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Connor v Connor [2018] NZHC 1721 (12 July 2018)

Last Updated: 18 July 2018

JUDGMENT OF THOMAS J

[1] In 1996, George Connor (George) desired to leave his home in Wellington and retire to Australia. He set up a trust for the protection and management of his New Zealand assets (the Trust). The final or primary beneficiaries of the Trust were his three children, Paul Connor (Paul), Christine Faulkner, nee Connor (Christine) and Mark Connor (Mark). During George’s lifetime, Mark and Paul were, at various times, appointed trustees, required to a sign deed of retirement as trustees and perhaps removed as trustees. George’s mental capacity declined around 2010 and he died in 2014. The only remaining assets of the Trust are a bank account or bank accounts which are frozen and debts owed to the Trust by both Mark and Paul.

CONNOR v CONNOR [2018] NZHC 1721 [12 July 2018]

[2] Mark and Paul have a difficult relationship and cannot agree who is a trustee of the Trust. Paul has commenced legal proceedings purportedly as trustee to recover Mark’s debt to the Trust. Mark claims the Trust is dysfunctional and has applied to the Court for the removal of the existing trustees and replacement with professional independent trustees. Paul opposes the application on the basis it is not necessary.

Background

The Trust

[3] There are four signed trust deeds and dispute as to which is the operative deed. Allied with this is a dispute as to whether there is one Trust or two. The deeds are variously dated 29 March 1996 (Balena Trust), 31 March 1996 (Balena Trust), 1 April 1996 (Balena Family Trust), 1 April 1996 (Balena Trust/Balena Family Trust).

[4] Each of the deeds names the same trustees (George, Dianne Connor (George’s former wife) and Mark) and beneficiaries (the three children). However, the deeds have different provisions relating to the appointment of trustees and different provisions as to whether resolutions of trustees must be unanimous or not.

[5] Paul maintains there is one Trust only, the Balena Trust, and the names Balena Trust and Balena Family Trust have been used interchangeably by all parties, including George and a lawyer acting for the Trust. While Mark was originally a trustee, Paul maintains he resigned on 9 May 2002 and has not been reappointed. Paul says he himself was appointed a trustee on 1 August 2003 and that George appointed him sole appointor in late-August and/or September 2009. He also relies on a statutory declaration by George dated 26 October 2012 confirming that, in September 2009, Paul was appointed the sole appointor of the Trust.

[6] Paul maintains that, following George’s death, he and Dianne were the trustees until Dianne died in 2017. In March 2017, Paul exercised his role as the appointor and appointed his daughter, Natalie Connor, as a trustee. That means, according to Paul, he and Natalie are the current trustees of the Trust.
[7] Mark maintains that, while he believes his father intended there to be one Trust only, given the confusion concerning the different deeds, there may indeed be two Trusts. He notes the original trustees of the Balena Trust were George, Dianne and himself. Dianne retired as trustee in June 2008 and Paul was appointed trustee in her place. From that time, George, Paul and Mark were the trustees of the Balena Trust. He says the Balena Trust deed provides for George to nominate by deed a person for the purpose of having the power of appointment of new trustees but, if that is not exercised, then on George’s death, the power of appointment vests in Mark. Mark says that, while George purported to appoint Paul the sole appointor of the Balena Trust in September 2009, that appointment was invalid because Paul witnessed George’s signature. Pursuant to s 9 of the Property Law Act 2007, a witness must not be a party to a deed. Mark says he has never lawfully been removed as a trustee of the Balena Trust and he, together with Paul, are the current trustees. Any purported appointment of Natalie as trustee is invalid because Paul did not have the power of appointment.

[8] Mark says the original trustees of the Balena Family Trust were George, Dianne and Mark and that Paul has never been a trustee of the Balena Family Trust. The power of appointment of new trustees of the Balena Family Trust was originally vested in George and Mark and passed to Mark on George’s death. Furthermore, in 2005, George resigned as appointor and appointed Mark as appointor. In 2016, Mark appointed Simon Kiddle as a trustee of the Balena Family Trust in place of Dianne because Dianne had been absent from New Zealand for more than 12 months.¹ Mark says, therefore, the current trustees of the Balena Family Trust are Simon Kiddle and himself.

[9] Added to the confusion is that, in March and May 2002, Paul and Mark respectively signed a deed resigning “from all offices of the Balena Family Trust”. Paul relies on this resignation to say that Mark is not a trustee, whereas Mark maintains there was no intention the resignations should be binding. The legal argument is that the deed was not “delivered”. Mark maintains (and there is some documentation to support this) that George required both Mark and Paul to sign resignation letters which

¹ Trustee Act 1956, s 43.

