Fagenblatt v Feingold Partners Pty Ltd
[2002] VSC 40
•1 March 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2007 of 2002
| MARK FAGENBLAT | Plaintiff |
| v. | |
| SIMON FEINGOLD, EDMUND ZELIK GURGIEL AND IAN TUSZYNSKI | Defendants |
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JUDGE: | HABERSBERGER, J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 15 FEBRUARY 2002 | |
DATE OF JUDGMENT: | 1 MARCH 2002 | |
CASE MAY BE CITED AS: | FAGENBLAT v. FEINGOLD PARTNERS PTY LTD | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 40 | |
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CATCHWORDS: Removal from Commercial List – Stay of second proceeding pending appeal in original proceeding – Grounds for stay in such circumstances – Whether prospects of success of appeal should be considered – Prima facie, plaintiff entitled to have action tried - Onus on party seeking stay to show injustice.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M. Dreyfus QC and Mr M. Robins | Nathan Kuperholz |
| For the Defendant | Mr R.M. Garrett QC and Mr S.P. Gardiner | Cornwall Stodart & Co. |
HIS HONOUR:
By summons dated 13 February 2002, the defendants, Simon Feingold, Edmund Zelik Gurgiel and Ian Tuszynski, applied for orders that this proceeding be removed from the Commercial List. Further and alternatively, the defendants sought that this proceeding be stayed pending the hearing and determination of the appeal in proceeding No. 6934 of 2000. The matter came before me on the first return day of the plaintiff's summons for directions. After hearing argument mainly concerning the question of the stay, I announced that I was not prepared to grant the application for a stay and that I would give my reasons at a later date. What follows are my reasons for refusing the application for a stay.
In proceeding No. 6934 of 2000 ("the original proceeding"), Mr Fagenblat sued, in his capacity as the trustee of the Mark Fagenblat Practice Family Trust, Feingold Partners Pty Ltd, in its capacity as the trustee of the Simon Feingold Practice Family Trust, the Edmund Gurgiel Practice Family Trust and the Ian Tuszynski Practice Family Trust, for payment of the share of the Mark Fagenblat Practice Family Trust as a partner in the legal practice conducted by the four family trusts under the name of the defendants. The Mark Fagenblat Practice Family Trust ("the Fagenblat trust") had retired from the partnership as at 30 June 2000. According to the reasons for judgment of the Honourable Justice Pagone in Fagenblat v. Feingold Partners Pty Ltd[1], the partners agreed that the main issue in the original proceeding was "the correct value of the practice as at 30 June 2000". However, the defendants also counterclaimed against Mr Fagenblat an entitlement to recover against him certain liabilities which were incurred by the practice before 30 June 2000.
[1][2001] VSC 479
After an eight day hearing, Justice Pagone handed down judgment on 17 December 2001 at first instance in the original proceedings. His Honour ordered the defendants to pay the plaintiff the sum of $375,399.00 plus interest of $55,164.12 and costs, including part of the costs on a solicitor/client basis. The counterclaim was dismissed.
The defendant has appealed against that judgment by notice of appeal dated 8 January 2002.
On 18 December 2001, Mr Fagenblat's solicitor served a creditors' statutory demand for payment of debt pursuant to s469E(2)(e) of the Corporations Act 2001 upon FGT Custodians Pty Ltd (formerly known as Feingold Partners Pty Ltd) ("the company") in respect of the liability of $430,563.12. There was no response to the statutory demand.
On 10 January 2002, Mr Fagenblat's solicitor applied under s459P of the Corporations Act 2001 for an order that the company be wound up in insolvency. That winding up application is returnable on 6 March 2002.
On 16 January 2002, Mr Samuel Richwol was appointed administrator of the company. The company's solicitor had previously told Mr Fagenblat's solicitor that the company was insolvent and invited Mr Fagenblat and his solicitor to inspect the financial records of the company in order to verify that it was insolvent.
