Kaptsis v Kaptsis
[2011] SASC 47
•7 April 2011
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
KAPTSIS v KAPTSIS
[2011] SASC 47
Reasons of Judge Withers a Master of the Supreme Court
7 April 2011
PROCEDURE
Action of account - wilful default.
Supreme Court Rules 2006 (SA) r 251, referred to.
McLauchlan & Anor v Prince & Anor [2001] WASC 43; Juul v Northey [2010] NSWCA 211; On Equity Young, Croft, Smith (2009); Williams, Mortimer and Sunnucks on Executors, Administrators and Probate 19th ed (2008), considered.
KAPTSIS v KAPTSIS
[2011] SASC 47
JUDGE WITHERS. The plaintiff initiated this action on 11 November 2009 and sought that the defendant provide a full account of his administration of the estate of Angelo Kaptsis, deceased. The defendant is the only brother of the deceased. The plaintiff sought the following orders:
1The defendant do provide a full account of his administration of the estate of Angelo Kaptsis deceased (“the deceased”) specifying:-
1.1 The assets and liabilities of the deceased at the date of death of the deceased and the value thereof at that date.
1.2 All amounts which the defendant has received in his administration of the estate of the deceased from the date of death to the present time specifying the date and source and amount of each such receipt.
1.3 Details of all liabilities paid by the defendant in the administration of the estate of the deceased from the date of death until the present time specifying the date of such amount, the payee and the amount paid.
1.4 the [sic] particulars of all real and personal assets unadministered at the present time.
1.5 All liabilities of the deceased unpaid at the present time.
1.6 Details of all assets presently in the hands of the defendant specifying the particulars of each such asset, where each asset is located and the value of such asset and the whereabouts of any document of title or other document passbook certificate or proof of ownership presently in the hands of the defendant.
Additionally the plaintiff sought further in the alternative that the grant of probate in favour of the defendant be revoked and that he be removed as an executor of the estate with leave being granted to the plaintiff to apply for letters of administration with the will annexed or for Public Trustee to administer the estate. Further orders were sought in relation to the delivery up of physical assets of the estate and as to costs.
The will of the deceased provides as follows:
EVERYTHING GOES TO MY SON
KOSTI KAPTSIS, WICH [SIC] WILL BE
DISTRIBUTED TO HIM BY MY
BROTHER AS HE FEEL’S FIT.
NO MONEY’S
WILL GO TO
MY X WIFE
KOSTI’S FUTURE ONLY
MY BROTHER WILL
MAKE SURE OF THAT
HE WILL BE 21 YEARS OLD B/4 PURCHASE
EVERY THING WILL GET SOLD
BY BILL (BROTHER) PUT IN
TRUST ACCOUNT, $10,000 WILL
GO TO MY BROTHER FOR
HIS PART
AND $1000 TO MY SISTER.
The plaintiff’s summons and statement of claim was supported by his affidavit – FDN 3 – filed on 11 November 2009 in which he attested that he was 18 years of age having been born on 19 January 1990. He attested that his father, Angelo Kaptsis, had died in Canada on 14 February 2006 and that his uncle, the defendant, had obtained a grant of probate on 17 April 2008. The net value of the estate disclosed at the Probate Registry was $264,966.41.
In paragraph 7 of his affidavit the plaintiff set out various concerns about the defendant’s conduct of the estate and particularly as to the inability of his solicitors to obtain from him any accounting as to his management of the estate. He also related an event that occurred on 20 May 2008 at which he asserted the defendant endeavoured to negotiate an arrangement with him in terms of his benefit from the estate.
The plaintiff’s mother in an affidavit filed on 11 November 2009 – FDN 2 –attested to meeting with the defendant at his request on 5 December 2008 when the defendant told her that he wanted to offer the plaintiff $100,000.00 in settlement of the plaintiff’s entitlement under the will and that the defendant would take the rest. The defendant’s mother attested that as her son was then over 18 years of age she told the defendant that she could not enter into any agreement on his behalf and that the defendant would need to speak directly with him. As to an apparent estate debt to a Mr Spero Chapley of $160,000.00 the defendant said “leave that up to me, I have my way and I will plead sympathy” – see paragraph 10 of FDN 2.
