McCallum v McCallum
[2020] NZHC 907
•5 May 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-000937
[2020] NZHC 907
BETWEEN CARRICK ROBERT ZACHARY McCALLUM and CALLUM FRASER
McCALLUM as trustees of the McCALLUM FAMILY TRUST
First Applicants
AND
CARRICK ROBERT ZACHARY McCALLUM and CALLUM FRASER
McCALLUM as executors of the estate of WILLIAM FRASER McCALLUM SNR
Second Applicants
Hearing: 3 February 2020 Appearances:
K G Davenport QC & A M Cameron for the Applicants D A T Chambers QC for William Fraser McCallum Jnr
C V Walsh for Carrick Robert Zachary McCallum and Callum Fraser McCallum
A K Finnie as Litigation Guardian for Fiona McCallum M Selwyn as Property Manager for Fiona McCallum
Judgment:
5 May 2020
JUDGMENT OF GWYN J
[Application for Beddoe Order]
This judgment was delivered by me on 05 May 2020 at 3.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
McCALLUM v McCALLUM [2020] NZHC 907 [5 May 2020]
Introduction
[1] The applicants, Carrick Robert Zachary McCallum (Rob) and Callum Fraser McCallum (Callum), are the trustees of the WF McCallum Trust (the Old Trust) and the McCallum Family Trust (the New Trust), settled by the late William Fraser McCallum Snr (Bill Snr). They are also the executors and trustees of Bill Snr’s estate (the Estate).
[2] William Fraser McCallum Jnr (William Jnr) has brought proceedings in CIV- 2019-404-00372 (the substantive proceedings) against the applicants in their capacities both as trustees and executors, as well as against them personally.
[3] Rob and Callum, in their personal capacities, are separately represented in the substantive proceedings and will defend William Jnr’s claims against them.
Application for Beddoe orders
[4] In the present proceeding the applicants seek what are known as Beddoe orders.1 In general terms a Beddoe order is an order that confirms that trustees’ reasonable costs in the litigation will be met from the assets of the trust or estate, regardless of the outcome of the litigation. In their capacity as trustees the applicants seek orders that it is reasonable for them, in their capacity as trustees, to defend the substantive proceedings and that, as trustees, they are entitled to be reimbursed out of the assets of the Trust for their reasonable legal costs in doing so.2 In their capacity as executors of the Estate they seek orders as to whether they should defend the proceedings seeking their removal as executors, and whether they are entitled to be reimbursed out of the assets of the estate for their reasonable legal costs of doing so.
1 Named after a case of that name – Re Beddoe [1893] 1 Ch 547 (CA). Other judgments commonly referred to are Re Buckton [1907] 2 Ch 406 (Ch) and Alsop Wilkinson v Neary [1995] 1 All ER 431 (Ch). New Zealand cases include Woodward v Smith [2014] NZHC 407, [2014] 3 NZLR 525; Fundación Pimjo AC v Aguilar & Aguilar Ltd [2015] NZHC 1402; and McLaughlin v McLaughlin [2018] NZHC 3198, [2019] NZAR 286.
2 I was informed by counsel that the total assets of the New Trust are valued in the region of $8 million.
[5] The application is made under Part 19 of the High Court Rules 2016. As is required, it is made in separate proceedings from the substantive claims and heard by a Judge different from the Judge who will determine the substantive proceedings.3
The family relationships
[6]The relevant figures in this proceeding are:
(a)William Fraser McCallum Snr (Bill Snr), the now-deceased settlor of both the Old Trust and the New Trust and testator of the Estate;
(b)William McCallum Jnr (William Jnr), the son of Bill Snr and Heather McCallum, who is a beneficiary of the Old Trust, the New Trust and the Estate;
(c)Fiona McCallum, daughter of Bill Snr and Heather and William Jnr’s sister, who is a beneficiary of the Old Trust, the New Trust and the Estate. Fiona is represented by a litigation guardian, who has not yet taken a formal position in the litigation;
(d)Carrick Robert McCallum (Rob), Bill Snr’s brother, William Jnr and Fiona’s uncle and a trustee of both the Old Trust and the New Trust and an executor of the Estate;
(e)Callum McCallum (Callum), William Jnr and Fiona’s cousin, Bill Snr and Rob’s nephew and a trustee of both the Old Trust and the New Trust and an executor of the Estate; and
(f)Callum’s children, who are amongst all of Bill Snr’s grand-nephews and grand-nieces as final beneficiaries of the New Trust.
3 Lynton Tucker, Nicholas Le Poidevin and James Brightwell (eds) Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2014) at [27–239].
Background
[7] Associate Judge Bell gave an oral judgment in the substantive proceedings on 30 July 2019, on an application for discovery by the plaintiff.4 In the judgment he summarised the factual background to this case. Rather than repeat that background I set out here the relevant portions of the judgment.
[3] The case concerns the estate planning by the late William Fraser McCallum Snr (Bill) before his death in January 2017 and steps taken at the end of 2017 by executors of his estate and the trustees of trusts he had established. The plaintiff is his son (William). Bill was married to Heather. They had two children, William and Fiona. For the last 20 years Fiona has lived in Western Australia. In recent years she suffered a stroke and as a result is incapacitated. Following her stroke, William went to live with her and has stayed in Western Australia ever since. Neither William nor Fiona are married or have partners and neither has children. Bill died in January 2017 and Heather died shortly afterwards. Carrick Robert Zachary McCallum (Robert) is Bill’s brother. Callum Fraser McCallum (Callum) is a nephew of Bill and Robert, that is, he is a cousin of William and Fiona.
[5] In 1986, Bill established the W F McCallum Trust (the Old Trust). The beneficiaries under that trust are Bill’s wife, his children and their spouses, his grandchildren and their spouses, trusts for the benefit of any beneficiary and any charitable trust. Bill was not a beneficiary of the trust. The trust deed provided that he was not to take any benefits under it. Various assets were settled on the trust, including a one-third share in a farm at Clevedon (Lismore) and investment properties in Papakura. Bill was a creditor of the trust for his expenditure on the farm property.
