Petterson v Ross & Ors

Introduction

In this judgment I shall refer to the parties by their Christian names. No disrespect is intended to the parties who consented to the use of their Christian names during the course of the hearing.

This is an unfortunate family dispute. Diana, Lorenzo and Gianni are the three children of Romana who died on 13^th July 2008. By her will dated 21^st October 1988 she appointed Mr Petterson, the senior partner in Meikles, as her executor. She left her estate between her three children by means of a number of specific legacies. At one time the validity of the will was in dispute in that caveats were entered by Lorenzo and other members of his family. However it became clear that there was no effective challenge to the will with the result that probate was granted to Mr Petterson on 21^st June 2012.

The problem in this case arises primarily because there are not sufficient assets to discharge the liabilities without resort to the specific bequests. Thus there needs to be some form of abatement to the specific legacies in order to give effect to the bequests. I am asked in effect to determine the proportions in which abatement is to take place. There are also issues as to potential liabilities. The most important of these relates to a claim against the estate by Lorenzo and other members of his family for in excess of £75,000 in respect of wages for himself and other members of his family. Another disputed claim relates to a claim by Lorenzo’s wife (“Lisa”) for in excess of £31,921 in relation to services or work carried out as long ago as 2004.

As I indicated in the course of the hearing the beneficiaries are of full age and capacity. Accordingly, it is open to them to reach any agreement in relation to which assets should be used to discharge the debts of the estate. It is, to my mind, a great pity that they were not able to reach such an agreement. Apart from other factors it means that substantial costs have been incurred in these proceedings which will further diminish the estate. In the absence of agreement between the parties I am required to decide the case on the basis of the rules set out in the Administration of Estates Act 1925 (“AEA”). I do not have discretion to decide the case on the basis of what I believe is fair.

I am conscious that both Lorenzo and Gianni represented themselves at the hearing before me though they did have the benefit of legal advice earlier in the proceedings. Lorenzo’s submissions in relation to the abatement issue did not really address the legal issues that arise.

Romana’s assets/the specific bequests

Romana and her husband, Antonio came to England from Italy in about 1957. They had 3 children – Gianni, Lorenzo and Diana. Gianni was the oldest and Diana the youngest. Diana was born in 1968. In or about 1978 Romana separated from Antonio. They were divorced in 1984.

In her witness statement Diana goes into the family history in considerable detail. It is not necessary to repeat it for the purpose of this judgment.

Romana had a number of assets:

13KG was acquired in about 1985 and vested in Romana’s sole name. It was subject to a mortgage with the Woolwich Building Society. Diana lived with her mother at 13KG until she was 29 or 30 when she left to live with her then partner – Harold Shaw.

As at the date of Romana’s death 13KG was valued at £125,000 but was subject to a mortgage with £50,401.52 outstanding.

Under clause 2 of Romana’s will she bequeathed 13KG to Diana “free from any mortgage or Legal Charge to which the same may be subject at the date of my death”. As will appear below those words are of considerable importance.

13KG has recently been repossessed by the mortgagee. It is currently on the market for £115,950. The outstanding debt to the mortgagee is said to be £67,042.38 but there will be other costs involved. There may be a surplus of approximately £45,000 following the sale.

Romana acquired 15MS in about 1970. She ran a small business – Romana’s Café – from the downstairs. Sometime, probably in the mid to late 1980s, she permitted Diana to run her own business – a hairdressing salon from the four upstairs rooms. Access to the hairdressing salon was primarily through the café, though I was told during the course of the trial that there is an alternative side access. Diana continued to run her hairdressing salon until about 2012. No rent was paid by Diana to Romana though she helped her mother in other ways.

From about 1978 Romana employed Lorenzo at Romana’s Café. It is not in dispute that he was an employee and was paid a modest wage. The accounts drawn up in respect of the last 3 years of Romana’s life show that the business made a modest profit based on the limited wages that were paid. Lorenzo was the only employee. A summary of the accounts is in the table below.

