Mielczarek by his tutor New South Wales Trustee and Guardian v Prendergast

[2023] NSWSC 144

Supreme Court

New South Wales

Medium Neutral Citation:	Mielczarek by his tutor New South Wales Trustee and Guardian v Prendergast [2023] NSWSC 144
Hearing dates:	12 December 2022
Decision date:	27 February 2023
Jurisdiction:	Equity
Before:	Robb J
Decision:	The first defendant acted beyond the power conferred on her as the plaintiffs’ power of attorney by misappropriating funds in breach of her fiduciary duty. The first and second defendants held their interests in the real property purchased with misappropriated funds on trust for the plaintiffs. The available evidence does not establish the quantum of misappropriated funds received by the second defendant. Making of orders deferred to allow plaintiffs to make further submissions and propose orders.
Catchwords:	EQUITY — fiduciary duties — power of attorney — absence of authority to give gifts or to confer benefits on others — where evidence prima facie establishes that defaulting fiduciary misappropriated funds — where second defendant received misappropriated funds, but quantum not definitively established by evidence — where defendants used misappropriated funds to purchase real property — where making of orders deferred to allow plaintiffs to make further submissions
Cases Cited:	Smith v Smith [2017] NSWSC 408
Category:	Principal judgment
Parties:	Josef Mielczarek by his tutor New South Wales Trustee and Guardian (First Plaintiff) Julie Mielczarek by her tutor New South Wales Trustee and Guardian (Second Plaintiff) Renee Louise Prendergast (First Defendant) Richard Christopher Smith (Second Defendant)
Representation:	Counsel: M Bennett (Plaintiffs) Solicitors: Keypoint Law (Plaintiffs)
File Number(s):	2022/00168809

JUDGMENT

1. The plaintiffs, Josef Mielczarek and Julie Mielczarek, commenced these proceedings by their tutor, New South Wales Trustee and Guardian (“TAG”), by statement of claim filed on 10 June 2022.

2. The defendants are Renee Louise Prendergast, who is the daughter of the plaintiffs, and her de facto partner, Richard Christopher Smith.

3. Each of the plaintiffs is a person under legal incapacity and is unable to manage their own financial affairs. The first plaintiff suffers from a cognitive decline and frontal lobe dysfunction, Parkinson's disease, severe hearing impediment and ischaemic heart disease. The second plaintiff has a history of stroke in 2018, brain shunt in 2018 after a seizure, breast cancer and left mastectomy in 2018, is insulin-dependent, has hypertension, atrial fibrillation, osteoarthritis, anxiety and depression, a cholecystectomy, left iliacus muscle haematoma, cognitive decline and lower limb deep vein thrombosis.

4. TAG was appointed as the financial manager of each of the plaintiffs by order made on 28 July 2021.

Outline of the plaintiffs’ claim

5. In essence, the plaintiffs claim that the first defendant, with the knowledge and assistance of the second defendant, breached her fiduciary duties to the plaintiffs under powers of attorney granted by them, and misused her relationship with the plaintiffs to sell the plaintiffs' home and to misappropriate a substantial part of the proceeds of sale, and of an inheritance to which the first plaintiff became entitled.

6. The statement of claim seeks a number of declarations concerning the conduct of the defendants and an order that they account to the plaintiffs on a wilful default basis or otherwise, and that they pay to the plaintiffs the amount found to be due on the taking of accounts. The plaintiffs also seek alternative equitable relief.

7. The plaintiffs owned a property situated at Minto in which they lived. In about August 2018, exercising her authority under enduring powers of attorney granted by the plaintiffs, the first defendant sold the Minto property. The first defendant received a total of $393,391.43 from the proceeds of sale, which was paid into a joint account in the name of the plaintiffs. Between 15 August 2018 and 20 August 2018, the plaintiffs allege that the first defendant transferred at least $384,804.05 out of the joint account to herself or otherwise for her benefit, and without the authority of the plaintiffs.

