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Memoranda of Wishes, Settlors, trust, Trustee liability, Trustee Resolutions, Trustees

More trustees sent to the naughty corner

Clement v Lucas concerns a family farming enterprise and illustrates the difficulties when beneficiaries cannot agree on how to give effect to the protections parents have put in place for the benefit of the beneficiaries.

The contest at the heart of the matter was whether the trustees should distribute the trust assets equally between the three children beneficiaries; or whether the trustees should distribute the trust’s assets in accordance with settlors’ memorandum of wishes.  The decision brings the case of Masters v Stewart to mind where trustees’ decision making process was challenged.  See Trustees sent to the naughty corner.

Key points that need to be taken into consideration include:

  • the trust was settled to provide a mechanism to equalise interests between the settlors’ children (to “even the ledger” – significant family assets having already been distributed to one son with smaller distributions being made to the other two children)
  • the trustees took legal advice, which was later found to be incorrect
  • during the hearing although the trustees became aware of information that they were not previously aware of, the trustees’ position remained that equal division of the trust assets was the best course of action
  • the trustees declined to surrender their discretion to the court
  • the deed was in standard from and did not contain any specific purposes
  • the settlors made several memoranda of wishes
  • it was important to the settlors that “each of the family should have a fair share”
  • when new trustees were appointed their review of the historical documents did not include pre-trust correspondence, which amongst other things referenced the settlors’ desire to “even the ledge
  • on 12 August 2016 the Trustees wrote to the lawyers acting,” noting they had met with each of [the three children] and had heard their perspectives on the family history, the background to the acquisition of the Trust properties, the background to the creation of the Trust and the details of the issues that had “brought about a collapse of the family relationship”. The letter stated: “Whilst unfortunate, we do not consider that it is our role to deal with or attempt to resolve the collapse of the family relationship, rather we consider our focus is to deal with the Trust’s property in a manner that takes into account the best interests of the beneficiaries.”
  • On 3 October 2016 the trustees advised the beneficiaries lawyers that “Because it is impossible to reconcile the divergent opinions the trustees have agreed that in the first instance the properties should be sold on the open market, recording that this will not prevent the beneficiaries from participating in the purchase process, and then once the properties are sold the proceeds of sale will be distributed to the beneficiaries in a manner that it yet to be determined.”
  • On 19 October 2016 the trustees sought legal advice advising their adviser that: “We are concerned that consideration of matters pre-dating the creation of the trust would be a breach of our powers as Trustees under the Trust.[Note: The writer considers that consideration of such matters is not possible as the Trustees can only consider matters relating specifically to the affairs of the Trust.]    … We think in general terms that other than allowances for contributions for rates and similar made during the life of the trust that distribution should be made equally between the beneficiaries.”
  • On 25 October 2016 the trustees’ lawyer advised that “In relation to the distribution approach I think that equality is best. I agree that the trustees cannot take into account things which happened outside of the trust.”
  • Orders were then sought by one of the beneficiaries pursuant to s 68 of the Trustee Act 1956
  • The trustees then sought orders pursuant to s 64 of the Trustee Act to sell the properties and divide the net proceeds amongst the beneficiaries equally

A technical point raised at the hearing related to the need when trustees are seeking directions pursuant to s 68 of the Trustee Act to establish whether the power in question is concurrent between the deed and the Trustee Act.

[68] There was no serious disagreement among counsel as to the scope of the Court’s jurisdiction to intervene in the exercise of the Trustees’ discretionary powers. Reference was made to the decision of the United Kingdom Supreme Court in Pitt v Holt  where Lord Walker of Gestingthorpe, for the Court, considered and clarified the “Rule in Hastings-Bass” – which for some years had been taken as authority for the proposition that:

… a trustee when exercising a power (for example) of appointment or advancement shall take into account all relevant considerations and refrain from taking into account any irrelevant consideration, and opens his decision to challenge if he fails to do as so required.

[69] Counsel also referred to the decision of the High Court in Masters v Stewart where Mander J considered the application of Pitt v Holt in a case whose facts had some similarities to the present. As Mander J stated:

[28] The circumstances in which a Court will intervene in the exercise of a trustee’s discretionary power are limited. Trustees, in the exercise of their fiduciary discretion, however, must act in good faith, responsibly and reasonably. The parameters of those obligations require greater definition.

[29] Insofar as it is relevant to the present case, the parties are agreed that the Court will only set aside a trustee’s decision if he or she has considered irrelevant considerations; failed to consider relevant considerations, or reached a decision that is perverse or capricious. …

[70] As Mander J went on to discuss, following the decision in Pitt v Holt there are important qualifications to these statements of principle. In the context of the present case, these qualifications are important.

[71] In Pitt v Holt, Lord Walker undertook a comprehensive review of the origins of the Rule in Hastings-Bass and the way the Rule had developed particularly in cases concerning trusts and tax-planning arrangements where, as Lord Walker noted:6

the arrangements have for one reason or another proved unexpectedly disadvantageous and, and the court has been asked to restore the status quo ante under the Hastings-Bass rule.

[72] It is apparent from Lord Walker’s judgment, notably in his citing of academic criticism of the evolution of the rule in Hastings-Bass,7 that a key consideration in the Supreme Court’s decision was to put limits on a rule that had enabled trustees to unwind transactions to which they had consented but which turned out to have unforeseen tax disadvantages. However, that was only one aspect of the Supreme Court’s criticisms of a Rule the Supreme Court considered had started from a misinterpretation of the original Hastings-Bass decision. In its decision, the Supreme Court clearly intended to offer guidance applicable to challenges to trustee decisions generally and not just to those dealing with taxation issues.

[73] Drawing on the decision of Lightman J in Abacus Trust Co (Isle of Man) v Barr, Lord Walker approved or stated the following propositions about the circumstances in which the courts will intervene to set aside decisions of trustees said to have been made without regard to relevant considerations:

(a) As to whether a trustee’s failure to consider relevant considerations must be fundamental:

… the rule does not require that the relevant consideration unconsidered by the trustee should make a fundamental difference between the facts as perceived by the trustee and the facts as they should have been perceived. All that is required in this regard is that the unconsidered relevant considerations would or might have affected the trustee’s decision.

(b) As to the relevance of the circumstances giving rise to the error by a trustee:

What has to be established is that the trustee in making his decision has … failed to consider what he was under a duty to consider. If the trustee has in accordance with his duty identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations, the trustee can be in no breach of duty and its decision cannot be impugned merely because in fact that information turns out to be partial or incorrect.

In Pitt v Holt, Lord Walker said of the above statement by Lightman J:

That is in my view a correct statement of the law, and an important step towards correcting the tendency of some of the earlier first instance decisions. If in exercising a fiduciary power trustees have been given, and have acted on, information or advice from an apparently trustworthy source, and what the trustees purport to do is within the scope of their power, the only direct remedy available (either to the trustees themselves, or to a disadvantaged beneficiary) must be based on mistake (there may be an indirect remedy in the form of a claim against one or more advisers for damages for breach of professional duties of care).

(c) If the rule applies, a trustee’s decision is voidable:

 

… Lightman J held that in cases where the rule applies … it makes the trustees’ disposition voidable, not void. The Court of Appeal agreed with his analysis and so do I.

[74] I agree with the reasoning of the United Kingdom Supreme Court in Pitt v Holt. Given the absence of contrary authority from the New Zealand Supreme Court or Court of Appeal, I consider that its reasoning should be applied in New Zealand.

[75] The Supreme Court in Pitt v Holt did not consider whether unreasonableness constitutes a separate ground for intervention – in the sense that a court should be prepared to intervene if trustees reach a decision that the court concludes no reasonable trustee could rationally have reached in all the circumstances. As Mander J noted in Masters v Stewart, there have been different approaches on this issue in New Zealand High Court decisions. Following Pitt v Holt and the limits established by the United Kingdom Supreme Court for judicial intervention in trustee decisions, it would seem New Zealand courts should be slow to recognise unreasonableness as a separate ground for intervention if a trustee’s decision is otherwise consistent with the trustee’s duties and within the trustee’s powers.

After discussing the relevant matters the court considered the questions to be decided.

The first question to decide – was it the settlors’ wish that the trust be used to “even the ledger” among the siblings taking pre-trust distributions into account?  The answer to this was yes.   Coming to this conclusion the court referenced pre-trust correspondence and the memoranda of wishes.  Accordingly, the legal advice that this could not be taken into consideration was wrong. As noted at [94]:

“The Trustees acknowledged they did not have regard to the pre-Trust correspondence that explained Walter and Nola’s intentions in setting up the Trust and which referred explicitly to the gifting of 160 acres to Keith, the wish to “even the ledger” by making provision for the other two children, and to the intention to transfer 260 acres to Brian as well as the homestead to Keith. The Trustees cannot be faulted for not considering the correspondence because [the lawyer] had not brought it to their attention. Nonetheless, it was very relevant information, as the Trustees acknowledged in cross examination.”

As noted by the court at [98] “There can be no doubt that the Trustees were under a duty to consider the purposes for which the Trust was established and the intentions of the Settlors even if, as Ms Robertson properly reminded me, the Trustees have a wide discretion in exercising their powers under the Trust Deed. As I have already held, the purposes of the Trust and the intentions of the Settlors included “evening the ledger” among the siblings by having regard to earlier distributions. On its face, failing to have regard to such matters amounts to a breach of the Trustees’ duty. However, following Abacus Trust and Pitt v Holt, that is not the end of the matter.”

The difficulty for the trustees was that while the advice the trustees were given was wrong, the trustees had already communicated their intentions to the beneficiaries before this advice was given, and so could not be said to have relied on it.

The next consideration for the court was whether to set the trustees’ decision aside.  As noted at [104] to [106]

[104] I consider that the circumstances warrant setting aside the initial decision to sell the Trust properties and to direct the Trustees to reconsider both that decision and the decision in principle to distribute the net proceeds equally among the beneficiaries. The decision in principle was predicated on the first decision to sell, so cannot stand – notwithstanding [the legal]  advice.

[105] It is apparent from the correspondence that the Trustees looked at their initial task as essentially limited to three options: implement the Memorandum of Wishes, distribute the assets as proposed by Keith, or sell – although the Trustees said in evidence that there were sub-options within those options. The only one of the three main options reflective of the Trust’s purpose was the first: implementation of the Memorandum of Wishes. But this was not favoured because of costs and, I infer, because it was opposed by Keith. Indeed, the Trustees’ letter of 3 October 2016 says it was the inability to reconcile divergent opinions (presumably on the first and second options) that the Trustees went for the sale option – without acknowledging that Brian was “implacably opposed” to this option.

[106] I recognise the validity of the observation made by the Trustees in their letter of 12 August 2016 to the beneficiaries’ lawyers that it was not their role to deal with or attempt to resolve the collapse of the family relationship. Equally, it was not their role to find a solution that all beneficiaries could accept. Rather, their role was to reach a distribution on the Trust assets having taken account of the Trust’s purposes, which include “evening the ledger” and, in that connection, taking account of earlier distributions – even if that produces a result with which one or more beneficiaries do not agree.

[107] It is not obvious to me that if the Trustees approach the task in that light they will reach the same decision as the one they reached earlier. Having said that, I acknowledge … the Trustees have a wide discretion under the Trust Deed and it cannot be presumed that they would have made any different decision had they taken pre-Trust distributions into account. That, of course, is for the Trustees.

Helpful guidance is then provided to the trustees as to factors to take into consideration.

The result is that the trustees’ decision to sell the trust’s assets and divide these equally amongst the beneficiaries is set aside and the trustees are ordered to reconsider their decision.

Being a trustee is hard.

The case is a worthwhile read and cannot be done justice in this format.  It is necessarily fact and party specific.  nevertheless whether a settlor or a trustee or and adviser to settlors or trustees it warrants a read.

 

 

References:

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