RMY Trustees (2007) Ltd v Harrop HC New Plymouth CIV 2011-443-477

[2011] NZHC 1494

IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY

CIV 2011-443-477

IN THE MATTER OF     THE TRUSTEE ACT 1956

BETWEEN  RMY TRUSTEES (2007) LTD AND GINA MAREE HARROP

Applicants

ANDPAUL JAMES HARROP Respondent

Hearing:         4 October 2011

Appearances: S W Hughes QC for applicants

C Quin and S L Dodunski for respondent

Judgment:      10 October 2011

JUDGMENT OF ALLAN J

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 11.30 am on Monday 10 October 2011

Solicitors/counsel :

S W Hughes, New Plymouth:  [email protected]

Reeves Middleton Young, New Plymouth

Quin Law, New Plymouth: [email protected]

RMY TRUSTEES (2007) LTD AND GM HARROP V PJ HARROP HC NWP CIV 2011-443-477 10 October

2011

Introduction

[1]      This is an application by two trustees of the P & G Harrop Family Trust (the Trust), for an order removing a co-trustee, Mr Paul Harrop.  There is an element of urgency about this case.   The applicants claim that Mr Harrop is actively misconducting himself in respect of the affairs  of the Trust, and that his status requires early resolution.

[2]      On 22 September 2011, Heath J made an interim order removing Mr Harrop as trustee and substituting Mr J P Larmer, a registered valuer and farm adviser. These orders were expressed by Heath J to inure until further order of the court.  His Honour set down this substantive application for hearing on 4 October 2001.

[3]      At the hearing, the court considered affidavits from Mr Harrop, Mrs Harrop, Mr N W Evetts (the long standing accountant to the trust and to the Harrops, but not a trustee), Mr Grieve (a solicitor in Reeves Middleton Young, which controls the first named corporate trustee), and Mr J F Lagan (a very experienced farm consultant now acting to some extent as manager of the farm which comprises the major asset of the trust).

[4]      Mrs  Harrop  was  not  called  for  cross-examination,  but  the  remaining deponents were.   I heard extensive oral evidence which lasted until well into the afternoon.  In addition, the court has before it a consent in writing by Mr Larmer to appointment on a permanent basis if that should be the outcome of the present application.

Background

[5]      The trust was established on 16 May 2001.  Subsequently it purchased a farm at Arawhata Road, Opunake, and acquired stock, plant and machinery.  The trust was settled by Paul and Gina Harrop, who were conducting a successful dairy farm operation on the farm.   The Trust continued to do so for some years thereafter. Regrettably, in early 2010, Mr Harrop appeared before the criminal courts.  He faced

various charges on multiple occasions, including for methamphetamine-related offences.   He was given an opportunity to attend the Capri Trust programme in Auckland, but that did not work out and he left the programme without completing it.   Mr Harrop was in prison for much of the period between March and August

2010, having pleaded guilty to a number of charges.

[6]      During 2010, sharemilkers were appointed for the farm.  In the months before their arrival, the overall performance of the farm had deteriorated markedly.  There were significant difficulties with milk quality, and overall production was down.  It appears  that  the  sharemilkers  have  effected  a  major  improvement.    Moreover, Mr Lagan,  initially  approached  to  act  as  a  farm  consultant,  has  now  agreed  to oversee farm operations.   He and the trustees (except Mr Harrop) have formed an effective working relationship.

[7]      Mr  and  Mrs  Harrop  separated  in  December  2009.    Mrs  Harrop  lives  in Hawera in rented accommodation with the four children of the marriage, aged between seven and 16 years.  Mr Harrop is living in one of three houses on the farm, but there is little for him to do, given the role of the sharemilkers and Mr Lagan’s oversight.   In cross-examination, Ms Hughes asked Mr Harrop what he was now doing by way of employment.  The answer was inconclusive.  I infer that although he is currently endeavouring to assert himself in respect of the running of the farm, his role is limited.   He did not suggest that he was undertaking any other useful activities.

