Bufalo v Official Trustee in Bankruptcy - [2007] FMCA 1411

FEDERAL MAGISTRATES COURT OF AUSTRALIA

BUFALO v OFFICIAL TRUSTEE IN BANKRUPTCY & ORS

[2007] FMCA 1411

BANKRUPTCY – Application under s.178 of the Act – failure of trustee in bankruptcy to assign to the applicant choses-in-action regarding a Supreme Court proceeding – order sought for an assignment – intervention of the other parties to the Supreme Court proceedings to prevent an assignment – trustee’s requirements not met by applicant in order for trustee to be satisfied that assignment was in keeping with the trustee’s duties – whether applicant’s case in Supreme Court hopeless on questions of res judicata, issue estoppel and being time barred considered – duties of trustee considered – trustee’s omission in the first instance and eventual refusal to assign was justified – trustee’s demands and conditions for the assignment in the circumstances of the case justified – application dismissed – interveners unable to satisfy their onus of proof that applicant’s case in the Supreme Court is hopeless.

Bankruptcy Act 1966, ss.134(4), 178

Adsett v Berlouis (1992) 37 FCR 201
Bendigo Bank Ltd v Demaria & Ors [2001] VSC 218)
Citicorp v Official Trustee (1996) 71 FCR 550
Estate of Cirillo; Exparte Official Trustee in Bankruptcy (1996) 136 ALR 607
Finikiotis v Knight Frank (SA) Pty Ltd [2001] FCA 1733
Freeman v Joiner [2005] FCAFC 149
Gore v Justice Corp Pty Ltd [2002] FCAFC 83; (2002) 119 FCR 429
Healey v Poentice (No 2) [2000] FCA 1598
Knight v FP Special Assets Ltd (1992) 174 CLR 178
Macchia v Nilant (2001) 101 FCR 101
Milane v The President etc of the Shire of Heidelberg (1928) VLR 52
Re Cheesman & Ors v Waters (1997) 143 ALR 78
Willoughby v Official Trustee(WA)(No1) [2001] FCA 753

Applicant:

GIOVANNI BUFALO

First Respondent:

THE OFFICIAL TRUSTEE IN BANKRUPTCY

Second Respondent:

PRIMELIFE CORPORATION LIMITED

Third Respondent:

EDUARD CHRISTIAAN SENT

File Number:

MLG 154 of 2007

Judgment of:

O'Dwyer FM

Hearing dates:

13, 14 & 15 August 2007

Delivered at:

Melbourne

Delivered on:

14 December 2007

REPRESENTATION

Counsel for the Applicant:

Mr Bergland QC with Mr Pirrie

Solicitors for the Applicant:

Hunts Lawyers

Counsel for the first Respondent:

Mr Maiden

Solicitors for the first Respondent:

Aitken Walker & Strachan

Counsel for the second and third Respondents:

Mr Wilson QC with Mr Marzella

Solicitors for the second and third Respondents:

Russell Kennedy, Solicitors

ORDERS

The application filed on 14 February 2007 is dismissed.
The applicant pay the first respondent’s costs.
The question of costs in respect of the applicant and the second and third respondents is reserved. Liberty to the applicant and the second and third respondents to apply for costs.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 154 of 2007

GIOVANNI BUFALO

Applicant

And

THE OFFICIAL TRUSTEE IN BANKRUPTCY

First Respondent

And

PRIMELIFE CORPORATION LIMITED

Second Respondent

And

EDUARD CHRISTIAAN SENT

Third Respondent

REASONS FOR JUDGMENT

Introduction

Pursuant to s.178 of the Bankruptcy Act 1966 (the Act) the applicant seeks an order that the first respondent (the trustee) assign to him the choses-in-action arising out of or in connection with Supreme Court proceeding No 6668 of 1999 as set out in the third amended statement of claim filed in that proceeding.
The trustee is the trustee in bankruptcy of the applicant who as a consequence of the bankruptcy was vested with such choses-in-action. Even though the period of bankruptcy has concluded, the trustee remains vested in any choses-in-action arising from that proceeding.
The second and third named respondents (the respondents) are defendants to the Supreme Court proceeding. They were granted leave to be joined in this proceeding because of their manifest interest in its outcome as they are both competitors with the applicant for the assignment and stand to be affected by the order sought by the applicant.
Should the applicant successfully obtain an assignment, there is no doubt that he intends to pursue litigation in the Supreme Court against the respondents. Should the respondents successfully obtain an assignment, then by necessity the Supreme Court proceeding will come, once and for all, to an end.
The trustee, for the reasons set out below, defends its action; which was to eventually refuse a proposal from the applicant for an assignment. The trustee says its determination to refuse the proposal was justified for the reasons set out below.
The applicant maintains that he, and his father and brother for whom he also seeks an assignment, have a valid claim against the respondents that has been quantified at various amounts. It is understood, however, that should the applicant be able to proceed with his claim, one of the respondents has a counterclaim in excess of $8 million.

