Rowan v Pharazyn
[2024] NZHC 3381
•13 November 2024
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2024-485-383
[2024] NZHC 3381
UNDER The Property Law Act 2007 IN THE MATTER OF
an application for a sale order
BETWEEN
DOUGLAS ROWAN
Applicant
AND
WENDY PHARAZYN, NINA ANNE PHARAZYN and NICHOLAS MARTIN PHARAZYN
Respondents
Hearing: On the Papers Counsel:
D D Vincent for the Applicant
Judgment:
13 November 2024
JUDGMENT OF CHURCHMAN J
Introduction
[1] On 25 June 2024, Mr Douglas Rowan, Trustee of the Estate of Charles Conrad Pharazyn (the Estate), filed a without notice application for directions that:
(a)It is a proper exercise of his powers, as Trustee of the Estate to bring proceedings against the trustees of the J & R Pharazyn Trust (the Trust) seeking sale orders under s 339 of the Property Law Act 2007 as set out in the affidavit of Douglas Rowan filed in support of the application; and
ROWAN v PHARAZYN, PHARAZYN and PHARAZYN [2024] NZHC 3381 [13 November 2024]
(b)He is indemnified accordingly from the assets of the Estate for costs properly and reasonably incurred for the benefit of the Estate in prosecuting the application.
[2] The applicant seeks these directions on the grounds that they are necessary to give effect to the terms of the Co-owners deed between the Estate and the other Co-Owners so that the Estate can separate its interests from the Trust’s and be paid the amounts agreed for its interest in the land, livestock and forestry block.
Background
[3] On 10 July 2020, the applicant was appointed trustee of the Estate, replacing the previous trustee Peter Neville Smith.
[4] The beneficiaries of the Estate are the deceased’s widow Wendy Pharazyn, and their children Nicholas Martin Pharazyn and Nina Anne Pharazyn. Wendy is the life tenant of the Estate’s interest in Motere Station. After Wendy’s death, that interest will vest in equal shares in Nicholas and Nina as remaindermen.
[5] The Estate is a one third owner of the farm known as “Motere” with the remaining two thirds owned by the Trust. Motere is made up of several adjacent properties which combined cover approximately 2,000 hectares of farmland in Hawkes Bay.
[6] In addition to Motere, the Estate and the Trust are also co-owners of stock which were subject to a bailment agreement with Motere Station Limited (MSL) until this was terminated on 31 December 2023. There is also a forestry block on the Station the ownership of which is divided between the co-owners in the same manner.
[7] MSL leased the farm until it gave notice of termination effective 31 December 2023. The applicant alleges that due to MSL having been unable to pay a commercial rent for the land and failing to meet its good husbandry obligations, the Estate is not receiving the income from the farm it is entitled to and is concerned about the maintenance of its capital.
[8] The parties entered into a co-owner’s deed on 15 August 2022 (the Deed) which provided for a block of land referred to as RT17699 to be sold and for the Trust to acquire the Estate’s interest in the remaining land on the terms set out in the Deed. Under the Deed it was agreed the Station’s value was $29,700,000 and the Estate’s interest was valued at $9,900,000. The Estate’s one-third share of the stock was also valued in the Deed as at $984,948.
[9] The Deed provides that the Estate would extract its interest in Motere Station and the Stock by the Trust and the Estate having RT17699 sold on the open market by tender. The net proceeds of sale would then be applied by paying the Estate
$9,900,000 for its interest in the station, $984,948 for its share of the stock, and one third of the value of the commercial tree crops situated on Motere, which Morice Limited valued at $411,000.
[10] If there was a shortfall from the net sale proceeds for the payment of those sums, then under the Deed, the Trust would pay the Estate the shortfall within twelve months of the settlement of the sale of RT17699 and the shortfall would be secured by a mortgage on the terms in the Deed’s first schedule.
[11] Once the net proceeds of sale had been received and, if necessary, all documentation signed concerning any shortfall, the Estate would transfer its interest to the Trust and various mortgages would be discharged disentangling the Trust and the Estate’s interests in the Remaining Land.