[8]      Currently, Mr Harrop receives an allowance from the trustees of $3000 per month.  He also has rent free accommodation of the farm house.  His utility costs are paid;  the Trust also pays for a weekly tank of petrol.  The evidence suggests that he has access to fresh meat on the farm at no cost.

[9]      Mrs Harrop receives $5000 per month, but she must pay rent out of that sum. She is also responsible for most of the family expenses, including the cost of caring for the children.

[10]     The initial trustees of the Trust were Mr and Mrs Harrop and Mr Gould, a New Plymouth solicitor who has subsequently retired.  The first named plaintiff was appointed at a later stage. It is a trust company incorporated by the partners of Reeves Middleton Young, a long established firm of New Plymouth solicitors (the Trust Company).   The Trust Company was appointed on 29 January 2008, on the retirement of Mr Gould.   The principal beneficiaries of the Trust are Mr and Mrs Harrop and the children.

[11]     There is no doubt that in earlier years, probably until 2009, Mr Harrop was an energetic and successful farmer.  He is now just 40 years old and so effectively in the prime of his working life.  His success can be gauged from the fact that two other farms were purchased at an earlier stage.  They have now been sold and the profits from those sales were applied in reducing the mortgage on the Opunake farm, to the point at which that property is now debt free. The farm is valued at about $4 million. At the time of the earlier sales the Trust also had a large cash reserve along with other assets associated with the farming operations.   Those reserves have been significantly depleted  over the last  two  years  or so,  allegedly by reason  of Mr Harrop’s lifestyle, to which I will turn below.   In the meantime, it is sufficient to observe that an important objective of the trustees must be to preserve the assets of the Trust and the profitability of the farm, in order to safeguard the welfare of the beneficiaries, who include Mrs Harrop and the four children.  It is relevant to note that Mrs Harrop suffers from multiple sclerosis and there are likely to be on-going expenses in relation to her health care requirements.

[12]      The evidence establishes that for some years this was a conventional and very successful farming operation, conducted by Mr and Mrs Harrop  under  the oversight of the trustees, who included in the latter stages the corporate trustee established by Reece Middleton Young.  The parties were assisted also by Mr Evetts, who was cross-examined at the hearing.   He impressed me as an experienced and careful chartered accountant who, for at least 20 years, has provided professional services of a high standard.

[13]     But over the last two years or so, the picture has changed dramatically.  By

the  time  the  Harrops  separated  in  December  2009,  Mr  Harrop’s  behaviour  had

become somewhat erratic. There is now significant difficulty between Mr Harrop and  the other trustees and the financial position has worsened.  The applicants say that Mr Harrop is solely responsible for this state of affairs, and that by reason of his misconduct he ought to be removed as a trustee.

[14]     It is relevant to note at this point that if the court sees fit to make an order, Mrs Harrop will also retire as a trustee.   That would remove what she sees as a possible on-going source of discord, and would leave the affairs of the Trust in the hands of the Trust Company and Mr Larmer, each entirely independent of Mr and Mrs Harrop at a personal level.

Mr Harrop’s alleged misconduct

[15]     The applicants allege that Mr Harrop has breached his obligations as a trustee in a great many respects.  In closing argument, however, Ms Hughes concentrated on three particular instances which, she argues, are sufficient of themselves to lead to the inevitable conclusion that Mr Harrop ought to be removed as a trustee.

[16]     The first of these issues is concerned with the operation of the Trust banking account with Rabobank.  In September 2010, the parties executed a form of account operating authority with Rabobank, in order to facilitate the operation by the Trust of a cheque account with that bank.   The authority provides, in respect of cheque signing rules, that cheques must be signed by either two directors from PriceWaterhouseCoopers, New Plymouth, or Paul James Harrop and one director from PriceWaterhouseCoopers, or Gina Maree Harrop and one director from PriceWaterhouseCoopers.

