Kapila (Trustee), in the matter of Edelsten (Bankrupt) (No 2) [2016] FCA 1269

Federal Court of Australia|2016-10-26|Before: Mr P, Mr J, Beach J

BACKGROUND 11 It is convenient to set out some aspects of the background to the Trustee's interim application.

The Turnover Motion 12 On 12 November 2014, the United States Bankruptcy Court made an order which provided that the Trustee receive a total sum of US$1.2 million from the sale of two properties forming part of the Edelsten estate (the proceeds of sale). Those two properties were first, Condominium 67, Palazzo Versace, 94 Seaworld Drive, Main Beach, Queensland and second, Apartment 1705, Quay West, 98 Gloucester Street, The Rocks, Sydney, New South Wales. 13 The balance of the proceeds of sale are currently held by Webb Korfiatis Commerical Pty Ltd, an entity associated with Michael Webb, a director of Selfside Pty Ltd (in liquidation), which corporate entity is the trustee of the Norman South Discretionary Trust (the Norman trustee). 14 In mid-July 2015, it became clear to the Trustee that the Bank was seeking to exercise control over the proceeds of sale. As a result, the Norman trustee had not been able to transfer the proceeds of sale to the Edelsten estate. The Bank had made demands on the Norman trustee which consequently prevented the Norman trustee from transferring those proceeds. 15 The Bank claimed a fixed and floating charge over the proceeds of sale. At its highest, the Bank's claim asserted an equitable interest in the proceeds of sale. 16 On 19 August 2015, the Trustee filed in the United States Bankruptcy Court a motion against the Bank for "turnover" of the proceeds of sale, and sanctions for violation of the automatic stay by reason of the Bank's conduct in preventing the turnover of the proceeds of sale (Case No: 14- 19613-JKO) (the Turnover Motion). The Turnover Motion required the United States Bankruptcy Court to adjudicate upon the competing entitlements of the parties, including the Bank, to the proceeds of sale. The Turnover Motion has been the subject of various interlocutory proceedings in the United States Bankruptcy Court. The Bank has opposed the Turnover Motion. It is not necessary for present purposes to set out the history of such proceedings. 17 Under the Trustee's interim application before me, the Trustee sought an order that the proceeds of sale held in the said trust account be transferred to the United States Bankruptcy Court, pending the resolution of the Turnover Motion. 18 On 21 October 2016, the Trustee scheduled an "emergency hearing" of the United States Bankruptcy Court requesting entry of an order determining that the proceeds of sale were property of the Edelsten estate. That Court set down that hearing for 24 October 2016. 19 On 24 October 2016, the Honourable Judge John K Olson of the United States Bankruptcy Court heard the matter and subsequently made the following orders: Based upon the foregoing, it is ORDERED: 1. The Sale Proceeds from the sale of the Palazzo Versace and Quay West Apartments are property of the bankruptcy estate of Geoffrey Edelsten. 2. The Norman South Discretionary Trust and all persons acting on its behalf are DIRECTED to turn over the Sale Proceeds to Trustee Kapila within 7 days of the entry of this Order. 3. National Australia Bank Limited is hereby DIRECTED to cease and desist FORTHWITH from interfering with Trustee Kapila's efforts to recover and transfer to the United States all property of this bankruptcy estate, including the Sale Proceeds. 4. Trustee Kapila is hereby ORDERED to hold the Sale Proceeds and to make no distribution from the Sale Proceeds pending further order of this Court after notice to NAB and a hearing. 5. All other relief sought in the Trustee's Motions is DEFERRED pending further order of this Court. 6. The Court will conduct a status conference with respect to the Trustee's Motions on November 8, 2016, at 1:30 p.m. in Courtroom 301, United States Courthouse, 299 East Broward Boulevard, Fort Lauderdale, Florida 33301 20 For completeness, I note that it is order 3 of his Honour's orders that was the genesis for the necessity to make the first set of orders that I made on 26 October 2016.

The Adversary Complaint 21 Before proceeding further, it is necessary to refer to another proceeding that has been taken by the Trustee. On 17 April 2015, the Trustee commenced proceedings in the US Bankruptcy Court seeking orders to avoid two registered Australian mortgages granted to the Bank by Mr Edelsten and to entitle the Trustee to payment of any amounts paid to the Bank pursuant to those mortgages, together with interests and costs (the Adversary Complaint). Essentially, it has been alleged that there was a fraudulent transfer of an interest in certain real property to the Bank for no consideration. On 1 February 2016, the Trustee filed an amended Adversary Complaint. 22 By way of background, on 22 December 2014 the Bank filed a proof of debt claim against the Edelsten estate in an amount for US$4,334,086.81. The Bank claimed that Mr Edelsten was indebted to it by reason of two guarantee and indemnity agreements between Mr Edelsten and the Bank, under which Mr Edelsten guaranteed the obligations of the trustee of the Norman South Discretionary Trust in a total amount of A$12,482,447. The Bank also claimed that Mr Edelsten's obligations under the guarantee and indemnity agreements were secured by two registered mortgages: first, a registered mortgage over 1801/181 Exhibition Street, Melbourne, Victoria entered into in 2010, and second, a registered mortgage over 1803/181 Exhibition Street, Melbourne, Victoria entered into in 2012. 23 The Trustee has objected to the Bank's US$4 million claim against the Edelsten estate and now has sought to avoid and recover property (or its equivalent value) the subject of allegedly voidable transactions involving the guarantees and the mortgages. In the Adversary Complaint, the Trustee originally alleged that the two mortgages were voidable transactions under the laws of Australia (ss 120 and 121 of the Bankruptcy Act 1966 (Cth)) and the United States of America (ss 544, 548 and 550 of the US Bankruptcy Code). 24 On 15 February 2016, NAB filed a motion to dismiss the Adversary Complaint. It is unnecessary to elaborate further on the Adversary Complaint, save to say that the Trustee has now excised from it the claims and allegations under ss 120 and 121 of the Bankruptcy Act.

Resignation of the Australian representative 25 Order 4 of my orders made on 10 October 2014 appointed Mark Robinson as the Australian representative of the Edelsten estate pursuant to article 21 of the Model Law. 26 On 15 August 2016, the Trustee received a letter of resignation from Mr Robinson. In that letter, Mr Robinson explained that the reason for his resignation was that his role as Australian representative appeared to be no longer required. 27 Mr Robinson no longer holds any funds in trust for the Edelsten estate. Further, all of Mr Robinson's invoices have been paid from the Edelsten estate and there is no amount outstanding to Mr Robinson. The Trustee has asserted before me that he does not anticipate any further work in Australia with which he would require the assistance of an Australian representative.

Paragraph 5 of the Trustee's interim application 28 It is first convenient to address paragraph 5 of the Trustee's interim application which sought an order in the following terms: Pursuant to s 6 of the Act, paragraph 1 of article 21 of the Model Law and rule 14.08 of the Bankruptcy Rules, an order that the proceeds of sale of Condominium 67, Palazo [sic] Versace, 94 Seaworld Drive, Main Beach, Queensland and Apartment 1705, Quay West, 98 Gloucester Street, The Rocks, New South Wales (being the amount of approximately A$1 million), currently held in the trust account of the firm Webb Korfiatis, be paid to the United States Bankruptcy Court, Southern District of Florida, Fort Lauderdale Division, to be held as funds in court pending the resolution of the Adversary Complaint filed by Trustee Kapila against National Australia Bank Limited on 19 August 2015 (Case No: 14- 19613-JKO), and otherwise to be distributed as directed by that court. 29 In my view, it was appropriate to make an order in the terms sought. I say this for a number of reasons. 30 First, the Bank has participated in the United States Bankruptcy Court proceedings and lodged a proof of debt therein. 31 Second, the Bank has specifically participated in that Court's hearing and adjudication of the Trustee's Turnover Motion dealing with the moneys relating to the proceeds of sale. Further, it is bound by that Court's adjudication thereof on 24 October 2016 wherein Judge Olson ordered: 1. The Sale Proceeds from the sale of the Palazzo Versace and Quay West Apartments are property of the bankruptcy estate of Geoffrey Edelsten. 2. The Norman South Discretionary Trust and all persons acting on its behalf are DIRECTED to turn over the Sale Proceeds to Trustee Kapila within 7 days of the entry of this Order. 3. National Australia Bank Limited is hereby DIRECTED to cease and desist FORTHWITH from interfering with Trustee Kapila's efforts to recover and transfer to the United States all property of this bankruptcy estate, including the Sale Proceeds. 4. Trustee Kapila is hereby ORDERED to hold the Sale Proceeds and to make no distribution from the Sale Proceeds pending further order of this Court after notice to NAB and a hearing. 32 Third, Judge Olson's pellucid reasoning makes it plain that he was not deciding whether the Bank's equitable interest in the proceeds of sale existed and was not deciding any question of priority between the Bank and the Trustee concerning an entitlement to the proceeds of sale. 33 Fourth, Judge Olson referred to and reinforced what I had said in my earlier ruling (Edelsten at [61]) where I stated: The assets to which the relief relates are the assets of Edelsten in Australia. In my view, those assets should be administered in the US Bankruptcy Court proceedings as it is efficient for there to exist a single mechanism for the distribution of Edelsten's assets in accordance with the orders of the United States Bankruptcy Court and the US Bankruptcy Code, which relevantly resembles Australian law apart from one matter dealing with what has been described colloquially as "the revenue rule" which I will address later. Under both laws, there are procedures for the distribution of assets among creditors that are designed to treat all creditors similarly "situated" in a similar way. Further and significantly for present purposes, the United States Bankruptcy Court in the present proceedings has made orders allowing foreign creditors including the Deputy Commissioner of Taxation to file claims, prove claims and participate in the US Bankruptcy Court proceedings. Australian creditors will be entitled to prove in the US Bankruptcy Court proceedings by filing proofs of claim which will entitle them to rank pari passu with other creditors of their particular class. 34 We are both ad idem that it is more appropriate and convenient that the United States Bankruptcy Court deal with questions concerning the Bank's entitlement to the proceeds of sale including any priority issue. The solution is not perfect, but Judge Olson is now seised of these matters. The counterfactual scenario where I dealt with these matters would result in an inappropriate bifurcation. Discretionary considerations support Judge Olson dealing with all aspects of the dispute concerning the proceeds of sale. 35 Fifth, there is little if any prejudice to the Bank in arguing the interest question and the priority question in that proceeding. True it is that United States choice of law principles apply and it is unclear whether Australian law or United States law will apply to the substantive issues. But the parties seem to have proceeded to date on the assumption that Australian law would apply to the question of the existence of the Bank's interest and any priority question. The Bank raised the choice of law question for the first time at the hearing before me, apparently prompted by my questions to the Trustee's counsel, but does not appear to have developed the point elsewhere in its affidavits or submissions. Moreover, it did not adduce any evidence suggesting relevant differences between United States choice of law principles and Australian choice of law principles or between United States substantive law and Australian substantive law on the relevant questions of interest and priority. In any event, my transfer order does not foreclose the Bank arguing in the United States Bankruptcy Court that Australian substantive law applies (if it makes any relevant difference in the circumstances) to the questions of the existence of the Bank's interest and priority.

Other paragraphs of the Trustee's interim application 36 The Trustee has now only pressed paragraphs 1 to 3, but not 4 of his interim application. I have made order 2 and modified my orders of 10 October 2014 to enable the necessary substitution. 37 In relation to paragraphs 1 to 3, the Bank opposed the orders, putting the point (as I understood it) that substituting the Trustee for the Australian representative might somehow condone of a situation where the Trustee was impermissibly, contrary to my orders of 10 October 2014, pursuing proceedings in the United States in relation to Edelsten's Australian assets contrary to paragraphs 4 and 6 of those orders which I will set out again for convenience: 4. Pursuant to section 6 and Article 21(1)(e) of the Model Law, the administration and realisation of all of the First Respondent's assets located in Australia be entrusted to Mark Robinson of PPB Advisory, Level 46, MLC Centre, 19 Martin Place, Sydney NSW 2000 (the Australian Representative). 6. Pursuant to section 6 of the Act and Article 21(1)(g) of the Model Law, subject to the provisions of the Bankruptcy Act, all powers normally available to a trustee in bankruptcy appointed under the provisions of the Bankruptcy Act, be made available to the Australian Representative. 38 It was asserted, as part of the argument, that the Trustee's Adversary Complaint in effect amounted to the realisation of Edelsten's Australian assets and that the effect of my orders was that this had to occur in Australia. There were a number of questionable premises and assertions with the Bank's argument. The argument required reading words into my earlier orders and also characterising statutory claims in respect of voidable transactions, as such a "realisation" of Mr Edelsten's Australian assets. I do not need to linger further on such questions for two reasons. 39 First, the orders that I have made facilitate the change in identity only and leave open the broader questions. 40 Second, if there is any substance to the broader issues raised by the Bank, they are matters that should be dealt with in the United States Bankruptcy Court in opposition to the Trustee's Adversary Complaint.