Background to this proceeding

There have been vigorous and protracted legal proceedings between the applicant and the respondents to date. The genesis for that litigation is a joint-venture entered into with the second respondent by the applicant, his father and brother and related companies. That joint-venture had associated with it various alleged arrangements and a loan, designed ultimately to effect the development of an aged care facility in Sale. Suffice to say, things did not proceed as the applicant and his father and brother anticipated, resulting in the bankruptcies of all of them. The trustee acted as the trustee of the estates in bankruptcy of all of those individuals.
The applicant was made bankrupt on 19 March 2002 and discharged on 20 July 2005. Prior to the bankruptcy, however, the applicant joined with his brother and father as plaintiffs in the Supreme Court proceeding seeking remedies against the respondents.

Upon bankruptcy, under the Act, as stated, the trustee was vested with any choses-in-action arising from the Supreme Court proceeding.
The Supreme Court proceeding has a significant history in its own right. The respondents, as set out below, highlight that history in support of their contention that the application should be dismissed as the applicant’s case is hopeless. The respondents seek a declaratory order to the effect that the trustee never assigned the choses-in-action to the applicant.
The Supreme Court proceeding in respect of the claims made by the applicant, his father and brother was dismissed by his Honour Justice Mandie on 29 October 2004.

Negotiations with the trustee for an assignment

Both the applicant and the respondents had been negotiating with the trustee for an assignment of the choses-in-action.
The mere fact that the respondents are seeking an assignment, the applicant submits, is counter to the respondents’ position that the applicant’s claims are hopeless. Simply put, the applicant says that they must have merit, otherwise the respondents would not be seeking an assignment. This argument carries, in my view, very little weight. There are clear commercial advantages to the respondents in obtaining an assignment; the most obvious being that the protracted and expensive litigation to date between the parties will come to an end. The prospect of further litigation, despite the respondents’ stated confidence in the outcome, would not have to be undergone at great cost in both time and the financial resources of the respondents in circumstances where the respondents suspect the applicant would not have the financial resources to pay any costs awarded against him at the end of a successful defence of the applicant’s claims.
Having made that point, it is helpful to set out a history of the applicant’s negotiations, as it is those proposals, or in particular the fifth proposal, and the trustee’s initial omission to act on that proposal and the later refusal of it, that is the justiciable issue for determination by this Court. I note that at times, during the running of the hearing, sight was lost to this fundamental point because of the arguments proffered by the respondents over the merit or otherwise of the choses-in-action sought to be assigned. Considerable time was taken at the hearing on these arguments by the respondents. Ultimately, subject to submissions, this reality may be reflected in an order for costs. As set out below, the respondents were unsuccessful in the position they prosecuted over the question of the hopelessness of the applicant’s case in the Supreme Court.

Negotiations with the Applicant

There have been five proposals put by the applicant to the trustee prior to the issuing of this proceeding, and a sixth proposal after. Each of the first five proposals had been rejected by the trustee, it would say, properly. A short chronology of the proposals is helpful.

The first proposal, made 20 December 2005

The applicant offered "$2000 together with a sum payable out of the judgment once obtained against the respondents, such sum equal to the amount owed to the creditors of the … Bufalos."
The trustee requested critical information as a precondition to its consideration of that request; namely details concerning the background of the action, a statement of claim setting out what the claim was, and copies of any legal opinions obtained in relation to the action (including any advice received as to the likelihood of success). While not necessarily determinative of whether the causes of action should be assigned, the trustee contends that such information is relevant to the exercise of its discretion. The trustee further contends that it would be negligent if it did not attend to determining whether the actions in question were manifestly hopeless. Having regard to the applicable law as set out below, the trustee’s stance in this regard, in my view, is both proper and reasonable.
The trustee's request for that information was refused by the applicant's father with whom the trustee had been communicating in respect of his own claims for an assignment and those of the applicant. The trustee informed the applicant that the proposal as put would be considered but without the information requested it was futile to think there was any significant chance of the proposal being accepted.

The second proposal, made 16 May 2006

The applicant proposed that the trustee obtain proofs of debt from all creditors, and provide him with those proofs. Following that proposed step, the applicant, again through his father, proposed that "we [will] then consider payment in full. The matter will then be finalised … we are not reliant on the proceedings to meet the payments to creditors, who provide satisfactory proof of debt (to our satisfaction)".

That proposal was clarified by a letter from the applicant’s father which said, "You refer to our proposal to 'pay all of the creditors'. This is not correct, what we did offer and continue to offer is to pay out all creditors who are ‘genuine’ creditors of all and any of the above bankrupts."
The proposal, from the trustee’s perspective, was inappropriate as it believed it was not the place of the applicant to determine which creditors benefit from an asset of the estate (viz, the proceeds of sale of the choses-in-action). The trustee felt that it could not enter into an agreement by which it purported to bind itself to act outside its statutory duties by subjugating its power to determine proofs of debt and distribution to creditors. The applicant was advised of this.
Additionally, because of the lack of funds in the estate, it would be inappropriate for the trustee to expend time and money proving the debts, particularly the second respondent’s proof of debt which was in excess of $8 million and which carried with it the portend of significant challenge and disputation.