[17]     The form of authority was executed by Mr and Mrs Harrop and by each of the directors of RMY Trustees (2007) Ltd, including Mr Grieve.

[18]     Despite the terms of the account operating authority, Mr Harrop has, on a number of occasions, signed cheques on the Rabobank trust account and presented them without obtaining a second signature.  He accepted in evidence that a number

of cheques, dated 11, 13 and 15 August 2011 respectively, were cheques signed and presented by him.

[19]     On 13 August 2011 alone there were three such cash cheques, for $150, $200 and $100 respectively.

[20]     Prior  to  August  there  had  been  difficulty  over  Mr Harrop’s  access  to chequebooks of the Trust.   Over a period he obtained, or endeavoured to obtain, chequebooks from Mr Grieve, Mr Evetts, Mr Lagan and Mrs Harrop.

[21]     The intention of the other trustees was that Mr Harrop should live within the allowance provided by the Trust, at least for the time being, and that he should not run up additional personal expenses by using the Trust’s cheque account.

[22]     In cross-examination, Mr Harrop accepted that the cheques of 11, 13 and 15

August were signed and presented by him.   When it was pointed out to him by Ms Hughes that his failure to obtain a second signature breached the terms of the account operating authority, he asserted first, that he had expected the bank to obtain a second trustee signature, and then that his signature to the authority form had been forged.   This was despite an endorsement on the authority from a bank officer, Mr Michael Hayward, verifying the signatures of both Mr and Mrs Harrop.

[23]     Mr Harrop had been on notice that the applicants intended to rely upon his misuse of the Trust chequebooks, but he failed to refer to the topic in his affidavit. Neither  was  anything  put  to  any  of  the  applicants’ witnesses  called  for  cross- examination on the topic of an alleged forgery of Mr Harrop’s signature.  Mr Grieve, in particular, might properly have been cross-examined on the point, given that he was also a signatory to the account operating authority form.

[24]     Mr Harrop’s signature on that form bears a remarkable resemblance to a number of other signatures which he acknowledges as his.   No person associated with this case had any reason to forge Mr Harrop’s signature.  The suggestion that someone might have done so is risible.  In my view, the allegation was made simply because Mr Harrop was driven into a corner during the course of cross-examination.

His claims of fraud and forgery do not reflect well on his credibility, and, indeed, upon his fitness to continue as a trustee.

[25]     I am satisfied that Mr Harrop has simply ignored the requirements of the authority form, when presenting cheques in payment of personal expenses without obtaining the signature of a co-trustee.  He well knew when doing so that he was in breach of his obligations as a trustee.

[26]     The second principal complaint concerns the sale by Mr Harrop of four cows for which, on or about 15 August 2011, he obtained a total of $3,933.  Under cross- examination he claimed they were his cows, that he was entitled to sell them as he wished, and that he had retained and spent the proceeds of sale. There is no evidence at all that Mr Harrop owns stock in his own right.  All stock ownership has been in the name of the Trust for some years.  Mr Evetts told the court that the stock ought to have been recorded in the books of the Trust (although it seems that they were not). Mr Evetts is also Mr Harrop’s personal accountant.  He told the court that the stock did not appear in Mr Harrop’s personal accounts.

[27]     The stock Mr Harrop sold appear to have been four of a number of offspring of the Trust’s former herd.   I am satisfied they belonged to the Trust and not to Mr Harrop.  His claim to outright ownership and to lawful retention of the proceeds of sale accordingly amounts to a breach of his obligations as a trustee.

[28]     The   third   principal   ground   relied   upon   by   the   applicants   concerns Mr Harrop’s actions on or about 30 August 2011, in arranging for the dairy cheque from Fonterra to be paid to his personal account at TSB Bank in Opunake, instead of the Trust bank account at Rabobank.  He lodged with Fonterra a written direction to divert monthly cheques otherwise payable to the Trust to his own personal account. His direction was acted upon by Fonterra, which paid approximately $17,000 to Mr Harrop.  That sum ought to have been paid to the Trust Bank account.  The farm is owned by the Trust.  Cheques from Fonterra were at all times payable to the Trust and not to Mr Harrop.  He must have known that.  Nevertheless, he deliberately set about diverting Trust income to himself.  Under cross-examination he accepted that

the proceeds of the Fonterra payment had been largely dissipated by him over the past few weeks.