Prior to the appointment of the administrator, the plaintiff's solicitor had made a demand on the company's solicitor for security for costs in relation to the appeal. It has since been agreed between the administrator and the plaintiff's solicitor that the company's further prosecution of the appeal be "put on hold" pending the outcome of the voluntary administration and pending the provision of security for the plaintiff's costs of opposing that appeal. In the voluntary administration, the defendants have proposed a deed of company arrangement which would see them contributing a sum of $30,000 to be applied to claims of unsecured creditors and the administrator's remuneration and expenses, including legal costs. In addition, the defendants propose that they will, at no cost to the company, fund the running of the appeal, including provision of any security for costs which may be ordered. The plaintiff has indicated that he will strongly oppose acceptance of the proposed deed of company arrangement.
Mr Fagenblat brings this proceeding in his capacity as trustee of the Fagenblat trust. His complaint is that the assets of the practice have been expended in making substantial payments to the other three family trusts and that virtually nothing is now left to meet the judgment owed to the Fagenblat trust. In addition, on 1 August 2001 the defendants merged the practice with another firm of solicitors. It is said that, after the merger, the accounts of the company ceased to disclose or allow for any value for goodwill.
In this proceeding, Mr Fagenblat alleges that the above conduct of the company was in breach of trust and that each of the defendants was knowingly involved in, and/or knowingly procured, the breaches by the company of its duties as trustee.
Whatever the finer points of the pleading, it is clear that this proceeding is an attempt by Mr Fagenblat, as the successful party in the original proceeding, to obtain the fruits of that judgment from the individual defendants in this action, given the insolvency of the judgment debtor in the original proceeding.
Mr Garrett, one of Her Majesty's counsel, who appeared with Mr Gardiner for the defendants, submitted that the whole premise of this proceeding was that a trust relationship continued after 30 June 2000 and that a reading of the minutes of the parties' meeting on 29 June 2000 revealed that this was wholly wrong and therefore the claim must fail. Although Mr Garrett accepted that this point was more appropriate for a summary dismissal application, he submitted that it was still applicable to the question of a stay. I am not prepared to investigate the merits of the claim on this application for a stay. It is quite inappropriate, in my opinion, to embark on that task at this early stage. In any event, I am far from convinced that, as a matter of law, the relationship of debtor and creditor necessarily excludes that of trustee and beneficiary. The intention of the parties would have to be examined.[2]
[2]See Barclays Bank Ltd v. Quistclose Investments Ltd [1970] AC 567 at 580-581 per Lord Wilberforce; Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v. Qantas Airways Ltd (1988) 13 NSWLR 331 at 340-341 per Hope, JA; and Walker v. Corboy (1990) 19 NSWLR 382 at 384 per Priestley, JA and at 395 per Meagher, JA.
Secondly, Mr Garrett submitted that it was premature to commence this proceeding when the appeal was on foot. He submitted that if the appeal were successful, then this proceeding would have been wholly unnecessary. Mr Garrett argued that the appeal would be successful because the trial Judge had erred in allowing certain expert evidence, given the family relationship between Mr Fagenblat and the expert, or the trial Judge erred in accepting expert evidence that did not take into account, in valuing the goodwill of the practice as at 30 June 2000, the subsequently known fact that Mr Fagenblat left the defendants' employment in August 2000.
Mr Garrett accepted that the amount of the capital account debt, $129,787, would not be altered by the outcome of the appeal. However, he said that there were two other factors to consider. First, if the counterclaim were successful, the amount payable by Mr Fagenblat to the company of $175,054, greatly exceeded the capital account debt. Although the damages claimed against Mr Fagenblat were a personal liability, Mr Garrett submitted that there was no reason why the two amounts could not be set off, with the result that there would be nothing owing to Mr Fagenblat. Alternatively, even if the appeal in respect of the counterclaim failed, Mr Garrett submitted that the way in which the plaintiff's case in this proceeding had been framed would have to be altered because on 11 April 2001 the company had made an offer of compromise in the original proceeding of $240,000. If the result of the appeal were that the plaintiff in the original proceeding recovered only $129,787, then Mr Garrett submitted that this would mean that the offer should have been accepted by Mr Fagenblat. Mr Garrett said that the company's accounts for the year ending 30 June 2001 disclosed that it could have paid that amount at that time. Thus, the plaintiff's case in this proceeding would fail on its present pleading.
