HAWKE'S BAY TRUSTEE COMPANY LTD & ANOR v MICHELLE KERRIAN JUDD [2016] NZCA 397 [17 August 2016]

HAWKE'S BAY TRUSTEE COMPANY LTD & ANOR v MICHELLE KERRIAN JUDD [2016] NZCA 397[17 August 2016]IN THE COURT OF APPEAL OF NEW ZEALANDCA45/2015[2016] NZCA 397BETWEEN HAWKE'S BAY TRUSTEE COMPANYLIMITED AND RICHARD WILLIAMHODGKINSON AS TRUSTEES OF THERICHARD HODGKINSON TRUSTAppellantsAND MICHELLE KERRIAN JUDDRespondentHearing: 28 April 2016Court: Ellen France P, Harrison and Kós JJCounsel: M E J Macfarlane for AppellantsJ L Bates for RespondentJudgment: 17 August 2016 at 11 amJUDGMENT OF THE COURTA The appeal is dismissed. The judgment of the High Court awardingMs Judd $65,000 stands.B Costs are reserved pending the filing of memoranda referred to in [52]below.____________________________________________________________________REASONS OF THE COURT(Given by Ellen France P)Table of ContentsIntroduction [1]Background [3]The facts [3]The High Court judgment [13]The applicable principles [17]Contributions to the property [19]The $50,000 payment [20]Contributions to the household [24]Our assessment [27]Reasonable expectation [34]Impact of Trust ownership [38]Conclusion [51]Introduction[1] Richard Hodgkinson and Michelle Judd were married for six and a half years.Over that period they lived in a property in Lane Road, Havelock North, which wasowned by the Richard Hodgkinson Trust (the Trust). After the couple separated,Ms Judd made a claim that the Trust held a share in the property on constructive trustfor her, reflecting her contributions to the property. After trial, Williams J foundMs Judd had established a beneficial interest in the property and awarded her$65,000 to reflect her contributions.1 The appellants, the trustees of the Trust, appealagainst that award.[2] The appeal raises three main issues. First, whether Ms Judd's contributionsto the property owned by the Trust qualified as contributions under Lankow v Rose.2Secondly, whether Ms Judd had a reasonable expectation of a share in the property.Finally, what was the impact of the Trust's ownership of the property on her claim?We deal with each issue in turn after setting out the background.1 Judd v Hawke's Bay Trustee Company Ltd [2014] NZHC 3298 [High Court judgment].2 Lankow v Rose [1995] 1 NZLR 277 (CA). Lankow v Rose is applicable because the Lane Roadproperty is the property of the Trust and so the claim is not subject to the Property(Relationships) Act 1976.BackgroundThe facts[3] We adopt the Judge's description of the key events in the narrative.3[4] Ms Judd and Mr Hodgkinson married in November 2005. Both had childrenfrom prior relationships, some of whom lived with the couple at various times.[5] Mr Hodgkinson was a "successful businessman, first as an orchardist andthen as a fruit retailer".4 The Judge described him as "in a relatively comfortableposition financially" over the time the couple were married.5[6] Prior to the marriage, Ms Judd had what the Judge referred to as a "modestproperty".6 She had worked as a beauty therapist for 25 to 30 hours a week.[7] The couple separated on 11 June 2012 and have divorced.[8] The Richard Hodgkinson Trust arose out of the restructure in 2003 of anearlier trust set up after Mr Hodgkinson inherited the family orchard in 1993. Thetrustees are Mr Hodgkinson and the Hawke's Bay Trustee Company Ltd (HBTC).The latter is a corporate trustee. It is operated by the accounting firm, Brown WebbRichardson Ltd. Stephen Dine, accountant and director of that firm, "operated as thehuman face of HBTC".7 Beneficiaries of the Trust are Mr Hodgkinson, his childrenand any grandchildren.[9] In addition to the Lane Road property, the Trust owns another rental propertyand has other funds accumulated from various investments.[10] The Lane Road property was renovated after its purchase by the Trust in2003. Most of the renovations were completed by the time the couple married. A3 High Court judgment, above n 1, at [2]–[17].4 At [4].5 At [4].6 At [5].7 At [8].garage and studio were uncompleted at that time. In addition, some furtherdecorating and other improvements were ongoing.[11] A valuer who gave evidence on behalf of Mr Hodgkinson suggested that theLane Road property had been valued at approximately $850,000 in 2005. Itsrecorded capital value in 2010 was $910,000 but by 2012 its value had fallen to$820,000. As the Judge said, "the overall effect of [Mr Hodgkinson's] valuationevidence was that between 2005 and 2012, Lane Road had not enjoyed any increasein value."8 That evidence was not contradicted by Ms Judd.