Mark Arnold Clayton v Melanie Ann Clayton

• Jurisdiction: New Zealand
• Judge: O'Regan J
• Judgment Date: 23 March 2016
• Neutral Citation: [2016] NZSC 29
• Docket Number: SC 23/2015
• Court: Supreme Court
• Date: 23 March 2016

Between

Mark Arnold Clayton

First Appellant

Mark Arnold Clayton as Trustee of the Vaughan Road Property Trust

Second Appellant

and

Melanie Ann Clayton

Respondent

[2016] NZSC 29

Court:

Elias CJ, William Young, Glazebrook, Arnold and O'Regan JJ

SC 23/2015

IN THE SUPREME COURT OF NEW ZEALAND

Appeal against a Court of Appeal (CA) decision which held that the appellant's power to appoint and remove beneficiaries under a trust deed was relationship property of value equivalent to the assets of the trust — cross-appeal by the respondent against a CA finding that the trust was not a sham and was not illusory — whether the bundle of rights and powers held by the appellant under the trust deed were “property” for the purposes of the Property (Relationships) Act 1976 (PRA) — whether the power of appointment under the trust deed was “relationship property” for the purposes of the PRA — whether the trust was a sham or illusory.

Counsel:

M J McCartney QC and K E Sullivan for First Appellant

C R Carruthers QC and A S Butler for Second Appellant

D A T Chambers QC and J R Hosking for Respondent

JUDGMENT OF THE COURT

A The appeal is allowed in part.

B We set aside the findings of the Court of Appeal that cl 7.1 of the Vaughan Road Property Trust (VRPT) trust deed (the VRPT deed) is a general power of appointment and that the power is both property and relationship property, having a value equal to that of the net assets of the VRPT.

C We substitute a finding that the powers of Mr Clayton as Principal Family Member and Trustee under cls 6.1, 7.1, 8.1 and 10.1 of the VRPT deed (read in light of cls 11.1, 14.1 and 19.1(c) of that deed) are property and relationship property having a value equal to that of the net assets of the VRPT.

D We set aside the finding of the Court of Appeal that the VRPT is not an illusory trust (i.e. that it is a valid trust). We decline to make a ruling on that issue.

E We uphold the finding of the Court of Appeal that the VRPT is not a sham.

F We make no award of costs.

REASONS

(Given by O'Regan J)

Table of Contents

	Para No.
Leave	[4]
Facts	[5]
Vaughan Road Property Trust	[10]
Relevant legislation	[15]
Are the rights of Mr (and Mrs) Clayton under the VRPT deed relationship property? Is the power of appointment under cl 7.1 of the VRPT deed relationship property?	[21]
Is cl 7.1 a general power of appointment?	[22]
Property definition	[24]
The Court of Appeal finding: general power of appointment in cl 7.1	[39]
Our interpretation of cl 7.1	[45]
The VRPT powers	[50]
General power of appointment?	[59]
Are the VRPT powers “property”?	[69]
Is this interpretation contrary to Parliament's intention?	[82]
Is the property “relationship property”?	[85]
Conclusions on VRPT powers	[98]
What is the correct valuation of the VRPT powers?	[99]
Sham trust or illusory trust?	[108]
Is the VRPT deed a sham?	[110]
Is the VRPT an illusory trust?	[118]
Is there a distinction between a sham trust and an illusory trust?	[128]
Result	[131]
Costs	[135]

1 This is an appeal and cross-appeal against a decision of the Court of Appeal, which dealt with a number of aspects of the relationship property dispute between Mark and Melanie Clayton. Most of the dispute concerned trusts established by Mr Clayton both during his marriage to Mrs Clayton and after they separated. 1

2 The Court of Appeal decision dealt with issues relating to four trusts that were established during the marriage and four trusts that were established after the parties separated. The present appeal and cross-appeal relate to one of those trusts, the Vaughan Road Property Trust (VRPT). We heard this appeal and cross-appeal contemporaneously with an appeal by Mrs Clayton relating to another trust, the Claymark Trust. Our judgment in relation to that appeal is being delivered at the same time as this judgment. 2

3 On 21 December 2015, the parties notified the Court that they had reached a settlement. In their memorandum, counsel said they accepted that the Court should still deliver judgment. The Court is also of the view that it is appropriate to deliver both judgments, given the importance of the issues they raise. 3

Leave

4 Leave was granted on to the following questions relating to the VRPT: 4

• (a) Was the Court of Appeal correct to find that there is no distinction between a sham trust and what the Family Court and the High Court described as an illusory trust? (Mrs Clayton's cross-appeal).

