Masters v Stewart [2014] NZHC 2419 (3 October 2014)

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BETWEEN	PHILLIP RALPH MASTERS Plaintiff
AND	LESLIE JAMES WILLIAM STEWART AND RUSSELL JAMES CASSIDY Defendants STEPHEN ANDREW MASTERS Second Defendant MICHAEL EDWARD MASTERS Third Defendant KATHRYN JANE MASTERS Fourth Defendant

Hearing:	15-17 September 2014
Appearances:	G Brodie for Plaintiff K Clay and P O'Dea for First Defendants No appearances by or for Second, Third and Fourth Defendants
_Judgment:	_{3 October 2014}

[1] In July 1980, the R K Masters Family Trust (the Trust) was established by Mr Ken Masters (Ken). The two defendants, Mr Leslie Stewart and Mr Russell Cassidy are the sole trustees. Ken was appointed as an advisory trustee, and his children, the second, third and fourth defendants and the plaintiff, Mr Phillip Masters (Phillip), are the discretionary beneficiaries of the Trust.

[2] The Trust was used by Ken as a vehicle to purchase commercial property in and around Rangiora. One of the first properties purchased was situated in Golflinks Road (the property). Phillip had been interested in purchasing this property himself,

_{however, on his father’s suggestion, it was agreed that the Trust
would purchase the}

property on the basis it would be resold to Phillip for the original purchase price of

$115,000 at some future time. The property consisted of some six acres with a house and three large glasshouses, and was to be operated as a market garden growing tomatoes. It was proposed that Phillip would work on the property and maintain other commercial properties including another market garden owned by the Trust.

[3] From April 1981 until 1989, Phillip worked both full-time and part-time on the property, maintaining the wider Trust market garden business and its other commercial buildings and carrying out associated tasks, including bookwork and the like. In 1989, Phillip commenced full-time employment but continued to work on the property and undertook other maintenance work in respect of the Trust’s other property interests.

[4] As the years went by Phillip made periodic payments to the Trust in furtherance of the agreement that he had with Ken that the property would be transferred to him for the original purchase price. In September 1990, Phillip married. He and his wife, Philippa, were concerned that his ownership of the property be clarified and confirmed. As they embarked on their married life, they sought assurance that contributions they made towards the acquisition and development of the property were for their benefit. The alternative for them was to purchase their own property elsewhere.

[5] In response to Phillip and his wife’s representations, Ken approached the trustees which resulted in Ken’s intentions in respect of the property being formally documented. The parties are agreed that the following documents accurately capture the position as understood by Ken, Phillip and the trustees at that time. The document of October 1990 records as follows:

I, RALPH KENNETH MASTERS as Advisory Trustee HEREBY REQUEST that if the Trust shall still retain ownership of the property situated at 59 Golflinks Road, Rangiora at the date of my death such property shall be transferred to my son PHILLIP RALPH MASTERS at a consideration of ONE HUNDRED AND FOURTEEN THOUSAND DOLLARS ($114,000.00) (sic) being the original purchase price thereof in recognition of time and effort that Phillip has expended both at the property and in respect of other unpaid assistance given to enable the Trust to develop its various other properties and activities.

[6] The second request of September 1991 is a more refined version of the first document.

59 Golflinks Road, Rangiora at the date of my death such property shall at the request of my son PHILLIP RALPH MASTERS be

transferred to him at a consideration of ONE HUNDRED & FIFTEEN THOUSAND DOLLARS ($115,000.00) being the

original purchase price thereof. The difference between the purchase price and the current market value is to be treated as an appropriation to Phillip in recognition of the time and effort that

Phillip has expended both at the property and in respect of other unpaid assistance given to enable the Trust to develop its various

other properties and activities. Over the latter years, Phillip has also introduced capital into the Trust and has received no interest in respect thereof. Accordingly, the arrangement as expressed herein is

2 I DIRECT that the remaining assets of the Trust should be shared equally between my four children the distribution thereof and the winding up of the Trust to remain at the discretion of my Trustees and in accordance with wishes which might be expressed by my children.

[7] It is apparent that Ken was concerned that in the event of his death there should be clarity regarding Phillip’s interest in the property and the longstanding agreement with his son that the property be transferred to him.

[8] Over the following years, Phillip sought to have his father put his promise into effect and have the property transferred to him. In 2002, the Trust became very active and significantly expanded its property portfolio. Some concerns were raised about the health of Ken, and Phillip and Philippa were becoming concerned about the Trust’s exposure to debt. More particularly, that the property was being used as security for the Trust’s activities and the associated risk which, given their interest in the property, they were effectively carrying. The delay in transferring the property to Phillip and the associated concerns regarding the Trusts activities coincided with a deterioration in the relationship between Ken and Phillip.

[9] After Phillip and his wife had instructed their own solicitor, arrangements were finally made in 2003 for the property to be transferred to Phillip. There had been difficulties in arranging substitute security for the Trust suitable to the bank, and there were also potential tax implications that had to be considered arising from the structure of the transaction. However, in April 2003, an agreement for sale and purchase was entered into for a market price of $331,800. Phillip paid the original agreed purchase price of $115,000 and entered into a deed of covenant to repay the balance of $216,800 which on the same day was forgiven by the Trust. The forgiveness of debt was labelled as a capital distribution to Phillip, however the parties are agreed that the use of such nomenclature was only because of the tax and accountancy advice received at that time, regarding how the transaction should be treated. The parties are agreed that nothing turns on that label and the intent was always to give effect to the original agreement between father and son entered into all those years before.

