Hwang v Doherty t/as Lloyd Lancaster Lawyers

[2007] FMCA 1963

FEDERAL MAGISTRATES COURT OF AUSTRALIA

HWANG v DOHERTY T/AS LLOYD LANCASTER LAWYERS [2007] FMCA 1963

BANKRUPTCY – Annulment of sequestration order – solicitor’s unpaid fees for investigating medical negligence claim – ‘no win, no fees’ agreements – whether liability arose when client terminated her instructions – whether unconscionable to enforce – significance of failure to defend debt and bankruptcy proceedings – applicant did not establish that sequestration order ‘ought not to have been made’ – application dismissed.

Bankruptcy Act 1966 (Cth), ss.52(1), 52(2)(a), 109(1)(a), 153B(1)

Legal Profession Act 1987 (NSW)

Commercial Bank of Australia Ltd v Amadio (1982) 151 CLR 447
Re Pollock; Ex parte Pollock v Deputy Federal Commissioner of Taxation, unreported, 4 March 1994
Rigg v Baker (2006) 155 FCR 531
Stankiewicz v Plata [2000] FCA 1185
Wolff v Donovan (1991) 29 FCR 480
Wren v Mahony (1972) 126 CLR 212

Applicant: LEANNE HWANG (AKA LE YEN HWANG)

Respondent: PETER DOHERTY T/AS LLOYD LANCASTER LAWYERS

File Number: SYG 2743 of 2007

Judgment of: Smith FM

Hearing date: 20 November 2007

Delivered at: Sydney

Delivered on: 30 November 2007

REPRESENTATION

Counsel for the Applicant: Mr S Moffet

Solicitors for the Applicant: Teakle Ormsby Conn

Counsel for the First Respondent: Mr P Doherty

Solicitors for the Respondent: Lloyd Lancaster Lawyers

ORDERS

1. The application is dismissed.

2. The respondent creditor’s costs, including all reserved costs, be taxed and paid from the estate of the applicant bankrupt in the priority fixed by s.109(1)(a) of the Bankruptcy Act 1966 (Cth).

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 2743 of 2007

LEANNE HWANG (AKA LE YEN HWANG)

Applicant

And

PETER DOHERTY T/AS LLOYD LANCASTER LAWYERS

Respondent

REASONS FOR JUDGMENT

1. Mrs Hwang was made bankrupt on 5 April 2007. The sequestration order was made in her absence by a Registrar on a petition of Mr Doherty, trading as Lloyd Lancaster Lawyers. The petition was based upon an unpaid default judgment for $39,000.08 obtained in the Local Court on 8 August 2006, a bankruptcy notice based on that judgment having been served on her on 25 October 2006. At all times, Mrs Hwang was aware of Mr Doherty’s claim against her for unpaid legal fees, and of all the steps taken by him to enforce their payment, including the listing of the petition on 5 April 2007. At all relevant times she had employed her present solicitors to deal with Mr Doherty’s claim, and they were aware of every document served on Mrs Hwang. However, neither she nor her solicitors took any steps to defend or oppose Mr Doherty’s proceedings, until after she was made bankrupt.

2. She now seeks to persuade me that the sequestration order “ought not to have been made” by the Registrar, and that the Court should in its discretion annul her bankruptcy under s.153B(1) of the Bankruptcy Act 1966 (Cth). She contends that she “has at least a reasonably arguable case to have the default judgment set aside”, on the basis that no debt was owing to Mr Doherty. She also contends that she is solvent “but for the debt created by the default judgment”.

3. The first contention does not properly relate to the principles upon which the Court decides whether a sequestration order “ought not to have been made” under s.153B(1). These were recently examined by French J in the Full Court in Rigg v Baker (2006) 155 FCR 531 at [59]‑[69], and were more concisely summarised by another Full Court in Stankiewicz v Plata [2000] FCA 1185 at [19] and [20]:

   19In Re Williams (1968) 13 FLR 10, Gibbs J explained the approach to be taken to the then equivalent of s 153B of the Bankruptcy Act (at 23):

   “In determining the question whether the sequestration order ought not to have been made, the court is entitled to consider not only the case as disclosed at the time the order was made, but as it would have been disclosed had all the true facts been before the Court on the making of the order.  If the Court is satisfied that the order ought not to have been made, it is not bound as a matter of course to annul the order, but must consider in the light of all the circumstances of the case whether the order ought to be annulled.” (Citations omitted.) 

