McCarthy v McManamon
[2021] NZHC 294
•26 February 2021
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-470-029
[2021] NZHC 294
BETWEEN CHRISTOPHER WAYNE MCCARTHY as
Trustee and Beneficiary of the Earnscleugh Trust and as Trustee and Beneficiary of the Elizabeth Street Trust Plaintiff
AND
CATHERINE MCMANAMON
First Defendant
AND
IMPACT LEGAL TRUSTEE LTD as
Trustees of the Elizabeth Street Trust Second Defendant
Hearing: 19-23 October 2020 Counsel:
A H Brown and J Y Leenoh for the Plaintiff
R C Laurenson and C D Batt for the First Defendant No appearance by or for the Second Defendant
Judgment:
26 February 2021
JUDGMENT OF GRICE J
Table of contents
Background[5]
The marriage[14]
The prenuptial arrangements[30]
Elizabeth Street Trust assets[58]
Earnscleugh Trust assets[59]
Bank accounts[89]
Ms McManamon[100]
Errors and omissions in the documentation[121]
Mr McCarthy's claims [125]The Heads of Agreement (HOA)[128]
Were the provisions of the HOA implied into the trusts?[134]
Specific performance[137]
The defences[149]
Summary of factual findings on undue influence and unconscionable bargain[150]
First general defence: undue influence[159]
MCCARTHY v MCMANAMON [2021] NZHC 294 [26 February 2021]
Second general defence: unconscionable bargain[173] Third general defence: failure to perform HOA and failure of express/implied provisions[180] Application of s 182 of the Family Proceedings Act 1980[192] Nuptial settlement[196]
Discretion[207]
The post nuptial settlement circumstances[218]
The present circumstances[226]
Constructive trust[246]
Proprietary estoppel[252]
The present deadlock[257]
Conclusion[263]
[1] The day before they married, Wayne McCarthy and Catherine McManamon each set up a trust to hold assets they would bring to the marriage. This was part of a prenuptial arrangement, the terms of which was set out in a Heads of Agreement (HOA), which existed at the same time as the trusts. The general intention then expressed was that if they separated after three years of marriage they would share equally in the joint assets of the trusts. They did separate after nearly 12 years of marriage. One trust now holds a house worth about $1,515,000. The other held approximately $150,000, which was distributed following separation.
[2] They now disagree about the effect of the prenuptial arrangements. In simple terms, Mr McCarthy seeks a half share of the $1,515,000 house held in Ms McManamon’s trust with a small adjustment for a distribution from his trust.1
[3] In general terms, Ms McManamon raises three defences: undue influence, that the prenuptial arrangements constituted an unconscionable bargain and that the HOA is void for a number of reasons including the fact Mr McCarthy did not transfer all the required assets into his trust.
[4] Both parties sought relief under s 182 of the Family Proceedings Act 1980 which I have granted, following my conclusion that Mr McCarthy breached his fiduciary obligations to transfer certain assets into his trust.
1 Mr McCarthy claims that the Court should order specific performance and the transfer of a half share of the house in question. He also claims a constructive trust and proprietary estoppel in relation to the house. I also refer to the plaintiff and the first defendant by their forenames, Wayne and Catherine.
Background
[5] Mr McCarthy and Ms McManamon met in 2000 and married on 8 March 2003. They each had three children from previous marriages at the time they married. They separated in February 2014 and divorced two years later.
[6] For some months before their marriage, Mr McCarthy and Ms McManamon had been discussing their property arrangements. On 7 March 2003, the day before they married, the couple signed a suite of documents relating to their existing assets and their intentions for the future. One of those documents was the HOA, which provided that they would each set up a trust. Each trust would receive assets of equal value from its settlor. The beneficiaries of each trust were to be the other party and all six children. The trustees of each were to be the parties and a lawyer, Mr Brian Boyer (later substituted by his corporate trustee, Impact Legal Trustee Ltd).2 The HOA set out provisions governing how the trusts would respond in each of three eventualities: if the parties separated within three years of marriage, if the parties separated after three years of marriage; or if each or both of the parties died during the marriage. The parties did settle their trusts, which continued to operate throughout the marriage. Mr McCarthy’s trust was the Earnscleugh Trust, Ms McManamon’s trust is the Elizabeth Street Trust.3
[7] Mr McCarthy left their home, in Elizabeth Street, Wellington, in June 2014 at Ms McManamon’s request. Since then he has been renting or boarding. Mr McCarthy is now retired. He has no assets to speak of, his income is his government superannuation plus a small amount of money coming in from some commissions.
[8] The Earnscleugh trust is worth little at present.4 The investments it did hold have been sold and distributed. The whereabouts of some of the investments it should have held remains obscure. The monies that were realised from the sale of investments
2 The change is not relevant for the purposes of these proceedings. Mr Boyer was a director of Impact Legal Trustee Ltd.
3 I refer to the Elizabeth Street Trust as Ms McManamon’s trust and the Earnscleugh Trust as Mr McCarthy’s trust.
4 Approximately $150,000 was distributed from it by agreement following separation. During the marriage, assets were also transferred out of it for the parties’ benefit.
went in part to pay joint debts, and the balance was distributed to Mr McCarthy by agreement.
[9] Ms McManamon has remained in the house, which was hers before the marriage. The house is owned by the Elizabeth Street Trust.
[10] The house is now worth somewhere in the vicinity of $1,515,000, and it has a mortgage of $250,000, which is being serviced by Ms McManamon. She lives in the property with her son, Joseph, who is living in the adjoining flat on the property. Ms McManamon works part-time.
[11] In April 2018, Mr McCarthy filed applications in the Family Court for division under the Property (Relationships) Act 1976. A minute issued by the Family Court indicated that the matter was unsuitable to be determined in the Family Court under that legislation because the parties’ assets were settled in trusts.5 The applications were subsequently discontinued in October 2018 at Mr McCarthy’s instigation.
[12] Mr McCarthy then filed these proceedings in the High Court in March 2019, seeking implementation of the HOA. In general terms this provides that the assets of the trusts be resettled and that a half share of the joint assets be put into two trusts set up for each party.
[13] In simple terms, Ms McManamon says it was always intended that she would retain the Elizabeth Street property, regardless of what happened to the assets of Mr McCarthy’s trust. Based on various defences and cross-claims, she adopts the position that she, or her trust, should take the Elizabeth Street property and Mr McCarthy should have only the assets in his trust.
The marriage
[14] When the parties married in 2003, Ms McManamon’s children were aged 19, 14 and 10. Those children lived with Ms McManamon and Mr McCarthy at the
5 CWM v CM FC Tauranga FAM-2018-070-000215, 9 August 2018.
Elizabeth Street property, which Ms McManamon had bought with her former husband and had retained as part of a relationship property settlement.
[15] At the time of the marriage, Mr McCarthy’s children were 16, 13 and 11. They resided with their mother, but at least in the early days of the marriage it was intended that they spend every second weekend at the Elizabeth Street property.
[16] Ms McManamon was working part-time as well as looking after her children. She continued to look after the household and work part-time throughout the marriage. She contributed her earnings to the household although her counsel, Mr Laurenson, described her income as not “flash”.
[17] Ms McManamon had been studying for a counselling qualification before the marriage and completed that qualification during the marriage. She had worked in several jobs, including as a book-keeper. She also managed rental properties and worked for a period for a large property management and rental company. She continues to work part-time as a counsellor.
[18] Mr McCarthy said that during the marriage Ms McManamon did the book-keeping for the parties’ various trusts and companies. At least by the time of separation,6 she was managing the bank accounts (in the names of various entities) and was very familiar with the couple’s finances.
[19] In August 2001, following the breakdown of his first marriage, Mr McCarthy had agreed to pay in the vicinity of $27,000 per annum for the support of his three children ($2,186 per month). His relationship property agreement records that Mr McCarthy retained his shares in Wayne McCarthy Ltd but is silent as to his net worth at that time.
[20] Mr McCarthy held tertiary qualifications and had obtained an MBA from the University of British Columbia. After a year of volunteer service abroad, he embarked on a career in finance. He held a number of senior finance-related positions in
6 This is clear from the email she sent to Mr McCarthy on 26 January 2014 to which I refer below at [27] and [98].
New Zealand, including with the Development Finance Corporation and the Rural Bank of New Zealand.7 At the time of the marriage, he was chief executive of a company in the St Laurence Group, then a well-known group of finance-related companies. Mr McCarthy indicated in cross-examination that at the date of marriage he had been earning approximately $9,800 per month. This was a gross salary of approximately $120,000 per annum. He also indicated he was due to receive a bonus of $260,000 when he left his position as chief executive in late 2003 or early 2004.
[21] A snapshot of the financial position of the parties, as Mr McCarthy saw it, immediately preceding the March 2003 marriage was as follows:8
… Please find below an asset liability statement for Wayne McCarthy (personal) and the McCarthy Family Trust.
Wayne McCarthy (personal)
Assets Liabilities London Taxi
10,000
Debt
5,000
Motorbike
3,000
Household effects
20,000
Total
33,000
The McCarthy Family
Assets
Trust Liabilities
Cash (NBNZ)
$359,000
Debt
nil
Investments, Bonds
117,000
Debtors
25,000
Car
20,000
Total
$511,000
I earn a salary of $100,000 p.a.
7 Both substantial financial institutions were originally owned by the government and subsequently sold to private concerns.
8 This was taken from a memorandum dated February 2003 from Mr McCarthy in support of an application for a loan from the National Bank.
I pay about $27,000 p.a. to my ex-wife (Liz Hay) as part of a matrimonial settlement.
I intend to invest about $300,000 of cash currently held by NBNZ in a commercial building.
I will get married on 8 March 2003.
My future wife (Catherine) will place her house located at 81 Elizabeth St together with a $300,000 life insurance policy in a trust called the "Elizabeth Street" trust. Her house was recently valued at $500,000 (see attached). I estimate that the net value of the Elizabeth St Trust was about $550,000-
$150,000=$400,000. Catherine previously had borrowings of about $150,000 and wish to repay these. We are undertaking some alterations and are keen to borrow an additional amount.
The McCarthy Family trust will place assets worth about $400,000 in a trust called the Earnscleugh Trust.
The trusts (Elizabeth St. and Earnscleugh) wish to borrow $210,000 as a first mortgage on an interest basis only with the right to prepay. Catherine McManamon will go by the name of Catherine McCarthy after 8 March and Christopher Wayne McCarthy (the writer) can act as the guarantors. Our borrowings will have an initial LVR of about 23% ($210,000/900,000). This assumes the life policy has no value.
[22] Ms McManamon did transfer the Elizabeth Street property into her trust. It had a net equity somewhere in the region of $400,000, following the deduction of an existing Westpac mortgage and a legal aid charge registered against the property. Those debts were repaid by a National Bank loan secured by mortgage of $210,000. The balance of the loan, following the debt repayments of approximately $40,000, was used in part for renovations to the Elizabeth Street property. This included renovating a bathroom to enable the couple to use the upstairs as their bedroom and free up space below. This provided room for Mr McCarthy’s children to stay when they visited.
