Leroy as Trustee of the Bankrupt Estate of Mogilevsky v Mogilevsky
[2016] FCCA 1742
•12 July 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| LEROY AS TRUSTEE OF THE BANKRUPT ESTATE OF MOGILEVSKY v MOGILEVSKY | [2016] FCCA 1742 |
| Catchwords: BANKRUPTCY – Application to restrain trustee in bankruptcy from retaining solicitor – where solicitor sought to be restrained was largest creditor of bankrupt estate – where retention of solicitor compromised the appearance of the trustee’s impartiality – restrain ordered BANKRUPTCY – Application to remove trustee in bankruptcy– where trustee retained solicitor in proceedings to recover asset for bankrupt estate – where solicitor retained was largest creditor of bankrupt estate – where retention of solicitor compromised the appearance of the trustee’s impartiality – trustee’s removal refused |
| Legislation: Bankruptcy Act 1966, s.120 |
| Cases cited: Kallinicos v Hunt (2005) 64 NSWLR 561 |
| Applicant: | PAUL LEROY, TRUSTEE OF THE BANKRUPT ESTATE OF ALLA MOGILEVSKY (VIC 124/15/3) |
| Respondent: | EDWARD LEON MOGILEVSKY |
| File Number: | BRG 566 of 2015 |
| Judgment of: | Judge Jarrett |
| Hearing date: | 16 November 2015 |
| Date of Last Submission: | 16 November 2015 |
| Delivered at: | Brisbane |
| Delivered on: | 12 July 2016 |
REPRESENTATION
| Counsel for the Applicant: | Mr Morris QC with Mr Klevansky |
| Solicitors for the Applicant: | Worcester & Co. |
| Counsel for the Respondent: | Mr Robertson QC with Mr Hogan, by video link to Melbourne |
| Solicitors for the Respondent: | AJH Lawyers |
ORDERS
That the Applicant, in his capacity as trustee of the bankrupt estate of Alla Mogilevsky, be restrained from retaining or continuing to retain Jeremy Worcester and/or Worcester & Co as his lawyer;
That the Applicant pay the respondent’s costs of and incidental to the application to be agreed and if not agreed, to be taxed in accordance with the Federal Circuit Court (Bankruptcy) Rules 2006;
That the application filed by the Applicant on 5 November, 2015 be adjourned to a date to be fixed;
That the application be otherwise adjourned to 25 July, 2016 at 9:30 a.m. for directions.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
BRG 566 of 2015
| PAUL LEROY, TRUSTEE OF THE BANKRUPT ESTATE OF ALLA MOGILEVSKY (VIC 124/15/3) |
Applicant
And
| EDWARD LEON MOGILEVSKY |
Respondent
REASONS FOR JUDGMENT
There are two applications before me for determination. One is a summary judgment application in the proceedings brought by Mr Paul Leroy as trustee of the bankrupt estate of Alla Mogilevsky. In those proceedings Mr Leroy seeks an order that a transfer by Alla Mogilevsky to the respondent Edward Leon Mogilevsky dated 3 November, 2011 and registered on 23 November 2011 of Alla Mogilevsky’s interest as joint tenant in certain land be declared void as against the applicant pursuant to s.120 of the Bankruptcy Act 1966 (Cth).
The other is an application by the respondent for an order that Mr Leroy in his capacity as trustee of the bankrupt estate of Alla Mogilevsky, be restrained from retaining or continuing to retain Jeremy Worcester and/or Worcester & Co as his lawyer. In his application filed on 6 November, 2011 he asks for an alternative order that Mr Leroy be removed as the trustee of the bankrupt estate of Alla Mogilevsky. Despite that, it appears from the written submissions filed for Mr Mogilevsky and the oral submission made on his behalf that he seeks that order, as well as the restrain set out in his application as his primary relief.
With the parties’ concurrence, I determined to hear both applications, but to determine the application by Mr Mogilevsky first. If the primary relief sought by Mr Mogilevsky is granted, the first application should not be determined until Mr Leroy has retained further legal representation or, if necessary, a new trustee is appointed. If I refuse Mr Mogilevsky’s application, I will determine the application for summary judgment.
