Murrell v Hamilton
[2013] NZHC 3241
•5 December 2013
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2012-412-336 [2013] NZHC 3241
BETWEEN JANE MAREE MURRELL Plaintiff
ANDWILLIAM ELLIOTT HAMILTON First Defendant
ANDGEOFFREY MIRKIN Second Defendant
ANDWE HAMILTON TRUSTEE LIMITED Third Defendant
Hearing: 11 and 12 September 2013
Counsel: L A Andersen for Plaintiff
D R Tobin for First and Third Defendants
M E Parker for Second Defendant
Judgment: 5 December 2013
JUDGMENT OF PANCKHURST J
Introduction
[1] This is a constructive trust claim. Ms Murrell, the plaintiff, and Mr Hamilton, the first defendant, lived in a de facto relationship for about seven years. For about four years of that time they resided in a new house in Devon Street, Arrowtown. Construction of the house was nearly completed when they moved into the property. By the time they moved out of the property, four years later, the house was completed and the section landscaped.
[2] Ms Murrell claims that she made contributions to both the finishing of the house and the development of the section. She also claims that Mr Hamilton’s conduct over the relevant time fostered a reasonable expectation on her part that she
had an interest in the property.
JANE MAREE MURRELL v WILLIAM ELLIOTT HAMILTON [2013] NZHC 3241 [5 December 2013]
[3] Devon Street was owned by the W E Hamilton Family Trust. Ms Murrell’s claim is resisted both on the merits, and on the basis that she cannot claim against an asset of the Trust. Further, the extent of any profit made from the sale of Devon Street is in dispute. Ms Murrell claims that the profit was up to $284,000, of which she seeks a half share.
[4] Three main issues require determination:
(a) whether Ms Murrell has a legitimate constructive trust claim,
(b) if so, what profit was made from the sale and what is the claimant’s
entitlement, and
(c) is the family trust Mr Hamilton’s alter ego so that the claim is
enforceable against the assets of the Trust.
[5] Mr Parker represented Mr Mirkin, the second defendant, a solicitor and formerly a trustee of the W E Hamilton Family Trust. Mr Parker, however, did not participate in the hearing, but rather limited his involvement to representing Mr Mirkin in relation to any downstream issues which might arise in relation to the Trust. Following Mr Mirkin’s resignation the third defendant Company became a trustee of the Trust.
Some further factual background
[6] The relationship between Ms Murrell and Mr Hamilton commenced in February 2002. Ms Murrell was then separated, but had the care of her teenage son. Mr Hamilton was living with his wife and three children, although he too separated a short time later. Mr Hamilton was living and working in the Queenstown/Arrowtown area, whereas Ms Murrell worked in Invercargill.
[7] Over the months until July 2003 the parties saw one another at weekends, some of which Mr Hamilton spent in Invercargill staying with Ms Murrell. Sometimes his children accompanied him.
[8] In July 2003 Ms Murrell and Mr Hamilton moved into rented accommodation at Five Rivers, near Lumsden. This was about the halfway point between Invercargill and Queenstown, from which the parties could travel an equal distance to work.
[9] In January 2004 Mr Hamilton’s wife and children moved to Christchurch, and Ms Murrell and Mr Hamilton shifted to Arrowtown. They moved into the house at 68 Devon Street, construction of which had commenced the previous year. Ms Murrell left her job in Invercargill in December 2003 in anticipation of the move. Mr Hamilton is a builder by occupation and his company, W Hamilton Building Limited, undertook work throughout Central Otago.
[10] The Devon Street property was built on land acquired some years previously by Mr Hamilton’s parents’ family trust. The trust acquired two contiguous building sections. Commencing in 2003 Mr Hamilton’s company began the construction of houses on each section. In August of that year the parents’ trust sold the land comprising 68 Devon Street to the W Hamilton Family Trust for $127,000. This sum was left owing as an interest free loan repayable on demand and documented as such. Construction of the two houses proceeded in tandem, although it appears that the parents’ house at 70 Devon Street was completed first. The state of completion of 68 Devon Street in January 2004, when the parties moved in, is a matter of some dispute to which I will return shortly.
[11] After leaving Invercargill Ms Murrell obtained employment in various administrative positions. She generally worked fulltime, but on occasions she could only obtain part-time employment. She also undertook administrative work for Mr Hamilton’s building company and was paid for this.
[12] In February 2007 Ms Murrell and Mr Hamilton left Arrowtown and moved to rented accommodation in Dunedin. Later that year a new trust was established upon the purchase of a house property in Dunedin. The new trust, of which the parties were trustees and discretionary beneficiaries, owned the newly purchased property. In the meantime 68 Devon Street was tenanted.
