JOSEPH HAYIM HAYIM AND ANOTHER v. CHITIBANK N.A. AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. This is a claim for breach of trust against the second defendant ("the defendant"). The first defendant ("Citibank") is joined as a necessary party but no relief is sought against it. Unhappily, the first plaintiff ("Joseph") has died since the writ was issued so that the claim is now pursued only by the second plaintiff ("George"). Counsel are agreed, however, that if I find in favour of George, there should be a like order for those interested in Joseph's estate as for George.

Facts

2. Ellis Joseph Hayim ("the Testator") made 2 wills. The first of these, dated 13th July 1972 ("the American will") was expressed to apply exclusively to (1) all the Testator's property situated in the U.S.A. at his death and (2) all property which, pursuant to any inter vivos or any other testamentary disposition, should at any time be added to and become part of the American Estate. All of the property to which this will was applicable was to be called "the American Estate."

3. In the American will, the Testator went on to :     

4. There is a codicil to the American will but it is not material.

5. On 25th April 1975 the Testator made the second will ("the Hong Kong will") which he declared:

6. After giving various legacies, the Hong Kong will provided in paragraph 6 ("the trust for sale") :

".....I Give Devise Bequeath and Appoint all my estate both real and personal whatsoever and wheresoever outside the United States of America not hereby or by any codicil hereto otherwise disposed of (hereinafter called "my Residuary Estate") unto my Trustee Upon Trust to sell call in and convert the same into money with power to postpone the sale calling in and conversion thereof so long as my Trustee shall in its absolute discretion think fit without being liable for loss Upon Trust to pay or transfer the proceeds of such sale calling in and conversion to the said First National City Bank or other the executor or trustee for the time being of my American will to be held by such executor or trustee upon the trusts of my American will or such of the same as shall then be subsisting and capable of taking effect."

7. First National City Bank is now, of course, Citibank.

8. The Testator died on 6th June 1977. At that time he was living at 41 Island Road, Hong Kong ("the property") with his brother Albert and with his sister Maisie, her husband and her son, Ezekiel. He was the absolute owner of the property and had lived there since 1959 together with his family.

9. The defendant did not and has not sold the property under the trust for sale. Initially it was influenced, as I read the documents, by 3 factors :

10. I have included this to set the scene for what follows. Although referred to by counsel, it is not, in my view, properly admissible for the purpose of construing the wills, but does become so for the purpose of the defendant's plea under the Trustee Ordinance.

11. Upon the Testator's death, the defendant was concerned to help the brother and sister but took the view that, without the agreement and consent of Joseph and George, the income beneficiaries, and JDC the capital beneficiary under the American will, there was nothing it could legitimately do. Fortunately, Joseph, George and JDC, in separate letters dated 9th August 1977 (but probably not signed until November, although nothing turns on this), as "the persons beneficially interested in the residuary estate under the American and Hong Kong wills" expressed the "wish that unless and until we ..... shall unanimously notify you in writing to the contrary (the property) shall not be sold but shall be held available free of rent as a place of residence for (the Testator's) sister and brother so long as they, or either or them, shall be living and shall wish to reside in the house ....." The letters were addressed both to Citibank and to the defendant.

12. By then, however, the defendant was having second thoughts about the position of Joseph, George and JDC. On 3rd December 1977 it wrote to John Sann, Citibank's attorney, as follows:

"....... We would like to point out that the beneficiary of the residuary estate in Hong Kong is Citibank, New York, and not the deceased's sons and (JDC), and we shall be obliged if you will request Citibank to give a similar letter to us."

13. That is, a letter similar to that of 9th August 1977.

14. Citibank obliged by letter of 6th January 1978, saying that as executor of the American will, it approved, consented to and joined in the expression of wishes. The defendant asked for further confirmation that such authority came also in Citibank's capacity as residuary beneficiary of the Hong Kong will. By letter dated 9th February 1978 Citibank confirmed that authority was given as executor and trustee.

15. There the position rested until late 1979 when Joseph discussed with the defendant the possibility of redeveloping; the site of the property. By the end of 1980, Joseph and George had clearly decided that they should either purchase the property themselves, which they could not afford to do, or that the property should be sold. The defendant sought instructions from Citibank as beneficiary but none were forthcoming so the defendant took no action.

