McKean v McKean Family Trustee Limited
[2024] NZHC 162
•15 March 2024
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV-2022-454-000021
[2024] NZHC 162
UNDER Part 18 of the High Court Rules 2018 IN THE MATTER
Of an application under the Trusts Act 2019 and the inherent jurisdiction of the Court to
(1) remove and replace the trustee of the Torwood Family Trust, (2) remove protector powers, (3) seek a review of the trustee’s omission to provide Trust information and orders accordingly, and (4) as to
reimbursement of costs paid by the TrustBETWEEN
JANET ANNE ABIGAIL MCKEAN
First Plaintiff
JOHN DUGALD STEWART MCKEAN
Second PlaintiffAND
MCKEAN FAMILY TRUSTEE LIMITED
First Defendant
IAN MACGREGOR STEWART MCKEAN
Second Defendant
CIV-2022-454-000071 BETWEEN
MCKEAN FAMILY TRUSTEE LIMITED
ApplicantAND
JANET ANNE ABIGAIL MCKEAN AND JOHN DUGALD STEWART MCKEAN
Respondents
Hearing: (On the papers) Counsel:
L M McKeown for First and Second Plaintiffs in proceeding CIV- 2022-454-000021 and Respondents in CIV-2022-454-000071
V T M Brunton KC and D I Durovich for First Defendants in CIV- 2022-454-000021 and Applicant in CIV-2022-454-000071
MCKEAN v MCKEAN FAMILY TRUSTEE LTD [2024] NZHC 162 [15 March 2024]
N L Walker and N J C Wilson for Second defendant in proceeding
CIV-2022-454-000021
Judgment:
15 March 2024
JUDGMENT OF LA HOOD J
Introduction
[1] This is a costs decision in respect of a hearing that was to take place before me on 2 November 2023. The hearing did not proceed because the parties reached agreement as to the appropriate orders. That hearing was intended to deal with one aspect of the claims in respect of the Torwood Family Trust (the Trust), namely the plaintiffs’ (Janet and John McKean) application for removal of McKean Family Trustee Ltd (MFTL) as trustee of the Trust.
[2]The wider proceedings have been described by Churchman J as follows:1
[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 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]I adopt Churchman J’s description of the background to the Trust 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.
1 McKean Family Trustee Ltd v McKean (No 2) [2023] NZHC 1098.
2 McKean Family Trustee Ltd v McKean [2023] NZHC 482 [Interim judgment].
[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.
[4] In his judgment of 10 May 2023, Churchman J refused an interlocutory application for an order that MFTL be indemnified for its costs from the Trust on the basis, among other things, that both sets of proceedings are hostile. Churchman J held:3
[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
3 McKean Family Trustee Ltd (No 2) v McKean, above n 1.
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.
[5] Churchman J also found that the costs incurred were not reasonable or properly incurred, concluding:
[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.
[6] In respect of the effect of the indemnity clause in a Variation Deed, Churchman J held:
[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.
[7]Churchman J’s overall conclusion was:
[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.
[8] The application that was to be heard before me was in respect of the first cause of action in Janet and John’s statement of claim dated 19 April 2022, which was pleaded as follows:
First cause of action: removal and appointment of trustee
Janet and John repeat the foregoing paragraphs and say:
67It is necessary or desirable that Ian not be a trustee of the Trust or the sole director of MFTL (as trustee).
68It is difficult or impracticable to remove Ian as a director of MFTL, add additional directors to MFTL, or remove MFTL as a trustee without the assistance of the Court.
Relief sought
a)an order removing MFTL as trustee of the Trust pursuant to section 112 of the Trusts Act 2019 and/or the exercise of the Court’s inherent jurisdiction;
b)an order appointing a trustee company as trustee of the Trust, with Janet, John, and a professional trustee (lawyer or accountant) being directors and shareholders of that company, pursuant to section 114 of the Trusts Act 2019 and/or the exercise of the Court’s inherent jurisdiction;
c)an order that the plaintiffs’ costs of and incidental to the proceeding and arising from the breach of duties owed by Ian and/or MFTL be paid by Ian personally or, failing the Court making that order, out of the Trust fund.
