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[2012] NSWSC 27
Supreme Court of NSW
2012-02-02
Slattery J
Original judgment source is linked above.
EX TEMPORE Judgment 1This is another case in which parties before the court are left to debate which of them will bear the losses resulting from a person's alleged fraud upon all of them. 2The plaintiff, Ruth Chong, the first defendant, Super Equity Investments Pty Ltd ("Super Equity") and the second defendant, Sui Generis (Global) Pty Ltd, ("Sui Generis") are all claimants to a fund of money paid into court by Permanent Custodians Limited. The money, a sum of $318,494.17 plus interest was paid into court in December 2010. The funds so paid into court are the surplus proceeds of sale of a residential property in Angelo Street Burwood formerly owned by Ms Chong. 3The main point at issue that comes before the court today is the question of whether or not in the resolution of the competing claims to this fund the plaintiff is entitled to an order that the first defendant, Super Equity, a company in liquidation, should provide security for the plaintiff's costs of pursuing the fund. For reasons that I will explain in this judgment, I have reached the view that security should not be ordered. But the proceedings today have been useful in other ways in reducing the issues that exist between the parties.
Background 4Some background is required before identifying the issues for determination. The plaintiff was, until December 2004, the registered proprietor of the Burwood property. She alleges in these proceedings that she was friendly with a Mr Robert Chu for more than ten years prior to December 2004 and relied upon him for advice as to her business and personal affairs. She alleges that he advised her in September 2004 to transfer the Burwood property to him, so it is alleged, to "enable him to assist her to obtain money to repair her kitchen and he would then transfer the property back to her." 5The plaintiff was at that time aged 89 years and is now I am told 96 years of age. She is resident in a nursing home and has suffered a number of bone fractures to her legs. She alleges that, unbeknown to her, Mr Chu was a fraudster who was engaged in a scheme to induce her to transfer the property to him so that he could raise funds upon it for his own benefit. Indeed, that is what the allegations and the evidence suggest he did. He borrowed money from Permanent Custodians Limited which secured its advances by first mortgage over the Burwood property. 6It is further alleged in the proceedings that some time later Mr Chu borrowed more money on the security of the Burwood property. This time he gave the security of an unregistered mortgage to the first defendant, Super Equity. That mortgage was never registered. Instead the first defendant lodged a caveat notifying its interests as an equitable mortgagee. 7The second defendant did not make a separate advance to Mr Chu. Its involvement in the proceedings is somewhat different. The second defendant, Sui Generis, has a commercial funding relationship with Super Equity. Sui Generis was the source of the funds that Super Equity advanced to Mr Chu. 8The parties have been represented in these proceedings by Mr Raphael for the plaintiff, Ms Cirillo for the first defendant and Mr Oliveri for the second defendant. Mr Oliveri has made clear as a result of exchanges between the parties and the bench something which was perhaps not perfectly apparent before today: that Sui Generis' claim to the funds in court is only contingent upon the success of Super Equity. The plaintiff, therefore, really has no issue with the second defendant, because if the first defendant is successful against the plaintiff, then and only then, do issues arise between the first and second defendants. 9The parties have, as a result of some suggestions from the bench, agreed to craft a form of orders which will have the effect of: the plaintiff discontinuing the proceedings against the second defendant; the first defendant indicating in an undertaking to the second defendant, that, if it is successful against the plaintiff, it will only deal with the funds after issues between it and the second defendant have been resolved; and, the second defendant renouncing any claim to the funds in court. The parties will, subject to the court's directions, hand up a document to record that arrangement. 10Predictably, Mrs Chong was unaware of Mr Chu's fraud. Mr Chu did not pay the mortgages. Permanent Custodians exercised its power of sale over the Burwood property because of Mr Chu's default which sale was completed by late 2010. Permanent Custodians then became aware of the competing claims between Ms Chong and Super Equity. As a trustee of the surplus funds after its mortgage was paid out, Permanent Custodians took the course of utilising the mechanism under Trustee Act 1925 part 4 and UCPR part 55 Division 3 of paying the surplus into court to await determination of this action. Since then Permanent Custodians has taken no part in these proceedings. 11The procedure for dealing with funds in court in this situation is provided for under UCPR, part 55 rule 8 to 11:- "55.8 This Division applies to the payment of funds into court under Part 4 of the Trustee Act 1925 and to proceedings arising out of payment into court under that Part. 55.9 (1) If a trustee proposes to pay money or securities into court, the trustee must commence proceedings in the court by filing a summons seeking to have the money or the securities paid into court. (2) The summons: (a) must be supported by an affidavit that complies with rule 55.10, and (b) if the payment is wholly or partly money, must be accompanied by a cheque payable to "The Supreme Court of New South Wales" in the amount of the money to be paid into court. (3) If the money is paid into court by a cheque, the money is to be taken to have been paid into court on the filing of the summons, without the need for any further directions. (4) Unless the Supreme Court otherwise orders, the summons must not join any person as a defendant in the proceedings. (5) Unless the Supreme Court otherwise orders, a copy of the summons must be served on each person identified in the affidavit as a person interested in or entitled to the money or securities. (6) A person paying money or securities into court may make an application, by notice of motion in the proceedings in which the money or securities were paid, for an order that the person's costs be payable from the money or securities. 