[29]     Ms  Hughes  calculates  Mr Harrop’s  spending  during  September  at  about

$18,000.  He did not disagree, but was unable or unwilling to say where the money had gone.  Under cross-examination he accepted that only about $3000 remained.

[30]     Mr Harrop’s actions amount self-evidently to a serious breach of trust.   He has simply appropriated Trust moneys for his own use and benefit.

[31]     I accept Ms Hughes’ submission that these three instances are sufficient, of themselves, to justify an order removing Mr Harrop as trustee in the absence of a compelling countervailing factor.  As to that, I discuss below Mr Harrop’s response to the thrust of the allegations.   In the meantime, it is sufficient to mention only briefly a series of other misdemeanours laid by the applicants at Mr Harrop’s door.

[32]     The first issue is concerned with certain of Mr Harrop’s activities on the farm itself.   There were two separate incidents.   The first relates to his decision to cut down two large trees on the farm.  Mr Lagan was particularly critical of the felling techniques employed, saying they were unsafe.  Ms Hughes argues that there was no need to cut down the trees because there were a great number of fallen trees on the farm in any event.  The felling of these trees seems somewhat unusual;   Mr Harrop gives no satisfactory explanation for the incident.  He asserted that he was entitled to cut down trees on “his” farm if he chose.  I do not regard this incident as particularly relevant to the present proceeding;  it does not directly impinge on the interests of beneficiaries.

[33]     Of  more  consequence  is  the  removal  of  wiring  from  the  old  cowshed (apparently in order to salvage copper wiring), so removing the source of electricity supply for the rear portion of the farm, and leaving that area with no power to operate pumps and electric fences.   Mr Lagan thought an axe had been used to remove the wiring.

[34]     There is no evidence that Mr Harrop himself was directly responsible, but it appears that he authorised a friend to remove certain items from the shed.  It is an available inference that that person went beyond his authority.  Again, it would not be right to regard this incident as relevant to Mr Harrop’s status as a trustee.

[35]     Another issue concerns the history of milk production on the farm prior to the appointment of a sharemilker.   The evidence establishes that production did fall away from about December 2009 when Mr and Mrs Harrop separated, and continued to deteriorate early in 2010, when Mr Harrop was in trouble with the police and had appeared on several occasions in the District Court.  It is perhaps unsurprising that the  standard  of  the  farming  operation  fell  away  significantly  at  a  time  when Mr Harrop was undertaking activities connected with the use of methamphetamine.

[36]     A further ground of complaint concerns his regular resort to the account maintained by the Trust with RD1 (a unit of Fonterra) for unauthorised personal expenditure.  On a great many occasions he purchased sundry items which appear to have been of a personal character rather than farm-related.   He also permitted a friend to access the farm account.   There are, in addition, some significant unexplained cash withdrawals from the RD1 account from mid-2009 onward, but the circumstances of those withdrawals and the identity of the person making the withdrawals is uncertain.

[37]     Although a great deal of time was spent at the hearing on trawling through these items of expenditure, they add little to the overall picture except in one respect. Mr Harrop’s explanation for the use of the RD1 account was simply that his parents had resorted to such an account on a day to day basis when they were running the farm, and that he had adopted their practices.  He did not see any need to distinguish between what occurred in former times, and the more current situation in which the account was that of the Trust and not of Mr Harrop personally.  His approach seems to me to suggest that he is unable to separate his own interests and affairs from those of the Trust.

