New South Wales Supreme Court CITATION : M.J. Connolly v S.A. Connolly - Estate of John Harry Connolly, and S.A. Connolly v M.J. Connolly - Estate of John Harry Connolly [2003] NSWSC 928 revised - 15/10/2003 HEARING DATE(S) : 9 October, 2003 JUDGMENT DATE : 9 October 2003 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Declaration that bequests to be calculated by reference to payments made in respect of both principal and interest. CATCHWORDS : WILLS - CONSTRUCTION - Bequest of a sum equal to amount paid by testator's son "in reduction and/or satisfaction of" testator's mortgage loan - whether bequest calculated by reference to payments made in respect of both principal and interest or by reference to payments made only in reduction of principal. PARTIES : Michael John Connolly - Plaintiff (3585/03); Defendant (3953/03) Sharon Annette Connolly - Defendant (3585/03); Plaintiff (3953/03) FILE NUMBER(S) : SC 3585/03; 3953/03 COUNSEL : L.J. Ellison - Plaintiff (3585/03); Defendant (3953/03) J. Wilson SC and M. Provera - Defendant (3585/03); Plaintiff (3953/03) SOLICITORS : McClellands - Plaintiff (3585/03); Defendant (3953/03) Back Schwartz Vaughan - Defendant (3585/03); Plaintiff (3953/03) Ex tempore 1 The late John Harry Connolly died on 2 July 2002. By his will dated 2 April 1997, he appointed as executors his two children, Michael John Connolly ("Michael") and Sharon Annette Connolly ("Sharon"). He gave a bequest to Michael which is the subject of the dispute in this case and gave the residue of his estate to Michael and Sharon in equal shares. The major asset of the deceased's estate was his home at Maroubra. That property has now been sold. The Executors, however, are in disagreement as to how the proceeds of sale must be distributed under the terms of the deceased's Will. 2 By Statement of Claim in proceedings 3585 of 2003 Michael, as Plaintiff, sought orders against Sharon, as Defendant, for the due administration of the estate in accordance with the terms of the will. By Summons filed in proceedings 3953 of 2003, Sharon, as Plaintiff, sought a declaration against Michael, as Defendant, as to the true construction of clause 4 of the will which is the bequest in favour of Michael. The question of the construction of clause 4 of the will is really the only issue in dispute between the parties. 3 The relevant facts may be shortly stated. The deceased had lived in the Maroubra property since 1956. After Michael's first marriage broke down in 1995, he returned to live at home with his parents. Between 1997 and 1998 the property was renovated and extended. The deceased borrowed a total of some $215,000, all of which was expended in renovations to the property, with the exception of the sum of about $30,000 which was paid to Michael as an allowance as he was fully occupied in organising the building works. The deceased was retired during the period of the loan and all payments under the various mortgages which secured the loan were paid promptly by Michael. It appears that there were two mortgages, the first to Citibank and the second, which was a refinancing of the loan, to Perpetual Trustee through one of its subsidiaries. 4 The original mortgage to Citibank has apparently been lost, but the parties agree that the amount payable monthly under the Citibank mortgage – and I think this also applies to the Perpetual mortgage – was a fixed amount, but the interest rate was variable so that the principal was reduced according to how the interest rate varied and to the extent that payments in advance were applied in reduction of principal. It would have been difficult, if not impossible, for the deceased to have ascertained month by month what parts of the payments being made by Michael to the mortgagee were in reduction of principal and what parts were in payment of interest only. 5 The total amount which has been paid by Michael to the mortgagees in respect of the mortgages is $85,880. The figures produced by the parties show that if that were broken up into reduction of principal and interest, then some $22,946 of the payments made by Michael have gone in reduction of the principal and some $62,300 have gone in reduction of interest. 6 The dispute arises, as I have said, by reason of the provisions of clause 4 of the deceased's will which is in the following terms: "I give and bequeath unto my son, Michael John Connolly, a sum of money which shall represent the total amount paid by the said Michael John Connolly in reduction and/or satisfaction of the mortgage loan secured over title to my home at 275 Malabar Road Maroubra." 7 Michael says that on the true construction of this clause, he is entitled under this bequest to an amount equal to the total of the payments which he has made to the mortgagees under the mortgages, that is, a total of some $85,880. 8 On the other hand, Sharon says that Michael is entitled only to a bequest equal to the amount by which the principal of the loan has been reduced by his payments, that is, he is entitled to only an amount of some $22,926. The question for construction is therefore what is meant by essentially the words "in reduction and/or satisfaction of the mortgage loan" under clause 4. 9 The construction of a clause of this character is really a matter of impression formed against the background of the circumstances in which the deceased was placed recalling, of course, that the will speaks as from the date of the testator's death. As I have recounted, the circumstances as agreed between the parties were that Michael was paying a fixed amount per month and it was not reasonably possible for either the deceased or Michael to be clear as to what part of that amount was attributable to the principal and what amount was attributable to interest. 