As nothing can be known about the profit the first defendant may have enjoyed, disgorgement damages are not appropriate. When it comes to the lost sale proceeds either by way of compensation or restoration, the outcome will be the same in terms of the quantum of the award. There is the loss the PWFM trust has suffered from not having had earlier access to the money those proceeds represent; however, equity provides for this through awards of simple or compound interest.
[12] In Eden Refuge Trust at [226], in reliance on Equiticorp Industries Group Ltd (in statutory management) v R (No 51) [1996] 3 NZLR 690, I found that the correct approach was to take the value of the lost trust property (as represented by the sale price) at the time it was removed inequitably. I also allowed for interest to be claimed from the time the trust property was removed inequitably until the entry of judgment against the defendants. This was also in accordance with the approach taken in Equiticorp (No 51).
[13] Except for the first defendant, the parties have agreed that $253,445.21 should be awarded to the trust as monetary relief. The first defendant has not participated in the argument on quantum, just as he took no part in the trial.
[14] The figure of $253,445.21 is arrived at by taking the sale price of the New North Road property and then making provision for advances or payments made by the second defendant to the first defendant; payments from trust funds of legal costs that were wrongfully incurred; and an allowance for the part of the sale proceeds that was not transferred to the first defendant, plus interest on that amount. Whilst the third and fourth plaintiffs have approached the exercise of quantification in slightly different ways, they have each arrived at the same end point. The second defendant does not dispute the quantum. I have considered the various arguments that have been made. I am satisfied that $253,445.21 correctly reflects the cost to the PWFM trust of the wrongful actions of the defendants. It follows that the third plaintiff as trustee of the PWFM trust is entitled to recover the total sum of
$253,445.21 from the first and second defendants. The defendants are jointly and severally liable in this regard.
[15] Included in the $253,445.21 is a $13,911.94 payment of legal fees that the second defendant wrongfully deducted from the trust funds after November 2002. In the liability judgment, I concluded at [152] that the events between November 2002 and March 2003 speak for themselves; namely, that the first defendant was intent on removing trust funds for his own use and that, as the second defendant knew this, he was a willing and knowing participant. I considered that, insofar as these events involved the second defendant performing legal services on instructions from the first defendant, the second defendant had no entitlement to payment for those services. Thus, the second defendant is liable to return to the PWFM trust the legal fees he wrongly claimed and deducted from trust funds. Further, the first defendant, in his role as trustee, unlawfully purported to issue the instructions for which these fees were rendered and then authorised their payment. I consider that he is liable to compensate the trust for these deductions.
[16] Also included in the $253,445.21 are personal advances totalling $52,491.78 that the second defendant made to the first defendant, and which the second defendant then wrongfully repaid to himself from trust funds. I consider that both defendants are liable to repay these amounts to the PWFM trust.
[17] When it comes to the power to award monetary relief in equity, in this case I think it is of little consequence how the relief is characterised. The plaintiff has not caused or contributed to its loss, and fiduciary duties were not innocently breached; rather, the duties were knowingly and dishonestly breached. The defendant fiduciaries should be required to restore to the PWFM trust all that it lost through their breaches of duty. Against the first defendant, the relief can be characterised as either compensatory or restorative. Against the second defendant, the relief relating to the unlawful personal loans to the first defendant and the unlawful payment of legal fees can be characterised as disgorgement damages, as the second defendant enjoyed a profit/benefit; whereas the balance of the $253,445.21 can be seen as compensatory or restorative. As the disgorgement portion is built into the total amount, there is no issue of double counting.
Interest
[18] In Rama v Millar [1996] 1 NZLR 257, the Privy Council referred to the established principle that Courts of equity have jurisdiction to award interest that is outside and additional to the statutory power contained in s 87 of the Judicature Act
1908. In principle, awards of compound interest are available in equity: see
Equiticorp (No 51).
[19] Here the third and fourth plaintiffs seek compound interest from each defendant. These plaintiffs also suggest an optional means of calculating an award of simple interest that differs from using the interest rates prescribed in s 87. In this case, any reliance on the s 87 interest rates would be by way of analogy, rather than through the application of that provision.
