Legler v Formannoij

[2021] NZHC 737

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE

CIV 2020-488-32

[2021] NZHC 737

IN THE MATTER OF

The Kaahu Trust

UNDER

Part 18 of the High Court Rules

BETWEEN

LI KARI LEGLER, LAILA SUN LEGLER KLAUI, and KEN LEGLER

Plaintiffs

AND

MARIA GUILLAUMINA CORNELIA JOHANNA FORMANNOIJ

First Defendant

KAAHU TRUSTEE LIMITED

Second Defendant

Hearing:	29 March 2021
Appearances:	D R Bigio Q C and J W H Little for the Plaintiffs J D McBride for the Defendants
Judgment:	1 April 2021

JUDGMENT OF CAMPBELL J

This judgment was delivered by me on 1 April 2021 at 3:30 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

LEGLER, KLAUI, and LEGLER v FORMANNOIJ [2021] NZHC 737 [1 April 2021]

[1]    The defendants applied for further and better discovery from the plaintiffs. I heard the application on 30 March 2021. The parties requested expedition in my decision, as the trial is scheduled to commence on 17 May 2021. In those circumstances I did not want to delay judgment until after the Easter vacation. Given the limited time available to me, in this judgment I do not address every point that was made at the hearing of the application.

Background

[2]Except where indicated, I understood the following to be common ground.

[3]    The plaintiffs are the only children of the late Mr Ricco Legler. Mr Legler died on 16 November 2017.

[4]    The first defendant, Ms Formannoij, is Mr Legler’s widow, and the plaintiffs’ stepmother. Mr Legler and Ms Formannoij were in a relationship, and then married, from 1989 until Mr Legler’s death.

[5]    The plaintiffs’ claim concerns the Kaahu Trust. The Kaahu Trust was created by deed in June 2008. The initial trustees were Mr Legler, Ms Formannoij, and a corporate trustee that I will call BOI Co Ltd. The plaintiffs were originally beneficiaries of the Kaahu Trust. The plaintiffs say they still are; the defendants say the plaintiffs have recently been excluded as beneficiaries.

[6]    After Mr Legler’s death, Ms Formannoij and BOI Co Ltd were left as the two trustees of the Kaahu Trust. On about 21 November 2019 (roughly two years after Mr Legler’s death), BOI Co Ltd resigned as trustee. This left Ms Formannoij as sole trustee.

[7]    The plaintiffs allege at paragraph [13] of their statement of claim that, as sole trustee of the Kaahu Trust, Ms Formannoij was unable to exercise any power or discretion in favour of herself. This is denied by the defendants.

[8]    On 26 November 2019, Ms Formannoij instructed her solicitors to incorporate the second defendant, Kaahu Trustee Ltd (KTL). Ms Formannoij is the sole director

of KTL. The shares in KTL are held by Ms Formannoij and a company controlled by her solicitors.

[9]    The next day, 27 November 2019, by a deed of retirement and appointment, Ms Formannoij purported to appoint (the plaintiffs say) or did appoint (the defendants say) KTL as trustee of the Kaahu Trust in her place.

The plaintiffs’ claim

[10]   In their statement of claim, dated 11 June 2020, the plaintiffs plead one cause of action. It is directed solely at Ms Formannoij’s exercise, on 27 November 2019, of the power to appoint a new trustee of the Kaahu Trust. The plaintiffs allege that Ms Formannoij’s appointment of KTL as trustee in place of herself was a fraud on her power of appointment.

[11]   In particular, after setting out the background facts (most of which I have captured above), the plaintiffs plead:

19.The power to appoint new trustees of the Kaahu Trust is a fiduciary power.

20.Ms Formannoij was accordingly required to exercise her power to appoint new trustees in good faith, for proper purposes and in the best interests of the beneficiaries as a whole.

21.On the true construction of the trust deed, including clauses 12.2(d),

18.1 and 26.1, Ms Formannoij was unable in any event to exercise her power to appoint new trustees for her own benefit.

