Liao v Liao
[2024] NZHC 3513
•22 November 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2024-404-1661
[2024] NZHC 3513
UNDER the Land Transfer Act 2017 IN THE MATTER OF
Caveat 13018335.3
BETWEEN
PEI-YA LIAO
Applicant
AND
A-WANG LIAO and TAN-KUEI LIAO LU
Respondents
Hearing: 20 November 2024 Counsel:
S O McAnally for the Applicant
S Jeffs / K Sun for the Respondents
Judgment:
22 November 2024
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 22 November 2024 at 12 Midday.
Pursuant to Rule 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors/Counsel:
Croftfield Law, Auckland Capstone Law, Auckland Sean McAnnally, Auckland
LIAO v LIAO [2024] NZHC 3513 [22 November 2024]
Introduction
[1] The applicant, Pei-Ya (Phoebe) Liao (Ms Liao), is the daughter of the respondents, A-Wang Liao and Tan-Kuei Liao Lu (Mr Liao and Mrs Lu respectively). Ms Liao is married to Yat Keung (Dennis) Lam (Mr Lam).
[2] The parties have engaged in property development. They fell into dispute regarding ownership of two properties, including 4A Whites Way, Ellerslie (the property) which was registered in Ms Liao’s name.
[3] The property was a vacant residential section when Ms Liao acquired ownership. A house was constructed on the property while Ms Liao was the registered owner, by Mr Lam’s construction company, D&T Homes Limited (D&T).
[4] Mr Liao and Mrs Lu commenced a claim against Ms Liao in this Court, CIV-2021-404-1067, seeking relief as the beneficial owners of the property (the substantive proceeding).
[5] On 17 April 2024, Woolford J gave judgment for Mr Liao and Mrs Lu in the substantive proceeding, declaring that Ms Liao held the property on resulting trust for Mr Liao and Mrs Lu as the beneficial owners (the judgment).1 Woolford J declared that Ms Liao is “… entitled to recover costs incurred while the property was in her possession and the costs of construction of the dwellinghouse on the property, which may include a reasonable margin for the builder.”2
[6]Woolford J concluded the judgment on the following terms:
[94] I do not make any further ancillary orders as I expect the parties to negotiate on a good faith basis and reach agreement, in particular, on the costs associated with development of the Ellerslie property as well as any claim for use of money, interests and costs.
[95] Leave is, however, reserved for the parties to return to Court for any ancillary orders necessary to implement the terms of this judgment.
1 Liao v Liao [2024] NZHC 828.
2 At [90] and [91].
[7] On 24 May 2024, registered ownership of the property was transferred from Ms Liao to Mr Liao and Mrs Lu (the transfer). At the same time, Ms Liao registered a caveat asserting an equitable lien securing Ms Liao’s right to indemnification from the trust asset for expenses incurred while she held the property on trust for her parents. Ms Liao says that the total of those expenses is $983,581.
[8] Mr Liao and Mrs Lu do not accept that Ms Liao has an equitable interest in the property. They argue that the transfer extinguished any equitable interest that Ms Liao may have had.
[9] Alternatively, if the Court finds that Ms Liao does have an arguable equitable interest in the property, they offer to pay $390,600 into trust as an alternative to the caveat, representing the maximum value of Ms Liao’s claimed interest.
[10] Mr Liao and Mrs Lu commenced the lapsing procedure under the Land Transfer Act 2017 (LTA). Ms Liao has applied under s 143 of the LTA for an order sustaining her caveat.