[12] The applicant’s case is that, after the Deed had been entered into RT17699 was put on the market by tender, with an offer of $22,755,000 being received. However, the purchaser could not obtain the required consents under the Overseas Investment Act 2005 and on 28 March 2024 it cancelled the agreement.
[13] After the applicant’s solicitor contacted the respondent’s solicitor seeking to have the real estate agent try to sell the property to the second placed tender offeror, the Trust refused to list the property for sale due to the fact it considered it would be unlikely to obtain a suitable price for the land. In a letter dated 9 May 2024, the Trust through its solicitors represented that the Deed no longer applies to the parties and that
the sums that were agreed to be paid to the Estate upon sale of parts of Motere Station would not be paid accordingly.
Legal principles
[14] Rule 19.4(f) of the High Court Rules 2016 (HCR) provides that a trustee seeking directions as to whether or not to bring or defend a proceeding in their capacity as a trustee may seek the directions of the court by originating application. An application for such directions is known as a “Beddoe application”.
[15]Rule 19.4A of the HCR provides that:
(1)A Beddoe application may initially be made without notice and must be accompanied by the following:
(a) a memorandum—
(i)describing the proceeding in respect of which directions are sought and explaining its significance to the trust estate; and
(ii)stating all other relevant matters relating to the content or conduct of the application, such as whether a stay of the proceeding is sought pending the determination of the application; and
(b) an affidavit containing evidence of—
(i)the value and nature of the trust assets; and
(ii)the estimated costs likely to be incurred by the trust, directly or indirectly, in the proceeding and any other expected adverse impact of the proceeding on the trust; and
(iii)the advice of an appropriately qualified lawyer as to the prospects of success of the proceeding and whether bringing or defending the proceeding is in the best interests of the trust; and
(iv)all other relevant matters; and
(c) an application for directions as to service giving reasons (if applicable) why it is proposed that—
(i)any beneficiary should not be served with the application; and
(ii)any part of the evidence prescribed in this rule should be withheld from being served on any person; and
(iii)any person should be excluded from any part of the hearing.
(2)This rule is subject to rule 7.46.
[16] Rule 7.46 provides that a Judge may determine that an application can properly be dealt with without notice only if the Judge is satisfied that requiring the applicant proceed on notice would cause undue delay and prejudice to them, the application only affects the applicant, the application relates to a routine matter, an enactment expressly permits it to be made without notice, or the interests of justice require the application to be determined without notice.
[17] The relevant principles were summarised by Thomas J in McLaughlin v McLaughlin:1
[18] The overriding obligation of a trustee is to preserve and safeguard trust property for the benefit of the beneficiaries. When faced with the prospect of litigation, costs incurred for the benefit of the trust in its defence will be generally paid out of trust funds. They must, however, be reasonably and properly incurred. To mitigate the risk of liability for costs personally, trustees or beneficiaries may apply for a Beddoe order, named for the case from which they originate. To mitigate the risk of an adverse costs award against either the trust or the trustees, an application for prospective costs orders may be made…
…
[29] the test as deduced from case law is simply that Beddoe applications are gauged against the fundamental question of what is in the best interests of the trust. The Court must therefore exercise its jurisdiction in the best interests of the trust, and the beneficiaries as a whole, having regard to all the circumstances. This may include the need to balance the interests of different beneficiaries, as well as the interests of beneficiaries and trustees. That basic test conforms to the principle on which such applications are founded, namely that trustees ought to be indemnified for costs properly and reasonably incurred for the benefit of the trust.
(footnotes omitted).
Submissions
[18] Mr Vincent, counsel for the applicant, submits that all relevant documents have been filed with the application, and that it is clearly in the best interests of the beneficiaries of the Estate to conduct the proposed litigation. This is because it will ultimately give them a secure and better return on their capital, and because there are very good prospects of the proposed litigation being successful.
