New South Wales Supreme Court CITATION : Stafford & anor v Kekatos & anor (No 4) [2008] NSWSC 1338 HEARING DATE(S) : 13 November 2008 JURISDICTION : Equity Division JUDGMENT OF : Brereton J EX TEMPORE JUDGMENT DATE : 13 November 2008 DECISION : First defendant may reopen to apply for reimbursement in respect of any amount in excess of $185,000 she is obliged to pay pursuant to Terms of Settlement in other proceedings. First defendant's Notice of Motion for leave to reopen otherwise dismissed. First defendant holds her property charged with immediate payment of judgment sum and interest pronounced in substantive proceeding. First defendant to pay plaintiff's costs of proceedings on party-party basis up to and including 23 June 2008, and on indemnity basis thereafter. No order as to costs as between plaintiffs and second defendant. CATCHWORDS : PROCEDURE – judgments and orders - amending, varying and setting aside – where judgment already given but not entered – general principles on applications to reopen case to adjust judgment sum in light of issue previously overlooked – whether defendant trustee can claim interest on funds advanced to trust – whether defendant should be permitted to claim reimbursement of costs incurred in other proceedings – EQUITY – general principles – remedies – tracing – where property to which plaintiffs held entitled in equity is traceable into defendant's property – whether defendant holds property subject to a charge – whether Court should declare charge – TRUSTS – (NSW) Trustee Act 1925, s 93 – whether proceeding "with respect to the management or administration of any property subject to a trust" – PROCEDURE – costs – indemnity costs – whether first defendant's conduct of case amounted to abuse of process – where offer of compromise made by plaintiffs – whether offer could only be relevant if accepted by both defendants – PROCEDURE – costs – general rule – costs follow the event – whether second defendant should pay or receive costs where no judgment given against him – where second defendant nonetheless failed on many issues raised by him and was cause of litigation LEGISLATION CITED : (NSW) Trustee Act 1925, s 93 (NSW) Uniform Civil Procedure Rules, r 20.26 CATEGORY : Procedural and other rulings Gertsch v Atsas & Ors [1999] NSWSC 898; (1999) 10 BPR 18,431 Metwally v University of Wollongong (No 2) (1985) 60 ALR 68; (1985) 59 ALJR 481 CASES CITED : Re Jones [1917] St R Qd 74 Sichel v O'Shanassy (1877) 3 VLR (E) 208 Stafford v Kekatos (No 3) [2008] NSWSC 1093 Wentworth v Woollahra Municipal Council (1982) 149 CLR 672 TEXTS CITED : Meagher and Gummow, Jacobs' Law of Trusts in Australia, 5th ed (1986) Butterworths H A J Ford and W A Lee, Principles of the Law of Trusts, Lawbook Company Susan Stafford (first plaintiff) PARTIES : Rhonda Dawn Stafford (second plaintiff) Voula Kekatos (first defendant) George Kekatos (second defendant) FILE NUMBER(S) : SC 4871/06 Mr E T Finnane (plaintiffs) COUNSEL : Mr M S Jacobs QC (first defendant) Mr D A Allen (second defendant) Uther Webster & Evans (plaintiffs) SOLICITORS : Serman & Associates (first defendant) Proctor & Associates (second defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRERETON J Thursday 13 November 2008 4871/06 Susan Stafford & Anor v Voula Kekatos & Anor JUDGMENT (ex tempore) 1 HIS HONOUR: On 17 October 2008, I gave judgment in the substantive proceedings, that the first defendant Mrs Voula Kekatos pay the plaintiffs Susan and Rhonda Stafford the sum of $613,177.18, and adjourned the proceedings to today for argument as to costs and as to whether any orders other than that judgment were necessary or appropriate [Stafford v Kekatos (No 3) [2008] NSWSC 1093]. I directed that the judgment not be entered until and including tomorrow, and that time for appeal not commence to run until today. 2 By Notice of Motion filed on 10 November 2008, Mrs Kekatos seeks leave to reopen her case (1) to claim credit for interest on amounts paid by her to Mr Cvitanovic (and others) to achieve the payment to her of $1.4 million, (2) to claim credit for the actual settlement sum (which she asserts is $250,000 rather than $185,000) under the terms of settlement between her and Mr Cvitanovic, and (3) to claim credit for an amount equal to the amount spent in litigating the claim against her by Mr Cvitanovic. She then seeks orders adjusting the judgment sum by those amounts, or making provision for their ascertainment. She also sought declarations that the plaintiffs did not have a caveatable interest over her Vaucluse home, but that part of the motion has been resolved by terms of settlement which I noted this morning. 