Palenzuela v Palaje

Legal Aid Commission Act 1979 Uniform Civil Procedure Rules 2005 LEGISLATION CITED : Supreme Court Rules 1970 Contracts Review Act 1918 Civil Procedure Act 2005 Conveyancing Act 1919

Palenzuela v Palaje [2008] NSWSC 527 Palenzuela v Palaje [2008] NSWCA 349 Palenzuela v Palaje & Ors [2009] NSWSC 1371 Maher v Network Finance Ltd (1986) 4 NSWLR 694 CASES CITED : Athens v Randwick City Council [2005] NSWCA 317; (2005) 64 NSWLR 58 Brewer v Brewer (1953) 88 CLR 1 Blair v Curran (1939) 62 CLR 464 In re Leighton's Conveyance [1937] Ch 149 Gallie v Lee (No 2) [1971] AC 1039

TEXTS CITED : Fisher and Lightwood's Law of Mortgage, 2nd Australian ed, LexisNexis Butterworths, Australia, 2005

PARTIES : Nelia David Palenzuela (Plaintiff) Maria Concepcion Palaje (Defendant)

COUNSEL : M Sneddon with C Alexander (Plaintiff) J Atkin (Defendant)

SOLICITORS : McLaughlin & Riordan (Plaintiff) S M Boyle & Co (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2010/126654 NELIA DAVID PALENZUELA v MARIA CONCEPCION PALAJE JUDGMENT 1 The major issue in this case is the extent, if any, to which any costs for which the defendant, Maria Concepcion Palaje, is liable are secured against her property at Kensington. 2 Nelia David Palenzuela, the plaintiff, lent $100,000 to Emily Palaje. The loan was guaranteed by her mother, Ms Palaje. An earlier loan of $75,000 was incorporated into the oral loan agreement. 3 Emily Palaje defaulted on the loans and Ms Palenzuela proceeded against Ms Palaje under guarantee. At first instance Ms Palenzuela failed (Palenzuela v Palaje [2008] NSWSC 527). That decision was overturned on appeal (Palenzuela v Palaje [2008] NSWCA 349) and a new trial was ordered. Ms Palaje was ordered to pay Ms Palenzuela's costs of the appeal and it was ordered that the costs of the first trial abide the result of the second trial. Ms Palenzuela was successful in the second trial (Palenzuela v Palaje & Ors [2009] NSWSC 1371) and Ms Palaje was ordered to pay Ms Palenzuela's costs of the proceedings including the costs of the first trial up to a specified date on the ordinary basis and thereafter on the indemnity basis. 4 At various stages during the above litigation Ms Palaje was a legally assisted person under the Legal Aid Commission Act 1979. Section 47(1) provides an exclusion from liability to pay costs of a legally assisted person in these terms: "Where a court or tribunal makes an order as to costs against a legally assisted person: (a) except as provided by subsections (2), (3), (3A), and (4A), the Commission shall pay the whole of those costs, and (b) except as provided by subsections (3), (3A), (4) and (4A), the legally assisted person shall not be liable for the payment of the whole or any part of those costs." 5 Of the exceptions in the Legal Aid Commission Act, s 47(1)(b) only s 47(3) is relevant to the instant proceedings. It relates to any period during which the person is not in receipt of legal aid. The person is personally liable for costs incurred in that period. The section provided: "The Commission shall not be liable to pay any costs incurred by or on behalf of a person in respect of a period during which that person was not a legally assisted person (even though those costs were ordered to be paid at a time when that person was a legally assisted person) and that person shall be liable for the payment of those costs." 6 Ms Palaje acknowledges that liability which was estimated by Andrew Gordon Cameron, Ms Palenzuela's solicitor, at $68,929.70. Mr Cameron was not cross-examined. 7 In the retrial Ms Palenzuela sought and was granted security for the judgment sum. Nicholas J made the following orders: "1 Judgment for the Plaintiff against the First Defendant, Maria Palaje, in the sum of $254,625.50 including interest up to the date of judgment in the sum of $79,625.50. 2 The First Defendant's property located at 22/7 South Dowling Road, Kensington, New South Wales and otherwise known as Folio Identifier 22/SP6850 ("the Kensington property") be charged the said judgment debt, and interest, in accordance with order 1 above. 3 The First Defendant's Cross Claim be dismissed. 4 The Plaintiff shall be at liberty to cause this Judgment to be registered as against the title of the Kensington property, as charged as per order 2 above." 8 When his Honour subsequently made the order for costs no order was sought or made securing the costs against the Kensington property. 9 Nevertheless, Ms Palenzuela claims that the costs are secured on the Kensington property pursuant to the Uniform Civil Procedure Rules 2005, Pt 42, r 42.25 which is in the following terms: "(1) Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be. (2) The court may order that the person's costs not be so paid if: (a) the trustee or mortgagee has acted unreasonably, or (b) in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund." 10 By her amended statement of claim in the proceedings before Nicholas J, Ms Palenzuela sought declarations that Ms Palaje guaranteed the repayment to her of all money owed by Emily Palaje and that Ms Palenzuela had an equitable interest in the real property of Ms Palaje as security for the guarantee. 11 Counsel for Ms Palenzuela referred to passages in the judgment of Nicholas J that led his Honour to charge the judgment debt against the Kensington property. 12 His Honour found that on 11 August 2004 Ms Palenzuela, Ms Palaje and Emily Palaje went to the office of a solicitor who advised Ms Palenzuela not to lend without a mortgage from Emily Palaje or if Ms Palaje was going to guarantee Emily then a mortgage to secure that guarantee. 13 When they left the solicitor's office to walk to the nearby bank his Honour accepted that Ms Palenzuela asked what they were going to do because the solicitor advised her to get a mortgage. At 6 [22] his Honour recorded the following portion of the transcript: "Q. And was there any urgency expressed in relation to --

