Wendt v Orr

[2004] WASC 28

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(Judgment by: Johnson J)

Wendt
vOrr

Court:

Judge:
Johnson J

Legislative References:
Trustees Act 1962 (WA) - The Act

Case References:
Downes v Cottam - [1893] 1 Ch 547

Hearing date: 29 April 2004
Judgment date: 4 March 2004

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Judgment by:
Johnson J

[1] When my reasons for decision in this action were handed down, I addressed the issue of the costs of the action and concluded that the first defendant should meet his own costs of the action and pay the costs of the plaintiffs and the second defendant, without indemnity from the estate. This conclusion was reached in the context of a claim by the plaintiffs for reimbursement of legal costs paid by the first defendant from the estate, an issue on which submissions were made by all parties. In the course of making my findings on this issue I drew a distinction between costs of the action and other legal costs incurred in the management of the estate. Having drawn that distinction, I proceeded to state my conclusions in relation to payment of both categories of costs. However, having delivered my reasons, it occurred to me that such a distinction was not drawn by the parties in their submissions and, accordingly, the first defendant was entitled to be further heard on whether he is entitled to an indemnity from the estate for the costs of the action.

[2] Accordingly, on 29 April 2004 a further hearing was held in which all parties were given an opportunity to make oral submissions. Counsel for the plaintiffs and the first defendant had each filed written submissions. Counsel for the second defendant had advised that his client would abide the decision of the Court. However, as the written submissions filed by the first defendant included a submission that he should not meet the legal fees of the second defendant, counsel for the second defendant was given the opportunity to make oral submissions and invited to file written submissions if he considered it would be in the interests of his client to do so.

[3] The facts relevant to the resolution of this issue include the following:

•

The assets of the estate at the time the first defendant became the executor included cash, shares, a boat and trailer, a demountable home and WA Government Bonds to a total value of $166,000 with bonds to the value of $114,000 due to mature on 1 December 1998.

•

By letter dated 22 May 1998 the plaintiffs' solicitors advised the first defendant's solicitors of their concern about the possibility that the first defendant would distribute capital to the second defendant.

•

By letter dated 9 June the first defendant's solicitors offered a compromise whereby the first defendant give an undertaking that he would give 21 days' notice to the plaintiffs of any intention on his part to pay capital to the second defendant.

•

By letter dated 12 June 1998, the plaintiffs repeated their concerns about the possibility of a distribution of capital to the second defendant and put the first defendant on notice that should any amount of capital be paid to the second defendant, then the plaintiffs would look to recover any consequential loss.

•

On 20 January 1999 the first defendant paid to the second defendant the net proceeds of sale of Optus shares.

•

On 9 April 1999 the first defendant paid to the second defendant the net proceeds of sale of CBA shares.

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On 12 December 1999 the first defendant paid to the second defendant the net proceeds of sale of a further sale of Optus shares.

•

All three payments were made without prior notice to the plaintiffs.

•

On 8 March 2000 the plaintiffs' solicitors wrote to the first defendant's solicitors advising that they were preparing an application to this Court to review the distribution of capital to the second defendant. The plaintiffs' solicitors invited the first defendant to consider his position, before the filing of the application, and propose an appropriate alternative to Court proceedings.

•

By letter dated 4 April 2000 the solicitors for the first defendant briefed counsel seeking advice, inter alia, on whether the proceeds of the share sales was income or capital and whether the legal fees in relation to this and related issues should be paid from the estate or the profits on the share sales.

•

The first defendant claimed privilege over counsel's opinion other than that part which advised that the costs of the advice on this issue should come from the proceeds of the share sales.

•

Despite this advice, on 9 May 2000 and 30 May 2000 the first defendant paid from the estate the fees of counsel and his solicitors respectively.

•

On 8 May 2000 the first defendant's solicitors advised that they should prepare an application to the Court seeking directions of the Court regarding whether the money made by share trading is income or capital.

•

There is no evidence before the Court that instructions were given by the first defendant to make the application, but it remains a fact that no such application was made.

