Commercial Factors Limited v Meltzer

[2018] NZHC 3141

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2016-404-001398

[2018] NZHC 3141

BETWEEN

COMMERCIAL FACTORS LIMITED

Plaintiff

AND

JEFFREY PHILIP MELTZER, LLOYD JAMES HAYWARD AND ARRON LESLIE HEATH

Defendants

On the papers
Judgment:	30 November 2018

COSTS JUDGMENT OF HINTON J

This judgment was delivered by me on 30 November 2018 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules

…………………………………………………………………… Registrar/Deputy Registrar

Solicitors:

Neilson Lawyers, Auckland McElroys, Auckland

COMMERCIAL FACTORS LTD v MELTZER [2018] NZHC 3141 [30 November 2018]

[1]    This judgment relates to costs following litigation concerning a funding agreement  between  the  defendants,  Messrs   Meltzer,   Heath   and   Hayward   (the liquidators), all partners or associated with Meltzer, Mason, Heath (MMH), and the  plaintiff,  Commercial  Factors  Ltd  (CFL).   My  decision  was  released  on   20 December 2017. In it I found for the liquidators, and ordered that memoranda be filed by the parties as to costs.1

[2]    The memoranda filed raised two material issues over costs – whether costs should be allowed on a 2C basis for the list of documents step, and whether increased costs should be awarded, relying principally on unreasonable refusal of settlement offers, but also on CFL’s approach to discovery being unreasonable.

[3]    CFL appealed my decision to the Court of Appeal. Given the claim of increased costs could obviously be impacted by the outcome of the appeal, I held off on issuing my costs decision.

[4]    The Court of Appeal released its judgment on 16 November 2018, dismissing the appeal.2

Background

[5]    I do not intend to go into a detailed summary of the relevant facts and the funding agreement entered into between the parties. For such a summary see my judgment,3 and that of the Court of Appeal.4 However, some background is necessary to understand the costs argument.

[6]    The defendants were the liquidators of Blue Chip NZ Ltd. CFL is in the business of debt factoring and finance, including some litigation funding. Pursuant to a funding agreement dated 24 August 2009, CFL agreed to provide the liquidators with

$60,000, for the primary purpose of obtaining an opinion from Mr Brian Keene QC as

1      Commercial Factors Ltd v Meltzer [2017] NZHC 3267.

2      Commercial Factors Ltd v Meltzer [2018] NZCA 505.

3      At [5]–[33].

4      At [5]–[30].

to the prospects of pursuing reckless trading and related proceedings against the directors of Blue Chip.

[7]The relevant clauses at issue in the proceedings provided:

(a)3.2.2 – If another party agrees to fund the proceedings, [Blue Chip] will procure the funder to repay to [CFL] the funding and [the greater of

$18,000 or 24 per cent per annum] before the proceedings are filed or any funding for the proceedings is made available to [Blue Chip] or the liquidators.

(b)3.4 – If proceedings are not commenced and [Blue Chip] receives any amounts from other sources (other than funds directly obtained for the purposes of funding investigations, legal advice or Court or other proceedings), [Blue Chip] will apply those amounts in the following order:

(i)3.4.1 – To meet [Blue Chip’s] obligations to any party who funded the obtaining of those amounts, and to reimburse the liquidators’ remuneration, costs and expenses in obtaining those amounts to the extent they were not funded;

(ii)3.4.2 – towards repayment to CFL of the funding and [the greater of $18,000 or 24 per cent per annum] …

(c)6.1 – The liquidators will have no personal liability … except in circumstances where they fail to act in good faith.

[8]    The opinion of Mr Keene was provided on 8 September 2010. In it he stated that, in his view, “… there is a good cause of action against the directors…”.

[9]    On 23 September 2010, CFL declined the opportunity to fund any further litigation.

