Trani v Trani (No 3)
[2020] VSC 332
•15 June 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY AND PROBATE LIST
S CI 2015 05222
| PATRIZIA TRANI | Plaintiff |
| v | |
| MARCO TRANI | First Defendant |
| LUCIANO TRANI | Second Defendant |
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JUDGE: | Daly AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 4 June 2020 |
DATE OF JUDGMENT: | 15 June 2020 |
CASE MAY BE CITED AS: | Trani v Trani (No 3) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 332 |
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PRACTICE AND PROCEDURE– Equitable set off – Where mutual judgment debts owing between the plaintiff and defendants - Where each party has an entitlement to costs against the other party arising from different proceedings – Whether the Court has inherent jurisdiction to set-off a judgment debt against a judgment in favour of the judgment debtor – Sivritas v Sivritas (No 2) [2008] VSC 580 referred to
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J Levine | The Law Professionals |
| For the First and Second Defendants | Mr A Panna QC | Robert James Lawyers |
HER HONOUR:
Following a trial in December 2017, and as a result of orders made by me in this proceeding on 25 October 2018 (‘October 2018 orders’), the defendants (‘Marco and Luciano’) owe the plaintiff (‘Patrizia’) the sum of $289,101.60, plus interest (‘judgment sum’). However, I ordered that $67,736.00 of the judgment sum (‘quarantined fund’) be retained in the trust account of the solicitors for Marco and Luciano, pending the resolution of possible claims by Marco and Luciano to some or all of the quarantined fund.
Patrizia’s entitlement to the judgment sum arose out of my finding, in a decision delivered on 21 June 2018 (‘primary reasons’),[1] that Marco and Luciano had caused the trustee of the Trani family trust, of which each of Marco, Luciano, and Patrizia (who are siblings) were beneficiaries, to act in bad faith and/or failed to properly execute its duties as trustee in connection with the winding up of the Trani family trust in July 2014. The consequence of this finding, and the operation of the provisions of the relevant trust deed, meant that each of Marco, Luciano and Patrizia were entitled to share equally in the assets of the trust.
[1][2018] VSC 274.
Following the delivery of the primary reasons, a further hearing was held on 11 September 2018 (‘second hearing’) to deal with a number of issues which arose as a consequence of the findings made in the primary reasons, including, among other things:
(a) the amount actually payable to Patrizia by Marco and Luciano;
(b) the date from which interest should run;
(c) the question of costs; and
(d) the unpaid entitlements issue, which concerned the question, which was not the subject of any pleadings, but arose during the course of the evidence at trial, of whether Marco and Luciano were entitled to be paid the income distributed to them in the accounts of the trust over the lifetime of the trust, but not actually paid to them.
Immediately following the second hearing, the solicitors for Marco and Luciano conducted a search of the title of a property at Safety Beach (‘Safety Beach property’), which had been purchased by their parents many years ago as a holiday home, and was owned by Marco, Luciano, and Patrizia as tenants in common in equal shares. This search revealed that, earlier in 2018 (during the period after the trial, but prior to the delivery of the primary reasons), unbeknown to Marco and Luciano, Patrizia had sold the Safety Beach property and kept the proceeds for herself, without accounting to Marco and Luciano.
On 19 October 2018, I delivered my reasons with respect to the issues canvassed in the second hearing. For reasons which are not presently relevant, the orders made consequent upon these reasons were not made until 25 October 2018. The reasons stated relevantly, as follows:
In relation to the unpaid entitlements issue, senior counsel for Marco and Luciano submitted that the net balance of the assets of the trust as at 26 June 2014, after taking into account the valid distribution of income to Marco and Luciano, should also be adjusted to take into account the income distributed to Marco and Luciano (and the estate of Caterina) in earlier years and not paid to them. The evidence of Mr De Vitto at trial was that those distributions to Marco and Luciano were valid, but were not paid to them separately: rather, they were ‘subsumed’ within the final payment to Marco and Luciano on 26 June 2014. Given that I have found that, insofar as the 26 June resolution, as rectified, purported to distribute the capital of the estate, it was invalid, senior counsel for Marco and Luciano submitted that there should be some adjustment in the sum finally payable to Patrizia to reflect their prior entitlements. Counsel for Patrizia submitted that to reduce the payment to Patrizia on the basis of the alleged unpaid entitlements would be ‘grossly unfair and a breach of the rules of procedural fairness’. If this issue had been raised in the proceeding then it could be properly investigated. The issue was only raised in this proceeding because it was relevant to what Marco and Luciano knew and understood at the time the 26 June resolution was made.
I agree with the submissions of counsel for Patrizia that it would be inappropriate to make an adjustment for the amounts said to have been distributed to Marco and Luciano from the income of the trust over time, but not paid to them, as shown in an exhibit tendered by Patrizia at trial. First, while this question emerged during the course of the trial of the proceeding, it was not an issue in the proceeding. It had not been the subject of any pleading or submissions: rather, it arose as a sidewind as a consequence of Mr De Vitto’s evidence. I agree that if Marco and Luciano were to pursue any claim for these funds, it would be necessary for there to be further discovery concerning the historical accounts of the trust, and questions of waiver, limitation of actions, and the proper construction of the trust deed may well arise. Further, the provenance of the document relied upon by Marco and Luciano to support any claim for unpaid entitlements remains unclear. The matter is further complicated by the fact that any claim made by Marco and Luciano for payment of their unpaid entitlement would need to be made against the trustee (which has been deregistered), not Patrizia, the differing amounts said to be owed to Mario and Luciano, and the amount said to be owed to the estate of Caterina.