In his affidavit (FDN 3) the plaintiff exhibits various correspondence and emails between the plaintiff’s solicitors and the defendant and the defendant’s solicitors, none of which amount to anything in the nature of a full account of the defendant’s administration of the estate. In those circumstances these proceedings were instituted.
On 27 November 2009 an address for service was filed on behalf of the defendant and on 31 March 2010 without opposition the defendant was ordered to provide a full account of his administration of the estate in much the terms that the plaintiff sought in paragraph 1 of his statement of claim.
The defendant’s account was provided by affidavit on 26 May 2010. In that account he attested in paragraph 3 as to all amounts that he had received in the administration of the estate. He attested in paragraph 4 as to all liabilities he had paid in the administration of the estate noting that $160,000.00 had been set aside for the repayment of a loan to Spero Chapley. He noted that in the assets of the estate held by him was an amount of $32,808.63 in a Commonwealth Bank deposit account the number of which was not provided. He attested that he had calculated that amount as the balance monies due to the plaintiff by way of his residuary bequest.
The plaintiff subsequently filed an affidavit on 23 September 2010 identifying a dispute in relation to some items of the defendant’s account – FDN 7. He recorded that the $160,000.00 debt said to be due to Mr Spero Chapley was not required to be repaid. Mr Chapley had advised the plaintiff’s solicitors that was the case and had subsequently signed a release, a copy of which was exhibited to the plaintiff’s affidavit. The Deed of Release is dated 31 August 2010.
Following the filing of that affidavit an order was made that the defendant attend for examination on his account on 17 November 2010. That examination was part-heard on 17 November 2010 when it was adjourned. An order was made on 8 December 2010 for the defendant to produce further documents. The examination was listed to resume on 18 January 2011. On 22 December 2010 an order was made for payment to the plaintiff of the monies in the deposit account upon their maturity on or about 25 January 2011.
The examination resumed on 18 January 2011. At the conclusion of the examination directions were given for the plaintiff to file written submissions, the defendant to file submissions in response, and the plaintiff to have a right of reply. The last submissions by way of reply were filed on 23 March 2011. It was directed that unless a party sought that the matter be relisted for oral submissions then the Court would determine the matter on the basis of the evidence and the written submissions. An order was also made for the payment into Court of balance funds in a NetBank account in the defendant’s name.
The Law
The Supreme Court Rules 2006 (SA) provide for accounts in Rule 251 as follows:
[6R 251] Orders for accounts or report
251 (1) The Court may, on its own initiative or on application by a party, order that accounts or a report relevant to a question in issue in an action be prepared and filed in the Court.
(2) The order may provide for preparation of the accounts or report by a party, an independent expert or other person.
(3) The Court may, in the same or a later order, give directions about the nature and extent of the inquiry to be carried out for the preparation of the account or report.
Example—
The Court might (for example) give directions about the extent to which the person preparing the accounts or report is required to inquire into the adequacy of existing accounts or records.
(4) The Court may order the examination of a party or other person on accounts or a report filed under this rule.
(5) The Court may order that, on the filing of accounts under this rule, a party is to pay to another an amount certified by the person preparing the accounts, to be owing from that party to another party.
The action of account, and particularly account in equity, is discussed in On Equity Young, Croft, Smith (2009) at [16.1300] to [16.1360]. It is noted in [16.1320] that:
Both at law and in equity, a plaintiff must first satisfy the court that he or she is entitled to some money from the defendant and that the defendant is bound to render an account. …
In this particular case there is no doubt that requirement is met. The defendant is acting as executor of an estate pursuant to a grant of probate where the plaintiff is the substantial beneficiary of the will of his deceased father. Indeed the plaintiff is entitled to all of the estate of his father after legacies of $10,000.00 to the defendant and $1,000.00 to the defendant’s sister are paid and after payment of the proper expenses of the administration.
