Business Insider: Lawyers see landmark in $28m trust battle

Case could affect thousands of other trusts, says barrister.
Barrister Ross Knight. Photo / Steve Dykes
Barrister Ross Knight. Photo / Steve Dykes

Got trust issues? Then look no further, as Business Insider attempts to wade through the wash-up from one of the most closely watched trust law cases of the past year.

Wednesday marked the final act in the marathon $28 million battle between divorcees Melanie and Mark Clayton, with the release of two Supreme Court judgments.

Although the estranged couple are no doubt interested in the result, it won't affect their fortunes, given that they reached an eleventh hour settlement while awaiting the rulings.

Just who got what in this confidential, out-of-court compromise is not publicly known.

Despite the deal, the Supreme Court forged on and published its decisions because of the public importance of the issues raised in the case. And rightly so - tens of thousands, if not hundreds of thousands, of New Zealanders have trusts.

When the Court of Appeal ruled in the Claytons' case last February, Queen's Counsel Lady Deborah Chambers said it had "redrawn the landscape" around trusts and relationship property.

Some commentators this week made similar comments about the Supreme Court's decisions, saying they were "landmark".

Powers as property

A key feature of the Court of Appeal's decision was the finding that the power to appoint and remove a trust's beneficiaries could be personal property and therefore divided up in a separation. The value of this power as property was equal to the value of a trust's assets.

The Supreme Court took a different approach.

In one of this week's decisions, its five judges said the power to appoint and remove beneficiaries alone did not constitute property.

But they said this ability, when combined with other personal powers under a trust deed, could amount to relationship property. A trust deed, in simple terms, contains the rules under which a trust must operate.

In the Claytons' case, the package of powers Mark Clayton held under the particular deed meant he faced none of the usual constraints in a trust relationship.

Some lawyers told Business Insider they believe the ruling limits the relevance of Clayton v Clayton and how it could be applied to other cases.

However, barrister Ross Knight disagreed.

"Both the Court of Appeal and Supreme Court, for different reasons, held that personal powers within a trust could be property for the purposes of the Property [Relationships] Act, valued by reference to assets in the trust. That is landmark," he said.

"Some purist trust law specialists would probably have quite negative views about this decision because it means now that there is likely to be thousands of trust deeds out there that may be subject to the same level of scrutiny as the Claytons' in the event of a relationship property dispute. This could compromise the whole reason why a trust was set up in the first place," Knight said.

[Court rulings] could compromise the whole reason why a trust was set up in the first place.
Barrister Ross Knight

That reason is usually someone wanting to avoid claims against a trust in the event of a separation.

Law firm Wynn Williams' executive chairman Jared Ormsby also believed the decision was "landmark".

"The big question that we're all going to be asking ourselves now is what happens if you don't have all the powers [Clayton had under the trust deed] but are approaching that level?" Ormsby said.

Lawyer Vanessa Bruton said a lesson from this case for those setting up a trust would be to limit the settlor's control.

"So make sure there is more than one trustee, carefully consider giving the settlor or principal family member the power to remove beneficiaries rather than making it a trustee power, and make sure they're proscribed from voting on any decision to benefit themselves," she said.

Nuptial settlements

Bruton believed the second of this week's Supreme Court decisions, dealing with nuptial settlements, was of more significance for the trust-holding public.

This part of the case concerned whether a Clayton trust was a nuptial settlement and therefore caught by the Family Proceedings Act.

A particular section of that law allows for a court to vary a settlement for the benefit of children or parties in a marriage.

The Family Court, High Court and Court of Appeal all ruled that this trust was not a nuptial settlement because it was created for business purposes and Melanie Clayton had no expectation of gaining an interest in its assets.

But the Supreme Court, according to a summary of its decision, said a "more generous approach" should be taken.

"In this case, there was a clear connection between the marriage and the settlement of the trust. Therefore the trust is a nuptial settlement," the summary said.

Given that the trust in question was set up during the marriage for the benefit of the Clayton family unit, the Supreme Court would have made an order to split it in two - had the ex-couple not resolved their dispute.

Bruton said that, in the wake of the decision, it should be easier for spouses to make claims against a trust when they aren't a named beneficiary.

"If people are going to use trusts as part of their estate and relationship property planning mechanisms, they would be wise to also have a pre-nup agreement which says the other spouse has no right to make a claim on the trust assets," Bruton said.

Photo / David White
Photo / David White

Who are the Claytons

Mark and Melanie Clayton were together for about 20 years and had two children before splitting up in 2006.

Mark Clayton set up his own business and in the mid-1980s established Claymark Industries, the brand under which he would develop a major sawmilling enterprise.

The business and other assets were owned by a series of firms and trusts.

In their property fight, Mark Clayton considered none of the trust assets were relationship property and felt his ex-wife was entitled only to their $850,000 home and $30,000. Melanie Clayton, however, believed she was entitled to half of the value of the business and trust assets.

Her valuer was of the view that if her approach was upheld, she could be due half of a total property pool estimated at $28.83 million when the parties were in the Family Court.

Her case, first filed in the Family Court in 2007, went to the High Court, the Court of Appeal and then to the Supreme Court last September. It settled in December.

- NZ Herald

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