Trani v Trani
[2018] VSC 274
•21 June 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY AND PROBATE LIST
S CI 2015 05222
| PATRIZIA TRANI | Plaintiff |
| v | |
| MARCO TRANI | First Defendant |
| LUCIANO TRANI | Second Defendant |
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JUDGE: | Daly AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 28, 29 November, 4 December 2017 |
DATE OF JUDGMENT: | 21 June 2018 |
CASE MAY BE CITED AS: | Trani v Trani |
MEDIUM NEUTRAL CITATION: | [2018] VSC 274 Revised 26 October 2018 |
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TRUSTS – Discretionary family trust – Defendants are the brothers of the plaintiff and were directors of trust in relevant period – Whether an earlier resolution resulted in an immediate vesting of the trust assets – Later resolution passed at directors’ meeting to distribute majority of trust proceeds in equal shares between the two defendants, to the exclusion of the plaintiff – Later resolution recorded in minute – Whether the later resolution constituted a valid distribution of the trust capital and income under the Deed – Whether the trustee exercised its discretion to pay the whole of the trust capital and income to the defendants in good faith, on a real and genuine consideration, and for proper purposes – Consideration of scope and criteria for a challenge to a trustee’s exercise of discretion – Attorney-General (Cth) v Breckler (1999) 197 CLR 83, referred to – Karger v Paul [1984] VR 161, referred to – Scope of a trustee’s immunity from disclosing reasons for the exercise of discretion – Mandie & Anor v Memart Nominees Pty Ltd (2014) 42 VR 325, referred to – Relevance of evidence of surrounding circumstances and subjective understanding of parties to assessing whether a trustee is acting in bad faith or for an improper purpose – Hindle v John Cotton Ltd (1919) 56 Sc LR 625, referred to – Finding that earlier resolution not effective to vest trust assets for the purposes of the Deed – Finding that later resolution had effect of distributing trust income to defendants with the effect that, in the absence of rectification, the balance of the trust assets ought to have been equally distributed to the parties – Finding that later resolution was made in bad faith and for an improper purpose.
EQUITY – Whether rectification available – Defendants had intended to wind up trust and distribute a specified sum being the trust account balance to themselves as beneficiaries in equal shares – Resolution failed to achieve that result – Defendants sought rectification to give effect to their actual intentions – Consideration of availability of remedy of rectification – Domazet v Jure Investments Pty Ltd [2016] ACTSC 33, referred to – The Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 – Finding that rectification is available to the defendants.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Hoyne | Baraka Lawyers |
| For the First and Second Defendants | Mr A Panna QC | Robert James Lawyers |
TABLE OF CONTENTS
The parties and background to this proceeding...................................................................... 1
The proceeding............................................................................................................................ 13
The evidence................................................................................................................................ 16
Patrizia’s evidence............................................................................................................. 16
Luciano’s evidence............................................................................................................ 16
Marco’s evidence............................................................................................................... 30
Mr Di Vitto’s evidence...................................................................................................... 36
Other documentary evidence.......................................................................................... 40
Observations concerning the evidence.......................................................................... 41
Issues and summary of conclusions........................................................................................ 43
The 15 March resolution............................................................................................................ 46
The 26 June resolution................................................................................................................ 50
Rectification................................................................................................................................. 56
Did Marco and Luciano cause the trustee to exercise its power to distribute the capital and the income of the trust to them in bad faith or for an improper purpose?..................... 67
Marco’s and Luciano’s entitlements as unpaid beneficiaries.............................................. 94
Conclusion................................................................................................................................... 95
HER HONOUR:
The parties and background to this proceeding
The parties in this proceeding, which concerns a family trust, are siblings. The plaintiff is Patrizia Trani (‘Patrizia’), and the defendants are her brothers, Marco Trani (‘Marco’) and Luciano Trani (‘Luciano’). Their parents were Gino Trani and Caterina Trani.[1] Marco was born in 1961, and is now 57 years old. Luciano was born in 1966, and is now 52 years old. Patrizia was born in 1967, and is now 51 years old. Both Marco and Patrizia have children, and Luciano is married without children. Caterina died in March 2011, and Gino died in January 2017.
[1]For convenience and ease of reading, I refer to each of the members of the Trani family by their first names. No disrespect is intended.
In 1955, Gino purchased a property in Sydney Road, Brunswick (‘Sydney Road property’), from which he established and operated a pizza business, which he ran for the next thirty years. In or around 1985 the pizza business was sold. Gino and Caterina retained the Sydney Road property, and over time also purchased three additional investment properties.
By a deed of settlement dated 23 July 1997 (‘deed’), the Gino and Caterina Family Trust was established with Latina Investments Pty Ltd (‘Latina’ or ‘the trustee’) appointed the trustee of the Trani Family Trust (‘trust’). The Deed established a reasonably conventional discretionary trust, in that the trustee was given wide powers to manage the trust, and a broad discretion to make distribution of trust income and capital to nominated beneficiaries. The Deed prescribed two classes of beneficiaries: the primary beneficiaries, being Gino, Caterina, Marco, Luciano and Patrizia, and the general beneficiaries. The primary beneficiaries were also members of the class of general beneficiaries, the balance of which were largely the spouses and descendants of the primary beneficiaries.
Clause 13 of the Deed provides as follows:
Subject always to any express provision to the contrary contained in this Deed every discretion vested in the Trustee shall be absolute and uncontrolled and every power vested in him shall be exercisable at his absolute and uncontrolled discretion and the Trustee have the like discretion in deciding whether or not to exercise any such power. The Trustee shall not be responsible for any loss or damage suffered by the exercise of any discretion or power conferred on the Trustee or by failure to exercise any such discretion or power.
In December 2001, various documents were executed to effect the removal of Gino and Caterina as appointers and beneficiaries of the trust and Marco, Luciano and Patrizia were appointed as appointors of the trust. By reason of clause 17 of the Deed, the appointers have the power to remove and/or appoint trustees to the trust.
ASIC extracts for Latina reveal that Marco was the original sole director and secretary of Latina from 23 July 1997 to 24 July 2003. On 24 July 2003 Luciano replaced Marco as director and secretary, and Patrizia was appointed as a director of Latina. Marco was re‑instated as a director on 4 April 2011, and Patrizia was removed as a director on 11 April 2013. Up until 2003, Marco was the sole shareholder of Latina. After that date, Luciano became the sole shareholder of Latina in his place, and as such, from that time, retained ultimate control over the trustee.
Soon after the trust was settled, in around December 1997, Gino and Caterina gifted the Sydney Road property and their three investment properties to the trust. Latina, in its capacity as trustee of the trust, purchased an additional investment property in 2007, and in 2011 purchased the property adjoining the Sydney Road property.
Caterina died on 11 March 2011. Patrizia deposed that the relationship between herself and the defendants broke down irretrievably around the time of Caterina’s death. She said that since that time they have been unable to agree on any matter concerning the trust. While Marco and Luciano deny that their conduct subsequent to that time was motivated by their animosity towards Patrizia, they agree that they are estranged from their sister.
The evidence suggests that up until March 2013, Patrizia was responsible for the day to day management of the affairs of the trust. Luciano spent much of his time interstate and overseas in his occupation as a professional soccer coach. While Marco gave evidence that from time to time he did some things in connection with the trust, such as inspection of properties for purchase by the trust, he had no real involvement in the affairs of the trust. Luciano and Patrizia were guarantors of loans obtained by Latina to fund the purchase of the additional properties purchased by Latina. The evidence on this point is a little unclear, but while there was a suggestion that between 2003 and 2011 there were some disputes between the siblings concerning the operations of the trust, I doubt that a firm conclusion could be drawn that the parties were in conflict prior to March 2011, when there was a disagreement between Patrizia and her brothers about the burial arrangements for their mother.
In the meantime, the financial position of the trust had become precarious, with the rental income from the trust properties being insufficient to service the loans used to fund the mortgage repayments for the additional properties purchased by the trust after 2007. However, a number of trust properties remained unencumbered. On 14 December 2012, Latina’s accountant, Stannards, wrote to ‘The Trustees’ of Latina, care of Patrizia. Notwithstanding the above, it appears from the contents of the letter that it was written on the instructions of Patrizia, and directed at Marco and Luciano. The letter stated as follows:
RE: LATINA INVESTMENTS PTY LTD ATF THE G & C TRANI FAMILY TRUST
The Trustees have engaged our firm to provide an independent valuation as to the net worth of the assets of the G & C Trani Family Trust (the trust), with a view to negotiating a financial settlement with Luciano Trani (LT) and Marco Trani (MT) in exchange for LT & MT surrendering their respective interests in the trust.
BACKGROUND INFORMATION
The Trust was established on the 23rd July 1997.
Since its establishment the Trust has acquired a number of different properties. Most of the properties are rented to arms length tenants.
The property purchase was funded by Bank West and as at 30 June 2012 the Trust has debts outstanding to Bank West of $1,279,732.00.The Trust is also indebted to Patricia Trani (PT) LT and MT. As at 30 June 2012 the Trust records a beneficiary current account owing of $275,850.00.
FINANCIAL INFORMATION
The Trust has engaged an independent property valuer to value each of the properties owned by the Trust. The valuations are set out below:
ADDRESS VALUE
$DATE OF VALUATION 5 Manly Court, Coburg North 510,000 22/10/12 331 Dromana Parade, Safety Beach 540,000 25/10/12 9 Merlyn Street, Merlynston 400,000 22/10/12 Unit 5/45 Davies Street, Brunswick 330,000 22/10/12 841 Sydney Road, Brunswick 700,000 13/01/11 839 Sydney Road, Brunswick 730,000 16/12/10 Unit 4/45 Davies Street, Brunswick 470,000 04/04/11 17 Catherine Street, Coburg North 700,000 16/12/10 $4,380,000 VALUATION CALCULATION
Based on the independent valuation for each property and the liabilities recorded in the Financial Statements for the Trust as at 30 June 2012 the valuation of the net realizable value of the Trust would be:
Realisation value of assets – (cost of realisation + cost to discharge liabilities) = Net realisable value.
This method has been adopted because the Trust has tangible assets that have an active market if they were to be sold.
$4,380,000 - ˆ 0 + *$1,555,582 = $2,824,418
ˆ Cost of realisation is zero because the Trust will not be disposing of any assets
* Liabilities consists of beneficiaries current accounts and Bank West debt as at 30 June 2012
Having regard for the market valuation of the assets of the trust and the beneficiary entitlements as at 30 June 2012 an appropriate valuation of the beneficiary entitlements of LT and MT is $941,472 each.
It is the desire of the Trustee that this offer and agreement be signed and executed by no later than the 15 January 2013.
The Trustee also requests that the property at 5 Manly Court, Coburg North be vacated by MT by no later than the 15 January 2013.
To assist with the relocation of MT the Trustee agrees to advance MT $5,000.00.
This report has been prepared for the beneficiaries of the Trust at the request of the Trustee. In preparing this report we have relied on source information provided to us by the Trustee and unaudited Financial Statements for the Trust as at 30 June 2012.