8. On about 12 February 2019, the defendants and the first defendant's son purchased a property at Ruse for $597,500. The Ruse property was registered in the shares 40% to the first defendant, 40% to the second defendant, and 20% to the first defendant’s son as tenants in common. The son has acknowledged that the Ruse property is held on trust for the plaintiffs and has disclaimed any beneficial interest in it, however he is not currently a party to the proceedings, a matter dealt with further below.

9. The price of the Ruse property was paid by means of a loan of $478,000 from Pepper Finance Corporation Limited (“Pepper Finance”) that was secured by a mortgage over the property, and an amount of $119,500 from funds allegedly taken by the first defendant from the plaintiffs' joint account. Consequently, the plaintiffs have alleged that the equity in the Ruse property was held by the defendants on trust for the plaintiffs.

10. By the time of the hearing that took place on 12 December 2022, the property at Ruse was in the process of being sold by Pepper Finance, and in order to simplify the proceedings the relief that the plaintiffs sought at the hearing was that judgment be entered in their favour in the amount of $656,107.18, and an order be made that Pepper Finance pay the net proceeds of sale of the Ruse property, after payment of proper expenses of the sale and the debt secured by the mortgage, to the plaintiffs.

Procedural history

11. It will be necessary to describe the procedural history of these proceedings before I set out the Court’s findings of fact in more detail than has been outlined above.

12. The evidence shows that each of the defendants was personally served with the statement of claim and TAG’s consent to act as tutor on 14 June 2022.

13. On 12 July 2022, the matter was listed for directions. There was no appearance for the defendants. A solicitor for the plaintiffs advised the defendants by email addressed to the first defendant that the proceedings had been adjourned to 2 August 2022, and that the plaintiffs intended to file a motion for default judgment seeking possession of the Ruse property and for an assessment of the quantum of the claim.

14. Also on 12 July 2022, the first defendant replied to the email sent to her saying that the adjournment "will give me time to get my defence documents together" and providing the email address of the second defendant.

15. The defendants did not appear at the directions hearing on 2 August 2022. Again, a solicitor for the plaintiffs advised the defendants by email to their respective email addresses that the matter had been listed for further directions on 30 August 2022.

16. On 30 August 2022, the defendants again did not appear at the directions hearing. A solicitor for the plaintiffs on that date advised the defendants that the matter had been listed for further directions on 20 September 2022.

17. The plaintiffs filed a notice of motion on 19 September 2022 that sought the following relief from the defendants:

“1.    Judgment for the first and second plaintiffs for possession of the land comprised [the Ruse property].

2.    Judgment for the first and second plaintiffs against the first and second defendants for damages as referred to in the statement of claim to be assessed.

3.    The first and second defendants pay the first and second plaintiff's costs.

4.    Stand over the balance of the Statement of Claim (dated 8 June 2022 and filed 10 June 2022) for further directions.”

18. On 19 September 2022, the plaintiffs served on the defendants at their respective email addresses the notice of motion filed on that date, together with supporting affidavits by the first plaintiff, a legal officer for TAG and a solicitor for the plaintiffs. The email advised the defendants that the matter would be referred to the applications list judge for allocation of a hearing date and to determine the motion. The plaintiffs received no response to the email.

19. On 20 September 2022, a solicitor for the plaintiffs advised the defendants by email that the notice of motion was listed for hearing on 25 November 2022. The defendants did not reply to the email.

20. An affidavit by the second plaintiff and exhibits to affidavits already served on the defendants were served on the defendants by email on 3 November 2022.

21. My Associate sent an email to the solicitors for the plaintiffs and to the defendants at their respective email addresses on 18 November 2022 reminding them of the forthcoming hearing on 25 November 2022.

22. At the hearing of the notice of motion that took place before me on 25 November 2022, the Court was asked by counsel for the plaintiffs to make orders in accordance with draft terms of judgment and orders as follows:

“1.    Judgment for the Plaintiffs in the amount of $656,107.18.