[9] The hearing did not proceed on 2 November 2023 because I received a joint memorandum of counsel dated 1 November 2023, recording the parties’ agreement that:
(a)MFTL is to be removed as trustee of the Torwood Family Trust;
(b)a corporate trustee company administered by Touchstone Trustees Ltd is to be appointed as a replacement trustee;
(c)the issue of costs on the application is to be determined on the papers and a timetable for the filing of submissions was set out.
I made orders accordingly.
[10] It is common ground that these orders have determined the first cause of action apart from the issue of costs, while the second to fourth causes of action remain alive and are, at this stage, proceeding to trial. Those causes of action include seeking removal of Ian’s powers as Protector of the Trust (second cause of action), seeking orders that MFTL and Ian provide Janet and John with disclosure of Trust information that it is said they had have refused and/or omitted to provide (third cause of action), and seeking reimbursement by Ian and/or MFTL for costs improperly charged to the Trust.
[11]I accept Ian’s submission that Churchman J did not determine:
(a)Whether MFTL will be entitled to have its legal expenses paid by the Trust (to some extent) if MFTL or Ian are ultimately successful in defending the substantive allegations.
(b)Whether the plaintiffs’ allegations about MFTL and/or Ian’s conduct are true. In his 10 May 2023 judgment, Churchman J recognised that Janet and John’s claims were only allegations at this stage and will need to be proven at trial.4
4 McKean Family Trust Ltd v McKean (No 2), above n 1, at [6] and [77].
The parties’ respective positions
[12]Janet and John seek:
(a)an order for costs against MFTL; and
(b)an order for costs against Ian McKean personally (Ian being the sole director and shareholder of MFTL, and a Class B Primary Beneficiary and protector); or
(c)in the alternative (to the orders at (a) and (b) above) an order that Janet and John’s costs be paid from the Trust fund.
[13] As to the quantum, Janet and John seek costs on an indemnity basis or, failing indemnity, in such sum as the Court considers appropriate.
[14]Ian submits:
(a)Costs should be reserved, pending determination, following trial, of the plaintiffs’ claims against MFTL and him.
(b)At this stage, the plaintiffs have not succeeded at all in their claims against MFTL and Ian (and they may never do so). They claimed that a replacement trustee company should be appointed, in which they were directors, along with an independent lawyer or trustee. In other words, they wanted to be in control of the trustee company. They have failed to achieve that. Rather, a completely independent trustee is now in office.
(c)MFTL proposed the appointment of a completely independent trustee in November 2021, before proceedings were even issued, to promote harmony and contain costs, due to the plaintiffs’ strong “aversion” to Ian. Had this proposal been accepted, no litigation would have been required.
(d)Following the issue of the High Court Judgment on 10 May 2023, counsel for MFTL filed a memorandum on 12 June 2023 requesting that a completely independent trustee be appointed. Had this suggestion been taken up, the independent trustee could have been identified and appointed in short order, at a cost of a few thousand dollars. It was unnecessary for Janet and John to spend some $53,003 on a proposal which came to nothing.
(e)Ian has defended the myriad of claims for breach of duty made against him by the plaintiffs in their statement of claim. There is no principled basis upon which the Court can order Ian is personally liable for Janet and John’s costs arising from breach of duties owed by Ian and/or MFTL without the allegations against Ian and his defence to them being tested at trial.
(f)Even if the plaintiffs are entitled to some costs at this stage (which is denied) the quantum sought is far too high.
[15]MFTL’s position is:
(a)Janet and John’s costs claim is predicated on the basis that Janet and John succeeded in their application to change trustee, as pleaded in their first cause of action in their statement of claim dated 19 April 2022. They did not, in fact, succeed.
(b)In particular, an independent trustee has been appointed, with no connection to any family member. In their statement of claim Janet and John sought “an order appointing a trustee company as trustee of the Trust, with Janet, John, and a professional trustee (lawyer or accountant) being directors and shareholders of that company ...”. This was not what they achieved. All other aspects of that statement of claim (other than the change of trustee) await determination at trial. No costs order can be made, in accordance with costs principles, that Janet and John have succeeded in terms of their statement of claim and are
therefore entitled to costs. Arguably, costs should be awarded against them in favour of MFTL because they have not achieved a change of trustee on the basis they proposed, and all that has been achieved is what MFTL proposed on 3 November 2021.
