Berger v Lysteron Pty Ltd
[2012] VSC 95
•19 MARCH 2012
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. S CI 2011 01046
| SABRINA PHILLIPA BERGER | Plaintiff |
| v | |
| LYSTERON PTY LTD (which is sued as putative trustee of the E Rosenberg Investment Trust) (ACN 149 456 404) | Defendant |
| and | |
| BARRY DAVID ROSENBERG (who is sued in his capacity as Appointor of the E Rosenberg Investment Trust) | Second Defendant |
| and | |
| GLEN OAK NOMINEES PTY LTD (which is sued as trustee of the E Rosenberg Investment Trust) (ACN 110 045 737) | Third Defendant |
---
JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 1-3, 6 JUNE 2011 | |
DATE OF JUDGMENT: | 19 MARCH 2012 | |
CASE MAY BE CITED AS: | BERGER v LYSTERON PTY LTD | |
MEDIUM NEUTRAL CITATION: | [2012] VSC 95 | 1st Revision: 1 May 2012 |
---
Trusts – Removal of trustee of discretionary trust – Whether power of removal a fiduciary one – Allegation that appointor had breached duties by not acting exclusively in the interests of the objects as a whole and by acting arbitrarily and capriciously – Whether plaintiff had made out breaches.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Dr IJ Hardingham QC and Mr A Herskope | Kalus Kenny |
| For the First Defendant | No appearance | |
| For the Second Defendant | Mr PH Solomon SC and Dr EJ Boros | Lord Commercial Lawyers |
| For the Third Defendant | No appearance |
HIS HONOUR:
Introduction
On 3 March 2011 Mr Barry Rosenberg, the appointor of the E. Rosenberg Investment Trust (“the Investment Trust”) removed Glen Oak Nominees Pty Ltd (“Glen Oak”) as trustee of the Investment Trust and appointed Lysteron Pty Ltd (“Lysteron”) to be the trustee in place of Glen Oak. On 9 March 2011 Mrs Sabrina Berger, an object of the Investment Trust, commenced this proceeding by originating motion alleging that the removal of Glen Oak was invalid. Mr Rosenberg disputed this claim. For the reasons given below, I have concluded that the challenge to Mr Rosenberg’s removal of Glen Oak fails.
Although both the first defendant, Lysteron, and the third defendant, Glen Oak, filed appearances neither of them took any further step in the proceeding and was not represented at the hearing. Both of these parties abided the result of the dispute between Mr Rosenberg and Mrs Berger.
The Factual Background
This dispute between Sabrina Berger and her brother, Barry Rosenberg, is a continuation of her dispute with their father, Emanuel Rosenberg. The full history of this saga is set out in the three judgments which I have delivered so far. A brief summary of the relevant factual background is set out below.
By a Deed of Settlement dated 14 April 1977 (“the Investment Trust Deed”) the B.D. Rosenberg Investment Trust was established. The settlor was David Strauch and the trustee was Fifteenth Eestin Nominees Pty Ltd (“Fifteenth Eestin”). Barry David Rosenberg and his father, Emanuel Rosenberg, were the directors of Fifteenth Eestin. The appointor was stated to be “Barry David Rosenberg and Emanuel Rosenberg”. The specified beneficiaries were Barry and Sara Rosenberg and their children. The definition of “beneficiaries” in the Investment Trust Deed included the specified beneficiaries, “Any spouse, parent, brother, sister, child, grandchild or remoter issue of the specified beneficiaries and the children of such brother, sister, child, grandchild and remoter issue” and “Any charity …”
Clauses 10A and 10B of the Investment Trust Deed provided as follows:
10A.The appointor named in the Schedule (and after the death of the appointor or if more than one the last surviving appointor, the person named in his or her will as being invested with such power or if he or she dies intestate or if no person is so named his or her legal personal representative (“successor”)) may at any time and from time to time remove any trustee from office as a trustee and/or may appoint any person (including a corporate body) to be trustee, or an additional trustee as he shall think fit provided however –
(a) that no beneficiary shall be a trustee.
(b)that the said appointor shall not appoint himself or herself or any legal entity in which he or she has a financial or controlling interest in or a company which he or she is a director of or in which he or she owns or holds any part of the issued capital of, as a trustee.
(c)that the appointor or his or her successor may at any time by notice in writing to the Trustee declare that henceforth he she or it (as the case may be) will not have any of the powers of removal and appointment conferred by this clause and as from the time or receipt of such notice by the Trustee this deed shall in all respects be read and construed as if this clause were deleted therefrom and thenceforth no person shall be conferred with any power of removal or appointment under this clause.
(d)No removal or appointment under this clause shall be effective in the event that the appointor or the successor imposes or attaches any conditions whatsoever upon the Trustee purportedly appointed or to be appointed that relate to the manner in which the Trustee is to exercise any of the discretions conferred upon him hereunder.
(e)that any appointment or removal hereunder shall be by and in writing and be executed and dated by the appointor.
10B.In the event of any inconsistency between the provisions of clause 10A and the provisions in the Schedule in relation to the appointor the provisions in the Schedule shall prevail and to the extent of any such inconsistency the provisions of Clause 10A shall not operate.
On 21 November 1990 Mr and Mrs Emanuel Rosenberg, Mr and Mrs Barry Rosenberg, Mrs Berger and various corporate entities entered into a Dissolution Agreement, which gave effect to the agreed dissolution and split of the Rosenberg family assets between what was called "Barry's interests", representing Barry and Sara Rosenberg, and "Emanuel's interests", representing Emanuel and his wife, Bloom Rosenberg, and his daughter, Sabrina Berger.
Pursuant to a Deed of Variation dated 21 November 1990 the description of the “Appointor” in the Investment Trust Deed was deleted and replaced with the following:
Barry David Rosenberg and Emanuel Rosenberg during their lifetimes or such person or persons as either or both Barry David Rosenberg and Emanuel Rosenberg may nominate in writing to the Trustees in his or their place as a substitute not an addition.
By a Deed of Nomination also dated 21 November 1990 Mr Barry Rosenberg resigned as an appointor of the Investment Trust and nominated his mother as his substitute. He also resigned as a director of Fifteenth Eestin and Mrs Berger was appointed a director in his place.
By a Deed of Amendment dated 28 June 1991 the name of the B.D. Rosenberg Investment Trust was changed to the E. Rosenberg Investment Trust.
In early 1993 a number of documents relating to the Investment Trust were drafted by solicitors. Evidence was given that thorough and extensive searches had failed to locate the originals of these documents. A copy of one of these documents was tendered in evidence. It was an undated unexecuted Deed which purported to amend the Investment Trust Deed by adding a new clause 5(d) which gave the trustee the power to declare that one or more beneficiaries were no longer beneficiaries.
A copy of another of these documents was also tendered in evidence. It was an undated Deed by which Fifteenth Eestin declared that henceforth Barry Rosenberg, his issue, his wife Sara Rosenberg and her issue would not be beneficiaries of the Investment Trust. Mrs Berger gave evidence that her signature and that of her father appeared on the document, as did the company seal. She said that she was unable to recall signing the document. Transcript of the evidence of the late Mr Emanuel Rosenberg at the hearing before me in the Fifteenth Eestin proceeding referred to below was tendered. He had given evidence that his signature appeared on that document and that he had given instructions to his solicitor to prepare the document.
Mr Ian Berger, the husband of Mrs Berger, gave evidence that on 7 May 1993 he received from his accountant several bundles of documents. Included in one bundle were unexecuted versions of each of the above documents. Shortly after he received them he “ensured that they were all executed”. He agreed that there were two versions of the undated but signed Deed. The differences were that there were different addresses for Fifteenth Eestin, only the signed version referred to Fifteenth Eestin’s ACN and the two documents were typed in different fonts. He could not explain why there were these differences. Mr Berger also gave evidence that, in response to a subpoena, searches had been made for any document recording or evidencing the decision of Fifteenth Eestin to affix its common seal to either of the above documents. He said that no such documents were found and agreed that this meant that they had never existed.
The effect of these two copy documents was a matter of much debate in this proceeding. However, as will be explained below, I was able to decide the outcome of this proceeding without having to deal with this particular dispute.
On 24 October 1993 Bloom Rosenberg died leaving her husband as the sole appointor of the Investment Trust.