We have relied on this information being accurate and complete and we have no reason to believe that this is not the case.
Please contact me as soon as possible to discuss the settlement as offered by the Trustee.
On 24 January 2013 Stannards wrote to Robert James Lawyers (the solicitors for Marco and Luciano in this proceeding) as follows:
I refer to the letter sent to your client (sic) dated 14 December 2012.
In that letter your client was given until the 15 January 2013 to accept the offer put to him. The trustee, nor his office has had no response to this request.
Accordingly the trustee has advised that the offer for your clients (sic) interest in the trust has been revised to $771,472.
Would your client please accept or decline this offer by no later than Thursday 7 February 2013.
On 27 February 2013, RDV Business Solutions (an accounting firm engaged by Marco and Luciano) wrote to Patrizia on behalf of Marco and Luciano, as follows:
Marco Trani & Luciano Trani have engaged our firm to assist them as to provide a valuation as to the net worth of the assets owned by Latina Investments Pty Ltd as Trustee for G & C Trani Family Trust.
The following properties are not owned by Latina Investments Pty Ltd and so have not been included in our net asset valuation calculations below:
1. 5 Manly Court Coburg North
2. 331 Dromana Parade Safety Beach
As Marco Trani and Luciano Trani have not received copies of the valuations of the properties referred to in the letter from Stannards dated 14th December 2012 they have engaged a local agent to prepare an appraisal (letters attached) on what the current market value of the properties in question are:
ADDRESS VALUE
$DATE OF VALUATION 9 Merlyn Street, Coburg North 775,000 13/02/2013 5/45 Davies Street, Brunswick 455,000 13/02/2013 841 Sydney Road, Brunswick 715,000 13/02/2013 839 Sydney Road, Brunswick 715,000 13/02/2013 4/45 Davies Street, Brunswick 455,000 13/02/2013 17 Catherine Street, Coburg North 725,000 13/02/2013 $3,840,000 In addition, after our discussions with Mario Incani from F. Bossio & Co Pty Ltd (Previous Accountant) and analysing the financial information provided for the purposes of the net asset valuation calculation below we have taken into consideration the loans and beneficiary loan account details of which are set out in Schedules 1 to 11 (attached).
VALUATION CALCULATION
= Property Value – Bank West Loan + Bank West Personal Use Loan + Personal Loan + Car Finance – Beneficiary Loan Account / 3
+ $3,840,000 - $1,285,982.00 + $43,867.00 + 17,000 + 19,436.00 - $47,080.00
= $2,587,241 / 3
= $862,414.00 each
OFFER
At the directors meeting on the 18th of February 2013 it was discussed that considering 5 Manly Court Coburg North & 331 Dromana Parade Dromana are of a similar value, Marco Trani & Luciano Trani take full ownership of 331 Dromana Parade which they already own 66% of, and you can discuss with your father ownership of 5 Manly Court Coburg North either via his Will or another arrangement. Marco Trani & Luciano Trani would not have anything further to do with 5 Manly Court Coburg North. If you agree to accept this offer you will need to sign a transfer of land for the title at 331 Dromana Parade.
In relation to the Trust assets, Marco Trani and Luciano Trani will agree to surrender their interests in the Trust on the following terms:
·For the amount of $862,414.00 each;
·Subject to a written agreement being entered into by the parties which is to include, among other things, the Trustee and you agreeing to sign all documents and do all things necessary to enable Marco Trani and Luciano Trani to be released from all obligations relating to the Trust and the properties owned by the Trust (including personal guarantees or other security provided to third parties) and indemnities from the Trustee and you to that effect and such other provisions as a (sic) reasonable in the circumstances; and
·Marco Trani and Luciano Trani being released from all obligations relating to the Trust and the properties owned by the Trust, including personal guarantees and other security provided to third parties (this may require refinancing of the properties owned by the Trust).
Marco Trani and Lucinao (sic) Trani consider this offer to be fair in the circumstances.
If you do not accept the above offer then a Directors Meeting will be held to discuss the potential sale of 839 Sydney Road Brunswick & 17 Catherine Street Coburg North to pay off Bank West and remove all debts from Latina Investments Pty Ltd with the sale proceeds.
Further to this Latina Investments Pty Ltd has not been charging your partner rent on 17 Catherine Street Coburg North for use of the property in connection with his business. Moving forward there will need to be a rental agreement in place at the market rate of rent as per a real estate agents appraisal which will also include outgoings. A rental agreement will need to be drawn up and the rental income can then service the debt that Latina Investments Pty Ltd has serviced to date.
A response to this letter is required by the 5th of March 2013. A Directors meeting will be scheduled pending your response to assess the position of the company moving forward. Marco and Luciano Trani will be discussing options with Bank West in due course and communicating the current issues to Kathryn Harrison the business banker at Bank West.
Upon an agreement of the above being entered into the loan with Bank West will need to be refinanced to remove Luciano Trani’s guarantee from the mortgage. Control of Latina Investments Pty Ltd will pass to you and Marco Trani & Luciano Trani will relinquish all ownership of Trust assets over to you to control as well as any liabilities on the terms set above (sic).
No response to this letter is in evidence.
A meeting of the directors of Latina was held on 15 March 2013. Patrizia, Marco and Luciano were in attendance, along with Mr Rocco Di Vitto[2] of RDV Business Solutions (‘Mr Di Vitto’), Ms Andrea Pane of Robert James Lawyers, and Mr Nello Traficante of Stannards.
[2]Also known as ‘Rocky’.
At the meeting the following resolution (’15 March resolution’) was passed:
It was resolved that all properties referred to below and owned by the Trustee as trustee of the Trust be listed for sale on terms to be decided by the Trustee and for the Trust to be wound up:
9 Merlyn Street Coburg North - Agent to be Melbourne Commercial Group
5/45 Davies Street Brunswick – Agent to be Barry Plant
841 Sydney Road Brunswick – Agent to be Melbourne Commercial Group
839 Sydney Road Brunswick – Agent to be Melbourne Commercial Group
4/45 Davies Street Brunswick – Agent to be Barry Plant
17 Catherine Street Coburg North Agent to be Melbourne Commercial Group
The minutes of the 15 March 2013 meeting recorded the following discussion taking place prior to the passage of the 15 March resolution:
During discussions Patricia Trani indicated that she would offer to pay Luciano Trani and Marco Trani an amount to surrender their interests in the Trust. Nello Traficante asked Luciano Trani and Marco Trani as to what amount they would be prepared to accept and asked Patricia Trani what amount she would be prepared to offer. Patricia Trani indicated that she would need to consider it further before making any offer.
Luciano Trani also raised the matter of the property at 5 Manly Court, Coburg North owned by Gino Trani and property at 331 Dromana Parade, Safety Beach owned by the Directors of the Trustee and there was discussion as to these properties and the properties of the Trust.
Andrea Pane raised that there had been offers made by Nello Traficante on behalf of Patricia Trani which had not been accepted by Luciano Trani and Marco Trani and that by (sic) Luciano Trani and Marco Trani had made an offer to Patricia Trani to which she had not responded. Andrea Pane asked Nello Traficante and Patricia Trani whether they had considered the offer, to which they advised that they had not as the appraisals attached to the offer were not proper valuations. Andrea Pane again raised that there had been offers by Luciano Trani and Marco Trani and Patricia Trani, none of which had been accepted resulting in the proposed resolution to sell the properties owned by the Trust and to wind up the Trust.
At the conclusion of discussions Luciano Trani and Marco Trani voted in favour of the sale of all the properties owned by the Trustee as trustee of the Trust and for the Trust to be wound up and Patricia Trani voted against.
Luciano Trani will engage all relevant real estate agents to sell the properties after the meeting. A reserve price will need to be agreed upon prior to each sale.
Also on 15 March 2013, Mr Di Vitto was appointed as Latina’s accountant, over Patrizia’s opposition. Resolutions were also made to seek a commercial lease agreement for the trust property at Catherine Street, Coburg North (‘Catherine Street’) which was occupied by Patrizia’s partner and used to store equipment in his earth moving business, again over Patrizia’s opposition.
While the minutes of the 15 March 2013 meeting suggest that the matters on the agenda were discussed cordially and dispassionately, the presence of a solicitor at the meeting and the events which immediately followed the meeting indicated the existence of a substantial dispute between Patrizia on the one hand, and Marco and Luciano on the other hand.
Between 21 March 2013 and 4 April 2013, Patrizia lodged caveats over a number of properties owned by the trust, claiming an interest in the properties pursuant to a constructive, implied or resulting trust. On 4 April 2013, there was a further directors’ meeting of Latina, where Marco and Luciano resolved to appoint real estate agents and set reserve prices for the trust properties, to appoint lawyers to prepare contracts of sale for the trust properties, to approach the bank about the trustee’s proposed debt reduction plan, and to take steps to evict Patrizia’s partner from Catherine Street. Patrizia did not attend this meeting, but a solicitor acting on her behalf did attend. One week later, on 11 April 2013, Patrizia was removed as a director of Latina by Luciano. Over the following months, legal action was taken to remove the caveats and to evict Patrizia’s partner from Catherine Street. Marco and Luciano rejected two offers made by Patrizia and her partner to purchase Catherine Street for $550,000.00 and $500,000.00, but later sold Catherine Street at a lower price than the offers.[3]
[3]The affidavit of Luciano sworn on 5 May 2016 discloses that Catherine Street was ultimately sold for $448,000, although some doubt about this was raised during cross‑examination.
By February 2014 all of the trust properties had been sold. The gross proceeds of sale of the trust properties was $3,092,135.65. After 11 April 2013, Patrizia had no involvement in the affairs of the trust. The uncontested evidence of Marco, Luciano and Mr Di Vitto was that by about March 2014 Marco and Luciano had decided to pay the balance of the proceeds of the sale of the trust properties, after payment of all of the debts of the trust, to themselves, and to pay nothing to Patrizia. Mr Di Vitto was instructed to give effect to this decision.
On 26 June 2014, a meeting of the directors of Latina (Luciano and Marco) was held at RDV Business Solutions’ office, with Mr Di Vitto also in attendance. The capital balance of the trust’s accounts, plus an estimated $2,500.00 in interest, totaled $1,408,370.70. The directors passed a resolution to pay unpaid present entitlements to beneficiaries totaling $52,003.00 and to distribute the remaining balance of the funds in the trust ($1,356,367.70) equally between Luciano and Marco (’26 June resolution’).
The minute of the resolution (’26 June minute’) stated as follows:
1. That the Trustee take steps to vest and wind up the Trust.
2.That pursuant to Clause 1.6 of the Trust Deed, the Trustee appoints 26th June 2014 as the Vesting Date.
3.That on the vesting day the Trustee distribute the whole of the capital and income of the Trust as follows:
a.In payment to beneficiaries with a present entitlement to receive money in respect of distributions made by the Trust in previous years (Outstanding Entitlements);
b.In payment of all other liabilities of the trustee (Liabilities); and
cIn respect of the balance of the capital and income of the Trust after payment of the Outstanding Entitlements and the Liabilities:
i. To Luciano Trani - $244,399.02; and
ii. To Marco Trani - $244,399.03.