A. They said "What are we going to do? Mr Acar is asking for a mortgage. We don't have time. The liquidators are closing in. We need to get the liquidators paid …."

Q. …What did you say? A. I told them, "What are we going to do now, because the solicitor advised me to get a mortgage off you" and Emily said "There is no time" and Maria said, "There is no time but don't worry about it Nellie, you will get your money back. You know that we have properties to back up the loan and I personally guarantee that you will get paid"." 14 Ms Palenzuela contended that a statement signed by Ms Palaje on 15 May 2005 evidenced Ms Palaje's acknowledgement of her agreement of 11 August 2004 to guarantee and secure the loans. His Honour at 9 [32] recorded the statement portion of which was as follows: "I am fully aware that Nelia agreed to lend Emily the money, because she trust and respect me and because I made a personal guarantee against whatever assets I have (personal or real), to back up the loan being sought for." 15 At 12 [51] his Honour expressed the opinion that the evidence firmly established that after leaving the solicitor's office on 11 August 2004 Ms Palaje agreed with Ms Palenzuela to personally guarantee the repayment of the loans to Emily in the total sum of $175,000 and to provide Ms Palenzuela with the Kensington property as security for the guarantee. 16 His Honour concluded at 13 [58] that the statement of 15 May 2005 operated to establish an equitable interest in Ms Palaje's real property, relevantly the Kensington property, sufficient to support Ms Palenzuela's existing caveat over it. And at 14 [63] his Honour said: "The claim that the Kensington property be charged to secure the payment of the debt should also be upheld. This claim is established under the agreement of 11 August 2004, alternatively, by the terms of the statement." 17 If Ms Palenzuela can bring herself within the Uniform Civil Procedure Rules, Pt 42, r 42.25 she would be entitled to the payment of all her costs out of the Kensington property. The authority for this proposition is Maher v Network Finance Ltd (1986) 4 NSWLR 694. The Court of Appeal considered the effect of the forerunner of Pt 42, r 42.25, Supreme Court Rules 1970, Pt 52, r 65, on the Legal Aid Commission Act, s 47(1). McHugh JA with whom Kirby P and Priestley JA agreed took the view that apart from the effect of s 47, the mortgagee could have sued for its costs and relied on any one of three independent causes of action: the costs order made by the primary judge, Pt 52, r 65 and the terms of a covenant in the mortgage entitling the mortgagee to costs. 18 With respect to the operation of s 47(1) his Honour said at 698: "When s 47(1)(b) says that "the legally assisted person shall not be liable for the payment of the whole or any part of these (sic) costs" it is speaking only of the costs which the legally assisted person is required to pay as the result of an order by a tribunal or court. Likewise, the direction in s 47(1)(a) to the Commission to pay the whole of the costs is a reference to the costs which a tribunal or court has ordered." 19 Thus the Legal Aid Commission Act, s 47(1) operated only on the primary judge's order for costs and left the mortgagee able to prosecute his claim under the covenant in the mortgage or under the Supreme Court Rules, Pt 52, r 65. 20 In the instant circumstances there was no covenant in the security over the Kensington property. But that does not matter if the Uniform Civil Procedure Rules, Pt 42, r 42.25 was available to Ms Palenzuela. 21 Counsel for Ms Palenzuela invited me to conclude, by reference to passages in Nicholas J's judgment, that Ms Palenzuela was a mortgagee. 