Gallagher-Dekker v Gallagher

[2024] NZHC 1329

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-002186

[2024] NZHC 1329

UNDER

Part 19 of the High Court Rules 2016, ss 112 and 114 of the Trusts Act 2019 and the

inherent jurisdiction of the High Court to supervise trusts

IN THE MATTER

of the estate of James Joseph Gallagher

BETWEEN

SALAMINA ELAINE GALLAGHER-DEKKER

Applicant

AND

OWEN ROE GALLAGHER and ALPHONSUS CUCHULLAIN TE KOOTI

LAFOIA GALLAGHER as executors and trustees of the estate of James Joseph

Gallagher Respondents

Hearing:	21 May 2024
Appearances:	G T Angus and M A Cousens for Applicant K I Bond and J R Field for Respondents
Judgment:	17 June 2024
Reissued:	11 July 2024

JUDGMENT OF ANDERSON J

This judgment was delivered by me on 17 June 2024 at 11 am pursuant to r 11.5 of the High Court Rules 2016.

.…………………………..

Registrar/Deputy Registrar

Solicitors:    Morris Legal, Auckland

Braun Bond and Lomas, Hamilton

GALLAGHER-DEKKER v GALLAGHER [2024] NZHC 1329 [17 June 2024]

[1]    The parties are the executors and trustees of the Estate of their late father, James Joseph Gallagher. They are three of his five adult children. Mr Gallagher died in September 2019. His wife, Meletina Gallagher, has survived him and is in good health.

[2]    The applicant, Elaine,1 applies to the Court to remove the respondents (her two brothers, Owen and Cuchullain) as trustees, conditional on her own resignation as trustee, and to appoint Perpetual Guardian as the sole replacement trustee. The respondents say that it is not desirable, necessary nor in the best interests of the beneficiaries to make the orders sought.

Background facts

[3]There is no dispute between the parties as to the general background facts.

[4]    Mr Gallagher’s last will was dated 28 October 1992. The applicant and respondents were named as executors and trustees of this last will in his second codicil dated 31 December 2015. Probate was granted on 10 December 2019.

[5]    Under cl 5 of Mr Gallagher’s will, the trustees are to hold the residue of his estate on trust and pay the net income to Mrs Gallagher for her lifetime. Following Mrs Gallagher’s death, the residue is to be divided equally between Mr Gallagher’s five children. Mrs Gallagher is in her late seventies and it could be many years before the Estate can be finally distributed.

[6]The following clauses of Mr Gallagher’s will are relevant:

(a)Mrs Gallagher is to be paid the net income of the Estate for her lifetime.2

(b)Any trustee engaged in a professional business may be so employed or act and is entitled to charge and be paid professional or other charges

1      I use the parties’ first names to avoid confusion.

2      Clause 5(a).

for any business done by that person or their firm in connection with the trust including acts which a trustee could have done personally.3

(c)The trustees are entitled to have recourse to the capital of the residue estate if at any time in their sole discretion they consider that the income together with Mrs Gallagher’s own resources is insufficient for her proper maintenance.4

[7]    There is no clause modifying the common law principle that trustees must act unanimously.

[8]    At the time of Mr Gallagher’s death, his assets largely comprised the following properties at:

(a)41 [X] Road, Onehunga, which was sold by the trustees in May 2020, largely to repay Estate debt;

(b)28 [A] Street, Sandringham, which is a vacant lot;

(c)38 [A] Street, Sandringham, which contains a single dwelling; and

(d)39 [X] Road, Onehunga, which contains three dwellings (Onehunga Property).

[9]    In 2016, each child was allowed to select a property from Mr Gallagher’s portfolio which resulted in certain distributions. As relevant for present purposes:

(a)The respondents’ company, Doneden Holdings Ltd, owns a property at 34 [A] Street which borders the properties at 28 and 38 [A] Street.

(b)The applicant’s property at 36 and 36A [A] Street, which was sold at auction on 1 May 2024, borders the property at 38 [A] Street.

3      Clause 9.

4      Clause 15.

[10]   At the date of Mr Gallagher’s death, he also owned a property in Mt Eden (Mt Eden Property). This was owned jointly with Mrs Gallagher and she inherited it by survivorship. There are multiple dwellings on that site. Mr and Mrs Gallagher built a new house on the back of the section in 2018, which became their family home. Owen currently lives in that house with his mother.