On 15 July 2004 Mr Emanuel Rosenberg removed Fifteenth Eestin and appointed Glen Oak as trustee of the Investment Trust. The sole director and shareholder of Glen Oak was Mr John Adams, a partner in the accounting firm BDO. The removal and appointment was disputed by Fifteenth Eestin and by Mr and Mrs Berger, who, together with Mr Emanuel Rosenberg, were the directors of Fifteenth Eestin. In a judgment handed down on 27 April 2007 I upheld the appointment of Glen Oak as the trustee.[1] An appeal by Fifteenth Eestin and Mr and Mrs Berger was dismissed by the Court of Appeal on 27 May 2009[2] and special leave to appeal that decision was refused by the High Court of Australia on 12 February 2010.
[1]Rosenberg v Fifteenth Eestin Nominees Pty Ltd [2007] VSC 101.
[2]Fifteenth Eestin Nominees Pty Ltd v Rosenberg [2009] 24 VR 155.
On 12 January 2008 Mr Emanuel Rosenberg died leaving a will dated 27 October 2004. By that will Mr Emanuel Rosenberg appointed his son Barry Rosenberg as the appointor under the Investment Trust. Mr Barry Rosenberg was also the executor of his father’s will. Mr Emanuel Rosenberg left the whole of his estate to his son’s children.
On 24 February 2010 I gave judgment concerning a number of matters including the quantum of Fifteenth Eestin’s lien over the assets of the Investment Trust.[3] In a judgment entered on 7 April 2010 the Court declared that upon payment by Glen Oak to Fifteenth Eestin of the amount which fully satisfied its entitlement to be indemnified by Glen Oak, any real property of the Investment Trust was vested in Glen Oak, and Fifteenth Eestin was directed to forthwith convey all such real property to Glen Oak.
[3]Rosenberg v Fifteenth Eestin Nominees Pty Ltd (No 2) [2010] VSC 38.
It was clear that the only way Glen Oak could satisfy the indemnity in favour of Fifteenth Eestin in the sum of approximately $3.85 million was either by selling the three properties of the Investment Trust in Alexandra Parade and Hoddle Street, Clifton Hill or by borrowing against them.
On 9 September 2010 Mr Barry Rosenberg entered into a Business Finance Agreement with Westpac Banking Corporation (“Westpac”) whereby a facility of $4.1 million was made available. On 10 September 2010 Mr Adams signed a resolution by Glen Oak to offer Westpac a guarantee and indemnity of Mr Rosenberg’s debt and mortgages over the three properties by way of security for that debt. Paragraph 3.3 of the “Noted” section of the resolution read as follows:
3.3Westpac has approved finance whereby Barry Rosenberg (the appointor of the Trust) will borrow $4,100,000 from Westpac (“the borrowings”). Barry will on-lend the borrowings to Glen Oak as trustee of the Trust for Glen Oak to pay:
(a) the Indemnity;
(b) its costs and expenses with BDO in the sum of $49,359.15;
(c) legal costs owing to B2B Lawyers in connection with the Trust,
and on the basis that Glen Oak as trustee of the Trust will be responsible for all interest and costs owing to Westpac on the borrowings in accordance with the Business Finance Agreement.
Those documents were executed that day. Mr Rosenberg gave unchallenged evidence that Westpac required the funding to be arranged this way.
On 20 October 2010 agreement was reached between Glen Oak and Fifteenth Eestin as to the discharge of Fifteenth Eestin’s lien. However, on 31 October 2010 Mr Adams died. On 10 November 2010 Mrs Berger issued a summons seeking the appointment of a new trustee. On 15 November 2010 Mr Adams’ personal representative appointed Laurence Andrew Fitzgerald a director of Glen Oak in place of Mr Adams pursuant to s 201F(2) of the Corporations Act 2001 (Cth). Mr Fitzgerald was a partner of Mr Adams in the firm BDO. On the same day, B2B Lawyers, the solicitors then acting for Glen Oak and Mr Barry Rosenberg, assured Mrs Berger’s solicitors that Mr Fitzgerald was “totally independent”. On 17 November 2010 I ordered by consent that Mrs Berger’s summons be dismissed with no order as to costs.
On 29 November 2010 Mr Barry Rosenberg drew down on the Westpac facility the sum of $3.76 million approximately and on lent those funds to Glen Oak which thereafter discharged Fifteenth Eestin’s lien and paid its outstanding accounts. The three trust properties were transferred to Glen Oak.
The Paintings Proceeding
In 2008, Mr Barry Rosenberg, in his capacity as the executor of the will of Mr Emanuel Rosenberg, had commenced proceeding No. 9282 of 2008 (“the paintings proceeding”) against Mrs Berger claiming that five paintings, one by each of John Glover, Arthur Boyd, Rupert Bunny, John Percival and Ernest Buckmaster (“the five paintings”) were at all material times owned by his father and that before about June 2002 they had been hung on the walls of his various residences from time to time. Mr Rosenberg further claimed that since about June 2002 when his father moved into Mrs Berger’s house at 7 Towers Road, Toorak the five paintings had been hung on the walls of that house and that after Mr Emanuel Rosenberg moved from Mrs Berger’s house in about February 2004 following a family dispute he had asked, by letters from his solicitors dated 19 October 2004 and 21 April 2006, for the five paintings to be returned to him. Finally, Mr Rosenberg alleged that Mrs Berger had wrongfully failed, refused and neglected to return the five paintings and had wrongfully detained them and that as executor of his father’s estate he was entitled to possession of the five paintings.
On 15 June 2010 Mr Adams signed a document addressed to B2B Lawyers confirming that Glen Oak consented to being added as a plaintiff to the paintings proceeding. On 28 July 2010 Mukhtar AsJ accordingly ordered that Glen Oak (as trustee of the Investment Trust) be added as a plaintiff. By an amended statement of claim dated 25 August 2010, Glen Oak pleaded, in the alternative to the estate’s claim, its claim to three of the five paintings, namely the Bunny, Percival and Buckmaster paintings (“the three paintings”). The particulars of Glen Oak’s claim were that on 22 June 1992, Fifteenth Eestin had acquired the three paintings from Mistirose Pty Ltd, the trustee of the Blue Boy Art Gallery Unit Trust. It was further pleaded that Glen Oak had requested the return of the three paintings by letters dated 26 June 2007 and 4 July 2007 respectively.
Alternative particulars were also given in the amended statement of claim of the estate’s claim to the three paintings. They were that Mr Emanuel Rosenberg had had the three paintings hanging in his various homes for at least 12 years prior to moving to his daughter’s house in about June 2002, and that:
Alternatively, if (which is denied) the paintings were originally acquired by and belonged to Mistirose Pty Ltd as trustee of the Blue Boy Art Gallery Unit Trust, then, after the closure of the Blue Boy Art Gallery, the paintings of the Blue Boy Art Gallery Unit Trust were divided between Emanuel, Sabrina and Barry Rosenberg, with Emanuel taking the Bunny, Percival and Buckmaster paintings.
On 6 October 2010 Mukhtar AsJ made orders for discovery by the parties in the paintings proceeding. On 16 November 2010 Daly AsJ ordered that the trial of the paintings proceeding and another related proceeding be fixed for hearing on 12 May 2011. That trial date was subsequently vacated by me as it was common ground that before those proceedings could be heard the dispute over the removal of Glen Oak as trustee of the Investment Trust had to be resolved. In the other proceeding Mrs Berger sued her brother for removing eight paintings or other works of art belonging to her from their father’s residence after his death and refusing to return them to her.
The Events in Question
Having given a brief background to this ongoing dispute, I turn now to examine the evidence concerning the events leading up to the Deed of Removal and Appointment.
By a facsimile dated 29 November 2010 Mr Jonathan Kenny of Kalus Kenny, the solicitors for Mrs Berger, wrote to Mr Fitzgerald referring to a number of matters concerning the Investment Trust, including assertions that Mr Barry Rosenberg and his issue and Mrs Sara Rosenberg and her issue had been removed as beneficiaries of the Investment Trust and that Mrs Sara Rosenberg’s mother, sister and sister’s children were “unintended objects” of the Investment Trust. He enclosed with the letter a draft deed “removing the unintended objects from the Trust”, which he asked Mr Fitzgerald to execute. Mr Kenny also pointed out that Glen Oak was an independent trustee “which acts solely for the benefit of the objects of the Trust who, on any view, do not include Mr Barry Rosenberg”, and suggested that Mr Fitzgerald should “retain independent representation so as to enable you to obtain independent advice”.
By an email dated 1 December 2010 Mr Steven White of White SW Computer Law wrote to both Kalus Kenny and B2B Lawyers advising that his firm now acted for Glen Oak. Mr White attached a copy of Mr Kenny’s letter and stated that Glen Oak was “currently considering the matters raised in attached letter and will reply to same in due course”. In the meantime, Mr White said that Glen Oak proposed “an open conference … solely for each party’s legal representatives and [Glen Oak’s] director to attend to discuss any matters of concern to the parties and hear what they have to say”.
