Abuse of trust

 

Background

In the New Zealand Court of Appeal (the Court of Appeal) case of A, B and C v D and E Ltd,^[1] the plaintiffs were given the fictitious names of Alice, Barry and Cliff (A, B and C, respectively), the three living adult children of Z (Robert).

The defendants, D and E Ltd, were the surviving trustees of the Z Trust (the Trust), which Robert settled in December 2014 for the benefit of himself and third parties with an expressed intention of alienating most of his assets, so they did not form part of his estate in order to ‘prevent[s] any of his family getting any of his [assets]’. Robert was a trustee of the Trust. The trust assets were worth approximately NZD700,000 and comprised a house and shares gifted in December 2014 and January 2016, respectively. Robert died in April 2016.

It was accepted in the High Court of New Zealand (the High Court) and the Court of Appeal that the plaintiffs and their mother were repeatedly physically, mentally and emotionally abused, and were threatened with firearms. It was also accepted that Alice, from the age of seven, was repeatedly raped and sexually abused by her father. These incidents occurred in the 1960s and 1970s, with their parents’ marriage ending in 1983. Robert established a new relationship for a time with a woman with children and grandchildren from another relationship, who were also made beneficiaries of the Trust. The plaintiffs or their children were mentioned in some of Robert’s wills, but no provision was made for them in his final will of November 2015.

The plaintiffs said they were each estranged from Robert as adults because of his abusive behaviour and they had little contact with him. The effects of this abuse have continued during the plaintiffs’ adult lives. Alice disclosed the abuse to a doctor in 1982 and wrote to Robert in 1992 telling him about its effect on her life and the suffering this had caused. She received no response. Alice was diagnosed with post‑traumatic stress disorder and major depressive disorder. Barry and Cliff gave similar evidence of physical and emotional abuse and its long‑term effects on them. The abuse left them emotionally and psychologically vulnerable, and educationally and financially deprived. The plaintiffs’ evidence was that they were operating under a disability as a result of their father’s abuse. They argued that the continued disability they suffered meant the fiduciary relationship between them and their father continued into their adulthood. The High Court judgment provides some of the harrowing details of the abuse suffered.

Legislative background: abolition of gift duty

An unintended consequence of the abolition of gift duty in New Zealand from 1 October 2011 was that a person could more easily gift away assets on their deathbed, ^[2] so as to defeat legitimate family claimants to their estate under the Family Protection Act 1955 (the Act). Previously, when gift duty was in force, the gift of a house and shares to the trustees, as in this case, would have incurred total duty of at least NZD150,000 that would have been due by the trustees.^[3] This would have been a strong disincentive to make such gifts, given New Zealand had no death duty.

A special report by the Policy and Strategy area of Inland Revenue (previously the Policy Advice Division) discloses that none of the government ministries consulted opposed gift duty abolition,^[4] relying on an earlier review:

‘As the review progressed, a strong case for outright abolition emerged. Some of the concerns which existed in 1992 have been addressed or reduced by the strengthening of existing legislative provisions. Remaining areas of concern were scrutinised in consultation with the Treasury, the Ministry of Economic Development, Ministry of Justice, Ministry of Health, New Zealand Police, the Ministry of Social Development, and Housing New Zealand Corporation. None of these agencies opposed gift duty abolition and several have said they will make administrative changes to support its abolition’.^[5]

In addition, in answer to an FAQ, at page 5:

‘Ministry of Justice officials do not consider changes to the Property (Relationships) Act, Family Protection Act and the Law Reform (Testamentary Promises) Act are required. The underlying philosophy of these Acts is that individuals are generally free to deal with their own property as they wish – any entitlement one person may have to the property of another does not arise until the actual event of separation or death … The Ministry of Justice will monitor any impacts of gift duty abolition to inform the government‑wide post‑implementation review.’

The underlying philosophy of the Act was to ensure that where adequate provision had not been made for a very limited class of persons related to the deceased, those people could claim against the deceased’s estate rather than be a burden on the state. The legislation referred to in the special report did not include ‘the underlying philosophy that individuals are free to deal with their property as they wish’.

