Relationship property: Clayton v. Clayton

A Bay of Plenty timber milling entrepreneur with business interests valued at $107.2 million and assets held through a structure of family trusts has seen a key funding trust prised open by the Court of Appeal in a relationship property claim because a general power of appointment in the trust deed potentially enabled him to take sole ownership of all trust assets.  The case has been referred back to the High Court for a decision on the value of this power of appointment now categorised as relationship property.  

Mark Clayton established various trusts to hold business and personal assets during his seventeen year marriage.  The court was told that when the marriage came to an end in 2006 title to the family home in Banksia Place, Rotorua was in his name, but most of the family’s assets including holiday homes and motor vehicles were owned by interest associated with Mr Clayton.  His business interests are owned and controlled by a number of companies and trusts in New Zealand and the United States.  His wife Melanie claimed she was entitled to half the net value of the business and trust assets as relationship property: a claim totalling $28.8 million.

At issue was whether Mark Clayton’s business assets are relationship property.    

Evidence was given that a key component of his business is a trust set up in 1999 called the Vaughan Road Property Trust.  This trust is used as banker for the business.  Loans to the business are channelled through the Trust and then advanced to companies and other trusts within Mr Clayton’s business empire.

Legal advisers for Mrs Clayton attacked the validity of this Trust, arguing it was a sham or illusory, being Mr Clayton in disguise.  The Court of Appeal ruled the Trust was valid.  It was properly set up and operated for a valid business reason; to separate fixed assets owned by the business from its operating assets.  The general rule is that assets held within a valid trust are safe from any relationship property claim.   In an uncommon move, Court of Appeal judges then invited the legal advisers to consider another line of attack: look at the wide powers of appointment given to Mr Clayton in the trust deed.

After hearing legal argument from lawyers for both Mr Clayton and Mrs Clayton the Court of Appeal ruled that the power of appointment in the trust deed was so wide as to amount to “property” in the Property (Relationships) Act.  The wording of the trust deed states that Mr Clayton has the role of settlor, sole trustee and potential beneficiary.  The deed also gives him power to appoint and remove trustees and to appoint and remove beneficiaries.  While he is a potential beneficiary, it is within Mr Clayton’s power to ensure he is the only beneficiary.  This power has considerable commercial value.  The case was referred back to the High Court to assess this value, being the net value of Mr Clayton’s equity in the Vaughan Road Trust.  Mrs Clayton is entitled to half the value.

The court also ruled that Mrs Clayton was entitled to claim against a number of Mr Clayton’s trusts holding real estate.  This included trusts set up after the couple separated.  Relationship property was transferred to trusts in which Mrs Clayton was not listed as a potential beneficiary.  The court ruled these were dispositions of property made to defeat Mrs Clayton’s rights.

Clayton v. Clayton – Court of Appeal (26.2.15)

15.017

Fair Trading: Batchelar Centre v. Westpac

Allegations of sharp practices by a Manawatu real estate firm for its role in the forced sale of a Palmerston North commercial building where a buyer was gazumped through a “better offer” clause saw Westpac and a Bayleys Real Estate franchise facing claims under the Fair Trading Act. 

Property company Batchelar Centre Ltd complains it was robbed of the chance to re-negotiate its deal for the purchase of a building in Broadway Avenue, Palmerston North because of misleading behaviour by staff at a Bayleys franchise, Coast to Coast Ltd.  In the High Court, Associate Judge Smith ruled there was prima facie evidence of a breach of the Fair Trading Act and the dispute should go to a full hearing.

The court was told Coast to Coast marketed the Broadway property in late 2013 on behalf of Westpac in a mortgagee sale.  It was passed in at auction with Batchelar Centre the only bidder at $400,000.  Batchelar had made a pre-auction offer of $750,000, but this offer was withdrawn.  After the auction, Batchelar signed a contract to buy at $400,000.  The contract contained a “better offer” clause: Westpac could cancel the contract if it received a better offer before settlement by Batchelar – due in some fourteen weeks.  Evidence was given that Batchelar was astounded to learn seven weeks prior to settlement that its contract was cancelled.  It had no inkling that other buyers had been interested.  The new buyer was buying at $405,000.  This buyer had also been present at the unsuccessful auction.  When Batchelar protested and asked for evidence of the better offer, the new buyer accelerated its date for settlement and finalised the deal quickly.

Batchelor sued, alleging breach of the Fair Trading Act.  Judge Smith said there were two aspects of the sale which might be considered a breach of the Act.  First, when Batchelar asked Coast to Coast why there was no “sold” sign posted on the property it was told one would be put up immediately.  This gave to Batchelar an impression that the property was off the market.  But at this time Coast to Coast staff were in fact actively looking for alternative offers.  Secondly, Batchelar was given brief access to the building around this same time “to have a look around”.  As it transpires, contractors hired by Batchelar removed some partitions from the building during this period in readiness for refurbishment of the building after settlement.  Again, granting early access gave Batchelar the impression it was the only buyer in the market.

If Coast to Coast is found to have breached the Fair Trading Act, Westpac is liable also.  Coast to Coast was acting as agent for Westpac in carrying out the sale.  Proof that there was a breach of the Act will require a later full court hearing.

Batchelar Centre v. Westpac – High Court (25.2.15)

15.012

Family Trust: Shailer v. Shailer

Where married couples choose to hold assets spread across different independent entities such as partnerships, trusts and companies they bear the risk that one of them could pre-empt a relationship property settlement by bringing a separate individual claim to get immediate cash.  The High Court held a Foxton farmer was entitled to $419,000 as repayment of her current account balance due from a family trust.

