Kite v Hodge

[2014] NZHC 3025

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2010-419-000980 [2014] NZHC 3025

IN THE MATTER OF

The Trustee Act 1956

BETWEEN

JAN CAROLINE KITE First Plaintiff

CARLA HODGE Second Plaintiff

AND

GRAEME HODGE First Defendant

MAUREEN DE LA RUE Second Defendant

HODGE TRUST LIMITED Third Defendant

GRAEME HODGE TRUST LIMITED Fourth Defendant

Hearing:

29 October 2014 and by supplementary submissions received

on 12 and 26 November 2014

Appearances:

J Niemand and D M Kostanich for plaintiffs
S A McKenna for defendants

Judgment:

1 December 2014

JUDGMENT OF LANG J

[on application for declarations as to breach of trust]

This judgment was delivered by me on 1 December 2014 at 4 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

JAN CAROLINE KITE v GRAEME HODGE [2014] NZHC 3025 [1 December 2014]

[1]      This  proceeding  forms  part  of  a  wide  ranging  dispute  between  several members of the Hodge family.  The principal protagonists for present purposes are Mr Graeme Hodge (Graeme) and his son and daughter, Mr David Hodge (David) and Ms Jan Kite.

[2]      At all times material to this proceeding Graeme, David and Ms Maureen De La Rue were trustees of both the David Hodge Trust and the Kite Family Trust.  In this proceeding the Court is required to determine whether Graeme breached his obligations as a trustee of those trusts when he entered into certain transactions on their behalf.   The transactions involved the transfer of property to the third and fourth defendants, Hodge Trust  Ltd and Graeme Hodge Trust  Ltd  (as  corporate trustees of two further trusts, the Hodge Trust and the Hodge Family Trust).  They also involved subsequent distributions of capital that the David Hodge Trust and the Kite Family Trust made to Graeme.

[3]      The plaintiffs also originally sought orders removing the trustees of all four trusts  with  which  this  proceeding  is  concerned.    That  aspect  of the proceeding appears to have been rendered moot by the fact that Graeme and Ms De La Rue have now apparently resigned as trustees of the David Hodge Trust and the Kite Family trust.  In addition, the corporate trustees of the Hodge Trust and the Hodge Family Trust are now apparently in liquidation and are therefore unable to perform their roles as trustees any further.  As a result, the plaintiffs seek an order appointing the Public Trust as trustee of all four trusts in their place.  I will deal with that issue at the end of this judgment.

The transactions

The David Hodge Trust

[4]      The David Hodge Trust was formed by deed of trust dated 1 November 1996. It owned a house situated at 24 MacFarlane Street, Hamilton.  As at July 2006, that property had a market value of approximately $317,000, and was encumbered by a mortgage securing the trust’s indebtedness to a bank in the sum of $208,532.82.

[5]      On or about 10 July 2006, Mr Graeme Hodge and Ms De La Rue entered into an agreement under which they sold the property to the third defendant, Hodge Trust Limited, as corporate trustee for the Hodge Trust.  Graeme had arranged for that trust to be formed.

[6]      The agreement for sale and purchase records that the David Hodge Trust sold the property to the Hodge Trust for the sum of $317,000.  The trust account records held by the solicitors who acted for both parties in respect of the transaction show that the Hodge Trust received the sum of $262,364.04 on 13 July 2006 by way of journal entry from the trust account in the name of the Kite Family Trust.  The sum of $209,165.32 was then transferred to the trust account of the David Hodge Trust by way of journal entry.  The trust account records in respect of the David Hodge Trust show that it used that sum to pay legal fees and to repay the debt secured by the mortgage registered against the property.

[7]      The Hodge Trust then owed the balance of the purchase price, namely the sum of $107,834.68, to the David Hodge Trust.   Graeme and Ms De La Rue then distributed that debt to Graeme by way of capital distribution made by the David Hodge Trust.  The net result of these transactions was that the David Hodge Trust disposed of both the MacFarlane Street property and the equity it had previously held in that property.  The property went to the Hodge Trust, and the debt went to Graeme.

