Monk v Burgess
[2019] NZHC 324
•1 March 2019
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE ROTORUA-NUI-A-KAHUMATAMOMOE ROHE
CIV-2018-463-73
[2019] NZHC 324
UNDER Part 18 of the High Court Rules and Section 66 of the Trustee Act 1956 and the inherent jurisdiction of the High Court IN THE MATTER
Of the Estates of Mary Alice Burgess and Christian Theodore Emil Burgess
AND
In an application for directions as to distribution of the estates pursuant to section 66 of the Trustee Act 1956 and the inherent
jurisdiction of the Court
BETWEEN
PHILLIP CHARLES MONK AND THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED
Plaintiffs
AND
WARWICK JAMES BURGESS
First Defendant
AND
JANET BURGESS
Second Defendant
Hearing: 26 November 2018 Appearances:
R J Latton for Plaintiffs
M K Brady for Second Defendant
C T Walker QC for the Armer PartiesJudgment:
1 March 2019
JUDGMENT OF PAUL DAVISON J
Solicitors:
This judgment was delivered by me on 1 March 2019 at 4:30 pm Pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Richard Broad, Auckland Tompkins Wake, Hamilton Gilbert Walker, Auckland
MONK AND ANOR v BURGESS & ORS [2019] NZHC 324 [1 March 2019]
Introduction
[1] The applicants, Philip Monk and The New Zealand Guardian Trust Company (Guardian), are the executors and trustees (the executors) of the estates of Mary Burgess (Molly) and Christian Burgess (Christian). Warwick Burgess (Warwick) unsuccessfully sued the executors alleging various breaches of tortious contractual and fiduciary duties between 1980 and 2010. Several other parties were joined as defendants. Following a hearing that occupied 32 court sitting days, Heath J delivered a reserved judgment in which he dismissed all of Warwick’s causes of action, and ordered that the executors were entitled to be indemnified for their reasonable fees and expenses incurred in relation to the proceeding from the funds of the estate, pursuant to s 38(2) of the Trustee Act 1956 (the Act).1
[2]The executors have calculated their reasonable costs and expenses at
$1,264,908.05.2 In a schedule detailing their costs and served on all other parties to the proceeding on 2 February 2018, the executors advised that they intended to deduct their costs and expenses from the assets of the estate, pursuant to the decision of Heath J.3 No party gave notice that they wished to challenge and review the schedule of costs and expenses.
[3] Prior to filing their present application on 2 July 2018, the executors had already deducted their costs and expenses from the estate. The executors calculated the balance of the estate prior to the deduction of their costs and expenses at
$2,050,000.4 In accordance with the terms of Molly’s Will, Warwick and his brother
Hilton Burgess (Hilton), are to share the net assets of the estate on the basis of a 60/40 division respectively. Such a distribution would yield prospective distributions of
$1,311,000 to Warwick and $739,000 to Hilton.
[4] However, Hilton had died prior to the proceedings determined by Heath J, and his estate played no active part in the proceedings.
1 Burgess v Monk [2017] NZHC 3255 at [511] – [512].
2 The hearing itself took 32 full Court days.
3 At [525](a).
4 Numerous “interim distributions” have been made to both parties since the grant of probate in 2007.
[5] In his judgment, Heath J referred to the possibility of the executors deducting their costs from the entirety of Molly’s estate and thereby reducing the share of the fund to be distributed to Hilton’s estate per the terms of Molly’s Will.5 He directed that if the executors’ deduction of costs was likely to be applied against the share of the estate to be distributed to Hilton’s estate, an application to the Court for directions was required to be made on notice to Hilton’s personal representatives before his share is depleted.6
[6] The executors calculate that if their costs are to be deducted pro rata from the entirety of the estate, then the share to be distributed to Hilton’s estate will be reduced from $739,000 to $298,000.7 Likewise, Warwick’s share will be depleted from
$1,311,000 to $649,000.
[7] However, if all the costs of the executors are charged solely against Warwick’s share of the residuary of the estate, Hilton’s estate would still receive a distribution of
$739,000, while the executors calculate that Warwick would receive only $210,000.
Order sought and opposed
[8] The executors apply for an order by way of a direction that in the final distribution of Molly’s estate, they may treat their costs and expenses indemnity as having been paid entirely out of Warwick’s share of the estate.8 The order is sought in order to avoid reducing the share of the estate to be distributed to Hilton’s estate, given that neither he nor his estate acted in any way that resulted in the executors incurring the costs and expenses.
