Hincks v Bracken

[2018] NZHC 3258

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE

CIV-2018-454-19

[2018] NZHC 3258

BETWEEN

MICHAELA MARIE HINCKS by her

litigation guardian JULIE MARIE EVERETT-HINCKS

Plaintiff

AND

HEATHER JOYCE BRACKEN

First Defendant

RAYMOND CHARLES HINCKS
Second Defendant

LESLIE WALTER JENSEN

Third Defendant

Hearing:

1 October 2018

Appearances:

R M Reeve for the Plaintiff (via AVL)

No appearance for the First, Second and Third Defendants

Judgment:

11 December 2018

Reissued:

13 December 2018

JUDGMENT OF CLARK J

Introduction

[1]    The plaintiff, who is a minor, seeks recovery of funds associated with a testamentary trust established by her late father’s will. The plaintiff is the sole residuary beneficiary.

[2]    In addition to the recovery of funds of $289,544.81 the plaintiff seeks orders for interest and for removal and replacement of the first and second defendants as trustees.

EVERETT-HINCKS v BRACKEN [2018] NZHC 3258 [11 December 2018]

[3]    The claim proceeds by way of formal proof against the first and third defendants neither of whom have filed a statement of defence. The merits of the claim against the second defendant, who has filed a statement of defence, remain to be assessed by the plaintiff in due course and in light of this judgment.

Background

[4]    When Darren Edward Hincks died on 19 May 2010 he left a will dated 14 May 2010. Under the will Mr Hincks’ mother, Heather Joyce Bracken (the first defendant), and brother, Raymond Charles Hincks (the second defendant), were the appointed executors and trustees.

[5]The deceased’s principal asset was a life insurance policy worth some

$533,000.  The deceased bequeathed $200,000 to his former wife of twelve years,  Dr Everett-Hincks, the plaintiff’s mother and litigation guardian. The first defendant was bequeathed the sum of $25,000. In addition, $20,000 was directed to be held in trust for the lifetime of the first defendant to be applied towards travel expenses to facilitate visits with her granddaughter, the plaintiff. Any balance remaining at the first defendant’s death was to form part of the residuary estate.

[6]    The residuary estate was to be held on trust for the deceased’s surviving children on attaining the age of 25. The plaintiff, Michaela Hincks, who was born in 2008 is the only surviving child.

[7]    Probate was granted to the first and second defendants on 23 September 2010. A distribution statement to the executors from lawyers, Sumpter Moore, recorded that as at 26 November 2010, $289,421.35 was held in trust for Michaela. The

$289,421.35 was held in a lawyer’s trust account for 41 days, earning $123.45 in interest. In this judgment I refer to the total sum of $289,544.81 as the “trust funds”.

[8]    The factual matrix giving rise to the asserted liability of the first and third defendants is set out in the first affidavit of Dr Everett-Hincks sworn 11 September 2018. The material facts may be summarised:

(a)Following Mr Hincks’ death Dr Everett-Hincks attempted to keep in touch with the first defendant so that Michaela could have a relationship with her grandmother. Dr Everett-Hincks deposes to a conversation with the first defendant in June 2015 when Dr Everett-Hincks asked whether the estate might contribute to Michaela’s schooling. The first defendant advised that the trust funds were tied up in property and were being well looked after. An hour or so later the first defendant called back and advised the estate could pay $100 per week and that annual accounts were being  produced  and  would  soon  be  available  for  Dr Everett-Hincks’ review.

(b)Dr Everett-Hincks’ evidence is that, except for three generic ANZ term deposit letters provided in 2011, at no stage have any accounts been received. While various sums were paid into Dr Everett-Hincks’ account for Michaela’s benefit, in all cases the payments were made from the personal accounts of the first and third defendants. At no stage has any payment been made from a professional’s trust account or from an account in the name of the deceased’s estate.

(c)By 2016, when no accounts had been received, Dr Everett-Hincks became suspicious and contacted her legal adviser Mark Deacon of Sumpter Moore. The documentary records before the Court show that:

(i)On 6 December 2010 Sumpter Moore transferred the trust funds to Todd Whitehouse Lawyers, thereby effectively ending Sumpter Moore’s involvement in the administration of the estate.

(ii)In February 2011 Todd Whitehouse Lawyers paid the amount of the trust fund into an ANZ account in the name of the estate of Darren Edward Hincks. The transfer was made at the direction of the trustees, the first and second defendants.