[8]      Graeme and Ms De La Rue were able to undertake these transactions without David’s direct involvement.  Graeme signed all the necessary documents on David’s behalf using a power of attorney dated 25 January 2006 under which David had appointed Graeme to act as his attorney.  The power of attorney contained an express delegation under the Trustee Act 1956 permitting Graeme to act as David’s attorney during David’s absences from New Zealand in respect of the exercise and execution of all the powers and discretions vested in David as trustee of the David Hodge Trust and the Kite Family Trust.

The Kite Family Trust

[9]      The Kite Family Trust was formed by deed dated 20 May 1992.  It owned a motel situated at 265 Te Rapa Road, Hamilton.

[10]     On or about 13 July 2006, Graeme and Ms De La Rue sold the motel to the fourth defendant, Graeme Hodge Trust Limited as the corporate trustee of the Hodge Family Trust.  Graeme had also arranged for that trust to be formed.

[11]     Details regarding the terms of the sale are unclear because the agreement for sale and purchase in respect of the sale is not in evidence.  The plaintiffs understand, however, that the sale price was $850,000.   The trust account records held by the solicitors who acted for both parties in respect of the transaction show that the sum of $666,056 was paid into the trust account in the name of the Kite Family Trust on

13 July 2006.   It is not entirely clear where those funds came from, although the evidence suggests that they came from the Hodge Family Trust.

[12]     On  the  same  date  the  sum  of  $402,717.96  was  deducted  from  the  trust account  in  the name of the Kite Family Trust  and  used to  repay the  mortgage registered against the motel property.   After payment of legal fees, the remaining balance of $262,364.04 was then transferred by journal entry to the Hodge Trust under the narration “Advance to G Hodge Trust”.  This transfer provided the Hodge Trust with sufficient funds to repay the debt secured by way of mortgage over the MacFarlane Street property.

[13]     Although no documents have been placed before the Court in evidence, there appears to be no dispute that the Kite Family Trust made a capital distribution to Graeme at about this time in respect of the debt comprising the balance of the purchase price.   The plaintiffs believe that this was in the sum of approximately

$439,000.

[14]     As in the case of the sale of the MacFarlane Street property, the sale of the motel property and the subsequent capital distribution of the residual debt effectively disposed of the equity the Kite Family Trust had formerly held in the motel property. The Hodge Family Trust acquired the motel, and Graeme acquired the residual debt.

Graeme again used David’s power of attorney to sign the documents required to give

effect to these transactions on David’s behalf.

The declarations sought

[15]     The plaintiffs originally sought declarations that Graeme and Ms De La Rue breached their fiduciary obligations as trustees when they sold the MacFarlane Street property and the motel to the Hodge Trust and the Hodge Family Trust respectively. During the hearing, however, Mr Niemand refined the scope of the proposed declarations  sought  by  his  clients  so  that  they  are  to  relate  only to  the  capital distributions made by each trust to Graeme.

[16]     The Court is therefore required to determine whether Graeme acted in breach of his obligations as a trustee of the David Hodge Trust and the Kite Family Trust through his involvement in the decision to make the capital distributions.

Decision

The capital distribution to Graeme of the debt owing by the Hodge Trust to the

David Hodge Trust resulting from the sale of the MacFarlane Street property

[17]     Clause 7.3 of the deed of trust in respect of the David Hodge Trust provided as follows:

7.3If any TRUSTEE is a DISCRETIONARY BENEFICIARY that TRUSTEE must not join with the other TRUSTEES in the exercise in favour of that TRUSTEE of any discretion, and the remaining TRUSTEES shall have the sole right of exercising any such discretion which, for the purposes of clause 7.1 shall be deemed unanimous.