[9] In their submissions, the executors make it clear that by their application they are not surrendering their discretion to the Court. Instead, what they seek is the Court’s direction or approval as to the possible exercise of their discretion to meet their costs
5 At [511].
6 At [525](b)
7 The executors have since the filing of the statement of claim on 2 July 2018 recovered a significant GST refund for the costs of their legal fees, which will be applied to reduce the cost of the indemnity.
8 Trustee Act 1956, s 66.
indemnity from Warwick’s share of the estate.9 Accordingly, notwithstanding the Court’s approval or otherwise to the course they propose to take, the executors submit that they will nevertheless retain the discretion to determine whether to distribute the balance of Molly’s estate, with their already deducted costs and expenses applied entirely against Warwick’s share, or on a pro-rata (60/40) basis against both Warwick’s and Hilton’s beneficial interests in their late mother’s estate.
[10] Warwick, as the first defendant in this proceeding, has not taken any steps and has not formally opposed the present application. The executors in their submissions nevertheless advise that Warwick has expressed his preference for the executor’s costs to be treated as paid from the estate first, with the remaining balance of the estate assets to thereafter be calculated and distributed on the 60/40 basis provided for in the will.
[11] Janet Burgess (Janet), as the second defendant in this proceeding, in her capacity as the executor of Hilton’s estate, supports the application made by the executors. Janet’s concern is that if the executors were to deduct their indemnity from the estate prior to calculating the respective shares of Warwick and Hilton’s estates in the residuary, the share payable to Hilton’s estate will be significantly diminished.
[12] Alisdair Morrison, and O’Sullivan Clemens, were the fourth and sixth defendants, respectively, in the substantive proceeding heard and determined by Heath J. Pursuant to the award of costs made by Heath J in their favour, they are entitled to recover costs from Warwick totalling $518,758.58. They have not filed a statement of defence to oppose the order sought by the executors and have advised the Court by memorandum filed that they will abide the Court’s decision in respect of the executor’s application.
[13] Armer Farms (N.I.) Ltd, Graeme Elvin and Sharlene Darragh, and Tihoi Holdings Ltd (collectively the Armer Parties) were the fifth, seventh and eighth defendants, respectively, in the substantive proceeding heard and determined by Heath J. Pursuant to the award of costs made by Heath J in their favour, they are collectively entitled to recover costs totalling $615,790.75. They oppose the order
9 Gailey v Gordon [2003] 2 NZLR 192 at [33]-[34]
sought by the executors. If the executor’s costs and expenses indemnity is to be treated as being satisfied solely from the share of Molly’s estate to be distributed to Warwick, then there will be insufficient funds available to Warwick following the final distribution from which he could meet the costs judgment in their favour.
Background
[14] The background to the present application is long and complex and extends back over a period from around the mid-1960s until 2011. A full account of this background and the issues raised and determined in the substantive proceeding are comprehensively dealt with in the judgment of Heath J,10 and for present purposes it will suffice for me to set out only a brief summary of that background.
[15] Warwick and CTE Burgess Ltd, a company of which Warwick is the sole director and shareholder, sued the trustees and executors of the estates of Molly and Christian, the solicitors who acted for the executors at various times, and various other entities associated with the purchase of a farm property at Tihoi. There were in total, eight defendants. The causes of action advanced against the defendants, included allegations of breach of trust by the executors; breach of a settlement agreement by the executors; breach of various duties owed by the executors as trustees to Warwick; breach of fiduciary duties by the executors to Warwick; knowing assistance of a breach of trust by the solicitors and the purchaser of the farm; and knowing receipt of the property in breach of a constructive trust by the purchaser.
[16] Warwick and Hilton’s father, Christian died in 1980. In accordance with his will, his entire estate devolved to his wife, Molly. The significant assets in Christian’s estate were a large farm at Tihoi; significant tracts of native and exotic forestry; and a general store (known as the Trading Post). At the time of Christian’s death, Molly was already entitled to a 50 per cent interest in all of these assets and holdings and acquired the remaining 50 per cent interest in the assets from Christian’s estate.
