Martindale ACF P/L v Johnson

[2013] FMCA 63

FEDERAL MAGISTRATES COURT OF AUSTRALIA

MARTINDALE ACF P/L v JOHNSON [2013] FMCA 63

BANKRUPTCY – Trustee rejects proof of debt – review of Trustee’s decision – Trustee’s decision upheld.

Bankruptcy Act 1966 (Cth), ss.102,104

Miles v Shell Company Australia (1998) 156 ALR 133
Union Bank of Australia v Harrison, Jones & Devlin [1910] 11 CLR 492
Wren v Mahony (1972) 126 CLR 212

Applicant: MARTINDALE ACF PROPRIETARY LIMITED

Respondent: GREGG ROBERTSON JOHNSON

File Number: ADG 66 of 2012

Judgment of: Simpson FM

Hearing date: 3 July 2012

Date of Last Submission: 3 July 2012

Delivered at: Adelaide

Delivered on: 8 February 2013

REPRESENTATION

Counsel for the Applicant: Mr White

Solicitors for the Applicant: O'Loughlins Lawyers

Counsel for the Respondent: Ms Walker

Solicitors for the Respondent: Madsen Rowley

ORDERS

1. The application filed on 4 April 2012 is dismissed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
ATADELAIDE

ADG 66 of 2012

MARTINDALE ACF PROPRIETARY LIMITED

Applicant

And

GREGG ROBERTSON JOHNSON

Respondent

REASONS FOR JUDGMENT

Introduction

1. I have before me an Application for Review of a decision by Gregg Robertson Johnson, the Trustee in Bankruptcy of the Estate of Patricia Heaton-Smith (“the respondent”), made pursuant to ss.102(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) on 19 March 2012 to reject a proof of debt in the sum of $18,497.63 lodged on behalf of the applicant Martindale ACF Pty Ltd (“the applicant”). The review is sought pursuant to ss.104(1) of the Act.

2. In these reasons, statements of fact are findings of fact arrived at on the balance of probabilities after a consideration of all of the evidence and the submissions put.

3. For convenience and clarity, throughout these reasons I will refer to Martindale as the applicant and the Trustee as the respondent.

Evidence relied upon

1. The applicant relied upon the following material:

   a)Affidavit of Stephen White filed on 4 April 2012;

   b)Affidavit of Elizabeth Bennett filed on 28 June 2012; and

   c)Affidavit of Stephen White filed on 28 June 2012.

2. The respondent relied upon the following materials:

   a)Affidavit of Chloe Parker filed on 17 May 2012;

   b)Affidavit of respondent filed on 18 May 2012;

   c)Affidavit of Grannie Shelley Lee Jones-Heaton-Smith filed on 5 March 2012; and

   d)Affidavit of Chloe Parker filed on 13 March 2012.

Background

1. The applicant operates an aged care facility known as Martindale Nursing Home situated at Gawler.  The father of the bankrupt was a resident of Martindale Nursing Home from 10 October 2007 until his death on 30 July 2010.  The bankrupt assisted her father to take up residence at Martindale Nursing Home.  Her father appointed her as his attorney pursuant to a Power of Attorney and subsequent to his death, she became the Executor of his Estate.

2. The applicant believed that Ms Heaton-Smith was liable to it for the balance owing for nursing home fees after her father died.  The arrangement concerning the payment of nursing home fees had been that the Commonwealth Government would regularly pay a portion of the fees that were due each month and the balance would be paid by Mr Heaton-Smith with the assistance of Ms Heaton-Smith.

3. On 19 August 2010, solicitors for the applicant wrote to Ms Heaton-Smith in the following terms (emphasis added):

   “Dear Madam

   Martindale Nursing Home

   We act for Martindale ACF Pty Ltd, the registered proprietor of the Martindale Nursing Home.

   Your late father, Mr Alec Heaton-Smith was a resident of our client’s aged care facility from 10 October 2007 until his death on 30 July 2010.  Indeed, you witnessed your father’s signature on the documents executed by him that enabled him to take up residence at our client’s facility.  We also understand that you were your father’s appointed attorney pursuant to a Power of Attorney, and with access to your father’s funds, you acquired a property which is registered in your own name at 5 Wandi Close, Riverhills in Queensland.  While it is not of immediate concern to our client, you obviously hold that property as a trustee for the benefit of your father, and therefore it must form part of his estate.