Mr Dreyfus, one of Her Majesty's counsel, who appeared with Mr Robins for the plaintiff, submitted that the Court should be slow to stay a proceeding. He recognised that if the appeal were successful, costs have been unnecessarily incurred but said that the plaintiff was prepared to run that risk. He urged me to take into account what he submitted was the inherent weakness of the appeal by the company. He submitted that the appeal would clearly fail and that Mr Fagenblat should therefore be allowed to continue his efforts to recover the amount found to be owing to him under the judgment of Justice Pagone. Mr Dreyfus referred me to a number of authorities which he submitted stood for the proposition that there must be some good reason for the Court to grant a stay and that there is a heavy onus on the party seeking a stay to put forward a sound basis for inviting the Court to grant the stay. He submitted that there was no such basis advanced by the defendants in this case, particularly where the appeal would not extinguish its liability to Mr Fagenblat in its entirety, even if it were successful. The sum of $129,787 plus interest would still be owing to Mr Fagenblat, in his capacity as trustee of the Fagenblat trust. Mr Dreyfus further submitted that, even if the counterclaim were successful, the two amounts could not be set off against each other.
It is clear that an appeal does not operate as a stay of execution unless it is otherwise ordered (r64.25). A stay may be granted if it is shown that there is a real risk that a successful appeal will be rendered nugatory because it will not be possible to restore the appellant to the situation which prevailed prior to execution.
Of course, what is sought to be stayed here is not execution pending the hearing and determination of an appeal from the judgment at first instance, but the continuation of another proceeding pending the hearing and determination of the appeal in the original proceeding. Nevertheless, it seems to me that similar principles should apply. In McBride v. Sandland [No. 2][3], the High Court of Australia allowed an appeal from an order by the Supreme Court of South Australia staying a second proceeding pending the hearing of an application to the Privy Council for leave to appeal against the judgment of the High Court of Australia in an earlier proceeding. The first proceeding concerned a claim by the plaintiff for a declaration that he was the owner of certain land subject only to the defendant's tenancy which had expired. Notwithstanding that the High Court allowed the plaintiff's appeal, the defendant refused to give up possession of the land. The plaintiff therefore commenced the second proceeding claiming an order for possession and for mesne profits. It was this proceeding which the defendant sought to stay, based on her intention to seek leave to appeal to the Privy Council. All three judges of the High Court held that the appeal against the order granting the stay should be allowed. Barton J stated that a stay should not be ordered "without the very strongest grounds".[4] Isaacs J held that it was essential to a stay of proceedings that "a serious injury would result to the petitioner unless a stay was granted".[5]
[3](1918) 25 CLR 369
[4](1918) 25 CLR 369 at 374
[5](1918) 25 CLR 369 at 375
McBride v. Sandland [No. 2][6] is also support for the proposition that consideration of the likely outcome of the appeal is largely irrelevant to the question of the stay. Isaacs J held that it was not "a sufficient ground" for a stay that the judgment under appeal "might be wrong".[7] In contrast to this are the comments of Kirby J in Bryant v. Commonwealth Bank of Australia[8] concerning the necessity that "in every case, some estimate should be made of the utility and possible outcome of the appeal". This was said in the context of an application for a stay of proceedings on a sequestration order pending determination of an appeal in the original proceeding. Further, whilst embarking on a consideration of the prospects of the appeal may be an appropriate task for an appellate court, I consider it would be quite inappropriate for me to do so. It is not for me to sit on appeal from the judgment of my brother, Justice Pagone. I therefore decline to give any weight to Mr Garrett's submissions concerning the likelihood of the appeal being successful. Equally, I decline to give any weight to Mr Dreyfus' submissions as to why the appeal would clearly fail. Thus, submissions based on what might have to happen to the conduct of this proceeding should the appeal wholly succeed, or only succeed in respect of the plaintiff's claim but not in respect of the defendants' counterclaim, are not helpful, in my opinion, when considering whether or not this proceeding should be stayed.
[6](1918) 25 CLR 369
[7](1918) 25 CLR 369 at 375
[8](1996) 70 ALJR 306 at 310
Nevertheless, it is of some relevance, in my opinion, that the defendants accepted that whatever the outcome of the appeal, the sum of $129,787 plus interest would still be owing to Mr Fagenblat, in his capacity as trustee of the Fagenblat trust, particularly as I do not accept Mr Garrett's submission that this debt could be set off against any personal liability by Mr Fagenblat arising out of a successful appealing of the dismissal of the counterclaim.