[10]   The liquidators looked for another litigation funder, but were unsuccessful. However, between May and October 2011, two of the liquidators and another partner of MMH, Ms Mason, provided funds of $49,500 by payment into MMH’s practice account. They then issued proceedings by filing a statement of claim against the directors of Blue Chip, on 30 November 2011. The funds for preparing this proceeding were paid directly from the MMH practice account, to the solicitors in charge of preparing the statement of claim.

[11]   At the time of filing the proceeding, the liquidators were of the view that no other material source of funds for Blue Chip to pay investors, creditors and CFL, would become available, other than via proceedings against the directors.

[12]   However, in March and May 2012, Blue Chip received what Mr Meltzer referred to as a “complete windfall recovery” totalling $307,961, by way of partial repayment of inter-company advances. That amount was then mostly spent on the liquidators’ remuneration, expenses and legal fees.

[13]   In February 2013, the liquidators announced that, having been unable to secure funding (from external sources), they would discontinue the proceeding.

[14]   The position of CFL was that, pursuant to the agreement between the parties, when the inter-company advances were paid to Blue Chip, cl 3.4 was engaged, such that Blue Chip (through the liquidators) was required to apply that amount to repayment of CFL. CFL’s argument was that proceedings had not been “commenced” as, although they had been filed, they had not been taken some distance, or followed through to an end.

[15]   I found against CFL on this point, on the basis that proceedings had been commenced when they were filed.5 I also found that there were a number of steps taken by the liquidators, and the proceedings had not been issued as a formality.6

5 At [38].

6 At [37].

[16]   CFL also argued that cl 3.2.2 applied, as “another party” had agreed to fund the proceedings, that other party being two of the liquidators and Ms Mason. As a result, Blue Chip, via the liquidators, was required to procure repayment to CFL before the proceedings were commenced or any funds were made available.

[17]   I agreed with CFL on this point, finding that the reference to another party referred to a party other than CFL.7

[18]   However, CFL was still required to prove that the liquidators had failed to act in good faith, in order for the liquidators to be personally liable to CFL. CFL was unable to convince me of this.8

[19]   CFL advanced a number of other grounds. These were that the liquidators received approximately $20,000 of money from other sources, which should have been applied to CFL; that the liquidators had access to funds from the Ministry of Economic Development, which they failed to call upon; and that the agreement between the parties was subject to implied terms. I found against CFL in each instance. These grounds do not appear to have been subsequently advanced on appeal.

[20]   The Court of Appeal agreed with my finding as to cl 3.4, finding that there was no breach of that clause.9 The Court held that cl 3.2.2 was not breached either, as the reference to “another party” was a reference to “a party other than the company or the Liquidators”.10 Although the parties who provided the $49,500 funding were not identical to the liquidators, the Court did not see that as material. Most relevantly, my finding as to there being no bad faith was upheld.

[21]   In dismissing CFL’s appeal against my decision, the Court awarded costs to the liquidators for a standard appeal on a band A basis and usual disbursements.11

7      At [44]–[50].

8      At [86]–[87].

9 At [57].

10 At [62].

11 At [77].

Costs issues

[22]   After my judgment, the liquidators wrote to CFL seeking agreement to a sum of $82,515.49 for costs and disbursements. That was based on 2B costs, but included second counsel, allowed for 2C costs for the list of documents, and then a 50 per cent uplift.

[23]In reply, CFL offered to pay costs on a 2B basis simpliciter, in the sum of

$45,269. It rejected 2C costs for the list of documents; costs associated with the appearance of second counsel, and any uplift for increased costs.

[24]Both parties then filed memoranda.

[25]The liquidators now seek a total of $84,188, for costs and disbursements, as

follows:
Scale costs	$55,304.00
50 per cent uplift	$27,652.00
Disbursements	$ 1,232.00
TOTAL	$84,188.00

[26]   No allowance is now sought for second counsel, but the amount sought on a 2C basis for the list of documents, has increased from $11,150 to $15,610 (being from five to seven days). Hence there is an overall increase from their earlier claim.