Clause 7 of Romana’s will contains the bequest in relation to Romana’s Café. Under clause 7(i) she gives the goodwill, the stock in trade, the fixtures and fittings and vehicles as to 50% for Lorenzo, and 25% to each of Diana and Gianni. Under clause 7(ii) she makes it clear that the gift includes a gift of the freehold of the downstairs but (in distinction from the gift in clause 2) she makes it clear that the gift is “subject to any Charge or liability which may be subsisting at my death which shall not be discharged out of my residuary estate”

Under clause 7(iii) Romana directed her children to carry on the business at 15MS and further directed that it could only be sold as a going concern if all three children consented in writing.

Clause 5 of the will deals with the upstairs. Under that clause Romana devised the upstairs of 15MS to Diana together with a full right of access from Romana’s Café.

As at the date of Romana’s death 15MS (including the goodwill of Romana’s Café) was valued at £117,000. There is no up to date valuation though Gianni told me he felt it was now worth more than that sum. Following an informal phone call to the valuer he apportioned the value as to £87,000 for the downstairs (including the goodwill) and £30,000 for the upstairs. All of the beneficiaries were content for me to adopt that apportionment. There is an outstanding charge on 15MS in the sum of £770.89 in favour of the Legal Services Commission.

It is common ground that following Romana’s death on 26^th July 2008 there was a meeting at Mr Petterson’s offices in Ferryhill on 18^th August 2008. It was attended by Mr Petterson, Diana, Lorenzo, Gianni and Mr Stott the family accountant and the person responsible for drawing up the accounts. It was a relatively long meeting. Mr Petterson’s file note suggests it lasted 1½ hours. Lorenzo said it lasted for longer than 45 minutes.

It is common ground that Mr Petterson read out the will and explained its terms. It is common ground that there was a discussion about what would happen to the business. There is, however a dispute as to what, if anything was agreed. In the light of the wages dispute I decided that the appropriate course was to hear oral evidence from those present (except Mr Stott).

Before considering the oral evidence it is necessary to refer to the documentary evidence.

Following the meeting Mr Petterson made a contemporaneous file note which includes:

On 26^th August 2008 Mr Stott wrote a letter to each of the beneficiaries which includes:

Although the letter invited the parties to contact him if they had any queries there is no evidence that any contact was made.

Mr Petterson made a number of file notes in late 2008 about various matters relating to the estate. This includes a file note on 8^th(?) September in respect of a 42 minute attendance on Diana. No mention was made of any problem with the business.

Problems seem to have arisen by May 2009. By this time Diana had consulted solicitors. There is a file note dated 9^th May 2009 in which Lorenzo told Mr Petterson that an impasse had been reached and that he was not prepared to carry on working for half the profits. Alternatively he would seek redundancy plus wages from the estate. He was not prepared to pay rent.

In a letter dated 15^th December 2011 Hewitts on behalf of Diana say:

In his position statement dated 12^th March 2012 Gianni says that at the meeting it was agreed that Lorenzo would run the downstairs business on a 100% Profit and Loss basis. It was also agreed that a Deed of Variation would be drawn up but that Mr Petterson failed ever to produce it.

Lorenzo’s position statement is to much the same effect as that of Gianni. He says that the Deed of Variation was not drawn up because Diana refused to sign it. He also makes the point that he continued the business since his mother’s death in reliance on the agreement.

The oral evidence of Mr Petterson, Lorenzo and Gianni at the trial was broadly in accordance with the written evidence I have summarised above. All confirmed that there was an oral agreement at the meeting. None of them thought that Diana was acting under duress. They described the meeting as amicable. Mr Petterson had no recollection of the phone conversation the day after the meeting or of the face to face meeting referred to by Hewitts. Although he described the family as being “at odds” within a matter of weeks he does not now recollect any dispute over the business until his file note of 2009. Both Lorenzo and Gianni described the agreement in the same terms. Pending sale the business would be run by Lorenzo on a profit and loss basis. He would keep all the profits and be responsible for the losses. On sale the proceeds would be divided in accordance with the will.

Diana’s evidence was not consistent with the account contained in Hewitt’s letter of 15^th December 2011. She described herself as upset at the meeting. She could not think straight. She had no recollection of any agreement being reached, though she did remember a discussion about signing some kind of deed. She pointed out that her head was in a blur and that she had never been to a will reading before.

She said she did telephone Mr Petterson the next morning. She said she asked him to explain what had happened because she did not understand what had gone on. He did not go into detail of what had been discussed but did say that he thought it was fair. She said OK and good bye. She also said that she phoned Mr Stott but could not now remember what was said.