[38]     There were also instances in which Mr Harrop is said to have disposed of farm vehicles without authority.  In cross-examination he explained that two of the

vehicles  concerned  had  disappeared  from  the  farm  while  he  was  in  jail.    The evidence about those vehicles is somewhat inconclusive.   Of more concern is the evidence regarding the sale of a BMW motor car.   In his affidavit Mr Harrop said that he “owned” a vehicle worth $15,000.   He said he traded this vehicle for two cheaper, more economical vehicles and that consent was given to the transaction by the other trustees.  There is no other evidence that the remaining trustees agreed to the sale, and indeed, there would have been no need for consent if Mr Harrop did, as he claims, own the vehicle himself.  But the evidence establishes that all the vehicles were owned by the Trust and not by him.  No witnesses were cross-examined as to the circumstances in which consent had been given to the sale.   As I understand Mr Harrop’s evidence, it was to the effect that one of the two vehicles so acquired by him had broken down and the other had crashed.  His evidence on this point struck me as wholly unsatisfactory;  in particular because he does not explain how it was that he, and not the Trust, was the owner of the vehicle he sold.

[39]     Another  ground  of  complaint  arises  from  the  recent  cancellation  by  the Trust’s insurers of insurance policies over the Trust’s assets.  The court is told that this occurred because the insurance company became dissatisfied with the level and nature of claims made on those policies.  A schedule of claims was produced to the court which appears to have come from the insurer, but there is no direct evidence as to the grounds upon which the policies were terminated.   This issue would not of itself, in my view, have justified Mr Harrop’s removal as a trustee.

[40]     Finally, there is the remarkable attempt by Mr Harrop to close the Trust’s bank account at Rabobank and to direct that the balance in that account be paid into his own account at the Opunake branch of TSB.  That appears to have occurred as late as 31 August 2011.  He accepts that he undertook that step without consulting his co-trustees.  He explained that he did so:

… for the good of the Trust and to protect it for my children …  I thought it was the best thing to do to protect it.  Rabobank said they were closing the account and I was worried my wife and kids wouldn’t be paid.

[41]     He said in evidence that he rang Mr Grieve to talk about the closure of the account, but Mr Grieve said it was not ethical to talk to him.

[42]     While it seems that Rabobank had become unhappy about Mr Harrop’s role within the Trust, and about the way in which the account was being operated, there is no  possible basis  upon which  Mr Harrop  could  defend  his  attempt  to close  the account unilaterally and to pay the money into his personal bank account.   His actions betray an inadequate appreciation of the duties which repose upon a trustee; moreover, they provide a graphic example of the sort of behaviour by Mr Harrop that led Rabobank to threaten closure of the account unless he was removed as a trustee.

Mr Harrop’s position

[43]     At the heart of Mr Harrop’s approach to the administration of the Trust lies his belief that the family trust and its assets are “his”, and that he is effectively entitled to deal with Trust assets as if they remained in his own name.   He has complained both to the other trustees and to the court in his affidavit, that the present drawings arrangements are unfair, and in effect claims that he is entitled to address the imbalance by unilateral action.  He appears not to accept that the other trustees were entitled to conclude that Mrs Harrop ought to receive a larger drawing each month than he because she had four children to care for and had to pay rent.  On the other hand, he has rent free accommodation and certain other expenses are paid for by the Trust.

[44]     His reaction when challenged in cross-examination about these conflicts was to deflect attention to other items in the accounts which evidenced payments to Mrs Harrop.  One involved a figure of $100,000, which Mr Evetts said in evidence had been removed from Mr Harrop’s reach in order to preserve it for Mrs Harrop and the children.  The evidence suggests she has resorted to this fund over the last two years or so for family-related expenses.   Nevertheless, it remains in the accounts of the Trust as a loan to Mrs Harrop and not a distribution, so in law she is liable to repay it upon demand.

[45]     A further figure of $13,000 apparently paid to Mrs Harrop was, Mr Evetts said, in truth a tax refund to which she was entitled in her own right.