[6] By 2016, Bill was aware that he was terminally ill. He made estate planning arrangements during 2016. He established another family trust, the McCallum Family Trust (the New Trust).
[7] At the beginning of 2016 the trustees of the Old Trust were Bill, William and Robert. In November 2016, Bill as appointor made Callum a trustee of the Old Trust. He also applied to the court for William to be removed as a trustee. William did not oppose that application. Woodhouse J made an order in December 2016 removing William as a trustee of the Old Trust.5 That left Robert and Callum as the only trustees after Bill died.
[8] Bill established the New Trust in August 2016. The trustees of that trust were Bill, Robert and Callum. Robert and Callum are the current surviving trustees of the New Trust. They are sued in this proceeding as trustees of that trust and for actions they took as trustees of the Old Trust. They are also the executors of Bill’s estate. They are sued for actions they took as executors and for alleged breaches of duty by Bill while he was alive.
4 McCallum v McCallum [2019] NZHC 1925.
5 McCallum v McCallum [2016] NZHC 2929. A reasons judgment followed in McCallum v McCallum [2017] NZHC 1218.
[9] The beneficiaries of the New Trust are Bill, Heather – both have now died – William and Fiona, any children of William and Fiona, and any trust held for the benefit of any discretionary beneficiary and any person appointed as a discretionary beneficiary.
[10] The statement of claim alleges that the final beneficiaries of the New Trust are:
(a)any children of William;
(b)any children of Fiona;
(c)any charitable trust;
(d)Bill’s grand-nephews and grand-nieces; and
(e)any trust for the benefit of any final beneficiaries.
The statement of claim pleads that William and Fiona are not final beneficiaries of the New Trust. A point also made for William is that Robert and Callum have a limited interest under the trust because they can enjoy the use of Bill’s boat “The Thistle” and an associated marina berth at Pine Harbour. The deed for the New Trust provides that any discretionary beneficiary who starts legal proceedings against the trustees will be barred from taking anything under the trust. William’s case is that the New Trust is not in the interests of Fiona and himself.
[11] There were other significant transactions. These started in August 2016. There was a deed of exchange of assets under which Bill and the trustees of the Old Trust exchanged assets. The assets on each side of the transaction were said to be worth $1.7 million. The trust’s one-third share of the farm property was transferred to Bill and in return he paid $500,000 cash and transferred to the trust shares in a family company and a property at Settlement Road, Papakura.
[12] Bill signed a memorandum of wishes to the executors of his estate and to the trustees of the Old Trust. The memorandum states that the overall purpose of the trust was to manage the family’s wealth to ensure that the income and capital from the trust’s rental properties and any other investment assets of the trust were applied to make adequate provision during the lives of himself, Heather and their children. Secondly, he wished “heirloom” family assets to pass down the McCallum family line and he wanted to make certain other specific assets available to beneficiaries. He directed his trustees to have special regard to the needs of his wife and continue to have regard to the reasonable needs of his children. After his death, while Heather was alive, he wanted the trustees to have special regard to her reasonable needs and he asked the trust to meet the costs of healthcare and living accommodation for her. The trustees are also to continue to have regard to the needs of William and Fiona and to ensure they could continue a lifestyle similar to what they were accustomed to. The trustees were to make available both income and capital as necessary to maintain their lifestyles. He gave directions what was to happen to other assets, with different provisions according to whether William and Fiona had children or not. William contests this deed of exchange and a later one because he says that it involved a resettlement which was outside the scope of the resettlement provision in the deed for the Old Trust.
[13] William says that in the months leading up to his death Bill entered into a programme to divest his assets away from William and Fiona in favour of Robert and Callum. That involved settling various assets on the New Trust: the vessel “The Thistle” and shares in various family companies. He also transferred shares in one of his companies, Excelsior Ltd, to Robert for no consideration. William says that is contrary to what Bill had expressed in his memorandum of wishes. Excelsior Ltd is said to be Bill’s primary source of income on which William and Fiona depended. Shares in another company, Rob McCallum Ltd, were transferred to Robert with the remaining share transferred to Callum. The marina berth at Pine Harbour was transferred to the New Trust.
[14] Bill made a final will in November 2016. He had made an earlier will in August 2016. The earlier will had included William as an executor, but that was changed under the November 2016 will. He gave his personal domestic assets to Heather. He forgave his debt to the New Trust. He gifted the residue of his estate to the trustees of the New Trust. One of Bill’s assets was the debt owed by the Old Trust and that fell into his residuary estate which has accordingly gone to the New Trust. Bill died on 15 January 2017. Probate of his will was granted on 7 February 2017.
[15] Heather died after Bill. Assets of her estate comprise the half-interest in the family home and about $1 million in bank accounts. The Public Trust is the executor of her estate. I have been advised that the Public Trust is continuing a proceeding started by Heather while she was alive against Bill’s estate under pt 8 of the Property (Relationships) Act 1976.
[16] In November 2017, there was a re-settlement under the Old Trust. Assets under the Old Trust were settled on the New Trust. Robert and Callum did that in their capacities as trustees of the Old Trust and trustees of the New Trust. William challenges that re-settlement as involving the re-settlement of the Old Trust on the New Trust where the beneficiaries include non-objects of the Old Trust.
Other parties
[8] The hearing before me was between Rob and Callum in their capacity as trustees and executors (the first and second defendants in the substantive proceedings) and William (the plaintiff in the substantive proceedings).6 Mr Finnie appeared as litigation guardian for Fiona and to explain that Ms Martha Selwyn has been appointed as Fiona’s property manager under the Protection of Personal and Property Rights Act 1988 and, in that role, it is appropriate that Ms Selwyn direct any steps in the overall litigation on Fiona’s behalf. Ms Selwyn will be appointing counsel to act on Fiona’s behalf. Ms Selwyn appeared out of courtesy but did not take an active part in the hearing. In view of Ms Selwyn’s appointment, Mr Finnie sought to be excused.
