IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV Plaintiff

Transcription

1 IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV UNDER IN THE MATTER OF BETWEEN AND THE TRUSTEE ACT 1956 and THE DECLARATORY JUDGMENTS ACT 1908 the estate of HAROLD RAYMOND CARRINGTON HENRY BERNARD CHELLEW Plaintiff KATHLEEN GLORIA EXCELL AND HENRY BERNARD CHELLEW AS TRUSTEES OF THE ESTATE OF HAROLD RAYMOND CARRINGTON Defendants Hearing: 10 October 2008 Appearances: G M Harrison for plaintiff W T Nabney for Ms Excell E J Hudson for residuary beneficiaries Judgment: 22 December 2008 JUDGMENT OF ALLAN J Solicitors: Stainton & Chellew, Auckland Gallie Miles, Te Awamutu B Nabney, Tauranga E J Hudson, Hamilton elliothudson@xtra.co.nz HENRY BERNARD CHELLEW V KATHLEEN GLORIA EXCELL AND HENRY BERNARD CHELLEW AS TRUSTEES OF THE ESTATE OF HAROLD RAYMOND CARRINGTON HC AK CIV December 2008

2 [1] This is a proceeding brought by the plaintiff in his capacity as a trustee of the will of the late Harold Raymond Carrington. [2] In 1993, he and his co-trustee, Ms Excell, sold the trust s one-half interest in a residential property at Tauranga to Ms Excell, who already owned the other half share. The validity of that transaction has been impugned by the residuary beneficiaries under Mr Carrington s will. Mr Chellew seeks declarations as to the power of the trustees to sell to Ms Excell, and for consequential relief (including a declaration pursuant to s 73 of the Trustee Act 1956) if the Court rules against the lawfulness of the sale. Factual background [3] Mr Carrington died on 3 May 1992, leaving a will dated 31 March He appointed Mr Chellew and Ms Excell, his widow, to be his executors and trustees. At the time of his death, the deceased and Ms Excell resided in a property at South Auckland, which they owned as tenants in common in equal shares. [4] The will made express provision in respect of the deceased s half interest in the South Auckland property. Clause 5 of the will reads: 5. IF KATHLEEN GLORIA RUSS is alive fourteen (14) days after the date of my death then: (a) I GIVE free of all duties my half interest as tenant in common with KATHLEEN GLORIA RUSS in the real estate comprised in Certificate of Title 47D/41 (South Auckland Registry) to my trustees UPON TRUST to permit KATHLEEN GLORIA RUSS to have the use, occupation and enjoyment of it until she dies PROVIDED THAT KATHLEEN GLORIA RUSS shall pay all rates and taxes on such property and keep it insured and in a reasonable state of repair to my trustees reasonable satisfaction. (b) MY TRUSTEES shall have power at the request of KATHLEEN GLORIA RUSS to sell that real estate and use the proceeds of sale belonging to my Estate in the purchase or building of another residence to be held upon the same trusts including sale and repurchase and any portion of the proceeds of sale belonging to my Estate that is not so used shall be invested