The Bank's interim application 41 The Bank has sought an order in the following terms: On the grounds stated in the supporting affidavits, and by reason of ss 27 and 31 of the Bankruptcy Act 1966 (Cth), the applicant National Australia Bank Limited ABN 12 004 044 937 (NAB) seeks a declaration under s 30(1) of the Bankruptcy Act 1966 (Cth) or s 21 of the Federal Court of Australia Act 1974 (Cth) in the following terms By reason of ss 27 and 31 of the Bankruptcy Act 1966 (Cth), the standing granted to the applicant by s 17(1)(a) of the Cross-border Insolvency Act 2008 (Cth) (CBIA) and Article 23 of the Model Law on Cross-border Insolvency of the United Nations Commission on International Trade Law (Model Law) upon the applicant's recognition as the foreign representative of a foreign proceeding under the OBIA and the Model Law (that proceeding being Case 14-19613-JKO in the United States Bankruptcy Court, Southern District of Florida, Fort Lauderdale Division) does not include standing to initiate a proceeding under s 120 or s 121 of the Bankruptcy Act 1966 (Cth) in a court other than the Federal Court Australia or the Federal Circuit Court of Australia. 42 It will be appreciated that this application seeks to address only potential claims under s 120 or s 121 of the Bankruptcy Act 1966 (Cth) and the bringing of such claims in the United States Bankruptcy Court. But that issue is now hypothetical. 43 First, the Trustee has amended the Adversary Complaint to remove such claims. 44 Second, the Trustee has now given an undertaking, which I accept, in the following terms: Any proceeding or claims in relation to the estate of the Respondent, Geoffrey Edelsten, under s 120 or s 121 of the Bankruptcy Act 1966 (Cth), or under any provisions of Australian Commonwealth, State or Territory legislation for the avoidance of transactions by a trustee in bankruptcy, including s 172 of the Property Law Act 1958 (Vic) and s 37A of the Conveyancing Act 1919 (NSW), will be commenced in this Court. 45 As the matter is now hypothetical and in the exercise of my discretion, I refuse to make the order sought. 46 For completeness, I should note that the Bank shifted its position before me and suggested that in relation to the alleged voidable transactions, the United States Bankruptcy Court should not even deal with the US law claims (ss 544, 548 and 550 of the US Bankruptcy Code). The argument was belated and misconceived. But no doubt, if the Trustee in relation to the same transactions seeks to pursue parallel proceedings in this Court in respect of the Bankruptcy Act claims and in the United States Bankruptcy Court in respect of the US Bankruptcy Code claims, then there will have to be further coordination between the two Courts. At the moment, a "wait and see" approach seems preferable from this Court, but this can be revisited depending upon developments in the Adversary Complaint.

CONCLUSION 47 It will be apparent that the orders that I have made are designed to facilitate co-operation between this Court and the United States Bankruptcy Court. I am using the concept of "cooperation" in this context as contemplated by the preamble to and articles 1, 4, 21, 25, 26, 27, 29 and 30 of the Model Law. In terms of the Model Law and in the context of cooperation (and coordination), I have had reference to the UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation (2009), the Decision of the United Nations Commission on International Trade Law (890th meeting, 1 July 2009) and the recommendation of the General Assembly embodied in its resolution 64/112 (16 December 2009), which is to the effect that I give due consideration (see paragraph 3) to the Practice Guide. My orders are consistent with both the philosophy underpinning these instruments and their text. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach.

Cross Border Insolvency Act 2008(Cth)

Federal Court of Australia Act 1974(Cth)

BEACH J: 1 The applicant is the trustee in bankruptcy for the estate of Geoffrey Edelsten under Chapter 7 of Title 11 of the United States Code (the Trustee). Previously, the Trustee had held an appointment in relation to that estate under Chapter 11 of Title 11 (the US Bankruptcy Code). 2 On 3 September 2014, the Trustee issued proceedings in this Court pursuant to s 6 of the Cross-Border Insolvency Act 2008 (Cth) and article 15 of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law), seeking recognition of a bankruptcy proceeding filed in the United States concerning Mr Edelsten. 3 On 10 October 2014, this Court recognised the bankruptcy proceeding in the United States as a foreign non-main proceeding under the Model Law (Kapila; re Edelsten (2014) 320 ALR 506; [2014] FCA 1112). The present reasons should be read with my earlier reasons. 4 On 10 October 2014, I made the following orders: 1. The Deputy Commissioner of Taxation be joined as the Second Respondent. 2. Pursuant to section 6 of the Cross Border Insolvency Act 2008 (Cth) (the Act), Article 15 and clause 1 of Article 17 of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law) and Rule 14.03 of the Federal Court (Bankruptcy) Rules 2005 (Cth) (the Rules), the proceeding of the United States Bankruptcy Court, Southern District of Florida, Fort Lauderdale Division, Case No 14-19613-JKO, Re: Geoffrey Edelsten, relating to the First Respondent (the Foreign Proceeding), in which the Applicant was appointed as trustee in bankruptcy for the estate of the First Respondent, be recognised as a foreign proceeding, within the meaning of Article 2(a) of the Model Law. 3. Pursuant to section 6 of the Act and clause 2(b) of Article 17 of the Model Law, the Foreign Proceeding be recognised as a foreign non-main proceeding, within the meaning of Article 2(c) of the Model Law. 4. Pursuant to section 6 and Article 21(1)(e) of the Model Law, the administration and realisation of all of the First Respondent's assets located in Australia be entrusted to Mark Robinson of PPB Advisory, Level 46, MLC Centre, 19 Martin Place, Sydney NSW 2000 (the Australian Representative). 5. Pursuant to section 6 and Article 21 of the Model Law: (a) except with the leave of the Court or with the Applicant's or the Australian Representative's written consent: (i) the commencement, continuation or enforcement of any individual action or legal proceeding (including without limitation any arbitration, mediation, or any judicial, quasi judicial, administrative action, proceeding or process whatsoever) against the First Respondent or any of his assets, rights and obligations, be stayed; (ii) the enforcement or execution of any judgment, order, or award against the First Respondent or his assets be stayed; (iii) the right to transfer, encumber or otherwise dispose of any of the First Respondent's property be suspended; to the same extent as would apply if each such stay or suspension arose under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act); For the avoidance of doubt: (iv) where no stay or suspension would arise under the Bankruptcy Act (either by operation of it or by Court order if made), no stay or suspension applies under this paragraph; (v) subject to the undertaking of the Commissioner of Taxation recorded above, order 5(a)(i) does not preclude or prevent the Commissioner of Taxation or the Deputy Commissioner of Taxation, their servants or agents, from exercising any power or taking any step which he or they may otherwise lawfully exercise or take under the laws of which the Commissioner of Taxation has the general administration, except for the powers and functions under Subdivision 255-A of Schedule 1 to the Taxation Administration Act 1953, unless the exercise of power or the taking of such a step is precluded by automatic operation of any provision of the Bankruptcy Act; (b) the Australian Representative may, as he deems appropriate, examine witnesses, take evidence and obtain delivery of information concerning the First Respondent's assets, affairs, rights, obligations or liabilities. 6. Pursuant to section 6 of the Act and Article 21(1)(g) of the Model Law, subject to the provisions of the Bankruptcy Act, all powers normally available to a trustee in bankruptcy appointed under the provisions of the Bankruptcy Act, be made available to the Australian Representative. 7. The Second Respondent shall be entitled to a distribution from the First Respondent's assets in Australia equal to the pari passu amount that he would receive if he was entitled to prove for the debts owed by the First Respondent to the Commonwealth of Australia as an unsecured creditor in the Foreign Proceeding. 