[12] In the High Court, Ms Judd sought a declaration that 40 per cent of theLane Road property was held on trust for her, or, alternatively, she sought equitablecompensation for her share.The High Court judgment[13] Justice Williams found that Ms Judd made contributions to the Lane Roadproperty that outweighed the benefits she received from the relationship.9 Further,the Judge concluded she had a reasonable expectation of a share in the property toreflect her work and it was reasonable to expect the trustees to yield her such ashare.10[14] The Judge then considered the effect of the fact the Lane Road property wasowned by the Trust. Applying the decision of this Court in Murrell v Hamilton,11 theJudge found that Mr Dine had delegated the Trust's decision-making toMr Hodgkinson in relation to matters concerning the Lane Road property.12[15] On quantum, the Judge took a fairly broad brush approach. He concludedMs Judd had shown her contributions equated to $10,000 per year for each year ofmarriage and awarded judgment in the sum of $65,000.138 At [15].9 At [68].10 At [70].11 Murrell v Hamilton [2014] NZCA 377.12 At [61] and [71].13 High Court decision, above n 1, at [74].[16] We note also that Ms Judd brought proceedings against Mr Hodgkinson in theFamily Court claiming spousal maintenance under the Family Proceedings Act 1980.The Family Court awarded maintenance but Mr Hodgkinson succeeded on appealfrom that decision and a rehearing was ordered.14The applicable principles[17] Ms Judd's claim was brought on the basis her contributions were such as togive rise to a constructive trust. It is common ground the relevant principlesapplicable to her claim are as set out in Lankow v Rose. That means, as Williams Jsaid, Ms Judd was required to show:151. Contributions, direct or indirect, to the property in question.2. The expectation of an interest therein.3. That such expectation is a reasonable one.4. That the defendant should reasonably expect to yield the claimant ininterest.[18] It is also common ground that contributions may be ones that assist in themaintenance of the property or its value.16 Further, "contributions in the home mayqualify as contributions to the home".17Contributions to the property[19] The first issue we need to resolve is whether the Judge was right to concludeMs Judd's contributions to the Lane Road property were more than minor and thatthe contributions "manifestly exceed[ed] the benefits" she received from therelationship as required by Hardie Boys J in Lankow v Rose.18 There are two aspectsto this question in this case. First, whether the Judge was right in his assessment ofthe impact of a payment of $50,000 made by Ms Judd and, secondly, whetherWilliams J was correct in his treatment of Ms Judd's contributions to the upkeep ofthe house and garden. We deal with each in turn.14 Hodgkinson v Judd [2014] NZHC 3315; and Hodgkinson v Judd [2015] NZHC 130.15 At [35]; and Lankow v Rose, above n 2, at 294 per Tipping J.16 High Court judgment, above n 1, at [39] citing Lankow v Rose, above n 2, at 295.17 Lankow v Rose, above n 2, at 295.18 High Court judgment, above n 1, at [68] citing Lankow v Rose, above n 2, at.The $50,000 payment[20] From the proceeds of the sale of her home Ms Judd contributed the sum of$50,000. This money was paid into Mr Hodgkinson's credit card account. Therewas a dispute at trial about the nature of this contribution because Mr Hodgkinsonmaintained that the money was for him to hold on Ms Judd's behalf so that "she didnot squander it".19 Justice Williams accepted the evidence that Mr Hodgkinson sawthe payment as Ms Judd's contribution to the relationship upon the sale of her house.He also accepted it was intended by the couple "to be used for general purposeswithin the relationship including for renovations".20 The Judge also found that: 21 a significant proportion of the money was in fact used to meet the costs ofrenovations that were undertaken prior to the marriage, but billed after [thecouple] were married, and to fund final renovation work undertaken after thecouple married (in part at least).