McLaren v McLaren
[2017] NZHC 161
•15 February 2017
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
CIV-2015-442-044 [2017] NZHC 161
UNDER the Trustee Act 1956, the inherent
jurisdiction of the Court and Part 18 of the
High Court RulesIN THE MATTER OF
a discretionary inter vivos family trust called the BDM Trust established by deed dated 2 March 1999
BETWEEN
DAVID MUIR MCLAREN and LENORE MARY MCLAREN (in their capacities as trustees and beneficiaries of the BDM Trust)
Plaintiffs
AND
BRUCE MUIR MCLAREN, DAVID MUIR MCLAREN AND LENORE MARY MCLAREN, MARK PHILIP BROWN, TIMOTHY HOWARD ALEXANDER SPEAR AND BUXTON NOMINEES 2015 LIMITED (all in their capacity as trustees of the BDM Trust) First Defendants
BRUCE MUIR MCLAREN (in his capacity as appointor of the BDM Trust) Second Defendant
Hearing: 10-13 October 2016 Counsel:
M G Locke for plaintiffs, and second and third-named first defendants
J C Ironside for first-named first defendant, and second defendant
No appearance for fourth-named first defendant
A B Darroch for fifth and sixth-named first defendantsJudgment:
15 February 2017
RESERVED JUDGMENT OF DOBSON J
MCLAREN v MCLAREN [2017] NZHC 161 [15 February 2017]
Contents
The factual context ............................................................................................................................ [2] The parents’ claims ......................................................................................................................... [25] Claimed constraints on the appointor’s powers ........................................................................... [27] Factors relevant to any fiduciary obligations on Bruce ............................................................... [50]
Removal of parents as beneficiaries ............................................................................................. [57] Appointment of additional trustees ............................................................................................... [70] Deficiency in manner of appointment?......................................................................................... [78]
Claims for removal of trustees ....................................................................................................... [81] Set aside the BDM Trust? ............................................................................................................... [84] Outcome ........................................................................................................................................... [89] Additional concerns ........................................................................................................................ [90] Costs ................................................................................................................................................. [99]
[1] This is a sorry tale of what can occur when a family adopts an inappropriate form of trust deed without adequate advice or sufficient understanding of the legal effect of its terms. In this case, a son who was given a power of appointment has, following a falling out with his parents, used that power to remove them as beneficiaries of the trust and to appoint additional trustees, thus neutralising his parents’ ability to dictate the outcome on trust resolutions. The essential issue is whether equity or the provisions of the Trustee Act 1956 can come to the parents’ aid to prevent their exclusion as beneficiaries or their relative loss of control as trustees and, if so, whether such relief is appropriate.
The factual context
[2] The McLaren family has a long-standing interest in mussel farms. David McLaren is a marine engineer and Mary had run a florist shop. David and Mary are the plaintiffs (referred to jointly as the parents, or separately as David or Mary). They started investing in mussel farming in about 1979 and persisted through an initial period in which the business ran at a loss. All three of their children (Bruce
and his two older sisters) helped their parents by working on the mussel farms during the weekends and school holidays.
[3] Bruce left high school in 1986. From about 1993, he had his own mussel lines to work, worked on the McLaren family mussel farms and also worked for other mussel farmers. From about 1995, Bruce started working full time on his parents’ marine farming business. He was allowed to use the vessel his parents then owned and his mother helped by maintaining his financial records. He was not paid for his work on the family’s mussel farms.
[4] In about 1995, the parents designed an 18 metre motorised barge, The Gladiator, specifically for the requirements of the mussel farming business. The parents paid for part of its cost, with the remainder being funded by borrowings repaid out of the business.
[5] In 1996, the parents and Bruce formalised their operating business into the
BDM Partnership. The parents had a 50 per cent interest and Bruce held the other
50 per cent interest in the partnership. Its assets comprised The Gladiator and other assets used in various aspects of servicing mussel farms in the Marlborough Sounds.
[6] The partnership ran at a loss until 1999 and in that year the partnership’s accountants recommended the establishment of a family trust to provide asset protection, and as a means of providing for succession by Bruce to the relevant assets, after the parents’ deaths.
[7] The trust that is the subject of the proceeding, the BDM Trust, was established on 2 March 1999. The trustees appointed by the trust deed were the parents, Bruce and the parents’ accountant, Mark Brown (Mr Brown), who had recommended the formation of the trust, and provided the precedent adopted for the trust deed. Bruce is sued both in his capacity as one of the trustees of the BDM Trust and separately as an appointor nominated by the terms of the trust deed.
[8] The settlor of the BDM Trust was Justine Lynch, an accounting clerk who worked in Mr Brown’s office. The trust deed made provision for a single class of
discretionary beneficiaries who were to include the parents, Bruce, any spouse or children or remoter issue of Bruce and any spouse, widow or widower of any of the persons attributed with status as beneficiaries by virtue of their relationship with Bruce.
