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Vervoort v Forrest [2016] NZCA 375; [2016] 3 NZLR 807; (2016) 4 NZTR 26-017; (2016) 30 FRNZ 790 (4 August 2016)

Last Updated: 1 February 2018

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IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN
 Appellant
AND
 First Respondents
Second Respondent
Hearing:
13 April 2016
Court:
French, Asher and Williams JJ
Counsel:
P T Finnigan for Appellant No appearance for Respondents
Judgment:


JUDGMENT OF THE COURT

A The appeal is dismissed.

B There is no order for costs.
____________________________________________________________________

REASONS OF THE COURT

(Given by Asher J)

Introduction

[1] This appeal arises out of a 12-year relationship between the appellant, Emilie Vervoort, and the second respondent, William Duffy. It follows the delivery of a judgment by Ellis J on 23 April 2015.[1] Ellis J rejected a number of Ms Vervoort’s claims to assets held in Mr Duffy’s family trust, leaving only a small number of assets as relationship property. Ms Vervoort has appealed that decision.
[2] It is a feature of this appeal that Mr Duffy, who had unsuccessfully protested jurisdiction,[2] took no steps to defend the claims in the final hearing in the High Court or in this appeal. The other first respondents, Russell Forrest and Raymond Spears, the former and present trustees of the William Duffy Family Trust, also took no steps, although the former swore an affidavit for Ms Vervoort.
[3] There were four key arguments presented to us on this appeal. First, it was submitted that Mr Duffy’s trust, which owned a very considerable number of assets, was a sham “from inception” or became a sham. The second submission was that the Judge’s determination Ms Vervoort did not have an interest as a constructive trustee in the property of the trust was wrong. The third was that Mr Duffy by his actions created an estoppel, precluding the trust from denying Ms Vervoort an interest in certain assets. The fourth was that, if any of Ms Vervoort’s arguments were established, orders should be made in relation to property.

Background

[4] The William Duffy Family Trust (the Trust) was formed on 1 August 1994 by Mr Duffy as settlor, well before any relationship with Ms Vervoort began. We will refer to the details of the Trust in due course. The original trustees were Mr Duffy and Mr Forrest.
[5] There are no current financial statements of the Trust that have been brought to our attention. However, accounts had been prepared in the past. The Trust has owned, and presumably continues to own, significant assets in New Zealand and Fiji.
[6] Mr Duffy, or the Trust, also has or had other assets including shares in a container business, United Container Services Ltd, shares in a property company, Curries Proprietary Ltd, and shares in other companies including Riverhead Pub Cruises Ltd, Moduco Ltd and Kings Klamps IP Development Ltd. None of these companies or their shareholding have featured in detailed submissions in this appeal.
[7] When Mr Duffy and Ms Vervoort commenced their relationship in April 1999 they both had non-dependent children and their own sources of income and assets. It would seem they commenced living together in about June 1999. From an early stage in their relationship Mr Duffy, who through his Trust had access to significant financial resources, provided the funding for their lifestyle. Ms Vervoort was not in paid employment. In about February 2000 the Trust purchased a lifestyle block in Coatesville, Auckland. It appears to have been the intention of Mr Duffy that this would be his family home with Ms Vervoort. They lived there for a period with two of her sons and one of his.
[8] Ms Vervoort says she helped Mr Duffy find the Coatesville property. There was a cottage on it and she helped to redecorate and refurbish it. She chose the tiles, colour schemes and furniture and established a garden. She maintained the cottage by cleaning it regularly. She also maintained the house and garden, the swimming and spa pools and cared for the animals. She mowed the lawns, fixed the fences and sprayed the gorse.
[9] Mr Duffy did some work around the property but was inhibited by a severe knee problem. In the years that followed Mr Duffy at times referred to Ms Vervoort as his spouse or acknowledged a de facto relationship. Together they went on numerous overseas trips.
[10] However, through the 2000s the relationship appears to have been fraught. There was legal correspondence between Ms Vervoort and Mr Duffy and assault complaints. In 2006 a temporary protection order was made. There were incidents of excessive drinking and violence and the parties had counselling. In early 2008 the Trust purchased an apartment at Marina Point in Denarau, Fiji. They remained partners and began to spend more and more time in Fiji. They both obtained Fijian residency.
[11] Ms Vervoort separated from Mr Duffy in January 2010. She commenced proceedings in the Family Court at Auckland seeking maintenance and relationship property orders. There appears to have been a period of reconciliation during that year when Mr Duffy allegedly promised various things to her, including that he would marry her and that she would receive a “fair” settlement in relation to relationship property issues if she went back to Fiji to live with him.
[12] Throughout 2010 Mr Duffy had protested the jurisdiction of the Family Court to hear the proceedings, claiming to be domiciled in Fiji. The Family Court proceedings were in due course dismissed for want of prosecution in November 2010. Ellis J recorded her understanding that Ms Vervoort did not pursue the claims because of the parties’ reconciliation and the signing of an agreement between her and Mr Duffy.[3] On 17 November 2010 Ms Vervoort and Mr Duffy entered into a formal deed of mutual settlement under which Ms Vervoort was to receive the proceeds of the sale of a property at Orewa and $20,000 (the first agreement). It appears some payments were made under this agreement.
[13] On 6 April 2011 Ms Vervoort and Mr Duffy entered into a further agreement entitled “deed of release” (the second agreement), which was said to supersede the first agreement.
[14] Under the second agreement Mr Duffy paid Ms Vervoort $327,002.17, which constituted the proceeds of the sale of a property at Orewa. This was expressed to be in full and final payment of “her claim against Duffy in respect to her allegations that she has some rights for continuing maintenance or rights to the property owned by Duffy or his trust”. The deed also contained a covenant by Ms Vervoort that she would not bring any further such claim or claims against Mr Duffy. The deed recorded an acknowledgement by Ms Vervoort that she had received and understood legal advice on the matters in the agreement.
[15] The relationship did not heal and the parties again separated. It finally ended in July 2011. Ms Vervoort filed further proceedings in the Family Court at Auckland. It appears some proceedings were also commenced in Fiji. As well as the Family Court proceedings, Ms Vervoort issued proceedings in the High Court at Auckland seeking relief in relation to the Trust.
[16] The trustees then applied to have the claims against the Trust dismissed because the second agreement was a complete answer to the claims, and because the second agreement was entered into in Fiji where there were proceedings that provided the proper vehicle for determining the dispute. It was also asserted that the property alleged to be relationship property was not held by Mr Duffy personally but by his Trust. This application was dismissed by Associate Judge Sargisson, who found that New Zealand was the appropriate forum.[4] The Judge found Ms Vervoort did not have a seriously arguable case based on a constructive trust, but that it was seriously arguable the Trust was a sham. If the Trust was a sham, the property held in the Trust could be relationship property. The judgment recorded it was conceded by Mr Duffy’s counsel at the hearing that it was at least arguable the second agreement was voidable for duress.[5]
[17] In January 2014 Ms Vervoort successfully applied to transfer the Family Court proceedings to the High Court.[6] On 5 March 2014 the transferred Family Court proceedings were consolidated with the High Court proceedings. This consolidated proceeding was heard and determined by Ellis J.
[18] In both the High Court proceedings and the Court of Appeal, Mr Forrest entered no appearance. Through his counsel he filed a memorandum advising he would abide the decision of the Court, on the basis that if any judgment was entered against him it would be limited to the assets of the Trust. Mr Duffy has filed no documents in this Court.

