KRNJULAC v LINCU

Judgment

1. BATHURST CJ: This is an appeal from orders made by a judge of the Equity Division of the Supreme Court, essentially ordering that the appellants transfer their interests in a property, Lot 32 in Deposited Plan 1823, being the whole of the land in Certificate of Title, Volume 2150, Folio 146 (the property), to the first, second and fourth respondents, as trustees for a trust for religious purposes (the Nazarene Church trust) and entering judgment against the appellants in favour of the respondents, as such trustees, in the sum of $467,134.37, being the amount due in respect of a mortgage over the property. I have used the expression "essentially ordering" as, with the greatest respect, some of the orders made by the primary judge are somewhat obscure. What I have set out above is their intended effect.
2. It was not in issue that, prior to the events giving rise to the proceedings, the property was held by the then registered proprietors as trustees for the Nazarene Church trust, or that the trust was a valid charitable trust. The proceedings arose out of the transfer of the property from the then trustees, the first and second respondents and Mr Laza Krnjulac, to Mr Laza Krnjulac and his sons, the appellants, and the subsequent mortgage of the property to Community First Credit Union Ltd, to secure the sum of $470,000. It was alleged that the transfer was procured by the fraudulent breach of trust of Mr Laza Krnjulac. No allegation of fraud or breach of trust was made against the appellants. Nor was it alleged that they acquired an interest in the property with knowledge of the alleged breach of trust, or that they participated in a dishonest and fraudulent design by Mr Laza Krnjulac.

The pleaded case

1. Because of the issues raised in the appeal, it is necessary to set out the pleaded case in a little detail.
2. The amended statement of claim pleaded that the property was held upon the trust to which I have referred. It pleaded that the land was unencumbered. It then made the following allegations against Mr Laza Krnjulac, who was the first defendant in the proceedings below and the appellants, who were the second and third defendants in those proceedings: "8. In or about 2004 the First Defendant fraudulently misappropriated or improperly procured a transfer of the Church Property from the Plaintiffs and himself to himself and the Second and Third Defendants. [Particulars which defined the "fraudulent procurement" omitted] … 10. On or about 4 June 2004 the First Defendant fraudulently or improperly used the procured transfer signed by the First Plaintiff and the Second Plaintiff to transfer to himself and the Second and Third Defendants the Church Property ('the fraudulent transfer'). 11. The transfer to the Second and Third Defendants lacked any or any valuable consideration. 12. In making the fraudulent procurement and the fraudulent transfer the First Defendant breached the terms of the Trust. 13. In consequence of the Fraudulent Procurement and the Fraudulent Transfer and the breach of trust the Church has suffered loss and damage. [Particulars omitted] … 14. In or about July 2004 the Defendants' [sic] mortgaged the Church Property ('the mortgage') without the consent of the trustees of the Church Property. 15. In mortgaging the Church Property the First Defendant breached the terms of the trust. 16. In consequence of the First Defendants fraudulent action, from about June 2010 to date, the First Defendant has prevent [sic] the Plaintiffs and the Church from using the Church Property. As a consequence the Church has had to find and use an alternate place to worship and have thereby suffered loss."
3. As I have stated above, there was no allegation of fraud against the appellants, nor was there any allegation of knowing receipt of trust property or knowing participation in a dishonest or fraudulent design on the part of the trustees. It was not in contest in the appeal that the case was conducted on the pleadings.

