Dixon, T W F v Cao, L T T

[1995] FCA 542

CATCHWORDS

BANKRUPTCY:   Trustee's title to property - title to property carries with it right to indicia of title - whether right to possession of folio identifier defeated by solicitor's lien for unpaid costs.

SOLICITORS:  Solicitor's lien - time when lien arises - capacity in which solicitors hold folio identifier - whether lien arising after sequestration orders made can defeat trustee's entitlement to possession of folio identifier - whether solicitors protected by the 'bona fide purchaser for value without notice' principle - whether lien only arises when costs due and bill of costs rendered.

LIEN:Solicitor's lien - possessory lien only.

Bankruptcy Act, 1966 (Cth)

Barratt v Gough-Thomas [1951] 1 Ch 242
Pelly v Wathen 1 De GM&G 16
Sawyers v Kyte (1870) 1 VR 94
Re Wright Ex parte Clout (1984) 1 FCR 51
Re Moseley;  Ex parte Official Receiver (1953) 16 ABC 195
In re Brall Ex parte Norton (1893) 2 QB 381
In re Hart Ex parte Green (1912) 3 KB 6
In re Birmingham, Dec'd Savage & Anor v Stannard & Ors [1959] 1 Ch 523
In re Taylor, Stileman & Underwood [1891] 1 Ch 590
O'Brien v Lewis (1863) 4 Giff at 398, 66 ER;
Hammerstone Pty Ltd v Lewis (1994) 2 QdR 267

THOMAS WILLIAM FREDERICK DIXON v LY TY TRAN CAO & ORS
No. W423 of 1991
THOMAS WILLIAM FREDERICK DIXON v VAN LAM CAO & ORS
No. W424 of 1991
Beazley J
28 July 1995
Sydney

IN THE FEDERAL COURT OF AUSTRALIA )
  )  No. W423 of 1991
NEW SOUTH WALES DISTRICT REGISTRY )     No. W424 of 1991
  )
BANKRUPTCY DIVISION              )

RE:      LY TY TRAN CAO
  Bankrupt
                  EX PARTE: THOMAS WILLIAM FREDERICK
  DIXON
  Applicant
  LY TY TRAN CAO
  First Respondent
  THANH PHUONG CAO
  Second Respondent
  THANH PHU CAO
  Third Respondent

AND:

RE:      VAN LAM CAO
  Bankrupt
                  EX PARTE: THOMAS WILLIAM FREDERICK
  DIXON
  Applicant
  LY TY TRAN CAO
  First Respondent
  THANH PHUONG CAO
  Second Respondent
  THANH PHU CAO
  Third Respondent

CORAM:BEAZLEY J

PLACE:    SYDNEY
DATE:     28 July 1995

SHORT MINUTES OF ORDER

The Court orders that:

1. Leave be granted to Gregory Eugene Smith and Andrew Pasternaki to be joined as respondents in the proceedings.

2. The application of Gregory Eugene Smith and Andrew Pasternaki otherwise be dismissed.

3. Gregory Eugene Smith and Andrew Pasternaki pay the applicant's costs of the said application. 

2.

1. The Registrar deliver up Folio Identifier 1/707753 to the trustee.

IN THE FEDERAL COURT OF AUSTRALIA )
  )  No. W423 of 1991
NEW SOUTH WALES DISTRICT REGISTRY )     No. W424 of 1991
  )
BANKRUPTCY DIVISION               )

RE:      LY TY TRAN CAO
  Bankrupt

EX PARTE: THOMAS WILLIAM FREDERICK
  DIXON
  Applicant

LY TY TRAN CAO
  First Respondent

THANH PHUONG CAO
  Second Respondent

THANH PHU CAO
  Third Respondent

AND:

RE:      VAN LAM CAO
  Bankrupt

EX PARTE: THOMAS WILLIAM FREDERICK
  DIXON
  Applicant

LY TY TRAN CAO
  First Respondent

THANH PHUONG CAO
  Second Respondent

THANH PHU CAO
  Third Respondent

CORAM:BEAZLEY J

PLACE:    SYDNEY
DATE:     28 July 1995

REASONS FOR JUDGMENT

BEAZLEY J:    This is an application by the solicitors for the third respondent in each matter seeking a declaration that they hold a retaining lien over Folio Identifier 1/707753 which is the folio identifier for property known as 38A Mosely Street, Strathfield, NSW (the property).  The solicitors apply to be joined as parties to the proceedings for the purposes of their application.  Leave for that purpose, which was not opposed, should be granted.   