The High Court judgment

[19] In the High Court Ellis J held the first and second agreements could be regarded as unconscionable or entered into under undue influence or duress. Each was therefore prima facie voidable.[7] Ellis J did not regard Ms Vervoort’s acceptance of the monies owed under those agreements to be an affirmation of them, as the undue influence continued to be exercised.[8] She concluded that Ms Vervoort was not barred by the agreements from bringing her claims. Needless to say, Ms Vervoort has not challenged this finding on appeal.
[20] Ellis J proceeded to consider the merits of the claims under the Property (Relationships) Act 1976 (the Act) and the claims against the Trust, and after a full analysis determined the Trust was not a sham.[9] She considered the alternative submission that Mr Duffy held half of his personal assets and half of the Trust’s assets on constructive trust for the benefit of Ms Vervoort and rejected that argument. She concluded it would not be reasonable to expect the trustees to yield to Ms Vervoort an interest in the Trust property having not discussed her interest in the property at all, or to do so on the basis of any representation made by Mr Duffy in his personal capacity.[10] With the Trust intact, there were only small items of property owned personally by Mr Duffy that might be considered to be relationship property.
[21] Ellis J noted that, accepting there was relationship property, the money Ms Vervoort had undisputedly received under the second agreement (approximately $327,000) dwarfed the value of her half-share in these lesser assets. Indeed, if she avoided the two agreements she faced the prospect of being found to owe Mr Duffy money.[11] Ellis J also questioned whether some of the more substantial Trust property could be relationship property even if the Trust was set aside. It could be traced back to pre-relationship property and might remain separate. The Judge considered it unnecessary to carry out the exercise of determining the value of the relationship property, noting in addition that any claims regarding Fijian immovables would have to proceed in Fiji.[12] She also refused to make any maintenance orders, given the monies Ms Vervoort had received.[13]
[22] Ellis J ended her judgment with the invitation that if Ms Vervoort wished to avoid the agreements and pursue her claim to the small number of assets that were accepted in the judgment as relationship property and her claim for maintenance, she was to advise the Court by way of memorandum so the appropriate orders could be made.[14] In all other respects her claims were dismissed. Ms Vervoort then lodged this appeal.
[23] It is necessary therefore to determine whether Ellis J was correct in her decision rejecting the sham, constructive trust and estoppel arguments.

First argument — there was no trust, and the trust documents were a sham

[24] It was Mr Finnigan’s argument that the Trust was a sham and that as a consequence some of the property owned by the Trust fell within the classification of relationship property under the Act.
[25] A sham trust arises where the trust structure that was set up was not intended by the parties who set it up to create the rights and obligations of a trust. It was stated by the majority of the Supreme Court in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue:[15]

In essence, a sham is a pretence. ... A document will be a sham when it does not evidence the true common intention of the parties. They either intend to create different rights and obligations from those evidenced by the document or they do not intend to create any rights or obligations, whether of the kind evidenced by the document or at all. A document which originally records the true common intention of the parties may become a sham if the parties later agree to change their arrangement but leave the original document standing and continue to represent it as an accurate reflection of their arrangement.

[26] This approach was recently adopted by the Supreme Court in Clayton v Clayton [Vaughan Road Property Trust].[16] The intention to create different rights and obligations must be held subjectively by those creating the trust.[17] For the Trust to be a sham, it must be shown that when Mr Duffy settled the Trust in 1994 he had no intention of setting up an operating trust.