[11]   A villa at the front of the section is split into two internal flats, occupied by Cuchullain and his family. There is a third brick and weatherboard flat adjoining the villa but this is currently unoccupied due to disrepair.

The parties’ respective positions

[12]   From the applicant’s perspective, since probate was granted she has had growing concerns about the trustees’ management of the estate and how it has become increasingly difficult for the trustees to work together. She says their relationship has now deteriorated to the point that the respondents have refused to meet with the Estate’s lawyer and have, until very recently, refused to meet with the applicant.

[13]   From the respondents’ perspective, they say that the parties have acted unanimously when it came to decisions regarding Mrs Gallagher’s proper maintenance, management of the Estate properties and management of the Estate’s financial accounts with no issues being raised at the time. While an issue regarding the choice of a real estate agent subsequently caused a deterioration of the relationship between the parties, the respondents say this is not to such an extent that the parties are unable to continue to work together to efficiently manage the Estate.

[14]   Accordingly, they say the matters raised by the applicant are either issues raised only in retrospect or have been resolved and do not justify the removal and replacement of the trustees with a professional trustee, the cost of which will be a significant drain on the assets of the Estate and not what their mother wants.

Legal principles

[15]   Sections 112 and 114 of the Trusts Act 2019 provide that the Court may remove a trustee and/or appoint a new trustee whenever it is “necessary or desirable” to do so,

and it is difficult or impractical to do so without the assistance of the Court. The statutory powers sit alongside5 the High Court’s power to remove and appoint trustees in its inherent jurisdiction to supervise trusts.6

[16]   Unlike its predecessor in the Trustee Act 1956, s 112 of the 2019 Act does not require the Court to replace the trustee it is removing. Section 51 of the Trustee Act 1956 gave the Court power to substitute a trustee where it was “expedient” rather than “necessary or desirable.” This does not suggest any lower threshold under s 112 than previously.7

[17]   There is no dispute that assistance of the Court is required. The issue is with whether it is “necessary or desirable” to remove the trustees under s 112 (and appoint a new trustee under s 114). The following guidance remains relevant:

(a)The starting point is the Court’s duty to see estates properly administered and trusts properly executed.8

(b)The jurisdiction includes a large discretion which is heavily fact-dependent.9

(c)The Court will not readily replace an executor selected by a deceased to manage their estate.10 But while the wishes of the testator/settlor are to be given consideration, ultimately the question is what is necessary or desirable in the interests of beneficiaries.11

(d)Misconduct, breach of trust, dishonesty or unfitness need not be established.12

5      Trusts Act 2019, s 8.

6      Letterstedt v Broers (1884) 9 App Cas 371 cited with approval by the Court of Appeal in Hunter v Hunter [1938] NZLR 520 (CA) at 529.

7      See K v K [2022] NZHC 3123, [2022] NZFLR 624 at [98]–[99] citing Nicola Peart (ed) Family Property (online ed, Thomson Reuters) at [TU112.03(2)].

8      Farquhar v Nunns [2013] NZHC 1670 at [13(a)].

9      At [13(b)].

10     Tod v Tod [2015] NZCA 501, [2017] 2 NZLR 145 at [27(a)].

11     Farquhar v Nunns, above n 8, at [13(c)].

12     At [13(d)].

(e)A trustee will not be removed simply because of a position of conflict between duty and interest.13 Whether or not a position of conflict will justify removal depends on the nature of the conflict and the other circumstances of the case.14 In substance, the conflict must actually prejudice the beneficiaries’ welfare or undermine the trustee’s ability to perform their duties.15

(f)Hostility as between trustees and beneficiaries is not of itself a reason for removal, but hostility will assume relevance if and when it risks prejudicing the interests of the beneficiaries.16 The issue must be such that it seriously adversely affects the proper administration of the trust.

(g)The same principle applies to incompatibility or hostility between trustees themselves.17 The Court should look at whether the hostility between the trustees obstructs the administration of the trust and whether there is realistic prospect of improvement in the future.

[18]   In essence, the issue for me is whether, in all the circumstances, I should remove the respondents with a view to ensuring or securing the proper administration of the trust established by Mr Gallagher’s will.

