New South Wales Supreme Court CITATION : Coulton v Coulton [2008] NSWSC 910 HEARING DATE(S) : 24 April 2008 23 May 2008 JUDGMENT DATE : 4 September 2008 JUDGMENT OF : McLaughlin AsJ 1. I order that the notice of motion filed by the Fifth Defendant on 11 February 2008 be dismissed. 2. I order that the Fifth Defendant pay the costs of the Plaintiff of the aforesaid notice of motion. DECISION : 3. The exhibits may be returned. 4. I grant leave to the Plaintiff to file and serve on or before 18 September 2008 a further amended statement of claim. 5. I reserve to the parties liberty to apply in respect to costs, consequent upon the filing of such a further amended statement of claim and in respect to any application for variation of Order 2 hereof. 6. Stand over to Thursday, 25 September 2008 before the Registrar. CATCHWORDS : PRACTICE - application for summary dismissal - whether Plaintiff's claim discloses a reasonable cause of action - whether release of a fiduciary also effects a release of a person who knowingly participates in the wrongful conduct of the fiduciary - constructive trust - indefeasibility of title to land. LEGISLATION CITED : Real Property Act 1900 Water Act 1912 Barnes v Addy (1874) LR 9 Ch App 244 First and Merchants National Bank of Richmond v Bank of Waverly (8 June 1938) 170 Va 469, 197 SE 462 General Steel Industries Inc. v Commissioner for Railways (1964) 112 CLR 125 CASES CITED : Muschinski v Dodds (1985) 160 CLR 583 Baumgartner v Baumgartner (1987) 164 CLR 137 LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517 Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89 Dixie Martha Coulton (Plaintiff) Keith Alfred Coulton (First Defendant) PARTIES : Samuel Alfred Coulton (Second Defendant) Benjamin Keith Coulton (Third Defendant) David Boyd Coulton (Fourth Defendant) Kim Alexandra Coulton (Fifth Defendant) FILE NUMBER(S) : SC 1395 of 2007 Mr J. Garnsey QC and Ms J. Simpson (Plaintiff) COUNSEL : Mr D. Sturzaker (solicitor) (First, Second and Third Defendant) Mr F. Kunc SC (Fifth Defendant) RBHM Commercial Lawyers (Plaintiff) SOLICITORS : Gadens (First, Second and Third Defendant) Abbott Pardy and Jenkins (Fifth Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION ASSOCIATE JUSTICE McLAUGHLIN Thursday, 4 September 2008 1395 of 2007 DIXIE MARTHA COULTON –v- KEITH ALFRED COULTON and ORS JUDGMENT 1 HIS HONOUR: By notice of motion filed on 11 February 2008 the Fifth Defendant, Kim Alexandra Coulton, claims substantively an order that the amended statement of claim filed by the Plaintiff, Dixie Martha Coulton, be summarily dismissed as against the Fifth Defendant, pursuant to Part 13, rule 13.4 of the Uniform Civil Procedure Rules 2005. 2 The proceedings were instituted by statement of claim filed by the Plaintiff on 7 February 2007. Subsequently, amended statements of claim were filed on, respectively, 13 August 2007, and 20 August 2007 (which pleadings are in substantially identical form). 3 At the outset of the hearing of the present application the Plaintiff sought leave to file a further amended statement of claim. Although aware of the Plaintiff's intention in that regard, the Fifth Defendant objected to the filing of such pleading on the ground that it did not remedy any of the asserted defects in the amended statement of claim. 4 The First, Second and Third Defendants did not oppose the filing of the further amended statement of claim. Further, they neither consented to nor opposed the present application for summary dismissal brought by the Fifth Defendant. (For completeness, it should here be observed that the Fourth Defendant has filed a submitting appearance, and has played no active part in the proceedings.) 5 It should here be recorded that at the outset of the hearing before me I stated, and had it recorded, that I was acquainted with the Plaintiff professionally and that I was also acquainted with the Plaintiff's husband professionally. Those facts caused no problem to any of the parties for my hearing this matter. 6 It is appropriate that I should set forth, at least in summary, the factual background to the present application. 7 The substantive proceedings concern two partnerships which were formed respectively in 1967 and 1975 for the purpose of carrying out farming businesses for profit, on two properties, known respectively as Getta Getta and Alcheringa, which are situate in north-west New South Wales. 8 The first partnership, known as the Getta Getta Pastoral Company, was created by agreement dated 14 June 1967, between the Plaintiff, Dixie Martha Coulton; her father, Keith Alfred Coulton, the First Defendant; her mother, Patricia Martha Coulton (now deceased); and her brothers, Samuel Alfred Coulton, Benjamin Keith Coulton and David Boyd Coulton, being the Second, Third, and Fourth Defendants respectively. 9 The second partnership, known as the Alcheringa Irrigation Company, was created by agreements dated 22 and 23 September 1975 between the same foregoing natural persons, as well as a company known as Getta Getta Irrigation Company Pty Limited. The property known as Alcheringa was registered in the name of the Getta Getta Irrigation Company Pty Limited (which, at the relevant time, was a company under the control of the First Defendant). 10 The Fifth Defendant, who is the wife of the Fourth Defendant, was not a party to any of the partnership agreements. 11 The partnerships borrowed substantial sums of money from the Australia and New Zealand Banking Group Limited ("ANZ"), with personal guarantees and indemnities being given by the partners in respect to such borrowings. According to the Plaintiff, by 30 June 1995 the indebtedness of the partnerships to ANZ was in an amount of $15,259,979. 12 It would appear that in or about 1985 control of the partnerships passed (albeit, seemingly without consultation with other members of the partnerships) from the First Defendant to the Second Defendant. 13 It is alleged by the Plaintiff that the First, Second, Third and Fourth Defendants did not fully and frankly disclose, at least to her, all matters relating to the financial circumstances of the partnerships, and that, in consequence, they were in breach of the fiduciary obligations which they owed to the Plaintiff as a member of the partnership. Moreover, it is alleged by the Plaintiff that in about July 1995, the First to Fifth Defendants informed the Plaintiff, that, unless she relinquished her interest in the partnerships for no consideration, ANZ would enforce the guarantee which she had executed in its favour, thereby rendering her assets in jeopardy. 14 The Plaintiff executed a deed of assignment dated 31 October 1995, the practical effect whereof was that she relinquished her interest in various of the partnership assets. 15 Further, it is alleged by the Plaintiff that, in breach of their fiduciary obligations to her and without her consent, the First to Fourth Defendants caused the sale to the Fifth Defendant of partnership assets (including two blocks of Torrens title land, known respectively as Morella and as Martha's Block, and certain water rights appurtenant to those blocks). 16 It is alleged that the Fifth Defendant took possession of the foregoing land with notice of a breach by the other Defendants of their fiduciary obligations towards the Plaintiff. 17 The Plaintiff seeks, in effect, to set aside the deed of 31 October 1995. She also seeks declaratory relief against the Fifth Defendant regarding the foregoing land and the water licences appurtenant thereto. 18 It should at the outset be recognised that the allegations against the Fifth Defendant are minimal. They are contained in paragraphs 35 and 38 of the amended statement of claim. It is alleged that between 1993 and 1995 a number of meetings between the members of the partnerships took place, during the course of which the Plaintiff was repeatedly requested by the First, Second, Third, Fourth, and Fifth Defendants to relinquish her interest in the partnerships for nothing (paragraph 35). The only other allegation made against the Fifth Defendant relates to the meeting held in July 1995, to which I have made reference (paragraph 38). 19 I have had the benefit of receiving written outlines of submissions from Senior Counsel for the respective parties to the present application. Those documents will be retained in the Court file. 20 Despite the wording of the relief sought in the Fifth Defendant's notice of motion of 11 February 2008 ("that the Amended Statement of Claim be dismissed as against the Fifth Defendant"), it is apparent, not only from the reference to Part 13, rule 13.4 of the Uniform Civil Procedure Rules ("… in relation to the proceedings generally… the Court may order that the proceedings be dismissed generally…") but also from the submissions of the respective parties regarding the present application, that the Fifth Defendant is seeking not merely that the pleading be dismissed (either on account of its form, or for some other reason) but that the proceedings themselves as against the Fifth Defendant be summarily dismissed. 