Re McKenzie (No 2)
[2018] VSC 238
•11 May 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TESTATORS FAMILY MAINTENANCE LIST
S CI 2016 02462
IN THE MATTER of Part IV of the Administration and Probate Act 1958
-and-
IN THE MATTER of the estate of DAVID CYRIL McKENZIE, deceased
BETWEEN:
| AILEEN MOIRA McKENZIE and FAYE ADA HARRIS | Plaintiffs |
| v | |
| DAVID GORDON McKENZIE and LYNTON HENRY McKENZIE (as executors of the will of DAVID CYRIL McKENZIE) | Defendants |
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JUDGE: | McMillan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | On the papers |
DATE OF RULING: | 11 May 2018 |
CASE MAY BE CITED AS: | Re McKenzie (No 2) |
MEDIUM NEUTRAL CITATION: | [2018] VSC 238 |
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COSTS — Where provision awarded to successful plaintiffs more favourable than their open offers made after mediation and before trial — Where plaintiffs seek their costs from the estate on indemnity basis — Where at trial executors limited asset pool to their share of the estate — Where defendants seek their costs from the estate
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr S T Pitt | Katz Silver Lawyers |
| For the Defendants | Mr M C McKenzie | Trevor Yong & Associates |
HER HONOUR:
Introduction
The plaintiffs in this proceeding were successful in their respective claims for provision from the estate of the deceased. The judgment, delivered 21 December 2017, provided that if the parties were unable to agree on the costs of the proceeding, written submissions were to be provided to the Court.[1]
[1]Re McKenzie [2017] VSC 792 (21 December 2017) [98].
The parties were unable to agree on the plaintiffs’ costs and provided written submissions.
Background
When the trial concluded on 16 June 2017, interim orders were made in respect of the first plaintiff’s claim reflecting the plaintiffs’ open offer made prior to trial. Those orders included the transfer of the freehold title of the home block, together with a small triangular portion of land annexed to the home block, to the first plaintiff and the payment of the sum of $70,000 to the first plaintiff (‘the interim orders’).
The first plaintiff’s entitlements under the deceased’s will included the sum of $36,942.05 from an insurance policy of the deceased and annual payments of $5,000 adjusted for CPI from each of the defendants. Orders were made for the defendants to pay personally to the first plaintiff the sum of $10,000 within 30 days of the orders being made.
In the reasons for judgment, the Court made the following orders, subject to the interim orders having been complied with by the defendants:
(a) Pursuant to s 91(1) of the Administration and Probate Act 1958, in addition to the further provision made by the orders on 16 June 2017, further provision be made for the first plaintiff out of the estate of the deceased by payment to her of a further pecuniary legacy of $180,000;
(b) Pursuant to s 91(1) of the Administration and Probate Act 1958, provision be made for the second plaintiff out of the estate of the deceased by payment to her of a pecuniary legacy of $150,000;
(c) Pursuant to s 97(2) of the Administration and Probate Act 1958, the burden of the payments of the sums of $180,000 pursuant to paragraph 1 of this order and $150,000 pursuant to paragraph 2 of this order, be charged on the following estate properties devised to the defendants under the deceased’s will:
(i) Lot 1 in Certificate of Title Volume 8796 Folio 467, the balance of the land in Certificates of Title Volume 7859 Folio 034, Volume 8464 Folios 395, 396, and 397, Crown Grants Volume 3904 Folio 667 and Volume 4026 Folio 009, devised to the first defendant; and
(ii) Certificates of Title Volume 7859 Folio 034 and Volume 8464 Folio 395 and Allotment 60A in Crown Grant Volume 1927 Folio 236, devised to the second defendant.[2]
[2]The defendants’ submissions raise an issue as to the amendment to some of the title details in the orders. These issues are referred to at paragraph 43.
According to the defendants’ submissions, the defendants have complied with the interim orders.
Plaintiffs’ two open offers
The plaintiffs sent two open offers to the defendants: the first on 21 February 2017 which was several months before the trial (‘the first offer’), and the second on 22 May 2017 (‘the second offer’) which was three weeks before the trial.
Both offers contained the proposal in relation to the first plaintiff concerning the transfer to her of the family home and the adjoining piece of land as well as water rights, all of which were the subject of the interim orders.
