Cetinkaya v Official Trustee in Bankruptcy

JUDGE: BROMBERG J DATE: 13 june 2012 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 There is only one issue that remains in this appeal and that is the question of who should pay its costs, in circumstances where the continuance of the appeal has become futile and has therefore been discontinued. For the following reasons, I have determined that no order as to costs should be made.

background 2 This proceeding is an appeal from the judgment of a Federal Magistrate published as Cetinkaya v Official Trustee in Bankruptcy [2011] FMCA 288. Each of the appellants ("the Cetinkayas") became bankrupt on 14 October 1997 on their own petition. The Cetinkayas made an application pursuant to s 178 of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act") for the Federal Magistrates Court to review the conduct of the first respondent ("the Official Trustee") who is the trustee of their bankrupt estates. Relevantly, s 178 empowers a bankrupt "affected by an act, omission or decision of the trustee" to apply for "such order as the court thinks just and equitable". 3 By their application in the Federal Magistrates Court, the Cetinkayas contested what they alleged was the Official Trustee's refusal to determine whether a proceeding commenced by them on 11 December 2008 against the second respondent ("Unal") in the County Court of Victoria ("the County Court claim"), should be assigned by the Official Trustee to the Cetinkayas. Recognising that s 58 of the Bankruptcy Act had the effect of vesting the chose in action arising from the County Court claim in the Official Trustee and desiring to proceed with that claim, the Cetinkayas had sought that the Official Trustee assign the County Court claim to them. By their application to the Federal Magistrates Court, the Cetinkayas also sought an order that the Official Trustee be restrained from assigning the County Court claim to Unal. Those orders were sought in the context of the Official Trustee having decided that it was prepared to assign the County Court claim and was entertaining offers from both the Cetinkayas and Unal. 4 The Federal Magistrate dismissed the Cetinkayas' application. Firstly, on the basis that it was out of time, and secondly, that there had been no refusal by the Official Trustee to determine whether or not to assign the County Court claim to the Cetinkayas. 5 When the appeal came on for hearing, it became apparent that the real controversy between the parties (at that time) was whether the County Court claim ought be assigned by the Official Trustee to the Cetinkayas, or instead, to Unal and the terms of any such assignment. It also became apparent that the Official Trustee was willing to consider afresh and determine any competing proposals for an assignment and make a decision as to whether or not to assign the County Court claim to either the Cetinkayas or to Unal. 6 In light of the Official Trustee's position that the conduct of the proceeding below, and of the appeal, had contributed to the Official Trustee not making a decision as to an assignment, and with the general consensus of the parties, I adjourned the appeal in order to allow the Trustee to consider any further offers and determine to whom it would assign the County Court claim. That seemed to me (at that time and on the limited understanding I then had about the nature of the County Court claim) to be a course which held out some prospect of a resolution of the real issue then in controversy. If no resolution was achieved, that course was also intended to facilitate any review which may have been sought by either the Cetinkayas or Unal of the anticipated decision of the Official Trustee. I regarded such a review a preferable course, to the course in which the parties were then engaged of devoting time and expense, through the further conduct of the appeal, to the far less useful question of whether or not the Official Trustee had earlier refused to make a decision. 7 As sometimes happens, what was anticipated has not eventuated. The Official Trustee has now determined that it would not entertain any offer from either the Cetinkayas or Unal for an assignment of the County Court claim. 8 In or about December 2011, the Official Trustee retained new solicitors to act on its behalf. On 23 December 2011, those solicitors advised the solicitors for the Cetinkayas and for Unal that, in considering their respective offers, the Official Trustee had determined that further information was required by it concerning the County Court claim. The correspondence advised that the Official Trustee would issue written notices pursuant to s 77C of the Bankruptcy Act for the provision of additional information. 