McKean Family Trustee Limited v McKean
[2023] NZHC 1098
•10 May 2023
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV-2022-454-71
CIV-2022-454-21 [2023] NZHC 1098
BETWEEN MCKEAN FAMILY TRUSTEE LIMITED
Applicant
AND
JANET ANNE MCKEAN JOHN DUGALD MCKEAN
Respondents
On the papers: Counsel:
V D Bruton KC and D I Durovich for Plaintiff L McKeown and A A Sawant for Defendants
Judgment:
10 May 2023
JUDGMENT (NO. 2) OF CHURCHMAN J
Introduction
[1] These proceedings concern the Torwood Family Trust (the Trust). The applicant, McKean Family Trustee Ltd (MFTL), is the sole trustee of the Trust. Ian McKean (Ian) is the sole director of MFTL. MFTL has applied for authorisation that its litigation costs in two separate proceedings concerning the Trust be paid from the Trust’s funds. This judgment deals with that application.
[2] The first substantive proceeding was commenced on 19 April 2022. It is an application by Janet McKean (Janet) and John McKean (John), the respondents in this application, to remove MFTL as trustee (the removal proceedings). The second proceeding, commenced on 13 September 2022, is an application by MFTL for directions that the Court direct sale of the Trust-owned farm to, or establish a new trust
MCKEAN FAMILY TRUSTEE LIMITED v MCKEAN (NO 2) [2023] NZHC 1098 [10 May 2023]
for the benefit of, those beneficiaries who wish to retain ownership of it, and for distribution and winding up of the Trust (the directions application).
[3] A hearing took place on 9 March 2023. At the conclusion of the hearing, I adjourned the proceedings and made directions as to the filing of further evidence. On 13 March 2023, I issued an interim judgment recording those directions.1 I now issue my final judgment on MFTL’s interlocutory application that its costs in respect of the two proceedings be paid from the Trust’s funds.
Background
[4]I set out the background to the Trust in the interim judgment as follows:2
The Trust
[10] On 10 December 2013, the late Flora Marion McKean (Flora) established the Torwood Family Trust (the Trust). The sole trustee of the Trust was the MTFL. Ian was the sole shareholder in and director of MTFL.
[11] The Trust Deed provided for the role of “protector” of the Trust. Flora was the initial protector and on her death the deed provided that the protectors would be John, Janet and Ian. The protectors hold the power of appointment and removal of the trustee.
[12] Flora’s purpose in establishing the Trust was to ensure that the farm which had been owned by the family since 1893 remained as a long-term asset for the family.
The beneficiaries
[13] The Trust Deed provided for both primary and secondary beneficiaries. There were three classes of primary beneficiary. Flora was the principal beneficiary; but the Class B primary beneficiaries were John, Ian, Janet and Stewart McKean (a son of the late Angus (Gus) McKean).
[14] The Class C primary beneficiaries were the children of the Class B primary beneficiaries: John’s son Alistair; Stewart’s children; Ian’s four children, Cameron, Lachlan, Logan, and Alexander; Janet’s children, Daniel and Elizabeth, as well as any grandchild or grandchildren or other lineal descendants of Class B primary beneficiaries, and any person or persons added by the trustees as a primary beneficiary pursuant to cl 20 of the Trust Deed.
[15] The secondary beneficiaries were any person added by the trustees as secondary beneficiaries or any other child or grandchild or other lineal descendant of the named secondary beneficiaries.
1 McKean Family Trustee Ltd v McKean [2023] NZHC 482 [interim judgment].
2 Interim judgment, above n 1. There is no challenge to this summary.
[16] Significant omissions from the Trust Deed as originally drafted were Flora’s daughter, Margaret Elizabeth (Liz), and Gus’ four daughters (Tracy, Caroline, Annie and Angela). Liz was not a beneficiary of the Trust because, during Flora’s life, a portion of the farm had been transferred to her. Gus’ four daughters were apparently omitted because of what was said to be Flora’s old- fashioned attitudes to women.
Ian’s actions
[5] I held in the interim judgment that for some six years after the creation of the Trust, Ian maintained to Janet and John that they were directors of MFTL, the sole trustee, but that a number of his actions in relation to the Trust were inconsistent with that.3 Ian signed the Trust financial statements for the years ended 31 March 2015– 31 March 2019 himself without any consultation with either Janet or John, and he made a number of other important decisions in relation to the Trust without consultation as well.4
[6] I record at this stage that MFTL has, in a subsequent memorandum, challenged a number of the factual comments I made in the interim judgment, including in respect of Ian’s actions in relation to the management of the Trust. It is not necessary for the purpose of this application to traverse in detail the challenges to my judgment MFTL has raised. Such matters can be addressed in the substantive hearings. It is enough at this stage, however, to note MFTL’s objections to several of my comments in relation to Ian’s actions concerning the management of the Trust.
The Trust assets
[7] The principal asset of the Trust is the 161-hectare Torwood farm, which produces an annual gross rental income in the region of $82,000. The farm was valued at $3,426,000 as at August 2022. A further 23 acres of land was valued at the same date as being worth $505,000.