5 Before this Court are two interim applications: first, an interim application filed by the Trustee on 22 August 2016 (the Trustee's interim application); second, an interim application filed by the National Australia Bank Ltd (the Bank) on 5 October 2016 (the Bank's interim application). 6 On 26 October 2016, I heard both applications which were contested by the respective parties. I pronounced two sets of orders at the hearing. These are my reasons in relation to the second set of orders. I do not need to elaborate further concerning the first set of orders save to say that they were necessary to facilitate the matter being dealt with by me on 26 October 2016 in the face of orders made by the United States Bankruptcy Court on 24 October 2016, which the parties before me perceived might restrict the positions that they could advance on the Trustee's interim application, particularly concerning the Trustee's proposed order 5. 7 The Trustee's interim application sought the following orders: 1. Pursuant to s 6 of the Cross Border Insolvency Act 2008 (Cth) (Act), paragraph 1 of article 21 of the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law (Model Law) and rule 14.08 of the Federal Court (Bankruptcy) Rules 2016 (Cth) (Bankruptcy Rules), orders that: a. the further administration and realisation of all of the Respondent's assets located in Australia be entrusted to the Applicant; and b. the Applicant may, as he deems appropriate, examine witnesses, take evidence and obtain delivery of information concerning the Respondent's assets, affairs, rights, obligations or liabilities. 2. Pursuant to s 6 of the Act and paragraph 3 of article 22 of the Model Law, an order that the resignation of Mark Robinson of PPB Advisory, Level 46, MLC Centre, 19 Martin Place, Sydney NSW 2000 as the Australian Representative be accepted and that Mr Robinson be released from his trusteeship of the Respondent's Australian assets. 3. Pursuant to s 6 of the Act, paragraph 2 of article 21 of the Model Law and rule 14.08 of the Bankruptcy Rules, an order that the distribution of all of the Respondents assets located in Australia be entrusted to the Applicant. 4. Pursuant to s 6 of the Act and paragraph 2 of article 23 of the Model Law, a declaration that the court is satisfied that the Respondent's Australian assets are assets which should be administered in the foreign non-main proceeding. 5. Pursuant to s 6 of the Act, paragraph 1 of article 21 of the Model Law and rule 14.08 of the Bankruptcy Rules, an order that the proceeds of sale of Condominium 67, Palazo [sic] Versace, 94 Seaworld Drive, Main Beach, Queensland and Apartment 1705, Quay West, 98 Gloucester Street, The Rocks, New South Wales (being the amount of approximately A$1 million), currently held in the trust account of the firm Webb Korfiatis, be paid to the United States Bankruptcy Court, Southern District of Florida, Fort Lauderdale Division, to be held as funds in court pending the resolution of the Adversary Complaint filed by Trustee Kapila against National Australia Bank Limited on 19 August 2015 (Case No: 14- 19613-JKO), and otherwise to be distributed as directed by that court. […] 8 The Trustee's interim application dealt with three distinct types of relief: (a) First, an order that the proceeds of sale of two properties (in the amount of approximately A$1m) held in a trust account by Webb Korfiatis Commerical Pty Ltd be transferred to the United States Bankruptcy Court. (b) Second, an order that the resignation of Mark Robinson, the Australian representative of the Trustee, be accepted and that Mr Robinson be released from his trusteeship of Mr Edelsten's Australian assets. (c) Third and relatedly, an order that the administration and realisation of the Australian assets be entrusted to the Trustee directly. 9 In support of his interim application, the Trustee filed an affidavit sworn by him on 19 August 2016. 10 On 5 October 2016, the Bank filed a notice of its grounds of opposition to the Trustee's interim application. It also filed an interim application seeking declaratory relief related to its grounds of opposition. In support of its interim application, the Bank filed affidavits of Steven John Palmer (the principal Australian solicitor for the Bank) sworn on 5 October, 24 October and 25 October 2016 and the affidavits of John Nicholas Schwartz (a US attorney) sworn on 5 October and 20 October 2016. I will deal with the Bank's interim application later.

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