In the application of Harris Freidman Pty Limited [2014] NSWSC 511

The Federal Court proceedings 4The background to these proceedings is as follows. 5Two Arizona limited partnerships, Australian Equity Investors ("AEI") and 258 Nest ("258 Nest"), commenced proceedings in the Federal Court of Australia against Colliers International (NSW) Pty Limited ("Colliers"). They alleged that Colliers had engaged in misleading and deceptive conduct contrary to ss 52 and 52A of the Trade Practices Act 1974 (Cth) in relation to a parcel of land in Crows Nest. 6The proceedings were the subject of partial determination by a judge of the Federal Court of Australia. AEI and 258 Nest were successful in persuading that court on a preliminary issue that Colliers had engaged in the misleading and deceptive conduct that had been alleged. 7In the way that the matter proceeded, the Federal Court did not get to the point of having to determine all of the other issues in the case. In anticipation of the determination of those other issues an order was made for the provision of security for costs by AEI and 258 Nest in relation to the further conduct of the Federal Court proceedings. 8AEI and 258 Nest had some difficulty in obtaining the funds to provide that security for costs. They eventually were able to do so by entering into the LFA with CAID Industries Inc ("CAID"). 9The LFA contained the following relevant provisions: LITIGATION FUNDING AGREEMENT dated April 26, 2103 BETWEEN: CAID Industries, Inc. ("Funder") and Australian Equity Investors, an Arizona Limited Partnership, Debtor in Possession and The 258 Nest, an Arizona Limited Partnership, Debtor in Possession ("Litigant') INTRODUCTION A. The Litigant is lawfully entitled to pursue the Action. B. The Litigant enters into this Agreement subject to the approval of the US Bankruptcy Court. C. The Funder intends to provide financial and other assistance to the Litigant in respect of the Action. D. The parties intend that certain payments be made to the Funder. E. It is intended that the Litigant prosecute the Action for the joint benefit of the Litigant and the Funder and that the Funder provide the security for costs required by the Federal Court of Australia by and through its Order dated September 7, 2011 of such Action on the terms of this Agreement. TERMS 1. Definitions and Interpretation In this agreement: 1.1 "Action" means each and every legal proceeding issued or arising out of or in connection with the Principal Cause of Action including any appeal from any final judgment therein and any action brought to enforce or recover under any such final judgment. 1.2 "Action Costs" means the reasonable costs and expenses incurred by the Litigant in the performance of this Agreement comprising: 1.2.1 Reasonable costs and expenses (including disbursements) incurred directly by the Funder in relation to the Action or this Agreement including and subject to Clause 15, without limitation, international traveling [sic] and accommodation costs; 1.2.2 Charges of Solicitors; 1.2.3 Time charges of barristers; 1.2.4 Court filing fees, Court-ordered security for costs and all other incidental Court fees; 1.2.5 Witness fees and expenses; and 1.2.6 Costs incurred by Gregory Moore in travelling to Sydney when required as a witness at the trial of the Action, for strategy meetings or as otherwise necessary. ... 1.7 "Principal Cause of Action" means the causes of action defined in Item 3 of Schedule A hereto; 1.8 "Recovery" means all and any amounts received by the Litigant by way of judgment, settlement sum, interest, and costs or otherwise in or as a result of the Action, subject to Clause 15; ... 2. Payment 2.1 In consideration of the Funder agreeing to enter into this Agreement and perform its obligations hereunder, and subject to Clause 15, the Litigant covenants and agrees to pay to the Funder Forty Percent (40%) of the Recovery; ... 11. The Funder's Obligation Subject to this Agreement, the Funder agrees to: 11.1 Satisfy the order of Justice Cowdroy made on 7 September 2011 requiring the Litigant to provide security for costs in the amount of AU $250,000. ... 13. Bankruptcy of Litigant 13.1 The Litigant is subject to administration pursuant to Chapter 11 of the Bankruptcy Code of the United States of America. 13.2 This Agreement shall not become effective and shall not bind any party unless or until it shall have been approved by the United States Bankruptcy Court after notice and opportunity for hearing to all creditors and parties-in-interest in the proceedings entitled In re Australian Equity Investors and The 258 Nest case number 4-12-bk-10590-EWH. 13.3 The Litigant will use its best efforts to obtain the approval referred to in Clause 13.2 as quickly as possible. 