[8] A document described as the “Beneficiaries Report” dated June 2022 listed other assets of the Trust as then being a savings account with $272,444 in it, an investment account of $55,733, and a cheque account with a balance of $37,052.
3 At [19]–[20].
4 At [20].
[9] Ian deposed in his 12 September 2022 affidavit that the cash then remaining in the Trust was some $337,862.
The substantive proceedings
[10] The two substantive proceedings have been precipitated by the breakdown in relationships between Ian on the one hand, and Janet and John (and other family members) on the other. As I noted in the interim judgment, there is significant acrimony in the affidavits filed in both proceedings and they contain material that is inflammatory and unhelpful.5
Removal proceedings
[11] Janet and John instituted the removal proceedings on 19 April 2022. In these proceedings, Janet and John seek the removal of MFTL as trustee of the Trust. They are concerned at many aspects of Ian’s actions, including a failure to provide them with financial information, or the provision only of incomplete information, often some time after it had been requested. They are also concerned about what they see as Ian’s deception in representing to them that they were directors of MFTL, but acting unilaterally.
[12] It appears matters came to a head when Ian used his powers to unilaterally vary the Trust Deed. The most significant variation was to provide that the trustee could remove the protectors, and that the protectors needed to act unanimously.
[13]As I found in the interim judgment:
[32] These alterations effectively gave Ian the power to block any decisions Janet and John might take as protectors and to remove them altogether if he chose to do so. It also stopped Janet and John from removing MFTL as trustee. It is unsurprising that Janet and John saw these unilateral actions of Ian as being in his self-interest rather than the interests of all the beneficiaries.
5 At [28].
[14] Janet and John are also concerned that Ian made a payment (the exact amount of which is disputed) to someone whom, at the time the payment was made, Ian knew was not a beneficiary (namely, one of Gus’s daughters, Annie).
[15] I noted the removal proceedings are clearly what is described as “hostile litigation”.6 In the removal proceedings, Janet and John seek orders:
(a)removing MFTL as trustee of the Trust;
(b)appointing a trustee company in replacement with John, Janet and a professional trustee being directors;
(c)removing Ian as a protector of the Trust;
(d)requiring Ian and/or MFTL to provide Janet and John with copies of Trust documents;
(e)requiring Ian and/or MFTL to reimburse the Trust costs for costs improperly charged to the Trust; and
(f)requesting that Janet and John’s costs be paid either by Ian personally or out of the Trust fund.
[16]As I noted, both MFTL and Ian have defended the removal proceedings.7
Directions application
[17] MFTL commenced the directions application proceedings on 13 September 2022, some six months after the removal proceedings were brought. Janet and John say although MFTL has described these proceedings as a directions application, they are equally as hostile.
6 At [34].
7 At [35].
[18] In these proceedings, MFTL seeks firstly a declaration that the Trust is a valid trust. The second relief sought is removal of Janet and John as protectors.
[19] Janet and John oppose the directions application, saying a declaration that the Trust is a valid trust as sought is unnecessary, and that their removal as protectors is a partisan move designed to further Ian’s agenda, vesting absolute control of the Trust in him.
Present interlocutory application
[20] At the same time as MFTL filed its direction application proceeding on 13 September 2022, it also brought a pre-emptive costs orders application, applying for authorisation that its litigation costs, both for defending the removal proceedings and for bringing the directions application, be paid from the Trust’s funds. As I noted in my interim judgment, although in form it is not a Beddoe application, in substance it has many of the same features.8
[21]Janet and John opposed, and continue to oppose, the application.
[22]In my interim judgment I found:
[45] On the basis of the information supplied in support of the application, it is impossible to discern exactly what costs are intended to be covered by the order sought. It is also impossible to establish whether the costs are reasonable.
[23] I therefore directed that MFTL file detailed information explaining exactly what the claimed costs of $142,000 (or $164,000) related to and provide an estimate of future legal costs.9
[24] I expressed my expectation that MFTL would abide the decision of the Court in the removal proceedings, and that there would be minimal further legal work required in relation to the directions application, as many of the issues were effectively duplicated in the removal proceedings litigation.10
8 At [6].
9 At [46].
10 At [47].
[25] I directed the parties to consider whether an order could then be made declaring the Trust valid by consent memorandum and encouraged the parties to consider whether a judicial settlement conference would be of assistance.11 I concluded by recording my concern that the cost of the anticipated litigation would exhaust the assets of the Trust, thus necessitating the sale of the farm.12
Positions of the parties
Applicant's submissions
[26] MFTL contends its litigation costs should be paid from Trust funds in relation to each of the proceedings. In essence, MFTL says its litigation costs arise in the course of administration of the Trust. It says those costs are reasonably and properly incurred in the interests of the beneficiaries as a whole.
[27] MFTL says the directions application was necessary to resolve intractable family conflict, which would otherwise destroy the Trust value, and likely result in the farm having to be sold, contrary to Flora’s wishes.
