Schmidt v Ebada Property Investments Limited

[2020] NZHC 757

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2011-404-004752

[2020] NZHC 757

BETWEEN

TAYLOR JADE SCHMIDT

First Plaintiff

ANTHONY MIKHAL SCHMIDT
Second Plaintiff

AND

EBADA PROPERTY INVESTMENTS LIMITED

First Defendant

BRIAN PATRICK GARRITY

Second Defendant

Hearing:	(On the papers)
Judgment:	20 April 2020

COSTS JUDGMENT OF VENNING J

This judgment was delivered by me on 20 April 2020 at 2.00 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date……………

Solicitors:           Woodhouse Law, Auckland

Smith & Partners, Auckland

Counsel:            N Scampion, Auckland

Copy to:            Second Plaintiff

SCHMIDT v EBADA PROPERTY INVESTMENTS LIMITED [2020] NZHC 757 [20 April 2020]

[1]        In a judgment delivered on 20 December 2019 the Court dismissed the plaintiffs’ claims against the defendants and entered judgment for the defendants on all causes of action.1

[2]        The Court directed the costs were to be dealt with by way of an exchange of memoranda with the costs submissions to be limited to five pages.

[3]        Unfortunately, and consistent with the way the parties have approached this litigation, neither the defendants nor the plaintiffs complied with the direction of the Court as to the page limit. An extension was sought to the timetable by Mr Schmidt. The Court has received voluminous material on the issue of costs, including on behalf of Mr Schmidt, the second plaintiff, a substantive critique of the judgment itself, and on behalf of the first plaintiff a reply to the reply by the defendants.

[4]        The starting point is that as the defendants were successful in opposing the plaintiffs’ claims they are entitled to costs against both plaintiffs.2

[5]        Costs calculated on a complexity category 2 scale amount to $97,333.25. Although Mr Woodhouse submitted there should be further deductions in relation to a number of the items claimed by the defendants, they were all steps taken in the proceeding. The parties may take a different view as to the reasons why the steps were taken but as costs were not dealt with at the time, the defendants as the successful party are entitled to their costs in relation to those steps and processes.

[6]        The first issue for the Court is whether indemnity or increased costs as sought by the defendants are appropriate. Increased or indemnity costs may be awarded under High Court Rule 14.6.3

[7]        Mr Scampion submitted the following factors in this case support indemnity or increased costs.

1      Schmidt v Ebada Property Investments Ltd [2910] NZHC 3548.

2      High Court Rule 14.2(1)(a).

3      Bradbury v Westpac Banking Corporation [2009] 3 NZLR 400 (CA).

(a)Reliance on/creation of false documents

[8]        Mr Scampion submitted the plaintiffs based their claims on false documents they had created. The Court found that the first defendant was prepared to doctor or create documents to advance his case in the proceedings. In particular, the Court found that a document referred in an affidavit deposed to by both plaintiffs was a fiction and had been created solely for the purposes of the hearing.

(b)False evidence

[9]        Mr Scampion submitted the Court had held the plaintiffs both lied to the Court in their evidence.

(c)Hopeless proceeding

[10]      Mr Scampion submitted there was insufficient evidence to support the structure of the trusts and without reliance on the false deed of declaration the claims for trust could not be made out. The undue influence and breach of fiduciary duty claims were hopeless because they relied on an assertion Mr Schmidt was naïve and reliant on Mr Garrity which the Court described as incredible.

(d)Unfocused pleadings

(e)Personal attacks and false allegations of fraud

[11]      Mr Scampion suggested the pleadings were confused and undirected. He also criticised the allegation of fraud against Mr Garrity which, in his submission, was known to them to be false.

(f)Unaccepted offers of settlement

(g)Additional costs resulting from delay

(h)Undertakings as to damages

[12]      Mr Scampion referred to an exchange of settlement offers in 2018 and 2019. He submitted the plaintiffs were not willing to negotiate reasonably. Next, he submitted the proceeding had been unnecessarily prolonged. Then he submitted the plaintiffs both undertook to accept liability for damages occurring to the defendants as the result of injunction orders to stop the mortgagee taking occupancy of Kaiaua Road.

