Comino v Juratowitch (in His Capacity as trustee of the Bankrupt Estate of Comino)
[2017] FCCA 1563
•11 July 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| COMINO v JURATOWITCH (IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF COMINO) | [2017] FCCA 1563 |
| Catchwords: BANKRUPTCY – Application to set aside decision of the Respondent – decision of Respondent not to assign causes of action to Applicant – Applicant did not demonstrate the claims are arguable – whether rights vested in trustee – Trustee not sufficiently protected as to third party costs order by proposed indemnity – application dismissed. |
| Legislation: Bankruptcy Act 1966, ss.116, 134, 178, sch.2 item 100-5 Insolvency Law Reform Act 2016, sch 1 pt 2 div 2 item 54 |
| Cases cited: Citicorp Australia Ltd v Official Trustee in Bankruptcy [1996] FCA 1115 Freeman v National Australia Bank Ltd [2004] FCAFC 318 |
| Applicant: | PETER HARRY COMINO |
| Respondent: | DANIEL PETER JURATOWITCH (IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF PETER HARRY COMINO) |
| File Number: | MLG 2227 of 2016 |
| Judgment of: | Judge Hartnett |
| Hearing date: | 18 May 2017 |
| Delivered at: | Melbourne |
| Orders made: | 7 July 2017 |
| Reasons delivered: | 11 July 2017 |
REPRESENTATION
| Counsel for the Applicant: | Mr Charnley |
| Solicitors for the Applicant: | Foster Nicholson Jones Lawyers |
| Counsel for the Respondent: | Mr Fary |
| Solicitors for the Respondent: | Hall and Wilcox |
ORDERS
The application filed 12 October 2016 is dismissed.
The Applicant pay the costs of the Respondent as agreed and failing agreement as taxed by a Registrar of the Court.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 2227 of 2016
| PETER HARRY COMINO |
Applicant
And
| DANIEL PETER JURATOWITCH (IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF PETER HARRY COMINO) |
Respondent
REASONS FOR JUDGMENT
By application filed on 12 October 2016 the Applicant seeks the following orders:-
“1. An order pursuant to section 178(1) of the Bankruptcy Act 1966, that the decision of the Respondent made on 9 August 2016 be set aside.
2. An order that all rights, benefits, powers, remedies, actions, suits or causes whatsoever which the respondent has or may have against The Australia and New Zealand Banking Group Limited (ANZ) howsoever arising from the contractual relationships or other dealings between the Applicant and the ANZ be assigned to the Applicant.
3. Such further or other orders as the Court deems fit.
4. Costs.”
The Applicant relied upon affidavits of evidence sworn by him on 12 October 2016 and 13 March 2017. The Applicant also relied upon written submissions filed by him on 3 May 2017.
The Respondent seeks dismissal of the application and costs.
The Respondent relied upon an affidavit of evidence sworn by him on 24 April 2017. In that affidavit the Respondent referred to and relied upon annexure ‘PC7’ to the Applicant’s affidavit sworn 12 October 2016. The Respondent also relied upon written submissions filed by him on 15 May 2017.
The proceedings involve the bankrupt estate of the Applicant, a former bankrupt. The Applicant is aggrieved by the Respondent’s decision, as trustee of the former bankrupt, to not assign claimed causes of action to the former bankrupt. Those claimed causes of action are said to be in contract, negligence, for misleading and deceptive conduct, unconscionable conduct and involve a claimed breach of s.85 of the Property Law Act 1974 (Qld) regarding the sale of properties at an undervalued price.
Background
In October 2007, the Applicant and his mother, Matina Comino, as trustees for the Comino Family Trust obtained a business loan facility with the Australian and New Zealand Banking Group Limited (‘ANZ’) (‘business loan facility’) for the construction of a building at 64 Bolsover Street Rockhampton in the State of Queensland (‘64 Bolsover Street’). 64 Bolsover Street was owned by the Applicant and his mother as trustees for the Comino Family Trust. Construction of the building commenced in 2008 and was completed in about September 2009 and a certificate of classification was issued dated 23 September 2009.
Finance for the construction of 64 Bolsover Street was obtained from the ANZ as follows:-
a)through the business loan facility as referred to in paragraph six above for the amount of $5.1 million;
b)by an increase in the business loan facility to $5.3 million in May 2009; and
c)by the provision of an overdraft facility of $200,000 in May 2009.
