Luvnlife Consulting Pty Ltd v Fasha

Background

1. The plaintiff is Luvnlife Consulting Pty Ltd ("Luvnlife"). The first defendant is Mr John Fasha, a current principal of the third defendant, John Fasha Solicitors Pty Ltd. The second defendant is Lawcover Insurance Pty Ltd ("Lawcover"), the insurer of John Fasha Solicitors and of Mr Fasha's previous firm, Lex Fori Lawyers. A question was raised about the appropriateness of the joinder of both Lawcover and Mr Fasha's current legal practice to which I will return.
2. These proceedings were commenced by way of statement of claim filed 29 May 2024 seeking: 1. damages by way of indemnity for the judgment entered against the plaintiff in Secured Lending 1 Pty Ltd v Luvnlife Consulting Pty Ltd [2020] NSWSC 851 (the "2020 Judgment"); and 2. damages for any shortfall between (a) the amount for which the plaintiff is liable to the 2020 Judgment creditors pursuant to the agreements pleaded in the statement of claim, and (b) the amount of the 2020 Judgment.
3. A claim is also informally made for what appears to be unliquidated loss of opportunity damages calculated in Mr Hernandez's September affidavit in a sum approximating $24.9 million.
4. On 31 May 2018, the plaintiff company entered into a loan agreement to borrow the amount of $415,000 from Secured Lending 1 Pty Limited ("SL1"). The loan was secured by a mortgage over a property situated in Glenhaven, NSW ("Property"), and guaranteed by Ms Stephanie Ruiz-Diaz who had then only recently become the sole director, sole secretary and sole shareholder of the plaintiff company. The loan was to be repaid by 30 November 2018. The loan agreement was varied twice by way of forbearance deeds: first on 7 December 2018 where the secured amount increased to $553,418.03 repayable by 31 December 2018; and second on 13 June 2019 where the secured amount increased to $842.073.38, repayable by 28 September 2019. The plaintiff defaulted, and SL1 obtained possession of the Property pursuant to the 2020 Judgment.
5. The crux of the plaintiff's claim is that Mr Fasha (and derivatively, Lex Fori Lawyers and John Fasha solicitors) was negligent in obtaining instructions and providing advice in relation to the plaintiff entering into the loan agreement and two forbearance deeds, the terms of which, in the plaintiff's case, were "riddled with" unconscionable terms that ought to have been identified by Mr Fasha. It is alleged that that negligence caused the plaintiff to suffer financial harm arising from entry into agreements it was unable to service. Mr Fasha's retainer was to provide certificates of independent advice to the plaintiff and guarantor for provision to SL1 as lender. Quite apart from the claim in professional negligence, the statement of claim avers that the content of the respective certificates were "false" without any particularisation of that serious allegation in the pleading.

Principles - Security for Costs

1. As I mentioned above, the defendants' application is made under r 42.21 UCPR and s 1335(1) Corporations Act. The plaintiff by the written submissions of Mr H W M Stitt of counsel, who appeared on its behalf, accepted that the legal principles animating those powers to order security for costs were apposite to the determination of this application.
2. Rule 42.21(1)(d) provides that the Court may order a plaintiff to give security where "there is a reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so". Similarly, s 1335(1) Corporations Act provides that where a corporation is plaintiff and "there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence", the Court may require sufficient security be given for those costs and stay all proceedings until the security is given.
3. I am satisfied the threshold referred to in r 42.21(1)(d) and s 1335(1) Corporations Act has been crossed. On 24 June 2024, the plaintiff's previous solicitor sent an email to the defendants' solicitor stating "Our client is not able to pay security for costs. All our assets were lost as result of your client's negligence". Similarly, the plaintiff's current solicitor Mr Hernandez, in his September affidavit states (at [2]) "After investigation and review of available documents and instructions… I have come to the conclusion that the Plaintiff has no assets or financial ability to pay security for costs". The defendants submit that such concession is only appropriate given the plaintiff company has a total issued capital of $1. It is a non-trading company and its only discernible asset was the residential real property the subject of the 2020 Judgment.
4. However, mere engagement of the condition on which r 42.21 and s 1335(1) operate is insufficient of itself to justify making an order because the power to order security for costs is discretionary (Barton v Minister for Foreign Affairs (1984) 2 FCR 463). In considering whether such an order should be made, I may have regard to such of the not exclusive factors set out in r 42.21(1A) UCPR, which largely reflect the discretionary considerations identified by Beazley JA (as her Excellency then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189; at least so far as each of them is relevantly engaged by the evidence read on the application.
5. Rule 42.21(1A) UCPR provides: (1A) In determining whether it is appropriate to make an order that a plaintiff referred to in subrule (1) give security for costs, the court may have regard to the following matters and such other matters as it considers relevant-- (a) the prospects of success or merits of the proceedings, (b) the genuineness of the proceedings, (c) the impecuniosity of the plaintiff, (d) whether the plaintiff's impecuniosity is attributable to the defendant's conduct, (e) whether the plaintiff is effectively in the position of a defendant, (f) whether an order for security for costs would stifle the proceedings, (g) whether the proceedings involve a matter of public importance, (h) whether there has been an admission or payment in court, (i) whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant, (j) the costs of the proceedings, (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, (l) the timing of the application for security for costs, (m) whether an order for costs made against the plaintiff would be enforceable within Australia, (n) the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff.

