Legler v Formannou

[2022] NZHC 586

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

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

CIV-2020-488-32

[2022] NZHC 586

IN THE MATTER

of the Kaahu Trust

UNDER

Part 18 of the High Court Rules 2016

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:	23 March 2022
Appearances:	D R Bigio QC and JWH Little for the Plaintiffs J McBride and R Woods for the Defendants
Judgment:	28 March 2022

JUDGMENT OF GAULT J

This judgment was delivered by me on 28 March 2022 at 4:00 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

……………………………………

Solicitors / Counsel:

Mr D R Bigio QC and Mr JWH Little, Barristers, Auckland

Ms Pravir Tesiram (plaintiffs’ instructing solicitor), TGT Legal, Auckland Mr J McBride and Ms R Woods, Barristers, Auckland

Mr L T Grant, Martelli McKegg (defendants’ instructing solicitor), Auckland

LEGLER, KLAUI and LEGLER v FORMANNOIJ [2022] NZHC 586 [28 March 2022]

[1]    On 16 March 2022 the plaintiffs applied without notice (on a Pickwick basis) for an urgent interim order requiring the defendants, Ms Formannoij (Marina) and Kaahu Trustee Ltd (KTL), “to comply with Downs J’s injunction” dated 18 October 2021 pending further order the Court.

[2]    The defendants filed a notice of opposition and, following telephone conferences on 17 and 18 March, I directed an urgent hearing on 23 March.

Factual background

[3]    Ricco Legler (Ricco) and Marina began a relationship in 1989. They married in 2009. Ricco died in 2017.

[4]The plaintiffs are Ricco’s adult children from his first marriage.

[5]    Ricco’s father died in 2002, leaving Ricco a significant inheritance. This led to the creation of two family trusts: the Horowai Family Trust (Horowai) and the Kaahu Trust (Kaahu). The discretionary beneficiaries of each trust were the same: Ricco, Marina, the children and any trust which included a beneficiary. Ricco and his children were the final beneficiaries of Horowai; Ricco and Marina were the final beneficiaries of Kaahu.

[6]    These proceedings concern Kaahu, which was established on 9 June 2008.  Its trustees were Ricco, Marina, and BOI Taxation Trustee Co No.2 Ltd (BOI).

[7]    Following Ricco’s death and the resignation of BOI, Marina was the sole trustee of Kaahu.

[8]    On 27 November 2019, Marina appointed KTL a trustee and then resigned as a trustee. Marina is the sole director of KTL.

[9]    On 3 March 2020, KTL and Marina executed a Deed of Distribution and Indemnity resolving to pay a distribution to Marina of $1 million. The distribution was paid to Marina on 17 March 2020 and placed on two term deposits of $500,000.

[10]   On 12 March 2020, KTL executed a Deed of Distribution (Kaahu to Horowai) resolving to transfer to Horowai a debt of $3,738,297.93 owed by Horowai to KTL; that is, forgiving the debt.

[11]   Also on 12 March 2020, KTL and Marina executed a Deed of Distribution and Indemnity resolving to distribute further substantial assets to Marina and irrevocably appropriate to Marina assets still to come into the trust fund from Ricco’s estate. These distributions were not implemented.

Proceedings to date

[12]   The substantive proceeding concerns the appointment of KTL as sole corporate trustee of Kaahu.

[13]   The plaintiffs claimed that Marina’s appointment of KTL was void as a fraud on a power. They claimed that appointment of a sole corporate trustee, with her as sole director, was a device to avoid the restrictions in the deed preventing her from exercising  sole  control  in  her  personal  capacity  (and  in  her  own  interests).  The plaintiffs also sought the appointment of an independent trustee.

[14]The plaintiffs obtained interim relief on a without notice basis.1

[15]   Following trial, Downs J dismissed the plaintiffs’ claim on  2  June 2021.2 The claim failed both as to Marina’s appointment of a sole corporate trustee and as to the allegation that she was preferring her own interests.   Among other reasons,     the plaintiffs were provided for in Horowai.