2.    Order that Pepper Finance Corporation Ltd pay all net proceeds of sale, after the payment of proper expenses of the sale and the debt secured by its mortgage, from the sale of [the Ruse property] to the Plaintiffs, by paying it into the trust account of [the plaintiffs' solicitors].

3.    The defendants pay the plaintiffs' costs as agreed or assessed.

4.    Stand over the balance of the Statement of Claim for directions before the Registrar in Equity on 3 February 2023.”

23. These orders went considerably further than the notice of motion, in that an order for final judgment was sought as well as that the balance of the proceeds of sale of the Ruse property be paid to the plaintiffs by Pepper Finance. As the orders sought by the plaintiffs were materially different from the orders specified in the notice of motion, the Court made the following orders instead of hearing the notice of motion:

“The Court:

1   Orders that Pepper Finance Corporation Ltd ACN 094 317 647 pay all net proceeds of sale, after the payment of proper expenses of the sale and the debt secured by its mortgage, from the sale of [the Ruse property] to the Plaintiffs (the Net Proceeds), by paying the Net Proceeds to the NSW Trustee and Guardian.

2   Notes the NSW Trustee and Guardian will hold the Net Proceeds in escrow pending further order of the Court in these proceedings.

3   The Plaintiffs’ are to serve the following documents on the Defendants, by 4pm on 6 December 2022:

a.   a copy of these orders;

b.   a copy of the proposed orders the Plaintiffs seek to be made on the next occasion (a copy of which is annexed to these orders and marked A);

c.   a copy of the Plaintiffs’ Outline of Submissions dated 23 November 2022.

4   The Plaintiffs’ have leave to serve the documents in accordance with order 3 above, by email:

a.   as to the first defendant, at [first defendant’s email address]; and

b.   as to the second defendant, at [second defendant’s email address].

5   In the email serving the Defendants in accordance with orders 3 and 4 above, the Plaintiffs are to include the following statement: “If you do not attend, or cause someone to attend on your behalf, when the matter comes before the Supreme Court at 10am on Monday 12 December 2022, the Court will make orders as sought by the Plaintiffs’ (which form of orders are attached to this email).”

6   Stands over the proceedings before Robb J at 10am on 12 December 2022.”

24. The effect of orders 1 and 2 was to preserve the plaintiffs' position in relation to the balance of the proceeds of sale of the Ruse property after the discharge of the mortgage pending the further determination of the plaintiffs' rights.

25. The proposed orders that were required to be annexed to the documents served on the defendants were as follows:

“1.   Judgment for the Plaintiffs in the amount of $656,107.18.

2.   In the alternative to order 1, judgment for the Plaintiffs in an amount to be determined by the Court.

3.   Order that the NSW Trustee and Guardian may apply any funds held as noted in paragraph 2 of the orders made by Robb J on 25 November 2022 in satisfaction, or partial satisfaction, of the judgment above.

4.   The Defendants pay the Plaintiffs’ costs on the indemnity basis.

5.   In the alternative to order 4, the Defendants pay the Plaintiffs’ costs on the ordinary basis.”

26. On 25 November 2022, my Associate sent an email to the solicitors for the plaintiffs and to each of the defendants at their respective email addresses attaching a copy of the orders that I made on that date. My Associate did not receive a reply from either of the defendants.

27. The evidence proves that on 25 November 2022 a solicitor for the plaintiffs complied with orders 3 to 5 made by the Court on that date. The solicitor has received no reply from either defendant.

28. The defendants did not appear at the adjourned hearing on 12 December 2022. Counsel for the plaintiffs conducted their application for the relief set out above at [25].

