New South Wales Supreme Court CITATION : Garrett v Yiasemides [2004] NSWSC 828 HEARING DATE(S) : 31 August 2004 JUDGMENT DATE : 31 August 2004 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Mortgaging of trust property authorised. Trustees removed and replaced. CATCHWORDS : TRUSTS - trustees' powers of investment - power to acquire interest in land to provide dwelling house for beneficiary to live in - power of trustees to make trust interest in land available as security for a loan, when trustees will not themselves be borrowing money - removal of trustees - conduct endangering trust property, and showing want of proper capacity to execute duties of trust - removal of bankrupt trustee - costs of application for removal of trustee - PROCEDURE - costs - costs of application for removal of trustee LEGISLATION CITED : Trustee Act 1925 Trustee Amendment (Discretionary Investments) Act 1997 Attorney-General v Murdoch (1856) 2 K and J 571; 69 ER 910 Hunter v Hunter [1938] NZLR 520 Letterstedt v Broers (1884) 9 App Cas 371 Miller v Cameron (1936) 54 CLR 572 CASES CITED : Murdocca v Murdocca (No.2) [2002] NSWSC 505 Nissen v Grunden (1912) 14 CLR 297 Palairet v Carew (1863) 32 BEAV 564; 55 ER 222 Re Estate of Roberts (1983) 20 NTR 13 In the Will of Sherriff [1971] 2 NSWLR 438 Swanson v Dungey (1892) 25 SALR 87 Grace Marie Garrett by her Tutor David Peter Jackson - First Plaintiff Michael Anthony Confos - Second Plaintiff PARTIES : Jonathon Thomas Garrett - Third Plaintiff George Andrew Yiasemides - First Defendant Peter Yiasemides - Second Defendant FILE NUMBER(S) : SC 1895/04 COUNSEL : J Soars - Plaintiffs No appearance - Defendants SOLICITORS : Beesley & Hughes - Plaintiffs No appearance - Defendants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J TUESDAY 31 AUGUST 2004 1895/04 GRACE MARIE GARRETT BY HER TUTOR JONATHON THOMAS GARRETT & ANOR v GEORGE ANDREW YIASEMIDES & ANOR JUDGMENT – Revised 3 September 2004 1 HIS HONOUR: This is an application which arises concerning the trusts of the late Irene Garrett also known as Irene Confos. The plaintiff seeks to have the present trustees removed and replaced with other trustees, and for those new trustees to be empowered to mortgage a particular item of trust property. Mrs Garrett's Estate 2 The late Mrs Garrett died on 15 March 1999. Mrs Garrett's maiden name was Confos. She had been married twice. Her first marriage, to Mr Andrew Yiasemides, was one which produced three children, George, Marion and Peter, who are now adults. Her second marriage, to Mr Garrett, produced one daughter, Grace. Grace is now aged five or six. 3 Mrs Garrett's last will is one which she made on 12 March 1999. It was admitted to probate on 6 October 1999. She appointed her elder son George Yiasemides, and her cousin Michael Confos as trustees and executors of the will. She gave her husband, Mr Garrett, a right of residence in her home, for a period of time which has now expired. Upon the expiry of that right of residence, the home was to go into residue. There were some small specific legacies. The residue of the estate was to be divided into five parts. Three of those parts were for the children of her first marriage, one of them was for Grace, and the fifth of them was for her husband Mr Garrett. The gifts to the children were ones which were conditional upon them surviving her and on attaining the age of 21 years. There was a substitutionary clause. 4 The requirement for children to attain the age of 21 years before taking is of some relevance, because Peter Yiasemides was born on 21 August 1985. Thus, it is only on 21 August 2006 that he will obtain a vested interest in possession in the gift given to him by the residuary clause. The trustees of the estate are holding money in a bank account on trust for him until he reaches 21 years of age. As well, obviously, the gift of residue made to Grace will not vest for many years. 5 There was a specific clause in the will, as follows: "8. HOWEVER I FURTHER PROVIDE that in the event of my death and my daughter GRACE MARIE GARRETT still being under the age of eighteen (18) years of age AND MY HUSBAND JONATHON THOMAS GARRETT wishes to purchase a property for himself and my daughter GRACE MARIE GARRETT, to reside in THEN I DIRECT my Executors and Trustees to provide such of my daughter's GRACE MARIE GARRETT, entitlement to purchase such property, in the name of my Trustees for and on behalf of my daughter GRACE MARIE GARRETT to be occupied by my husband and daughter." 