[9] The assets transferred to the BDM Trust were those that were used by the BDM Partnership. The assets were transferred at agreed values that were recorded as debts owing by the BDM Trust to each of the partners, according to their contributions. Before the present dispute arose, the parents forgave the debts owing to them for their share of the assets transferred to the BDM Trust. Bruce has not forgone the debt of the same character owing to him. His parents now complain that their forgiveness of debt was intended to be mutual and that they were unaware at the time that Bruce was not doing the same thing. Resolving that dispute is not a part of the present proceeding.
[10] The terms of the trust deed included the nomination of Bruce as “appointor”. There was no definition of that term, but the appointor was given the power to appoint new trustees, plus the power to nominate a successor as appointor, either by deed or will. The deed also specified that the appointor could make appointments at any time, including of himself as a trustee, and whether or not the occasion had arisen for the appointment of a new trustee.
[11] In a separate provision near the end of the deed, without any context that might throw light on its inclusion, the appointor was empowered to declare that the class of discretionary beneficiaries was to cease to include any person.
[12] At the same time as the BDM Trust was formed, the parents and Bruce also formed the McLaren Family Trust (the MFT), using the same accounting clerk as the settlor. The trust deed was in materially the same terms as that of the BDM Trust. The parents and Bruce were the trustees and the discretionary beneficiaries included each of them, Bruce’s two sisters and the children, grandchildren and spouses of each of them. The appointors for the MFT were the parents.
[13] Prior to the formation of the trusts in March 1999, the BDM Partnership had provided all the services needed to maintain and harvest mussels from the parents’ farms. On formation of the MFT, it was those marine farming assets that were transferred into the MFT. In addition, the BDM Partnership (and its successor, the BDM Trust) had obtained contract work in carrying out the operational activities for third party owners of other mussel farms.
[14] From 2005, Bruce drew a wage for full-time work for the BDM Trust. In October 2007, Bruce separated from his first wife and a difficult and protracted relationship property dispute ensued.
[15] In August 2008, the BDM Trust purchased a residential property in Stoke that was to be occupied by Bruce and his new family. The parents’ perception is that they provided a material level of support for Bruce throughout the difficult period when he was settling the relationship property dispute with his first wife.
[16] By September 2013, deeds had been completed which excluded Bruce’s first wife and the children of his first marriage from the class of discretionary beneficiaries of the BDM Trust.
[17] In October 2013, again on professional advice, the BDM Trust incorporated a separate company, BDM Contracting Limited (the company), as the trading entity to undertake the work the trust had previously done in servicing and harvesting mussel farming operations. The parents and Bruce were appointed the directors of the company, and each of them held one share. The remaining 997 shares were held by the trustees of the BDM Trust.
[18] The relationship between Bruce and his parents deteriorated in January 2015. The parents told Bruce that they were proposing to sell “their” mussel farms (that is, owned by the MFT). Bruce responded (in a manner he later accepted was an over- reaction) by advising that the company would no longer do work for the MFT. David adopted the view at that time that dissolving the BDM Trust would involve splitting its assets in three ways.
[19] In March 2015, the MFT arranged with an independent contractor (Clearwater Mussels Limited) to progressively take over the operational aspects of the MFT mussel farms. Those arrangements included the sale of equipment and, conditionally, The Gladiator.
[20] The Gladiator and other equipment were subsequently sold, and the net proceeds of most of the sales are held pending resolution of the present claims.
[21] Since the dispute arose, Bruce has unilaterally withdrawn amounts from the bank account operated by the company, and also funds from the BDM Trust.
[22] In June 2015, he appointed two new trustees to the BDM Trust. These were Mr Timothy Spear, a Nelson solicitor, and Buxton Nominees 2015 Limited, which is controlled by a Nelson-based accountant, Mr Maurice Woodhouse.
[23] In July 2015, Bruce executed a document that was intended to be in the form of a deed that removed his parents as discretionary beneficiaries of the BDM Trust. That document was later re-executed in June 2016 with greater formality so that the mode of witnessing complied with the requirements of the Property Law Act 2007 for the completion of deeds.
[24] The parents have continued to attend meetings of trustees of the BDM Trust. The involvement of the two new professional trustees has brought greater rigour to the conduct of the trustees in the sense that agendas are circulated in advance, formal resolutions posed and written minutes are prepared.
The parents’ claims
[25] The parents pleaded five causes of action. Two of them sought orders removing all the present trustees and replacing them with the Public Trust, in reliance either on s 51 of the Trustee Act or on the Court’s inherent jurisdiction.
[26] A further two causes of action sought to reverse the effect of Bruce’s actions as appointor in appointing the new trustees and removing the parents as beneficiaries of the BDM Trust. Those claims are pursued either on the basis that Bruce’s actions
constitute breaches of fiduciary obligations, or by invoking the Court’s inherent jurisdiction. Finally, the parents applied for orders setting aside the BDM Trust on the ground that it is ineffective as a trust and is no more than a bare power.
Claimed constraints on the appointor’s powers
[27] The third and fifth causes of action that sought reversal of the consequences of Bruce’s exercise of his power as appointor are central to the parents’ case. It is appropriate to assess those claims first, as the outcome on these claims impacts on the remainder.
