McKeown v Small
[2015] NZHC 1043
•18 May 2015
IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY
CIV-2014-476-000023 [2015] NZHC 1043
BETWEEN JAMES SUTHERLAND MCKEOWN
Plaintiff
AND
ANGELA JEAN SMALL AND NICOLA JANE GEARY
First Defendants
GEOFFREY ANDREW CHAPMAN, ANGELA JEAN SMALL AND NICOLA JANE GEARY
Second Defendants
Hearing: 23 March 2015 Appearances:
J V Ormsby for Plaintiff
C A O'Connor for DefendantsJudgment:
18 May 2015
JUDGMENT OF GENDALL J
Contents
The claim................................................................................................................[1] Background ............................................................................................................[3] Procedural background.........................................................................................[14] What is in dispute? ...............................................................................................[15] The value of Peter’s estate ...................................................................................[17] South Canterbury Finance and Dominion Finance Losses ..................................[18] James’ position [18] Defendants’ position [21] Accounting evidence [25] Resolution [28] Outcome [41] The doctrine of survivorship and Partnership assets ............................................[43] Peter’s partnership salary .....................................................................................[50] Losses on Heather’s shares ..................................................................................[52] Conclusion............................................................................................................[55] Costs .....................................................................................................................[62]
MCKEOWN v SMALL [2015] NZHC 1043 [18 May 2015]
The claim
[1] The Plaintiff, James McKeown (James), brings an action against the first defendants, Angela Small (Angela) and Nicola Geary (Nicola), his sisters, as beneficiaries under the estate of their mother Heather McKeown (Heather), the estate of their father Peter McKeown (Peter), and the McKeown Family Trust No 2 (The Trust). James also brings an action against Angela, Nicola and Geoffrey Chapman (Mr Chapman), as executors of Heather’s estate.
[2] Prior to explaining the nature of the claims before the Court in more detail, it is necessary to set out the events leading up to this proceeding. At this stage it is sufficient to state that James’ central complaint is that, due to the actions of the first and second defendants, his interest under his father Peter’s will, has been substantially diminished, while the interests of Angela and Nicola (including their interest under the will of their late mother which preferred them over James) have been correspondingly enlarged.
Background
[3] Peter and Heather were farmers in the Totara Valley. They together had the three children named above, James, Angela and Nicola. For some time it seems Peter and Heather jointly arranged their affairs so that their assets would devolve to their children upon their death. Both Peter and Heather are now deceased, Peter having died on 2 November 2002, and Heather on 22 November 2008.
[4] On 20 July 2001, Peter settled the Trust. Peter named himself, together with Heather and a Mr Rupert Scott (Mr Scott) as trustees of the Trust. The terms of the Trust Deed relevantly provide:
(a) the discretionary beneficiaries are Peter, Heather, their children, along
with “remoter issue” of Peter and Heather (cl 4.1(3));
(b) the final beneficiaries are James, Angela and Nicola as children of
Peter and Heather (cl 4.1(5));
(c) during the trust period (defined in cl 4.1(9)), the trustees may use as much of the capital of the Trust Fund (defined in cl 4.1(8)) as they think necessary for the past, present or future maintenance, education, advancement or benefit of the discretionary beneficiaries (cl 2.4);
(d)on the distribution date the trustees will divide the trust fund equally among the final beneficiaries but have the power to make an earlier nomination or resettle the trust in a manner that is for the benefit of a discretionary beneficiary (cl 2.5); and
(e) distribution date is defined as meaning either the expiry of the perpetuity period (defined in cl 4.1(6)) or an earlier date specified by the Trustees.
[5] Also in July 2001, Peter and Heather purchased a property at Pages Road, Timaru, on which they built a house. On 20 July 2001, the same date on which the Trust was settled, Peter and Heather sold the Pages Road property to the Trust, leaving a debt owing to them by the Trust, and they simultaneously took a lease of the property from the Trust.
[6] On 19 June 2002, Peter and Heather executed mutual wills. Peter’s will
relevantly provides:
(a) Heather and Mr Scott were to be the executors and trustees of his estate;
(b) any debts owing to Peter by Nicola or the Trust were forgiven;
(c) Heather was to receive a life interest in the income from his residuary estate; and
(d)after the death of Heather, the residuary estate was to be divided equally among his children James, Angela and Nicola (and if any of them were not living at the time, to their respective children).
Heather’s will was a mirror image of Peters.
