Ludwig v Jeffrey

Supreme Court of NSW|2020-11-30|Before: Slattery J

Judgment

Something is seriously wrong with the administration of a trust when the trust property of $204,000 is almost wholly consumed by legal fees. Regrettably that has occurred in this case involving an intra-family trust. With different trust management and legal guidance to take advantage of Trustee Act 1925, s 63 judicial advice, the beneficiaries could have preserved much more of their trust property than they have.
This is the Court's second judgment in these proceedings. In the Court's first judgment, the defendant unsuccessfully moved to stay the proceedings: Ludwig v Jeffrey [2019] NSWSC 1550. The costs of the motion were reserved.
The first judgment set out the general history and background of the proceedings up to November 2019. This judgment should be read with the Court's first judgment. Events, matters and persons are referred to in both judgments in the same way.
In short, the plaintiffs, Mr Robert and Mrs Joanne Ludwig, and the defendant, Mr Lynton Jeffrey (Mrs Ludwig's cousin), were registered proprietors as joint tenants of a residential property in Chester Hill. Mr Jeffrey acknowledged that he held his one third legal interest in the property on trust for Mr and Mrs Ludwig and was ready to transfer it to them. The Ludwigs sought relief that Mr Jeffrey transfer their equitable interest in one third of the property to them or that the property be sold under Conveyancing Act 1919, s 66G. But the active issues between the parties related to (a) ascertaining the extent of Mr Jeffrey's tax liabilities for his ownership of the one third interest in the property and (b) the adequacy of various competing mechanisms to indemnify Mr Jeffrey for his trusteeship.
After declining a stay, in the first judgment the Court made directions for the further conduct of the proceedings. The Court referred the matter to a Court-annexed mediation and granted general liberty to apply. The parties were unable to resolve their differences. But the refusal of a stay and an alignment of the parties' preferences led to an agreement to sell the property.

Further Background: Mr Jeffrey, the Ludwigs, and their Property in Chester Hill

The background to these proceedings was set out in the Court's first judgment. But that background is expanded here to cover other relevant events. Some of these additional relevant events relate to the period before proceedings were commenced. Other additional events relate to the period since the Court gave the first judgment on 8 November 2019.
A short history of the acquisition of the property back in 1994, and the Ludwigs meeting all the outgoings on the property since its acquisition (both before and after the refinance with Newcastle Permanent in 2000), are sufficiently recounted in the first judgment.
Mr Jeffrey retained previous solicitors, Strategic Legal Services ("SLS"), up until the commencement of these proceedings in May 2018, from when he retained his present solicitors, Whitfields Solicitors. The principal at SLS, who was managing the matter for Mr Jeffrey, was his mother, Ms Lyn Drake. Mr Jeffrey probably retained a firm where a relative of his was practising, in order to contain his legal costs. And there was constraint on Mr Jeffrey's pre-litigation legal costs, given that SLS acted for him between 2013 and May 2018 charging a total of $29,558.78. The Ludwigs retained Shad Partners from near the beginning of the present disputes.
The idea that the Ludwigs would acquire the one third legal interest in the property held by Mr Jeffrey dates back to 2013, when the Ludwigs were contemplating building a duplex on the property so that they could all live there together with their children and Mrs Ludwig's mother, Mrs Kath Fullagar. For that purpose they sought to refinance their mortgage over the property. The Ludwigs always understood they owned Mr Jeffrey's property beneficially. It became a source of continuing inconvenience to the Ludwigs that every time they wanted to refinance the property they needed to get Mr Jeffrey to sign off on the transaction. This prompted them to request Mr Jeffrey to transfer his interest in the property to them.
Mr Jeffrey always understood that he did not hold beneficial ownership in the one third of the property he owned legally. But for a long time he thought that he held his one third share on trust for Mrs Fullagar. He says that between 2013 and 2016 he received somewhat contradictory statements about who was the true beneficial owner of his one third interest, whether there was a trust of that interest and if so what were its terms. But by before 2017, a reasonable consensus had developed that Mr Jeffrey held his one third interest beneficially for the Ludwigs although he wanted Mrs Fullagar's consent for steps he was taking. But the confusion between 2013 and 2016 about who was the true beneficial owner and whether there was a trust goes some way towards explaining the first three years of the remarkable seven years delay that has occurred since this issue was first raised.
Another source of the lengthy delay in bringing this matter to finality is that Mr Jeffrey has lived permanently in the United States since January 2001 and is subject to both Australian and United States taxation regimes. Ultimately the matter has become complicated by many potential tax liabilities. Mr Jeffrey's transfer of his one third interest may attract not only Australian CGT but United States tax. On top of that, the parties have had to consider Mr Jeffrey's liability for NSW land tax. And the Ludwigs may have had to deal with NSW stamp duty.
There is little doubt that Mr Jeffrey has tried to cooperate in transferring his one third interest in the property right from the outset. A review of the correspondence bears this out. As will be seen, Mr Jeffrey was met from time to time with what the Court regards as unnecessarily peremptory correspondence sent on behalf of the Ludwigs.
The Early Years - 2013 to 2016. Mrs Fullagar proposed the transfer of Mr Jeffrey's one third as early as April 2013. SLS communicated this to Mr Jeffrey, whose concern from the outset was making sure there was enough money set aside to cover his potential tax liabilities arising from the transfer, before he transferred the property. SLS was active to point out that provision needed to be made for his potential tax liability, because as he was a resident of the United States he perceived that a CGT principal residence tax exemption would not be available to him.
It is not necessary to detail the correspondence that went backwards and forwards between the parties in 2013 and 2014 other than for the Court to say that it involved a necessary exploration of the following matters: whether there was a trust of Mr Jeffrey's one third share in the property; who held the beneficial interest; and on what terms. In April 2014, an email emerged dated 15 July 2002 that sufficiently convinced Mrs Fullagar that she had no continuing interest in the property.
But by early July 2014, a reasonable consensus had developed about what should be done about the existing structure. On 6 July 2014, SLS wrote to the Ludwigs stating as follows: "[Mr Jeffrey] will transfer his interest…provided that the appropriate documentation is put in place and that he is protected from any stamp duty and tax consequences for which you have said more than once you will take responsibility. You need to engage another lawyer to help you achieve the outcomes that you want including for Aunty Kath. We can then all work together to bring the matter to finality for your family and for Lynton, who is equally anxious to be rid of this problem that was not of his making."
On 8 July 2014, the Ludwigs' lawyers, Shad Partners replied, strangely denying that Mr Jeffrey held the property as trustee for the Ludwigs and stating that there was no satisfactory documentation establishing a trust but nevertheless stating: "The Ludwigs agree to indemnify Mr Jeffrey in relation to the Capital Gains Tax that may become payable because of the beneficial disposition [to the Ludwigs] It is my instructions that the CGT will be circa $11,500 and this sum shall be held in trust pending [Mr Jeffrey's] ATO assessment for the 2014/2015 year".
Just why Shad Partners were denying at this stage that Mr Jeffrey held the property on trust is unclear as all the circumstances pointed to him holding it on trust, as Shad Partners' later pleadings asserted.
This correspondence was followed by letters in September and October 2014 between Shad Partners and SLS in which Mrs Fullagar clearly disclaimed any interest in the house and pleaded even at that time that "this has been going on for far too long". In the correspondence the Ludwigs sought the transfer of Mr Jeffrey's "legal and beneficial interest" in the property to them. Mr Jeffrey not surprisingly thought from these statements that the Ludwigs continued to believe that he held a beneficial interest in his one third in the property. And Shad Partners were also suggesting that Mr Jeffrey should obtain his own advice about his potential CGT and land tax liabilities.
Mrs Fullagar continued to write imploring correspondence to SLS, worried about rising legal costs for the Ludwigs and to try and encourage the early transfer of Mr Jeffrey's one third interest to the Ludwigs. Mrs Fullagar said in one email on 2 November 2014: "Can you PLEASE help us with this problem with the house... My family are all so very distressed. … Joanne has had three different solicitors and paid that much money to try and get this settled and we have been told repeatedly that the hold-up is Lynton's signature … I cannot believe that a family I love so much could cause us this much pain… why cannot we just have this settled".
In reply, Ms Drake for SLS explained that it was not a simple matter of Mr Jeffrey signing a document. She referred to the tax issues and made clear that: "That is the fact that at no time has Lynton ever had any beneficial interest whatsoever in [the property]. Lynton has confirmed this over time including when required in writing and Joanne and Robert need to take advice on the amount of taxes that they have agreed to pay as a result of the above factual situation."
It is difficult for the Court to read this correspondence six years later without wondering why this has taken so long and has become so expensive. As will be seen, there were readily available legal solutions to bring it to a head at little cost to the parties, once it was clear that Mr Jeffrey was disclaiming a beneficial interest in the property and that this disclaimer was accepted.
This kind of correspondence continued throughout 2015 and 2016, in part pushed along by Mrs Fullagar. By the first quarter of 2015, Mr Jeffrey was looking to the Ludwigs to obtain valuations of the land and indicative calculations so proper financial arrangements could be made when the transfer occurred. Indeed, the Ludwigs obtained a valuation of the whole property as at June 2014 in the sum of $570,000.
The Ludwigs wrote to Mr Jeffrey on 28 April 2015 estimating potential CGT at $11,500 based on an accountant's calculation and offering to sign "indemnity forms completely indemnifying you of all costs associated with the property and that we will pay all costs". Their letter finished in the following way: "We have no intentions of suing anyone or going down that road but we are frustrated that the information from both sides is getting confused. Bottom line is we want the property so that we can do what we need to do and you do not want anything to do with the property so, please sign the transfer, we will do the same with the undertaking and place the money in trust for you to do a tax return. … I trust we can resolve this ASAP and get on with our respective lives."
A basic consensus was clear by this time. Despite earlier somewhat contradictory statements, it was clear enough that Mr Jeffrey was not seen as a beneficial owner and the Ludwigs were properly taking responsibility to indemnify him for liabilities incurred upon the transfer.
But a persistent issue that divided the parties was already evident in this email which proposed setting aside money to meet Mr Jeffrey's tax liabilities. But what if that sum was not enough? That worried Mr Jeffrey. Given the number of tax regimes he had to satisfy, that was not an irrational concern. A logical solution to this was to give Mr Jeffrey a charge (whether registered or not) over the Ludwigs' property once Mr Jeffrey's one third was transferred to secure all his tax and other liabilities arising out of the transfer until they were met. This charge would have been a substitute for the lien which he held over the trust property to meet these liabilities. Creating such a charge would have involved the negotiation of two issues: whether the quantum of the charge should be limited to the value of the property transferred to the Ludwigs; and how to deal with the Ludwigs' first mortgagee, who may have resisted giving consent to a subsequent charge. But neither of these should have been impossible obstacles to overcome. And if they could not be agreed, then the best course for Mr Jeffrey was to propound a reasonable position and to take judicial advice as to whether he should adhere to that position.
But the Ludwigs did not offer this kind of solution. Instead the parties became involved in tax calculations, all of which were necessary if a sufficient sum had to be set aside at the time of transfer. But no matter how good the calculations were, there was always going to be some uncertainty about Mr Jeffery's precise tax liability. And some form of charge over the property in the Ludwig's hands was an obvious solution until those liabilities were all met.
During 2016, less correspondence was sent between these parties. Some of that correspondence rather strangely suggests that Mr Jeffrey's advisers continuing to ask questions on the basis that Mr Jeffrey may have been a trustee for Mrs Fullagar. It is difficult to see why that hypothesis had not already been discarded.
A Change to Selling the Property - 2017. But by early 2017, the Ludwigs were exhausted by the complications of the transfer of Mr Jeffrey's one third legal interest in the property to them. They preferred to sell rather than to refinance the property. Mr Ludwig wrote to Mr Jeffrey in the following terms on 22 February 2017: "Hi Lynton, Regarding the mess that this house has caused we are no longer going to rebuild and are just sick of it all we are going to sell up and will require you to agree to the sale. Kind regards, Rob."
Shad Partners wrote to SLS on 17 March 2017 on behalf of the Ludwigs conveying instructions that "they now desire to sell the property". The letter asserts that a "common intention constructive trust exists" giving the Ludwig beneficial ownership in the property. The Ludwigs sought acknowledgement of the following terms: that Mr Jeffrey had no beneficial interest in the property, and that the Ludwigs could control the sale proceeds subject to an indemnity to Mr Jeffrey for all his relevant tax liability. The letter sought to reassure Mr Jeffrey that he would still be indemnified from any taxation liabilities, and "should your client agree to these terms we shall prepare a Deed outlining the agreement". But the letter indicated that, if agreement to acknowledgement of the trust was not forthcoming, proceedings would be commenced in the Supreme Court under Conveyancing Act, s 66G.
On 28 March 2017, SLS proposed in a letter to Shad Partners that the parties meet to discuss "the terms of all necessary deeds including in relation to joint and several indemnities given by your clients". The SLS letter of 28 March 2017 included the following statements: "My client does not claim to hold, nor at any time has he claimed to have held, any beneficial interest in the property. To the contrary, at all material times my client has unequivocally affirmed that his legal interest in the property is held pursuant to a bare trust. My client has consistently recognised the existence of this trust on and from the date of transfer by Mrs Fullagar, including during the negotiations relating to the property which have occurred since 2013. … In my view, it is in our respective clients' best interests that proceedings are not commenced for reasons including the significant cost of litigation. Further, if litigation is commenced numerous family members, including Mrs Fullagar, will be required to give evidence in Court. An out-of-Court settlement will prevent this from being necessary".
But Shad Partners responded by proposing that instead of meeting, SLS should draft a deed, which should include the terms that had been already proposed by Shad Partners. Shad Partners harkened back to the possibility of commencing proceedings saying, "We do not act for Mrs Fullagar and she will no doubt be a witness should proceedings be commenced." This is puzzling. Mrs Fullagar had long disclaimed any interest in the property. But SLS in correspondence a few days later, on 31 March 2017, indicated they had written to Mrs Fullagar and would follow Mrs Fullagar's directions in relation to any drafting of deeds. This may have been a mark of family respect for Mrs Fullagar and represents a continuing indication on Mr Jeffrey's part that he felt morally obligated to follow her directions. But by then Mrs Fullagar appeared happy to consent to anything reasonable which would get this transaction completed. Why she was being involved seems to have been residual concern on Mr Jeffrey's part that she might be claiming some beneficial interest. But by then she clearly had disclaimed such an interest. The issues about contacting and including Mrs Fullagar seem to have added to the delay. This somewhat exasperated Shad Partners who began to threaten to commence proceedings in correspondence in April 2017.
If the property were to be sold and the proceeds distributed, the issues of payment of Mr Jeffrey's tax liabilities were considerably simplified. The proceeds of sale needed to be retained for long enough to meet those liabilities. There would not be any need for a formal charge over the property. All that was needed was an agreement as to how the proceeds would be dealt with until all Mr Jeffrey's tax liabilities were satisfied. A complex deed may not even have been required, provided the agreement to indemnify Mr Jeffrey was sufficiently well recorded in correspondence between the parties.
Draft Deeds Exchanged: 2017 to 2018. SLS provided a draft deed to Shad Partners in May 2017. The parties' solicitors then exchanged several amended drafts of a proposed deed until May 2018. These drafting efforts culminated in Shad Partners proposing a fifth iteration of the draft on 9 April 2018. It is not necessary to cover these drafts in much detail other than to identify some general issues that arose in the course of the various iterations in the drafting before the production of the April 2018 deed.
SLS wrote to Shad Partners on 24 July 2017 expressing concern that, in the then current draft, the Ludwigs were not consenting to their two thirds legal interest in the property being included in the deed and that a security sum to secure the Ludwig's obligations to Mr Jeffrey was being limited to 10% of the sale proceeds. SLS' concern was well placed. Mr Jeffrey had an undivided one third interest as a joint tenant in the whole property and artificially limiting the extent of his security to 10% of the sale proceeds was a stipulation for the benefit of the Ludwigs that was less than Mr Jeffrey's proper entitlement to security under applicable trust law. He was entitled to have as security one third of the sale proceeds, representing the proper extent of the trust property.
