New South Wales Supreme Court CITATION : Smith & Ors v Collier & Ors [2001] NSWSC 194 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2968/99 HEARING DATE(S) : 15/03/01-16/03/01 JUDGMENT DATE : 16 March 2001 James Edwin Smith (1st Plaintiff) Mark Lewis Graham (2nd Plaintiff) PARTIES : Gary Jon Fox (3rd Plaintiff) Denice Susan Collier (1st Defendant) National Australia Bank Ltd (2nd Defendant) Esanda Finance Corporation Ltd (3rd Defendant) JUDGMENT OF : Simos J A Colefax (Plaintiffs) D S Collier (in person) (1st Defendant) COUNSEL : L Einstein (2nd Defendant) A Wright (Solicitor) (3rd Defendant) Mullane & Lindsay (Plaintiffs) SOLICITORS : Dibbs Barker Gosling (2nd Defendant) Luscombe Wright (3rd Defendant) CATCHWORDS : Express Trust - monies received into solicitors' trust account on terms of express trust - Held, certain payments out of trust account were made in breach of trust. - Legal Profession Act 1987 section 61 - monies received into solicitors' trust account on terms of express trust - Held, monies were received by solicitors on behalf of all beneficiaries of the express trust within the meaning of section 61 of the Act. LEGISLATION CITED : Legal Profession Act 1987 Adams v Bank of NSW (1984) 1 NSWLR 285 CASES CITED : Barnes v Addy (1874) 9 Ch App 244 Consul Development Pty Ltd v D P C Estates Pty Ltd (1975) 132 CLR 373 US Surgical Corp v Hospital Products International Pty Ltd (1982) 2 NSWLR 766 DECISION : Monies paid out of solicitors' trust account were paid in breach of trust. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION SIMOS J 16 March 2001 2968/99 - JAMES EDWIN SMITH, MARK LEWIS GRAHAM, GARY JON FOX -V- DENICE SUSAN COLLIER, NATIONAL AUSTRALIA BANK LIMITED AND ESANDA FINANCE LTD JUDGMENT - EX TEMPORE HIS HONOUR: The Proceedings 1 These proceedings were commenced by a summons in the nature of an inter-pleader summons filed on behalf of James Edwin Smith, Mark Lewis Graham and Gary John Fox, being the partners of a firm of solicitors carrying on the practice of their profession under the name of Attwaters. The summons sought an order that the plaintiffs pay into Court the sum of $35,687.00 from their trust account, said in the summons to be held on account of Denice Susan Collier, the first defendant, and also sought "such directions and orders as the Court deems necessary to be made for the determination of all matters in dispute about the said sum of $35,687.00." By agreement between the parties the said sum of $35,687.00 was, and is, invested in an interest bearing bank account pending the outcome of these proceedings. 2 The said sum of $35,687.00 was the balance remaining in the trust account of the plaintiffs from an amount of $168,340.00 which was originally paid into the trust account of the plaintiffs pursuant to a release dated 12 February 1999 between the first defendant, described in the release "as Denice Susan Collier (trading as the Thoroughbred Hotel) care of Attwaters, Solicitors, Bolton and King Streets, Newcastle, NSW" and "Guardian Underwriting Services Pty Ltd of 137 Moray Street, South Melbourne, VIC 3205". 3 The release was in the following terms:- WHEREAS: A. In this claim ("the claim") the claimant contends that Lloyd's of London is liable for damages pursuant to a policy of insurance evidenced by BusinessPak Certificate No. C22087 in relation to a fire which occurred at the claimants Thoroughbred Hotel, Kelly Street Scone, in the State of New South Wales ("the premises") on or about 1 July 1998 ("the fire"). B. The insurer's representative denies and continues to deny the claimant's allegations and denies that it is liable to the claimant as alleged or at all. C. In consideration of these terms of settlement the claimant and the insurer's representative have agreed to resolve their differences upon the terms contained hereinafter. NOW IT IS AGREED: 1 The claimant agrees that the claim is resolved for the sum of $210,000.00 inclusive of certain interim payments made in the sum of $41,660.00. 2 The insurer's representative agrees to pay and the claimant agrees to accept the sum of $168,340.00 ("the said sum") inclusive of costs in full satisfaction of all actions, suits, demands, claims and costs of every description whatsoever in respect of the said fire, loss and damage allegedly sustained by the claimant as a result of the said fire with the exception of any claims arising pursuant to "Policy 7" under BusinessPak Certificate No C22087. "NOW THIS RELEASE WITNESSES that in consideration of the insurer's representative's promise to pay the aforesaid amount to the claimant: 1. The claimant for herself and for her heirs, executors, administrators and assigns HEREBY RELEASES AND FOREVER DISCHARGES the insurer, the insurer's representative and their successors and assigns and their servants, employees and agents from all actions, suits, demands, claims and costs for common law damages which the claimant now has or at any time hereafter may have had or which but for the execution of this agreement could or might have had against the insurer's representative by reason or arising out of the fire save and except for any claims arising pursuant to "Policy 7" under BusinessPak Certificate No. C22087. 