It is not in dispute that Lorenzo has continued to run Romana’s Café from the date of Romana’s death. From time to time he has received assistance from his wife – Lisa and his daughter – Chantelle. Unaudited accounts have been prepared on his instructions for the years ending 30^th June 2009 to the year 30^th June 2011. They may be summarised:

It can be seen that the turnover figure is comparable to the turnover prior to Romana’s death, the loss is accounted for by the huge increase in the figure for wages. When I asked Lorenzo about the wages he was unable to justify the figures in the accounts. He said that his wages were £15,000 and those of his wife and daughter under £8,000 each.

He said that there were no express discussions with anyone on the level of the wages or of the decision to employ his wife and daughter. As I understood the position his wife is a proprietor of a separate business as an Interior Design Consultant. Lorenzo said that the only discussions he had were the discussions at the meeting of 18^th August 2008.

None of the wages referred to in the accounts have actually been paid.

Lorenzo, Lisa and Chantelle have each submitted claims against the estate to the Employment Tribunal in respect of wrongful deduction of wages . The matter came before Employment Judge Garnon on 13^th May 2013. EJ Garnon stayed the proceedings until 31^st August 2013 and directed the parties to inform the Tribunal of the progress of this case by then.

In paragraph 18 of the Notes of the Discussion EJ Garnon expressed the view that the question of whether each claimant was a worker or an employee or neither could not be decided without deciding who became the beneficial owner of the business after Romana’s death.

In the final account prepared by Mr Petterson two of the “disputed” claims were expressly abandoned during the course of the hearing before me. The first was a claim by Lorenzo for £9,547.02 in respect of old invoices at Romana’s Café. In evidence Lorenzo explained that there was a misunderstanding. These invoices had been paid out of moneys belonging to Romana’s Café. Thus there was no further claim in respect of them. The second was a claim for roofing works to 13KG in the sum of £810. Mr Wigglesworth said the claim was not pursued.

However there remains a disputed claim by Lisa for £31,921.68 in respect of invoices which date back to July 2004. The invoices relate to work done at Romana’s Café.

Lisa is not a party to these proceedings although she was present in court throughout the hearing. Thus any views I express on this claim would not be binding on her. My provisional view is that any claim by Lisa would face very considerable difficulties. First the claim would appear to be statute barred. The claim should have been brought within 6 years and it is now more than 9 years after the work was carried out. Second it is by no means clear that there was ever any agreement between Romana and Lisa and/or what the terms of any agreement were.

I have set out the position in relation to 15MS in some detail because it is central to the dispute between the parties. I hope that if that dispute is resolved it will be possible to resolve this case without further substantial legal costs.

I have come to the clear conclusion that at the meeting on 18^th August 2008 there was an agreement between all of the parties in relation to the running of Romana’s Café. The agreement was, as Lorenzo and Gianni stated in evidence, that pending the sale of Romana’s Café it would be run by Lorenzo on his own behalf. He would be entitled to all of the profits but be solely liable in respect of any losses. When 15MS is sold the net proceeds of sale would be divided in accordance with the will.

I am satisfied that Diana agreed to this arrangement at the meeting and that she was not placed under pressure to agree it. She agreed with it willingly.

I am equally satisfied that although there was mention of a Deed of Variation the agreement was not conditional on such a Deed being executed.

My reasons for reaching this conclusion are as follows:

It follows in my view that Lorenzo is entitled to all of the profits from Romana’s Café until it is sold. It equally follows that Lorenzo is responsible for all of its liabilities between Romana’s death and the date of sale. This includes the claim for wages by Lisa and Chantelle. It follows that their claims for wages against the estate must fail. It equally follows that Lorenzo was not an employee or a worker. He was running Romana’s Café as a sole proprietor pursuant to the agreement reached on 18^th August 2008. It follows that his claim for wages must fail.

If I had thought that there might be a valid claim for wages I would have had considerable reservations about the amount claimed. As the accounts made clear the business supported a modest wage bill of some £7,000 per annum. It is difficult to see how without consulting the other beneficiaries or Mr Petterson, Lorenzo could possibly be entitled to increase the wage bill to over £25,000 per annum or (according to the accounts) over £35,000. In the absence of express agreement Lorenzo would have to rely on an implied agreement. For my part I cannot begin to see that such a huge increase could possibly be justified on the basis of implication.

