Sewell v Zelden

LEGISLATION CITED : Uniform Civil Procedure Rules (2005) NSW

Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737 CASES CITED : Sewell v Zelden [2010] NSWSC 1180 Sewell v Zelden (No. 2) [2010] NSWSC 1181 TCN Channel 9 Pty Limited v Antoniadis (No. 2) (1999) 48 NSWLR 381

Phillip Malcolm Sewell (plaintiff) PARTIES : Boris Zelden (first defendant) Henamast Pty Limited (second defendant) Elena Zelden (third defendant)

G M Drew (plaintiff) COUNSEL : S Y Reuben (first defendant) D E Baran (second and third defendants)

Williams & Co. Solicitors (plaintiff) SOLICITORS : Zelden Solicitors (first defendant) Colin Daley Quinn Solicitors (second and third defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Date of Hearing: 18 November 2010 Date of Judgment: 23 November 2010

2009/287105 Phillip Malcolm Sewell v Boris Zelden and ors (No. 3)

JUDGMENT (EX TEMPORE) 1 REIN J: This is an application by means of a Notice of Motion filed by the defendants on 8 November 2010 for a stay of the judgment and orders made by me on 1 October 2010. The Notice of Motion was filed after the expiry of the time within which the judgment debt was to be paid. By virtue of reasons handed down on 3 September 2010 (Sewell v Zelden [2010] NSWSC 1180) and 1 October (Sewell v Zelden (No. 2) [2010] NSWSC 1181), the combined effect of the judgment and orders was to award the plaintiff, Mr Sewell (for whom Mr G Drew of counsel appears), an amount of $60,000 plus interest calculated to be $30,848.22. Ancillary orders against the defendants were also made, including costs orders.

2 These reasons for judgment assume familiarity with the earlier reasons for judgment, but essentially the first defendant, Mr Zelden (for whom Mr S Reuben of counsel now appears), is a solicitor who acted for Mr Sewell in relation to the purchase by Mr Sewell of a property owned by a company, Henamast Pty Limited ("Henamast"), the second defendant, which company was owned by Mrs Zelden, the third defendant, without his having disclosed to Mr Sewell that Henamast was owned by Mrs Zelden. I found that Mr Zelden thereby breached a fiduciary duty owed by him to Mr Sewell, and further, that his conduct had been dishonest and fraudulent. 3 Mr Zelden, Henamast and Mrs Zelden wish to appeal from my decision. Mr Zelden's grounds of appeal do not include any challenge to the finding of a breach of fiduciary duty. The applicants need leave to appeal because the judgment is for a sum less than $100,000.

4 Broadly, if leave is granted, the appeal will involve: (1) an appeal against the finding of dishonest and fraudulent conduct; (2) an appeal against the amount for which Mr Zelden and the other defendants were held liable, that is, $60,000; (3) an appeal against the imposition of interest on that amount, that is, a further $30,848.22; (4) an appeal against the award of indemnity costs against Mr Zelden and the award of costs on the usual basis against Mrs Zelden and Henamast; and (5) an appeal by Henamast and Mrs Zelden on the grounds listed above and against the finding that they were liable in connection with Mr Zelden's breach of fiduciary duty.

5 In support of the stay, Mr Zelden relies on two affidavits of his, sworn 2 November 2010 and 4 November 2010. Henamast and Mrs Zelden rely on an affidavit of Mr Timothy William Daley, solicitor, sworn 4 November 2010, which only annexes the proposed grounds of appeal for those two defendants. Mr D Baran of counsel appears for Henamast and Mrs Zelden.

6 Mr Sewell opposes the grant of a stay. His affidavit sworn 16 November 2010 was read in opposition to the applicants' motion.