Factual findings

29. I will now set out the facts that I am satisfied the evidence establishes for the purposes of the present application. Some of the facts are not controversial. I should record that the evidence of withdrawals of the plaintiffs’ funds by the first defendant is primarily found in the affidavit of Taylor Murphy, one of the plaintiffs’ solicitors, in an affidavit sworn on 15 September 2022. The affidavit analyses transactions recorded in the plaintiffs’ bank records and concludes, based upon the lifestyle of the plaintiffs and their limited capacity to engage in transactions on their own bank accounts, as detailed in par 6, that the relevant transactions were effected by the first defendant. The findings are also supported by the evidence of each of the plaintiffs. The evidence supports a prima facie finding that the first defendant was responsible for the transactions and that they were not for the benefit of the plaintiffs. That prima facie finding stands, as the defendants have not provided evidence to contradict the conclusions that the evidence justifies the Court in reaching.

30. Subject to some qualification, the evidence satisfies me at a prima facie level of the following facts that are material to the application:

1. at the time of the hearing, the plaintiffs were respectively about 72 and 70 years of age;

2. the plaintiffs were highly vulnerable as described above at [3];

3. the plaintiffs purchased the Minto property sometime prior to 1987 and used it as their family home;

4. since 2017, the first defendant has had complete access to the plaintiffs' bank accounts, and from early 2018 complete control of their finances;

5. as of about 1 January 2018, the plaintiffs' assets consisted of the Minto property and $23,696.13 in cash;

6. on 27 February 2018, each of the plaintiffs executed an enduring power of attorney in favour of the first defendant with the requirement that the first defendant act in the plaintiffs’ best interests, and not gain a benefit without express authorisation;

7. the plaintiffs did not at any time authorise the first defendant to exercise the powers of attorney to withdraw or use the plaintiffs’ funds for her benefit;

8. the first defendant registered the powers of attorney with the Registrar General on 25 July 2018;

9. in August 2018, the first defendant used the powers of attorney to sell the Minto property for $595,000, of which the net proceeds were $393,391.43;

10. it appears, subject to the need for confirmation as is discussed below, that on 17 August 2018 the first defendant used $320,028 of the Minto property sale proceeds to pay that money into an account in the second defendant's name;

11. in the period 15 to 20 August 2018, the first defendant used $384,992.78 of the plaintiffs' funds for her own purposes (including the $320,028 referred to above);

12. on 12 February 2019, the defendants together with the first defendant's son purchased the Ruse property for $597,500 as tenants-in-common in the proportions 40%, 40% and 20%. (As noted above, the son has acknowledged the beneficial ownership of the plaintiffs in the property and disclaimed any interest in it). The Ruse property was purchased using a loan of $478,000 from Pepper Finance secured on first mortgage over the property, and an amount of $119,500 from the funds taken from the plaintiffs;

13. on 10 December 2019, the first plaintiff received a distribution of $25,000 from his late father's estate;

14. in the period 13 to 27 December 2019, the first defendant took at least $25,374.11 from the plaintiffs;

15. on 26 May 2021, the first plaintiff received a further distribution of $550,000 from his late father's estate; and

16. in the period 26 May 2021 to 12 June 2021, the first defendant took at least $245,974 from the plaintiff, but her attempt to take a further $300,000 was stopped.

31. I note the evidence that is summarised at pars 14 to 17 in the affidavit of Jarrad McCarthy sworn 19 September 2022 that the total amount of the plaintiffs’ funds and assets misappropriated by the first defendant, plus costs of $3,490, is $659,597.16.

32. The evidence before the Court establishes a prima facie case that the first defendant has committed a series of egregious breaches of her fiduciary duty to the plaintiffs, with the result that the Court should make an order that the first defendant restore to the plaintiffs all of the property that she has misappropriated from them without their authority, on the basis of the principles considered by Lindsay J in Smith v Smith [2017] NSWSC 408. The Court is able to find on the evidence that the first defendant's conduct was the primary and direct cause of the misappropriation of the plaintiffs' funds.

