Power to the People?

Tale of Two Power Stations

While the Māori Land Court decision in Savage & Ors v Adlam, 95 Waiariki MB 176, is subject to appeal, the decision is of legal interest as it illustrates established principles that trustees (whether of charitable or of other trusts) may be liable for breach of fiduciary duties and for profits made by a trustee at the expense of a trust.  In principle, the same duties apply to officers of societies.

Ms Beverly Adlam proposed the idea of developing two power stations, TG2 and GDL, on a block of Māori land owned by the Bath Trust of which she was one of the trustees.  The well for TG2 was on the Bath Trust block and the GDL well was on another trust’s land but the power station for it on Bath Trust land.  The decision of the Māori Land Court notes that “all parties agree that whatever the case against Mrs Adlam, absent her efforts, skill, knowledge and enterprise, there would be no other significant income for both Trusts.”

Over about 16 years she received net $13,640,149 from the two projects, the amount at stake in this litigation.

Conversion of funds in breach of fiduciary duty towards the Bath Trust

In proceedings before the Māori Land Court, her fellow trustees, while recognising her contribution to the establishment of the power stations,sought full compensation and for Ms Adlam to account for the profits due to the trust, while Ms Adlam sought a developer’s fee or allowance. Judge Coxhead held that:

[78] I … find that Ms Adlam, in taking money due to the Bath Trust for her own use, committed a blatant breach of trust.  A breach that she has contested up until the day of hearing when she conceded that she owed the Bath Trust.

[79] Ms Adlam was not an employee of the Trust and was not entitled to a salary or to charge a salary.  She was at all times a trustee – operating under a trust order that did not provide for the payment of trustees fees.

[80] Ms Adlam was in a position where her duties as a trustee conflicted with her personal interest.  She used her position as a trustee to obtain significant funds from the use of the trust assets.

[81] I agree that from 1993 until 2008, Ms Adlam converted to her own use the proceeds due to the Bath Trust, and in so doing deprived beneficiaries of the Trust, significant entitlements.  Since 1993, as a trustee, she has taken funds due to the Bath trust for her own personal use.  The breach is that simple and that serious.

[85] In my view the seriousness of the blatant breach, the amount of money involved and the length of time the beneficiaries have been deprived of the funds, outweighs all … factors in favour of granting an allowance or developer’s fee for Ms Adlam.  Therefore, on balance I find that a developer’s fee or allowance should not be granted in these circumstances.  Ms Adlam must fully compensate the Bath Trust for the agreed loss of $2,440,149.00.

Unauthorised profit in breach of fiduciary duty

Again, the judgment sets out the background to the claim clearly:

[159] …. It has been agreed by all parties that:
(a)          an account for profits is appropriate and required in the circumstances; and
(b)          the total profit Ms Adlam is liable to account for in relation to GDL is $11,200,000.00.

[160] With this foundation established, the next question is: to whom is Ms Adlam liable to account for her profits?

[161] In order to have an entitlement to an equitable remedy of any nature, there must first be shown to be an existing equitable relationship creating equitable duties and obligations.  It is the breach of these duties and obligations that creates the entitlement to an equitable remedy.

[165] … all parties have acknowledged that Ms Adlam has a duty to account to the Bath Trust for her breach of fiduciary duty.  The applicants claim that Ms Adlam must account to the Bath Trust for the GDL profit.

In respect of this second claim, Ms Adlam sought to apportion the profits made between the two Trusts, but the Judge rejected that claim:

[195] In my view, Ms Adlam made the entire profit in breach of the fiduciary duty she owed to the Bath Trust.  No clear information to the contrary has been provided.  She is therefore liable to account to the Bath Trust for the whole $11,200,000.00.

[196] In my view, there is no apportionment to be made between Ms Adlam and the Bath Trust.  I would only find apportionment applied in this case if part of the profit did not result from the breach and was in fact profit she was entitled to on her own account.

Compensation for contributions made to trust profits

In respect of both claims, Ms Adlam sought some allowance for the contribution she made to the projects, but this was rejected by the Court, and in respect of the second claim the judgment notes:

[224] In my view Ms Adlam has committed a serious breach of fiduciary duties.  It is a clear situation of Ms Adlam, using her position as a trustee to generate personal financial gains of a significant amount.  The seriousness of the breach, along with the amount of funds involved and the length of time the beneficiaries have been deprived of the funds, outweighs those factors in favour of granting Ms Adlam an allowance or developer’s fee.  This is not a situation where the Court should exercise its discretion.  Therefore, on balance I find that a developer’s fee or allowance should not be granted. Ms Adlam must account to the Bath Trust for the agreed amount of $11,200,000.00.

Lessons fromSavage & Ors v Adlam

Even if the decision is upset or modified on appeal, the lessons are clear.  Trustees owe fiduciary duties to trusts they administer, and if they profit personally in breach of those obligations they can be required to account in full for those profits.

Postscript: In 1986Ms Adlam was NZ Businesswoman of the Year, in 2008 she receiveda Member of the New Zealand Order of Merit for services to business, and in 2012 she pleaded guilty to and was convicted on 24 counts of knowingly filing false tax returns involving over $500,000 in taxes, interest and penalties.

This is one of a series of articles on societies and charitable trusts by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.