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Trustees, Trusts

Breaches of trust will not be rewarded – not even a little bit

The decision in Adlam v Savage, which relates to a breach do trust is a hard read.  However, it is worth persevering to appreciate the practical issues associated with the remedies available when a trustee profits from a trust or fiduciary relationship.

In Adlam v Savage Ms Adlam received over $14 million from exploiting knowledge she gained as a trustee and a fiduciary.  While the breach of trust was eventually conceded, the question or the courts was whether she could retain any gain attributable to her own efforts, and how the disgorgement of profits should me managed in the context of two related trusts.

It is convenient to refer to the judgment for the background facts:

“[1] The proceedings in the lower Court and the present appeals concern whether the appellant, Rae Beverly Adlam (Ms Adlam), is entitled to retain the substantial profits and income she received from spearheading the development of two geothermal power stations on Māori freehold land at Kawerau, in the Bay of Plenty.

[2] Ms Adlam was instrumental in the development of two power stations. The first was developed between 1992 and 1993, and is known as the TG2 power station (TG2). The second was commissioned in September 2008 by Geothermal Developments Limited (GDL), a company established by Ms Adlam. Both power stations are located on a block of Māori freehold land know as the Bath block. In addition, the GDL power station draws its geothermal resource from a well (KA24) located on an adjacent block of Māori freehold land known as the Farm block.

[3] The Bath block and Farm block are administered by separate ahu whenua trusts known as the Bath Trust and Farm Trust respectively. The blocks share substantial commonality of beneficial ownership and Ms Adlam is closely related to the owners. A majority of the trustees of the Bath Trust are also trustees of the Farm Trust. Ms Adlam was a trustee of the Bath Trust during the period in which the two power stations were developed. She has never been a trustee of the Farm Trust though she worked closely with that trust in relation to the GDL development.

[4] Ms Adlam received several million dollars of profit and income from the two power stations. She received $3,584,323 in payments between 1993 and 2009 in relation to the TG2 power station. In 2010 she made an $11,200,000.00 profit from the GDL power station when she sold her shares in GDL.

[5] In 2007 the trustees of the Otonga Whānau Trust, who are beneficial owners of the Bath Trust and Farm Trust, sued Ms Adlam in the lower Court to recover the money she received from the two power station projects. Ms Adlam denied any liability for her role in the two developments right up until the commencement of the hearing in the lower Court.

[6] At the commencement of that hearing Ms Adlam admitted she had acted in breach of her duties as a trustee of the Bath Trust. Consequently, the hearing in the lower Court focussed on the quantum Ms Adlam owed the Bath Trust in relation to the TG2 and GDL developments. As far as the Farm Trust was concerned, Ms Adlam continued to deny any liability to that trust.

Judgment of the Māori Land Court

[7] In relation to the TG2 power station, Ms Adlam and the parties in the lower Court agreed that she must account to the Bath Trust for a net figure (after GST and tax) of $2,440,149.00. However, she argued she was entitled to a developer’s fee or allowance tobe deducted from that sum for her skill and enterprise in advancing the development.

[8] Judge Coxhead declined Ms Adlam’s claim to a developer’s fee or allowance. He ruled that Ms Adlam must compensate the Bath Trust for the entire sum of $2,440,149.00 plus interest at 5% from 12 July 2007, being the date of the commencement of the proceedings, to the date of judgment (totalling $823,550.29)

[9] In relation to the GDL power station, Ms Adlam accepted she was liable to account to the Bath Trust for part of the GDL profit. Consistent with her stance in relation to the TG2 project, she also argued for a developer’s fee or allowance in relation to the GDL project. As for the Farm Trust, she denied any liability to that trust: she was never a trustee, and she disputed she owed or had breached any other duties to that trust. She also disputed that any claim had been properly pleaded in the lower Court in relation to the Farm Trust.

[10] As Ms Adlam was only liable to the Bath Trust in relation to the GDL profit, she argued that the Court was required to determine how much of the GDL profit related to the Bath Trust as opposed to the Farm Trust. She could only be held liable for the amount that related to the Bath Trust. If the Court did not make that determination, the Bath Trust would recover profits that did not belong to it. This is the major issue on appeal.

[11] Judge Coxhead concluded that a claim had not been properly pleaded against Ms Adlam in relation to the Farm Trust for breach of duty or equitable obligation. Therefore the Court was only concerned with quantifying Ms Adlam’s liability to the Bath Trust. For the same reasons that applied to the TG2 project, Judge Coxhead rejected the claim to a developer’s fee or allowance. Of most significance, Judge Coxhead ruled that Ms Adlam had failed to discharge the onus upon her to establish that apportionment of the GDL profit between the two trusts was required. Therefore he ordered that Ms Adlam disgorge the entire $11,200,000.00 profit to the Bath Trust.6

The appeal and cross-appeals

[12] Ms Adlam appeals the order that she disgorge the entire $11,200,000.00 profit to the Bath Trust. She argues that it is necessary for the Court to first establish what proportion of the $11,200,000.00 profit is attributable to the use of Farm Trust assets. That portion is not due to the Bath Trust. It is then necessary to establish who is entitled to that portion of the GDL profit, Ms Adlam or the Farm Trust. If the Farm Trust is entitled to a share of the GDL profit, should she receive an allowance for her skill and enterprise? In the absence of a properly pleaded claim on behalf of the Farm Trust, it was submitted that the proper course is for this Court to remit the matter back to the lower Court with directions to the Farm Trust to particularise and plead its claim.

