Joan Victoria Edwards v Frederick Alexander Adam

The plaintiff, Joan Victoria Edwards claims she loaned $150,000 to her accountant, the first defendant, Frederick Alexander Adam, which sum has not been repaid. Mrs Edwards took an unregistered mortgage over Mr Adam’s interest in the matrimonial home in Wahroonga that he jointly owned with his wife, Suzanne Adam. Mrs Edwards protected this unregistered interest by caveat.

But Mr Adam has been convicted of fraud, banned from practice as an accountant and is now serving a term of imprisonment. Mrs Edwards commenced these proceedings against Mr and Mrs Adam, to avoid her caveat over the Wahroonga property from lapsing and ultimately to recover the security interest she holds in the Wahroonga property.

Mr Adam subsequently became bankrupt and the caveat over the Wahroonga property lapsed due to an oversight. Mr Adam’s trustee in bankruptcy has decided to take no active part in these proceedings. Now Mrs Edwards has decided that she does not wish to pursue the proceedings and Mrs Adam seeks to strike them out.

This judgment deals with two motions in the proceedings: Ms Edwards’ motion of 3 August 2016 seeks leave to file a notice of discontinuance in relation to the whole of the proceedings, pursuant to Uniform Civil Procedure Rules (“UCPR”), r 12.1, and seeks an order under UCPR, r 42.19 that there be no order as to costs to the intent that each party bear her own costs of the proceedings to date. Mrs Adam, the second defendant, also moves on her motion of 2 August 2016 seeking that the proceedings be dismissed against her pursuant either to UCPR, r 2.1 or UCPR, r 13.4.

Mrs Edwards’ case is that she brought these proceedings to recover loan monies and to enforce an unregistered mortgage but now that a supervening event has occurred, the bankruptcy of the mortgagor, Mr Adam, each party should now bear its own costs of the proceedings. Mrs Adam’s case is that she has been unnecessarily vexed with litigation which she was likely to win and which Mrs Edwards no longer wishes to pursue, so she should now have her costs.

The motions were argued in the applications list. Ms H. Mann of counsel instructed by Shaddicks Legal Pty Ltd appeared for the Plaintiff, Mrs Edwards. Mr D. Klineberg of counsel appeared for the Second Defendant, Mrs. Adam, instructed by O’Bryen Legal.

Although the facts in contest in the proceedings have not been decided and need not be decided, some short background to them is necessary in order to determine the issues on the motion.

Mrs Edwards claims that she loaned $150,000 to her accountant, Mr Adam on 27 October 2009. She advances a handwritten document in her case that records a transaction involving Mr Adam on that date in the amount of $150,000 as follows:

The document then makes handwritten reference to the Adam, Barnes & Co Trust Account, recording its BSB number and account numbers. Associated electronic banking records indicate that $50,000 was paid by telegraphic transfer to Mr Adam on 29 October 2009. It appears that the balance was paid by cheque in the sum of $100,000 given to Mr Adam.

Mrs Edwards from time to time after October 2009 corresponded with Mr Adam about what she described as “my $150,000 investment with you”. She does this for example in her letter of 25 April 2010. In that letter she treated the investment as a commercial one asking her accountant, “the end of the financial year is not far away, how will I show the interest on this money? Also when will it be paid and how will it be paid?”

Mr Adam responded on 25 October 2010 saying to Mrs Edwards:

The following year, similar correspondence took place with Mrs Edwards explaining that she would need the money herself fairly soon. The substance of her letter of 2 October 2011 about her “investment” to Mr Adam was the following:

Mr Adam reported back to Mrs Edwards later in 2011. He answered her query on 14 December 2011 in the following terms:

The next correspondence between the client, Mrs Edwards and her accountant, Mr Adam does not appear to come to the fore until 2013, when Mrs Edwards again inquires of Mr Adam about her investment. She says in a letter of 21 April 2013 the following:

Little seems then to have happened until the first half of 2015, when Mrs Edwards became somewhat exasperated with Mr Adam’s apparent continuing failure to respond to her queries about her investment with him. She ultimately emailed him on 22 May 2015, and said in as firm terms as she had ever written to him:

Mr Adam replied. But he was clearly constrained in some way at the time of his reply. He wrote the following quite cryptic message back:

What Mr Adam’s correspondence did not explain fully is that by May 2015 Mr Adam appears to have been charged with fraud and had been banned from practising as an accountant.

