McKellow v Domney

[2020] NZHC 1118

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2017-485-611165

[2020] NZHC 1118

UNDER

the Administration Act 1969

IN THE MATTER

of the Estate of Noeline Ada Domney of Palmerston North in New Zealand, Retired, Deceased

BETWEEN

JUDITH KAY MCKELLOW

Applicant

AND

STEVEN LYALL DOMNEY AND ROSS PAUL DOMNEY

Respondents

AND

LYALL WILLIAM DOMNEY

Interested party

Hearing:

15 May 2020

Counsel:

M J Wenley for the Applicant A McEwan for the Respondents

D I Sheppard for the Interested party

Judgment:

26 May 2020

JUDGMENT OF CULL J

[1]    Judith McKellow applies for orders removing her brothers Steven Domney and Ross Domney as administrators of their late mother’s estate. She seeks an order vesting the property in her as the continuing administrator and a specific order vesting the estate’s assets in her sole name as executor. The application is made under s 21 of the Administration Act 1969 (the Act) on the grounds that Steven and Ross are acting out of self-interest by refusing to complete the administration of their mother’s estate.

MCKELLOW v DOMNEY AND ANOR [2020] NZHC 1118 [26 May 2020]

[2]    There is hostility among the three administrators and at the heart of the current application is the life tenancy granted to their 89-year-old father, who lives in the principal asset of the estate, the property at Lowestoft Place in Palmerston North (Lowestoft Place). The life tenancy was not granted under the testatrix’s will. By agreement between the testatrix and her three children, the three entered into a Residential Tenancy Agreement with their father in their capacity as administrators of their mother’s estate. Lyall Domney, the father of Judith, Steven and Ross and the former spouse of Noeline Domney, initially filed an appearance reserving his rights as an interested party.

[3]Judith’s application is opposed by her brothers and her father.

Background facts

[4]    The testatrix, Noeline, died at Palmerston North on 2 August 2017. She made her last will dated 23 May 2012 and probate was granted to the three administrators on 17 August 2017.

[5]Noeline’s will (the Will) provided:

(a)a bequest of $5,000 to each of Noeline’s grandchildren;

(b)Noeline’s half share in two properties in Douglas Street, together with joint investments held with Lyall, to Lyall;

(c)furniture and household effects were left to Lyall; and

(d)the residue of her estate was left in three equal parts to:

(i)the Bayne and Judith McKellow Family Trust;

(ii)Steven; and

(iii)Ross.

[6]    Noeline’s bequest to her grandchildren and the devise of the Douglas Street properties to Lyall have been made, leaving only the residue of her estate yet to be distributed. The administrators cannot agree to the distribution of the residue.

[7]    The Will records a loan arrangement made by Noeline to Steven to enable him to buy property. She left directions to her trustees that the loan and the interest she had paid should be brought into account and charged against Steven’s share in her residuary estate. Clause 7 of the Will provides:

I confirm that I arranged a loan for $80,000.00 for Steven to assist him with the purchase of a property in New York. This loan was secured against my Lowestoft Place property. Steven has paid $3,000.00 in reduction of this debt but I have made all other principal and interest payments on the loan. I direct my Trustees to bring into account and charge against Steven’s share in my residuary estate $80,000.00 plus all interest that I have paid on the loan certified by the lender from the time the advance was made until it was repaid less the sum of $3,000.00 that Steven has already paid to me. If Steven dies before me the share of his children in my residuary estate will be similarly charged.

[8]    Noeline borrowed $120,000 from New Zealand Guardian Trust (Guardian Trust) and used $80,000 to fund her loan to Steven. The loan from Guardian Trust was advanced on 31 March 1995 and repaid by Noeline in March 2010.

[9]    Steven has repaid $3,000 in reduction of his debt to his mother, as recorded in clause 7 of the Will, leaving the amount owed by Steven of $161,790.70 approximately. Steven has acknowledged this amount and also that he received a further loan from his mother of $11,000. The final calculation of the amount owing by Steven in respect of the calculation of interest payments on his mother’s $80,000 loan has yet to be finalised or agreed.

[10]   Noeline also loaned Ross $5,000, which is to be deducted from his share of the estate, although there is no reference to it in her Will.

[11]   What is not included in the Will is the life tenancy granted to Lyall of Lowestoft Place, which contains a four-bedroom house and six one-bedroom units. The six units are managed by property managers and do not form part of the Residential Tenancy Arrangement with Lyall. It is not accepted by Judith that there was in fact a testamentary promise of a life interest granted to Lyall by her mother.

