Standing of Trust Beneficiaries to Sue a Third Party for Injury to Trust Property
In Lorebray Pty Ltd v Liddy [2022] NSWSC 1633 – 29 November 2022 – Henry J addressed the circumstances in which a trust beneficiary may pursue a claim against a third party upon a cause of action in respect of injury to the interests of the trust:
[1] This is an application by some of the beneficiaries of the McNamee Property Trust (MPT) to be joined as plaintiffs to enable them to continue to prosecute proceedings that were commenced by the trustee of the MPT, Lorebray Pty Ltd (Lorebray), against another beneficiary, that Lorebray no longer wants to pursue.
Background
[2] The MPT was established by deed dated 23 September 1991. The primary beneficiaries are the late John Boden McNamee, his wife, Margaret (Peg) McNamee, their seven adult children: Peter McNamee, Stephen McNamee, John McNamee and Philippa Hardy (together the Applicants), William (Bill) McNamee, Sally Collignon and Christine Liddy (the defendant in these proceedings), their grandchildren and the respective spouses of their children and grandchildren.
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[6] In these proceedings, Lorebray sues Ms Liddy to recover $1,650,030 plus interest and costs. Lorebray claims that, in the period from 2013 to 2015, Ms Liddy received the amount of $1,650,030 by way of loans from Lorebray that were payable on demand, which she has refused to repay despite demand being made.
[7] By her defence and cross-claim filed on 13 July 2020, Ms Liddy says that the monies received were paid to her as a gift or trust distributions and denies any liability to repay them.
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[19] On 6 September 2021, the Applicants filed a notice of motion (the subject of the hearing before me on 22 July 2022) (Notice of Motion) seeking orders for leave to be granted to the Applicants to continue these proceedings on behalf of Lorebray and represent it for the purposes of the proceedings and, to the extent necessary, for leave to amend the Statement of Claim, with effect from the date of commencement of the proceedings, so as to plead their standing to continue this proceeding on behalf of Lorebray.
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The Applicants’ motion
[22] At the hearing of the Notice of Motion, the Applicants propounded orders in the following terms:
(1) Pursuant to r 6.27, the Applicants are to be joined as plaintiffs.
(2) Each of the Applicants have leave, to the extent that is necessary, to continue to prosecute these proceedings as the second to fifth plaintiffs.
(3) Costs.
[23] In addition, the Applicants have proffered the following undertaking to the Court:
The Applicants, and each of them, hereby undertake to the Court not to seek contribution from the first plaintiff:-
(a) in respect of any costs which they are ordered to pay to the defendant and which are incurred by her after the date of grant of leave by this Court; and
(b) in respect of such costs as they cannot recover from the defendant pursuant to any order for costs against her. [NB: this would be for any reason whatsoever]
Note: This undertaking is given on the basis that it does not prevent the Applicants obtaining indemnification for the party and party (ie the ordinary) costs incurred by them from monies paid by the defendant pursuant to any judgment or order, or any agreement to resolve the proceedings.
[24] The Applicants contend that the relief they seek should be granted as it is apparent that Lorebray does not wish to continue to prosecute the proceedings and the claims against Ms Liddy have merit, relying on the special and exceptional circumstances jurisdiction, the principles of which are set out in Re Canberra Babington Pty Ltd [2021] NSWSC 552 at [27] –[29] (Canberra Babington). They submit that the undertaking that they have proffered is sufficient to deal with any prejudice that Lorebray may suffer as a consequence of it remaining a party to the proceedings, which they say should be as the first plaintiff to deal with any doubt that may arise from the operation of r 6.28 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), which relevantly provides that the date of commencement of the proceedings in relation to a person joined as a party is taken to be the date on which the order is made or such later date as the Court may specify in the order.
