MAXWELL v CHITTICK

Court of Appeal (NSW)|1994-05-11|Before: Mahoney JA, Young J

MAHONEY, PRIESTLEY and POWELL JJA 10-11 May 1994, 23 August 1994

Was appellant retained as respondent's solicitor - deceit and fraud - breach of fiduciary and trust obligations - breach of duty.

RESPONDENTS INDUCED TO BUILD HOME ON APPELLANT'S LAND - whether appellant retained as respondent's solicitor - appellant's actions amounted to deceit and fraud - breach of fiduciary and trust obligations - breach of duty in negligence - Bankruptcy Act 153(2)(b) applies - Limitations Act does not run.

The respondents were induced by the appellant to build a home upon land owned by the appellant and his wife. Without the consent of the respondents, the appellant caused a series of mortgages to be given over the land and ultimately defaulted in payment. The mortgagee took possession of the land and sold it. The appellant later became bankrupt and entered into a scheme of arrangement with his creditors.

Held: (1) The evidence did not disclose a formal retainer of the appellant as solicitor for his parents-in-law and in the circumstances of this case such a retainer should not be inferred. (2) The appellant's actions involved a deceit upon the respondents and, in the extended or equitable sense, a fraud upon them. False representations concealing the existence of the mortgages amounted to conscious fraud. (3) The appellant owed both fiduciary and trust obligations to the respondents and through his actions in creating and discharging successive mortgages over the land he acted in breach of these duties. (4) A breach of duty by the appellant in negligence was established. (5) The composition with creditors did not release the appellant from the respondent's claim since the appellant's actions amounted to fraud within s153(2)(b) of the Bankruptcy Act 1966. (6) The Limitations Act does not run against the breach of equitable obligations of this kind. (7) The appellant's claim against his insurer was defeated.

Mahoney JA Mr and Mrs Maxwell owned land at Regentville. Mrs Maxwell's parents Mr and Mrs Chittick were induced to spend money to build a home on the Maxwells' land on the basis that they would have the right to live in it and have other rights in respect of it. Without their consent Mr Maxwell caused a mortgage to be given over the land and subsequently caused a series of mortgages to be given. He ultimately defaulted on the mortgage at the relevant time existing on the land. The then mortgagee took possession of the land and sold it.

Mr Maxwell became bankrupt. He entered into a scheme of arrangement with his creditors.

Mr and Mrs Chittick have claimed against Mr Maxwell and the firm of lawyers of which he was at the relevant time a member. Cross claims have been made including a cross claim against the insurer of Mr Maxwell and that firm.

At the trial the trial judge Young J gave judgment for Mr and Mrs Chittick against Mr Maxwell. He dismissed their claim against the firm and, as far as it is relevant, the claim against the insurer was also dismissed.

Mr Maxwell has appealed to this Court against his Honour's judgment.

The primary facts are, I think, not seriously in dispute. The factual disputes which have arisen have arisen in relation essentially to the interpretation to be placed upon the primary facts. The facts have been detailed in the judgment of Young J. I shall repeat them only insofar as it is necessary to do so in order to indicate why I have reached the conclusions that I have.

Mr and Mrs Chittick were persons not directly engaged in business. Mr Chittick had, in 1979 or thereabouts, retired at the age of sixty years having worked as a diesel mechanic. Mr Maxwell, then a solicitor, was a member of the firm of solicitors Timmins Freestone and Maxwell. A block of vacant land was purchased by Mr and Mrs Maxwell and the land was subject to a mortgage.

At the end of 1979 or thereabouts, Mr and Mrs Chittick were living in the home of Mr and Mrs Maxwell. While they were there a conversation took place between them and Mr Maxwell. The version of it given by Mr Chittick - the version given by Mrs Chittick does not differ essentially from what he said - was as follows:

"Mr Maxwell: Why don't you build a house on our land at Regentville. We will pay the rates and you can pay insurance and running expenses. You can stay there as long as you want. If you want to go and live in a unit or something we can either sell the house and land and give you the value of the house or Di and I can pay you the value of the house and hang on to it. Otherwise YOU can stay there until you die.

A few days afterwards, the parties met again and Mr Maxwell said: "What do you think of my proposal for the Regentville land?" Mr Chittick said: "We will go ahead with it. We can select a project home to put on it". Mr Maxwell said: "We can help you look for a project home".

Subsequently a home was selected, a written contract entered into, and the price of the home was paid by Mr and Mrs Chittick, amounting to "about $65,000-$75,000". Additional amounts were paid for carpeting, cork tiles, woodweave blinds and other items. Various improvements were subsequently made by them in respect of the land. They moved into the house on the land and lived there until ultimately it was sold by a mortgagee.

