Simpson v Sax
[2017] NZHC 112
•10 February 2017
IN THE HIGH COURT OF NEW ZEALAND
TAURANGA REGISTRY
CIV-2016-470-48
[2017] NZHC 112
UNDER High Court Rules Part 19 IN THE MATTER
of an application by one of the trustees of the Luke Simpson and Janine Simpson Family Trust
BETWEEN
LUKE ANDREW SIMPSON AS TRUSTEE/BENEFICIARY OF THE LUKE SIMPSON AND JANINE SIMPSON FAMILY TRUST
Plaintiff
AND
JANINE DAVINA SAX AS TRUSTEE/BENEFICIARY OF THE LUKE SIMPSON AND JANINE SIMPSON FAMILY TRUST
First Defendant
LUKE ANDREW SIMPSON AS TRUSTEE/BENEFICIARY OF THE LUKE SIMPSON AND JANINE SIMPSON FAMILY TRUST
Second Defendant
Hearing: 14 July 2016 Counsel:
Further submissions:
E Eggleston for Plaintiff/Second Defendant G McArthur for First Defendant
12, 16 and 21 December 2016 and 20 January 2017
Judgment:
10 February 2017
JUDGMENT OF THOMAS J
[1] The plaintiff, Mr Simpson, applies under s 66 of the Trustee Act 1956 (the Act) seeking directions that the Luke Simpson and Janine Simpson Family Trust (the Trust) may:
SIMPSON v SAX [2017] NZHC 112 [10 February 2017]
(a)defend proceedings taken in the District Court by the Peter Sax No 2 Trust (the Sax Trust); and
(b)pay the reasonable costs of defending the claim from the Trust fund.
[2] Mr Simpson, who is a trustee of the Trust, contacted Ms Sax, the first defendant and other trustee, and sought her approval to the Trust defending the proceedings. He says he received no reply. The District Court proceedings are continuing, as the Sax Trust would not agree to extend the time for filing the statement of defence until this application was resolved.
Background
[3] The background to this matter involves the marriage of Mr Simpson and Ms Sax on 29 March 2009 and the dissolution of their marriage in June 2013. Despite the marriage being of short duration and the absence of any child custody issues, six Family Court applications were filed when the relationship ended.
[4] During their marriage, Mr Simpson and Ms Sax lived together in a house purchased by the Trust. The house was purchased for $481,000. It was funded:
(a)by a loan of $356,000 from Mr Simpson;
(b)by a loan of $100,000 from the Sax Trust; and
(c)by a “wedding gift” (now contested) of $25,000 from the Sax Trust.
[5] His Honour Justice Brewer issued a judgment on applications by each party relating to their use of the house after separation on 26 June 2015.1 The claims included cross claims for occupation rent, possible damages owed to the Trust, the question of whether the Trust owed Mr Simpson interest on his loan and whether the Trust owed either or both monies for reimbursement of payments made in respect of the house. Relevant to this proceeding, his Honour ordered the Trust to pay Mr Simpson $7,168.73, being five per cent interest per annum on the $356,000 he
1 Simpson v Sax [2015] NZHC 1466, [2015] NZAR 1210.
loaned the Trust for the period between 7 June 2013 (when Mr Simpson made demand for the repayment of the debt by the Trust) and 1 November 2013 (the date the Trust repaid the debt).
[6] Ms Sax attempted to appeal that decision to the Court of Appeal, but was declined leave to dispense with security for costs.2
[7] On 18 December 2015, the Sax Trust filed proceedings in the District Court against the Trust, seeking relief against the Trust for:
(a)return of the $25,000, as a loan to the Trust;
(b)interest on the $25,000 loan at 6.25 per cent per annum, totalling
$5,847.85 as at 25 November 2015;
(c)interest on the $100,000 loan at 6.25 per cent per annum, totalling
$10,599.14 as at 4 November 2015;
(d)interest on the $10,599.14 outstanding as interest on the $100,000 loan from the date that the $100,000 was repaid, at 6.25 per cent per annum, totalling $1,361.25 as at 25 November 2015; and
(e)associated costs.
[8]The $100,000 loan was repaid on 1 November 2013.
Directions from the Court
[9] Section 66 of the Act allows a trustee to apply to the Court for directions concerning any trust property or the exercise of any power of discretion vested in the trustee.
[10]Additionally, the Court in its inherent jurisdiction can make what is termed a
Beddoe order, a discretionary court order which allows trustees or personal
2 Sax v Simpson [2016] NZCA 3.
representatives to be indemnified from costs incurred during litigation on behalf of the trust.3 A “Beddoe application” involves a trustee or personal representative applying to the court for directions on whether to pursue or defend a court claim on behalf of the trust.4 If the court approves the trustee pursuing the claim, as part of those directions the court will order that the trust indemnify the trustee against the reasonable expenses of the litigation.
[11] The application stems from the principle that the trust should reimburse the reasonable costs incurred by the trustee in the administration of the trust.5 The rationale for such a procedure has been expressed as being for the trustees’ personal protection, but also for protecting the interests of the trust.6 While pursuing litigation may at times put the trust at unnecessary risk, in other circumstances it may be required as part of the trustees’ fiduciary duty to protect and preserve the estate for the beneficiaries.
[12] The test in assessing a Beddoe application is solely whether the proposed step is in the best interests of the trust.7 The Court assesses, from a neutral perspective, whether the action proposed by the trustees would be in the best interest of the trust and what is required in the interests of justice.8
[13] Although this discretionary position leaves much of the assessment to the individual judge, there are cases providing guidance around the types of litigation in which Beddoe orders will be appropriate, as recently summarised by the High Court.9 Alsop Wilkinson v Neary sets out three categories of proceedings:10 “trust disputes”, “beneficiary disputes” and “third party disputes”. Lightman J stated that if the litigation is “hostile”, and the trustee is either pursuing or defending
3 Re Beddoe [1893] 1 Ch 547.
4 Greg Kelly and Chris Kelly Garrow and Kelly Law of Trusts and Trustees (7th ed, LexisNexis, Wellington, 2013) at [24.36].
5 Re Beddoe, above n 3.
6 Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42, (2008) 237 CLR 66; Alsop Wilkinson v Neary [1995] 1 All ER 431 (Ch) at 434.
7 Weth v Attorney-General [2001] EWCA Civ 263, [2001] All ER 314 at [54] – [55]; Marley v Mutual Security Merchant Bank and Trust Company Limited [1991] 3 All ER 198 (PC) at 201h.
8 Alsop Wilkinson v Neary, above n 6, at 1224.
9 Woodward v Smith [2014] NZHC 407; [2014] 3 NZLR 525 at [23], citing Re Buckton, [1907] 2 Ch 406.
10 Alsop Wilkinson v Neary above n 6.
themselves against a beneficiary or third party, then the matter of costs is for the discretion for the court. Judges have emphasised the discretionary nature of the assessment.11
[14] There are particular requirements for making a Beddoe application.12 The applicant must provide the court with full and frank disclosure of all information about the potential dispute, so the court can make an accurate decision on whether the proceedings should go ahead. If an order is made it will typically provide that the trustee may recover costs and expenses incurred in accordance with counsel's advice from the trust itself, but it will not usually deal with costs the trustees are ordered to pay to other parties.13
Submissions
[15] Mr Eggleston, appearing for Mr Simpson, outlined the plaintiff’s case. He conceded that interest was payable on the $100,000 loan, but said that it should be paid at the same rate as interest was awarded on Mr Simpson’s loan to the Trust, which was five per cent per annum.14
[16] Mr Eggleston submitted that the District Court proceedings were analogous to a dispute with a “third party”, despite being supported by a co-trustee, Ms Sax. He submitted the $25,000 was a gift to the Trust from the Sax Trust and it was either paid to Ms Sax, who provided it to the Trust, or to the Trust as a nominated beneficiary given Ms Sax was a beneficiary of the Trust. Mr Eggleston pointed to what he maintained was contradictory evidence from Ms Sax about the $25,000 in other related proceedings. He said the Sax Trust provided two cheques the same day, one for $100,000 and the other for $25,000, and it was clear in the circumstances that only the $100,000 was covered by a deed of acknowledgement of debt from the Trust to the Sax Trust. At all times when the $25,000 was transferred it was
11 Kain v Hutton (2001) 1 NZTR 11-011at [20], citing Evans v Evans [1986] 1 WLR 101 at 104. Re Buckton, above n 9, at 415; cited with approval in Solomon-Rehe v Hokotehi Moriori Trust [2016] NZHC 239 at [15].
12 See Alsop Wilkinson, above n 6; Kain v Hutton, above n 11.
13 Woodward v Smith, above n 9, at [27].
14 Simpson v Sax above n 1.
understood to be a gift, he said. In Mr Eggleston’s submission, there was a reasonably arguable case on the merits.
