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Court of Appeal of New Zealand |
Last Updated: 24 August 2016
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IN THE COURT OF APPEAL OF NEW ZEALAND
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BETWEEN
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Appellants |
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AND
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Respondent |
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Hearing: |
28 April 2016 |
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Court: |
Ellen France P, Harrison and Kós
JJ |
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Counsel: |
M E J Macfarlane for Appellants
J L Bates for Respondent |
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Judgment: |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS
OF THE COURT
(Given by Ellen France P)
Table of Contents
Introduction [1]
Background [3]
The facts [3]
The High Court judgment [13]
The applicable
principles [17]
Contributions to the
property [19]
The $50,000
payment [20]
Contributions
to the household [24]
Our
assessment [27]
Reasonable
expectation [34]
Impact of
Trust ownership [38]
Conclusion [51]
[1] Richard Hodgkinson and Michelle Judd were married for six and a half years. Over that period they lived in a property in Lane Road, Havelock North, which was owned by the Richard Hodgkinson Trust (the Trust). After the couple separated, Ms Judd made a claim that the Trust held a share in the property on constructive trust for her, reflecting her contributions to the property. After trial, Williams J found Ms Judd had established a beneficial interest in the property and awarded her $65,000 to reflect her contributions.[1] The appellants, the trustees of the Trust, appeal against that award.
[2] The appeal raises three main issues. First, whether Ms Judd’s contributions to the property owned by the Trust qualified as contributions under Lankow v Rose.[2] Secondly, whether Ms Judd had a reasonable expectation of a share in the property. Finally, what was the impact of the Trust’s ownership of the property on her claim? We deal with each issue in turn after setting out the background.
The facts
[3] We adopt the Judge’s description of the key events in the narrative.[3]
[4] Ms Judd and Mr Hodgkinson married in November 2005. Both had children from prior relationships, some of whom lived with the couple at various times.
[5] Mr Hodgkinson was a “successful businessman, first as an orchardist and then as a fruit retailer”.[4] The Judge described him as “in a relatively comfortable position financially” over the time the couple were married.[5]
[6] Prior to the marriage, Ms Judd had what the Judge referred to as a “modest property”.[6] She had worked as a beauty therapist for 25 to 30 hours a week.
[7] The couple separated on 11 June 2012 and have divorced.
[8] The Richard Hodgkinson Trust arose out of the restructure in 2003 of an earlier trust set up after Mr Hodgkinson inherited the family orchard in 1993. The trustees are Mr Hodgkinson and the Hawke’s Bay Trustee Company Ltd (HBTC). The latter is a corporate trustee. It is operated by the accounting firm, Brown Webb Richardson Ltd. Stephen Dine, accountant and director of that firm, “operated as the human face of HBTC”.[7] Beneficiaries of the Trust are Mr Hodgkinson, his children and any grandchildren.
[9] In addition to the Lane Road property, the Trust owns another rental property and has other funds accumulated from various investments.
[10] The Lane Road property was renovated after its purchase by the Trust in 2003. Most of the renovations were completed by the time the couple married. A garage and studio were uncompleted at that time. In addition, some further decorating and other improvements were ongoing.
[11] A valuer who gave evidence on behalf of Mr Hodgkinson suggested that the Lane Road property had been valued at approximately $850,000 in 2005. Its recorded capital value in 2010 was $910,000 but by 2012 its value had fallen to $820,000. As the Judge said, “the overall effect of [Mr Hodgkinson’s] valuation evidence was that between 2005 and 2012, Lane Road had not enjoyed any increase in value.”[8] That evidence was not contradicted by Ms Judd.
[12] In the High Court, Ms Judd sought a declaration that 40 per cent of the Lane Road property was held on trust for her, or, alternatively, she sought equitable compensation for her share.
