McLennan v Livaja
[2017] NZCA 446
•11 October 2017 at 2.30 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA246/2016 [2017] NZCA 446 |
| BETWEEN | IAIN MCLENNAN AND BORIS VAN DELDEN AS LIQUIDATORS OF NEIL TIMBER LIMITED (IN LIQUIDATION) Appellants |
| AND | BORIS LIVAJA |
| AND | IWONA GRAZYNA KOTOWSKA-LIVAJA |
| AND | ORION TRUSTEE 1 LIMITED |
| Hearing: | 26 June 2017 |
Court: | Brown, Dobson and Brewer JJ |
Counsel: | P J Dale for Appellant |
Judgment: | 11 October 2017 at 2.30 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellants must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Dobson J)
This is an appeal from a decision of Associate Judge Doogue dismissing an application by the appellants, the liquidators of Neil Timber Ltd (NTL), that a caveat lodged against a residential property located at 113G Sturges Road, Henderson, Auckland (the Sturges Road property), should not lapse.[1] The three respondents are the registered proprietors of the caveated property in their capacity as the trustees of the Orion Trust.[2] In essence, the appellants claim an equitable interest in the Sturges Road property on the basis that it was purchased using funds arising from the sale of a property that had been acquired in circumstances amounting to knowing receipt. The issue raised by the appeal is whether a party other than a party to whom relevant obligations were owed in the course of a particular transaction can bring equitable claims for relief relying on the breach of such obligations.
[1]McLennan v Livaja [2016] NZHC 889.
[2]The origins of the Orion Trust are explained at [16]–[18] below.
The background to the application for the caveat is protracted and somewhat complicated. An understanding of that background is necessary, however, to analyse the legal basis advanced for the appellants’ claim to a caveatable interest.
Factual background
The relationship between Mr Ede and Ms Kotowska-Livaja
The second respondent, Ms Kotowska-Livaja, was married to Mr John Ede in January 2004. She met him previously whilst visiting New Zealand and maintained a long distance relationship with him from Poland where she lived. After the couple married, Ms Kotowska‑Livaja returned to Poland until September 2004 when she moved to New Zealand with her mother and her son, who was then seven years old. Difficulties soon arose in the marriage. Mr Ede and Ms Kotowska-Livaja separated in March 2005, in which month she lodged a notice of claim against a residential property at 131 Edmonton Road, Te Atatu, Auckland.
Mr Ede had been bankrupted in June 2004. Before and after his bankruptcy he worked with NTL in a role treated as that of a shadow or quasi director. Throughout the relevant period NTL’s sole director was Mr Stuart Boaden. Mr Boaden explained that Mr Ede was working with NTL with a view to purchasing it.
Mr Ede was also responsible for the formation of a company called Neil Timber Trustee Company Ltd (NTTCL). The sole shareholder and director of NTTCL was a member of Mr Ede’s immediate family who appears to have participated at Mr Ede’s direction.[3] Mr Ede’s intention was to use NTTCL as the vehicle to purchase NTL, but that did not happen.
[3]The appellants contended that the director/shareholder was a brother of Mr Ede, whereas the respondents rejected that and contended that it was his mother.
Over a period of some six years Mr Ede completed three agreements in relation to property with Ms Kotowska-Livaja. A first handwritten agreement was not explicitly in contemplation of marriage and was not witnessed. It recorded certain contingent promises that Mr Ede would make if he became engaged to marry Ms Kotowska‑Livaja, in terms of provision of money and assets for her. The document appears to be dated August 2003, but its terms indicate that it was either completed later (after October 2004) or was amended after that time.[4]
[4]Mr Dale advised that the liquidators have not sighted an original of the document and the photocopy provided is indistinct.
In January 2005 Ms Kotowska-Livaja settled the D’Angellis Trust. She had by then consulted an Auckland solicitor, Anthony Fortune. The trust deed was prepared by Mr Fortune’s firm, Fortune Manning. It appointed Ms Kotowska-Livaja and FM Trustees 325 Ltd as the trustees. Mr Fortune and a second solicitor in his firm, Mr Selkirk, were the directors of that company.
A second “relationship property” agreement was concluded in April 2005. It was also prepared by Fortune Manning. The recitals acknowledged that Mr Ede had been adjudicated bankrupt. The April 2005 agreement recorded that the prior agreement of August 2003 had been partially performed by Mr Ede purchasing a motor vehicle and a sports bicycle for Ms Kotowska-Livaja. It further acknowledged that the remaining aspects of the August 2003 agreement that had not been fulfilled remained enforceable, including a transfer of an apartment at 1/1 Ambrico Place to Ms Kotowska-Livaja’s trust. The parties also agreed that Mr Ede would pay Ms Kotowska-Livaja $4,000 per month by way of maintenance from the date on which they commenced living apart (recorded as 14 March 2005). There was no analysis in the agreement of what comprised the pool of relationship property.