The third proposal, made 9 August 2006

A third proposal was made in response to some of the conditions spelt out by the trustee. Those conditions set by the trustee included the following:
a)payment of $5000 upon execution of any agreement or assignment;
b)an additional payment (whether fixed or as a percentage of funds received);
c)provision of an indemnity in respect of legal costs;
d)advice received by the applicant as to the prospects of success of the actions to be assigned (which would, of course, necessitate identification of those actions); and
e)contemporaneous with the provision of the proposal and the advice, payment of at least $5000 to enable consideration of the advice and the proposal.
The trustee required the applicant, within seven days, to inform it as to whether he was prepared to make a proposal encompassing the above requirements. If he was, then that proposal was to be made by 31 August 2006.
Whilst not informing the trustee as to whether he was prepared to make a proposal encompassing those requirements, the applicant responded with a proposal in the following terms:
“Should the plaintiffs be successful in the proceedings, then as part of my proposal the creditors (of our estates) would be pay 100 cents of admitted claim. I am prepared to pay a total of $5000 for assignment/purchase of the proceeding which is to include your necessary costs of documenting the agreement. An appropriate indemnity will also be provided.”
It is to be noted that the trustee's requirements were not addressed and no payment to enable the trustee to obtain advice regarding the proposal was made. The trustee contends that it was in its power to require funding to obtain legal advice concerning the proposal and that in the circumstances of this particular case, it was particularly appropriate. The trustee highlights that the litigation was complex; it has been hard fought and replete with interlocutory skirmishes with uncertain impact in respect of the long-term rights of the parties.
A very significant consideration for the trustee has been the financial reality in which it found itself as much was being demanded of it in circumstances where there are no funds in the estates of the applicant, or his brother and father from which to draw to meet, it would say, necessary legal costs for advice to ensure the probity of its actions.
In my view, having regard to the resources of the estate, the requirement by the trustee for funds was both in keeping with the law as set out below and reasonable.

The fourth proposal, made 5 September 2006

A fourth proposal was put on behalf of the applicant on 5 September 2006. The trustee's requirements were not addressed in that proposal, nor was any payment received. In any event, that proposal was soon replaced.

The fifth proposal, made 18 October 2006

By his fifth proposal, the applicant offered:
“… to pay 100 per cent of those creditors whose debts are proved, to pay your client's legal costs to date up to the sum of $30,000 payable by an immediate payment of $10,000, with the balance payable within two days of receipt of copies of your client's legal fees accounts and to indemnify your client in relation to any future cost …”
The trustee found the fifth proposal more appropriate than those that had preceded it. It did not, for instance, purport to discriminate between creditors. The concern for the trustee had always been that the second respondent, which had filed a proof of debt, should it have proved its debt, would have been excluded from payment under the discriminatory proposals put prior to the fifth proposal, but would now receive payment under the fifth proposal. To that extent, therefore, the trustee looked more favourably upon the proposal.
However, again the trustee's requirements were not met. Further, given the scope of the proposal (which might have required payment of an amount up to or above $9 million should all the proofs of debt lodged be proved), it would have been reasonable to expect the applicant to have, in the mind of the trustee, provided some indication of how he proposed to fund it. The trustee highlights that the applicant had been aware for some months beforehand that the second respondent had submitted a proof of debt in excess of $8 million.
The trustee wrote in response to the fifth proposal to the applicant's solicitors and informed them that the proposal was under consideration. In the following three months the trustee also considered a proposal submitted by the respondents.
However, the trustee decided to decline the fifth proposal, which decision was communicated to the applicant by a solicitor's letter dated 7 June 2007, which set out two reasons:
“(a) [The Trustee] is not satisfied that [the Bufalos] have sufficient assets to stand behind proffered indemnity in respect of costs in circumstances where [the Bufalos] will be conducting complicated Supreme Court proceedings against a number of parties, which proceedings will be vigorously contested. [The Trustee's] potential exposure to costs could therefore be very substantial if [the Bufalos] are unsuccessful …
(b) [The Bufalos] proposal indicates that they would pay 100 per cent of the bankrupt estate's creditors. However, it is not specified how your clients intend to pay such creditors in circumstances where Primelife has lodged a proof of debt for in excess of $8 million. Given the history of this matter, we assume that it is not [the Bufalos'] intention to pay any proof of debt submitted by Primelife. Again our client's potential liability to proceedings by Primelife concerning its proof of debt have not been addressed.”

The sixth proposal, made 8 August 2007

The current proceedings were commenced on 14 February 2007. Consequently, proposals put following the commencement, such as the sixth proposal, are not within the ambit of this Court's review. However, given the broad scope of the orders available under s.178 of the Act, it is appropriate that the sixth proposal be considered in light of the issues before the Court.
The sixth proposal provided for:
a)payment of the trustee's "scale legal costs in the bankruptcy, other than of present proceedings"; plus
b)5 per cent of an award of damages received by the applicant net of "all expenses, inclusive of legal costs and expenses incurred in funding the cost of the litigation", capped at "the amount owed to those creditors whose debts are proved".
The terms of the sixth proposal do not make clear whether it is an alternative to, or a substitute for, the fifth proposal. If a substitute (that is, a revocation of the proposal constituted by the fifth proposal), the review of the trustee's decision is rendered nugatory, and the trustee would contend that the application before me ought to be dismissed with costs.
The applicant, however, did not elucidate on the purport and effect of the sixth proposal and relies upon the fifth proposal as the one properly before the Court for consideration. The applicant through his counsel advised the court that the fifth and sixth proposal should be read together. If that be so, the sixth proposal creates its own dilemma for the trustee arising from the prospect that the trustee stands to gain from the outcome of the Supreme Court proceeding and may therefore leave itself open to an adverse costs order if the proceeding is unsuccessful.
The sixth proposal, in my view, is illustrative of the significant difficulties that the trustee has faced in dealing with the applicant. The trustee indicates that the sixth proposal, in any event, is unacceptable and highlights the following reasons:
a)that unless the applicant succeeds in subsequent proceedings to agitate the choses-in-action, and recovers significant funds as a result of that success, the creditors will not benefit, as the only payment will be a portion of the trustee's legal expenses;
b)that it does not provide for an indemnity to the trustee in respect of legal fees other than the scale fees outside the present proceedings (and is silent as to whether that includes any costs of appeal of any decision by this court to assign the choses-in-action to the applicant);
c)specifically, it does not provide for indemnity for any adverse costs orders arising from any proceedings subsequently instituted; and
d)it does not address the trustee's concerns regarding the ability of the applicant to fund the proposal.