On 20 October 2009 the Applicant received an email from Ms Mary O’Dea, Assistant Manager at ANZ, advising him that the remaining balance available on the business loan facility was $217,477.52. After 18 November 2009 no further payments were made from the business loan facility and the Applicant was advised none would be at that time. At a meeting between the Applicant and staff of the ANZ on 12 January 2010 the Applicant was advised that the business loan facility was fully drawn.
It is alleged by the Applicant that on 9 October 2010, the ANZ breached the business loan facility by failing or refusing to pay trade creditors the sum of $310,701.97, which included GST. The Applicant’s evidence is that the ANZ transferred the sum of $150,000 towards payment of the amount of $310,701.97 owing to trade creditors, however did not make payment of the balance being the sum of $160,701.97. This is said by the Applicant to give rise to a claim in contract and in negligence. There is no evidence before the Court as to what term or clause or part of the business loan facility was breached, or how. There is simply the Applicant’s assertion, relevantly, that “It was the ordinary course that details of amounts owing to trade creditors…were provided to the ANZ and the ANZ would then attend to payments of the amounts directly to the trade creditors”.[1]
[1] Affidavit of Mr Peter Harry Comino sworn 12 October 2016 at [11].
It is also in a rather garbled way, alleged by the Applicant that in October 2010, staff of the ANZ represented to the Applicant that there were monies available to him from the business loan facility. It is alleged further, and on the earlier date of 12 January 2010, that the ANZ advised the Applicant that there were no funds available in the business loan facility to pay outstanding trade creditors. These representations are claimed to be misrepresentations and the conduct misleading and deceptive. The Applicant claims that had he known at a time earlier than 12 January 2010 there were no monies to pay trade creditors, he would have sourced the funds from an unidentified other lender.
In order to repay the amount owing on the business loan facility, and the amount owing to trade creditors, the Applicant and his mother, as trustees of the Comino Family Trust decided, in April 2010, to arrange for the sale of 64 Bolsover Street. At the same time the Applicant and his mother agreed to take ownership, in what manner is unclear, of two lots of vacant land being lots 24 and 25 ’Marina Beach Resort’ 19 East Point Road Mackay Harbour in the State of Queensland (‘Mackay Harbour’).
In September and December 2009 Herron Todd White provided to the ANZ, valuations of 64 Bolsover Street. In September the valuation was $5,730,000 and in December 2009 the valuation was $6,220,000 being an “on completion value” with the valuation including the statement that the value given “may change significantly and unexpectedly”.
In April 2010, the Applicant and his mother as trustees for the Comino Family Trust entered into a contract of sale subject to special conditions to sell 64 Bolsover Street to Valu-Inns Pty Ltd (‘Valu-Inns’) for $5.5 million made up of $4 million cash and the Mackay Harbour lots of vacant land overvalued, on the evidence as contained in a relatively contemporaneous valuation of Herron Todd White as at 29 March 2010 prepared for ANZ, at $1.5 million. The value provided by Herron Todd White was $525,000 for lot 24 and $525,000 for lot 25. The sale was not proceeded with.
On 18 June 2010 the Applicant and his mother in their own capacities and as trustees for the Comino Family Trust executed a Deed of Agreement (‘the Deed’) with the ANZ and two other parties. The recitals to the Deed are as follows:-
“A. The bank holds the securities from the Customers.
B. The Cominos have proposed to realise the property at 64 Bolsover Street (as defined) for $4,500,000.00.
C. Part of the sale transaction of 64 Bolsover Street involves the Cominos taking ownership of 19 East Point Road (as defined) in a contemporaneous settlement.
D. The bank has consented to the sale of Bolsover Street on the basis that it will receive the agreed proceeds of sale (as defined), and security over 19 East Point Road, and that its interests are otherwise adequately protected.
E. The parties to this Deed agree to the terms of this Deed.”
The purpose of the Deed was to allow for the sale of 64 Bolsover Street, to Valu-Inns. 64 Bolsover Street was sold to Valu-Inns for $4.5 million. The Applicant submits the sale price was at a considerable undervalue given the higher valuations previously obtained from Herron Todd White and the sale of the property in June 2012 for $8 million. The Court observes the valuations were provided at a time that was some six and more months earlier. Further, the valuations had the qualifications as set out in paragraph 12 above. Further, a bare assertion that the sale did not realise those valuation amounts does not of itself establish a breach of statutory duty.