The High Court judgment
[13] Justice Williams found that Ms Judd made contributions to the Lane Road property that outweighed the benefits she received from the relationship.[9] Further, the Judge concluded she had a reasonable expectation of a share in the property to reflect her work and it was reasonable to expect the trustees to yield her such a share.[10]
[14] The Judge then considered the effect of the fact the Lane Road property was owned by the Trust. Applying the decision of this Court in Murrell v Hamilton,[11] the Judge found that Mr Dine had delegated the Trust’s decision-making to Mr Hodgkinson in relation to matters concerning the Lane Road property.[12]
[15] On quantum, the Judge took a fairly broad brush approach. He concluded Ms Judd had shown her contributions equated to $10,000 per year for each year of marriage and awarded judgment in the sum of $65,000.[13]
[16] We note also that Ms Judd brought proceedings against Mr Hodgkinson in the Family Court claiming spousal maintenance under the Family Proceedings Act 1980. The Family Court awarded maintenance but Mr Hodgkinson succeeded on appeal from that decision and a rehearing was ordered.[14]
[17] Ms Judd’s claim was brought on the basis her contributions were such as to give rise to a constructive trust. It is common ground the relevant principles applicable to her claim are as set out in Lankow v Rose. That means, as Williams J said, Ms Judd was required to show:[15]
- Contributions, direct or indirect, to the property in question.
- The expectation of an interest therein.
- That such expectation is a reasonable one.
- That the defendant should reasonably expect to yield the claimant in interest.
[18] It is also common ground that contributions may be ones that assist in the maintenance of the property or its value.[16] Further, “contributions in the home may qualify as contributions to the home”.[17]
Contributions to the property
[19] The first issue we need to resolve is whether the Judge was right to conclude Ms Judd’s contributions to the Lane Road property were more than minor and that the contributions “manifestly exceed[ed] the benefits” she received from the relationship as required by Hardie Boys J in Lankow v Rose.[18] There are two aspects to this question in this case. First, whether the Judge was right in his assessment of the impact of a payment of $50,000 made by Ms Judd and, secondly, whether Williams J was correct in his treatment of Ms Judd’s contributions to the upkeep of the house and garden. We deal with each in turn.
The $50,000 payment
[20] From the proceeds of the sale of her home Ms Judd contributed the sum of $50,000. This money was paid into Mr Hodgkinson’s credit card account. There was a dispute at trial about the nature of this contribution because Mr Hodgkinson maintained that the money was for him to hold on Ms Judd’s behalf so that “she did not squander it”.[19] Justice Williams accepted the evidence that Mr Hodgkinson saw the payment as Ms Judd’s contribution to the relationship upon the sale of her house. He also accepted it was intended by the couple “to be used for general purposes within the relationship including for renovations”.[20] The Judge also found that: [21]
... a significant proportion of the money was in fact used to meet the costs of renovations that were undertaken prior to the marriage, but billed after [the couple] were married, and to fund final renovation work undertaken after the couple married (in part at least).
[21] Justice Williams also accepted that Mr Hodgkinson could identify payments later made by him to Ms Judd that equalled the $50,000 she contributed.[22] Those payments were the meeting of a $5,000 credit card debt prior to the marriage, payments towards school fees for one of Ms Judd’s children amounting to $15,000 and then the sum of $30,000 paid to her after the marriage ended. The Judge took the view that this repayment was relevant in the weighing process but did not mean the $50,000 could not be seen as “a contribution to the relationship”, and “through the relationship, to Lane Road itself. Insofar as it met some of the costs of renovations, it was money the Trust did not have to pay.”[23]
[22] On appeal the argument is that the $50,000 was given to Mr Hodgkinson as husband, not as a trustee, and in that sense equated to a rental payment the obligation for which rested with Mr Hodgkinson. In developing this submission, Mr Macfarlane for the appellants referred to the evidence of Mr Dine that Mr Hodgkinson understood that the Lane Road property was a Trust asset and his occupation “was only that of a tenant”. Mr Dine said that, although there was no written record of the basis of that tenancy, it was “clearly understood to be one in which [Mr Hodgkinson] would be responsible for the maintenance and upkeep of the home and the property generally”.[24] Further, it is argued that the benefit to the Trust from the $50,000 payment was a short-term cash flow advantage at best. That is because while some of the $50,000 was used to pay builders’ invoices for the renovations, the Trust subsequently reimbursed Mr Hodgkinson’s credit card for that sum.
[23] We see no error in the Judge’s approach to this sum of money. The payment can be characterised as a capital contribution to the property. It was held and used in that way. In these circumstances, Ms Judd’s actions cannot be seen as reflecting what a tenant might do. (Nor, we add, can she be seen as a volunteer, that is, someone who does not give any consideration for the benefit received.)[25] As to the value of the contribution, it was money the Trust did not have to pay and so a contribution of some value to the Trust. Correctly, the Judge did not attach great weight to this payment but we agree it was a relevant contribution.
Contributions to the household
[24] The Judge’s relevant findings were as follows:
[52] I accept also that during the course of a relationship of reasonable length — six and a half years — [Ms Judd] made contributions to the relationship that indirectly merged with Lane Road itself. These were (to paraphrase Tipping J in Lankow v Rose) services by [Ms Judd] which improved or maintained the property, or freed [Mr Hodgkinson] up to improve or maintain the property. This included [Ms Judd’s] work on the gardening and landscaping, and on maintenance of the house (albeit to a minor degree). It also included caring for [Mr Hodgkinson] and his sons during the course of the marriage in a manner that freed [Mr Hodgkinson] up to pursue his business interests and thereby to make his own contributions to the property. I consider that Lane Road’s status as the matrimonial home is of particular importance. [Ms Judd] invested a great deal of time and effort in and on Lane Road because it was the physical base of the relationship. Indeed that was one of the key ways in which she demonstrated her commitment to [Mr Hodgkinson].
[53] That said, Mr Macfarlane was right to point out that [Ms Judd] received direct personal benefits from the relationship which must also be weighed in the mix. She and her children lived rent-free in a beautiful home for the six and a half years of marriage. She had free use of the studio above the garage to operate her beauty therapy business, and she was able to utilise the gardens to earn a hobby income selling her preserves. It is clear that she wanted for nothing materially during the course of the marriage.
[25] In conclusion, the Judge said:
[68] I am left to conclude that in the areas of [Ms Judd’s] maintenance and upkeep of Lane Road, and indirect contributions to the property (by provision of opportunity for [Mr Hodgkinson] to focus on his business activities), some modest recognition of [Ms Judd’s] contribution is in order. I acknowledge the direct advantages gained by her from the relationship — particularly accommodation for her children and premises for her business — but I do not consider these outweigh the contributions she made.
[26] The submission from Mr Hodgkinson on this raises two aspects. First, it is said that the Judge has been too generous in his assessment of this contribution. The submission is that Ms Judd was doing what she enjoyed doing and that she received benefits from the relationship. Secondly, it is said the contributions were to the relationship rather than to the Trust.
Our assessment
[27] To put these matters in context, we need to provide some information about the Lane Road property. The property comprises a one and a half hectare block. The house on the property is a four-bedroom, three-bathroom home with separate double garage including a self-contained studio above it. The Judge described the gardens as “substantial” and mostly ornamental but there was also a vegetable garden.[26]
[28] Ms Judd’s evidence was that she spent 20 to 40 hours a week working on the house and gardens over the course of the marriage. Prior to his marriage to Ms Judd, Mr Hodgkinson employed a housekeeper who was working 20 hours a week. After Ms Judd moved in they continued to employ a cleaner but reduced the time for which cleaning services were provided to two and a half hours per week. The cleaner remained in employment between 2006 and 2009 but was not kept on after that point. A gardener visited weekly for the first five years of the couple’s marriage and fortnightly for the last 12 to 18 months of the marriage.
[29] As to benefits, Ms Judd enjoyed a rent-free home for herself and her children. She also ran a small business on a part-time basis as a beauty therapist from the studio above the new double garage. That was best described as a hobby business and brought her minimal income.
[30] Against this background, we are satisfied the Judge was right to treat Ms Judd’s efforts as an indirect contributions to the maintenance of the Trust’s property that qualified as contributions under Lankow v Rose. There is no question she expended considerable effort over a six and a half year period and contributed in this way to the preservation of the property. As Mr Hodgkinson accepted, Ms Judd was very good at what she did around the house and her efforts contributed to preventing the house from, as he accepted, “going to rack and ruin”. We agree with Williams J that proof of enhanced value is not always required. Rather, as the Judge said:[27]
... the judgment of Tipping J [in Lankow v Rose] in particular is clear that contributions that directly or indirectly maintain property value will also generate entitlements, all other things being equal. In addition, contributions can relate to the maintenance not only of property value, but of the property itself. This means that even in a falling market and even in respect of an overcapitalised property, contributions can have proprietary effects. It is hardly surprising that, notwithstanding the unjust enrichment language sometimes used in these cases, equity would not approach division of property at the end of a relationship in this black and white way.
