National Australia Bank Ltd v Cunningham

Supreme Court of NSW|2014-08-29|Before: Garling J, Schmidt J

Judgment 1On 25 June 2014, the National Australia Bank Ltd ("the Bank"), the plaintiff in the proceedings, applied for the following orders: "1. The funds paid into Court by the Second and Third Defendants (being Neil Cunningham and Paola Toppi), pursuant to the orders made by Her Honour Justice Schmidt on 17 May 2011 in the amount of $343,000, be paid to the Plaintiff forthwith. 2. The Second and Third Defendants pay the plaintiff's costs of the motion." 2The respondents to this Motion, Mr Cunningham and Ms Toppi, opposed the order. 3For the reasons which are set out below, I have decided to grant the Motion and make orders reflecting those which were sought.

History of the Proceedings 4On 14 June 2010, the Bank commenced these proceedings ("the possession proceedings") against Ms Dolores Lavin, three companies, and, as well, Mr Cunningham and Ms Toppi, ("the respondents"), who were named as the second and third defendants. 5The Statement of Claim claimed a monetary judgment for a sum a little under $8M against each of the defendants, including the respondents. As well, the Statement of Claim sought an order for judgment for the possession of a property owned by the respondents at 2/1A Wylde Street, Potts Point, New South Wales ("the Wylde Street property"). 6The claim against the respondents arose from the terms of a guarantee which they had given with respect to the borrowings of the sixth defendant, a corporation. The sixth defendant was in default of its loan obligations, and receivers were appointed to it by this Court on 10 November 2009. 7The mortgage over the Wylde Street property had been given by the respondents as security for their obligations under the guarantee. 8On 29 October 2010, the respondents filed an Amended Defence in which they denied being in default of any loan made by the Bank to them, pleaded that the amount for which they were liable as guarantors was limited to a sum significantly less than that claimed, and that the mortgage over the Wylde Street property did not extend to the greater amount. 9In answer to the whole of the Bank's claim on the guarantee, the respondents pleaded that the Bank was in breach of its obligation at common law and in equity to act in good faith. It was alleged that, by reason of the various particularised failures, the guarantee and mortgage were void as against the respondents, and they did not owe the monies claimed. 10The respondents also claimed that the Receivers appointed by the Bank owed to them a duty to take all reasonable care to sell the mortgaged properties, and obtain the best price reasonably obtainable, and that the Receivers had been in breach of that duty of care. The Bank was alleged to be liable for these breaches of the receivers. 11Finally, the respondents pleaded that they had been released from their guarantee because the Bank had released fellow joint sureties. 12On 13 December 2010, the possession proceedings between the Bank and the first defendant, Ms Lavin, were finalised. 13In early 2011, the respondents decided to sell the Wylde Street property, over which the Bank had a registered mortgage. The parties could not agree upon how the proceeds of sale would be used and, accordingly, in April 2011, the respondents brought a Notice of Motion in the possession proceedings seeking various declarations and orders which would have enabled the settlement of the sale of the Wylde Street property and a resolution of the distribution of the proceeds of sale. 14The Motion was heard by Schmidt J on 10 and 11 May 2011. On 17 May 2011, Schmidt J delivered her reasons: National Australia Bank Ltd v Lavin [2011] NSWSC 440. Her Honour stood the matter over for the making of formal orders. 15At [7], her Honour described the situation in the litigation at that stage. She said: "The proceedings have been resolved against all defendants, except Mr Cunningham and Ms Toppi. Mr Cunningham and Ms Toppi intend to use a portion of the Settlement of the sale of their property to repay what is owed to the bank under their guarantee. It is common ground that there will be a significant surplus from the sale. They then intend to bring proceedings against both the Bank and a receiver it appointed. It is common ground that such proceedings may not be brought against the Bank, until the guarantee is satisfied. What now remains in dispute is what sum, if any, must be paid into Court out of the proceeds of sale in respect of the costs of those proposed proceedings." 16On 2 June 2011, Schmidt J made orders in terms of Short Minutes of Order, agreed between the parties, which were handed up in Court. 17Insofar as they are relevant, the Short Minutes of Order provided that the Bank would provide a discharge of its mortgage over the Wylde Street property: "... subject to and upon ... payment of the sum of $343,000 by way of bank cheque, to the Supreme Court of NSW to be held on account of the plaintiffs' reasonable estimated future legal costs in respect of the matters raised in the amended Defence filed herein on 29 October 2010." On 7 June 2011, the respondents paid the sum of $343,000 into Court. The monies remain in Court. 18On 21 July 2011, the Bank filed a Notice of Discontinuance of the possession proceedings. That Notice of Discontinuance was consented to by the respondents. The Notice of Discontinuance contained a notation in the following terms: "The Court notes that: ... 4. On 7 June 2011, the sum of $343,000 was paid into [Court] in these proceedings: (a) consequential upon the plaintiff agreeing to discharge the mortgage executed by the second and third defendants in favour of the plaintiff over the land ...; (b) on account of the plaintiff's reasonable estimated future costs of the proceedings that the second and third defendants have indicated that they wish to bring against the plaintiff; and (c) pursuant to the orders made by Schmidt J on 2 June 2011, and that such monies are not to be paid out or otherwise released without order of the Court or the consent in writing of the parties." 