Deutsch v Trumble
[2016] VSC 263
•20 May 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2015 5388
| ERWIN DEUTSCH | Plaintiff |
| v | |
| MICHAEL TRUMBLE as trustee for the Deutsch Grandchildren Trust, the Cooee Trust, the Deutsch Children Family Trust, the International Development Unit Trust, the Delfrid Superannuation Fund, the Tzedoko Unit Trust & the International Fabrics Trust | Defendant |
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JUDGE: | HARGRAVE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 2 February 2016 | |
DATE OF JUDGMENT: | 20 May 2016 | |
CASE MAY BE CITED AS: | Deutsch v Trumble | 1st Revision: 9 June 2016, [22] |
MEDIUM NEUTRAL CITATION: | [2016] VSC 263 | |
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TRUSTS – Court-appointed trustee of deadlocked trusts – Trusts included fixed and discretionary trusts – Discretionary powers effectively removed by Court order – Application by beneficiary for production of trust accounts and other trust documents – Whether ‘proprietary approach’ or ‘discretionary approach’ should be applied – O’Rourke v Darbishire [1920] AC 581 applied – Schmidt v Rosewood Trust Limited [2003] 2 AC 709 not followed – Orders made for production and inspection.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W Smith | KWS Legal |
| For the Defendant | Mr M Barrett | Michael Trumble Legal |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 1
The application................................................................................................................................... 7
Background to the application........................................................................................................ 9
Applicable law.................................................................................................................................. 15
What documents should Mr Trumble produce for inspection and copying?...................... 22
When should Mr Deutsch pay Mr Trumble’s costs of review and production?.................. 24
Conclusion......................................................................................................................................... 25
HIS HONOUR:
Introduction
This proceeding concerns an application by a beneficiary of certain trusts for orders that the trustee produce trust accounts and specified trust documents to him for inspection and copying. It is necessary to set out the background to the application.
In 2012, I was the trial judge in a proceeding between Erwin Deutsch, the plaintiff in this proceeding, and his estranged brother, Robert Deutsch (the ‘original proceeding’).[1] There were subsequent judgments delivered by me in the proceeding.[2] The full context of the disputes between the Deutsch brothers is set out in those judgments. For present purposes, it is enough to give a brief summary of relevant matters.
[1]Deutsch v Deutsch [2012] VSC 227.
[2]Deutsch v Deutsch (No 2) [2013] VSC 15; Deutsch v Deutsch (No 3) [2014] VSC 494.
The original proceeding involved a bitter family dispute in circumstances where each brother was:
(1) one of the only two directors of corporate trustees of the trusts referred to in (2); and
(2) a beneficiary of fixed trusts, including a superannuation trust, and an object under discretionary trusts (‘the trusts’).
Because of the disputes between the brothers, control of the trusts was deadlocked. On 22 September 2008, the brothers entered into terms of settlement of the original proceeding. In substance, the terms of settlement provided for administrators to be appointed to the trusts and for them to:
(a) arrange for the orderly sale of the trust assets;
(b) pay trust debts, including agreed amounts to Robert Deutsch;
(c) arrange for the trusts to comply with their statutory obligations, including for the preparation of statutory returns and the payment of tax; and
(d) arrange for the trusts to vest, and following vesting, pay the balance of the net trust assets to the brothers equally (except for the superannuation trust which was to operate according to its terms).
Following a trial, I found that Erwin Deutsch had repudiated the terms of settlement. As a result he became liable to Robert Deutsch for damages and equitable compensation. I concluded my reasons for judgment with the following statement:
I will hear the parties as to the precise form of the Court’s judgment in the proceeding. As I am satisfied that Erwin’s breaches of the terms of settlement were not just contractual in nature, but involved him in serious breach of his fiduciary duties to the trusts, the Court is in those circumstances empowered to mould relief which is ‘practically just’ in all the circumstances. In my view, the Court should endeavour to mould relief consistent with the terms of settlement and these reasons for judgment. The parties should be given an opportunity to consider these reasons for judgment, before called upon to make further submissions in that regard.[3]
[3]Deutsch v Deutsch [2012] VSC 227 [181] (citation omitted).
The brothers agreed to the Court moulding relief on this basis. In these circumstances, on 18 July 2012, the Court ordered in the original proceeding that the defendant, Michael Trumble, be appointed as the sole trustee of each of the trusts.
Under the order appointing him as trustee, Mr Trumble was:
(1) required to retain the trust property and not distribute it to beneficiaries except in accordance with an order of this Court.[4] This effectively meant that the discretionary trusts became fixed trusts;
[4]18 July 2012 orders, paragraph 8.
(2) required to get in the assets of the trusts and convert them into cash;[5]
[5]Paragraph 9.
(3) required to take all steps reasonably necessary to have independent chartered accountants prepare trust accounts, trust tax returns and all documents required under the Corporations Act 2001 (Cth) for each of the trusts as soon as reasonably possible after sale of the assets of that trust.[6] Mr Trumble appointed Deloitte Private to undertake this task;
[6]Paragraph 10.
(4) entitled to use trust assets to pay his fees and expenses;[7]
[7]Paragraph 11.
(5) obliged to act in good faith and, provided that he did so, he was not to be liable to the trusts, Robert Deutsch, Erwin Deutsch or any beneficiary or contingent beneficiary of the trusts for any conduct by him as trustee or pursuant to the terms of the orders appointing him;[8]
(6) entitled to charge the trusts for his services in acting as trustee at his normal charge-out rate;[9] and
(7) entitled to apply to the Court for directions as to the performance of his duties as trustee.[10]
[8]Paragraphs 12, 13.
[9]Paragraph 15.
[10]Paragraph 14.
