Malthus v Laura Fergusson Trust Incorporated

[2022] NZHC 407

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-404-2234

[2022] NZHC 407

IN THE MATTER

of the Charitable Trusts Act 1957

IN THE MATTER

of the Laura Fergusson Trust

BETWEEN

SOPHIA GRACE MALTHUS

First Applicant

FRIENDS OF LAURA FERGUSSON TRUST INCORPORATED SOCIETY
Second Applicant

VICTORIA MARY CARTER
Third Applicant

AND

LAURA FERGUSSON TRUST INCORPORATED

Respondent

Hearing:

28 February 2022

Appearances:

P J Dale QC and V Fletcher for the Applicants

B Keown and D Scholes for the Laura Fergusson Trust Incorporated
K Laurenson and A B Lawson for the Attorney-General

Judgment:

17 March 2022

JUDGMENT OF HINTON J

This judgment was delivered by me on Thursday 17 March 2022 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar  Date:………………………….

Counsel/Solicitors:

P J Dale QC, Barrister, Auckland TGT Legal, Auckland

Bell Gully, Auckland Crown Law, Wellington

MALTHUS v LAURA FERGUSSON TRUST INCORPORATED [2022] NZHC 407 [17 March 2022]

[1]                 There are two proceedings before the Court, filed one after the other, which arise essentially out of one dispute. The applicant in the first-filed proceeding, Laura Fergusson Trust Incorporated (LFT), seeks to partly strike-out and/or stay the second proceeding.

[2]                 Both proceedings concern the operation of LFT, an entity under the Incorporated Societies Act 1908 and a registered charity. LFT was formerly synonymous with the Laura Fergusson rehabilitation centre, a well-known and much-loved facility in Great South Road that provided care to disabled people. The confidential and controversial closure and sale of that facility triggered the proceedings.

Background

[3]                 LFT emerged out of the Laura Fergusson Trust for Disabled Persons (the National Trust), which was established by deed dated 25 May 1967. LFT itself was established in 1969 to support disabled persons under the Laura Fergusson name in the Auckland region. Other entities were set up in Wellington and Christchurch. (These continue to provide residential and rehabilitation services for disabled people.)

[4]                 The National Trust deed has a sole object: “to assist disabled persons in the solution of their residential problems”.

[5]                 LFT’s constitution (and rules) on the other hand has 14 objects including: assisting disabled persons to provide rehabilitation services and residential accommodation; carrying out associated research and marketing; sponsoring related activities of others and entering into joint ventures and partnerships to achieve LFT’s objects.

[6]                 LFT has a long history. The Laura Fergusson facility provided residential accommodation, rehabilitation, respite and other services to the disabled community for some 50 years.

[7]                 The Board of LFT took the decision in October 2019 to close down the Laura Fergusson facility, cease provision of its existing services, and sell the Great South

Road property. LFT says that decision was unavoidable and that services could not be provided on a sustainable basis. There was widespread public interest and concern regarding that decision by the Board, including a petition organised by David Seymour, leader of the Act Party. The sale nonetheless proceeded and recently settled.

[8]                 The formation of the Friends of Laura Fergusson Trust Incorporated Society (the Friends) arose out of the controversy.

[9]                 Since the sale, LFT has signalled an intention to apply some of the sale proceeds to a joint venture with Autism New Zealand (Autism NZ). According to an LFT publication dated 7 October 2021, LFT will work with Autism NZ to apply knowledge and infrastructure for early detection and treatment of autism to an expanded range of developmental disabilities in infants. This is stated to involve early assessment, diagnosis and care pathways to support children with cognitive disorders, including for example FASD, hearing challenges and other neuro-diverse conditions.

[10]            The Friends say LFT has the sole object of providing residential care and rehabilitation for disabled people. They say the Board has departed from the original object of the National Trust1 and their own original rules, and acted ultra vires in closing down the Laura Fergusson facility and selling the Great South Road premises. The Laura Fergusson facility played a significant purpose for disabled people. Members of the public made numerous donations in reliance on the sole object of the National Trust and LFT made insufficient effort to obtain further funding before deciding to sell. The Friends strongly object to the way the decision was made, the lack of debate around it, and the closed nature of the sale.

[11]            The Friends argue further that the Board is acting ultra vires in its signalled intent to enter into the joint venture with Autism NZ.

[12]            A large number of the Friends and others applied to be members of LFT but their applications were declined or at least not accepted. The Friends say this was done to preserve the composition of the Board.

