Other blogs have noted what poor bedfellows trusts and relationships make. This observation is supported by the recent decision in Spence v Lynch . Paragraph 3 of Priestley J’s decision in this case neatly setting the scene for the ultimate show down that could be paraphrased “bad things happen to bad trustees.”
“ The relationship of the man and woman lasts for six years and five months. Despite the initial orthodox and sensible arrangements evinced by the trust and s 21 agreement, carelessness, confusion, and chaos rode in behind the couple. Their family lived in properties owned by the trust. Both the man and the woman’s mother advanced substantial sums to the trust. Startlingly no one took any steps to prepare annual accounts and balance sheets for the trust. The s 21 agreement was never reconsidered or updated. The trust’s bank accounts were used constantly and extensively by the woman to pay domestic accounts. The man, because he respected the woman’s financial acumen, gave her internet banking authority for his bank accounts. The solicitor, advised the man and woman about a possible property sharing agreement, but one was never concluded. When the couple separated the man lodged a notice of claim pursuant to s 42 of the Act. The woman, despite the domestic loss of the man’s income, continued to use the trust as a vehicle to acquire further realty.”
Latter in his judgment Priestley J refers to the woman as the “dominant trustee” noting that she “operated the trust with scant regard for orthodox legal, equitable, and accounting principles.”
To save you reading the 39 pages that comprise the decision (although if you do, the style in which it is written makes it an easy read) the facts can be summarised as follows:
- intermingling of separate property, relationship property, trust property and third-party advances
- trust’s fortune’s diminish due to poor management by the trustees
- professional trustee bails
- relationship ends
- the man (Mr Spence) sues the professional trustee to recover advances made by Mr Spence to the trust
- Mr Spence and the professional trustee settle
- professional trustee seeks to be indemnified from his former co-trustees
- once the court establishes how much Mr Spence did in fact advance the trust, and what can be set-off against this, judgment in this amount is awarded against the remaining trustees.
How the unholy mess arose? Perhaps not surprisingly there were no trustees’ meetings. Accounts were not prepared. Loan advances were not documented. Extraordinarily it is also noted in the judgment that “Expenditure or reimbursement by the trust [was] permitted so that [the third trustee (the woman’s mother)] could earn air points.”
It may be surprising against this backdrop to remember that the trust did in fact have a professional trustee. In that regard Priestley J noted at para  of the judgment that:
“I find it remarkable that a professional trustee … did not inquire or insist that some documentation was in place … to record the large advance made on 11 October 2006 and the terms on which such an advance was made. This was a year before Mr Lynch retired as trustee. Doubtless in some measure that oversight on his part lies behind the $155,000 settlement payment he has made to Mr Spence.”
The reference to the “dominant” trustee is interesting. There is of course no more a dominant trustee for trust law purposes as there is a passive trustee. That said, this case highlights, again, that where trustees do not work together to manage a trust, there are risks for all parties. Trusts are the best form of long-term intergenerational asset protection – if, and it’s a big if, the trustees work together to manage the trust’s assets for the benefit of the beneficiaries. Where the trust’s assets are treated as the settlor / trustee’s personal pot (or worse structured to ensure maximum air points), trusts perhaps offer the worst of all structure options.
Matters did not end with the 2013 decision. New proceedings have been issued by Ms White and her mother to set aside the judgment against them as trustees in the sum of $130,158 ordered by the High Court. Unsuccessful proceedings were filed to seek to admit new bank evidence that would show that in fact Mr Spence owed the trustees $33,000. This was followed with an unsuccessful proceedings to join Mr Spence’s earlier counsel, Mr Wright. The trustees are now defending bankruptcy notices in proceedings set down to be heard on 24 November 2014.
The hearing scheduled for 24 November 2014 was adjourned part heard due to the plaintiffs’ further attempts to enter new evidence in the form of Mr Spence’s bank statements, which the plaintiffs have argued would show that the evidence regarding the amounts paid by Mr Spence to the trust were wrong.
The issue of whether the court would have formed if a different view if the additional bank statements had been before the court is considered in a strike out application and an application to have the bankruptcy notices stayed or set aside (Spence v Lynch  NZHC 1020).
Although a number of causes of action, some alleging fraud were put to the court the result is neatly summarised at  of the judgment by Faire J who notes that:
“The plaintiffs have not provided a fully pleaded, particularised, and cogent claim that the judgment of Priestly J was obtained by fraud. The pleadings and submissions were largely an attempt to circumvent the Court of Appeal’s refusal to adduce new evidence on appeal and to re-litigate the same issues as those first put before Priestly J. Accordingly, all of the pleaded cases of action are struck out.”
The application to stay or set aside the bankruptcy notices were also unsuccessful.
It is useful to reflect on how this matter, which has now consumed much of the court’s time arose. While the trustees have since felt very strongly about the conclusions of the court; the matter had its genesis in the parties failure to recognise the place of the trust. It was there when suited and equally disregarded when that suited. The barriers between personal and trust, whihc are an essential facet of good trust management were disregarded. The results speak for themselves. While recording advances is dull, as is much trust management; the value of this is highlighted when the risk reward consequences are considered.
Love your trust – keep an up to date, accurate record of gifts, advances, loans and distributions.
Never, ever, mix trust and personal. If the trust pays for toothpaste you probably have a problem.
- Spence v Lynch  NZHC 1478
- Spence v Lynch  NZHC 2668 (appeal against costs decision)
- Spence v Lynch  NZHC 1081 (non-party discovery)
- White v Spence  NZCA 298
- White v Lynch  NZHC 2819
- White v Lynch  NZHC 2901
- Spence v Lynch  NZHC 609 (application to rescind judgment)
- Spence v Lynch  NZHC 735 (application for recall)
- White v Lynch  NZHC 1020 (strike out application)
Also see:Law News – Issue 28