13.4 For the avoidance of doubt, any costs incurred by the Litigant in respect of its bankruptcy, including obtaining the approval referred to in clause 13.2, are not Action Costs. 14. Security for Costs The Funder shall provide funds sufficient to satisfy the order of Justice Cowdroy made on 7 September 2011 requiring the Litigant to provide security for costs in the amount of AU $250,000. 15. Distribution of Recoveries 15.1 If the Litigant receives any Recovery from any source in or as a result of any Action it must pay the Recovery into the trust account of the Solicitors to be held in trust and distributed for the Litigant and the Funder only in accordance with the following and as soon as reasonably practicable. The Solicitors will have the Recovery paid out as follows in the following order of priority: 15.1.1 Attorneys' fees and costs incurred by the Solicitors, MBJ Lee, Barrister and Edward Cowpey, Barrister; 15.1.2 Return to the Funder the security posted as security for costs; 15.1.3 Return to the Litigant the security posted as security for costs; 15.1.4 Fifty Percent (50%) of all asset recovery to the Funder; 15.1.5 Ten Percent (10%) of all asset recovery to Gregory Moore; 15.1.6 Repayment to the parties that advanced Action Costs paid by them in connection with this Action; 15.1.7 The balance to the Litigant. 15.2 For the avoidance of doubt the parties acknowledge that any property other than cash recovered in or as a result of the Action will be realized and converted to cash as quickly as reasonably possible by the Litigant and then applied in accordance with this Clause 15. ... 27. Governing Law This Agreement is governed by the laws of the State. However, to the extent this Agreement concerns litigation pending before the Federal Court of Australia, that Court's rules and Australian federal law shall control the administration of the case. ... SCHEDULE A ... Item No. 3 Principal Cause of Action: Claims made by the Litigants in Action Number 1344 of 2009 in the Federal Court of Australia, New South Wales District Registry. Item No. 4 The State: New South Wales, Australia ... SCHEDULE B STATEMENT REGARDING DISTRIBUTION OF RECOVERIES The undersigned agrees to distribute any proceeds from litigation known as Australian Equity Investors, L.P., et al v. Colliers International, et al. in accordance with Clause 27 of this agreement. In so agreeing the undersigned does not become a party to this agreement. Signature of Scott Freidman Scott Freidman Harris Freidman Lawyers 10In accordance with the LFA, CAID made arrangements for the security for costs that was required to be provided in accordance with the orders that had been made by the Federal Court. Some time after that was done but before any further hearing in the Federal Court, those proceedings were the subject of a mediation. That mediation resulted in a settlement agreement between the parties. That agreement was that the proceedings would be disposed of by a payment of AUD$1,577,500 to 258 Nest. While the proceedings brought by AEI were also dismissed, no amount was payable to AEI under the settlement agreement. 11The payment required by the settlement agreement was paid into Harris Freidman's trust account. Some disbursements have been made from that account, leaving a current balance of AUD$1,222,000 in Harris Freidman's trust account.

An American creditor 12It is now necessary to make reference to another player in the drama, being an entity referred to as the "Lackey Trust". It is a trust established under the laws of Arizona. 13On 11 February 2012 the Lackey Trust obtained a judgment in the Superior Court of the State of Arizona for the County of Pima against AEI for USD$2,296,148.70. The Lackey Trust is therefore a significant creditor of AEI. 14At various times AEI and 258 Nest have been the subject of bankruptcy proceedings under the laws of the United States of America. It is unnecessary for me to go into these in any detail, other than to note that proceedings have also been on foot in the United States Bankruptcy Court, District of Arizona (the "US Bankruptcy Court") in relation to the settlement proceeds held by Harris Freidman. To a limited extent this application and those proceedings have continued in parallel. I have been taken to a transcript of what I have been informed is the latest hearing in the US Bankruptcy Court. It is apparent from that transcript that the position has been reached that the US Bankruptcy Court is waiting to see what the outcome of this application is before any further steps occur in Arizona. I am conscious of the need to maintain comity between courts. By reference to that transcript I am satisfied that I am able to proceed to determine Harris Freidman's application in these proceedings without in any way infringing upon the jurisdiction of or otherwise affecting comity between this Court and the US Bankruptcy Court.