•

On 6 July 2000, the plaintiffs commenced these proceedings.

•

On 27 May 2002 the originating summons was amended to request an order for repayment of the capital and legal fees dispersed.

[4] It was submitted on behalf of the first defendant that the costs incurred prior to the issue of the proceedings and paid from the estate related to matters that were properly within the usual duties of the executor. Counsel for the plaintiffs have provided the Court with a schedule of costs paid by the first defendant from the estate ("the Schedule"), a copy of which is attached to these reasons. It is conceded by the plaintiffs that items 1 to 5 were costs properly incurred and payable from the estate.

[5] However, the plaintiffs dispute that items 6 and 7, the costs of obtaining counsel's advice, should be paid from the estate. The first defendant argues that the costs incurred in obtaining counsel's opinion and the costs of the solicitors' advice that the first defendant should seek the Court's directions are reasonable costs incurred in the exercise of the trusteeship.

[6] The plaintiffs rely on two main points to rebut the proposition that the first defendant should be indemnified by the estate in relation to these costs. The plaintiffs' first point is that the first defendant claimed privilege over the documentation relating to counsel's advice and over the advice itself. Privilege was voluntarily waived in relation to a part of counsel's advice during the course of the hearing, but the privilege was maintained in relation to the balance of the document. The plaintiffs' submission is that the claim of privilege is inconsistent with the advice being obtained for the benefit of the estate and, hence, should not be paid for by the estate. The plaintiff further submits that if the advice had been obtained for the benefit of the estate, it would be the property of the estate and the beneficiaries would be entitled to access to the advice. It is said that a claim of privilege in an action involving only the executor and the beneficiaries of the estate is so inconsistent with the advice being obtained "for the benefit of the estate" that the only reasonable conclusion is that it was obtained and used for the benefit of the executor and, hence, should be paid for by him.

[7] I consider there to be considerable merit in this submission. As Bowen J observed in In Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562:

A trustee can only be indemnified out of the pockets of his cestui qui trust against costs, charges, and expenses properly incurred for the benefit of the trust.

[8] In my view, a claim of privilege over a document, such claim being made by an executor in the course of an action involving only beneficiaries, is entirely inconsistent with the documentation being obtained for the benefit of the estate. In my view, this factor alone disentitles the first defendant to an indemnity from the estate for the costs set out in items 6 and 7 of the Schedule.

[9] The plaintiffs' second point is that the evidence establishes that the first defendant did not act on the advice received in a timely fashion or at all. Indeed, with respect to one aspect of the advice the first defendant acted contrary to counsel's advice by paying the costs of obtaining the advice from the estate rather from the proceeds of the share sales. Although privilege was claimed over counsel's advice at the hearing, the written submissions filed on behalf of the first defendant state that counsel's opinion included the advice "that the trustee should use the provisions available under s 92 of the Trustee's Act seeking the Court's directions". Annexed to an affidavit filed after the hearing on behalf of the first defendant is a letter dated 8 May 2000 sent to the first defendant by his solicitors. Contained in that letter is advice that an application should be made to the Court seeking directions regarding whether the money made by the share trading is income or a capital gain. The first defendant had already been warned by the plaintiffs' solicitors on 8 March 2000 that they were preparing an application to the Court specifically in relation to the distributions made to the second defendant. Nevertheless, no application to the Court for directions was made by the first defendant as executor in the two-month period between the advice and the commencement of proceedings by the plaintiffs.

[10] In the first defendant's written submissions it is said that the solicitor representing the first defendant moved from P J Griffin & Co to Lewis Blyth & Hooper shortly after 8 May 2000. It is further stated in the written submissions that Lewis Blythe & Hooper did not receive instructions to act in this matter for the first defendant until 12 July 2000, after the originating summons had been filed. There is a further assertion that prior to the commencement of the action by the plaintiffs, the solicitors for the first defendant were instructed to prepare an application under the Trustees Act seeking the directions of the Court regarding whether money made by share trading was capital or income. There is no evidence before the Court which would allow the Court to conclude that the first defendant ever instructed his solicitors to prepare an application under the Trustees Act seeking directions. It seems to me that, if indeed such instructions had been given, it would be a simple matter to provide a copy of any letter giving or confirming the instructions or a file note recording the instructions. In view of my findings on the first defendant's credibility, in the absence of supporting evidence, I am not prepared to conclude that he gave such instructions.