3 For their part, the plaintiffs seek, in addition to the judgment previously given, a declaration that Mrs Kekatos holds her Vaucluse property charged with immediate payment to the plaintiffs of the judgment sum and interest; costs against her on an indemnity basis, either ab initio or from 23 June 2008 (the day after an offer of compromise was made); an order charging the costs payable by Mrs Kekatos to the plaintiffs on her Vaucluse property; and an order that the second defendant Mr George Kekatos pay their costs on an indemnity basis or otherwise. 4 Mr Kekatos, against whom no relief has been granted, seeks an order that the plaintiffs pay his costs. Mrs Kekatos' application for leave to re-open 5 It is convenient and logical to commence with the application for leave to reopen. This application is made after the giving of judgment, but before entry of judgment. Accordingly, those additional restrictions which pertain to applications to vary a judgment after entry do not apply here. Nonetheless, even before judgment is entered, the jurisdiction to re-open after judgment, while undoubtedly available, is one to be exercised with caution. As the High Court said in Metwally v University of Wollongong (No 2) (1985) 60 ALR 68, 71; (1985) 59 ALJR 481, 483: It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so. 6 Generally speaking, the jurisdiction is exercised only where the applicant for leave to reopen can show that by accident, without fault on his or her part, he or she has not been heard [Wentworth v Woollahra Municipal Council (1982) 149 CLR 672, 684]. However, the jurisdiction is available where a court has overlooked an issue tendered for decision, or has made an error which can be recalled before entry of judgment, or has not adverted to matters or issues raised in the course of the proceedings. It is far preferable, where there has been a manifest oversight or error, that it be put right at first instance if it can be, rather than to require the parties to incur the unnecessary costs and delay of an appeal, to rectify what could easily be rectified at the outset. It is bearing those principles in mind that I turn to the three respects in which Mrs Kekatos seeks leave to reopen. 7 I shall deal first with the proposal to adjust the judgment sum by $65,000, on account of the Cvitanovic terms of settlement. When Mrs Kekatos settled the proceedings brought against her by Mr Cvitanovic on 29 August 2008, they executed terms of settlement which provided for judgment for Mr Cvitanovic for $250,000 inclusive of costs and interest to 27 August 2008, but then: 2. The plaintiff will accept payment of the amount of $185,000.00 inclusive of costs and interest, if paid by 24 September 2008. ... 4. If the $185,000.00, or any part thereof is not paid by 24 September 2008, then the Plaintiff will accept the outstanding balance at any time up to 25 November 2008, together with interest on the unpaid balance ... . 5. If payment of the $185,000.00, or any part thereof, is not made by 25 November 2008, the Plaintiff will enforce the Judgment of $250,000.00, less any payments received ... . 8 Shortly before the commencement of the trial, the parties exchanged and provided to the Court written outlines of their argument. The plaintiffs' skeleton argument of 29 August 2008 noted (at [104]): Finally there is a claim for $253,000 "claimed by Cvitanovic in proceedings" ... . If, as the Plaintiffs believe, those proceedings have settled, the settlement sum should be substituted if, and when, it is paid. 9 Mrs Kekatos' skeleton argument, also of 29 August 2008, included the following (at [42], [45]): 42. To the extent it might be found there is any substance in the Plaintiffs' claim there should be an indemnification of the First Defendant's cost out of the assets of any trust found to exist prior to any distribution to the Plaintiffs. These amounts should include: ... 45. Cvitanovic's costs $185,000 (settlement of proceedings no: 1751/07) 10 During the course of the hearing, the terms of settlement were tendered on behalf of Mrs Kekatos. Counsel for Mrs Kekatos said, "It's relevant to the amounts paid out or that are to be paid out". Senior Counsel for the plaintiffs said, "There is no issue that $185,000 was the sum settled for, if that will assist my friend. It hasn't been paid, but there is no issue that that is the sum". Mrs Kekatos' then counsel formally tendered the settlement terms; they were admitted. They became exhibit DX12. I made orders in accordance with them in the Cvitanovic proceeding. 11 Schedules which were provided by counsel for the plaintiffs setting out various approaches to the calculation of the judgment sum showed the relevant amount as $185,000. Nothing was ever said against the proposition that $185,000 was the relevant sum. However, in Mrs Kekatos' closing submissions of 16 September 2008, paragraph 141 recorded the following: That to the extent it might be found there is any substance in the Plaintiffs' claim there should be an indemnification of the First Defendant's costs out of the assets of any trust found to exist prior to any distribution to the Plaintiffs. The amounts should include: … 141.3 Mr Cvitanovic's costs in the amount of $250,000 (in proceedings 1751/07 and subject to any discount) ... 