[17] Molly died in 2007. In her will she left the whole of her estate (including the balance of Christian’s estate which her executors had been holding on bare trust for
10 See paragraphs [1] – [112].
her) to be distributed between Warwick and Hilton on a 60/40 basis respectively. Without imposing a trust or any binding obligation on her executors requiring them to do so, in her will Molly expressed her wish that in achieving the division between her two sons, her executors transfer the farm to Warwick.
[18] For quite some time prior to the deaths of his parents Warwick had anticipated that the farm would devolve to him upon their deaths. This was an expectation also shared by other members of the family. Since the mid-1960s, Warwick had worked extensively on the farm, often without drawing a salary, while his brother Hilton had shown neither aptitude nor interest in the farm. This was largely the reason why the will provided for an unequal distribution of the estate between the two sons. As Warwick had exerted such effort in the operation of the farm, it seemed fair to his parents that he should be rewarded with a greater share of their estate upon their deaths, and if it could be achieved while providing for Hilton’s interests, sole- ownership by Warwick of the farm.
[19] As it happened, the farm did not pass to Warwick. Instead, on 27 July 2009, the executors entered into an agreement to sell it to Armer Farms (N.I.) Ltd.
[20] Warwick issued proceedings initially in 2013. A trial was scheduled to go ahead in 2015, but it was adjourned on 11 August 2015, with wasted costs ordered in favour of the defendants.11 The trial finally commenced on 25 September 2017 and concluded on 20 November 2017.
[21] Heath J found against Warwick on all causes of action. He commented that the fourth statement of claim, on which the trial proceeded: was “prolix and difficult to understand”; conflated different legal concepts; and was “built on flimsy assumptions rather than sound factual allegations”.12 Heath J concluded that to describe Mr Warwick’s claim as over-complicated would be “a gross understatement”.13 All defendants were “wholly successful” in defending Warwick’s various claims against them.14
11 [2015] NZHC 1881.
12 At [16].
13 At [16].
14 At [510].
[22] Awarding costs on a 3B basis with a 50 per cent uplift to Mr Morrison and O’Sullivan Clemens, Heath J said that Warwick had pursued claims that lacked merit and had over-complicated the claims that those defendants were required to meet.15 When awarding 3B costs with a 50 per cent uplift to the Armer Parties, Heath J noted that the costs and uplift recognised the unreasonable way in which Warwick pursued the case against those parties.16
[23] The costs ordered to be paid by Warwick are substantial. As noted above, the Armer Parties are owed just over $615,000, while Mr Morrison and O’Sullivan Clemens are owed just over $518,000. Together with the approximately $1.26 million costs and expenses indemnity awarded to the executors, and disregarding the sum required to satisfy his own counsel’s fees, the total costs incurred and awarded following the dismissal of Warwick’s claims total close to $2.4 million.
[24] As matters presently stand Warwick’s only assets are his share in the residue of the estate, totalling around $1.3 million before the indemnity is applied. Warwick previously also owned a house in Paeroa, valued at around $550,000 and over which Heath J ordered a security be granted to Mr Morrison, O’Sullivan Clemens and the Armer Parties as security for their costs. That house was sold at auction on 29 November 2018.
Submissions
[25] As I have noted, this application has not been formally opposed by Warwick. Janet Burgess, represented by Ms Brady, supports the application made by the executors. The Armer Parties however, represented by Mr Walker QC, oppose the order sought.
Submissions for the executors
[26] Mr Latton, counsel for the executors, explains that their over-arching purpose in bringing this application is “to treat Warwick and Hilton in an even-handed
15 At [515].
16 At [516].
fashion”, and that having Hilton’s estate share the financial burden of Warwick’s unmeritorious claim would be neither equitable nor even-handed.
[27] Mr Latton submits that s 38(2) of the Act, which entitles trustees to recover from trust property all expenses reasonably incurred in execution of the trusts or powers, does not specifically limit how those expenses are to be deducted from the trust property. In particular, the executors submit that there is nothing in the words of the provision that requires an indemnity to be apportioned pro rata between the beneficiaries.
[28] The executors further submit that in a situation such as the present, where a single beneficiary has brought proceedings against the trust solely for the benefit of their own interests, it would be inequitable for other beneficiaries to suffer the consequences of the costs incurred in relation to those proceedings by having their share of the trust funds applied to satisfying the trustees’ entitlement to the costs indemnity.