A meeting was proposed for 7 December 2010. By an email dated 2 December 2010 to Mr Kenny, Mr White and Mr Fitzgerald, Mr Damien Walton of B2B Lawyers, now acting for Mr Rosenberg alone, responded that they did not propose to attend the meeting as “we do not presently have any issues of concern to discuss in conference”. He continued:
We disagree with the contentions contained in Kalus Kenny’s letter to the trustee of 29 November 2010, but we consider that those matters ought to be addressed formally and in writing, rather than in conference.
If the trustee seeks our client’s views on any specific matter please let us know.
Mr Fitzgerald and his assistant Mr Tom Lesnikowski, an associate director of BDO, and Mr White met with Mrs Berger’s solicitor, Mr Kenny, and her counsel, Dr Hardingham QC and Mr Herskope, on 7 December 2010. Mr Fitzgerald and Mr Lesnikowski were called by the plaintiff to give evidence about later events. Both of them were, however, cross-examined about the discussion at this meeting and their file notes were tendered in evidence. Mr Fitzgerald said in cross-examination that he saw the purpose of the meeting as being “a discussion to elucidate the issues of the trust”. He wanted the parties to advise him on “where they saw things”. Mr Lesnikowski said in cross-examination that he understood the purpose of that meeting was to bring together the parties “with an interest in the matter generally” to discuss “where it was at and particularly where it was to go”. He said that he did not recall that he had particular questions in mind.
At the meeting, Mrs Berger’s representatives commenced by giving the Glen Oak representatives a history of the family disputes from her point of view but it is not necessary to give the detail of much of that discussion. What is relevant is that Mr Herskope apparently told the Glen Oak representatives that it could not plead its claim to the three paintings nor tender any evidence in support of that claim and that Mrs Berger would “entertain” a walk away settlement. However, despite being pressed in cross-examination both Mr Fitzgerald and Mr Lesnikowski denied that any agreement had been reached at that meeting about a settlement of Glen Oak’s claim to ownership of the three paintings. Further, they both said that they regarded Mr Herskope’s points as being the position put by one party to the dispute. They did not accept or reject the points made by him.
Both Mr Fitzgerald and Mr Lesnikowski said that following the meeting they read a lot of documents relating to the disputes and received legal advice about the paintings proceeding.
Mr Fitzgerald also said that he did not form any opinions from this meeting. He later formed the view that Mr Rosenberg was not a beneficiary of the Investment Trust after reading “an enormous number of legal documents” and receiving advice from Mr White. But he still had not determined who were the beneficiaries of the Investment Trust.
By an email dated 24 February 2011, Mr Walton forwarded to Mr Lesnikowski unsigned documents relating to the Westpac facility taken out in Mr Barry Rosenberg’s name and requested, “pursuant to the agreement between Glen Oak and Barry Rosenberg (see para 3.3 of “noted” section in attached resolution of John Adams)”, that Glen Oak pay $48,475.31 into the account “to cover interest and charges up to 16 February 2011”. By a second email some 20 minutes later, Mr Walton advised that the correct amount to be paid was $50,940.90. Mr Lesnikowski responded on the same day and asked for “a copy of the facility agreement” to be forwarded.
Mr Fitzgerald said in his evidence that he had two reasons for seeking information about the terms of the loan by Westpac to Mr Rosenberg, which Glen Oak had guaranteed. First, he wanted to determine whether Glen Oak was obligated to meet the interest costs of the facility. Secondly, he needed to know whether Glen Oak was going to be paying $50,000 a month in interest because his financial plan showed that in that case “we were going to run out of cash quite quickly”. In fact, his plan showed interest on the loan accruing at the rate of $24,400 a month. The request for just over $50,000 was for interest payable since 29 November 2010. He said that he received unsigned drafts of the guarantee and the primary bank documents around November 2010 but that he did not receive signed copies of the relevant documents until May 2011 despite requests for them.
In cross-examination, Mr Fitzgerald agreed that he also received copies of the bank statements for the facility on 24 February 2011, and an unsigned copy of Glen Oak’s resolution of 10 September 2010 referred to in paragraph 18 above. He said that he was “not overly” concerned that the copy of the resolution was unsigned, although he later said that he was concerned that he did not have signed copies of the Westpac documents. He said that he could not recall asking for a signed copy of the Glen Oak resolution. Mr Fitzgerald also said that his real concerns were to get some documentation to evidence that Glen Oak was required to pay the interest because if it was that produced cash flow problems for Glen Oak and to ascertain whether there was any other document evidencing the agreement between Mr Rosenberg and Glen Oak.
By a facsimile letter dated 25 February 2011 Mr Fitzgerald wrote as the director of Glen Oak to both Kalus Kenny and B2B Lawyers. Mr Fitzgerald stated that he was providing “a preliminary report in respect of Glen Oak and the Trust”. He set out the assets and income of the Investment Trust. Based on a report from M3 Property he valued the three properties at $7.87 million. The monthly rental income was $17,500 for one property, $10,600 for a second and nil for the third. Later in the report Mr Fitzgerald included a “forecast cash income and expenses for the period 1 December 2010 to 30 June 2011”. He said that the forecast was:
incomplete in so far as I have estimated the monthly interest payable based upon a request received on 24 February 2011, for reimbursement of interest in the sum of $50,940.90. Furthermore I am awaiting receipts of details and documents pertaining to that interest expense to enable me to determine the conditions of the facility it relates to.
The forecast showed that Glen Oak would have a negative cashflow by March 2011 and a loss totalling over $80,000 by June 2011, after taking into account such expenses as interest on the bank debt, council rates, land tax, insurance, water rates, electricity, valuation fees, legal fees and accounting fees.
Mr Fitzgerald also addressed the question of the status of the litigation in which Glen Oak was involved. He commented as follows:
3.1 The Trustee Proceedings
The extant litigation is the tail of protracted and complicated litigation which has been active for some seven (7) years. I understand that the only remaining issue in respect of the litigation, is the question of interest and costs arising in relation to the later payment of monies owed to the former trustee.
Furthermore, in the event that the Company in its capacity as Trustee should fail in this litigation, I estimate that approximately $200,000 may be required to meet costs and interest in relation to same. Such compensation would be drawn from the assets of the Trust. Accordingly, I invite formal offers from the parties to settle the proceedings without further costs.[4]
3.2 The Painting Proceedings
The former director of the Company consented to the Joinder of the Company to the Proceedings.
The Company in its capacity as Trustee is seeking declarations that it is the owner of various paintings against the defendant in those proceedings. I note that if successful the Company may, in its discretion and in due course ultimately vest same in the defendant to these proceedings. Consistent with the Trustee Proceedings it is my view that these proceedings should be settled or otherwise resolved without incurring of further costs.
[4]In fact, there had been a hearing in respect of those issues before me on 17 February 2011 and supplementary written submissions had been filed on 22 and 24 February 2011. Judgment was handed down on 9 March 2011. Fifteenth Eestin’s claim for interest was dismissed with costs but Glen Oak was ordered to pay Fifteenth Eestin’s costs of the summons filed on 4 August 2010 on an indemnity basis apart from any costs attributable to the making of the claim for interest. See Rosenberg v Fifteenth Eestin Nominees Pty Ltd (No 3) [2011] VSC 66.
Finally, under the heading “Recommendations”, Mr Fitzgerald stated that it was his view that a number of matters required attention. Relevantly, he said as follows:
6.3 Trustee proceedings
Seek formal offers from the parties to settle the proceedings without incurring further cost.
6.4 Painting proceedings
Seek formal offers from the parties to settle the proceedings without incurring further cost.
6.5 Financial position
·Determine financial obligations arising from guarantees provided by the Company in respect of bank facilities, and
·Determine financial obligations arising from settlement of litigation and associated claims.
The above matters will allow a conclusion to be drawn as to the solvency or otherwise of the Company and the extent that it will seek to rely on indemnity against the assets of the Trust.
Mr Lesnikowski said in cross-examination that he drafted the letter of 25 February 2011. He said that at that time he knew that the paintings would be valuable but did not know what they were worth as they had not been valued. He said that he understood they would have to be very careful about distributing the paintings in specie as he knew there were beneficiaries apart from Mrs Berger. Mr Lesnikowski said that at the time he drafted the letter he had not formed a view on the strength of Glen Oak’s claim to the three paintings. He said that he held the view that the dispute over the paintings should be settled because it was not “desirable for us to find ourselves embroiled in further long term ongoing litigation”. He knew from experience that litigation was “generally expensive”.