In January 2006 Mr Fortune gave notice to Mr Ede on behalf of Ms Kotowska-Livaja that she wanted the April 2005 relationship property agreement to be honoured.
A third agreement was completed in January 2009. By then Mr Ede had been discharged from his bankruptcy. This is the only agreement that records it as being in relation to the division of property pursuant to ss 21 and 21A–21S of the Property (Relationships) Act 1976. Mr Ede confirmed an ongoing promise to pay monthly maintenance, and increased the amount to be paid from $4,000 to $6,500 per month until the marriage was dissolved, which the parties intended to occur after 15 July 2009. The January 2009 agreement also recorded Mr Ede’s commitment to pay Ms Kotowska-Livaja $300,000 as her separate property in three instalments between February and June 2009. This was recorded as releasing Mr Ede from the obligation he had made in the April 2005 agreement to pay her $250,000 upon either a breakdown of their marriage in the future or his death.
The transaction at issue
In February 2006 Mr Ede signed an agreement for sale and purchase of an apartment at 30/1 Ambrico Place, New Lynn, Auckland. The purchaser was described as NTTCL or its nominee. The purchase price was $330,000 and settlement was to occur on 23 May 2006. On 7 March 2006 Mr Ede sent Mr Fortune a facsimile using an NTL cover sheet, attaching the three operative pages of the agreement for sale and purchase. Mr Ede’s handwritten note on the cover page advised Mr Fortune:
Our property sale[[5]] is proceeding and funds will be available on settlement date or earlier to complete Ambrico purchase.
[5]There is no elaboration identifying the property sale referred to. It appears to be the transaction NTL was involved in, described at [65] below.
In March 2006 Mr Ede’s solicitors gave notice to Mr Fortune that the D’Angellis Trust was to be nominated by NTTCL as the purchaser of the apartment. Mr Ede’s solicitors acted for the purchaser in completing the conveyancing for the transaction. A letter from Mr Ede’s solicitors to those acting for the vendor on 19 May 2006 noted that the nominee for the purchaser was not then bound because the deed of nomination, as between NTTCL as the nominator and the trustees of the D’Angellis Trust as nominee, had not been completed. It is reasonable to infer that the trustees accepted that nomination as the purchase was settled on 23 May 2006. Alternatively, Mr Ede may have instructed his solicitors to proceed, despite the nomination not having been formally accepted by the D’Angellis Trust. The D’Angellis Trust provided none of the consideration.
It is the source of the funds for purchase of 30/1 Ambrico Place that gives rise to the appellants’ alleged caveatable interest. Mr Ede was involved in a complex land development scheme that involved NTL. NTL obtained a loan facility supposedly related to that development. A sum of $565,000 was made available, but not received by NTL directly. Instead, the money was paid into the trust account of Mr Ede’s solicitors. The explanation was that Mr Ede claimed an entitlement to a commission of $360,000 for his part in the land development transaction and took that amount from the $565,000 that had been paid to his solicitors. On his instructions, the solicitors used that amount to pay for the purchase of 30/1 Ambrico Place and to make a further payment of $20,000 to Ms Kotowska-Livaja towards the cost of renovating the property. The statement prepared by Mr Ede’s solicitors accounting for the $360,000 received was addressed to NTL and acknowledged receipt of that amount, implicitly from NTL.
Some aspects of the land transactions Mr Ede was involved in (although apparently not the purchase of 30/1 Ambrico Place) featured in his later criminal prosecutions for 22 charges under the Insolvency Act 2006, the Crimes Act 1961 and the Companies Act 1993. He was convicted and sentenced to three years and seven months’ imprisonment.[6]
[6]R v Ede DC Auckland CRI-2009-090-3527, 25 June 2013.
Some three weeks after settlement, Messrs Boaden and Ede completed a joint letter respectively on behalf of NTL and NTTCL that was addressed to the D’Angellis Trust. It confirmed that the moneys applied to purchase the apartment at 30/1 Ambrico Place, and the $20,000 advance to Ms Kotowska-Livaja were not a loan, and were not to be repaid. On the same day Mr Boaden wrote a one sentence instruction to Mr Ede’s solicitors, directing them to settle the purchase of 30/1 Ambrico Place and to issue the new owner as the D’Angellis Trust for Ms Kotowska-Livaja.
Subsequent developments and acquisition of caveated property
In October 2007 Ms Kotowska-Livaja settled a new trust (the Fata Morgana Trust) and resettled on that new trust the assets of the D’Angellis Trust. A company, Fata Morgana Ltd, was incorporated to act as the corporate trustee for the new trust. Ms Kotowska-Livaja was appointed the director of that company. Ms Kotowska‑Livaja married Mr Livaja in September 2009 and he subsequently became an additional beneficiary of the Fata Morgana Trust.
