Martinez v Morris
[2011] FMCA 478
•25 July 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| MARTINEZ v MORRIS & ANOR | [2011] FMCA 478 |
| COSTS – Dismissal of a creditor’s petition on review of a sequestration order – competing claims for costs by the petitioning creditor, the debtor and the trustee in bankruptcy – petitioning creditor a firm of solicitors – debtor a third party payer – solicitors failing to meet the requirements of the Legal Profession Act 2004 (NSW) in relation to costs – costs orders against the solicitors. |
| Bankruptcy Act 1966 (Cth), s.32 Legal Profession Act 2004 (NSW), ss.302A, 317, 318A |
| Burlington Centre Supermarket Ltd v Karandonis [2000] FCA 1318 Cummings v Lewis (unreported, Fed Ct, Wilcox J, NG668 of 1989, 29 May 1992) Hall and Wilcox (A Firm) v O’Meara [2005] FMCA 1838 Inspector-General in Bankruptcy v Bradshaw (No.2) [2006] FCA 383 Jones v Porsche Centre Melbourne Pty Ltd [2000] FCA 1423 Kyriackou v Shield Mercantile Pty Ltd (No.2) [2004] FCA 1338 Latoudis v Casey (1990) 170 CLR 534 Oshlack v Richmond River Council (1998) 193 CLR 72 Principal Strategic Option Pty Ltd v Coshott [2001] FCA 664 Re Skase; Ex parte Donnelly (1992) 37 FCR 509 Rhodes v Tower Australia Superannuation Limited as Trustee for Tower Superannuation Fund [2004] FCA 812 Ruddock v Vardarlis (2001) 115 FCR 229 Winn v Brian Ward and Partners Pty Ltd [2007] FMCA 1090 |
| Applicant: | JUAN JOSE MARTINEZ AS TRUSTEE FOR THE MARTINEZ HWL PRACTICE TRUST TRADING AS HWL EBSWORTH LAWYERS |
| First Respondent: | ANTHONY MORRIS |
| Second Respondent: | VANESSA JACKSON |
| File Number: | SYG 2393 of 2010 |
| Judgment of: | Driver FM |
| Hearing date: | 24 June 2011 |
| Delivered at: | Sydney |
| Delivered on: | 25 July 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr R Foreman |
| Solicitors for the Applicant: | HWL Ebsworth Lawyers |
| Counsel for the second Respondent: | Mr J Johnson, with Ms B Nolan |
| Counsel for the trustee: | Mr Baird |
ORDERS
The petitioning creditor shall pay the costs and disbursements of Vanessa Jackson of and incidental to the creditor’s petition against her estate and also of the application to review the sequestration and costs orders made by the registrar against her estate, including any reserved costs
The petitioning creditor shall pay the costs and disbursements of the trustee of and incidental to the review application, including any reserved costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2393 of 2010
| JUAN JOSE MARTINEZ AS TRUSTEE FOR THE MARTINEZ HWL PRACTICE TRUST TRADING AS HWL EBSWORTH LAWYERS |
Applicant
And
| ANTHONY MORRIS |
First Respondent
| VANESSA JACKSON |
Second Respondent
REASONS FOR JUDGMENT
Introduction and background
On 21 February 2011 a registrar of this Court made a sequestration order against the estates of Anthony Morris and his wife Vanessa Morris (nee Jackson) (Vanessa Jackson). The registrar also ordered that the petitioning creditor’s costs be fixed in the sum of $4,370.20 and paid from the estate of the respondent debtors in accordance with the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”).
On 11 March 2011 Ms Jackson filed an application to review the registrar’s decision insofar as it dealt with her estate.
On 13 May 2011 the trustee of the bankrupts’ estates filed an application for annulment of Ms Jackson’s bankruptcy as a protective measure in the event that the review application was substantiated[1]. The trustee’s position was that in the event that the Court was minded to accept that a sequestration order should not have been made against the estate of Ms Jackson, the appropriate course was an annulment, so that the trustee might be protected on his costs of the administration of the bankrupt estate.
[1] SYG971 of 2011
On 19 May 2011 I stayed the sequestration order insofar as it related to the estate of Ms Jackson until further order and listed the proceedings for hearing on 24 June 2011.