3 and the income paid to KATHLEEN GLORIA RUSS until her life interest in the real estate terminates. (c) UPON THE termination of the life interest of KATHLEEN GLORIA RUSS in the said real estate then my Estate s interest in that real estate and in any capital sum from earlier sale proceeds shall be divided equally between those of my children LANCE CARRINGTON, ANN CARRINGTON and GRANT JOHN CARRINGTON who survive me and have attained the age of twenty-five (25) but if any of them have died before taking their share leaving a child or children surviving then that child or those children shall on reaching the age of twenty-five (25) take and if more than one in equal shares the share which their parent would otherwise have taken. [5] Kathleen Gloria Russ, referred to in clause 5 of the will, is one and the same person as Ms Excell. [6] Of the three residuary beneficiaries named in clause 5(c) of the will, Lance has died, leaving no issue. Upon termination of Ms Excell s life interest, the residuary estate will therefore be divided equally between Ann Burdon (formerly Carrington) and Grant Carrington. [7] As envisaged by clause 5(a) of the will, the South Auckland property was sold, and in 1993 another property was purchased at 42 Cumberland Crescent, Welcome Bay, Tauranga. The purchase price was $110,000; title was taken by Ms Excell and by the trustees of the estate, as tenants in common in equal shares. Ms Excell and the estate each contributed $55,000. The surplus of $15, derived by the estate from the sale of the South Auckland property has been invested through the trust account of the estate s solicitors. Net interest is paid annually to Ms Excell in terms of the will. [8] Shortly after moving into the Welcome Bay house, Ms Excell decided to renovate and modernise it. She was concerned to ensure that the value of any improvements effected by her were properly recognised as between her on the one hand, and the trustees of the estate (including of course herself) on the other. She consulted her solicitor, Mr Lawrie, who also acted for the estate. Mr Lawrie in turn contacted Mr Chellew, also a solicitor. They agreed that the best course of action was for the trust to transfer its half interest in the property to Ms Excell, thereby conferring upon her sole ownership. In turn, she would execute an interest-free

4 mortgage in favour of the trust for $55,000 (equivalent to the share of the purchase price paid by the trust just a few months earlier), so providing to Ms Excell a source of funds with which to pay out the trustees. [9] At that time, according to Mr Chellew, land values were relatively static. It is not suggested that the price at which the trustees sold the estate s half interest to Ms Excell represented an under-value. [10] All of the foregoing is a matter of record and not in dispute. There is however, a measure of disagreement between Mr Chellew and Mr Lawrie as to what passed between them, prior to the decision of the trustees to sell the estate s half interest in the Tauranga property to Ms Excell. Unfortunately, a memorandum sent by Mr Lawrie to Mr Chellew is missing. Mr Chellew s memorandum in response to the missing document does not really assist on the two issues where there is disagreement, namely: a) whether or not, as Mr Chellew asserts, Mr Lawrie had advised him in writing that Ms Excell s intention was to redevelop and sell the property. Mr Lawrie says that Ms Excell had no intention to sell and Mr Chellew has mistaken a possible reference in the missing document to developing the property as being an indication of resale; and b) whether or not, as Mr Chellew believes, he was advised that, upon completion of Ms Excell s renovations, the title was to revert to a tenancy in common between the estate and Ms Excell. Neither Mr Lawrie nor Ms Excell accept that a resale by her to the trustees was ever in contemplation. Such a resale of a half share back to the trust would, on the face of it, appear to be inconsistent with Ms Excell s desire to gain sole control of the property. [11] On the view I take of this case, it is unnecessary to resolve the differences in recollection between Mr Chellew on the one hand, and Mr Lawrie and Ms Excell on the other. There is agreement between the parties that Ms Excell did undertake

5 renovations to the Tauranga property, and further agreement as to the proportion of the present value of the property properly referable to the improvements she effected. I will return to that point later. [12] Ms Excell paid no interest under her mortgage to the estate. There would have been no practical justification for the payment of interest, given that she was solely entitled to the income pursuant to clause 5(b) of the will. [13] Nothing further of relevance occurred for some years. But in about 2004, Ann Burdon and Grant Carrington, the remaining residuary beneficiaries, made certain inquiries about the administration of the estate. In the course of those inquiries they caused to be lodged a caveat, dated 1 July 2004, against the title to the Tauranga property, claiming: a beneficial interest in an undivided half share of the land contained in the above Certificate of Title as cestui que trust of which the registered proprietor KATHLEEN GLORIA EXCELL is a trustee. [14] Negotiations between Ms Excell, Mr Chellew and the residuary beneficiaries took several years. The latter contended that the trustees were wrong to sell the trust s half interest in the Tauranga property to Ms Excell and that the duty of the trustees was to maintain the trust s interest in appreciating real property. They contended that they had suffered loss in their capacity as residuary beneficiaries because the trust s interest in real property had been replaced by an investment on first mortgage, which self-evidently enjoyed no capital growth. [15] No resolution was achieved, and ultimately Mr Chellew decided to issue this proceeding for the purpose of obtaining a ruling in respect of the challenged sale by the trust to Ms Excell. The self-dealing rule [16] The primary argument for the residuary beneficiaries is a simple one. It is supported by Mr Harrison for Mr Chellew (albeit that it reflects on Mr Chellew s actions), but opposed by Mr Nabney, counsel for Ms Excell. Shortly put, the