1      The 1967 deed refers to residential care and not expressly to rehabilitation.

[13]            LFT’s position is that it has at all points acted properly and in accordance with its (lawful) constitution. It categorises the actions of the Friends as having been unconstructive and, at times, derogatory. This is particularly offensive to the Board members who are unpaid volunteers and have put in many years of service.

The proceedings

[14]            On 17 November 2021, LFT filed an originating application for a declaratory order that it “does not hold assets on trust with the sole object of the Laura Fergusson Trust for Disabled Persons settled by deed of 25 May 1967”. LFT says rather it is bound by its constitution.

[15]            Two days after the LFT proceeding was filed, the Friends and the other applicants in this proceeding, who for convenience I still refer to jointly as “the Friends” filed this originating application claiming:

(a)a declaration that LFT is in breach of s 61 of the Charitable Trusts Act 1957 (the Act) by amending its rules without complying with the Act;

(b)a declaration that LFT holds the proceeds of sale of the Laura Fergusson facility as constructive trustee on behalf of the beneficiaries of LFT and for purposes consistent only with the National Trust;

(c)a declaration that LFT holds the proceeds of donations, made to it on the basis that its sole object was that of the National Trust, for that sole object , it being unconscionable to use the proceeds for other purposes. (Pallant v Morgan equity);2

(d)breach of contract by LFT by refusing to allow new members to join LFT; and

(e)in the alternative, a direction that the Attorney-General inquire into LFT pursuant to s 58 of the Act.

2      Pallant v Morgan [1953] Ch 43.

[16]            The Friends’ proceeding had been signalled for some time before it was filed, and in fact formal notice of it had been given to LFT by the Friends’ solicitors the day before LFT filed its own proceeding without any prior notice. The Friends’ proceeding was clearly well advanced before LFT’s was filed, as they filed six affidavits in support of their application, several of which had already been sworn prior to the unsignalled LFT proceeding.

[17]            LFT now seeks to strike out the Friends’ fourth cause of action which alleges breach of contract in respect of the declined membership applications. LFT also seeks a stay of the Friends’ proceeding pending resolution of its proceeding.

[18]            Further affidavit evidence has been filed by the Friends in opposition to LFT’s interlocutory applications.

[19]            The Attorney-General is the only named respondent in LFT’s proceeding. He has been served with the two interlocutory applications in this proceeding in his role as protector of charities. He abides the outcome of the two applications but filed brief submissions to assist the Court, and was represented at the hearing. Prior to the issue of the two proceedings, and following a request by the Friends, the Attorney-General had been conducting an investigation of matters relating to LFT, but considered it inappropriate to continue once proceedings had been filed.

[20]            As well as bringing its own originating application, LFT advises that it has initiated a parallel process under Part 3 of the Act to vary any trust that might be found by the Court, with a view to proceeding on the basis of what it says is a valid constitution. LFT will be seeking to have the application to vary, which has not yet been filed, heard along with its existing proceeding.

Application to strike out fourth cause of action

[21]            Rule 15.1(1)(a) of the High Court Rules 2016 provides that the Court may strike out all or part of a pleading if it discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading. The principles applicable to a strike-out apart from being reasonably clear in the rule itself are well-established and I do not need to repeat them.

[22]            The fourth cause of action, which as noted relates to breach of contract by LFT for wrongly declining membership applications, is pleaded as follows:

26.The Board of [LFT] has:

(a)Refused up to 135 applications for membership and in particular by Victoria Mary Carter, Norman John Carter, Timothy James Lofts, and Jane Carrigan.

(b)Declined to give reasons.

27.The rejection of the membership applications of Mr and Mrs Carter, Mr Lofts and Ms Carrigan was unreasonable and in bad faith in particular because:

(a)Ms Carter is an experienced businesswoman, with a long association with Charities and a member of the New Zealand Order of Merit.

(b)Mr Carter is an experienced solicitor.

(c)Mr and Mrs Carter have a particular interest in [LFT] their niece, the first applicant is disabled.

(d)Ms Carrigan is an experienced disability advocate.

(e)Mr Lofts has an extensive involvement in disability services.

28.The Board’s continuing refusal to admit new members including in particular Mr and Mrs Carter, Mr Lofts and Ms Carrigan is a continuing breach of contract because:

(a)It was an implied term of the rules of the [LFT] that membership would be open to members of the public unless there was some legitimate reason for refusal.