At all times the property has been registered in the name of the second and third applicants.  However, on 19 August 1994, Davies J declared that the property belonged to the applicant, as trustee of the estate of the first respondent in each matter.  Appeals from His Honour's order made that day were dismissed on 21 February 1995.

Notwithstanding the making of the declaration that the property belonged to the trustee, the third respondent failed to sign the memorandum of transfer necessary to transfer the legal title to the property to the trustee.  In addition, the Cao family refused to voluntarily vacate the premises.  I made orders dealing with these matters on 14 March and 23 June 1995 respectively.  The background reasons for the third respondent and the Cao family acting as they did are set out in my Reasons for Judgment dated 23 June 1995.  Even though orders for possession of the property have been made, the trustee will not be able to deal with the property until such time as he is in possession of the folio identifier, which is presently in the possession of the Deputy Registrar, without prejudice to and pending the outcome of the solicitors' claim. 
The trustee disputes the validity of the lien as against him on two grounds.  First, he submitted that as the lien claimed arose after the making of the sequestration orders, it could not defeat the title of the trustee.  Secondly, he submitted that a retaining lien only arises upon the delivery to the client of an account for the costs due to the solicitor.  In this case no account had been delivered.

Facts alleged giving rise to the lien
The solicitors came into possession of the folio identifier on about 6 March 1992, when they were retained by the second and third respondents to act for them in relation to a mortgage loan transaction.  Prior to settlement of the mortgage, the respondents delivered the certificate of title to the solicitors, together with a discharge of mortgage in respect of a mortgage to Westpac, which was still registered on title.  On about 10 March 1992, as a result of a search conducted at the Land Titles Office, the solicitors ascertained that the trustee had lodged a caveat on the title seeking an interest in the nature of a constructive trust in respect of the whole of the land.  The caveat revealed that the first respondents in each matter had become bankrupt on 26 February 1991.  The solicitors applied to the Registrar General for the issue of a Lapsing Notice but on 14 April 1992, the trustee obtained orders that the caveat remain on title.

The solicitors caused other inquiries to be made in March and April 1992 and thereby ascertained that the respondents had acquired the land in January 1986 with monies provided by the bankrupts; that the bankrupts had each committed an act of bankruptcy on or about 17 April 1990; and that the trustee had commenced proceedings seeking a declaration that settlements of the land by the bankrupts in favour of the beneficiaries were void within the meaning of s 120(2) of the Bankruptcy Act, 1966.  As it turns out Van Lam Cao, the first respondent in proceedings W424 of 1991, committed an act of bankruptcy on or about 7 May 1990.  Further, the trustee had not commenced proceedings as at March 1993.  Those proceedings were commenced in August 1993 and were heard by Davies J, who, on 19 August 1994 made the declaration that the property belonged to the trustee.  Nothing turns on the error in the date of the act of bankruptcy.  However, the solicitors submitted that the fact that the trustee had not commenced proceedings at that time was a relevant factor in determining whether they had a lien.  

The proposed mortgage transaction did not proceed.  However, the solicitors remained in possession of the folio identifier.  From that time they did work on behalf of the second and third respondents in connection with the trustee's application claiming title to the property and the subsequent appeal from Davies J's decision.  They also did work for the second respondent in connection with other proceedings in the court.  They claim a lien over the folio identifier for the unpaid costs incurred in respect of the work undertaken in both proceedings.  The solicitors have not rendered a bill in respect of the work which they have undertaken nor have they costed it in full.

Nature of a solicitor's lien
A solicitor's lien is possessory only, the classic statement of the nature of a lien being found in the judgment of Evershed MR in Barratt v Gough-Thomas [1951] 1 Ch 242 at 250 as follows:

"The nature of a solicitor's general retaining lien has more than once been authoritatively stated.  It is a right at common law depending (it has been said) upon implied agreement.  It has not the character of an encumbrance or equitable charge.  It is merely passive and possessory:  that is to say, the solicitor has no right of actively enforcing his demand.  It confers upon him merely the right to withhold possession of the documents or other personal property of his client or former client-in the words of Sir E. Sugden, L.C., "to lock them up in his "box, and to put the key in his pocket, until his client satisfies "the amount of the demand" (Blunden v. Desart (1842) 2 Dr. & W. 405, 418).  It is wholly derived from and therefore co-extensive with the right of the client to the documents or other property (see the statement of Lord Cranworth, L.J., in Pelly v. Wathen (1851) 1 De G.M. & G. 16,23), cited by Chitty J., in In re Llewellin [1891] 3 Ch 145, 148). "

