Pratley v Courteney
[2018] NZCA 436
•17 October 2018 at 3 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA40/2018 [2018] NZCA 436 |
| BETWEEN | LANCE HOWARD PRATLEY |
| AND | STEVEN COURTENEY |
| AND | KLAUDIA ARIANE COURTENEY |
| Hearing: | 1 October 2018 |
Court: | Gilbert, S France and Dunningham JJ |
Counsel: | R J B Fowler QC and G F Kelly for Appellant |
Judgment: | 17 October 2018 at 3 pm |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe judgment entered in the High Court ([2017] NZHC 3285) is set aside.
CThe appellant’s reasonable costs and expenses incurred in his capacity as sole executor and trustee of the estate of William Ronald Courteney in defending the claim brought against the estate by the first respondent in the District Court (CIV‑2012‑035‑52) are to be met from the assets of the estate.
DThe first respondent must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Gilbert J)
The issue on this appeal is whether an independent professional executor and trustee should be indemnified from estate assets for costs incurred in unsuccessfully defending a claim against the estate. The High Court found that although the executor and trustee acted with the best of motives, believing he was discharging his professional obligations, he should bear the costs personally because it was not necessary for him to defend the claim.[1] For the reasons set out below, we have come to a different view.
Background
[1]Courteney v Pratley [2017] NZHC 3285 (2017) 4 NZTR 27-030 at [39]–[40] [High Court judgment].
William Ronald Courteney (Ron) died on 17 July 2011 leaving the whole of his estate to his wife Joan Ayleen Courteney (Joan) who was the sole executor under his will. Joan died in Munich nearly a year later, on 21 May 2012. She left the whole of her estate, including assets in New Zealand, Jersey and Germany, to one of their two middle-aged sons, Stuart Courteney (Stuart), who was also living in Munich at that time. Joan appointed Stuart as the sole executor and trustee of her estate. Stuart therefore became the sole executor of both estates following Joan’s death.[2]
[2]Administration Act 1969, s 13.
In 2013 the couple’s other son, Steven Courteney (Steven), the first respondent, brought a claim in the High Court under the Family Protection Act 1955 seeking an order that proper provision be made for his maintenance and support from Joan’s estate.[3] Steven’s adult daughter and the only grandchild, Klaudia Courteney (Klaudia), the second respondent, joined the Family Protection proceedings as a second plaintiff.
[3]Courteney v Courteney HC Wellington, CIV-2013-485-5912 [Family Protection proceedings].
Steven experienced difficulties obtaining adequate disclosure from Stuart as to the overseas assets of the estate. To overcome this problem, Steven applied to the High Court for an order removing Stuart as the sole executor and trustee and replacing him with an independent solicitor, Lance Pratley, the appellant. The order was duly made by Clifford J on 20 October 2015 on the express basis that Mr Pratley’s costs would be payable by the estate.[4] The effect of the order was that Mr Pratley replaced Stuart as the sole executor and trustee of both estates.
[4]Courteney v Courteney [2015] NZHC 2563 at [10].
Unbeknown to Mr Pratley at the time he accepted this appointment, a two-day hearing had been scheduled in the District Court at Wellington to determine a claim Steven had commenced against his father’s estate in 2012.[5] The hearing was set to commence on 10 November 2015, just three weeks after Mr Pratley was appointed. Although Mr Pratley knew of the underlying dispute at the time he was appointed, he did not know about the about the hearing until 21 October 2015 and he was not able to obtain the files from the solicitors acting for the estate until Friday 30 October 2015, leaving only one working week before the trial was set to begin.
[5]Courteney v Courteney DC Wellington, CIV-2012-035-52 [District Court proceedings].
Steven’s claim was for reimbursement of $36,869 he had paid to fund additional care for his father in the last few weeks of his life, over and above the normal care available at the rest home. The District Court proceedings were initiated at a time when the rules did not require pleadings, only the exchange of information capsules. However, the claim was eventually advanced at the hearing on two alternative legal bases. The first was that the Steven’s wife, Karen Courteney, had retrospectively authorised these expenses in purported exercise after Ron’s death of an enduring power of attorney. The second basis of claim was in restitution. Steven claimed that he paid the expenses as a “necessitous intervener” providing Ron with the “necessaries of life”.