55.10 The affidavit under rule 55.9 must set out the following: (a) a short description of the trust and of the instrument creating it or, as the case may be, of the circumstances in which the trust arose, (b) the amount and description of the funds, (c) the name and address, so far as known to the deponent, of each person interested in or entitled to the funds, (d) if any person interested in or entitled to the funds is a minor: (i) the name and address, so far as known to the deponent, of a parent or guardian of the minor's person or estate, or (ii) if the minor has no such parent or guardian or any such parent's or guardian's name or address is unknown to the deponent, the name and address, so far as known to the deponent, of a person with whom the minor resides or in whose care the minor is, (e) if any person interested in or entitled to the funds is a protected person: (i) the name and address, so far as known to the deponent, of the protected person's manager, or (ii) if the protected person has no manager or any such manager's name or address is unknown to the deponent, the name and address, so far as known to the deponent, of a person with whom the protected person resides or in whose care the protected person is, (f) the name of the person paying the funds into court and his or her address for service. 55.11 (1) Funds that have been paid into court may only be paid out of court pursuant to the directions of the Supreme Court. (2) An application for such directions is to be made by filing a notice of motion in the proceedings in which the funds were paid into court." 12It is noteworthy that UCPR, part 55 rule 11(2) simply requires, before payment out, that there be a motion filed for directions, which then provides a platform for the court's analysis of the competing priorities, followed by payment out. 13At a directions hearings before this matter came to me, the Registrar made directions for the plaintiff to file a Statement of Claim pleading her claim and for each of the defendants to plead their defences. If I may say so, with respect to both the parties to and the Registrar, this was a sensible course given the complexity of the issues raised here which are more detailed than most simple payment out cases. 14In a number of prior judgments I have dealt with a number of the requirements of proof in the ordinary case under UCPR, part 55 rule 11, where a party seeks payment out of court. I identified those requirements in Commonwealth Bank v Estate of late Slieman [2010] NSWSC 661 the following way:- "[8] An applicant under UCPR r 55.11 must establish three matters to justify an order for the payment of money out of court. The first is to identify the person who is primarily entitled to any funds paid into court and the basis of that entitlement. It is fundamental that the person be identified from the best evidence available, so that the court can be sure that the person has been given appropriate notice of the application and can if necessary contest it. [9] The second matter that needs to be proved by a claimant is that he or she is not merely an unsecured creditor against the person primarily entitled to the fund but is a person who has an beneficial interest in the very fund that has been paid into court. The same evidence that demonstrates a person's primary entitlement to the funds in court often establishes this second matter. [10] Thirdly, it is necessary for an applicant to identify the other potential claimants to the fund in court and to prove that those persons were notified of its claim. Those persons may consent to the claim. Alternatively, the applicant may prove that those persons either do not have valid claims against the fund or that their claims do not have priority over the applicant's claims. [11] The court requires strict proof as to who has the entitlement to the funds in court. There is a heavy burden placed on a party seeking payment of money out of court under Trustee Act s 98 and UCPR r 55.11. It is necessary for that party not only to prove his or her entitlement to the funds but also to prove that all other potential claimants to the funds in court have been properly notified. Otherwise there is a risk of incorrect payments being made." 15See also La Trobe Capital & Mortgage Corp Ltd, Re [2009] NSWSC 1118. 16The plaintiff initiated proceedings against Mr Chu, who consented to judgment in the Equity Division of this Court. But he did not have the funds to meet the plaintiff's obligations under the registered first mortgage. So the first mortgagee exercised its power of sale. I am told that Mr Chu's conduct in this transaction has been referred to the New South Wales Police for investigation. 17In her Statement of Claim the plaintiff asserts exclusive right to the moneys in court by virtue of the breaches of the proprietor Mr Chu, the fraudster, holding a property under constructive trust for her on the basis of the well-known principle that a thief or fraudster holds the property stolen on constructive trust for his victim: Black v Freedman & Co (1990) 12 CLR 105, Greater Pacific Investments (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 and Muschinski v Dodds (1985) 160 CLR 583. 18The issues raised through the first defendant's defence are that the first defendant had no knowledge of the fraud, is the next valid equitable interest entitled to the surplus proceeds of sale of the Burwood property after Permanent Custodians, and is now therefore entitled payment of the moneys in court, either under Real Property Act 1900, s 58(3) or under general equitable principles. 19The matter has become more complicated in another way. The plaintiff commenced professional negligence proceedings in the District Court of New South Wales against Mr Michael Lee, a solicitor who advised both herself and Mr Chu in respect of the transfer of the Burwood property. She also commenced proceedings against other solicitors who were apparently retained to pursue Mr Chu and other persons at an early stage but failed to do so. 20I am told from the bar table that the plaintiff's proceedings against Mr Michael Lee, have been settled. An incidental part of the motion before the Court today which has now been dealt with largely by agreement is whether or not those terms of settlement should be made available in response to the second defendant's notice to produce to the plaintiff. As I have indicated in argument, I see no reason, subject to the defendants giving undertakings about keeping that material confidential, why it should not be produced. The parties have now agreed to file consent orders about this issue.
