Drake v Wood Marshall Williams Solicitors

Supreme Court of NSW|2015-06-10

Judgment

HER HONOUR: By notice of motion filed 20 May 2015, the defendants seek orders that the amended statement of claim filed 30 March 2015 filed be dismissed pursuant to rule 13.4 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), or alternatively, that the amended statement of claim be struck out pursuant to UCPR 14.28.
The plaintiffs are Lawrence Drake and Judith Drake ("the Drakes"). The Drakes appeared in court and their son Christopher Drake spoke on their behalf. The defendants are Neal Marshall and Charles Parisi ("the solicitors"). The Drakes relied upon the affidavits of Lawrence Drake sworn 14 May 2015 and 21 July 2015 and the affidavit of Christopher Paul Drake filed 29 July 2015. The solicitors relied on the affidavit of Malcolm John Cameron dated 19 May 2015 and the affidavit of Morgan Bedford Moroney sworn 28 July 2015
The solicitors' motion in these proceedings was heard with the defendant's motion in 2014/370202 Drake v Wight & Strickland Lawyers. The defendant in those proceedings is Wight & Strickland Lawyers.
On 10 June 2015, the motions came on before me for hearing. The Drakes sought an adjournment on the basis that they were not legally represented and wanted an opportunity to seek whether the trustee in bankruptcy would "revest the Drakes' right of action to them". An adjournment was granted. On 29 July 2015, the notices of motion were heard.

Background

For the purposes of this application only, I have taken the Drakes' case at its highest and I will take what they have pleaded as being correct.
The solicitors are legal practitioners who, at the relevant time, practised at the firm Wood Marshall Williams Solicitors ("Wood Marshall Williams").
On 17 December 2014, the Drakes filed a statement of claim against the solicitors.
On 30 March 2015, pursuant to leave granted by the Court, the Drakes filed an amended statement of claim (ASC).
The Drakes' claim against the solicitors arises from the solicitors allegedly acting for the Drakes in a transaction that settled on 4 February 2008. That transaction is said to involve a transfer of property from Armond Shoostovian ("Mr Shoostovian") to the Drakes.
The ASC contains the following allegations: (i) In January and February 2008 the solicitors acted for Mr Shoostavian, a director of AS Group Nominees Pty Ltd and the owner of a property at Rouse Hill, in connection with the discharge of mortgage on that property and its transfer to the Drakes. (ii) The solicitors also acted for the Drakes in the transaction. (iii) The purchase price for the property, $378,623.19, was provided by Ms Dorothy Badman ("Ms Badman"). These funds were used for the discharge of mortgage by the vendor and the payment of fees associated with the transaction. (iv) The solicitors were aware that Ms Badman and the Drakes were not "independently legally represented". (v) The solicitors knew, or ought to have known, that the transaction was "illegal" and that there was a risk it would cause harm to the parties involved, particularly the Drakes. (vi) The solicitors were negligent in failing to advise and require both the Drakes and Ms Badman to obtain independent legal advice. (vii) Ms Badman subsequently issued proceedings in the Supreme Court, which culminated in the transaction being overturned, in the judgment of Young CJ in Eq, Badman v Drake [2008] NSWSC 1366. (viii) The overturning of the transaction caused a direct financial loss to the Drakes.

Badman v Drake

The judgment of Young CJ in Eq in Badman indicates that the vendor was AS Group Nominees Pty Ltd. Wood Marshall Williams acted for this company.
On 19 December 2008, Young CJ in Eq held that the transaction should be set aside due to equitable fraud and undue influence. His Honour determined that the appropriate order was that the Drakes pay equitable compensation to Ms Badman in the sum of $378,623.19 plus interest.
As noted above, the Drakes claim loss as a result of the judgment in Badman. The particulars of loss refer to the order for payment of $378,623.19. It is also alleged that had the solicitors required Ms Badman to obtain independent legal advice, the transaction would have either proceeded lawfully or not at all. In addition, the Drakes claim the legal costs associated with defending the Supreme Court proceedings.

Summary dismissal

UCPR 13.4(1) provides that the Court may dismiss proceedings generally, or in relation to any claim for relief, in three circumstances. These are, if the proceedings are frivolous or vexatious, if no reasonable cause of action is disclosed or if the proceedings are an abuse of the process of the court.
UCPR 14.28(1) provides that the Court may at any stage of the proceedings order that the whole or any part of a pleading be struck out if the pleading firstly, discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading, secondly, has a tendency to cause prejudice, embarrassment or delay in the proceedings, or thirdly, is otherwise an abuse of the process of the court.
UCPR 14.28(2) provides that the court may receive evidence on the hearing of an application for an order under subrule (1).
In O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71, the Court of Appeal applied the High Court decision of Spencer v Commonwealth [2010] HCA 28; (2010) 241 CLR 118. In Spencer, the High Court was concerned with s 31A(2) of the Federal Court Act 1976 (Cth), but the following principles are of general application (O'Brien at [3]): 1. On a summary judgment application, the real issue is whether there is an underlying cause of action or defence, not simply whether one is pleaded (at [23]). 2. The critical question can be expressed as whether there is more than a "fanciful" prospect of success (at [25]) per French CJ and Gummow J) or whether the outcome is so certain that it would be an abuse of the process of the court to allow the action to go forward (at [54] in the judgment of the plurality). Demonstration of the outcome of the litigation is required, not an assessment of the prospect of its success. 3. Powers to summarily terminate proceedings must be exercised with exceptional caution (French CJ at [55] and Gummow J at [24]).
See also General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125, in which Barwick CJ comments that a lack of a cause of action must be "clearly demonstrated" in terms that the case is untenable and cannot possibly succeed (at 128-129).
Recent decisions of this Court and the Court of Appeal demonstrate that the impact of s 56 of the Civil Procedure Act 2005 (NSW) is such as to expand the circumstances where an order for dismissal under UCPR 13.4 may be made.
In Simmons v Protective Commissioner of NSW [2012] NSWSC 455 at [28], Hammerschlag J expressed support for the proposition that the combination of the words in UCPR 13.4(1)(b) and s 56 of the Civil Procedure Act lead to a result that: "…it is not incumbent on an applicant under this particular rule to establish certainty of outcome, but rather that the applicable test is whether a defendant has demonstrated that a plaintiffs case has no reasonable prospects of success."
Simmons was subsequently cited by Ward J in McDonald v Grech; Bank of WA v McDonald [2012] NSWSC 717 at [32]-[33].
In Bott v Carter [2012] NSWCA 89, also a dismissal application involving a defence of advocate's immunity, Basten JA observed that while s 56 of the Civil Procedure Act may not reduce the conditions for the engagement of the power to dismiss proceedings under UCPR 13.4, it limits the circumstances in which the court, satisfied that the power is available, might be inclined to refuse relief on discretionary grounds (at [14]).

