Riva NSW Pty Ltd v Key Nominees Pty Ltd

The proposed claim

1. The proposed claim is contained in a draft statement of claim annexed to an affidavit sworn by Mr Angelo Ferella.
2. The proposed statement of claim alleges that: 1. by reason of s 58(3) of the Real Property Act 1900 (NSW), Key Nominees, as mortgagee, was obliged to apply the surplus proceeds of sale (after paying expenses of sale and the amount due under the mortgage) to the Ferellas or at their direction to Riva; 2. in breach of that duty, and with actual notice of the Ferellas' claim that they held the property in trust, Key Nominees: 1. overpaid itself in the sum of some $53,000 (the "Overpayment Claim"); 2. paid its solicitors Bray Jackson & Co, $75,000 as security for further costs being costs to which it was not properly entitled ("the Costs Claim"); 3. paid some $723,000 to the Australian Taxation Office, on the false premise that this sum was due in respect of Goods and Services Tax arising out of the sale of the land and in circumstances where Key Nominees "should have…challenged" the ATO's entitlement to that fund ("the GST Claim"); and 4. paid the surplus (some $1.79 million and described as the "OT Payment") to the Official Trustee rather than to the Ferellas in their capacity as trustee of the Cavallino Unit Trust ("the OT Claim").
3. The proposed statement of claim pleads that, by reason of s 58(3) of the Real Property Act the surplus "should have" been paid to the Ferellas, or at their direction, to Riva.
4. A mortgagee holds the surplus proceeds after the mortgagee sale on trust for subsequent encumbrancers and thereafter for the mortgagor (see generally E L G Tyler, P W Young and C E Croft, Fisher & Lightwood's Law of Mortgage, (3rd ed 2014, LexisNexis Butterworths) at [10.12] and [20.44]).
5. In so far as s 58(3) provides that the proceeds of a mortgagee sale "shall be applied", relevantly, to the mortgagor, it is to be read in a manner consistent with that equitable duty to account as a trustee for any surplus (Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; HCA 44 at [35] per Gummow, Hayne, Heydon, Kiefel and Bell JJ, citing with approval Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 299 per Hutley JA).
6. Consistently with those principles, Riva and the Ferellas seek: 1. an order that an account be taken of the "correct amount which ought to have been payable" to the Ferellas or Riva as trustees of the Cavallino Unit Trust; 2. a declaration that Key Nominees "is a trustee for the plaintiffs for the monies found to be due as a result of the taking of the said account"; and 3. equitable compensation in respect of the Overpayment Claim, the Costs Claim and the GST Claim and for "[t]hat part of the OT Payment found not to have been directly applied by the Official Trustee in satisfying indebtedness incurred by [the Ferellas] in their former capacity as trustees of the Cavallino Unit Trust".