Mrs Edwards did not engage further with Mr Adam. She decided instead to engage solicitors, who wrote by an emailed letter to Mr Adam on 12 June 2015 making allegations against him as follows:

Mrs Edwards’ solicitor, Mr D.J. Shaddick from Shaddicks solicitors, then drew the following conclusion:

In this letter Mr Shaddick then claimed on Mrs Edwards’ behalf the principal sum of $150,000, accumulated interest up to 12 June 2015 of $67,560 making a total of $217,560. Mr Shaddick foreshadowed that if this sum was not received before 22 June 2015 then proceedings for recovery would be commenced.

12 June 2015 was a Friday. Mr Shaddick’s letter of demand was issued very shortly before 5pm that Friday. It elicited a strange response at 4:30pm the following Sunday, 14 June 2015. On that Sunday, a woman by the name of Anne Gray, an old client and friend of Mr Adam replied in the following terms:

Ms Anne Gray’s letter disturbed Mrs Edwards, so she instructed Mr Shaddick, solicitor to find out what was going on. It was discovered apparently that Mr Adam was in gaol.

Mr Shaddick’s office acted quickly. Mr Ian Roche of that office went to visit Mr Adam at the John Morony Correctional Centre and spoke to Mr Adam for about 25 to 30 minutes. In the course of that conversation he explained that he was acting for the plaintiff, Mrs Edwards.

He says that he said to Mr Adam words to the effect, “I’m here to ask you to sign a mortgage over your share of the interest in the home you own with your wife to ensure repayment of your debt to Joan Edwards. I have calculated the amount of the debt as principal and interest to date to be $217,560. Here is the document.” Mr Roche was referring to the calculation that had been made in Mr Shaddick’s 12 June letter. Mr Roche had brought with him to the Correctional Centre a pre-drafted form of mortgage for Mr Adam to sign. Mr Roche then deposes to showing Mr Adam the document and Mr Adam reading it and then saying back to Mr Roche, “yes, I understand. I do want her repaid. We have known her for a long time.”

According to Mr Roche, Mr Adam then signed and initialled the document in a number of places. Mr Roche placed his signature and initials on the document as a witness, and left a copy of the document with Mr Adam and then left the Correctional Centre.

Upon his return to the office that day, Mr Roche arranged for Mrs Edwards to attend to sign the mortgage and took instructions for the lodging of a caveat on the title to notify of the interest taken. Mrs Edwards instructed him to lodge the caveat.

The unregistered mortgage is dated 24 June 2015, the date of Mr Roche’s visit to the John Morony Correctional Centre. Mr Roche witnessed the signature of the mortgagor, who is recorded as Frederick Alexander Adam with the mortgagee as Joan Victoria Edwards. The mortgage incorporates the standard memorandum Q860000 filed pursuant to Real Property Act 1900, s 80A. The special conditions on the mortgage in Annexure “A” relevantly as to clauses 1 and 2 provides as follows:

The same day, the plaintiff Mrs Edwards caused caveat number AJ 601070 to be filed. The estate or interest claimed in schedule 1 of the caveat was as “equitable interest pursuant to Mortgage between Frederick Alexander Adam (as mortgagor) and Joan Victoria Edwards (as mortgagee), dated 24 June 2015.”

The caveat was entered on 26 June 2015 and notice of the caveat was given to Mrs Adam on 1 July 2016 or shortly thereafter. Mrs Adam then engaged solicitors to seek to have the caveat removed. Thereafter the parties communicated through their solicitors.

