Trani v Trani [2018] VSC 274
Snapshot
Trani v Trani is a remarkable case that demonstrates that, even when correcting wrongs through the legal system seems difficult, there is always a path for the aggrieved party to seek justice.
If you are a party to a discretionary trust and you have or have had problems in the past with other parties, this case may be relevant for you.
Outline of case
Proving misconduct in discretionary trusts
The trustee of a discretionary trust has broad discretion to decide when and how to distribute income or capital to beneficiaries. While trustees are expected to consider all potential beneficiaries, it is extremely difficult for a disgruntled beneficiary to challenge their decision. Courts rarely infer misconduct from a trustee’s failure to provide reasons, leaving beneficiaries to rely on circumstantial evidence.
Patrizia Trani’s efforts to prove misconduct
Trani v Trani is an exceptional case where the application of legal principles led to an unexpected outcome. Patrizia Trani lost control of a family discretionary trust to her brothers, Luciano and Marco, who were supposed to share the benefits equally. After a dispute, the brothers ousted her, liquidated the trust’s valuable property, and split the proceeds, leaving her out. Usually, recovering control or a share is challenging unless there’s an issue with the paperwork or evidence of the trustees’ bad faith. However, such evidence is hard to prove as only circumstantial evidence can be used, due to discretionary trustees having the right to confidentiality over their reasons for decisions.[1]
The key issue in this case is whether the evidence brought supported Patrizia’s claims that her interests were improperly disregarded, and that decisions made in bad faith and for an improper purpose by Marco and Luciano, who were driven by animosity and self-interest.
Patrizia was backed by court
The Court found, based entirely on circumstantial evidence, that the corporate trustee’s actions were driven by bad faith and improper purpose—a rare decision, as circumstantial evidence is seldom this compelling.
Bases Upon Which a Trustee’s Exercise of Discretion May Be Attacked
The following are bases upon which the court can impugn the exercise of trustee discretion:[2]
Bad Faith
-
- Definition: ‘A refusal to make an informed decision, making a decision for an ulterior motive or purpose, and a failure to take relevant considerations into account.’[3]
- Application in Trani: Evidence showed Marco and Luciano harboured animosity towards Patrizia, influencing their decision to exclude her.
Improper Purpose
-
- Definition: Exercising discretionary powers for purposes other than those intended by the trust instrument.
- Application in Trani: Trustees acted to enrich themselves at Patrizia’s expense, deviating from the trust’s purpose ([193], [207], [208]).
Failure to Give Real and Genuine Consideration
-
- Definition: Trustees must actively consider the interests of all beneficiaries.
- Application in Trani: The court found no evidence that the trustees genuinely considered Patrizia’s interests ([194], [207(h)], [211]).
Consideration of Irrelevant Matters or Ignoring Relevant Matters
-
- Definition: Taking into account factors that should not influence the decision or failing to consider pertinent factors.
- Application in Trani: Trustees ignored Patrizia’s status as a primary beneficiary and her contributions to the trust ([207(g)], [208]).
Acting Capriciously or Irresponsibly
-
- Definition: Making arbitrary decisions without reasonable justification.
- Application in Trani: The hasty winding up of the trust, despite alternatives, was deemed irresponsible ([207(i)]).
Resulting in a Grotesquely Unreasonable Outcome
-
- Definition: An outcome that is extremely unreasonable may indicate breach of duty.
- Application in Trani: Completely excluding a primary beneficiary was considered excessively unreasonable ([208]).
Ulterior Motive or Indirect Purpose
-
- Definition: Exercising discretion to achieve an outcome ulterior to the trust’s intentions.
Refusal to Make an Informed Decision
-
- Definition: Failing to adequately inform oneself before making a decision.
- Application in Trani: Trustees did not seek or consider relevant information about Patrizia or other beneficiaries ([207(c)], [207(g)]).
Onus of Proof
-
- Definition: The burden lies on the challenger to prove the trustees’ breach.[4]
- Application in Trani: Patrizia provided sufficient evidence to demonstrate bad faith and improper conduct ([212]).
Circumstantial Evidence of Bad Faith and Improper Purpose
Breakdown of Relationships:
-
- Patrizia provided extensive evidence of the irreparable breakdown in her relationship with her brothers, Marco and Luciano.