The primary judgment

1. The primary judge held that the land was trust property and that Mr Laza Krnjulac fraudulently procured its transfer. Those findings were not disputed in the appeal. However, in holding the appellants to have the same liability, the judge effectively held that the appellants received the trust property with knowledge of the breach of trust. The finding was incorporated in the following paragraphs of his judgment: "[33] By that transfer his sons, with him, acquired the legal title to the property, with notice that it was held on trust for charitable purposes. They did so, knowing that he had no present, or prospective, beneficial entitlement to it, and for no consideration. They took title to the property as constructive trustees for the charitable purposes of the Church. It remains dedicated to charity. [34] Immediately after they took title to the land, in breach of their obligations as trustees the first defendant and his sons mortgaged the property for their own private, business purposes. The first defendant contrived to appropriate the title to the property to himself with that object, not disclosed to fellow worshippers, clearly in mind. [35] As trustees, the first, second and third defendants are liable to account for the trust property they have misapplied. They are obliged to restore it to the Church, represented in these proceedings by the Attorney General for NSW (the fourth defendant) as, ex officio, protector of charities and, pursuant to leave granted under the Charitable Trusts Act 1993 NSW, by the plaintiffs. … [77] The plaintiffs contend, and I find, that: (a) they were tricked by the first defendant into 'transferring' the land to him and his sons; (b) that they never intended to transfer the land to him, or for the personal benefit of him and his family, or to transfer it away from the Church; (c) that the first, second and third defendants took the land on a constructive trust for the charitable purposes of the church; (d) that the defendants acted in breach of trust in mortgaging the land for their own personal benefit; and (e) that they are liable to account for the trust property they have taken, and to be removed and replaced as trustees for the Church. … [86] Neither of the first defendant's sons (the second and third defendants) has given evidence. Their absence from the witness box is unexplained, although it is common ground that they are not members of the Church. In reality, any case advanced on their behalf rises no higher than that of their father. [87] It is common ground that any interest they acquired in the land was acquired by them as volunteers. [88] Given the nature of the land (upon which a church building is and has been at all material times erected); their residence with their parents, and their involvement in their family's business enterprises, at the time the land was acquired; their father's close connection with worship and other church activities on the land; their lack of any personal connection with either the land or church activities on it; and their father's evidence that he put them on the title to help 'protect' the Church, they cannot but have been aware that the land was dedicated to charitable purposes of the Church. I infer that they were, in fact, so aware, from (at least) the time of their acquisition of an interest in the land. [89] That inference is the more readily available for their unexplained absence from the witness box; they could have contradicted it, by giving evidence, but they chose not to do so: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 308, 312 and 320-321. … [91] Their counsel invites the Court to find that, if they have any liability (otherwise than as guarantors of the Credit Union mortgage) it must be a liability no more extensive than as volunteers in receipt of trust property according to the principles enunciated in Heperu Pty Limited v Bell [2009] NSWCA 252; (2009) 76 NSWLR 230 at 267-268 [163] rather than by reference to Barnes v Addy (1874) LR 9 Ch App 244 at 251-252. [92] It is not necessary, I apprehend, to explore this territory. It is, for present purposes, sufficient to record that, as I have found, the sons were aware that the land was dedicated to charitable purposes of the Church from at least the time of their acquisition of an interest in the land. They granted a mortgage to the Credit Union, to secure a debt they personally owe to the Credit Union, at a time when they must be found to have held the land on a constructive trust for the Church."

Preliminary issues

1. The primary judge made orders on 30 May 2014 and 16 December 2014. The appellants sought leave to appeal against the orders made on 30 May 2014 on the basis that the appeal against these orders was out of time.
2. It is by no means clear that this is correct as the orders were essentially interlocutory orders having regard to Gerlach v Clifton Bricks Pty Ltd [2002] HCA 22; 209 CLR 478 at [6]-[8]. Further, on one view of the matter, the orders made on 16 December 2014 did not finally dispose of the proceedings, so those orders could also be classed as interlocutory. In those circumstances, leave to appeal against those orders would also be necessary.
3. However, it was accepted at the hearing by counsel for the first, second and fourth respondents that leave to appeal should be granted. In those circumstances, the Court indicated that to the extent necessary, such leave would be granted.
4. Mr Laza Krnjulac was not joined as a party to the appeal proceedings. He should have been. To accommodate this issue, the Court made the following orders at the conclusion of the hearing: 1 Direct that the appellants, a. within seven days, file a further amended notice of appeal joining Mr Lazo Krnjulac as a respondent; b. within 14 days serve on Mr Krnjulac an amended notice of appeal, the appeal books filed in connection with the appeal, the transcript of the hearing and a copy of this order. 2. Direct that should Mr Lazo Krnjulac wish to be heard against him being joined as a party against the appeal or make submissions on the merits of the appeal, notify the court of that within seven days after service of the documents referred to in 1(b) of these orders. 3. In the event that Mr Lazo Krnjulac notifies the Court in accordance with paragraph 2 of these orders the proceedings be listed before the Registrar for the Court of Appeal for further directions."
5. Mr Laza Krnjulac has not filed submissions on the question of joinder or the merits of the appeal. In those circumstances, an order should be made joining him as fifth respondent to the appeal.

