Robert Deutsch v Erwin Deutsch (No 3)
[2014] VSC 494
•2 October 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2008 05515
| ROBERT DEUTSCH & ORS | Plaintiffs |
| According to the attached schedule | |
| v | |
| ERWIN DEUTSCH & ORS | Defendants |
According to the attached schedule
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JUDGE: | HARGRAVE J |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 28, 29 August, 17 September 2014 |
DATE OF JUDGMENT: | 2 October 2014 |
CASE MAY BE CITED AS: | Robert Deutsch & Ors v Erwin Deutsch & Ors (No 3) |
MEDIUM NEUTRAL CITATION: | [2014] VSC 494 |
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DAMAGES – Breach of terms of settlement – Correct method of assessing loss – Need to avoid double compensation – No double compensation – Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; Haines v Bendall (1991) 172 CLR 60; HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640.
INTEREST – Delay by plaintiff in prosecuting case – Delay contributed to by defendant – Whether defendant has had use of the money represented by damages award during period of delay – Whether good cause shown to the contrary to limit period of statutory interest – Supreme Court Act 1986, s 60; Penalty Interest Rates Act 1983, s 2.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J Slattery | Holding Redlich |
| For the Defendants | Mr N Jones | Moama Law |
HIS HONOUR:
These reasons for judgment assume familiarity with the Court’s principal reasons for judgment in the proceeding,[1] and the Court’s reasons for judgment concerning costs of the proceeding to and including 8 February 2013.[2]
[1]Robert Deutsch & Ors v Erwin Deutsch & Ors [2012] VSC 227 (‘principal reasons’).
[2]Robert Deutsch & Ors v Erwin Deutsch & Ors (No 2) [2013] VSC 15 (‘costs reasons’).
The position has now been reached where the Court has sufficient information before it to assess Robert’s entitlement to damages for breach of the terms of settlement. On 28 August 2014, I accepted the oral application made by counsel on behalf of the plaintiffs, consistent with paragraph 136 of the principal reasons, that the plaintiffs have leave to make a claim on behalf of Robert Deutsch for damages equal to the proceeds he would have received from the terms of settlement had Erwin Deutsch not breached them.
The parties agree that Robert Deutsch is entitled to damages for breach of the terms of settlement in accordance with the ruling principle, that he should be placed in the same position, so far as money can do it, as he would have been in had Erwin performed his obligations under the terms of settlement.[3] This principle entitles Robert to damages comprising the specific amounts payable to him under the terms of settlement and an amount representing one-half of the remaining net proceeds of sale of the trust assets in accordance with the terms of settlement in 2009, after deducting all necessary costs to bring about those sales and wind-up the trusts.
[3]Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272, 285-6 [13].
The general rule is that damages should be assessed at the time of the breach.[4] However, compensation remains the cardinal concept. A plaintiff cannot recover more than he or she has lost.[5] So, as it is sometimes expressed, there is an ‘overriding compensatory rule’.[6] This enables the Court to look at subsequent events and ensure that a party is not over-compensated.[7]
[4]Johnson v Perez (1988) 166 CLR 351.
[5]Haines v Bendall (1991) 172 CLR 60, 63.
[6]HTW Valuers (Central Queensland) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640, 666-7 [63].
[7]Ibid, 658-9 [39]; Willis v The Commonwealth (1946) 73 CLR 105, 109.
In paragraph [181] of the principal reasons, I stated:
I will hear the parties as to the precise form of the Court’s judgment in the proceeding. As I am satisfied that Erwin’s breaches of the terms of settlement were not just contractual in nature, but involved him in serious breach of his fiduciary duties to the trusts, the Court is in those circumstances empowered to mould relief which is ‘practically just’ in all the circumstances.[8] In my view, the Court should endeavour to mould relief consistent with the terms of settlement and these reasons for judgment. The parties should be given an opportunity to consider these reasons for judgment, before called upon to make further submissions in that regard.[9]
[8]For example, Warman International Ltd v Dwyer (1995) 182 CLR 544; Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102.
[9]Robert Deutsch & Ors v Erwin Deutsch & Ors [2012] VSC 227, [181] (citation in original).
Since that time, there have been many further hearings as the Court worked in a practical way with the parties, and the new trustee of the trusts appointed by the Court, Michael Trumble, to ensure that all of the trust assets were gathered in, converted to cash and made available for distribution to the parties. This has involved much cost, but the exercise has been worthwhile. The new trustee, assisted by Deloitte Private Accountants and Valuers, has provided great assistance to the parties and the Court in achieving this end and maximising the value of the trust assets. Among other things, this has involved negotiations with the Australian Taxation Office to avoid substantial interest and penalties resulting from the failure of the trusts, while the corporate trustees were deadlocked, to complete annual accounts or lodge tax returns for many years.
During the course of this process, the Court has permitted both Robert and Erwin to draw sums from the trust assets for their personal purposes, including amounts awarded against Erwin in the main proceeding, amounts awarded against Robert in the caveat proceeding, for Erwin’s living expenses and for Robert’s and Erwin’s legal expenses. On a balance of account, more has been taken from the trusts by Erwin than Robert.
These payments, together with the costs payable to the new trustee and those engaged by him, have substantially depleted the trust funds. On the other hand, however, the delay in realisation of the trust assets has led to significant profits due to increases in property values. Overall, the property trusts are about $1.1 million better off than they would have been had the properties been sold in accordance with the terms of settlement in 2009.[10]
[10] Deloitte Private, Report to the Court, 9 October 2013, pp 10-11.