For the reasons that follow I have determined to make an order that Mr Leroy in his capacity as trustee of the bankrupt estate of Alla Mogilevsky be restrained from retaining or continuing to retain Jeremy Worcester and/or Worcester & Co as his lawyer. I have resolved not to order the removal of Mr Leroy as the trustee of the relevant bankrupt estate. Consequently, I have adjourned the hearing of the summary judgment application for further directions.
Mr Mogilevsky’s application
Alla Mogilevsky is the wife of the respondent Edward Mogilevsky. Since October, 2011 they have owned, jointly, real property situated at Brighton in Victoria.
On 26 September, 2011 Ms Irma Foxman commenced proceedings in the District Court of Queensland at Southport against Mrs Mogilevsky.
On 3 November, 2011 Mrs Mogilevsky transferred her interest in the land to Mr Mogilevsky for a consideration expressed to be ‘natural love and affection’.
On 24 October, 2012 judgment was entered in favour of Ms Foxman in the District Court proceedings against Mrs Mogilevsky for $747,093.17.
Mr Jeremy Worcester and Worcester & Co, the solicitors acting for Mr Leroy in these proceedings, acted for Ms Foxman in the District Court proceedings. By letter dated 2 November, 2012 Worcester & Co. informed Mrs Mogilevsky about the judgment given in the District Court and advised that Worcester & Co. acted for the judgment creditor, Ms Foxman.
On 15 January, 2015 Mrs Mogilevsky presented a debtor’s petition and, as a consequence, became bankrupt. Mr Joseph Loebenstein of Loebenstein Insolvency Services Pty Ltd in Victoria was appointed as the trustee of the bankrupt estate of Mrs Mogilevsky.
Of the five unsecured creditors identified by Mrs Mogilevsky in her statement of affairs, Ms Foxman was her major creditor by a large margin.
On 12 March, 2015 Worcester & Co., on behalf of Ms Foxman, wrote to Mr Loebenstein and informed him that Ms Foxman sought his replacement as trustee of Mrs Mogilevsky’s bankrupt estate by Mr Paul Leroy.
Mr Loebenstein sought the attitude of the other unsecured creditors to Mr Leroy’s substitution. There was, apparently, no objection. Consequently, Mr Leroy was substituted as the trustee of the estate of Alla Mogilevsky on 1 April, 2015. Mr Leroy practices in Sydney, New South Wales.
On 17 June, 2015 the present proceedings were commenced. Worcester & Co. are the solicitors on the record for Mr Leroy.
When Mr Mogilvesky’s application was commenced, and when argument commenced before me, it was Mr Mogilvesky’s case that because Mr Worcester acted for the largest creditor of Mrs Mogilevsky’s estate, it was appropriate to restrain Mr Leroy from engaging him or continuing to engage him as his solicitor.
But matters soon changed complexion. It emerged from the written submissions delivered for Mr Leroy that Ms Foxman is bankrupt. The assertion in the submissions was not supported by any evidence of that fact. Senior Counsel for Mr Mogilevsky sought to point that out, but in the course of his doing so, Senior Counsel for Mr Leroy said that he was instructed to give an undertaking that Mr Worcester “doesn’t and will not act for Ms Foxman”. It is not clear when Ms Foxman became bankrupt, but that may have come about in September, 2015. In any event it does not matter.
It later emerged, after Mr Mogilevsky’s solicitors undertook some inquiries with the trustee of the bankrupt estate of Ms Foxman over the luncheon adjournment, that Mr Worcester had taken an assignment of the debt owed by Mrs Mogilevsky to Ms Foxman. When that matter was raised with the Court it drew a concession from Senior Counsel for Mr Leroy that there was indeed an assignment to that effect.
It was said by Senior Counsel for Mr Leroy that the assignment was to secure the fees owing by Ms Foxman to Mr Worcester for acting for her in the District Court proceedings, interest on those fees and for other legal work and advice that he has done for Ms Foxman in the past. Nonetheless, the assignment was for the whole of the debt and Mr Worcester had lodged a proof of debt for the whole amount of the judgment with Mr Leroy. But, it was said, there would be a refund given of any amount that exceeded the amount due to Mr Worcester for his costs.