4.That the Trustee enter into a Deed of Vesting of the Trust, to be prepared by the Trustee’s solicitors, Robert James Lawyers.
What occurred next did not accord with the text of the 26 June minute, although a Deed of Vesting was executed on that day. Mr Di Vitto deposed that on 27 June 2014, the day after the meeting, he attended the Fawkner branch of the Commonwealth Bank with Marco and Luciano to close Latina’s accounts and open three accounts in the names of Luciano, Marco, and Luciano and Marco jointly. The following amounts were transferred from Latina’s accounts:
(a) $460,622.56 into Luciano’s account;
(b) $452,122.56 into Marco’s account; and
(c) $443,357.73 into the joint account.[4]
[4]Mr Di Vitto deposed that sums of $344,851.98 and $98,505.75 ($443,357.73 in total) were deposited into the joint account.
The total of the above amounts was $1,356,102.85.[5] The difference between the amounts paid to Marco and Luciano (Luciano being paid $8,500.00 more than Marco) reflected a prior agreement between Marco and Luciano. The amount of $443,357.73 transferred to the joint account was said to have been set aside for ‘contingent liabilities’ of the trust. While both Marco and Luciano did not accept that this was set aside to deal with a possible claim by Patrizia against the assets of the trust, this amount is just a little short of the amount that Patrizia would have received had the net balance of the trust fund been divided equally between her and her brothers.
[5]The minor discrepancy between this amount and the amount referred to in paragraph 21 above reflects the difference between the amount Mr Di Vitto had expected the trust funds to earn by way of interest and the final balance of Latina’s bank accounts when they were closed on 27 June 2014.
Also on 27 June 2014, bank cheques were issued for payments to other beneficiaries of the trust, including Gino, and Patrizia and Marco’s children. These payments were for modest amounts, totaling $52,003.00, and were payments of amounts which had been distributed to those beneficiaries in the accounts of the trust in past years, but had not actually been paid. These distributions were recorded in a spreadsheet headed ‘Latina Investments Pty Ltd ATF G & C Trani Family Trust – Distributions to beneficiaries’.[6] The spreadsheet had some handwritten annotations and other markings. The totals in three columns were crossed out, being columns recording past distributions to Caterina ($18,000.00), Marco ($143,481.00) and Luciano ($33,227.00). Under Caterina’s column there was an arrow and a notation ‘Marco Executor of Will’. There is no evidence of any payments being made in respect of those distributions, and Mr Di Vitto gave evidence that they were subsumed within the final distributions to Marco and Luciano, notwithstanding the substantial differences between the prior distributions to Marco and Luciano. Finally, this spreadsheet indicates that no distribution has ever been made to Patrizia from the income of the trust over the lifetime of the trust.
[6]Exhibit G.
Each of Marco, Luciano and Mr Di Vitto deposed that the 26 June minute contained an error, being the reference in paragraph 3(c) of the 26 June minute to amounts of $244,399.02 and $244,399.03 to be paid to Luciano and Marco respectively. This error is the basis of their claim for rectification of the 26 June minute. Each deposed as to their understanding of what the 26 June minute was expected to record, and Mr Di Vitto explained how the error occurred. More details of this evidence is provided later in these reasons.
Also on 26 June 2014, Marco and Luciano executed a document titled ‘Deed of Vestment and Termination of Trust of the Gino and Caterina Trani Family Trust’ (‘Deed of Vestment’), prepared by Robert James Lawyers. Recital B of the Deed of Vestment states:
Pursuant to the Trustee’s powers contained in the Trust Deed the Trustee hereby resolves to wind-up and vest the Trust and thereby terminate all functions, obligations and purposes of the Trust effective immediately on the Effective Date.
The operative provisions of this document provide as follows:
1.The Vesting Day of the Trust is defined in clause 1.6 of the Trust Deed as follows:
‘The “Vesting Day” means the first to occur of the following dates, namely:
The date of expiration of the perpetuity period hereinafter defined;
Such earlier date as the Trustee may in its absolute discretion appoint.’
2.The Trustee has resolved to exercise its discretion contained in the Trust Deed to wind-up, vest and determine the Trust effective immediately on the Effective Date.
3.The Trustee will take all necessary action to vest and determine the Trust on the Effective Date on the basis that the balance of any assets in the Trust will vest in such beneficiaries and in such proportions and for one to the exclusion of the others as the Trustee may determine and appoint in pursuance of its power contained in clause 4 of the Trust Deed.
The Effective Date was defined as 26 June 2014.
Latina was deregistered on 4 September 2014.
On 19 November 2014, Russell Kennedy, Patrizia’s former solicitors, wrote to Marco and Luciano referring to the 15 March resolution, and requesting information concerning the winding up of the trust and Patrizia’s entitlements as a beneficiary of the trust. Patrizia deposed that she did not receive a formal response to this letter.
The proceeding
This proceeding was commenced on 17 October 2015, originally by way of originating motion. There were difficulties in effecting service, and no substantive procedural directions were made until 31 March 2016. The proceeding failed to settle at a mediation on 20 May 2016, and on the same day, Marco and Luciano’s solicitors issued a summary judgment application. This application was not pressed on that day, and on 2 June 2016 Lansdowne AsJ ordered that the proceeding continue as if commenced by way of writ, and that the parties file and serve pleadings. This duly occurred, and an amended statement of claim was filed and served pursuant to orders made on 1 February 2017. A further amended statement of claim was filed on 21 July 2017, and on 19 September 2017, the proceeding was listed for trial. A second further amended statement of claim was filed on 23 November 2017, a few days prior to the commencement of the trial. A defence to this claim and counterclaim was filed on the same time, raising for the first time a claim by Marco and Luciano for rectification of the 26 June minute.
In her second further amended statement of claim, Patrizia made the following claims:
(a) on 15 March 2013 Latina resolved to sell the trust properties and wind up the trust;
(b) on 26 June 2014, notwithstanding that Latina had already resolved to wind up the trust on 15 March 2013, Latina purported to wind up the trust and distribute the sums of $244,399.02 and $244,399.03 to Luciano and Marco respectively;
(c) the remainder of the capital and the income of the trust, being $867,304.80 was not distributed or dealt with prior to the Vesting Day, being 26 June 2014;
(d) the payment of $1,356,102.85 to Marco and Luciano was in breach of:
(i) the intention of the settlor and appointer of the trust;[7]
[7]This contention was not pressed at trial.
(ii) the trust, by reason of Clause 4.1 of the Deed; or
(iii) alternatively, if the 26 June resolution was valid, the deed required that the balance remaining after the distribution of the income of the trust, being $867,304.80, be distributed equally between Marco, Luciano, and Patrizia;
(e) by distributing the assets of the trust to Marco and Luciano in equal shares without Patrizia’s knowledge, Latina acted in breach of the fiduciary duties owed by it to the beneficiaries of the trust;
(f) Marco and Luciano knowingly assisted Latina in its breach of trust, and its breach of fiduciary duty;
(g) Marco and Luciano knowingly received funds in breach of trust; and
(h) Marco and Luciano hold the sum of $452,045.00, alternatively $289,101.60 on trust for Patrizia.
In their defence and counterclaim, Marco and Luciano:
(a) admitted most of the factual matters alleged by Patrizia in her statement of claim, such as the holding of meetings, the resolutions made at meetings, and the payments made following the meeting on 26 June 2014;
(b) referred to the terms of the Deed, in particular to the character of the trust as a discretionary trust;
(c) denied that the effect of the 15 March resolution was to wind up the trust;
(d) said that on 26 June 2014 the trustee resolved to wind up the trust, distribute from the capital balance of the trust the sum of $52,003.00 in unpaid entitlements to beneficiaries, and distribute the whole of the capital balance and any income of the trust to Marco and Luciano equally;
(e) said that the dollar amounts in the 26 June minute were errors;
(f) said that the 26 June minute was signed by Marco and Luciano in the belief that it embodied the resolution in fact made on 26 June 2014 (as set out in (d) above);
(g) denied that the effect of the 26 June minute was to distribute the income of the trust, being $488,798.05;
(h) denied that the payments made to them on 27 June 2014 were made to them in breach of trust;
(i) did not admit that the trustee owed the beneficiaries fiduciary duties, and denied that Latina breached any fiduciary duties owed by it;
(j) denied that they knowingly assisted any breach of fiduciary duty by Latina, or received funds in breach of trust; and
(k) claimed that they are entitled to an order that the 26 June minute be rectified so as to embody the resolution actually made and the true intentions of them and the trustee.
In her reply and defence to counterclaim, Patrizia admitted that the trustee paid the sum of $673,801.42 to Mario and $682,301.43 to Luciano, but said that the trustee was not permitted to pay those sums, and there was no entitlement to have any resolution, or any minute of a resolution, rectified.
The evidence
Patrizia’s evidence
At trial, Patrizia relied upon her affidavit sworn on 6 October 2015 in support of her originating motion in this proceeding. The substance of her evidence has been largely canvassed in the introductory section of these reasons. Patrizia also deposed as follows:
Since around the time of my mother’s death on 11 March 2011, the relationship between myself and both my brothers, Marco and Luciano, had broken down irretrievably and we were unable to agree on any matter concerning the operation of the Trust.
Patrizia was not cross‑examined.
Marco and Luciano relied upon the following affidavits:
(a) affidavits sworn by Luciano on 5 May 2016 and 27 November 2017;
(b) an affidavit sworn by Marco on 27 November 2017; and
(c) an affidavit of Mr Di Vitto sworn on 27 November 2017.
One issue concerning the admissibility of evidence arose at the commencement of the trial. Senior counsel for Marco and Luciano submitted that the authorities made it clear that Marco and Luciano, as directors of the trustee of a discretionary trust, could not be compelled to give reasons as to why they exercised their discretion in the way that they did. As such, I ought not allow Marco and Luciano to be cross‑examined as to their reasons for excluding Patrizia from the distribution of the assets of the trust. I acceded to that submission.
Luciano’s evidence
In his first affidavit sworn on 5 May 2016, Luciano deposed mainly as to formal matters, and the history and financial position of the trust. He deposed as to what occurred at the meeting on 26 June 2014, as follows:
On 26 June 2014, me and Marco as then directors of Latina held a directors meeting at which Marco and I:
(i) considered the Capital Balance;
(ii) resolved to distribute all of the Capital Balance;
(iii) considered the terms of the Trust Deed;
(iv)resolved to appoint a new vesting date for the trust, namely 26 June 2014;
(v)considered Latina’s power under the Trust Deed to exercise the discretions permitted by the Trust Deed to distribute the Capital Balance;
(vi)considered the potential beneficiaries under the Trust Deed; and
(vii)resolved to distribute the whole of the Capital Balance.
