Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3)
[2018] FCA 1842
•23 November 2018
FEDERAL COURT OF AUSTRALIA
Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842
File number: NSD 362 of 2016 Judge: MURPHY J Date of judgment: 23 November 2018 Catchwords: REPRESENTATIVE PROCEEDINGS – application for court approval of settlement under s 33V of the Federal Court of Australia Act 1976 (Cth) – whether the proposed settlement is fair and reasonable – preclusion of class members whose claims were likely to be out of time –objections to settlement approval – where amounts sought to be deducted from the settlement sum by applicant’s solicitor and funder would substantially consume the settlement – whether legal costs charged by legal representatives are reasonable and proportionate – whether proposed funding charges are reasonable and proportionate – whether a common fund order is appropriate – legal costs and funding charges are disproportionate and must be materially reduced – settlement approved with reduced costs and funding charges Legislation: Corporations Act 2001 (Cth)
Civil Procedure Act 2005 (NSW)
Civil Procedure Act 2010 (Vic)
Legal Profession Act 1987 (NSW)
Legal Profession Act 2004 (NSW)
Legal Profession Uniform Law (NSW)
Limitation Act 1969 (NSW)
Limitation of Actions Act1974 (Qld)
English Civil Procedure Rules 1998
Cases cited: Baden v Société Générale for Favouriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509; [1992] 4 All ER 161
Barnes v Addy (1874) LR 9 Ch App 244
Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (in liq) (No 3) (2017) 343 ALR 476; [2017] FCA 330
Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527
Caason Investments Pty Ltd v International Litigation Partners No.3 Ltd [2018] FCAFC 176
Camilleri v The Trust Company (Nominees) Limited [2015] FCA 1468
Camping Warehouse v Downer EDI [2016] VSC 784
Clarke v Sandhurst Trustees Limited(No 2) [2018] FCA 511
Darwalla Milling Co Ltd v F Hoffman-La Roche (No 2) (2006) 236 ALR 322; [2006] FCA 1388
Dillon v RBS Group (Australia) Pty Ltd (No 2) [2018] FCA 395
Earglow Pty Ltd v Newcrest Mining Limited [2016] FCA 1433
Gerace v Auzhair Supplies Pty Ltd (in liq) (2014) 87 NSWLR 435; [2014] NSWCA 181
Hogan v Australian Crime Commission (2010) 240 CLR 651; [2010] HCA 21
Kelly v Willmott Forests Ltd (in liquidation) (No 4) (2016) 335 ALR 439; [2016] FCA 323
Kelly v Willmott Forests Ltd (in liquidation) (No 5) [2017] FCA 689
Lewis Securities Ltd (in liq) v Carter (2018) 355 ALR 703; [2018] NSWCA 118
Lifeplan Australia Friendly Society Limited v S&P Global Inc (Formerly McGraw-Hill Financial, Inc) (A Company Incorporated in New York) [2018] FCA 379
Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289
McAlister v State of New South Wales (No 2) [2017] FCA 93
Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (2017) 252 FCR 1; [2017] FCAFC 98
Mitic v OZ Minerals Limited (No 2) [2017] FCA 409
Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626
Money Max Int Pty Limited (Trustee) v QBE Insurance Group Limited (2016) 338 ALR 188; [2016] FCAFC 148
Money Max Int Pty Limited (Trustee) v QBE Insurance Group Limited [2018] FCA 1030
Newstart 123 Pty Ltd v Billabong International Ltd (2016) 343 ALR 662; [2016] FCA 1194
Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited [2017] FCA 699
Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 2) [2017] FCA 1231
Re Banksia Securities Limited (Rec & Mgr Appted) [2017] VSC 148
Redfern v Mineral Engineers Pty Ltd [1987] VR 518
Santa Trade Concerns Pty Limited v Robinson (No 2) [2018] FCA 1491
Skalkos v T & S Recoveries Pty Ltd (2004) 65 NSWLR 151; [2004] NSWCA 281
Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1999) 29 NSWLR 549
Timbercorp Finance Pty Ltd (In Liquidation) v Collins (2016) 259 CLR 212; [2016] HCA 44
Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR; [2000] FCA 1925
Yara Australia Pty Ltd v Oswal (2013) 41 VR 302; [2013] VSCA 337
Date of hearing: 25 May and 4 July 2018 Registry: New South Wales Division: General National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 274 Counsel for the Applicant: Mr R McHugh SC and Mr D Sulan Solicitor for the Applicant: Gilbert + Tobin Counsel for the First Respondent: Mr S M Nixon SC and Mr J Hutton Solicitor for the First Respondent: Jones Day Counsel for the Second Respondent: Ms E Holmes Solicitor for the Second Respondent: Johnson Winter & Slattery Counsel for Quinn Emanuel Urquhart & Sullivan: Dr P Cashman Counsel for Vannin Capital Operations Limited: Mr L Armstrong QC and Ms B Slocum Solicitor for Vannin Capital Operations Limited: Baker McKenzie Counsel for Mr N Jeffares, Objector Mr N Jeffares appeared in person Table of Contents
A INTRODUCTION [1] B THE CONFIDENTIALITY CLAIMS [17] C RELEVANT PRINCIPLES [22] D THE KEY FEATURES OF THE SETTLEMENT [23] E WHETHER THE SETTLEMENT IS FAIR AND REASONABLE [25] F WHETHER QUINN EMANUEL’S COSTS ARE REASONABLE AND PROPORTIONATE [83] G WHETHER GILBERT + TOBIN’S COSTS ARE REASONABLE [188] H WHETHER THE FUNDING CHARGES ARE REASONABLE AND PROPORTIONATE [191] I WHETHER THE SETTLEMENT DISTRIBUTION SCHEME IS FAIR AND REASONABLE [259] J WHETHER THE SCHEME ADMINSTRATION COSTS ARE REASONABLE [266] K WHETHER THE REIMBURSEMENT PAYMENT IS REASONABLE [271] L OTHER COSTS [273] M CONCLUSION [274] REASONS FOR JUDGMENT
NSD 362 of 2016
BETWEEN: PETERSEN SUPERANNUATION FUND PTY LTD ACN 136 059 562
Applicant
AND: BANK OF QUEENSLAND LIMITD ABN 32 009 656 740
First Respondent
DDH GRAHAM LIMITED
Second Respondent
DATE:
23 NOVEMBER 2018
MURPHY J:
A INTRODUCTION
The applicant, Petersen Superannuation Fund Pty Ltd (Petersen), seeks Court approval of a proposed settlement of a class action pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (the Act). The class action has been settled, subject to Court approval, pursuant to an agreement in which the respondents are to pay the applicant and class members $12 million inclusive of costs in full and final settlement of their claims.
The proceeding concerns a fraudulent Ponzi scheme in which the retirement savings of hundreds of people were misappropriated by their financial advisor, Sherwin Financial Planners Pty Ltd and associated companies (Sherwin), through unauthorised withdrawals from Money Market Deposit Accounts (MMDAs) operated by the respondents, the Bank of Queensland Limited (BoQ) and DDH Graham Limited (DDH) as agent for BoQ. Mr Brad Sherwin, the architect of the fraud, has been jailed and his associated companies wound up. The fraud has had a devastating impact on class members, many of whom have lost the chance of the comfortable retirement for which they worked their whole lives.
It appears that the applicant’s lawyers considered there was insufficient prospect of recovering substantial damages from Sherwin, and Petersen only brings the proceeding against BoQ and DDH, doing so on behalf of all persons who:
(a)were advised by Sherwin to deposit monies into a MMDA;
(b)entered into a contract for the supply of the MMDA product with BoQ and/or DDH, or alternatively with BoQ alone;
(c)authorised a director, officer, employee or agent of Sherwin or Sherwin itself to act as an Authorised Signatory in respect of that MMDA;
(d)deposited monies into the MMDA; and
(e)have been unable to recover some or all of the funds so deposited.
The proceeding is funded by a litigation funder Vannin Capital Operations Limited (Vannin).
The proposed settlement is an example of an increasing problem in class action litigation in that the legal costs and litigation funding charges are disproportionate to the settlement monies to be distributed to class members. I have three main concerns in relation to the proposed settlement:
(1)the proportionality of the legal costs that the applicant’s solicitors, Quinn Emanuel Urquhart & Sullivan (Quinn Emanuel) seek to claim from the settlement fund;
(2)the reasonableness and proportionality of the funding charges for which Vannin seeks payment from the settlement fund; and
(3)the fact that many class members will be bound in the settlement, but precluded from sharing in the proceeds of settlement because their claims are out of time and caught by limitation defences raised by the respondents.
I commence by noting that if Quinn Emanuel’s claimed costs and Vannin’s litigation funding charges are approved in the amounts sought (and taking account of the other deductions) then all but approximately $250,000 of the $12 million settlement will be eaten up, and class members will receive only 2% of the settlement. The Part IVA regime is intended to provide access to justice to the applicant and class members and it is not intended solely for the benefit of service providers such as lawyers and funders. The legitimate use of the Court’s processes should not be undermined by proceedings that disproportionately benefit the funder and/or solicitor rather the litigants.
For the reasons I explain, in the particular circumstances of the case, it is appropriate to approve the settlement but to disallow a substantial amount of the legal costs and funding charges sought. I briefly summarise my reasons below.
First, the proposed settlement should be approved because I am satisfied that the quantum of the settlement is fair and reasonable. The core of the applicant’s case is that the withdrawals made from account-holders’ MMDAs on Sherwin’s instructions were suspicious transactions which should have put DDH and/or BoQ on notice as to a serious or real possibility that Sherwin was committing a fraud on the account-holder. It is alleged that DDH’s and/or BoQ’s implementation of Sherwin’s instructions to transfer money out of the MMDAs constituted: (a) a breach of the contract between the account-holder and DDH and/or BoQ; and (b) knowing assistance by DDH and/or BoQ of Sherwin’s breach of fiduciary duties within the second limb of Barnes v Addy (1874) LR 9 Ch App 244 (Barnes v Addy).
Having regard to a confidential opinion (Counsel’s Opinion) provided by the applicant’s counsel (Mr Richard McHugh SC, Mr David Sulan and Mr Ryan May) I am satisfied that the applicant’s case faces substantial risks on liability and has low prospects of success. The materials show that $12 million constitutes a high proportion of the aggregate claim value of registered class members’ claims that are within time.
Second, insofar as any alleged unauthorised withdrawals from class members’ MMDAs occurred before 11 March 2010 the respondents have pleaded limitations defences. Having regard to Counsel’s Opinion I am satisfied that the claims of class members that are based on allegedly unauthorised withdrawals before 11 March 2010 are out of time, and they cannot recover damages. The settlement is based on the aggregate value of class members’ claims that are within time and it is fair that class members whose claims are statute-barred do not share in the proceeds of settlement.
Third, in regard to the legal costs Quinn Emanuel seeks, it asks for approval of costs totalling $4,577,408 (mostly fees), which includes $1,002,408 already paid to it. I will use GST inclusive figures unless I state otherwise. If the claimed costs are approved the firm will be paid an amount of $3,575,000 from the settlement fund. Quinn Emanuel does not seek approval of $1,941,877 in disbursements it incurred in the proceeding (essentially because they were paid by Vannin, and Vannin seeks approval for their reimbursement) but in assessing the proportionality of costs the disbursements incurred must also be taken into account. When they are, Quinn Emanuel ran up total costs of approximately $6,519,285.