[23] In April 2003, the cash held by the National Bank, referred to in the February 2003 memorandum, was advanced by the McCarthy Family Trust to the Earnscleugh Trust to invest in commercial property by the purchase of shares in a company known as GPI (2002) Ltd (GPI). The purchase of the commercial property by GPI was financed by a loan obtained by GPI and guaranteed by the Earnscleugh Trust, of approximately $1,500,000. A further loan for that purchase brought the total indebtedness of GPI up to approximately $1,800,000. The cost price of the GPI investment was approximately $280,000, together with a short-term advance of
$50,000. Ten of the original shares in GPI were sold during the marriage and the remaining were sold for approximately $201,000 following separation.9
[24] In April 2004, Wayne McCarthy Ltd bought a Money Shoppe financial advisory business for approximately $350,000. The payment was staggered over two years and the first payment was made in April 2004. Mr McCarthy says the equity put in to the business came from investments sold. The purchase price referred to in the settlement statement dated 23 April 2004 was $150,000. A loan of $150,000 funded this. The National Bank mortgage over the Elizabeth Street property was refinanced and the principal debtor became Wayne McCarthy Ltd, which was owned by the Earnscleugh Trust. That business was a financial planning and mortgage broking business in which Mr McCarthy continued to work as a financial advisor. Mr McCarthy changed the business name to First Finance Planning (FFP).10 From then on Mr McCarthy’s principal income came from that business. Part of its income came from the sale of financial products, mainly those produced by the ANZ for which FFP was paid commission. It is the tail end of those commissions which still continue to be paid to Mr McCarthy. He estimated that over the past six years he had received a total of approximately $9,000 from the tail end of those commissions.
[25] It appears that during the early years of the marriage the couple and their family lived comfortably. They took a honeymoon of three weeks in Cuba and Mexico, holidayed overseas, on occasions taking some of the children, as well as undertaking further renovations on the house.
[26] Mr McCarthy was working in the FFP business in 2008 when he suffered a heart attack and stroke. Around that time, and in the following years, the business was also affected badly by the Global Financial Crisis (GFC). It moved its operations to the Elizabeth Street property from the end of 2008. Mr McCarthy could not work for a period after his heart attack. He attempted to sell the business. He said despite attempts to do so, he could not find a buyer. The business income diminished over the
9 Following separation in 2014, the balance of the shares in GPI were sold. From these proceeds, distributions were made by agreement between the parties. Mr McCarthy received $142,043.68 of those funds. The balance was paid toward the parties’ joint debts.
10 FFP changed its name to Wayne McCarthy Mortgages Ltd in March 2016.
next few years. It seems some of its assets, including rights to commissions, were sold. Today it is worth virtually nothing.
[27] In an email of 26 January 2014, Ms McManamon indicated she thought they should separate. Mr McCarthy said he was surprised by this although they had had earlier discussions about the state of their marriage.
[28] In the January 2014 email Ms McManamon said it had been a juggle moving money around between the various accounts every month to make sure debts and credit cards were paid. She noted that finances had been tight for some time. Ms McManamon said that following Mr McCarthy’s health problems in October 2008 FFP was “retrenched to home”. She commented the business income continued to diminish and “may completely dry up soon”. Ms McManamon noted that the previous five years had been difficult but the last three years had become increasingly so. She acknowledged Mr McCarthy’s attempts to gain employment, including applying for more than 500 jobs. Ms McManamon described their financial position as follows:
FINANCIAL
I believe that financial losses, personality types and our communicating style with each other have contributed to the marriage breaking down over time.
FFPL was purchased for $350,000.00 cash. An additional $70,000.00 was injected after your cardiac arrest ($70,000.00 funds came from ING insurance pay-out).
Previously we agreed to sell 10% of our equity stake in GPI to release funds to pay off credit card debt, Liz, taxi etc. This reduced our equity stake from 50% to 40%.
I agreed to increase the mortgage $40,000.00 (from $210,000 to $250,000 to put in a kitchen upstairs to rent out top part of Elizabeth and pay off credit card debt) when Jane went to Germany about nine years ago.
We have also asked ANZ to top up our mortgage approx. 4 times when we were having cash flow difficulties.
In addition to that the partners in GPI agreed that we can take out $2000 per month for several months while you were trying to find a job.
Using up equity, selling off shares and FFPL failing ha[ve] had a negative impact on our relationship. We have both suffered grief and loss in the financial sector. This has added to our relationship difficulties and losses. I recognise that it causes us both stress.
It's a juggling act every month moving money from property management, Elizabeth Street rental, FFPL, wages from Family Works and some private counselling income.
OUR CURRENT LIABILITIES (APPROX)
$20,000.00 FFPL O/D. This overdraft has been ongoing since 2004.
$5000.00 our eftpos account (several years)
$13500.00 BNZ (Global Plus) $2800.00cliam with BNZ should reduce this.
$10,000.00 Wayne's ANZ platinum
$4000.00 Cath's Westpac
$6000.00 Cath's ANZ Visa
$3000.00 Cath's ANZ MasterCard
$1700.00 Gem Visa (initially computer purchases and vacuum cleaner etc)
$650.00 GE Credit Line
$400.00 Farmers approx.
$2500.00 (your Tax) I have been paying this off at $80 per month as per arrangement with IRD
$700.00 Mercy Hospital for testing in Auckland I have been paying it off monthly.
Wayne I would like you to respond to this email and add on your comments.
It's only whilst you have been in Vietnam that I have thought about us separating. Up until then separation was not an option for me.
[29] By the time the parties separated Mr McCarthy was earning little, if anything. He had received payments from various insurance policies triggered by his health problems. It appears these amounted to approximately $100,000, which went into the family finances.
The prenuptial arrangements
[30] By December 2002, with the wedding scheduled for March 2003, Mr McCarthy and Ms McManamon were discussing how they should arrange their assets.
[31]On 2 December 2002, Mr McCarthy emailed Ms McManamon as follows:
Cath
This is the basis for our trusts. What are your thoughts? The Trustees
Cath, Wayne and Brian Boyer Underlying principles
Cathy and Wayne shall have an equal amount in Trust
Any income earned during their term of Marriage shall be shared equally by Cath and Wayne
At the date of marriage Cathy and Wayne shall pro rata their net worth.
The value shall only apply to Cath's house or Wayne's investments. It will not apply to cars or household effects
Illustration
Cath shall value her house by a reputable valuer (81 Elizabeth Street)
From this amount shall be subtracted her mortgage (valued as at 31/11/02). This is the Net Amount. The value will be about $600k-
$150k=$450k.
Wayne shall place an equal amount to the Net Amount. Any excess shall remain outside, in a separate trust controlled by Wayne
Separation
In recognition that Wayne may wish to invest in more risky investments than Cath, if Cath and Wayne separate in less than 3 years from the Marriage date then Cath will be the beneficiary of either 81 Elizabeth Street or 50% of the joint assets.
If Cath and Wayne separate more than 3 years from the Marriage Date then Cath and Wayne shall share equally. Cath and Wayne may wish to sell the various assets and divide the cash or value the house so that Cath can retain this asset.
If Cath or Wayne die then 50% of the joint assets shall be distribu[t]ed equally to Cath and Wayne's 6 children. If both Cath and Wayne die then the assets shall be equally distributed to each of the 6 children. If the children are less than 25 years then any amount owing to them shall be retained and invested by the trustees until the beneficiaries reach the prescribed age. The Trustees shall have power to ove[r]rule the age of beneficiary payout.
If any of the 6 children have pressing health injuries or illnesses that require financial assistance then the Trustees may agree to treat this as a priority.
[32] Mr McCarthy sought advice from Mr Boyer a lawyer and principal in the Wellington law firm, Impact Legal, on the proposed arrangements. He had met Mr Boyer when instructing him and other members of the law firm to undertake legal work for the St Laurence Group. Mr McCarthy said he saw Mr Boyer, who worked in the same building as Mr McCarthy, at least two or three times a week and would perhaps communicate with him in other ways two or three times a week. Mr Boyer had been Mr McCarthy’s personal lawyer for about two or three years.
[33] Mr McCarthy sent Mr Boyer a copy of his email of 2 December 2002 saying that these were Mr McCarthy and Ms McManamon’s “initial thoughts”.
[34] On 4 December 2002, Mr Boyer responded saying that it was possible to put the proposed structure in place and it would involve completion of a family trust and a property sharing agreement and new wills. He asked for details of names. These were provided by Mr McCarthy by email on 23 January 2003.
[35] On 3 February 2003, Mr Boyer emailed to Mr McCarthy copies of two draft trust deeds. The trustees were as recorded in the 2 December email. The parties and all six children were named as discretionary beneficiaries as to capital and income. Mr Boyer said in the email:
The effect is that the two trusts are very much set up for the benefit of both families, and controlled by the two of you. It will be necessary for the trusts to enter into an agreement between themselves to cover all of the matters which you wish to deal with during your lifetimes.
[36] Mr Boyer asked the couple to make a time that would suit to determine exactly how the details would work. He then met with Ms McManamon and Mr McCarthy on 13 February 2003. Mr Boyer’s notes from that meeting indicate that each party would put $400,000 “in round numbers” into their respective trusts. Ms McManamon would put in her house valued at “$550,000 less mortgage of 150 K”. Mr McCarthy would contribute cash and/or investments. These included an investment in GPI of about $300,000, and other investments totalling $100,000. The notes indicate that if the parties separated within three years Ms McManamon could choose 50 per cent of the total assets or “her house and life policy”. If one or the other died, the trusts would
be resettled into two trusts, one for the survivor and their children and the second for the deceased’s children. The note says an “insurance policy goes in too”.
[37] Mr McCarthy emailed Mr Boyer on 24 February 2003 confirming that they intended to set up the two trusts: the Elizabeth Street Trust and the Earnscleugh Trust. He asked for his trust deed as he had to “provide this to bankers for the Hutt Park Road property”. This referred to the GPI property investment to be acquired by his trust. Mr McCarthy also mentioned that Ms McManamon had advised him that Ms Bev Roche was shortly leaving New Zealand and asked how it was going with the two trusts and that they were “keen to finalise details asap”. Ms Roche was a lawyer with the law firm of Tripe Matthews & Feist, Ms McManamon’s lawyers.
[38] Mr Boyer had by then sent the two draft trust deeds to Mr McCarthy and noted he was working on the HOA between the two trusts. He suggested that Mr McCarthy email Ms McManamon’s deed to Ms Roche “today for her comments”. A couple of hours after that email Mr Boyer sent a draft HOA to Mr McCarthy setting out what he thought had been agreed to date. He said:
One point I see is that you need a policy which follows after clause 8. If you separate after 3 years, what is to happen then? I would imagine that it would probably be the same as would happen within the 3 years.
[39] On 25 February, Mr Boyer sent copies of the two trust deeds and the draft HOA to both parties. He noted Ms McManamon could send “this” on to Ms Roche for her review. He also noted that “[o]ur goal is to have all of the documentation completed this week, including your new wills”. He concluded by saying “[p]lease give me a call if we need to discuss anything so far”.
[40] By the time the HOA had been sent to Ms McManamon and Mr McCarthy on 25 February, a provision at clause 11 had been amended to provide that the joint trust assets would be divided equally between the couple’s trusts if the parties separated permanently after three years. It appears that an earlier version of clause 11 had only governed the events on the death of one of the parties but had been amended following Mr Boyer’s query about separation.
[41] The documents were sent to Ms Roche by Ms McManamon on 26 February 2003. Ms McManamon asked Ms Roche to look over the documents for her. She said she was getting married on 8 March and would be out of New Zealand until 30 March. Ms McManamon indicated that the intention was that the wills and “suchlike” would be sorted before they went.