[7] Despite their mutual wills, after Peter’s death, Heather, on 28 May 2007, executed a new will the relevant terms of which provide:
(a) her earlier 19 June 2002 will was revoked;
(b)Mr Chapman, Angela and Nicola were to be the executors and trustees of her estate;
(c) any debts owing to her from James, Angela, Nicola or the Trust were to be forgiven;
(d)specific monetary gifts were to be made to Mr Chapman ($5,000), Mr Scott ($5,000), and each of her grandchildren living at her death ($30,000); and
(e) the residue was to be transferred equally to Angela and Nicola (or their children if Angela and/or Nicola predeceased their children).
[8] On or around 16 October 2007, Heather executed a third will, which was identical to this 28 May 2007 will, save that it removed provision for forgiveness of any debts of James, effectively excluding him from any inheritance in any form from Heather. In addition, Mr Chapman was appointed as an additional trustee of the Trust by deed of appointment. At that time the three trustees of the Trust nominated that Angela and Nicola alone would be the final beneficiaries of the Trust capital and would share this equally.
[9] At the time of executing the 16 October 2007 will, Heather wrote and signed an explanatory note of the same date, which records:
I have not made any provision in my Will or the Trust for my son JAMES, in view of the substantial benefits he has received through the help given to him in purchasing a farm 20 years ago. My daughters have not received equivalent benefits. He also has an entitlement as to an equal share with my daughters on my death in the estate of my late husband Peter Sutherland McKeown.
[10] In his affidavit, James responds to the contents of the explanatory note in these terms:
I did not receive “substantial benefits” as the explanatory note suggests. I worked hard for my parents and paid off the majority of the mortgage for the farm I now own myself. My parents received benefits from purchasing the farm in my name; they took income and gained tax advantages. I was always there for my parents while my sisters did their own thing outside of farming.
My mother, as is referred to in her explanatory note, had 20 years in which to change her will to reflect that I had already received benefits which my sisters had not. I have no idea why she took the steps she did in 2007.
[11] Heather executed a fourth (and final) will on 14 May 2008. Under the terms of the final will, she appointed Geoffrey, Angela and Nicola as executors and trustees of her estate, made certain monetary gifts to Geoffrey, Rupert and her grandchildren, forgave James, Angela and Nicola any debts, and gave her residuary estate equally to Angela and Nicola (or to their respective children if Angela and/or Nicola predeceased her).
[12] James has not received any capital from either the Trust or Heather’s estate. Further, James only became aware of the facts which gave rise to his claims upon the death of his mother Heather, when her estate, along with Peter’s estate, became distributable. James says his amended statement of claim filed in this proceeding on
10 November 2014 only became necessary following discovery, and the discovered material being considered in detail. Indeed, in his affidavit, James deposes:
I was not aware of … [these] will change[s] until after my mother’s death but it is the first example of either of my parents treating my sisters and I differently in terms of the distribution of their estates. There was no explanatory note at the time of this [first] will change saying that the capital was going all to my sisters because of any benefits I had already received.
[13] After a substantial period of correspondence between the parties, James issued proceedings. He has made no challenge to Heather’s estate (i.e. by way of claim under the Family Protection Act 1955 or otherwise) or to distributions made by the Trust. Rather, he primarily claims that his one third share of Peter’s estate has been undervalued. He seeks to recover that undervalue here.
Procedural background
[14] For completeness I set out below the events giving rise to this claim:
(a) 8 December 2008: prior to the distribution of Peter and Heather’s estates, James, through his solicitor, notified counsel administering Peter and Heather’s estates that he was considering bringing a claim against one or both of Peter’s and Heather’s estates.
(b)19 May 2009: James, through his solicitor, gave further notice to counsel administering Peter and Heather’s estates of his intention to bring a claim against Heather’s estate.
(c) 14 September 2009: James asked counsel for the second defendants for (a) information explaining a number of financial and accounting concerns arising out of letters sent to James on 28 May 2009 and
11 June 2009; and (b) confirmation, as a matter of urgency, that the first and second defendants did not intend to make any distributions from Heather’s estate prior to 5 December 2009, being 12 months from the date of probate, to enable James to bring a claim under the Family Protection Act 1955.
(d)5 November 2009: counsel administering Peter and Heather’s estates confirmed that James could bring proceedings within one month of receiving the information requested in the letter of 14 September
2009, despite the time limit in s 9 of the Family Protection Act.
(e) 23 February 2010: James, through his solicitor, confirmed the agreement to extend the timing for filing proceedings until one month after the requested information was received.