[10] As Mr Cassidy stated in evidence, at the time of the transaction no thought was given to the forgiveness of debt, being classified as a capital distribution to Phillip. Mr Cassidy stated that the trustees did not think it would have any future consequences for the Trust. Phillip was acquiring an asset that had been promised by his father years ago. Later, in October 2003, Phillip sold the property.

[11] In 2006, Ken raised with the trustees the prospect of a distribution of Trust capital to Phillip’s siblings. After a meeting between the trustees and Ken, it was resolved that the Trust would make a distribution in the sum of $250,000 to each of Phillip’s siblings. The rationale for the distribution is summarised in a note of the meeting taken by Mr Cassidy:

3. Ken Masters as Advisory Trustee felt it was appropriate now that the Trust was in the main, cashed up that a distribution be made to each of his children, Stephen, Kate and Michael in the sum of

$250,000.00. Such a distribution would have the effect of equalising a distribution which was made some two years ago to Phillip

Road property. Ken felt that the $250,000.00 distribution to Stephen, Kate and Michael would enable them to manage their own affairs and would leave the Fund with adequate reserves.

[12] There matters remained until 2011 when Phillip became aware of the capital distributions of $250,000 and another of $27,000 to his siblings but not to him. No issue arises in respect of the distribution of $27,000, however the $250,000 distribution to each of Phillip’s brothers and sister is at the heart of this proceeding.

[13] Ken died in May 2011. After the resolution of this proceeding the Trust is to be wound up and the balance of its assets, approximately some $2 million, distributed to the beneficiaries. A difficulty that has arisen is that Mr Stewart, one of the trustees, has for health reasons become indisposed and will likely need to be replaced as a trustee. He was unable to participate in the hearing. However his fellow trustee, Mr Cassidy took an active role in the defence of Phillip’s claim.

[14] Phillip contends that the trustees in exercising their discretion to make a capital distribution of $250,000 to his siblings have acted in a way that was neither fair nor rational. He contends that the distribution to his siblings to his exclusion is because the $216,800 which was written-off by the Trust, along with the capital gain that Phillip received as a result of its subsequent sale has been treated as the equivalent of a capital distribution to him. The effect of doing this, he submits, was to negate his labour and effort which he put into the property and other Trust properties to the benefit of the Trust, which was the consideration for the property being transferred to him for the original purchase price of $115,000 and not the current market value. He submits that this treatment of the transfer is contrary to the agreement he made with his father which was known to the trustees.

[15] In response, the trustees submit that their decision to allocate $250,000 to Phillip’s siblings in 2006 was the result of a legitimate exercise by them of their discretion to appropriate capital in accordance with the deed of trust.

[16] Phillip, in making his claim, relied upon four causes of action, namely: (1) breach of contract;

[17] In oral argument however it became apparent that Phillip’s case distils to an allegation that the trustees, in making the $250,000 capital distribution to Phillip’s other siblings, acted in breach of their duties as trustees, and represented an unreasonable exercise by the trustees of their discretion under the deed of trust.

[18] Implicit in having the Court focus on the decision of the trustees may be a recognition by Phillip of limitation difficulties attaching to the causes of action resting on breach of contract, constructive trust and equitable estoppel. However, in my view, the approach the Court is being asked to take by Phillip to his claim is appropriate. It is the Court’s assessment of the actions of the trustees in making the distribution to Phillip’s siblings which will give rise to a remedy. Absent any breach of trust, the claim must fail.

[19] It is therefore the exercise of the trustees’ discretion against the background of alleged breach of contract, estoppel or constructive trust which, at least on Phillip’s case, the trustees’ decision to exclude him from the distribution of capital is sought to be measured. If the trustees’ decision is a legitimate exercise of their discretion, the merit of Phillip’s claims based on the other pleaded causes of action will not assist him. Phillip’s case stands or falls on the allegation that the trustees have breached their fiduciary duties in making the distribution of $250,000 to his siblings. Accordingly, the limitation issue falls to be determined on the interpretation and application of s 21 of the Limitation Act 1950. That provision provides:

(2) Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:

Provided that the right of action shall not be deemed to have accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession.

[20] Phillip relies on the proviso that his right of action for breach of trust has not accrued because as a beneficiary he is entitled to a future interest in the Trust property and that interest has not fallen into his possession yet. He relies upon the Trust deed which provides that upon the expiration of the Trust period he, as one of the beneficiaries, will be entitled to an equal share in the property of the Trust.

[21] The trustees argue that the claim does not relate to a future interest in the Trust property, but rather to a decision made in relation to property which is no longer the subject of the Trust and does not relate to a future interest. In that regard, reliance is placed on the principle that a “future interest” held by a person who is within the class of discretionary beneficiaries under a Trust cannot take the benefit of

[22] The difficulty for the trustees however is that Phillip does not seek to rely upon his status as a discretionary beneficiary, but the rights that will accrue to him upon the expiration of the Trust period provided for within the Trust deed. The status of a beneficiary who has a right to share in the residue of the Trust fund contingent on survival to the date of distribution was the subject of consideration by

[23] In that case, Tipping J held that a beneficiary’s residual interest does amount to a future interest in the Trust’s property and it is the postponement of possession until the date of distribution which makes the interest a future interest for the purposes of the proviso.³The “future interest” in the proviso to s 21(2) of the Act is one in respect of which possession, that is, enjoyment, is delayed. Once the interest

_{falls into possession, time starts running. Until that occurs the
interest must qualify}

as a future interest for the purposes of the proviso.⁴A future interest is simply an interest of which the beneficiary may enjoy possession as of right at a future time.⁵

[24] The Court of Appeal observed that the difference between contingent and vested interest, on the one hand, and discretionary interest, on the other, is that possession of the former interest, if enjoyed at all, is enjoyed as of right, whereas discretionary interests are never enjoyed as of right; their enjoyment is always subject to the discretion of the trustees.⁶In examining the concept of entitlement as required by the proviso, it is only necessary that the interest is one which the beneficiary may enjoy possession as of right in the future.⁷Future interest to which a beneficiary is entitled must be one that has either not yet fallen into possession or, if it has fallen into possession, it did so within the six-year period following the commencement of the proceedings.