   20In Re Ditford; ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347, Gummow J observed (at 350) that the “true facts” which are to be considered include those known at the hearing of the annulment application to have existed at the time the sequestration order was made, but exclude those facts that have occurred since the order was made. See also Re Ginnane; ex parte Ginnane (1994) 60 FCR 429, at 445‑446; Re Gollan; ex parte Gollan (1992) 40 FCR 38, at 40‑41.

4. The judgment of Carr J in Re Pollock; Ex parte Pollock v Deputy Federal Commissioner of Taxation, unreported, 4 March 1994, which was relied upon by Mrs Hwang, considered other authorities where a sequestration order was made without proper notice to the debtor, so that a prima facie ground of annulment “ex debito justitiae” might appear to arise. In such a situation, it may be appropriate to apply a test of “reasonably arguable case” to a disputed debt in an annulment application. However, that was not the situation in the present case, since Mrs Hwang has at all times been on notice of every stage of Mr Doherty’s proceedings against her, and she has never been unfairly denied an opportunity to put forward a defence to his claim nor to otherwise oppose bankruptcy.

5. In this situation, the initial issue facing Mrs Hwang is to establish that, on the evidence now presented to me, the bankruptcy court would have been bound to have refused to allow Mr Doherty to rely upon the Local Court judgment and his affidavit of debt, when being satisfied of the proof of his debt under s.52(1) of the Bankruptcy Act. In effect, I need to be persuaded that there was sufficient reason to look behind the default judgment in the Local Court, and then to find that “in truth and reality” she did not owe the debt to him (cf. Wren v Mahony (1972) 126 CLR 212 at 224 and Wolff v Donovan (1991) 29 FCR 480).

6. In this context, there is a suggestion in Rigg v Baker (supra) at [71] that “where a party voluntarily absents himself or herself from a hearing of a petition and does not take any other step to oppose the order sought, there is a significant, if not insuperable, obstacle raised to the proposition that the registrar or a judge hearing the petition was bound not to make a sequestration order”. In the present case, Mrs Hwang’s solicitors have not given evidence explaining why she never filed a notice of opposition, nor explaining their absence from the hearing of the petition after an adjournment by consent. Mrs Hwang herself admits knowing of the listing, and appears to claim that at this time, as earlier, she relied upon vague assurances that her solicitor “was looking after the case and he was corresponding with Peter Doherty”. However, there is no clear assertion that she ever instructed them to take any step to oppose Mr Doherty’s proceedings in either the Local Court or this Court. I am far from persuaded that there was not a “voluntary absenting” of the applicant and her legal representatives on the occasion of the hearing of the petition.

7. However, my failure to be satisfied that the sequestration order ought not to have been made relies upon more than the circumstances of its making. This is because I am not persuaded that the applicant has presented a case which establishes that the bankruptcy court would have “gone behind” the local court judgment, and would have found that no debt existed, if it had before it the evidence of Mrs Hwang now given to the Court.

8. In September 2001, Mrs Hwang engaged Mr Doherty as her solicitor to investigate and advise on a claim against medical practitioners and hospital authorities who she suspected were negligent in their care of her infant son at a time when he first developed or exhibited symptoms of autism and chronic eczema. The matter required, and was given, considerable attention by Mr Doherty, and by experts and counsel consulted by him. His instructions were suspended between August 2002 and May 2003, while Mrs Hwang instructed another firm of solicitors, before she again engaged Mr Doherty in the matter. In June 2003, Dr Kathy Sant of counsel delivered a lengthy and thorough opinion, which exposed the complex issues and risks facing the commencement of litigation against various potential defendants. Among the issues raised by her, was a difficulty facing the appointment of Mrs Hwang as tutor for her son, since there was a possible claim against her for contributory negligence. It appears that all the issues were discussed with Mrs Hwang in conference with counsel in June 2003.

