Szmulewicz v Recht
[2010] VSC 447
•6 October 2010 (and revised on 19 October 2010)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 1664 of 2010
| DAVID SZMULEWICZ and Others | Plaintiffs |
| - and - | |
| SAM RECHT and MICHAEL ZYLBERMAN (who are sued personally and as the executors of the estate of John Szmulewicz, deceased) | Defendants |
---
JUDGE: | Mukhtar, AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 14 September 2010 | |
DATE OF JUDGMENT: | 6 October 2010 (and revised on 19 October 2010) | |
CASE MAY BE CITED AS: | Szmulewicz v Recht | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 447 | |
EQUITY – Fiduciary obligations – Solicitor and client – Preparation of will – Solicitor appointed as trustee and executor – Right under will to charge professional fees – Additional entitlement to executor’s commission – Whether conflict of duty to client and personal gain – Whether cause of action disclosed
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr S. Newton | Wills & Probate Victoria |
| For the First Defendant | Mr M. Goldblatt | Tisher Liner & Co |
| For the Second Defendant | Mr E. Nekvapil | Lewenberg & Lewenberg |
HIS HONOUR:
This case concerns the fiduciary principle. At issue is its possible application to a solicitor (the first defendant) whose firm prepared a will for a client John Szmulewicz, now deceased. He was the father of the three plaintiffs who are the beneficiaries of his will. They allege that the solicitor stands to gain, for himself and an accountant (the second defendant), a personal benefit under the will which conflicts with his fiduciary duty to the client and would be inequitable for him to retain.
The proceeding was commenced by originating motion as an administration action under rule 54. At the same time, there was filed an affidavit of the first plaintiff David Szmulewicz with exhibits in support of the originating motion. The Court was told that would be the only affidavit and exhibits on which the plaintiffs would rely in the proceeding. The defendants complained those materials were defective and placed them “in the dark” about the basis on which they were being sued. They contended the case should proceed by way of pleadings.
Pleadings may be called for when it is necessary to state relevant facts as ingredients of a cause of action to justify the relief or remedy claimed. But here there was no dispute that the first defendant and his firm had acted as solicitor and had prepared the will. And the defendants accepted, as they were bound to, that a solicitor is classically a fiduciary to the client and as such owes certain duties in each particular case: see Hospital Products Ltd v United States Surgical Corp[1] and Maguire v Makaronis.[2] The distinguishing characteristic of a fiduciary relationship is, at its essence, the obligation to serve exclusively the interests of another person, or, to put it in the negative, it is a relationship in which the fiduciary cannot pursue a separate or personal interest, at least not without informed consent: see generally Meagher, Gummow & Lehane’s, Equity Doctrines & Remedies.[3] The question according to the defendants was how or in what way there was said to be a breach of that duty.
[1](1984) 156 CLR 1
[2](1996) 188 CLR 449 at 463.
[3]4th Edition at [5-005].
In the interests of advancing the litigation, I was not willing to order pleadings but gave the plaintiffs leave to amend the relief or remedy sought in the originating motion by adding the grounds, both factual and legal, upon which they seek their relief or remedy. I also ordered the proceeding be conducted as a trial by affidavit and made routine directions about the filing of opposing affidavits.
The plaintiffs have filed an amended motion. The defendants have abstained from filing any responding affidavits but instead have each filed a summons seeking summary judgment on the ground that the proceeding does not disclose a cause of action. They persevere with their contention that without an “allegation” of a breach of the fiduciary duty in the materials as filed, the claim is bad and ought to be struck out. That is really a pleading point, even though there are no pleadings. The defendants, or at least the first defendant, went further and said the claim was bound to fail anyway, and there should therefore be summary judgment.
The facts are not elaborate. John Szmulewicz died on 2 April 2008 leaving a will dated 22 January 2008. The defendants are the executors and trustees of the estate. Probate of the will was granted on 8 July 2008. According to an inventory of assets and liabilities, the estate is valued at $6 515 339.18.
The will was prepared by Messrs Tisher Liner & Co of which the first defendant is a solicitor and partner. The second defendant is an accountant. Both of them had been acting for the plaintiffs’ father for some time. They also held a power of attorney.
The plaintiffs have brought this case because of clause 22 of their father’s will which says:
22. Entitlement to Charge
(a)Any trustee being a legal practitioner or accountant may act in a professional capacity and shall be entitled to charge and be paid all the professional charges for any business or act done by him in a professional capacity in connection with my Will.
(b)In addition to 22(a) above if any of the named executors proves this my Will then, in addition to being paid for professional fees, he/they shall be entitled to retain from my estate commission of an amount equal to 3.5% of the gross Value of my estate and an amount equal to 5% of the income received by my executor, such charges are to be for the provision of non legal and non accounting work and in connection with the Trusts established by my Will.
The administration of the estate is complete and the residuary estate of the deceased has been distributed. The plaintiffs say that so far Tisher Liner & Co have rendered three accounts for legal fees relating to the administration of the estate for a total amount of $21 218.95. In addition to those invoices, the defendants have also rendered invoices for a total amount of $260 811.54 (including GST) for executors’ commission.
The plaintiffs believe that the charges made for executors’ commission are not based upon work actually carried out by the defendants which is not already covered by the three invoices rendered by Tisher Liner & Co. As the administration of the estate is now complete, they openly say that they need to rely upon the process of discovery of documents in this proceeding to properly investigate the underlying work for the invoices rendered.
The plaintiffs’ supporting affidavit also made reference to the fact that the deceased was in hospital at the time he made his last will, having undergone major surgery to remove a large tumour. He was also suffering from a psychiatric illness and had regular psychiatric hospitalisations. They say that he had suffered a significant deterioration in his mental state, including impaired memory and judgment and did not discuss matters of a financial nature with any of the members of the family. His earlier will, they say, did not have clause 22 in it.
There is something intrinsic to the fiduciary principle which does not have to be “pleaded”. That is: the fiduciary is under an obligation, without informed consent, not to promote the personal interests of the fiduciary by making or pursuing a gain in circumstances in which there is a conflict or a real or substantial possibility of a conflict between personal interests of the fiduciary and those to whom the duty is owed: see Pilmer v Duke Group Limited.[4]
[4](2001) 207 CLR 165 at 199 [78].
To that I would add another principle. The fiduciary obligation is largely regarded as a proscriptive one; that is, to be faithful to the beneficiary (client) and not to obtain any unauthorised benefit from the relationship, and not to be in a position of conflict: Breen v Williams.[5] If those obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. The principle is activated when the fiduciary seeks improperly to advance his own or a third party’s interests in or as a result of the relationship. On this proscriptive approach, an adviser’s duty of disclosure becomes a fiduciary one only when the advisory position is used possibly to advance his own or a third party’s interests: see P.D. Finn, “The Fiduciary Principle” in Youdan, Equity, Fiduciaries & Trusts.[6] The reference to a third party’s interests is significant in this case because the second defendant, the deceased’s accountant, did not prepare the will and it was submitted he should be treated differently.
[5](1996) 186 CLR 71 at 113.
[6]At p 25.
As I have said, in this application, the defendants attack the proceeding because the plaintiffs do not allege, nor does the affidavit demonstrate, in what respect the defendants have breached their fiduciary duty or in what respect he has failed to discharge obligations owed as a fiduciary.