The short facts after July 2015 are the following. Mrs Adam received a notification of the caveat on or about 6 July 2015. Then on 7 July 2015 Mr David O’Bryen, solicitor for Mrs Adam, wrote to Shaddicks Lawyers requiring removal of the caveat. On 9 July 2015, Mr Roche spoke to Mr O’Bryen, seeking agreement to have Mrs Adam produce the title to enable a mortgage to be registered, an issue he followed up on 20 July 2015.

Mr O’Bryen responded on 5 August 2015, again requesting removal of the caveat and advising that agreement had been reached in relation a property settlement under the Family Law Act 1975 (Cth) in relation to the divorce of Mr and Mrs Adam.

Draft orders to settle the matrimonial proceedings were sent to Mr Roche shortly after 28 July 2015. Order 1 of these draft orders reflected an agreement to transfer Mr Adam’s interest as tenant-in-common in the Wahroonga property to Mrs Adam “free of any liens rights and other encumbrances except for any such encumbrances set out on the certificate of title to the Wahroonga property”. These orders did not give any comfort to Mrs Edwards, as they did not indicate whether and how she was going to be paid out before transfer of Mr Adam’s interest in the Wahroonga property to Mrs Adam.

On 27 August, by letter Mr Roche sought the withdrawal of those orders. He expressed surprise “that there is no information contained in the [draft Family Court orders] which properly discloses the existence and nature of our client’s claim to have the equitable interest in the land which is the subject of the order…”. He consequently sought the withdrawal of the orders or the filing of an affidavit in the family law proceedings setting out the nature of the plaintiff’s claim.

Mr O’Bryen did not immediately reply and a reminder was sent 11 September 2015. This evoked a response from Mr O’Bryen on 15 September 2015 in a letter the effect of which was debated in the proceedings. In that letter Mr O’Bryen said to Mr Roche:

In this letter Mr O’Bryen then invited Shaddicks Lawyers to submit any proposed amendments to the Family Court orders, provided the amendments “would not prejudice my client’s argument that your client’s mortgage is not valid.”

The following day Mr Roche replied to Mr O’Bryen’s 15 September letter on Shaddick’s letterhead, relevantly in the following terms:

Some amendments did then subsequently take place to the Family Court orders. But as will be seen these orders remained on their face somewhat delphic as to what was going to happen with Mrs Edwards’ claimed interest in the land.

Orders in the Family Court were eventually made on 14 October 2015 which provided for the transfer of the husband’s right title and interest in the Wahroonga property to the applicant wife, Mrs Adam “subject to…(a) any registered or valid or unregistered mortgage that may subsist over the Wahroonga property”. The short minutes of order by now specifically mentioned the possibility of an unregistered mortgage but did not mention Mrs Edward’s mortgage by name and left open the issue of its validity.

Mr O’Bryen forwarded a copy of the Family Court orders to Mr Roche on 26 October 2015 and he then began to give effect to the Family Court orders by arranging a transfer of Mr Adam’s share in the Wahroonga property to Mrs Adam. This was effected by transfer dated 20 October 2015 which Mr O’Bryen lodged for registration in November 2015. He informed Mr Roche on 16 November 2015 of that fact and asked him to “provide a copy of the document supporting your clients above caveat”. Land and Property Information raised a requisition in relation to the caveat and on Friday, 27 November 2015 Mr O’Bryen wrote to Mr Roche in the following terms:

Mr O’Bryen did not apparently receive an immediate response and on 2 December 2015 wrote to Mr Roche again pointing out that there was a time limit on dealing with his LPI requisitions and stating:

Mr Roche replied on 7 December 2015 to Mr O’Bryen. He said “it seems to me that my client has priority over your client’s claim, regardless of what the mortgagor has furnished to you, and it is entitled to be registered.”

