Stoker v Starr [2012] NSWSC 226

Supreme Court New South Wales

Medium Neutral Citation: Stoker v Starr [2012] NSWSC 226 Hearing dates: 27 February 2012 Decision date: 27 February 2012 Jurisdiction: Equity Division Before: Rein J Decision: Judgment against the first defendant for the misappropriated trust funds plus compound interest. Catchwords: EQUITY - trusts and trustees - misappropriation of trust funds by co-trustee

INTEREST - equitable right to interest - compound interest appropriate where trustee has misappropriated trust money for his own purposes Cases Cited: Harrison v Schipp [2002] NSWCA 213; (2002) 54 NSWLR 738 Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125 Murdocca v Murdocca (No. 2) [2002] NSWSC 505 Wallersteiner v Moir (No. 2) [1975] QB 373 Category: Principal judgment Parties: Lynette Mavis Stoker (first plaintiff) Annette Margaret Darragh (second plaintiff)

Clinton Henry Starr (first defendant) Sally Anne Starr (second defendant) Warren Brian White (third defendant) Representation: Counsel: D H Mitchell (plaintiffs) No appearance by the defendants Solicitors: Legal Minds No appearance by the defendants File Number(s): SC 2009/288264

ex tempore Judgment 1The plaintiffs, Mrs Lynette Mavis Stoker ("Mrs Stoker") and Mrs Annette Margaret Darragh ("Mrs Darragh"), are co-trustees of the estate of the late Mildred Starr ("the Estate"). Mildred Starr died on 9 May 1975. By her will she appointed her daughter, Gwendolyn Mildred Neild, as the sole executor and trustee of the estate, to whom she also granted a life estate. Probate of the will was granted on 10 October 1975. 2On 17 August 2004, the plaintiffs and Clinton Henry Starr ("Mr Starr") were appointed trustees of the Estate in place of Gwendolyn. Under the will, the residue of the estate was go to Mildred's sons, Charles Alfred Starr, Ronald Henry Starr and Leslie John Starr. The principal asset of the estate was a property at Haberfield. After Gwendolyn was admitted to a nursing home the property was sold in 2005 with net proceeds of some $923,000: see the first affidavit of Mrs Stoker dated 3 April 2009 at paragraph 16. 3The plaintiff's case is that Mr Starr, whilst acting as co-trustee, transferred approximately $450,000 from the Estate to himself, or his superannuation fund, for his benefit only. There is one qualification to that which relates to the purchase of some shares in a company called Green Planet Holdings Pty Limited to which I shall return. The plaintiffs claim that Mr Starr has failed to account for the monies that were taken by him and they seek judgment for the amount of $448,698 plus interest and declarations relevant to the matter. 4Mr Starr was, on the application of the plaintiffs, removed as a co-trustee by order of this Court on 20 April 2009. The matter was called this morning in Court and outside Court and there was no appearance by any of the three defendants. In addition to Mr Starr, there is joined as second defendant his wife, Sally Anne Starr ("Mrs Starr"), and the third defendant is Warren Brian White, who is Mr Starr's trustee in bankruptcy. 5There is evidence before the Court of service of the proceedings, including service of notice of today's date, on each of the defendants. So far as Mr White is concerned he has indicated, through correspondence between his office and the plaintiff's solicitor office, that he does not propose to take part in these proceedings: see the affidavit of Chelsea Louise Schaefer dated 27 February 2012, in particular annexure C to that affidavit. The third defendant advises in the email dated 13 September 2011 at annexure C that the administration is without funds and that the third defendant does not anticipate any recoveries to be made in the bankrupt estate of Mr Starr. The letter does refer to the fact that the bankrupt is yet to file a statement of affairs with the official receiver and that Mr Starr has not been discharged from bankruptcy. 6So far as Mrs Starr is concerned, she has indicated by a letter, Exhibit A, that she consents to declarations made against her in the proceedings on a particular basis, namely that the Court notes that it is not alleged that she had noticed that the monies claimed to have been received, through an account operated by her with her husband, were received or comprised trust funds and were subsequently disbursed in breach of trust. 7Mr Starr has not appeared in the proceedings at any time. He has, however, responded to Notices to Produce that have been served on him and has written to the Court on three occasions. I have had this correspondence marked as MFI 1, MFI 2 and MFI 3. The underlinings and handwritten additions to those documents should be ignored because they were copies provided from the brief of Mr Donald Mitchell of counsel, who appears for the plaintiffs in these proceedings. 