[28] The essential plank of Mr Locke’s arguments to restrain or reverse Bruce’s exercise of his power as appointor was that he owed fiduciary obligations to his parents and that his conduct was in breach of those obligations. Mr Locke’s argument to this effect depended entirely on an October 2015 Honours student’s
dissertation.1 That dissertation was completed after the Court of Appeal judgment,2
but before the judgment of the Supreme Court in the protracted Clayton v Clayton
litigation.3
[29] Bruce’s defence on this essential point was that the power of appointment is a general one vested in him personally, that it cannot be constrained by any fiduciary obligations and that Bruce’s position as appointor was to be considered distinctly from that as a trustee. Mr Ironside cited the Court of Appeal’s analysis in Clayton in the following terms:4
[104] Fiduciary obligations are not usually imposed by the courts on the exercise of a general power of appointment of this nature. This is because the courts recognise that a power of this nature is personal to the donee and may be exercised by the donee exclusively in his or her own interests. …
[30] The Court of Appeal’s reasoning on the point acknowledged that a general
power to appoint and remove beneficiaries where it is held by a person in a capacity other than as trustee may be exercised by the holder of the power without
1 Josie Beverwijk “Power to a Point: Is the Power to Add and Remove Discretionary Beneficiaries of a Trust Fiduciary?” (LLB (Hons) Dissertation, University of Otago, 2015).
2 Clayton v Clayton [2015] NZCA 30, [2015] 3 NZLR 293.
3 Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29, [2016] 1 NZLR 551.
4 Footnotes omitted.
consideration of the interests of beneficiaries who might be removed or appointed. To hold otherwise was seen by the Court of Appeal as constraining the exercise of the power contrary to the donor’s intentions.5
[31] Counsel submitted that there was a dearth of New Zealand authority that considers whether an appointor owes fiduciary obligations to beneficiaries when deciding whether to exclude any of them. Mr Ironside invited analogy with a judgment of Associate Judge Osborne on a strike out application in proceedings where the settlor of a family trust, who was also a trustee and the appointor, had removed one of her children as a discretionary beneficiary because that daughter no
longer remained in her affections.6 The claim brought by that daughter complaining
of her exclusion was struck out. The reasoning included the following:
[39] The beneficiary’s right to be considered for distributions is not in play in this case. There must be limited scope, if any, for the application of a requirement of even-handedness in relation to the exercise of the trustees’ power to add to or exclude beneficiaries. The earlier duties which I have considered provide those within existing classes with protections against irrationality and bad faith. To impose on the trustees a concept of even- handedness when the power they have been expressly given, if exercised, will inherently discriminate against those who would cease to be beneficiaries would limit the scope of the power. Nothing in the trust deed indicates that the settlor intended that the scope of the power be so limited. It is not for this Court to limit a power beyond the limits recognised in the line of authority to which Re Manisty’s Settlement belongs.7
[32] I am not persuaded that the rationale for the appellate decisions in the Clayton litigation is directly analogous to the present assessment of whether the appointor under the BDM Trust owes any fiduciary obligations. The Clayton judgments arose in relationship property proceedings where Mrs Clayton claimed that the nature of Mr Clayton’s interests in a particular trust (the VRPT) brought that trust’s assets within the definitions of property, and thus relationship property, for the purposes of the Property (Relationships) Act 1976 (PRA). Mr Clayton was the settlor and the only trustee of the VRPT. He was also nominated as “Principal Family Member”, a position that empowered him to appoint or remove discretionary beneficiaries. Mr and Mrs Clayton and their two daughters were discretionary
beneficiaries and the two daughters were final beneficiaries.
5 At [108].
6 Penson v Forbes [2014] NZHC 2160.
7 Re Manisty’s Settlement, Manisty v Manisty [1974] 1 Ch 17 (Ch).
[33] Mrs Clayton was successful in the Court of Appeal and then, on somewhat different grounds, in the Supreme Court. The Court of Appeal treated the power of appointment as a general one, bringing it within the relevant PRA definitions. The Supreme Court took a different view, rejecting the Court of Appeal’s characterisation of the power as analogous to a power to revoke the VRPT because Mr Clayton’s powers did not extend to enabling him to remove his daughters as the final beneficiaries.
[34] However, the Supreme Court was satisfied that the combined impact of powers and entitlements for Mr Clayton as trustee, principal family member and discretionary beneficiary amounted in effect to a general power of appointment in relation to the assets of the VRPT. That combination of powers was properly classified as rights, thereby bringing the value of that right within the pool of relationship property.
[35] The Supreme Court acknowledged that it was adopting an expansive approach to the concept of property, to achieve the purposes of the PRA:8
… We see the reference to “any other right or interest” when interpreted in the context of social legislation, as the PRA is, as broadening traditional concepts of property and as potentially inclusive of rights and interests that may not, in other contexts, be regarded as property rights or property interests. …
[36] That context is important to the finding on the combined effect of the powers
Mr Clayton had in that case:9
These provisions mean that Mr Clayton is not constrained by any fiduciary duty when exercising the VRPT powers in his own favour to the detriment of the Final Beneficiaries. The fact that he cannot remove the Final Beneficiaries does not alter the fact that he can, unrestrained by fiduciary obligations, exercise the VRPT powers to appoint the whole of the trust property to himself. …
[37] The essence of the Supreme Court’s reasoning is that, in the context of a relationship property dispute, the appointor could exercise a power of appointment in
a personal sense, rather than as a component of duties as a trustee, and was not fixed
8 Clayton v Clayton, above n 3, at [38].
with fiduciary obligations in respect of that power. The power was unfettered to an extent that it qualified as property, thereby enabling Mrs Clayton to bring the assets of the VRPT within those to be assessed as relationship property.