12 No reference was made to this issue in the course of oral argument. In the context of the apparent position that $185,000 was uncontroversial, and that Mrs Kekatos' counsel's closing submissions, though referring to $250,000, added "subject to any discount", I did not give close attention to the possibility that $250,000 rather than $185,000 might be the appropriate amount. 13 The principle which my judgment sought to reflect was that which says that a trustee is entitled to be reimbursed from the trust assets for expenses and liabilities reasonably incurred by the trustee in the administration of the trust or the preservation of the trust assets. It is not and has never been an issue that the amount properly payable by Mrs Kekatos to Mr Cvitanovic falls within that category. What was not clearly an issue at the trial – although I accept, having now looked again at Mrs Kekatos' counsel's submissions, that it was "on the table" – was whether the appropriate amount was $185,000 or some greater amount. 14 The position, as the evidence before me now establishes, is that the date for payment of $185,000 free of interest has passed, and the date as at which $185,000 with interest will be acceptable to Mr Cvitanovic will cease to be acceptable to Mr Cvitanovic is fast approaching. It is very likely that Mrs Kekatos will have to pay something more than $185,000 (on account of interest), and it is possible that she may have to pay $250,000. I am not, at least at present, in a position to conclude that if she has to pay the higher amount – or any amount greater than $185,000 – the difference has not reasonably been incurred. It is apparent, on the material already before me, that at least some delay in raising the sum in question has been occasioned by the presence of the plaintiffs' caveat. While it may well be an entirely proper caveat, its existence may also provide a perfectly good explanation as to why it has not been possible for Mrs Kekatos to raise the sum payable by her to Mr Cvitanovic at any earlier stage. I am not prepared to conclude, as presently advised, that for her to have incurred liability for any sum over $185,000 is, in the circumstances, unreasonable. 15 The argument has proceeded to date on the basis that the whole of any further amount should be recoverable, but as the judgment proceeds on the basis of a notional distribution of the trust assets – and although I will hear further argument on this, if necessary, at a later date – as presently advised, it seems that Mrs Kekatos' entitlement would be to recoup only one half of any payment over the $185,000. 16 Accordingly, as I overlooked the possibility that the appropriate allowance might be more than $185,000, and as it is at least arguable that it will be, on this issue Mrs Kekatos should have leave to reopen, to argue that she should be entitled to recoup not only the $185,000 for which provision has already been made, but also half of any further amount that may be payable. 17 The nature of the trustee's right in these circumstances is one of reimbursement, coupled with a right of recoupment or exoneration and of retainer, in the sense that the trustee is entitled to retain sufficient of the trust assets to cover its claim to indemnity, pending exercise of the right. In my view, having raised the issue, albeit obliquely, in submissions, Mrs Kekatos should not be debarred by my judgment from mounting her claim for additional reimbursement, if and when it crystalises, but her failure to raise it with clarity at an earlier stage impacts on her ability to mount a claim of retainer, as distinct from one of reimbursement. I intend to make orders that will preserve her ability to claim reimbursement once the amount actually required to be paid has been ascertained. As it is agreed that I will stay enforcement of the judgment for at least 14 days in any event, it will not be necessary to make any other orders, so far as the judgment is concerned, until that amount is known. If, in due course, Mrs Kekatos makes out a claim for additional reimbursement, it will be possible to give effect to that by a judgment in her favour for the relevant amount, and then to set off the two judgments. It is not necessary to vary my judgment on this account. 18 The next respect in which leave to reopen is sought is to claim interest on the amounts paid by Mrs Kekatos, chiefly (though not exclusively) to Mr Cvitanovic, between late 2004 and September 2005 (when she received the settlement proceeds). Those payments are referred to in paragraph 83 of my principal judgment. In the principal judgment, I allowed interest on the balance remaining in Mrs Kekatos' hands from 25 September 2005, after providing for recoupment by her of all her expenditure. Mr Jacobs QC, who appears for her on this application, submits that she should recover interest on the amounts paid by her up to 25 September 2005 (during which period she was out of pocket). Evidence has been tendered on her behalf calculating her claim for interest over the relevant period to 25 September 2005 at a total of $52,854.82. 19 There are numerous difficulties with this submission. First, unlike the issue in relation to the amount of her liability under the Cvitanovic terms of settlement, it was in no way raised, orally or in writing, during the trial, and there is no explanation or apparent reason for it not having been raised inconsistent with fault on the part of Mrs Kekatos' side of the record. Accordingly, there is simply no basis to grant leave to reopen in that respect in the first place. Secondly, as Mr Finnane, who appears for the plaintiffs points out, her entitlement to interest would be a charge not against the plaintiffs but a charge against the trust fund, thus she would be entitled to only one half of the amount claimed. Thirdly, while I did not provide for interest in favour of Mrs Kekatos on those payments, I also did not allow interest to the plaintiffs in respect of the period before 25 September – notwithstanding that Mrs Kekatos had received trust moneys before that date from the royalty distributions – on the basis that she was entitled to retain the moneys so received until the amount of her expenditure had been fully recouped. If I were to allow interest on the sums she had paid out, I would correspondingly have to allow interest on those other receipts in her hands. Superimposed on the reduction just mentioned (of half), this would practically extinguish her interest claim. Fourthly, and in my view decisively, as Mr Finnane again points out, ordinarily when a trustee advances his or her own money to the trust he or she is not entitled to interest thereon [Sichel v O'Shanassy (1877) 3 VLR (E) 208; Re Jones [1917] St R Qd 74; Jacobs' Law of Trusts in Australia, 5th ed, [2107]; Ford and Lee, Principles of the Law of Trusts, [14.3370]]. 20 Accordingly, I would refuse leave to reopen to claim interest on the payments made by Mrs Kekatos. 21 The third aspect of the application for leave to reopen concerns the costs incurred by Mrs Kekatos in defending the Cvitanovic proceedings. Again, this issue was never raised, in writing or orally, during or in connection with the trial. There was then, and is now, no evidence of what those costs were. Mrs Kekatos seeks leave to issue and have made returnable a subpoena for production of documents which might elicit evidence of them. To my mind, this is all much too late. If this issue was to be raised, it should have been raised at the trial. There is no explanation why it was not. It is too late to raise it now. I would refuse leave to reopen to claim an allowance or set off for the costs incurred in the Cvitanovic proceedings. A charge on the Vaucluse property 22 I turn then to the plaintiffs' application, the first aspect of which I shall consider is the application for an order declaring that the judgment is a charge on Mrs Kekatos' Vaucluse property. 23 It is common ground that the settlement proceeds – which were the property to half of which I have found that the plaintiffs were in equity entitled – were applied by Mrs Kekatos to the reduction of a loan secured by mortgage on the Vaucluse property. Although the principles have not been argued in detail on this application, on reflection it seems to me clear enough that the plaintiffs' equitable claim can in that way be traced into Mrs Kekatos' Vaucluse property. Their property – their funds – were used to reduce the mortgage secured on her property and, to that extent, to increase her equity in it. It seems to me, therefore, that, in principle, the plaintiffs are entitled in equity to a proprietary interest in the Vaucluse property. This conclusion is consistent with what was said by Foster AJ in Gertsch v Atsas & Ors [1999] NSWSC 898; (1999) 10 BPR 18,431, [100]. It has been said that the plaintiffs have an election between a proportionate ownership interest and a charge; but they claim only a charge. 24 Based on the same passage in Foster AJ's judgment, Mrs Kekatos has submitted that it is unnecessary to declare a charge in circumstances where the plaintiffs' position is currently protected by the existence of its caveat. I was at first inclined to think there was considerable force in this argument, but ultimately I am not being asked to impose a charge, but to declare an existing right. Either the plaintiffs have a charge or they do not, and if they do have a charge, declining to make the declaration achieves nothing, except to preserve the issue for further argument. As I have concluded that their claim is traceable into the Vaucluse property, I see no legitimate purpose in declining to recognise it by making a declaration to that effect, and I will do so. Costs 25 The next question is the plaintiffs' costs as against Mrs Kekatos, which the plaintiffs seek on an indemnity basis, it not being apparently controversial that there should be an order that Mrs Kekatos pay the plaintiffs' costs on the ordinary basis. 26 The application for indemnity costs is made on two bases. In so far as it is contended that the defence of the proceedings from the outset was hopeless, so as to amount to an abuse of process, I am unpersuaded that Mrs Kekatos' conduct of the defence was of sufficient delinquency to warrant an indemnity costs order from the outset. There were a number of difficult issues. Mrs Kekatos succeeded on some. The amount ultimately recovered by the plaintiffs was significantly less than the amount of their claim. The plaintiffs at various times pressed a restitutionary claim, on a basis that would have entitled them to a 60 per cent or greater share in the settlement proceeds, rather than the 50 per cent which they more or less conceded, but only at the trial, appropriately described the limit of their claim. Accordingly, I would not make an indemnity costs order from the outset. 27 However, it was submitted that an indemnity costs order should be made from 23 June 2008, on the basis of an offer of compromise served on that day. That offer was addressed to both the defendants, and was expressed to be an offer under (NSW) Uniform Civil Procedure Rules, r 20.26, in the following terms: 1. By the Defendants paying to the Plaintiffs the sum of $400,000.00 inclusive of interest in respect of the principal claim; and 2. The Defendants paying the Plaintiffs' costs as agreed or assessed. 28 It was argued that this offer was not capable of acceptance by all of the defendants separately, and could only have been accepted by both the defendants. That argument, I think, is correct, insofar as had Mrs Kekatos alone accepted the offer, there would have been no agreement between the plaintiffs and both defendants that the defendants would pay the plaintiffs the sum of $400,000. Nonetheless, I do not think that that makes this offer irrelevant from the point of view of its costs consequences. 29 The circumstance that an offer of compromise may not be capable of immediate acceptance by the party to whom it is addressed is relevant to whether the Court ought to impose the usual consequences on the non-acceptance of such an offer, but in this case it can fairly be said that, after that offer was made and in the absence of any evidence of any other offers or withdrawals, Mrs Kekatos assumed the risk of the litigation if she were to end up having to pay more than the $400,000 for which the plaintiffs were evidently prepared to settle. It was open to Mrs Kekatos to respond to the offer by saying that she would have been prepared to pay $400,000 (and costs), and that would have brought an end to the litigation, on a basis more favourable to her than has eventuated. Mr Kekatos' position would then have been irrelevant. 30 Insofar as it is said that the acceptance of the offer would also have visited on her the whole of the plaintiffs' costs – including their costs against Mr Kekatos – the facts of this case were such that it was not only reasonable but also inevitable that the plaintiffs would have to join Mr Kekatos to the proceedings. Mrs Kekatos' defence was conducted on the basis of Mr Kekatos' evidence. The joinder of Mr Kekatos was reasonable and necessary in light of the defence advanced by Mrs Kekatos. In those circumstances, I will in any event be making an order that Mrs Kekatos pay the plaintiffs' costs of the proceedings generally (not limited to the proceedings as against Mrs Kekatos). 31 Accordingly, Mrs Kekatos ought to pay costs on an indemnity basis from 23 June 2008. 32 The plaintiffs sought an order that these costs be charged on the Vaucluse property, invoking for that purpose s 93 of the (NSW) Trustee Act 1925. However, I am unpersuaded that these proceedings can properly be characterised, for the purposes of s 93(3), as proceedings "with respect to the management or administration of any property subject to a trust". In any event, to the extent that the Vaucluse property could at all be characterised as trust property, that would be so only to the extent that Mrs Kekatos' equity has been increased by application of the plaintiffs' share of the settlement proceeds. In those circumstances, I do not think there is any room for using s 93 to charge the costs order, or liability under it, on the Vaucluse property. 