Towards the conclusion of the original proceeding, the Court made orders on 28 August 2014 which provided further protection to Mr Trumble and those engaged by him to perform work on behalf of the trusts, in the following terms:
Provided only that they have acted in good faith … upon the winding up of the [t]rusts [Mr Trumble] and any experts, Special Referees or other consultants engaged by him or working under his direction shall be fully released and discharged from all claims whatsoever and indemnified and held harmless by Robert Deutsch, Erwin Deutsch and all other beneficiaries of the [t]rusts jointly and severally.[11]
[11]28 August 2014 orders, paragraph 6.
Following more than two years of work by Mr Trumble as trustee, in the context of continuing disputation between the brothers, as evidenced by my previous judgments and many interlocutory hearings at which oral judgments were given and directions made, final orders were made in the original proceeding on 2 October 2014.
The final orders were based on my reasons for judgment delivered that day,[12] including the following statements:
[12]Deutsch v Deutsch (No 3) [2014] VSC 494.
3The parties agree that Robert Deutsch is entitled to damages for breach of the terms of settlement in accordance with the ruling principle, that he should be placed in the same position, so far as money can do it, as he would have been in had Erwin performed his obligations under the terms of settlement. This principle entitles Robert to damages comprising the specific amounts payable to him under the terms of settlement and an amount representing one-half of the remaining net proceeds of sale of the trust assets in accordance with the terms of settlement in 2009, after deducting all necessary costs to bring about those sales and wind-up the trusts.
…
5In paragraph [181] of the principal reasons, I stated:
I will hear the parties as to the precise form of the Court’s judgment in the proceeding. As I am satisfied that Erwin’s breaches of the terms of settlement were not just contractual in nature, but involved him in serious breach of his fiduciary duties to the trusts, the Court is in those circumstances empowered to mould relief which is ‘practically just’ in all the circumstances. In my view, the Court should endeavour to mould relief consistent with the terms of settlement and these reasons for judgment. The parties should be given an opportunity to consider these reasons for judgment, before called upon to make further submissions in that regard.
6Since that time, there have been many further hearings as the Court worked in a practical way with the parties, and the new trustee of the trusts appointed by the Court, Michael Trumble, to ensure that all of the trust assets were gathered in, converted to cash and made available for distribution to the parties. This has involved much cost, but the exercise has been worthwhile. The new trustee, assisted by Deloitte Private Accountants and Valuers, has provided great assistance to the parties and the Court in achieving this end and maximising the value of the trust assets. Among other things, this has involved negotiations with the Australian Taxation Office to avoid substantial interest and penalties resulting from the failure of the trusts, while the corporate trustees were deadlocked, to complete annual accounts or lodge tax returns for many years.
7During the course of this process, the Court has permitted both Robert and Erwin to draw sums from the trust assets for their personal purposes, including amounts awarded against Erwin in the main proceeding, amounts awarded against Robert in the caveat proceeding, for Erwin’s living expenses and for Robert’s and Erwin’s legal expenses. On a balance of account, more has been taken from the trusts by Erwin than Robert.
8These payments, together with the costs payable to the new trustee and those engaged by him, have substantially depleted the trust funds. On the other hand, however, the delay in realisation of the trust assets has led to significant profits due to increases in property values. Overall, the property trusts are about $1.1 million better off than they would have been had the properties been sold in accordance with the terms of settlement in 2009.
…
40The parties joined in the submission that the affairs of the Delfrid Superannuation Fund should be finalised under the control of the new trustee. No party sought any particular relief related to that fund. Once the remaining tax liabilities are resolved, the new trustee can proceed to distribute the assets of that trust by rolling the respective entitlements of Robert, Erwin and their respective wives into alternative superannuation funds of their choice.
…
Summary of final relief in the proceeding
58For the above reasons:
(1)Robert has established a prima facie loss for breach of the terms of settlement and damages in the nature of interest as at 17 September 2014 of $3,116,662.88.
(2)Robert must give credit against that amount for the components of that sum which have been paid ($315,000 plus interest of $114,190.15).
(3)Robert must also give credit for the amounts paid to him by the new trustee for personal purposes ($795,234.86) and for his adjusted entitlement to a half share of the remaining trust assets ($816,839.25). This is necessary to avoid over-compensation.
(4)There will be judgment for Robert against Erwin in the sum of $1,075,398.62 for breach of the terms of settlement, including damages in the nature of interest to 17 September 2014.
(5)In addition, there will be judgment for Robert against Erwin in the sum of $128,759.57 for equitable compensation, including damages in the nature of interest to 17 September 2014.
(6)Robert’s costs of the proceeding until 8 February 2013 ($650,000) and his costs of a dispute concerning the American properties ($23,000) have already been fixed by the Court and paid to him by the new trustee. They form part of the calculations of the adjusted entitlements of Robert and Erwin to their respective half shares in the remaining trust assets.
(7)Robert is further entitled to a gross sum costs order of $260,042.70 for his costs of the proceeding from 8 February 2013 to date.
…
(9)The new trustee will be directed to pay all the remaining trust assets to Robert, in the new trustee’s discretion as to the time of payment. To the extent that the total amount paid to Robert exceeds $816,839.25, that excess will represent payment by Erwin in partial satisfaction of Robert’s judgment for damages and interest for breach of the terms of settlement.
(10)I will reserve liberty to apply if there is a delay beyond 1 March 2015 in the payment of all the remaining trust assets pursuant to the Court’s directions. Of course, the new trustee can and should make partial payments as possible future liabilities are resolved to his reasonable satisfaction.
Concluding remarks
59These are the final reasons for judgment which the Court will give in this most unfortunate dispute. This proceeding has taken a disproportionate amount of Court resources and has doubtless left both parties unsatisfied. Erwin is apparently insolvent and faces bankruptcy. Robert faces an unsatisfied judgment of more than $1 million.[13]
[13]Ibid [3], [5]–[8], [40], [58], [59] (citations omitted).