Bankruptcy

On 30 January 2009, the Drakes were declared bankrupt. On 31 January 2012, they were each discharged from bankruptcy. The Drakes have been discharged from bankruptcy for over three years.
Section 58 of the Bankruptcy Act 1966 (Cth) provides: "Vesting of property upon bankruptcy - general rule (1) Subject to this Act, where a debtor becomes a bankrupt: (a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and (b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee."
"Property" is defined in s 5 of the Bankruptcy Act as: "real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property".
Section 58 of the Bankruptcy Act provides that when a debtor becomes bankrupt, the property of the bankrupt vests forthwith in the trustee. The property includes any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt.
A bare right to sue in respect of alleged property and economic losses is property of the bankrupt which will vest in the trustee pursuant to s 58: see Campbell J in Kovarfi v BMT & Associates Pty Ltd (No 2) [2014] NSWSC 100 at [27]. The exceptions to s 58, as set out in s 116(2)(g) of the Bankruptcy Act, are not applicable to these current proceedings.
The issue as to whether a cause of action such as this divests from the trustee and revests in the (former) bankrupt was expressly considered by Campbell J in Kovarfi (No 2). Kovarfi (No 2) also involved an application to dismiss a statement of claim. In those proceedings, the plaintiffs became bankrupt in 2005 and were discharged from bankruptcy in 2008. They subsequently commenced proceedings in respect of losses allegedly suffered in 2004.
As stated by Campbell J in Kovarfi (No 2), the issue above was "settled beyond argument" by the decision of the Court of Appeal in Daemar v Industrial Commission of NSW (No 2) (1990) 22 NSWLR 178. In Kovarfi (No 2) at [35] his Honour continued: "[35] The next question then is whether, upon discharge from bankruptcy, the cause of action divested from the trustee and re-vested in the first and second plaintiffs. The answer to this question is settled beyond argument in New South Wales by the decision of the Court of Appeal in Daemar v Industrial Commission of New South Wales (No 2) (1990) 22 NSWLR 178. The judgment of Kirby P, as his Honour then was, Clarke JA and Meagher JA agreeing, depends upon the language of s 152 of the Act in particular. That provision is in the following terms: A discharged bankrupt must, even though discharged, give such assistance as the trustee reasonably requires in the realization and distribution of such of his or her property as is vested in the trustee. Having noted some differences of opinion in early English and Australian cases, Kirby P referred with approval to the decision of Needham J in Pegler v Dale (1975) 1 NSWLR 265 and said: [S 152], as Needham J pointed out, assumes that property vested in a trustee at the time of sequestration remains vested in that trustee, even after the discharge of the bankrupt. There is nothing in the section which specifically revests in the discharged bankrupt the property which was, by the sequestration order, vested in the trustee. That property includes shows as inaction, not only as Needham J construction is attentive to the language of section 152, it is appropriate to the scheme of the Bankruptcy Act. Under that act, it is the function of the trustee to gather in for the benefit of the creditors the property of the bankrupt at the time of sequestration. Save as exceptions provided by the act, such property is to be then available for distribution to the creditors. The property includes shows as an action. It thus includes the 'actions' which a bankrupt may have commenced at the time of the sequestration order. The act exempts certain personal actions. But for reasons which given at the original stay proceedings, the claimant's action against the Industrial Commission and Mr Sheath is not in that class."
Following the judgment in Daemar, Campbell J in Kovarfi (No 2) held that the cause of action did not divest upon discharge (at [40]): "[40] ...the proceedings brought by the first and second plaintiffs, whether depending upon a cause of action in negligence, under the Trade Practices Act, or one which may have been pleadable in fraud, are not competently commenced for the simple reason that if such an action arose on 27th October 2004, it vested in the trustee, by dint of s 58 of the Act, and remained vested in the trustee even after discharge by force of s 152 of the Act, according to the reasoning in Daemar."
On that basis, Campbell J ordered that the statement of claim in those proceedings be summarily dismissed.