The appeal

1. The appellants submitted that the findings of the primary judge went beyond the case that was pleaded and run at the trial. Counsel for the appellants submitted that the appellants, as volunteers, could only be liable to the extent that they retained their interest in the property or the traceable proceeds of it.
2. The appellants submitted that it was not pleaded that, at the time the property was mortgaged, the appellants had knowledge of any breach of trust by Mr Laza Krnjulac. They submitted that there was no evidence that the appellants had received any benefit from the funds derived from the mortgage of the property.
3. The respondents did not dispute these submissions. In their written submissions, they sought to support the reasoning of the primary judge without regard to the pleading issue. Counsel for the first, second and fourth respondents accepted that the findings in pars [88]-[92] of the judgment of the primary judge could not be supported having regard to the pleaded case and conceded that the appeal must be allowed.

Disposition

1. It was not in contest that, apart from "where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on the pleadings": Dare v Pulham [1982] HCA 70; 148 CLR 658 at 664. The importance of the pleadings in this context was emphasised in the well-known passage in the judgment of Mason CJ and Gaudron J in Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd [1990] HCA 11; 169 CLR 279 at 286-287: "The function of pleadings is to state with sufficient clarity the case that must be met: Gould and Birbeck and Bacon v. Mount Oxide Mines Ltd. (In liq.) (1916) 22 C.L.R. 490, at p. 517, per Isaacs and Rich JJ. In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party's right to this basic requirement of procedural fairness. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities. See, e.g., Browne v. Dunn (1893) 6 R., at p. 76; Mount Oxide Mines (1916) 22 C.L.R., at pp. 517-518." See also Forrest v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486 at [26]-[27].
2. In the present case, it was not contended that the case was not conducted on the pleadings. Nor could it have been. When the trial judge indicated during argument the approach which was ultimately reflected in his judgment, counsel for the appellants immediately submitted that such an approach was outside of the pleadings.
3. The difficulty which arose can be shown by one example. The primary judge, in reaching his conclusion, drew an adverse inference from the failure by the appellants to give evidence. However, the appellants admitted what was actually put against them, namely, that they were volunteers. On the case as pleaded, there was no reason for them to give evidence as to their knowledge of whether the transfer was in breach of trust.
4. It follows that the primary judge was not entitled to decide the case on the basis that he did and the orders made by him against the appellants must be set aside.
5. The question remains as to whether a new trial is necessary or whether this Court can finally dispose of the proceedings. The appellants submitted that as volunteers, they were required to account for so much of the trust property as remained in their hands at the time they acquired knowledge of the breach or the traceable proceeds of the trust property: Black v S Freedman & Co [1910] HCA 58; 12 CLR 105 at 109; Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230 (Heperu) at [139], [154], [163]; Sze Tu v Lowe [2014] NSWCA 462 (Sze Tu) at [142]-[145].
6. The appellants accepted that they were bound to transfer their interest in the property to the present trustees of the trust. However, they submitted that it was not pleaded that they had knowledge of the trust at the time of the mortgage or that the grant of the mortgage constituted a breach of any obligation owed by them to the first, second and fourth respondents. They pointed to evidence at the trial to the effect that the proceeds of the mortgage were used by Mr Laza Krnjulac to purchase a business, Total Power Tools. There was no suggestion that the appellants had any interest in this business.
7. None of the propositions referred to above, either legal or factual, were disputed by the first, second and fourth respondents. There was no submission by them that what was said by this Court in Heperu or Sze Tu was incorrect (cf Re Diplock [1948] Ch 465; Ministry of Health v Simpson [1951] AC 251) or that, contrary to the evidence of Mr Laza Krnjulac, the appellants derived a traceable benefit from the proceeds of the mortgage.
8. Further, the appellants themselves did not contend that they were entitled to an indemnity in respect of their liability under the personal covenant in the mortgage.