[16] Ian and MFTL proposed the appointment of a completely independent corporate trustee in late 2021, subject to conditions which included that there would be no further challenge to the validity of the Trust or any claims brought against MFTL, Ian or his wife, and there would be no promotion of sale of the farm to Flora’s daughter Liz (who was not included as a beneficiary because she had already been given 200 acres of adjoining farmland). These conditions are said to have been aimed at upholding Flora’s wishes (including keeping the farm in the family and excluding Liz) and ending all the acrimony between the beneficiaries and the consequent costs. The conditions were proposed when Janet and John were pursuing allegations that the Trust was invalid because Flora lacked capacity when setting it up and was subjected to undue influence by Ian and his wife. Ian submits that it was not until 4 October 2022 that, in an affidavit from Janet, it was confirmed that “[w]e are now willing to accept that the Trust was validly established”.
[17] Ian and MFTL submit that the effect of the judgments of Churchman J and the appointment of Touchstone is that, in essence, the conditions attached to MFTL’s November 2021 proposal have been met. This is because the Trust is confirmed as valid, which means there can be no claims of lack of capacity or undue influence, and an independent trustee is in place with no involvement of Janet and John that would give them any legal authority to promote a deal with Liz.
[18] Shortly after Churchman J’s final judgment, on 12 June 2023, MFTL filed a memorandum requesting appointment of an independent sole trustee, suggesting Perpetual Guardian or the Public Trust, in place of MFTL with no conditions. Ian and MFTL submit that, instead of agreeing to this course, Janet and John incurred costs of
$53,003 between June and November 2023 only to achieve what was proposed in the memorandum dated 12 June 2023. This was because they would not agree to the appointment of an independent trustee without the appointment being conditional upon the sale of the farm.
[19] In response, Janet and John submit that the outcome now reached does not incorporate any of the conditions previously sought by MFTL and is far more favourable to Janet and John because they have succeeded in ending MFTL and Ian’s involvement in the Trust, while the other claims against MFTL and Ian (their second to fourth causes of action) remain alive. There were good reasons for not accepting the 12 June 2023 offer of appointment of Perpetual Guardian or the Public Trust as a replacement trustee, including that there first needed to be compliance with Churchman J’s judgment of 10 May 2023 by MFTL reimbursing the Trust and MFTL arranging payment of Janet and John’s costs. Also, their concerns about Perpetual Guardian’s independence have been remedied by appointment of Touchstone, as have their concerns about the Public Trust’s proposed terms of engagement (including its costs). They submit it is incorrect that most of Janet and John’s costs between June and November 2023 related to the proposal for sale of the farm given these issues. Moreover, Janet and John incurred the vast bulk of their costs prior to Ian’s 17 October 2023 agreement to Touchstone’s appointment on an unrestricted basis.
[20] On 12 December 2023, Torwood Trustees Limited (Torwood Trustees) was incorporated and took appointment as the new independent trustee of the Trust. Torwood has filed a memorandum dated 11 March 2024 stating that it takes a neutral position on costs between the parties but considers that no costs order should be made for recovery from the Trust assets. I will come back to Torwood’s position below.
Have Janet and John been “successful”?
[21] It is not easy to assess success on one out of four causes of action when the Court was not required to substantively determine the cause of action.
[22] As noted above, Churchman J has not determined whether MFTL will be entitled (to some extent) to have its legal expenses paid out of the Trust if MFTL and Ian are ultimately successful in defending the substantive allegations. The judgment was only in respect of entitlement to pre-emptive indemnification. Janet and John’s allegations against Ian and MFTL can only be determined as part of the substantive trial. Churchman J has not determined whether Janet and John’s allegations about
MFTL and/or Ian’s conduct are proven. It follows that costs can only be determined at this stage in relation to MFTL’s replacement simpliciter and not based on findings of misconduct by MFTL or Ian.
[23] I accept the submission that Janet and John have not succeeded on the first cause of action “as pleaded”. They claimed that a replacement trustee company should be appointed in which they were directors, along with an independent trustee. On the other hand, their desire to replace MFTL has, in the end, plainly succeeded.