16. By letter dated 1st June 1981 addressed to Citibank and the defendant, Joseph and George asked for the property to be sold. I do not think I need elaborate on the reasons. By letter dated 15th June 1981, JDC consented to this suggestion but by letter dated 25th June 1981 of its attorney, Mr. Stewart, that consent was withdrawn and JDC expressed the wish that the property continue as a residence for the brother and sister.

17. The defendant by now took view that it held the property as bare trustee or nominee for Citibank. It sought instructions from Citibank which by telex of 20th June (Bundle 2/351) and through Mr. Sann by telephone (2/354) told the defendant to await instructions before taking any action. Such instructions were not forthcoming. The defendant took no action. Joseph and George commenced these proceedings for breach of trust. In 1981 the property was worth approximately HK$18 million; it is now worth HK$4-6 million.

18. It is right point out here that at all times Joseph and George were, and George still is, prepared to provide suitable alternative accommodation for the brother and, previously, the sister.

George's case

19. Mr. Godfrey, for George, has no complaint about the defendant before 1st June 1981. Under the Hong Kong will, the defendant had a duty to sell the property but a -power to postpone sale in the usual form. That power had to be exercised properly, in favour of the beneficiaries who, by looking at the Testator's testamentary dispositions, could only be Joseph, George and JDC, and not Citibank which is only a conduit for final distribution of the Hong Kong estate in the U.S.A.

20. Joseph, George and JDC consented in writing to the property being retained as a residence for the brother and sister. The defendant was entitled to rely on that. But that consent was withdrawn in June 1981 albeit only for a few days by JDC. Depending on when the defendant received the letters withdrawing the consent, the number of days was 6 or 10, but nothing turns on this.

21. For a sufficient period, says Mr. Godfrey, the beneficiaries were unanimous and, in any event, Joseph and George were not estopped by their letters of 9th August 1977 from changing their minds. The defendant, in June 1981, should have exercised its discretion to postpone sale of the property properly and reasonably in favour of the beneficiaries, carefully holding the balance between the income beneficiaries who stood to lose income from the proceeds of sale and the capital beneficiary which did not benefit until the deaths of Joseph and George.

22. The defendant did not exercise its discretion properly, either preferring the brother and sister to the beneficiaries or effectively delegating its responsibility to Citibank. The one was improper, the other was no exercise of discretion at all.

23. In those circumstances, the court may interfere. George is entitled to an order for sale of the property and reconstitution of the trust.

The defendant's case

24. Mr. Ainger, for the defendant, puts forward 3 principal submissions which, he says, while overlapping, are each complete in themselves and entitle the defendant to have the claim dismissed. He also relies on some fall-back defences, which I shall not deal with here, and finally asks that the defendant be excused from liability under section 60 of the Trustee Ordinance.

25. Mr. Ainger's defences, or submissions are:

26. Mr. Godfrey says, and I agree, that the crucial issue is the true effect of the testamentary dispositions, or the construction of Clause 10. Until that has been ascertained the question of locus standi cannot be effectively approached, nor indeed the other principal argument.

Construction of Clause 10

27. In construing Clause 10, Mr. Ainger asks me to adopt the well-known "armchair" principal (Hawkins and Ryder on the Construction of wills, p.12). Until Clause 10, there is no mention of Hong Kong in the American will while the Clause itself appears to contain 2 unconnected ideas namely the property, and the brother and sister. The connection, however, is obvious to anyone in the armchair and able to look at the subsisting circumstances at the Testator's death: the Testator and his family had resided together since 1954, first in Shanghai and after 1959 in the property which the Testator owned, and the brother and sister were elderly.

28. The inference is that Citibank was given a discretion to allow the brother and sister to continue to reside in the property, making them discretionary beneficiaries of the American will. Clause 10 was carefully drawn to ensure that the discretionary beneficiaries did not get a larger interest than intended, for example, a life interest. The problems associated with simply providing a residence for a beneficiary are, well set out in Williams Law relating to Wills, 5th Edn., Vo1. 2, p.1290, which recommends a trust for sale with a power to permit the beneficiary to occupy.

29. The Testator, Mr. Ainger submits, has done this in his 2 wills which are not independent of each other. In the Hong Kong will, there is the trust for sale; in the American will, the discretionary power to permit residence. The Testator was entitled to confer such power and discretion separately. It was logical that the defendant in Hong Kong should be responsible for such matters as title, the timing and mode of the sale; while Citibank as ultimate executor, as Mr. Ainger puts it, should be in a position to decide whether residence should continue and, if so, for how long.