SLS focused on the indemnity security issue in a letter of 18 September 2017. In negotiations on the deed, the Ludwigs had increased the proposed security for Mr Jeffrey to 12.5% of the sale price. Mr Jeffrey requested that the security sum include a full indemnity for him and, to the extent that his tax and other liabilities were not discharged on the sale transfer date, that it should cover all outstanding tax and other liabilities.
But there was disagreement about the exact CGT tax liability that would arise on the sale, due in part to the issues that have been discussed in the first judgment. On 29 September 2017, Shad Partners proposed (what appears to be for the first time in the correspondence) that there be an acknowledgement of the trust relationship between each side and that the Ludwigs would approach the ATO for an ATO private ruling as to the amount of CGT which might arise upon the transfer. This was apparently seen as a way of resolving the parties differences about the extent of that liability.
A very substantial amount of correspondence and professional time between these parties was ultimately devoted to preparing material to be submitted for an ATO private ruling. Resources to this end were spent both when SLS were acting for Mr Jeffrey and later after Whitfields Solicitors commenced to act for him. It was ultimately successful in one sense because when the private ruling came back in March this year it held that no CGT was payable.
But was an application for a private ruling really the best course? At first the parties saw it as an easy way of resolving the differences about the quantum of CGT payable. But in the Court's view, it was foreseeable that it was always going to involve a very substantial investment of professional time and may still leave these parties in a state of uncertainty about the ultimate imposition of CGT after the transaction. And it was never going to solve issues concerning United States tax, NSW land tax and stamp duty. But the parties thought it was the best course at the time and they do not merit much criticism for initially embarking on that course. But when it later became a major and expensive source of conflict about who was to supply information to the ATO, someone among the lawyers advising in this case should have questioned its utility in relation to the size of the trust estate.
By mid-2017, all parties saw Mr Jeffrey as a trustee. In the Court's view, at this time serious consideration should have been given to seeking Trustee Act, s 63 judicial advice. The principles that govern such applications are set out later in these reasons. This course is particularly apt where goodwill exists on both sides in a family trust, but nevertheless there is disagreement between trustee and beneficiary about the best way to administer the trust property. The imperative to seek judicial advice was not as strong at this time as it was later when the Ludwigs commenced these proceedings. But it should nevertheless have been considered by September 2017.
How would a judicial advice application have proceeded? A number of alternatives could have been put to the Court for judicial advice. Proceeding to seek an ATO ruling was one possible option. But another was simply proceeding with the sale, and Mr Jeffrey asking the Court whether he would be justified in stipulating that a particular sum of the sale proceeds be reserved to secure his unascertained tax liabilities. The Court in judicial advice would have advised him whether or not he was justified in insisting on the quantum he requested. He would have been fully indemnified for taking that position if the judicial advice supported him. He would not have needed to negotiate any further but rather just taken that position. He would thereby have preserved the trust estate from a significant part of the burden of continuing legal fees.
There was no doubt that the lawyers on both sides saw the ATO private ruling as an attractive solution. But regrettably they overlooked the easiest solution: judicial advice. Principal responsibility for this lies with Mr Jeffrey. But he cannot have been expected to know about Trustee Act, s 63 himself. But his legal advisers should have seriously considered it from as early as this time.
Instead of that simplicity, the lawyers for the parties engaged in unnecessarily confrontational correspondence. It was principally Shad Partners who raised the temperature, as appears from their letter of 29 September 2017 in which they again threatened to commence proceedings for a declaration of trust and an order that Mr Jeffrey execute the then current draft of the deed.
By 23 October 2017, SLS had received indications that the Ludwigs were now "not in any hurry to sell" the property. SLS stressed that Mr Jeffrey was ready, willing and able to co-operate in a process which involved Mr Jeffrey, the Ludwigs and Mrs Fullagar executing the documents evidencing the trust, followed by approaches to various taxation authorities, followed by the sale of the property, or alternatively the transfer of the trust asset to the beneficiaries. But SLS complained, with some justification, that on the revised edits to the then current draft deed the "security sum" to be set aside for Mr Jeffrey provided no mechanism to compensate him should the beneficiaries' submissions to the various tax authorities be unsuccessful. He was looking for a cash fund to draw upon if he was, for example, levied for land tax.
But Shad Partners' answer to this was unsatisfactory. With respect to providing security for Mr Jeffrey they said: "With respect to the third stage [providing security], it's unnecessary to deal with the disposition at present as our client may decide to remove your client as trustee, retain the property or vest the trust corpus in the beneficiaries. In this regard a security sum, as you suggested, is unnecessary as your client has the legal title fo the Property as to 1/3 providing sufficient assets to indemnify him as the trustee. If your client does not consent to the course suggested within 5 days we have instructions to commence proceedings without further notice. Our client will rely on this letter as to a question of costs".
But this statement gave Mr Jeffrey little comfort about what would be set aside for him after he had transferred property to Mr and Mrs Ludwig.
In their letter in reply of 13 November 2017, SLS protested that the arrangements for Mr Jeffrey's security over trust property were unsatisfactory because the then draft deed was limiting his rights to security over trust assets in a way which was incompatible with general trust law. SLS said on Mr Jeffrey's behalf in this letter: "In all the circumstances for a period of indefinite duration as the beneficiaries now propose…The trustee will be exposed to risk… it is reasonable for the trustee to point out that a trustee is not under any obligation to agree to exclude or otherwise limit or prejudice a trustee's right to indemnity in equity and under statute as against the beneficiaries and any new trustee of the trust".
SLS were correct in this stance. Mr Jeffrey otherwise indicated through SLS that he was willing to participate in an approach by them which involved the execution of two deeds. Although other matters were dealt with within the correspondence, the parties remained at issue about maintaining proper security for Mr Jeffrey until the proceedings were commenced. The correspondence continued through until April/May 2018. On 9 April 2018, Shad Partners forwarded the final iteration of the draft deed to SLS. The key provisions to the deed giving general indemnity to Mr Jeffrey, and attempting to protect his security interest upon transfer of the one-third interest in the property to the Ludwigs, were clauses 3.3.3, 5.1.1 and 5.1.2 which provided as follows.
Clause 3.3.3 stipulated that the Ludwigs could not, without Mr Jeffrey's prior written consent, grant any further security interest over the property exceeding two-thirds of its value. Clause 3.3.3 relevantly states: "Until [the Ludwigs] have fully discharged all their indemnity obligations to [Mr Jeffrey] in and arising under this Deed they must not, without [Mr Jeffrey's] express written agreement, grant any further Security Interest in the Property in respect of an amount exceeding two-thirds of the value of the Property as agreed or determined by a valuer appointed by the parties or, if the parties cannot agree on a valuer, by the President of the Law Society of New South Wales."
Clause 5.1.1 entitled Mr Jeffrey to an indemnity to be fully discharged out of the property, or personally by the Ludwigs. Clause 5.1.1.1 relevantly states: "The Trustee's Indemnity is a continuing indemnity to be fully discharged out of the Trustee Asset or personally by the Beneficiaries whether discharged before or after termination of the [property] Trust".
And by clause 5.1.2, the Ludwigs agreed to be responsible for the payment of all monies and the performance of all statutory obligations which Mr Jeffrey may be personally liable to pay or perform. Clause 5.1.2 relevantly provides: "In addition to their payment of the Purchase Money and all costs and expenses (including stamp duty, legal fees and borrowing costs) relating to the Property, in accordance with their undertaking provided to [Mr Jeffrey] on the Effective Date [the Ludwigs] affirm that they are responsible at all times for: payment of all moneys including the Mortgage Debt and Taxes; and performance of all statutory obligations including in relation to the tax affairs of the [property] Trust, as at any time are the personal responsibility of [Mr Jeffrey] to pay or perform (whether in capacity as Trustee, mortgagor, owner or taxpayer) arising out of or as a consequence of this Deed, the [property] Trust, the Trust Asset and the Property and further that those moneys to the extent that they remain unpaid by [the Ludwigs] constitute a debt due to the Trustee and in any event are the subject of the Trustee's Indemnity".
Clause 5.1.3 clarified that no clause in the draft deed was intended to operate to limit Mr Jeffrey's right to a priority charge over the property. Clause 5.1.3 relevantly states: "Nothing in clause 5.1.2 or in any other clause of this Deed is intended either to limit the Trustee's Indemnity or any other indemnity to the subject matter of those clauses or any rights that [Mr Jeffrey] may have now or in the future including in relation to any priority charge at law over the Trust Asset".
A critical difference between the parties about the terms of then current draft deed was that although the beneficiaries warranted that no third party, other than the named mortgagee, had any interest in the property after the transfer to the Ludwigs, the draft deed did not give the trustee any security interest in the property after transfer. All that the Ludwigs promised under clause 3.3.3 was that until the full discharge of their indemnity obligations they would not grant any security interest in the property to a third party exceeding two-thirds of its value. Mr Jeffrey's concern about this reasonably minimal offer was justified. He was entitled to some equivalent to the lien over trust property that he held at that time as a trustee. Clause 3.3.3 was not an adequate substitute.
On 9 April 2018, Shad Partners wrote in the following terms to SLS: "We refer to the above matter and enclose herewith the following: 1. Draft Deed of Settlement; and 2 Draft Statement of Claim. The terms of the Draft Deed of Settlement are proper in the circumstance and there should be no reasonable basis for your client rejecting them, particularly as our client agrees to indemnify your client inter alia. We advise that your client has until 23 April 2018 to accept the terms therein. Should your client either reject the terms or fail to respond, our client will commence proceedings thereafter without further notice in the Supreme Court. Our client will rely on this letter as to a question of costs including indemnity costs"
At this point it would have been better for Shad Partners to suggest the trustee seek judicial advice rather than to threaten hostile action.
SLS replied on 23 April 2018 to the draft Statement of Claim sent with the 9 April 2018 letter from Shad Partners. Mr Jeffrey's position as a trustee was made quite clear. The letter said: "I refer to your letter dated 9 April 2018 enclosing a draft statement of claim and a revised draft deed. Notably, the draft deed that I sent you on 21 November 2017 on behalf of the Trustee recites the Trust and in the operative part (in terms identical to those in earlier versions of the draft deed) makes provision for the Trustee to transfer the Trust Asset as and when directed by the Beneficiaries (Trustee's Deed). At all times the Trustee has affirmed that there is a trust. Over time the Trustee has provided written assurances to the Beneficiaries that the Trustee is ready, willing and able to co-operate with the Beneficiaries including in relation to actioning the various changes in their directions to the Trustee. On 29 September 2017, the Beneficiaries withdrew their direction (of February 2017) to the Trustee for an on-market sale of the Property and directed the Trustee on their two-deed approach. Since 29 September 2017, the Beneficiaries have not notified any direction to the Trustee for transfer of the Trust Asset. Consequently, your letter dated 9 April 2017 enclosing a draft statement of claim that seeks a declaration of trust and an order for transfer of the Trust Asset to the Beneficiaries is all the more surprising when your letter makes no reference to the Trustee's Deed or to my letters to you dated 13 November 2017 and 21 November 2017 that, after over four months have elapsed, remain unanswered. The Trustee does not reject the draft deed that you enclosed with your letter dated 9 April 2018 (Beneficiaries' 9 April Draft) However, a number of terms in that document give rise to some uncertainties as to their timing and operation. It is reasonable that the Beneficiaries clarify these as discussed later in this letter."
SLS commented upon the relief sought in the draft Statement of Claim indicating that "the trustee would be willing to consent to a declaration of trust on terms that provide adequate protection to the trustee including the date when the trust was created, 10 November 1994, upon which prayer one is silent". The letter then complained that the beneficiaries' claim for relief in prayer two for the transfer of the property in registrable form within seven days could not be complied with, in part because of the need to deal with NSW Revenue, the ATO and NSW Land Registry Services.
The letter then commented upon the Ludwigs' 9 April draft deed. SLS stated in the letter that Mr Jeffrey "does not reject the draft deed". But apart from the matters concerning prayers 1 and 2, Mr Jeffrey took issue with a number of aspects of the draft deed. It is not necessary to detail them in these reasons other than to identify their subject matter. Mr Jeffrey expressed disagreement on the following subjects: uncertainties that arose in the draft because of changes made to the previous draft by Shad Partners; the practical operation of clause 3.3.3; how the beneficiaries will fund payment of the trustee's liabilities; whether the grant of a caveatable interest in the property is prohibited by the existing mortgagee or not; and the potential wasted costs of preparing early drafts of the deed based upon an on-market sale when what was now being proposed was an off-market transfer. And in conclusion, SLS made a general estimate of Mr Jeffrey's costs and expenses to date of $20,000.
On 30 April 2018, Shad Partners replied. They said that "…there is ample equity in the Property to satisfy the Trustee's Indemnity. We are instructed that, as at 26 April 2018, $85,179.39 was owing under the mortgage registered over the Property". But the terms of the draft deed were not accepted. Shad Partners also said: "The terms contained within the Draft Deed are manifestly reasonable and ought to be accepted by your client. Our clients have undertaken to indemnify your client against any cost or expense which your client may incur upon transfer of his legal interest in the Property. They have done so in circumstances where your client does not claim to have a beneficial interest in the Property and has no basis on which to oppose an order for the conveyance of his legal interest. … We are respectfully of the view that the costs of a mediation or settlement conference are not warranted at this time. Our respective clients have already reached an in principle agreement. All that is left is for the parties to agree on the precise terms with which to record that agreement."
This was another moment when Mr Jeffrey should have sought judicial advice. If he was supported by judicial advice he could have stood his ground on the deed and opposition from the Ludwigs should have collapsed.