However, I accept that there is prima facie evidence which supports Marco and Luciano’s claims with respect to their unpaid entitlements as beneficiaries of the trust. For that reason, I will order that the sum of $64,902.67, being one third of the amount of the unpaid entitlements referred to in the evidence, be paid into the trust account of the solicitors for Marco and Luciano pending resolution of these claims, with those funds to be released to Patrizia if a proceeding in a court of competent jurisdiction is not brought within a reasonable time. While I accept that this proposal does not reflect the potential discrepancy between the claims of Marco and Luciano for unpaid entitlements, it does prompt the parties to resolve this matter. Alternatively, if the parties agree, I would be content to order that there be an accounting with respect to the trust, limited to ascertaining the outstanding liabilities of the trust with respect to unpaid beneficiary entitlements as at 26 June 2014. That may be a more cost‑effective means of resolving this issue, but I would only make that order if the parties agreed.
…
In relation to the payment issue, the consequence of the findings in relation to the matters above means that the sum due to Patrizia is $289,101.60, subject to the sum of $64,902.67 being held in the solicitor’s trust account pending further action, resulting in an immediate payment to Patrizia of $224,198.93.
The October 2018 orders provided as follows:
1.The written resolution of 26 June 2014 signed by the defendants be rectified as follows:
(a)a new paragraph 2A to the following effect:
‘Pursuant to clause 4 of the Trust Deed, the Trustee appoints Marco Trani and Luciano Trani as beneficiaries of the property of the Trust as tenants in common in equal shares absolutely’;
(b)by the deletion of paragraph 3(c) and its replacement with the following:
‘In respect of the balance of the capital and income of the Trust after payment of the Outstanding Entitlements and the Liabilities: to Luciano Trani and Marco Trani equally save that Luciano is paid $8,500 more than Marco.’
2.The defendants pay the plaintiff the sum of $221,736.00, plus interest at the rate prescribed under s 2 of the Penalty Interest Rates Act from 7 October 2015.
3.The defendants pay the sum of $67,736[2] into an interest bearing account in the name of their solicitor, such funds to be retained on trust by the solicitor for the defendants subject to the terms of paragraphs 4 and 5 of these orders (‘trust fund’).
4.By 4.00pm on 19 February 2019, the defendants issue any proceeding in a court of competent jurisdiction to claim any entitlement to the trust fund as unpaid beneficiaries of the Trani Family Trust, and any entitlement of the second defendant to the sum of $8,500 said to be owed to him by the Trani Family Trust.
5.If no proceeding is issued by 19 February 2019, or any other agreement reached between the parties, the trust fund (plus any accumulated interest) be paid to the plaintiff.
6.The defendants pay eighty per cent of the plaintiff’s costs of the proceeding, including reserved costs, on a standard basis, to be taxed in default of agreement.
7.There be liberty to apply to the Court for orders by consent that there be an accounting with respect to the unpaid liabilities of the Trani Family Trust as at 26 June 2014, such liberty to be exercised by 19 February 2019.
8.The proceeding be otherwise dismissed.
[2]This figure differs slightly from the figure referred to in the passage of my reasons extracted in paragraph 5 above for reasons which are immaterial to the current applications.
By this time, Marco and Luciano, having discovered the sale of the Safety Beach property, had issued a proceeding against Patrizia and a company controlled by her, (‘fraud proceeding’), and had made a successful ex parte application for a freezing order over the assets of Patrizia and the company, Ascended Mastery Pty Ltd (‘company’). The factual background to the fraud proceeding and the chronology of events can be seen from the following extract of my reasons for dismissing the application by Patrizia and the company to set aside a default judgment obtained by Marco and Luciano against her in the fraud proceeding delivered on 17 January 2019,[3] as follows:
The plaintiffs in this proceeding, Marco and Luciano Trani, are brothers. The first defendant, Patrizia Trani, is their estranged sister. The second defendant, Ascended Mastery Pty Ltd, is a company controlled by Patrizia. The third defendant, Michelle Farfoud, is a conveyancer who was engaged by Patrizia to sell the family beach house at 331 Dromana Parade, Safety Beach (‘Safety Beach property’). Until July 2018, Marco, Luciano and Patrizia owned the Safety Beach property as tenants in common in equal shares.
On 17 September 2018, Marco and Luciano issued this proceeding, alleging that, in summary, Patrizia had sold the Safety Beach property to a third party, without their knowledge or consent, and had forged their signatures on the transfer of land documents lodged with the Registrar of Titles. Marco and Luciano alleged that the second defendant was liable as a knowing recipient of the proceeds of sale of the Safety Beach property, and the third defendant was liable for misrepresentations said to have been made by her to the Registrar of Titles that she was authorised to execute the transfer of land documents on behalf of Marco and Luciano.
…
Returning to the current proceeding, on 17 September 2018, McDonald J made freezing orders over the assets of Patrizia and the second defendant following an ex parte application made by Marco and Luciano. The freezing orders were extended by John Dixon J on 24 September 2018.
By the operation of the rules of Court, Patrizia and the second defendant were required to file and serve their defences by 21 October 2018. No defences were filed, and on 1 November 2018, Marco and Luciano obtained judgment in default as defence against Patrizia and the second defendant. The third defendant has filed a defence, alleging, among other things, that Patrizia and the second defendant are concurrent wrongdoers for the purposes of Section 24AH(1) of the Wrongs Act 1958 (Vic) and s 87CB(3) of the Competition and Consumer Act 2010 (Cth).
[3][2019] VSC 2.
An appeal by Patrizia against my refusal to set aside the default judgment in the fraud proceeding was dismissed by Kaye JA on 7 May 2019.[4]
[4][2019] VSC 294.
At no time during the course of the application to set aside the default judgment, or during the course of pursuing the appeal against my orders of 17 January 2019, did Patrizia descend into any detail with respect to her denial that she had committed fraud in selling the Safety Beach property without the knowledge or consent of Marco and Luciano.