The tenancy for life

[12]   Lyall and Noeline married in 1952 and had four children: Judith, Steven, Ross and Ian. Noeline and Lyall separated in 1974, divorcing a couple of years later. Lyall remarried but his second marriage broke down after a few years.

[13]   In 1979, Ian Domney died in a car accident. Noeline and Lyall together grieved over Ian’s death at Noeline’s house at Lowestoft Place, following which Lyall continued living with Noeline there until her death in August 2017. They did not resume their relationship either as husband and wife or de facto partners. Lyall’s status in this arrangement was as Noeline’s boarder.

[14]   Lyall agreed with Noeline that in addition to his companionship, he would carry out the maintenance of Lowestoft Place, including the six flats and also the two flats that they jointly owned in Douglas Street, Palmerston North. In return, Noeline told Lyall he could live at Lowestoft Place rent-free for as long as he wanted or needed, including after she died. Lyall carried out all of the maintenance and repair work on the dwellings at Lowestoft Place and Douglas Street and Noeline collected and kept all the rent that was earned from the Lowestoft flats.

[15]   As outlined, Noeline’s Will did not reflect her agreement with Lyall, that he could live at Lowestoft Place for as long as he wanted or needed. However, shortly before her death, Lyall describes Noeline summonsing all of her children to come to her, and one by one, she made them promise they would honour the life tenancy she had promised Lyall.

[16]   It was never part of the agreement between Noeline and Lyall that he would have interest in the rental income from the flats at Lowestoft Place. Lyall has made a statement to the Court confirming that his interest relates only to the house at Lowestoft Place and does not extend to the Lowestoft Place flats. He confirms that he lived with Noeline in the house for about 38 years until she died in 2017 and he wants to continue to live in it for as long as he can.

[17]   As a result of Noeline’s request of her children to honour her agreement with Lyall, the Residential Tenancy Agreement was entered into between Lyall and his three

children, Judith, Steven and Ross (the Tenancy Agreement). The Tenancy Agreement grants Lyall the right to remain in the house at Lowestoft Place rent free as the sole occupant, for as long as he chooses to reside in the property. The commencement date of the tenancy is 7 August 2017, just five days after Noeline’s death.

The law

[18]   Section 21 of the Act states the Court has the power to remove or discharge an administrator of an estate on grounds set out in the section. Of relevance to this case, s 21(1) provides:

Where … it becomes expedient to discharge or remove an administrator, the court may discharge or remove that administrator, and may if it thinks fit appoint any person to be administrator in his or her place, on such terms and conditions in all respects as the court thinks fit.

[19]   Two recent Court of Appeal judgments affirmed the principles, outlined in the judgment of Heath J in Farquhar v Nunns,1 that should guide the Court in the exercise of its powers under s 21 to remove an administrator.2 Those principles are:

(a)The starting point is the Court's duty to see estates properly administered and trusts properly executed.

(b)This jurisdiction involves a large discretion which is heavily fact- dependent.

(c)The wishes of the testator/settlor (evidenced by the appointment of a particular executor or trustee) are to be given consideration, but ultimately the question is as to what is expedient in the interests of the beneficiaries.

(d)Expedience is a lower threshold than necessity, and imports considerations of suitability, practicality and efficiency. Misconduct, breach of trust, dishonesty, or unfitness need not be established.

(e)Hostility as between administrators/trustees and beneficiaries is not of itself a reason for removal, but hostility will assume relevance if and when it risks prejudicing the interests of the beneficiaries.

1      Farquhar v Nunns [2013] NZHC 1670 at [13].

2      Tod v Tod [2015] NZCA 501, [2017] 2 NZLR 145 at [22]; and Frickleton v Frickleton [2016] NZCA 408, [2017] NZLR 154 at [29].

[20]   In summarising the  principles,  Heath J  drew  heavily  upon  Associate Judge Osborne’s exposition of s 21 principles in Crick v McIlraith, where Associate Judge Osborne held that the testator’s selection of executor should not lightly be set aside.3 The Court of Appeal in Tod v Tod endorsed the importance of the testator’s appointment of executors, observing “the courts will not readily replace an executor selected by a deceased to manage his or her estate.”4

[21]   Since then, the Court of Appeal has reinforced two important aspects of these principles. The first is that the interests of the beneficiaries must always be the focus.5 In Frickleton v Frickleton, the Court referred to the Privy Council decision of Letterstedt v Broers from which, the following can be distilled: 6

(a)if the Court is satisfied that the continuance of the trustee would prevent the trusts being properly executed, the trustee might be removed;

(b)the trustees exist for the benefit of those to whom the creator of the trust has given the trust estate; and

(c)the courts main guide in removing trustees must be the welfare of the beneficiaries.

[22]   The second consideration, endorsing the Court of  Appeal’s  decision  in  Kain v Hutton, is that mere incompatibility between trustees and beneficiaries is not enough:7

Any incompatibility must be at such a level that the proper administration of the trust is seriously adversely affected and it has become difficult for a trustee to act in the interests of the beneficiary …

[23]   Finally, as the authorities reinforce, expedience is the focus of the Court’s jurisdiction under s 21 of the Act and, by reference to trustees, under s 52 of the Trustee Act 1956.8 As noted, expedience is a lower threshold than necessity and

3      Crick v McIlraith [2012] NZHC 1290 at [19].

4      Tod v Tod, above n 2, at [27(a)].

5      Frickleton v Frickleton, above n 2, at [33].

6      Letterstedt v Broers (1884) 9 App Cas 371 (PC) at 386-387, per Lord Blackburn, delivering the Privy Council’s opinion.

7      Kain v Hutton [2017] NZCA 199, [2007] 3 NZLR 349 at [267].

8      Frickleton v Frickleton, above n 2, at [36]; and Farquhar v Nunns, above n 1, at [13(f)].

imports considerations of suitability, practicality and efficiency. Misconduct, breach of trust, dishonesty, or unfitness is not required to be established.9

Parties’ positions

[24]   Judith claims that when the executors all swore their affidavit in support of the application for the grant of probate of the Will, they said they would faithfully execute the Will. Judith says Steven and Ross are refusing to do so and both, but particularly Steven, are acting in their own self-interests arising from their debts to the estate. Judith relies on a general rule that legacies are payable at the end of one year from the date of death of the testator. Where there have been significant delays by the trustees in completing the estates distribution, trustees have been removed.10

[25]   Judith submits that the existence of the tenancy right in favour of her father Lyall is not a valid reason to refuse to complete the administration of the estate. In order to expedite the estate’s administration, Judith seeks the removal of Steven and Ross as administrators accordingly.

[26]   Steven, Ross and Lyall oppose Judith’s application. In summary, they say that Judith is not promoting the proper administration of Noeline’s estate because she does not recognise Noeline’s promise of a life interest to Lyall. The motivation for Steven and Ross not distributing the estate with its principal asset at Lowestoft Place is the Tenancy Agreement, which they entered into along with Judith (as administrators) with their father. They reject Judith’s offer that the residuary estate could be distributed to the beneficiaries, with a replacement tenancy agreement concerning Lowestoft Place being entered into between Lyall and the three of them in their capacities as the beneficiaries. This would mean that Judith’s beneficial status would be the Bayne and Judith McKellow Family Trust, not Judith personally.

9      See [20(f)] of this judgment, and also R v Leitch [1998] 1 NZLR 420 (CA) at 428-429; and Harsant v Menzies [2012] NZHC 3390 at [55].

10     Harsant v Menzies, above n 9.

Analysis

[27]   This is an unfortunate family dispute among executor siblings over whether their mother’s estate should be distributed to each of them before their father’s life interest in the main asset of the estate is extinguished. As the Court of Appeal reinforced in Frickleton, the starting point is the Court’s duty to see estates properly administered.

[28]   Judith alleges that Steven and Ross are motivated out of self-interest because both her brothers have debts owed to the estate and their refusal to “complete the administration of the estate” is governed by their wish to delay for as long as possible any repayment of those loans. On that basis, Judith seeks to remove both of her brothers and have herself appointed as the sole administrator, in whom the estate property should vest. In advancing her claim, Judith does not accept that her father has a life interest in Lowestoft Place but has a lease for life instead, which she is prepared to recognise by a replacement residential tenancy agreement with the three beneficiaries.

[29]   All parties accept that Noeline told Lyall that he could remain in her house at Lowestoft Place, until he no longer wished to live there or could no longer live there. There was also unanimous acceptance that Judith, Steven and Ross had agreed to this arrangement as administrators of Noeline’s estate, with their father.