In [16.1330] of Young, Croft, Smith On Equity, the learned authors refer to a decision of Master Sanderson in the Supreme Court of Western Australia, McLauchlan & Anor v Prince & Anor [2001] WASC 43. In [11] and [12] of that decision, the learned Master said:
[11] Before dealing further with this question it is convenient to state just what is meant by the taking of accounts on the basis of wilful default. Meagher, Gummow and Lehane: “Equity Doctrines and Remedies” define the phrase as follows:
(Wilful default) means that the defendant must account not only for all receipts and payments actually made by him but also for all moneys which he would have received if he had managed the property prudently.
[12] This may be contrasted with what is referred to as a common account. Generally speaking a common account is a procedure to ascertain the monetary dealings of the parties in respect of the subject property and to determine with precision the balance due between them. After the balance is ascertained orders are made as to the rights of the parties to that balance. Thus a common account generally involves a two-step process. But an account on the basis of wilful default involves ascertaining the status of the corpus, determining the extent to which it has been depleted, ascertaining what would have been earned had the estate been properly administered and ordering payment to the plaintiff of that amount. This whole process is wrapped up in the one procedure. In effect then, the making of an order that the accounts be taken on the basis of wilful default effectively disposes of that part of the plaintiffs’ claim.
In [16] the learned Master said:
[16] Before leaving this issue [of wilful default] I should point out that there is no question of dishonesty on the part of the first defendant. That was not alleged on this application and in fact counsel for the plaintiffs made it plain that a claim for active breach of trust which is to be found in the statement of claim was not pursued. An order for accounts to be taken on the basis of wilful default is an equitable remedy which imputes a failure on the part of a trustee to meet the highest standards set by equity in the administration of trusts. The use of the word “wilful” means no more than the trustee, understanding his obligations, has failed to comply with those obligations. …
In taking an account the procedure is for the accounting party to file his account verified by affidavit. The other party is given the opportunity to cross-examine the accounting party with a view to identifying surcharges and falsifications.
In [16.1360] of Young, Croft, Smith On Equity the learned authors say:
A surcharge is a statement that there is an omission in the accounts for which credit ought to be given. A falsification alleges that a matter has been wrongly inserted, such as an allegation that a sum said to have been paid was either not paid or improperly paid. Surcharges and falsifications may be based on fact or on legal issues. …
The plaintiff has now reached 21 years of age (as at 19 January 2011) and distribution of the estate in accordance with the terms of the will is clearly due.
In compliance with the directions given by the Court the plaintiff filed an outline of submissions on 4 February 2011. The defendant filed an outline of submissions in response on 3 March 2011. Submissions in reply were filed on 23 March 2011. As to the actual account itself there appears to be substantial agreement between the parties about the findings that the Court should make.
It is agreed, and I so find, that the Court is in a position to determine the assets of the estate, the debts paid or payable by the estate and therefore determine the balance residuary legacy due to the plaintiff. The realization of the assets of the estate produced the following amounts:
BT Financial Group $ 21,889.94
CBA account $ 16,068.61
Proceeds of sale of unit $227,292.15
ATO refund$ 1,451.82
Proceeds of sale of unit refund $ 400.00
Total$267,102.52
This accords with the defendant’s affidavit of account – FDN 6 – filed 26 May 2010 save that the proceeds of sale of unit is $211.99 higher than the amount disclosed in the affidavit. This is explained by the earlier figure being taken from a draft settlement statement rather than the final settlement statement. The affidavit of account also omitted the refund figure of $400.00. Accordingly, the assets of the estate as disclosed in the original affidavit of account were $611.99 below that which they should have been.
Paragraph 4 of the defendant’s affidavit (FDN 6) sets out his recording of the liabilities of the estate. In his evidence Mr Kaptsis was either unable or did not produce receipts for some of these items. The record keeping of the defendant in his administration of this estate was entirely unsatisfactory. He either did not keep records or, alternatively, declined or failed to produce them. It is incumbent upon me to comment on his evidence during the course of the accounts. In my view he was a witness who exhibited little understanding of his obligations as an executor.
