Gamble v Schepens
[2023] NZHC 3191
•13 November 2023
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2022-488-000086
[2023] NZHC 3191
BETWEEN DEBORAH ANNE GAMBLE, DEIRDRE JANE LEADLEY and HAYLEY MAREE LEITH
Plaintiffs
AND
JOHN EMILE SCHEPENS and BRUCE
JOSEPH MORRIS in their capacity as trustees of the estate of LILY JOSEPHINE SCHEPENS
First DefendantsJOHN EMILE SCHEPENS and BRUCE
JOSEPH MORRIS in their capacity as trustees of the estate of ALLAN VICTOR SCHEPENSSecond Defendants
Hearing: 14 – 15 and 17 August 2023 Appearances:
J P Browne and J P Cartwright for Plaintiffs
J P Golightly for First Defendant (J Schepens) C Muston for Second Defendant (B Morris)
Judgment:
13 November 2023
JUDGMENT OF ANDREW J
This judgment was delivered by Justice Andrew on 13 November 2023 at 3.30 pm
pursuant to r 11.5 of the High Court Rules 2016 Registrar / Deputy Registrar
Date ………………………
GAMBLE v SCHEPENS [2023] NZHC 3191 [13 November 2023]
Introduction
[1] The three plaintiff sisters, Deirdre, Deborah and Hayley,1 apply under the Trusts Act 2019 to remove and replace the current trustees of two testamentary trusts. They, together with one other sister, Shannon, are the remainder beneficiaries of these testamentary trusts.
[2] The testamentary trusts are those of the plaintiffs’ grandparents’ estates. The principal asset of the trusts is a large farm at Waimatenui, Northland. It is in a remote location adjacent to the Waipoua forest. Farming in the district is challenging.
[3] Mr John Schepens is the uncle of the plaintiffs and one of the two trustees of the testamentary trusts. The other trustee is Mr Bruce Morris. For many years John has farmed both the trust property and the adjacent farm, which is owned by John personally. The properties have been managed as one farm.
[4] The plaintiffs say that the relationship between the trustees was and is dysfunctional and that the farm, being the principal trust asset, has significantly declined in value under the current trusteeship. It is contended that the trustees have failed to properly maintain the farm, including by failing to maintain buildings and other improvements, failing to control wild pigs and goats, and failing to apply fertiliser.
[5] It is not in dispute that Bruce should be removed; Bruce expects and wishes to be discharged as a trustee. The critical issue is whether John should also be removed and the trusts governed solely by an independent solicitor trustee, as proposed by the plaintiffs.
1 For ease of reference, I shall refer to all of the parties by their first names. No disrespect is intended.
Factual background
(a)The Schepens’ estates
[6] The plaintiffs’ late grandparents, Allan and Lily Schepens, owned the farm at Waimatenui, more particularly described as the land comprised in Certificates of Title NA1368/36, NZ1311/38, NA226/220, NA981/221 and NA935/207 (the Schepens’ farm). They owned the farm as tenants in common in equal shares.
[7] Lily Schepens died on 5 July 1988. On 16 January 1989, probate of her will dated 16 September 1985 and codicil dated 13 January 1987 was granted to Allan Schepens, John and Mr James Shaw.
[8] On 31 May 1991, Allan Schepens died. On 5 November 1991, probate of his will dated 16 September 1985 and codicil dated 13 January 1987 was granted to John and Mr Shaw.
[9] On the death of Allan Schepens, John and Mr Shaw became, together, the sole executors and trustees of the estate of Lily Schepens.
[10] The adjacent farm personally owned by John is in part land gifted to him by his father, Allan Schepens, in 1974. As noted, both John’s farm and the Schepens’ farm are managed as one large farm. John’s property forms the majority of the jointly managed farm and the Schepens’ farm (i.e. owned by the trusts) forms the minority (about 66 per cent and 33 per cent respectively). The amenities on the Schepens’ farm include the plaintiffs’ grandparents’ family home, a concrete block shearers’ quarters, a woolshed and various other sheds. John lives on his own property.
