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Beneficiary rights, Eden Refuge Trust, General, Trustee liability, Trusts

“But the trustee told me to …”

The decisions in Eden Refuge Trust make sobering reading for any person acting under a trustee’s instructions. 

The proceedings (see Eden Trust v Hohepa) relate to claims against a trustee for breach of trust and conversion, and claims against the solicitor acting for the trust for breach of fiduciary duty, knowing receipt and dishonest assistance.

By way of background Mr Hohepa (first defendant) was the trustee of the the Eden Refuge Trust, which owned a property in Auckland (the Property) that was used as a place of worship.  Mr Hohepa emigrated to Spain and later instructed Mr Fletcher (the second defendant) to sell the property.

Mr Fletcher’s initial instructions related to an opinion regarding the deed of trust and the implications of a sale of the property and how the proceeds of sale were to be dealt with in accordance with the deed of trust.

Although never referred to in any of the Court decisions, it is also interesting to consider whether Mr Hohepa’s Spanish residence created any issues for the Trust and whether or not this point was ever canvassed. Spain is a civil law jurisdiction that does not recognise trusts.  As the sole trustee of the Trust at the time the property was sold, arguably any capital gains should have been accounted for by Mr Hopepa  as the legal owner of the property and a Spanish tax resident (Spain does have a capital gains tax).   

Irregular dealings

That aside, the relationship  between Mr Hohepa and Mr Fletcher and the resulting transactions were early marked with irregularity.  Despite Mr Fletcher’s knowledge of the terms of the trust, the bulk of the sale proceeds were paid to Mr Hohepa personally.  Somewhat unusually, more than $50,000 of the sale proceeds were used to offset payments made on account of Mr Hohepa (including hotel bills) by Mr Flectcher via Mr Fletcher’s credit card.

When the congregation that worshipped at the Property became aware of the sale an interim injunction froze the remainder of the proceeds of sale, and the proceedings against Mr Hohepa and Mr Fletcher commenced.

The comments made here about the case, focus on the actions of Mr Fletcher.

In the beginning

Although Mr Fletcher’s opinion regarding the trust contained errors of law, it is clear that he was aware of the Trust’s claim to charitable status.   A divide in the congregation that Mr Hohepa represented as explanation for his actions, was never reliably proven to Mr Fletcher. Instead of approaching the Attorney-General for assistance, which would be the appropriate mechanism where it is unclear how to progress a charitable trust matter (as was the case here had Mr Fletcher properly appreciated the terms of the trust deed and the inherent inconsistencies with trust law), Mr Fletcher proceeded to sell the Property. During the sale process loans were obtained against a mortgage security and these funds were advanced to Mr Hohepa in clear breach of trust.

Mr Hohepa also benefited personally from the subsequent sale of the Property.  Although the breaches were personal to Mr Hohepa and actionable against him, the breaches arose because Mr Fletcher, who was on notice of the trust, allowed them to happen.

Solicitors must act with loyalty and fidelity to their clientsAlthough instructed by Mr Hohepa as trustee, Mr Fletcher was acting for the Trust, not Mr Hohepa.  Accordingly, Mr Fletcher was obliged to:

  • refuse to act on instructions from a trustee that would be likely to result in harm or loss to the trust
  • ensure the Trust’s property is dealt with in accordance with the law, and
  • ensure that the trustee’s instructions are not contrary to the trust deed.

It was not enough to be able to say, “but the trustee told me to …”

Failures

Sending trust funds offshore for Mr Hohepa was not consistent with the terms of the deed of trust. Mr Fletcher’s fiduciary failures enabled Mr Hohepa to gain access to the trust funds and misapply them. The Court was also satisfied that liability for knowing receipt was proven by accepting payment of legal fees incurred in circumstances where trust funds were being paid in breach of trust.   Further, the Court found that these were not the actions of an honest person or an honest solicitor.  Accordingly this amounted to dishonest assistance; in the Court’s objective assessment Mr Fletcher acted dishonestly. 

Dishonesty

The finding of dishonesty was a critical one for Mr Fletcher because this meant that his negligence and the costs that flowed from it, would not be covered by his professional indemnity policy.  The dishonesty claim did not feature when the proceedings were first filed. 

The finding of dishonesty was upheld by the Court of Appeal, who found that Mr Fletcher had the “requisite dishonest state of mine” in a judgment delivered on 30 March 2012.  In dismissing the appeal the Court of Appeal made an award of indemnity costs.  See further below.

Costs against Mr Fletcher in respect of the loss to the Trust were determined in a subsequent hearing on the matter.

The Trust was awarded the gross sale price of the Property of $253,445.00 as monetary relief in repect of which Mr Hohepa and Mr Fletcher were jointly and severally liable.  The Court also made a punitive award of $10,000.00 exemplary damages against Mr Fletcher.

Compound interest was awarded against Mr Hohepa on the expectation that he profited from the funds received in breach of trust.  Mr Fletcher was liable for compound interest only to the extent of his legal fees and the payments made to his credit card, all other interest awarded against him being on a simple basis.  There were also awards made on account of the different plaintiff’s costs.  The costs awards made were on a scale basis rather than the more punitive indemnity(i.e. trust cost) basis.

Proceedings with Insurer

Proceedings against Mr Fletcher’s insurers were eventually withdrawn by Mr Fletcher.  However, due to the late hour at which the proceedings were withdrawn costs awarded were somewhat higher than might have been the case.  The costs decision also turns in large part on the elements of dishonesty.

Fletcher was only acting on instruction

The facts of this case are perhaps extraordinary.  Or perhaps not.  Arguably, from the very start Mr Fletcher was out of his depth professionally.  The original advice given was flawed.  In this regard, given the number of trust “experts” in practice, many lawyers may take something from these decisions. 

To the lay person, it may well appear that Mr Fletcher was just doing what he was told.   To a certain extent this is true.  Had Mr Fletcher had no knowledge of the trust, matters would likely have played out very differently (at least for Mr Fletcher).  But therein lies the rub.  Mr Fletcher did know; and that level of knowledge was such that the Court found it insupportable that he could not know that he was assisting a clear breach of trust.

Trusts represent complex arrangements.  While analogy with “smoke and mirrors” may seem trite, trust ownership can sometimes amount to the same.  When assets are held in trust and unavailable, the separation of legal and beneficial ownership can assist in the preservation of assets.  However, as has been so unfortunately demonstrated in the Eden Refuge case, when a trustee abandons the obligations of the trust, those who stood to benefit can be horribly disadvantaged.

For this reason, the level of honesty and fidelity required is higher.  Whether the reward for accepting appointment as a trustee is worth the risks requires careful consideration.  The message to remember is that you cannot separate the trustee from the trust to justify actions.

Post script

The final round of this matter was played out in front of the NZ Lawyers and Conveyancers Disciplinary Tribunal, which has suspended Mr Fletcher from practice as a lawyer for two years.

References:

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