After the First Judgment

The Orders of 11 November 2019. After the first judgment, the Court indicated to the parties that it may assist in the progress of the ATO private ruling if the Court were to make a declaration about the existence of a trust in relation to the trust property. It was clear from the evidence before the Court at the time of the first judgment that such a declaration could be made and there was no issue between the parties about the existence of the trust or the trusteeship of Mr Jeffrey on a bare trust. With the agreement of the parties therefore the Court made the following declarations on 11 November 2019: "1. The Court declares that since 10 November 1994, the Defendant has held each of his interest in the property comprised in folio identifier 39/31597 and described as 13 Barbers Road, Chester Hill NSW 2162 in the State of New South Wales ("the Trust Property") on trust for the sole benefit of the First and Second Plaintiffs respectively; and 2. The Court declares that the Defendant, in his capacity as trustee, has a right of indemnity out of the Trust Property for any taxation liabilities incurred by the trust, legal costs ultimately ordered in these proceedings (if any) and any other expenses or liabilities properly and reasonably incurred by the Defendant in his capacity as trustee."
The ATO Private Ruling. The parties ultimately settled their differences about an ATO private ruling and applied for it on 19 December 2019. After Mr Whitfield applied for the ATO private ruling, he maintained contact with personnel at the ATO about its progress and assisted in bringing it to finality. By late February 2020, Mr Whitfield was being informed by personnel from the ATO that the application for an ATO private ruling was under consideration.
In its original form the application for an ATO private ruling asked seven questions. The ATO interpreted the applicant as withdrawing all but the first question. This may not have been correct but whether it was correct is not presently material. Question one was as follows: "Will you be liable to pay Capital Gains Tax (CGT) upon the sale of [Chester Hill property] held on trust for the benefit of the beneficiaries (the Ludwigs) in accordance with Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997)?"
The ATO gave the answer "No" to this question. The answer appears to be unequivocal upon the basis of the facts provided to the ATO. So far as the Court can see, from the "relevant facts and circumstances" provided to the ATO, accurate information was given to the ATO. The relevant facts and circumstances included the declarations which the Court made on 11 November 2019.
The ATO's decision and its reasons for decision were as follows: "Summary The Commissioner considers that you have no beneficial ownership on the property and thus you will not be liable to pay tax on the capital gain upon the sale of the property. Detailed Reasoning Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. The property is a CGT asset (section 108-5 of the ITAA 1997). Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner that will have a CGT event upon sale of a CGT asset. In some cases, an entity may hold a legal ownership interest in property for another individual in trust. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset. We consider in extremely limited circumstances where the beneficial ownership and the legal ownership are not the same, there must be evidence that the legal owner holds the property on a trust for the beneficial owner. There must be a valid trust over the property and that the equitable owner is entitled to benefit from the property. In your case, the information provided by you state that you have not held any beneficial interest in the property and have only held legal interest in the property on trust. The beneficiaries who have paid all outgoings are the beneficial owners. You will make a capital gain in your capacity as trustee, which may be eligible for the main residence exemption as long as the beneficial owners of the property live there."
With this additional background, the three remaining issues can now be addressed. But first, the relevant applicable principles in relation to the indemnification of trustees should be stated.

