Pennell v Carter
[2022] NZHC 3094
•24 November 2022
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2022-485-356
[2022] NZHC 3094
UNDER the Trusts Act 2019 and the inherent jurisdiction of the High Court IN THE MATTER
of the Carter Family Trust
BETWEEN
SIDNEY HERBERT PENNELL AND JOAN PENNELL
Applicants
AND
PETER BERNARD CARTER
First Respondent
TERESA MARY BROSNAHAN
Second Respondent
Hearing: 17 October 2022 Appearances:
A S Butler KC and S W H Fletcher for the Applicants E M S Cox and R Georgiou for the First Respondent
M Freeman and G M Cairns for the Second Respondent
Judgment:
24 November 2022
JUDGMENT OF COOKE J
[1] By originating application dated 4 July 2022 the applicants seek directions relating to the Carter Family Trust established by Trust Deed dated 30 July 1991. In particular directions are sought concerning two matters, namely:
(a)whether the applicants were properly appointed as trustees of the Trust, and if not regularising their appointment; and
PENNELL v CARTER [2022] NZHC 3094 [24 November 2022]
(b)determining whether the second respondent, as the executor of the estate of Graham Carter, has a beneficial interest in the trust fund under the Trust Deed, or whether the trust fund is solely for the benefit of Graham’s brother, Peter Carter (the first respondent).
[2] The directions relating to the first matter are not opposed. The directions in relation to the second matter are supported by the second respondent but opposed by the first respondent.
Background facts
[3] Colin and Greta Carter had two sons, Graham and Peter. They also had a daughter, Marilyn, but she died in 1975.
[4] Colin and Greta accumulated modest assets during their lifetime. Their primary asset was their property in Alice Street, Alicetown which had been in the family for some time.
[5] On 9 February 1990 Colin and Greta executed wills. Under them if one predeceased the other Peter and Graham were to be their executors and their real and personal property was to be held on trust for their children “in equal shares as shall survive me”. There was also a gift over clause — if any of the children predeceased Colin or Greta then their grandchildren would take their parent’s share once they reached 20 years of age.
[6] Some 17 months after executing these wills Colin and Greta settled the Carter Family Trust. The Trust Deed was prepared by a solicitor. There were proposals to introduce asset testing for rest home care subsidies at that time. Death duty was also still in existence, although it was abolished shortly thereafter. I accept that Colin and Greta established the Trust to prevent them having property in their own names which could be subject to asset testing as this might affect their ability to receive rest home care subsidies.
[7]The Trust Deed relevantly provides:
2. The Trust shall continue for the lifetime of the Settlors.
…
4. The Trustees shall stand possessed of the Trust Fund and the income thereof UPON TRUST to apply the said income at their discretion for the benefit of the Settlors during their lifetimes and thereafter to hold the capital and any accumulated incomes of the Trust Fund for the children of the Settlors as tenants in common in equal shares.
[8] The Settlors were identified as Colin and Greta, and the Trustees were Graham and Peter. Colin passed away on 6 May 1998, but Greta only did so recently.
[9] In February 2013 the applicants were approached by Graham. Graham had been diagnosed with terminal cancer. Sydney and Joan Pennell had been very close with Greta and her family. Graham wanted to ensure that Greta, and his own family, would be looked after when he died and he asked them to become trustees. They agreed. To appoint the Pennells as trustees Graham purported to exercise a power of appointment in the Trust Deed on Greta’s behalf as her attorney. He signed a deed of appointment on that basis. Peter did not. Graham died later that year, on 6 October 2013.
[10] The enduring power of attorney that Greta had executed was a joint power of attorney, however. Graham and Peter had to act together as Greta’s attorney. Moreover there is authority to the effect that a power of attorney cannot be used to exercise the power of appointment of trustees. The Pennells nevertheless acted as trustees from that time without controversy until the events giving rise to this proceeding.
[11] Greta then passed away on 4 September 2021. On 16 November 2021 Peter emailed the Pennells indicating that his legal advice was to the effect that he was the sole beneficiary of the Trust under the terms of the Trust Deed. Both the Pennells and the second respondent, Teresa Brosnahan, who was Graham’s partner and is the executor of his estate, did not agree with that view, and this application for directions has been made as a consequence.
[12] The Pennells take a neutral stance in this proceeding in the sense that they are not personally interested in the outcome, although they disagree with Peter’s
interpretation of the Trust Deed. They also seek to regularise their appointment, and their ability to be indemnified by the Trust when acting as trustee.
