W9 | Trustee Rights, Liabilities, Breach of Trust & Tracing PDF

10/3/24 Express Trusts: Trustee Rights and Responsibilities, Breach of Trust and Tracing LAWS2500/8010 DR MICHAEL NANC...

10/3/24 Express Trusts: Trustee Rights and Responsibilities, Breach of Trust and Tracing LAWS2500/8010 DR MICHAEL NANCARROW 1 Trustee Liability OFFICE | FACULTY | DEPARTMENT 2 2 1 Trusts in Australia typically have a corporate trustee, a superannuation fund or a scheme is a really good example of where we have a corporate trustee. Just be aware 10/3/24 of it since it touches all of us. As we've seen already it's invariable that you need to have an awareness of other areas of law and how situations and scenarios arise from the dealings out there in the world. Trustee liability Trust it is not a separate legal entity like a corporation. It is a relationship between a trustee and the beneficiaries/objects Trustee personally owns all of the trust property at law and is personally liable in relation to it, as well as any obligations that must be incurred for the trust to be administered. E.g. seeking legal advice (cf advice from the court under s63 TA). The trustee is personally liable on the contract for advice. Cf a corporation that is a separate legal entity with directors and shareholders of a corporation. Directors, who are the human beings who act for a company, are not liable for its debts, except in exceptional circumstances e.g. continuing to trade when they know the company is insolvent. Many trusts in Australia have a corporate trustee, combining the benefits of trust and corporations law. For the purpose of studies in this Unit, you are not expected to understand all the tentacles of this complexity (e.g. the intersection of the Corporations Act and trust law) But, you do need to have an awareness that it exists. OFFICE | FACULTY | DEPARTMENT 3 3 The trust is not a person like a company for example. It's a relationship between the participants between the bene ciaries and the trustee's. The trustee becomes the legal owner on the creation of the express trust. Trustee’s right of indemnity IF TRUSTEES DID NOT HAVE THIS, NO ONE WOULD AGREE TO BE A TRUSTEE Indemnity = a right to be paid back for an expense or loss you have incurred. Trustees have a right to be indemnified by the trust for properly incurred expenses: to be paid back for expenses they have paid and to pay for expenses directly from trust assets. What does properly incurred mean? Trustee Act, s59(4) (4) A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee's trusts or powers. Right is broad e.g. Re Raybould – trustees who were successfully sued in negligence by neighbour whose property was undermined by coal mining on trust land were entitled to reimbursement from trust. OFFICE | FACULTY | DEPARTMENT 4 4 One of the things that our lecturer wants to bring to our attention is this triangulation (examinable) between the source of the rights and obligations the trust instrument the legislation case law But be careful ;if you're looking at case law outside of Australia. English law is not necessarily on point. Since Australian law in Equity has diverged- or even the governing law in NSW. 2  10/3/24 Trustee indemnity = charge or lien over trust property This matters as between: Trustee and beneficiaries and Trustee and creditors. Who gets the money first? Indemnity = charge or lien over (which often means who is trust property paid all they are owed). Trustee’s right of indemnity ranks ahead of any claim of The right cannot be excluded beneficiary to trust property; by the trust deed as it is a beneficiaries’ rights to trust necessary incident to the office property cannot even be of trustee: JA Pty Ltd v Jonco quantified until indemnity is Holdings Pty Ltd per Santow J. accounted for. OFFICE | FACULTY | DEPARTMENT 5 5 What is trustee entitled to be indemnified for? GATSIOS HOLDINGS PTY LTD PTY LTD V KRITHARAS HOLDINGS PTY LTD NSWCA 29 SB 19.3B Facts: A former trustee’s agent made deceptive and misleading representations in relation to the trust business contrary to s52 of the Trade Practices Act (now Australian Consumer Law). Representations were made to franchisees about how may sites could be visited in a day (50 or more alleged) and how long it took to pack snack foods in boxes. Judge held misleading but not fraudulent. Corporate trustee was held vicariously liable, and ordered to pay $400K damages. Should trustee be entitled to be indemnified from trust under s59(4)?. Note Gatsios Holdings Pty Ltd is the law in NSW, not Nolan v Collie. It is important to understand that as lawyers in NSW, you must advise in accordance with NSW law, and you cannot go into court and argue a point that is contrary to a binding decision of a higher court, without special leave to do so. The law of other jurisdictions can be persuasive if the law is unclear or ambiguous in NSW, (e.g. what does ‘benefit’ mean in s86A if there is little to no NSW case law on point yet), but if there is clear authority on point, the law of other jurisdictions is not applicable. OFFICE | FACULTY | DEPARTMENT 6 6 Dicta from CJ Speiglman: (Gri th v Corrigan) The only question is whether the executors conduct in this case has... amounted to a violation or culpable neglect of their duty. He's saying that we don't want to really obsess about this word proper concerning boundaries around what the trustee can get indemni cation for. Mason- notes that there are some limits to recognise some grossly innappropriate or frolicks of the trustee. 