J D & K J Zohs Properties Pty Ltd v Ferme
[2015] SASC 55
•7 April 2015
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
J D & K J ZOHS PROPERTIES PTY LTD v FERME & ANOR
[2015] SASC 55
Judgment of The Honourable Justice Stanley
7 April 2015
EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - LIABILITY FOR BREACH OF TRUST
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - ORDER FOR COSTS ON INDEMNITY BASIS
Claim by the executor of a deceased estate that a former executor indemnify her for losses suffered by the estate as a result of his breach of duty while acting as an executor of the estate.
The deceased died on 28 October 2006. The defendants, as the sole executors and trustees, obtained a grant of probate of the deceased’s will on 4 July 2007. The principal asset of the estate was two parcels of farming land. On 20 June 2014 the defendants entered into a contract for the sale of the land as vendors, to Jason and Kimberley Zohs as purchasers. On 4 July 2014 Mr and Mrs Zohs assigned their right, title and interest in the contract to the plaintiff by a Deed of Assignment. On 9 July 2014 the plaintiff executed a Memorandum of Transfer. The second defendant executed the Memorandum of Transfer but the first defendant failed to do so. When the first defendant failed to do so, the plaintiff instituted these proceedings on 7 August 2014. The plaintiff sought a declaration as to the validity and enforceability of the contract and orders for specific performance together with a claim for damages, interest and costs. On 4 September 2014 the Court made an order for specific performance of the contract and an order pursuant to s 40 of the Trustee Act 1936 (SA) appointing the second defendant to execute the Memorandum of Transfer on behalf of the first defendant. These orders were made with the consent and support of the second defendant. The Court ordered that there be a separate hearing of the plaintiff’s claim for damages. That claim was for losses by way of damages, interest and costs suffered as a result of the failure to settle earlier on the contract for the sale of the land.
On 22 October 2014 the second defendant compromised the plaintiff’s outstanding claims in an agreed amount of $55,000 paid from the estate to the plaintiff. On 24 October 2014 the Court ordered that the remaining claims for relief by the plaintiff against the defendants in this action be dismissed with no orders as to costs between the plaintiff and the defendant but that the action continue in relation to the relief sought by the second defendant against the first defendant. The relief sought is in the nature of an order that the first defendant pay the costs of and incidental to these proceedings of the second defendant on an indemnity basis or, in the alternative, on a solicitor/client basis, and an order that the first defendant indemnify the second defendant for the $55,000 paid to compromise the plaintiff’s claims.
Whether by failing to execute the Memorandum of Transfer the first defendant acted in breach of his duty as an executor of the estate. Whether this constituted a devastavit and rendered the first defendant liable to make good the loss thereby caused to the estate.
Held:
1. The failure of the first defendant to execute the Memorandum of Transfer was a breach of his duty as the executor of the deceased estate and constituted a devastavit (at [38]).
2. The first defendant has not discharged the onus he carries of proving that he acted honestly and reasonably in committing the devastavit. He has not established an entitlement to the benefit of s 56 of the Trustee Act 1936 (SA) (at [62]).
3. The settlement was in the best interests of the beneficiaries (at [55]).
4. The first defendant is liable to indemnify the second defendant for the payment of the $55,000 in addition to interest on that sum (at [58]).
5. The circumstances justify the Court making the unusual costs order sought by the second defendant that the first defendant pay her costs of the proceedings. Those costs should be paid on an indemnity basis (at [65]).
6. The first defendant is not entitled to receive his interest as beneficiary in the estate without first making good the loss he has caused to the estate (at [76]).
Trustee Act 1936 (SA) s 40, s 56, s 28; Supreme Court Civil Rules 2006 (SA) r 168, r 209; Land and Business (Sale and Conveyancing) Act 1994 (SA) s 7(1); Supreme Court Act 1935 (SA) s 40; Powers of Attorney Act 1998 (Qld) s 105(1); Corporations Act 2001 (Cth) s 1318(1), referred to.
Frost & Anor v Bovaird & Ors (2014) FCAFC 20; Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694; Bovaird v The Trustee of The Bankrupt Estate of Frost (2010) 118 ALD 263; Iliffe v Trafford [2003] WTLR 507; Armitage v Nurse [1998] Ch 242; Broughton v Broughton (1855) 5 De G M & G 160; Re Tankard [1942] Ch 69; Tebbs v Carpenter (1816) 1 Madd. 290; Williams, Mortimer and Sunnucks, Executors, Administrators and Probate (Sweet & Maxwell, 19th ed, 2008); Jones v Dunkel (1959) 101 CLR 298; Hasham v Zenab [1960] AC 316; Marks v Lilley [1959] 1 WLR 749; Oakacre Ltd v Claire Cleaners (Holdings) Ltd [1982] Ch 197; Vyse v Foster, Vyse and Vyse (1874) LR 7 HL 318; Re Mulholland’s Will Trusts [1949] 1 All ER 460; Horden v Horden [1910] ASC 465; Unity Insurance Brokers Pty Ltd v Rocco Pezzano (1998) 192 CLR 603; Johnson v Trotter; Estate of Trotter [2006] NSWSC 67; In Re Kay; Mosely v Kay [1897] 2 Ch 518; In Re Morish [1939] SASR 305; Craven-Sands v Koch (2000) 34 ASCR 341; Ede v Ede [2006] QSC 378; Solowij & Ors v Parish of St Michael & Ors (No 2) [2003] SASC 48; Cretazzo v Lombardi (1975) 13 SASR 4; In Re Dacre [1916] 1 Ch 344; The Estate of Tolley (Deceased) (1972) 5 SASR 466; RWG Management Ltd v Commissioner for Corporate Affairs & Anor [1985] VR 385; Jacubs v Rylance (1874) LR Eq 341; Irby v Irby (1858) 25 Beav 632; Doering v Doering (1889) 42 ChD 203; Cumming & Anor v Austin & Ors (1903) 28 VLR 622; Cherry v Boultbee (1839) 2 Keen 319; Cherry v Boultbee (1839) 41 ER 171; Turner v Turner (No 1) [1911] 1 Ch 716, considered.
WORDS AND PHRASES CONSIDERED/DEFINED
"devastavit"
J D & K J ZOHS PROPERTIES PTY LTD v FERME & ANOR
[2015] SASC 55Civil
STANLEY J:
Introduction
This is a claim by the executor of a deceased estate (“the second defendant”) that a former executor (“the first defendant”) indemnify her for losses suffered by the estate as a result of his breach of duty while acting as an executor of the estate.
Background
The deceased died on 28 October 2006. The defendants, as the sole executors and trustees, obtained a grant of probate of the deceased’s will on 4 July 2007. The will left the residuary estate to six beneficiaries, including the first defendant, in equal shares. The principal asset of the estate was two parcels of farming land. On 20 June 2014 the defendants as executors of the estate, entered into a contract for the sale of the land as vendors, to Jason and Kimberley Zohs as purchasers. The purchase price was $1.4 million. On 4 July 2014 Mr and Mrs Zohs assigned their right, title and interest in the contract to the plaintiff by a Deed of Assignment. On 9 July 2014 the plaintiff executed a Memorandum of Transfer. The second defendant executed the Memorandum of Transfer but the first defendant failed to do so. On 18 July 2014 the plaintiff, by letter from its solicitors, required the first defendant to execute the Memorandum of Transfer by 5 p.m. on 23 July 2014. A further demand to execute the transfer was made by letter of 30 July 2014. When the first defendant failed to do so, the plaintiff instituted these proceedings on 7 August 2014. The plaintiff sought a declaration as to the validity and enforceability of the contract and orders for specific performance together with a claim for damages, interest and costs. On 4 September 2014 the Court made an order for specific performance of the contract and an order pursuant to s 40 of the Trustee Act 1936 (SA) appointing the second defendant to execute the Memorandum of Transfer on behalf of the first defendant. These orders were made with the consent and support of the second defendant. The Court ordered that there be a separate hearing of the plaintiff’s claim for damages. That claim was for losses by way of damages, interest and costs suffered as a result of the failure to settle earlier on the contract for the sale of the land. Settlement of the sale of the land occurred on 23 September 2014.
On 3 October 2014 in separate proceedings between the defendants, the Court ordered that the grant of probate to the defendants be revoked with effect from 24 October 2014 and that a new grant of probate be issued to the second defendant only. That fresh grant of probate was issued to her on 3 November 2014. However, on 22 October 2014 the second defendant compromised the plaintiff’s outstanding claims in an agreed amount of $55,000 paid from the estate to the plaintiff. On 24 October 2014 the Court ordered that the remaining claims for relief by the plaintiff against the defendants in this action be dismissed with no orders as to costs between the plaintiff and the defendant but that the action continue in relation to the relief sought by the second defendant against the first defendant. The relief sought is in the nature of an order that the first defendant pay the costs of and incidental to the proceedings of the second defendant on an indemnity basis or, in the alternative, on a solicitor/client basis, and an order that the first defendant indemnify the second defendant for the $55,000 paid to compromise the plaintiff’s claims.
The basis of the second defendant’s claim is an allegation that, by failing to execute the Memorandum of Transfer, the first defendant acted in breach of his duty as an executor of the estate. This constituted a devastavit and rendered the first defendant liable to make good the loss thereby caused to the estate.
As I have observed, the first defendant is a residuary beneficiary of the estate. The second defendant seeks a declaration that the first defendant is not entitled to receive a distribution of his equal share of the residuary estate from the second defendant as the executor of the estate until such time as he pays into the estate the sum of $55,000 and interest thereon and the second defendant’s costs of action on an indemnity basis or alternatively on a solicitor/client basis. In lieu of such payment, a declaration is sought that the second defendant is entitled to calculate the first defendant’s share of the residuary estate and distribute the residuary estate to the other beneficiaries after setting off against his share of the estate the amount lost by his breach of duty.
The first defendant disputes that he is liable to make good the sums paid from the estate in compromise of the plaintiff’s claim or payment of costs and interest as sought, or that the second defendant is entitled to set off against his entitlement to a distribution from the residuary estate those amounts. He submits that there is no devastavit. In the alternative, he submits that even if there is, it is not causative of any loss or damage to the estate as the payment of $55,000 agreed by the second defendant was not reasonable. In the further alternative, he submits that, in any event, he should be relieved from any liability pursuant so s 56 of the Trustee Act 1936 (SA).
Devastavit
Devastavit is a Latin word meaning “he has laid waste”. In law it means a mismanagement of a deceased estate by the legal personal representative of the estate squandering or misapplying the assets in the estate.[1]
[1] Frost & Anor v Bovaird & Ors [2014] FCAFC 20 at [3], (2014) 223 FCR 275 at 277.
The responsibility of an executor is to duly administer and distribute the deceased’s estate in accordance with the terms of the deceased’s will. An executor owes duties to preserve the assets of an estate, deal properly with them, and to apply them in the due course of administration for the benefit of those interested in the estate.[2] An executor who breaches any of these duties is guilty of a devastavit and may be personally liable to make good the loss caused to the estate.
[2] Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 at 707.
Devastavit describes both an action in equity and a common law tort. In an administration suit in equity a creditor or legatee may bring an application for account on a wilful default basis against executors for parting with, or failing to get in, estate assets. From the outset, Chancery refused to permit recovery from executors without wilful default on their part being demonstrated. On the other hand, at common law, the position was different and it was accepted that a creditor or legatee could recover from executors who parted with, or failed to get in, estate assets without any fault being demonstrated on their part. In more recent times, the rules of equity have prevailed over the former common law position. The modern position is that an executor can only be liable for a devastavit in an administration suit in equity where an order for account on a wilful default basis is sought. Such an executor will also be liable at common law in an action on the case provided wilful default is shown.[3]
[3] Bovaird v The Trustee of The Bankrupt Estate of Frost [2010] FCA 1159 at [19] – [20], (2010) 118 ALD 263 at 7 – 8.
“Wilful default” occurs where the executor has acted or failed to act in circumstances which fall below the standards to be expected of a reasonably competent executor.[4] It means that the executor has been guilty of a want of ordinary prudence by failing to retain or take into his possession assets that he could with reasonable diligence have retained or obtained.[5] As an executor is a fiduciary, he owes a duty not to place himself in a position whereby his interests conflict with the interests of the estate.[6] If a person accepts the office of executor, he must perform that office and use due diligence in doing so.[7] He must not permit the estate to suffer loss by reason of his neglect or careless administration.[8] If an executor breaches his duty he may be ordered to account for the assets of the estate which, due to his breach, he had not received or had received but lost.[9]
[4] Iliffe v Trafford [2003] WTLR 507.
[5] Armitage v Nurse [1998] Ch 242 at 252.
[6] Broughton v Broughton (1855) 5 De G M & G 160 at 164.
[7] Re Tankard [1942] Ch 69.
[8] Tebbs v Carpenter (1816) 1 Madd. 290.
[9] Williams, Mortimer and Sunnucks, Executors, Administrators and Probate, (Sweet & Maxwell, 19th ed, 2008) [55.05].
Devastavit is an illustration of the general principle that a person under a fiduciary duty shall not place himself or herself in a position where his or her interest will, or even may, conflict with that duty. If interest and duty do conflict, duty must prevail over interest. If not, the person under the duty must give an account of the loss suffered by the estate or the profit made by the fiduciary as a result.
The second defendant’s claim
The basis of the second defendant’s claim against the first defendant is that the estate suffered the loss of $55,000 paid to the plaintiff in settlement of its claim for damages arising from the first defendant’s failure to execute the Memorandum of Transfer together with interest and costs. The second defendant alleges that this resulted from the first defendant placing himself in a position of conflict. The conflict is alleged to arise because the first defendant and his wife were parties to a Share-Farming Agreement with the deceased in respect of the farming land.
The Share-Farming Agreement was entered into on 26 May 2004. At the date of the deceased’s death, the first defendant and his wife farmed the land pursuant to the Share-Farming Agreement. The term of the Share-Farming Agreement was five years with a right of renewal for a further term of five years under the same terms and conditions. On 24 May 2009 the first defendant and his wife gave notice in writing to the executors that they elected to exercise their option to extend the period of the Share-Farming Agreement for a further five years. Accordingly, the agreement as extended was to expire on 26 May 2014. Clause 11 of the Share Farming Agreement provided:
‘If at any time during the term of this agreement or the renewed term the Owner shall be desirous of selling the land which is the subject of this agreement, the Owner shall:
(a)Give the Farmers notice of the Owner’s intention to sell prior to Owner placing the land upon the open market or inviting offers privately or publicly for the purchase of the land; and
(b)Offer to sell the land to the Farmers or any of their descendants at the same price and upon the same terms and conditions as the Owner is prepared to sell to anyone else.’
Clause 12 of the Share Farming Agreement provided:
‘Upon the death of the Owner during the terms of this agreement or the extension of the Farmers shall be entitled to purchase the land in accordance with the provisions of this clause.
12.1The Farmers shall exercise the Farmer’s entitlement by serving upon the heirs or executors of the Owner notice in writing of the Farmer’s intention to purchase the demised premises within two months of the service of the notice.
12.2The purchase shall be upon the following terms and conditions:
(a) the purchase price shall be the price agreed between the parties or in default of agreement as shall be fixed, at the equal cost of the parties by a valuer appointed by the President for the time being of the Australian Institute of Valuers and Land Economists (South Australian Division) and the decision of such valuer acting as an expert, not as an arbitrator, shall be final and binding on the parties;
(b) the purchase price shall be paid upon settlement which shall be within two months of the date of the notice;
(c) in all other respects the conditions of purchase shall be as agreed between the parties and failing agreement shall be the usual conditions for the sale of a property of the nature of the land.
12.3Any purchase in accordance with this covenant shall at all times be subject to and conditional upon:
(a) the Owner obtaining any and all necessary consents as may be required by the Owner to proceed with the purchase;
(b) the Farmers obtaining all and any necessary consents as may be required by the Farmers to proceed with the purchase;
(c) the demised premises being able to be used for the purpose required by the Farmer; and
(d) the granting of any and all permits, consents, liceneces and approvals necessary in relation thereto.’
So much is common ground between the parties.
The second defendant alleges that the first defendant failed to execute the Memorandum of Transfer because he was asserting rights in relation to the land under the Share-Farming Agreement. In doing so, she alleges he was in breach of his duty as executor. The first defendant submits that contractually he was not under any obligation to execute the Memorandum of Transfer. In any event, he did not refuse to execute the Memorandum of Transfer. His failure to do so was due to his ill health. Accordingly, he contends his conduct did not constitute a devastavit.
In any event, he says his conduct was not the cause of any loss or damage to the estate. Finally, in the alternative, he submits that in the event his conduct did constitute a devastavit, he acted honestly and reasonably and ought fairly to be excused for the breach pursuant to s 56 of the Trustee Act.
The evidence at trial
The trial proceeded on affidavits pursuant to 6SCR 168 and 6SCR 209. The Court received evidence from the second defendant by way of the following affidavits:
·Affidavit of Kimberley Jane Zohs sworn on 7 August 2014[10]
·Affidavit of Mary-Lee Hutchins sworn on 7 August 2014
·Affidavit of Henry Ringwood sworn on 20 August 2014
·Affidavit of Henry Ringwood sworn on 29 August 2014
·Affidavit of Barnaby Hugh Grant sworn on 13 August 2014
·Affidavit of Mary-Lee Hutchins sworn on 2 September 2014
·Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014
·Affidavit of Henry Ringwood sworn on 18 December 2014
·Affidavit of Jennette Heather Ferme sworn on 2 September 2014[11]
·Affidavit of Travis Leon Le Riche sworn on 19 February 2015
[10] Only the first three paragraphs of the Exhibit KJZ 6 to the affidavit were admitted into evidence.
[11] This affidavit was filed in the separate proceedings between the defendants in Ferme v Crawford (SCCIV-14-1203).
No affidavits have been filed by or on behalf of the first defendant.
