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alter ego trust, Disclosure, Discovery, Settlor; settlors, Trustees, Trusts

It’s my trust and I’ll do as I like

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, …”

Thus commenced Charles Dickens’ novel A Tale of Two Cities, and similarly the mindset of any settlor of a trust confronted with the reality of what it is to have settled a trust and surrendered control.

The background of Vandy v Vandy echoes such a sentiment.  See for example [33], which provides:

[33] They admit that Eric made the statements to Glen and Jane to the effect that the Trust was his Trust and he could do what he liked with it, but say that Eric acknowledges that his statements were made in error, and arose out of his frustration with Glen’s interference in the Trust’s affairs, and pressure and provocation from Glen. The defendants say that Eric is aware of his rights and obligations as a trustee, and that he has always sought legal advice before taking any action. They accept that Glen made a similar statement to Jane, but say that the statement was merely Eric’s expression of his understanding of the office of trustee, and that, as a trustee, he had a discretion to deal with the Trust property in accordance with the Trust Deed.

Significantly in Vandy, the trust in question, the Vandy Family Trust (the Trust), was settled by Mr Vandy and his deceased wife.  However, when Mr Vandy wished to provide for his current wife, the intersection of the terms of the Trust and Mr Vandy’s personal wishes intersected with some discordance.

Editor’s note: it is suggested that this will be a common theme in cases that reaches the courts for the forseeable future.  See for example Buyer’s remorseLoss of Morale and More remorse.

The case reached the court to address in the first instance, discovery issues.  This highlighted, the disconnect between disclosure obligations to beneficiaries in contrast with discovery obligations in accordance with the High Court rules.  The distinction between the two concepts is set out at [89]:

The distinction was noted in Gavin v Powell, where Nation J cited the following passage from Lewin on Trusts:

On the other hand, documents which are normally, or may in the discretion of the court, be withheld under the trust supervisory jurisdiction, may come within the scope of standard disclosure, or a wider (or narrower) order made by the court. Confidentiality may be a powerful reason for refusing or limiting disclosure under the trust supervisory jurisdiction. In general, however, though the court has a discretion, confidentiality, even of third parties, is not a reason for excluding or limiting disclosure or inspection under Part 31 of the Civil Procedure Rules. Further, the rule under the trust supervisory jurisdiction, that the court will not order disclosure in favour of a beneficiary of the trustees’ reasons for exercising a power or discretion, and normally will not order disclosure of documents concerning the trustees’ reasons, does not exclude the obligation to give disclosure of documents under Part 31 of the Civil Procedure Rules in litigation when the validity or propriety of the trustees’ actions is impeached or otherwise some other relief is sought beyond the provision of disclosure itself. Similarly, in such litigation the trustees can be required under Part 18 of the Civil Procedure Rules to provide further information about the reasons, and can be cross-examined at trial about them. (Footnotes omitted)

[90] Nation J also referred to Equity and Trusts in Australia and New Zealand, where the learned authors said:

[40] Yet if a decision taken by trustees is directly attacked in legal proceedings, the trustees may be compelled legally, through discovery or subpoena, to disclose the substance of the reasons for their decision. Moreover, if a plaintiff puts forward a prima facie case that the trustee’s discretion has miscarried, the absence of reasons and the absence of any evidence before the court as to what happened will tend to make that prima facie case “a virtual certainty”. So trustees may be compelled practically to disclose reasons for the decision in issue in order to avoid adverse inferences from being drawn. If the trustees divulge reasons for their decisions, the court may then assess the correctness of the reasoning. (Footnotes omitted)

Matters considered in Vandy v Vandy with respect to discovery included:

  • the relevance of memoranda of wishes with respect to trust property
  • the relevance of a will signed the day a trust was settled as being “more likely than not” to be of assistance.  However, this was not the case with later wills, notwithstanding that the later wills revoked the earlier wills
  • loan terms are relevant, even when not taken out by the trustees where trust property is provided as security for borrowings as this relates to the interests  of beneficiaries that might be prejudiced in the event of default by the borrowers
  • discovery was sought regarding any payments that might have been made to the settlor Eric’s second wife Verna, who is not a beneficiary of the trust.  In this regard it was noted at [104] that:

“The defendants have deposed that there was no Trust bank account, and that expenses on the property have had to be paid by Eric and Verna personally. The Trust had no cash or other assets (apart from the property) from which it could have made distributions. In their affidavit, the defendants attached a summary of rents received from the cottage on the property, and they provided some details of expenses paid by them over the period from 2014 to 2018. In each of those years, the rent receipts were modest (ranging from $2,210 to $9,800), and they were exceeded by expenses. Details of the expenditure incurred in each of those years has been provided, and none of the expenses appears to be excessive or unusual.”

Editor’s note: this raises the question as to what amounts might be owed from the Trust to the settlor and his second wife and highlights the risks to trustees where the trust does not maintain a bank account.  In this regard see [109].

  • the relevance of documents relating to a trustee’s cognitive function
  • fishing expeditions will not be allowed
  • with respect to documents held by other parties that may be confidential or privileged, as noted at [125] “It is not sufficient to make a broad claim of irrelevance, privilege or confidentiality for an entire file – each document needs to be reviewed separately.”

The case is fact specific, but highlights the need (given the costs order in favour of the plaintiffs) to  carefully assess the merit of decisions not to discover trust and related documents.

References:

  • Vandy v Vandy [2019] NZHC 3080
  • Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2014) at [23-099]
  • G E Dal Pont and D R C Chalmers Equity and Trusts in Australia and New Zealand (2nd ed, LBC Information Services, Sydney, 2000) at 622
  • Gavin v Powell [2018] NZHC 2866 at [38] – [42]

 

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