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[2011] NSWSC 181
Supreme Court of NSW
2011-03-01
Pembroke J
Original judgment source is linked above.
Judgment 1On 11 February 2011 I gave judgment in these proceedings Parkes -Linnegar & Anor v Watson [2011] NSWSC 37 in which the principal issue was whether the defendant was justified in withholding his consent to the termination of a trust of which he was a trustee and the plaintiffs were the sole beneficiaries. What remains for resolution are the precise form of orders and the allocation of costs. The costs question in turn gives rise to an issue as to a trustee's right of indemnity from trust property. 2The termination of trust issue was ultimately and primarily ventilated by an application by the defendant for judicial advice. As the defendant is only one of two trustees and the first plaintiff, who takes an opposing view, is the other trustee, there should be an order at the outset that the defendant be appointed to represent the trustees for the purpose of the judicial advice application. 3As I explained in the principal judgment, the defendant's unwillingness to consent to the termination of the trust was based on two broad objections. One of those objections related to certain debts said to be owing by the trust. The other was a supposed concern as to whether the first plaintiff was sui juris by reason of her lack of capacity. I will deal first with the costs and indemnity consequences of the capacity issue.
The Capacity Issue 4At the commencement of the hearing, it was not entirely clear whether the defendant advanced a positive case on this issue. The prior history, now adumbrated in submissions, reveals an unsatisfactory state of affairs. I have concluded that the conduct of the defendant and his legal representatives in relation to this issue was unreasonable. The sequence of events is as follows: (a)On 18 August 2010, the defendant filed his defence. It contained no affirmative allegation that the first plaintiff lacked capacity or was not sui juris. It merely traversed the issue by a non-admission; (b)On the same date, the defendant also filed a cross claim seeking judicial advice. There was no accompanying statement of facts and no explicit reference to the capacity issue; (c)On 3 September 2010, the plaintiffs' solicitors provided the first of two medical certificates establishing that the first plaintiff's mental functions were normal. They sought an admission from the defendant that the first plaintiff was sui juris but received no response to their request; (d)On 24 September 2010, the defendant filed a statement of facts which stated that the defendant was agreeable to the termination of the trust subject, among other things, to evidence that the first plaintiff had received independent legal advice; (e)On 30 November 2010, the plaintiffs' solicitors provided the defendant with a copy of a letter from Mr Robert Green, solicitor, outlining the legal advice that he had provided to the first plaintiff in relation to the termination of the trust. They sought an admission from the defendant that the first plaintiff had received independent legal advice. On 8 December 2010, the defendants filed a notice disputing this fact; (f)On 10 December 2010, the defendant served an amended statement of facts in which he added to his requirements for consent to the termination of the trust. They became threefold. He required evidence that the first plaintiff was not being coerced by and was not under the undue influence of the second plaintiff. He also required evidence that the first plaintiff had received independent financial advice. And he maintained that there was no evidence of independent legal advice; (g)On 23 December 2010, the plaintiffs' solicitors responded by serving an affidavit from the first plaintiff which explained her reasons for wishing to terminate the Trust. They also served an affidavit from Mr Green detailing the legal advice that he had provided; (h)In January 2011, the defendant served a proposed amended defence in which he expressly denied the first plaintiff's legal capacity in paragraph 49 but continued to not admit that capacity in paragraph 47. The particulars of both paragraphs referred to the first plaintiff's vulnerability with respect to her son but did not actually allege undue influence; (i)In late January 2011, the plaintiffs provided further affidavits and certificates in an attempt to satisfy the defendant. They included another affidavit from the first plaintiff explaining in greater detail her reasons and motivations for termination of the trust; an affidavit by an accountant, Ms Houghton, in relation to her meeting with the first plaintiff, and a further affidavit from the solicitor Mr Green. In addition, the first plaintiff submitted herself to further testing by her doctor and provided a further medical certificate; (j)At the hearing commencing on 31 January 2011 the defendant's written opening contained allegations of undue influence. This was notwithstanding that no such allegation had been affirmatively pleaded. And no such case was actually advanced. At the hearing, the defendant led no evidence to support a case of undue influence; objections to the evidence of Mr Green, which had been notified, were not pressed; the first plaintiff was not cross-examined in relation to her understanding of the effect of the termination of the trust or her reason for bringing the proceedings; and the accountant who gave financial advice to the first plaintiff was not required for cross-examination. 