Can a trustee use trust funds for litigation costs?

Friday 22 March, 2019

Trustees are generally entitled to reimbursement for costs properly incurred in the administration of a trust. There are however limitations to that principle, particularly in respect of litigation costs.

This issue was addressed in the recent Court of Appeal decision of Pratley v Courtney (2018) CA40/2018 NZCA 436, which concerned an appeal against a decision of the High Court.

Mr Pratley was appointed by the High court as an executor and trustee of an estate. At the time of his appointment, Mr Pratley was not aware of an imminent Court hearing scheduled to determine a claim against the estate by a son of the deceased. The estate had total assets of approximately $850,000. The claim was for $36,800.

Mr Pratley requested an adjournment so he could familiarise himself with the claim. The judge declined that request and ultimately the son was successful in his claim.

Mr Pratley sought reimbursements for the costs incurred in respect of the claim (around $29,000). The High Court accepted Mr Pratley acted “out of an abundance of caution and with the best of motives”.  However, the Court thought the son’s claim was “modest” which was not “necessary” to defend.  It characterised  the matter as “hostile litigation” and refused reimbursement of Mr Pratley’s costs.

The Court of Appeal disagreed. It found trustees must act honestly and reasonably. They have a duty to protect the assets of a trust for the benefit of the beneficiaries. That duty extends to defending claims when it is reasonable to do so. If in doubt, Trustees should seek directions from the Court.

The Court of Appeal identified the three categories of trust disputes:

1. A dispute about the proper construction or interpretation of the trust;
2. A beneficiary dispute concerning beneficiaries and the propriety of action taken by trustees; and
3. a dispute concerning a claim by a third party in contract or tort.

The second category is regarded as “hostile litigation”.  A trustee is not entitled to reimbursement for costs of defending such claims unless sanctioned by the Court.

The Court of Appeal found that although the claimant (the son) was a beneficiary, he was claiming as a creditor of the estate for reimbursement of funds paid towards the deceased’s care while living.  Therefore the claim wasn’t “hostile litigation”, rather it was a “third party” claim which Mr Pratley was obliged to defend. The Court also found Mr Pratley was not entitled to choose not to defend the claim merely because it was “modest”, and he was entitled to be indemnified his costs.

Claims against trustees and using trust funds to defend those claims is a complex area. If a trustee gets it wrong he or she can be liable for their own costs, and those of the claimant. As costs can run into hundreds of thousands of dollars, trustees should seek good advice from the outset.  If you have any queries or need advice please get in touch.

Peter Fanning specialises in Trust advice. He is an accredited member of the Society of Trust and Estate Planners. Peter is one of the four members of the New Zealand Law Society Trust Working Group which developed and made submissions on the Trust Bill (currently before the house) on behalf of the legal profession.