Sammut v Leroy (Trustee)

Case [2016] FCA 1294

FEDERAL COURT OF AUSTRALIA

Sammut v Leroy (Trustee) [2016] FCA 1294

Appeal from: Sammut v Paul Leroy as Trustee of the Bankrupt Estates of Joanne De Rome & Geoffrey De Rome & Ors (No. 2) [2016] FCCA 573
File number: NSD 530 of 2016
Judge: MARKOVIC J
Date of judgment: 3 November 2016
Catchwords: COSTS – appeal from a decision of the Federal Circuit Court of Australia ordering indemnity costs orders in favour of the first and second respondents – where the first respondent made an offer of settlement prior to trial – where the second respondent made no offer of settlement prior to trial – whether first respondent’s offer to settle was a genuine offer – whether rejection of the first respondent’s offer was unreasonable – whether the primary judge erred in finding a basis to award indemnity costs to the second respondent on the basis that the appellant’s case was hopeless
Legislation:

Bankruptcy Act 1966 (Cth) ss 58, 139ZQ, 178

Federal Circuit Court Rules 2001

Federal Court Rules 2011

Cases cited:

Ainger v Coffs Harbour City Council (No 2) [2007] NSWCA 212

Black v Lipovac (1998) 217 ALR 386

Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225

Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397

Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1

Globaltech v Pareek [2006] WASC 30

Gretton v Commonwealth of Australia [2007] NSWSC 149

Hacker v Weston [2015] FCA 790

House v The King (1936) 55 CLR 499

Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242

Prosperity Advisers Pty Limited v Secure Enterprises Pty Limited t/as Strathearn Insurance Brokers [2012] NSWCA 192

Seven Network Limited v News Limited (2007) 244 ALR 374

Date of hearing: 9 August 2016
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: General and Personal Insolvency
Category: Catchwords
Number of paragraphs: 104
Counsel for the Appellant: Mr J S Emmett
Solicitor for the Appellant: Harris & Company
Counsel for the Respondents: Mr R D Marshall with Mr W R Johnson
Solicitor for the First Respondent: Bartier Perry
Solicitor for the Second Respondent: Gillis Delaney Lawyers

ORDERS

NSD 530 of 2016
BETWEEN:

DANIEL SAMMUT

Appellant
AND:

PAUL LEROY AS TRUSTEE OF THE BANKRUPT ESTATES OF JOANNE DE ROME & GEOFFREY DE ROME

First Respondent

BRETT DE ROME

Second Respondent

JUDGE:

MARKOVIC J

DATE OF ORDER:

3 NOVEMBER 2016

THE COURT ORDERS THAT:

1.To the extent necessary grant leave to appeal from the Federal Circuit Court judgment of Judge Manousaridis given on 24 March 2016.

2.Dismiss the appeal against the first respondent.

3.Allow the appeal against the second respondent.

4.Order 2 and order 3, insofar as it relates to the costs of the second respondent, made by the Federal Circuit Court on 24 March 2016 be set aside.

5.In lieu thereof order that the appellant is to pay the costs of the second respondent in the court below in proceedings SYG 2528 of…

Continue reading Sammut v Leroy (Trustee)

Sign in free to access the full text

Details
AGLC
Sammut v Leroy (Trustee) [2016] FCA 1294
Case
[2016] FCA 1294
Decision Date

CaseChat Overview and Summary

The matter of Sammut v Leroy (Trustee) was heard in the Federal Court of Australia, where Mr Sammut, the largest unsecured creditor of the bankrupts' estates, appealed the decision of the Federal Circuit Court of Australia. The dispute arose from the Trustee's decision to transfer certain real property of the bankrupts to Brett De Rome, in exchange for a payment of $18,000 to the bankrupts' estates. The primary legal issues in this case were whether the first respondent's offer to settle was genuine, and whether the rejection of this offer was unreasonable. Additionally, the court had to determine whether the primary judge erred in finding a basis to award indemnity costs to the second respondent on the basis that Mr Sammut's case was hopeless.