Clause 21 of the Deed is a release. Its terms are relevantly as follows:-
“The Customers release, indemnify and discharge the bank, its present and former directors, employees and agents from all claims, causes of action, proceedings, suits or demands whatsoever that they may have now, in the future or which they at any time might have had or but for the execution of this Deed might have against the Bank, its present and former directors, employees and agents in respect of the facilities and the Securities, and any fact, matter or thing otherwise related to or in any way connected with the subject matter of this Deed.”
As can be seen, cl.21 of the Deed is very broadly expressed to include any claims, causes of actions and proceedings. At the time of execution of the Deed, the ANZ held security as mortgagee, over 64 Bolsover Street, the vacant lots which formed Mackay Harbour, and real properties situate at 12 Victoria Parade Rockhampton in the State of Queensland (‘Victoria Parade’) and at 21-23 Bolsover Street Rockhampton in the State of Queensland (‘21-23 Bolsover Street’). The evidence before the Court does not identify who owns these properties and in what capacity. It is suggested they are owned by the Applicant with Mackay Harbour being owned by the Applicant and his mother and possibly as trustees for the Comino Family Trust. The Applicant had obtained a market appraisal with respect to Victoria Parade on 25 January 2010 wherein the market range, as described, was $1,180,000 to $1,220,000. A valuation of 21-23 Bolsover Street had been obtained by the ANZ on 26 July 2007 for $4,220,000.
In 2011, the ANZ, as mortgagee, caused receivers and managers to be appointed over the remaining security properties being the land lots at Mackay Harbour, Victoria Parade and 21-23 Bolsover Street (‘the security properties’). The security properties were sold in the period between August 2011 and January 2012 in order to repay the business loan facility. The Applicant alleges that the ANZ did not take reasonable steps to ensure that the security properties were sold at market value and claims the security properties were undervalued. In August 2011 Mackay Harbour was sold for $725,000. In September 2011 21-23 Bolsover Street was sold for $1.87 million. In January 2012 Victoria Parade was sold for $530,000. Again, the Applicant provides no evidence as to a breach of duty by the receivers and managers in the sale process. Historic valuations and an historic market appraisal is the only evidence coupled with bare assertions that the security properties were undervalued. The sale proceeds were insufficient to repay the Applicant’s debts to the ANZ.
The conduct of the ANZ in not making available funds in the business loan facility for payment of approximately $300,000 to trade creditors, alternatively representing that funds were available in the business loan facility, resulted, it is alleged by the Applicant, in the non-payment of monies to trade creditors of 64 Bolsover Street. This caused a chain reaction of events ultimately culminating in his bankruptcy. The Applicant was made bankrupt on 14 March 2011. He was discharged from bankruptcy on 15 March 2014.
On 29 February 2016, the Applicant’s solicitors wrote to the Respondent requesting an assignment of rights against the ANZ bank and delivered a proposed deed of assignment. The Respondent did not agree to the assignment to the Applicant of any rights against the ANZ.
Legislation
The relevant provision of the Bankruptcy Act 1966 (Cth) (‘the Act’) are set out below:-
“BANKRUPTCY ACT 1966 - SECT 134
Powers exercisable at discretion of trustee
(1) Subject to this Act, the trustee may do all or any of the following things:
(a) sell all or any part of the property of the bankrupt;
(aa) accept, without terms or conditions, or subject to terms and conditions, a sum of money payable at a future time as the consideration or part of the consideration for the sale of any property of the bankrupt;
…
(3) Subject to this Act, the trustee may use his or her own discretion in the administration of the estate.”
Section 116 of the Act provides:-
“BANKRUPTCY ACT 1966 - SECT 116
Property divisible among creditors
(1) Subject to this Act:
(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and
…
(2) Subsection (1) does not extend to the following property:
(a) property held by the bankrupt in trust for another person
…”
As legislatively provided for, s.116(1) of the Act does not extend to “property held by the bankrupt in trust for another person”. This section is important in respect of 64 Bolsover Street in that the property was formerly owned by the Applicant and his mother as Trustees for the Comino Family Trust.
Section 178 of the Act, in force at the time the application was filed, provided:-
“(1) If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order 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.”
