Ouch

In Davis v White (see You aren’t my beneficiary – are you??) a trust was found to have failed by reason of uncertainty.

The second hearing of the matter related to costs and is a sobering tale for trustees.

Mrs White who incurred significant costs (AUD 40,893 and $85,369.50 in New Zealand, plus disbursements) said that the proceedings could have been avoided as early as October 2014 when her Australian solicitors wrote to Mr McNiece, one of the trustees.  In that letter Mrs White’s lawyers advised that “on a proper construction of the terms of the trust,[Mrs White] was the only person to whom the applicants as trustees could pay or apply the trust funds, and that the Masonic Lodge was not an entity to whom the applicants were able to pay or apply the trust funds. The letter took issue with the view expressed in a letter written by the [the trustees’ lawyer] that Mr McNiece as trustee was entitled to distribute the whole of the trust fund to the Masonic Lodge as nominated by Mr White, and that the [trust]did not fail by uncertainty. The open letter proposed as a solution that the applicants should pay the whole of the trust funds to the respondent, and in recognition of the issues raised by the applicants, the respondent would agree to making testamentary arrangements whereby $100,000 of the trust funds remaining on her death would be left by her to a nominated Masonic Lodge in New Zealand and the balance to another not for profit organisation.”

It was also noted by Mrs White’s counsel that the matter was entirely brought about by  the trustees losing the trust deed.  Mrs White’s counsel also submitted that as the trustees “were both unsuccessful in the proceeding and unreasonable in their actions, and consequently should not be entitled to take any expenses relating to the proceedings from the trust funds, either for the purpose of meeting an award of costs, or in respect of the costs they themselves have incurred in conducting the proceedings.”

With respect to defendant trustees paying costs personally, the following, Hammond J noted in Re O’Donoghue at p 122 as follows:

A Court will naturally hesitate before leaving a trustee, who, after all, shoulders an onerous burden, to carry costs personally. But I am afraid that this is such a case: I can see no proper reason for the trustee having adopted the obdurate position he did. He acted unreasonably in the sense that I can discern no proper justification, or even a reasonably arguable one, for his having persisted in forcing Health Waikato up to a full defended hearing, and a delayed distribution of some years of the estate. It cannot be right that he should then seek to offload his costs of the proceeding onto the residuary beneficiary. There will, therefore, be an order that the trustee is not entitled to indemnity from the estate for his costs or disbursements in these proceedings.

Not surprisingly the trustees argued that their position was to protect the settlor’s instructions to them regarding the payment of the trust fund.   With respect to costs the court noted in [15] that:

“In response to the respondent’s application for an order that the applicants disgorge the legal costs already paid by them on behalf of the trust, Mr Gould submits that the applicants have not acted unreasonably, and in fact acted properly and in accordance with the law and established practice. He further submits that the applicants have not themselves profited. He notes that the applicants have paid counsel’s fees totalling $48,500.93 (including GST and disbursements), and that Mr McNiece has unpaid professional fees totalling $19,895.00. Mr Gould questions the jurisdiction of the Court to order the disgorgement sought by the respondent, and says that in any event the circumstances of the case do not warrant what he describes as a “draconian step”. Mr Gould submits that the respondent’s costs appear to be excessive by comparison to the applicants’ costs, and says that should the Court be minded to award indemnity costs, then the applicants seek to have the respondent’s costs revised by the New Zealand Law Society in accordance with the Client Care Rules.

Costs, by way of a refresher, are:

• at the court’s discretion
• increased can be awarded  when a party has acted unreasonably after proceedings have commenced
• indemnity costs can be awarded when a party has behaved badly or very  unreasonably

In the case in hand Davison J found that the trustees acted unreasonably by pursuing and argument into the existence of the trust in question based on a draft deed (for another trust).  As noted by the court at [18]:

“While it is appropriate for trustees to seek directions from the Court, in this case the applicants not only sought to have the RWFT declared a valid trust by relying on a draft document, they also took the position that the whole of the trust fund should be paid to Freemasons New Zealand. This was an entirely untenable proposition, and indeed was in direct conflict with Mr McNiece’s earlier written advice to the respondent following her husband’s death in which he told her that “all the assets in the trust and the estate are effectively yours.” The subsequent steps taken by the respondent to secure the very same position as Mr McNiece had told her she was entitled to, required her to engage solicitors in Australia and counsel in New Zealand, and to defend the proceedings commenced by the applicants in which they argued for a quite different position, namely that Freemasons New Zealand was the proper beneficiary of the trust and was entitled to the whole of the trust fund. This put Mrs White to considerably more expense than would otherwise have been the case at every stage of the proceeding.”

Because the trustees had sought and relied on legal advice the court did not consider an award of indemnity costs was appropriate.  However, the court did think that increased costs were appropriate and awarded a 50% up-lift on scale 2B costs.  Which means what?  At the level of theory scale costs are intended to approximate 2/3rds of costs.  Accordingly an up-lift of 50% would equate to full recover of reasonable costs.  Where does that leave Mrs White, well, maybe not entirely happy.  Her costs total approximately (AUD costs converted at an exchange rate of 1.1)  $130,264 plus disbursements of 1,928.72 total of $132,192.  A 50% up-lift in scale costs still leaves Mrs White to meet over $96,000 of her own costs.

And what about the source of those costs – are these from the trust or the trustees personally?  In this regard Davison J noted at [25] that ” the Court will hesitate before directing a trustee to meet the burden of paying costs personally. Trustees carry a significant burden of responsibility and professional trustees, such as lawyers and accountants, often undertake the role largely as a service to their clients.”  However, in the case in hand ” … the position finally taken by the applicants that Freemasons New Zealand was to be the final beneficiary of the RWFT, was in marked contrast with the position earlier adopted by Mr McNiece that the respondent was entitled to all of the funds. There was no clear explanation for this change of position; although I do accept that the opinion provided by counsel for the applicants supported the position that they ultimately took. I consider that the applicants’ behaviour in relation to the RWFT and the manner in which they brought and conducted this proceeding, together with my finding that the trust is void, leads me to conclude that this a case where the trustees should be ordered to pay costs personally.”

Ouch indeed.

But wait, there’s more. What about the trustees’ costs?  The trustees’ costs amounted to $48,500.93.  With respect to these the court ordered that while the trustees had embarked on the proceedings on an entirely untenable basis (see [28]) they had done so on advice (see [29]) and so this was not a case where the trustees could be considered to be obstructive or unreasonable.  The result was that the trustees were personally liable for half of their own costs (the balance paid or payable from the estate of Rex White (which was where the “trust” fund resulted to.

Costs at the end of the day?

Mrs White: $96,000

Trustees personally: $60, 298

Estate Rex White (effectively Mrs White as she was the sole beneficiary): $24,250

A pretty sorry tale all round; but one that trustees everywhere should consider and reflect on when confronted with challenges as to validity or actions that could be construed as unreasonable.

References:

• Davis v White (Costs Judgment) [2016] NZHC 500
• The Cats’ Protection League v Deans (2010) 20 PRNZ 584
• Re O’Donoghue [1998] 1 NZLR 116
• High Court Rules 2016, r 14.1, 14.6