[25] It matters not whether ultimately there will be any actual Trust property to be enjoyed as of right as an interest in possession. Discretionary distributions so as to reduce the Trust property to nothing cannot affect a beneficiary’s claim that had there been no breaches of trust there would have been additional property in which he or she, at least contingently, was entitled to share.⁸

[26] The action brought by Phillip is in respect of an alleged breach of trust as a beneficiary who is entitled to a future interest in the Trust property. The fact, as argued by the trustees, that the decision of the trustees being challenged, relates to property which has been distributed is irrelevant to the application of the proviso contained in s 21(2) of the Act. In that regard, the concluding observations in the Court of Appeal in Johns v Johns are apposite:⁹

[The plaintiff] should be allowed to bring proceedings in an attempt to show that his future interest in the trust property has been harmed to the extent of his proportionate interest in whatever property (or its value) would have existed had the trustees not committed the breaches of trust alleged against them. Notwithstanding the so-called winding up, the plaintiff must be entitled to pursue this line of reasoning in respect of breaches alleged to have occurred within the six-year period. It would, in our view, defeat the

legislative purpose of the proviso if he were not allowed to do so in respect of breaches occurring outside the six-year period.

[27] The Trust period as defined in the Trust deed has not yet expired. It follows therefore that Phillip is still the holder of a future interest in possession and time has not begun to run in respect of his action for breach of trust.

[28] The circumstances in which a Court will intervene in the exercise of a trustee’s discretionary power are limited. Trustees, in the exercise of their fiduciary discretion, however, must act in good faith, responsibly and reasonably.¹⁰The parameters of those obligations require greater definition.

[29] Insofar as it is relevant to the present case, the parties are agreed that the Court will only set aside a trustee’s decision if he or she has considered irrelevant considerations; failed to consider relevant considerations, or reached a decision that is perverse or capricious.¹¹Related to the last consideration is the requirement for a trustee to act rationally and in good faith. There remains some uncertainty as to whether such considerations extend to a requirement for a trustee to act reasonably.

[30] The trustees submitted that the law does not go that far. In Craddock v Crowhen,¹²Tipping J held that the review of the exercise by trustees of their discretionary powers extends to a consideration of whether such powers have been exercised reasonably, in a sense analogous to the concept of unreasonableness in administrative law; ie Wednesbury unreasonableness.¹³The decision can only be regarded as unreasonable if no reasonable trustee could rationally have made such a decision in all the circumstances. That approach was endorsed by Fisher J in Wrightson Ltd v Fletcher Challenge Nominees Ltd,¹⁴observing that a trustee’s

_{decision must be “one which can fairly be said to be beyond the
bounds of reason”,}

¹¹Wrightson Ltd v Fletcher Challenge Nominees Ltd HC Auckland CP129/96, 21 August 1998 at

¹³_{Associated Provincial Picture Houses Ltd v Wednesbury
Corporation [1947] EWCA Civ 1; [1948] 1 KB 223.}

that is to say one which “no reasonable trustee could rationally have made in all the

circumstances”.¹⁵A similar approach has been taken by Wild J in Blair v Vallely.¹⁶

[31] In Gailey v Gordon¹⁷, O’Regan J took a more conservative approach, cautioning against a relaxation of the normal reluctance of the Courts to intervene in the decisions of trustees except where a decision has been exercised in bad faith or is ultra vires. While recognising that the concept of bad faith may include taking into account irrelevant considerations and refusing to take into account relevant considerations, in his Honour’s view the potential for the Court to intervene in the exercise of a trustee’s discretion on the basis it has been exercised unreasonably, involves some extension of the Court’s supervisory role. In the absence of any Court of Appeal authority mandating such an approach, O’Regan J preferred to recognise

[32] Insofar as New Zealand authority is concerned, the trustees acknowledge that unreasonableness in the sense that no reasonable trustee could rationally have made the decision in all the circumstances was little, if any, different from the requirement that a trustee act rationally and in good faith; an observation which, in my view, has some merit.

[33] In the United Kingdom Supreme Court judgment of Pitt v Holt,¹⁹Lord Walker endorsed the approach taken by Lightman J in Abacus Trust Co²⁰to the interpretation of the rule provided in the English Court of Appeal’s decision of Hastings-Bass.²¹This rule sets out when a Court may interfere in the exercise of a trustee’s discretion notwithstanding the trustee having acted in good faith. The English Court of Appeal held that a Court should not interfere in the exercise of a trustee’s discretion even where a trustee’s action does not have the full effect which

the trustee may have originally intended, unless what has resulted is either unauthorised by the power conferred upon the trustee or it is clear that the trustee

_{would not have otherwise acted as he or she did. Further, and
relevantly to the}

²⁰_{Abacus Trust Co (Isle of Man) v Barr [2003] EWHC 114; [2003] 1 All
ER 763.}

present case, unless the trustee had taken into account considerations which the trustee should not have taken into account, or had failed to take into account considerations which the trustee ought to have taken into account.²²

... the rule does not require that the relevant consideration unconsidered by the Trustee should make a fundamental difference between the facts as perceived by the Trustee and the facts as they should have been perceived. All that is required in this regard is that the unconsidered relevant consideration would or might have affected the Trustee’s decision, and in a case such as the present that the Trustee would or might have made a different appointment or no appointment at all.