8MFI 3 is a document contained within an envelope. Mr Starr, it appears, sent the letter to the Court in either August or September 2009 and claimed privilege in respect of the document contained within the envelope. Although I have had regard to the covering letter of what is called "A Statement of 12 August By Mr C Starr", I have not read the statement given two matters, firstly, that the letter claims that the document should not be read by reason of the privilege claimed and that any application for access to the document should be referred to Mr Starr and secondly, because he has not entered appearance in the case either by himself or through his trustee in bankruptcy and has not sought to advance in any proper form any defence of or explanation of his conduct; I can see no reason why the Court should have regard to the contents of the letter. 9I am aware, from what Mr Mitchell has said and from MFI 1 and 2, that documents have been sought from Mr Starr to assist the plaintiffs in establishing their case and it appears that there have been difficulties in obtaining documents from Mr Starr. 10In support of the plaintiff's case there have been filed and tendered today affidavits of Mrs Stoker sworn on 3 April 2009, 17 April 2009 and 10 November 2009. 11The evidence which is relied on supports the plaintiff's claims in these proceedings. The evidence establishes that Mr Starr was effectively given control of the Estate monies by his co-trustees, permitted to open bank accounts in the name of the Estate and indeed placed into one of those accounts monies obtained on the sale of the property to which I earlier referred. The evidence establishes that he was the person to whom the accounts were sent by the bank and the person who had access to the Estate's accounting records through the Internet and was able to make transfers of monies into and out of those accounts. It is clear from the material relied on that he transferred monies from those accounts established for the Estate into accounts and for purposes unconnected with the Estate. 12There is one exception to what I just said which relates to the Green Planet Holdings Pty Limited shares. An amount of $36,500, which was initially part of the monies transferred into the superannuation fund account run on behalf of the superannuation fund of Mr and Mrs Starr, was subsequently paid to Green Planet Holdings Pty Limited. In 2009 the remaining co-trustees sought orders from the Court in relation to those shares. There is some confusion as to the timing and degree of understanding that the plaintiffs had about the use of trust funds to purchase those shares. 13His Honour White J, on the application of the plaintiffs, ordered that the 18,250 shares were to be treated as assets of the Estate. In an email which Mr Starr sent to the plaintiffs on 21 April 2008, which is found in Annexure A1 to Mrs Stoker's affidavit of 10 November 2009, Mr Clinton said: "The investment in Green Planet Holdings Pty Limited was effected with agreement from Lynette, Annette and Gwen Neild at the time of making the investment in 2005. Since it was an unlisted equity investment I undertook to underwrite the capital as protection. My position in the company was completely known and declared to my wider family." 14The shares were not issued at the time of the payment of the $36,500 and there is no evidence to establish that the shares were in fact paid for. 15Although there is a real issue about the degree to which these matters were properly explained by Mr Starr to the plaintiffs, in view of the fact that an order was made that these shares are trust assets, I think it follows that the $36,500 that was paid must be treated as being paid to purchase those assets, though even at that time, those assets were very unlikely to be worth anything like $36,500 and had a nominal face value of $1 per share. Leaving aside the $36,500, I am satisfied on the evidence before me that Mr Starr has wrongly removed assets of the Estate and appropriated them to his own personal benefit. Accordingly, the plaintiff is entitled to judgment against Mr Starr for the amount of those misappropriations. 16I have also, in addition to Mrs Stoker's affidavits, an affidavit of Mrs Darragh sworn on 4 April 2009 and another sworn on 9 November 2009. I am satisfied that neither Mrs Stoker nor Mrs Darragh had any knowledge of the misappropriations by Mr Starr. There is evidence that the plaintiffs became aware that what they had previously understood had happened with the funds had not occurred, but their endeavours to ascertain precisely where the money had gone were met with obfuscation and deception by Mr Starr. It was only after considerable correspondence, including letters from their solicitor, that the plaintiffs came to appreciate that the monies had not only been taken out of the National Australia Bank but had not been placed in any fund accessible to the Estate. 