An unconscionable bargain alleged to have taken place in inheriting plastics company

A recent story from New Zealand published in the New Zealand Herald Online is a classic example of a sibling dispute . It has dragged for over 10 years. Ray and Joyce Lee left approximately $800,000 in assets for their children at the time of their deaths in 2003 and 2004. A plastics company named High Duty Plastics was one of the assets. It was worth approximately $333,000. One of their children, Greg Lee, was employed at the company and eventually took control and bought shares for $200,000 in 2000. Two of his siblings, Robert Lee and Helen Heard, have challenged the transfer alleging an unconscionable bargain and undue influence by Greg Lee on their parents in procuring the transfer.

It is also alleged that mental capacity may have been an issue at the time of the transaction. Joy Lee was apparently diagnosed with bipolar mood disorder and alcohol abuse as early as 1994. Ray Lee was put in an old age home in early 2000 due to capacity issues.

It is important to note that a transfer of control of a company from parties with alleged diminished capacity is likely to be viewed as suspect by all parties affected. This is especially true if the transfer is done at a price below market value. A transfer below market value may leave the transaction open to allegations of an unconscionable bargain. More importantly, any transfer of assets to one beneficiary to the exclusion of other beneficiaries is likely to be scrutinized. The Courts have the power to undo the transfer for the benefit of the excluded beneficiaries if there has been an unconscionable bargain or unjust enrichment.

Testators transferring a business to one child to the exclusion of other children should make their intentions clear to all potential beneficiaries at the time of the transfer. If testamentary capacity is an issue, the parties who stand to be excluded should address the matter as soon as possible. Failure to do so may result in protracted estate litigation and significant legal expenses. Even if the parties are successful in undoing the transfer of a business, the costs and delay associated with the process may neutralize any potential gain to be attained.

Greg Lee tried to have the matter struck out as frivolous and vexatious in High Court in 2012. He denied the claims against him. He had support from a High Duty Plastics accountant who made it clear that there are documents showing the advice the parents received with respect to transferring the company to Greg and the consideration given to the fairness of the transfer. Greg’s position was that he was receiving his inheritance early when he purchased the shares for $200,000. The judge at first instance agreed with Greg.

On appeal, Justice Clifford found that the parents Ray and Joyce Lee understood that their estate would be split evenly between their four children. Justice Clifford found that the claims by Robert Lee and Helen Heard were equitable and that if Greg was to inherit High Duty Plastics he would have to compensate his siblings for the difference between the value of the business ($333,000) and what he paid ($200,000). Greg would be required to pay his siblings $133,000.

This decision means that the High Court proceedings continue. The appeals court judge also suggested that the parties should consider alternative dispute resolution.

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