The creditor’s petition had been based on a judgment debt for unpaid legal costs said to be due from Ms Jackson as a third party payer. The position was that the petitioning creditor is a firm of solicitors which had acted for Mr Morris but, apparently in anticipation that they might not be paid by him, obtained from Ms Jackson a third party payment agreement. At the time I issued the stay order on 19 May 2011, counsel for the petitioning creditor conceded that if, as was asserted by Ms Jackson, there had not been any disclosure as required by s.318A of the Legal Profession Act 2004 (NSW) (“the Legal Profession Act”) to her as an associated third party payer, they would be unable to sustain the sequestration order and the petition. The purpose of the stay and the adjournment to 24 June 2011 was to give the petitioning creditor time to identify the necessary disclosure required by the Legal Profession Act.
On 24 June 2011 counsel for the petitioning creditor confirmed what had been notified to the Court the preceding day, that the relevant disclosure had not been identified. It was not in dispute that Ms Jackson was not for relevant purposes a client of the petitioning creditor. Because she was an “associated third party payer” as defined in s.302A of the Legal Profession Act, and notice as required by s.318A had not been given, s.317 of the Legal Profession Act postponed an obligation to pay legal costs until they were assessed under Division 11 of that Act. The petitioning creditor was not able to maintain proceedings against Ms Jackson as an associated third party payer until the firm’s costs had been assessed. It further followed that proceedings under which the petitioning creditor obtained judgment by default against Ms Jackson were barred by the operation of s.317(2) of the Legal Profession Act and should not have been brought. Any obligation by Ms Jackson to make a payment to the solicitors was postponed by the operation of s.317 of the Legal Profession Act and, in the circumstances, the Court could looked behind the default judgment obtained. There was no proper basis for the bankruptcy notice and creditor’s petition subsequently issued and filed.
In the light of those facts and circumstances, I made orders on 24 June 2011 that the sequestration order made by the registrar be set aside insofar as it related to Ms Jackson and that the costs order made by the registrar be likewise set aside to the extent that it related to Ms Jackson. I further ordered that the creditor’s petition presented against Ms Jackson’s estate be dismissed. I did not consider that an annulment of the bankruptcy was an appropriate course in the circumstances, given that there was never any proper legal foundation for the legal proceedings brought against Ms Jackson by the solicitors. The review application was properly brought by Ms Jackson and I did not accept that the trustee in bankruptcy could establish a case for being remunerated for the administration of her former bankrupt estate.
The issue of costs
The remaining issue to resolve as between the petitioning creditor, Ms Jackson and her former trustee in bankruptcy is the costs of the legal proceedings brought or defended by the parties and the trustee. Ms Jackson seeks an order for costs on an indemnity basis because of asserted delinquency on the part of the petitioning creditor.
The petitioning creditor submits that the firm should receive an order for costs of the petition and review on a party/party basis, having regard to the fact that it was not until 17 May 2011 that the firm was alerted to the opposition of the petition based on the associated third party payer disclosure point. The solicitors place emphasis on the history of the matter as follows:
a)on 10 June 2010, Ms Jackson and Mr Morris were served with the statement of claim;
b)neither Mr Morris nor Ms Jackson ever filed a notice of appearance or defence in relation to the statement of claim;
c)default judgment was entered on 29 July 2010 as against both Ms Jackson and Mr Morris;
d)no steps have been taken by Ms Jackson to seek the setting aside of the default judgment;
e)on 10 October 2010, Ms Jackson and Mr Morris were served with bankruptcy notices;
f)on 15 December 2010, Ms Jackson was served with the creditor’s petition and supporting affidavits;
g)31 January 2011 was the first return date of the creditor’s petition. On that occasion, the matter was stood over to 21 February 2011. Ms Jackson’s legal representatives were informed that this had occurred;
h)on 21 February 2011, there was no appearance for Ms Jackson and the registrar made a sequestration order against her.
The solicitors rely on the decision of the Federal Court in Rhodes v Tower Australia Superannuation Limited as Trustee for Tower Superannuation Fund [2004] FCA 812 at [18]-[20] where the Court stated:
In the end, the substantive basis upon which the appeal was dismissed was that the Tribunal had no authority to vary the terms or set aside the imposition of the exit fee. That was so for two reasons. The first was that the imposition of the exit fee was not made pursuant to any decision taken by the Trustee and was therefore beyond the authority of the Tribunal to adjudicate. The second was that the Tribunal was prevented, by s 37(5) of the Act, from doing anything contrary to the terms of the contract of insurance or the rules of the fund.