[20] The comment in Eden Refuge Trust (at [228]-[229]) that the third plaintiff was entitled to interest under the Judicature Act was made in circumstances where I recognised that this claim was open to him: see Day v Mead. The second defendant refers to these statements in the liability judgment and queries whether a finding on an award of interest has already been made. I consider that these comments cannot confine the third plaintiff to an award of interest under s 87. At the time I delivered the judgment on liability I had not heard from the third and fourth plaintiff on the
topic of relief. The tenor of these sections, particularly [229], makes it clear that the questions of quantifying the relief and awarding interest and costs were to be dealt with separately and in circumstances where all parties had an opportunity to be heard on those topics. Moreover, in that judgment I left open the availability of an award of compound interest, given that the liability findings against the defendants were founded in equity, and such an award could not be made under s 87. I do not, therefore, read anything in Eden Refuge Trust precluding the third and fourth plaintiffs from advancing arguments for an award of interest based on equitable principles. Now that the third and fourth plaintiffs have exercised their opportunity to address the question of relief, including interest, it is clear that they are advancing their arguments on equitable principles and have not relied on s 87.
[21] I have not heard from the first defendant on the topic of relief. This is consistent with the stance he has taken in the proceeding. The second defendant opposes any award of compound interest and argues that it is not available against him. The second defendant contends that the appropriate award of interest should accord with that prescribed in s 87.
[22] Since the monetary relief is calculated on the value of the trust property at the time it was lost, I consider that it is only proper that any interest the PWFM trust receives should be payable from that time. This is consistent with the principle that interest can be payable as from the date of the accrual of equitable causes of action such as breach of trust and/or breach of a fiduciary duty and knowing receipt: see Equiticorp (No 51).
Simple or compound interest
[23] At [91] to [102] of Eden Refuge Trust I made findings on the first defendant’s liability for breach of trust and breach of fiduciary duties. These included a finding that the first defendant had intentionally set about dealing with the PWFM trust’s property in a way that enabled him to use trust funds for his own personal benefit. Thus the first defendant intentionally breached his duties as a trustee in order to gain a personal benefit.
[24] At [152] I rejected the second defendant’s explanations for acting on the first defendant’s instructions. I concluded that the second defendant must have realised the dishonest intentions of the first defendant and that the instructions he gave were designed to ensure that he would personally benefit from the trust funds. I later found that the second defendant had breached his duties of loyalty and fidelity in circumstances where he either knew that he was doing so or wilfully shut his eyes to the obvious (at [191]-[205]).
[25] Thus, when it came to payment of legal fees for services rendered after
November 2002, I found that the second defendant wrongly and knowingly received
$13,911.74 drawings from PWFM trust funds. This means that the second defendant has enjoyed a profit and a benefit at the trust’s expense. The second defendant has argued that these drawings cannot constitute a profit at the trust’s expense because he was entitled to charge the trust for his services. I reject that argument. I accept that a solicitor who provides legitimate services to a trust is entitled to charge for those services. But there is no such entitlement when the services are not legitimately provided. Here, as there is no lawful basis for their receipt, they can only amount to an illegitimate profit.
[26] In addition, having made personal loans to the first defendant, the second defendant repaid those loans from PWFM trust funds. The total amount of those loans comes to $52,491.78. Had the second defendant not repaid himself from trust funds, the personal loans he made to the first defendant would have probably remained unpaid. The first defendant has either been residing in Spain or his whereabouts have been unknown. Thus it would have been difficult, if not impossible, to recover the loans from him. By achieving repayment of those loans, the second defendant has again personally profited at the expense of the trust.
[27] These profits/benefits that the second defendant enjoyed at the expense of the PWFM trust in breach of his fiduciary duties (as well as amounting to knowing receipt) are relevant to considering an award of compound interest.
[28] An award of compound interest is not imposed for the purpose of punishment: see Equiticorp (No 51) at 696-697. However, Chancery Courts have
awarded compound interest when they thought justice so demanded; that is, where money had been obtained or retained by fraud, or where it had been withheld or misapplied by a trustee or anyone else in a fiduciary position: see President of India v In Pintada Compania Navigacion SA [1985] AC 104 at 116. Both defendants satisfy this requirement as each of them has knowingly breached his fiduciary duties: the first defendant as trustee of the PWFM trust; and the second defendant as solicitor for the trust. The alternative finding that the second defendant wilfully closed his eyes to the obvious would also satisfy this requirement.