The court examined the evidence and circumstances at the time the offer was made and found that the Trustee's offer was a genuine compromise, considering the weak state of Mr Sammut's case. The court noted that the Trustee had taken into account several factors, including the costs of legal proceedings, potential recovery to the bankrupt estates, and the impact of the likely market value of the property. The court further found that the primary judge did not err in assessing the offer prospectively and did not apply hindsight. The court concluded that the primary judge was aware of the test to apply and properly considered the relevant factors at the time the offer was made.

The court dismissed the appeal against the first respondent, Leroy, but allowed the appeal against the second respondent, Brett De Rome. The court ordered that the orders made by the Federal Circuit Court on 24 March 2016, insofar as they related to the costs of the second respondent, be set aside. Instead, the court ordered that Mr Sammut was to pay the costs of the second respondent in the court below in proceedings SYG 2528 of 2013 on the ordinary basis. Additionally, the court ordered that Mr Sammut was to pay the first respondent's costs of the appeal, and Brett De Rome was to pay Mr Sammut's costs of the appeal.

Orders

Orders of the court

1. To the extent necessary grant leave to appeal from the Federal Circuit Court judgment of Judge Manousaridis given on 24 March 2016.

2. Dismiss the appeal against the first respondent.

3. Allow the appeal against the second respondent.

4. Order 2 and order 3, insofar as it relates to the costs of the second respondent, made by the Federal Circuit Court on 24 March 2016 be set aside.

5. In lieu thereof order that the appellant is to pay the costs of the second respondent in the court below in proceedings SYG 2528 of 2013 on the ordinary basis.

6. The appellant is to pay the first respondent’s costs of this appeal.

7. The second respondent is to pay the appellant’s costs of this appeal.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