In the circumstances of the present case I consider costs of $6.5 million to be plainly disproportionate. For the reasons I explain, it is appropriate to reduce the claimed costs of $4.57 million by 40%, which is a reduction of $1,830,963. On that basis Quinn Emanuel’s approved fees will total approximately $2,746,445 (of which it has already been paid $1,002,408). On that basis, it will be paid $1,744,037 from the settlement fund.
Fourth, in regard to the funding charges Vannin proposes, it seeks approval for the reimbursement of costs, disbursements and other expenses of the proceeding it has paid to Quinn Emanuel and third parties totalling $4,978,001 (Vannin Costs). The applicant argues, however, that Vannin should not be reimbursed many of these costs because they were incurred by Vannin in pursuit of its own commercial interests. The contentious amounts include: (a) $1,421,200 in premium expense for an “After the Event” (ATE) insurance policy taken out to cover any adverse costs order; (b) $267,772 being expenses Vannin incurred in obtaining its own independent legal advice on issues that arose during the proceeding and in the lead up to settlement; (c) some disbursements incurred through Vannin’s direction that the respondents’ security for costs application be opposed (against the express advice of Quinn Emanuel and counsel); and (d) book building costs paid by Vannin.
There is some force in the applicant’s contentions in this regard but the funding agreement provides that Vannin is entitled to such reimbursement. The fact that Vannin is entitled to reimbursement of the contested amounts goes to the costs and risks it assumed in funding the proceeding and to what is a reasonable funding commission. Vannin is entitled to reimbursement of the Vannin Costs.
Fifth, in regard to the common fund order Vannin seeks, I am satisfied that such an order is appropriate. However, I am not prepared to approve the funding rate of 25% of the gross settlement that Vannin seeks and I will only approve a funding rate very much at the low end of the range. I will make a common fund order for Vannin to receive a funding commission of $1 million, which is a funding rate of 13.7% of the net settlement (after deduction of approved costs and disbursements), or 8.3% of the gross settlement. On that basis Vannin will be paid a total of approximately $5.98 million, made up of $4.98 million in reimbursement of Vannin Costs plus the funding commission. That is a reduction of $2 million from the total funding charges it seeks.
There are some further deductions from the settlement fund but in approximate terms the approved costs and funding charges will mean that two thirds of the settlement will be taken up by legal costs and funding charges and approximately one third will be distributed to class members. That is:
(a)Quinn Emanuel is entitled to approximately $2.75 million (mostly fees) of which it has already been paid $1,002,408, which means $1.75 million will be distributed to Quinn Emanuel;
(b)Vannin is entitled to approximately $5.98 million, all but $1 million of which is in reimbursement of amounts it paid out; and
(c)approximately $4 million, or around 33% of the settlement sum, will be distributed to the applicant and registered class members with claims within time.
In the circumstances of the case I consider such costs and funding charges to be reasonable and proportionate. As a result of these orders the applicant and class members will be approximately $3.8 million better off than they would have been had the funding charges been approved in the amounts sought. They may remain unsatisfied with the result, and such a reaction would be understandable given what has happened to them. However, they should keep in mind that: (a) they would have recovered nothing without Vannin’s funding and Quinn Emanuel acting largely on a no win-no fee basis; (b) there are no real winners in a settlement like this and Quinn Emanuel and Vannin have suffered substantial reductions to their proposed costs and funding charges; and (c). they are better off than if the case had proceeded to trial as in my view it was likely to fail.
B THE CONFIDENTIALITY CLAIMS
In relation to the issue of the proportionality of legal costs and funding charges, Quinn Emanuel and Vannin rely on affidavits of Mr Damian Scattini, the Quinn Emanuel partner with the conduct of the case and Mr Patrick Coope, Vannin’s Regional Managing Director. The applicant also relies upon material in these affidavits to argue that the costs and funding charges are disproportionate. Each of Quinn Emanuel and Vannin however say that those affidavits are confidential and seek confidentiality orders. Without reaching a final view on the issue, to preserve the status quo I made confidentiality orders on 30 May 2018, subject to further order.
The Court may make an order for confidentiality if it is satisfied that the order is necessary “to prevent prejudice to the proper administration of justice” (s 37AG(1)(a) of the Act), and “necessary” is a “strong word”: Hogan v Australian Crime Commission (2010) 240 CLR 651; [2010] HCA 21 at [30]. When considering making a confidentiality or non-publication orders it must also be kept in mind that a primary objective of the administration of justice is to safeguard the public interest in open justice: s 37AE. That is particularly so in the context of class actions, where the settlement is not simply a private bargain between the parties, but has a public dimension and the community has a significant interest in access to relevant information: Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289 (Liverpool) at [107] (Lee J); Santa Trade Concerns Pty Limited v Robinson (No 2) [2018] FCA 1491 at [26] (Lee J).
In the circumstances of the present case, so as to fully explain: (a) my decision to approve the settlement notwithstanding the low net recovery by class members; (b) my rejection of Quinn Emanuel’s submissions regarding the proportionality of its claimed costs; and (c) my rejection of Vannin’s submissions regarding the proportionality of its funding charges; I have found it necessary to refer to parts of Mr Scattini’s and Mr Coope’s affidavits.
I will not descend into the material which is asserted to be confidential except where I consider it necessary, but to the extent I do so I am not persuaded that a confidentiality order is necessary to prevent prejudice to the proper administration of justice. The proportionality of costs and funding charges in class actions is a matter of significant public interest, including through an ongoing inquiry by the Australian Law Reform Commission, and it is appropriate to give primacy to the public interest in open justice. That is not to say, however, that none of the material in those affidavits should be treated as confidential.
I will vary the existing confidentiality orders. Quinn Emanuel and Vannin are directed to draft orders to reflect an appropriate variation and to identify those parts of Mr Scattini’s and Mr Coope’s affidavits over which they continue to seek confidentiality.
C RELEVANT PRINCIPLES
The principles relevant to a settlement approval application under s 33V of the Act are well-established and it is unnecessary to repeat them here. I set them out in Kelly v Willmott Forests Ltd (in liquidation) (No 4) (2016) 335 ALR 439; [2016] FCA 323 (Kelly) at [62]-[77] and recently summarised them in Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527 (Caason) at [12]-[13]. I will address the reasonableness of the settlement essentially by reference to the factors set out in Class Actions Practice Note (GPN-CA) including the complexity and likely duration of the litigation, the reaction of the class to the settlement, the stage of the proceeding, the risks of establishing liability and quantum, and the range of reasonableness of the settlement in light of best recovery and all the attendant risks of the litigation, reflecting the considerations set out by Goldberg J in Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR; [2000] FCA 1925 459 at [19].
D THE KEY FEATURES OF THE SETTLEMENT
On 26 February 2018 the relevant parties agreed to settle the proceeding on terms set out in a binding Heads of Agreement, which included a requirement to enter into a settlement deed. On 28 May 2018 the parties executed the Settlement Deed. The key features of the Settlement Deed are as follows:
(a)the parties agree to resolve the proceeding on the basis that DDH and BoQ each pay $6 million to the applicant and class members, which obligation is several and not joint;
(b)Petersen enters into the Settlement Deed on its own behalf and on behalf of class members; and
(c)upon each respondent paying their respective portions of the settlement sum, Petersen grants a broad release to that respondent and its related entities, doing so on its own behalf and on behalf of class members.
There are two other key features of the proposed settlement which do not arise from the Settlement Deed:
(a)non-registered class members are bound in the settlement but are precluded from sharing in it. This is the result of class closure orders made in October 2017; and
(b)the proposed Settlement Distribution Scheme (SDS) provides that claims by class members based on unauthorised withdrawals from their MMDAs prior to 11 March 2010 are excluded.
E WHETHER THE SETTLEMENT IS FAIR AND REASONABLE
I now turn to address the fairness of a settlement of $12 million inclusive of costs.
The breadth of the releases
The releases and covenants not to sue (releases) are expressed in broad terms. They provide that on its own behalf and on behalf of the class members Petersen releases and forever discharges the respondents and their related parties from:
…any Claims that the Applicant or the Group Members now have, at any time had, or may have or, but for this Deed, could or might have had arising out of, relating to or in any way in connection with or incidental to the Proceeding or its subject matter (or any part of the Proceeding or its subject matter).
The definition of “Claim” in the Settlement Deed is broad and encapsulates every conceivable type of claim, counter-claim or set off.
Releases of class members’ claims “relating to or in any way in connection with or incidental to the Proceeding or its subject matter” might be read to extend to claims based in a class member’s individual or unique circumstances, beyond those common claims which are the subject of the representative proceeding. The applicant only represents class members in respect of common claims as set out in s 33C of the Act, the existence of which are anterior to the claims actually pleaded in the proceeding. The applicant does not have authority to settle the other claims class members may have: see Timbercorp Finance Pty Ltd (In Liquidation) v Collins (2016) 259 CLR 212; [2016] HCA 44 at [52]-[53]; Dillon v RBS Group (Australia) Pty Ltd (No 2) [2018] FCA 395 (Dillon) at [34]-[54] (Lee J).
In my view the applicant’s authority to settle extends to common claims that are not pleaded. The applicant (or more accurately the applicant’s lawyers) will have made a forensic decision as to which of the available common claims are pleaded, and the utility of the class action mechanism is eroded if class members or their lawyers are able to circumvent an unsuccessful outcome by bringing a fresh case (either individual or another class action) pleading those common claims which were not pleaded in the first instance. It is counterintuitive to suggest that the applicant does not have authority to enter into a release dealing with non-pleaded common claims, which claims if brought within a separate later proceeding could be the subject of an issue estoppel or Anshun estoppel if the first proceeding had been litigated to judgment: Newstart 123 Pty Ltd v Billabong International Ltd (2016) 343 ALR 662; [2016] FCA 1194 (Newstart) at [58] (Beach J).
I proceed on the basis that the releases operate only in relation to claims that are within the meaning of s 33C, that is, the claims of class members which are in respect of, or arise out of, the same, similar or related circumstances as those that are advanced by the applicant in the proceeding. Construed in this way the releases are not too broad. For the avoidance of doubt, I would not have approved the settlement if it purported to bar class members’ individual or unique claims beyond the s 33C claims that are the subject of the proceeding, since it would be beyond the authority of the applicant to give a release of these claims on behalf of class members.
The class closure orders precluding non-registered class members from sharing in the settlement
On 6 October 2017 the Court made orders for class member registration and opt out (class closure orders). The orders required opt out and class member registration notices to be sent to all persons whom DDH’s records show have ever held an MMDA in respect of which a director, officer, employee or agent of Sherwin, or Sherwin itself, was an Authorised Signatory, and for the notices to be published on Quinn Emanuel’s website and on the Federal Court website. The orders also provided for a short form notice to be published in Queensland in the Courier Mail and the Rockhampton Bulletin.