A solicitor's right to a lien is co-extensive with the client's rights to the documents or goods in question.  As Cransworth LJ said in Pelly v Wathen  (1851) 1 De GM&G 16 at 23:

"It is a right derived entirely through the client,
and therefore, on the most obvious principles of justice, cannot go beyond the right of the client himself.  If the client's right to the deeds which came to the hands of the solicitor is absolute, so will be the right of the solicitor.  If the deeds in the hands of the client are subject to any rights outstanding in third parties, such rights will follow them into the hands of the solicitor."

See also In re Llewellin [1891] 3 Ch 145; Sawyers v Kyte (1870) 1 VR 94 at 97; McLeish v Palmer (1921) 22 SR (NSW) 53 at 57.

The capacity by reference to which the documents or goods are held is essential to the determination of whether a lien exists.  See Barratt v Gough-Thomas.  In Re Wright Ex parte Clout (1984) 1 FCR 51 at 53, Beaumont J stated:

"It is well established that the "retaining" lien of a solicitor extends only to property delivered to him in his professional character.  Thus, he has no lien on papers which he receives as mortgagee or trustee, although a solicitor trustee has a lien on the trust estate for all costs to which he is properly entitled as solicitor to the trust (see Cordery on Solicitors, 7th ed. (1981) at 274-275;  Halsbury's Laws of England, (4th ed.) vol. 44 at 171; Sykes, Law of Securities, (3rd ed.) at 561).  Where money is paid to a solicitor for a particular purpose so that the solicitor becomes a trustee of that money, the solicitor's lien will not attach to the money unless it is allowed to remain in the solicitor's hands for general purposes with the client's express or implied consent after the particular purpose has been fulfilled or has failed (see Alessio v Daniels - Kaye J., Supreme Court of Victoria, unreported, 19 October 1983 at 5-8).  Thus, in such cases, a threshold question, essentially one of fact, arises as to whether the moneys were paid to the solicitor for a specially designated purpose on the one hand or were merely paid to him "in the ordinary course of his business as solicitor for the client" on the other (see Loescher v Dean [1950] 1 Ch. 491 at 495)."

Basis upon which lien claimed
Counsel for the solicitors submitted that the above principles, whilst correctly stated, do not apply in this case.  First, he submitted they were distinguishable as they dealt with factual situations analogous to that which would have arisen if the solicitors claim had arisen in relation to costs incurred by the bankrupts.  Here they were acting for persons other than the bankrupts.  Secondly, as a matter of common sense the solicitors should not be deprived of their costs in acting for parties who were challenging the actions of the trustee of the estates of the bankrupts.  Thirdly, "the equity" attaching to the folio identifier should not be defeated by a judgment in subsequent proceedings, which merely declared the title of the trustee, and where the only orders made were consequential orders for the transfer of the second and third respondents "respective estates or interests in the land to the...Trustee".  Fourthly, the transaction by which the second and third respondents gained their title to the property was voidable only: see In re Hart; Ex parte Green and therefore the rights of the respondent to the property, and, it followed, the indicia of title to the property, "remained in situ until at least" the date the court declared the title of the trustee.  Finally, it was submitted that a solicitor claiming a retaining lien may be entitled to the benefit of the "bona fide purchaser for value without notice" principle: see  Sawyers v Kyte (1870) 1 VR(E) 94, where Molesworth J stated at 97-98:

"It has been laid down in many cases that no one can give a solicitor a lien upon deeds against a person from whom he could not himself withhold them: Pelly v Wathen.  There may be exceptions where the solicitor stands in the position of a purchaser for value without notice."

I do not agree with these submissions.  The principles in Pelly v Wathen and Barratt v Gough-Thomas are principles of general application and are not dependant for their application upon whether the retaining lien is claimed in respect of costs incurred on behalf of a bankrupt.  The trustee's title derived from the provisions of the Bankruptcy Act which vested in him the bankrupt's property: s 58.  That title operated as and from the date of the sequestration order.  It is irrelevant that, as happened here, a third party might refuse to recognise that title, necessitating the trustee to take action to have the title declared.  Nor does it assist the solicitors' claim that the transaction whereby the second and third respondents purportedly obtained title was voidable only: see s 120 of the Bankruptcy Act; In re Brall; ex parte Norton (1893) 2 QB 381. Once the transaction was avoided, the trustee's title had effect as and from the time when the first respondents became bankrupt.

