Potter v Duffy
[2015] NZHC 544
•24 March 2015
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2014-470-131 [2015] NZHC 544
BETWEEN TERI ANNE POTTER
Plaintiff
AND
MARK FRANCIS DUFFY Defendant
TERI ANNE POTTER
MARK FRANCIS DUFFY and LE PINE TRUSTEES LIMITED Second Defendant
Hearing: 25 February 2015 Appearances:
E Eggleston for the Plaintiff
M F Duffy (First Defendant) in personNo appearance for Le Pine Trustees Ltd, (third-named Second Defendant)
Judgment:
24 March 2015
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 24 March 2015 at 4:00pm
Pursuant to Rule 11.5 of the High Court Rules
………………………………………….
Registrar/Deputy Registrar
Solicitors:
Holland Beckett Lawyers, Tauranga, for plaintiff
Le Pine & Co, Taupo for third-named second defendant
Copy for:
E Eggleston, Barrister, Tauranga, for Plaintiff
Mark F Duffy, RD3 Tauranga, First Defendant
POTTER v DUFFY [2015] NZHC 544 [24 March 2015]
[1] Mark Duffy and Teri Potter lived in a relationship in the nature of marriage from 1979 to 2007. They have two children, Michael aged 23 and Rhian aged 20. They lived on a horticultural property at Pyes Pa, Tauranga. Since separation Mr Duffy has continued to live on the property. Rhian lives there as well. Ms Potter, a sickness beneficiary, has been waiting since 2007 to obtain a property settlement with Mr Duffy. That has not been straightforward. That is because their family trust owns the Pyes Pa property. Trust law applies, not the Property (Relationships) Act 1976.
[2] Ms Potter and Mr Duffy have not been able to decide what should happen to the Pyes Pa property. If the couple owned the property in their own names, rather than through a trust, Ms Potter would have a strong case under the Property (Relationships) Act 1976 to have her share of relationship property realised. The “clean break” principle would count strongly in her favour. The remedies under trust law are not so straightforward.
Procedural history
[3] Ms Potter began a relationship property proceeding in the Family Court in December 2012. In June 2014 that proceeding was transferred to the High Court. In September 2014 Ms Potter filed a statement of claim with two causes of action. The first cause of action seeks a division of relationship property under the Property (Relationships) Act. In the second, she seeks orders for the sale of the property, the division of proceeds of sale, and for the removal of Mr Duffy as trustee. If the court were to remove Mr Duffy as trustee, she would also resign, leaving Le Pine Trustees Ltd as the sole trustee.
[4] Ms Potter required leave under r 12.4(2) of the High Court Rules 2008 to apply for summary judgment. I gave it on 13 October 2014.
[5] Le Pine Trustees Ltd neutrally neither consented to nor opposed the summary
judgment application but abided the court’s decision. Mr Duffy opposed.
The trust deed
[6] The trust that owns the Pyes Pa property was set up under a deed dated
23 January 2002. Mr Duffy and Ms Potter are the settlors. They and Le Pine Trustees Ltd are the trustees. The trust deed is a conventional discretionary family trust. The children are the final beneficiaries. The discretionary beneficiaries are each settlor and their children. The trust was to take effect upon the Family Court making orders approving the vesting of the parties’ respective assets in the trust. The trust allows the trustees to make distributions of income and of capital before the vesting date. The trustees are required to act unanimously. The trustees have all the rights, powers and privileges of a natural person and, subject to the trusts, may deal with the trust fund as if they were the absolute owners and beneficially entitled to the trust fund. It is not in dispute that the trustees have the power to sell the trust assets including the Pyes Pa property.