It is first necessary to summarise the amounts to which Robert has established a prima facie entitlement for breach of the terms of settlement in accordance with the ruling principle:
(1) An amount of $315,000 payable by Erwin from his share of the trust assets in accordance with the terms of settlement, plus interest on that amount. On 12 November 2012, the Court gave judgment in Robert’s favour against Erwin for this amount. This amount was paid from the trust assets and adjusted against Erwin’s share of those assets.
(2) On 8 February 2013, the Court ordered Erwin to pay Robert interest on the sum of $315,000 in the sum fixed at $114,190.15. That amount was also paid from the trust assets and adjusted against Erwin’s share.
(3) There were other payments due under the terms of settlement — Erwin was to pay Robert $37,000 and Robert was to pay Erwin $14,000. So, on a balance of account, Erwin was required to pay Robert $23,000. That amount, plus interest pursuant to statute of $12,801.86 at 17 September 2014, has not yet been paid or adjusted against Erwin’s share of the trust assets.
(4) Expert evidence from Mr Sincock of Deloitte Private and Mr Bond of AVA Property established that, had the trust assets been sold and the proceeds distributed in accordance with the terms of settlement during 2009, Robert Deutsch would have received, in addition to the sums of $315,000 and $23,000, an amount of $1,791,189.06, representing his half share of the remaining net trust assets.
(5) Robert claims interest pursuant to statute of $860,481.81 at 17 September 2014 on the $1,791,189.06. Erwin contends that no interest should be allowed to Robert or, if he is to recover interest, that it should be for a lesser period or at a lesser rate. The interest issue is resolved below in Robert’s favour.
In assessing Robert’s damages and interest, however, it is necessary to compare his prima facie loss and interest entitlement (assessed at the time of Erwin’s breach of the terms of settlement) with the amounts he has received and is entitled to receive from the trust since Erwin’s breach. In other words, how much is Robert worse off by reason of the breach? This approach ensures that Robert is not over-compensated.
My conclusion that Erwin must pay Robert interest at the penalty rate on the amount of $1,791,189.06 means that the total prima facie loss and interest for breach of the terms of settlement is $3,116,662.88, calculated as follows:
Amounts Description $315,000.00 Due under the terms of settlement $114,190.15 Interest on the sum of $315,000 to 17 September 2014 $23,000.00 Due under the terms of settlement $12,801.86 Interest on the $23,000 to 17 September 2014 $1,791,189.06 Robert’s half share of the net trust assets if terms of settlement had been effectuated $860,481.81 Interest on the $1,791,189.06 to 17 September 2014 $3,116,662.88 Prima facie loss ($2,129,189.06) and interest ($987,473.82)
As appears above, the sum of $315,000 plus interest of $114,190.15 has already been paid to Robert and adjusted against Erwin’s share of the trust assets. This reduced the prima facie loss and interest to $2,687,472.73.
It is next necessary to consider how the respective drawings of Robert and Erwin from the trust assets since the new trustee was appointed should be taken into account in formulating final relief.
How should the respective drawings from the trusts be dealt with?
As appears above, the determination of Robert’s prima facie loss in accordance with the ruling principle presents no difficulty. The complicating factor is the continuation of the trusts beyond the dates when each of the trusts would have been finalised in accordance with the terms of settlement. Because of Erwin’s wrongful repudiation of the terms of settlement, the trusts have continued in existence for about five years longer than they would have if the terms of settlement had been effectuated. In the meantime, there have been significant costs incurred, significant increases in property values and, following the appointment of the new trustee, amounts have been distributed from the trusts.
In a report to the parties dated 25 August 2014, the new trustee estimated the amount of the remaining trust assets at that date at $1,926,000. This amount includes a provision for estimated further costs to be incurred by the new trustee in finalising the trusts, distributing the remaining trust assets and causing the trustee companies to be deregistered. The provision has been allowed at $150,000, which is at the top of the estimated range of $100,000 to $150,000 for further costs. In order to ensure that damages are assessed on a once and for all basis,[11] I will adopt the middle of the range, $125,000. Further, an amount of $13,276.80 must be deducted from the trust assets to reflect a recent payment from the trusts and adjusted against Robert’s share of the remaining trust assets.[12] These adjustments increase the estimated amount of the remaining trust assets to $1,937,723.20.
[11]The Nominal Defendant v Gardikiotis (196) 186 CLR 49, 60-1.
[12]Pursuant to the Court’s order made 17 September 2014.
Since the time of the report, the new trustee has paid $673,000 from the trust assets to Robert, to satisfy Erwin’s obligation to pay gross sum costs orders of $650,000 and $23,000. This payment reduced the estimated amount of the remaining trust assets to $1,264,723.20, and was adjusted against Erwin’s share of the remaining trust assets.
It is possible that there will be further trust liabilities for tax, and the new trustee has been granted time to satisfy himself that this is not so – so as to avoid personal liability. But, while I recognise that it is prudent for the new trustee to delay final distributions for up to six months,[13] I am not satisfied that the evidence justifies me adjusting the estimated remaining trust assets further on account of mere possibilities.
[13]See the Court’s orders made 28 August 2014, [3].