[29] Where it has been established that defaulting trustees/fiduciaries have used trust moneys in trade, they may be charged compound interest. The justification for doing so lies in the fact that profits earned in trade are seen to be likely to be used as working capital for earning further profits. Moreover, compound interest has also been awarded in cases where the defendant has wrongfully profited, or is presumed to have so profited from having the use of another person’s money: see Wallersteiner v Moir (No 2) [1975] QB 373 at 397 (emphasis added):
It is well established in equity that a trustee who in breach of trust misapplies trust funds will be liable not only to replace the misapplied principal fund but to do so with interest from the date of the misapplication. This is on the notional ground that the money so applied was in fact the trustee’s own money and that he has retained the misapplied trust money in his own hands and used it for his own purposes. Where a trustee has retained trust money in his own hands, he will be accountable for the profit which he has made or which he is assumed to have made from the use of the money. In Attorney General v Alford, No 4 DeG.M.&G. 843 at 851 Lord Cranworth LC said:
What the Court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it.
This is an amplification of the doctrine that the Court will not allow a trustee to make any profit from his trust.
[30] In Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669 at 702, Lord Browne-Wilkinson stated that in the absence of fraud, equity only allowed awards of compound interest where a defendant had acted in breach of his duties as a trustee or other fiduciary duties. His Lordship did not consider that the award of compound interest should be confined to cases where the
defaulting fiduciary had used trust moneys in his own trade and that it was enough if he had improperly profited from his breach of duty.
[31] In the present case, there is no evidence that the first defendant actually profited from his misuse of the trust funds. Nonetheless, in accordance with the principles expressed in the above authorities, I consider that it is open to the Court to presume that the first defendant has applied the trust funds in a way that would lead to him being estopped from denying he has profited from their misuse.
[32] In this regard, I rely on the comments by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale that equity is not so confined when it comes to awarding compound interest. But in the alternative, I note that in communications with the second defendant, the first defendant was constantly referring to the other investments he intended to make; and that he attempted to present himself as an investor. This is supported by his references in email messages to the second defendant about a valuable “asset” that he needed to have released to him, as well as his proposed visit to Hong Kong for the purpose of investment. I consider, therefore, that financial investment can be seen as one of his trades and he can be presumed to have applied the trust funds to some personal investment in pursuit of that trade.
[33] I find, therefore, that the third plaintiff is entitled to an award of compound interest against the first defendant.
[34] It is clear that the second defendant enjoyed an unlawful and inequitable profit at the expense of the trust only in the case of the repayment of personal loans to the first defendant and the payment of legal fees after November 2002. Again, for the reasons already stated, I do not see that this profit must be connected with any trade performed by the second defendant. In the alternative, the receipt of payment for legal fees is connected to the performance of the second defendant’s profession. However, the payment of the personal loans was connected with the second defendant’s role as a lender to the first defendant. Thus, in performing the role of a financier, the second defendant has acted to ensure he profited by having his loans repaid.
[35] Regarding the repaid loans and the payments for legal services, the second defendant is liable to pay an award of compound interest, rather than an award of simple interest.
[36] In all other respects I consider that simple interest should be awarded against the second defendant. Whilst the remainder of the trust funds were either directly or indirectly channelled by the second defendant to the first defendant, there is no evidence that the second defendant profited from such action. Nor should the second defendant be presumed to have done so, because in the course of channelling the funds to the first defendant, there was no opportunity for the second defendant to profit. The facts do not support any presumption that there must have been a profit for him. This can be contrasted with the circumstances of the first defendant, who had personal and unlimited use of all the trust funds that were either transferred directly to him or used to support loans that the first defendant was then able to apply to his personal use.
[37] The fourth plaintiff argues that the second defendant should be liable for an award of compound interest on the total sum that I have ordered to be repaid. This is based on the second defendant having been found liable for dishonest assistance. The fourth defendant acknowledges that he has no authority to support this argument.
