Judd v Cowley
[2020] NZHC 184
•17 February 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000749
[2020] NZHC 184
IN THE MATTER of the Jeanette Reid Trust BETWEEN
ROBERT DUDLEY JUDD and DRURY NOMINEES LIMITED
Plaintiffs
AND
BROOKE MORAL COWLEY
Defendant
Hearing: 3 February 2020 Appearances:
S A Grant for the Plaintiffs S Round for the Defendant
Judgment:
17 February 2020
JUDGMENT OF MOORE J
This judgment was delivered by me on 17 February 2020 at 2:00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar Date:
JUDD & ANOR v COWLEY [2020] NZHC 184 [17 February 2020]
Introduction
[1] The plaintiffs, Robert Dudley Judd and Drury Nominees Limited, are the trustees of the Jeanette Reid Trust (“the Trust”).
[2] The settlor is Jeanette Reid who resides alone in an assisted-living apartment in a Remuera retirement village. She suffers from dementia.
[3] In 1994, as settlor, she executed the trust deed (“the Deed”) which is at the centre of these proceedings. The trustees were her brother-in-law, Mr Judd,1 and her then solicitor (“first solicitor”). One of the primary purposes of the Trust was to hold assets and to make distributions for the purpose of providing financial support for Ms Reid during her life.
[4] In 1998, certain manual changes were made to original deed by the first solicitors. This followed Ms Reid discovering that the Deed, as drafted, did not reflect her intentions. The changes were not the subject of a deed of variation nor were they made by way of application to this Court.
[5] Ms Reid then changed solicitors. She instructed Mr Shaun Kelly (“second solicitor”) to review her affairs including the Trust. The second solicitors pointed out there were some material omissions and errors in the Deed, most notably that she was not listed as a discretionary beneficiary. Again, manual changes were made to the Deed.
[6] The trustees now seek to rectify the Deed to align it with Ms Reid’s intentions at the time she settled the Trust. They do so on the grounds that the original Deed contains no power to amend or vary and thus the changes made by the first and second solicitors were of no effect. This means that distributions made to Ms Reid for her care and maintenance are and will continue to be contrary to the provisions of the Deed.
1 Married to Ms Reid’s sister.
[7] Initially, the orders sought were opposed by the defendant, Brooke Moray Cowley. Ms Cowley, who is Ms Reid’s daughter and a beneficiary under the Trust.2 At the hearing before me she appeared through counsel, Ms Round. She no longer opposes the orders sought.
Factual background
[8] The original Deed was executed on 19 May 1994. Over the next four or so years Ms Reid proceeded with her plan to build the assets of the Trust by transferring or funding the acquisition of properties to the Trust. These included the following:
(a)on 26 August 1994 she transferred her half share in an Epsom unit to the trustees and then progressively forgave the amount of the debt due by the trustees at the then permitted rate of $27,000 per annum;
(b)on 20 May 1997 a property acquired through a combination of funds advanced to the trustees by Ms Reid was transferred to the trustees; and
(c)on 15 August 1997 a property Ms Reid had previously acquired in Royal Oak was transferred to the trustees.
[9] As a consequence, all the properties Ms Reid acquired or funded after the Trust was settled were put in the names of the trustees. She had no properties or land interests registered in her own name.
[10]Over this period the trustees made no distributions.
[11] In late 1997 it would appear that Ms Reid raised with her first solicitors concerns regarding aspects of the Deed and, in particular, the definitions in cl 1 of the Deed relating to the classes of beneficiaries, being “child, children and issue”, “the final beneficiaries” and “the discretionary beneficiaries”.
2 Ms Reid had two children. Her son died in 1996 without issue. Ms Cowley, her only daughter, has four natural born children aged between 21 and 30 and a grandchild aged 3.
[12] On 1 December 1997 her first solicitors wrote to Ms Reid regarding amendments to the Deed. It was Ms Reid’s wish to restrict the class of child beneficiaries to her natural born children and their natural born issue only. She did not wish the beneficiaries to include adopted or foster children or the spouses or partners of any such children.3
[13] This was the first set of changes (“the first tranche of changes”). They appear to have been made in early 1998 following Ms Reid advising her first solicitors that the Deed did not record her wishes. The changes included:
(a)altering the definition of “children” to limit it to “natural born children” (cl 1(d));
(b)altering the definition of “the final beneficiaries” to limit the class to “natural born children and grandchildren of the settlor” (cl 1(f)); and
(c)the provision for spouses or partners of final beneficiaries was deleted (cl 1(f)).