[17] Mr Eggleston also raised concerns as to priority of payments from the Trust, given the modest funds it holds. As at 7 March 2016, the Trust had $59,104 in a solicitors’ trust account. Currently, in accordance with Brewer J’s judgment
$37,940.8815 of that fund will be paid to Mr Simpson.16 Mr Simpson accepts that the Sax Trust is owed $9,111.24 in interest on the $100,000 loan. This leaves the Trust with a balance of $12,051.88, which is insufficient to meet all the relevant claims.17
[18] Given these circumstances, Mr Simpson seeks orders that costs in relation to this application and the District Court proceedings are paid to him as a priority, with any other creditors paid on a pro rata basis.
[19] Mr Eggleston noted that the Sax Trust has also sought personal relief against Mr Simpson, despite the fact that he is indemnified by the deed of acknowledgment of debt. He said this is another reason why the Trust is obliged to defend the proceedings.
[20] Mr Eggleston relied on a paper by William Patterson, an acknowledged expert in the area of trusts as confirmation of the appropriateness of utilising either s 66 of the Act or the Court’s inherent jurisdiction when seeking directions from the Court.18 He referred to the Kain v Hutton decision as an example of a case where only some of the trustees sought directions from the Court as to the conduct of litigation.19 However in that case, Pankhurst J analysed which of the causes of action challenged the personal actions and performance of the trustees and postponed the decision on the trustees’ right to an indemnity to be finally determined in light of the outcome, including the way in which the trustees conducted themselves in the
15 This figure would appear to be $37,688.88 if the figures in Mr Simpson’s submissions are
correct.
16 I note that the judgment or aspects of it is subject to an appeal.
17 Or $12,303.88 depending upon the sum to be paid to Mr Simpson.
18 Bill Patterson “Obtaining Directions from the Court: The Why, When & How” (paper presented to ‘The difficult and demanding trust client and beneficiary and how they should be managed” Step Australasian Conference Auckland, 17-18 March 2016).
19 Kain v Hutton above n 11.
course of the litigation. To that extent, therefore, the case provides limited support
for the plaintiff’s position.
[21] The second case relied on by the plaintiff was the case of Hargreaves v Talford.20 That case concerned an independent trustee seeking payment of his costs out of trust funds. The other two trustees were a husband and wife in some conflict. To that extent there is some similarity with this case although the independent status of the trustee is in marked contrast to the situation in the present case.
[22] Mr Simpson is not an independent trustee. There is significant force in the submission that Mr Simpson’s wish to defend the District Court proceedings is in his interest both as a beneficiary and as a creditor of the Trust rather than in the interest of the beneficiaries as a whole. Mr Eggleston had to concede that Mr Simpson can fairly be considered to be acting in his own best interests.
[23] The notice of opposition to the application states that the orders sought are not appropriate when the Trust is dysfunctional because the two primary trustees have fallen out. In Mr McArthur’s submission, appearing for Ms Sax, s 66 of the Act is designed to assist trusts taking steps where the trustees are able to form the appropriate quorum under the trust deed. Mr McArthur submitted that it would be inappropriate for one of the trustees, who is subject to the real risk of bias against the other trustee, to have the powers sought as he could act to the detriment of the beneficiaries as a whole. The affidavit of Ms Sax in opposition attests to her belief that Mr Simpson will defend the claim and run up the Trust’s costs to her detriment as a beneficiary and creditor.
[24] Mr McArthur’s submissions relied on Law of Trusts and Trustees21 in which the learned authors cite the case of Melville v NRMA Insurance New Zealand Ltd,22 as authority for the proposition that questions of substance or importance involving matters of controversy or contest between trustees do not lend themselves to an application under s 66 of the Act.
20 Hargreaves v Talford (2006) 1 NZTR 16-015 (HC).
21 Kelly, above n 4, at [24.8].
22 Melville v NRMA Insurance New Zealand Ltd (2002) 1 NZTR 12-002 (HC).
Analysis
[25] The issue is whether it is in the best interests of the Trust to fund the plaintiff in defending the District Court proceedings.
[26] I would observe that the statement of claim in the District Court proceedings is somewhat confused. If the allegation is that the Sax Trust made a gift of $25,000 to Ms Sax, and at her direction paid the money as a loan to the Trust as a matter of convenience to facilitate settlement of the house purchase, then it is difficult to see why the claim is not being brought by Ms Sax as opposed to the Sax Trust.
