McKean Family Trustee Limited v McKean

[2023] NZHC 482

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 482

BETWEEN

MCKEAN FAMILY TRUSTEE LIMITED

Plaintiff

AND

JANET ANNE MCKEAN JOHN DUGALD MCKEAN

Defendants

Hearing:	9 March 2023
Counsel:	V D Bruton KC and D I Durovich for Plaintiff L McKeown and A A Sawant for Defendants
Judgment:	13 March 2023

INTERIM JUDGMENT OF CHURCHMAN J

The application

[1]    On 13 September 2022, McKean Family Trustee Limited (MFTL) (the plaintiff) applied for authorisation that its litigation costs be paid from the Trust’s funds. The application related to two separate sets of proceedings, these proceedings, CIV-2022-454-71 and proceedings in CIV-2022-454-021 (the removal proceedings).

[2]    The plaintiffs in the removal proceedings, which had  been commenced on  19 April 2022, were Janet McKean (Janet) and John McKean (John). The defendants in those proceedings were MFTL (first defendant), and Ian McKean (Ian) (second defendant).

[3]    The plaintiff sought to cast its role in both sets of proceedings as simply acting in the management and administration of the Torwood Family Trust (the Trust) and

MCKEAN FAMILY TRUSTEE LIMITED v MCKEAN [2023] NZHC 482 [13 March 2023]

doing no more than providing information to assist the Court and abiding the decision of the Court in respect of the removal proceedings.

[4]    The application acknowledged the possibility that the removal proceedings could arguably be categorised as hostile litigation and said that for that reason, Ian was separately represented in those proceedings funding his representation at his own cost.

[5]    The application also contended that there were “sufficient funds” in the Trust’s bank account for the legal costs to be deducted.

[6]    Although not in form a Beddoes application, in substance it had many of the same features.

[7]The application is opposed by Janet and John.

[8]    At the conclusion of the hearing on 9 March 2023, I adjourned these proceedings and made directions as to the filing of further evidence.

[9]    This interim decision records those directions. However, before setting the directions out I will briefly cover some of the background.

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.

[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

[17]   Ian knew as at 4 December 2013 that Janet and John were not directors of MFTL because he emailed them on that date to advise MFTL had been incorporated and said, “You will be added as directors when you come home for a visit.”

[18]   Ian produced some minutes for MFTL dated Monday 21 July 2014 which stated, on 18 July 2014 Janet had signed the necessary forms thus becoming a director of MFTL. This statement was untrue. Janet and John had, on separate dates, in 2014, each signed forms that had been provided to them. However, those forms were nothing to do with MFTL but were in fact enduring the powers of attorney for Flora.

[19]   For some six years after the creation of the Trust, Ian maintained to Janet and John that they were directors of the sole trustee.

[20]   However, a number of his actions in relation to the Trust were inconsistent with that. He signed the Trust financial statements for the years ended 31 March 2015–  31 March 2019 himself without any consultation with either Janet or John. He made a number of other important decisions in relation to the Trust without consultation as well.

[21]   Torwood Farm had been leased for many years. On 11 February 2014, Ian signed a lease with Brett and Jennifer Walker for a term of five years and two months commencing on 1 April 2014. That lease had a right of renewal from 1 June 2019 for a further three terms each of three years and then a first right of renewal for a further four terms each of three years.

[22]   On 27 May 2022, Ian also signed a Deed of Renewal of Lease with the DL and GL Henricksen Partnership to whom the Walkers had apparently assigned their interest in the lease.  The Henricksen Partnership appeared to have rights of renewal until   31 May 2028 and if MFTL wished to continue the lease after 31 May 2028 then the Henricksen Partnership has a further four rights of renewal of three years each. Ian did not consult with Janet or John about the lease or renewal.

The Trust assets

[23]   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.

[24]   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.

[25]   The same document recorded that the Trust’s legal fees for the period from September 2020 to 30 June 2022 had totalled $142,395 and gave an estimate of the

Trust’s legal costs (presumably in relation to the removal proceedings) as being

$300,000. In a schedule to his affidavit, Ian has deposed that legal costs incurred were

$164,240.79. It is not clear what these costs covered.

[26]   The amount of fees anticipated to be incurred will essentially exhaust the entire cash reserves of the Trust.

[27]   In Ian’s affidavit of 12 September 2022, he deposes that the cash then remaining was some $337,862.

The proceedings

[28]   The breakdown in relationships between Ian on one hand, and Janet and John (and other family members) on the other hand, led to the removal proceedings. There is significant acrimony in the affidavits filed in both proceedings and contain material that is inflammatory and unhelpful.

[29]   Janet and John are concerned at many aspects of Ian’s actions including the failure to provide them with financial information, or the provision of incomplete information often some time after it had been requested.

[30]   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.

[31]   Matters seem to have come to a head when Ian used his powers to unilaterally vary the Trust Deed. The most significant variations to the original deed was to provide that the trustee (Ian) could remove the protectors and that the protectors needed to act unanimously.

[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.

[33]   Ian also made a payment to one of Gus’ daughters (Annie) who Janet and John were also concerned that, at the time the payment was made, Ian knew was not a beneficiary. The payment was said by Ian to be $1,500 but Annie says she only received $500.

[34]   The removal proceedings are clearly what is described as “hostile litigation”. They 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;

(f)requesting that Janet and John’s costs be paid either by Ian personally or out of the Trust fund.

[35]Both MFTL and Ian have defended the proceedings.

[36]   The present proceedings were commenced on 13 September 2022 some six months after the removal proceedings.

[37]   The first relief sought in these proceedings is a declaration that the Trust is a valid Trust. Janet and John point out that they long ago accepted that Flora had testamentary capacity and that the Trust was validly established. Indeed, the removal proceedings are pleaded on the basis of the terms of the Trust. They point out that therefore there is clearly no need for such a declaration.

[38]   The second relief sought is removal of John and Janet as protectors. John and Janet say that this is a partisan move designed to further Ian’s agenda vesting absolute control of the Trust in him.

Issues

[39]   There is significant agreement between the parties as to the legal principles to be applied when a trustee seeks reimbursement of legal fees.

[40]   The starting position is that there is a presumption that a trustee is entitled to an indemnity from the assets of the Trust for costs incurred in the administration of the Trust’s affairs.

[41]   In terms of legal proceedings, if they are brought to obtain the Court’s guidance on construction of the trust deed or an aspect of trust administration, the costs are likely to be indemnified.

[42]   However, the proceedings must be necessary. An instance where proceedings were not necessary would be if the answer to the question posed was obvious.

[43]   Where proceedings are of a hostile nature, as the removal proceedings clearly are, costs normally follow the outcome.

[44]Costs are also required to be reasonable.

[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.

Directions

[46]   I therefore direct that the applicant shall file detailed information explaining exactly what the claimed costs of $142,000 (or $164,000) relate to and provide an estimate of future legal costs.

[47]   I would expect that MFTL would abide the decision of the Court in the removal litigation and that little further legal work would be required in relation to the directions application as many of the issues are effectively duplicated in the removal litigation.

[48]   I also direct the parties to consider whether, by consent memorandum, an order can now be made declaring the Trust valid.

[49]   I further encourage the parties to consider whether a judicial settlement conference would be of assistance. I am concerned that the cost of the anticipated litigation will exhaust the assets of the Trust necessitating the sale of the farm.

Churchman J

Solicitors:

Kensington Swan, Auckland for Plaintiff Duncan Cotterill, Wellington for Defendants