The Alphabet case: Supreme Court refuses to “read equity backwards”

The Supreme Court has handed down its long-awaited decision in A, B and C v D and E Limited as Trustees of the Z Trust¹ regarding the extent of fiduciary duties owed by a parent to an adult child.

The Supreme Court judgment confirms the decision in the Court of Appeal, which had overturned the decision of the High Court.

Those decisions arose out of actions taken by the appellants' father, whom the Supreme Court referred to as Robert², to deprive the appellants of his assets on his death. He did so by transferring the majority of them to a trust during his lifetime. The appellants, who the Supreme Court referred to as Alice, Barry, and Cliff, are not beneficiaries of the trust. The assets remaining in Robert's estate against which they may claim under the Family Protection Act 1955 (FPA) are modest.

Alice, Barry, and Cliff originally pleaded several causes of action in the High Court, but the cause of action they pleaded in the Supreme Court relates to allegations that Robert's actions breached fiduciary duties that he owed to them. The appellants were adults at the time of the transfers. However, they argued that:

1. due to Robert physically and emotionally abusing them, and sexually abusing Alice, when they were children, he owed them fiduciary duties that extended into their adulthood. That abuse has had a significant adverse impact on them, both as children and into their adult lives.
2. he breached those duties by transferring most of his assets to the trust in order to prevent them from benefiting from those assets on his death.

They argued that as a result of Robert's breach of duties, the assets should revert back to his estate to satisfy FPA claims they have made against the estate.

The Court found that fiduciary duties do exist between parent and minor child while the child is in the parent's care. However, generally those duties cease once the child reaches adulthood or the caregiving responsibility ends. The Court left open the possibility that duties may continue into the adulthood of the child in certain circumstances, such as where an adult child has disabilities.

In this case the Court found that Robert owed duties to his children during their childhood but declined to find that those duties continued into their adulthood, notwithstanding their vulnerability arising from his abuse of them. The fiduciary relationship between Robert and each of the children ended when he ceased to have caregiving responsibilities for them.

The Court noted that a fundamental feature of fiduciary relationships is that there must in fact be a relationship. In this instance the appellants and Robert had not had a relationship of any type for many years. The Court found that to impose fiduciary duties to remedy past wrongdoing outside of an ongoing relationship between the parties would "read equity backwards"³ by "reverse engineering" a remedy.⁴ The Court refused to impose fiduciary obligations based purely on the vulnerability of the appellants (despite Robert being responsible for that vulnerability). The Court noted that to do so would result in "great uncertainty in the law".⁵

The Court also rejected the suggestion that it should treat the assets held by the trust as being part of Robert's estate on the basis that the trust was used to avoid a FPA claim by the appellants. The Court noted that the FPA does not contain an anti-avoidance provision of the type it was being asked to apply. However, it also noted that this case shows the need for such a provision in any replacement of that legislation in the future.

On this note, the Law Commission, concerned about the exact situation that resulted in this litigation, proposed in 2022 a law change that would allow a court to 'unwind' inter vivos property dealings in a broader range of situations. This proposal is contained in the Review of Succession Law: Rights to a person's property on death (NZLC R145, 2021), which was released in April 2022.

The Law Commission proposed (amongst other changes) a mechanism that would allow a court to recover property to an estate from a third party if there is insufficient property in the estate to meet all entitlements and claims. The power would apply if the property:

1. has been disposed of with intent to defeat an entitlement or claim under the legislation; or
2. was owned by the deceased as a joint tenant and has accrued to the remaining joint tenant(s) by virtue of survivorship with the effect of defeating an entitlement or claim.

The Court was sympathetic to Alice, Barry and Cliff and did not deny the harm that Robert had caused them, but ultimately found that the law could not support their claim. There were other claims available to them at the time of Robert's abuse which they, understandably, did not pursue. This settles the law in this regard. However, the Court acknowledged that there is a gap in the law, which the Law Commission's proposals may ultimately fill. While the previous Government accepted the Law Commission's proposals, they are unlikely to be implemented soon.

This alert was written by Daniel McLaughlin, a Special Counsel in our Private Wealth team.

1. [2024] NZSC 161. ↩
2. The names of all parties connected to the proceedings are suppressed and they are referred to by pseudonyms in the judgments. ↩
3. At [76]. ↩
4. Ibid. ↩
5. At [78]. ↩

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