19In April 2012, the respondents, together with another party, commenced proceedings against the Receivers in the Equity Division of this Court ("the receivership proceedings"). 20In the course of the receivership proceedings, on 26 July 2012, the Court made a number of consent orders, set out in Short Minutes of Order of that date. In these proceedings, the respondents were the plaintiffs. The Bank was not a party. 21In those Short Minutes of Order, the parties asked the Court to note the following: "1. The plaintiffs' acknowledge to the Court that the funds paid into Court in Supreme Court proceedings 2010/150034 and any accrued interest thereon is available to National Australia Bank (NAB) for the purpose of meeting any liability that NAB has to the fourth defendants pursuant to any indemnity provided by NAB in favour of them, including without limitation, any liability in relation to the fourth defendant's legal costs in this proceeding." 22The fourth defendant in the receivership proceedings were the two Receivers, who had been appointed by the Bank, and about whose conduct allegations had been made in the Amended Defence in the possession proceedings in 2010, even though they were not parties to those proceedings. 23The final hearing of the receivership proceedings commenced before Rein J on 20 August 2013. 24On 21 August 2013, Rein J made an order that the receivership proceedings against the fourth defendants (the Receivers) be dismissed with costs. That order was made consequent upon a concession by counsel for the present respondents, who were the plaintiffs before Rein J, that in the absence of a particular witness, Mr Argyrou being available to give evidence, the respondents' case against the Receivers was doomed to fail. 25For reasons, which emerged from the course of discussion between counsel and Rein J, it became apparent that even though the witness would not be available to give evidence, Rein J was not prepared to adjourn the proceedings. Counsel for the respondents, Mr Pesman, said: "Pesman: I am satisfied that your Honour's reasons appear from the argument and I won't trouble your Honour further. That being so, we accept that the case against the Receivers must fail. His Honour: What do you want to do about that case then, now? Pesman: I obviously can't consent to it being dismissed on that basis, given the reason that that becomes so, but we accept that without Mr Argyrou we cannot win that case. Smith: Can the case be dismissed with costs? His Honour: I think that is the consequence. Pesman: I don't consent to that, but I accept that consequence." 26Senior counsel for the Receivers, Mr Smith SC, made an application that Rein J order that the costs be paid by the respondents on an indemnity basis. Discussion ensued. Rein J raised the question of whether there was any need for an indemnity costs order because it was likely that the terms of the mortgage would be sufficient to entitle the Bank to recover costs on an indemnity basis. 27The following discussion occurred: "His Honour: You don't need to have this argument about the special order for costs. You get it. Your client will get it by way of contract. Smith: My client is entitled. I suppose that's what we are debating is the entitlement to get it out of the costs order from the plaintiff. Really, the effect of all of this is to throw the costs burden, to the extent that there is one, onto NAB. They have to indemnify the Receiver. His Honour: Doesn't the NAB say, we have to pay the Receiver all of these costs and you promised that you'd pay these costs? Smith: Mr Potts [junior counsel] I think, accepts the correctness of your Honour's views, but I'll let Mr Potts explain it. Potts: My clients have an indemnity from the National Australia Bank. They could have their costs paid by that bank. The bank would then have a right to recover under the fund in court, which is the $340,000. The mortgage has gone, so the fund is in lieu of that mortgage. His Honour: I understand. Can you get instructions on whether the 343 is sufficient to cover the costs that you would be seeking on a solicitor/client basis? Potts: I can. To complete the exercise what we are seeking is an order directly against the plaintiff, that the Receivers cover their costs directly and don't have to go through the NAB, and then have the NAB recover from the fund in court. But I will get the instructions that your Honour has asked me to get. I understand there is about $100,000 shortfall. Pesman: Your Honour's instinct is correct. What will happen is that the Receiver will send bills to the NAB, who will pay it from the fund." 28His Honour went on to hear further argument about whether he should make an order for indemnity costs and he declined to do so, orally expressing short reasons. 29His Honour then went on to say this: "His Honour: Is there any reason why I can't order such as whatever funds is available can be utilised. In other words costs can, in the first instance, be taken out of that fund from your point of view. Pesman: Not from my point of view. But NAB may have a view on that. His Honour: OK. Mr Potts, do you need to get instructions or do you want to leave it as it is. Potts: Yes. In light of what your Honour has said, it doesn't matter. But I should correct what I was instructed before. I am told the legal costs are roughly equivalent to what is in funds. The other difference is in relation to the Receiver's own professional legal costs." 30My reading of these exchanges is that the then counsel for the respondents here, conceded that the monies in Court, referred to as the "343", were available to the Bank to meet the costs order which had been made by Rein J in favour of the Receivers and against the respondents.