The Trust at its inception

[27] The Trust deed has the following key features:
[28] Ellis J found there was no real evidence to suggest Mr Duffy did not have an intention to create a valid trust in 1994.[18] We respectfully agree. While, as we shall set out, Mr Duffy appears to have exercised de facto control of the Trust, at the outset he ensured a co-trustee was appointed, Trust accounts were prepared, properties were purchased in the name of the Trust, and by and large the formalities of a trust structure were put in place and retained. There was nothing to indicate a lack of intention to create a real trust, although we have no doubt Mr Duffy intended to control it. At the present stage New Zealand law does not recognise that the de facto control of a trust by a single trustee, who is also a beneficiary, creates a sham even if the other trustees are clearly not involved.[19]

The Trust after inception

[29] It was observed by the Court of Appeal in Official Assignee v Wilson that once a trust has been validly created and the beneficiaries have an interest, that cannot be easily undone: “[u]nless the later appearance of a sham can be traced back to the creation of the trust, the trust remains valid”.[20] The Court went on to say that while the originally valid trust would remain, there could be later sham transactions that would be invalid.[21]
[30] As already noted, it was said in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue that:[22]

A document which originally records the true common intention of the parties may become a sham if the parties later agree to change their arrangement but leave the original document standing and continue to represent it as an accurate reflection of their arrangement.

[31] Mr Finnigan submitted that if the Trust was not a sham from its inception, the concept of an “emerging sham” should be accepted and applied to the Trust. He pointed out that Mr Duffy did not take any particular steps to disprove the allegation of a sham and adopted a blocking approach to a proper consideration of the issues, including failing to meet his obligations on discovery and protesting jurisdiction. Mr Finnigan submitted this supported the inference of a sham.
[32] In support of that submission, Mr Finnigan referred to a situation where a launch “Slainje” was purchased. The boat was first placed into the name of Mr Forrest as trustee, without informing Mr Forrest of the purchase. Then when it came to importing the boat into Fiji and avoiding import duties, Mr Duffy removed Mr Forrest as the owner and placed the boat in the name of his son Edward. In an affidavit he filed in the High Court of Lautoka, Fiji, seeking an interim injunction to prevent Ms Vervoort removing chattels and personal effects, Mr Duffy asserted that the chattels belonged to him personally, whereas they belonged to the Trust. In a statement of claim in the Fiji proceedings, Mr Duffy asserted his apartment in Marina Point and the launch belonged to him, whereas they were shown in the accounts as Trust property. Mr Finnigan asserted these actions showed a subjective intention that the assets belonged to him and not the Trust.
[33] The first trustee, Mr Forrest, has filed an affidavit deposing that, while he was aware he was appointed a trustee, he had little knowledge of the Trust finances. Although on occasions at the early stages of the Trust’s existence he did carry out some tasks, in later years he was never consulted or asked to approve payments made by cheque by the Trust. He never met the Trust’s accountant Ms Nye. He does not seem to have been aware of the Trust’s major purchases. Following the filing of court proceedings, he resigned on 25 November 2010 and was replaced as a trustee by Mr Spears.
[34] Ellis J found that at times Mr Duffy may have used his name and the Trust’s name interchangeably.[23] For example, when a property in Orewa was purchased in 2007 the named purchaser was Mr Duffy personally, but the registered proprietor became the trustees, and the purchase was funded by the Trust.
[35] Mr Finnigan pointed to the fact that when Mr Forrest resigned in 2010 and was replaced by Mr Spears, Mr Duffy took an irrevocable power of attorney dated 6 December 2010 from Mr Spears. That authorised Mr Duffy to execute all documents on Mr Spears’ behalf for the purposes of the Trust, and Mr Duffy was given wide powers to do all things necessary to deal with Trust property by Mr Spears.
[36] It may be a situation could arise when an originally valid trust becomes a sham because there has been a deliberate change in the trust arrangement so that it no longer has any of the characteristics of a trust, and the use of the trust name has become a deliberate pretence of a trust arrangement. However, there are conceptual difficulties with this, summarised by Jessica Palmer in her article “Dealing with the Emerging Popularity of Sham Trusts”, and we do not need to determine the question in this appeal.[24] The facts relied on by Mr Finnigan do not show such a deliberate pretence being created or developing. Mr Duffy undoubtedly exercised de facto control of the Trust, and at times was at the very least careless as to how he described items and acted, revealing the fact that he effectively controlled all the Trust assets. This did not show any deliberate creation of a deception. To the contrary, the Trust in fact did continue to own all the assets and show the features of a trust. The transaction with the launch may have involved a fiction, but the fiction was that Mr Duffy’s son Edward was shown to own it rather than the Trust. The true position appears to have been that the Trust still owned it.
[37] We do not consider that there arises any so-called “illusory trust” or “alter ego trust”, terms that have been used in some cases.[25] As this Court stated in its decision in Clayton v Clayton “[t]here is either a valid trust or there is not”.[26] There is no room for an illusory trust, unless the phrase is treated as meaning no trust at all.[27] There is either a trust or there is not, and there can be no half-way house, where there is a trust but it is not to be regarded as like other trusts because of the extent of the control of a single trustee.[28] Clayton v Clayton [Vaughan Road Property Trust] shows a remedy can be available if the trustee’s powers to appoint are so extensive they can be treated as relationship property.[29]
[38] We conclude Ellis J was correct when she rejected the argument that the Trust was or became a sham.
[39] Mr Finnigan did not seek to apply the reasoning of the Supreme Court in Clayton v Clayton [Vaughan Road Property Trust], that where a trustee had an unfettered ability under the provisions of the trust to apply the trust capital and income to his or herself to the exclusion of other beneficiaries, this would be relationship property. We note there are significant differences between this trust deed and the deed in Clayton v Clayton. The trust deed here, unlike that in Clayton v Clayton, was created long before the parties’ relationship began. It did not provide a way for Mr Duffy to act without the fetter of fiduciary duties. Alone, he did not have an effective general power of appointment. There was a second trustee and, although Mr Duffy as settlor could choose the identity of trustees, Mr Duffy was prohibited by the trust deed from making himself the sole trustee. He could not appoint and remove discretionary beneficiaries, although the trustees could nominate any additional beneficiaries. The fact Mr Forrest, in breach of his obligations as a trustee, left the management of the Trust to Mr Duffy did not make the Trust expire. However, it could give rise to other remedies, such as a claim for breach of trust or negligence (which were not argued), and a claim based on constructive trust, which was argued and to which we now turn.
[40] If the argument that the trust was a sham had succeeded we likely would have remitted the case back to the High Court to allow a full property analysis. However, it has not succeeded.