[28] MFTL says that to the extent there are allegations of self-interest made against Ian, he has engaged a lawyer personally whom he is paying at his own cost.
[29] MFTL says it abides the Court’s decision in the removal proceedings as to whether or not to remove it as a trustee. It says it is simply looking to put relevant information before the Court in order for the Court to resolve the underlying factual allegations. It says the Trust should therefore pay its costs of putting the information before the Court, as in McCallum Jnr v McCallum.13
[30] MFTL says it has continued to faithfully administer the Trust notwithstanding the litigation between the parties, and submits that it is difficult to see what, in the circumstances, it could have done other than what it has done, namely to bring the
11 At [48]–[49].
12 At [49].
13 Referring to McCallum Jnr v McCallum [2021] NZCA 237.
directions application and abide the Court’s decision in the removal proceedings while providing information to assist the Court.
Respondent's submissions
[31] Janet and John oppose the pre-emptive costs application. They say neither of the substantive proceedings can properly be described as relating to the management and administration of the Trust.
[32] Janet and John say MFTL has not acted, and continues not to act, reasonably or properly in defending the removal proceeding and bringing its own proceeding.
[33] Janet and John say MFTL, under Ian’s sole control and direction, is acting in its and/or Ian’s self-interest. They say MFTL is not acting in the interests of the beneficiaries, and is not acting to ensure the settlor’s wishes are upheld.
[34] Janet and John say that even if the proceedings are not hostile, the costs incurred by MFTL are unreasonable. They also say MFTL cannot rely on the indemnity clause in the variation deed, and that an order approving indemnification at this early stage in the proceedings is not in the interests of the beneficiaries.
[35] However, Janet and John have accepted that an allowance can be made to account for those costs that might have been properly incurred in the administration of the Trust. They submit it would be appropriate for MFTL to be indemnified for up to 30 per cent of its costs, and no more, except in respect of its costs in defending the removal proceedings, for which it should not be indemnified at all. Further, Janet and John say there should be no need for MFTL’s counsel to appear further in the removal proceedings, or at least not at the expense of the Trust fund.
[36] Janet and John submit that the costs they have incurred in opposing the pre- emptive costs application be paid by MFTL, or otherwise from the Trust fund, as the indemnity provision relied on by MFTL applies equally to costs incurred by the protectors (Janet and John both being protectors) and their opposition to the application (in which they have acted entirely reasonably) has been in the interests of
the beneficiaries as a whole, namely to stop unrestrained expenditure from the Trust fund.
Legal principles
[37] The parties are in general agreement on the legal principles to be applied as to payment of a trustee’s costs by the trust of which it is a trustee.
[38] The starting point is the general rule that trustees are indemnified for expenses incurred, and therefore entitled to be reimbursed out of the trust for all the expenses and liabilities they have reasonably incurred when acting reasonably on behalf of the trust.14 The right to indemnity arises in equity and is an incidence of trusteeship, reflecting the contract between the settlor and the trustees.15
[39] The right to indemnity also has statutory recognition in s 81 of the Trusts Act 2019, which provides:
81Trustee’s liability for expenses and liabilities incurred, and trustee’s right to indemnity
(1)A trustee is personally liable for an expense or a liability incurred by the trustee when acting as a trustee.
(2)However, a trustee who incurs an expense or a liability when acting reasonably on behalf of the trust is entitled,—
(a)if the trustee has paid the expense or discharged the liability out of the trustee’s own funds, to reimbursement from the trust property; or
(b)in any other case, to pay the expense or discharge the liability directly from the trust property (or to have it paid or discharged by a remaining trustee).
(3)The operation and enforcement of the indemnity in this section is governed by the rules of the common law and equity relating to trusts.
(4)This section does not limit any indemnity available at common law or in equity.
14 Alexander v Alexander [2021] NZHC 3056 at [44].
15 Butterfield v Public Trust [2017] NZCA 367, [2017] NZAR 1439 at [21]; and Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (20th ed, Sweet & Maxwell, London, 2020) [Lewin on Trusts] vol I at [19-007] and vol II at [48-004]. See also Armitage v Nurse [1998] Ch 241 (CA) at 263.
[40] The right to indemnity can also be provided for under the trust deed.16 Clause 29.2 of the Trust Variation Deed in this case also confirms the trustee’s right of indemnity, as follows:
Any trustee … shall be entitled … to receive reimbursement from the Trust of all expenses in the performance of their duties, including any legal expenses incurred in connection with any question which may arise with reference to their duties or powers under this Trust Deed.
[41] However, the general rule that trustees are indemnified does not apply in certain situations, namely:
(a)in hostile litigation;
(b)where the trustee’s costs are unreasonable or not properly incurred;
(c)where there has been misconduct by the trustee; and/or
(d)where the trustee is acting partisan in their own interests.
[42] The fact that a trustee may not be indemnified where they are found to have acted other than reasonably or properly in relation to the costs they have incurred has led to the procedure for Beddoe orders, now the subject of specific rules in the High Court Rules 2016, under which a trustee may bring an application for pre-emptive orders confirming a trustee’s right to an indemnity for costs properly and reasonably incurred in litigation.
