Parrella v Trustee of the Property of Marino

1. Leave be granted to the applicants, pursuant to s 58(3)(b) of the Bankruptcy Act 1966 (Cth) to continue the proceedings against the bankrupt in case no. 295470 of 2020 in the Supreme Court of New South Wales. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

KATZMANN J: 1 Francesco (aka Frank) Marino is the first defendant in an action commenced in the Equity Division of the Supreme Court of New South Wales on 14 October 2020 (case no. 295470 of 2020) (the Supreme Court proceeding). The plaintiffs in that proceeding are Adelaide Concrete Cutting & Drilling Pty Ltd and Giovanni Antonio Parrella. The second defendant in the Supreme Court proceeding is Renaldo Polo, a solicitor and the principal of the law firm, Oracle Law. In substance, the plaintiffs allege that Mr Marino duped them into investing in a sham investment scheme by inducing them to enter into an asset management agreement with him by making false representations. 2 The plaintiffs claim that Mr Marino was an employee or officeholder of Oracle Law, made false representations to Mr Parrella and Sergio Pacifico, the sole director of Adelaide Concrete, and that Adelaide Concrete and Mr Parrella entered into the asset management agreements in reliance on those representations. As an initial capital investment, they transferred $210,000 into a bank account in the name of Mr Marino. The plaintiffs allege that Mr Marino breached the agreements and is liable to each of them under guarantees that were given personally by him expressly and as warranties collateral to the agreements; breached his fiduciary duties; breached various provisions of the Corporations Act 2001 (Cth); engaged in misleading or deceptive conduct contrary to s 18 of the Australian Consumer Law in Schedule 2 to the Competition and Consumer Act 2010 (Cth); and breached his duty of care as their asset manager by failing to act "in the manner of a reasonable and responsible asset manager". 3 The plaintiffs claim that Mr Polo, in his capacity as the principal of Oracle Law, is liable to them (both personally and vicariously) for the negligence of Mr Marino. They allege that Mr Polo failed to take steps to ensure that the legal services provided by Oracle Law were provided in accordance with the Legal Profession Uniform Law 2014 (NSW), Legal Profession Act 2007 (Qld) (Queensland Act), and the Australian Solicitors Conduct Rules 2015, that Mr Polo was in breach of s 34(1)(b) of the Uniform Law, and that Mr Polo is taken to have directly contravened any provision of those laws and the Conduct Rules that was contravened by Oracle Law, in accordance with s 35(1)(b) of the Uniform Law and s 701 of the Queensland Act. The plaintiffs also allege that Mr Polo contravened r 41.1 of the Conduct Rules, which prohibit a solicitor from conducting managed investments as part of the law practice except in relation to a scheme administered by relevant professional associations, and also breached the disclosure obligations relating to multidisciplinary partnerships under s 152 of the Queensland Act. In addition, the plaintiffs allege that Mr Polo contravened the ACL by representing that Mr Marino was entitled to engage in legal practice and that he breached his duty of care to Mr Parrella and Adelaide Concrete "as clients or prospective clients of Oracle Law". 4 As against Mr Marino, the plaintiffs seek the following relief: (1) damages for breach of contract or breach of a collateral warranty in the amounts of their initial capital investments ($10,000 for Adelaide Concrete and $200,000 for Mr Parrella); (2) alternatively, damages in the same amounts; (3) alternatively, a declaration that the agreements are rescinded and orders that the sums invested be returned; (4) pre-judgment interest; and (5) costs. 5 Similar relief is sought against Mr Polo either in the inherent jurisdiction of the Supreme Court in relation to the control and discipline of solicitors as compensation for their losses, as damages in negligence, or under s 236 of the ACL. 6 On 26 March 2021 Mr Polo filed a defence, disputing liability. On 9 December 2021 Mr Polo filed a cross-claim against LawCover and Mr Marino seeking from each of them contribution towards, or an indemnity for, any verdict obtained against him. As against LawCover, the claim is one for failing to honour its insurance policy. As against Mr Marino, the claim is that Mr Marino used the email address of Oracle Law without informing Mr Polo and without his permission. 7 Mr Marino filed a defence on 1 December 2021 and later a debtor's petition, which was accepted by the Australian Financial Security Authority with a bankruptcy date of 22 June 2022. 8 Section 58(3)(b) of the Bankruptcy Act 1966 (Cth) relevantly provides that, after a debtor becomes bankrupt, it is not competent for a creditor, except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. A "provable debt" is a debt provable in bankruptcy. With certain exceptions, all debts and liabilities (present or future, certain or contingent) to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in the bankruptcy: Bankruptcy Act, s 82(1). They include demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust: Bankruptcy Act, s 82(2). 