This stand-off then led to Mr O’Bryen issuing a lapsing notice on 11 January 2016 which was served on Chadwick’s lawyers. Mrs Edwards then commenced these proceedings to extend the operation of the caveat. As is usual in these cases she was required to plead the claim that she had caveated. And she filed a Statement of Claim that pleaded a loan made in October 2009 together with a claim for interest and an unregistered mortgage taken out in June 2015 to secure the loan. Mrs Adam filed a Defence denying a loan, denying that a mortgage was taken out, pleading that any money advanced was unsecured, and that the mortgage did not comply with the formal requirements of the Real Property Act.

There were a series of appearances in the first half of this year in the proceedings, extending the operation of the caveat. The most important of these was consent orders made on 14 April 2016 in which the operation of the caveat was extended until 5 August 2016 and the matter was listed for directions before the Registrar in Equity on 26 May 2016. The caveat was due to expire on about 14 April. But unfortunately Mr Roche did not lodge the orders made on 14 April with the LPI and as he explains in his affidavit “Accordingly the extension of the caveat was not registered on the title of the property as agreed to by the parties. I was not aware that the [extension] of caveat was not lodged until 16 June 2016”. Mr Roche was quite frank that he had instructions from Mrs Edwards to extend the caveat and the lack of lodgement was due to an “inadvertent omission”.

Pausing at this situation for a moment it is clear that both sides intended the caveat to be extended. Both Mr Roche and Mr O’Bryen were well aware that was the joint intention but the failure to execute this intent on Mr Roche’s side ultimately lead to the transfer going through.

At the time the 14 April consent orders were signed Mr O’Bryen wrote a Calderbank letter to Mr Roche pointing out that Mrs Edwards had a right to prevent registration of the transfer and that he could not see any reasonable basis for Mrs Edwards refusing to consent to the transfer and he said “I again invite your client to do so, subject to her caveeat”. He pointed out that Mrs Edwards’ refusal to consent was causing Mrs Adam’s emotional distress and preventing her from dealing with the property. Mr O’Bryen further pointed out that Mr Adam was “almost certainly insolvent” and expressed concern that it was difficult for Mrs Adam to entertain any settlement with Mrs Edwards because if Mr Adam became bankrupt his trustee in bankruptcy could re-open the consent orders made by the Family Court and make a claim on the Wahroonga property. Accordingly Mr O’Bryen refused to contemplate any settlement that would involve paying Mrs Edwards any money for recognising her security interest. He therefore simply offered in the circumstances to dismiss the proceedings with no order as to costs provided Mrs Edwards removed the caveat.

Mr Adam’s bankruptcy soon intervened. A bankruptcy notice was issued against him on 10 May 2016 and a sequestration order ultimately was made on 18 July 2016. In the meantime, other inconsequential correspondence passed between the parties in which they maintained their positions: Mr O’Bryen seeking further information about Mr Adam’s insolvency and Mr Roche asserting Mrs Edwards’ claims.

But in the meantime it had become clear that the caveat had lapsed and the transfer of Mr Adam’s share of the property to Mrs Adam was registered on 11 June 2016. Since then Mr Adam’s trustee in bankruptcy has not expressed any interest in seeking to set aside the transfer or to take any further part in these proceedings.

With that background, in early August the parties’ respective motions were filed.

The Court was assisted by careful submissions from counsel on both sides in this case. The detail of those submissions need not be reproduced again in this judgment. The following summary of Mrs Adam’s contentions will suffice.

Mr Klineberg submitted on behalf Mrs Adam that Mrs Edwards should pay Mrs Adam’s costs on and from 30 May 2016 on the indemnity basis because Mrs Adam was forced into litigation where in substance no allegation was made against her and the plaintiff no longer seeks to continue the proceedings.