In my opinion the discretion to award costs to a successful respondent may be informed by its failure to take a preliminary objection until the very last minute. I would not go so far as to say that it would be appropriate in any but exceptional cases to award costs against such a respondent. However it may be appropriate to refuse the benefit of an order for costs in such a case.
In the present case I have regard to the following factors:
1. The Tribunal’s authority to hear and determine the application was not challenged before the Tribunal.
2. The question of the Tribunal’s authority was not raised until the hearing of the appeal.
3. The Trustee is involved in the superannuation industry on a day-to-day basis and would be expected to have access at a much earlier stage than the hearing of the appeal to advice in relation to the powers of the Tribunal.
4. Much of the debate in the written and oral submissions at the appeal was wasted in light of the preliminary point taken.
5. There was no prior notice of the intention of the Trustee to take the preliminary issue.
The trustee seeks his costs of being represented in the proceedings instituted by the petitioning creditor and Ms Jackson. I have already ordered that there should be no order as to costs of the annulment application which was dismissed in consequence of the dismissal of the creditor’s petition and in circumstances where there was no argument on the annulment application. The annulment application simply fell away when it became apparent that there was no bankruptcy in law to annul.
In support of their application for costs, the petitioning creditor relied upon the affidavit of Anne Saab made on 23 June 2011. Ms Saab was cross-examined on her affidavit. It was apparent that Ms Saab is in a relatively junior position in the petitioning creditor’s firm and acted under the supervision and subject to the direction of Mr Mark Webeck of that firm. Mr Webeck did not give evidence.
Consideration
General principles concerning the awarding of costs are helpfully summarised in the submissions of counsel for Ms Jackson. The Court has a general discretion to order costs under s.32 of the Bankruptcy Act. A costs order is intended to compensate the successful party and not to punish the unsuccessful party[2]. The normal principle is that costs follow the event[3]. The discretion is unfettered, except it must be exercised judicially. There are recognised circumstances where a petitioning creditor may be able to be awarded costs, or part thereof, even though unsuccessful.
[2] Latoudis v Casey (1990) 170 CLR 534 at 543, 567; Oshlack v Richmond River Council (1998) 193 CLR 72 at [1], [67]; Ruddock v Vardarlis (2001) 115 FCR 229 at [13] (FC)
[3] Latoudis v Casey (1990) 170 CLR 534 at 542-3, 557, 567-569
In Re Skase; Ex Parte Donnelly (1992) 37 FCR 509 at 522, Drummond J treated as applicable certain propositions propounded by Wilcox J in Cummings v Lewis (unreported, Fed Ct, Wilcox J, NG668 of 1989, 29 May 1992):
a)the Court has an unfettered discretion as to its costs order;
b)but, because of the usual practice of the Court, a successful party has a reasonable expectation of recovering costs, in the absence of special circumstances;
c)the Court is entitled to look beyond the actual conduct of the case and have regard to the circumstances out of which it arose;
d)there must be a limitation on the weight to be put on the pre-litigation conduct, lest the exception overwhelm the rule;
e)the Court may take into account the conduct of the litigation by the successful party. Where a successful party has put the opposing party to significant expense in connection with an issue on which the party failed, it may be reasonable to take that matter into account by awarding something less than full party-party costs[4]; and
f)there is no difference in principle between the case of a successful applicant and that of a successful respondent.
[4] Also Inspector-General in Bankruptcy v Bradshaw (No 2) [2006] FCA 383 at [11]-[12]
Branson J in Principal Strategic Option Pty Ltd v Coshott [2001] FCA 664 said that these propositions provide a useful guide in bankruptcy matters. If a debtor does not apply either to set aside a judgment or bankruptcy notice, and the petitioning creditor acted reasonable in that it could not anticipate the defence raised at the hearing, a court may order that the petitioning creditor be entitled to recover its costs, or part thereof, against the debtor. This often occurs where the debtor for the first time raises some defect with the judgment debt or claims to be solvent. If the petitioning creditor is put on notice of a dispute and wishes to proceed and argue the point, then ordinarily the debtor will be entitled, if successful, to his or her costs after notice of that dispute was given to the petitioning creditor.
As I have already stated, there are circumstances in which an unsuccessful petitioning creditor will receive an order for costs notwithstanding the dismissal of the petition. Those circumstances include where the respondent debtor’s conduct has caused costs to be incurred unnecessarily. The petitioning creditor presented extensive authorities relating to such circumstances[5]. I am not persuaded that this case is an example of such a circumstance where there should be a costs order in favour of the unsuccessful petitioning creditor. It is apparent from exhibit R2, tendered on behalf of Ms Jackson, that Mr Morris’ solicitors had a poor opinion of him and of their ability to recover outstanding costs from him. They obtained a third party funding agreement from Ms Jackson so that they might, if necessary, make a claim on the residential property of Ms Jackson and Mr Morris. Given the obvious interest of the firm in protecting its position on costs, they should have paid close attention to their obligations under the Legal Profession Act in order to secure that position. It appears that they did not do so. The demand for payment made against Ms Jackson should not have been made and the recovery action taken against her should not have been taken. There was no proper basis for the bankruptcy notice issued against Ms Jackson and the creditor’s petition subsequently presented.
[5] For example see Jones v Porsche Centre Melbourne Pty Ltd [2000] FCA 1423; Winn v Brian Ward and Partners Pty Ltd [2007] FMCA 1090; Hall and Wilcox (A Firm) v O’Meara [2005] FMCA 1838
Ms Jackson is not a legal practitioner and had no reason to be aware of the notification requirements under the Legal Profession Act. The petitioning creditor, however, is a large firm of solicitors, and could be expected to be aware of those obligations. Ms Jackson should not be criticised for not defending the legal proceedings taken against her and for not resisting the bankruptcy notice. She was not to know that she had a defence until it was pointed out to her. Once it became apparent to counsel for Ms Jackson that there was an issue in relation to the requirements of the Legal Profession Act not having been met, the petitioning creditor was notified and a notice to produce documents was issued. The petitioning creditor initially asserted an inability to comply with that notice on the basis that the trustee held the firm’s files. However, it later transpired that documents were held in electronic form and were produced. The fact was that the firm was not in a position to state whether or not it had complied with the requirements of the Legal Profession Act until it had conducted its own search of its own documents. It ultimately transpired that the firm was unable to establish compliance with the Legal Profession Act and was therefore required to concede the review proceeding.
In my view, having regard to the circumstances, the ordinary principle that costs follow the event should apply. I am not, however, persuaded that costs should be awarded against the petitioning creditor and in favour of Ms Jackson on an indemnity basis. There is no evidence of misfeasance by the petitioning creditor. There is evidence of professional oversight. That is, no doubt, embarrassing for the solicitors but there has been nothing improper in their conduct of these proceedings. While the solicitors were mistaken initially as to their capacity to respond to the notice to produce, I am satisfied that there was no deliberate withholding of information.
The petitioning creditor should pay Ms Jackson’s costs and disbursements of and incidental to the creditor’s petition and the review application on a party/party basis. I have considered whether Ms Jackson should receive her costs only from the date of notification of the issue upon which she succeeded. I have concluded that the costs order should not be so limited but should cover the whole proceedings. The Court is entitled to look beyond the actual conduct of the proceedings and to have regard to the circumstances under which the proceedings arose[6]. In the present case the critical circumstance is that Ms Jackson was not liable to pay anything to the petitioning creditor firm of solicitors because the solicitors had not met their duty of disclosure under State law. As I have already noted, Ms Jackson could not be expected to have been aware of the solicitors’ default and the legal consequences of it until she was advised of it by her counsel, and she should not be deprived of her costs in respect of the period before she received that advice.
[6] Re Skase; Ex parte Donnelly (1992) 37 FCR 509 at 522; Burlington Centre Supermarket Ltd v Karandonis [2000] FCA 1318
The petitioning creditor should also pay the costs and disbursements of the trustee of the review application on a party/party basis. The trustee was placed at risk by that review application and reasonably acted to seek to defend his position by making an annulment application and by being represented on the review application. The trustee also prepared a report in accordance with a direction from the Court. In that regard, the decision of Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 at [37] is distinguishable because the trustee in this matter was directed to file a report. The report in this matter was complicated by reason of the joint bankruptcy of Ms Jackson with her husband Anthony Morris and the involvement of the Serious Fraud Office. There were also New South Wales freeze orders as well as Proceeds of Crime orders in the United Kingdom for the trustee to deal with.
The trustee was unable to pursue the annulment application because of the circumstances of the matter and will not be remunerated for his costs of administering the estate of Ms Jackson. That outcome is the consequence of the professional oversight of the petitioning creditor firm and the creditor, while not responsible for the remuneration of the trustee, should pay the trustee’s legal costs and disbursements of the review.
I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of Driver FM
Date: 25 July 2011
11
2