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General

Trustees who meddle are not always meddlers

What costs can trustees be indemnified for if their term as trustee has expired without the trustee realising?  If future appointments and other actions of the trust have been done invalidly and require the assistance of the court to validate, can the trustees be indemnified for their reasonable costs from the trust fund?

Apparently yes.

Background

The Burnett family farmed Mount Cook Station and Cox’s Downs Station in the South Island of New Zealand since 1860. In recent years the sole owner was Mr Donald Burnett.

In December 2009, at the age of 94, Mr Burnett made a will providing for the properties to be acquired at current market value by the Burnett Mount Cook Station Charitable Trust (the Trust). Mr Burnett was settlor of the Trust by a Trust Deed made shortly before his will, in November 2009. The purchase price was payable only on demand. The residue of the estate (including the loan to the Trust) would vest in the Trust under the will. The objects of the Trust were, broadly, to preserve the properties’ historical and natural heritage and environmental value for the benefit of the public.

Mr Burnett died the following year.

The initial trustees were Messrs Butterfield and Taylor. As it happened, the transfer of the farming properties from the estate to the Trust did not occur until 30 November 2015. Shortly before that occurred Messrs Butterfield and Taylor purported to appoint Mr Hilson as a third and further trustee. Then in March 2016 they entered into an agreement to sell the properties to a Mr Gould of Guide Hill Station Ltd. In April 2016 they purported to appoint a Mr Askin as a fourth and further trustee. He alone was subsequently appointed interim trustee by the Court in July 2016.

However, Messrs Butterfield and Taylor did not realise that they has a major problem: their terms of appointment as trustees were limited to five years. The terms had therefore expired in November 2014. The appellants (and their legal advisers) had not realised this until early April 2016, after they had entered into the agreement to sell the properties to Mr Gould. Accordingly none of the purported trustees were validly occupying that position at the time.

Editor’s note: always read the trust deed.

A series of applications for orders in the High Court followed.

In May 2016 all four purported trustees brought an application seeking appointment of the new trustees, variation of the objectives of the trust and approval of the sale. In a judgment issued in September 2016 Gendall J held that Messrs Butterfield and Taylor had ceased to be trustees when their term expired and were therefore trustees de son tort (meaning persons who owe fiduciary duties despite wrongfully meddling in trust affairs). Neither of Messrs Hilson or Askin had been validly appointed and Gendall J declined to validate their appointments so they too were trustees de son tort. He instead ordered the Public Trust be appointed as trustee.

The Public Trust ceased the application for variation of the trust objectives but took up the application to validate the sale of the properties. This application proved controversial with a number of parties opposing. The sale was later approved after the terms had been amended.

The appellants, who had commenced the application and had subsequently assisted the Public Trust, applied to be indemnified for their costs. This was rejected by Gendall J on the basis that they either had ceased to be trustees or were invalidly appointed. The Public Trust was entitled to recover its costs but all other costs were to lie as they fell.

The out of pocket non-trustees appealed to the Court of Appeal under the general jurisdiction in equity. The Court of Appeal agreed.

As observed in the judgment of Kós P, the farm properties were loss making and almost insolvent. The purported trustees had entered into the transaction in good faith, not realising their respective disabilities to act.

The decision is interest as the trustees were considered to be “trustee de son tort” As noted at [17] The expression “trustee de son tort” is an archaic law French description for a de facto trustee under an institutional constructive trust. Lord Millett described a trustee de son tort as a person though not appointed as trustee who takes it upon himself to act as such and to discharge the trustee’s duties on behalf of others. Such a trustee is said to closely resemble an express trustee. Indeed Lord Millett called them “true trustees … fully subject to fiduciary duties”.12 That is important because some of the incidents of express trusteeship may then apply to an honest de facto trustee.

While the term trustees de son tort was correct, the common assumption that it refers to a meddler in trust affairs was not the case. It was apt to describe  their position as an intended express trustee whose appointment had failed. They had many of the fiduciary duties of duly appointed express trustees and for this reason the term and “some of the incidents of express trusteeship may then apply to an honest de facto trustee”.

It was agreed that the appellants could not rely on indemnity under the terms of the Trust Deed. This applied only to an express trustee. The Court did muse that costs could have been awarded under s 71 of the Trustee Act 1956, but decided it was unnecessary to use this provision, which  permitted applicants are not strictly limited to express trustees.

Kós P went on to find that “It is one of the fundamental rights of an honest express trustee that costs and expenses properly incurred in the administration of the trust are compensable out of the assets of the trust… The proposition is so fundamental that it need not be justified.” The right was to indemnification for reasonable costs – not an award of indemnity costs. It was open to former trustees to claim such costs from their successors, or else from the court. He also observed that the same applies to constructive trustees, acting reasonably and in good faith, when they incur costs in administering a trust on a de facto basis.

References:

  • Butterfield v Public Trust [2017] NZCA 367
  • Pearce v Pearce (1856) 22 Beav 248, 52 ER 1103
  • Lynton Tucker and others Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [42-01].

 

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