[43] MFTL has not sought the Court’s approval to defend Janet and John’s proceeding, or to bring and pursue its own proceeding. The present application is therefore not a Beddoe application, though it is similar in substance.17 Counsel are in agreement, however, that while this is not a Beddoe application, the Beddoe principles are relevant. I turn to detail those principles.
16 Official Assignee v Menzies HC Auckland CIV-2010-404-5457, 14 February 2011; and Butterfield v Public Trust, above n 15, at [20].
17 Rather, MFTL submits that the Court has jurisdiction to determine the present application as an application for directions under s 133 of the Trusts Act.
The general rule does not apply in hostile litigation
[44] To determine whether a pre-emptive costs order should be made in a case of litigation involving a trust, the proceeding is typically categorised. There are several approaches to the categorisation exercise, each of which however leads to the same conclusion that a trustee is not indemnified in hostile litigation.
[45]In Re Buckton, the Court categorised trust litigation into three types:18
(a)a trustee application, proceedings brought by trustees to obtain the Court’s guidance on construction of the trust deed or some aspect of the trust administration;
(b)an application similar to the first category, but brought by someone other than a trustee (such as a beneficiary);
(c)a beneficiary dispute, where a beneficiary or third party makes a hostile claim against the trustee or trustees or other beneficiary or beneficiaries, such as concerning the propriety of trustee actions or seeking removal of a trustee.
[46] For proceedings in the first two categories, both non-hostile, usually the costs of all parties necessarily participating in the proceedings are paid out of the trust fund, being treated as incurred for the benefit of the estate.19 Generally, proceedings in the third category (beneficiary disputes) are considered to be hostile. Costs follow the event in the usual fashion, whereby the unsuccessful party must pay costs to the successful party, and are not paid out of the trust fund.20
[47] As an alternative categorisation, the editors of Lewin on Trusts identify seven broad functional categories of trust proceeding, as follows:21
18 Re Buckton [1907] 2 Ch 406.
19 McCallum, above n 13, at [34(a)–(b)].
20 At [34(c)].
21 Lewin on Trusts, above n 15, vol II at [48–002] (footnotes omitted), cited in McCallum, above n 13, at [35].
(a)proceedings for the construction of the trust instrument or determination of questions of law as to the validity or scope of the trusts or powers under the trust instrument or imposed or conferred by law;
(b)proceedings in which directions are sought for the guidance of the trustee in the administration or execution of the trust;
(c)proceedings in which the assistance of the court is sought under various statutory provisions, for example under the Trustee Act … in relation to the appointment of trustees and vesting of trust property;
(d)proceedings in which the rights of beneficiaries in the administration or execution of the trusts are sought to be enforced, for example in relation to accounts, provision of information to beneficiaries or distribution of the trust fund;
(e)breach of trust proceedings;
(f)proceedings concerning self-dealing and profits from the trust; and
(g)proceedings for or concerning the removal of trustees.
[48]In McCallum, the Court of Appeal stated in reference to the above categories:22
… It is reasonably obvious that the prospects of indemnity for trustees’ costs being denied are greater in the latter three categories than in the former three (with the fourth category in no man’s land, capable of being seized by either outcome). In the latter three categories, a trustee ought not to expect a pre- emptive determination of indemnity in their favour via a Beddoe order. That order will only be made where doing so is nonetheless in the best interests of the trust.
[49] As another final alternative categorisation, the Court in Alsop Wilkinson (a firm) v Neary adopted the following classification system:23
22 McCallum, above n 13, at [35].
23 Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 (Ch).
(a)a trust dispute: a dispute as to the trusts on which the trustees hold the subject matter of the settlement;
(b)a beneficiaries dispute: a dispute with one or more of the beneficiaries as to the propriety of any action taken or omitted by the trustees; and
(c)a third party dispute: a dispute with persons, otherwise than in the capacity of beneficiaries, in respect of rights or liabilities assumed by the trustees as such in the course of administration of the trust.
[50] The Court of Appeal in McCallum found the Alsop classification less instructive as to the likely availability or denial of indemnity, because the first and second categories under this classification system include both non-hostile and hostile proceedings, noting hostile proceedings are far less likely to result in indemnity.24
[51] In the case of a hostile trust dispute, the trustees should normally remain neutral, in which case they are entitled to be reimbursed their costs from the trust fund. If the trustee successfully defends the action, they will ordinarily be entitled to indemnity. But if they defend the action and are unsuccessful, the trustee will ordinarily not be entitled to an indemnity. Such a determination is, however, made only when the result is known.
[52] In the case of a beneficiaries dispute, costs follow the event and are not paid from the trust fund. In the case of a third party dispute, the trustees have a duty to protect and preserve the trust estate but can make a Beddoe application if in genuine doubt, or else act at their own risk as to costs.
