McLaughlin v McLaughlin
[2021] NZHC 3015
•9 November 2021
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2017-442-52
[2021] NZHC 3015
BETWEEN MARK JAMES MCLAUGHLIN and ANDREW ASHLEY MCLAUGHLIN (as
beneficiaries of the Ashley Trust) Plaintiffs
AND
JOHN DAVID MANUEL MCLAUGHLIN
(as trustee of the Ashley Trust) First Defendant
AND
GLASGOW HARLEY TRUSTEE LIMITED
Second Defendant
AND
BRETT MCLAUGHLIN
Interested Party
Hearing: Memoranda Filed: 17 May 2021 – 2 June 2021; 24 – 25 June 2021
16 and 25 June 2021, 9, 16, 23 and 28 July 2021 and 3 August
2021Appearances:
J W A Johnson, J R Halligan and N G Lawrence for the Plaintiffs N S Gedye QC, O D Peers and G Dill-Russell for First Defendant J Bierre for Second Defendant
J H McGuigan for Interested Party Brett McLaughlin
Judgment:
9 November 2021
JUDGMENT OF GENDALL J
This judgment was delivered by me on 9 November 2021 at 1.30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: .
MCLAUGHLIN v MCLAUGHLIN [2021] NZHC 3015 [9 November 2021]
Table of Contents
Introduction [1]
First words [11]
Background [18]
(a)The Marsden Valley farm [18]
(b)The McLaughlin family [24]
Jim and Edna [25]
The sons [30]
The grandchildren [37]
Formation of the Trust [41]
The subdivision activities [50]
The pleadings [74]
Remedies sought in their pleadings by Mark and Andrew [86]
Causes of action [87]
Costs and repayment of legal fees [90]
Admissibility of evidence [93]
FIRST CAUSE OF ACTION — Removal Of Trustee [107]
(a)Removal of John as a trustee [107]
(b)Replacement trustee [118]
SECOND CAUSE OF ACTION – Breach of Duty [152]
(a)Pleadings [153]
(b)Trustees’ duties [154]
(c)Clause 9.2 of the Trust Deed and the settlor’s intentions [172]
(d)Did the Trustees breach their duty of prudent investment? [199]
(i)Failure to analyse and understand the needs of the
beneficiaries? [215]
(ii)Failure to consider and/or analyse or to take advice on
alternative investments? [221]
(iii)Failure to adopt a proper decision-making process? [226]
(iv)Failure to consider financial progress of the subdivision [230]
(e)The Ching’s Block subdivision [233]
(f)Failure of Trust management processes and budgeting? [270]
(g)Failure to appoint a suitable and qualified project manager [277]
(h)Failure to provide financial information? [288]
(i)Failure to consult with beneficiaries? [292]
(j) Causation of loss? [293] (k) Exemption clauses in Trust Deed and s 73 Trustee Act 1956 [305] THIRD CAUSE OF ACTION – Account of profits [320] (a) Pleadings [323] (b) A fiduciary’s duties [324] (c) Discussion [343] (i) John’s appointment and remuneration as project manager [365] (ii) John’s contribution as a neighbour to the initial resource consent cost [386]
(iii) Were John’s decisions as trustee to undertake the Ching’s Block and Homestead Block developments made in his self-interest rather than in the interests of the Trust? [394]
(iv) Has John derived benefits and/or profited from the Trust’s subdivision of the Ching’s Block as an adjoining landowner? [400]
(d) Third cause of action against GHTL [413] (e) Section 73 Trustee Act 1956 [421] Result [427] Costs [428] Final words [432]
Introduction
[1] These proceedings involve the McLaughlin family and their family trust settled by the parents (both now deceased), James John Ashley McLaughlin (Jim) and Edna Burton McLaughlin (Edna), on 26 February 2004. The principal asset of the Ashley Trust (the Trust) was approximately 100 hectares of land (the Trust land) previously farmed by Jim and Edna in the Marsden Valley, Nelson. Jim and Edna had purchased this land in the 1960s, they transferred it to the Trust in April 2004 and subsequently gifted the $9.9 million purchase price.
[2] Jim and Edna have four sons, John David Manuel McLaughlin (John), the first defendant, Mark James McLaughlin (Mark), the first-named plaintiff, Andrew Ashley McLaughlin (Andrew), the second named plaintiff, and Brett Gardner McLaughlin (Brett), an interested party in this litigation.
[3] The discretionary beneficiaries of the Trust were Jim and Edna, their children, John, Mark, Andrew and Brett, together with any spouse, widow or widower of those children, any grandchild or later issue, and any further trust or body appointed by deed. The final beneficiaries were Jim and Edna’s children. The settlors of the Trust in 2004, Jim and Edna, appointed as the initial trustees themselves, their son John and their solicitor, Brian Nelson (Mr Nelson), who worked in the Nelson legal firm, Glasgow Harley. Mr Nelson was later superseded as a trustee of the Trust by the second defendant, Glasgow Harley Trustee Limited (GHTL). Later changes of some of the trustees has occurred.
[4] Sadly, over the last 12 or so years, major disputes over the Trust and a widening rift has unfolded between the McLaughlin brothers. The present proceeding issued in 2017 was a significant product of this.
[5] At its core, this case involves claims of breach of fiduciary and equitable duties by some of the trustees at the time, specifically John and GHTL.
[6] Mark and Andrew say that John and GHTL as trustees have mismanaged the Trust’s property and exercised their powers in breach of their obligations largely by way of a persistent course of development of the Trust land in particular.
[7] This course of action, the plaintiffs contend, breached the John and GHTL’s obligations as trustees in several ways:
(a)it did not assess the needs and interests of the beneficiaries;
(b)it did not assess alternative investment strategies; and
(c)it created and then allowed a conflict whereby John, as a trustee, was also project manager for the development, his alleged inexperience and the fact his own land, neighbouring and previously part of the Trust block, benefitted from the development of the Trust land.
[8] Mark and Andrew contend the land development was seriously misguided and that a stubborn persistence to proceed with this land development course of action by the trustees has cost the Trust and the beneficiaries dearly. They complain that to the exclusion of any alternatives each of them to date has received inadequate distributions from the Trust, these amounting only to $550,000 each. In total those distributions from the Trust have been $2.2 million which the plaintiffs contend was well below what was promised.
[9] In these proceedings, Mark and Andrew seek the removal of John as a trustee as well as compensation and an account of profits. Compensation is also sought from GHTL for breach of equitable duty and also to the extent John might fail to account for profits he has obtained.
[10] Finally, by way of introduction, I note that this proceeding has already spawned significant and acrimonious litigation. An opposed Beddoe application was made to this Court and it was only partially successful.1 Further, an interim injunction application was initiated by Mark and Andrew to restrain the trustees from proceeding with a particular stage of development of the trust property.2 This failed. Attempts at mediation between the parties have also failed.
1 McLaughlin v McLaughlin [2018] NZHC 3198, [2019] NZAR 286.
2 McLaughlin v McLaughlin [2019] NZHC 2597, [2019] NZFLR 299.
First words
[11] It is appropriate in this litigation that the first words should fall to Edna. With her husband, Jim, Edna was a settlor and a discretionary beneficiary of the Trust. She was one of its initial trustees, a role she actively continued for some years, and she was the mother and in some respects the matriarch of the family, living for many years on part of the Trust property until a short time before her death. And finally, it was Edna and Jim who started matters off as they had owned the farm since the 1960s and effectively gifted it to the Trust to become largely the Trust’s sole asset. Sadly, Edna died on 28 May 2021, midway through the trial in this proceeding. In her affidavit sworn 7 November 2016 and filed in this proceeding, Edna, then aged 94, used these words:
[2] I am advanced in age and my health is not so good these days. I am aware that Mark and Andrew have threatened legal action against the trustees. I am swearing this affidavit now to make sure that Jim’s and my views and intention in relation to the trust are made known to any Court or tribunal that might need to hear or decide any Trust issues that Mark and Andrew, or anyone else, might pursue.
And, in conclusion in this affidavit in part she deposed:
It would sadden me greatly if this issue had to go to court.
[12] Regrettably for all concerned, Edna’s wish was not fulfilled. The longstanding and unfortunate dispute between the brothers did go to court, and is the subject of these proceedings filed by Mark and Andrew in 2017. That dispute too has no doubt been extremely costly to all concerned, both in monetary, personal and other terms. It has involved many interlocutory and pre-trial skirmishes, an almost three-week hearing in this Court, and protracted disagreements subsequently over appointment of a new trustee.
[13] So far as Edna’s 7 November 2016 affidavit is concerned, somewhat belatedly Mark and Andrew raised objections before me as to its general admissibility and also as to certain parts of the affidavit. Other evidence admissibility issues were also raised at trial. I will address further all these admissibility questions below. But, in the meantime, I note that much of the objection to Edna’s 7 November 2016 affidavit was based upon, first, the unavailability of Edna as a witness at trial, given her advanced
age and, secondly, what was said to be her failing health and impressionability when the affidavit was sworn in November 2016.
[14] This November 2016 affidavit from Edna was accepted as admissible evidence in earlier interlocutory hearings between these parties. The current objections have surfaced at a late stage.
[15] On that issue, I find the affidavit is admissible in its entirety and reject any objections to it advanced on behalf of Mark and Andrew. Before me, an independent and experienced Nelson solicitor, Donald James Turley (Mr Turley), who was present and witnessed Edna’s signature when the affidavit was completed, provided useful and affirmative evidence as to her position and understanding at the time the affidavit was sworn. In addition, by November 2016, it is accepted Edna had spent some 11 and a half years as an active and engaged trustee of the Trust, participating in trustees’ decisions to carry out the subdivision development.3 What she deposes to in her affidavit simply confirms what she and the other trustees ensured would come to pass.
[16] It is also useful at this point to note a special and rather unique provision which, according to the evidence of Mr Nelson, was included at cl 9.2 in the Trust Deed at Jim and Edna’s request in 2004. In a sense, the words chosen in this cl 9.2 were Edna’s (and Jim’s) first words too.
[17] The cl 9.2 provision outlined Edna and Jim’s wishes as settlors. It expressly provided that the trustees should:
Realise the value of the farm property by way of subdivision into individual or lifestyle allotments to better benefit the discretionary beneficiaries.
More discussion on this provision will follow later.
3 Indeed, in evidence before me it is confirmed that whilst she was a trustee of the Trust, Edna attended every meeting of the trustees without fail, bar one.
Background
(a)The Marsden Valley farm
[18] Jim and Edna (and their family) came to the rural Marsden Valley in the Nelson area, purchasing a significant part of the trust property in the late 1960s. At the time it was farmland and for some years Jim, Edna and their family farmed and broke in areas of the land. Clearly, however, Jim and Edna had a long-term view to it being turned into a residential subdivision development as they could see its potential even at that time.
[19] Later, in 1979, John and his wife, Wendy, purchased five hectares of land which formed part of the farm from Jim and Edna. Some time after that, John assisted Jim in the preparation and pursuit of various subdivision and rezoning applications for both the farmland owned by Jim and Edna, and the adjoining land owned by John and Wendy.
[20] The farmland in question was a small farm-holding. Largely, it comprised two blocks on either side of the Marsden Valley Road, the first known as the Ching’s Block and the second known as the Homestead Block. The Ching’s Block was subject to a local authority plan change in 1994. The land was then zoned rural/residential but with a minimum lot size for subdivision.
[21] Prior to his death on 21 May 2007, Jim took steps to have the overall farmland rezoned more closely for residential subdivision purposes.