Wider Issues 21Before I indicate my reasoning in relation to the security for costs question, there are a number of wider issues that must be mentioned. The structure of the proceedings so far, is one in which the defendants have not filed cross-claims but have raised issues in their defence that would, if successful, entitled them to the fund in court. 22The first defendant initially advanced $70,000 to Mr Chu. But that $70,000 was at a very high interest rate of 60 per cent per annum. The advance took place early in the history I have given. The cumulative interest on that advance now exceeds the amount paid into court which would, at the present time, probably be no more than about $350,000. The precise amount claimed by the first defendant, should it be successful, has not been formulated. Nor has the plaintiff had an opportunity to address the amount claimed and field any defence to the quantum of the claim. 23One can readily see that defences under the Consumer Credit (New South Wales) Code may be fielded against a claim for an interest at that high rate. It is unclear whether or not the Code has been complied with here to justify the recovery of such a substantial interest rate. All that Mr Raphael says is that this will be an issue at final hearing. 24But a further wider issue arises out of part of the settlement of the District Court proceedings. The first defendant says if the plaintiff has received a substantial sum under that settlement, that even if the plaintiff is entitled to recover on her constructive trust argument against the first defendant, that she should do equity and allow an accounting to take place of the receipts she has obtained from her former solicitors, to ascertain whether or not full recovery should take place against the first defendant and the fund. 25Next, given the plaintiff's age and situation, this is a matter which, in my view, stands a good chance of qualifying for expedition in the expedition list. I propose therefore to make a direction that the matter be placed in to the expedition list tomorrow week, prior to which time one of the parties should file a motion for expedition. 26I also considered in the course of the argument today, whether or not a separate question might be able to be formulated and determined which may avoid some of the complexities of these proceedings if it is found one way or the other, and therefore reduce the costs of the proceedings. 27The potential separate question arises out of a submission put by Mr Raphael and was based upon a recent decision of the New South Wales Court of Appeal in Residential Housing Corporation v Esber [2011] NSWCA 25. I have had an opportunity of looking at that case over the lunch hour. Mr Raphael's point arising from it is that because the first defendant was not a registered mortgagee of the Burwood property (the only registered mortgagee over the Burwood property being Permanent Custodians) Super Equity cannot claim under s 58(3) the next entitlement to the surplus funds now paid into court. Esber's case at [69-70] says there is no such entitlement. He says as a result that his client has the full entitlement. 28On the basis of Esber's case, that argument is correct as far as it goes. But Ms Cirillo has pointed out, and this is also supported by Esber's case at [71-72], that the first defendant is not precluded from arguing, as she foreshadows it will, that outside the first defendant's rights under Real Property Act, s 58(3) it is entitled to claim priority over the plaintiff according to the general equitable principle. 29In my view, such an argument is consistent with the reasoning in Esber . This means that the separate question cannot resolve the proceedings on a final basis even if they are decided on the Real Property Act , s 58(3) point in Mr Raphael's client's favour. 30A further complication is that will not end the proceedings in any event. There will still be questions of the extent to which there will or will not be a reduction in the amount payable to the plaintiff by reason of receipts in the District Court proceedings. For these reasons, I will not take the course of ordering a separate question in this case.
