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Charities & Not-For-Profits Law in Australia

Trustee Duties v Self-Interest – A Battle over Church Property

Posted in Compliance, General, Governance, Liability & Risk

York CathedralLast week, a NSW Supreme Court decision was handed down regarding the fate of a parcel of land on which a church building stands.  The findings of Lindsay J in this case serve as a timely reminder of the obligations and duties of trustees who hold property in their names, in this context, on behalf of a church body.

Facts of the Case

While some of facts of the case were contentious, the findings from Lindsay J paint a straightforward picture of the events that had occurred:

  • In 1978, five men, being members of a small congregation of Christians who worshipped under the name “The Apostolic Christian Church Nazarene-Sydney” (Church), purchased a property in Arncliffe, NSW (Land) for the purposes of enabling the congregation to worship and pray there.
  • While the Land was purchased in their five individual names, there was no doubt that the Land was purchased and used only for the advancement of religion.  The Judge was satisfied that the five individuals intended to hold the Land as trustees for the Church.
  • Out of the five trustees, two of them became the plaintiffs in the present case, one of them became the first defendant and the other two had passed away prior to the commencement of the proceedings.
  • In 2004, the first defendant transferred the title of the Land into his own name and the names of his two sons (who were also defendants in the proceedings).  The reasons the defendant gave for this action were: (a) he promised to pay the outgoings of the Land and (b) he had perceived an (unsubstantiated) threat that a congregation from Melbourne may try to take control or ownership of the Land.
  • The plaintiffs contended that they were tricked by the first defendant into signing documents that they had understood to be unrelated to the Land, but which were later used without their consent by the first defendant to form part of the transfer document that enabled him to transfer the Land to himself and his sons.
  • After the transfer was carried out, the first defendant granted a mortgage over the Land to a credit union to secure a loan (which his sons guaranteed) that he used for his own personal and business purposes.
  • The first plaintiff came to discover this and joined with the other plaintiffs to bring these proceedings against the first defendant and his sons, and asked the Court to transfer the Land into the names of the plaintiffs as trustees for the Church.

Findings

The Court did not hesitate to apply and reiterate long-standing legal principles regarding trustee duties and obligations to the facts of this case.  In summary, the Court held that:

  • Even though the Church was not a legal entity in and of itself (it was described as being “an unincorporated voluntary association of members”) and was without a written constitution or a trust deed, this did not mean that a trust of property held for its purposes was invalid. In fact, in this case, the Court easily found that property “of” the Church can be held by individuals on trust for church purposes.
  • The Land was acquired in 1978, and remains, impressed with a trust for the charitable and religious purposes of the Church, not for the benefit of particular individuals.
  • The transfer of the Land by the first defendant to himself and his sons was held to be a breach of obligations of a trustee.  The Judge found that the sons must have been aware that the Land was dedicated to charitable purposes and therefore found that they took title to the Land as constructive trustees for the Church. Furthermore, the fact that the defendants then immediately mortgaged the Land for their own private and business purposes was another breach of their obligations as trustees.
  • The Judge made clear that this misappropriation of the Land by the defendants did not deprive the Land of its character as land dedicated to religious, charitable purposes.
  • As trustees, the defendants were held to be liable to account for the trust property (that is, the Land) they had misapplied and were obliged to restore the Land to the Church.
  • The Court found in favour of the plaintiffs and made a number of orders, including a declaration that the plaintiffs, as trustees of the Church, were entitled to the title of the Land, an order that the defendants indemnify the plaintiffs against all claims that might be made by the mortgagee against the Land and an order that the defendants pay the plaintiffs’ costs.

As an aside, the Judge made a point to note the irony of the defendant’s case.  The first defendant’s evidence had cast him as a benefactor and protector of the Church.  The first defendant had suggested that the transfer of Land to him and his sons was part of his plans to “save the Church”, including “saving” the Land from a takeover from an interstate congregation.  The defendant did not produce evidence of this perceived threat.

Instead, the Judge found the first defendant’s primary motivation was out of self-interest, because he needed the Land as security for personal borrowings from the credit union. During cross-examination, it was revealed that even if the defendants had wanted to, at the time of the proceedings, they did not have the financial means to discharge the mortgage registered against the Land.  The Judge noted there is now a real chance that the Land could be lost to the Church if the defendants are unable to service the debt which would cause the Land to be exposed to a mortgagee sale.

Take Home Lesson

A trustee’s many duties and obligations concerning property it holds for the benefit of others cannot be treated lightly.  The law expects trustees to put their obligations and duties to the trust purposes above their own self-interests and motivations.

As demonstrated in this case, it does not matter whether the beneficiary is a small, informal group of persons (in this case, a small church congregation) or whether the beneficiary is a formal legal entity, a trustee must be very careful as to how it deals with trust property.

When breaches of a trustee’s duties have been uncovered, the Courts will not hesitate to make orders to undo the wrong, which could result in significant financial and other consequences for the trustee.

In this case, it is also important to note that the Court had no qualms with finding the first defendant’s sons to be “constructive trustees” (even though they were not members of the Church) because they would have been aware that the Land was dedicated to the purposes of the Church.  This is a lesson that teaches us to remain vigilant when dealing with property that you know or suspect is being held for others, because even if you are not a named trustee for the property, you may be subject to the fiduciary obligations of a trustee.