[38] That analysis excluded the relationship between the equivalent of an appointor and beneficiaries from the categories of relationship recognised as having a fiduciary character. It is relevant to the reasoning in the Clayton judgments that the Principal Family Member (appointor) was also the settlor, and by analogy it would apply where there is a close identity between settlor and appointor. It leaves open the question whether respect for the unconstrained nature of a power vested in an appointor should also apply where there is no meaningful identity of interests between the settlor and the appointor. Further, that starting position does not exclude the prospect of factual circumstances arising in a particular relationship where circumstances of vulnerability of a beneficiary and the nature of the reliance placed on the appointor may justify the imposition of fiduciary obligations of an appropriate extent.
[39] The basis for considering the imputation of fiduciary obligations in individual cases falling outside the relationships recognised as having a fiduciary character was put by the Supreme Court in Chirnside v Fay in the following terms:10
It is clear from the authorities that relationships which are inherently fiduciary all possess the feature which justifies the imposition of fiduciary duties in a case which falls outside the traditional categories; all fiduciary relationships, whether inherent or particular, are marked by the entitlement (rendered in Arklow as a legitimate expectation) of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interests. …
[40] In a different factual context, the Court of Appeal has more recently commented on the approach to the imputation of fiduciary obligations in Jay v Jay:11
[65] In the period since Chirnside was decided, the comments of Tipping J remain apposite – no single formula or test has received universal acceptance in deciding whether a relationship outside the recognised categories has been established. The key feature in the imposition of a fiduciary duty is the entitlement of one party to place trust and confidence in the other. The inquiry is whether equity recognises a party as entitled to rely
10 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [80].
on the other party not to act in a way contrary to that first party’s interests. The imposition of fiduciary obligations by equity in novel situations should not, however, lightly be assumed.
[41] Courts have previously considered whether constraints apply to the conduct of persons appointed to various other non-trustee positions within the governance of a trust, such as protectors or guardians. Where Courts have attributed fiduciary obligations to protectors and guardians, the potential impact on the beneficiaries or on the proper governance of the trust has been recognised as relevant.
[42] Elworthy-Jones v Counties Trustee Company Ltd considered the standing of a person appointed by the terms of the relevant trust deed as “guardian”.12 The guardian had a right of veto in relation to any discretionary power exercised by the trustee and also had the power of appointment of further trustees. Heath J observed that it seemed reasonably clear that such a person would be subject to fiduciary obligations which are sufficient to ensure that he or she acts in good faith and for the benefit of those entitled beneficially to the trust property.13
[43] In that trust, the guardian’s powers were triggered by an exercise of trustees’ powers, so they derived from conduct by the trustees which is quintessentially constrained by fiduciary obligations to the beneficiaries. It would be anomalous if the initiating action by the trustee required compliance with fiduciary obligations, but the veto of it did not.
[44] In Carmine v Ritchie, Gilbert J dealt with an application by a solicitor who unsuccessfully challenged his removal as a trustee.14 The power to do so was vested in the “Principal Family Members” as defined in the trust deed. On the facts, that person was also a trustee. In criticising the manner in which he had been removed, it was argued for the former trustee that the power to do so was “self-evidently held in a fiduciary capacity”. Those defending the removal characterised it as a personal
power, without fiduciary obligations. Gilbert J acknowledged that the power was a
12 Elworthy-Jones v Counties Trustee Company Ltd HC Auckland CP15 AS-02, 14 August 2002.
13 At [31].
14 Carmine v Ritchie [2012] NZHC 2279.
personal one, and not an incident of her office as a trustee. Then the Judge observed:15
[66] The power to appoint new trustees is generally acknowledged to be a fiduciary power even though it may not have been conferred on trustees or the holder of any other office. Equally, a power to remove a trustee and replace him with a new trustee is almost always considered to be a fiduciary power to be exercised in the best interests of the beneficiaries. This is because the subject matter of the power is the office of the trustee which lies at the core of the trust and carries fundamental and onerous obligations to act in the best interests of the beneficiaries as a whole.
[45] I note academic comment that is critical of reasoning to the effect that where a power to appoint or remove trustees arises in a personal capacity, that factor is determinative of whether it carries fiduciary obligations. Such comment cites Gilbert J’s decision in Carmine v Ritchie for the proposition that fiduciary
obligations will arise even if the position is held in a personal capacity.16
[46] Because of the critical importance of the identity of trustees, powers to remove or add them are distinguishable from powers to alter the class of beneficiaries. The former power naturally reflects a shared interest by all beneficiaries, whereas the latter is inevitably discriminatory between beneficiaries.
