SIMPSON v SAX [2017] NZHC 112

SIMPSON v SAX [2017] NZHC 112 [10 February 2017]IN THE HIGH COURT OF NEW ZEALANDTAURANGA REGISTRYCIV-2016-470-48[2017] NZHC 112UNDER High Court Rules Part 19IN THE MATTER of an application by one of the trustees ofthe Luke Simpson and Janine SimpsonFamily TrustBETWEEN LUKE ANDREW SIMPSON ASTRUSTEE/BENEFICIARY OF THELUKE SIMPSON AND JANINESIMPSON FAMILY TRUSTPlaintiffAND JANINE DAVINA SAX ASTRUSTEE/BENEFICIARY OF THELUKE SIMPSON AND JANINESIMPSON FAMILY TRUSTFirst DefendantLUKE ANDREW SIMPSON ASTRUSTEE/BENEFICIARY OF THELUKE SIMPSON AND JANINESIMPSON FAMILY TRUSTSecond DefendantHearing: 14 July 2016Counsel:Furthersubmissions:E Eggleston for Plaintiff/Second DefendantG McArthur for First Defendant12, 16 and 21 December 2016 and 20 January 2017Judgment: 10 February 2017JUDGMENT OF THOMAS J[1] The plaintiff, Mr Simpson, applies under s 66 of the Trustee Act 1956 (theAct) seeking directions that the Luke Simpson and Janine Simpson Family Trust (theTrust) may:(a) defend proceedings taken in the District Court by the Peter Sax No 2Trust (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 firstdefendant and other trustee, and sought her approval to the Trust defending theproceedings. He says he received no reply. The District Court proceedings arecontinuing, as the Sax Trust would not agree to extend the time for filing thestatement of defence until this application was resolved.Background[3] The background to this matter involves the marriage of Mr Simpson andMs 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 custodyissues, six Family Court applications were filed when the relationship ended.[4] During their marriage, Mr Simpson and Ms Sax lived together in a housepurchased 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 partyrelating to their use of the house after separation on 26 June 2015.1 The claimsincluded cross claims for occupation rent, possible damages owed to the Trust, thequestion of whether the Trust owed Mr Simpson interest on his loan and whether theTrust owed either or both monies for reimbursement of payments made in respect ofthe house. Relevant to this proceeding, his Honour ordered the Trust to payMr Simpson $7,168.73, being five per cent interest per annum on the $356,000 he1 Simpson v Sax [2015] NZHC 1466, [2015] NZAR 1210.loaned the Trust for the period between 7 June 2013 (when Mr Simpson madedemand for the repayment of the debt by the Trust) and 1 November 2013 (the datethe Trust repaid the debt).[6] Ms Sax attempted to appeal that decision to the Court of Appeal, but wasdeclined leave to dispense with security for costs.2[7] On 18 December 2015, the Sax Trust filed proceedings in the District Courtagainst 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 $100,000loan from the date that the $100,000 was repaid, at 6.25 per cent perannum, 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 directionsconcerning any trust property or the exercise of any power of discretion vested in thetrustee.[10] Additionally, the Court in its inherent jurisdiction can make what is termed aBeddoe order, a discretionary court order which allows trustees or personal2 Sax v Simpson [2016] NZCA 3.representatives to be indemnified from costs incurred during litigation on behalf ofthe trust.3 A "Beddoe application" involves a trustee or personal representativeapplying to the court for directions on whether to pursue or defend a court claim onbehalf of the trust.4 If the court approves the trustee pursuing the claim, as part ofthose directions the court will order that the trust indemnify the trustee against thereasonable expenses of the litigation.[11] The application stems from the principle that the trust should reimburse thereasonable costs incurred by the trustee in the administration of the trust.5 Therationale for such a procedure has been expressed as being for the trustees' personalprotection, but also for protecting the interests of the trust.6 While pursuinglitigation may at times put the trust at unnecessary risk, in other circumstances it maybe required as part of the trustees' fiduciary duty to protect and preserve the estatefor the beneficiaries.[12] The test in assessing a Beddoe application is solely whether the proposed stepis 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 trustand what is required in the interests of justice.8[13] Although this discretionary position leaves much of the assessment to theindividual judge, there are cases providing guidance around the types of litigation inwhich Beddoe orders will be appropriate, as recently summarised by theHigh Court.9 Alsop Wilkinson v Neary sets out three categories of proceedings:10"trust disputes", "beneficiary disputes" and "third party disputes". Lightman J statedthat if the litigation is "hostile", and the trustee is either pursuing or defending3 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 theDiocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA42, (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 