[13] In March 2009 68 Devon Street was sold for $573,418. In February of the following year Ms Murrell and Mr Hamilton separated. He moved out of the home owned by the new trust and this property was subsequently sold but a capital gain did not result.
[14] Subsequently, Ms Murrell sought legal advice concerning her rights to claim in relation to the Devon Street property. A protracted process of disclosure followed, at the conclusion of which a constructive trust claim was asserted. Negotiations were fruitless. Eventually, in November 2012, this proceeding was issued.
Does Ms Murrell have a legitimate constructive trust claim?
The legal principles
[15] Lankow v Rose1 affirmed the elements of a constructive trust claim. The claimant must show:
(a) contributions, direct or indirect to the property in question; (b) the expectation of an interest in the property;
(c) that such expectation is reasonable; and
(d)that the defendant should reasonably expect to yield the claimant an interest.
Tipping J added this:2
In the case of a de facto union, the claimant does not start from a presumptive half share but rather from nothing. A de facto claimant must demonstrate first a case for an interest and then what that interest should be. The interest must broadly reflect the contributions. Arithmetical precision will generally be unattainable and is in any event not necessary. The Court must, however, do its best to reflect in the assessed shares the value of the claimant’s contributions.
[16] Hardie Boys J explained how contributions are to be assessed:3
... by contributions to assets one is not referring to those contributions to a common household that are adequately compensated by the benefits the
1 Lankow v Rose[1995] 1 NZLR 277 (CA).
2 At 295.
3 At 282.
relationship itself confers. The contribution must manifestly exceed the benefits. ... Further, the contributions need not be in money; they may be in services or in any other respect. But there must be a causal relationship between the contributions and the acquisition, preservation or enhancement of the defendant’s assets ... .
Otherwise, there is no basis for a proprietary claim based upon constructive trust principles.
The contributions
[17] Ms Murrell gave evidence of various contributions that she made, being work and assistance typical of that required to finish and improve the presentation and appearance of a new home. She said that work commenced in 2003 while Devon Street was still under construction, and that she and Mr Hamilton drove from Five Rivers most weekends to undertake work about the property.
[18] In January 2004 they moved into Devon Street, although Ms Murrell maintained the house was still a “shell”. She said there was one working toilet, only one bedroom with ceiling linings and no cooking facilities. There was no kitchen or bathrooms, and only bare concrete floors throughout the house. The exterior of the house had not been plastered, nor the section landscaped. The parties camped in the home, using Mr Hamilton’s parents’ house next door for showering and the like.
[19] In early 2004 Ms Murrell said that she assisted Mr Hamilton with specific tasks, including erecting ceilings, putting T and G cladding in the hallway, completing frames and skirtings, laying insulation and timber flooring in the kitchen/dining area and tiling the bathrooms and the front entrance. Ms Murrell also said that she painted the exterior of the house and played an active role in selecting colours, curtains and carpet for the home.
[20] After the house itself was completed, her attention turned to landscaping. Ms Murrell said she was actively involved in spreading topsoil, establishing a stone path, selecting and placing garden stones and generally in establishing a flower garden and a small herb and vegetable patch. All the while she was also responsible for the clearing up and cleaning of the property, work incidental to the house finishing and the landscaping.
[21] Mr Hamilton’s perception of the contributions made by his former partner was rather different. At the outset he pointed out that his building company undertook construction of the house under contract to the Trust. The building work, he said, was undertaken by himself, his employees and contractors retained in relation to some elements.
[22] Mr Hamilton described the house as “well underway” when he and Ms Murrell moved in in January 2004. Practical completion was achieved by the midpoint of that year. The move at the beginning of the year avoided the long daily commute from Five Rivers to Arrowtown. The distance was such that Mr Hamilton said he and Ms Murrell had not driven to Arrowtown to undertake work at Devon Street during weekends in 2003.
[23] With reference to the specific contributions asserted by Ms Murrell, Mr Hamilton disputed her evidence. He said that finishing work required the input of skilled tradesmen, and that any contributions from Ms Murrell were inconsequential. He had no recollection of her assisting with ceilings, wall cladding, window frames and skirtings and the like. Mr Hamilton accepted that Ms Murrell cleaned up in relation to tiling and also painted the exterior of the house. But, as he recalled, this was because she was out of work at the time and his Company paid wages for the painting work. This money, he said, was retained for her personal use, not applied to meet joint expenses.
[24] With regard to landscaping Mr Hamilton similarly denied that his then partner had undertaken work of any moment. He observed:
I agree that she may have planted some vegetables in the garden once it was created, but that is as far as I accept that she did anything.
