Starling v Bailey

[2015] NZHC 2108

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2015-409-516 [2015] NZHC 2108

BETWEEN

M STARLING AS TRUSTEE OF THE

MICHAEL STARLING FAMILY TRUST Plaintiff

AND

S G BAILEY AS TRUSTEE OF THE MICHAEL STARLING FAMILY TRUST First Defendant

S G BAILEY AND M J BAILEY AS TRUSTEES OF THE SERINA BAILEY FAMILY TRUST

Second Defendants

Hearing:	27 August 2015
Appearances:	M Starling (self) as Plaintiff J Johnson for first Defendant and Second Defendants
Judgment:	1 September 2015

JUDGMENT OF DUNNINGHAM J

Introduction

[1]      This is an application seeking a mandatory interim injunction to effect a partial distribution of the proceeds of sale of a property owned by two family trusts.

[2]      As in any such application for interim relief, I must determine whether the circumstances are such that, in the interests of justice, I should grant the relief sought,  or whether the matters  should  be left  to  be resolved  in  the substantive

proceedings.

STARLING v BAILEY AND ANOR [2015] NZHC 2108 [1 September 2015]

Background

[3]      Michael Starling, as a trustee of the Michael Starling Family Trust (MSFT), is the plaintiff in this matter. He is suing both his co-trustee, Serina Bailey, and Ms Bailey and Michael Bailey, in their capacity as trustees of the Serina Bailey Family Trust (SBFT), for refusing to agree to the release of funds held in trust by the law firm Rhodes & Co.

[4]      Mr Starling and Ms Bailey entered a de facto relationship in mid 2005. In early 2009 they decided to purchase a property at 141 Hackthorne Road, Cashmere, Christchurch (the Hackthorne Road property) in order to run a boutique hotel and wedding venue business. They both established family trusts in anticipation of the purchase, and both were appointed as trustees of the two trusts, although the SBFT also had Ms Bailey’s brother appointed as a third trustee.

[5]      Although the two family trusts were registered as owning the Hackthorne Road property as tenants in common in equal shares, in fact it was held in a partnership between the trustees of the two trusts, and leased to another partnership, comprising Mr Starling and Ms Bailey in their personal capacity. The property was the only asset of the two trusts and the trusts’ unequal contributions to the purchase price was reflected in the partnership accounts.

[6]      At the beginning of 2013 Ms Bailey and Mr Starling ended their relationship, and matters became acrimonious. Eventually, the Hackthorne Road property was sold for a price of $2,500,000.00 including GST, with settlement to occur on 18

August 2015.

[7]      An  independent  firm  of  solicitors,  Rhodes  &  Co,  was  instructed  by  the trustees of the two Trusts to act on the sale. The instructions given to Rhodes & Co by the trustees included the following:

5.The balance of funds must then be held by Rhodes & Co on interest bearing deposit  in the joint  names  of  both Trusts. That  balance, together with the interest (less residents withholding tax, Rhodes & Co’s commission on the interest, and Rhodes & Co’s fees and disbursements for any work it does in relation to the funds) should be paid as directed in writing by (a) the trustees (at the time the

written direction is given) of both the Serina Bailey Family Trust and the Michael Starling Family Trust, or, (b) by Court order (after any appeal period has expired or any appeal has been decided).

[8]      On 29 June 2015, and before he confirmed the instructions to Rhodes & Co, Mr Starling entered into an agreement to purchase a property at 34 Millhill Lane, Huntsbury, Christchurch (the Millhill Lane property). He purchased this property in the name of “Michael Starling and/or nominee” and paid the deposit from personal funds. It seems he hoped to nominate the MSFT in due course, and to use the proceeds of the sale of the Hackthorne Road property which were due to MSFT, to meet the balance of the purchase price, being approximately $173,000.00.

[9]      The current position is that Ms Bailey has not, in her capacity as trustee of either the MSFT or the SBFT, consented to the release of funds and so settlement of the purchase of the Millhill Lane property is delayed, with Mr Starling anticipating the imminent service of a notice under the Property Law Act 2007 by the vendors of that property. Once served it will require him to remedy his default within no less than 12 working days or risk cancellation of the contract.

[10]     In the circumstances Mr Starling has applied, in his capacity as trustee of the MSFT, for interim relief from the Court seeking the distribution of at least a portion of the uncontested funds to the MSFT. His application sought either a distribution of

50 per cent of the sale proceeds to the MSFT or, alternatively, that $300,000.00 be distributed to the MSFT. During the hearing other proposals for an interim distribution  were  mooted,  including  that  the  SBFT  also  receive  an  interim distribution of equal value up to 50 per cent of the sale proceeds. At the very least, it is clear Mr Starling would like to receive sufficient funds to settle the purchase of the Millhill Lane property.