[7] Clause 8.1 of the deed says:
8.1In the event of an irreconcilable dispute or marriage breakdown or dissolution or cessation of the relationship between the settlers, the trust deed shall be compellable to transfer one half of the trust funds to the trustees of a trust nominated by Mark Francis Duffy, such trust being on the same terms as this trust but excluding Terri Anne Potter as a beneficiary and the provisos to clauses 4.1, 6.1 and 11.1 and the balance to the trustees of the trust nominated by Terri Anne Potter such trust being on the same terms as this trust but excluding Mark Francis Duffy as a beneficiary and the provisos to clauses 4.1, 6.1 and 11.1.1
[8] The Pyes Pa property, a trust asset, is subject to a registered mortgage in favour of ASB Bank. The property is 9.8 ha., with approximately 3.6 canopy ha in kiwifruit. The improvements include a house, implement shed and organic kiwifruit orchard.
[9] As part of her case, Ms Potter, who keeps the books for the trust, portrays a worsening financial position, with a deteriorating overdraft, unpaid GST, arrears in mortgage payments and overdue trade creditors. She refers to disrepair and lack of
maintenance of the property and alleges lack of motivation on the part of Mr Duffy.
1 The provisos to clauses 4.1, 6.1 and 11.1 are directed at ensuring equality of distribution between Ms Potter and Mr Duffy.
She complains of casual arrangements for neighbours to use equipment without charge. She also points to the management deadlock between Mr Duffy and herself, shown up in lack of consultation and absence of agreement on how to deal with unpaid debts.
[10] In response Mr Duffy explained that temporary cash-flow difficulties could be overcome, arrangements were being made with creditors, the alleged disrepair was being played up and neighbours’ equipment use is part of long-standing neighbourhood customary practice. On limited and untested evidence it is not possible to say definitively who is correct. All the same, even on a summary judgment application, it is clear that Ms Potter and Mr Duffy certainly do not see eye to eye on the Pyes Pa property and there is little reason to expect that they will be able to overcome their differences.
[11] Mr Duffy also took the point that the children had not been served and their views should have been sought.
The application for order for sale of the property
[12] Ms Potter applies for an order for sale under Part 6 subpart 5 of the Property Law Act 2007, under which the court may order the division of property among co- owners. She has not applied for an order for sale under the Property (Relationships) Act because that does not apply where a spouse is acting as trustee.2 Nor has she applied under ss 64 and 66 of the Trustee Act 1952 or under trust law generally. Under s 64, the court can authorise dealings with trust property and variations of the trust. That section may be invoked where the trustees have resolved unanimously on a course of action considered to be in the best interests of the beneficiaries, but
require the court’s assistance by the conferral of the power. Case law has established that the section does not allow the court to act when the trustees cannot agree on a
course of action.3
2 Property (Relationships) Act 1976, s 4B.
3 See Neagle v Rimmington [2002] 3 NZLR 826, Melville v NRMA Insurance NZ Ltd HC Wellington CP70/01, 17 April 2002 and KAMG v STG [2013] NZHC 1767 at [41]-[55].
[13] Under s 66 trustees may obtain advice or directions from the court. Harrison v Mills, a New South Wales decision, but followed in New Zealand,4 shows that s 66 allows a trustee to obtain directions from the court where there is uncertainty as to the propriety of a proposed course, but it cannot be used to resolve differences between trustees.5
[14] In some jurisdictions, legislation provides for applications for the sale of land held in trust.6 These seem to serve a purpose similar to Part 6 subpart 5 of New Zealand’s Property Law Act.7 But New Zealand’s Trustee Act does not contain anything comparable.
Procedural matters
[15] There are procedural difficulties with Ms Potter’s application. Not everyone has been served. Section 341(2) and (3) of the Property Law Act says:
(2) Every person who is one of the following must, if not already a party to the proceeding on that application, be served with a copy of that application:
(a) a co-owner of the property:
(b) a person who has an estate or interest in the property that may be affected by the granting of the application:
(c) a person claiming to be a party to, or entitled to a benefit under, an instrument relating to the property.
(3) The court to which that application is made may, by order made on an application for the purpose, change, or dispense with service on, the people who must be served under subsection (2).
[16] It is common ground that the ASB Bank, a registered mortgagee, has an interest in the property, but it has not been served.
[17] As Mr Duffy has pointed out, the children have not been served. He advised that both children feel an attachment to the property as their home.