[27]   The remaining points of contention are whether 2C costs should be awarded for the list of documents step, and the 50 per cent uplift.

Costs for list of documents – 2B or 2C?

[28]   The liquidators say that band C should apply to preparation of the liquidators’ list of documents, supplementary list of documents and ancillary issues. They say the scope of discovery sought by CFL at the first case management conference was significant. The documents sought in CFL’s memorandum were as follows:

(a)Documents particularising the funds received by the liquidators from any sources available for use in the reckless trading proceeding;

(b)Documents relating to negotiations with third parties for the purposes of seeking funding for the reckless trading proceeding;

(c)Litigation files in relation to the conduct of the reckless trading proceeding;

(d)Documents concerning the funds which the liquidators personally provided towards the investigations and legal proceedings for the reckless trading proceeding;

(e)All other relevant documents.

[29]   Associate Judge Bell, in a Minute dated 22 March 2017, ordered standard discovery, but also directed that the parties have regard to the discovery items referred to in the memoranda for the conference.

[30]   To obtain band C costs for preparation of the list of documents, the liquidators need to establish that a comparatively large amount of time for that step is reasonable in terms of r 14.5(2)(c). (The liquidators did not refer to the rule in their submissions.)

[31]   I do not agree that the liquidators needed to spend a comparatively large amount of time for this particular step, or that if they did, they should receive materially increased costs as a result.

[32]   Although they say the actual time spent was approximately 40 hours, it is not clear what that involves. The liquidators refer, in addition to the lists of documents, to “ancillary issues”. Some of the time spent they brought on themselves, as I detail below. Further, although 40 hours is more than the two-and-a-half days allowed under band B, it is materially less than the seven days now claimed under band C.

[33]   The liquidators submit they had to spend extra time because CFL’s approach to discovery was unreasonable. Viewed overall, I do not agree. This point is relevant

both to this claim, but also to the liquidators’ claim for a 50 per cent uplift in reliance on CFL’s approach to discovery. In some respects, I agree that CFL’s approach was unreasonable, (for example, in relation to ongoing requests for documents relating to receipt of funds from the Ministry of Economic Development). However, as I recorded in my judgment, and the Court of Appeal agreed, in some aspects of their earlier conduct, the liquidators did not act in accordance with best practice, including in implementation of the funding agreement, and failing to keep CFL informed, as they had contracted to do under the agreement.12 This would have heightened CFL’s view of the extent of documents required. In addition, the liquidators’ briefs of evidence were, in a number of respects, contrary to their earlier correspondence with CFL. Furthermore, CFL had to engage in ongoing requests to obtain discovery, which did lead to the liquidators providing additional documents. I particularly note that during the hearing before me, the liquidators were still in a number of respects correcting or changing their evidence, and providing additional documents.

[34]   Overall, I do not consider that, even if a comparatively large amount of time was involved, additional costs would be reasonable.

[35]   The costs fixed for preparation of the list of documents are therefore to be on a band B basis, being for 2.5 days at the applicable daily recovery rate of $2,230, totalling $5,575, rather than $15,610, as sought by the liquidators.

[36]   Total costs on a 2B basis therefore come to $45,269, rather than the scale costs claimed by the liquidators of $55,304. The sum of $45,269 is the sum CFL offered, and maintained in written submissions.

Increased costs

[37]   The liquidators also seek increased costs under r 14.6 of the High Court Rules 2016.

12     Commercial Factors Ltd v Meltzer [2018] NZCA 505 at [34] and [73].

(i)Rule 14.6(3)(b)(ii) unnecessary step

[38]   The first argument put forward by the liquidators is under r 14.6(3)(b)(ii), on the basis that CFL has contributed unnecessarily to the time required by the liquidators in the proceeding, by pursuing an unnecessary step (or an argument that lacks merit). That step is said to be in relation to CFL’s approach to discovery.