The evidence given by Marco, Luciano, and Mr Di Vitto at trial concerning what actually occurred at the meeting on 26 June 2014 indicates that the evidence above is somewhat misleading, insofar as it suggests that at the meeting the directors of Latina actively ‘considered’ the matters referred to in the 26 June minute. In his second affidavit sworn on 27 November 2017, the day before the commencement of the trial, Luciano deposed, in summary, as follows:
(a) he is a full time soccer coach, and does not hold any tertiary qualifications;
(b) after he and Marco became the only directors of Latina, they engaged Robert James Lawyers and Mr Di Vitto to assist them to manage and wind up the trust;
(c) by March 2014, once the trust properties had been sold and settled, he and Marco had spoken many times about which beneficiaries would receive money from the winding up of the trust;
(d) he deposed as follows:[8]
[8]Changes to the affidavit as filed have been made to reflect the determination of objections made at the commencement of the trial.
By early March 2014, Marco and I had decided to pay out all of the Trust’s liabilities and then pay all the remaining money in the Trust to me and Marco. We had decided to not pay any money to Patrizia. In many discussions with [Mr Di Vitto] between March 2014 and June 2014, I told [Mr Di Vitto] that this was what we were going to do, and I wanted him to do what was necessary to achieve this and wind up the Trust.
In about early June 2014, me and Marco had sought advice from our solicitors about the trust and had instructed [Mr Di Vitto] to whatever was needed to pay out the Trust’s liabilities and wind up the Trust. [Mr Di Vitto] was going to do the accounting work and would do everything that needed to be done to wind up the Trust, and to prepare whatever documentation was necessary to pay the balance of monies in the Trust to me and Luciano equally.
On 26 June 2014, I attended [Mr Di Vitto’s] office with Marco to have our directors meeting. Marco and I, on behalf of Latina, had instructed [Mr Di Vitto] to prepare the accounting paperwork, to wind up the Trust and do whatever else was necessary to pay out all liabilities and pay the remaining monies to me and Marco in equal shares. It was always my intention to ensure that all monies left over in the Trust (after payment of all liabilities) were paid to me and Marco equally. From my discussions with Marco by that time, I knew that this was also his intention. I never intended, or decided, to leave any money in the Trust not distributed.
In his office, [Mr Di Vitto] explained to me and Marco that he had prepared Latina’s financials and tax return, and had calculated roughly how much money was available to distribute to me and Marco. He made some hand-written notes on a piece of paper to show roughly how much Marco and I would receive after payment of all of the Trust’s liabilities.
By that time, I knew that Robert James’ legal bill had been paid, and [Mr Di Vitto’s] bill had also been paid. I knew that there were other beneficiaries of the Trust who were owed about $52,000.00. [Mr Di Vitto] told us that there was a little over $1.3 million left over to pay to me and Marco. I took [Mr Di Vitto] at his word about how much money was available to pay me and Marco.
[Mr Di Vitto] also told us that he had completed the minute of the meeting that we were about to have.
We then went to the kitchen at the back of [Mr Di Vitto’s] office to have our directors meeting. [Mr Di Vitto] put a bundle of papers on the table. The meeting then started. [Mr Di Vitto] handed me a copy of the minute he prepared. He told me to read the minute out aloud, and I did. The written minute was to me full of legal jargon, and I assumed that it contained everything it had to make sure me and Marco were having the meeting properly and complying with all the formalities needed to properly wind up the Trust, pay out all liabilities, and pay the whole of the capital balance of the monies to me and Marco.
After I read the Minute out aloud, [Mr Di Vitto] told me and Marco to sign the minute, and some other papers. We did so. I understood that to then be the end of the meeting.
Prior to signing the minute, I did not pay attention to the dollar figures in the minute. I just assumed everything in the minute reflected my instructions to [Mr Di Vitto], and everything we had to do to properly wind up the Trust. Now produced and shown to me and marked LT-1 is a copy of the minutes of directors meeting of 26 June 2014, which my solicitor showed me in the morning of 27 November 2017. Until that time, I had not seen a copy of the minute since the meeting on 26 June 2014.
I never agreed on 26 June 2014, or at any other time, that the only amounts we would be receiving from the Trust were the amounts in paragraph 7(c)[9] of the Minute. If [Mr Di Vitto] had explained to us that the dollar figures in paragraph 7(c) of the Minute was all we were going to get from the winding up of the Trust, I would have told him that was not correct, and I would not have signed the Minute.
[9]This equates to paragraph 3(c) of the 26 June minute.
(e) he deposed that he did not keep any copies of any of the documents he signed that day;
(f) in 2015 he collected the trust documents from Mr Di Vitto, which he provided to Marco to store at his house; and
(g) he deposed as follows:
When I re-read the Minute on 27 November 2017, I realized that it did not accurately identify all of the money that was to be distributed to me and Marco. It only covered some of the money that we were to receive on the winding up of the Trust even though Marco and I had decided to distribute the whole of the balance of the trust money equally between us. The written minutes was not (sic) accurate as it did not state that all of the money was to be distributed to me and Marco. It stated that Marco and I would receive only part of the trust money.
I assumed when I signed the minute on 26 June 2014 that it contained all that was necessary to give effect to my decision as to the distribution of the balance of the trust money to be divided equally.
Luciano was a director of Latina between 2003 to 2011, along with Patrizia, but he didn’t contact Patrizia during this time about the operations of the trust, because he was absent from Australia for much of this period. He was unaware of what contributions Patrizia made to the operations of the trust during this time. He believed that he was only responsible for the affairs of the trust when he was present at directors’ meetings. Luciano confirmed that he consented to all the transactions that Latina entered into on behalf of the trust during this period. He agreed that his parents effectively made decisions regarding the affairs of the trust.
Under cross‑examination, Luciano gave the following evidence regarding his relationship with Patrizia:[10]
[10]T 76-77.
Your relationship with your sister broke down from the early 2000s, didn't it?‑--No, it didn't.
When do you say it broke down?---Your Honour, it never broke down.
You are still good friends with your sister, are you?---Always have been.
Is that a serious answer, Mr Trani?---Yes, Your Honour.
Can the witness be shown Exhibit 7 to the plaintiff's affidavit.
Do you recognise that document?---I am sorry, I need some more information. I am just looking at this page.
By all means, read through the document, have a look through the document.
…
MR HOYNE: Do you recognise that document?---Yes, I do, Your Honour.
It was an affidavit you swore?---That is correct.
It was true and correct at the time it was sworn?---That is correct, Your Honour.
At paragraph 59 you say, "Patrizia's relationship with Marco and me has irretrievably broken down because we had a disagreement about how the trust should operate", correct?---Correct, Your Honour.
That was correct at the time it was given?---Yes, Your Honour.
"I do not believe we can agree on any matter concerning the trust"?---Your Honour, there was things that we needed to look at.
That is what it says, doesn't it?---Yes, Your Honour.
I asked you a moment ago about - in fact, if you go to paragraph 43 you say, "Since about 2003 Patrizia, on the one hand, and Marco and I on the other hand, have generally been in dispute over the manner in which the trust was operated an what transactions were effected using trust moneys", correct? Paragraph 43?
…
MR HOYNE: Of course. You said that, correct?---Yes, Your Honour.
You said that your dispute with Patrizia escalated in 2010 because you thought she was mis-managing the trust financial affairs?---Yes, Your Honour.
I asked you a moment ago whether you were still good friends with your sister and you said yes you were?---Yes, Your Honour.
And you also, around about this time, brought proceedings on behalf of the trust against her partner to require them to remove property at Chapman Street, correct?---That is correct, Your Honour.
HER HONOUR: Is that Chapman Street or Catherine Street?---Catherine Street.
MR HOYNE: It was also around about this time that you decided to remove her - this is around April 2013 time to remove her as a director of the trustee company, correct?---That is correct, Your Honour.
Luciano was taken to the minutes of the meeting held on 15 March 2013. He maintained that, despite being taken to those parts of the minutes which recorded discussion between the participants in the meeting, the minutes were drafted prior to the meeting. He gave similar evidence with respect to the minutes of the meeting held on 4 April 2013.
Luciano’s understanding of how the trust works appears somewhat limited. When questioned about the role of an appointor, he did not appear to understand what that role entailed, save that he agreed that he could not unilaterally change the trustee of the trust from Latina. He understood that he and Marco controlled Latina and confirmed that if he wanted to he could have removed Marco as a director too because he was the sole shareholder of Latina.
Luciano agreed that the sale price of Catherine Street recorded as $448,000.00 in his affidavit sworn 6 May 2016 may have been incorrect, and that based on the signed transfer of land document shown to him the sale price may have been $492,800.00. He was unable to provide any explanation for the discrepancy.
Luciano was unclear about the sale prices of the properties sold by the trust as well as the total amount received and the amount remaining after the bank debt had been cleared: ‘I never went to that point of knowing what the total figure would be.’
Luciano confirmed that he read the 26 June minute aloud at the Latina directors’ meeting on 26 June 2014.
Luciano stated that he and Marco had discussions prior to the meeting on 26 June 2014 to the effect that they decided to wind up the trust and divide the funds equally between them. He conceded that these discussions did not occur during the Latina directors’ meeting on 26 June 2014 as described in the 26 June minute. However, Luciano maintained that genuine consideration of the trust and the beneficiaries took place during the meeting on 26 June 2014.
Luciano gave the following evidence under cross‑examination:[11]
[11]T96-97.
Mr Hoyne: Indeed, you say at paragraph 10 of your affidavit of 27 November that you sought advice from your solicitors about the trust. This is your affidavit of 27 November, paragraph
Luciano: Yes, I see it.
Mr Hoyne: What advice did you seek from them?
Luciano: Seeking information regarding trust deed and other relative information.
Mr Hoyne: It is fair to say that at the meeting of 26 June there was no genuine consideration about anything, was there, it was just a reading and then the signing of a document, correct?
Luciano: No, Your Honour.
My Hoyne: There was genuine consideration?
Luciano: Absolutely.
Mr Hoyne: You genuinely considered what at that meeting?
Luciano: The trust itself.
Mr Hoyne: Did you have a copy of the trust deed?
Luciano: Not in front of me at the time.
Mr Hoyne: You had it all recollected?
Luciano: From the information that I had sourced.
Mr Hoyne: What information was that?
Luciano: The responsibility of the trust deed.
Mr Hoyne: What was that responsibility, in your mind?
Luciano: That act accordingly and also to be able to exercise the discretionary trust.
Mr Hoyne: What does act accordingly mean?
[…]
Luciano: In order to run the trust correctly.
Mr Hoyne: What do you need to do in your mind to run a trust correctly?
Luciano: To go through the process legally, correctly.
Mr Hoyne: What does that entail? What do you need to do to legally – on your understanding, what did you need to do to go through the trust legally?
Luciano: To seek advice from the experts to be able to be guided as to what you can and can't do.
Mr Hoyne: What could you and couldn't you do?
Luciano: The things that we were able to do based on the information that we were allowed to do.