[38] Usually a person who is found to have dishonestly assisted a defaulting trustee or fiduciary is a stranger to the wronged beneficiary and owes him or her no equitable obligations. In such cases, the Court is simply concerned with determining whether there has been a dishonest assistance and, if so, how it should be remedied. But in this case the dishonest assistance that the second defendant rendered to the first defendant also amounts to a breach of the fiduciary obligations that the second defendant owed to the PWFM trust. Here, liability for dishonest assistance does not add to the range of available remedies. But, it is of contextual relevance as it goes to establish the seriousness of the breach of fiduciary obligation. Short of stealing from clients or defrauding them in some other way, the conduct of the second defendant is at the uppermost end of reprehensible breaches of fiduciary obligations. In such circumstances, the nature of the breach of those obligations makes the second
defendant vulnerable to an award of compound interest; so that when it comes to considering this award, the findings of liability based on dishonest assistance, or for that matter knowing receipt, add nothing to the established liability of knowingly breaching fiduciary obligations. There is no need to draw on the finding of dishonest assistance or to argue that an award of compound interest can be made in cases of dishonest assistance.
[39] The bigger obstacle to an award of compound interest is that apart from the two areas where the second defendant has personally profited or benefited (payment of unlawful legal fees and repayment of unlawful personal loans), there is no evidence to suggest that he has personally profited or benefited from the other misuses of trust funds. Nor is there evidence to support a presumption of such profit or benefit. In the absence of those, I can see no basis for awarding compound interest beyond the two specific areas I have already identified.
[40] In short, therefore:
a) Each defendant is jointly and severally liable for the principal sum of
$253,445.21;
b)Each defendant is jointly and severally liable for simple interest calculated on the principal sum;
c) The first defendant is also liable for an extra amount representing compound interest on the principal amount over and above simple interest; and
d)The second defendant is also liable for compound interest on the sums of $13,911.94 and $52,491.78 (which form part of the $253,445.21) over and above simple interest.
[41] The interest should be calculated from the date the cause of action accrued (that is, the date the wrongful drawing occurred) down to the date of this judgment. The interest calculations prepared by the fourth defendant will need to be updated.
[42] The total sum of $253,445.21 was not drawn down in its entirety on one occasion. Thus, it is necessary to identify the dates of the various wrongful drawings, as each event is a separate demonstration of an equitable wrong. The parties appear to agree that the various dates identified by the fourth defendant in his submissions signify when those drawings occurred. I shall, therefore, rely on those dates. The result is as follows:
Improper Advances Made from PWFM Trust Property by the Second Defendant to the First Defendant for his Personal Benefit
Date
12 February 2003 – 8 June 2011
12 March 2003 – 8 June 2011
16 March 2003 – 8 June 2011
27 March 2003 – 8 June 2011
28 March 2003 – 8 June 2011
31 March 2003 – 8 June 2011
TOTAL:
Principal
$ 98,353.42
$ 55,518.00$ 1,912.95
$ 4,303.00 and $ 15,816.53
$ 4,000.00
$ 835.00$2,009.00 and $ 4,293.59
$187,041.49
Drawings on Trust Funds Used to Repay
Second Defendant’s Loans to First Defendant
Date
11 December 2002 – 8 June 2011
10 February 2003 – 8 June 20116 March 2003 – 8 June 2011
14 March 2003 – 8 June 2011
TOTAL:
Principal
$10,500.00
$ 7,122.07
$20,264.73
$14,604.98
$52,491.78
Legal Costs Wrongly Charged
Date
5 December 2002 – 8 June 2011
Principal
$ 2,454.38
28 March 2003 – 8 June 2011 $ 3,010.90 31 March 2003 – 8 June 2011 $ 5,028.10 17 April 2003 – 8 June 2011 $ 3,418.56
TOTAL:
$13,911.94
[43] Calculation of the interest awards will need to reflect these different draw down dates. If the parties are unable to agree on the result of such calculations, leave is reserved for them to return to Court for a determination on this issue.
Rate of interest
[44] The fourth plaintiff contends that an interest rate different from that provided for in the Judicature Act can be adopted. The third plaintiff adopts this contention. Any use of the Judicature Act rate is by analogy only, as here all awards of interest are being made in equity.