[29] In support of their submission the executors primarily rely on the 1941 decision of the High Court of Australia in National Trustees Executors and Agency Co of Australasia Ltd v Barnes .17 In Barnes, the Court ordered that the executors of an estate, who had successfully defended proceedings for breach of duty against nine of 37 beneficiaries, were entitled to an indemnity for their costs from the estate, and which was to be deducted from the shares of the nine beneficiaries who had brought the action, as they were responsible for the costs being incurred.
[30] The executors accept that an approach of apportioning the costs of an indemnity unevenly between beneficiaries and the shares of the estate which they are entitled to, will not be automatic in cases where a single beneficiary (or a subset thereof) has brought proceedings against trustees or executors of an estate. However, the executors submit that the Court should strive to achieve an equitable balance between the beneficiaries in individual cases. In doing so, the following factors are submitted as being relevant:
17 National Trustees Executors and Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268.
(a)involvement of the other beneficiaries in the litigation;
(b)the benefit to all the beneficiaries from the prospective success of the proceedings;
(c)whether, having regard to the nature of the litigation and the way in which it has been conducted, the plaintiff beneficiary has caused the costs to be incurred; and
(d)whether in all the circumstances it would be unfair or inequitable for the other beneficiaries to share in meeting those costs.
[31] The executors submit that having regard to those factors, the Court should direct that the executors are entitled to deduct the full amount of the indemnity costs and expenses from Warwick’s share of the estate, because:
(a)Hilton had no involvement in the proceeding and consequently was not responsible for the costs necessarily incurred by the executors defending the meritless claims brought against them by Warwick;
(b)the proceeding was brought solely for Warwick’s benefit;
(c)the allegations made against the defendants in the proceeding were meritless and the causes of action were all dismissed; and
(d)the manner in which Warwick conducted the proceeding caused substantial costs to all parties involved (by the start of the trial Warwick himself is estimated at having already spent $1,542,319 on the proceeding).
Submissions for Janet (Hilton’s estate)
[32] On Janet’s behalf Ms Brady submits that the costs of the executors to be indemnified out of Molly’s estate relate entirely to proceedings brought by Warwick, of which Hilton’s estate was not joined as a party and which were entirely for
Warwick’s benefit. In the circumstances, the requirement for the executors to be even- handed between the beneficiaries requires the indemnity to be deducted entirely from Warwick’s share of the residue.
[33] Ms Brady says that in a memorandum of 16 March 2017, counsel for Hilton’s estate disclaimed any interest in any damages or other benefit awarded to Warwick out of the proceeding.
[34] Ms Brady further submits, that while her client has some sympathy for the position of the Armer Parties, and Mr Morrison and O’Sullivan Clemens, those parties are not themselves creditors of the trust, but are creditors of Warwick. Accordingly, the interests of those parties in recouping their costs from Warwick are not factors or considerations that rightly bear on the determination of the issue.
Submissions for the Armer Parties
[35] Mr Walker submits that the Court has no power to grant the order sought given the terms of Molly’s Will. He says that in any event it would be inappropriate to grant the order given that had Warwick’s claims been successful they would have benefitted the estate as a whole, including Hilton; and Hilton could have disclaimed an interest in the proceedings but did not do so. However he acknowledged at the hearing that Hilton had in fact disclaimed an interest in the proceedings, explaining that the Armer parties had been unaware of this as it was notified in documents which had not been served on them.
[36] Consequently, the sole basis on which the Armer parties now object to the application brought by the executors is that there is no power to grant the order. Mr Walker submits that in terms of Molly’s Will, the executors are required to pay out of the estate their testamentary expenses, before the residue is ascertained and thereafter distributed on a 60/40 basis to Warwick and Hilton respectively.
[37] Mr Walker draws a distinction between the role and responsibilities of an executor and the role and responsibilities of a trustee. He submits that the primary role of an executor is to realise all assets, and to pay all debts, expenses and legacies.
Once that task has been completed and the residuary estate determined, the executors assume the additional role of trustees to hold the residue of the estate upon trust for the beneficiaries and upon the terms set out in the will.