[16]The plaintiffs appealed to the Court of Appeal.3

[17]The plaintiffs sought and Downs J granted interim relief pending appeal.4

1      Minute of Brewer J dated 8 July 2020.

2      Legler v Formannoij [2021] NZHC 1271.

3      The appeal was heard on 26 February 2022 and judgment reserved.

4      Minute (No 4) of Downs J dated 2 July 2021.

[18]   It subsequently became apparent that the plaintiffs had never provided an undertaking as to damages. On 18 October 2021, Downs J recalled his interim orders and re-issued them conditional on the plaintiffs “providing an undertaking to pay damages in accordance with r 7.54”.5

[19]   The plaintiffs provided an undertaking dated 20 October 2021. However, the defendants considered the undertaking did not comply with Downs J’s re-issued order because it was only prospective and did not undertake to compensate for damages sustained by the earlier injunction granted by Brewer J. The defendants filed an interlocutory application seeking compliance dated 22 October 2021.

[20]   The defendants’ application was heard by Harland J on 14 February 2022, with judgment reserved. I was told that as well as the issue as to whether Downs J’s condition required a retrospective undertaking, in the alternative the hearing before Harland J addressed whether an undertaking as to damages was implied in the order of Brewer J.

[21]   In the meantime,  an  interim  arrangement  between  the  parties  lapsed  on  8 March 2022 as a result of a dispute about Marina’s proposed access to funds given that to date she has personally paid all the defendants’ legal costs in the proceeding. Hence, the plaintiffs’ urgent application of 16 March  2022.  On 17  March  2022, Mr McBride offered the defendants’ undertaking not to make payment to the first defendant pending the hearing before me, which at the hearing was extended until this judgment.

[22]   There has been some confusion as to what Marina has proposed. The plaintiffs understood that she proposed to realise Kaahu property and distribute the proceeds to herself in reliance on an argument that the undertaking was not compliant with Downs J’s condition and so his order did not come into effect. But Marina filed an affidavit on 21 March 2022 stating that she was merely intending to transfer funds from the two term deposits she holds in her own name following the distribution from Kaahu to her in March 2020, before the proceeding was commenced. Marina agrees, on an interim basis pending the judgment of Harland J, to comply with the orders of

5      Legler v Formannoij [2021] NZHC 2759.

Downs J. In other words, pending Harland J’s decision, she will not dispose of Kaahu property in reliance on the argument that Downs J’s condition was never satisfied.

[23]The plaintiffs still seek to prevent use of the term deposits pending appeal.

Issues

[24]   The parties agree that I should not address the issues pending before Harland J. The issues for me to determine are:

(a)Does the scope of Downs J’s interim order of 18 October 2021 restrain use of the term deposits?

(b)Aside from Downs J’s order, should the defendants be restrained from using the term deposits pending appeal?

Scope of Downs J’s order

[25]   Mr Bigio QC submitted that Downs J’s interim order pending appeal needed to be read in the context of Brewer J’s earlier interim order, and that both orders restrained use of the $1 million held on term deposit. Mr McBride submitted that the orders do not apply to the term deposits.

[26]Brewer J’s original order of 8 July 2020, made without notice, stated:

I make an order directing the first defendant and the second defendant not to exercise any dispositive powers or otherwise dispose of property of the Kaahu Trust pending further order of the Court.

[27]   On its face, this would not capture a disposition of trust property that had already occurred. However, Mr Bigio referred to a letter from the defendants’ solicitors to the plaintiffs’ solicitors dated 16 June 2020 in which they said:

… deeds of distribution were prepared and signed by KTL in March of this year. However, that proposed distribution has now been halted. We will provide further details in due course.

[28]   I accept that letter made no distinction between the 3 March 2020 deed relating to the $1 million, and the 12 March 2020 deed relating to other trust property. I also

accept that letter was referred to in Brewer J’s minute. However, that was in relation to drawing an inference from the letter that the defendants may intend to make very significant dispositions; Brewer J referred to the marketing of the trust’s principal asset. I doubt that letter warrants extending the plain meaning of Brewer J’s order to capture dispositions of trust property that had already occurred. Nor does the fact that the without  notice order was subsequently continued and modified by  consent.6   The specific issue was not addressed.