The claim was first made against Ron’s estate when Joan was the sole executor. Joan did not consider that the additional care was necessary and she instructed solicitors and counsel to defend the claim. Following her death, Stuart continued the estate’s defence of the claim using the same legal advisers.
After obtaining the files on 30 October 2015, Mr Pratley immediately instructed solicitors to apply for an adjournment. In his supporting affidavit sworn on 2 November 2015, Mr Pratley explained that he had only just been appointed as executor of the estate. He sought an adjournment to enable him to familiarise himself with the claim and explore whether it could be resolved without the need for a trial. If the matter could not be resolved, an adjournment would enable him to prepare properly so that the estate’s interests could be protected. The adjournment application was opposed by Steven and declined by the Judge.
The case proceeded to hearing on 10 November 2015 as scheduled. Judge Tompkins issued a reserved judgment four months later, on 24 March 2016, finding in favour of Steven.[6] The Judge dismissed the first cause of action based on the retrospective exercise of the enduring power of attorney.[7] That claim was obviously hopeless. In upholding the alternative cause of action, the Judge held that “necessaries of life” should be interpreted with a significant degree of flexibility and compassion.[8] The Judge was satisfied in all the circumstances that the care arrangements Steven paid for qualified as necessaries of life because a review of the clinical notes showed that Ron’s quality of day to day life substantially improved as a result.[9]
[6]Courteney v Estate of Courteney [2016] NZDC 20578, [2017] DCR 390.
[7]At [22].
[8]At [44].
[9]At [44]–[45].
The Family Protection Act proceedings ultimately proceeded by way of formal proof in May 2017. In a judgment delivered on 28 July 2017 Cull J awarded the entirety of the estate’s assets held in New Zealand, estimated to be worth over $510,000, to Steven.[10] The Judge said she did not have full information about the value of the overseas assets received by Stuart but the available evidence indicated these had a combined value of approximately $350,000.[11] The Judge then addressed the liabilities of the estate.[12] These included the costs incurred in defending Steven’s claim in the District Court.[13] The Judge expressed the provisional view that these costs should not be paid for out of the estate’s assets awarded to Steven.[14] She invited submissions if anyone disagreed.
[10]Courteney v Pratley [2017] NZHC 1761 at [58].
[11]At [29]–[30] and [68].
[12]At [59]–[71].
[13]At [66].
[14]At [70].
Mr Pratley opposed the Judge’s provisionally indicated directions in respect of the costs he had incurred in defending the District Court proceedings. This opposition precipitated a hearing on 9 November 2017 and the subsequent judgment now under appeal.[15]
High Court judgment
[15]High Court judgment, above n 1.
The Judge considered that whether Mr Pratley should be indemnified for the costs he incurred in instructing solicitors to defend the claim against the estate turned on whether it was “necessary” for him to do so.[16] The Judge accepted that Mr Pratley had to make a judgment call in difficult circumstances.[17] She also accepted that Mr Pratley acted out of an abundance of caution and with the best of motives.[18] Emphasising that this did not in any way adversely reflect on his competence or integrity, the Judge concluded that it was not necessary for Mr Pratley to defend the claim and he should not be indemnified for the costs he incurred in doing so.[19]
[16]At [2], [3], [21], [34] and [39]–[40].
[17]At [39].
[18]At [39].
[19]At [40].
The Judge summarised her reasons for reaching this conclusion as follows:[20]
My reasons for finding this are:
(a)The background facts indicated that Stuart, as the former trustee and executor, acted in a conflict of interest and contrary to the obligations on him as a trustee, to act even-handedly between his interests and the claimant’s interests to the estate.