The opt out and class member registration notices informed class members of their right to opt out of the proceeding, the requirement to register if they wished to share in any settlement achieved at or shortly after the mediation, and the consequences of neither opting out nor registering. The notices said that if class members neither registered nor opted out by 14 December 2017 (the Class Deadline) they would be bound into any settlement that was achieved but barred from receiving any compensation under the settlement.
I am satisfied that Quinn Emanuel gave notice to the class members in accordance with the class closure orders. The evidence is that 193 persons registered by the Class Deadline.
The preclusion of non-registered class members from sharing in the settlement arises by operation of the class closure orders rather than because of any term in the Settlement Deed. Class closure orders of this type may be reasonably adapted to seeking or achieving justice in the proceeding because they facilitate the desirable end of settlement: Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (2017) 252 FCR 1; [2017] FCAFC 98 at [74]. This aspect of the settlement is not a reason to refuse settlement approval.
The late applications for registration
Two class members who failed to register by the Class Deadline have applied for orders that they be permitted to register late.
Ms Michelle Squire on behalf of the Hannay Squire Superannuation Fund contacted Gilbert + Tobin on 8 June 2018. She said that she had only just become aware of the existence of the proceeding because she and her partner had moved five times since 2013, had not kept their contact details updated, and did not know or have contact with any other class members.
Ms Leigh Brown on behalf of the A & L Brown Superannuation Fund contacted Gilbert + Tobin on 2 July 2018. She said that she only became aware of the existence of the proceeding about six months earlier and after the Class Deadline, and that due to circumstances including that her father had passed away during that time and she had significant duties as a carer for her mother with dementia, she did not follow through with enquiries about joining the class action at that time.
I will make orders to permit Hannay Squire Superannuation Fund and A & L Brown Superannuation Fund to now register as class members and participate in the settlement to the extent they are eligible (i.e. for losses that were suffered within time), as assessed by the Scheme Administrator.
The preclusion of class members from claiming losses suffered before 11 March 2010
The proceeding alleges that the respondents committed breaches of contract and/or knowingly assisted in breaches of fiduciary duties by giving effect to unauthorised withdrawals from the applicant’s and class members’ MMDAs. The respondents, however, plead that the claims of class members based on unauthorised withdrawals made before 14 March 2010 are statute-barred because those transactions took place more than six years before the proceeding was filed. There is a small question as to the date the proceeding was filed. Although the date inscribed by Quinn Emanuel on the Originating Application and Statement of Claim is 11 March 2016 those documents are stamped by the Court as having been filed on 14 March 2016. It is unnecessary to decide any question as to the date the case was filed. I proceed on the assumption (favourable to the applicant and class members) that the proceeding was commenced on 11 March 2016.
Under the proposed SDS any losses suffered through unauthorised withdrawals from the applicant’s and class members’ MMDAs before 11 March 2010 are not compensable.
I consider this aspect of the proposed settlement is fair and reasonable because claims based on transactions that occurred more than six years prior to the commencement of the case are statute-barred; and because the settlement is based on an assessment of the aggregate value of class members’ claims that are within time.
The claims in the proceeding
In broad summary the applicant says that Sherwin advised the applicant and class members that MMDAs should be set up operated by BoQ and DDH as BoQ’s agent. Upon the creation of the MMDAs and the applicant and class members depositing monies into the accounts, Sherwin fraudulently and without authority directed DDH and/or BoQ to withdraw funds from the MMDAs, which Sherwin misappropriated. The proceeding makes two main claims against BoQ and DDH.
The breach of contract claim
The applicant’s primary case is that BoQ and DDH acted in breach of contract by giving effect to instructions from Sherwin to withdraw funds from the applicant’s and class members’ MMDAs in circumstances where the respondents knew or ought to have known that there was a serious or real possibility that the instruction to withdraw was fraudulent. The applicant alleges that an express or implied term of the contract with account-holders was that BoQ and DDH would question instructions received and not act in accordance with instructions if the surrounding circumstances raised a serious or real possibility that fraud was being committed.
This term of the contract is said to arise from a clause in the Product Disclosure Statement which accompanied the application form for MMDA products which stated, under the heading “Terms implied into the contract between banker and customer”:
Question a valid mandate – while we are subject to the primary duty to repay on demand an amount due to you, this is conditional upon our duty to question a request for payment. We will do this in circumstances which raise a serious or real possibility that fraud is being committed on the account.
The applicant asserts that there was a “serious or real possibility of fraud” based on emails Sherwin sent to DDH directing the withdrawal of funds, which allegedly contained indicia of fraud (suspicious emails) including:
(a)“round robin” emails in which Sherwin instructed DDH to transfer money from one client’s MMDA to another client’s MMDA via a company owned or controlled by Sherwin, either in one email or over two separate emails sometimes only minutes apart;
(b)“false notations in emails” in which Sherwin instructed DDH to transfer monies with notations that disguised the true nature and origin of the transaction, for example describing them as “application” and “fixed interest” when this was not the case; and
(c)“personal use of funds emails” in which Sherwin instructed DDH to transfer monies from one client’s MMDA to the personal bank account of a Sherwin employee or spouse.
The proceeding also makes two alternative breach of contract claims, by BoQ and DDH:
(a)acting on instructions given by email when the application form and PDS for the MMDAs did not provide for the giving of withdrawal instructions by email. The applicant says that withdrawals could only be made through standard instructions provided in writing in the application form, by telephone or fax, or at BoQ branches; and
(b)in the case of some class members, by implementing instructions to transfer money when those instructions were given by a person who was not an authorised signatory for the account. The applicant and class members are alleged to have only authorised specific individuals to act in this capacity and BoQ and DDH gave effect to instructions that were not from these people.
In relation to the breach of contract claims the respondents rely upon the six year limitation period in s 10(1) of the Limitation of Actions Act1974 (Qld) (QueenslandLimitations Act), which provides that an action for breach of contract shall not be brought more than six years after the date the cause of action arose. The relevant events occurred in Queensland and, having regard to Counsel’s Opinion I am satisfied this is the applicable Limitations of Actions Act.
Breach of contract is actionable without proof of loss or damage and the applicant’s and class members’ causes of action accrued on breach, i.e. when BoQ or DDH gave effect to Sherwin’s instructions. Having regard to Counsel’s Opinion, class members’ claims for breach of contract based on unauthorised withdrawals from their MMDAs before 11 March 2010 are statute-barred.
The ‘knowing assistance’ claim
As a secondary or fallback claim in the proceeding, the applicant alleges that the respondents knowingly assisted in Sherwin’s breach of the fiduciary duties it owed to the applicant and class members as their financial advisor. DDH is said to have had sufficient knowledge of Sherwin’s practices through the suspicious emails to be liable for knowing assistance within the meaning of the second limb of Barnes v Addy. BoQ was to be imputed with DDH’s knowledge as a result of the relationship of agency between them.
In relation to this equitable claim the respondents rely upon the six year limitation period in Limitations Act by analogy. The question arises as to whether or not class members’ claims are likely to be subject to the six year limitation period or a longer limitation period. This question was the subject of detailed consideration in Counsel’s Opinion. I proceed on the basis that Counsel’s Opinion is correct. It is in any event inappropriate to endeavour to resolve any controversy as to the applicable limitation period in the context of a settlement approval hearing. There has not been full argument on the matter and the Court is not required to be positively satisfied that the view taken by the applicant’s lawyers regarding the applicable limitation period is correct. Its task is only to satisfy itself that such decisions are within the range of reasonableness having regard to the circumstances and knowledge of the applicant and its legal representatives. The Court should also take the applicant’s lawyers as it finds them, recognising that lawyers may reach different views on contested legal issues and may have different appetites for risk: Kelly at [74]; Newstart at [12]; Clarke v Sandhurst Trustees Limited(No 2) [2018] FCA 511 (Clarke) at [31] (Lee J).
It is likely that, unless there was fraudulent concealment or other conduct by the respondents involving consciousness of wrongdoing, the Court would apply by analogy the six year limitation period in s 10(1) of the Queensland Limitations Act. In Gerace v Auzhair Supplies Pty Ltd (in liq) (2014) 87 NSWLR 435; [2014] NSWCA 181 at [70]-[75] (Beazley P, Meagher and Emmett JJA) the NSW Court of Appeal comprehensively reviewed the relevant authorities and said (at [75]):
The grounds on which equity declines to permit a defendant to rely upon a statutory bar by analogy include where there has been fraudulent concealment, which requires either fraudulent conduct as an element of the right of action or conduct consisting of active concealment of a right of action that does not include fraud as an element. … The equitable doctrine is not confined to common law fraud or deceit and requires a consciousness on the part of the defendant that what is being done is wrong or that to take advantage of a particular situation involves wrongdoing…
(Citations omitted.)
Having regard to the materials, the prospects of the applicant being able to establish fraudulent concealment or other conduct by the respondents involving consciousness of wrongdoing are low.
I note that, following settlement approval, the NSW Court of Appeal handed down the decision in Lewis Securities Ltd (in liq) v Carter (2018) 355 ALR 703; [2018] NSWCA 118 (Lewis). In that case the Court concluded that the 6-year limitation period in s 1317K of the Corporations Act 2001 (Cth) (Corporations Act) did not apply because:
(a)the 12-year limitation period in s 47(1) of the Limitation Act 1969 (NSW) applies directly to a claim for a constructive trust for knowingly assisting in a breach of fiduciary duties, and therefore equity would not apply a six-year period by analogy (at [62] and [72]); and
(b)equity would not apply by analogy the six-year limitation period in s 1317K of the Corporations Act because of the requirements of a dishonest and fraudulent design in the second limb of Barnes v Addy (at [61]).
I am satisfied that the decision in Lewis does not alter the reasonableness of precluding class members from making claims under the settlement based on unauthorised withdrawals prior to 11 March 2010. First, the decision in Lewis, based as it is on the limitation period in the NSW statute, cannot be translated to the application of the limitation period in the Queensland Limitation Act. In Lewis (at [46]) Leeming JA expressly acknowledged the difference between the relevant New South Wales and Queensland legislation and explained that the Queensland Limitations Act has a narrower definition of trust than the NSW legislation considered in Lewis. Accordingly, the equivalent of s 47(1) in the Queensland legislation, being s 27, does not directly apply to claims under the second limb of Barnes v Addy.
Second, the facts of the present case are quite different to those in Lewis. In the present case the accessorial claim against the respondents is based on the lowest level of knowledge required by Baden v Société Générale for Favouriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509; [1992] 4 All ER 161, and the respondents are much further removed from the alleged breach of fiduciary duty than the accessories in Lewis, who were party to the alleged dishonest and fraudulent design. Leeming JA acknowledged (at [34]) that where no statute applies directly the question of analogy turns on the particular facts giving rise to the equitable claims and (at [35]) that the appropriate analogy may be with tort or contract. His Honour also observed (at [49]) that not all breaches of fiduciary duty or cases of Barnes v Addy liability are of the same character.
Finally, it must be kept in mind that, whatever the applicable limitation period I am satisfied that the prospect of the applicant being able to establish that BoQ and/or DDH had sufficient knowledge of Sherwin’s fraud for a knowing assistance claim to succeed is low.
