McLaren v McLaren
[2018] NZHC 555
•28 March 2018
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2017-442-000031
[2018] NZHC 555
UNDER Part 18 of the High Court Rules 2016 BETWEEN
SUSAN MARY MCLAREN
Plaintiff
AND
DAVID MUIR MCLAREN, LENORE MARY MCLAREN AND MARK PHILIP BROWN, AS TRUSTEES OF THE MCLAREN FAMILY TRUST
First Defendants
DAVID MUIR MCLAREN and LENORE MARY MCLAREN
Second Defendants
Hearing: 27 November 2017 and 19 March 2018 Appearances:
P McRae for Plaintiff
M Phillipps and V Ammundsen for Defendants
Judgment:
28 March 2018
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
Introduction
[1] The plaintiff (Ms McLaren) sues the first defendant trustees of the McLaren Family Trust (the trustees, MFT) and the second defendants who are the holders of a Power of Appointment under the MFT (the appointors) in relation to events arising from her sale to the MFT in 2002 of a one-third interest in a mussel farming licence. She challenges events surrounding the transfer of the licence, the operation of the MFT subsequently, and the appointors’ decision to remove her from the range of discretionary beneficiaries in the MFT.
MCLAREN v MCLAREN [2018] NZHC 555 [28 March 2018]
[2]David and Lenore (Mary) McLaren are Ms McLaren’s parents.
[3] The trustees and the appointors apply to strike out the proceeding. The application is opposed.
[4] The application in its original form was argued before me in November 2017. At the conclusion of argument I formed the view that the plaintiff should be given an opportunity to replead the case, in accordance with the principles stated in Marshall Futures Ltd (in liquidation) v Marshall.1 A Minute was issued indicating the ways in which it seemed to me that the pleading was, in its original form, deficient.
[5] The plaintiff took the opportunity afforded by the Court and filed an amended statement of claim. The defendants then filed an amended notice of application which is also opposed.
The principles to be applied on an application to strike out
[6] The legal principles to be applied when considering an application to strike out all or part of a proceeding are well settled and are not in dispute in this case. Rule 15.1 of the High Court Rules provides that the Court may strike out all or part of a pleading if it does not disclose a reasonably arguable cause of action or defence, as the case may be, or it is frivolous or vexatious or otherwise an abuse of the process of the Court.
[7]The principles to be applied on an application under this rule are these:2
(a)Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation.
(b)The cause of action or defence must be clearly untenable.
1 Marshall Futures Ltd (in liquidation) v Marshall [1992] 1 NZLR 316 (HC).
2 Attorney-General v Prince [1998] 1 NZLR 262 (CA); Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.
(c)The jurisdiction is to be exercised sparingly and only in clear cases. This reflects the Court’s reluctance to terminate a claim or defence short of trial.
(d)The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.
(e)The Court should be particularly slow to strike out a claim in any developing area of the law, perhaps particularly where a duty of care is alleged in a new situation.
[8] In Couch v Attorney-General, Elias CJ and Anderson J observed “it is inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed”.3 They said that particular care is required in areas where the law is confused or developing.
[9] Where a defect in a pleading can be cured by amendment, and the respondent to an application to strike out is prepared to make an amendment, the correct course for the Court to follow is to permit an opportunity to amend rather than strike out the pleading.4
Pleaded facts
[10] On 15 January 1999 the MFT was settled by deed with the first defendants named as trustees. The discretionary beneficiaries are defined as Mary and David McLaren and any of their children or grandchildren, together with any spouse, widow or widower of any of these persons. In the event of an appointment of the trust capital not being in place on the vesting day, the capital is held for the children of Mary and David McLaren equally, with substitution for their children in the event of either or both of them having predeceased. The Power of Appointment of capital is held by the trustees. The vesting day is the day 80 years after execution of the deed or such earlier day as the trustees may appoint by deed.
3 Couch v Attorney-General, above n 2, at [33].
4 Marshall Futures Ltd (in liquidation) v Marshall, above n 1.
[11] The appointors are given power at any time to declare that any given person is not a discretionary beneficiary.