(b)Family Protection Act 1955 litigation
[11] In the early 1990s, proceedings were brought under the Family Protection Act 1955 against the estates of Allan Schepens and Lily Schepens by Anne Currin (then Anne Schepens) and the grandchildren. Anne is the mother of the plaintiffs.
[12] This Court, by judgments dated 21 July 1994 and 20 September 1994, held that there was a moral duty by each parent and amended their wills as follows:2
(a)Anne Schepens was given an additional legacy of $40,000 in each of the estates ($80,000 total);
(b)the grandchildren were each given a legacy of $17,500 in each of the estates ($35,000 total) contingent upon their reaching the age of 20; and
(c)the residue of the estates, including the Schepens’ farm, was to go to John for life, then on John’s death to Anne Schepens for life, then to the grandchildren (the plaintiffs) as final beneficiaries.
[13] The Court of Appeal, by judgment dated 24 November 1995, provided further relief to Anne Schepens on a provisional basis in relation to her mortgage over a property in Western Australia, the value of the mortgage being AUD 58,000, pending other reasonable avenues of enforcement against her ex-husband being exhausted.3
[14] Following the Court judgments, the residue of the estate of Allan Schepens and the estate of Lily Schepens, including the Schepens’ farm, is left:
(a)to John for life;
(b)then to Anne Currin for life; and
(c)then to the grandchildren of the deceased (the plaintiffs and their remaining sister, Shannon) in equal shares as the capital beneficiaries.
(c) Trustees of the Schepens’ trusts
[15] On 16 December 1996, Mr Shaw retired as a trustee of each of the estates and Bruce was appointed as trustee of the estates in his place.
2 Re Schepens (deceased) HC Whangarei M41/92 and M80/93, 21 July 1994; and Re Schepens (deceased) HC Whangarei M41/92 and M80/93, 20 September 1994.
3 Re Schepens (deceased) (1995) 14 FRNZ 1 (CA) at 7.
Relevant legal principles
[16] The jurisdiction to remove and replace trustees has been codified in the Trusts Act 2019.4 The test is whether it is “necessary or desirable” to do so.
[17]Section 112 of the Trusts Act 2019 reads:
Court may make order for removal
Whenever it is necessary or desirable to remove a trustee and it is difficult or impracticable to do so without the assistance of the court, the court may make an order removing a trustee.
[18]Section 114(1) of the Trusts Act 2019 reads:
Court may appoint or replace trustee
(1) Whenever it is necessary or desirable to appoint a new trustee and it is difficult or impracticable to do so without the assistance of the court, the court may make an order appointing a new trustee.
[19] The Laws of New Zealand notes that the legislation enacts the test that determined whether a court would exercise its inherent jurisdiction, namely whenever it was seen as desirable for the good of the trust property or in the interests of the beneficiaries to remove a trustee.5
[20] The touchstone is the welfare of the beneficiaries. The Court of Appeal in Tod v Tod applied the following statement of principles from Farquhar v Nunns:6
(a)The starting point is the Court’s duty to see estates properly administered and trusts properly executed.
(b)This jurisdiction involves a large discretion which is heavily fact- dependent.
4 As relied on for the first cause of action in the statement of claim. The second (alternative) cause of action relies on s 21 of the Administration Act 1969. The third (again, alternative) cause of action seeks to invoke the Court’s inherent jurisdiction.
5 Lindsay Breach The Laws of New Zealand Trusts (online ed, LexisNexis) at [219]; citing, among others, Letterstedt v Broers (1884) 9 App Cas 371. See also Miller v Cameron (1936) 54 CLR 572 (HCA) and Jillian Mallon “Removal of trustees: The old, the new, friction and hostility and other issues” [2022] NZ L Rev 59.
6 Tod v Tod [2015] NZCA 501, [2017] 2 NZLR 145 at [22]; citing Farquhar v Nunns [2013] NZHC 1670 at [13].
(c)The wishes of the testator/settlor (evidenced by the appointment of a particular executor or trustee) are to be given consideration, but ultimately the question is as to what is expedient in the interests of the beneficiaries.
(d)Expedience is a lower threshold than necessity, and imports considerations of suitability, practicality and efficiency. Misconduct, breach of trust, dishonesty, or unfitness need not be established.
(e)Hostility as between administrators/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.