By an email dated 28 February 2011 Mr Kenny wrote to Mr White querying Glen Oak’s obligation to pay interest on the bank debt and the absence of signed loan documents in the possession of Glen Oak, as mentioned by Mr Fitzgerald in his report.
By an email dated 1 March 2011 Mr Kenny again wrote to Mr White pointing out that Glen Oak was in breach of a court order in the paintings proceeding for the delivery of an affidavit of documents and threatening an application to compel the same unless the affidavit was delivered in the next seven days. Mr Fitzgerald said that he was concerned about the amount of work that would be required in the paintings proceeding if it did not settle.
On 2 March 2011 Mr White emailed a letter to Kalus Kenny and B2B Lawyers in which he invited the respective clients (and their lawyers) to attend a meeting that week or early the next week either together or separately “in relation to the Trust generally”. He asked the other solicitors to advise availability before 4.00 pm on the following day. The letter continued:
6.In the interim, we confirm that our client proposes to file a notice of discontinuance in the Painting Proceedings.
7.We confirm that should any beneficiaries of the Trust be interested in the Trust assigning its rights in the Painting Proceedings (whatever they may be) to a beneficiary of the Trust (which entitlement or status as a beneficiary is not admitted) then please contact our office before 4 pm, 3 March 2011.
Mr Lesnikowski said, in respect of the statement in Mr White’s letter of 2 March 2011 that Glen Oak proposed to file a notice of discontinuance, that it was a means of “flushing out [the] parties”. He denied that this step was taken with unseemly haste. Mr Fitzgerald said that it was “to elicit a response from the parties”. Preparation for the trial was required if Glen Oak could not exit the litigation. He thought that it was urgent to start this process.
Mr Walton responded by a letter sent by email on the same day. It read:
We refer to your letter dated 2 March 2011.
We are perplexed by your advice that your client, without consultation, proposes to file a notice of discontinuance in this proceeding and your invitation that any beneficiary “interested in the Trust assigning its rights in the Painting Proceedings (whatever they may be)” contact your office before 4 pm tomorrow.
First, filing a notice of discontinuance will probably have adverse costs consequences for the Trust.
Second, your client cannot do so without the consent of all other parties or the leave of the Court under Rule 25.02.
Third, the appropriate course if your client assigns its rights (if such assignment be proper) would be for the assignee to be substituted for your client as second plaintiff.
Your invitation that any beneficiary “interested in the Trust assigning its rights in the Painting Proceedings (whatever they may be)” contact your office before 4 pm tomorrow is unreasonable in the context of a matter that is not urgent and has been ongoing for some time. This time-frame does not allow sufficient time for us to seek instructions.
Kindly confirm immediately that no steps will be taken by your client to assign or otherwise dispose of the Trust’s rights in connection with the paintings and the proceeding without first giving us at least 7 days’ prior notice.
Mr Walton and Mr White spoke by telephone on 3 March 2011. When Mr Fitzgerald and Mr Lesnikowski were giving evidence, it was put to them in cross-examination that Mr White had refused to give any assurance that seven days’ notice would be given of any relevant step by Glen Oak. Mr Lesnikowski said that he did not know what had been said by Mr White. Mr Fitzgerald said that Mr White had discussed this issue with him and had said that he would probably have to give the assurance because giving the other side seven days’ notice was “automatic”. But although they agreed “to allow their request of seven days”, he did not know what Mr White had said to Mr Walton about the seven day request. Mr Fitzgerald also said that he understood that Mr White was preparing a written response to Mr Walton’s email.
At 5.04 pm on 3 March 2011, B2B Lawyers emailed the following letter to Mr Fitzgerald:
We advise that Glen Oak Nominees Pty Ltd has been removed as trustee of the Trust by Barry David Rosenberg pursuant to his power of appointment under the trust deed dated 14 April 1977 (as amended).
Mr Rosenberg has appointed Lysteron Pty Ltd (Lysteron) as the new trustee of the Trust.
We enclose a copy of the deed of removal and appointment for your reference.
The sole shareholder and director of Lysteron (from today) is Daniel Peter Juratowitch of Cor Cordis, Level 10, 200 Queen Street, Melbourne.[5]
We anticipate that Lysteron will contact you in due course.
[5]On the following day Bruno Anthony Robert Secatore, a partner of Mr Juratowitch, was appointed a director of Lysteron.
Enclosed with the letter of 3 March 2011 was a Deed of Removal and Appointment signed by Mr Rosenberg on 3 March 2011. Mr Rosenberg was asked in evidence in chief to identify the reasons which informed the exercise of the power to remove Glen Oak as trustee. His answer was:
that Glen Oak were [sic] going to drop the paintings case.
Perhaps surprisingly he was not asked to expand on or clarify that answer. Rather more surprisingly, after seeking a short adjournment to obtain instructions, the plaintiff’s junior counsel announced that there were no questions for Mr Rosenberg. Presumably both sides saw tactical advantages in leaving that answer stand alone, but that approach has hindered rather than helped the resolution of the dispute.
After both sides’ final submissions were apparently completed, counsel for the second defendant applied to re-open his case to call Mr Walton to give evidence about the advice given to Mr Rosenberg between receipt of Mr White’s letter on 2 March 2011 and the sending of B2B Lawyers’ letter enclosing the Deed of Removal and Appointment on 3 March 2011. Senior Counsel for Mr Rosenberg argued, with some justification in my opinion, that one of the ways the plaintiff’s case was put in final submissions went beyond the pleadings in that it was submitted that the arbitrary nature of Mr Rosenberg’s conduct was to be found in the inadequate consideration, the lack of “real and genuine consideration”,[6] given to the question in his too hasty decision making process on 3 March 2011. It was submitted that Mr Rosenberg acted because of “a knee jerk reaction”.
[6]Karger v Paul [1984] VR 161, 175 (McGarvie J).
Senior counsel for Mrs Berger submitted that if Mr Walton was to be called “it would probably be sensible if Mr White is called as well to give evidence on the matter”. Senior counsel for Mr Rosenberg acknowledged that this step would inevitably involve Mr Walton giving evidence about what he told Mr Rosenberg “accurately or otherwise” about his conversation with Mr White, but said that this was not the purpose of the application. It was to overcome the second defendant being taken by surprise as a result of the plaintiff’s new approach. He agreed that if the application was granted this would remove any point about the submission going beyond the pleadings.
I decided that fairness required that the application to call Mr Walton be allowed. However, I declined to hear from Mr White who, despite being present in court at the time, had not been called by the plaintiff as part of her case to give evidence about what was said in his telephone conversation with Mr Walton.
Mr Walton said that he received Mr White’s email at 3.56 pm on 2 March 2011 and that his response was sent at 5.20 pm on the same day. He was asked what was his concern in sending his email. He answered:
My concern was that the trustee had given notice that it intended to assign its interests – its interest in the paintings, and it had sought interest – or it had invited beneficiaries of the trust to advise whether they were interested in taking an assignment of the rights in the paintings, within 24 hours – or by 4 pm on 3 March, in the earlier letter.
Mr Walton said that the next day he spoke with Mr White at about 11.50am and then with Mr Juratowitch. Then he prepared the Deed of Removal and Appointment. He and his partner, Mr Sweeney, met with Mr Rosenberg at about 2.30 pm. One or other of them told Mr Rosenberg that the letter of 2 March 2011 indicating an intention to assign the Trust’s rights to the paintings had been sent by the trustee’s solicitor, that they had asked for an undertaking that no such step would be taken within seven days and that the response had been that no undertaking would be given. Mr Walton continued:
we told Mr Rosenberg that it was unlikely that the trustee would act within seven days, but no undertaking would be given so we told Mr Rosenberg that this put at risk [the] Trust’s rights in the paintings because at any time after four o’clock that day, which was the deadline of which the trustee had sought an interest to take an assignment of … the rights in the paintings, the rights in the paintings could be assigned away.
He also said that he or Mr Sweeney told Mr Rosenberg that Mr Sweeney had received advice the night before from the senior counsel who had previously acted for Mr Emanuel Rosenberg and then Mr Barry Rosenberg to “change the trustee”.