21 The principles relating to applications for summary dismissal where no reasonable cause of action is disclosed are well recognised. I need do no more that refer to the decision of the High Court of Australia in General Steel Industries Inc. v Commissioner for Railways (1964) 112 CLR 125, where Barwick CJ said, at 130, …great care must be exercised to ensure that under the guise of achieving expeditious finality a plaintiff is not improperly deprived of his opportunity for the trial of his case by the appointed tribunal. On the other hand, I do not think that the exercise of the jurisdiction should be reserved for those cases where argument is unnecessary to evoke the futility of the plaintiff's claim. Argument, perhaps even of an extensive kind, may be necessary to demonstrate that the case of the plaintiff is so clearly untenable that it cannot possibly succeed. 22 Consonant with the foregoing passage (especially the final sentence thereof) from the judgment of the Chief Justice, the fact that two Senior Counsel presented detailed arguments over one and half days does not of itself defeat the present application. 23 To the extent that the present application for summary dismissal is grounded upon the assertion that the pleading discloses no reasonable cause of action, it is proper for the Court to proceed upon the basis that the Plaintiff, at a final hearing, will be able to establish the various factual matters asserted in the pleading. It is not appropriate, therefore, in the present application for the Court to give consideration to any question of the evidentiary strength or weakness of the Plaintiff's case. 24 The present application is brought upon the following grounds. First, the Fifth Defendant submits that the principles of indefeasibility of title provided by section 42 of the Real Property Act 1900 will defeat the claim of the Plaintiff to any interest in the real property asserted to have arisen in consequence of a constructive trust. Second, that such indefeasibility extends to the water entitlements attached to that real property. 25 Third, it is the further submission of the Fifth Defendant that the release by the Plaintiff of the Fourth Defendant (who it will be recalled is the husband of the Fifth Defendant) by the deed of assignment, has the effect of also releasing the Fifth Defendant from the only liability asserted against her, being in the nature of an accessorial liability, and thus constitutes a complete defence to the claims of the Plaintiff against the Fifth Defendant, even if the facts asserted by the Plaintiff ultimately be proved. 26 The Plaintiff, however, contends that argument surrounding all of these matters would benefit from a more extensive consideration at a final hearing, and that these matters are thus inappropriate to be determined in a claim for summary dismissal. 27 I shall proceed to consider each of the foregoing grounds relied upon by the Fifth Defendant in her present application. 28 The essential complaint of the Plaintiff against the Fifth Defendant is that that Defendant holds certain property and water rights appurtenant thereto in consequence of the breach by the First, Second, Third, and Fourth Defendants of the fiduciary duties owed by them to their partner -the Plaintiff - and that the Fifth Defendant had full knowledge of such breach when she accepted the transfer to her of the real property and its appurtenant water rights. 29 It is asserted by the Plaintiff that the consequence of such knowledge on the part of the Fifth Defendant is that that Defendant holds such land on a constructive trust for the benefit of the Plaintiff. That constructive trust is asserted to arise in a manner consistent with the first limb of the principles recognised by the Court of Appeal in Chancery in Barnes v Addy (1874) LR 9 Ch App 244, where Lord Selborne LC (with whom James and Mellish LJJ agreed) said, at 251, Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort , or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust . But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. 30 In Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89, the High Court of Australia (in the joint judgment of Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ) accepted the correctness of the foregoing passage of Lord Selborne, saying, at 140, The form of liability referred to in the first part of the last sentence is often called the "first limb" of Barnes v Addy , and the form of liability referred to in the second part of the last sentence is often called the "second limb"… It has become common to describe the first limb as involving "knowing receipt" and the second limb as involving "knowing assistance". Lord Selborne LC did not use the expression "knowing receipt". It seems to have been employed first in 1966 by the editors of Snell's Principles of Equity (26 ed, p 202)… However, in 1972 Brightman J adopted the expression in Karak Rubber Co Ltd v Burden [No 2] [1972] 1 WLR 602 at 632 - 633. He said that the labels "knowing receipt or dealing" and "knowing assistance" employed by Snell were "an admirable shorthand description of their different natures". Those labels have been commonly used since then. In contrast, Lord Selborne LC's expression was "receive and become chargeable" (at 251). Persons who receive trust property become chargeable if it is established that they received it with notice of the trust. 31 It will be appreciated that in the instant case the relevant property was not trust property as such, but was partnership property. What is, however, being alleged against the First, Second, Third, and Fourth Defendants is that as partners they were in breach of the fiduciary obligations owed by them to another member of the partnership – the Plaintiff. To that extent, it is asserted by the Plaintiff that the principles relating to the breach of fiduciary obligations and the knowing assistance of another person in a dishonest and fraudulent design on the part of those owing such fiduciary obligations has equal application to the circumstances of the instant case. 32 Such a submission is clearly arguable, and, if ultimately accepted, would, by extension of the principles compendiously referred to as the second limb in Barnes v Addy, affect the beneficial ownership of the property transferred to and now held by the Fifth Defendant. 33 If the Plaintiff can ultimately establish an entitlement to relief against the Fifth Defendant consequent upon her knowing assistance in the breach of the fiduciary obligations of the other Defendants to the Plaintiff, then the concept of a constructive trust falls to be considered. 34 Where a plaintiff is able to establish a cause of action, a Court of Equity can always mould to the circumstances of the case, the relief to which that successful plaintiff is entitled. As was recognised by Deane J in Muschinski v Dodds (1985) 160 CLR 583, at 616, The principal operation of the constructive trust in the law of this country has been in the area of breach of fiduciary duty. Some textwriters have expressed the view that the constructive trust is confined to cases where some pre-existing fiduciary relationship can be identified: see, e.g., Lewin on Trusts , 16th ed. (1964: Mowbray ed.), p. 141. Neither principle nor authority requires however that it be confined to that or any other category or categories of case: cf., generally, Professor R. P. Austin's essay on "Constructive Trusts" in Essays in Equity , (Finn ed.) (1985), esp. at pp. 196-201; Waters, op. cit., p. 28ff. Once its predominantly remedial character is accepted, there is no reason to deny the availability of the constructive trust in any case where some principle of the law of equity calls for the imposition upon the legal owner of property, regardless of actual or presumed agreement or intention, of the obligation to hold or apply the property for the benefit of another: cf. Hanbury and Maudsley, op. cit, p. 301; Pettit, op. cit, p. 55. 35 It will be appreciated that the imposition upon a defendant of a constructive trust in favour of a successful plaintiff does not offend against the principles of indefeasibility of title. The legal title in the subject property continues in the person or entity who is the registered proprietor. Nevertheless, that registered proprietor will hold the legal estate for the benefit of the person in whose favour the constructive trust is imposed. 36 It is alleged by the Plaintiff that the Fifth Defendant received the real property with full notice of the breach of fiduciary duty owed to the Plaintiff by the Fourth Defendant, and that in consequence the Fifth Defendant is the constructive trustee of the real property, such a consequence constituting an in personam exception to the Fifth Defendant's indefeasibility of title. 37 In Farah Constructions, supra, the High Court of Australia had occasion to consider instances in which a constructive trust will operate as an in personam exception to indefeasibility. Their Honours said, at 171, The essential point on which Ashley A-JA differed from the majority in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 at 166 was put thus: "The proposition that an equity may be recognised and enforced so long as it involves no conflict with the indefeasability [sic] provisions has not prevented the High Court from imposing constructive trusts so as to recognise equities in cases where the transfer of real property was effected at different stages in the course of events giving rise to the equities." He referred to Bahr v Nicolay [No 2] (1988) 164 CLR 604, Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137. Earlier, Ashley A-JA had said, at 162, that the "necessary balance" between personal equities and indefeasibility was "disclosed by the judgment of Wilson and Toohey JJ in Bahr v Nicolay [No 2] " (1988) 164 CLR 604 at 637-638. However, as Pullin J pointed out in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517 at 571, in those cases "the defendant was the primary wrongdoer, attempting to ignore an obligation to share or convey the land with or to the plaintiff. In none of those cases was the defendant a party who merely had notice of an earlier interest or notice of third party fraud". There is no analogy between the constructive trusts involved in those cases and that which can arise from application of the first limb of Barnes v Addy . 