[11] In some circumstances two months would not be an excessively long period before acting on the advice of counsel and would not necessarily preclude an executor from being indemnified from the estate for the costs of the advice. However, in this case the first defendant had known since May 1998 that the plaintiffs took issue with the payment of any capital to the second defendant. He had known since June 1988 that, if he were to do so, the plaintiffs would seek to recover any consequential loss. He had known since 8 March 2000 that the plaintiffs would initiate court action if the first defendant did not propose an appropriate alternative. It was, in my view, clearly the case that the first defendant was well aware that time was of the essence if he wished any request for directions of the Court to be initiated by him as executor.

[12] I consider that the evidence adduced at trial, in particular the first defendant's explanations for his actions, belie any intention on the first defendant's part to do other than act in accordance with his initial decision to administer the estate to the benefit of the second defendant. I gained from the evidence and the chronology of events a clear understanding that the first defendant would continue to administer the estate to the benefit of the second defendant unless forced to do otherwise. In my view, the first defendant did not intend to act on counsel's advice unless it accorded with his intentions with respect to the estate. His decision to pay from the estate the legal costs of obtaining counsel's advice, contrary to that advice, reinforces that conclusion. For these reasons I accept the plaintiffs' submission that the first defendant should not be entitled to be indemnified by the estate for the costs of advice he did not follow and had no intention of following.

[13] Items 8 to 21 represent costs of the litigation which have been dispersed by the first defendant from the funds of the estate and, according to the plaintiffs, should be repaid to the estate.

[14] On behalf of the first defendant, it was submitted that he made a mistake of judgment and should not be disentitled to an indemnity from the estate as he has acted with reasonable prudence, but has been pre-empted by the plaintiffs commencing proceedings before his solicitors could do so. That submission is in conflict with the findings of fact made by me. I did not conclude that he made a mistake of judgment but, rather, he deliberately decided, from the outset, to administer the estate in a manner which benefited one class of beneficiary over another and thereby acted in breach of trust. I further found that he acted unreasonably and dishonestly and in breach of trust in administering the estate in that manner and in distributing capital to the income beneficiary. Consequently, if the first defendant submits that the costs of the litigation should be met by the estate rather than by him, that submission will need to be on some basis other than the fact that he simply made an error of judgment whilst acting with reasonable prudence.

[15] Counsel for the first defendant identifies two bases for the submission that the costs, or part of the costs, of the litigation should be paid from the funds of the estate. The first basis is that the central question of whether or not the profit from share trading should be defined as capital or income would. It is submitted that the originating summons in its initial form was of the same character as would have been brought by an executor under s 94 of the Trustees Act, the costs of which, in the normal course of events, would be met by the estate. In addition, it is suggested that the same, quite complex, arguments would have been raised by counsel for the first defendant, and properly put before the Court, if the executor had initiated the action. As much of the costs would have been incurred in any event, the first defendant should not have to bear all of the costs. This submission was supported by counsel for the second defendant.

[16] In his oral submissions, Counsel for the first defendant also raised the possibility that the first defendant was not advised at an early stage that he was entitled to bring an application for directions. Counsel noted that it was nearly three years before the solicitors sought counsel's advice. I have some difficulty with this submission which is speculative and not based on any evidence before the Court. The fact is that the first defendant was represented and if his legal representatives did not properly advise him, then his remedy lies in an action against them. In any event, there is no evidence from which a conclusion can be drawn that, prior to seeking counsel's advice in 2000, the first defendant was never told that he could seek the Court's assistance in resolving the dispute with the plaintiffs.