[53] In summary, the case law is clear that a trustee’s general right to indemnity is displaced in cases of hostile litigation. As the Court of Appeal stated in McCallum:25
… It would be difficult to imagine a truly hostile proceeding, involving an allegation of breach of trust with at least some prospect of success, where it
24 McCallum, above n 13, at [36].
25 At [44], citing McLaughlin v McLaughlin [2018] NZHC 3198 at [30]. See also Easton v The New Zealand Guardian Trust Co Ltd [2016] NZHC 3011 at [12], where the Court considered it clear that Beddoe orders would not be granted in proceedings where trustees faced allegations of breach of trust.
would be in the best interests of the trust to pre-emptively indemnify the trustees for costs out of the trust assets before determining those allegations.
Costs unreasonable or not properly incurred
[54] However, even where proceedings are not hostile, the general indemnity can be displaced if the trustee’s costs are unreasonable or not properly incurred.26 As Hammond J explained in Re O’Donoghue:27
… it is the beneficiaries who are meeting the trustee’s expenses. It follows that it is critical that there be a check on those expenses and costs incurred by a trustee … it is only expenses which are “properly incurred” which are the subject of a trustee’s indemnity …
Trustee misconduct or trustee acting partisan in their own interests
[55] As the Court of Appeal confirmed in McCallum, indemnity is unlikely to be granted to a trustee in self-interested litigation, or where trustees are defending their actions against allegations of breach of fiduciary duties, except for in exceptional cases.28 As the Court stated:29
… misconduct includes careless and unreasonable conduct in the conduct of litigation or the management of the trust. A trustee partisan in [their] own interests or the interests of only some beneficiaries likewise may be deprived of indemnity.
[56] The Supreme Court has recently discussed the situation where a trustee aligns itself with one beneficiary. In Lambie Trustee Ltd v Addleman, the Supreme Court found that a trustee was deprived of indemnity where it had aligned itself with one beneficiary.30 The Court ordered that the trustee company was not entitled to any costs and expenses, as it had acted in a way partisan to that beneficiary.
[57] As the Court of Appeal expressed in McCallum, the greater the degree of self- interest of the trustee bringing or defending the proceeding, the less likely it was that a Beddoe order should be made.31
26 Re O’Donoghue [1998] 1 NZLR 116 (HC).
27 At 121–122.
28 McCallum, above n 13.
29 At [32].
30 Lambie Trustee Ltd v Addleman [2023] NZSC 7.
31 McCallum, above n 13, at [45].
Should MFTL be indemnified for its costs?
Both proceedings are hostile
[58] The case law is clear that while a trustee is entitled to be indemnified for its costs in administering the trust and in carrying out its duty to protect the trust estate for the benefit of the beneficiaries, a trustee’s costs in hostile proceedings, where for example it is defending itself from removal or advancing a claim in its own cause, will not be met by the trust.
[59] I am satisfied that both substantive proceedings in this case in respect of which MFTL seeks that its costs be indemnified are hostile. Janet and John have alleged that MFTL has breached its duties as a trustee and fiduciary, and sought the removal of MFTL as trustee. They have also sought Ian’s removal as a protector of the trust. MFTL and Ian have actively defended this proceeding to date, and although MFTL purports to now abide the decision of the Court in the removal proceedings, I note that even now in a subsequent memorandum it continues to actively defend Ian’s actions following my interim judgment, in which I noted I expected it would abide the decision of the Court at least from that point henceforth. MFTL purports to suggest it is simply presenting information for the Court’s reference. It is, however, conspicuously one- sided and didactic in terms of defending Ian’s actions.
[60] MFTL’s own directions application is also similarly hostile. In these proceedings MFTL has made allegations against Janet and John, including that they have breached their duties as protectors, and seeks their removal as protectors. Janet and John oppose the proceedings. MFTL’s claims may or may not be found to be well- founded. However, that is a matter for substantive determination in the substantive proceedings. It is not cause to pre-emptively indemnify MFTL’s costs.
[61] If MFTL were to be indemnified now, the beneficiaries would bear the cost of MFTL defending itself from allegations that it has breached duties owed to the beneficiaries, and MFTL will have little incentive to settle the dispute, knowing that its litigation costs are covered.
[62] It is unknown what the ultimate result of MFTL’s substantive claims will be. There is no injustice if its costs are not now indemnified by the Trust, and the potential for injustice if they are. If no pre-emptive indemnification is granted and its claims are found to be well-founded, it is likely to have its costs indemnified by the Trust fund. If pre-emptive indemnification is granted and its claims are found not to be well- founded, the beneficiaries will lose out.
[63] I therefore decline to order that MFTL’s costs be indemnified from the Trust fund.
The costs incurred are not reasonable or not properly incurred
[64] Even if I was not of the view that the proceedings were hostile, I would still be minded not to order that MFTL be fully indemnified, as I am of the view the costs incurred by MFTL are not reasonable or are otherwise not properly incurred.
[65] Despite MFTL’s assertion that it abides the decision of the Court as to whether or not it should be removed as a trustee, MFTL has actively defended Janet and John’s proceeding to date, and appears to continue to do so, despite my stated expectation that it would, at least from the time of my interim judgment, abide the decision of the Court. In such circumstances, I do not consider it would be appropriate to indemnify it for its costs.
[66] Secondly, I agree with Janet and John (particularly in view of MFTL’s stated position as to abiding the decision of the Court) that it is difficult to justify the costs the Trust has incurred in engaging senior counsel for its representation. In response to my interim judgment requesting further information as to its costs incurred, MFTL has provided more detailed breakdown of its costs. Nevertheless, its costs are expansive, and MFTL estimates its total costs will be in the vicinity of $300,000. The Trust funds have already suffered a significant reduction on account of this litigation. As I noted in my interim judgment, “[t]he amount of fees anticipated to be incurred will essentially exhaust the entire cash reserves of the Trust.”32 For MFTL’s costs to be indemnified by the Trust funds risks depleting the Trust funds to zero and
32 Interim judgment, above n 1, at [26].
potentially having to sell the property, contrary to Flora’s express stated wishes. I consider there would have to be extremely good reason for MFTL to justify being indemnified by the Trust to this amount, risking the future of the Trust and particularly given its defence in its own cause to date. I am not satisfied such an explanation here exists.
[67] Moreover, there are concerns that MFTL appears to have sided with one beneficiary of the Trust and its costs have been incurred to the benefit of that party. As noted above, MFTL has actively defended Ian and much of its material adduced to the Court has been aligned with Ian’s. As noted above, in Lambie Trustee Ltd v Addleman the Supreme Court found the trustee company was deprived of indemnity where it had aligned itself with one beneficiary.33 Although I accept there are certain differences between that case and the present situation, including the fact Ian has now (albeit belatedly) secured his own representation, I consider there are similar concerns here. (Moreover, I note Ian’s counsel was instructed only more recently, in or around April 2022, by which time MFTL, the sole shareholder and director of which is Ian, had incurred significant costs in the course of defending itself.).
[68] I am also satisfied that indemnification is not in the interests of the beneficiaries as a whole. Apart from the fact that MFTL has been defending itself, and continues to do so, it appears that it is not necessarily aligned in its position with the beneficiaries, given the expressed concerns of a number of beneficiaries in addition to Janet and John (who are class B beneficiaries), namely, as I understand the position, class C beneficiaries Angela McKean, Tracey McKean and Caroline Louis.
[69] Finally, I accept that at least a significant part of MFTL’s costs have been incurred unnecessarily, as I accept that MFTL’s proceedings are to an extent superfluous and unnecessary. It could have sought the directions it now seeks in its separate proceedings (filed more than six months after Janet and John filed their proceedings) as part of Janet and John’s proceedings. Moreover, the declaration it seeks in its proceedings that the Trust is a valid trust has long been unnecessary, as although Janet and John initially challenged the validity of the Trust, it has long been
33 Lambie Trustee Ltd v Addleman, above n 30.
clear they no longer do so. It is clear that trustees are under no duty to seek advice or pose questions via a directions application where the answer is obvious.34 As such, it has been neither incumbent on, nor necessary for, MFTL to bring its own proceedings, and as such it would not now be appropriate for the beneficiaries of the Trust to finance, and continue to finance, such unnecessary additional litigation costs.
[70] It is no answer for MFTL to say that it needed to bring its proceedings as Janet and John have failed to engage in respect of settlement proposals. Having been advised as to the nature of the settlement proposals tabled, I accept (at least at this preliminary stage) that Janet and John have understandably found Ian’s settlement proposals unacceptable, and have therefore continued in the pursuit of their litigation.
[71] Notwithstanding my conclusions above as to the hostility of these proceedings, I thus would also not allow MFTL’s costs to be indemnified from the Trust fund in any case on the basis they are unreasonable and otherwise not properly incurred.
Effect of the indemnity clause in the Variation Deed
[72] I am also of the view that the indemnity clause in the Trust Variation Deed is of no assistance to MFTL.
[73] Clause 29.2 of the Variation Deed confirms that the costs of any trustee or protector are indemnified by the Trust, namely that they are entitled to receive reimbursement from the Trust “for all expenses incurred in the performance of their duties, including any legal expenses incurred in connection with any question which may arise with reference to their duties or powers under this Trust Deed.”
[74] However, I do not consider that MFTL’s costs as pre-emptively claimed fit within the scope of cl 29.2. I have found that the litigation is hostile and MFTL has acted, at least to a large extent, in its own defence. The costs are therefore not “properly incurred in the administration of the trust”, as would be covered by cl 29. It cannot be said that its actions to date have been fully incurred “in the performance of [its] duties”.