9 By further correspondence of 27 February 2012 (some detail of which I will return to later), the Official Trustee advised that it rejected the offers for an assignment made by each of the Cetinkayas and Unal and that the Official Trustee would not be entertaining any further offers. The Official Trustee advised that it sought to investigate and possibly examine under oath both the Cetinkayas and Unal in relation to the transfer from the Cetinkayas to Unal of a property in Brunswick ("the Brunswick property"). The ownership of that property is the subject matter of the County Court claim. The letter advised that, subject to those investigations, the Official Trustee anticipated that proceedings under s 121 of the Bankruptcy Act would be instituted by the Official Trustee to recover the Brunswick property, on the likely basis that the transfer of the property was made by the Cetinkayas to Unal to prevent it being available in their bankruptcy and that Unal knew, or could reasonably have inferred, the purpose of the transfer. 10 As noted by the Official Trustee's solicitors in their earlier correspondence of 23 December 2011, by their statement of claim in the County Court claim, the Cetinkayas sought to set aside the transfer of the Brunswick property to Unal, on the grounds that the transfer was: (a) forged; or (b) signed under a mistaken belief; or (c) executed on the basis of a fraudulent misrepresentation by Unal that the property was to have been transferred to a family trust for the benefit of the Cetinkayas for the express purpose of keeping it out of the hands of their creditors in the event of their bankruptcy. 11 The statement of claim alleges that Unal was, at the relevant time, an accountant from whom the Cetinkayas had sought financial advice. The correspondence from the solicitors for the Official Trustee of 27 February 2012 advised that, given the position of the Official Trustee, there appeared no valid reason for the Cetinkayas to continue the appeal. It was suggested that the parties agree to discontinue the appeal and have the question of costs reserved until the completion of the Official Trustee's investigations and the outcome of the foreshadowed s 121 proceeding. 12 On 20 March 2012, the Court made orders by consent including that the Cetinkayas either file and serve a notice of discontinuance or alternatively advise the respondents in writing by 23 March 2012 that they intended to proceed with their appeal. The orders contemplated that (if the appeal was to be discontinued) any application for costs be filed and served by 19 April 2012. On 23 March 2012, the Cetinkayas filed a notice of discontinuance of the appeal stating that the discontinuance was pursuant to and in accordance with the consent orders to which I have just referred. 13 Following the exchange of written submissions and affidavits, the hearing resumed on 3 May 2012 for the purpose of the Court determining the competing applications for costs orders. The Cetinkayas sought an order that the Official Trustee pay their costs of the appeal and also their costs of the proceedings before the Federal Magistrate. Further and alternatively, they sought an order that the Official Trustee indemnify them against any adverse cost orders made in favour of Unal. Unal sought an order that the Official Trustee pay his costs of the appeal and those of the Federal Magistrates Court proceedings on an indemnity basis. In addition, Unal sought that his costs of the appeal be paid by the Cetinkayas. He contended that course to be appropriate on the basis that liability for adverse cost orders against the Official Trustee and the Cetinkayas would operate jointly and severally. The Official Trustee contended that the Cetinkayas should pay its costs and stated that it is prepared to agree to a further order that enforcement of the cost order against the Cetinkayas be deferred until the conclusion of the Official Trustee's foreshadowed investigation and any proceedings instituted as a result. The Official Trustee further contended that if, contrary to its submission, the Court was minded to make any adverse cost orders against the Official Trustee, such costs should be ordered to be paid out of the Cetinkayas' bankrupt estates.