The position of the Trustee

Christopher Drake and his father depose to a number of conversations and there are emails by Christopher Drake addressed to Mr Mark Marlow ("Mr Marlow") of Jones & Partners, the trustee in bankruptcy (Aff, Christopher Drake 29/7/15). There is also evidence of correspondence between Mr Marlow and the solicitor for Wight & Strickland (Aff, Morgan Moroney 28/7/15). As any assignment given by the trustee has to be in writing, I shall refer to what the trustee has said in writing.
On 27 July 2015 at 11.42 am, Mr Marlow emailed Christopher Drake and stated: "I refer to your recent enquiries regarding your parent's action (Lawrence & Judith Drake) against both Wight & Strickland & Wood Marshall Williams and your parents affidavit dated 20 July 2015. I note that the trustee does not grant permission as per your affidavit at paragraph 3. It is for the court to determine whether this action can proceed."
On 27 July 2015 at 12.09 pm, Mr Marlow emailed Christopher Drake in the following terms: "I refute that any such permission was ever given I do note we had some discussions in regards to your parents request and any conclusion was left open pending further review."
On 27 July 2015 at 1.24 pm, Mr Marlow emailed Christopher Drake as follows: "I make no further comment other than to say I have taken advice on behalf of the trustee and non-response is not approval."
On 27 July 2015, Ms Moroney, the solicitor for Wight & Strickland, wrote to Mr Marlow stating: "… we would be grateful if you would: (a) confirm that you have given your permission to Mr and Mrs Drake for them to pursue the actions; (b) advise whether or not any further arrangements have been made between you and Mr and Mrs Drake in relation to the actions (including whether or not you have assigned any rights to Mr and Mrs Drake); (c) provide copies of any communications (including any agreements or transactional documents) between you and Mr or Mrs Drake in relation to the proceedings (limited to documents created in 2015). …"
On 27 July 2015 at 11.32 am, Mr Marlow replied to Ms Moroney: "I refer to your letter dated 27 July 2015 and note the following A) The trustee had not granted permission for the bankrupts to pursue the actions B) No rights or other arrangements have been made C) Unsure of what this means noting no written arrangements have been entered into with the plaintiffs."
From this correspondence it is clear that the trustee has not assigned this cause of action or show in action to the Drakes. Any cause of action remains vested in the trustee.
However, the Drakes submitted that the trustee has denied them the right to appeal or otherwise review the decision, despite their requests, and that in that manner, the trustee divested himself of the specific property of the Drakes that he had been vested with, being a claim against the solicitors. Therefore, the Drakes say that the general proposition that the property vested in the trustee and remained with him does not apply in this case. They submitted that the case ought to be differentiated from the authorities referred to by the solicitors.
In support of this proposition, the Drakes referred to Ersh v The Greek Orthodox Parish and Community of Burwood and District Saint Nectarios Limited [2015] NSWSC 331. Ersh was an appeal from a decision of a Local Court Magistrate. In those proceedings, it was common ground that on 18 October 2005, Ms Ersh was declared bankrupt. She was discharged from bankruptcy on 18 October 2008. She had not disclosed to the trustee the debt said to be owed by her to the Greek Orthodox Parish and Community of Burwood and District Saint Nectarios Limited ("the Greek Orthodox Parish"). On 14 February 2014, the trustee subrogated and assigned the debt to Ms Ersh for the purposes of authorising her absolutely to continue on in taking any and all such recovery action or proceedings with respect to the amount against the Greek Orthodox Church as she deemed fit.
The Drakes submitted that in these current proceedings, consent operates in the same way as a rejected vested interest would, in the sense that the interest is returned to them. I do not agree. In these current proceedings, unlike what occurred in Ersh, the trustee has not assigned the cause of action to them.
The Drakes also drew this Court's attention to Windsurf Holdings Pty Ltd v Leonard; Carlson v Leonard; Wyvill v Leonard [2009] NSWCA 6. That was an appeal from a decision I made in relation to applications to extend limitation periods pursuant to the Limitation of Actions Act 1974 (Qld). In the appeal, counsel for the plaintiffs submitted at [73]: "[73] The notice of contention filed on behalf of Ms Leonard covered a second argument relied on by Mr Butcher. He submitted that if Ms Leonard had failed to file a statement of claim in accordance with the requirements of the UCPR, the failure was to be treated as an "irregularity" under s 63(2)(a) of the Civil Procedure Act. The effect of s 63(2)(b), so Mr Butcher argued, was that any such irregularity did not invalidate the step taken. He contended that the Court should order that Ms Leonard's application to join Windsurf and Mr Wyvill be treated as the commencement of proceedings against them."
This argument was rejected by the Court of Appeal (at [24] and [114]). Hence, s 63 of the Civil Procedure Act does not overcome the lack of assignment of the cause of action by the trustee.
The Drakes also referred to s 56 of the Limitation Act 1969 (NSW) and ss 56 and 58 of the Civil Procedure Act as a means of overcoming s 58 of the Bankruptcy Act. Section 56 of the Limitation Act concerns an action based on mistake rather than a "mistake" made in the commencement of proceedings. Sections 56 and 58 of the Civil Procedure Act also do not assist the Drakes to overcome their bankruptcy problem.
It is my view that the right to sue the solicitors for damages in negligence vested in the trustee in bankruptcy. On discharge from bankruptcy, that right did not divest from the trustee and revest in the Drakes. There has been no assignment by the trustee of the cause of action. The Drakes' current pleading is incompetent.
This is not a matter where I would exercise my discretion to permit the Drakes to replead their claim, because the flaw is a fatal one. It cannot be overcome by a repleading of the ASC. As these current proceedings have not been competently commenced they are dismissed.
Costs are discretionary. Costs usually follow the event. The plaintiffs are to pay the defendant's costs of the proceedings. The Court orders that: (1) The amended statement of claim filed 30 March 2015 is dismissed. (2) The proceedings are dismissed. (3) The plaintiffs are to pay the defendant's costs of the proceedings on an ordinary basis as agreed or assessed.

Amendments 01 September 2015 - Coversheet - Added defendants as parties DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 September 2015

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