The Principles: Indemnification of Trustees and the Defence of These Proceedings

A trustee's right of indemnity is recognized by the Trustee Act, s 59(4) which provides as follows: "(4) A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee's trusts or powers."
That section does no more than repeat the general law. Lord Eldon LC's statement on the matter in Worrall v Harford [1802] EngR 342; (1802) 8 Ves Jun 4, (1802) 32 ER 250 is probably the best known statement of that law: "It is in the nature of the office of a trustee, whether expressed in the instrument, or not, that the trust property shall reimburse him all the charges and expenses incurred in the execution of the trust."
See also National Trustees Executors & Agency Company of Australasia v Barnes (1941) 64 CLR 268; [1941] ALR 58; [1941] HCA 3 at [274] (Starke J).
A negative test has long been said to be the applicable test to determine whether or not a trustee should be indemnified out of trust assets. That test is said to allow indemnification for expenses that have not been shown to have been "improperly" incurred, a formulation which can be traced back at least to the judgment of Lindley LJ in Re Beddoe [1893] 1 Ch 547. The Ludwigs argue that whether liabilities are "reasonable" and are "properly incurred" are the touchstones of indemnity, citing the following passage from Northey v Juul [2014] NSWSC 464 at [96]: "A trustee will be indemnified out of the trust estate in respect of costs, charges and expenses properly incurred for the benefit of the trust; and "property" in this context means reasonably as well as honestly incurred, so that whilst trustees ought not be visited with personal loss on account of mere errors in judgment, which fall short of negligence or unreasonableness, mere bona fides is not the test: see Mead v Watson (as liquidator for Hypec Electronics) [2015] NSWCA 133; (2005) 23 ACLC 718 and Bovaird v Frost [2009] NSWSC 917 at [33]."
But in the New South Wales Court of Appeal in Gatsios Holdings Pty Ltd v Kritharas Holdings Pty Ltd (in liq) (2002) ATPR 41-864 ("Gatsios"), Spigelman CJ and Meagher JA criticised the use of the word "improperly" in the traditional formulation of the test as ultimately unhelpful. The case concerned the conduct of a trustee who had been found liable for misleading and deceptive conduct under Trade Practices Act 1974, s 52 in the performance of a trust. But the statements made have been treated as having wider application to the indemnification of trustees.
Spigelman CJ said (at [14] - [18]): "[14] It is clear that the right of indemnity cannot be availed of if expense was incurred by conduct outside the scope of the trust or in excess of the powers conferred by the trust. The same result should ensue when a trustee incurs expenses as a result of conduct in breach of a duty which the trustee owed to the trust, including the duty to execute the trust with reasonable diligence and care. (See e.g. Ecclesiastical Commissioners v Pinney [1900] 2 Ch 736 at 742-743.) It was in this way that Brooking J explained the passages in Benett v Wyndham and Re Raybould on which the Appellant relies. (See R.W.G. Management Limited at 396.) [15] To similar effect is the observation of Lord Selborne LC with respect to the contractual rights of indemnity of a mortgagee or trustee: "These rights, resting substantially upon contract, can only be lost or curtailed by such inequitable conduct on the part of the mortgagee or trustee as may amount to a violation or culpable neglect of his duty under the contract." (Cotterell v Stratton (1872) 8 Ch 295 at 302.) [16] This passage was quoted with approval by Griffiths CJ, then Chief Justice of Queensland, in Corrigan v Farrelly (1897) QLJ 105 at 111-112, in a context where a challenge was made to the right of an executor to recover costs and expenses arising from his failure to prove a will in solemn form. His Honour applied the test in the following terms at 112: "The only question, therefore, is whether the executors' conduct in this case has been such as to amount to a violation or culpable neglect of their duty." [17] I find this general approach more helpful than the use of conclusory terminology of whether or not conduct was "proper" or "reasonable" as if it were a test."
Meagher JA said (at [47]) in the same case: "[47] What are the limits to be placed on this right to indemnification? This is a matter which has rarely engaged the attention of either the Australian or the English Courts. Presumably if the activity which generated the liability in question were a breach of trust, the right to an indemnity under the general law would no longer exist; similarly if it were criminal in nature, but no criminal offences were charged against NKH, its associates or officers. Again, one must in principle incline to the view that if the activity in question had been fraudulent the law would withhold the right to indemnification; but in the present case Tamberlin J expressly negatived fraud. I find it difficult to formulate any other limitations. United States authorities, to which Hamilton J refers, might be read as establishing either or both these propositions: (a) that the activity in respect of which indemnity is claimed must be "reasonable", and (b) that the activity must be "proper". In my view, neither such limitation exists in Australian law. As to the former, it is in the circumstances, meaningless; no conduct has to be castigated as "unreasonable" unless one has a clear criterion of what constitutes reasonableness, and here there is none. As to the latter, it is almost as meaningless to endeavour to apply some hypothetical standard of propriety in ordinary commercial life, absent fraud and crime. I find it difficult to view occasional breaches of Trade Practices legislation as anything other than incidental aspects of ordinary commercial life."
After Gatsios, the High Court has referred to the test in its traditional formulation without entering into this debate; see for example: Macedonian Orthodox Community Church Saint Peka Incorporated v His Eminence Petar (2008) 237 CLR 66 at 93; [2008] HCA 42 ("Macedonian Orthodox") at [71]. But Gatsios has generated analysis at the intermediate appellate level about the content of the "improperly incurred" formulation: see for example Nolan v Collie (2003) 7 VR 287; [2003] VCA 39.
Mr Jeffrey argues that the costs and expenses he has incurred were "reasonable" and were "properly incurred". But he disputes that this is the relevant legal test. Ms Ensor argues: "[t]he relevant inquiry pursuant to this statutory provision is whether or not expenses incurred do in fact answer the description of having been so incurred 'in or about execution of the trustee's trust or powers'", citing Gatsios at [8] - [9] (Spigelman J) and [47] (Meagher JA). Applying this formulation, Mr Jeffrey submits that at all times he has acted within his powers and responsibilities as trustee, and that he should therefore be indemnified out of the estate for all of his expenses and costs in so acting.
In her submissions of 13 March 2020, Ms Ensor also cites the statement of Darke J that trustees will not be indemnified where they breach their duties: Segal v Osborne (No. 2) [2016] NSWSC 1328 ("Segal") at [17]. And where beneficiaries sue a trustee, the trustee is ordinarily entitled to defend their conduct as an incident of administration and to be indemnified in respect of those costs of their defence: Segal at [7]. These statements are unexceptionable as far as they go as general statements of principle. But Segal does not involve an issue of whether or not a trustee should have sought judicial advice before defending proceedings.
The Ludwigs respond by saying that Gatsios is an inadequate analogue to the case at hand, as it concerned a trustee's indemnity in respect of a breach of the Trade Practices Act, s 52.
The present state of the law, taking into account Gatsios, which is binding on judges at first instance in New South Wales, was comprehensively summarised by Gordon J (when her Honour was a judge of the Federal Court of Australia) in the context of an express trust, in Australian Securities and Investments Commission v Letten (No 17) (2011) 286 ALR 346; (2011) 87 ACSR 155; [2011] FCA 1420 ("Letten") at [14] - [18], where her Honour said: "[14] The trustee's right of indemnity against trust assets, however, is qualified. In general terms, it depends on whether the trustee has strictly adhered to the terms of its mandate. So, for example, the indemnity is not available if the activity which generated the liability involved a breach of trust or a breach of a duty by the trustee, was beyond the powers given to the trustee or was criminal or fraudulent in nature: Gatsios Holdings Pty Ltd v Kritharas Holdings Pty Ltd (in liq) (2002) ATPR 41-864. The indemnity is also not available where the liability is "unreasonable or unnecessary" and therefore is not "properly incurred": O'Keeffe v Hayes Knight GTO Pty Ltd (2005) 218 ALR 604 at [14] and Nolan v Collie (2003) 7 VR 287 at [51] and [53]. [15] Although those principles appear relatively straightforward, the scope and nature of a trustee's right of indemnity has been the subject of judicial comment and academic debate: see, for example, Nolan v Collie [2004] HCA Trans 22 and Aitken L, "A liability 'properly incurred'? - The trustee's right to indemnity, and exemption from liability for breach of trust" (2011) 35 Australian Bar Review 53 at 54. At the core of the debate is identifying when a trustee's liability has been "properly incurred". As has been noted on more than one occasion, the word "properly" or "improperly" is less than helpful: see, for example, Gatsios at [8]. The negative test is the relevant test; that is to allow indemnification for what has not been shown to have been improperly incurred: Nolan at [51] and [53] citing Lindley LJ in Re Beddoe [1893] 1 Ch 547. [16] To determine what is "improperly incurred" it is necessary to consider whether the conduct of the trustee was (Nolan at [53]): 1. done in bad faith; 2. outside the relevant power (that is, outside the terms of the trust deed); and/or 3. exercised with an absence of the care and diligence that a person of ordinary prudence should exercise. If it concerns the management of trust property, the equitable standard applies: Speight v Gaunt (1883) 9 App Cas 1. If it concerns investment of trust property, the statutory standard applies, namely the duties under the relevant provisions of the Trustee Act of each State and Territory. [17] Of course, not all breaches of duty result in a trustee losing the right of indemnity. Duties that require strict adherence, if breached, will result in loss of the right of indemnity: Nolan at [51]. In Nolan, the following examples were given at [52]: 1. duty to keep and render accounts; 2. the duty not to allow a conflict between duty and interest; 3. the duty not to obtain an unauthorised benefit from the trust; and 4. the duty to adhere and carry out the terms of the trust deed. The list is, of course, not exhaustive. On the other hand, duties that concern the day to day management of the trust, if breached, will not result in a loss of the right of indemnity: Nolan at [51]. [18] At a practical level, a breach of certain "core" duties will as a matter of course result in a loss of the right of indemnity. For all other breaches, the answer will depend on the terms of the trust deed and whether that breach was in bad faith, outside the relevant power and exercised with an absence of care and diligence that a person or ordinary prudence should exercise."
Most of the costs and expenses that Mr Jeffrey claims were incurred in the course of, or in the context of, this litigation. When a trustee incurs legal costs in litigation the principle of indemnity is governed by the rules of Court: Uniform Civil Procedure Rules 2005 ("UCPR"), r 42.25: "42.25 COSTS OF TRUSTEE OR MORTGAGEE (1) Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be. (2) The court may order that the person's costs not be so paid if - (a) the trustee or mortgagee has acted unreasonably, or (b) in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund."
UCPR, r 42.25 has been applied from time to time to deprive trustees of an indemnity for their litigation costs from trust property. Trustees who insist on adopting unreasonable positions that are contrary to the requests of their beneficiaries results in litigation, can be deprived of an indemnity out of trust assets under UCPR, r 42.25 in respect of their costs and expenses of litigation: see for example Perpetual Nominees Limited v Storehouse Managed Investments Limited [2015] NSWSC 1994 ("Storehouse").
A feature of this case is that Mr Jeffrey did not take judicial advice about whether or not he should defend these proceedings. It is regrettable that he did not. The need for a trustee to take judicial advice at an early stage in litigation brought by beneficiaries (whether or not for alleged breach of trust) against a trustee has often been emphasised and in more recent times at the highest levels. In Macedonian Orthodox, the High Court said (at [69] to [74]): "[69] Relationship of s 63 to rights of indemnity. Seventhly, Lord St Leonards' Act was enacted in England at a time when the legal and practical burdens on trustees were increasing, and against a background conception which continues to possess vitality. That conception is that the office of trustee is a gratuitous one unless a special arrangement to the contrary is made. Provision was made for procedures of the kind embodied in the two legislative schemes because "[i]t is an inflexible rule of a Court of Equity that a person in a fiduciary position ... is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict" [Bray v Ford (1896) AC 44, at 51]. But as Danckwerts J said[In re Grimthorpe (1958) Ch 615 at 623]: "persons who take the onerous and sometimes dangerous duty of being trustees are not expected to do any of the work on their own expense; they are entitled to be indemnified against the costs and expenses which they incur in the course of their office; of course, that necessarily means that such costs and expenses are properly incurred ... The general rule is quite plain; they are entitled to be paid back all that they have had to pay out." While trustees acting gratuitously are entitled both under the general law and s 59(4) of the Act [78] to an indemnity out of the trust assets for expenses incurred in administering the trust, it was understandable that the legislature should enact provisions enabling them to take advice before embarking on any course which might carry a risk of incurring costs that might be outside the indemnity. [70] In particular, trustees who are sued, particularly for breach of trust, may sometimes experience uncertainty about whether they will be able to obtain indemnity as to the costs of their defence under s 59(4) in any event. Perhaps they will if their breach is excused under s 85(2); but they cannot be sure, in advance, that the court's discretionary power to excuse the breach will be exercised in their favour, and one of the matters to be excused is their failure to obtain the court's direction under s 63 or otherwise. This points strongly to the conclusion that an application under s 63 by a trustee sued for breach of trust (including a breach of trust alleged to arise in the very defence of the proceedings) is not to be seen as one which should rarely if ever succeed. Instead it should be seen as a standard instance to which s 63 can in appropriate circumstances apply. [71] In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee's fear of personal liability for costs. [72] It is, therefore, not right to see a trustee's application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice have another and no less important purpose of protecting the interests of the trust. [73] The fact that one of the purposes of proceedings for judicial advice is to protect the interests of the trust has particular importance where, as in this case, the trust concerned is a charitable purpose trust. In litigation brought by private persons having a particular view about the terms of a trust, the trustee will ordinarily be joined as a necessary and proper party to the proceedings. Unless some other party will act as contradictor, the burden of defending the suit will fall upon the trustee. If, as will often be the case with a charitable purpose trust, there is no other party that will act as contradictor, the claims made about the terms of the trust will go unanswered unless the trustee can properly resort to the trust funds to meet the costs of defending the litigation. And even if there is another party that will act as contradictor, it is almost always desirable, even necessary, for the trustee to take an active part in the proceedings so that issues are properly ventilated and argued. [74] A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings. In deciding that question a judge must determine whether, on the material then available, it would be proper for the trustee to defend the proceedings. But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the principal proceeding. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the principal proceedings." (emphasis added)"