[30]   It is therefore plain that Noeline has made a testamentary promise to Lyall, which their children acknowledged by entering into the Tenancy Agreement with him. Although the life interest was not included in the Will, Noeline went to some lengths to ensure her children understood the arrangement she had made with their father. A lease for life has been defined, broadly, as a life interest,11 and I consider nothing turns on the nomenclature of tenancy for life, life interest or lease for life in this instance. In the event that the executors do not recognise Lyall’s interests, I consider Lyall could bring a claim under the Law Reform (Testamentary Promises) Act 1949 because of the deceased’s express promise in exchange for Lyall’s services and work. Testamentary provision was clearly intended.

11     Hinde McMorland and Sim Land Law in New Zealand (loose-leaf ed, LexisNexis) at [3.012].

[31]   Steven and Ross are respecting the wishes of Noeline, with their acknowledgment in this proceeding that Lyall has a testamentary promise claim against the estate in the event that Noeline’s wishes were not respected. Their reluctance to accede to Judith’s wishes that the estate be distributed is also supported by their agreement as administrators in the executed Tenancy Agreement with Lyall.

[32]   I turn then to the allegation by Judith that her brothers have conflicts of interest because of their outstanding indebtedness to the estate. As the authorities note, a conflict of interest is not a reason in itself to remove the executor.12 The issue is whether it prejudices the welfare of the beneficiaries or undermines the executor’s ability to preform his or her duties as administrator.13

[33]   In response to the allegation of conflict, Steven refers to a meeting with the estate lawyers shortly after Noeline’s death where it was agreed with Judith and Ross that his debt to the estate would be paid at the time the estate was distributed. That meant it would be taken out of his share of the estate. There were further discussions among the siblings in which they agreed that distributing the estate would take place when Lowestoft Place was sold. Steven describes the decision to delay the distribution of the estate as follows:

I acknowledge that in granting my father a life interest in Lowestoft Place, the final distribution of the estate is delayed. This in turn means that the time at which my debt to the estate is repaid is delayed as well. However, I agreed to Dad being granted a life interest, or tenancy in Lowestoft Place, because he is elderly, not in the best of health, it was what our Mum told me she wanted, and finding him and his dog a new home would have been distressing for him. I would have agreed to this whether I owed a debt to the estate or not.

[34]   Steven initially considered that the reason Judith was making this application was for financial reasons. Although they had all agreed to wait until Lowestoft Place was sold, Steven made an offer to Judith that all distributions and rental income be split among Judith and Ross, until his loan was expunged or the property sold. This was rejected. Judith has made several counter proposals, seeking a larger share of the ownership of Lowestoft Place, adjusted by the debts owed by Ross and Steven.

12     Tod v Tod, above n 2, at [27].

13     At [27(c)], citing Hunter v Hunter [1938] NZLF 520 (CA) at 530-531.

[35]   At a meeting in February 2018 with the estate lawyers, the three administrators agreed to a distribution from the estate’s trust fund. However, a few weeks after that meeting, Judith declined. Further offers were made to settle the estate, including Steven’s offer to pay Judith her share of the $11,000 loan Noeline had given to Steven’s daughter as a contribution to her medical school fees. This offer was not taken up.

[36]   Because the monetary offers made by Steven and Ross were declined by Judith, Steven has concluded that this application is not about obtaining money in advance of final distribution. I agree. It appears that Judith is seeking a greater share of the Lowestoft Place property in lieu of cash adjustments for her brothers’ debts. I note that Judith’s application not only seeks the removal of her brothers as administrators but seeks a vesting of the estate property in her solely, with no additional executor being appointed.

[37]   In making this application, Judith has pointed to the fact that a new tenancy agreement could be entered into with the beneficiaries once the estate was distributed. The beneficiaries would then be the owners of Lowestoft Place and could ensure Lyall’s ongoing tenancy in the property, albeit with the beneficiaries directly. At the present time, the Tenancy Agreement is with each of the siblings in their capacity as executors. Judith’s beneficial share is through the Bayne and Judith McKellow Family Trust.

[38]   Both Lyall and her brothers reject her proposal that a fresh tenancy agreement with the beneficiaries, with Judith as the sole administrator, would provide adequate protection for Lyall’s interest. Mr Sheppard for Lyall submits that there is a greater risk of prejudice to the beneficiaries’ welfare if Judith is the sole trustee and executor or Noeline’s estate, because she refuses to recognise Lyall’s life interest and wants the Lowestoft property distributed without delay.

