KRNJULAC v LINCU

1. [1]

   BATHURST CJ: This is an appeal from orders made by a judge of the Equity Division of the Supreme Court, essentially ordering that the appellants transfer their interests in a property, Lot 32 in Deposited Plan 1823, being the whole of the land in Certificate of Title, Volume 2150, Folio 146 (the property), to the first, second and fourth respondents, as trustees for a trust for religious purposes (the Nazarene Church trust) and entering judgment against the appellants in favour of the respondents, as such trustees, in the sum of $467,134.37, being the amount due in respect of a mortgage over the property. I have used the expression “essentially ordering” as, with the greatest respect, some of the orders made by the primary judge are somewhat obscure. What I have set out above is their intended effect.

2. [2]

   It was not in issue that, prior to the events giving rise to the proceedings, the property was held by the then registered proprietors as trustees for the Nazarene Church trust, or that the trust was a valid charitable trust. The proceedings arose out of the transfer of the property from the then trustees, the first and second respondents and Mr Laza Krnjulac, to Mr Laza Krnjulac and his sons, the appellants, and the subsequent mortgage of the property to Community First Credit Union Ltd, to secure the sum of $470,000. It was alleged that the transfer was procured by the fraudulent breach of trust of Mr Laza Krnjulac. No allegation of fraud or breach of trust was made against the appellants. Nor was it alleged that they acquired an interest in the property with knowledge of the alleged breach of trust, or that they participated in a dishonest and fraudulent design by Mr Laza Krnjulac.

The pleaded case

1. [3]

   Because of the issues raised in the appeal, it is necessary to set out the pleaded case in a little detail.

2. [4]

   The amended statement of claim pleaded that the property was held upon the trust to which I have referred. It pleaded that the land was unencumbered. It then made the following allegations against Mr Laza Krnjulac, who was the first defendant in the proceedings below and the appellants, who were the second and third defendants in those proceedings:

3. [5]

   As I have stated above, there was no allegation of fraud against the appellants, nor was there any allegation of knowing receipt of trust property or knowing participation in a dishonest or fraudulent design on the part of the trustees. It was not in contest in the appeal that the case was conducted on the pleadings.

The primary judgment

1. [6]

   The primary judge held that the land was trust property and that Mr Laza Krnjulac fraudulently procured its transfer. Those findings were not disputed in the appeal. However, in holding the appellants to have the same liability, the judge effectively held that the appellants received the trust property with knowledge of the breach of trust. The finding was incorporated in the following paragraphs of his judgment:

Preliminary issues

1. [7]

   The primary judge made orders on 30 May 2014 and 16 December 2014. The appellants sought leave to appeal against the orders made on 30 May 2014 on the basis that the appeal against these orders was out of time.

2. [8]

   It is by no means clear that this is correct as the orders were essentially interlocutory orders having regard to Gerlach v Clifton Bricks Pty Ltd [2002] HCA 22; 209 CLR 478 at [6]-[8]. Further, on one view of the matter, the orders made on 16 December 2014 did not finally dispose of the proceedings, so those orders could also be classed as interlocutory. In those circumstances, leave to appeal against those orders would also be necessary.

3. [9]

   However, it was accepted at the hearing by counsel for the first, second and fourth respondents that leave to appeal should be granted. In those circumstances, the Court indicated that to the extent necessary, such leave would be granted.

4. [10]

   Mr Laza Krnjulac was not joined as a party to the appeal proceedings. He should have been. To accommodate this issue, the Court made the following orders at the conclusion of the hearing:

5. [11]

   Mr Laza Krnjulac has not filed submissions on the question of joinder or the merits of the appeal. In those circumstances, an order should be made joining him as fifth respondent to the appeal.

The appeal

1. [12]

   The appellants submitted that the findings of the primary judge went beyond the case that was pleaded and run at the trial. Counsel for the appellants submitted that the appellants, as volunteers, could only be liable to the extent that they retained their interest in the property or the traceable proceeds of it.

2. [13]

   The appellants submitted that it was not pleaded that, at the time the property was mortgaged, the appellants had knowledge of any breach of trust by Mr Laza Krnjulac. They submitted that there was no evidence that the appellants had received any benefit from the funds derived from the mortgage of the property.

3. [14]

   The respondents did not dispute these submissions. In their written submissions, they sought to support the reasoning of the primary judge without regard to the pleading issue. Counsel for the first, second and fourth respondents accepted that the findings in pars [88]-[92] of the judgment of the primary judge could not be supported having regard to the pleaded case and conceded that the appeal must be allowed.

Disposition

1. [15]

   It was not in contest that, apart from “where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on the pleadings”: Dare v Pulham [1982] HCA 70; 148 CLR 658 at 664. The importance of the pleadings in this context was emphasised in the well-known passage in the judgment of Mason CJ and Gaudron J in Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd [1990] HCA 11; 169 CLR 279 at 286-287:

2. [16]

   In the present case, it was not contended that the case was not conducted on the pleadings. Nor could it have been. When the trial judge indicated during argument the approach which was ultimately reflected in his judgment, counsel for the appellants immediately submitted that such an approach was outside of the pleadings.

3. [17]

   The difficulty which arose can be shown by one example. The primary judge, in reaching his conclusion, drew an adverse inference from the failure by the appellants to give evidence. However, the appellants admitted what was actually put against them, namely, that they were volunteers. On the case as pleaded, there was no reason for them to give evidence as to their knowledge of whether the transfer was in breach of trust.

4. [18]

   It follows that the primary judge was not entitled to decide the case on the basis that he did and the orders made by him against the appellants must be set aside.

5. [19]

   The question remains as to whether a new trial is necessary or whether this Court can finally dispose of the proceedings. The appellants submitted that as volunteers, they were required to account for so much of the trust property as remained in their hands at the time they acquired knowledge of the breach or the traceable proceeds of the trust property: Black v S Freedman & Co [1910] HCA 58; 12 CLR 105 at 109; Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230 (Heperu) at [139], [154], [163]; Sze Tu v Lowe [2014] NSWCA 462 (Sze Tu) at [142]-[145].

6. [20]

   The appellants accepted that they were bound to transfer their interest in the property to the present trustees of the trust. However, they submitted that it was not pleaded that they had knowledge of the trust at the time of the mortgage or that the grant of the mortgage constituted a breach of any obligation owed by them to the first, second and fourth respondents. They pointed to evidence at the trial to the effect that the proceeds of the mortgage were used by Mr Laza Krnjulac to purchase a business, Total Power Tools. There was no suggestion that the appellants had any interest in this business.

7. [21]

   None of the propositions referred to above, either legal or factual, were disputed by the first, second and fourth respondents. There was no submission by them that what was said by this Court in Heperu or Sze Tu was incorrect (cf Re Diplock [1948] Ch 465; Ministry of Health v Simpson [1951] AC 251) or that, contrary to the evidence of Mr Laza Krnjulac, the appellants derived a traceable benefit from the proceeds of the mortgage.

8. [22]

   Further, the appellants themselves did not contend that they were entitled to an indemnity in respect of their liability under the personal covenant in the mortgage.

9. [23]

   In these circumstances, it is appropriate to make the orders which were foreshadowed on a preliminary basis at the conclusion of the hearing. None of the orders affect the liability of Mr Laza Krnjulac, as found by the trial judge. So far as costs are concerned, although the appellants should have their costs of the appeal, having regard to the fact that they retained the same solicitors as Mr Laza Krnjulac at the hearing, no order for the costs of the proceedings at first instance should be made in their favour.

10. [24]

    In these circumstances, I would make the following orders:

    1. (1)

       To the extent necessary, grant the appellants leave to appeal from the orders made by Lindsay J on 30 May 2014 and 16 December 2014.

    2. (2)

       Grant leave to the appellants to file an amended notice of appeal, adding Mr Laza Krnjulac as the fifth respondent.

    3. (3)

       Appeal allowed.

    4. (4)

       Set aside Orders 5 to 14 inclusive of the orders made by the primary judge on 30 May 2014 and Orders 10 to 14 of the orders made by him on 16 December 2014 and, in lieu thereof, make the following orders:

    5. (5)

       Order that the first, second and fourth respondents pay the appellants’ costs of the appeal and have a certificate under the Suitor’s Fund Act 1951 (NSW) if eligible.

11. [25]

    Orders (1)(e)-(h) adopt the form of orders made by the primary judge which, insofar as they applied to the fifth respondent, were not challenged.

12. [26]

    LEEMING JA: I agree with Bathurst CJ.

13. [27]

    EMMETT AJA: This appeal is concerned with the appropriate relief to be granted in circumstances where a property held by Mr Laza Krnjulac and his two sons was mortgaged by them to secure an advance to Laza Krnjulac, who procured the mortgage by fraudulent breach of trust, though no allegation of fraud or breach of trust was made against the two sons (the appellants). Further, no allegation was made in the pleadings that the appellants acquired an interest in the property with knowledge of the alleged breach of trust or that they participated in a dishonest and fraudulent design by their father.

14. [28]

    The primary judge found that Laza Krnjulac had procured the transfer of the property to himself and his sons, and had procured the mortgage, by fraudulent breach of trust. His Honour ordered the appellants and Laza Krnjulac to transfer their interests in the property to the first, second and fourth respondents, who are trustees of the Nazarene Church Trust. There is no complaint about that part of the relief granted. However, his Honour also directed the entry of judgment against the appellants, in favour of those respondents, for the amount that was owing under the mortgage over the property. That is the relief that is in dispute in the appeal.

15. [29]

    In the course of the hearing of the appeal, counsel for the respondents accepted that certain critical findings made by the primary judge could not be supported in the light of the case pleaded by them, and conceded that the appeal ought to be allowed.

16. [30]

    I have had the advantage of reading in draft form the proposed reasons of the Chief Justice. I agree, for those reasons, with the orders proposed by his Honour.