EASTON v LARSEN [2017] NZCA 258

EASTON v LARSEN [2017] NZCA 258 [19 June 2017]IN THE COURT OF APPEAL OF NEW ZEALANDCA521/2016[2017] NZCA 258BETWEEN IAN CHARLES EASTONAppellantAND ALAN MCKENZIE LARSENRespondentHearing: 8 June 2017Court: French, Miller and Clifford JJCounsel: J O Upton QC for AppellantS M Hunter and S F Alawi for RespondentJudgment: 19 June 2017 at 10.30 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on a band A basis together with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by French J)Introduction[1] Mr Easton issued a proceeding in the High Court against Mr Larsen.1Justice Ellis struck out the proceeding. She did so on the grounds that at its highest the claim was a claim for breach of trust to which Mr Larsen had a complete defence under an indemnity clause in the relevant trust deed.2[2] Mr Easton now appeals that decision.Background[3] Mr Larsen was the accountant for Mr Easton and various entities associated with Mr Easton and his extended family. One of those entities was the Moutoa Trust (the trust), a trust established by Mr Easton's parents. In addition to doing theaccounting work for the trust, Mr Larsen was one of the trustees.3 Mr Easton and his two sisters were discretionary and final beneficiaries under the trust.[4] The Easton family owned a number of farming properties. Two of those properties are at issue in this appeal. Both were owned by companies controlled by the trust. The trust owned all the shares in one land-owning company, and about 17 per cent of the non-voting shares and 100 per cent of the voting shares in the other company.4[5] After Mr Easton's parents died in 2000, Mr Easton and his two sistersbecame embroiled in a dispute under the Family Protection Act 1955. The trust was the sole residuary beneficiary in both estates.[6] On 28 January 2003 a family meeting was held at Mr Larsen's office. Anagreement was reached to the effect that, pending resolution of the dispute, Mr Easton was to be given the opportunity to farm the farm properties in his own1 A company owned by Mr Easton called Easton Agriculture Ltd was also a plaintiff in the High Court but has not appealed the decision. Earlier proceedings filed in 2009 by Mr Easton and his company alleging professional negligence and breach of trust by Mr Larsen were discontinued: Easton v Larsen [2013] NZHC 2859.2 Easton v Larsen [2016] NZHC 2234.3 After the death of his parents Mr Easton became a trustee, joining one of his sisters and Mr Larsen.4 Mr Easton owned the majority of the non-voting shares.right, subject to him not being at a financial disadvantage. He was to lease the land. A market rental was to be fixed and apportioned between the various entities"relying upon the strict understanding that when the rental is paid, it will then be paid out in the appropriate shares" to Mr Easton and his two sisters.[7] Subsequently in August 2003 a farm lease was signed. The deed was between the two land-owning companies as landlord and Mr Easton as tenant. Clause 5.2 of the lease noted that the tenant intended his company Easton Agriculture Ltd (Easton Agriculture) would be the entity actively farming the land.[8] Clause 27.2 of the lease stated:IT is acknowledged by the parties that the Tenant has entered into this Lease largely to facilitate the administration of the affairs of the Landlord and in determining the rental a representation was made to the Tenant that when the rental is paid, it will forthwith be distributed to the beneficiaries of the Easton family related entities, one of whom is the Tenant, and it is essential those payments be made without delay as they will form a fundamental part of the cash flow of the Tenant.[9] Both before and after the lease was signed, Mr Larsen issued invoices for the rent to Easton Agriculture, presumably relying on cl 5.2.5[10] In early 2004 the farms were inundated with flood waters. The damage was substantial and Easton Agriculture sustained heavy losses. It was then orally agreed that the full rent need not be paid meantime.6 Between 2004 and 2015 Easton Agriculture only paid approximately 20 per cent of the full rental.[11] Mr Larsen recorded the rental payments that were received as payments from Easton Agriculture and charged that company interest on the unpaid rent balances. Mr Larsen did not make any distributions to Mr Easton.5 Mr Upton submitted Mr Larsen may have relied on the fact that Easton Agriculture was registered for GST, whereas Mr Easton was not.6 According to the statement of claim, it was agreed the abated rent would be calculated on the basis Mr Easton would pay the full rental amount less what he would have received from the distributions anticipated by cl 27.2 of the lease. However, the arrangement was not before us and was not a feature of the submissions.[12] In 2011 due to ongoing family conflict it was agreed that the existing trustees including Mr Larsen would be removed and replaced by Guardian Trust. Guardian Trust adopted the same accounting structures put in place by Mr Larsen.The claims against Mr Larsen[13] The statement of claim that was before Ellis J was a third amended statement of claim handed up on the day of the hearing of the strike-out application. It pleaded four causes of action which the Judge addressed.