9. In these circumstances, it is appropriate to make the orders which were foreshadowed on a preliminary basis at the conclusion of the hearing. None of the orders affect the liability of Mr Laza Krnjulac, as found by the trial judge. So far as costs are concerned, although the appellants should have their costs of the appeal, having regard to the fact that they retained the same solicitors as Mr Laza Krnjulac at the hearing, no order for the costs of the proceedings at first instance should be made in their favour.
10. In these circumstances, I would make the following orders: 1. To the extent necessary, grant the appellants leave to appeal from the orders made by Lindsay J on 30 May 2014 and 16 December 2014. 2. Grant leave to the appellants to file an amended notice of appeal, adding Mr Laza Krnjulac as the fifth respondent. 3. Appeal allowed. 4. Set aside Orders 5 to 14 inclusive of the orders made by the primary judge on 30 May 2014 and Orders 10 to 14 of the orders made by him on 16 December 2014 and, in lieu thereof, make the following orders: 1. Declare that the appellants and the fifth respondent hold their respective interests in the land contained in Folio Identifier 32/1823 (the church land) on trust for the trustees, for the time being, of the Nazarene Church trust (the trustees). 2. Order that the appellants and the fifth respondent execute and deliver transfers of their respective interests in the church land to the trustees. 3. Order that the appellants and the fifth respondent deliver up possession of the church land to the trustees. 4. Order that the fifth respondent account to the trustees for the use of title to the church land. 5. Order that the fifth respondent indemnify the trustees against all claims that may be made against them in relation to the church land by Community First Credit Union Ltd as mortgagee in respect of mortgage AA852414 over the church land (the mortgage). 6. Order (in aid of Order (e)) that judgment be entered against the fifth respondent in favour of the first, second and fourth respondents, as trustees of the church land, in the sum of $467,134.37, the amount outstanding under the mortgage as at 12 December 2014. 7. Order that until further order, the fifth respondent, by himself, his servants or his agents, be restrained from removing from Australia or in any way disposing of or dealing with or diminishing, the value of his assets in Australia, up to an unencumbered value of $700,000. 8. Order that the fifth respondent pay the first, second and fourth respondents' costs of the proceedings in the court below on an indemnity basis and those of the third respondent on an ordinary basis. 1. Order that the first, second and fourth respondents pay the appellants' costs of the appeal and have a certificate under the Suitor's Fund Act 1951 (NSW) if eligible.
11. Orders (1)(e)-(h) adopt the form of orders made by the primary judge which, insofar as they applied to the fifth respondent, were not challenged.
12. LEEMING JA: I agree with Bathurst CJ.
13. EMMETT AJA: This appeal is concerned with the appropriate relief to be granted in circumstances where a property held by Mr Laza Krnjulac and his two sons was mortgaged by them to secure an advance to Laza Krnjulac, who procured the mortgage by fraudulent breach of trust, though no allegation of fraud or breach of trust was made against the two sons (the appellants). Further, no allegation was made in the pleadings that the appellants acquired an interest in the property with knowledge of the alleged breach of trust or that they participated in a dishonest and fraudulent design by their father.
14. The primary judge found that Laza Krnjulac had procured the transfer of the property to himself and his sons, and had procured the mortgage, by fraudulent breach of trust. His Honour ordered the appellants and Laza Krnjulac to transfer their interests in the property to the first, second and fourth respondents, who are trustees of the Nazarene Church Trust. There is no complaint about that part of the relief granted. However, his Honour also directed the entry of judgment against the appellants, in favour of those respondents, for the amount that was owing under the mortgage over the property. That is the relief that is in dispute in the appeal.
15. In the course of the hearing of the appeal, counsel for the respondents accepted that certain critical findings made by the primary judge could not be supported in the light of the case pleaded by them, and conceded that the appeal ought to be allowed.
16. I have had the advantage of reading in draft form the proposed reasons of the Chief Justice. I agree, for those reasons, with the orders proposed by his Honour.

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