[24] I also accept that the position now reached has the effect of meeting most of the conditions of MFTL’s proposal for an independent trustee to be appointed in late 2021. There is no claim the Trust is invalid and no claim of undue influence against Ian or his wife. Janet and John have no decision-making power over the Trust as trustees, or lawful ability to promote a deal with Liz. Moreover, the independent trustee has been appointed without the conditions sought by Janet and John for sale of the farm. On the other hand, I accept an important distinction is that Janet and John are not precluded from continuing with their other claims of misconduct against Ian and MFTL (in causes of action two to four).
[25] As the above history shows, proposals for the appointment of an independent trustee have been made by both sides since late 2021. Having heard no oral evidence or submissions, I am reluctant to make findings about the conduct of any party. It seems to me that the settlement that was achieved on 1 November 2023 could, and should, have been achieved much earlier and that there are grounds for criticism of all involved. However, on the material currently before me, I consider it inappropriate to apportion blame.
[26] I find it difficult to definitively conclude, at this stage, that Janet and John have been the successful parties on the first cause of action. They have achieved some, but not all, of what they wanted to achieve, as has MFTL and Ian. On one view, Janet and John appear to have been no more successful than Ian in achieving their underlying goals or pleaded relief at this point.
[27] At the conclusion of the trial, the Court will be much better placed to determine overall success, including on the first cause of action. I accept Ian’s submission that Janet and John’s allegations of misconduct by MFTL and Ian are the essential foundation for all four causes of action. I note that Ian also intends to invite the Court to find at trial that the entirety of the substantive proceedings, including the first cause of action, and the events that led up to and following the filing of the proceedings, establishes that Janet and John’s ultimate aim has always been to access the Trust fund for their own purposes (including to obtain an inheritance) contrary to the purpose of the Trust. Ian will rely on Janet and John: alleging the Trust was invalid due to allegations of lack of capacity and undue influence; seeking MFTL’s removal and replacement by a trustee company they controlled; and later seeking appointment of an independent trustee for the sole purpose of winding up the Trust.
[28] Ultimately, I consider an assessment of success on the first cause of action should not occur in isolation from the allegations of misconduct by MFTL and Ian that are the foundation of Janet and John’s overall claim; or indeed Ian’s allegations about Janet and John’s conduct and motivation for bringing their claim. Those respective allegations require determination at a full trial where credibility findings can be made.
[29] The above conclusions are reinforced by Torwood’s position. Although it takes a neutral position on costs between the parties, it submits:
(a)Each party has taken steps which have served to increase their cost and exposed them to further risk.
(b)The order, made by consent on 2 November 2023 appointing Torwood Trustees as independent trustee of the Trust, has likewise failed to vindicate either party in respect of the positions they have taken in the litigation.
(c)The pleaded positions for each party indicated partisan approaches which were likely to encourage a hostile relationship between the trustee and beneficiaries, regardless of which party succeeded.
[30] I am also reinforced by the approach of Grice J in Pascoe v Minister of Land Information, where it was held that it would be inefficient to deal with costs following the determination of a preliminary issue given the determination forms just one part of the suite of considerations in a proceeding as a whole.5
[31] Finally, I reject Janet and John’s submission that the Court should not reserve costs because it would be contrary to the agreement in the joint memorandum of 1 November 2023, which stated that the parties agreed that the issue of costs is to be determined on the papers and provided a timetable for submissions. First, it is not clear from that agreement that MFTL and Ian were precluded from taking the position that costs should be determined on the basis that they should be reserved until trial. In any event, the appropriate costs order is a matter for the Court not for agreement between counsel.
Conclusion
I therefore conclude that the costs on the first cause of action should be reserved until the conclusion of the trial, or other resolution, of the second to fourth causes of action. However, given the appointment of Touchstone as an independent trustee, I urge the parties to bring this longstanding family dispute to a resolution that addresses all outstanding issues without the need for further intervention by the Court.
La Hood J
Solicitors:
Duncan Cotterill for First and Second Plaintiffs in CIV-2022-454-000021 and Respondents in proceeding CIV-2022-454-000071
Dentons Kensington Swan, Auckland for First Defendant in proceeding CIV-2022-454-000021 and Applicant in proceeding CIV-2022-454-000071
Russell McVeagh, Wellington for Second Defendant in proceeding CIV-2022-454-000021
5 Pascoe v Minister of Land Information [2023] NZHC 795 at [6] and [7].
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