Findings of fact
I make the following findings:
By letter dated 4 March 2014 the first defendant wrote to the solicitor acting for the executors purporting to exercise the right conferred by clause 12 of the Share-Farming Agreement to purchase part of the land the subject of the agreement, namely, Section 258 in the Hundred of Koolunga. The option was expressed to be subject to finance. The letter further proposed that the remainder of the land be sold by expression of interest.[12]
[12] Letter from Murray Ferme to the attention of Paul Boylan dated 4 March 2014.
On 26 March 2014 the defendants were advised by their solicitor that the entitlement to purchase the land given by clause 12 of the agreement applied to the whole of the land and not to part of the land. Upon receipt of this advice the defendants authorised their solicitors to offer the land for sale.[13]
[13] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 at [33] – [34].
Item 15 of the Schedule to the Land Contract provided that the settlement day was 15 June 2014.[14]
[14] Affidavit of Kimberley Jane Zohs sworn on 7 August 2014 (Exhibit KJZ 3).
On 21 June 2014 the first defendant and his wife retained solicitors to act for them in connection with the Share-Farming Agreement.[15]
[15] Affidavit of Jennette Heather Ferme sworn on 2 September 2014 at [36].
On or about 23 June 2014 solicitors for the purchasers advised the solicitors for the executors that it would take the purchasers more than 10 days to put their finance in place and be ready for settlement under the contract.[16]
[16] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 (Exhibit RJC 7).
By letter dated 24 June 2014 the solicitors for the first defendant and his wife wrote to the solicitors acting for the executors advising that they were seeking counsel’s opinion in relation to their rights to enforce the provisions of the Share-Farming Agreement conferring an option to purchase the land. The letter puts the executors on notice not to settle on the contract for sale of the land until such time as they had obtained counsel’s opinion. The letter warns that in the absence of agreement on the part of the executors not to settle on the contract until such time as counsel’s advice has been obtained, an application would be made to obtain an injunction restraining the settlement.[17] I am satisfied this letter was sent on the instructions of the first defendant. I infer as much from the fact that the solicitors for the executors sent a copy of the 24 June 2014 letter to the first defendant by email that same day and sought instructions. The first defendant did not take any steps to advise the executors’ solicitors that the letter was not sent on his instructions. On the face of the letter it plainly was.[18]
[17] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 (Exhibit RJC 6 at [13]).
[18] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 (Exhibit RJC 6 at [11] - [12]).
On 9 July 2014 the purchasers executed the Memorandum of Transfer. The solicitors for the purchasers presented a copy of the executed Memorandum of Transfer to the executors’ solicitors.[19]
[19] Email from David Rowe to Paul Boylan dated 9 July 2014.
By email dated 9 July 2014 the solicitors for the purchasers advised the solicitors for the executors that given the failure to settle by the settlement date in the contract, namely, 15 June 2014, the purchasers proposed a new settlement date of 15 July 2014 and sought confirmation that the vendor was willing to settle under the contract on that date.[20]
[20] Email from David Rowe to Paul Boylan dated 9 July 2014.
On 11 July 2014 the solicitors for the executors sent an email to the first defendant, via his wife’s email address, which advised that the Memorandum of Transfer executed by the purchasers had been received and requested the defendants make an appointment to execute the transfer.[21] The first defendant failed to respond to this email.
[21] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 (Exhibit RJC 8).
On 18 July 2014 the solicitors for the purchasers wrote to the solicitors for the executors requiring the first defendant to execute the Memorandum of Transfer by 23 July 2014 failing which proceedings would be instituted seeking specific performance of the contract for sale of the land and claiming damages and costs from the executors.[22] On 21 July 2014 the executors’ solicitor forwarded the letter of 18 July 2014 to the first defendant.[23] I infer from the contents of the affidavit sworn by the first defendant’s wife that the letter was received by the first defendant. By letter dated 24 July 2014 the solicitors for the first defendant and his wife wrote to the purchasers’ solicitors advising that they were currently considering advice from counsel and asking that the purchasers desist from filing proceedings until such time as they had obtained their clients’ instructions.[24] I infer that the letter was written on the instructions on the first defendant. The first defendant did not provide any instructions to the executors’ solicitors.
[22] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 (Exhibit RJC 9 at [17]).
[23] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 (Exhibit RJC 9 at [16]).
[24] Affidavit of Kimberley Jane Zohs sworn on 7 August 2014 (Exhibit KJZ 11).
In response, the solicitors for the purchasers sent an email to the solicitors for the first defendant and his wife, and to the solicitors for the executors. That email advised that unless the solicitors for the executors were in a position to confirm to the purchasers’ solicitors by 5 p.m. on 25 July 2014 that they were in possession of a fully executed Memorandum of Transfer, they were instructed to issue proceedings to enforce the contract for sale of the land.[25] I infer the first defendant received a copy of this email. I find he took no action in response.
[25] Affidavit of Kimberley Jane Zohs sworn on 7 August 2014 (Exhibit KJZ 12).
Sometime after 7:05 p.m. on 25 July 2014 the first defendant and his wife received from their solicitors a copy of an email from the solicitors for the purchaser dated 25 July 2014. It noted that the first defendant had not executed the transfer, and advised that they had asked the solicitors for the executors to obtain instructions whether they would accept service of the proceedings the purchasers intended to institute.[26] Within two hours, the first defendant suffered an angina attack and was taken to the Crystal Brook Hospital. He remained in hospital overnight.
[26] Affidavit of Jennette Heather Ferme sworn on 2 September 2014 (Exhibit JHF 8).
On 26 July 2014 the first defendant’s wife instructed their solicitors to write to the solicitors for the executors and the solicitors for the purchasers. An email was sent that same day notifying them that the solicitors did not have instructions from their client to comply with the deadline imposed because the first defendant was in hospital with a serious heart condition and advising that they would not be in a position to take further instructions until his health was stable.[27]
[27] Affidavit of Jennette Heather Ferme sworn on 2 September 2014 (Exhibit JHF 9).
The purchasers issued proceedings in this Court on 7 August 2014. The first defendant became aware of the proceedings no later than 8 August 2014.[28] The first defendant took no action in relation to the proceedings until 20 October 2014 when a Notice of Address for Service was filed in Court.
