Erceg v Erceg: A balancing act between trustee and settlor

Case law has established that a beneficiary of a trust has a clear right to seek information relating to the trust to enable that beneficiary to ensure trustee accountability.  However, one of the main obligations of a trustee is to satisfy the intentions of the settlor.  When a settlor intends the matters of the trust to remain confidential, the rights of the beneficiary and the obligations of the trustee may no longer be compatible. 

The recent case of Erceg v Erceg highlights this conflict and provides guidance in balancing the obligations of a trustee to fulfil a settlor’s intentions, and the rights of beneficiaries to have access to information.

In 2004 Michael Erceg, the founder of Independent Liquor NZ Limited, settled the Acorn Foundation Trust.  Michael was both settlor and trustee, and the Acorn Foundation Trust was one of a number of trusts settled by Michael.

The Acorn Foundation Trust deed contained a confidentiality clause which stated:

“Without prejudice to any right of the trustees under the proper law to refuse disclosure of any document or information, the trustees shall not, unless required by law, be bound to disclose to any person any document or information relating to this Trust, the Trust fund or any Trust property, the beneficiaries or any document setting forth or recording any deliberations of the trustees as to the manner in which they have or should exercise any power or discretion, or the reasons for any particular exercise of any such power or discretion, or any other related documents including this instrument”.

Michael was killed in an accident in November 2005.  Following Michael’s death, his widow and the second defendant, became the trustees of the Trust. 

The plaintiff, Millie Erceg, was Michael’s mother.  She was named as a secondary beneficiary of the Trust.

The Trust sold its shares in Independent Liquor NZ Limited for a substantial sum.  The Trust was then distributed.  Millie Erceg did not receive any distribution.

Millie sought an order from the Court that she was a beneficiary of the Acorn Foundation Trust and requested copies of documents relating to the Trust.  These included copies of the Trust Deed, financial accounts for the Trust, the agreements for the sale of the Trust’s shares in Independent Liquor NZ Limited and the minutes of all trustee meetings.

Millie argued that it was her right as a beneficiary to have access to certain information to ensure that the trustees were accountable for their actions.  She requested copies of the Trust’s resolutions and financial statements which would have shown the distributions made to the beneficiaries.  In order for her to be properly advised of her rights and position by her counsel, disclosure of the documents was necessary.

In response to Millie’s argument the trustees claimed that they were bound by Michael’s intention as settlor that the Trust and its affairs remain confidential.  It is an established principle that trustees, when exercising a discretionary power, are not bound to disclose  any information to beneficiaries.

The Court acknowledged that there was a conflict between Millie Erceg’s right as a beneficiary to have access to certain information to ensure the accountability of the trustees, and the principle that the trustees were not bound to disclose the reasons behind their decisions, which had been the intention of the settlor.

Case law

To assist him in reaching his decision, the Judge considered the two leading trust law cases on the issue.

One of those cases was the 2003 UK case Schmidt v Rosewood Trust Ltd.  In that case the Court found that it was not a beneficiary’s proprietary right to have the trust documents disclosed to them, rather it is within the Court’s jurisdiction to supervise, and in some cases, intervene in the administration of trusts.  In a case involving personal or commercial confidentiality, the Court may have to balance competing interests of different beneficiaries, trustees and third parties in deciding whether or not to do so.

The Court also considered the New Zealand case of Foreman v Kingston.  Similarly to the Erceg case, the beneficiaries in this case requested the disclosure of certain trust documents and argued that the trustees were under a duty to disclose these to the beneficiaries. The Court in this case determined that the beneficiaries have the right to receive information which will enable them to ensure the accountability of the trustees, however, that this right is subject to the discretion of the Court. 

Erceg v Erceg decision

In relation to Millie Erceg’s first claim, the Court determined that an order declaring her as a beneficiary was unnecessary.  The Acorn Foundation Trust deed named Millie as a secondary beneficiary.

When the Court considered Millie’s second claim, it acknowledged that there was a conflict between her right as a beneficiary to have access to certain information, so as to ensure the accountability of the trustees, and the principle that the trustees were not bound to disclose any reasoning behind their decisions. 

The Court agreed that there should be disclosure of the documents requested to allow Millie to be properly advised of her rights and position.  This was, however, to be limited by Michael Erceg’s intention that the Trust remain confidential.  The trustees had an obligation to fulfil Michael’s intention as settlor, subject to their legal obligation to comply with directions of the Court. 

Because of this, the Court ordered that the Acorn Foundation Trust Deed and the valuation the trustees received for the Independent Liquor NZ Limited shares were to be made available to Millie Erceg.  Millie and her counsel were also to have access to the financial accounts and resolutions of the Trust, however these were to be subject to redactions to ensure that the names of other beneficiaries and the amounts of individual distributions and loans were to remain confidential.  

Case law both internationally and in New Zealand has shown that a beneficiary of a trust has a right to seek information relating to the trust to enable that beneficiary to ensure accountability.  The extent of this right however is subject to the discretion of the Courts, and may be limited by the intentions of the settlor.  Erceg v Erceg provides guidance as to how the Court may balance competing rights and obligations.

If you would like further information please contact Daniel Shore on 07 958 7477.