- The court found that the brothers acted with animosity so severe that they were willing to harm the trust and themselves just to harm Patrizia.
Example of Financial Detriment:
-
- Patrizia’s de facto partner offered to buy a trust property for $550,000, but the brothers rejected the offer.
- The property was later sold on the open market for $100,000 less, demonstrating a financially irrational decision driven by hostility.
Historical Evidence of Trust Intentions:
-
- Before the falling out in 2013, all three siblings, including Marco and Luciano, accepted that the trust was intended to benefit all equally as per their parents’ wishes.
- Despite their right to remain silent about their reasons for excluding Patrizia, the evidence overwhelmingly showed that Patrizia had not been genuinely considered for a distribution.
Scrutiny of Meeting Minutes:
-
- The minutes recording the decision to distribute trust assets were found to be misleading.
- Although the minutes stated the decision was made at the meeting and involved proper consideration of the trust deed and beneficiaries, the evidence showed otherwise.
- Marco and Luciano had decided to distribute to themselves well before the meeting and failed to genuinely consider Patrizia or other beneficiaries.
Accountant’s Testimony:
-
- The accountant admitted the resolution was simply read aloud during the meeting, with no substantive discussion about the distribution decision.
- Errors in the resolution and lack of discussion reinforced the impression that the meeting was superficial and contrived.
Conduct of Marco and Luciano:
-
- The brothers gave evasive and self-serving testimony, further damaging their credibility.
- Their denial of animosity was deemed implausible by the court.
- The haste with which they wound up the trust suggested a guilty conscience.
- Marco and Luciano’s exclusion of Patrizia from the trust assets, despite her status as a Primary Beneficiary and 10 year prior management of the trust, was motivated by hostility rather than relevant factors. Their actions ignored the default position of equal shares and exploited their control, amounting to bad faith.
- Although they might not have been motivated by greed itself, all factors, specifically gaining a payment each of over $600,000.00, is suspicious, when considering that both of them only have a moderate or no income.
- They believed their discretion over the trust was largely unfettered, and therefore, started acting in a hostile manner; charging Patrizia’s partner rent was one such example.
- Possible corruption – the rushed winding up of the trust, unnecessary and tax-inefficient, suggests possible guilt – Marco and Luciano’s claim that the trust needed to be wound up quickly due to the financial troubles of Latina was not justified, as it would have been possible to sell some trust properties to clear the bank debt while postponing the sale of others to achieve a more tax-efficient outcome. The urgency with which they chose to wind up the trust, despite it not being necessary, and the resulting adverse tax consequences for themselves, suggest they were motivated by a “consciousness of guilt.” Their actions raised suspicions about their true intentions in managing the trust [207]
- The lack of inquiry into beneficiaries’ financial circumstances suggests no genuine consideration of distributing assets beyond themselves
Court findings
-
- [196] – In Hindle v John Cotton Ltd, the Court emphasized that when determining abuse of powers, the state of mind and motives of those acting are crucial. The court can examine their intentions by considering the surrounding circumstances to determine whether the directors were acting in the company’s best interests or pursuing personal gain or other ulterior motives.
- The court determined that the trust’s decision to exclude Patrizia was motivated by animosity and self-enrichment
- They failed to properly consider the interests of all beneficiaries, particularly Patrizia.
- The decision was made in bad faith and for an improper purpose, rendering it invalid.
Outcome
-
- The court imposed a constructive trust, declaring that Marco and Luciano hold one-third of the trust fund for Patrizia and ordered them to transfer her share.
The Trani v Trani case highlights the courts’ ability to rectify injustices in discretionary trusts, even with challenging evidence. By proving bad faith and improper purpose, Patrizia secured her rightful share, setting a critical precedent for holding trustees accountable.
Please get in touch with Warlows Legal today using the contact information below and our team will assist you.
[1] Curwen v Vanbreck Pty Ltd [2009] VSCA 284; Mandie v Memart Nominees Pty Ltd [2014] VSC 290; Cohen v Amberley Corporation Australia Pty Ltd [2016] VSC 140; Re Londonderry’s Settlement [1965] Ch 918.
[2] Attorney-General (Cth) v Breckler (1999) 197 CLR 83; Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd [1998] FCA 51; Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association [1999] 3 VR 642; Karger v Paul [1984] VR 161.
[3] [173][g]
[4] [173][h]