(iii)Three ANZ letters record investment of the trust funds in three ANZ term deposits on 18 February 2011. A sum of $100,000.00 was invested for 18 months at an interest rate of 5.40 per cent per annum. A further sum of $100,000.00  was  invested  for 24 months at an interest rate of 5.50 per cent per annum. The third sum of $89,544.81 was invested for 12 months at an interest rate of 5.20 per cent per annum. Thus, the maturity dates were (respectively) 18 August 2012, 18 February 2013 and 18 February 2012.

(d)Around September 2016 Mr Deacon contacted the first defendant who advised the accounts were forthcoming. By May 2017 Dr Everett- Hincks had received no accounts and had no knowledge of the manner of the investment of the trust funds. On 25 May 2017 Mr Deacon wrote to the second defendant seeking clarity about the trust funds especially in light of the fact no annual accounts for the estate had ever been sent to Dr Everett-Hincks in her capacity as Michaela’s guardian. Of further potential  concern  was  the  first   defendant’s   earlier   mention  to Dr Everett-Hincks of the trust funds being tied up in property, the first defendant’s apparent reluctance to provide contact details for herself or the accountant and that payments made to Dr Everett-Hincks, as Michaela’s guardian, were from an account in the first defendant’s name.

(e)The second defendant did not reply to Mr Deacon’s letter. Consequently, on 5 July 2017 Dr Everett-Hincks telephoned the second defendant. By the end of the conversation Dr Everett-Hincks was no further enlightened. The second defendant had forwarded Mr Deacon’s letter to the first defendant but he was unable to give any further details about the trust funds or the identities of the first defendant’s legal adviser or accountant. The second defendant advised Dr Everett- Hincks he no longer wished to be a trustee.

(f)On 12 July 2017 Dr Everett-Hincks received a telephone call from  Mr Jensen, the third defendant. Mr Jensen advised Dr Everett-Hincks that he and the first defendant invested the trust funds in a pub along with approximately $500,000 of his own funds. As a result of the purchase the residuary estate had been wholly or substantially lost.   Dr Everett-Hincks deposed to Mr Jensen’s advice to her that both he and the first defendant recognised they owed a debt to Michaela and that they had placed a Foxton property in trust in Michaela’s name.

(g)Mr Jensen would not reveal the address of the Foxton property at the time but undertook to provide the trust documentation in October 2017 when he returned to New Zealand. No such documentation was ever provided. While Mr Jensen did not disclose the address of the property Dr Everett-Hincks remembered visiting it at 49 Park Street, Foxton following the deceased’s death.

Liability to a contingent beneficiary

[9]    Mr Reeve raised as an apparent difficulty with the plaintiff’s claim the fact she is a “contingent beneficiary” until such time as she reaches the vesting age of 25. As the plaintiff has not attained the vesting age Mr Reeve submitted it could be argued she has not yet suffered loss. Because the trust funds have not yet vested in the plaintiff a legal question might be thought to arise as to how judgment in the plaintiff’s favour “can sit with her current position as a contingent beneficiary under her late father’s trust”. Mr Reeve then posed as a possible solution, judgment against the first and third defendants which could operate as a judgment in favour of the estate and thereby in favour of the plaintiff when she reaches the vesting age.

[10]   I do not share counsel’s concerns. I do not regard the issue of whether or not relief should be granted as dependent on an assessment of whether or not the plaintiff has yet suffered loss. The plaintiff has an existing interest under a subsisting trust even if she may not take the benefit until she reaches 25 years of age. The plaintiff has the basic right of any beneficiary in such circumstances namely, as described by

Lord Browne-Wilkinson, “to have the trust duly administered in accordance with the provisions of the trust instrument, if any, and the general law”.1

[11]   In my view, the fact the plaintiff transpires to be the sole beneficiary of the residuary estate which her father left to such of his children who survived him, and who attained the age of 25, does not take her claim beyond the rules applicable to a traditional trust in respect of which the equitable rules of compensation apply. In a case such as this:2

… the basic rule is that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss. … If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed.

[12]   Accordingly, the question is not whether I may, or may not, be minded to grant to the plaintiff herself an enforceable judgment. If the plaintiff demonstrates that the trustees have acted in breach of trust and that the breaches have caused loss to the trust, the proper compensation for the breach will be an order for restitution and compensation to the trust fund, as opposed to the beneficiary herself.

Has there been a breach of trust?

[13]   Following the trustees’ directions to transfer the trust funds into an ANZ account the trust funds were invested in three term deposits due to mature at intervals of 12, 18 and 24 months. As at 18 February 2013 when the last of the term deposits matured, the trust funds had attracted a minimum of 5.20 per cent interest.3

[14]   In June 2012 the first and third defendants consulted their legal adviser regarding a business proposal. In his email dated 2 November 2017 to the plaintiff’s counsel, Mr Downey of Todd Whitehouse Lawyers advised of the first and third defendants’ consultation:

1      Target Holdings Ltd v Redferns (a firm) [1996] AC 421 (HL) at 434. In Target Holdings Ltd v Redferns Lord Browne-Wilkinson described the development of rules for compensation for breaches of trust by reference to traditional trusts having several beneficiaries and where it is necessary to protect the rights of all beneficiaries.

2      At 434.

3      The term deposits are described at [8](c)(iii) above.

…it soon became evident that they intended to borrow from Michaela’s trust fund. I disabused them of that suggestion and made a lengthy file note as to the advice I gave them on that occasion. I followed it up with a lengthy letter to them on 9 July 2012 detailing Heather’s responsibilities as a trustee particularly with regard to using trust funds to her own benefit. I would dearly like to produce this file memo and letter to you but I think client confidentiality precludes this – unless you can convince me otherwise. I did not hear from this pair again.

[15]   On 25 March 2013, the first and third defendants incorporated a New Zealand company, Benneydale Hotel 2013 Ltd. A copy of the Companies Office register exhibited to Dr Everett-Hincks’ affidavit records the first and third defendants as the two directors. On 22 April 2013 the first and third defendants bought the Benneydale Pub.   At the time of the sale to the first and third defendants on 22 April 2013,     Mr Smith and Ms Segar, the previous owners of the Benneydale Pub registered a mortgage against the titles to the Benneydale Pub land as well as the Foxton property.4

[16]   The first and third defendants appear to have sold the Benneydale Pub around January 2014, although there is evidence to suggest they may have walked out of the business as early as October 2013. The company was deregistered on 18 November 2014.

[17]   With the exception of three generic term deposit letters dated 18 February 2011, no accounts have ever been rendered by the defendants to the plaintiff despite multiple requests for an account and promises to provide it. The three ANZ letters were provided by the first or third defendant sometime in 2011.

[18]   A lawyer’s letter dated 3 August 2017 to Todd Whitehouse Lawyers, as solicitors for the first and second defendants in their capacity as trustees, detailed what I have summarised above. In particular, the letter documented the following concerns:

(a)Dr Everett-Hincks’ concerns about the administration of the trust appeared to be well grounded.

(b)The trust funds appeared to have been lost.

4      See references at [8](f) and [8](g).

(c)There had been a failure to produce copies of accounts despite multiple requests for an annual set of accounts.

(d)A title search of the Foxton home, which the third defendant asserted to Dr Everett-Hincks had been placed in a trust in the plaintiff’s name in light of the losses to her, showed the plaintiff’s interests had not in fact been protected at all. The home had been transferred into the joint names  of  “Heather  Joyce  Bracken,  Leslie  Walter  Jensen   and RTS Trustees Ltd” and the solicitors for that trust had confirmed it to be a standard discretionary family trust not one specifically set up for the plaintiff.

(e)As it appeared the investment in the Benneydale Pub had been for the personal benefit of the first and third defendants there had been a fundamental breach of trust and a violation of the requirements of equity that fiduciaries must not place themselves in a position where their duties conflict with their own interests.

[19]   The letter concluded by expressing a deep hope of avoiding litigation and stating that the first and second defendants’ continued role as trustees was untenable in the circumstances. The first and second defendants were advised to instruct a lawyer and that litigation might be avoided by securing Michaela’s entitlement to the equity in the defendants’ property and the Foxton home or by arranging for the funds to be paid into a trust account to be administered by an independent trustee. Failure to  hear  from  the  first  and  second   defendants  or  their  legal  representative  by  1 September 2017 would result in proceedings being initiated on behalf of the plaintiff without further notice.

[20]   On 2 November 2017 Mr Downey from Todd Whitehouse advised he had not heard from the first or third defendants since disabusing them of their notion of using the trust funds for personal benefit.5

5 Mr Downey’s note of his advice is set out above at [14].

[21]   The plaintiff waited for approximately seven months before (reluctantly) serving proceedings on 27 March 2018. By their lawyers Cavell Leitch, the first and third defendants requested an extension of time within which to file a statement of defence. That request was immediately granted. Despite the extension of time within which to file a statement of defence,6 the first and third defendants have taken no step in the proceeding.

[22]   In accordance with the principle that a trustee who acts in breach of trust must pay to the trust estate the assets which have been lost by reason of the breach, the first defendant, as trustee of the trust, must repay to the trust the trust funds which she and the third defendant applied, wrongfully, to their personal benefit.