(b)The first applicant was entitled to expect members of the public would be admitted as members unless there was a legitimate reason not to do so.

(c)Ms Carrigan has particular knowledge, experience, and expertise in respect of disability issues.

(d)Mr and Mrs Carter and Mr Lofts would make a valuable contribution to the running and administration of [LFT].

29.As a consequence of [LFT’s] breach of contract it:

(a)Remains under the control of a limited number of members and the Committee.

(b)Prevents further public discussion on the administration of [LFT].

(c)Ensures that the conduct of the Board is not subject to challenge.

(d)Lost the benefit of potential members who were qualified to contribute to the administration of [LFT].

30 As a further consequence of [LFT’s] breach of contract it discourages members of the public applying to join as members of [LFT].

31.The first applicant is entitled to orders for specific performance and in particular:

(a)Directing [LFT] to allow members of the public who had a legitimate interest in issues relating to disability be admitted as members of [LFT].

(b)Alternatively, directing that the Board of [LFT] consider applications for membership on a fair and open basis.

(c)Consider any applications for membership in good faith.

(d)The Board not unfairly discriminate against membership applicants because they may potentially disagree with the policy of the Board.

32.Appearing in the affidavits of Victoria Mary Carter, Sophie Grace Malthus, Jane Carrigan, Norman John Carter, Peter Denis Lane, and Timothy James Lofts filed in support.

33.This application is made in reliance upon HCR 19.2, 19.5, 19.5A,   ss 58, 60 and 61 of the Charitable Trusts Act 1957 and Stratford Racing Club v Adlam [2008] NZAR 329, [2008] NZCA 92.

[23]            LFT acknowledges it has an obligation as a matter of general law to determine membership applications in good faith and for the purpose of advancing the objects of the Society.3 “In the interests of procedural efficiency” LFT is also willing to accept that these obligations can be expressed in terms of an implied contractual constraint.

[24]            It is well-established, inter alia by the Court of Appeal decision in Stratford Racing Club, that members who consider their club or society is breaching the rules have a remedy under the law of contract.4 The Court of Appeal judgment records:

[57]      Mr Anderson submitted that the committee had a complete discretion as to whom to accept as members. …

3      Based on Middeldorp v Avondale Jockey Club [2020] NZCA 13 at [59], citing the Court of Appeal’s earlier decision in Stratford Racing Club Inc v Adlam [2008] NZCA 92, [2008] NZAR 329 at [58].

4 At [55].

[58]      We reject that submission. The committee of the club, as stewards of the assets held by the incorporated society, were required to exercise their powers in the best interests of the club and for proper purposes: Cabaret Holdings at 674. That obligation is expressed clearly in the analogous duties owed by directors to a company: s 131(1) of the Companies Act 1993 provides that a director “must act in good faith and in what the director believes to be the best interests of the company”, while s 133 requires that a director “must exercise a power for a proper purpose”. Indisputably, it was in the club’s interest that it should grow and be successful and any reasonable committee member would have acted on that premise. Further, the committee were obliged to treat applicants fairly. For a committee to reject membership applications because they feared they might lose control of their club would be to act for an improper purpose or, arguably, in bad faith.

(citations omitted)

[25]            Mr Scholes for LFT says however that there is no term, nor can one be implied, that membership would be open to members of the public unless there was some “legitimate reason” for refusal.

[26]            I agree that the pleading in the latter regard would appear to over-state the term that can be implied on the basis of Stratford Racing Club Inc (an authority relied on by both parties).5 However, there is sufficient merit in the pleading for it not to be struck out. The application pleads a breach of contract on the basis that rejection of at least the nominated parties’ applications was unreasonable and in bad faith. That does fall broadly within the principle of Stratford Racing Club Inc. It is also arguable that a Court hearing this matter might be prepared to further extend the implied term although I am not sure what the broader pleading adds to the Friends’ case.

[27]            LFT’s second argument was that the Friends could not succeed in contract in circumstances where the alleged breach by declining the membership applications, occurred before the first applicant, Ms Malthus, had any contractual relationship with LFT. The claim in breach of contract can only be brought by someone who was a member at the time of the alleged breach. The alternative would have been for those who were declined membership to bring judicial review proceedings, which they have not done.

5      Stratford Racing Club Inc v Adlam, above n 3.

[28]            However, that pleading defect was remedied by the Friends applying to substitute Mr Harvey (a member of LFT at the relevant time) for Ms Malthus as first applicant, an application which is not opposed by LFT.