The position is, therefore, that this proceeding has been regularly commenced by the plaintiff against the defendants. Mr Dreyfus referred me to the principles which have been developed as a useful guide to the exercise of the Court's discretion in determining an application for a stay where a defendant applies for a stay of civil proceedings until the completion of criminal proceedings on the ground that he has been charged with offences arising out of the same events involved in the civil proceedings. In my opinion, some of those principles are apposite to this case, even if only by way of analogy. They were set out by Wootten J in McMahon v. Gould[9] as follows:
"(a)Prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the court ...
(b)It is a grave matter to interfere with this entitlement by a stay of proceedings, which requires justification on proper grounds.
(c)The burden is on the defendant in a civil action to show that it is just and convenient that the plaintiff's ordinary rights should be interfered with …"
[9](1982) 7 ACLR 202 at 206. These principles were accepted and applied by Young CJ in Philippine Airlines v. Goldair (Aust.) Pty Ltd [1990] VR 385
The importance of what has been called "the fundamental principle that a plaintiff is entitled to have his action tried"[10]is also to be found in cases concerning stay applications on the basis of an inappropriate forum for the determination of the dispute.[11] The rationale for the exercise of the power to stay in those cases is said to be the avoidance of injustice between the parties in the particular case.[12]
[10]Rochfort v. John Fairfax & Sons Ltd [1972] 1 NSWLR 16 at 19 per Sugerman ACJ
[11]See, for example, St. Pierre v. South American Stores (Gath & Chaves) Ltd [1936] 1 KB 382 at 398 per Scott LJ
[12]See Voth v. Manildra Flour Mills Pty Ltd (1990) 171 CLR 538 at 554 per Mason CJ, Deane, Dawson and Gaudron JJ.
Accordingly, in my opinion, Mr Dreyfus was correct in his submission that the defendants had not discharged the onus of advancing a sound basis for the grant of a stay. There was no suggestion by the defendants that if there were no stay, their successful appeal would be rendered nugatory. All that they could point to was that they would have been forced unnecessarily to incur legal costs in defending the plaintiff's claim in this proceeding. In that event, an order for costs could be made to reimburse them for the unnecessary expense to which they had been put. It is relevant to note that there was no suggestion that Mr Fagenblat (with his right of indemnity from the assets of the Fagenblat trust) would be unable to meet any order that he pay the defendants' costs of this proceeding.
In announcing that I was of the view that a stay should be refused at this stage, I indicated that later in the proceeding the position may have changed and that my decision was obviously without prejudice to the defendants' right to seek to stay the matter subsequently. I also ruled that it was premature to order that the proceeding be removed from the Commercial List and indicated that I would look at that question again when the proceeding was ready to be set down for trial.
In the light of my decision, the plaintiff sought an order that the defendants pay the plaintiff's costs of the unsuccessful application for a stay on a solicitor/client basis. Mr Dreyfus submitted that the defendants' conduct had been high handed in that the plaintiff, by his solicitor, had given the defendants the chance to withdraw their application at the earliest possible opportunity. I am not persuaded that this is an appropriate case for the awarding of costs on a solicitor/client basis (see Colgate Palmolive Company v. Cussons Pty Ltd[13]). However, I am satisfied that the plaintiff is entitled to an order for costs on a party/party basis. Mr Dreyfus submitted, with some justification, that counsel would not have needed to be present at the directions hearing were it not for the defendants' stay application. Mr Garrett argued that costs should be reserved because eventually it would be shown that the whole proceeding was unnecessary. Alternatively, he seized on my reservation about a stay not being appropriate at this stage, as indicating that the application was justified. I see no reason to depart from the normal rule that costs should follow the event.
[13](1993) 46 FCR 225 at 233-234
The order of the Court will be:
1.The application that this proceeding be stayed pending the hearing and determination of the appeal in proceeding No. 6934 of 2000 is refused.
2. The defendants to pay the plaintiff's costs of and incidental to that application.
3.The defendants' summons dated 13 February 2002 otherwise adjourned to 24 May 2002.
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