[18]     There is no dispute that Graeme has always been a discretionary beneficiary of the David Hodge Trust.  As a result, clause 7.3 prohibited him from joining with the other trustees in the exercise of any discretion in his favour.   The decision to make a capital distribution to Graeme was plainly one to which clause 7.3 applied. As a result, Graeme was not permitted to join with the other trustees in making the decision.

[19]     Graeme originally sought to defend this aspect of the plaintiff’s claim on the basis that he did not participate in the decision to make the capital distribution. During the hearing, however, Mr Niemand produced a copy of a resolution that the trustees of the David Hodge Trust passed on 10 July 2006.  This was in the following terms:

RESOLUTION OF TRUSTEES

…The David Hodge Trust

Resolution of Trustees this [10th July] 2006.

Signed for the purpose of becoming an entry in the Minute Book of the

Trust.

The Trustees resolve to:

1.      Enter into an agreement for sale and purchase of the property at 24

MacFarlane Street Hamilton for $317,000.00 in terms of the attached agreement for sale and purchase.

2.Secure part of the sale price of 24 MacFarlane Street Hamilton by way of an acknowledgement of debt and unregistered second mortgage in terms of the documents attached.

3.To make a capital distribution of the funds secured by the deed of acknowledgement of debt and unregistered second mortgage to Graeme Hodge; such distributions to be treated as capital distributions to Graeme Hodge as a beneficiary of the trust.

SIGNED by Trustees of the David Hodge Trust

[Signed]  [Signed]

Graeme Hodge  David John Hodge by his attorney

Graeme Hodge

[Signed]

Elwyn Maureen DelaRue

[20]     Graeme signed the resolution both on his own behalf and as David’s attorney. He was therefore obliged to accept in cross-examination that he had participated in the decision to make the capital distribution to himself.  In doing so he breached the restriction contained in clause 7.3 of the trust deed.

[21]     I therefore hold that Graeme acted in breach of the terms of the trust deed by joining with Ms De La Rue in the decision to make the capital distribution by the David Hodge Trust in favour of himself.

The capital distribution to Graeme of the debt owing by the Hodge Family Trust to the Kite Family Trust resulting from the sale of the motel

[22]     The deed of trust in respect of the Kite Family Trust does not contain a provision equivalent to clause 7.3 of the deed of trust relating to the David Hodge Trust.  Instead, it contains the following clauses:

7.1Subject to compliance with the requirements of clause 8.3, and with the exception of the circumstances stated in clause 7.2, all discretions given to the TRUSTEES by this deed shall be properly exercisable by a majority of the TRUSTEES provided that every TRUSTEE has first been given the opportunity of giving his opinion or voting on the question at issue.

7.2In the event of any decision being required to be made by the TRUSTEES while their numbers include any person who is a DISCRETIONARY BENEFICIARY, or related to a DISCRETIONARY BENEFICIARY, the decision in the event of disagreement between the TRUSTEES shall be made by the majority vote   of   the   other   TRUSTEES   (or   TRUSTEE)   who   are   not beneficiaries or so related.  If no resolution on the question at issue can be made in that manner it shall be the subject of an application by the TRUSTEES to the Court under section 64 of the Trustee Act 1956.

[23]     These provisions permit decisions of trustees to be made by majority vote so long as all trustees have been given the opportunity to give their opinion or to vote on the issue.  They do not, however, prevent a trustee who is a beneficiary, or who is related to a beneficiary, from being involved in the decision making process.  That is so even where the decision affects or relates to that beneficiary and/or his or her relatives.  Such persons may still participate in the decision making process so long as all trustees are in agreement as to the outcome.   Should the trustees not be in agreement, however, those trustees who are beneficiaries or who are related to beneficiaries must step aside.  In that event, the decision must be made by a majority of those remaining trustees who are not beneficiaries and who are not related to beneficiaries.