Constructive trust

[41] In the High Court both Associate Judge Sargisson[30] and Ellis J rejected Ms Vervoort’s claim that the trustees of the Trust had created a beneficial interest on Lankow v Rose principles over the Trust assets in Ms Vervoort’s favour.[31] Ellis J held that:[32]

... any determination that it would be unconscionable for the trustees not to yield Ms Vervoort an interest in property held by the trust would squarely violate orthodox trust principles of unanimity and nondelegation ... .

[42] Ellis J distinguished the Court of Appeal’s decision in Murrell v Hamilton,[33] on the basis there was clear evidence in that case that the independent trustee had “abjured his responsibility” to the other trustee, whereas in Ms Vervoort’s case, rather than there being a decision to defer in relation to a particular acquisition, there was a complete abstention from all decision-making by the other trustee.[34] Mr Finnigan argues this conclusion was wrong, and that Mr Duffy holds half of his personal assets and half of the Trust assets on a constructive trust for the benefit of Ms Vervoort.

Constructive trust principles

[43] Prior to the 2002 amendments to the Act that extended its provisions to de facto relationships, the New Zealand courts developed the proposition that the unconscionable assertion of ownership by one partner in a relationship to property to which the other partner had contributed could be treated as giving rise to a constructive trust.[35] Cooke J, in an early decision developing the concept, observed in Hayward v Giordani:[36]

The law of unjust enrichment — and the principles of equity more generally — cannot have ceased growing at some climatic date in England, any more than tort law stopped before Donoghue v Stevenson.

[44] Richardson J in his short judgment in the same case noted:[37]

There is considerable force in the argument that given the realities of contemporary family life the property interests of parties who have been cohabiting together outside of marriage should not turn on an elusive and often vain search for indications of a common intention in relation to the property; and that there should be room in the evolution of equitable principles for the imposition of a constructive trust to reflect the direct and indirect contributions of the parties to the property which they have when they cease to live together.

[45] The constructive trust in de facto relationship claims was developed along these lines, and the specific requirements were ultimately set out in the Court of Appeal decision of Lankow v Rose, where Hardie Boys J stated:[38]

It is however important that whatever the legal rubric there should be clear criteria for the imposition of constructive trusts in the area of de facto relationships. These will necessarily involve a value judgment, but there is nothing unusual about that.

The essential requirements I see to be twofold: that the plaintiff contributed in more than a minor way to the acquisition, preservation, or enhancement of the defendant’s assets, whether directly or indirectly; and that in all the circumstances the parties must be taken reasonably to have expected that the plaintiff would share in them as a result.

[46] Tipping J summarised the four key features as follows:[39]

Before discussing further the question of contributions, I summarise what the de facto claimant must show:

1. Contributions, direct or indirect, to the property in question.

2. The expectation of an interest therein.

3. That such expectation is a reasonable one.

  1. That the defendant should reasonably expect to yield the claimant an interest.
[47] It is clear the contributions need not be money and can be other services, and that there has to be a causal relationship between the contributions and the acquisition, preservation or enhancement of the owner partner’s assets. A claim to a constructive trust is a proprietary claim and the contributions have to be made to assets, but not necessarily particular assets. The contribution can be entirely indirect, for instance, a contribution to groceries by one partner while the other partner pays the mortgage.[40] The claimant has to show a reasonable expectation of an interest in the assets. This was a significant development in contrast to the continued position in England, where the proprietary basis of a constructive trust has been seen as requiring, first, a common intention that one partner have a beneficial interest, and, more prohibitively, a value contribution to the specific property itself.[41]
[48] Lankow v Rose and the other decisions that developed the constructive trust in this area do not discuss a situation where the home or other asset that was the subject of the constructive trust was itself owned by an express family trust. That issue has arisen on occasions in New Zealand over the last 15 years, as family homes are owned with increasing frequency by a family trust, which may be immune from direct attack under the Act. Where one partner has de facto control of the trust and Lankow v Rose contributions and expectations have arisen the noncontrolling partner may be forced to claim against the trust itself if any share of the assets is to be obtained.
[49] In Re The Motorola New Zealand Superannuation Fund (which was not a de facto relationship case) McGechan J did not accept there was an absolute rule or principle under which rights and obligations under an express trust can never be subjected to a constructive trust.[42] He observed:[43]

Equity operates on conscience. Traditionally, equity operated to mitigate the rigour of absolute rights and obligations at common law. At least equally, equity should operate to mitigate the rigour of any absolute rights and obligations arising under equitable creations such as express trusts, and where necessary, as may be so in the absence of other applicable equitable doctrines, by the imposition of a constructive trust. More usually perhaps, other equitable rules will suffice, but there is no reason to exclude in principle the constructive trust tool.