9. In October 2003, Mrs Hwang decided to terminate Mr Doherty’s instructions in the matter, and commenced to instruct her current solicitors. On 14 November 2003, they wrote to him stating: “we have been instructed to act on behalf of Master Hunter Hwang in relation to a possible medical negligence claim”. They requested that he forward “our client’s file”, and enclosed an authority signed by Mrs Hwang. Much further correspondence ensued, both in relation to the release of the documents held by Mr Doherty, and his efforts to obtain remuneration for his past work. Under their instructions, Mrs Hwang received further advice about the negligence claim, including some negative opinions from counsel. The current state of the negligence claim is unclear on the evidence, but I infer that no litigation has yet been commenced, and that Mrs Hwang and her solicitors may be waiting until Hunter Hwang reaches 18 before deciding what to do.

10. Although there may be some dispute about her reasons for terminating Mr Doherty’s employment in the matter, it is not now alleged that this was occasioned by any repudiation of his engagement nor breach of professional responsibilities on the part of Mr Doherty. Nor is it alleged that the work and disbursements itemised by him in an invoice dated 19 February 2004, and in an itemised bill of costs dated 14 December 2005, were improperly incurred, performed, or quantified. The latter bill was independently costs‑assessed at $31,071.40, and it was this amount, with interest, which eventually gave rise to the Local Court judgment entered on 8 August 2006. In the interim period, Mrs Hwang and her solicitors were given ample opportunities to dispute the bill, including by exercising her rights to apply to the Supreme Court for an assessment under the Legal Profession Act 1987 (NSW). It is not now alleged that she has any basis for challenging the judgment debt under that Act or its successor.

11. Mrs Hwang’s defences which were submitted to have been raised on the material before me, contend that no liability whatsoever to Mr Doherty was enforceable under his fees agreements with Mrs Hwang, either upon the proper construction of two written agreements executed by her, or by the application of equitable principles of unconscionability.

12. Mrs Hwang’s first engagement of Mr Doherty occurred in the course of her attendance at his office on 21 September 2001. A written costs agreement has that date and is signed by both parties. It confirms “your instructions that we act on your behalf to claim compensation in respect of injuries sustained by you as a result of medical negligence”. In relation to Mr Doherty’s right to charge for his work, two clauses of the agreement need to be reconciled:

    3.Legal Fees 

    3.1We are entitled to charge you legal fees from the commencement of your instructions to us but as discussed, we are prepared to act on your behalf on the basis that you do not have to pay our legal fees unless your claim is successful.  Your claim will be considered to be successful if: 

    3.1.1The Court awards a verdict in your favour; 

    3.1.2Your claim is settled by agreement; or

    3.1.3The Defendant(s) and / or Respondent(s) offer you a sum of money which we or the barrister assisting us in the preparation of your case advise you that you should accept in settlement of your claim, whether or not you accept the amount offered or not. 

    … 

    7.Ceasing To Act 

    7.1If prior to the conclusion of your case we cease to act on your behalf then all legal fees, barrister’s fees and any outstanding legal disbursements will become immediately payable by you to us. 

    7.2We are entitled to cease acting on your behalf if: 

    7.2.1You mislead us as to the facts surrounding your case, including in relation to the circumstances of any accident, any previous accidents, any previous injuries or the type and extent of your current injuries, your medical history and pre‑existing conditions and any previous personal injury claims;

    7.2.2If you fail to co‑operate with us in the preparation of your claim;

    7.2.3If you indicate to us that we no longer have your confidence in the preparation and pursuit of your claim;

    7.2.4If you do not accept and act in accordance with our advice; or

    7.2.5If you fail to pay legal disbursements as and when they are incurred. 

    7.3Subject to Clause 7.1 you may terminate our instructions at any time. 

13. In my opinion, an objective construction of the parties’ intention shown in this document must lead to the generality of the cl.3.1 statement “you do not have to pay our legal fees unless your claim is successful” being qualified by the specific provision of cl.7.1 that “all legal fees …will become immediately payable by you to us” “if prior to the conclusion of your case we cease to act on your behalf”. This provision would otherwise be rendered meaningless. The other provisions of cl.7 clearly encompass within “cease to act” any action in which “you may terminate our instructions at any time”.