The substantial item in the account was a $160,000.00 loan said to be due to Spero Chapley. In the affidavit of the account that entry has been altered by inserting words in relation to that item “(money set aside)” with that addition being initialled by the defendant. It was abundantly clear from his evidence that the defendant had utilised estate monies for his own purposes. The defendant asserts that Spero Chapley had told him that he could use the monies due to Spero Chapley for his own purposes. No evidence in support of that assertion was called by the defendant. Mr Chapley could have confirmed it. Instead of that the plaintiff obtained from Mr Chapley a document dated August 2010 in which he asserted that debt due to him was entirely forgiven. In any event had Mr Chapley forgiven any part of that debt and so notified the defendant that did not provide the defendant with any licence or authority to use those monies. Those monies were at all times an asset of the estate or alternatively funds retained to meet a debt due to be paid by the estate.
The defendant did not disclose bank statements that ought to have been disclosed pursuant to the orders of the Court. When the Court made a specific order in December 2010 that he disclose a number of bank account statements insofar as they related to the transactions involving the estate, all the defendant did was to print out off the internet copies of the last five bank statements which only went back for a limited period. He did not bother to make an enquiry of the bank to obtain full bank statements that would have enabled a tracing exercise to take place. I place little reliance on the defendant’s sworn evidence where it is not corroborated by documentary material.
In the course of the examination on the account the plaintiff’s counsel indicated he wanted to examine on some matters where notice had not been given to the defendant. Accordingly, I adjourned the examination to enable that notice to be given and for the further examination to take place. Despite being given notice of the issues the defendant did not bother to obtain the necessary documents or make reasonable enquiries to enable him to properly answer the questions that ought to have been seen as coming. The defendant was an unimpressive witness.
In its written submissions the plaintiff in paragraph 42 accepted all of the liabilities stated in paragraph 4 of the defendant’s account as debts or liabilities of the deceased or an expense in the administration of the estate save for three items notwithstanding unsatisfactory proof of many of those items. The three items in dispute were as follows:
DATE SOURCE AMOUNT
30 November 2009 Lynch Meyer – legal fees $703.89
2010 Spero Chapley – repayment of loan (money set aside)
$160,000.00 24 May 2010 Lynch Meyer – legal fees
$921.36
The items in the liabilities of the estate included a legacy to the defendant of $10,000.00 and a legacy to Noula Milios of $1,000.00.
The defendant asserts that the Lynch Meyer legal fees are a proper expense of the estate and on that basis the residuary estate, including the $160,000.00 forgiven loan from Spero Chapley, amounts to $193,783.74. On the plaintiff’s argument the residuary estate, excluding the Lynch Meyer fees, would amount to $195,408.99 – see Schedule 1 to the plaintiff’s written submissions – FDN 12. This leaves aside the question of interest about which there is a dispute.
The plaintiff makes various criticisms of the conduct of the defendant which it says should impact on the defendant’s entitlement to have his legal fees paid as an expense of the estate. Those criticisms are:
(1)That the defendant failed to answer basic questions from the plaintiff and his solicitors as to the assets and liabilities of the estate.
(2)That the defendant did not complete the administration of the estate following settlement of the sale of the home unit in a timely fashion.
(3)The defendant’s attempt to bargain with the plaintiff over his entitlement under the will.
(4)The defendant’s failure to provide a detailed accounting when requested.
(5)A provision of incorrect and incomplete information from January 2009 in response to the plaintiff’s request for an account.
(6)That even the account provided pursuant to the Court order was inaccurate.
In those circumstances it was submitted that these proceedings were necessitated by his defaults as executor and trustee and that he was in breach of his duty as a trustee to keep proper accounts and be ready to provide them when called on by a beneficiary.