Sustaining caveats – the legal principles
[11] The legal principles applicable to applications to sustain caveats were confirmed by the Court of Appeal in Philpott v Noble Investments Ltd:3
[26] The applicable legal principles which governed the application to sustain the caveats, and which now govern this appeal, are as follows:
(a)The onus is on the applicants to demonstrate that they hold an interest in the land that is sufficient to support the caveat, but they need not establish that definitively;
(b)It is enough if the applicants put forward a reasonably arguable case to support the interest they claim;
(c)The summary procedures involved in applications of this nature are not suited to the determination of disputed questions of fact. An order for the removal of a caveat will only be made if it is patently clear that the caveat cannot be maintained — either because there is no valid ground for lodging it in the first place, or because such a ground no longer exists; and
3 Philpott v Noble Investments Ltd [2015] NZCA 342.
(d)When an applicant has discharged the burden upon it, the Court retains discretion to remove the caveat which it exercises on a cautious basis. Before it does so the Court must be satisfied that the caveator’s legitimate interest would not be prejudiced by removal.
[12] The Court has a residual discretion to remove a caveat or to allow a caveat to lapse if the Court is completely satisfied that the legitimate interests of the caveator will not be prejudiced.4 The onus is on the party challenging the caveat. The discretion is to be exercised on a cautious basis.5
The claimed equitable interest
[13]Legal principles
[14] There is no dispute between the parties regarding the general principles that apply to Ms Liao’s rights as a trustee in respect of liabilities incurred to third parties in the discharge of the trusteeship.
[15] Those liabilities are personal to the trustee6 and the trustee has a right of indemnity out of the trust assets.7 The right of indemnity accrues at the time the obligation is incurred.8 The trustee’s right to an indemnity is sometimes referred to as an equitable lien. The right of indemnity includes an additional right to proceed against a beneficiary personally for recoupment.9
[16]The indemnity is now found in s 81 of the Trusts Act 2019, which provides:
81Trustee’s liability for expenses and liabilities incurred, and trustee’s right to indemnity
(1)A trustee is personally liable for an expense or a liability incurred by the trustee when acting as a trustee.
(2)However, a trustee who incurs an expense or a liability when acting reasonably on behalf of the trust is entitled,—
4 Pacific Homes (in receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656.
5 Stewart v Kaipara Consultants Ltd [2003] 3 NZLR 55 (CA) at 60.
6 Thomas Fletcher (ed) Lewin on Trusts (20th ed, Sweet & Maxwell, London, 2020) at [24-037].
7 Investec Trust Guernsey Ltd v Glenalla Properties Ltd [2018] UKPC 7, [2019] AC 271 at [59].
8 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 at [19].
9 Lewin on Trusts, above n 6, at [19-057].
(a)if the trustee has paid the expense or discharged the liability out of the trustee’s own funds, to reimbursement from the trust property; or
(b)in any other case, to pay the expense or discharge the liability directly from the trust property (or to have it paid or discharged by a remaining trustee).
(3)The operation and enforcement of the indemnity in this section is governed by the rules of the common law and equity relating to trusts.
(4)This section does not limit any indemnity available at common law or in equity.
[17]This provision applies to a resulting trust where necessary or appropriate.10
[18] A trustee is entitled to retain possession of trust property against the beneficiary until the indemnity is exercised.11 However, the equitable lien does not depend upon the trustee’s continuing possession of the trust asset for its existence.12
[19] The equitable lien continues where trust property is vested in a new trustee and the party seeking indemnification is no longer a trustee.13 The position when a trustee distributes to the beneficiaries is different. The learned authors of Lewin on Trusts opine:14
When the trustee makes a distribution, we consider that as regards the distribution (but not any retained assets), the trustees proprietary right of indemnity ceases to exist, unless expressly preserved, for example by an express charge executed by the beneficiaries who receive the distribution. The case of distribution is different from that of vesting the trust fund in new trustees upon a change in the trusteeship, when the proprietary right of indemnity survives. In the case of distribution the trust fund goes to the beneficiaries, and might be expected to be freed altogether from the trusts, while in the case of change in the trusteeship the trust fund is retained in the hands of trustees, the trust continuing to subsist.
[20] The learned authors of Law Relating to Trusts and Trustees state that whether a trust asset will be released from an equitable interest on a transfer of the asset to the beneficiaries must be a matter of intention to be gathered from the circumstances.15
10 Trusts Act 2019, s 5(2)(b)(i).
11 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd, above n 8, at [22].