It is from the orders made in Sammut (No 2) that Mr Sammut now appeals. BACKGROUND The FCC Proceeding arose from the decision made by the Trustee to transfer certain real property of the bankrupts to Brett De Rome and to agree to take no further action in respect of a mortgage over that property in favour of Brett De Rome in exchange for a payment by Brett De Rome of $18,000 to the bankrupts’ estates (the Decision). The facts which gave rise to that transaction and the FCC Proceeding together with the facts relevant to the orders made in Sammut No 2, which are the subject of this appeal, are set out below. They are, in part, taken from the judgment in Sammut No 1. Mr Sammut is the largest unsecured creditor of the bankrupts’ estates with a judgment entered in his favour by the Queensland District Court for $108,394.04 plus costs. The bankrupts’ appeal against that judgment was dismissed with costs. The Trustee was appointed trustee of the bankrupts’ estates upon Mr and Mrs De Rome presenting their own petitions. In support of their petitions Mr and Mrs De Rome each prepared a statement of their affairs in which they stated that they were the registered proprietors of a property situated at 1 Tenalga Street, Nerang, Queensland (the Property). They also stated that the Property was subject to two registered mortgages: the first in favour of Suncorp Metway Limited (Suncorp) securing a debt of $214,662 and the second in favour of their son, Brett De Rome, securing a debt of $40,000. After his appointment, the Trustee made a number of enquiries about the Property, including in relation to its value, and in October 2012 he received two appraisals. The Trustee also requested that Brett De Rome provide documents that evidenced his security over the Property and the amount the bankrupts owed him. In the course of these enquiries, Brett De Rome expressed interest in purchasing the bankrupts’ interest in the Property. On or about 25 October 2012 the Trustee circulated reports to creditors. In those reports he noted that the bankrupts’ assets included the Property, that it had an estimated resale value of $260,000 and that it was subject to two mortgages securing loans from each of Suncorp and Brett De Rome and set out the amounts of the loans. The Trustee also reported that he was liaising with Brett De Rome in relation to purchasing the bankrupt estates’ interest in the Property but that at that stage no agreement had been reached and, if the purchase did not proceed, he would consider the commerciality of enforcing his rights as Trustee and selling the Property for the benefit of the bankrupt estates. The Trustee noted that on the information presently available it was unlikely there would be a dividend and that he did not expect to send any further reports unless there was a material change or significant development. On 20 November 2012 Mr Sammut’s solicitors wrote to the Trustee providing him with an appraisal of the Property that said if it were offered for sale a price of between $280,000 to $310,000 would be recommended and noting that Brett De Rome’s mortgage was registered after Mr Sammut obtained judgment against the bankrupts and a matter of days before the bankrupts’ appeal against that judgment was dismissed. In a response to Mr Sammut’s solicitors the Trustee noted that, because of the discrepancy in values based on kerbside appraisals, he proposed to obtain a professional valuation of the Property.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The FCC Proceeding arose from the decision made by the Trustee to transfer certain real property of the bankrupts to Brett De Rome and to agree to take no further action in respect of a mortgage over that property in favour of Brett De Rome in exchange for a payment by Brett De Rome of $18,000 to the bankrupts’ estates (the Decision). The facts which gave rise to that transaction and the FCC Proceeding together with the facts relevant to the orders made in Sammut No 2, which are the subject of this appeal, are set out below. They are, in part, taken from the judgment in Sammut No 1. Mr Sammut is the largest unsecured creditor of the bankrupts’ estates with a judgment entered in his favour by the Queensland District Court for $108,394.04 plus costs. The bankrupts’ appeal against that judgment was dismissed with costs. The Trustee was appointed trustee of the bankrupts’ estates upon Mr and Mrs De Rome presenting their own petitions. In support of their petitions Mr and Mrs De Rome each prepared a statement of their affairs in which they stated that they were the registered proprietors of a property situated at 1 Tenalga Street, Nerang, Queensland (the Property). They also stated that the Property was subject to two registered mortgages: the first in favour of Suncorp Metway Limited (Suncorp) securing a debt of $214,662 and the second in favour of their son, Brett De Rome, securing a debt of $40,000. After his appointment, the Trustee made a number of enquiries about the Property, including in relation to its value, and in October 2012 he received two appraisals. The Trustee also requested that Brett De Rome provide documents that evidenced his security over the Property and the amount the bankrupts owed him. In the course of these enquiries, Brett De Rome expressed interest in purchasing the bankrupts’ interest in the Property. On or about 25 October 2012 the Trustee circulated reports to creditors. In those reports he noted that the bankrupts’ assets included the Property, that it had an estimated resale value of $260,000 and that it was subject to two mortgages securing loans from each of Suncorp and Brett De Rome and set out the amounts of the loans. The Trustee also reported that he was liaising with Brett De Rome in relation to purchasing the bankrupt estates’ interest in the Property but that at that stage no agreement had been reached and, if the purchase did not proceed, he would consider the commerciality of enforcing his rights as Trustee and selling the Property for the benefit of the bankrupt estates. The Trustee noted that on the information presently available it was unlikely there would be a dividend and that he did not expect to send any further reports unless there was a material change or significant development. On 20 November 2012 Mr Sammut’s solicitors wrote to the Trustee providing him with an appraisal of the Property that said if it were offered for sale a price of between $280,000 to $310,000 would be recommended and noting that Brett De Rome’s mortgage was registered after Mr Sammut obtained judgment against the bankrupts and a matter of days before the bankrupts’ appeal against that judgment was dismissed. In a response to Mr Sammut’s solicitors the Trustee noted that, because of the discrepancy in values based on kerbside appraisals, he proposed to obtain a professional valuation of the Property.