Luciano was aware of the need to take into account the beneficiaries of the trust which in his understanding were the family – the kids, being himself and his siblings. In response to questions regarding what consideration of the beneficiaries took place at the meeting on 26 June 2014, Luciano stated ‘I knew that there were other beneficiaries of the trust who were owed about $52,000’, stating ‘me and my brother agreed to pay the beneficiaries.’ Luciano conceded that at the meeting on 26 June 2014 he just read out aloud the 26 June minute but did not accept the proposition that no additional consideration was given to anything at the meeting.
Luciano gave evidence that his instructions to Mr Di Vitto were always that after the deduction of liabilities and the $52,003.00 to other beneficiaries that the balance was to be paid equally to himself and Marco. Luciano understood that despite these instructions he got paid more than Marco.
Luciano confirmed that at the meeting on 26 June 2014 he did not know the balance of the trust monies to the last dollar and cent.
When questioned as to when and what consideration was given to beneficiaries beyond Marco and Luciano, Luciano stated that other beneficiaries were considered but he appeared to be talking about the $52,003.00 payment only. He agreed that grandchildren and charities were not considered as potential beneficiaries. Luciano gave the following evidence:[12]
[12]T105-110.
Mr Hoyne: When you came to the meeting of 26 June you decided at that point in time that Patrizia was to get nothing, correct?
Luciano: A decision was made in regards to all the beneficiaries.
Mr Hoyne: When was that decision made?
Luciano: During the meeting and before the meeting.
Mr Hoyne: When before the meeting?
Luciano: When discussions were being had beforehand, during a period of time, a month, regarding all these situations.
Mr Hoyne: Did you take into account Patrizia’s financial position?
Luciano: I took into account all the beneficiaries.
Mr Hoyne: How did you know what Patrizia’s financial position was?
Luciano: I don't know her personally, I don't know her situation.
Mr Hoyne: What about the financial position of her children, did you know about that?
Luciano: They were put into the account, in the beneficiaries.
Mr Hoyne: So on your understanding they got a distribution because they got part of the $52,000.
Luciano: Part of the responsibilities of the trust was to pay the beneficiaries and which were obviously the kids.
Mr Hoyne: In terms of the rest of it, the $1.35 million, did you take into account the financial positions of all of the kids?
Luciano: Yes, Your Honour.
[…]
Mr Hoyne: What charitable purposes did you take into account when you made your decision to pay the moneys to yourself and your brother?
Luciano: I don't understand the word “charitable”.
Mr Hoyne: Did you take into account any charities that might be paid with the $1.35 million?
Luciano: After all the expenses that were paid to the debts and the liabilities, it was always instructed that myself and Marco would be paid.
Mr Hoyne: Did you take into account any grandchildren any of you might have in the future?
Luciano: No, no grandchildren. There was no discussion around that
[…]
Mr Hoyne: […] when you came to consider the other beneficiaries, did you take into account the possibility of your wife?---
Luciano: My wife has got nothing to do with the trust.
Mr Hoyne: So you didn't contemplate the possibility of paying her anything?
Luciano: No. This has got - she's not part of the trust, the Latina Investment Trust.
Luciano conceded that the final capital balance of $1,408,105.85 was not known until after the meeting of 26 June 2014, so they were unable to consider that figure at the meeting.
Luciano conceded that no other beneficiaries were considered at the 26 June 2014 meeting:[13]
My Hoyne: And then you say you considered the potential beneficiaries under the trust deed. On the 26 June 2014 meeting, I put to you didn't consider any potential beneficiaries, other than yourself and your brother and the payment of the $52,000; correct?
Luciano: That is correct.
[13]T112.
However, when the trial resumed the following day, Luciano appeared to resile from his earlier evidence:[14]
[14]T115-116.
Mr Hoyne: […]- to clarify some of the points we were dealing with yesterday, as I understand your evidence, I think it was that you considered who might get the proceeds of the trust at the meeting of 26 June?
Luciano: No, Your Honour.
Mr Hoyne: So you didn't consider at the meeting of 26 June who might get the capital and income of the trust?---
Luciano: We considered it before and during the meeting.
Mr Hoyne: I am going to be step by step. You did it at the meeting?
Luciano: Yes, Your Honour.
Mr Hoyne: The nature of your consideration at the meeting, was that the same type of consideration you gave before the meeting as well?
Luciano: Yes, Your Honour.
Mr Hoyne: The people who you took into account were yourself and your brother and your nephews and nieces, that's correct?
Luciano: Everyone was, including my sister.
Mr Hoyne: Sorry, and your sister. On your understanding, you decided to given the nephews and nieces 52,000?
Luciano: That is correct.
Mr Hoyne: Then you decided to give the rest of it to yourself and your brother?
Luciano: Yes.
Mr Hoyne: In relation to the rest of it, as in the $1.35 million, who did you consider might get that? Before you decided it was you and your brother, who did you think of that?
Luciano: I thought about everyone.
Mr Hoyne: Who is everyone?
Luciano: Everyone including the beneficiaries.
Mr Hoyne: Who, under your understanding, is everyone, including the beneficiaries, I need names?
Luciano: Myself, Marco and Patrizia.
Mr Hoyne: Those are the three you considered. And you decided not to give it to Patrizia?
Luciano: That is correct.
Luciano alleged that Patrizia used trust funds for her own private use and business use. He conceded that he was also in control of the trust and signed every document during the time he alleges that Patrizia was in control and using the funds for her own purposes.
Luciano gave the following evidence regarding the process by which he and Marco made their decision with respect to the distribution of the trust assets:[15]
[15]T125-127.
At which point in time did you come to make the decision that you and your brother were going to get everything and Patrizia was going to get nothing?‑‑‑Can I have some time to look at - - -
You can have time in a moment but just right now, do you remember?‑‑‑I don’t remember the exact time but the instructions were very clear, that the beneficiaries were going to get paid and myself and my brother were going to be paid equally.
Do you recall the discussion with your brother where that decision was made?---I don’t have a time.
I am not asking that; I am asking a different question now. Do you recall that discussion with your brother?---Yes, in terms of the time, in terms of the - it happened, yes, we had a discussion.
Do you recall the discussion?---Discussion - we were sitting down and we spoke about it.
Where were you sitting down?---At home.
Whose home?---Family home, 5 Manly Court, North Coburg.
So you do have a clear recollection of this discussion?---There were a number of discussions around as to what we were going to do so it not only happened at Manly Court, North Coburg, it happened also at the accountant's office when the funds were being distributed.
But that was after this date. I am trying to focus on when this actual decision was made, correct? Sorry. Let me take that step by step. The discussions with the accountant were after this date. I am trying to focus on this point in time when this decision is made that you and your brother get everything and Patrizia gets nothing?---I don’t recall the exact time and place, all I remember is we were sitting down and we were discussing it. I can't remember the time, I don't remember the date but I do recall that me and my brother, we spoke about it and said, look, this is what we are going to do and this is it. So that's how it was. I don’t - like I said, before, this has been obviously a long journey, there was a lot of discussions, a lot of paperwork surrounding many discussions around that. I can't recall exactly every moment but I do, as I say, remember. It happened a number of times that those discussions, and it was always the beneficiaries would be paid as well as the end, the capital would be divided between myself and my brother.
What I suggest to you, sir, is what happened was - in fact I don’t disagree with any of that. What I suggest to you transpired is that you and your brother decided that you were both going to take everything because you didn’t have to pay Patrizia anything and so you decided, because you didn't have to, you weren’t going to, correct?---No. That was an opportunity - we exercised our right in regard to the discretionary trust.
You had the right to include Patrizia and arrange of other people as well, didn't you?---I had the right to make those calls.
What I suggest, the reason you exercised that right is because you wanted the money; do you agree or disagree with that?---It was a shared - it was a trust that exercised its right with obviously the information that we had received.
The other reason that you exercised it in terms of particularly excluding Patrizia was because you weren't on speaking terms and you didn’t like her any more?---No, Your Honour.
Luciano did not accept that the third of the trust balance of the trust fund was put into a joint account held by him and Marco in anticipation of Patrizia suing the trustee. He maintained that this money was set aside in case of unforeseen bills payable by the trust.
In re-examination Luciano confirmed that before the meetings of 15 March 2013 and 4 April 2013 he had received an agenda of the meeting and that what was on the agenda before the meeting was reflected in the actual resolutions of the meeting.
Luciano stated that Patrizia ‘never attended any directors meetings held for Latina Investments Trust during my time.’ He agreed that in the period 2003 to 2013 Patrizia was managing the affairs of the trust with input from Gino and Caterina.
In re‑examination, Luciano was taken to paragraph 46 of his affidavit sworn on 17 April 2013. Paragraph 46 of this affidavit states as follows:[16]
[16]Exhibit ‘PT-7’ to the affidavit of Patrizia sworn 6 October 2015 (Exhibit C).
Further, Marco and I believe that Patrizia has, over some years, used one or more of the Properties (being property of the Trust) as security for personal borrowings, to fund her own interests, expenses and lifestyle. For example, Marco and I have become increasingly concerned about the state of the Trust’s beneficiary loan accounts. It is my understanding that sometime prior to 2010, Patrizia took out a Commonwealth Bank of Australia (‘CBA’) line of credit facility to fund the purchase of her home at 28 Eastgate Street, Pascoe Vale South Victoria. She subsequently refinanced that CBA facility with Bankwest, and used one or more of the Properties as security for the refinance. I understand that she needed more money to complete the construction of a new house on her residential property. However, I understand that the refinance of her CBA facility somehow caused a large increase in the beneficiary loan account of the Trust. I understand that Patrizia believes that the Trust owes her a significant amount of money. Now produced and shown to me and marked ‘LT-15’ is a true copy of an email chain between Mr Incani and Mr Di Vitto which contain references to this refinance as being the principal cause of an increase in the Trust’s beneficiary loan account from $47,080.87 as of 30 June 2009 to $221,577.82 as of 30 June 2010.[17]
[17]This email chain was not in evidence.
Luciano gave evidence as follows:[18]
[18]T137-138.
Luciano: This point, 46, Your Honour, is the point and the main issues and concerns we had over the control of the trust. It is only one example that - and the concerns of loans that had increased through private use.
Mr Panna: Private use by whom?
Luciano: By Patricia Trani for the home.
Mr Panna: How did you come to that conclusion? What information did you receive, and from whom, to come to that conclusion?
Luciano: We received it from her at the time, who was looking after the company's accountancy, who was asked, when he had forwarded on his paperwork on to the next firm, that the reason for that figure to have been raised was for a home in Pascoe Vale and that was the reason for the increase of loan.
Mr Panna: You said the increase. Can you look at the figures on the last sentence of that paragraph. Can you see that?
Luciano: Account from $47,000?
Mr Panna: Yes?
Luciano: $80.87.
Mr Panna: And it's gone to $221,577?
Luciano: That is correct.
Mr Panna: What was your concern about that increase in the beneficiaries loan account?
Luciano: I was not given any information regarding that.
Mr Panna: By whom?
Luciano: By Patricia Trani.
Mr Panna: Did you ask her why there was such an increase in that period of time?