George would then hold.² Interestingly, the theme of these documents appears to be George’s desire that Paul and Mark would be joint appointees and trustees but, until George’s death, he intended to have a veto over all decisions. He also records that all three children had received loans and acknowledged he may have indicated repayment was not required. He did, however, want full details to be recorded so:³

I will be able to assess the situation with view to equalising the three children after my demise by bringing the lower two children up to the highest drawer before making equal disbursement to all three.

[10] Indeed, it is the loans which have been made from the Trust which have caused a high level of disagreement and mistrust between Paul and Mark.

Loans to Paul and Mark

[11] In May 2005, the Trust made a loan to Paul in the sum of $258,397.93.

[12] Around November 2006, the Trust made a loan of $540,000 to Bamonte Holdings Limited, a company in respect of which Mark is the sole director and shareholder. The loan was guaranteed by Mark. The loan was secured by a mortgage, the mortgagees recorded as George, Dianne and Mark. A discharge of the mortgage was signed by George, Dianne and Mark and dated 16 June 2007, although the apparent intention was that the discharge would be held for later use. Mark maintains that between December 1999 and September 2008, Bamonte Holdings Limited paid
$384,261.86 gross interest and resident withholding tax on the loan.

[13] It is not in dispute that neither loan has been repaid. Paul maintains he has paid interest on his loan, although Mark disputes that.

[14] A resolution of the Balena Family Trust dated 20 October 2009 and signed by George and Mark, purported to forgive both loans. It recorded that the trustees of the Balena Family Trust were satisfied there was no outstanding interest payable on Mark’s loan and that the mortgage would be discharged. It acknowledged that

2. See for example a signed and witnessed letter dated 18 August 2005 (document 191, common bundle), a document dated 18 September 2006 (document 219, common bundle) and an undated document addressed to Paul and Mark (document 443, common bundle).

³ Statement of Properties and Trust (document 444, common bundle).

$393,273.00 had been received from Mark between November 1999 and June 2008. Paul disputes the validity of that resolution on the basis Mark, as a trustee, was self-interested and not acting in the best interests of the Trust. Furthermore, that the resolution noted the absence of the trustee Paul, and the Trust deed requires unanimity amongst trustees (although only one of the Balena Family Trust deeds requires unanimity).

[15] In 2016, Paul and Dianne, purporting to be the current trustees of the Balena Trust, sent a letter of demand to Mark, claiming $890,542 in respect of capital, interest and costs. Paul and Natalie, purportedly as trustees of the Balena Trust, have commenced proceedings in the High Court claiming Bamonte Holdings Limited and Mark have breached the terms of the loan and failed to pay outstanding amounts. These proceedings are opposed by Mark on the basis that Paul and Natalie have no standing to bring them and that Paul has a conflict of interest as a trustee, given his own indebtedness.

[16] Mark’s position seems to have changed somewhat from that reflected in the statement of defence in those loan proceedings. Through his counsel, Mr McHerron, it appears he now accepts he remains liable for the loan but says there was no intention it should be repayable on demand, rather it was a matter to be taken into account in the final distribution of the Trust to the beneficiaries.

[17] Paul, meanwhile, refers to a document purportedly recording a meeting of the “Balena Family Trust” on 9 September 2009. This document records that Mark was to be granted temporary relief on his loan interest at seven per cent per annum and that the situation would be revisited as deemed necessary. The loan to Paul, also at seven per cent per annum, was to be granted the same relief. The document records that both loans would still have interest payable and any other arrears accounted for, which would remain a due and payable debt to the Trust before any capital distribution.

[18] Mark disputes the veracity of this document for a number of reasons, including that it was signed by Dianne, purportedly as trustee, although she had been removed prior to that time. Mark claims he was a trustee at the time but accepts that the Balena
Family Trust deed does not require unanimity of trustees (although one of the Balena Family Trust deeds does).

Other relevant context

[19] Paul has been resident in Australia since the early 1970s, whereas Mark has always lived in Wellington. Christine also lives in Australia. Mark is some years younger than Paul and Christine.

[20] The differences between Paul and Mark have not been confined to the Trust. There are also disputes between them regarding George’s personal property and will.

[21] George’s mental health began to deteriorate around 2010, when he was diagnosed as needing permanent high-level residential care and lacking capacity to make decisions regarding his care and accommodation needs. Mark relies on this to question actions taken by George after this time, for example his 2012 statutory declaration purportedly confirming that Paul was the sole appointor of the Balena Trust/Balena Family Trust.

