Defina v Matina
[2017] VSC 106
•16 March 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY & PROBATE LIST
S CI 2016 03061
| PHILIP DEFINA | Plaintiff |
| v | |
| JOSEPH MATINA | First Defendant |
| -and- | |
| THERESA BARBIERI | Second Defendant |
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JUDGE: | McMillan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | On the papers |
DATE OF JUDGMENT: | 16 March 2017 |
CASE MAY BE CITED AS: | Defina v Matina |
MEDIUM NEUTRAL CITATION: | [2017] VSC 106 |
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COSTS — Where beneficiary seeks his costs be paid personally by trustees — Where trustees seek their costs be paid from the trust — National Trustees Executors & Agency Company of Australasia Ltd v Barns (1941) 64 CLR 268 — Nolan v Collie (2003) 7 VR 287 — Trustee Act 1958, s 36(2) — Supreme Court (General Civil Procedure) Rules 2015, r 63.26
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr B E Barr | Madgwicks Lawyers |
| For the First Defendant | Mr R Alexander | Wyndham Partners |
| For the Second Defendant | Mr T Mah | Caleandro Guastalegname & Co |
HER HONOUR:
The defendants are the trustees of the Philip Defina Trust made by deed dated 25 August 2003 (‘the trust’). The assets of the trust comprise the sum of $277,000 held in a term deposit and a cash management account with the Bendigo Bank.
The plaintiff is the only beneficiary of the trust, being the principal beneficiary and the sole general beneficiary. The trust deed provides that the trustees may determine the determination date of the trust at any time. By a deed of variation dated 14 June 2013, the trustees terminated the trust with effect from 1 June 2013. After the deed of variation was signed, the defendants failed to transfer the assets of the trust to the plaintiff.
By originating motion filed 2 August 2016, the plaintiff sought a declaration that the determination date of the trust is 1 June 2013, an accounting of the trust, an order that the defendants distribute the assets of the trust to the plaintiff and costs on an indemnity basis, alternatively, on the standard basis. In the alternative, the plaintiff sought directions as required.
By letter dated 7 October 2016 to the defendants, the plaintiff’s solicitors noted that although the trust was terminated as from 1 June 2013, the defendants had not taken any action to transfer the assets of the trust to the plaintiff nor did they dispute or otherwise contest the matters in issue. The defendants were informed that the plaintiff would seek indemnity costs should his application be successful.
In his affidavit sworn 27 October 2016, the first defendant deposed that he has always been willing to distribute the trust assets to the plaintiff but he considered the distribution sought by the plaintiff amounted to a variation of the terms of the trust, which meant that an order pursuant to s 63A of the Trustee Act 1958 (‘the Act’) was necessary. He considered that until such time as the Court approved the distribution, he was unable to vary the terms of the trust or comply with the plaintiff’s request.
In an affidavit sworn 7 October 2016, the second defendant deposed that she did not object to the trust being wound up and the assets distributed to the plaintiff, if the Court considered it appropriate. In written submissions, she reiterated that she did not object to an order winding up the trust or that the trust assets be distributed to the plaintiff. However, she submitted that an order of the Court, pursuant to s 63A of the Act, was necessary to vary the trust as proposed by the plaintiff and that the defendants were unable to vary the terms of the trust without the approval of the Court. She further submitted that the plaintiff had not provided sufficient material to enable the Court to consider whether the proposed variation would benefit the class of beneficiaries that may become entitled to receive a distribution from the trust.
At the first directions hearing on 14 October 2016, leave was granted to the plaintiff to amend the application to include an order varying the trust pursuant to s 63A of the Act. In a supplementary affidavit sworn 28 October 2016, the plaintiff deposed that he was single, on a disability pension, did not have any children and did not expect to have any children in the future. He deposed that if he did have children, he would use the trust funds and any other means to support them.
At the next directions hearing on 11 November 2016, the Court suggested that the proceeding be amended to include an application under r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (‘the Rules’) to seek directions regarding the trustees’ determination to vest the trust assets to the plaintiff. The plaintiff’s standing to bring the application as a beneficiary of the trust pursuant to r 54.03 of the Rules was not an issue between the parties.
On 28 November 2016, the Court made orders that leave be granted to the plaintiff to amend the application to seek directions pursuant to r 54.02 of the Rules. The Court determined that the defendants are justified in vesting the trust and distributing the proceeds of the trust to the plaintiff as the primary beneficiary of the trust pursuant to the deed of variation.
Costs of the parties to the proceeding
The remaining issues are the costs of the parties, agreed to be dealt with on the papers. All parties filed written submissions, with the defendants each filing separate submissions. At all times, the defendants were separately represented in the proceeding, with each retaining solicitors and counsel.
The plaintiff
The plaintiff seeks that the defendants pay the plaintiff’s costs of and incidental to the proceeding, including any reserved costs, on an indemnity basis and without being indemnified for those costs from the trust, such costs to be taxed in default of agreement.
The plaintiff also seeks that the defendants bear their own costs of and incidental to the proceeding personally and without being indemnified for those costs from the trust.
The first defendant
The first defendant seeks that his legal costs of the proceeding of approximately $11,000 (including written submissions on costs) be assessed on an indemnity basis and paid from the trust.
The first defendant is an accountant. He says that in his role as a professional trustee he has undertaken work on behalf of the trust over the past 13 years and he seeks reimbursement of the sum of $8,354.88. This is in addition to his legal costs of approximately $11,000. He exhibited four invoices, inclusive of GST, dated 11, 13, 15 and 29 October 2016 respectively. The description of the work in the invoices is a combination of accounting and legal work, with some of the items seeming to include this proceeding. It is not clear whether any of the work referred to in the four invoices is also included in his estimated costs of $11,000.
The first defendant submits that the onus is on the plaintiff to prove that the trustee should not be indemnified for his legal costs. His failure to distribute the trust proceeds to the plaintiff is an exercise and performance of his duties and powers generally under the trust deed and he is entitled to rely on cl 5.2 of the deed to be reimbursed for his costs. Clause 5.2 of the deed, inter alia, provides that the trustees may be reimbursed out of the trust for costs or expenses of and incidental to the performance of the trustees’ duties and powers generally under the trust deed. He submits that his failure to distribute the assets does not amount to misconduct nor has he acted with an absence of care and diligence that a person of ordinary prudence would exercise.
The second defendant
The second defendant seeks her costs of approximately $6,000 be paid from the trust on an indemnity basis, and that the plaintiff’s costs be paid out of the trust.
The second defendant submits that a trustee has a general right to approach the Court for directions and for approval of a trustee’s decisions. The fact that there were different views as to the basis of the plaintiff’s application demonstrates that there was a real question as to the power of the trustees to distribute all of the trust funds to the plaintiff.
The second defendant acknowledges that the Court ultimately determined that approval under s 63A of the Act was unnecessary but submits that her view as to whether the Court’s approval was required was a legitimate concern and the trustees were entitled to seek the Court’s view as to whether approval was required.
In such circumstances, the second defendant contends that the trustees are entitled to the Court’s protection and to seek approval of the exercise of their discretion to pay the trust assets to the plaintiff.
Applicable principles
The power of the Court to order costs under s 24 of the Supreme Court Act 1986 is exercised subject to and in accordance with Order 63 the Rules.[1]
[1]Supreme Court (General Civil Procedure) Rules 2015, r 63.02.
As well, r 63.26 of the Rules provides as follows:
Unless the Court otherwise orders, a party who sues or is sued as trustee or mortgagee shall be entitled to the costs of the proceeding out of the fund held by the trustee or out of the mortgaged property in so far as the costs are not paid by any other person.
Section 36(2) of the Act provides that:
A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers.
Trustees are ordinarily entitled to costs out of the estate in litigation relating to the administration of the trust estate, unless they have been guilty of misconduct.[2] In respect of their costs, trustees are entitled as of right to indemnity out of the trust for expenses properly incurred, that is, all costs except to the extent that they are of an unreasonable amount or have been unreasonably incurred. The concept of proper expenditure excludes conduct demonstrating want of prudence or diligence.[3]
[2]Turner v Hancock (1882) 20 Ch D 303; J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006) 591 [2136].