vMutual 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] 2Ch 406.10 Alsop Wilkinson v Neary above n 6.themselves against a beneficiary or third party, then the matter of costs is for thediscretion for the court. Judges have emphasised the discretionary nature of theassessment.11[14] There are particular requirements for making a Beddoe application.12 Theapplicant must provide the court with full and frank disclosure of all informationabout the potential dispute, so the court can make an accurate decision on whetherthe proceedings should go ahead. If an order is made it will typically provide thatthe trustee may recover costs and expenses incurred in accordance with counsel'sadvice from the trust itself, but it will not usually deal with costs the trustees areordered to pay to other parties.13Submissions[15] Mr Eggleston, appearing for Mr Simpson, outlined the plaintiff's case. Heconceded that interest was payable on the $100,000 loan, but said that it should bepaid 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 analogousto 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 eitherpaid to Ms Sax, who provided it to the Trust, or to the Trust as a nominatedbeneficiary given Ms Sax was a beneficiary of the Trust. Mr Eggleston pointed towhat he maintained was contradictory evidence from Ms Sax about the $25,000 inother 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 circumstancesthat only the $100,000 was covered by a deed of acknowledgement of debt from theTrust to the Sax Trust. At all times when the $25,000 was transferred it was11 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 areasonably 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 asolicitors' 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 theSax Trust is owed $9,111.24 in interest on the $100,000 loan. This leaves the Trustwith 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 tothis application and the District Court proceedings are paid to him as a priority, withany other creditors paid on a pro rata basis.[19] Mr Eggleston noted that the Sax Trust has also sought personal relief againstMr Simpson, despite the fact that he is indemnified by the deed of acknowledgmentof debt. He said this is another reason why the Trust is obliged to defend theproceedings.[20] Mr Eggleston relied on a paper by William Patterson, an acknowledgedexpert in the area of trusts as confirmation of the appropriateness of utilising eithers 66 of the Act or the Court's inherent jurisdiction when seeking directions from theCourt.18 He referred to the Kain v Hutton decision as an example of a case whereonly some of the trustees sought directions from the Court as to the conduct oflitigation.19 However in that case, Pankhurst J analysed which of the causes ofaction challenged the personal actions and performance of the trustees and postponedthe decision on the trustees' right to an indemnity to be finally determined in light ofthe outcome, including the way in which the trustees conducted themselves in the15 This figure would appear to be $37,688.88 if the figures in Mr Simpson's submissions arecorrect.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 presentedto '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 supportfor the plaintiff's position.[21] The second case relied on by the plaintiff was the case of Hargreaves vTalford.20 That case concerned an independent trustee seeking payment of his costsout 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 statusof 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 thesubmission that Mr Simpson's wish to defend the District Court proceedings is in hisinterest both as a beneficiary and as a creditor of the Trust rather than in the interestof the beneficiaries as a whole. Mr Eggleston had to concede that Mr Simpson canfairly be considered to be acting in his own best interests.[23] The notice of opposition to the application states that the orders sought arenot appropriate when the Trust is dysfunctional because the two primary trusteeshave fallen out. In Mr McArthur's submission, appearing for Ms Sax, s 66 of theAct is designed to assist trusts taking steps where the trustees are able to form theappropriate quorum under the trust deed. Mr McArthur submitted that it would beinappropriate for one of the trustees, who is subject to the real risk of bias against theother trustee, to have the powers sought as he could act to the detriment of thebeneficiaries as a whole. The affidavit of Ms Sax in opposition attests to her beliefthat Mr Simpson will defend the claim and run up the Trust's costs to her detrimentas a beneficiary and creditor.[24] Mr McArthur's submissions relied on Law of Trusts and Trustees21 in whichthe learned authors cite the case of Melville v NRMA Insurance New Zealand Ltd,22as authority for the proposition that questions of substance or importance involvingmatters of controversy or contest between trustees do not lend themselves to anapplication 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 plaintiffin defending the District Court proceedings.