FEDERAL COURT OF AUSTRALIA Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) (No 8) [2013] FCA 411 Citation: Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) (No 8) [2013] FCA 411 Parties: WINGECARRIBEE SHIRE COUNCIL, CITY OF SWAN and PARKES SHIRE COUNCIL v LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760) File number: NSD 2492 of 2007 Judge: RARES J Date of judgment: 18 March 2013 Legislation: Corporations Act 2001 (Cth) ss 411, 471B Federal Court of Australia Act 1976 (Cth) Pt IVA, ss 33Q, 33R, 33ZJ, 43 Cases cited: Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 applied Graham Barclay Oysters Pty Limited v Ryan (No. 2) [2000] FCAFC 1220 applied Kazar v Kargarian (2011) 197 FCR 113 applied Oshlack v Richmond River Council (1998) 193 applied Probiotec Ltd v University of Melbourne (2008) 166 FCR 30 applied Wingecarribe Shire Council v Lehman Brothers Australia Ltd (In Liq) [2012] FCA 1028 referred to Wingecarribee Shire Council v Lehman Brothers Australia Limited (In Liq) (No. 3) [2010] FCA 747 referred to Date of hearing: 18 March 2013 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 15 Counsel for the Applicants: Mr A S Bell SC, Ms M Walker, Mr D Sulan Solicitor for the Applicants: Piper Alderman Counsel for the Respondent: Mr R G McHugh SC, Mr S M Nixon and Mr J J Hutton Solicitor for the Respondent: Ashurst IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2492 of 2007 BETWEEN: WINGECARRIBEE SHIRE COUNCIL First Applicant CITY OF SWAN Second Applicant PARKES SHIRE COUNCIL Third Applicant AND: LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760) Respondent JUDGE: RARES J DATE OF ORDER: 25 MARCH 2013 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The parties: (a) have agreed on the amounts which noteholders of Coolangatta AA, Coolangatta BBB, Coolangatta Combo Note, Endeavour AAA, Global Bank Note AAA, Kakadu Restructure, Merimbula AAA, Merimbula BBB and Miami AA (the Dante Notes) will receive under or as a result of the settlement agreements entered into between Lehman Brothers Special Financing Inc and the noteholders (see sixth further agreed statement of agreed facts on Dante Notes, Ex AO); and (b) agree that: (i) on or about 7 August 2012 Parkes sold Esperance 2 notes with a face value of $1.5 million for a price of $37.619 per $100 face value; (ii) the sale of Esperance 2 by Parkes was not unreasonable; and (iii) Parkes suffered a crystallised loss on Esperance 2 on or about 7 August 2012 of $645,165. THE COURT DECLARES THAT: 2. The first applicant (Wingecarribee) is entitled to be admitted to prove in the liquidation of the respondent (Grange) in accordance with the following formula: (a) $13,803,840.00 comprising Wingecarribee's loss and damage in respect of its investment in Claim SCDOs other than the Esperance SCDO; plus (b) $2,000,000 less such amount as Wingecarribee receives or becomes entitled to as a result of Esperance reaching maturity on 20 March 2013, comprising Wingecarribee's loss and damage in respect of its investment in the Esperance SCDO; plus (c) $187,826.71, comprising interest awarded at Federal Court rates on such part of the loss or damage within paragraphs (a)-(b) above as was suffered by Wingecarribee prior to 26 September 2008 by reason of the sale, maturity or wipe-out of any Claim SCDO prior to that date, such interest accruing from the date of sale, maturity or wipe-out of any Claim SCDO up to 26 September 2008. 3. The second applicant (Swan) is entitled to be admitted to prove in the liquidation of Grange in accordance with the following formula: (a) $4,843,792.40 comprising Swan's loss and damage in respect of its investment in Claim SCDOs other than the Esperance SCDO; plus (b) $500,000 less such amount as Swan receives or becomes entitled to as a result of Esperance reaching maturity on 20 March 2013, comprising Swan's loss and damage in respect of its investment in the Esperance SCDO; plus (c) $0 in respect of interest, as no part of the loss or damage within paragraphs (a)-(b) above was suffered by Swan prior to 26 September 2008. 