[31] A further argument was that the obligation to maintain was an obligation of those who occupied the property as tenants. Assuming there was such an obligation, we do not consider that obligation means that the contributions cannot have been contributions for the benefit of the Trust. The practical effect was to contribute to the maintenance of the Trust property.
[32] Finally, the appellants also challenge the quantum of the award. The appellants are critical of the absence of evidence of quantification by Ms Judd of her contributions. We consider the nature of the contributions means it is not possible to do more than was done in this case. The Judge has taken a fairly broad brush approach to quantum, but appropriately so in our view. In any event, the award is a modest one and the Judge recognised that Mr Hodgkinson had contributed the greater percentage to the home.
[33] One means of cross-checking the approach is to note that the judgment sum amounts to an award of some $200 a week for the course of the marriage. If we assume that Ms Judd would have otherwise made rental payments of, say, $200 per week that means she has received overall a payment of $400 a week. We do not consider it is unreasonable or unrealistic to say that her contribution equated to about $400 a week.
[34] The appellants also say the Judge was wrong in concluding Ms Judd could reasonably have expected a share in the property. This aspect of the appeal arises because the Judge accepted Mr Hodgkinson’s evidence that Ms Judd knew Lane Road was owned by a trust in which she was not a beneficiary.[28] Further, Williams J also accepted Ms Judd knew Mr Hodgkinson had structured his affairs in that way because “his assets had been significantly depleted following the dissolution of his previous marriage”.[29] The Judge said this knowledge diminished the extent to which Ms Judd could reasonably have expected a share in the property.[30]
[35] Mr Macfarlane submits that the effect of this finding was that Mr Hodgkinson’s assertion of Trust ownership defeated Ms Judd’s claim to an interest in the property. He relies for this proposition on the following statement by Cooke P in Gillies v Keogh:[31]
Put shortly it is that an interest or monetary right by way of constructive trust or otherwise cannot arise if a reasonable person in the claimant’s position would have understood that he or she was not to receive one.
[36] We do not consider it necessarily follows from this factual finding that there could be no reasonable expectation Ms Judd would share in the property. In the circumstances, knowledge of the existence of the trust and its background was not sufficient to displace her expectation.[32] Ms Judd’s understanding of the situation that pertained to the Trust did not mean she expected she was to contribute in the way she did but, if the marriage broke up, receive nothing. As the Judge said:
[70] I conclude further that [Ms Judd] was entitled to expect a modest share in Lane Road and it is reasonable for [Mr Hodgkinson] to yield such a share. Although [Ms Judd] knew of the trust and why it was established, the couple nonetheless worked together to improve Lane Road and their work in this regard was a significant aspect of the relationship itself. They both very much enjoyed improving and presenting the property. And they were well satisfied with the division of the roles they adopted. It would be perfectly understandable for [Ms Judd] to expect to share in the value of her hard work. Just as it would be perfectly reasonable to expect [Mr Hodgkinson] to yield it.
[37] We agree.
[38] As we have foreshadowed, the Judge approached this aspect on the basis he was bound by the principles of this Court’s decision in Murrell v Hamilton.[33] In that case, the Court accepted a constructive trust claim could succeed against property owned by a trust where a trustee had abjured decision-making responsibilities to the other trustee.[34] Justice Williams accordingly posed the question for consideration as being whether: [35]
... Mr Dine on behalf of HBTC had abjured his trust responsibility to [Mr Hodgkinson] in any areas in which [he had found Ms Judd’s] contribution proved, or whether, more generally, the trustees had agreed that in those areas, authority was properly delegated [to Mr Hodgkinson].