The complex at 1 Ambrico Place had weathertightness issues. Between 2009 and 2014 it required substantial expenditure on recladding and legal fees in pursuit of weathertightness claims. In December 2014 the Fata Morgana Trust sold the property at 30/1 Ambrico Place and, after repayment of a mortgage, applied the net proceeds to the purchase of the Sturges Road property.
The appellants claim that the equity applied was approximately $270,000. The Sturges Road purchase was completed in the name of yet another trust, the Orion Trust. The three respondents are the trustees of that trust.
The appellants had been appointed liquidators of NTL in December 2007 but, at least on their version of events, were unable to have sufficient access to NTL’s records to research the application of company moneys for the purchase of 30/1 Ambrico Place until 2015.
The appellants lodged a caveat against the Sturges Road property in January 2016 claiming that the registered proprietors held it as constructive trustees for the liquidators as beneficiaries on behalf of the creditors of NTL. Shortly thereafter the appellants commenced the present proceedings for an order that the caveat not lapse.
Ms Kotowska-Livaja swore an affidavit in opposition to the appellants’ application on 7 March 2016. She stated that she treated the acquisition of 30/1 Ambrico Place as part of her relationship property settlement with Mr Ede. She stated that she did not know if NTL funds were used to purchase the unit or the details of the dealings between NTL and Mr Ede. She emphasised throughout her affidavit that she relied at all times on the legal advice of Mr Fortune. She said that she was “represented by [her] lawyer at that time who made sure that [her] settlement was legitimate”.
The appellants’ statement of claim alleged that a constructive trust arose out of the respondents’ awareness of the source of funds used to acquire 30/1 Ambrico Place. It alleged that Ms Kotowska-Livaja had “actual and constructive knowledge” of the circumstances in which Mr Ede had procured the moneys of NTL to be applied to the purchase of that property.
Mr Dale for the appellants acknowledged that if the appeal is allowed the liquidators will file an amended statement of claim. It would instead allege that liability arises because of knowing receipt by the trustees of the D’Angellis Trust of the NTL funds applied to the purchase of 30/1 Ambrico Place, and that those funds had been misapplied in breach of fiduciary obligations or misappropriated by Mr Ede.
The High Court decision
The Associate Judge’s analysis of the circumstances in which the transaction occurred was generally consistent with the reconstruction as discovered by the appellants. The Associate Judge’s reasoning that the appellants could not demonstrate a reasonably arguable case for an equitable interest in the Sturges Road property sufficient to sustain a caveat is recorded in the following paragraphs of the judgment:[7]
[31] The next issue, then, is whether the applicants can show that it is arguable that [Ms Kotowska-Livaja] ought to have appreciated that there was a likelihood that the money used to purchase the property at 30/1 Ambrico Place came from a questionable dealing on the part of Mr Ede. No submissions were made to me about the level of detail which equity requires that the recipient would have to have about the circumstances importing dishonesty. I will assume that the owner of the property need only show that it was likely from all the surrounding circumstances that the recipient held the subjective belief that there was probably something suspicious about the transaction. Can that be said of the recipient in this case?
…
[34] Dishonesty relevant to these questions, though, would seem to involve knowledge of dishonesty affecting the circumstances in which the paying party himself obtained the property. Any avoidance of the bankruptcy regime affected creditors of Mr Ede but not the company. It would be possible for Mr Ede to have obtained the $360,000 by legitimate means even though he might have been dishonest by not making that money available to the Official Assignee to distribute between his creditors.
[35] My conclusion is that the fact that Mr Ede was bankrupt was not a matter which relevantly affected the conscience of the second respondent when receiving these funds and which requires her to be treated as a trustee of the funds for the benefit of the company. I do not consider that it is reasonably arguable that she believed that the property had been acquired as a result of Mr Ede practising dishonesty on the company, even though my conclusion is that that is probably what occurred.
Arguments on appeal
[7]McLennan v Livaja, above n 1.
Mr Dale argued that the actual knowledge that could be attributed to any of the trustees of the D’Angellis Trust at the time it acquired 30/1 Ambrico Place should have caused them to make inquiry as to the source of the funds and the propriety of their application. Arguably, there were sufficient grounds for suspicion to impute to the trustees constructive knowledge of Mr Ede’s misappropriation of NTL’s money or application of its money in breach of a fiduciary obligation owed by him to NTL.
Mr Dale did not explicitly criticise the Associate Judge for focussing solely on the extent of actual knowledge that could be attributed to Ms Kotowska‑Livaja. However, the absence of any analysis as to the potentially greater awareness that could have been attributed to the professional trustees, and the absence of consideration of a wilful blindness form of constructive knowledge were the principle points on which this Court was invited to come to the contrary conclusion.