[35] The error however must be sufficiently serious to amount to a breach of duty. In further endorsement of the approach of Lightman J, Lord Walker approved the following passage from the judgment in Abacus Trust Co:²⁴

If the trustee has in accordance with his duty identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations, the trustee can be in no breach of duty and its decision cannot be impugned merely because in fact that information turns out to be partial or incorrect.

[36] In elaboration of that approach, Lord Walker observed that absent a claim based on mistake, no remedy is available if in exercising a fiduciary power, trustees have acted on information or advice from an apparently trustworthy source and what the trustees purport to do is within the scope of their power.²⁵

[37] Should it be established that a relevant consideration went unconsidered which might have affected the trustees’ decision, the trustees’ disposition is avoidable, not void. The breach of duty arises in the performance of something that is within the scope of the trustees’ powers, not in the trustees doing something they

In my view, Lightman J was right to hold that for the rule to apply the inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty. Breach of duty is essential (in the full sense of that word) because it is only a breach of duty on the part of the trustees that entitles the court to intervene... It is not enough to show that the trustees’ deliberations have fallen short of the highest possible standards, or that the court would, on a surrender of discretion by the trustees have acted in a different way... [O]nly breach of fiduciary duty justifies judicial intervention.

[39] The Court heard from Mr Stephen Tomlinson, a lawyer with particular expertise in trust law. Objection was taken to this evidence, primarily that parts of his evidence constituted legal opinion. I admitted the evidence on a provisional basis. In the event, Mr Tomlinson’s evidence was, insofar as it sought to summarise the common law relating to the requirements of the valid exercise of a discretionary power, uncontroversial. The observations of the Supreme Court in Penny v

Mr Tomlinson’s evidence relating as it did to the expression of opinion on disputed legal issues.²⁹

[40] Blanchard J deprecated the practice of expert witnesses expressing such views:³⁰

It should, however, be observed that it is undesirable and wasteful of time and effort of both parties when such material appears in expert briefs of evidence. The practice of including it should stop. If it persists, Courts should require amended briefs to be filed.

[41] An opinion by an expert is not inadmissible simply because it is about an ultimate issue to be determined in a proceeding. However a distinction needs to be made between evidence which can be given by an expert witness based on professional experience and practice that may directly confront a matter in dispute at

_{trial, and that which expresses a witness’s opinion of what
ultimately is a legal}

²⁸_{Penny v Commissioner of Inland Revenue [2011] NZSC
95, [2012] 1 NZLR 433 at [32].}

question for adjudication by the Court. Therefore, insofar as Mr Tomlinson expressed a view on the legal issues I have to decide, I put his evidence to one side.

[42] Mr Cassidy’s evidence was that from about 2003 it was apparent to him that Ken was under some pressure from his other children to obtain financial assistance. The Trust was expanding with a large amount of investment in Rangiora, and Phillip was perceived as having been able to establish himself with a family home that once belonged to the Trust. This issue became the subject of discussion between the trustees and Ken, and ultimately they took Ken’s advice as the advisory trustee that a distribution be made to the children. The financial state of the Trust was such that no question arose as to its ability to make such a distribution. In February 2006, the formal decision was made by the trustees to make a distribution to each of Phillip’s siblings in the sum of $250,000. The rationale for the distribution is recorded in Mr Cassidy’s notes of the meeting, set out at [11].

[43] In making the decision to distribute the sum of $250,000, Mr Cassidy stated that the trustees were aware of the financial circumstances of Ken’s other three children in terms of their levels of income and assets available to them. In particular, the trustees were satisfied that Ken was in a position to assess the relative financial position of his children. Phillip accepted that his father would, in broad terms, know the financial circumstances of his siblings. The trustees were also aware of Phillip’s financial circumstances, to the extent that the property had been transferred to him which he had subsequently sold.

[44] It is clear that Ken saw the distribution as a way of “equalising” the position between his children in terms of what they had received from the Trust. Ken wished to help his other children at that time. Mr Cassidy did not think that the decision to make the distribution to the exclusion of Phillip was motivated by any acrimony held by Ken towards Phillip, although he was aware that the father and son relationship had broken down at that point.

[45] Mr Cassidy’s evidence was that the decision to make this distribution was

considered over a period of time and was not taken lightly. His evidence was that, as

a trustee, he was persuaded by Ken that it was an appropriate step to take on the basis that the children were discretionary beneficiaries who needed some assistance and the Trust had substantial assets which were available to provide that assistance. The trustees’ position was that Ken, as an advisory trustee, was entitled to suggest they exercise their discretion to provide his other children with some benefit from the Trust.

[46] It is not disputed that a significant part of the rationale for making the distribution was that Phillip had already received a benefit over the course of some years from the Trust as a result of his involvement with and acquisition of the property. The trustees concluded that it was fair and reasonable having regard to the history of the family and the transfer of the property to Phillip that the distribution of

[47] Phillip submits that it was unreasonable and irrational for the trustees to exercise their discretion to make capital payments to his siblings because it was inconsistent with the commitment given to him in 1981, to the effect that the property would be transferred to him at some future time subject only to the payment of $115,000. The benefit to be realised by him was not to be adjusted by reducing what would otherwise be an equal distribution of Trust capital. He submits that no reasonable trustee would depart from that commitment which, while likely sufficient to create a contractual obligation, at least gave rise to an equitable interest.