As stated, more has been taken from the trusts by Erwin than Robert. The difference has been calculated at $382,232.09.[14] When allowance is made for the $13,276.80, the difference becomes $368,955.29, as that amount must be adjusted against Robert’s share. Accordingly, to equalise Robert’s and Erwin’s entitlements, it is necessary to adjust the total amounts taken from the trust assets by Robert and Erwin by reducing Erwin’s entitlement by half this amount ($184,477.65) and increasing Robert’s entitlement by the same amount. On the basis that there is approximately $1,264,723.20 remaining in the trusts for distribution, this results in adjusted entitlements of $816,839.25 for Robert and $447,883.95 for Erwin as follows:
[14]Plaintiffs’ supplementary submissions regarding distribution of property trusts, 5 September 2014, schedule 4. Erwin raised no objection to the arithmetic included in this calculation.
Item
Robert
Erwin
50% of estimated surplus from trusts ($1,264,723.20) $632,361.60
$632,361.60
50% of the net difference between the trust distributions made for the benefit of Erwin and Robert +$184,477.65
-$184,477.65
Estimated amount payable from remaining trust assets $816,839.25 $447,883.95
As appears above, $2,687,472.73 of Robert’s prima facie loss and interest remains unpaid. However, since the appointment of the new trustee, Robert has already drawn $795,234.86 from the trusts for his personal purposes.[15] To avoid double recovery, that amount must also be credited against his damages and interest to arrive at an unpaid amount. Further, in accordance with the table above, Robert stands to receive an adjusted distribution from the remaining trust assets of about $816,839.25. Taking into account the amounts already drawn by Robert, and assuming payment of his estimated distribution from the remaining trust assets, Robert’s unpaid damages and interest should be assessed at $1,075,398.62, calculated as follows:
[15]Ibid. Plus the allowance for $13,276.80.
Amounts Description $2,687,472.73 Unpaid prima facie loss and interest Less
Less$795,234.86
$816,839.25Drawings for personal purposes
Robert’s estimated share of remaining trust assets$1,075,398.62 Damages and interest
For the reasons given above, and below in respect of interest on the $1,791,189.06, there will be judgment for Robert in the total sum of $1,075,398.62, representing unpaid damages for breach of the terms of settlement and interest.
I will direct that the new trustee, in his discretion as to the time of payment,[16] to pay to Robert his adjusted half share of the remaining trust assets in accordance with the above reasons.
[16]The new trustee has satisfied the Court that he is entitled to withhold moneys for up to six months to account for possible future tax liabilities.
The question remains as to whether the Court should direct the new trustee to pay Robert all or part of Erwin’s adjusted half share of the remaining trust assets (estimated at $447,883.95) in part satisfaction of Robert’s entitlement to damages and interest. Even if all of Erwin’s share is paid to Robert for this purpose, there will still be a remaining amount unpaid.
As to the amount which Erwin is entitled to actually receive from the remaining trust assets, there is an issue raised by him and his lawyers as to whether his lawyers (solicitors and counsel) have an equitable charge over Erwin’s entitlement, to secure their unpaid fees. If they have such a charge, the amount of Erwin’s share of the remaining trust assets that is available to satisfy the unpaid portion of Robert’s entitlement to damages and interest will be correspondingly reduced. This issue is resolved below.
The following issues remain for determination:
(1) How should the judgments against Erwin in favour of the new trustee in his capacity as trustee of the Cooee Trust, and interest on those amounts, be taken into account? On 12 November 2012 and 8 February 2013, the Court made orders that Erwin Deutsch pay the Cooee Trust:
(a) the sum of $129,501.04, together with interest to 8 February 2013 in the sum of $60,612.40, in respect of moneys which Erwin misappropriated from the Cooee Trust; and
(b) the sum of $27,577.52, and interest in the sum of $12,381.94, to 8 February 2013, in respect of management fees taken by Erwin from the Cooee Trust after the terms of settlement were signed on 22 September 2008.
Interest will need to be calculated up to date in respect of these amounts.
(2) Is Robert entitled to interest on his notional share of the trust assets under the terms of settlement?
(3) How should the affairs of the Delfrid Superannuation Fund be finalised?
(4) Do Erwin’s lawyers have a charge over his share of the trust assets for their unpaid costs?
There is also an unresolved costs issue. In summary, the costs position is as follows:
(1) On 8 April 2013, the Court made a gross sum costs order in favour of Robert in the sum of $650,000 for his costs to and including 8 February 2013. That amount has been paid from the trust assets and adjusted against Erwin’s share.
(2) On 8 April 2014, the Court made a gross sum costs order in favour of Robert for $23,000. That sum has also been paid from the trust assets and adjusted against Erwin’s share.
(3) Robert claims costs of the proceeding since 8 February 2013. He has asked the Court to make a gross sum costs order in that respect. That amount is fixed below.
How should the judgments in favour of the new trustee be dealt with?
The orders in favour of the new trustee have been authenticated. The new trustee and Erwin consent to the judgments being set aside and replaced with judgments in favour of Robert against Erwin for equitable compensation in an amount of half that previously ordered, and interest calculated until 17 September 2014. Robert has calculated those amounts in schedules 2 and 3 to his outline of submissions filed 5 September 2014, as follows:
(1) $64,750.52 plus interest of $41,403.69 to 17 September 2014;
(2) $13,788.76 plus interest of $8,817 to 17 September 2014.
I am satisfied that the Court has the necessary jurisdiction to proceed in this fashion in the absence of evidence that a third party will suffer loss by the making of the order.[17] In this case, I am not satisfied that the other objects of the discretionary trusts at issue will suffer any loss by the making of the proposed consent orders.
[17]Permanent Trustee Co (Canberra) Ltd v Stocks & Holdings (Canberra) Pty Ltd (1976) 15 ACTR 45, 50 (Brennan J as he then was).
I will make consent orders as follows:
(1) The orders of the Court in paragraph 4 of the orders made 12 November 2012 and paragraphs 2, 3 and 4 of the Court’s orders made 8 February 2013 are, by consent, set aside;
(2) Erwin Deutsch pay Robert Deutsch equitable compensation in the sum of $78,539.28 and interest thereon until 17 September 2014 of $50,220.69, making a total of $128,759.97. [This order combines the figures in (1) and (2) above.]
Is Robert entitled to interest on his notional share of the trust assets under the terms of settlement?
As I have said, the expert evidence before the Court establishes that, had the terms of settlement been effectuated, Robert would have received an amount of $1,791,189.06 at various dates during 2009, as his half share of the sale proceeds of the Cooee business, the St Kilda Road property, the Bay Street property and the Johnson Street property. That amount is after deduction of capital gains tax, interest and accounting costs. If Robert is entitled to payment of penalty interest pursuant to s 60 of the Supreme Court Act 1986 and the rates applying under s 2 of the Penalty Interest Rates Act 1983, schedule 1 to the plaintiff’s outline of submissions calculates that the total interest until 17 September 2014 is $860,481.81. Erwin does not disagree with this calculation. He contends, however, that Robert should not be entitled to any interest, or alternatively should be entitled to interest for a lesser period and/or at a lesser rate.
First, Erwin contends that the amount payable to Robert is not properly described as the recovery of a debt or damages within the meaning of s 60 of the Supreme Court Act. Rather, it was contended that Robert’s entitlement is to a distribution from a trust fund. I do not accept that submission. Robert’s entitlement is to damages for breach of the terms of settlement. The fact that the money was to be paid from a trust fund is not to the point. He has been deprived of distribution from the trust fund for a period of about five years by reason of a breach of contract.
Second, Erwin contends that the discretion to award interest should be exercised in favour of declining to do so because Robert has ‘benefitted from the delay in the sale of the trust properties by their increasing value’. Erwin contends that Robert will receive double compensation if he both receives damages and interest and is entitled to share in the increases in property values since 2009 by receiving his half share of the trust assets as they presently stand.
For the reasons appearing above in assessing Robert’s damages, Erwin’s contention in this regard should be rejected. Robert’s entitlement to both interest and his adjusted half share of the remaining trust assets will not result in any double compensation.
Third, Erwin contends that Robert has been guilty of exceptional delay in prosecuting this proceeding, most of which was caused by his failure to proceed with a straightforward trial fixed to proceed in November 2008 to determine whether the terms of settlement had been repudiated or discharged by frustration and, if repudiated, whether Robert was entitled to specific performance. Robert determined not to proceed with the trial at that time but, rather, to expand his claims to include claims which were released by the terms of settlement. Had that course not been chosen, it is likely that the proceeding would have been determined in late 2008 or early 2009 and Robert would not have suffered the significant delay in receiving his damages.
Erwin’s counsel accepted that, as a general rule, delay does not deprive a successful plaintiff of interest. He accepted that the starting point is the requirement that interest ‘must’ be awarded for the whole of the period after issue of the writ unless ‘good cause is shown to the contrary’. I reviewed the relevant cases referred to in Kalenic v Apostolidis (No 2).[18] In summary, delay may be a relevant discretionary factor in determining whether good cause has been shown to the contrary, but that will rarely be the case ‘because of the self-evident observation that the defendants have had the use of the money since the commencement of the proceeding’.[19]
[18][2009] VSC 410, [12]-[23].
[19]Ibid [17], quoting Johnson Tiles Pty Ltd & Ors v Esso Australia Pty Ltd & Ors(No 3) [2003] VSC 244, [51] (Gillard J).
In this case, Erwin contends that he has not had the use of the money since the commencement of the proceeding because the relevant moneys have been tied up in the deadlocked trusts. I accept that the money which was intended to be available to pay Robert’s entitlements under the terms of settlement was not intended to come from Erwin’s personal assets, but was intended to come from the trust assets. The reason the money has been tied up in the deadlocked trusts is, however, wholly Erwin’s fault. If the terms of settlement had been performed, the trusts would have been wound-up in an orderly fashion and Robert and Erwin would have received their entitlements under the terms of settlement. Moreover, when taken as a whole, the assets of the trusts have increased during the period of delay in finalising this proceeding, and Erwin has been entitled to a one-half share of the increase in value. The fact that there will be insufficient assets in the trusts to pay all of Robert’s damages, interest and costs entitlements is wholly due to Erwin’s breach of the terms of settlement and the consequent costs which have been incurred as a result.
Further, as noted in the costs reasons, the delay in finalising the proceeding was not only due to Robert’s choice to abandon the trial fixed in November 2008 and to expand his claims to include claims which were released by the terms of settlement. Erwin’s conduct also contributed to the delay in the proceeding.[20]
[20]Robert Deutsch & Ors v Erwin Deutsch & Ors (No 2) [2013] VSC 15, [8]-[15].