[11]     Ms Bailey, in her capacity as a trustee of the SBFT, opposes the relief sought. In her capacity as a trustee of the MSFT, she abides the decision of the Court, as does Mr Bailey, the co-trustee of the SBFT.

[12]     Ms Bailey’s affidavit evidence points out that the partnership accounts for the

Trusts demonstrate that, as between the Trusts, there is a $400,000.00 imbalance

between the capital accounts to reflect the fact that the SBFT contributed more towards the Hackthorne Road property when it was purchased. She says, therefore, that the distribution of the proceeds of sale involves the dissolution of that partnership, and the funds should be distributed in accordance with those accounts. Mr Starling, however, has denied the SBFT’s entitlement to a greater share of the proceeds  of sale of the  Hackthorne Road  property,  and  has  raised  other claims against Ms Bailey in her personal capacity.

[13]     Ms Bailey has proposed that the funds (less Rhodes & Co’s fees and any amount needed for partnership tax liabilities) be distributed in accordance with the partnership accounts. However, she says the plaintiff does not agree with this and instead “wants to keep money that the Serina Bailey Family Trust is entitled to tied up”.

[14]     Thus, the current position is that Mr Starling seeks interim relief on the basis that:

(a)      he has entered into an unconditional agreement for the purchase of the Millhill Lane property, settlement of which had been arranged to coincide with settlement of the Hackthorne Road property sale, on the understanding that funds from one could be used for the other;

(b)the  defendants  were  aware  that  Mr  Starling  was  reliant  on  the proceeds of the Hackthorne Road property to purchase the Millhill Lane property, as this had been notified to the defendants’ lawyers two weeks prior to settlement;

(c)      he is only seeking a distribution of the undisputed portion of the funds held by Rhodes & Co; and

(d)there  is  therefore  no  lawful  basis  for  the  defendants  to  refuse  to instruct Rhodes & Co to distribute that portion of the proceeds as it is not in dispute.

[15]     Ms Bailey, in response, argues:

(a)      the  funds  are  held  in  the  MSFT  and  SBFT  partnership  and, accordingly, the funds can only be distributed by agreement or under a dissolution process according to the Partnership Act 1908;

(b)the application is contrary to the agreed terms on which Rhodes & Co were to hold the proceeds of sale. Mr Starling entered into this agreement after purchasing the Millhill Lane property and the agreement cannot be set aside simply because of the inconvenience caused by his own actions;

(c)      the  MSFT  has  no  liability  for  the  purchase  of  the  Millhill  Lane property, and the plaintiff is only liable in his personal capacity. The orders being sought, therefore, are essentially to make a payment to one of the beneficiaries of the MSFT trust without any application for directions being made;

(d)      in any event, the plaintiff ’s conduct disentitles him to relief because:

(i)he entered into the agreement for the sale and purchase of the Millhill Lane property while himself disputing access to the partnership funds;

(ii)knowing about the dispute, and knowing he had entered an unconditional agreement for sale and purchase, he nevertheless entered the agreement with Rhodes & Co that prevented the funds being immediately available;

(iii)     he did not make a request for funds until after settlement of the

Millhill Lane property was due to occur;

(iv)he has failed to engage on the question of the dissolution of partnership assets; and

(v)he has failed to make efforts to find alternative finance, despite having the ability to arrange finance for other property purchases;

(e)       his  application  does  not  meet  the  requirements  for  an  interim injunction, as:

(i)his  own  conduct  has  led  to  the  situation  of  loss,  not misconduct on the part of the defendants;

(ii)he has failed to establish irreversible damage that cannot be adequately compensated by way of damages; and

(iii)it is not appropriate for a mandatory injunction setting aside an agreement and for payment of funds to be given.

Principles applying to application for an interlocutory injunction

[16]     The legal principles applying to applications for interim injunctions are well known.  In order to succeed a plaintiff must show: 1

(a)       there is a serious issue to be tried;

(b)that the balance of convenience favours the making of the orders sought; and

(c)       in considering all matters, the overall justice favours the making of the orders sought.

Discussion

If there is a serious issue to be tried?

[17]     There  is  no  doubt  that  there  is  a  serious  question  to  be  tried  in  the proceedings. It is clear that each family trust is entitled to a share of the funds held in

1      Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).

Rhodes & Co’s trust account. The only real dispute appears to be whether those funds should be divided equally between the two trusts, or whether, as Ms Bailey’s affidavit explains, they should be distributed in accordance with the partnership accounts for the partnership between the two Trusts.

[18]     In the latter case, the SBFT is entitled to receive $400,000.00, before the balance of the proceeds (after payment of any partnership liabilities, including costs to Rhodes & Co) is divided equally.

[19]     While neither affidavit confirmed the amount being held by Rhodes & Co, I was advised from the bar that the sum was at least $1,300,000.00. If so, then even in a worst case scenario, the MSFT is entitled to receive around $450,000.00 of the sale proceeds. I also accept, and it was not disputed, that if Mr Starling has claims against Ms Bailey in her personal capacity, that has no bearing on how the entitlement to the trust funds are to be calculated.

[20]     Thus, the first hurdle of a serious question to be tried is easily achieved and the real focus of the competing contentions was on the issues of balance of convenience and the overall interests of justice.

Where does the balance of convenience lie?

[21]     First consideration under this heading is whether the agreed terms on which Rhodes & Co held the funds should preclude relief, or at least, tell against it. By that agreement the trustees of the both the SBFT and the MSFT agreed that the sale proceeds should only be distributed;

“as directed in writing by … the Trustees … of both [Trusts] or …by Court order (after any appeal period has expired or any appeal has been decided)”.

[22]     I do not think it is contrary to the agreement to seek assistance from the Court either on an interim, or substantive, basis. What Mr Starling has done is to seek an order of the Court authorising distribution, so that he comes within the second of the two options provided for in the agreement. There is nothing untoward about that.

[23]     The next question is whether damages would be an adequate remedy for the

plaintiff. Here the plaintiff’s claim faces the following obstacles:

(a)      There is nothing to suggest that, even if the contract is cancelled, the damage suffered by Mr Starling could not be quantified and claimed in the substantive proceedings from the trustees of the SBFT.

(b)Perhaps more importantly, it is not the trustees of the MSFT who are liable under the agreement to purchase. Mr Starling cannot show that the trustees of the MSFT will suffer any loss if the interim relief is not granted. Mr Starling agreed to purchase the Millhill property in his own name at a time when there was no certainty that matters between the trustees would be resolved. As he has been unable to purchase in his capacity as trustee, he cannot show he will suffer any loss in that capacity.

(c)      There is no evidence that Mr Starling has endeavoured to finance the purchase in any other way, and indeed, he acknowledged in submissions that this was an option he would have to pursue if the Court did not grant relief.

[24]     Each one of those reasons weighs against the grant of interim relief, but the primary reason is the second one, which is that the trustees of the MSFT have not resolved to purchase the property (and are unlikely to while Ms Bailey remains a trustee), and so it cannot be shown that the plaintiff, in his capacity as a trustee of that Trust, requires the interim relief sought. Thus, in considering the balance of convenience as between the competing parties, the MSFT cannot show it requires the interim relief sought.

Interests of justice

[25]     For the reasons given above, under the consideration of where the balance of convenience lies, I also do not consider that it is in the interests of justice to grant the relief sought.

Conduct of the proceedings from here on

[26]     I am conscious, however, of the context to the application. In reality, there is an  acrimonious  personal  dispute  which  is  driving  the  actions  of  the  parties, including, it seems,  in  their capacity as  trustees of the respective family trusts. Allegations of failing to come to the Court with “clean hands” were made, as were allegations of each trustee using his or her ability to stymie the other’s desire to move on, in order to achieve leverage in the resolution of both personal and trust disputes. I have neither needed to, nor thought it helpful to, come to any conclusions on those allegations.

[27]     I do observe, though, that the time has come for Mr Starling and Ms Bailey to formally resign as trustee of the other’s family trust. They are each clearly conflicted while they continue in that role. Mr Starling asserts he has given his oral resignation from the SBFT, although he has not signed the requisite paperwork, and Ms Bailey says she has offered to sign paperwork confirming that she resigns as a trustee of the MSBT, but that offer has not been taken up. It is to be hoped, that both parties attend to that formality as soon as possible.

[28]     Given my observations, it is also imperative that the claim is progressed expeditiously.  I therefore direct that:

(a)       A statement  of  defence  to  the  statement  of  claim  be  filed  by  11

September 2015.

(b)The matter is to be scheduled for a telephone conference as soon as practicable thereafter where the possibility of scheduling a judicial settlement conference is to be explored. If that is not possible, then the Court will look to make timetabling directions to progress the matter to hearing as promptly as possible. It would assist if counsel filed memoranda prior to the conference indicating their client’s proposals on those matters.

Costs

[29]     Costs are reserved. While I note the provisions of r 14.8 of the High Court Rules, I do not consider that it will facilitate prompt resolution of this matter if costs are fixed now. I simply record that I consider 2B costs would be appropriate if, in the future, costs on this application need to be fixed.

Dunningham J

Solicitors:

Wynn Williams (Christchurch) - First and Second Defendants

Michael Starling – Plaintiff (in self)