Consideration
In my view, Mr Worcester is in a position of conflict. As the largest creditor of Mrs Mogilevsky, Mr Worcester plainly has an interest in recovering as much of his debt as possible. That is achieved, amongst other ways, by ensuring that the estate from which provable debts might be paid is as large as possible. On the evidence, the interest of Mr Mogilevsky in the Brighton property represents the largest asset possibly available to Mrs Mogilevsky’s trustee in bankruptcy. It is in Mr Worcester’s interests for Mr Mogilevsky’s interest in the Brighton property to be brought into the estate’s assets.
Mr Leroy’s duty is to impartially administer Mrs Mogilevsky’s estate in bankruptcy. A trustee in bankruptcy must be independent and be seen to be independent: In Re Partridge, (Federal Court of Australia, Lockhart J, 22 September 1982, unreported) at p.3; In Re Hetherington, (Sweeney J, 14 December 1982, unreported); Re Lamb; Ex parte Registrar in Bankruptcy (1984) 1 FCR 391 at p.396; Lamb v Registrar in Bankruptcy (Vic) (1984) 4 FCR 269 at 270 – 271; Re Temple [2000] FCA 1406 at [12] and Re Pruzanski; Ex parte Horne [2000] FCA 151.
As Mr Leroy’s solicitor, Mr Worcester has a duty to act in the best interests of Mr Leroy in any matter in which he represents Mr Leroy, including these proceedings. Mr Worcester’s self-interest as the largest creditor of the bankrupt estate clearly conflicts with his duty to Mr Leroy.
Mr Mogilevsky’s application is against Mr Leroy, not Mr Worcester. He does not seek an order restraining Mr Worcester from acting for Mr Leroy. Rather, he seeks an order restraining Mr Leroy from retaining or continuing to retain Mr Worcester or his firm as his lawyer. That maybe a distinction without a difference.
As the Chief Justice of the Federal Court of Australia pointed out in Coshott v Burke [2013] FCA 553, to restrain a party from retaining particular lawyers is an exceptional step, founded on proper grounds, ultimately having at their root the protection of the administration of justice. In that case, the Chief Justice adopted with approval the summary of principles by Brereton J in Kallinicos v Hunt (2005) 64 NSWLR 561 that should be observed when considering such a restraint. In that case, Brereton J suggested that the following matters were of importance when a court was called upon to restrain a party from retaining particular lawyers (citations omitted):
[76] The foregoing authorities establish the following:
• During the subsistence of a retainer, where the court’s intervention to restrain a solicitor from acting for another is sought by an existing client of the solicitor, the foundation of the court’s jurisdiction is the fiduciary obligation of a solicitor, and the inescapable conflict of duty which is inherent in the situation of acting for clients with competing interests.
• Once the retainer is at an end, however, the court’s jurisdiction is not based on any conflict of duty or interest, but on the protection of the confidences of the former client (unless there is no real risk of disclosure).
• After termination of the retainer, there is no continuing (equitable or contractual) duty of loyalty to provide a basis for the court’s intervention, such duty having come to an end with the retainer.
• However, the court always has inherent jurisdiction to restrain solicitors from acting in a particular case, as an incident of its inherent jurisdiction over its officers and to control its process in aid of the administration of justice…
• The test to be applied in this inherent jurisdiction is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a legal practitioner should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice.
• The jurisdiction is to be regarded as exceptional and is to be exercised with caution.
• Due weight should be given to the public interest in a litigant not being deprived of the lawyer of his or her choice without due cause.
• The timing of the application may be relevant, in that the cost, inconvenience or impracticality of requiring lawyers to cease to act may provide a reason for refusing to grant relief.
Mr Worcester has never acted for Mr Mogilevsky. No basis other than the Court’s inherent jurisdiction to control its process in aid of the administration of justice was relied upon by Mr Mogilevsky for the order that he seeks.
The conflict of interest that exists between Mr Worcester’s interest and his duty to Mr Leroy as his solicitor in these proceedings impacts upon the appearance of independence, if not the actual independence of Mr Leroy. The test is not whether there is an actual absence of impartiality: the test is whether there might be, in the eyes of a fair-minded, reasonably informed member of the public, a perception of the absence of impartiality.