22.Ms Formannoij’s purpose in replacing herself as sole trustee with a company under her control was to evade the limits in clause 18.1 of the trust deed and in the law on her ability as trustee to use the trust property to benefit herself.

23.In the circumstances pleaded above, Ms Formannoij’s appointment of the second defendant as trustee of the Kaahu Trust in her place complied with none of the requirements referred to at paragraph 20 above, was for her own benefit, and so was a fraud on her power of appointment.

[12]   By way of relief, the plaintiffs primarily seek a declaration that Ms Formannoij’s appointment of KTL as trustee is void as a fraud on a power. That

reflects the narrow focus of the plaintiffs’ claim. They seek consequential relief for the appointment of an independent trustee.

[13]   I pause to observe that “fraud on a power” has a special equitable meaning. It means that a trustee has exercised a power for an improper purpose. The plaintiffs are not pleading fraud in its common law sense.

The defence

[14]   The defence is found in the defendants’ second amended statement of defence, dated 11 December 2020. The defendants deny all of the allegations in paragraphs

[19] to [23] of the plaintiffs’ statement of claim (quoted above), other than the allegations, in part of paragraph [20], that Ms Formannoij was required to exercise her power to appoint new trustees in good faith and for a proper purpose.

[15]              The defendants also make several affirmative allegations in their defence. The defendants say these affirmative allegations are relevant to the discovery application before me.

[16]              First, in paragraph [1] the defendants deny the plaintiffs’ allegation that they are beneficiaries of the Kaahu Trust, and then say:

… that the plaintiffs were excluded as beneficiaries of the Kaahu Trust by deed dated 12 March 2020, once the defendants had considered the plaintiffs’ interests and respective financial positions, to give effect to Ricco Legler’s (Ricco’s) wish that:

(a)the Horowai Family Trust, settled by Ricco on or about 2 March 2007 and with Ricco and the plaintiffs as “Final Beneficiaries” (as defined), would hold assets contributed, directly or indirectly, by Ricco on trust and for the benefit of the plaintiffs; and

(b)the Kaahu Trust, settled by Ricco on or about 9 June 2008 and with Ricco and the first defendant as “Final Beneficiaries” (as defined), would hold assets contributed, directly or indirectly, by Ricco and the first defendant, on trust and for the benefit of Ricco and the first defendant, during their lifetimes.

[17]The defendants list ten particulars under this allegation.

[18]Second, the defendants plead in paragraph [24] that:

24.The first defendant’s decisions to appoint the second defendant as trustee of the Kaahu Trust and to then exclude the plaintiffs as beneficiaries as [sic] the Kaahu Trust were decisions made:

a)in good faith;

b)for a proper purpose, namely to ensure that the Horowai Family Trust would be for the primary benefit of the plaintiffs and the Kaahu Trust would be for the primary benefit of the second [sic] defendant;

c)in accordance with the wishes of Ricco;

d)in accordance with Ricco’s division of capital and income between the Horowai Family Trust and the Kaahu Trust, as confirmed to his advisers on numerous occasions;

e)in accordance with the plaintiffs’ administration of the Horowai Family Trust, by which a corporate trustee is the sole trustee, and the beneficiaries of the trust appointed as the corporate trustee’s directors, with no independent trustee or director(s);

f)in accordance with the plaintiffs’ residual entitlement to the assets of the Kaahu Trust once the first defendant dies; and

g)in accordance with the interests of all the beneficiaries, given that the plaintiffs were more than adequately provided for by way of assets held by the Horowai Trust [sic] for their benefit, including the Forestry Block, the 20 May 2020 distribution from the Kaahu Trust to the Horowai Family Trust of

$3,738,297.93, the gift of the sailing catamaran “Jimmy” worth $400,000-600,000 to the Horowai Trust [sic], and the property at 785F Purerua Road, Kerikeri.

[19]              The defendants particularise these allegations by referring to the particulars to paragraph [1] of their defence.

[20]              The plaintiffs have filed a reply to the second amended statement of defence. They make a bare denial of the affirmative allegations pleaded in paragraphs [1] and [24]. I take that to be a denial merely of the pleaded allegations, not of the particulars (given that a party does not have to plead to particulars).