[38] Mr Walker argues that here, the executors (although described in the will as trustees and executors) still continue to act in their capacity as executors because their administration of the estate has not yet been completed. As a result, the litigation costs and expenses for which the executors are entitled to be indemnified are to be paid from the estate as testamentary expenses in accordance with the terms of Molly’s Will. It is only once the costs have been paid that the residue of the estate is determined. The executors are then required to distribute the residue of the estate in accordance with the terms of Molly’s Will between Warwick and Hilton on the 60/40 basis stipulated in the will.
Analysis
[39] The essential issue is whether, having regard to the terms of the will, s 38(2) of the Act and the interests of Warwick and Hilton in the residue of the estate, the Court has power to and should make a directions order that the executors are able to apply the whole of their indemnity costs against Warwick’s share of the residue.
Case law
[40] As I have noted, the executors rely on the Australian case of Barnes. In that case the appellants were the executors and trustees of a testatrix, who had left the residue of her estate to her 37 nieces and nephews. Nine of those beneficiaries were dissatisfied with the performance of the executors in administering the estate, and they brought an action for breach of duty, alleging a failure by the executors to collect the balance of purchase monies on a contract for the sale of land. Their claim was dismissed.
[41] The High Court of Australia unanimously held that a trustee is entitled to an indemnity from the trust estate for all costs properly incurred in the execution of the trust (both Starke J and Williams J referred to s 30(2) of the Trustee Act 1928, which
has near identical language to s 38(2) of the Act).18 Williams J however, went further and held that “…the indemnity must be given effect to in such a way as to make the burden fall upon the beneficiaries equitably having regard to the circumstances under which the costs, charges and expenses were incurred.”19 As the costs were incurred by nine of the beneficiaries bringing the action, Williams J determined that the shares of those beneficiaries in the residue of the estate should be depleted before the executors burdened the other 28 beneficiaries by extracting their indemnity from their shares. Williams J said that if any authority was needed for the proposition that the Court can apportion the burden of an indemnity between the beneficiaries “…it will be found in the cases referred to in Halsbury, 2nd ed., vol. 33, p. 275, notes h and I, and In re Allen.”20
[42] In, Allen, the testator had devised his estate in three parts for his three children for life, and after their deaths for their children.21 If any of his children were to die without having had children of their own, the testator directed that their share of the estate be held on the same trusts for the other surviving children. As matters transpired, one of the sons of the testator died without having had any children of his own, and so did two of the testator’s grandchildren, both born to the same parent. The child of the testator who was the parent of the two deceased grandchildren brought an action against the trustees holding the property settled on trust for him for life and for his deceased brother. The Court ordered that the costs of the proceeding were to be borne by the plaintiff.22 The way in which costs were apportioned was that the trusts to which each part of the action related were to bear the costs of that part of the action.23
[43] It is not clear from the report of the case whether there was any finding of impropriety against the plaintiff in relation to him bringing and prosecuting the matter, although it does appear that the action was brought solely for his own benefit. I agree with Mr Walker that In re Allen can be distinguished from the present, as in Allen there
18 At 274 and 277.
19 At 279.
20 At 280.
21 In re Allen (1889) WN 132.
22 At 133.
23 At 133.
were individual trusts against which the costs of the trustees could be applied, in contrast to the situation here where the individual beneficial interests of Warwick and Hilton in the residue had not been established with the respective shares being held on trust for each of them individually.
[44] Of the several cases referred to in Halsbury, that most directly on point is the 1848 case of Thompson v Clive.24 In Thompson the testator, bequeathed the residue of his estate in six equal parts for his six children. The first five parts were bequeathed to the testator’s five sons without restriction. Reflecting a different age, 1,000 Pounds of the remaining one sixth was given to his executors and trustees to hold in trust for the separate use of his daughter Letitia, during her lifetime with the remainder to her children, and the balance of that one sixth was for her without restriction. Letitia’s husband was the plaintiff. A dispute had arisen between the two of them as to her share of the residue, which was “liable to the marital right of the husband”.25 By this time, the executors had realised the estate and ascertained the residue, which they had appropriated into the six individual shares. The actions of the executors were not communicated to the plaintiff who filed against the executors for administration of the estate. The appropriation was then made plain to the plaintiff, and the wife’s share paid into Court. However, the plaintiff decided to proceed and insisted on having an account taken of the estate, despite being warned that to do so would risk an award of costs. A decree was granted for the ordinary accounts and but for the exception of a trifling legacy, the accounts were as the executors had represented them. The Master of the Rolls held that the costs of the executors must come out of the sixth share held in trust for the plaintiff’s wife.26
[45] Accordingly, Thompson is authority for the proposition that where an estate has been administered and individual shares determined and apportioned as between the beneficiaries, the trustees and executors are entitled to have their costs paid out of the share held in trust for the beneficiary who brought the unsuccessful action which resulted in costs being incurred. Thompson is therefore, not entirely on all fours with Barnes or the present case, as the estate residue had been determined, and the