[47] A relevant consideration to the nature of an appointor’s power is the circumstances in which the trust was formed. The traditional form of family trust is where the settlor provides the majority of assets and the principal purpose of the trust is to provide the benefits of those assets for future generations. In that classic situation, an appointor is likely to be seen as standing in the shoes of the settlor which readily justifies the distinction between the personal nature of the powers granted to an appointor and the fiduciary nature of obligations owed by trustees.
[48] In this case, the settlor had no interest at all in how the trust would be administered, so any on-going role for her (or her imputed interest in the trust’s
governance) was not in contemplation. Therefore there were no “settlor’s shoes” in
15 Authority cited for these propositions was: Geraint Thomas Thomas on Powers (2nd ed, Oxford University Press, Oxford, 2012) at [1.52]; John McGhee Snell’s Equity (32nd ed, Sweet & Maxwell, London, 2010) at [27-011]; David Hayton (ed) Underhill and Hayton Law Relating to Trusts and Trustees (18th ed, LexisNexis, London, 2010) at [70.20] and [71.11].
16 Jessica Palmer and Nicola Peart “Clayton v Clayton: A Step Too Far?” (2015) 8 NZFLJ 114.
which the appointor would be “standing”. Bruce was the person who was likely to have the closest day-to-day involvement with the assets that were to be transferred to the trust, and to be involved with them for the longest period of time.
[49] I reject the proposition that the characterisation of an appointor’s powers as personal ones, rather than being derived from the status of a trustee, is determinative of itself. A relevant qualification is that if Chirnside considerations require the recognition of some fiduciary obligations in the particular circumstances that have arisen, then equity will recognise such obligations to the requisite extent. However, where the power is to alter the class of discretionary beneficiaries, the fact that such a power will inevitably be exercised discriminately as between beneficiaries puts a limit on the extent of any fiduciary obligations because it logically excludes any obligation to act even-handedly between all beneficiaries.
Factors relevant to any fiduciary obligations on Bruce
[50] Bruce said in evidence that he had been aware of the power he had to remove discretionary beneficiaries from the time the trust deed was completed, and the power had been used without any challenge in 2013 to exclude his first wife and the children of that marriage.
[51] Bruce saw the BDM Trust arrangements as a form of “living will”, with the shared expectation being that the assets involved in the business of servicing mussel farms would pass entirely to him on his parents’ death.
[52] Bruce considered there was a measure of complementarity about his predominant interest in the assets of the BDM Trust and the extent of power he had to control it, when contrasted with the retention of powers by his parents over the assets in the MFT where he had no equivalent expectation.
[53] He removed his parents as beneficiaries only after they had signalled a fundamental change in the previously shared expectation as to how various aspects of the family businesses would operate.
[54] From the parents’ perspective, it would be a mistake if Bruce could exercise the powers he is given as appointor without regard to their interests. They consider they were poorly advised when executing the trust deed. Clearly, they did not consider the consequences of any falling out with Bruce.
[55] The intentions of the settlor, as evident from the terms of the trust deed, are generally important in determining the nature of powers created by the terms of the deed. However, any attempt to discern the intentions of the settlor from the terms of this trust deed would be meaningless. The notional settlor was an independent functionary with no interest in any of the property to be settled on the BDM Trust, and no understanding of the relationships between trustees and beneficiaries. This was not a trust in the classic sense that was driven by the intention of the settlor to provide for a range of beneficiaries. The precedent adopted by the parents’ accountant had not been reviewed in light of any legal advice that could reasonably be expected to reflect on subsequent developments with the business and in the relationship between the parents and Bruce.
[56] As providers of a substantial portion of the value of assets transferred to the BDM Trust, the parents expected to have a say in the administration of the BDM Trust. They never contemplated they might be excluded as beneficiaries against their will, and clearly did not contemplate that prospect when they forgave the debts owed to them by the BDM Trust. Implicitly, that was because they expected that Bruce would always be considerate of their interests when exercising his powers as appointor.
Removal of parents as beneficiaries
[57] Focusing first on Bruce’s exercise of the power to remove his parents as discretionary beneficiaries, I find that the circumstances of this trust gave rise to a relationship of trust and confidence in his position as appointor. I also find that prior to the falling out between them, the parents and Bruce would have shared an expectation that the parents would continue to have an interest in the assets held by the BDM Trust, at least to the extent of the income that the business it operated was generating.
[58] The parents’ reliance on Bruce not to remove them from all prospects of receiving benefit from the assets is distinguishable from the 2013 decision, taken mutually but in Bruce’s name, to remove other beneficiaries. Bruce’s first wife and the children of his first marriage were excluded after contested relationship property claims had been resolved.
[59] On any objective view, Bruce should have appreciated that his parents were vulnerable to complete exclusion and therefore had to trust him to exercise the power to exclude them as discretionary beneficiaries only after considering the matter in good faith in light of the purposes of the trust and the circumstances then pertaining. This is less than an obligation of even-handedness.
