Trustees who delay are made to pay

Although a trustee is essentially a servant and not a master, some trustees think the relationship is the other way round: if any documents are to be given to a beneficiary, they will be given sparingly and late.

Trustees who think like this can - and should - be made personally liable to pay the costs of the beneficiaries whose interests they frustrate.

A recent illustration of this is The Cats Protection League v Deans & Anor HC CIV-2008-409-003119, 22.2.10, Osborne AJ.

Mrs Hewitt gave more than a million dollars to trustees to pay the net income to the League.  It took more than four months for the trustees to inform the League of its right to income.  Three months after that, when the League had heard nothing more from the trustees, nor received a cent, the correspondence started.

And it was nearly all one way:  beneficiary action met by trustee reaction.

It is surprising how many trustees have not caught up with the new reality of beneficiary entitlement to information.

Over the course of months the League sought a list of investments (it took four months to get this information), interest rates, expenses that the trustees had charged to the Estate, an account of what had happened to the original investments, a Trust account, and other financial information.

The trustees had engaged a fund manager and they justified some delays by saying that “a professional trustee does not have ‘at their fingertips’ the detailed trading undertaken by a financial manager.” 

They went further and said that the manager’s financial records were not strictly “trustee records” that were available for them to provide.  As the Judge said, “there is no merit in that analysis” [27].  They could not avoid their accountability by delegating trading to a financial manager.

They said it was unreasonable for the beneficiary to assume ‘that the trustees have at any one time detailed information to hand of action taken by the investment adviser”.  To this, the Judge said “If the trustees did not have a reasonably detailed understanding of the history of their investments to hand, they should have done.”  [28].

The League instructed lawyers who resorted quite quickly to making demands for responses within 7 days.  When this tactic failed to produce enough information, they resorted to threats of litigation.  The threats turned into reality and they filed a proceeding in which they sought documents and information relating to the Trust’s finances.  It was only when the Trustees engaged counsel to represent them that the disputes were resolved.  The prospect of a public hearing of allegations of breach of duty will usually cause an errant Trustee to remedy his or her default. 

The Court was asked to rule whether the Trustees should pay costs to the League and Osborne AJ held that the trustees were personally liable to pay 50% of the assessed costs.

In doing this he followed Re O’Donoghue [1998] 1 NZLR 116 where Hammond J had said “I can see no proper reason for the trustee having adopted the obdurate position he did …”.  Having adopted that stance, “it cannot be right that [the trustee] should then seek to offload his costs of the proceeding onto the residuary beneficiary.  There will, therefore, be an order that the trustee is not entitled to [an] indemnity from the Estate for his costs or disbursements …”  [page 122].

The Judge held that the trustees must pay 50% of the beneficiary’s costs and disbursements.  He said “As in Re O’Donoghue, there is no doubt that the trustees through their stance leading to the litigation have caused loss to the beneficiary in the sense of legal costs.”  [41].  And “an injustice would be caused if the plaintiff’s costs were either left to be absorbed by the plaintiff itself or reimbursed to the plaintiff from the Trust capital.  Ultimately, the final impact of either course will fall entirely on the plaintiff as income beneficiary.”  [42].

There is a sting at the end of this tale.

Our system for assessing recoverable costs produces sums that are typically so small that they give no incentive for a plaintiff to sue and no incentive for a defendant to settle.

I have asked the League how much money the trustees have been ordered to pay but it won’t say.  I suspect it may be a couple of thousand dollars and far less than it spent on legal fees.

Many think it wrong that innocent litigants should be punished by the State for standing up for what is right. 

If defaulting trustees had to pay costs on a solicitor/client basis the level of compliance with trustee obligations would inevitably rise with it.  The prospect of an award of solicitor/client costs would be as clear an incentive for an innocent beneficiary to issue proceedings against a defaulting trustee as it would be a powerful incentive to a defaulting trustee to comply with his/her obligations.

This state of affairs is something that the Rules Committee should address.