At another point in his evidence Mr Hamilton said:
Jane did not contribute to any of the property-related expenses at 68 Devon Street, by that I mean insurance, rates, mortgage payments, or things like that, nor did she ever pay any rent. We did have a joint account to which we both contributed, although my memory is that I put in a lot more than she did, which was used to pay for groceries, power, telephone and holidays.
Further, Mr Hamilton disputed that Ms Murrell had regular employment, stating that she was either unemployed, in part-time employment or working some hours for his building company.
[25] Questioned in cross-examination Ms Murrell was adamant in refuting contentions that she had not undertaken the work she had outlined. She also disputed that she had received payment for painting the house exterior, stating that she was paid for work on the Company’s accounts and books, but not otherwise.
[26] Further witnesses were called in relation to this aspect. The first was a builder who worked for Mr Hamilton for about five years to 2007. His evidence included this:
I never liked Jane. I remember that she seemed to be a ticking time bomb, ready to explode, particularly if she got a skin-full.
This witness worked on the Devon Street houses. He doubted that Ms Murrell had assisted with the finishing of the house, as the work was undertaken by Mr Hamilton and his staff, and comprised skilled work requiring a tradesman. He conceded:
Jane did paint parts of the exterior of the house. It took her a lot longer to do so than it would have taken a skilled painter or even a brush hand.
The witness also said that he did not see Ms Murrell doing any landscaping or gardening, and that there was not much in the way of a garden anyway.
[27] The other witness was a quantity surveyor. He produced a schedule in which he costed the value of the work undertaken by Ms Murrell in relation to house finishing and landscaping at $2,802.58 in total. Ms Murrell’s labour was costed at
$22 per hour. I do not find this evidence greatly helpful. It is not, I think, realistic to assess the value of a householder’s contributions towards finishing, and then developing a house into a home, by reference to quantity surveying principles. In cross-examination, the witness said he had not been instructed to assess the value added to the property as a result of the work required in landscaping and establishing it as a home.
Assessment
[28] I am satisfied that Ms Murrell did make a valuable contribution, essentially as a homemaker, in relation to the Devon Street property. A number of factors prompt that conclusion. Ms Murrell, I think, was an honest witness. She impressed me as straight-forward in giving evidence, and importantly, in cross-examination. Logically, it makes sense that someone in her position, after moving into the shell of an unfinished house, was in a position to bring her touch to bear in transforming the property into a home. Photographs of the property, although taken some time after the event, show the house and section in a finished state. It is apparent that the property was finished and presented in an attractive manner.
[29] Mr Hamilton’s evidence concerning both this aspect, and others, lacked balance and realism. Whenever opportunity existed to criticise, and refute, it was taken. The picture he painted of Ms Murrell was out of keeping with the personality, and impression, she made as a witness in the course of giving quite lengthy and detailed evidence.
[30] I shall return to the valuation of the entitlement shortly.
The reasonable expectations of the parties
[31] Contributions to the finishing, and improvement, of 68 Devon Street are not enough. Ms Murrell must also establish that such contributions were made in circumstances which gave rise to a reasonable expectation that thereby she acquired an interest in the property. Conversely, it must be shown that any reasonable person in Mr Hamilton’s position would recognise that Ms Murrell had a legitimate expectation of an interest in the property. If his conscience should have led Mr Hamilton to that conclusion, the intervention of equity to impose a constructive trust is appropriate.
[32] The evidence of the parties in relation to this aspect was quite brief. Ms Murrell conceded she knew throughout that 68 Devon Street was owned by the Trust. However, in 2003 and for some years thereafter she and Mr Hamilton were in a loving relationship. Discussions between the two led her to believe that they were
working together for their mutual benefit. Remarks were made by Mr Hamilton to the effect that the benefits from the sacrifice, and hard work, they were putting into the new house would be shared in the future. Had he said otherwise, in particular said that work on the property would benefit only the beneficiaries of the Trust, himself and his children, she would not have committed herself in the way that she did. In short, throughout the greater part of their relationship she said that she and Mr Hamilton were a committed couple, working together to assure their future together. Had this not been Ms Murrell’s appreciation, she said she would have moved to Sydney to be with her family.
[33] Mr Hamilton provided a quite different account. He outlined the history of his family’s involvement with trusts. Over many years family members, including his parents and siblings, had taken advice from Mr Mirkin, the second defendant, concerning the establishment and administration of trusts. He was told of the “risks involved in tainting or intermingling of assets”. When he first married in 1991
Mr Hamilton and his wife established what is now the W E Hamilton Family Trust. A contracting out agreement was also concluded. The Trust was intended to keep Mr Hamilton’s personal property separate from his business assets. Their first home was owned by the Trust.