On 21 November 2018, after default judgment had been obtained by Marco and Luciano against Patrizia and the company in the fraud proceeding, but prior to hearing the application to set aside the default judgment, I made orders in this proceeding which, among other things, stayed the order requiring payment of the balance of the judgment sum (the quarantined sum having been dealt with by the October 2018 orders), on the condition that this amount be paid by Marco and Luciano into their solicitor’s trust account, pending further order. The quarantined fund and the balance of the judgment sum remain in trust, and a modest amount of interest has accumulated over the past eighteen months or so.
In the fraud proceeding, Marco and Luciano also made claims against the conveyancer retained by Patrizia to conduct the sale of the Safety Beach property. A trial of those claims, along with an assessment of the damages payable by Patrizia and the company in accordance with the default judgment, was heard by Forbes J on 22 and 23 October 2019. On 19 December 2019, her Honour made the following orders:
1.At all material times the first defendant and the second defendant held and continue to hold $900,000.00 from the proceeds of sale of the property situated at and known as 331 Dromana Parade, Safety Beach, Victoria, and more particularly described in Certificate of Title Volume 09352 Folio 710 (‘the Property’) on a resulting and/or constructive trust for the plaintiffs.
2.The plaintiffs’ claim against the third defendant is an apportionable claim under Part IVAA Wrongs Act 1958.
3.There be judgment for the first plaintiff in the sum of $450,000 in damages together with interest on the damages calculated at the rate prescribed under s 2 of the Penalty Interest Rates Act 1983 (Vic) from 17 September 2018 to 19 December 2019 on the sum of $450,000.
4.There be judgment for the second plaintiff in the sum of $450,000 in damages together with interest on the damages calculated at the rate prescribed under s 2 of the Penalty Interest Rates Act 1983 (Vic) from 17 September 2018 to 19 December 2019 on the sum of $450,000.
5.The funds currently held by the plaintiffs’ solicitors, Robert James Lawyers, on trust pending resolution of this proceeding pursuant to the order of the Honourable Justice John Dixon, made 24 September 2018, in the sum of $430,011.21 (plus any interest accrued thereon) be paid forthwith to the plaintiffs absolutely in equal share, in partial satisfaction of the first and second defendant’s liability for damages, and the freezing orders made by the Honourable Justice John Dixon be discharged.
6.The third defendant’s liability to the plaintiffs is limited to 15 per cent of the plaintiffs’ loss and damage (including interest) pursuant to s 24AI of the Wrongs Act 1958 (Vic).
7.The first and second defendants pay the plaintiffs’ costs of the proceeding, including the costs of the plaintiffs’ freezing order application made by summons filed 17 September 2018 and any other reserved costs on a standard basis.
8.The third defendant pay the plaintiffs’ costs of the proceeding on the standard basis up to 11:00am on Tuesday 17 September 2019 pursuant to rule 26.08(3)(a) including reserved costs (but excluding any liability for costs orders made by the Honourable Associate Justice Daly on 17 January 2019 in Trani & Anor v Trani & Ors [2019] VSC 2 and the Honourable Justice Kaye made 7 May 2019 in Trani & Anor v Trani & Anor [2019] VSC 294 and the orders of the Honourable Justice John Dixon made on 17 September and 24 September 2018.
9.The third defendant’s liability for costs in paragraph 8 is joint and several with the first and second defendants’ liability for costs in paragraph 7.
10.The plaintiffs pay the third defendant’s costs of the proceeding after 11:00am on Tuesday 17 September 2019 (including any costs reserved after that time) on a standard basis, in accordance with rule 26.08(3)(b).
As can be seen from the October 2018 orders, and the orders made by Forbes J on 19 December 2019, there are orders for the payment of specific sums both in favour of and against Patrizia, as well as costs orders going both ways. It appears that no steps have been taken to have any costs assessed by the Costs Court or by any other means, save that the solicitors for Marco and Luciano deposed that, between 11 September 2018 and 19 December 2019, Marco and Luciano incurred and paid legal costs of $292,290.01, the bulk of which would have been referrable to the fraud proceeding and the application for a stay of the October 2018 orders requiring payment to Patrizia of the balance of the judgment sum.[5] Further, in the affidavit sworn by Patrizia in the fraud proceeding on 21 September 2018 in response to the original freezing orders, she deposed to having incurred and paid about $243,500.00 in legal fees in this proceeding.
[5]I ordered that the costs of the stay application should follow the result in the fraud proceeding.
The current applications concern the quarantined fund and the balance of the judgment sum. Patrizia has applied for orders that the entirety of the judgment sum be paid to her by a fixed date. Marco and Luciano oppose this application, and seek orders that the judgment sum (including the quarantined fund) be paid to them in partial satisfaction of the balance of the debt owing to them by Patrizia as a result of the judgment in the fraud proceeding. Patrizia opposes this application.
Turning first to the quarantined fund, the salient facts and matters are as follows:
(a) as at 21 April 2020, the balance of the quarantined fund was $69,384.79;
(b) the October 2018 orders required that Marco and Luciano issue a proceeding in a court of competent jurisdiction to claim any entitlements to the quarantined fund by 19 February 2019;
(c) on 15 February 2019, Marco and Luciano filed a complaint with the Magistrates’ Court at Melbourne (‘complaint’) seeking payment of the quarantined fund to them by reason of their unpaid entitlements as beneficiaries of the Trani family trust;
(d) however, despite receiving an email from Patrizia’s current solicitor on 30 November 2019 to Marco and Luciano’s solicitors seeking that the complaint be served ‘without further delay’, no steps were taken to serve the complaint until 13 February 2020, the day before the expiry of the validity of the complaint;
(e) on 13 February 2020, the solicitors for Marco and Luciano sent an email to the solicitor acting for Patrizia in the fraud proceeding, asking if he had instructions to accept service of the complaint. The following day, on 14 February 2020, the solicitor replied that he did not have instructions to accept service of the complaint. Attempts by a process server to effect personal service of the complaint upon Patrizia on 14 February 2020 were unsuccessful;
(f) on 22 April 2020, the solicitors for Marco and Luciano attempted to file a summons with the Magistrates’ Court at Melbourne seeking the following orders:
(i) an order that the validity of the complaint be extended pursuant to rule 5.12(2) of the Magistrates’ Court General Civil Procedure Rules 2010 (‘Rules’) be extended for a period of six months; and
(ii) pursuant to rule 21.11(2) of the Rules, an order extending the period of three months referred to in rule 21.11(1) for a period of six months.