[60] I accept that the terms of the trust deed do not suggest any constraints on the exercise of the appointor’s general power. It is not an adequate answer in this case to say that any exercise of the power would inevitably be discriminatory, and that the Court ought not to impose any constraints where the trust deed appeared to create the power in unfettered terms. The case-specific rejoinder to that proposition is that the circumstances at inception of the trust and as they have evolved do not justify treating the power as an unfettered one.
[61] I also acknowledge that the predicament has arisen at least in part because of the parties’ adoption of an inapt form of trust deed without adequate advice, and that the parents are not now entitled to the intervention of equity to save them from the consequences of being poorly advised in the past. The matter is to be assessed on the terms and effect of the deed in light of the clear intention of the parties in creating it.
[62] The most likely inference is that Bruce was nominated as the appointor because the business operated by the trust was likely to continue under his stewardship after the parents ceased active involvement, and potentially after they died. That operational role is distinguishable from that of a person acting according to his or her perception of the intentions of the settlor.
[63] I therefore find that certain basic fiduciary obligations can be imputed to Bruce in the exercise of the appointor’s power to remove his parents as discretionary beneficiaries. As to the scope of the fiduciary obligations, the parents pleaded duties of extensive scope in the following terms:17
(a) to act in the best interests of the beneficiaries of the trust; (b) not to act in bad faith or for an improper motive;
(c) to act responsibly, with due diligence and prudence; (d) to act reasonably;
(e) to treat all beneficiaries fairly and impartially and to put aside personal interests;
(f) not to take into account irrelevant, improper or irrational factors or to reach a decision that is perverse or capricious;
(g)not to act where his own interests and those of the beneficiaries of the trust conflict;
(h)to apply to the Court for directions if he is unsure as to whether any action contemplated by him is or may be a breach of his obligations as appointor.
[64] Duties of that scope would be co-extensive with those of trustees. That would be substantially broader than is justifiable. In particular, any suggestion of a duty to act fairly as between all beneficiaries in a discretionary trust is beyond what could be expected.18 However, the obligations required by (b) to (d) and (f) are fundamental and at the core of the approach that can be expected of anyone dealing, in any capacity, with obligations arising under a trust. The absence of specific
obligations assumed to the beneficiaries does not free an appointor from supervision
17 Amended Statement of Claim at [70].
18 Kain v Hutton [2007] NZCA 199, [2007] 3 NZLR 349 at [243].
by the law of equity because this supervisory jurisdiction extends to all aspects of the conduct of the affairs of trusts.19
[65] Summarising the pleaded aspects of the duties that I find to exist, Bruce was obliged to act responsibly, with an appropriate level of diligence and prudence, and to avoid taking into account irrelevant, improper or irrational factors. He was not to act in bad faith or for an improper motive.
[66] The next question is whether Bruce’s decision to remove his parents as beneficiaries was in breach of those limited fiduciary obligations. From Bruce’s perspective, his parents “cast the first stone” by indicating their intention to sell the mussel farming assets. Retention of the mussel farms was pivotal to the volume of on-going business for the BDM Trust. Further, Bruce may previously have had some expectation of a share in the assets of the MFT, along with his sisters, assuming they were still owned when his parents died. His parents’ proposal to sell those assets turned the previously anticipated course of events on its head.
[67] Bruce argued that his parents’ exclusion was only accelerating the inevitable in that their shared intentions long-term were that he would inherit the assets used in the operating business. That argument overlooks what I find to be the shared expectation that the parents would be considered for distributions of income during their lifetime.
[68] Bruce’s response in removing his parents as beneficiaries was disproportionate. Leaving him and his immediate family as the only beneficiaries of the BDM Trust, given the circumstances in which its assets were vested in the trust and the shared aspirations of Bruce and his parents until their falling out, amounted to an expropriation of trust property entirely in his own interests, and disproportionately punitive to his parents. I find that the decision was taken having
regard to improper or irrational factors. It was not a reasonable one.
19 See Andrew Butler Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington,
2009) at [5.5.4].
[69] Accordingly, I find that the circumstances in which Bruce exercised the appointor’s power to exclude the parents as discretionary beneficiaries was in breach of the basic fiduciary obligations he owed them.
Appointment of additional trustees
[70] The power to appoint additional trustees is to be assessed in a somewhat different light to the power to remove beneficiaries. The same irreducible core elements reflected in (b) to (d) and (f) of the alleged scope of duties, as set out at [63] above, apply equally. Alterations to the personnel acting as trustees are to be
considered in light of the interests of all beneficiaries.20 In most contexts, these
obligations, whether the power is perceived as a personal one or a fiduciary one, must be exercised for proper purposes.21
[71] In the context of the BDM Trust, this power might be invoked in various circumstances where appointments were warranted for the good governance of the trust. Further appointments could be justifiable independently of, or incidental to, considerations where the personal interests of the appointor conflicted with those of other beneficiaries.
[72] The appointments occurred in June 2015 when a seemingly irreconcilable rift had arisen between a majority of the existing trustees, so that the on-going management of the trust justified the inclusion of additional independent professionals.