It is fair and reasonable that the SDS operates to preclude claims by class members based on unauthorised withdrawals from their MMDAs which took place before 11 March 2010. Even so it is readily understandable that many class members were surprised and dissatisfied with the preclusion of claims based on unauthorised withdrawals before 11 March 2010. They were not informed by Quinn Emanuel until after settlement that such claims were out of time and, while it made no difference to their substantive rights, it is unfortunate (and unsatisfactory) that they were not earlier informed about the possibility or likelihood that their claims would be statute barred.
The complexity and likely duration of the litigation
The case is legally and factually difficult, but not unusually complex for class action litigation. It was listed for hearing on 12 March 2018 on an estimate of three weeks. Both BoQ and DDH have shown determination in defending the proceeding and both are well resourced. If the case proceeded to hearing legal costs would significantly increase. Given the factual and legal issues involved in the case there must also be a real prospect that the respondents would appeal if they were unsuccessful at trial.
Having regard to the modest aggregate claim value, the complexity and likely duration of the litigation points in favour of settlement approval.
The stage of the proceeding at which settlement was achieved
After a mediation on 31 January 2018 the parties continued settlement negotiations. They did not enter into a Heads of Agreement until 26 February 2018.
By that time the applicant had filed its lay and expert evidence including an expert forensic accounting report and a tender bundle of documents and it was only two weeks before the trial was set to commence. The respondents had not filed their evidence at the time of the mediation but DDH provided an affidavit of its managing director, Mr Ugo Di Girolamo, who explained why DDH did not consider Sherwin’s emails to be suspicious and why it was not on notice of a serious or real possibility that Sherwin was perpetrating a fraud on the applicant’s and class members’ MMDAs.
The late stage at which the proceeding settled means that the applicant’s lawyers were sufficiently acquainted with the evidence likely to be faced at trial to form a view as to the adequacy of the settlement offered. That points in favour of approving the settlement.
The risks of establishing liability
Counsel’s view is that the settlement is fair and reasonable in the interests of the class members to be bound by it, and the opinion sets out comprehensive reasons for reaching this view. I take into account counsel’s obligation to candidly disclose the strengths and weaknesses of the claims by the applicant and class members and I proceed on the basis that Counsel’s Opinion as to the prospects of the case on liability and quantum is correct.
I have also had regard to: (a) the confidential affidavits of Mr Scattini in which he sets out his view as to the risks of the case at different stages; (b) the affidavit of Mr Ugo Di Girolamo, Joint Managing Director of DDH, which includes an apparently credible explanation as to why DDH did not suspect that Sherwin was engaged in fraudulent activity; and (c) the confidential affidavits of Mr Coope in relation to an independent review of the applicant’s prospects of success in the case conducted by Elizabeth Cheeseman SC, Caspar Conde and Daniel Habashy of counsel.
Having regard to all the materials I am satisfied that if the case proceeds to trial the applicant and class members face a significant risk that they will be unable to establish either the breach of contract or the knowing assistance claim. In my opinion the case has low prospects of success. That opinion is central to my conclusion that the proposed settlement should be approved.
The risks in relation to quantum and the range of reasonableness in the light of best recovery
Having regard to Counsel’s Opinion and some preliminary estimates of the assessed losses of registered class members made by the Scheme Administrator I am satisfied that (leaving aside the substantial legal costs) the proposed settlement represents a high proportion of the aggregate value of class members’ claims that are within time and within the range of reasonableness in light of best recovery. Of course, after deduction of legal costs the picture is somewhat different, but I will later deal with the quantum of approved legal costs. This consideration too points in favour of settlement approval.
The range of reasonableness of the settlement in light of all attendant circumstances
Having regard to Counsel’s Opinion and the other confidential materials to which I have referred I am satisfied that the proposed settlement falls comfortably inside the range of reasonable outcomes. As I have said there is a significant risk that if the case proceeds to hearing the applicant’s claims will not succeed, and I consider the settlement represents a high proportion of the aggregate value of class members’ claims that are within time. I consider the settlement to be plainly reasonable in light of all the attendant circumstances.
The reaction of the class to the settlement
Another useful method of considering the reasonableness of a proposed settlement is by reference to the objections to settlement by class members: Darwalla Milling Co Ltd v F Hoffman-La Roche (No 2) (2006) 236 ALR 322; [2006] FCA 1388 at [39] (Jessup J).
On or about 30 April 2018 class members were sent a Court-approved Notice of Proposed Settlement which informed them of the key terms of the settlement (including the approximate quantum of the legal costs, litigation funding charges and other deductions for which Court approval was to be sought) and of their right to object to the proposed settlement. On or about 11 May 2018 class members were sent an Amended Notice of Proposed Settlement which corrected an error in the earlier notice and increased the amount of Vannin Costs by $1.065 million to reflect the ATE insurance premium it paid.
Twenty-three class members (or groups of class members) filed objections to settlement approval, which is approximately 11% of the 193 registered class members. This relatively high level of objection is understandable when: (a) many class members are highly aggrieved about the fraudulent misappropriation of their retirement savings and they have strong feelings about the case; (b) it was only after the settlement that class members were told that the settlement amount would be substantially consumed by legal costs and funding charges; and (c) it was only after the settlement that class members were first told that they could not recover compensation for any unauthorised withdrawals from their MMDAs which occurred before 11 March 2010.
Gilbert + Tobin maintained a register of emails and telephone calls received from class members following receipt of the Notices of Proposed Settlement and the evidence is that approximately 50% of the calls and emails received from class members were neutral as to the settlement and 50% of class members indicated they were unhappy with the settlement. Gilbert + Tobin categorised the class members’ concerns into three main categories of issues, being: (a) the quantum of the settlement sum; (b) the preclusion of claims by class members based on unauthorised withdrawals which occurred before 11 March 2010; and (c) the level of legal costs and litigation funding charges proposed to be charged.
The objections filed with the Court can be categorised as follows:
Reason for objection Objectors Whether the settlement is in the interests of the group members, or only in the interest of the applicant, respondents and applicant’s lawyers/Funder · James Martin Ryan (C & J Ryan Superannuation Fund)
· Kenneth Bedford (Bedford Superannuation Fund)
The size of the settlement sum, including how calculated · Andrew Shine (A&N Shine Superannuation Fund)
· Beverley Holliday (by her advocate and daughter Adrienne Lynch) (Holliday Superannuation Fund P/L)
· James Martin Ryan (C & J Ryan Superannuation Fund)
· Dorothy Jordan
· Ian and Susan Jolly (Jolly Superannuation Fund)
· Michael Reynolds (Mick Reynolds Superannuation Pty Ltd)
· Carolyn and Robert Hildebrand
· Chris Pychtin (Pychtin Superannuation Fund Pty Ltd)
· Gregory Rigbye (Greg Rigbye Superannuation Fund)
· Kenneth Bedford (Bedford Superannuation Fund)
· Catherine and Robert Spence (RG and CL Spence Superannuation Fund)
· Jill and Enzo Topatig
· Nigel Jeffares (Nigel Jeffares Super Fund P/L)
Size of the fees and costs sought to be deducted from the settlement sum by Quinn Emanuel and Vannin, including deduction of $1.065 million from the settlement sum to pay AmTrust for ATE insurance · Andrew Shine
· Bernadette Nora Carroll
· Beverley Holliday (by her advocate and daughter Adrienne Lynch) (Holliday Superannuation Fund P/L)
· James Martin Ryan (C & J Ryan Superannuation Fund)
· Christine Bussian (Chris Bussian Superannuation Fund)
· Dorothy Jordan
· Ian and Susan Jolly (Jolly Superannuation Fund)
· Joseph and Bernadette Carroll (Damian Carroll Superannuation Fund)
· Michael Reynolds (Mick Reynolds Superannuation Pty Ltd)
· Carolyn and Robert Hildebrand
· Chris and Anne Pychtin (Pychtin Superannuation Fund Pty Ltd)
· Prudence Raymond (PJ Raymond Superannuation Fund)
· Gregory Rigbye (Greg Rigbye Superannuation Fund)
· Kenneth Bedford (Bedford Superannuation Fund)
· Catherine and Robert Spence (RG and CL Spence Superannuation Fund)
· Jill and Enzo Topatig
· Barrie Seabrook
· Nigel Jeffares (Nigel Jeffares Super Fund P/L)
Common Fund Order · Beverley Holliday (by her advocate and daughter Adrienne Lynch)
· Nigel Jeffares (Nigel Jeffares Super Fund P/L)
Settlement distribution scheme, including lack of detail as to calculation of payments to group members · James Martin Ryan (C & J Ryan Superannuation Fund)
· Kenneth Bedford (Bedford Superannuation Fund)
Conflicts between Quinn Emanuel and Vannin; Quinn Emanuel ceasing to act for the group members · James Martin Ryan (C & J Ryan Superannuation Fund)
· Kenneth Bedford (Bedford Superannuation Fund)
Limitation period and exclusion from recovery of losses suffered prior to 11 March 2010 · Andrew Shine
· Elizabeth Ann Spence
· Christine Bussian (Chris Bussian Superannuation Fund)
· Ian and Susan Jolly (Jolly Superannuation Fund)
· Michael Reynolds (Mick Reynolds Superannuation Pty Ltd)
· Carolyn and Robert Hildebrand
· Chris and Anne Pychtin (Pychtin Superannuation Fund Pty Ltd)
· Prudence Raymond (PJ Raymond Superannuation Fund)
· Catherine and Robert Spence (RG and CL Spence Superannuation Fund)
· EJ and MV Purcell (Purcell SMSF)
· Barrie Seabrook
· Nigel Jeffares (Nigel Jeffares Super Fund P/L)
Non disparagement clauses in the Settlement Deed · Nigel Jeffares (Nigel Jeffares Super Fund P/L) General concern about the effect of fraud on group members · John and Candace Hawkins (C & J Hawkins Superannuation Fund) Unspecified objection · Stephen and Glenys Railton (Railton Superannuation Fund)
I will deal with the objections by reference to these categories.
The quantum of the settlement
I effectively considered this issue when dealing with the risks of establishing liability, the risks in relation to quantum and the range of reasonableness of the settlement in light of all attendant circumstances. One can readily understand class members’ disappointment with a settlement of $12 million inclusive of costs when it is plain that they were expecting much more, and it is proposed that it be largely subsumed by legal costs and funding charges. It is impossible not to sympathise with the position of people who have had their life savings misappropriated by fraud, but it must be kept firmly in mind that: (a) it was Sherwin that perpetrated the fraud; (b) there is little in the materials to support the allegation that the respondents knowingly assisted in the fraud; (c) many class members’ claims are statute-barred and if the case proceeds to trial they cannot recover damages; (d) the settlement represents a high proportion of the aggregate value of class members’ claims that are within time; and (e) the case has poor prospects of success at trial.
The quantum of the settlement is comfortably within the range of reasonable settlements of the case. This is not a basis upon which to refuse settlement approval.
The amount of legal costs and litigation funding charges.
As I said at the outset I have concerns as to the proportionality of the costs and funding charges proposed to be deducted from the settlement and there is force in this category of objections. Even so, I consider the proposed settlement to be in the class members’ interests because the settlement represents a high proportion of the aggregate value of class members’ claims that are within time and the case has low prospects of success at trial. To the extent that costs and funding charges are disproportionate and therefore unreasonable they will be reduced.
The common fund order
One class member objects to the making of a common fund order per se, and others do not oppose a common fund order but object to the funding rate. As I will explain, I consider a common fund order to be appropriate in the circumstances of the case but consider the proposed 25% funding rate of the gross settlement to be disproportionate. I decline to make a common fund order at a 25% funding rate and will instead make an order at the rate of 8.3%. At that funding rate I am satisfied that the funding charges are proportionate to the claim value and the recovery by class members, and these objections do not justify refusal to approve the settlement.
The lack of detail in the SDS as to the calculation of payments to class members
Some objectors oppose settlement approval on the basis that the SDS provides insufficient detail as to how the compensation payments to class members are to be calculated. I will deal with this objection when considering the reasonableness of the SDS. I would not refuse settlement approval on this ground.
The breakdown in the relationship between Quinn Emanuel and Vannin
Some class members object to the settlement on the basis that the settlement reflects the breakdown in the relationship between Quinn Emanuel and Vannin, rather than fairly reflecting the merits of the case. I am well satisfied that by early 2018 the relationship between Quinn Emanuel and Vannin had broken down, but there is nothing to show that this deterioration resulted in a lower settlement than might otherwise have been achieved. The materials indicate that the settlement reflects revised views about the strength of the case on liability and the aggregate value of class members’ claims that are within time. This is not a reason to refuse settlement approval.
Quinn Emanuel ceasing to act for the class members
The applicant and some class members object to Quinn Emanuel’s costs on the basis that the firm withdrew from acting for the applicant and class members following Vannin’s application for the appointment of a costs referee. They argue the withdrawal increased costs because the settlement approval application had to be taken over by Gilbert + Tobin.
As I will explain, while Quinn Emanuel’s decision to withdraw from acting was ill considered, it did not result in materially increased costs. I have taken the increased costs into account in the reduced amount in which Quinn Emanuel’s costs are approved. This is not a basis upon which to refuse settlement approval.
The preclusion from claiming losses suffered before 11 March 2010
Some class members object to the settlement because class members’ claims that are based on unauthorised withdrawals from their MMDAs before 11 March 2010 are not eligible to receive compensation. For the reasons already explained, this is not a basis upon which to refuse settlement approval. It would not be fair and reasonable if class members whose claims are statute-barred and therefore unable to succeed at trial are permitted to share in a settlement based on the aggregate value of class members’ claims that are within time.
The confidentiality and non-disparagement clauses
Mr Nigel Jeffares appeared as an objector on his own behalf and on behalf of other class members who are members of a support group named the Superannuation Crisis Support Group. He expressed the concern that class members may be gagged by the confidentiality and non-disparagement clauses in the Settlement Deed, including by being restricted in giving evidence before the Financial Services Royal Commission.
Mr Jeffares’ submissions were considered and helpful, and I thank him for the assistance he has provided to other victims of Sherwin’s fraud. However his concerns regarding the confidentiality and non-disparagement clauses are misplaced. The non-disparagement clause in the Settlement Deed binds only the named parties and not class members. Confidentiality in the terms of settlement was lost when the Notice of Proposed Settlement (which included the settlement amount and other key terms) was sent to class members and the quantum of the proposed settlement was published in mass media. Any subsisting confidentiality in the terms of settlement was lost when the key terms of settlement were the subject of submissions in open court. I note also that the confidentiality orders I have made do not restrict publication of the terms of settlement or inhibit class members from speaking or giving evidence in relation to the case. This is not a basis upon which to refuse settlement approval.
F WHETHER QUINN EMANUEL’S COSTS ARE REASONABLE AND PROPORTIONATE
The claimed costs
Quinn Emanuel submits that it incurred costs in the proceeding totalling $6,581,076, made up as follows (all amounts are inclusive of GST unless otherwise stated):
(a)costs of the proceeding charged of $1,002,408 (and paid by Vannin);
(b)unpaid costs in the proceeding of $3,989,728;
(c)unpaid costs of the security for costs application of $332,352;
(d)unpaid costs of $176,066 incurred by reason of and after Quinn Emanuel’s withdrawal from acting as solicitors for the applicant; and
(e)a 25% uplift fee payable in the event of success pursuant to s 182 of the Legal Profession Uniform Law (NSW) (Uniform Law) of $1,080,520.
This total does not include disbursements which Quinn Emanuel incurred in the proceeding totalling $1,941,877 (which have been paid by Vannin), and if they are included Quinn Emanuel ran up total costs of $8,522,953. I note in passing that there are some differences in the costs figures in the Referee’s Report and those provided in Quinn Emanuel’s and Vannin’s submissions but the differences are not material and it is unnecessary to explain them. The figures I use should be treated as approximate rather than exact.
In the settlement approval hearing counsel for Quinn Emanuel submitted that the firm had made a “substantial concession” by forgoing an uplift fee of $1.08 million which should “put to one side the quibbles about the minute aspects of the costs”. It said that the uplift fee, if not foregone, would “take out of the pot” a large amount that would otherwise be payable by class members. As I will explain, I accept the Referee’s conclusion that, because the costs agreement failed to properly describe what would constitute a ‘successful outcome’ under the agreement, Quinn Emanuel is not entitled to charge an uplift fee. In those circumstances I do not treat its waiver of the uplift fee as a concession. However, nothing turns on that. Whether or not the firm was entitled to a $1.08 million uplift fee under the costs agreement I would have reached the same view on the proportionality of costs.
Quinn Emanuel did though make other concessions. It seeks approval of costs in a reduced amount of $4,577,408 (or 38% of the settlement) which includes $1,002,408 already paid to it (the claimed costs). If the claimed costs are approved Quinn Emanuel will be entitled to receive an additional payment of $3,575,000 from the settlement (or approximately 30% of the settlement).
It must be kept in mind, however, that taking account of disbursements of approximately $1,941,877, Quinn Emanuel ran up costs totalling approximately $6,519,285. Quinn Emanuel does not seek approval of the disbursements incurred because they were paid by Vannin, and Vannin seeks their reimbursement as part of the Vannin Costs.
The requirement for Court oversight of costs charged to class members
Judicial oversight of the costs proposed to be charged is an important part of the Court’s role in protecting class members’ interests. In Redfern v Mineral Engineers Pty Ltd [1987] VR 518 at 523 Tadgell J said, and I respectfully agree:
The court’s surveillance over costs as between solicitor and client is assumed with a view to preventing any unfair advantage by solicitors in their charges to their clients. It stems, it seems, from the notion that ordinarily a solicitor is presumed to be in a position of dominance in relation to his client as a result of his presumed knowledge of the law and of what may and may not be properly charged by way of fees. Were a strict view not taken it might be open to a solicitor to overreach his client or otherwise act oppressively towards him on the matter of costs.
His Honour’s observations were made in the context of a taxation of costs but they have been cited with approval in the settlement approval context: see Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626 at [26] (Gordon J) and Kelly at [332].
In class actions the requirement for judicial supervision of legal costs proposed to be charged is obvious because: (a) the applicant’s solicitor is in a more dominant position vis-a vis a class member than in a solicitor-client relationship in individual litigation; (b) class members are commonly not told about the mounting costs as they are incurred and they suffer a significant information asymmetry in that regard; (c) it is not necessary for class members to retain the applicant’s solicitor and commonly they do not, yet they are usually made liable for a pro rata share of the costs; (d) even where class members retain the applicant’s solicitor they do not provide instructions as to the running of the class action and have no control over the quantum of costs, yet they are usually made liable for a pro rata share of the costs; (e) class members are unlikely to pay much attention to legal costs because they are usually only payable upon success and from the successful outcome; (f) it is usually not until after settlement is achieved that class members are told the total costs claimed, but they are not told (and it is commonly very difficult to accurately estimate) what their pro rata share of the costs will be; and (g) the Court has a protective role in relation to class members’ interests.
There is no real question that all class members who share in the benefits of a settlement should pay a proportionate share of the costs incurred to obtain it: see Caason at [108] and the cases cited. The question is whether the costs which Quinn Emanuel seeks be deducted from the settlement are reasonable and proportionate.
The appointment of a Costs Referee
On 27 March 2018 Lee J made orders directing Mr Roland Matters, costs consultant (the Referee) to conduct an enquiry into the reasonableness of Quinn Emanuel’s costs and to report to the Court on that question. On 26 April 2018 I made orders to expand the reference and directed the Referee to conduct an enquiry as to whether the following categories of costs incurred are fair and reasonable and to provide a report to the Court as to:
(a)the costs and disbursements of the proceeding charged or proposed to be charged by Quinn Emanuel;
(b)the costs and disbursements of the proceeding claimed by Vannin;
(c)the legal costs and disbursements of the proceeding charged or proposed to be charged by Gilbert + Tobin;
(d)the costs and disbursements of the security for costs application; and
(e)the quantum of any costs thrown away by Quinn Emanuel’s withdrawal from acting in the proceeding.
The fees and disbursements incurred by Quinn Emanuel total approximately $6.5 million, which would soak up more than half the settlement, and the applicant, some objectors and Vannin contend that Quinn Emanuel’s costs are excessive. In such circumstances it was clearly appropriate for the Court to appoint an independent costs referee and it would have been wrong to rely upon the report of a costs assessor appointed by Quinn Emanuel: see Caason at [111]-[124] and the remarks of Lee J in Lifeplan Australia Friendly Society Limited v S&P Global Inc (Formerly McGraw-Hill Financial, Inc) (A Company Incorporated in New York) [2018] FCA 379 (Lifeplan) at [40]-[41] and Dillon at [66].
The Referee undertook a comprehensive enquiry in relation to Quinn Emanuel’s costs including by reviewing documents filed in the proceeding, witness statements, the discovery database, tax invoices and Quinn Emanuel’s electronic accounting and time records, and considering written and oral submissions from Quinn Emanuel, Vannin and Gilbert + Tobin. On 20 June 2018 the Referee provided a 68-page report with eight lengthy attachments (the Referee’s Report) to the Court and the parties.
The Referee’s Report is predicated on an express assumption that Quinn Emanuel’s costs are proportionate. The report states (at paragraph 4.2):
I have assumed that, if charged for, performance of the work directed to the tasks summarised at paragraph 40 of the affidavit of Damian John Scattini sworn 22 May 2018 (Mr Scattini’s 22 May affidavit) and the tasks summarised at paragraph 10 of the affidavit of Damian John Scattini sworn 8 June 2018 (Mr Scattini’s 8 June affidavit) prior to formation of “the view” expressed at paragraph 194 of Mr Scattini’s 22 May affidavit, will result in legal costs being charged that are no more than those proportionately and reasonably incurred within the meaning of sub-section 172(1)(a) of the Legal Profession Uniform Law (NSW) (the Uniform Law).