(g) in an affidavit sworn by an employee of the solicitors of Marco and Luciano, Ms Rita Vecchiarelli, on 3 June 2020, Ms Vecchiarelli deposed as to the difficulties she had encountered in filing the summons to extend the validity of the complaint by reason of the restrictions in place caused by the COVID‑19 pandemic. Ms Vecchiarelli deposed, relevantly, as follows:
(i) at the request of the Magistrates’ Court Civil Registry (‘Registry’), she sent an email to the Registry on 22 April 2020 with the summons and supporting affidavit;
(ii) on 23 April 2020, she received an email from the Registry acknowledging receipt of the summons and supporting affidavit;
(iii) on 1, 4, 5, 11, 12, 13 and 14 May 2020, she attempted to contact the Registry by telephone to ascertain whether the summons had been formally filed and a hearing date allocated. On 11, 12, 13 and 14 May 2020, she spoke to a Registry officer, who informed her that the filing fee had been received, but there was a backlog of emails owing to COVID‑19 and Registry staff working from home; and
(iv) she exhibited to her affidavit emails sent by her to the Registry on 14 and 25 May 2020, to which as at 3 June 2020 she has not had a response; and
(h) a copy of the complaint was emailed to the solicitors acting for Patrizia on 17 March 2020. However, later that day, Patrizia’s solicitor reiterated that he did not have instructions to accept service of the complaint, asserted that Marco and Luciano had failed to comply with the October 2018 orders, and foreshadowed the current application by Patrizia to have the quarantined fund released to her; and
(i) on 5 June 2020, while my decision in the current applications was reserved, my associate received an email from the solicitors for Marco and Luciano attaching an order made by a magistrate extending the period of the validity of the complaint to 2 March 2021.
As for the balance of the judgment sum, the salient facts and matters are as follows:
(a) as at 17 December 2019, the amount of the balance of the judgment sum held in trust was $297,905.07;
(b) as at 19 December 2019, the sum of $440,612.34 (‘frozen funds’) was held in a bank account pursuant to the freezing orders made in the fraud proceeding;
(c) the frozen funds were released to Marco and Luciano shortly thereafter, thus reducing the unpaid amount of the damages payable to them by reason of the orders made by Forbes J on 19 December 2019 to $459,387.66 (plus interest accruing at the penalty interest rate), which has not been paid by Patrizia or anyone else;
(d) according to the calculations of the solicitor for Marco and Luciano (which are disputed by Patrizia, although she has not proffered an alternative calculation), as at 20 March 2020, the amount payable by Patrizia and the company to Marco and Luciano, assuming the payment of the fifteen per cent contribution payable by the third defendant in the fraud proceeding (the conveyancer) is $431,280.22;
(e) if the quarantined fund and the balance of the judgment sum was paid to Marco and Luciano, Patrizia and the company would still be indebted to Marco and Luciano in the sum of $64,008.92, plus any penalty interest accumulating after 20 March 2020;
(f) in his affidavit sworn on 21 April 2020, the solicitor for Marco and Luciano deposed as follows:
Despite without prejudice communications on behalf of the Defendants seeking to reach agreement with Ms Trani on a set‑off and release of the Monies, no agreement has been reached.
…
Paragraph 1 of the Damages Orders provide that Ms Trani at all times held and continue to hold $900,000 from the proceeds of sale of the Safety Beach property on a resulting and/or constructive trust for the Defendants.
Ms Trani has not accounted to the Defendants for the balance of their share of the sale proceeds ($900,000) after the $430,011.21 was released to the Defendants, being a sum of $469,988.79 (plus interest thereon).
That balance remains unpaid to the Defendants. Ms Trani has made no effort to explain to the Defendants or this Court (in the various proceedings) what has happened to those proceeds, despite opportunities to do so.
The Defendants contend that Ms Trani has little means, if any, to pay the amounts owed to the Defendants, as a result of the following:
a.Ms Trani swore an affidavit on 21 September 2018 in response to the Defendants’ freezing order application which reveals she has only one asset of substance, being her interest in her residential property at 28 Eastgate Street, Pascoe Vale South Victoria … ;
b.Ms Trani owns her residential property jointly with her partner, Mr Abraham Di Quinzio. Mr Di Quinzio is an undischarged bankrupt, and his interest in that property has vested in his bankruptcy trustee;
c.The Defendants do not know the dollar value of Ms Trani’s share in any equity in her property, after deduction of any encumbrance affecting that property (including the mortgage) and after account is taken of the interest claimed by the bankrupt estate of Mr Di Quinzio; and
d.The Defendants do not know if Ms Trani has any other assets of value.
(g) no steps have been taken by any party to quantify the costs orders in their favour; and
(h) the parties’ costs position is complicated by the fact that Patrizia is entitled to eighty per cent of the costs of this proceeding, including the costs of the second hearing up to 25 October 2018, and is jointly and severally liable with the third defendant in the fraud proceeding for the costs of Marco and Luciano, save for the costs incurred by them in resisting the application to set aside the default judgment in the fraud proceeding, including the appeal before Kaye JA, and any costs incurred by them after 17 September 2019. Further, the second defendant in the fraud proceeding, the company controlled by Patrizia, is also jointly and severally liable with Patrizia (and the third defendant as to part) for the costs of the fraud proceeding.