6 The probate had annexed to it an inventory of property, which suggested that, apart from items which were the subject of specific legacies, the assets of the estate would be of the order of $520,000. Thus, if there were no liabilities, the one fifth share in residue to which each of the residuary beneficiaries was entitled would amount to a little over $100,000. There is no evidence before me, however, about the state of the liabilities of the estate. Construction of the Bangalow House 7 Mr Garrett decided that the best course for him to adopt with his young daughter was to arrange for her interest in her mother's estate to be used in purchasing a half interest in a block of land, and in the erection of a house upon it. The land in question is folio identifier 76/1031773. It is a property known as 32 Tristania Street, Bangalow. The current edition of the certificate of title was issued on 18 October 2001. It shows Mr Garrett as the owner of a half share as tenants in common in the land, and Mr Michael Confos and Mr George Yiasemides (between them as joint tenants) as holder of the other half share as tenants in common in the land. The land was purchased by contributing $41,250 of Grace's share in the assets of her mother's estate, and Mr Garrett contributing the balance. The construction costs of the house have been paid, as to $33,750, from Grace's share in her mother's estate. Mr Garrett has provided approximately $46,250 towards construction of the house. It will be seen, by simple arithmetic, that the amount which Grace has received from her mother's estate is a round $75,000. 8 At the time that Mr Garrett embarked on the construction of the house he was aware that the sum which was available from Grace's funds, and the amount of own money that he had available, was not sufficient to complete the building work. He believed, however, that he would have no difficulty in obtaining a mortgage to complete the work. 9 Experience has shown that his belief was mistaken. Lenders are unprepared to lend against his half interest in the property. The situation has now been arrived at where the house is almost complete, but there are further essential works which need to be carried out before the Council will grant a certificate to enable occupation of the house. Mr Garrett has been advised that certain particular items of work are needed to get the house to the stage where a certificate of occupancy can issue. He obtained quotations, mainly in August and September of last year, for the cost of carrying out that work. Those quotations total some $12,540. He says that he would also like to carry out some work, of a cost of around $8,000, which is not necessary to obtain an occupation certificate, but as I understand it, today's application is based only on the work which is necessary to enable an occupation certificate to issue. 10 There is evidence, in the form of a real estate agent's appraisal, that the house, in its incomplete state, was worth around $300,000 in August 2003. 11 At present, Mr Garrett and Grace are living in the house, notwithstanding the absence of an occupation certificate. This is, obviously, a matter of considerable concern to him. Mr Garrett's Attempts to Raise Money Secured by the Land 12 It was May 2003 when Mr Garrett first came to realise that he would not be able to obtain a loan secured by a mortgage over his half interest in the house. He consulted his solicitors about what could be done. His solicitors, beginning on 6 June 2003, wrote various letters to Mr George Yiasemides, asking, first, whether he would be prepared to resign as trustee. By July 2003 that request had become a request to Mr George Yiasemides to agree to the signing of a mortgage over the property. Mr Michael Confos, the other trustee, was by that stage prepared to agree to the granting of a mortgage. By July 2003, the suggestion was being put in the alternative, by Mr Garrett's solicitors, that Mr George Yiasemides might retire as trustee if he was not willing to enable a mortgage to be granted. 13 There has been a succession of correspondence since that date, which has produced no response. These proceedings were begun on 12 March 2004. Initially, they were begun with Grace (by her tutor Mr Garrett) named as first plaintiff, and Mr Michael Confos name as second plaintiff, and Mr George Yiasemides named as defendant. Because of a possible conflict of interest between Grace and her father concerning this matter, Mr Garrett has been replaced as tutor by an independent solicitor. Procedural Steps in this Litigation 14 There was great difficulty in serving Mr George Yiasemides with the statement of claim, but it was eventually served on 15 April 2004. He has not filed a Notice of Appearance. However the Court's records show that he appeared in the proceedings in person, with his father, Andrew Yiasemides, and his brother, Peter Yiasemides, before Gzell J at an interlocutory hearing on 30 July 2004. 