[42] Ms Roche passed the matter on to Ms Christine Batt, an experienced family lawyer, to act on behalf of Ms McManamon. Ms Batt and Ms McManamon met to go through the documents, which included the two trust deeds and the HOA. On 27 February 2003, Ms Batt wrote to Mr Boyer asking for full details of Mr McCarthy’s assets including any debt due to him from his separate trust and any benefits he was eligible for under that trust. She also asked what was proposed in respect of the debts back to the parties on separation or death and queried the lack of a relationship property agreement.
[43] On 27 February, Mr Boyer responded saying he had referred the request for financial information to Mr McCarthy. He further said that it was intended the debts would be the subject of bequest or forgiveness under their respective wills. He indicated the lack of the relationship property agreement was an oversight, which would be remedied. Mr Boyer also, in response to Ms Batt’s question concerning the reason for the transfer, said:
The proposal to transfer the home and life insurance policy into a trust came from Wayne and Catherine. They wish to transfer assets into trusts for all of the reasons usually adopted by people in terms of estate planning and protection of assets.
[44] On 28 February, Ms Batt emailed Ms McManamon saying that there should not be an attempt to finalise matters before the wedding:
…partly because we do not yet have all the information and documents we need and partly because of the reservations we have expressed about the arrangements which you are being asked to enter into. We would like you to have the opportunity to consider these matters in a more orderly manner after your return from your honeymoon.
[45] Ms McManamon responded an hour later to say that they would like it finalised before they went on honeymoon. She said that the property sharing agreement:
should be included before we finalise our arrangements … If you have any suggestions to the proposal we currently have, that would be fair and equitable to both parties please advise otherwise I am keen to have this settled next week.
[46] Ms Batt emailed further advice to Ms McManamon on the following Monday (3 March 2003) with the subject “Advice”, as follows:
Dear Cathie
We have not yet received details of Wayne’s assets from Brian Boyer which makes it impossible for us to finalise our advice to you at this stage.
Subject to the further information we receive, my view is that the minimum provision which should be made for you in these arrangements is that you preserve your $400,000.00 equity as separate property. The $400,000.00 in [Wayne’s] Trust would be [Wayne’s] separate property and any increase in value on the property of the two Trusts would be shared equally between you in the event of a separation or death.
In reaching this arrangement we would wish to specify that if there is any diminution in the value of the property so that at separation or death either of the Trusts’ property is worth less than $400,000.00 then you would bear the loss entirely in respect of the Elizabeth Street Trust and Wayne would bear the loss entirely in respect of the Earnscleugh Trust.
As advised to you, at our meeting, in the worst case scenario if [Wayne’s] property value decreases and your property increase in value you may have to pay [Wayne] or his estate one half of the increase in value which, depending on a variety of circumstances, may mean that you would have to sell your house. However, at least you would have sufficient equity remaining to house yourself and your children.
We suggest that you give some thought to this proposal and that we meet again when Mr Boyer has provided the further information sought by us.
We do not believe that either you or Wayne would be prejudiced by delaying consideration of these issues until after your honeymoon.
[47] At 9.33 the next morning (4 March 2003) Ms McManamon emailed Ms Batt. The email contained the subject line “re advice”, saying:
Thank you for your email. I have given consideration to your suggestion and I have decided to stay with the original proposal inclusive of the property sharing arrangement.
I would like to sign documents by Thursday at the latest including wills, and so I await your next instruction.
[48]Ms McManamon also sent an email to Mr McCarthy on 4 March saying:
wayne [sic] the only suggestion I have to our proposal is that on death that perhaps there should be some additional time inbuilt to allow for adjustments etc so neither of us has to rush out the house for example.
c
[49] Mr McCarthy then forwarded that email to Mr Boyer saying he would phone to discuss. Mr Boyer cannot remember having a telephone discussion after that although he vaguely recalled Ms McManamon had actually telephoned him about it. In any event there was no file record made by Mr Boyer of any telephone conversation.
[50] On 7 March 2003, the relevant trust deeds, wills and HOA were signed by the parties as well as related documents including the loan documents for the National Bank to refinance the mortgage on the Elizabeth Street property and obtain additional funds for renovations and other expenses.
[51] Ms McManamon recalls going into the Impact Legal offices early in the morning of 7 March and Mr McCarthy going upstairs to get someone from his St Laurence Group office. This appears to have been Ms Eaton who witnessed the signatures of Mr McCarthy and Ms McManamon on one copy of the Earnscleugh Trust and Elizabeth Street Trust deeds of trust. Lawyers from Impact Legal witnessed the remaining signatures.
[52] Ms McManamon says that later in the day she was telephoned by someone from Impact Legal and asked to go back to the offices. She returned and says she signed a number of documents on the street in front of Impact Legal on The Terrace. She cannot recall how many but thought it was a pile. Mr McCarthy could not recall this. Mr Boyer said he was present when the documents were signed but could not recall the signing in detail. He acknowledged that sometimes people did sign documents in the street outside the office, however he doubted whether there would be a pile of documents signed there.
[53] Ms McManamon said she was under tremendous pressure that day, rushing to get things organised for the wedding the following day. People were arriving from overseas, including her mother, and she had many things to do.
[54] The likely explanation for Ms McManamon’s recollection is that there may have been some signatures missed earlier in the day and Ms McManamon and Mr McCarthy returned later in the day to remedy that. It seems that those documents were brought down to the street for signing rather than the parties or Ms McManamon going back up to the office.
[55] On 13 March, Impact Legal wrote a reporting letter addressed to the couple. Ms McManamon says she did not see this letter until after the separation. That letter referred to the documentation completed for:
(a)formation of the Elizabeth Street Trust on 7 March 2003;
(b)transfer of the Elizabeth Street property to the Elizabeth Street Trust;
(c)acknowledgement of debt of $550,000 back to Ms McManamon, being the trust purchase price for the house;
(d)loan agreement and mortgage to National Bank: this included a guarantee from Ms McManamon, Mr McCarthy and Mr Boyer in their capacities as trustees of both the Elizabeth Street Trust and the Earnscleugh Trust. Mr Boyer’s liability was limited to the amount of the assets in each trust as he was a professional trustee of each trust;
(e)formation of the Earnscleugh Trust (noted as being formed on 23 January 2003);11
(f)Ms McManamon’s will, made in contemplation of her marriage to Mr McCarthy: its main beneficiary was the Elizabeth Street Trust. The will included a forgiveness of any debt owed at the time of her death to the trustees of the Elizabeth Street Trust as well as provision for distribution of personal effects;
11 This was an error. See below at [121].
(g)Mr McCarthy’s will made in contemplation of marriage. The beneficiary of his will was the Earnscleugh Trust. It provided for forgiveness by Mr McCarthy of any debt owed at the time of his death to the trustees of the Earnscleugh Trust;
(h)Powers of Attorney for each Ms McManamon and Mr McCarthy in favour of Mr Boyer and Ms Dallimore; and
(i)the HOA.
Copies of documents enclosed in the letter were listed as follows:
(a)the trust deed for the Earnscleugh Trust (with 23 January 2003 inserted as the date);
(b)minutes of the first meeting of trustees of the Earnscleugh Trust;
(c)the trust deed for The Elizabeth Street Trust;
(d)minutes of meetings of the trustees of the Elizabeth Street Trust;
(e)the agreement for sale and purchase;
(f)the deed of acknowledgement of debt;
(g)the deed of gift forgiving part of a debt;
(h)minutes of a meeting of the trustees recording the gifting;
(i)minutes of the meeting of trustees for the Elizabeth Street Trust regarding National Bank borrowing;
(j)minutes of the meeting of trustees for the Earnscleugh Trust regarding the National Bank borrowing;
(k)Wayne’s will;
(l)Wayne’s power of attorney;
(m)Catherine’s will;
(n)Catherine’s power of attorney;
(o)the National Bank loan agreement;
(p)the guarantee for the Earnscleugh Trust;
(q)the guarantee for the Elizabeth Street Trust; and
(r)a copy of the mortgage.
[57] The solicitor from Impact Legal who sent the reporting letter, noted in the last paragraph that the firm would be in touch with the parties:
… upon your return from overseas, so that we can transfer the other assets you have agreed to transfer to the trusts pursuant to the heads of agreement, complete the section 21 agreement contracting out of the Property (Relationships) Act 1976, and complete Catherine’s gifting.
Elizabeth Street Trust assets
[58] On 7 March 2003, Ms McManamon gifted $27,000 of what was recorded as a debt of $550,000 incurred from the sale of the Elizabeth Street property to her trust. It left a balance owing, according to the forgiveness of debt deed and related minutes, of $523,000. This figure appears to be the result of an arithmetical error as the equity in the Elizabeth Street property at the date of transfer was estimated at $400,000. After the first gifting, the balance owing must have been in the vicinity of $383,000. In fact, the debts secured over the Elizabeth Street property were higher than anticipated, so the equity in the house at transfer was $390,000.12 In addition, further funds were borrowed at the time for renovations. The refinanced home loan was for a sum of
12 If the house was worth $550,000. Estimate in the memorandum to the National Bank dated February 2003. See [21].
$210,000. Therefore, the equity in the house following the settlement was in the vicinity of $340,000. The error was perpetuated in subsequent deeds of forgiveness relating to this debt.
Earnscleugh Trust assets
[59] The arrangements for the transfer of the investment assets to Mr McCarthy’s trust were not completed on 7 March 2003.
[60] An agreement for the purchase of the GPI shares had been executed and recorded in the Earnscleugh Trust minutes of 1 March 2003 recording that the purchase price did not exceed $365,000 (tied to the valuation of the commercial building to be purchased by GPI). The settlement and guarantee documents were to be signed by the attorneys while Mr McCarthy and Ms McManamon were in Cuba on their honeymoon.
[61] It is likely that the Earnscleugh Trust deed was executed on 7 March 2003, not in January 2003. The email correspondence indicates Mr Boyer did not prepare the deed until February 2003. That trust needed to be in existence earlier than 7 March in order to predate the agreement to acquire shares in GPI. Nothing turns on this here.
[62] The Powers of Attorney granted by the parties to Mr Boyer and Ms Dallimore had been executed. This enabled the attorneys to execute the required documents for settlement of the Earnscleugh Trust’s purchase of the shares in GPI and the related guarantee it was to give the bank to support the financing of the commercial property purchase by GPI.
[63]The GPI shares represented approximately $314,000 of the approximately
$400,000 required from Mr McCarthy’s separate assets to match Ms McManamon’s contributions to her trust.
[64] The settlement statement for the purchase of the GPI shares records an advance from Mr McCarthy’s separate McCarthy Family Trust to the Earnscleugh Trust of
$330,412.17. That amount was paid to settle the GPI purchase. The consideration for the share transfer is recorded as $280,412.17. The extra $50,000 paid was a short-term
advance by the Earnscleugh Trust required by the bank. That $50,000 was repaid once GPI had put in place leases for its commercial properties. Guarantees to the BNZ of
$1,560,000 were provided by Mr McCarthy and the Earnscleugh Trust (limited to the assets of the trust). Similar guarantees were given by the other (unrelated) shareholders in GPI.