[13]      The Court did criticise the plaintiffs for their reliance on the creation of false documents. It also rejected their evidence. However, as the Court observed, Mr Garrity was himself prepared to create false documents or documents which did not record the actual position. Mr Garrity’s evidence was also unsatisfactory in certain respects.

[14]      The proceedings were not hopeless. The proceedings failed as the plaintiffs were unable to prove their case but as the Court observed there were arguments that could be made for the plaintiffs.4

[15]Ultimately as the Court expressed it:

[175] Taking the evidence overall, and despite the unsatisfactory nature of the documents and the way all parties acted, the plaintiffs fail to satisfy the Court that there was an agreement between the vendor of the property represented by Mr and Ms Schmidt and Mr Garrity, that Ebada would hold the properties on trust. …

[16]      I consider the criticism of the pleadings to be overstated. Initially they were drawn by the plaintiffs themselves, but Mr Woodhouse redrew the pleadings on behalf of the first plaintiff. They were as focused as they could be in light of the evidence the plaintiffs had to present. The causes of action were identified. Next, while the plaintiffs’ allegations of fraud against Mr Garrity did not succeed, as noted the Court did find Mr Garrity was prepared to execute documents that did not record the correct position. While that did not lead to the plaintiffs establishing their case against him, it is a relevant factor when considering whether the allegations were entirely unjustified. The same point relates to the criticism of the personal attacks against Mr Garrity.

[17]      I place little weight on the unaccepted offers of settlement referred to in the defendants’ submission given the state of the proceedings at the time and the nature of the offers. Next, both parties must accept some responsibility for the delay in these long running proceedings. Finally, the undertakings as to damages were in relation to an interlocutory application and do not relate to the substantive proceeding.

4      At [171] of the judgment is one example.

[18]      Standing back and looking at the matter overall, the principal factor which supports an award of increased costs, if not indemnity costs, is the fact the plaintiffs created a false document for the purpose of advancing their claim. I do not consider the other factors to be sufficient in this case. However, against that factor is the fact that the Court also found Mr Garrity’s evidence to be unsatisfactory in a number of respects, and that he also was criticised for creating documents which did not correctly record the position. I consider Mr Garrity’s own conduct amounts to a good reason which justifies the Court refusing an order for increased or indemnity costs in this case.5

[19]      In summary, I consider the appropriate order for costs is cost on a category 2 basis which as noted, amounts to $97,333.25.

[20]      There are three further complicating factors. Mr Schmidt submitted he should not be subject to an order for costs as he was only kept in the proceedings for the purposes of costs. Mr Schmidt is also an undischarged bankrupt and Ms Schmidt was in receipt of legal aid for a substantial part of the proceeding.

Mr Schmidt’s position

[21]      Mr Schmidt’s role in the proceedings was confirmed prior to the commencement of the proceedings by a minute of Associate Judge Andrew of 15 November 2018. It was also dealt with in this Court’s substantive judgment at [18] and [19]. Mr Schmidt ultimately took an active part in the proceeding. His role was evident throughout. He was the principal witness to support the plaintiffs’ case and made written submissions. He is properly liable for costs.

[22]      I understand from the exchange of memoranda that Mr Schmidt is an undischarged bankrupt. The Official Assignee has disclaimed any interest in this particular litigation. In my judgment there are two bases upon which he remains liable for costs, despite being an undischarged bankrupt.

5      HCR 14.7(g).

[23]      The Supreme Court decision of Bradbury v Commissioner of Inland Revenue confirms an order for costs may be made against an undischarged bankrupt in certain circumstances.6 The relevant sections of the Insolvency Act 2006 are ss 76 and 232:

76       Effect of adjudication on court proceedings

(1)On adjudication, all proceedings to recover any debt provable in the bankruptcy are halted.