12 Lewin on Trusts, above n 6, at [17.057].
13 Lewin on Trusts, above n 6, at [17-059].
14 At [24-041].
15 Paul Matthews and others Underhill and Hayton Law of Trusts and Trustees (20th ed, LexisNexis, United Kingdom, 2022) at [85.34].
The concession and the issues
[21] Mr Liao and Mrs Lu accept that Ms Liao paid invoices totalling $48,695.35 related to the construction of the house. In doing so, they must be taken to accept that Ms Liao was entitled to an indemnity from the trust asset for that amount. Mr Liao and Mrs Lu do not accept the balance of the expenditure claimed by Ms Liao.
[22]Therefore, the issues are:
(a)Is it reasonably arguable that Ms Liao’s equitable lien survived her transfer of the property to Mr Liao and Mrs Lu?
(b)If the answer is yes, can Ms Liao’s right to an indemnity be protected by substitution of a fund instead of the caveat?
Is it reasonably arguable that Ms Liao’s equitable lien survived her transfer of the property to Mr Liao and Mrs Lu?
[23] Shortly after the judgment was delivered, the solicitors for Mr Liao and Mrs Lu wrote to Ms Liao’s solicitors, demanding that Ms Liao transfer the property to Mr Liao and Mrs Lu. Mr Liao and Mrs Lu filed a memorandum in the substantive proceeding seeking an order that the Court appoint Mr Liao and Mrs Lu to sign a transfer on behalf of Ms Liao. Ms Liao signed the transfer before the Court considered that application.
[24] Unfortunately, the parties have been unable to resolve the issue of the costs incurred by Ms Liao related to the construction of the house. Ms Liao has now made an application in the substantive proceeding for orders fixing the amount that she is entitled to recover. That application will require a further hearing in the substantive proceeding.
[25] Counsel for Mr Liao and Mrs Lu, Mr Jeffs, submitted that there is no evidence that the parties held a mutual intention that Ms Liao’s equitable lien would be preserved on the transfer, and the unilateral registration of a caveat was not enough to preserve the equitable lien.
[26] I find that it is reasonably arguable that the transfer did not extinguish Ms Liao’s right to an indemnity from the asset of the trust, for the following reasons:
(a)The transfer occurred after the judgment, which included a declaration that Ms Liao is entitled to recover costs incurred while the property was in her possession and the costs of construction of the house.
(b)This declaration was made on Mr Liao and Mrs Lu’s cause of action for equitable relief based on a resulting trust. There was no counterclaim by Ms Liao against Mr Liao and Mrs Lu, and no pleaded basis for Woolford J to make a finding of liability in personam against Mr Liao and Mrs Lu in respect of Ms Liao’s expenditure as trustee. The declaration in [91] of the judgment must be read as a declaration of the right of indemnification.
(c)Although a distribution of trust property by a trustee to a beneficiary will prima facie release a trustee’s equitable lien, the beneficiary does not receive absolute legal and beneficial ownership in all cases. For example, the non-possessory interest of a former trustee cannot be given up by the current trustee that makes the distribution, unless the current trustee has the authority of the former trustee to give it up.16
(d)It would be incongruous for equity to recognise a trustee’s right to retain possession of a trust asset based on the right to an indemnity, but not recognise the trustee’s right to transfer the trust asset to the beneficiary while at the same time expressly preserving the trustee’s right to an indemnity.
(e)While it might be prudent to obtain the express agreement of the beneficiary to the preservation of the equitable lien, a unilateral act by the trustee should be sufficient if it is unequivocal and brought to the attention of the beneficiary. If that occurs, the beneficiary is in no
16 Lewin on Trusts, above n 6, at [85.35] and Underhill and Hayton Law of Trusts and Trustees, above n 15, at [25-041].
worse position than the position the beneficiary would be in if the trustee simply retained possession of the asset, which the trustee would be entitled to do.
(f)Ms Liao’s lodgement of the caveat at the time of the transfer, and following the Court’s declaration of her right of indemnification, is inconsistent with an intention to release the trust property from her equitable lien. On the contrary, it demonstrates that Ms Liao was preserving her equitable lien.