[12] In 2002 Ms McLaren, her brother Bruce, and their father, David McLaren, sold to the MFT their respective one-third interests in a mussel farming licence for area PE14, for the sum of $175,000 per one-third share. She says that this price was to be a debt repayable to her by the MFT. She says that although the sale included the coastal permit for the water space in area PE14, it did not include mussel lines, floats, growing mussels and infrastructure owned by each of the vendors, which accordingly remained their property. Nonetheless the MFT took responsibility for operation and management of the farm in area PE14, and used these assets. Ms McLaren says she was not encouraged or required by the trustees to take independent legal advice before entering into this transaction.
[13] Ms McLaren also pleads that a separate agreement was entered in relation to the use of her infrastructure, and the infrastructure owned by her brother and father, by the MFT. She describes this as a:
common or mutual understanding and expectation with the first defendant Trustees that each Infrastructure owner would receive income or profits from the farming operation through distributions to them as beneficiaries of the Trust, in proportion to each owner’s share of the Infrastructure.
[14] The terms of this pleading are important because it is stated with precision that the income or profit from the farming operation would be returned by way of distributions to the owners of the infrastructure as beneficiaries of the MFT.
[15] Ms McLaren then pleads that these arrangements and expectations in relation to the operation of the marine farm by the trustees for the benefit of the infrastructure owners, and for distributions from the MFT, were confirmed by David and Mary McLaren in 2003 as part of a document entitled “Estate and Trust Management”. This statement of intent sets out the wishes or intentions of David and Mary McLaren as appointors and as major contributors of the assets of the MFT, apart from PE14. Particulars of this statement of intent are pleaded.
[16] First, it provides that David and Mary McLaren were, as at November 2003, in the process of transferring all personal ownership into the MFT “for simplicity in management for the trustees”.
[17] Secondly, the statement of intent records that the MFT was taking over management of the individually owned lines (which is the infrastructure referred to earlier).
[18] Thirdly, the statement of intent goes on to describe how the MFT was becoming a working entity and that “the distribution of surplus funds after all expenses will be on the basis of the proportion of backbone each owner has in the water and which has been given to the trust for management”. The backbone is a term applied to the lines to which other infrastructure is attached.
[19] The statement of intent then records that “money for the equipment loaned to the trust can (at the discretion of the trustees) be paid out to the owners or left as a sum owing to them along with the money owed to Bruce and Sue by the trust in the takeover of PE14”. The sum owing for PE14 is then noted.
[20] Ms McLaren says that although she has received various payments over time there remains owing to her part of the price which, subject to verification, will be not less than $59,000.
[21] Ms McLaren says that as she continued to own three of the 10 long lines within the mussel farm, and other items associated with those lines, she was entitled to a share of annual income which, over the same period (and after deduction of expenses) should have yielded income of $876,513. I return to the precise way this is pleaded when considering the causes of action.
[22] Ms McLaren says that she does not know whether she has received a distribution of any income since she sold her interest in permit PE14 to the MFT. She accepts she has received some monies from the MFT, but is unsure whether these are income or payments on account of the purchase price of PE14. In 2012 this led to her requesting the Public Trust to investigate and carry out an independent
audit of the MFT pursuant to s 83B of the Trustee Act 1956, a request which the Public Trust agreed to. It appointed Wayne Anderson, a chartered accountant, to undertake this task. According to the pleading the trustees did not respond to this audit. Instead the appointors removed Ms McLaren as a discretionary beneficiary.
[23] As a consequence the Public Trust decided that as Ms McLaren was no longer a beneficiary she could not apply under s 83B. Ms McLaren then sought a court order that an audit be carried out. An order was made on 22 October 2013. Mr Anderson was again appointed investigator, and he produced an interim report in May 2016.
[24] Ms McLaren pleads findings from the interim report released by Mr Anderson. She also says that since 2014 the trustees have undertaken a programme of selling the assets of the MFT, as well as the infrastructure that she continues to own and which she allowed the MFT to use.
Pleaded causes of action
[25]Against that factual background Ms McLaren pleads five causes of action.
First cause of action
[26] The first is a breach of duties on the part of the trustees to her and her brother Bruce, at the time of entering the transactions in 2002, to inform them that they each required independent legal advice on the risks of the transaction for them, and not to proceed with it unless and until they were satisfied that she and Bruce had obtained the necessary advice and consented to the transactions. It is said that an account of profits flowing to the trustees from the acquisition of PE14 and management of the infrastructure should be ordered, with return to Ms McLaren of one third of those profits. Alternatively, Ms McLaren seeks equitable compensation for lost income to date, and hence to 2024, as well as other compensatory damages including for her infrastructure assets.
Second cause of action
[27] In the second cause of action Ms McLaren pleads that the trustees were at all material times under a number of duties. First, to manage PE14 responsibly and in good faith for the benefit of all discretionary beneficiaries of the MFT and without reference to the personal interests of David and Mary McLaren. Secondly, to keep adequate records and to carry out appropriate analysis to enable decisions about management of the MFT and the allocation of income to beneficiaries to be rational, well-informed and responsible, taking into account all relevant considerations. Thirdly, to take account of the need as expressed in the 2003 statement of intent to generate income for Ms McLaren and the other infrastructure owners. Fourthly, to take careful account as a relevant consideration when determining distributions to Ms McLaren, of her contribution to the MFT by her allowing the trustees to use her share of the infrastructure assets and other efforts she is said to have made on behalf of the MFT. Fifthly, when considering distribution of income, to give careful and adequate consideration to the intentions expressed in the 2003 statement of intent, as relevant or highly relevant considerations, and sixthly, to avoid taking into account or being influenced by irrelevant considerations when determining those distributions including the personal interests or preferences of David or Mary McLaren.
[28] It is then said that in breach of these duties and in breach of clause 12.4 of the trust deed, which expressly deals with distributions by trustees to themselves, and in furtherance of their own preferences, the trustees exercised their powers including in relation to PE14 and their control of infrastructure to produce income and profits but this was paid as distributions exclusively to David and Mary McLaren in breach of trust and in disregard of the statement of intent. It is said that the breaches of trust were contributed to by the trustees’ continuing failure to keep adequate records. It is said that the trustees are liable to account for the profits they have made from PE14 and the infrastructure which has been wrongly distributed in breach of trust. Alternatively it is said that the trustees should pay equitable damages or compensation to Ms McLaren in an amount yet to be quantified but not less than
$36,900 for each year the breaches of trust have occurred.
[29] On that basis Ms McLaren claims an account of profits in respect of all profits flowing to the trustees from PE14, including from its subsequent disposal, which have been wrongly paid to David and Mary McLaren, and payment to her of a share of those profits proportionate to her share of the infrastructure.
[30] In the alternative, in the event an account of profits cannot be accurately established or is inadequate to compensate Ms McLaren, she seeks equitable compensation based on lost income from the use of her infrastructure assets and from her share of PE14 from 2003 until 2013 when she was removed as a beneficiary, $405,900 for future income from 2014 to 2024, $64,500 to replace her infrastructure assets wrongly sold by the trustees, and a sum for profit on the sale or disposal of assets by the trustees.
Third cause of action
[31] In the third cause of action Ms McLaren pleads breach of a fiduciary duty of loyalty. This, she says, includes a duty to enforce the trust deed fairly taking into account the statement of intent where appropriate, and for the benefit of all discretionary beneficiaries without favouring the trustees’ own personal interests or the interests of third parties which conflict with those of the beneficiaries. She says that in breach of these duties the trustees failed to manage PE14, as well as her and her brother’s infrastructure assets, for their benefit or for the benefit of all the beneficiaries, and instead applied income only for the benefits of David and Mary McLaren. This is said to be a fundamental conflict of interest, and a breach of a duty of loyalty to Ms McLaren.
[32]Ms McLaren seeks the same relief as for the first and second causes of action.
Fourth cause of action
[33] In the fourth cause of action Ms McLaren pleads fiduciary duties on the part of the second defendants, the appointors. These duties were to act responsibly, to act with appropriate diligence and prudence, to avoid taking into account irrelevant, improper or irrational factors, and not to act in bad faith or for an improper motive.
She challenges, as a breach of duty, their decision to exclude her from the class of discretionary beneficiaries.
[34] Ms McLaren says that in deciding to exclude her as a beneficiary the appointors acted fraudulently and in breach of these duties, because it was backdated from some point in 2013, when it was decided to take this action, to 3 July 2012 in order to avoid the audit requested from the Public Trust.
[35] Ms McLaren says that alternatively, whenever it was executed, the exclusion of her as a beneficiary was made for an improper purpose because the appointors or the trustees or both wished to neutralise or prevent her attempts to gain information about the MFT. It was irrational and imprudent, being based on annoyance or irritation at her seeking reasonable information. In either case she says her exclusion was in breach of the duties set out.
[36] It is said that this caused Ms McLaren to suffer loss including loss of the opportunity for compensation by way of an appropriate distribution or distributions to correct previous provable losses to her that arose from improper or improperly considered distributions to David and Mary McLaren.
[37] Ms McLaren pleads that on 23 November 2017 the appointors purported to revoke her removal as a beneficiary but on the basis that her renewed status as a discretionary beneficiary was effective only from that date. It is said that the revocation was and remains ineffective and her losses remain unchanged, because the power to remove a discretionary beneficiary is not revocable, and a person cannot be added as a discretionary beneficiary.
[38]Ms McLaren seeks equitable compensation in an amount not less than
$800,000 to be quantified at trial.
Fifth cause of action
[39] In the fifth cause of action, which is expressed as an alternative cause of action, Ms McLaren sues the trustees for breach of an express or an implied trust. This trust, however, is not the same trust as is the subject of all the other causes of
action. Rather, Ms McLaren says that the first defendants by their words and actions settled a further separate trust when they received PE14, together with the management rights for infrastructure, in 2002. This is said to be an express trust or an implied trust. The trustees accepted obligations to manage PE14 and the owners’ infrastructure in order to generate income for the benefit of the infrastructure owners and in proportion to the share of the assets of each such owner. Alternatively, this trust was settled in 2003 when David and Mary McLaren, assisted by the third trustee Mr Brown, acknowledged similar obligations as trustees through the statement of intent.
[40] It is said that the subject-matter of this new trust comprised the property originally settled (PE14, and management rights for infrastructure together with income and proceeds from those assets). The final beneficiaries are Bruce McLaren (Ms McLaren’s brother), David McLaren (her father) and Ms McLaren. There are no discretionary beneficiaries.
[41] Ms McLaren then pleads that the first defendants as trustees of this new trust have failed to account to the beneficiaries of it and instead, and in breach of trust, have distributed all income earned by the trust as though it were income from the MFT. As a result she has suffered losses which are yet to be fully ascertained. She claims restitution to the new trust of all property, including proceeds of property lost through breaches of trust, which are still in the possession of any of the defendants; an account of profits flowing to the trustees from PE14 including its subsequent disposal; and payment to Ms McLaren of a share in the profits in due proportion to her share of the infrastructure. In the alternative should it not be possible to accurately establish an account of profits, or should such an account be inadequate to compensate her, she claims equitable compensation to be quantified at trial but not less than $875,000.
Discussion of the five causes of action
First cause of action
[42] The duties pleaded in this cause of action are described as duties of fair dealing. Mr Phillipps for the defendants says that a duty of fair dealing does not
arise in equity where trustees purchase an asset from a person who is not selling property which is subject to the trust. He relies on a passage from Tito v Waddell (No 2):5
The fair-dealing rule is … that if a trustee purchases the beneficial interest of any of his beneficiaries, the transaction is not voidable ex debito justitiae, but can be set aside by the beneficiary unless the trustee can show that he has taken no advantage of his position and has made full disclosure to the beneficiary, and that the transaction is fair and honest.
[43] Mr Phillipps says the trustees were not buying a beneficial interest from a beneficiary when they purchased the property. They were dealing with a vendor. They bought the property and agreed to pay for it by way of an enforceable loan by the vendor to the MFT.
[44] Mr McRae for Ms McLaren accepts that this cause of action does not fit within the parameters of the duty of fair dealing as described in Tito, but he relies instead on the broader equitable principle described by the House of Lords in Boardman v Phipps:6 First, Lord Upjohn cited this passage from Bray v Ford:7
It is an inflexible rule of the court of equity that a person in a fiduciary position … is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.
[45]His Lordship then continued:
It means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.
