Mudgway v Slack HC Auckland CIV 2010-404-2058

[2010] NZHC 1277

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-2058

UNDER  The Trustee Act 1956

BETWEEN  NICOLA JANE MUDGWAY First Plaintiff

ANDSOPHIA JANE MUDGWAY (A MINOR) BY HER GUARDIAN AD LITEM RODERICK HUGH STEWART

Second Plaintiff

AND  GABRIELLA LILI MUDGWAY (A MINOR) BY HER GUARDIAN AD LITEM RODERICK HUGH STEWART Third Plaintiff

ANDMADISON LEE MUDGWAY (A MINOR) BY HER GUARDIAN AD LITEM RODERICK HUGH STEWART Fourth Plaintiff

ANDTIMOTHY UPTON SLACK First Defendant

ANDNIGEL HUGH BECK Second Defendant

Hearing:         21 July 2010

Appearances: L J Kearns for the Plaintiffs

No appearance by or on behalf of the Defendants

Judgment:      21 July 2010

Reasons:        26 July 2010

RESERVED JUDGMENT OF ELLIS J

This judgment was delivered by me on 26 July 2010 at 2 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Counsel:       L J Kearns, PO Box 1857, Auckland 1140

P Rice, PO Box 4341, Auckland 1140

MUDGWAY AND ORS V SLACK AND ANOR HC AK CIV-2010-404-2058  21 July 2010

[1]      This proceeding has its origins in the breakdown of the marriage between the first plaintiff and her husband, Mr Craig Mudgway.  Mr Mudgway is the settlor of the Madison Family Trust.  Mr Mudgway’s three minor children are beneficiaries of the Trust and they are the second, third and fourth plaintiffs.  The third and fourth plaintiffs  are  Mrs  Mudgway’s  biological  children  and  the  second  plaintiff  is Mr Mudgway’s child by a former partner. Mr Roderick Hugh Stewart was appointed as their litigation guardian.

[2]      The first and second defendants are, or have been, Trustees of the Madison Family Trust.  The Trust is the owner of the house in which the Mudgway family formerly resided and in which Mrs Mudgway and her children are presently living.

[3]      Although the dispute between Mr and Mrs Mudgway has many facets and has already been the subject of a considerable amount of litigation in the Family Court, it is the Trust’s role in that dispute that is the focus of this proceeding.  More specifically it is the Trust’s ownership of the house and certain actions that have been taken by Mr Mudgway and/or the Trustees in relation to that house that is at the heart of the present application, by which the plaintiffs seek orders removing either or both of the defendants as Trustees and appointing the Public Trust in their stead. Various ancillary orders are also sought.

[4]      The proceedings were served on the first defendant, the second defendant and Mr Mudgway.  Affidavits of service have been filed.  However no steps have been taken by any of them apart from Mr Slack (the first defendant) who has filed an appearance reserving rights.   The application is therefore unopposed and the only evidence before the Court (being an affidavit from Mrs Mudgway) is effectively undisputed.  The Public Trust has also advised in writing that it consents to act as the sole trustee should it be so appointed by this Court.

[5]      Nonetheless there are matters about which I must be satisfied before granting the orders sought.

Background

[6]      Mr and Mrs Mudgway’s relationship began in 2003.  They were married in

May 2007 and separated in early 2009.

[7]      The Madison Family Trust was settled by Mr Mudgway on 7 February 2006. The trust deed is annexed to Mrs Mudgway’s affidavit and provides (inter alia) that:

a)       The purpose of the Trust is said to be “for the benefit of the persons described in this deed”;

b)        The first defendant Mr Slack was named as the sole trustee of the

Trust;

c)       The term of the Trust is 80 years or such earlier date as the trustee may select;

d)       The Final Beneficiaries are the children of Craig Mudgway;

e)       The  Discretionary  Beneficiaries  include  Mr Mudgway  himself  (as Settlor),  the  Final  Beneficiaries  and  other  persons  falling  within certain descriptive categories;

f)        The Trust Fund includes any property acquired by the Trustees after the date of the deed by any means for the purpose of the Trust;

g)       The Trustees may at any time and for any reason apply or transfer any part of the capital of the Trust Fund for the benefit of any of the Discretionary Beneficiaries;

h)The sole power of appointment and removal of trustees is vested in the Settlor;

i)The Settlor may by deed declare that the discretionary beneficiaries no longer include persons named as such in the trust deed;

j)The  Trustees  are  to  have  the  fullest  powers  and  absolute  and uncontrolled power and discretion in the management and investment of the Trust Fund;

k)The  Trustees  may  by  any  means  provide  a  home  for  any of  the discretionary beneficiaries and are to be guided solely by the needs of the discretionary beneficiaries in that respect.