The interest question

[23]   The plaintiff seeks interest on the residuary estate at a rate of 4 per cent per annum compounding annually from 16 February 2011, the date on which the second defendant authorised Todd Whitehouse Lawyers to transfer funds into the ANZ account,7 to 1 October 2018, the date of the hearing. As is apparent from three ANZ letters, each bearing the date 18 February 2011, the amount comprising the residuary estate was invested in three ANZ term deposits on 18 February 2011. Beyond these three letters no accounts have ever been provided and it is supposed (if not inferred) that the capital and interest were jointly applied to the purchase of Benneydale Pub in April 2013. The plaintiff asks the Court to exercise its equitable jurisdiction to award what the plaintiff would have received had the defendants simply opted to leave the trust funds on interest-bearing deposits from 16 February 2011.

[24]   The principles applicable to the award of compound interest were summarised by Duffy J in Eden Refuge Trust v Hohepa.8 Compound interest is not imposed for the purpose of punishment but where justice so demands.9 Courts have awarded interest where money has been obtained by fraud or withheld or misapplied by those

6      Fifty-two calendar days from the date of service were given.

7      See above at [8](c)(ii).

8      Eden Refuge Trust v Hohepa [2011] 3 NZLR 273 (HC) at [28]–[30].

9 At [28].

in a fiduciary position. In the present case the first defendant’s breach of trust resulted in an apparent complete loss of the trust funds, misappropriated for personal benefit.

[25]   I am satisfied it is appropriate to award compound interest at a rate of 4 per cent from 16 February 2011 until, and including 1 October 2018, the date of hearing.10

Removal of trustee

[26]   Where it is expedient to do so the Court may appoint a new trustee in addition to, or in substitution for, any existing trustee. Section 51 of the Trustee Act 1956 provides:

51       Power of court to appoint new trustees

(1)The court may, whenever it is expedient to appoint a new trustee or   new trustees, and it is found inexpedient, difficult, or impracticable so to do without the assistance of the court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.

…

[27]   The jurisdiction of the Court to remove a trustee is ancillary to its principal duty to see that the trusts are properly executed.11 While it is not necessary to establish that trustees have committed breaches of trust I have found in this case the first defendant acted in breach of her fiduciary and trustee’s duties by misappropriating trust funds for personal benefit. The plaintiff has established to my satisfaction the first defendant must be removed as a trustee.

[28]   I propose also to order the removal of the second defendant as trustee, not because there are adverse findings in this judgment against the second defendant, but because that is specifically what the second defendant wishes. In his statement of defence the second defendant specifically seeks an order from the Court removing him as a trustee.

10     The Interest on Money Claims Act 2016, s 26 specifically preserves the Court’s jurisdiction in respect of claims for interest in equity.

11     Hunter v Hunter [1938] NZLR 520 (CA) at 529.

[29]   Dr Everett-Hincks has consented to being appointed as a trustee and I propose to do so.   As indicated by her bringing of this proceeding in Michaela’s name,      Dr Everett-Hincks understands the importance of seeing the estate properly administered and the trust properly executed.

Result

[30]   The first and third defendants plainly hold themselves liable to reimburse the plaintiff for her loss. In November 2018, counsel for the plaintiff and second defendant filed a joint memorandum in which the Court was advised the first and third defendants had paid to the plaintiff $58,035.92 being the net proceeds of the sale of the property at 49 Park Street, Foxton. Accordingly, the value of the lost trust property is arrived at by deducting from the trust estate ($289,544.81) the sum of $58,035.92 which was recently paid to the plaintiff.

[31]   The interest, however, is payable on the full value of the trust funds as the trust estate (and not the first and third defendants) should have received the benefit of the interest earned when the trust funds were placed on term deposit.

[32]   The interlocutory application without notice for judgment against the first and third defendants is granted. The following orders are made:

(i)The first and second defendants are removed as trustees of the estate of the late Darren Edward Hincks, who died on 19 May 2010 leaving a last will dated 14 May 2010.

(ii)Dr Julie Marie Everett-Hincks is appointed trustee of the estate of Darren Edward Hincks.

(iii)The first and third defendants must repay to the trust estate the sum of

$231,508.89.

(iv)Interest at a rate of 4 per cent per annum compounding annually from 16 February 2011 until 1 October 2018 is payable on $289,544.81 (being the value of the trust funds lost by the breach of trust).

(v)Costs and disbursements of $16,650.00 are awarded to the plaintiff, in accordance with the schedule of costs which was attached to the plaintiff’s submissions.

Karen Clark J

Solicitors:
Wilkinson Rodgers Lawyers, Dunedin