In Johnson Tiles Pty Ltd & Ors v Esso Australia Pty Ltd & Ors (No 3),[21] Gillard J accepted that the penalty rate has ‘a penalty component over and above the compensatory function of the award of interest.’[22] On this basis, Gillard J summarised the objectives of an award of interest to a successful claimant in the following terms:
There are three main objectives of the award of interest. First, as compensation to the judgment creditor for being out of the funds from the date of commencement of the proceeding until judgment; secondly, to deter judgment debtors from delaying proceedings and thereby having the use of the money for a longer period; and finally, to encourage defendants to make realistic assessments of their liability in a case and to take bona fide steps to compromise the claim.[23]
[21][2003] VSC 244.
[22]Ibid [60].
[23]Ibid [61].
In this case, Robert Deutsch has been ‘out of the funds from the commencement of the proceeding’. As mentioned, Erwin Deutsch has also been guilty of delay in the proceeding. Any delay since delivery of the principal reasons has not been Robert’s fault. Moreover, Erwin did not make a realistic assessment of his liabilities prior to the trial, and there is no evidence of him having made bona fide steps to compromise Robert’s claim. To the contrary, as noted in the principal reasons, it was not until trial that Erwin made belated concessions which ought to have been made at an early stage and thus enabled the proceeding to progress more expeditiously.[24]
[24]Robert Deutsch & Ors v Erwin Deutsch & Ors [2012] VSC 227, [36].
In all the circumstances, I am not satisfied that Erwin has shown good cause to the contrary. Robert is entitled to interest at the penalty rate. I see no reason to reduce that rate, or the period during which the interest should run, in all the circumstances of the case. As to the rate, it is appropriate that Robert be compensated for being ‘out of the funds’ for such a long period — during which, for example, property values in Melbourne have increased substantially — while Erwin maintained denials of the indefensible. As to the period, I reject Erwin’s contention that it should be reduced by about two years, because Robert was not ready to proceed with the trial fixed for 18 January 2010, and the trial did not ultimately begin until March 2012. As noted in the costs reasons, I infer Erwin was not ready to proceed at that time either.[25]
[25]Robert Deutsch & Ors v Erwin Deutsch & Ors (No 2) [2013] VSC 15, [15].
How should the affairs of the Delfrid Superannuation Fund be finalised?
The parties joined in the submission that the affairs of the Delfrid Superannuation Fund should be finalised under the control of the new trustee. No party sought any particular relief related to that fund. Once the remaining tax liabilities are resolved, the new trustee can proceed to distribute the assets of that trust by rolling the respective entitlements of Robert, Erwin and their respective wives into alternative superannuation funds of their choice.
What amount should Robert be awarded for costs since 8 February 2013?
Robert contends that the Court should fix a gross sum for his costs during this period and that the Court has enough evidence to do so. Erwin contends that the Court should refer the issue to the Costs Court for determination.
The interests of justice favour fixing a gross sum, so as to avoid further cost in this extraordinarily protracted proceeding. This is consistent with the overarching purpose under the Civil Procedure Act 2010.
During the course of oral submissions on 17 September 2014, I ruled that the plaintiffs were entitled to recover 40 per cent of their costs for solicitors’ time, 60 per cent of counsel’s fees and 100 per cent of the charges by the costs consultant, Ms Chua, since 8 February 2013, to the extent that they have not already been taken into account in earlier costs orders. Further, I determined that the plaintiffs were entitled to recover all of their costs of the hearings on 28 and 29 August and 17 September 2014. These percentages equate to a total order for costs in the sum of $224,717.70, prior to the commencement of work for the applications heard on 28, 29 August 2014 and 17 September 2014.
In respect of the hearings on those three days, I have been provided with counsel and solicitors invoices, totalling $44,338. Given that these hearings have been recently held, and concern the issues dealt with in these reasons, I am confident that I can assess the plaintiffs’ costs of and incidental to these three hearings on a logical, fair and reasonable basis:[26]
(1) I see no good reason to question the rates for preparation and appearance charged by counsel. The rates are similar to those charged by counsel for the defendant, and similar to amounts allowed in previous gross sum costs applications based on the expert evidence from Ms Chua. Nor do I see that any excess work has been done. Counsel for the plaintiffs has charged reasonable preparation costs (including for detailed written submissions which assisted the Court) and claimed only half a day for the hearing on 29 August 2014.
(2) Reading the plaintiffs’ solicitors ‘Detailed schedule of professional fees’, and based on my knowledge of the issues dealt with at the three hearings, I am left with an impression that there has been duplication of work done by counsel, and other work performed of a ‘practitioner/client nature’, which falls outside the assessment of costs on a standard basis.[27] Doing the best I can, and having regard to the need to further the overarching purpose under the Civil Procedure Act 2010, the need to finalise this drawn-out proceeding once and for all, and the need to be fair and reasonable towards both parties, I will reduce the amount claimed in respect of the plaintiffs’ solicitors fees from $27,013 to $18,000. This represents a reduction of about one third. In assessing that as an appropriate reduction to take account of practitioner/client matters including duplication of work, I note that a total of $11,124 has been charged by the plaintiffs’ solicitors for ‘Preparing for hearing’ in respect of the three hearings. The invoices from counsel’s clerk indicate that significant preparation charges were made by counsel who, after all, had the carriage of the hearings in Court. Of course, there will have been some costs other than practitioner/client costs in relation to the preparation for the three hearings, and some allowance has been made for those. Finally, in determining the amount of the reduction from the fees claimed, I note that the plaintiffs have provided only scant detail in a summarised form in the ‘detailed schedule of professional fees’ contained in the two invoices. This necessitates the Court in being cautious in fixing a gross sum figure. Unlike the fees prior to the three hearings, no affidavit of Ms Chua has been put forward in respect of these fees.
[26]Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119, 123.
[27]Cf affidavit of Cheryl Chua, 30 May 2014, [8]-[9].
Accordingly, I fix the plaintiffs’ costs of the hearings on 28, 29 August and 17 September at $35,325, representing solicitor’s fees of $18,000 and counsel’s fees of $17,325.
There will be a gross sum costs order for $260,042.70, being the total of the two amounts referred to above — $224,717.70 and $35,325.
Do Erwin’s lawyers have a charge over his share of the trust assets?
Erwin contends that his entitlement to a distribution from the remaining assets of the trust fund has been charged by him in favour of his lawyers (solicitors and counsel) to secure unpaid legal fees. The charge is alleged to arise under written directions given by Erwin to the new trustee on 6 February 2014 in the following terms:
IRREVOCABLE ORDER TO PAY
To: Michael Trumble
I, Erwin Deutsch, of 32 Talbot Avenue St Kilda East, hereby irrevocably authorize and request you to pay Gleeson and Co all outstanding and future professional costs and disbursements incurred by me in Supreme Court Proceeding No. 2008 5515 from the funds held in trust on my behalf on demand.
Dated this 6th day of February 2014
| [Sgd] |
Erwin Deutsch
An identical document was signed by Erwin in respect of his counsel in the proceeding, Nick Jones.
Each irrevocable order to pay has been endorsed by the new trustee as follows:
Acknowledged, subject to me receiving Orders from the Court authorising me to make payments of trust funds to Mr Erwin Deutsch.
[Sgd]
M.R. TRUMBLE
TRUSTEE11 February 2014
I accept that the irrevocable orders to pay have the effect of creating an equitable charge over Erwin’s contingent entitlement to distribution of his adjusted share of the remaining trust assets. In Swiss Bank Corporation v Lloyds Bank Ltd, Buckley LJ summarised the principles giving rise to an equitable charge in the following terms:
An equitable charge … is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realisation by judicial process …[28]
[28][1982] AC 584, 595.
In Fisher & Lightwood’s Law of Mortgage (2nd Australian Edition), the learned authors summarised the ways in which an equitable charge can arise in the following terms:
(1)By a charge or direction in a settlement, will, or other instrument, whereby real or personal property is expressly or constructively made liable or specifically appropriated to the discharge of a debt, portion, legacy, or other burden, or declared to be subjected to a charge for securing the same; no debt is implied, but a right of realisation by judicial process is conferred; or
(2)By the appropriation to the discharge of a debt of specific things in action or chattels, which either are, at the time of appropriation, or may or will thereafter be in the hands of a third person[29] …
In Jackson v Richards,[30] White J said on the basis of Rodick v Gandell:[31]
An agreement between a debtor and his creditor that the debt owing shall be paid out of a specific fund coming to the debtor will create a valid equitable charge upon the fund and operate as an equitable assignment of it. However, for this principle to apply, there must be a specific fund from which the debt owing is to be paid.
No special form is required to create a charge …[32]
[29]See Swiss Bank Corp v Lloyds Bank Ltd [1982] AC 584, 594-6.
[30][2005] NSWSC 630.
[31](1852) 1 De G M & G 763, 777, 778; ER 749, 754.
[32]ELG Tyler, PW Young and C Croft, Fisher and Lightwood's Law of Mortgage (2005, 2nd ed, LexisNexis Butterworths) 49-50 [2.3] (citations in original).
Later, the learned authors accepted that it was unnecessary for there to be a present entitlement for the debtor to be paid out of the specific fund or thing in action. It was enough that ‘it is possible at the time when the charge is sought to be enforced to identify the property …’.[33]
[33]Ibid 50-1 [2.4].
In this case, I am satisfied that Erwin has created a valid equitable charge in favour of his lawyers over his adjusted entitlement to receive one-half of the remaining trust assets. In my opinion, Erwin’s share of the remaining trust assets is a sufficiently specific fund and the irrevocable orders to pay constitute a specific appropriation of that fund to the discharge of Erwin’s liability for his unpaid legal fees. Prudently, the new trustee has given conditional recognition to the equitable charge, by acknowledging it subject to orders of the Court authorising payment from the trust funds.
The evidence concerning the amount of unpaid fees may be summarised as follows:
Unpaid solicitor’s fees $140,885.51 Unpaid counsel’s fees $35,675 Total $176,560.51
I propose to order that the new trustee pay this amount to Erwin’s solicitors forthwith.
As to the remaining balance of Erwin’s adjusted share of the remaining trust assets, I will direct the new trustee to pay that amount to Robert in part satisfaction of the unpaid judgment debt against Erwin.