[50] He thought such a situation would not often arise and that it would take something exceptional before the trustee acted “unconscionably” in following the trust.[44] He then proceeded to analyse whether in that case the conscience of the trustees obliged them to depart from the terms of the express trust, and held it did not.[45]
[51] This issue of a constructive trust claim against an express trust has arisen in a number of High Court decisions, where it has been accepted that, in a family context, there could be a constructive trust arising in relation to property owned by an express trust.
[52] In Prime v Hardie, decided in 2002, Ms Prime asserted a constructive trust interest in the family home based on contributions she had made during the course of the relationship.[46] The home was owned by Mr Hardie’s family trust. Salmon J found the trust was effectively Mr Hardie’s “alter ego” and that the other trustee (a company) left matters to him.[47] He could see no reason why a constructive trust should not be imposed upon a property owned by a trust in those circumstances.
[53] In Glass v Hughey there was a de facto relationship and Ms Glass had made contributions to Mr Hughey’s business, enhancing his assets.[48] Ms Glass had a reasonable expectation of an equitable interest. The contributions were made to a company, but by the date of separation the company had been sold to the trust. Priestley J held an interest arose directly against the company, but could also be traced to the trust, observing that the trust should be regarded as a sham or more particularly the husband’s “alter ego”.[49]
[54] In C v C a married couple farmed a property owned by the trustees of a trust settled by the husband’s grandfather.[50] Following separation the wife successfully claimed an interest in the farm. The trustees had left the management of the affairs of the farm entirely to the husband and promised him he would have the farm. He and his wife did work on developing the farm. A constructive trust was found to have arisen between the husband and the trustees. The increased value of the husband’s separate interest in the farm under the constructive trust was treated as property under the Act.[51]
[55] In Marshall v Bourneville, a decision of this Court, the appeal concerned a caveat lodged in relation to an intended constructive trust claim.[52] The Court allowed the appeal and ordered that the caveat not lapse. The Court noted there was no case in which a New Zealand court had declined to grant relief against assets owned by a trust in which an expectation of an interest had been demonstrated.[53] The Court in that case reviewed all the relevant New Zealand cases and stated:[54]

Like the High Court Judges in these cases, we see no reason why, in a proper case, relief by way of a constructive trust should not be ordered against trust property. It seems to us that such an outcome might reasonably be available to Ms Marshall. On her case, an expectation of an interest in the Symonds Street property arose when it was acquired by Mr Bourneville. We see no reason why that expectation should not survive the transfer of the property to the trustees. Mr Bourneville, as settlor and trustee, obviously would have had knowledge of the circumstances giving rise to the expectation. In such circumstances, Ms Marshall could well be able to establish that a trust was impressed on the property and the trustees should reasonably expect to yield to her an interest in the property.

[56] The most recent Court of Appeal decision is Murrell v Hamilton. In that case it was said:[55]

We see no reason in principle why a constructive trust claim should not succeed in respect of a property owned by a trust. Such a claim succeeded in Prime v Hardie.

[57] In Murrell there were two trustees, Mr Hamilton and a co-trustee Mr Mirkin. Mr Mirkin was a partner in a firm of solicitors. However, Mr Mirkin had at the relevant time ceased to have any active involvement in the trust and knew little of its activities.[56] In doing so Mr Mirkin had essentially abjured his trustee responsibilities in favour of Mr Hamilton.[57] He had allowed Mr Hamilton to bind the trustees to contracts, and so Mr Hamilton’s actions were treated as the actions of both trustees, at least in relation to contract counter-parties. The Court of Appeal held, taking a different view of the facts from that of Panckhurst J:[58]

In that unusual factual situation, we consider it would be unconscionable for the trustees to deny Ms Murrell’s claim based on the expectation stimulated by Mr Hamilton on behalf of the Trust.

[58] The Court went on to hold:

[30] We emphasise that allowing Ms Murrell’s claim does not alienate Trust property, that is it does not take away from the beneficiaries of the Trust something to which they are entitled. Rather, it means a part of the value of the Trust’s property which should not accrue to the Trust does not accrue to it. Allowing Ms Murrell’s claim averts the unjust enrichment which would otherwise result to the Trust — essentially the Trust getting $37,500 for nothing — a windfall.

[59] The High Court in Judd v Hawke’s Bay Trustee Company Ltd followed Murrell v Hamilton.[59] A wife sued the trustees of her husband’s trust for a 40 per cent share of the property they occupied during their marriage on a Lankow v Rose basis. Williams J considered each of the Lankow v Rose factors in turn, and some of the cases cited above. The corporate trustee was a far more “hands on” trustee than that in Murrell v Hamilton, but had left all matters of maintenance and upkeep of the house entirely to the husband trustee and had delegated the trust’s decision-making in that area.[60] Williams J therefore allowed the claim, having found the claimant was entitled to expect a modest share in the house and that it was reasonable for the the husband to yield such a share.[61]
[60] Mr Finnigan invites us to follow the Murrell v Hamilton reasoning and to find a constructive trust in Ms Vervoort’s favour.
[61] Because Mr Duffy has not appeared at this hearing we have not had the benefit of submissions challenging the constructive trust claim. However, it is necessary to consider two objections that can be raised to a finding there is a constructive trust on an express trust. The first is, as Ellis J commented, that there is no unanimity of trustees, given the lack of involvement of Mr Forrest and then Mr Spears, and the prohibition on trustee delegation. Ellis J did not feel able to find unanimity of trustees sufficient to make it equitable the Trust was obliged to Ms Vervoort. She stated:[62]

To do so would be to conflate the evidence that the trust is the alter ego of Mr Duffy with evidence that there was unanimity between trustees. That equation is untenable. In my view, any determination that it would be unconscionable for the trustees not to yield Ms Vervoort an interest in property held by the trust would squarely violate orthodox trust principles of unanimity and non-delegation, the importance of which have been reiterated on numerous occasions by the Court of Appeal.