[22] This involved an extensive resource consent process. In December 2006 the Trust, and neighbours John and Wendy made a joint application to subdivide the Ching’s Block. At that time the Trust’s portion of the Ching’s Block comprised around 12 hectares, and the application overall was to create a staged subdivision with a total of 117 residential lots. This followed at least two earlier (generally unsuccessful) resource consent applications made by Jim on behalf of the family in the 1990s.
[23] The resource consent process was still ongoing when Jim died in May 2007. Resource consent was subsequently granted for the Ching’s Block by the Nelson City
Council in November 2007. That consent provided for a 117 lot residential subdivision to be carried out in accordance with the December 2006 application as amended by a scheme plan in September 2007.
(b)The McLaughlin family
[24] It is useful here to set out a little more fully, details of the McLaughlin family, who are (or have been) affected by these proceedings.
Jim and Edna
[25] Jim and Edna, as parents of the four boys, were married for nearly 60 years when Jim died in May 2007. Edna, his widow, aged 98, died on 28 May 2021.
[26] Jim and Edna came to the Nelson region in the late 1960s (with their family). Originally, they purchased the Homestead Block farm area in the Valley. They farmed this initially on a part time basis when Jim obtained work in Nelson City. Subsequently, they acquired the neighbouring Ching’s Block. Jim, it is said, was a determined and single-minded man and throughout had it in mind that their farm, being close to Nelson City, would be ripe for residential subdivision in the future.
[27] Both Jim and Edna were two of the original trustees of the Trust. Jim had health issues and died in 2007.
[28] Edna continued on as one of the trustees of the Ashley Trust until she resigned in 2017.
[29] Both Jim and Edna were named as two of the discretionary beneficiaries in the Trust.
The sons
[30] Jim and Edna’s four sons who have survived them, again are: John, who, as I understand it, is now aged 71, Mark now aged 68, Andrew now aged 66 and Brett now aged 63.
[31] John and his wife at the time, Wendy, lived in the Marsden Valley on a portion of the Ching’s Block comprising about five and a half hectares which was sold to them by Jim and Edna from about 1979. John and Wendy have three children.
[32] Mark and his wife have four children. He is a doctor and medical specialist residing in Christchurch.
[33] Andrew was a veterinarian and previously owned a farm on the West Coast which the parties say proved to be unsuccessful. Andrew has three children.
[34] Brett has lived and worked on the farm in Marsden Valley for many years. He is single. Brett still resides in his home on a small block in the Valley, adjacent to the Trust property, which effectively was gifted to him by his parents and the Trust over the years. Brett currently suffers from ill health with heart issues. Although he is not a named plaintiff in this proceeding, he is an interested party and, as I have noted, he says he supports Mark and Andrew in their claim against John and GHTL. Brett’s essential complaint against John and GHTL (and indeed other trustees) here is that he says they have been entirely hostile towards him and his interests throughout.
[35] All the brothers, John, Mark, Andrew and Brett, are both discretionary beneficiaries and, whilst described in the Trust Deed as “child beneficiaries”, are effectively the residuary beneficiaries under the Trust. Brett’s position as a residuary beneficiary is slightly different to that of his brothers John, Mark and Andrew, which I outline below.
[36] In 2004, John was appointed by Jim and Edna to be one of the initial trustees of the Trust. He remains as a trustee up to the present.
The grandchildren
[37] The children of John, Mark and Andrew, who are grandchildren of Jim and Edna, are discretionary beneficiaries under the Trust. Brett has no children.
[38] So far as the grandchildren are concerned, at the outset, Mark and Andrew’s children filed applications noting they were interested parties.
[39] Since that time, however, as best I can tell, those grandchildren have taken no effective steps in the substantive proceeding. They were not represented at the hearing of this matter before me and they have taken no formal steps since filing their original applications noted above.
[40] John and Wendy’s children (also grandchildren of Jim and Edna and accordingly discretionary beneficiaries under the Trust), have taken no steps in this proceeding.
Formation of the Trust
[41] The Trust as I have noted was settled by Jim and Edna on 26 February 2004. As settlors of the Trust, they appointed as initial trustees themselves, John, and Brian Nelson. A further trustee, Fred Westrupp was appointed shortly after the Trust was settled.
[42] The power of appointment (and removal) of trustees under the Trust Deed was vested in Jim and Edna acting jointly (or the survivor of them). Afterwards this power of appointment was to vest in the person or persons appointed by the survivor of Jim and Edna by deed or will. There was a caveat however regarding trustee appointment that at all times there was not to be less than two trustees, at least one of whom was not to be a discretionary beneficiary.
[43] The discretionary beneficiaries under the Trust Deed are Jim, Edna, their children John, Andrew, Mark and Brett (who were described as the child beneficiaries), any spouse, widow or widower of those child beneficiaries, any grandchild or remoter issue of the settlors and any trust or body appointed by the trustees by deed which has as its sole or principal object the benefiting of any of the discretionary beneficiaries.
[44] The Trust period to run until the date of distribution was to be such date as was chosen by the trustees, with a maximum period 80 years from the formation date, 26 February 2004.
[45] The Trust Deed had standard provisions regarding distributions to be made at the discretion of the trustees to discretionary beneficiaries.
[46] As to the final distribution on the date of distribution under the Trust, the Trust Deed provided that the trustees:4
… shall stand possessed of such of the capital and income of the Trust Fund as may then remain upon trust for the child beneficiaries as shall then be living and if more than one in equal shares as tenants in common absolutely PROVIDED HOWEVER the share of the said Brett Gardner McLaughlin shall not be paid to him but shall be retained by the trustees for twenty years and on his death paid to his children, failing any children to the child beneficiaries under this clause. The trustees shall have power to request the capital if they think desirable to maintain Brett in a suitable standard of living and care.
[47] It is apparent, therefore, the final beneficiaries under the Trust are John, Mark, Andrew and Brett.
[48] The Trust Deed also contains relatively standard investment powers along with limitation of liability clauses which are set out as follows:
7 INVESTMENT OF TRUST FUND
…
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.
…
12 TRUSTEES’ LIABILITY
The Trustees shall not be liable for (and shall be indemnified out of the Trust Fund for) any loss or liability which they may incur by reason of the exercise, manner of exercise or non-exercise of any of the powers, authorities or discretions conferred on them by this deed or by law.
Before settling the Trust in 2004 Jim had also provided a “Memorandum of Wishes” dated 8 June 2001. It is Mark and Andrew’s position that this “Memorandum of Wishes” was intended to be a direction to the trustees of the Trust, notwithstanding it
4 In the Trust Deed the “child beneficiaries” are defined as John, Mark, Andrew and Brett.
was signed nearly three years prior.
[49]In the “Memorandum of Wishes”, Jim stated:
I direct that in all major decisions my Trustees consult my sons before making that decision.
I understand that my sons have no voting power however. My trustees are to put the proposal in writing to each to allow them to comment and make submissions within a stipulated period.
If they so request or the Trustees decide, a meeting may (if the Trustees desire) be called to resolve any differences.
The subdivision activities
[50] In December 2006 some six months before Jim’s death, the Trust and John (and Wendy) together made a joint application to the Nelson City Council to subdivide the Ching’s Block to create a staged subdivision totalling 117 residential lots. Resource consent was granted by the Council in November 2007, some six months after Jim’s death. That consent provided for the 117 lot residential subdivision.
[51] By this time Fred Westrupp (Mr Westrupp) had been added as a trustee of the Trust at Jim’s request.
[52] Following Jim’s death in August 2007, Mr Westrupp raised a number of issues regarding the future and direction of the Trust as clearly he had misgivings about his future as a trustee.
[53] Subsequently on 21 September 2007, Mr Westrupp retired as a trustee. Mr Nelson also retired around this time to be replaced by his law firm’s trust company, GHTL.
[54] Once the resource consent was obtained in November 2007, Edna, John and GHTL as continuing trustees made the decision to proceed with the physical subdivision development of the Ching’s Block. At that point the trustees wrote to Mark and Andrew advising them of this with the comment:
The next stage will be the preparation of engineering plans and as the Trust does not have sufficient funds for this, it will be necessary to raise funds by
way of a bank mortgage over the Trust’s property. John hopes that work can start once the engineering plans are completed and accepted by the Council in October 2008.
[55] Then, in May 2008, an application for a further Plan Change was lodged with the Nelson City Council. It requested the Council adopt a Plan Change to rezone all of the Trust’s land owned as residential. This Plan Change was adopted by the Council in late 2008.
[56] The trustees and John around this time had also made an application to amend the resource consent for the Ching’s Block to reflect an altered subdivision layout and numbering. This was successful, increasing the available lots from 117 to 130. This amendment benefitted both the Trust’s land and John (and Wendy’s) land.
[57] At that point the trustees entered into a Heads of Agreement with John and Wendy which provided that they would contribute to the Trust $40,000 (excluding GST) towards the costs of obtaining the initial resource consent. That total cost was originally estimated to be around $130,000 but, as I understand it, the cost was said to increase to $220,000 in a subsequent funding application which was lodged. The true cost, in evidence before me however, was said to be around $300,000. The original arrangement, however, was never revisited. John and Wendy made no further contribution to this cost other than the original $40,000 agreed. Mark and Andrew complain about this and the fact John made no further contributions to the subdivision costs. These costs related to the Council’s Plan Change, amendments to the original consent, subsequent resource consent applications, appeals regarding existing consent conditions and physical subdivision works such as roading and the installation of services to the boundary of what is said to be his otherwise landlocked land.
[58] In June 2008 with subdivision development work soon to commence, John was installed by the Trust as project manager for the development on a fulltime basis at an agreed salary of $120,000 (plus GST) per annum. At that time, the Trust also purchased machinery to undertake the development. It seems also that in July 2008 the trustees agreed that the Trust’s accounting activities would be transferred from accountants, Thompson & Daly, who had worked for Jim and Edna for some time, to John’s own accountants, W H K Hintons.
[59] Bank funding for the initial development stages was arranged through Westpac and work began. By the end of 2008, however, the trustees were aware of a potentially depressed property and section sales market caused by the Global Financial Crisis (GFC) and had already instituted a slowdown in work.
[60] Various bank funding applications for the Trust were drafted. Mark and Andrew make something of the fact that John and the Trust’s accountants in June 2009 had forecast a return on the Ching’s Bock of something over $12 million and Duke & Cooke had provided a valuation of that block in August 2008, updated in November 2008, based on a 90 lot subdivision at $6.76 million.
[61] From late 2008 to early 2011, the trustees continued to undertake the development of Stage 1 of the Ching’s Block. Mark and Andrew complain now that this was without reference to them. From about July 2011, Andrew and Mark sought updates on progress. A report from the Trust dated 16 December 2011 noted that only four lots on Ching’s Block Stage 1 had been sold as the market had slowed significantly over the past 15 months since development had commenced. Later, in April 2012, a further update to the beneficiaries was provided by the trustees. This update noted that reduced section prices and increased costs meant that each lot to be sold would only produce a net taxable profit of $100,000. Mark and Andrew complain that, notwithstanding this, the development of Stage 1 continued.
[62] Mark and Andrew’s concerns about the development in late 2011 or early 2012 led them to engage Kendons, chartered accountants, and, later, the solicitors Hannan Seddon to make a number of enquiries of the trustees on their behalf. In light of these concerns, in October 2012 the trustees engaged Mr Mick Hollyer (Mr Hollyer) to review the Trust’s activities. At that time, Mark and Andrew also engaged their independent expert, Mr Peter Mahony (Mr Mahony), to conduct a review which produced the Mahony report.
