New South Wales Supreme Court CITATION : Firth v Leek & 7 Ors [2007] NSWSC 1007 HEARING DATE(S) : 3 September 2007 JUDGMENT DATE : 12 September 2007 JURISDICTION : Common Law JUDGMENT OF : Associate Justice Harrison DECISION : (1) The appeal is dismissed; (2) The decision of His Honour Magistrate Lulham dated 20 December 2006 is affirmed; (3) The summons filed 7 May 2007 is dismissed; (4) The plaintiff is to pay the defendant's costs as agreed or assessed. CATCHWORDS : Appeal from Local Court, solicitor's lien, garnishee order Bankruptcy Act 1966 (Cth) LEGISLATION CITED : Civil Procedure Act 2005 (NSW) - s 124 Local Court Act 1982 (NSW) - s 73 Unform Civil Procedure Rules 2005 (NSW) - Part 39.41 CASES CITED : Firth v Centrelink & Anor [2002] NSWSC 564 Wedgwood; Exparte Bank of New Zealand (1993) 116 ALR 153 Stephen Paul Firth trading as Firths - The Compensation Lawyers - Plaintiff PARTIES : Cathy Leek - First Defendant Paul Hopkins, Ian Dalgleish, Mark Saunder, Michael McGrath, Craig Osborne, Michael Naughtin & Martin Cullen trading as Russell McLelland Brown - Second to Eighth Defendants FILE NUMBER(S) : SC 12441/2007 COUNSEL : Mr R Goodridge - Plaintiff Mr C W Robinson - Defendants SOLICITORS : Firths - The Compensation Lawyers - Plaintiff Russell McLelland Brown Lawyers - Defendants LOWER COURT JURISDICTION : Local Court LOWER COURT FILE NUMBER(S) : 13250/2002 LOWER COURT JUDICIAL OFFICER : Lulham LCM LOWER COURT DATE OF DECISION : 20 December 2006 LOWER COURT MEDIUM NEUTRAL CITATION : Firth v Leek [2006] NSWLC 49 IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION ASSOCIATE JUSTICE HARRISON WEDNESDAY, 12 SEPTEMBER 2007 12441/2007 - STEPHEN PAUL FIRTH t/as FIRTH - THE COMPENSATION LAWYERS v CATHY LEEK & 7 ORS JUDGMENT Appeal from Local Court, solicitor's lien, garnishee order) 1 HER HONOUR: By amended summons filed on 7 May 2007, the plaintiff seeks the following orders: Firstly, an order pursuant to s 73 of the Local Court Act 1982 setting aside the judgment of Magistrate Lulham dated 20 December 2006 and substituting an Order that the second to eighth defendants pay to the plaintiff the sum of $21,109 plus interest; secondly, an order that the second to eighth defendants pay the costs of the Local Court proceedings file no. 13250 of 2002; and finally, an order that the second to eighth defendants pay the plaintiff the sum of $22,568.25 plus interest or such other sum as determined by the court. 2 The plaintiff is Stephen Paul Firth trading as Firths - The Compensation Lawyers (Mr Firth). The first defendant is Cathy Leek (Ms Leek). The garnishee order was served upon the second to eighth defendants who are the partners of the law firm Russell McLelland Brown (RMB). 3 While there is a Notice of Grounds of Appeal filed it is not helpful. At [15] to [19] Mr Firth says that he had a legal entitlement to be paid pursuant to the judgment debt and the garnishee notice and that legal entitlement was further supported by the equitable right of the solicitor to be paid his costs. These rights were a fruits of the action lien charged against the settlement funds. Mr Firth says that on the facts found by Magistrate Lulham, judgment ought to have been entered in his favour. Further, or in the alternative, Mr Firth seeks to enforce his equitable and legal rights by judgment of this court in accordance with the summons. Notice of contention 4 RMB filed a notice of contention, which seeks to challenge the Magistrate's reasoning that the Bankruptcy Act 1966 (Cth) does not apply. RMB says that, contrary to the Magistrate's decision, the Bankruptcy Act does apply. The background facts 5 On 15 December 2000, Ms Leek entered into a costs agreement with Mr Firth, who was to act as her solicitor in a claim for personal injury damages. 6 On 6 March 2002, Ms Leek became bankrupt and ceased to instruct Mr Firth. 7 On 2 July 2002, Ms Leek instructed RMB to act for her in the personal injury claim in which she had previously instructed Mr Firth. 8 On 5 September 2002, Mr Firth rendered a tax invoice claiming $20,996.35 from Ms Leek for services rendered. 9 On 16 May 2003, RMB wrote to Mr Firth advising him that Ms Leek had been declared bankrupt and requesting that he correspond directly with Ms Leek's Trustee in Bankruptcy and lodge his claim with the Trustee. 10 On 7 March 2005, Ms Leek was discharged from bankruptcy. 11 On 10 January 2006, RMB held $21,109.00 in a trust account on behalf of Ms Leek. A garnishee notice is served on RMB. 12 On 9 November 2006, the amount held by RMB on behalf of Ms Leek was $15,949.05. The Local Court proceedings 13 On 13 November 2002, Mr Firth as plaintiff, issued a statement of claim (No 13250/02) against Ms Leek as defendant in the Local Court at Sydney, seeking payment of the sum of $20,996.35 being for professional legal services rendered by him to her in accordance with fee agreement dated 15 December 2000. On 24 December 2003, Mr Firth obtained default judgment in the sum of $22,568.25. 14 Mr Firth sought to enforce this judgment by means of a garnishee order served upon RMB. The issue before the Magistrate was whether RMB had a liability to pay the moneys held in its trust account on behalf of Ms Leek to Mr Firth. RMB submitted that it also had a lien over the proceeds of Ms Leeks personal injury claim and the amount it was owed for costs and disbursements exceeded the amount held in the trust account. In other words, there was not enough money held in trust to pay both solicitors. The statutory framework 15 Section 124 of the Civil Procedure Act 2005 (NSW) (CPA) reads: "Procedure where garnishee order not complied with (1) On the application of a judgment creditor who considers that a garnishee order has not been complied with, the court: (a) may hear and determine any question as to the liability of the garnishee to pay the debt, wage or salary sought to be attached by the garnishee order, and (b) if satisfied that the garnishee is so liable, may give judgment in favour of the judgment creditor against the garnishee: (i) for the amount of that debt, wage or salary, or (ii) for the unpaid amount of the judgment debt, whichever is the lesser. (2) The court may refuse to give such a judgment if it is of the opinion that such a judgment should not be given. (3) Without limiting subsection (2), the reasons that may lead the court to form such an opinion may include: (a) the smallness of the amount outstanding under the judgment, and (b) the smallness of the debt, wage or salary to be attached. (4) As between the garnishee and the judgment debtor, an amount paid to the judgment creditor by the garnishee under a judgment given under this section is taken to have been paid to the judgment debtor." 16 Part 39.41 of the Uniform Civil Procedure Rules 2005 (NSW) reads: "Lien or claim of third person (1) This rule applies in circumstances in which the garnishee claims that some person, other than the judgment debtor, is or may be entitled to: (a) any money paid under a garnishee order, or (b) any debt, wage or salary attached by a garnishee order, or (c) any charge or lien on, or other interest in, any such money, debt, wage or salary. (2) In these circumstances, the court may hear and determine the garnishee's claim and give such judgment or make such order in respect of the claim (including an order barring the claim and an order for the payment into court by a judgment creditor of money received under the garnishee order) as the nature of the case requires." 17 Mr Firth's claim in the Local Court was founded on a common law claim for moneys due and owing under a contract. He obtained a default judgment in respect of moneys due for professional services rendered by him in accordance with a fee agreement. That is, Mr Firth obtained judgment in respect of a debt owed by Ms Leek to him. He did not obtain judgment on the basis of an equitable lien, that is his equitable right to be paid or recouped money from a particular item of another person – see Wedgwood; Exparte Bank of New Zealand (1993) 116 ALR 153. The Local Court Decision 18 Mr Firth submitted that on the facts found by Magistrate Lulham, judgment should have been entered in his favour and failure to do so amounted to an error of law. Failing that submission, Mr Firth now wishes to have his legal and equitable rights to the settlement fund enforced. 19 Firth relied upon the statement of relevant principles by Campbell J in Firth v Centrelink & Anor [2002] NSWSC 564 at paragraph [35] where His Honour stated: "[35] The authorities establish the following propositions concerning this right of the solicitor: (j) If the client is a company which goes into liquidation, the solicitor is entitled, in relation to costs arising from work done before the start of the liquidation, to claim the full amount of the costs from the fund, and is not required to prove in the liquidation: In Re Born; Curnock v Born [1900] 2 Ch 433; In Re Meter Cabs [1911] 2 Ch 557. This has the same practical effect as enforcing the right against the other creditors of the company. The solicitor's lien attaches to property recovered through his exertions, even if the actual recovery occurs after the client goes into liquidation: North West Construction Co Pty Ltd (In Liquidation) v Marian [1965] WAR 205 at 211. (k) Likewise if the client is a natural person who becomes bankrupt, the solicitor is not required to prove in the bankruptcy for the amount of costs incurred, but can recover the costs from the debt which is the result of his efforts: Guy v Churchill (1887) 35 Ch D 489; Worrell v Power & Power (1993) 46 FCR 214. The trustee in bankruptcy takes that debt subject to the equitable right of the solicitor to be paid his costs, and if the amount of the solicitor's costs exceeds the value of the debt, the debt does not vest in the trustee in bankruptcy at all; if the client is discharged from bankruptcy he can sue to enforce the debt as it never was property divisible among the creditors, and any amount that the client then receives is also subject to the solicitor's lien: Kison v Papasian (1994) 61 SASR 567 20 Without RMB intervention, Mr Firth submitted that he should have been paid his legal costs and the balance of the funds paid to Leek. Further, according to Mr Firth, RMB having intervened should have paid Mr Firth his costs and then used the balance to pay their own costs, as agreed between themselves and Leek, or assessed by a Costs Assessor. 