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An unexpected role for the independent trustee?!

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Claims against property owned by trusts can be made by strangers to the trust according to the principles laid down in Lankow v Rose.[1]

These constructive trust claims have recently become more common where a disappointed husband or wife (including de facto) finds upon separation of matrimonial property that the other party’s trust stands in the way of access to a share of property used in the relationship. 

Essential to such claims is proof of the making of contributions to that property by the claimant.  A conventional example is the work done or paid for on that property with a consequential increase in value.  Provided the trustee owners of that property could be shown to have known of the contributions so as to be obliged to yield up some interest in that property to the claimant, their failure to provide that interest may be held by a Court to be unconscionable.   In that event an order will be made in favour of the claimant.

A good example of such a case was to be found in Murrell v Hamilton where the trust in question built and later sold a house in which for a time the de facto couple lived.  The house was owned by the husband Mr Hamilton’s trust, but he (one of the two trustees) and his partner were involved in the building of it.  Her contribution was significant.  In the High Court she would have succeeded in her claim to an interest but for the fact that the other (independent) trustee knew nothing of the contributions she made, and so the expectation she could reasonably have held that she would have that interest.  On appeal to the Court of Appeal[2] she did succeed.   It was held that the lack of such knowledge did not matter where that independent trustee could be shown to have abjured his responsibility as a trustee and in effect delegated his function to the other trustee who did have that knowledge. 

In Judd v Hodgkinson[3] the High Court followed the Court of Appeal decision in Murrell v Hamilton in holding that the independent trustee was in a similar position to that in Murrell.  That was despite the substantial differences between the independent trustees in each case.

In Murrell v Hamilton the independent trustee had very little to do with the trust’s activities and was involved only in the annual financial statements and resolutions, even though it seems that he must have known of the husband’s building activities involving the trust and left him to it.

In Judd v Hodgkinson the independent trustee was much more significantly involved in the trust’s affairs meeting his co-trustee (the equivalent of Mr Hamilton) at least fortnightly, and so keeping abreast of the trust’s activities, its beneficiaries and financial position at least fortnightly.  He even held the trust chequebook and usually signed the cheques including those for building and improvement work on the trust property.  He knew that the wife (Ms Judd) lived in the trust’s house at that property, had met her, and dealt with her tax returns. 

Despite those significant differences the Court of Appeal then held in Hodgkinson v Judd[4] that the independent trustee had the same status as had the independent trustee in Murrell v Hamilton.  It said –

“[46] We consider it can be said that in the present case the conscience of both trustees is affected.  Mr Hodgkinson obviously had direct knowledge of the contributions being made by Ms Judd but, as the Judge found, Mr Dine had effectively given Mr Hodgkinson “carte blanche” to do as he wished with the assets of the Trust.  The requirement for unanimity cannot be used as a shield in this situation where one trustee has abdicated responsibility and so enabled trust property to be improved without first resolving the basis of receipt.”

In answer to the concerns expressed for such trustees generally that there was very little such trustees could be expected to do to know about and then take steps to head off a potential claim the Court of Appeal said –

“[48] ....it was open to the trustees to take steps to preserve the position they now seek to maintain.  They could have taken advice on the issue at the time of the marriage.  Further, Mr Hodgkinson could have entered into a relationship property agreement with Ms Judd.  Absent such an adjustment of her expectations, where the contributions are to the matrimonial home and the trustees have encouraged or permitted these contributions, it would be wrong to treat a contributor like Ms Judd as a volunteer.”

That means it is not enough for the independent trustee to point to the fact that one of the main purposes of the trust was to protect the trust assets from claims by the husband’s future wife or partner!

Independent trustees, it seems, must now be alert to the possibility of a constructive trust claim and be proactive in taking steps to avoid them.  How practical that may turn out to be and how likely it is that such steps will succeed remains to be seen. 

In the Judd v Hodgkinson case the independent trustee would likely have had to have made a number of visits to the house property, to have interviewed the wife claimant as to the contributions if any she was making to it and their significance, and ensured the husband was not behaving in a way which could have led his wife to think she had some claim against the house property. 

If you are setting up a Trust, or to discuss any matters raised in this article, contact one of our Trusts experts  Magnus Macfarlane, Gerry Sullivan or Stephen Greer.
Related article: How safe is my trust?

[1]Lankow v Rose, [1995] 1 NZLR 277 (CA) or

[2]Murrell v Hamilton, [2014] NZCA 377, 7 August 2014

[3]M K Judd v Hawke’s Bay Trustee Company and R W Hodgkinson [2014] NZHC 3298, 17 December 2014

[4]Hawke’s Bay Trustee Company Ltd & Anor V Michelle Kerrian Judd, [2016] NZCA 397, 17 August 2016