[24]     Graeme accepts that he was involved in the decision to make the capital distribution to himself following the sale of the motel to the Hodge Family Trust.  He also accepts that, although the document cannot now be found, he and Ms De La Rue probably signed a resolution similar to that relating to the capital distribution made by the David Hodge Trust.  Graeme maintains he was entitled to use David’s power

of attorney to sign the resolution on David’s behalf.  He therefore says that he and Ms De La Rue were not required to give David an opportunity to vote on or express his opinion about the proposal.   Furthermore, he points out that the trustees were never in a state of disagreement regarding the proposed capital distribution, and he was therefore not required to stand aside from the decision-making process.

[25]     Furthermore, Graeme points out that David was also a beneficiary of the Kite Family Trust.  If David had been consulted and had disagreed with the proposal, both David and Graeme would have been required to stand aside.  In that event Ms De La Rue would have been the only trustee entitled to vote on the capital distribution.  Ms De La Rue was clearly in favour of the proposal because she joined with Graeme in voting for it.   Graeme therefore contends that the end result would have been the same even if he and David had disagreed about the proposal to make the capital distribution.

[26]     Mr Niemand disputes the validity of this approach.   He points out that the trust deed required all trustees to have the opportunity to give their opinion and to vote on any issue the trustees were required to decide.  He submits that David never had that opportunity, and that the decision making process therefore miscarried as a result.

[27]     Mr Niemand also submits that Graeme had no right to use the power of attorney to give effect to the sale and the capital distribution.  David’s evidence was that he had provided Graeme with the power of attorney for the limited purpose of making day to day decisions involving the two trusts.  In doing so he never intended to permit Graeme to make decisions on his behalf in relation to major issues such as the sale of the trust’s assets and the making of capital distributions.

[28]     Graeme was adamant when giving evidence at the hearing that he had kept David informed about what was going on, and that David was happy to provide the power of attorney so that Graeme could do whatever might be necessary to protect the trusts’ assets.  He said that the family was entrenched in conflict at this time, and that he expressly told David that he might need to transfer the two properties to other trusts in order to protect them from these disputes.  He said David was more than

happy for this to occur.  He acknowledged, however, that he did not discuss the issue of the capital distributions with David at the time he signed the power of attorney because at that time he did not know they would be made.

[29]   Following the hearing and at my request, both counsel filed helpful supplementary submissions addressing the issue of what the legal position would be if I was to find that Graeme had exercised his powers under the power of attorney in a manner that did not accord with the understanding he had reached with David regarding the circumstances in which the power of attorney could be used.  I am very grateful to counsel for their assistance in this regard.

[30]     Having reflected on the matter, however, I have concluded that the issue of whether or not David authorised Graeme to use the power of attorney in the way in which he did is not relevant to the issues raised by the pleadings as they currently stand.  The current version of the statement of claim relies on the following acts as constituting the breaches of trust on which the plaintiffs rely in respect of the capital distribution made by the Kite Family Trust:

28.There was no unanimous decision by the trustees of The Kite Family Trust, nor was there a majority decision by the trustees of The Kite Family Trust following consultation with, and between all trustees for the transfer of the motel property from the trustees of The Kite Family Trust to the Fourth defendant as trustee of The Hodge Family Trust. As such, the transfer resulted in a breach of trust caused by the First and Second Defendants.

[31]     This paragraph is arguably defective given the nature of the declaration that the plaintiffs now seek, because it does not refer to the capital distribution.   If necessary, however, I would have granted the plaintiffs leave to amend their pleading so that it extended to the capital distribution and not just the sale.  There could be no prejudice to the defendants if that was done, because they were content for the Court to determine the case only in respect of the capital distributions.