[46] Based on this rule Mr McRae argues that the trustees could not and should not have concluded the transaction, by which he refers to not only their purchase of PE14, but also to their taking over management and control of Ms McLaren’s infrastructure. By placing these assets of hers into a trust from which she was
5 Tito v Waddell (No 2) [1977] Ch 106, [1977] 3 All ER 129 at 271.
6 Boardman v Phipps [1967] 2 AC 46, [1966] 3 All ER 721 at 756, quoting from Bray v Ford
[1895-99] All ER Rep at 1011, [1896] AC at 51.
7 Bray v Ford, above n 6.
entitled to receive income only as a discretionary beneficiary, the trustees put Ms McLaren into a position where she had no right to receive the income which her assets generated. The risk of her being deprived of the income from her assets by the trustees exercising their discretion to appropriate the income to other beneficiaries was a matter on which she should have been given independent legal advice and further, was such that the trustees should not have proceeded, unless and until they were satisfied that the beneficiaries had obtained advice and fully consented to the transaction.
[47] These risks, which were inherent in the transaction, were of course borne out by the events which are said to have occurred. Not only is it unclear whether Ms McLaren has or has not received any income for the use of her own assets, or as a consequence of her having sold PE14 to the MFT, but the trustees have appropriated all income to two of their number, David and Mary McLaren, and gone so far as to purport to sell Ms McLaren’s infrastructure assets to a third party. Accepting the facts as pleaded, the contract entered and the other arrangements made in 2003 have been manifestly to the disadvantage of Ms McLaren.
[48] The issue, however, in relation to the first cause of action is directed at events prior to the transaction. By entering into the contract to buy PE14 and the arrangements to manage Ms McLaren’s infrastructure as part of operating the marine farm the trustees were not putting themselves in a position where their interest and duty were necessarily in conflict. It is pleaded that this occurred later, in the way David and Mary McLaren operated the MFT and distributed income (and/or capital) to themselves, steps they presumably took in concert with their co-trustee, Mr Brown.
[49] The principle in Boardman v Phipps applies, though, where on the facts and in the circumstances applying at the time, a reasonable observer would think that there was a real sensible possibility of conflict. This conclusion might be reached on the basis that instead of being entitled to income from the operator of PE14 in return for use of infrastructure assets which she owned, Ms McLaren entered a transaction whereby any entitlement to income which she may have would be discretionary and the trustees were in a position of conflict because they could decide that two of their
number, David and Mary McLaren, would receive the income instead of her. That was a clear and appreciable risk to Ms McLaren at the time that she entered the transaction, even though it would not necessarily occur. Therefore whilst I accept Mr Phillipps’ argument that the duty of fair dealing does not apply to the sale of Ms McLaren’s interest in PE14 in isolation, the overall transaction which included the arrangements made in relation to her infrastructure assets was arguably a breach of the trustees’ duty because of the “real and sensible possibility of conflict” of interest arising between the interests of two of the three trustees, and those of Ms McLaren.
[50] Given that the circumstances of this case do not fit readily into the duty of fair dealing, for the reasons I have described, it may be misleading to specifically describe the duties in the way paragraph 31 of the first amended statement of claim does. Mr McRae accepts this, but says that he will argue that the ambit of the duty of fair dealing is not fixed and should encompass the circumstances in this case. I think that argument is unlikely to succeed, and that the strength of the argument raised in relation to this cause of action is the appearance of conflict of interest, as I have said. I am mindful however that as a result of this application, the defendants will not be misled by the pleading as it stands. Also, and more importantly, a claim should not be dismissed summarily unless the Court is certain it cannot succeed, and particular care is required with areas where the law is developing.8 In my opinion the Court should not make a summary decision dismissing this cause of action on the ground it cannot succeed when the pleaded facts disclose circumstances by which Ms McLaren lost her right to income from her infrastructure assets in return for a possibility of receiving income as a discretionary beneficiary. The transaction has the appearance of being manifestly unfair to Ms McLaren and beneficial to David and Mary McLaren. Independent advice would have put squarely before Ms McLaren the real possibility of a conflict of interest and the risk to her arising from that conflict.
[51]It follows that the first cause of action will not be struck out.