[39]   If the Lowestoft Place was owned by the beneficiaries, Ms McEwan for the respondents submits, there is nothing preventing the McKellow Family Trust seeking a partition order from the Court and selling its share. Although Mr Wenley for Judith assured the Court that the McKellow Family Trust would consider itself bound to

honour a replacement tenancy agreement, the McKellow Family Trust must act in the best interest of its beneficiaries, which does not include Lyall. Mr Wenley is not acting for the McKellow Family Trust and nor was it represented separately. The concerns of Judith’s brothers and her father were not alleviated by this indication.

[40]   Mr Sheppard submits that any replacement tenancy agreement would not provide sufficient security for Lyall. He says the tenancy could be terminated on notice and the non-payment of rent by Lyall does not meet the definition of a residential tenancy under the Residential Tenancies Act 1986, making his future tenancy subject to a potential legal challenge.

[41]   At present, the Tenancy Agreement is with the executors of the estate, who are currently recognising and protecting the estate’s life interest. If the beneficiaries become the owners of Lowestoft Place, Judith will not be a signatory to the Tenancy Agreement. It will be the McKellow Family Trust. I accept Mr Sheppard’s submission that there would not be adequate protection of Lyall’s life interest without the recognition by the administrators of his entitlement. The variables of a replacement residential tenancy agreement, if compromised or terminated, may mean Lyall would have to resort to court action, which he can ill-afford, to enforce his testamentary promise. Further, there has been no suggestion of a maintenance fund in the event that repairs and expenditure will be required for Lowestoft Place, if the estate is distributed. Again, resort to the beneficiaries for payment out of personal funds makes Lyall’s position more vulnerable.

[42]   I accept that there are grounds for concern that Judith does not recognise Lyall’s life interest. His interest could be recognised by Judith and the estate could be distributed, but there would be no need for Steven and Ross to be removed as trustees and executors. More concerning from Lyall’s perspective is that Judith is not seeking to have a replacement trustee and executor appointed or an independent professional trustee. I consider that a replacement tenancy agreement would not provide adequate security for Lyall.

[43]   Applying then the principles in the exercise of the powers under s 21 of the Act, I consider that the estate is being properly administered. The agreed and principal

consideration is the protection of Lyall’s life tenancy in the main asset of the estate at Lowestoft Place. Secondly, the fact that Noeline appointed her three children as executors is an important consideration. The three executors are, after all, the children of Noeline and Lyall.

[44]   Acknowledging that expedience is a lower threshold than necessity, I consider that it is not expedient to remove Steven and/or Ross as administrators of the estate. Nor do I consider it expedient that the estate be distributed without the full agreement of the executors before Lyall’s life tenancy terminates. I also do not uphold Judith’s contention that her brothers are acting out of self-interest.

[45]   During the hearing, Mr Wenley submitted on Judith’s behalf that no interest had been paid by Steven in respect of the outstanding loan to his mother. There is no foundation for an expectation that interest on the outstanding sum is to be paid. This was a loan extended by Noeline to her son and she has ensured that the capital and interest, which she paid on the loan, is adjusted in respect of his ultimate share in the estate. That is all. This is not a loan recovery scheme and nor has the estate been out of pocket by interest payments. This contrasts with Harsant v Menzies where 20 years had lapsed since the grant of probate and the trust had borrowed against the estate’s capital, with ongoing crippling interest rates to meet.14

[46]   I consider there can be no expectation here that Steven must pay interest on his mother’s loan. She did not demand it and nor did she intend that this should be a consequence on the distribution of her estate.

[47]   Finally, it was accepted by the parties that there is hostility among the administrators. Hostility only assumes relevance if and when it risks prejudicing the interest of the beneficiaries. I am satisfied here that the interests of the beneficiaries are not prejudiced by this hostility. There was agreement among the executors that the estate would be distributed on the expiration of Lyall’s life interest. There is no call for a partial distribution at the present time, unless the administrators subsequently agree to one and I can see no risk to the interests of the residuary beneficiaries in the interim. What concerns the Court more is the risk to Lyall’s life interest.

14     Harsant above n 9.

Result

[48]The application is dismissed.

[49]   If no agreement can be reached among counsel as to costs, counsel may file a short memoranda, no more than five pages within 20 working days of this decision.

Cull J

Solicitors:

Willis Legal, Napier for the Applicant Langley Twigg, Napier for the Respondents