Analysis and decision
Issue (a) – Should John be removed?
[21] As noted, it is not disputed that Bruce should be removed as a trustee. There is a clear evidential basis for that agreement and it is also relevant to the truly critical issue of whether John should also be removed.
[22] John accepts that there should be a new independent solicitor trustee but contends that he should remain a trustee and work together with the new appointment.
[23] In addressing this critical issue of whether it is necessary or desirable to remove John, the history of the dysfunctional relationship between the two current trustees, Bruce and John, is an obvious starting point. Both John and Bruce acknowledged that their trustee relationship was never, at any point, a functional trustee relationship.
[24] Trustees are required to act unanimously, unless the trust deed provides otherwise.7 Likewise, trustees have no authority to delegate to one of their number a general authority to make decisions on their behalf, unless:
(a)Specifically permitted by the trust deed; or
(b)Specifically permitted by statue; or
7 Trusts Act 2019, s 38, s 28. Section 38 is a default duty and can be modified or excluded by express or implied terms of the trust. See ss 28 and 5(4).
(c)Where it is practically unavoidable and is usual in the course of business and the particular agent is employed in the ordinary scope of his or her business.8
[25] However, in clear breach of those obligations John has been running these trusts unilaterally for a very long time.9 Bruce has had no meaningful input into the operation of the trusts. I agree with the submission of Mr Browne, for the plaintiffs, that Bruce’s acquiescence to John’s unilateral running of the trusts amounts to an unlawful delegation of his powers and duties to John. In the circumstances, I understand why Bruce left John alone to run the farm as he saw fit; it is a family property and John has lived and worked there most of his life. Bruce sought to respect his autonomy. However, Bruce has not in substance performed his role as a trustee.
[26] There were no trustee minutes at all during the period 1996–2023. John sold all of the estates’ sheep and non-breeding cattle to the Simpkins (who now also lease John’s individual share of the farm and have a licence to occupy the Schepens’ farm) without the knowledge or consent of Bruce. Bruce had no involvement in the preparation or filing of the financial statements of the estate. He was surprised by the fact that John owes around $358,000 to the estate.
[27] The evidence also establishes that there is now clearly a level of animosity between John and Bruce. Their relationship appears to have worsened since the Tutamoe School incident in 2018. It is clear that John and Bruce are unable to work together. To allow the relationship to continue would clearly risk prejudicing the interests of the beneficiaries.
[28] Both John and Bruce have also failed to understand the terms of the testamentary trusts. At the meeting between the parties on 12 February 2020:
8 Niak v MacDonald [2001] 3 NZLR 334 (CA) at [16]. See Trusts Act 2019, ss 67–73 for exceptions. See also Chris Kelly and others Garrow and Kelly: Law of Trusts and Trustees (8th ed, LexisNexis, Wellington, 2022) at [19.91]–[19.108].
9 The unchallenged evidence of Mr Shaw, the former trustee, is that from the inception of the trusts John was acting in a unilateral fashion, namely without consulting Mr Shaw.
(a)John adamantly disagreed with the fact that his sister, Anne, had a successor life interest to himself; and
(b)claimed that he held the “trump card” and could dissolve the trusts at any time.
[29] John now responsibly accepts that those two claims are incorrect. His sister does have a successor life interest and he does not hold the power to dissolve the trusts. For his part, Bruce seems to have been unaware that the trustees had the power to distribute capital to the residuary beneficiaries. That is an important power which, if exercised, might have provided real assistance to the plaintiffs.
[30] Against this historical background I now turn squarely to address the contemporary situation and to focus on whether it is necessary or desirable to remove John.
[31] John is now 68 years old. He has retired from farming. His whole life has been dedicated to both farms; he is one of three generations of the Schepens’ family who have broken in the land and worked very hard to achieve that goal. It is important to acknowledge those facts.
[32] I also acknowledge the importance of having regard to the wishes and intentions of the testator/settlers, namely Allan and Lily Schepens. John was appointed to be the trustee of both estates and also to receive the life tenancy. However, in substance the wishes and intentions of the testators have largely been fulfilled; John has for a very long time been the effective trustee in control of the farm and assumed the principal and primary responsibility for it. Critically, I must determine what is desirable in terms of the interests of the beneficiaries. That is the overriding consideration.
