Re The Palermo Unit Trust; Ex parte Philip Milton Rundell (as Trustee for Various Trusts)
[2014] WASC 69
•10 MARCH 2014
RE THE PALERMO UNIT TRUST; EX PARTE PHILIP MILTON RUNDELL (AS TRUSTEE FOR VARIOUS TRUSTS) [2014] WASC 69
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2014] WASC 69 | |
| Case No: | CIV:1096/2014 | 26 FEBRUARY 2014 | |
| Coram: | CHANEY J | 10/03/14 | |
| 14 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| B | |||
| PDF Version |
| Parties: | PHILIP MILTON RUNDELL (AS TRUSTEE FOR VARIOUS TRUSTS) |
Catchwords: | Trusts Direction to Trustee Whether trust assets should be sold to associates of one of the beneficiaries Beneficiaries in dispute Duty to act impartially as between beneficiaries Proposed sale at less than market value |
Legislation: | Trustees Act 1962 (WA) s 92 |
Case References: | Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 Nevin v The Beneficiaries of the Bremer Bay Estate Trust [2002] WASC 24 Palermo v Palermo (No 2) [2014] WASC 6 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
Re: The Palermo Unit Trust, Esplanade Trust, The Hampton 41 Trust, The Metro Trust, The Parkfield Trust, The River Gem Trust, The River Trust, The Time Trust, The Timewize Trust, The Murray Trust & the MM Trust
PHILIP MILTON RUNDELL (AS TRUSTEE FOR VARIOUS TRUSTS)
Applicant
Catchwords:
Trusts - Direction to Trustee - Whether trust assets should be sold to associates of one of the beneficiaries - Beneficiaries in dispute - Duty to act impartially as between beneficiaries - Proposed sale at less than market value
Legislation:
Trustees Act 1962 (WA) s 92
Result:
Application dismissed
Category: B
Representation:
Counsel:
Applicant : Mr J A Robertson
First Interested Party : Mr C Colvin SC
Second Interested Party : Mr M Howard SC
Solicitors:
Applicant : Williams & Hughes
First Interested Party : Rockwell Olivier
Second Interested Party : Gadens Lawyers
Cases referred to in judgment:
Breen v Williams [1996] HCA 57; (1996) 186 CLR 71
Nevin v The Beneficiaries of the Bremer Bay Estate Trust [2002] WASC 24
Palermo v Palermo (No 2) [2014] WASC 6
1 CHANEY J: Mr Phillip Rundell is a chartered accountant with over 30 years' experience in the re-organisation and re-construction of businesses. On 25 September 2013, he was appointed by the Supreme Court of Western Australia as trustee of a number of trusts of which two brothers, John Palermo and Anthony Palermo, and parties associated with them, have interests as beneficiaries. The assets of the various trusts comprise extensive land holdings. The relationship between John Palermo and Anthony Palermo has completely broken down, and they, or associated entities or family members, are engaged in extensive litigation in this and other courts.
2 On 23 January 2014, John Palermo commenced the present proceedings as plaintiff, naming Mr Rundell, in his capacity as trustee of the various trusts, as defendant. The application was brought under s 92 of the Trustees Act 1962 (WA). Section 92 of the Trustees Act provides:
92. Directions, trustee may ask Court for
(1) Any trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of that property, or respecting the exercise of any power or discretion vested in the trustee.
(2) Every application made under this section shall be served upon, and the hearing thereof may be attended by, all persons interested in the application or such of them as the Court thinks expedient.
The defendant is justified in completing the following contracts for sale:
A. Jolida Investments Pty Ltd ('Jolida') as trustee of the Pinjarra Hills Trust for the land owned for the benefit of the MM Trust;
B. Westscircle Corp Pty Ltd as trustee for the Hawthorne Trust for the land owned for the benefit of The Esplanade Trust;
C. Jolida as trustee of the SOG Trusts for the land owned for the benefit of the River Gem Trust and the River Trust;
D. Jolida as trustee for the West Pinjarra Trust for the land owned for the benefit of the MM Trusts, Time Trust, Metro Trust, Park Field Trust, The Riverside Trust, Murray Trust and Timewize Trust;
E. Cobromin Resources Pty Ltd as trustee for the Hampton Trust for the land owned for the benefit of the Hampton 41 Trust.
4 The contracts for sale referred to above (the December contracts) involve the sale of various lots of land to each of Jolida, Westcircle Corp Pty Ltd and Cobromin Resources Pty Ltd by Mr Rundell in his capacity of trustee of the various trusts which hold the land. Each of Jolida, Westcircle and Cobromin are companies controlled by John Palermo or his wife. The December contracts are each subject to a condition that they will only be effective if a direction of the Court for sale of the properties is obtained under s 92 of the Trustees Act.
5 Anthony Palermo opposes the orders sought, and contends that the Court should conclude that the trustee is not justified in completing the December contracts.
Background to the contracts
6 As already noted, Mr Rundell was appointed as trustee on 25 September 2013. One of the trusts to which he was appointed trustee was the Palermo Unit Trust. The previous trustee of that trust was Tomar Holdings Pty Ltd (Tomar). Tomar has extensive borrowings (NAB loan) from the National Australia Bank (NAB). Many, but not all, of the former trustees of the trusts are guarantors of the NAB loan. The NAB is also secured by a mortgage over many, but not all, of the properties which were assets of the various trusts.
7 The NAB loan is, and has been since prior to Mr Rundell's appointment, in default. Receivers have been appointed to Tomar by the NAB.
8 As part of his administration of the trusts, Mr Rundell sought advice in relation to the realisation of the properties held in trust and in relation to marketing and valuation of those properties. He obtained a number of valuations from Opteon (Western Australia) Pty Ltd (Opteon). A tabulation of the valuations obtained, prepared by Mr Rundell, reveals that the properties (which are the subject of the agreements in respect of which approval is sought) have a market value as individual lots of $16,190,000.00, a 'forced sale value' as individual lots of $13,046,000.00, a market value, if sold as single parcels (of grouped lots), $11,333,000.00, and a 'forced sale value', if sold as single parcels (of grouped lots), of $9,885,000.00.
9 On 3 December 2013, Mr Rundell received advice from his solicitors, Williams and Hughes. That advice made reference to a proposal from John Palermo for Jolida, Cobromin and Westcircle to purchase a total of 26 lots owned by the various trusts for an aggregate purchase price of $14,920,000.
10 Subsequently, on 24 February 2013, Mr Rundell executed the December contracts which effect the conditional sale of a total of 25 lots, for a total consideration of $11,267,000.00.
11 None of the affidavits filed either by Mr Rundell or Mr Palermo give any explanation as to what led to the proposed purchase price changing from $14,920,000.00 to $11,267,000.00 or how the latter figure was negotiated. It is apparent that the agreements of 24 December 2013 did not include the sale and purchase of a property described in Williams and Hughes' letters as Lot 300 Southwestern Highway, Coolup, and in the valuation obtained from Opteon as 1 Murray Street, Coolup, although both give the title details as Certificate of Title Vol 2202 Folio 65, being Lot 300 on the posited Plan 24686. I note that the Opteon valuation of that lot provides a market value of $460,000.00 inclusive of GST and a forced sale value of that lot of $390,000.00. The exclusion of that lot from the sales the subject of the agreements of 24 December 2013 does not, therefore, provide an explanation as to the basis for the change in the proposed purchase price.
12 It can be seen that the aggregate purchase price under the December contracts falls well short of either the market value of the individual lots or the forced sale value of the individual lots, as assessed by Opteon. It also falls slightly short of the single parcel market value, although is greater than the single parcel forced sale value.
The factors leading Mr Rundell to support the proposed sales
13 As noted above, these proceedings were initially commenced by John Palermo as plaintiff with Mr Rundell, in his capacity as trustee of the various trusts, named as defendant. Mr Rundell initially adopted a somewhat neutral stance in relation to the application. His initial affidavit, sworn on 22 January 2014, explained the difficulties with which he was faced in relation to his administration of the trusts, and put forward all of the information that he considered necessary to enable the Court to assess whether completion of the December contracts was justified. He initially refrained from expressing a view as to whether the completion of the December contracts should occur. Rather, as his counsel put it in a directions hearing prior to the hearing, the outcome of the December contracts was 'something that he is prepared to entertain'. By letter dated 31 January 2014 from Mr Rundell's solicitors to Anthony Palermo's solicitors, it was said that Mr Rundell 'does not endorse or support the contracts for the sale of the trusts' properties'.
14 In his affidavit of 25 February 2014, Mr Rundell said that, since his appointment, it has been his intention to remain neutral and objective in his administration of the trusts and he had approached the sale of the trusts properties with the same objectivity. In his affidavit of 25 February 2014, however, Mr Rundell indicated that he supported the application on the basis that, from his experience and his deliberations about the matter since his appointment, completion of the December contracts would, on balance, be a better or more certain outcome for the beneficiaries of the trusts than enforcement action initiated by NAB or a protracted sales program. He produced a further analysis of the financial outcome of various scenarios to support that opinion.
15 Mr Rundell summarised his position as trustee of the trusts which led to him entering the contracts of sale as follows:
(i) He has no or limited funds in the trusts at his disposal other than the proceeds of sale of a property by a trust, and rental income from some residences on some rural properties owned on behalf of some of the trusts.
(ii) The former trustees of the trusts, which have a right of indemnity from the assets of the trusts, are sureties for Tomar in respect of the NAB loan. Anthony Palermo and John Palermo are personal guarantors of the NAB loan.
(iii) The NAB loan is currently $9,750,000.00, is in default, and the NAB has appointed receivers to Tomar. The NAB is threatening to appoint receivers to all of the trusts' properties that are mortgaged to the NAB.
(iv) The NAB loan requires interest servicing of approximately $70,000.00 per month. It was due to mature on 14 January 2014 but has been extended by consent, most recently until 31 March 2014, subject to certain conditions requiring payments of interest and fees. NAB has also agreed to forebear from charging the default interest rate of approximately 16.27%. If the loan is not repaid within the extended period, that will result in interest being incurred at the default rate in an amount of approximately $1,600,000.00 per year.
(v) The trusts' properties generate, or can potentially generate, an annual income of approximately $174,000.00.
(vi) Rates and taxes for the properties the subject of the trusts are approximately $100,000.00.
(vii) There are potential compensation claims attaching to two properties the subject of trusts, but because of commercial pressures associated with the NAB loan, Mr Rundell does not have the time or the funds to pursue litigation in relation to those claims. More will be said below about the status of those claims under the December contracts.
(viii) A comparative schedule of valuations of the trusts' properties, based on values referred to by Opteon, show that the December contracts would only meet the single parcel distressed sale value expressed by Opteon.
(ix) The properties owned by the trusts which are mortgaged to secure the NAB loan would, under the December contracts, realise $7,459,000.00. In order to clear the NAB loan, it would therefore be necessary for Mr Rundell to draw on proceeds of the sale of land not mortgaged to secure the NAB loan, being land within the MM Trust. The former trustee of the MM Trust was CMT Pty Ltd, which is a guarantor in relation to the NAB loan. CMT Pty Ltd would be entitled to indemnity from the assets of the MM Trust in relation to its liability to NAB as guarantor. The 2010 financial statements for the MM Trust (which I assume are the most recent accounts available to Mr Rundell) reveal that John Palermo and Anthony Palermo are shown as creditors of the MM Trust, in an amount of approximately $5,700,000.00. The NAB has the benefit of a subordination agreement by which various of the former trustees of trusts within the Palermo group subordinated any debts owed to them by Tomar to the debt owed by Tomar to NAB. John Palermo and Anthony Palermo were not, however, parties to the subordination agreement. Thus their cooperation will be required to enable Mr Rundell to utilise proceeds of the sale of properties in the MM Trust to discharge the liability to NAB in preference to the liability to John Palermo and Anthony Palermo.
16 Each of the December contracts contained special conditions. The special conditions provided that all of the December contracts were interdependent so that if any one is not completed then the others would become of no force and effect. A further special condition provides that the contract is subject to and conditional upon the buyer obtaining, at its expense, a direction under s 92 of the Trustees Act. I was informed at the hearing that the parties proposed that that special condition should be varied by consent so as to provide that the seller, that is the trustee, is to obtain a direction.