30. It is therefore wrong to say that all discretion in relation to the property was reposed in the defendant under the Hong Kong will, but go on to treat the wills together for the purpose of ascertaining the beneficiaries. To do this is to defeat the clear underlying intention.

31. Acting in accordance with the discretion so given to it, there is ample evidence in Bundle 2, that Citibank has permitted, or authorised the defendant to permit, continued residence in the property. In particular, the defendant relies on documents 249, 351, 354 and 371.

32. If his contention is wrong, Mr. Ainger queries the purpose of Clause 10 which appears to absolve Citibank from liability while the defendant must nonetheless sell under the trust for sale.

33. Those arguments are powerful but, based as they are on the "armchair" principle, in my view wrong. Clause 10 appears to me to be a clear statement of the Testator's intention namely, that Citibank should keep its hands off the property. In effect the Testator was saying to Citibank " you are my executor and trustee and as a prudent executor and trustee you will no doubt take steps to get in all estate under the American will including that under paragraph (2) of Clause first. When so doing, you need not take any action in relation to a residence I may have in Hong Kong until one of the events which I have mentioned occurs."

34. I am unable to see how that direction confers any power on Citibank in relation to the property. The direction, as Mr. Godfrey says, requires Citibank to adopt a passive role and impose duties only when a specified event occurs. Citibank could not be a trustee in relation to the property; that responsibility is cast entirely on the defendant under the Hong Kong will. And should the defendant for any reason be slow in selling the property, no liability would fall on Citibank for failing to try and speed things up.

35. Further, I accept that the wills must be read together to establish the identity of the real beneficiaries under the Hong Kong will. It would be idle to pretend that the defendant need not look beyond that will when it contains a reference to the trusts of the American will. The American will clearly establishes Joseph; George and JDC as the true beneficiaries. In my view, Citibank cannot be described, as the defendant would like, as residuary beneficiary, It had no beneficial interest. It was interested in the Hong Kong estate only in a fiduciary rapacity.

Competence

36. As the defendant's second line of defence fails, I turn to the question of the loans standi, or competence, of George. Mr. Godfrey agrees with Mr. Ainger's submission in law namely that, as George can only sue because of the American will, he must establish special circumstances before he can sue direct rather than seek an order compelling Citibank, his trustee, to take proceedings; and must join his trustee and any other beneficiaries as defendants.

37. Mr. Ainger has taken me through various cases: Yeatman v. Yeatman 7 Ch. D. 210; Meldrum v. Scorer 56 L.T. 471; Harmer v. Armstrong (1934) 1 Ch. 65; In re Field, dec'd (1971) 1 W.L.R. 555; and Wong Yu Shi and Ors. v. Wong Ying Kuen 1957 H.K.L.R. 420.

38. From these cases, Mr. Ainger suggests that the flavour is that the matter which justifies the court making an exception to the general rule must be extrinsic to the trust. Further, there is no case where, the beneficiaries having taken opposing views, one has been allowed to sue.

39. The only special circumstance relied on is Clause 10. But that, says Mr. Ainger, is part of the trust through which George claims and so does not fit within the character of special circumstances demonstrated by the cases.

40. In Yeatman v. Yeatman, Hall, V. C. said, at p.216:

"    Notwithstanding the view that I have taken of this case with reference to the right to sue, my impression rather is that it would be a correct holding to say that if the circumstances of any given case are such that upon an inquiry directed as to whether any and what proceedings should be taken, the Court upon the materials before it would come to the conclusion that it was a proper case for proceedings to be taken, although not necessarily and absolutely certain that they would be successful, there it would be a proper case to allow a party to sue in his own name."

41. In Harmer v. Armstrong, in which the passage by Hall, V.C. was quoted, Lord Hanworth, M.R. said at p,84:

"What special circumstances may be must depend in each case upon its own facts..."

42. In In re Field, Goff J. after citing the same passage by Hall V. C., went on to say at p.559 :

"But all of the cases say there must be special circumstances, and the test propounded is, as it seems to me, only a test and not an exclusive definition of the circumstances in which an action such as I have can be maintained,."

43. At p.560, he said :

"..... in the end I think that I have to judge for myself on the material before me whether there are special circumstances justifying the bringing of this action in this form."