Ratio Decidendi

Legal Principle Established

Finally the Trustee submitted that the primary judge did not err in concluding that the Offer contained a genuine compromise, while accepting that the concession contained within it was modest and that a modest concession is capable of forming the basis of a genuine offer. Consideration The critical issue that arises in this ground of appeal is whether the primary judge failed to make the assessment of whether the Offer was a genuine offer to settle at the time the Offer was made, that is prospectively, and in fact applied hindsight. That the primary judge was aware of the test he had to apply cannot be in doubt. As set out at [25] above, at several junctures during the course of argument, the primary judge asked and was told that the assessment of whether the Offer was a genuine offer to settle Mr Sammut’s claim was to be made at the time of the Offer by reference to the surrounding circumstances and Mr Sammut’s knowledge at that time. In considering whether the Offer was a genuine offer to compromise Mr Sammut’s claim, the primary judge, relying on Prosperity Advisers Pty Limited v Secure Enterprises Pty Limited t/as Strathearn Insurance Brokers [2012] NSWCA 192 at [111], observed at [10] that if a concession in an offer is modest that will not necessarily mean that the offer could not be properly characterised as a genuine offer to compromise. His Honour observed that if the case of the offeree who did not accept an offer was very weak, the modesty of the concession may not count against the offer being characterised as genuine. The primary judge found at [11] that Mr Sammut’s case “was always weak”. His Honour noted that at the time the Offer was made the Trustee’s and Mr Sammut’s evidence had been filed and found that “it ought to have been apparent to Mr Sammut that, on the state of the evidence that had been filed, Mr Sammut’s case for relief against the Trustee under s 178 of the Act was very weak, especially because there was no evidence which, if accepted, could have proven that Mr Sammut was a person affected by the Trustee’s decision”. The primary judge concluded that in light of the weakness of Mr Sammut’s case, the Offer was a genuine compromise. The primary judge referred expressly to the Trustee’s evidence which had been filed and was served at the time the Offer was made. That evidence comprised the affidavit sworn by the Trustee on 25 June 2014. In that affidavit the Trustee set out his analysis which led him to conclude that the bankrupt estates would not be in a better position if he challenged Brett De Rome’s mortgage. The Trustee took into account:(1)the costs of bringing proceedings to challenge Brett De Rome’s mortgage which the Trustee considered were likely to exceed the $40,000 secured by that mortgage; that even if he was successful, based on his experience, he would not recover all of his costs; and if he was unsuccessful he would be liable to pay Brett De Rome’s costs;(2)the impact of the likely market value of the Property including that, given the lack of funds in the bankrupt estates, no formal valuation had been obtained; that Suncorp had a first registered mortgage over the Property; that there would be costs of sale, including real estate agent’s commission and conveyancer’s costs, costs of obtaining vacant possession and possible costs of making the Property ready for sale;(3)the potential recovery to the bankrupt estates having regard to the costs of sale set out above, including the discharge of the Suncorp mortgage, but not taking into account Brett De Rome’s mortgage. Assuming a high, average and low sale price based on the appraisals of the Property received by the Trustee the net return to the estates would be respectively $68,000, $29,000 and ($10,000);(4)that the Property could not be sold unless the Trustee obtained a discharge of Brett De Rome’s mortgage. The Trustee was concerned that if he commenced proceedings against Brett De Rome and was successful Brett De Rome would stop paying the Suncorp loan instalments which he had been doing. That would create default which could lead to a mortgagee sale by Suncorp. Both of these events, including the cost of any lawyers retained by Suncorp, would impact on the equity in the Property;(5)before there could be any return to creditors, under the order of priorities, the Trustee’s own remuneration and expenses would be paid;(6)on a best case scenario, assuming that the Trustee succeeded in a proceeding against Brett De Rome and sold the Property at the high sale price, the Trustee estimated that there would be a net deficiency of $13,000 to the bankrupt estates after payment of all expenses relating to the proceeding, the sale of the Property and his own remuneration; and(7)as a result the Trustee did not consider it appropriate to seek funding from any creditor to prosecute a claim against Brett De Rome and considered it inappropriate to incur the expense and inconvenience of convening a creditors’ meeting to discuss any such court action.