1 McLaughlin v McLaughlin [2018] NZHC 3198, (2018) 32 FRNZ 403.
[19] Mr Vincent submits the proposed litigation will enable the Estate to remove its substantial capital from its co-ownership relationship with the Trust and invest its funds elsewhere. He argues the current short-term lease of Motere Station does not secure a long-term consistent return on the Estate’s assets, and notes the Estate is not currently receiving any regular income. Mr Vincent also contends that although the property is marketed for sale, it is unlikely to sell due to the impasse over the application of the Deed and the minimum price expectations of the Trust. This means that unless litigation is commenced, the only income the Estate can expect from its capital is from the leasing of Motere Station. Mr Vincent also submits the proposed proceeding accords with Mr Rowan’s duty as trustee to exercise the care and skill of a prudent person in managing the Estate’s capital and ensuring it is invested properly.
[20] In respect of the prospects of success, Mr Vincent refers to the opinion of John Goddard that there “appears to be no scope for interpreting the deed as asserted by the Trust”, namely that the Deed only applied to the proposed marketing and sale in 2023 and has now come to an end. He notes the Deed contains no timeframe for the sale of the property. He also argues there are good reasons to imply into the Deed an expectation of immediate sale, given the Deed requires the parties to actively promote the sale, that the sale be settled “as soon as is reasonably possible” and that the parties previously acted promptly following the execution of the Deed to market the property for sale. Mr Vincent also notes that Associate Professor Simon Connell supports the proceeding saying it has “good prospects of success” and that it is unlikely the Court will imply into the Deed any ability to terminate the Deed on reasonable notice.
[21] With regard to the financial position of the Estate to fund litigation, Mr Vincent submits the Estate is able to fund the litigation costs from the money held on interest bearing deposit, and that Wendy Pharazyn as life tenant has agreed to that course of action and to defer payment of amounts owing to her to ensure the Estate has sufficient funds to conduct the litigation. Mr Vincent says given Mr Rowan estimates the legal fees for the proposed litigation at around $100,000 plus GST, and that the Estate has recently received a part payment of $607,462.77 for its interest in livestock recently sold, the Estate is financially able to conduct the litigation.
Analysis
[22] I am satisfied it is appropriate for the application to proceed without notice. Proceeding on such a basis is standard for Beddoe applications, as indicated by r 19.4A(1) of the HCR. I do not consider that there are any circumstances warranting a departure from that standard course.
[23] It is evident the proceeding is in the best interests of the Estate. The continued investment of the Estate’s capital in Motere Station is unlikely to provide much income to the estate, given the prior long-term lease of MSL was terminated at the end of 2023 and only a short-term lease of six months has replaced it. Withdrawing the capital and investing it in a more productive asset would clearly be for the benefit of the Estate. I agree with Mr Vincent’s submission that these proceedings accord with Mr Rowan’s duties as a trustee to exercise care and skill in managing and investing the Estate’s capital.
[24] I also consider that the proceeding has strong prospects of success. Mr Goddard deposes that the Trust would face a significant hurdle in establishing that a term should be implied that the Deed was terminated once the sale of RT17699 failed. He expresses the opinion that such a term would appear to contradict the express terms of the Deed regarding the sale process, how the proceeds of sale would be applied, and what would occur in the event of any shortfall. He considers the Trust remains bound by the terms of the Deed, and consequently the Estate has “very good prospects of success” in the proceedings. These views are echoed by Associate Professor Connell. I accept their views.
[25] Although the Estate is not currently receiving any regular income, I am satisfied that the Estate is financially able to conduct the litigation, given its considerable funds which appear to amount to around $411,454.16, and the projected costs of the litigation of around $100,000, which I consider to be a reasonable estimate.
[26] Overall, I consider it is a proper and reasonable use of the Estate’s assets to fund the litigation against the Trust to enable the Estate to remove its capital from co-ownership and reinvest it for the benefit of its beneficiaries.
Conclusion
[27] The Beddoe application is granted. I direct that it is a proper exercise of the applicant’s powers, as Trustee of the Estate, to bring proceedings against the trustees of the J & R Pharazyn Trust seeking sale orders under s 339 of the Property Law Act 2007.
[28] The applicant shall be indemnified accordingly from the assets of the Estate for costs properly and reasonably incurred for the benefit of the Estate in prosecuting the proceedings against the Trust.
Churchman J
0