[14] On appeal, only two causes of action were sought to be reinstated. The twocauses of action allege "breach of trust" by Mr Larsen. They relate to his accountingwork and on the face of the pleading appear in substance to be allegations of negligence. It was not disputed that any negligence claim would be statute barred under the Limitation Act 1950.[15] The pleading of the two causes of action is sparse. Their essence was explained in the following terms by Mr Upton QC.[16] Mr Upton accepted that not every breach of trust by a trustee is a breach of their fiduciary obligations. However, he advised that what is intended by the pleading is an allegation of breach of fiduciary duty. Having been a party to the promise made to Mr Easton at the meeting on 28 January 2003, a promise which was recorded in cl 27.2 of the lease, Mr Larsen is said to have assumed a fiduciary obligation to Mr Easton to properly carry out the promise. Mr Easton was vulnerable and relied on Mr Larsen who was a professional trustee.[17] It is further alleged that Mr Larsen breached the promise/undertaking and hence his fiduciary obligation in two respects. First, he wrongly invoiced Easton Agriculture for the rent when it should have been invoiced to Mr Easton who was the named tenant under the lease. Secondly, Mr Larsen breached his fiduciary obligation by not making distributions to Mr Easton as a beneficiary. In the circumstances that required Mr Larsen to record in the books of the trust, as a debt owing to Mr Easton, the distributions Mr Easton would have been entitled to receive if the full rental had been paid.[18] Mr Upton further submitted contrary to the view taken by Ellis J that the indemnity clause in the trust deed would not afford Mr Larsen a defence to this claim. The clause in question reads:20.0 Trustees' indemnity except for fraudNo Trustee shall be liable for:(a) Any loss not attributable to dishonesty or to the wilful commission by the Trustee of any act known to the Trustee to be a breach of trust; or(b) The neglect or default of any solicitor, bank, accountant, auditor, stockbroker, investment advisor or other agent employed in good faith by the Trustee; or(c) Any claim made against the Trustee by any beneficiary or any creditor or any other person having any claim against the Trust Fund which cannot be satisfied because of any resettlement or other distribution of any or all the Trust Fund to any Discretionary Beneficiary;AND in particular no Trustee shall be bound to take any proceedings against a co-trustee or former Trustee for any breach or alleged breach of trust committed by such co-trustee or former Trustee.[19] The clause provides the trustees with immunity except in cases of dishonestyor wilful breach. In Mr Upton's submission it was arguable that in the circumstancesof this case there was dishonesty in its wide equitable meaning. He further submitted that in any event as a matter of law, all breaches of fiduciary duties are arguably outside the scope of such an indemnity clause because by definition a breach of fiduciary duty amounts to equitable fraud or dishonesty. And because it amounts to equitable fraud, an errant fiduciary is also prevented from relying on the Limitation Act.Analysis[20] We are mindful that claims should never be struck out unless they are so certainly or clearly bad they should be precluded from going forward.7 However, in our view, this claim for breach of fiduciary duty is in that category. We are certain it cannot succeed and that it is incapable of repair by further amended pleading.7 Couch v Attorney-General [2008] NZSC 45, 3 NZLR 725 at [33].[21] The promise was by its terms conditional on rental being paid. The rent was not paid or at least not paid in sufficient amounts to enable Mr Larsen to make a distribution. When this was put to Mr Upton, he said that as pleaded the complaint was Mr Larsen should have made a journal entry crediting the unpaid distribution to Mr Larsen. However, Mr Upton was unable to articulate what difference that would have made, had that been done.[22] Not only was Mr Upton unable to articulate conceptually how Mr Easton had been disadvantaged by any failings on the part of Mr Larsen, he did not in our view articulate anything that on the facts alleged would be capable of amounting to a breach of fiduciary duty. There is no suggestion Mr Larsen was responsible for the fact the rent was not paid and no suggestion he adopted the accounting practices he did in order to circumvent the promise. Accounting practices were not part of the promise.[23] It follows we agree with Ellis J that, at best for Mr Easton, his claim is a claim for negligent administration of a trust to which Mr Larsen has a complete defence under the indemnity clause. We would add that in our view, he would also have a complete defence under the Limitation Act.[24] It also follows it is unnecessary for us to consider the correctness orotherwise of Mr Upton's assertion that every breach of a fiduciary duty amounts to dishonesty or equitable fraud.Outcome[25] The appeal is dismissed.[26] As regards costs, we see no reason why costs should not follow the event. Mr Upton asked us to take into account the fact Mr Easton is in financial difficulties. However, that is not a reason why he should be exempted from an order of costs.[27] The appellant is ordered to pay the respondent costs for a standard appeal on a band A basis together with usual disbursements.Solicitors:Rainey Collins, Wellington for AppellantGilbert Walker, Auckland for Respondent