The substance of the final orders was that Robert Deutsch obtained judgments against Erwin Deutsch for sums of money which exceeded, by a substantial amount, any entitlement which Erwin Deutsch had to a distribution under the trusts. In these circumstances, Mr Trumble was ordered to pay all the remaining trust assets, other than the assets of the superannuation trust, to Robert Deutsch and, to the extent that the remaining trust assets exceeded Robert Deutsch’s adjusted share of those trust assets, ordered that the excess would represent payment by Erwin Deutsch in partial satisfaction of Robert Deutsch’s judgment for damages and interest against Erwin Deutsch.
Erwin Deutsch appealed against the final orders. The appeal was resolved by terms of settlement dated 7 May 2015 which included terms that:
(1) the parties would consent to the following orders:
a.Without adjudication on the merits, the judgment and orders of the Honourable Justice Hargrave made on 2 October 2014 be set aside.
b.The amount of $50,000 paid into court by the Appellant pursuant to the order made on 19 December 2014 be paid out to the respondents’ solicitors.
c.The New Trustee (Mr Michael Trumble) shall pay to the solicitors for the Respondents the residue of the trust assets held by him being no more than $767,025.83.[14]
d.Order 1 of the Order of the Honourable Justice Hargrave made on 8 April 2014 be set aside.
e.The appeal is otherwise dismissed with no orders as to costs.
(2) The parties otherwise released each other from all claims connected with the original proceeding, including costs.
[14]Emphasis added.
The effect of these terms of settlement was that Robert released Erwin from payment of judgments totalling $1,464,200.89. In return, Robert agreed to accept ‘the residue of the trust assets held by [Mr Trumble] being no more than $767,025.83.’[15]
[15]Emphasis added.
The amount of $767,025.83 referred to in paragraph c. of the consent orders was the total of the remaining trust funds then held by Mr Trumble, as advised by him to the parties on the day the terms of settlement were signed.
The Court of Appeal made the consent orders and the original proceeding was then finally concluded.
The application
By an amended summons and amended originating motion filed after the hearing to regularise various errors, Mr Deutsch sought the following forms of relief:
(1) By paragraph 3: That, pursuant to rule 54.02(2)(b) of Supreme Court (General Civil Procedure) Rules 2015 or otherwise, Mr Trumble produce for inspection by Mr Deutsch:
(a) controlled money movement ledgers relating to his trusteeship of the trusts;
(b) all invoices rendered by him to the trusts for his professional services;
(c) all other invoices for costs incurred by the trusts during his trusteeship; and
(d) any reports or advice received by him from any accountant that were paid for from trust money and any letters of instruction provided by him commissioning those reports or advices;
(2) By paragraph 3A: For the purposes of the inspection, Mr Trumble provide appropriate inspection and copying facilities.
(3) By paragraph 4: That, pursuant to rule 54.02(2)(b) of Supreme Court (General Civil Procedure) Rules 2015 or otherwise, Mr Trumble file an account verified by affidavit showing all trust moneys disbursed by him both to himself and to third parties, showing details of each transaction and a description of the purpose.
As appears below, Mr Trumble acknowledges that he is required to produce his trust accounts and many of the documents sought by Mr Deutsch. He contends that Mr Deutsch should in any event pay his costs of identifying and producing those documents and any further documents which the Court orders be produced. Having regard to the history of the original proceeding and related proceedings, his trusteeship and communications between the parties concerning his costs of identifying and producing documents to Mr Deutsch, Mr Trumble seeks that he be permitted to estimate his costs before identifying and producing documents — and that the estimated costs be paid into Court or otherwise secured before he commences the task. Mr Deutsch acknowledges that he should pay the costs of identification and production of documents other than the trust accounts, but contends that the costs should be paid after the documents have been produced, and only following a properly itemised bill of costs from Mr Trumble. This issue is resolved below.
There is no issue that Mr Trumble must produce his trust accounts on request by Mr Deutsch in his capacity as a beneficiary. In my opinion, he has substantially done so by producing his trust ledgers. Further:
(1) Mr Trumble provided detailed reports to the Court and the parties in the original proceeding as to the receipts of the trusts, and these are clearly evident from the trust ledgers;
(2) Mr Trumble has sworn a detailed affidavit in this proceeding as to the course of his trusteeship, which explains the relationship between his trust ledgers and his law practice trust account; and
(3) as appears below, I will order that Mr Trumble produce all the invoices supporting the payments recorded in his trust ledgers.
I will not order that Mr Trumble swear a further affidavit verifying his accounts. He is a solicitor and Court-appointed trustee with attendant duties. That deals with paragraphs 3(a) and (4) of Mr Deutsch’s application.
Mr Trumble now agrees to produce his own invoices, and those from Deloitte Private, together with supporting details of the hours worked, hourly rates and work performed. That deals with paragraph 3(b) and part of paragraph 3(c) of Mr Deutsch’s application.
Paragraph 3A of Mr Deutsch’s application relates to the form of orders in this proceeding and will be dealt with when framing those orders.
The remaining issues concern the balance of paragraph 3(c) — as to whether Mr Trumble should produce all other trust invoices; and paragraph 3(d) — relating to reports and advices received by Mr Trumble from accountants and any instructions he gave for commissioning those reports or advices.
Background to the application
On 18 June 2015, Mr Deutsch’s solicitors wrote to Mr Trumble and requested that he provide ‘all the tax invoices and expenses you incurred as trustee of the trusts’.
On 30 June 2015, Mr Trumble responded. He provided information in relation to the sale of various properties owned by the trusts and his ‘Controlled Money Movement Ledgers’ for the only three bank accounts he established for the purposes of his trusteeship of the trusts (collectively, ‘the trust ledgers’).[16]
[16]Michael Trumble affidavit, 6 November 2015.
As to the request for all tax invoices, Mr Trumble said that it would be an ‘immense task’ and that he would, if pressed, seek directions from the Court concerning payment in advance for the costs he would incur in undertaking it.
On 27 July 2015, Mr Deutsch’s solicitors wrote again to Mr Trumble requesting certain documents as follows (the ’27 July request’):
Pursuant to your fundamental and ongoing common law obligations as trustee to keep and render to the beneficiaries a full and candid report of your stewardship…our client requires that you furnish him with the following:
(a)All itemised accounts of the Trusts;
(b)All invoices for costs incurred by the Trusts; and
(c)Copies of instructions and all relat[ed] correspondence (emails, letters, faxes, file notes etc) passing between yourself and your agent including but not limited to, any accountant, lawyers, and real estate agents, for professional services rendered on behalf of the Trusts.
…
Our client acknowledges that you (and/or your agents) are entitled to be remunerated for the cost of producing the Accounts, and request that you provide your estimate of costs forthwith, for our client’s consideration prior to the costs being incurred.[17]
[17]Emphasis added.
By letter dated 11 August 2015, Mr Trumble responded that he was prepared to provide the accounts and invoices sought in paragraphs (a) and (b) of the 27 July 2015 request, but refused to provide the instructions sought in paragraph (c), as that would ‘be an immense task which I am not prepared to undertake unless ordered to do so by the Court’. Mr Trumble stated that he would provide the material in paragraphs (a) and (b) once $11,000 (including GST) was deposited into his trust account. As discussed below, Mr Trumble was justified in seeking payment in advance for his costs. As appears above, paragraph (c) of the 27 July request was directed at a wider range of documents than those sought in respect of that category in the plaintiff’s amended originating motion.
By his 11 August letter, Mr Trumble also noted that one of the purposes of the Court’s orders of 18 July 2012 and 28 August 2014 was ‘to avoid exactly the mischief that Erwin Deutsch now appears to be causing now in requesting so much information so late in my trusteeship’.
By letter dated 13 August 2015, Mr Deutsch’s solicitors agreed to receive ‘[all] itemised accounts of the Trusts’ and ‘all invoices for costs incurred by the Trusts’, and requested details of Mr Trumble’s trust account for payment of Mr Trumble’s ‘anticipated costs’ — a clear reference to the $11,000 sought by Mr Trumble. The letter also asked Mr Trumble to itemise his costs.
The parties continued to exchange correspondence as to the terms on which the trust accounts and invoices sought in the 27 July request would be produced. It is not necessary to set out this correspondence in detail. Suffice to say, however, that the parties failed to resolve the dispute, principally because Mr Deutsch insisted that the $11,000 not be paid to Mr Trumble as an advance payment of anticipated costs but, rather, remain in his solicitor’s trust account until the documents in paragraphs (a) and (b) of the 27 July request had been produced to him for inspection and copying. Mr Trumble maintained his position that he would not assemble or produce the documents until his anticipated costs were paid to him, as he contended had been agreed. For present purposes, it is unnecessary to resolve the dispute between the parties on that issue.
In these circumstances, Mr Trumble wrote to the Court on 9 October 2015, seeking directions to resolve the impasse, and providing some submissions in support of his position. At this time, as the parties knew, I had been on sabbatical leave for some time and was not due to return until 16 October 2015.
On 20 October 2015, the parties were informed by the Court that, subject to inspection of the consent orders of the Court of Appeal, I was prepared to accede to Mr Trumble’s request to hear his application for directions in the original proceeding. By that time, however, Mr Deutsch had already filed this proceeding against Mr Trumble.
As appears above, in the course of the correspondence preceding this application, Mr Trumble questioned Mr Deutsch’s motives for seeking accounts and trust documents at such a late stage of his trusteeships, in circumstances where:
(1) his trusteeships were virtually complete and the remaining trust funds were inadequate to meet his costs of production of the trust documents being sought;
(2) Robert Deutsch, who is entitled to all of the remaining trust assets, did not support Erwin Deutsch’s application; and
(3) in any event, he and those engaged by him had the benefit of the indemnities from claims contained in the 18 July 2012 and 28 August 2014 court orders in the original proceeding (the ‘court ordered indemnities’).
In light of these matters, the history of the original proceeding, and the course of Mr Trumble’s trusteeships, Mr Trumble wrote in correspondence to the effect that he suspected that Mr Deutsch was engaged in a futile and mischievous ‘fishing exercise to try and mount a claim against [him] despite the [court ordered indemnities]’, which protect him from any claims provided he has acted in good faith.
In his affidavit in support of the application, Mr Deutsch explained that he was concerned about three items in the trust ledgers provided to him by Mr Trumble during the course of the correspondence, which referred to payment of invoices or accounts without specifying to whom the payments had been made. In these circumstances, Mr Deutsch deposed that the orders sought by him had the following purpose:
so that I am in a position to verify that the professional costs and other expenses incurred by the trusts during the trusteeship of [Mr Trumble] have been reasonably incurred.[18]
[18]Erwin Deutsch affidavit, 15 October 2015 [9].
Prior to commencing this proceeding, notwithstanding the earlier production of the trust ledgers and the extensive correspondence between the parties, Mr Deutsch’s affidavit was the first notice Mr Trumble had that Mr Deutsch had concerns about the three ledger entries. Mr Trumble satisfactorily explained these entries in his first affidavit in this proceeding.[19] In this affidavit, Mr Trumble again questioned Mr Deutsch’s motives for bringing this application, given that the whole of the remaining trust assets were, under the terms of settlement and consent orders made by the Court of Appeal, to be paid to Robert Deutsch. At that stage, the remaining balance of the trust funds, excluding the superannuation trust, was only $13,869.50, with a final GST refund of about $7,000 still to be received, and was subject to deduction of Mr Trumble’s final tax invoice for his remaining costs and disbursements. Accordingly, this application was the only matter preventing ‘finalisation of all matters in [Mr Trumble’s] trusteeship’.
[19]Michael Trumble affidavit, 6 November 2015 [49]–[50].
Mr Deutsch affirmed an affidavit in response to Mr Trumble’s affidavit in an endeavour to demonstrate that this proceeding has utility in the form of ‘possible financial gain’ to him.[20] Relevantly, Mr Deutsch deposed that he believed the effect of the terms of settlement and consent orders made by the Court of Appeal:
is that the entitlement of all the other beneficiaries to trust assets held by [Mr Trumble] at the date of the consent orders was capped at $767,025.83, and therefore it is possible that I will have an entitlement to an additional distribution of trust money should it be found at a later date that professional fees must be refunded to the trusts.[21]
[20]Erwin Deutsch further affidavit, 17 December 2015.
[21]Ibid [3].
Mr Deutsch’s belief as to the effect of the terms of settlement and consent orders is open to question. There is an ambiguity between the order that Mr Trumble pay Robert Deutsch ‘the residue of the trust assets’ and the subsequent reference to the current amount of those assets ‘[then] being no more than $767,025.83’. Moreover, if the $767,025.83 figure is a ‘cap’ on Robert Deutsch’s entitlement under the terms of settlement and consent orders, and the trust assets exceed that amount for some reason, Mr Trumble’s obligation would be to apply to the Court for directions under the terms of the 18 July 2012 order appointing him. Depending on the effect of the releases in the terms of settlement, it may be that any excess assets should be distributed between the brothers equally. If the issue ever arises, Robert Deutsch would need to be given an opportunity to be heard and Mr Trumble could simply abide the Court’s determination so as to avoid him incurring costs.
Further, Mr Deutsch deposed that he would in any event:
(1)‘like to go through the process of obtaining accounts and inspecting trust documents in order to ensure that the trusts have been properly administered, whether or not I personally stand to gain.’[22]
(2)‘[a]s a beneficiary of the trust, … like the opportunity to review the tax invoices charged to the trusts and inspect the charges to determine whether they were reasonable in the circumstances. In the event that any overcharging is discovered, I believe it is just to request that those funds be immediately returned to the trusts of which I am a beneficiary.’[23]
[22]Ibid [4].
[23]Ibid [7].
The second-mentioned purpose appears to ignore the court ordered indemnities.
Further, Mr Deutsch deposed to a concern about ‘private’ correspondence between Mr Deutsch and Robert Deutsch’s solicitors:
This is relevant and of concern to me because without being provided with the accounts for the trusts, I am unable to determine whether [Mr Trumble] charged his fees for the private correspondence with Robert Deutsch, to the trusts.
…
I want to determine whether the trusts were charged for helping Robert Deutsch with his tax affairs.[24]
[24]Ibid [9]–[10].
Mr Deutsch then referred in his affidavit to correspondence and a conference call concerning Robert Deutsch’s tax affairs, in which Mr Trumble apparently assisted.
Mr Trumble denies that he gave any tax advice or assistance to Robert Deutsch. In a further affidavit sworn 27 January 2016, Mr Trumble explained that his role concerning Robert Deutsch’s private tax affairs was limited to providing Robert Deutsch with:
information concerning distributions made to him out of the trusts which I considered to be confidential to him, and I recall that a short conference call with [his solicitors] concerning this was arranged and conducted.[25]
[25]Mr Trumble’s further affidavit, 27 January 2016 [13].
In oral evidence, Mr Trumble confirmed that he had given similar assistance to Erwin Deutsch and his solicitors from time to time, as requested, and that the provision of information to both Robert Deutsch and Erwin Deutsch, and their solicitors, was ‘on both sides’. I accept Mr Trumble’s evidence in this regard. In my opinion, that was a normal incident of his trusteeship and does not give rise to any legitimate concerns.
I turn to consider the applicable law.
Applicable law
Mr Deutsch contends that the general rule is that a beneficiary — be it a beneficiary with a vested or contingent interest under a fixed trust, or an object of a discretionary trust — has a prima facie entitlement to inspect and copy all ‘trust documents’. He relies principally on the decision of the House of Lords in O’Rourke v Darbishire to support this contention.[26] I will refer to this as the ‘proprietary approach’.
[26][1920] AC 581.
Mr Trumble contends that the Court should apply the decision of the Privy Council in Schmidt v Rosewood Trust Limited,[27] which, he submitted, now applies in Australia and has altered the nature of a beneficiary’s prima facie entitlement to inspect and copy trust documents under the proprietary approach. I will refer to this as the ‘discretionary approach’.
[27][2003] 2 AC 709 (‘Schmidt’).
The decision of North J in In Re Cowin underpins the proprietary approach.[28] That case concerned a testamentary estate. The plaintiff beneficiary sought to mortgage his interest under the estate and requested inspection of the title deeds of the trust property. The trustees’ solicitors refused that request. North J held that the plaintiff had a prima facie right to inspect the deeds, because beneficiaries of trust estates are ‘beneficial owners of the trust property’.[29] North J further stated, however, that the plaintiff was not entitled to inspect ‘as of right … because there might be a state of circumstances under which the right to production would not exist’.[30] However, no such circumstances were demonstrated in that case.[31]
[28](1886) 33 Ch D 179.
[29]Inre Cowin (1886) 33 Ch D 179, 185 (emphasis added).
[30]Ibid 187.
[31]Ibid 186.
In O’Rourke v Darbishire, the House of Lords affirmed the proprietary approach. The case concerned allegations of fraud against one of the executors of an estate, who was also the testator’s solicitor. The plaintiff sought the disclosure of documents containing legal advice provided by the testator’s solicitor to the testator (while he was alive) and the other executors. In obiter dicta, Lord Wrenbury stated: [32]
If the plaintiff is right in saying that he is a beneficiary, and if the documents are documents belonging to the executors as executors, he has a right to access to the documents which he desires to inspect upon what has been called in the judgments in this case a proprietary right. The beneficiary is entitled to see all trust documents because they are trust documents and because he is a beneficiary. They are in a sense his own. Action or no action, he is entitled to access to them.
[32]O’Rourke v Darbishire [1920] AC 581, 626 (emphasis added).
The principle as expressed by Lord Wrenbury has been followed by a number of Australian authorities. In Re Simersall; Blackwell v Bray,[33] Gummow J, while a judge of the Federal Court, noted the ‘continuing importance in Australia’ of the passage,[34] and described these principles as ‘well settled’.[35]
[33](1992) 35 FCR 584.
[34]Ibid 588.
[35]Ibid 589.
The above passage of Lord Wrenbury was also cited by Dawson and Toohey JJ in Breen v Williams,[36] where their Honours noted it had been ‘accepted or referred to without demur in In re Londonderry’s Settlement and [has] been accepted in this country’.[37] Dawson and Toohey JJ further stated:[38]
But the right of access of a beneficiary to trust documents arises because of the beneficial interest of the beneficiary in the trust property and it is in that sense that the right may be described as proprietary.
[36](1996) 186 CLR 71.
[37]Breen v Williams (1996) 186 CLR 71, 89 (emphasis added), referring to Re Fairbairn [1967] VR 633, 637–8; Re Simersall; Blackwell v Bray (1982) 35 FCR 584, 588; cf Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 443.
[38]Ibid.
In In re Londonderry’s Settlement, the Court of Appeal of England and Wales held that a beneficiary’s entitlement to trust documents was curtailed by the principle that documents evidencing a trustee’s exercise of discretion ought remain confidential. In that case, the Court considered a request for access to certain documents by a defendant who was an object under a discretionary trust and dissatisfied with her distribution under the trust. The documents were likely to reveal information about the trustees’ exercise of their discretion and/or communications between the trustees and the settlor or other beneficiaries. Harman LJ adopted the above-quoted statement of Lord Wrenbury in O’Rourke v Darbishire, and his Lordship’s further statement concerning a beneficiary’s right to inspect advice taken by trustees, as emphasised below:[39]
…The beneficiary is entitled to see all the trust documents because they are trust documents and because he is a beneficiary. They are in a sense his own. Action or no action, he is entitled to access to them. This has nothing to do with discovery. The right to discovery is a right to see someone else’s documents. A proprietary right is a right to access to documents which are your own.[…] Documents containing professional advice taken by the executors as trustees contain advice taken by trustees for their cestuis que trust, and the beneficiaries are entitled to see them because they are beneficiaries.
[39] [1920] AC 581, 626–7 (emphasis added), cited in In re Londonderry’s Settlement [1965] Ch 918, 932–3.
His Lordship was critical of this passage for offering ‘very little guidance’,[40] as it neglected to define what constituted ‘trust documents’. Nonetheless, the Court of Appeal adopted the view in O’Rourke v Darbishire that beneficiaries were ordinarily entitled to inspect trust documents, subject to an exception for documents evidencing the reasons for exercise of a trustee’s discretion.
[40]In re Londonderry’s Settlement [1965] Ch 918, 933.
Salmon LJ expressly invoked the proprietary basis of the entitlement, and stated:[41]
Together with the rule enunciated in the authorities [that trustees are not obliged to disclose reasons for exercising a discretionary power] … marches the rule no less firmly established that beneficiaries have a proprietary interest in, and a right to see, all trust documents.
[41]Ibid 937.
Salmon LJ also attempted to set out common characteristics of trust documents.[42] This attempt has been criticised in later cases, but it is unnecessary to consider it further here, because Mr Trumble did not contend that the categories of documents in dispute were not trust documents. His contention is that the discretionary approach applies and that the Court should refuse inspection on discretionary grounds.
[42]Ibid 938.
Re Londonderry’s Settlement was followed by Gillard J in Re Fairbairn,[43] where his Honour stated, referring to a passage from the earlier case where Harman LJ held that the protection from disclosure of trustees’ deliberations on a discretionary matter overrode the ordinary rule:[44]
This statement confirms that in certain circumstances, trust documents are not required to be produced for inspection. Nevertheless, it also implies that the general rule is that in the absence of special circumstances they should be produced for inspection.
[43][1967] VR 633.
[44]Ibid 638.
The decision in Re Londonderry’s Settlement was considered by the New South Wales Court of Appeal in Hartigan Nominees Pty Ltd v Rydge.[45] The court considered whether the trustee of a discretionary trust was required to disclose the settlor’s memorandum of wishes or whether the confidence of the settlor’s wishes ought be protected. The court refused access to the memorandum.
[45](1992) 29 NSWLR 405 (‘Hartigan’).
Mahoney JA expressly followed Re Londonderry’s Settlement,[46] but held that the memorandum ought not be disclosed on confidentiality grounds:[47]
It is possible to envisage documents communicated to a trustee which, though the property of the trust, are confidential and for that reason should not be disclosed to beneficiaries. The settlor may communicate confidential information about a beneficiary as a reason for not exercising a discretionary power in his favour; a beneficiary may communicate to the trustee information as to his assets which he desires to keep confidential; and information may be communicated in the context of personal family affairs the disclosure of which would be abrasive or distressing. As the judgments in the Londonderry case indicate, that is a proper reason for not requiring disclosure of documents or information which otherwise should be disclosed to a beneficiary.