It was put to Mr Walton in cross-examination that it was “odd” that he had not called Mr White again between the first telephone discussion and the sending of the removal Deed. He agreed that he knew that filing a notice of discontinuance without the consent of the parties or the leave of the Court would not be “valid” but said that he did have a concern that if such a notice was filed “it may have … consequences in terms of being interpreted as giving up rights”. Mr Walton also rejected the suggestion that Mr White in effect told him that nothing was going to happen for seven days in relation to the assignment point. He said that Mr White said it was unlikely that the trustee would act but that no undertaking would be given unless there was “a basis requiring it to be given”. He said that he told Mr White that the basis was that he needed more time simply to obtain instructions on the trustee’s proposal and that Mr White replied that this was no basis so no undertaking would be given and that he would be responding to Mr Walton’s letter later in the day. Mr Walton also said later in answer to the question why did he not consider it necessary to call Mr White again prior to sending the email at 5.04 pm:
because we didn’t want to discuss matters with him with the deadline hanging over us that his client would act at four o’clock that day and really … our fear … that the trustee would dispose of [its rights in] the paintings at four o’clock or shortly thereafter meant we had to basically drop everything to organise to replace the trust deed.
He said that he was concerned to take action “to preserve the position”.
Mr Walton also said in cross-examination that he had given Mr Adams oral advice about Glen Oak’s claim to the three paintings before it agreed to be joined as a plaintiff in the paintings proceeding. He said that on 3 March 2011 he was not thinking about how Glen Oak was going to prove its case but that, when he last looked at it, he considered that “there was an arguable claim”.
The Pleadings
Pleadings having been ordered, Mrs Berger pleaded in her statement of claim that Mr Rosenberg in his capacity as appointor owed duties, implied by law, to the objects of the exercise of the power of appointment, namely:
(a)that the power of appointment be exercised exclusively for and in the interests of the objects of the [Investment] Trust and not for any collateral purpose; and
(b) that the power not be exercised arbitrarily or capriciously.
Mrs Berger pleaded that Mr Rosenberg had breached the duties, which were said to be implied by law, by purporting to remove Glen Oak as the trustee of the Investment Trust and appointing Lysteron in its stead. Lengthy particulars of the breach of the duties were then set out. First, it was said that the breach of the first of the duties set out above was to be inferred from the joinder of Glen Oak in the paintings proceeding and from the events of February and early March 2011 referred to above. A collateral purpose was said to be to avoid Glen Oak withdrawing its claim in the paintings proceeding and “to avoid the prospect of the exercise by the third defendant of its discretion” to vest the three paintings in Mrs Berger. Although this was particularised as a single collateral purpose it seems to me that there were in fact two separate and contradictory collateral purposes being alleged. The possibility of vesting the three paintings in Mrs Berger, which was mentioned in Mr Fitzgerald’s letter of 25 February 2011 was premised on Glen Oak being successful in its claim to the paintings, which it would not be if it withdrew its claim. Thus, avoiding Glen Oak withdrawing its claim to the paintings meant that Glen Oak might, if successful, vest the paintings in Mrs Berger. On the other hand, if Glen Oak withdrew its claim then the possibility of the paintings being vested in Mrs Berger could never occur.
Secondly, it was said that the breach of the second of the duties set out above was to be inferred from all of the factual background referred to above. The particulars continued:
(n)In the circumstances set out and against the background of the proceeding to validate and maintain the appointment of the third defendant, the efforts to ensure continuity by the third defendant in its office as trustee of the … [Investment Trust] and the proclamation of the total independence of Mr Fitzgerald as late as 15 November 2010 by B2B Lawyers on behalf of the second defendant, the purported removal of the third defendant by the second defendant was a capricious and arbitrary exercise of the power of appointment.
(o)Further, in purporting to remove the third defendant as trustee of the … [Investment Trust] in response to its indication that it proposed to discontinue its claim against the plaintiff as defendant in the Paintings Case, the second defendant capriciously and arbitrarily and impermissibly interfered with the proper exercise by the third defendant of its powers and discretions as on-going trustee of the … [Investment Trust].
Additional particulars were subsequently provided by the plaintiff. With respect to the breach of the first of the duties set out above, it was said that Mr Rosenberg removed Glen Oak “with a view to avoiding the need” to provide it with the details and documents of the agreement between Mr Rosenberg and Glen Oak concerning the loan from Westpac which had been requested by Glen Oak.
With respect to the breach of the second of the duties set out above, it was said that following the request by Glen Oak for the details and documents:
the second defendant capriciously and arbitrarily and impermissibly interfered with the proper discharge by the third defendant of its duties in relation to the disbursement of trust moneys.
In his defence, Mr Rosenberg denied that he owed the duties pleaded by the plaintiff. He referred to clauses 10A and 10B of the Investment Trust Deed and to the fact that, at its settlement, both he and his father, the appointors, were an object of the Investment Trust. Accordingly, Mr Rosenberg pleaded that:
it neither was nor could have been the intention of the Settlor that the power of appointment conferred by clause 10A of the Trust Deed was required to be exercised by the appointor without having any regard to his own interests.
Mr Rosenberg further pleaded that, subject to the restrictions specified in sub-paragraphs (a), (b), (d) and (e) of clause 10A and an obligation not to act in fraud on the power of appointment conferred by the Investment Trust Deed, the appointor was empowered to remove any trustee and to appoint any person to be trustee:
(a) as he thought fit, and
(b) whether or not in so doing he had regard to his own interests.
In her reply, Mrs Berger denied the allegation concerning the intention of the settlor in respect of the power of appointment referred to above. She further pleaded that, by the undated Deed referred to in paragraph 10 above, the trustee had declared that henceforth Mr Barry Rosenberg was not an object of the Investment Trust and that on 3 March 2011, the date of the purported exercise by the second defendant of the power of appointment, he was not an object of the Investment Trust.
The last allegation gave rise to an exchange of correspondence between Lord Commercial Lawyers, the solicitors now acting for Mr Rosenberg, and Kalus Kenny. Mr Paul Norris of Lord Commercial Lawyers pointed out that the allegation in the reply that Mr Rosenberg was not on 3 March 2011 an object of the Investment Trust did not respond to Mr Rosenberg’s defence in which he pleaded that at the time of the settlement of the Investment Trust he was an object.
The correspondence also revealed that whilst Mr Rosenberg accepted that it was his father’s signature on the undated Deed, he required strict proof that it was effective to remove Mr Rosenberg as an object, in particular that Fifteenth Eestin had authorised the affixing of the common seal to the Deed. Counsel for Mr Rosenberg submitted that he had not been removed as an object. Nevertheless, Mr Rosenberg’s position was that the question of whether he was an object of the Investment Trust on 3 March 2011 did not arise in this proceeding and that accordingly I need not, and should not, decide that issue.
Is Mr Rosenberg an Object of the Investment Trust?
A considerable amount of time in this proceeding was spent in presenting detailed submissions on the interesting question of whether or not Mr Rosenberg was still an object of the Investment Trust. Despite this, I have concluded for a number of reasons that I should not decide this issue. First, I did not consider that it was a necessary finding in reaching my decision that the removal of the trustee was valid. Secondly, I agreed with the submission that this issue was not properly raised by the pleadings. Thirdly, any finding by me that Mr Rosenberg was or was not an object of the Investment Trust might not be appellable because the actual outcome of the proceeding might favour the party who wished to appeal my finding about Mr Rosenberg’s status as an object. Fourthly, there were other persons in the same situation as Mr Rosenberg who were not parties to this proceeding and their status as possible objects of the Investment Trust should not be decided, even indirectly, without them having the opportunity to be heard.
I came to this conclusion with some regret because, given the history of this long running dispute, it seems extremely unlikely that the parties will be able to reach any agreement on this issue. This means that yet another proceeding will have to be commenced in order to obtain a definitive ruling on the issue. At least that will have the benefit that all of the appropriate parties will have the chance to participate and they will then be bound by the decision of the Court on the precise issue in contention.
The Nature of the Power of Removal and Appointment
One area of conflict between the parties was the nature of the power of removal and appointment. The plaintiff submitted that the power was fiduciary in nature and that that character gave rise to the implied duties alleged by her in the statement of claim. The second defendant submitted that this was too absolute a proposition and that there were no fiduciary obligations on the appointor in exercising the power of appointment under the Investment Trust Deed, only obligations:
(a) to act within the scope of the power; and
(b) not to act in fraud on the power.
There was no dispute, however, that the express limitations on the power contained in clause 10A of the Investment Trust Deed were not infringed. It was common ground that Mr Rosenberg was the appointor; that Lysteron was not a beneficiary of the Investment Trust (proviso (a) of clause 10A); that Mr Rosenberg had no financial or controlling interest in Lysteron and was not a director of it or a shareholder in it (proviso (b) of clause 10A); that no conditions had been imposed by Mr Rosenberg upon Lysteron relating to the manner of exercise of its discretions (proviso (d) of clause 10A); and that the removal and appointment was in writing and was signed and dated by Mr Rosenberg (proviso (e) of clause 10A).