   Our client has for some time been concerned that neither your father, nor you on his behalf, contributed the unfunded portion of the fees to our client’s facility.  At the date of his death, the amount outstanding to our client is the sum of $15,192.66.  We enclose a copy of the final reconciliation of your father’s account for July 2010.  We understand that you have ignored correspondence from our client, and furthermore ignored correspondence from the Public Trustee.

   Our client has no other interest in your father’s estate other than to recover its outstanding residential care fees, and their legal costs.

   We are not aware whether your father died having left a Will, or intestate.  We do understand that you are your father’s only child, and the only relative is a brother in the United Kingdom, Derick.  In any event, you are likely to be the executor of your father’s estate, or will not doubt be the administrator pursuant to Letters of Administration.  Either way, you will have control of your father’s estate, and will be, if not the sole beneficiary, the major beneficiary.

   Our client wishes to have the matter of its outstanding fees resolved, and there is no reason for it to wait any longer.

   Our client requires payment of the following:

   1.  Outstanding care fees             $15,192.66
   2.  Legal costs incurred to date   $2,000.00

   Total  $17,192.66

   Our client wishes to resolve this matter without resorting to legal proceedings, however in the event that the matter is not resolved in the short term, this letter should be treated as a Notice of Intention to Sue pursuant to Rule 20A of the Magistrates Court Rules, which requires twenty one (21) days’ notice before proceedings are instituted.

   To avoid further action we request that you contact the writer as a matter of priority.  Alternatively, if you have already instructed solicitors in respect of your father’s estate, would you please have them respond to this letter.  All correspondence and communication in this matter should now be with our office.

   Yours faithfully
   O’Loughlins Lawyers”

1. Ms Heaton-Smith responded to the letter by contacting the applicant’s solicitor’s office by telephone and indicating that she was not going to pay the debt.

2. The solicitors sent a further letter to Ms Heaton-Smith on 25 August 2010.  It was in the following terms:

   “Dear Madam

   Martindale Nursing Home

   We refer to our letter of 19 August 2010 and your message to our receptionist on Tuesday 24 August 2010.

   ...

   Your comments appear to be entirely off the mark.  Your remarks seem to suggest that we have some issue with your father’s Will.  That is not the case, we do not even know whether your father died having left a Will or not.

   This matter has come to our hands because you have previously ignored correspondence from our client.  We also understand that you have not been responsive to previous correspondence from the Public Trustee office.

   Our client was responsible for your father’s care while he was a resident at our client’s aged care facility.  There is an outstanding amount due to our client in the sum of $15,192,66 together with legal costs incurred to date of $2,000.00 for a total of $17,192,66.  If you provide us with a cheque for that amount that will be the end of the matter.

   The point about your father’s Will is that if there are not funds immediately available, then we need to lodge this claim with the solicitors instructed with the responsibility of acting for the Executor of the estate.  We assume you will be the Executor.  We simply require an assurance that our client will be paid either now, or out of the proceeds of the estate.  Given the rather long history of inaction on your part, we simply wish to secure payment of our client’s fees and legal costs.

   We shall await your response.

   Yours faithfully
   O’Loughlins Lawyers”

1. Ms Heaton-Smith failed to respond to the letter of 25 August 2010 as a result of which on 12 November 2010, proceedings were commenced in the Port Adelaide Magistrates Court.  Ms Heaton-Smith failed to respond to the summons that was served upon her with the result that on 20 December 2011, default judgment was entered against Ms Heaton-Smith for the sum of $18,497.63 in favour of the applicant.

2. On 13 January 2011, solicitors for the applicant wrote to Ms Heaton-Smith.  The letter was in the following terms:

   “Dear Madam

   Martindale ACF Pty Ltd v Patricia Heaton-Smith

   Magistrates Court of South Australia at Port Adelaide Action No. 700 of 2010

   We refer to our previous correspondence and, in particular, our letters of 19 August 2010 and 25 August 2010.

   As you are aware, we instituted the above proceedings and you were served with a copy of these proceedings by the Court on or about 12 November 2010.  You failed to file a Defence or, for that matter, respond to the proceedings in any way.

   On 15 December 2010, in the absence of any Defence, we proceeded to sign judgment in the sum of $18,497.63.  For your reference we enclose a copy of the Certificate of Judgment.