[13] With respect to the TG2 development, the only substantive issue on appeal was the cross-appeal from four of the trustees of the Bath Trust concerning the date from which interest should run.7 Ms Adlam seeks to uphold the interest award of the lower Court. In addition, Ms Adlam says the lower Court was wrong to characterise her breach of duty to the Bath Trust as “conversion”.

[14] Four of the trustees of the Bath Trust filed a cross-appeal in relation to the award of interest. They say that interest on the income derived from the TG2 development should run from the date the cause of action arose, not the date when proceedings were first commenced.

[15] A separate cross-appeal was filed on behalf of three of the trustees of the Farm Trust. They appeal the lower Court’s finding that Ms Adlam did not owe a duty or equitable obligation to the Farm Trust in relation to the GDL profit. They also appeal Judge Coxhead’s refusal to grant a remedy to the Farm Trust in that regard.”

The decisions

Two fundamental rules of being a trustee are that a trustee must be loyal to the trust and cannot put the trustee’s personal interests above – or in conflict with – those of the trust.  This is the case whether a person is a formally appointed trustee, or otherwise assumes a fiduciary role.  as noted in the decision at [56]

“… although the equitable remedy of account is not concerned with general law issues of causation of loss, it nevertheless operates on the basis that there must be a causal link between the fiduciary’s breach and the principal’s property. We were not referred to (and nor have we found) any cases on all fours with the present case where a fiduciary breaches their duty to one trust and generates a profit that is sourced from the assets of two trusts. Nonetheless, the causal-link principle is clear from the authorities.”

In accounting to the trust for a breach of trust, the remedy is not compensatory in nature.  Rather it redirects the benefit of the breach from the trustee to the trust.

The fact that only one trust plead a breach of trust was a complicating factor in the case, which lead in the lower court to all of the profit going to one trust only.  However, on appeal the court said that the exercise was not “one of apportioning the profit wrongfully earned by Ms Adlam from any personal profit she was entitled to retain”

Rather the correct approach was to establish ” the causal-link between the profit and the breach, that is: how much of the $11,200,000.00 was the Bath Trust’s property? Disgorgement is based on the gain attributable to the trust property misused by the defaulting fiduciary. Identifying the trust property is therefore key to quantifying the appropriate remedy for the Bath Trust.”  This aspect of the matter was remitted back to the lower court to determine and to allow the Farm Trust to properly plead its case for a share of the profit.

The subject of interest was complicated by the period of time since the breach of trust and jurisdictional issues confirmed in the long discussion on this subject from [92] to [132].  As noted by the court in conclusion on that point:

“[131] This was a case of a blatant breach of trust by a trustee with significant influence and control over the trust. The fact that Ms Adlam ultimately admitted liability does not reduce the severity of that breach. She kept for herself money belonging to the trust and its beneficial owners for a period of over 14 years from 1994 to 2008. The trust has not only not received that money, but has not had the use of that money for the entire period. It would simply be wrong for Ms Adlam to retain the benefit of the use of that money by not paying interest on it. Furthermore, it would be contradictory to allow Ms Adlam the benefit of the use of the money in recognition of her contribution to the TG2 development (as argued by Mr Billington QC) when Judge Coxhead quite properly ruled out any developer’s fee or allowance, and Ms Adlam accepted that ruling.

[132] The interests of justice require that Ms Adlam should disgorge all of the money she earned since 1994 from the TG2 power station and pay interest on that money from the date her breaches of trustee duties arose. We will order her to pay interest at the rate of 5% on those sums of money received by her since 31 March 1994.”

The appeal relating to the lower court’s finding of conversion is neatly summarised at [140 where the court state that “We do not propose to say or do anything more on this point. While Judge Coxhead incorrectly labelled the actions of Ms Adlam as “acts of conversion”, the underlying sentiment contained in those paragraphs is correct, which is that Ms Adlam retained for her own use, and failed to account for, monies rightfully belonging to the Bath Trust.”

by way of summary principles illustrated by the decision include:

  • Trustees cannot profit from the role without the beneficiaries’ informed consent
  • Where the breach is serious an expansive approach is taken to the trustee’s liability
  • An account for profits strips the profits from the trustee
  • There must be a causal link for profits to be disgorged
  • Disgorgement is based on the gain attributable to the trust property misused by the defaulting trustee / fiduciary
  • The disgorgement is the remedy for the breach
  • Breaches of trust must be plead for a remedy to be available to the affected trust
  • Breach of trust can represent a criminal offence
  • Where a conflict arises it is not open to the court to consider the overall circumstances – once a conflicted trustee participates in decision making the transaction is void able

References:

  • Crimes Act 1961, s 229
  • Adlam v Savage Maori Appellate Court of New Zealand 2014/1; 2014/4
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