5In my principal judgment, I held at [27] that there was never a proper factual basis for the issue of the first plaintiff's capacity being a defence to the amended statement of claim nor adequate grounds for seeking judicial advice on this issue. I did so having regard to the evidence before me and without knowledge of the prior history leading to the hearing which I have now summarised in paragraph [4] above. I explained my reasons as follows: 29. The defendant's case on this issue was unedifying. It was advanced with the diffidence which it deserved. It was put no higher than a non-admission in the pleaded defence. But it depended on speculation and inference from facts that, by themselves, were benign. Those facts were that the first plaintiff: (k)is presently aged 80 years; (l)suffers from Stage 2, Parkinson's Disease; (m)lives with her son, the only child. 30. From that foundation, the defence went on to contend that "in all the circumstances, the first plaintiff may not be able to give proper consideration to, or consent to, the purported termination of Trust". None of the above facts, either alone or in conjunction with each other, or having regard to the overall evidence, leads to an inference that the first plaintiff did not understand the nature, quality and significance to her of the termination of the Trust. In my view, the defendant knew this, or should have known this. Furthermore, the credibility of his defence (by non-admission), and his application for judicial advice, were weakened by an underlying suggestion - perhaps it was no more than a lingering questioning - that there was a relationship of undue influence between the first plaintiff and her son Robert. This was inappropriate and unsustainable. It was hinted at, but never squarely put or pleaded. 6UCPR 42.25 provides that subject to sub-rule (2), a person who is a party to proceedings in the capacity of trustee is entitled to be paid his costs in the proceedings out of the fund held by the trustee. However sub-rule (2) provides that the court may order that the trustee's costs not be so paid if the trustee has acted unreasonably or has in substance acted for his own benefit rather than the benefit of the fund. 7The defendant contends that on the capacity issue he has acted reasonably and is entitled to his costs out of the trust property. This is said to be because on 15 July 2010 he obtained advice from senior counsel. The evidence of the content of that advice is somewhat opaque. It consists of no more than a letter from the defendant's junior counsel to his instructing solicitor saying that "we need to consider seeking, [among other things] judicial advice under Section 63 of the Trustee Act". Junior counsel then made the following comment in the letter: Mr Ellison SC suggested that judicial approval would be required for any settlement sought by the plaintiff. The court may require Mrs Gloria Linnegar to be medically examined as to her mental condition or alternatively we may need to cross examine her before the defendant can reasonably give consent to the settlement involving her waiving her life estate in favour of her son. 8A trustee will, of course, usually be taken to have acted reasonably if he acts on the advice of counsel. But there are limits to this protection and legal advice is not always a passport to relief. It depends in part on the precise content of that advice and the facts provided by the trustee to counsel. If the trustee is aware of material facts that are not put before, or not considered by, the person from whom the advice is sought, he will not be entitled to shelter behind the advice. Equally, if the trustee disregards subsequent events or further facts and continues to act on the advice, when reconsideration is clearly called for, his conduct may not be reasonable: In re Paulings Settlement Trusts [1964] 1 Ch 303 at 358-359 (Upjohn LJ). 9Whatever may be said about the supposed advice given in July 2010 and the undisclosed facts on which it was based, much happened after that advice was given. I do not regard the fact of the advice in July 2010 as rendering reasonable the defendant's subsequent continuing conduct in pursuing the issue as to whether the first plaintiff was sui juris. As I found in my principal judgment, there was never a sound factual basis for the contention in the first place. There was no reasonable reason known to the defendant for doubting the first plaintiff's capacity. This was firmly and progressively reinforced as the plaintiffs' solicitors provided to the defendant's solicitors evidence as to (1) her normal mental functions; (2) her reasons, both explicable and rational, for wishing to terminate the trust; (3) her solicitor's legal advice; and (4) her accounting advice. 