Necessary or desirable to remove trustees

[19]   The applicant points to the following key reasons for her contention that it is necessary and/or desirable to remove the respondents as trustees in this case, conditional on her resignation:

(a)Conflicts of interest between the trustees’ personal interests and the interests of the Estate and its beneficiaries.

13     Tod v Tod, above n 10, at [27(c)].

14     Green v Green [2015] NZHC 1218 at [604]; and Bond v Platun [2016] NZHC 3038 at [12].

15     Tod v Tod, above n 10, at [27(c)].

16     Farquhar v Nunns, above n 8, at [13(e)].

17     Bond v Platun, above n 14, at [14].

(b)The Estate is relatively complex and has been mismanaged resulting in improper profit by the respondents and/or unnecessary cost to the Estate.

(c)That the parties are unable to work together effectively to manage and administer the Estate.

[20]   As the Estate may need to be managed for a considerable time, she says it is in the beneficiaries’ best interests for an independent trustee to take over that role now.

[21]I consider these issues in turn.

Conflicts of interest

[22]    The applicant says that the parties have a conflict of interest due to them each owning properties that neighbour the Estate’s properties.  She says this has resulted in the trustees being unable to agree on what properties should be sold to release funds because of how that decision impacts on the property the trustees hold in their personal capacity. The respondents acknowledge that conflicts may arise but submit that these have been adequately managed.

[23]   I do not consider that there is sufficient evidential support for the contention that the conflicts of interest are such that, if this stood alone, I would remove the trustees. It is relevant that Mr Gallagher gave each of the parties an adjoining property but did not change his choice of executors and trustees. In other words, Mr Gallagher had contemplated the conflict that exists.

[24]   More substantively, however, while there have been disagreements (which I come to later) I do not see sufficient support for the view that self-interest or the existence of this conflict has had a material bearing on the operation of the trust.

[25]   A second aspect of conflict is that Cuchullain is the property manager of the Estate properties through his company, Gallagher Property Development Ltd. He is also responsible for the property maintenance through his company, Loco Construction Ltd. The companies invoice the Estate for their time and Cuchullain

pays his own invoices (the applicant says) without her having the opportunity to approve, review or challenge invoices before payment.

[26]   The will contemplates that a trustee may charge fees for business done by their firm in connection with the trust.18 This matter is not of significant concern to the operation of the trust. The respondents have confirmed that they would be willing to set up a better process for authorisation of invoices going forward. Moreover, Cuchullain says, and I accept, that he has invoiced the Estate for services at the companies’ standard market rates.

[27]   A further matter raised by the applicant is that she says the Estate is paying power and phone bills for all of the Mt Eden Property dwellings (Mrs Gallagher’s property where she lives) including the residence occupied by Cuchullain and his family. The respondents have provided invoices demonstrating that this is not the case.

[28]   Finally, on this point, the applicant says that Cuchullain’s business held the Estate’s funds for a period of some 16 months before a dedicated Estate account was set up. It is suggested that he may have made profit over that period for which he has not accounted. It was poor management of the Estate for no dedicated account to have been set up, and a position of potential conflict did arise. However, I am not satisfied that, having regard to Cuchullain’s evidence in response to this contention, there has been any failure to account. I come back to the bank account issue later.

Mismanagement of the Estate

[29]   The applicant claims that the Estate has been mismanaged in the following ways:

(a)The issue referred to above, that the Estate’s funds were held in Cuchullain’s business account for a period of 16 months after probate was granted.

18     See [6](b)] above.

(b)Maintenance work was carried out on the Mt Eden Property at the Estate’s cost and without the applicant’s consent.

(c)Cuchullain mismanaged the subdivision of the Estate property at the Onehunga Property, resulting in wasted costs to the Estate.

[30]   As to the first of these, it is correct that there was a delay in setting up a bank account. I agree this was poor management of the Estate and should not have taken this long. The delay cannot solely be explained by COVID related issues. To be fair to the respondents, I took them as acknowledging that COVID did not provide a full excuse for this.

[31]   The respondents say that the applicant had access to the Estate’s accountants and that the relevant bank statements for the business account being used for Estate funds were available for her to review. They say she signed off on the Estate’s financial accounts for the year ended March 2021 without raising any concerns. This concerns the operation of the trust generally. I prefer to come back to it in that context. For present purposes, I accept there was no deliberate delay on the part of the respondents in setting up the Estate’s account nor was the Estate disadvantaged by this. While the delay should not have happened, I do not see it as an issue justifying removal of trustees.