7 The affidavit material reveals that: (1) Mr Zelden has a line of credit available to him of $960,000 based on the equity in a property at Rose Bay. The property is owned by him and his wife as to 70 percent and by Henamast as to 30 percent. Although in his affidavit Mr Zelden did not mention it, Mr Reuben informed me that $260,000 of that line of credit has been used; (2) in the proceedings before me, Mr Zelden was represented by solicitors and senior and junior counsel retained by LawCover. Following the publication of my reasons for judgment on 3 September and after a hearing on costs and other matters, which matters are dealt with in my reasons for judgment handed down on 1 October, LawCover denied liability to indemnify Mr Zelden on the basis of my finding that Mr Zelden's conduct had been dishonest and fradulent and withdrew the representation previously provided; (3) Mr Sewell owns two properties in which he has a net equity of $240,000, and he does not have any other significant assets; and (4) Mr Sewell owes approximately $200,000 in legal costs and disbursements to his solicitor and counsel for the proceedings to date. The estimate of costs of $200,000 was not challenged as being unrealistic, and Mr Reuben accepted that on an ordinary assessment basis, the plaintiff was likely to obtain two-thirds of the actual amount. I raised the question of the likely costs of the appeal and was informed that between $50,000 and $75,000 was a realistic amount for Mr Sewell. It is likely to be more for Mr Zelden, since he has retained senior counsel for the appeal.

8 Mr Zelden contends that LawCover's denial of indemnity to him is wrongful on two discrete grounds. First, it is a ground of his appeal in these proceedings that the conclusion that he acted dishonestly and fraudulently is erroneous and should be set aside. If that occurs, he says, LawCover will be required to indemnify him. Secondly, he contends that whether or not that finding is overturned, LawCover is estopped from denying him indemnity having regard to its conduct of the case. He contends that because LawCover has wrongfully denied indemnity to him, he must, if he is to pay the judgment debt and meet the costs order, borrow money.

9 There was no disagreement that the Court of Appeal's decisions in Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 and Kalifair Pty Ltd v Digi-Tech (Australia) Ltd (2002) 55 NSWLR 737 authoritatively lay down the principles to be applied in applications for a stay by an unsuccessful party, namely that: (1) a successful party is prima facie entitled to the fruits of the judgment obtained; (2) the onus is upon the applicant to demonstrate a proper basis for a stay that will be fair to all parties; (3) the mere filing of an appeal will not of itself provide a reason or demonstrate that it is an appropriate case or discharge the onus that the applicant for the stay bears; (4) the court has a discretion as to whether or not to grant a stay, and if so, as to the terms that would be fair; (5) the court will weigh considerations such as the balance of convenience and the competing rights of the parties; (6) the risk that assets of the applicant will be disposed of if a stay is granted is a matter which might of itself lead to refusal of the stay; (7) the court may sometimes require the payment of the whole or part of funds available to be paid to the judgment creditor. Alternatively, security might be required as a condition of the grant of a stay; (8) where there is a risk that the appeal will be rendered nugatory if a stay is not granted, that will be a substantial factor in favour of the stay; (9) the court can have regard to the strength or otherwise of the grounds of appeal; (10) the judgment creditor is entitled to be protected, so far as practicable, from the risk that if the appeal fails, assets which were available to satisfy the judgment will no longer be available; (11) security is not to be ordered to improve the position of the judgment creditor; and (12) if a stay were not granted and this would be likely to abort the appeal, the court will normally exercise the discretion to order a stay. In Kalifair , for example, the appellants were companies, some of which had no assets and whose appeals would be stymied if winding-up proceedings were commenced against them.

10 Mr Zelden points to the limited funds of Mr Sewell and submits that if he is required to pay out $90,000 for the judgment and $200,000 for the costs, he runs the risk that if he is completely successful on the appeal, he will not recover that money because $200,000 of it would be used to pay Mr Sewell's solicitors, and Mr Sewell's equity in the two properties is limited to $240,000.

11 Secondly, Mr Zelden points to the fact that I ordered that the Rose Bay property be charged with the payment of the judgment and the costs, so that it was submitted that Mr Sewell is not at risk. Mention was made in court of the fact that Mr Sewell has lodged a caveat over the property to protect his charge. As I have noted, Mr Zelden says that to pay the moneys due for the judgment and the costs (that is, $290,000), he would have to borrow money using his line of credit.

12 Mr Drew's response is to emphasise that his client is entitled to the fruits of his success in the proceedings and that relations between Mr Zelden and his insurer are not relevant to the plaintiff's entitlement to be paid pursuant to the judgment and orders.