Luciano: I recall the meeting. We were at the Bosseo’s[19] as far as how the dealings - there was very little response as to the accurate situation of any of these transactions. It was met with, at times, very little clarity.
[19]The trustee’s former accountant.
Marco’s evidence
In his affidavit sworn on 27 November 2017 Marco deposed, in summary, as follows:
(a) while he has done some certificate courses, he did not complete year 12 and did not go to university. After school, he worked for a while in the family pizza business, and then pursued a career in hairdressing and massage, until he ceased work in about 2013 to care for Gino, whose health had deteriorated by that time;
(b) by early June 2014 he and Luciano had spoken many times about what they were going to do with the money in the trust. By that time they had told Mr Di Vitto on many occasions that he and Luciano had decided to pay out all liabilities, pay the rest of the monies in the trust to him and Luciano, and had decided not to pay any money to Patrizia;
(c) on 26 June 2014, he and Luciano attended Mr Di Vitto’s office, where Mr Di Vitto told him and Luciano that they would both be getting over $600,000.00 each;
(d) he deposed as follows:
We then went into the kitchen at the back of [Mr Di Vitto’s] office, and had our directors meeting at the table there. [Mr Di Vitto] opened the meeting. He handed me a minute of the meeting. I read it to myself whilst Luciano and [Mr Di Vitto] also read it.
I recall that at the time of reading the Minute prior to signing it, I saw the dollar figures in paragraphs (sic) 7(c) of the Minute, and thinking to myself that they must be a figure that [Mr Di Vitto] has (sic) put in for some reason. It was not my understanding at the time that I was going to receive $244,399.03 only from the Trust. I had in my mind that we would each receive over $600,000.
I thought [Mr Di Vitto] put these figures in for some reason, and I trusted he knew what he was doing, so I did not ask him about the figures. The rest of the Minute did not make much sense to me, and I did not understand some of the legal words in the document. But I did know that the meeting was about making the proper decisions as directors to make sure the Trust was properly wound up and that all the money was properly paid to me and Luciano, and not Patrizia.
(e) he did not recall whether Mr Di Vitto gave him a copy of the documents executed by him that day;
(f) Mr Di Vitto told him and Luciano that they should put some of the funds paid to him in a separate account to cover any future liabilities; and
(g) he deposed as follows:
I never intended to leave any money left over in the Trust. It was my intention, and my instructions to [Mr Di Vitto], that all the money in the Trust was to go to me and Luciano equally.
I would have next seen a copy of the Minute when I swore the affidavit of documents on 27 June 2017, but I do not recall actually reading the Minute that day. I next saw a copy of the Minute on 21 November 2017, when I saw my solicitor. I read the Minute that day. The dollar figures in clause 7 and resolution 3 were not what was paid to me and Luciano. These figures are not what me and Luciano had decided to pay to each of us. We had decided to pay all money left over to each other equally.
I assumed when I signed the minute on 26 June 2014 that it contained all that was necessary to give effect to Luciano’s and my decision to distribute the balance of the trust money to each of us equally.
Marco’s understanding of his role in administering the trust is even more limited than Luciano’s in that he was vague about the role of the appointer of the trust, did not understand the difference between a director and a shareholder of a company, and he frankly confessed, unsurprisingly, that he did not understand the Deed.
Marco attributed his removal as director of Latina in 2003 to Patrizia despite him being the sole shareholder at the time. He conceded that his parents made the decision to remove him, and that he did not ask them why they made that decision.
Marco’s account of the disagreement concerning his mother’s funeral arrangements was slightly different to that of Luciano. He claimed that Patrizia wanted their mother cremated and that this was against his mother’s wishes. Marco agreed that he and Patrizia haven’t spoken since his mother’s funeral in March 2011, and that they are estranged.
Marco confirmed that it was decided at the meeting on 15 March 2013 that the Trust was going to be wound up.
Marco was questioned as to whether any advice was sought or proffered on how the winding up of the trust might have been arranged more tax-effectively, and responded as follows:[20]
Mr Hoyne: Did you get any advice about the tax consequences of all of this?
Marco: Yes.
Mr Hoyne: And what was that advice?
Marco: To pay taxes.
[20]T 155.
Marco was taken to his affidavit of 27 November 2017, where he deposed that by early June 2014 he and Luciano had spoken many times about what they were going to do with the money in the trust. He was asked to elaborate on these discussions, and gave evidence as follows:[21]
[21]T157.
Mr Hoyne: […]After you got that advice, what were the discussions you then had with your brother about what would you would do with the money in the trust?
Marco: I just said, we would then look the an our (sic) options.
Mr Hoyne: Yes. And who said what to who?
Marco: That was a long time ago, I can't think of the speech.
Mr Hoyne: I am not asking for the exact words, I am asking for the substance of the conversation that you had with your brother?
Marco: The substance of the conversation would be to oversee all options.
Mr Hoyne: After you considered all options - what were all the options?
Marco: All options were all options.
Mr Hoyne: What were all of the options?
Marco: I can't recall now to give you all the options.
Mr Hoyne: What did you discuss as to what all the options might be?
Marco: Our legal standings, what we were legally bound to do, what we could do, what we couldn't do, what we needed to do, on what day to do it, on how to do it. All aspects, Your Honour.
Mr Hoyne: What did you discuss? I am trying to focus on the discussions you had with your brother. What was the nature of the discussions you had with him about what you could and could not do?
Marco: I just said, I just answered the question, about all the considerations of the information.
Marco was asked who the potential beneficiaries of the trust and he responded that it was the family which included himself, Patrizia, Luciano and ‘all of the siblings and others’. This was clarified to mean his children and Patrizia’s children. He said that no-one else was considered.
Marco gave the following evidence concerning the decision to distribute the balance of the assets in the trust to him and Luciano:[22]
[22]T159.
You didn’t consider the potential to distribute to anybody else?---No, Your Honour.
The decision you came to was to give it all to yourself and to your brother, correct?---The ultimate decision?
Yes?---That was the conclusion we came to.
What factors did you take into account in coming to that conclusion?---Many factors.
What were they?---Legal factors.
What were the legal factors?---What we could do with our discretion, considering that the discretion of what it meant - - -
You say that, “I was entitled to do it”?---We could do under that discretion, yeah.
You were allowed to do anything so you decided to give it to yourselves?‑‑‑That's incorrect.
What factors did you take into account? You have just said legal factors, I am trying to work out what those legal – I am trying to work out what it was that made you decide to give it to yourself and your brother rather than all of these other potential beneficiaries, what were the factors you took into account?---The accountancy factors, the legal factor, the advice on other - on many other things.
Marco confirmed that the decision to pay everything to himself and Luciano was made before the meeting on 26 June 2014. He conceded that he had not factored the $52,003.00 in unpaid present entitlements to beneficiaries into his decision to pay everything to himself and Luciano.
When questioned on what factors he considered in deciding who to distribute the trust money to, Marco referred to ‘accountancy factors’ and elaborated as follows:[23]
Marco: Moneys that had been distributed in the past, who got things in the past.
Mr Hoyne: Who had got things in the past?
Marco: I don't know who got things in the past. We didn’t have a record of who got what.
[23]T 159.
Marco pointed to ‘transactions have gone from one account into Patrizia’s account.’[24]
Mr Hoyne: So what payments do you say were made to Patrizia?
Marco: There was a loan of $50,000, a personal loan. And to my knowledge, now, there was $200,000 transferred from one account to another account, going to her personal house loans. There were loans payment dumped for car financing that I had to go through rigorously and pick out repayments.
[24]T 161.
When it was suggested to Marco that information was not disclosed in the financial accounts of Latina, he responded as follows:[25]
Well, I had accounts from Commonwealth that had been closed down and that's where I got my gist of where the moneys were transferred.
[25]Ibid.
Marco gave evidence that he decided that, once the children were paid their unpaid entitlements, that was all that they were entitled to receive. He gave evidence as follows:[26]
… So your understanding was that the children got the $52,000 and there was nothing else to be given to them and then it sort of automatically - and because you excluded Patrizia, the rest of you have just flowed to you and your brother effectively, is that right?---Correct.
[26]T 162.
Marco gave evidence that he was provided with a copy of the 26 June minute before the start of the meeting. He gave evidence that, in contrast, the minutes of the meeting of 15 March 2013 had been prepared after the meeting.
Marco was questioned as to what transpired at the meeting on 26 June 2014. His understanding was that the figures appearing at paragraph 3(c) in the 26 June minute of $244,399.02 was a part of what he was going to finally receive, and he was aware that the final figure to be paid to him was in the order of $600,000.00.[27]
Mr Hoyne: You thought that the point of this resolution was to give you part of it but not all of it?
Marco: I thought that this resolution, this paper, was a stepping stone to the process of putting it all together.
Mr Hoyne: Did you understand that there needed to be a resolution of the directors for the amounts to get paid to you?
Marco: No, Your Honour.
[27]T 167-168.
Marco maintained that even though the 26 June minute was merely read aloud and signed at that meeting that the 26 June minute was ‘an accurate portrayal of what proceeded’ at the meeting.
Marco denied that he was motivated to not distribute any trust money to Patrizia because he didn’t get along with her.
Marco agreed that the decision to pay each of himself and Luciano equally was not what actually happened, because Luciano received an additional $8,500.00.
Marco explained that the third of the funds which was put into the joint account was for the purpose of ‘liabilities of people that may be suing us’ and suggested that such liabilities may be in respect of construction work that they had done on the properties or other liabilities of the trust.
Mr Di Vitto’s evidence
In his affidavit sworn on 24 November 2017, Mr Di Vitto deposed that he assisted Marco and Luciano:
in relation to the process of selling all of the properties, pay out all of the liabilities of the Trust, and anything else required to give effect to the winding up of the Trust.
Mr Di Vitto deposed as follows concerning the discussions he had with Marco and Luciano, and Luciano in particular, concerning the winding up of the trust:
By early March 2014, Latina still had various liabilities to pay, including GST, repairs to properties, legal fees payable to Robert James Lawyers, and accounting fees payable to [RDV Business Solutions]. Latina also had unpaid present entitlements (distributions of profit from previous financials years) which also remained unpaid. These outstanding liabilities were to be paid from the Business Transaction Account. I had a meeting with Luciano at my office about this time (early March 2014) to discuss the calculation and payment of these liabilities.
At this meeting, Luciano and I exchanged words to the following effect:
I said:
“After Latina pays out all liabilities, where do you want the balance of the monies in the Trust to go?”
Luciano replied:
“Marco and I have discussed this. We want all the money to be paid to me and Marco equally. Patrizia will not receive anything.”
I said:
“OK, I will arrange that.”
Between March 2014 and June 2014, I had other conversations with Luciano and/or Marco in which we discussed how all the monies in the Trust were going to be paid to Marco and Luciano equally, and nothing would be paid to Patrizia (the plaintiff in this proceeding). As a result of these conversations, by early June 2014 I was well aware that Marco and Luciano intended to pay all the monies in the Trust to themselves equally, and not pay anything to Patrizia. I was instructed to give effect to this.
By early June 2014, I was also aware that Robert James Lawyers had been retained by Latina to prepare any legal documentation to give effect to the winding up of the Trust.
Mr Di Vitto also gave evidence in some detail as to what took place at his offices on 26 June 2014, as follows:
The Summary showed that Latina’s CBA Business Transaction account had a balance of $98,505.75, and Latina’s Business Online Saver account had a balance of $1,307,365.04. These sums totalled $1,405,870.79.
Latina did not have any other liabilities outstanding to my knowledge, other than monies owed for unpaid present entitlements.
I then made a hand-written calculation of the total amount to be distributed to Marco and Luciano from the whole of the capital and income of the trust, being the $1,405,870.79 available in the accounts, plus my estimate of $2,500.00 in interest receivable for June 2014, which totaled $1,408,370.70. I hand-wrote that calculation on the Summary. After deduction of the cheques to some of the beneficiaries for unpaid present entitlements totaling $52,003.00, and noting all other known liabilities of the Trust had by that time already been paid in full, I calculated that the net amount available for distribution to Marco and Luciano was $1,356,367.70. I made hand-written annotations on the Summary reflecting this calculation.
Shortly prior to 4:30 PM on 26 June 2014, I had completed Latina’s financial statements and its tax return. I opened the Draft Minute on my computer screen at my desk and completed the sections in yellow highlight. I used the Net Profit for Distribution amount ($488,798.05), divided it by 2, and inserted the sum of $244,399.02 for Luciano at clause 7ci and resolution 3ci, and the sum of $244,399.03 for Marco at clause 7cii and resolution 3cii.
At approximately 4:30 PM on 26 June 2014, Marco and Luciano attended my office to have the directors meeting.
(b) Patrizia had made an offer to buy out Marco’s and Luciano’s interests in the trust. Strictly speaking, given that the trust was a discretionary trust, neither Marco or Luciano had any ‘interests’ to buy out, but it is tolerably clear from the letter of offer, and the counter offer made in response,[92] that all parties considered each of Marco, Luciano, and Patrizia to be entitled to the assets of the trust in equal shares. That is understandable, given that the assets of the trust were largely assets which, would have been, if not gifted to the trust, assets of Gino and Caterina, which would have thus formed part of the assets of their estates upon their death;
(c) that the above was the common understanding of the parties was supported by the evidence of Luciano[93] to the effect that Patrizia’s offer was rejected, not because the offer was based upon a legal fiction, but because he and Marco were concerned that she would be unable to finance the proposed buy‑out; and
(d) at the meeting on 15 March 2013, it was contemplated that Patrizia might make a further offer to Marco and Luciano to buy out their interests in the trust. There is no evidence of the interests of any other of the beneficiaries of the trust being in the contemplation of any party at that time (or, for that matter, at any time).
[92]See the letters extracted at paragraphs 10 to 12 of these reasons.
[93]Affidavit of Luciano Trani sworn on 13 April 2013 in the caveat removal proceeding.
Accordingly, the decision of Marco and Luciano in or about March 2014 to exclude Patrizia from the assets of the trust was not made in a vacuum. Rather, it amounted to a change of position on the part of Marco and Luciano. Prior to that time, there appeared to be no dispute that Patrizia had an interest in the trust, notwithstanding that this understanding did not reflect the true legal position, the dispute concerned how much she was prepared to pay Mario and Luciano to surrender their interests. The question is, what motivated Marco and Luciano to change their position? Was it, as contended for by Patrizia, their animosity and greed?
Before answering this question, I pause to make some observations concerning the evidence of Marco and Luciano under cross‑examination. First, it is apparent from the material on the court file prior to 24 November 2017 that neither Luciano or Marco intended to give any substantive evidence concerning their decision to exclude Patrizia from the assets of the trust. Marco had not sworn an affidavit at all, and Luciano’s affidavit of 5 May 2016 concerned largely formal and uncontentious matters. This position is consistent with the authorities regarding the protection from disclosure of the reasoning process of trustees, and the authorities indicate that I can draw no adverse evidence regarding their failure to give reasons for their decision, either at trial or beforehand.
However, the door shutting off information concerning their decision making process was at least pushed ajar, if not fully opened, by their need to bring a rectification claim with respect to the 26 June minute. While I did not permit Marco and Luciano to be cross‑examined directly concerning their reasons for excluding Patrizia from the assets of the trust, the cross‑examination necessarily canvassed a number of aspects of their decision-making process. Further, as noted in paragraph 98 of these reasons, some of the evidence given by Marco and Luciano casts significant doubt upon their credibility as witnesses. While that credibility gap does not, of itself, establish that Marco and Luciano were motivated by bad faith and/or an improper purpose, it does cast a great deal of doubt upon their protestations of affection for Patrizia, and their insistence that they gave proper consideration to all of the beneficiaries during the process of winding up the trust.
Further to the above, I should say that, notwithstanding my ruling early in the trial that Marco and Luciano could not be cross‑examined on their reasons for making the decision they did, I am not precluded from relying upon the evidence they did give, taking into account concerns I have regarding the quality and veracity of that evidence, in determining whether their exercise of discretion was lawful. First, the cross‑examination largely focused upon what consideration they gave to the position of the beneficiaries of the trust and other matters. The decision in Karger v Paul[94] does not preclude investigation of such matters. As stated by McGarvie J:[95]
In my view, in this case it is open to the Court to examine the evidence to decide whether there has been a failure by the trustees to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. As part of the process of, and solely for the purpose of, ascertaining whether there has been any such failure, it is relevant to look at evidence of the inquiries which were made by the trustees, the info
They had and the reasons for, and manner of, their exercising their discretion. However, it is not open to the Court to look at those things for the independent purpose of impugning the exercise of discretion on the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. … the issues which are examinable by the Court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred.
[94][1984] VR 161.
[95]Ibid, 161.
In Wendt & Ors v Orr & Anor,[96] Commissioner Johnson QC referred to the statement above and stated:[97]
In my view, a close reading of Karger v Paul makes it clear that the case is not authority for the proposition that a trustee cannot be cross‑examined in relation to the exercise of the discretion. It merely determines the purpose to which such evidence can be put.
[96][2004] WASC 28.
[97]Ibid [46].
I agree. In my view, all of the evidence can be examined for the purpose of determining whether the trustee exercised its discretion lawfully. What it cannot be used for is to determine whether a lawfully exercised discretion was exercised properly or reasonably. However, evidence of a failure to make proper enquiries may well support a finding that the trustee had not given real and genuine consideration to the beneficiaries of the trust. Further, the evidence of what consideration was in fact given to the beneficiaries of the trust is directly relevant to the question of whether that consideration was ‘real and genuine’. Indeed, that was the exercise undertaken by McGarvie J in Karger v Paul.[98]
[98][1984] VR 161.
Further, the decisions in Mandie & Anor v Memart Nominees Pty Ltd[99] and Cohen & Ors v Amberley Corporation Australia Pty Ltd,[100] while made in the context of discovery, also support the contention that it is open to the Court to examine a trustee’s decision making process.
[99](2014) 42 VR 325.
[100][2016] VSC 140.
Finally, there is an additional element in the current case that gives me comfort that, while no adverse inference can be drawn from the failure of Marco and Luciano to provide reasons for the trustee’s decision, there is no limitation upon the use to which I can draw inferences from the evidence given by Marco and Luciano regarding their decision making process. In the current case, Marco and Luciano are not only defending their decision to exclude Patrizia from the distribution of the assets of the trust, they have also brought a positive claim for rectification of the 26 June minute. In order to establish their right to relief, it was incumbent upon them to disclose their intentions and when those intentions were formed. However, the claim for rectification was brought voluntarily, and had it not been brought, Marco and Luciano may well have been able to remain behind their shield of silence. It would have certainly been more difficult for Patrizia to expose what actually occurred at the meeting on 26 June 2014, which provided considerable support for her contention that the trustee failed to provide real and genuine consideration to her entitlements as a beneficiary. It seems to me that it would be artificial, and indeed unfair, if Marco and Luciano could rely upon the evidence advanced by them in support of their claim for rectification, but contend that I could not deploy that evidence, including my observations regarding the credibility of their evidence, in evaluating the claims advanced by Patrizia. I do not consider that a submission in those terms was advanced by senior counsel for Marco and Luciano, but for the avoidance of doubt, if it was, I reject that proposition.
Having regard to the evidence, I make the following observations and findings:
(a) as noted in paragraph 197 above, the evidence needs to be viewed in the context of the surrounding circumstances and the subjective ‘understandings’ and intentions of the parties. At least as at March 2013, while Patrizia was in disagreement concerning the future of the trust, the common understanding of the parties was that the parties were entitled to the assets of the trust in equal shares. It is against this background that the conduct and decision making process of Marco and Luciano is to be assessed;
(b) Marco and Luciano were advised by lawyers at least since the start of 2013. It is apparent from their evidence that they sought and obtained advice not only as to what they should do, but what they could do under the terms of the Deed. No advice was sought from Mr Di Vitto regarding how they should deal with the assets of the trust: he was simply instructed to do what was required to give effect to their decision;
(c) the evidence of Marco and Luciano, notwithstanding that in some respects it was somewhat incoherent, makes it clear that Marco and Luciano understood that they had a discretion as to how to deal with the assets of the trust, and believed that discretion was largely unfettered;
(d) during and after the 15 March meeting, Marco and Luciano, and Luciano in particular, moved to take control of the trust. An old friend of Luciano was appointed as the accountant for the trust, and moves were afoot to charge Patrizia’s partner commercial rent for Catherine Street. While the trustee was entitled to do these things, they were clearly hostile acts directed at Patrizia;
(e) similarly, while this decision was probably at least partly motivated by Patrizia’s somewhat ill‑advised conduct in lodging caveats over the trust properties, Marco’s and Luciano’s decision to remove Patrizia as a director of the trustee meant that she was cut out of the decision‑making process of the trust, and had limited, if any, access to information about the affairs of the trust, a trust she had voluntarily managed for at least ten years prior to that time;
(f) given the above, the suggestion that Marco and Luciano held no animosity towards Patrizia, and were not motivated by any animosity towards her, is, as contended for on behalf of Patrizia, highly implausible;
(g) while it is not determinative of the matter, the lack of inquiry of any kind concerning the financial circumstances of Patrizia or indeed of any of the other general beneficiaries supports the contention that no genuine consideration was given to distributing the assets of the trust to anyone other than themselves;
(h) the evidence of Marco and Luciano regarding what consideration they give to the beneficiaries of the trust was evasive, vague in the extreme, and conclusionary. Their continued assertions that they gave consideration to ‘everyone’, and ‘all of the options’ did not descend, despite repeated questioning, to any detail whatsoever as to when the beneficiaries, or any of them were considered, and what issues were canvassed or taken into account in that consideration. While I accept that the law does not proscribe any particular process which must be undertaken by a trustee prior to making decisions of this nature, and decisions concerning trusts such as this are often made in an informal manner, this was a significant decision. The trustee had determined to wind up the family trust which had operated for nearly twenty years, comprising a substantial portfolio of property largely gifted by their parents, from which Marco and Luciano had decided to exclude their sister and the next generation of the family;
(i) while Marco and Luciano contended that the need for the trust to be wound up quickly was owing to the parlous financial position of Latina, it would have been possible to sell some but not all, trust properties to clear the bank debt, and sell the remaining properties in the following financial year to achieve a more tax effective outcome for the ultimate beneficiaries of the trust. The haste with which Marco and Luciano wound up the trust, notwithstanding that it was not necessary to do so, and notwithstanding the adverse tax consequences for themselves as a result of this transaction, does indicate some ‘consciousness of guilt’; and
(j) the evidence of what occurred during the meeting of 26 June 2014, compared with the text of the 26 June minute, and the misleading evidence of Luciano in his affidavit of 5 May 2016 concerning what occurred at the meeting, suggests that the 26 June minute was a contrivance aimed at conveying a misleading impression to the reader. The 26 June minute was drafted by solicitors prior to the meeting, and was consistent with what the authorities say should occur, but was not consistent with what did occur. The absence of any substantive evidence regarding the question of whether Marco and Luciano gave genuine consideration to whether other beneficiaries, in particular Patrizia, should benefit from the final distribution of the trust assets, supports a finding that no genuine consideration was given. As noted above, Marco’s and Luciano’s evidence in that regard was evasive, circular, and conclusionary, and Mr Di Vitto’s evidence gave them no assistance.