[62] We are respectfully unable to agree with this reasoning. The Judge was quite right in acknowledging the traditional trust principles of unanimity and nondelegation,[63] but those principles must bend to the practical realities when one trustee is in absolute control of all trust activities and the other trustees have effectively abdicated their trustee responsibilities. Any other conclusion would mean settlors, who appointed themselves as trustees, would be able to take advantage of their own wrong in failing to ensure the trust is properly administered by all trustees. The trust would get a windfall, not available but for the use of the trust format.
[63] While traditional trust principles require unanimity and non-delegation, the Court’s approach to trusts must, as the recent cases show, meet the reality of how property is owned in New Zealand. In 2013 there were estimated to be between 300,000–500,000 private trusts in New Zealand.[64] It seems likely a good portion of New Zealand’s real estate is now held in discretionary family trusts of the same type as the trust created in this case.
[64] Prime v Hardie, Glass v Hughey, Marshall v Bourneville and now Murrell v Hamilton can be seen as the application of established Lankow v Rose principles to this reality.[65] In a case like this, where one relationship partner is in control of the trust, under the present state of New Zealand law there is a valid trust. However, that controlling partner cannot avoid equitable constructive trust obligations by relying on the prohibition on delegation and the lack of consent from the other trustee, whom that controlling partner has deliberately isolated from trustee functions. To allow that would be to allow a trust principle to operate as a weapon for inequity. The deliberate exclusion of other trustees from a role in managing the trust cannot be invoked to create an injustice.
[65] It was stated in Lankow v Rose that in equity the conscience of the legal owner is required to acknowledge the other party’s beneficial interest in the property.[66] In this case not only is the conscience of Mr Duffy affected but in a different sense so is the conscience of the other trustee, Mr Forrest, and then Mr Spears, who both gave Mr Duffy carte blanche to do as he wished with the assets of the trust. While they have no knowledge of the situation arising that puts claims on the Trust, the consciences of Messrs Forrest and Spears are “activated” by their practical surrender of their trustee role to Mr Duffy.
[66] The other main objection to imposing a constructive trust on an express trust relates to the property rights at the heart of the trust concept. The concept of a constructive trust being created by trustees over the assets of an express trust has been roundly criticised in New Zealand.[67] Traditional trust principles provide that the trustee holds the property on behalf of the beneficiaries and so require trustees to not yield trust property to third parties. It can be argued that creation of a constructive trust over express trust assets involves a trustee unilaterally redistributing the property rights at the expense of existing beneficiaries. It has been said:[68]

All of the beneficiaries acting together could have authorised the granting of a beneficial interest to the claimant, but their rights and expectations are not considered in any of the cases.

[67] However, as was pointed out in Murrell v Hamilton,[69] in a successful Lankow v Rose constructive trust claim there will have been contributions to assets of the trust by the claimant, and the trust assets will reflect the value of the contributions. Thus, existing beneficiaries are not being deprived of assets or increases in the value of assets that they would have otherwise enjoyed.
[68] The alternative of allowing the trustees to take advantage of trust principles to deny those who have enriched the trust is not acceptable. As was observed in Hayward v Giordani the function of the courts must be to “develop common law and equity so as to reflect the reasonable dictates of social facts, not to frustrate them”.[70] Although remedies against the trustees could be an alternative means of redress, as it has transpired the constructive trust has developed as the primary mechanism of protection. At this stage unjust enrichment concepts have not been developed as an alternative route for partners who are deprived of their contributions to assets in this way. The New Zealand courts had the option of going down that route but have chosen to develop the constructive trust to compensate Lankow v Rose type claimants. In effect, the Lankow v Rose constructive trust prevents an unjust enrichment from occurring. A Lankow v Rose claimant’s position is entirely different from that of a contractor. A contractor has a contract and corresponding contractual remedies and the relationship of trust does not arise.
[69] Although there may also be conceptual objections to allowing a trustee to bind the trust with the effect of giving third parties expectations over property held for beneficiaries, in a Lankow v Rose constructive trust there will be contributions to trust property. Those contributions can be expected to be reflected in increases to the value of trust assets or the preservation of value that would otherwise decrease. Equity would not intervene if the effect of recognising a constructive trust would be to reduce the corpus of trust property. It is only the increase or preservation of value corresponding to contributions from the claimant that are to be compensated.
[70] It is acknowledging the reality of the New Zealand trust landscape as it has developed that has justified the recognition of the constructive trust beneficiary’s claim. It is a further reality of that landscape that the trustees of family discretionary trusts are more often than not the beneficiaries of those trusts and in control of them.[71] It is common in many trusts in New Zealand “for the settlor to retain some extent of control or to vest that control in someone other than the trustee”.[72] The effect is that the reality of a trustee’s ability to give a third party expectations (in return for that third party’s contributions) over trust property, which that trustee deals with as if their own, must be recognised. There is no misappropriation of property in that the beneficiaries of the express trust have no claim in conscience to the increases in value resulting from the contributions. Beneficiaries cannot expect trustees to retain for them an unearned benefit, extracted by expectations engendered by the trustees. The express trust beneficiaries should reasonably expect to yield the third parties an interest.
[71] We see recognising the trustees’ ability to hold trust property on behalf of a third party in particular circumstances as a natural application of the Lankow v Rose principles. As noted, those principles go further than the comparable English constructive trust cases. They already partly eschew a traditional property rights analysis as a partner’s contribution creates a right against the defendant’s property generally, rather than by way of specific proprietary right. A constructive trust over assets held by a trustee, over which he or she has effective control, can be created by the Lankow v Rose factors.
[72] We proceed therefore on the basis there is no bar to Ms Vervoort’s constructive trust claim. To this extent we disagree with Ellis J.