6 At the hearing before me counsel advised that a new, independent trustee was appointed to the New Trust during the course of 2019.
[9] Ms Walsh appeared out of courtesy for Rob and Callum in their personal capacity (as third and fourth defendants in the substantive proceedings) but did not take an active role in respect of the Beddoe application.
[10] The Public Trust, as executor of the estate of Heather McCallum, is not a party to the proceeding but at an earlier stage its counsel filed a memorandum addressing whether funds can be made available to meet the legal expenses of William and Fiona (Heather’s last will left her estate equally to William and Fiona). The Public Trust also advised of a Property (Relationships) Act 1976 claim against the Estate (filed prior to Heather’s death). That claim was filed in the Family Court but has now been transferred to the High Court. At the hearing before me I was advised that Heather’s estate has made funds available to William Jnr and Fiona to meet their legal costs of this application. That has resulted in the withdrawal of William Jnr’s application for a prospective costs order which was to have been heard at the same time as this Beddoe application.
Jurisdiction
[11] The jurisdiction to make a Beddoe order was recently comprehensively reviewed by Thomas J in McLaughlin v McLaughlin.7 Application for a Beddoe order is made in separate proceedings, usually by a trustee or trustees, for directions as to whether to initiate litigation or defend litigation against them. Those directions insulate trustees against the risk that their decision to engage with the litigation may be subsequently challenged and they will be held personally financially liable. A Beddoe order does not generally deal with issues of costs as between the parties in the main proceedings. The test for making the order is gauging what is in the best interests of the trust.8
[12]In MacKintosh v Thomas Simon France J said:9
It is common to categorise types of litigation involving trustees and then, in each category, there are settled but not irrebuttable approaches to costs and whether a Beddoe order is appropriate. There are different iterations of the categories of trustee litigation but no real difference in approach results.
7 McLaughlin v McLaughlin, above n 1, at [18]–[38].
8 At [29]; Re Beddoe, above n 1, at 562; and Alsop Wilkinson v Neary, above n 1, at 434.
9 MacKintosh v Thomas [2019] NZHC 1585 at [9].
[13] In Woodward v Smith (in the context of a prospective costs application) Kós J (as he then was) summarised categories previously identified in Re Buckton and Alsop Wilkinson:10
(a)The first category involves proceedings brought by trustees to obtain the Court’s guidance on the construction of the trust deed or some aspect of the trust’s administration. In such cases, the costs of all parties necessarily participating are treated as incurred for the benefit of the estate and ordered to be paid out of the trust fund.
(b)The second category involves a similar application, but by someone other than a trustee (such as a beneficiary). However, it is a case which would have justified application by a trustee. The same approach is taken to costs in the second category as to the first.
(c)The third category, however, is where a beneficiary is making a “hostile claim” against the trustees, or another beneficiary. The claim may still involve a point of construction, or administration. It will often involve a claim to a beneficial interest or entitlement to a part of the trust fund. In the third category, involving a hostile claim again trustees or another beneficiary, the usual principles as to costs apply. Ordinarily they will follow the event.
[14] It is common ground that the claims in the substantive proceedings are “hostile” litigation.11 That label derives from the nature of the claim, not the subjective approach or attitude of the parties.
[15] The general rule in this type of beneficiary dispute is that each party bears its own costs until the substantive dispute is resolved. However the Court observed in Spencer v Fielder that “categorisation is not some kind of statute and there are cases which do not fit easily within any of those categories”.12
Availability of a Beddoe order in hostile litigation
[16] For William Jnr, Ms Chambers QC says because this is hostile litigation “exceptional circumstances” would be required before the Court could order payment of the trustees’ costs at this stage.13
10 Woodward v Smith, above n 1, at [23]; citing Re Buckton, above n 1, and Alsop Wilkinson v Neary, above n 1.
11 Associate Judge Bell noted that neither side contested this characterisation in McCallum v McCallum, above n 4, at [34].
12 Spencer v Fielder [2014] EWHC 2768 (Ch) at [26].
13 Relying on Fundación Pimjo AC v Aguilar & Aguilar Ltd, above n 1.
[17] The applicants disagree. They say that the correct test is simply what is in the best interests of the trust. They rely on Mclaughlin v McLaughlin, where Thomas J concluded that the exceptional circumstances test was incorrectly drawn from the analogous area of prospective costs orders,14 going on:15
The test as deduced from case law is simply that Beddoe applications are gauged against the fundamental question of what is in the best interests of the trust. The Court must therefore exercise its jurisdiction in the best interests of the trust, and the beneficiaries as a whole, having regard to all the circumstances. This may include the need to balance the interests of different beneficiaries, as well as the interests of beneficiaries and trustees. That basic test conforms to the principle on which such applications are founded, namely that trustees ought to be indemnified for costs properly and reasonably incurred for the benefit of the trust.
(footnotes omitted)
[18] Answering the question of what is in the best interests of the trust, the applicants say, requires consideration of the nature of the claim, the nature of the trust(s), the merits of the substantive proceedings and whether there is (on a preliminary assessment) a sufficient prospect of successfully defending them. I address those three factors below.
The causes of action
[19] William’s statement of claim in the substantive proceedings contains eight causes of action, under the following headings:
(a)First cause of action – Proper maintenance and support pursuant to the Family Protection Act 1955.
(b)Second cause of action – Breach of moral duty by Bill Snr.
(c)Third cause of action – Invalid resettlement of the assets of the Old Trust.
(d)Fourth cause of action – Knowing receipt of trust and estate assets.
14 McLaughlin v McLaughlin, above n 1, at [28].
15 At [29].
(e)Fifth cause of action – Breach of fiduciary duty (in relation to Callum).
