New South Wales Supreme Court CITATION : Metsikas v Quirk (No 2) [2010] NSWSC 757 HEARING DATE(S) : 16 March 2010 JURISDICTION : Equity Division JUDGMENT OF : Brereton J EX TEMPORE JUDGMENT DATE : 16 March 2010 DECISION : Mr Kalmath's conduct was not so delinquent as to warrant a personal costs order against him. No order as to costs, to the intent that each party bear its own costs of the motion. CATCHWORDS : PROCEDURE – Costs – Costs orders against legal practitioner LEGISLATION CITED : (NSW) Legal Profession Act 2004 s 348, s 349 CATEGORY : Consequential orders CASES CITED : Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284 Stella Metsikas (plaintiff) PARTIES : Wayne John Quirk (first defendant/applicant) Anna Quirk (second defendant/applicant) Asheesh Kalmath (respondent) FILE NUMBER(S) : SC 09/287884 COUNSEL : Mr G Curtin (for Kathmath Lawyers) Mr R Newell (defendants) SOLICITORS : Kalmath Lawyers (plaintiff) L C Muriniti & Associates (defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRERETON J Tuesday, 16 March 2010 2009/287884 Stella Metsikas v Wayne John Quirk JUDGMENT (ex tempore) 1 HIS HONOUR: The factual background to the present application is contained in my judgment of 1 February 2010 pursuant to which I granted leave to the plaintiff Stella Metsikas to discontinue the proceedings, and ordered that the plaintiff pay the defendant's costs of the proceedings, but declined to order that those costs be assessed on the indemnity basis. In the course of dealing with that application I accepted that, apart from the question of standing, there were reasonable grounds for instituting proceedings seeking a tracing remedy against the Quirks. However, on the question of standing, I concluded that it could be said that the proceedings were hopeless and doomed to failure from the outset, any such cause of action as Ms Metsikas had against the Quirks of the type in question having accrued to her prior to the date on which she became bankrupt on 4 January 2006, whereupon all her property vested in her trustee in bankruptcy. Such property included any interest which she had in the Quirks' property to which she might be entitled by way of a tracing remedy, and which might otherwise have supported the caveat that she sought to sustain in the substantive proceedings. 2 The Quirks, by notice of motion filed on 15 June 2009, now claim an order pursuant to the (NSW) Legal Profession Act 2004, s 348, that Mr Kalmath, the solicitor who acted for Ms Metsikas, personally pay the costs which Ms Metsikas had been ordered to pay the Quirks. ] 3 On such an application, the first issue is whether, in terms of s 348, Mr Kalmath has provided legal services to Ms Metsikas "without reasonable prospects of success". Section 349 provides that, if the Court hearing proceedings on a claim for damages finds that the facts established by the evidence before the Court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption that legal services were provided without reasonable prospects of success. 4 As I have recorded, in the judgment of 1 February 2010, I did find that the proceedings were hopeless and doomed to failure from the outset. Although I was not actually hearing the original claim on merits, I was hearing alternative motions for leave to discontinue, and for summary dismissal of, those proceedings. In that sense, I think I was then hearing proceedings on the claim for the purposes of s 349 and, accordingly, the presumption provided for by that section is attracted. It, therefore, falls to Mr Kalmath to establish that, at the time that he provided the services in question, there were provable facts that provided a basis for a reasonable belief that the claim had reasonable prospects of success. 5 As I have also already recorded, in so far as the substance of a tracing remedy supporting a caveatable interest in the Quirks' property was concerned, I was and am now satisfied that there were provable facts providing a basis for a reasonable belief that such a claim had reasonable prospects of success. Mr Kalmath's difficulty arises not in that respect, but in respect of the standing of the plaintiff, in light of her bankruptcy, to assert that claim. 6 Prior to the institution of the present proceedings, some preliminary work had been undertaken. Mr Kalmath had briefed counsel to advise on the possibility and prospects of a claim against the Quirks to recover the $50,000 that allegedly had been paid by the fraudster to them pursuant to causes of action founded in unjust enrichment or constructive trust. On 9 July 2008, counsel briefed by Mr Kalmath, who there is no reason to suppose Mr Kalmath had any reason to think was other than competent and appropriate to advise in the field, gave the following advice: Miss Metsikas is an undischarged bankrupt having been the subject of a sequestration order on 4 January 2006 as a result of a debtor's possession. It would seem to me that our client would have considerable difficulty commencing an action against the Quirks in respect of stolen funds in light of her status as it: (a) requires the trustee's consent, and (b) would certainly result in the application for security for costs. Assuming, however, for the purposes of this argument that Ms Metsikas can take some steps in respect of bankruptcy, such as reaching a settlement with her creditors by way of assignment of property or part payment of funds that will allow her an early discharge, she would then be able to maintain the action. Failing in such a situation, Ms Metsikas would suffer the likelihood of having to pay security for costs in any action against Mr and Mrs Quirk. She would need the consent of the trustee in bankruptcy who would also be standing in line to take the proceeds of the action. But assuming these are all things that can be dealt with one way or another, applicable law, in my opinion, favour success by Ms Metsikas if she commences proceedings. 