The Arrangements between the Bank and the Receivers 31On 8 January 2010, the plaintiff Bank appointed the Receivers. By a Deed of Indemnity dated 8 January 2010, the Bank agreed to indemnify and keep indemnified the Receivers from all liability properly incurred by them in the course of the receivership, and from all claims arising out of the receivership. This indemnity was subject to some exceptions which are presently immaterial. 32The parties agreed in cl 3 of the Deed that the indemnity did not affect or prejudice any rights the Receivers might have against any mortgagor to be indemnified against costs, charges, expenses and liabilities incurred by the Receivers. By cl 4 of the Deed, it was agreed that the plaintiff Bank would be subrogated to the rights of the Receivers in relation to any liability discharged by it under the Deed. The Receivers agreed to assist the Bank with respect to its exercise of such rights. 33By cl 5 of the Deed, the plaintiff Bank agreed to pay the Receivers' remuneration and expenses for work carried out in respect of the receivership to the extent to which funds were not available to pay them for that purpose. 34The Deed of Indemnity obliged the Bank to pay the Receivers their costs and expenses incurred in defending the receivership proceedings.

Receivers' Costs and Expenses 35In the period between 24 October 2012 and 17 December 2013, with respect to the receivership proceedings the receivers rendered Memoranda of Fees to the Bank, which totalled over $385,000. These fees included the legal costs that the Receivers had paid to the solicitors and counsel retained to act for them in the proceedings. 36According to an affidavit of Ms Danielle Kuti, the lawyer responsible for the carriage of this matter on behalf of the Bank, up to 24 June 2014 the Bank had paid a sum a little in excess of $369,000 to the Receivers in respect of the costs that had been billed. The fact of payment of this amount was not challenged by the respondents.