[8]      As regards (e) above, the evidence before me suggests that there are in fact no  other  Discretionary  Beneficiaries,  apart  possibly from  a  company  owned  by Mr Mudgway.  It is thus apparent that Mrs Mudgway was (contrary to what appears to have been not only her understanding, but Mr Slack’s) never a beneficiary under the Trust.

[9]      The Trust acquired a high value property at 22A Upland Rd, Remuera in about July 2006.  Title was taken in Mr Slack’s name, as Trustee.  The purchase was funded by a loan from Mr Mudgway and a mortgage over the property.  The relevant Trustee resolution also records that Craig Mudgway was to be permitted to occupy the property provided that he pays all outgoings including the costs of repairs and maintenance unless otherwise agreed by him and the trustees.

[10]     From that date until the time of separation Mr and Mrs Mudgway lived there with their children.

[11]     The other relevant facts disclosed in Mrs Mudgway’s affidavit are as follows.

[12]     Following the separation, Mrs Mudgway and the children remained living at

22A Upland Road.

[13]     On 4 November 2009 Mrs Mudgway applied in the Family Court for an occupation order in relation to the property and a temporary protection order against Mr Mudgway.  The temporary protection order was granted shortly afterwards.

[14]     On 11 December 2009 Mrs Mudgway and her lawyer attended a meeting with the first defendant, Mr Slack, who was known by Mrs Mudgway to be the sole trustee of the Trust.  She also regarded him as a family friend.

[15]     Mrs Mudgway’s lawyer told Mr Slack that Mr Mudgway had withdrawn all financial support from Mrs Mudgway and the children.  She expressed concern about Mrs Mudgway’s on-going financial security and the importance of secure accommodation and on-going income for her and the children.   The sale of the

22A Upland Road property, and the purchase for Mrs Mudgway of a more modest home, was put forward as the best way of achieving this.

[16]     The letter written by Mrs Mudgway’s lawyer to Mr Slack following the meeting records these matters together with Mrs Mudgway’s willingness to allow access to the home to workmen who might be required to bring it up to sale standard and concerns she had about the on-going responsibilities of the Trust.   It appears from that letter that there had been some discussion at the meeting of Mr Slack’s potential resignation as trustee and the possibility of Mr Mudgway taking his place.

[17]     It appears that Mr Mudgway did not respond positively when the gist of the meeting was reported to him by Mr Slack.  On 14 December 2009 Mrs Mudgway was confronted with three security guards, an employee of Mr Mudgway’s and a person who identified himself as the lawyer  for the Trust, outside the home at

22A Upland Road.  She was prevented from returning into the house and handed a trespass notice.   She was told the Trust had arranged for her to move into a new rental property.   She was also handed a letter written by the second defendant, Mr Beck, which indicated that he was now the trustee of the Madison Family Trust.

[18]     On 15 December 2009 Mr Slack wrote to Mrs Mudgway’s lawyer stating that the previous day Mr Mudgway had signed a Deed of Removal and appointed a new trustee, Mr Beck.   Mr Beck is Mr Mudgway’s insurance broker.   Mr Slack also advised that Mr Mudgway had signed a Deed declaring that the named discretionary beneficiaries  under  the  Trust  Deed  no  longer  included  his  three  children  or Mrs Mudgway (notwithstanding that she had never been a discretionary beneficiary).

[19]     There may be an issue as to the effectiveness of both these deeds of removal. As to the removal of Mr Slack, the issue is whether Mr Mudgway had grounds to remove him in terms of the trust deed.   As to the removal of the children as discretionary  beneficiaries,  the  issue  arises  because  the  Trust  Deed  itself  still provides  that  discretionary  beneficiaries  include  the  final  beneficiaries  (namely Mr Mudgway’s children).