The first offer also sought the sum of $200,000 for the first plaintiff and $120,000 for the second plaintiff, with costs fixed at $40,000 and all amounts payable in 90 days.
The second offer also sought the sum of $250,000 for the first plaintiff and $120,000 for the second plaintiff, with costs fixed at $65,000 and all amounts payable in 90 days. The first plaintiff also offered to forego her rights to the annuity payable by the defendants under the deceased’s will.
Plaintiffs’ costs of the proceedings
The plaintiffs seek the following orders in respect of their costs:
(a) the costs of the plaintiffs of and incidental to the proceeding, including any reserved costs, be paid out of the estate on an indemnity basis;
(b) no order as to the costs of Mrs Lorraine Ternes.[3]
[3]Mrs Ternes was the second plaintiff in the proceeding until 7 April 2017, before the trial commenced.
The defendants oppose the plaintiffs’ orders for indemnity costs. They submit the appropriate orders should be the costs of the plaintiffs be paid out of the estate on the standard basis, to be taxed in default of agreement, and limited to two thirds for the period that Mrs Ternes was a plaintiff in the proceeding.
Defendants’ submissions
The defendants submit there is no proper basis for ordering indemnity costs. They submit the plaintiffs’ offers were as to the whole proceeding and any analysis of them as separate claims is misconceived. They also submit that Mrs Ternes did not achieve any better outcome from the first offer and the first plaintiff did not achieve any better outcome than the second offer.
The defendants submit that the first plaintiff has not established any proper basis for the Court to order costs on any basis other than the usual standard basis as there was no single offer made by the first plaintiff to accept any sum less than the sum of the $250,000 ordered by the Court.
The defendants made detailed points regarding the first offer, the effect of which was that the defendants were not in a position to accept the plaintiffs’ first offer as it was a combined settlement offer to ‘compromise the proceeding’ and not an offer to settle individual claims. They contend that the first offer was not more favourable than the result at trial where payment to the first plaintiff was to be made in three ‘separate tranches’.
Detailed points were also made by the defendants regarding the second offer, including that it was an offer to compromise the proceeding, not to settle individual claims, and that the offer did not allow a reasonable time for acceptance, having been made three weeks before the trial.
The defendants also raised a number of matters they considered ought ‘weigh upon the Court’s discretion’ in respect of the costs. One matter was that the plaintiffs had not included quotes for the necessary work on the first plaintiff’s home and the costs of aged care provision in their affidavit material and only provided such evidence to the defendants a matter of days before the hearing. Another matter was that no notice was given to the defendants that the plaintiffs were not going to rely on Mrs Ternes’ affidavit. The final matter was that the defendants sought, but were denied, leave to provide evidence of the first plaintiff’s life expectancy and the value of her indexed life annuity and her pension.
Applicable costs principles
The usual order as to costs is that a successful party in litigation is entitled to an award of costs in its favour and the unsuccessful party bears the liability for the costs of the unsuccessful litigation.[4]
[4] Oshlack v Richmond River Council (1998) 193 CLR 72, 67.
Prior to 1 January 2015, the usual order as to costs in civil litigation was the exception rather than the norm in family provision applications, as s 97(6) of the Administration and Probate Act 1958 provided that, subject to s 97(7), the Court may make any order as to the costs of a family provision application that is, in the Court’s opinion, just.[5]
[5]Prior to amendment, section 97(7) of the Administration and Probate Act 1958 dealt with the costs where the application has been made frivolously, vexatiously or with no reasonable prospects of success.
As from 1 January 2015, the costs in respect of family provision claims are to be determined in the exercise of the Court’s general costs discretion.[6]
[6]Justice Legislation Amendment (Succession and Surrogacy) Act 2014 repealed ss 97(6) and (7) of the Administration and Probate Act 1958.
The prima facie position in respect of costs in litigation is for standard costs to be ordered by the Court.