relevant legal principles 14 Section 43 of the Federal Court of Australia Act 1976 (Cth) confers a wide and unfettered discretion upon the Court to award costs. That discretion is to be exercised judicially and not against a successful party, except for some reason in connection with the case: Ruddock v Vadarlis (No 2) [2001] 115 FCR 229 at [9] (Black CJ and French J). The costs of an appeal, like those at first instance, are at the discretion of the appellate court. The discretion enables the Court to respond to a wide range of circumstances: Ruddock at [16]. 15 The Federal Court Rules 2011 ("the Rules") make provision for the award of costs where proceedings are discontinued. Rule 26.12 provides that a party claiming relief may discontinue a proceeding by filing a notice of discontinuance. Rule 26.12(2) specifies when leave of the Court to discontinue may be required and, in the particular circumstances there identified, a notice of discontinuance may variously be filed either without the leave of the Court, with the opposing party's consent or with the leave of the Court at any time. Rule 26.12(7) states: Unless the terms of a consent or an order of the Court provide otherwise, a party who files a notice of discontinuance under subrule (2) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued. 16 The Rules contain a specific rule dealing with the discontinuance of an appeal. Rule 36.73 permits an appellant to discontinue an appeal by filing a notice of discontinuance. That may be done without the Court's leave at any time before the hearing of the appeal or, with the Court's leave, at the hearing or after the hearing and before judgment is pronounced. Rule 36.73(4) provides: An appellant who files a notice under subrule (1) must, unless the parties otherwise agree, pay the costs of each respondent. 17 Unlike r 26.12(7), which provides for a capacity for the Court to otherwise order, r 36.73(4) contains no such facility. However, I do not consider that r 36.73(4) was intended to foreclose the exercise of the Court's discretion as to costs, where the leave of the Court to discontinue an appeal is required. In relation to the predecessor provision to r 36.73(4) Lee, Tamberlin and RD Nicholson JJ in Mineralogy Pty Ltd v National Native Title Tribunal & Ors [1998] FCA 1700 at 7, reasoned that where an appellant sought leave to discontinue an appeal, the question of costs fell to be considered in accordance with the Court's discretion. In Christodoulou v Disney Enterprises Inc [2006] FCA 902 at [4], Heerey J similarly observed in relation to the predecessor provision to r 36.73(4), that the Court nevertheless has a broad discretion conferred by s 43 of the Federal Court Act to make some other order as to costs. 18 There are well established principles developed by the authorities to guide the Court in the exercise of its discretion to award costs in the event where there has been no hearing on the merits and a proceeding is discontinued. 19 As, McHugh J observed in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625: In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. … Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried…But such cases are likely to be rare. If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases [footnotes omitted]. 20 In the context of the discontinuance of an appeal, the Full Court in Mineralogy accepted the test enunciated by McHugh J as the appropriate test to apply. That test has been frequently applied in relation to the discontinuance of a proceeding. The relevant authorities are helpfully collected by Greenwood J in Akiba and Another v Queensland (2010) 184 FCR 406 at [83] - [96] and also by Kenny J in Ann Street Mezzanine Pty Ltd v KPMG [2011] FCA 453 at [24]-[29]. The many authorities there considered may be supplemented by the Full Court's judgment in Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd (2010) 265 ALR 112 at [118]. 21 The guiding principles are firm in their resolve that where parties wish to end the litigation, the Court will facilitate that course. The Court will not conduct a hypothetical trial to assess the merits of the substantive application before it, for the purpose of determining who should bear the costs. Commonly, a discontinuance will result in no order as to costs so that each party will bear its own costs. Whilst it has been suggested that "special circumstances" may be required to be demonstrated to avoid such a result, the better view is that the imposition of that qualification would be an overly strict approach. 22 Where the further prosecution of a proceeding has become futile, there are two well recognised reasons for the making of adverse costs orders, each of which is referred to by McHugh J in Lai Qin. 23 The first is where the judge is confident that one party was "almost certain" to have succeeded. A discontinuance amounting to an effective surrender by the applicant provides an obvious example of where an adverse costs order against an applicant will be made. But as McHugh J emphasised, reaching the requisite level of confidence as to the apparent certainty that one party will have won, is "likely to be rare". 24 The second category relates to cases where one of the parties has acted "so unreasonably" that the other party should obtain the costs of the action. The unreasonableness of the conduct of a party may be examined by reference to the commencement of, and the conduct of, the proceeding.