Background - the litigation so far

1. The Ferellas were discharged from bankruptcy in December 2008.
2. On 17 December 2009 the Ferellas, together with Agusta Pty Ltd (which then claimed to be the trustee of the Cavallino Unit Trust) commenced proceedings against Key Nominees ("the 2009 Proceedings").
3. On 23 December 2010, the 2009 Proceedings were fixed for hearing on 23 and 24 May 2011.
4. By that time, Riva had been substituted as plaintiff. The allegations made by Riva in an amended statement of claim filed in the 2009 Proceedings included the Costs Claim and the GST Claim.
5. The matter came on for hearing before Windeyer AJ (as his Honour then was) on 23 May 2011. A solicitor appeared for the sole purpose of making an application for an adjournment. Windeyer AJ refused the application and dismissed the proceedings with costs.
6. On 16 June 2011, Riva filed a notice of intention to appeal from that decision. On 17 September 2011 the time to lodge a notice of appeal expired without any notice of appeal being filed.
7. In 2012 Riva and the Ferellas commenced further proceedings ("the 2012 Proceedings").
8. On 13 September 2013, Riva and the Ferellas served a statement of claim in the 2012 Proceedings. That statement of claim named Key Nominees as first defendant, and also named Mr Chris Stomo, of counsel, as the second defendant. The statement of claim was some 60 pages long and difficult to follow. It appears to have included the GST Claim and something like the Costs Claim.
9. In a judgment delivered on 20 December 2012 (Riva NSW Pty Limited v Key Nominees Pty Limited [2013] NSWSC 1952) Young AJ found that the statement of claim was "hopelessly defective" and ordered that it be struck out.
10. However, his Honour held that the pleading "could possibly be cured by being put in proper form" and gave Riva and the Ferellas "one further final chance to put [the] pleading in order".
11. His Honour directed that any further proposed pleading be circulated by 4 March 2014 and said that "if that is not done…then the proceedings may well be dismissed".
12. The matter was listed before Young AJ on 4 March 2014.
13. In a judgment that his Honour delivered on 21 March 2014 (Riva NSW Pty Ltd v Key Nominees Pty Ltd [2014] NSWSC 301) Young AJ said that on 4 March 2014: "I ordered that the proceedings be dismissed, but stayed that order up until 21 March to give [counsel then appearing for Riva and the Ferellas] one last opportunity to justify his pleading. I did this because I was faced with a very voluminous document at 4:05pm on the last day for considering the matter, the redraft appeared to have retained many of the defects previously considered, and there appeared to be two different versions of the revised pleading. I thought that justice required that a little time be granted to review my summary decision."
14. On 21 March 2014 Young AJ considered the further proposed statement of claim and concluded that it was "replete with defects", and that no further leave should be given to amend.
15. His Honour ordered that the proceedings be dismissed and made the order, to which I have referred, that no fresh proceedings were to be commenced by Riva and the Ferellas without leave. His Honour also dismissed the claim against Mr Stomo.
16. There was no dispute before me about his Honour's power to make the order; whether under s 86 or s 91 of the Civil Procedure Act 2005 (NSW) or under the Court's inherent jurisdiction.
17. Riva and the Ferellas sought leave to appeal by way of summons. On 7 November 2014 the Court of Appeal ordered that that summons be dismissed: Riva NSW Pty Ltd v Key Nominees Pty Ltd [2014] NSWCA 381.
18. On 1 May 2015, Riva and the Ferellas commenced yet further proceedings ("the 2015 Proceedings"). The claims made in those proceedings included the GST Claim.
19. On 26 June 2015, Darke J held that as the 2015 Proceedings had been instituted without leave, and thus contrary to the terms of Young AJ's order of 21 March 2014, they should be dismissed: Ferella v Key Nominees Pty Limited (Supreme Court (NSW), Darke J, 26 June 2015, unrep).
20. Riva and the Ferellas sought leave to appeal against Darke J's decision.
21. On 9 December 2015 the Court of Appeal dismissed that application (Ferella v Key Nominees Pty Limited [2015] NSWCA 401).
22. Leeming JA (with whom Emmett AJA agreed) gave the lead judgment and held: "There are therefore two reasons why, in my view, leave should be refused. The first is that, far from establishing a case of arguable error, I am not persuaded that the reasons of the primary judge are attended by any error. As I have said, the 2015 summons is between the same parties and seeks recovery of precisely the same amount, $722,727.27, from the proceeds of sale by the defendant as mortgagee of the same property which was the subject of the 2013 statement of claim. Although the focus of the 2013 pleading was the GST treatment of part of the proceeds of sale, the underlying cause of action was a complaint of breach of contractual and common law and equitable duties by the mortgagee. The reformulated summons falls within the scope of the order made by Young AJ. Secondly, it was open to the applicants for leave (and remains open to them) to seek leave in the manner contemplated by Young AJ's order. Indeed, there is no explanation before the Court for why they have sought leave to appeal from the decision of the primary judge, rather than seeking leave in the manner contemplated by the order. Mr Newton, who appears for the applicants for leave, candidly acknowledged that there was no explanation for the course taken by his clients. It was common ground at the bar table that (a) there is no obstacle to the applicants seeking leave in the event that leave to appeal is refused, and (b) nothing has happened between 1 May 2015 and today which would be relevant to the expiration of any limitation period which would give rise to a difficulty in seeking leave."
23. The summons in these proceedings was, as I have said, filed on 19 September 2016, some nine months later.

Should leave be granted?