Counsel for Patrizia submitted that the liberty to apply granted by my orders of 21 November 2018 did not extend to allowing Marco and Luciano to make an application to have the quarantined fund paid to them. The liberty to apply with respect to the quarantined fund was granted only for the parties to apply to the Court (by consent) for an accounting with respect to the unpaid liabilities of the Trani family trust, which was not exercised. There is otherwise no basis to imply liberty to apply in the October 2018 orders, as those orders were final orders. Any liberty to apply with respect to final orders does not extend to allowing any variation or amendment of the orders, but rather, is limited to questions of machinery which may arise from the implementation of final orders.
Counsel for Patrizia submitted that the only operative orders with respect to the quarantined fund are the orders requiring the defendants to issue a proceeding in a court of competent jurisdiction by 19 February 2019. While Marco and Luciano filed a proceeding in the Magistrates’ Court on 15 February 2020, it was not served within twelve months, and thus by operation of the Rules stands dismissed. Accordingly, the quarantined fund should be paid to Patrizia forthwith.
With respect to the balance of the judgment sum, counsel for Patrizia submitted, in summary, as follows:
(a) in ‘Other Matters’ of the orders made on 21 November 2018, I stated that ‘what I am proposing is, in effect an extension of the freezing order made on 24 September 2018 in the [fraud proceeding]; the judgment debt is an asset of Patrizia’s but will be preserved in the same manner as her other assets …’;
(b) the freezing order was discharged by the orders made by Forbes J on 19 December 2019;
(c) Marco and Luciano’s proposed orders would impermissibly vary, amend or substantially change the October 2018 orders, as they would require the balance of the judgment sum to be paid to Marco and Luciano, not Patrizia;
(d) the net amount owing to either Patrizia on the one hand or Marco and Luciano on the other hand cannot be known until the parties’ costs in each proceeding are taxed;
(e) if the net result of the taxation of the costs orders in this proceeding and in the fraud proceeding results in a debt owing to Patrizia, it would be unfair to pay the judgment sum to Marco and Luciano in the absence of any evidence that they have sufficient assets to repay her; and
(f) the Court should fix a time frame for the payment of the judgment sum to Patrizia, as it is empowered to do under the rules of Court.
Senior counsel for Marco and Luciano submitted, in summary, as follows:
(a) Patrizia’s application for the payment to her of the judgment sum, and her opposition to the orders sought by Marco and Luciano completely ignores the fact that she defrauded her brothers and owes them over $459,000.00;
(b) it is highly unlikely that Marco and Luciano would be able to recover any damages or costs from Patrizia or the company, given their limited assets;
(c) Patrizia has not put any material before the Court to justify lifting the stay and having the judgment sum paid to her, and she continues with her obstructionist defence of her fraudulent conduct;
(d) paragraph 1 of the orders made on 21 November 2018 had the effect of freezing the balance of the judgment sum. The Court has the power to supervise the enforcement of orders, including the power to stay the enforcement of judgments;
(e) as for the quarantined fund, Marco and Luciano have complied with the October 2018 orders, having paid the quarantined sum into their solicitors’ trust account on 8 February 2019, and having issued a proceeding on 15 February 2019;
(f) while the complaint was not served within the one year period, it is clear that the complaint is not a nullity, and the Magistrates’ Court may extend time for compliance;[6]
[6]This submission has been overtaken by events.
(g) in any event, even if Patrizia’s contention that the complaint is now invalid is correct, the quarantined funds should be dealt with by the Court in the same way as the balance of the judgment sum: that is, be set off against Patrizia’s liability pursuant to the judgment debt in the fraud proceeding;
(h) having regard to the unpaid amount of the judgment debt in the fraud proceeding, and the judgment sum, even on Patrizia’s best case scenario, she and the company would still owe at least $64,000.00 to Marco and Luciano;
(i) the Court has the jurisdiction to order that the judgment sum be payable to Marco and Luciano in partial satisfaction of the judgment debt in the fraud proceeding, on two bases:
(iii) on the basis of substantive equitable set off; and
(iv) under the inherent jurisdiction of this Court to order setoff in respect of funds held pursuant to its orders; and
(j) finally, senior counsel for Marco and Luciano submitted as follows:
The basis of the Defendants’ submission is that the Defendants should be protected against loss and damage that they will inevitably suffer if those funds were to be released to Patrizia Trani as she does not have any liability to pay the balance of the fraud judgment debt against her.
In the circumstances:
(a)Patrizia Trani’s application for release of the sum of $69,384.79 should be dismissed.
(b)The Court should order that the sum of $292,992.92 and the sum of $69,384.79, and any further interest that has accrued in respect of each sum be set off and paid to the Defendants in part satisfaction of the fraud judgment debt owed by Patrizia Trani to the Defendants.
(c)Alternatively to paragraph (b), paragraph 1 of the stay orders continue until further orders of the Court.
Accordingly, the issues in the current application are:
(a) whether the ‘liberty to apply’ granted in the orders of 21 November 2018 extends to the quarantined fund, or is limited to the balance of the judgment sum;
(b) whether Marco and Luciano have complied with the conditions imposed with respect to the quarantined fund, or whether the quarantined fund should be paid to Patrizia forthwith;
(c) whether this Court has the jurisdiction to set off the judgment sum, or the judgment sum other than the quarantined fund, against the unpaid balance of the judgment obtained by Marco and Luciano in the fraud proceeding; and
(d) if the Court does have the jurisdiction to set-off, should it exercise its discretion to do so, and to what extent having regard in particular to the outstanding untaxed costs orders in this proceeding and the fraud proceeding.