[45] The fourth plaintiff argues for a commercial rate based on the “Business Base Lending Rate” (BBLR). The fourth defendant advises that historical information on this rate is readily available from the Reserve Bank website, and that it has been used before in Parson v Graham HC Auckland CP601-1M01 13 December 2002. Whilst that decision shows that a commercial rate can be adopted as a benchmark for determining an interest rate, the case does not reveal the mode in which that information was before the Court.
[46] Here, no one has put the relevant BBLR rates before the Court. The second defendant argues that if the prescribed rate in s 87 is not used, there is no evidence before the Court as to an appropriate alternative interest rate. The second defendant contrasts this circumstance with what occurred in Equiticorp, where there was extensive evidence before the Court by a series of experts as to the appropriate rate of interest applicable.
[47] There are occasions when a Court can take judicial notice of the information contained in certain types of publications. In an electronic age, this may extend to electronic publications. However, when that occurs, the subject information is presented to the Court by the party inviting the Court to take judicial notice of the information. In this form, parties are aware of its content. Here, the BBLR information is not before the Court. It is not clear whether, in making the submission about the availability of this information, the fourth defendant is suggesting that the Court conduct its own investigation of the Reserve Bank website
or is seeking time to obtain the information. The former is not appropriate. Regarding the latter, I consider that the third and fourth plaintiffs have had ample opportunity to provide the Court with evidence of the relevant BBLR rate. I do not consider it appropriate to provide any further opportunity. I propose to adopt the s 87 interest rate as an appropriate measure of the interest to be awarded. This is to be applied to the calculation of both simple and compound interest awards. The rates should be those that were applicable to the relevant period. Up to 1 July 2008, the rate was 7.5 per cent and after that date the rate was increased to 8.4 per cent: Revocation of Judicature (Interest of debts and Damages) Order 2002.
[48] Regarding the awards of compound interest, it is well established that when such awards are made, the rests are generally annual: see Westpac Banking Corporation v O’Keefe (1991) NZBLC 102, 477. I consider there is no reason to depart from the general approach and that annual rests are appropriate.
Exemplary Damages
[49] The third and fourth plaintiffs seek an award of exemplary damages against the first defendant. They argue that the facts as established in this case meet the tests for such an award: see Aquaculture Corp v NZ Green Mussel Co Ltd [1990] 3 NZLR
299 (CA) at 301; Cook v Evatt (No 2) [1992] 1 NZLR 676 (HC) at 706; and Couch v Attorney-General [2010] NZSC 27; [2010] 3 NZLR 149 awards of exemplary damages in tort.
[50] These decisions make it clear that exemplary damages are to be reserved for serious and exceptional cases of conscious wrongdoing, when other remedies fall short of adequate punishment. I consider that the actions and conduct of the first defendant meet these requirements. As the sole trustee of a religious charitable trust, the first defendant consciously connived to sell the trust’s real property and to convert it into funds that could be transferred to him offshore, to be applied for his own purposes. He did so in circumstances where he knew there was no other trustee to stop him and where he had received advice from the second defendant on his duties as a trustee. The first defendant then embarked on a course of conduct that was designed to defeat or make it difficult for anyone else to oppose him. At the
time, the first plaintiff had been using the PWFM trust property at New North Road for its church since 1984, and the PWFM trust deed provided a substitute beneficiary in the event of there no longer being followers of the PWFM congregation. The first defendant knowingly and intentionally avoided the obstacles the first plaintiff and the substitute beneficiary might have posed to his unlawful designs. At all relevant times the first defendant acted dishonestly, highhandedly (when it came to the first plaintiff) and contumeliously.
[51] I also consider that whilst the remedies awarded to the third plaintiff will go some way to rectify the loss the PWFM trust has suffered and to restore the lost trust funds, this will not in any way penalise the first defendant for his wrongful conduct. Something more is required if he is to be penalised for what he has done. This is a case where I consider that some penalty or punishment is warranted.
[52] The amount of $50,000 is sought in the statement of claim. I consider this too high for exemplary damages; and out of line with established principle. However, I consider that in the circumstances of this case, an award of $10,000 would be in keeping with established principle. I consider that this amount is a proper reflection of the seriousness of the unlawful conduct.