[29]            The third ground on which LFT applies to strike out is that the remedies sought are not reasonably arguable. I accept that proceedings can be struck out where the remedies sought would be refused, but note that in the only example cited to me, Maddever v Umawera School Board of Trustees, not only were the remedies considered to be futile but there were no valid grounds for review.6

[30]Mr Scholes, who very ably argued this part of the case, submits that:

(a)The Friends have sought a general declaration that the Board is in breach of its contractual obligation by refusing to allow new members to join, but LFT is allowing new members to join. Ms Malthus, the currently named first applicant, is one such member.

(b)The Friends have requested a court-ordered inquiry by the Attorney- General under s 58 of the Act but the Attorney-General was already undertaking an inquiry in which LFT was co-operating, and s 58 is a statutory discretion that rests entirely with the Attorney-General. The Attorney-General echoes this submission.

(c)Finally, the first applicant has also sought general orders for specific performance, which Mr Scholes submits cannot reasonably be made because they would require ongoing supervision by the Court, of discretionary decisions.

[31]If these remedies were all struck out, there would be no remedies left.

[32]            I agree with much of Mr Scholes’ submissions, particularly regarding the latter two remedies. However I consider the first form of relief, although again over-stated, does encompass the type of relief that might be available if the Friends succeeded.

6      See Maddever v Umawera School Board of Trustees [1993] 2 NZLR 478.

Also the third form of relief might be attainable by consent of the Attorney-General, which would involve in effect a resumption of his inquiry, and not necessarily on the same terms as before. As Ms Laurenson acknowledges, on behalf of the Attorney- General, it is not unprecedented that an inquiry be resurrected. If this form of relief is to be maintained however, the Attorney-General would need at least to be named as a party to the application.

[33]            Overall, I consider the fourth cause of action, albeit pleaded imperfectly, is sufficiently pleaded to avoid a strike-out. Importantly, I consider the thrust of the cause of action is clear enough to LFT and to the Court. I am also mindful that (at least) Mr Dale QC as senior counsel for the Friends is acting pro bono. The Court should allow some latitude in those circumstances.

[34]            The application to strike out the fourth cause of action is dismissed. Mr Dale has undertaken to amend the pleading. I do not consider it necessary to make directions. I am sure that as senior counsel he will see to it that the pleading is amended so far as necessary to address the points noted above. That might not be feasible until the Friends have had the discovery referred to below and they can specify the membership applications to which they refer.

Application to stay Friends’ proceeding

[35]            Under r 10.12 of the High Court Rules the Court has a discretion to consolidate, stay or separately try proceedings.

[36]In Shadbolt v Invercargill City Council the High Court noted:7

The purpose of the rule is to encourage efficiency in court proceedings and to avoid conflicting findings and/or inconsistent decisions. In determining whether and how to exercise its discretion the Court must balance considerations of justice, convenience and expense.

(citations omitted).

7      Shadbolt v Invercargill City Council [2021] NZHC 2363 at [16].

[37]            The discretion given to the Court under r 10.12 is “a wide one, to be exercised broadly in the interests of justice”.8

[38]            LFT seeks to stay the Friends’ proceeding pending resolution of its own proceeding “in order to facilitate the efficient resolution of the key matter at issue: how [LFT] can lawfully assist the disabled community”. LFT says that the answer to the declaration sought in its proceeding – namely that it does not hold assets on trust with the sole object of the 1967 deed – will completely determine the first three causes of action in the second proceeding.

[39]            LFT volunteers that the Friends may still appear as an intervener and may rely on the affidavits they have filed. If the fourth cause of action survives the strike-out application, it can be heard subsequently. Otherwise, discovery and other interlocutory applications in that regard will delay resolution of the main issue.

[40]            LFT says that allowing the second proceeding to continue, whether separate to or as part of the first proceeding, carries a serious risk of increased cost, delay and complexity for no obvious benefit. In this regard LFT points to and relies heavily on the unfortunate history between the parties and in particular what it says is acrimonious correspondence from some of the Friends.

[41]            Mr Keown for LFT points to the Court having previously stayed proceedings pending the resolution of other proceedings which have a “common thread”.9 I note that although “common thread” was the expression used by Associate Judge Gendall in Lawrence Riverside Ltd, in that case the second proceeding was found to be contingent on the first, a factor which goes somewhat beyond a common thread.

[42]I address these points below.