Regularising the Pennells as Trustees
[13] It is clear that the Pennells were not validly appointed as trustees of the Trust. The power of attorney was a joint power of attorney, and it was only exercised by Graham in this case. In any event the established authority is that powers of appointment in a trust deed cannot be exercised by attorneys.1
[14] It is clear, however that the Pennells, Peter and Graham (and latterly the second respondent) proceeded on the basis that there had been a valid appointment and the Pennells have dutifully acted as trustees since that time. They have accordingly acted in substance as trustees — what the law calls acting as trustees de son tort. As the Court of Appeal said in Butterfield v Public Trust this characterisation applies not only to strangers who intermeddle in trust affairs, but also to “an intended expressed trustee whose appointment has for some reason failed”.2
[15] I agree that this characterisation applies to the applicants. For the avoidance of doubt it is appropriate for the Court to make an order appointing the applicants as trustees under s 114 of the Trusts Act 2019. As a consequence of s 116(5) that order amounts to a vesting order vesting the trust property in the applicants along with Peter for the purposes of s 89 of the Land Transfer Act 2017. That will ensure that the remaining steps referred to at [33] below can take place smoothly. I also declare that the applicants have acted as trustees de son tort from the time of their apparent appointment to the date of the above order.
[16] The only remaining issue is that the applicants do not have the benefit of the indemnity under the trust deed. As Mr Butler KC pointed out, in Butterfield v Public Trust the Court of Appeal said that a right of indemnity in a trust deed only applies to an express trustee duly appointed and continuing, validly, in office at the time the expense in question was incurred.3 Mr Butler invited me to say that this conclusion
1 Re Godfrey Family Trust [2017] NZHC 420, [2017] 3 NZLR 198.
2 Butterfield v Public Trust [2017] NZCA 367, [2017] NZAR 1439 at [16].
3 Butterfield v Public Trust, above n 2, at [18].
was wrong. But the fact that this Court is bound by the Court of Appeal stands in the way of this invitation. In those circumstances Mr Butler sought an order from the Court that the Pennells be so indemnified. Neither the first or the second respondent oppose the order sought by the Pennells for costs or indemnities.
[17] Under s 131 of the Trusts Act the Court may relieve a trustee from personal liability in certain circumstances. It may well be that the Pennells could benefit from such an order if any such issue arose. No one is suggesting that they have acted other than in an appropriate way. An order of this kind was made in Butterfield, albeit under the Trustee Act 1956.4 But as I said during the hearing, however, I do not think it appropriate for the Court to make an order under s 131 in the absence of particular controversy to which such an order is directed. If any question of personal liability ever arose then there may well be a good case for indemnification. But I decline to make a formal order without any information on what the potential controversy might be. I very much doubt that any issue of this kind will ever arise. I will, however, reserve leave to make any such application. I address the costs associated with this proceeding separately below.
Is the second respondent a beneficiary?
[18] The main dispute between the parties is whether Graham’s half interest in the trust fund as a beneficiary survived his death and passed to Graham’s partner as his executor. Peter contends that it did not, and that the trust fund is now entirely for his benefit. Alternatively he argued that the trust fund failed in relation to Graham’s half interest, and is held on resulting trust and reverts back to be dealt with under Colin and Greta’s wills, with the effect that Peter will get 75 per cent, and Graham’s family 25 per cent of their parents’ property.5
[19] As I will deal with in greater detail below, Peter contrasts the terms of the Trust Deed with the wills of Colin and Greta. The wills expressly extended the benefit of the bequests to the grandchildren if any child did not survive them. He argues that the
4 I note the definition of “trustee” in s 9 of the Trusts Act, but I doubt that this can limit the jurisdiction of the Court under s 131, or the inherent jurisdiction.
5 Relying on the category of resulting trust referred to in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL) at 708.
difference in the instruments was deliberate, and he emphasises that the Trust was to make provision for the senior members of the family in their retirement and not the grandchildren. He refers to the known family circumstances in relation to that choice, including the earlier death of Marilyn and the impending arrival of the second and third grandchildren.
[20] Notwithstanding these arguments I accept the submissions for the Pennells and the second respondent that the meaning of the Trust Deed is clear, and that the second respondent continues to benefit from Graham’s shares as his representative.
[21] There is no dispute between the parties as to the approach to the interpretation of trust deeds, which follows the approach normally implied to contracts with due regard to the particular circumstances arising in relation to trusts.6 In identifying the proper meaning to be given to cl 4 of the Trust Deed it is apparent that any ambiguity arises only as the result of a question of timing. When the Trust Deed was executed on 30 July 1991 it would have been clear what the words “children of the Settlors” would have been understood to mean. It would obviously have meant Peter and Graham. I accept Mr Cox’s argument that it cannot have meant to include Marilyn who had died many years earlier. I also accept that these words are capable of meaning Peter alone some thirty years later on the death of Greta on 4 September 2021. That is because Graham had died some eight years earlier.
