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Beddoe Order, Indmenity, Removal of trustees, Trustee liability, Trustee retirement, Trusts, Wills

Myths and liability

Trustees act personally.  As noted in the Supreme Court judgment in Macalister Todd Phillips Bodkins v AMP (emphasis added):

“Liabilities incurred by a trustee in relation to a trust are always the personal liabilities of the trustee … A creditor has a personal right to sue a trustee and to get judgment and make the trustee bankrupt.”

A myth that continues to be perpetrated is that that an independent trustee has no personal liability unless the trustee commits a breach of trust.

Courtney v Pratley dispels this myth, yet again, as well as providing some useful guidance on Beddoe order applications in situations where time is short.

Editor’s note – the decision has been overturned on appeal on its particular facts – nevertheless the decision remains relevant as the risks in this case are as for any other matter where a trustee must decide whether or not to defend a claim.

Background

This case concerns whether it was necessary for Mr Pratley as executor / trustee to take steps to defend a $36,000 claim filed by Mr Steven Courteney for expenses from his father’s estate. Ron Courtenay had died the year before Steven’s mother.  Ron’s estate went to Steven’s mother (Joan) who left her entire estate to Steven’s brother Stuart Courteney.  Steven and his daughter made a successful Family Protection Act claim against Steven’s mother’s estate.

Mr Pratley’s costs were $8,000 on his own account, $29,000 in legal fees and a costs award in favour of Steven of $36,735.80 (making a total of over $73,000).

Steven was claiming $36,000 on account of the cost of providing care for his father.

Mr Pratley was appointed in difficult circumstances where Stuart, the appointed trustee / executor who had failed to act even-handedly in his dual role as trustee / executor and beneficiary.  See Minute of McKenzie J dated 16 April 2015 where it is noted at [2] that “The essence of the issue before the Court at this stage is how best to achieve an “equality of arms” between the plaintiffs and the defendant [Stuart], given the superior position of the defendant which derives from his possession of material and information in his capacity as an executor.” and at [4] “That dual role of the defendant creates a conflict of interest.  The defendant … says that on balance, he does not consider he has a conflict of interest.  That is wrong.  He does.  The conflict is, as a matter of law, inherent in the dual role.”

When appointed, Clifford J said (somewhat appositely) that:

“Mr Pratley’s costs will be payable from the estate.  Mr Pratley will, I am sure, be mindful of the need for proportionality in the steps he now takes as an executor and trustee.”

He wishes.

On appointment Mr Pratley needed to immediately decide whether to defend Steven’s claim on account of his father’s expenses.  Mr Pratley took advice and then instructed Counsel to pursue the former trustee (Stuart’s) defence.

The question for the Court was whether  Mr Pratley’s action were necessary. A trustee is entitled pursuant to s 38(2) of the Trustee Act 1956 for “all expenses properly incurred”.   The corollary of this is that improperly incurred expenses fall upon the trustee personally.  See Re O’Donoghue at [121].

While the court was sympathetic to Mr Pratley’s position in defending the claim, the court’s view was that the defence was not warranted. The claim of $36,000 made litigation over such an amount uneconomic (as was reflected in the costs of the litigation).  The trustee’s obligation to protect the assets of the trust had to be measured against erosion of trust property due to litigation and although Stuart was the sole beneficiary at the time, the merits of the claim by his brother and niece needed to be taken into consideration.  There was an option to consider the claim as ordinary hostile litigation between beneficiaries.

At [46] to [57] Cull J usefully considered whether Mr Pratley should have sought a Beddoe order (which would have determined whether his costs were to be met by the estate).  Notwithstanding the limited time-frame.  The court observed that sections 66 and 69 of the Trustee Act 1956 are intended to provide an “easy method for trustees to obtain directions from the Court in relation to specific matters of trust administration.”  It was suggested that there should be  no impediment to any trustee seeking urgency from the Court when faced with a pressing dilemma such as an impending hearing.

The Court was clear that no criticism was intended of Mr Pratley.  Regardless, the result was that Mr Prately was not entitled to his costs in respect of the proceedings regarding Steven’s costs on account of his father.

Consider the myth busted.  Trustees act personally.  And can be personally liable.  no breach of trust required.

Editor’s note:  This decision was overturned on appeal see Between a rock and a hard place where the Court of Appeal paid careful attention to the relevant time-line and the nature of the claim.

References:

  • Courteney v Pratley [2017] NZHC 1761
  • Courteney v Pratley [2017] NZHC 3285
  • Courteney v Courteney HC Wellington CIV-2013-485-5912, 16 April 2015, Minute of McKenzie J
  • Re O’Donoghue [1998] 1 NZLR 116

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