14. In my opinion, Mrs Hwang had no prospect of success in any defence to a claim for fees incurred under the 21 September 2001 fees agreement, on the ground that its terms did not give rise to an immediate liability upon her terminating Mr Doherty’s services.

15. I can find nothing in the extraneous evidence which is before me about the surrounding circumstances in which the September 2001 agreement was executed, which either provides a “matrix of facts” allowing a contrary construction, or which raises an arguable case that the agreement was unenforceable for unconscionability.

16. Mr Doherty’s affidavit gave no account of his consultation with Mrs Hwang on 21 September 2001, and he was not required for cross‑examination.

17. Mrs Hwang’s affidavit said only: “I first saw Peter Doherty about a claim for my son in 2002.  My understanding of my agreement with Mr Doherty in relation to costs for my case was ‘no win, no fee’”. She also said that in 2005, when she received his itemised bill: “I instructed my solicitors that the cost agreement was ‘no win, no fee’ and that I would not pay Mr Doherty’s fees”. Although she had sworn her affidavit in English without an interpreter, she declined to be cross‑examined without the assistance of an interpreter, and no interpreter had been arranged for the hearing. I therefore would not draw any conclusions from the absence of cross‑examination of Mrs Hwang. Moreover, her evidence as to her “understanding” of the agreement carries little weight, and is not inconsistent with an awareness on her part that Mr Doherty’s engagement was only “no win, no fee” so long as he was employed with the carriage of the matter.

18. Mrs Hwang gives no sworn evidence to the Court that she was ever misled by Mr Doherty as to the terms of his engagement, or was improperly pressured or taken advantage of by him. A letter given to her with the fees agreement on 21 September 2001, drew attention to the agreement and of her right to get independent legal advice about it. The fact that she re‑engaged him in 2003, and employed him over several years of extensive contacts, suggests that she had confidence in his professionalism. Subsequently, when she was receiving independent advice, she did not claim prior to September 2007 to have been misled or imposed upon, nor take any step to oppose the entry of judgment and enforcement of the bill of costs through bankruptcy proceedings. This conduct must also weaken the credibility of any claim of unconscionable conduct in the making of the 2001 fees agreement.

19. Counsel for Mrs Hwang argued that it would be unconscionable for Mr Doherty to enforce her liability to pay his fees before the successful completion of the negligence claim, under principles applied in Commercial Bank of Australia Ltd v Amadio (1982) 151 CLR 447. He referred to her evidence that “English is my second language”, that she was a full‑time carer of a child with impairments, that her previous occupation was a hairdresser, and the compassionate background to the fees agreement, as factors which showed that she was in a special position of disability, so as to require Mr Doherty to justify the fairness of the transaction (cf Amadio at 474).

20. However, I do not regard the evidence of these matters as placing Mrs Hwang in a special or vulnerable position in her decision to engage Mr Doherty upon the terms of his fees agreement. She was an adult person, able to read English and therefore, presumably, able to understand the simple language of cl.7.1 of the agreement. In the absence of any evidence from her, I cannot find support for a finding that its terms were not sufficiently explained by him to her in accordance with his professional responsibilities. In the absence of any evidence suggesting that Mr Doherty made misleading statements about its terms, or otherwise abused his position as a solicitor when accepting her instructions, and in the absence of any apparent unfairness in the terms of his engagement, I do not consider that she has raised an Amadio defence of any real substance.

21. I am not persuaded by her evidence to find that it was not appropriate for the Registrar to have relied upon the Local Court default judgment when making the sequestration order, in so far as it relied upon a debt arising under the 2001 fees agreement.