[63] Following this, in 2013 Mark and Andrew instructed barrister Nicholas Davidson QC (as he then was). Thereafter, the Trust made distributions totalling
$550,000 to each of the child beneficiaries, John, Mark, Andrew and Brett in March and December 2014. These distributions which totalled $2,200,000, according to
Mark and Andrew, were made “in a bid to placate the beneficiaries”. They complained that this did not, however, address their concerns which primarily focused on decision- making, financial forecasting and timeframes for the Trust. They also held concerns around what they say was the evident intention of the trustees to go on to develop the Homestead Block.
[64] In early 2015, a meeting chaired by John Marshall QC and Nicholas Davidson QC aimed to resolve all issues between the parties. No resolution was achieved. However, the trustees did begin discussions about the appointment of additional independent trustees. In April 2015 Ian Kearney (Mr Kearney) was appointed as a trustee and he was joined by Mark Russell (Mr Russell) as an additional trustee later in 2015. At this point revised agreements with John and his related entities regarding his employment, equipment-hire and profit sharing were entered into.
[65] Early in 2016, however, Mr Kearney retired as a trustee. The remaining trustees also around that time engaged Tony Sewell (Mr Sewell) to prepare a report on the merits of proceeding with development of the Homestead Block. As I understand it, his reports were favourable and he recommended the development of that Block proceed.
[66] Additional complaints around this time as to access by the beneficiaries to information regarding the Trust were made. The Sewell report was provided to Mark and Andrew in December 2016. They commissioned their own expert financial analysis relating to the Trust from accountants, Hussey & Co, and this was provided in June 2017.
[67] The last sales of sections for the Ching’s Block occurred between 31 March 2017 and 31 March 2018, although the development at that stage remained incomplete as nine hill sections on the block (known as Ching’s 4B) remained unsold. Mark and Andrew contend it is unlikely those nine sections can be developed for a profit, given the difficulty and expense of doing so. This is strongly disputed by the trustees and others, including Mr Sewell who firmly believes they will have significant value when sold.
[68] In the meantime, from around 2015, it seems that John (and Wendy) started and completed their own subdivision on their land which was previously part of the Ching’s Block. Mark and Andrew complain, first, that these actions created competition for the unfinished Ching’s Block sections and, secondly, that John’s subdivision also stole attention from the proposed commencement of the Homestead Block development.
[69] As a result of Mark and Andrew commencing these proceedings in November 2017, work on the development of the Homestead Block was put on hold. The trustees continued to progress various resource consent related matters and obtained certain valuations.
[70] In November 2018, the trustees also sold a lot in the overall subdivision known as Lot 143 (which was located on the Ching’s Block side of Marsden Valley Road and had previously been intended to be developed in conjunction with that block). This sale of Lot 143 was as an undeveloped block of land at a sale price of $590,000.
[71] Then in July 2019, the trustees resolved to progress development of Stage 1 of the Homestead Block. Efforts were also made to identify an independent trustee company to replace GHTL which had expressed the wish to retire.
[72] The trustees’ plans to proceed with the development of Stage 1 of the Homestead Block led Mark and Andrew to seek an interim injunction from this Court in October 2019 to halt the development. This was declined by Dunningham J.5
[73] Subsequently, in August 2020, the trustees entered into a Heads of Agreement with Jennian and Milestone Homes for the sale of the balance of the Homestead Block (excluding Stage 1 and the land surrounding Edna’s house) for the sum of $6.7 million. This sale, as I understand it, is due to settle shortly.
5 McLaughlin v McLaughlin & Ors [2019] NZHC 2561 (Result Judgment) and [2019] NZHC 2597 (Reasons Judgment)
The pleadings
[74] This proceeding commenced when Mark and Andrew filed their initial statement of claim dated 24 August 2017. That statement of claim named John, GHTL and Mark William Russell (Mr Russell), trustees of the Trust at the time, as first defendants and Mr Nelson, the ex-trustee, as second defendant.
[75] The defendants named in that statement of claim filed their statement of defence on 3 November 2017.
[76] On 1 November 2017, Edna filed a notice of appearance indicating that she wished to appear and be heard in the proceedings.
[77] On 4 December 2017, a notice of appearance by interested parties was filed by Mr Colin Smith, a Greymouth solicitor, on behalf of Aaron McLaughlin, Olivia Campbell, Chelsea McLaughlin and Brittany McLaughlin (beneficiaries of the Trust) who, I understand, are grandchildren of Jim and Edna. My understanding is also that they are Mark’s children and may have been represented at the earlier hearing of a Beddoe application in this proceeding.
[78] Then, on 30 January 2018 a further notice of appearance by interested parties was filed by Mr Colin Smith, this time on behalf of James McLaughlin, Louise McLaughlin and Callum McLaughlin (also beneficiaries of the Trust). They are also grandchildren of Jim and Edna, being Andrew’s children.
[79] Despite the two notices of appearance,6 and some of those grandchildren opposing the trustees’ Beddoe application, as best as I can tell, none of the named grandchildren have played any further part in this proceeding. As I have noted above, they did not appear, nor were they represented at the final hearing of this matter before me.
[80] Returning to the plaintiffs’ pleadings here, on 31 January 2020, an amended statement of claim was filed in this proceeding by Mark and Andrew as plaintiffs
6 Noted at [77] and [78] of this judgment.
against John as first defendant and GHTL as second defendant, trustees of the Trust at the time.
[81] On 9 March 2020, a statement of defence to this amended statement of claim was filed.
[82] Then, on 15 September 2020, a second amended statement of claim was filed in this Court by Mark and Andrew as plaintiffs. An amended statement of defence to this second amended statement of claim was then filed on behalf of the defendants dated 10 February 2021.
[83] A statement in reply was filed on behalf of Mark and Andrew on 19 March 2021.
[84] A short time later, on 23 April 2021, a cross-claim was filed by GHTL as second defendant against John as first defendant and on 31 May 2021 a cross-claim was filed by John against GHTL.
[85] I interpolate at this point one further comment. Although matters generally challenged by Mark and Andrew relate to decisions made by the trustees of the Trust at relevant times, and on some of these occasions Edna was a trustee, she is not named as a defendant in these proceedings. I say more on this later.
Remedies sought in their pleadings by Mark and Andrew
[86]In their claim, Mark and Andrew seek orders for:
(a)the removal of John as a trustee of the Trust;
(b)an account of profits from John for the project management fees paid to him;
(c)for a further accounting for:
(i)the profit received from the subdivision of the land (forming part of the Ching’s Block) previously owned by John;
(ii)the difference between John’s contribution to the cost of the resource consent process and development works and the contribution actually required of him;
(iii)the benefits accruing to John from the use of machinery and equipment purchased by the Trust used for the development of his land;
(d)that the defendants (John and his former co-trustee, GHTL) pay compensation calculated on the basis of what an alternative involvement strategy would have delivered to the Trust;
(e)that John and GHTL repay various legal and associated costs paid by the Trust, seemingly in contravention of orders made by this Court; and
(f)for costs against John and GHTL together with an order that the Trust indemnify Mark and Andrew for any unmet portion of their costs.
Causes of action
[87] In seeking the remedies I outline above, essentially there are three causes of action pleaded by Mark and Andrew. These are:
(a)a first cause of action – for removal of John as a trustee of the Trust;
(b)a second cause of action – pleading breach of duty as trustees by John and GHTL;
(c)a third cause of action – pleading breach of fiduciary duty relating particularly to a conflict of interest on the part of John and, secondly, issues over the involvement of Trust assets;
[88] As to GHTL’s liability, Mark and Andrew claim that GHTL as a trustee knew of a breach or threatened breach of trust by its co-trustee, John, and took no active measures for the protection of the interests of the beneficiaries. This means, they say, that GHTL is liable for the consequences of that breach. Effectively they contend GHTL is jointly and severally liable with John. Therefore, GHTL is liable to account for profits made by John and also for compensation to be ordered in respect of the second cause of action for breach of the duty of prudent investment.
[89] Issues arise here too regarding limitation of liability and, in particular, what effect the limitation of liability clauses in paras 7 and 12 of the Trust Deed might have.7
Costs and repayment of legal fees
[90] Although this does not seem to be pleaded in any of their statements of claim, at the hearing before me Mark and Andrew appeared to seek orders that John and GHTL repay various legal and associated costs which were paid by the Trust seemingly in contravention of orders made by Thomas J in the Beddoe application:8
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.
[91] The Court was advised in the course of the Beddoe application that as at 31 October 2018 the legal costs invoiced by the trustee’s solicitors were:
(a)costs in substantive litigation - $96,204.61 (plus GST);
(b)costs in Beddoe application - $187,692.73 (plus GST) and
(c)third party disbursements - $60,915.75 (plus GST).
[92] It seems at 10 May 2021 the trustees’ costs and disbursements met by the Trust in respect of this substantive litigation and the Beddoe application totalled some
7 Noted at [48] of this judgment.
8 McLaughlin v McLaughlin, above n 1, at [133].
$405,054.61. Issues may well arise concerning this possible indemnification of trustees’ costs. More on this later.
Admissibility of evidence
[93] As I note at [13] above, certain evidence admissibility issues were raised by counsel at this trial. I now address these.
[94] Issues concerning admissibility of evidence at a trial such as this are determined by reference to the Evidence Act 2006. In terms of r 9.7(4) of the High Court Rules 2016 a witness’ brief of evidence must not contain evidence that is inadmissible.
[95] Fundamental to the principle of admissibility is relevance. Irrelevant evidence is not admissible in terms of s 7(2) of the Evidence Act.9 To assess relevance a question must be asked whether the evidence in issue has a tendency to prove or disprove anything of consequence to the determination of the proceeding.10 Further limits on the admissibility of evidence include rules regarding hearsay evidence and (expert and lay) opinion evidence.
[96] With certain exceptions, hearsay statements made by a person other than a witness that are relied upon for the truth of their contents are prima facie inadmissible.11 The principal exception to the hearsay rule is set out in s 18 of the Evidence Act.
[97] As to opinion evidence, a factual witness (as opposed to a recognised expert witness) may state an opinion only if that opinion is necessary to enable the witness to communicate or the factfinder to understand, what the witness saw, heard or otherwise perceived.12 Section 25 governs the admissibility of expert opinion
9 See also Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5 at [29].
10 Evidence Act 2006, s 7(3).
11 Section 4(1).
12 Section 24.
evidence which is generally admissible subject to a “substantial helpfulness” criterion.13 In this regard, an expert is defined as:14
a person who has specialised knowledge or skill based on training, study or experience
and, expert evidence as:
the evidence of an expert based on the specialised knowledge or skill of that expert and includes evidence given in the form of an opinion.
[98] The position adopted on behalf of Mark and Andrew here is that much of the evidence advanced by John and GHTL should be regarded as inadmissible. Notwithstanding this, Mr Johnson for Mark and Andrew suggested before me that not much in this case turns on questions of admissibility given that he acknowledges there are faults which have occurred on both sides. Mr Johnson, however, did make something of what he described as two real issues here on the admissibility question.
[99] The first related to the evidence of Edna contained in her affidavit before the Court and also what he described as hearsay evidence provided on behalf of John and GHTL relating to the alleged wishes of Edna and Jim here. The second real issue recognised by Mr Johnson related to evidence advanced for John and GHTL which was said to be expert evidence but which he claimed was neither truly qualified or independent and, further, on occasions it breached the impartiality requirement.
[100] On these admissibility questions, Mr Gedye for John and GHTL submitted that this is not a case which should turn on the admissibility or otherwise of specific pieces of evidence other than specifically the affidavit of Edna which he said bears directly on central issues here, is inherently reliable, and must be accepted as admissible. Mr Gedye goes on to suggest that many parts of the evidence advanced for Mark and Andrew represent submissions rather than fact and, further, that various reports obtained by them from authors who were not called as witnesses before me (for example, Mr Mahony and Mr Hussey) should not be received as proof of their contents. Mr Gedye claims these matters were raised prior to trial but that, in any
13 Section 25(1).
14 Section 4(1).
event, insofar as any such evidence simply forms part of the narrative of events which have occurred, no objection is raised to the Court admitting them simply for that purpose. Mr Gedye also maintains that the expert briefs of Brett Smithies (Mr Smithies) and Grant Graham (Mr Graham) provided on behalf of Mark and Andrew contain evidence which is beyond their fields of expertise and this needs to be seen as inadmissible too. On this aspect, Mr Gedye notes that Mr Smithies, a valuer, endeavours to give evidence in relation to subdivision practices including development costs and John’s project management fees. This Mr Gedye claims occurs in a situation where he does not accept Mr Smithies could be seen as a properly qualified and experienced property developer/subdivider able usefully to assist the Court with opinions on these matters. This part of Mr Smithies’ evidence, Mr Gedye says, should not be admitted pursuant to s 25 of the Evidence Act. Further, it seems Mr Smithies to some extent criticises the reliability of evidence provided by other witnesses here, which Mr Gedye complains is not a proper role for him as an expert in this case. Mr Gedye says too that Mr Smithies’ credibility generally should be questioned because of his gratuitous support for Mark and Andrew’s case. As a result, his impartiality is questioned. I say more on this aspect later.
[101] As to Mr Graham, the chartered accountant expert called by Mark and Andrew, Mr Gedye complains that in his brief Mr Graham also ventures into the realm of opinion evidence on property development and subdivision matters, fields in which he has no qualifications or expertise. Much of this evidence too is said to be opinion and merely speculative and Mr Gedye maintains it should not be admitted. Clearly, I accept here that Mr Graham gives expert evidence only as a chartered accountant. He is not giving evidence as an expert professional trustee or a property developer.
[102] Lastly, so far as Edna’s evidence is concerned, this is contained in her 7 November 2016 affidavit. I have already referred to this and found it admissible here at paras [13]–[15] above. In a joint memorandum of counsel dated 15 September 2020 filed in this proceeding, it was agreed Edna’s affidavit could be accepted as read, save only for the specific areas of challenge identified in that memorandum. I understand too that Edna’s affidavit without objection was accepted as admissible evidence in earlier interlocutory hearings in this proceeding. For the reasons I outline at [13]–[15] above, I am satisfied her evidence is inherently reliable here and fulfils
the requirements of s 18 of the Evidence Act. Given her advanced age and health at the time of the trial in this matter, by agreement Edna was not called as a witness but her affidavit was before the Court. I accept that affidavit is important here and bears directly on central issues between the parties. Mr Turley’s independent evidence relating to Edna’s affidavit and the consequent reliability of her evidence is useful and confirming, as I note at [15] above. I confirm my finding that Edna’s evidence in this affidavit is admissible, in particular as to the settlors’ intentions in setting up the Trust, and the general operation of the Trust as confirmed too by her later actions as a trustee.
[103] As a result, Edna’s 7 November 2016 affidavit was read and accepted at trial and I will give such weight to it as I feel is appropriate in all the circumstances.
[104] Lastly, I turn to Mr Johnson’s concern raised on behalf of Mark and Andrew relating to the evidence of Mr Sewell, the subdivision and property development expert called on behalf of John and GHTL. As to Mr Sewell, Mr Johnson suggested I should approach any view expressed by him regarding the success of the Ching’s Block or other subdivision here with some scepticism. Mr Johnson contended his evidence must be seen as being on the borderline of impartiality, particularly as he had written a report for the trustees and provided advice on their subdivision matters (particularly relating to the Homestead Block) over the last five years. This, Mr Johnson says, coloured his evidence which in part related to comments on what was said to be his own work and advice in the past. All this Mr Johnson said supported the view that Mr Sewell might be considered as a “hired gun” for John and GHTL.
[105] For reasons which will become apparent as this judgment unfolds, I do not accept these criticisms of Mr Sewell’s general experience and his broad independence here. I reject these criticisms advanced by Mr Johnson.
[106] Further, so far as other evidence admissibility questions are concerned, where required I will address relevant aspects as this judgment unfolds. Where evidence is clearly inadmissible it will not be taken into account. I do need to say, however, that many admissibility objections raised before me related to relatively unimportant matters and they are properly left on one side.
FIRST CAUSE OF ACTION — Removal Of Trustee
(a) Removal of John as a trustee
[107] At paragraph 73(a) of Mark and Andrew’s final 11 September 2020 pleading in this proceeding, John’s removal as a trustee was sought and his replacement with a professional trustee on the basis John misconducted himself in the administration of the Trust. John opposed his removal as a trustee and pleaded:
…
(f)there is no justification for, or benefit to, removing John as a trustee and replacing him with a professional independent trustee (assuming that one could be found who would be willing to take appointment);
(g)removing John as a trustee would be to the detriment of the beneficiaries as John has significant institutional expertise and knowledge of the Trust’s development activities which cannot be replaced and he has provided personal guarantees which are necessary for Bank funding purposes;
(h)removing John as a trustee would be detrimental to the efficient administration of the Trust and Comac does not support his removal.
[108] Throughout the hearing before me from 17 May 2021 to 2 June 2021, John continued this opposition to his removal as a trustee.
[109] That hearing was originally scheduled to take two weeks from 17 May 2021, concluding on 28 May 2021. Two extra hearing days to 2 June 2021 were allowed but this was still insufficient to hear counsel’s final submissions. Therefore, by agreement, on 2 June 2021 the proceeding was adjourned for me to hear final submissions from counsel on 24 and 25 June 2021.
[110] That hearing of final submissions took place. Again, however, the additional two-day time allocation proved to be insufficient.
[111] In the meantime, on 16 June 2021, counsel for John filed a memorandum in this Court which stated:
2.John McLaughlin is prepared to resign as a trustee, and we advise the Court of this now to save any party preparing any unnecessary closing submissions in respect of the first cause of action.
3.John has indicated for some time that he is not fixated on remaining as a trustee and will be prepared to resign.
…
5. However, having reviewed the position following the hearing, he [John] is now prepared to resign. He proposes to present submissions only in relation to the timing of resignation and the question of a replacement trustee.
…
9. Further submissions will be made in closing on the above resignation issues, but it seems appropriate to advise the Court and the plaintiffs of this position now because, if there is no need for a disputed determination of the removal application, that should substantially narrow the factual scope of matters for the Court’s consideration and determination in its judgment…
[112] On that issue, further disputes arose between Mark and Andrew (with the concurrence of Brett) on the one hand, and John on the other, over his retirement and the identity of a replacement trustee. This spawned a series of further memoranda from counsel.
[113] On the question of John’s retirement as a trustee, the initial position advanced by Mark and Andrew was that John was not purporting to retire unconditionally and that in any event, John wished his retirement to be delayed. John roundly disputes this. He asserts his retirement as a trustee was, and always had been, unequivocal. In any event, matters have moved on. All parties now seem to accept that John is retiring, and they suggest the Court should make an order confirming his removal or retirement without delay.
[114]That said, s 112 of the Trusts Act 2019 provides:
112 Court may make order for removal
Whenever it is necessary or desirable to remove a trustee and it is difficult or impracticable to do so without the assistance of the court, the court may make an order removing a trustee.
[115] John has agreed to retire as a trustee. His counsel has confirmed that this can occur almost immediately, suggesting a seven-day period for this to take effect, and that a court order pursuant to s 112 is appropriate.
[116] An order is to follow, therefore, confirming that, pursuant to John’s expressed wish to retire as a trustee of the Trust, which the Court accepts, he does so retire and is removed as a trustee. This is to be effective from a date being five working days from the date of this judgment.
[117] The issue then arises as to the identity of a replacement trustee, given the present requirement in the Trust Deed that there are at least two trustees.
(b) Replacement trustee
[118] Despite provisions in the Trust Deed specifying who might appoint a replacement trustee, in view of what was a significant impasse between them, all parties agreed before me that this Court might make the appointment.
[119]As to this aspect, s 114 of the Trusts Act 2019 provides:
114 Court may appoint or replace trustee
(1)Whenever it is necessary or desirable to appoint a new trustee and it is difficult or impracticable to do so without the assistance of the court, the court may make an order appointing a new trustee.
…
(3)If the court proposes to appoint Public Trust as the replacement trustee, the court must, before making the appointment, give Public Trust an opportunity to be heard on the matter.
(4)If the court (except on application by a supervisor within the meaning of section 6(1) of the Financial Markets Conduct Act 2013) appoints Public Trust as the replacement trustee, Public Trust—
(a)must accept the appointment; and
(b)may charge fees for acting as trustee.
[120] In their request for the Court to appoint a replacement trustee, Mark, Andrew (and Brett), have suggested this should be David Stuart Vance (Mr Vance). John, in turn, opposes the appointment of Mr Vance and has suggested instead that Paul Dorrance (Mr Dorrance) should be appointed. The appointment of Mr Dorrance is opposed by Mark, Andrew and Brett.
[121] Accusations, claims and counterclaims on this issue have flowed. The level of trust between the brothers, as I see it, appears to be at an all-time low. This issue of a replacement trustee, like other issues concerning the Trust, has also developed into a further partisan battle.
[122] Mr Vance is an experienced chartered accountant residing in Wellington who, although previously a partner in a range of accounting firms, now works on his own account. With a background in insolvency matters, Mr Vance says his areas of specialisation have increasingly turned to restructuring and valuation advice and assistance in disputes involving financial and/or accounting matters. He states in a 27 July 2021 affidavit:
7.Throughout my career, including taking appointments as liquidator and receiver, I have investigated and reviewed the affairs of a significant number of stressed companies. This has involved assessments of business’ financial strengths and weakness, taking control of and running businesses to either rehabilitate and/or realise their assets and assessments of the conduct of shareholders/directors.
[123] Mr Vance has several Court appointments, some as a replacement trustee of trusts which were the subject of a breakdown in family relationships. Mr Vance has met with Mark, Andrew and Brett and made contact with various legal advisors.
[124] Mr Dorrance is a solicitor in Christchurch and has been a partner in the firm Duncan Cotterill since 1997. He has been described as a leading private trust lawyer, and it seems he has considerable knowledge in New Zealand trust law, having many appointments as an independent trustee or advisor. Evidence is before the Court that he has acted for or been involved with over 320 trusts. These range from small family trusts to trusts of high net worth individuals and intergenerational groups. His CV before the Court claims that in many of these trusts Mr Dorrance has played an active advisory role for the family concerned, including often taking a role as director of associated companies.
[125] In passing, it is noted that Mr Dorrance’s firm, Duncan Cotterill, although operating principally from Christchurch, also has a branch office in Nelson, the city in which the Trust property is situated. This may be seen as advantageous here.
[126] After Mr Vance’s meeting with Mark and Andrew, Mr Johnson confirms that Mark and Andrew were “impressed by his credentials and measured approach” and “they consider he would make a good independent trustee and would support the participation of all beneficiaries in significant decisions regarding the future administration of the trust”.