CONSIDERATION 25 In this case, the consent orders made on 20 March 2012 impliedly granted to the Cetinkayas leave to withdraw should they choose to do so by 23 March 2011 and effectively reserved the question of costs if they did. In that context, the strict application of r 36.73(4) would result in injustice. If it had been necessary, I would have utilised r 1.34 to dispense with the requirement imposed by that sub-rule. However, as I have earlier observed, despite the terms of r 36.73(4), the question of costs falls to be considered in accordance with the Court's discretion. 26 Turning then to the question of how the Court's discretion should be exercised, it is apparent that this is a case where the prosecution of the proceeding has become futile. No party seeks the continuance of this appeal. It is clear that, in the context of the Official Trustee's position that it will not assign the County Court claim, the continuance of the appeal has been rendered futile. No party suggested a different conclusion and each may be taken to have agreed that discontinuance was the only sensible course. 27 This is not a case of the Cetinkayas surrendering their claim for relief. Nor am I able to confidently say that their appeal would have failed. In those circumstances, I should next consider whether a costs order may be supported by reason of the unreasonable conduct of one or more of the parties. 28 Unal's claim for Cetinkaya to pay its costs is based upon the operation of r 36.73(4). For reasons already explained, I do not consider that the question of costs should be resolved by the operation of that rule. No criticism is made by Unal of the conduct of the Cetinkayas in commencing the proceeding or in its conduct. 29 The Official Trustee has criticised the Cetinkayas for the commencement of both the proceeding below and the appeal. No basis is given for the contention that the proceeding lacks legal foundation and was incompetent and no such basis is apparent. I am not satisfied that the appeal was unreasonably commenced, and there is no allegation that the Cetinkayas have acted unreasonably in the conduct of the appeal, including by affecting its discontinuance. 30 There is therefore no basis for an order that the Cetinkayas pay the costs of the appeal incurred by either Unal or the Official Trustee. 31 The basis for the application of both the Cetinkayas and Unal, that the Official Trustee pay their costs, is the Official Trustee's change of position. They say that they were induced to commence and/or participate in the proceeding by the initial course embarked upon by the Official Trustee, that it would consider an assignment to one or other of them and, by inference, that the Official Trustee did not intend to pursue proceedings pursuant to s 121 of the Bankruptcy Act in relation to the Brunswick property. 32 Whilst not expressed in terms of unreasonable conduct, the contentions made against the Official Trustee effectively amount to an allegation of unreasonableness. To some extent the Official Trustee has sought to defend its position by alleging an earlier failure on the part of the Cetinkayas and Unal to provide it with sufficient information to determine the proper course it should pursue. I reject that contention. I am satisfied that there was sufficient information available to the Official Trustee, well before the proceeding in the Federal Magistrates Court was instituted, for it to have come to the same view it now has as to the proper course it should take in relation to the Brunswick property. 33 In my view, the changed course now taken by the Official Trustee is the result of a belated recognition by the Official Trustee that the previous course pursued by it was wrong. That is made abundantly clear in the letter of 27 February 2012 to the solicitors for the Cetinkayas and for Unal, where the solicitors for the Official Trustee stated: We now advise both parties that the Official Trustee will not be entertaining any offer by either party to assign the chose in action arising from the County Court proceedings. In circumstances where there appears to have been serious breaches of the Act, it is not appropriate for the Official Trustee as both a statutory officer and officer of the Court to entertain negotiations with parties who may have committed those breaches. Any further application by either party seeking to force an assignment of the cause of action will be resisted on this basis. 34 The Official Trustee's changed position is not unreasonable. Far from it, the position now taken by the Official Trustee appears to be the proper course for the Official Trustee to have taken. What may be regarded as unreasonable, is the failure of the Official Trustee to have taken that course from the outset, when it first became aware of the County Court claim. But neither the Cetinkayas nor Unal have contended that it was unreasonable for the Official Trustee to treat with them in relation to an assignment of the County Court claim. Both actively encouraged the Official Trustee to do so and continued to actively encourage the Official Trustee right up until the Official Trustee's decision to change course. 35 There can be no doubt that the legal controversy which has led to this appeal would never have eventuated if the Official Trustee had not embarked upon its initial course of negotiating an assignment of the County Court claim. But it does not follow that the Official Trustee should therefore be ordered to pay the costs of the appeal. 36 If the Official Trustee has acted unreasonably at the outset of or in the course of the litigation, it has only done so by reason of the fact that it maintained a preparedness to negotiate for an assignment of the County Court claim. However, in circumstances where the Cetinkayas and Unal encouraged that course and sought to take the benefit of it right up to the time of the Official Trustee's change of position, I would not exercise the Court's discretion in their favour. The costs incurred in a legal proceeding which arose out of a dubious course of action, for which each of the the Official Trustee, the Cetinkayas and Unal bear some responsibility, should stand where they fall. 37 The appropriate order in relation to the costs of the appeal is that there be no order as to costs. 38 Both the Cetinkayas and Unal further contended that the Court should reverse the costs order made by the Federal Magistrate and make an order that their costs of the proceeding before the Federal Magistrates Court be paid by the Official Trustee. The capacity of the Court to make such an order, in the absence of a finding of error in the judgment below, was not identified. In any event, even if I had been satisfied that I could make such an order, I would not have made a costs order in favour of the Cetinkayas and Unal for the same reasons as I declined to do so in relation to the costs of the appeal. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bromberg.