Some Contentions About Judicial Advice

Mr Jeffrey has defended these proceedings since their inception. The submissions filed on his behalf concede that he has not taken judicial advice about any aspect of this dispute. The proper and efficient course for Mr Jeffrey in a case such as this was, once joined as a defendant to the proceedings, to approach the Court to seek judicial advice as to whether he was justified in insisting on his own proposed course, or some other course, to secure an indemnity for his costs and expenses and to ascertain his GST liability.
It would have been open to him to take that advice and then put on a submitting appearance, thereby reducing the costs of a contested hearing. The fact that judicial advice was not taken is one reason why the costs on both sides of the ensuing litigious contest have become so disproportionate to the quantum of the trust property.
This contested litigation has been a regrettable waste of the parties' resources. The Court accepts that when one party puts on detailed arguments it may appear that the other party must respond in kind. But in litigation against a trustee, judicial advice is an important protection not just for the trustee but for the preservation of the trust estate. Judicial advice will often reduce the risk of contested proceedings that might consume the trust estate. Judicial advice is a simple accessible summary procedure. The fact that the trustee did not take that simple course, in the Court's view, is one reason that this litigation was commenced and has become expensive.
In her written submissions on behalf of Mr Jeffrey, Ms Ensor submits that he should suffer no costs consequences for not having sought judicial advice. One argument she advanced was the following: "PS Nov 2020 [5]: had judicial advice been sought after the proceedings were commenced it would have related to proceedings framed by the plaintiffs in terms of two executed transfers, each naming one plaintiff as transferee of their respective share in the property: [2], SOC filed 9 May 2018; [2], ASOC filed 26 July 2018. But on 14 August 2018, the plaintiffs notified a changed intent - that there instead be one transfer naming the plaintiffs as transferees as tenants in common in equal shares.On 10 September 2018, the plaintiffs notified a further changed intent - three transfers; one severing the joint tenancy, and then a separate 50% transfer from the defendant to each of the plaintiffs. However on 20 November 2019 the plaintiffs again changed their position - now seeking an on-market sale of the property. Had judicial advice been sought at any stage prior to then its effect would have been rendered nugatory due to the plaintiffs' repeatedly changed position. The defendant consented to the on-market sale of the property proposed by the plaintiff subject only to a reserve price at auction and a certain regime for distribution of the sale proceeds in order to meet extant liabilities. The defendant did not oppose the on-market sale which the plaintiffs sought and did not 'defend' the proceeding in any active sense."
This submission is not persuasive. The judicial advice being sought need not be tied to a precise proposed transaction by the plaintiffs. It could have been framed in terms of the principles to which the plaintiff was justified in agreeing over several possible transactions. For example, Mr Jeffrey's concern about security over the trust property once it was transferred to the Ludwigs was an issue which transcended the precise transaction, which was being advanced at any one time.
Ms Ensor submits that the statement in Macedonian Orthodox at [74] does not overturn existing authority such as Re Beddoe, but by using the word "should" in [74] it makes clear that it is merely desirable for a trustee to seek judicial advice in certain circumstances. But the High Court's statement nevertheless sets a standard for what a trustee should do when sued in litigation by the trustee's beneficiary. In the Court's view, this trustee failed to act according to the standard set down by the High Court and thereby exercised his duties as a trustee with the absence of care and diligence that a person of ordinary prudence would exercise, to adapt the words used by Gordon J in Letten. In the Court's view, Mr Jeffrey (judged together with his legal advisors), should have taken this course. It is probable that it would have reduced costs in these proceedings. Some discount should apply to his claim for indemnity for the costs of the proceedings.
Ms Ensor also argued that the Court in a judicial advice application would be in no better position than the parties to ascertain the potential quantum of CGT liability and that the Court would not have been inclined to answer hypothetical questions as to the quantum of funds needing to be quarantined for that reason.
The submission is correct that the Court would not have entertained such hypothetical matters. But the parties were in general agreement that the quantum of CGT liability was unknown. They were unlikely to have asked the Court to make its own CGT assessment on a judicial advice application. There are other matters on which the Court could have advised the parties.
The Ludwigs submit that Mr Jeffrey's pursuit of the ATO private ruling in the absence of judicial advice was an expense from which he should not be indemnified. But that is not a persuasive submission. The parties both co-operated in pursuing an ATO private ruling over a long period even though it was primarily advanced by Mr Jeffrey. And a greater degree of certainty was achieved by reason of the private ruling, which has now been given.
With these observations in mind, the Court turns to the three issues in dispute.