[127] Following Mr Vance’s meeting with Brett, Ms McGuigan confirms that Brett also prefers Mr Vance as the replacement trustee here.
[128] It is understood that Mr Vance also offered to meet with John but this offer was not taken up by John.
[129] So far as Mr Dorrance is concerned, as I understand it, he has spoken with Mr Johnson but has expressed the view that he should not at this point meet with beneficiaries here. Accordingly, he has not met with Mark, Andrew or Brett despite their requests to meet with him.
[130] The question remains for the Court: who to appoint as a replacement trustee to join with Comac, the remaining trustee? The Court’s role involves an overarching consideration of the welfare of the beneficiaries. The exercise of the Court’s supervisory jurisdiction involving removal and appointment of a trustee is always guided by this concept.
[131] The subjective views of Mark, Andrew and Brett (supporting the appointment of Mr Vance) and also John’s support for Mr Dorrance have been provided. Although perhaps of limited interest by way of background, in my view, they do not assist the Court here. The objective merits and suitability for the job of each of the candidates must be the major matters of relevance to the Court when making a decision such as this.
[132] And finally, the position of related beneficiaries of the Trust, other than the four brothers, on the issue of a replacement trustee, is simply unknown to the Court. The most important criteria for appointment must be independence, competence,
experience and ability to act effectively in what is regrettably a highly contentious case.
[133] Submissions before me from Mr Johnson hint at some connection Mr Dorrance is said to have with John’s solicitors and the fact he might be too busy to provide appropriate attention to the interests of this Trust. On independence questions, Mr Johnson contends that Mr Vance should be preferred. There is little in these aspects.
[134] I turn now briefly to the principles to be applied here. In Mendelssohn v Centrepoint Community Growth Trust, Tipping J, delivering the judgment of the Court of Appeal, said:15
In the Tempest case Turner LJ stated certain principles in relation to the appointment of new trustees by the Court. In short they are: consideration of settlors’ intentions; neutrality between beneficiaries; and promotion of the purposes of the trust. As to the first, Turner LJ was considering cases in which either expressly or implicitly the Court could discern that the intention of the author of the trust was that a person or persons of a certain description should not be appointed trustees. If, conversely, it can be seen that either expressly or implicitly the author intends the trustees to be of a certain description, the Court will give considerable weight to that expression of the author’s wishes. But, as stated earlier, the Court is not bound by those wishes and is entitled to depart from them if good cause is shown.
[135] Generally, it seems there are no hard and fast principles regarding the selection of a replacement trustee. It is essentially a matter for this Court’s discretion which requires a practical judgment call.
[136] A test commonly applied refers to Tipping J’s comments in Mendelssohn v Centrepoint Community Growth Trust where he stated that the Court’s task is: “to appoint the person or persons best suited to administer the trust in the circumstances prevailing”.16
[137] It is clear too that in ascertaining a settlor’s intentions, the Court can be guided by the words of the Trust Deed and the context in which that Trust was created.
15 Mendelssohn v Centrepoint Community Growth Trust [1999] 2 NZLR 88 (CA) at [97] citing Re Tempest (1866) Ch App 485.
16 Mendelssohn, above n 15, at [97].
[138] In this case, as I have noted, the settlors, Jim and Edna, initially appointed as trustees of the Trust themselves, their son John and Mr Nelson, their solicitor at the time.
[139] A possible argument follows that, with John now retiring as a trustee and, given the heated relationship to date between immediate members of this family, his replacement might be an appropriately experienced trust lawyer with legal knowledge and expertise. This would, to an extent, equate with the wishes of Jim and Edna at the outset to have a lawyer as one of the trustees of the Trust.
[140] Comac, as a corporate trustee, continues as a trustee of the Trust. Although Mr Vance has spoken to those individual beneficiaries of the Trust outlined above, he has not consulted with the existing independent trustee, Mr Fitzpatrick, of Comac. Clearly, it is important that a productive and functional relationship with a co-trustee is a useful prerequisite when considering issues as to the proper administration of an ongoing trust. By way of contrast, Mr Dorrance, as I understand it, has spoken to Mr Fitzpatrick and Comac has confirmed its advice that it supports Mr Dorrance’s appointment as the replacement trustee. This is perhaps of significance given that in the normal course Comac, as the remaining trustee, would hold the power of appointment in terms of ss 92 and 113 of the Trusts Act 2019.
[141] By way of an aside, I note that in cases where an impasse as to appointment of a new trustee has developed, the Public Trustee on occasions has been appointed by this Court. In the present case the Public Trustee has not been approached nor have they participated in any way with respect to this Trust. Despite the provisions of the Trust Act, and the obvious desirability in cases of impasse to enlist the independence of the Public Trustee, this is not sought by the parties here. Nor is a further trustee corporation to join Comac as the continuing trustee appropriate in this case.
[142] Instead, here, the desirability of a neutral impartial trustee who is suitably qualified and has professional experience to carry out the role in what has proven to be a difficult family relationship, in my view, is critical.
[143] In Mark and Andrew’s pleaded first cause of action they sought an order for the appointment of a professional trustee without any further limitations or stipulations. As I see it, the selection process for a replacement trustee needs to focus on the merits and capability of the individual candidates and involve an objective assessment of their experience and the skills they hold in the area. Subjective views from beneficiaries as to which candidate they might prefer, even if based on an initial meeting with a prospective trustee, are not matters that should carry weight. It is the Court’s role, not that of the beneficiaries of a trust, to assess who may be best suited as a replacement trustee to administer the Trust in all the circumstances that prevail.
[144] Any replacement trustee candidate must be independent and have relevant professional experience and expertise. That experience and expertise here, needs to encompass work as a professional trustee together with significant commercial experience, in this case perhaps also involving property development and subdivision matters.
[145] On these aspects, Mr Dorrance, from his CV, shows clearly that he has significant experience both in a wide range of trust matters and also residential development projects, both as a legal advisor and as a professional trustee. This is directly relevant to the situation facing the Trust here where, amongst other issues, significant decisions remain for the trustees as to whether (and how) to develop or sell the remaining land assets. On behalf of Mark and Andrew, Mr Johnson has endeavoured to challenge Mr Dorrance’s suitability as John’s solicitors, Buddle Findlay, acted on a previous occasion on Mr Dorrance’s behalf. In my view, there is nothing in this complaint. Nor, as I see it, does any issue arise from the fact Mr Dorrance for some years has acted as legal advisor to the Christ’s College Board of which Mr Johnson is a member. Christchurch and its professional community is relatively small, and broad connections are routinely managed.
[146] I conclude that there are no issues here with Mr Dorrance’s independence when considering his suitability as a replacement trustee. Nor do any independence issues arise in relation to Mr Vance. Any suggestion from John, therefore, that if independence or other issues had arisen to disqualify Mr Dorrance here, then another experienced lawyer, Mr Christopher Darlow could be considered as an alternative
replacement trustee candidate, slip away. There is no need, as I see it, to bring Mr Darlow into the mix.
[147] A further complaint against Mr Dorrance advanced strongly on behalf of Mark, Andrew and also Brett, is that he has chosen not to meet with them as beneficiaries. I read nothing into this. Indeed, I accept Mr Dorrance’s view that it could be seen as inappropriate for a prospective trustee to be undertaking unilateral meetings with select beneficiaries at a time when a selection process is underway. I leave these aspects entirely on one side.
[148] Overall, I have considered all the material before the Court and the CVs and information provided relating to Mr Dorrance and Mr Vance. Mr Dorrance is an experienced trust lawyer with an office of his firm in Nelson. He has advantages over Mr Vance given the settlors’ original wishes that a lawyer be amongst the trustees they wished to appoint. On balance, it is my view Mr Dorrance would be an appropriate appointment as a replacement trustee in all the circumstances. Mr Dorrance’s overall experience and legal knowledge, in particular in relation to difficult trust matters, would assist too. His location in Christchurch, albeit with an office of his firm in Nelson, given modern communication techniques provides no impediment to his undertaking his trustee role fully.
[149] None of this is in any way to cast aspersions upon Mr Vance (or indeed Mr Darlow who has also been suggested) who, in my view, would have been proper appointments as replacement trustees.
[150] Given the requirement here for neutrality and independence obviously favouring the appointment of a professional trustee, Mr Dorrance with both his legal and also his specific trust experience gained over the years (no doubt including negotiation and mediation techniques), is well placed to guide and ensure the welfare of all the Trust beneficiaries. I am satisfied Mr Dorrance is a highly competent trusts lawyer, with a good reputation and acknowledged commercial skills, in particular in the areas required, he is clearly independent of any parties and he has specific experience in managing difficult family trust affairs.
[151] He has researched and is prepared to undertake the role as a replacement trustee. The Court now appoints him as that new trustee subject to him completing an appropriate consent to act. An order to this effect will follow.
SECOND CAUSE OF ACTION – Breach of Duty
[152] Under the second cause of action Mark and Andrew broadly contend that John and GHTL as trustees breached their duty of prudent investment with respect to the decision to embark upon, and the subsequent carrying out of, the Ching’s Block subdivision.
(a) Pleadings
[153] In their statement of claim, Mark and Andrew plead the basis for this claim as follows:
70As trustees, John and Glasgow Harley Trustee owe and / or owed duties to the beneficiaries of the Trust.
71These duties include:
(a)an obligation to administer the Trust under the Trust Deed;
(b)the duty to act in good faith;
(c)the duty to act in the best interest of the beneficiaries;
(d)the duty not to act in a position of conflict;
(e)the duty not to delegate their duties and powers as trustees, including to co-trustees;
(f)the duty to actively participate in trust-related decisions;
(g)the duty to protect and preserve Trust assets;
(h)a duty of care and skill in undertaking a business through the Trust;
(i)the duty of prudent investment of Trust assets; and
(j)the duty to account to beneficiaries.
72The defendants have breached the above duties for the following reasons:
(a)In the circumstances, the Ching’s Block subdivision has failed to provide a reasonable return on investment.
(b)The defendants failed to consult the beneficiaries regarding the decision to subdivide Ching’s Block, which was a significant decision affecting the Trust Property and was inconsistent with the Memorandum of Wishes.
(c)In the circumstances, the subdivision of Ching’s Block was an inherently risky investment.
(d)The defendants failed to take appropriate and adequate expert advice on the merits of undertaking, and continuing with, the Ching’s Block subdivision.
(e)The defendants failed to reassess the merits of continuing with the development of Ching’s Block following the initial decision to subdivide.
(f)The defendants failed to appoint a suitably qualified and experienced project manager to manage the Ching’s Block subdivision.
(g)The defendants acted unreasonably in purchasing significant amounts of machinery and equipment, and by having the Trust undertake earthworks itself.
(h)The defendants failed to adequately monitor the financial performance of the Ching’s Block subdivision, including by not comparing forecasted with actual results.
(i)The defendants failed to provide the plaintiffs with financial information and accounts to allow them to assess the financial performance of the Ching’s Block subdivision.
(j)The defendants, and in particular John, have shown themselves to be hostile to the beneficiaries.
(k)In the case of John, by acting in positions of conflict of interest.
(l)In the case of Glasgow Harley Trustee, by allowing and / or assisting John to act in positions of conflict of interest.
(m)As a result of John’s conflicts of interest, the subdivision of Ching’s Block was undertaken in John’s self-interest, rather than for the purpose of better benefitting the beneficiaries.
73As a result of these breaches of duty, the Trust has suffered the following loss:
(a)The difference between the return achieved on the development of Ching’s Block and the return which would have been achieved had the development been undertaken absent the above breaches.
(b)Alternatively, the difference, as at today’s date, between the return achieved on the development of Ching’s Block and the
return which would have been achieved had the property been sold in 2008 (or subsequently) and the proceeds invested in an alternative investment.
74The exclusion clause at clause 12 of the Trust Deed (Exclusion Clause) is invalid at law being too wide in its scope.
75To the extent that the Exclusion Clause is valid:
(a)John cannot rely on the Exclusion Clause because the breaches at paragraphs 72(a)-(m) above were knowingly undertaken.
(b)Glasgow Harley Trustee cannot rely on the Exclusion Clause because it was drafted by the firm of which it is the corporate trustee, namely, Glasgow Harley, in circumstances where that firm failed to advise the settlors to seek independent advice on it.
Wherefore the plaintiffs seek:
(a)Equitable compensation payable to the Trust in the sum of:
(i)The difference between the return achieved on the development of Ching’s Block and the return which would have been achieved had the development been undertaken absence the above breaches.
(ii)Alternatively, the difference, as at today’s date, between the return achieved on the development of Ching’s Block and the return which would have been achieved had the property been sold in 2008 (or subsequently) and the proceeds invested in an alternative investment.
a.Interest.
b.Costs.
(b)Trustees’ duties
[154] On this aspect, it is clear that trustees owe beneficiaries a duty to act with due diligence and prudence in the discharge of their duties.17
[155]In Re Speight,18 Jessel MR stated:
…on general principles a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee.
17 Re Mulligan [1998] 1 NZLR 481(HC) at 500.
18 Re Speight (1883) Ch D 727 (CA) at 739.
[156] Trustees, however, are also required to administer the trust generally in accordance with the provisions of the trust instrument.
[157]And, as the authors of Garrow and Kelly also note:19
Circumstances may arise in the administration of the trust which make it appear necessary or beneficial that the trustee should deviate from the strict letter of the trust; but if this is done the trustee acts at the risk of later having to satisfy the Court that the deviation was necessary or beneficial.
[158] A court, in considering the performance of trustees, must always be careful to avoid hindsight judgments. In Jones v AMP Perpetual Trustee Company NZ Limited the Court said: “…[trustees’] performance must be judged, not by hindsight, but by facts which existed at the time of the occurrence.”20
[159] At times it may be difficult to avoid hindsight considerations but, nevertheless, rigour is needed to achieve this.
[160] Throughout submissions advanced for Mark and Andrew by Mr Johnson, he contended that, in large measure, the need for trustees to discharge their duty of prudent investment often came down to issues of process. Whilst that is a factor, it does not tell the entire story. In defining the duty to act prudently, in my judgment, trustees who operate a highly process-driven system are not necessarily able to say the decisions they have made are prudent ones. This is particularly the case in a close family trust context where trustees often confer frequently and informally and they have a significant level of knowledge of what is occurring. It is unrealistic in that situation to suggest such trustees must always impose heavy layers of process to discharge their duties of prudence. Quality decision-making, on occasions, can be masked by substituting detailed processes and procedures for careful thought and wise reflection.
[161] Before me, Mr Sewell, a highly experienced expert on subdivision and residential developments, provided useful evidence. He clearly supported the trustees’ position here and thought generally they acted properly on subdivision matters in this
19 Chris Kelly and Greg Kelly, Garrow and Kelly Law of Trusts and Trustees, (7th ed, Lexis Nexis, Wellington, 2013) at [20.15], citing Harrison v Randall (1851) 9 Hare 397 at 407.
20 Jones v AMP Perpetual Trustee Company NZ Ltd [1994] 1 NZLR 690 (HC) at 707.
case. In doing so, Mr Sewell noted that proper process in a medium or large residential subdivision like this one, related to all aspects of risk management in the development. This included marketing, sales strategies, evaluation of costings, consenting and planning, quality control, earthworks and construction programming and management and so forth. He made clear that a court should not take an overly narrow view of proper process in considering the quality of a trust’s decision-making in undertaking a residential subdivision.
[162] As to business judgment issues for trustees, in a relatively recent decision, Little v Howick Trustees DL Ltd, Brewer J considered that “…truly egregious trustee decision-making” is required before the Court would intervene in the exercise of a trustee’s discretion.21 He saw this as: “an appropriately high threshold given the slight nature of a discretionary beneficiary’s interest in trust property”.22 Matters such as bad faith or improper motive, misinterpretation of the Trust Deed, taking into account irrelevant considerations or failing to consider relevant considerations, or reaching a decision that is perverse or capricious would be required for the Court to intervene.23
[163] In this case Mark and Andrew have endeavoured to raise and pursue a range of issues relating to judgment matters surrounding the development. They have advanced certain submissions relating to this, but generally without calling what I see as authoritative evidence from an experienced, long-standing expert in subdivision matters. Mark and Andrew did call Brett Smithies (Mr Smithies), a registered property valuer, suggesting he was an expert in this area. Mr Smithies prepared a retrospective valuation for the Ching’s Block as at 1 August 2008. He also gave evidence on residential subdivision costings and budgeting matters generally. In doing so however, in my view Mr Smithies strayed into areas beyond his specific expertise (expertise which excluded any hands-on experience of undertaking residential subdivision developments), such as his criticisms of John’s remuneration and his manager role that he suggested should not have been a fulltime one. Also, he erred at times, first, in his attempts to challenge truly expert evidence of Mr Sewell and others, and secondly, in situations where he endeavoured to express opinions and conclusions on positions
21 Little v Howick Trustees DL Ltd [2018] NZHC 1884, (2018) 4 NZTR 28-013 at [31].
22 At [31].
23 At [49], citing Wrightson Ltd v Fletcher Challenge Nominees Ltd HC Auckland CP129/96, 21 August 1998 at 41-42.
favourable to Mark and Andrew, positions which were unsupported and, in any event, again outside his experience and expertise. And in 2013, Mark and Andrew retained Mr Mahony as a property and subdivision expert and he provided the Mahony Report. Perhaps inexplicably, Mr Mahony, however, was not called as a witness before me. As I see it, this was a particularly notable omission, given the significant evidence advanced for the defence from John, Mr Sewell and Mr Newton in relation to subdivision and development matters.
[164] John and GHTL also object here to the content of Mr Mahony’s report being before the Court. This is on the basis that they say they are inadmissible hearsay if used to establish the truth of their contents or the substance of Mr Mahony’s opinions. I accept generally this is the case, given that, as far as I am aware, Mr Mahony was available to be called as a witness but Mark and Andrew elected not to call him. Further, Mr Gedye contends the criteria in s 18 of the Evidence Act 2006 cannot be satisfied here, and broadly I agree.24
[165] Mr Mahony could have been called as a witness, but he was not. And, in any event, even if Mr Mahony’s untested report(s) are considered here, they make little difference to the issues before me. As will appear later, the evidence as to subdivision matters from Mr Sewell called by John and GHTL, I find, is particularly compelling. Mr Sewell too was open, frank and unshaken in both his evidence-in-chief and particularly in the detailed cross-examination to which he was subjected. Mr Sewell’s long and direct involvement, experience and knowledge of significant residential and other subdivision developments in this country equip him well to provide expert evidence on this aspect. As such, his views expressed in detail in the extensive evidence Mr Sewell provided to the Court in my view are significant and they confirm the quality of the Marsden Valley subdivision and the Ching’s Block development in particular undertaken here. In his evidence Mr Sewell confirms:
Marsden Park is a high quality residential development. That has resulted in an increase in value in terms of the price now achieved for the recent sale of the Homestead Block (except Stage 1) and the options remaining for the trustees in terms of the residual blocks of land.
24 National Standards Committee (No 1) of the New Zealand Law Society v X [2021] NZHC 821 at [24].
And:
…the development of the Trust’s land…into a very good residential suburb would not have occurred without prudent and competent foresight, planning and execution. In order to attract a market, the staging and design had to be well thought through and of a high quality. In my opinion, John and the other Trustees have achieved this in the way they approached the Marsden Park subdivision.
performed his project management/project director role here competently, effectively and with diligent hard work over a long period, achieving excellent results for what was not an easy ground-breaking subdivision in the Marsden Valley.
[373] I return now to the objections Mark and Andrew raise as to the level of remuneration paid to John as project manager over the various periods from 2008.
[374] Annual project management fees paid to John for the period 2008 – 2015 were initially set at $120,000 per annum including expenses. The evidence is that this amount was adjusted at some point to $130,000 per annum.
[375] While it is correct that the 2008 to 2015 period covered the bulk of the time for physical development of the Ching’s Block, the services to be provided by John under the 2008 project management arrangement were much broader than simply the physical development of the 12.72 hectare Ching’s Block Stage 1 land. Other roles undertaken by John included securing appropriate Plan Changes and resource consents for the entire Trust property, developing marketing and sales strategies, arranging appropriate bank and other funding, carrying out the subdivision work, and arranging other activities necessary to achieve the key outcomes of the development.
[376] Any criticisms from Mark and Andrew that John was writing his own contract terms as project manager for this or any later period are simply not justified on the evidence before me. Discussions between trustees other than John as to the terms of his employment and the rates to be paid occurred independently of him. These included, in particular, discussions with Edna as a trustee. Mr Hinton, too, provided input, in doing so no doubt relying on his commercial experience.
[377] In 2013 a relevant benchmarking assessment of John’s employment payment terms was undertaken by Mr Ewing, an expert in this area from EQI Global. This occurred partly in response to issues arising out of enquiries from the accountants, Kendons, and the involvement of Mr Mahony in 2012/2013.
[378] Mr Ewing’s estimated range for payment to a project manager for a development of this type was $180,000 to $220,000 with amounts being paid of up to
$260,000 per annum outside the Nelson area. These amounts were well above the
$120,000 to $130,000 per annum paid to John, an amount which also included expenses at the time. Despite this, no suggestion is made that John even attempted then to use the opportunity to request any pay increase.
[379] From 2016 onwards, Mr Russell assisted in preparing a management agreement involving John and his company. That 2016 agreement specified an annual management fee of $180,000 per annum plus GST. This included $10,000 for expenses.
[380] The $180,000 fee was based on another benchmarking report, this one from accountants PWC carried out in August 2015. The impetus for this PWC report it seems came from Mr Kearney, who was then for a time chairman of the board of trustees for the Trust. Mr Kearney too, it seems clear, was the strongest proponent for John’s remuneration at this $180,000 plus GST mark. And, interestingly, all parties to this proceeding, first, unequivocally accepted Mr Kearney’s credentials as a well- known Nelson businessman with significant construction and development experience and expertise, and secondly, acknowledged the high regard he was accorded by all who knew him. Significant weight, as I see it, can be given to his views on this remuneration rate.
[381] Mr Russell, a trustee at that time, accepted this. He said in his evidence he regarded Mr Kearney’s views as quite rightly a factor which he and the other trustees should give significant weight to.
[382] John said in his evidence (and others have confirmed) that the wide-ranging consenting, development and related work he had undertaken under his management contract throughout had been demanding and his role was a full time one. Despite this, John had not received management fees he had accrued since 2016 and at the date of the hearing in this matter these had accrued and I understand he was owed $520,950 in outstanding management fees (GST inclusive). This may have been in addition to a loan I understand he had made earlier to the Trust of $261,976.55 (GST inclusive) with respect to other management fees previously earned and declared but which also had never been paid to him.