It would appear that the effect of the abolition of gift duty on the operation of the Act was either overlooked or not considered by government officials as it related to circumstances such as the present case. Other parties that might be vulnerable following the abolition of gift duty, such as creditors or the Ministry of Social Development,^[6] had their own statutory or regulatory protection. ^[7]

Consequently, assets may now be transferred to a trust to frustrate claims under the Act, which has no anti‑avoidance provision. It should also be mentioned, by way of comparison, that under s.4 of the Act, the court’s jurisdiction is limited to circumstances where a deceased has failed to make ‘adequate provision’ for the claimant. It is thought that the comparable English and Welsh legislation, which enacts a standard of ‘reasonable provision’, requires more generous treatment. Generally, the New Zealand statute has been interpreted by the courts conservatively, to give greater recognition to a testator’s wishes.^[8]

In terms of alternative legal remedies, the Accident Compensation Act 1972 (the 1972 Act)^[9] introduced a bar to civil claims for personal injury. However, it did not prevent a plaintiff from suing for exemplary damages (except in respect of criminal proceedings before 1998)^[10] where they were the victim of an assault or for breach of fiduciary duty giving rise to physical and emotional harm, such as in a doctor/patient relationship. In the present case, a claim in tort had long expired under the then Limitation Act 1950 (the 1950 Act).

High Court decision

In the substantive High Court proceeding, Justice Gwyn held that:^[11]

• Robert’s relationship with his children was inherently fiduciary when they were in his care. The abuse Robert inflicted on each of his children was a breach of the fiduciary duty he owed them. Once his children became adults, Robert ceased to have an inherently fiduciary relationship with them.
• Robert’s earlier breaches of the fiduciary duties he owed to the plaintiffs left them emotionally and psychologically vulnerable, and educationally and financially deprived. The consequence of his breaches was enforced incompetence and non‑autonomy.
• This was not a case about testamentary freedom but property rights and the ability to deal with property during one’s lifetime, subject only to pre‑existing legal constraints. The plaintiffs’ vulnerability was a direct consequence of Robert’s own actions. Their abuse, particularly that suffered by Alice, was egregious. To find a fiduciary relationship between Robert and the children as adults would not give rise to a floodgate of litigation (as the trustees asserted).
• At the time he gifted the property to the Trust, Robert owed each of the plaintiffs a duty to recognise them as members of his family and provide for them from his wealth. This arose from the vulnerability his earlier breach of fiduciary duties had caused them. The transfer was in breach of the fiduciary duties Robert owed his children.
• The trustees were liable for knowingly receiving the property gifted by Robert because his knowledge as trustee was imputed to the other trustees of the Trust.^[12]
• The assets of the Trust were held on a constructive trust for Robert’s estate.

In a subsequent supplementary judgment, A, B and C v D and E Ltd,^[13] Gwyn J held that:

• the constructive trust imposed on the trustees was an institutional constructive trust effective from the date of receipt of the property;
• the interim distributions to the Trust beneficiaries were made after the institutional constructive trust came into existence and could not stand; and
• the defendant trustees were not entitled to indemnity costs from the trust fund.

The trustees appealed.

Court of Appeal

Overview

In D and E Ltd v A, B and C,^[14] Justice Collins, writing the principal judgment, dissented in part by dismissing the trustees’ appeal in respect of Alice but agreed with President of the Court of Appeal Stephen Kós and Justice Gilbert in allowing the appeal in respect of the sons. Kós P and Gilbert J found for the trustees in regard to Alice, so allowing their appeal in full.

While Collins J and Kós P agreed on the issue of fiduciary duty while children are minors, Kós P disagreed as regards any continuing duty. He also disagreed with Collins J in regard to the nature of the remedy in a situation such as the present. Collins J argued for rescission of the transfer of the father’s assets to the trust, whereas Kós P maintained that the remedy for breach of fiduciary duty, by way of sexual or other physical abuse, would be equitable compensation. Gilbert J on the issue of fiduciary duty argued for the traditional, limited approach. The trustees’ appeal from the High Court was therefore allowed, effectively dismissing the claims by the adult children.