(b)There was clear evidence of acrimony between the two brothers, with Stuart engaging in the defence of his brother’s claims in the District Court and the High Court. The District Court litigation was a “hostile dispute” between claimants in respect of the same trust fund.
(c)The claim itself was only $36,000, which made litigation over such an amount uneconomical.
(d)The trustee’s obligation to protect the assets of the trust had to be measured against the erosion of trust property by litigation costs.
(e)Although Stuart was the only beneficiary of the estate in 2015, Steven and his daughter’s claim under the Family Protection Act was on foot and proceeding. This factor was stressed by MacKenzie J and required an assessment by the trustee about the likely beneficiaries of the estate and their interests.[[21]]
(f)Stuart had already provided the Court with his submissions in support of his defence and elected to step away from the litigation. The option of regarding this as “ordinary hostile litigation” between beneficiaries, to be decided on the strength or weaknesses of either parties’ submissions and evidence (or lack of it), with no involvement of the trustee, was open to him.
[20]At [39].
[21]MacKenzie J was case managing the Family Protection Act proceedings prior to Mr Pratley being appointed by Clifford J on 20 October 2015 to replace Stuart as executor and trustee.
The Judge observed that Mr Pratley should have brought a Beddoe application to the High Court seeking directions as to whether he should continue the estate’s defence of Steven’s claim in the District Court.[22] The Judge considered that such an application could have been accommodated and resolved in the week available between Mr Pratley’s receipt of the file and the commencement of the District Court hearing.
Submissions
[22]High Court judgment, above n 1, at [46]–[57].
Mr Fowler QC submits that no criticism can fairly be made of Mr Pratley’s failure to seek a Beddoe order. He argues there was insufficient time for this and it would have added considerable further expense if that course had been followed. Mr Fowler submits that Mr Pratley was entitled to rely on the advice he received from his solicitors that the estate had a good arguable defence to the claim and it should not be allowed to proceed on an undefended basis.
Mr Fowler contends that the Judge was wrong to suggest that the claim should not have been contested because of the economics of defending a claim for only $36,000. He argues that the Judge was also wrong to characterise the proceedings as hostile litigation between claimants in respect of the same trust fund and to conclude it was not necessary for Mr Pratley to defend the proceedings because Stuart had elected not to come from Switzerland, where he was then living, to New Zealand to attend the hearing.
Mr Morrison for Steven and Klaudia supports the Judge’s reasoning and conclusion. He submits that there is no proper basis for this Court to interfere with the Judge’s decision regarding the incidence of these costs.
Our assessment
An executor and trustee has a duty to protect estate assets for the benefit of the beneficiaries. This duty extends to representing the estate in claims made against it by third parties where there are reasonable grounds of defence.[23] The trustee must act reasonably, exercising due skill and care. In cases of doubt, the trustee may take legal advice or seek directions from the Court.[24] So long as the trustee acts honestly and reasonably, he or she is normally entitled to an indemnity for all expenses reasonably incurred in the execution of the trust.[25]
[23]Geoffrey Fuller Laws of New Zealand Trusts at [295].
[24]Re Beddoe [1893] 1 Ch 547 (CA).
[25]Trustee Act 1956, s 38(2).
There are generally thought to be three broad categories of disputes involving trustees.[26] In Alsop Wilkinson (a firm) v Neary, Lightman J described the first category as a “trust dispute”, for example a dispute about the proper construction of the trust. The second he described as a “beneficiaries dispute” concerning the propriety of any action taken or to be taken by the trustees. Disputes in this category are regarded as ordinary hostile litigation with costs following the event and not being paid out of the trust estate.[27] The third category he called a “third party dispute”. These were disputes with persons, other than in their capacity as beneficiaries, in respect of the trust, for example in contract or tort. As to the third category, Lightman J made the following observations of importance in the present case:[28]
Trustees (express and constructive) are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust and have a lien on the trust assets to secure such indemnity. Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and accordingly to represent the trust in a third party dispute.
[26]Re Buckton [1907] 2 Ch 406 at 414–415; McDonald v Horn [1995] 1 All ER 961(CA) at 970‑971; and Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 (HC) at 1222.