22 That raised the possibility of issue-estoppel and since this was not argued at the hearing, I invited counsel to make further submissions on this question. 23 I was invited to look at the pleadings in the proceedings before Nicholas J. In the amended statement of claim, amongst other relief, a declaration was sought that Ms Palenzuela was an equitable chargee and/or mortgagee over the Kensington property and an order was sought that Ms Palaje do all things necessary to execute a mortgage and/or charge in favour of Ms Palenzuela. 24 In the alternative, a declaration that Ms Palenzuela had a proprietary interest in the Kensington property was sought. 25 It was pointed out that no charging order was sought but there was a claim for such further or other declarations and orders as the court considered appropriate. 26 There was a cross-claim but, as one would expect, no order material to this question was sought. Ms Palaje sought relief under the Contracts Review Act 1918. 27 Counsel for Ms Palenzuela referred to authority for the proposition that orders are to be construed by reference to the originating judgment, at least to resolve an ambiguity (Athens v Randwick City Council [2005] NSWCA 317; (2005) 64 NSWLR 58 at 78-79 [132] - [135]). 28 It was submitted that if recourse was had to the judgment of Nicholas J and the order was properly construed the word "chargee" would be given the meaning "mortgagee." One problem with that submission is that the word "chargee" is not used in the order or in the judgment. 29 In my view there is no ambiguity in the orders of Nicholas J and they reflect the judgment and are in response to the relief sought in the amended statement of claim.

30 The second central issue in the case before his Honour was whether Ms Palenzuela had an equitable interest in the Kensington property. That is reflected in the declarations and orders sought. A declaration was sought that Ms Palenzuela had a proprietary interest in the Kensington property. His Honour decided that issue. Ms Palenzuela had an equitable interest in the Kensington property sufficient to ground her caveat and sufficient to persuade his Honour to make a charging order under the Civil Procedure Act 2005, s 126. 31 His Honour did not make the declaration sought that Ms Palenzuela was an equitable chargee and/or mortgagee over the Kensington property nor did he make an order that Ms Palaje do all things necessary to execute a mortgage and/or charge in favour of Ms Palenzuela against the Kensington property as security for Ms Palaje's indebtedness to Ms Palenzuela. 32 His Honour did not identify the equitable interest in the Kensington property as a mortgage. 33 In my view, Ms Palenzuela is foreclosed from contending she was an equitable mortgagee by issue-estoppel. 34 Counsel for Ms Palenzuela referred to Brewer v Brewer (1953) 88 CLR 1 at 14-15 where Fullagar J said the whole position was carefully explained by Dixon J in Blair v Curran (1939) 62 CLR 464. At 531-532, Dixon J explained: "A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion, whether that conclusion is that a money sum be recovered or that the doing of an act be commanded or be restrained or that rights be declared. The distinction between res judicata and issue-estoppel is that in the first the very right or cause of action claimed or put in suit has in the former proceedings passed into judgment, so that it is merged and has no longer an independent existence, while in the second, for the purpose of some other claim or cause of action, a state of fact or law is alleged or denied the existence of which is a matter necessarily decided by the prior judgment, decree or order.