6 argument is that the sale by the trustees to Ms Excell is caught by the self-dealing rule, which is long established and of wide scope. The rule itself has been defined and explained on innumerable occasions during the course of the last 200 years or so. Early illustrations are Ex Parte Lacey (1802) 6 Ves 625; 31 ER 1228 and Ex Parte James (1803) 8 Ves 337; 32 ER 385. [17] The most widely cited recent authority is perhaps Tito v Waddell (No.2) [1977] Ch 106 at 241, where Megarry V-C explained: The self-dealing rule is that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction. [18] The reasons for, and consequences of, the rule are usefully summarised in Dal Pont & Chalmers Equity and Trusts in Australia and New Zealand (4th ed 2007) at 573: The purchase, (or lease), of trust property by a trustee is generally prohibited. This is because it places the trustee s personal interest in conflict with the duty to the beneficiaries, and the trust may derive an advantage over third party purchasers by reason of her or his knowledge of the property. The same prohibition applies in the case of a sale of trust property by cotrustees to one of themselves and third parties. Equity treats any such transaction as voidable at the instance of the beneficiaries, however open or honest the trustee s conduct and however fair the price. [19] The foregoing principles have been regularly re-affirmed: see by way of example only: Re Thompson s Settlement; Thompson v Thompson [1986] Ch 99, Clay v Clay (2001) 202 CLR 410 at 434, and Bayliss v Bayliss [2003] BCL 757. [20] Where the rule has been infringed, a non-consenting beneficiary may, within a reasonable time, seek to have the sale rescinded: Re Postlethwaite (1888) 60 LT 514: Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102. [21] Although there has been significant delay between the sale by the trustees to Ms Excell on the one hand and the challenge by the residuary beneficiaries on the other, it is not suggested that the latter are thereby precluded from mounting a challenge to the sale. For many years they were simply unaware of it.

7 [22] The existence of the self-dealing rule is not in dispute. Rather, Mr Nabney for Ms Excell submits that: a) although the residuary beneficiaries may have been entitled to bring proceedings for an order setting aside the transaction, that has not occurred. As a matter of procedure the Court ought not to grant them relief in proceedings brought by a trustee; and b) the mortgage advance to Ms Excell was expressly permitted by clause 5(b) of the will; and c) there has been a recent relaxation of the rule that a trustee must not purchase trust property: Holder v Holder [1968] 1 Ch 353, such that there is a residual discretion in the Court to uphold a transaction that technically falls within the prohibition. In the present case the Court should exercise its discretion against setting aside the transaction, because instead of buying a one-half share in the Tauranga property and then selling that share to Ms Excell a few months later, the trustees could just as easily have financed Ms Excell s purchase by an advance secured on first mortgage at the outset. [23] I deal with each of these arguments in turn. The challenge to the transaction [24] Mr Nabney argues that the Court may set aside a transaction only where the residuary beneficiaries have themselves taken action as plaintiffs. [25] I reject that submission. As a matter of convenience, and after a long period of negotiation, Mr Chellew responsibly took the initiative by issuing proceedings in his capacity as trustee, in order to obtain resolution of the dispute. This proceeding provides an appropriate forum within which the residuary beneficiaries are entitled to be heard and to formally seek an order setting aside the transaction. It would be quite futile to require the residuary beneficiaries to issue their own proceedings. The

