In brief – Family trusts can be set aside if settlement procured by fraud
A recent decision of the NSW Court of Appeal in Tjiong v Tjiong demonstrates that trustee misconduct will not be tolerated and that Australian courts will be willing to set aside a family trust if the settlement has been procured by fraud.
Acrimonious litigation between trustee of family trust and its beneficiaries
A fabricated pilot's log book, a mysterious bag of cigarette butts, a dusty pocket diary unearthed from storage and a bogus claim of medical malpractice are not the components of a traditional trust dispute. But, in Tjiong v Tjiong  NSWCA 201, each was a key piece of evidence in acrimonious litigation between the trustee of a family trust and the beneficiaries who accused him of fraud and misrepresentation.
While the trustee's performance in putting his defence from the witness box at first instance was neither Oscar-worthy nor polygraph-proof, the facts of this extraordinary case give a good insight into the law regarding the establishment of family trusts by fraud and the forcible removal of trustees from their role.
Trustee procures creation of trust by fraud
Dr Richard Tjiong was a well-regarded surgeon and lawyer, who had been appointed as executor of the will of his brother Dr George Tjiong. George's will left the whole of his estate equally to his children, Katrina and Lindsay, and appointed Richard as his executor.
In 2003, Richard informed Katrina and Lindsay that they should create a family trust, for two reasons: first, George had told Richard that he wanted Richard to establish a trust, and second, it would prevent significant tax liabilities arising on George's death. On his recommendation, and as George was by that time incapacitated by illness, Katrina and Lindsay agreed to the creation of the 'George Tjiong Family Trust', on to which assets of George's totalling A$1.3 million were settled. A company called 'Maroka', of which Richard, Katrina and Lindsay were directors, was appointed as trustee. The beneficiaries of the trust were George, Katrina, Lindsay and other family members.
Sadly, George died in January 2004. Shortly afterwards, Richard formed the view that he should distribute the capital of the trust as he wished. However, Katrina and Lindsay were of the opinion that George had wanted all of his estate to be left to them and they pressed for a distribution from the trust. With great reluctance, on 9 April 2004, Richard gave each of them a cheque for A$100,000, drawn by Maroka but postdated to 22 April 2004.
Trustee engages in misconduct and deciet
On 14 April 2004, Richard exercised the powers conferred upon him as appointer of the trust to remove Maroka as trustee and appoint himself as the sole trustee in its place. On the same day, he requested that Katrina and Lindsay return the cheques to him. They refused, and sought legal advice.
A week later, Richard informed Katrina and Lindsay that he had received a telephone call from a 'Mr Johnson' who had foreshadowed a large medical negligence claim against George's estate on behalf of his stepson, 'Kevin'. Various letters then flooded in, purportedly from Mr Johnson, explaining that Kevin had suffered brain damage after treatment by George many years earlier. Richard informed Katrina and Lindsay that no distribution could be made to them until this claim had been resolved.
Lindsay and Katrina became increasingly suspicious of the authenticity of the claim by 'Kevin', as well as Richard's actions in appointing himself as trustee. In February 2005, they commenced proceedings against Richard in the NSW Supreme Court, pursuant to which they sought various forms of relief, including the setting aside of the trust or, in the alternative, the removal of Richard as trustee. The application in this case was based on allegations that the trust had been established based on Richard's fraudulent misrepresentations, and that Richard's conduct as trustee had been unconscionable and warranted his removal.
Richard denied all allegations against him. He also brought a cross-claim against Katrina and Lindsay pursuant to section 85 of the Trustee Act 1925 (NSW), which provides that the court may relieve a trustee from personal liability for a breach of trust if the trustee has acted honestly and reasonably, and ought fairly to be excused for their conduct.
Trustee caught out fabricating evidence and lying to the court
Richard's cross-claim was good in theory. However, it went up in smoke as soon as he was cross-examined. The Court was unimpressed, to say the least, about Richard's credibility as a witness and found that he had acted deceitfully and with improper motives by:
- Fabricating a pilot's log book for his private plane in an attempt to show that he had met with George to discuss the establishment of the trust, when he had not.
- Fabricating the medical negligence claim by the 'Johnson' family in an effort to prevent or delay distribution of the trust fund to Katrina and Lindsay.
- Endeavouring to cast suspicion on Katrina as the instigator of the bogus medical negligence claim. The Court found that Richard had arranged for the sending of a letter to Richard's lawyer, which arrived in an envelope containing two cigarette butts in a plastic bag. The letter included phrases such as 'My health has gone bad rapidly, I want to straighten things out before I'm gone... the cigarette butts come from Katrina, there may be some DNA links.'
- Lying in his evidence to the Court about notes in an old pocket diary that his wife had allegedly found in storage in their apartment a few days into his cross-examination and that he said were contemporaneous notes of key events. They were not.
In reaching these conclusions, the primary judge held that Richard had been caught out in 'the most flagrant act of fabricating evidence' both during his trusteeship and in the course of the hearing.
Courts will set aside trusts created by way of fraud and remove trustees who have misconducted themselves
Richard ultimately decided to step down as trustee and compromise his cross-claim before final judgment was given. Noting that these aspects of the case had been compromised, the Court stated that, had that not been the case, it would have found that Katrina and Lindsay had relied on fraudulent misrepresentations by Richard to their detriment, and that their consent to the establishment and administration of the trust by Richard had been procured by Richard's fraud. This would have been sufficient basis to set aside the trust. Similarly, Richard's actions were of a category so severe that his removal would have been warranted.
NSW Court of Appeal upholds Supreme Court decision
Richard was not happy about the Court's dim view of him and he decided to take steps to restore his reputation. He appealed to the NSW Court of Appeal, applying to adduce further evidence to challenge the findings of the lower court regarding his credibility.
The Court of Appeal's judgment, handed down on 29 June 2012, made short work of Richard's application. Dealing largely with findings of fact and evidentiary issues, the Court reached the same conclusions as to Richard's credibility and upheld the findings of Palmer J.
As a tale of a trustee apparently seeking omnipotence but caught out in a labyrinth of lies, the case is fascinating. But it is more than that.
Although a binding decision on the points was not required, the judgment itself contains confirmation, first, that the Australian courts will be willing to set aside a family trust if the settlement has been procured by fraud; and, second, that trustee misconduct, even if not at the extremes of this case, will not be tolerated. Trustees partial to fabrications and falsehoods are therefore on notice: their flights of fantasy will be easily and permanently grounded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.