McLaughlin v McLaughlin
[2018] NZHC 3198
•6 December 2018
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2017-442-52
[2018] NZHC 3198
BETWEEN MARK JAMES MCLAUGHLIN AND ANDREW ASHLEY MCLAUGHLIN AS BENEFICIARIES OF THE ASHLEY
TRUST
PlaintiffsAND
JOHN DAVID MANUEL MCLAUGHLIN, GLASGOW HARLEY TRUSTEE
LIMITED AND MARK WILLIAM RUSSELL AS TRUSTEES OF THE ASHLEY TRUST
First Defendants
BRIAN JAMES MAURICE NELSON
Second DefendantCont’d …
Hearing: 12-13 November 2018 Counsel:
W J Palmer and O D Peers for Applicants/Defendants
J W A Johnson and G J C Carter for Respondents/Plaintiffs J Little for Respondents’/Plaintiffs’ Children
J M McGuigan for Brett McLaughlin
Judgment:
6 December 2018
JUDGMENT OF THOMAS J
MCLAUGHLIN v MCLAUGHLIN, [2018] NZHC 3198 [6 December 2018]
CIV-2017-442-78
UNDER the Trustee Act 1956 IN THE MATTER of the Ashley Trust
BETWEEN GLASGOW HARLEY TRUSTEE
LIMITED AND JOHN MCLAUGHLIN
Applicants
ANDMARK JAMES MCLAUGHLIN AND ANDREW ASHLEY MCLAUGHLIN
Respondents
Table of contents
Introduction [1]
The Applications [8]
The Substantive Proceedings [8]
The Beddoe Application [9]
Issues [17]
Beddoe orders and prospective costs orders – relevant legal principles [18]
Further background [39]
Ching’s Block [47]
Homestead Block [53]
Reports [57]
Merits of the Substantive Proceedings [62] First cause of action: removal of trustees [63] Conflict of interest [66]
Hostility [69]
Mismanagement of the Ching’s Block subdivision [71]
Second cause of action: application for directions [80]
Third, fourth and fifth causes of action [98]
Is it in the best interests of the Ashley Trust to make a Beddoe order
authorising the trustees to defend the Substantive Proceedings? [110]
Should the trustees be indemnified from the Ashley Trust against the
costs they have incurred to date? [129]
Should the trustees indemnify Brian Nelson from the Trust assets in
respect of any costs for which he is or may become personally liable? [132]Orders [133]
Costs [136]
Introduction
[1] On 26 February 2004, Jim and Edna McLaughlin settled their family trust, the Ashley Trust. Jim and Edna McLaughlin had four sons, one of whom, John, is a trustee of the Ashley Trust, together with an independent trustee company, Glasgow Harley Trustee Ltd (Glasgow Harley). All four sons are discretionary beneficiaries as well as final beneficiaries of the Ashley Trust. Two of the sons, Mark and Andrew, are suing the trustees for breach of their trustee duties. They apply for removal of the trustees, appointment of an independent trustee and directions concerning the future conduct of the Ashley Trust (the Substantive Proceedings).
[2] The trustees deny any allegations of wrongdoing and apply to the Court for a Beddoe order approving their decision to defend the Substantive Proceedings at the cost of the Ashley Trust (the Beddoe Application).1 This followed Mark and Andrew’s application for a restraining order seeking to restrain the trustees from using the Ashley Trust funds to defend the Substantive Proceedings (the Restraining Application).
[3] The trustees are therefore the applicants in the Beddoe Application, the defendants (together with Brian Nelson, a former trustee) in the Substantive Proceedings and the respondents in the Restraining Application. Mark and Andrew McLaughlin (the respondents) are the respondents in the Beddoe Application, the plaintiffs in the Substantive Proceedings and the applicants in the Restraining Application.
[4] Glasgow Harley is a nominee trustee company whose four directors are the partners of the legal firm Glasgow Harley. One of the directors, Mr Nelson, the second defendant in the Substantive Proceedings, was an original trustee of the Ashley Trust, having been the longstanding family solicitor for the settlors. On his retirement as a trustee in September 2007, he was replaced by Glasgow Harley.
[5] Edna McLaughlin supports the Beddoe Application, considering it to be in the best interests of the Ashley Trust and her as a beneficiary. Correspondingly, she opposes the Restraining Application.
1 Re Beddoe [1893] 1 Ch 547 (CA).
[6] The fourth brother, Brett McLaughlin, was granted leave to be heard in respect of the Beddoe Application, which he opposes.
[7] Jim and Edna McLaughlin’s grandchildren, being children of John, Mark and Andrew, are discretionary beneficiaries of the Ashley Trust. Brett McLaughlin does not have any children. John’s children do not seek to be heard. Mark and Andrew’s children (the Respondents’ Children) were granted leave to be heard and oppose the Beddoe Application.
The Applications
The Substantive Proceedings
[8]The Substantive Proceedings involve:
(a)An action for the removal and replacement of the trustees with two new, independent and professional trustees (unspecified). The basis for the claim is that the trustees have misconducted themselves in the administration of the Ashley Trust.
(b)An action for directions as to the management and distribution of the Ashley Trust property. The sole asset of the Ashley Trust is land at Stoke, Nelson (the Ashley Trust Land). The following orders are sought:
(a)A direction for the Trustees to stop work on the Proposed Homestead Development and only do work necessary to enable the land to be sold with consents for subdivision.
(b)A direction that the Trust Property be sold after the relevant consents are obtained (if they have not been already) to maximise its value and provided that Edna’s wish to remain in her home is respected.
(c)A direction for the proceeds of sale, except for any amount required for the continued support of Edna, to be distributed to the sons.
The orders are sought on the basis of the trustees’ alleged breach of trust in work undertaken to date and claims that the future work to the Ashley
Trust Land proposed by the trustees will not be for the benefit of the four brothers as final beneficiaries.
(c)Three causes of action alleging breach of trust and fiduciary duty against the trustees and Mr Nelson alleging, amongst other matters, failure to meet the standards expected of a reasonable and competent trustee and acting in a position of conflict and/or hostility to beneficiaries. Damages are sought as well as an account of profits in respect of John McLaughlin and Mr Nelson. It is claimed that John McLaughlin breached his fiduciary duties by:
(a)acting as Trustee when his position as Trustee conflicts with his personal interest; and
(b)profiting from decisions he has made as a Trustee.
Particulars
(c)John is directly employed and remunerated by the Trust as a Project Manager for the Development work.
(d)John received a fee for being a guarantor of the Trust’s obligations to the Bank.
(e)The Trust has purchased a significant amount of machinery that has been used by John for his own purposes.
(f)John owns adjoining land and has profited by virtue of the benefits of the subdivision works undertaken and paid for by the Trust, including resource consents and infrastructure developments, which have increased the value of his own land.
It is claimed Mr Nelson breached his fiduciary duties by:
(a)acting as Trustee when his position as Trustee conflicts with his personal interest; and
(b)profiting from decisions he has made as Trustee.
Particulars
(c)The Second Defendant is a partner in the law firm Glasgow Harley.
(d)Glasgow Harley has received fees from the Trust for the Ching’s block subdivision and will receive fees from the Proposed Homestead Development.
The Beddoe Application
[9]The trustees seek orders:
(a)approving their actions as trustees in defending the Substantive Proceedings;
(b)authorising the trustees to make payment of their legal and associated costs incurred in responding to and defending the Substantive Proceedings from the assets of the Ashley Trust provided such costs are approved in advance by senior counsel appointed with the Court’s approval as reasonable and legitimate;
(c)authorising the trustees to indemnify Mr Nelson as the second defendant in the Substantive Proceedings from the assets of the Ashley Trust in respect of any costs or adverse costs award for which he is or may become personally liable (revised at the hearing to remove the application for an indemnity in respect of any adverse costs award); and
(d)that the costs of the Beddoe Application be paid from the assets of the Ashley Trust.