[34] Mr Hamilton said that it was “completely untrue” that he said anything to
Ms Murrell to indicate she would benefit from the finishing and development of
68 Devon Street. In addition to the interest free advance from his parents (representing the price of the section), the Trust borrowed about $200,000 to fund the construction. He had no discussions with Ms Murrell concerning 68 Devon Street because it was “none of her business”. He viewed the property “as a home for my children when they were with me”. Indeed, Mr Hamilton said that it was “a source of irritation to Jane that she knew that she had no interest in 68 Devon Street”. This caused her to threaten on occasions that she would “get the trust busters” in if their relationship ended.
[35] Mr Hamilton also described the establishment of three joint trusts, involving himself and Ms Murrell, in relation to three separate properties. The last trust owned the house property in Dunedin which they occupied in 2010 when they separated.
These trusts were formed in light of the philosophy that assets should be kept separate, and protected, given Mr Hamilton’s ongoing involvement in the risky building industry. Although Ms Murrell stood to benefit, as a beneficiary of the three purpose trusts, she did not in fact do so because none of these ventures proved profitable. The evidence of the existence of these trusts was said to demonstrate Mr Hamilton’s approach to property ownership, and to also confirm his evidence concerning Devon Street. It was owned by the Trust, Ms Murrell was not a beneficiary of that Trust, and accordingly Mr Hamilton said and did nothing to indicate otherwise to Ms Murrell.
[36] Although there is a certain logic in this contention, I find it unpersuasive. The parties commenced living together at Five Rivers in mid 2003. At much the same time the Trust acquired the section and construction of 68 Devon Street, and his parents’ house next door, began. At this early point in their relationship it was hardly surprising that Ms Murrell was not formally involved in the venture.
[37] But, matters moved on. As already described the parties moved into the new house in early 2004. It is in this context, in my view, that the conflicting evidence of the parties is to be assessed. The parties commenced living in an unfinished house. Finishing work, and what I have termed the conversion of a house into a home, occupied their attention for many months. Devon Street became, of course, a family home. Ms Murrell’s son, although by then living with his father in Invercargill, and Mr Hamilton’s three children, stayed in the house for holidays.
[38] The challenge they faced in finishing and developing the property would naturally have stimulated discussion concerning both the effort required and how this would benefit them in the future. In my view it is much more likely that the discussions which resulted were as described by Ms Murrell. I also consider there is confirmation for this to be found in subsequent events, in particular the fact that Mr Hamilton subsequently entered into three joint ventures with Ms Murrell, albeit through the vehicle of separate purpose trusts. But for the timing, I think it is probable that the joint development of Devon Street, as it became, would have been pursued via a purpose trust as well.
[39] For these reasons I find that Ms Murrell’s contributions were made in circumstances in which she had a reasonable expectation of an interest. In good conscious Mr Hamilton was bound to recognise that interest.
Conclusion
[40] For these reasons I am satisfied that Ms Murrell made contributions to
68 Devon Street and that she did so in circumstances where she held a reasonable expectation that she enjoyed an interest in the property. Further, I find that it would be unconscionable of a reasonable person in Mr Hamilton’s shoes to deny the existence of such interest. These findings, however, remain subject to my consideration of the third element – whether the property being an asset of the Trust precludes recognition of a constructive trust claim.
What profit resulted from the sale and what is the value of Ms Murrell’s
interest?
Profit from the sale
[41] The house at 68 Devon Street was sold in March 2009 for $573,418. In August 2012 Mr Hamilton made an affidavit in this proceeding to which was annexed a six page spreadsheet containing the total building costs of
68 Devon Street. These totalled $427,723. This indicated a profit from the sale of
$145,695.
[42] Ms Murrell, however, disputed many of the items contained in the spreadsheet. Her evidence included schedules itemising the matters in dispute. There were three such schedules:
Items verified by invoices, but not
A
being building costs $34,500.00
Items not verified by an invoice, and
B
not being building costs $30,371.28
Items not verified by invoice, but
C
which may be building costs $31,657.89
Total $96,529.17
In giving evidence Ms Murrell said that the profit from the sale, plus the net rental income from the property in the period from February 2007 to March 2009 “could be as much as $284,575.31”. When questioned in cross-examination she stated that her claimed entitlement was a half share of this figure, since “it is like relationship property”.
[43] Ms Murrell was not challenged in relation to the figures itemised in the schedules. Mr Hamilton adhered to the view that the profit from the sale of
68 Devon Street was the difference between the sale price and the figure identified in his spreadsheet. However, he did not contest the analysis in Ms Murrell’s schedules. When questioned by Mr Andersen, Mr Hamilton was obliged to accept that various items in the schedules were not building costs, and that many others were not supported by invoices.