[73] The parents’ pleading made trenchant criticisms of the new trustees, treating them as acting at Bruce’s bidding. From that premise, the parents criticised the appointment as intended to create a voting block that would successfully oppose their views in the on-going governance of the BDM Trust. Their reasoning was that the third existing trustee, Mr Brown, could be relied on to align with them and that
Bruce had appointed the two new trustees to automatically align with him.
20 Carmine v Ritchie, above n 14, at [66].
21 Kea Trust Co Ltd v Pugachev [2015] NZHC 2412 at [48].
[74] Both the new trustees gave evidence. I am satisfied that they are acting being mindful of their independent roles, and mindful of their obligations to act in the interests of all beneficiaries.
[75] Pending resolution of the parents’ claims to be reinstated as beneficiaries, I apprehend that the trustees have been wary of advancing the business of the BDM Trust in any way that would preclude fresh consideration of distributions that were required to take account of the parents as beneficiaries. The new trustees have credibly denied acting in Bruce’s interests.
[76] I acknowledge concerns raised by Mr Darroch on behalf of the new trustees that the claims against them remained in the proceedings after any tenable basis for them had disappeared. The pleading included allegations of dishonesty and male fides on their parts. Nothing of that sort was ever put to them in cross-examination. The parents’ failure to withdraw such unjustified allegations is regrettable.
[77] I am satisfied that Bruce’s exercise of the power to appoint them was one that
was reasonably open to him in the circumstances.
Deficiency in manner of appointment?
[78] At the outset of the hearing, Mr Locke foreshadowed an additional ground of challenge to the appointment of new trustees. He wished to argue that the document Bruce completed to make their appointment was required to be by way of a deed and that the document completed at that time did not comply with the requirements for a deed in the Property Law Act 2007.
[79] I gave Mr Locke leave to develop the point, and an amended pleading raising the additional challenge was presented in Court on the second day of the hearing.
[80] I am satisfied that there is nothing in the point. A re-documentation of the appointment of the new trustees has subsequently been completed. More relevantly, the technical deficiency in the mode of witnessing completion of the appointment, and consent by the new trustees to act, does not raise any substantive concerns about the competence of all those participating in the document, or their understanding of
its effect. I infer that the document was drafted by Bruce’s solicitor, signed by him as appointor and by the new trustees to evidence their consent to appointment. Overlooking the requirement for it to be in a form that complied with the formalities for a deed can have no material effect on its operation at all. If needed, it is a circumstance in which the Court ought to facilitate regularising what could only be a meaningless technical deficiency.
Claims for removal of trustees
[81] The parents’ first two causes of action were for removal of all existing trustees, and their replacement with the Public Trust or an alternative trustee. The first cause of action invoked s 51 of the Trustee Act, and the second invoked the Court’s inherent jurisdiction on the same grounds. The Court’s “main guide must be the welfare of the beneficiaries”.22 Not all instances of neglect, incompatibility or breach of trust will suffice; it depends on an assessment of the nature, gravity and surrounding circumstances of the breach.23 The situation must be such that trust property is endangered, or the trust’s proper administration in the interests of the beneficiaries is seriously adversely affected.24
[82] It follows from my analysis on the previous claim that the parents cannot make out any basis on which the Court could entertain an order to remove the new trustees. Even if grounds were made out for doing so, I would not make such an order. If removal of trustees was warranted, the conditions that the Public Trust sought to impose would, in my view, have disqualified it from appointment.
[83] On a more positive note, I consider the continued involvement of the new trustees is likely to increase the prospects of an efficient resolution of all outstanding issues in relation to the BDM Trust. Indeed, given the terms on which this judgment leaves the future administration of the BDM Trust, they have a critical role to play in
bringing all aspects of the present differences to an acceptable conclusion.
22 Letterstedt v Broers (1884) 9 App Cas 371 (PC) at 387 per Lord Blackburn, cited with approval by the New Zealand Courts in Hunter v Hunter [1938] NZLR 520 (CA) at 529 and Kain v Hutton CA23/01, 25 July 2002 at [19].
23 Kain v Hutton, above n 18, at [267].
24 At [267]; Letterstedt v Broers, above n 22, at 385.
Set aside the BDM Trust?
[84] The last cause of action to be considered is the fourth, which sought orders that the Court set aside the BDM Trust. Arguably this was warranted because the Trust was ineffective and was no more than a bare power. The basis for that proposition is that Bruce had been able to remove all the remaining beneficiaries, to an extent that, if upheld, would transform the trust into a personal holding for him. The terms of the trust deed to not permit additional beneficiaries.
[85] The parents sought a setting aside of the BDM Trust on terms that the assets would re-vest in the BDM Partnership. Implicitly, they saw that as a means by which they could obtain reinstatement of the ownership of the assets, in proportions that had applied when the assets were transferred to the BDM Trust.
[86] That claim is not tenable, particularly in light of the parents’ reinstatement as
beneficiaries.
[87] The commitment of assets to a trust brings to an end the entitlement of the former owners of legal and beneficial title in them to treat them as their own. If donors retain interests in legal ownership of the assets by virtue of their status as trustees of the trust, that should not be confused for any partial continuation of the position that pertained prior to the transfer of the assets.