13 Mr Drew draws attention to the inherent weakness in the premise that Mr Sewell would be required to refund all or almost all of the judgment moneys and all of the costs, particularly given the fact that Mr Zelden does not challenge the finding of breach of fiduciary duty and that the finding of dishonest and fraudulent conduct on the part of Mr Zelden is relevant not to the claim against Mr Zelden, but to the other two defendants. Mr Drew's primary position is that the defendants have not demonstrated that they are at risk of not recovering from Mr Sewell any amount paid beyond the level of any result which they might realistically obtain.

14 Mr Zelden's proposed appeal on quantum has these elements: (1) He asserts that the correct measure of the award to Mr Sewell is $1,100, being the costs that he charged Mr Sewell on the conveyance of the Eastwood property after the deduction of disbursements. This ground is not articulated at all clearly in the draft Notice of Appeal: see pages 11-15 of Mr Zelden's affidavit sworn 2 November 2010, but Mr Reuben said that his client wanted to run this argument in the Court of Appeal; (2) Alternatively, he asserts that correct measure of the award for the breach of fiduciary duty here is the difference between the price that the property was sold to Mr Sewell and its market value, that is $35,000. That argument is clearly articulated in the draft Notice of Appeal; (3) He asserts that no interest should be awarded on the $1,100 or the $35,000, or the $60,000 found by me to be payable; and (4) He asserts that no costs should be awarded against him if $1,100 is the amount awarded to Mr Sewell for his breach of fiduciary duty.

15 So far as the first element is concerned, this argument was not advanced by Mr Zelden at the trial. Mr Sewell did not claim an entitlement to refund of the $1,100 once he had made the election to retain the Eastwood property. The fact that the argument was not run by Mr Zelden at the trial does not necessarily mean that it cannot be maintained on appeal, but it is contended by Mr Drew that it is a very weak and unmeritorious argument, and the fact that it was not run at trial in a context where a number of other detailed arguments were advanced on the manner in which the profit or gain to Mr Zelden should be calculated does provide some support for that description of the argument.

16 The question is what gain or profit Mr Zelden obtained from his breach of fiduciary duty (now admitted), which resulted in Mr Sewell purchasing a property owned by Mrs Zelden's company, whose debt Mr Zelden had personally guaranteed without him advising Mr Sewell of the conflict of interest or resolving that conflict. Although I adopted a different approach, I accept that the difference between the price paid by Mr Sewell and the market price at the time (that is, $35,000) is an arguable approach as a measure of the benefit or gain to Mr Zelden, but I do not think that the conveyancing fee he earned has any significant prospect of being accepted as the limit of Mr Zelden's benefit or gain.

17 So far as the question of whether interest is payable is concerned, I have recounted the arguments in relation to this in the judgment delivered on 1 October: see [26] of the second judgment. I think that Mr Zelden's prospects on this point are slim.

18 On the question of costs, I accept that views may differ as to whether indemnity costs should be awarded, but beyond this and having regard to the history of the matter which I recounted in the second judgment, in my view, it is unrealistic to think that the plaintiff would not be entitled to an order for costs, at least on the ordinary basis. 19 Having regard to these matters, I think that, realistically, even if Mr Zelden were successful on appeal, he would still be liable to pay $35,000 plus interest plus costs on the ordinary basis. It was agreed that interest on $35,000 for the relevant period would be at least $15,000. Costs on the ordinary basis, rather than the total solicitor-client costs of approximately $200,000, would equate to $132,000. I would adopt a more conservative approach to the $200,000 figure and reduce it to $180,000 as the total amount of costs for the purposes of this application. If one takes two-thirds of that amount, it yields a figure of $120,000.

20 During the course of argument and discussion about figures for costs and interest, I raised with Mr Reuben the failure of his client to offer to pay any amount to Mr Sewell at this stage. Mr Baran had by this stage excused himself from further participation in the hearing of the Notice of Motion due to another commitment, but he had earlier indicated that his clients were not prepared to pay any amount towards the judgment or costs. I shall come back to the position of the second and third defendants shortly.