Under the heading “Assumptions made in addition to assumptions reported in my reasons” the report states (at paragraph 21):
If charged for, performance of the work directed to the task summarised at paragraph 40 of Mr Scattini’s 22 May affidavit and the tasks summarised at paragraph 10 of Mr Scattini’s 8 June affidavit prior to formation of “the view” expressed at paragraph 194 of Mr Scattini’s 22 May affidavit, will result in legal costs being charged that are no more than those proportionately and reasonably incurred within the meaning of sub-section 172(1)(a) of the Uniform Law.
To explain these references I note that:
(a)paragraph 40 of Mr Scattini’s affidavit of 22 May 2018 summarised the work undertaken by Quinn Emanuel to obtain documentary evidence of suspicious emails;
(b)paragraph 10 of Mr Scattini’s affidavit of 8 June 2018 summarised the work required to estimate class members’ losses, including obtaining evidence of the pleaded breaches of contract and suspicious emails, evidence of the identity of class members and their full MMDA statements, and evidence concerning the nature of the transactions into and out of class members’ MMDAs and particularly whether or not those transactions were purportedly authorised; and
(c)paragraph 194 of Mr Scattini’s 22 May affidavit states that during further negotiations that followed the mediation on 31 January 2018 Quinn Emanuel formed the view that the aggregate value of class members’ claims that appeared to be within time was a factor favouring acceptance of the respondents’ $12 million final settlement offer.
When that is understood, the gist of the Referee’s assumption is that the costs associated with estimating class members’ losses, up to the point of settlement, were proportionately incurred within the meaning of sub-section 172(1)(a) of the Uniform Law. Before me, all parties approached the question of costs on the basis that the question of proportionality was a matter for the Court, not the Referee.
The Referee concluded that Quinn Emanuel incurred costs in a total of $6,540,433, made up as follows (exclusive of GST):
(a)legal costs charged in the proceedings (and paid by Vannin) of $911,280;
(b)disbursements charged in the proceeding of $1,795,568;
(c)GST reimbursement charged of $258,584;
(d)legal costs proposed to be charged in the proceeding of $3,250,000; and
(e)GST reimbursement proposed to be charged of $325,000.
That total does not include Quinn Emanuel’s asserted entitlement under the costs agreement to a 25% uplift on its unpaid fees payable in the event of success pursuant to s 182 of the Uniform Law.
Assuming proportionality, the Referee concluded that, generally, the extent of the services provided by Quinn Emanuel was reasonable, and the great bulk of costs were reasonably incurred. The Referee concluded that the costs should be reduced by $133,159, to $6,407,273.
Whether it is appropriate to adopt the Referee’s report
The applicant, Quinn Emanuel and Vannin took different positions on whether the Court should adopt the Referee’s Report:
(a)the applicant contends that the Court should not adopt the Referee’s Report. It argues that the Referee’s reasoning is unclear and the conclusions reached are partly based on material errors such that the Court should not be satisfied that the report provides a sufficient and reasonable basis to conclude that Quinn Emanuel’s claimed costs are fair and reasonable. The applicant contends, amongst other things, that:
(i)the Referee made material errors of calculation or quantification, including substantially overstating the number of documents the firm reviewed, so that the Referee’s conclusion as to the reasonableness of the substantial fees incurred in relation to document production, inspection, management and discovery was erroneous; and
(ii)the Referee should have concluded that the costs agreement between Quinn Emanuel and the applicant is void pursuant to s 185(1) of the Uniform Law because it does not satisfy the requirements of s 181(2)(b). Further, once the costs agreement is understood as void, the Referee erred in concluding that the firm could charge any costs for its “speculative” or “conditional” work, that is, the initial work for which it has already been paid $1,002,408 (incl. of GST);
(b)Quinn Emanuel contends that the Referee’s Report should be adopted insofar as it relates to the reasonableness of its costs. It does not accept the Referee’s conclusion that that it is not entitled to charge a 25% uplift on its unpaid fees (but offers to waive those fees provided it is paid the amount that it seeks);
(c)Vannin does not oppose the Court’s adoption of the Referee’s Report, and submits since it paid the Vannin Costs as it was obliged to under the funding agreements, it should be reimbursed all fees and disbursements, including those that the Referee found were not reasonably incurred; and
(d)the applicant also submits that Quinn Emanuel ought to bear the costs of their fees which are found not to be fair and reasonable (to be achieved by deduction from amounts otherwise payable to Quinn Emanuel from the settlement fund).
I accept that the Referee erred in concluding that Quinn Emanuel produced, inspected or reviewed approximately 1,710,363 documents and that (by applying a rate of $6 per document) costs in the vicinity of $10 million would be justifiable. I accept Mr Scattini’s evidence that Quinn Emanuel reviewed approximately 566,807 documents, which is less than one third of the number of documents to which the Referee referred, and that the firm incurred fees in the order of $1.75 million for such work. Quinn Emanuel did not seek costs anywhere near $10 million in relation to its work in producing, inspecting and reviewing documents, and the Referee did not allow costs in anything approaching that amount. The Referee only concluded that, insofar as it could be said that some of the costs involved in the security for costs dispute were not reasonably incurred, that was more than balanced by the parsimony that Quinn Emanuel applied to quantifying legal costs in respect of document production, inspection, management and discovery. I am not persuaded that the Referee’s overall conclusion that costs of $6,407,273 were reasonably incurred is materially flawed.
Some parts of the Referee’s Report could be clearer and reasonable minds may differ in relation to some of his conclusions, but it is plain from the report that the Referee conducted a thorough review, took an analytical approach, and took into account the parties’ written and oral submissions on the issues in dispute.
It is well-established that the reference procedure is not to be treated as some sort of warm up for the real contest: Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1999) 29 NSWLR 549 at 563-4 (Gleeson CJ) and 566-7 (Mahoney JA). In Caason at [132] I set out the principles that apply to adoption of a referee’s report as follows:
(a) an application contending that a report not be adopted is not an appeal;
(b)the discretion to not adopt a report should be exercised consistently with the purpose of the reference;
(c)where the report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition to accept the report;
(d)where the report reveals some error of principle, patent misapprehension of the evidence or manifest unreasonableness in fact finding, then there would arise reasons for rejecting it; and
(e)the referee should give sufficient reasons to enable the parties and the Court to know that the conclusion is not arbitrary or influenced by improper considerations, and is not affected by the flaws described in (d) above.
Where, as in the present case, the Court has the benefit of a costs referee’s report that uses a reasonable methodology and shows an analytical and thorough approach there are good reasons for the Court to adopt it. It is appropriate that I do so.
I will however deal in more detail with: (a) Quinn Emanuel’s asserted entitlement to the uplift fee; (b) the applicant’s contention that Quinn Emanuel is not entitled to any fees beyond the sum of $1,002,408 (incl of GST) already paid to it; and (c) whether costs were increased by Quinn Emanuel’s decision to cease acting for the applicant.
Whether Quinn Emanuel is entitled to a 25% uplift on its unpaid fees
Quinn Emanuel says that – provided the Court approves payment to the firm of the additional amount of $3.575 million – it will waive any claim to an entitlement under the costs agreement to be paid a 25% uplift on its unpaid fees. I found this conditional waiver curious when the firm is only permitted to charge costs that are fair and reasonable (s 172(1) of the Uniform Law) and the quantum of reasonable costs will be as approved by the Court. Upon the Court approving the quantum of reasonable costs it will be impermissible for the firm to charge any further amount, whether or not the Court approves the amount Quinn Emanuel seeks.
While submitting that the Referee’s Report should be adopted, counsel for Quinn Emanuel contends that the Referee erred in concluding that the firm was not entitled to charge an uplift fee.
The costs agreement between the applicant and Quinn Emanuel is headed “Retainer and Conditional Costs Agreement” and dated 16 June 2016 (the costs agreement). It is composed of two parts, one part having unconditional application and the other part having application conditional upon the applicant obtaining “a successful settlement or judgment”.
The costs agreement states:
You have also entered into a Funding Agreement with Vannin Capital (Vannin). Vannin is providing financial assistance on this matter which will enable us to conduct the litigation without seeking a contribution to the legal costs and expenses from you unless your case is successful (as defined below).
We have agreed with Vannin to conduct the litigation accordance with the Funding Agreement, incorporating the Terms of Engagement which are annexed to the Funding Agreement.
This includes an agreement between Vannin and us in relation to our Legal Costs. Vannin has agreed to pay the first $800,000 towards our professional fees on our usual terms.
We agree to accept legal instructions after this amount, on a speculative, or “no win, no charge” basis in relation to our professional costs as defined below.
Successful Outcome Of The Matter
We will only be entitled to receive payment of our Legal Costs from you, beyond the first $800,000, in the event that you obtain a successful settlement or judgment.
Professional Fees
We will charge you professional fees for the work we do based on hourly rates….
[Here the costs agreement sets out the hourly rates for the Quinn Emanuel lawyers working on the case.]
Uplift Fees
In the event that you obtain a successful outcome, we will charge an additional 25% “uplift” on our professional fees.
Section 181 of the Uniform Law relevantly provides:
Conditional costs agreements
(1)A costs agreement (a “conditional costs agreement”) may provide that the payment of some or all of the legal costs is conditional on the successful outcome of the matter to which those costs relate.
(2) A conditional costs agreement must--
(a)be in writing and in plain language; and
(b)set out the circumstances that constitute the successful outcome of the matter to which it relates.
Section 185 of the Uniform Law relevantly provides:
Certain costs agreements are void
(1)A costs agreement that contravenes, or is entered into in contravention of, any provision of this Division is void.
Note: If a costs agreement is void due to a failure to comply with the disclosure obligations of this Part, the costs must be assessed before the law practice can seek to recover them (see section 178(1)).
(2)A law practice is not entitled to recover any amount in excess of the amount that the law practice would have been entitled to recover if the costs agreement had not been void and must repay any excess amount received.
(3)A law practice that has entered into a costs agreement in contravention of section 182 is not entitled to recover the whole or any part of the uplift fee and must repay the amount received in respect of the uplift fee to the person from whom it was received.
Before the Referee the applicant submitted that the “no win, no charge” or conditional part of the costs agreement failed to set out in plain language the circumstances that would constitute a “successful outcome” as required by s 181(2). The applicant contended that the expression “successful settlement” in the costs agreement cannot be construed to apply to any settlement that sees one or more of the respondents paying the applicant any amount. It used the following hypothetical examples to demonstrate why such a construction would be wrong:
(a)the respondents agree to pay the applicant $1, which meant that the applicant was thereafter liable to pay Quinn Emanuel $5 million in costs;
(b)one respondent agrees to pay the applicant $1 million, but the applicant’s case against the other respondent is dismissed, and the applicant is ordered to pay $7 million in costs; or
(c)a settlement where, after deductions for costs and litigation funding commission, the applicant and class members recovered nothing.
The applicant submits that none of these examples constitute either a “successful outcome” or a “successful settlement” which is the expression used in the costs agreement.