For completeness, I should mention that Erwin and his lawyers also claimed that his share of the remaining trust assets was the subject of an equitable ‘fruits of the action’ lien in favour of his lawyers.[34] Had it been necessary to rely upon the claimed solicitor’s lien, I would not have been satisfied that the lien was established. Erwin lost the proceeding at trial, before the lawyers were appointed to act on his behalf. They have been acting on his behalf since the trial in an endeavour to limit the amount of damages payable to Robert and to increase the share of trust assets payable to Erwin. They have no doubt been acting on instructions. They have not, however, been successful in achieving a result in Erwin’s favour equivalent to the ‘fruits of the action’. In essence, they have been involved, quite properly, in ‘damage control’. There has not, however, been any issue upon which it can be said that they were successful and that Erwin became entitled to the ‘fruits of the action’ in the sense discussed in the authorities.
[34]For example, Trkulja v Efron [2014] VSCA 76.
Summary of final relief in the proceeding
For the above reasons:
(1) Robert has established a prima facie loss for breach of the terms of settlement and damages in the nature of interest as at 17 September 2014 of $3,116,662.88.
(2) Robert must give credit against that amount for the components of that sum which have been paid ($315,000 plus interest of $114,190.15).
(3) Robert must also give credit for the amounts paid to him by the new trustee for personal purposes ($795,234.86) and for his adjusted entitlement to a half share of the remaining trust assets ($816,839.25). This is necessary to avoid over-compensation.
(4) There will be judgment for Robert against Erwin in the sum of $1,075,398.62 for breach of the terms of settlement, including damages in the nature of interest to 17 September 2014.
(5) In addition, there will be judgment for Robert against Erwin in the sum of $128,759.57 for equitable compensation, including damages in the nature of interest to 17 September 2014.
(6) Robert’s costs of the proceeding until 8 February 2013 ($650,000) and his costs of a dispute concerning the American properties ($23,000) have already been fixed by the Court and paid to him by the new trustee. They form part of the calculations of the adjusted entitlements of Robert and Erwin to their respective half shares in the remaining trust assets.
(7) Robert is further entitled to a gross sum costs order of $260,042.70 for his costs of the proceeding from 8 February 2013 to date.
(8) Erwin’s adjusted half share of the remaining trust assets is charged with payment of his unpaid legal fees of $176,560.51. The new trustee will be directed to pay that amount to Erwin’s solicitors forthwith.
(9) The new trustee will be directed to pay all the remaining trust assets to Robert, in the new trustee’s discretion as to the time of payment. To the extent that the total amount paid to Robert exceeds $816,839.25, that excess will represent payment by Erwin in partial satisfaction of Robert’s judgment for damages and interest for breach of the terms of settlement.
(10) I will reserve liberty to apply if there is a delay beyond 1 March 2015 in the payment of all the remaining trust assets pursuant to the Court’s directions.[35] Of course, the new trustee can and should make partial payments as possible future liabilities are resolved to his reasonable satisfaction.
[35]By paragraph [3] of the Court’s orders made on 28 August 2014, the Court ordered that the new trustee hold $100,000 in trust for up to six months after the trusts were wound-up, to cover unexpected payments arising during that time.
Concluding remarks
These are the final reasons for judgment which the Court will give in this most unfortunate dispute. This proceeding has taken a disproportionate amount of Court resources and has doubtless left both parties unsatisfied. Erwin is apparently insolvent and faces bankruptcy. Robert faces an unsatisfied judgment of more than $1 million. The amounts which Robert has been paid have been largely used for legal fees and in paying Tziporah Deutsch the judgment sum and her costs in the caveat proceeding.[36]
[36]Deutsch v Rodkin & Ors [2012] VSC 450.
All of this could have been avoided if Erwin had honoured his obligations under the terms of settlement. If he had done so, he would have received about $1,500,000 during 2009 and Robert would have received about $2 million at that time under the terms of settlement. They could have, in Robert’s words at trial, ‘let bygones be bygones’[37] and moved on with their lives. Instead, both they and their families have had to endure the stress, bitterness and costs of protracted litigation over six years. Of course, Robert did not help his cause by his extraordinary conduct in relation to the events described in the caveat proceeding, which justified awards of both compensatory and exemplary damages against him. But that conduct would not have occurred in the absence of Erwin’s breach. The blame remains with Erwin. Unfortunately, it is not just him who will suffer the consequences.
[37]Robert Deutsch & Ors v Erwin Deutsch & Ors [2012] VSC 227, [37].