[22] Mark and Paul had disagreed as to their father’s care and capacity, Mark maintaining Paul mismanaged George’s financial affairs. There was a hearing in the New South Wales Guardianship Tribunal. Paul was then replaced as manager of George’s finances, Mark alleges as a result of the Tribunal’s decision, whereas Paul says he stepped down voluntarily to try and appease the situation.

[23] Mark maintains the context of the resolution in October 2009 forgiving both Mark and Paul’s loans was that Dianne, then George’s estranged wife, was threatening to claim against the Trust as part of the relationship property division. Paul disputes this, saying, although George and Dianne were separated, they maintained a mutually beneficial relationship and continued to care for one another’s wellbeing. Indeed, George hoped to the end to rekindle the relationship.

[24] Mark maintains he had tried to resolve matters even before George died, trying to wind up the Trust and distribute the assets. He says he came close to succeeding
but ultimately failed because Paul withdrew from discussions. He maintains he has continued with unsuccessful attempts to resolve matters between him and Paul.

[25] Paul, however, contends he has tried to carry out George and Dianne’s wishes of calling in the loans and winding up the Trust. He says it was he rather than Mark who tried to wind up the Trust before George’s death but this was unsuccessful as Mark refused to include interest owed on his loan in any reconciliation. Paul says he has always tried to maintain the integrity of the Trust’s records and follow George’s intention and guidance.

[26] There is a mutual antipathy between Mark and Paul. Paul accuses Mark of having placed George under great duress over the years and indeed accuses him of having attempted to destroy records of the Trust and gain control of it. Those accusations are vehemently denied by Mark. He does not consider Paul is capable of discharging the responsibilities of a trustee and claims Paul deliberately undermined Mark’s relationship with George.

Current assets

[27] Although the Trust has held real property in the past, its only assets are a bank account or bank accounts holding between $300,000 and $400,000. The accounts have been frozen since before George’s death because the bank is unclear as to who the trustees are and so will not permit withdrawals.

[28] Mark has taken responsibility for ensuring that annual tax returns for the Trust are filed with the Inland Revenue Department and there are no outstanding tax liabilities. He says he pays the accounting fees himself.

The law

[29] Mark applies under s 51 of the Trustee Act 1956 and/or in the Court’s inherent jurisdiction for an order appointing independent trustees in substitution for the existing trustees.

[30] Section 51 of the Trustee Act 1956 provides as follows:

51 Power of court to appoint new trustees

(1) The court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult, or impracticable so to do without the assistance of the court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.

(2) In particular and without prejudice to the generality of the foregoing provision, the court may make an order appointing a new trustee in substitution for a trustee who—

(a) has been held by the court to have misconducted himself in the administration of the trust; ...

...

[31] The appointment, being either in substitution for or in addition to existing trustees, necessarily implies a power of removal although the Court, in any event, has an inherent jurisdiction to remove trustees as part of its general jurisdiction to supervise the administration of trusts.

[32] The term “expedient” has been held to import considerations of suitability, practicality and efficiency rather than necessity.⁴ However, in Coote v Warren,
Panckhurst J said:⁵

[12] That said, the authorities in this context stress that the removal of executors, or trustees, is not to be undertaken lightly. Where possible, the wishes of the testator should be honoured. The Court’s jurisdiction to intervene reflects its duty to ensure that estates are properly administered and trusts properly executed. The welfare of the beneficiaries, what will best safeguard their interests, is the yardstick to be applied. As a consequence, the jurisdiction is fact dependant and involves a large element of discretion. The circumstances of individual cases will necessarily be determinative of their outcome.

[33] As the Privy Council said in Letterstedt v Broers:⁶

In exercising so delicate a jurisdiction as that of removing trustees, their Lordships do not venture to lay down any general rule beyond the very broad principle ... that their main guide must be the welfare of the beneficiaries. Probably it is not possible to lay down any more definite rule in a matter so essentially dependent on details often of great nicety. But they proceed to look carefully into the circumstances of the case.

4. R v Leitch (1997) 15 CRNZ 321 (CA) at 327–328; cited in Crick v McIlraith [2012] NZHC 1290 at [18].

⁵ Coote v Warren [2013] NZHC 3210.

⁶ Letterstedt v Broers (1884) 9 App Cas 371 (PC) at 387.

[34] As regards the relationship between trustees and beneficiaries, the Court of Appeal in Kain v Hutton said:⁷

... mere incompatibility between trustees and beneficiaries is not enough. Any incompatibility must be at such a level that the proper administration of the trust is seriously adversely affected and it has become difficult for a trustee to act in the interests of the beneficiary.