[33] There are three critical factors that support a finding that it is now desirable in the interests of the beneficiaries that John be removed as a trustee. They are: the decline in the estates’ cash reserves; the fact that John now owes a large debt of approximately $358,000 to the estates; and the steady state of decline of the farm.
These three factors pose a particular risk to the interests of the beneficiaries. I now address each of these factors in turn.
[34] Not only is there an absence of trustee minutes, but there has been a general failure for a long period to keep crucial trust records. Some financial statements are available. However, the following financial statements are missing: 1994 (draft financials are available), 1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2007 and 2008.
[35] The critical Court of Appeal case was decided in November 1995. Therefore, the financial statements for the year ended 30 June 1996 would have been particularly useful in showing the size of the estate after paying out various legacies. In the absence of those financial statements, the draft 1994 financial statements are the best evidence of the baseline of the estate, particularly in terms of stock numbers.
[36] The financial statements that are available show the cash held by the estates as at the balance date. The table below shows the cash held for selected years. This demonstrates that the cash held by the estates has diminished significantly.
Financial statements (y.e. 30 June) Total cash held 1994 (draft)10 $322,827 200411 $130,539 202012 $158,917 202113 $159,647 202214 $12,734
[37] From these financial statements, it appears that what has happened is that as animals have been sold and the significant term deposits have matured, cash has been taken out from the estates by John and he now owes the estates a large sum.
[38] The financial statements for the year ended 30 June 2004 show that the estates had a liability to John of $71,886. By 30 June 2009, this flipped to a current asset of
10 Total current assets.
11 Current assets of $53,145 plus term deposit of $77,394 = $130,4539.
12 Two cheque accounts ($913 + $4,446) + a savings account ($4,255) + two term deposits ($126,000
+ $23,303) = $158,917.
13 Two cheque accounts ($317 + $4,448) + a savings account ($4,257) + two term deposits ($127,296
+ $23,329) = $159,647.
14 Two cheque accounts ($1,588 + $5,669) + a savings account ($5,477) = $12,734.
the estates (i.e. John owed a debt of $44,782 to the estates). Following this point, the amount John owes to the estates has increased markedly and as at 30 June 2022, the most recent figure available, he owes $358,532.
[39] The growth in the amount owed by John to the estates is shown in the table below.
Financial statements (y.e. 30 June) Debt owed by/(to)
J E Schepens to estate
2003
$0
2004
($71,886)
2005
($24,560)
2006
($25,512)
2008
($9,229)
2009
$44,782
2010
$14,908
2011
$54,320
2012
$79,052
2013
$87,259
2014
$109,785
2015
$92,708
2016
$178,217
2017
$169,077
2018
$262,340
2019
$289,275
2020
$289,908
2021
$339,993
2022
$358,532
[40] It is important to note that the plaintiffs do not suggest dishonesty on John’s behalf. He has of course never sought to hide the increasing level of debt he owes to the estates. It may be, as Mrs Golightly for John submitted, that the management of both farms as one operation might provide some explanation for the high level of debt that John now owes. However, John, as the trustee with access to all the relevant information, was best placed to provide that sort of explanation and whether there was a proper accounting reason for the level of debt (as was submitted). It was incumbent on him to provide that evidence. He is, after all, the accountable fiduciary. No such evidence was provided.
[41] Ultimately, the unavoidable conclusion is that the financial position of the estates is dependent on John being able to pay $358,532 on demand.
[42] I also find that the overall balance of evidence supports the conclusion that the Schepens’ farm has been in a steady state of decline for a long period. This includes a decline in stock numbers, a decline in pasture quality and a decline in improvements, in particular fencing. I acknowledge that this is difficult country to farm and that for economic reasons there has been a move away from sheep farming to beef farming. However, despite those factors, there are now very real questions about the nature and quality of the stock on the farm, as well as the quality of the pasture and state of the fencing.