[28] Affidavit of Rebecca Jennette Crawford sworn on 22 October 2014 at [55].
On 21 August 2014 solicitors for the first defendant and his wife sent a letter to the purchasers’ solicitors advising that the first defendant would consent to an order that he sign the Memorandum of Transfer.[29]
[29] Affidavit of Jennette Heather Ferme sworn on 2 September 2014 (Exhibit JHF 12).
On 22 August 2014, however, the first defendant’s wife sent an email to the solicitors for the executors advising that the first defendant was not well enough to sign the transfer.[30] She said: “Please get and [sic] order today and he will sign it when his health allows.”
[30] Affidavit of Jennette Heather Ferme sworn on 2 September 2014 (Exhibit JHF 13).
On 3 September 2014 the first defendant instituted proceedings to have himself removed as an executor of the deceased’s estate.
Breach of duty
In my view, the failure of the first defendant to execute the Memorandum of Transfer was a breach of his duty as the executor of the deceased estate and constituted a devastavit.
Once the contract for the sale of land had been executed by the defendants, as executors of the estate, they were under an obligation to do all things necessary to effect the timely settlement of the sale of the land in order to bring into the estate the purchase price of $1.4 million. At all times the purchaser and the second defendant, as executor, were willing and ready to proceed to settlement under the contract upon a date appointed for settlement under the contract by the purchaser in conformity with the provisions of the contract. The due and faithful discharge of his duty as an executor obliged the first defendant, as the other executor, to do all acts and things required of him under the contract as the vendor in order to effect settlement.
On the basis of the evidence, I am satisfied that his failure to do so was intentional and deliberate. I am not prepared to find that his failure to execute the Memorandum of Transfer was due to ill health except during the two days he was hospitalised on 25 and 26 July 2014.
The first defendant has conspicuously failed to put on an affidavit deposing to the proposition that his ill health prevented him from discharging his duty as an executor by executing the Memorandum of Transfer.
There is no evidence to show that the first defendant could not have executed the Memorandum of Transfer for medical reasons during the whole of the period subsequent to the transfer being tendered for execution by the vendors and until the institution of the proceedings. Further, there is no evidence that the first defendant is incapacitated from deposing to any matters relevant by way of affidavit in these proceedings. This gives rise to two inferences. First, that the first defendant prefers not to expose himself by giving evidence in this action. Secondly, that the Court is entitled to infer that had the first defendant given evidence in the proceedings, that evidence would not have assisted the first defendant’s case.[31]
[31] Jones v Dunkel [1959] HCA 9, (1959) 101 CLR 298 at 308, 312 and 320 – 321.
In the circumstances I find that the failure of the first defendant to execute the Memorandum of Transfer in that period, with the exception of the 24-48 hour period in which he was hospitalised on 25 and 26 July 2014, resulted from a deliberate decision on his part to prefer his own private interests to the discharge of his obligations as an executor of the deceased’s estate. That decision was based on his intention to pursue his claims in relation to the land under the Share-Farming Agreement as outlined in the letter of 24 June 2014.
I reject the first defendant’s contention that he did not breach his duty because he was under no contractual obligation to execute the Memorandum of Transfer. The foundation for this submission is that clause 8 of the contract provided, inter alia, that settlement shall take place on the settlement day specified in Item 15 and that the vendor shall execute and deliver to the purchaser the Memorandum of Transfer upon payment by the purchaser of all moneys required to be paid by the purchaser at or before settlement. Item 15 of the contract provided the settlement day was 15 June 2014 but the contract was only executed by the vendors on 20 June 2014. Pursuant to s 7(1) of the Land and Business (Sale and Conveyancing) Act 1994 (SA) the Form 1 was required to be served by the vendor upon the purchaser at least 10 clear days before the date of settlement under the contract. The vendor served the Form 1 in relation to the contract upon the purchaser on 24 June 2014. While no other settlement day was agreed between the vendors and the purchaser, the purchaser, recognising that the settlement date proposed in the contract antedated the execution of the contract, and given the problem with the service of the Form 1, proposed a new settlement date of 15 July 2014 by email dated 9 July 2014 from its solicitors. The failure to agree a new settlement date arose from the default of the first defendant. The first defendant cannot rely upon his own default in that regard to excuse his breach of duty. He was not acting with clean hands. Further, I reject the submission that the purchaser did not pay all moneys required by it to be paid pursuant to the contract prior to the institution of these proceedings. The evidence does not justify such a finding.
In any event, the issue here is breach of duty not breach of contract. The relevant default by the first defendant was his failure to do all things necessary and reasonable to complete the sale of the land so as to get in the assets of the estate, in accordance with his duty as executor to duly administer the deceased’s estate. In any event, equity will order specific performance wherever a breach of contract has occurred or there is in the circumstances a sufficient likelihood of the occurrence of a breach to render it desirable that the interests of a party to the contract should be protected.[32] In this case, the Court ultimately made an order for specific performance.
[32] Marks v Lilley [1959] 1 WLR 749; Hasham v Zenab [1960] AC 316; Oakacre Ltd v Claire Cleaners (Holdings) Ltd [1982] Ch 197.
Further, I reject the submission that there is no breach of duty on the part of the first defendant in failing to execute the Memorandum of Transfer while he and his wife were awaiting counsel’s advice in relation to their contractual right to exercise an option to purchase the land. The basis of this submission is the proposition that there is no breach of duty in an executor exercising a right of pre-emption in a contract entered into prior to the existence of a subsequent fiduciary relationship. This is an illustration of the exception to the general principle that no-one who has fiduciary duties is allowed to enter into engagements in which he has, or can have, a personal interest conflicting with the interests of those he is bound to protect. That exception is where a testator, with knowledge of the facts, imposes on an executor a duty which is inconsistent with a pre-existing interest which he or she has in another capacity.[33] The first defendant sought to rely upon the exception as it was considered in Re Mulholland’s Will Trusts.[34] In my view, that case is distinguishable.