[10] The trustees consider the Substantive Proceedings are an ill-conceived attempt by discretionary/final contingent beneficiaries of a trust to take control, have its assets sold and distributed, and the trust wound up. The trustees maintain the respondents have couched the Substantive Proceedings as hostile litigation in an attempt to stop the trustees defending their decisions. They say that the Beddoe Application is a direct consequence of this attack on them and, if not granted, will have the practical effect of forcing the trustees to concede, with the result that the respondents will have achieved their wishes despite their claims being unmeritorious and contrary to the interests of the Ashley Trust.
[11] Importantly, the trustees say a related consequence would be that the Trust would lose the opportunity to increase the value of the Ashley Trust Land by at least
$8 million as a result of developing what is known as the Homestead Block by
subdivision. Thus, the trustees say, defending the Substantive Proceedings is in the Trust’s best interests, as continuing with the subdivision will enhance the Ashley Trust assets for the benefit of the Ashley Trust.
[12] In short, the trustees say the Substantive Proceedings would require the Court to usurp the trustees’ function and discretions where the proceedings are lacking in merit, with no evidence of loss or harm to the Ashley Trust which could justify the Court’s intervention.
[13] The respondents say the trustees’ use of approximately $1 million of trust funds to defend the Substantive Proceedings is not in the best interests of the Trust. The Substantive Proceedings are properly categorised as hostile and the respondents say exceptional circumstances are required to establish it is in the best interests of the Ashley Trust to use Trust funds to fund the trustees’ defence pending the outcome of the Substantive Proceedings.
[14] Brett McLaughlin’s opposition to the Beddoe Application is primarily based on his view that the Substantive Proceedings are effectively a dispute between well-resourced beneficiary groups, appropriately characterised as “hostile litigation”. As such, he does not consider defence of the Substantive Proceedings to be reasonable and in the best interests of the Ashley Trust. He suggests the Ashley Trust would be better served by the trustees abiding the Court’s decision in the Substantive Proceedings. Furthermore, that any particular concerns can be addressed in any final costs order when the Substantive Proceedings have been determined.
[15] The Respondents’ Children consider that it is not in the interests of the Ashley Trust for trust property to be used to defend the trustees against the claims in the Substantive Proceedings. More generally, they are of the view that the status quo is aggravating the divisions between different parts of the wider McLaughlin family. They do not have confidence that the Ashley Trust is being managed in an even-handed way and for the benefit of the beneficiaries as a whole. They do not consider it in the interests of the Ashley Trust for trust property to be used to protect the personal finances of current and former trustees, at least in advance of a proper assessment by the Court of their conduct at the trial of the Substantive Proceedings.
[16] The Respondents’ Children are concerned about the costs already expended in this litigation, noting that the trustees have spent approximately $350,000 on proceedings to date and expect to spend another $500,000–$680,000. They suggest the trustees should simply resign and allow new, independent and professional trustees to investigate the management issues and determine the best way forward after consultation with all beneficiaries. They consider this would be an obvious and much cheaper alternative to the litigation.
Issues
[17] Both the Beddoe Application and the Restraining Application essentially involve the same issues:
(a)Is it in the best interests of the Ashley Trust to make a Beddoe order authorising the trustees to defend the Substantive Proceedings?
(b)Should orders be made retrospectively indemnifying the trustees against the costs they have incurred on this application?
(c)Should Mr Nelson be indemnified from the Ashley Trust assets?
(d)Should the Restraining Application be granted?
Beddoe orders and prospective costs orders – relevant legal principles
[18] The overriding obligation of a trustee is to preserve and safeguard trust property for the benefit of the beneficiaries.2 When faced with the prospect of litigation, costs incurred for the benefit of the trust in its defence will be generally paid out of trust funds. They must, however, be reasonably and properly incurred. To mitigate the risk of liability for costs personally, trustees or beneficiaries may apply for a Beddoe order, named for the case from which they originate.3 To mitigate the risk of an adverse costs award against either the trust or the trustees, an application for prospective costs orders may be made. However, there is some overlap between the
2 Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 (Ch), at 1224.
3 Re Beddoe, above n 1, at 557 and 562.
two types of orders and, consequentially, a lack of clarity as to the law to be applied to each. I shall now discuss the law in more detail.
[19] A Beddoe application is made in prior separate proceedings for directions as to whether to bring or defend the main proceedings at the expense of the trust. Applicants
– often trustees – primarily seek the sanction of the Court to bring or defend claims, the question being whether the trust’s funds should be spent or placed at risk in the main proceedings. An applicant must fully disclose the strengths and weaknesses of those proceedings. If granted, the applicant is indemnified by the trust fund for the cost of bringing or defending the main proceedings. It may extend to immunity from a costs award against the applicant personally. However, it will not typically deal with issues of costs as between the parties in the main proceedings.4 These are more commonly dealt with in prospective costs orders.
[20] Prospective costs orders are made in advance of the trial and are therefore contrary to the usual principle that costs follow the event. They fall into two broad categories. First, an applicant may seek an order that their own costs be paid out of the trust fund on an indemnity basis. Secondly, they may seek an order, in advance of the substantive hearing in the main proceedings, that they will not be liable to pay the other party’s costs, regardless of the outcome of the case. The former category can overlap with orders sought under a Beddoe application.
[21] The Court has an inherent jurisdiction to make both types of orders, as part of its equitable jurisdiction to supervise the administration of trusts. In New Zealand, there is no specific legislative procedure for either order. In this case, as with most, the Beddoe Application has been brought as an application for directions pursuant to s 66 of the Trustee Act 1956 (the Act).5
[22] Although Beddoe applications are not common in New Zealand, they often accompany applications for prospective costs orders. Consequently, decisions in New Zealand have tended to conflate the two. This has resulted in obiter dicta which
4 Lynton Tucker and others Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [27-238].
5 This is in contrast to England and Wales and Australia, where both jurisdictions contain specific provisions for costs in trust and estate litigation.
import aspects of the law relating to prospective costs orders into the test applied to Beddoe applications. A key question which arises in applications where the main proceedings involve hostile litigation is whether the rule that there must be special or exceptional circumstances to justify a prospective costs order is equally applicable to a Beddoe application. Answering that question requires traversing the case law in some detail.
[23] Re Beddoe was an 1892 decision of the Court of Appeal of England and Wales which concerned an appeal against an award of indemnity to a trustee. In allowing the appeal, Lindley and Bowen LLJ noted the general proposition that trustees are indemnified for costs incurred for the benefit of the trust but emphasised the requirement that such costs need to be properly and reasonably incurred.6 Where there is doubt that expenditure on particular litigation would meet this requirement, the Lords Justice indicated a trustee ought to seek the answer from the courts as to whether the litigation ought to be fought or abandoned.7
[24] Subsequent cases attempted to categorise proceedings in such a way so as to help the court assess whether the particular circumstances indicated costs would be properly incurred. The preeminent cases in this regard from England and Wales are In Re Buckton and Alsop Wilkinson (a firm) v Neary, which each categorised cases according to certain features.8 The former decision concerned what might be described as a Beddoe application, while the latter addressed Beddoe applications cursorily but prospective costs in more detail. In Alsop, Lightman J indicated the Court’s jurisdiction for prospective costs orders in hostile litigation was “exceptional”.9
[25] Kós J (as he then was) summarised the Buckton and Alsop categories in Woodward v Smith, a decision concerning an application for prospective costs, as follows:10
6 Re Beddoe, above n 1, at 558 per Lindley LJ and 562 per Bowen LJ.
7 At 557 per Lindley LJ and 562 per Bowen LJ.
8 In Re Buckton [1907] 2 Ch 406 (HC); and Alsop Wilkinson v Neary [1996] 1 WLR 1220 (Ch).
9 Alsop, above n 8, at 1226.
10 Woodward v Smith [2014] NZHC 407; [2014] 3 NZLR 525 at [23].
(a)The first category involves proceedings brought by trustees to obtain the Court’s guidance on the construction of the trust deed or some aspect of the trust's administration. In such cases, the costs of all parties necessarily participating are treated as incurred for the benefit of the estate and ordered to be paid out of the trust fund.
(b)The second category involves a similar application, but by someone other than a trustee (such as a beneficiary). However, it is a case which would have justified application by a trustee. The same approach is taken to costs in the second category as to the first.
(c)The third category, however, is where a beneficiary is making a “hostile claim” against the trustees, or another beneficiary. The claim may still involve a point of construction, or administration. It will often involve a claim to a beneficial interest or entitlement to a part of the trust fund. In the third category, involving a hostile claim against trustees or another beneficiary, the usual principles as to costs apply. Ordinarily they will follow the event.
[26] Kós J thoroughly canvassed English and Welsh case law in relation to prospective costs orders. He concluded that prospective costs orders are routinely made in cases falling within categories one or two. However, prospective costs orders for the third category – hostile proceedings – would be “quite exceptional” and made only where “special circumstances” justified departing from the ordinary rule that costs follow the event.11 This conforms to the principle that, where hostile litigation is involved, it is usually appropriate for each party to bear their own costs until the merits of the litigation have been determined and costs issues can then be decided in light of the result.
[27] That case law was again considered in Fundación Pimjo Ac v Aguilar& Aguilar Ltd which dealt with both Beddoe and prospective costs applications.12 Fundación recognised the categories in Buckton apply equally to Beddoe and prospective costs applications,13 but relied primarily on Woodward and other authority on prospective costs to say it was clear neither application could succeed without exceptional circumstances where the proceeding was hostile.14 The Court in Easton v The New Zealand Guardian Trust Co Ltd considered it clear that Beddoe orders would not be granted in proceedings where trustees faced allegations of breach of trust.15
11 At [39] and [40].
12 Fundación Pimjo Ac v Aguilar& Aguilar Ltd [2015] NZHC 1402.
13 At [34].
14 At [36] and [39].
15 Easton v The New Zealand Guardian Trust Co Ltd [2016] NZHC 3011, at [12].
Further, although the learned authors of Lewin on Trusts state that exceptional circumstances will apply to Beddoe applications for litigation involving allegations of breach of trust, the statement does not cite any authority.16
[28] I agree that the Buckton and Alsop categories may inform assessments under both prospective costs and Beddoe applications.17 However, to say a Beddoe application will succeed in exceptional circumstances only where the substantive proceedings are hostile, misrepresents the authorities and imports into Beddoe applications an aspect of the law which developed in relation to prospective costs. The distinction is a fine one but one nonetheless based on different principles. I am also mindful that the difference between what a party expends in pursuing litigation and what it might receive in a Court ordered award of costs has become more pronounced over time, not only in amount but also conceptually. Beddoe was determined at a time when those differences were likely less significant.
[29] The test as educed from case law is simply that Beddoe applications are gauged against the fundamental question of what is in the best interests of the trust.18 The Court must therefore exercise its jurisdiction in the best interests of the trust, and the beneficiaries as a whole, having regard to all the circumstances. This may include the need to balance the interests of different beneficiaries, as well as the interests of beneficiaries and trustees.19 That basic test conforms to the principle on which such applications are founded, namely that trustees ought to be indemnified for costs properly and reasonably incurred for the benefit of the trust.
[30] In any event, my analysis of the law does not suggest that substantive outcomes are likely to be materially different. It is difficult to imagine a truly hostile proceeding, such as an allegation of a breach of trust with at least some prospect of success, where it would be in the best interests of the trust to fund the proceedings out of its own
16 Lewin on Trusts, above n 4, at [27-181].
17 The Court of Appeal has recently issued its decision in Pratley v Courteney [2018] NZCA 436. That case discussed the Alsop categories but did not expressly address the test to be applied in a Beddoe application.
18 See for example Beddoe, above n 1, at 562 ; Alsop Wilkinson, above n 2, at 1224; and Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] NCA 42, (2008) 237 CLR 66 at [71]–[72].
19 In the matter of X (Trust) [2012] JRC 171 at [22].
assets prior to determination of those allegations. I doubt whether, in that situation, the different tests for Beddoe or prospective costs applications would yield materially different results. It is therefore unnecessary to add a special or exceptional circumstances test in the context of hostile litigation, as the threshold of the best interests of the trust itself adequately addresses that circumstance.
[31] Further guidance on how to assess whether bringing or defending a proceeding is in the best interests of the trust can be found in recent decisions concerning Beddoe applications. In Spencer v Fielder, the English Chancery Division addressed a Beddoe application in the context of a proceeding against trustees of a large pension scheme.20 The plaintiff in the main proceedings, British Airways PLC, had made serious allegations against the decisions of the trustees, including allegations of conduct amounting to breaches of trust.21 Sir Terence Etherton C said:22
[27] I have emphasised that what matters is whether, in substance, trustees who are parties to litigation are acting in the best interests of the trust rather than for their own benefit. It is clear, for example, that, depending on the precise facts, trustees may be entitled to an indemnity for costs even though incidentally they will secure a personal benefit from a successful claim or defence or where there are allegations of breach of trust.
[28] Turning to the relevant facts here, it is perfectly clear … that the Main Proceedings should not go undefended. The 2011 Amendment and the 2013 Decision will benefit the overwhelming majority of the members of the Scheme, that is to say some 29,000 pensioners and deferred members out of a total, including active members, of just under 30,000. Mr Rowley and the Trustees’ two junior counsel, Mr Thomas Seymour and Mr Jonathan Hilliard, have written a 58-page joint opinion, which examines in detail the allegations in the Points of Claim.
[32] This emphasises that the main proceedings must be in the best interests of the trust. The merits of the main proceedings,23 and whether they should be taken or defended, given their importance for the future administration of the trust must be considered.24 This requires consideration of the substance of the dispute but necessarily on a preliminary basis.
20 Spencer v Fielder [2014] EWHC 2768 (Ch).
21 At [12], [13] and [21].
22 Citations omitted.
23 Evans v Evans [1985] 3 All ER 289.
24 Importantly, in Spencer v Fielder, above n 20, there was no claim for personal relief against the trustees and the defence was not to the personal benefit of the trustees.
[33] The nature of the claim is a relevant consideration and this is where categorising the proceedings as per Buckton and Woodward – including whether the proceedings are hostile – may be useful. Where a claim can be characterised as an allegation of breach of trust, a Beddoe order may not be available,25 and indeed may not be sensible to make.26
[34] Considering the nature of the claim is not the same as deciding the issues themselves.27 Although there may be sufficient prospects of success in bringing or defending a claim, that is not the same as deciding whether it is in the interests of the trust as a whole to do so.28 There is some suggestion in the case law that the merits of defending a claim can justify a Beddoe order only when the claim against the trust is so weak that it can be summarily dismissed.29 Other cases suggest that the onus is on the applicant to show there is a sufficient prospect of success to warrant continuing with the proceeding.30
[35] The nature of the trust itself is also a relevant consideration. This was the case in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand where the trust involved was charitable and the main issue was one of interpretation of the trust instrument.31 In that case, the High Court of Australia, in considering a statutory procedure for advice and direction, observed that, in the case of a non-charitable private trust involving a conflict between beneficiaries, or between beneficiaries alleging a breach of trust, it might not be correct to give the trustee an opinion, advice or direction. The Court said, however, the position was not necessarily the same where the trust was for a charitable purpose where none of the contestants were suing or defending in order to protect personal assets and where the crucial question was the precise terms of the purpose for which the trust existed.32
25 Kain v Hutton HC Christchurch M 1989/00, 3 October 2001 at [12].
26 Pettigrew v Edwards [2017] EWHC 8 (Ch) at [27].
27 Macedonian Orthodox Community Church St Petka Inc, above n 18, at [74].
28 Re Uncle’s Joint Pty Ltd [2014] NSWSC 321, (2014) 12 ASTLR 487 at [30]–[33].
29 STG Valmet Trustees Ltd v Brennan [1999–2000] Gib LR 211 (CA).
30 Macedonian Orthodox Community Church, above n 18, at [162].
31 Macedonian Orthodox Community Church, above n 18.
32 At [67]. Note this was not a Beddoe application, but an application made under a similar but statutorily defined process.
[36] Mr Johnson referred to the 2017 decision of the Supreme Court of Victoria in Charlesworth Nominees Pty Ltd v Charlesworth.33 That case concerned the trustee of the Charlesworth Family Trust applying for judicial advice and directions under the relevant Rules, including seeking orders that it was justified in defending proceedings and paying all of the costs on a full indemnity basis, as well as any party costs. Croft J held that, in circumstances where the trust had vested over 25 years ago and the trustee held the assets on a bare trust, it was simply a beneficiaries’ dispute and the interests of the trust as a whole were unaffected, with the duty of the trustee being to remain neutral.34 He said:35
… Whilst it is true that the relief sought clearly affects the Trustee’s personal role and status as trustee, this is a separate and distinct matter from the interests of the Trust as a whole. In this respect, the ancient equitable maxim that a trust will not fail for want to a trustee looms large. In the present circumstances, it “translates” to the effect that the identity of the trustee is not a matter affecting the due administration of the Trust and not a matter with which equity is concerned, save to ensure that, if necessary, a new trustee is appointed to ensure the due, and in this case, neutral administration of the Trust.
[37] Trustees have a statutory indemnity in respect of costs “reasonably incurred in or about the execution of the trusts or powers”.36 The right to an indemnity extends to former trustees.37 In this case, the Trust Deed includes a trustee indemnity clause.38 Such clauses have been held to exempt trustees from liability for loss or damage to trust property except in the case of dishonesty.39 However, I accept Mr Johnson’s submission that a trustee who acts in breach of a trustee’s duties cannot be considered to be a trustee acting properly and therefore is unlikely to be entitled to the indemnity under the Trust Deed. Some argue such a clause might obviate the need for a Beddoe application. That assumption would be unwise, for the very reason Mr Johnson suggested. The point of a Beddoe application is to decide whether that indemnity should apply from the first stages of the proceeding or whether it should wait until the outcome of the substantive claim is known.
33 Charlesworth Nominees Pty Ltd v Charlesworth [2017] VSC 445.
34 At [24].
35 At [25].
36 Trustee Act 1956, s 38(2).
37 Butterfield v Public Trust [2017] NZCA 367 at [21].
38 Clause 12.
39 Armitage v Nurse [1997] 2 All ER 705 (CA) at 711; and Gillespie v Guest [2013] NZHC 669 at 48, citing Spencer v Spencer [2012] 2 NZLR 229 at 189.
[38] One further aspect which requires comment is the principle relied on by Mr Johnson that the trust has no interest in the identity of the trustees. This is because the identity of the trustee is not a matter affecting the due administration of a trust and equity is concerned only that trustees ensure the proper administration of the trust.40 In saying that, the Court will usually have regard to a settlor’s wishes as to the identity of trustees, particularly in the context of a family trust.
Further background
[39] The trustees filed extensive affidavit evidence, they say in furtherance of their obligation of candour to the Court. There were some 13 affidavits from the trustees and various experts/advisers to the Ashley Trust. Three affidavits were filed on behalf of the respondents. While a Beddoe application should not be a mini-trial, the general flavour of the evidence filed is reflected in my consideration of the Application.
[40] The Ashley Trust Land was originally a block comprising 113 hectares. Jim and Edna McLaughlin purchased the land in two stages in the 1960s, acquiring first what is known as the Homestead Block and then what is known as Ching’s Block. Although purchased as farmland, it was not an economic farming unit. It is not in real dispute that Jim McLaughlin was interested in the Ashley Trust Land for its development potential. He and Edna were involved in the subdivision consent process since the 1990s and Jim in particular carried on this work until he died in 2007.
[41] John McLaughlin and his wife purchased five hectares of land from Jim and Edna McLaughlin in 1979. John assisted Jim in the preparation and pursuit of various subdivision and rezoning applications, all of which incorporated both the Ashley Trust Land and John’s land. In the early 2000s, Jim McLaughlin tested the market in relation to Ching’s Block but there was limited market interest at that time.
[42] Edna McLaughlin deposes that, when the Ashley Trust was settled on 26 February 2004 by Jim and her, Jim’s health was deteriorating and “[w]e wanted to keep the land safe for the family and to ensure that Jim’s subdivision wishes would be carried through”.
40 Charlesworth Nominees Pty Ltd, above n 33, at [25] and [33].
[43] Both Edna McLaughlin and Mr Nelson depose that it was the settlors’ clear intention that the Ashley Trust be established as a vehicle to subdivide the Ashley Trust Land.
[44]The Trust Deed contains the following:
7.3Limited liability for loss – Notwithstanding any provision of law to the contrary the Trustees will not be liable for any loss resulting from any investment made by the Trustees in good faith.
…
9.2 It is declared as the further wish of the Settlor that the Trustees shall realise the value of the farm property by way of subdivision into individual or lifestyle allotments to better benefit the discretionary beneficiaries.
…
12 Trustees’ Liability: The Trustees shall not be liable for (and shall be indemnified out of the Trust Fund for) any loss or liability for which they may incur by reason of exercise, manner or exercise or non- exercise of any of the powers, authorities or discretions conferred on them by this deed of by law.
[45] After Jim McLaughlin’s death in 2007, John McLaughlin assumed responsibility for completing the subdivision. Edna says she and Jim always intended that John would succeed Jim in managing and carrying out the subdivision. They considered him reliable, with the necessary experience. Furthermore, he lived in Marsden Valley and his land formed part of the subdivision applications. He was therefore, for them, the natural choice as trustee.
[46] Edna McLaughlin is now 96 years old. She still lives in the family house next to the Homestead Block. Mark McLaughlin is a doctor. Andrew McLaughlin is a veterinarian. Brett McLaughlin lives on his land, adjacent to Ching's Block, where he runs a small deer farm.
Ching’s Block
[47] Resource consent for the subdivision of Ching’s Block was granted in 2007. It was a greenfield site with no Council services available.
[48] In August 2008, Duke & Cooke valued Ching’s Block at $6,750,000 on a hypothetical subdivision basis. The valuation was carried out on instructions from a bank and for the purposes of funding some of the subdivision work. However, Mr Nelson does not believe there was a market to sell what he describes as a difficult block for that sum. In his opinion, a developer would have seen too many difficulties associated with the development and considered the risk too great. This is supported by affidavit evidence from a property developer who inspected Ching’s Block when Jim McLaughlin attempted to sell it.
[49] There were significant delays with the Stage 1 subdivision of Ching’s Block as a number of resource consent conditions required amendment and appeal. Construction of the subdivision infrastructure commenced in 2010 and proceeded over three stages. Sales were: six lots in 2012; 15 in 2013; 21 in 2014; 12 in 2015; 15 in 2016; 11 in 2017; and three in 2018.
[50] Two stages of the Ching’s Block subdivision are left: Lot 143 and Stage 4B. Lot 143 will provide the infrastructure for the sale of nine lots to be developed as townhouses in respect of which the trustees anticipate a profit of $900,000. Stage 4B involves difficult topography and its exact design has yet to be finalised.
[51] Andrew Smith of Crowe Horwath, accountant for the Ashley Trust, calculates that Ching’s Block will return an “overall gross surplus of $7,738,446 excluding the cost of the land”. Tony Sewell, former CEO of Ngai Tahu Properties Ltd, gave affidavit evidence of an overall gross surplus rate of return from Ching’s Block of
24.55 per cent.
[52] A distribution of $2.2 million was made in 2015, divided equally between the four sons. John McLaughlin deposes that an intended further distribution at the end of 2017 was delayed, given the Substantive Proceedings, but the trustees consider it a priority for the future.
Homestead Block
[53] The Homestead Block subdivision comprises 22.6 hectares. Resource consent has been granted for subdivision into 220 lots. After receipt of legal advice, the
trustees successfully challenged some of the conditions. One minor issue remains unresolved. The trustees commissioned an independent review from Mr Sewell, who forecasted net profits of approximately $6 million.
[54] Further Ashley Trust Land adjoins the Homestead Block. This includes the property where Edna McLaughlin resides and a further area of approximately 62 hectares. The value of this land will be unlocked by the provision of services, including access, through the Homestead Block subdivision.
[55] The trustees’ current intention is to carry out the subdivision of the Homestead Block to the extent of installing the infrastructure to unlock the balance of the land and to subdivide the Homestead Block, although not necessarily all of it.
[56] The respondents oppose proceeding with the Homestead Block subdivision. They dispute Mr Sewell’s forecast that it will take eight years, their expert considering it will take closer to 12 to 15 years. John McLaughlin deposes that the trustees might undertake the development to the point where the value of the balance of the Ashley Trust Land (that adjoining the Homestead Block) can be unlocked, which he estimates would be closer to five years than eight to ten years.
Reports
[57] The parties have obtained various reports concerning the Ashley Trust and the Ashley Trust Land over the years, and some of these are referred to in this decision. The trustees rely on them to show they have acted responsibly and appropriately, saying that they are not obliged to follow the opinions in any report commissioned by the respondents.
[58] Given action taken by the respondents in 2012, the trustees obtained an independent review of the trustees’ actions. They engaged Mick Hollyer, a lawyer in Wanaka with experience in subdivision and development issues, who released his report on 20 December 2012. Mr Hollyer’s report was on the whole supportive of the trustees’ conduct and management. He made some suggestions for improvement, most of which have been adopted.
[59] The respondents instructed Peter Mahoney of Strategy for Property Ltd to undertake a review of the subdivision. His final report dated 12 June 2013 did not find significant fault but raised issues regarding documentation and transparency of accounts.
[60] The trustees then obtained the report from Mr Sewell in December 2016. He generally endorsed the trustees’ management of the subdivision. His analysis indicated significant economic benefit in continuing with the development of the Homestead Block both in terms of nett profit and impact on the remaining balance of the land.
[61] The trustees took advice from Darren Johnson of Deloitte, who said, from a strictly accounting perspective, the Ashley Trust accounts were generally adequate and appropriate in accordance with IRD minimum standards.
Merits of the Substantive Proceedings
[62] The trustees say the pleaded causes of action in the Substantive Proceedings are unmeritorious, unlikely to succeed and should be defended.
First cause of action: removal of trustees
[63] The respondents seek the removal of trustees and their replacement with two (unspecified) professional trustees.
[64] The Court has an inherent jurisdiction to remove trustees but will not remove them without reasonable cause or simply because a beneficiary wants a particular trustee removed.41 The overarching consideration is the welfare of the beneficiaries.
[65] The respondents claim there has been a lack of professional management of the Ashley Trust, continued breach of trustees’ fiduciary duties as they relate to questions of conflict, trustee hostility towards the beneficiaries and mismanagement of the Ching’s Block subdivision.
41 Kain v Hutton [2007] NZCA 199, [2007] 3 NZLR 349 at [267].
Conflict of interest
[66] The particular issue focused on by the respondents is an alleged conflict of interest. This primarily concerns John McLaughlin as trustee. The basis for it is the benefit to land owned by him and his wife (through his family trust) which adjoins the Ashley Trust Land and which has formed part of the subdivision. The trustees maintain there are two answers to these allegations. First, this was always the intention of the settlors, who appointed John as a trustee. Secondly, the trustees have provided evidence to demonstrate that the benefits arising to John’s property do not arise through the use of Ashley Trust Land.42 There is evidence that the inclusion of John’s land has benefited the Ashley Trust Land by allowing a higher density subdivision on the Ashley Trust Land.
[67]The respondents point out that:
(a)John McLaughlin is the sole director of Marsden Park Ltd (Marsden), the company owned by the Ashley Trust which is responsible for the subdivisions.
(b)John is employed by Marsden as project manager and is paid $180,000 per annum. This employment is through John’s own company, of which he is the sole director and shareholder.
(c)John is the sole director of Earthworks NZ Ltd (owned by Marsden), which is the company responsible for earthworks for the subdivision;
(d)John’s landlocked land shares the same consent and is part of the Ching’s Block subdivision. The provision of services to Ching’s Block assisted in unlocking this land.
(e)John is party to agreements personally with the Ashley Trust which require the land/costs be divided between John and the Ashley Trust
42 Bordman v Phipps [1967] 2 AC 46 (HL).
subject to values “as agreed” between the parties, with no agreed formula or independent assessment of that formula.
(f)John is responsible for invoicing and expense coding all of the above entities.
[68] The trustees maintain that the allegations do not disclose any evidence of loss or harm to the Ashley Trust. Furthermore, protection is added by the role of Glasgow Harley as an independent trustee. They dispute that the asserted conflict prevents the proper administration of the Ashley Trust,43 whereas the respondents’ position is that the conflicts contributed to the trustees’ decisions in breach of their duties.
Hostility
[69] The respondents say the trustees’ hostility towards Mark, Andrew and Brett McLaughlin is clear. As a result, they say the trustees ignored their views and those of their experts. The trustees deny any hostility towards the respondents.
[70] In Mr Peers’ submission, for the trustees, the trustees were alive to the respondents’ concerns and open to appointing replacement trustees supported by them. However, he pointed to a pattern of trustees being appointed with the respondents’ support but resigning as a result of pressure from the respondents when the new trustees supported the subdivision work. There is evidence to support this proposition, for example from former trustee Mark Russell. Mr Kearney also apparently resigned as trustee in light of the respondents’ continual questioning of his judgment and integrity.
Mismanagement of the Ching’s Block subdivision
[71] The respondents characterise the work undertaken to date as consistently over-promising and under-delivering. Mark McLaughlin’s affidavit refers to the trustees’ projected profits for the Ching's Block subdivision, noting they were lowered to around $7-8 million from the original projected profit of over $12 million. He questions why no critical analysis of this was undertaken, which he says points to
43 Kain v Hutton, above n 41, at [267].
trustee mismanagement. He refers to John McLaughlin’s explanations of increased engineering and earthworks, which he says is of considerable concern, given John runs the company carrying out those works.
[72] The respondents refer to the report they commissioned from the accountant, Shane Hussey, dated 8 June 2017. They say it confirms their fears that the development was nowhere near as profitable as the trustees had led them to believe, largely as a result of increased costs compared to projected costs, and the financial reporting effectively masked that fact. For example, Mr Hussey’s report shows the actual cost of sales to date has been $11.058 million, as against the anticipated cost as shown in the trustees’ funding application of $6.730 million and the valuer’s estimate of $9.028 million. This shows, the respondents say, that the Ashley Trust has effectively lost millions of dollars.
[73] Mr Hussey’s analysis of the Ching’s Block subdivision concluded the likely gross surplus before land cost would be $5.9 million, as against the trustees’ 2009 funding application forecast of $12 million. On a land cost analysis using the 2008 Duke & Cooke land valuation of $6.75 million, Mr Hussey says the subdivision of Ching’s Block led to a loss of $852,000. In Mr Hussey’s opinion, had Ching's Block been sold for $6.75 million and invested in low risk NZ Government stock, it would have resulted in a return to the Ashley Trust of around $8.8 million.
[74] Mr Johnson referred to the trustees’ estimate in March 2014 of a distribution to beneficiaries of $7.8 million by 31 December 2016 as against an actual distribution of $2.2 million made in 2015. In John McLaughlin’s management report to the trustees dated July 2015, he forecast a distribution of $7.4 million and, at the trustees’ meeting on 24 March 2016, $5 million was said to be available for distribution. Mr Johnson submitted this evidence reveals a consistent history of the trustees’ forecasts not being met.
[75] The respondents say that the same criticism can be made in connection with the proposed subdivision of the Homestead Block: the trustees have never critically assessed it against other investment options, primarily, they assert, given the conflicts of interest of the trustees. They criticise the Sewell report because the core issue,
whether it was financially viable to continue with the Homestead Block subdivision or sell the land, was addressed without analysing the overall profitability of the Ching’s Block subdivision. That, in Mr Johnson’s submission, is imprudent and establishes a breach of trust.
[76] The trustees do not accept the Hussey report’s conclusions that the trustees have not acted in the Ashley Trust’s best interests and should have sold the land for
$6.75 million. Mr Nelson says there was no buyer at that value and, in the trustees’ opinion, much more could be achieved by subdividing rather than a sale. They say the core reason for the Sewell report was to look at the proposed Homestead Block subdivision rather than review the Ching’s Block subdivision.
[77] Richard Chung is a property valuer and consultant, and a partner in PricewaterhouseCoopers. In his opinion, had Ching’s Block been offered for sale in August 2008, buyers would have priced the land materially less than the valuation of
$6.75 million.
[78] John McLaughlin refers to the evidence of Andrew Smith of Crowe Horwath that Ching’s Block will achieve a gross profit of approximately $7.7 million, excluding land cost, which he says is consistent with the projections made since at least 2014. For example, in July 2015 the trustees projected a pre-tax profit of $81,300 per lot for the Ching’s Block subdivision. The evidence of Mr Smith is that in fact the pre-tax profit was $82,324 per lot. John McLaughlin acknowledges, however, that projections have altered and earlier expectations of distributions have not occurred. He refers to the difficulties in forecasting development performance and factors outside the trustees’ control. He expects a surplus from Lot 143 and Stage 4B to enable a distribution in the relatively near future.
[79] The trustees say that the merits of this cause of action cannot be considered in isolation from the second cause of action, which essentially seeks a direction that the trustees discontinue with subdivision of the Ashley Trust Land. The trustees say this would have the effect of bringing forward the date of distribution, resulting in the Ashley Trust being wound up. The difficulty in seeking this direction is that any new trustees’ discretion would be severely curtailed. This leads the trustees to submit that
what the respondents really seek is the appointment of a de facto receiver of the Ashley Trust. In Mr Peers’ submission, the evidence does not meet the necessary threshold to warrant removal of the trustees nor the direction.
Second cause of action: application for directions
[80] The second cause of action relies on the High Court’s inherent jurisdiction to supervise trusts as opposed to s 68 of the Act which allows a trust beneficiary to apply to the Court to review or give directions in respect of any acts or anticipated acts or decisions of a trustee.
[81] The respondents say an application for directions will be particularly appropriate where the decision is a particularly momentous one.44 In Mr Johnson’s submission, it is entirely appropriate for the Court to consider whether it is appropriate for the Ashley Trust to continue to engage in what he describes as a lengthy and highly risky subdivision in circumstances where beneficiaries are ageing, do not want the subdivision to proceed and where there are clear historical issues with the Ashley Trust’s performance and administration.
[82] In Mr Johnson’s submission, the trustees need to satisfy the Court that if the Homestead Block subdivision proceeds, the Ashley Trust will be significantly benefited to the extent that the likely costs of defending the Substantive Proceedings (approximately $1 million) are justified. He submitted that the Court cannot be so satisfied, given the evidence from John McLaughlin and Mr Nelson is in their self-interest; the Ching’s Block subdivision underperformed; the Homestead Block subdivision is behind schedule and over-budget; the trustees’ forecasts are hopelessly optimistic; and the respondents’ expert evidence is that the predicted profit is unrealistic.
[83] Mr Johnson suggested the trustees are unwilling to grapple with questions around the success of the Ching’s Block subdivision and options for the Homestead Block. He says they have failed to consider the reasonable needs of the beneficiaries, given their age and circumstances.
44 Public Trustee v Cooper [2001] WTLR 901 (Ch).
[84] The trustees maintain that the increased value of the Homestead Block is due to the Ching’s Block subdivision, the rezoning of Marsden Valley to residential and Nelson’s population growth. The Ching’s Block subdivision provided for upgraded services to the whole valley, a significant cost of which was loaded onto the Ching’s Block subdivision expenses. This has had a beneficial effect on the value of the Homestead Block as all the major infrastructure services are now in place in Marsden Valley Road.
[85] In his December 2016 report, Mr Sewell provided figures to demonstrate the advantage of pursuing the resource consent for subdivision of the Homestead Block. He instructed a valuer to provide two valuations as follows:
(a)the Homestead Block as is, without subdivision consent: $4 million;
(b)the Homestead Block as is, with subdivision consent: $7.45 million.
He therefore concluded that the trustees’ decision to pursue a subdivision consent was clearly advantageous to the beneficiaries of the Ashley Trust, given the $3.5 million increase in value as a result of having incurred costs which would not have exceeded
$300,000.
[86]His projection was that subdivision of the Homestead Block into 187 lots over
8.5 years resulted in a gross margin of almost $5.7 million, that is, 21.3 per cent. The analysis includes the cost of borrowing. Mr Sewell said:
The beneficiaries would gain approximately $6 million in today’s dollars over an 8.5 year timeframe from undertaking the next stage of development. This is in addition to the $3.5 million they have already gained from the subdivision consent.
Another significant upside available to the beneficiaries is the increase in value of the adjoining block owned by the Trust should access be provided. Once the main access road is completed as part of the next stage of development, significant value is added to the adjoining block. Based on the value lift from bare land to consented land and considering that the land may be sold unconsented, the provision of access should add something in the vicinity of $1 million to the value of this adjoining block and would make a sale a much more attractive proposition for a buyer.
[87] Mr Russell, commercial barrister, was appointed a trustee of the Ashley Trust on 3 August 2015 and has recently resigned. In his opinion, if the trustees declined to follow the settlors’ wishes to undertake subdivision and sought to effect an immediate sale, they would be exposing themselves to claims from other discretionary beneficiaries who could claim losses based on the profits the subdivision would have realised.
[88] The respondents’ main issue with the subdivision of the Homestead Block is the anticipated timeframe of eight years or more. They seek sale of the subdivision as a whole rather than in subdivided lots on the basis it will take at least eight years to realise the projected profit of $6 million.
[89] The trustees say that unlocking the potential of the Homestead Block requires the development of the stages closer to Marsden Road so that the value of the blocks at the rear can be increased. The trustees will then consider selling the rear blocks for others to develop. Mr Nelson says:
I believe the trustees have no desire to keep the Trust running in perpetuity (nor does John) and would like the family to be reconciled with each other. Once the majority of the value of the Property is unlocked, the Trust will likely have served its purpose. Selling undeveloped blocks could be part of that process once the Homestead Block is completed.
[90] In John McLaughlin’s assessment, it could take three to four years to complete the initial stages of the Homestead Block development to the point it connects with the main road access and development potential will be unlocked. Apparently prompted by that evidence, Mr Johnson now indicates that the positions of the parties might not be as irreconcilable as might first appear.
[91] In Mr Peers’ submission, at the crux of the Substantive Proceedings is a dispute between the expert reports as to how much profit the development of the Homestead Block might make and in what timeframe. There is no evidence there has been loss to the Ashley Trust which would justify the Court’s interference and, in his submission, it cannot be said on the evidence that proceeding with the subdivision would be a decision no prudent trustee could support. Such a decision would therefore be within the trustees’ discretion and powers.
[92] Furthermore, Mr Peers submits the consequence of granting the second cause of action would be effectively to usurp the object of the Trust Deed. He says the continued subdivision of the Ashley Trust Land derives from the Trust Deed. Drawing an analogy with s 68 of the Act, he says the Court’s role is not that “of a general court of appeal from trustees’ decisions and the Court will not interfere with the express powers and discretions conferred on a trustee by a settlor unless the trustees are acting in bad faith or unreasonably in a Wednesbury sense”.45
[93] As discussed, the merits (or lack of) of a substantive claim may justify a Beddoe order but the issue is whether the defence is in the best interests of the Trust. Although there has been a substantial volume of evidence, primarily on behalf of the trustees, the Court is not at this stage determining the Substantive Proceedings.
[94]In my assessment, the respondents’ case in respect of the second cause of action
– at its highest – is that there are some questions which need to be addressed concerning the prospects of success of subdividing the Homestead Block. The likely timescale for that subdivision is in issue. These factors need to be considered in the context of whether proceeding with the subdivision of the Homestead Block (or all of it) is in the best interests of the beneficiaries, taking into account the age and circumstances of the four final beneficiaries.
[95] In this context, the Substantive Proceedings plead that the Ashley Trust was established to provide income for Jim and Edna McLaughlin during their retirement and, on their deaths, to provide capital to their sons. However, the Ashley Trust Deed provides for a date of distribution being either 80 years from the date of the Trust Deed or such date as the trustees may, in their discretion, decide. On the date of distribution, the Trust assets are to be distributed to the final beneficiaries, being the four sons or their issue.46
[96] Mark and Andrew do not seek to have the Ashley Trust wound up, acknowledging that it must continue to provide for Edna McLaughlin. However, the
45 Jaspers v Greenwood [2012] NZHC 2422.
46 There is a slightly different provision as regards Brett.
relief they seek is that the proceeds of sale are distributed to the sons except any amount required for Edna’s support.
[97] I agree with Mr Peers that there is a real question as to whether the Court would consider making the directions the respondents seek as part of its inherent jurisdiction to oversee the proper administration of trusts. The question of the future subdivision is a matter of the trustees’ commercial judgement in accordance with their obligations, in the context of the Ashley Trust Land being the sole asset of the Ashley Trust. As framed, the claim has the flavour of asking the Court to advantage the final beneficiaries over the discretionary beneficiaries and to make orders in the absence of any information as to the needs of the discretionary beneficiaries. In that light, I question the prospect of success of the second cause of action.
Third, fourth and fifth causes of action
[98] The respondents seek damages against John McLaughlin, Glasgow Harley and Mr Nelson for alleged breaches of duty in undertaking the subdivisions. The fourth and fifth causes of action seek an account of profits against John McLaughlin and Mr Nelson respectively.
[99] The account sought against Mr Nelson is in respect of legal fees rendered by Glasgow Harley for legal services performed for the subdivision. The trustees point out that Mr Nelson was entitled to be paid for professional services pursuant to the Trust Deed. The respondents claim he acted in a conflict of interest.
[100] The respondents say that there are clear conflicts between the best interests of the Ashley Trust and the positions of John McLaughlin and Mr Nelson. Mr Johnson stressed the fact that the purpose of the no-conflict rule is to ensure all decisions are made in the best interests of the Trust and to minimise breaches of other duties. In his submission, the conflicts contributed to the trustees breaching their other duties through the conduct of the Ching’s Block subdivision and the decision to proceed to subdivide the Homestead Block.
[101] The claim against John McLaughlin relates principally to the benefits the respondents claim his adjoining land has received from subdivision of the Ashley Trust
Land together with the remuneration he receives for performing a project management service in connection with the subdivision ($180,000 per annum). Again, the Trust Deed expressly permits a trustee receiving payment for professional services or, to the extent as alleged by the respondents that John is not a professional, for business services. John’s affidavit evidence details his professional and commercial background. Both Edna McLaughlin and Mr Nelson depose that John’s business experience was a significant reason for his being appointed a trustee. Evidence of other deponents attest to his skillset and work as a project manager for the benefit of the Ashley Trust. This is challenged by the respondents.
[102] John McLaughlin refers to the fact he provided a personal guarantee for the borrowings of the trustees up to $3.7 million for subdivision of Ching’s Block; that for seven years or so he received no payments for his work as the Ashley Trust did not have the funds; and that he continued to carry out duties as project manager on the basis he would be paid once the Ashley Trust was in a financial position to do so. He considers this was a substantial benefit to the Ashley Trust.
[103] Mr Nelson deposes that John agreed to delay his own subdivision on his five hectare block to avoid conflict with the Ashley Trust’s development. Mr Nelson describes the relationship between the Ashley Trust and John’s development as of mutual benefit.
[104] The trustees says that the commercial structure of using Marsden as the developer and Earthworks NZ Ltd as the machinery owner was recommended by Deloitte as the most tax efficient method of structuring the undertaking. It avoided tax and liability problems which would arise had the Ashley Trust undertaken the works itself.
[105] The trustees’ evidence is to the effect that they identified the potential conflict of interest and took steps to mitigate it. The trustees have actively sought and appointed appropriately qualified independent trustees. John’s remuneration as project manager has received independent oversight. There is evidence of appropriate decisionmaking procedures to ensure the trustees’ decisions are made in the best interests of beneficiaries.
[106] In Mr Peers’ submission, the Trust Deed specifically contemplates remunerating trustees for their work associated with trust property and the real issue is how trustees manage this. Mr Peers stressed that family members are frequently trustees of a family trust and often in positions of conflict. He emphasised that Jim and Edna McLaughlin specifically chose John as a trustee.
[107] There is no doubt there is an issue concerning John McLaughlin’s position as trustee in the current circumstances. He works full time for the Ashley Trust and companies owned solely by him carry out a substantial amount of the subdivision work. When it comes to a decision as to subdivision of the Homestead Block, he clearly has an interest in it. In saying that, he could quite properly contend that a sale of the Homestead Block and early distribution to beneficiaries would arguably be a better financial outcome for him.
[108] Mr Peers properly acknowledged that if the Substantive Proceedings concerned only an application for John’s removal as trustee and an account of profits from him, then there would be no merit in a Beddoe Application.
[109] Mr Johnson submitted it cannot be in the best interests of the Trust to defend the actions of a former trustee unless there is no real prospect of success and a strikeout of the claim would be warranted. Mr Nelson resigned as a trustee in 2007 and was replaced by the corporate trustee. Development work did not commence until 2010. There is therefore a real question as to the claim against Mr Nelson in his personal capacity and whether there is a realistic prospect of success of the claim against him. Mr Johnson accepted the need to review the claim against Mr Nelson.
Is it in the best interests of the Ashley Trust to make a Beddoe order authorising the trustees to defend the Substantive Proceedings?
[110] In Mr Johnson’s submission, only one of the five causes of action in the Substantive Proceedings relates to the future administration of the Ashley Trust and the balance involves issues around the trustees’ alleged breach of duty. Mr Johnson said, if the purpose of the Beddoe Application had been simply to put information before the Court, then the respondents would not oppose the application. In his submission, however, the approach of the trustees has been to spend the Ashley Trust
money to advance John’s views on development of the Homestead Block, which is something he is capable of doing himself.
[111] In Mr Peers’ submission, the focus of the Court’s inquiry should be whether the defence of the Substantive Proceedings affects the future administration of the Trust. If so, the Beddoe Application should be granted. If it is simply to avoid personal claims, then he accepts that the weight of authority is against the trustees.
[112] There was some criticism of the trustees in not following the advice in Lewin on Trusts as to how a Beddoe application should be made. In particular, it was suggested that the trustees should have provided the Court with an independent opinion from a senior lawyer as to the prospects of success of defending the Substantive Proceedings. Lewin is of course a United Kingdom text. Mr Peers referred to the volume of affidavit evidence filed in support of the trustees’ application. In many ways that proves the point. The trustees have filed what, on the face of it, would be the evidence required to defend the Substantive Proceedings in any event and prior to obtaining the Beddoe order.
[113] The evidence presented by the trustees sought to justify their position and effectively refute the allegations in the Substantive Proceedings. I am satisfied they have complied with their obligation to provide full and frank disclosure, including the strengths and weaknesses of their position. This is required in order for the Court to make an informed decision as to whether it is in the best interests of the Trust (as opposed to the trustees) for the trustees to pursue or defend the litigation.47
[114] The trustees have presented evidence which could support a finding that they have honestly and diligently carried out the objects of the Ashley Trust (as expressed by the settlors’ wishes) by subdividing the Ashley Trust Land with the result of significantly enhancing the value of the trust assets. The trustees’ honest and, on their evidence reasonably held, opinion is that there is substantial benefit in undertaking the next stage of the subdivision by the development of the Homestead Block. In particular, the affidavit evidence of Mr Sewell is a comprehensive response to the criticisms levelled against the trustees and is to the effect that an immediate sale of the
47 See Alsop Wilkinson, above n 2; and Kain v Hutton, above n 25.
Homestead Block would not be for the benefit of the beneficiaries. This type of evidence will, no doubt, also be relied on by the trustees in defending the claims of breach of duty.
[115] The respondents’ evidence supports their personal preference for the Ashley Trust Land to be sold immediately, with an immediate distribution to the four sons.
[116] It is not for the Court at the stage of a Beddoe application to resolve any factual disputes or differences of expert opinion in the affidavit evidence. For example, the respondents assert the subdivision of Ching’s Block caused a “loss” to the Trust based on an assertion that the trustees could have sold the land in 2008 for $6.75 million, based on a valuation report on a hypothetical subdivision basis. As against that, there is expert evidence on behalf of the trustees that the subdivision of Ching’s Block performed strongly against objective performance measures of subdivision development and has contributed to the value of the balance of the Ashley Trust Land. There is also a difference between the experts relating to different accounting treatment.
[117] The trustees say if the Beddoe Application is refused, they will be forced to “throw in the towel”. However, it is evident that a considerable amount of work has already been undertaken in relation to the Beddoe Application. Mr Peers conceded there may not be much more evidence required from the trustees for the purposes of the Substantive Proceedings. Further, as John McLaughlin has been the person responsible for the subdivision work to date, he can reasonably be expected to participate in the Substantive Proceedings, particularly given the claims against him.
[118] A key element of a Beddoe order is that, if the Court authorises a trustee to defend a claim, the trustee will be indemnified out of the trust funds for the costs of so doing. As discussed above, however, Beddoe applications ought only to be made where they are in the best interests of the trust. In claims involving allegations of breach of trust, it is unlikely to be proper for the costs of defending such allegations to be met out of the trust funds until after the allegations have been considered and determined. In such a case, it is more appropriate for trustees to be indemnified for costs when the allegations are found to be unsubstantiated.
[119] I accept Mr Johnson’s submissions that the Beddoe Application must fail in relation to the first, third, fourth and fifth causes of action. The proceedings are hostile proceedings involving a significant (and costly) battle over control of the Ashley Trust. Each party claims to have the best interests of the Ashley Trust at heart but serious allegations are levelled at the trustees.
[120] If the trustees’ actions to date are upheld, then they will likely be entitled to an indemnity from the Ashley Trust to meet any shortfall between actual costs incurred and those it might recover from the respondents. However, it would be inappropriate for the assets of the Ashley Trust to be used in defending allegations which are found to be proven. Put simply, if the trustees have indeed breached their duties, it would be wrong for trust assets to be used to defend them.
[121] It is the second cause of action which poses undoubted difficulty. Although the respondents seek the replacement of the existing trustees, they then seek to fetter their decisionmaking.
[122] I have already discussed my reservations as to the prospect of success of the second cause of action. The respondents effectively seek to challenge the continued pursuit of the objective of the Ashley Trust as recorded in the Trust Deed and as the surviving settlor confirms still applies. It seeks a direction that the proceeds of sale of the Ashley Trust’s sole asset be distributed to the final beneficiaries well in advance of the potential life of the Ashley Trust and without consideration of the interests of discretionary beneficiaries. It asks the Court essentially to usurp the role of the trustees. All of these matters involve a challenge to fundamental aspects of the Ashley Trust itself. It is right that the trustees defend this cause of action. It is in the best interests of the Trust. The trustees are in the best position to defend the claim.
[123] In the circumstances, I am satisfied it is appropriate to grant the trustees’ Beddoe application to use the assets of the Ashley Trust to pay the reasonable legal and associated costs in defending the second cause of action. That, however, is subject to considerations of proportionality. Given the volume of information before the Court already, it is difficult to see the need for significant further expenditure.
[124] The Substantive Proceedings criticise the financial performance of the Ching’s Block subdivision. On that basis, it is then claimed that the trustees, in pursuing the proposed Homestead Block subdivision, will breach their duties to act in good faith and in the best interests of the beneficiaries.
[125] It is plain, therefore, that in order to address the claim as to the future of the Ashley Trust and the directions which are sought by the respondents, the past performance of the Ashley Trust will need to be analysed. To that extent, I cannot accept the respondents’ position that the bulk of the affidavit evidence filed to date is for the purposes of addressing the claims against the trustees for breach of duty. For a court to make any decision on the second cause of action it will require evidence about subdivision of Ching’s Block.
[126] Having already spent approximately $350,000, the trustees propose to spend an additional $500,000 to $600,000 plus GST of Ashley Trust funds to defend the Substantive Proceedings. I am satisfied that is disproportionate and not in the interests of the Ashley Trust.
[127] Ashley Trust funds are to be expended only in respect of the second cause of action (including addressing the success or otherwise of the Ching’s Block subdivision) and to the limited extent necessary to progress the claim. This is to be decided by independent senior counsel, who is to be provided with a copy of this decision. To avoid any further conflict, the parties have 14 days from the date of this decision to agree the identity of senior counsel. Failing agreement, it will be decided by me on the papers after receipt of a memorandum from each side, limited to two pages.
[128] Finally, I reiterate my comments to the parties at the end of the hearing. This is a most unhappy and unfortunate situation. I encourage the parties to move from their entrenched positions and seek to resolve this dispute in an alternative forum, mediation being the obvious one. The parties must approach any such process with an open mind and without preconditions.
Should the trustees be indemnified from the Ashley Trust against the costs they have incurred to date?
[129]The information before the Court is that the trustees have expended at least
$350,000 in this application and the Substantive Proceedings to date. The respondents say this sum is out of all proportion to the narrow issue to be decided and is effectively in preparation for defending the Substantive Proceedings. Mr Little, for the Respondents’ Children, pointed out that it would be particularly unsatisfactory if, having lost the Beddoe Application, the trustees were nevertheless able effectively to use the Ashley Trust fund to pay for their defence in the Substantive Proceedings through the back door of a costs order on the Beddoe Application.
[130] I have decided that the Ashley Trust assets can be used in the defence of the second cause of action in the Substantive Proceedings. I have also observed that much of this work has already been done by way of the evidence filed in support of the Beddoe Application. I have also noted that evidence about the subdivision of Ching’s Block is relevant to the second cause of action.
[131] The parties at the hearing indicated they would seek their costs in connection with this application and requested that costs should be reserved. In all the circumstances therefore, this aspect of the Beddoe Application will be decided following short memoranda from all parties on the question of costs, which will then be decided on the papers. It is hoped the parties should be able to agree this aspect but, failing agreement, all parties are to file a memorandum by 31 January 2019.
Should the trustees indemnify Brian Nelson from the Trust assets in respect of any costs for which he is or may become personally liable?
[132] The same considerations as already discussed apply. If indeed Mr Nelson is found to have breached his trustee’s duties, then it would be improper for him to be indemnified from the Ashley Trust. If the allegations are not made out, then he will likely be entitled to the indemnity.
Orders
[133] The Beddoe Application is granted in respect of the reasonable and proportionate legal and associated costs of defending the second cause of action of the Substantive Proceedings only.
[134] If the parties are unable, by 31 January 2019, to agree on the identity of senior counsel who is to approve such costs, they must each file a memorandum of no more than two pages in length.
[135] The trustees, through Mr Peers, undertook to the Court that the Ashley Trust will not be used to fund any defence of the Substantive Proceedings except to the extent allowed by this decision. On that basis, it was agreed that such an undertaking would dispense with the Restraining Application.
Costs
[136]Costs are reserved and will be addressed in accordance with [131] above.
Thomas J
Solicitors:
Wynn Williams, Christchurch for Plaintiffs/Respondents Buddle Findlay, Christchurch for Defendants/Applicants
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