In this case, the lien did not arise, if at all, until 10 March 1992, when the specific purpose for which they obtained the folio identifier failed and it was retained for general purposes.  At that time, the sequestration orders having been made, the second and third respondents' entitlement to the property and, it follows, the indicia of title to the property, was subject to the claim of the trustee.  The rights of the solicitors to the folio identifier were at all times subject to the trustee's rights: Pelly v Wathen.  The only basis upon which it could be said in this case that the solicitors may have a valid retaining lien as against the trustee is if they are entitled to the benefit of the protection afforded to a bona fide purchaser for value without notice: Sawyers v Kyte; In re Hart; Ex parte Green.  Assuming for the moment that that principle could operate in favour of the solicitors, it is necessary to determine the capacity in which the solicitors held the folio identifier at relevant times and the state of their knowledge at those times.

The solicitors first came into possession of the folio identifier on 6 March 1992.  They received it, not for any general purpose, but for the specific purpose of acting on a mortgage transaction into which the second and third respondents were proposing to enter.  Up until that point of time, the solicitors did not have a lien in respect of the folio identifier.  They were holding it for the sole purpose of passing it on to the mortgagee on settlement of the mortgage transaction.  That particular purpose failed, as the mortgage transaction did not proceed due to the existence of the trustee's caveat on title and his claim to the property.  It appears, and was conceded, that the solicitors retained possession of the folio identifier for general purposes or, it may be inferred, for the specific purpose of obtaining a solicitor's lien over it.  However, at that point, where the solicitor's lien might otherwise have arisen, they had notice of the bankruptcy of the first respondents and of the trustee's claim to the whole of the property.  Given that state of knowledge, they cannot be said to fall into the category of persons entitled to the protection of the "bona fide purchaser for value without notice" principle.

Accordingly, I reject the solicitor's application for a
declaration that they have a retaining lien.

Is the existence of lien dependant upon delivery of a bill of costs?

Counsel for the trustee submitted that, in any event, no lien can arise until the costs in respect of which it is claimed, are due.  Having regard to my finding that the solicitors have no lien, it is not necessary for me to decide this issue.  However, I will briefly state my view on the matter.

Counsel for the trustee submitted that a retaining lien was available only in respect of costs which were due and that costs were not due until such time as a bill had been rendered by a solicitor to the client: see In re Taylor, Stileman and Underwood [1891] 1 Ch 590, where Lindley LJ stated at 596 that a solicitor's lien existed:

"for all taxable costs, charges and expenses incurred by him as a solicitor for his client. ... His taxable costs...would include money payments which he makes for his client in the course of his business, such as counsel's fees...";

and In re Birmingham, decd; Savage & Anor v Stannard & Ors [1959] 1 Ch 523 where Upjohn J stated that costs were not due in the matter before him as no bill had been rendered.

Notwithstanding the authority of these statements, I am of the opinion that a lien may still exist even though no bill has been rendered to the client, provided of course that costs have been incurred.  My view in this regard is predicated upon two factors.  First, it accords with common sense.  It would be strange if an important right such as a lien could be defeated by the mere absence of bill notwithstanding that costs had been incurred.  Secondly, it seems to me that it is falls within the ordinary meaning of the word "due" to say that costs are due once incurred.  See The Macquarie Dictionary definition which includes: "due: owing, irrespective of whether the time for payment has arrived".  In my opinion, it is not the point that "due" may have other meanings, especially in a statutory context.  Nor is it relevant that there may be statutory restrictions upon the recovery of costs: see s 192 Legal Profession Act (NSW) 1987. 
However, as I have found that the solicitors are not entitled to a lien, I propose to dismiss the application and order that they pay the trustee's costs.

I certify that this and the preceding 11 pages
are a true copy of the Reasons for Judgment
of the Honourable Justice Beazley.

Associate:

Dated:    28 July 1995

APPEARANCES

Counsel for the Applicant:                Mr Gibb

Solicitors for the Applicant:                  MAURICE FREIDMAN & COMPANY

Counsel for the Third Respondents:             Mr Podleska

Solicitors for the Third Respondent:      SMITH &   PASTERNACKI

Dates of hearing:  14 March, 10 April 1995