10 The other circumstance is, of course, that as the deceased was retired during the life of the loan it appears, by implication at least, from the circumstance that Michael paid all the of the amounts due under the mortgage, that the deceased himself was not able to make any, or any substantial, contribution to the payments due under the mortgage, even though the sum borrowed was for the improvement of the deceased's sole property. 11 In my opinion, on the true construction of clause 4, the bequest gives to Michael the total amount which he has paid to the mortgagees in respect of the mortgages, regardless of whether the amounts comprised therein are apportionable between principal or interest. My reasons are as follows. 12 The clause is somewhat broadly drawn. It does not explicitly state, of course, that the amount of the bequest is equal to the amount by which the principal of the mortgage loan has been reduced. In circumstances in which a fixed sum is paid monthly, there being no practical way for the deceased to know how much of that amount is being apportioned to principal and how much to interest, one would have thought that if the deceased wished to give Michael the benefit only of reductions of principal, he would have been very clear in saying so because the executors would thereby have been required to make precise calculations, going back over the history of payments under the mortgages, as to how much was attributable from Michael's payment to the principal and how much was attributable to interest. The testator, however, has simply used the words "in reduction and/or satisfaction of the mortgage loan" . 13 I think that Mr Ellison's submission is correct that the words "mortgage loan" in broad terms must be understood as a reference to indebtedness due under the mortgage documents or under the mortgage transaction. Such indebtedness, of course, is an indebtedness, not only in relation to principal, but also in relation to interest. The use of the word "satisfaction" in my view connotes discharge of an obligation, as Mr Ellison submits. Accordingly, in my view, what the testator had in mind was that whatever Michael had paid, either to reduce or discharge the testator's obligation under the mortgage transaction, should be reimbursed to Michael under the provisions of clause 4 as a bequest. Accordingly, I would make a declaration in terms of paragraph 1(a) of Sharon's summons. 14 It may be that the parties can agree on the precise figures now and they can be encapsulated in some Short Minutes or it may be that they would need to do some further fine tuning to the calculations before a declaration in terms of paragraph 1(a) is made. I will hear from Counsel in that respect shortly. 15 I should now deal with the other matter which is raised by Mr Wilson SC, who appears for Sharon, and that is that the Statement of Claim filed by Michael, which in effect sought an administration of the estate, was premature in that the estate had not reached the stage of administration by the time the proceedings were commenced. 16 At the time that the Statement of Claim was filed, it appears that the subject property had not yet been sold so that it is certainly arguable that the time for administration had not yet arrived. However, by that time the dispute between the parties as to the construction of clause 4 had clearly arisen and it was quite clear that unless the dispute could be resolved by agreement, it would have to be resolved by the Court. 17 It may be that the Statement of Claim was filed prematurely but the dispute which was already in existence by that time has come to Court and been determined pursuant to Sharon's Summons for construction. It seems from my discussion with Mr Wilson on this point that the only additional cost which has been incurred by Sharon in relation to the administration suit, that is, the Statement of Claim filed by Michael, is the filing of a one and one-third page Defence which simply denies or does not admit the matter as set out in the Statement of Claim. Sharon, very shortly after filing that Defence, filed her own Summons for the construction of the will which really did raise the question in dispute between the parties. 18 It seems to me that although the administration suit may very well have been commenced prematurely, the costs incurred by Sharon and thrown away thereby have really been minimal and I do not really think that it is appropriate or justifiable to try and hive off artificially the costs of preparing a very formal and short Defence. 19 Before I had concluded giving my judgment, Mr Ellison helpfully indicated that the parties would be able to agree upon the orders disposing of these proceedings in the light of what I had just said. The parties have now framed the orders accordingly so that I make the following orders. 20 I order that in respect of monies held by Messrs Back Schwartz Vaughan in a controlled monies account the Defendant, that is, Sharon, in proceedings 3585 of 2003, join with the Plaintiff and do all things necessary and execute all documents necessary to enable within fourteen days of the making of this order a payment in the sum of $85,425.34 to the Plaintiff to satisfy the Plaintiff's entitlement pursuant to clause 4 of the will of the deceased. 21 As to costs of each of the proceedings, by consent there will be no order as to costs to the intent that each of the parties in their capacities as executors and beneficiaries of the will of the deceased will bear his and her costs of the proceedings respectively. Otherwise I dismiss the Amended Statement of Claim. – oOo – Last Modified: 10/17/2003 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.