The concerns over the sixth proposal reflect those over the fifth proposal.
The trustee submits that any proposal must satisfy the following criteria before an assignment should be made. It should:
a)include a payment which provides some return to the estate: this criteria is in pursuance of the trustee's principal duty; namely to maximise a return to the creditors of the estate (within the bounds of propriety and the limits of its other duties). (See Adsett v Berlouis (1992) 37 FCR 201, 208-9; Citicorp v Official Trustee (1996) 71 FCR 550, 561-5; Freeman v Joiner [2005] FCAFC 149, [16]-[19]).
b)include an indemnity which is sufficient to protect the trustee from any potential liability for legal costs related to the choses-in-action assignment and any proceedings related to or arising from the assignment, and any court approval thereof (including any appeals). This is a corollary of the principal duty to ensure a return to the estate. There is a real risk, the trustee highlights, that, in this particular instance with these particular litigants, of significant further litigation involving the estate. Further, there is, it is submitted, a real risk that the trustee will be exposed to adverse costs orders if it assigns any choses-in-action on terms which include it receiving a share of the proceeds of litigation brought to enforce those choses-in-action. (See Knight v FP Special Assets Ltd (1992) 174 CLR 178; Gore v Justice Corp Pty Ltd [2002] FCAFC 83; (2002) 119 FCR 429.) If the trustee's costs and expenses (including those incurred as a result of any adverse costs orders) exceed the amount paid as consideration for the proposal, the estate will suffer a net detriment as a result of the assignment.
c)involve asset or security backing sufficient to comfort the trustee that the payment and indemnity are reliable. The trustee must be satisfied that, it was submitted, there is some real merit in any consideration offered. A bare, unsupported promise to pay and/or indemnify is of no merit to the estate.
d)properly identify the choses-in-action assigned, so that the trustee can be certain they do not include actions with no prospect of success. While the trustee need not be assured as a matter of law that the choses-in-action have prospects of success, he cannot assign a cause of action which he knows is doomed to fail. In circumstances such as these, where the merits of at least some of the choses-in-action have been attacked by another party to the proceeding, the trustee must be sure that the choses-in-action which are assigned do not include any which are proved to be worthless. In those circumstances, it needs to know with some degree of particularity what choses-in-action are assigned, to be sure that none of them are frivolous or vexatious.
It is the above concerns and considerations that the trustee contends necessitates and justifies its refusal to assign the choses-in-action as requested by the applicant and which forms the basis for the dismissal of this proceeding. Having regard to the law applying as set out below, I agree with the trustee in respect of all the contentions set out in [39]. For the reasons set out below, however, the trustee’s concern spelt out at [39(d)] no longer applies, but was applicable at the time of the rejection of the fifth proposal.