[46]Ibid 435.
[47]Ibid 433.
Sheller JA was critical of the proprietary basis of the decision in Re Londonderry’s Settlement.[48] However, his Honour accepted the reasoning concerning the right of a trustee to refuse to produce documents disclosing: (1) the reasons for exercising a discretionary power; or (2) information provided to a trustee in confidence.[49]
[48]Ibid 443–4.
[49]Ibid 445–7.
Kirby P (as he then was), in dissent, stated that he did not consider that Re Londonderry’s Settlement represented the law in Australia. His Honour stated:[50]
I do not consider that it is imperative to determine whether that document is a ‘trust document’ (as I think it is) or whether the respondent, as a beneficiary, has a proprietary interest in it (as I am also inclined to think he does). Much of the law on the subject of access to documents has conventionally been expressed in terms of the ‘proprietary interest’ in the document of the party seeking access to it. Thus, it has been held that a cestui que trust has a ‘proprietary right’ to seek all documents relating to the trust ... This approach is unsatisfactory. Access should not be limited to documents in which a proprietary right may be established. Such rights may be sufficient; but they are not necessary to a right of access which the courts will enforce to uphold the cestui que trust’s entitlement to a reasonable assurance of the manifest integrity of the administration of the trust by the trustees.
[50]Ibid 421–2.
The Privy Council decision in Schmidt relied on this passage, and other passages in Hartigan, in departing from some of the principles in Re Londonderry’s Settlement.
I turn to consider the Privy Council’s approach in Schmidt.
In Schmidt, the beneficiaries sought disclosure of trust accounts and other documents which were not capable of exclusion on the basis that they revealed the trustee’s exercise of discretion. The Privy Council held that ‘no beneficiary (least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document’.[51] The Privy Council found that it was not the proprietary rights of a beneficiary which gave rise to the court’s power to require disclosure. Instead, the court considered that it was founded in the exercise of its inherent jurisdiction over the administration of trusts:[52]
… a beneficiary’s right to seek disclosure of trust documents, although sometimes not inappropriately described as a proprietary right, is best approached as one aspect of the court's inherent jurisdiction to supervise (and where appropriate intervene in) the administration of trusts. There is therefore in their Lordships' view no reason to draw any bright dividing line either between transmissible and non-transmissible (that is, discretionary) interests, or between the rights of an object of a discretionary trust and those of the object of a mere power (of a fiduciary character).
[51]Schmidt [2003] 2 AC 709, 734 (emphasis added).
[52]Ibid.
Lord Walker identified three considerations relevant to a court in forming a discretionary judgment as to whether or not it should compel the disclosure of trust information:[53]
… whether a discretionary object (or some other beneficiary with only a remote or wholly defeasible interest) should be granted relief at all; what classes of documents should be disclosed, either completely or in a redacted form; and what safeguards should be imposed (whether by undertakings to the court, arrangements for professional inspection, or otherwise) to limit the use which may be made of documents or information disclosed under the order of the court.
[53]Ibid 730.
The Privy Council recognised that ‘where there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves, and third parties’.[54]
[54]Ibid 734.
I consider that I am bound to apply the proprietary approach and not the discretionary approach for the following reasons.
First, I do not consider I am able to depart from the seriously considered dicta of the High Court in Breen v Williams (set out above) that supports the proprietary approach.[55]
[55]Farah Constructions Pty Ltd & Ors v Say-Dee Pty Ltd (2007) 230 CLR 89, 150–2 [134]–[135].
Second, the only two references to Schmidt by the High Court concern standing. In CPT Custodian Pty Ltd v Commissioner of State Revenue, the Court stated:[56]
In Schmidt v Rosewood Trust Ltd, the Privy Council recently stressed that the right to seek the intervention of a court of equity to exercise its inherent authority to supervise and, if necessary, to intervene in the administration of trusts, ‘does not depend on entitlement to a fixed and transmissible beneficial interest’. In a sense, the Commissioner's submissions tend to prove too much.
[56](2005) 224 CLR 98, 110 [17] (citations omitted).
This passage in CPT Custodian concerns standing to apply for relief under the Court’s well recognised inherent jurisdiction over trusts. It says nothing about the broader aspects of the decision in Schmidt concerning the proprietary approach. Schmidt and CPT Custodian are both referred to for the same purpose in Kennon v Spry; Spry v Kennon.[57] Such passing references in this context, without express disapproval of O’Rourke v Darbishire, Re Londonderry’s Settlement or the Australian authority which has accepted those decisions, is not sufficient to displace the proprietary approach.
[57](2008) 238 CLR 366, 408 [125].
Third, the proprietary approach was confirmed by the Queensland Full Court in Tierney v King.[58] Matthews J (Kelly and Macrossan JJ agreeing) stated:[59]
There is a general rule that a cestui que trust has a proprietary interest in and a right, therefore, to inspect trust documents (O’Rourke v Darbishire [1920] AC 581 at p. 626; Re Fairbairn [1967] VR 633) …
[58][1983] 2 Qd R 580.
[59]Ibid 583 (citation in original).
Fourth, although some single judges in Australia have applied Schmidt, others have not. In Silkman v Shakespeare Haney Securities Limited,[60] Hammerschlag J followed Schmidt ‘[a]bsent clear appellate guidance’.[61] In Avanes v Marshall,[62] Gzell J followed Schmidt and said as follows:
… the approach in Schmidt should be adopted by Australian courts. The decision should not be regarded as abrogating … the trustee’s obligation to grant a beneficiary access to trust accounts. But when it comes to inspection of other documents there should no longer be an entitlement as of right to disclosure of any document. It should be for the court to determine to what extent information should be disclosed.