1. The manner in which Riva and the Ferellas have conducted this litigation flies in the face of the overriding purpose of the Civil Procedure Act; that the real issues between parties be resolved in a just, quick and cheap manner.
2. To achieve that overriding purpose cases are to be managed having regard to, amongst other things, the efficient use of available judicial resources (s 57(1)(c)).
3. When considering what is required by the dictates of justice, I must have regard to the degree of expedition with which the parties have approached the proceedings and the use the parties have made of opportunities available to them in the course of the proceedings (s 58(2)(b)(ii) and (v)).
4. On any view of the matter, Riva and the Ferellas have not approached resolution of what they contend to be the issues arising out of the circumstances of the 2006 sale of the property with expedition or in a manner which can be described as either just, quick or cheap. They have had more than their fair share of the available judicial resources and have had ample opportunity to prosecute their case.
5. However, Young AJ's order of 21 March 2014 in the 2012 Proceedings, and Leeming JA's observations in the appeal in the 2015 Proceedings, contemplate the possibility that, despite these matters, Riva and the Ferellas might seek and obtain leave to bring further proceedings, once a proper pleading was to hand.
6. On behalf of Riva and the Ferellas, Mr Newton submitted that the statement of claim now being propounded "differs radically" from those that "so troubled Young AJ" and that "whilst the general factual background remains the same, the pleaded causes of action are viable and are set forth clearly, concisely and in accordance with the UCPR".
7. On behalf of Key Nominees, Mr Parsons made lengthy submissions focussing on a lamentable history of this litigation. But he did not suggest that the proposed statement of claim was demurrable.
8. Mr Parsons drew attention to the factual background to the proposed GST Claim and OT Claim and took me through a large number of documents concerning those claims.
9. As Mr Parsons pointed out, a difficulty with the GST Claim is that, on three occasions, Key Nominees sought a private ruling from the ATO as to whether the sale was subject to GST. The second and third of those rulings was that the sale was subject to GST. The third of those rulings was made following delivery to the ATO by Key Nominees' accountant of a submission on the GST issue prepared by Mr Stomo (on behalf of Riva and the Ferellas) arguing that the transaction was not subject to GST. Evidently, the ATO did not accept that submission. In those circumstances, Riva and the Ferellas may have difficulty establishing that Key Nominees acted in breach of its duty as mortgagee in not taking that matter further.
10. So far as concerns the OT Claim, Mr Parsons emphasised that prior to the draw down of the $4.3 million in July 2004, and in answer to requisitions on title, the Ferellas represented, in terms, that they held the property beneficially, and not on trust. That representation was false, and I have seen no explanation for it. However, it does seem clear that by early 2006, after Key Nominees went into possession, and before it exercised its power of sale, it was on notice that the Ferellas (who were then bankrupt) claimed that they had purchased the property as trustee for the Cavallino Unit Trust and that Riva was by then trustee. Evidently because of the representation to which I have referred, Key Nominees, through its solicitor, Mr Stuart McDougall, did not accept that the Ferellas were trustees of the property at the time of the advance. Accordingly, it complied with the direction of the solicitor for the Official Trustee to pay the surplus proceeds of sale to the Official Trustee. It did so without Mr McDougall calling for documentary evidence of the trust that the Ferellas asserted and, seemingly, without Mr McDougall giving consideration to Key Nominees paying the surplus into Court on an interpleader. In those circumstances, it appears to be that the pleaded claim is, at least, arguable.
11. Mr Parsons did not address submissions to the merits of the Overpayment Claim or the Costs Claim.
12. Nor did Mr Parsons submit that anything has happened since March 2014 which would be relevant to the expiration of any limitation period.
13. In those circumstances, my opinion is that, despite the history of the matter, leave should be granted to Riva and the Ferellas to bring the proposed claim.
14. But that leave must be on terms that Key Nominees is protected so far as concerns its costs.
15. Accordingly, leave will be conditional on Riva and the Ferellas: 1. paying all amounts due to Key Nominees arising from any outstanding costs orders in any of the earlier proceedings; and 2. providing security for Key Nominees' costs of the proposed proceedings, with such security to be calculated on a solicitor and client basis.
16. Leave will also be conditional on Riva and the Ferellas undertaking to the Court that they will diligently prosecute the proposed proceedings and will seek to have those proceedings expedited. It will, of course, be a matter for the Expedition List Judge to determine if expedition is to be granted.
17. Further, Riva and the Ferellas are to pay the costs of this application. I will hear submissions as to whether any special order for costs should be made and as to the further directions that should now be made.

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