Can Ms Liao’s right to an indemnity be protected by substitution of a fund instead of the caveat?
The alternative security offered
[27] I accept the proposition that in principle this is a suitable case for the caveat to be replaced with a fund held on trust to protect Ms Liao’s right to an indemnity. However, the issue is the amount that would need to be held to adequately protect Ms Liao’s legitimate interest.
[28] The amount of the indemnity is to be determined in the substantive proceeding. I am satisfied that it is reasonably arguable that the indemnity is for $983,581 as contended by Ms Liao, for the following reasons.
[29] Ms Liao signed a construction contract with D&T for a price of $895,217.50. Ms Liao has produced a report from an independent quantity surveyor which estimates the cost of constructing the house in 2021 to be $879,000. Ms Liao has produced evidence of the other costs that comprise the amount claimed of $983,581.
[30] Ms Liao accepts that many of the larger payments towards the costs of construction were made from Mr Lam’s bank account, including $897,000 to D&T. Mr Jeffs argued that there is no evidence that Mr Lam is a creditor of Ms Liao, and Ms Liao’s actual personal expenditure is limited to $48,695.35.
[31] In their affidavits, Ms Liao and Mr Lam described the payments from Mr Lam’s bank account as “payments on our behalf”. It is arguable that either:
(a)the funds in Mr Lam’s bank account were jointly owned by Ms Liao or relationship property, and the payments were to her account; or
(b)if the payments were, as a matter of law, made by Mr Lam then the payments gave rise to a corresponding obligation by Ms Liao to repay Mr Lam, and this obligation was incurred in satisfaction of Ms Liao’s contractual obligation to pay the price of the construction contract to D&T, and on behalf of the trust.
[32] Mr Liao and Mrs Lu assert that Ms Liao engaged D&T in a conflict of interests, because Ms Liao has a financial interest in D&T. Whether Ms Liao acted in a conflict of interests precluding her right to an indemnity is a matter for trial in the substantive proceeding. So is the issue of whether the payments from Mr Lam’s bank account to D&T are bona fide payments towards the cost of constructing the house.
[33] The amount of the fund offered by Mr Liao and Mrs Lu, $390,600, is based on the estimated building cost stated in the building consent. That is not evidence of the actual cost of the construction.
[34] The issue is not whether the amount offered by Mr Liao and Mrs Lu is “reasonable security”, as submitted by their counsel. The issue is whether the amount offered is sufficient so that Ms Liao’s legitimate interests are not prejudiced.
[35]There is potential for Ms Liao’s legitimate interests to be prejudiced if:
(a)Ms Liao is successful in the substantive proceeding in obtaining a declaration that she is entitled to be indemnified from the trust asset for approximately $1,000,000; and
(b)the caveat has been removed and replaced by a fund of only $390,600.
[36] Mr Jeffs could not point to any prejudice to Mr Liao and Mrs Lu if the caveat remains. Mr Jeffs submitted that Mr Liao and Mrs Lu may be prepared to increase the size of the fund offered as security. That can be accommodated in the orders made.
Orders
[37] Caveat 13018335.3 registered against Record of Title Identifier 831683 shall lapse on the payment of $1,000,000 into a trust account approved by the applicant to be held on trust to satisfy any right to an indemnity that the applicant has in terms of the judgment of Woolford J dated 17 April 2024 in CIV-2021-404-1067 and subject to any further order made in that proceeding.
[38] If the fund required by the above order is not established then Caveat 13018335.3 registered against Record of Title Identifier 831683 shall not lapse pending further order of the Court.
[39]If the parties are unable to agree on costs, then:
(a)the applicant shall file and serve a memorandum as to costs, of no more than three pages, by 6 December 2024;
(b)the respondents shall file and serve a memorandum on costs, of no more than three pages, by 13 December 2024; and
(c)I will determine costs on the papers.
Associate Judge Brittain
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