Section 178 of the Act was repealed by sch 1 pt 2 div 2 item 54 of the Insolvency Law Reform Act 2016 (Cth) (‘IRLA’). The transitional provisions which came into effect in March 2017 maintain s.178 of the Act in this application as the proceeding was commenced prior to the commencement date of the IRLA.
The IRLA came into effect on 1 March 2017. It has the effect of adding sch.2 to the Bankruptcy Act, which is relevantly as follows:-
“100‑5 Trustee may assign right to sue under this Act
(1) Subject to subsections (2) and (3), the trustee of a regulated debtor’s estate may assign any right to sue that is conferred on the trustee by this Act.
(2) If the trustee’s action has already begun, the trustee cannot assign the right to sue unless the trustee has the approval of the Court.
(3) Before assigning any right under subsection (1), the trustee must give written notice to the creditors of the proposed assignment.
(4) If a right is assigned under this section, a reference in this Act to the trustee in relation to the action is taken to be a reference to the person to whom the right has been assigned.”
Section 85(1) of the Property Law Act 1974 (Qld) provides:-
“Duty of mortgagee or receiver as to sale price
(1) It is the duty of a mortgagee, including as attorney for the mortgagor or a receiver acting under a power delegated to the receiver by a mortgagee, in the exercise of a power of sale conferred by the instrument of mortgage or by this or any other Act, to take reasonable care to ensure that the property is sold at the market value.”
Consideration
The principles which govern an application under s.178 are as set out by Besanko J in Frost v Sheahan [2008] FCA 1073 as follows:
“1. Section 178 confers a “supervisory jurisdiction over the conduct of the trustee”: Cummings v Claremont Petroleum NL (1996) 185 CLR 124 at 132 per Brennan CJ, Gaudron and McHugh JJ. The section confers on the Court a very wide discretion: McGoldrick v Official Trustee in Bankruptcy (1993) 47 FCR 547 at 552-553.
2. It is not necessary for an applicant for relief under the section to show that the trustee’s decision was absurd, or unreasonable or taken in bad faith. The Court has a wide discretion to make such order as seems appropriate in the circumstances of the case: Re Tyndall; Ex parte Official Receiver (1977) 30 FLR 6 at 9-10; 17 ALR 182 at 186 per Deane J. At the same time, the Court will be slow to make orders which will have the effect of interfering in the day-to-day administration of a bankrupt’s estate and, in cases involving an exercise of business or commercial judgment, will place considerable weight on the trustee’s decision. Furthermore, a Court will not intervene under s 178 simply because the Judge forms a different view from that of the trustee.
3. An order may be made under s 178 even if the trustee’s decision was correct on the material before him, if, for example, additional material is put before the Court.
4. The power to make orders under s 178 is not necessarily ousted by the presence of an alternative remedy. In any particular case, the presence of an alternative remedy may lead to an argument that the alternative procedure is a code for correcting alleged errors by a trustee. That was a possibility discussed by the Full Court of this Court in McGoldrick, although the argument did not succeed in that case. In almost all cases, the presence of an alternative remedy will be relevant to the exercise of a discretion under s178 not to make an order. There is, with respect, an illuminating discussion of the relevant principles by French J in Macchia v Nilant (2001) 110 FCR 101.
Counsel for the respondent in this case referred to McGoldrick and the argument that an alternative review procedure might be construed as a code excluding relief under s.178, but by the time of their respective closing submissions both parties accepted that there is no alternative review procedure which might affect this application either as a matter of law or as a matter of discretion. The position taken by the parties is correct because the review procedure in Part VII, Division 2, Subdivision C relates to a trustee’s decision to file a notice of objection (s.149K(1)); not a decision (or act or omission) by a trustee not to withdraw an objection.”
The prospects of success of any proposed cause of action of the Applicant was considered in Citicorp Australia Ltd v Official Trustee in Bankruptcy [1996] FCA 1115 wherein the Full Court of the Federal Court of Australia stated at [558]:-
“Counsel for the appellants contended that the duties which rest on a trustee in bankruptcy require the trustee, before selling or assigning a cause of action, to be satisfied that the cause of action can be identified as one vested in the trustee and its value estimated so that the trustee can, and then does, consider whether it can and should be pursued for the benefit of the estate. Comprehended in the performance of this duty is the need, once the cause of action is identified, to assess the prospects of success of the cause of action. There is a twofold purpose in this requirement; one purpose goes to the assessment of the adequacy of the consideration being offered, and the other to the question whether the proposed assignment would visit a mischief or injustice on the community, including creditors in the bankrupt estate. A mischief or injustice would relevantly arise, so it is contended, if the alleged cause of action had no reasonable prospect of success or is not at least arguable. It would be vexatious or oppressive to the proposed defendant if an attempt were made by the proposed assignee to enforce such a cause of action. The alternative notions that a cause of action has no reasonable prospect of success and that it is not arguable convey the same meaning, and we shall treat the contention as being simply that the cause of action proposed to be assigned must have a reasonable prospect of success.”
In Freeman v National Australia Bank Ltd [2004] FCAFC 318 at [35], the Full Court of the Federal Court of Australia held that it would not be proper for a trustee in bankruptcy to assign a cause of action which demonstrably had no prospects of success. His Honour Judge Spender also considered recovery of the trustee in bankruptcy’s costs stating:-
“The concern by the trustees about the risks associated with electing to prosecute, or to assign the proceedings, including exposing the trustees to an adverse orders for costs, when there were not funds in the estate from which to indemnify the trustees for those costs is a very real consideration.”
The following alleged claims accrued prior to the execution of the Deed on 18 June 2010:-
a)the contract claim;
b)the negligence claim; and
c)the misleading and deceptive conduct claim.
As submitted by Counsel for the Respondent, each of the contract claim, the negligence claim and the misleading and deceptive conduct claims would appear to be “connected with the subject matter of this Deed”, namely the business loan facility. Given the wide ranging nature of cl.21 of the Deed it is likely that any claims referrable to the period prior to 18 June 2010 could not succeed. The decision of the trustee to not assign them is reasonable on the evidence that is before the Court and produces a just and equitable outcome. Furthermore, absent the Deed, it is not possible on the current state of the evidence to find the claims have some reasonable prospect of success. There is a significant absence of material evidence that would go to support the claims proposed by the Applicant.
Additionally, 64 Bolsover Street was an asset of the Comino Family Trust. Property held on trust is exempt from the relevant vesting provisions in bankruptcy. Any right of action of the Applicant and his mother in respect of this property resides in them as trustees of the Comino Family Trust.
The sale at undervalue (as claimed) of the security properties occurred after 18 June 2010, and therefore is possibly not covered by cl.21 of the Deed. The security properties were sold by a receiver appointed by the ANZ. A receiver is typically appointed as agent of the property owner. It is the receiver under s.85 of the Property Law Act 1974 (Qld) who has the relevant duty. Accordingly, any action taken by the Applicant is likely to be against the receiver, and not the ANZ but a proper basis for any such action is not before the Court. There is also the added question as to whether this right is assignable which is not established by the Applicant.
The Applicant does not contend that the Respondent trustee has no exposure as to costs, only that “the presiding court would not likely make a non-party costs order against the [trustee]”. The Applicant considers the Respondent’s apprehension about exposure to legal costs, by reference to the principles in the decision of the High Court in Knight v FP Special Assets Limited [1992] HCA 28, to be misplaced. The trustee has expressed, and continues to express, concern that any indemnity offered by the Applicant is of no commercial value. The Applicant has indeed not offered any security of proper value including any real property security, to support the indemnity. There is no evidence before the Court that the Applicant would have any capacity to meet a costs order against him if unsuccessful in any action against the ANZ. The Applicant seeks by this application to expose the trustee to an adverse order for costs with an indemnity of no value. This is a very real consideration for the Court in these proceedings.
The Court determines it is not a just and equitable order to set aside the Respondent trustee’s decision. The material before the Court is deficient and does not establish that the alleged conduct of the ANZ resulted in the alleged losses of the Applicant as claimed. To that extent the Applicant has not demonstrated that the claims have a reasonable prospect of success. The Court is also concerned that the trustee is not protected by the indemnity proposed. The Court also agrees with the submissions of Counsel for the Respondent that the Applicant (as one of the joint trustees of the Comino Family Trust) has not demonstrated that an assignment in respect of at least 64 Bolsover Street is necessary. The application is therefore dismissed and costs follow that event.
I certify that the preceding thirty-five (35) paragraphs are a true copy of the reasons for judgment of Judge Hartnett
Associate:
Date: 11 July 2017
0
6
3