[383] Suggestions are made too particularly by Mr Smithies, but also by Mark and Andrew that, in any event here, John’s role was not a full time one. In my view, this contention is quickly dismissed, as evidence to this effect is limited and questionable. This evidence includes comments from Mr Smithies, the valuer, who it is acknowledged, unlike Mr Sewell, has no hands-on residential subdivision experience. Mr Smithies makes what I see as an unsupported statement that John’s remuneration should have been based over an eight year period of the development “based upon a fulltime equivalent of 0.5 per cent (of the development cost) or thereabouts”. Mr Smithies, although a registered valuer, I am satisfied was unable to establish before me that he was a truly qualified expert in the day-to-day details of subdivision or development matters. And, as to this evidence, I am satisfied he based his comments in any event on what was an incorrect assessment of John’s role. As I see the position, it needs to be given little weight. By way of contrast, Mr Sewell, who clearly was a very experienced subdivision and development expert, illustrated in his evidence that John’s role here was a full-time one, it was extensive, and it was a role he successfully undertook throughout. Indeed, Mr Sewell’s oral evidence went so far as to confirm that, for him to employ a project manager to undertake even the bulk of the roles which have fallen to John here (particularly in Nelson which itself is a small market creating its own difficulties), would have required a salary to be paid in the order of $250,000 per annum plus.
[384] Lastly, Mark and Andrew repeatedly asserted throughout their evidence that John was simply not competent to fill the role of project manager for this development. I reject this contention. It is simply not borne out by reliable and expert evidence here from witnesses including, in particular, Mr Sewell, who were qualified and in a position to judge this. Mark and Andrew’s credibility in attacking John’s competence here must also be undermined, as I see it, by other evidence relating to the two awards which Newtons Survey and the Ching’s subdivision won for the Trust’s Marsden Valley subdivision as a standout subdivision. The significant weight of evidence before me was that John performed his project management and project direction role here competently, diligently, and with considerable hard work over a long period with good results.
[385] For all these reasons, I conclude that this aspect of Mark and Andrew’s third cause of action must fail. The request for an account to be undertaken for John’s project management fees, said by Mark and Andrew to involve an excessive amount of at least $1.1 million, is dismissed.
(ii) John’s contribution as a neighbour to the initial resource consent cost
[386] Under this head, Mark and Andrew seek that a further account of profits exercise is undertaken. This exercise would be in relation to the difference between the contribution John paid to the cost of the initial resource consent application (being
$40,000 (plus GST)) and what should have been a much higher figure to represent a true pro rata contribution required of him to the actual cost of the consent application and related development works.
[387] This raises a question also as to whether John improperly participated in the decision of the trustees at the time to require only a $40,000 (plus GST) contribution from him towards the initial resource consent, such that this was a breach of his duty as a trustee and represented an unacceptable conflict. The breach alleged by Mark and Andrew does not assert there was anything inherently wrong with a cost-sharing transaction being entered into at the time. Rather, the objection appears to be that John, under this arrangement, did not pay his fair share at this figure of $40,000 (plus GST).
[388] John in his evidence explains that the total $45,000 contribution (including GST) was based on the costs outlined for the initial 2007 resource consent from the Council. Evidence from the accountant, Mr Smith, links a $130,000 plus GST figure as the total approximate costs in relation to the consent application based on a total subdivision of 129 lots. Thus, the Trust was to meet $90,000 plus GST and John to meet $40,000 plus GST on a rough estimate basis. The arithmetic for this suggested that the $130,000 plus GST total, based on 129 lots, produced consent costs of $1,007 per lot. From the initial Council consent, the Trust was to benefit with 91 lots and John’s adjoining land with 38 lots. The Trust’s pro-rata share of this $130,000 plus GST for its 91 lots was therefore $91,637 and John’s adjoining land share for 38 lots was $38,363. This general formula was accepted by the trustees at the time with
agreement recorded in contemporaneous documents. John’s share for the 38 lots was rounded up to this $40,000 plus GST figure.
[389] As to the process adopted to reach this position, Mr Nelson in his evidence said that at the time (which was some 13 years ago) he discussed this issue with his co- trustee, Edna, and the accountant, Mr Hinton, separately from John. They were all satisfied it was fair.
[390] Mark and Andrew initially contended before me that the actual resource consent cost was not $130,000 but approximately $300,000 and that John, therefore, should have contributed a much higher figure than the $45,000 he paid. This was their initial assertion, later modified to an actual resource consent cost of $220,000. The
$220,000 contention was based it seems on a 2009 funding application document prepared by John. The $300,000 figure it appears came from a 2016 report from Mr Sewell. The $300,000 figure was erroneous as Mr Sewell was referring in the report to the Homestead Block when that cost amount was provided.
[391] Issues also arise over whether the $220,000 represented a fair figure in identifying the precise costs legitimately related to joint or common processes between the Trust and John’s entities. It is obvious there is no basis for requesting John to contribute to matters which benefit the Trust exclusively.
[392] I am satisfied Mark and Andrew have not adduced any unequivocal evidence before me to establish that the total actual shared resource consent cost was higher than the $130,000 (plus GST figure). It is true the $220,000 figure appears to have come from John himself in his later funding application material for the Trust. All this is historical however, relating back as it does to over a decade ago. The trustees at the time, Mr Nelson and Edna, and also Mr Hinton, were satisfied the $40,000 (plus GST) contribution was a fair one then. This Court should be reluctant to disturb commercial decisions made by independent trustees at the time with contemporaneous knowledge of the relevant circumstances. The amounts too, in any event, would not be particularly significant. Any difference is relatively minor in the context of the overall
claims made here.78 John says, too, that if there was any benefit to him, which he denies, it is more than offset by a significant amount of unpaid work he did to obtain the consent, which the Trust benefitted from at no additional cost.
[393] I agree with John and GHTL that, from a legal perspective, there is little in this claim to a further contribution towards resource consent costs advanced before the Court. In advancing this particular claim here, Mark and Andrew have not met the evidential standard required, being on the balance of probabilities. That claim is dismissed. But having said that, I consider it appropriate in the entire context of this case to advance an invitation to John (which I now do), without constituting any legal obligation on his part to do so, to make an additional ex gratia payment to the Trust towards his or the Keystone Trust’s contribution to the overall consenting costs he has himself noted at a total of $220,000.79
(iii) Were John’s decisions as trustee to undertake the Ching’s Block and
Homestead Block developments made in his self-interest rather than in the
interests of the Trust?
[394] It is appropriate at this point to briefly address the claim that John has been solely motivated by self-interest in his decisions as a trustee. This issue is raised at para 78(a) of Mark and Andrew’s statement of claim outlined at [323] above.
[395] The answer to this question follows from the matters I have outlined above. This must include my conclusion as to the reasonableness of the decision taken by the trustees to undertake the Ching’s Block development at the outset, in light of the purposes of the Trust, the meaning of cl 9.2 of the Trust Deed and the original intentions of Jim and Edna as settlors.
[396] I am satisfied here that Mark and Andrew have failed to establish that the original decisions to undertake the Ching’s Block development, and then not to sell it uncompleted when economic conditions changed in about 2008, were decisions made
78 Of the original consent figure at $130,000 (plus GST) used, the $40,000 (plus GST) paid by John amounted to about 30.8 per cent. If that original consent figure was calculated at $220,000 (plus GST), John’s 30.8 per cent share would have been $67,760 ( plus GST). A further payment of
$27,760 would have been required from John.
79 This ex gratia payment would obviously be made without any admission of liability.
solely in John’s self-interest. These decisions were made unanimously by all participating trustees. This included Edna as original settlor and trustee. They were the continuation of the processes Jim and Edna had already set in train and were in accordance with the express purpose outlined in the Trust Deed. The expert evidence is clear that these decisions were made for commercially justified reasons. Decisions made to continue the development ultimately were demonstrably better options for the beneficiaries than any alternatives of dumping land on a depressed market, assuming that any buyer could have been found.
[397] I reject the proposition that decisions to which John contributed to pursue development of the Ching’s Block and later the Homestead Block were made solely in order to secure his ongoing employment as project manager. As I see it, that suggestion is simply not supported by the evidence. Efforts to cast John as desperate for a job and unable to obtain employment elsewhere are not supported by any evidence provided to me.
[398] And, so far as the Homestead Block is concerned, because it does not connect in any way to John and Wendy’s adjoining land, I am satisfied its development does not involve a direct conflict with John’s interest in that adjoining land. The only potential conflict relates to John’s role as project manager generally and decisions to obtain funding for the Homestead Block. On these aspects I am satisfied, however, that the general merit of the Trust undertaking development of the Homestead Block is clear, given the substantial amount of evidence before me that subjected this question to significant scrutiny. Mr Sewell confirms the real merit in proceeding with the Homestead Block. Previously Mark and Andrew had sought a direction and injunction to prevent the development of the Homestead Block but, as I understand it, this was withdrawn after the merits of the application were questioned in this Court by Thomas J. Later, those merits were again considered by this Court when Mark and Andrew unsuccessfully applied for an injunction to prevent Stage 1 of the Homestead Block development from proceeding. Dunningham J, in her decision in this Court refusing the injunction, described the evidence advanced on behalf of John and GHTL
as “compelling as to the merits of the current course of action in terms of maintaining the value of the Trust property”.80
[399] I conclude that Mark and Andrew’s pleading that the Trust’s decision to undertake the Homestead Block was also one made in John’s self-interest does not bear further scrutiny. I dismiss it. I note in passing too that the current trustees of the Trust have sold most of the Homestead Block land for $6.7 million in response to what I understand was an unsolicited offer. This sale action is entirely inconsistent with Mark and Andrew’s theory that John is trying to drag out the subdivision simply to continue his receipt of remuneration as project manager.
(iv) Has John derived benefits and/or profited from the Trust’s subdivision of the
Ching’s Block as an adjoining landowner?
[400] Lastly, I turn to this aspect of Mark and Andrew’s third cause of action. For this claim to succeed, I must first establish that there was a fiduciary breach and, secondly, if so, that any profits concerned were derived and arose as a consequence of that breach. Here, causation is an essential element of an account of profits succeeding. If I am to reach a point of ordering disgorgement of profits by John from his adjoining land, a subsequent process will be required for the taking of accounts.
[401] On all this, however, John contends any claim to profits obtained by him or the Keystone Trust, his Trust which owned and developed the adjoining land, is fundamentally misconceived.
[402] At the outset, it is clear the Keystone Trust is not a party to this proceeding. The evidence indicates this was a family trust settled on 4 May 2016 following John’s separation from his wife, Wendy. John maintains it was a family trust settled for legitimate and normal reasons following a major change in his family circumstances.
[403] As a starting point, John contends the trustees of the Keystone Trust owed no fiduciary duties to Mark and Andrew and that, in any event, it has derived all proceeds of sale of the adjoining land sections simply from its own development of its land at
80 McLaughlin v McLaughlin, above n 2, at [65].
its own cost. He maintains too, no basis has been established here for treating the Keystone Trust as his alter ego in respect of subdivision activity carried out by John and for his benefit.
[404] Any question of profits obtained by John prior to the transfer to the Keystone Trust which occurred on 18 May 2017 does not arise here. There were no sales of sections from this adjoining land made until August 2017, with the majority of sales not settling until 1 April 2020.
[405] Both John and Mr Hinton, who was a trustee of the Keystone Trust, state that its development on the adjoining land was an entirely separate exercise from that undertaken by the Trust on its land. The Keystone Trust and John used separate contractors with separate planning processes and entirely separate funding sources.
