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Advancing money? Document carefully or suffer the consequences

01 March 2019

Advances between different entities in farming businesses are common – for example, advances from parents to children and advances between companies and shareholders and beneficiaries and trustees. Where there is no adequate record of the nature of a payment made by one person to another misunderstandings and disagreements between the parties, and willful blindness or even dishonesty by one party, can result. This is particularly so if the payment is made when the parties are on good terms and the relationship subsequently breaks down.  In a recent case a failure to record the nature of a payment led to legal action to recover it.

Ex-husband seeking reconciliation pays ex-wife $250,000

Greg and Brenda[i] had been separated for three years when Brenda applied for a dissolution of their marriage. Brenda was shocked and very angry when Greg claimed an interest in her home. Greg had promised her he would never make such a claim. In settlement of the relationship property dispute Brenda paid Greg $305,000.

Eleven days after Brenda had paid the $305,000 settlement, Greg instigated a meeting with her to attempt reconciliation. There were lengthy discussions at the meeting leading to Greg paying $250,000 to Brenda. In the months that followed Greg and Brenda attempted to revive their relationship but there was no lasting reconciliation. Greg sued Brenda for the return of the $250,000 claiming he was entitled to it because (a) Brenda was holding the money on trust for him; (b) the payment was an unconscionable bargain; and (c) the payment was made by deceit. Brenda responded to Greg’s claims by stating the payment was a gift and she was entitled to keep it. The judge held in Brenda’s favour and responded to Greg’s arguments as follows:

(a) Resulting trust

Where one person makes a voluntary payment to another person there is a presumption that the person paying the money did not intend to make a gift. If the person to whom the payment is made does not rebut that presumption then that person holds the money on trust for the person who paid it. The judge considered the evidence (including the conversations taped during the meeting) and held the $250,000 was an outright gift.

(b) Unconscionable bargain

The judge said the doctrine of “unconscionable bargains” could extend to gifts. Greg’s argument that the payment was an “unconscionable bargain” did not succeed because he had not shown on the evidence that it would be unconscionable for Brenda to retain the money because of her knowledge of his mental vulnerability.

(c) Deceit

To succeed in his final claim of deceit, Greg would have to prove Brenda had made a false representation of past or present fact. The judge found there was no representation at all other than Brenda’s acknowledgement that, if the money were paid, that would be a first step towards an uncertain process of reconciliation - “If you do this, I might do that.”  Even if there had been a representation of past or present fact, there was nothing false about it.

A hard lesson

For Brenda, justice was done – no doubt at significant cost to her. For Greg, perhaps he truly believed Brenda would pay back the money if the reconciliation was not successful. For both of them, the lesson to be learned is to take legal advice and record the terms of a proposed payment before the payment is made.  In farming families where substantial payments are often made between different entities, this lesson is particularly appropriate.

[i] Names have been changed.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott