Rydzewski v Rydzewski (No 2)

[2024] NSWSC 1074

Supreme Court

New South Wales

Medium Neutral Citation:

Rydzewski v Rydzewski (No 2) [2024] NSWSC 1074

Hearing dates:

Written submissions on 26 July, 29 July and 4 August 2024 and then on the papers

Date of orders:

23 August 2024

Decision date:

23 August 2024

Jurisdiction:

Equity - Succession & Probate List - Probate

Before:

Richmond J

Decision:

See [32]

Catchwords:

COSTS — Payable out of a fund — Deceased estate — Bases of quantification — Indemnity basis — Ordinary basis — Factors relevant to the court’s discretion when quantifying costs — Whether difference between ordinary and indemnity costs should be paid out of the deceased estate — Whether costs incurred proper and reasonable

Legislation Cited:

Civil Procedure Act 2005 (NSW)

Legal Profession Uniform Law (NSW)

Trustee Act 1925 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Bouras v Grandelis (2005) 65 NSWLR 214; [2005] NSWCA 463

Cardaci v Cardaci [2023] WASCA 158

Dean v Antunes [2016] NSWSC 1845

DVB v NSW Trustee and Guardian [2021] NSWCATAD 105

Hayward (as Executor of Felton Estate) v Speedy and Felton [2021] NSWSC 943

Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432

Nobarani v Mariconte (No 2) (2018) 360 ALR 390; [2018] HCA 49

Olsen v James [2020] NSWSC 1015

Permanent Trustee Co v Redman (1917) 17 SR (NSW) 353

Ramage v Waclaw (1988) 12 NSWLR 84

Re Atkinson, deceased [1971] VR 612

Re Ciantar [2022] VSC 116

Re Estate Nitopi, deceased [2018] NSWSC 1560

Reeves v Reeves (No 2) [2024] NSWSC 386

Rydzewski v Rydzewski [2024] NSWSC 802

Wardle v Wardle (No 2) [2021] NSWSC 1663

Texts Cited:

Dal Pont, Law of Costs (5th ed, 2021, LexisNexis Australia)

JD Heydon & MJ Leeming, Jacob’s Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworths)

Category:

Costs

Parties:

Stanislaus Rydzewski (Cross-claimant)
Daniel McKinnon as the administrator of the Estate of the late Maria Rydzewski (Fifth Cross-defendant)

Representation:

Counsel:
Dr H Bennett (Cross-claimant)
Mr AF Stevens (Fifth Cross-defendant)

Solicitors:
Browne Linkenbagh Legal Services (Cross-claimant)
Complete Legal and Conveyancing (Fifth Cross-defendant)

File Number(s):

2021/00100787

Publication restriction:

Nil

JUDGMENT

1. This judgment deals with an outstanding issue concerning costs following the substantive decision in these proceedings in which the cross-claimant, Stan Rydzewski (Stan), was successful in setting aside transfers of three properties made by the deceased, Maria Rydzewski (the deceased), to the second and third cross-defendants during her lifetime, as the transfers were procured by unconscionable conduct and undue influence: Rydzewski v Rydzewski [2024] NSWSC 802 (Judgment).

2. By an amended cross claim filed on 28 September 2022 Stan sought the following relief in respect of costs:

24.    The Second and Third Cross Defendant pay the costs of the Cross Claimant of the proceedings, such costs calculated on the ordinary basis.

25.    That any difference between ordinary costs and indemnity costs of the Cross Claimant be paid out of the estate of the Deceased.

3. Following the judgment, I made orders on 9 July 2024 which included the first of these orders, and now before the Court is Stan’s application for the second order, being that any difference between his ordinary costs and indemnity costs be paid out of the estate of the deceased.

4. Both Stan and the fifth cross-defendant, Mr Daniel McKinnon, who was appointed as independent administrator of the deceased’s estate on 21 September 2021 (the Administrator), have provided to the Court submissions on that issue. The second and third cross-defendants neither consent to nor oppose the order sought by Stan. For the reasons which follow, I have concluded that such an order should be made.

Background

5. Under her last will, the deceased left her estate, as to one-third to her son Kevin, one-third to her son Stan, and one-third on trust for her daughter Barbara for her life and on her death for her surviving children. Following Barbara’s death after the conclusion of the hearing, her share has passed to her children. The effect of the proceedings is that the three properties with a combined value of around $3.4 million have been transferred by the second and third cross-defendants to the deceased’s estate.

6. Prior to the deceased’s death, there were contested proceedings in the New South Wales Civil and Administrative Tribunal (NCAT) as to whether the NSW Trustee and Guardian (Trustee), who had been appointed as her financial manager, should bring proceedings to set aside the impugned transfers. The Trustee had previously decided not to do so. That decision was overturned by the decision of NCAT published on 30 March 2021: DVB v NSW Trustee and Guardian [2021] NSWCATAD 105; see Judgment at [45]. However, the deceased died on 5 April 2021 and consequently the Trustee did not commence proceedings in this Court to set aside the impugned transfers. Instead, after Kevin commenced proceedings in this Court on 12 July 2021 seeking a grant of probate in respect of Maria’s last will, Stan filed a defence together with a cross‑claim seeking, among other things, that Kevin be passed over as executor and orders including setting aside the impugned transfers.

7. In the course of the case management of the proceedings, the parties agreed to the appointment of Mr McKinnon as independent administrator and, with leave of the Court, on 28 September 2022 Stan filed an amended cross-claim which joined Mr McKinnon as a defendant and removed both Kevin and Barbara as parties. The relief claimed also clarified the basis on which costs were claimed by Stan, as set out earlier.

8. The amended cross-claim was filed after orders made by Hallen J on 21 September 2021 which noted that the Administrator was to consider his position in relation to bringing a claim in equity against the second and third cross-defendants on behalf of the deceased estate to set aside the impugned transfers. The Administrator decided not to do so. His submissions on this costs application state that he made this decision because to bring the proceedings would have been at an enormous cost to the estate as he would have to ‘start from scratch’ to determine whether there was a cause of action including considering the materials that were tendered in the NCAT proceedings, and he would also have needed to seek indemnities from beneficiaries and/or sought judicial advice.

9. At a further directions hearing on 14 October 2021, Hallen J noted that Stan was aware that subject to the exercise of the Court’s discretion, the continuation of the cross-claim, said to be on behalf of the estate of the deceased, was upon the basis that he was at risk as to costs in the event that he was unsuccessful in the proceedings.

10. The Administrator filed a submitting appearance and took no active steps in the proceedings apart from providing the parties with details of estimated estate costs, assets and liabilities which form part of the Joint Agreed Schedule.

11. On the first day of the hearing, I made an order granting Stan leave to continue to prosecute the proceedings on behalf of the estate, but noting that the granting of this leave would not affect the question of costs in the event that Stan was unsuccessful.

12. According to the Joint Agreed Schedule provided by the parties to the Court at the commencement of the hearing, Stan’s costs were estimated to be $620,000 on the ordinary basis, and $832,066 on the indemnity basis. The second and third cross-defendants’ costs were estimated to be $440,000 on the ordinary basis and $640,000 on the indemnity basis.

13. Stan seeks an order that any difference between his ordinary costs and indemnity costs (which is estimated at $212,066) should be paid out of the estate of the deceased because the estate benefitted from the proceedings, in circumstances where the executor, Kevin, and the Administrator would not have otherwise brought the action for the estate.

14. The Administrator submitted that if the Court was to make an order that Stan was entitled to costs from the estate, it should be for an amount capped at around 50% of the difference between Stan’s ordinary and indemnity costs. This discount is said to be justified on the basis that Stan incurred unreasonable and/or disproportionately high legal costs, indicated by the total amount being very high and the excessively large number of documents put before the Court (the court book being over 5,300 pages), and that he also lost on one argument (being whether Maria had mental capacity to execute the three transfers).

15. Stan submits that there should be no discount from the amount to be paid from the estate because the complex and lengthy litigation history justified the high cost. In addition, the defendants contributed to the high cost by not agreeing to using a single medical expert; there was no evidence that the Administrator would have run the proceedings any differently to Stan, had he been in his position; and further the Administrator accepted in his submissions that the costs of him taking over the proceedings would have been ‘enormous’. If the Administrator had conducted the matter, provided he acted properly and reasonably, then he would have expected to have his costs on an indemnity basis paid out of the estate. Stan submits that having effectively stood in the Administrator’s shoes, he ought not to be treated any differently.

Consideration

16. Costs are in the discretion of the court and may be awarded on the ordinary basis or on an indemnity basis: s 98 of the Civil Procedure Act 2005 (NSW) (CPA) and r 42.2 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). While the Court’s discretion is broad, it must be exercised judicially and in accordance with the principles stated in ss 56-60 of the CPA. The usual rule is that costs follow the event, unless it appears that some other order should be made as to some or all of the costs: UCPR, r 42.1.

17. Although a beneficiary may have standing to bring a derivative suit to recover assets on behalf of an estate, they are ‘bound to conduct the derivative suit at [their] own risk as to costs’: Re Estate Nitopi, deceased [2018] NSWSC 1560 at [3] (Lindsay J), citing Re Atkinson, deceased [1971] VR 612 at 617; Ramage v Waclaw (1988) 12 NSWLR 84 at 91; Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432, 436-437. See also, Dean v Antunes [2016] NSWSC 1845 at [67]; Hayward (as Executor of Felton Estate) v Speedy and Felton [2021] NSWSC 943 at [27]; Re Ciantar [2022] VSC 116 at [58].

18. Nevertheless, costs incurred by a beneficiary may be ordered to be paid from the estate where ‘two requisites’ are satisfied: first, that the expenditure resulted in a benefit to the common property of the estate, and second, that the expenditure was reasonably incurred: Permanent Trustee Co v Redman (1917) 17 SR (NSW) 353 at 360 (Harvey J), referred to in Reeves v Reeves (No 2) [2024] NSWSC 386 at [89] (Meek J); Wardle v Wardle (No 2) [2021] NSWSC 1663 at [9] (Slattery J).

19. This principle is consistent with the general right of an executor to be indemnified out of the estate in respect of liabilities, costs and expenses properly and reasonably incurred in the administration of the estate, which is captured in s 59(4) of the Trustee Act 1925 (NSW), rr 42.5 and 42.25 of the UCPR and the general law: JD Heydon & MJ Leeming, Jacob’s Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworths) at [21-09]; Olsen v James [2020] NSWSC 1015 at [87]-[103].

20. The High Court in Nobarani v Mariconte (No 2) (2018) 360 ALR 390; [2018] HCA 49 at [2] (Kiefel CJ, Gageler, Nettle, Gordon and Edelman JJ) stated that:

The general rule concerning executors, like that concerning trustees, is that costs properly and reasonably incurred by the executor in connection with the administration of the estate are payable from the estate. These costs can include litigation expenses.

21. Similarly, in Cardaci v Cardaci [2023] WASCA 158 at [569] (Buss P, Murphy and Mitchell JJA), the Court noted that:

The general rule of indemnity has been described by the High Court as applying to costs reasonably and properly incurred by the trustee in connection with the administration of the trust. Costs for this purpose can include litigation expenses. The rationale for indemnification in respect of litigation expenses is that the trustee who has incurred the expense has not been acting for his or her own benefit, but for the benefit of the beneficiary or the trust estate in question.

22. If Stan, as a beneficiary of the estate, was acting purely in his own interest and not on behalf of the estate, then he would not be entitled to be indemnified out of the estate: Reeves [244]-[246]. There appears to be no dispute that Stan was acting on behalf of the estate and the result of the proceedings has benefited the estate, in circumstances where the Administrator would not otherwise have brought the claim. The role in which Stan was acting in bringing and prosecuting the proceedings was recognised by the order which I made on the first day of the hearing. It was beneficial to Stan in his personal capacity as co-beneficiary, but it was also beneficial to the common property of the estate – there appears to be a congruence between the interests of the estate and Stan’s personal interests in this case. If the order sought by Stan is made, Stan will effectively bear the burden of one-third of the amount of costs paid out of the estate through the diminution of his interest in the estate, and consequently the other beneficiaries will bear the costs burden in the same proportion as they have benefited from the recovery.

23. Turning now to whether the expenditure was reasonably incurred, there is a need for reasonableness which extends beyond the bringing of the claim. Even if bringing the claim was proper, as it clearly was, it is necessary that the expenditure incurred in running the claim was reasonable.

24. The Administrator submits that Stan’s costs were very high at approximately $832,000 on an indemnity basis, Stan lost on one argument, there was an excessively large court book with some irrelevant material, there is no evidence that Stan made any offers to settle the proceedings and there were extensions of time for late evidence by Stan (although it is recognised that this may have little relevance to the question of costs).

25. Stan submits that when the relevant costs the subject of the proposed order (being around $212,066 based on the Joint Agreement Schedule) are viewed relative to a recovery of around $3.4 million for the estate, the amount is not disproportionate compared to the benefit received by the estate. In addition, Stan submits that there was a complex and lengthy litigation history which justified the cost, the defendants contributed to the cost by not agreeing to a single expert, there was no evidence that the Administrator would have run the proceedings any differently to how Stan did, and the Administrator also conceded that if he had taken over the proceedings it would have incurred enormous cost. The medical evidence was relevant to the other issues in the case and not just the mental capacity issue (on which Stan was not successful). The extensions of time for late evidence were explained by an affidavit given by Stan’s solicitor at the time and were granted with the consent of the other parties. Further, if the Administrator had conducted the matter, provided he acted properly and reasonably, then he would have expected to have his costs paid on an indemnity basis; there is no reason why Stan, effectively standing in the Administrator’s shoes, should be treated any differently.

26. I accept the force of each of the submissions for Stan referred to in the previous paragraph. In my opinion, while Stan’s costs may appear, at first blush, to be high for the nature of the claim, the matters raised by the Administrator do not justify a different order to the one sought by Stan for the following reasons.

27. First, while I am not in a position to assess properly the reasonableness of the amount of Stan’s costs, there is an explanation for their size in the particular features of the case:

1. Stan was a stranger to the impugned transfers, and at the time they occurred there was a schism in the family. Consequently, most of the key evidence as to the circumstances in which the transfers occurred would need to come from witnesses called by the second and third cross-defendants, but it was necessary for Stan to call a significant number of lay witnesses to establish the context in which the transfers occurred, together with expert evidence dealing with the decline in the deceased’s health over a long period.

2. The significant amount of lay evidence and expert evidence is an explanation for the considerable costs in preparing for the hearing and the length of the hearing itself. The lay evidence relied on by Stan comprised 25 affidavits (for 13 witnesses). The lay evidence relied on by the second and third cross-defendants comprised 29 lay affidavits (also for 13 witnesses). There were two further lay witnesses who dealt with the deceased and whose evidence was important, but they were not called as a witness for either side: Mr Ireland, the deceased’s solicitor, and Dr Bassa, the deceased’s general practitioner. Also, there were two medical experts (who gave evidence in their reports, in a joint report and oral evidence at the hearing concurrently). The cross-examination of all these witnesses took up eight days of the hearing.

3. In addition, it was necessary for the Court to be referred to a large number of medical records of the deceased, and a large number of documents relating to the prior proceedings in NCAT. This material, together with the large number of affidavits accounts for the size of the court book. I do not regard any of this material as unnecessary.

4. It is apparent from the transcript of the directions hearing before Hallen J on 1 August 2022, that his Honour originally made directions for a single medical expert, but this was overtaken by the second and third cross-defendants’ decision to instruct their own expert (Dr Schwartz). Hence, the fact that there were two medical experts rather than a single expert is not due to the conduct of Stan.

28. Second, I do not regard the other matters raised by the Administrator (being the failure of Stan to make a settlement offer, the extensions of time for late evidence, and the fact that he lost on the mental capacity issue) as relevant to the question of whether Stan’s costs were reasonably incurred or otherwise to the question of costs in this case. While it is true that Stan failed on the issue as to whether the deceased had the mental capacity to make the impugned transfers, the medical evidence put forward for this claim was central to his success on the unconscionable conduct and undue influence claims: see Judgment at [296]-[297] and [316]. There was no significant waste of time or cost due to the mental capacity issue having been raised.

29. Third, an order that Stan is entitled to recover out of the estate the difference between ordinary costs and costs on an indemnity basis would not, assuming the costs were assessed, entitle him to recover costs which were unreasonably incurred. Under the ordinary basis of costs assessment, a party is only entitled to recover costs that are no more than fair and reasonable in all the circumstances, and that in particular are proportionately and reasonably incurred and proportionate and reasonable in amount: Legal Profession Uniform Law (NSW), s 172(1); Dal Pont, Law of Costs (5th ed, 2021, LexisNexis Australia) at [16.6]. Under the indemnity basis, a party is entitled to recover all costs other than those that appear to have been unreasonably incurred or appear to be of an unreasonable amount: UCPR, r 42.5(b); Dal Pont, Law of Costs at [16.23]. The effect of the exclusionary words is to shift the onus to the paying party to show that the costs have been unreasonably incurred, but if the paying party can satisfy the costs assessor of this, the costs which have not been reasonably incurred will not be recovered: Bouras v Grandelis (2005) 65 NSWLR 214; [2005] NSWCA 463 at [117]-[119].

28. In my view, the issue as to reasonableness of Stan’s costs is properly a matter for an assessor rather than me on this application. If an amount in respect of Stan’s costs is ordered to be paid out of the estate, the Administrator will be entitled to have those costs formally assessed unless otherwise agreed by the parties. The ability of the Administrator to require the costs to be assessed provides protection against the recovery by Stan of costs which were not reasonably incurred and provides an appropriate way for the Administrator to challenge the amount which Stan ultimately claims should the Administrator wish to do so.

29. In all the circumstances of this case, in particular the manner in which it came to be Stan rather than the estate bringing the cross-claim, I consider that it is appropriate that the Administrator should have the burden of establishing that some part of the costs were unreasonably incurred rather than Stan having the burden of establishing that they were reasonably incurred.

Conclusion

32. For the above reasons, the Court will make the following orders and notation:

1. NOTES that on 9 July 2024 the Court ordered that the Second and Third Cross-defendants pay the costs of the Cross-claimant of the proceedings, such costs to be calculated on the ordinary basis.

2. An order that any difference between ordinary costs and indemnity costs of the Cross-claimant, in each case as agreed or assessed, be paid out of the estate of the Deceased.

3. An order that the Fifth Cross-defendant’s costs of the proceedings, including his costs in relation to the Cross-claimant’s application for costs, be paid from the estate on the indemnity basis.

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Decision last updated: 23 August 2024