(f)Sixth cause of action – Breach of fiduciary duty (in relation to Robert).
(g)Seventh cause of action – Removal of trustees and executors.
(h)Eighth cause of action – Setting aside (undue influence).
[20] The applicants have indicated that they do not seek to have their costs met in respect of all causes of action. They propose to abide the decision of the Court in relation to the first cause of action. They will abide the decision on the fifth and sixth causes of action, which are against Rob and Callum personally. In relation to the seventh cause of action, Rob and Callum will abide the application to remove them as trustees but seek to defend the application to remove them as executors.
Nature of the claim
[21] As to the first of the three factors I am to weigh, William Jnr challenges Bill Snr’s decisions made both as settlor and trustee of the Old Trust and the New Trust and as testator.
[22] The applicants characterise the claim as fundamentally a challenge to Bill Snr’s estate-planning arrangements, put in place in the last year or so of his life. They say that Bill Snr’s evidence in the application before Woodhouse J (which is before the Court and discussed further below) manifests his concerns:
(a)that his wife Heather and adult children, Fiona and William Jnr, be adequately provided for after his death;
(b)about William’s and Fiona’s ability to manage the assets of the trust; and
(c)that certain “heirloom” assets remain in the McCallum family and be passed down the male line.
[23] The applicants say that if they are not able to defend the substantive proceedings there is no one else before the Court to advance Bill Snr’s clear intentions. Counsel also notes that not all of the claims in the substantive proceedings can be properly characterised as breaches of trust: only the claims in relation to the Deed of Exchange of August 2016 and the resettlement transaction can be characterised in that way. Everything else relates to the disposition of Bill Snr’s personal assets, owned in his own name. They say he must have been free to dispose of those assets as he saw fit (subject only to the Family Protection Act 1955 claim, which does not attach to specific assets).
[24] Counsel for William Jnr says he makes serious allegations of breach of duty in the substantive proceedings. The submission for William Jnr is that the applicants cannot claim to be a neutral voice representing Bill Snr’s wishes. Those wishes are disputed: William Jnr says they fell short of Bill Snr’s duty to him, and Bill Snr was unduly influenced by Rob and Callum, who were complicit with Bill in breaching his duties. William Jnr also says it is not necessary to have the trustees and executors as contradictors because Rob and Callum are defending in their personal capacity.
[25] Counsel for William Jnr asserts that the trustees are defending the substantive proceedings in their own interests, rather than the interests of the trusts. Allegations are also made by William Jnr that the trustees have been miserly in their application of trust funds for his benefit and the benefit of Fiona and are interested in preserving the wealth represented by the trusts for the wider McCallum family, rather than for William Jnr and Fiona.
[26] I note that the criticisms made by William Jnr and his counsel about the conduct and/or motives of the trustees are not supported by the evidence currently before the Court. The evidence before me (which includes the evidence filed in the substantive proceedings and in the application before Woodhouse J) does not support the assertion that the trustees have taken a niggardly or obstructive position in relation to William Jnr’s and Fiona’s financial and other needs. The current position is described by Rob in his affidavit, and is not in any substance now disputed by William Jnr. It is that the New Trust pays to William Jnr and Fiona (the only discretionary beneficiaries of the Trust) AUD $6,000 every three to four weeks, and this sum is “topped up” as
William Jnr and Fiona require. A larger apartment, more adequate to the needs of both Fiona and William Jnr now that William Jnr lives with Fiona, had been identified but as at the date the evidence was finalised it appears that William Jnr has not yet followed up on that option.
[27] To the extent that difficulties may have arisen they appear to result, at least in part, from William’s difficulty or reluctance around maintaining regular communications with Rob and other family members who have been enlisted to help and his limited availability to consider options put to him to meet his and Fiona’s needs.
Nature of the trust
[28] As to the nature of the trust, the respondent points to Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand.16 William Jnr relies on comments in that case, in which the Australian High Court distinguished charitable trusts from non-charitable private trusts:17
Where there is a non-charitable private trust involving a conflict between beneficiaries, or between beneficiaries alleging a breach of trust out of which a trustee has profited and that trustee, and where the defendants in those proceedings have a personal capacity to fund the defence, it might not be correct to give the trustee an opinion, advice or direction. The position is not necessarily the same where the trust is for a charitable purpose, …
[29] The applicants however stress that the Court in the Macedonian case did not declare a definitive prohibition on giving directions to engage with the litigation in such circumstances, but merely considered it “might not be correct” to do so. They note that while the Old Trust and New Trust are not charitable trusts, one of the key elements of the trust arrangements is provision for Fiona’s reasonable needs. Fiona is incapacitated.18 This is as a result of both a stroke in recent years and post-birth cranial sutures, which significantly impaired her intellectual development. The applicants
16 Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42, (2008) 237 CLR 66 at [71]–[72].
17 At [67].
18 As recorded in McCallum v McCallum, above n 4, at [3].
submit that the relief sought by William Jnr in the substantive proceedings would result in significant assets passing to William Jnr alone. This would be contrary to Bill Snr’s wishes and the trustees’ duty to preserve the assets of the New Trust for the beneficiaries as a whole and would particularly affect Fiona to her detriment.
Merits of the substantive proceedings
[30] As to the third factor, the merits of the substantive proceedings, unsurprisingly there is a dispute between the parties on a number of significant matters. The applicants say that the causes of action pleaded in the substantive proceedings lack merit and are unlikely to succeed. William Jnr emphasises that he does not have to establish the allegations in this application, but says it is plain that they are serious allegations and his claim is meritorious.
[31] The Court’s focus is on whether it is proper to incur the costs in defending the application.19 The Court makes this assessment from the perspective of the trust itself
– focussing on whether the litigation is economically (or otherwise) reasonable to undertake.