Fiduciary duty in the High Court and the Court of Appeal

Fiduciary duty in the High Court

In the High Court, Gwyn J noted that there were two broad circumstances in which the courts would categorise a relationship as fiduciary: those recognised by law as inherently fiduciary (such as solicitor/client relationships) and those where the law imposed fiduciary obligations because the particular circumstances justified doing so, namely ‘where one party is reasonably entitled to repose and does repose trust and confidence in the other, either generally or in a particular transaction ...’.^[15] The High Court  also noted that a significant, recent development in this area was the recognition of fiduciary duties in circumstances of physical and sexual abuse and a move away from tying fiduciary protection to economic interests. Gwyn J referred to the Canadian Supreme Court decision of M (K) v M (H)^[16] and a New Zealand case that also supported this approach.^[17] Robert’s relationship with the plaintiffs, as their parent and caregiver while they were children, was inherently fiduciary, here limited to the requirement to refrain from sexually or physically assaulting the plaintiffs.

The High Court concluded that although Robert’s relationship with the plaintiffs as children was inherently fiduciary, the relationship of an adult child to their parent is generally of a non‑fiduciary kind unless there were aspects that engaged fiduciary obligations within the second Chirnside category.^[18] Gwyn J then referred to Judge Wilson’s formulation in Frame v Smith and the three general characteristics of a fiduciary relationship,^[19] namely:

• the fiduciary has scope for the exercise of some discretion or power;
• the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiaries’ legal or practical interests; and
• the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

The High Court pointed out that the key feature of vulnerability was fundamental to all fiduciary relationships. Gwyn J concluded that there was no reason, in principle, why fiduciary principles should not be extended to cover a relationship and circumstances that have not, to date, been recognised as fiduciary. This was not a case about testamentary freedom but property rights and the ability to deal with property during one’s lifetime, subject only to pre‑existing legal constraints. The plaintiffs’ vulnerability was a direct consequence of Robert’s own actions.

Fiduciary duty in the Court of Appeal

In the principal judgment, Collins J set out observations regarding fiduciary duties in New Zealand:^[20]

• Fiduciary duties are assumed responsibilities and may be inferred where the relationship is one of assumed trust, confidence and loyalty.
• A relationship may give rise to fiduciary duties:
  • when there is an inherently fiduciary relationship between the parties; or
  • when particular aspects of a relationship not inherently fiduciary nonetheless justify it being classified as such (Chirnside v Fay)^[21] and which in either situation is marked by the entitlement of one party to place trust and confidence in the other.
• Some relationships are inherently fiduciary in nature, such as solicitor/client and trustee/beneficiary relationships, whereas in other cases a fiduciary relationship is only likely to be inferred when the legal relationship involves:
  • conferral of powers that may be used to affect the proprietary rights of the beneficiary;
  • the apparent assumption of a representative or protective responsibility by the alleged fiduciary for the beneficiary; and
  • the implied subordination of the alleged fiduciary’s own self‑interest.

In regard to ‘vulnerability’, Gilbert J considered this to be vulnerability to an abuse of fiduciary power:

‘They were only “vulnerable” and “at his mercy” in terms of any atonement for his offending because of their freely informed decision not to pursue any remedy against him until after his death.’^[22]

Kós P disagreed with Gilbert J on this point, noting that although vulnerability was expressly stated in the Canadian formulation, it was:

‘… inherent in its New Zealand counterpart. It is not to be over‑emphasised, however; it refers to vulnerability arising from the relationship itself, rather than existing apart from it. For instance, in many principal/agent relationships, the principal will be the far stronger party economically; the principal’s vulnerability arises from the act of empowering the agent to manage its affairs’.^[23]

Fiduciary duties in a family context

Collins J discussed fiduciary duties in a family context, in particular the relationship between parent and child, which had been recognised as fiduciary in Canada and New Zealand. Hallmarks included the actual or implied trust and confidence a child has in a parent and a duty not to act contrary to the child’s interest. A breach of fiduciary duty was recognised in the situation of sexual abuse by a father of his daughter as a child in the Canadian decision of M (K) v M (H).^[24] Those principles were applied in New Zealand in B v R.^[25] Robert’s relationship with each of his children while living in his home was inherently fiduciary and breached by his proven physical abuse of Barry and Cliff and proven sexual abuse of Alice.