7 Counsel's advice was, with respect, wrong in several respects. It was wrong to suggest that Ms Metsikas could bring an action against the Quirks with her trustee in bankruptcy's consent. Her cause of action had vested in her trustee, and the trustee in bankruptcy could bring the action himself, or could assign the cause of action to Ms Metsikas, but there was no basis upon which the trustee could consent to Ms Metsikas bringing such an action in her own name. 8 Secondly, the suggestion that upon early or any discharge Ms Metsikas would be able to bring the action was also wrong. Discharge from bankruptcy does not affect the vesting of property in the trustee in bankruptcy, and the trustee alone could or prosecute any such cause of action. 9 Moreover, while it is true that counsel expressed the view that the applicable law favoured success by Ms Metsikas if she commenced proceedings, but that was hedged with the comment, pertaining to the bankruptcy issues "but assuming these are all things that can be dealt with one way or another", it already having been pointed out that "it would seem our client would have considerable difficulty commencing an action against the Quirks in light of her status". 10 On 22 October 2008, Mr Kalmath wrote to Insolvency and Trustee Services Australia (ITSA) and enquired as to the trustee's attitude to Ms Metsikas commencing proceedings in order to pursue the Quirks for recovery of $50,000 and seeking the trustee's consent to that course of action. No direct response to that letter was forthcoming. However, on 9 January 2009, the trustee informed Ms Metsikas that she had been discharged on 5 January 2009. The letter pointed out "You should also note that unless otherwise advised by your trustee, any property that vested in your trustee upon bankruptcy (such as real estate) remains vested even if the trustee has not dealt with the property by the time you were discharged. You cannot deal with such property without your trustee's permission". 11 Having lodged the caveat which was at the heart of the substantive proceedings, Ms Metsikas was served, on or about 9 February 2009, with a lapsing notice issued at the request of the Quirks. She forwarded that to Mr Kalmath, with a request that he take urgent action "as I do not want this caveat to lapse under any circumstance. I intend to get this matter as far as it needs to go to get results". Mr Kalmath forwarded this material to counsel who had previously been engaged, asking if he could draft a statement of claim before the caveat lapsed. Counsel was also briefed with the letter from ITSA concerning discharge. According to Mr Kalmath's affidavit, which was not contradicted and upon which he was not cross-examined, he then had a conversation with counsel as follows: KALMATH: Stella has received a lapsing notice in respect of the caveat she lodged against the Quirk's home. She's worried they are taking steps to sell to avoid a judgment. I wrote to the trustee in bankruptcy in October seeking consent to commence proceedings against the parents, but haven't received any response. However, Stella's bankruptcy was discharged in January. Given ITSA doesn't appear to object, is that sufficient to proceed? COUNSEL: The correspondence indicates they don't object and I can't see why they would so I think we can just commence proceedings now. If they were to raise an issue we can rely on correspondence. The main object is to get an undertaking or injunction and if any other matters needed to be addressed, that can be done after the Quirks' property is secure. I will prepare something and get back to you. 12 Counsel referred the matter to other, more junior, counsel, who apparently drafted a statement of claim and notice of motion. However, what was ultimately filed in this Court, on 6 March 2009, was a summons claiming the following relief 1. That pursuant to Section 74A of the Real Property Act 1900 the operation of Caveat No. AE188955 be extended until further order of the Court. 2. Alternatively, an order pursuant to section 74O of the Real Property Act, that the Plaintiff have leave to lodge a further caveat in respect of Land at 86 Canberra Street, Oxley Park, folio reference 194/16937, claiming an equitable interest as created by a constructive trust in respect of monies received by the first and or second defendants from Melissa Maree Quirk. 3. In the alternative, upon the plaintiff, by its counsel, giving the usual undertaking as to damages, the first and second defendant, by itself, its servants and agents, be restrained pending determination of these proceedings or until further order of this court from seeling, or further encumbering the property folio reference 194/16937 known as 86 Canberra Street Oxley. 4. A Declaration that there existed a constructive trust between the Melissa Maree Quirk Trustee and the Plaintiff as Cestui Qu Trust in the amount of $414,748.00 in respect of the money fraudulently taken from the Plaintiff by Melissa Maree Quirk 5. An order that Melissa Quirk account to the plaintiff for the said sum of money. 