(2)However, on the application by any creditor or other person interested in the bankruptcy, the court may allow proceedings that had already begun before the date of adjudication to continue on the terms and conditions that the court thinks appropriate.

232     What debts are provable debts

(1)A provable debt is a debt or liability that the bankrupt owes—

(a)at the time of adjudication; or

(b)after adjudication but before discharge, by reason of an obligation incurred by the bankrupt before adjudication.

…

[24]      An order for costs against a bankrupt made in proceedings commenced before the bankruptcy is provable as a contingent liability as the liability for costs has arisen by reason of an obligation which the bankrupt incurred when he became a party to the proceedings. That applies to Mr Schmidt in this case.

[25]      Section 119 of the Insolvency Act is also relevant. As the Official Assignee disclaimed the proceedings that enabled Mr Schmidt to remain in the proceedings in his personal capacity. The defendants have suffered loss or damage as a result of the disclaimer (namely the costs incurred in defending the proceedings). They may claim as creditors in the bankruptcy for the amount of that loss or damage, which in this case would be the costs award.

[26]      There is no reason why an order for costs should not be made against Mr Schmidt.

6      Bradbury v Commissioner of Inland Revenue [2015] NZSC 80, [2015] 1 NZLR 739.

Ms Schmidt’s legal aid position

[27]      Mr Woodhouse accepted that $11,656 of the scale costs were incurred prior to the application for legal aid was made on Ms Schmidt’s behalf in September 2012.

[28]      He submitted, however, that the provisions of the Legal Services Act 2011 applied to the remainder of the costs sought. An order could be made against Ms Schmidt only in exceptional circumstances.7 He submitted that there were no exceptional circumstances in this case justifying an order for costs against Ms Schmidt while in receipt of legal aid, and even if there were, any award must not exceed an amount that is reasonable having regard to all the circumstances, including the means of all parties and their conduct.8 Both Ms Schmidt and Mr Garrity have filed affidavits as to their means.

[29]      The defendants rely on the same factors relied on to support the award of indemnity costs to support their argument exceptional circumstances apply.

[30]      Largely for the same reasons that the Court rejected the application for indemnity or increased costs and, having regard to the factors in s 45(3) of the Legal Services Act, I am not satisfied that exceptional circumstances are made out in this case. As the Court of Appeal observed in Laverty v Para Franchising Limited the question whether there are exceptional circumstances needs to be examined on a case by case basis, whether or not they involve disapprobation.9 In my judgment while this case had a number of extremely unusual features, given the actions of the defendants themselves, particularly Mr Garrity, I do not consider the conduct of Ms Schmidt, while unsatisfactory, is sufficient to amount to exceptional circumstances in this particular case.

[31]      However, nor is there any reason why an order  should not be made under     s 45(5) of the Legal Services Act. Section 45 provides:

7      Section 45(2) Legal Services Act 2011.

8      Section 45(1) Legal Services Act 2011.

9      Laverty v Para Franchising Limited [2006] 1 NZLR 650 (CA).

45        Liability of aided person for costs

…

(5) If, because of this section, no order for costs is made against the aided person, an order may be made specifying what order for costs would have been made against that person with respect to the proceedings if this section had not affected that person’s liability.

Result

[32]      The defendants are to have costs against Anthony Schmidt, the second plaintiff, in the sum of $97,333.25 together with disbursements as fixed by the Registrar.

[33]      The defendants are also to have costs against the first plaintiff Ms Taylor Schmidt in the sum of $11,656.00 in relation to costs incurred before the application for legal aid in this proceeding. The liability of Ms Schmidt for those costs is joint and several with Mr Schmidt.

[34]      No further order for costs is made against Ms Schmidt but I make an order confirming that an additional $85,677.25 would have been made against Ms Schmidt jointly and severally with Mr Schmidt if s 45 had not affected her liability for costs.

Venning J