[60][2011] NSWSC 148.
[61]Ibid [27].
[62](2007) 68 NSWLR 595, 599.
In McDonald v Ellis,[63] Bryson AJ considered Avanes v Marshall but declined to follow Schmidt, as it would have been ‘a departure from clearly established opinion in New South Wales not to treat the claim to information as based on a proprietary interest’.[64]
[63](2007) 72 NSWLR 605.
[64]McDonald v Ellis (2007) 72 NSWLR 605, 619.
As appears above, the proprietary approach is subject to the exception that a trustee need not produce documents disclosing reasons for the exercise of discretionary powers. The parties accepted another exception: that, even on the proprietary approach, the trustee is not required to produce documents containing confidential information of third parties.[65] I accept that, ordinarily, a trustee is not obliged to produce documents imparted to him, her or it in confidence in connection with the administration of the trust.[66] This includes confidential written communications, and notes of oral communications, to and from beneficiaries or their representatives.[67]
[65]Plaintiff’s outline of submissions, 11 January 2016 [62(a)].
[66]Hartigan (1992) 29 NSWLR 405, 433–5 (Mahoney JA), 445–7 (Sheller JA).
[67]Ibid.
What documents should Mr Trumble produce for inspection and copying?
For the above reasons, I have concluded that it is not for a single judge to determine that, in light of the Privy Council’s decision in Schmidt, the proprietary approach no longer represents the law in Australia. This is especially so in a case such as the present, where, although some of the trusts are discretionary in nature, the order appointing Mr Trumble as trustee removed that discretion and made all distributions of trust assets subject to Court order. As appears above, the Court then proceeded to award relief on the basis of equality of interest between the Deutsch brothers, subject to adjustments for Erwin’s breaches of the terms of settlement. In substance but not in form, the discretionary trusts became akin to fixed trusts for the Deutsch brothers from the time of Mr Trumble’s appointment.
Applying the proprietary approach to the facts of this case, I conclude as follows.
First, on whatever view is accepted, it is now common ground that Mr Trumble should produce to Mr Deutsch:
(1)His trust ledgers recording the payments and receipts of the trusts. These have already been provided.
(2)His invoices to the trusts for professional services, including details itemising the hours charged each day and a narration of the work done during that day.
(3)Invoices from Deloitte Private to the trusts, together with its narration of the work performed and the number of hours worked on a day-by-day basis.
Second, Mr Deutsch must pay Mr Trumble’s costs of producing those documents for inspection, and any further trust documents which the Court orders be produced to him.
Third, adopting the proprietary approach, Mr Trumble must produce to Mr Deutsch, for inspection and copying, the trust documents requested by Mr Deutsch in paragraph 3 of his amended originating motion which have not already been provided:
(1) as to sub-paragraphs 3(b) and (c), while I accept that the invoices relating to Mr Trumble’s professional charges, and those of Deloitte Private, together comprise the overwhelming majority of expenses incurred by the trusts during Mr Trumble’s trusteeship, the other invoices are clearly trust documents and must also be produced;
(2) the reports, advices and instructions described in sub-paragraph 3(d) must also be provided.[68]
[68]O’Rourke v Darbishire [1920] AC 581, 626–7.
Fourth, I accept Mr Trumble’s evidence that, within his trusteeship, there were communications with third parties, especially Robert Deutsch, which he believes would be embarrassing to those third parties if they were to be disclosed to Erwin Deutsch or his advisors. On this basis, before producing documents to Mr Deutsch, Mr Trumble should be afforded the opportunity to review them for the purpose of identifying and excising or redacting documents which fall within the confidentiality exception discussed above. His costs of doing so must be paid by Mr Deutsch at the hourly rates specified in the Court’s orders appointing him as trustee of the trusts, including, for the avoidance of doubt, any increase in that hourly rate since he was appointed on 18 July 2012.
Fifth, in the first instance, Mr Trumble should produce to Mr Deutsch his invoices and the narrations described above, and the Deloitte Private invoices and narrations. The evidence disclosed that these are stored electronically and can be provided to Mr Deutsch at a modest cost. I accept, however, that Mr Trumble is entitled to extract the invoices and narrations, collate them in a proper form, and then review them for completeness before providing them to Mr Deutsch. As to the balance of the documents which have not yet been produced to Mr Deutsch, Mr Trumble should be afforded a reasonable time for his review, having regard to his other professional and personal commitments and responsibilities.
I turn to consider the terms on which Mr Deutsch should pay Mr Trumble for his review and production of trust documents.
When should Mr Deutsch pay Mr Trumble’s costs of review and production?
Mr Deutsch contends that Mr Trumble should first produce the documents to him and then make a claim for his costs of doing so by rendering an itemised bill of costs. Mr Trumble contends that, in all the circumstances, he should be permitted to make a reasonable estimate of his costs of review and production, and that Mr Deutsch should pay the amount of his estimated costs into court before he is required to commence the process of review and production of documents. For the following reasons, the course proposed by Mr Trumble should be preferred.
First, Mr Trumble should not be left in a position where, as a court-appointed trustee, he faces the risk of performing substantial work without proper reward. As noted, the remaining trust funds are not substantial and, in any event, there was no reason why Robert Deutsch should have his trust entitlement depleted by reason of Erwin Deutsch’s application, which he does not support.
Second, my various reasons for judgment in the original proceeding, my experience as the trial judge in the original proceeding, and Mr Deutsch’s frequent statements to me during the course of the original proceeding as to his lack of financial resources, combine to cause me to have substantial doubt that Mr Deutsch has the financial resources to pay Mr Trumble’s costs of review and production.
Conclusion
I will hear the parties as to the form of orders, and as to the costs of the proceeding.
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