A, B and C v D and E Ltd as Trustees of The Z Trust
| Jurisdiction | New Zealand |
| Judge | Gwyn J |
| Judgment Date | 14 February 2022 |
| Neutral Citation | [2022] NZHC 172 |
| Docket Number | CIV-2018-441-000060 |
| Court | High Court |
[2022] NZHC 172
Gwyn J
CIV-2018-441-000060
IN THE HIGH COURT OF NEW ZEALAND
NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA
AHURIRI ROHE
Family, Trusts — application by the defendants for indemnity costs — clarification of date the constructive trust arose — the High Court found that the plaintiffs had been sexually and physically abused by their deceased father which meant the father owed a fiduciary duty to provide economically for them — property gifted to Trust was in breach of that duty — nature of a constructive trust — difference between a remedial and institutional constructive trust — date on which constructive trust became effective — effect on interim distributions — indemnification for trustees’ costs — hostile trust litigation — High Court Rules 2016 — Trusts Act 2019
M Phillipps and N Dennison for the Plaintiffs
M Wenley and B Ronberg for the Defendants
The plaintiffs alleged that Z had physically and sexually (in relation to plaintiff A) abused them during their childhood. In my judgment of 5 November 2021 (the judgment) 1 I found that abuse was proved and amounted to a breach of the fiduciary duty Mr Z owed to his children at that time. The plaintiffs also pleaded that the proved abuse created a vulnerability which meant that, in their adulthood, Mr Z owed them a fiduciary duty to provide economically for them from his wealth. 2
I found that Mr Z did owe a fiduciary duty to the children as adults and had gifted his property 3 to the Z Trust in breach of that duty. I concluded that the Z Trust held the property on constructive trust for the plaintiffs.
By memorandum of 10 November 2021, Mr Wenley, counsel for the trustee defendants, sought a Beddoe order in the following terms:
… notwithstanding the declaration that they hold the assets of the [Z] Trust on a constructive trust for the Executors of [Z]'s estate, they are entitled to be indemnified out of the assets of the [Z] Trust in respect of the reasonable and proper legal and associated costs of:
(a) Defending the claim in the High Court;
(b) The High Court costs award;
(c) Lodging and pursuing an appeal in the Court of Appeal.
In my minute of 1 December 2021, 4 I declined to grant a Beddoe order, either in respect of the High Court proceedings or the prospective appeal by the defendants to the Court of Appeal.
The minute records two questions on which counsel for the defendants had sought clarification:
(a) The date that the declaration of a constructive trust becomes effective; and
(b) The status of the interim distributions of $21,000 already made to the beneficiaries of the trust prior to 5 November 2021.
As I noted in the minute, those questions are genuinely incidental to the judgment and I invited submissions on those two points before I issued a supplementary judgment. 5
I have now received submissions from counsel for the defendants, dated 13 December 2021, and for the plaintiffs, dated 15 December 2021.
Mr Phillipps for the plaintiffs says that the constructive trust declared by the Court is properly characterised as an institutional constructive trust. Accordingly, it arises and is effective from the date of the receipt by the Z Trust of the property. Counsel relies on the Court of Appeal judgment in Fortex Group Limited (in receivership and liquidation) v Macintosh 6 ( Fortex Group) where Tipping J for the Court analysed the distinction between an express trust, an institutional constructive trust and a remedial constructive trust.
Mr Phillipps says that here the property was never beneficially held by the trustee recipients. The trustees of the Z Trust have been found to have known at the time they received the property that the transferor, Mr Z, was in breach of his fiduciary duty to the plaintiffs.
Mr Phillipps poses the question as: does the trust arise directly from the transaction between Mr Z, the Z Trust and the property? The answer, in his submission, is yes.
Mr Wenley for the defendants does not directly address the question of when the constructive trust takes effect, but says:
The application of the equitable maxim that ‘one who seeks equity must do equity’ would allow for recognition of competing legal and equity interests of the trustees and the beneficiaries of the [Z] Trust. This would enable the Court to adjust those interests as at 5 November 2021 rather than retrospectively impose a blanket constructive trust.