33. In relation to the second defendant, the Court must act on the basis that he will only be liable to the plaintiffs on an ancillary basis for his participation in the breaches of duty by the first defendant or his receipt for no consideration of funds that were taken from the plaintiffs by the first defendant.

34. The statement of claim pleads a series of wrongful actions by the first defendant, and then alleges in par 52 that the first defendant is liable to account to the plaintiffs for the withdrawals in pars 17, 34 and 42. These paragraphs refer to a list of specific transactions whereby the first defendant misappropriated the plaintiffs' funds.

35. Paragraph 12(b) of the statement of claim alleges that the second defendant was in receipt of funds and property from the first defendant, knowing that they arose from the first defendant's breach of her fiduciary duties to the plaintiff and her dishonest and fraudulent design to procure benefits from the plaintiffs, and that he provided knowing assistance to the first defendant in furtherance of her fraudulent design.

36. Later the statement of claim alleges:

“53.    By reason of the matters pleaded above, including at paragraph 12, the Defendants are liable to the Plaintiffs for the withdrawals in paragraphs 17, 34 and 42 above, by way of:

(a)    equitable compensation; or, in the alternative

(b)    monies had and received.”

37. In this way the statement of claim rolls up the claim against the second defendant with the more elaborately pleaded claim against the first defendant.

38. However, the statement of claim only specifically alleges that the plaintiffs' funds were paid into an account in the name of the second defendant as follows:

1. paragraph 34(a) alleges that between 13 and 27 December 2019, $3,783 was transferred out of $25,000 of the first plaintiff's inheritance distribution to an account in the name of the second defendant; and

2. paragraph 42(m) alleges that on 11 June 2021, $300,000 of the $550,000 second distribution of the first plaintiff's inheritance was transferred to an account in the name of the second defendant.

39. The statement of facts that was provided to the Court on behalf of the plaintiffs, as explained in the plaintiffs' written outline of submissions, tells a somewhat different story. The statement of facts is a useful document that contains contemporaneous references to the evidence upon which the plaintiffs rely. Paragraph 13 of the submission says that, when the Minto property was sold, of the net proceeds of sale of $393,391.43, $320,028 was paid to an account in the name of the second defendant. Part of that money was then used to purchase the Ruse property.

39. The document relied upon by the plaintiffs to prove the payment of $320,028 into the second defendant's account may in fact evidence that transaction, but it is a printout headed "INTERNATIONAL TRANSFER". This document is referred to in par 30 of the affidavit of Jarrad McCarthy sworn 19 September 2022, but the affidavit is not informative and does not conclusively establish that the account belongs to the second defendant.

40. Although par 42 of the statement of claim alleges that the first defendant transferred at least $545,929 from the $550,000 second distribution of the first plaintiff's inheritance, and in subpar (m) that $300,000 of that amount was transferred to an account in the name of the second defendant on 11 June 2021, par 15(ii) of the submissions states that the first defendant only succeeded in taking $245,974 of that money, because a transfer of $300,000 was blocked.

41. I am satisfied that in the case of the first defendant, the evidence prima facie establishes that she was the defaulting fiduciary, and that she misappropriated the plaintiffs’ funds by making unauthorised withdrawals for the benefit of herself or others rather than the plaintiffs. That evidence is unanswered by the first defendant, and accordingly is sufficient to justify an order against her that she restore the misappropriated funds. That is because her liability arises at the point of misappropriation and it is immaterial what she did with the funds. The position of the second defendant is different, as it must be shown that in a legally relevant way he participated in the dishonest and fraudulent design of the first defendant, or that he received misappropriated funds. As a practical matter, the liability of the second defendant will more easily be established on the basis of prima facie evidence where it can be shown that the second defendant has received misappropriated funds in his own bank account.