Security for Costs 31Finally, we are left with the security for costs question. The statutory structure for claiming security for costs is well known and the principles are well established. They have been summarised both in Mr Raphael's and Ms Cirillo's submissions at the level of general principle. 32The Court has power to order security for costs on a number of bases: in its inherent jurisdiction: Rajski & Anor v Computer Manufacture and Design Pty Ltd & Ors (1982) 1 NSWLR 443 at 447; under Uniform Civil Procedure Rules , r 42.2(1); and under Corporations Act 2001, s 1335. The power to order security is discretionary and the factors relevant to the exercise of discretion are well summarised in the authorities: KP Cable Investments Pty Ltd v Melt Globe Pty Ltd (1995) 56 FCR 189 at 197-8. The general factors relevant to the exercise of the discretion here are of less importance in my view than the specific factor the subject of my reasons below, which has been the principal factor debated between the parties. 33The real question here arises out of two competing submissions of the parties. Mr Raphael says for the plaintiff, that the first defendant is truly a moving party and a plaintiff in these proceedings and should therefore, provide security as to costs. The first defendant says in contrast, that it is certainly a claimant to the fund, and would, if Mr Raphael's client were not a claimant, be a moving party by a motion to claim the fund itself. But the first defendant also says that because there are competitors for the fund, it is a defendant here as the pleadings show it to be. 34Mr Raphael further says that the first defendant should, in effect, reveal its true colours and be required to file a cross-claim and then to give security for costs as a moving party. I think that is partly correct. For the reason that I have already given, a cross-claim should be filed, and an opportunity given for that cross-claim to be properly pleaded and for Mr Raphael's client, the plaintiff, to file a defence to it. That plea would include a proper quantification of the amount actually claimed and would deal with any arguments about questions of potential reduction in the plaintiff's entitlements due to receipts from the District Court proceedings. Any defence to that cross-claim would include issues raised under the credit legislation, relevantly the Consumer Credit (New South Wales) Code , as to why the claim of the first defendant/cross-claimant in the Court's discretion, might otherwise be answered. 35But that seems to me to be purely a pleading issue. The real question is whether in the Court's discretion, security for costs should be awarded. On this question, for the following reasons, I am of the view that Ms Cirillo's submissions are the more persuasive. 36The essential problem with the plaintiff's claim for security for costs is revealed by asking the question: if security is awarded and not paid and any claim by the first defendant to the fund is stayed, what happens then? The short answer to that question is Mr Raphael will still have to propound his claim to the fund in Court. And in doing so he will have to demonstrate priority to the fund over the first defendant. The first defendant would still be entitled to answer that claim in its defence, thereby contending for its own priority to the fund. Thus the Court would in effect have to deal with the same issues that would otherwise arise on any cross-claim. This is a usual requirement when a party such as Ms Chong seeks payment of a fund in Court: La Trobe Capital & Mortgage Corp Ltd, Re [2009] NSWSC 1118. 37This seems to me to be a classic example of those security for costs cases in which a party is a claimant, but is nevertheless a defendant in respect of exactly the same issues in the proceedings, even if its role as a claimant were to be stayed. An order for security will not generally be made in such circumstances. 38There are a number of examples of these security for costs not being awarded in situations. The issue arises sometimes in probate litigation where a caveator against a grant of probate is the occasion for the institution of a probate suit, but is not actually its instigator, and where the probate suit issues must be resolved to the Court's satisfaction in any event: Rowe v Epstein (1974) 1 WLR 1565 and Re Emery (deceased) (1923) P 184. But this issue also has arisen in this Court in two decisions in recent years and another in the Supreme Court of Western Australia: Sydmar Pty Limited v Statewise Developments Pty Ltd (1987) 73 ALR 289 (Smart J), Concrete Constructions v Dalma Formwork Pty Ltd [1999] NSWCA 16, and Crestland Investments Pty Ltd v Parisi Holdings Pty Limited [2003] WASC 181 (Master Newnes). I cite the principle as Rolfe J stated it in Concrete Constructions at first instance, and repeated with approval by the Court of Appeal at [15]:- "[15] Rolfe J dealt with a number of questions not the subject of any submission in this application. These were whether Dalma's claim was made bona fide had an reasonable prospects of success, whether Dalma's lack of funds had been caused or contributed to by the conduct of Concrete, and Dalma's financial position. These were decided adversely to Dalma. His Honour then came to the question whether substantially the same facts were likely to be canvassed in determining the action and the cross-action. Rolfe J began his discussion of this matter by saying: "In circumstances where the claim and the cross-claim arise out of the same, or essentially the same, factual matrix this, in my opinion, is a very important consideration. It has been frequently and consistently said by Judges sitting in this Division that an order for