[46]     In short, Mr Harrop says that he has worked hard all his adult life and should be able to spend “his money” as he chooses.  He does not distinguish between assets of the Trust and personal assets, and seems unable to understand the need to have regard to the existence of the Trust and the legal obligations that arose from the date of its creation.  He speaks of “my” family trust.  He says also that any failings on his part as trustee are the responsibility of his co-trustees, who ought to have offered training and advice.  As to that, there is ample evidence that several professionals have tried to point out to Mr Harrop the extent of his obligations and the limits of his powers and entitlements. They have been ignored.

Discussion

[47]     Mr Harrop’s stance in this litigation, and his answers to questions during cross-examination,  demonstrate  an  inability  or  unwillingness  on  his  part  to understand and acknowledge the obligations resting upon trustees.

[48]     The  principal  grounds  relied  upon  by  Ms  Hughes  plainly  establish  very serious breaches of trust on Mr Harrop’s part.  Upon being taxed with them during the course of cross-examination, he tended to raise counter-allegations against the other trustees, to argue the point when he had no argument to put, or to complain of the favouritism by the trustees in respect of his wife and children.  His performance in the witness box did not suggest to me that he was capable of adopting the calm, analytical, and dispassionate approach to the administration of a trust that is required of a trustee.  He seldom gave a direct answer to a direct question, raising instead a variety of other arguments and complaints.  On occasion he denied the obvious, and of course, when pressed on the question of the signing authority, he simply asserted without any basis that his signature was a forgery.  I reached the conclusion that it was  unsafe to  accept  anything he said  in  evidence unless  it  was  independently corroborated.

[49]     Moreover, his recent personal history is disturbing.  The charges for which he was imprisoned included possession of methamphetamine, cannabis and drug paraphernalia,  and  of  permitting  his  farm  house  to  be  used  for  drug-related

offending.    On  one  occasion,  Judge  Roberts,  sitting  in  the  District  Court,  told

Mr Harrop that his life was out of control.

[50]     Among the duties resting upon a trustee are a duty to adhere to the terms of the trust, a duty to act impartially as between beneficiaries, a duty to act in the best interest of beneficiaries, and a duty to act unanimously.

[51]     I consider that Mr Harrop is not at present fit to discharge any of those duties. For reasons that may well be associated with his recent lifestyle, and in particular his drug-related offending, his concerns appear to be limited to maintaining a significant personal cash flow.   Certain of his recent actions directly fly in the face of his obligations as a trustee.  There seems to be no prospect that he will be able to work with the remaining trustees;  his objectives are quite different from theirs.  In short, there is nothing to suggest that, despite the numerous breaches of his obligations as a trustee, an order for his removal ought to be refused.

[52]     The concerns which caused Heath J to make an interim order for removal were, in my opinion, well founded.  It is therefore appropriate to make a permanent order for removal pursuant to the court’s jurisdiction under s 51 of the Trustee Act

1956.

Orders

[53]     There will be an order directing that Mr Paul Harrop be removed as a trustee of the P & G Harrop Family Trust.

[54]     There will be a further order appointing Mr P F Larmer in his place.  The orders are made on the understanding that Mrs Harrop will forthwith retire as a trustee.

[55]     Ms Quin indicated to the court that Mr Harrop is deeply dissatisfied with the performance of the continuing trustee, the Trust Company.   The major criticisms appear to concern an alleged lack of impartiality and inadequate record keeping (especially in relation to trustee decisions).   Had there been more time, Ms Quin

says, there may have been a cross claim for the removal of the Trust Company.  It is not appropriate to comment upon this indication, except to stress the desirability of keeping careful records of all significant trustee decisions, especially where (as here) future discord cannot be ruled out.

[56]     I direct that the reasonable solicitor/client costs (including counsels’ fees) of both Ms Hughes and Ms Quin be paid out of the assets of the Trust.  In making that order I acknowledge the assistance I have obtained from both counsel, and in particular the responsible manner in which Ms Quin has conducted a difficult case.

C J Allan J