44. I should mention that in In re Field and Meldrum v. Scorer, a preliminary or interlocutory point was being taken. Nothing turns on this, I think.

45. Both Yeatman v. Yeatman and Meldrum v. Scorer quoted a passage by Turner V.C. in the earlier case of Travis v. Milne (9 Hare, 141), where he was dealing with suits by parties beneficially interested in the estate of a deceased partner against his executors and the surviving partners, and said:

"....such a bill may be supported in all cases where the relation between the executors and the surviving partners is such as to present a substantial impediment to the prosecution by the executors of the rights of the parties interested in the estate against the surviving partners."

46. In the absence of a clear statement to that effect, I would be reluctant to find from these cases the flavour for which Mr. Ainger contends. I do not find that special circumstances must arise from matters dehors the trust. Rather, I must simply look at the material before me.

47. Clause 10, as I have construed it, confers no duty or power on Citibank until one of the specified events occurs. This makes it difficult for Citibank to contemplate proceedings. This difficulty is aggravated by its attitude since the Testator's death, which was active at the outset when it helped the defendant obtain the beneficiaries' consents but rightly inactive and without views at the end. Clause 10 has directly led to a delicate situation between Citibank and the defendant. Taken together, these factors constitute a substantial impediment to Citibank prosecuting a case against the defendant.

48. With these matters in mind and having regard to the unusual nature and complexity of the case as a whole, I find that there are special circumstances giving George locus standi.

49. The case to which I have referred make it plain that all beneficiaries should be joined to prevent multiplicity of action. Further, if there is a dispute between the beneficiaries, the right in issue should not be enforced by action by some only of the beneficiaries: Harmer v. Armstrong. However, JDC has through its lawyers by letter dated 24th December 1984 stated "it will not be represented at the trial nor take a position concerning the question raised." I take that to mean it will abide by the decision of this court. In the circumstances, I do not regard the non-joinder of JDC as fatal. Harmer v. Armstrong is equally strong authority for the court to decide the real issues where justice demands it and avoid circuity of action.

Citibank's position

50. What then of Mr. Ainger's third defence?  The law that a beneficiary's case is only as good or as bad as that of his trustee's is not, I think, in dispute. On this point, Mr. Ainger's submission really falls into 2 parts. First, on his construction of Clause 10, Citibank could not sue because it has exercised its discretion under that Clause. In view of my findings, this contention must fail.

51. Secondly, Citibank at all times after 1st June 1981 had directed the defendant not to sell or take any steps towards the sale of the property. In such circumstances, it would be monstrous that the defendant should be sued or held liable for breach of trust. That is a short but powerful point which has given me great concern.

52. In my judgment, however, I think that Mr. Godfrey is right. The breach of trust of which he complains occurred on or immediately after 1st June 1981 when Joseph, George and JDC withdrew their wish to retain the property as a residence. Although JDC restored its original position on 25th June, the defendant was aware that the true beneficiaries of the Hong Kong will had expressed the wish that the property be sold and that 2 of the 3 beneficiaries, being the income beneficiaries whose interests were crucially affected by retention of the property, did not resile from that position. The telex dated 20th June (Bundle 2/351) from Citibank telling the defendant to defer any action and the telephone call from Mr. Sann (2/354) requesting the defendant to await Citibank's instructions do not cure the position for the defendant. No instructions were forthcoming nor any positive expression of view by Citibank. There was correspondence concerning the accounts and repairs to the property and in November 1983 (2/447) Citibank, in a letter, after referring to Clause 10, said it did not consider it appropriate to transfer the property into Citibank's name.

53. The defendant is a paid trustee. There is reposed in it a discretion. It was not entitled to remain inactive in the light of the expressed wish of Joseph and George and the absence of any positive instruction from Citibank. At best, the absence of instructions from Citibank may have been a legitimate reason for delaying the sale for a period within which such instructions might reasonably have been forthcoming. Thereafter, the defendant should have acted. In the circumstances, the defendant is not entitled to hide behind Citibank.