Is a constructive trust claim made out?

[73] Mr Finnigan in his submissions did not place a possible figure on Ms Vervoort’s claim, but rather listed the property and Trust property that he submitted was relationship property. He proposed that, should his arguments succeed, the case should be remitted back to the High Court for a property relationship analysis.
[74] We have already summarised the evidence concerning Ms Vervoort’s contributions. Her assertions as to what she did lack detail. There was her assistance in finding the Coatesville property, her assistance in redecorating and refurbishing it, and general maintenance work. No attempt was made in her evidence to show any increase in the value of Trust assets or the extent of it. Recognising we are sitting on appeal, we consider it clear that her work and help did not constitute any great contribution to the value of the assets in question. It is clear Ms Vervoort had the benefit of living in houses or apartments owned by the Trust throughout much of the period of their relationship, and enjoyed extensive travel. She was not in a position to put money into Trust properties, and her other contributions were limited. Mr Duffy was at least partially retired and there is no indication her support of him (such as it was in their fraught relationship) assisted him in building or maintaining his assets.
[75] We have accepted a constructive trust can arise in this case, and that applying the Lankow v Rose criteria a claim against the Trust was theoretically possible. However, the work Ms Vervoort did, in our assessment, was of a cosmetic nature. There is nothing to show contributions that significantly added value. We are left in no doubt that any entitlement under a constructive trust in Ms Vervoort’s favour would be less, and in all likelihood significantly less, than the settlement of $327,002.17 she has already received. We do not consider that at a further High Court hearing there would be any chance of a different view being reached. We have all the evidence before us. For that reason, her constructive trust claim must fail.
[76] Mr Finnigan also submitted Ms Vervoort’s evidence she went to Fiji to live with Mr Duffy at his property at Marina Point on the promise of a fair settlement and that there would be no violence meant the trustees should reasonably expect to yield Ms Vervoort an interest in the property. There was also evidence she returned to him in March and April 2010 and abandoned her Family Court proceedings in Auckland on the basis of similar assurances.
[77] We are unable to see how such loose statements by Mr Duffy, which did not lead to any direct or indirect contribution to property by Ms Vervoort, could have given rise to a constructive trust. Lankow v Rose trusts do not arise from general promises. They arise in relation to contributions to assets and expectations created during that process.

Estoppel

[78] As far as the promissory estoppel claim is concerned, the relevant promises allegedly made by Mr Duffy in April 2010 include that, in return for Ms Vervoort discontinuing her (2010) proceedings against him:
[79] Ms Vervoort says that, in reliance on these representations, she moved to Fiji to live with Mr Duffy and instructed her New Zealand solicitor to discontinue the original Family Court proceedings.
[80] The elements required to establish promissory estoppel have been recently summarised by this Court in Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd.[73] In the context of this case it must be shown that:
[81] We do not think promissory estoppel is established, largely for the same reasons as those set out by Ellis J.[74] The alleged representations are equivocal. The words “fair” and “proper” are vague. They must be interpreted against the background that Ms Vervoort does not appear to have had any significant claims under the Act. There is not enough evidence to show that Mr Duffy’s conduct could be fairly categorised as unconscionable. It is very difficult to see how moving to Fiji could be said to be a relevant detriment to Ms Vervoort. Indeed, the indications are that this is something she wanted to do.
[82] As Ellis J commented, the most fundamental problem is that the vast majority of the relevant assets are owned by Mr Duffy’s Trust.[75] While we have found that a constructive trust could notionally arise in relation to those Trust assets, these particular representations appear to have been entirely personal to Mr Duffy and about things he would do in his personal capacity.
[83] In our assessment, Ellis J was correct in her rejection of the estoppel claim.

Division of relationship property

[84] The value of the only small items of relationship property owned personally by Mr Duffy will be limited. These appear to include a jetski, two kayaks, a motorcycle, a BMW motor vehicle and a Pajero motor vehicle. There may be an argument these items were acquired out of separate property or from assets derived from the Trust.
[85] The quality of the proof of these assets being relationship property is poor. What is clear is that the money Ms Vervoort indisputably received, as the Judge said, “dwarfs the value of these assets combined (and halved)”.[76] Indeed, if Ms Vervoort chooses to exercise her option to avoid the first and second agreements, she faces the prospect of being found to owe Mr Duffy money. The Judge decided there would be no purpose in engaging in the complicated hypothetical exercise that would be necessary to determine the value of these relationship property items. We can see why she did so, and uphold her decision.
[86] It remains open to Ms Vervoort in terms of Ellis J’s judgment to make a claim in relation to the small number of assets and to pursue her claim for maintenance in the High Court.[77]

Result

[87] The appeal is dismissed.
[88] As the first and second respondents took no steps in the appeal there is no order for costs.





Solicitors:
East Auckland Law, Auckland for Appellant
McHardy Parbery, Auckland for First Respondents

[1] Vervoort v Spears [2015] NZHC 808, [2015] NZFLR 525 [High Court decision].

[2] Vervoort v Forrest [2013] NZHC 590.

[3] High Court decision, above n 1, at [9].

[4] Vervoort v Forrest, above n 2.

[5] At [45].

[6] Vervoort v Duffy [2014] NZFC 485.

[7] High Court decision, above n 1, at [49].

[8] At [50].

[9] At [67].

[10] At [82] and [91].

[11] At [96].