Quinn Emanuel argued to the contrary. The Referee reached the conclusion that the cost agreement was in contravention of s 181(2)(b) in that it did not “provide the parties to it with the ability to know that any particular circumstance(s) will or will not constitute a successful outcome.” The Referee found that the conditional part of the costs agreement was therefore void pursuant to s 185(1) and that pursuant to s 185(3) Quinn Emanuel was not entitled to charge an uplift fee.
There is a sound basis for the Referee’s conclusion in this regard and it is appropriate to adopt the Referee’s Report. The purpose of s 181(2) is to ensure that it is clear what circumstances will constitute a “successful outcome” and thereby create an obligation to pay an uplift fee.
First, without an order equalising the payment of funding charges across the class it seems likely that the entirety of any recovery by funded class members would go towards paying Vannin’s funding charges. Funded class members comprise less than one third of the registered class members and there is no good reason why they should carry the burden of the proceeding when unfunded class members also benefit from it.
Second, a common fund order will mean that all class members will pay the same pro rata share of legal costs and funding commission from any amounts they receive from the settlement. It is in the interests of justice in the proceeding that the burden of the legal costs and funding charges incurred in achieving the settlement fall equally upon all class members who stand to benefit from it.
Third, a common fund order is a simpler and more transparent mechanism than a funding equalisation order for fairly apportioning funding charges across the class. It is easier for class members to understand and it avoids disputes about whether, on their proper construction, the funding agreement permits Vannin to charge a funding commission on the “grossed up” amount redistributed to funded class members from unfunded class members’ recoveries.
Fourth, a common fund order means that funded class members (who have entered into funding agreements which require them to pay a funding commission of the greater of: (a) 25% of any gross settlement; or (b) three times the aggregate of all (broadly based) costs in the proceeding, adverse costs, and any security for costs paid in cash) get the benefit of funding at a Court-approved funding rate, which, for the reasons I will explain, is materially lower.
Further, if a common fund order is not made, unfunded class members (who have not entered into funding agreements) are likely be saddled with a funding rate based on the higher funding rates in the funding agreement through a funding equalisation order. Through a common fund order they too will get the benefit of a lower Court-approved funding rate.
Class members may, of course, be able to obtain the benefit of a Court-approved funding rate without a common fund order. The Court has held that it has power to vary the funding commission required to be paid by class members under their funding agreements, but that power has recently been doubted. Allowing the application for a common fund order avoids any controversy as to the Court’s power to approve a funding commission in a lower amount.
Fifth, unfunded class members were informed in the Opt Out and Registration Notice that Vannin may apply for them to pay the same funding rate as funded class members. The Notice of Proposed Settlement informed class members that Vannin would seek a common fund order, and they have had the opportunity to object and file submissions in that regard. To the extent that some class members have objected the Court will take those objections into account.
Having said this, a common fund order will only be appropriate and in the interests of justice in the proceeding if it is made at a reasonable rate. The real question is what is a reasonable funding rate in the circumstances of the present case.
What is a reasonable and proportionate funding rate
Vannin argues that the Court should approve a funding rate of 25% of the gross settlement which equates to a funding commission of $3 million. As I have said, if a $3 million funding commission were to be approved, on top of the Vannin Costs and Quinn Emanuel’s claimed costs (and the other deductions) there would only be about $250,000 left for distribution to the class members.
Vannin submits however that it is not responsible for class members’ investments in MMDAs through Sherwin or for the modest outcome in the litigation. It contends that, although a $3 million funding commission represents a substantial proportion of the settlement after deduction of reasonable fees and disbursements, that is not due to any fault of Vannin and simply reflects the fact that class members’ claims proved to be worth less than they, Quinn Emanuel or Vannin had originally hoped.
Vannin further argues that it contracted with the applicant and funded class members to provide litigation funding for reward; that it performed its side of the bargain and expended substantial monies to fund the attempt by the applicant and class members to recover value for their claims. It contends that having regard to the circumstances that existed at the time the funding agreements were entered into, and Vannin’s substantial exposure that it accepted in good faith as the proceeding continued, a common fund order at a funding rate of 25% on the gross settlement constitutes reasonable remuneration for the risk it took.
Vannin’s submissions are not without merit but in the circumstances of the present case and by reference to the principles set out in Money Max Int Pty Limited (Trustee) v QBE Insurance Group Limited (2016) 338 ALR 188; [2016] FCAFC 148 (Money Max) at [80] (Murphy, Gleeson and Beach JJ), I consider it appropriate to set a funding rate very much at the low end of the range. I will approve a funding commission of $1 million which equates to a funding rate of 13.7% of the net settlement (after approved fees and disbursements) or 8.3% of the gross settlement.
First, a funding commission should be proportionate to the amount sought and recovered in the proceeding: Money Max at [80](g).
Discerning the amount sought in the present case is not straightforward. Like Mr Scattini, Mr Coope’s initial approach to estimating aggregate claim value was really just a stab in the dark. He says that in around February 2016 he formed the view that the “maximum amount” recoverable in the proceeding would be more than $60 million. He did so on the basis of the Administrator’s Report to Creditors in respect of the Sherwin companies, which identified that approximately $85 million of total funds under management had been lost through the fraud. Of that loss, $25 million was attributed to funds invested with Wickham Securities (it is not clear whether that attribution was by Mr Coope or by the Administrator) which was the subject of a separate class action, which left a balance of at least $60 million that Mr Coope concluded was “potentially recoverable” in the proposed class action.
Putting to one side the unreliability of such a rough and ready estimate, it had the obvious problem that it did not take into account the risk that many class members’ claims might be out of time.
Importantly, Mr Coope says that Mr Scattini did not tell him that Quinn Emanuel and counsel were concerned that many class members’ breach of contract claims might be out of time. He states that Quinn Emanuel’s only communication to him about limitation period difficulties concerned the applicant’s claim. In that regard he says that by mid-February 2016 he understood that Mr Scattini was concerned to commence the class action by a particular date in March 2016 so as to avoid any argument about the expiry of a limitation period in respect of the applicant’s claim only.
He also states, however, that by an email dated 4 March 2016 he agreed to fund the proceeding on an ‘open’ class basis “because of Mr Scattini’s concern that some group member claims could potentially be out of time if the action proceeded as a closed class.”
I have two difficulties with Mr Coope’s evidence in this regard. First, given that he understood the applicant’s claim faced a risk of being statute-barred it is hard to see how he would not also have understood that the same limitation period may also affect class members’ claims. Second, on its face the contention that Mr Coope did not know that class members’ claims faced a risk of being statute-barred appears to be inconsistent with his statement that his reason for agreeing to fund the case on an open class basis was to address Mr Scattini’s concern that a closed class could mean some class members’ claims would potentially be out of time.
However, Mr Armstrong QC, senior counsel for Vannin, submits that Mr Coope’s evidence should be understood as showing that he thought that any potential limitation period difficulties in relation to class members’ claims were solved by bringing the proceeding as an open class action.
It is not clear to me that this is what Mr Coope’s evidence meant but not much turns on it. If Mr Coope had such an understanding it was completely erroneous. Pursuant to s 33ZE of the Act, the commencement of a class action operates to suspend the running of any limitation period that applies to a class member’s claim. It does not, somehow, bring back within time a class member’s claim that is already statute-barred. There is nothing in the materials to explain how Mr Coope could have reached so flawed a view of the operation of the Act.
Mr Coope is legally qualified, the materials show that he met regularly with Mr Scattini to get reports on and make decisions in the case, and he took a firm hand in directing the case. On at least one occasion he went so far as to override Quinn Emanuel’s and counsel’s view and on two occasions he obtained contrary legal advice. In circumstances where it should have been readily apparent that many class members’ claims might be time-barred it was not reasonable or proportionate for Vannin to expend millions of dollars in funding an action based on such an erroneous understanding. Vannin directed and funded the case without requiring that the necessary work be performed to enable a reliable estimate to be made of the aggregate claim value of class members’ claims within time.
Whether Mr Coope did not turn his mind to the potential limitation problems facing class members’ claims because Quinn Emanuel did not alert him to any concerns in that regard, whether he gave insufficient attention to the issue generally, or whether he did not give attention to the issue because he misunderstood the operation of s 33ZE of the Act, the result is the same. Mr Coope continued to direct and Vannin continued to fund a case on the basis of a seriously over-blown estimate of aggregate claim value, and did not require the work to be undertaken to get to a more reliable estimate.
I do not accept Vannin’s contention that the proportionality of the funding commission should be approached on the basis that the case was a $60 million claim. It was never realistic to expect $60 million to be achievable in the litigation and I will not assess proportionality against that amount.
The amount recovered in the proceeding is more straightforward. The settlement is $12 million inclusive of costs and, on the assumption that the respondents’ offer includes an allowance for legal costs, proportionality should be assessed net of costs. The approved costs and disbursements are approximately $4.69 million and the net settlement (after costs) is therefore approximately $7.31 million. A $3 million funding commission would comprise 41% of the net settlement, even before taking into account the other substantial costs, and would be neither reasonable nor proportionate.
As Lee J said in Clarke at [29] “[t]here must be a good reason why a settlement could be considered fair from the perspective of group members, when the lawyers, experts and the funders get more out of it than the people who have allegedly suffered a wrong.” There is no good reason in the present case, and in my view funding charges should only be approved in a significantly lower amount than the sought.
Second, the quantum of adverse costs exposure the funder assumes is an important consideration: Money Max at [80](e).
Under the funding agreement Vannin agreed to indemnify the applicant against adverse costs up to a specified cap, but the agreement required that ATE insurance be obtained. Vannin obtained ATE insurance at an initial premium cost of $355,300. That cost was at Vannin’s risk because, if the case was unsuccessful, it could not recover that amount.
Importantly however, Vannin having paid that premium (and class members being obliged to pay the conditional premium from any successful outcome in the case) Vannin no longer had any adverse costs exposure. If the case was unsuccessful the insurer would pay the adverse costs up to the specified cap. The $1,065,900 cost of the contingent premium for the insurance is not Vannin’s expense. It is payable only upon success in the litigation and by deduction from the settlement fund and as such it is entirely borne by the applicant and class members.
Further, unlike the position in Clarke (at [5]), this is not a case where the funder carried the ATE premium cost as a cost of its business. Under Vannin’s funding agreement all ATE premium costs are directly recoverable by Vannin from the settlement fund.
It follows that Vannin’s exposure to an adverse costs order was low, its expense in insuring that risk was low, and the substantial cost of adverse costs cover is ultimately directly met by the applicant and class members rather than by Vannin.
Third, the quantum of legal costs expended and to be expended in the litigation, and any security for costs paid, are important considerations: Money Max at [80](f).
Under the funding agreement Vannin was only obliged to pay Quinn Emanuel’s fees up to $800,000 (although in total it paid $1,002,408 (incl. of GST)), and upon receipt of that amount Quinn Emanuel was obliged to conduct the case on a no win-no fee basis. Vannin was not required to pay Quinn Emanuel’s fees after the initial period but it paid disbursements of $1.94 million.
In my view Vannin’s expenditure on costs was at the low end, it did not face a risk paying legal fees if the case proceeded to trial, and Quinn Emanuel rather than Vannin carried the majority of costs. This also points towards a low funding commission.