   We appreciate that while the judgment may be against you, you are entitled to recover from your father’s estate.  If you have not already done so, you should draw this matter to the attention of those acting in the administration of your father’s estate and request that they contact the writer for the purposes of confirming when payment of the judgment sum will be settled.

   In the event that we do not hear from you prior to the close of business on Thursday, 27 January 2011 we are instructed to proceed to enforce the judgment.  This may include the issue of a bankruptcy notice, or an attempt to execute against other assets held by you.

   You should also be aware that if further action is taken, a copy of this letter may be produced to a Court of appropriate jurisdiction as evidence that the judgment, and the possibility of further action, has been drawn to your attention.

   Yours faithfully
   O’Loughlins Lawyers”

1. Ms Heaton-Smith failed to respond to the letter.

2. On 10 February 2011, a Bankruptcy Notice was issued against the bankrupt.  The Bankruptcy Notice was served on the bankrupt on 16 February 2011 at her home. 

3. Ms Heaton-Smith engaged a lawyer briefly in March 2011 as a result of which solicitors for the applicant delayed taking the next step, namely to file a Creditor’s Petition.

4. As no progress was being made, on 6 July 2011, solicitors for the applicant issued a Creditor’s Petition which was served on the bankrupt on 11 July 2011 at her residence.  Again, Ms Heaton-Smith took no action.  On 8 August 2011, a Sequestration Order was made against the Estate of Ms Heaton-Smith.

5. On or about 12 February 2012, the applicant through its lawyers, submitted a Proof of Debt in the bankrupt estate of Ms Heaton-Smith in the sum of $18,497.63 and stated that it was a judgment debt.  The Proof of Debt form stated that the Copy of Record (presumably of the Magistrates Court) was attached.  The Copy of Record was not attached to the document put before the Court by affidavit of Mr White, solicitor having the conduct of the matters for the applicant.

6. By notice dated 19 March 2012 the respondent advised the applicant that the claim against the estate was rejected on the basis that the respondent’s investigations into the claim did not support the debt being owed personally by Ms Heaton-Smith.  The respondent also sent a letter to the applicant also dated 10 March 2012, in which a detailed explanation was given as to why the claim was rejected.  The explanation contained in the letter succinctly explains why the respondent rejected the proof of debt.  It is worthwhile to provide the text of the letter in full in these reasons:

   “Dear Sir

   Bankrupt Estate of Patricia Heaton-Smith
   Estate No SA 1002 of 2011/5

   I refer to my appointment as Trustee of the Estate and to previous communications regarding the claim of Martindale ACF Pty Ltd (“Martindale”) against the Bankrupt for an amount of $18,497.63.

   As you are aware, I have made various enquiries of the debt and also sought legal advice on the adjudication of the claim in the bankruptcy.

   Please note that the legal advice received recommends I reject the claim of Martindale as the Bankrupt is not personally liable for the debt.

   Determination

   As you are aware, the mere fact that the debt is the subject to a formal judgment does not preclude me, in my capacity as trustee, from going behind the judgment to confirm whether the debt is truly owed.  This is especially so where, as in the present case, the judgment has been obtained by default without a trial of the issues.

   You have provided to me a copy of the Magistrates Court claim.  The particulars of claim set out the grounds relied upon by Martindale to claim that the Bankrupt was personally liable for outstanding aged care fees payable under a Residential Care Service Agreement dated 21 October 2007 (“Agreement”).

   It is alleged in the particulars of claim that the Agreement was signed by Mr Alec Heaton-Smith who was a resident of Martindale’s aged care facility from 10 October 2007 until his death on 30 July 2010.  The Bankrupt is the daughter of the late Mr Alec Heaton-Smith.

   The particulars of claim allege that the Bankrupt was the attorney (or agent) of Mr Heaton-Smith pursuant to a power of attorney and that she was a witness to his signature on the Residential Care Service Agreement – paragraph 4.  The particulars also allege that the Bankrupt was the executor of the estate of the late Mr Heaton-Smith.

   One of the grounds relied upon by Martindale for claiming that the Bankrupt was liable for the relevant debt was because she was the appointed attorney of Mr Heaton-Smith – paragraph 9.  However, the mere fact that the Bankrupt was an agent of the primary debtor does not necessarily render her liable for his debts.  To begin with, it is alleged in paragraph 4 that she merely witnessed his signature.  It does not state that she signed the Agreement on his behalf under the power of attorney.  If she has merely witnessed his signature, then the fact that she was his agent is not relevant to the question of liability.  Further, even if she did execute the Agreement as the debtor’s agent, she did so in circumstances where the identify (sic) of the principal was clearly disclosed.  An agent is not liable for the debts incurred by the agent on behalf of a disclosed principal.  Accordingly, the fact that the Bankrupt happened to hold a power of attorney granted in her favour b the primary debtor does not render her liable for his debts.

   The second ground for alleging that the Bankrupt was liable for the debt was because she was the executor or administrator of her deceased father’s estate.  Paragraph 7 of the particulars of claim alleges that the Bankrupt was therefore ‘responsible for the administration and winding up of the estate of the late Alec Heaton-Smith, including realising assets and paying any debts of the late Alec Heaton-Smith’.  That allegation is a broadly accurate statement of the obligations imposed upon an executor of a deceased estate.  However, the fact that the Bankrupt was the executor or administrator does not necessarily render her liable for the debts that were incurred during the lifetime of the deceased.  An executor may become liable for those debts if they are on notice of the debt in question but have chosen to distribute all the assets of the estate to beneficiaries prior to discharging the debt.  From my investigations this has not been the case.

   Accordingly, as a result of my determination I have enclosed a Notice of Rejection of Marindale’s Proof of Debt.

   I draw your attention to Section 104 of the Bankruptcy Act 1986 (“the Act” which entitles Martindale to make application to the Court for a review of my decision under Section 102(1), (2), (3) or (4) of the Act. Please note that subject to the power of the Court, you have 21 days from the date of the decision being made to apply.

   Should you have any queries please contact me.

   Yours faithfully

   Estate of Patricia Heaton-Smith
   GR Johnson
   Trustee”

Conclusions

1. The applicant does not dispute the respondent’s right to look behind a judgment debt to decide whether a claim should be accepted.  A trustee may do so if a view is formed for some good reason that there ought not to have been a judgment in which case, he or she may reject the proof of debt[1].  The question for the Court is whether there was in fact and in law a debt which could legally found the judgment[2].

   [1]     Wren v Mahony (1972) 126 CLR 212 at 224 – 225.

   [2]     Miles v Shell Company Australia (1998) 156 ALR 133 at 136.

2. The Statement of Claim in the Magistrates Court action that gave rise to the judgment debt stated that the bankrupt’s father was indebted to the applicant at the date of his death and that the bankrupt was personally liable to the applicant for these fees on the basis that, (a) she held a power of attorney in respect of her father’s affairs or, alternatively, (b) she was an executor of her father’s estate.

3. The fact that the bankrupt held a power of attorney for her father does not, per se, make her liable for her father’s debts.  No authority is needed for such a basic proposition.  There is no evidence that the bankrupt used the power of attorney in any way that made her personally liable to the applicant.  This aspect of the applicant’s case fails.

4. The second aspect of the applicant’s case is a criticism of the bankrupt’s administration of her father’s deceased estate.  The argument is put that the bankrupt did not do what she should have done as administrator of her father’s deceased estate, in that she did not pay the applicant what it was owed.  It is submitted that therefore she is personally liable to the applicant for the amount owed.  This does not follow.  If the bankrupt had failed to properly administer the deceased estate by failing to pay the deceased’s debts out of the estate’s asset pool or any other maladministration, action could have been taken by the applicant in the appropriate forum, namely, the Supreme Court of South Australia in its testamentary jurisdiction.

5. No legislation or authorities are relied upon by the applicant other than a quote from Union Bank of Australia v Harrison, Jones and Devlin[3].  The passage referred to does not assist the applicant’s argument that the bankrupt was liable for the debt.

   [3] [1910] 11 CLR 492 at 515 – 516 Issac J.

6. On the basis of the evidence put before me, I am not satisfied that there was a debt that genuinely existed.  The respondent was correct in his analysis of the position contained in his letter of 10 March 2012.  I am satisfied that the respondent was justified in not admitting the applicant’s proof of debt.

7. I make the orders to be found at the beginning of these reasons.

8. I will hear the parties on the question of costs.

I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of Simpson FM

Date:  8  February 2013