Costs
[53] I shall deal with the fourth plaintiff’s claim for costs first. His role in the proceeding only occurred after judgment was entered against the first defendant. The fourth plaintiff’s role focused on supporting the third plaintiff to prove the claims against the second defendant. For this reason, the fourth defendant seeks costs on a category 2B basis. The category level and limited costs sought are said to reflect the late entry of the fourth defendant in the proceeding. The fourth defendant was not added as a plaintiff until 1 April 2009, even though the Attorney-General has a special role in the oversight of charitable trusts.
[54] The total sum sought is $17,348.07. Of this, $14,148.07 covers time spent in preparation for, and appearing at, the hearing. An additional sum of $3,200 is sought to cover the cost of preparing submissions on the quantification of remedies.
[55] The fourth plaintiff requests that the Court apportion the costs between each defendant. I consider that the costs of $14,148.07 are reasonable costs that were necessarily incurred in establishing the liability of the second defendant. Given the limited role the first defendant had in this proceeding, which was conducted against him by way of formal proof, the bulk of the fourth plaintiff’s efforts were directed against the second defendant. Nonetheless, I see no reason to depart from the general rule (r 14.14 of the High Court Rules) that costs against two or more parties are awarded on a joint and several basis. Therefore, each defendant is jointly and severally liable for the fourth plaintiff’s costs. I also consider that the sum of $3,200 to cover the submissions on quantum is reasonable.
[56] I now deal with the third plaintiff’s application for costs. This application is not straightforward. The third plaintiff did not become involved in the proceeding until 8 August 2008. By then, the proceeding had been on foot since 23 March 2003. The second plaintiff was not added until 12 June 2006. I understand that the third plaintiff either intends to or has already reimbursed the first and/or second plaintiffs for the costs they have paid in this proceeding. It is on this basis that the third plaintiff now seeks costs from the date of the commencement of the proceeding. Costs are sought at category 3B and in the alternative category 2B. At category 3B they come to $189,126.00, and at category 2B they come to $126,680.
[57] The second defendant opposes an award of costs on this basis. In essence, the second defendant contends that the proceeding was made overly complex and has taken up more time than it should have through the way in which it has been prosecuted.
[58] There is some merit to the second defendant’s argument. The third plaintiff was added to these proceedings because there were real doubts as to the standing of the first and second plaintiffs. They were essentially claiming to be the congregation for which the PWFM trust was established. There were questions as to whether they were in fact the same congregation or a different congregation that sought to avail themselves of the building owned by the PWFM trust. There were also legal uncertainties as to whether a congregation that is connected with a charitable trust can bring a proceeding of this type. The addition of the third plaintiff brought the
prosecution of the proceeding under the control of the Court appointed trustee of the PWFM trust. This also meant that I did not need to deal with the questions arising from the second defendant’s challenge to the standing of the first and second plaintiffs.
[59] This proceeding was commenced in 2003. Though I have gone over the various conference Minutes that have been issued during its course, I have found nothing to inform me that the proceeding was categorised for the purpose of costs. Categorisation of a proceeding usually occurs at the first or second case management conference. The second defendant is the only party to claim that the proceeding has been categorised for costs. But he has not referred to the source of this decision. Since there is no certain indication the proceeding was categorised, I consider that I should determine its appropriate category.
[60] Apart from determining the appropriate category of costs, the question of the costs to be awarded following the addition of the third plaintiff is readily determined. After 8 August 2008, the proceeding followed a fairly conventional path. I propose, therefore, to deal with the third plaintiff’s costs application by considering first the costs claimed after he was joined as a plaintiff and then to consider the costs incurred in prosecuting the claims against the defendants before this date.
[61] The law regarding the duties of trustees of charitable trusts and the duties of solicitors is fairly settled; as is the law regarding dishonest assistance and knowing receipt as applicable here. This was not a case where the plaintiffs’ equitable claims against the defendants strained the boundaries of the applicable legal principles. The proceeding was comparable to the general range of proceedings based on the types of claims that come before this Court. The statement of claim could have been confined to claims of breach of trust/breach of fiduciary duty/dishonest assistance and knowing receipt case. It did not need to include the other causes of action that were also pleaded. When seen in this light, the proceeding would fall into category
2B – the category that is usually applied to civil proceedings in this Court. The claims made in tort and in contract did not add to the proceeding; rather, they covered the same ground as the equitable claims, but not as well.
[62] In its early stages, this case was complicated by the way in which the plaintiffs formulated it, rather than the nature of the substantive issues. However, the practical effect of those complexities had diminished by the time the third plaintiff was added; and even more so once the fourth plaintiff was added. Thus from 8 August 2008 onwards, the proceeding can be treated in the same way as any other category 2B proceeding. Accordingly, I consider that costs should follow the event; and the third plaintiff is entitled to costs on a category 2B basis from 8 August
2008. The award is against each defendant on a joint and several basis.
[63] I now turn to the period before the third plaintiff was joined. The first plaintiff played a pivotal role in securing the interim injunction that prevented the balance of the PWFM trust’s funds being sent offshore to the first defendant. Had the first plaintiff not acted when it did, all of the trust funds would have been placed at the disposal of the first defendant. In such circumstances I can understand why the third plaintiff seeks to reimburse the first plaintiff for the costs it incurred on behalf of the PWFM trust. This is akin to a ratification of the first plaintiff’s ability to act on behalf of the PWFM trust. However, no authority has been cited to support the proposition that the third plaintiff is able to adopt this course.
[64] The second defendant argues that the third plaintiff cannot retrospectively assume responsibility or authorise actions that were undertaken by the first and second plaintiffs. As this proposition is novel and untested, he cannot cite supporting authority.
[65] For the reasons set out below, I have determined that the manner in which the proceeding was conducted before the addition of the third plaintiff would disqualify any claim for costs against the defendants. In such circumstances it is unnecessary to determine whether it is permissible for the third plaintiff to claim costs that were incurred by the first and second plaintiffs.
[66] In this case there was a period of time after the interim injunction was obtained but before the third plaintiff was added when the proceeding became bogged down in interlocutory steps and other complexities, which ultimately led nowhere. For example, the judgment of Associate Judge Doogue dated 13 June
2006 shows that resolving the joinder of the second plaintiff occupied three appearances, when this addition did not assist with establishing that the then named plaintiffs had appropriate standing to bring the proceeding. The Judge concluded that, given the three appearances, the application for joinder should incur costs that lay where they fell. A costs order was made against the second defendant for his unsuccessful application for security for costs, but the category of costs was not specified. Later, in a Minute dated 26 June 2006, the Judge set costs at category 2B. One of the things this proceeding demonstrates is the advantage of costs on interlocutory applications being determined at the time the application is determined. The early history of this proceeding is so chequered that it is now difficult to determine the appropriate costs for any interlocutory step.
[67] Whilst the defendants were ultimately unsuccessful, the proceeding was brought in a muddled fashion; which materially inflated the time and effort required to establish the claims against them. This imposed excessive costs on the second defendant. An example is the unnecessary time and trouble that the second defendant spent during the week of the hearing in March 2008 regarding the argument that the first and second plaintiffs had no standing. This part of the hearing concluded with the Court ordering the removal of the first defendant as trustee of the PWFM trust and his replacement with Callum MacDonald, who later became the third plaintiff. This addition answered any concerns about the first and second plaintiffs’ lack of standing. Nonetheless, it needs to be recognised that until the third plaintiff was added, the second defendant’s arguments about the first and second plaintiffs’ standing had merit.
[68] Had the fourth plaintiff been alerted to the first defendant’s wrongful actions and the need for him to be removed from his position as trustee at the outset, the proceeding may have been efficiently progressed earlier on. In cases of a defaulting trustee of a charitable trust, the Attorney-General is the appropriate party to commence proceedings against the defaulting trustee. When persons having an interest in a charitable trust seek to prevent a defaulting trustee from harming the trust, the conventional approach is to engage the assistance of the Attorney-General. There is no need for them to advance complicated arguments to establish that they have standing to bring proceedings in their own name. The one possible exception
to this rule is when urgent action, such as interim relief, is required to protect the trust from harm. In Eden Refuge Trust at [104], I considered that, in urgent circumstances, a congregation may have some standing to enforce a religious charitable trust under which they may derive some benefit. However, once interim relief was obtained and the PWFM trust was protected from further harm, the proper course of action would have been for the first plaintiff to have brought the matter to the attention of the Attorney-General by serving the proceeding on the Crown Law Office. Instead, the unnecessary step of adding the second plaintiff was taken in June 2006, and it was not until April 2009 that the Attorney-General was joined as fourth plaintiff.