[20]     It appears that attempts had also been made to remove the children as the final beneficiaries, although Mr Mudgway was subsequently advised that this was not possible under the terms of the Trust Deed.

[21]     In an affidavit later filed in the Family Court Mr Slack explained his reasons for resigning as trustee.  In it he stated:

[20]   ...Through my involvement as solicitor to the Mudgways, to the Trust and as trustee I have inevitably got to know the applicant and the Mudgway family.   As such, I have felt increasingly uncomfortable about the tension between my obligations as trustee and the impact of the actions I would feel compelled  to  take  in  that  role  on  the  Mudgway  family,  including  the children.

[22]     On 22 December 2009 there was an urgent hearing in the Auckland Family Court in relation to Mrs Mudgway’s application for an interim occupation order.  As the  owner  of  the  property  the  Trust  was  represented  and  made  submissions. Mr Mudgway  also  was  represented  and  made  submissions.     His  submissions supported   the   Trust’s   position.     The   children  had   separate   counsel   whose submissions supported Mrs Mudgway’s position.

[23]     Mr Mudgway and some friends moved into the Upland Rd house over the

Christmas period.  Mrs Mudgway and the children stayed with friends.

[24]   On 11 February 2010 Judge Burns delivered his decision granting the occupation order and Mrs Mudgway then moved back into the home.  The Trust was represented at the hearing before Judge Burns and made submissions essentially in support of those of Mr Mudgway.   Counsel for the children also appeared and supported Mrs Mudgway’s position.

[25]     Notwithstanding advice received prior to Christmas 2009 as to the Trust having money to spend on repairs and renovations to the property, it appears that no such work had been done.   Mrs Mudgway, through her lawyer, has attempted to obtain information in relation to the present finances of the Trust and in particular various cash advances that have been made pursuant to a mortgage with Cressiter Finance.  No information has been forthcoming.  The trustee has also not complied with consent orders made in the Family Court that require them to file affidavits and

make discovery.  Although on 19 February 2010 Mr Slack, on behalf of the Trust, filed an appeal against Judge Burns’ occupation order, that appeal was not pursued and has now been struck out.

[26]     On 11 February 2010 Judge Burns in the Family Court granted a temporary occupation order entitling the first plaintiff and children to personally occupy the home  in  Upland  Road.    The  learned  Family  Court  Judge  added  terms  to  the temporary occupation order as follows:

a)       Mr Mudgway was not to take steps to remove the first plaintiff or children either himself or through an agent so long as the protection order previously made continues; and

b)The temporary occupation order was to be binding on the trustee who was also not to take steps to exclude Mrs Mudgway or the children from occupation.

c)       Leave was granted to Mrs Mudgway to apply to add the trustee as an associated respondent to the protection order (if there was a breach of the occupation order and the relevant terms and grounds established under the Domestic Violence Act 1995).

[27]     In the course of his judgment Judge Burns also expressed concerns about the role played by the Trust in the dispute.  He said in particular at [47]:

I do observe that there appears to be a contradiction between the behaviour of the latest trustee and the trustee’s obligations to the final beneficiaries.  It would seem to me that a fundamental obligation to advance the interests of the children in this case is to ensure that they have a roof over their head.

[28]     At [53] Judge Burns concluded that “on an interim basis” the evidence before him established a link between the actions of Mr Mudgway and the trustee.

[29]     The Trust (represented by the first respondent) lodged an appeal to this Court from the decision of Judge Burns.  However this has since been struck out following failure to comply with an “unless” order.   It appears the Trust has also failed to

comply with orders in the Family Court requiring it to file affidavits and provide discovery in  relation  to  various  matters.    The  final  beneficiaries  have  also  had considerable difficulty obtaining information about the assets or financial position of the Trust.

Relevant Law

[30]     The   relevant   law   has   been   usefully   summarised   by   Allan   J   in Morris v Sumpter HC Auckland CIV-2004-404-3060, 6 April 2005.  At [50] – [54] he said:

[50] It is necessary to deal with the law only briefly because there is no dispute between the parties as to the applicable legal principles.   Section

51(1) of the Trustee Act provides:

51 Power of Court to appoint new trustees

(1) The Court may, whenever it is expedient to appoint a new trustee or   new   trustees,   and   it   is   found   inexpedient,   difficult,   or impracticable so to do without the assistance of the Court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.