[32]   The next issue is the applicant’s discovery in mid-2020 that the respondents were re-roofing and repainting the exterior of the flats at the Mt Eden Property at the Estate’s cost. She says this was despite her advising that she did not approve of the works being done as she did not consider it a sensible use of the Estate’s capital (the property being outside the Estate). The respondents say in answer that Mrs Gallagher requested that the Estate pay for those works and that they informed the applicant of them and provided her with an estimate of costs which she did not oppose.

[33]   The respondents say the repair work was undeniably needed and provision of funds for this was consistent with the trust’s purpose of looking after Mrs Gallagher. Again, I accept the respondents’ submission that these improvements were a material

benefit to Mrs Gallagher and does not constitute mismanagement or represent a conflict of interest that would require them to be removed.

[34]   The last aspect relating to mismanagement concerns steps to arrange a subdivision of the property at Onehunga Property into three lots. The respondents say (but Elaine does not accept) that this process was started by Mr Gallagher prior to his death or at least that this is what he wanted. The respondents also say the parties unanimously agreed to complete the subdivision once he had passed away. They say that at the least the applicant did not voice any concerns at the time. I come back to the decision-making around this.

[35]   For present purposes, the mismanagement assertion is that Cuchullain obtained advice from an architect and either was not told or misinterpreted advice that there would need to be provision of services before the subdivision could be effected. A resource consent was granted on 27 May 2022. In late 2022 the applicant says the respondents advised her that the Estate could not afford to undertake the further work required to complete the subdivision, resulting in over $50,000 in wasted costs to the Estate.

[36]   The respondents say that, while they accept there was an issue with being unable to effect the subdivision at that time, the work is not wasted because the consent has been obtained. The issue is one of timing and the necessary funds to complete it in the timeframe that had been intended.

[37]   This does appear to be an example where at least the second respondent, Cuchullain, has perhaps overestimated his expertise in property management. However, again it is not of itself something that would lead me to conclude there has been mismanagement of such significance that he and his brother should be removed as trustees given the benefit generally of having family members as trustees.

Parties are unable to work together

[38]   Pausing at this point, the issues raised by the applicant as to mismanagement and conflict of interest do not seem to me to be of sufficient severity or consequence for an order removing trustees. I do not consider they place the present situation as

one where the respondents should be removed to ensure the Estate can be administered for the benefit of beneficiaries. In my view, the benefit to the family of family members being the trustees and their knowledge of the properties and the family requirements would countermand the issues described above.

[39]   However, regrettably, the issue that stands in the way of the present trustees remaining in office is the inability of the trustees to work together.

[40]   The respondents say that it is just the applicant who is causing issues with any failure to agree now and that the matters are historical or trivial. I do not consider that is accurate. Reviewing the backdrop and crystallisation of the dispute, I reject the respondents’ characterisation that the present scenario has arisen simply because of a disagreement over who should be a real estate agent for the sale of one of the Estate properties, or that the applicant can be said to have always willingly agreed, or that these issues are likely to be resolved in the future.

[41]   It is true that the catalyst for Elaine bringing the present proceeding was disagreement over a real estate agent for the sale of the trust property at 38 [A] Street when Elaine was proposing to sell her adjacent property at 36/36A [A] Street. Elaine proposed they use the agent with whom she had signed to sell her property so that there was the possibility of giving potential buyers the prospect of buying both. The respondents consulted different agents, who agreed that selling the properties together would maximise the sale price for the trust property. However, Elaine did not want to change to the respondents’ agents for her own property.

[42]   Owen and Cuchullain for their part did not want to use Elaine’s agent. Other options of selling in a joint campaign were proposed. Owen and Cuchullain appear to have considered that Elaine was not acting in the best interests of the trust. Elaine for her part felt that her brothers were not acting in the best interests of the trust in that there was no genuine justification for insisting on their agent for 38 [A] Street. Elaine says she saw this as the last straw in terms of what she saw as her brothers always trying to get their way and failing to act appropriately.