Subsequently, in or about July 1982, Mr Maxwell said to Mr Chittick: "I will draw up a document for Regentville to make it all legal and to protect you". Mr Chittick said, "Why?'. Mr Maxwell said: "Well, I'd better protect you just in case something happens later on". Mr Chittick said: "TI will leave it to you". A few days later, Mr Maxwell showed Mr and Mrs Chittick a document headed "Deed". He said: "This is what I have drawn up for you. You had better have a look at it and read it over". Mr and Mrs Chittick read the deed at their home and discussed it together. They subsequently discussed the matter further with Mr Maxwell and in due course the deed form was signed by them and witnessed by a Mr Phillip Saggers, then a solicitor employed by the firm Timmins Freestone and Maxwell. Mr Maxwell then said: "I will keep it safe and send you a copy".

During the relevant period Mr Maxwell was engaged in the business of land development as well as carrying on practice as a lawyer. He continued with the firm of which he had been a partner until 30 June 1984. He subsequently became a barrister.

From time to time after the house was built on the land, mortgages were effected on the land. Various mortgages were given and discharged.

The mortgage which ultimately existed on the land was one given to St George Commercial Credit Corporation Ltd. As I have said, the land was owned by Mr and Mrs Maxwell together. Apparently the mortgages and discharges were executed by both of them or otherwise carried out in a way which bound both of them. Mr and Mrs Maxwell separated in February 1990. No issue has been raised as to her position in relation to these transactions and she has not been a party to this appeal.

Mr and Mrs Chittick gave evidence that they were not aware of the mortgages which were from time to time given over the land nor did they consent to them. In or about 1987, a pest inspector came to the property. Mr Chittick asked Mr Maxwell why an inspection had been made. Mr Maxwell said: "I have a small loan on the property but I am about to pay it off. Don't worry, I will pay it off and it will be fixed up". Mr Chittick said: "OK". It appears from the sequence of transactions that the then existing mortgage was paid off.

Subsequently, during Spring 1988, a valuer inspected the premises. When asked why this had taken place, Mr Maxwell said: "I meant to tell you that a valuer would be coming. I am just putting my finance and insurances under the same umbrella. There is nothing to worry about". Shortly thereafter, Mr Chittick said to Mr Maxwell: "Are you taking a mortgage out on the place. What's going on". Mr Maxwell said: "Don't worry, you can stay there as long as you like". Mr Chittick replied: "Father Time will shift me out of the property when I can't look after it any more or when I die". Mr Maxwell replied: "You are right for as long as you like".

It was not until about April 1990 that Mr Chittick was told by Mrs Maxwell that there was a mortgage on the property. She said that Mr Maxwell had told her that he would be keeping up the payments and that there was nothing to worry about. However, early in 1991 Mr Chittick received from the St George company a notice claiming possession of the property. On 28 May 1991 Mr and Mrs Chittick were forced to vacate the property and in due course it was sold by that company as mortgagee.

Mr Maxwell was in financial difficulties. In October 1991 he gave authority to the trustee of his estate pursuant to s188 of the Bankruptcy Act 1966. On 11 November 1991, a meeting of creditors accepted a composition which provided for a total fund of $133,000 to be paid to the trustee to be distributed pro rata amongst them. In due course the trustee of the composition paid the moneys pro rata amongst the creditors and certified that the terms of the composition had been carried out.

On 19 November 1991 Mr and Mrs Chittick commenced proceedings against Mr Maxwell. On 29 March 1992 Mr Maxwell's trustee rejected a proof of debt filed by Mr and Mrs Chittick.

On 2 December 1993 Young J gave judgment in favour of Mr and Mrs Chittick against Mr Maxwell for $164,500, described as equitable compensation for breach of fiduciary duty. He gave a verdict for Mrs Maxwell on Mr Maxwell's cross claim against her. There was a verdict for the lawyers who were or had been partners of Mr Maxwell and a verdict was given on the cross claim in favour of the insurer.

As [have indicated, Mr Maxwell has appealed against his Honour's judgments on the claim against him and against his interests in respect of the cross claims.

The claim by Mr and Mrs Chittick against Mr Maxwell was made in a number of different and alternative ways. Subject to what I shall say, I am of opinion that his Honour's conclusions in relation to the various matters should be accepted. In

these circumstances, I shall not seek to set out each of the claims made or to differentiate between them other than in the manner of the learned judge. His Honour dealt with the issues involved by reference to a number of headings. It will be convenient for the purposes of determining this appeal to deal with the issues by reference to those headings.