[51] Section 51(2) of the Act provides that:

In particular and without prejudice to the generality of the foregoing provision, the Court may make an order appointing a new trustee in substitution for a trustee who—

(a)  Has  been  held  by  the  Court  to  have  misconducted himself in the administration of the trust;…

[52] There exists a parallel inherent jurisdiction to remove a trustee. It is derived from the Court’s general supervisory powers in equity relating to the supervision of trusts for the welfare of beneficiaries. That jurisdiction was described by Lord Blackburn in Letterstedt v Broers (1884) 9 AppCas 371,

385-6 in this way:

But in cases of positive misconduct, Courts of Equity have no difficulty in interposing to remove trustees who have abused their trust; it is not indeed every mistake or neglect of duty, or inaccuracy of conduct of trustees, which will induce Courts of Equity to adopt such a course. But the acts or omissions must be such as to endanger the trust property or to shew a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity.

[53] The highly discretionary character of the exercise of the Court’s jurisdiction is illustrated by the following passage from the judgment of Dixon J in Miller v Cameron (1936) 54 CLR 572, 580.

The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trust and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. But in a case where enough appears to authorise the court to act, the delicate question of whether it should act and proceed to remove he trustee is one upon which the decision of a primary judge is entitled to especial weight.

[54] The jurisdiction may be exercised in a wide variety of circumstances, not only in cases where the trustee has disqualified himself by his conduct, but also simply where he is out of sympathy with the objects of the trust or with  the  beneficiaries:  Clifton  v  Clifton  HC  AK  CIV  2004-404-4184

5 November 2004: The Laws of New Zealand: Trusts, at para 229.

[31]     In the present case it was submitted that it is expedient to remove the existing trustee(s) on the basis that they are no longer prepared to act and have, in the case of the first defendant, consented to being removed, and in the case of the second defendant, not objected.  The plaintiffs say that the defendants have not taken any steps to protect the interests of the beneficiaries, have not ensured that Trust property is not dissipated and have not faithfully and soundly exercised the Trust for the benefit of the children.

[32]     In my view there is no need in the present case to go so far as to consider questions of actual misconduct.

[33]     In Mr Slack’s case, and as his affidavit filed in the Family Court makes clear, a position of conflict has arisen due to his personal relationship with the Mudgways and his role as trustee given the involvement of the trust in the present matrimonial dispute.

[34]     In Mr Beck’s case the evidence satisfies me that he is in a similarly difficult situation.  While it may be that there are plausible explanations for the eviction of the

children from 22A Upland Rd that are consistent with his duty as trustee to act in the interests of the children as beneficiaries, the reality is that none have been offered by him  in  this  Court.     I  also  take  into  account  the  reservations  expressed  by Judge Burns,  who  necessarily  has  a  greater  appreciation  of  the  nuances  of  the situation than I do.

[35]     I am satisfied that the continuance of either Mr Slack or Mr Beck as trustee is not consistent with the welfare of the beneficiaries of the trust, amongst whom I include Mr Mudgway himself.

[36]     I  also  accept  the  plaintiffs’  position  that  it  is  in  the  interests  of  the beneficiaries that an independent and impartial examination of the Trust’s financial position occur and that the Trust’s failure to provide information (or complete information) notwithstanding orders made in the Family Court is concerning.

[37]     Accordingly I consider that in all the circumstances I have set out above it is expedient that the Public Trustee be appointed as the Trustee of the Madison Family Trust, in substitution for any and all existing Trustees.   No other avenues are obviously available to remedy the difficulties that have arisen.   Any issue as to whether Mr Slack has been validly removed or as to whether Mr Beck was validly appointed is therefore irrelevant; neither are to remain as trustees.