[32] In this case, the applicants followed the advice in Lewin on Trusts as to the procedure for making a Beddoe application.20 That is to provide the Court with an independent opinion from a senior lawyer as to the prospects of success in defending the substantive proceedings. Doing so enables the Court to make an informed decision as to whether it is in the best interests of the trust (as opposed to the trustees) for the trustees to defend the litigation.21 The opinion provided to the applicants by Mr Chris Kelly evaluates the strengths and weaknesses of each of the claims, and of the trustees’ position, whether they are obliged to defend the claims, the basis on which they might do so and the strengths and weaknesses of those defences.22 There was
19 See Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand, above n 16, at [69]–[72].
20 Lewin on Trusts, above n 3, at [27–252].
21 See McLaughlin v McLaughlin, above n 1, at [113].
22 By agreement with counsel at the hearing of the Beddoe application I heard first from counsel for the respondent on the merits of the application and on completion of her submissions, counsel, the respondent himself and counsel for the other parties left the courtroom. I then heard the applicants’ submissions, including in relation to the strength of the applicants’ position in respect of the substantive proceedings.
also comprehensive evidence before the Court that goes to the allegations in the substantive proceedings.
[33] I am satisfied that the applicants have complied with their obligation to provide full and frank disclosure, including regarding the strengths and weaknesses of their position.
[34] The opinion provided to the applicants by Mr Kelly remains privileged.23 While the Court is assisted by it, I have made my own, necessarily preliminary, assessment of the merits of the substantive proceedings, based on the statement of claim and the evidence before the Court.
Whether to grant the Beddoe application
[35] Regarding whether “exceptional circumstances” are required for the grant of a Beddoe order I adopt Thomas J’s conclusion in McLaughlin v McLaughlin that the test is, rather, what is in the best interests of the trust.24 I acknowledge that in practice that may not generally result in materially different outcomes. Thomas J noted:25
Considering the nature of the claim is not the same as deciding the issues themselves. Although there may be sufficient prospects of success in bringing or defending a claim, that is not the same as deciding whether it is in the interests of the trust as a whole to do so. There is some suggestion in the case law that the merits of defending a claim can justify a Beddoe order only when the claim against the trust is so weak that it can be summarily dismissed. Other cases suggest that the onus is on the applicant to show that there is a sufficient prospect of success to warrant continuing with the proceeding.
(footnotes omitted)
[36] As to the merits of the substantive proceedings, any assessment by the Court at this stage can be only preliminary, and it is not appropriate to attempt to resolve any factual disputes. As Kos J said in Woodward v Smith, citing Browne-Wilkinson V-C in Re Westdock Realisations Ltd, “this is not the occasion for a mini-trial on complex issues of law and fact.”26
23 Evidence Act 2006, ss 54 and 56.
24 McLaughlin v McLaughlin, above n 1, at [28].
25 At [34].
26 Woodward v Smith, above n 1, at [20]; citing Re Westdock Realisations Ltd [1988] BCLC 354 (Ch) at 362.
[37] In this case, however, some discovery has already been made by the applicants27 and, the Court has the benefit of the affidavits filed relating to this application, as well as the evidence in the application heard by Woodhouse J.28 To that extent the Court is better placed to make a preliminary assessment of the substantive proceedings than will often be the case in a Beddoe application.
[38] Bearing that in mind, I accept for present purposes that the trustees’ position is strong. Even if that assessment is correct, deciding what is in the best interests of the trust “requires consideration of the substance of the dispute but necessarily on a preliminary basis.”29
[39] On the one hand, to the extent that there are allegations of breach of the trust deed(s) or of the obligations owed by the trustees/executors, it is beneficial to have those allegations tested and, if made out, rectified. In the usual course it would not be appropriate for the trustees to actively defend such allegations. On the other hand, to the extent that the relief William Jnr seeks would result in significant assets passing to him alone, rather than being available for the beneficiaries as a whole (particularly Fiona, who is reliant on the trust and estate and would be disadvantaged by William Jnr’s claim as currently framed), the proceedings cannot be said to be in the best interests of the trust as a whole.
[40] What follows is my analysis and finding on the Beddoe application in relation to each of the causes of action.
[41] I note at this juncture that it is not all or nothing. Where I have indicated the applicants should remain neutral, neutrality should not necessarily be equated with being passive. In some cases, the Court may be assisted by the provision of factual information and/or submissions from the trustees as to the principles of law or construction involved, although a claim is not actively defended on its merits.
27 Pursuant to Associate Judge Bell’s judgment in McCallum v McCallum, above n 4.
28 In McCallum v McCallum, above n 5.
29 McLaughlin v McLaughlin, above n 1, at [32] (emphasis added).
First cause of action – Family Protection Act 1955
[42] The first cause of action is a claim by William against the estate of his father under the Family Protection Act. The proceeding was started on 1 March 2019, which was more than a year after the grant of probate of Bill Snr’s final will, so William has sought an extension of time to bring the proceeding.30 On the face of it, the claim faces difficulties and it is out of time with no obvious reason as to why an extension of time should be granted.
[43] The applicants in their capacity as executors indicate they will abide the Court’s decision in relation to this claim but will (if leave is granted to William to issue the proceeding out of time) provide to the Court whatever information is required as to the value of the estate.
Second cause of action – breach of moral duty by Bill Snr
[44] The second cause of action alleges that Bill Snr owed legal and fiduciary duties to William Jnr, in that as his parent Bill Snr was obliged to recognise William Jnr as a member of his family “from his wealth”. As such, his actions were unconscionable and a breach of moral duty. The assets transferred by Bill Snr and received into the New Trust, or personally received by the applicants, were transferred and received in breach of fiduciary duties owed by Bill Snr to William Jnr and are held on constructive trust for William Jnr.
[45] Amongst the relief sought by William Jnr is a declaration that the defendants hold the assets of the New Trust and the assets they personally received from Bill Snr on constructive trust for William Jnr.