[33] Vyse v Foster, Vyse and Vyse (1874) LR 7 HL 318; Horden v Horden [1910] ASC 465; Re Mulholland’s Will Trusts [1949] 1 All ER 460; Mordecai v Mordecai (1988) 12 NSWLR 58 at 66 – 67.
[34] [1949] 1 All ER 460.
In Re Mulholland’s Will Trusts a testator entered into a lease agreement with a bank which conferred an option to purchase the leased premises under certain conditions. Subsequently the testator made a will appointing the bank and his widow as executors and trustees. Subsequent to the testator’s death the bank exercised the option to purchase and the property was conveyed to the bank by the bank and the widow as executors. The beneficiaries under the will sought to have the conveyance set aside as a breach of duty. Wynn-Parry J held that there was no breach of duty and the conveyance stood. The Court found that the only contract between the parties was the lease agreement which pre-existed the imposition of fiduciary obligations on the bank by its appointment as the testator’s executor and trustee. The notice exercising the option did not lead to the creation of any fresh contractual relationship; therefore the only contractual right was created before the fiduciary relationship arose. The Court held that where a contract has been brought into existence before a fiduciary relationship, a trustee is not precluded by the subsequent fiduciary relationship from asserting rights under the pre-existing contract.
While in this case the Share-Farming Agreement was entered into before the appointment of the first defendant as the executor of the deceased’s estate as in Re Mulholland’s Will Trusts, the significant distinction in this case is that the first defendant, as the executor of the deceased’s estate, subsequently entered into a contract for the sale of the estate’s property. Once he did so, he was under an obligation to do all things necessary to perform that contract in the interests of the beneficiaries of the estate. The breach of duty in this case does not arise from the purported exercise of the contractual option to purchase but from the failure to do all things necessary and reasonable to perform the contract for the sale of land once he had executed that contract in his capacity as executor of the estate.
Causation
The first defendant submits that his conduct did not cause the estate to suffer any loss. He contends that the second defendant’s decision to compromise the plaintiff’s claim by payment of the sum of $55,000 was not reasonable in the circumstances. The first defendant submits the compromise was not reasonable because the second defendant failed to consider: the objective probability of the plaintiff obtaining an order for costs on a particular scale; the lack of evidence of any particular work having been done giving rise to an entitlement to costs; and the basis of the liability of the defendants for the losses allegedly suffered by the purchaser, including issues of causation and quantum.
It is for the second defendant to prove that the sum paid in settlement was reasonable. The test of reasonableness is objective. Whether the settlement was reasonable must be judged by reference to the material available to the second defendant at the time the compromise was reached.[35] Whether a compromise of a claim is reasonable will almost always require consideration of the chances of the parties succeeding in their respective claims or defences. That prediction of likely outcomes must always be imperfect and imprecise. In Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd Hayne J said:[36]
[T]hat is why the compromise of a claim, which is a monetary claim that will succeed entirely or fail entirely, will usually fasten upon a figure that is less than would be recovered if the claim were to succeed and why it is that there will be a range of figures within which the reasonable observer may conclude that settlement of the claim would be reasonable.
[35] Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38 at [129] – [130], (1998) 192 CLR 603 at 653.
[36] Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38 at [132], (1998) 192 CLR 603 at 653 – 654.
In my view, the compromise reached was reasonable.
The compromise was reached on 15 October 2014 when the second defendant accepted the plaintiff’s offer to settle for the sum of $55,000. The settlement was in full satisfaction of the plaintiff’s claim for damages, interest and costs arising from the failure of the vendor to settle under the contract for the sale of the land and the consequent action for enforcement of the contract by way of an order for specific performance.
As at 26 September 2014 the purchaser’s legal costs were $36,000, comprising solicitor’s fees of $18,860, counsel fees of $14,850 and a filing fee of $2,320. The solicitors anticipated at that date that if the matter was to resolve within seven days by acceptance of the settlement offer of $55,000, that the additional costs incurred would be no more than $4,000. In fact, the offer was not accepted for a further 19 days.
The purchaser was claiming damages for its losses in a range of $28,000 to $38,000. The particulars of that claim were:
1Loss of yield ($20,000 - $30,000). The claim was based on the uncertainty surrounding settlement which caused the purchaser to undertake less than optimal spraying resulting in a drop in yield, the full extent of which was not then known.
2Loss of profit ($2,150). It was claimed that the same uncertainty also caused the purchaser to forward contract less of the crops’ yield than usual. The purchaser forward contracted 200 tonne of wheat only at a price of $284.50 per tonne. The purchaser’s usual practice would have been to forward contract 250 tonne of each of barley and wheat. They would have expected to forward contract the wheat at the same price as the barley. At the time the AWB price for barley and wheat at the Crystal Brook silos was $241.40 per tonne. The loss of profit suffered as a result of not forward contracting 250 tonne of wheat was $2,155.
3Travel expenses and loss of income ($2,040). The Zohs were required to travel from Kingston SE to Adelaide to provide instructions to their solicitors and to swear an affidavit filed in the proceedings. There is a claim of $882 for travelling 1,176 kilometres at a rate of 75 cents per kilometre. The visits to Adelaide also resulted in a loss of income for the Zohs. They claimed one day for Jason Zohs at $500 and two days for Kimberley Zohs at $330 per day.
4Agistment of sheep ($1,400). The Zohs had agisted 280 lambs at 50 cents per head per week (for 10 weeks) due to not having access to the property.
5Lost rental of homestead ($1,200). The Zohs had intended to rent the homestead at $120 per week. They claimed that loss for 10 weeks.
6Costs of cartage of water for spraying ($450). As the purchaser was unable to take possession of the property until 23 September 2014, it had to cart water for spraying from a nearby property. The nearby property was approximately 10 kilometres away. The carting involved approximately 30 trips. The claim was based on a rate of 75 cents per kilometre.
7Miscellaneous other losses (not expected to exceed $1,000). Upon entry to the homestead it appeared that an air conditioner had been removed and a screen door had to have a barrel replaced.