[14] The first tranche of changes was circulated to the then trustees on or about 1 December 1997. They were initialled by the trustees being Mr Judd and her first solicitor but not, it seems, by Ms Reid.
[15]Ms Reid then engaged the second solicitor, to review her Trust arrangements.4
[16] The second solicitor advised Ms Reid that the Deed did not include her as a beneficiary and the amendments made by the first solicitor did not properly reflect her stated intentions, including her intention to restrict the class of beneficiaries to her natural born children and their natural born issue. As drafted, the beneficiaries included adopted children and also the spouse or partner of any child.
3 It appears the distinction is a real one. Ms Cowley has a number of foster children.
4 Mr Kelly died in August 2018. His comprehensive file notes were attached to affidavits filed in support.
[17] Furthermore, in her instructions to the second solicitor, Ms Reid said she wished to include her four nephews, the sons of Mr Judd, as beneficiaries and also to allow the trustees to transfer assets or funds to entities that she established for the benefit of discretionary beneficiaries.
[18] It was as a result of the second solicitor’s involvement that the second set of changes (“the second tranche of changes”) were made. These included three changes:
(a)the addition of Ms Reid as a discretionary beneficiary;
(b)the addition of her nephews, Mr Judd’s children, as discretionary beneficiaries; and
(c)the addition of trusts and like entities established by Ms Reid or others for the benefit of the discretionary beneficiaries.
[19] These changes were made to the original, albeit previously amended, Deed. They were initialled by Ms Reid but no other initials appear beside the amendments.
[20] On the evidence, the second tranche of changes would appear to have been made after the first solicitor’s retirement as a trustee on 31 July 1998 and before 10 August 1998 when a lender requested a copy of the amended Deed.
[21] By deed dated 7 December 2017, Ms Reid retired as a trustee. It seems likely this was due to her declining cognitive state. Drury Nominees Ltd was appointed in her place.
[22] In accordance with Ms Reid’s intentions the trustees have made regular distributions to Ms Reid to support her.
[23] Only very recently have the trustees become aware that the original Deed contains no power to vary or amend. They now wish to regularise the position in relation to past and future distributions to ensure that Ms Reid is able to continue her present living arrangements without disruption and that following her death her intentions relative to the other classes of beneficiaries may be honoured and observed.
Procedural background
[24] The trustees filed these proceedings on 23 April 2019. On 2 July 2019 Ms Cowley, who had been served as an interested party, filed her statement of defence.
[25] Essentially the defendant’s position is that she does not oppose an order rectifying the original Deed to incorporate the first tranche of changes but does oppose aspects of the claim to rectify in relation to the second tranche of changes and, in particular, the inclusion of Ms Reid’s nephews as beneficiaries.5
Causes of action
[26] The relief sought is expressed in the alternative. First, the plaintiffs seek an order rectifying the original Deed to incorporate the first and the second tranches of changes and secondly, in the alternative, an order that the Trust commenced from the date that the last changes were made.
[27] The first, and preferred, order sought is for rectification with retrospective effect from 1994. The second order seeks a declaration that the original Deed was void or of no effect. The properties and interests transferred by Ms Reid prior to 1998 were held on a bare trust with the Trust coming into effect after the first tranche of changes and the second tranche of changes had been made.
Legal principles
[28] It is common ground that this Court has the power to rectify a trust deed, notwithstanding that it is a voluntary settlement and not the result of a bargain. Ms Round, for the defendant, accepts this jurisdiction exists.
[29] The key principles for rectification as a discretionary remedy were established in Re Butlin’s Settlement Trusts:6
(a)a settlor may seek rectification by proving that the settlement does not reflect their true intention;
5 Minute of Associate Judge Smith of 15 October 2019 at [7].
6 Re Butlins Settlement Trust [1976] CH 251 at 262.
(b)it is not essential for the settlor to prove that the settlement fails to express the intentions of the trustees; and
(c)the Court may decline rectification where a trustee objects.