34 NZ Māori Council v Foulkes [2015] NZHC 489 at [31].
[75] The indemnity clause does not displace the limitation impressed upon the general principle that a trustee is indemnified for its costs reasonably incurred where the litigation is hostile. I am of the view the situation here is similar to that in Ash v Singh, in which the High Court found that a limitation of liability clause gave no protection to the trustees in that case because although the trustees were “under a duty to act impartially amongst beneficiaries”, the Court found “the trustees knowingly aligned themselves with [one beneficiary] and supported her as a beneficiary and opposed the plaintiff.”35 As the Court stated, they did so “knowingly … in breach of trust” and in those circumstances were therefore not entitled to be indemnified out of the trust assets.36
[76] Clause 38.2 of Schedule 2 of the Variation Deed similarly provides no recourse for MTFL to be indemnified by the Trust. It provides that the trustees are entitled to be indemnified by the Trust fund for:
… losses and liabilities properly incurred by them in the conduct of their duties for the Trust except for losses caused by their dishonesty, wilful misconduct, or gross negligence or wilful breach of trust, or failure to exercise the care, diligence, and … skill that a prudent person of business would exercise in managing the affairs of others.
[77] At this stage the outcomes of the substantive proceedings are unresolved. It would be premature to find that MFTL as trustee is entitled to be indemnified for its losses and liabilities when it is unknown whether such losses and liabilities have been “properly incurred by [it] in the conduct of [its] duties for the Trust” and unknown whether such losses have or have not been “caused by” dishonesty, (wilful) misconduct and breach, which are among the allegations contained in Janet and John’s proceeding against MFTL. If it is established following the substantive hearing that MFTL has losses incurred in the conduct of its duties not caused by such things, it will be appropriate for MFTL to be reimbursed for its losses at that point – but not before.
Conclusion as to indemnification
[78] I have therefore found as a starting point that MFTL is not entitled to pre- emptive indemnification for its costs.
35 Ash v Singh [2018] NZHC 224 at [22].
36 At [22].
Allowance for costs properly incurred in the administration of the Trust
[79] Janet and John concede, however, that MFTL might have properly incurred some of its stated costs. They accept that an allowance should be made to account for those costs which might have been properly incurred in MFTL’s administration of the Trust. In doing so, they have taken what I accept is a generous approach as to what quantum of its costs MFTL should be indemnified for. I also consider this is the right approach in the circumstances.
[80] MFTL has advised the Court it has now incurred costs totalling $290,371.26. Janet and John have submitted it would be appropriate for the Court to now cap indemnity of MFTL’s costs at a maximum of $82,762.51. Janet and John say this figure accurately reflects the principles applying to trustee costs and Beddoe applications. The breakdown of this amount was included in a schedule attached to their memorandum following the hearing.
[81] MFTL, in its memorandum in response to my interim judgment requesting further information, has now furnished the Court with invoices for work performed for it by Dentons Kensington Swan (Dentons), which it has classified into eight categories as follows:
(a)correspondence with Mr Brian Gubb and Mr Anthony Grant (previous counsel for Janet and John);
(b)preparation of directions application;
(c)defence of the removal proceedings;
(d)correspondence regarding the lease;
(e)instructions and correspondence with BakerAg regarding the valuations of the Torwood Farm and sections;
(f)receiving and responding to Janet and John’s notice of opposition to the costs application;
(g)memorandum of counsel for October 2022 case management conference; and
(h)correspondence regarding potential mediation, submissions and preparation for costs application hearing.
[82]There is also an additional category listed for non-chargeable time.
[83] The figure Janet and John propose for indemnification is based on taking 30 per cent of each category of costs incurred by MFTL, except in relation to its defence of the removal proceedings, in respect of which it submits MFTL should not be indemnified at all. To this are added reasonable disbursements, including the invoice for the BakerAg valuation, and GST, as well as Ms Burton’s flights and accommodation. I consider this is a reasonable approach to the matter of indemnification of MFTL’s costs.
[84] I consider it is appropriate that MFTL be indemnified for 30 per cent of its costs, and no more than that, in relation to each of the above categories, except for its defence of the removal proceedings, for which I consider it should not be indemnified at all. In reaching this conclusion, I note briefly in particular the following reasons behind my decision in respect of each category of costs:
(a)Correspondence with Mr Gubb and Mr Grant: Much of this correspondence was unnecessary, related to defending Ian’s conduct and repeatedly failed to furnish Janet and John with the information necessary to satisfy their requests for information. I accept some of these fees may have arisen in the course of properly administering the Trust, though it is not possible to discern exactly what portion from the information provided. I consider 30 per cent is adequate, or $19,653.04 of the $65,510.13 claimed.
(b)Preparation of directions application: The quantum claimed under this head ($42,567.32) is unreasonable, likely on account of engaging senior lawyers at Dentons as well as Ms Bruton KC. As noted, the
directions sought by this proceeding were unnecessary, MFTL’s interests seem to have been conflated with Ian’s in bringing the proceeding, and MFTL as trustee ought not to have pursued such hostile litigation. I consider indemnification of 30 per cent of its costs under this head is therefore appropriate, or $12,770.20 of the $42,567.32 claimed.
(c)Defence of the removal proceedings: For the reasons I have already outlined, I consider MFTL as trustee ought to have taken a neutral stance in the proceedings concerning its potential removal. It did not do so, and instead actively defended the proceeding. In these circumstances, I am unable to accept MFTL should be indemnified at all for the $29,284.48 it claims for costs incurred.