(1) Mr Jeffrey's Expenses and Costs

Relative to the size of the trust property Mr Jeffrey makes a substantial claim for indemnity for his costs and expenses. He seeks to be indemnified out of the proceeds of the sale of the property: (a) for $29,558.78 in costs incurred prior to the commencement of proceedings, (b) for $120,000 in costs of the hearing; and, (c) for $25,000 in post-hearing costs. Mr Jeffrey's total claim for costs and expenses is $174,558.78. In reply, the Ludwigs point out this total claim represents 86% of the $204,052 in trust property sale proceeds.
The Court's analysis of this part of the claim will be divided into those three time periods.
(a) Costs Prior to the Commencement of Proceedings. The Ludwigs commenced these proceedings on 9 May 2018. The parties agree that Mr Jeffrey should be indemnified for his legal costs and expenses out of the proceeds of the sale for his costs incurred prior to their commencement. But they disagree on the quantum of the indemnity for this period.
Mr Jeffrey contends that he should be fully indemnified for $29,558.78 in costs incurred during this period. But the Ludwigs contend the costs should be capped at $20,000, subject to any adverse costs order made, and that the $20,000 should be held on trust for Mr Jeffrey pending the determination of the quantum of his recoverable costs. In support of this contention the Ludwigs submit that Mr Jeffrey's solicitors provided them with a costs estimate of $20,000 on 23 April 2018. In reply, Mr Jeffrey submits that it was reasonable to expect that this figure would increase.
The Court will allow Mr Jeffrey full indemnity for his costs and expenses prior to the commencement of this litigation. Although it is the Court's view that he should have sought judicial advice long before he did, the statement in Macedonian Orthodox only sets the standard that it does upon the commencement of litigation against a trustee. Ms Ensor's arguments for a full indemnity are persuasive prior to the commencement of proceedings. And Mr Jeffrey should not be held to the SLS estimate of $20,000. It was plainly not a closely considered figure and was likely to be expanded once detailed fee notes were prepared. Moreover, the Court does not regard as excessive fees of $30,000 for what was in effect five years' work. Mr Jeffrey will be allowed full indemnity for this amount.
(b) Costs of the Proceedings Up Until 20 February 2020. Mr Ludwig also claims approximately $120,000 in costs to defend the proceedings from 9 May 2018 to 20 February 2020.The Ludwigs contend that Mr Jeffrey should not be indemnified for these costs, as they are "manifestly excessive, have been unreasonably incurred, and warrant an extraordinary costs order".
The Ludwigs further contend that Mr Jeffrey has not discharged his duty as trustee to act reasonably and prudently in the administration of the estate, including in limiting costs in the conduct of litigation. And they seek an order that Mr Jeffrey pay the Ludwigs' costs of the proceedings.
The Ludwigs focus on two specific issues about Mr Jeffrey's conduct as trustee. First, they submit that Mr Jeffrey unreasonably rejected the terms of the draft deed. Second, they submit that Mr Jeffrey's costs are manifestly disproportionate to the issues in dispute. Mr Jeffrey has responded to each of these submissions.
Mr Jeffrey Rejects the Draft Deed. The Ludwigs contend: that Mr Jeffrey's rejection of the terms of the 9 April 2018 draft deed was unreasonable; he only made "relatively minor" amendments during the exchange of draft deeds prior to 9 May 2018; and that the rejection meant that the Ludwigs had to commence this litigation, rather than finalise this matter with the draft deed. The Ludwigs give three examples from the terms of the draft deed that they say demonstrate how unreasonable Mr Jeffrey's stipulations were in rejecting the draft deed: 1. Mr Jeffrey took issue with the draft deed not requiring the Ludwigs to make submissions to both NSW Revenue and the ATO to claim favourable tax rulings. The Ludwigs submit this was unreasonable: that Mr Jeffrey would still have been indemnified under the terms of the draft deed irrespective of whether either party made any submissions to tax authorities (cl 5.2.1); and there was "ample equity" in the property, especially as the Ludwigs would have been prevented by the draft deed from encumbering the property (cl 3.3.3). Moreover, they submit any submissions to tax authorities would only have served to reduce the amount payable by the Ludwigs to Mr Jeffrey under the indemnity. 2. Mr Jeffrey asked whether or not the Ludwigs would grant him a "security interest" in the property. The Ludwigs submit that this was unreasonable because they were already restricted by the draft deed in placing any further encumbrances on the property (cl 3.3.3). 3. Mr Jeffrey also sought a grant of a caveatable interest in the property in the draft deed. But the Ludwigs submit that this too was unreasonable because the draft deed fully protected Mr Jeffrey's legitimate interests as trustee. They submit Mr Jeffrey's equity in the property was preserved by the draft deed after its transfer (cl 3.3.3); the transfer was "subject to discharge in full of all amounts payable as at the date of transfer pursuant to the Trustee's Indemnity" (cl 3.5.2); Mr Jeffrey could already enforce his indemnity against the Ludwigs personally; and, the Ludwigs would be bound by a duty to act fairly and in good faith, so Mr Jeffrey would have been given notice of any dealings that could affect his indemnity: Burger King Corporation v Hungry Jack's Pty Limited (2001) 69 NSWLR 558 at [163] - [174] (Sheller, Beazley and Stein JJA).
But the Ludwigs' arguments are not persuasive. The Court has already explained that Mr Jeffrey was reasonable in requesting a security interest in the property after his one third was transferred to the Ludwigs and he was entitled to the grant of the caveatable interest.
The Ludwigs also contend that their email of 9 April 2018 to Mr Jeffrey's solicitors enclosing the draft deed constituted an offer, and that Mr Jeffrey's refusal to accept this offer was so unreasonable as to disentitle him from now claiming a full costs indemnity.
Mr Jeffrey responds to this in two main ways. First, he argues that if the draft deeds exchanged between the parties constituted offers, then he was in fact the first to make an offer of a draft deed on 22 May 2017, which was not accepted. Mr Jeffrey submits that by his solicitors preparing the detailed first draft deed based on the Ludwigs' instructions, he in fact incurred the majority of the costs of this exercise of drafting and exchanging deeds.
Second, Mr Jeffrey argues that even if the Shad Partners email of 9 April 2018 constituted an offer, he did not actively reject the terms of the draft deed but instead he sought to further negotiate its terms at a settlement conference. But he states that the Ludwigs would not accept that the costs associated with a settlement conference were warranted. Instead they initiated proceedings on 9 May 2018, thereby generating the costs of this litigation.
Mr Jeffrey's refusal to accept the terms of the draft deed of 9 April 2018 was not unreasonable. Mr Jeffrey's position of seeking to further negotiate at a settlement conference was a reasonable position to take to avoid the inevitable escalation of costs in litigation.
Mr Jeffrey's Costs; Manifestly Disproportionate? The Court was disturbed in November and December 2019 about the level of costs expenditure in these proceedings. The Court put the parties on notice on 19 December 2019 that the costs of the remaining issues in dispute needed to be minimised. The Court's directions that day were couched in language designed to alert the parties to the Court's concern and to warn them that the Court's assessment of the trustee's indemnification after that date would be informed by how they responded to that direction. The Court directed: "… the parties to so far as reasonably possible minimise their expenditure on legal costs in resolving the remaining issues and the Court notes that in assessing whether or not the parties' costs are reasonably and properly incurred in these proceedings it will have regard to the parties compliance with this direction."
The sheer volume of what followed surprised the Court. It repeated the parties' take-every-point approach and general lack of restraint in the conduct of this litigation.
The Ludwigs submit that since this direction was given, Mr Jeffrey's solicitor, Mr Whitfield, served two affidavits with a combined length of 399 pages, itemising costs expenditure in great detail and largely blaming the Ludwigs for all the costs that Mr Jeffrey incurred.
The Ludwigs argue that cost-saving measures claimed on behalf of Mr Jeffrey are "over-stated or misconceived". First, they say that 15 pages of Mr Whitfield's affidavits are dedicated to the costs prior to the commencement of proceedings, an amount for which only $9,558.78 is in dispute. Second, the Ludwigs submit that the briefing of a reader, claimed by Mr Jeffrey as a cost saving, only saved a total of $110. Third, the Ludwigs identify approximately $10,000 in fees from telephone calls between Mr Jeffrey's previous solicitor, Ms Drake at SLS Law, and Mr Whitfield during which no client or counsel are said to be present. Fourth, they contend that Mr Jeffrey's counsel's invoices are not itemised, so they cannot discern the reasonableness of these costs. Finally, they contend in answer to a claim for senior counsel's fees, that engaging senior counsel was not warranted for the narrow scope of issues in this dispute.
But the matters raised by the Ludwigs are not the main issue here. Mr Jeffrey should have sought judicial advice immediately after he was sued by the Ludwigs. It is very difficult to estimate how much in legal costs they would have been saved had he done so. The Court will be conservative about estimating the expense to the estate from Mr Jeffrey's failure to take this course. The costs of pursuing judicial advice must be factored into the estimate. And the estimate is based upon a counter-factual. Doing the best the Court can, Mr Jeffrey would probably have been able to save approximately $30,000 from taking this course, in the Court's view. His total claim for costs during the proceedings up to 20 February 2020 should therefore be reduced so that he is indemnified for no more than $90,000.
(c) Costs after 20 February 2020. Mr Jeffrey's solicitors estimate that he has incurred costs after 20 February 2020 amounting to an additional $25,000 on account of the preparation of submissions, attending to the hearing on 9 April 2020, and effecting the sale of the property.
Mr Jeffrey's costs after 20 February 2020 were incurred after the Court's warning in December 2019 to contain costs. The Court regards the extent of the material put on by Mr Jeffrey after the Court's warning to be excessive, given the warning. The Court would limit his claim for indemnity after 20 February 2020 to a further $20,000 rather than his estimate of $25,000. The Court is conscious that there is a degree of overlap between expenditure after the December 2019 warning and before 20 February 2020 but this has been taken into account in the maximum fees set for the earlier period. Excepted from this limit will be Mr Jeffrey's costs before Lindsay J, discussed below.