4 KAMG v STG, above n 3 at [56]-[69].
5 Harrison v Mills [1976] 1 NSWLR 42 (NSWSC).
6 See, for example, the Trusts of Land and Appointment of Trustees Act 1996 (UK), ss 14-15; the
Conveyancing Act 1919 (NSW), s 66G; the Property Law Act 1974 (Qld) s 38.
7 As an example under the United Kingdom legislation, see Mortgage Corporation Ltd v Shaire
[2001] Ch 743.
[18] If the children were only discretionary beneficiaries, they could have no more than an expectation that they might receive an interest in the property in due course. That would not be enough to bring them within s 341(2). They would not be entitled to a benefit under any instrument relating to the property.8 But the children are more than discretionary beneficiaries: they are final beneficiaries. In B v M Allan J distinguished the position of discretionary beneficiaries from final
beneficiaries, holding that the latter’s rights amounted to property under s 2 of the
Property (Relationships) Act:9
The position of the parties as final beneficiaries is different. Those rights are
vested and therefore fall within the definition of “property” in s 2…
[19] Similarly, the children as final beneficiaries can claim to be entitled to a benefit under an instrument relating to the property, the trust deed.
[20] Mr Eggleston submitted that the court could dispense with service under s
341(3). The bank may have an interest in being heard. While it may have rights over the property, independent of the court’s powers under the Property Law Act, it might wish to be heard on a division application, for example, to show that a sale initiated by the parties may produce a better outcome for all parties than one under its powers as mortgagee. I am also loath to dispense with service on the children. It would not be safe to assume that either of their parents can speak on their behalf. They may have their own contributions to make, of which I am presently unaware. I cannot in the circumstances dispense with service on the bank and the children.
[21] In the absence of service on all necessary parties, I cannot make orders on the sale application.
Division of trust property
[22] Aside from that, there are substantive difficulties. I am not satisfied that
Part 6 subpart 5 of the Property Law Act can be used to order a division of property
8 See Hunt v Muollo [2003] 2 NZLR 322 (CA) at [11]-[14].
9 B v M [2005] NZFLR 730 at [101].
when the property is owned by a single trust but there is disagreement among the trustees as to sale or retention.
[23] The purpose of Part 6 subpart 5 of the Property Law Act is to provide for the division of property among co-owners. Division can be ordered in three forms: sale of the property and division of the proceeds among the co-owners; division of the property in kind; and requiring one or more of the co-owners to buy out others.10
[24] But ownership by trustees of a single trust does not lend itself to those kinds of division. While trustees own as joint tenants,11 a trusteeship is otherwise a distinct form of co-ownership. The trustees are required together to hold and manage trust assets under the terms of the deed or other trust instrument for beneficiaries. The trusteeship is collective. The default position under trust law is that trustees must act unanimously. Even in those trusts where majority voting is
allowed, trustees must confer before making a decision. Unless a trust instrument were to provide for it specifically, trustees cannot allocate trust assets to be managed separately by individual trustees. A court-ordered division of trust assets under s 339 of the Property Law Act would not bring the trusteeship to an end. The trustees would still hold the divided assets on trust and would still be required to confer and agree on all trustee decisions. They would remain collectively responsible to the beneficiaries for the management of the divided trust assets.
[25] Besides, it would not make sense to require one trustee to buy out the interest of another trustee under s 339(1)(c). It would be a bizarre way to remove a trustee. A trusteeship has no value (except where a professional trustee is entitled to remuneration for its services). It is the share in the property that is to be purchased, not the trusteeship, but among trustees, any share (jointly owned and carrying no benefits) has no value.