[22] Seen in those terms the important issue is precisely when cl 4 calls to be applied, and accordingly when the beneficial interests in the trust funds it refers to vested. That question, and the resolution of this controversy generally, is answered by a well-established line of authority, most recently reiterated by the Court of Appeal in McLean v Public Trust.7 In that case a father had left a life interest in his property to his wife. His will also said that on the death of his wife particular land, livestock and farm machinery would go to his son John, with the remainder going to his children in equal shares. But John died before his mother did. The question was whether John’s
6 See, for example, Powell v Powell [2015] NZCA 133, [2015] NZAR 1886 at [53]–[55].
7 McLean v Public Trust [2019] NZCA 449, [2019] NZAR 1989.
family still benefited from the specific bequest of land, livestock and machinery. The Court of Appeal upheld the High Court in concluding that they did. The Court held:8
As the Judge noted, the courts have consistently held that notwithstanding the creation of a life interest, a devise or bequest to a residuary beneficiary still vests in that residuary beneficiary on the death of the will maker unless there are express and clear words to the contrary. The residuary beneficiary’s interest is certainly postponed in possession until the death of the life tenant
— the property will not be transferred until then — but it is nevertheless a vested interest during the lifetime of the life tenant. Clear words are required before the gift will be held to be contingent on the death of the life tenant and so not vest until then. As to what form of words might be needed to achieve that result, the authorities also show that wording such as “on the death of [the life tenant]” is not of itself sufficient. Something more is required.
[23] The only material difference between that case and the present is that that case dealt with a trust established by a will. The trust established by a will comes into existence on the death of the testator. A trust established by a trust deed comes into existence on the execution of the deed declaring property to be held on trust. And as I have indicated above at the moment that the trust was created here there is no ambiguity as to what it meant. Peter and Graham were the children of the settlors at this time. Their beneficial interests in the Trust property vested at that moment, albeit subject to the life interest to the settlors. I see the present case as indistinguishable from McLean.
[24] One of the principles relied upon by the High Court in McLean v Public Trust, referred to by the Court of Appeal, was that:9
When using similar words to those which have been interpreted by the courts in previous decisions, drafters and will-makers are presumed to have those decisions in mind. Similar words should produce similar results unless the context requires otherwise.
[25] That is also so when this Trust Deed was drafted in 1991. Mr Freeman referred to the decision of the Court of Appeal in Tanner v New Zealand Guardian Trust Co Ltd which was released on 15 April 1992.10 The Court of Appeal upheld the decision of the High Court dated 29 April 1991, released two months before the Trust Deed
8 McLean v Public Trust, above n 7, at [38] (footnotes omitted).
9 At [21](c) (footnotes omitted).
10 Tanner v New Zealand Guardian Trust Co Ltd [1992] 3 NZLR 74 (CA).
here was executed.11 Both judgments were reported in the New Zealand Law Reports. The case dealt with a similar issue in relation to a will. The controversy arose because a grandchild subject to a bequest had pre-deceased a parent with a life interest. Did the grandchild lose his entitlement because of his death? So it is again the same issue. McKay J said for the Court of Appeal in relation to the clause in issue in that case:12
The clause itself defines the beneficiaries as “the sons of my said son Alfred Robert Tanner”. It does not add, as it could so easily have done, the words “who are then living”. There is nothing in the clause that would justify adding such a qualification. In the absence of qualification the will speaks from the date of death, and those persons then living who fit the description “sons of my said son Alfred Robert Tanner” must take, subject to a partial divesting if additional members of the class are born thereafter. It is not necessary to add any words to achieve that result as it is the ordinary meaning of the words used if they are not qualified.
[26] Exactly the same can be said of cl 4 of the present Trust Deed. The only difference is that cl 4 speaks from the date of the establishment of the Trust, not from the date of death.
[27] In Tanner the Court of Appeal also referred to the principle that “[d]raftsman should be able to rely on consistency of construction by the Courts so that similar words will produce a similar result unless the context requires otherwise”.13 That principle explains why, some 28 years later, the Court of Appeal reached the same conclusion in McLean.
[28] The recognition of this well-established approach is also reflected in the reference in cl 4 of this Trust Deed to the children of the settlors taking “as tenants in common in equal shares”. The reference to them being tenants in common in equal shares, rather than joint tenants, contemplates the potential for the death of one of them, with the equal share passing to that sibling’s estate. The intention of the drafter, and accordingly the settlors, is clear.