[35] Consequently, misconduct on the part of the trustee, or incompatibility between trustees and beneficiaries, can be reasons for removing a trustee, but whether a Court will do so will turn on whether those factors undermine the execution of the trust for the beneficiaries. There must be some detriment to the administration of the trust.⁸

[36] The jurisdiction to remove a trustee is largely fact dependent and involves a large amount of discretion.⁹ The analysis must be “in macroscopic and not microscopic fashion” based on the impressions of the case.¹⁰

[37] In the appointment of new trustees, the Court is guided by three considerations:¹¹

(a) settlor’s intentions: the Court will give considerable weight to the settlor’s intentions as to the identity of the trustees. The Court is not bound by them and may depart from them “if good cause is shown”;

(b) neutrality between beneficiaries: trustees must be neutral and even-handed as between beneficiaries with different interests; and

(c) promotion of the purposes of the Trust: this is inherent in any trusteeship.

The application

[38] The reasons Mark gives for his application are set out in his affidavit filed in support. He refers to:

(a) the dispute about which Trust deed(s) are the operative ones;

⁷ Kain v Hutton [2007] NZCA 199, [2007] 3 NZLR 349 at [267] (citations omitted).

⁸ Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 at [146].

⁹ Nawisielski v Nawisielski [2014] NZHC 1547.

¹⁰ Great Western Railway v Owners of SS Mostyn [1928] AC 57 (HL) at 62, cited with approval in

Hunter v Hunter [1938] NZLR 520 (CA) at 528.

11. Guest v Warner [2018] NZHC 666 at [26] (citations omitted); citing Mendelssohn v Centrepoint Community Growth Trust [1999] 2 NZLR 88 (CA) at 97–98.
    • (b) the uncertainty surrounding who are currently the trustees and who they were at relevant times;

(c) the erratic way in which the Trust was managed when George was alive;

(d) the current dysfunction of the Trust, preventing the Trust assets from being accessed or properly managed in the interests of the beneficiaries;

(e) the long-standing and ongoing disagreement between Mark and Paul, including on matters concerning the Trust; and

(f) Paul’s conflict of interest if he remains as a trustee, given his indebtedness to the Trust.

[39] Paul opposes the application. He does so on the basis it is clear that Paul and Natalie are the current trustees and the only dysfunction is because of Mark’s behaviour, in particular in relation to what Paul considers to be Mark’s attempt to avoid repaying his loan. Paul says the Trust itself is not dysfunctional and it is therefore not expedient or in the interests of the beneficiaries that the trustees be replaced. Any such replacement would deplete the assets of the Trust and reduce any benefit the beneficiaries may receive.

Assessment

[40] All in all, this case can be considered a good example of the perils of a family trust when the nature of a trust and trustees’ obligations are not properly understood. It is an all too common story. Family trusts are set up with the best of intentions by a settlor parent who still wishes to retain full control over the assets of the trust which he or she continues to regard as their personal property. Control is retained by constantly changing trustees, threatening to do so, demanding children resign as trustees or sign resignation deeds which can be considered effective by the settlor parent at their whim. Matters often come to a head when the settlor parent dies. Confusion reigns and, unless the settlor parent has been open with all children, suspicion abounds and the trust descends into dysfunction (if not already so) and paralysis.
[41] There was discussion at the hearing as to the possibility of, by consent, a forensic accountant being appointed to conduct a reconciliation of the financial affairs of the Trust. This would include assessing the loans and in particular what interest has or has not been paid. On the basis that all three beneficiaries should be treated equally, the loans and outstanding interest would then be deducted from Mark and Paul’s share of the assets.¹² The proposal was that Mark and Paul should both abide by the forensic accountant’s reconciliation and the Trust would then be wound up.

[42] Unfortunately, that proposal, which seemed a pragmatic way forward, could not be agreed. I accept there could be difficulties because some measure of agreement would still be required. For example, whether there should have been a period of forgiveness of interest and what the interest rate on the loans should be.

[43] Given the circumstances outlined above, I am in no doubt that the Trust is dysfunctional and that independent trustees should be appointed. The best illustration of this is that, whether Mark and/or Paul are the trustees, they both pay scant regard to the interests of Christine, one of three final beneficiaries. This amply demonstrates that, irrespective of whether one or both are trustees, neither is acting nor is able to act in the best interests of the beneficiaries. Indeed, given the assets of the Trust and size of the two loans, Christine might be the only beneficiary to receive a distribution.

[44] It cannot be said that the current situation is to the benefit of any of the beneficiaries, except perhaps Paul and Mark, who have not repaid their loans. The bank account(s) have been frozen since before George’s death. The bank refuses to allow withdrawals because of the dispute as to the identity of the trustees.