[30] Ms Grant, for the plaintiffs, has directed me to case law developing the principles of rectification. In summary, the following criteria must be met before a rectification can be made:
(a)there must be an operative mistake, in that the deed does not reflect the settlor’s intentions;7
(b)the mistake must be causative and of sufficient gravity, rather than mere inadvertence;8
(c)there must be convincing proof of what would have been intended if the mistake had not been made;9 and
(d)it must be appropriate to make the Deed conform with that intention.10
[31]Two recent examples of Re Butlin’s being applied in New Zealand are
Re Hindle and Walker v Restieaux.
[32] In Re Hindle a family trust was established for the benefit of the Hindle family.11 It was discovered that the settlor’s family had inadvertently been named as beneficiaries.12 The evidence was that this was clearly never the intention of the settlor. Courtney J granted an order rectifying of the trust deed. In Walker v Restieaux, the trust deed stated that a ‘notional settlor’ was excluded from benefitting under the trust.13 Mr and Mrs Restieaux were named as beneficiaries but were concerned they
7 Racal Group Services Limited v Ashmore [1995] STC 1151; Re Stokes Family No 2 Trust HC Hamilton M288/94, 30 September 1994 at [7].
8 Pitt v Holt [2013] UKSC 26 at [122].
9 Racal Group Services Limited v Ashmore [1995] STC 1151.
10 Re Stokes Family No 2 Trust HC Hamilton M288/94, 30 September 1994 at [7].
11 Re Hindle [2012] NZHC 903.
12 The deed had been drafted from a template.
13 Walker v Restieaux [2015] NZHC 1875.
were also notional settlors. Relying on evidence from the drafting solicitor, Davidson J found that it was clearly not the intention of the Trust Deed to exclude them as beneficiaries. As to whether the court should exercise its discretion to decline to rectify the Trust Deed, all relevant parties consented. The order was granted.
Discussion
[33] With these principles in mind I now turn to consider each element on the evidence before me. However, before doing so, I record that there is no contemporary documentary evidence from the time proximate to the original Deed being drafted and executed in 1994. Ms Reid’s intentions as settlor are to be inferred from correspondence with her various solicitors four years later, her second solicitor’s files notes, a memorandum of wishes and notes made in Ms Reid’s hand commenting on the original draft Deed and its apparent shortcomings.
[34] In my view there is ample evidence to support the inference that the original draft Deed did not reflect Ms Reid’s intentions at the time the Trust was settled and that rectification should be ordered. My reasons follow.
(a)Is there an operative mistake in that the deed does not reflect Ms Reid’s intentions?
[35]Under this heading I consider the three mistakes in the original Deed:
(a)First, and plainly the most significant, is the failure to include Ms Reid as a discretionary beneficiary. The effect of this is that she is unable to benefit from the Trust. As settlor it is plain she intended that the Trust would provide for her financial needs. The evidence, particularly the memorandum of wishes dated 7 August 1998, reveals that she intended the trustees to treat her interests as paramount during her life. That document also reveals she did not, in fact, realise she was not named as a beneficiary until that fact was brought to her attention by her second solicitor. Her second solicitor’s advice and file notes record that he told Ms Reid in 1998 she was not a beneficiary. Handwritten notes,
apparently in Ms Reid’s hand, on a copy of the original Deed forwarded to her by Rice Craig state:
“What about me!!? Spending if needed.”
Furthermore, between 1994 and 1997 Ms Reid transferred all her property interests to the trustees. It is inconceivable that she would have adopted that course absent a belief that the Deed empowered the trustees to provide for her if and when that was necessary. Indeed, that is just what the trustees did and have continued to do up to the present time, ignorant of the fact that they did not have the power to do so under the Deed.
The second solicitor’s file note of 17 March 1998 adds additional weight. It records:
“[Ms Reid] tells me that when she retires in about five years time she wants to be able to have access to the income from some of the rental properties. She wants to have the properties all paid off from the income. I indicated that she should be a beneficiary of her own trust.