SCHEDULE OF PARTIES
| S CI 2008 05515 | |
| BETWEEN: | |
| ROBERT DEUTSCH | First Plaintiff |
| ALEXANDER DEUTSCH | Second Plaintiff |
| HELEN GOLDSCHMIEDT | Third Plaintiff |
| DAVID DEUTSCH | Fourth Plaintiff |
| GABRIEL DEUTSCH | Fifth Plaintiff |
| ISSAC DEUTSCH | Sixth Plaintiff |
| ABRAHAM DEUTSCH | Seventh Plaintiff |
| LEON DEUTSCH | Eighth Plaintiff |
| ELIZABETH DEUTSCH | Ninth Plaintiff |
| SCHMUL DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Tenth Plaintiff |
| ARYAA (Michael) DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Eleventh Plaintiff |
| DINA DEUTSCH (a minor, by her litigation guardian ALEXANDER DEUTSCH) | Twelfth Plaintiff |
| MEIR DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Thirteenth Plaintiff |
| ARI GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fourteenth Plaintiff |
| BENJAMIN GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fifteenth Plaintiff |
| FRIDA GOLDSCHMIEDT (a minor, by her litigation guardian HELEN GOLDSCHMIEDT) | Sixteenth Plaintiff |
| AVI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Seventeenth Plaintiff |
| ARI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Eighteenth Plaintiff |
| RAIZY DEUTSCH (a minor, by her litigation guardian GABRIEL DEUTSCH) | Nineteenth Plaintiff |
| SCHMUL (Schmuly) DEUTSCH (a minor, by his litigation guardian ISSAC DEUTSCH) | Twentieth Plaintiff |
| - and - | |
| ERWIN DEUTSCH | First Defendant |
| 333 ST KILDA ROAD PTY LTD | Second Defendant |
| COOEE ON ST KILDA ROAD PTY LTD | Third Defendant |
| 253 BAY STREET PTY LTD | Fourth Defendant |
| FASHION FABRIC CUTS PTY LTD | Fifth Defendant |
| PRYCROFT NINETY ONE PTY LTD | Sixth Defendant |
| INTERNATIONAL DEVELOPMENTS (VIC) PTY LTD | Seventh Defendant |
| STUDIO 412 PTY LTD | Eighth Defendant |
| TZIPORAH DEUTSCH | Ninth Defendant |
| ADAM DEUTSCH | Tenth Defendant |
| ANDREW DEUTSCH | Eleventh Defendant |
| JACQUELINE DEUTSCH | Twelfth Defendant |
| ARI DEUTSCH (a person under disability being a minor by his litigation guardian TZIPORAH DEUTSCH) | Thirteenth Defendant |
| SHIRA DEUTSCH (a person under disability being a minor by her litigation guardian TZIPORAH DEUTSCH) | Fourteenth Defendant |
| AKIVA DEUTSCH (a person under disability being a minor by his litigation guardian ADAM DEUTSCH) | Fifteenth Defendant |
| MORDECHAI DEUTSCH (a person under disability being a minor by his litigation guardian ANDREW DEUTSCH) | Sixteenth Defendant |
| AND BETWEEN: | |
| TZIPORAH DEUTSCH | Firstnamed Plaintiff by Counterclaim |
| ADAM DEUTSCH | Secondnamed Plaintiff by Counterclaim |
| ANDREW DEUTSCH | Thirdnamed Plaintiff by Counterclaim |
| JACQUELINE DEUTSCH | Fourthnamed Plaintiff by Counterclaim |
| ARI DEUTSCH (a person under disability being a minor by his litigation guardian TZIPORAH DEUTSCH) | Fifthnamed Plaintiff by Counterclaim |
| SHIRA DEUTSCH (a person under disability being a minor by her litigation guardian TZIPORAH DEUTSCH) | Sixthnamed Plaintiff by Counterclaim |
| AKIVA DEUTSCH (a person under disability being a minor by his litigation guardian ADAM DEUTSCH) | Seventhnamed Plaintiff by Counterclaim |
| MORDECHAI DEUTSCH (a person under disability being a minor by his litigation guardian ANDREW DEUTSCH) | Eightnamed Plaintiff by Counterclaim |
| - and - | |
| ROBERT DEUTSCH | Firstnamed Defendant by Counterclaim |
| ALEXANDER DEUTSCH | Secondnamed Defendant by Counterclaim |
| HELEN GOLDSCHMIEDT | Thirdnamed Defendant by Counterclaim |
| DAVID DEUTSCH | Fouthnamed Defendant by Counterclaim |
| GABRIEL DEUTSCH | Fifthnamed Defendant by Counterclaim |
| ISSAC DEUTSCH | Sixthnamed Defendant by Counterclaim |
| ABRAHAM DEUTSCH | Seventhnamed Defendant by Counterclaim |
| LEON DEUTSCH | Eighthnamed Defendant by Counterclaim |
| ELIZABETH DEUTSCH | Ninthnamed Defendant by Counterclaim |
| SCHMUL DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Tenthnamed Defendant by Counterclaim |
| ARYAA (Michael) DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Eleventhnamed Defendant by Counterclaim |
| DINA DEUTSCH (a minor, by her litigation guardian ALEXANDER DEUTSCH) | Twelfthnamed Defendant by Counterclaim |
| MEIR DEUTSCH (a minor, by his litigation guardian ALEXANDER DEUTSCH) | Thirteenthnamed Defendant by Counterclaim |
| ARI GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fourteenthnamed Defendant by Counterclaim |
| BENJAMIN GOLDSCHMIEDT (a minor, by his litigation guardian HELEN GOLDSCHMIEDT) | Fifteenthnamed Defendant by Counterclaim |
| FRIDA GOLDSCHMIEDT (a minor, by her litigation guardian HELEN GOLDSCHMIEDT) | Sixteenthnamed Defendant by Counterclaim |
| AVI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Seventeenthnamed Defendant by Counterclaim |
| ARI DEUTSCH (a minor, by his litigation guardian DAVID DEUTSCH) | Eighteenthnamed Defendant by Counterclaim |
| RAIZY DEUTSCH (a minor, by her litigation guardian GABRIEL DEUTSCH) | Nineteenthnamed Defendant by Counterclaim |
| SCHMUL (Schmuly) DEUTSCH (a minor, by his litigation guardian ISSAC DEUTSCH) | Twentiethnamed Defendant by Counterclaim |
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