[43] It is also relevant to record that in August 2022, John was convicted and sentenced in the District Court and fined $18,000 for breaches of the National Animal Identification and Tracing Act 2012 for failing to register 496 cattle.15 Previously, following an inspection by the Ministry of Primary Industries (MPI) in December 2020, John was issued with an instruction to prevent or mitigate suffering under the Animal Welfare Act 1999. In February 2021, MPI issued a written warning to John concerning a calf that had to be euthanised.
[44] On the issue of a decline in pasture quality, I accept the evidence of Mr McNally for the plaintiffs. He is an independent expert and his evidence was substantially helpful.16 Mr McNally can fairly be criticised for failing to disclose to the Court that he had resigned from the New Zealand Institute of Valuers following a judgment being entered against him for an inflated valuation. However, I generally accept his evidence, supported by others such as Bruce and Jed Craig, that relatively minimal fertiliser has been applied to the trusts’ land – and certainly far less than when Mr Shaw was a trustee.17 I acknowledge the significant expenses now associated with aerial topdressing, which has traditionally been the only viable option for a substantial
15 Ministry for Primary Industries v Schepens [2022] NZDC 15809.
16 Evidence Act 2006, s 25.
17 According to the unchallenged evidence of Mr Shaw, until the mid-1980s, the farm was “considered by many to be one of the best sheep and beef farms north of Auckland”. During that time the farm was well-fenced, annual fertiliser was applied and had been for decades, and the buildings and yards were well maintained. Mr Shaw also noted that from June 1993, John no longer applied fertiliser on the property.
portion of the farm. However, the financial statements show very little has been spent on fertiliser and the weight of the evidence supports Mr McNally’s conclusion that urgent attention now needs to be given to a fertiliser program with lime spread annually and phosphorous every six months.
[45] On the issue of improvements, most importantly fencing, I note that at the 12 February 2020 meeting, John acknowledged that the fences are run-down and that he was not going to dispute that issue. Jed Craig, farm worker and former employee of John, described the farm as a “wild west farm”. He agreed with the evidence of Mr McNally that it was a ranch-style farm with very few internal fences. Fences of that kind would have allowed for proper grass and stock management. Both Mr McNally and Bruce were also critical about the state of the fences. Mr McNally was of the view that at least 50 per cent of the fencing will need to be replaced. The poor state of the fences is reflected in the fact that stock belonging to the estates have wandered onto the road, Bruce’s land and other neighbours’ land.
[46] In weighing all these factors, I conclude that it is both necessary and desirable that John be removed as a trustee. Steps now need to be taken to protect and restore estates’ assets. These will inevitably impact on the position of John as the life tenant of the estates.
[47] There is a conflict of interest between the personal interests of John and his duties as a trustee. In circumstances where there is now significant work for a new trustee to do, I find that it is not in the interests of the beneficiaries for John to remain in a decision-making trustee role. The following matters require attention by new trustees:
(a)Making demand for the $358,332 that John owes the estates.
(b)Considering the recent arrangements entered into by John with the Simpkins (i.e. the June 2022 licence to occupy) and ratifying, disclaiming or seeking to modify them.
(c)Identifying the extent to which estate assets have been damaged and diminished. This will likely require a full assessment of fences, pasture quality, stock numbers and the like.
(d)Creating a plan to rectify the loss of estate assets and whether that might involve litigation.
(e)Considering whether any capital should be advanced to any of the beneficiaries.18
Issue (b) – Replacement trustee
[48] Having concluded that both John and Bruce should be removed as trustees, it is clearly necessary and desirable to appoint a new trustee under s 114 of the Trusts Act.
[49] I accept and find that Schepens’ Trustee Ltd should be the replacement trustee. This is a company incorporated by Thomson Wilson, solicitors, of Whangarei. It has, as directors, four senior partners of that firm. This includes Mr Badham who would be the senior partner with principal responsibility. Mr Badham has signed a consent to being appointed as a trustee.
[50] I note that John supports the appointment of Mr Badham as trustee. John acknowledges that Mr Badham is a highly respected and experienced lawyer and professional trustee.
Issue (c) – Trustee remuneration
[51] The default position is that trustees are to act gratuitously (s 37 of the Trusts Act). However, this is modified in many trust deeds.