[29] Against that background Mr Cox’s argument that there is significance in the failure to adopt the expression used in the wills that the beneficial interest went to the
11 Tanner v New Zealand Guardian Trust Co Ltd [1992] 1 NZLR 58 (HC).
12 Tanner v New Zealand Guardian Trust Co Ltd, above n 10, at 76.
13 At 77.
children “that survive me” has no merit. Clauses such as cl 4 have a well-established meaning, known to professionals who prepare such documents. Such additional words are unnecessary. On the contrary the law is clear that it will be necessary to add express words to exclude the beneficial interest passing to a representative, such as by adding the words “who are then living”.
[30] I also do not accept Mr Cox’s argument that it was not necessary for Colin and Greta to make provision for the grandchildren as they had already been provided for in the wills. It is clear that the Trust Deed effectively replaced the wills, as all substantial assets that Colin and Greta had were transferred into the Trust, with only specific bequests then remaining to be dealt with by the wills. So the wills did not properly cater for the grandchildren at all. If anything, the terms of the wills confirm what Colin and Greta intended for the Trust, as the Trust effectively replaced the wills, and it was only established to avoid asset testing. It was not entered to change how Colin and Greta wanted their property to pass.
[31] I also do not accept Mr Cox’s argument that the Trust was only for the benefit of the senior members of the family in their retirement, and it accordingly excluded the grandchildren, and that advancing their position was not a purpose of the Trust. It is clear from the terms of the Trust that the property was to vest absolutely in Colin and Graham on the death of their parents, reiterated by the terms of cl 2 which provides that the Trust was for the life of the parents as the settlors. It would then be for Colin and Graham to decide how such property would benefit their own families. There is nothing in the Trust Deed evidencing an intention to prevent Colin and Graham’s families from benefitting. Indeed the reference to Peter and Graham taking their shares as tenants in common has the opposite implication.
[32] I also see no substance to the related point that Colin and Greta were well aware of the potential for their children to die before them. That was apparent as Marilyn had earlier died — something that had caused considerable grief for Colin and Greta. In addition Mr Cox emphasised that further grandchildren were on the way when the Trust was established. But if anything this reiterates the points made above — the Trust Deed contemplated such eventualities through the well-established approach the law had followed. It also did so through cl 4 providing that the brothers took the
beneficial interests as tenants in common in equal shares, which meant that their share would pass to their estate on their death, just as the earlier wills had provided.
[33] It follows that the applicants succeed with their claims. As I understand it, it is now contemplated that the Trust will be wound up and will be distributed to the first and second respondents. That makes sense. Under cl 2 the trust continued for the lifetime of the settlors, although that does not mean that the Trust ended on the death of the settlors. Clause 4 of the Trust continued the Trust after the death of the settlors. But it would be consistent with the terms of the trust for the trustees to now distribute the Trust in accordance with cl 4. To facilitate this I will make the orders to assist with these steps below.
Costs
[34] The final issue concerns costs. There is a difference between the parties in relation to the appropriate orders that should be made for this proceeding. I heard counsel on these issues at the hearing, and granted leave for counsel for the first respondent to file further written submissions. I also invited the first respondent to disclose the legal advice that he had relied upon in his materials before the Court, and he has done so in the written submissions dated 25 October.
[35] There is no dispute between the parties on the relevant principles that the Court should apply in relation to costs of litigation of this kind. They were summarised by the Court of Appeal in McCallum Jnr v McCallum in the following terms:14
(a)Proceedings brought by trustees to obtain the court’s guidance on construction of the trust deed or some aspect of the trust administration. The costs of all parties necessarily participating in those proceedings are treated as incurred for the benefit of the estate and will be ordered to be paid out of the trust fund.
(b)An application similar in nature to the first category, but brought by someone other than a trustee (such as a beneficiary). It would equally have justified application by a trustee. The same approach is taken to costs in this category as in the first category.
(c)Claims where a beneficiary or third party is making what might be termed a hostile claim against the trustees, or another beneficiary. That claim may still involve a point of construction or administration, but
14 McCallum Jnr v McCallum [2021] NZCA 237, (2021) 32 FRNZ 851 at [34].
will often involve a claim to a beneficial interest or entitlement to a part of the fund. Here, the usual principles as to costs apply; they follow the event.