17 Two of the contracts dealt with land in respect of which unresolved compensation claims (for compulsory taking of land) attached. As originally presented, a special condition to those contracts provided for the seller to assign all of the compensation rights to the purchaser as part of the sale of the land. Those compensation claims have been the subject of negotiations with the resuming authority, although they appear not to have progressed for some time. In order to preserve privilege, the amount of the offers made to settle the compensation claims was not disclosed in the affidavits filed in support of this application. At the hearing of this matter, I was informed from the bar table that agreement had been reached between Mr Rundell and the relevant proposed purchasers to vary the special condition so as to remove the assignment of compensation rights such that they would remain with the trustee.
18 It was against that background that Mr Rundell supported the application for a determination by the Court that completion of the contracts is justified.
John Palermo's submissions
19 Notwithstanding the substitution of Mr Rundell as the applicant for relief, John Palermo effectively assumed the role of arguing in favour of the orders sought in the application. Anthony Palermo argued strongly against the making of the orders sought. It is important to bear in mind that, underlying these proceedings is the dysfunctional and bitter dispute between John and Anthony Palermo. After a long period of working together quite successfully, their relationship has disintegrated to the point where McKechnie J in Palermo v Palermo (No 2)1 described their antagonism as 'almost palpable'. It is fair to infer from the corporate structures of the various former trustees, and from the fact that John Palermo and Anthony Palermo are beneficiaries of all of the trusts with which we are concerned in this case, that the assets the subject of the December contracts represent the product of their joint enterprises over an extended period of time. The effect of completion of the December contracts would be that John Palermo (through his associated entities) will gain complete control of those assets for a price which is acknowledged to be substantially less than their market value. Any prospect of Anthony Palermo sharing in the realisation of the assets would be lost. Those facts, by themselves, do not necessarily lead to the conclusion that the December contracts are not justified. They do, however, provide a context against which the transactions must be viewed, having regard to a trustee's obligations to exercise the same care as an ordinary prudent person exercising the conduct of their own business,2 and to treat beneficiaries impartially.
20 John Palermo points to the incapacity of the trusts to meet their liabilities from their income, and the prospect that NAB will enforce its securities if it is not paid out by the latest extended date. In that event, the trusts will become insolvent (in the sense of being unable to pay their debts as on when they fall due). He points to the advice given to Mr Rundell, from a real estate agent, that placing all the properties on the open market would cause an oversupply. Therefore, it would be prudent to undertake a staggered marketing campaign which might be expected to take two years. He points out that the trustee does not have the funds with which to market the properties in any event. He contends that, in the circumstances, the only option is to sell all of the properties 'in one line' which, as the valuer recognised, gives rise to a discounted value. He argues that in those circumstances, a person looking after his own affairs would have entered into the December contracts, notwithstanding the discounted price, and that a direction should be given that the December contracts are justified. John Palermo argues that the return to the trusts, should receivers be appointed by the NAB, would not be likely to be much greater than is achieved through the December contracts, and the risk of significant additional costs might be avoided.
Anthony Palermo's opposition
21 Anthony Palermo, in written submissions, argued that the Court should not entertain an application by John Palermo, whose personal interest conflicted with the proper performance of the duties of the trustee in the administration of the trusts. It was no doubt as a result of that submission that John Palermo consented to the trustee assuming the role of applicant in these proceedings. Anthony Palermo observes that the first affidavit filed by Mr Rundell in relation to the application was prepared by John Palermo's solicitors, and that by letter dated 31 January 2014, Mr Rundell's solicitors wrote to Mr Palermo's solicitors advising that Mr Rundell's position 'is and has always been' that he 'does not endorse or support the contracts for the sale of the trusts properties'.
22 Anthony Palermo submits that the December contracts are for a sale at a substantial undervalue of the properties when compared to both their market value and their forced sale on an individual lot basis. He contends that the sale of all lots in one line at a substantial undervalue is not a prudent course for the trustee to take, and that the trustee, or any receiver appointed by NAB, could, on the available evidence, secure a much higher price on a forced sale of individual lots basis. He complains that there is no evidence as to any marketing by Mr Rundell in the three-month period between 25 September 2013 and 24 December 2013 when the December contracts were signed, notwithstanding that it must have been obvious from the outset that the income from the properties was incapable of supporting the interest payable to NAB. Rather, Anthony Palermo submits that Mr Rundell took no steps to test the market in the five months of his appointment.
23 Anthony Palermo noted that no evidence had been put before the Court as to the nature of any discussions between Mr Rundell and NAB about possibilities of re-financing debts or undertaking orderly sales of individual lots so as to maximise the possible return from the properties. He notes that the evidence discloses that NAB has been prepared to grant extensions on repayments and to forbear on penalty interest rates since as long ago as October 2012 (both prior to and after Mr Rundell's appointment as trustee). He notes that during that period of forbearance, Tomar's debts to NAB have reduced from in excess of $27,000,000.00 to its present level of approximately $9,750,000.00. He contends that the evidence does not establish that NAB would necessarily appoint receivers and arrange forced sales rather than negotiate an orderly sale of the properties to reduce the debts, thus avoiding the costs of receivers and maximising the potential return on the properties.
24 He also contends that Mr Rundell has been guilty of the inaction which has resulted in the difficult position in which the trusts now find themselves, and that directions should not now be made which have the effect of absolving him from any potential liability in relation to claims brought by beneficiaries. In that context, Anthony Palermo complains that there was a delay of almost a month between the time the December contracts were executed and when he received any advice of that fact.
25 Further, Anthony Palermo submits that 'in order to ensure that the actions of the trustee do not advantage the position of one beneficiary over another', it is inappropriate that there be dealings with one of two beneficiaries in dispute. It is submitted that any such dealing should be able to be justified as being at least as favourable as the next best option available to the trustee.
26 In relation to the proposed amendments to the December contracts to remove the assignment to the buyers of the rights to claim compensation, Anthony Palermo argues that the contracts should not be approved until the amendments are clearly set out, and until there is clarification as to whether, having disposed of the land, the trustee would indeed be in a position to pursue those claims.
27 He also contends that there is no adequate explanation for the price which has been agreed having regard to the fact that a proposal was apparently on foot (it was the subject of the advice from Williams and Hughes) to pay $14,920,000.00 in early December 2013. He contends that in the absence of any explanation for the price difference, or any evidence as to the negotiations which led to the current price, approval of the December contracts should not be given.
28 Reliance is also placed on the fact that payment to the bank from the proceeds of the properties held in the MM Trust would require the cooperation of other creditors which has not been secured.
Should the order sought be made?
29 It is not in issue that the Court has the power to make the order sought by the trustee. An order was made under s 92 of the Trustees Act by Pullin J directing a trustee to exercise a power of sale in Nevin v The Beneficiaries of the Bremer Bay Estate Trust3. His Honour observed, at [14], that the authorities suggest that if advice is given by a court under s 92, it should be conservative advice. I respectfully adopt that approach, especially given the underlying conflict between the principal beneficiaries of these trusts.
30 The dilemma facing the trustee in this case is a difficult one. There would seem little doubt that, were the two Palermo brothers able to negotiate sensible commercial arrangements between themselves, the risk of default action by NAB could be avoided. That much is clear from the fact that John Palermo obviously has the capacity to make satisfactory arrangements to discharge the NAB loan utilising whatever resources are available to him. Presumably, if the December contracts are approved, John Palermo would be in a position to undertake an orderly sale of the properties if he wished, and ultimately to realise their market value. Although I know nothing of Anthony Palermo's financial position, it seems inevitable that if there was cooperation between the two brothers on a sensible commercial basis, the current spectre of default action by the NAB, and the resultant costs of that action, could be removed, and the maximum possible return on the trusts' assets could be achieved.
31 I accept that Mr Rundell has endeavoured to achieve that outcome, but has found it impossible to achieve the necessary cooperation, particularly, it would seem, from Anthony Palermo. It is reasonable to assume that neither brother is any longer capable of dealing with the other on a sensible commercial basis; thus, the trustee's present dilemma.
32 John Palermo argues that, having regard to the 'real world', the trustee is justified in completing the December contracts given the returns that might be achieved in the event that the NAB acts on the default, receivers are appointed and the properties are placed on the market by the receivers. Mr Rundell's table of comparative net returns under various scenarios shows that, after payment out of the NAB loan, the December contracts would show a net return of $1,486,965. He compared that with sales on different bases for different periods. The summary table is set out below.
CONTRACT COMPARATIVE TO NET RETURNS FROM PROPERTIES AT VALUATION
Sale Program Duration |
Market Value |
Forced Sale |
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Forced Sale |
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Under various scenarios, NAB debt not discharged from secured and guarantor trusts Compensation Claims Assumptions All properties settle end of period NAB interest is straightline | |||||
34 It is those scenarios which provide the foundation of the argument that the trustee is justified in completing the December contracts.
35 Anthony Palermo notes that, even if there were a forced sale of individual lots by a receiver over a 12-week period, the net return would be in excess of $2,300,000.00, some $836,000.00 more than the December contracts would produce. He argues that the valuation on a forced sale basis contemplates immediate sale, not a sale over extended periods as illustrated in the comparative table. Therefore, he argues, even if the NAB proceeded with default action and immediately placed the properties on the market, a better return than that achieved by the December contracts could be expected. He argues that there is insufficient evidence of negotiations with the bank concerning, or of the banks likely attitude to, proposals for an orderly sale so as to prevent default action by NAB. He submits that if further forbearance could be negotiated, particularly in relation to the default interest rate, the net returns would be substantially increased. For example, if a 12-month period for forced sales was required, but the present interest rate as distinct from the default interest rate was were charged, and no receivers fees were incurred, the return would be increased by around $900,000.00, without allowing for the progressive reduction of the debt from any individual sales achieved within the 12-month period. He observes that, if receivers are appointed by NAB, there is nothing to stop John Palermo negotiating with the receivers to purchase the assets.
36 The December contracts can only be justified if they are consistent with the performance of the trustee's duties, including, relevantly to the present circumstances, the trustee's duty to act impartially as between beneficiaries. On the evidence before me, I am not satisfied that that duty would be met by performance of the December contracts. The arguments in favour of the directions sought are essentially based on the proposition that, in all the present circumstances, the December contracts produce the likely best outcome for the beneficiaries. I am not satisfied that that is the case. In the context of the bitter dispute between the Palermo brothers, the outcome achieved by the December contracts appears very much in favour of John Palermo and to disadvantage Anthony Palermo. I am not satisfied that the evidence establishes that the December contracts achieve the optimal outcome, notwithstanding the significant difficulties facing the trusts by reason of the immediate lack of access to funds.
37 Some criticism was made by Anthony Palermo of the fact that five months have passed between Mr Rundell's appointment and the hearing of this matter, and that Mr Rundell has not done more to test the market in that period. I do not consider that criticism justified, particularly having regard to the fact that he has had difficulty in obtaining books and records, and dispute between the two brothers has undoubtedly made his task more difficult. The contracts were entered into within three months of his appointment. The following two months were focused on the present proceedings. Notwithstanding that the delay is understandable, it seems to me that there should be further exploration of the options for realising assets for a greater value rather than treating the December contracts as the only realistic option. Because I am not satisfied that the December contracts are the only realistic option, and because they have the effect of transferring to one beneficiary substantially all of the assets of the trusts at substantially less than their market value, and depriving the other beneficiary of any opportunity to share in the realisation of the assets (other than perhaps in relation to the compensation claims), I do not consider that performance of the December contracts is justified.
38 I am reinforced in that view by the fact that the parties propose amending the contracts in terms which are only before the Court by way of general description. One of those changes relates to compensation rights but there appears to be some uncertainty as to the effect of disposition of the land to which the rights relate. Taking a conservative approach, I would be reluctant to make a direction where those details remain unclear. A similar concern arises in relation to the unrestricted issue of consent of the unsubordinated creditors of the MM Trust, including Anthony Palermo and John Palermo, to the use of funds from the sale of land not mortgaged to secure the NAB loan.
39 For those reasons I would decline to give the directions sought.
1Palermo v Palermo (No 2) [2014] WASC 6 [2].
2Breen v Williams [1996] HCA 57; (1996) 186 CLR 71, 137.
3Nevin v The Beneficiaries of the Bremer Bay Estate Trust [2002] WASC 24.
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