[43]            First, the fourth cause of action may, as with the first to third causes, affect future governance of LFT and it is clearly not answered by LFT’s proceeding. While slightly less urgent, that issue should be considered along with the questions around

8      Medlab Hamilton Ltd v Waikato District Health Board (2007) 18 PRNZ 517 (HC) at [8].

9      Lawrence Riverside Ltd v Colliers International NZ Ltd HC Auckland CIV-2011-404-1486, 30 June 2011 at [18]–[22].

LFT’s object or objects, which go directly to governance and administration of LFT’s funds. LFT itself acknowledges the need for procedural efficiency in addressing the fourth cause of action. The affidavit evidence already filed relates to all issues.

[44]            I note Mr Keown’s related submission that the proceedings may be prolonged and involve greater cost without a stay. But having reflected on the matter, I consider that in fact the reverse may be true. It would be undesirable for the parties to face two sets of proceedings and two hearings. Mr Keown’s submission assumes the balance of the Friends’ proceeding will die away, but I cannot make that assumption, particularly as to the fourth cause of action.

[45]            In terms of the Friends prolonging the proceedings, I see no good reason to expect that. Both parties took a pragmatic and balanced approach in argument before me. In any event, from here matters will be governed by the Court, not by the parties. Mr Dale advises that the only discovery he would seek arising out of the Friends’ proceeding is of the membership applications and a report provided to LFT by PwC which supposedly guided the Board in their decision-making. These are matters that should be capable of prompt resolution, one way or the other.10

[46]            I agree that in substance the Friends’ first three causes of action are similar to or answered by the first proceeding. However there are differences. The Friends seek an order that LFT is in breach of s 61 of the Act, which is in different terms to LFT’s application. It seems to me that the Friends are entitled to seek an order framed in that way, or at least that the question should not be as framed by LFT. Also, as Mr Dale submits, the third cause of action relating to unconscionability raises additional issues. I note further that LFT has not sought to strike out the Friends’ first three causes of action on the basis they do not have standing to bring them, or otherwise.

[47]            Even allowing for the overlap, I consider it just that the two proceedings be heard together or consolidated rather than the second proceeding be stayed. With experienced counsel on both sides, the parties must be able to appropriately frame the issues for the Court. The Friends are the driver behind both proceedings. The LFT proceeding, albeit issued first in time, is clearly in response to the issues raised by the

10     I expressed reservations as to the relevance of the PwC report to the issues pleaded.

Friends, and the Friends should have the opportunity to be heard as a party, rather than be in the secondary role of an intervener, as offered by LFT.

[48]            In this regard, Ms Laurenson makes the helpful point that the Attorney- General’s role is likely to be more neutral than that of the Friends. She notes that the argument is being advanced by the Friends rather than the Attorney-General and the evidence relied on will be the Friends’ evidence only.

[49]            Finally, I consider it reasonable that the Friends have the ability to appeal which they would not be able to do if they were a mere intervener.

[50]            For all of the above reasons I do not consider it just to stay the Friends’ proceeding. The application to stay is dismissed.

Costs

[51]            Mr Dale’s written submission references a wish to be heard on costs. My preference would be to reserve costs. An order at this point could be counter- productive to a possible resolution between the parties.

[52]            If either party nonetheless wishes to be heard on costs, memoranda are to be filed within seven days.

Directions

[53]            The Friends’ application to substitute Mr Harvey for the first applicant is granted.

[54]            Leave is granted to issue and serve both sets of originating applications on the terms sought. I agree with Mr Keown that the National Trust does not need to be served. As Mr Dale acknowledges, the fourth cause of action would not ordinarily proceed by originating application but in the interests of efficiency I consider it can be in this instance.11   Discovery and factual disputes will both be limited.  As Mr Dale

11     See Gallagher v Grant [2021] NZHC 1907.

says, the property having sold, the main focus now is on how the funds are to be applied.

[55]            The two proceedings are to be allocated a one-hour case management conference. Any outstanding matters of an interlocutory nature can hopefully be resolved before then, or if not, can be determined at that conference. I expect that counsel can agree questions for the Court to answer (which might be formulated somewhat differently from both applications) and agree discovery on a limited basis. The aim at the conference will be to set the proceedings down for hearing if necessary.

[56]            Regardless of intemperate language there can be no doubt of the genuine interest, commitment and concern of all those involved in this proceeding. Mediation, or some form of alternative dispute resolution, as proposed by the Friends, would be highly desirable and I encourage it. If orders are considered to be necessary as a consequence, they can be submitted to the Court for approval.

Hinton J