[27]Alsop Wilkinson (a firm) v Neary, above n 26, at 435; and McDonald v Horn, above n 26, at 971.
[28]Alsop Wilkinson (a firm) v Neary, above n 26, at 1224.
By contrast, Lightman J stated that a beneficiaries dispute is regarded as ordinary hostile litigation with costs following the event and not payable out of the trust estate.[29]
[29]At 1224. See also McDonald v Horn, above n 26, at 971 per Hoffmann LJ.
Cull J considered that Steven’s claim against the estate in the District Court fell into the second category as being a beneficiaries dispute:[30]
The hostile dispute between two rival claimants to a trust fund is the situation which greeted Mr Pratley upon his appointment.
[30]High Court judgment, above n 1, at [33].
We consider this was an error. Steven was not claiming against the estate in his capacity as a beneficiary. This was not a claim to the same trust fund by two rival beneficiaries. Steven pursued the claim, not in his capacity as a beneficiary, but as a person claiming to be a creditor of the estate. His claim accordingly fell into the third category.
When Mr Pratley was appointed sole executor and trustee, the responsibility for dealing with this claim fell to him. He had a duty to preserve the estate assets for the benefit of all beneficiaries, whoever they turned out to be. At the time he was appointed, the prospective beneficiaries were Stuart, Steven and Klaudia. We do not agree with the Judge that it would have been appropriate for Mr Pratley to step back from the litigation and expect Stuart to deal with it. Having been removed as trustee, Stuart had no right to represent his father’s estate and defend the claim. Had Mr Pratley abrogated his responsibility to defend the claim, he could have been vulnerable to a claim by Stuart for failing in his duty to protect the assets of the estate.
We do not consider Mr Pratley can be criticised for not making a Beddoe application to the High Court seeking directions as to whether to defend the claim. We agree with Mr Fowler that it may not have been possible to obtain directions in the very limited time that was available prior to the trial and Mr Pratley needed to be mindful of the costs of taking this additional step. Executors and trustees are not entitled to immunise themselves against possible claims irrespective of the difficulty of the issue or the amount at stake.[31]
[31]New Zealand Guardian Trust v Hewitt (1998) 1 NZTR 8–001.
While one can readily appreciate the justness of Steven’s claim, it was not straightforward legally. The first cause of action relying on the retrospective use of an enduring power of attorney was hopeless, as we have already observed. The second cause of action based on intervention to provide the necessaries of life succeeded but this outcome was by no means a foregone conclusion. We are satisfied that Mr Pratley acted reasonably in continuing the defence of this claim in accordance with the legal advice he received.
Given that Mr Pratley only received the file about a week prior to the hearing, he took the sensible course of seeking an adjournment to enable him to assess the merits and explore settlement. When that initiative failed, Mr Pratley was left with few choices. An executor and trustee is not entitled to allow a claim against the estate to proceed on an undefended basis merely because the amount claimed is modest. If he chose to abandon the defence, he would have been failing in his duty to protect the assets of the estate exposing himself to a claim from Stuart who was then the sole beneficiary. In all the circumstances, we consider Mr Pratley acted reasonably in continuing the defence of the claim in accordance with the legal advice he received that there were good grounds of defence, a view we share. It was common ground before us that the actual costs Mr Pratley incurred in defending the claim were reasonable.
For these reasons, we conclude that Mr Pratley is entitled to be indemnified out of the estate’s assets for the costs he incurred in defending Steven’s claim in the District Court.
Result
The appeal is allowed.
The judgment entered in the High Court ([2017] NZHC 3285) is set aside.
The appellant’s reasonable costs and expenses incurred in his capacity as sole executor and trustee of the estate of William Ronald Courteney in defending the claim brought against the estate by the first respondent in the District Court (CIV‑2012‑035‑52) are to be met from the assets of the estate.
The first respondent must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Lance Pratley Law, Wellington for Appellant
WCM LEGAL, Carterton for Respondents
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