Mr Judd’s response for the respondents was that there were no tenable grounds for attributing more extensive constructive knowledge to the trustees, so as to put them on notice of grounds for suspecting the source of the funds applied to purchase 30/1 Ambrico Place. He also disputed the relevance of the state of awareness of Ms Kotowska‑Livaja’s co‑trustees of the D’Angellis Trust. In the context of an application to maintain a caveat, the appeal turns on these two issues.
The test for maintaining a caveat
The test for maintaining a caveat pending substantive determination of the underlying claim is well settled. The caveator has an onus to make out a reasonably arguable case. The Court generally adopts a relatively cautious approach, given the rights of parties ought not to be determined in summary proceedings and the consequences of requiring a caveat to be withdrawn.[8] A Court will not order removal of a caveat unless it is patently clear that the caveat cannot be maintained because there was no valid ground to support the caveat or that such a valid ground no longer exists.
[8]See New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1 NZLR 41 (CA) at 43 and Sims v Lowe [1988] 1 NZLR 656 (CA) at 659–660.
In Eng Mee Yong v Letchumanan s/o Velayutham the Privy Council, on appeal from the Courts of Malaysia, treated the process for interlocutory consideration of the justification for a caveat as being similar to the analysis in cases of interlocutory injunction.[9] That analysis involves first the assessment of whether the evidence presented in support of the claim to an interest in the property raises a serious question to be tried, and, if so, the assessment as to whether the balance of convenience favoured the caveat being sustained until substantive determination.
[9]Eng Mee Young v Letchumanan s/o Velayutham [1980] AC 331 (PC) at 335–337.
A similar residual discretion applies in New Zealand. Notwithstanding an arguable case, the Court retains a discretion to remove a caveat where, for instance, the removal will not prejudice the interests of the caveator.[10] However resort to such a discretion is relatively rare and, generally, a caveator will be entitled to an order maintaining the caveat once a reasonably arguable case is made out.
Knowing receipt
The test for requisite knowledge
[10]Pacific Homes Ltd (In Receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656; Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA) at [22]–[23]; and Bethell v Rickard [2013] NZCA 68 at [22]–[23].
The appellants do not allege that the trustees of the D’Angellis Trust had actual knowledge that NTL’s funds were either misappropriated by Mr Ede, or that they were applied for the purchase of 30/1 Ambrico Place in breach of fiduciary obligations owed by him to NTL. Rather, the claim for knowing receipt of those moneys relies on attributing constructive knowledge of such a breach to the trustees because of their wilful blindness in not making inquiries when there were strong grounds for suspicion about the source of the funds and Mr Ede’s entitlement to apply them.
Mr Dale relied on the description of wilful blindness in the Supreme Court’s decision in Westpac New Zealand Ltd v MAP and Associates Ltd.[11] That litigation involved the bank defending a claim that it had failed to honour the terms of a mandate between it and its customer which the bank sought to justify on the ground that actioning the transaction in question would leave it vulnerable to a claim for dishonest assistance. In that context, the Supreme Court observed:
[27] The key ingredient in the cause of action for dishonest assistance is the need for a dishonest state of mind on the part of the person who assists in the breach of trust. We agree with the statement in Barlow Clowes that such a state of mind may consist in actual knowledge that the transaction is one in which the assistor cannot honestly participate. But it may also consist in what we would describe as a sufficiently strong suspicion of a breach of trust, coupled with a deliberate decision not to make inquiry lest the inquiry result in actual knowledge. For the purpose of this alternative, it is necessary that the strength of the suspicion that a breach of trust is intended makes it dishonest to decide not to make inquiry. That state of mind, which equity equates with actual knowledge, is usually referred to as wilful blindness. It involves shutting one’s eyes to the obvious and can thus fairly be equated with the dishonesty involved when there is actual knowledge.
[11]Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751.
Mr Dale did not draw any distinction between this test for wilful blindness that applies in cases of dishonest assistance and the test that should apply in cases of knowing receipt.
Mr Judd sought to confine liability for knowing receipt to circumstances in which the recipient had actual knowledge of a fraud or breach of trust. He relied on the High Court decision of Courtney J in Worldtel NZ Ltd v Kim.[12] That case involved claims against a Ms Han for both knowing receipt and dishonest assistance of the fraud of her husband. The Judge focussed on the nature and extent of one defendant’s actual knowledge of the dishonesty in the other defendant’s fraudulent conduct, concluding that that knowledge must be of a type making it unconscionable to retain the benefit received.[13]
[12]Worldtel NZ Ltd v Kim HC Auckland CIV-2009-404-1158, 30 September 2011.
[13]At [38].