21 According to Mr Firth, the action that RMB took upon intervention was to give Leek the settlement money (the said $22,500) in an attempt to avoid having their proper bill assessed and taking their proper priority behind Mr Firth. Given these facts, Mr Firth submitted that in terms of which party was to have priority to the settlement fund his position should prevail 22 RMB submitted that they had a solicitor's lien over the money in the trust account, based on their efforts which resulted in the recovery of the money by Leek, and that they had an equitable right to have their proper costs and disbursements paid from the money, so recovered. 23 His Honour Magistrate Lulham in his written reasons dated 20 December 2006 stated: "[28] However, in these proceedings I am satisfied that the garnishee Russell McCelland Brown also have a 'Solicitor's fruits of the action' lien over the proceeds of the claim in relation to their costs and disbursements and I am satisfied that in these proceedings Russell McCelland Brown can rely on that lien as a defence in this Motion by Firth, the judgment creditor. They can do so pursuant to r 39.41 of the Uniform Civil Procedure Rules. [29] I am satisfied that the garnishee has established its Solicitor's 'Fruits of the Action' lien over the money held in its trust account. I am satisfied that in these proceedings such lien constitutes a bar to the judgment creditor's claim on the garnishee summons. [30] In making that finding, I do so on the basis that the judgment creditor's garnishee claim is based on a judgment in the Local Court. The fact that the judgment was obtained by the judgment creditor for legal costs and disbursements against Ms Leek, does not have any special significance in so far as these garnishee proceedings are concerned. I am satisfied that the judgment creditor cannot before this court rely on the garnishee summons as being an enforcement of any lien. [31] It may well be that Firth also has a solicitor's 'fruits of the action' lien over the amount held in the garnishee's trust account. However, if the Firth wishes to assert that lien, then he would be required to commence proceedings in the Equity Division of the Supreme Court (or some other court having equitable jurisdiction) to obtain a declaration from the court in exactly the same manner as was done in Firth v Centrelink & Anor . I am satisfied this court does not have the jurisdiction to make a declaration in relation to a solicitor's claim based on a 'fruits of the action lien'. On that basis, in my view, the motion must fail." 24 The Magistrate decided that the provisions of the Bankruptcy Act did not affect the right of Mr Firth to proceed to sue for and obtain judgment for his costs in acting for Ms Leek. If Mr Firth's claim had been once in relation to a lien, I would agree with the Magistrate. But it was not. It is my tentative view that the default judgment that Mr Firth obtained was in respect of a debt. It was a provable debt in bankruptcy but it is not necessary that I decide that issue. 25 Section 124(2) of the CPA gives a discretion to the Magistrate whether to give judgment in favour of a judgment creditor against a garnishee. As the Magistrate stated that RMB also had an equitable lien over the proceeds of Mr Leek's personal injury claim, he declined to give judgment in favour of Mr Firth in circumstances where there were two competing equitable liens in relation to the proceeds. The moneys held in the trust fund do not cover both liens. The Magistrate declined to give a judgment in favour of Mr Firth. The proper Court to litigate competing equitable liens is this Court, not the Local Court. There has been no error of law. The appeal is dismissed. The decision of His Honour Magistrate Lulham dated 20 December 2006 is affirmed. 26 I understand that Mr Firth has current legal proceedings on foot in this Court in respect of his "solicitor's fruits of the action lien". It may be that the legal costs incurred by both firms or solicitors will exceed the moneys held in the trust account. The summons filed 7 May 2007 is dismissed. 27 Costs are discretionary. Costs normally follow the event. The plaintiff is to pay the defendant's costs as agreed or assessed. The Court orders: (1) The appeal is dismissed. (2) The decision of His Honour Magistrate Lulham dated 20 December 2006 is affirmed. (3) The summons filed 7 May 2007 is dismissed. (4) The plaintiff is to pay the defendant's costs as agreed or assessed. ********** 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.