[46] The claim is a novel one. To the extent it is concerned with breach of moral duty it appears to be subsumed within the first cause of action. The broad question of whether parents owe their adult children a fiduciary duty to retain property in their
30 Bill Snr’s final will of 4 November 2016, superseded his will of 18 August 2016. Probate of the final will was granted on 7 February 2017.
favour has been the subject of recent academic commentary.31 The author’s opinion concludes that the parent/adult child relationship does not meet the requirements of a fiduciary relationship as set out by the Supreme Court in Chirnside v Fay and that the practical ramifications of imposing such a duty would be profound.32
[47] As Katz J put it in Bean v Bean, an application to strike out proceedings under the Family Protection Act, “It would be highly unusual, and probably unprecedented, for an able-bodied adult child, with no demonstrated financial hardship, to successfully establish a breach of moral duty in circumstances where their parent has left them slightly more than half of their estate, comprising assets valued at close to a million dollars.”33
[48] The claim appears to amount, in effect, to an assertion that, in such circumstances, a parent is not entitled to divest his assets into a trust, or gift them away, during his lifetime. As Ms Davenport QC for the applicants put it, such a claim, if successful, would have significant ramifications in relation to testamentary freedom.
[49]This claim does not allege a breach of trust.
[50] Bearing in mind the legal complexity but limited prospect of success, the Beddoe application is granted in respect of the reasonable and proper legal and associated costs of defending the second cause of action in the substantive proceedings. I expect that this will solely, or largely, entail submissions on the relevant legal principles.
Third cause of action invalid resettlement of the assets of the Old Trust
[51] The third cause of action claims that a one-third interest in Lismore Farm was invalidly resettled by the Old Trust on Bill Snr on 18 August 2016 and that Bill Snr subsequently purported to sell that one-third interest to Callum at an undervalue.34 It
31 Andrew Steele, “Do parents owe fiduciary duties to their adult children?” [2019] NZLJ 315. The article considered the question in the context of two High Court decisions seeking to strike out claims by adult children against parents who had settled property into trusts.
32 At 317–318; citing Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433.
33 Bean v Bean [2019] NZHC 20, at [34].
34 The transfer of the one-third share of Lismore to Bill Snr was part of an exchange of assets: Bill Snr received the one-third share in Lismore from the Old Trust and the Old Trust received from
goes on to plead that on 15 December 2017, Rob and Callum resettled all of the assets of the Old Trust into the New Trust. It is alleged that the High Court’s consent was not obtained to the purported resettlement. The allegation is that at all relevant times the defendants and Bill Snr owed legal and fiduciary duties to the beneficiaries of the Old Trust.
[52] There are some apparent difficulties with this cause of action. First, Callum was not a trustee of the Old Trust at the time of the asset exchange. He was appointed on 4 November 2016. It is reasonable to assume that he would not have been aware of the terms of the trust deed prior to his appointment. No other factual basis is pleaded on which it might be asserted that Callum was aware of the terms of the exchange of assets between Bill Snr and the Old Trust. It is therefore not clear on what basis Callum might, at the relevant time, have owed legal and fiduciary duties to the beneficiaries of the Old Trust. The applicants point to the fact that, in any event, the trust deed of the Old Trust allows trustees to act even if their personal interests and their duties conflict.35
[53] A further potential difficulty with this claim is that it appears, in part, to be a collateral challenge to findings made by Woodhouse J on the application by the other trustees to have William Jnr removed as a trustee of the Old Trust.36 The statement of claim alleges that Bill Snr’s trustees did not seek High Court consent to the purported resettlement. The application before Woodhouse J for William Jnr’s removal was occasioned by William Jnr’s refusal to engage with the other trustees on the proposal by Bill Snr that one asset of the Old Trust, a one-third interest in Lismore, be exchanged with Bill Snr for other assets of an equivalent value.37 The rationale for the proposal, as put before Woodhouse J, was that Lismore produced no income and required significant expenditure (by Bill Snr personally) for maintenance.38 The assets proposed to be acquired by the Old Trust in exchange were income-producing and
him $500,000 in cash, shares in Pakihi Island to a value of $800,00 and a rental property at 3/17 Settlement Road, Papakura, valued at $400,000.
35 Clause 63 of the Schedule to the Deed.
36 In McCallum v McCallum, above n 5.
37 William Jnr was served with the application but took no steps. In an affidavit filed 27 March 2019 in the discovery proceeding he said that he did not read the relevant documents and simply put them in a drawer.
38 McCallum v McCallum, above n 5, at [9].
more readily realisable than the one-third interest in Lismore. Justice Woodhouse made an unequivocal finding, removing William Jnr because of his failure to give effect to that transaction, saying:
[18] William junior was and is unfit to continue to act as a trustee. The proposal from William senior was a prudent one and plainly in the interests of the beneficiaries…
…
[20] The evidence establishes that William junior is not competent to make sensible decisions relating to management of the trust assets, that he is not able to distinguish between his duties as a trustee and his personal interests, and that he is either unwilling or unable to participate in the necessary decision making of the trustees.
[54] The applicants say the Court should recognise that the trustees responsibly put the information about the deed of exchange and Bill Snr’s gifting policy before the Court and sought a ruling. They say they should be entitled to rely on the Court’s opinion that informed the removal order and therefore be authorised to defend this claim.
[55] However, as the respondent notes, Woodhouse J did not consider whether the exchange of assets was permitted by the Trust Deed; nor did he consider the subsequent resettlement of assets in to the New Trust.39 Ms Chambers QC for William Jnr says that the applicants before Woodhouse J failed to advise the Judge that Bill Snr had recently settled the New Trust, or that the trustees of the Old Trust intended to settle assets of the Old Trust into the New Trust.
[56] It is clear from his affidavit at the time that Bill Snr did advise the Court of the setting up of the New Trust, although it appears that more detailed information about the New Trust and the proposal to settle the assets of the Old Trust into it were not put before the Court.