[21] Justice Williams also accepted that Mr Hodgkinson could identify paymentslater made by him to Ms Judd that equalled the $50,000 she contributed.22 Thosepayments were the meeting of a $5,000 credit card debt prior to the marriage,payments towards school fees for one of Ms Judd's children amounting to $15,000and then the sum of $30,000 paid to her after the marriage ended. The Judge tookthe view that this repayment was relevant in the weighing process but did not meanthe $50,000 could not be seen as "a contribution to the relationship", and "throughthe relationship, to Lane Road itself. Insofar as it met some of the costs ofrenovations, it was money the Trust did not have to pay."23[22] On appeal the argument is that the $50,000 was given to Mr Hodgkinson ashusband, not as a trustee, and in that sense equated to a rental payment the obligationfor which rested with Mr Hodgkinson. In developing this submission,Mr Macfarlane for the appellants referred to the evidence of Mr Dine thatMr Hodgkinson understood that the Lane Road property was a Trust asset and hisoccupation "was only that of a tenant". Mr Dine said that, although there was nowritten record of the basis of that tenancy, it was "clearly understood to be one in19 High Court judgment, above n 1, at [42].20 At [49].21 At [49].22 At [51].23 At [51].which [Mr Hodgkinson] would be responsible for the maintenance and upkeep of thehome and the property generally".24 Further, it is argued that the benefit to the Trustfrom the $50,000 payment was a short-term cash flow advantage at best. That isbecause while some of the $50,000 was used to pay builders' invoices for therenovations, the Trust subsequently reimbursed Mr Hodgkinson's credit card for thatsum.[23] We see no error in the Judge's approach to this sum of money. The paymentcan be characterised as a capital contribution to the property. It was held and used inthat way. In these circumstances, Ms Judd's actions cannot be seen as reflectingwhat a tenant might do. (Nor, we add, can she be seen as a volunteer, that is,someone who does not give any consideration for the benefit received.)25 As to thevalue of the contribution, it was money the Trust did not have to pay and so acontribution of some value to the Trust. Correctly, the Judge did not attach greatweight to this payment but we agree it was a relevant contribution.Contributions to the household[24] The Judge's relevant findings were as follows:[52] I accept also that during the course of a relationship of reasonablelength — six and a half years — [Ms Judd] made contributions to therelationship that indirectly merged with Lane Road itself. These were (toparaphrase Tipping J in Lankow v Rose) services by [Ms Judd] whichimproved or maintained the property, or freed [Mr Hodgkinson] up toimprove or maintain the property. This included [Ms Judd's] work on thegardening and landscaping, and on maintenance of the house (albeit to aminor degree). It also included caring for [Mr Hodgkinson] and his sonsduring the course of the marriage in a manner that freed [Mr Hodgkinson] upto pursue his business interests and thereby to make his own contributions tothe property. I consider that Lane Road's status as the matrimonial home isof particular importance. [Ms Judd] invested a great deal of time and effortin and on Lane Road because it was the physical base of the relationship.Indeed that was one of the key ways in which she demonstrated hercommitment to [Mr Hodgkinson].[53] That said, Mr Macfarlane was right to point out that [Ms Judd]received direct personal benefits from the relationship which must also beweighed in the mix. She and her children lived rent-free in a beautiful home24 In cross-examination Mr Dine accepted there was no resolution recording an agreement withMr Hodgkinson about what Mr Dine described as a tenancy arrangement.25 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington,2009) at [4.3.5(1)].for the six and a half years of marriage. She had free use of the studio abovethe garage to operate her beauty therapy business, and she was able to utilisethe gardens to earn a hobby income selling her preserves. It is clear that shewanted for nothing materially during the course of the marriage.[25] In conclusion, the Judge said:[68] I am left to conclude that in the areas of [Ms Judd's] maintenanceand upkeep of Lane Road, and indirect contributions to the property (byprovision of opportunity for [Mr Hodgkinson] to focus on his businessactivities), some modest recognition of [Ms Judd's] contribution is in order.I acknowledge the direct advantages gained by her from the relationship —particularly accommodation for her children and premises for her business— but I do not consider these outweigh the contributions she made.[26] The submission from Mr Hodgkinson on this raises two aspects. First, it issaid that the Judge has been too generous in his assessment of this contribution. Thesubmission is that Ms Judd was doing what she enjoyed doing and that she receivedbenefits from the relationship. Secondly, it is said the contributions were to therelationship rather than to the Trust.Our assessment[27] To put these matters in context, we need to provide some information aboutthe Lane Road property. The property comprises a one and a half hectare block. Thehouse on the property is a four-bedroom, three-bathroom home with separate doublegarage including a self-contained studio above it. The Judge described the gardensas "substantial" and mostly ornamental but there was also a vegetable garden.26[28] Ms Judd's evidence was that she spent 20 to 40 hours a week working on thehouse and gardens over the course of the marriage. Prior to his marriage to Ms Judd,Mr Hodgkinson employed a housekeeper who was working 20 hours a week. AfterMs Judd moved in they continued to employ a cleaner but reduced the time forwhich cleaning services were provided to two and a half hours per week. Thecleaner remained in employment between 2006 and 2009 but was not kept on afterthat point. A gardener visited weekly for the first five years of the couple's marriageand fortnightly for the last 12 to 18 months of the marriage.26 High Court judgment, above n 1, at [13].[29] As to benefits, Ms Judd enjoyed a rent-free home for herself and her children.She also ran a small business on a part-time basis as a beauty therapist from thestudio above the new double garage. That was best described as a hobby businessand brought her minimal income.[30] Against this background, we are satisfied the Judge was right to treatMs Judd's efforts as an indirect contributions to the maintenance of the Trust'sproperty that qualified as contributions under Lankow v Rose. There is no questionshe expended considerable effort over a six and a half year period and contributed inthis way to the preservation of the property. As Mr Hodgkinson accepted, Ms Juddwas very good at what she did around the house and her efforts contributed topreventing the house from, as he accepted, "going to rack and ruin". We agree withWilliams J that proof of enhanced value is not always required. Rather, as the Judgesaid:27 the judgment of Tipping J [in Lankow v Rose] in particular is clear thatcontributions that directly or indirectly maintain property value will alsogenerate entitlements, all other things being equal. In addition, contributionscan relate to the maintenance not only of property value, but of the propertyitself. This means that even in a falling market and even in respect of anovercapitalised property, contributions can have proprietary effects. It ishardly surprising that, notwithstanding the unjust enrichment languagesometimes used in these cases, equity would not approach division ofproperty at the end of a relationship in this black and white way.[31] A further argument was that the obligation to maintain was an obligation ofthose who occupied the property as tenants. Assuming there was such an obligation,we do not consider that obligation means that the contributions cannot have beencontributions for the benefit of the Trust. The practical effect was to contribute tothe maintenance of the Trust property.[32] Finally, the appellants also challenge the quantum of the award. Theappellants are critical of the absence of evidence of quantification by Ms Judd of hercontributions. We consider the nature of the contributions means it is not possible todo more than was done in this case. The Judge has taken a fairly broad brushapproach to quantum, but appropriately so in our view. In any event, the award is a27 High Court judgment, above n 1, at [73].modest one and the Judge recognised that Mr Hodgkinson had contributed thegreater percentage to the home.[33] One means of cross-checking the approach is to note that the judgment sumamounts to an award of some $200 a week for the course of the marriage. If weassume that Ms Judd would have otherwise made rental payments of, say, $200 perweek that means she has received overall a payment of $400 a week. We do notconsider it is unreasonable or unrealistic to say that her contribution equated to about$400 a week.Reasonable expectation[34] The appellants also say the Judge was wrong in concluding Ms Judd couldreasonably have expected a share in the property. This aspect of the appeal arisesbecause the Judge accepted Mr Hodgkinson's evidence that Ms Judd knewLane Road was owned by a trust in which she was not a beneficiary.28 Further,Williams J also accepted Ms Judd knew Mr Hodgkinson had structured his affairs inthat way because "his assets had been significantly depleted following thedissolution of his previous marriage".29 The Judge said this knowledge diminishedthe extent to which Ms Judd could reasonably have expected a share in theproperty.30[35] Mr Macfarlane submits that the effect of this finding was thatMr Hodgkinson's assertion of Trust ownership defeated Ms Judd's claim to aninterest in the property. He relies for this proposition on the following statement byCooke P in Gillies v Keogh:31Put shortly it is that an interest or monetary right by way of constructive trustor otherwise cannot arise if a reasonable person in the claimant's positionwould have understood that he or she was not to receive one.[36] We do not consider it necessarily follows from this factual finding that therecould be no reasonable expectation Ms Judd would share in the property. In the28 High Court judgment, above n 1, at [56].29 At [48].30 At [56].31 Gillies v Keogh [1989] 2 NZLR 327 (CA) at 330.circumstances, knowledge of the existence of the trust and its background was notsufficient to displace her expectation.32 Ms Judd's understanding of the situation thatpertained to the Trust did not mean she expected she was to contribute in the way shedid but, if the marriage broke up, receive nothing. As the Judge said:[70] I conclude further that [Ms Judd] was entitled to expect a modestshare in Lane Road and it is reasonable for [Mr Hodgkinson] to yield such ashare. Although [Ms Judd] knew of the trust and why it was established, thecouple nonetheless worked together to improve Lane Road and their work inthis regard was a significant aspect of the relationship itself. They both verymuch enjoyed improving and presenting the property. And they were wellsatisfied with the division of the roles they adopted. It would be perfectlyunderstandable for [Ms Judd] to expect to share in the value of her hardwork. Just as it would be perfectly reasonable to expect [Mr Hodgkinson] toyield it.[37] We agree.Impact of Trust ownership[38] As we have foreshadowed, the Judge approached this aspect on the basis hewas bound by the principles of this Court's decision in Murrell v Hamilton.33 In thatcase, the Court accepted a constructive trust claim could succeed against propertyowned by a trust where a trustee had abjured decision-making responsibilities to theother trustee.34 Justice Williams accordingly posed the question for consideration asbeing whether: 35 Mr Dine on behalf of HBTC had abjured his trust responsibility to[Mr Hodgkinson] in any areas in which [he had found Ms Judd's]contribution proved, or whether, more generally, the trustees had agreed thatin those areas, authority was properly delegated [to Mr Hodgkinson].32 Lankow v Rose, above n 2, at 282 per Hardie Boys J; and Gillies v Keogh, above n 31, at 334–335 per Cooke P. See also Farrelly v Gruar (2000) 20 FRNZ 56 (CA) at [25]; and Butler, aboven 25, at [41.4.1(4)].33 High Court judgment, above n 1, at [61]; and Murrell v Hamilton, above n 11. Williams J notedthat in declining leave to appeal in that case, the Supreme Court recorded that "[o]n other facts,there may be an issue as to the appropriate test for constructive trusts in cases of this type":Hamilton v Murrell [2014] NZSC 162, [2015] NZFLR 45 at [6] footnote 4.34 Murrell v Hamilton, above n 11, at [22] and [28].35 At [61].[39] Justice Williams answered this question positively. He said that, to the extentthe $50,000 payment was expended on renovations and other relationship expenses,"Mr Dine left those matters for [Mr Hodgkinson] to decide".36[40] Mr Macfarlane first submits that Murrell should be distinguished. Thissubmission is put in the written submissions on the basis the proprietorialcontributions made by Ms Murrell were different in kind from those made byMs Judd because the former were "direct, significant and more readily quantifiablein the construction of a new house sold for value and thereby enrichment".[41] Secondly, the correctness of the abjuration approach taken in Murrell, absentfurther explanation, is questioned. That issue is said to arise because of the principlethat trustees cannot delegate their powers. In this context, Mr Macfarlane saysMurrell poses difficult practical issues for trustees in this situation.[42] For the reasons we have discussed, we do not consider there is any merit inthe first submission, namely, that the contributions made by Ms Judd were notsufficiently direct and quantifiable.[43] On the second submission, similar criticisms of Murrell were discussed bythis Court in its recent decision in Vervoort v Forrest.37 The Court in Vervoortobserved that the question of the application of a constructive trust to an asset, likethe Lane Road property, itself owned by an express trust had arisen in a number ofother cases.38 After discussion of that line of authority39 the Court observed that theJudge at first instance in Vervoort was correct to acknowledge the "traditional trustprinciples of unanimity and non-delegation" but said "those principles must bend tothe practical realities when one trustee is in absolute control of all trust activities andthe other trustees have effectively abdicated their trustee responsibilities".4036 High Court judgment, above n 1, at [67].37 Vervoort v Forrest [2016] NZCA 375.38 At [48].39 At [49]–[55]; Re Motorola New Zealand Superannuation Fund [2001] 3 NZLR 50 (HC); Primev Hardie [2003] NZFLR 481 (HC); Glass v Hughey [2003] NZFLR 865 (HC); C v C [2012]NZHC 3159, [2013] NZFLR 534; and Marshall v Bourneville [2013] NZCA 271, [2013] 3NZLR 766.40 Vervoort v Forrest, above n 37, at [62].