[52] The wills of Allan and Lily Schepens do not contain a clause allowing professionals to charge (as executor or trustee). However, the Court has power to order remuneration to a trustee under s 139. That section reads:
18 There was a specific provision in the wills of Allan and Lily for such advances to be made (cl 5).
Court may order payment of remuneration to trustee
(1) Despite section 37 (duty to act for no reward), the court may order that reasonable remuneration be paid out of the trust property to a person who is or has been a trustee of the trust if the court is satisfied that it is just and reasonable to do so.
(2) In determining under subsection (1) what remuneration is reasonable, the court must consider the following:
(a)the total amount that has already been paid to any trustee of the trust:
(b)the number and difficulty of the services provided by the trustee:
(c)the liabilities to which the trustee is or has been exposed, and the responsibilities imposed on the trustee:
(d)the skill and success of the trustee in administering the trust:
(e)the value of the trust property:
(f)the time and services reasonably required of the trustee:
(g)whether any payment that might otherwise have been allowed or ordered should be refused or reduced due to the conduct of the trustee in the administration of the trust:
(h)any other circumstances that the court considers relevant.
(3) If there are 2 or more persons who are or have been trustees, an order may specify whether and how the commission is to be apportioned among the trustees.
[53] There is limited case law on s 139. The only case referred to me was that of Cull J in Re Otago Museum Trust Board where her Honour approved (including retrospectively) remuneration of $10,000 per annum (plus GST) for the chair of the Board.19
[54]The ultimate touchstone is whether remuneration would be just and reasonable.
[55] I accept the submission of Mr Browne that the new trustee will have a difficult task to properly assess the state of the trusts’ property. The trustee will need to seek repayment of the large amount that John owes the trusts and to consider the legality of previous unilateral decisions by him, such as selling the sheep and entering into the
19 Re Otago Museum Trust Board [2023] NZHC 1427.
licence to occupy with the Simpkins. There may also be issues of breach of trust to investigate.
[56] These tasks are quintessentially ones for someone with legal training to undertake. The trustee role going forward is not merely one requiring knowledge of farming; an experienced and independent legal practitioner is clearly best suited for the role.
[57] Having regard to the factors in s 139(2) and the ultimate test of what is just and reasonable, I conclude that I should make an order requiring the payment of remuneration to Schepens Trustee Ltd.
[58] A subsidiary issue arises, namely whether the payment of trustee remuneration should come from the trusts’ income or capital. Section 139 is silent on the point.
[59] I find that the trustee remuneration here should come out of the income earned. That is because:
(a)The usual position is that trustee remuneration is a cost that is paid out of income rather than capital. It is part of the costs of running a trust.
(b)There are real issues concerning breaches of trust caused by the two now-removed trustees and it would be unfair for the residuary beneficiaries to effectively bear the cost of addressing those issues.
Result
[60]I make the following orders:
(a)An order under s 112 of the Trusts Act 2019 removing John Emile Schepens and Bruce John Morris as trustees of the testamentary trusts of Lily Josephine Schepens and Allan Victor Schepens;
(b)An order under s 114 of the Trusts Act 2019 appointing Schepens Trustee Limited as trustee of the testamentary trusts of Lily Josephine Schepens and Allan Victor Schepens;
(c)An order under s 139 of the Trusts Act 2019 approving the reasonable remuneration of Schepens Trustee Ltd, Whangarei, at the usual rates of the directors of Thomson Wilson, solicitors, in acting as trustee of the testamentary trusts of Lily Josephine Schepens and Allan Victor Schepens and reimbursing the plaintiffs the $3,000 retainer paid to date. All of the remuneration is to be paid out of the income earned by the testamentary trusts;
(d)Schepens Trustee Ltd is to report on a quarterly basis to the beneficiaries and to John on the quantum of fees charged to the testamentary trusts.
[61]As to costs, the parties are to confer and to file memoranda within 21 days.
Andrew J
Addendum
In my view it will be important that John, as the departing trustee, depart with dignity. He has been farming the land for a very long time and has undoubtedly worked very hard to try and maintain it as a viable farming operation. He clearly has great respect and concern for his plaintiff nieces. I acknowledge too that they have taken care to try and ensure that their uncle is treated fairly and with respect. I hope that the relationship between the parties continues on that basis, and despite the orders I have made in this judgment.
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