Wayne and Denise Shailer ran a dairy farm and contracting business in Foxton prior to their separation in November 2012.  Like many farmers, the land is owned by a family trust while a separate partnership stocks and runs the farm.  The Shailers as joint trustees of their family trust leased the farmland to themselves as partners in the farming partnership.  The High Court was told matters reached a head when the family trust sold some of its land, netting about $867,500.  Initially it was intended these funds would be used to reduce debt.  Rules governing the Shailers’ family trust require trustees’ unanimous consent for trust decisions.  The trustees could not agree on how the $867,500 should be used.  Evidence was given that a stalemate followed with the money sitting in an interest-bearing lawyer’s trust account pending some agreement.

After establishing their family trust in 1994, the Shailers sold farmland to the trust, leaving that part of the purchase price owing to each of them on current account as an on demand loan.  At the date of separation, Mr and Mrs Shailer were each owed $419,000 on their separate current accounts.  Mrs Shailer (as an individual) then made formal demand from the trustees of the trust (which included herself as a trustee) for repayment of the $419,000 owed to her with payment to come out of the funds held in their lawyer’s trust account.

Associate Judge Smith ruled she was entitled to payment.  He said there is nothing in relationship property legislation which affects the right of a spouse to sue a third party for the recovery of a debt.  The $419,000 current account debt was owed by a third party – the family trust.  A family trust is an independent entity separate from the people who set it up.

Shailer v. Shailer – High Court (24.2.15)

15.011

Negligence: Tauranga Law v. Appleton

There is no liability for negligent advice where the advice is ignored; negligence did not cause the loss.  One investor was not entitled to recover from a Tauranga law firm his $90,400 deposit lost when Blue Chip went under because he was determined to push on with the investment regardless of the advice he was given.

The Supreme Court was told John Appleton, together with his family trust, invested in a Blue Chip project after attending one of the company’s seminars.  In 2004, he signed up for an apartment to be built in Turner Street, Auckland, at a price of $356,896 with a deposit of $101,910 payable up front.  The project collapsed.

Legal paperwork signed by Mr Appleton went to Tauranga Law who were to act as his solicitors.  Mr Appleton approached Bank of New Zealand for a loan to pay the deposit.  Wary of inflated apartment prices then apparent in Auckland, the Bank was unwilling to lend the full $101,000 requested.  The Blue Chip group then agreed to take a lesser amount of $90,468 as the deposit.

Tauranga Law, who had been acting for a number of Blue Chip investors, sent out a standard form three page letter to Mr Appleton setting out details of his transaction and some of the risks inherent in the proposed project.  The contents of this letter were subject to close scrutiny in the courts.  The letter stated Tauranga Law was not commenting on the transaction’s commercial merits but did indicate that the project might not be completed satisfactorily and that he might lose his deposit.   Mr Appleton was critical: he argued the letter did not emphasise that on paying a deposit he would become an unsecured creditor of the Blue Chip group and that the shell company he was buying the apartment from had no right to the land on which the apartments were to be built, had no funds to complete the construction and had no right to force Blue Chip to either undertake the project or to sell the building to it.  He said he would have cancelled the contract if this had been made specific.

The Supreme Court said even if Tauranga Law’s advice was negligent, Mr Appleton would have gone ahead regardless.  There was evidence that Mr Appleton did not take much notice of the three page letter when it arrived.  In his words: “He felt confident with the deal he had.”  Mr Appleton’s and his family trust’s loss of the $94,400 deposit was not caused by any Tauranga Law negligence.

Tauranga Law v. Appleton – Supreme Court (19.02.15)

15.009

Consulting: Prophecy Networks v. Revera

Wellington chartered accountant William Giesbers failed in his claim for a success fee of $3.6 million on the 2013 sale of cloud services company Revera Ltd to Telecom.   

The High Court was told Mr Giesbers had agreed back in 2007 to assist Revera in a possible trade sale when Hewlett-Packard was expressing interest in buying Revera’s data centre business.  Through his company, Prophecy Networks Ltd, Mr Giesbers negotiated a consulting contract with Revera.  He reorganised the group ready for sale by amalgamating Revera with a subsidiary. He prepared an information memorandum for intending purchasers.  And he negotiated an agreement for future services in facilitating any trade sale.  Prophecy Networks was to receive a base fee of $25,000 whether there was a sale or not and a further success fee calculated on a sliding scale for any sale of twenty million dollars or more.

Nothing came of Hewlett-Packard’s initial interest.  Six years later, Telecom (prior to its rebranding as Spark) purchased Revera in a deal valued at $96.5 million.

Mr Giesbers first heard of this sale through the news media.  He invoiced Revera for $3.6 million as a success fee based on the 2007 consulting contract.  He said the 2007 contract still stood.  The wording of the contract applied to any sale, he said, not just a sale to Hewlett-Packard.

Justice Brewer ruled that the 2007 consulting contract was for a limited period only.  The wording of the contract indicated that it was to operate only for any sale to Hewlett-Packard or to any other buyer surfacing around that time.  The 2007 information memorandum Mr Giesbers prepared had a limited shelf life.  The data incorporated rapidly became stale over time.  The consulting agreement was not of indefinite duration.  It had expired by the time of the Telecom deal.

His Honour also ruled that the 2007 consulting contract had been terminated in 2008 when Mr Giesbers was told to put in his invoice for $25,000 as agreed payment since no sale had then been made.  This was clear and unambiguous evidence that the consulting contract was at end, His Honour said.  Evidence was given that Mr Giesbers did not invoice Revera the $25,000 in 2008 as requested.

Prophecy Networks v. Revera – High Court (19.02.15)

15.010