6. An order that all funds loaned or given by Melissa Maree Quirk to the first and second defendant, or either of them, in breach of the said trust, be returned to the Plaintiff 7. Such further or other orders as the court thinks appropriate 8. Equitable damages 9. Costs 13 On the authority of Barrett J's decision in Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284, it would seem that these proceedings are therefore "proceedings ... taken on a claim for damages" for the purpose of the section in the Legal Profession Act under consideration. However, I do not think it is irrelevant to overlook that the purpose of the proceedings, when they were instituted, was primarily not to claim damages, but to obtain an extension of the operation of the caveat (or alternatively leave to lodge a further caveat) asserting a proprietary interest by way of constructive trust in the defendant's property. I proceed, therefore, on the basis that the claim was one for damages in the relevant sense; but the purpose and timing of the proceedings are relevant discretionary considerations. 14 Once again, it has to be said that the advice given by counsel in the telephone conversation, to which reference has been made, was wrong. The absence of objection on the part of the trustee provided no basis for commencing proceedings which Ms Metsikas had no standing to institute. However, that does not alter the circumstance, on the other hand, that there is unchallenged and uncontradicted evidence that Mr Kalmath received or was given that advice. 15 I do not consider that Mr Kalmath has discharged the onus of establishing that there were provable facts that provided a basis for a reasonable belief that the claim had reasonable prospects of success. I reach that conclusion because an essential provable fact was Ms Metsikas' standing, and there were no provable facts which were able to provide a basis for a reasonable belief that she had standing. Accordingly, I am satisfied that the power conferred by s 348 to make a costs order against Mr Kalmath is enlivened. 16 The question then becomes whether the discretion to make such an order should be exercised. In the exercise of that discretion, it is relevant to bear in mind that the purpose of such a costs order is essentially disciplinary, not compensatory. While such orders may take on, from the applicant's perspective, an increased significance where the party primarily liable is impecunious, ultimately the question in making such an order is concerned not so much with the applicant's position and detriment to the applicant, but with the conduct and state of mind of the respondent. 17 On the one hand, in this case, it has to be said that while I am acutely conscious that it may be unfair for those familiar with proceedings in this division or in the bankruptcy court to assume knowledge of an aspect of insolvency law by other practitioners, the notion of an insolvent's assets vesting in the trustee in bankruptcy or liquidator upon sequestration or winding is fairly fundamental, and a basic one which every lawyer ought to understand. The precise means by which a bankrupt after bankruptcy may bring proceedings, notwithstanding bankruptcy, is another matter, and I would not necessarily expect every practitioner to know, without research, the circumstances in which there might be exceptions under s 116 or in which leave or permission to bring proceedings on behalf of or against a bankrupt might be obtained. Mr Kalmath was, to some extent, alert to the fact that bankruptcy was an issue, and drew his client's status to counsel's attention. Counsel gave advice on the consequences of that status and the steps required to address it. Ultimately, when asked whether the present proceedings should be instituted, counsel advised, in the conversation to which I have referred, that they could be instituted, at that stage, without requiring further or at least prior consultation with the trustee. 18 Mr Kalmath did not institute proceedings recklessly, without seeking advice from competent counsel, or in disregard of such advice. On the evidence before me, he instituted the proceedings in accordance with advice he had received. It is at this point, to my mind, that it becomes significant that the context in which the proceedings were instituted was an urgent one, in the sense that a lapsing notice had been served. It is of course notorious in this jurisdiction that delays in instituting proceedings in response to a lapsing notice are dangerous. 19 It is clear from the conversation between Mr Kalmath and counsel that proceedings were instituted primarily for the purpose of securing interim relief, and ultimately leave to lodge a further caveat while the position might be further investigated. Once they were instituted, the Quirks proffered an undertaking which preserved the position pro tem. 20 The precise issue of the effect of the vesting of the plaintiff's assets in the trustee in bankruptcy was raised by the Quirks' solicitor in a letter of 14 May 2009, and confirmed by the judgment of the Federal Magistrate's Court in associated proceedings in September 2009. The plaintiff thereafter sought leave to discontinue the present proceedings in October 2009. It is common ground between the parties that practically nothing happened in the proceedings in this Court after the issue was first raised in May 2009, until the application for leave to discontinue in October 2009. 21 Given the circumstances in which the proceedings were commenced, the oral advice that Mr Kalmath had received from counsel shortly before instituting them, and that virtually no steps were taken in them after the critical issue had been raised in May 2009, I do not think Mr Kalmath's conduct was so delinquent as to warrant a personal costs order against him, and for those reasons, I will dismiss the present motion. 22 The motion is dismissed. There will be no order as to costs, to the intent that each party bear its own costs of the motion. ********** 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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