Case Note: Czapp v Cassar and Caldwell

Last blog we determined that trustees can usually recover for liabilities incurred in the proper administration of the trust. Recent Victorian case Czapp v Cassar and Caldwell [2015] VSC 111 is a matter arising in a familiar family business context, and illustrates how this can be questioned and considered by a court in practice. It also emphasises how essential it is for trustees to comply with their duties. The case concerned whether the trustees could recover costs incurred for proceedings in relation to the dispute.

For the purposes of this case note, be aware that it is possible to set up a trust through a will.

Important parties to the case

There are several important people on these facts:

• Gregory Czapp (Snr.), the deceased (Deceased);
• Victor Czapp, the plaintiff and the Deceased's son (Victor);
• Erica Cassar, a defendant and the Deceased's daughter (Cassar);
• Gregory Czapp (Jnr.), the Deceased's son; and
• Mark Caldwell, the Deceased's solicitor (Caldwell).

Facts

The Deceased passed away in August 2010. He left an estate primarily consisting of real estate, which he gave to the executors of his estate, Cassar and Caldwell, as trustees of discretionary trusts for his family. That is, his estate became a discretionary trust estate with Cassar and Caldwell as trustees. The Deceased was survived by his three children.

In July 2011 Victor issued an application seeking additional provision from the Deceased's estate. He was in significant financial need (living primarily on Centrelink payments) and had previously received payments (which were apparently loans) from the Czapp Business Trust to assist with living expenses.

The day before trial, Cassar and Caldwell (Defendants) sought to vacate the trial because they needed to resolve a taxation issue that was brought up during a pre-trial mediation. They sought advice from two accounting firms, neither of which were taxation experts. The then sought advice from expert counsel, who required additional information and the Defendants argued would take some months to provide the requisite tax advice.

The application to vacate lead to more negotiations between Victor and the Defendants. Ultimately, they reached a settlement. It included a requirement that the Defendants undertake to do all things necessary to resolve the tax issue expeditiously.

The Defendants did not comply in that:

• Expert counsel requested the additional information on 12 June 2013. The Defendants until late August 2013.
• The Defendants followed-up counsel between September and November 2013, who requested another copy of the additional information. The Defendants did not provide another copy until late November 2013.
• Counsel's advice on the taxation issue was delayed and not provided until 9 January 2014, with a request for more instructions from the Defendants. The Defendants did not provide the required instructions until 21 January 2014, and did not follow up with counsel for final tax advice.

Counsel returned to them on 18 March 2014 without the additional advice. Victor ultimately brought proceedings to enforce the settlement.

A major issue for the Court was whether the Defendants, as trustees, could be indemnified by the trust estate for their costs incurred in proceedings relating to the tax issue.

Decision

The Court first articulated the main principle:

            "...a trustee is entitled to indemnification for all costs and expenses incurred in relation to the trust estate which have been ‘properly incurred’."

To determine whether or not costs were properly incurred, the Court said it must look at the particular cost and consider, objectively, whether it was incurred acting in accordance with the powers and duties with which the trustee is required to comply. The Court will not allow a trustee to be indemnified from costs arising where the trustee has:

(a)  acted beyond power;

(b)  did not acted in good faith;

(c)  has not exercised its power in accordance with its duties.

Further, the Court noted that trustees will usually be indemnified for legal costs incurred in connection with the administration of the trust, unless they have acted unreasonably or for their own benefit (rather than the beneficiaries').

In this matter, the Court said, the Defendants as trustees for the trust estate were required to:

(a)  resolve the taxation issue expeditiously; and

(b)  act in the best interests of the beneficiaries of the trust.

Resolution of the taxation issue expeditiously was a requirement of the settlement that the Defendants ultimately reached with Victor. The Court held that, after settlement with Victor was reached, the Defendants did not act expeditiously or promptly as required. The Court found that the Defendants were delaying for their own benefit, and not for the benefit of the beneficiaries of the trust estate (so were in breach of their trustee duty). It was decided that had the Defendants acted promptly with respect to the tax issue, their costs would have been far less and subsequent court proceedings (by Victor to enforce the settlement) would not have been necessary.

Therefore, the Court said, the Defendants could not be indemnified for costs incurred in relation to the tax issue because:

(a)  the costs were unreasonably and improperly incurred (were not incurred in the proper administration of the trust); and

(b)  were incurred in breach of their duty to act in the bests interest of the beneficiaries.

Conclusion

This case demonstrates the importance of the trustee complying with its powers and duties, and also shows how a Court works through any disputes in relation to a trustee being indemnified out of trust assets.

Allawdocs trust deeds grant trustees with clear and specified powers, so that it is clear what actions are in the proper administration of the trust. Allawdocs is also proudly supported by GV Lawyers, who can provide advice if you are concerned about a particular act (either as trustee or beneficiary). Contact GV Lawyers on 1300 729 914 or via their website.

Until next time!

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