(f) 12 March 2010: James received a copy of an accounting report prepared by Mr Colin Sinclair (Mr Sinclair) dated 3 March 2010, which valued the estates of Peter and Heather, and the value of the Trust. Mr Sinclair is a retired accountant, the father-in-law of Nicola
and a longstanding friend of Peter and Heather. This report was then relied on by the second defendants for determining the values of the estates and the Trust for the purposes of distribution. It is agreed that the second defendants knew Mr Sinclair’s accounting report would be relied on to determine distributions of the parents’ estates and distributions from the Trust. Further, when preparing and relying on the report the second defendants were acting as executors and trustees of Heather’s estate and concurrently as executors and trustees de son tort of Peter’s estate, or otherwise acted knowingly, in respect of how both estates and the Trust would be distributed.
(g)21 April 2010: James received a cheque for $100,000, being a distribution of estate funds authorised by the first and second defendants.
(h)23 April 2010: James, through his solicitor, wrote to counsel for the first and second defendants to (a) clarify that the information sent to James on 12 March 2010 had not satisfied his request for information as detailed in the letter of 14 September 2009; (b) confirm that that deadline for bringing proceedings would be further postponed pending further analysis of the information supplied; (c) request confirmation that no further distributions be made; and (d) question whether distributions had been made to other beneficiaries.
(i)28 April 2010: counsel for the first and second defendants confirmed that the estates of Heather and Peter had been substantially distributed on or about 21 April 2010 and that there would be no further extension of time for bringing proceedings.
(j)8 July 2010: despite James’ request on 23 April 2010 that no further distributions be made, the first and second defendants made further distributions on this date.
(k)12 July 2010: James notified the first and second defendants by letter that he may still pursue a claim against Heather’s estate. There was no challenge to the accuracy of Mr Sinclair’s report up until this date. In the same letter, James also put the first and second defendants on notice that he considered that Peter and Heather’s estates had not been administered correctly and that he considered they had acted in breach of trust.
What is in dispute?
[15] The parties are in fundamental agreement that the main issue in dispute in this proceeding relates to the value of Peter’s estate. It also seems to be accepted that if there has been an understatement, then Nicola and Angela will need to compensate James. James submits that this claim involves no more than him seeking his true entitlement from his father’s estate. He claims:
(a) $93,125.67 which is the difference between the $221,652 distributed to him pursuant to Peter and Heather’s wills and $314,777.67, being James’ entitlement to what he says is the true value of his one third share in the value of the estate.
(b) Either:
(i) interest on the above sum at the Judicature Act rates from the
date that Peter’s estate became distributable; or
(ii)an account of profits received by Angela and Nicola from the misappropriated $93,125.67 until payment.
(c) $18,142.05 being the legal fees and related expenses incurred between
8 December 2008 and 16 December 2013 by James when instructing Timpany Walton to request information regarding his parents’ estate administration and value.
(d)costs and disbursements incurred by James on a solicitor and own client basis during this proceeding.
[16] Heads (a) and (b) are claimed against Angela and Nicola, while (c) and (d)
are referable to Angela, Nicola and Mr Chapman.
The value of Peter’s estate
[17] In an affidavit filed on 16 March 2015, the accounting expert engaged by James, Mr Joseph Butterfield, and the accounting expert engaged by the defendants, Mr Craig Copland, recorded their positions on the financial evidence and points of agreement and disagreement. Mr Butterfield took the view that Peter’s distributable estate was valued at $944,336, while Mr Copland considered it to be valued at
$661,518. There is a difference of $282,818. This difference is attributable to the following disputed questions:
(a) whether losses on investments in South Canterbury Finance and Dominion Finance fall equally against Peter’s estate and Heather’s estate;
(b)whether the doctrine of survivorship applies to the assets in Peter’s and Heather’s partnership;
(c) whether Peter’s partnership salary earned during his lifetime forms
part of Peter’s estate; and
(d) whether South Canterbury Finance Preference Shares held in
Heather’s name are partnership assets.
South Canterbury Finance and Dominion Finance Losses
James’ position
[18] Peter and Heather were in a farming partnership named “PS & HM McKeown” (the Partnership). The main assets of the Partnership were the proceeds of their farming ventures. At some point, shares in South Canterbury Finance and
Dominion Finance were purchased in Peter’s name. Prior to realisation and distribution of those shares, some losses were made through the collapse of the respective companies. Mr Sinclair allocated these losses solely to Peter’s estate.
[19] It is James’ position that, despite the shares being in Peter’s sole name, they belong to the Partnership. In making this argument, James relies on s 24 of the Partnership Act 1908 (the Act), which provides:
Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm.
[20] These shares were initially purchased with partnership funds, resulting from the sale of the partnership farm. These farm sale proceeds can be traced through the accounts. James further submits that there is no evidence of a “contrary intention”, which therefore means that the losses attaching to those shares of $197,146 should be borne equally by Peter’s estate and Heather’s estate. If this argument was accepted, Peter’s estate would be enlarged by $98,573, of which James would be entitled to one third.