[65] The GPI transaction was settled while Mr McCarthy and Ms McManamon were on their honeymoon. The security documents were signed by Mr Boyer and Ms Dallimore as attorneys for Mr McCarthy and Ms McManamon pursuant to the powers of attorney granted by Ms McManamon and Mr McCarthy on 7 March.13
[66] Ms McManamon now disavows any knowledge of the GPI transaction and, in particular, of the implications of the guarantee that the Earnscleugh Trust gave for the GPI loan.
[67] I am satisfied that Ms McManamon was aware of the transaction and its implications at the time.14 She signed the Powers of Attorney in favour of Mr Boyer and Ms Dallimore. She does not deny it is her signature on those documents. Mr Boyer indicated he would have as a matter of course explained the effect of a guarantee at the time of execution. In addition, Mr Boyer made a file note on 7 March 2003 recording that, following a discussion with the solicitor on the other side of the GPI purchase, he spoke to Mr McCarthy and Ms McManamon at 10.15 am when they were in his office executing the documents. The note records a number of documents were signed and refers to what Mr Boyer says was the security for the GPI financing as follows: “Not likely to be a third mortgage – probably enough first and second and equity”.
[68] In addition, Mr Boyer also produced emails to and from Ms McManamon’s personal email address, signed off by Mr McCarthy who was by then in Cuba with Ms McManamon.15 The email from Mr McCarthy asked if the settlement was going
13 Mr McCarthy was appointed director of GPI on 31 March 2003. The share transfer to the trustees is dated 31 March 2003 and the Particulars of the Share Transfer was registered with the Companies Office on 26 February 2004.
14 See below at [159]–[191] (in particular, [168]) as to my findings on Ms McManamon’s general defences.
15 Ms McManamon confirmed that the email address was her personal email.
okay. Mr McCarthy also sent a fax to Mr Boyer from a hotel in Cuba asking after the settlement and signed it “Wayne and Cath”. While they were not signed by Ms McManamon they were sent while they were together on honeymoon. It is unlikely she was not aware of Mr McCarthy’s enquiries.
[69] Mr McCarthy says the balance of the investment assets required to be contributed by him to equalise the trusts’ asset values were acquired by his trust in April 2003. He produced an agreement for sale and purchase dated 16 April 2003 recording an agreement to transfer investments in four properties held by an investment vehicle known as Direct Property Investments (DPI) from the McCarthy Family Trust to the Earnscleugh Trust. DPI was a property investment product of the St Laurence Group. The details of those unit property investments are set out in the schedule to the agreement for sale and purchase dated 16 April 2003 as follows:
One interest in Unit B, Harvey Norman Centre,
Mt Wellington Proportionate Ownership Scheme $25,000.00
One interest in 67 Courtenay Street, New Plymouth
Proportionate Ownership Scheme $20,000.00
One interest in East Tamaki Proportionate
Ownership Scheme $20,000.00
Prince's [sic] Wharf (Hilton Auckland Hotel) Limited Bonds $50,000.00
[TOTAL $115,000.00]
[70] The agreement recorded that the McCarthy Family Trust would leave the purchase price of $115,000 for those investments owing and an acknowledgement of debt to that effect was signed at the same time. Settlement was to take place on 16 April 2003. There is no record of settlement actually occurring.
[71] Ms McManamon disputes that the DPI investments were ever transferred to the Earnscleugh Trust. She says she cannot recall signing the agreement for sale and purchase of assets as trustee of the Earnscleugh Trust but does not deny that it is her signature on the agreement as a trustee. She also points to the fact that income from those investments were paid into a bank account in the name of Mr McCarthy’s separate McCarthy Family Trust in the period 31 March 2003 to 16 May 2005
totalling some $32,846.41. Those amounts include $10,178.65 in relation to Princes Wharf, one of the investments listed in the agreement for sale and purchase. Entries in the bank statements for that account also show payments made for the Elizabeth Street mortgage. I discuss the bank accounts in more detail below.
[72] The McCarthy Family Trust was the transferor named in the agreement for the sale and purchase of the DPI investments. Its trustees were Mr McCarthy and Kevin John Podmore. Ms McManamon’s signature, as a trustee of the Earnscleugh Trust, appears on that agreement for sale and purchase of the investments from the McCarthy Family Trust to the Earnscleugh Trust witnessed by “A Bovey”. Ms Bovey was Mr McCarthy’s personal assistant at the financial planning business (FFP), which he took over in April 2004. Ms McManamon says she thinks she met Ms Bovey in about 2004 and suggests that the document was actually not signed until 2004.
[73] However, Mr McCarthy says he actually agreed to buy the Money Shoppe (FFP) in from the previous owners in 2003. He said because the approval of the Guardian Trust was required to that sale, and that was not forthcoming for some time, the purchase did not settle until April 2004. He says that during 2003 he was visiting the Money Shoppe’s offices in the Hutt Valley. He says both he and Ms McManamon knew Ms Bovey from 2003 onwards.
[74] Mr McCarthy also points to returns filed with the Inland Revenue Department returning the rental income from the DPI investments in the name of Mr McCarthy and Ms McManamon for the year ending 31 March 2004. The income returned was for the year 1 April 2003 to 31 March 2004.
[75] Mr McCarthy was unable to point to any documentation evidencing the legal transfer of the DPI investments into the Earnscleugh Trust. Evidence was produced of a number of reminders from lawyers in Impact Legal to Mr McCarthy to formalise the transfer of the DPI investments to the Earnscleugh Trust. The correspondence and legal notes produced indicate that the legal transfer of the DPI investments had not occurred by 2007 insofar as the Impact Legal lawyers were concerned. I note also that the financial accounts of the Earnscleugh Trust for the 2012 year show the GPI
investment ($280,412) but do not show any other investments. Wayne McCarthy Ltd is listed at a value of $120.
[76] Mr Boyer said, in his evidence, that the equitable interest in the DPI investments was transferred by the agreement for sale and that if the “mechanics” of transfer were not completed there was no prejudice to the parties. I do not agree. Without the legal transfer being effected Mr McCarthy was able to deal with those investments outside the Earnscleugh Trust. That seems to have been what happened.16
[77] Mr McCarthy says the DPI investments were sold in order to pay for the FFP business in his pleadings. However, he could not give details of the sale and was unclear in his evidence about what happened to those investments or when they had been realised.
[78] The suggestion was that Wayne McCarthy Ltd was provided with funds from the sale of the DPI investments to assist in the purchase of FFP. Wayne McCarthy Ltd at that stage was owned by the Earnscleugh Trust.17
[79] The settlement documentation relating to the Money Shoppe (FFP) purchase in April 2004 refers to a purchase price of $150,000, which was financed by a loan from the National Bank. A further amount of $200,000 was apparently due a year later (2005) but there is no documentation showing that this payment was made. Mr McCarthy thinks he paid it to the vendor directly.
[80] Ms McManamon suggested in her email of January 2014 that proceeds of an ING insurance policy, totalling $70,000, might have been later invested in FFP
[81] I am satisfied that the legal transfer of the DPI investments to the Earnscleugh Trust never occurred.
[82] Even though the income tax returns prepared showed the investment income returned in the couple’s names, these were prepared for taxation or financial purposes.
16 Or through his McCarthy Family Trust.
17 Wayne McCarthy was the director. Ms McManamon, Mr McCarthy and Impact Legal owned the shares as at 4 April 2004.
The independent evidence suggests no transfer was ever completed. That evidence was in the form of the bank statements and contemporaneous notes and emails indicating that Mr McCarthy’s lawyers were chasing him to finalise the transfers from 2003 to 2007. He did not tell them the investment had been transferred despite meeting with them about the issue. In addition, income from DPI investments was paid into Mr McCarthy’s separate trust, the McCarthy Family Trust bank account.
[83] The Earnscleugh Trust may have had an equitable interest in the investments, but it did not legally own, nor did it control the investments or their income. The whereabouts of those investments remains unclear. There are no trust minutes or other documentation which would be expected. If the investments were sold, the vendor was likely to have been Mr McCarthy’s separate trust, the McCarthy Family Trust. The whereabouts of the investments has not been satisfactorily explained in circumstances where an explanation by Mr McCarthy was called for.
[84] Mr McCarthy may well have intended to transfer the DPI investments, then worth about $115,000, from the McCarthy Family Trust to the Earnscleugh Trust, but it did not happen. The McCarthy Family Trust retained legal ownership of the DPI investments and dealt with them.
[85] Therefore Mr McCarthy only transferred the GPI shares to his trust. He was short by approximately $100,000, of the $400,000 worth of assets he had agreed to transfer to the Earnscleugh Trust.
[86] That left the Earnscleugh Trust with GPI shares at a face value of $280,000. Ms McManamon argued this shareholding was worth less. This was because the acquisition involved the Earnscleugh Trust guaranteeing the loan for the purchase of a commercial building by GPI. This exposed the trust to a possible claim for
$1,500,00018 although the guarantee provided by the trust was limited to its assets.
[87] Ms McManamon knew that the assets that Mr McCarthy intended to put in his trust were investments. They were likely to be less straightforward investments than a house. The anticipation no doubt was that the return on the GPI investments might
18 Which were substantially less than $1,500,000.
be greater than on a house, but the risk was also greater. The parties recognised that Mr McCarthy’s trust would hold “riskier assets”.19 I see no reason to discount the value of that investment because of this risk and the more complicated investment arrangements.
[88] Nor do I consider the fact that the GPI shares were transferred to the trust on 25 March 2003, not 7 March 2003, has relevance here as was submitted. Both parties were aware the GPI settlement was to occur while they were on their honeymoon and that is what happened.
Bank accounts
[89] The parties operated a number of bank accounts in the names of various entities at different times. The Elizabeth Street Trust and Earnscleugh Trust operated a joint bank account. It also received funds from other entities including Wayne McCarthy Ltd.
[90] The bank account position was confusing. Only some bank statements for a range of entities were able to be located and produced. The position was complicated by the fact that Mr McCarthy used a number of different entities for his business and investment interests. He had incorporated two separate companies at different times using the same name, Wayne McCarthy Ltd. In the first he and his first wife were shareholders. This was incorporated in 1993 and removed from the register in September 2001. The second was incorporated on 7 April 2004. The shareholding in the second was in the names of Ms McManamon, Mr McCarthy and Impact Legal Trustee Ltd, the trustees of the Earnscleugh Trust. It was removed from the register on 14 November 2016.20
[91] The two entities that appear to have remained outside the prenuptial arrangements are the McCarthy Family Trust and W McCarthy Ltd.21 Company
19 This is recorded in the email dated 2 December 2022. See [31].
20 That company owned the shares in Wayne McCarthy Mortgages Ltd (FFP), which was removed from the register on 14 October 2016.
21 Company records produced in the course of the hearing show that W McCarthy Ltd was owned by Mr McCarthy.
records produced in the course of the hearing show that W McCarthy Ltd was owned by Mr McCarthy.
[92] Ms McManamon carried out an analysis of the bank statements able to be located, including those relating to the McCarthy Family Trust and W McCarthy Ltd. Statements were missing, many entries were not narrated and it was not clear who had authority to operate which accounts.
[93] At least in the second half of the marriage the bank accounts appear to have been operated without much regard as to who was the named account holder. The parties moved money between various accounts to ensure there were sufficient funds to pay bills and credit card debts.
