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alter ego trust, constructive trusts, Sham trust

Know thy beast

A constructive trust claim provides instructive reading into recognising what it is that you are after before you begin.  It begins, as is so often the case with trust cases, with a failed relationship.  There was a home owned and constructed by a trust that was settled well before the relationship began.  After the relationship ended Ms Murrell claimed an interest in a constructive trust.  She satisfied the court that she had made a contribution to the property and that she had a reasonable expectation of an interest.  The court determined this to be worth 15% of the propety’s sale price.  So far so good.  Just one step left – enforcing the interest against the trust.  This is where things took a turn for the worse in relation to Ms Murrell’s expectations. 

It was claimed that the trust was Mr Hamilton’s alter ego.  This was presumably considered necessary as to found the claim against the trust it must be demonstrated that all of the trustees should be required to ante up the interest.  Difficult when, as was demonstrated at the hearing, the “professional” trustee was all but MIA.

The court noting in this regard at para [58] to [59], after recording the professional trustee’s impressive track record and experience that:

  • although there was a resolution dated 8 December 2003 by which the trustees resolved that the bank account known as the “W E Hamilton Building Account” was the nominated bank account for the Trust. In fact, the bank account used by the Trust was in the name of William Elliot Hamilton
  • there were no records pertaining to the Trust held by [the professional trustee], or at least documents proved in evidence to exist
  • there was no designated file for the Trust, no file notes, one trustee resolution and only limited financial statements. The financial statements covered the period that ‘the trust property] was tenanted and were for tax purposes. They did not include a statement of the Trust’s assets and liabilities
  • contact between [the] co-trustees had been limited
  • [the professional tustee] knew little about the Trust’s activities beyond the fact that a house was under construction
  • the supposed Trust’s bank account was used for non-trust transactions. For a period Mr Hamilton’s salary was paid into the account, and it was used to meet Mr Hamilton’s living expenses as well as Trust expenses. A facility from the bank for building expenses was not documented in the records of the Trust, nor it seems was it known to [the professional trustee].

No wonder perhaps that Ms Murrell’s counsel latched onto the idea that the trust was Mr Hamilton’s alter ego.

So what is an alter ego trust?

Alter ego means another side of oneself or a second self. Mr Hamilton was the controlling hand and the professional trustee was largely in the dark. Accordingly, the argument is that the Trust was a facade that cold be disregarded and its assets were really the de facto property of Mr Hamilton and available to meet Ms Murrell’s claim.

Importantly, the claim was not advanced on the basis that the trust was a sham.

Alter ego trusts are recognised in other jurisdictions and have been acknowledged in New Zealand in a limited fashion.  However, alter ego trust arguments, like sham trust arguments are not easy to make because the trust itself must not be what it appears.  Where this is the case, most commonly what there is, is trustees in breach of trust, but none the less there is a trust.

Factors put forward that a trust is an alter ego trust have included:

  • a lack of trustees’ meetings, minute books and resolutions
  • inadequate or non-existent trust accounts
  • inadequate documentation
  • rubber stamping of directions given by the “controlling party”
  • payment of trust expenses by the controlling party
  • receipt of direct financial benefits from the trust assets by the controlling party
  •  conduct of the controlling party which evinces an intention to control the trust assets

Are any of these factors really indicative of anything other than trustees who are not meeting the duties owed?

Is there in fact any such beast as an alter ego trust?

In Prime v Hardie Ms Prime (sucessfully by way of constructive trust) asserted an interest in the family home, which was owned by a family trust, based on her contributions.  Salmon J upheld Ms Prime’s claim subject to the difficulty that the house was owned by a trust. The trustees were Mr Hardie and a trustee company. Salmon J found:

“What is clear on the evidence … is that the trust was effectively Mr Hardie’s alter ego. He was the principal (although not the only) beneficiary. He borrowed the money which enabled the trust to purchase its assets. He paid the interest on the mortgages and rates and insurance. In the 1998 financial year his personal income return showed an apparently fictitious rental income from [the home] of $3,600 and deductions for interest, depreciation and other items resulting in a net loss of $10,975 which he claimed as a tax deduction against his personal income. There is no doubt [the home] and before that [another] property, were the family homes for the couple and their children. In those circumstances I see no reason why a constructive trust should not be imposed upon a property owned by a trust.”

In Glass v Hughey,  another constructive trust case, the concept of sham and alter ego were mixed. The Court noting that:

“… that the trust has for all intents and purposes been disregarded by him … and so far as [Ms Glass’s] claim is concerned should be regarded as a sham or more particularly the husband’s alter ego.”

It is important to appreciate that the decision inGlass v Hughey relied on Australian authorities that provide that Courts will disregard trusts that are a spouse’s alter ego or a sham to ensure that a family property claim is not unfairly defeated.  However, the legislative basis for these is not mirrored in New Zealand.

As noted in Murrell v Hamilton at [68]:

” … the decisions in Prime v Hardie and Glass v Hughey did not address “the theoretical basis upon which a Court is justified in finding an alter ego trust”.14 It noted that the Australian cases relied upon in Glass v Hughey needed to be viewed with “some caution”, because the Australian family law regime permits recourse to trust assets where a spouse is in effective control of them, without the need to violate the trust in order to do so.There are no equivalent provisions in New Zealand.”

Assumption of control of a trust by someone other than a trustee, or by one trustee to the exclusion of others, could not of itself invalidate a trust. Dontrol of trust property does not justify attribution of ownership of the assets from the trustees to the trust controller. To do so would be to ignore the rights of the beneficiaries.   And as already noted questions the actions of the trustees and whether any breaches have arisen as much as the actions of any alleged controller.

Sham trusts and alter ego trusts are not interchangeable

Although sham and alter ego trusts are often referred to in the alternative, they are not interchangeable concepts.  A sham trust exists where the documents and acts attributable to the “trust” give the appearance of creating legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.  For example, “I own this property.  However, in the event this is questioned, here is a trust deed to show that I own it as trustee for B.”

Where a sham is found, the assets remain the property of the settlor who has throughout owned the assets for the settlor’s ultimate benefit.

In the case of an alter ego trust, if such exists,  control of trust property resulta “in appropriation of that property to the controller…”.  However, “since such an outcome is antithetical to our system of property law”, the question must be asked is there any such beast?

In the case at hand is not the fact that Mr Hamilton treated and controlled the property of the trust as if it was his own that is pivotal – if he did the trustees may be answerable for this.  Rather, the problem is that while Mr Hamilton may not have disabused her, his MIA co-trustee clearly could not have aroused similar expectations such that it would be unconscionable for both of them to deny her claim.  Accordingly the constructive trust claim failed.

The difficulty from the external observer given the recent case of Trustees of the B Trust v CIR and the earlier case of Regal Castings, is when is the view and knowledge of one trustee transferred to all the trustees and when is it isolated.  It seems somehow wrong in principle that the trustees here appear to “get off” to a certain extent because they did such a poor job. 

References:

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