Vannin did advance $1.486 million in security for costs, but that money was not really at risk because Vannin had taken out an ATE insurance policy. If the case was unsuccessful the insurer was obliged to pay the adverse costs and Vannin would have recovered the amount advanced.
Fourth, the funding agreements provide for Vannin to be reimbursed amounts incurred largely in pursuit of its own commercial interests which further reduced the level of the cost and risk Vannin took on. The reimbursements fall into three categories:
(a)$255,829 Vannin paid to obtain a second opinion from Ashurst in relation to the security for costs application (including senior counsel) and a second opinion from Baker McKenzie (including senior counsel) prior to mediation in relation to the prospects of success;
(b)the disbursements incurred by Quinn Emanuel in defending the security for costs application (the firm having agreed to waive its fees) which Vannin insisted on defending against the advice of Quinn Emanuel and counsel; and
(c)the costs associated with the book building work undertaken to identify class members and sign them up to a litigation funding agreement. The book building work was undertaken by Quinn Emanuel (with the assistance of another law firm, Berrill & Watson) and invoiced to Vannin. The cost of book building which was largely for Vannin’s benefit was thus passed on to the applicant and class members.
These matters also point to a lower funding commission.
Fifth, it is relevant to compare the funding commission sought with those in other Part IVA proceedings and/or what is available or common in the market: Money Max at [80](c).
I set out the publicly available material regarding funding rates in the market in a recent settlement approval decision and I need not reiterate that: see Money Max [2018] FCA 1030 at [197]-[204]. As I said in that case (at [200]) it is appropriate to be cautious in comparing ‘headline’ funding rates since the reasonableness of the funding rate often depends on case-specific factors including the risks assumed by the funder through the particular funding terms.
In the present case, if regard is had just to the headline rate, a funding rate of 25% of the gross settlement is within prevailing market rates at the time the case was commenced. But a comparison of funding rates is only useful when one is comparing like with like and that is not the case here. That is so because, as set out above, Vannin did not assume the risks of adverse costs, passed on substantial costs to class members and was not obliged to pay most of the legal fees associated with the litigation.
I accept that the case was difficult and it involved significant risks on liability and quantum, and that having regard to the period over which Vannin has had its money out a funding commission at $1 million may mean that it will suffer a loss by funding the case. However, the amount that could reasonably be expected to be achieved in the litigation is low, the recovery by class members is low, Vannin’s conduct in directing and funding the case without obtaining a reliable estimate of aggregate claim value of class members’ claims within time was not reasonable or proportionate, and it should not receive a funding commission divorced from those matters. In the circumstances I consider a funding rate of 13.7% of the net settlement to be reasonable and proportionate, which equates to 8.3% of the gross settlement.
I WHETHER THE SETTLEMENT DISTRIBUTION SCHEME IS FAIR AND REASONABLE
The aim of the Amended SDS is to produce a fair, cost effective and quick process which will result in the expeditious assessment of class members’ claims and distribution of settlement monies into the hands of class members entitled to recover. Its salient terms include:
(a)subject to further order of the Court, any class member who did not register their claim before the 14 December 2017 class closure deadline will remain a class member for all purposes but will not be entitled to receive a distribution from the settlement fund nor to receive notices under the SDS;
(b)registered class members that have suffered losses prior to 11 March 2010 will not be entitled to recover proportionately for those losses;
(c)registered class members that have suffered losses after 11 March 2010 will be entitled to recover proportionately for those losses;
(d)Mr Wynand Mullins, a partner of the accounting firm Ferrier Hodgson is appointed as the Scheme Administrator;
(e)timelines for each step in the SDS;
(f)the Scheme Administrator will establish a database of registered class members;
(g)the Scheme Administrator will assess each registered class member’s losses and provide an opportunity for registered class members to notify the Scheme Administrator of any errors in the loss assessment and propose adjustments, by identifying authorised transactions on their MMDA;
(h)the following Court-approved amounts are to be deducted from the settlement fund:
(i)Quinn Emanuel’s costs;
(ii)the Vannin Costs and funding commission;
(iii)the costs of administering the SDS (settlement administration costs); and
(iv)a payment to Mr and Mrs Petersen for the time spent providing instructions and acting on behalf of class members (reimbursement payment);
(i)the Scheme Administrator will distribute the remaining settlement monies pro rata between all registered class members assessed as being entitled to recover compensation; and
(j)provision for what is to be done with any unpresented cheques and residue monies after settlement distribution is complete.
The applicant submits that it is appropriate to appoint Mr Mullins as Scheme Administrator, that he has the capacity to undertake the required work, understands the obligation to act fairly and impartially in assessing class members’ claims, and understands the obligation to seek directions from the Court should any question arise as to the proper administration of the SDS. I accept these submissions.
By orders on 30 May 2018 I approved an SDS which provided that the Scheme Administrator would undertake a review of registered class members’ MMDA statements to determine the net outflow (if any) of transactions after 10 March 2010 from each registered class member’s MMDA to a series of Sherwin accounts nominated in a schedule to the SDS. The Scheme Administrator would then provide a preliminary assessment of loss to each registered class member entitled to recover, who had 28 days to notify any adjustments they proposed to the assessment and to provide any evidence in support of that adjustment. The Scheme Administrator would then consider the proposed adjustments and determine whether to make them in his absolute discretion.
Although the SDS contained the safeguard that class members could object to the preliminary loss assessment and seek adjustments, the applicant recognised that this method of assessment had limitations and possibly a significant degree of imprecision. The applicant submitted that this was reasonable having regard to the small amounts class members will receive, the expense and time likely to be associated with a more exact process, and the advanced age of many class members. I was persuaded that the cost of a tracing exercise in respect of each registered class member’s MMDA was likely to substantially erode the amount available for class members see Camilleri v The Trust Company (Nominees) Limited [2015] FCA 1468 at [43]. That is borne out by the substantial costs incurred by the applicant’s solicitors in retaining Ms Janine Smith of Vincents Chartered Accountants to ascertain the losses of a subset of class members.
Subsequently a number of registered class members raised concerns that the preliminary loss assessment excluded some material unauthorised withdrawals from their MMDAs, and in some cases said that the assessments were incorrect by a substantial amount. This led to Gilbert + Tobin filing an application for an Amended SDS. On 16 August 2018 I made orders approving an Amended SDS changing the scheme so that, before the Scheme Administrator makes a preliminary loss assessment, each registered class member is given the opportunity to identify any unauthorised transactions after 10 March 2010 of an amount more than $10,000, by providing a statutory declaration and identifying such transactions on their MMDA statement.
The Amended SDS is an improvement, although it too has its limitations. I remain satisfied that the substantial time and cost of attempting some form of tracing exercise is inappropriate having regard to the relatively small amounts available for distribution, and the advanced age of many class members. I consider the loss assessment methodology in the Amended SDS is likely to deliver a broadly fair relative payout as between individual registered class members.
I am satisfied the Amended SDS is fair and reasonable.
J WHETHER THE SCHEME ADMINSTRATION COSTS ARE REASONABLE
By orders on 30 May 2018 Mr Mullins was appointed as Scheme Administrator and the quote provided of $65,000 was approved as Scheme Administration Costs. On 31 August 2018, Ferrier Hodgson wrote to the Court seeking approval for a further $44,000 of fees and disbursements, made up of:
(a)$9,000 for costs incurred to 31 July 2018; and
(b)$35,000 for costs to administer the Amended SDS, including costs already incurred from 1 August 2018.
With respect to costs incurred to 31 July 2018, Mr Mullins says that the firm’s unadjusted professional time costs were approximately $86,000, which is $21,000 more than the estimate provided for the work. Making allowances for write-offs and charging for some time of senior staff at a lower rate, Mr Mullins says his adjusted professional time costs to 31 July 2018 is $74,000 excluding GST, or $9,000 more than the original estimate.
Mr Mullins says that the key matters which caused costs to exceed his estimate were:
(a)entering new and additional MMDA statements that were provided on 12 July 2018 in substitution of MMDA statements previously provided;
(b)replacing marked MMDA statements with clean MMDA statements;
(c)entering MMDA statements that are significantly longer than the length of an MMDA statement estimated based on the sample provided;
(d)higher than expected levels of inquiries (over 110 calls) from or on behalf of RGMs who did not understand the process and documents provided. Mr Mullins says this required lengthy explanations over the phone and assistance to callers with their queries;
(e)higher than expected level of enquiries from RGMs who wish to challenge Mr Mullins’ preliminary assessment by other means including identifying certain transactions as unauthorised and modifying the statutory declaration accordingly, providing detailed documentary support for these transactions, and objecting to the preliminary assessment of loss but not indicating any transactions on the basis that they had no knowledge of the MMDA;
(f)higher than expected utilisation of senior staff to assist with complex queries from RGMs and their agents; and
(g)unforeseen delays, and receiving additional information requiring rework and changes to the original timetable.
Based on the costs to date and the unanticipated additional work required, Mr Mullins estimates costs from 1 August 2018 will be $50,000 plus GST. These costs are largely due to the amendment to the SDS approved on 16 August, which created unanticipated additional work. The Amended SDS required Ferrier Hodgson to send further letters to all 208 RGMs, which explained the amendment to the SDS and the process for RGMs to challenge the preliminary assessment of loss by identifying unauthorised transactions. He has adjusted this amount down to $35,000 in recognition of the complexities of the matter, the losses suffered by group members and the scrutiny given to costs in this case.
I am satisfied that the further Scheme Administration Costs are fair and reasonable in the circumstances and I approve such costs in a total of $109,000.
K WHETHER THE REIMBURSEMENT PAYMENT IS REASONABLE
The applicant seeks an order for a $25,000 reimbursement payment to be deducted from the settlement fund and paid to its directors in reimbursement for their time and expenses incurred in prosecuting the proceeding on behalf of the class. It is well-established that a representative party may be entitled to an additional part of any settlement to reflect the heavier burden it has typically borne: Caason at [176]; Money Max [2018] FCA 1030 at [212]; Caason Investments Pty Ltd v International Litigation Partners No.3 Ltd [2018] FCAFC 176 (Allsop CJ, Middleton and Perram JJ).
Mr and Mrs Petersen are elderly and were unwell during some of the period over which the case ran. Under the terms of the funding agreement they were required to travel from Queensland to meet with Vannin and Quinn Emanuel bi-monthly, and they attended numerous additional meetings with Quinn Emanuel and counsel and with class members at town hall meetings. They found their work in the case emotionally and physically exhausting. I consider that $25,000 is reasonable compensation for the assiduous and commendable effort to which Mr and Mrs Petersen went.
L OTHER COSTS
By orders made on 11 July 2018 I approved costs in the amount of $19,917.48 for the fees and disbursements of the Referee and $10,523.30 for fees of the Distribution Agent in providing notices to class members. I am satisfied these deductions are fair and reasonable.
M CONCLUSION
I direct the parties to prepare draft orders reflecting these reasons within ten days. If the parties cannot reach agreement as to the form of the draft orders they must file their competing versions and short submissions (no more than three pages) explaining the position they take.
I certify that the preceding two hundred and seventy-four (274) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy. Associate:
Dated: 23 November 2018
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