[36] There are two related, but separate questions to address in this context. The first is whether the parties should be indemnified for their legal expenditure from trust funds. The applicants and the first and second respondent each seek such an indemnification. Secondly, there is a question as to whether any costs award should be made against any of the parties in favour of any of the other parties. In that respect it should be noted that the costs rules only involve an award on the basis set out in the schedules to the High Court Rules 2016. These contemplate a contribution to actual legal expenditure based on deemed recovery rates, and not a full indemnification of the party awarded costs, although indemnification can happen in limited circumstances.
[37] Here there is no dispute that the applicants should be indemnified out of the assets of the Trust for their costs. That is the approach applied by the Court of Appeal in Butterfield v Public Trust.15 For the same reasons, I accept there should be no order as to costs as between the applicants and the first respondent notwithstanding that the first respondent is the unsuccessful party. This means, in substance, that the second respondent is subsidising the first respondent in relation to legal costs incurred by the applicants as trustees because of the stance the first respondent has taken. But in applying the principles from McCallum that can be seen as part of the costs of the administration of the Trust.
[38] But contrary to the submissions for the first respondent I have concluded that this proceeding involves elements that fall within the category referred to in paragraph [35](c) of McCallum more than [35](a) or [35](b). That is because I see the argument as having been, at least in part, a dispute between the beneficiaries that has had to be decided by the Court, and that the costs consequences of such a dispute should fall in the normal way. The controversy that has caused the substantial part of the legal expenditure is Peter’s argument that he was entitled to the whole trust fund to the exclusion of the second respondent.
15 Butterfield v Public Trust, above n 2, at [20].
[39] This is reflected in the position concerning the legal advice received by Peter. He explained that he had received that legal advice in his capacity as a beneficiary, and not in his capacity as a trustee. That advice was not disclosed to the applicants or the second respondent. The effect of the advice was relied upon by Peter in the materials filed in Court, however. On my request the advice was provided to the Court. I note that the advice was only a preliminary view which was said to need further research, and that it recorded that there was an argument that the interest would pass to Graham’s children as “would be fairly standard practice in a family trust”. Given that background I do not think it is correct to characterise this litigation as involving a legitimate issue raised by Peter in his capacity as a trustee. Rather Peter has taken the stance that he has a beneficiary advancing a claim for a greater share than the trustees were allowing. He sought to be given all, or most of the assets of the Trust to the exclusion of the second respondent. That is a dispute of the kind referred to in [35](c) above.
[40] This should not be taken as a criticism of the first respondent. Parties are entitled to raise arguments before the Court. But it is to ask too much of the second respondent to not only pay what is effectively a half share of the applicants’ costs in addressing this issue, but also to say that Peter’s legal expenditure should be indemnified out of the estate as well as her own.
[41] Ultimately it is a question of achieving justice when exercising the discretion as to costs, and the powers of the Court in the supervision of trusts, in a manner that is consistent with the principles outlined in McCallum Jnr v McCallum. To do so I direct that neither the first or second respondents will have their legal expenditure arising from this proceeding paid out of the assets of the Trust. This will mean that each of the first and second respondents is responsible for paying their own legal expenditure. There will then be a costs award on a 2B basis against the first respondent in favour of the second respondent. This will offset some of the legal expenditure incurred by the second respondent arising from the dispute before the Court caused by the stance that the first respondent has taken, but short of a full indemnification. In short, it is the normal costs award a party faces when engaging in unsuccessful litigation before the courts.
Conclusion
[42] For the reasons outlined above I make the following orders, declarations and directions:
(a)Declaring that the applicants have acted as de son tort trustees of the Carter Family Trust.
(b)Appointing the applicants as trustees of the Trust under s 114 of the Trusts Act 2019. This appointment has the consequence of vesting all trust property in the applicants as well as the first respondent in accordance with s 89 of the Land Transfer Act 2017, including the property in Alice Street, Alicetown.
(c)Granting leave for the applicants to apply for indemnification if any issue arises in relation to their past conduct as trustees of the Carter Family Trust.
(d)Declaring that the second respondent takes the share of Graham Carter in accordance with cl 4 of the Carter Family Trust.
(e)Declaring that the applicants’ legal expenditure can be met from the assets of the Trust, but declining the applications by the first and second respondents to be indemnified for such legal expenditure from the assets of the Trust.
(f)Granting the second respondent costs against the first respondent on a 2B basis for all relevant steps taken in relation to this proceeding.
(g)Reserving leave for all parties to apply to the Court for further or consequential orders.
Cooke J
Solicitors:
Succeed Legal Ltd, Wellington for the Applicants Gibson Sheat, Wellington for the First Respondent
Thomas Dewar Sziranyi Letts, Lower Hutt for the Second Respondent
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