The forms of imputed or constructive knowledge that are sufficient to establish liability for dishonest assistance or knowing receipt where actual knowledge cannot be made out have been considered in numerous contexts where there are cross-references from tests to be applied in the one type of claim to the test that should apply in the other type of claim.
The Supreme Court’s approach in Westpac New Zealand Ltd v MAP and Associates Ltd, and in particular the passage cited at [32] above, has settled the scope of constructive or imputed knowledge that is required in cases where actual knowledge on the part of the dishonest assister cannot be made out. The same cannot be said in the case of knowing receipt. In Marr v Parkin this Court recognised different schools of thought on the degree of knowledge or notice required to establish knowing receipt, without expressing a concluded view as to the test that should apply in New Zealand.[14] The nature of the test is relevant to the liquidators’ claim in this proceeding, and a degree of clarity is therefore required.
[14]Marr v Parkin [2015] NZCA 371 at [39]–[40].
There are relevant distinctions in the rationale for the two types of claim and in the intended effect of any relief granted. A dishonest assister incurs liability in circumstances that may be likened to the tort of unlawful interference in contractual relations.[15] The dishonest assister facilitates dealings that she or he knows involve property passing to other recipients in breach of rights of or obligations owed to the entity deprived of that property. It is not relevant whether the dishonest assister has or had propriety interests in the property involved.[16] The dishonest involvement triggers a personal liability to compensate the claimant for facilitating the transfer of property in breach of rights of or obligations owed to the claimant.[17]
[15]Charles Harpum “Accessory liability for procuring or assisting a breach of trust” (1995) 111 LQR 545 at 546.
[16]Royal Brunei Airlines Sdn Bdh v Tan [1995] 2 AC 378 (PC) at 382.
[17]At 392.
A claim for knowing receipt, however, depends on the tainted circumstances of receipt of property.[18] Liability will arise where it is unconscionable for the recipient to retain it because of the recipient’s state of knowledge in respect of the fact that the transfer involved a breach of fiduciary obligations owed by the transferor.[19]
[18]Some commentators prefer the term “unconscionable receipt”: see Alastair Hudson Equity and Trusts (9th ed, Routledge, Milton Park, 2017) at [19.3.1].
[19]Bank of Credit and Commerce (Overseas) Ltd v Akindale [2001] Ch 437 (CA) at 455.
Different High Court judgments have described the basis for knowing receipt as either unconscionability or unjust enrichment, a divergence possibly arising from the nature of the remedy applied in such cases.[20] This in turn has led to differing conclusions as to the level of knowledge required to establish liability.
[20]For the unjust enrichment position see Powell v Thompson [1991] 1 NZLR 597 (HC) and Equiticorp Industries Group Ltd (In Statutory Management) v The Crown(Judgment no 47) [1998] 2 NZLR 481 (HC). For the unconscionable position see Equiticorp Industries Group Ltd v Hawkins [1991] 3 NZLR 700 (HC) and Worldtel NZ Ltd v Kim, above n 12. Unjust enrichment as a basis for knowing receipt has not found academic favour: see for example Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones: The Law of Unjust Enrichment (9th ed, Thomson Reuters, London, 2016) at [8–201]–[8–203]; Hudson, above n 18, at [19.3.6]; and Rohan Havelock “The battle over knowing receipt” [2015] 26 NZULR 587 at 600–609.
We consider that the correct basis for knowing receipt is unconscionability. We prefer to characterise the liability incurred on a finding of knowing receipt as a personal liability to account in equity to the beneficiaries by restoring the property lost by the unconscionable receipt. The core duty of that liability is to restore misapplied assets, or their equivalent, to the beneficiaries.[21]
[21]Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 at [31].
Numerous cases have considered the forms of imputed or constructive knowledge that are sufficient to create liability for knowing receipt. They often do so by reference to the categories of knowledge originally defined in the dishonest assistance case of Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA,[22] which postulated that actual knowledge and four further levels of imputed or constructive knowledge could be sufficient to make out liability for dishonest assistance. This Court contemplated the prospect that, depending on circumstances, each of the five categories of actual, imputed or constructive knowledge defined in Baden might be sufficient in making out claims for both dishonest assistance and knowing receipt.[23]
[22]Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (Ch) at [250], [274]–[275] and [287]. Note that Baden was in fact decided in 1983 although not reported until 1993.
[23]Westpac Banking Corporation v Savin [1985] 2 NZLR 41 (CA) at 52–53.
Soon after Baden, however, Megarry VC in Re Montagu’s Settlement Trusts eschewed those five categories as being any more than guides in determining whether the recipient’s conscience was affected in such a way as to require him or her to hold any of the property received on a constructive trust.[24]
[24]ReMontagu’s Settlement Trusts; Duke of Manchester v National Westminster Bank Ltd [1987] Ch 264 (Ch) at 278–279.