In Heydon and Leeming, Jacobs’ Law of Trusts in Australia, 7th ed (2006) at [1714] records:
… Failure to render accounts when requested to do so will make the trustees liable to pay the cost of proceedings instituted to obtain them. …
The plaintiff further complained that even after the proceedings were instituted and during the course of the proceedings the defendant failed to provide a full and proper account of his dealings with the estate. He failed to search for and provide banking and other records, and failed to keep sufficient records of receipts and payments or, alternatively, failed or refused to produce such records. He was unable to identify the source of funds used to discharge liabilities or debts of the deceased. He intermingled the estate monies with his own monies. He could not or chose not to produce cheque butts, records, or bank account records to establish his payments. He failed to comply with the Court order of 8 December 2010 in relation to production of bank and financial institution statements and records. The five statements that he had printed out off the internet only went back to 2 January 2009 rather than to 14 February 2006 when the deceased died.
It was submitted that the Court should find “that the defendant has comprehensively failed in the execution of his duties as executor and trustee of the deceased’s estate in relation to the keeping of proper accounts” – see plaintiff’s written submissions – FDN 12. The plaintiff submitted that the Court should not accept the defendant’s evidence that Mr Chapley had authorised him to spend any debt monies due to him for his own purposes. No corroborating evidence was called by the defendant in relation to this assertion and I do not accept it. In any event it has no impact on the defendant’s obligations as trustee in respect of those monies.
While the affidavit filed by the plaintiff – FDN 3 – asserts that $160,000.00 had been set aside to pay Mr Chapley’s debt, no evidence was produced to support that assertion. The defendant was unable to point to any record or deposit of $160,000.00 being held to meet that debt if called upon. Estate monies were intermingled with the defendant’s own funds.
In light of these matters the plaintiff submitted that the Court should find that he had wilfully disregarded his duties as executor and had wilfully and deliberately misapplied the estate funds. These assertions by the plaintiff amounted to assertions of conduct that met the requirements for a finding of wilful default.
The defendant in its submissions of 3 March 2011 asserted that this allegation had not been pleaded nor raised during the examination. It asserted that the examination was conducted on the basis of an ordinary examination on an account based on the pleadings. Such a late allegation of wilful default was seriously prejudicial to the defendant. The defendant had no opportunity to adduce evidence explaining the transaction. It was asserted that there was a good deal of information which could be put before the Court in relation to the debt to Mr Chapley. In my view that is not the only transaction that might be said to support a finding of wilful default.
The defendant relied on the authority of Juul v Northey [2010] NSWCA 211, where the Court of Appeal in New South Wales considered a number of issues arising out of the administration of an estate. At [191] McColl J said in considering the proposition that accounts on account of wilful default cannot be taken unless the issue has been pleaded:
[191] … No doubt this is why Williams [Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, 19th ed (2008)] (at [61-29]) says particulars of the allegation of wilful default should be given in the pleadings. However Williams (at [61-29]) also suggests that if such particulars are not given in the pleading, they must be set out in the affidavit or witness statement alleging wilful default. MGL [Meagher, Gummow & Lehane] accepts (at [25-035]) that the allegation of wilful default can be made by amendment at trial. This contrasts with the strict pre-Judicature Act position, that if the plaintiff’s pleadings did not raise the wilful neglect point, it could not be raised “either at the original hearing or on further directions”: [authorities not cited].
Reference is made by the learned Judge in [205] to the requirements of the Uniform Civil Procedure Rules (“UCPR”) r 15.3, namely that in the pleading if any breach of trust or wilful default is alleged particulars must be provided.
While these proceedings were commenced by summons and statement of claim, the factual matters were referred to as being contained within an affidavit. In those affidavits of the plaintiff and his mother (FDN 2 and FDN 3) the words “wilful default” are not used but rather it contains a series of allegations of inappropriate lack of activity by the defendant in responding to enquiries by the plaintiff or his solicitors and of an improper attempt to negotiate a reduced payment to the plaintiff. I note that the order for taking an account made on 31 March 2010 was made on Minutes prepared by the plaintiff’s solicitors and that no reference is made therein to taking an account on the basis of wilful default. However, the assertions in the affidavits supporting the plaintiff’s claim, if established, would amount to wilful defaults by an executor.