Kós P agreed with Collins J that the relationship between the children and their father was inherently fiduciary in nature for so long as they lived with or were cared for by him:

‘The relationship between parent and child is – or should be regarded as – inherently fiduciary in nature, at least for so long as the parent undertakes care of the child. It is difficult to imagine a context in which greater trust and confidence is reposed. That the relationship is not primarily economic does not alter that reality or analysis.’^[26]

Kós P reasoned further:

‘That a fiduciary duty should be recognised in a parent/child context is supportable by reference to cases involving more conventional fiduciary relationships: doctor and patient and priest and penitent. I refer to these cases because they have two points in parallel with the present appeal. First, the relationship is often purely personal in nature, rather than proprietary. Secondly, the nature of the abuse at issue in a claim for breach of duty may be similar in nature, being sexual or other physical abuse.’^[27]

It was noted that it had long been accepted that a doctor is in a fiduciary relationship with a patient when dealing with their property, citing Dent v Bennett and Mitchell v Homfray.^[28] Kós P continued:

‘A more contested issue is whether the doctor‑patient fiduciary relationship extends beyond these proprietary grounds. The proposition that it does has been effectively rejected in England and Wales in Sidaway v Board of Governors of the Bethlem Royal Hospital (HL)^[29] and in Australia in Breen v Williams (HCA).’^[30]

In concluding, Kós P considered that the duty in a family context should be cast in negative terms:

‘[A]s I see it, the fiduciary duty is to refrain from acts that fundamentally violate the relationship of trust inherent in a parent‑child relationship. Foremost within a duty expressed in such terms is to refrain from sexually and physically abusing the child.’^[31]

In the present case, the judge’s findings on sexual and other physical abuse by the father were unchallenged and there was no reason to doubt those findings. Gilbert J made no comment or disagreed regarding such a fiduciary duty.^[32]

Can fiduciary duties to the child extend beyond childhood?

Collins J noted that in some circumstances, the inherent fiduciary relationship between parent and child may continue after a child becomes an adult: for example, a child with severe disabilities who is dependent on their parents for care and support, with the continuous relationship being inherently fiduciary. Kós P may have left this door open in stating the duty ended ‘when the responsibilities of parental care ended’. In the present case, this was ‘on the children leaving home’.^[33] It might be argued, however, that where the physical and emotional abuse is so serious that the children are forced to leave home, should this factor end the fiduciary duty? It also leaves open the question of ongoing damage already caused.

Another issue relates to the absence of subsequent contact between Robert and his children, which was the basis on which the majority rejected a duty in favour of Alice.

Collins J picks this point up:^[34]

‘The majority have used the absence of contact between Robert and Alice to reason that Robert could not have owed fiduciary duties to Alice. I do not, however, consider the absence of contact between Alice and Robert to be a barrier to Alice’s expectation that Robert would provide for her. The absence of contact between Alice and Robert was the direct consequence of Robert’s abuse. Alice could not have been expected to continue contact with Robert, but Alice could expect Robert to provide her with the support that she needed as a result of the abuse. It would, in any event, be perverse if Robert could avoid being held to be a fiduciary by relying on his earlier breaches of fiduciary duty.’

A fiduciary duty in novel circumstances

Collins J, like Gwyn J, acknowledged that to find a fiduciary duty would be to recognise a fiduciary relationship in novel circumstances but noted ‘the categories of fiduciary relationships are not closed, and it is a strength of equity that it can respond flexibly to the needs of justice’. Collins J also pointed out:

‘It is not an adequate response to argue that finding a fiduciary duty in this case is unprincipled and outcome driven. Rather, it is an example of equity responding to an unprecedented situation by applying the established indicia of a fiduciary relationship. In the exceptional circumstances of this case, the needs of justice require the recognition of a fiduciary relationship between Robert and Alice … that continued throughout Robert’s life … Robert’s transfer of his principal assets to the Trust to deprive Alice of any meaningful claim against his estate was in breach of this fiduciary duty.’^[35]

In regard to the sons, Collins J allowed the trustees’ appeal. He considered that they did not have the requisite trust in Robert when he transferred his principal assets to the Trust. The judge found Barry and Cliff ceased to rely on their father once they left home. In contrast, Alice’s life was ruined by the nature of the abuse inflicted, which caused profound and enduring psychological trauma throughout her life, and her situation was comparable to that of an adult child with disabilities. The judge expressed the view that the sons made good their lives after many long years battling their childhood disabilities. However, the evidence and the High Court judgment might be thought to paint a more sombre picture of their disabilities in adulthood.