Instructed to advise regarding the new trustees. I suggested that perhaps [Ms Reid] could also be a trustee and that she most certainly has to be a discretionary beneficiary if she wants to receive income from the trust property. …”
The following day, the solictor wrote to Ms Reid confirming his earlier advice that she was not a discretionary beneficiary of the Trust. Relevantly, he said:
“… Deed of family trust and the proposed amendment14 are both unsatisfactory as regards the list of discretionary beneficiaries. Discretionary beneficiaries only include your
14 Reference to “the proposed amendment” appears to relate to the first tranche of changes. It is possible that at the time Mr Kelly wrote this letter to Ms Reid the first tranche of changes by the first solicitor had not, in fact, been made or, alternatively, Mr Kelly was of the view they had not been made or effected.
daughter and your grandchildren. There are no other classes of discretionary beneficiaries.”
Ms Reid’s memorandum of wishes removes any doubt as to her intentions in settling the Trust. Relevant portions are reproduced below:
“I have assumed that my trustees will at all times regard the interests of Jeanette Reid as paramount during her life. This no doubt goes without saying. It is essential that she have no financial or other worries and I would not like her own independent resources of capital and income to be whittled away. My trustees should disregard Jeanette Reid’s own assets in considering what assistance should be given.
After my death I want the trustees to provide primarily for my natural born daughter Joanne Brooke Barton and my natural born grandchildren. So far as is possible I wish the trustees to maintain equality between them. The assets of the trusts are sufficient that it should not be difficult to do this. …”
It follows I am thus easily satisfied on this point there is an operative mistake contrary to the intentions and purpose of the settlor.
(b)Similarly, failing to limit the meaning of “child, children and issue” in the Deed is an operative mistake. Ms Reid intended the meaning of this term to be confined to her natural born children and grandchildren. Notwithstanding this, the definition, as drafted, included “children by adoption”. The evidence supporting this conclusion is ample. For example, in the second solicitor’s 17 March 1998 file note he recorded Ms Reid stating that her intention was that the Trust assets should go to her daughter and her natural grandchildren in equal shares. If any of the grandchildren died before the vesting date it was to be divided equally between the remaining final beneficiaries.
In another file note dated 19 May 1998, the second solicitor recorded Ms Reid instructing him to change the Trust to include amongst the discretionary beneficiaries herself, her daughter and any natural born grandchildren and, in particular, not any adopted grandchildren or step- grandchildren nor any spouse of the settlor’s children or grandchildren.
The file note recorded that the discretionary beneficiaries were to be herself, her daughter, her natural grandchildren and her four nephews.
In a later file note dated 11 August 1998 the second solicitor recorded a conversation he had with Ms Reid that she wanted the Trust to look after her daughter and her grandchildren when she was “not here”.
From this combination of evidence it is very apparent that it was Ms Reid’s express and firm intention that the class of beneficiaries was to be limited to herself, her daughter and any natural born grandchildren.
(c)Thirdly, Ms Reid decided that in the unlikely event that Ms Cowley, her children and any descendants of those children pre-deceased her, her four nephews would be able to benefit from the Trust’s assets as discretionary beneficiaries. They were, however, omitted from the list of discretionary beneficiaries. The second solicitor’s comprehensive file note of 17 March 1998 supports this. It records:
“[Ms Reid’s] intention regarding the trust is that the trust property or funds should go to her daughter and her natural grandchildren in equal shares. If any of the grandchildren die before vesting day it would just be divided equally between the remaining final beneficiaries.
I advised her that the amendment of the trust deed that she’s just got from Rice Craig does not provide that and simply provides that the final beneficiary will be her daughter. I also suggested that the discretionary beneficiaries be extended to include any other possible beneficiaries. She instructs me that she wants the trust fund to go to her nephews Jonathan Dudley Judd, Simon Robert Judd, Charles Judd and Nicholas William Judd in equal shares in the event that her daughter and grandchildren do not survive her.”
The memorandum of wishes emphasises this when it stated:
“It is my wish that the trust funds should be distributed on the Vesting Day as follows: equally between my daughter Joanne Brooke Barton and my natural born grandchildren as tenants in common in equal shares. In the event that my daughter Joanne Brooke Barton and my natural born grandchildren are
not living on the Vesting Day then the trust shall vest in my nephews [named] as tenants in common in equal shares.”