Turning first to the issue in paragraph 20(a) above, I agree with counsel for Patrizia that, based upon the natural and ordinary language used in the October 2018 orders and the orders made on 21 November 2018, the liberty to apply granted in the orders made on 21 November 2018 extends only to the balance of the judgment sum, as paragraph 1 of those orders applies only to the payment to Patrizia to that part of the judgment sum. The failure of the orders of 21 November 2018 to deal with the quarantined fund, to say, take into account the possibility that Marco and Luciano failed to issue a proceeding by 19 February 2019 may well have been an (understandable) oversight on the part of the parties and the Court, but I do not consider that failure to be something which can be corrected under the ‘slip’ rule. The consequences of this oversight for the parties’ applications are discussed later in these reasons.
As for the question of whether Marco and Luciano have complied with the October 2018 orders with respect to the quarantined fund, any doubt about whether the complaint is a ‘valid’ proceeding has been settled by the order made by the Magistrates’ Court extending the period of the validity of the complaint.
Accordingly, the question remains, should the reference to ‘issue a proceeding’ in the October 2018 orders be construed as meaning the mere filing of a proceeding (in this case the complaint), or the filing and service of the proceeding? In my view, given the natural and ordinary meaning of the word ‘issue’, it was sufficient for the purpose of compliance with the October 2018 orders for Marco and Luciano to file the complaint by 19 February 2019, which they did.
My view is bolstered by the circumstances in which the decision was made to establish the quarantined fund was made, and the problem that the orders concerning the quarantined fund were intended to address. Marco and Luciano defended Patrizia’s claims in this proceeding on an ‘all or nothing basis’, asserting that the trustee of the Trani family trust was entitled to exercise its discretion to give Marco and Luciano the assets of the trust as it saw fit. There was no fall-back position contended for at trial. As it turned out, I found that the decision to pay the income of the trust to Marco and Luciano was valid, but not the capital.
The question of whether Marco and Luciano had a separate entitlement to income which had been distributed to them over the lifetime of the trust but not actually paid to them was not the subject of any pleadings, and only arose during the course of the trial. While I found that there was some evidence of such an entitlement, Marco and Luciano had not made any claim to those funds, understandably, given that they had received all of the assets of the trust, and at trial defended their right to receive those assets. The position was complicated by the fact that the assets of the trust had vested in the beneficiaries, and the trustee had been deregistered. Further, it was not possible on the state of the evidence to determine whether there may be possible defences to any claim by Marco and Luciano with respect to any claims by them to their unpaid entitlements.
Accordingly, the most practical and cost effective solution to this issue was to preserve a sum of money representing Patrizia’s share of the trust assets from which any unpaid entitlements could be paid, and provide Marco and Luciano with a reasonable period (taking into account the pending summer break) in which they could take advice and consider their position with respect to the unpaid entitlements. In effect, they were being invited to make an election as to whether to pursue any claims with respect to their unpaid entitlements, and, in the absence of any agreement from Patrizia regarding an accounting, the only way of making such an election was to issue a proceeding, which they did. Any other construction of the October 2018 orders would have led to the absurd result that, even if the complaint was served reasonably promptly, during the period of time between the time the complaint was filed and service of the complaint at any time after 19 February 2019, Patrizia would be entitled to demand payment of the quarantined fund.
Accordingly, I reject Patrizia’s application that she be paid the quarantined fund.
As for the application by Marco and Luciano to have the funds in trust released to them, I agree with senior counsel for Marco and Luciano that this Court has an inherent jurisdiction to set off judgments between parties, and that the Court has the discretion to do so even if the judgments arise in different proceedings, and in respect of different transactions. As observed by the learned author of The Law of Set-off,[7] referring to the distinction between the inherent jurisdiction of the Court and the equitable jurisdiction of the Court (citations omitted):
The Court of Appeal’s criticism in the Burkett case of the proposition that the set‑off is an equitable set‑off was confined to a set‑off of costs against costs. But, notwithstanding that the Court of Appeal on other occasions has referred to the analysis in the Lockley case with evident approval, it is also difficult to accept that a set‑off of judgments and orders in contexts other than costs against costs is an equitable set‑off. In the first place, equitable set‑off is a defence to an action to enforce payment of a debt or other monetary obligation, the defence operating in equity as a complete or partial defeasance of the plaintiff’s claim. A set‑off of judgments and orders, on the other hand, is not a defence in that sense. Essentially, it is a procedural device which determines the amount for which execution may issue, and which may provide a ground for a stay of enforcement. Secondly, the practice of setting off judgments and orders was developed in the common law courts (as opposed to courts of equity) long before the Judicature Acts. It is true that the availability of the set‑off has been described as an ‘equitable jurisdiction. However, that expression was used in the sense of justice and fairness, as opposed to the jurisdiction of the Court of Chancery.
The true basis of the set‑off is the court’s inherent jurisdiction. Its purpose is to prevent absurdity or injustice, and to do that which is fair. It has long been accepted that the inherent jurisdiction is not confined to judgments in the same action, or the same court, without it being suggested that the claims nevertheless must be closely connected as for an equitable set‑off. Further, in so far as the Court of Appeal in the Lockley case was reticent to accept that a set‑off of costs against damages would always be justified, it is nevertheless the case that the courts have been prepared to order a set‑off of costs against a judgment for damages and costs, or of costs against a judgment for debt and costs, or of costs against any future sums which may be ordered to be paid on the taking of a partnership account between the parties. In truth, the distinction between damages and costs was not an important issue in the cases in which the jurisdiction was developed.
(emphasis added)
[7]Derham, R (2010, 4th edition, Oxford University Press).