Nothing but what is legally indispensable to the conclusion is thus finally closed or precluded. In matters of fact the issue-estoppel is confined to those ultimate facts which form the ingredients in the cause of action, that is, the title to the right established. Where the conclusion is against the existence of a right or claim which in point of law depends upon a number of ingredients or ultimate facts the absence of any one of which would be enough to defeat the claim, the estoppel covers only the actual ground upon which the existence of the right was negatived. But in neither case is the estoppel confined to the final legal conclusion expressed in the judgment, decree or order. In the phraseology of Coleridge J. in R. v. Inhabitants of the Township of Hartington Middle Quarter (1), the judicial determination concludes, not merely as to the point actually decided, but as to a matter which it was necessary to decide and which was actually decided as the groundwork of the decision itself, though not then directly the point at issue. Matters cardinal to the latter claim or contention cannot be raised if to raise them is necessarily to assert that the former decision was erroneous.

(1) (1855) 4 E. & B. 780, at p. 794 [119 E.R. 288, at p. 293]." 35 A matter cardinal to the present claim is the nature of the equitable interest held by Ms Palenzuela in the Kensington property. In the proceedings between Ms Palenzuela and Ms Palaje before Nicholas J, his Honour decided that cardinal issue. If I were to decide that Ms Palenzuela was an equitable mortgagee that would necessarily assert that his Honour's decision was erroneous. 36 In any event, no facts on this issue were adduced before me and I am not prepared, in reliance upon passages from the judgment of Nicholas J, to conclude that Ms Palenzuela was an equitable mortgagee. 37 It was submitted that notwithstanding the difference between a mortgage and a charge the terms were used interchangeably and I should conclude that Ms Palenzuela, as an equitable chargee, was a mortgagee for the purposes of the Uniform Civil Procedure Rules, Pt 42, r 42.25 based on Nicholas J's findings. 38 In Fisher and Lightwood's Law of Mortgage, 2nd Australian ed, LexisNexis Butterworths, Australia, 2005 at [1.9] the authors point out that "mortgage" and "charge" are often loosely used as a generic term for all species of security and examples are given. To those might be added the Court of Appeal decision in In re Leighton's Conveyance [1937] Ch 149 to which reference was made by Kirby P in Maher. 39 Lord Wright MR at 152-153 spoke about the judge at first instance denying the ordinary right of a mortgagee to add to his security all costs, charges and expenses reasonably and properly incurred in ascertaining or defending his rights or in recovering the mortgage debt. But his Lordship was referring to charges that had been entered in the charges register. The passage was cited with approval by Viscount Dilhorne in Gallie v Lee (No 2) [1971] AC 1039 at 1049. 40 Be that as it may, I see no reason to depart from the ordinary meaning of a mortgage in the Uniform Civil Procedure Rules, Pt 42, r 42.25. After all, there is a distinction between a mortgage that involves a grant or transfer or assignment of property and a charge that merely reserves rights in property to which the chargee may resort in the event of default. The principal remedy of a mortgagee is foreclosure whereas that of a chargee is judicial sale. 41 But the issue does not arise in the instant circumstances, in my view. Nicholas J did not find that Ms Palenzuela was an equitable chargee. He found that her equitable interest was sufficient to sustain a caveat. And he made a charging order limited to the judgment debt. And the charging order took effect when it was made in terms of the Civil Procedure Act, s 126(3). 42 Thus, even if an equitable chargee can be said to be a mortgagee for the purpose of the Uniform Civil Procedure Rules, Pt 42, r 42.25, Ms Palenzuela was not an equitable chargee with respect to the costs and did not conduct the proceedings before Nicholas J in the capacity of an equitable chargee in relation to the costs that were not ordered until after his Honour delivered judgment. 