Kerr (Trustee), in the matter of Cross (Bankrupt) v Bechara

REASONS FOR JUDGMENT 1 On 31 March 2015 I made orders in respect of competing applications by a trustee, David John Kerr, and two creditors, Maria Bechara and Feridun Akcan, concerning the bankrupt estates of Gabriel Cross and Rosabelle Cross (Kerr (Trustee), in the matter of Cross (Bankrupt) v Bechara [2015] FCA 284, referred to below as the principal judgment). In effect, Mr Kerr succeeded in his application and the creditors failed on their applications. Another creditor, Mark Petrucco, was joined as a party. As explained in the principal judgment, Mr Petrucco is the successor in title to the claims of Rockwell Olivier (Sydney) Pty Ltd (Rockwell Olivier). 2 I gave the parties an opportunity to make further submissions about one issue, as set out in order 9, which was as follows: 9. Costs of and in connection with paragraph 6 of the application and the involvement of Mark Petrucco in the proceeding be reserved on the basis that: (a) any party seeking an order for costs in that regard is to notify the other parties within 14 days of the terms of the order sought; (b) a party seeking costs is to file and serve a short written outline in support of their claim for costs within a further 7 days thereafter; (c) any party against whom costs are sought is to file and serve a short written outline in reply within a further 7 days thereafter; and (d) the outlines are to advise whether any party objects to the issue being determined on the papers. 3 Mr Kerr, the trustee, and Mr Petrucco filed and served submissions as contemplated by these orders. No submissions in reply were received as required by the orders. Unfortunately, the positions of Mr Kerr and Mr Petrucco are inconsistent. Mr Kerr seeks an order that Ms Bechara and Mr Akcan pay the costs in connection with paragraph 6 of the application whereas Mr Petrucco contends that, in all of the circumstances, Ms Bechara and Mr Akcan should not be the subject of such an order but, rather, his costs should be paid out of the estate. 4 As explained in the submissions for Mr Petrucco: The proceedings, as originally commenced by the Trustee, sought, inter alia, Directions regarding the manner in which the Trustee ought, in the administration of the bankrupt estates, treat a claim by Rockwell Olivier (Sydney) Pty Ltd ("RO") and in particular whether he would be justified in accepting the claim by that creditor as being, in part at least, a secured claim and in releasing funds held by him in satisfaction of that claim. The nature of the proceeding was altered, so that it became one which sought substantive declarations as result of the opposition expressed by Maria Bechara and Feridun Akcan to the Trustee's application. Following that change, Messrs Bechara and Akcan, along with the RO, were added as parties to the proceedings on the basis that each had a relevant interest in the issues which were then the subject of claims for substantive relief. The Third Respondent (Petrucco) participated in the proceedings as a result of an assignment of rights from Rockwell Olivier (Sydney) Pty Ltd. That participation was limited to the question of the validity of the mortgage dated 7 March 2013 - on which Petrucco's claim to be a secured creditor in the estates is based. On that issue Petrucco's claims at the hearing were opposed by Messrs Bechara and Akcan. Given the appearance of motivated contradictors, the Trustee did not himself take any positive position at the hearing in respect of that issue. The Third Respondent (Petrucco) succeeded on the only issue in respect of which he had any interest at the hearing. In accordance with the usual practice, he could ordinarily expect to receive the benefit of an order that his costs be paid by the First and Second Respondent - being the parties who actively opposed the making of an order confirming the validity of the mortgage. The declaration made by the Court in respect of the mortgage, being in a form contended for by Petrucco albeit different from that originally proposed by the Trustee, recognised the existence of a level of uncertainty regarding the proper quantum of Petrucco's claim. Petrucco fairly accepts that, although unsuccessful in their claim that the Court should not make any declaration of validity in respect of the mortgage, the First and Second Respondents have persuaded the Court that it ought not make any determination on the issue of quantum (although, equally fairly, it can be noted that neither did Petrucco contend at the hearing for a determination of that matter). 