[44] The exercise of establishing the building costs for 68 Devon Street is complicated by the fact that it, and Mr Hamilton’s parents’ house at 70 Devon Street, were built in tandem. Accordingly, there was scope for confusion as to whether building costs related to one house or the other, and perhaps in some instances to both. Mr Hamilton nonetheless maintained that there was no confusion because throughout the building project he was assiduous in ensuring that the charges rendered by his building company to the Trust were accurate. When this claim was put to the test, however, this assurance suffered somewhat.
[45] In these circumstances precision is not attainable. But, nor is it required.4 I have considered the itemised schedules prepared by Ms Murrell. Many of the items in the first two schedules are clearly not building costs, being amounts paid for chattels or to meet house outgoings (for example rates). Other items refer to expenditure incurred well after the construction of 68 Devon Street, some even after the date of sale in March 2007. Although it is necessarily a matter of assessment, I am satisfied that it is appropriate to recognise $85,000 of the total adjustment of about $98,000 claimed in the three schedules. It follows that the profit from the sale,
after a fair allowance for building costs, should be increased to $230,000.
4 Lankow v Rose at [295].
[46] I also accept that some allowance is required in relation to the rental income derived from 68 Devon Street over a period of approximately two years. The house was let for $420 per week and Ms Murrell claimed a half share of the net return after payment of outgoings. There is precious little evidence concerning the outgoings, save for a further schedule prepared by Ms Murrell. This showed outgoings of
$1,261.79, but self-evidently this figure cannot be the true total as, for example, the allowance for rates is only about $150. Further, Ms Murrell claimed a half share of about $284,000 (being the total of building costs and net rental income), whereas her claim must be based on her percentage interest in 68 Devon Street – not a presumptive half share. In my view the outgoings on the property from 2007 to
2009 would have reduced the rental income significantly, and I adopt a net figure of
$20,000.
What is the extent of Ms Murrell’s interest?
[47] Having established a case for an interest, I turn to the value to be placed upon Ms Murrell’s interest. The interest must broadly reflect her contributions. Arithmetical precision is neither attainable, nor necessary. The assessment is necessarily fact specific. Comparisons with other cases provide only limited assistance.
[48] A comparison of the respective contributions of the parties is required. Ms Murrell’s contributions to Devon Street have already been discussed. The essential question is to what extent did her contributions lead to the enhancement of the home? This is necessarily a matter of evaluation.
[49] I find that Ms Murrell obtained and held employment throughout the much greater part of the relevant period. Her income went into a joint account and was absorbed in meeting living expenses. In addition, she made direct contributions to the finishing of the house, more particularly in relation to the aspects by which it was developed to become an attractive home.
[50] Mr Hamilton’s contributions to the property were even greater. His parents advanced, interest free, the purchase price of the section. Through the Trust he secured the banking accommodation required to build the house. His Company was,
of course, paid for the work entailed in building the house. When it came to the finishing of the house, and the landscaping of the section, it seems to me that the contributions of the parties were about equal. But, timing is also important. Ms Murrell’s contributions to the property commenced in earnest in early 2004, whereas Mr Hamilton was involved in his personal capacity prior to this.
[51] In my view Ms Murrell’s contributions warrant recognition of a 15 percent interest in the property.
Is the interest enforceable against the Trust?
Was the Trust Mr Hamilton’s alter ego?
[52] The claim was not advanced on the basis that the W E Hamilton Family Trust was a sham. Rather, Mr Andersen contended that Ms Murrell’s constructive trust interest should be recognised because the Trust was controlled and operated by Mr Hamilton such that it was an extension of him, and not a separate entity. That is to say, the Trust was merely an alter ego of Mr Hamilton.
[53] A leading text5 contains a discussion of relevant factors that may provide evidence of an alter ego trust.6 The many factors include a lack of trustees’ meetings, minute books and resolutions; inadequate or non-existent trust accounts; inadequate documentation pertaining to trust transactions; the rubber stamping of
directions given by the controlling party to the trustees; payment of trust expenses by the controlling party; receipt of direct financial benefits from the trust assets by the controlling party; the controlling party being the sole or principal beneficiary of the trust; and conduct of the controlling party which evinces an intention to control the trust assets.
[54] At the hearing there was considerable cross-examination of Mr Hamilton and
Mr Mirkin designed to show that the Trust was in substance an alter ego of
Mr Hamilton. He denied that this was the case. Frequently, in response to questions,
5 Butler (ed), Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009).
6 At 15.6.4.
Mr Hamilton deferred to Mr Mirkin when he was found wanting in answering questions concerning the affairs of the Trust.
[55] Mr Mirkin’s evidence began with an authoritative outline of his experience as a professional trustee. He also detailed the extent of his involvement with members of the Hamilton family in relation to establishing and administering trusts. He said that Mr Hamilton’s parents fostered in their three children an understanding of the advisability of ensuring that assets be held by trusts to provide protection “from business creditors and from any unsuccessful relationships”. His evidence included this:
They [the parents] have always impressed me with their knowledge of the use of trusts and the importance of properly maintaining and running those trusts. Likewise, the children have shown knowledge of the use of trusts, and the care that must be taken with them, from early on.
[56] Mr Mirkin then spoke of his involvement with numerous Hamilton trusts, including his multiple appointments as a trustee, the documenting of trust transactions, participation in dozens of meetings with co-trustees, the generation of minutes and resolutions as required and the preparation of financial accounts in a form understandable to family members. Mr Mirkin, I note, was appointed a trustee of the W E Hamilton Family Trust when it was established in 1991, and remained a trustee until September 2012. At that time he resigned, and the third defendant, W E Hamilton Trustee Limited, was substituted. Control of this company rests with Mr Hamilton.
[57] When the assertion that the W E Hamilton Family Trust had been efficiently administered was put to the test, however, a different picture emerged. The sale of the Devon Street land to the Trust (from Mr Hamilton’s parents) was duly documented, culminating in the transfer of the title to the then trustees in August
2003. Likewise, the Trust’s indebtedness for the purchase price, and that the advance was interest free and repayable on demand was recorded. There was also a resolution dated 8 December 2003 by which the trustees resolved that the bank account known as the “W E Hamilton Building Account” was the nominated bank account for the Trust. In fact, the bank account used by the Trust was in the name of
William Elliot Hamilton. Otherwise, there were no records pertaining to the Trust held by Mr Mirkin, or at least documents proved in evidence to exist.
[58] Under cross-examination it emerged there was no designated file for the Trust, no file notes, one trustee resolution and only limited financial statements. The financial statements covered the period that Devon Street was tenanted and were for tax purposes. They did not include a statement of the Trust’s assets and liabilities.
[59] Cross-examination of the two witnesses revealed other issues. Contact between them in their capacity as co-trustees had been limited. Mr Mirkin knew little about the Trust’s activities beyond the fact that a house was under construction. The supposed Trust’s bank account was used for non-trust transactions. For a period Mr Hamilton’s salary was paid into the account, and it was used to meet Mr Hamilton’s living expenses as well as Trust expenses. A facility from the bank for building expenses was not documented in the records of the Trust, nor it seems was it known to Mr Mirkin at the time it was extended. A registered valuer’s report dated 2 August 2004 recorded the purpose of the report as “for mortgage purposes and for transfer to Trust purposes”. The reason for this was not explained.
[60] Building on these various factors Mr Andersen argued that the Trust was shown to be an alter ego trust. Alter ego means another side of oneself or a second self. Mr Hamilton was the controlling hand. Mr Mirkin, his co-trustee, was largely in the dark. Record keeping was minimal. Trust administration was lax. In reality Mr Hamilton ran the trust as he saw fit. Hence the Trust was a facade, able to be disregarded. Its assets were the de facto property of Mr Hamilton and available to meet Ms Murrell’s claim.
[61] Mr Tobin submitted this was not an alter ego trust situation. He conceded there were some administration problems, and also that mistakes had been made in matters pertaining to the Trust’s affairs. But, he did not accept it was an alter ego of Mr Hamilton. He also questioned whether as a matter of principle there is any such thing as an alter ego trust – rather, either a trust is a sham, or its existence must be recognised. This submission raises an important legal issue to which I now turn.
Is there such a concept as an alter ego trust?
[62] To consider this issue it is necessary to look at a number of previous
New Zealand cases. The situation in other countries may perhaps be different.
[63] The first is Prime v Hardie,7 decided in 2002. This was a constructive trust case involving former partners to a de facto relationship. Ms Prime asserted an interest in the family home based on contributions she made to it during the course of the relationship. The home was owned by Mr Hardie’s family trust.
[64] Salmon J upheld Ms Prime’s claim subject to the difficulty that the house was owned by a trust. The trustees were Mr Hardie and a trustee company. Salmon J found: 8
What is clear on the evidence ... is that the trust was effectively Mr Hardie’s alter ego. He was the principal (although not the only) beneficiary. He borrowed the money which enabled the trust to purchase its assets. He paid the interest on the mortgages and rates and insurance. In the 1998 financial year his personal income return showed an apparently fictitious rental income from [the home] of $3,600 and deductions for interest, depreciation and other items resulting in a net loss of $10,975 which he claimed as a tax deduction against his personal income. There is no doubt [the home] and before that [another] property, were the family homes for the couple and their children. In those circumstances I see no reason why a constructive trust should not be imposed upon a property owned by a trust.
Salmon J accepted that a distinction was to be drawn between the family home, and rental properties, owned by the trust. Only Ms Prime’s claim in relation to the family home was recognised.
[65] The next case is Glass v Hughey,9 decided in 2003. This was also a constructive trust case involving former de facto partners. Priestly J found that Ms Glass had made contributions to Mr Hughey’s business, that these enhanced the business assets and that Ms Glass’s expectation of an equitable interest in them was a reasonable one. However, the Judge said that to which assets the constructive trust should attach was “problematic”.10 The contributions were made to a company
owned by a family trust, but by the date of separation the company had been sold to the benefit of the trust.
[66] Priestly J held that the interest arose directly against the company, but could be traced to the trust. Alternatively, he found that the company, and the trust, were controlled by Mr Hughey, indeed: 11
... that the trust has for all intents and purposes been disregarded by him ... and so far as [Ms Glass’s] claim is concerned should be regarded as a sham or more particularly the husband’s alter ego.
The Judge then added: 12
There are Australian authorities which make it clear that Courts will disregard trusts which are a spouse’s alter ego or a sham to ensure that a family property claim is not unfairly defeated.
[67] In 2008 the Court of Appeal decided Official Assignee v Wilson.13 A Mr Reynolds became bankrupt. The family home occupied by Mr Reynolds and his partner was owned by a family trust. The Official Assignee claimed the house as an asset in Mr Reynolds’ estate on the basis that the trust was a sham, or alternatively an alter ego of Mr Reynolds. The alternative contention was based on trust administration factors somewhat similar to those advanced in this case. The Court held that as the Official Assignee stood in Mr Reynolds’ shoes he could not seek an alter ego finding based on the slackness, informality and perhaps even illegality of Mr Reynolds conduct. This finding disposed of the appeal, but the Court nonetheless considered the sham and alter ego contentions.
[68] With reference to the latter the Court observed that the decisions in Prime v Hardie and Glass v Hughey did not address “the theoretical basis upon which a Court is justified in finding an alter ego trust”.14 It noted that the Australian cases relied upon in Glass v Hughey needed to be viewed with “some caution”, because the Australian family law regime permits recourse to trust assets where a spouse is in
effective control of them, without the need to violate the trust in order to do so.15
There are no equivalent provisions in New Zealand.
[69] Most importantly, the Court concluded that assumption of control of a trust by someone other than a trustee, or by one trustee to the exclusion of others, could not of itself invalidate a trust. In short, control of trust property does not justify attribution of ownership of the assets from the trustees to the trust controller. This would be to ignore the rights of the beneficiaries.16 At most, arguments and evidence of the kind advanced in an alter ego context were relevant to an argument that the trust was a sham, but an alter ego argument could not succeed on a standalone basis.17
[70] These observations were of course obiter, given the earlier conclusion that the Official Assignee could not advance the bankrupt’s own conduct as a basis to access assets of the trust to the benefit of creditors in the estate. That said, all three members of the Court subscribed to the alter ego trust analysis, save that Glazebrook J left open whether the alter ego concept might warrant recognition in a relationship property division context.
[71] I note that the analysis in Official Assignee v Wilson has been followed in at least two High Court cases.18
[72] In another, Clark v Clark,19 a married couple farmed a property owned by the trustees of a trust settled by the husband’s grandfather. Following separation the wife successfully claimed an interest in the farm. However, she did so by virtue of a constructive trust declared in favour of her husband (against the trustees), and then claimed a share in the increased value of the husband’s separate interest in the farm
under the Property (Relationships) Act 1976.
15 At [67].
16 At [67].
17 At [72] and [92].
18 F v W HC Wellington, CIV-2009-485-531, 3 August 2009, per Gendall J; and Vervoort v Forest
[2013] NZHC 590, per Sargisson AJ.
19 Clark v Clark [2012] NZHC 3159.
[73] Recently the Court of Appeal decided Marshall v Bourneville.20 The appeal concerned a caveat lodged in relation to an intended constructive trust claim. The Court allowed the appeal and ordered that the caveat not lapse. Following reference to some of the cases cited above, and other decisions, Rodney Hansen J in delivering the judgment of the Court said: 21
Like the High Court Judges in these cases, we see no reason why, in a proper case, relief by way of a constructive trust should not be ordered against trust property. It seems to us that such an outcome might reasonably be available to Ms Marshall. On her case, an expectation of an interest in the Symonds Street property arose when it was acquired by Mr Bourneville. We see no reason why that expectation should not survive the transfer of the property to the trustees. Mr Bourneville, as settlor and trustee, obviously would have had knowledge of the circumstances giving rise to the expectation. In such circumstances, Ms Marshall could well be able to establish that a trust was impressed on the property and the trustees should reasonably expect to yield to her an interest in the property.