43 For these reasons I am of the view that Ms Palaje is only liable for the costs incurred on her behalf during periods when she was not a legally assisted person. 44 On 13 May 2010, Ms Palaje entered into a contract for sale of the Kensington property to her son for $280,000. It was agreed for the purpose of these proceedings that the market value of the Kensington property was $515,000. Ms Palenzuela sought a declaration that the contract was voidable under the Conveyancing Act 1919, s 37A as an alienation of property made with intent to defraud creditors or under s 37B as a voluntary alienation of land made with intent to defraud a subsequent purchaser. 45 No creditor other than Ms Palenzuela was identified. The contract contained a special clause providing for the continued residence in the property of Ms Palaje. 46 On 17 March 2010, Suzanne May Boyle, Ms Palaje's solicitor, had advised Mr Cameron that Ms Palaje had located a purchaser. She did not say it was Ms Palaje's son. 47 On 8 April 2010, Mr Cameron responded seeking payment of costs in excess of $150,000. That included costs incurred during periods when Ms Palaje was a legally assisted person for which I have found she was not liable. 48 In her letter of 13 April 2010, Ms Boyle took the view that her client was not liable for any costs and it was a matter for the Legal Aid Commission. 49 On the date the contract for sale was signed, 13 May 2010, Ms Boyle informed Mr Cameron that she had received the counterpart of the contract that day from the purchaser's solicitors and expected settlement on 24 June 2010. Again there was no mention that the purchaser was Ms Palaje's son. 50 It was not until the commencement of these proceedings and discovery that Mr Cameron became aware of the contract price, the terms of the contract and the identity of the purchaser. 51 Under cross-examination, Ms Boyle said the whole purpose of the contract was to raise sufficient funds to pay out what was owing to Ms Palenzuela. But she was advised by Mr Cameron that day that interest to 24 June 2010 would add a further $11,865.42 to the judgment debt making a total of $266,492.92. This meant that there was just $13,507.08 remaining from the sale price of the Kensington property, an amount insufficient to pay costs due to Ms Palenzuela during periods when Ms Palaje was not a legally assisted person. 52 Ms Boyle said that if Ms Palenzuela was entitled to $150,000 for costs Ms Palaje and her son had agreed to rescind the contract and put it on the market for it to be sold so that Ms Palenzuela could be paid what she was owed. 53 But on 7 June 2010 when Mr Cameron swore his affidavit with the $68,929.70 estimate of the costs during periods when Ms Palaje was not a legally assisted person, or shortly thereafter, Ms Boyle must have been aware that the contract price was insufficient. Yet Ms Palaje and her son did not rescind the contract. Instead, Ms Palaje gave an undertaking to the court that until further order she would not by herself, her employees, servants, or agents sell, transfer, encumber, or otherwise deal with the Kensington property. 54 But I do not think the contract for sale was executed with intent to defraud. Ms Boyle was misguided in failing to appreciate that her client would be liable for costs in excess of $13,507.08. In my view a case for an order under the Conveyancing Act, s 37A or s 37B has not been made out. 55 On the other hand, I am not prepared to leave it to Ms Palaje and her son to rescind the contract for sale. The appropriate order is an injunction restraining Ms Palaje from completing the contract for sale with her son. 56 I will order Ms Palenzuela to pay Ms Palaje's costs of these proceedings. Ms Palenzuela failed to establish an entitlement to any of the relief she claimed in the amended summons. 57 There should be an order for sale of the Kensington property and an order that from the proceeds of sale Ms Palenzuela be paid $266,490.92 plus interest on the judgment debt from 25 June 2010 to the date of payment together with the unchallenged estimate of costs in the periods when Ms Palaje was not a legally assisted person of $68,929.70. I direct the parties to bring in short minutes of order reflecting these reasons. ***********

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