That this inherent jurisdiction exists was recognised by the Court of Appeal of the Supreme Court of Western Australia in Krishell v Nilant Limited,[8] where Buss JA stated that ‘where a Court has a discretion to allow a set‑off, it also has power, if it thinks fit, to order a stay of execution’,[9] the Supreme Court of Queensland in Team Dynamik Racing Pty Ltd v Longhurst Racing Pty Ltd & Ors,[10] the New South Wales Supreme Court in Australian Beverage Distributors v Ewans and Tate Premium Wines Pty Ltd,[11] and by the Federal Court in Eiros Pty Ltd v St George Bank Ltd,[12] where Finkelstein J referred to the statement of Brett MR in Edwards v Hope[13] that:
Courts … always had an equitable jurisdiction, for the purposes of preventing absurdity or injustice in cases where there had been judgment for damages between the same parties in distinct actions, to set‑off one judgment against another and to allow execution in respect of the balance only.[14]
[8](2006) 32 WAR 540 [83]-[84].
[9]Ibid [83].
[10][2008] QSC 36.
[11](2006) 200 FLR 332.
[12](2008) 68 ACSR 202 [16]-[20].
[13](1865) 14 QBD 922.
[14]Ibid, at 926.
That said, it appears that it is at least arguable in Victoria there must be some connection between the underlying claims giving rise to the judgments which are sought to be set off, applying the ‘impeachment test’ set out in Rawson v Samuel[15] to applications of the current kind. The impeachment test is described in Equity: Doctrines and Remedies as follows:
One ingredient was necessary in equity but not required at law, that is, that the set-off actually go to the root of, be essentially bound up with, “impeach”, the title of the plaintiff. ... It was not sufficient that there be countervailing claims, nor that those claims were mutual, nor even that they arose out of the same transaction. The defendant, in order to make out an equitable set-off, had to establish that he possessed some equitable right to be protected from the plaintiff’s claim.
[15](1841) Cr & Ph 161.
In Sivritas v Sivritas (No 2) (‘ Sivritas’),[16] Kyrou J surveyed the relevant authorities regarding the set‑off of a party’s entitlement to costs against a judgment in favour of the other party, and, despite preferring the view that the jurisdiction to do so was conferred by the Court’s inherent jurisdiction, unconstrained by the impeachment test, proceeded to determine the application in accordance with equitable principles.
[16][2008] VSC 580.
However, I agree with Kyrou J that the preponderance of authority supports the view that there is no need to establish a particular connection between the subject matter of different proceedings in order for me to exercise my discretion to set off the judgment sum against the judgment obtained by Marco and Luciano in the fraud proceeding. While the need for some tangible connection as far as claims are concerned is understandable, principles underpinning such a requirement fall away when one is considering setting off judgments against each other, given that, once a party obtains a judgment, that party’s cause of action merges in the judgment, and ceases to have an independent existence. Further, it is apparent from the authorities that this inherent jurisdiction is not limited to circumstances where the Court is exercising its equitable jurisdiction.
Having reviewed the authorities referred to by Kyrou J in Sivritas,[17] being Eagle Star Nominees Limited v Merril[18] and Indisrie v General Credits Ltd,[19] along with the authorities relied upon by counsel for Patrizia,[20] those decisions are concerned with whether a defendant may raise a claim for unliquidated damages as a defence to a claim yet to be determined at trial, or to seek to set off a judgment or order for costs against an unliquidated claim. I do not consider they detract from or otherwise confine the inherent jurisdiction of the Court to set off one judgment debt against a judgment in favour of that judgment debtor.
[17]Ibid.
[18][1982] VR 557 per Tadgell J.
[19][1985] VR 251 (Full Court).
[20]Perpetual Nominees Ltd v McGoldrick & Anor [2014] VSC 152 and HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 479.
In any event, even if I was constrained by the impeachment test, it would be open to the Court to achieve the same result through other means. As observed by the learned authors of On Equity (citations omitted):[21]
Where A has a monetary judgment against B (whether for damages or costs), and B has a monetary judgment against A, a stay of execution of A’s judgment against B may have the effect of a set‑off. The difference, however, is that while equitable set‑off extinguishes or reduces the debt, a stay of execution simply precludes enforcement of the debt for the duration of the stay. For a stay of execution to be granted in these circumstances, it is not necessary for the requirements of equitable set‑off to be satisfied; the test is whether it is just for the stay to be granted.
[21]P Young, C Croft, and M Smith (2009, Lawbook Co).
Accordingly, it would be open to the Court to permanently stay the execution of the judgment in favour of Patrizia in this proceeding, and vacate the orders of 21 November 2018 requiring the balance of the judgment sum be paid into the trust account for the solicitors for Marco and Luciano. In any event, I consider that I do have the power to order that the judgment sum (or any part of it) be set-off against the unpaid balance of the judgment in the fraud proceeding. I reject the submission made on behalf of Patrizia that pleadings are required in order to effect a set‑off: that is only necessary when a set-off is put up as a defence to a claim, not once judgment had been entered. The question is whether it is fair and just that I should do so.
I accept the calculations prepared by the solicitors for Marco and Luciano that if the judgment debt was to be set off against the unpaid balance of the judgment in the fraud proceeding, there would still be a debt owed by Patrizia and the company to Marco and Luciano. I agree that it would be unfair to Marco and Luciano to lift the stay imposed by the orders of 21 November 2018, in circumstances where Patrizia, by reason of the default judgment, is deemed to have admitted the serious allegations made against her in the fraud proceeding. Further, if the judgment sum, or any part of it was paid to Patrizia, I accept there would be a real risk that Marco and Luciano would be unable to otherwise recover the unpaid balance of the judgment in the fraud proceeding from Patrizia or the company. Even if Patrizia took no steps to put those funds beyond the reach of her creditors, it is not beyond the realms of possibility, given their limited assets and outstanding debts, that she may become bankrupt and/or the company become insolvent, leaving Marco and Luciano in the unenviable position of being unsecured creditors forced to deal with a trustee in bankruptcy and/or a liquidator.
However, the real difficulty in determining what is fair and just in all of the circumstances is the existence of the competing unquantified costs orders. In this proceeding, the evidence is that Patrizia has incurred costs of, say, $250,000.00, and Marco and Luciano have been ordered to pay eighty per cent of those costs. Based upon a conservative estimate on what might be recoverable upon a taxation, it is possible that Marco and Luciano will be liable to pay Patrizia approximately $150,000.00 with respect to the costs of this proceeding.