[12] High Court decision, above n 1, at [98].

[13] At [99].

[14] At [102].

[15] Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [33].

[16] Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29, [2016] 1 NZLR 551 at [113].

[17] Clayton v Clayton [2015] NZCA 30, [2015] 3 NZLR 293 at [66]; Clayton v Clayton [Vaughan Road Property Trust], above n 16, at [128].

[18] High Court decision, above n 1, at [60].

[19] Official Assignee v Wilson [2007] NZCA 122, [2008] 3 NZLR 45 at [70]; see also the Court of Appeal and Supreme Court’s approach to sham trusts in Clayton v Clayton [Vaughan Road Property Trust], above n 16, at [110]–[116] and Clayton v Clayton, above n 17, at [57]–[70].

[20] Official Assignee v Wilson, above n 19, at [57].

[21] At [57].

[22] Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, above n 15, at [33].

[23] High Court decision, above n 1, at [56].

[24] Jessica Palmer “Dealing with the Emerging Popularity of Sham Trusts” [2007] NZ L Rev 81 at 106–110.

[25] See the discussion in Official Assignee v Wilson, above n 19, at [63]–[64]; and Clayton v Clayton, above n 17, at [71]–[85].

[26] Clayton v Clayton, above n 17, at [85].

[27] Clayton v Clayton [Vaughan Road Property Trust], above n 16, at [123].

[28] Palmer, above n 24, at 111.

[29] Clayton v Clayton [Vaughan Road Property Trust], above n 16, at [98]; and Clayton v Clayton, above n 17, at [116].

[30] Vervoort v Forrest, above n 2.

[31] Lankow v Rose [1995] 1 NZLR 277 (CA).

[32] High Court decision, above n 1, at [81].

[33] Murrell v Hamilton [2014] NZCA 377.

[34] High Court decision, above n 1, at [79]–[80].

[35] Hayward v Giordani [1983] NZLR 140 (CA); Gillies v Keogh [1989] NZCA 168; [1989] 2 NZLR 327 (CA); Phillips v Phillips [1993] 3 NZLR 159 (CA); Lankow v Rose, above n 31; Pasi v Kamana [1986] NZCA 93; [1986] 1 NZLR 603 (CA); and Oliver v Bradley [1987] NZCA 70; [1987] 1 NZLR 586 (CA). In Fortex Group Ltd (in rec and liq) v MacIntosh [1998] 3 NZLR 171 (CA) at 172 the Court of Appeal explained that there were two types of constructive trusts: institutional and remedial. The constructive trust in a de facto relationship context generally fell into the category of institutional constructive trust: at 178.

[36] Hayward v Giordani, above n 35, at 148.

[37] At 149.

[38] Lankow v Rose, above n 31, at 282.

[39] At 294.

[40] At 295. See also Nuthall v Heslop (1995) 13 FRNZ 518 (HC) at 521.

[41] Lloyds Bank v Rosset [1990] UKHL 14; [1991] 1 AC 107 (HL) at 132–133; and see the criticism contained in Alistair Hudson Equity and Trusts (8th ed, Routledge, Oxford and New York, 2015) at 794.

[42] Re Motorola New Zealand Superannuation Fund [2001] 3 NZLR 50 (HC).

[43] At [63].

[44] At [65].

[45] At [76].

[46] Prime v Hardie [2003] NZFLR 481 (HC).

[47] At [30].

[48] Glass v Hughey [2003] NZFLR 865 (HC).

[49] At [89].

[50] C v C [2012] NZHC 3159, [2013] NZFLR 534.

[51] At [69].

[52] Marshall v Bourneville [2013] NZCA 271, [2013] 3 NZLR 766.

[53] At [34].

[54] At [39].

[55] Murrell v Hamilton, above n 33, at [22].

[56] At [18].

[57] At [27].

[58] At [28].

[59] Judd v Hawke’s Bay Trustee Company Ltd [2014] NZHC 3298.

[60] At [9] and [71].

[61] At [70].

[62] High Court decision, above n 1, at [81] (footnote omitted).

[63] See criticism of Murrell v Hamilton on this point in Ah Song Sunwoo and Brent O’Callahan “Murrell v Hamilton [2014] NZCA 377” [2015] NZLJ 15 at 17; and Andrew Steel “The remedial constructive trust — a fresh way to claim against trusts in a personal relationship context” (2014) 16 BCB 91 at 92.

[64] Law Commission Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013) at 6.

[65] Prime v Hardie, above n 46; Glass v Hughey, above n 48; Marshall v Bourneville, above n 52; and Murrell v Hamilton, above n 33; and Lankow v Rose, above n 31.

[66] Lankow v Rose, above n 31, at 294.

[67] We have had the benefit of reading a forthcoming article of Professor Charles Rickett: “Instrumentalism in the Law of Trusts: the Disturbing Case of the Constructive Trust Upon an Express Trust” (2016) 47(3) VUWLR (forthcoming).

[68] Family Property (online looseleaf ed, Thomson Reuters) at [TU12.02(2)(c)].

[69] Murrell v Hamilton, above n 33, at [30].

[70] Hayward v Giordani, above n 35, at 148.

[71] The earlier cases that have found a constructive trust to exist over an express trust have all involved trustees who were also discretionary beneficiaries, as noted in Family Property, above n 68, at [TU12.02(2)(c)].

[72] Jessica Palmer “Controlling the Trust” [2011] OtaLawRw 3; (2011) 12 Otago LR 473 at 477–478.

[73] Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567 at [44].

[74] High Court decision, above n 1, at [88]–[91].

[75] At [91].

[76] At [96].

[77] At [102].

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