9 It is apparent that the Supreme Court proceeding is at least in part "a proceeding in respect of a provable debt". It was submitted that there was some doubt about whether that is true with respect to all of the causes of action. In these circumstances, it is open to the Court to proceed on the assumption that leave is required (see Allanson v Midland Credit Ltd [1977] FCA 14; 30 FLR 108 at 115; 16 ALR 43 at 49, and that is the course I propose to take. 10 On 26 September 2022 Mr Parrella filed an application in this Court seeking a number of orders. Some of those orders were made by consent on 27 September 2022. They included orders removing Mr Parrella's then trustee in bankruptcy and appointing Sean Magnus Wengel in his place. The only outstanding question was whether the Court should make an order under s 58(3)(b) for leave to continue the Supreme Court proceeding against Mr Marino. On 1 December 2022 the new trustee, Mr Wengel, advised Mr Parrella's solicitors that he does not oppose the continuance of the Supreme Court proceeding. At a case management hearing on 5 December 2022 Adelaide Concrete and Mr Polo made oral applications to be added as applicants in order to join in the leave application and I made orders to that effect. An amended application naming Mr Parrella, Adelaide Concrete and Mr Polo as applicants (and making other minor amendments) has now been prepared and will be filed by 9 am tomorrow. It is upon that application that the three parties now move. Mr Wengel appeared at the case management hearing on 5 December and confirmed that he does not oppose the leave application. As the bankrupt, Mr Marino has no right to be heard: Commissioner of Taxation v Yeo (Trustee) (No 2) [2019] FCA 1188 at [30]-[44] (Anderson J); Kitay (Liquidator) v Trenfield (Trustee) [2021] FCA 508 at [12]-[16] (Jackson J). 11 The leave application is supported by two affidavits, sworn by Simon Chen on 26 September 2022, only parts of which were read, and 6 December 2022. Mr Chen is a solicitor in the employ of William Roberts Lawyers, the solicitors for Mr Parrella and, more recently, Adelaide Concrete. Mr Polo relies on that evidence and the submissions made on behalf of Mr Parrella and Adelaide Concrete. 12 For the reasons that follow, I am satisfied that leave should be granted. 13 The Bankruptcy Act does not specify any factors that should be taken into account in considering whether leave should be granted. The discretion is at large. But the authorities indicate that the following matters weigh in favour of an applicant: (1) the proceeding the subject of the application involves parties other than the bankrupt and it might be necessary for the bankrupt to become a party: Re Rose; Ex parte Devaban Pty Ltd [1994] FCA 1082 (Hill J); (2) it is in the interests of justice that the claims made against the bankrupt are determined at the same time as the court determines the claims against the other parties: National Australia Bank Limited v Moore [2012] FCA 865 at [20] (Robertson J); (3) the facts are complex and the issues would be better and more comprehensively dealt with in a contested trial than if the creditor were required to lodge a proof of debt against the debtor alone: Allanson, 30 FLR 108 at 114; 16 ALR at 48; (4) there is no opposition from the trustee in bankruptcy: SBA Music Pty Ltd v Hall (No 2) [2014] FCA 1116 at [28] (Wigney J); Health Services Union v Jackson (No 3) [2015] FCA 694 at [19] (Tracey J); (5) the proceeding was commenced well before the date of the bankruptcy and there is no evidence to suggest that the application was made to gain an advantage over other creditors: Stoker (Trustee), in the matter of Starr (Bankrupt) v Starr [2011] FCA 746 at [22] (Jacobson J); Jackson at [20]; and (6) the proceeding is otherwise ready for hearing such that the interests of unsecured creditors are unlikely to be prejudiced: Jackson at [20]. 14 Here, as I have already observed, the trustee in bankruptcy does not oppose the application. It appears from the information recorded by the Official Receiver on the National Personal Insolvency Index that the largest single creditors are Mr Parrella and Adelaide Concrete. Together the debts said to be owing to them amount to about 70% of the total debt. The Supreme Court proceeding was commenced nearly two years before the date of the bankruptcy. There is no evidence to suggest that the application was made to gain an advantage over other creditors. Freezing orders were made against the assets of Mr Marino on 15 April 2021 and four days later so, too, were asset disclosure orders and asset notification orders all of which provide some protection for the creditors. If variations to the freezing orders were necessary, absent a grant of leave to proceed against Mr Marino variations may not be possible. Although the Supreme Court proceeding is not yet ready for hearing, it is at a relatively advanced stage. All parties other than Mr Marino have filed their lay evidence in chief. Mr Marino's evidence was due to be filed by 21 April 2022, two months before he filed his debtor's petition. I was informed that he had sought an extension of time but that his application had not been determined by the time of his bankruptcy. The evidence filed by Mr Parrella and Adelaide Concrete is extensive. 15 While pre-bankruptcy costs orders would constitute a provable debt, post-bankruptcy costs are not provable in the bankruptcy: Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 at [65] and [67]. As there is no certainty that the applicants will recover their post-bankruptcy costs, that question would have to be determined by the Court in any event. 16 There are multiple parties in the Supreme Court proceeding. It raises complex questions of fact and law. The matters involving Mr Marino and Mr Polo are interrelated and, in part, share the same factual matrix. It is unquestionably in the interests of justice that the claims against Mr Marino brought by Mr Parella and Adelaide Concrete are determined at the same time as their claims against Mr Polo and, if there is any merit in Mr Polo's cross-claim against Mr Marino, that that claim also be determined by the Court at that time. Mr Parrella and Adelaide Concrete would be potentially disadvantaged in their case against Mr Polo if they were not able to proceed with their claim against Mr Marino. To the extent that the proceeding raises questions of law, there can be no doubt the Court is best placed to determine them. Moreover, the resolution of all claims in the Supreme Court avoids bifurcation and the necessity to decide which of the claims are provable in bankruptcy and which are not: Graham & Linda Huddy Nominees Pty Ltd v Byrne [2017] FCA 1638 at [7] (Logan J). 17 I will therefore order that leave be granted to the applicants pursuant to s 58(3)(b) of the Bankruptcy Act to continue the proceedings against the bankrupt in case number 295470 of 2020 in the Supreme Court of New South Wales. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Katzmann.