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Consideration and determination
[30] A beneficiary under a trust has no cause of action against a third party in relation to injury to trust property unless they can establish special or exceptional circumstances. Special or exceptional circumstances relevantly include a failure by a trustee, excusable or inexcusable, to sue on an available cause of action that a trustee has against a third party, in performance of the duties owed by the trustee to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate: Canberra Babington at [27]; see also Chahwan v Euphoric Pty Ltd trading as Clay & Michael [2009] NSWSC 805 at [16] –[17] (Chahwan v Euphoric ); Ramage v Waclaw (1988) 12 NSWLR 84 at 91(Ramage v Waclaw ); Alexander v Perpetual Trustees WA Ltd (2003) 216 CLR 109; [2004] HCA 7 at [55].
[31] To invoke the special or exceptional circumstances jurisdiction, a beneficiary must establish not only that the trustee is unable or unwilling to commence or maintain proceedings on a cause of action against the third party, but also that the proposed action has merit, in the sense that there is, at least, a serious question to be tried as to the claims that the beneficiaries wish to pursue. That requires the pleadings to disclose a good cause of action and for there to be material capable of supporting the claims alleged, not that the proposed claims will succeed or are particularly strong, although the merit requirement will not be satisfied if there are defences available that are bound to succeed. If the Court concludes that the claims are not ‘meritorious’, the requirement for special or exceptional circumstances will not be met: Canberra Babington at [28] and [29]; Chahwan v Euphoric at [19] and [30] ; Dean v Antunes [2016] NSWSC 1845 at [98].
[32] While traditionally limited to a claim in equity, the exceptional circumstances jurisdiction extends to common law claims: TAL Life Ltd v Shuetrim; MetLife Insurance Ltd v Shuetrim [2016] NSWCA 68 at [54]. It typically involves beneficiaries taking action as plaintiffs and joining the trustee as a defendant to the proceedings, or otherwise conducting the proceedings in the trustee’s name: Ramage v Waclaw at 91; Bhagat v Australian Securities Commission (1995) 16 ACSR 536 at 542; Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 at 438; and Canberra Babington at [27].
[33] There is some conflict in the authorities as to whether leave is required before an applicant beneficiary is entitled to bring a proceeding in special or exceptional circumstances. In Treadtel International Pty Ltd v Cocco [2016] NSWCA 360, Barrett AJA (Gleeson and Leeming JJA agreeing) observed there were conflicting authorities on whether a prior grant of leave to bring derivative proceedings was required, and stated (at [74]) that:
I suspect that there is no hard and fast rule and that much depends on context. The need for a safeguard by way of screening by the court as a prelude to a derivative suit by a beneficiary upon a cause of action maintainable by the trustee is understandable where certain conditions prevail – for example, where there are several beneficiaries one of whom purports to act for the estate as a whole; where there is a question about the benefit that the estate will derive from pursuit of the proceedings; or where it is necessary to discover whether the trustee’s decision not to proceed has some sound basis. In straightforward cases, there will be no need for such a safeguard. (citations omitted)
[34] Recent authorities favour the view that leave is not required, although the principles of whether to grant leave may be relevant when considering whether to grant leave to amend a pleading to introduce a claim by a beneficiary on a cause of action of the trustee, noting that any pleading relying on exceptional circumstances should include an allegation to the effect that the trustee will not bring the proceedings: Re Wil Brown Management Pty Ltd [2022] NSWSC 207 at [99]; Chahwan v Euphoric at [33] and [39] .
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[50] I accept that authority does not compel persons in the position of the Applicants always to indemnity [sic] a trust or estate as a condition of bringing an action in a trustee’s or an estate’s name: Cong v Shen [2019] NSWSC 1675 at [88] –[95]. It also seems practically unlikely that Ms Liddy (as a beneficiary of the MPT and a shareholder of McMardi, which is a shareholder of Lorebray) would seek to recover her costs from Lorebray, rather than from the Applicants, if she succeeds in defending the claim.
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[53] The Applicants’ proffered undertaking should go some way to ameliorating Lorebray’s costs risk going forward but, in my view, in the absence of the Applicants proffering an indemnity, the undertaking does not fully deal with Lorebray’s exposure in respect of future legal costs and the possibility that it may need to rely on its right of indemnity at general law out of the MPT assets in respect of those costs, which could impact other beneficiaries, such as Ms Liddy and those who will not be parties to these proceedings.
[54] If the Applicants are to be granted leave to continue the proceedings, the orders should seek to minimise future disputation by ensuring that, as between the Applicants and Lorebray, the Applicants are responsible for the future legal costs associated with continuing the proceedings.
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[57] Accordingly, I will grant the relief sought by the Applicants subject to a condition relating to an indemnity.
More recently, in the decision in Katsoulas v Kritikakis; Katsoulas v Apostolatos [2024] NSWSC 67 (7 February 2024), Leeming JA held that a residuary beneficiary under a will [Tony, the only son of the deceased] had standing to claim against:
(a) a friend of the deceased [Lakis] – Anthony;
(b) attorneys for the deceased being also the executors under the deceased’s will [Zoi and George, the children of Anthony].
The deceased was elderly and infirm.
As to standing, Lemming JA said:
Procedural issues
- No attention was paid to the technical and procedural hurdles to Tony propounding the claims he maintains the executors should have brought against Lakis [the deceased]. There is no difficulty in the parties having adopted that course. However, I should explain why that is so.
- It will have been seen that all of Tony’s claims against Anthony are claims that Anthony breached duties owed at law or in equity by him to Lakis. They are claims that vest in the executors. Had the administration of the estate proceeded such that the executors became trustees (see for example Pagels v McDonald [1936] HCA 15; (1936) 54 CLR 519 at 526; [1936] HCA 15), then Tony’s claim against Anthony as residuary beneficiary would correspond with his entitlement to proceed directly against Anthony in accordance with the exception to the general rule that the trustee is the proper plaintiff, as noted in Ramage v Waclaw (1988) 12 NSWLR 84 at 91-93, that a beneficiary may sue directly, so long as the trustee is joined, where there are “special circumstances” which include but are not confined to collusion between the trustee and the third party. Those propositions were endorsed by the High Court in Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109; [2004] HCA 7 at [55]– [56]. Irrespective of whether Zoi and George are executors or trustees, the modern power under UCPR r 7.10(2)(b) to appoint a representative of Lakis’ estate for the purposes of proceedings in which Zoi and George have an interest which is adverse to that of the estate is available and appropriate.
- Constructively, if as Tony contends Anthony is found to have taken hundreds of thousands of dollars from the deceased in the years prior to his death without authority, then it is common ground that Zoi and George are inappropriate executors to recover such funds from their father, large amounts of which are shown to have been received by them and spent on things like cars, repayments of loans taken by Zoi and George on an investment property, improvements to property owned by them, and personal expenses such as mobile phones and credit card bills. This was confirmed at the outset of the hearing when I raised the point (T11.7-14). Because at all times the defendants have accepted that probate should be revoked if as Tony contends there has been a substantial unauthorised dissipation of Lakis’ money, and because Tony is the sole residuary beneficiary, the difficulties of timing to which Hammerschlag J referred in Ivanovski v Perdacher [2009] NSWSC 913 at [49]– [50] do not arise. It might perhaps have been preferable for me to regularise this at the outset by a formal order, although neither side invited me to do so. I return to this at the conclusion of these reasons.
- I have already remarked that in a case which turned on the bank transactions alleged to have been effected by the defendants, no subpoena was issued to the bank, although Tony’s solicitors complained for years about the non-production or unsatisfactory production of financial records. Nor was any subpoena addressed to the nursing home, so as to provide relatively objective evidence of Lakis’ mental state or the times when he was visited by the parties. The plaintiff did not establish by documentary evidence when he visited his father at St Basil’s. The defendants’ case was also remarkable insofar as there was not a skerrick of documentary evidence from Lakis authorising the transfer of hundreds of thousands of dollars of his money to themselves.
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Tony’s claim was successful, with consequential relief being granted.
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