Subsequent to Megarry VC’s decision in Re Montagu’s Settlement Trusts the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council required the attribution of a form of knowledge that affects the recipient’s conscience in claims for knowing receipt.[25] In that decision, where the claimant banks were ultimately unsuccessful in their claim for compound interest, Lord Browne-Wilkinson reflected on the rationale for such a claim and, in particular, whether an equitable proprietary claim arose in such circumstances. In laying the foundation for his reasoning Lord Browne-Wilkinson stated four relevant principles of trust law as he described them, the first two of which were:[26]
(i)Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust).
(ii)Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest being affected, he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust, or, in the case of a constructive trust, of the factors which are alleged to affect his conscience.
[25]Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL).
[26]At 705.
Where a recipient of property is not fixed with actual knowledge, but rather a relevant form of wilful blindness, those principles are to be applied at the point when the recipient was sufficiently on notice to appreciate he or she should inquire about adverse interests, but elected not to inquire and therefore became wilfully blind to the interest that was relevantly adverse to the recipient taking legal title.
Although the Supreme Court’s formulation of the requisite knowledge in Westpac New Zealand Ltd v MAP and Associates Ltd is in the context of a dishonest assistance claim, we consider that the circumstances of imputed knowledge as set out in that judgment are appropriately applied in considering whether the circumstances of receipt make it unconscionable for the recipient to retain the property. The utility of adopting that approach does not derive from any shared rationale for the bases for the respective causes of action in dishonest assistance and knowing receipt. However, without putting a gloss on the inquiry, the formulation by the Supreme Court aptly captures the nature of the inquiry as to the potential unconscionability of the circumstances of receipt.
Whose knowledge or awareness is relevant?
Mr Judd argued that a requisite level of knowledge could not be made out against any of the trustees of the D’Angellis Trust. In oral argument he took the additional point that the appellants could not attribute to Ms Kotowska-Livaja suspicions that might arguably have triggered an obligation for Messrs Fortune or Selkirk (as directors of the corporate trustee, FM Trustees 325 Ltd) to make inquiry where they could be expected to be far more aware of the prospects of Mr Ede acting in breach of relevant obligations. Mr Judd cited Re Montagu’s Settlement Trusts as authority for this proposition. There, the recipient of the trust property was held not to have knowledge of the breach of trust because, although the recipient’s solicitor was on notice as to the breach of trust, the recipient was entitled to rely on his solicitor’s advice to the contrary.[27] Thus the trust property was received without any constraint that ought to have affected his conscience.
[27]Re Montagu’s Settlement Trusts, above n 24, at 286.
We are not satisfied there is a direct analogy between the circumstances of the Montagu case and the present. The analogy could be made out if Ms Kotowska‑Livaja acquired 30/1 Ambrico Place outright on her own (that is, both legally and beneficially) without having knowledge of sufficient facts for her to be suspicious to an extent that it was wilful blindness for her not to inquire, and where Mr Fortune (who may have had such knowledge) was involved only as her solicitor.
However in this case legal title was taken by all of the trustees. The state of awareness of the corporate trustee can be treated as that of Mr Fortune. Ms Kotowska‑Livaja participated in the same capacity as Mr Fortune, rather than in a different one. Where the rationale for imposing a constructive trust is on the basis of wilful blindness that has prevented the recipient learning of misapplication of the funds, equity will inquire as to the conscience of the recipient, and that is necessarily a personal assessment. In this case Ms Kotowska-Livaja was not the only recipient. Having elected to take ownership via a trust, it is the knowledge and awareness of all the trustees that is relevant. We therefore consider that the state of suspicion reasonably attributed to the trustees would be unreasonably and artificially confined if it was determined only on the state of Ms Kotowska‑Livaja’s own knowledge.
In broadening the analysis to include all of the trustees, FM Trustees 325 Ltd’s knowledge is that which can reasonably be attributed to its directors, and, in particular, Mr Fortune. The appellants’ claim can therefore extend to circumstances that ought to have given rise to a suspicion of wrongdoing by Mr Ede that was sufficient to characterise Mr Fortune’s lack of inquiries as wilful blindness.
Which obligations owed by Mr Ede were relevant?
The case for the appellants relies on the combined impact of all grounds for suspicion about Mr Ede’s entitlement to fund the purchase of the 30/1 Ambrico Place as he did. However, concerns over Mr Ede’s capacity to lawfully complete the purchase could have been triggered by the prospect of breach of obligations he owed distinctly to two separate entities. The first and more obvious concern was how an undischarged bankrupt could procure the resources required to purchase the property without breaching the restrictions on him as a bankrupt. The obligations Mr Ede owed in that regard were to the Official Assignee.
The second concern was the prospect that Mr Ede provided the funds to complete the purchase by misapplying an asset of NTL. Mr Ede’s obligations not to do that were owed to NTL, in whose shoes the liquidators now stand. The question is whether the appellants, who complain of any breaches of obligations owed to NTL, can now also stand in the shoes of the Official Assignee as the person to whom Mr Ede owed separate obligations not to conduct transactions in breach of the constraints on him as a bankrupt.
Since the decision in Re Montagu’s Settlement Trusts the English authorities have focussed increasingly on the unconscionability of the retention of property as the essence of a claim for knowing receipt. Nourse LJ observed for the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele that:[28]
… just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt.
[28]Bank of Credit and Commerce International (Overseas) Ltd v Akindele, above n 19, at 455.
More recently Lord Sumption in the United Kingdom Supreme Court in Williamsv Central Bank of Nigeria put it succinctly:[29]
[31] The essence of a liability to account on the footing of knowing receipt is that the defendant has accepted trust assets knowing that they were transferred to him in breach of trust and that he had no right to receive them.
[29]Williams v Central Bank of Nigeria, above n 21.
We do not consider that the equitable rationale for a claim of knowing receipt extends to a claimant invoking a breach of obligations owed to a third party for the purposes of characterising retention of the property as unconscionable. There do not appear to be any decisions where such a claim has been upheld. It would be inconsistent with the second of Lord Browne‑Wilkinson’s general propositions in Westdeutsche, quoted at [43] above, for a recipient to be imputed a trustee in respect of property where the recipient’s conscience was affected by the interests of someone other than the imputed beneficiary.
If the original trustees were wilfully blind in not inquiring about Mr Ede’s entitlement to carry out the transaction notwithstanding his bankruptcy, then Mr Ede’s trustee in bankruptcy (the Official Assignee) could assert knowing receipt by them of property to which that trustee had a claim. However the appellant liquidators of NTL cannot rely on that form of wilful blindness to advance a claim against the property acquired by the original trustees. Instead the appellants need to make out wilful blindness on the trustees’ part in electing not to inquire as to Mr Ede’s entitlement to apply NTL’s assets as he did.
We therefore assess whether the appellants can make out a tenable claim against the proceeds of the property traced into Sturges Road property on the basis that the trustees were wilfully blind to Mr Ede’s action as described by the Supreme Court in Westpac New Zealand Ltd v MAP and Associates Ltd.[30] However, such wilful blindness is restricted to any election not to inquire about Mr Ede’s entitlement to apply NTL’s asset to the purchase, if that concern arose for the original trustees of the D’Angellis Trust.
The circumstances confronting the trustees and basis for maintaining the caveat
[30]Westpac New Zealand Ltd v MAP and Associates Ltd, above n 11, at [27].
There was clearly scope for a solicitor who provided advice on relationship property matters to doubt the efficacy and the enforceability of the April 2005 agreement, which included the transfer of a property at 1/1 Ambrico Place. Mr Ede was bankrupt at the time, which would arguably have precluded his creating obligations in respect of any of his assets, except to the extent that the assets were ones in which Ms Kotowska‑Livaja had a protected interest at the time of his bankruptcy. The April 2005 agreement purported to address the performance by Mr Ede of commitments made in the initial August 2003 agreement.
The opening paragraph of the August 2003 agreement specified:
Upon becoming engaged to Iwona and to give Iwona security and independence upon any future unknown events to my estate, I would promise to Iwona the following points.
There should have been real doubts about the enforceability of that agreement. Any consideration passing from Ms Kotowska‑Livaja for procuring the commitments made by Mr Ede in the August 2003 agreement would be limited to a promise to marry him. There is no suggestion that the 2003 agreement resolved any entitlements to a pool of relationship property assets, and there was no reference to the Property (Relationships) Act. The parties’ unwitnessed, partial execution of the handwritten document fails to comply with the requirements as to form for an enforceable agreement under that Act.[31]
[31]Property (Relationships) Act 1976, s 21F.
Accordingly the August 2003 agreement provided a tenuous justification, if at all, for any commitments purportedly made by Mr Ede during his subsequent bankruptcy. If the August 2003 agreement did not constitute an enforceable commitment made under the Property (Relationships) Act, then using it as the purported justification for the commitments undertaken by Mr Ede in the April 2005 agreement might arguably fall away.
In oral argument Mr Judd made passing reference to Mr Ede’s entitlement to deal with relationship property, despite his bankruptcy, pursuant to s 47 of the Property (Relationships) Act. We did not invite Mr Judd to expand on the suggestion that s 47 of that Act might be seen as a basis for legitimising a transaction that could otherwise have been challenged by the Official Assignee. There appear to be a number of hurdles in the way of Mr Ede’s entitlement to resist any challenge that the Official Assignee might bring to the transaction. There is an issue as to whether the funds committed to the purchase for the D’Angellis Trust constituted relationship property and, if it was relationship property, there would have been at least a tenable argument that the agreement was a transaction intended to defeat his creditors and would therefore be void as against the Official Assignee. That would be the more straight forward basis for the Official Assignee to pursue recovery. An alternative may well have been an equitable claim for knowing receipt.