[57] On a preliminary assessment there will be legal arguments as to whether there was power in the Old Trust to resettle, whether there was good reason to do so, whether it was in the interests of the Old Trust beneficiaries to do so, and whether the proposed
39 The resettlement of assets took place on 15 December 2017.
resettlement complies with the rule against perpetuities.40 The trustees sought and relied on an expert opinion from Mr Kelly (who also advises on the current application) on the proposed resettlement, given on 3 November 2017, and this was provided to William Jnr (in redacted form) pursuant to discovery orders made by AJ Bell on 30 July 2019.41
[58] The third and fourth causes of action are factually connected. As such, I give my analysis of why I will grant the Beddoe application for both the third and fourth causes of action, to a limited extent, after discussing the fourth cause of action below.
Fourth cause of action – knowing receipt of trust and estate assets
[59] The fourth cause of action seeks the imposition of a constructive trust in respect of two one-third shares in Lismore and 51 per cent of the shares in Excelsior Ltd for the benefit of William Jnr. This cause of action encompasses three transactions. The first is the transfer of a one-third interest in Lismore from the Old Trust to Bill Snr, allegedly at an undervalue, which is also pleaded in the third cause of action. That interest was then sold by Bill Snr to Callum (the applicants say in fact to Callum’s family trust). This too is encompassed in the third cause of action.
[60] The second transaction was Bill Snr’s gift to Callum (the applicants say to Callum’s family trust) of a different one-third share in Lismore.
[61] The third transaction was Bill Snr’s transfer of 51 per cent of the shares in Excelsior to Rob for no consideration.
[62] In the case of all three transactions Bill Snr, Callum and Rob respectively, are said to have “knowingly received” the assets and, it is pleaded, may not therefore in good conscience retain them.
40 It appears the key differences were that Bill Snr was a discretionary beneficiary of the New Trust, when he had not been a beneficiary under the Old Trust (although William Jnr and Fiona are now the only surviving discretionary beneficiaries); the New Trust has a more limited class of discretionary beneficiaries than the Old Trust; and the New Trust includes Bill Snr’s great nieces and great nephews as final beneficiaries.
41 McCallum v McCallum, above n 4, at [48].
[63] As to the first transaction, the statement of claim alleges that Bill and Callum knew the terms of the Old Trust deed. This is the factual basis for the claim that Callum “knowingly received” the property. But this claim faces the same difficulty identified in relation to the third cause of action. That is that Callum was not a trustee of the Old Trust at the relevant time. There is a consequent difficulty in sustaining a claim that he knew the terms of the Old Trust deed and thus “knowingly” received the one-third share in Lismore that Bill Snr had received from the Trust in exchange for other assets.
[64] In respect of the second and third of these transactions too it is difficult to discern what is the “knowledge” of Callum and Rob respectively at the time of receipt. The assets involved in the second and third transactions were not trust assets: the one- third share in Lismore was held by Bill Snr personally. It appears from the evidence that the Excelsior shares too were held by Bill Snr personally. The knowledge alleged cannot therefore be knowledge that they were trust assets.
[65] The cause of action refers to knowing receipt by Callum and Rob, respectively, of “an asset of Bill Snr’s Estate”. But at the time of both transfers Bill Snr was alive; the assets had not fallen into the Estate. It appears that these two claims are in fact akin to the second cause of action in that they are fundamentally a challenge to Bill Snr’s ability to dispose of his personal assets as his chose and/or his testamentary freedom.
[66] As with the second cause of action, there is a further question relevant to this cause of action. Fiona too has expectations from her father’s estate. To the extent there is any merit in William Jnr’s claims, an equal claim might be made on her behalf. Mr Finnie and Ms Selwyn indicated that no formal steps had been taken in the proceedings on Fiona’s behalf, but that she supported the opposition to the Beddoe application. Ms Selwyn indicated that new counsel for Fiona, once appointed, will be taking steps in the substantive proceedings. In the meantime, however, the substantive proceedings as currently framed make no provision for Fiona’s ongoing benefit. The remedies William Jnr seeks in the second and fourth causes of action would result in the relevant assets passing to him alone.
[67] The third and fourth causes of action are factually connected. The third cause of action is in part a collateral attack on Woodhouse J’s findings.42 The fourth cause of action goes to the issue of testamentary freedom. As such it is appropriate they be dealt with together to some extent. Unless and until the existing substantive proceedings are amended to include Fiona as a joint plaintiff, or similar proceedings are filed on her behalf, I must proceed on the basis that the substantive proceedings would, if successful, deprive Fiona of her interests.
[68] I weigh this factor, along with the significant hurdles the claims face, in assessing whether it is in the interests of the New Trust, and of all the beneficiaries of the New Trust, for the trustees to defend the substantive proceedings.
[69] I conclude that it is appropriate to grant the order to a limited extent. The Beddoe application, in so far as it relates to the third and fourth causes of action, is granted to enable the defendants to assist the Court with the provision of all relevant factual information and submissions on relevant legal principles, but not to actively defend the merits of the claims.
Fifth and sixth causes of action – breach of fiduciary duty
[70] The fifth cause of action alleges breach of fiduciary duty by Callum. The trustees and executors indicated that, in that capacity, they will abide the decision of the Court in relation to this claim so I do not analyse it further.
[71] Similarly, the sixth cause of action alleges breach of fiduciary duty by Rob, and the trustees and executors will, in that capacity, abide the decision of the Court.
Seventh cause of action – removal of trustees and executors
[72] The seventh cause of action seeks removal of the trustees and executors. Rob and Callum in their capacity as the trustees have indicated their intention to abide this aspect of the claim; in their capacity as the executors they wish to defend it.