security will not generally be made in such circumstances, in the exercise of the Court's discretion. It would, in my view, be quite wrong to preclude a party from litigating matters by way of a defence to a cross-claim merely because that party has been the initial institutor of the proceedings. The conduct of the other party may have forced the allegedly impecunious party to take the litigious initiative, whilst not constituting misconduct. Put simply if [Concrete] seeks to recover any part of the debt the issues raised by Dalma in its claim would be available to it as a defence, and there has never been any suggestion that a party could be precluded from defending proceedings, where the defence is bona fide, by reason of impecuniosity. It is, therefore, a somewhat and exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence." 39Crestland Investments Pty Ltd v Parisi Holdings Pty Limited is another useful illustration of the principle in action. There, in a building contract, the Catholic Archbishop of Perth as the trustee of the church's property was in a dispute with a developer about a rescinded contract for the sale of a property being sold by the church. Upon rescission the deposit was left with the selling agent for the property. The Archbishop said the deposit had been forfeited, a contention the developer disputed. Therefore, the Archbishop and the developer were both claiming that fund in the hands of the agent. After citing Concrete Constructions and Sydmar (Master Newnes) said:- "[20] In the present case, I think it can reasonably be said that in substance Crestland and the Archbishop are each as much a plaintiff as the other. Moreover, as I have said, the primary issue in both Crestland's claim and in its defence to the Archbishop's claim is whether Crestland was, as it claims, entitled to rescind the contract by reason of misleading or deceptive conduct or breach of an implied term. It follows that, even if Crestland's claim were to be stayed, it would still be entitled to litigate that issue in defence to the Archbishop's claim. The only matter that would fall away would be Crestland's claim for consequential losses. [21] I accept, as submitted by Crestland's counsel, that it would be a somewhat odd result if Crestland was ordered to provide security for costs for its claim, with the potential consequence that that claim could be stayed, when essentially the same factual issues would be litigated in its defence of the Archbishop's counterclaim." 40It seems to me that the Court here is faced with a very similar situation. There is little point in ordering security for costs against Super Equity in respect of issues which, even if the security is not paid and Super Equity's cross claim is stayed, will be litigated any way, of necessity, in Ms Chong's claim and on the defence Super Equity proffers. For that reason, I decline to order security. 41The parties have now formulated orders and directions to give effect to my reason. The Court therefore makes the following orders and notations:- (1)notes the admission by the second defendant to the court and the parties that it makes no claim upon the monies paid into court in or about December 2010. (2)Notes that the plaintiff and the first defendant accepts the admission in paragraph 1. (3)Grants leave to the plaintiff to discontinue the proceedings and any claim against the second defendant. (4)Orders that the proceedings be discontinued against the second defendant with no order as to costs. (5)Notes the interparties undertaking by the first defendant by its counsel to the second defendant that the first defendant, in liquidation, will not deal with any proceeds that the first defendant may receive from the fund in court, without the agreement of the second defendant or order of the court, in this or other proceedings. (6)Dismiss the amended notice of motion filed by the plaintiff on 15 December 2011. (7)Directs that the proceedings stand into the expedition list on Friday 17 February 2012 (or such later date as the list judge may direct). (8)Directs that the first defendant file and serve a cross-claim by 10 February 2012. (9)Directs that the plaintiff file a defence to the cross-claim by 16 February 2012. (10)Orders that: (a)the plaintiff shall within 21 days of this order provide to the first defendant any and all terms of settlement or other agreements as to the dispute between the plaintiff and Michael Lee concerning 5 Angelo Street, Burwood. (b)The plaintiff shall by 5pm 10 February 2012 serve the solicitors for Michael Lee with a copy of these orders. (c)If the solicitors for Michael Lee dispute the production of documents to the first defendant in sub-paragraph (a), they shall within 12 days of this order make any application to this court, or notice to the plaintiff and the first defendant, seeking variation or vacation of this order 10. (d)The production of documents pursuant to order 10(a) shall be to the solicitors for the first defendant, and counsel and not disclosed to any party other than by order. (e)Upon the conclusion of these proceedings, the first defendant's solicitors shall destroy documents produced under clause 10(a). (11)Order the plaintiff pay two thirds of first defendant's costs of the motion filed 15 December 2011 and the costs of the hearing on 2 February 2012. (12)No order for costs as between the plaintiff and second defendant to the intent that each will bear her and its own costs.
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: 03 February 2012
Ruth Chong
Super Equity Invests Pty Ltd & Anor
[2004] WASC 57
[2003] WASC 181
(1990) 12 CLR 105
(1996) 39 NSWLR 143
(1995) 56 FCR 189
(1985) 160 CLR 583
(1982) 1 NSWLR 443
(1987) 73 ALR 289