10Rather than respond reasonably and sensibly to this evidence, the defendant widened, somewhat ambivalently, the area of disputation to include a suggestion that Robert, the second plaintiff, was coercing his mother and exercising undue influence over her. Then at the hearing, the undue influence case, such as it was, whether as a defence to the plaintiffs' claim or as a basis for seeking judicial advice, was effectively and unceremoniously abandoned. I set out my findings about this in paragraph [5] above. They included the finding that the defendant knew, or should have known, of the absence of a proper basis for questioning the first plaintiff's capacity. 11Those circumstances lead to the conclusion that the defendant should pay the plaintiffs' costs relating to the capacity issue on an indemnity basis. I also propose to order pursuant to UCPR 42.25 that the defendant's liability for the plaintiffs' costs on the capacity issue, and the defendant's own costs on this issue, not be paid out of the trust property. 12There is ample justification for doing so where a trustee has acted "obstructively, unreasonably and in disregard of his clear duty": Drummond v Drummond [1999] NSWSC 923 at [47] (Austin J). That language is, I think, apposite to describe the defendant's conduct in this case on the capacity issue. Whatever might be said about his position on the debts allegedly owing by the trust, the defendant's position on the capacity issue was an inappropriate makeweight. It never deserved to be propounded - either as a basis for seeking judicial advice or as a defence to the claim. Other illustrations of the application of this principle include Rouse v 100F Australia Trustees Ltd (No 3) [1999] SASC 208 at [41] and Christmas v Jones [1897] 2 Ch 190. It does not matter that the defendant was represented by solicitors and counsel. He gave the instructions and he was the one who should have known better. To his knowledge, after July 2010, there was never a factual basis that justified his opposition to the termination of the trust on the basis of the first plaintiff's capacity.
The Trust Debts Issue 13That leaves the trust debts issue. In my principal judgment, I explained that some moneys may well be due by the trust to the legal firm of Spencer Whitby and the accounting firm of Watson & Proud. The parties have now agreed the amount owing to Spencer Whitby in the sum of $9,000. There is no agreement on the amount owing to Watson & Proud. The plaintiffs however accept that some moneys are owing by the trust to Watson & Proud for expenses incurred by the defendant in the authorised conduct of the business of the trust. 14Although I expressed some reservations about these liabilities, as well as about a supposed liability represented by a loan account in the sum of $136,535.50 in the books of CRL, I do not think the defendant should suffer any adverse cost consequence as a result of his reliance on them in withholding his consent to the termination of the trust. The supposed debt of $136,535.50 owing to CRL was never a debt owing by the trust and reliance on it was misplaced. But that is a legal question and the defendant should not be penalised for it. 15The existence of debts owing to Spencer Whitby and Watson & Proud amounted to a proper basis for withholding consent to the termination of the trust, at least until the amounts were resolved. I said in my principal judgment that there was a legitimate issue as to whether some or all of those liabilities were incurred by the defendant in the authorised conduct of the trust. I also said that the invoice issued by Watson & Proud deserved searching scrutiny. However, I do not think it is appropriate to deny the defendant his entitlement to an indemnity from the trust property for the costs incurred by him in connection with those issues. 16Nor is this a case, as the plaintiffs contend, where the indemnity should be denied because the trustee has in substance acted for his own benefit. The agreed liability in the sum of $9,000 to Spencer Whitby for legal expenses was not incurred for the defendant's benefit in any direct sense. And the liability to Watson & Proud for accounting expenses will only be a legitimate liability of the trust (for which the trustees will be entitled to be indemnified) to the extent that there is a resolution of the amount that is properly owing. Agreement may be reached by mediation, or failing agreement by the taking of accounts. It could not be said that the defendant's conduct in pursuing the amount due to Watson & Proud, was in substance for his own benefit in the sense implied in UCPR 42.25(2)(b). The rule would not ordinarily apply to amounts found to be properly due for accounting services rendered to the trust by a firm of which one of the trustees is a member. That amount, when resolved, may well be significantly less than the invoice amount. It will however, by definition, be a legitimate liability of the trust for which indemnity from the trust property should be available.