Remedy

The Court of Appeal disagreed with the High Court as regards remedy. Collins J considered that a claim in knowing receipt gave rise to a personal rather than proprietary remedy such as a constructive trust. The judge did not view this as fatal to Alice because the equitable principles governing rescission were available where property has been transferred in breach of a transferor’s fiduciary obligations. The transfer may be rescinded, with the trustees and beneficiaries receiving the property as volunteers.

Kós P maintained that the usual remedy for a fiduciary’s breach of duty, by way of sexual or other physical abuse, must be equitable compensation, referring to the Canadian case of Norberg v Wynrib.^[36] In that case, a doctor had sexually abused his patient by procuring sexual favours in exchange for drugs. The remedy of equitable compensation had also been applied in priest/penitent cases involving sexual abuse that were not time‑barred.

Kós P agreed with Gilbert J that the transfer to the Trust was not in breach of fiduciary duty and could not be rescinded. The residual personal claim for equitable compensation could not be converted to (and preserved by) a continuing proprietary claim to the father’s property. That Alice suffered enduring vulnerability and disadvantage did not sound in a new or sustained fiduciary duty to make proprietary provision during the many years they no longer lived together. This would amount to overreach and convert a purely personal claim into a proprietary one where proprietary remedies had no place.

A conservative judgment?

It is the author’s respectful view that Gilbert J appears to chart a more conservative course, against a backdrop of earlier Supreme Court and Court of Appeal judgments over the past 15 years, which have indicated a cautiously wider approach to fiduciary duties. The judge did not offer comment on whether there was a fiduciary relationship between Robert and the respondents while they were children nor whether he owed a fiduciary duty not to physically or sexually abuse them. It was noted that no such fiduciary relationship or duty had been recognised in Australia or England and Wales. The judge argued that the respondents could have successfully pursued claims against Robert in tort for assault and battery and for breach of fiduciary duty because those causes of action arose prior to 1 April 1974, which is when the accident compensation legislation came into force. A further argument against finding for the children was that they continued to have no contact with Robert.

Gilbert J considered that there was no fiduciary relationship between Robert and his adult children at the time he gifted his assets to the Trust, referring to the central, distinguishing obligation of a fiduciary, to act with undivided loyalty to the beneficiary, being absent. However, that is only one limb of fiduciary duty arising in the situation of a solicitor/client or trustee/beneficiary relationship and not the one that arises in this case.

Gilbert J argued that the respondents had no proprietary claim to Robert’s assets and that the fiduciary duty proposed by Collins J in regard to Alice in her adult life:

‘is not only novel but unprincipled … such an approach opens up the possibility of a vast expansion of the circumstances in which claims for breach of fiduciary duty can be advanced, without a sound foundation in principle’.^[37]

Gilbert J argued there was no authority given for the proposition that parents owe their children lifelong fiduciary duties of any kind. Both Collins and Gwyn JJ note the exceptional circumstances of this case. In allowing the appeal in full, Gilbert J concluded, ‘I cannot agree that equity can supply the remedy sought in this case following Robert’s death.’^[38]

Conclusion

That the children had no ongoing contact with their father was not surprising given the abuse suffered for an extended period at such a vulnerable age. One would think that in early adulthood they were focused on trying to hold their lives together rather than contemplate litigation against their abusive father. There appears to be some confusion around the significance of the lack of contact. Not having contact may be disentitling conduct under a claim under the Act but has limited relevance to fiduciary duty.

With regard to the failure to take up a claim in tort, it is suggested that this is largely illusory. Although the other two children were born in the early 1960s, Cliff was born in 1971. Claims in tort were barred three years later by the 1972 Act. The effect of this and the 1950 Act left little of a window within which to achieve a just remedy. Given the damage suffered by the children, it must be questionable whether this was a realistic expectation in the circumstances of the case.

In what appears to be a government department oversight, with the abolition of gift duty, the New Zealand Parliament’s statutory intention and provision under the Act has, in the present case, been negated. Breach of fiduciary duty, as held in the High Court, is a potential solution and Collins J’s judgment provides the remedy.