I should first of all dispose of an argument that was advanced on behalf of the first defendant. It was said that, akin to a contract, the testator had agreed under clause 22(a) to confer those benefits upon the solicitor and the accountant and therefore there was no real occasion to even embark upon the exercise of seeing if there was a breach of fiduciary duty. I think this misunderstands the fiduciary principle. True it is, it was established in Hospital Products[7] that the fiduciary duty has to accommodate itself to the relationship between the parties created by their contractual arrangements, and entitlement under the contract to act in a relevant matter solely by reference to one’s own interests will constitute an answer to an alleged breach of the fiduciary duty. But I do not think it possible to apply that consideration to the case at hand. A will is not a contract. To say there is no breach of fiduciary duty because the testator is presumed to have agreed to clause 22 avoids the question.
[7](1984) 156 CLR 41 at 99.
The plaintiffs’ case is that the breach of the fiduciary duty is self evident in the nature of the case. They say that clause 22 gives both defendants a very significant financial benefit, potentially significantly greater than any entitlement which the law would give them for executor’s commission. Absent provision by will or agreement between all beneficiaries, there is no right to executors’ commission and is expected to act gratuitously. Commission must be sought from the Court under s 65 of the Administration & Probate Act which is entirely discretionary and only upon proof of “pains and trouble” over and above which an executor would be expected to experience anyway.
The commission is not there for the asking and courts embark on an examination under s 65 whether an executor can truly demonstrate that an executor is entitled to commission for an amount (not exceeding five per cent) as is just and reasonable. The amount of commission will depend on a number of factors including the size of the estate, the scale of administration, the work and judgment involved in the realisation of assets and earning income, the extent of administrative activities, problems encountered, and general responsibility. A solicitor who is appointed as an executor is usually entitled to charge professional fees for work done and is precluded from taking commission for that work. It is possible for a solicitor to apply for commission for work done for which a direct professional charge cannot be made.
Of course, commission can be provided for by will or by agreement between all beneficiaries. The plaintiffs’ argument is that clause 22, which was presumably prepared by the first defendant, gives an executor’s commission of 3.5 per cent (which I know from deciding executor’s commission cases tends to be at the top end of the scale, at least for the corpus of an estate) yet:
(a) they can charge this amount absolutely irrespective of the “pains and troubles” incurred by them in the administration of the estate;
(b) they have this right in addition to their right to charge professional fees;
(c) they may be entitled to charge commission of 3.5 per cent on capital and 5 per cent on income even though they may have done nothing in return for that charge in addition to the amounts charged as professional fees, and to make those charges without being capable of scrutiny by the court.
The plaintiffs’ case is that the very creation of that clause in the preparation of the will created a conflict between the solicitor’s duty of loyalty to the client and the personal interest of the solicitor, as executor, in gaining a commission which the law might not otherwise allow. The contention is that as an advisor, the first defendant had a duty of disclosure to inform the testator about the nature and effect of clause 22 and how it was conferring on the executors a benefit which they would not otherwise be entitled to under the law, or at least may not be entitled to without proper proof as required under the executors’ commission provisions.
In that sense, it is being contended that the solicitors, regardless of his good intention or good faith, has allowed his personal interest to conflict with his duty of loyalty. And, so the case goes, the only way that breach could be neutralised is where it can be shown that the fiduciary had obtained the fully informed consent of the person to whom the fiduciary duty is owed: Chan v Zacharia.[8] In that situation, the informed and effective consent exonerates the fiduciary. It is here I detect the possible relevance of the evidence concerning the psychiatric state of the testator. For it will be said that consent is not free and informed where it is impeachable on equitable grounds such as undue influence or unconscionable conduct: see generally Young, Croft and Smith, On Equity.[9]
[8](1983) 154 CLR 178 at 204.
[9]Para [7.360].
The plaintiffs say on the conventional test applicable to summary dismissal, that case is certainly arguable and there is a case to be investigated.
For the defendants, in particular the second defendant, reliance was placed on Maguire v Makaronis.[10] In that case, the majority stated that:
What is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if a fully informed consent has been given.
[10](1997) 188 CLR 449 especially at 471 and following.
In a passage heavily relied upon by the second defendant, the majority in that case then added:
However, it should be noted that, contrary to what appeared to be suggested by the respondents in argument, there was no duty as such on the appellants to obtain an informed consent from the respondent. Rather, the existence of an informed consent would have gone to negate what otherwise was a breach of duty.
Thus, the argument was that this proceeding has not disclosed a cause of action because the motion and the supporting evidence do not “plead” a breach of duty. Therefore, it was said, it was not competent for the plaintiff to merely allege an absence of informed consent, or to raise that as a case to be investigated. What had to be alleged was a specific breach; and if it was truly a breach, it was then a matter for the solicitor here to raise the informed consent of his client to clause 22 as exoneration.
The point here though which seems to be lost in the debate, is that the very existence of clause 22 of itself creates ― arguably for present purposes ― a conflict between the duty of loyalty and the personal interest to be gained by the solicitor and the accountant as executors. There is, the plaintiffs are saying, an innate beneficence to the solicitor and to the accountant in circumstances where the solicitor prepared the will and presumably advised the testator. If there is a conflict in the solicitor’s responsibility as the testator’s lawyer with a personal benefit he stands to gain as executor, then it is the conflict that then requires him to fully disclose the material facts to the client and obtain his informed consent to his so acting in that position of conflict.
Now, it may be the defendants want to argue there is an co-incidence of interests between the defendants in their capacity as solicitors and their capacity as executors. But that will be a question for investigation or a basis for saying there was in truth no conflict. The plaintiffs wish to contend there was manifestly a conflict and that will be a case to be examined and determined at trial. But to say, as the defendants do, that the case is defective to the point that it should be struck out because it does not allege a breach is, to my mind, not right. Nor is it possible to say, I think, that the case is hopeless and should be summarily dismissed on the merits.
It would have been better had the originating motion been explicit in the exposure of the case sought to be put about the innate problem with clause 22. It may be that the plaintiffs’ advisers assumed an understanding that the controversy would concern the very nature of the benefit conferred under clause 22(a) which went beyond what the law would ordinarily provide to an executor for commission.
I think therefore there is no basis to either strike out or give summary judgment for the defendants. The course is now set for this case to proceed. I maintain my view that it was expedient to proceed without pleadings, especially to avoid a prolonged and expensive fight over an estate which has already been fully administered. I think sufficient has been agitated and exposed now in the course of two interlocutory skirmishes to lead me to conclude that the issues are properly exposed and the defendants should now decide whether to adduce any evidence.
Finally, the question was raised by the second defendant whether there could be any basis for a case against the accountant even if there was a case against the solicitor. I am firmly of the view that the case against the accountant should remain to be investigated. I do not think it is correct to say that there is no cause of action pleaded against Mr Zylberman. The cause of action in here lies in the fiduciary principle. As I have said, on the proscriptive approach that underlies the fiduciary principle, an adviser’s duty of disclosure arises when the advisory position is used possibly to advance the adviser’s own interests, or a third party’s interests. If it is the very transaction in clause 22(a) which is under attack then I think there is a case to be investigated whether anyone who takes a benefit under the impugned clause should be entitled to retain that benefit, where it was procured in the context of a fiduciary relationship at least between the solicitor and the client. To think otherwise would result, I think, anomalously in a breach being shown but no possible remedy against a third party who has benefited from the breach particularly someone acting in the joint office of executorship with the solicitor.,
I shall dismiss the first defendant’s summons filed 2 September 2010, and dismiss the second defendant’s summons filed 3 September 2010. The time within which the defendants are to file any affidavits must now be extended. I shall hear counsel on the time needed and any other ancillary orders.
---
CERTIFICATE
I certify that this and the 9 preceding pages are a true copy of the reasons for decision of the Honourable Associate Justice Mukhtar of the Supreme Court of Victoria delivered on 6 October 2010 (as revised on 19 October 2010).
DATED: 19 October 2010.
Nigel Cooper
Associate
9
4
0