15 Mr Michael Confos became bankrupt on 22 September 2002. He has filed an affidavit in the proceedings, where he agrees that George Yiasemides should be removed as trustee and a Jacqueline Thompson appointed in his place. He also agrees, if the Court thinks fit, to his own removal as trustee, and his replacement by Mr Peter Confos. Mr Peter Confos is the father of the late Mrs Garrett. 16 On 19 July 2004, his Honour Gzell J made an order that Peter Yiasemides be joined as a defendant in the proceedings. His Honour was of the view, with which I respectfully agree, that it would be undesirable for the administration of the trust relating to the Bangalow land to be separated from the administration of the other assets in the estate, if that could be avoided. It was with a view to Peter Yiasemides being informed of a proposal to change the trustees of the estate (a matter which would affect who was the trustee who held the money to which he was going to be ultimately entitled) that he was added as a defendant. It appears that he opposes that change being made. 17 Unfortunately it was only today that an amended statement of claim joining Mr Peter Yiasemides as a defendant was filed. While Mr Peter Yiasemides has been informed of the proposal to amend the statement of claim in the manner outlined by that amended state of claim, he has not actually been served with a filed copy. In these circumstances, I would not be prepared to proceed, today, to change the identity of the trustees of the money to which he will become entitled. Further, given that this is a small estate, and has already had to bear significant legal costs, I would not wish the hearing to be delayed any further. For that reason, I have given consideration to the question of whether the administration of the trust relating to the Bangalow land should be separated from the rest of the trust assets in the estate. 18 It seems to me that, given the procedural situation with which I am confronted today, it would be the lesser evil to split the administration of the trust of the Bangalow land from the administration of the rest of the assets of the late Mrs Garrett, assuming for the moment that a case for a change of trustees relating to the Bangalow land was made out. Further, it strikes me as strange that the interest which Grace has in her mother's estate, as a residuary beneficiary, is a round $75,000. It may be that there are some extra duties of administration or distribution, even concerning Grace's interest in that estate, which remain to be performed, although the evidence before me by no means establishes that this is an actuality rather than a possibility. I see some merit in leaving the present trustees with the responsibility of carrying through whatever steps, if any, might still be outstanding to distribute completely Grace's interest in the estate and to account for their receipts and expenditures to date. While this might involve leaving Mr Confos, a bankrupt, as one of the trustees of whatever, if any, assets there might still be held on trust for Grace, I will not remove him as trustee of any such assets because (a) the plaintiff does not seek it, (b) in the circumstances that I have indicated I would not make an order affecting Peter without his being served, (c) there is no affirmative evidence there are any such assets, and (d) because of (c), it is not possible to draft a vesting order relating to any specific assets. Trustee's Power to Invest in Partial Interest in House 19 The power conferred by clause 8 of the will is one which, possibly, might not extend to permit the trustees to purchase vacant land, and to then erect a house on it, at least in circumstances where the trustees did not have an assurance that the costs of construction could all be met. However, the powers of the trustees of the estate (and it appears, on the evidence, that they are now trustees) include the powers of investment arising under the Trustee Act 1925. There was a radical change in policy concerning which investments are permissible for trustees to make, which was effected by the enactment of the Trustee Amendment (Discretionary Investments) Act 1997. That Act, which commenced on 13 March 1998, made amendments to the investment provisions of the Trustee Act 1925. In broad and excessively simple terms, a trustee may, since the commencement of that Act, invest trust funds in any form of investment, provided that the trustee is prudent in so doing, and observes any specific restrictions or obligations in the trust instrument. The trustee is also under a specific duty to have regard to a list of factors set out in section 14C Trustee Act 1925. Section 14DA provides: "(1) Without limiting section 14C and subject to the instrument (if any) creating the trust, a trustee may: (a) purchase a dwelling-house for a beneficiary to use as a residence, or (b) enter into any other agreement or arrangement to secure for a beneficiary a right to use a dwelling-house as a residence. (2) Despite the terms of the instrument (if any) creating the trust, a trustee may, if to do so would not unfairly prejudice the interests of other beneficiaries, retain as part of the trust property a dwelling-house for a beneficiary to use as a residence. (3) A dwelling-house purchased, retained or otherwise secured for use by the beneficiary as a residence may be made available to the beneficiary for that purpose on such terms and conditions consistent with the trust and the extent of the beneficiary's interest as the trustee thinks fit. (4) The trustee may retain a dwelling-house or any interest or rights in respect of a dwelling-house acquired under this section after the use of the dwelling-house by the beneficiary has ceased. (5) In this section, dwelling-house includes: (a) any building or part of a building designed, or converted or capable of being converted, for use as a residence, and (b) any amenities or facilities for use in association with the use of a dwelling-house." 20 This section is one which was enacted to overcome the decision of Helsham J in In the Will of Sherriff [1971] 2 NSWLR 438. It is wide enough to authorise the trustees investing trust moneys in the purchase of a fractional interest in the land, and in advancing the money towards the erection of a house on it, to secure for a beneficiary a right to use the house as a residence, provided always that in so doing the trustees observed their obligations of prudence. It is not clear, on the evidence before me, as to whether the obligation of prudence has or has not been observed in making this particular expenditure of trust money. In the circumstance where I am now proposing to leave the existing trustees of the will as trustees, if it were to happen that there had been a departure from prudence in allowing the investment to be made in the first place, this is a matter concerning which Grace might possibly have a remedy if she were to suffer loss in consequence. Trustee's Power to Mortgage 21 Section 82 of the Trustee Act 1925 authorises the court to authorise a trustee to effect improvements on land, up to an amount nominated in the Court order, and to raise that amount by mortgage of the land. There is also a power in section 82A of the Trustee Act 1925, which says: "(1) Where any leasehold or freehold land is vested in a trustee and in the opinion of the trustee it is expedient in the interest of all persons beneficially interested in the land to expend capital moneys subject to the trust for any one or more of the purposes specified in paragraphs (a) to (f) both inclusive of subsection (1) of section 82 the trustee may, without the authority of the Court, expend on all or any of such purposes capital moneys subject to the trust not exceeding in all the prescribed amount. (1A) For the purpose of subsection (1), the prescribed amount is: (a) in the case of a trustee other than the Public Trustee or a trustee company—$50,000 or 30% of the value of the land, whichever is the greater, or … " Section 82A(2) has the effect of allowing the trustee to mortgage trust land for the purpose of raising money to be expended under section 82A(1). 22 In the present case, the proposal is that it will be Mr Garrett who borrows the money which is needed to complete the building, and that the interest of the trust in the land will be used only as security, without a personal covenant. Because the trustees will not be spending money which is raised on mortgage, this proposal is not one which the trustees would have power to effect without Court approval under section 82A. For the same reason, the Court's power under section 82 does not apply to it. However section 81 Trustee Act 1925 is comfortably wide enough to authorise the proposal if the Court finds it expedient. 23 In the present case, it seems to me that it is desirable, in the interests of Grace, for the money to be raised on mortgage in the fashion proposed. The situation that she is now in, of living in an uncompleted house where the money to complete it is not available, might be one which she really ought not have been allowed to get into in the first place. It is not my task to decide whether there has been any breach of obligations towards her in getting her into that situation. However, the question of whether it is appropriate for money to be raised on mortgage needs to be approached bearing in mind the situation she is actually in now. It is highly undesirable, from a commercial point of view, for her capital which is tied up in the house and land to be in a less than optimally marketable condition, in consequence of the house not being completed. Further, from the point of view of her own welfare, it is highly desirable that she have the security of knowing that the Council will not be in a position to order her and her father out of the home they were living in. The enactment of section 14DA Trustee Act 1925 shows that, whatever might have been the situation before its enactment, it is now proper for the Court to take into account, in exercising power under section 81 Trustee Act 1925, considerations concerning whether the beneficiary of a trust has a secure right to use a dwelling house (in the expanded sense of section 14DA Trustee Act 1925) as a residence. I have discussed with counsel for the plaintiff that a consequence of it being Mr Garrett who borrows the money and expends it in improving land belonging to himself and his daughter is that a presumption of advancement will arise as to half the money so expended: she tells me Mr Garrett understands that. 24 The amount that is proposed to be raised is, now, an amount of $27,000. That amount is made up of the quotations for building work which have been received, together with some allowance for inflation, together with the legal costs which have been involved in these proceedings. 25 I propose to authorise the raising of a mortgage for $27,000. Removal of Trustee 26 I have dealt with the question of whether authorisation should be granted to the proposed mortgage first, because it is only Mr George Yiasemides' refusal to agree to that mortgage which is relied on as a ground for his removal. If I had not found that the mortgaging of the land should be carried out, in Grace's interests, there would not be any ground for removing him. 27 In circumstances where I am of the view that the mortgaging of the land is desirable, the power of the Court under section 70 Trustee Act 1925 falls to be considered. I accept that a trustee is not to be removed for every mistake or neglect of duty or inaccuracy of conduct - that he or she is to be removed only when the acts or omissions are such as to endanger the trust property or to show a want of honesty or a want of proper capacity to execute the duties, or a want of a reasonable fidelity: Letterstedt v Broers (1884) 9 App Cas 371 at 385-6; Nissen v Grunden (1912) 14 CLR 297 at 319 to 20. The fundamental criterion is the welfare of the beneficiaries: Re Estate of Roberts (1983) 20 NTR 13 at 16-17; 70 FLR 158. In the present case, Mr George Yiasemides, by declining to agree to the mortgage for a period of well over a year, has, in my view, engaged in conduct which endangers the trust property, and also demonstrates a want of proper capacity to execute the duties of the trust. For these reasons, it is appropriate that he be removed as trustee of the Bangalow land. 28 Mr Confos, being bankrupt, is also not a proper person to continue as a trustee of the Bangalow land. The reasons why a bankrupt is usually unsuitable to continue as a trustee are set out in Jacobs, Law of Trusts in Australia, 6th edition, paragraph 1562: "A bankrupt is in ordinary circumstances undoubtedly an unsuitable person to be appointed a new trustee. The temptations to misuse trust funds are greater in the case of a man in necessitous circumstances than in the case of a man of means. Furthermore, one who has not shown skill and prudence in the management of his own affairs cannot be regarded as a suitable person to mange the affairs of other people." 29 There is authority, in the High Court decision in Miller v Cameron (1936) 54 CLR 572 that a bankrupt trustee is unfit to act, which leads to a conclusion that it is possible for a bankrupt trustee to be removed, and replaced, by a registered deed under section 6 Trustee Act 1925. That power is not one which Grace or her tutor can cause to be exercised in the instant case, however, because it is Mr George Yiasemides, as the only other trustee, who would have the power to remove and replace Mr Confos by a registered deed. Thus it is necessary for the Court to remove and replace him. 30 There is evidence of the consent, and of the fitness, of the two proposed new trustees, Ms Thompson and Mr Peter Confos. I shall appoint them as trustees of the Bangalow land. Costs 31 There remains a question of whether there should be a costs order against Mr George Yiasemides. The case law shows various examples of situations where a trustee is removed from the trust, and is not allowed his costs out of the trusts estate, and may be ordered to pay the costs involved in the action: Attorney-General v Murdoch (1856) 2 K and J 571 at 573; 69 ER 910 at 911; Palairet v Carew (1863) 32 BEAV 564; 55 ER 222; Swanson v Dungey (1892) 25 SALR 87; Hunter v Hunter [1938] NZLR 520. 