(2) Mr Jeffrey's Liability to Pay CGT

The Ludwigs argue that the outcome of the ATO private ruling on 4 March 2020 is that Mr Jeffrey is not liable to pay CGT upon the sale of the property. They submit that this issue now falls away.
Mr Whitfield contends that he saved costs by seeking an ATO private ruling, as it was "free advice" and the ruling has clarified that Mr Jeffrey has no liability. The Ludwigs reject the argument that this saved money. They submit that Mr Whitfield has overlooked the legal fees incurred to obtain the ruling. And they submit that Mr Jeffrey would have a better financial outcome if he had obtained tax advice from one of "the big four" accounting firms.
The ATO private ruling was unsatisfactory in ways that were always a risk. Of the questions submitted to the ATO, questions 1 to 6 were not answered in the ATO private ruling. Mr Whitfield sent a further letter to the ATO on 6 March 2020 to seek further answers. The ATO has not provided any further answers up to the date of these reasons.
Mr Jeffrey is still not fully satisfied that he does not have to pay CGT. He cites several reasons for his misgivings about his CGT liability. These include: that at the time of the request for an ATO private ruling, the Ludwigs were seeking a transfer of the property, not its sale; and the ATO private ruling did not address Draft Taxation Ruling (TR) 2005/D25, or whether or not a CGT event E1 has occurred. If this is right, then that ATO private ruling would not meet Mr Jeffrey's requirements.
There was always a risk in proceeding down the ATO private ruling path that the ruling would be unsatisfactory. And if it was not satisfactory the result would be continuing uncertainty as to whether Mr Jeffrey would face CGT liability.
It is probable now that Mr Jeffrey will have no CGT liability. If he does incur CGT liability or any other tax liability then the Ludwigs will remain personally liable to indemnity him once his security rights over the trust property held by the independent solicitor have been exhausted.

(3) Applying the Proceeds of Sale

The final issue is the application of the proceeds of sale. The law on this subject is not controversial. Ms Ensor correctly submitted on Mr Jeffrey's behalf that his right to exoneration or recoupment out of the proceeds of the sale of the property "takes priority over the rights in or reference to the assets of beneficiaries or others who stand in that situation": Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 335 per Dixon J; [1946] ALR 50; [1945] HCA 37.
The Ludwigs' submissions do not contest this. The Ludwigs' entitlement to the trust property is "confined to so much of those assets as is available after the trustee's indemnity has been discharged or provision has been made for such liabilities": Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at [48] (Brennan CJ); (1998) 151 ALR 1; [1998] HCA 4. A trustee has a right in equity to recoupment or exoneration, a right at all times sustaining a caveatable interest in the property whilst the trustee remained unpaid.
This issue should now fall away. Mr Jeffrey has recourse to the remaining funds in Court to indemnify himself in accordance with these reasons in respect of his execution of the trust. Once those funds are exhausted he can look to the Ludwigs on their personal obligation to indemnify him.

The Ludwigs' Costs

The Ludwigs seek orders that Mr Jeffrey pay their costs. But the history recounted in these reasons does not warrant the making of such an order. A number of factors indicate that Mr Jeffrey should not have to bear any of the Ludwigs' costs of these proceedings.
The Court has been critical of Mr Jeffrey for not seeking judicial advice at an early stage when advised by SLS and later when advised by Mr Whitfield. Whilst Mr Jeffrey had principal responsibility for seeking judicial advice, nowhere in the correspondence upon the Court's analysis was it ever suggested by the Ludwigs that Mr Jeffrey should seek judicial advice. Instead the Ludwigs wrote hostile correspondence that was not justified and launched these proceedings in May 2018.
But looking beyond the issue of judicial advice in avoiding contested proceedings, other factors suggest that the Ludwigs' own conduct, both before the proceedings commenced and during the proceedings, caused costs to be unnecessarily incurred. There are a number of examples of this. The Ludwigs changed course a number of times about whether they wanted the transfer of Mr Jeffrey's one-third legal interest as joint tenant to them or whether they wanted the sale of the property. The Ludwigs raised and maintained issues as to whether there was one trust or two trusts of Mr Jeffrey's one third of the property that served little apparent purpose and did little to advance the orderly resolution of this dispute.
Moreover, the Ludwigs pleaded their claim in their Statement of Claim in a detailed manner which, in the Court's view, was unnecessary given the admissions which had been made by Mr Jeffrey that he held the property for the benefit of the plaintiffs. A detailed pleading is appropriate where there is to be a major contest of relevant fact essential to making out a cause of action or a claim for relief. But no facts were really in issue in this case, given the defendant's admissions.
When it comes to the exchange of draft deeds up to the commencement of proceedings, the Ludwigs were as much responsible for the number of iterations of the deeds as was Mr Jeffrey. Perhaps the points that Mr Jeffrey was taking could be said to be overly cautious. But it can equally be said that the Ludwigs were precipitous in commencing these proceedings in the face of the accurate warning SLS issued on behalf of Mr Jeffrey: that litigation was likely to substantially increase the costs to the parties. The escalation of the overall costs of these proceedings was magnified by the fact that they became contested proceedings. And responsibility for that lies with the Ludwigs. These proceedings should always have been framed around the seeking of judicial advice. Mr Jeffrey after all had altruistically volunteered to be a trustee to assist other family members. Launching contentious litigation against someone who had approached his office in that way and simply wanted to be financially protected when retiring as a trustee should have been the last option.
The Ludwigs also sought to argue that costs should be awarded on the basis of their success on the motion for a stay heard on 18 October 2019. But this is not persuasive. Although Mr Jeffrey was not successful on the motion, the Court recognised that the motion was nevertheless a beneficial step, as the Court commented (at [57]) in the first judgment.
Moreover, as the Court said in its first judgment (at [58]), the Court declined a stay largely for timing reasons. There was going to be delay in preparing the matter for hearing and during that time it was likely that the ATO private ruling would be made. That is indeed what happened. This is not a matter in which it could be said that Mr Jeffrey was unsuccessful on the motion. The Court reserved costs on the motion. But there is no basis for the Ludwigs to ask for costs on the basis that they were successful. The "success" the Ludwigs achieved was an incidental result of the Court's trial management.
Neither party can claim success or otherwise in the proceedings because of the ATO private ruling. It ultimately lived up to expectations, indicating that no CGT was payable. Both parties were clearly in agreement that the ATO private ruling should be sought by the time it was lodged in December 2019.
Although little argument took place upon it, the defendant filed a Cross-Claim in the proceedings which, in prayers 3 and 9, sought a declaration that the defendant had a right of indemnity out of the trust property for taxation liabilities incurred by the trust and other expenses or liabilities "properly and reasonably incurred" by Mr Jeffrey in his capacity as trustee. That success is qualified by the fact that the principle was never contested by the Ludwigs, the argument instead being about what it meant when applied to the facts in this case.

The Costs Before Lindsay J

There was a contest about the costs before Lindsay J. The Ludwigs say that Mr Jeffrey capitulated and agreed to the release of the funds sought and seek costs of this contest. The defendant ultimately consented to the release of the funds sought leaving the $204,000 in the hands of the independent solicitor, because this reflected the legal position: that Mr Jeffrey could only seek his right of indemnity out of trust assets. This was not a capitulation. By this time the parties had taken entrenched positions and, in the Court's view, Mr Jeffrey was not unreasonable to take a cautious position in the application before Lindsay J before agreeing to the release of the funds. In the Court's view, Mr Jeffrey should have indemnity for the costs before Lindsay J and no costs order should be made in favour of the Ludwigs for that application.
If the Court makes no costs order other than to grant an indemnity to Mr Jeffrey, constrained as the Court has reasoned, then costs will otherwise lie where they fall. The Ludwigs will bear their own costs of the proceedings. And in the Court's view, that is a just result for the reasons given.

Conclusion and Orders

For these reasons, the Court makes the following orders and directions: 1. Direct the parties to bring in short minutes of order to give effect to these reasons; and 2. Grant liberty to apply.

Amendments 10 December 2020 - [5] deletion of comma [6] last line deleted, repetition. [9] first line, comma after "submission" [10] second last line, comma after "result" [12] second line, full stop after initial "B" [15] first line, "Strategic Legal Services ("SLS")" inserted instead of "SLS"; third line, comma after "SLS"; fourth line, comma after "Jeffrey" [20] third last line, insert "a" before "resident" [21] fifth line, comma after "2014" [22] second line, delete "not" before "about" [27] in quote, third line, delete "at" and replace with "and" [36] full stop inserted after last line [46] fourth line, delete comma after "where" [60] in quote, fourth line, "m" replaced with "in" [64] third last line, hyphen inserted in the word "off market" [86] fourth line, delete comma before "result" and add "s" to "result" [87] last line, after "Macedonian Orthodox" add comma and delete "at 93" [90] second line, delete "a" and replace with "on" before "detailed"; fourth line, add "is" before "an"; in second last line, add comma after "view" [93] second line, add comma after "Beddoe" [98] third last line, move "and" before "(c)"; second last line, comma after "reply" and delete comma after "out" [105] first line, delete "They" and replace with "The" [131] second line, add comma after "which" and comma after "view"

27 January 2021 - [Case name] insertion of (No. 2) [28] second line, deletion of duplicate "the Court" [31] second line, insertion of "not" before "seen" [32] second line, "meet" instead of "make", thirteenth line, deletion of "not" after "should" [53] first line, insertion of "of" [59] repetition removed DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 January 2021

Trade Practices Act 1974(Cth)

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