The evidence does not disclose whether, as at 15 October 2014 when the second defendant accepted the offer and compromised the claim, she was in possession of any further material beyond the letter of 26 September 2014 from the purchaser’s solicitors setting out the basis of its claim for costs and damages and offering to settle in the sum of $55,000. Nonetheless, the Court had already made an order for specific performance of the contract. There were reasonable prospects that the Court would order the defendants to pay the purchaser’s costs on an indemnity basis in the circumstances of the case where the defendants had failed to settle on the contract without any proper basis and where they were on notice prior to the institution of the proceedings that costs would be claimed on an indemnity basis. Accordingly, there was a reasonable prospect that the defendants would be liable for costs in a sum approximating $40,000. While the merits of the claim for damages was harder to assess, as at 15 October 2014 the second defendant was facing a claim for damages in a range of $28,000 to $38,000. The particulars of the claim set out an arguable case for loss and damage resulting from the failure to settle on the contract for sale. It is likely that considerable further legal costs would have been incurred to investigate the strength of the purchaser’s claim for damages. Having regard to the further expense that investigating the claim would have required and the fact that the compromise involved a sum of only $15,000 by way of damages and interest in addition to the likely exposure to costs, I am satisfied that the settlement was reasonable. I am satisfied that the settlement was in the best interests of the beneficiaries. It avoided the potential for further loss by way of damages, interest and costs to the deceased’s estate.
In this context I note that prior to compromising the purchaser’s claim, the second defendant by its solicitors wrote to the first defendant’s solicitors a letter dated 7 October 2014 setting out her intention to settle in the sum of $55,000 in full satisfaction of the purchaser’s claim for costs, damages and interest. The first defendant’s solicitors replied by letter dated 14 October 2014. In that letter there is no suggestion that the proposed settlement is not reasonable.
There can be no dispute as to the power of the second defendant as executor to settle the plaintiff’s further claims, and to do so without the concurrence of the first defendant. As to the former proposition, s 28 of the Trustee Act confers power on an executor to settle or compromise any claim on an estate on any evidence that the executor thinks sufficient. As to the latter proposition, in Johnson v Trotter; Estate of Trotter[37] White J said:[38]
… It is well settled that one of several personal representatives can act separately from the others, and bind them and the estate in so doing. (Harrison Jones and Devlin Limited v Union Bank of Australia (1910) 11 CLR 492 at 508, 516, 520). In that case, Isaacs J said (at 516, 520):
“When it is said that co-executors are to be regarded as an individual person, it is not meant that all must unite in the performance of each act, but that their official personality is not divisible or distinguishable, and that they have individually and collectively all the rights and duties of the office they undertake”. (At 516).
and
“… the law makes the distinction that each has, by virtue of his office, and therefore so long as that office continues, and by reason of his personal representation of the testator, such an interest authority, and power, as enables him to deal with the whole estate, for the purpose of the administration”.
[37] [2006] NSWSC 67.
[38] [2006] NSWSC 67 at [20].
For these reasons, I find that the payment of the settlement sum of $55,000 was caused by the first defendant’s devastavit. The second defendant paid the purchaser $55,000 in accordance with the terms of the compromise on 22 October 2014. It follows that the first defendant is liable to indemnify the second defendant for the payment of the $55,000 in addition to interest on that sum calculated from 22 October 2014.
Section 56 of the Trustee Act 1936 (SA)
The first defendant submits that he should be relieved of any liability for the devastavit pursuant to s 56 of the Trustee Act. Section 56 provides:
If it appears to the Supreme Court—
(a) that a trustee is, or may be, personally liable for any breach of trust (whether the transaction alleged to be a breach of trust occurred before or after the passing of this Act); but
(b) that the trustee has acted honestly and reasonably and ought fairly to be excused for the breach of trust, and for omitting to obtain the directions of the said court in the matter in which he has committed such breach,
then the said court may relieve the trustee, either wholly or partly, from personal liability for the breach of trust.
Section 56 confers power on the Court to excuse any breach of trust where the trustee has acted honestly and reasonably and ought fairly to be excused for the breach. The provision can apply to a representative who has committed a devastavit.[39]The burden of proving that the trustee acted honestly and reasonably in the matter is on the applicant for relief.[40] Once that has been established, it is for the Court to decide whether the trustee ought fairly to be excused for the breach of trust committed. Each case depends on its own circumstances.[41] The Court has a wide discretion in matters of this kind and must look to the whole circumstances in which the breach took place. The Court should not be hard on a trustee who has tried to act honestly but it must not encourage laxity of dealings.[42]
[39] In Re Kay; Mosely v Kay [1897] 2 Ch 518 at 521.
[40] In Re Morish [1939] SASR 305 at 319.
[41] In Re Morish [1939] SASR 305 at 319.
[42] Craven-Sands v Koch [2000] NSWSC 374 at [188], (2000) 34 ACSR 341 at 368; Ede v Ede [2006] QSC 378 at [38].
In Ede v Ede[43] Muir J (as he then was) considered a cognate provision, s 105(1) of the Powers of Attorney Act 1998 (Qld). He noted that the meaning of “honestly” in s 1318(1) of the Corporations Act 2001 (Cth), and in its analogues, has been equated with absence of moral turpitude.[44] He said:[45]
Whilst I accept that acting in conscious disregard of the interests of a person to whom fiduciary duties are owed will normally, if not invariably, constitute dishonesty or moral turpitude, I doubt that consciousness of wrongdoing is a necessary prerequisite to a finding of dishonesty. For example, in Re Second East Dulwich 145th Starr-Bowkett Building Society, Kekewich J, with reference to legislation excusing trustees for breach of duty where they acted “honestly and reasonably”, observed:
“In the one sense a trustee is honest if he has not done anything dishonest … But in another sense he is not honest. It seems to me that a man who accepts such a trusteeship, and does nothing, swallows wholesale what is said by his co-trustee, never asks for explanation, and accepts flimsy explanation, is dishonest.”
[Citation omitted].
[43] [2006] QSC 378.
[44] [2006] QSC 378 at [27].
[45] [2006] QSC 378 at [28].