• (b) Was the Court of Appeal correct to find that the VRPT was neither a sham trust nor what the Family Court and the High Court described as an illusory trust? (Mrs Clayton's cross-appeal).

• (c) If so:

  • (i) Was the bundle of rights and powers held by Mr and/or Mrs Clayton under the VRPT deed “property” for the purposes of the Property (Relationships) Act 1976 (PRA)? (Mrs Clayton's cross-appeal).

  • (ii) Was the Court of Appeal correct to find that the power of appointment under clause 7.1 of the VRPT deed was “relationship property” for the purposes of the PRA? (Mr Clayton's and the VRPT Trustee's appeal).

  • (iii) If so, did the Court of Appeal err in its approach to the valuation of the power? (Mr Clayton's and the VRPT Trustee's appeal).

Facts

5 Before dealing with those questions, we briefly recount the factual background.

6 Mr and Mrs Clayton commenced a de facto relationship in 1986 and married in 1989. They separated in 2006 after 17 years of marriage, and their marriage was dissolved in 2009. They have two daughters who were born in 1990 and 1994 respectively.

7 Shortly before their marriage, the parties signed an agreement (the s 21 agreement) contracting out of the regime for the division of property on dissolution of marriage, which is contained in the PRA. 5 Under that agreement, Mrs Clayton was to receive a maximum of $10,000 for each year of marriage up to a maximum of $30,000.

8 At the time the parties met, Mr Clayton owned a small timber supply business and a block of land in Banksia Place, Tikitere, near Rotorua. The parties built a family home on that land during the relationship. The business owned two other blocks of land in Vaughan Road, Rotorua. By the time they separated, Mr Clayton had built up a significant sawmilling and timber processing business (the Claymark business). This business was owned and controlled by companies and trusts in New Zealand and the United States. The trusts involved in the appeals before us (the VRPT and the Claymark Trust) are two of those entities. The VRPT owned the land and buildings in Vaughan Road from which the Claymark business was operated while the Claymark Trust owned some adjoining land.

9 The s 21 agreement was set aside by the Family Court under s 21J of the PRA, which empowers the Court to set aside such an agreement if satisfied that giving effect to it would cause serious injustice. 6 That finding was upheld by the High Court on appeal. 7 Mr Clayton did not challenge the decision to set aside the s 21 agreement in the Court of Appeal.

Vaughan Road Property Trust

10 VRPT was settled on 14 June 1999 (some thirteen years after the relationship between the Claytons commenced) by a declaration of trust executed by Mr Clayton. He is the settlor and sole Trustee of the VRPT. The discretionary beneficiaries include Mr Clayton as “Principal Family Member”, Mrs Clayton as his wife or former wife, and their two daughters. The daughters are the final beneficiaries.

11 The Family Court Judge said the purpose for which the VRPT was set up was to separate and distance the ownership of the land associated with the Claymark business from the operating assets of the company that held the assets of that business. She described the operation of VRPT as acting as a banker. 8 She said the VRPT had borrowed largely from the Bank of New Zealand to advance loans to other entities associated with Mr Clayton.

12 As is clear from the issues on which leave to appeal has been given, Mrs Clayton claims that the VRPT is a sham or, if that claim is not upheld, that it is an illusory trust. The claim of sham has failed at all levels, but both the Family Court and High Court found that the VRPT was an illusory trust, though for differing reasons. 9 The Court of Appeal overturned the finding that the VRPT was an illusory trust, but upheld Mrs Clayton's claim that the power of appointment held by Mr Clayton as “Principal Family Member” under the VRPT deed was relationship property, and that the value of that relationship property was equivalent to the net value of the assets of the VRPT. 10

13 In this Court, Mr Clayton, in his personal capacity and as Trustee of the VRPT, challenges the Court of Appeal's finding that the power of appointment held by Mr Clayton is relationship property and that its value is equivalent to the net value of the assets of the VRPT. Mrs Clayton challenges the Court of Appeal's rejection of her claims that the VRPT is a sham or, alternatively, that it is an illusory trust. Mrs Clayton also argues that the bundle of rights and powers held by her and/or Mr Clayton under the VRPT deed are property for the purposes of the PRA and are, in the present case, relationship property.

14 The relevant provisions of the VRPT deed are set out in the appendix. 11 As will become apparent, the VRPT deed is unusual because Mr Clayton is settlor, Principal Family Member, sole Trustee and Discretionary Beneficiary and his powers as Principal Family Member and Trustee are both broad and free from the normal obligations imposed on fiduciaries in family trust deeds.

Relevant legislation

15 Section 1M of the PRA sets out its purpose. Of particular note in the present context is the purpose of recognising the equal contributions of both spouses to a

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