[27] While Mr Eggleston raised a number of matters in support of Mr Simpson’s version of events, arguably the context of the arrangements favours the Sax Trust/Ms Sax. That is, all of the money Mr Simpson contributed to the purchase of the house was covered by a deed of acknowledgement of debt. In Mr Simpson’s version of events, only $100,000 of that contributed by or on behalf of Ms Sax was covered by a deed in mirror terms and $25,000 of the purchase price was by way of gift. However, the deed of acknowledgement of debt in favour of Ms Sax included further advances. Furthermore, when there is a disparate level of contributions between the two parties, it would seem unusual for the party with the lesser interest to make a contribution by way of a gift when the other party’s larger contribution is all by way of a loan.
[28] Overall, however, I am satisfied there is a reasonably arguable case in respect of both positions. That really takes me no further.
[29] I turn to consider the provisions of the Trust. Clause 14.1 of the Trust provides:
No self benefit: subject to cl 14.2 and notwithstanding anything contained or implied in this deed, no Trustee who is also Beneficiary shall exercise any power or discretion vested in the Trustees in his, her or its favour.
[30] Clause 14.2 enables any power or discretion vested in the trustees to be exercised in favour of a trustee who is also a beneficiary by the other trustee or trustees.
[31] The discretionary beneficiaries under the Trust are Mr Simpson and Ms Sax (the “principal” family members) and each of their parents. In this case, of course, the parents of Ms Sax are linked to the plaintiff in the District Court proceedings, that is, the Sax Trust. The Sax Trust is also connected to Ms Sax, as a trustee of the Trust. Ms Sax is a discretionary beneficiary of the Sax Trust. The trustees of the Sax Trust are her father and an independent trustee. The independent trustee was formerly an independent trustee of the Trust.
[32] The statement of claim in the District Court proceedings alleges that Mr Simpson personally “deliberately construed the transaction to suit his personal claims against Ms Sax and conversely defend himself against claims by Ms Sax”. The claim records Ms Sax’s position, as trustee, that the $25,000 was received as a loan. Under the heading “Second Defendant”, the claim states that Mr Simpson’s actions have caused damage to the Sax Trust, and have been contrary to his fiduciary obligations as trustee of the Trust.
[33] The Sax Trust also seeks from Mr Simpson personally any money that the Trust is unable to pay and costs incurred in pursuit of the money being repaid. Given the dispute raised by Mr Simpson as to the priority of the various claims on the Trust fund, there is a clear conflation of Mr Simpson’s interests personally and as trustee.
[34] The District Court proceedings are very clearly hostile and involve a third party, albeit one related to another trustee/beneficiary. It appears to be targeted primarily at Mr Simpson, in his role as trustee and personally.
[35] In Kain v Hutton, the trustees sought a direction that they “actively (defend) such allegations as are made against them personally (eg personal hostility), leaving the active defence of all other matters to such other parties as are now defending those allegations”.23 Some of the allegations related to the personal behaviour of the trustees, while others were more general claims against the trust. In that case, the Court took the view that it was overall a hostile beneficiary’s dispute, and it would be inappropriate to direct that the trustees be entitled to indemnity. The case was relatively straightforward, as, in the usual course, trustees should not be indemnified
23 Kain v Hutton above n 11 at [6].
by a trust to defend against allegations by beneficiaries that they are acting in breach of trust.24 In contrast, in most circumstances where a trust faces a hostile claim from a genuine third party, it will be reasonable for the trustee to defend the trust in order to preserve its assets for the beneficiaries.
[36] In this case, two complicating factors arise. The first is that the third party has strong connections to a trustee and beneficiary, making this very similar to disputes between trustees. In those cases, where the claim is hostile and the Court has no way (prior to determination of the proceeding) of establishing which party is in the wrong, it will typically not award indemnity costs from the trust in advance.
[37] The second is that, if the Sax Trust succeeds, the penalty will be suffered by Mr Simpson personally in his role as a creditor of the Trust. His defence of the proceeding is therefore not necessarily linked to furthering the best interests of the Trust but also to furthering his own best interests. This complication makes it difficult to assess what is in the best interests of the Trust.
[38] The Trust will pay out the majority of its assets to creditors no matter what the result of the dispute. If the defence succeeds there will be approximately
$10,000 left in the Trust after Mr Simpson and the Sax Trust are each repaid the amounts they are owed as creditors. If Sax Trust succeeds, the Trust will have insufficient funds to pay its debts. Therefore, unlike most other trust disputes, there is very little to preserve for the beneficiaries.
[39] Mr Simpson has also been sued in his personal capacity. This means Mr Simpson will be obliged to defend the suit in any case regardless of whether he is indemnified by the Trust.