The defendants’ application for further and better discovery

[21]              On 11 December 2020 the defendants applied for further and better discovery from the plaintiffs. They sought discovery of two categories of documents, and

identified some types of documents that would be within those categories. The two categories are:

(a)Documents relating to the administration of the Horowai Family Trust between 2007 and 2020; and

(b)Documents relating to the defendants’ pleading that Ricco intended that the Horowai Family Trust would be for the benefit of the plaintiffs, while the Kaahu Trust would be for the benefit of Ricco and the first defendant.

[22]              In their application, the defendants said (among other things) that the plaintiffs “refuse to provide discovery of the current financial position of the Horowai Family Trust and the basis upon which it is being administered, being documents that are directly relevant to the pleaded issues”.

[23]              The plaintiffs oppose the application. In their notice of opposition, they say the proceeding concerns their claim that Ms Formannoij’s exercise of her power of appointment (of KTL as trustee in her place) was a fraud on a power and void. They say they “plead specifically” that:

(a)Ms Formannoij’s purpose in replacing herself as sole trustee with a company under her control was to evade the limits in the trust deed, and the law, on her ability as trustee to use the trust property to benefit herself.

(b)Ms Formannoij failed to exercise her power of appointment in good faith, for proper purposes and in the interests of the beneficiaries as a whole.

[24]              The plaintiffs then say that the documents sought by the defendants in their application “were not in the control of Ms Formannoij in November 2019 and so could not be relevant to her purpose and intention when she exercised the power of appointment”. The plaintiffs say the documents are therefore not relevant.

[25]              In summary, on this application, the dispute is solely about whether the documents sought by the defendants are relevant to an issue in the proceeding. Other disputes that sometimes arise on discovery applications, such as proportionality, do not arise here.

Decision

[26]              As I have said, the question is whether any of the documents sought by the defendants are relevant to an issue in the proceeding. The issues in the proceeding are determined by the pleadings.

The plaintiff ’s statement of claim

[27]              The starting point is the plaintiffs’ statement of claim. This is clear and concise. In my view the key allegations that have been denied by the defendants, and the nature of the issues that arise, are as follows:

(a)Paragraph [13]: the plaintiffs allege, and the defendants deny, that, as the sole trustee of the Kaahu Trust, Ms Formannoij was unable to exercise any power or discretion in favour of herself. This is an issue of law. Its resolution depends on the general law and (perhaps) on the terms of the Kaahu Trust deed.

(b)Paragraph [19]: the plaintiffs allege, and the defendants deny, that the power to appoint new trustees of the Kaahu Trust is a fiduciary power. This is another issue of law, dependent for its resolution on the general law, applied to the terms of the Kaahu Trust deed.

(c)Paragraph [20]: the plaintiffs allege, and the defendants deny, that Ms Formannoij was required to exercise her power to appoint in the best interests of the beneficiaries as a whole. This is another issue of law. It depends on the general law and the terms of the Kaahu Trust deed.

(d)Paragraph [21]: the plaintiffs allege, and the defendants deny, that on the true construction of the trust deed, Ms Formannoij was unable in

any event to exercise her power to appoint new trustees for her own benefit. This is an issue of law, dependent on the construction of the deed.

(e)Paragraph [22]: the plaintiffs plead, and the defendants deny, that Ms Formannoij’s purpose in replacing herself as sole trustee was to evade the legal limits on her ability as trustee to use the trust property to benefit herself. This is an issue of fact: what was Ms Formannoij’s purpose?

(f)Paragraph [23]: the plaintiffs plead, and the defendants deny, that “in the circumstances pleaded above” Ms Formannoij’s appointment of KTL complied with none of the (legal) requirements in paragraph [20], was for her own benefit, and so was a fraud on her power of appointment. This is an issue of law. It assumes that the circumstances are as pleaded, and alleges that those circumstances do not meet the pleaded legal requirements.

[28]              The plaintiffs have identified a very narrow factual mast to which they have nailed their colours. That mast is the allegation, in paragraph [22], that Ms Formannoij’s purpose in replacing herself as sole trustee with KTL was to evade the legal limits on her ability as trustee to use the trust property to benefit herself. That is, on the plaintiffs’ claim, the only factual matter in issue.

[29]              So, leaving aside the affirmative allegations raised by the defendants (which I address below), on the plaintiffs’ claim there is only one factual issue for determination. This was confirmed by the plaintiffs’ written submissions, which stated that whether Ms Formannoij’s exercise of her power was “in fact” a fraud on the power would turn on her purpose and intention when she exercised it.

[30]              Every other issue is one of law. The documents sought by the defendants cannot be relevant to those legal issues. To be clear, some of those legal issues are matters of interpretation of the Kaahu Trust deed. Trust deeds are, like contracts, interpreted in their factual context. Where those contextual facts are disputed, an issue

of fact can lie behind an issue of interpretation. But that is not the basis of the defendants’ application. They do not say that the documents they seek would be relevant to the interpretation of the Kaahu Trust deed.

[31]              I return to the factual issue raised by the plaintiffs’ claim: was Ms Formannoij’s purpose, when she appointed KTL, to evade the legal limits on her ability as trustee to use the trust property to benefit herself? I accept the plaintiffs’ submission that this purpose must be ascertained as at the date on which Ms Formannoij exercised the power. That is self-evident.1

[32]              In my view the documents sought by the defendants cannot be relevant to a determination of Ms Formannoij’s purpose when she exercised the power of appointment. This is because, as the plaintiffs submitted, the documents were not in her possession or control at the relevant time. She must have formed her purpose without reference to them. The documents could only be relevant to an after the fact justification of her decision. But the proceeding is concerned with her purpose at the time, not with justifications after the fact.

[33]              When I raised this point with Mr McBride, his response was that the defendants have pleaded that over the past decade or so the Kaahu Trust, and Mr Legler when he was still alive, have taken many steps to provide for the plaintiffs or for the Horowai Family Trust. Mr McBride said that the plaintiffs appear to dispute that pleading, and therefore there was a factual issue as to whether such provision had been made, to which the documents would be relevant.

[34]              That answer did not explain why the documents were relevant to the issue of Ms Formannoij’s purpose when exercising the power of appointment. Rather, the answer relied on the defendants having made affirmative allegations. Indeed, in the defendants’ written submissions, at paragraphs [9] and [15], they based their application for discovery on those affirmative allegations.

1      In any event, there is authority for the proposition: Re O’Brien (deceased) [1974] 1 NZLR 58 (HC) at 66.

[35]              I therefore conclude that, leaving aside the defendants’ affirmative allegations, there is no basis for requiring the plaintiffs to discover the documents sought.

[36]              I have reached that conclusion on the pleadings. I add that at the hearing I was referred to the affidavit that Ms Formannoij has sworn for the upcoming substantive hearing. Paragraphs [73] to [95] of her affidavit reinforce me in my decision. Ms Formannoij first addresses her decision to replace herself with KTL. She then explains some of the decisions that she subsequently made (as director of KTL) with respect to the Kaahu Trust. It is only in respect of the latter decisions (which the plaintiffs do not put in issue on their pleading) that Ms Formannoij says she took into account matters to which the documents sought by the defendants might be relevant.

[37]              Before considering whether the documents are discoverable by reason of the defendant’s affirmative allegations, I briefly touch on two other matters. First, the submissions before me revealed a sharp disagreement between the parties as to the scope of the doctrine of “fraud on a power”. Mr McBride submitted that the doctrine is directed to the appointment to a “non-object” of a trust, cloaked as a permissible appointment but with a covert and unlawful purpose. He said that the doctrine had no application here, because Ms Formannoij was an object of the Kaahu Trust. Mr Bigio did not accept that the doctrine was so limited. It will be for the trial Judge to decide, if necessary, this legal issue. It is not relevant to the discovery application.

[38]              Second, Mr McBride expressed concern that at the substantive hearing the plaintiffs might seek to go beyond their pleaded case, or even that the trial Judge might wish to determine the case on a wider basis than is pleaded. But I have to consider the defendants’ application on the basis of the case that is pleaded, rather than speculate about how the case might be pleaded. The plaintiffs would face obvious difficulties in expanding their pleaded case at trial, given the pains they have gone to on this application to emphasise the narrowness of their case. If they nonetheless obtained leave to amend their pleadings, that would have an effect on the issues and most likely on the scope of documents that were relevant. But that would be for then. It is not for me to deal with now.

The defendants’ affirmative allegations

[39]              I now turn to the affirmative allegations made by the defendants. I first observe that the mere fact an affirmative allegation has been made does not necessarily make the matter traversed in the allegation an issue that has to be determined in the proceeding. Mr McBride accepted that.

[40]              The defendants’ first affirmative allegation, at paragraph [1] of their defence, is that the plaintiffs were, by deed dated 12 March 2020, excluded as beneficiaries of the Kaahu Trust. The defendants plead that they made this decision “once the defendants had considered the plaintiffs’ interests and respective positions” and to give effect to Mr Legler’s alleged wishes as to the Horowai Family Trust and the Kaahu Trust.

[41]              That allegation traverses the exclusion of the plaintiffs as beneficiaries, and the defendants’ reasons for that decision. But neither of those matters is in issue in this proceeding. The plaintiffs do not, in their claim, challenge the decision to exclude them. If they succeed in their challenge to the appointment of KTL as trustee, the plaintiffs will presumably say that decisions made by KTL as trustee were legally ineffective. But they do not seek any such declaration in this claim. And they do not, in this claim, plead as an alternative that if the appointment of KTL was valid then the decision to exclude them was (for example) in breach of trust or of fiduciary duty.

[42]              The defendants’ second affirmative allegation, at paragraph [24], addresses the purpose of and reasons for the defendants’ decision “to appoint the second defendant as trustee of the Kaahu Trust and to then exclude the plaintiffs as beneficiaries as [sic] the Kaahu Trust”. The defendants have thereby rolled up, in the one pleading, two decisions that were taken four months apart.

[43] To the extent that the defendants’ paragraph [24] addresses the decision to exclude the plaintiffs as beneficiaries, that matter is not in issue, for the reasons I have set out above at [41]. To the extent that the paragraph addresses Ms Formannoij’s decision to appoint KTL as trustee, I have already concluded, above at [32], that the documents sought by the defendants are not relevant.

[44]              For those reasons, I conclude that the defendants’ affirmative allegations do not make the documents that the defendants seek discoverable by the plaintiffs.

Summary

[45]              The plaintiffs have chosen to make a narrow claim. They do not challenge the decision to exclude them as beneficiaries, nor the decisions taken by KTL to make various distributions. They challenge only Ms Formannoij’s appointment of KTL as trustee in her place. Even then, the challenge to that appointment is narrow. There are two key planks to the challenge. First, as a matter of interpretation of the trust deed, the plaintiffs say that Ms Formannoij was not able to exercise her power to appoint new trustees for her own benefit. Second, they say that Ms Formannoij’s purpose in appointing KTL was to evade that limit.

[46]              Both planks are contested by the defendants. But the first plank is merely a question of interpretation. The documents sought do not bear on it. And the second plank is concerned only with Ms Formannoij’s purpose at the time she exercised the power. She must have exercised the power without reference to the documents, so they cannot be relevant to a determination of her purpose at that time.

[47]              Defendants are sometimes understandably concerned that a plaintiff’s case might expand near or at trial. That seems very unlikely here, given the narrowness of the claim and the plaintiffs’ insistence that its claim has a sharp focus. Even if it were to happen, that would have discovery consequences then. It is not for me to anticipate them now.

Result

[48]I dismiss the defendants’ application for further and better discovery.

[49]              The plaintiffs are entitled to costs on the application. If costs cannot be agreed, the plaintiffs are to file and serve a memorandum by 16 April 2021, the defendants to follow by 23 April 2021. Each memorandum is not to exceed two pages, excluding annexures or schedules.

Campbell J