The Legal Principles Applicable

None of the parties take any issue with the proposition that choses-in-action as constituted in legal proceedings with causes of action on foot at the time of a bankruptcy are assets capable of being assigned to the former bankrupt or to third parties. (See Estate of Cirillo; Ex parte Official Trustee in Bankruptcy (1996) 136 ALR 607, 613 per Branson J; Citicorp Australia Ltd v Official Trustee in Bankruptcy (1996) 141 ALR 667, 675-6)
Neither the applicant, nor the trustee, take issue with the standing of the respondents to be parties to this proceeding.
This proceeding comes before the Court pursuant to s.178 of the Act. That section provides:
“(1) If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the Trustee, he may apply to the Court, and the Court may make such orders in the matter as it thinks just and equitable.
(2) The application must be made not later than 60 days after the day on which the person became aware of the Trustee's act, omission or decision.”
The operation of the section was described by French J in Macchia v Nilant (2001) 101 FCR 101, [38]:
“Section 178 confers a "supervisory jurisdiction over the conduct of the Trustee". It confers a power to "in substance" review the decision of the Trustee. The power is necessarily judicial. In the latter case Lee J said that the Court could not, in an application under s.178, be asked to perform the administrative function of a Trustee administering an estate in bankruptcy. It is given original jurisdiction, the exercise of which might entail "orders of a supervisory character insofar as the determination of questions of law raised by the application require those orders to be made". The applicant "must show a ground on which the Trustee's administration of the affairs of the bankrupt is to be reviewed". That proposition must be read with the generic concept of review in the original jurisdiction of the Court as one which can, according to context, enliven "the jurisdiction of the Court in respect of the whole matter" raising issues of either or both law and fact. Some functions which are administrative in character when exercised by an administrator have the chameleon quality of becoming judicial when exercised by a Court. In relation to s.178, it is unnecessary, for the purpose of enlivening the Court's jurisdiction, to find that the Trustee has done anything wrong. His decision may, on the material before him, have been quite correct and reasonable. On the other hand, it is not to the point that the Judge who hears a review application might have acted differently. It is not necessary here to discern the outer limits of s.178, but rather, to emphasise its importance in providing for wide ranging supervision by the Court of trustees who are appointed to administer the interest of bankrupts in the interest of creditors and, in so doing, to have regard also to the interest of the bankrupts.”
The Court has power to make such orders as it thinks "just and equitable". In Willoughby v Official Trustee In Bankruptcy (WA) (No 1), the Full Federal Court held:
“Section 178 falls to be considered against the background provided by s.30 of the Act, which gives the Court full power to decide all questions of fact or law in any case of bankruptcy coming within the cognisance of the Court. The Court may make such orders as are necessary for the purposes of carrying out or giving effect to the Act: s.30(2).”
In exercising its power of review, the Court should bear in mind that the trustee is an officer of the Court, and has both a public duty and a duty to administer the estate so as to maximise the return from the estate assets, and thereby to maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt. (See Adsett v Berlouis; Citicorp v Official Trustee; and Freeman v Joiner) As stated in Healey v Poentice (No 2) [2000] FCA 1598 at [21] as a general principle:
“It would be enough to excite the Court to intervene if it be shown that the impugned conduct of the Trustee was incorrect or that other conduct was, or on the material before the Court would be, preferable and that justice and equity required the Court's intervention. An applicant no doubt carries the onus of establishing this. It is plain that the Court should not be too ready to intervene for fear of making the role and work of a trustee unmanageable. That the Judge who hears a review application might have acted differently from the way a trustee did is not to the point. The question is whether it is just and equitable that the Court should afterwards intervene in some fashion.”
Section 178 can apply to a trustee even after the bankrupt has been discharged (Re Cheesman & Ors: Cheesman & Ors v Waters (1997) 143 ALR 78). This is the case here.
The applicant bears the onus of proof (See Healey v Poentice (No 2)).
The following principles can be derived from Willoughby v Official Trustee [2001] FCA 753, [27] per Nicholson J:
a)Section 178 confers "supervisory jurisdiction over the conduct of the Trustee";
b)However, despite the width of the power:
i)it is not necessary to find the existence of any unreasonableness, absurdity or bad faith in the decision of the trustee for the power to be exercised;
ii)it is not relevant whether the Judge who hears an application under this section might or would have acted differently from the trustee;
iii)it is not the case that the Judge hearing the application is at large to remake the decision to which the application relates. The power is a judicial power of review, not an administrative power for substitute decision making;
iv)it is not appropriate for the Court to be too ready to intervene, for that will make the role and work of a trustee unmanageable.
c)The application of the section is to be determined (aside from the question of whether it is just and equitable to make an order) with regard to the following features:
i)the justiciable issue raised in the application;
ii)whether the applicant has shown a ground on which the trustee's administration of the affairs of the bankrupt is to be reviewed;
iii)the statutory context in which the particular issue identified arises;
iv)whether the trustee had adequate regard to the interests of the creditors of the bankrupt estate in question as a whole;
v)whether the trustee properly considered the legitimate interests of the bankrupt;
vi)whether the trustee properly considered the legitimate interests of other parties likely to be affected by the decision to which the application relates.
d)Having considered those matters, the Court must form a judgment on whether there is "an adequate decision making process" and whether the trustee did not "properly evaluate".
e)In relation to a justiciable issue raised by an application concerning whether a trustee should have approved the assignment of a choses-in-action:
i)it is not necessary that a trustee be satisfied that the chose-in-action has a realistic chance of success before it is assigned;
ii)however, the trustee or the Court should not allow such an assignment to occur in a case where it is clear that the claim sought to be pursued by the bankrupt or other proposed assignee is frivolous or vexatious;
iii)where a creditor or intervening party contends that an assignment should not be authorised because the proposed claim has no prospect of success, it is for that party to demonstrate the absence of any prospect of success;
iv)there is no obstacle to an assignment of choses-in-action where one of the proposed defendants asserts a cross-claim.
To those Willoughby criteria may be added the following holdings of the Full Court in Freeman v Joiner:
a)It does not follow from Citicorp v Official Trustee that in a case where trustees are not certain about the prospect of a claim's success, that an assignment should follow. Principles about what a trustee should do in a particular case cannot be stated as universal. Trustees will be faced with different factual scenarios to which the general principles relating to their duty and to practical issues will need to be addressed;
b)Certain cases may justify a trustee insisting on obtaining legal advice concerning the assignment of the action; and
c)It may be practical for the trustee to require funding to obtain that advice as a precondition of considering the request for assignment.
In Willoughby, Nicholson J completed his summary of the approach to review with the following. If the justiciable ground for review of the application is established, then the Court must consider what order is "just and equitable". Examination of the language of s.178 discloses that the Court is required to take at least the following steps:
a)identify the applicant for the exercise of the supervisory jurisdiction of the Court – is it a bankrupt, a creditor, "any other person" or a discharged bankrupt?
b)identify the relevant act, omission or decision of the trustee to which the application relates.
c)find that the applicant is "affected" by the relevant act, omission or decision of the trustee.
d)be satisfied that the act, omission or decision of the trustee was made in such a way that there is a justiciable ground for the exercise of the Court's supervisory jurisdiction; and
e)in the event, it is satisfied that the ground is established, consider what order is "just and equitable" in the matter.

The competing submissions

Out of time

The trustee initially submitted that the application was filed out of time. It was supported in that submission by the respondents. However, during the hearing the trustee abandoned this submission and because of its position on this issue, the respondents also abandoned this submission.

The trustee's other submissions

The trustee in its dealings with the applicant, either in dealing with him directly or his father on his behalf, has always been troubled, and has expressed its concern to the applicant, by the:
i)lack of particularity of the choses-in-action sought to be assigned;
ii)the prospect of success for the applicant should he pursue the Supreme Court litigation;
iii)the need, as a consequence, to obtain appropriate legal advice to ascertain this aspect and also the legality of the trustee’s action generally;
iv)the vulnerability of the trustee for claims against it should it have inappropriately assigned the choses-in-action, such claims being by way of damages and costs;
v)the vulnerability of the trustee for costs associated with further litigation, including appeals against any determination to assign;
vi)that the basis of any assignment not offend the trustee’s obligations to all creditors or prejudice the proper administration of the estate; and
vii)the lack of funds in the estate.
In respect of all those concerns, the trustee simply says they are legitimate, that they are matters that it needs to be satisfied about, as a matter of law, before any assignment can be given. In respect of those concerns, despite numerous requests for detail, funds to investigate and appropriate indemnities, the applicant has failed to provide.
The trustee refers to and relies upon the above setting out of the applicable law and submits that it simply is unable to assign the requested choses-in-action and that its decision, ultimately, to refuse the fifth proposal on 7 June 2007 is justified. Accordingly, it is submitted this Court should not interfere.
The respondents join with the trustee in those matters put by the trustee in justifying its action to refuse the fifth proposal.
I am of the view that in the circumstances of these parties, the nature and history of the litigation to date and having regard to the law applicable as set out above, the trustee indeed acted appropriately in forming a judgement to refuse the assignment. Each of the trustee’s concerns and demands were justified.
In respect of its concern about the particularisation of the choses-in-action sought to be assigned, at the time, having regard to the trustee’s duty not to assign hopeless choses-in-action, it was a reasonable and justified concern. The request for funding for a legal opinion in that regard, and generally about the probity of the trustee’s conduct in assigning, for an estate devoid of funds, was also justified.
The trustees conduct in refusing the fifth proposal must be considered in the context subsisting when that decision was made. However, things have moved on considerably since as a consequence of the articulation of the applicant’s and respondents’ cases in this proceeding. It is fair to say that much of the information sought by the trustee on which it could make a sound judgement as to whether the choses-in-action sought to be assigned are hopeless has now been ventilated. For the reasons set out below, I am of the view that the respondents’ case that the proposed choses-in-action for assignment are hopeless is not sustainable. In my view, they are not manifestly hopeless; although they are not without considerable difficulties, but that is not the standard by which such issues are judged in the type of applicant before this court.

The respondents’ further submissions

The respondents, in addition to supporting the trustee in respect of its submissions, set out two other grounds for dismissal of the application; namely:
(i)the applicant seeks to assign choses-in-action which have not vested in the trustee; and
(ii)the making of the orders sought is against the public interest because the claims the applicant purportedly has are hopeless for the various reason set out below.
The respondents joined with the trustee in supporting its contention that it was justified in not assigning the choses-in-action, but also ask the court to give a direction under s.178 that the trustee not, in effect, ever assigns the choses-in-action to the applicant.
The respondents made issue over the suggestion that the applicant, because of the global nature of the choses-in-action sought to be assigned, was in effect also claiming choses-in-action that are not vested in the trustee, namely those that are properly vested in the Bufalo company, which is in liquidation. To overcome this issue, it seems to me to be a simple process of the trustee ensuring that the documentation evidencing the assignment clearly states that the assignment does not include any choses-in-action not vested in the trustee and, more particularly, does not include those that are vested in the Bufalo company and its liquidator. Any argument in later proceedings that the applicant is attempting to prosecute a cause of action where he has no standing should be left to determination in another court. The respondents’ concern about an assignment of choses-in-action not vested in the trustee is, in my view, without merit.
The respondents submitted that the further pursuit of the action in the Supreme Court by the applicant would be frivolous and vexatious, indeed, hopeless; that there is no reasonable prospect of success and in accordance with the law set out above (see Adsett, Citicorp and Freeman above), as a matter of public interest, the application should not only be dismissed but a direction given to the trustee not to assign the choses-in-action to the applicant. There were a number of bases for these contentions; namely the proposed choses-in-action are:
(i)res judicata;
(ii)issue estopped; and/or
(iii)an abuse of process.

Res judicata

On this point the respondents rely on the dismissal by his Honour Justice Mandie in the Supreme Court proceeding on 29 October 2004. Whilst there is transcript of the proceeding that day which shows an issue arose as to whether he should stay or dismiss the proceeding and that he chose to dismiss the proceeding, he has declined to provide reasons for his decision.
The respondents relied on a number of cases where the question of a stay or dismissal in similar circumstances to this case were canvassed, with the conclusion reached that a stay would be more appropriate because a dismissal may cause insurmountable hurdles for the bankrupt should he wish to pursue the litigation at the end of his bankruptcy. (See Finikiotis v Knight Frank (SA) Pty Ltd [2001] FCA 1733; Milane v The President etc of the Shire of Heidelberg (1928) VLR 52 and Bendigo Bank Ltd v Demaria & Ors [2001] VSC 218). I was invited to conclude, by inference, that his Honour Justice Mandie, being alert to the issue and having determined to dismiss the proceeding as opposed to staying it, must have determined that there was no merit in the applicant’s claims.

The respondents further buttressed this submission with the contention that the trustee must have also concluded that the applicant’s case was hopeless and its letter, through its solicitors, of 3 July 2003, to his Honour is evidence of this. This aspect of the submission by the respondents is readily dismissed as the trustee through its counsel informed the court that no such assessment had been reached by the trustee then or, indeed, now.
Further enlightenment is shown on the events of that day by the transcript of the proceedings. Whilst it is correct to say that his Honour was alerted to the significance of the various orders available to him under the rules, either a dismissal or a stay of proceedings, he was informed by counsel on the day that he could dismiss the proceeding as against the applicant on the basis of abandonment. It was certainly a consideration squarely raised before him. His refusal to give reasons for his decision to dismiss the proceeding, as opposed to staying it, leaves open the possibility that, as he was invited, he dismissed the proceeding on the basis of abandonment. It is trite law that a proceeding dismissed because of abandonment can be revived.
I cannot be satisfied that his Honour gave consideration to and evaluated the merits of the applicant’s case against the respondents when he dismissed the proceeding in the absence of the applicant and without hearing evidence going to the merits of the applicant’s claims. In these circumstances, I am of the view that it cannot be said that the proceeding in the Supreme Court is res judicata.
The applicant asserts that under the rules (see Order 46.08 Supreme Court (General Civil Procedure) Rules 2005) he can apply to set aside his Honour’s dismissal. The respondents highlight that there was an earlier direction given by his Honour Justice Hargrave setting a timetable for such an application with which the applicant did not comply. Be that as it may, there may well be, although I was not given any detail as to how it might be put, a successful application to the Supreme Court to set aside the dismissal. It may be difficult, but it is not for this court to evaluate that where the obligation placed on me is to determine whether the applicant’s case is manifestly hopeless. I note that the onus of proof in this regard falls squarely on the respondents, and in that regard they have failed.

Issue estoppel

Next is the submission that there is an issue estoppel (indeed, suggested as a further res judicata) arising from a determination made by Master Mahoney on 18 August 2000 in respect of a pivotal, it was submitted by the respondents, question of fact and law; namely, the existence of a loan agreement where monies were due and owing, which monies were secured by guarantees of the company’s performance under the loan.
The respondents say that any choses-in-action capable of assignment relating to the loan and any challenge to it has been determined by the judgment of Master Mahoney. For him to have made the decision he did, the respondents submit, he would have had to be satisfied:
·that monies were due and owing under that loan agreement;
·that proper demand had been made for those monies;
·that the monies were due and payable and had not been paid;
·that the security documentation was in proper order and enforceable against the applicant and others; and
·that the applicant and others were wrongfully refusing to comply with their obligations under the security offered to enable the specified shares to be transferred to the second respondent.
The respondents submit, having regard to Master Mahoney’s determination, that the choses-in-action the applicant seeks to have assigned that can be readily identified in this regard are issue estopped, manifestly hopeless, and that accordingly an assignment to him would be against the public interest.
In an associated submission on the question of the credit of the applicant and his father is raised. Reference was made to conflicting affidavit material filed at court by them. In one the loan is affirmed and relied on whilst in the other it is denied. Reference was also made to conflicts and inadequacies in the pleadings in respect of the loan.
Whilst these matters might reflect a difficulty in the applicant’s case, I cannot be certain that the applicant’s case is fatally flawed and hopeless. I note the whole basis of proceedings in the Supreme Court is to challenge the transfer of shares in related companies that were offered as security for the alleged loan which, should the challenge be successful, would result, in effect, in setting aside Master Mahoney’s orders made that day. In addition, as highlighted by counsel for the applicant, the nature of the process undertaken by Master Mahoney could be properly described as simply putting the second respondent in a position where it could enforce the mortgages if it was so entitled. Mr Warren, solicitor for the respondents deposed in his affidavit affirmed on 10 August 2007 that:
“Senior Master Mahony commented that there was not a question of enforceability or validity, but rather there was the question of putting Primelife [second respondent] in a position to enforce the Mortgages, if it was so entitled. He stated that the Mortgages of Securities operated as an old law mortgage i.e., a transfer subject to an equity of redemption. Primelife were still not registered as the shareholders of shares in Confalo and Newpark. They had a Power of Attorney which entitled them to execute the transfer of the shares.”
What the Master was doing was just completing the transaction. If the evidence of the applicant and his father and brother is accepted by the Supreme Court at trial, that transaction should, it was submitted, be set aside. The Master it would appear left open the question of entitlement, which is an issue that goes to the subject of the Supreme Court litigation. Once again, the respondents bear the onus of proof in this regard, and once again they fail.

Statute barred

The respondents submit that because of his Honour Justice Mandie’s dismissal, the applicant by necessity would need to issue new proceedings which are statute barred. I do not accept this as a submission of merit. As set out above, it is possible to have his Honour’s dismissal set aside and should such an application be successful, then the Supreme Court proceeding would be revived and any issue over time limitation evaporates. It would be, in my view, for the Supreme Court to determine whether there is any merit in the applicant’s application to set aside his Honour’s dismissal and I cannot sensibly evaluate the strength and merit of any such application on the limited material before me.
By way of further expansion on this point, the respondents submit that the choses-in-action so identified in the applicant’s solicitors’ letter of 8 August 2007 come within various categories of limitation. I need not canvass each of the respondents’ submissions in these regards, suffice to say that the strength and merits of such arguments are best left to the Supreme Court should the trustee ever determine to assign the choses-in-action to the applicant.

An assignment of the claimed choses-in-action an abuse of process

This submission I take to be a combination of the trustee’s submissions and those of the respondents. It is also predicated on the assertion that the applicant’s proceeding in the Supreme Court is hopeless. For the above reasons, whilst there will be difficulties for the applicant in the Supreme Court, should he nonetheless be successful in reviving the proceeding there he will then be placed in the same position as he was in prior to his bankruptcy and the validity of his claims against the respondents will be tested. I cannot see him pursuing whatever entitlements he may have in the Supreme Court as an abuse of process.

Conclusion

The trustee’s action to date has been focused on ensuring that only choses-in-action which are appropriate for assignment are assigned; and secondly, that any assignment be made on appropriate terms. In so doing, it has acted, in my view, entirely appropriately.
The justiciable issue before me was whether the trustee was right to reject the fifth proposal on the grounds it did. The applicant bears the onus of proof to show that the trustee’s administration of his estate in bankruptcy should be reviewed and an order made in the terms he seeks. The applicant, in my view, plainly failed to satisfy his onus.
As set out above, the request for information that focused on the issue of whether the trustee was meeting its duty to the public and creditors by not assigning hopeless choses-in-action and its need to fund any legal opinion on the issue were more than reasonable in the circumstances of this case. A failure to provide both by the applicant constituted a sound basis for the rejection of the fifth proposal.
The trustee was also right to examine critically the likely return to the creditors under the proposal and whether there was in reality some substance to the proposal that would see the estate and the creditors better off, rather than exposed to awards of costs or even damages which would leave the estate in a net detriment position.
In light of that the application must be dismissed.
The conduct of this proceeding has addressed the legitimate concern of the trustee over whether an assignment of the subsisting choses-in-action to the applicant would place it at risk for having assigned a hopeless cause of action in circumstances where there were claims to that effect by what can be described as determined and vigorous litigants. For the reasons stated, it cannot be said that the applicant’s case is hopeless. Because of my finding in that regard, the trustee need no longer be troubled about being placed at risk and in breach of its public duty for that reason. The need to fully particularise the choses-in-action that previously was appropriate to form a view about the hopelessness of any claim no longer subsists. The trustee should take some comfort from my finding in this regard when considering its position on any other proposal put by the applicant. An assignment to the applicant, for instance, can be made, in my view, in the broad terms used in Citicorp v Official Trustee; so long as it is clear that the assignment is only those choses-in-action vested in the trustee.
That is not to say any proposal put by the applicant should be uncritically accepted. Those other responsibilities of a trustee as set out above are still extant and the trustee must be satisfied it has complied with its responsibilities, for instance, to the creditors.
However, in the circumstances of this case, by way of general comment, any assignment must include some payment that actually provides some tangible return to the estate. Also, because of the lack of funds in the estate, the trustee is entitled to be put in sufficient funds to cover any costs of effecting the assignment, the obtaining, if required, of a legal opinion and a sufficient and tangible indemnity, to the satisfaction of the trustee, for costs associated with any litigation in which the trustee may be inveigled. A mere assertion by a party that it will indemnify must be tangible and reliable, not merely an assertion which may prove to be without substance.
Unfortunately, there is little scope in my view to make directions in the abstract as to whom and on what terms an assignment can or should be made. No doubt further proposals will be put by both the applicant and the respondents and before effecting an assignment the trustee will make application under s.134(4) of the Act. Despite an understandable desire on the part of the trustee to limit its exposure to further litigation, having regard to the nature of the parties involved, and the history of litigation to date, the prospect of extensive and expensive litigation looms large.

Costs

There is no doubt, in my view, that an order that the trustee’s costs be paid by the applicant follows as a matter of course. An order to that effect will be made.
However, the question of the costs of the applicant and the respondents is more problematic and would warrant submissions on the part of those parties before any order could be made. Accordingly, the question of the applicant’s and respondents’ costs is reserved and liberty is granted to them to make an application for costs for determination on a date and time to be fixed.

I certify that the preceding eighty-nine (89) paragraphs are a true copy of the reasons for judgment of O'Dwyer FM

Associate:

Date: