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Agreement for Sale and Purchase, Beneficiaries, Beneficiary rights, Cases, Limitation Act, Trustee liability

Trustees sent to the naughty corner

Much is written about breach of trust, and the liability that can flow.  However, a sensible question, might be, is a breach of trust always fatal?  Can trustees have a go at getting it right?

As it happens, yes, in some circumstances. as is demonstrated in Masters v Stewart  they can.  In that case, a capital distribution was made to a beneficiary in circumstances where the value of the distribution was not as clear as might normally be the case.

As well as demonstrating how trustees can act in breach of trust when exercising a discretion that they appear to have; Masters v Stewart also highlights (again) the risks that arise where private and trust interests coincide.

Philip, a beneficiary of a trust (“the Trust”), was interested in purchasing a property.  However, it was agreed that the Trust would purchase the property, but that it would be sold to Philip some time in the future for the original purchase price.  Philip made payments over time towards the purchase of the property as well as carrying out work on account of other trust property.  Over time Philip, and later his wife Philippa sought confirmation regarding the purchase of the property.  This was eventually recorded in writing by the advisor trustee.  However, notably there was no agreement that was binding on the trustees.

After some considerable time the property was sold to Philip.    However, the sale was styled as at market price, with Philip owing the difference between the original and purchase price as a debt.  This debt was “forgiven” by the trustees by way of a capital distribution.  The consequences of styling this as a forgiveness were not considered.  What did become relevant was the capital distribution.

This was due to a subsequent distribution of $250,000 being made to Philip’s siblings to equalise the capital distribution to him.

Philip took issue with this contending that the exercise of the trustees’ discretion regarding the distribution to his siblings was neither fair nor rationale and negated the labour and effort he put into the property distributed to him as well as other trust property.  He also submitted that the treatment of the transfer by the trustees was contrary to the agreement he made with his father.  In this regard it is important to note that his father was not a trustee at the time of the agreement, his father had no ability to bind the trustees and no agreement was made with the trustees when the property in question was acquired.  Had agreement been reached between Philip and the trustees at the time the property was acquired, matters might have proceeded somewhat more happily and transparently for all parties.

Although Philip relied upon a number of causes of action (breach of contract, equitable estoppel, constructive trust and breach of duty) only the breach of duty claim had any significant merit as it was the Court’s assessment that only if the trustees made the distribution to Philip’s siblings in breach of trust could a remedy arise to Philip.

Whether Limitation Act issues barred the claim was considered and as Philip is the holder of a future interest in possession (as a final beneficiary) time had not yet run in respect of his action for breach of trust.  See para [19] to [27] for further on this point.

As general observations:

  • there are limited situations where the Court will intervene in the exercise of a trustee’s discretion
  • trustees must exercise any discretion in good faith, reasonably and responsibly
  • the Court will only set aside a trustee’s decision if the trustee has considered irrelevant considerations; failed to consider relevant considerations; or reached a decision that is perverse or capricious (that is the trustee has not acted rationally and in good faith – it is not decided law as to whether trustees must act reasonably).  See [28] to [41]

All parties agreed that and accepted that the trustees had the power to make unequal distributions. The question for determination was whether in doing so

The Court found that the distribution to Phillip’s siblings was the conscious exercise of a discretionary power that was available to the trustees.  Not only did the trustees comply with memoranda of wishes, they also gave the matter their own consideration.

The Court was also satisfied that the reason for the distribution was to equalise the position of Phillip’s siblings vis-a-vis the trust, notwithstanding the Court’s satisfaction that the trustees did consider the relative financial position of all of the children.  The Court was also satisfied that the primary purpose of the distribution was as a consequence of the distribution of the property to Phillip and the perceived benefit to him from this.

At this point it is not looking good for Phillip.  However, one cannot help but have sympathies and wonder how the matter could have been better addressed between the parties.  One significant hurdle to leap is the fact that the beneficiaries of a discretionary trust do not have an “entitlement” to be treated equally.

Fear not, the Court did not leave matters there.  The question next raised by the Court was to whether the trustees discharged their obligations in making the distribution on the basis of accepting Ken’s assessment of the position (Ken being the advisory trustee, Phillip’s father and the original party to the “agreement” with Phillip).

The Court the embarked on a pseudo-forensic exercise to value Phillip’s years of unpaid labour netting this against the benefit to Phillips of living in the property.  While two different approaches were taken the end result was an assessment of a total benefit to Phillip in the range of $155,000 to $176,000.

The effect of this calculation, raised the prospect to the court that the benefit to Phillip was significantly less than the $250,000 distributed to his siblings.

What follows from the failure to consider this is that in making the equalising distributions of $250,000 the trustees failed to accurately assess the true benefit to Phillip in light of the distribution made to his siblings.

The criticism of the trustees being not that they failed to consider a relevant consideration, but rather they failed to take into consideration that they ought to have – that is Phillip’s contribution to the trust.

This inadequate deliberation amounted to a breach of the fiduciary duty that the trustees owed Phillip.

The finding of a breach is essential if the court is to intervene.  It is not enough that a trustee’s action does not have the full effect of what was intended, something more is required: Hastings-Bass.

Trustees are required to use proper care and diligence to obtain relevant information and advice.  However, this standard of proper care does not amount to forensic accounting.  Further, the fact that a decision is later impugned because information is found to be partial or incorrect does not mean that an exercise of a discretion results in a breach of duty.

The difficulty for the trustees here is that they did not directly examine Phillip’s contributions to the trust.  Therefore they failed to take into account a relevant consideration.  While the trustees were entitled to take into account a range of factors such as the siblings’ financial position and the guidance of the advisory trustee “they were also obliged in exercising their discretion, in the terms they sought to be guided by, to take into account Phillip’s contribution to the Trust arising out of the arrangement relating to the property entered into between father and son.”  The Court was not satisfied that the trustees did this or whether they were cognisant of whether Phillip’s work over the years contributed to Trust income.  Although not specifically addressed in the decision, it is assumed that the trustees ratified the agreement between Phillip and his father.

The paucity of evidence from the trustees that they took Phillip’s contributions into account satisfied the Court that the trustees were in breach when exercising their discretion to make an equalising distribution.

The result?  Fortunately from the trustees’ perspective, the trust still has significant assets.  This is not a case where the trustees are liable for their breach.  The trustees have been given the obligation to reconsider the appropriation of capital made to Phillip’s siblings.

Significantly, the Court did not make any finding of entitlement on Phillip’s part, rather the trustees have the option to review their discretion.  No order was made as to costs and the parties were entitled to reach agreement  between themselves.

The disappointing aspect of the decision, which reflects on no party particularly, but is so common in family matters, whether or not a trust is involved, is that better consideration of the outcome of an agreement the trustees appear to have bound themselves to could have clarified the position and expectation of all parties and expensive litigation and the family fall out, might have been avoided.

References:

Discussion

One thought on “Trustees sent to the naughty corner

  1. Very interesting report on a noteworthy case.

    Posted by nzinsurancelaw | October 16, 2014, 1:21 pm

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