Relationships and trusts are poor bedfellows. I have said this before. Another way of expressing the sentiment is that trustees and spouses/partners are equally poor bedfellows. The difficulty being that the dividing line between Mrs Smith – wife and Mrs Smith trustee can blur.
The consequence of this blurring, and the hard cold cost, was sheeted home in Scholzel v Scholzel. The background is all too familiar. Spouses settle a trust. The marriage breaks down and with it the trustee relationship. The trustees are deadlocked and as a result are unable to address pressing financial issues. Mrs Scholzel sought an order pursuant to s. 51 of the Trustee Act for a new trustee to be appointed in substitution for herself and her husband, together with other orders dealing with trust property.
Associate Judge Matthews notedat  that “It was clear from a reading of the statement of defence that Mr Scholzel interpreted the proceedings as a form of litigation in which many or all relationship differences … would be aired”. This observation could be made of many trust disputes involving spouses or partners. When assets are disposed of to trust the assets no longer comprise either property of the relationship, or of either spouse or partner. This is why the decision to settle a trust must be made so very carefully.
Matters were ultimately resolved without a substantive hearing. However, substantial costs had been incurred and Mrs Scholzel sought indemnity costs (that is her real costs) from Mr Scholzel.
Although an award of indemnity costs was not made, the court did order a 50% uplift from scale. The result of which was that Mrs Scholzel was awarded $34,327.50 of her $41,948.00 legal fees plus disbursements and costs of the independent trustee.
The bare result does not mean a lot by itself, other than perhaps the fact that trustees who cannot agree should more readily accept the wisdom of thier replacement with an independent trustee. However, the decision provides useful guidance on the matters taken into consideration. Specifically:
- costs will not generally be awarded against a trustee unless the trustee has acted unreasonably
- where a trustee allows personal considerations to get in the way and cannot meet the standard of objectivity and skill required of a trustee (remember big shoes to fill) – the trustee is acting unreasonably
- indemnity costs will rarely be ordered against a trustee, even if the trustee has been unreasonable (Re Chapman), for indemnity costs to be awarded the trustee must have acted dishonestly (Membery and Hodge v Harris)
- the High Court rules allow increased costs to be awarded where a party’s actions result in delay or cost
The message to be taken from this case is simple – being a trustee is fulfulling a role, it is work not a right. Where the trustee cannot act appropriately, if this is not recognised and rectified, the trustee can be liable for the costs of continuing to act in the face of all evidence that the responsibilities of the role cannot be properly acquitted. Very few trustees want to see a professional appointed in their place – there are costs and a loss of control. However, the cost of avoiding that cost and retaining that control can be very high.