Submissions 37The Bank submitted that whilst initially, consequent upon the orders made by Schmidt J, the funds paid into Court were to be held on account of the Bank's reasonable estimated future costs of the receivership proceedings which were subsequently brought in the Equity Division, the acknowledgement recorded on 26 July 2012, was sufficient to enable the Court to make the order which it seeks. 38The Bank submitted that it was clear that the parties had agreed, and the respondents had acknowledged in the course of the receivership proceedings, that the monies in Court were to be made available to the Bank so that it could be repaid the monies it had been paying for the Receiver's legal costs. 39The Bank submitted that this was not an unusual circumstance given that the terms of the mortgage, which secured the guarantee provided by the respondents, was sufficient to oblige the respondents to pay all costs incurred by the Bank as a consequence of any default. 40The respondents submitted that as Rein J had declined to make an indemnity costs order against them and in favour of the receivers, then before the money in Court could be accessed, the receivers had an obligation to have their Bill of Costs assessed on a party and party basis and, once assessed and a Certificate of Costs issued, then the receivers would be entitled to access the monies paid into Court. 41The respondents further submitted that as there had been no Costs Certificate issued, or costs assessment undertaken, there was no proper basis to enable the Court to assess the reasonableness of the costs which had been charged to the Receivers and for which the Receivers had sought indemnity from the Bank. 42The respondents pointed to the fact that there was no obligation under the Deed of Indemnity for the Bank to pay the Receivers' costs where the Receivers had an entitlement to recover costs from a third party, and had not done so. 43Finally, the respondents submitted that the Court would not act upon or give any weight to the acknowledgement contained in the Short Minutes of Order dated 26 July 2012, but would rather limit the purpose for which the funds were in Court to that described in the Short Minutes of Order made on 2 June 2011, following the judgment of Schmidt J.

Discernment 44The substance of the real issue between the parties is the purpose for which the funds presently in Court are being held, and who may be entitled to them. 45There is no doubt that the funds were initially paid into Court pursuant to the orders made by Schmidt J on 2 June 2011. Those orders were made in the possession proceedings, and were made to enable the settlement of the sale of the Wylde Street property to occur. 46It was in prospect at the time that the respondents would commence proceedings against the Bank seeking damages arising from the conduct of the receivership. The general nature of the proposed claim had been highlighted in the Amended Defence filed in October 2010. 47At the time the monies were paid into Court, they were paid on account of the Bank's reasonable estimated future costs of the proceedings that the respondents indicated they wished to bring against it. 48As things turned out, proceedings were not commenced against the Bank, but rather against, relevantly, the Receivers appointed by the Bank. 49It is unsurprising that in those circumstances, in the course of the receivership proceedings, that an acknowledgment was made in those proceedings, that the monies were being held for a purpose which was broader than that which had covered the monies when first paid into Court. After all, the respondents had not commenced proceedings against the Bank, which was what was initially envisaged, rather the proceedings were against the Receivers appointed by the Bank. But the Bank, in reality, remained liable for the Receivers' costs. 50The acknowledgment made on 26 July 2012, is clear in its terms. The respondents were acknowledging that the funds paid into Court and any accrued interest, was available to the Bank for the purpose of meeting its liability to the Receivers, including any liability in relation to the receivers' legal costs of the receivership proceedings. 51There is no doubt that the terms of the acknowledgment are clear, and it is sufficient to entitle the Court to make the order sought by the Bank on this Motion. 52This approach is consistent with what counsel for the present respondents told Rein J at the time of the ultimate disposition of the proceedings brought by the respondents against the receivers. 53It is appropriate to make the orders sought in the Notice of Motion dated 25 June 2014. The respondents should pay the plaintiff's costs of the Motion as they have been wholly unsuccessful.

Orders 54I make the following orders: (1)Order pursuant to r 41.3 of the Uniform Civil Procedure Rules 2005, that the funds paid into Court by the second and third defendants (being Neil Cunningham and Paola Toppi) in the amount of $343,000, together with all accrued interest thereon, be paid out to the plaintiff forthwith. (2)Order the second and third defendants to pay the plaintiff's costs of the Motion.

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: 29 August 2014

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