It is clearly arguable that it ought to have been apparent to the trustees of the D’Angellis Trust as recipients of the property at 30/1 Ambrico Place that Mr Ede’s participation in the purchase would be deemed gratuitous, rather than in discharge of an obligation that was thought to be enforceable against him. The context in which the April 2005 agreement was concluded should have triggered concerns for a practitioner in Mr Fortune’s position to protect his client from being implicated in transactions in breach of Mr Ede’s obligations to his creditors.
However the appellants, standing in NTL’s shoes, do not have a basis for claiming to reverse a transaction because Mr Ede’s part in it was undertaken in breach of his obligations to the Official Assignee. Their claim can only arise out of a deliberate failure to inquire about an alleged breach by Mr Ede of obligations owed to NTL. Reliance on a breach of obligations owed to the Official Assignee would require the appellants to invoke an expectation of lawful conduct, an expectation which belongs to the Official Assignee.
In this case, the distinction between the different interests that should have triggered an obligation to inquire is not necessarily absolute. A solicitor in Mr Fortune’s position would be on notice that there were very limited opportunities for Mr Ede to complete a transaction of this size outside his bankruptcy. Without inquiry, it could not reasonably be assumed that Mr Ede had arrangements with the Official Assignee that permitted him to earn income of $360,000 without accounting for any of it to his trustee in bankruptcy.[32] Nor could assets to that value have been lawfully retained by him; if he had to ask family sources to borrow, or provide the settlement sum for him, then one would reasonably expect those arrangements to be referred to, if not detailed. That context is relevant in assessing the extent to which Mr Fortune should have appreciated the need to make further inquiries. The question remains, however, whether that context links it sufficiently to the critical question of whether the trustees were on notice that required them to inquire into the legitimacy of Mr Ede’s appropriation of NTL’s funds.
[32]If he had “lent” his services to NTTCL for it to “earn” the commission he arguably qualified for, then he was equally not at liberty to apply his skills for a related entity free of charge. There is no suggestion in the evidence that the transaction as structured in this way.
There is no evidence that the trustees were aware at the time of settlement that Mr Ede was claiming a commission that equated to the amount that was applied to the purchase of the property, plus the additional sum provided to Ms Kotowska‑Livaja to upgrade it. Mr Ede’s 7 March 2006 facsimile on an NTL cover sheet referred to “our property sale” proceeding,[33] which would reasonably be interpreted as NTL’s and, inferentially, that that transaction was the source of funds available to purchase 30/1 Ambrico Place.
[33]See [11] above.
There is no evidence that the written assurances received some three weeks after settlement had been conveyed in another form prior to settlement. Therefore those assurances could not be relied on by the trustees at the time title was taken. An inference is available that, had the trustees inquired as to the legitimacy of the funds applied, then an explanation consistent with that provided later, and as reflected in those letters, would have been provided. Whatever the extent of concerns about a breach of obligations to the Official Assignee, such an explanation endorsed by Mr Boaden would more likely than not be sufficient to end any obligation to inquire about a breach of Mr Ede’s obligations to NTL. That limited cause for suspicion about a possible breach of obligations Mr Ede owed to NTL is not sufficient to attribute wilful blindness to the trustees of a form that would now be enforceable by NTL’s liquidators.
Mr Judd also opposed the claim on the basis that, even if wilful blindness was made out against the trustees of the D’Angellis Trust, then equity could not justify transferring their obligations through the Fata Morgana Trust, which received the assets of the D’Angellis Trust on resettlement, to the Orion Trust, which had the assets of the Fata Morgana Trust resettled on it.
We are not persuaded that the transformation of the asset comprising the funds originally appropriated from NTL would avail the present respondents. Ms Kotowska‑Livaja is common to each of the trusts and, because she would be held to a state of awareness of the individuals representing the original trustees, her state of imputed knowledge would arguably be attributable to each of the successor trusts. However it is unnecessary for us to decide that point. It is also unnecessary to deal with other foreshadowed defences under the Limitation Act 2010 or laches, or the argument raised by Mr Judd that the proceeding constituted an impermissible challenge to the indefeasibility of the present trust’s title to the Sturges Road property.
Result
For the foregoing reasons, we find that the appellants have not established a reasonably arguable case for maintaining the caveat and we accordingly dismiss the appeal.
The appellants must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Bruce Scott Stevens, Auckland for Appellants
Davies Law, Waitakere for Respondents
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