Counsel for the plaintiff submitted that the fiduciary nature of the power of appointment was established by a long line of authority, starting with the decision of Kay J in In re Skeats’ Settlement; Skeats v Evans[7] which concerned the ability of a joint appointor to appoint himself as trustee. His Lordship held that he could not. He relevantly said that the appointor:
… cannot exercise the power for his own benefit. Why not again? The answer is inevitable. Because it is a power which involves a duty of a fiduciary nature; and I therefore come to the conclusion, independently of any authority, that the power is a fiduciary power. The case cited before Lord Eldon seems expressly to confirm that view. Lord Eldon did treat it as a power in the exercise of which the appointor had a fiduciary duty to perform, which he could not exercise in any way for his own benefit, and in exercising which he was bound to do the best in the interests of the cestuis que trust whose trustee he was appointed. I therefore come without any hesitation to the conclusion that this power is of a fiduciary nature.[8]
His Lordship concluded that:
… this is a power of a fiduciary character, and consequently that the man who exercises it is exercising a duty of a fiduciary nature to the cestuis que trust under the settlement, and therefore he cannot exercise it by appointing himself.[9]
[7](1889) 42 Ch D 522.
[8](1889) 42 Ch D 522, 526-527.
[9](1889) 42 Ch D 522, 527.
The decision in Skeats was followed by Kekewich J in In re Newen; Newen v Barnes.[10] His Lordship said:
… as far as I am concerned, I conceive the law to be that … no trustee having a fiduciary power of appointing trustees can exercise that power by appointing himself, either alone or together with any other person.[11]
[10][1894] 2 Ch 297.
[11][1894] 2 Ch 297, 309.
In Inland Revenue Commissioner v Schroder[12] Vinelott J stated:
The power to remove trustees is vested in the committee, and although the settlor can fill vacancies or possibly appoint additional members of the committee even when there is no vacancy, that power, like the power to appoint new trustees, must I think be a fiduciary power. It could not properly be used to “pack” the committee to ensure that the settlor has a majority which will follow his directions. Similarly, the committee’s power to remove and his power to appoint new trustees are fiduciary powers. Even though these powers are unusual it cannot in my judgment be said that the settlor has put himself in a position where he can secure the appointment of trustees who would follow his wishes and who would not exercise any discretion of their own.[13]
[12][1983] STC 480.
[13][1983] STC 480, 500.
Counsel for the plaintiff next referred to the decision of Davies J in Re Burton; Wily v Burton.[14] In that case B was the appointor under a discretionary family trust. B’s trustee in bankruptcy sought to restrain him from exercising his power as appointor. His Honour dismissed the application. He said:
[14](1994) 126 ALR 557.
But perhaps the more important point is that the power to remove a trustee and to appoint a new trustee is neither a general power of appointment nor a power which may be executed in the interests of the appointor. The interests of persons other than the appointor must be taken into account. The power is a trust or fiduciary power, being a power conferred by a deed of trust, and must be exercised accordingly, in the interests of the beneficiaries.
A power, even though not a fiduciary power, must be exercised solely in furtherance of the purpose for which it was conferred. …
When the power is contained in a deed of trust, the donee of the power is even more constrained to act in the interests of the persons for whose benefit the power was conferred.[15]
After referring to Skeats and Newen, Davies J concluded:
Thus, as the interests of the beneficiaries must be taken into account, and the power exercised in their interest, the power which Mr Burton holds as appointor is not “property” which vests in his trustee in bankruptcy nor a power “as might have been exercised by the bankrupt for his own benefit.”[16]
[15](1994) 126 ALR 557, 559-560.
[16](1994) 126 ALR 557, 560.
All of these cases apart from Schroder were cited by Bleby J in Pope v DRP Nominees Pty Ltd[17] as support for his statement that:
A power of appointment has therefore been described as a power of a fiduciary character and its exercise as a duty of a fiduciary nature to the cestuis que trust.[18]
His Honour continued:
It may be an over-simplification to suggest that all powers of appointment are fiduciary in nature. See Finn “Fiduciary Obligations”(1977) at pp270-273. However, that is not to say that fiduciary obligations do not arise in some circumstances in the exercise of a power of appointment. As this court has held in Duke Group Ltd (in liquidation) v Pilmer [1999] SASC 97 at [716]-[236] fiduciary duties will arise where there exists a power or discretion, to be exercised in the interests of and for the benefit of another, and where that other is vulnerable in the sense that the relationship is one of trust and dependency. That will undoubtedly arise, as in this case, where beneficiaries rely on the integrity of the appointor to appoint a competent person to carry out the terms of the trust. The most important single component, however, is the duty to act with loyalty to and in the interests only of another. A person cannot be said to be acting in the interests solely of that other where his own interests conflict with those of the other.[19]
[17][1999] SASC 337 (Duggan and Debelle JJ agreed with Bleby J).
[18][1999] SASC 337, [46].
[19][1999] SASC 337, [47].
In Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq)[20] Finkelstein J stated:
I am prepared to accept that a power of removal of a trustee may be a fiduciary power that must be exercised for the benefit of the beneficiaries and not for the benefit of the donee of the power, at least when the donee is not a beneficiary, although much will depend upon the terms of the trust instrument: …
After referring to Skeats and Schroder, his Honour continued:
However, it is not likely that such an obligation will be imposed when it is the beneficiary that has been given the power of removal. In that circumstance it may usually be assumed that the beneficiary is entitled to act in his own interests when exercising the power. … However, while a beneficiary may act in his own interests, I do accept that there should be some limitations on the exercise of a power of removal. One restriction that I would adopt is that the power must not be exercised fraudulently. There may be other limitations as well.[21]
[20](2001) 188 ALR 566.
[21](2001) 188 ALR 56, [98].
In Hillcrest (Ilford) Pty Ltd v Kingsford (Ilford) Pty Ltd (No 2)[22] Biscoe AJ said that:
the removal and appointment power must be exercised for the benefit of the beneficiaries, not for the benefit of the person upon whom the power is conferred: see Mowbray et al, Lewin on Trusts, 18th ed (2008) Law Book Co at 13-44.[23]
His Honour also cited Fitzwood and Burton.
[22][2010] NSWSC 285.
[23][2010] NSWSC 285, [38].
The most recent relevant decision is that of Lindgren AJ in Rayner v NJ Sheaffe Pty Ltd.[24] An added complication in that case was that the appointor, Pamela, acted through her attorney, Nicola, however that did not affect the relevant reasoning. His Honour stated:
I accept that the power of removal and appointment given to Pamela by cl 8A was to be exercised by her not for her own benefit but for the benefit of “the beneficiaries”.[25]
He referred to Skeats, Newen, Schroder, Fitzwood and Hillcrest and continued:
However, Pamela cannot be in a position more beneficial to herself than she would be if she were of full mental capacity and were contemplating exercise of the power of removal and appointment. As Appointor, Pamela was obliged not to exercise the power of removal and appointment for her own benefit but to exercise it for the benefit of “the beneficiaries” (it would be necessary for her to regard them as a whole, in view of the nature of the Trust as a discretionary trust). This position is not altered by the fact that she had appointed Nicola her attorney. The foundation platform for consideration of the present question is the Deed of Settlement, the power of removal and appointment given to Pamela by cl 8A of that document, and the fiduciary obligations incumbent on Pamela attached to any exercise of that power. Prior to appointing Mr Nicholls on 16 June 2010, Nicola had to ask herself what was [for] the benefit of “the beneficiaries”, including but not limited to Pamela.[26]
[24][2010] NSWSC 810.
[25][2010] NSWSC 810, [150].
[26][2010] NSWSC 810, [152].
Finally, counsel for the plaintiff referred to the following passage from “On Equity” by Young, Croft and Smith:[27]
The basic definition of a “fiduciary power” is a power given to a person who holds a fiduciary office. However, as Thomas points out, while this is a satisfactory working definition, it is not appropriate in all contexts. Thus, the power to appoint a new trustee is a fiduciary power,[28] even though the person who holds the power may not be a fiduciary.
In National Trustees, Executors and Agency Co of Australasia Ltd v Boyd, the High Court defined a fiduciary power as one “entrusted to the donee so that [they] might exercise a discretion in the interest of others as well as [themselves]”.[29]
[27]Law Book Co 2009 [8.830].
[28]Referring to Skeats and Pope.
[29](1926) 39 CLR 72, 81.