In the judgment I found 7 that the transfer by Mr Z of the property to the Z Trust was in breach of the fiduciary duties Mr Z owed to the plaintiffs. I also found that the Trust was imputed with Mr Z's knowledge and received the gifts of the property knowing they were in breach of Mr Z's fiduciary duties to the plaintiffs, that is, they were in knowing receipt of the property.
I found that the trustees therefore hold the property on constructive trust for the plaintiffs. As the author of Laws of New Zealand states: 8
A stranger who receives property in circumstances where he or she has actual or constructive notice that it is trust property being transferred to him or her in breach of trust will, however, also be a constructive trustee of that property.
I agree with Mr Phillipps that to answer the question of when the constructive trust becomes effective, it is first necessary to establish the nature of the constructive trust.
The analysis in the Fortex Group case is helpful: 9
It [the case] concerns the law of trusts: specifically the circumstances when express trusts and institutional constructive trusts come into existence and when remedial constructive trusts may be imposed. For present purposes, these three types of trust can be described as follows. An express trust is one which is deliberately established and which the trustee deliberately accepts. An institutional constructive trust is one which arises by operation of the principles of equity and whose existence the Court simply recognises in a declaratory way. A remedial constructive trust is one which is imposed by the Court as a remedy in circumstances where, before the order of the Court, no trust of any kind existed.
The difference between the two types of constructive trust, institutional and remedial, is that an institutional constructive trust arises upon the happening of the events which bring it into being. Its existence is not dependent on any Order of the Court. Such orders simply recognise that it came into being at the earlier time and provides for its implementation in whatever way is appropriate. A remedial constructive trust depends for its very existence on the Order of the Court, such order being creative rather than simply confirmatory. This description should not be regarded as definitive or as precluding further developments in this area of the law when greater refinement may be necessary…
In Regal Castings v Lightbody the Supreme Court (also the judgment of Tipping J) referred with approval to the passage from the Fortex Group case. 10 There, the Supreme Court imposed a remedial constructive trust against the property received by the trustees of the family trust in favour of the Official Assignee in Lightbody's bankruptcy. I agree with Mr Phillipps that in this case the property was never beneficially held by the trustee recipient, unlike in Regal Castings, where the alienation of the property was described as “only voidable at best”. 11
The difference between a remedial and an institutional constructive trust was also discussed by the Privy Council in Goldcorp Exchange Limited (in receivership): Kensington v Liggett: 12
Finally, it is argued that the Court should declare in favour of the claimants a remedial constructive trust, or to use another name a restitutionary proprietary interest, over the bullion in the Company's vaults. Such a trust or interest would differ fundamentally from those so far discussed, in that it would not arise directly from the transaction between the individual claimants, the Company and the bullion, but would be created by the Court as a measure of justice after the event.
As the author of Laws of New Zealand, Institutional Constructive Trusts, states: 13
An institutional constructive trust is imposed upon a particular asset or assets, not because pre-existing property of the plaintiff has been followed in equity into those assets but because, quite independently of such considerations, it is, within accepted principle, unconscionable for the defendant to assert a beneficial title to the asset or assets, to the denial of the plaintiff.
In Commonwealth Reserves I v Chodar Glazebrook J describes the two features generally used to distinguish institutional from remedial constructive trusts in the following terms: 14
The first is that the institutional constructive trust is a mandatory consequence of certain events, while the remedial constructive trust is a discretionary remedy. The second is that the institutional constructive trust exists from the time the events giving rise to it occur, while a remedial constructive trust becomes effective at the time of
the Court Order. The second factor is confirmed by Tipping J in Fortex when he says at p 175 “this kind of trust does not exist at all until the Court imposes it”.
The constructive trust declared by the Court in the judgment is an institutional constructive trust imposed on the property in the hands of the constructive...
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