In his submissions in reply – FDN 13 – the plaintiff argued that his initial supporting affidavit raised allegations of breach of trust and breach of executor’s duties. The plaintiff alleged active breaches of trust not simply passive breaches. He referred to Williams (supra) at [61-28] where the learned authors said:
Wilful default in this context means a passive breach of trust, an omission to do something that ought to have been done as distinct from an active breach of trust or waste.
In this matter it is difficult to see how the evidence of the defendant in relation to his use of the “Spero Chapley” monies for his own purposes could not amount to anything other than a breach of trust. Further the defendant was on notice that his conduct in relation to this asset was to be challenged. His conduct in relation to his general administration of the estate and his failure to respond to enquiries from the residuary beneficiary and his representatives was also criticised.
As to the costs of Lynch Meyer forming part of the account, I reject the plaintiff’s submissions in respect thereof. In my view it was appropriate that the defendant obtain legal assistance in relation to the matter. He clearly either had not been able to or chose not to address the matter in any substantial way prior to obtaining legal assistance. The two legal accounts are dated 30 November 2009 and 24 May 2010 and doubtless refer to the work involved in the preparation of the account in the plaintiff’s affidavit which account has at the end of the day with some minor modifications largely been accepted. I find that each of those items is a proper expenditure for the estate. Even if these proceedings had not been issued because the defendant had earlier sought legal assistance and provided an account as a result, in my view the costs of that legal assistance would be justified. However, the ongoing legal costs of the defendant is a matter for further submissions.
The defendant argued that in relation to the Chapley debt it was recorded as a debt in the original statement of assets and liabilities lodged with the application for probate which had been prepared with the assistance of a solicitor. There was no Deed of Release obtained until August 2010 by the plaintiff’s solicitors and, in any event, there was no challenge to the defendant’s evidence of his dealings with Mr Chapley. It would therefore be unfair to now use that evidence against the defendant. The defendant accepts that following the release by Mr Chapley he must repay that money to the estate to the extent that he has utilised it. In my view none of these matters justify the defendant as executor of the estate and trustee of these funds using these monies for his own purposes.
Both parties agreed that the Court at this time should determine the balance for which the executor is liable to account to the plaintiff as residuary beneficiary.
Leaving aside the issues of wilful default, interest and costs, and noting that I found the payments of costs to Lynch Meyer to be a proper expense of the estate to date, I find that the amount of the residuary estate for which the defendant must account to the plaintiff is $193,783.74. I note that proceeds of a term deposit of $44,208.54 have been paid to the plaintiff and that $42,042.32 has been paid into the Suitor’s Fund. To the extent that those payments include interest I will leave that issue for oral submissions by the parties if necessary.
Before making final orders as to interest and costs I will allow the parties an opportunity to be heard. I intimate that in the event that I were to find that the defendant was in wilful default of his obligations as trustee as I would do on the present evidence then I would accept the calculations of interest due to 31 January 2011 in the amounts set out in Schedule 1 of the plaintiff’s submissions adjusted to reflect the slightly lower amount payable – see FDN 12. I reject the defendant’s submission that no interest should be paid on the $160,000.00 Chapley debt until it was formally forgiven in August 2010. Those monies should have always been retained for the benefit of the estate. It is difficult to see how any “explanation” from the defendant could affect that. However, in light of the submission of surprise creating an unfair prejudice to the defendant I will provide him with a further opportunity to be examined on his account if he so chooses.
I will also hear the parties as to costs in light of these findings and any further material or submissions that may be put before the Court.
The formal orders on the account to date will be:
1.That the entitlement of the plaintiff as residuary beneficiary of the estate of Angelo Kaptsis be fixed at $193,783.74 with questions of interest and costs reserved.
2.That the funds presently standing to the credit of this action together with any interest earned thereon be paid to the plaintiff’s solicitors for the benefit of the plaintiff.
3.Adjourned to 9.15 am on Friday, 29 April 2011 for further directions.
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