[26] Ms Potter has something else in mind. She is seeking not only sale of the property, but in addition orders for distribution of the proceeds of sale equally
between herself and Mr Duffy so that each may take beneficially, rather than as
10 Property Law Act, s 339(1).
11 A trusteeship ends on death. It is not passed on to descendants.
trustees. That would amount to bringing the trust to an end and dividing the main trust asset between the trustees. Of course she does not say that they are entitled because they are trustees; they are after all also discretionary beneficiaries. But the presence of discretionary beneficiaries in so many current trusts counts against Ms Potter’s approach. If the division powers in s 339 were intended to apply to distribution of trust assets among beneficiaries, Parliament would surely have required the interests of discretionary beneficiaries to be taken into account and given them the opportunity to be heard. In contrast discretionary beneficiaries are not required to be served under s 341(2): they are not co-owners; they do not have an estate or interest in the property; and they are not parties to or entitled to benefits under trust instruments.
[27] The matter goes beyond questions of procedural fairness. Division under Part 6 subpart 5 of the Property Law Act involves separating out interests in a property under concurrent ownership. Those interests or shares already exist. Division does not involve creating fresh interests or shares. When dividing property or its proceeds or fixing a buy-out price, the court values the parties’ separate shares rather than creating new interests.12 Under s 339 a co-owner’s interest may be transmuted into proceeds of sale, a separately owned part of the entire property or the entire property after paying out a co-owner, but that interest will have been there
from the outset. By way of illustration, s 342 requires the court to have regard to the extent of the parties’ shares in the property,13 but says nothing about making orders to bring about new interests in the property. On the other hand, when trust assets are distributed among beneficiaries in a discretionary trust, fresh interests in those assets are created. In short, the court’s power to divide property among co-owners under s 339 does not encompass a power to make distributions to beneficiaries in a discretionary trust.
[28] That is confirmed by the legislative history, under which the courts’ powers
to divide property were extended but only in cases where co-owners held both legal estate and beneficial rights. At common law, the courts had no jurisdiction to
12 It is necessary to add of course that in dividing sale proceeds, directing a partition or fixing a buy out price, the court can make adjustments, as recognised under s 343.
13 Section 342(a) and (c).
partition land among co-owners. The Partition Acts of 1539 and 1540 provided that a joint tenant or tenant-in-common could insist on partition.14 A court had no jurisdiction to refuse, no matter how bizarre the result. Under later legislation, courts were given powers to order a sale instead of partition. That was the position under the Property Law Act 1952, ss 140 - 143. While the court could order sale instead of partition, the court had no jurisdiction to require co-owners to buy out the
share of the owner wishing to sell, or to order a co-owner to sell to co-owners. Under s 339 of the Property Law Act 2007, the court has more extensive powers, but they apply in the same circumstances as the older legislation: co-ownership with each party holding both the legal estate and the right to beneficial enjoyment.
Clause 8.1 of the trust deed
[29] The matter would be different if two trusts co-owned a property. There would be the requisite co-ownership by the trusts, so as to allow division orders under s 339. The trustees would represent the interests of their respective beneficiaries, so that the latter would not need to be served. The interests of the respective trusts in the land would be separated by division orders, but no fresh interests in land would be created.15
[30] Under cl 8.1 of the trust deed, it is possible to replace the current ownership by one trust with co-ownership by two trusts. That provides for resettlement of the trust in the event of irreconcilable dispute, marriage breakdown, dissolution or cessation of the relationship between Ms Potter and Mr Duffy. Clearly there is an irreconcilable dispute and the relationship has broken down. Ms Potter’s remedy is to seek orders in terms of cl 8.1 directed at a resettlement on new trusts. Those are not orders that the court can make under Part 6 subpart 5 of the Property Law Act. A resettlement of trusts, with adjustments to beneficiaries’ rights, is not within the relief allowed under the act.
[31] So far Ms Potter has not sought a resettlement of the trust in her statement of claim. She needs to include it, so as to bring about a co-ownership by two trusts,
14 Partition Act 1539 (Eng) 31 Hen VIII c 1, s 1; Partition Act 1540 (Eng) 32 Hen VIII c 32, s 1.
15 Shaw v Haven Trustee Ltd [2013] NZHC 2961, (2013) 15 NZCPR 241 is an example, even though the summary judgment application failed. See also Fuller v Smeets [2013] NZHC 1284.
which will allow the court to make division orders under s 339. Without it, she cannot obtain an order for division. It is premature to consider any notional resettlement. The trusts have not been established. The trustees have not been identified. The assets held under those trusts have not been and cannot yet be recorded. They may include more than the land itself. Carrying out a resettlement may not be straightforward.
