So you think your assets are safe in a Trust?

So you think your assets are safe in a Trust?
Wednesday August 20, 2014

The Court of Appeal has recently confirmed that there is no reason in principle why a constructive trust cannot be imposed on property owned by a trust – Murrell v Hamilton & Ors [2014] NZCA 377. Murrell and Hamilton were in a de facto relationship for 8 years.  Two years after their relationship started they moved into a house under construction by a company operated by Hamilton who was himself a builder.  The property was owned by Hamilton’s family trust (“the Trust”).  For the following three years, the property was completed and landscaped.  Murrell assisted with the completion of the house.  After it was complete, the couple moved out and the property was rented.  It was later sold.  About a year after its sale the couple separated. Murrell then brought a constructive trust claim against the Trust.  She said she had assisted with the completion of the house over the three-year period because Hamilton had made statements to the effect that she would share in profit of their joint efforts.  Hamilton adamantly denied that. The High Court found that Murrell had made contributions to the property and that she did so in circumstances where she held a reasonable expectation that she would enjoy an interest in the property.  The Court also found that it would be unconscionable of a reasonable person in Hamilton’s shoes to deny the existence of that interest.  However, the High Court found that the interest was not enforceable against the Trust (the key finding).  This was because (a) the property had been owned throughout by the Trust; and (b) that there was no basis for the view that both trustees of the Trust had stimulated Morrell’s expectations of a share in the property such that it would be unconscionable of them to deny her claim. However, the Court of Appeal overturned the High Court’s key finding.  It saw no reason in principle why a constructive trust claim should not succeed in respect of property owned by a trust.  On the facts of the case, it found that as Hamilton’s actions were effectively treated as the actions of all trustees of the family trust (and binding on it), it would be unconscionable for the trustees to deny Murrell’s claim based on the stimulation, by Hamilton, of Murrell’s expectation vis-à-vis the trust.   The Court of Appeal was at pains to point out that allowing Murrell’s claim would not alienate Trust property – rather it meant that part of the value of the Trust property which should not accrue to it, did not accrue to it.  It was also at pains to record that it did not find the Trust to be a sham or the “alter ego” of Hamilton – it was a valid Trust and was to be treated as such. Morrell was entitled to a 15% share of the net sale profits of the property and the rental income arising from it. This decision just goes to show no matter how the title to assets might be held, if the Court thinks that the effect of the legal title will be unjust (here the Trust keeping entirely the sale proceeds of the house Morrell worked on), it will find a way to go behind the legal ownership to avoid what it perceives to be any unjust enrichment.

By Chris Patterson, 2014

 

By Chris Patterson