Australian and American proceedings 15When the Lackey Trust became aware of the settlement of the Federal Court proceedings and the fact that there was a sum of money in Harris Freidman's trust account that was apparently going to be disbursed in accordance with Clause 15 of the LFA, the Lackey Trust made an urgent application in the Common Law Division of this Court (the "First NSW Supreme Court Proceeding"). The underlying application supporting the Lackey Trust's proceedings was to register the judgment referred to in paragraph [13] above obtained by the Lackey Trust against AEI in Arizona. Ex parte asset preservation orders were made in relation to the moneys that would otherwise be payable to 258 Nest. Those orders were discharged at their next return date, when it became apparent that there was no basis upon which the Lackey Trust was properly able to submit that it had an interest in those funds. 16The Lackey Trust's real concern was that the terms of the settlement of the Federal Court proceedings were for all of the money to be paid to 258 Nest without a share to AEI. That circumstance has excited a concern in the Lackey Trust - and I emphasise that it is a concern, nothing more than that has been established before me - that there was something improper or fraudulent about the way that the settlement was achieved. The Lackey Trust wanted to suggest that the way in which the settlement was structured was intended to be a fraud on the creditors on AEI. 17Having said that, it is important to note that counsel who appeared for the Lackey Trust on the return of its asset preservation order application quite properly indicated to the Court that his client, at least as far as his instructions stood, was not in a position to advance an allegation, for example, that the settlement agreement in the Federal Court could be impeached as a fraud on creditors pursuant to s 37A of the Conveyancing Act 1919 (NSW). That concession was apparently the basis upon which this Court formed the view that there was no underlying cause of action that could support the continuation of the asset preservation order. 18Having been unsuccessful in New South Wales, the Lackey Trust then obtained what is described as a temporary restraining order in the Superior Court of Arizona for the County of Pima intended to preserve what it said were its rights in relation to the settlement funds. 19The orders as originally obtained in the Arizona Court were subsequently amended by the consent of the parties in that court (being the Lackey Trust, AEI, 258 Nest and other entities not presently relevant) (the "Arizona Order"): IT IS HEREBY ORDERED AS FOLLOWS: 1. On or before October 20, 2013, Defendants Australian Equity Investors LP and The 258 Nest LP shall cause the following to occur regarding the $1,222,000 AUS available from the Colliers settlement (the "Available Settlement Funds") in the Harris Freidman Law Practice Trust Account (the "Harris Trust Account'): a. The sum of $763,750 (50% of the $1,522,500 settlement proceeds) shall remain in the Harris Trust Account or delivered to an appropriate location as agreed to by the parties; and, b. The $458,250 balance of the Available Settlement Funds shall be sent to the United States attorney trust account maintained by attorney John Baade (the "Baade Trust Account') or delivered to an appropriate location as agreed to by the parties. 2. The above funds shall be maintained in the above-referenced trust accounts and/or agreed upon locations pending further Order of the Court. 3. The remaining issue at the Preliminary Injunction Hearing on October 31, 2013 is the validity of the litigation funding agreement as to Caid Industries, Inc. pending trial on the merits in this matter. DONE IN OPEN COURT this 15th day of October 2013.

Determination of the application 20The present application arises because Harris Freidman have received a direction from AEI and 258 Nest to deal with the settlement moneys in accordance with the Arizona Order. The Court accepts that for Harris Freidman to do so would be to act in a way other than is mandated by Clause 15.1 of the LFA and, perhaps more importantly, the undertaking given by Harris Freidman in Schedule B of the LFA. 21Harris Freidman accordingly seeks advice under s 63 of the Act as to how it would be entitled to proceed in the face of those instructions which conflict with the LFA. 22When these proceedings first came before me, I raised with Senior Counsel for Harris Freidman the possibility of the Lackey Trust being formally joined in these proceedings, so its concerns could be properly dealt with. Steps have been taken, in accordance with directions that I made on an earlier occasion, to notify the solicitors who have been corresponding with Harris Freidman on behalf of the Lackey Trust. Those solicitors have been provided with everything that is before me except the opinion of senior and junior counsel ("the Opinion"), which remains confidential, and a further short witness statement. Importantly, the solicitors for the Lackey Trust have indicated that they do not have instructions to accept service and all of Harris Freidman's inquiries of those solicitors have gone unanswered. There has been no attempt by anyone today to appear on behalf of the Lackey Trust and so the proceedings have continued, appropriately, as an application for judicial advice by Harris Freidman. 