8 At [8] above.
Second cause of action
[52] On this cause of action Mr Phillipps directs his argument at paragraph 37, and the claim which follows as a prayer for relief in paragraph 38. He says that the relief sought is not available even if the duties alleged are found to have applied, and the breaches of them established as pleaded.
[53]Para 37 provides:
The Trustees are liable to account for the profits they have made from Marine Farm PE14 and Infrastructure, and wrongly distributed in breach of trust; or alternatively should pay equitable damages or compensation to [Ms McLaren] in an amount still to be fully quantified but not less than
$36,900 for each year the breaches of trust occurred.
[54] In paragraph 38 the first relief sought is an account of profits which flowed to the trustees from operation of PE14 including its subsequent disposal, and said to have been wrongly paid only to David and Mary McLaren. Ms McLaren seeks payment of a share of such profits, proportionate to her share of the infrastructure used in operating PE14.
[55]As an alternative to this relief Ms McLaren seeks equitable compensation, to
be quantified at trial, but tied to income which she describes as “loss” at the rate of
$36,900 per annum from 2003 to 2013 when she was purportedly removed as a beneficiary of the MFT, and for future income lost for the subsequent 10 years. She also claims $64,500 to replace the infrastructure which she owns and which the trustees have purported to sell to another party. Finally, loss of profit is claimed for profit on the sale or disposal of assets by the trustees, though which assets this relates to is unclear.
[56] The position taken by the defendants in relation to this cause of action is simply that the relief claimed is not available. It is said that the plaintiff is simply not entitled to an account of profits from the marine farm business which were paid to David and Mary McLaren. Nor is she entitled to a share of those profits proportionate to her share of the infrastructure. All she is entitled to is to be considered as a discretionary beneficiary in relation to income derived by the MFT for the period during which she was a beneficiary. Further, the defendants say that
equitable compensation is not available as a remedy for breaches of trust as alleged, even if established.
[57] Mr McRae says that there is no authority to say that equitable compensation is not available in the circumstances of this case. Ms McLaren should be considered when distributions are made from the MFT and all relevant facts should be taken into account in that process. He says there were repeated failures to provide income, against an overall arrangement that Ms McLaren would receive income proportionate to her share of the infrastructure as a discretionary beneficiary when she agreed that her infrastructure assets could be used in the marine farm business by the MFT. Mr McRae says that equitable compensation is available as a remedy, otherwise the trustees could be found to be in breach of their duties but not be accountable for that breach.
[58] The claimed relief can be considered in parts. First, if the trustees are found to have been in breach of their duties as alleged in this cause of action, the Court may well hold them to account for the profits they have made and wrongly distributed. That account, however, would be directed at putting the MFT back into the position it should have been but for the established breaches. Then the trustees would be required to reconsider distribution of that income in accordance with the correct principles the Court finds they should take into account. As I understand the argument for the trustees, that is as far as the Court would go. Mr Phillipps relies heavily on the status of Ms McLaren as a discretionary beneficiary only, and says her entitlement to consideration by the trustees is defined by that capacity.
[59] In this case, however, I find it to be arguable that the circumstances which the trustees must take into account include the specific arrangements said to have been made at the time the transactions were entered into in 2003, that she would receive income as a beneficiary for the use by the MFT of her infrastructure assets, which were an integral part of the marine farm operation. This is specifically pleaded and this is a particular relevant consideration which the trustees may well be found to be required to consider. If the arrangement as pleaded is established in evidence, it is highly material to the way the trustees should have acted, yet did not. The prayer for relief for an account of profits is therefore appropriate, as is the request for an order
requiring payment to Ms McLaren of a share of profits proportionate to her share of the infrastructure, because this was the arrangement into which she and the trustees entered. The Court may stop short of making such an order, requiring reconsideration by the trustees instead, but given that two of the trustees received the money in question the prospect of the Court granting the relief sought cannot be ruled out.
[60] Mr Phillipps argues that this was a contractual arrangement which could have been enforced by an action in contract, but which is now out of time. If the arrangement was just a contractual agreement by party A that party B could use and manage its assets in return for a share of profits, I would agree. However, the pleading is that it was specifically agreed that the return on the assets made available to the trustees would be by way of distribution of income by the MFT proportionate to the use of those assets, and after expenses. That was a highly material circumstance that the trustees were required to take into account in exercising their discretion. It is not merely a simple matter of contract.