(d)Correspondence regarding the lease: The instruction of a valuer would ordinarily be payable from the Trust fund. However, it appears, at least at this early stage, that MFTL acted contrary to its duty to provide information to Janet and John, who were entitled to it, and there are suggestions it might have potentially prejudiced the beneficiaries in committing the Trust to new lease arrangements. In the circumstances, I am not prepared to indemnify MFTL any more than the 30 per cent allowance Janet and John have suggested, or $832.52 of the $2,775.07 claimed.
(e)Instructions and correspondence with BakerAg regarding the valuations of the Torwood Farm and sections: Though MFTL claims to have incurred legal fees of $4,104.00 in arranging valuations of the Farm, it would have been in the best interests of the beneficiaries for MFTL to obtain a rental valuation (as opposed to a market valuation) prior to its new lease renewal discussions. In this respect, therefore, it has also acted contrary to the interests of the beneficiaries. I am accordingly prepared for MFTL to be indemnified for its costs under this head only to 30 per cent, or $1,231.20 of the $4,104.00 claimed.
(f)Receiving and responding to Janet and John’s notice of opposition to the costs application: For the reasons I have given, I consider MFTL’s application for pre-emptive indemnification of its costs has been misguided, in particular given the appearance of doing so for the purpose of furthering the interests of one particular beneficiary (namely, Ian). As such, I consider indemnification only to 30 per cent of its costs is appropriate under this head, or $4,623.30 of the $15,411 claimed.
(g)Memorandum of counsel for October 2022 case management conference: On Janet and John’s evidence, counsel for MFTL made only one minor change to the joint memorandum prepared by counsel for Janet and John. In the circumstances, I accept the fees claimed for this work of $3,464 are unreasonable and disproportionate, and make an allowance of 30 per cent, or $1,039.20 of the $3,464.00 claimed.
(h)Correspondence regarding potential mediation, submissions and preparation for costs application hearing: Similarly to (f) above, I have found that the application for pre-emptive indemnification is generally not well-founded, and MFTL is not entitled to be indemnified for its costs in these proceedings. I have granted 30 per cent indemnification generally as an allowance to account for its costs properly incurred in its duties in the administration of the Trust. Accordingly, I consider 30 per cent, or $8,255.10 of the $27,517 claimed under this head in its preparations for mediation and for the hearing, is appropriate.
[85] MFTL also produced invoices for work performed for it by Ms Bruton. I consider it was not necessary for MFTL to engage senior lawyers at Dentons as well as Ms Bruton. I consider it is appropriate to allow MFTL to be indemnified for 30 per cent of Ms Bruton’s costs, or $14,976.00 of the $49,920.00 claimed. I accept the reimbursements proposed in respect of Ms Bruton’s flights and accommodation, of $657.60 and $399.00 respectively.
[86] I also accept the reasonable disbursements as listed in the schedule to Janet and John’s memorandum, and the calculations in their entirety.
[87] MFTL submitted that its further legal costs will depend on the extent to which the Court considers it ought to continue to be involved in the proceedings, or whether individual beneficiaries should be left to advance their personal positions as to the future of the Trust. This was answered clearly in my interim judgment, but it appears that it necessitates restating. There should be no need for MFTL’s counsel to appear further in the removal proceedings.
Janet and John’s costs
[88] The final point for determination concerns Janet and John’s costs in defending this application.
[89] Janet and John have been the largely successful party, although MFTL has had a measure of success in being allowed indemnification generally as to 30 per cent of its costs. The costs of MFTL in bringing this application will be met by the Trust fund to the order of 30 per cent, as detailed above. In the circumstances, I consider it is appropriate that Janet and John’s costs be met by the Trust fund in full. Clause 29.2 of the Variation Deed (the indemnification clause) applies equally to Janet and John as protectors of the Trust. I am satisfied that Janet and John have acted reasonably in defending this application, and have done so in the interests of the beneficiaries, given the significant expenditure from the Trust fund inappropriately incurred on behalf of MFTL. As such, I consider Janet and John’s costs in defending this application have been properly incurred in the course of their roles as protectors, and thus they are indemnified for their costs in (successfully) defending this application pursuant to cl 29.2 of the Variation Deed.
Conclusion
[90] I have found that MFTL is not entitled to be indemnified for its costs from the Trust fund.
[91] However, Janet and John have conceded, and I consider such a concession is both expedient and appropriate in the circumstances, that MFTL be indemnified for generally 30 per cent of its costs to date to account for costs properly incurred in the administration of the Trust. I consider the cap on indemnity Janet and John have proposed of $82,762.51 in relation to MFTL’s stated costs of $290,371.26 is appropriate.
[92] MFTL is to be indemnified by the Trust fund to that amount. To the extent it has received more than that amount already from the Trust fund, MFTL will need to reimburse the balance.
[93]Janet and John’s costs are to be met in full as detailed in [89] above.
Churchman J
Solicitors:
Dentons Kensington Swan, Auckland for Applicant
Duncan Cotterill, Wellington for Respondents
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