[26] I would observe that the statement of claim in the District Court proceedingsis somewhat confused. If the allegation is that the Sax Trust made a gift of $25,000to Ms Sax, and at her direction paid the money as a loan to the Trust as a matter ofconvenience to facilitate settlement of the house purchase, then it is difficult to seewhy 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'sversion of events, arguably the context of the arrangements favours the SaxTrust/Ms Sax. That is, all of the money Mr Simpson contributed to the purchase ofthe house was covered by a deed of acknowledgement of debt. In Mr Simpson'sversion of events, only $100,000 of that contributed by or on behalf of Ms Sax wascovered by a deed in mirror terms and $25,000 of the purchase price was by way ofgift. However, the deed of acknowledgement of debt in favour of Ms Sax includedfurther advances. Furthermore, when there is a disparate level of contributionsbetween the two parties, it would seem unusual for the party with the lesser interestto make a contribution by way of a gift when the other party's larger contribution isall by way of a loan.[28] Overall, however, I am satisfied there is a reasonably arguable case inrespect of both positions. That really takes me no further.[29] I turn to consider the provisions of the Trust. Clause 14.1 of the Trustprovides:No self benefit: subject to cl 14.2 and notwithstanding anything contained orimplied in this deed, no Trustee who is also Beneficiary shall exercise anypower 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 beexercised in favour of a trustee who is also a beneficiary by the other trustee ortrustees.[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 theTrust. Ms Sax is a discretionary beneficiary of the Sax Trust. The trustees of theSax Trust are her father and an independent trustee. The independent trustee wasformerly an independent trustee of the Trust.[32] The statement of claim in the District Court proceedings alleges thatMr Simpson personally "deliberately construed the transaction to suit his personalclaims 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 aloan. Under the heading "Second Defendant", the claim states that Mr Simpson'sactions have caused damage to the Sax Trust, and have been contrary to his fiduciaryobligations as trustee of the Trust.[33] The Sax Trust also seeks from Mr Simpson personally any money that theTrust is unable to pay and costs incurred in pursuit of the money being repaid. Giventhe dispute raised by Mr Simpson as to the priority of the various claims on the Trustfund, 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 thirdparty, albeit one related to another trustee/beneficiary. It appears to be targetedprimarily 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), leavingthe active defence of all other matters to such other parties as are now defendingthose allegations".23 Some of the allegations related to the personal behaviour of thetrustees, while others were more general claims against the trust. In that case, theCourt took the view that it was overall a hostile beneficiary's dispute, and it wouldbe inappropriate to direct that the trustees be entitled to indemnity. The case wasrelatively straightforward, as, in the usual course, trustees should not be indemnified23 Kain v Hutton above n 11 at [6].by a trust to defend against allegations by beneficiaries that they are acting in breachof trust.24 In contrast, in most circumstances where a trust faces a hostile claim froma genuine third party, it will be reasonable for the trustee to defend the trust in orderto preserve its assets for the beneficiaries.[36] In this case, two complicating factors arise. The first is that the third partyhas strong connections to a trustee and beneficiary, making this very similar todisputes between trustees. In those cases, where the claim is hostile and the Courthas no way (prior to determination of the proceeding) of establishing which party isin 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 byMr Simpson personally in his role as a creditor of the Trust. His defence of theproceeding is therefore not necessarily linked to furthering the best interests of theTrust but also to furthering his own best interests. This complication makes itdifficult 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 whatthe 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 theamounts they are owed as creditors. If Sax Trust succeeds, the Trust will haveinsufficient funds to pay its debts. Therefore, unlike most other trust disputes, thereis very little to preserve for the beneficiaries.[39] Mr Simpson has also been sued in his personal capacity. This meansMr Simpson will be obliged to defend the suit in any case regardless of whether he isindemnified by the Trust.