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Supreme Court 15 October 2002

Hankins v Lundy

[2002] NSWSC 955

Fraud & dishonesty
TRUSTS AND TRUSTEES BREACH OF TRUST WHETHER FRAUDULENT INFANT BENEFICIARY FAILURE BY TRUSTEE TO PAY BENFICIARY LIMITATION DEFENCE

Citation: Hankins v Lundy [2002] NSWSC 955
Court: Supreme Court of New South Wales, Equity Division
Date: 15 October 2002
Judge(s): Master McLaughlin

Background

The plaintiff was the granddaughter of a deceased testator who died in June 1974. Her father, one of the three children entitled under the will, had predeceased the testator by four months, and so the plaintiff and her brother inherited their father's one-third share between them. The plaintiff was accordingly entitled to one-sixth of the net estate, with the Stamp affidavit recording that entitlement as $2,362.37.

The defendant was the executor and trustee under the will. Rather than distributing the plaintiff's entitlement, the defendant transferred the principal estate asset, a residential property at Bellbird, to his then-wife for $8,000, the same value shown in the Stamp affidavit. His wife sold that property less than four years later for $14,900, almost double the purported purchase price.

The defendant's primary defence was that undisclosed debts of the deceased, including alleged gambling debts and misappropriated funds from a miners' lodge, had exhausted the estate and even required him to contribute funds of his own. The plaintiff, who had been an infant at the time of the deceased's death, received nothing from the estate and spent years after turning eighteen struggling to locate the defendant and obtain a response from him.

  • Whether the defendant, as trustee and executor, committed a breach of trust by failing to distribute the plaintiff's entitlement
  • Whether that breach was fraudulent, including whether information in the Stamp affidavit was knowingly false
  • Whether the defendant's claimed payments of estate debts were genuine and legally effective to extinguish the plaintiff's entitlement
  • Whether the sale of the Bellbird property to the defendant's wife was at an undervalue
  • Whether a limitation period defence under the Limitation Act 1969 barred the plaintiff's claim
  • Whether the defences of laches and delay applied
  • What compensation the plaintiff was entitled to, including interest

Decision

Master McLaughlin rejected the defendant's claim that the estate's debts exceeded its assets. The defendant offered no evidence beyond his own unsupported assertions to establish that the alleged debts, including gambling debts and lodge funds, existed or had been paid. The court found those assertions unreliable and insufficient to displace the Stamp affidavit's recorded surplus of assets over liabilities.

The court found that the information in the Stamp affidavit had been stated by the defendant to be false to his own knowledge at the time he swore it. The sale of the Bellbird property to the defendant's wife at $8,000, a price later shown to be significantly below market value given the resale at $14,900 within four years, was found to have been at an undervalue. These findings supported a conclusion that the breach of trust was fraudulent in character.

The limitation and laches defences failed. The plaintiff had been an infant beneficiary at the relevant time, and the court was satisfied that the defendant had not established grounds to invoke those defences against her claim. The plaintiff's difficulties in locating and communicating with the defendant after she reached adulthood were also noted.

On compensation, the court accepted the evidence of the plaintiff's expert, Mr Alexander, whose calculations were not challenged by the defendant. The court adopted the conservative investment basis as at 20 February 1996, the date the plaintiff first formally instituted proceedings (later abandoned), producing a base compensation figure of $30,836. Interest calculated at applicable Supreme Court rates from that date to judgment added a further $20,601.40, producing a total award of $51,437.40.

Orders Made

  • Judgment for the plaintiff in the amount of $51,437.40
  • The defendant to pay the plaintiff's costs
  • Exhibits returned

Key Takeaways

  • A trustee's bare assertion that estate debts exhausted available assets will not displace contemporaneous sworn documentary evidence of a surplus where no corroborating evidence is produced to support those assertions.
  • Where a trustee knowingly provides false information in a Stamp affidavit and sells the principal estate asset to a family member at an undervalue, a court is likely to characterise the resulting breach of trust as fraudulent.
  • Limitation and laches defences did not bar the claim of a beneficiary who was an infant at the time of the breach and who, after reaching adulthood, encountered sustained difficulty in locating and engaging with the defaulting trustee.
  • Compensation for breach of trust is not confined to the original monetary entitlement. The Supreme Court adopted an investment-growth methodology to calculate what the beneficiary's share would have been worth by the time proceedings were formally commenced, with interest running from that date to judgment.
  • Under s references apart, the Limitation Act 1969 did not assist a trustee whose conduct had been fraudulent, reinforcing the principle that fraudulent breach of trust attracts greater scrutiny of time-based defences.

Legislation and Cases Referenced

Legislation:
- Limitation Act 1969 (NSW)

Cases:
- Alamite Lubrequip Pty Limited v Adams (1996) 41 NSWLR 45
- Hagen v Waterhouse (1991) 34 NSWLR 308
- Hourigan v Trustees Executors and Agency Company (1934) 51 CLR 619