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

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.