42 McCallum v McCallum, above n 5.
[73] In relation to their capacity as trustees, this claim will stand or fall depending on the outcome of the preceding causes of action so I do not analyse it separately. I note that the statement of claim in the substantive proceedings does not clearly differentiate between allegations made against the trustees of the New Trust, the executors of the Estate and Rob and Callum in their personal capacities. That makes it difficult to ascertain the misconduct alleged by William Jnr against the executors that is said to provide the basis for their removal.
[74] I am reluctant to authorise any expenditure on defence of the seventh cause of action as it relates to the executors, given the small size of the estate. In the normal course the outcome of this claim would stand or fall on the success or failure of the preceding causes of action. However the statement of claim does not lay a clear factual or legal foundation for removal of the executors. For that reason I authorise the executors to defend the seventh cause of action. The Beddoe application is granted to use the assets of the Estate to defend the cause of action seeking the applicants’ removal as executors only.
Eighth cause of action – setting aside (undue influence)
[75] The eighth cause of action alleges undue influence by Rob and/or Callum, with the result that Bill Snr’s final will did not reflect his free judgment and true wishes.
[76] There is a high bar to establish a claim of undue influence.43 The onus of proof is on the proponent – here, William Jnr. Mere persuading of the willmaker is not sufficient. Nor is it enough to show that others had the means and opportunity to unduly influence the deceased and that there has been a recent testamentary disposition in their favour. “The Court must be satisfied both that the power was exercised and that the will would not have resulted but for that exercise.”44
[77] Bill Snr was seriously ill in the last months of his life. He knew his cancer was terminal and that was the reason for his estate planning arrangements. There is no evidence currently before the Court (in this application, or the substantive proceedings
43 See Re Dudley (deceased); and Norton v Carey HC Auckland M191/95, 1 July 1996 at 54–55; cited in Mahon v Mahon [2016] NZCA 642 at [14].
44 Re Dudley (deceased), above n 43, at 11–12.
or the application before Woodhouse J) that his illness led to a particular vulnerability beyond what is inherent in that position. The evidence (including Bill Snr’s own evidence) does show that there was a need in early November 2016 for Rob and Callum to assist him and remove him from his home into professional care because of the apparent inability of William Jnr and Heather (by then also ill) to take care of even his most basic physical needs.
[78] Nor is there evidence currently before the Court of any mental deterioration on the part of Bill Snr prior to his death. Rather, counsel for the applicants point to the medical certificate obtained by ASCO Legal Limited (the solicitors for the applicants) that indicates there was no such deterioration and to the evidence before the Court in the substantive proceedings and in the application before Woodhouse J, including Bill Snr’s own affidavit, which counsel says demonstrates that he was the driving force behind the decisions in question.
[79] There is a significant gap between the evidence currently filed and the legal threshold which must be met to prove undue influence on the balance of probabilities. I consider this warrants provision of information by the trustees and some clarification of legal principles, but incurring costs with a more active defence is not in the best interests of the trust.
[80] The Beddoe application is granted in relation to the eighth cause of action, to the extent necessary for the defendants to put all relevant information before the Court and to make submissions on the legal principles relevant to a claim of undue influence, but not to actively defend the merits of the claim.
Summary
The Beddoe application is dealt with as follows:
(a)First cause of action: no order is granted.
(b)Second cause of action: the application is granted in respect of the reasonable and proper legal and associated costs of defending the second cause of action in the substantive proceedings.
(c)Third cause of action: the application is granted for the reasonable and proper legal and associated costs of providing the Court with all relevant factual information and submissions on relevant legal principles, but not actively defending the merits of the claim.
(d)Fourth cause of action: the application is granted for the reasonable and proper legal and associated costs of providing the Court with all relevant factual information and submissions on relevant legal principles, but not actively defending the merits of the claim.
(e)Fifth and sixth causes of action: no order is granted.
(f)Seventh cause of action: the application is granted in respect of the reasonable and proper legal and associated costs of defending the seventh cause of action in the substantive proceedings solely in respect of the claim seeking the applicants’ removal as executors of the Estate.
(g)Eighth cause of action: the application is granted for the reasonable and proper legal and associated costs of providing the Court with all relevant factual information and submissions on relevant legal principles, but not actively defending the merits of the claim.
Should the costs of this Beddoe application be met from the Trust/Estate?
[82] The information before me is that the applicants (in their capacities as trustees and executors) have spent $48,000 in bringing this application. Counsel for William Jnr has provided a global figure of $208,736.28, from May 2017 to 28 January 2020, in respect of both the Family Court and the High Court litigation. Ms Chambers for the respondent asked that I reserve the costs of this application.
[83] The likely costs of defending the substantive proceedings are also before the Court. The applicants estimate total fees of $222,500–$242,500 (excluding GST). Counsel for William Jnr indicates a further $170,000 (approximately) will be necessary to continue the litigation. I observe that it may well be that the preparatory
work and expenditure to date by the parties, for example by the applicants in relation to discovery, will reduce that estimate.
[84] As this application is separate from the substantive proceedings I will decide the question of whether the parties’ costs on this application should be met from the New Trust funds and, if so, in what amounts, following short memoranda from the parties on the question. I will decide on the papers. I would hope that the parties should be able to agree this aspect but, if not, they are each to file a memorandum by 27 May 2020.
Resolution of issues
[85] Finally, particularly having regard to the large sums already expended in relation to both the substantive proceedings and this application, I strongly encourage the parties to move from their current positions and resume their attempts to resolve the dispute in an alternative forum, such as mediation.
Next steps
[86] Because this Beddoe application is necessarily made in a proceeding separate from the substantive proceedings the next steps in the substantive proceedings will be for determination of the Associate Judge who is seized of the matter.
Gwyn J
Solicitors/Counsel:
D A T Chambers QC, Auckland K G Davenport QC, Auckland A K Finnie, Barrister, Auckland C V Walsh, Barrister Auckland Bankside Chambers, Auckland
Churton Hart & Divers, Auckland ASCO Legal Limited, Auckland Kelly Flavell Law, Auckland
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