[48] Phillip submits that to take into account the benefit he received from obtaining the property in return for the provision of valuable consideration by him in terms of the work and effort provided to the Trust demonstrates that the trustees have made a fundamental mistake. He relies on the two memoranda, dated 1990 and

1991, which record the commitment made by Ken to his son, which was premised on an equal distribution of Trust capital notwithstanding any benefits to Phillip that may accrue to him in the future. Phillip submits that if the trustees intended to take a position inconsistent with the commitment given by Ken, they should have made greater inquiry of the circumstances relating to the transfer of the property and of Phillip, rather than simply acquiesce to Ken’s subsequent instructions.

[49] Phillip claims that the trustees are estopped from denying the authority of

Ken to enter into the commitment that he made to Phillip on behalf of the Trust in

1991. Phillip is critical of the process adopted by the trustees and submits that the trustees simply carried out the wishes of Ken in arriving at a figure of $250,000 for distribution to his siblings. He submits the trustees made no investigation into the personal circumstances of the three other beneficiaries and did not make an attempt to identify and calculate what the true value of the benefits and detriments as between Phillip and his other siblings actually were. Phillip submits that it is inherently unreasonable for the trustees to have allocated the sum of $250,000 based on a flawed premise that he had already received his benefit from the Trust in having the property transferred to him for the original purchase price of $115,000.

[50] Finally, Phillip relies on the minute of the meeting held by the trustees and Ken on 17 February 2006 in which the distribution to the other beneficiaries is viewed as having the effect of equalising the distribution which was made to Phillip when the Trust appointed to him its interest in the property. That is compared with the evidence of Mr Cassidy that, at the time of the property transaction in 2003, the trustees gave no thought to the prospect that one day they would take into account the difference between the market value and the original purchase price of the property as a capital distribution to Phillip which would make him unequal with his other siblings, and require them to make a distribution to the exclusion of Phillip. If that was the case, how then, submits Phillip, could the trustees have rationalised a subsequent distribution in 2006 on the basis that it was to equalise the benefit which he had apparently already received.

[51] The starting point for the trustees is that the Trust deed vests the trustees with an express power to make unequal capital distributions to discretionary beneficiaries. That was acknowledged and accepted by both Phillip and his wife.

[52] Secondly, it is submitted that the commitment given by Ken to his son to transfer the property to him for $115,000 was discharged. The commitment did not go beyond that and could not prevent unequal capital distributions in the future. Phillip was cognisant of this when he consulted with his solicitor at the time of the

property transaction in 2003. This was obviously a concern to Phillip. Mr Cassidy advised that, as Phillip was a discretionary beneficiary, he was not in a position to advise if the deed of appointment in respect of the property would have an impact on future distributions. Phillip’s solicitor conveyed to him that he would have no control over future Trust distributions as that was within the trustees’ discretion.

[53] In response to the specific causes of action, the trustees submitted that the circumstances of the transfer of the property cannot give rise to a remedy. Having regard to the approach taken by Phillip to his claim, it is not strictly necessary to review the pleaded causes of action. However the trustees’ response to the heads of claim pleaded are relevant to Phillip’s claim of breach of trust.

[54] Replying to the allegation that the trustees by making a distribution in 2006 breached the agreement for sale and purchase of the property settled in 2003, the trustees submit the events are unrelated. The property was transferred in accordance with the arrangements entered into between father and son that the property be settled on Phillip for the original purchase price of $115,000. There was no ongoing obligation under the agreement, and the trustees did not undertake or bind themselves to fetter their discretion to make discretionary distributions in the future.

[55] In regard to the claim of equitable estoppel, it is submitted that Phillip’s entitlement to acquire the property for the original purchase price was not accompanied by any further representation that such transfer would be “without any additional detriment” as claimed by Phillip. While reliance is placed on the formal requests made by Ken to the trustees in 1990 and 1991, the terms of those requests were unknown to Phillip. More importantly however is the recognition by Phillip that at the time of the transfer, the deed of appointment involving the transfer of the land to him remained without prejudice to any future distributions to beneficiaries of the discretionary trust. Phillip’s solicitor advised him of this at the time of the transfer of the property.

[56] To recognise the estoppel, the trustees submit, would be to fetter the future exercise of the discretion of the trustees to make capital or income distributions in accordance with the Trust deed. Further, to recognise the estoppel argument would mean the trustees would always be required to make equal distribution or bring into

account the transaction relating to the property in such a way as to ensure Phillip was always treated equally in subsequent transactions.

[57] Finally, the trustees emphasised that such is the nature of a discretionary trust that circumstances may change. It is not therefore unconscionable for a promise not to be kept, if such a promise had been made, and circumstances have subsequently changed or the relationship between the parties has changed.³¹

[58] Similar arguments are made in respect of the cause of action resting on the finding of a constructive trust. In that regard, it is emphasised that Phillip did in fact acquire the very interest that his father had promised and for the price on which they had agreed. The existence of an equitable interest as a result of Ken’s promise to his son is not denied, but upon receiving legal ownership of the property that obligation has been fulfilled. To suggest that Phillip has obtained ownership of the property on the basis that the trustees could not subsequently make an unequal capital distribution in exercise of their discretion without equalising that distribution to Phillip illustrates, in the trustees’ submission, the disconnect between Phillip’s ownership of the property and his expectations as a discretionary beneficiary of the Trust.

[59] I am satisfied that the distribution of $250,000 in 2006 to Phillip’s siblings was the conscious exercise of a discretionary power available to the trustees. The trustees acted at the request of and pursuant to the direction given by Ken, but I am satisfied that the trustees gave the matter their own consideration, discussed the matter with Ken and worked through what he was proposing with him.

[60] Both sides agree that the trustees had a broad discretion available to them under the terms of the Trust deed, and the exercise of their power to make a distribution to discretionary beneficiaries was not exercised other than for a proper purpose. To provide assistance to Ken’s children was a legitimate rationale for

_{making such a distribution. There is no question that the trustees acted
in good faith.}

³¹Equity in Trusts in New Zealand, at 621; Dhormer v Majors [2009] UKHL 18; [2009] 1 WLR 776.

[61] The trustees have emphasised that the exercise of their discretionary power to make a distribution was independent of Ken’s commitment to Phillip in respect of the property. That commitment was fulfilled. It was also legitimate for the Trust to accept Ken’s assessment that it was an appropriate time to make a distribution to the other children having regard to the apparent respective positions of the children.

[62] By reference to a number of documents written by Phillip and Philippa, the trustees submit the couple are under a misapprehension of having an entitlement to a capital distribution because of the distribution made to the other siblings. Phillip himself in evidence expressed himself in those terms. That, of course, is not the case. The use of such language is more a manifestation of Phillip’s sense that he has been unfairly treated, rather than an assertion as to the correct legal position in terms of the exercise of the trustees’ powers.

[63] The trustees have submitted that they did not consider that the earlier transaction involving Phillip in relation to the property impacted on their ability to make capital distributions to the other children and that their discretion was not fettered. That is undoubtedly correct, and there is no requirement to make distributions “equally” to all beneficiaries nor, indeed that the benefit that Phillip received as a consequence of the property transactions be isolated from or ignored by the trustees in how they chose to exercise their discretion in the future. I accept that is the position. However in the circumstances of this case, the focus in terms of the exercise of the trustees’ discretion inevitably is on the expressed reason for the trustees deciding to make a $250,000 distribution to the other children and not to Phillip. There is no question that the trustees under a discretionary trust are entitled to make unequal distributions, but in this case the trustees did so in order to achieve a particular effect.

[64] The contemporaneous record and, indeed, Mr Cassidy’s own evidence was that one of the reasons for the distribution was to “equalise” the position of the children vis-a-vis the Trust. That was not the sole reason and there were wider considerations regarding the relative financial positions of the children. I am satisfied however that the primary purpose in making the distribution was as a consequence of the settlement of the property on Phillip and the perceived benefit he obtained from the Trust as a result, accompanied by the apparent need in Ken’s

assessment and, as accepted by the trustees, to put the other children on the same or similar footing. That is a proper and relevant consideration. However the question arises as to whether the trustees discharged their obligations in proceeding to make the distribution on the basis they did by accepting Ken’s assessment of the position.

[65] I heard evidence from both parties which attempted in various ways to quantify the benefit or detriment that had accrued to Phillip as a result of the commitment made by Ken that Phillip could purchase the property at its original price and the subsequent transfer, some years later, to his legal ownership. Essentially, Phillip’s position is that the work he put into the property and other Trust properties over the years for which the Trust received the benefit accounted for what benefit derived to him as a result of the property finally being transferred to him at the original purchase price in 2003. In that regard, there was evidence of the unpaid hours which he had put in over many years for the benefit of the Trust and capital improvements that had been made to the property at his expense.

[66] Two accountants, Messrs Keyse and McClay, gave evidence of the way in which they had sought to calculate the benefits and detriments received by Phillip and the Trust between 1991 and 2003, in an effort to arrive at a figure which could be compared with the subsequent $250,000 distribution in 2006 to Phillip’s siblings.

[67] Mr Keyse approached the exercise by attempting to reconstruct the nominal “current accounts” of the four children. Mr McClay’s approach was different and involved a reconciliation of the net financial cost incurred or benefit received by Phillip from acquiring the property. Both accountants did their best to provide the Court with an accurate assessment, but each acknowledged various factors pointed to by counsel which he had not taken into account or which did not apply to the particular method he had adopted.

[68] In any event, it was Mr McClay’s evidence that the expert witnesses having conferred and compared their figures and after making adjustments which they acknowledged to be appropriate, arrived at figures calculating a benefit to Phillip which were not that far apart, in the region of approximately $155,000 to $176,000.

It is apparent that these calculations are hardly forensic, covering as they do a period in excess of two decades. That is no reflection on the approaches taken by the witnesses but is simply indicative of the difficult analysis they were asked to undertake.

[69] The effect of the expert evidence served to illustrate a number of things. Firstly, there was an apparent difference between what Phillip received in terms of a benefit from the acquisition of the property and the capital distribution to his siblings of $250,000. Secondly, that the type of accounting exercise undertaken resulted in very approximate figures with wide margins of error arising from a lack of detailed information and some very general assumptions.

[70] It is not reasonable or realistic to suggest the trustees should have embarked on such an exercise in 2006 before making the distribution. It was not required by the trustees in the exercise of their discretion. In any case, even if they had done so it is unlikely given the accuracy of such an exercise that it would necessarily have resulted in them having any particular confidence that such a calculation was reliable or accurate, or would have resulted in them being better informed in terms of the views being expressed by the advisory trustee.