Rule 63.28 of the Supreme Court (General Civil Procedure) Rules 2015 provides that the Court has discretion to award costs other than on the standard basis. A special costs order will only be made where the proceeding exhibits a special or unusual feature or special circumstances. Each proceeding must be considered on its own facts and, specifically, whether those facts support the making of a special order for costs. The rejection of an offer is a matter to which the Court should have regard when considering whether to order indemnity costs. The Court will consider whether the rejection of the offer was unreasonable in the circumstances, having regard to matters such as the stage of the proceeding at which the offer was received; the time allowed to the offeree to consider the offer; the extent of the compromise offered; the offeree’s prospects of success, assessed as at the date of the offer; the clarity with which the terms of the offer were expressed and whether the offer foreshadowed an application for indemnity costs in the event of the offeree’s rejecting it. [7]
[7]See, eg, Hazeldene Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435, 442.
Consideration
Mrs Ternes is an adult daughter of the deceased and initially was a plaintiff in the proceeding. The first offer provided that she withdraw her claim for further provision over and above the amount of $20,000 that she was entitled to under the deceased’s will.
By orders made 7 April 2017, Mrs Ternes ceased as a plaintiff in the proceeding. The settlement reached with Mrs Ternes was that she withdraw from the proceeding and pay $12,643.73 for her share of the estate’s costs of the litigation to that date. That amount was deducted from her bequest of $20,000 under the deceased’s will and she was paid the sum of $7,326.27.
Contrary to the submission of the defendants, there is no basis for an order that the plaintiffs’ costs, incurred during the period Mrs Ternes was a plaintiff, should be reduced in some manner by reason of Mrs Ternes initially being a plaintiff in the proceeding. Mrs Ternes is no longer a party in the proceeding and costs orders cannot be made against her. This proceeding does not concern Mrs Ternes, and her settlement is not relevant in the context of whether the plaintiffs should have their costs assessed on the standard or indemnity basis. The only costs at issue in this proceeding are the costs of the successful plaintiffs.
The matters described in the defendants’ submissions that should ‘weigh upon the Court’s discretion’ are difficult to follow in the context of the overall discretion as to costs and appear to relate to discontent with rulings at or before trial. Both offers included the details of the necessary work on the first plaintiff’s home and the aged care brochures, which were provided to the defendants in sufficient time before the trial. The plaintiffs’ reliance on various quotes did not create any prejudice for the defendants, with counsel for the defendants cross-examining on them extensively at trial.
In respect of Mrs Ternes’ affidavit, it was made clear by the plaintiffs when dealing with objections to the various parts of the affidavits filed in the proceeding that they did not intend to rely upon that affidavit and the defendants’ responses to Mrs Ternes’ affidavit were also struck out. There is no basis to say that no notice was given in the circumstances.
The final matter is the asserted denial of leave to adduce evidence of the first plaintiff’s life expectancy, the value of her indexed life annuity and her pension. The Court ruled on this application in circumstances where the defendants were attempting to adduce expert evidence on the eve of trial against the specific order made by the Court that such evidence would not be permitted. The matters described by the defendants do not hold weight in terms of the discretionary considerations against the plaintiffs receiving their costs.
The question of the deceased’s moral duty towards the plaintiffs was not an issue in the proceeding. The issue was the adequacy of the provision for the plaintiffs in terms of the quantum to be awarded. It is incumbent on a personal representative to assess the evidence in an impartial and objective manner, act properly and reasonably in conducting the litigation and, if appropriate, compromise the proceeding.[8] Parties to family provision litigation are encouraged to make open offers as early as practicable. This is consistent with the fiduciary duty of a personal representative conducting litigation affecting an estate, whereas beneficiaries do not have such a duty.[9] The family provision legislation imposes a duty on testators to make adequate and proper provision for eligible persons and that duty must not be ignored by personal representatives.
[8]Collett v Knox [2010] QSC 132 (23 April 2010) [167].
[9]Underwood v Sheppard [2010] QCA 76 (30 March 2010) [16].
It is misconceived for the defendants to characterise the plaintiffs’ offers as being combined offers of settlement. Both offers were capable of being accepted by the defendants either separately or together. Consistent with their duty, it is incumbent on the defendants to make counter offers in an attempt to resolve the litigation, particularly in this proceeding where the first plaintiff is elderly and the provision made for her by the deceased was significantly below what would be considered as adequate and proper provision.
The plaintiffs’ offers were both made within reasonable time frames. The second offer was made three weeks before the trial and allowed sufficient time for acceptance by the defendants. When the offers were made, particularly the second offer, the defendants would have been in a good position to evaluate the plaintiffs’ claims. As the defendants limited any provision being made to the plaintiffs from the estate to their entitlements under the deceased’s will, only the defendants’ entitlements were affected. The second offer made by the first plaintiff included that she forewent her rights to the annuity payable by the defendants under the deceased’s will. In the result, she retains the annuity, which is required to be paid by the defendants as set out in the deceased’s will.
The rejection by the defendants of the offers was unreasonable in the circumstances, having regard to the fact that the first offer was made just after the mediation of the proceeding and the second offer was made three weeks before the trial. Both plaintiffs had strong claims and the offers were realistic and sensible attempts to settle the proceeding. The offers were clearly expressed and foreshadowed applications for indemnity costs in the event of their rejection. The rejection of the offers by the defendants caused substantially more costs than the costs referred to in the two offers. The result for both plaintiffs at trial is that the judgment was more favourable than the offers as they succeeded to a greater extent than the offers.
The relevant offer for consideration is the first offer. The first offer was dated 21 February 2017 and was open for acceptance for 14 days after that date. The offer therefore expired on 7 March 2017.
The plaintiffs seek indemnity costs from the estate for the entire proceeding, citing authorities referred to in Dal Pont’s Law of Costs.[10] Some of the authorities cited pre-date the changes to the assessment of costs to the standard basis, being decided when costs were assessed either on a party party or solicitor client basis. Costs are now assessed on either the standard basis or on an indemnity basis.[11]
[10]G E Dal Pont, Law of Costs (LexisNexis, 3rd ed, 2013) [10.35].
[11] Supreme Court (General Civil Procedure) Rules 2015, rr 63.30, 60.30.1.
In the case of the plaintiffs, it is appropriate to make the usual orders where a plaintiff has succeeded at trial to a greater extent than an offer, that is, the successful plaintiff is entitled to costs on the standard basis. In the circumstances where the rejection of the offers was unreasonable, the first offer was made immediately after the mediation, both offers allowed sufficient time for the defendants to consider them, the offers were clearly expressed, the claims of the plaintiff were strong and the offers foreshadowed an application for indemnity costs in the event of rejection, the Court considers that an order for indemnity costs in favour of the plaintiffs as from 8 March 2017 ought be made.
Defendants’ costs of the proceeding
The defendants seek that their costs be paid out of the estate on an indemnity basis. The defendants submit that the costs should fall upon the estate in the usual manner where there are no specific cash funds or other sources of payment, that is, costs would be borne by the beneficiaries pro rata, so that the costs, insofar as they are to be paid by the estate, would be borne by all beneficiaries in proportion to their entitlement. They submit this would include the plaintiffs costs based on the orders made being read as a codicil made to the will immediately before death, pursuant to s 97(4)(a) of the Administration and Probate Act 1958.
The usual order for defendant executors is that their costs be paid out of the estate on an indemnity basis. The usual order as to the costs of the defendants may be modified in the exercise of the Court’s discretion in circumstances where reasonable and realistic offers were rejected, where the litigation has been unnecessarily prolonged or where the executors of the estate are entitled to the whole of the available asset pool.
The defendants specifically limited the quantum of the estate, out of which any provision would be paid to the plaintiffs, to their entitlements under the deceased’s will, being real estate valued for probate purposes, some 18 months earlier, at $1,290,000.[12] This limitation was made by counsel for the defendants at the commencement of trial when the Court enquired as to the interest of the deceased’s grandson under the will. He was the devisee of a property known as ‘Five Ways’. At trial, the Court enquired whether the grandson was represented or aware of the proceeding and what was his position in relation to the proceeding. Counsel for the defendants informed the Court that if any further provision were made for the first plaintiff and any provision was made for the second plaintiff, that provision would be made from the defendants’ entitlements only. This meant that any family provision orders made in favour of the plaintiffs would not have an adverse effect on the other beneficiaries of the estate of the deceased.[13] The consequence of this was that the property known as ‘Five Ways’ was not part of the asset pool. The defendants’ position as to the available assets of the estate was accepted by both the plaintiffs and the Court. This means that the defendants were defending their beneficial interests in the asset pool as beneficiaries, not as executors of the estate of the deceased.