Mr Klineberg relies on UCPR, r 42.19(2) that “unless the Court orders otherwise” a plaintiff must pay the defendant’s costs at the date of a notice of discontinuance. Mrs Adam accepts that the Court’s power to “order otherwise” preserves the Court’s discretion as to the appropriate costs outcome: Fordyce v Fordham (2006) 67 NSWLR 497; [2006] NSWCA 274 at [84]. But Mr Klineberg submits that there must nevertheless “be some sound positive ground or good reason for departing from the ordinary course”: Botannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWCA 32 at [54]. Mrs Adam accepts that the general principles as to when the Court may order otherwise are established in cases such as Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6; 186 CLR 622 (“Lai Qin”) and Australian Securities Commission v Aust-Home Investments Limited (1993) 44 FCR 194 at 201; (1993) 116 ALR 523 (“Aust-Home”).

Mr Klineberg on behalf of Mrs Adam submits that the key issue which arises from the authorities is the reasonableness of the parties and that in this case Mrs Edwards’ conduct was not reasonable, whereas Mrs Adam’s was.

The exercise of the Court’s discretion to make an order when parties do not wish to proceed with litigation or have consented to a grant of final relief or have otherwise agreed on the outcome of the proceedings is informed by principles stated in these two leading cases. The first is a statement by Hill J in Aust-Home at 530:

The second is the statement by McHugh J in Lai Qin at 3:

The parties did not take issue with these being the relevant principles.

Mr Klineberg challenged the availability of Mrs Edwards’ claim against Mrs Adam, submitting that the $150,000 advance was really money that she asked him to invest on her behalf rather than a loan. He also maintains that the mortgage was not supported by any consideration and was liable to be set aside because of the circumstances in which it was made when Mr Roche visited Mr Adam in jail on 24 June 2015, bespeaking it is said unconscionability.

Mrs Adam then points to other matters that are said to be relevant to the Court’s exercise of discretion. There were three principal matters relied upon.

First, that Mr Adam might become bankrupt was well known or ought reasonably to have been known to Mrs Edwards well before proceedings were commenced. Mrs Edwards says that now that Mr Adam’s bankruptcy has supervened there is no point in her proceeding further on the action. But Mr Klineberg says on behalf of Mrs Adam that she must have appreciated this long before she commenced proceedings and that is not in substance an excuse for her not proceeding now.

The second matter on which Mrs Adam relies is that months before proceedings were commenced she had said through solicitors to Mrs Edwards that she would not object to the transfer of the first defendant’s interest in the property, being made subject to any interest in the property which the plaintiff could establish. Mr Klineberg’s submissions then referred to the various orders of the Family Court of Australia identified earlier in these reasons. Mr Klineberg submits that notwithstanding Mrs Adam’s reiteration that she did not object to the transfer of Mr Adam’s interest subject to the purported mortgage to Mrs Edwards, that offer was not taken up. Moreover, it is submitted that the caveat simply lapsed on Mrs Edwards side due to inadvertence and the transfer of Mr Adam’s and Mrs Adam’s interest has now taken effect.

Mrs Adam’s third discretionary factor is really the same as her first. The current (third) item is her fourth discretionary factor. Mrs Adam submits that to the extent that it is put against her that she acted unreasonably by taking an active part in the proceedings that submission should be rejected. Mr Klineberg points out on her behalf that her conduct in this regard was not unreasonable because if the mortgage had been registered and found effective that it may have involved Mrs Adam’s loss of her home, an attitude which the plaintiff’s correspondence made clear was a distinct possibility.

In summary, Mr Klineberg submits with considerable force that there is no reason to order otherwise under you UCPR, r 41.19(2).

In this section the Court deals with Mrs Edwards’ various responses to Mrs Adam’s submissions. The Court ultimately finds Mrs Edwards’ answers to Mrs Adams’ submissions are persuasive and so they are dealt with as part of the Court’s overall consideration of the matter. Both sides do not contest the applicability of Aust-Home and Lai Qin. There is no need to reproduce Ms Mann’s submissions about those authorities. The issue in this case is their application to the present circumstances.