5 The essence of the submission for Mr Kerr was as follows: Ms Bechara and Mr Akcan had raised a controversy concerning the funds in the controlled money account and whether Rockwell Olivier was a secured creditor. Having threatened proceedings if the Trustee did not deal with the money in accordance with their views, they neither communicated about those views nor commenced proceedings. The Trustee was obliged to do so. They cannot now be heard to say that the application was unnecessary. In those proceedings, they should have made plain all of their reasons for opposition at an early stage, so that a determination in the proceedings ended all controversies in relation to those funds. They did not do so. Measured by reference to the matters in their outline of submissions…, Ms Bechara and Mr Akcan had no success at all. When it became obvious that there were issues surrounding the state of accounts as between the Bankrupts and the Trustee, the Trustee did not press his application for Prayer 6 at the hearing. Had the issues raised been flagged before the trial, the Trustee could either have investigated them prior to the hearing or withdrawn that part of the application before the hearing and the parties would have been saved the time and costs consumed with that issue. The failure to make those issues known, foreclosed those options. Ms Bechara and Mr Akcan simply opposed the orders sought without making any attempt to communicate the basis of their opposition. Nevertheless, as between the Trustee and Mr Pertucco, a cooperative approach meant that a declaration of more limited utility was able to be made. The Court has found that Rockwell Olivier was indeed a secured creditor. As between the Trustee and Ms Bechara and Mr Akcan, that should be "the event". Only the amount of that debt remains to be determined. The other creditors of the Bankrupts should not have to bear the costs of the Trustee dealing with Ms Bechara and Mr Akcan's unsuccessful attempt to defeat Rockwell Olivier's claim. 6 Mr Petrucco, as noted, seeks an order that his costs of the proceedings, excluding the application for leave to re-open (in respect of which he has a costs order against Ms Bechara and Mr Akcan in his favour), should be paid from the bankrupt estates as an expense of the administration on an indemnity basis. 7 Mr Petrucco submitted as follows: As for the balance of his costs, Petrucco's submission is that they should be paid from the bankrupt estates as an expense of the administrations with the level of priority granted by section 109(a) of the Bankruptcy Act. Such an order is authorised by section 32 of the Bankruptcy Act. See the decision of the Full Court in Lawman v Queensland Building Services Authority (No 2) [2000] FCA 174 at [5]; Bayles v Nominal Defendant [2012] FMCA 184 at [49]-[50]. A determination as to the validity or otherwise of the mortgage was a matter which the Trustee had decided was sufficiently important, and potentially controversial, as to justify an application to Court-initially for Directions and then for substantive Declarations. The involvement of [RO] as a party and then of Petrucco at the hearing relieved the Trustee of the need to prepare for or participate in the argument concerning the mortgage at the hearing. As was the case with the petitioning creditor in Lawman, Petrucco's involvement, albeit in advancing his own interests, has also served the interests of the estates in that it has facilitated the efficient resolution of a controversy in the administrations. But for his involvement, the Trustee, would have been required to take an active role, as contradictor, in the face of the opposition of the First and Second Respondents. For that reason, and in light of his success at the hearing, his costs should be paid from the estates. By clause 5 of the mortgage memorandum (which appears at paragraph [104] of the judgment), the mortgagee is entitled to recover, as part of the debt secured by the mortgage, all costs and expenses, including as between solicitor and client, incurred in consequence of or on account of any default on the part of the mortgagor. That equates to an obligation to pay costs on the indemnity basis. The existence of contractual provisions of this type has long been recognised as a basis on which the Court can exercise its discretion to award costs on the more generous basis. See Kyabram Property Investments Pty Ltd & Anor v Murray & Anor [2005] NSWCA 87 at [12]-[14]; Katsaounis v Beleheris [1995] ANZ ConvR 115; also Wenpac Pty Ltd v Allied Westralian Finance Ltd (1994) 123 FLR 1 at 68-9. 8 Those costs are sought from 16 January 2015, being the date on which Mr Petrucco purchased the rights and interests of Rockwell Olivier. 9 Section 32 of the Bankruptcy Act 1966 (Cth) provides that: The Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such orders as to costs as it thinks fit. 10 In Lawman v Queensland Building Services Authority (No 2) [2000] FCA 174 at [5] the Full Court said: Under s32 of the Bankruptcy Act, the Court has a wide power with respect to costs orders. This would extend in an appropriate case to ordering that a party to proceedings in bankruptcy entitled to the costs of those proceedings should have those costs out of the estate in a particular priority. The petitioning creditor was plainly not acting only in its own interest. The petitioning creditor, by successfully resisting the bankrupt's annulment application, has preserved the bankrupt's property, such as it is, for distribution among the creditors generally. It can therefore be said to have a claim to payment out of the estate of its costs of doing that in the same priority which s109(1)(a) accords to the trustee's costs of the annulment proceedings. This consideration, in our opinion, entitles the petitioning creditor to be put in the same position so far as priority of payment of his costs is concerned as is the trustee. 11 In Bayles v Nominal Defendant [2012] FMCA 184 Burnett FM said: [49] In any event, I am also of the view that the argument presented by counsel for the Nominal Defendant is extremely persuasive; that is that s 109(1)(a) deals with the priority of payments to be made from the estate and provides in the first instance that the first priority is in respect of the payment of taxed costs of the petitioning creditor and the costs, charge and expenses of the administration of bankruptcy, including the remuneration of expenses of the trustee, which costs are provided for in Schedule 3 and in particular, so far as it relates to this application, item 2, they being expenses reasonably incurred on behalf of the trustee in protecting all or part of the bankrupt's assets. [50] In this instance there can be no question that the Nominal Defendant's involvement in the application as a respondent to the bankrupt's application for an annulment was one designed to protect the bankrupt's assets such as they were or are for the benefit of creditors, and accordingly, it is, by operation of the schedule, an appropriate expense which ought to be afforded priority under s 109(1)(a). It follows in my view that the trustee and the Nominal Defendant ought to be entitled to an order for costs. 12 As Mr Petrucco's submissions recognised, the present case is different in that Mr Petrucco was not acting to protect the interests of all creditors by taking action to preserve the bankrupt estates. He was acting in his own interests. Despite this, it is true that the trustee, Mr Kerr, had sought orders enabling the payment of a quantified sum to Mr Petrucco and, but for Mr Petrucco's involvement, would have had to resolve, one way or another, the contentions of Ms Bechara and Mr Akcan about Mr Petrucco's entitlements under the mortgage. Accordingly, the resolution of the contentions of Ms Bechara and Mr Akcan about Mr Petrucco's entitlements formed part of the trustee's administration of the estates. It is on this basis that Mr Petrucco seeks an order for his costs to be paid out of the bankrupt estates. 13 Despite this, I find the submissions for Mr Kerr more persuasive than those for Mr Petrucco. The fact is that both Mr Kerr, as trustee, and Mr Petrucco, as a creditor, were put to expense by reason of the contentions of Ms Bechara and Mr Akcan which remained obscure until the hearing. Mr Kerr expressly invited a clear explanation of the reasons for the position taken by Ms Bechara and Mr Akcan. No explanation was forthcoming. While the position of Ms Bechara and Mr Akcan during the hearing exposed reasons against the making of the declaration as initially sought by Mr Kerr in paragraph 6 of his application, the matters relevant in that regard could have been made known to Mr Kerr well before the hearing. Once the potential difficulty with quantification was exposed, moreover, Mr Kerr properly left it to Mr Petrucco to support his claim to be a secured creditor by reason of the mortgage, which Ms Bechara and Mr Akcan continued to impugn. I cannot see why, in these circumstances, the costs of Mr Kerr and Mr Petrucco should not be paid by Ms Bechara and Mr Akcan, albeit on the usual rather than an indemnity basis as sought by Mr Petrucco if his claim to be paid out of the estates had been accepted. That Mr Kerr did not obtain the declaration initially sought is subsumed into the declaration ultimately made, which Ms Bechara and Mr Akcan continued to oppose. More to the point, Ms Bechara and Mr Akcan should have responded to Mr Kerr's requests for information explaining their position. Mr Kerr's decision to bring the matter to a head was proper, indeed necessary, in order to enable him to discharge his functions as trustee. It is Ms Bechara and Mr Akcan who are responsible for all of the costs incurred by Mr Kerr and Mr Petrucco who both should be compensated on that account. Such compensation should not burden the bankrupt estates but should be to the account of the unsuccessful parties, Ms Bechara and Mr Akcan. 14 I otherwise accept the submission for Mr Petrucco that the costs payable to him should run from 16 January 2015. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.