Court makes orders in SMSF estate case

The deceased estate also included commercial properties located in Florida.  

On 6 December 2000, the court made a protection order pursuant to the Aged and Infirm Persons’ Property Act appointing Raymond Victor Perla (the deceased) manager of the whole of the estate of Matilda Perla (his sister). On 1 May 2003, Ian Allan McFarlane was appointed the manager of Ms Perla’s estate in substitution for the deceased. 

Mr Perla died on 21 April 2017. He left an estate owning assets in Australia and in Florida. The deceased made his last will and testament on 18 April 2012. Various dispositions made by the deceased in his will have proven to be a cause of disputation between the beneficiaries. Civil proceedings related to these disputes were commenced in 2018. 

On 27 October 2017, in respect of the Australian estate, probate of the deceased’s will was granted to Carmel Edwards and George Panuccio (the executors). Mr Panuccio has since ceased to act as an executor of the deceased’s estate pursuant to orders made in the related civil proceedings. 

In respect of the Florida estate, a Florida court appointed George Mantzidis, a Florida attorney, to be the personal representative in charge of administration according to the terms of the deceased’s will.

Rather than distributing the money direct to Ms Perla, Mr Mantzidis paid $US583,862.22 in three tranches in March, August and October 2018 into the trust account of the solicitors for the executors of the Australian estate on the basis they were to be held on trust for Ms Perla. 

The executors intermingled that money with the funds held by them in the Australian estate. The executors then used nearly all of the intermingled funds at the direction of Mr McFarlane to pay the debts and testamentary expenses of the Australian estate and to lend money from the estate to the Lonestar Trust, of which the trustee formed part of the estate. 

It is possible that that expenditure may have been in breach of trust in that, once distributed, the Florida monies were the property of Ms Perla, and not liable to pay the debts and testamentary expenses of the Australian estate. 

Further, the executors may not have had power to lend estate funds. Ms Edwards sought an order pursuant to section 56 of the Trustee Act 1936 (SA) (Trustee Act) that the executors be excused from personal liability for the potential breach. 

Mr McFarlane sought a similar order for the past receipt of the Florida monies and their use on behalf of the Australian estate. 

Mr McFarlane submitted that at the time of the deceased’s death, Rayvic Investments Pty Ltd, which was the trustee of the Lonestar Trust, was the proprietor of land at Ryans Road. Rayvic had borrowed funds from the Commonwealth Bank secured by a mortgage over the land and supported by a guarantee from the deceased. The loan was an interest-only loan. The balance was $517,000. Interest payments were made monthly by the deceased. They continued for some months after his death.

He submitted that at the date of the deceased’s death, Rayvic was indebted to the deceased in the amount of approximately $143,000. That debt increased to $146,282.54 as a result of the further payments made subsequent to the deceased’s death. Once those payments stopped, the loan fell into arrears and CBA made a demand on the executors. On the recommendation of their solicitors on 23 January 2018, the executors paid the arrears from the residue of the Australian estate in an amount of $23,000.

The loan balance was to fall due in April 2018. The executors’ solicitors recommended the loan balance be paid out of the residue which included distributions made from the Florida estate to Ms Perla. The executors paid $517,000 to CBA on the basis that it would be recorded as an inter-entity loan from the residue to Rayvic.

In addition, from 1 July 2017, the executors paid a number of different third-party unsecured liabilities of Rayvic. These payments amounted to $183,826.79. By making these payments, the Australian estate enabled third-party creditors to be paid in full and has stepped into their shoes, leaving the estate to bear the loss which will flow from the deficiency in the assets. The total of all funds advanced by the executors was $867,908.65. The executors caused a loan agreement to be entered into between Rayvic and themselves recording a loan in that amount, payable on demand made in writing, with no provision for interest or security.

The position of Ms Edwards was that the estate was an unsecured creditor of Rayvic for that amount.

Mr McFarlane submitted that the question of whether the estate was unsecured for the whole amount of the debt could not be determined in this action. While approximately $143,000 represents the debt as at the date of the deceased’s death and has always been unsecured, the estate, he said, might be entitled to an equitable charge over the proceeds of the sale of the Ryans Road land in the amount of $537,700.32 paid to the CBA in discharge of liabilities secured by the mortgage over that land.

As to $183,826.79 paid to discharge third-party debts, he submitted that the estate is very likely an unsecured creditor of Rayvic. He contended that if it is the case that the estate is ultimately found to be an unsecured creditor to the full extent of the $867,908.65, then the making of advances by the estate to Rayvic has had the effect of substantially increasing the exposure of the estate as an unsecured creditor of Rayvic with the result that the residuary estate is about $150,000 worse off than it would otherwise have been.

He contended that these matters should not be determined in these proceedings and he wished to preserve all rights of action in connection with this loss. Accordingly, he opposed the orders sought by Ms Edwards pursuant to s 56.