It is not clear when or how Romana obtained 6OB. According to Diana’s statement Romana became the owner as a result of the divorce settlement. It is, however, clear that from a date shortly after their marriage Romana permitted Lorenzo and Lisa to live at 6OB. It is also not in dispute that they have lived there ever since without paying any rent to Romana.

Under clause 6 of the will 6OB is specifically devised to Lorenzo.

6OB was valued at £65,000 as at the date of the death. There is no up to date valuation.

Romana owned a “holiday home” known as Pic Inisco in Italy. Under clause 8 of the will this was specifically devised to Diana, Lorenzo and Gianni in equal shares. She directed that it should not be sold unless they all agree in writing.

The land has been valued at the modest sum of £8,980.33. It is to my mind somewhat unfortunate that the valuation of this modest piece of land cost £3,924.96.

Romana was entitled to two insurance policies which were originally taken out with Sun Alliance. It is common ground that these policies changed their name to Phoenix. In any event the net proceeds were £34,169.12 (£13,010.21 + £21,158.91). For reasons that are not clear these net proceeds have not been received by Mr Petterson as executor. They are, however included in the estate accounts as an asset of the estate. I am not in a position to comment whether it was correct to include them as an asset of the estate.

Under clause 4 of the will Romana gave “the proceeds of my Life Assurance Policy with Sun Alliance Insurance Company” to Diana.

It is to be noted that the gift is a gift of the proceeds of a singular policy rather than of 2 policies. I am told that the policy numbers of the two policies taken out with Sun Alliance are the same as the policy numbers of the two Phoenix policies but it is not clear to me whether on its true construction this gift refers to both policies or to just one and, if so, to which one.

This was not a matter debated before me at the hearing. However as neither Lorenzo nor Gianni had the benefit of representation it seems to me to be appropriate to raise it.

The matter is of some importance. If the proceeds of the policies are assets of the estate and only one is given to Diana the other will be part of the residuary estate which will affect the abatement calculation.

For present purposes I shall assume without deciding that it is correct to interpret the bequest as a bequest of both policies.

The estate accounts show that assets totalling £6,697.76 have been received by Mr Petterson as executor. These are not specifically devised in the will and have been used to defray the expenses.

Liabilities

Mr Petterson has helpfully prepared draft estate accounts at various times. The draft accounts “as at the date of death” show that this is a solvent estate. Liabilities are shown as £66,125.09 as against assets of £355,156.89.

The principal liability was the liability to discharge the mortgage on 13KG in the sum of £50,401.52. However there were other liabilities including £6,555.08 due to HSBC on the business account, a funeral account of £2,398, a water bill of £1,786.71, a tax bill of £1,511.02, and an accountant’s bill of £1,417.67. The other debts (including the debt of £770 due to LSC) were for less than £1,000.

However the accounts also highlight the problem in this case – the lack of liquid funds to discharge the liabilities. The only liquid fund in the hands of Mr Petterson was the £6,697.76 referred to above. Lorenzo and Gianni have taken the view (and maintained it up to the trial) that as Diana has received 13KG the £50,401 due under the charge should be payable out of that asset.

The current estate accounts show a significantly worse picture. They still show a solvent estate in that they show assets of £231,847 plus £48,907 in respect of the estimated net proceeds of sale of 13KG. However they show liabilities totalling £172,870.44. It is not necessary for me to comment on all of the items in the accounts but it is necessary to comment on some of them.

In my view it is misleading to enter 13KG as an asset worth £48,907. It should in my view be treated in the same way as in the accounts at death. That is to say its current value (£115,950) be entered as an asset and the difference added as an additional liability. The reason for this will appear below.

The list of liabilities contains a number of post death liabilities in respect of 13KG. Some of these have been paid by Diana and some have not and are still “to pay”. Individually the items are not large but cumulatively they come to a sum in excess of £2,000. I did not hear argument over the items during the hearing. However as 13KG was the subject of a specific bequest I am far from convinced they ought to be treated as liabilities of the estate. I note that Diana abandoned her claim in relation to the roofing contractor. My provisional view is that these other claims fall into the same category.

I have already commented that this debt is charged on 15MS.

For the reasons set out in section 2.2 above this claim which is shown at £75,112.60 is without merit and should not be included as a liability.

For the reasons set out in section 2.2 above my provisional view is that this claim which is shown at £31,921.68 is likely to fail. In my view Mr Petterson should invite Lisa to withdraw it or at least to deal with the obvious limitation and contractual problems that it faces.

In the event that Lisa refuses to withdraw it and/or fails to satisfy Mr Petterson that she can overcome its difficulties Mr Petterson will have to apply to Court for directions as to whether it should be admitted or rejected. Lisa should be warned that if she persists in the claim and a further application to court is necessary the court could order her to pay the costs of the application.

In the estate account sums totalling £5,398.96 are included in relation to valuation and court fees. In addition costs of £11,375.28 were included up to the issue of proceedings and £17,817.60 in respect of costs following issue. The total of these three sums is £34,591.84. At the trial Mr Petterson produced a rather more detailed estimate of costs totalling £45,955.84. Thus the costs are £11,364 more than the sum in the accounts.

I am, of course, not in a position to comment on the reasonableness of the costs claimed. The beneficiaries have a statutory right to an assessment. However it will be no doubt borne in mind that Mr Petterson has had to deal with the beneficiaries individually and has been involved in two sets of proceedings. Significant costs are inevitable.

It will also have to be borne in mind that this estate is by no means finalised. If the parties are not careful there is a risk that, like the litigants in Bleak House, the whole estate will been eaten up in costs.

Abatement

The rules as to abatement are contained in section 34(3), 35(1) and Part II of Schedule 1 of AEA. Under section 34 where the estate is solvent

It is to be noted that the Act uses the word “shall”. That means that the court has no discretion. As I noted above in the absence of agreement the court must apply the statutory rules.

Part II of Schedule 1 provides the order of application of assets of a solvent estate. Two of those are relevant. The second item is property included in a residuary gift. This would include in this case the £6,697.76 which was received by Mr Petterson. Conceivably if one or other of the Phoenix policies did not pass under clause 4 of the will it would include the proceeds of that policy.

The sixth item in the list is:

This would cover all the specific bequests in Romana’s will. Rateably according to value means value to the testator so that the probate value is taken and not any subsequent value. [See Snell’s Equity 32^nd Ed paragraph 32-042]

Section 35(1) deals with dispositions by will of property which at the time of death is subject to a charge. It operates

In that event the property is primarily liable for the payment of the charge.

There are in this case two charges. The important charge is the charge on 13KG. I have set out the relevant wording of clause 2 of the will above. In my view this wording is a clear contrary intention within the meaning of the Act. It follows in my view that contrary to the view of Lorenzo and Gianni the liability for the 13KG mortgage is not primarily to be discharged out of the sale proceeds of 13KG. It is a liability of the estate which is to be treated as the other liabilities.

The second (much smaller) charge is the £770.89 charge against 15MS. That charge is subject to the general rule in section 35(1) with the result that 15MS is primarily liable for that charge. It also follows that for the purpose of valuing 15MS for the purpose of the abatement it falls to be reduced by the £770.89. The value of each portion needs to be rateably reduced. That means that the value to Romana at the date of her death was £116,229.10. This is apportioned as to £29,802.34 in respect of the upstairs and £86,426.77 in respect of the downstairs.

The application of the above provisions to the assets in this case gives the following results:

This table gives the percentage of the liabilities not paid by assets in the residuary estate that have to be funded from the specific bequests. In so far as the relevant sums are not raised or paid by the persons entitled to them the asset will have to be sold.

As already noted these percentages are not conclusive. I have some doubt about the insurance policies noted above. Furthermore I have ignored the value of the contents of 13KG which were specifically bequeathed to Diana. If there is any significant value it out really to be brought into account.

Marshalling

Notwithstanding that the gift of 13KG was intended to be free of mortgage Woolwich have in fact discharged the mortgage out of the proceeds of sale of 13KG. This brings into play the principle of marshalling. The effect is that Diana is entitled to recoup or compensate herself out of the property which ought used to pay the mortgage before resort was had to 13KG. [See Snell paragraph 32-046].

It was for this reason that I indicated that in the estate accounts 13KG should be entered as an asset at its value with the liability to the mortgagee as a separate liability. I have equally included the value of 13KG at £125,000 in the above table.