In the fraud proceeding, Marco and Luciano have incurred costs of around $290,000.00.[22] Again, assuming a recovery rate of 75 per cent, Marco and Luciano will be entitled to recover approximately $215,000.00 of those costs. However, Patrizia will only be solely liable (or, more accurately, liable along with the company) for the costs of the application to set aside the default judgment and the appeal, which I doubt would exceed $30,000.00, and the costs incurred after 17 September 2019 (which would include the costs of the trial of the fraud proceeding). The third defendant is jointly and severally liable with Patrizia and the company for the remainder and, while this may be stretching what is permissible for the purposes of taking judicial notice, I can infer from the identity of the firm representing the third defendant in the fraud proceeding that the third defendant was at least partly indemnified by an insurer, such that Marco and Luciano will be able to recover at least part of the costs of the fraud proceeding from the third defendant. If Marco and Luciano are successful in recovering a substantial part of their costs in the fraud proceeding from the third defendant, their contention that the amount owing to them by Patrizia and the company exceeds the judgment sum is perhaps over confident.
[22]Assuming a modest part of the costs referred to in Mr Peries’ affidavit are referrable to the second hearing.
Doing the best I can on the information available to me, I estimate the total amount owed by Marco and Luciano to Patrizia arising out of the orders made in this proceeding to be $520,000.00 (including the quarantined fund). Further, I can estimate reasonably confidently that the amount payable by Patrizia and the company to Marco and Luciano is approximately $470,000.00 (including penalty interest accumulating since 20 March 2020), a net difference of $50,000.00 in favour of Patrizia. Given that the third defendant will not be liable to pay any costs incurred by Marco and Luciano after 17 September 2019 (some two months prior to trial), I can assume that Patrizia and the company will be liable for a substantial, but as yet unquantified amount of costs incurred by Marco and Luciano in the fraud proceeding, which may well reach or exceed $50,000.00. But at this stage I cannot be certain.
However, if the balance of the judgment sum (approximately $300,000.00) was paid to Marco and Luciano by way of set‑off, the amount owed by Patrizia and the company to Marco and Luciano would be reduced to approximately $130,000.00, plus costs of an unspecified amount, a subset of which may also be recoverable from the third defendant. Setting aside the quarantined fund for the time being, I can be confident that the amount owing to Patrizia pursuant to the costs orders in this proceeding will not exceed the amount outstanding to Marco and Luciano, given that Patrizia and the company will be liable to pay the costs of the application to set aside the default judgment, the appeal, and the costs of the trial of the fraud proceeding.
Accordingly, I will order that the balance of the judgment sum held in trust pursuant to my orders of 21 November 2018 be paid to Marco and Luciano in partial satisfaction of the unpaid balance of the judgment in the fraud proceeding.
That leaves the question of how to deal with the quarantined fund. While I accept that the liberty to apply in the orders made on 21 November 2018 did not extend to the quarantined fund, it seems to me to be at least arguable that no liberty to apply is required with respect to applications to set off judgment debts, being, as suggested by the learned author of The Law of Set-off a ‘procedural device which determines the amount for which execution may issue, and which may provide a ground for a stay of enforcement.’ No liberty to apply is required to stay the enforcement of a judgment debt, as the Court may stay the execution of a judgment under rule 66.16 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic).
It seems to me that there are two options open to Marco and Luciano with respect to the quarantined fund: they could press their claims in the complaint, and if successful obtain judgment with respect to part or all of the quarantined fund. Alternatively, they could go through the taxation process, and, if the net amount of the costs payable to them by Patrizia and the company, along with the unpaid balance of the judgment sum in the fraud proceeding exceeds the amount of the quarantined fund, then it would be open to Marco and Luciano to apply for a permanent stay of execution with respect to the part of the judgment represented by the quarantined fund in favour of Patrizia in this proceeding, for which no liberty to apply is required. To facilitate this, I would be prepared to make an order to the effect that if Patrizia does not issue a summons for taxation of her costs in this proceeding within a reasonable period of time (say, two to three months), the execution of the judgment in respect of the quarantined fund be stayed, in order to prevent any further delay in finalising the net amount of the outstanding debt owed between the parties.
For completeness, I do not consider that the fact that Patrizia and the company are liable to Marco and Luciano in the fraud proceeding, while the judgment sum is payable to Patrizia alone, is material to the question of whether the Court can exercise its inherent jurisdiction to set off the unpaid balance of the judgment debt against the judgment sum. Patrizia controls the company, and is jointly and severally liable with the company to pay the balance of the judgment in the fraud proceeding and costs to Marco and Luciano. The company appears to have limited assets, and thus execution against the company is unlikely to materially diminish Patrizia’s liability to Marco and Luciano.
Accordingly, I propose to make the following orders:
(a) that part of the judgment sum held in the trust account of the solicitors for the defendants pursuant to the orders made on 21 November 2018 be set off against the unpaid balance of the judgment obtained by the defendants on 19 December 2019 in proceeding number S ECI 2018 01356, and be paid to the defendants forthwith;
(b) if the plaintiff fails to issue a summons for taxation of the costs awarded to her in the orders of 25 October 2018 by 4.00pm on 15 September 2020, the judgment in her favour in this proceeding be permanently stayed, and the funds held in trust pursuant to the orders made on 25 October 2018 be paid to the defendants forthwith;
(c) the parties file and serve any (brief) written submissions with respect to the question of the costs of the parties’ applications heard on 4 June 2020 by 4.00pm on 22 June 2020, with any submissions in reply to be filed and served by 4.00pm on 25 June 2020; and
(d) there be liberty to apply with respect to the orders made this day.
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