[45] Paul maintains he is acting as a trustee, yet it is Mark who has been responsible for the tax returns for the Trust for the last several years. That fact does not establish who the trustees are but it does demonstrate, if Paul is indeed the trustee, he has not (or perhaps is not able to) properly carry out his obligations.

12. As referred to at [9] above, there is a suggestion Christine also received a loan. There was no mention of this by either Paul or Mark in their affidavits. This matter will need to be investigated.

[46] I have taken into account what I consider to be George’s wishes as best I can discern them from the various documents. George appeared to intend both Paul and Mark be trustees on his death and the Trust assets divided equally between the three siblings after accounting for any loans to any of them. For the reasons discussed, Mark and Paul are incapable of properly fulfilling either wish.

[47] It is unfortunate that the appointment of replacement trustees will involve the Trust incurring costs. However, that is preferable to the current situation where there is an impasse in the management of the Trust.

[48] For these reasons, I am satisfied it is expedient and in the best interests of the beneficiaries to appoint two independent professionals as trustees in substitution for the existing trustees.

[49] Mark proposes the appointment of Mike Curtis, accountant, and David Chapman, lawyer. Mike Curtis is a consultant to Deloitte, where he was formerly a partner. He is willing to act as a Court-appointed independent trustee and has no conflict of interest with the Trust or Mark or Paul. His experience includes having advised on numerous family and trustee disputes. He has been appointed by the Court previously to act for a family trust. He acts as trustee for several trusts. David Chapman is a principal of Chapman Tong Law, a private client firm with a general (non-litigation) practice. He is a trust specialist with a large trust and estate practice and holds numerous trusteeships. He has been appointed an independent trustee/administrator on a number of contentious trusts and estates, either through the agreement of affected parties or by court appointment. He consents to being appointed a trustee in this case.

[50] Should the Court determine replacement trustees are required, Paul abides the Court’s decision.

[51] I am satisfied Mr Curtis and Mr Chapman are appropriate people and should be appointed in substitution for the existing trustees.

[52] It might be helpful for the trustees if I set out some observations:

• (a) I doubt it really matters whether there is one Trust or two. However, in my view, it is likely there is one Trust only. There is nothing in the evidence I have seen which would indicate any reason for two Trusts.

(b) Which trust deed is the operative one is also not of great moment given my decision to appoint two independent trustees. The issues as to the identity of the appointer(s) and current trustees falls away with the appointment of new trustees. There is no dispute that the final beneficiaries are Paul, Mark and Christine.

(c) At the hearing, I expressed some concern that the interests of Christine were not properly being considered. Although at times George might have indicated a desire for her to be treated differently, in my view the more consistent position was his desire for the assets to be divided between the three siblings equally. I suggest the appropriate starting point is that the three siblings are treated equally.

(d) In this regard, there is also a suggestion that Christine should receive an annuity rather than a lump sum. It will be for the trustees to decide whether there is anything to justify that position or whether she should receive her share in full. I understand that Christine’s daughter, who is a lawyer, has power of attorney over her mother’s affairs and this might allay any concerns in any event.

(e) The most obvious issue for the trustees is the treatment of the loans to Mark and Paul (and whether Christine received any loan). There is no dispute that the loans were made. It is documented that Mark paid a total of $393,273.00 in interest between November 1999 and June 2008, although that may require verification. Paul agrees that he was to pay interest on his loan and says he did so, although Mark says there is no evidence of this. The trustees will need to consider:

(i) The interest rate which should be charged on the loans and whether that should be the same for Paul and Mark and whether,
as Mark claims, he has paid a higher interest rate than the seven per cent referred to by Paul.

(ii) The fact neither Mark nor Paul paid interest following the purported resolution of the Trust on 20 October 2009 (although Paul may dispute this). Paul was not party to this resolution (whether or not he was a trustee) and Mark, who also benefited, was party. The trustees will need to consider whether or not interest is payable on the loans from that time.

(iii) The fact it appears to be accepted that both loans should be taken into account in the final distribution.

Result

[53] For the reasons given, the application is granted and the following orders are made:

(a) Mike Curtis and David Chapman are appointed as trustees of the Balena Family Trust/Balena Trust in substitution for the existing trustees;

(b) consequential vesting orders under ss 52 and 59 of the Trustee Act 1956 concerning all Balena Family Trust/Balena Trust property;

(c) leave is given to the new trustees to apply to the Court for any further directions; and

(d) at the request of the parties, costs are reserved.

Thomas J

Solicitors:

Greg Kelly Law, Wellington for Plaintiff Rainey Collins, Wellington for Defendant