33 That then brings me to the question of Mr Kekatos' costs. In a sense, Mr Kekatos won his case, in that no judgment was given or order made against him. He succeeded because, first, it was not shown that any of the settlement proceeds had found their way into his hands or his property – it transpiring that they had all gone to Mrs Kekatos; and secondly, because – almost in spite of his case on the misleading and deceptive conduct aspect – his conduct was found not to be misleading or deceptive because the plaintiffs did in fact retain an equitable interest in the Global charge. Mr Kekatos' case, however, failed on many issues. Moreover, he was, in all relevant respects, the agent of Mrs Kekatos, and, in every sense, the cause of the litigation. 34 On the one hand, considerable weight must be given to the circumstance that ultimately no order or judgment was given against him. On the other, I give weight to the circumstance that he failed on many issues, and was the cause of the litigation. If I were to make a costs order in his favour against the plaintiffs, the case for a Bullock order – that those costs be recoverable by the plaintiffs from Mrs Kekatos – would be formidable. As I have already outlined, it seems to me that his joinder was necessitated and occasioned by Mrs Kekatos' defence. However, Mr Kekatos' counsel, when asked, indicated that Mr Kekatos did not seek a direct costs order against Mrs Kekatos (a Sanderson order). In those circumstances, I think the more just course is to make no order as to costs as between the plaintiffs and Mr Kekatos. 35 That finally leaves the costs of the applications which have been heard today. So far as the applications concerning the caveat were concerned, they were settled. Authority indicates that in such a case, ordinarily where proceedings are settled with no agreement on costs the Court will leave each party to bear its own costs and make no order, although there are exceptions. On an incidental application such as the caveat application in this case, I see no warrant for embarking on extensive examination of the merits in order to ascertain what order the Court would ultimately have made, had the matter been litigated. I propose to adopt the course endorsed by the authorities of leaving the costs where they lie and making no order in that respect. 36 Otherwise, in respect of the applications today, it seems to me that each party has had a measure of success and a measure of failure, and I conclude that there should be no order as to the costs of the motion and applications before the Court today, to the intent that each party bear its own costs. 37 It is agreed that there should be a stay for a further 14 days or until the matter can come back, for the proper argument of a stay application, and by which time it will be known exactly how much Mrs Kekatos has had to pay Mr Cvitanovic. Orders 38 I order that execution of the judgment given on 17 October 2008 be stayed until and including 1 December 2008. 39 I reserve liberty to the first defendant to apply for reimbursement in respect of any amount in excess of $185,000 which she might become liable to pay pursuant to the terms of settlement in proceedings 1751/07. 40 I otherwise dismiss the first defendant's Notice of Motion filed 10 November 2008. 41 I refuse leave to issue a subpoena addressed to Kells for production of documents from the Mavrakis file. 42 I declare that the first defendant holds the land comprised in Folio Identifier 1/110554 being property situate at and known as 31 Vaucluse Road, Vaucluse, in the State of New South Wales charged with immediate payment to the plaintiffs of the sum referred to in the judgment given on 17 October 2008 and interest pursuant to (NSW) Civil Procedure Act 2005, s 101, thereon. 43 I order that the first defendant pay the plaintiffs' cost of the proceedings, such costs to be on a party-party basis up to and including 23 June 2008 and thereafter on the indemnity basis. 44 I make no order as to costs as between the plaintiffs and the second defendant. 45 I make no order as to the costs of the first defendant's motion filed 10 November 2008 and of the other applications before the Court today, to the intent that each party bear its own costs of those applications. 46 I adjourn the proceedings to Monday, 1 December 2008, at 9.30am before me, on which occasion if necessary I will entertain the application for extension of the stay, and the question of further reimbursement. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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