32 The circumstances in which a trustee who is so removed can be ordered to pay costs depend upon whether the litigation in which his removal is sought is in substance adversarial litigation, or whether it is litigation raising a question as a matter of administration of the trust: Murdocca v Murdocca (No.2) [2002] NSWSC 505. In the present case, it seems to me that the litigation falls on the adversarial litigation side of the line. 33 For those reasons, I shall order that Mr George Yiasemides pay the costs of the proceedings. Orders 34 There are various undertakings which Mr Garrett has proffered, and which I have taken into account in deciding that this is an appropriate case in which to authorise a mortgage of the trust property. The text of those undertakings I will set out in the orders. 35 The orders of the Court are: In these orders "the Property" is the land, buildings and improvements at 32 Tristania Street Bangalow, New South Wales, being Lot 76 in Deposited Plan 1031773, Folio Identifier 76/1031773. 1. George Andrew Yiasemides be removed as a trustee of the half share as tenant in common of "the Property", of which half share George Andrew Yiasemides and Michael Anthony Confos are the registered proprietors as joint tenants (the said half share hereinafter being called the "Bangalow Trust Property") and that Jacqueline Thompson be appointed in his place. 2. Michael Anthony Confos be removed as a trustee of the Bangalow Trust Property and that Peter Confos be appointed in his place. 3. These orders in no way affect the duties and responsibilities of George Andrew Yiasemides and Michael Anthony Confos as trustees of the trusts created by the will dated 12 March 1999 of the late Irene Garrett (also known as Irene Confos), concerning any assets other than the Bangalow Trust Property. 4. The Bangalow Trust Property vest in Jacqueline Thompson and Peter Confos as trustees for Grace Marie Garrett, on the same trusts as those attaching to the one-fifth share in residue given to Grace Marie Garrett by the Will of Irene Garrett made 12 March 1999. 5. The costs of these proceedings be paid by the first defendant. 6. The trustees be authorised to make their interest in the Bangalow Trust Property available as security for a loan of up to $27,000 to be borrowed by Mr Jonathon Thomas Garrett, and to be secured by a mortgage over the Bangalow Trust Property and over Mr Jonathon Thomas Garrett's remaining half share of the Property, on such terms as they think fit, for the purposes of Mr Garrett using the moneys so borrowed: (a) To pay for the carrying out of the essential works totalling $12,540 referred to in paragraph 11 of the affidavit of Jonathon Thomas Garrett sworn 23 February 2004; and (b) To pay the reasonable costs of these proceedings, on condition that any moneys received or recovered from the first defendant pursuant to order 5 in payment of those costs be used to reduce the moneys advanced and secured by the said mortgage. 36 I note the following undertakings given to the Court by Jonathon Thomas Garrett: (A) That he will liaise with the trustees of the Bangalow Trust Property and obtain their consent before drawing down any advance on the loan to be secured by the said mortgage over the Bangalow Trust Property and his share of the Property. (B) That he will give a written direction to the mortgagee bank that in the event that the mortgagee bank seeks to exercise a power of sale over the Property or the Property is sold for any reason, the mortgagee bank must deduct any moneys outstanding secured by the Mortgage from Mr Garrett's share of the proceeds of any sale of the Property and not from the share of the proceeds of sale referable to the Bangalow Trust Property. (C) That he will use his best endeavours to pay the loan secured by the said mortgage in accordance with the terms of the loan and to comply with the terms of the mortgage. 37 I also grant to any party liberty to apply. ********** Last Modified: 09/23/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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