[43]   Notwithstanding the respondents’ submission that Elaine failed to raise issues canvassed above at the time they arose, I accept that Elaine has been genuinely endeavouring to have the trust operated on a more professional basis. I characterise the issues raised in the past prior to the real estate agent issue as Elaine raising issues and being overruled by her brothers. Irrespective of who contributed most to where the relationship sits now, I do not consider that the status quo can continue in the interests of the trust.

[44]   The respondents say that the parties have been able to continue administering the trust in the sense of paying bills. However, despite this upcoming Court proceeding the parties did not meet to resolve matters. The evidence suggests that they have not met to discuss trustee issues since at least October 2022. In the meantime, there have been instances where the accounting and legal advisers to the trust have struggled to obtain instructions, and/or navigate the instructions they receive due to the disharmony between the trustees. I have each respective side’s perspective as to why that is so, and who bears responsibility for it. However, I do not consider it is fully Elaine’s or Owen’s/Cuchullain’s fault.

[45]   Since the dispute over the real estate agent, Elaine has sold her property at 36/36A  [A]  Street.  The  leverage  available   of  selling  both  that  property  and  38 [A] Street together is no longer available. The respondents say the parties remain agreed to sell 38 [A] Street. At the hearing, Ms Angus advised that her instructions are that this is not correct, and that Elaine considers another property should be sold, rather than 38 [A] Street which is income producing. In addition to which property to sell there is the issue of whether the subdivision development should proceed and there will be trustee decision-making required in the course of that. There are also the ongoing decisions to be made on provision for Mrs Gallagher.

[46]   Unfortunately, this is a case where leaving the trustees to manage the trust is not in the best interests of beneficiaries. I am satisfied there will continue to be significant disagreement and inability to come to unanimous decisions on substantive matters that will need to be addressed in managing the properties. That is in the context that the parties agree the Estate is of a relatively complex nature, and where there are going to need to be decisions about which properties should be sold, which

should be developed, and how. The respondents’ suggestion that there is the ability to seek directions from the Court and/or seek a direction that the parties mediate in the event of disagreement is not a realistic answer to the current breakdown of relationships.

[47]   I acknowledge Mr Gallagher’s desire as executor that his three children manage the Estate. This is also the wish of Mrs Gallagher. Frankly, all parties including the applicant would prefer that to be the case. In principle I agree that this would be the best outcome. However, I have formed the view that it is unrealistic to consider the parties will work together in the future. Nor do I consider that the blame for that should be placed at the applicant’s door, such that she should effectively be forced to resign rather than continue working with the respondents, as was a suggestion raised by counsel for the respondents.

Replacement trustee/s

[48]   I regrettably have decided that it is necessary or desirable for the respondents to be removed as trustees, conditional upon the applicant’s resignation. There is no question that, therefore, the Court should appoint a replacement trustee or trustees under s 114 of the Trusts Act.

[49]   The applicant has proposed Perpetual Guardian as the replacement. I have no detail of its fees or the basis of charging, nor any information on how it would approach management of this trust.

[50]   Obviously, Perpetual Guardian is a reputable professional trustee, however I raised with the parties at the hearing that if I formed the view, as I have, that they should be removed, I would give them time to see if they could agree the replacement trustee/s and, if not, allow them to provide me with further information and submissions on their proposed trustee/s.

[51]   Accordingly, I propose to give the parties some time to see if they can reach an agreement. Obviously, my orders removing the respondents will not take effect until an appropriate replacement is appointed by the Court.

[52]That being the case:

(a)I make orders removing the respondents as trustees, to be effective only on resignation of the applicant as trustee and upon the appointment by the Court of a replacement trustee/s.

(b)This matter is to be listed in the Duty Judge List on 31 July 2024 to give the parties time to seek to reach agreement on an independent trustee/s and who is willing to replace them.

(c)The parties are to file a joint or separate memoranda within five days prior to that date advising as to any agreement and if not, propose a timetable for considering trustee appointments. The parties should advise whether, in such event, they wish to be heard or whether they wish the choice of trustee to be addressed on the papers.

(d)The Court is to be provided with information of the proposed trustee/s such as charging basis, and any other information the parties consider will inform the making of the appointment.

(e)I suggest, but do not direct, that the parties engage with the other beneficiaries to canvass their views on the proposed trustee/s once the trustees have identified some possible choices.

[53]I reserve costs until the proceeding is finally determined.

Anderson J