[94] In 2004 the W McCarthy Ltd bank account was used to pay the rates and mortgage payments on Elizabeth Street, as well as premiums on various insurance policies, including insurance policies that paid out substantial amounts following Mr McCarthy’s heart attack and stroke in 2008.22 The McCarthy Family Trust bank account statements show income received from DPI. Payments for the Elizabeth Street mortgage, rates and family expenses, including payment of an account for Ms McManamon’s son’s dental work, are recorded in the bank statements for W McCarthy Ltd. Those mortgage payments for Elizabeth Street were paid out in 2004 after Wayne McCarthy Ltd23 had taken over as the principal borrower on the mortgage loan.
[95] Family expenses came out of the bank accounts in the name of Mr McCarthy’s separate trust and company. It is likely that Ms McManamon would have made many of these payments at least from the time of Mr McCarthy’s stroke in 2008, but withdrawals for family expenses were recorded well before that.
22 The AIA Insurance policy apparently paid out a lump sum following Mr McCarthy’s heart attack and strokes and part of those funds were used by the parties for a family trip overseas. The Wayne McCarthy Ltd bank account also shows credits for payments received in 2009 by AIA and IAG following Mr McCarthy’s heart attack and stroke claims.
23 That company’s shareholder was the Earnscleugh Trust.
[96] Mr McCarthy’s maintenance payments to his first wife were paid out of a variety of accounts, including the Wayne McCarthy Ltd bank account.24 A summary of payments produced by Ms McManamon indicates that payments of $2,271 were made for that purpose on four occasions from 17 May to 16 August 2004. A further 12 payments of $15,014 were made to Mr McCarthy’s first wife from April 2005 to March 2006 from the ING Unit Trust held by the McCarthy Family Trust. In all, Ms McManamon estimated that, from March 2003 to February 2006, payments Mr McCarthy made to his first wife and children totalled $147,973.
[97] On the material produced it is not possible to undertake a comprehensive analysis of the bank accounts. However, the picture emerges that both parties were operating the accounts, regardless of the named account holder, for their joint benefit as well as for household purposes.
[98] Mr McCarthy said that Ms McManamon had undertaken the book-keeping for the various entities during the marriage. In my view, Ms McManamon had as much control and oversight of the financial arrangements as Mr McCarthy, at least from 2008 onwards. She noted in her 26 January 2014 email to Mr McCarthy that the mortgage had been topped up to assist them financially. In that email she also refers to selling the 10 per cent equity stake in GPI to release funds to pay off the credit card, reducing “our equity stake” from 50 per cent to 40 per cent. She noted that the partners in GPI had agreed that they could take out $2,000 per month for several months while Mr McCarthy was trying to find a job. In that email she refers to “[u]sing up equity, selling off shares” and FFP failing, which had a negative impact on their relationship. All this indicates a good and longstanding grasp of the general financial position of the couple and their various trusts and entities.
[99] In his evidence Mr McCarthy said that he had largely recovered from the effects of the 2008 heart attack and strokes. Despite that, he had difficulty recalling events, particularly in relation to the financial arrangements and bank accounts. Some of his recollections were clearly wrong. In particular, under cross-examination he said that he had thought the relationship property agreement had been executed and that it
24 The Earnscleugh Trust owned the shares in the second Wayne McCarthy Ltd.
might have been lost in a warehouse used by Impact Legal to store documents that had been damaged in an earthquake. The next day he corrected himself and said that a s 21 agreement had been agreed between the parties but not signed.25 I allowed Mr McCarthy some latitude for the time that has passed since the events giving rise to these proceedings and his memory problems since the 2008 stroke and heart attack.
Ms McManamon
[100] Ms McManamon says she was under pressure to sign the documents on 7 March 2003, the day before her wedding. She points to the following factors in support of that claim:
(a)She received no independent legal advice.
(b)She received a phone call from Impact Legal, or Mr McCarthy, on 7 March 2003 to say that she “must” sign the documents on that date.
(c)She was distracted from the implications of signing the documents as she was busy making arrangements for the wedding the next day.
(d)Mr McCarthy picked her up and legal documents were signed on the footpath without proper explanation.
(e)She relied on assurances from Mr McCarthy that he would look after her interests and that the arrangements were for her benefit.
[101] She further pleaded that there was an imbalance of power between her and Mr McCarthy based on factors that included:
(a)Mr McCarthy had a tertiary education including an MBA qualification from Canada and was the Chief Financial Officer of Skellerup before the defendant met him. When she met him, he was a director of the
25 McCarthy v McManamon HC Wellington CIV-2019-470-029, 21 October 2020.
St Laurence Group. He persuaded her that he was someone with significant financial acumen.
(b)Mr McCarthy instructed Mr Boyer at Impact Legal to prepare the documentation to give effect to the arrangements to the plaintiff that Mr McCarthy required.
(c)Mr Boyer was Mr McCarthy’s existing lawyer. He also did legal work for and was located in the St Laurence Group office building as was Mr McCarthy.
(d)She was studying part-time toward a counselling degree and caring for her children and she had little or no understanding of what was being proposed.
[102] Mr McCarthy said that Ms McManamon had done much of the book-keeping for the various entities because of her experience in that area. She also helped out with the commercial rental arrangements for the commercial property owned by GPI. Ms McManamon does not deny this but says in the early days of their marriage she had a limited understanding of the structures and transactions involved.
[103] Ms McManamon agreed that she had undertaken work as a book-keeper and had managed rental properties for a large firm and had continued to do so after her marriage to Mr McCarthy. She said that at the time of their marriage she had little knowledge of financial matters, and the implications of what she was doing, or how trusts worked. She said her knowledge of those matters increased later in the marriage and after separation. Ms McManamon also said it was not until later in the marriage that she had operated the bank accounts.
[104] In 2008 Ms McManamon had made an enquiry of Mr Boyer about the state of gifting to Mr McCarthy’s trust. Apparently that gifting had not been occurring from Mr McCarthy to the Earnscleugh Trust as he had been completing a gifting programme to the McCarthy Family Trust. Mr Boyer responded to Ms McManamon saying there remained a debt from the McCarthy Family Trust to Mr McCarthy of
$405,166.21 and a similar amount was owing from the Earnscleugh Trust to Mr McCarthy. He noted that the latter trust's principal asset was the commercial property in Lower Hutt.26 Mr Boyer indicated that at that stage the debt from the Elizabeth Street Trust to Ms McManamon was $338,000. Mr Boyer noted that to bring “parity” to the gifting programmes the following transactions should occur:
6. Wayne will lend $405,166.21 to the Earnscleugh Trust. At the same time, the Earnscleugh Trust will repay its debt to the McCarthy Family Trust. Also at the same time, the McCarthy Family Trust will repay its debt to Wayne. The Earnscleugh Trust will then enter into an acknowledgement of debt for the amount it now owes to Wayne. Wayne will commence gifting immediately at $27,000 per annum. Part of the debt will be structured so that demand cannot be made for payment until Wayne's annual gifting has caught up with Cath's annual gifting to her trust.
7. When the debt from the Elizabeth Street Trust to Cath is repaid (the current balance is $338,000), there will still be a debt from the Earnscleugh Trust to Wayne of $67,166.21. That means the debt to Wayne will take a further 2 years to repay in full.
8. This solution (which I note from a letter on our file we suggested in 2003) will mean that the debt position between Wayne and the McCarthy Family Trust will be extinguished, there will be a debt from the Earnscleugh Trust to Wayne, and a debt from the Elizabeth Street Trust to Cath.
[105] The timing of Ms McManamon’s enquiry suggests that it occurred after Mr McCarthy’s heart attack and stroke.
[106] It appears that the arrangements suggested by Mr Boyer were implemented. The 2011 financial statements for the Elizabeth Street Trust show that the sum of
$257,000 remained owing to Ms McManamon, and for 2012 the Earnscleugh Trust financial statements records the sum of $199,412 is shown as owing to Mr McCarthy.
[107] I am satisfied Ms McManamon was aware of the legal effect of the prenuptial arrangements and entered them freely. Ms Batt had advised her of the effect of the documents. Ms McManamon met with Ms Batt for an hour to discuss the documents. Ms Batt’s advice is set out in her email to Ms McManamon of 3 March 2003. She advised Ms McManamon to alter the prenuptial arrangements so to preserve the
26 This apparently refers to the GPI investment.
$400,000 equity, to which Ms McManamon had replied she had taken this into consideration but decided to stay with the original arrangement.27
[108] I am satisfied Ms McManamon understood the advice she was given by Ms Batt. In her evidence Ms McManamon acknowledged that Ms Batt had “put the fear of death” into her. She said that “when I went to see Christine she raised my angst. She said ‘hang on a minute, this this this, this this this…’”. In response to a question as to whether she made an “informed choice” not to take the legal advice from Ms Batt, Ms McManamon responded:
I did, I wanted to get married, I did, and as was said to you, when I went to visit Christine she put the fear of death into me and said: “What are you [d]oing ?
[109] Ms McManamon agreed that despite Ms Batt’s advice she decided to go ahead with the prenuptial arrangement and “stay with the original proposal”. In response to a question in cross-examination about knowing she could lose Elizabeth Street she said:
A I know, I know and I have read that, that at that stage I didn’t, I didn’t think that I could lose my house because, because I was putting my house into trust and in my head I believed that Wayne would be a guardian or a looker after of that. So I did not believe that.
Q That Ms Batt advised you point blank that you could lose the house, didn’t she?
A She said that in an email, yes.
[110] At the same time, Ms McManamon was making suggestions about the HOA arrangements. She told Mr McCarthy she had considered the documents, including the HOA, and suggested that on death there should be some additional time inbuilt to allow for adjustments so neither of them had to rush out of the house for example. That suggestion was incorporated into the final HOA by Mr Boyer.
[111] Ms McManamon impressed me in the witness box as a confident and articulate woman. She gave intelligent answers to the questions she was asked. In cross-examination it was apparent she was able to discern where certain lines of
27 See above at [46]–[47] for excerpts of the email exchange.
questioning were going and was able to explain matters in a way that was consistent with the case she was presenting. For instance, a series of questions were put to her about spreadsheets she had prepared and produced as exhibits, which analysed the bank accounts to show payments out of various bank accounts for, among other things, Mr McCarthy’s maintenance obligations from his first marriage. To this, she said the following:
… I just want to qualify something else if I may. In the last five years, well, sorry, sorry. In the last 10 years I've learnt to do things like Excel spreadsheets and add up figures. I could add up figures on a normal piece of paper but I’ve learned to do them in an Excel spreadsheet since about 2010. So I just – that’s the first thing I want to make clear that it probably, about 2010 I learned to add up on Excel spreadsheets. The other thing I want to make really clear as well is that I know that a lot happened, I signed a lot of papers in those beginning years but I have not been able to understand what it was I signed. In all of the last five years since Wayne has initiated legal letters and through
– then I have come to understand a lot more things that I previously did not understand. So I want to make that very clear because in 2003, 2004, 2005, those early years (inaudible 14:31:29) I would not have been capable of doing something, that, ‘cos I wouldn’t have known how to do it…
[112] Ms McManamon had looked after her own finances following the breakdown of her first marriage three years earlier. She had already negotiated one relationship property settlement and been advised by the same legal firm, which independently advised her on this transaction. She had acquired the Elizabeth Street property in the relationship property division, had managed that property, and paid her mortgage and other bills. She had managed rental properties and had book-keeping experience. She had taken independent legal advice and understood it, although she did not accept it.