WAS THERE ANY RETAINER OF A SOLICITOR BY THE PLAINTIFFS?

One of the bases of the claim of the plaintiffs was that Mr Maxwell had acted for them as a solicitor and that he was liable for breach of his duty as such. His Honour held that Mr Maxwell had not been engaged by them as solicitor and had not relevantly acted for them. I agree with this conclusion.

It is, of course, to be accepted that persons in the relationships that existed between Mr Maxwell and the plaintiffs may also undertake the relationship of solicitor and client. Whether that relationship existed depends essentially upon whether it was the intention of the parties that it should be created. I am of the opinion that, having regard to the circumstances, no such relationship was intended to be created. There are, in my opinion, two matters in respect of which the existence of the relationship would have been relevant: the agreement between them in relation to the rights of the parties consequent upon the erection by the plaintiffs of a home upon the land owned by Mr and Mrs Maxwell; and the arrangement entered into by the execution of the deed. For the reasons to which I shall refer, Mr Maxwell became subject to obligations in relation to the plaintiffs in tort and otherwise. But what occurred between them at each of these times did not constitute in terms the making of a contract or the accepting of a retainer so as to create the relationship of solicitor and client. And I do not think that the circumstances require it to be implied that such a relationship was intended to be created between them.

During argument, reference was made to the fact that Mr Maxwell, alone or in the context of the firm of solicitors of which he was a member, had acted for Mr and Mrs Chittick in other respects. Reference was made to a third party claim made in September 1981 and to a claim for property damage in May 1982. In 1982 or thereabouts, the deed which had been prepared by Mr Maxwell was executed and placed in the firm's safe. At earlier times, the firm had acted in relation to the sale of a home at Lane Cove and Mr Maxwell had prepared a will for Mr and Mrs Chittick and had retained it in safe custody in the firm's safe. In the transaction which took place in late 1979-1980, in respect of the building of the home, Mr Maxwell had discussed the form of contract and, I would infer, gave Mr Chittick the benefit of his views in relation to it. But the evidence does not disclose a formal retainer of him as solicitor and, as I have said, in the circumstances I would not infer the existence of such a retainer.

THE INVOLVEMENT OF THE FIRM TIMMINS FREESTONE AND MAXWELL:

His Honour considered whether, if there was a retainer or otherwise a relationship of solicitor and client in respect of Mr Maxwell, he was in what he did acting as a member of the firm or on his own behalf. In view of the finding that there was no retainer or relationship of solicitor and client, this matter does not strictly arise. However, insofar as it may be relevant, I agree with his Honour's conclusion that, in what he did, Mr Maxwell did not act for the firm or as a partner of it. I do not desire to add to what in this regard the learned judge said.

In my opinion, what Mr Maxwell did in his relationships with Mr and Mrs Chittick involved fraud of various kinds. When, in 1979-1980, he induced them to spend money in the erection of a home upon the land owned by him and his wife, he was involved in fraud in the sense of conscious deceit. At the time of the discussion the land was subject to a mortgage. During the course of the discussion of and the erection of the home, the then existing mortgage was discharged and another mortgage given over the land. These facts were not revealed to Mr and Mrs Chittick. It was obviously in their interest that they be told of the existence of such mortgages. Not to tell them of the mortgages involved, in my opinion, a deceit of them. There was, in the extended or equitable sense, a fraud committed upon them. It is not necessary for present purposes to determine whether, at that stage, Mr Maxwell had the intention of defrauding them in the sense of defeating the interest which he held out to them in respect of their continued residence upon the land and in the house. It may be that it was then his intention to carry out the terms of the mortgage so that they would remain undisturbed in their occupation of the land. But, in my opinion, however that be, the mortgage transaction entered into by him in the context of what occurred involved deceit of them and, in the sense to which I have referred, fraud.

At the time when the deed executed in 1982 was entered into, the land remained subject to a mortgage. The deed was, I think, not intended to constitute a variation of the relationships then existing between Mr and Mrs Chittick and Mr and Mrs Maxwell. The purpose of it was to "protect" the plaintiffs, not to vary their rights and obligations. It may be that Mr Maxwell then was conscious of the possibility of financial difficulties arising from his activities as a land developer. And, I think, the terms of the deed involved some comparatively minor variation of the rights and obligations of the parties. But, as I have said, it was intended, by providing appropriate legal backing to what existed, to "protect" the plaintiffs.