[61] The equitable compensation Ms McLaren seeks is based on income which the MFT derived from her assets and which it has not made, as she understands it, to her. I do not see any reason in principle why this should not remain in the pleading and be available to be considered by the Court as an appropriate remedy, if the facts alleged by Ms McLaren are established. It is trite to note that in the context of an application to strike out, the question is not whether the plaintiff will succeed but whether the plaintiff can succeed. The defendants have not established that the plaintiff in this case, Ms McLaren, cannot receive equitable compensation if the Court considers this is the appropriate remedy.
[62]For these reasons the second cause of action will not be struck out.
Third cause of action
[63] Mr Phillipps concedes that the allegations in this cause of action may “in isolation, give rise to a cause of action”. His objection, however, is that they are tied to relief arising from obligations related to the assets which were sold (PE14) and
otherwise provided (infrastructure) by Ms McLaren to the Trust. He says that relief is not available on that basis.
[64] It seems that his position in relation to relief is the same on this cause of action as on the second cause of action. This is unsurprising, given that the relief claimed on the second and third causes of action is materially the same. Nothing was presented in argument in relation to this cause of action that differs from the argument presented in relation to the second cause of action, and the response of the Court is accordingly the same. I need add nothing to the discussions set out above.
Fourth cause of action
[65] The pleadings in the fourth cause of action, which is against the second defendants, the appointors, are summarised above.9 The cause of action calls into question the decision of the appointors to exclude Ms McLaren as a beneficiary of the MFT, and challenges the effectiveness of the purported reappointment of her as a beneficiary in November 2017. The remedies sought, however, are for equitable compensation, which on the pleadings is derived from losses Ms McLaren says she suffered during the period between her removal and her reinstatement of a discretionary beneficiary, as she was not considered for any distribution during that time.
[66] Mr Phillipps accepts that it is arguable that the appointors owed a fiduciary duty to Ms McLaren not to act in a way contrary to her interests by removing her as a discretionary beneficiary. He accepts that if established this may give rise to the need for decisions made by the appointors to be revisited, but he says that they cannot give rise to a claim tied to the profits from the assets employed by the MFT.
[67] Mr Phillipps also argues that the compensation sought is directed at the trustees as distinct from the appointors, noting that there are three trustees of whom the appointors are just two. Ms Ammundsen, second counsel for the defendants, added in a brief submission that if it were found that Ms McLaren should not have been excluded as a beneficiary, and was not therefore considered as a potential
9 At [33] – [38].
income beneficiary for a period of years when she should have been, that can and would be remedied by this being specified as a relevant consideration to be taken into account by the trustees after she was reinstated as a discretionary beneficiary. That, of course, depends on whether or not the Court finds the reinstatement to be valid, it being her position (as pleaded) that it is not.
[68] I do not accept Mr Phillipps’ submission that the remedy sought is directed at the trustees. Throughout the first amended statement of claim it is Ms McLaren’s case that David and Mary McLaren have received the income generated by the business operated by the MFT, including her infrastructure assets, to the exclusion of other beneficiaries including her. If she establishes that David and Mary McLaren acted as pleaded in relation to excluding her as a beneficiary she should be entitled to a remedy. Whilst it is open to the appointors to plead, in response to the fourth cause of action, that the purported reinstatement was valid, and that the correct remedy is for her to be considered for distribution in subsequent years, with her period of exclusion taken into account as a relevant consideration, that does not mean that she cannot approach the Court for equitable compensation as a consequence of her exclusion. At the very least, her exclusion left it open to the trustees to distribute income of the MFT to other discretionary beneficiaries including David and Mary McLaren without taking into account Ms McLaren’s interests. Thus the appointors themselves benefitted as beneficiaries from their decisions (made in conjunction with Mr Brown, presumably) as trustees which were consequent on their own decision as appointors. No reason in principle was given to me why in these circumstances, if made out, there should not be an award of equitable compensation against the appointors, who received the money in issue, in favour of Ms McLaren. Whether there would be or not is a matter for trial.
[69]It follows that the fourth cause of action will not be struck out.
Fifth cause of action
[70] As can be seen from the description of this cause of action above,10 it is an alternative cause of action founded on PE14 not having been transferred to the MFT,
10 [37] – [39].
but transferred instead to the same three persons as are the trustees of the MFT and held by them on an express or implied trust of which Ms McLaren, her brother and her father, David McLaren, are the beneficiaries. In the same vein it is said that the management rights in relation to the infrastructure assets were also transferred to these persons to be held on this trust, and it is this trust which operated the mussel farm business. The plain advantage of establishing a trust in these terms, from Ms McLaren's perspective, is that she claims to be a final beneficiary in the trust, not a discretionary beneficiary. Establishing an arrangement along the lines pleaded in the fifth cause of action sets to one side the complicating issues that Ms McLaren faces as only a discretionary beneficiary.
[71] Whilst that may well be the case, it is much less clear how Ms McLaren might establish that this was in fact the way that the three named first defendants received PE14 and the management rights to the infrastructure assets.
[72] Mr Phillipps approached his argument in relation to this cause of action on the basis that there is no dispute that Ms McLaren sold PE14 to the MFT in 2002 and that the MFT legally owns it. Indeed that is how Ms McLaren herself pleads the situation to be in paragraph 6. Mr McRae responds by saying that this cause of action is a true alternative, implying that it is open to Ms McLaren to prove that the first defendants took legal ownership of PE14 but held the beneficial interest in this asset on a basis quite different to that declared in the MFT deed.
[73] The Court must proceed on the basis that the pleaded facts are correct. Quite apart from that, the agreement for sale and purchase for PE14 is before the Court. It does not state that the purchaser is the MFT. It states that the purchasers are the three named first defendants, but makes no reference to the capacity in which they received this asset. On that basis alone, the question of the fiduciary obligations which these three persons accepted when they received this asset remains open.
[74] That is not to say that there are not substantial evidentiary hurdles in the way of Ms McLaren in establishing the facts on which the fifth cause of action is based. Mr Phillipps’ argument, however, is tempered by the fact that his founding premise, that there is no dispute that PE14 was sold to the MFT, is not sound. Therefore his
argument about overlaying obligations under the MFT with obligations under some other trust falls away. He is correct in his submission, however, that if Ms McLaren wishes to persist with the fifth cause of action, it must be brought against David McLaren, Mary McLaren and Mark Brown as trustees of the alleged separate trust; presently they are sued only in their capacity as trustees of the MFT. On that basis alone the cause of action could be struck out, but this is a relatively minor pleading deficiency which can readily be remedied and it would not be just to strike out this cause of action on that basis. A second amended statement of claim must be filed.
[75] Mr Phillipps’ final criticism of this cause of action was directed at the opening sentence in which it is stated that the plaintiff repeats the facts pleaded in paragraphs 2 and 3 of the amended statement of claim. Mr Phillipps said that this means that there is real uncertainty in the pleading of this cause of action because there is no definition of the terms used within it, specifically Marine Farm PE14 and infrastructure. This is a minor quibble with the pleading and can easily be rectified. There is no doubt on the face of the pleading what these terms mean when used in the fifth cause of action whether or not there is a cross reference to earlier paragraphs where they are defined.
[76] The test for striking out is not whether a cause of action may succeed at trial, because the facts as pleaded are assumed to be true in this context. However unlikely it is that this cause of action will succeed, assuming the pleaded facts to be true leads to the result that this cause of action should not be struck out.
Outcome
[77]The outcome is as follows:
(a)The application to strike out this proceeding is dismissed.
(b)The plaintiff will file and serve a second amended statement of claim in which the fifth cause of action is directed at named third defendants and not at the first defendants in their capacity as trustees of the McLaren Family Trust. This is to be completed within 10 working days.
(c)As discussed with counsel costs are reserved. If not agreed memoranda are to be exchanged in draft, and then completed, filed and served within 15 working days. They are to be confined to three pages in length.
J G Matthews Associate Judge
Solicitors:
C & F Legal Limited, Nelson.
Vicki Ammundsen Trust Law Limited, Auckland.
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