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Rabson v Gallagher – foxes guarding chickens

Rabson v Gallagher & Ors [2011] NZCA 459 provides a useful guidance on how not to manage a trust following the break down of a relationship.  The facts of the case can be summarised as follows:

  • a trust (T1) was established soon after the parties commenced a de facto relationship
  • the ostensible purpose of T1 was to conserve the separate property status of A’s pre-relationship property
  • 2 years into the relationship A won more than a million dollars in a Lotto draw, the money was paid to A and then later tranfserred to T1
  • another trust (T2) of which A and his de facto partner B were both trustees acquired 3 properties, funded by advances from T1
  • following the subsequent break up of the relationship A removed B as a trustee of T1.  At this stage T1’s assets included a significant capital gain that was attributable to the lotto winnings
  • A and B were unable to put personal differences aside and consequently could not act effectively as trustees of T2

The matter ultimately came before the courts.  The result of the trial and subsequent appeals can be summarised as follows:

  • the Court removed both Mr A and B as trustees of T2 and directed the appointment of a professional trustee
  • the parties’ poor record keeping and poor trust management meant that property that otherwise would be reserved to T1 or T2 or the individual parties for the ultimate benefit of one party or the other was all treated as relationship property

The end result was that property that could have been retained by A had to be shared with B.  Further, due to the appointment of an independent trustee neither A or B would be able to determine how T2’s assets should be managed.

Although the trusts were not well managed (the Court of Appeal referring to issues arising from the complexity of the way in which assets were held in trusts and the informality with which these separate ownership interests were treated by the parties), T1 in particular appearing to be under the effective control and management of A, the Court did not consider whether the arrangements to amount to a sham. 

While this might appear perplexing to some observers, the fact remains that although the trusts were not well managed and the duties owed by a trustee were largely ignored, the issue to consider is if the trusts are not a sham what are they?

And the answer is that actually, not being found to be a sham may be a scarier thing, than being a sham.  The reason for this is that if a trust is a sham, matters will be treated as if the trust were never settled and any asset protection etc that was anticipated will not be available.  However, if the trust is not a sham but the “settlor / controller” has treated the trust property as that person’s personal property, that person could be liable to the beneficiaries for breaching the duties owed as a trustee.

Effective trust management is a a complex business and any trustee who deviates from the standard expected of trustees may find that a finding a trust is not a sham is about as bad as things can get.  To date beneficiaries have been pretty slow off the mark.  However, trustees cannot expect this to continue to be the case.

In closing it is also useful to consider comments made by A who said that he regularly used personal money to buy Lotto tickets for the trust.   However, fatal to that argument that any Lotto tickets were purchased for T1 was the fact that there was no evidence that the trustees of T1 ever authorised A to purchase a Lotto ticket or that there was any evidence in the accounts or elsewhere of advances on account of the purchase of Lotto tickets.  The devil is in the detail.  Or in the context of trustees – without a resolution proving that a decision was made by the trustees, all you have is a decision (perhaps) or actions of a lone trustee – and that is a very different thing.

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