17I also should note that to proceed against the bankrupt Mr Starr it is necessary for the plaintiffs to obtain leave of the Federal Court. The plaintiffs have indeed sought and obtained leave by the Federal Court and a copy of the orders made by Jacobson J on 22 June 2011 are in evidence as Exhibit B. 18So far as the $36,500 is concerned, Mr Mitchell accepted that in view of the fact that the Estate has sought and obtained orders in relation to the shares in question being trust assets, there is an obstacle to including that amount in the claim for misappropriated funds. However, Mr Mitchell then sought to rely on the guarantee that Mr Starr himself refers to in his email of 21 April 2008. I have granted leave to the plaintiff to amend the Amended Statement of Claim to include a claim based upon the guarantee with the repayment of the guaranteed monies being due from the time Green Planet Holdings Pty Limited was deregistered on 7 February 2011: see Exhibit C. I think it is appropriate to grant leave because not only is the defendant on clear notice of the proceedings and has taken no steps to defend them, but there is no increase in the amount that is being sought, rather, it is a reformulation of the way in which the claim is put. 19Mr Mitchell has prepared a proposed alteration to the Amended Statement of Claim in the form of paragraphs 4(A) and 28(A). The problem with this amendment, however, is that it is not the subject of approval by the Federal Court for the action against the bankrupt to proceed and the trustee in bankruptcy and bankrupt has no notice of it. 20It seems to me there is a reasonable basis for the claim on the guarantee but it cannot proceed because leave has not been obtained. I think that any claim against Mr Starr based on the guarantee should be stood over to a time, which would be fixed shortly, to enable the plaintiffs, if they so wish, to advance that claim after having sought leave from the Federal Court to do so, if they are so advised. 21Accordingly, it follows that the claimed amount of $36,500 and any interest on that amount must be excluded from the amount for which judgment is to be entered. Mr Mitchell has prepared a schedule of calculations which took into account the $36,500 in interest; deducting those amounts, which total $39,831.50, this brings the amount for which judgment should be entered down to $639,558.38. The rates of interest that have been applied in reaching that figure are the Court interest rates and a schedule of them is found as part of Exhibit D. 22Mr Mitchell has drawn my attention to the decision in the High Court in Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125. In particular, a passage appearing in the judgment of Mason CJ and Wilson J at [148], in which the following was said: "Equity has adopted a broad approach to the award of interest. It has long been accepted that the equitable right to interest exists independently of statute: Wallersteiner v Moir (No. 2) [1975] QB 373." This passage was approved in a decision of Campbell J, as his Honour then was, in Murdocca v Murdocca (No. 2) [2002] NSWSC 505 at [6]. 23I think in this case, in circumstances where a trustee has siphoned off money from the trust account for his own purposes, it is appropriate to award compound interest. Mr Mitchell is not in a position today to advance calculations based on compound interest. What I propose to do is to give liberty to the plaintiffs to advance a case for compound interest, should they be so advised, and to do so within a specific period of time, which I shall fix in a moment. It should be noted that of course any amount for compound interest to which the plaintiffs are entitled would have to take into account the amount already awarded on the basis of simple interest which is contained in the calculations. 24So far as the plaintiffs' claim for indemnity costs is concerned I have given consideration to the indication by the Court of Appeal that in considering whether or not special orders should be made against a party it is necessary to look at the conduct of the party in the proceedings rather than the conduct which led to the proceedings: see Harrison v Schipp [2002] NSWCA 213; (2002) 54 NSWLR 738. 25Mr Mitchell pointed to the failure of Mr Starr to admit matters and to assist the plaintiff by making admissions and providing documents. I do not think that is sufficient conduct to entitle an award for indemnity costs. I should say that I think that the conduct prior to proceedings is in effect taken into account by the award of compound interest as opposed to simple interest. I do not think that it is appropriate to, in addition, award indemnity costs against Mr Starr in the light of the approach taken by the Court of Appeal in Harrison v Schipp . 26Given the seriousness of the matters before the Court and without any way of indicating any conclusions about which, if any, provisions of the criminal law of this State have been breached, I think the matter is one that should be referred to the Director of Public Prosecutions for consideration of the conduct of Mr Starr and I propose to direct the Registrar in Equity to write to the Director of Public Prosecutions enclosing a copy of the judgment and advising the Director that exhibits have been retained by the Court and that access can be provided to him should he wish to obtain copies. MFI 1, 2 and 3 should also remain on the file. 27The balance of the proceedings, therefore, are stood over until Tuesday 29 May 2012 at 9.30am.