3  10/3/24 So there's a balance here with focusing on what trust law needs and other competing laws as well Characterise the facts and categorise according to governing legal framework General law Trust law Contracts, negligence, Beneficiary vs Trustee consumer law Trustee vs 3rd parties Can trustee claim that money as an indemnity? Was there Agent employed by trustee a breach of duty owed to breaches ACL, other Act or beneficiaries, that would common law duty (e.g. torts) disentitle indemnity? E.g. breach of duty to exercise reasonable care in Trustee held vicariously management of trust or liable for agent’s actions action outside scope of trust Trustee pays 3rd party Trustee or beneficiary bear loss OFFICE | FACULTY | DEPARTMENT 7 7 S63 provides an exception for the Court to resolve disputes between competing litigants, it a ords the option of giving private advice so this is unusual and the role of context in applying s63 (See Macedonian case) Trustee right to seek directions from court Sometimes it is not clear what a trustee should do. Because the standards imposed on trustees are so high, if they are not sure how to act, they should ask a court for advice. S63 TA Advice ― (1) A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument. ― (2) If the trustee acts in accordance with the opinion advice or direction, the trustee shall be deemed, so far as regards the trustee's own responsibility, to have discharged the trustee's duty as trustee in the subject matter of the application, provided that the trustee has not been guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion advice or direction. Expenses incurred by following advice will be properly incurred. OFFICE | FACULTY | DEPARTMENT 8 8 It's not a blanket of protection but there is a protection if you sought the advice of the court 4  10/3/24 Right to seek Directions from the court: Ss 63 and 85 TA MACEDONIAN ORTHODOX COMMUNITY CHURCH ST PETKA INC V HIS EMINENCE PETAR THE DIOCESAN BISHOP… HCA 42 SB 19.5A Facts: Land (church, childcare centre, apartments) that was held on trust was transferred to the Association on its incorporation. The Association was a trustee and was sued for breach of trust by the Bishop and former priest in relation to the transfer. The Association applied to the Court for advice on whether it should defend the proceedings and expend trust funds (sell particular properties) to do so. Legal expenses are usually indemnified but there was a chance these expenses would deplete the trust fund entirely. Lower courts The first instance judge gave the advice sought – that Ass’n should defend and could use trust property. NSWCA held that it was generally inappropriate for a court to give judicial advice in adversarial proceedings. Held: HCA High Court set out when judicial advice should be sought spelling out various matters to be considered in appreciating the court’s discretion under s 63, the circumstances of when the Trustee should seek advice and the relationship between s63 and s85 TA (NSW) OFFICE | FACULTY | DEPARTMENT 9 9 Breach of Trust: Defences and Remedies OFFICE | FACULTY | DEPARTMENT 10 10 5  10/3/24 Breaches of trust Breaches of trust do not automatically require the trustee to compensate for breach of the trust. Equitable remedies are almost always discretionary trying to meet the ends of practical justice. What does the trust instrument say? If you have clauses what do they say? They are a source of primary rights and obligations. Breaches of Trust: DEFENSES AND REMEDIES If a trustee does not comply with a duty they have under the trust instrument, statute or the doctrines of equity, they will breach the trust. Breach of trust does not automatically require the trustee to compensate the trust. They can be excused in a number of ways, and also equitable remedies are ultimately always discretionary. OFFICE | FACULTY | DEPARTMENT 11 11 The trust instrument See cl 14 Special Powers and Discretions in sample discretionary trust deed on iLearn – an example of a trust instrument excluding trustee liability for particular actions (and giving the trustee a right of indemnity). - NB cl 14C – the trustee is not excused for breaches that involve fraud, dishonesty or a lack of ‘the degree of prudence and diligence required of trustees’. Clauses like this are interpreting strictly against the trustee, in accordance with the natural meaning of the words e.g. Wight v Olswang – an exemption clause was ambiguous as to whether it covered professional trustees. Ct interpreted it strictly and said it did not. Armitage v Nurse Facts: trustee liability excluded for everything other than their own actual fraud. Held: See Sourcebook 20.3.1a OFFICE | FACULTY | DEPARTMENT 12 12 The word actual fraud is used to exclude other types of fraud such as equitable fraud or constructive fraud. It's deliberately chosen to exclude other types of fraud. But he also states that "care needs to be taken when the concepts are applied to a representation in the context of a breach of a trust." Not all breaches will necessary lead to liability. 6  10/3/24 S59 is about this idea of implied indemnity also please note that trustees will be held jointly and separately liable as well. Statute S59 TA: (2) A trustee shall be answerable and accountable only for the trustee's own acts, receipts, neglects, or defaults, and not for those of any other trustee, nor for any banker, broker, or other person with whom any trust moneys or securities may be deposited, nor for the insufficiency or deficiency of any securities, nor for any other loss, unless the same happens through the trustee's own willful neglect or default. (3) Nothing in subsections (1) and (2) shall prejudice the provisions of the instrument, if any, creating the trust. Trustees are not liable for default of other trustees, unless they improperly delegate their authority to that trustee (remember trustees have a duty to act personally). Wilful neglect or default means that if a trustee is negligent in appointing an agent or supervising them, they will be liable for what that agent does. Dalyrmple v Melville: - A trustee who signed blank share transfers and gave them to his co-trustee, a solicitor, who sold shares and then absconded, was not entitled to s59(2) defence. What he did was wilful neglect and default. He was liable to beneficiaries for loss. OFFICE | FACULTY | DEPARTMENT 13 Dalymple v Melville 13 There was a solicitor, two characters were executors and trustees under a will of a late person and they decided to sell some of the trust shares to nance the payment of legacies and Melville (not the solicitor) signed blank transfers to the other trustee (the solicitor Blackmore). But Blackmore, sold the shares- misappropriated the shares and he absconded. It was held that Melville was liable to compensate the trust for the value of the shares because he had acted in wilful in the default and was therefore not entitled to the indemnity in s 59. Melville was grossly negligent but there was no comment on the solicitor. But that doesn't absolve the non-legally trained trustee. Section 85 TA Also known as exculpatory breaches 85 EXCUSABLE BREACHES OF TRUST (1) Where a trustee is or may be personally liable for any breach of trust, the Court may relieve the trustee either wholly or partly from personal liability for the breach. (2) The relief may not be given unless it appears to the Court that the trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the Court in the matter in which the trustee committed the breach. (4) This section applies whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act. This section is necessary because trustees sometimes do breach trusts, leading to losses, but they may not have done so dishonestly, fraudulently, for personal gain etc. Without this section, they would be personally liable to compensate the trust and that could be quite unfair. You may see a breach but action may not lay against the trustee, you can break down the critical words particularly within sub (2) OFFICE | FACULTY | DEPARTMENT 14 14 In Macedonia the Court looked at all the elements of s 63 but they also looked at S85 as well because there's a bit of a link between sections. 7  10/3/24 Melville was a person of reasonable business experience, not some simple person and the Judge compared it to a case where a person who had been appointed as trustee was a monk. The judge said the monk would have no business understanding to operate in good faith. But the Court saw the person as having the capacity to make reasonable business decisions and therefore was held liable. Know that there's a di erence between a professional and non professional trustee. S85 TA analysed ‘Reasonable’: To fall within s85, a trustee must have not only acted honestly, but also reasonably eg in Dalyrmple, the court held that signing a blank share transfer was not reasonable, and so the trustee did not get s85 protection. ‘Honestly’: A breach of the fiduciary duty not to profit or place oneself in a position of conflict of duty and interest will usually not be honest, so not within s85. ‘Ought fairly to be excused’: prof trustees less likely to be excused Relying on incorrect legal advice = excused: Marsden v Regan ‘omitting to obtain the direction of court’ – it is not the case that s85 cannot apply if s63 advice not sought. If the trustee did not ask under s63, but would have been told they could act, they will be excused under s85. OFFICE | FACULTY | DEPARTMENT 15 15 In the exam I'm giving you legislative provisions which will test your critical analysis and application. It's understanding the connection between s63 and 85 and going back to the earlier HC decision that we looked at in the Macedonian case. Equitable Defences CONSENT- SEE SPELLING V GEORGE (1992) 26 NSWLR 666 SB 20.4A Beneficiaries can consent to a breach of trust if trustee has made full disclosure of the circumstances of breach and legal consequences. They can’t then sue the trustee for breach of trust and any loss flowing from it. Spelling v George Facts: Overbearing father-in-law breached trust by transferring trust assets to a new trust. He had asked his son-in-law who was a beneficiary and solicitor and sent him a memorandum setting out changes. Beneficiary commented on them but did not oppose them. He was not sure proposed changes would actually go ahead. Later, the beneficiary claimed that transfer had reduced trust assets. Trustees said beneficiary had consented. Held: What is consent? OFFICE | FACULTY | DEPARTMENT 16 16 The NSW Court of Appeal refused to strike out the claim as there was evidence that the bene ciary had not given informed consent. That's an understanding of what that dimension actually means. J Handley said that consent make take various forms (page 513) Active encouragement or inducement Participation with or without direct nancial bene t Express consent Consent means something more than a state of mind, the trustee must know about the consent prior to the breach. 8  10/3/24 See Equitable Bars to relief (chapter 6) are we looking at a situation that suggests laches, delay or acquiescence. Equitable Defences ACQUIESCENCE Acquiescence = calculated (deliberate and informed) inaction by the plaintiff or standing by which encouraged the defendant to reasonably believe that their omissions were accepted or not opposed. See Ch 6 of Texts. In context of breach of trust, must show beneficiary had full knowledge of breach of trust and by their actions or inactions, can be taken to have accepted breach. E.g. Re Kerr, beneficiaries knew that trustees were being overpaid for overseeing farm work but did nothing for 5 years. They were taken to have acquiesced in the breach of trust. Release is similar to acquiescence but is more likely to be provided in writing. Explicit release of trustee from trust obligation, with full knowledge of beneficiary and no pressure or undue influence. OFFICE | FACULTY | DEPARTMENT 17 17 Proprietary remedies- we want to get access to property. Remedies for breach of trust MONETARY REMEDIES Although the amount of common law remedies can be discretionary, the remedy is available as of right. Equitable remedies can be monetary or non-monetary (e.g. removal of a trustee) and they are always discretionary. Unauthorised profits – as fiduciaries, trustees cannot make unauthorised profits from their position. If profit is made, they will be stripped of it by an account of profits (cough it up and give it to beneficiaries) or constructive trust (hold the property on trust for the beneficiaries). Prohibited breaches - trustees have a duty to account to the beneficiaries for all trust property If they can’t because it has been misused, they must restore the trust fund in full. What would be the value of the fund ‘but for’ the trustee’s breach? Trustee will usually have to pay monetary compensation called equitable compensation (not damages). NB. Disregard discussion of AIB Group v Mark Redler AC 1503 (Bryan TB 20.37) and English case and does not reflect the Australian position. Don't be guided by AID Group v Mark Redler (see textbook) OFFICE | FACULTY | DEPARTMENT 18 18 9  10/3/24 Monetary remedies cont’ Negligence in performance – the assimilation of torts law and the principles of negligence are contentious and for good reason. It is poor legal analysis to just blend different areas of law together unthinkingly. However, Bryan makes the valid point that trustees should not be required to restore trust funds in full just because they have been negligent. They should not effectively be an insurer of the fund against all possible losses. Should be sufficient if they are judged by the standard of the reasonable trustee and remoteness and foreseeability are appropriate concepts when calculating quantum of liability, but Aust courts have not adopted this. Compensation for breach of ‘no conflict’ rule – compensation will be ordered for all loss caused by breach. Trustees are jointly and severally liable – you can sue one trustee for all loss, and then they have to try to recover from other trustees. Exception = if failure to take care or misleading and deceptive conduct, then proportionate liability under Civil Liability Act 2002 (NSW), s35 NB. CLA is covered in detail in the Remedies unit OFFICE | FACULTY | DEPARTMENT 19 19 It's very hard to strip something (disgorgement) that hasn't been made yet. Non-monetary remedies for breach of trust Removal of trustee – by Trustees won’t be someone given power in removed simply because Injunctions – to stop trust instrument (an they have breached trust trustees carrying out a appointer) or by a court unless there is a risk to breach of trust under inherent jurisdiction the trust property and the or via welfare of the s70 TA. beneficiaries. Recission – of contracts entered into by trustee in Trustees have a duty to breach of self-dealing rule sue co-trustees or former Standing to sue – trustees to get in trust NB. Just an awareness as assets or restore a trust considered in more detail fund in Remedies unit Beneficiaries can enforce trust, seek replacement trustee, and sue in relation to a completed trust. OFFICE | FACULTY | DEPARTMENT 20 20 10  10/3/24 Equitable Tracing OFFICE | FACULTY | DEPARTMENT 21 21 The whole purpose of tracing is to trace into something (property, it can be personal property or it can be land). As you know from your property law studies, we are concerned in the land space with Torrens title land. But there are exceptions to indefeasibility of tile in the Real Property Act. You can trace him for the car that the trustee now owns. Good faith purchaser for value isn't what's relevant- those ideas in NSW includes those who acquired it for value and registered it, and those who did the same but were gifted the land. There's an exception in s 118 of the RPA if the purchaser was subject to fraud. Tracing Note – we are doing a limited amount of tracing just so you understand the concept. We are not covering the complex accounting rules that apply to tracing when a trustee has mixed trust funds with their own money or other beneficiaries’ money. Tracing is a way of getting at something of value that has been acquired through misused trust funds e.g. trustee wrongly uses $50,000 of trust funds to buy themselves a car. The trust money may be spent, but the asset (or part of it) can be claimed by the beneficiaries. Tracing is not a remedy; it is the process of identifying a new asset as the substitute for the old. OFFICE | FACULTY | DEPARTMENT 22 22 We're going to be focusing on scenario 4 and that's starting on page 362. The trustee pays the bene ciaries money to an honest volunteer who mixes the money with his own funds. You also can't trace where a woman has inherited fraudulent/unsubstantiated funds. 11  10/3/24 You cannot trace if… Money that has been dissipated e.g. the trustee misappropriated $10,000 and spent it on parties and holidays. The money has gone and there is nothing to trace into. The money has been received by a good faith purchaser for value e.g. trustee misappropriates $50,000 of trust funds and buys a car. You cannot trace into the $50K that the vendor has honestly received, (but you can trace into the car the trustee now owns). If it is land, and the person is registered under s42 RPA, it does not matter whether they are a good faith purchaser for value or a volunteer. You cannot get the land back from them as both purchasers and volunteers have indefeasible (undefeatable) title in NSW: Bogdanovic v Koteff. The recipient has changed their position, relying in good faith on the receipt, e.g. woman inherited $100K under a will that turned out to be forged. The beneficiaries under the will wanted the money back but she had used it to pay off her mortgage, quit her job and started studying. That prevented the beneficiaries making a claim to the property whose mortgage had been paid by the inheritance. OFFICE | FACULTY | DEPARTMENT 23 23 Tracing can be contrasted to claiming, e.g., trustee misappropriates $10,000 and gives it to their daughter. She buys a painting with money. Beneficiaries can ‘claim’ the painting. Equity allows people to recover property, or the substitute for that property, from a recipient. Equity may say that a recipient holds property on trust for The common law was much more reluctant to allow beneficiaries or give beneficiaries an equitable lien over people to actually recover property, and often simply the property. If the property is sold (or beneficiaries ask gave damages (e.g. only detinue in torts allows recovery court to order a sale) the beneficiaries will be paid the of property; conversion and trespass only allow amount of the lien from the proceeds of sale. damages). OFFICE | FACULTY | DEPARTMENT 24 24 Equity allows people to recover property or a substitute for property that's very di erent to the common law. Equity plays a signi cant role in property because it can give you an interest in the land which is valuable beyond money because land appreciates in value. 12  10/3/24 This unit will focus on this Equitable tracing rules MIXING MONEY IN A BANK ACCOUNT These cases typically arise when a trustee wrongly puts trust money i. In their own account ii. In another trust account iii. In the account of an honest volunteer. We are only going to deal with iii. i and ii are dealt with in your textbook in detail (21.8-21.24). All you need to understand is: If a trustee puts trust money in their own account and it is still there, the beneficiaries can get it back. If the trustee uses that money to buy an asset, that asset will be held on constructive trust for the beneficiaries or they will have a lien over it for the amount of misappropriated trust funds. Complications arise if the trustee had spent money from account, put other money in, spent more money, bought assets that have increased/decreased in value etc. There will be questions about what money left in the account is trust money and how much of the asset an beneficiary can claim (increased value?). You do not need to learn all these rules (rule in Clayton’s case, the lowest intermediate balance etc.). OFFICE | FACULTY | DEPARTMENT 25 25 Equitable Tracing cont Complications also arise if a trustee wrongly mixes trust money from multiple trust funds in a single account and spends some of that money. When the trustee is stopped (freezing order) and beneficiary claims start to be made, how do the multiple beneficiaries compete against each other in relation to a remaining balance that won’t cover all of their claims? Beneficiary whose money was wrongly taken is paid out first? (Rule in Clayton’s case). Beneficiaries share the remaining money in proportion to the contribution of their own money that was made? (Pari passu method). These are mathematical calculations that you will not be examined on. OFFICE | FACULTY | DEPARTMENT 26 26 Our lecturer isn't going to ask you to do mathematical calculations in the exam 13  Remember the certainties Certainty of subject matter Certainty of intention 10/3/24 Certainty of object There's a mixing here of charitable and non charitable objects. In another ruling the House of Lords held that the gift was void because the objects were not exclusively charitable and therefore an invalid non-charitable trust had been created. Charitable trusts work in a di erent way to private trusts (because charitable trusts are for a purpose that doesn't include bene ting particular bene ciaries). Trustee wrongly pays beneficiaries’ money to honest volunteer We are going to cover this situation because it is a straightforward example of tracing. These rules apply to someone who is honest and a volunteer (although not a volunteer who has acquired land and is registered; they have an indefeasible (undefeatable) title by virtue of s42 RPA). Re Diplock Facts Ultimate nightmare for trustees. You have distributed large sums of money, you think in accordance with the trust, and then are told that distribution provision is void because it purported to be a charitable trust but allowed distribution to objects that were not exclusively charitable. You have given lots of money to charities and now the next of kin under the testator’s will want their money back. But the charities have the money in their bank accounts, and some have spent money. Could the beneficiaries trace into that money or property acquired or improved with that money? Held: Sourcebook, 21.6a OFFICE | FACULTY | DEPARTMENT 27 27 The truth is that in the decision in Brian at page 349 there's a nice summary on tracing concerning charities. The Court held that tracing principles applies to mixing by both duciaries and third parties, who have received money or other property from trustees and other duciaries and a third party volunteer (who is not paid for the property and is a third party volunteer and have mixed the trust property with their own) shares the product of the mixing rateably with the bene ciary. Where an innocent volunteer buys the property with their money and with trust money- without the money going through a bank account during the process, the property will be rateably apportioned between the bene ciary and the volunteer. Money used by an innocent volunteer to improve property cannot be traced- interesting because misappropriated trust monies (the money was distributed but the trust was held to be invalid) and the money was used to build a new children's ward in the hospital. Diplock was trying to ascertain that you could trace the money into the hospital but the Court said no because what tracing does is give you access to something that can then be reduced back to money. 14