[29]   The defendant’s new solicitors did provide further details to the plaintiffs’ solicitors by letter dated 3 December 2020:

We confirm the advice provided in WRMK’s letter to you of 16 June 2020 that the distributions authorised by the deeds dated 12 March 2020 have not occurred, pending resolution of this dispute. The distribution authorised by the deed dated 3 March 2020 was paid to Marina, but she has retained it separately on short term investment pending resolution of this dispute.

[30]   Although the 16 June 2020 was not clear in relation to the $1 million distribution, this 3 December 2020 letter confirmed that the $1 million had been distributed to Marina but that she was retaining it separately on short term investment pending resolution of the dispute. The plaintiffs were entitled to rely on that advice, at least pending notification of a change of position.

[31]   The issue was not raised when the parties sought a further variation of the interim order by consent in April 2021.7

[32]   Following Downs J’s substantive judgment, the plaintiffs sought interim relief pending appeal. The application dated 21 June 2021 sought:

orders restraining the defendants from exercising any dispositive powers or otherwise disposing of the Kaahu Trust’s property (including by implementing deed executed in March 2020), subject to the modifications made to the equivalent orders during the High Court proceeding identified in schedule A, until the final determination of the applicants’ appeal to the Court of Appeal…

[33]   Downs J granted the application, subject to conditions that Marina may continue to sell the Kaahu owned property in which she resided and purchase a home

6      Minute of Woolford J dated 15 July 2020.

7      Minute of Campbell J dated 13 April 2021.

on Waiheke Island with the proceeds (which had been the subject of the consent variation in April 2021) and continue to receive an income from the trust sufficient to meet her needs.

[34]   As indicated, when it became apparent that the plaintiffs had never provided an undertaking as to damages, Downs J recalled his interim orders and re-issued them conditional on the plaintiffs providing an undertaking to pay damages. Otherwise, the terms of his interim order did not change.

[35]   The material change in the terms of the interim order pending appeal was the addition of the words in brackets “including by implementing deeds executed in March 2020”. Those additional words make explicit that the order applies to the dispositions in the March 2020 deeds that had not been implemented. That includes the distributions in the 12 March 2020 deed. While I acknowledge those additional words refer to implementing “deeds” plural, the distribution in the 3 March 2020 had already been implemented, and the plaintiffs’ solicitors knew that it had already been implemented before they drafted the application. It was not suggested that Downs J was told before making either his July 2021 order or his October 2021 re-issued order that the $1 million distribution had occurred before the proceeding had commenced. He may even have simply intended to reflect the earlier pre-trial interim orders without reference to the additional words. I do not consider those additional words extend the scope of Downs J’s order to capture the $1 million disposition that had already been implemented. The terms of the injunction should not be given an expansive interpretation. I therefore consider that Downs J’s interim order of 18 October 2021 did not restrain use of the $1 million held on term deposit.

[36]   Rather, as indicated, the $1 million distribution was the subject of an arrangement between the parties that it would be retained separately on short term investment pending resolution of the dispute, at least pending notification of a change of position (which has now occurred).

Other grounds to restrain

[37]   Accordingly, I consider the real issue is whether, aside from Downs J’s order, the defendants should now be restrained from using the term deposits pending appeal.

Mr McBride took no issue with the plaintiffs now seeking interim relief in different terms from their interlocutory application.

[38]   Mr Bigio submitted the status quo should remain pending appeal given that, if the appeal succeeds, the distributions may be unwound and there will be an issue about Marina’s indemnity in relation to legal costs incurred. He acknowledged that the reasonableness of her costs will be moot unless the appeal succeeds but disputed that she has an “entitlement” to be indemnified and submitted that indemnification is premature.

[39]   I accept that a trustee’s entitlement to indemnity for costs and expenses incurred in litigation is subject to those costs being necessarily and reasonably incurred.8 The Court in its supervisory jurisdiction will review the costs and expenses of trustees.9 As Mr Bigio submitted, whether, in the end result, indemnity is available to trustees defending self-interested litigation will depend on the ultimate outcome of, and the trustees’ conduct in, the litigation.10

[40]   However, I consider it does not follow that a trustee or former trustee who has successfully defended proceedings must await the outcome of an appeal before seeking indemnification in relation to legal costs incurred. Once there has been a substantive Court determination exonerating the (former) trustee, I consider the focus pending an appeal should be whether the risk of dissipation is such that the appeal may be rendered nugatory and the (former) trustee should be denied the benefit of the substantive judgment in the meantime. The balance is more akin to the case of a stay, albeit in a case such as this where the defendant has succeeded interim relief rather than a stay is necessarily sought.