21 I raised with Mr Reuben the possibility that I might be willing to grant a stay, but on the condition that payment of a portion of the judgment and costs was made. Mr Reuben was granted time to obtain instructions, and he advised the Court after a short adjournment that his client was not willing to submit to a condition for payment of any portion of the judgment, nor any amount on account of costs. Mr Baran, as I said earlier, had also indicated that his clients were not willing to accept such conditions. Mr Baran and Mr Reuben both indicated that their clients were willing to undertake to prosecute their appeals expeditiously. Mr Drew mentioned, in this context, the failure of the defendants even to bring this application for a stay until after the expiry of the time for payment of the $90,848.22

22 I accept that Mr Sewell does have some measure of protection in the provision of a charge, but he owes approximately $200,000 to his solicitors and he has few assets and will need to defend himself in the appeal which has been launched and which will cost him at least a further $50,000. There appeared to be no disagreement about that. I do not accept that there is no prejudice to Mr Sewell if he is not paid any amount of the judgment or any amount towards costs.

23 In my view, the refusal of Mr Zelden to undertake to pay any portion of the judgment and costs as a condition of a stay of the entire judgment and costs would, if accepted, lead to an unjust result to Mr Sewell, notwithstanding the existence of a charge on the Rose Bay property, particularly given the weakness of Mr Zelden's case that he would now have to pay only $1,100, no interest, and none of Mr Sewell's costs to date. Further, Mr Zelden has the prospect, if he succeeds in overturning the dishonest and fraudulent conduct finding, of recovering complete indemnity from LawCover and a significant portion of the moneys paid over from Mr Sewell. He may also, as his counsel maintains, be able to recover from LawCover even if he does not succeed in his appeal on the finding of dishonest and fraudulent conduct.

24 So far as the other defendants are concerned, their appeal is on liability as well as quantum. It is possible that they could succeed in the appeal even if Mr Zelden does not, but it is obvious that there is a very close relationship between all three defendants, and it is clear from Mr Zelden's evidence that he has a line of credit over the Rose Bay property that he will be using this to meet the payment of the judgment and costs. Henamast and Mrs Zelden have provided no evidence of their financial position or the effect on them if no stay is granted. If Mr Zelden is successful in obtaining indemnity from LawCover, this will be to the benefit of Henamast and Mrs Zelden. Indeed, Mr Baran described Mr Zelden as having a strong case against LawCover.

25 I have reached the conclusion that a stay of the entire judgment and costs is not appropriate, and I have considered whether, given the failure of the defendants (particularly Mr Zelden) to offer as a condition of the stay the payment of any portion of the judgment and costs, it is appropriate that I determine that any condition should be imposed. I have, however, formed the view, not without hesitation, that the appropriate course, rather than simply to dismiss the application, is to order a stay until the hearing of the appeal, but on conditions. Those conditions are: (1) The payment by Mr Zelden of $50,000 of the total judgment amount of $90,848.22 within 14 days of today's date; (2) The payment by Mr Zelden of an amount of $120,000 towards the costs of Mr Sewell within 14 days of today's date; and (3) An undertaking being given by the defendants to the Court and to Mr Sewell to prosecute the appeal expeditiously and diligently. I will hear from the parties on the precise form of orders to be made.

26 This course has the advantage of reducing the amount of borrowings required by Mr Zelden, giving Mr Sewell the advantage of receiving some but not all of the judgment moneys and costs, and limiting the risk to Mr Zelden that if he is completely successful in his appeal he will not be able to recover that amount from Mr Sewell, even in the absence of indemnity from LawCover. 27 I should note that in connection with the borrowings, Mr Reuben contended that if Mr Zelden were completely successful on appeal, he would not be able to obtain from Mr Sewell interest on the borrowings. I am not convinced that it is not open to a successful appellant to recover interest on moneys borrowed to fund a judgment debt: see rule 51.54 of the Uniform Civil Procedure Rules (2005) NSW ("If any step has been taken for the enforcement of a judgment or order that the Court varies or sets aside, the Court may make such orders for reinstatement or restitution as it thinks fit"); and see also TCN Channel 9 Pty Limited v Antoniadis (No. 2) (1999) 48 NSWLR 381 at 382 ([4]), which considered the rule in its then form. But in any event, Mr Zelden, if successful in his appeal, would have the prospect of indemnity from LawCover, and given the matters to which I have already referred, the prospect that he would recover more than the amount that he is required to pay under the conditions that I have imposed is quite limited.

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