As already discussed this position was also recorded in other contemporary correspondence the second solicitor had with Ms Reid.
[36] Notwithstanding this, Ms Reid’s nephews were omitted from the list of discretionary beneficiaries.
[37] Again, I am easily satisfied these omissions amount to an operative mistake such that the Deed did not and does not reflect Ms Reid’s intentions.
(b)Are the mistakes in the Deed of sufficient gravity to justify rectification?
[38] Plainly the mistakes are of sufficient gravity to justify rectification. The central purpose of the Trust was to make provision for Ms Reid, particularly in her retirement years and to provide support for her daughter and her natural born children after her death. The mistakes prevent the trustees from being able to carry out these intentions without acting in breach of the Deed as it is presently expressed.
(c)Are the mistakes qualifying mistakes?
[39] The question here is whether the errors alleged are, in fact, mistakes rather than the product of ignorance, inadvertence, forgetfulness or misprediction.
[40] On the evidence it is plain to me that Ms Reid’s original solicitors failed to record her intentions in the Deed. This omission was not rectified by the first tranche of changes.
[41] The omissions and alleged errors did not arise from mere ignorance or other conduct on Ms Reid’s part. The evidence easily satisfies me that the solicitors acting for Ms Reid failed to incorporate her intentions when settling the Trust.
[42] That Ms Reid may have had difficulty comprehending the meaning and effect of the Deed is entirely understandable. The 16 page document is dense and would, most certainly, have been difficult to understand. A marginal note on the copy of the
Deed forwarded to her by Rice Craig in Ms Reid’s handwriting supports this conclusion:
“What the hell does all this mean?”
[43] Irrespective of how the alleged errors are viewed they are plainly qualifying mistakes wholly inconsistent with the objects and purposes of the Trust as contemplated by Ms Reid.
(d)Is there convincing proof of the specific intentions of the settlor which are contrary to the wording of the Deed?
[44] I have already dealt with this in the above discussion. Although there is no contemporary supporting evidence of Ms Reid’s intentions in 1994 when the original trust Deed was executed, there is a strong and persuasive body of evidence from 1997 and 1998 which reveals Ms Reid’s considerable irritation and frustration when she discovered the Deed did not reflect her intentions or the purpose of the Trust when she settled it.
[45] This evidence is both cogent and consistent with other evidence including contemporary documentation and Ms Reid’s actions in transferring her property interests to the trustees after the Trust was settled.
(e)Should the Court decline to rectify the Deed?
[46] Subject to one qualification, which is discussed below, I agree with Ms Grant that the mistakes are serious and that it would be unjust not to order rectification.
[47] If the Deed is not rectified so as to include Ms Reid as a beneficiary she would be unable to afford to continue to live at the retirement village which provides her with specialised care. That would defeat the primary purpose for which the Trust was created.
[48] Secondly, it would be unjust not to restrict the definition of “children”. As noted there is a potential pool of persons who could claim they are discretionary beneficiaries because, under the present definition, they would be included as children. This would include foster and adopted children. Extending the definition in this fashion would potentially deplete the Trust’s resources and run contrary to Ms Reid’s express wishes for the beneficiaries to be limited to her blood related children and grandchildren.
[49] However, I do not consider that it would be appropriate to include as beneficiaries, Ms Reid’s nephews. While the evidence satisfies me that it was Ms Reid’s intention that the Trust should include her nephews they have each expressly renounced any interest under the Trust and have executed a deed recording this. In regard to this issue only, I will exercise my discretion to decline to rectify the Deed.
Alternative cause of action
[50] Given my findings on the first cause of action there is no need to consider the second cause of action.
Conclusion and result
[51] For these reasons I am satisfied that the Jeanette Reid Trust Deed dated 19 May 1994 should be rectified.
[52] The specific terms of that order are contained in the draft dated 3 February 2020. Orders to that effect are made.
Costs
[53]The draft order specifically deals with the question of costs at [2] and [3].
[54] Having heard from counsel I am satisfied that no further order as to costs is required.
Moore J
Solicitors:
Ms Grant, Auckland Ms Round, Auckland
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