[71] It is uncontested that the trustees took into account the benefit considered to have been received by Phillip and sought to make an “equalising” distribution to his siblings. Phillip’s case distils to a failure or an inadequacy on the part of the trustees to accurately assess the benefit when compared to the appointment of $250,000 to the other beneficiaries. It follows therefore that the criticism of the trustees is not that they failed to consider a relevant consideration, but rather that they did not take into account a consideration which they ought to have taken into account, namely Phillip’s contribution to the Trust from the work he carried out on the property and other Trust properties. In that regard, Phillip stresses that this relevant consideration which he contends for might have affected the trustees’ decision and the trustees

might have made a different appointment.³²Further, he says they did not use proper

_{care and diligence in obtaining relevant information and advice to
accurately assess}

the sum required to be distributed to the other beneficiaries in order to “equalise” the siblings positions. That inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty.³³

[72] Breach of duty is essential if the Court is to intervene. It is not enough to show that the trustees in reaching their decision have fallen short of the highest possible standard or that the Court would have acted in a different way. As the English Court of Appeal in Hasting-Bass³⁴observed, even where a trustee’s action does not have the full effect of what was originally intended, something more is required.

[73] The trustees in the context of a discretionary power sought to assist Ken’s other children. It is apparent this was motivated out of a view expressed to them by Ken, the advisory trustee, that Phillip had received a benefit from the Trust by way of his involvement and ownership of the property. The trustees were entitled to accept the father’s assessment of the respective financial positions of his children in making the distribution. Many years later, when the rationale applied by the trustees is sought to be examined in greater detail, it is apparent that, indeed, a benefit was received by Phillip but that it was less than the $250,000 distribution and arguably substantially so.

[74] Phillip relied upon the approach taken by Wild J in Blair v Vallely,³⁵where a beneficiary had purchased land from the Trust and subsequently sold it many years later for a substantially greater price. The trustees in making a distribution of the capital of the Trust set out to achieve equality among all beneficiaries and in doing so made an adjustment for the “intangible benefit” received by the beneficiary from the acquisition and subsequent sale of the parcel of Trust land. Wild J observed that the rationale relied upon by the trustees in making the adjustment appeared to be the fact the beneficiary purchased the property, completed its development and sold it some years later for substantial gain, after deducting the purchase price and development costs. In deciding that the beneficiary should have been debited with this allowance for “intangible benefits”, Wild J held that the trustees had acted

[75] The circumstances in that case are, in my assessment, distinguishable. The beneficiary entered into a commercial transaction with the Trust to purchase the land which otherwise would have gone on the market for full value. A three-year interest free loan facility provided to him was brought to account as a tangible benefit. The beneficiary in that case was in no different position from a purchaser that had acquired the property with the assistance of vendor finance, and therefore there was no reason why the trustees should have penalised him for entering into the property transaction with the Trust when seeking to reconstruct and balance the benefits received by the respective beneficiaries over many years.

[76] In the present case, the property was purchased by the Trust with an agreement that it would be transferred to Phillip at some later time for the original purchase price. Apart from piecemeal payments made by Phillip over the years, he did not have to pay rent or interest. He carried out improvements to the property and generated income for the Trust. After all those years, what is in issue is the assessment of the benefit received by Phillip in comparison to the $250,000 distribution to his siblings made in 2006 and whether the trustees in making that distribution were in breach of their fiduciary duty. Blair v Vallely concerned the reasonableness of the trustees imposing a “penalty” from the unrelated benefit obtained by the beneficiary entering into an ordinary commercial transaction with the Trust. The circumstances of the present case in terms of the benefit obtained by Phillip from the property in which the Trust remained inextricably involved is quite different as is the wide discretion available to the trustees in making a discretionary distribution based on the financial circumstances of the children.

[77] The difficulty for Phillip is that his argument is premised on his position being assessed relative to that of his siblings in the context of a discretionary trust. Put simply, he does not have an “entitlement” to be treated equally. Had the trustees in exercising their discretion deliberately set out to disadvantage Phillip, a breach of trust would no doubt have arisen. There is no evidence however to suggest that was the case. To the contrary, the trustees sought to deal with the children in an even- handed way with the guidance of the advisory trustee.

[78] Phillip is critical that the trustees simply did Ken’s bidding but the evidence

does not support that contention. The suggestion is made that the trustees failed to

protect Phillip. The evidence however does not support that contention, only that the trustees sought to act in good faith, believing that the distribution was fair and equitable in the circumstances.

[79] Phillip relies on the record of Ken’s intentions in 1990 and 1991 which formalised his commitment to Phillip that the property would be transferred to him for the original agreed price. Furthermore, and more importantly for the purposes of Phillip’s argument, in the 1991 document Ken directs the trustees that the remaining assets of the Trust were to be shared equally between his four children, notwithstanding the transfer of the property to Phillip.

[80] That may properly be pointed to as evidence reflecting Ken’s views in September 1991, but it does not provide a sufficient basis to conclude that the trustees in 2006 were in breach of their duties when they made an unequal distribution to the exclusion of Phillip. In June 2004, Mr Cassidy recorded in a letter to his fellow trustee, Mr Stewart, Ken’s view that Phillip had received substantial assistance via the property appropriated to him and that “as a matter of fairness” his other children should be helped at this time of their lives. In the same letter, Mr Cassidy observed that such matters “bear some thought and discussion” and that they represent something of “an about face” as far as Ken is concerned. Mr Cassidy opined they may be motivated by recent problems between Ken and Phillip and other worries regarding the recent expansion and associated problems with the Trust.

[81] It is apparent that the trustees were aware of the dynamics within the family and possibly what may have been behind Ken’s apparent change of view in terms of the way the Trust capital should be distributed. The trustees could not be bound by what Ken had communicated to them in 1991 (in any event, a direction predicated on his death), when in June 2004 he was taking a different view of matters. It is apparent the trustees did not simply rubberstamp or immediately seek to act on Ken’s wishes. Rather, they were alive to potential issues that may have been in play and were aware of the need for caution and for thought and discussion.

[82] The trustees are required to use proper care and diligence to obtain relevant information and advice relating to the considerations they are required to take into account. As I have already observed, it cannot realistically be suggested that the

trustees were required to embark on a forensic accountancy exercise to check that Ken’s assessment of the respective positions of his family members was accurate or, indeed, to calculate the actual benefit received by Phillip from the property. As illustrated at trial, there are inherent limitations to accurately making such an assessment across a two decade period given the nature of the factors involved. The fact that subsequently the decision made by the trustees can be impugned because information turns out to be either partial or incorrect does not mean that the exercise

[83] There is however no evidence that the trustees directly examined the issue of Phillip’s contribution to the Trust when they set out to “equalise” the position of the children in 2006. Therefore there is validity in Phillip’s contention that the trustees failed to take into account this relevant consideration. It was a factor which was made relevant by the explicit rationale expressed by the trustees themselves as to their objective in making the distributions to the other children to the exclusion of Phillip at that time.

[84] The trustees were entitled to take into account other factors regarding the children’s respective financial position and the guidance of the advisory trustee. They were however also obliged in exercising their discretion, in the terms they sought to be guided by, to take into account Phillip’s contribution to the Trust arising out of the arrangement relating to the property entered into between father and son. I am not satisfied that the trustees did this or, indeed, that they were cognisant of the issue as to whether Phillip’s work over the years had contributed to the Trust’s income.

[85] The evidence adduced by the plaintiff has satisfied me that the trustees were required to examine the issue of Phillip’s contribution to the Trust in assessing the benefit that he had obtained before making the decision to make distributions to his siblings in an effort to “equalise” their financial positions. There is a paucity of evidence from the trustees that they took into account Phillip’s contribution when making that assessment. This has led me to conclude that a breach of the trustees’

[86] I am mindful that the decision made in 2006 by the trustees was an exercise of a discretionary power of distribution within the scope of the trustees’ powers and was based on the dual objectives not only of equalising the respective positions of the siblings but also to enable the other siblings to manage their own affairs and provide assistance to them. Further, that in the exercise of their discretion the trustees are entitled to make “unequal” distributions to the Trust’s beneficiaries. It should also be noted that the evidence called at trial regarding the benefit Phillip has received from the property shows that he is mistaken in his view that he has not benefitted from the Trust.

[87] The trustees are not required to account to Phillip for their assessment in the exercise of their discretion in making the distributions to his other siblings in 2006. The evidence however has shown that in assessing the amount to be distributed to the other children to assist and “equalise” them with the distribution said to have been made to Phillip “two years ago”, they did not take into account Phillip’s contribution to the Trust over very many years, which may have offset some of the benefit received by him from the transfer of the property in 2003. That assessment is a matter for the trustees to make, but it is not one that I am satisfied was undertaken by the trustees when exercising their discretion to make a distribution to the other children.

[88] I have therefore concluded that the trustees decision in the exercise of their discretion to make an appointment of $250,000 to Ken’s other children failed to take into account Phillip’s involvement in the property and the other Trust properties over the years. Phillip’s position in terms of the benefit he had received from the property was a relevant consideration for the trustees to take into account. I have accepted that their consideration did not need to extend to the level of detailed analysis to which it has subsequently been subjected, but the apparent failure to make any assessment has led to a breach of the trustees’ duty.

[89] Phillip did benefit from the property, and I accept that whether the distribution to the other beneficiaries did or did not “equalise” the children’s respective benefits received from the Trust is not determinative in the context of a

discretionary trust. Ken’s commitment to transfer the property to Phillip was something separate to the exercise of the trustees’ discretion and I accept the intention of the discretionary distributions was also guided by an assessment of the respective financial positions of the children.

[90] Where the difficulty arises is that the perceived benefit already received by Phillip from the transfer of the property was clearly sought to be taken into account by the trustees and, indeed, was the catalyst for the distribution. That on closer examination the appointment of capital to the other children may have exceeded the calculated benefit received by Phillip cannot of itself render the decision by the trustees to make the distribution a breach of duty. I need however to be satisfied that the trustees, having explicitly decided to make a distribution to “equalise” the other children with the “distribution” received by Phillip, did take into account in exercising their discretion the contribution made by Phillip to the Trust in respect of which the transfer of the property was indisputably related. I have concluded that the trustees did not assess Phillip’s contribution and therefore did not take that relevant consideration into account.

[91] Accordingly, I make an order directing the trustees to reconsider the appropriation of capital made by them to Phillip’s siblings, taking into account an assessment of his contribution to the Trust before the property was transferred to him in 2003.

[92] The costs of this proceeding are reserved. Phillip has partially succeeded in his claim against the trustees, insofar as I have directed the trustees reappraise the exercise of their discretion. I have however declined to make any finding of an entitlement on the part of Phillip to be treated equally in respect of the appropriation of capital pursuant to the exercise of a discretionary power of distribution, nor have I made any order requiring a payment to Phillip by the Trust. That remains a matter for the trustees upon review of their discretion.

[93] It is to be hoped that the parties can agree a settlement of costs. In the event that is not possible, the parties should exchange in draft and file memorandum of no more than five pages each.

High Court of New Zealand Decisions

Masters v Stewart [2014] NZHC 2419 (3 October 2014)