2. The claimant HEREBY COVEANTS with the insurer's representative that she will not at any time hereafter bring or institute any proceedings in law or in equity against the insurer's representative or any person liable to be made an insurer's representative in respect of any of the matters aforesaid save and except for any claims arising pursuant to "Policy 7" under the BusinessPak Certificate No. C22087. 3. The insurer's representative shall pay the said sum to the claimant's solicitors Attwaters, Bolton and King Street, Newcastle, NSW Trust Account for and on behalf of the claimant subject to the rights of the National Australia Bank Limited and Esanda Finance Corporation Limited ("the financiers") and any portion of the said sum will not be discharged from the trust account until the financiers have been satisfied as to any amounts owing. 4. Each party, its employees and agents will keep confidential these terms of settlement except where disclosure is by the written consent of the parties or where disclosure is required by law or where disclosure is necessary for the purposes of enforcing any obligation arising under these terms of settlement. Signed by the said DENICE ) SUSAN COLLIER this 12th ) day of February ) 1999, in the presence of:- ) (sgd) D S Collier Claimant (sgd) Witness" The Principal Issue 4 The principal issue in the proceedings was as to whether or not the effect of the circumstances of the payment into the plaintiffs' trust account of the sum of $168,340.00 pursuant to the said release, and, in particular, having regard to the terms of clause 3 thereof, produced the result that the said sum was held by the plaintiffs in that trust account, upon an express trust to pay out of the said sum the monies owed by the first defendant to National Australia Bank Ltd and to Esanda Finance Corporation Ltd in priority to paying any amount out of the said sum to, or on behalf of, the first defendant. 5 It was submitted on behalf of the plaintiffs that the sum of $168,340.00 was held by the plaintiffs in their trust account "on behalf of" the first defendant within the meaning of section 61 of the Legal Profession Act 1987. Section 61 of the Act has been amended since the events subject to these proceedings occurred, however, the applicable legislation is that that was in force during the period 11 March 1999, when the funds were first advanced to Attwaters, through to 14 May 1999, when the last disbursement was made from the trust account. During this period sub-sections (1) and (2) were in the following terms: - 61.(1) If a solicitor, in the course of practising as a solicitor, receives money on behalf of another person, the solicitor shall: (a) hold the money exclusively for the other person, and (b) ensure that subsection (2) and the regulations are complied with in relation to the money. (2) Money received on behalf of another person by a solicitor, in the course of practising as a solicitor: (a) shall, except where the person on whose behalf the money is received otherwise directs, be paid, within the prescribed time, to the credit of a general trust account at a bank in New South Wales and be held in accordance with such regulations as may be in force in relation to trust money. (b) shall, where the person on whose behalf the money is received directs that it be paid otherwise than to the credit of a general trust account and the money is to be held under the direct or indirect control of the solicitor for less than the prescribed period, be paid as directed, or (c) shall, in the case of money referred to in paragraph (b) that is to be held for the prescribed period or a longer period, be paid as directed and held in accordance with such regulations as may be in force in relation to controlled money. 6 The plaintiffs relied, inter alia, upon those words of clause 3 of the release which provided that the money should be paid to their trust account "for and on behalf of the claimant", and submitted that the subsequent words of clause 3 did not give rise to any express trust as contended for and on behalf of the second and third defendants, more particularly as neither the plaintiffs, nor the second and third defendants, were parties to the release. Counsel for the plaintiffs relied, in particular, inter alia, upon the decision of the New South Wales Court of Appeal in Adams v Bank of New South Wales (1984) 1 NSWLR 285, however, in my opinion, that case is distinguishable because it was held, in effect, that the relevant solicitor was not a trustee of funds in his trust account held by him on account of his client Mr Adams. It is true that in that case, the funds were received by the solicitor upon the basis that it was expected that part of those funds would be used to discharge a mortgage, but it was held, in effect, that the solicitor did not receive the relevant funds upon trust, inter alia, for such a purpose. 7 It was submitted, on the other hand, on behalf of the second and third defendants, that the circumstances in which the monies were paid into the trust account of the plaintiffs were such as to give rise to an express trust, relevantly, to the effect that the plaintiffs would pay out of the said sum all monies owed by the first defendant to the second defendant and to the third defendant in priority to any amounts paid out to, or on behalf of, the first defendant. 8 The second and third defendants relied on the express words of clause 3 of the release, and in particular, on that provision of clause 3 which provided that "any portion of the said sum will not be discharged (presumably "disbursed") from the trust account until the financiers have been satisfied as to any amounts owing." They also referred to the fact that although clause 3 provided that "the said sum" was paid to the plaintiffs' trust account "for and on behalf of the claimant", those words were followed by the words: "subject to the rights of the National Australia Bank Ltd and Esanda Finance Corporation Ltd ("the financiers")." It was submitted on behalf of the second and third defendants that, accordingly, it could not be said that the "said sum" was held in the plaintiffs' trust account only "for and on behalf of" the first defendant within the meaning of section 61 of the Legal Profession Act 1987. Decision 9 In my opinion, all of the submissions made on behalf of the second and third defendants should be accepted, with the result, in my opinion, that the monies received by the plaintiffs in their trust account pursuant to the release, were held by them upon an express trust to pay from that sum any amounts owing to the second and third defendants in priority to paying any amounts to, or on behalf of, the first defendant. 10 There can be no doubt that the plaintiffs, through their employed solicitor, Mr Dickson, were well aware at the time of payment of the monies into the trust account, of the provisions of the release and of clause 3 thereof in particular, and that they were, accordingly, receiving the monies into their trust account as trustees upon the terms of clause 3. That the monies were held by them upon trust is made abundantly clear by the fact that the monies were being paid into the "trust" account of the plaintiffs, and, of course, those monies became trust monies vested in the plaintiffs as trustees upon its receipt into their trust account. 11 Moreover, clause 3 made it plain to the plaintiffs, through the agency of their employee Mr Dickson, that the monies were not held simply "on behalf of" the first defendant because, as stated above, clause 3 stated that that was so only "subject to the rights of the National Australia Bank Ltd and Esanda Finance Corporation Ltd". If any further clarification was required it was made clear by the subsequent words, "and any portion of the said sum will not be discharged from the trust account until the financiers have been satisfied as to any amounts owing", that those financiers were to be paid in priority to the first defendant. 12 In other words, in my opinion, clause 3 makes it plain in all the circumstances, that the subject trust monies were not simply held "on behalf of" the first defendant within the meaning of section 61 of the Legal Profession Act 1987; rather they were held by the plaintiffs on behalf of all the beneficiaries of the express trust namely firstly, in effect, "on behalf of" the second and third defendants in amounts sufficient to pay each of those defendants "any amounts owing", and it was only the balance after deduction of such amounts that was held by the plaintiffs "on behalf of" the first defendant within the meaning of section 61 of the Legal Profession Act 1987. 13 The defendants also relied on the surrounding circumstances to support this result, including the letter dated 4 February 1999 to Mr Bruce Dickson of Attwaters (the plaintiffs) from the solicitors for the underwriters in which the following was stated inter alia:- "We understand that a settlement has been negotiated by the Loss Adjustors in this matter. It has come to our attention that the National Australia Bank Ltd and Esanda Finance Corporation Ltd ("the financiers") are noted on a Certificate of Currency issued on 14 August 1998 by Mawhinney Insurance Brokers Pty Ltd. We propose that our client pay the settlement sum direct to your trust account and that such sum be held by you on trust subject to the rights of both the NAB and Esanda. A draft Release follows for your reference. Please advise if this is not acceptable." 14 Particular emphasis was placed on the use of the words that the proposal was that the relevant sum "be held by you on trust subject to the rights of both the NAB and Esanda." 15 The second and third defendants also relied upon the letter of 12 February 1999 to the solicitors for the underwriters from Mr Dickson on the letterhead of Attwaters the plaintiffs, which included the following:- "We refer to our previous correspondence and confirm that after a conference with Counsel as previously advised our client has executed the Release submitted to us. We enclose the signed document and note that the funds will be forwarded to us for distribution." 16 Special emphasis was placed upon the words "forwarded to us for distribution", which it was submitted indicated that it was the plaintiffs who would attend to the distribution in accordance with the provisions of the release, that being consistent with the creation of an express trust in the terms contended for, and inconsistent with any notion that the funds received by the plaintiffs were to be disbursed according to the unfettered and uncontrolled discretion of the first defendant. 17 In my opinion, these considerations also support the conclusion that an express trust was brought into existence in the terms contended for on behalf of the second and third defendants. Subsequent Events 18 The monies were received into the plaintiffs' trust account pursuant to the terms of the release on 11 March 1999 subsequent to which the following payments were made on the dates and to each of the payees and in the amounts indicated below:- Breaches of Trust 19 It will be observed that the plaintiffs paid to the first defendant one amount of $5,000.00, one amount of $10,000.00 and one amount of $100,000.00, as well as certain other amounts to creditors of the first defendant, including various amounts to themselves, presumably for services rendered in relation to the insurance claim. It is plain, in my opinion, that each of those amounts was disbursed by the plaintiffs on the express or implied instructions of the first defendant and that those payments were made without having proper regard to the rights of the second and third defendants in relation to the monies in the plaintiffs' trust account. The first defendant disputes, to some extent, that all the amounts paid out were paid out with her authority or pursuant to her direction, but whatever the position in that regard, the fact remains, in my opinion, that the various payments made by the plaintiffs, whether at the direction of, or with the authority of the first defendant, or not, were payments in breach of the terms of the express trust on which they held those monies, by reason of the fact that the terms of the express trust required that priority be given to payment of monies owed by the first defendant to the second and third defendants. 20 Mr Dickson recognised that the payments were made in breach of trust as appears from the following passages in his cross examination:- "WRIGHT: Q. Mr Dickson, can I ask you just to have a look at paragraph 28 of your affidavit, do you still have the copy you had previously because I think your copy looked different? A. Yes. Q. At the end of that paragraph, you say that you were not aware of the possible implications of paying the sum of $100,000 to Collier? A. Yes. Q. Can you tell His Honour what you would have done if you had been aware of those implications? A. I wouldn't have paid the monies to her and I would have had regard to the terms of the release with regard to the monies payable to the National Bank and Esanda. Q. When you say that I would have had regard to the terms of the release, what does that mean? A. I would have followed the terms of the release as to the injunction that the monies weren't to be paid until the mortgagees were paid." 21 In my opinion, for those breaches of trust, the plaintiffs are personally liable to the second and third defendants for the amounts which were owing and payable to each of them at the date when the balance in the trust account fell below the amount required to pay the first and second defendant but which, for practical purposes, may be taken to be the amounts as so owing as at 14 May 1999 when the last of the said payments was made. 22 Mr Dickson gave evidence by affidavit that he was suffering personal difficulties at the time when the payments were made, and also that he was under pressure from frequent telephone calls from the first defendant (which is denied) when the various payments were made. This however, in my opinion, has no bearing whatsoever on the liability of the plaintiffs for the breaches of trust which I have referred. 23 In my further opinion, the first defendant was also a party to those breaches of trust. She frankly admitted in the witness box, that she authorised most of the payments, if not all, and although she says that she did not request the payment to her of $100,000.00 on 13 May 1999, she made no effort to return that sum when she received it. In every relevant sense, in my opinion, the first defendant was a knowing participant in the breaches of trust by the plaintiffs, since she was a party to the release which contained clause 3. In those circumstances, she is also, in my opinion, equally liable with the plaintiffs to the second and third defendants for the amounts owing to them. See Barnes v Addy (1874) 9 Ch App 244 at 251-252; Consul Development Pty Ltd v D P C Estates Pty Ltd (1975) 132 CLR 373. 24 I am also of the opinion that, as the first defendant received the benefit of the payments made in breach of trust, either by receiving monies personally, or by way of having personal debts discharged, she is liable to indemnify the plaintiffs for the whole of the amounts paid in the breach of trust. 25 I propose to make orders that the plaintiffs and the first defendant pay to the second and third defendants the relevant amounts due to them as at 14 May 1999 on the basis, of course, that they cannot be paid twice, and that any necessary adjustments may be made between the plaintiffs and the first defendant to reflect my order that the first defendant should indemnify the plaintiffs in respect of the relevant amounts. 26 The first defendant did not dispute that she was indebted to the second and third defendants as appears from the following passages in her cross examination:- "Q. Do you accept now you are indebted to the National Australia Bank? A. Yes. Q. Do you accept that based upon a loan facility which was granted to you by the National Australia Bank back in August 1997? A. Yes. Q. Do you accept that pursuant to that loan facility you borrowed for the purpose of the purchase of the lease of the Thoroughbred Hotel a sum of $65,000? A. Yes. Q. Do you accept that that sum has not been repaid? A. Yes. Q. Do you accept that an overdraft facility was subsequently granted to you by the National Australia Bank in January 1998? A. Yes. Q. That the overdraft limit of that facility was $5,000? A. Yes… Q. It is the very short one. I will show you a document which is a copy of an affidavit sworn by Andrew Joseph Donato today. Is the second page of that document headed "Certificate"? A. Yes. Q. Does that contain amounts said to be due to Esanda? A. Yes. Q. Do you agree those amounts are owing by you to Esanda? A. Yes." 27 The certificate referred to was in the following terms:- "CERTIFICATE I certify that: 1. the Relevant Rate applicable to the amount payable under Offer to Hire Agreement No 210018401 between Esanda Finance Corporation Limited and Denice Susan Collier dated 27 October 1997 is 11.75% per annum; and 2. the Recoverable Amount payable under the Offer to Hire Agreement referred to in paragraph 1 above is, as at the date of this Certificate $6,805.33. 3. the Relevant Rate applicable to the amount payable under Finance Lease Non Maintained No 249261994 between Esanda Finance Corporation Limited and Denice Susan Collier dated 26 May 1998 is 10.25% per annum; and 4. the amount outstanding under the Lease and payable to Esanda Finance Corporation Limited by Denice Susan Collier as at the date of this Certificate is $6,382.23. Dated 15 March 2001 (Sgd) A Donato Andrew Joseph Donato Manager, Recoveries NSW and ACT Esanda Finance Corporation Limited Balance Remaining in Trust Account 28 As between the respective entitlements to the balance presently remaining in the trust account of the plaintiffs, I am of the opinion that the relevant clauses of the Traders Bill of Sale obtained by the second defendant from the first defendant, do not operate to assign to it the benefit of the contract of insurance insofar as it covers goods owned by the third defendant. The relevant clause in the Bill of Sale is in the following terms: NOW THIS INDENTURE WITNESSES 1. In consideration of the matters specified above and of the Present Advance the Mortgagor as beneficial owner assigns and transfers to the Bank and its assigns:-… (d) the full benefit of every present or future agreement, contract, agency, certificate of registration, appointment, franchise and licence which at any time is or has been made or held by or made with or granted to the Mortgagor in respect of or is or has been required or necessary for the purpose of the said business or its conduct and of every renewal thereof; 29 On the other hand, I am of the opinion that the third defendant was not entitled to any more from the proceeds of the insurance policy than the value of its goods as at the time of loss. I propose to give the third defendant an opportunity to present evidence as to that value of its goods at the time of loss, and I state my opinion that the second and third defendants are entitled to proportionate shares of what remains in the trust account of the plaintiffs, in the proportions which the value of the third defendant's goods bears to the amount of the second defendant's loss at the relevant date. Interest 30 So far as interest is concerned in respect of the amounts payable by the first defendant to the second and third defendants respectively as at the relevant date of loss, I am of the opinion that prima facie both the second and third defendants would be entitled to interest at the Supreme Court rate from the date of loss and until payment. It has been submitted on behalf of the second and third defendants that I have a discretion to order interest at the contract rate from that date. I agree that I do have a discretion to order payment of interest on the relevant amounts from the date of loss, and until payment at the contract rates. I propose to exercise my discretion accordingly so that the second and third defendants will be in the same position in which they would have been if their respective contracts had been performed by the first defendant. This is consistent with the view of McLelland CJ in Equity in US Surgical Corp v Hospital Products International Pty Ltd (1982) 2 NSWLR 766, that the appropriate measure of equitable compensation in the case of breach of trust is the plaintiff's loss. The relevant passage in his Honour's judgment is as follows (at 816): "Apart from the limited power to award damages in addition to or in substitution for equitable relief, conferred by the Supreme Court Act, 1970, s 68 (following Lord Cairns' Act), which is of no present relevance, the court has an inherent power to grant relief by way of monetary compensation for breach of a fiduciary or other equitable obligation: see Nocton v Lord Ashburton [1914] AC 932, at pp 946, 956, 957; McKenzie v McDonald [1927] VLR 134, at p 146; Homes v Walton [1961] WAR 96; cf Seager v Copydex Ltd [1967] 1 WLR 923; [1967] 2 All ER 415; [1969] 1 WLR 809; [1969] 2 All ER 718. The nature and extent of this remedy have been discussed by I E Davidson in an illuminating article entitled "The Equitable Remedy of Compensation" in 13 Melbourne University Law Review 349. This remedy differs from an account of profits in that the loss to the plaintiff rather than the gain to the defendant is the measure of relief. The principles of assessment of equitable compensation do not necessarily coincide with those applicable to common law damages." Duty of Care 31 It was also submitted on behalf of the second and third defendants, that, in the relevant circumstances, the plaintiffs owed a duty of care to the second and third defendants to ensure that the monies owing to them were paid from the monies in the plaintiffs' trust account, in priority to any payments to, or on behalf of, the first defendant. 32 In my opinion, however, once it is established that the funds were held by the plaintiffs upon an express trust as contended for on behalf of the second and third defendant, there is no need to find any such duty of care since the second and third defendants are fully protected by the obligations of the plaintiffs arising under the express trust, and nothing would be added by holding that, in addition, the plaintiffs were also subject to a duty of care. In any event, having held that the plaintiffs held the subject monies upon the terms of an express trust as contended for by the second and third defendants, it is unnecessary for me to make any finding as to whether or not a duty of care existed. Unconscionability 33 For the same reasons, it is unnecessary for me to make any finding, one way or the other, as to whether the plaintiffs may have been guilty of unconscionable conduct as well as guilty of breaches of trust. Direction 34 I direct the second and third defendants to bring in short minutes of order giving effect to these reasons for judgment. ********** Last Modified: 04/09/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.