[40] The reality is that this litigation is a continuation of the long-running disputebetween the two trustees and principal beneficiaries of the Trust following theirseparation. Although it is to some extent masked by the claim being brought by athird party, this is a type of case where the Court cannot say in advance that it is24 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 isdifficult to determine which interpretation of events is correct and therefore whetherit would be in the best interests of the Trust to defend this claim. Further, Ms Saxappears (although she did not respond to Mr Simpson's contact about the case) tohave sworn affidavits in the District Court proceedings supporting the case of theSax Trust. The Court would therefore be supporting the position of one trustee overanother.Should the trustees be replaced?[41] Section 51 of the Act provides the Court the power to appoint new trusteesin 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 ornew trustees, and it is found inexpedient, difficult, or impracticableso to do without the assistance of the court, make an orderappointing a new trustee or new trustees, either in substitution for orin addition to any existing trustee or trustees, or although there is noexisting trustee.(2) In particular and without prejudice to the generality of the foregoingprovision, the court may make an order appointing a new trustee insubstitution for a trustee who—(a) has been held by the court to have misconducted himself inthe administration of the trust; or[42] The Court also has an inherent jurisdiction to remove trustees as part of itsgeneral jurisdiction to supervise the administration of trusts.[43] When exercising its jurisdiction to remove trustees or executors the Court isguided by the welfare of the beneficiaries.25 The term "expedient" has beendescribed as importing considerations of suitability, practicality and efficiency ratherthan necessity.2625 Letterstedt v Broers (1884) 9 App Cas 371 (PC) at 387 applied in New Zealand by the Court ofAppeal 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 Trustin deciding whether or not to defend the proceedings but (s)he would also bring anindependent mind to any settlement discussions in respect of the litigation. Giventhe 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, neitherMr Simpson nor Ms Sax favoured the appointment of an independent trustee giventhe associated costs. The parties sought an adjournment to consider whetheragreement could be reached on the appointment of an independent trustee and to filefurther submissions. For various reasons, the timetable for such submissions wasextended on a number of occasions. The position now is that, although bothMr Simpson and Ms Sax agree to the appointment of an independent trustee, theycannot agree to the terms of any such appointment. Mr Simpson has made his ownenquiries of two trust companies, two local law firms and an experienced trustlawyer in Auckland and there is no appetite to accept appointment as the sole trusteein this case.[46] There is some debate as to whether the Public Trust could be appointed unders 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 beforced to become a trustee even if it is unwilling to do so would appear to bepossible under s 75(1) of the Public Trust Act 2001 which does not require the PublicTrust's consent.28[47] The reality is, with minimal Trust assets, it is unlikely anyone would agree tobe appointed as an independent trustee without an indemnity for costs should thosecosts exceed the balance of the Trust fund. The appointment of an independenttrustee would likely dissipate the remaining Trust assets and, in this way, would becontrary to the interests of the Trust. The Trust will inevitably be wound up when allthe relationship property proceedings between Mr Simpson and Ms Sax have been27 See Kelly above n 4, at [30.24]; and Law Commission Review of the Law of Trusts (2013) NZLCR130.28 Unlike subs (2) and (3) and surrounding provisions such as ss 76 and 81.finalised. For these reasons and notwithstanding the dysfunctional relationshipbetween 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 toindemnify Mr Simpson from the Trust in advance of the proceedings or make ordersas to the priority of payments in advance. This aspect of the application is thereforedismissed.[49] Mr Simpson has already filed a statement of defence to the District Courtproceedings on behalf of the Trust and himself. This can remain and is effectively aholding position. Leave is, however, given for both Mr Simpson and Ms Sax to giveevidence as trustees, notwithstanding their contrary positions.[50] The proceedings in the District Court will need to take their course with theCourt being faced with the unenviable task of a defendant (the Trust) whose trusteesare 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 tothis application ($13,313.54) and the filing of the defence in the District Court. TheDistrict 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 ofthis decision.Thomas JSolicitors:Tauranga Family Chambers, Tauranga.Families Matter Law Practice, Rotorua.