(emphasis added)
The judgment does not refer to Official Assignee v Wilson. However, that may well reflect the circumstance that there was no contention that the trust was a sham, or an alter ego of the settlor. Unlike the present case, Ms Marshall’s constructive trust interest arose before the relevant property was settled on a trust. I think the essential issue was whether her interest could be traced to the trust, not whether the trust itself was a facade.
[74] The Law Commission considered sham and alter ego trusts in an issues paper published in December 2010.22 The discussion includes reference to most, if not all, of the above cases, and also to some influential academic papers. One paper emphatically rejects the notion that the control, and even maladministration, of a trust provides a basis in law to label it an alter ego trust, the assets of which may be available to external claimants. Such an approach ignores the ownership of the trust assets by the trustees and equally the interests of the beneficiaries.23 Another paper
challenges the thesis that a trust can be the alter ego of a person, when a trust is not a
20 Marshall v Bourneville [2013] 3 NZLR 766 (CA).
21 At [39].
22 NZLC IP20 Some Issues with the Use of Trusts in New Zealand: Review of the Law of Trusts
Second Issues Paper (2010).
23 Jessica Palmer, “Dealing with the Emerging Popularity of Sham Trusts” [2007] NZ L Rev 81.
legal entity, rather a construct by which defined rights and obligations attach to certain property.24
[75] The Law Commission recently released a Review of the Law of Trusts.25 The Commission concluded that the better course was to define the core concepts of a trust in a proposed new Act, and that this would avoid the need for statutory intervention in relation to the “potentially problematic causes of action such as “sham trust”, “alter ego”, “bundle of rights” or “illusory trust”.26 The review also contains proposals for some limited amendments to the existing provisions by which Court orders may be made in defined circumstances requiring trustees to make payments from trust assets to relationship property claimants.27 But these provisions, and the proposed amendments, are not relevant to the issues in this case.
Analysis
[76] A sham trust exists where the acts of, and documents executed by, parties are intended to give the appearance of creating legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.28 To demonstrate that a sham exists there must be evidence that the parties to the transaction held a common intention to this effect.29 A trust adjudged to be a
sham is void from its inception. The assets are held by the trustees on resulting trust for the settlor.
[77] While by and large these principles are well settled, the same cannot be said in relation to alter ego trusts. This, I think, is evident from the preceding review of New Zealand cases. Although the observations of the Court in Official Assignee v Wilson are obiter, and not therefore binding, I regard them as highly persuasive. In particular I note the observation that while evidence of far reaching control of a trust
may support a finding that the trust is a sham, it does nothing more.
24 Peter Watts “The Company’s Alter Ego”, in Company Law Writings: a New Zealand Collection
(Centre for Commercial and Corporate Law, Christchurch, 2002).
25 NZLC Report 130 Review of the Law of Trusts: A Trust’s Act for New Zealand, (August 2013).
26 At [21].
27 Property (Relationships) Act 1976, s 44C and Family Proceedings Act 1980, s 182.
28 Snook v London and West Riding Investments Limited [1967] 1 All ER 518, per Diploc LJ at
528.
29 Snook at 528.
[78] But the New Zealand cases indicate the existence of at least two or three situations in which a constructive trust claim may succeed in a family trust context. One is where the contributions were made, and the reasonable expectation of an interest arose, while the property in question was owned by the claimant’s partner; and the transfer of such property to a trust occurred subsequently. Marshall v Bourneville seems to be in this category.
[79] Another, and I think more contentious, example is where the claimant’s contributions to the trust property were made with the knowledge and approval of all the trustees, such that their collective conscience is bound to recognise the validity of the claim. A third example is where a constructive trust benefits the partner and the claimant successfully claims against that interest, as in Clark v Clark. But then the claimant’s entitlement is defined by reference to the 1976 Act, not equity.
[80] Nor are these examples based on an alter ego approach. It is not the fact that the defendant (the claimant’s ex-partner) treated and controlled the property of the trust as if it was his own that is pivotal. Rather, the common theme is that the claimant can assert and establish a constructive trust claim against the trustees of an express trust, at least in the first two examples.
[81] These situations are, I think, consistent with the approach taken in Official Assignee v Wilson. They avoid the major criticism of the alter ego concept; that control of property alone should not result in appropriation of that property to the controller, since such an outcome is antithetical to our system of property law.
[82] Returning to this case, Ms Murrell’s claim is not within any of the possible exceptions discussed above. Her constructive claim is against property that was owned by the Trust throughout. Nor is there a basis for the view that both trustees stimulated her expectations in such circumstances that it would be unconscionable of them to deny her claim.
Conclusion
[83] For these reasons the constructive trust claim must fail and the claim is dismissed.
Solicitors:
L A Andersen, Dunedin
D R Tobin, Dunedin
M E Parker, Dunedin
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