[113] Ms McManamon acknowledged she knew that following a separation, there would be an asset division and that, in December 2002 or January 2003 onwards, there had been ongoing discussions between her and Mr McCarthy before the marriage about their assets. She also acknowledged she was aware he was facing possible litigation resulting from his previous role as CFO of Skellerup and was concerned about the risks this posed to her assets.
[114] It may well be that she built on her financial knowledge and confidence since she married Mr McCarthy, but I am satisfied that she understood the nature of the arrangements she was entering into at the time she entered the prenuptial
arrangements. She was determined to enter into those arrangements despite legal advice to the contrary. She was aware of the risk she could lose the house as she had been specifically advised of that possibility. Despite that, she chose to enter the prenuptial arrangements.
[115] While the signing of the documents on 7 March 2003 was rushed, she could have sought more time to consider them. She did not do so. She had been advised by Ms Batt to leave things until after the honeymoon. Ms McManamon had been discussing the property arrangements since December 2002 with Mr McCarthy. She had suggested at least one amendment to the HOA and at any stage she could have asked for the process to be delayed until she had further time to consider the documents.
[116] Ms McManamon’s longstanding friend, Ms Lutton, also gave evidence. She confirmed that Ms McManamon was capable and intelligent. She said Ms McManamon was also naïve. Ms Lutton gained the impression that the couple were very much in love. Ms Lutton said she had warned her friend to protect her assets. She saw no evidence of bullying by Mr McCarthy.
[117] Ms McManamon could point to nothing that was said, or anything that could reasonably lead her to believe, whatever happened she could be entitled to the house if there was a separation after three years. The HOA in that regard was consistent with the couple’s earlier discussions as outlined in the email to her from Mr McCarthy dated 2 December 2002. The evidence indicates that Ms McManamon was aware of the risks in the prenuptial arrangements but that she was prepared to take those risks.
[118] During the marriage Ms McManamon’s children lived in the house with her and Mr McCarthy. Throughout 2003 and 2004 the couple were discussing the provisions of a document to explain to all their children what they had done concerning their assets and, in particular, what would happen on their deaths. While it is not clear if that document was ever sent to the children, I am satisfied Ms McManamon was involved in the drafting of it and contributed to it. The drafted document, headed “Cath and Wayne’s Request”, described the two trusts that had been set up in March 2003 and that they had transferred assets of equal value into the Earnscleugh Trust and
the Elizabeth Street Trust. The document noted “[w]e hope that over time the assets in both Trusts will increase in value”.
[119] I conclude Ms McManamon may not have understood the exact intricacies of trusts, but she was aware of the nature of the arrangements and, in particular, of the consequences of putting her house in a trust and entering the prenuptial arrangements.
[120] Once the prenuptial arrangements were in place it appears that throughout the marriage the parties worked together, using the joint assets of the trusts, their incomes and other funds such as Mr McCarthy’s insurance payments, to maintain their lifestyle and assets, including the Elizabeth Street property. Throughout the first half of their married life, especially while Mr McCarthy was receiving a comfortable income from the St Laurence Group and the early days of the FFP business, it appears they lived well, and he contributed most of the household income. Subsequently, following Mr McCarthy’s heart attack and stroke in 2008, and with the effects of the GFC on the investments and financial planning business, his income dropped away, although there was some financial assistance provided by his insurance payouts. The marriage continued for another six years after Mr McCarthy’s stroke.
Errors and omissions in the documentation
[121] In the course of the proceedings a number of errors and omissions were pointed out in the prenuptial documents. It is not necessary to record them all, but they included:
(a)The backdating of the Earnscleugh Trust deed to 23 January 2003 when it was actually signed on 7 March 2003: the trust entered an agreement to purchase the GPI shares before the trust was formed. However, by the time the settlement was effected, the trust deed had been signed and the GPI shares were transferred to the Earnscleugh Trust. I do not consider that the backdating of the deed has particular relevance in these proceedings.
(b)The recording of the acknowledgement of debt from the Elizabeth Street Trust to Ms McManamon at $550,000, which was the
amount that the house was valued at, not the net equity of the property which was about $390,000 but assumed to be $400,000.28 Therefore, that should have been the amount of the debt acknowledged. This error was perpetuated in the deeds of forgiveness of debt, which were executed annually in the following years forgiving $27,000 per annum. Later, the amount of the debt was altered from $550,000 to $500,000. Mr Aislabie, a solicitor at Impact Legal, made this adjustment apparently at Mr McCarthy’s request. In evidence Mr Boyer acknowledged the error. Again, I do not consider this error has any relevance here.
(c)The infelicitous drafting of clause 11 of the HOA to which I refer below.29
[122] Mr Laurenson also pointed to the postponed gifting by Mr McCarthy of the debt for the investments transferred to the Earnscleugh Trust. This was remedied in 2008 when Ms McManamon followed it up with Mr Boyer. It appears that Mr McCarthy’s gifting was delayed due to the fact he first had to gift off an earlier debt owed to him by the McCarthy Family Trust and could not gift more than $27,000 per annum without paying gift duty. For the purposes of this proceeding counsel agreed that the present ungifted balances are $284,000 in the case of Ms McManamon and the Elizabeth Street Trust, and $324,000 in the case of Mr McCarthy and his trust.
[123] In addition to the above errors the management of the day-to-day operation of the trusts appears to have been casual. For instance, the bank accounts were apparently operated without regard to which entity was the named account holder30 and income from the DPI investments was returned to the Inland Revenue Department in the name of the couple when it seems the legal ownership of the investments remained with the McCarthy Family Trust.
28 The amount owing on the mortgage and a legal aid charge totalled $160,000. The higher end of the house valuation was $550,000. See above at [22] and [58].
29 See below at [130]–[132].
30 See above at [97].
[124] Nevertheless, despite the errors and shortcomings in administration, the trusts generally operated effectively during the marriage. They distributed income to the couple, filed returns, had commercial dealings, and borrowed from banks. They were not shams. I do not consider the shortcomings of administration and recording are serious enough to otherwise affect the validity of the trusts or the HOA.
Mr McCarthy’s claims
[125] Mr McCarthy’s claims are for: a breach of terms of the trusts, the terms being the provisions of the HOA said to be incorporated into the trusts; specific performance of the HOA; constructive trust; and proprietary estoppel. He also claims for relief under s 182 of the Family Proceedings Act 1980.
[126] I will first summarise the HOA. I will then turn to address Mr McCarthy’s first two claims and the application of s 182.
[127] I will then consider the specific defences raised. I will then address Mr McCarthy’s claims for constructive trust and proprietary estoppel.
The Heads of Agreement (HOA)
[128]Relevantly the HOA, dated 7 March 2003, states:
Formation of Trusts
1.Cath will form the Elizabeth Street Trust, and Wayne will form the Earnscleugh Trust. In both cases:
a.the beneficiaries will be Cath, Wayne, and the six children, all as discretionary beneficiaries;
b.the trustees will be Cath, Wayne and Brian Boyer;
c.all trustees' decisions must be unanimous;
d.Cath and Wayne jointly have the power to appoint and remove trustees. If one of them dies, the power remains with the survivor and the executor of the deceased.
…
Trust Assets
3.Cath's trust will own 81 Elizabeth Street, Mt Victoria and a life insurance policy on the life of her former husband.
4.The value of the assets will be taken as $550,000, less a mortgage over the house of $150,000.
5.The Earnscleugh Trust will own shares in GPI (2002) Limited worth about $300,000, and other investments, including cash, bringing the total to $400,000 so that the two trusts are equal in terms of assets held.
6.All other assets, currently owned by Cath or Wayne, or in Wayne's existing trust, will stay in that ownership, and will not be transferred into the new trusts.
[129] Clauses 7 and 8 provided for the division of the trusts’ assets if separation occurred within three years. In that event Ms McManamon had the option of taking half of the joint trust assets, or alternatively, the Elizabeth Street property and the life insurance policy. The policy was never transferred to the trust and it had no value.31
[130] Clause 11 covered the death of either party or separation after three years of marriage as follows:
11.If Cath or Wayne dies, or if they separate permanently after 3 years, then the trusts will be resettled, so that there are two trusts, each receiving one-half of the assets:
a.one for the survivor and his or her children; and
b.one for the children of the deceased.
…
13. To achieve the result in paragraph 11, assets owned by either trust will be sold if necessary.
[131] The words “or if they separate permanently after three years” were added later. The clause has been clumsily amended. If the parties separated permanently the references to the trusts for the survivor and/or her children (clause 11(a)) and for the children of the deceased (11(b)) make no sense. Both parties would still be alive.
31 I do not consider the reference to the policy has any significance in these proceedings.
[132] This has the hallmarks of an unfortunate drafting error that would readily be open to rectification if that were necessary, but I do not consider it is.32 Mr Boyer, the draftsperson, acknowledged the defective drafting but said it was clear both parties understood what was intended.
[133] I conclude that, putting to one side whether it binds Ms McManamon and her interests in the event of a separation after three years for other reasons, the intention of the clause, and how it would have been understood by a reader, is clear. There would be two trusts set up: one for Mr McCarthy and his three children and one for Ms McManamon and her three children. These trusts would each receive one half of the joint assets of the Elizabeth Street Trust and Earnscleugh Trust. To achieve that result, assets owned by either trust might be sold if necessary.
Were the provisions of the HOA implied into the trusts?
[134] Turning to Mr McCarthy’s first claim, he submitted that the HOA was a deed and, as it dealt with the terms of the trusts, it should be enforced rigidly. He says the failure by Ms McManamon to effect the division of assets provisions under clause 11 amounted to a breach of trust. He sought orders for enforcement under the Trustee Act 1956.
[135] The HOA is a deed and it forms part of the written documentation evidencing the prenuptial arrangements. In my view, the HOA operated as a contract between the parties and should be interpreted as such. There is nothing to suggest that the terms were to be incorporated as terms of the trusts.
[136] I am of the view some obligations under the HOA were fiduciary in nature and I discuss this below.33 However, the terms of the HOA were not incorporated as terms of the Elizabeth Street Trust or Earnscleugh Trust and therefore there has been no breach of terms of the trusts. Mr McCarthy’s first claim fails.
[214] In addition, it noted that the principles of the Property (Relationships) Act do not underpin s 182.89 There is no entitlement or presumption to a 50/50 or any fractional division of the trust property. Nevertheless, in the current social context the contributions to the marriage may be made in different but equal ways and were all relevant in assessing the source and character of the assets.90 Where the assets have been acquired or sustained by one or both spouses during the marriage it may be that equal sharing will result, absent countervailing factors.91
[215] The fact that a trust is set up for business purposes, or that the assets are business assets, does not on its own provide a reason for not exercising the discretion.92
88 At [89].
89 Claymark Trust, above n 66, at [65]; citing Ward v Ward (SC), above n 82, at [20].
90 At [66].
91 At [67].
92 At [74].
[216] In Claymark Trust, the Supreme Court was considering a nuptial settlement in the form of a discretionary trust set up during the marriage. The parties had been in a de facto relationship for three years and married for 16 years. They had two children who were by then adults. During the marriage Mrs Clayton had obtained a number of benefits from the trust, including the use of a car and the payment of the children’s expenses. Following the marriage, the position changed, and she did not receive those benefits. The Supreme Court noted that the source of some of the settled assets had included relationship property (contrary to findings in the lower Court), and that Mrs Clayton had worked in the business in the early part of the marriage. The Supreme Court concluded there was a basis for exercising the discretion in that case.93
[217] I now consider the circumstances of Mr McCarthy and Ms McManamon at the time of the nuptial settlement, and at the present time, and the factors relevant to the exercise of the discretion.