Counsel for the second defendant submitted that, in general terms, there were two constraints on the exercise of powers. They were that powers must be exercised:
(a) in accordance with their terms; and
(b) bona fide for the end designed.[30]
It was said that the second of these constraints, expressed in more modern language, was a requirement that the exercise not be a fraud on the power. That term does not “denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term, or any conduct which could properly be termed dishonest or immoral”. Rather it means that the power has been exercised “for a purpose, or with the intention, beyond the scope of, or not justified by, the instrument creating the power”.[31]
[30]Farwell: “A Concise Treatise on Powers”, Stevens and Sons Ltd, 3rd ed, 1916, p 403, citing Aleyn v Blechier (1758) 1 Eden 132.
[31]Farwell pp 458-459. Cited in Santos Ltd v Pettingell (1979) 4 ACLR 110, 113 (Rath J).
Counsel submitted that the doctrine encompassed the requirements that the power must not be exercised:
(a) for an ulterior purpose; or
(b) to acquire any benefit for the appointor, either directly or indirectly.
The formulation of this doctrine was said to come from Duke of Portland v Topham.[32] In that case, Lord Westbury LC said:
I think we must all feel that the settled principles of the law upon this subject must be upheld, namely, that the donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power.[33]
In the same case, Lord St Leonards said:
A party having a power like this must fairly and honestly execute it without having any ulterior object to be accomplished. He cannot carry into execution any indirect object, or acquire any benefit for himself, directly or indirectly.[34]
[32](1864) 11 HLC 32.
[33](1864) 11 HLC 32, 54.
[34](1864) 11 HLC 32, 55-56.
Counsel for the second defendant drew attention to, and placed reliance upon, the qualifications in both Pope and Fitzwood on the absolute nature of the proposition that all powers of appointment were fiduciary in nature. Particular emphasis was placed on Finkelstein J’s qualification in Fitzwood that it was not likely that there would be an obligation to exercise a power of removal for the benefit of the beneficiaries if the power of removal was given to a beneficiary.
Reference was also made to “Fiduciary Obligations” by Finn,[35] where the learned author had stated that the characterisation of a power of appointment as fiduciary was “by no means an accepted usage” and was something that could “only be a cause for confusion”. He then went on to give examples of powers to appoint which had never been held to be fiduciary powers, such as creditors appointing a trustee in bankruptcy, creditors or contributories appointing a liquidator and shareholders, debenture holders or employees appointing a director.
[35]The Law Book Company Limited 1977 [627].
All of this led counsel for the second defendant to submit that the correct approach to determining whether or not a power is fiduciary is to look at the particular instrument that created the power. In this respect, counsel pointed out that on the date of settlement of the Investment Trust the appointors were beneficiaries, Mr Barry Rosenberg as a specified beneficiary and Mr Emanuel Rosenberg as a beneficiary, because he was the parent of a specified beneficiary. It was submitted that it must follow from this that it could not have been the intention of the settlor that the appointor was required to exercise the power of appointment without having regard to his own interests.
Whilst I agree with the submission that it is important to consider the terms of the instrument creating the power in determining whether or not that power is fiduciary, I do not agree that the fact that both of the initial appointors were beneficiaries necessarily meant that the power of removal and appointment in clause 10A of the Investment Trust Deed was not fiduciary. As Davies J emphasised in Burton, the power in question is contained in a deed of trust. The settlor must have contemplated the possibility that at some stage in the future someone apart from Mr Emanuel Rosenberg or Mr Barry Rosenberg would become the appointor. The nature of the power remains the same, regardless of the identity of the appointor. Therefore, it seems to me unlikely that the settlor would want such a person to be able to exercise the power of appointment having regard to his own interests rather than in the interests of the beneficiaries as a whole. Further, I agree with the submission by counsel for the plaintiff that the words “as he shall think fit” are to be read with the word “may” and that they are just normal words of empowerment. They were to be contrasted with a broadening phrase such as “in its absolute discretion” which was to be found in clause 4 of the Investment Trust Deed.
Therefore, I have concluded that in deciding whether or not to remove Glen Oak as trustee, Mr Rosenberg was obliged to exercise that power for the benefit of the beneficiaries as a whole. In talking of the beneficiaries as a whole I put to one side the question of whether Mr Barry Rosenberg and his issue and Mrs Sara Rosenberg and her issue are beneficiaries of the Investment Trust. As the plaintiff’s solicitor recognised in his facsimile of 29 November 2010 referring to the “unintended objects” of the Investment Trust, it seems clear that Mrs Sara Rosenberg’s mother, sister and sister’s children are still beneficiaries. In my opinion, the conclusion I have reached is consistent with the weight of judicial authority which supports the view that, at least in deeds of trust, the power of removal and appointment is likely to be a fiduciary one which must be exercised for the benefit of the beneficiaries.
Consideration of the Issues
In my opinion, the onus was on the plaintiff to make out her case that the second defendant breached the alleged duties. Mr Rosenberg’s unchallenged evidence was that he exercised the power to remove Glen Oak as trustee because it was going to drop the paintings case. As the plaintiff’s counsel did not cross-examine Mr Rosenberg about this evidence, she fails at the outset, in my opinion, in respect of some of the alleged collateral purposes. First, it was never put to Mr Rosenberg that he removed Glen Oak “to avoid the prospect of the exercise by the third defendant of its discretion” to vest the three paintings in Mrs Berger. There is simply no evidence to support this allegation. As discussed above, if Glen Oak dropped its claim in the paintings proceeding, the possibility of the three paintings being vested by Glen Oak in Mrs Berger could not occur.
Secondly, it was never put to Mr Rosenberg that he removed Glen Oak to avoid the need to provide it with the financial details of, and the documents relating to, the agreement between Mr Rosenberg and Glen Oak. Evidence was led of the requests by Glen Oak for such information and of the fact that Mr Fitzgerald did not receive signed copies of the documents until May 2011. But the evidence also showed that he had received all of the relevant documents, albeit unsigned, by 1 March 2011 at the latest. Therefore, the allegation that Mr Rosenberg removed Glen Oak to avoid the need to provide it with these documents was not made out. Counsel for the plaintiff never explained why Mr Rosenberg would want to do such a thing when it was clearly in his personal financial interest to provide all such information so that he could obtain reimbursement from Glen Oak of the interest and charges which had accrued on the loan from Westpac in his name.
Similarly, there was no evidence to support the allegation that Mr Rosenberg “capriciously and arbitrarily and impermissibly interfered with the proper discharge by the third defendant of its duties in relation to the disbursement of trust moneys” following the request by Glen Oak for the details and documents. Indeed, it appeared to me that these allegations were all but abandoned in the plaintiff’s final submissions.
I turn then to consider whether I should find that Mr Rosenberg in deciding to remove Glen Oak as trustee because it was going to drop the paintings case was acting for a collateral purpose rather than exclusively for and in the interests of the objects of the Investment Trust, or whether he was acting arbitrarily or capriciously. Given that in his defence Mr Rosenberg had denied that he owed any such duties, a finding might well have been open that he did not consider the interests of the objects of the Investment Trust when deciding to remove Glen Oak as trustee. However, that was never put to Mr Rosenberg.
Counsel for the plaintiff submitted that it was for Mr Rosenberg to explain to the Court why he believed that the decision to remove Glen Oak as a consequence of it dropping the paintings case was for the benefit of the beneficiaries of the Investment Trust. It was submitted that it was not incumbent on the plaintiff to seek to ascertain such an explanation in cross examination. I do not agree. As previously stated, the onus is on the plaintiff to make out her case, by demonstrating, by cross-examination if appropriate, that the second defendant’s defence cannot be upheld. If a possible view of the facts, when there has been no cross-examination, leaves open the conclusion that the decision might have been in the interests of the beneficiaries and not arbitrary or capricious, then I do not consider that the plaintiff will have discharged that onus. It seems to me, therefore, that unless I can conclude that on no view of the facts would Mr Rosenberg have been taking into account the interests of the objects as a whole when deciding to remove Glen Oak or that he must have been acting arbitrarily or capriciously, then the plaintiff’s claim must fail.
In my opinion, Glen Oak’s approach to the issue of whether or not to continue this litigation was, on its face, detrimental to the interests of the objects of the Investment Trust. Once its solicitor had stated in his letter of 2 March 2011 that Glen Oak proposed to file a notice of discontinuance in the paintings proceeding, its bargaining position was exceedingly weak. Any chance of negotiating some payment for giving up its claim to these three valuable paintings was substantially, if not entirely, reduced. Even if the claim was now considered to be weak or difficult to prove it was surely in the interests of the objects as a whole to seek at the very least some return for the time and costs already spent in the litigation. Moreover, simply filing a notice of discontinuance without reaching some prior agreement with the other side about costs, exposed Glen Oak to the risk that it would be liable for the costs incurred by Mrs Berger in meeting its claim. Whilst the Glen Oak representatives had been told at the meeting on 7 December 2010 that Mrs Berger would “entertain” a walk away settlement, both Mr Fitzgerald and Mr Lesnikowski were adamant that no such agreement had been reached with Mrs Berger at that meeting.