22. Mrs Hwang’s argument about the enforceability of the second fees agreement, executed by her on 5 May 2003, turns upon the construction of cl.1:

    1.Professional Costs and Disbursements 

    The following Professional Costs will be payable by you only if a successful outcome is achieved or a designated event occurs (see v.).  These Professional Costs will usually be recoverable to some extent from the insurer. 

    i.Time spent by a solicitor of LLOYD LANCASTER doing work requiring the skill of a solicitor (for example, but not limited to, time spent in conference, receiving instructions, advising, negotiating, appearing in court, telephone calls, drafting and settling documents and letters, reading documents and research) at the rate of $400.00 per hour ($40.00 per 6 minute unit). 

    ii.Time spent by non‑professional employees of LLOYD LANCASTER undertaking work not requiring the skill of a solicitor (such as filing and serving documents, searching records, making enquiries, delivering documents) at the rate of $120.00 per hour ($12.00 per 6 minute unit). 

    iii.As a result of this matter being conducted on a contingency basis in that you not being liable for our costs and disbursements if you lost then if your claim proceeds through the Court system and there is a successful outcome then a success fee whereby the professional costs payable will be increased 25% as provided for under the Legal Profession Act. However if you are not successful in your matter we confirm that we will not charge you for our Professional Costs.

    iv.The term professional time includes not only time that is necessary for LLOYD LANCASTER to spend on the client’s behalf but for also other time that the client may ask LLOYD LANCASTER to spend on the client’s behalf. 

    v.A successful outcome for the purpose of this Cost Agreement includes a determination by the Court in your favour or a negotiated settlement.  A designated event for the purpose of this Cost Agreement includes where you transfer the file to another legal practitioner or discontinue the matter. 

    vi.LLOYD LANCASTER Solicitors and Barristers reserves the right to alter its rates but only after the client has been advised. 

1. Counsel for Mrs Hwang argued that “a designated event” as defined in c.1(v) had never occurred, because Mr Doherty had refused to forward his file of documents to her new solicitors when requested, but had claimed a lien over them pursuant to cl.14 of the agreement. He submitted that the designated event of “where you transfer the file to another legal practitioner” had not occurred, and that there was no evidence that she had “discontinued the matter”.

2. I accept that the language of this agreement should not be stretched to arrive at a construction favouring its proponent. However, the language should be given a sensible construction in the light of the apparent purposes and context of the agreement. In my opinion, the agreement was clearly using the term “you transfer the file to another legal practitioner” as a “simple language” equivalent of “you terminate the solicitor’s instructions and instruct another legal practitioner in the matter”. I do not consider that it carries the sense of “physically pass over” the file containing the client’s papers relevant to the matter. To read it this way would not give proper effect to cl.14, which maintained a solicitor’s normal lien over papers after the termination of services, and confirms an intent that a liability to fees was intended to arise before the physical release of the client’s papers. The reading which Mrs Hwang supports would also be inconsistent with the reference to “you transfer the file”, which is contemplating a terminating action taken by the client, not the solicitor.

3. I therefore do not accept the construction submitted on behalf of Mrs Hwang. It is clear on the evidence that she did “transfer” the carriage of the matter from Mr Doherty to her current solicitors no later than November 2003. She therefore had no defence to a liability to fees arising under the May 2003 fees agreement, based on its construction. For reasons given above, I also do not consider that she has sufficiently raised a defence based on the argued unconscionability of allowing the fees agreements to be enforced.

4. I therefore do not accept that Mrs Hwang has established that the Registrar ought not to have relied upon the evidence of debt which was before him on 5 April 2007.

5. The further contention of Mrs Hwang’s ability to pay her debts appears to have assumed that she had no liability for Mr Doherty’s fees. Moreover, no evidence was led from her which was clearly directed at her financial position as at 5 April 2007. Her current financial position, as reported upon by her trustee in bankruptcy, shows that there is a deficit in relation to available funds, and that it will be necessary to realise her shared interests in some real estate before her creditors and the costs of the bankruptcy and administration can be paid. She is not, therefore, at the present time a person who is “able to pay her debts” within a reasonable time (c.f. Stankiewicz v Plata (supra) at [27]‑[31]). On all the evidence, I am not satisfied that she was such a person as at 5 April 2007, and that the Court should have applied its discretion under s.52(2)(a) to dismiss the petition for that reason.

6. For the above reasons, I am not satisfied that the precondition to an order for annulment under s.153B(1) has been established by Mrs Hwang. I am not satisfied that the “sequestration order ought not to have been made”. I therefore do not need to consider whether, even if so satisfied, I would have exercised the discretion to make that order.

7. The application must be dismissed.

I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate:  Lilian Khaw

Date:  30 November 2007