38 Whether or not it can be established that the Fifth Defendant was the primary wrongdoer in the sense in which that phrase was used in, for example, LHK Nominees Pty Ltd v Kenworthy, at 571 is a matter which must be determined by evidence at a final hearing. 39 If it be established that the Fifth Defendant gave knowing assistance to the breach of the fiduciary obligations owed by the other partners to their co-partner, the Plaintiff, then, consonant with the principles recognised by the High Court of Australia regarding the concept of a constructive trust, in such cases as Muschinski v Dodds, supra, and Baumgartner v Baumgartner (1987) 164 CLR 137, then it is at least arguable that the property legally held by the Fifth Defendant would be impressed with such a constructive trust in favour of the Plaintiff 40 As I have already observed, it is not essential, in an application of the nature of that with which I am presently dealing, that the Plaintiff persuade the Court that she must of necessity succeed in establishing that she is entitled to have imposed upon the real property held by the Fifth Defendant (and the appurtenant water rights) a constructive trust of the nature which was recognised in the Court of Appeal in Chancery in Barnes v Addy and in such decisions of the High Court of Australia as Muschinski v Dodds and Baumgartner v Baumgartner. All that is necessary is that the Plaintiff establish that such a claim is arguable. I have no hesitation in expressing my conclusion that the Plaintiff does have an arguable case in this regard. 41 It was the submission of the Fifth Defendant that the water rights go with the land and cannot be severed therefrom. However, I consider that the Plaintiff' submission to the contrary, that the water rights are severable from the land, is at the least arguable. 42 In any event, I do not see how the principles of indefeasibility of title consequent upon provisions of the Water Act 1912 can be determinative of the entitlement (if she be able ultimately to establish such an entitlement) of the Plaintiff to have imposed in her favour a constructive trust in respect to the land and appurtenant water rights of which the Fifth Defendant is the legal owner. 43 There remains to be considered, however, the final submission of the Fifth Defendant, that the Plaintiff's claim should be summarily dismissed in consequence of the deed of 31 October 1995. It will be appreciated that the Fifth Defendant was not a party to that deed. However, the deed contained a release by the Plaintiff of the Fourth Defendant (who is the husband of the Fifth Defendant). By clause 5.2 of that deed, the Plaintiff, …releases David [the Fourth Defendant] from all or any actions, suits, causes of action, costs, interest, claims and demands whatsoever at law or in equity or howsoever arising, which one or others, jointly or severally may have against him arising out of or related to any fact, matter, event or circumstance predating this Deed. 44 It is submitted on behalf of the Fifth Defendant that there is no doubt that the transfer of the properties to her was within the contemplation of the parties at the time of the execution of the deed. The relevant contracts of sale were exchanged on 25 October 1995, thus predating the deed. 45 It is submitted on behalf of the Fifth Defendant that her alleged liability in equity (consequent upon the principles in Barnes v Addy and the imposition of a constructive trust upon property of which she is the legal owner, by way of remedying the position of the Plaintiff, is a liability in equity which is at most accessorial to the alleged breach of the Fourth Defendant's fiduciary obligations to the Plaintiff. Thus, so runs the argument of the Fifth Defendant, the release of the Fourth Defendant must also release any liability in this regard of the Fifth Defendant. 46 Senior Counsel for the Fifth Defendant in presenting this argument frankly conceded that there was no judicial authority which is precisely on point. The only analogous principles upon which the Fifth Defendant here relied concerned the situation of co-trustees where there was a release from liability of one of their number. It was acknowledged on behalf of the Fifth Defendant that such was not the situation in the present application, where the Fourth Defendant was asserted to be a fiduciary and the role of constructive trustee is sought to be imposed upon the Fifth Defendant by the Court. 47 However, the Fifth Defendant relied upon a 1938 decision of the Supreme Court of Appeals of the Commonwealth of Virginia, being First and Merchants National Bank of Richmond v Bank of Waverly (8 June 1938) 170 Va 469, 197 SE 462, that being an appeal from the Circuit Court of Sussex County. In that case it was held that, while the co-trustees were jointly and severally liable, the satisfaction of the cause of action made by one discharged the other, even though the parties did not intend to discharge the other joint wrongdoer. 48 However, the equation of co-trustees with joint tortfeasors made by their Honours in the Commonwealth of Virginia in 1938 has no warrant either in law or in principle, and totally misconceives the nature of the office of a trustee. 49 The dissenting judgment of Hudgins J in that case reveals a far greater understanding of the concepts of trusts and trustees and their obligations and liabilities. His Honour said (and I would respectfully agree), I do not think the same rule [as that applicable to tortfeasors] should be applied to the release of one of two fiduciaries for the loss of trust funds. The principles of law controlling the relation of the parties are different. 50 I am not persuaded, first, that the judgment of the majority in the Virginia case is correct, or, even if it were, that, by analogy, the principle upon which that decision was based would have the effect of discharging the Fifth Defendant from any liability which she might have incurred in consequence of her having knowingly accepted a transfer to her of property which had been relinquished by the Plaintiff by reason (as it is alleged) of the breach by the other Defendants of fiduciary duties owed to the Plaintiff. (In any event, it needs hardly to be emphasised that the Virginia case, which I consider to have been wrongly decided, is of no binding authority upon the Supreme Court of New South Wales.) 51 As I have already observed concerning the earlier grounds relied upon by the Fifth Defendant in the present application, it is not necessary that I should be persuaded that the Plaintiff must of necessity succeed in her claim against the Fifth Defendant. It is necessary only that, at this stage of the proceedings, I be satisfied that the Plaintiff has an arguable case. I am far from being persuaded that the inevitable consequence of the release of the Fourth Defendant is that the Fifth Defendant, if a knowing participant in the breach of the Fourth Defendant's fiduciary obligations to the Plaintiff is also thereby released from the consequences of her such knowing participation. 52 I am satisfied that the claim of the Plaintiff against the Fifth Defendant is arguable, and is not doomed to failure. It follows, therefore, that the present application of the Fifth Defendant must be dismissed. 53 It will be recalled that at the outset of the hearing the Plaintiff sought to file a further amended statement of claim. The Fifth Defendant opposed that application, not because of the form of that document, but because of its substance, which (so the Fifth Defendant argued) did not remedy any of the asserted defects of the Plaintiff's case against the Fifth Defendant, as identified in the present pleading. Since, in my conclusion, the Fifth Defendant has not succeeded in having dismissed the substantive claim brought against her, there is no reason why the Plaintiff should not, if she now so desires, file a further amended statement of claim, subject, of course, to any costs consequences which may flow from the filing of such a pleading at this stage of the proceedings. 54 I make the following orders, 1. I order that the notice of motion filed by the Fifth Defendant on 11 February 2008 be dismissed. 2. I order that the Fifth Defendant pay the costs of the Plaintiff of the aforesaid notice of motion. 3. The exhibits may be returned. 4. I grant leave to the Plaintiff to file and serve on or before 18 September 2008 a further amended statement of claim. 5. I reserve to the parties liberty to apply in respect to costs, consequent upon the filing of such a further amended statement of claim and in respect to any application for variation of Order 2 hereof. 6. Stand over to Thursday, 25 September 2008 before the Registrar. ********** 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.