23I dealt with the way in which an application for judicial advice should be brought in my recent judgment In the application of NSW Trustee & Guardian [2014] NSWSC 423. In particular, in that judgment I dealt with the issue of the role and form of counsel's opinion. The Opinion conforms in all respects with the type of advice by which I indicated the Court is most assisted in an application of this kind. 24The Opinion sets out all of the relevant facts and matters known to Harris Freidman that could cast light upon the present problem. I have also had the benefit of all of the underlying material that informed the Opinion and have been taken through that in detail by counsel. The Opinion deals with the legal issues that have arisen and ultimately expresses the view that Harris Freidman would be justified, after deduction of their costs and expenses, to distribute the moneys held by that firm in accordance with the regime provided for by Clause 15 of the LFA. The Opinion provides detailed reasoning and a proper basis for that conclusion. Having considered all of the underlying material and the Opinion, the Court is of the view that Harris Freidman would be justified in so acting. 25There are, however, two matters of detail as to how the amounts should be distributed to which I need to make reference. 26The first concerns what is to happen in relation to costs orders that were made in the First NSW Supreme Court Proceeding. 27The Opinion raises the question as to whether costs orders made in favour of AEI and 258 Nest in the First NSW Supreme Court Proceeding can themselves be paid out of the amount in Harris Freidman's trust account as part of the attorneys' fees and costs referred to in Clause 15.1.1 of the LFA. While the Opinion expresses the view that the better construction of the LFA is that those costs do fall within Clause 15.1.1, in the course of argument Senior Counsel for Harris Freidman fairly put the arguments to the contrary. It is not for this Court to reach a definitive view of the construction of Clause 15.1.1. However, there is a general approach which the Court adopts in giving advice of this kind to err on the side of conservatism without expressing a final view of the matter: G.P. Stuckey K.C. and D.C. Irwin, Parker's Practice in Equity, 2nd edition, Law Book Co of Australia Pty Ltd, 1949 at p 756. There is a serious and substantial argument which supports a construction that would not bring the costs of the First NSW Supreme Court Proceeding within Clause 15.1.of the LFA. That argument is that Clause 15.1.1 is confined to costs incurred in obtaining the "Recovery" referred to in the chapeau of Clause 15.1. Adopting the traditionally conservative approach the Court takes in matters of this kind, the Court will not advise Harris Freidman that it would be justified in seeking to include the costs of the First NSW Supreme Court Proceeding as part of the costs which it will deduct under Clause 15.1.1. 28The second matter relates to whether or not the expression "all asset recovery" in Clauses 15.1.4 and 15.1.5 means the gross amount of the recovery or the amount remaining after the amounts referred to in Clauses 15.1.1 to 15.1.3 have been paid. 29In the Court's view, that issue of construction is far less uncertain than the first issue to which I have referred. Clause 15.1 sets out an order of priority. It follows from that that the amounts referred to Clauses15.1.4 and 15.1.5 are amounts calculated after the earlier priority payments referred to in the preceding sub-clauses have been paid. Harris Freidman is justified in doing its calculations for what amounts it should remit pursuant to those later clauses on that basis. 30In the course of the compendious and scrupulously fair presentation of the issues by Senior Counsel for Harris Freidman, my attention was drawn to correspondence from the Lackey Trust's solicitors as to specific issues which they asked be drawn to the Court's attention. I record that was done. None of those matters provides a basis for departing from the advice which has been recommended in the Opinion and which the Court proposes to give. Indeed, at least one of the matters referred to in the solicitors' correspondence (the assertion that neither the Lackey Trust nor any party to the LFA suggests that the LFA is in any way invalid) fortifies the view which the Court has formed as to the course which Harris Freidman is justified to take. 31Finally, the Court accepts as appropriate two additional orders that have been suggested by Harris Freidman. The first is that Harris Freidman should give AEI, 258 Nest, CAID and the trustee of the Lackey Trust, 21 days' notice of the intended distribution of the settlement funds in accordance with the advice that the Court will give. That is entirely sensible. It is apparent from the material before the Court that those interested parties should be afforded an opportunity to make such application as they may wish in an American court for whatever relief may be available to them in relation to funds that will be disbursed to those parties pursuant to the LFA. 32Second, some concern was expressed by the solicitors for the Lackey Trust that the Court, in approving the proposed distribution as extending to a deduction for legal fees incurred by Harris Freidman and counsel in relation to the original Federal Court proceedings, might in some way be taken as foreclosing whatever rights of assessment or taxation would be available in respect of those costs. That is clearly not Harris Freidman's intention. An order has been proposed, which will I make, in relation to preserving whatever rights anyone may have in relation to the assessment or taxation of the legal fees and expenses that were incurred in relation to the Federal Court proceedings. 33Harris Freidman should bring in orders, including calculations, to give effect to these reasons. I will make those orders in chambers. 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 May 2014