Defendants’ position
[21] James’ argument is opposed by the defendants on the basis that they say the “plaintiff’s approach assumes there must be a partnership between the estate of PS McKeown and the surviving spouse, HM McKeown”. The defendants maintain that the Partnership dissolved upon Peter’s death by virtue of s 36(1) of the Partnership Act 1908, which states:
Subject to any agreement between the partners, every partnership is dissolved as regards all the partners by the death or bankruptcy of any partner.
[22] Because there was no discovered written partnership agreement, or any document recording agreement on this matter, the starting point is that the partnership is dissolved. The defendants do note, however, clauses 8(d) and 9 of Peter’s will which respectively and relevantly provide:
8. I DECLARE that my trustees shall have the following further powers in addition to any powers given to trustees by law:
…
(h) To enter into any partnerships or joint venture agreements with any one or more of my children as they shall think fit.
9. MY TRUSTEES may in their discretion retain possession of any farming or other business of any kind for the time being vested in them on the trusts of this my will and carry on any business or joint venture which I may be carrying on at the date of my death either solely or in partnership with any other person or persons …
[23] The defendants say that cl 9 is discretionary in nature, and that cl 8(h) has no application on the basis it is specifically referable to Peter’s children, and not to Heather. They say that despite the fact that financial accounts after Peter’s death purport to carry on the Partnership, there is no clear evidence of an intention to continue the Partnership. They rely on the fact that the closing balance of the Partnership account was divided in two following Peter’s death, with half being allocated to Heather, and half to Peter’s estate. The defendants then refer to the fact that the investments in any event are in the sole name of Peter.
[24] The defendants alternatively argue that if I was to find that the partnership has continued, or a new partnership formed, then there is sufficient evidence of a “contrary intention” in terms of s 24 of the Act. First, the investments are expressly noted as being owned by Peter, not by any partnership. Second, the financial statements for the year ending 31 March 2008 clearly record the Dominion Finance Investment as “Dominion Finance – Estate PSMcK”. Third, financial statements of “the Estate P S & H M McKeown” from 2003 to 2008 ascribe income directly to either of the individual accounts, not the Partnership accounts. Finally, in the same financial statements, some income (from Dominion Finance Ltd and South Canterbury Finance Ltd) was wholly attributed to Peter’s estate, rather than being split on an equal basis.
Accounting evidence
[25] As is the case with many of the disputed financial matters in this proceeding, in my view, much of the accounting evidence is wanting. For example, Mr Butterfield has stated in his affidavit:
7. From the information provided in discovery and initial disclosure, and from enquiries previously made of current partners at Thomas Lawson, Chartered Accountants of Timaru, it appears that no separate financial statements were prepared for either the Estate P S McKeown or the Family Trust. 8.
My view is that where there is a separation between income and capital beneficiaries in any trust or estate, good practice requires that separate financial statements be prepared annually for that trust, if for no other reason, but to continually account for the difference between income and capital. The Trustees of an estate should, throughout the life of the entity, be able to account for the value of that entity from commencement to distribution (or the latest balance date if still pre-distribution).
[26]
Even
Mr Sinclair’s report, which was relied on for the purposes of
distribution, evidences the inadequacies with the accounting. He more or less eschewed reliance on any previous accounts and endeavoured to reconstruct the value of Peter’s estate by ex post facto determination. Some of the comments he makes in his report include:
Pages Road Property
Pages Road land was bought by Peter and Heather in July 2001 and transferred into the newly created McKeown Family Trust No 2 – also in July 2001. The debt due by the Trust to Peter and Heather created by this transfer was almost immediately written off by a lease arrangement and gifts. This does not appear to be recorded in this manner in the 2004 Annual Accounts of McKeown Family Trust No 2.
The cost of the land is shown in those accounts. The house construction costs show as $71,016.05 when in fact more than $387,000 had been spent on the house and landscaping.
…
Annual Accounts
It became evident that the Annual Accounts for the years after Peter’s death
could not be used as a basis for the determination of Estate or Trust values
…
Bank Accounts
The bank accounts could not be relied upon as a true indication of ownership
funds between the two Estates. …
…
Solicit or ’s Trust Accounts
For similar reasons as shown above with bank accounts, it is most unreliable
to rely on the Solicitor’s Trust Accounts as a guide to ownership of funds. …
[27] And, I note that there are other similar statements throughout the evidence in this case. Despite those inadequacies, however, I appreciate here that the parties have, to the best of their ability, sought to reconstruct the true position, and I must proceed on this basis.
Resolution
[28] A convenient starting point here is to consider how this dispute arose. As has been noted, Peter and Heather operated the Partnership. The primary assets of the Partnership were the proceeds of Peter and Heather’s farming venture. During the currency of the Partnership, accounts prepared by Thomas Lawson accountants show a joint current account between Peter and Heather. Mr Butterfield states that the “current account reflected their combined capital investment in the farm partnership”.
[29] From the evidence I can discern little dispute that the shares in question are able to be traced from the sale of the partnership farm, which was an asset of the Partnership. This issue therefore requires the resolution of two issues:
(a) did the Partnership dissolve upon Peter’s death; and, if not,
(b) are the shares partnership property.
[30] For my part, it seems that the first hurdle to James’ claim here is the plain words of s 36 of the Act.1 In the absence of some contrary agreement, a partnership will be dissolved upon death. This too was the position at common law:2
The death of any one member of a firm operates as a dissolution thereof as between all the members, unless there is some agreement to the contrary. This is obviously reasonable, for by the death of one of the members it is no longer possible to adhere to the original contract, the essence of which is (in the case supposed), that all the parties to it shall be alive.
1 The Partnership Act 1908 replaced the Partnership Act 1891. The New Zealand Act of 1891 has its origins in the Partnership Act 1890 (UK) (which endures today), of which the comparable section for present purposes was s 33.
2 Lord Lindley A Treatise on the Law of Partnership (5th ed, Charles H Edson & Co, Boston,
1888) at 670.
[31] In making this observation, Lord Lindley referred to a line of ancient authority.3 Of these authorities, it is useful to consider the comprehensive treatment outlined in Crawshay v Maule, where the Lord Chancellor stated:4
The doctrine, that death or notice ends a partnership, has been called unreasonable. It is not necessary to examine that opinion, but much remains to be considered before it can be approved. If men will enter into a partnership, as into a marriage, for better and worse, they must abide by it; but if they enter into it without saying how long it shall endure, they are understood to take that course in the expectation that circumstances may arise in which a dissolution will be the only means of saving them from ruin; and considering what persons death might introduce into the partnership, unless it works as a dissolution, there is strong reason for saying that such should be its effect. Is the surviving partner to receive into the partnership at all hazards, the executor or administrator of the deceased, his next of kin, or possibly a creditor taking administration, or whoever claims by representation or assignment from his representative?
[32] In Lindley & Banks on Partnership it is noted:5
It is important to note that this rule is applied strictly: the mere fact that the partnership was originally entered into for a fixed term which has not expired will not, of itself, be sufficient to prevent a dissolution caused by the untimely death of a partner.
…
It goes without saying that, irrespective of the terms of the agreement, a partnership cannot continue where there is a sole surviving partner, but this does not mean that such a partner may not have a contractual right to acquire all the former partnership assets.
[33] Similarly, the authors of The Laws of New Zealand observe:6
Subject to any agreement between the partners, a partnership is dissolved as regards all the partners by the death of any partner. … Unless the partnership agreement otherwise provides, neither the surviving partners nor the personal representatives of a deceased partner are entitled or bound to continue a partnership, even in the partnership term is unexpired at the time of death. …
3 Pearce v Chamberlain (1750) 2 Ves Sen 33, 28 ER 23 (Ch); Crawford v Hamilton (1818) 3
Madd 251, 56 ER 501 (Ch); Crawshay v Maule (1818) 1 Swanst 495, 36 ER 479 (Ch); Vulliamy v Noble (1817) 3 Mer 593, 36 ER 228 (Ch); Crosbie v Guion (1857) 23 Beav 518, 53 ER 203.
4 Crawshay v Maule (1818) 1 Swanst 495, 36 ER 479 (Ch) at 509, 484 (citations omitted).
5 Roderick Banks (ed) Lindley & Banks on Partnership (19th ed, Sweet & Maxwell, London,
2010) at [24–30] (citations omitted). See too Keith Fletcher The Law of Partnership in Australia
(9th ed, Lawbook Co, Sydney, 2007) at 236–239.
6 Laws of New Zealand Partnership and Joint Ventures at [166]. See also Halsbury’s Laws of
England (5th ed, 2014) vol 79 Partnership at [175]; Halsbury’s Laws of Australia vol 19 (at 15
May 2014) 305 Partnerships and Joint Ventures, “Dissolution” at [305–520].
[34] The starting point is therefore that upon Peter’s death, the partnership dissolved. It is no more than a starting point, however. It is possible to rebut the presumption by furnishing adequate evidence of a contrary intention.
[35] Clause 9 of Peter’s will expressly vested in the representatives of his estate the power, inter alia, to “carry on any business or joint venture which I may be carrying on at the date of my death either solely or in partnership with any other person or persons”. To the extent that the authors of the Laws of New Zealand posit that an intention for the partnership to continue following death, or permission for such to occur, must be contained in the partnership agreement itself, I do not share that view. It seems to me to be entirely appropriate that such an agreement might be contained in Peter’s will. As to the other partner(s), they will ordinarily remain alive to agree or to not agree.
[36] The difficulty for the defendants here is that there is significant evidence in this case that the partnership did continue beyond Peter’s death. For example, partnership accounts (and presumably partnership returns for taxation purposes) continued to be produced until 2008 and the partnership was not officially wound up despite the presumption of dissolution. In these circumstances, I am satisfied that Peter’s estate, with Peter’s agreement and intention outlined in his will, and Heather’s agreement inter vivos, continued the Partnership. I have also been unmoved by the defendants’ argument in relation to the capital of the partnership account being split in two as evidencing termination of the Partnership. There was a need to do so to ensure it was possible to account for interest and capital separately.
[37] The question now becomes whether, in that light, the investments held in Peter’s name are in fact investments of the partnership as a result of the application of s 24 of the Act.7 The words of the section are plain. However, the point is made by the authors of Lindley & Banks on Partnership, in these terms:8
The mere fact that the property in question was purchased by one partner in his own name is immaterial, if it was paid for out of the partnership monies;
7 The equivalent provision in the United Kingdom is to be found in the Partnership Act 1890 (UK), s 21.
8 Roderick Banks (ed) Lindley & Banks on Partnership (19th ed, Sweet & Maxwell, London,
2010) at [18-07] (citations omitted).
for in such a case he will be deemed to hold the property in trust for the firm, unless he can show that he holds it for himself alone. Upon this principle it has been held that land purchased in the name of one partner, but paid for by the firm, is the property of the firm, although there may be no declaration or memorandum in writing disclosing the trust, and signed by the partner to whom the land has been conveyed. So, if shares in a company are bought with partnership money, they will be partnership property, although they may be standing in the books of the company in the name of one partner only, and although it may be contrary to the company’s deed of settlement for more than one person to hold shares in it.
[38] The authors continue:9
The statutory presumption that assets purchased with partnership money constitute partnership property may, of course, be rebutted. … [However, the] mere fact that the property is vested in the name of one partner is clearly not sufficient to rebut the presumption, especially where it is shown as a partnership asset in the firm’s accounts. …
[39] Similarly, in the Laws of New Zealand, the authors comment:10
Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm. It is immaterial that the purchase is made in the name of one partner only, if it is clear that that partner is not to hold it for himself alone. The mere fact that the business is conducted on property belonging to one partner does not necessarily involve that property in partnership dealings so as to make it partnership property. Where property has been purchased out of partnership assets and held as part of the partnership stock, it is immaterial that it has not been actually used for carrying on the partnership business upon it or by means of it. …
[40] In the circumstances of this case, I have not been taken to a position where the defendants have been able to rebut the presumption by establishing a contrary intention. I have set out the basis of their argument above. The reality is that the shares were purchased with partnership funds, and there is no compelling evidence
that the shares were intended to vest, both legally and beneficially, in Peter alone.
9 At [18–08] (citations omitted).
10 Laws of New Zealand Partnership and Joint Ventures at [106] (citations omitted). See also Halsbury’s Laws of England (5th ed, 2014) vol 79 Partnership at [117]; Halsbury’s Laws of Australia vol 19 (at 15 May 2014) 305 Partnerships and Joint Ventures, “Dealings Between Partners: Partnership Property” at [305–255]. See too Keith Fletcher The Law of Partnership in Australia (9th ed, Lawbook Co, Sydney, 2007) at 144–146 and the authorities there collected.
Outcome
[41] I conclude therefore that the Partnership continued beyond Peter’s death and the investments were purchased with partnership assets, being the proceeds of sale of partnership land. Any capital gains or losses associated with those investments (or any investments that were made with partnership property) are therefore to be borne equally by Peter’s estate and Heather’s estate.
[42] For the purposes of this application, this means that Peter’s estate will increase by $98,573. I will address below the issue of whether losses on investments held in Heather’s name should receive similar treatment.
The doctrine of survivorship and Partnership assets
[43] The issue here is whether $345,490 of partnership assets are subject to the laws of survivorship. The starting point is s 23(1) of the Act:
All property and rights and interests in property originally brought into the partnership stock, or acquired (whether by purchase or otherwise) on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.
[44] Thus, the rebuttable presumption is that partnership assets are held by the partnership and are not subject to principle of survivorship and its rigours. This accords with the ancient maxim jus accrescendi inter mercatores locum non habet, pro beneficio commercii: for the good of commerce, the right of survivorship has no
place among merchants.11 The authors of Lindley & Banks on Partnership explain
the position in these terms:12
It has long been recognised that partnership is not a species of joint tenancy and that, in the absence of some contrary agreement, there is no survivorship as between partners, at least so far as concerns their beneficial interest in the partnership assets. Lord Lindley put it thus:
11 Bryan Garner (ed) Black’s Law Dictionary (10th ed, Thomson Reuters, Minnesota, 2014) at
1924.
12 Roderick Banks (ed) Lindley & Banks on Partnership (19th ed, Sweet & Maxwell, London,
2010) at [19–13] (most citations omitted), referring to Bathurst v Scarborow [2005] 1 P & CR 58 (CA).
It is an old and well-established maxim, that jus accrescendi inter mercatores locum non habet. This is a common law, and not only an equitable maxim; but whilst its application in equity was subject to a few, if any, exceptions, it was not a law so universally applicable as the generality of its terms might lead one to suppose.
He then concluded:
Before quitting the present subject, it may be observed that the doctrine of non-survivorship amongst partners is not confined to merchants nor even to traders, but extends to partners generally.
It was, however, held in Bathurst v Scarbrow that, in an appropriate case, partners may agree to hold partnership property as joint tenants and that agreement will be respected by the courts and the doctrine of non- survivorship will be displaced. As was pointed out by Rix LJ, this may be easier to demonstrate in the case of a partnership between a husband and the wife or the like.
[45] The same treatment is identified in Megarry & Wade:13
Where partners acquire land as part of their partnership assets, they are presumed to hold it as beneficial tenants in common. It was an ancient rule that the right of survivorship had no place in business. …
The presumption of a tenancy in common may however be rebutted by
evidence of a contrary intention. …
[46] This issue received detailed consideration by Keane J in Stirling v Stirling, where His Honour stated:14
[15] Where partners hold land as tenants in common in shares equal to their partnership shares, there is no evident incongruity. Where, though partners in equal shares, they hold land as joint tenants, each possessing an interest in the whole, there obviously is. But that incongruity, in the absence of an agreement to the contrary, has always been resolved in favour of the partnership interest.
[47] On the evidence as presented, the property belongs to the partnership. This being so, the onus rests on the defendants to demonstrate a contrary intention.15 In my view they have failed to establish a basis for departure. The defendants purport
to rely on the fact, first, that the non-land assets were owned on a joint basis, and,
13 Charles Harpum, Stuart Bridge and Martin Dixon (eds) Megarry & Wade The Law of Real Property (8th ed, Sweet & Maxwell, London, 2012) at [13–029] (citations omitted). See too Keith Fletcher The Law of Partnership in Australia (9th ed, Lawbook Co, Sydney, 2007) at 147–
149.
14 Stirling v Stirling (2005) 6 NZCPR 252 (HC), subsequently referring to Hegeman v Rogers
(1971) 21 DLR (3d) 272; Re Bourne [1906] 2 Ch 427 (CA).
15 Heywood v Parfitt HC Christchurch M406/90, 12 July 1991 at 15.
secondly, that they were recorded in a single joint account, as establishing a contrary intention. The defendants also state:
… it is submitted the fact jointly owned property is shown in a partnership’s accounts as a partnership asset for taxation purposes does not necessarily mean the property is, or has become, a partnership asset.
[48] I reject these arguments. As I see it, the arguments are not persuasive and the defendants are unable to raise any compelling basis for inferring an intention on the part of Peter and Heather that they wished their partnership assets to be treated other than in accordance with the default position – that principles of survivorship do not apply to partnerships. Indeed, it seems that the testamentary arrangements entered into by Peter and Heather in 2002 were designed to ensure that each of their children would get a third of their residuary estates upon their respective deaths. Peter’s estate included his partnership interests.
[49] In conclusion, I have found no basis for departure from the presumption that the right of survivorship does not apply to this partnership. Peter’s estate will accordingly increase by $172,745.
Peter’s partnership salary
[50] I am not entirely certain why there is a dispute over Peter’s salary. It is recorded in the accounts as salary, not as a share of profits. It appears to compensate Peter for his personal effort. If through poor record keeping, or for some other reason, the Partnership continued to pay to Peter a salary following his death (and no doubt taxation on this income was assessed accordingly) then, in these circumstances, that issue surely will rest on the persons responsible for the accounts and this particular decision.
[51] But I have not been satisfied here that this amount is not wholly attributable
to Peter as his salary. Peter’s estate will therefore increase by $11,500.
Losses on Heather’s shares
[52] I do not agree with counsel for the defendants that:
If it is proven the investment losses are to be allocated evenly over both the Estate and Mrs McKeown, then it follows as a matter of logic and equity the losses incurred on the investments with South Canterbury Finance recorded in Mrs McKeown’s sole name should also be allocated in a similar fashion.
[53] The reason I have concluded that the losses on the investments in Peter’s name should be so allocated is due to the combined finding that the partnership had endured beyond Peter’s death and that the shares had been purchased out of the proceeds of sale of partnership assets.
[54] Absent the defendants being able to establish the same in respect of the shares held by Heather’s estate, then the same result does not flow. Other than a bare assertion in submissions, no evidence has been adduced on this point. There is a reasonable argument open, it seems to me, that Heather may have purchased these shares from her own funds or assets. Therefore, I decline to make any adjustment on this basis.
Conclusion
[55] James has succeeded on all points raised in relation to the value of Peter’s estate. In accordance with the joint expert witness statement filed, I therefore conclude that Peter’s estate is valued at $944,336.16 James’ interest in Peter’s estate is therefore increased by $93,126.67, being the difference between what he received from Peter’s estate ($221,652.00) and what he should have received ($314,778.67).
[56] In these circumstances, I consider it just that interest accrue on that sum at the Judicature Act 1908 rates from 8 July 2010, the date on which the final distribution from Peter’s estate was made to James, down to the date of final payment. The current interest rate is five per cent per annum.17 By my calculations, this equates to
$4,656.30 interest per annum, or $12.76 per day.
[57] In submissions, counsel for the defendant acknowledged that should I reach this conclusion, James will be entitled to an upwards adjustment of his entitlement
under Peter’s estate. Plainly this has come to fruition. I leave it in the parties’ hands
16 I use this figure rather than $944,333 as listed in James’ submissions.
17 Judicature (Prescribed Rate of Interest) Order 2011.
as to the method by which James is to receive this additional entitlement, given that there is agreement that he will be compensated by Angela and Nicola.
[58] Because of this conclusion, I need not consider the issue of misappropriation of trust assets, knowing receipt or unjust enrichment raised by James. However, should there be any dispute as to the implementation of this order, I grant leave for the parties to come back to the Court for directions. I expect, however, that they will be able to give effect to this decision in the absence of such assistance from the Court.
[59] I do not comment in detail on the remainder of the assertions made by James, other than to note in passing that the manner in which the estates have been handled might well be seen as somewhat unsatisfactory here. In particular, I observe that:
(a) The accounting records were particularly poor given the complexity of the testamentary arrangements;
(b)James, as a beneficiary under Peter’s estate, did not receive relevant information in a timely manner;
(c) The fact Mr Sinclair was called upon to prepare the accounts was not entirely satisfactory. Irrespective of whether he was in fact biased (and I reach no conclusion and make no comment on this), his relationship as Nicola’s father-in-law might well create a perception of bias. With the benefit of hindsight, it would have been wise to select a completely independent third party for carrying out these accounting and other functions here; and
(d)Potential issues clearly arose when decisions were taken to distribute the estate without first informing James that this was intended. This was particularly the case in the circumstances here where the administrators and beneficiaries were well aware a claim was on foot, and arguably a prior agreement had been reached not to distribute until the requested information had been received.
[60] One further concern that may arise here relates to the position of grandchildren beneficiaries. Under Heather’s final will, the grandchildren living at the date of her death were all to receive a gift of $30,000 upon their respectively attaining the age of 25 years. Interest was to accrue on these gifts from six months following Heather’s death. No evidence it seems was before the Court as to the ages of any potential grandchildren beneficiaries. A concern may arise relating to comments in correspondence that the estates of Peter and Heather have been either wholly or substantially distributed.
[61] On the evidence that has been presented, Heather had eight grandchildren living at the date of her death. If this is the correct position, it would seem that, depending on the age/s of these grandchildren at the time, the administrators may have been required to retain up to $240,000 in capital from Heather’s estate for this purpose, with interest accruing on this sum. I am unsure whether this may have occurred, even if indeed it was required.
Costs
[62] I have had no detailed submissions on the issue of costs. In submissions, James sought $18,142.05 for legal costs incurred while attempting to obtain information regarding the administration of his parents’ estate (the Timpany Walton costs). He also sought indemnity costs for this proceeding.
[63] I am not prepared to grant these costs orders in the absence of both parties being afforded an appropriate opportunity to be heard. If the parties are unable to agree on the issue of costs, they are to file memoranda and I will deal with the matter on the papers. Plaintiffs submissions are to be filed within 15 working days of the date of this judgment (not exceeding five pages). Defendants’ submissions are to follow 15 working days thereafter (not exceeding five pages).
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Gendall J
Solicitors:
Wynn Williams, Christchurch
Gresson Dorman & Co, Timaru
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