He submitted that if the executors were relieved from liability, it may impact any rights of action they have or the estate has against their legal and financial advisers. In these circumstances, the question of whether the executors ought to be relieved from liability for breach of trust should be addressed in any future proceedings in which the circumstances of the use of the Australian estate funds to discharge the Rayvic liabilities are more fully addressed, and after the issue is resolved of whether the estate is subrogated in equity to the security previously held by CBA.

Mr McFarlane said his position was different from the executors’ because their conduct related to the use of the funds of the estate to pay debts that were not debts of the estate, and insofar as funds were applied to discharge bank debt secured by mortgage, the funds were applied in a manner that did not protect the estate by ensuring a subrogation of the estate to mortgage securities.

He stated that he had merely agreed in principle to the application of distributions from the Florida estate being applied to discharge the CBA debt. He was not involved in the manner in which that was done, namely, with no steps taken to protect the estate by subrogation to the bank’s security and he was not involved in the use of estate funds to pay other third-party creditors of Rayvic.

Mr McFarlane submitted that if his conduct constituted a breach of trust, the court should be satisfied that he honestly and reasonably took the view that the debts and funeral and testamentary expenses had to be paid out of the residue of the deceased’s estate which was left to Ms Perla.

He also contended that he directed payment of distributions from the Florida estate to the executors of the Australian estate to be used in this way based on his belief that it would have no net impact on the ultimate benefit to be received by Ms Perla.

Mr McFarlane stated that it was now apparent that the funds from the Florida estate had been applied by the executors in a manner which reduced the residual estate of the deceased.

Ms Edwards contended that in receiving and using the distributions of the Florida estate to meet the debts and testamentary expenses of the Australian estate, the executors acted honestly and reasonably. In the case of the repayment of the Commonwealth Bank of Australia (CBA) loan to Rayvic, they did so not only on the advice of their solicitor but with the consent of Mr McFarlane.

Justice Tim Stanley stated that the facts in relation to the transactions were complex and not entirely clear.

“They raise a number of legal issues involving a number of parties, including the executors and their advisers,” Justice Stanley stated.

He accepted the submissions of Mr McFarlane and granted him an order pursuant to s 56 excusing him from liability for any breach of trust he may have committed in relation to the receipt and use by the executors of distributions from the Florida estate.

While Justice Stanley accepted that there was no real issue that the executors had acted honestly, he rejected the submissions of Ms Edwards on the basis that there may be evidence not currently before the court or evidence which is before the court which will assume a different complexion in the light of the potential for further evidence concerning their dealings with the estate.

“I do not have to decide now whether the executors have acted honestly and reasonably. I accept the submission of Mr McFarlane that to do so now would be premature,” he stated.

“If the interests of Ms Perla have been harmed by any breach of trust on the part of the executors, it would be wrong for the court to now grant relief to the executors pursuant to s 56 if that has the consequence of prejudicing any rights she had to recover any loss she may have suffered as a result of such a breach. None of this should be understood as precluding any subsequent application by the executors pursuant to s 56; however, I am not prepared to make any order at this stage.”

Mr McFarlane also applied for orders and direction by the court to facilitate the completion of the administration of the Florida estate.

Under Florida law, in order to complete the administration of the Florida estate and be discharged, Mr Mantzidis was required to file a detailed, and potentially expensive, final accounting for the estate with the Florida court.

However, Florida law provides that accounting may be waived by the estate’s beneficiaries by executing a formal written waiver. According to the court documents, the waiver is the usual practice of most Florida attorneys where there is no dispute about the administration and the beneficiaries have been kept informed of the status of the estate. It is quicker and cheaper than a full accounting.

Mr Mantzidis therefore requested that Ms Perla execute such a waiver. As she was not able to do so and Mr MacFarlane as manager did not have the power to do so, he sought orders from the court empowering him to waive Ms Perla’s right to a formal accounting of the Florida estate and to grant an indemnity to Mr Mantzidis. He also sought direction from the court to execute documents on behalf of Ms Perla for those purposes.

Justice Stanley agreed to make an order empowering Mr McFarlane to waive the right to a formal accounting of the Florida estate and to grant an indemnity to Mr Mantzidis. He also directed Mr McFarlane to execute documents on behalf of Ms Perla for those purposes.

“I am satisfied that in all the circumstances, it is appropriate that Mr McFarlane should be cloaked with those powers and directed by the court to exercise them. There is no other person who can exercise these powers on behalf of Ms Perla. I am satisfied that the exercise of the powers are in her best interests,” he stated.

“Her best interests would be served by the completion of the administration of the Florida estate and the distribution to her of the $US824,000 remaining in that estate. The timely completion of the Florida estate will be facilitated by the making of these orders and the direction for the exercise of the powers thereby conferred on Mr McFarlane.”

He also directed the executors that they should cause Rayvic to resolve to be wound up by way of a creditors’ voluntary winding up and to appoint the liquidator of Rayvic as trustee of the Lonestar Trust.