DUTIES OF EXPRESS TRUSTEES/REMEDIES FOR BREACH

for property test

What is a trustee?

A legal owner of trust property, but not to treat the trust property as their own

What is the trust triangle?

Duties flow from the relationship between trustee and beneficiary, while there is no legal relationship between the beneficiary and settlor

Consequences for breach of trust

Removal as a trustee, being found personally liable to the beneficiary for loss suffered, and facing proprietary remedies

Important for multiple trustees

To act unanimously and not unilaterally

The overarching fiduciary duty

Loyalty

Rule from Re Thomson; Thomson v Allen

Trustees are to avoid situations where personal interests conflict or may conflict with beneficiary duties

Re Thomson facts

Competing yacht business was established by the trustee and thus breached fiduciary duties

Where to find trustee duties

The trust, Trusts Act 2019, or the ‘common law’ of equity

Mandatory duties

Duties that mut be fulfilled and cannot be changed by altering the trust deed

Mandatory duties sections

ss 23-27 Trusts Act 2019

s 23

The trustee must obtain complete evidence about the terms, what the trust property is, and who the beneficiaries are. The trustee must determine if they have a conflict of interest.

s 24

A trustee must undertake to carry out the wishes of the settlor as expressed in a deed or will

Lee v Torrey facts

Trustees of a trust made for the benefit of one of two sons were worried the other son might sue so used trust assets to pay him $25k. They also sold a car and misappropriated the trust money.

Exceptions to s 24

1. If beneficiaries are adults of sound mind, they can direct trustees to deviate

2. if the instructions in the deed are impossible to carry out

3. The court has an inherent jurisdiction to sanction deviation from the requirements of the trust

4. s 130 of the Trusts Act permits variations to be made to a trust deed by the HC where necessary or desirable for the proper management or administration of the trust property

s 25

Act honestly and in good faith

Armitage v Nurse

‘the duty of the trustees to perform the trust honestly and in good faith for the beneficiaries is the minimum necessary to give substance to the trust’

s 26

Trustee must act for the benefit of the beneficiaries (usually means maximising or protecting financial interests but can extend to cultural or religious interests)

s 27

Exercising power for a proper purpose: trustees are to use the powers for the purpose for which they were conferred. This reflects the broader fiduciary duty of loyalty.

Default duties

These duties apply unless the deed explicitly excludes or modifies them

Default duties sections

ss 28-38

Duties of prudent management

Trustees must preserve value, grow value and generate returns where appropriate

s 29

General duty of care; trustees are to exercise all reasonable care and skill when administering the trust. Particular regard is to be made to any special knowledge or experience of the trustee.

s 30

Duty to invest prudently; regard is to be had to special knowledge of the trustee and special knowledge that is reasonably expected of professional trustees

s 34

Duty to avoid conflict of interest; trustee must avoid conflict between their own interests and beneficiaries’ interests

s 35

Duty of impartiality; a trustee must act impartially between beneficiaries and not unfairly favour one beneficiary or class of beneficiaries. Doesn’t require equal treatment.

Re Mulligan rule

Trustees must invest fairly where investments affect different classes of beneficiaries differently

Re Mulligan facts

Trust fund invested in fixed-interest investments; widow received a strong income but capital failed to grow with inflation. When widow died, the remaining capital had lost all real value. The trustee had consistently favoured the widow’s interests

s 36

Duty not to profit; a trustee must not make a profit from the trusteeship of a trust

Bray v Ford rule

A person in a fiduciary position is not, unless expressly provided, entitled to make a profit

Boardman v Phipps rule

Fiduciaries cannot exploit opportunities acquired through fiduciary positions

Boardman v Phipps facts

Both purchased shares personally with trustee consent and obtained confidential information while acting in a fiduciary position.

s 37

Duty to act for no reward; trustees generally act gratuitously but may recover expenses or receive authorised remuneration.

Exceptions to s 37

Where the trust deed authorises payment, the beneficiaries consent, or the court orders a remuneration order under s 139.

s 56

General powers of trustees; trustees have all powers to manage trust property, similar to those of an absolute owner

s 58

Power to invest; a trustee may invest trust property in any property. Broad investment powers limited by duties of care and prudence

s 59

Matters relevant to investment; when investing, trustees may consider factors appropriate to the trust’s circumstance.

s 60

Income and capital; trustees may determine whether a return should be treated as income or capital

Remedies available for breach of trust

Termination of trust, order compelling performance, injunction restraining a breach, compensation for loss, tracing or following, and claims against third parties for knowing receipt and dishonest assistance

Personal claims for breach of trust are

Account of profits, equitable compensation and injunctions

Account of profits purpose

To strip the gains obtained through breach of fiduciary duty and prevent the fiduciaries from profiting off wrongdoing

Account of profits may apply even where:

1. the plaintiff suffered no loss

2. the plaintiff could have never made the profit

3. the defendant acted honestly

4. the plaintiff actually benefitted from the transaction

Chirnside v Fay rule

An account of profits may be reduced by an allowance for the defendant’s skill, effort, and work in generating the profit

Equitable compensation purpose

To reconstitute the trust fund and restore the trust to the position it would have occupied had the breach not occurred

Basic rule for equitable compensation

A trustee must restore trust assets lost through the breach OR compensate for the loss caused

Spencer v Spencer

Trustees had not acted honestly and thus breached the trust. The remedy included Robert being awarded money for his unpaid weekly entitlements, the remaining trust assets were to be restored to the trust, and new trustees were appointed to distribute the assets.

Relief from liability

Trusts Act 2019 s 131: courts may relieve a trustee from personal liability where they have acted honestly and reasonably and ought fairly to be excused. Relief remains discretionary

Relief in Spencer v Spencer

Was unavailable because the trustees had not acted honestly

Relief in Re Mulligan

Was unavailable because the trustee company had not acted reasonably

Proprietary claims are

Tracing, following, constructive trusts, and equitable proprietary claims. These claims focus on the property rather than personally on the trustee

Tracing

Allows beneficiaries to identify trust property as it changes form

Why tracing?

It allows a beneficiary to trace their equitable interest into the replacement asset. This is useful where the trustee is insolvent

Exception to tracing

A bona fide purchaser for value without notice, and where no traceable property remains

Foskett v McKeown rule

Beneficiaries can trace their property into the asset and choose to claim a proportionate share of its total value or proceeds

Foskett v McKeown HoL found

The interest the purchasers had was an equitable proprietary interest in the original trust money which can be traced into substitute property unless it reaches a bona fide purchaser for value without notice

Unmixed tracing

Straightforward as trust money remains separate

Simple mixed tracing

This occurs where the trustee mixes trust money with personal money

Re Hallett’s Estate presumption

A trustee is presumed to spend their own money first (this protects beneficiaries)

Held in Re Hallett’s Estate

Beneficiaries do not lose proprietary rights merely because the trust money becomes mixed. Where they become mixed, the beneficiary may claim a proprietary in substitute assets (assert ownership over new property bought with misappropriated trust money)

Clayton’s case rule

The first money deposited into an account is presumed to be the first money withdrawn

Re Oatway presumption

Where trust money and personal money are mixed, the beneficiary may choose the tracing method that best protects their interest (they may claim the surviving asset or claim the remaining balance)

Roscoe v Winder presents

A limitation to the Hallett and Oatway presumptions

Roscoe v Winder rule

Once trust money is spent, it is gone; later deposits of personal money do not become trust property. Beneficiaries can only trace into the lowest balance that remained in the account

Following

Involves tracing the same asset as it moves between people

Limit to following

Equity’s darling, however, the beneficiary may still be able to trace the proceeds of the sale

Two types of claims against third parties

Dishonest assistance and knowing receipt

Dishonest assistance

A third party assists with breach of trust

Barnes v Addy - elements of dishonest assistance

1. fiduciary duty

2. breach of fiduciary duty

3. assistance

4. dishonesty

Royal Brunei Airlines v Tan rule

The trustee’s state of mind does not matter. The question is: was the third party dishonest?

Royal Brunei - test for dishonesty

An objective test of whether a person was ‘not acting as an honest person would in the circumstances’

Westpac NZ Ltd v MAP & Associates rule

Dishonesty may consist of actual knowledge OR strong suspicion and deliberate failure to inquire - this wilful blindness, the courts treat as equivalent to actual knowledge

Knowing receipt

The defendant received trust property

Elements of knowing receipt

1. fiduciary duty

2. breach of

3. receipt of trust property

4. sufficient knowledge of the breach

Baden levels of knowledge - knowing receipt

1. actual knowledge

2. wilfully shutting eyes

3. recklessly failing to inquire

4. knowledge of suspicious circumstances (facts would indicate wrongdoing to an honest person)

5. circumstances putting person on inquiry (facts would prompt an honest person to investigate)

Pounamu Properties Ltd v Brons facts

Mrs Crawford received the benefit of a unit. She didn’t know about her husband’s breach of duty in accordance with Baden categories 1-3. But she fell within categories 5 and 6 which was that an honest and reasonable pperson would have realised something was wrong and made inquiries

McLennan v Livaja

Focuses on unconscionability - is it unconscionable for the recipient to retain the property?

Khan v New Zealand Muslim Association

The recipient’s state of knowledge must make it unconscionable for them to retain the benefit