The post nuptial settlement circumstances
[218] Immediately following the nuptial settlement on 7 March 2003, the couple were living in the Elizabeth Street home. They had the right to rent out the flat, which they did during the marriage. They received rental income, which was distributed through the trust to each of them.
[219] Mr McCarthy earned a comfortable income, both from his employment at the St Laurence Group and subsequently, as a financial advisor, at least until his heart attack and stroke in 2008. Following those events, payments were made under his insurance policies of approximately $100,000. It also appears some insurance income continuation payments may have been received. The income and insurance proceeds appears to have been largely used for the couple’s joint benefit.
[220] Shortly after the settlement, the GPI shares were transferred to the Earnscleugh Trust and the couple had the benefit, through those shares, of income and advances from that investment during the marriage. FFP was owned by Wayne McCarthy Ltd, whose shares were owned by the Earnscleugh Trust. It owned
93 At [78].
that business from 2004 onwards. The income from FFP also went to support the household.
[221] The parties lived comfortably, including going on overseas family holidays. Ms McManamon was largely responsible for running the household. She looked after her school-aged children at home and earned a small income from part-time work. Mr McCarthy paid maintenance for his children who lived with their mother.
[222] As I have outlined, circumstances changed dramatically following Mr McCarthy’s heart attack and stroke.94 He was unable to work in the FFP business, which was also subsequently badly affected by the GFC. Despite attempts to sell the business, no buyer was found. For practical purposes the business is now worth nothing.
[223] During the marriage, the Earnscleugh Trust sold 10 per cent of its shares in GPI and advances were made by GPI to the couple via the Earnscleugh Trust to help meet their outgoings when their finances were strained.
[224] Outgoings on the home and family expenses were paid through various bank accounts, including the W McCarthy Ltd account owned by the Earnscleugh Trust.
[225] The parties separated in early 2014. Mr McCarthy left the home and the marriage was dissolved two years later.
The present circumstances
[226] The Elizabeth Street Trust owns the Elizabeth Street property now worth approximately $1,515,000. There is approximately $250,000 owing on the bank mortgage over that property.
[227] At present, Ms McManamon resides in the Elizabeth Street property. Her son resides in the adjoining flat on the property, and she no longer receives rental payments from that. Ms McManamon continues to work part-time and pays the interest on the
94 See above at [26].
mortgage and outgoings on the property. She has no significant assets other than the interest in the Elizabeth Street Trust.95 Ms McManamon is nearing retirement.
[228] Mr McCarthy left the Elizabeth Street property in June 2014 at Ms McManamon’s request. He has lived in rental properties since. He presently lives in Dunedin. He has no assets other than his personal chattels. Following his heart attack and stroke he found it difficult to gain employment, despite retraining. He is now retired.
[229] Mr McCarthy receives income from national superannuation and a very small amount of commission from the tail end of sales of products made when he was a financial advisor.
[230] The Earnscleugh Trust has few, if any, assets. By agreement, the balance of the GPI shares was sold to pay various debts and paid a distribution to Mr McCarthy of approximately $142,000.
[231] The six children are all now adults. They remain beneficiaries of both trusts. Throughout the marriage they were supported by the couple in various ways. Ms McManamon’s children lived with them in the Elizabeth Street property. The bank account statements show payments for family and household expenses as well as for Ms McManamon’s youngest child’s expenses coming from the trusts and from Mr McCarthy’s income.
[232] In summary, the circumstances of the parties have changed significantly since the nuptial settlement. Following the settlement both parties were living in a comfortable house, enjoying a good standard of living, including overseas trips, paid for, to a significant extent, by Mr McCarthy’s income. Ms McManamon contributed a small income as well as looking after the household and the three children from her first marriage on a day to day basis. Mr McCarthy supported the three children from his first marriage by way of maintenance. They might have had a comfortable
95 The parties have dealt with relationship property division including the division of their furniture, chattels and personal property.
retirement with one trust providing them with a home and the other with investment income if circumstances had been favourable.
[233] Both parties now face retirement and are unlikely to be able to accumulate significant savings beyond the little they have at present. However, Ms McManamon has the benefit of occupying a $1,515,000 home with an option of receiving rental income,96 while paying outgoings in the vicinity of $270 per week or $14,000 per annum for the house97. Mr McCarthy is in rental accommodation, is retired and relies for his income largely on national superannuation.
[234] The trustees of both trusts are Ms McManamon, Mr McCarthy and Impact Legal. The beneficiaries remain the couple and the six children. A provision in the trust deeds of both the Earnscleugh Trust and the Elizabeth Street Trust directs the trustees to exercise their powers and discretions primarily for the benefit of those beneficiaries for whom the settlor has “natural love and affection”. In the present circumstances, it appears likely the trustees will allow Ms McManamon and her three children to continue to primarily benefit from the Elizabeth Street trust property. It is also unlikely that the trusts are functioning effectively given the existing trustees and beneficiaries.98
[235] Mr McCarthy has received a capital distribution from his trust in the vicinity of $147,000 since separation. It appears there is nothing left in his trust.
[236] I consider the change in circumstances supports the exercise of my discretion under s 182. I may make orders as to the whole or any part of the settled property or vary the terms of any agreement or settlement for the benefit of the parties or the children.99
96 The rental income in 2020 that might be achieved for the flat was estimated at $22,400 per annum with expenses of $12,800.
97 This is the outgoings figure supplied for the home only.
98 The trustees’ discretion must be exercised unanimously. The power of appointment is vested in Ms McManamon and Mr McCarthy in relation to each of the trusts.
99 Family Proceeding Act 1980, s 182(1).
[237] Other relevant factors to consider in the exercise of my discretion include the following:
(a)At 12 years, the length of marriage was reasonable; it was neither of short duration nor a very long marriage.
(b)The couple looked after the six children during the marriage in various ways. This included day to day care, maintenance or accommodation and expenses. The children are now adults and independent.
(c)Mr McCarthy’s personal income, his assets, insurance policies and the Earnscleugh Trust provided direct and indirect contributions to the Elizabeth Street property. This was by way of paying the mortgage and outgoings, renovations, household and family expenses.
(d)Renovations were carried out on the Elizabeth Street property during the marriage. These were largely funded by loans secured by the mortgage over the home.
(e)Mr McCarthy failed to contribute approximately $100,000 of the
$400,000 he had agreed to put in his trust, under the HOA. This breached his fiduciary obligation to do so. At the same time, he did transfer to his trust (through Wayne McCarthy Ltd) the Money Shoppe business (later FFP). From 2004 onwards this business generated income for the Earnscleugh Trust and was used for the benefit of the parties. In addition, the couple benefitted from Mr McCarthy’s insurance policies.
(f)The whereabouts of the DPI investments, which were to be transferred to the Earnscleugh Trust, remains obscure. It seems they are no longer in existence so must have been realised at some stage. Mr McCarthy indicated they had been sold but was unable to give any satisfactory details about the sale.
(g)Mr McCarthy was also unable to explain what had happened to the
$50,000 repayment to the Earnscleugh Trust made by the bank following the purchase of the GPI shares. However that was part of the consideration paid for the investment. The refund must have been repaid to the Earnscleugh Trust.
(h)The house at Elizabeth Street was transferred into the trust by Ms McManamon. The increase in its value is largely due to inflation. However, it was maintained and improved during the marriage. That asset was directly and indirectly maintained by the income of Mr McCarthy and his investments.
[238] Also relevant is the reason for the change in circumstances. Mr McCarthy’s heart attack occurred at a time of his life which made it difficult to find work outside his area of expertise. That was exacerbated by the GFC. If external disasters had not struck, it may be that the FFP business and GPI investment would have been significant assets for the Earnscleugh Trust.100
[239] The Supreme Court in Claymark Trust noted that the parties’ expectations should not attract undue weight.101 The parties’ subjective views may be relevant, but the assessment remains the “reasonable expectations”: an objective assessment of the overall circumstances.102 In this case, each party had expected to share in the benefits of both the trusts’ assets. They had expressly turned their minds to the possibility of a separation after three years. Both subjective and objective expectations at the time of the prenuptial settlement were that the trusts’ assets would be shared equally.
[240] The exercise of the discretion under s 182 is not a strictly arithmetical exercise. I must take into account all the circumstances and considerations that I have outlined. This, as the Supreme Court has said, is not a formulaic exercise but requires a rounded approach. There is no presumption of equal sharing.
100 The GPI investment provided funds for the couple when their finances were stretched. See above at [28]. The proceeds of sale of those shares following separation of approximately $205,000 were used to pay joint debts and a distribution of $142,043.68 to Mr McCarthy.
101 Claymark Trust, above n 66, at [72].
102 Claymark Trust, above n 66, at [48] per William Young, Glazebrook, Arnold and O’Regan JJ and [127]–[132] per Elias CJ.
[241] Standing back and considering the relevant factors I have listed above I have reached the conclusion that Mr McCarthy’s interests should receive a further
$400,000. This, together with the $142,000 he has received from the Earnscleugh Trust, amounts to $542,000: equivalent to 43 per cent of the present equity in the Elizabeth Street property.103 This recognises that Mr McCarthy did not make the contributions he had agreed to make to his trust. At the same time the couple had the benefit of the assets and income of both trusts as well as Mr McCarthy’s income and insurance payouts during the marriage. These funds directly and indirectly contributed to the maintenance and improvement of the Elizabeth Street trust property.
[242] I have put to one side the debts back to each of the parties from the trusts. Those debts are largely meaningless when assessing the position of the parties. Mr McCarthy has no prospect of recovery of his debt from his trust. The gift duty which largely drove the use of acknowledgements of debt no longer has any practical effect. It is artificial to attempt to deal with those debts in the context of this matter. They should now be dealt with by the parties as they think fit as part of the reordering of the trusts.
[243] Ms McManamon or her trust will continue to be responsible for the mortgage debt. In addition, I make no separate allowance of the use of the Elizabeth Street house and the rental for the adjoining flat, which has been to Ms McManamon’s benefit since separation. I have taken that into account in the round, in particular, given her contribution to the Elizabeth Street trust assets.
[244] A further payment of $400,000 (a total payment of $542,000) leaves Ms McManamon with a substantial equity ($855,000) in her trust. It allows Mr McCarthy a reasonable amount for his retirement to use as he wishes.
[245] I now deal with the other claims advanced by Mr McCarthy: constructive trust and proprietary estoppel.
103 This assumes the net equity to be $1,255,000. No deduction is made for the debt owed to Ms McManamon by the trust.
Constructive trust
[246] Mr McCarthy claimed a constructive trust over a half of the Elizabeth Street property (which is referred to as the Family Home in the statement of claim) and seeks that share be vested in the Earnscleugh Trust.
[247]The elements necessary in order to establish a constructive trust here are:104
(a)direct or indirect contributions to the property in question;
(b)an expectation of an interest in the property;
(c)that such an expectation is a reasonable one; and
(d)that the defendant should reasonably expect to yield the claimant an interest.
[248] Whatever the nature of the contributions, it is generally accepted that they must have added significant value to the property.105 They must have also “manifestly exceeded” any benefits received so that there is “a situation of sufficient disproportion to merit Equity's intervention”.106
[249] In this case, the parties had specifically turned their minds to the arrangements for their property sharing and established a trust as part of a prenuptial settlement. Mr McCarthy has breached those arrangements. The property over which Mr McCarthy seeks to establish a constructive trust is the property that Ms McManamon settled in a trust pursuant to the prenuptial arrangements. In my view those express arrangements are inconsistent with, and preclude the establishment of a constructive trust in circumstances where Mr McCarthy receives some appropriate share of the prenuptial settlement.
104 Lankow v Rose [1995] 1 NZLR 277 (CA) at 294.
105 Vervoot v Forrest [2016] NZCA 375, at [75].
106 Blumenthal v Stewart [2017] NZCA 181, (2017) 4 NZTR 27-009 at [53]; citing Lankow v Rose,
above n 104, at 282.
[250] On the other hand, if I am wrong about the application of s 182, I would have found that a constructive trust was established in favour of Mr McCarthy over the Elizabeth Street trust. The relief as a result would be that Mr McCarthy was entitled to the same amount as I have found he is entitled to under s 182. Mr McCarthy made significant direct and indirect contributions to the Elizabeth Street property throughout the marriage. He could reasonably have expected an interest in the property due to his contributions, and the Elizabeth Street trust/Ms McManamon should reasonably yield him an interest in the Elizabeth Street property. That the house is held in trust is no bar as the trustees accepted his contributions.107
[251] I am of the view that the better way to approach the matter is by the application of s 182. However, the same result could have been achieved by the recognition of a constructive trust.
Proprietary estoppel
[252]I do not consider that Mr McCarthy has established a proprietary estoppel.
[253] The law on estoppel is now regarded as settled. Historically there were three strands of estoppel: estoppel by representation, promissory estoppel and proprietary estoppel. The Courts now recognise one doctrine of equitable estoppel.108 There are four elements required to establish equitable estoppel. These are:109
(a)The person alleged to be estopped has created or encouraged, by words or conduct, a belief or expectation in the claimant of the estoppel.
(b)The claimant has reasonably relied on the belief or expectation.
(c)The claimant will suffer detriment if the person alleged to be estopped departs from the belief or expectation.
107 Hawke’s Bay Trustee Co Ltd (Trustees) v Judd [2016] NZCA 397, (2016) 4 NZTR 26-019.
108 Sutherland v Lane [2020] NZHC 721 at [129].
109 Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567 at [44]; and Hansard v Hansard [2014] NZCA 433, [2015] 2 NZLR 158 at [63].
(d)It would be unconscionable for the person alleged to be estopped to depart from the belief or expectation.
[254] Under this head Mr McCarthy points to the provisions in the HOA and his trust’s reliance on the obligation to share its assets with the assets of the Elizabeth Street Trust, in the event of a separation after three years. He therefore seeks a half share of the Elizabeth Street Trust assets based on clause 11 of the HOA. I have found he has breached the terms of that deed. Ms McManamon did as she was required under the HOA.110 It is Mr McCarthy’s breach that has led to his not obtaining specific performance of the contract.
[255] In the circumstances neither Ms McManamon nor her trust has created an expectation that Mr McCarthy or his trust would share in her trust or the Elizabeth Street property. Nor would it be unconscionable in terms of estoppel for the defendants to depart from Mr McCarthy’s expectation.
[256]As is apparent, I consider the most appropriate approach remains under s 182.
The present deadlock
[257] Both trusts continue in existence, albeit they are unlikely to be operating effectively due to the breakdown of the relationship of two of the trustees. Each party seeks to resolve the deadlock here. The six children remain beneficiaries of both trusts.
[258] Mr Laurenson submitted that whatever the outcome, the Court should exercise its discretion to remove Mr McCarthy and his children from the Elizabeth Street Trust. Similarly, he indicated Ms McManamon and her children should be removed from Mr McCarthy’s trust. Mr Laurenson indicated he sought those orders under the Court’s inherent jurisdiction as he considered the powers under the Trustee Act were unlikely to allow that relief.
110 I include her trust when I refer to her in the context of the claims by Mr McCarthy against the Elizabeth Street Trust.
[259] The usual course for removing trustees and beneficiaries is by way of originating application following which directions as to service would be made. In this case the interested parties would include not only the parties and beneficiaries but third parties and the mortgagee of the Elizabeth Street property.
[260] Section 182 is wide enough to allow for orders to vary a trust which is part of a nuptial settlement by removing trustees and beneficiaries where appropriate. Any amendments varying the trustees and the beneficiaries do not directly affect the ownership of the Elizabeth Street house or the mortgage to the bank, although it is likely the consent of the bank would be required.
[261] I am of the view that it would be appropriate for the Court to vary the trusts to remove each party and their respective children from the other’s trust without the need for further court applications. The parties’ circumstances since the trusts were set up have changed significantly. The children are now adults, and I am satisfied that the trustees are able to represent their interests. In the circumstances it does not appear necessary for them to be served. However, counsel should address that issue in the memorandum/a, as directed below.
[262] I direct that a joint memorandum be filed in relation to the final form of the orders including the structure of the payment, and the entity to which the payment is to be made. The mortgagee’s consent to the removal of the trustees and beneficiaries should be obtained if that is required under the terms of the mortgage. A copy of that consent should be provided to the court before further orders are made. The joint memorandum should be filed and served on or before 14 days of the date of this judgment.
Conclusion
[263] Mr McCarthy fails on his other claims except in relation to s 182 of the Family Proceedings Act. Similarly, Ms McManamon fails in her defences except for the claim seeking resettling of the trusts under s 182.
[264] The trust arrangements put in place by the parties before marriage amount to a prenuptial settlement for the purposes of s 182. The circumstances of the parties have
changed significantly from when they entered into the nuptial settlement to the present time.
[265] In the present circumstances, the Court’s discretion under s 182 should be exercised. It is a wide discretion to take into account all relevant factors and involves a wide-ranging evaluation. It is not susceptible to a precise arithmetical calculation.
[266] I have concluded that Mr McCarthy, or an entity nominated by him, should receive $542,000 inclusive of $142,000 he has received from the Earnscleugh Trust. This requires a further payment to him of $400,000 by the Elizabeth Street trust, the second defendant. The Elizabeth Street trust will continue to be entitled to retain the Elizabeth Street house and take liability for the mortgage.
[267] Counsel will confer over the form of the final orders and file a joint memorandum.
[268] If the parties cannot agree on the form of the final orders the parties should liaise with the Registrar to arrange a conference and file memoranda in accordance with the usual requirements.
[269]All other applications are adjourned pending the making of final orders.111
111 Order for sale of the Elizabeth Street property and vesting order of an interest in the Elizabeth Street property in the trustees of the Earnscleugh Trust under ss 339 and 350A of the Property Law Act 2007; and orders removing Mr McCarthy and his children as trustee and beneficiaries of the Elizabeth Street Trust and removing Ms McManamon and her children as trustee and beneficiaries of the Earnscleugh Trust.
[270] Finally, I note that each party has been successful in some measure. It appears an appropriate case for costs to lie where they fall. With that indication counsel may be able to reach agreement as to costs. However, failing that, any application for costs, together with memoranda on costs, should be filed by the plaintiff on or before seven days from the date of this judgment and a reason by the defendants on or before a further seven days. The plaintiff has a further three days to reply.
Grice J
Solicitors:
K3 Legal Limited, Auckland for the Plaintiff Batt Law, Masterton for the Defendants
Attachment 1 – Heads of Agreement dated 7 March 2003
HEADS OF AGREEMENT BETWEEN THE ELIZABETH STREET TRUST AND THE EARNSCLEUGH TRUST dated 7 March 2003
Formation of Trusts
1.Cath will form the Elizabeth Street Trust, and Wayne will form the Earnscleugh Trust. In both cases:
a.the beneficiaries will be Cath, Wayne, and the six children, all as discretionary beneficiaries;
b.the trustees will be Cath, Wayne and Brian Boyer;
c.all trustees' decisions must be unanimous;
d.Cath and Wayne jointly have the power to appoint and remove trustees. If one of them dies, the power remains with the survivor and the executor of the deceased.
2.The alternative trustee for Brian Boyer in the Elizabeth Street Trust will be Beverley Roche, and in the Earnscleugh Trust will be Kevin Podmore.
Trust Assets
3.Cath's trust will own 81 Elizabeth- Street, Mt Victoria and a life insurance policy on the life of her former husband.
4.The value of the assets will be taken as $550,000, less a mortgage over the house of $150,000.
5.The Earnscleugh Trust will own shares in GPI (2002) Limited worth about
$300,000, and other investments, including cash, bringing the total to
$400,000 so that the two trusts are equal in terms of assets held.
6.All other assets, currently owned by Cath or Wayne, or in Wayne's existing trust, will stay in that ownership, and will not be transferred into the new trusts.
Operation of the Trusts
7.The two trusts will agree to “share” the use and enjoyment of the assets held, but each trust will continue to own solely its assets, which will not be jointly owned.
8.If Cath and Wayne separate permanently within 3 years of 23 January 2003, then Cath is entitled to choose to receive either:
a.81 Elizabeth Street, Mt Victoria and the life insurance policy; or
b.the equivalent of 50% of the total assets owned by the two trusts.
9.The result of Cath's choice under the preceding paragraph will be that Wayne will receive either his shares or the other 50% of the total assets, depending on the choice Cath makes.
10.The result of the above two clauses will be that, in the event of the separation:
a.Cath and Wayne will each resign as a trustee of the other's trust;
b.the new trustees will exclude Cath and her children, and Wayne and his children, as beneficiaries of the trust of the other;
c.the power of appointment of trustees will be varied in each trust, so that only Cath and Wayne have the power of appointment of new trustees in respect of their own trusts.
11.If Cath or Wayne dies, or if they separate permanently after 3 years, then the trusts will be resettled, so that there are two trusts, each receiving one-half of the assets:
a.one for the survivor and his or her children; and
b.one for the children of the deceased.
12.If Cath or Wayne dies, then the survivor will have a period of 12 months after that death before the provisions of paragraph 11 are implemented.
13.To achieve the result in paragraph 11, assets owned by either trust will be sold if necessary.
14.After the trusts have been resettled, there will be a requirement in the case of the trust for the deceased partner that the beneficiaries will not receive any capital entitlement until they reach 25 years of age, except in circumstances where the trustees believe that an exception should be made, in the interests of a particular child.
15.When each child reaches the age of 25 years, one-third of the assets in the trust will be cashed up, so that child may receive one-third of the assets, and do with it as he or she chooses.
16.In the event that Cath and Wayne both die together, then the resettlement of the trusts will take place, providing for a new trust for each of Cath's and Wayne's three children.
Wills
17.Cath and Wayne will make new wills.
18.In the wills, they will provide that the trustees will be Wayne and Beverley Eileen Roche in Cath’s case, and Cath and Kevin Podmore in Wayne’s case.
19.The wills will provide that Beverley and Kevin respectively are appointed a trustee of Cath’s or Wayne's trust.
20.The wills will provide that all assets not held in trust will be bequeathed to the children of the deceased parent and that any debt owed by the deceased’s trust to the deceased will be forgiven on death.
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