[40] The reality is that this litigation is a continuation of the long-running dispute between the two trustees and principal beneficiaries of the Trust following their separation. Although it is to some extent masked by the claim being brought by a third party, this is a type of case where the Court cannot say in advance that it is
24 Fundación Pimjo AC v Aguilar & Aguilar Ltd [2015] NZHC 1402, (2015) 4 NZTR 25-018 at [39].
reasonable and appropriate for the Trust to defend the claim. In advance it is difficult to determine which interpretation of events is correct and therefore whether it would be in the best interests of the Trust to defend this claim. Further, Ms Sax appears (although she did not respond to Mr Simpson’s contact about the case) to have sworn affidavits in the District Court proceedings supporting the case of the Sax Trust. The Court would therefore be supporting the position of one trustee over another.
Should the trustees be replaced?
[41] Section 51 of the Act provides the Court the power to appoint new trustees in substitution for an existing trustee:
51 Power of 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
…
[42] The Court also has an inherent jurisdiction to remove trustees as part of its general jurisdiction to supervise the administration of trusts.
[43] When exercising its jurisdiction to remove trustees or executors the Court is guided by the welfare of the beneficiaries.25 The term “expedient” has been described as importing considerations of suitability, practicality and efficiency rather than necessity.26
25 Letterstedt v Broers (1884) 9 App Cas 371 (PC) at 387 applied in New Zealand by the Court of Appeal in Hunter v Hunter [1938] NZLR 520 (CA).
26 Crick v McIlraith [2012] NZHC 1290 at [18].
[44] Not only could an independent trustee consider the best interests of the Trust in deciding whether or not to defend the proceedings but (s)he would also bring an independent mind to any settlement discussions in respect of the litigation. Given the small amount of money at stake, those are very real benefits to the beneficiaries.
[45] When this issue was canvassed at the hearing on 14 July 2016, neither Mr Simpson nor Ms Sax favoured the appointment of an independent trustee given the associated costs. The parties sought an adjournment to consider whether agreement could be reached on the appointment of an independent trustee and to file further submissions. For various reasons, the timetable for such submissions was extended on a number of occasions. The position now is that, although both Mr Simpson and Ms Sax agree to the appointment of an independent trustee, they cannot agree to the terms of any such appointment. Mr Simpson has made his own enquiries of two trust companies, two local law firms and an experienced trust lawyer in Auckland and there is no appetite to accept appointment as the sole trustee in this case.
[46] There is some debate as to whether the Public Trust could be appointed under s 46(4) of the Act in these circumstances. The Public Trust has been described as a “trustee of last resort” on a number of occasions.27 Whether the Public Trust can be forced to become a trustee even if it is unwilling to do so would appear to be possible under s 75(1) of the Public Trust Act 2001 which does not require the Public Trust’s consent.28
[47] The reality is, with minimal Trust assets, it is unlikely anyone would agree to be appointed as an independent trustee without an indemnity for costs should those costs exceed the balance of the Trust fund. The appointment of an independent trustee would likely dissipate the remaining Trust assets and, in this way, would be contrary to the interests of the Trust. The Trust will inevitably be wound up when all the relationship property proceedings between Mr Simpson and Ms Sax have been
27 See Kelly above n 4, at [30.24]; and Law Commission Review of the Law of Trusts (2013) NZLC R130.
28 Unlike subs (2) and (3) and surrounding provisions such as ss 76 and 81.
finalised. For these reasons and notwithstanding the dysfunctional relationship between the trustees, at this stage I decline to make any such appointment.
Result
[48] In my assessment, in all the circumstances it would be inappropriate to indemnify Mr Simpson from the Trust in advance of the proceedings or make orders as to the priority of payments in advance. This aspect of the application is therefore dismissed.
[49] Mr Simpson has already filed a statement of defence to the District Court proceedings on behalf of the Trust and himself. This can remain and is effectively a holding position. Leave is, however, given for both Mr Simpson and Ms Sax to give evidence as trustees, notwithstanding their contrary positions.
[50] The proceedings in the District Court will need to take their course with the Court being faced with the unenviable task of a defendant (the Trust) whose trustees are in conflict as to whether the claim should be defended or not.
Costs
[51] Mr Simpson seeks to have his costs reimbursed by the Trust with respect to this application ($13,313.54) and the filing of the defence in the District Court. The District Court Judge will deal with the costs associated with those proceedings. Given the result of this decision, I invite Mr Simpson to reconsider his position. Costs will be dealt with on the papers. Memoranda are required within 21 days of this decision.
Thomas J
Solicitors:
Tauranga Family Chambers, Tauranga. Families Matter Law Practice, Rotorua.