[39] Justice Williams answered this question positively. He said that, to the extent the $50,000 payment was expended on renovations and other relationship expenses, “Mr Dine left those matters for [Mr Hodgkinson] to decide”.[36]
[40] Mr Macfarlane first submits that Murrell should be distinguished. This submission is put in the written submissions on the basis the proprietorial contributions made by Ms Murrell were different in kind from those made by Ms Judd because the former were “direct, significant and more readily quantifiable in the construction of a new house sold for value and thereby enrichment”.
[41] Secondly, the correctness of the abjuration approach taken in Murrell, absent further explanation, is questioned. That issue is said to arise because of the principle that trustees cannot delegate their powers. In this context, Mr Macfarlane says Murrell poses difficult practical issues for trustees in this situation.
[42] For the reasons we have discussed, we do not consider there is any merit in the first submission, namely, that the contributions made by Ms Judd were not sufficiently direct and quantifiable.
[43] On the second submission, similar criticisms of Murrell were discussed by this Court in its recent decision in Vervoort v Forrest.[37] The Court in Vervoort observed that the question of the application of a constructive trust to an asset, like the Lane Road property, itself owned by an express trust had arisen in a number of other cases.[38] After discussion of that line of authority[39] the Court observed that the Judge at first instance in Vervoort was correct to acknowledge the “traditional trust principles of unanimity and non-delegation” but said “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”.[40]
[44] The Court saw Prime v Hardie, Glass v Hughey, Marshall v Bourneville and Murrell v Hamilton as the “application of established Lankow v Rose principles” to the reality of the New Zealand trust landscape where it is likely a good proportion of property is held in discretionary family trusts and trustees are more often than not the beneficiaries of those trusts and in control of them.[41] We agree.
[45] Reflecting the reality recognised in Vervoort, Mr Hodgkinson treated the property as his own. He was the controlling trustee and as one among a number of family beneficiaries he enjoyed the benefit of an apparently indefinite right to occupy the trust property rent-free. This arrangement was inconsistent with a conventional arm's-length transaction between trustees and a third party to invest or rent trust property to secure an economic return for the beneficiaries. The trustees owned and operated the property for Mr Hodgkinson's primary benefit.
[46] We consider it can be said that in the present case the conscience of both trustees is affected. Mr Hodgkinson obviously had direct knowledge of the contributions being made by Ms Judd but, as the Judge found, Mr Dine had effectively given Mr Hodgkinson “carte blanche” to do as he wished with the assets of the Trust.[42] The requirement for unanimity cannot be used as a shield in this situation where one trustee has abdicated responsibility and so enabled trust property to be improved without first resolving the basis of receipt. Further, although Mr Dine may not have known of these contributions earlier, he did at the time of trial. In all these circumstances, it would be unconscionable not to recognise the benefits freely accepted by the Trust.
[47] The concern about the impact of this approach on the property rights that form a key part of the trust concept is understandable.[43] We make three points on this aspect. First, we agree with Mr Bates’ submission that Ms Judd’s successful claim simply reverses or disgorges the benefit of the defendants’ enrichment. This Court in Murrell made the same point.[44] As the Court put it, the claim means “a part of the value of the Trust’s property which should not accrue to the Trust does not accrue to it”.[45]
[48] Secondly, it was open to the trustees to take steps to preserve the position they now seek to maintain. They could have taken advice on the issue at the time of the marriage. Further, Mr Hodgkinson could have entered into a relationship property agreement with Ms Judd. Absent such an adjustment of her expectations, where the contributions are to the matrimonial home and the trustees have encouraged or permitted these contributions, it would be wrong to treat a contributor like Ms Judd as a volunteer.
[49] Finally, as Mr Bates also submits, the question is not whether a party’s action is in breach of their trustee duties but, rather, the focus is on the reasonableness of a third party’s expectation of an interest in the property and the reasonableness of requiring the legal owners to yield an interest or to pay compensation in lieu.
[50] Accordingly, we do not consider this ground of appeal succeeds.
[51] For these reasons, the appeal is dismissed. The judgment of the High Court awarding Ms Judd $65,000 stands. The approach taken by Williams J was careful and appropriately reflected the contributions made by both parties over the course of the marriage. We agree with it.