In my view, the first defendant has not discharged the onus he carries of proving that he acted honestly and reasonably in committing the devastavit. He has not seen fit to put on an affidavit explaining his conduct. On the face of it he acted in breach of trust in preferring his own interests over those to whom he owed a fiduciary duty. He has not established an entitlement to the benefit of s 56 of the Trustee Act.
Costs
The second defendant seeks an order that the first defendant pay her costs of the proceedings.
The claim is unusual. There has been no order as to costs as between the plaintiff and the defendants. If the defendants had been ordered to pay the plaintiff’s costs, such liability would have been joint and several. No authority is cited by the second defendant to support an order that the first defendant meet her costs where both parties have been unsuccessful, let alone in circumstances where the second defendant has not been held liable to pay the successful party’s costs. Yet the only fetter on the discretion conferred by s 40 of the Supreme Court Act 1935 (SA) with regard to costs is that the discretion must be exercised judicially. As was said in Solowij & Ors v Parish of St Michael & Ors (No. 2)[46] by Williams J, there is only one immutable rule in relation to costs and that is that there are no immutable rules. It cannot be doubted that the Court has the power to order a successful party to pay the costs of an unsuccessful party in whole or in part.[47] In my view there is no impediment in principle to an order being made as sought by the second defendant.
[46] [2003] SASC 48.
[47] Cretazzo v Lombardi (1975) 13 SASR 4 at 11 – 12.
In my view the circumstances warrant the making of such an order. The second defendant was acting in a representative capacity as the executor of the deceased estate. She is entitled to be indemnified by the estate in relation to her costs of the proceedings. If the order she has sought is not made, the costs she has incurred will be visited upon the estate and the beneficiaries will suffer a loss attributable to the first defendant’s breach of duty. These circumstances justify the Court making the unusual costs order sought by the second defendant. Given the basis upon which I find the order for costs is justified, I consider that those costs should be paid on an indemnity basis so as to fully protect the estate.
The position of the first defendant as a beneficiary of the estate
The first defendant is a beneficiary of the deceased’s estate. He has a one-sixth interest in the residuary estate.
The second defendant submits that the first defendant is not entitled to receive his interest as beneficiary in the estate without first making good the loss he has caused to the estate. She submits that she is entitled to set-off against the first defendant’s interest in the estate the moneys which he must pay to the estate to make good that loss.
A long series of authorities support the proposition that a defaulting trustee cannot claim a share in an estate unless and until he or she has made good the default.[48]
[48] In Re Dacre [1916] 1 Ch 344 at 346 – 347.
In The Estate of Tolley (Deceased)[49] Walters J said:[50]
In considering the case of a defaulting trustee-beneficiary, it is plain that if a trustee who is also a beneficiary commits a breach of trust, the other beneficiaries are entitled to a charge upon his beneficial interest in order to secure their claims against him for breach of trust. And he will not be allowed to receive any part of the trust estate to which he is entitled until he has made good his default. In other words, he can take no share out of the trust estate without making good to that estate the amount which he has misappropriated out of it.
[49] (1972) 5 SASR 466.
[50] (1972) 5 SASR 466 at 472.
The principle is explained in RWG Management Ltd v Commissioner for Corporate Affairs & Anor[51] by Brooking J as follows:[52]
[T]he rule that a defaulting trustee cannot claim a share in the estate unless and until he has made good his default is founded on the principle that where there is an aggregate fund in which the trustee is beneficially interested and to which he owes something, he must be taken to have paid himself that amount on account of his shares.
[51] [1985] VR 385.
[52] [1985] VR 385 at 398.
A defaulting executor or trustee who causes loss to a trust estate is treated as having received by anticipation any amount to which the executor or trustee is entitled as beneficiary of that trust estate to the extent of the dollar value of the loss or damage the defaulting executor or trustee has caused.[53]
[53] In Re Dacre [1916] 1 Ch 344; Jacubs v Rylance (1874) LR 17 Eq 341; Irby v Irby (1858) 25 Beav. 632; Doering v Doering (1889) 42 Ch D 203; Cumming & Anor v Austin & Ors (1903) 28 VLR 622.
Whenever a person seeks equity in respect of a fund, but owes money to that fund, the debt to the fund must either first be paid or an accounting had. This is described as the rule in Cherry v Boultbee.[54] The rule is based on the principle that it would be inequitable to permit a claimant to compete against others who are entitled to share in the fund until the fund has been fully constituted by getting in the asset that the claimant’s debt represents.
[54] (1839) 2 Keen 319 affirmed on appeal (1839) 41 ER 171.
In Turner v Turner (No 1)[55] Cozens-Hardy MR explained the principle as follows:[56]
[I] think that the more logical and correct mode of explaining that doctrine is this: You, the debtor, have in your hands part of the assets of the testator and you cannot claim any part of the assets of the testator, out of which of course your legacy must be paid, without bringing into the estate that portion which is now in your pocket; or, in other words, your legacy must be treated as paid pro tanto out of the assets of the testator which you have in your pocket.
[55] [1911] 1 Ch 716.
[56] [1911] 1 Ch 716 at 719.
The application of these principles results in a liability on the part of the first defendant to make good the losses suffered by the deceased’s estate resulting from his devastavit.
Those losses are constituted by the sum of $55,000 paid by way of compromise and interest calculated thereon from 22 October 2014 and the second defendant’s costs of these proceedings on an indemnity basis.
Conclusion
I would make the following declarations:
1.The first defendant is not entitled to receive distribution of his equal share of the residuary estate of Mavis Jean Smart deceased from the second defendant as executor of the estate until such time as the first defendant pays into the estate, by payment to the second defendant as executor of the estate:
1.1 the sum of $55,000 plus interest thereon from 22 October 2014; and
1.2 the second defendant’s legal costs of the proceedings on an indemnity basis.
2.In lieu of the first defendant paying into the estate by payment to the second defendant as executor of the estate the sums referred to in paragraph 1.1 and 1.2 above, the second defendant is at liberty to calculate the first defendant’s share of the residuary estate and distribute the residuary estate to the other residuary beneficiaries on the footing that the sums referred to in paragraph 1.1 and 1.2 above are set off against the share of the residuary estate that the first defendant otherwise would be entitled to receive.
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