4. The third applicant (Parkes) is entitled to be admitted to prove in the liquidation of Grange in the amount of $8,681,863.84 which is comprised of: (a) $8,679,886.85 comprising Parkes' loss and damage in respect of its investment in Claim SCDOs; plus (b) $1,976.99, comprising interest awarded at Federal Court rates on such part of the loss or damage within paragraph (a) above as was suffered by Parkes prior to 26 September 2008 by reason of the sale, maturity or wipe-out of any Claim SCDO prior to that date, such interest accruing from the date of sale, maturity or wipe-out of any Claim SCDO up to 26 September 2008. THE COURT ORDERS THAT: Interlocutory application to re-open evidence 5. In respect of the Grange's amended interlocutory application filed on 18 March 2013, Grange be granted leave to adduce evidence to prove: (a) the amount which noteholders of the Dante Notes have received, or become entitled to, under or as a result of the settlement agreements entered into between Lehman Brothers Special Financing Inc and the noteholders; and (b) the amount which noteholders of the following Claim SCDOs will receive or become entitled to at maturity: Newport, Esperance and Esperance 2. Common issues 6. Pursuant to the inherent power of the Court and r 39.05 of the Federal Court Rules 2011 (Cth), the orders made on 3 December 2012 answering the questions in annexure B thereto be amended by: (a) adding "(a)" after each reference to s 14A(2) of the Trustee Act 1925 (NSW); (b) adding after the word "damages" in Question (8), "and interest at Federal Court rates"; (c) adding a new subparagraph 8.2(f), "For the Claim SCDOs, interest should be awarded from the date of crystallised loss (sale, maturity, wipe out, or, in the case of the Dante notes, the settlement agreement or agreements) at Federal Court rates to the date of assessment of the particular Group Member's loss." (d) Schedule 1 be amended to delete the references in the table to Newport, Esperance AA+ and Esperance 2 notes. Costs 7. Grange pay: (a) 80% of the amount of the applicants' costs as agreed or taxed on an indemnity basis; and (b) the applicants' disbursements as agreed or taxed. Claims resolution process 8. Pursuant to r 30.01 of the Federal Court Rules 2011 (Cth), the following question be determined separately (Separate Question): (a) Should the Court order a process for the resolution of group members' claims? (b) If so, what is the appropriate process for the resolution of group members' claims? 9. The proceeding be listed for hearing on the Separate Question at 10:15am on 30 April 2013. 10. The applicants serve on Grange their proposed process for the resolution of group members' claims by 28 March 2013. 11. Grange serve on the applicants its proposed process for the resolution of group members' claims by 4 April 2013. 12. The parties meet to confer regarding the proposed process for the resolution of group members' claims by 15 April 2013. 13. The parties exchange submissions on the Separate Question by 23 April 2013. Application to Amend 14. The applicants' applications made on 18 March 2013 for leave to: (a) amend the third further amended statement of claim; and (b) to adduce further evidence be dismissed. Leave to appeal 15. Pursuant to s 25(2) of the Federal Court of Australia Act 1976 (Cth), Grange be granted leave to appeal from: (a) the Court's orders made on 3 December 2012, as amended by the Court's orders on 21 December 2012 and by order 6 of these orders; and (b) if leave be necessary, orders 2-4 and 7 of these orders. 16. Pursuant to r 36.03 of the Federal Court Rules 2011 (Cth), the date fixed by the Court for the filing of Grange's notice to appeal in respect of the Court's orders made on 3 December 2012 as amended by the Court's orders on 21 December and by order 6 of these orders, and any notice of appeal in respect of these orders, is 15 April 2013. Additional orders 17. Grange's application filed on 21 December 2012 be dismissed. 18. Liberty to apply on 3 days' notice. THE COURT NOTES THAT: 19. The applicants' costs and disbursements as agreed or taxed in accordance with order 7 are an "expense properly incurred by a relevant authority in preserving, realising or getting in property" of Grange pursuant to s 556(1) of the Corporations Act 2001 (Cth). 20. The applicants undertake: (a) not to take any step in reliance on the declarations made by the Court (including but not limited to, serving notice of entry of judgment on the US insurers referred to in the Agreement and Release dated 14 May 2012 (agreement and release), commencing proceedings under s 3420 of the New York Insurance Code, or asserting any right to US insurance monies under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) or directly under the insurance policy or policies the subject of the agreement and release) until after either (i) a scheme proposed by the liquidators of Grange, the subject of an application pursuant to s 411 of the Corporations Act 2000 (Cth) filed on or prior to 12 April 2013 is voted upon or otherwise fails; or (ii) in the event that an application pursuant to s 411 of the Corporations Act 2000 (Cth) is not filed by 12 April 2013 or such other date as agreed in writing; and then (b) not to take any step in reliance on the declarations made by the Court without first giving the liquidators of Grange seven days' notice in writing of their intention to do so. 21. The declarations in orders 2 to 4 above are made without limiting each applicants' right to apply to the Court for the making of orders for money judgments upon seven day' notice to Grange. 