[38]     Having got to that point, certain ancillary issues remain.   In particular  I accept that it would be pointless to make an order under s 51 while the present provision in the Trust Deed permitting Mr Mudgway to remove and appoint trustees remains unaltered.  Faced with a similar situation in Clifton, the Court said:

[43] The Court's inherent jurisdiction to alter trusts has been restricted by the House of Lords decision in Chapman v Chapman [1954] AC 429, as applied in Re Ebbett [1974] 1 NZLR 392. However, what is sought here is not, in my view, a variation of the trust. As noted above, it is a variation of an administrative provision and not an alteration of the trust itself. This trust was sanctioned by this Court to protect infant beneficiaries. In my view, the Court must have a supervisory jurisdiction to modify an administrative provision which has been shown can be used in a manner which may be to the detriment of the infant beneficiaries. The Court, in its inherent jurisdiction, should intervene to modify that administrative provision so that the interests of the infant beneficiaries cannot be readily jeopardised. In the

circumstances,  I intend  to  use  the  inherent  jurisdiction  of  this  Court  to modify this administrative provision.

[39]     I accept that the same principles apply to the present case and that I should make an order that the trust deed be amended to vest in the Public Trustee, rather than Mr Mudgway, the power to appoint and remove trustees.

[40]     As to the further ancillary orders sought by the plaintiffs I simply repeat that neither the defendants nor Mr Mudgway have indicated any opposition to those. There are no other final beneficiaries under the Trust other than the minor Mudgway children who are plaintiffs in this proceeding.   I am, however, conscious that the orders will be made at a time when the full extent of the Trust’s affairs is not known to the plaintiffs, the Court or to the new trustee and accordingly, in the event that any difficulties or issues are identified subsequently by the Public Trustee in respect of any of the orders made, leave will be reserved to him to revert to the Court or to apply further.

[41]     In summary I make the following orders:

a)        Timothy Upton Slack and/or Nigel Hugh Beck (as the case may require) are removed as trustees of the Madison Family Trust;

b)The Public Trust (at Auckland) is appointed as sole trustee pursuant to s 51(1) Trustee Act 1956;

c)        The trust deed dated 7 February 2006 is varied by revoking clause

11.1 and 11.2 and substituting the following:

11.1 Person empowered to Appoint New Trustees: The power of appointing a new Trustee or Trustees is vested in the Public Trust (at Auckland).

d)       All  Trust  property,  including  the  land  and  buildings  situated  at

22A Upland Rd, Remuera, being all that parcel of land contained and comprised  in  Lot  1  Deposited  Plan  343887     (North  Auckland Registry) shall vest in the name of the Public Trust (at Auckland) as trustee of the Madison Family Trust;

e)        The Notice of Claim registered against the title of 22A Upland Rd, Remuera in the name of the first plaintiff is to be removed.

[42]     The plaintiffs sought a further order authorising the Public Trust to sell the

22A Upland Rd property and to utilise the proceeds of sale to: - a)    Repay the Trust’s secured debts; and

b)        Purchase a suitable substitute debt free property for the plaintiffs; and

c)        Establish and maintain a trust fund for the ongoing support of the

Mudgway children; and

d)       Pay the plaintiffs’ legal costs.

[43]     At the hearing before me on 21 July 2010 I indicated to the plaintiffs’ counsel that I would be prepared to make all the orders sought by them, on the basis of the submissions  that  had  been  presented  and  in  light  of  the  fact  that  they  were unopposed.

[44]     Having considered the matter further in the course of writing this judgment I am reluctant to make the orders set out at [42] at this stage.  More particularly, I am uncertain as to the legal basis upon which I could make such orders.  That issue was not addressed in the plaintiffs’ submissions and no authorities have been referred to me.  As well, it may be that whether or not such orders are appropriate will depend on the resolution of other issues not presently before me, including (for example) whether the children have in fact been properly removed as discretionary beneficiaries under the Trust.

[45]     I record that the plaintiffs accepted that the issue of whether damages should be awarded against the defendants personally (such damages being a remedy sought in the amended statement of claim) should be adjourned to a later date pending receipt of the Public Trust’s report.  A similar approach seems appropriate in relation to the orders referred to in [42] above.  If the plaintiffs wish me to make those orders prior  to  receiving  the  Public Trust’s  report,  however,  they are  to  file a  further

memorandum within 14 days of the date of this judgment, setting out the basis upon which such orders could be made and referring me to any relevant statutory provisions and judicial authorities.

[46]     Regardless of whether the plaintiffs choose to file such a memorandum, leave is reserved to them and to the Public Trust to apply to the Court for any further

orders in these or any other respects.

Rebecca Ellis J