[69] The first, second and third plaintiffs were represented by the same solicitor and counsel. His fee comes to $205,861.65, with disbursements of $6,063.39. An award of costs at category 2B from 8 August 2008 onwards will be far less than the actual fees that have been incurred by those three plaintiffs.
[70] However, in view of the early history of this proceeding and the doubtful nature of the third plaintiff attempting to ratify actions taken by the first and second plaintiffs, I consider that the interests of justice are best served by ordering that costs prior to 8 August 2008 that have not already been the subject of a Court order should lie where they fall. It is up to the third plaintiff as trustee of the PWFM trust to decide what to do in relation to payment of the actual legal costs. This decision has been arrived at by balancing the competing claims of the opposing parties. The deciding factors may bear differently on any decision that the third plaintiff has to reach and, therefore, for him the outcome may be different.
Disbursements
[71] As the successful party, the third plaintiff is entitled to reasonable disbursements. Here, the costs of the disbursements cover the period before and after the third plaintiff was joined in the proceeding. The third plaintiff is entitled to recover the disbursements he incurred after he was joined in the proceeding. For the same reasons that led to deny his claim for costs for the period before he was joined in the proceeding, I find he cannot claim disbursements for this time.
[72] The third plaintiff seeks expert witness costs of $35,818.27 for witnesses that were engaged by the first and second plaintiffs. Robert Eades gave expert evidence following the joinder of the third plaintiff. His fees during this period come to
$4,060.15. Though his evidence was not relied upon by the Court in reaching its conclusions, I consider that it was reasonable to engage his expert testimony; and that his fees for the period following 8 August 2008 are a recoverable disbursement.
[73] The testimony of the other expert witnesses was adopted by the third plaintiff; however their fees were incurred before the third plaintiff joined the proceeding. In such circumstances, I consider that the fee should be a recoverable disbursement. I consider, therefore, that Mr Eades’ fee of $4,623.75, which predates
8 August 2008, is also recoverable. For the same reason, I approve recovery of the fee of Kevin Gould of $4,328.12.
[74] However, I can see no basis for Mr Gould claiming $13,806.25. His evidence was no more detailed than Mr Eades’. Without more information to justify this fee, I am not prepared to approve it.
[75] I am prepared to allow recovery of one of the two sets of valuation fees, which are both for $4,500. The second defendant argues that the value of the property did not form part of the reasoning that led to judgment against the second defendant. Whilst that is so, I consider that the alternative approach of valuing the New North Road property was something that the plaintiffs might reasonably think could form the basis of a judgment against the defendants. However, there is insufficient explanation to support the second fee. I am not satisfied that recovery of this fee is justified.
[76] Each defendant is jointly and severally liable for the approved disbursements and witness expenses.
[77] Leave is reserved to the parties to return to Court on any matter that either requires further clarification or is outstanding.
Duffy J
Counsel: D A Wood P O Box 1452 Shortland Street Auckland 1001 for the
Second Defendant
Solicitors: G Bogiatto P O Box 106120 Auckland 1001 (DX CP19060) for the First and
Second Plaintiffs
Armstrong Murray P O Box 331028 Takapuna North Shore 1309 (DX BP66018) for the Third Plaintiff
The Solicitor-General Crown Law P O Box 2858 Wellington 6140 (DX SP20208) for the Fourth Plaintiff
Shieff Angland P O Box 2180 Shortland Street Auckland 1140 (DX CP19036)
for the Third Party
Copies To: D M O’Neill P O Box 815 Waikato Mail Centre Hamilton 3240
Nielsen Law (D E G Nielsen) P O Box 1108 Waikato Mail Centre
Hamilton 3240
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