I do not mean by this that there was then no obligation upon Mr Maxwell to inform Mr and Mrs Chittick frankly of the encumbrances upon the land. The deed was plainly intended to create legal relationships. In that context, it was necessary that they be informed of the existence of the mortgage upon the land. It was deceit of them by Mr Maxwell not to tell them of it. Again, in the sense to which I have referred, there was at that time a further fraud committed.

In addition, there was, in my opinion, the commission of further frauds each time Mr Maxwell, without the consent of the plaintiffs, executed further mortgages upon the land. The fact alone of the creation of fresh mortgages in 1984, 1986, and 1989 involved on each occasion deceit of the plaintiffs. I infer that, at least by 1987, Mr Maxwell had the subjective intention to defeat the interests of the plaintiffs if that should be necessary. At the time, in 1987 and again in Spring 1988, his representations to them in relation to the visit by the pest inspector and the valuer were to his knowledge false. He made those representations with the purpose of misleading the plaintiffs and diverting their attention from the fact that mortgages existed or were to be granted. There was, in what was then done, conscious fraud and the contemplation that, should his financial circumstances become such, Mr and Mrs Chittick's rights in relation to the land would be defeated. There was, in my opinion, in respect of these various matters a fraud.

In his judgment, Young J dealt in terms with the claim made by the plaintiffs: para54 of the further amended statement of claim; that on 27 July 1982 Mr Maxwell had made fraudulent representations to the plaintiffs in relation to the deed which then was to be entered into by them. His Honour concluded that there

was not a fraudulent representation, as pleaded, that the proferred deed would carry out the terms of the agreement existing between the parties or that the interests of the plaintiffs would be fully protected. His Honour considered that the evidence did not show that the Chitticks relied on any such representation if it was made. He concluded that the claim of fraudulent representation as so pleaded had not been made out.

I do not differ from his Honour's conclusion in this regard. I am prepared to accept that, when Mr Maxwell prepared and proferred the document in question, he intended that it operate, as he said, to "protect" the plaintiffs and not to defeat them.

In my opinion, Mr Maxwell, in what he did, acted in breach of fiduciary duties which he owed to the plaintiffs. The original arrangement made between the Chittick and the Maxwell families was one which created equitable obligations in favour of the plaintiffs. When Mr Maxwell procured that the plaintiffs cause the home to be built upon the land at their expense, and did so upon the basis of their occupancy rights, he undertook equitable obligations to them. I would conclude that, once the home had been erected, Mr and Mrs Maxwell held the land as trustees subject to obligations of the nature of a trust to deal with the land so as to procure for Mr and Mrs Chittick the right of occupation and otherwise specified in the agreement made between them. I infer that the plaintiffs relied upon Mr Maxwell and upon the statements that he made to them and that he occupied, as far as they were concerned, a position of influence. They relied upon what he said as indicating that there would be created in their favour the rights to occupancy and otherwise to which reference was made. There was accordingly imposed upon Mr Maxwell an obligation not to act in such a way that his interest as owner of the land came into conflict with their claim to occupancy of the land and otherwise; and he was subject to the obligation not to profit at their expense from his position as owner of the land. Such obligations arose, I think, by virtue of his position as trustee of the land with his wife and by reason of the reliance which they placed upon him and the position that he assumed in relation to them.

Insofar as the deed executed in 1982 created rights not previously existing or varied existing rights, and did so to his benefit, there was in my opinion a breach of a fiduciary obligation owed by him to the plaintiffs. The plaintiffs relied upon him, acted under his influence, and trusted, in this regard the conduct of their affairs to him.

By what he did in creating and discharging the successive mortgages over the land, Mr Maxwell acted in breach of the duties which, in this way, he had created in their favour in respect of the land. Those duties were of an equitable nature and, insofar as it may be relevant, included obligations arising from the trust created in respect of the land and from the fiduciary obligations which he undertook by virtue of the position which he assumed in relation to their affairs. As the learned trial judge said, it is clear that Mr Maxwell knew that the plaintiffs were not people who had any legal training or were sophisticated in the ways of business and that they looked to him to preserve their position. Instead of preserving their position, he dealt with the land in a way which was contrary to their interests and favourable to his.

I have referred in what I have said to the obligations which Mr Maxwell had in this regard and to the nature of them, arising from, as I understand them to be, obligations of a trust nature as well as obligations of a fiduciary nature. I am conscious that the plaintiffs' claim, as pleaded, was amended in various ways and

that it is necessary that, insofar as they claim relief against Mr Maxwell, the claim fall within the terms of the statement of claim as ultimately amended. The matter has been argued principally, if not completely, by reference to fiduciary duties. However, if and insofar as it may be relevant, I am of the opinion that the obligations owed by Mr Maxwell were both fiduciary and of the nature of trust obligations. I am satisfied that, whatever be the nature of the pleadings in this regard, the claim as pleaded has been made out.

His Honour, in my opinion rightly, took the view that it was not necessary to pursue this aspect of the plaintiffs' claim. It may be that a claim based upon the terms of the deed, express or implied, would sound in covenant or contract. However, I agree that it is not necessary for present purposes to pursue this aspect of the matter.

The plaintiffs claimed, in para46 of the statement of claim, that a liability arose in tort by reason of Mr Maxwell's failure to exercise skill and expertise to the required extent in what he did in preparing the documentation in question. I agree with the conclusion of the learned judge that a breach of duty in negligence was established. The fact that Mr Maxwell did not act as solicitor for the plaintiffs does not negative the possibility that he owed to them a duty of care in negligence. What he said to the plaintiffs in July 1982 in relation to the document indicated, I think, that they could and should rely upon him to prepare such a deed as would "make it all legal and... protect you". The fact that he did this of his own volition and without prompting does not mean that there was no reliance or no duty such as to give rise to liability in negligence. The plaintiffs were invited to rely upon him in this regard and, I infer, did so.

Were it necessary to base their claim solely upon a breach of duty in negligence, issues might arise in respect of the damages arising from that breach of duty. However, as the claim has resulted in equitable compensation and the plaintiffs' claim has not been put differently, it is not necessary to pursue this matter further.

It was submitted for Mr Maxwell that the result of the composition with creditors which was effected in 1991 was that he was released from the claims made by the plaintiffs. $153(2)(b) of the Bankruptcy Act 1966 provided that no discharge should be effected so as to "release the bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he was a party or a debt of which he has obtained forbearance by fraud". The learned judge concluded, and I agree, that the "debt" owed to the plaintiffs was incurred by means of fraud or a fraudulent breach of trust. As the learned judge has pointed out, the term "fraud" in the bankruptcy provisions in this regard has been given a broad interpretation. It is not necessary to pursue the authorities which were referred to by the judge and in argument before this Court. So much is accepted. The obligations incurred by Mr Maxwell, however they arose and whatever point in time they arose, involved fraud of the relevant kind. The obligations which arose under and by virtue of the original proposal to build were of an equitable nature and, as I have indicated, there was deceit in the nature of fraud at that time. That deceit was repeated at the time the deed was executed. There were, when the various mortgages were entered into, breaches of equitable obligations arising

from deceit in the nature of fraud. In my opinion, on each of the relevant occasions, there was fraud within the meaning of the statute. I agree with the judge's conclusions in this regard.

I agree in substance with the judge's conclusion that the Limitation Act does not run against the breach of equitable obligations of this kind. As his Honour said, "this is not a situation where equity applies to (the) Statute of Limitations by analogy. Accordingly the limitation defence fails".

I do not desire to add to his Honour's findings in relation to the nature or quantum of the compensation to be payable to the plaintiffs. I adopt the views and the reasons which his Honour has expressed.

I agree also that any claim against the insurer is defeated because, if the loss be one which falls within the terms of the policy, it was "brought about by the dishonest or fraudulent act or omission of the assured". The loss in the present case was clearly brought about by Mr Maxwell's failure to disclose the existence originally of the mortgage and by his execution of successive mortgages upon the property contrary to the interests of the plaintiffs. Again, I do not think that it is necessary to add to what his Honour has said in this regard.

For these reasons, I am of opinion that the orders made by the learned judge were correct. I see no reason to differ from his orders in respect either of the appeal or the cross claim. The appeal and the cross appeal should be dismissed with costs.

Priestley JA I agree with Mahoney JA. Powell JA I agree with Mahoney JA.

Counsel for the appellant: D M J BENNETT QC/P TILLMAN Solicitors for the appellant: FOULSHAM AND GEDDES

Counsel for the respondents: (1) P G HELY QC/SL WALMSLEY Counsel for the respondents: (2-7) W NICHOLAS QC/P LINEY Solicitors for the respondents: (1) KABOS ELDER

Solicitors for the respondents: (2-7) COLIN BIGGERS AND PAISLEY

At a glance

Court

Decision date

Before

Source

Judgment (60 paragraphs)

Parties

Cited By (5)