[52] If the parties are unable to agree on costs, brief memoranda (no more than three pages) are to be filed as to why costs should not follow the event. The appellants’ memorandum is to be filed by Friday 19 August 2016 and the respondent’s memorandum by Friday 26 August 2016.
Solicitors:
Sainsbury Logan & Williams,
Napier for Appellant
Brown & Bates Ltd, Napier for Respondent
[1] Judd v Hawke’s Bay Trustee Company Ltd [2014] NZHC 3298 [High Court judgment].
[2] Lankow v Rose [1995] 1 NZLR 277 (CA). Lankow v Rose is applicable because the Lane Road property is the property of the Trust and so the claim is not subject to the Property (Relationships) Act 1976.
[3] High Court judgment, above n 1, at [2]–[17].
[4] At [4].
[5] At [4].
[6] At [5].
[7] At [8].
[8] At [15].
[9] At [68].
[10] At [70].
[11] Murrell v Hamilton [2014] NZCA 377.
[12] At [61] and [71].
[13] High Court decision, above n 1, at [74].
[14] Hodgkinson v Judd [2014] NZHC 3315; and Hodgkinson v Judd [2015] NZHC 130.
[15] At [35]; and Lankow v Rose, above n 2, at 294 per Tipping J.
[16] High Court judgment, above n 1, at [39] citing Lankow v Rose, above n 2, at 295.
[17] Lankow v Rose, above n 2, at 295.
[18] High Court judgment, above n 1, at [68] citing Lankow v Rose, above n 2, at.
[19] High Court judgment, above n 1, at [42].
[20] At [49].
[21] At [49].
[22] At [51].
[23] At [51].
[24] In cross-examination Mr Dine accepted there was no resolution recording an agreement with Mr Hodgkinson about what Mr Dine described as a tenancy arrangement.
[25] Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [4.3.5(1)].
[26] High Court judgment, above n 1, at [13].
[27] High Court judgment, above n 1, at [73].
[28] High Court judgment, above n 1, at [56].
[29] At [48].
[30] At [56].
[31] Gillies v Keogh [1989] NZCA 168; [1989] 2 NZLR 327 (CA) at 330.
[32] Lankow v Rose, above n 2, at 282 per Hardie Boys J; and Gillies v Keogh, above n 31, at 334–335 per Cooke P. See also Farrelly v Gruar [2000] NZCA 404; (2000) 20 FRNZ 56 (CA) at [25]; and Butler, above n 25, at [41.4.1(4)].
[33] High Court judgment, above n 1, at [61]; and Murrell v Hamilton, above n 11. Williams J noted that in declining leave to appeal in that case, the Supreme Court recorded that “[o]n other facts, there may be an issue as to the appropriate test for constructive trusts in cases of this type”: Hamilton v Murrell [2014] NZSC 162, [2015] NZFLR 45 at [6] footnote 4.
[34] Murrell v Hamilton, above n 11, at [22] and [28].
[35] At [61].
[36] High Court judgment, above n 1, at [67].
[37] Vervoort v Forrest [2016] NZCA 375.
[38] At [48].
[39] At [49]–[55]; Re Motorola New Zealand Superannuation Fund [2001] 3 NZLR 50 (HC); Prime v Hardie [2003] NZFLR 481 (HC); Glass v Hughey [2003] NZFLR 865 (HC); C v C [2012] NZHC 3159, [2013] NZFLR 534; and Marshall v Bourneville [2013] NZCA 271, [2013] 3 NZLR 766.
[40] Vervoort v Forrest, above n 37, at [62].
[41] At [63]–[64] and [70]. In its review of the Property (Relationships) Act 1976 the Law Commission has indicated it will consider legislative provisions in the relationship property area as they relate to trusts: Law Commission “Review of the Property (Relationships) Act 1976” (May 2016) <www.lawcom.govt.nz>.
[42] High Court judgment, above n 1, at [67]; and Vervoort v Forrest, above n 37, at [65].
[43] See the discussion in Vervoort v Forrest, above n 37, at [66].
[44] Murrell v Hamilton, above n 11, at [30].
[45] At [30].
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