8 inevitable outcome would have been consolidation, either formal or informal, and a hearing of the two proceedings together. In the circumstances of this case there would be no point in requiring the residuary beneficiaries to spend money and time on what would be in effect, a duplicate set of proceedings. The relief claimed by Mr Chellew is amply sufficient to resolve the issues between all parties. Construction of the will [26] Mr Nabney argues that the advance of $55,000 made by the trustees to Ms Excell on first mortgage is expressly authorised by clause 5(b) of the will. That is because the sub-clause expressly authorises the trustees to invest such part of the proceeds of the sale of the South Auckland property as is not required for the purchase of a replacement property, and to pay the resulting income to Ms Excell during her life. [27] Both Mr Harrison and Mr Hudson argue that the mortgage advance was not permitted by the will. But their arguments are quite different. Mr Harrison contends that clause 5(b) constitutes a direction to the trustees to invest the proceeds of sale of the South Auckland property, at least principally, in the purchase of real property, although he accepts that the reference to an investment of a surplus is consistent with the testator s intention that not all of the proceeds need be so invested. [28] The difficulty with that approach is that it tends to overlook the plain purpose of clause 5(b) which is to empower the trustees to purchase another residence for Ms Excell. If she makes no request under clause 5(b) the trustees have no power to act in reliance on the sub-clause. That is the point picked up by Mr Hudson. He submits that no reliance can be placed on clause 5(b) unless and until Ms Excell makes a request. If she does, then the trustees are empowered to utilise the sale proceeds of the South Auckland property in the purchase of an alternative residence for her. If the proceeds of the sale of the South Auckland property are greater than are necessary to effect the requested purchase, then, and only then, may the residue be invested as contemplated by the closing words of clause 5(b).

9 [29] Ms Excell s entitlement to the income from the investment of the residue, is entirely contingent upon a request by her for the purchase of a residence by the trustees for her occupation, he contends. [30] In my opinion Mr Hudson is right. His argument is supported by the closing words of clause 5(b) and the opening words of clause 5(c), each of which refer to Ms Excell s life interest in the real estate. The testator has not left her a life interest in the whole of the estate. It is difficult to say whether the language of the will accurately reflects the testator s intention; it may not, but the terms of the will are clear. [31] The result is that if Ms Excell makes no request for the purchase of an alternative residence by the trustees, then the sale proceeds of any former property would be invested in the normal way by the trustees; but the will making no provision for the disposition of income on such investments, that income falls into residue. [32] The express powers conferred by clause 5(b) are confined to the purchase by the trustees of a replacement residence for Ms Excell if she so requests, and in that event only, for the investment of any surplus not required for the purchase of the residence and the payment of the income on such investments to Ms Excell during her lifetime. [33] It follows that clause 5(b) does not expressly authorise the first mortgage granted by the trustees to Ms Excell subsequent to the challenged sale. Holder v Holder [34] Mr Nabney relies upon Holder v Holder as authority for the proposition that, notwithstanding the apparently imperative character of the rule against self-dealing, there nevertheless exists a residual discretion for the Court to refuse relief in an appropriate case. In that case, Victor Holder, an executor of his father s will, purported to renounce the executorship, having in mind the purchase of properties forming part of his deceased father s estate, of which he was tenant. But the