Thus, it seems to me that it is hardly surprising that Mr Rosenberg might have been concerned by the trustee’s indication that it was proposing to discontinue its claim to the three paintings and might have considered that such a step was not in the interests of all of the objects of the Investment Trust, whoever they might be.
However, it was submitted by the plaintiff’s counsel that Mr Rosenberg acted without knowing the motivations for Glen Oak deciding to act as it did and without seeking any explanation from Mr Fitzgerald for his foreshadowed conduct. Thus, it was said that Mr Rosenberg did not know that Mr Fitzgerald:
(a)was concerned about the financial position of the Investment Trust, specifically its cash-flow problems;
(b)was concerned about the immediate need to start preparing for the pending trial of the paintings proceeding, in particular to respond to the threat of an application in respect of Glen Oak’s overdue affidavit of documents;
(c)had received legal advice about Glen Oak’s claim in the paintings proceeding; and
(d)was concerned about Glen Oak incurring further legal costs in what he described as “the trustee proceedings” and “the painting proceedings”.
Thus, counsel for the plaintiff then submitted that Mr Rosenberg’s conduct in removing Glen Oak as trustee without giving notice to it or offering any explanation to it and without making a concerted effort to meet with Mr Fitzgerald to discuss these issues, was arbitrary and capricious and reflected a failure to give due consideration to the question of removal and in particular a failure to ask himself what was for the benefit of the beneficiaries.
However, Mr Rosenberg’s ability to ask about any of these matters or to seek an explanation as to why Glen Oak was proposing to discontinue its claim to the three paintings and possibly to assign to a beneficiary of the Investment Trust its rights to those paintings, when only seven months earlier it had been joined as a plaintiff in the paintings proceeding, was constrained by Glen Oak’s solicitor imposing a 24 hour time limit on the question of the possible assignment of its rights to the three paintings. There was no apparent reason for such extreme urgency particularly as Mr Fitzgerald’s report had been sent only some five or six days earlier.
Mr Walton’s evidence made it clear that Mr Rosenberg and his advisers were extremely concerned about the fact that without any action on his part Glen Oak might shortly after 4.00 pm on 3 March 2011 assign its rights to the paintings to one of the beneficiaries of the Investment Trust. The terms of any such assignment had not been disclosed. Given Glen Oak’s attitude to discontinuing its claim in the paintings proceeding, Mr Rosenberg might have feared that the assignment would be for little or no consideration. Yet, potentially, the claim might result in ownership of three valuable paintings.
Perhaps more importantly not all of the beneficiaries had been given notice of the opportunity to seek such an assignment for themselves. Mr White’s letter was addressed only to Kalus Kenny, the solicitors for Mrs Berger, and B2B Lawyers, the solicitors for Mr Rosenberg, and there was no evidence that notice had been given to the other beneficiaries of the possibility of seeking an assignment of Glen Oak’s rights to the paintings.
Thus, it seems to me that it is hardly surprising that Mr Rosenberg might have been concerned by the trustee’s indication that it was receptive to expressions of interest from beneficiaries, within a 24 hour timeframe, in taking an assignment of the trustee’s rights to the three paintings and might have considered that such a step was not in the interests of all of the objects of the Investment Trust, whoever they might be.
Counsel for the plaintiff in effect submitted that there was no such urgency and that Mr Rosenberg had had time to pursue these matters further because Mr Fitzgerald on behalf of Glen Oak had been willing to accede to Mr Walton’s request for seven days’ notice before it assigned or disposed of its rights in relation to the paintings proceeding. The only trouble with this submission is that Mr Fitzgerald’s willingness was never conveyed to Mr Rosenberg or his lawyers. On the contrary, as Mr Walton’s evidence made clear, Glen Oak’s solicitor refused to give any such undertaking. This regrettable refusal meant that Mr Rosenberg was right to be apprehensive that steps detrimental to the interests of the objects of the Investment Trust as a whole might be taken shortly after 4.00 pm on 3 March 2011. The criticism that Mr Rosenberg should have sought an explanation from the trustee about its actions makes no sense in light of the rapidly approaching deadline.
Faced with what appeared to be a hasty, ill-considered and irrational stance taken by Glen Oak, Mr Rosenberg might well have considered that the only proper step for him to take in the interests of the objects of the Investment Trust, whoever they might be, was to remove Glen Oak as trustee without delay. Thus, whilst Mr Rosenberg said that he exercised the power to remove Glen Oak as trustee in order to stop it dropping its claim in the paintings proceeding, I am not persuaded that the plaintiff has established that he did so in breach of a duty to act exclusively in the interests of the objects of the Investment Trust. Similarly, I am not persuaded that, in the circumstances then confronting Mr Rosenberg, his expressed purpose was an improper or collateral purpose.
Moreover, counsel for the plaintiff never explained why it was not in Mr Rosenberg’s own interest to allow the trustee to proceed with its stated intention of dropping the paintings proceeding. Glen Oak’s claim to the three paintings was in the alternative to Mr Rosenberg’s claim, as the executor of his father’s estate, to those three paintings. If Mr Rosenberg’s claim succeeded, his children became the owners of the three paintings. If Glen Oak’s claim succeeded, the Investment Trust was held to be the owner. Mr Rosenberg must have known that his claim not to have been removed as a beneficiary of the Investment Trust would be disputed. Further, there was a distinct possibility that if Glen Oak succeeded the persons who would be likely to benefit most, from Glen Oak becoming the owner of the three paintings, would be Mrs Berger and her children. So why should his evidence not be accepted when he said that he removed Glen Oak because it was proposing to drop the paintings proceeding?
Of course, in due course after sensible discussions between the parties and further consideration, it may be that the trustee of the Investment Trust may eventually decide not to pursue its claim to the three paintings, but that result could surely be achieved without, at the very least, exposing the Investment Trust to the risk of being ordered to pay Mrs Berger’s costs of meeting the abandoned claim. Or it may be that in due course the trustee assigns its interest in the paintings to one or other of the beneficiaries after giving each of them notice of such a possible course of action and appropriate time to consider whether or not to express interest in taking an assignment and after considering which expression of interest contained the best result (in terms of some payment) for the beneficiaries as a whole. But neither of those hypothetical outcomes was possible in the situation in which Mr Rosenberg found himself on the afternoon of 3 March 2011. The false sense of urgency had been imposed on Mr Rosenberg by the actions of the trustee and its solicitor.
There remain the two further ways in which it was pleaded that the removal was arbitrary and capricious. Particular (n) alleged that against the background of the proceeding to validate and maintain the appointment of Glen Oak as trustee, the efforts to ensure Glen Oak remained as trustee despite the deaths of its sole director and the assurance in November 2010 that Mr Fitzgerald, the new director, was “totally independent”, the removal of Glen Oak less than four months later, at the ultimate expense of the Investment Trust, was arbitrary and capricious. It is a matter of regret that the removal of the trustee disrupts the continuity of office holding and causes expense to the Investment Trust, but in my opinion the above analysis explains why Mr Rosenberg may have felt that he had to act as he did. I therefore reject the plaintiff’s submissions that the facts it relied on demonstrated that Mr Rosenberg’s exercise of the power of removal was arbitrary or capricious.
Particular (o) alleged that Mr Rosenberg’s decision to remove the trustee because it proposed to discontinue its claim to the three paintings impermissibly interfered with the proper exercise by the trustee of its powers and discretions and was therefore arbitrary and capricious. As indicated above, a settlement by the trustee of its claim in the paintings proceeding after due and proper consideration and after sensible negotiations resulting in the best possible outcome for the beneficiaries would be no reason for Mr Rosenberg to remove the trustee. However, for the reasons discussed above, Mr Rosenberg had good reason to fear that the approach being followed by Glen Oak with unjustified haste was ill-considered and not going to result in the best possible outcome for the beneficiaries. I therefore reject the plaintiff’s submission that there was an impermissible interference with the trustee’s discretion which rendered Mr Rosenberg’s decision arbitrary and capricious.
Conclusion
As I have concluded that the plaintiff has failed to make out her case, the order I propose to make is that the proceeding commenced by originating motion on 9 March 2011 is dismissed. I will hear the parties on the question of costs.
---
3
0