[12]Re McKenzie [2017] VSC 792 (21 December 2017) [61].
[13]Ibid [60].
In this context, the defendants’ submission that the costs of the proceeding should be borne pro rata by the beneficiaries, including the plaintiffs, is unclear. The defendants are the only beneficiaries affected by the orders made in the proceeding and the relevant asset pool is at least $1,290,000, so there are sufficient assets to pay the provision ordered for the plaintiffs plus their costs. Based on the submissions, the defendants appear to have taken alternating positions depending on the circumstances. There is a conflict where executors seek to advance their own interests as beneficiaries of an estate under the guise of upholding the deceased’s will and use estate funds to do so.
The defendants have also unreasonably rejected two reasonable and realistic offers to compromise the proceeding and, by rejecting the offers, have unnecessarily prolonged the litigation.
The Court would be assisted by further short written submissions as to the costs of the defendants.
Other matters raised by the defendants’ written submissions
The defendants raised certain queries or made conclusions on matters extraneous to the costs. These issues will now be considered.
Amendment to the orders for provision
The defendants state that the title particulars of the properties referred to in order (c) of the orders set out in [5] above require amendment as a result of the separation of certificates of title. The details in the orders were taken from the evidence then before the Court. If the orders require amendment, the Court requires evidence to support the assertions by the filing of an affidavit deposing to the relevant evidence, such as the title searches for the relevant properties.
Stay on the payment of provision and the plaintiffs’ costs
The defendants’ submissions seek a stay on the payment of the provision made at final judgment to the plaintiffs and the plaintiffs’ costs for 120 days.
An application for a stay must be made on notice with appropriate affidavit evidence in support of the application. No application for a stay has been filed with the Court. The defendants’ submissions make general unsubstantiated statements, such as the estate having no cash funds to meet the payments, that it is likely that land will need to be sold or mortgaged to fund the payments and that the process will be complex, time consuming and costly. General unsubstantiated statements are not a basis on which a stay may be granted.
The defendants have been aware since at least February 2017 of the possible quantum of the plaintiffs’ claims and have known the asset pool for the purposes of the proceeding. Judgment was delivered on 21 December 2017. The defendants have had adequate time to arrange their financial affairs for the payments to be made to the plaintiffs, now a combined total of $330,000. As demonstrated by the provision to the plaintiffs, they are in financial need and the amounts for provision must be paid forthwith. In the circumstances, the defendants’ attempt to seek a stay reflects poorly on them and their legal practitioners.
Further issue to be considered by the parties
A further issue that arises from the defendants’ failure to pay the pecuniary legacies to the plaintiffs and their attempts to delay or reduce the payment. In the ordinary course, interest is payable on unpaid pecuniary legacies.
Until the recent changes made to the Administration and Probate Act 1958 by the Administration and Probate and Other Acts Amendment (Succession and Related Matters) Act 2017 (‘the amending Act’), interest on pecuniary legacies not paid from the end of the executor’s year was generally calculated at the rate of 4 per cent per annum.[14]
[14]Re Blake (2009) 25 VR 27.
The amending Act came into operation on 1 November 2017. It provides that interest on legacies that are not paid within 12 months of the date of death be calculated at 2 per cent above the cash rate last published by the Reserve Bank of Australia before 1 January in the calendar year in which interest begins to accrue.[15]
[15]Administration and Probate Act 1958, s 3(1).
The parties are to provide short written submissions in respect of the statutory interest payable on the unpaid portion of the legacies, including the applicable rates of interest and the commencement date of the payment of interest.
Orders
The Court will make the following orders:
(a) the costs of the plaintiffs of and incidental to the proceeding, including any reserved costs, up to and including 7 March 2017 be paid out of the estate of the deceased on the standard basis, and thereafter on an indemnity basis, to be taxed in default of agreement;
(b) no order as to the costs of Mrs Lorraine Ternes, a plaintiff in the proceeding until 7 April 2017;
(c) the costs of the defendants are reserved;
(d) on or before 21 May 2018, the defendants file short written submissions on the costs of the defendants and whether interest is payable on the unpaid portion of the pecuniary legacies payable to the plaintiffs;
(e) on or before 31 May 2018, the plaintiffs file short reply submissions.
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