Parties' Cases

1. In my view, the most relevant consideration in the present case is whether the plaintiff is impecunious (r 42.21(1A)(c)), which is a "substantial factor in the decision whether to exercise the discretion in favour of ordering security": Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2013] NSWCA 404 at [18] (per Sackville AJA, referring to Idoport Pty Ltd v NAB [2002] NSWCA 271 at [40]).
2. In his affidavit, Mr Alder, in addition to the concessions made by the plaintiff's solicitors referred to at [10] above, points out the following matters establish the impecuniosity of the plaintiff company and persons associated with it: 1. on 15 January 2020, a judgment was entered against the plaintiff company, Ms Stephanie Ruiz-Diaz, Enrique Ruiz-Diaz and Andrea Ruiz-Diaz in the District Court of NSW for the sum of $273,820.65; 2. on 12 March 2014, Mr Enrique Ruiz-Diaz was declared bankrupt, and subsequently discharged on 13 March 2017; 3. on 16 June 2014, Ms Andrea Ruiz-Diaz was declared bankrupt (discharge date unspecified); 4. on 4 September 2018, Ms Andrea Ruiz-Diaz was again declared bankrupt, and subsequently discharged on 19 March 2022; and 5. in 2021, an unrelated entity commenced an application for substituted service of a bankruptcy notice against Mr Enrique Ruiz-Diaz in the Federal Circuit Court.
3. Mr Enrique Ruiz-Diaz and Ms Andrea Ruiz-Diaz are the parents of Ms Stephanie Ruiz-Diaz. Without intending any disrespect, as necessary I will refer to these individuals as necessary as "ERD", "ARD" and "SRD" respectively. From the averments in the statement of claim, it appears to be the plaintiff's case that ARD arranged the various consultations with Mr Fasha and introduced SRD to him.
4. The defendants, by the written submissions of Ms K E Holcombe of counsel who appears, further submit: the application was brought in a timely way (r 42.21(1A)(l); the amount sought by reference to the complexity of the subject matter in dispute is proportionate (r 42.21(1A)(k)); and the amount sought for security ought not stifle the proceedings (r 42.21(1A)(f)). These factors favour the order being made, particularly so in circumstances where the defendants will be unprotected if no order is made notwithstanding the likelihood of the defendants incurring substantial costs in excess of $60,000 during what Mr Alder describes as the "first stage" of the litigation (Affidavit of B Alder, 16 July 2024, [31]-[36]). I interpolate the "fist stage" in general terms, subject to exceptions specified by Mr Alder, will bring the matter to readiness for mediation or to take a date for hearing.
5. The plaintiff on the other resists an order on the bases that: the plaintiff's impecuniosity was caused by the defendants' conduct (r 42.21(1A)(d)); the plaintiff's prospects of success (r 42.21(1A)(a)); and the risk that an order will stifle the proceedings (r 42.21(1A)(f)).
6. First, the plaintiff in its written submissions contends that (at [19]): "its poor financial situation is entirely caused by the negligence of the Defendants. Due to their negligent professional advice, the Plaintiff signed three loan agreements with such unconscionable and oppressive terms that no solicitors, acting professionally and non-negligently would have advised their client to sign…" In particular, the plaintiff alleges that the first defendant - contrary to the plaintiff's specific instructions - failed to effect or negotiate a change to the due date (from 12 June to 13 June 2019) to the effect the plaintiff's interim payment of $200,000 on 13 June 2019 was late, put the plaintiff in default and justified SL1 taking possession of the Property. By defaulting on the mortgage, the plaintiff was deprived of the means of prosecuting these proceedings against the defendant.
7. Secondly, the plaintiff contends that it has reasonable prospects of success against the defendants and refers to the High Court of Australia's decision in Stubbings v Jams 2 Pty Ltd (2022) 276 CLR 1; [2022] HCA 6 where the court set aside a contract on equitable principles on the basis that the entry into it by a vulnerable client (the vulnerability of which was known to the defendant) was contrary to good conscience. Certificates of independent legal and financial advice were insufficient to "protect" the lender from the consequences of its agent's knowledge of the true facts.