42. I am satisfied in principle that it will be proper for the Court to make an order that the first defendant restore to the plaintiffs the full amount that she has misappropriated from them. Order 1 as set out at [25] may not be the appropriate form for that order. That is a simple order that judgment be given for both plaintiffs in the amount of $656,107.18. I make the following comments:

1. I will decide the proper amount when the plaintiffs have provided the explanation of the uncertainties I have expressed at [38]-[41] above;

2. the final orders should deal with the rights of the plaintiffs separately, as both plaintiffs had a joint interest in the Minto property, but only the first plaintiff was entitled to the inheritance;

3. the final orders should include declarations that the defendants held their interests in the Ruse property on trust for the plaintiffs and there should be a note that TAG is authorised to apply the funds received from Pepper Finance in accordance with order 2 made on 25 November 2022 for the benefit of the plaintiffs in accordance with its duties as the plaintiffs' financial manager;

4. to simplify the process of enforcing the judgment against the first plaintiff, I will be prepared to enter judgment against her for an appropriate sum. It would be preferable if the amount of the judgment was stated as being the full amount less the amount paid by Pepper Finance to TAG. Some confusion may be caused if the judgment is for the full amount and the Court only makes order 3 as set out at [25] above. I understand that the plaintiffs may have proposed the orders that they have because they do not yet know the final amount that Pepper Finance will pay to TAG. The plaintiffs may respond to the Court on this issue when they respond to the questions raised below concerning the position of the second defendant.

44. I am not presently satisfied that the evidence is sufficient to justify the same order being made against the second defendant as will be made against first in respect of all of the misappropriated funds.

45. I am satisfied that the evidence justifies the same order being made against the second defendant as will be made against the first defendant in relation to their respective interests in the Ruse property and its proceeds of sale. That is because I am satisfied on the evidence that the second defendant's share in the initial equity in the property came from misappropriated funds of the plaintiffs for which the second defendant was a volunteer.

46. As the defendants held their interests in the Ruse property as tenants in common, it will be necessary for the Court to make separate declarations and orders in respect of the 20% interest held by the first defendant’s son. As the son is not a party to these proceedings the Court does not currently have jurisdiction to do so. Exhibit JM1 to the affidavit of Jarrad McCarthy dated 19 September 2022 includes a deed made in May 2022 between the son and TAG as financial manager for each of the plaintiffs. In broad terms, the recitals contain an acknowledgement by the son that he did not make any financial contribution to the purchase of the Ruse property, that to his knowledge the funds to purchase the property were provided by the plaintiffs, and that he holds his 20% interest in the property on trust for the plaintiffs.

47. Assuming that this remains the son’s position it would be prudent for the plaintiffs to draft short minutes of order seeking leave of the Court to join the son to these proceedings, dispense with the requirement to amend the statement of claim, and note the son’s consent to the proposed declaration that he holds his interest in the Ruse property (including any proceeds of sale) on trust for the plaintiffs, and that he consents to the Court making an order that the share of the proceeds of sale representing his 20% share be paid to the plaintiffs. The son should sign consent short minutes of order to that effect. The plaintiffs’ solicitor should make a brief affidavit to prove the son’s signing of the short minutes of order. This will enable the Court to deal with the remaining 20% interest expeditiously, as it is noted that the deed contemplates the transfer of the son’s interest in the property directly to the plaintiffs which, by reason of the sale of the property by Pepper Money as outlined above, is no longer possible. I will give the plaintiffs an opportunity to consider these reasons for judgment and to provide further submissions in respect of the orders that should be made against the second defendant. The evidence must be clear at a prima facie level as to which misappropriated funds of the plaintiffs were paid into an account in the name of the second defendant. A second issue that may be relevant is whether what the evidence proves is inconsistent with what was alleged in the statement of claim.

48. The plaintiffs should provide any further response within 14 days of the delivery of these reasons for judgment.

49. I will defer the making of any orders and considering the issue of costs until I am in a position to deliver reasons that finally dispose of the plaintiffs' application.

**********

Decision last updated: 27 February 2023