[17] Counsel for the plaintiffs submits that where, as in this case, there is a dispute over the proper interpretation of the Will and the distribution of funds under the Will, a prudent trustee would have sought legal advice and/or directions from the Court prior to making the distribution about which there is a dispute. This submission is in accordance with the findings that I have already made. I see no reason to resile from those findings. It is also submitted that it is clear from the evidence that the first defendant was never going to make that application to the Court. I accept that submission.

[18] The plaintiffs also submit that if the application is brought by a beneficiary, then a prudent trustee would not oppose the order that his decision be reviewed. For example, in his affidavit evidence of 4 September 2000 the first defendant made it clear that he did not support the application to review his distribution of the share sale profits to the second defendant. Nor would a prudent trustee oppose an amendment which would allow the estate to recover moneys improperly disbursed. Further, the amendment was opposed despite the fact that an order for repayment of the moneys was always implicit in a claim alleging that the moneys were improperly disbursed.

[19] It was further submitted on behalf of the plaintiffs that the first defendant's conduct in defending the action was for the purpose of protecting his own interests in the litigation rather than protecting the interests of the trust. As he was not acting for the benefit of the trust, the costs were not incurred for the benefit of the trust. I accept that submission as it is entirely consistent with my impression of the first defendant as he was giving evidence. He presented as an adversary to those bringing the action, aggressively defending his actions and resentful of his actions being questioned.

[20] While the plaintiffs conceded that some of the same legal issues might have been canvassed had the first defendant made the application, the length, nature and cost of the application was said to be very different.

[21] There was some debate about the proportion of the costs which would be equivalent to the cost of a s 94 application brought by the first defendant. In the end result, it is unnecessary to resolve this issue. In my view, the argument that the first defendant is entitled to a reduction in the amount of costs to be paid by him without indemnity from the estate equivalent to the costs of an inevitable s 94 application has no merit. It is correct to say that, if the application had been brought by the first defendant when first advised of the dispute and before distribution of the moneys, he would be entitled to an indemnity for his reasonable costs of the action. However, the first defendant declined to do so and even failed to bring an application when so advised by his legal representatives. I do not consider it to be particularly useful to say that the central issue would be the same, because the circumstances surrounding the application were not the same. Neither do I accept that a s 94 application was inevitable. Counsel for both the first and second defendants maintain that the main issue in dispute was complex, without authority directly on point, as a result of which it would be unlikely that counsel would take a position without also recommending recourse to the Court. However, all interested parties could have obtained legal advice and, if all beneficiaries are unanimous as to the proper course to take, appropriate indemnities could be obtained by the trustee, overcoming the need to apply to the Court. As a result of the first defendant's actions, the beneficiaries were simply not given the opportunity to avoid litigation because they were not consulted. Such an outcome resulting from the sharing of advice and meaningful dialogue between the beneficiaries and the executor may be said to be unlikely in view of the attitudes apparent at trial. However, there is no way of knowing whether the attitudes displayed would have been the same if appropriate action had been taken at an early stage.

[22] Essentially, the first defendant's conduct has ensured that the Court must resort to speculation as to what would have occurred if he had acted prudently. The need for a ruling on the issues raised in the plaintiffs' originating summons did not arise from the nature of the trust. It arose because of the actions of the trustee. Accordingly, I am unpersuaded that the first defendant should be indemnified for the costs equivalent to a s 94 application brought by him as trustee.

[23] Counsel for the first and second defendants observed that the effect of an order that the first defendant pay all the costs of the action without indemnity is that the estate has the benefit of the ruling without the detriment of having to pay the costs of a s 92 application. The estate is said to be receiving a "slight windfall". I think this proposition needs to be considered in light of the evidence that the executor decided from the outset to separate the estate into two categories; shares forming part of the estate at the time of the deceased's death and shares acquired by the first defendant in which he was to trade for the benefit of the second defendant. Another relevant factor is that the first defendant made considerable profits in trading in the after-acquired shares. At the same time he left the previously acquired shares to languish without consideration to the potential for detriment to the interests of the capital beneficiaries. Whilst I accept that it would not be prudent for the first defendant to invest the entire estate in the share market, if he had dealt with some portion of the previously acquired shares in the same way and as successfully, a benefit would have accrued to the estate likely to exceed by the costs of the hypothetical s 94 application. For example, the defendant sold the after-acquired Qantas shares for a profit of $33,000 to the benefit of the income beneficiary, but did not consider the prospect of selling the existing Qantas shares with a view to making a profit for the benefit of the capital beneficiaries.

[24] I must exercise my discretion as to costs in relation to the application that was in fact brought, not the one that should have been but was not. I am not persuaded that, in all the circumstances of this case, an award of costs to be paid by the first defendant without indemnity constitutes a "windfall" to the estate such that the amount of costs to be paid should be reduced by any amount.

[25] The second basis for the submission that the costs, or part of the costs, of the litigation should be paid from the funds of the estate is that it was not until the amendment to the originating summons on 27 May 2002 that there was a specific request for an order for repayment of the legal fees paid from the estate. Having already made the payments, it is said that the first defendant did not have the power to recoup the moneys from the second defendant.

[26] The first response which can be made to this proposition is that there is no evidence that the first defendant ever requested the return of the moneys. At all times prior to and during the trial the first defendant maintained the position that his actions in distributing the profits on the share sales to the second defendant were in accordance with the Will and should not be questioned. The next response is that an order for reimbursement of the moneys distributed was the obvious outcome of a successful application, even without a specific plea of such relief. Indeed, counsel for the first defendant conceded that there would be an order for repayment resulting from a ruling in the plaintiffs' favour on the originating summons in its initial form. The final response is that, if the first defendant had acted prudently and applied to the Court for directions from the outset, there would be no need to ask for the second defendant to pay the moneys back because it would not have been disbursed to her in the first place.

[27] As to the costs of the second defendant, the first defendant submits that her costs incurred after the amendment of the originating summons should be paid by the estate. The plaintiffs oppose any suggestion that the second defendant be entitled to indemnity from the estate for any legal fees on the basis that, for whatever reason, the second defendant made assertions that were untrue and relied upon a defence which had no basis. She is, therefore, not entitled to be indemnified by the estate. Counsel for the plaintiffs further argue that the position of the second defendant is to some extent akin to that of the plaintiffs in that she did not create the problem, but was involved in the litigation brought to resolve it. The only differences are said to be the fact that the second defendant had the benefit of the moneys and that she did provide an active but unsuccessful defence. However, it must be kept in mind that the benefit of having access to the moneys is reduced or removed by having to repay them without an entitlement to the income on the profits to which she was entitled. It must also be kept in mind that the active defence was pursuant to s 65(8) of the Trustees Act which would not have arisen in the context of an application brought by the first defendant prior to distribution of the profits on the share sales.

[28] I accept that reimbursement of her costs from the estate will have a greater financial effect on the plaintiffs than on the second defendant. However, I do not consider that an indemnity from the estate is the appropriate order to make in all the circumstances of this case. In my view, it is the first defendant's imprudent behaviour in breach of trust which has led to the second defendant incurring legal costs in this action and those costs should be met by the first defendant. For the reasons already given, I do not consider that the fact that the second defendant might have incurred costs in a hypothetical s 94 application brought by the executor in any event should operate to reduce her entitlement to have her legal costs paid in full by the first defendant without indemnity to him from the estate.

[29] The plaintiffs make the very valid point that, if the Court were to order that legal costs come from the trust, it validates all of the actions of the first defendant because the consequences of his actions will be visited on the beneficiaries. If the legal costs are paid from the estate, it will mean that despite the fact that the plaintiffs' concerns were valid, their application successful, they will be in a worse position than they would have been if they had done nothing, as the costs of the parties are likely to be greater than the amounts of capital disbursed. In my view, that would not be a just outcome.