[3]G E Dal Pont, Equity and Trusts in Australia (Lawbook Co, 5th ed, 2011) 679, citing Turner v Hancock (1882) 20 Ch D 303, 305; Re Beddoe [1893] 1 Ch 547, 558; Nolan v Collie (2003) 7 VR 287, 303–10 (Ormiston JA); Dimos v Skaftouros (2004) 9 VR 584, 617 [164]–[165] (Dodds-Streeton AJA), referring to National Trustees Executors & Agency Company of Australasia Ltd v Barnes (1941) 64 CLR 268.
Expenses and liabilities that are improperly incurred, such as acting beyond power, in bad faith or exercising power ‘with an absence of care and diligence that a person of ordinary prudence should exercise’ are not caught by the right of indemnity and shall be borne by the trustee personally.[4] Both English and Australian authorities have affirmed that, in cases of doubt, the trust estate should bear the trustee’s costs.[5] In Nolan v Collie, Ormiston JA approved the approach of Bowen LJ in Re Beddoe to a limited extent, where his Honour expanded upon the meaning of ‘properly’.[6] Bowen LJ stated that the term ‘properly’ means that a trustee should not be personally liable for ‘mere errors in judgment’ and that ‘mere bona fides is not the test’.[7] Ormiston JA added that ‘what is “proper” and “improper” must be answered by reference to the circumstances and in particular by reference to the duty with which a trustee was obliged to comply or the power which a trustee is intending to exercise’.[8]
[4]G E Dal Pont, Equity and Trusts in Australia (Lawbook Co, 5th ed, 2011) 679–80 [23.135], citing Re O’Donoghue [1998] 1 NZLR 116, 121 (Hammond J); Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) (2001) 188 ALR 566, 606 [149] (Finkelstein J); Nolan v Collie (2003) 7 VR 287.
[5]Re Beddoe [1893] 1 Ch 547, 558 (Bowen LJ).
[6]Nolan v Collie (2003) 7 VR 287, 304–5 [46].
[7]Re Beddoe [1893] 1 Ch 547, 562.
[8]Nolan v Collie (2003) 7 VR 287, 306 [51].
The onus to prove that a trustee should not be indemnified rests with the party seeking to deny the right of indemnity to demonstrate that costs have been improperly incurred.[9]
[9]Ibid [50].
Consideration
The costs of the defendants
The practical effect of the positions taken by the defendants regarding the payment of their legal costs would be to require the plaintiff to pay those costs, as well as his own costs, notwithstanding that he was required to issue the proceeding for the trust assets to be distributed to him.
The plaintiff issued his proceeding in August 2016, more than three years after the deed of variation was executed. Despite executing the deed of variation, the defendants took no action to transfer the assets of the trust to the plaintiff or to seek the advice of the Court. In October 2016, the defendants were notified that the plaintiff would seek indemnity costs against them if orders were made in his favour.
The positions taken by the defendants to the plaintiff’s application were identical: both executed the deed of variation vesting the trust pursuant to the power in the trust deed and did not object to the winding up of the trust but would not wind up the trust without the approval of the Court. Neither of them sought to approach the Court for its advice and directions, pursuant to r 54.02 of the Rules, on the winding up of the trust.
The question of whether it was unreasonable for the defendants not to have sought judicial advice in respect of the vesting of the trust is a discretionary matter. A failure to seek advice is not fatal to a trustee’s indemnity for costs but it is a question of perspective.[10] Both defendants submitted there was a real question as to the power of the trustees yet they did not seek judicial advice on the question and defended the plaintiff’s application.
[10]Wales v Wales [2014] VSCA 101 (27 May 2014) [88] (Ashley JA).
It is well established that where joint trustees are appointed, they must act unanimously in the exercise of powers conferred on them relating to a trust. Clause 7.1 of the trust deed also provides that trustees must act jointly or unanimously. There was no disagreement between the trustees but there was disagreement between the trustees and the plaintiff. Where there is disagreement between trustees and beneficiaries, those differences ought be resolved by the trustees making an application to this Court, pursuant to r 54.02 of the Rules, for appropriate directions and orders.[11]
[11]Beath v Kousal [2010] VSC 24 (12 February 2010) [18]–[19], [55] (Kaye J).
Considering the outcome of this proceeding, it is credible to conclude that had the defendants sought judicial advice after they signed the deed of variation in 2013, they would have been advised to accede to the plaintiff’s requests to distribute the proceeds of the trust to him as the primary beneficiary of the trust. In doing this, it would have been likely that they would have been indemnified for their costs of the application. By seeking judicial advice, the substantive issues would have been resolved and the subsequent litigation that the plaintiff was compelled to issue against them would have been avoided.
If judicial advice had been sought by the defendants, it would necessarily have involved the expenditure of costs but those costs would not have been to the same extent now claimed by the defendants. Furthermore, the defendants obtained separate legal advice and representation. No authority was cited by the defendants that it was proper or prudent for them to retain separate legal representation and claim separate amounts for their legal costs. By doing this, they incurred and now claim unnecessary and unreasonable legal expenses. This was not proper or prudent in the circumstances and cl 5.2 of the trust deed, relied on by the first defendant, does not alter this conclusion.
The defendants should be entitled to some costs from the trust, but not the amount now claimed by them. In my view, their reasonable costs should be assessed on the basis that they made an application to seek judicial advice on the issues that they say concerned them. This would include the costs of issuing an application, drawing an affidavit and a hearing of the application. Such an application could have been disposed of with a short hearing in the Trusts, Equity and Probate List of this Court, taking no more than one hour. Other than those estimated costs being paid from the trust, the defendants’ costs now claimed by them have not been properly incurred and should not be covered by the right of indemnity from the trust. Accordingly, those costs should be paid by the defendants personally, without any right of reimbursement from the trust.
The remaining claim is the first defendant’s claim for the sum of $8,354.88 for work done by him on behalf of the trust over the past 13 years. As stated, the description in the invoices seems to include some costs of this proceeding but otherwise describes accountancy work undertaken by him. This claim for accountancy work falls outside the costs of the proceeding and should not be allowed.
The plaintiff’s costs
In respect of the plaintiff’s costs, it follows that had the defendants sought judicial advice, the plaintiff would not have been required to incur the costs of this proceeding. The plaintiff should never have been required to issue the proceeding. The defendants have been unsuccessful in defending it. An order that the plaintiff’s costs be paid out of the trust, as the defendants submit, would mean the plaintiff would bear his own costs, despite being successful in the proceeding. In circumstances where it has been determined that the defendants should have made an application to seek judicial advice, the plaintiff’s costs should be paid by the defendants personally.
The defendants were on notice from 14 October 2016 that the plaintiff would seek indemnity costs in the event he was successful in the proceeding.
The authorities concerning the principles to be applied when a court, in the proper exercise of its discretion, may depart from making the usual order for costs on a standard basis are well known and set out in cases such as Colgate-Palmolive Co v Cussons Pty Ltd,[12] Ugly Tribe Co Pty Ltd v Sikola[13] and Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3).[14] The categories of circumstances that warrant a special costs order are not closed.
[12]Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.
[13]Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189 (14 June 2001).
[14]Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3) [2012] VSC 399 (14 September 2012).
The defendants maintained they did not object to the assets of the fund being distributed to the plaintiff, but they would not do so without the approval of the Court. Notwithstanding this, they did not seek judicial advice at any stage. In not doing so, they acted unreasonably and caused delay and unnecessary expense to the plaintiff. Their conduct provides a proper basis for the Court to exercise its discretion to award indemnity costs to the plaintiff as and from 28 October 2016, being 14 days after notice was given to them that the plaintiff would seek indemnity costs if successful.
Conclusions
The parties are to consult with a view to ascertaining the reasonable costs of the defendants to make an application for judicial advice. If agreement cannot be reached, the Court will decide on the quantum of those costs.
When those reasonable costs have been determined, the parties are to forward minutes of orders consistent with these reasons.
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