Such a perception has been held to arise where a solicitor retained to advise and act for a trustee in bankruptcy is also acting for a creditor who has made a contentious claim against the same bankrupt estate: Re Pruzanski; Ex parte Horne (2000) FCA 151. In that case there was a conflict between the solicitors’ duty to their client - a creditor in the bankrupt estate - and their duty to assist the trustee to impartially determine the validity of the claims made by other creditors. The solicitors’ conflict of duty and duty impacted upon the trustee’s appearance of impartiality.
However, such a perception has been held not to exist where lawyers who were owed sums of money by way of fees for work performed in the past were acting for a trustee in bankruptcy in proceedings, which if successful, would produce a fund of money for the trustee out of which legitimately incurred fees could be paid: Coshott v Burke (above). But that is a different position to that in the present case where the solicitor is a creditor of the estate, rather than a creditor of the trustee administering the estate.
The focus of much of the argument made for Mr Leroy was that here, as in Coshott v Burke, there is no contest between creditors for admission of their respective proofs of debt. In the absence of a proof of debt from Mr Mogilevsky, it was argued that the type of conflict identified in Pruzanski and Re Temple (above) does not and cannot arise. But in my view, that argument pays no attention to the broader principle identified in the case to which I have earlier referred that a trustee must be seen to be independent and impartial.
For the reasons I have attempted to explain, Mr Worcester’s concurrent position as the major creditor of the bankrupt estate and as the solicitor for the trustee of the bankrupt estate necessarily compromises the trustee’s appearance of independence and impartiality.
Those considerations are sufficient in my view to lead to the conclusion that Mr Leroy ought to be restrained from engaging or continuing to engage Mr Worcester, or his firm, as his solicitor. In my view such a restraint is necessary so as to protect the integrity of the judicial process and the due administration of justice, including the appearance of justice.
Although Mr Leroy is ordinarily permitted his choice of lawyer, here the impact upon the appearance of his independence of his present choice of lawyer furnishes sufficient cause to exercise the otherwise exceptional jurisdiction to restrain his choice.
I am not satisfied, however, that the evidence demonstrates that there is a need for Mr Leroy to be removed as the trustee of Mrs Mogilevsky’s estate. The compromise upon Mr Leroy’s independence will be removed if Mr Worcester or his firm no longer acts for him.
It was argued for Mr Mogilevsky that the continued prosecution of these proceedings by Mr Leroy and in particular, the commencement of summary judgment proceedings in circumstances where I have earlier set aside a judgment given in default of an appearance by Mr Mogilevsky indicates that the trustee has lost the appearance of independence. However, I disagree. There is a serious dispute as to whether Mr Mogilevsky is a creditor of his wife’s estate in the way in which he seeks to argue. The trustee’s case is not without merit. If his case succeeds, the proceedings will be vindicated. Whether the trustee’s legal interest in the land thus acquired would be subject to the mortgage liability affecting the transferred interest and also to Mr Mogilevsky’s asserted equity of exoneration is by no means certain.
I cannot conclude that Mr Leroy’s claim is futile and ought never have been made by a trustee acting in accordance with his duty to the general body of creditors as Mr Mogilevsky contends.
Conclusion
It was suggested in argument that it was necessary for Mr Mogilevsky to be a creditor of the estate for him to succeed in this application. It was not clear if that submission was advanced in respect of the injunctive relief that was sought against Mr Leroy, or the application to have him removed as trustee, or both. In any event I was taken to no authority or legislation that demonstrated that he needed to be clothed in the description of a creditor for him to succeed on his claim for the injunctive relief. In my view, Mr Mogilevsky need not be a creditor to secure the injunction that he seeks in these proceedings. He is a party to the proceedings. The outcome will necessarily affect his interest in the Brighton property whatever it might be. He is entitled, in those circumstances, to be interested in the impartiality of the trustee of Mrs Mogilevsky’s estate, at least insofar as these proceedings and the claim against him is concerned.
For the above reasons I make the orders set out at the commencement hereof. The applicant has been successful on his primary relief and should have his costs of the application.
I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Judge Jarrett delivered on 12 July, 2016.
Date: 12 July 2016
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