[406] Further, Mark and Andrew have not sought to join John’s former wife, Wendy, as a party to this proceeding. She and John, as original owners of the adjoining land, sold it to the Keystone Trust and any pre-transfer profits would have been jointly owned by her and John. Clearly this Court has jurisdiction only in respect of alleged profits obtained by John alone.
[407] I am satisfied, too, that no account of profits can lie in this case simply because of an increase in the value of the adjoining land whether prior to, or subsequent to, the May 2017 transfer to the Keystone Trust. Causation becomes a real issue and is problematic here for Mark and Andrew. Any such increase in value of the Keystone Trust land naturally follows from its location in the Marsden Valley next to land with a developing change to residential use. It is a property right which belongs to the landowner and, as I see it, causation simply cannot be established here.
[408] Although it is accepted that the development of the Ching’s Block created efficiencies and benefits for John’s adjoining land in terms of connecting to boundary services, and “opening up” the Valley, much of that has also occurred for other neighbouring land owned by the McCashin family and others. All this was simply a consequence of the Trust carrying out the Ching’s Block subdivision, a subdivision expressly pursued by Jim before he died and completed by the Trust. Benefits to
John’s adjoining land were not caused by any breach by John of his fiduciary duty to the Trust.
[409] As to suggestions from Mark and Andrew that, although not pleaded, John should also have contributed to the cost of roads, bridges and other services installed on the Trust’s land which benefitted his adjoining land, no convincing evidence of any type was provided to the Court to support these assertions.
[410] And, in any event, no legal principle has been advanced to support the proposition that an account of profits should be ordered on the basis that a neighbouring landowner did not subsidise development work on the Trust’s land, land which it did not own, when it had no legal obligation to do so. This cannot constitute attackable profit the adjoining land has obtained. Before me, in cross-examination Mark and Andrew endeavoured to advance a theory the trustees erred in that they should have waited for another unconnected neighbour in the Marsden Valley (for example, Solitaire) to develop first. Although this claim was unpleaded, it is of no substance when the facts before the Court clearly establish two critical points. First, that Solitaire’s Quail Rise resource consent was not granted until 18 December 2014, some seven years after the Ching’s Block consent and its subdivision. Second, another small 17 lot development, Tussock Place, although mentioned only in passing, was consented to only on 26 March 2008, it had significantly lower quality design features, and it was located at the start of Marsden Valley. That Tussock Place development, therefore, would also have provided little benefit to the trustees had they waited for it to be completed.
[411] It necessarily follows that Mark and Andrew, in requesting an account of profits resulting from the adjoining land development, must be signalling for the Court ultimately to grant a remedy against the Keystone Trust. The trustees of that trust, as I note above, have not been joined as parties to this proceeding. As I see it, this creates an immediate difficulty for Mark and Andrew.
[412] Notwithstanding this, and in any event, Mark and Andrew have simply been unable to establish on the balance of probabilities that, even had there been an actionable breach of fiduciary duty on the part of John (and I have found otherwise),
in terms of causation John has profited by virtue of those actions by obtaining benefits from the sale of adjoining land sections directly from that breach of duty. I also, therefore, reject this aspect of Mark and Andrew’s third cause of action against John here.
(d)Third cause of action against GHTL
[413] The substance of Mark and Andrew’s allegations against GHTL in this proceeding relate largely to this third cause of action. At [80] of their pleading noted at [323] above, they contend that GHTL allowed/assisted John to act in positions of conflict and to profit thereby.
[414]This raises two issues so far as the claim against GHTL is concerned:
(a)If John was conflicted in any of the ways alleged by Mark and Andrew, did GHTL as a matter of law have to address those alleged conflicts of interest and, if so, how did it do that?
(b)Even if GHTL did not adequately address the alleged conflicts (which has been denied) and assuming that allowed John to profit thereby (again which has been denied) can GHTL be liable as a matter of law to account for profits that it did not make?
[415] Here, I have concluded for the reasons outlined above that, even if it is accepted there was a potential for unauthorised conflicts of interest on the part of John to occur, these were appropriately managed by the trustees and there was no recoverable benefit derived by John.
[416] At [80](b) of Mark and Andrew’s statement of claim they contend that GHTL ought to have required John to retire as a trustee in light of what they say were these alleged conflicts of interest. On this, clearly there was no ability for GHTL, however, as only one of the trustees, to require John to resign under the Trust Deed. It would have required Edna, prior to 4 April 2016 when she purported to resign as appointor, to remove John. The only other possible route would have been to make application to the Court which I accept was simply not warranted here.
[417] I turn now to the issue as to whether GHTL, in any event, can be liable as a matter of law for the alleged profits made by John. On this Mark and Andrew, it seems, qualified their claim that GHTL is jointly and severally liable for any order to disgorge profits made against John by saying this is only to the extent that John is unable to meet any award himself. This represented an oral submission made before me by Mr Johnson. I consider, however, that this claim against GHTL is fundamentally misconceived. Unlike compensatory damages which are measured by what a plaintiff may have lost, an account of profits is measured by what a defendant has gained.81 Here, GHTL maintains it has gained nothing. I accept this is the case.
[418] An errant fiduciary will only be liable to account for profit it has made. The leading case relating to this is the Supreme Court decision in Stevens v Premium Real Estate Ltd.82 In that case, Mr and Mrs Stevens retained Premium to sell their home. Premium induced the Stevens to sell the home to a Mr Larsen knowing, but not telling the Stevens, that Mr Larsen was in the business of re-selling homes quickly for a profit. The Stevens sued Premium for the profit made by Mr Larsen in re-selling the home. On that claim the Supreme Court found Premium to be in breach of its fiduciary duty but, however, refused to make an order that it account for the profits made by Mr Larsen.
[419] The Supreme Court held that the errant fiduciary could not be liable to account because it had not shared in the profit made. This decision in Premium is binding on me. Although I accept it was not a case involving a trustee as fiduciary, the activity or occupation in which Premium as defendant was engaged and gave rise to the fiduciary obligation, was not important and did not affect the principle reached. It is the existence of the fiduciary duty (which can be one owed by real estate agents, directors, trustees and others) that is important when determining the remedy.
[420] Even if I had found that GHTL had breached its fiduciary duties and John had profited here (and I have found otherwise) GHTL, as I see it, cannot be liable for a profit it did not make. To hold otherwise would be inequitable and not serve the purpose behind the remedy of an account of profits.
81 Chirnside v Fay, above n 64, at [17].
82 Stevens v Premium Real Estate Ltd [2009] NZSC 15, [2009] 2 NZLR 884.
(e)Section 73 Trustee Act 1956
[421] Had I found otherwise regarding the third cause of action there is a possible argument that s 73 of the Trustee Act is available to John and GHTL in the context of this account of profits claim, it being a defence available in the event of breaches of trust being established.
[422] On this, John relies upon the principles and comments which I have addressed with respect to the second cause of action claim noted above.
[423] By way of additional comment, I note that a principle of acquiescence is of some relevance relating to this aspect. In particular, plaintiffs who seek a remedy of account in equity cannot stand by and permit defendants to make profits over a period and then claim those profits for themselves.83
[424] John says this is precisely what Mark and Andrew have done in this case. He says they have simply stood by and allowed the trustees to proceed with development of the Ching’s Block and now complain. This occurred, first, in the period 2007 to 2011 when, despite reports being provided to them to make it clear the Ching’s Block development was happening, they raised no objection and showed little interest. Secondly, in the period 2012 to 2017, John says that despite some five years of intensive communications by the trustees to Mark and Andrew, they did not at any stage place him or the trustees on notice that they would seek disgorgement of alleged profits or that it was a belief or expectation that development works to be undertaken on John’s adjoining land (albeit by third parties) would be for the benefit of the Trust. No demands were made that the development of the Ching’s Block stop. It is fair to say that would have been at odds with what appeared to be Mark and Andrew’s main concern, underlying their appointment of Mr Davidson QC, which was their stated desire for faster distributions to be made from the Trust.
[425] Given the reasons outlined earlier and the delays I note above, including general acquiescence on the part of Mark and Andrew, I find here it would be
83 See Tucker, Le Poidevin and Brightwell, above n 43, at [41-123] and Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [31.6.1].
inappropriate in the interests of justice to make any order for disgorgement or account of profits.
[426] For all the reasons I have outlined above, this third breach of fiduciary duty cause of action against John and also against GHTL seeking an account of profits fails. It is dismissed.
Result
[427]For the reasons I have indicated above:
(a)As to Mark and Andrew’s first cause of action relating to removal of John as a trustee of the Trust, this effectively succeeds, given that John has now agreed to retire as a trustee. An order is now made, as referred to in [116] above, confirming that, pursuant to John’s expressed wish to retire as a trustee of the Trust, which the Court accepts, John does so retire and he is hereby removed as a trustee of the Trust, effective from the 16th day of November 2021.
(b)Pursuant to [151] above, an order is now made that Paul Dorrance is appointed as the new trustee of the Trust to replace John effective from the 16th day of November 2021 subject to Paul Dorrance completing an appropriate consent to act prior to that date.
(c)As to Mark and Andrew’s second cause of action against John and GHTL seeking compensation for alleged breach of their duties to the beneficiaries relating to the Ching’s Block subdivision, that claim fails and it is dismissed.
(d)As to Mark and Andrew’s third cause of action seeking an account of profits from John and GHTL with respect to alleged breaches of fiduciary duty, this claim also fails and is dismissed.
Costs
[428] Certain issues as to a possible claim for costs have arisen from Mark and Andrew’s pleadings in this case. In addition, costs with respect to the proceeding and the hearing before me need to be determined.
[429] Counsel at the hearing requested that costs should be reserved. If necessary, they suggested these could be the subject of further submissions.
[430]That said, costs are reserved.
[431] Counsel for the parties are urged to liaise with a view to endeavouring to resolve between themselves all issues as to costs. Failing this being achieved, then the parties may file (sequentially) memoranda of submissions as to costs and, in the absence of either party indicating they wish to be heard on that question, I will decide the issue of costs based upon the memoranda filed and all the other material which has been provided relating to this proceeding.
Final words
[432] At [11] above, I indicated that the first words in this unfortunate family dispute should fall to Edna. Areas of concern which the parties have exhibited reflect the wider and combative family dispute between these siblings. A primary task between the McLaughlin brothers and affected members of their individual families ought now to be building bridges between the two sides. The inter-family problems which developed are not of a kind that any Court can fully resolve. That resolution will require restraint, common sense and generosity of spirit from all.
[433] Bearing all this in mind, it seems only appropriate that the final words in this whole sad and unfortunate saga should again fall to Edna:84
I am glad that the Trust dispute has not interfered with my relationship with my children or grandchildren too much but very much hope that these issues can be resolved without court action.
84 At para [42] of Edna’s 7 November 2016 affidavit.
[434] Regrettably, Edna’s hopes and aspirations came to nothing. This bruising dispute over the Trust went the distance in this Court. With this judgment, that aspect, in the High Court at least, is now over. Hopefully, despite the brothers having been pitted against each other for many years (for which no doubt everyone feels aggrieved), a time might come when Edna’s expressed concerns about the relationships in her family will result in real efforts being made to heal the rifts so all can move forward with their lives.
……………………………………………….
Gendall J
Solicitors:
Wynn Williams, Auckland
N Lawrence, Barrister, Christchurch Jeremy Johnson Barrister, Auckland Nathan Gedye QC, Barrister, Auckland Buddle Findlay, Christchurch
Janna McGuigan Barrister Limited, Christchurch
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