10 renunciation was ineffective because Victor had performed certain trivial but unequivocal acts of executorship, the effect of which was to preclude him from renouncing the office of executor. Probate was granted to his mother and sister, who put certain estate properties on the market for sale. Victor tendered the highest bids which exceeded the reserve price in the case of one property, and equalled it in the case of the other. After some difficulties the sales were completed, but 18 months later, Victor s brother, a beneficiary under the will, sought to have the sales set aside. [35] In the High Court, the Judge effectively made an order for resale, but Victor appealed successfully to the Court of Appeal where Harman LJ said at 391: Of course I feel the force of the Judge s reasoning that if Victor remained an executor he is within the rule, but in a case where the reasons behind the rule do not exist I do not feel bound to apply it. [36] Danckwerts LJ agreed. He said at 398: It is said that it makes no difference, even though the sale may be fair and honest and may be made at a public auction ; But the court may sanction such a purchase and, if the court can do that there can be no more than a practice that the court should not allow a trustee to bid. In my view it is a matter for the discretion of the Judge. [37] That approach appears on the face of it to conflict with the purpose of the rule, to which the Courts have strictly adhered for a very long time. For example in Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461, at ; [ ] All ER Rep 249 at 252, Lord Cranworth LJ said: It is a rule of universal application that no-one, having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interests of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the cestui que trust which it was possible to obtain. [38] No case was cited to me which adopted or approved the line taken by the Court of Appeal in Holder, but there have been numerous cases since in which the strict principle has been applied. In Re Thompson s Settlement Vinelott J held in effect that Holder v Holder should be confined to its own facts. He said at 115:

11 It is clear that the self-dealing rule is an application of the wider principle that a man must not put himself in a position where duty and interest conflict or where his duty to one conflicts with his duty to another: see in particular the opinion of Lord Dunedin in Wright v Morgan [1926] AC 788 which I have cited. The principle is applied stringently in cases where a trustee concurs in a transaction which cannot be carried into effect without his concurrence and who also has an interest in or owes a fiduciary duty to another in relation to the same transaction. The transaction cannot stand if challenged by a beneficiary because in the absence of an express provision in the trust instrument the beneficiaries are entitled to require that the trustees act unanimously and that each brings to bear a mind unclouded by any contrary interest or duty in deciding whether it is in the interest of the beneficiaries that the trustees concur in it. [39] Holder v Holder was referred to in In Re McDonald HC INV CP 49/86 19 October 1992, where Williamson J stated the ordinary principle but referred to Holder without analysis of the different approach mandated in that case: Purchases by trustee A trustee is not entitled to purchase the trust property either from himself or his co-trustee except: (a) (b) (c) With the consent of the Court, or Pursuant to an express power contained in the trust instrument, or with the assent of all beneficiaries. If he does then any such purchase is voidable at the request of any beneficiary no matter how honest and fair the purchase may have been. It is clear that a trustee is bound to get the best possible price for the trust property. See Halsbury 4 th edn Vol 48 para 808, Gower & Kelly s Law of Trusts and Trustees 5 th Edn Chapter 17 p 269. The rule is not an absolute one. It was explained in the case of Holder v Holder [1968] 1 Ch 353 at 397; [1968] 1 All ER 665 at 677 upon the basis that it was a rule which made purchases by trustees voidable if within a reasonable time they are challenged by the beneficiary. In the Holder case the Court of Appeal sanctioned the purchase because the trustee had renounced his office after taking only some minor steps and had purchased at auction in circumstances where the beneficiaries knew of his interest as a prospective purchaser. [40] There is no suggestion in the balance of the judgment that Williamson J considered that he had a discretion to exercise if a breach of the self-dealing rule was established.

12 [41] The views expressed in Holder v Holder have received a degree of criticism by textbook writers: see for example Cope Constructive Trusts (1992) at 155, and more recently the same author in Equitable Obligations: Duties, Defences and Remedies (2007) at , where the author expresses the view that the selfdealing rule remains in full force. [42] There is further criticism of the decision in Holder v Holder in Ford & Lee Principles of the Law of Trusts (3rd ed 1996) at [9720]. [43] In my view, the Court has no option but to apply the ordinary rule. I am not satisfied that the approach in Holder vholder has attracted any significant support. It cannot be said with confidence that the Court has a discretion to decline to enforce the rule against self-dealing. [44] In the present case it is common ground that the trustees made no application to the Court; nor did they obtain the consent of the residuary beneficiaries. It follows that the sale by the trustees to Ms Excell is liable to be set aside. [45] Although on one view that appears to be a somewhat harsh outcome insofar as Ms Excell s interests are concerned, there is no doubt that the residuary beneficiaries have a proper interest in ensuring that, once the trustees took a one-half interest in the Tauranga property (with its attendant potential capital growth), that interest was not improperly relinquished by a transaction that infringed the selfdealing rule. The fact that dealings between Ms Excell and her fellow trustee could have been structured differently, is, as Mr Hudson submits, irrelevant. Conclusion [46] The plaintiff is entitled to relief. In his statement of claim he seeks the following: a) A declaration as to whether the trustees had the power to exchange the trust s interest in a half share of the Tauranga property, for a mortgage

13 securing its value over the same property, for a limited period or otherwise; b) A declaration as to the extent of the interest or claim that the trust retains in the Tauranga property; c) An order directing the trustees to take such action as necessary to alter the legal ownership of the property to reflect properly the trust s current beneficial interest in that property; d) Such further or other order as may be necessary to give effect to such interests that the trust may be entitled to; e) In the event that this Honourable Court determines that the plaintiff has acted in breach of trust, a declaration pursuant to s 73 of the Trustee Act 1956 that the plaintiff has acted honestly and reasonably and ought fairly to be excused wholly from personal liability for such breach; and f) Such further or other order including orders as to the incidence of costs, as may be just. [47] In terms of paragraph (a) of the prayer for relief, there will be a declaration that the trustees of the estate had no power to exchange the trust s interest in a half share of the Tauranga property for a mortgage secured over the same property. [48] Ms Excell is directed to execute a registerable transfer of an interest in the Tauranga property to the trustees in order to reflect the interest of the trustees in that property. There is agreement that she is entitled to credit for the renovations and improvements carried out by her. There is agreement also that the proper way to reflect the respective interests, is for Ms Excell to transfer to the trustees a 185/405 share in the property. The valuation evidence supports that. Accordingly, Ms Excell is directed to execute a transfer of a 185/405 share. The trustees are to execute a

14 discharge of the mortgage given by Ms Excell. There will be a declaration that the trustees hold a 185/405 interest in the property. [49] Mr Chellew seeks an order pursuant to s 73 of the Trustee Act 1956, declaring that he has acted honestly and reasonably and ought fairly to be wholly excused from personal liability for the breach of his duty as trustee not to sell the trust property to a fellow trustee. Mr Harrison advises that if the transaction is set aside there is no need for the Court to consider Mr Chellew s application. I do however reserve leave to all parties to make application (by memorandum) for such orders as may be necessary in order to assist in the implementation of this judgment. Costs [50] The residuary beneficiaries are entitled to costs. Mr Hudson seeks costs against the trustees jointly and severally on a solicitor/client basis. Without further argument, I am prepared to make an order for scale costs in terms of category 2B. If Mr Hudson wishes to press for solicitor/client costs I will need more detailed submissions. [51] Mr Hudson is to file and serve by 31 January 2009, a memorandum which must either: a) Set out the circumstances that justify an award of solicitor/client costs, or b) Indicate that the residuary beneficiaries will be content with scale costs. [52] In the former event, counsel for Mr Chellew and Ms Excell are to file any memorandum in opposition on or before 13 February I will thereafter deal with the application for costs on the papers. [53] Mr Chellew and Ms Excell seek an order for costs against each other. They are to bear their own costs.

15 [54] Although technically Mr Chellew has brought a successful application, it is in effect an application for a declaration that he himself has acted in breach of trust. Moreover, he is a solicitor who ought to have been alive to the obvious legal problems associated with the purchase by Ms Excell of trust assets. [55] On the other hand, Ms Excell has brought the proceeding on herself by deciding to defend it in circumstances where there was very little prospect of success. C J Allan J