[44] The Court saw Prime v Hardie, Glass v Hughey, Marshall v Bourneville andMurrell v Hamilton as the "application of established Lankow v Rose principles" tothe reality of the New Zealand trust landscape where it is likely a good proportion ofproperty is held in discretionary family trusts and trustees are more often than not thebeneficiaries of those trusts and in control of them.41 We agree.[45] Reflecting the reality recognised in Vervoort, Mr Hodgkinson treated theproperty as his own. He was the controlling trustee and as one among a number offamily beneficiaries he enjoyed the benefit of an apparently indefinite right tooccupy the trust property rent-free. This arrangement was inconsistent with aconventional arm's-length transaction between trustees and a third party to invest orrent trust property to secure an economic return for the beneficiaries. The trusteesowned and operated the property for Mr Hodgkinson's primary benefit.[46] We consider it can be said that in the present case the conscience of bothtrustees is affected. Mr Hodgkinson obviously had direct knowledge of thecontributions being made by Ms Judd but, as the Judge found, Mr Dine hadeffectively given Mr Hodgkinson "carte blanche" to do as he wished with the assetsof the Trust.42 The requirement for unanimity cannot be used as a shield in thissituation where one trustee has abdicated responsibility and so enabled trust propertyto be improved without first resolving the basis of receipt. Further, althoughMr Dine may not have known of these contributions earlier, he did at the time oftrial. In all these circumstances, it would be unconscionable not to recognise thebenefits freely accepted by the Trust.[47] The concern about the impact of this approach on the property rights thatform a key part of the trust concept is understandable.43 We make three points onthis aspect. First, we agree with Mr Bates' submission that Ms Judd's successfulclaim simply reverses or disgorges the benefit of the defendants' enrichment. This41 At [63]–[64] and [70]. In its review of the Property (Relationships) Act 1976 the LawCommission has indicated it will consider legislative provisions in the relationship property areaas they relate to trusts: Law Commission "Review of the Property (Relationships) Act 1976"(May 2016) <www.lawcom.govt.nz>.42 High Court judgment, above n 1, at [67]; and Vervoort v Forrest, above n 37, at [65].43 See the discussion in Vervoort v Forrest, above n 37, at [66].Court in Murrell made the same point.44 As the Court put it, the claim means "a partof the value of the Trust's property which should not accrue to the Trust does notaccrue to it".45[48] Secondly, it was open to the trustees to take steps to preserve the positionthey now seek to maintain. They could have taken advice on the issue at the time ofthe marriage. Further, Mr Hodgkinson could have entered into a relationshipproperty agreement with Ms Judd. Absent such an adjustment of her expectations,where the contributions are to the matrimonial home and the trustees haveencouraged or permitted these contributions, it would be wrong to treat a contributorlike Ms Judd as a volunteer.[49] Finally, as Mr Bates also submits, the question is not whether a party's actionis in breach of their trustee duties but, rather, the focus is on the reasonableness of athird party's expectation of an interest in the property and the reasonableness ofrequiring the legal owners to yield an interest or to pay compensation in lieu.[50] Accordingly, we do not consider this ground of appeal succeeds.Conclusion[51] For these reasons, the appeal is dismissed. The judgment of the High Courtawarding Ms Judd $65,000 stands. The approach taken by Williams J was carefuland appropriately reflected the contributions made by both parties over the course ofthe marriage. We agree with it.[52] If the parties are unable to agree on costs, brief memoranda (no more thanthree pages) are to be filed as to why costs should not follow the event. Theappellants' memorandum is to be filed by Friday 19 August 2016 and therespondent's memorandum by Friday 26 August 2016.Solicitors:Sainsbury Logan & Williams, Napier for AppellantBrown & Bates Ltd, Napier for Respondent44 Murrell v Hamilton, above n 11, at [30].45 At [30].