[88] The Court is appropriately reluctant to entertain requests to reinstate the status quo ante when unanticipated changes in circumstance reveal that those committing assets to a trust may have been inadequately or incorrectly advised on the consequences of doing so. Here, the cause of action is untenable.
Outcome
[89] Accordingly, all causes of action except the third cause of action are dismissed. On that cause of action, there is to be an order that the parents are reinstated as beneficiaries of the BDM Trust. There are no orders interfering with Bruce’s appointment of the new trustees.
Additional concerns
[90] I am mindful that the dispute between Bruce and his parents is likely to spawn additional litigation. Mr Locke foreshadowed claims arising out of the circumstances in which the parents forgave the debts owing to them by the BDM Trust for the value of assets transferred to it. On the parents’ perception, they took that step in the understanding that there would be mutual forgiveness of debts, including by Bruce. Subsequent to their forgiveness, they discovered that Bruce has not acted, and does not intend to act, consistently. They have signalled an intention to seek redress on that.
[91] Unresolved difficulties have also arisen in the governance of the company. Its constitution requires directors to retire at the age of 80 and that has been invoked to require the removal of David and Mary as directors. The parents seek to argue that the trustees of the BDM Trust, as controlling shareholder of the company, should facilitate an amendment to the constitution, or authorise an exception from it, to enable David and Mary to resume office as directors.
[92] Mr Locke also made less specific references to other disputes. There are suggestions that the parents will claim that the trust or the company should now pay for services that, at the time they were provided, were treated as being done without charge for the overall interests of the trust and its beneficiaries.
[93] I endeavoured to convey to counsel and the parties at the conclusion of the hearing my clear view that it is the professional responsibility of all advisers to apply their minds constructively and co-operatively to pursue all options for an overall settlement. Their primary task ought to be building bridges between the two sides, not preparing rockets to fire at each other.
[94] However embittered each side’s view of the other might now have become, putting differences aside and making every possible endeavour to objectively recognise the concerns of the other side is now required. The alternative is to commit disproportionate personal and trust resources for the benefit of the lawyers.
[95] For Bruce, Mr Ironside opposed any attempt to broaden the issues that I would formally determine in this proceeding. Nonetheless, it is my responsibility, having reinstated the parents as beneficiaries of the BDM Trust, to reflect on the consequences, as I see them, of doing so.
[96] First, it is highly unlikely that the parents could ever justify any distribution of the proceeds of the liquidated assets of the BDM Trust that attempted to reflect the proportionate contributions to the assets of the trust in its establishment phase.
[97] Secondly, if the parents have genuine grounds for complaint that they forgave the debts owed to them by the BDM Trust for assets transferred to it on the understanding that Bruce (as the other contributor to the assets) was similarly forgiving the extent of the debt owed to him, then some allowance for that inconsistency would appear to be appropriate. Assuming the net proceeds of the realisation of the trust’s assets is reduced by Bruce’s prior claim to be repaid the full extent of the debt owing to him, then the residue available for distribution would be materially less than if all transferors of assets to the BDM Trust had acted consistently.
[98] Thirdly, my clear impression of the shared expectations of the parents and Bruce prior to their falling out equated more or less to the parents having an expectation approximating distributions in line with the income being earned, whereas Bruce’s expectation was more akin to that of a residuary beneficiary, who would recognise payments of interest to the beneficiaries in the prior generation, subject to an expectation of ultimately receiving the capital representing the assets. As I suggested to counsel, I urge the parties to see an apportionment along those lines as one basis for resolving their dispute.
Costs
[99] I set out my provisional view on costs, acknowledging that I would need to revisit the issue if any settlement offers were made prior to the hearing, without prejudice as to costs, that would affect costs entitlements.
[100] I consider that the claims to remove the new trustees and replace them with the Public Trust were misconceived. Attacks on their professional standing were not withdrawn after they ought reasonably to have been. I consider that the new trustees are entitled to scale costs on a 2B basis, and that those costs should be met out of the funds of the BDM Trust. I appreciate that attributing this liability to the trust in a sense punishes Bruce for conduct not of his making, but that is a consequence of being embroiled in the family dispute that has arisen.
[101] I also appreciate that an award of scale costs leaves the new trustees and/or their professional indemnifiers out of pocket for the unrecoverable component of Mr Darroch’s reasonable costs. Again, I consider that the appropriate balance between reimbursement for their being wrongfully pursued to trial, and such challenges being an incident of professional practice.
[102] The parents have succeeded in one significant component of their claims. I consider they ought to be indemnified out of the trust fund for the portion of reasonable costs represented by the cause of action on which they have succeeded. I would provisionally suggest that they be entitled to a reimbursement out of the fund of 30 per cent of their actual expenses, subject to vetting the reasonableness of the extent of those expenses.
[103] I do not consider that Bruce is entitled to a contribution to his costs from his parents. However, his reasonable costs should be claimable from the trust fund.
Dobson J
Solicitors:
Hamish Fletcher Law, Nelson for plaintiffs, second and third-named first defendants
Stallard Law Limited, Nelson for first-named first defendant, and second defendant
Darroch Forrest, Wellington for fifth and sixth named first defendants
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