Consideration

1. To the extent it is the plaintiff who resists the discretion being exercised, it is convenient to address its case first.
2. Dealing with the first contention, it is well recognised that the plaintiff bears the onus of establishing the adverse effect of the defendants' conduct: Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; 208 ALR 564; Jazabas Pty Ltd v Haddad [2010] NSWSC 594. For the reasons below, I am not satisfied the plaintiff has established its impecuniosity is attributable in any material way to the defendants' alleged negligence. As Ms Holcombe submits in her written submissions, it appears the plaintiff was already in significant financial difficulties prior to engaging the defendants in or around May 2018: 1. as of January 2017, the plaintiff was in arrears of $180,000 on its loan from the NAB ("Home Loan") (SOC at [16]). 2. as of 31 May 2018, the plaintiff company (i) was in arrears of $229,421.25 on the Home Loan and owed $17,321.32 in rates; and (ii) sought to enter into a bridging loan from a private lender (SOC at [20]). 3. as of 7 December 2018 (being the date of the first forbearance deed), the plaintiff company required additional funds to pay the Sydney Water Corporation in the sum of $118,418.03 so as to dispose of the winding up proceedings that instrumentality had initiated against it. 4. The circumstances of the entry into, and two extensions of, the SL1 loan demonstrate real financial distress or at least straightened circumstances then. The extensions show that neither SRD, a 19-year-old university student at the time, ERD nor ARD had the wherewithal to discharge the loan by the repayment of principal and interest in accordance with its terms.
3. I am not of the view that the plaintiff has demonstrated a "real causal connection between the defendants' conduct and the plaintiff's apprehended lack of means" (Dalma Formwork Pty Ltd (admin apptd) v Concrete Constructions Group Ltd [1998] NSWSC 472, so as to discharge its onus. I would reject the first contention.
4. Dealing with the second contention, the prospects of success or merits of the proceeding under r 42.21(1A)(a). As held in Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 (at [98]-[102]), the strength of the plaintiff's case will be relevant in informing the exercise of the discretion, irrespective of the difficulty a court faces in forming a meaningful view as to the strength or weakness of the claim. However, the difficulty in the present case is that no document has been filed in the substantive proceedings save for the statement of the claim which, with respect, is not a model of its type (It was not drawn by Mr Stitt). Stubbings is really of no assistance as it deals with unconscionability of the lender in an "asset lending" scenario rather than the legal liability of the professionals providing the certificates. From the averments, the case at hand seems to be that Mr Fasha failed in his duty to protect the company, the only plaintiff, from what is said to be an obviously unconscionable loan. Much emphasis is placed upon what is said to be the position of disadvantage of the youthful and inexperienced SRD, who is not a party.
5. In the absence of any defences or affidavit evidence, it is my view that an attempt to assess relative merit would be unproductive and contrary to the dictates of s 60 Civil Procedure Act 2005 (NSW). In Mohareb v Harbour Radio Pty Ltd [2020] NSWCA 231, the Court observed (at [44]): "While the merits of a proceeding may, in an appropriate case, be taken into account, there is no requirement that that be done and in this case, the nature, extent and complexity of the defences is such that an attempt to assess relative merit would have been unproductive and may have entailed disproportionate costs to the parties contrary to s 60 of the Civil Procedure Act 2005 (NSW). A security for costs application should not be turned into a mini trial of the merits of the proceedings". (My emphasis.)
6. I emphasise my refusal to assess the merits of the plaintiff's claim at this stage is not in any way to pre-judge the outcome of the substantive matter, nor do I make any finding as to the strength or weakness of the plaintiff's case. Rather, given the very limited material available to me, I am precluded from identifying the issues in this matter, let alone assessing the respective strengths or merits of the case for each party. Certainly, the only appropriate forum for the determination of the plaintiff's alleged loss in the sum of $24,916,512.24 would be at the final hearing before a trial judge who will have had the benefit of a full suite of pleadings, evidence and expert evidence. In any event, for the purpose of this application, I am attracted to the defendants' submissions that the plaintiff will have difficulties establishing causation, particularly in light of its own pleading that the company had financial difficulties prior to retaining the defendants. I would reject the second contention.
7. Perhaps the real issue is whether an order for security in the sum sought would stultify or stifle the proceedings. To my mind, this issue has to be assessed in part by reference to the difficulty of making any meaningful appraisal of the merits of the plaintiff's case. An obviously meritorious claim would have a greater claim to avoidance an otherwise strong argument for the provision of security than one of lesser or doubtful merit. At best the merit of the plaintiff's claim given my difficulty is at the doubtful end of the range. Moreover, an important part of the plaintiff's case on causation as pleaded is that had Mr Fasha advised against borrowing from SL1, SRD could have borrowed on behalf of the plaintiff from a senior family member (whom she replaced as sole shareholder and director of the plaintiff just before the impugned transaction) which would have obviated the need to enter into the "unconscionable" loan. Accepting this at face value (noting the statement of claim is verified by SRD) and having regard to what strikes me as the relative modesty of Mr Alder's assessment, I am of the view given a little time the plaintiff should be able to raise the required amount especially bearing in mind the amount in issue. I am not persuaded that an order for security for cost will stifle these proceedings.
8. For the reasons above, I am satisfied that an order for security for costs should be made. In doing so, I accept the defendants' submissions that they would be left unprotected and exposed to incurring substantial costs if no such order was made. For completeness, it is my view that the sum of $50,000, in the context where the defendants estimate their costs to exceed $60,000 for the first phase of the proceedings, is proportionate to the subject matter in dispute (r 42.21(1A)(j)). As I have indicated, I regard Mr Alder's assessment as relatively modest. The charge-out rates he specifies for work within his practice and by counsel seem entirely proper.