[32] For the above reasons, Ms Potter has not satisfied me that Mr Duffy does not have an arguable defence to her application for sale under s 339 of the Property Law Act.
Application to remove Mr Duffy as trustee
[33] The position at this point is that Ms Potter cannot use Part 6 subpart 5 of the Property Law Act immediately to obtain an order for sale of the property. She may be able to use the resettlement provision of the trust deed to arrange matters so that two trusts will co-own the Pyes Pa property and the trustees of one might be able to obtain a division order. But that will not produce a quick result for her.
[34] Because trust law and the Property Law Act do not have a ready-made remedy to compel the sale of a trust property when trustees fall out, many unhappy trustees see the answer in having the other trustee removed.
[35] The court has an inherent jurisdiction to remove a trustee.16 In addition, s 51 of the Trustee Act allows the 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.
(2) 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; or
16 Letterstedt v Broers (1884) 9 App Cas 371 (PC) is a leading decision.
(b) is convicted of a crime involving dishonesty as defined by section 2 of the Crimes Act 1961; or
(c) is a mentally disordered person within the meaning of the
Mental Health (Compulsory Assessment and Treatment) Act
1992, or whose estate or any part thereof is subject to a property order made under the Protection of Personal and Property Rights Act 1988; or
(d) is a bankrupt; or
(e) is a corporation which has ceased to carry on business, or is in liquidation, or has been dissolved.
[36] There is a line of cases where the courts have ordered the removal of trustees in the case of a family trust, where relations between trustees have broken down following the failure of a marriage or other domestic relationship: ,17 The deadlock in this case is similar to those in other cases.
[37] That does not mean that Mr Duffy’s removal as trustee is inevitable. In this summary judgment application, Ms Potter has to show that Mr Duffy has no defence to the application. For that, she proposes that if the court ordered Mr Duffy to be removed, she would resign also, leaving Le Pine Trustees Ltd as sole trustee.
[38] I am not satisfied for summary judgment purposes that that is the only possible answer. If there remain other arguable outcomes, Ms Potter has not satisfied the summary judgment test. In my judgment another potential outcome is that the trust would be resettled under cl 8.1 of the trust deed.
[39] Under Ms Potter’s proposal, the management of the trust would fall into the control of an independent trustee, who would alone decide what to do with the Pyes Pa property. Under a resettlement under cl 8.1, the property would be owned by two trusts, one associated with Mr Duffy and the other with Ms Potter. Arguments for
Mr Duffy that resettlement is to be preferred are:
17 Re Hudson HC Auckland M378/89, 17 July 1992; De La Rossi v Pilkington [2012] NZHC 1826; Koornneef v Koornneef HC Wellington CIV-2010-485-2444, 8 March 2011; KAMG v STG, above n 3; Broadbent v Broadbent [2014] NZHC 254.
a) Resetttlement is the remedy the parties provided in the trust deed for these circumstances;
b)Placing the trust assets in the sole control of an independent trustee will disempower both Ms Potter and himself, whereas resettlement under cl 8.1 will leave it open to both of them to influence events through their respective trusts.
[40] I cannot dismiss those arguments as implausible.
Outcome
[41] In summary, Mr Duffy has arguable defences to both the application for orders for sale under s 339 of the Property Law Act and to his removal as trustee. Therefore I decline the application for summary judgment.
[42] I direct a case management conference for 29 April 2015 at 2:15pm. It is to be a face-to-face. Ahead of that conference, Ms Potter may wish to consider amending her statement of claim. A possible way forward for her is to ask for a re- settlement of the trust fund under cl 8.1 of the trust deed. If she wishes to add such a cause of action, she should specify how the trust assets should be re-settled upon the new trusts.
[43] I reserve costs on the summary judgment application.
Associate Judge R M Bell
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