24 Thompson v Clive (1848) 11 Beavan Ch 475.
25 At 478.
26 At 480.
individual beneficiary entitlements had been allocated to individual beneficiaries. Thompson was not a case of deducting testamentary expenses prior to determining the residue of the estate.
[46] A case not mentioned by Williams J in Barnes, but referred to in Thompson, and of closer analogy to both the present application and to that in Barnes, is the 1844 case of Mackenzie v Taylor.27 In Mackenzie the testator had bequeathed to Mr Newton one moiety (being a half share) of the residue of the estate, and to Mrs Mackenzie one fourth of the residue of the estate for life, with the remainder to her children.28 On the death of Mrs Mackenzie her children filed for the administration of the estate. While one question was determined in their favour, concerning the investment of their mother’s share after her death, they also sought an account of the residue. Mr Newton objected, being satisfied with the account as stated by the executors and trustees and having already been paid his share (so clearly the administration must have been completed and the residue ascertained). The accounts turned out to be wholly in order and the Master of the Rolls ordered that the children of Mrs Mackenzie were to pay for the costs of the executors and trustees in preparing those accounts out of their share.29
[47] Accordingly, Mackenzie is authority for the proposition that where a subset of beneficiaries to the residue of an estate bring an action in their own interests, and which the other beneficiaries to that residue have already been paid out and have foresworn the action, the costs of that action shall be met from the residue of the estate owing to those beneficiaries who brought the action.
Molly’s Will
[48]Molly’s Will states, at clause 4:
4.I GIVE the whole of my estate to my trustee UPON TRUST:
(a)to pay out of it my just debts funeral and testamentary expenses and all taxes and duties payable in respect of my taxable or dutiable estate.
27 Mackenzie v Taylor (1844) 7 Beavan Ch 467.
28 The case does not mention the other fourth share.
29 At 469 – 470.
(b)to divide the residue (“my residuary estate”) into ten
(10) equal parts as to value and to hold six (6) of such parts for my son WARWICK BURGESS absolutely and four (4) of such parts for my son HILTON BURGESS absolutely.
[49] None of the cases to which I have referred, or to which I was referred by counsel, appear to have involved the courts considering the power of executors or trustees to allocate their costs and expenses against a particular beneficiary or sub-set of beneficiaries, where the provisions of the will direct that all testamentary expenses are to be paid before the residue is determined.
[50] In previous judgments delivered in this present proceeding, there have been differing judicial opinions expressed as to the manner in which the executors are to satisfy their costs and expenses indemnity from the estate.
[51] When the first trial fixture was aborted and the issue of wasted costs arose, Heath J directed that those costs be paid by Molly’s estate and be applied against Warwick’s entitlement as a residuary beneficiary to those sums.30 Those costs which were paid from the estate related not only to those incurred by the executors of the estate, but were also paid to Alisdair Morrison and to Armer Farms (N.I.) Ltd.31 They were calculated on the basis of scale costs without any reference to the executor’s right to indemnify themselves from the estate.32
[52] In dealing with a pretrial application by Warwick for an order directing that the executors make an interim distribution of funds from the estate, Peters J noted the executors’ submission that the term “testamentary expenses” as it appears in Molly’s Will included the legal costs and expenses they may incur in relation to the proceedings commenced by Warwick and CTE Ltd against them, and also noted the executor’s submission that the residue of the estate would not be ascertained until the determination of the proceeding.33 Peters J said: 34
30 Burgess v Monk [2015] NZHC 1881 at [26].
31 At [25].
32 At [19].
33 Burgess v Monk [2017] NZHC 612 at [13].
34 Burgess v Monk [2017] NZHC 612 at [11].
… the first matter to determine is whether or not the estate is still in administration, because the executors submit that it is and that Mr Burgess has no fixed entitlement until the process of administration is completed and the residue of the estate ascertained.
[53] The application before Peters J was refused as her Honour was not satisfied that she had jurisdiction to order the executors to make a distribution.35
[54] In his judgment dealing with a pre-trial application by Warwick for an order directing an interim distribution of $800,000 from the estate to enable him to meet anticipated legal cost and disbursements to complete the trial, Heath J observed: 36
[65] In the present case, the first question is whether Molly’s Trustees are currently acting in the capacity of executors or trustees. The role of an executor is to realise all assets, and to pay all debts, funeral expenses and legacies. Once that has been done, the residuary estate is created. At that time, the persons named as executors and trustees step into the role of a trustee and hold the residuary estate on the terms set out in the will. It is clear that a beneficiary of an un-administered estate does not have a propriety interest in the assets of the estate until such time as the amount of the residue has been established. Until that time, it is not possible to identify assets to which the beneficiary has an entitlement.
[66] For present purposes, I am prepared to assume (without deciding the point) that the role of Molly’s Trustees has not shifted from executors to trustees. GST issues remain outstanding. The will requires payment of Molly’s “just debts, funeral and testamentary expenses and all taxes and duties payable in respect of [her] taxable or dutiable estate” before division of the residue between Warwick and Hilton in their respective shares.
[67] Nevertheless, although Molly’s Trustees have not yet assumed a role as trustees, there is no doubt that they may be treated as trustees, for the purpose of the supervisory jurisdiction, in appropriate cases. Primarily I rely on the definitions of “trust” and “trustee” in s 2(1) of the Trustee Act 1956. There is a wealth of case law to support that approach.
[55] Although considering the Court had jurisdiction to grant such an order Heath J declined to interfere with the decision of the executors not to make an interim distribution.37 Referring to s 38(2) of the Act, he noted that the executors are entitled to an indemnity thereunder as there is nothing in Molly’s Will “…to vary the right conferred by s 38(2).”38
35 Burgess v Monk [2017] NZHC 612 at [7] and [16].
36 Burgess v Monk [2017] NZHC 2424 at [65].
37 At [80] – [81].
38 At [75] – [77].
[56] When dealing with the final pre-trial application by Warwick seeking an order that he receive an interim distribution of funds from Molly’s estate to enable him to meet his legal expenses, Heath J made the direction on the basis that it was conditional on the interim distribution to Warwick being treated as having a 60 per cent interest and a pro rata distribution in respect of the 40 per cent interest of Hilton’s estate. Heath J commented:39
That will ensure an equity of treatment as among the beneficiaries. On current indications release of funds in that sum will not affect the utility of the right of indemnity that the Trustees possess.
[57] In his principal judgment, Heath J, with reference to his earlier decision, ordered that the costs indemnity was payable out of the estate pursuant to s 38(2) of the Act. He said:
[511] Christian’s Trustees and Molly’s Trustees are entitled to have their costs paid out of the trust fund. Section 38(2) of the Trustee Act 1956 controls the position. Nevertheless, the “reasonableness” of costs incurred must be established before the trust fund is depleted. In addition, there may be a difficulty if indemnity for costs requires Molly’s Trustees to exercise their right against assets that would, prima facie, be distributed to Hilton’s personal representative. They have not been joined to this proceeding and do not have, at this stage, an opportunity to be heard.
[512] I shall declare that Christian’s and Molly’s Trustees are entitled to indemnity from the trust fund for reasonable fees and expenses incurred in relation to this proceeding, and shall make further directions to deal with quantification or other difficulties that may arise in relation to the share of the estate that would otherwise be distributed to Hilton’s personal representatives.
…
[525] In addition, I direct:
(a)Christian’s and Molly’s Trustees shall provide a schedule of costs they intend to deduct from the trust fund to Warwick and CTE on or before 2 February 2018. Unless Warwick and/or CTE make an application to the Court to review the amount to be deducted, a sum calculated by reference to my earlier directions may be applied from the trust fund no earlier than 19 February 2018. If an application were made by Warwick and/or CTE, no deduction of costs shall be made pending determination of that application.
(b)If any deduction of reasonable costs is likely to be applied against the share of the trust fund otherwise to be distributed to the personal representative of Hilton, an application for
39 Burgess v Monk [2017] NZHC 2549 [18 October 2017] at [10]
directions must be made on notice to those personal representatives before his share is depleted.
[58] However, in relation to each of those decisions in this proceeding, it is noteworthy that the issue of whether the executors could take their costs and exercise their indemnity against Warwick’s share in the residue alone was not argued or specifically addressed.
[59] The terms of clause 4 of Molly’s Will stipulates that the executors of her will are first charged with paying her “just debts funeral and testamentary expenses and all taxes …” and thereafter to divide the residue into ten equal parts as to value, and to hold six parts for Warwick and four parts for Hilton. Thus the executors will only determine the residue to be divided and held for Warwick and Hilton, having first paid the testamentary expenses. The executors’ costs of defending the proceeding are clearly testamentary expenses, as those costs were reasonably incurred by them in relation to their administration of Molly’s estate and in determining the legal issues arising from the proceedings brought against them by Warwick in their capacity as executors and trustees of the estate.
[60] Section 38 of the Trustee Act is entitled: “Implied indemnity of trustees”. In my view s 38(2) of the Act, has no work to do in terms of implying or providing the executors with the power to deduct the costs of the proceeding from the estate assets, as those costs fall within the scope of the testamentary expenses referred to in clause 4 of the Will, and are expenses that they are directed to pay before they determine the residue that remains for distribution to the beneficiaries. It is only the residue that remains after the debts, testamentary expenses, taxes etc have been paid that is to be held on trust for Warwick and Hilton, with six-tenths being held for Warwick and four tenths for Hilton. Given the terms of the Will, there is no need for the executors to rely on the statutory power implied and conferred by s 38(2) as authorising them to deduct their reasonably incurred expenses from the trust property.
[61] Under s 38(2) of the Act, and in light of the authorities referred to, in particular Barnes, a trustee may be required by equity to apply their indemnity against specific trust assets held by the trustee on trust for a particular beneficiary (or subset of beneficiaries) who has caused the trustees or executors to incur reasonable expenses
in the execution of the trust or the estate. Whether or not equity so requires will likely depend upon a number of equitable considerations including the manner in which the expenses have been incurred and whether they were incurred for a sole beneficiary’s benefit.
[62] However, in terms of clause 4 of Molly’s Will, while the executors are entitled to an indemnity in the form of their “just… testamentary expenses”, they are required to deduct that indemnity before the residue of the estate is determined. Only once they have paid the testamentary expenses and determined the quantum of the residue do the shares of Warwick and Hilton crystallise as being their beneficial entitlements to the residue which the executors/trustees hold on trust for them.40
[63] Once the executors have deducted their reasonable costs in accordance with, and pursuant to the authority contained in the Will, and once the residue is created, they are then required to distribute the residue in accordance with the provisions of the Will. While the executors have fiduciary duties to carry out their administration tasks honestly and diligently and to treat beneficiaries in an even-handed manner, their core duty is to distribute the residue in accordance with the terms of the Will.
[64] Accordingly, I find that the terms of Molly’s Will do not permit the executors to apply an indemnity in respect of the costs they have incurred in relation to the actions of one of the two beneficiaries, to that particular beneficiary’s prospective share of the residue.
[65] The effect of this finding will be that Hilton’s estate will share and bear the burden of satisfying the substantial legal costs and expenses incurred by the executors in defending Warwick’s claims, with the result that Hilton’s estate’s share will be significantly reduced.
[66] Here, in the absence of an order for costs in their favour against Warwick, the executors are left in the position of endeavouring to recognise what they consider to be the respective responsibility of the two brothers for the legal costs they incurred in
40 Re Maguire (deceased) [ 2010] 2 NZLR 845 at [17] – [20]; Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694 (PC) at 707-708.
defending Warwick’s claims against them, by adjusting and reducing Warwick’s entitlement under the Will and effectively setting off the costs indemnity against Warwick’s 60 per cent beneficial interest in the residue of the estate. While their reasons for seeking to achieve that outcome are understandable having regard to the circumstances whereby Warwick was solely responsible for them incurring the costs and expenses defending the proceedings, the means by which they propose this course would involve them dealing with the residue in a manner contrary to the terms of Molly’s Will.
Result
[67]The executors’ application for the directions sought is declined.
[68] The executors are nevertheless entitled to be indemnified for their reasonable legal costs and disbursements incurred in connection with this proceeding and in accordance with clause 4 of Molly’s Will.
[69]The costs of the other parties to this proceeding shall lie where they fall.
Paul Davison J
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