22. Grange undertakes that it will not assert or in any way claim that the applicants are estopped or in any other way precluded from seeking orders for money judgments by reason of the applicants being granted the declarations in orders 2 to 4 above or by reason of the applicants being granted these orders. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2492 of 2007 BETWEEN: WINGECARRIBEE SHIRE COUNCIL First Applicant CITY OF SWAN Second Applicant PARKES SHIRE COUNCIL Third Applicant AND: LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760) Respondent JUDGE: RARES J DATE: 18 MARCH 2013 PLACE: SYDNEY REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 The issues between the Councils and Grange as to the form of final orders that should be made have largely been resolved by events between the delivery of my principal reasons on 21 September 2012 (Wingecarribe Shire Council v Lehman Brothers Australia Ltd (In Liq) [2012] FCA 1028) and today. The parties have agreed today on a means of enabling declarations to be made for the purposes of ascertaining the amounts to which each of the Councils should be admitted to proof in the liquidation and reserving to the Councils the right to apply to the Court for an order for judgment in the event that a proposed scheme of arrangement, pursuant to the provisions of s 411 of the Corporations Act 2001 (Cth) between Grange and its creditors does not occur. I will use the same descriptions and abbreviations of matters in these reasons as I did in my principal reasons. The Issues 2 That has left outstanding two substantive issues namely, first, the form of a claims resolution procedure to enable the quantification of the amounts for which each of the remaining group members should be admitted to proof in Grange's liquidation and, secondly, the appropriate costs order. The parties also agreed that I should grant Grange leave to appeal both from the orders made on 3 December 2012 in respect of the answers to the common questions, and the orders that I will make in relation to the declarations of the amounts for which the Councils may be admitted to proof and costs of the proceedings. 3 The parties will formulate a separate question for the determination of the outstanding issues on the claims resolution procedure which can then be made the subject of a consent grant of leave to appeal once that is finalised on or after the hearing fixed for 30 April 2013. Costs - background 4 The Councils argued that they are entitled to costs on an indemnity basis. They put this on the ground that the proceedings, although not a test case in the true sense, had a significance that went beyond the forensic purposes of the parties alone. That was the resolution of major issues in Grange's liquidation that involved not just the Councils as applicants but also the group members and other creditors who could have been within that class. They argued that the legal issues that were resolved by my principal reasons and the orders that have since been, and will be, made reflect the first examination by a Court in this country of the class of financial products, being the Claim SCDOs. The Councils pointed to benefit which the liquidators said at an earlier stage of these proceedings they would receive from guidance by the Court in this way. One of the then liquidators, Mr Singleton, explained those advantages in his affidavit of 29 October 2009, where he stated: "… the most efficient and cost effective means to determine whether any liability arises between the Company and the Contingent Litigation Creditors is through defending [the Wingecarribee] proceeding. This is because, whilst the result will not be binding in relation to other proofs of debt received, I believe that any findings by this Honourable Court on liability raised in this proceeding, issues of causation and the proper approach to assessing damages will greatly assist Mr Parbery and I to properly adjudicate on other proofs of debt in similar claims. Even if this proceeding is case managed and is resolved by agreement prior to the hearing, that process itself would provide some benefits." 