Other defences

54. I am therefore against Mr. Ainger on his 3 principal submissions. I must look at his fall-back defences.

55. First, he relies on the use of the word "unanimously" in the 9th August 1977 letter (2/250). That requires a unanimous and not unilateral notification that the beneficiaries had changed their mind about retaining the property. The June 1981 consent was not unanimous because JDC withdrew its consent on 25th June or, at least, the unanimity should have been long enough to allow the property to be sold. Suffice it to say that the unanimity was there for a few days and, in any event, I do not think the 9th August 1977 letter prevented any of the signatories withdrawing consent although any single signatory so doing would not be in a strong position.

56. Next, it is tentatively argued that the defendant had properly exercised its power to postpone sale; initially because of the 9th August 1977 letters and Citibank's confirmation thereof; after June 1981 by reliance on Citibank's direction that no action be taken, or other influencing factors. Whilst the defendant clearly considered the position carefully in 1977, I am unable to discern that it did so after June 1981, and I cannot accept that the 1977 exercise of discretion continued after June 1981. Clearly a trustee must be alive to changing circumstances.

57. In paragraph 25A of the amended Defence, it is suggested that any breach has not caused damage because Citibank would have terminated the trust for sale and allowed the property to continue to be used as a residence. However, that is an inference which T am unable to draw from the documents, notwithstanding JDC's strong views until 24th December 1984.

Trustee Ordinance

58. Finally, Mr, Ainger seeks relief under section 60 of the Trustee Ordinance which I set out for convenience:

"60.     If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Ordinance, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same."

59. The approach adopted by, the courts is set out in National Trustees Company of Australasia v. General Finance Company of Australasia (1905) A.C. 373 where Sir Ford North said, at p.381:

"Unless both are proved."

                that is that the trustee acted honestly and reasonably

"the Court cannot help the trustees; but if both are made out, there is then a case for the court to consider whether the trustee ought fairly to be excused for the breach, looking at all the circumstances."

60. It is not disputed that the defendant acted honestly and for most humanitarian reasons. Did it act reasonably?

61. I am asked to look at the defendant's conduct in the light of 2 elements. First, the defendant was aware of the provisions of the 2 wills. Nothing was more natural than that the defendant should notify and consult Citibank about the house. Had the defendant sought directions from the court, Citibank would have been joined and its views given careful attention. Indeed, Citibank might have been encouraged to obtain the views of the New York court, New York being the relevant State.

62. Secondly, the defendant was aware of the background material containing the testator's wishes as to the property. I have already referred to this.

63. In all these circumstances, it is suggested the defendant acted reasonably. It is necessary to go on, therefore, to consider whether a paid trustee should be excused.

64. Mr. Ainger concedes that the courts are reluctant to excuse a paid trustee. In addition to National Trustees v. General Finance where the trustee received erroneous legal advice, he referred me to In re Pauiing's Settlement Trusts (1964) 1 Ch. 303 where there was a conflict of interest, and Bartlett and Ors. v. Barclays Bank Trust Co. Ltd. (Nos. 1 and 2) (1980) 1 Ch. 515 where the trustee held the majority of shares in a company but did not involve itself in the management and the company lost money.

65. In none of these cases vas the trustee excused. Indeed Mr. Godfrey suggests there is no reported case of a paid trustee being excused, which is no doubt correct because Mr. Ainger, who meticulously researched., prepared and presented his case, would surely have found it.

66. However, Mr. Ainger suggests the facts of these cases are more serious and the court can take a more lenient course towards the defendant which has not acted dishonestly or unreasonably but simply tried to do its best having regard to the provisions of the will and the humanitarian requirements of the brother and sister.

67. In my judgment, the defendant did not act reasonably for 3 reasons:

68. So it does not fall to me to decide whether the defendant should be excused. But if it did, I should not excuse the defendant for the 3 reasons just given because, although quite understandable, they are not excusable. In addition, it must not be forgotten that a paid trustee such as the defendant is appointed, amongst other reasons, because it is impartial and will not be drawn into taking sides, thus avoiding the kind of situation which has unhappily arisen here.

Finding

69. I am satisfied that, after lst June 1981, the defendant was in breach of trust. It did not, on the evidence, show that in any way or at all it exercised its discretion other than by seeking instructions from Citibank. But the defendant was and is the trustee for sale and it was for the defendant to exercise the power to postpone on sound principles. George, whom I have already found is entitled to sue, is entitled to judgment.

70. Counsel have indicated that they wish to address me on the order for sale, and anticipate that a minute will be prepared as to the enquiry and reconstitution of the trust. I will therefore hear counsel.