I also consider that the current proceeding is an instance where what might be described as a ‘grotesquely unreasonable’ result may of itself be evidence of a breach of duty. Having regard to the inclusion of each of Patrizia, Marco and Luciano in the class of Primary Beneficiaries under the Deed, the ‘default’ position under clause 4.1 of the Deed, Patrizia’s management of the affairs of the trust over many years, and the correspondence between the parties prior to the meeting on 15 March 2013, when all parties corresponded on the assumption that Marco, Luciano and Patrizia were entitled to an equal share of the assets of the trust, the decision to exclude Patrizia went beyond mere unfairness and unreasonableness. Indeed, in their evidence, Marco and Luciano made specific reference to excluding Patrizia (as opposed to excluding other general beneficiaries, or other categories of general beneficiaries), indicating that they understood that Patrizia, along with each of them, had a particular claim to the assets of the trust. They were clearly motivated by their hostility to her. Whether that hostility arose out of conflict over their mother’s burial arrangements, their disagreements over the management of the trust, their suspicions regarding Patrizia’s dealings with the assets of the trust, or her conduct in lodging caveats over the trust properties does not matter much: what matters is that Marco and Luciano exploited their control of the trust to exclude Patrizia from any share of the assets built up by their parents and husbanded by Patrizia’s efforts over many years. That, in my view, amounts to bad faith on their part.
In making the above findings and observations, I reject the submissions advanced on behalf of Marco and Luciano to the effect that while Marco and Luciano had a limited understanding of trusts and corporations, they did the best they could in all of the circumstances. As I have said earlier, I do not level any criticisms at Marco and Luciano for failing to understand the Deed: it is a dense and difficult document, and expressed in the archaic language common to such documents. However, I consider that Marco and Luciano were much more astute in business affairs than they might initially appear. They understood the powers of the trustee, and that they were required to ‘give consideration’ to the beneficiaries. They were advised by solicitors and accountants along the way. They knew of their rights to take control of the trust, and instructed solicitors to engage in litigation.
Further, while I accept that Patrizia’s management of the trust in the past gives her no special claim to the assets of the trust, it is a relevant background circumstance. Luciano’s evidence was that Gino and Caterina played a significant role in making decisions concerning the trust, even after they ceased being beneficiaries of the trust. They were responsible for removing Marco as a director and the shareholder of the trustee, for reasons which did not emerge at trial. That Gino and Caterina entrusted the management of the trust to Patrizia is consistent with the understanding of the parties, at least until March 2013, that in fact, if not in law, the real beneficiaries of the trust were Marco, Luciano, and Patrizia.
Finally, given my findings concerning the credibility of the evidence given by Marco and Luciano, I do not agree that I should accept their evidence that in making the decision to pay the assets of the trust to themselves, and excluding Patrizia from the distribution of the assets of the trust, they gave real and genuine consideration to the beneficiaries of the trust, and their decision was not motivated by their animosity towards Patrizia.
In rejecting the submissions advanced on behalf of Marco and Luciano regarding the credibility of their evidence, I accept that, notwithstanding the findings I have made concerning credibility, the onus remained firmly upon Patrizia to establish any bad faith or any other breach of duty on the part of Marco and Luciano. However, I consider that, by reason of the surrounding circumstances and the patently unjust result of the trustee’s decision of themselves established a prima facie case of breach of duty. While the existence of a prima facie case did not of course shift the burden of proof, the unsatisfactory nature of the evidence bolstered Patrizia’s case beyond being a prima facie case to one which satisfied me to the requisite standard of proof.
I should say something here about the allegations advanced against Patrizia concerning her use of trust assets for her personal advancement. Some of the allegations were made with some precision,[101] such that I could speculate that they were made with some foundation. However, no evidence, apart from oral evidence, was advanced to support such allegations, and Marco and Luciano (with Mr Di Vitto’s assistance) have been in control of the trust for many years now. Further, the suggestion that the reduction in the beneficiaries’ loan account over the course of the financial year ended 30 June 2014 is somehow related to payments to Patrizia makes no sense: this loan account recorded amounts owing to the Trani family by the trust, and Mr Di Vitto’s evidence is that this debt was cleared by making payments to Marco and Luciano, presumably prior to the purported final distribution of the trust assets on 26 June 2014. Marco and Luciano controlled the trust for the entirety of the 2013/2014 financial year. One could question the propriety of repaying loans made by the ‘Trani family’ to Marco and Luciano alone, but the evidence was insufficient for me to making any findings about that issue, as well as any findings about the conduct of the affairs of the trustee by Patrizia. In the absence of any pleading or evidence to the effect that the rationale for excluding Patrizia from the trust was the trustee’s view that she had already helped herself from assets of the trust, or indeed any solid evidence to support such an allegation, the conduct of the parties with respect to the financial affairs of the trust is not relevant to the determination of the issues in the proceeding.
[101]See, for example, Marco’s evidence that there was a loan of $50,000.00 (presumably made to Patrizia) and $200,000.00 transferred from one account to another.
For completeness, should the issue become relevant later, I should add that if I had not found that the 26 June minute was capable of rectification, and thus the effect of the 26 June minute was to distribute the income of the trust to Marco and Luciano, I would not have found that decision to have been impeachable on the grounds referred to in Karger v Paul[102] and the other authorities. First, a finding of bad faith, improper purpose, and/or failure to give real and genuine consideration by necessity involves an evaluation of the subjective intentions of the parties: Marco and Luciano certainly had no intention to distribute just the income of the trust. Further, such a distribution of the income would not be ‘grotesquely unreasonable’. While the trustee may have decided to adopt a different course, distribution of the income alone would have left a generous sum of capital in the Vesting Trust, a third of which would have passed to Patrizia under the terms of the Deed.
[102][1984] VR 161.
Marco’s and Luciano’s entitlements as unpaid beneficiaries
As noted above, at the meeting on 26 June 2014, the trustee failed to deal with the prior distributions to Marco and Luciano (and the estate of Caterina) recorded in the accounts of the trust, being $143,481.00 to Marco, and $33,227.00 to Luciano (and $18,000.00 to Caterina). The only evidence concerning the treatment of these prior distributions was that of Mr Di Vitto to the effect that these amounts were ‘subsumed’ within the payments made to Marco and Luciano on 27 June 2014.
It seems that, on and before 26 June 2014, the trustee failed to recognize that pursuant to clause 3.1 of the Deed, the prior distributions of income to Marco and Luciano removed those funds from the trust fund available for distribution on the Vesting Day (pursuant to clause 4 or 4.1 of the Deed), but rather vested immediately as a separate trust fund held by the trustee on trust for recipients of the income at the time of their distribution as recorded in the accounts of the trust. Accordingly, each of Marco and Luciano are sole beneficiaries of separate trusts in respect of those past distributions. Clause 3.1 of the Deed empowers the trustee:
pending payment thereof to such General Beneficiary to invest, apply or deal with such fund or any resulting income therefrom or any part thereof in the manner provided for in SUB-CLAUSE 6.4 of THIS DEED.
Clauses 6.4 and 6.3 of the Deed (to which clause 6.4 refers) provide the trustee certain powers to deal with income and capital of the trust with respect to beneficiaries under a legal disability or infant beneficiaries. The Deed is otherwise silent as to how and when income paid to beneficiaries in the past is to be paid to the beneficiary concerned.
Accordingly, while I am content to hear further submissions on this point, given the other findings I have made, I am inclined to agree with the statement made by senior counsel for Marco and Luciano that these prior distributions need to be accounted for in any final orders in this proceeding, subject to any argument that by their conduct, and the terms of the 26 June resolution, Marco and Luciano (and Marco on behalf of the estate of Caterina) had waived their right to demand payment to them of those unpaid distributions.
Conclusion
To sum up again, I make the following findings regarding the issues in the proceeding:
(a) the 15 March resolution was not effective to appoint 15 March 2013 as the Vesting Day pursuant to clause 4 of the Deed;
(b) the 26 June resolution was not effective to appoint Marco and Luciano as beneficiaries of the Vesting Trust;
(c) the 26 June resolution was effective to distribute the income of the trust earned in the 2013-2014 financial year to Marco and Luciano;
(d) for the avoidance of doubt, the 26 June resolution, as construed, could not be impugned on the basis of bad faith and/or improper purpose;
(e) the remedy of rectification is available to Marco and Luciano to (i) appoint them as beneficiaries of the Vesting Trust, and (ii) amend the dollar figures in paragraph 3(c) of the 26 June minute, in order to give effect to their clear intentions that day;
(f) however, the 26 June resolution, as rectified, was invalid on the basis that the trustee’s decision was motivated by bad faith, and the trustee failed to give real and genuine consideration to the entitlements of the beneficiaries, and in particular, Patrizia;
(g) given the above, (noting that it was not contended at trial that, were I to make findings adverse to Marco and Luciano concerning the 26 June resolution, they would not be liable under the principles in Barnes v Addy[103]) Marco and Luciano have knowingly assisted in a breach of trust on the part of Latina; and
[103](1874) LR 9 Ch App 244.
(h) having regard to my findings above, further consideration needs to be given to:
(vii) the unpaid entitlements owed to Marco, Luciano, and the estate of Caterina;
(viii) whether the status of Latina needs to be regularized in order to give effect to the remedy of rectification;
before making final orders.
Accordingly, the further hearing of the proceeding will be adjourned to a date to be fixed to address the final form of orders and the question of costs. Prior to that hearing, it would be helpful if the legal representatives of the parties could give some consideration to the nature of the orders I ought to make to give effect to these reasons: in particular, orders for payment, or orders by way of declarations, or a combination of both.
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