Misleading Conduct 17The final issue relates to the plaintiffs' misleading conduct claim. This was a discrete claim on which the plaintiffs failed. It is reasonable and appropriate that there be a separate costs order in favour of the defendant in respect of this claim. This is a purely discretionary matter on which I have reached a broad view based on my assessment of the merits of the claim and its separateness from the trust issue.
Conclusion & Orders 18There should be an immediate transfer of the shares in CRL to the second plaintiff. In the circumstances, I am not prepared to allow the defendant any additional security for the amounts for which he will be entitled to indemnity other than the moneys currently standing to the credit of the first plaintiff in the controlled money account which the defendant caused to be established. That amount will by now be greater than the $70,000 of which I was informed at the hearing. In the unlikely event that those moneys are not sufficient, the defendant should look to the plaintiffs who will remain liable, if necessary, as the sole beneficiaries of the trust: Balkin v Peck (1998) 43 NSWLR 706 (CA). 19I make the following orders and give the following advice: Summons (1) Declare that the first and second plaintiffs have validly terminated the trust of 2,446 ordinary shares in CR Linnegar (Investments) Pty Ltd created under the Will of the late Charles Richard Linnegar. (2) Order that the defendant sign and deliver to the plaintiffs the share transfer form dated 4 June 2010 enclosed with the letter from the plaintiffs' solicitor to the defendant's solicitor dated 7 June 2010. (3) Order that the plaintiffs pay to Spencer Whitby the sum of $9,000 in respect of the invoices dated 13 October 2008, 19 June 2009, 9 February 2010 and 17 September 2010. (4) Order that the plaintiffs pay to the defendant his usual professional and other charges for work done by him or the firm Watson & Proud that is the subject of the invoice from Watson & Proud dated 20 September 2010, but only to the extent that such work was: (a) carried out in connection with the administration of the trust; and (b) work that required the services of an accountant. (5) Order that, if, within 10 days, the parties have not agreed the amount to be paid to the defendant pursuant to Order (4): (a) the defendant file, by 8 April 2011 and serve on the plaintiffs, his detailed account of the amount he claims to be entitled to be paid; and (b) the parties should inform my Associate so that orders for the compulsory mediation of the defendant's claim, and the appointment of a mediator, may be made. (6) Declare that pending payment of the sums referred to in Orders (3) and (4), and the payment of such costs for which the defendant is entitled to be indemnified, the defendant is entitled to a charge over all moneys standing to the credit of the first plaintiff in the controlled money account described as "ANZ Bank Account number: 012125 901432628". (7) Order that, upon satisfaction of the charge referred to in Order (6) and the payment out to the defendant of the moneys to which he is entitled, the defendant forthwith take all steps that are necessary to ensure that the balance, if any, of moneys in the controlled money account are paid to the first plaintiff. Cross Claim (8) Order that the defendant be authorised to seek the Court's opinion, advice and directions pursuant to Section 63 of the Trustee Act 1925 . (9) The opinion, advice and direction of the Court is as follows: (a) The defendant was justified in withholding his consent to the termination of the trust be reason of the moneys outstanding to the firms of Spencer Whitby and Watson & Proud; (b)The defendant was not justified in withholding his consent to the termination of the trust by reason of: (i) any concern about the first plaintiff's capacity; and (ii) the debt allegedly owing to CR Linnegar (Investments) Pty Ltd in the sum of $136,535.52. Costs & Indemnity (10) Order the plaintiffs to pay the defendant's costs of and in connection with the misleading conduct issue. (11) Order the defendant to pay the plaintiffs' costs of and in connection with the balance of the proceedings subject to the proviso that the defendant should pay the plaintiffs' costs of and in connection with the issue as to the first plaintiff's capacity on an indemnity basis. (12) Declare that the defendant should have no right of indemnity from the trust property for his own costs, and his liability for the plaintiffs' costs, of and in connection with the issue of the first plaintiff's capacity. (13) Declare that, save as referred to in paragraph 12, the defendant is entitled to be indemnified out of the trust property or income for all of his own costs, and his liability for the plaintiffs' costs.
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: 21 March 2011
Parkes-Linnegar & Anor
Watson