[32]     Leaving that issue to one side, however, it is clear from the pleadings that the plaintiffs rely upon an alleged breach of clause 7.1 of the deed of trust.  They do not allege that Graeme breached his obligations as a trustee by using the power of attorney to  approve  the  capital  distribution  to  himself.   That  is  understandable,

because any claim advanced on this basis may need to be advanced by David as donor of the power of attorney and David is not a plaintiff in the present proceeding. Similarly, the plaintiffs do not advance their claim on the basis of an alleged breach of wider fiduciary obligations that Graeme owed to the other beneficiaries of the Kite Family Trust. It is therefore not necessary to decide whether David expressly authorised Graeme to use the power of attorney only for day to day administrative matters involving the Kite Family Trust.

[33]     The power of attorney remains relevant, however, because Graeme used it to ensure that the decision of the trustees to make the capital distribution was unanimous.  Under the power of attorney David appointed Graeme as his attorney to act for him “in all matters with or in which I shall be in any way connected interested or concerned…as fully and effectually as I could if personally present”.   The document then continued:

IN EXERCISE of the powers contained in Section 231[sic] of the Trustee Act 1956 I DELEGATE to my Attorney (jointly and each of them severally if  there  be  more  than  one)  DURING  MY ABSENCES  FROM  NEW ZEALAND AND DURING ANY PERIODS OF TEMPORARY PHYSICAL INCAPACITY  the exercise and execution of all the trusts powers and discretions for the time being vested in me as trustee under the terms of

(a)       The DAVID HODGE TRUST established by deed dated the 1st day of November 1996 and

(b)      DAVID HODGE TRUST NUMBER 2 established by deed dated the day of     and

(c)       THE KITE FAMILY TRUST established by deed dated the 20th

day of May 1992.

AND

I APPOINT my Attorney (jointly and each of them severally if there be more than one) to be my Attorney or attorneys during such absences and periods to act for me in my name and on my behalf in all matters connected with the affairs of the trusts and assets subject to the trusts of each and every Instrument of trust and in all matters in which any of the said trusts and assets may be interested as I could if personally present at my Attorneys absolute discretion BUT if under any of the said Instruments there shall for the time being be only two trustees comprising myself and one of my said Attorneys then as regards that Will or trust this Deed shall be construed as if the name of that Attorney had been omitted from these presents.

WITHOUT LIMITING the generality of the foregoing I DECCLARE that my Attorney has the power for me and in my name

(a)     to enter into or to perform any contract in relation to my property or affairs present or future which I might enter into personally

(b)     to  exercise  any  right  power  authority  or  discretion  of  whatsoever nature which the ownership or possession of any property or my legal relation thereto confers upon me or which by virtue of any fact or circumstance I am entitled to exercise

(c)     to  purchase  sell  exchange  mortgage  charge  or  pledge  any  real  or personal property either alone or jointly with any other person

…

[34]     The reference in the deed to s 231 of the Trustee Act 1956 is clearly a typographical error, because that Act only contains 89 sections.   The deed must instead have been intended to refer to s 31 of the Trustee Act 1956, which permits a trustee  who anticipates being out of New Zealand or temporarily incapacitated to delegate his or her powers and discretions as a trustee by power of attorney executed as a deed.

[35]     The power of attorney was extremely broad in its terms.  It gave Graeme the ability to exercise all of the powers and discretions vested in David under the trust deed.  The only limit or qualification on the use of those powers was that David had to  be  absent  from  New  Zealand  or  temporarily  physically  incapacitated.    It  is common ground in the present case that David was living in Ireland when Graeme used the power of attorney in relation to the present transactions.

[36]     The appointment of an attorney has been held to be the donor’s “statement to the world that the donee is authorised to act as agent for the donor.”1   In the present case there was no restriction on the purposes for which Graeme could exercise the power of attorney.  Graeme therefore had the legal ability to use it on David’s behalf to join the resolution by which the trustees approved the capital distribution. Those who dealt with him on the basis of the power of attorney could do so safely in the

knowledge that he was David’s duly authorised agent.

1      DFC Financial Services Ltd v Abel [1991] 2 NZLR 619 (HC) at 628.

[37]     That fact does not necessarily mean, however, that Graeme did not breach his obligations as a trustee when he used the power of attorney to give effect to the capital distribution.  I have no doubt that Graeme could have signed the resolution as David’s attorney if David had agreed to the capital distribution.  However, I do not consider the fact that Graeme held the power of attorney negated or affected the requirement under clause 7.1 that all trustees should have the opportunity to vote on or express their views in relation to decisions to be made by the trustees.  Clause 7.1 is an extremely important provision.  It ensures that the trustees do not exercise their powers and discretions under the trust deed without first ensuring that all trustees have an opportunity to vote or express their view.   That type of safeguard was particularly important in respect of decisions that affected the trust’s assets.  Graeme accepted in evidence that he was in regular contact with David when David was living in Ireland.  It would therefore have been a simple matter for Graeme to have raised the issue of the proposed capital distributions with David so that David could provide his input into that issue.   In failing to do so Graeme breached the requirements imposed by clause 7.1.

[38]     I acknowledge that it is possible that the ultimate outcome may have been the same even if David had disagreed with the proposal so that he and Graeme were required to step aside and leave the decision to Ms De La Rue.   In that event, however, Ms De La Rue would have been required to make her decision knowing that David disagreed with the proposal.   She would also have known why David disagreed with it.  It is therefore by no means certain that her decision would have been the same if David had been given an opportunity to express his view about the capital distribution.

[39]     I have therefore concluded that both Graeme and Ms De La Rue breached the requirements imposed by clause 7.1 when they signed the resolution approving the capital distribution to Graeme.

Removal and appointment of trustees

[40]     I now turn to the question of the removal and appointment of trustees.  The

Court has an inherent supervisory jurisdiction to ensure that the terms of a trust are

carried out.  This is derived from the Court’s powers in equity to supervise trusts for the welfare of beneficiaries and exists in parallel to the power under s 51 of the Trustee Act 1956.2   This permits the Court to make an order removing trustees when it is necessary to take that step in order to protect the interests of beneficiaries.

[41]     The evidence does not confirm that the defendants have formally resigned as trustees of the four trusts of which they have been trustees.   For that reason it is appropriate to make an order removing all the present trustees of those trusts.  It is also necessary to make a consequential order appointing the Public Trust as sole trustee of each trust in their place.

Result: orders

[42]     I make a declaration that Graeme acted in breach of Clause 7.3 of the trust deed of the David Hodge Trust when he joined with Ms De La Rue in resolving to make a capital distribution to himself of the debt owing by the Hodge Trust.

[43]     I make a further declaration that Graeme and Ms De La Rue acted in breach of their obligations under clause 7.1 of the trust deed of the Kite Family Trust in failing to provide David with the opportunity to vote on or provide his opinion in relation to the proposed capital distribution to Graeme of the debt owed by the Hodge Family Trust.

[44]     I make an order removing all the present trustees of the David Hodge Trust, the Kite Family Trust, the Hodge Trust and the Hodge Family Trust.   I make a further order under s 51(1) of the Trustee Act 1956 appointing the Public Trust as the sole trustee of those trusts.

Costs

[45]     The plaintiffs have succeeded and are entitled to costs.  Costs on a category

2B basis together with disbursements as fixed by the Registrar would appear to be appropriate.

2      Morris v Sumpter HC Auckland CIV-2004-404-3060, 6 April 2005 at [52]; Miller v Cameron

(1936) 54 CLR 572 at 580.

[46]     If the parties are unable to reach agreement regarding costs within 21 days, counsel for the plaintiffs is to file a short memorandum (no more than three pages in length) setting out the orders his clients seek.   Counsel for the defendants is to respond no later than 31 January 2015.  I will then determine the issue of costs on

the papers.

Lang J

Solicitors:

Niemand Peebles Hoult, Hamilton
Counsel:

S A McKenna, Hamilton