[41]   In any event, despite Marina’s affidavit of 21 March 2022 stating that she wished to be reimbursed for the legal fees pursuant to her indemnity, properly characterised she is not seeking to access trust assets but rather to access the term deposits in her name (that she has previously agreed to retain separately on short term

8      See McCallum Jnr v McCallum [2021] NZCA 237, [2021] 32 FRNZ 851 at [27]-[42].

9 At [31].

10 At [42].

investment pending resolution of the dispute) in order to give her some liquidity since she has incurred the legal costs. I am not being asked to characterise that access to her term deposits as reimbursement pursuant to her indemnity.

[42]   Marina does not seek access to the $1 million. In her affidavit, she sought access to the amount of her legal costs to 31 January 2022, that is $541,981.85. During the hearing, she reduced the amount sought to $500,000.

[43]   Given the way the issue developed, there was no evidence in relation to the risk of dissipation. As Mr McBride submitted, in the context of an appeal it is not for a respondent to an application for a stay or interim relief to prove there is no risk of dissipation. But I will consider the balance of convenience or least irremediable prejudice in substance rather than solely rely on the lack of evidence given the way the issue developed.

[44]   In favour of restraining use of the term deposits, I accept that if the appeal succeeds, the $1 million distribution may be unwound.  If Marina is able to access

$500,000, she might not be in a position to repay. The arrangement that the $1 million distribution would be retained separately on short term investment pending resolution of the dispute has been in place throughout the proceeding. That is the status quo. Also, as Mr Bigio submitted, the legal costs to 31 January 2022 in Marina’s schedule extend beyond the date of the substantive High Court judgment of 2 June 2021, and so  beyond  the  benefit  of  that  judgment.    Based  on  the  schedule, approximately

$440,000 of the legal costs relate to the period up to that judgment.

[45]   On the other hand, the defendants have succeeded at trial. I have concluded that the $1 million distribution is not subject to Downs J’s interim order, and the defendants gave notice that they sought to change the arrangement. The plaintiffs have not offered a further undertaking as to damages in the event that Downs J’s interim order did not apply, although I could make any further restraining order conditional on the provision of an undertaking.11    Given that Marina has paid legal  costs  of  nearly

$542,000 to 31 January 2022, it is neither surprising nor unreasonable that she seeks access to the funds on term deposit. Mr Bigio acknowledged that the plaintiffs are not

11     As a condition of interim relief under r 12 of the Court of Appeal (Civil) Rules 2005 or otherwise.

asking Marina to prove her monthly outgoings. The historic annual income she has continued to receive from Kaahu under the interim orders ($200,000) is insufficient to cover the legal costs incurred. Downs J’s interim order has a carve out for Marina to continue to receive an income from Kaahu “sufficient to meet her needs”. If that order applied, as Mr McBride submitted, it would not require Marina to deplete all her own savings before seeking funds to meet legal costs. Marina is not seeking access to all the $1 million distribution. The other term deposit is to be retained separately on short term investment pending resolution of the dispute (pursuant to the arrangement between the parties rather than further order of the Court).12 Marina is on notice that if the appeal succeeds, the $1 million distribution may need to be repaid.

[46]   Balancing all the circumstances, including the interim order already in place to protect the plaintiffs pending appeal, I consider that Marina should be permitted to access the $500,000 sought from one term deposit pending appeal. It is not in the interests of overall justice to grant further interim relief restraining her from such access pending the outcome of the plaintiffs’ appeal.

Result

[47]The plaintiffs’ interlocutory application is dismissed.

[48]   Costs ordinarily follow the event, but Mr Bigio signalled that he wishes to be heard in relation to costs given the way the issue developed. If costs cannot be agreed, I will receive memoranda not exceeding three pages within 15 working days and determine costs on the papers.

Gault J

12     The Court expects that the arrangement will not change again necessitating further Court time pending appeal except in the event of a very material change of circumstances.