Pleadings

1. I return to the pleadings. Given the orders I am about to pronounce there may be little urgency, or capacity, to address these issues until security is provided. Moreover, there was no full debate before me about whether the statement of claim conformed to the UCPR. Accordingly, it would be inappropriate to make any definitive ruling about the issues discussed. Mr Stitt accepted the pleading required a degree of revision without being specific. The circumstances did not call for specificity.
2. However, there is a question about whether any defendant other than Mr Fasha is a proper party. At all material times he was a solicitor practising as a principal in private practice. His professional duty of care was owed by him personally to his client directly arising out of him performing legal work pursuant to the retainer regardless of whether the retainer strictly was with the legal practice, him personally or both.
3. Lawcover is sued under s 601AG Corporations Act because the incorporated legal practice of which Mr Fasha was a member at the material time has been deregistered. But given the personal duty of care owed by him, joining Lex Fpri Lawyers were it still on the register, would add nothing to the plaintiff's rights. As a practising member of the legal practice, Mr Fasha is covered by professional indemnity insurance, subject to its terms and conditions. As the insurance is no doubt "a claims made and notified" policy there would be a question as to which policy responds to the claim. There appears to be no reason why Mr Fasha's current practice is even arguably a proper party.
4. Finally, there is the curious averment that the content of the certificates provided by Mr Fasha were "false". The pleading falls a long way short of the requirements of pleading fraud, if that is what is intended. The matter is curious because it is difficult to understand why a plaintiff would wish to raise "fraud" or other deliberate misconduct against a defendant insured under a legal liability policy of insurance.

Orders

1. I make the following orders: 1. Pursuant to r 42.21 Uniform Civil Procedure Rules 2005 (NSW) and s 1335(1) Corporations Act 2001 (Cth), the plaintiff is to provide security for the first, second and third defendants' costs in the sum of $50,000. 2. Such security is to be made by payment into Court or other means satisfactory to the Registrar by 11 December 2024. 3. Stay the proceedings until security for costs is provided in accordance with these orders. 4. The plaintiff is to pay the defendants' costs of the motion of 16 July 2024.

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: 31 October 2024