5 The proceedings were originally commenced in late 2007 by Wingecarribee alone against Grange. However, when they came before me on 9 July 2010, I recorded that the parties had been engaged in very constructive negotiations to convert the proceedings into a class action under Pt IVA of the Federal Court of Australia Act 1976 (Cth) and to proceed with what was an ambitious, but in fact achieved, timetable to bring the matter to a final hearing in early 2011. I said (Wingecarribee Shire Council v Lehman Brothers Australia Limited (In Liq) (No. 3) [2010] FCA 747 at [8]): "The parties recognise that a substantial controversy between them has arisen in the liquidation. These proceedings will assist the liquidators in determining the admission of debts in the liquidation, and in determining a significant range of issues that would, in any event, be highly likely to require litigation." 6 Grange opposed the making of any special order in relation to costs although accepted that party-party costs against it should follow the event. It contended that in all cases in which indemnity costs had been ordered, the party ordered to pay them had been found to have engaged in some unreasonable conduct, or conduct otherwise attracting criticism by the Court. Grange accepted that in October 2009, it had made an application that Wingecarribee be granted leave under s 471B of the Corporations Act to continue the original, non-representative action, proceedings against it on the basis that a result in the proceeding would be a useful guide for the liquidators in dealing with similar claims lodged by Grange's other contingent creditors, being persons who had claims arising from their dealings in SCDOs with Grange. However, Grange contended that the mere fact that there was an advantage to it and its liquidators from the resolution of these representative proceedings, that involved the three principal categories of client with whom it dealt in relation to SCDOs (i.e. on an IMP agreement basis, on an individual transaction basis or on both bases but at different times) was not sufficient to warrant the award of costs on an indemnity or solicitor-client basis. It noted that in Graham Barclay Oysters Pty Limited v Ryan (No. 2) [2000] FCAFC 1220 at [10], the Full Court had observed there was an advantage to group members under the procedure in Pt IVA of the Federal Court of Australia Act because, similarly, they did not have to incur liability for costs in numerous individual proceedings. Grange argued that it had neither consented to nor opposed the Councils' application on 9 July 2010 to convert these proceedings into a class action but that that should not redound against it in the outcome that has occurred. Consideration 7 In my opinion, these proceedings were very much in the nature of a test case. There was substantive uncertainty as to the basis on which Grange may or may not have been held liable in its dealings with persons within the group of some of whom each Council was likely to have been representative. The current pleadings dealt with the representative character of the proceedings and raised the issues that I sought substantially to resolve in my principal reasons (Wingecarribee [2012] FCA 1028). 8 Where the Court has made an award of damages in representative proceedings, a representative party or a sub-group representative party or a person who had been such a party, is entitled to apply to the Court for an order under s 33ZJ of the Federal Court of Australia Act. That allows to the Court to order that an amount equal to the whole, or a part, of the excess be paid to that person out of the damages awarded if the costs that were reasonably incurred in relation to the representative proceeding by person will be likely to exceed what will be recoverable from the respondent. The Court may also make any other order it thinks just. The power under s 33ZJ supplements the general power of the Court to order costs under s 43 of the Federal Court of Australia Act. Limitations, in awarding costs against an applicant in the case of representative proceedings are recognised in ss 43(1A), 33Q and 33R. Section 43(3) gives instances of orders that the Court may make in the exercise of that discretion, without seeking to limit that discretion. These include the power to order that costs be awarded against a party assessed on an indemnity basis or otherwise. Nonetheless, the general power of the Court to award costs is found in s 43(2), that provides: "Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge." 9 The ambit of this discretion was discussed by Gleeson CJ, Gummow, Hayne and Crennan JJ in Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52, particularly at 62-65 [24]-[34]. Their Honours demonstrated that there was no absolute rule as to how the statutory discretion to award costs must be exercised, saying (234 CLR at 65 [34]): "That was not to say that Chancery awarded costs on an unpredictable or irregular basis. As explained in Daniell's Practice of the High Court of Chancery, the discretionary nature of the award of costs meant simply that an equity court [5th ed (1871) vol 2, p 1239 (footnote omitted)]: "is not, like the ordinary Courts, held inflexibly to the rule of giving the costs of the suit to the successful party; but that it will, in awarding costs, take into consideration the circumstances of the particular case before it, or the situation or conduct of the parties, and exercise its discretion with reference to those points. In exercising this discretion, however, the Court does not consider the costs as a penalty or punishment; but merely as a necessary consequence of a party having created a litigation in which he has failed; and the Court is, generally, governed by certain fixed principles which it has adopted upon the subject of costs, and does not, as is frequently supposed, act upon the mere caprice of the Judge before whom the cause happens to be tried." The similarity with the modern treatment of costs applications will be readily apparent." 10 In Kazar v Kargarian (2011) 197 FCR 113 at 115-117 [1]-[9] Greenwood and Rares JJ discussed the ambit of the discretion, noting that it had escaped what Gaudron and Gummow JJ described as "arterial hardening" in Oshlack v Richmond River Council (1998) 193 CLR 72 at 87 [38]. The discretion conferred by s 43(2) is unconfined except insofar as the subject matter, the scope and purpose of the Federal Court of Australia Act may enable the court to pronounce some relevant restraint: Probiotec Ltd v University of Melbourne (2008) 166 FCR 30 at 42-44 [45]-[52] per Rares J, with whom Finn and Besanko JJ relevantly agreed. 11 In my opinion, both parties have acted with substantial commonsense and reasonableness in the conduct of this litigation, which has been complex and difficult to resolve. It would not have been able to be resolved as readily as it has been but for that cooperation and application by each of them. It would not be appropriate to make any order for costs against Grange on the basis that it was in some way in default or that it had acted in any way that was open to criticism in the conduct of the proceedings. Nonetheless, the resolution of the proceedings by judgment has been beneficial to all the creditors of Grange's estate in clarifying the principles on which it is liable to compensate its former clients in respect of the sales of SCDOs and will enable many, if not all, outstanding issues to be resolved in the proposed claims resolution process. That will enable the rest of the class, and possibly others, to ascertain the amount for which they should be admitted to proof in Grange's liquidation having regard to the principles enunciated in my principal reasons and the individual circumstances of the particular group member or other contingent creditor. 12 Thus, although the Councils brought the proceedings in their representative capacities, there was a corresponding benefit for the general estate of Grange in the conduct of the litigation. That to some extent necessitated the conduct of the proceedings in the complex form in which they ran and the need to address in them numerous and complex issues in order that there would be some general guidance for the liquidators and the balance of the group members to assist in the resolution of any outstanding issues between them. 13 I am of opinion that that characteristic in the particular circumstances of this matter requires that there be some adjustment to the ordinary party/party costs order that Grange accepts the Councils should be awarded. Grange submitted, however, it would not be appropriate to make an award of indemnity costs because the group members have had the benefit of litigation funding to bring these proceedings and cannot be said to have engaged in the proceedings entirely altruistically. 14 While that may be so, on the other hand, there was a need that both Grange and the Councils saw to identify principles in a judgment that would have a broader application than applied simply to what was necessary to resolve the claims by each of the three Councils whose cases I determined. That factor suggests that the recovery of costs by the Councils should not be as limited as it would be if I simply made a party and party costs order. Conclusion 15 In all of the circumstances, I am satisfied that it is appropriate to make an award of 80% of the costs that would be payable to the Councils on a taxed or agreed indemnity costs order, leaving unaffected by the mere use of that percentage the amount that the taxing officer considers appropriate to allow for disbursements. The amount of indemnity costs before discounting would simply be the sum properly payable on such a taxation. The parties should bring in draft orders to reflect the orders made today. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 6 May 2013