This is not a case where the Court could conclude that Mrs Adam was almost certain to have won the proceedings and Mrs Edwards almost certain to have lost. Mrs Adam’s submissions somewhat suggested that this was likely but I do not accept that is correct.

This is so for several reasons. The documents between Mrs Edwards and Mr Adam in 2009 are at least consistent with a loan agreement between them, although other constructions are clearly possible. A charge, such as this unregistered mortgage, can be created without the need for consideration: Champion Homes Sales Pty Ltd v JKAM Investments Pty Ltd Hotray Pty Ltd v JKAM Investments Pty Ltd [2014] NSWSC 952 at [67] – [71]. Moreover, the one-month extension on repayment of the loan which was conferred by the mortgage is forbearance which could amount to consideration sufficient to support a mortgage: Leslie Peter Sole v Benjamin Nuele Akari [2007] NSWSC 1022 at [14]. Nor do I accept that a professional accountant in jail when visited by a solicitor for a former client is necessarily in a position of special disadvantage in signing a mortgage. Mr Adam still had his professional background and training and was arguably in a position to decline to receive Mr Roche, if he had so wished. In my view Mrs Edwards’ prospects of success in establishing the validity of an unregistered mortgage over the Wahroonga property is not a decisive consideration on the present costs argument. Summary judgment against Mrs Edwards would therefore always have been difficult for Mrs Adam to achieve.

But in my view both parties behaved reasonably in this case. It certainly cannot be said that Mrs Edwards herself, or through her solicitors, conducted herself unreasonably such that a costs order should be made against her upon a discontinuance. She says that there is no point in continuing because of Mr Adam’s bankruptcy and to some extent because the transfer of Mr Adam’s interest in the Wahroonga property has gone through. The following matters are important in the circumstances, taking into account the matters raised by Mr Klineberg.

First, it cannot be said that Mrs Edwards behaved unreasonably by commencing proceedings in the face of Mr Adam’s potential bankruptcy. In my view, she had little choice but to commence proceedings to seek extension of the caveat to protect what was arguably a valid security interest over Mr Adam’s share in the Wahroonga property. If she had done nothing the security interest would have been lost by reason of the transfer to Mrs Adam. Moreover, it was proper of her to join Mrs Adam as a party to the proceedings: for Mrs Edwards to enforce her security interest orders for sale would have needed to be made, which would have effected Mrs Adam’s interest in the property.

Secondly, Mrs Adam’s offer not to object to the transfer of Mr Adam’s interest to Mrs Adam subject to Mrs Edwards’ caveat, was not an offer that Mrs Edwards could ever really accept. Even a reimposition of the caveat after the transfer would have been of little value to Mrs Edwards because the caveat was only over Mr Adam’s interest, which by then would have been extinguished. And as the transfer was one made without consideration, it was not possible to set aside any money from the transfer, over which fund Mrs Edwards could have maintained a security interest in competition with Mr Adam’s trustee in bankruptcy. This dilemma was never really addressed by the parties, making it not unreasonable for Mrs Edwards not to have accepted the offer made.

Thirdly, I do not regard the inadvertence on behalf of Mrs Edwards in allowing the transfer to go through as unreasonable conduct. It was certainly not deliberate conduct. An occasional lapse by busy professionals is not a sign in my view of unreasonable conduct for which their clients should be penalised.

The fact that this contest ultimately took place vigorously, between Mrs Adam and Mrs Edwards does not assist the analysis greatly. Mr Adam’s conduct put them both in the position they were in. And they were both entitled to take the view that they had no alternative but to pursue the actions that they did. And there is little point in Mrs Edwards pursuing proceedings against the Trustee in Bankruptcy. In my view this is a classic case for the application of the principles of Lai Qin and Aust-Home and the Court will make no order as to costs to the intent that each party will bear their own costs of the proceedings.

For the reasons given therefore the Court orders as follows: