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Cases, Corporate trustee, Sham trust, Trustee liability, Trustee Resolutions, Trustees, Trusts

Sham trust – a rose by any other name

Allegations of sham are commonly made, but rarely made out. Accordingly the case of Rosebud Corporate Trustee Limited v Bublitz makes interesting reading.  The judge does not keep us in suspense long, coming out with his finding at p. 5 that the trust is a sham.

One of the major players in this story is one Mr Nielsen, a property developer who was bankrupted in 2009 on account of judgment against him for in excess of $13m. While bankrupt Mr Nielsen instructed his advisors to incorporate Rosebud Corporate Trustee Limited (Rosebud Trustee).  Once incorporated Rosebud Trustee settled the Rosebud Trust, which was a blind trust (that is the true beneficiaries (Mr Nielsen an his wife) were not named): see para [36] “This is a blind trust with no named beneficiaries. Subsequently you and [Mrs Nielsen] were appointed beneficiaries so as not to show up on the trust deed.”

Soon after Mr Nielsen entered into a business venture (despite the prohibitions against doing so incumbent on his bankruptcy).  Funds from this flowed to the Rosebud Trust and out to Mr Nielsen and his wife, who gave evidence that she alone accessed the funds.  With respect to Mrs Nielsen the Judge noted that “I did not consider her to be a reliable witness. Rather, she was in the thrall of Mr Nielsen.”

At some point Mr Nielsen’s new business interest was assigned to the Rosebud Trust. However, payment flows continued to be made directly to Mrs Nielsen.  The basis for the payment flows was unclear and these were variously claimed as advances, drawings, distributions and consulting fees.  There was no oversight or management by the trustee of the Rosebud Trust.

Mr Nielsen’s financial demands and difficult trading led to tension between the business partners; and ultimately a buy out was negotiated whereupon the Rosebud Trust would sell its interests in the business to the joint venture parties.  And the fun began.  The following paras outline the attention to detail evidenced:

“[64] The agreement was signed by all of the named parties.

[65] Mr Whitney purported to witness Mr Nielsen’s signature. Mr Whitney acknowledged in cross-examination that he was not present when Mr Nielsen signed the document. Mr Nielsen signed it in Las Vegas, and Mr Whitney witnessed Mr Nielsen’s signature when the document was later returned to New Zealand. When it was put to Mr Whitney that the words “In the presence of…” required that he be present when Mr Nielsen signed it, Mr Whitney offered the explanation that he had:

taken it to mean also if you know the person’s signature and you’ve discussed it with them and they acknowledge it then that’s fine.

[66] Again, this is far from satisfactory.”

The business experienced further difficulties.  The Official Assignee had some knowledge of the business and due to Mr Nielsen’s involvement, sought to extend the period of his bankruptcy.

So was the trust a sham – and what if it was?

It is a fundamental of trust law that a valid trust requires an intention that there be a trust.  Making it look like a trust, no matter how carefully crafted the deed or the type face, is not sufficient. Control by another person does not of itself provide justification for invalidating a trust – it just means that the trustees are likely in breach of trust. However, evidence of control can be relevant to the question of whether the trust is a sham. If there is a sham, the trust will be void.

Mr Nielsen was found to be a prolific user of trusts.  While nothing should turn on this.  However, it went into the mix and the judge determined that:

“All of this suggests that there was no intention at the outset to create a valid trust. … the intention was to set up a structure behind which Mr Nielsen could carry on a business venture, notwithstanding his bankruptcy, and without his name being in the public domain.”  Further the judge was satisfied that Mr Nielsen in fact controlled the trust – and to be fair, it is difficult to put any other construction on the evidence.  The trust could have been operated as a trust, but it wasn’t.

It is noteworthy that neither Mr Whitney nor Mr Foster were able to provide a single example of a situation where they refused a request or direction from Mr Nielsen, other than, in Mr Foster’s case, in relation to the lodging of the caveat over the stage 1 land. When Mr Foster eventually disagreed with Mr Nielsen over this issue, he resigned from the trust, but again only after first discussing his resignation with Mr Nielsen.  This lack of “push back” as discussed in the Hotchin decision is often illustrative in questions of sham and highlight the need for genuine dialogue by and with trustees or directors of trustee companies.

Out of the frying pan into the fire

“[114] Mrs Nielsen became a director of Rosebud as from 24 July 2012. However, she was clearly not treated by anyone as a proper director or trustee. She had little or no knowledge of the accounts she signed for the Rosebud Trust. She was not consulted over serious queries raised in 2013 by the Official Assignee in relation to the Rosebud Trust.”

Other issues:

  • The trust was virtually ignored at the outset. While it registered for tax purposes with the IRD in late November 2010, it had no bank account. When it did open a bank account, it went into debit because nothing was paid into it, not even the sum of $10 which was, according to the trust deed, the sum initially settled on the trust by Rosebud.
  • Until 8 August 2011, payments made by Hunter Capital Limited were paid direct to Mrs Nielsen, and not via the trust, notwithstanding that those payments were generated by a business venture the trust was supposed to own.
  • There is an almoste complete absence of any resolutions passed by the trustee on any of the key issues.
  • There were no proper financial accounts.
  • Key documents were back dated.

And the real crux of the matter, the agreement that Rosebud Trust purported to sue on, could not be considered as the Trust was a sham and never existed.  Accordingly, the trustee could not sue to protect the Trust’s rights.  The proceedings had to fail.

The judgment is long, runnning to 50 pages.  It is a sorry tale.  Not as rare as it ought to be.  Illustrative reading and a lesson for many beyond the key players.

Ed note:

Since the Rosebud decision was heard proceedings regarding an application to bankrupt Mrs Neilsen have progressed in a similarly shambolic form as attributed to the management of the purported trust. See Developer’s wife, facing bankruptcy, argued wrong court case.

Also note that a subsequent costs award was made in favour of the first and second defendants.  However, as noted in the costs Judgment:

“[3] The first and second defendants in their memorandum observe that the plaintiff company is unlikely to be in a position to meet any costs award without assistance, and they seek the leave of the Court to file an interlocutory application for non-party costs against Mrs Nielsen and Mr Whitney.”

While the court made the costs award, it did not grant leave for an interlocutory application for non-party costs the reason given being:

“[16] In regard to the request for leave to bring costs applications against non parties, I observe that the discretion conferred by s 51G of the Judicature Act and in Part 14 of the High Court Rules permits costs against non parties (Erwood v Maxted [2010] NZCA 93 at [18]; Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC) at 763–764; Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 (HL)). The power to award costs can extend to solicitors. (Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 124, [2011] 2 NZLR 25 at [11]; Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2005] 1 NZLR 145 (PC) at [25(3)]). There is, however, no provision in the High Court Rules that I am aware of requiring the grant of leave before an application for costs can be made against a non party.”

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