[39]   The argument concerning CFL’s approach to discovery has been canvassed above. I do not intend to repeat it here. Suffice to say that I will not be awarding increased costs on the basis that CFL’s approach to discovery was unreasonable.

(ii)Rule 14.6(3)(b)(v) – failure to accept offer

[40]   The second ground on which the liquidators seek increased costs, is on the basis of two Calderbank offers made by them to CFL on 8 May 2017 and 24 May 2017, seeking to settle the proceedings by paying to CFL an amount of money.

[41]   Though not expressly stated by the liquidators, this is clearly an application under r 14.6(3)(b)(v), which states that a Court may order increased costs if the party opposing costs has failed, without reasonable justification, to accept an offer of settlement.

[42]   On 8 May 2017, the liquidators offered to pay CFL $67,500, plus costs on a 2B basis up to that point in the proceeding, (which the liquidators calculated at

$10,927).

[43]This was rejected in a counter offer by CFL, on 19 May 2017, where it sought

$225,000.

[44]The liquidators, in response, increased their offer by letter of 24 May 2017 to

$100,000, costs included. No response was received in relation to this offer.

[45]   CFL argues that this is not an appropriate case for an uplift of costs. It submits that although it ultimately failed, it did succeed in relation to my finding under

cl 3.2.2,13 and only narrowly lost at the post by my further finding that the liquidators acted in good faith.

[46]   CFL also argues that it had reasonable justification in refusing the offers because:

(a)The first offer of $67,500 plus costs was not made until the case had been in progress for almost one year, and most of the work required for trial had already taken place. The trial was due to start on 24 July 2017. It says such an offer would have been reasonable before the case had reached such a late stage. It points to its own offer in December 2015 to settle the litigation for the sum of $60,000 (plus GST) only, which the liquidators did not accept or counter.

(b)The second offer of $100,000 inclusive of costs was in similar circumstances to the first offer.

[47]   CFL also submits that it had a sound basis for considering that cl 3.4 of the agreement was triggered by the re-payment of the inter-company advances back to Blue Chip, because correspondence from the liquidators indicated they considered that cl 3.4 was triggered, but thought (wrongly) they could pay legal fees and themselves first.

[48]   CFL also submits that the judgment of Associate Judge Bell, refusing to strike out the claim or issue summary judgment to the defendants, encouraged it to continue with the claim.14

[49]   Finally, CFL says that, if I consider there should be increased costs, the increase could only be justified from 8 May 2017, when the first offer was made.

[50]   I now turn briefly to the relevant principles to be considered when an application for increased costs is made on the basis of rejected Calderbank offers.

13     This point was made prior to the Court of Appeal judgment.

14     Commercial Factors Ltd v Meltzer [2017] NZHC 30.

[51]   In Bluestar Print Group (NZ) Ltd v Mitchell, the Court of Appeal said the following:15

It has been repeatedly emphasised that the scarce resources of the Court should not be burdened by litigants who choose to reject reasonable settlement offers, proceed with litigation and then fail to achieve any more than was previously offered.

[52]   As noted above, r 14.6(3)(b)(v) refers to a party failing, without reasonable justification, to accept an offer of settlement. The analysis undertaken by Priestley J in NZ Sports Merchandising Ltd v DSL Logistics Ltd, suggests that the question of whether or not it was reasonable to refuse a Calderbank offer should be assessed at the time of the rejection, not against the subsequent result.16

[53]   In Weaver v HML Nominees Ltd, Katz J listed a number of matters she considered relevant when assessing whether increased costs should be awarded against a party who has refused a Calderbank offer, including consideration of the reasonable expectations of the party that refused the offer and whether they were in a position to assess the merits when the offer was received .17 Those two matters in particular, also support the contention that whether or not it was reasonable to refuse a Calderbank offer should be assessed at the time of the rejection.

[54]   In Weaver, prior to trial the unsuccessful defendant had made a Calderbank offer to the plaintiffs of almost the entire amount claimed by the plaintiffs, less interest and costs. The plaintiffs were successful at trial, but for roughly half of what they had claimed in damages, and had been offered in settlement. In her costs decision, Katz J awarded costs to the unsuccessful defendant on the basis of scale, plus a 50 per cent uplift for increased costs under r 14.6(3)(b)(v), running from the date that the Calderbank offer had been made to the plaintiffs.18 For the period prior to the Calderbank offer, costs were left to lie where they fell.

15     Bluestar Print Group (NZ) Ltd v Mitchell [2010] NZCA 385 at [20].

16     NZ Sports Merchandising Ltd v DSL Logistics Ltd HC Auckland CIV-2009-404-5548, 19 August 2010 at [36].

17     Weaver v HML Nominees Ltd [2016] NZHC 473 at [30].

18 At [34].

[55]   The Court of Appeal upheld Katz J’s award of increased costs to the defendant.19 The Court of Appeal considered that the offer was a reasonable offer when weighed against the always real possibility of less than complete success, and that this remained the case even though the plaintiffs had then genuinely considered their case to be stronger than it ultimately turned out to be.20 Additionally, the Court of Appeal held that the plaintiffs had acted unreasonably in refusing to engage with the offers put to them by the defendant.21

[56]   Turning to the facts of the present case, I consider that an uplift for increased costs should be allowed on the basis of the Calderbank offers. These offers were refused without reasonable justification, both in the context of what CFL could have reasonably hoped to have achieved at the time the offers were made to it, and on the basis of the ultimate outcome of the litigation. This is particularly so in the case of the second offer.

[57]   I do not agree with CFL’s interpretation of the liquidators’ earlier correspondence in terms of cl 3.4. In any event, the focus is on the Court’s likely interpretation, not the liquidators’.  Although Associate Judge Bell considered that  cl 3.4 arguably applied, as I noted in my judgment, he did not have to grapple with whether the liquidators had acted in good faith or not, which was a major hurdle for CFL. Also, CFL had to appreciate that the plain wording of cl 3.4 did not support its case. Any reasonable party in its position would have had to hold at least some scepticism as to the potential for success under cl 3.4.

[58]   Given the Court of Appeal’s finding in relation to cl 3.2.2, it can no longer be argued by CFL that it was successful in terms of repayment having been triggered.

[59]   In any event, the key and overriding point in the case was the requirement for CFL to prove that the liquidators had failed to act in good faith in order to sheet home personal liability. CFL lost on that point in both Courts.

19     Weaver v Auckland Council [2017] NZCA 330.

20 At [35].

21 At [37].

[60]   Also, CFL does not appear to have genuinely engaged with the offers put to it. It only responded to the first offer and the amount it then sought was $225,000, which included a significant allowance for interest, and was, in my view, uncompromising. (I note that CFL had much earlier offered to accept $60,000, and would have felt frustrated on that account by the much later offer of a similar amount by the liquidators, but I do not consider the earlier offer is material here.)

[61]   The offers were made at least two months in advance of trial, by which point both parties should have been in a good position to weigh the risks of proceeding to trial. The offers were not so close to trial that it would have been reasonable to reject them.22 I therefore consider that an order for an uplift of costs is justified.

[62]   The majority of the costs (whether looked at on a scale or actual basis) would have been incurred after the 8 May 2017 Calderbank offer, and even after the 24 May 2017 offer.

[63]Weighing up all factors, I consider a 50 per cent uplift on scale to be reasonable.

[64]That brings the total costs to $67,903.50.

Orders

[65]CFL is to pay the liquidators’ costs in the sum of $67,903.50.

[66]CFL is to pay the liquidators’ disbursements in the sum of $1,231.99.

----------------------------------------------

Hinton J

22     Loktronic Industries Ltd v Diver [2014] NZHC 1189 at [14].