Martinez v Morris [2011] FMCA 478 will be enjoyed by those who take pleasure in the suffering of lawyers. A well known national law firm with over 500 staff acted for a man. They had a low opinion of him, and so required that his wife promise to pay his fees. Since her promise was made directly to the law firm, she was an ‘associated third party payer’ to whom disclosure obligations in relation to costs estimates and the manner of charging and so on were owed. The obligations were not satisfied though. Sure enough, the husband did not pay the firm’s fees. So they sued his wife. She did not defend, ignorant of s. 317(1) of the Legal Profession Act, 2004 (NSW) which said that by virtue of the disclosure defaults, she need not pay the fees until there had been what used to be known as a solicitor-client taxation at the solicitors’ expense. Default judgment was obtained and no attempt was made to set it aside. And then the firm set out to bankrupt her. A creditor’s petition resulted in a sequestration order. It was the end of the road; they’d got their pound of flesh and could move a trustee in bankruptcy in to scoop up her worldly possessions, and take away any income she might earn, to restore the hole in their profits.
Then some bright spark alerted the wife to the solicitors’ problem. ‘Too late!’ you might say to yourself diving for a statement of res judicata, if you have not been reading my blog properly (see this post and this one about Quaresmini v Crouch & Lindon (a firm) [2010] FMCA 750 and Chadwick Lawyers v McMullen [2009] FMCA 992, both Queensland cases to which no reference was made in the NSW case at hand). But no, not too late: Federal Magistrate Driver set aside the sequestration order — that is he unbankrupted the wife — and completely sicked the solicitors on costs for good measure. In the process, he looked beyond the default judgment, rendering it worthless for the purposes of bankrupting the wife without it having been set aside. And now, no doubt, the wife has a right to set aside the default judgment ex debito justitiae (as of right), so the firm cannot substitute the Sheriff for the trustee in bankruptcy. The wife may still have to pay her husband’s legal fees; whether she does or not will depend on whether the firm can be bothered having the NSW equivalent of a taxation at which the taxed bills may be reduced on account of the wholesale costs disclosure defaults. Whatever the case, she won’t have to pay them for some time, and there must be a real issue about whether the lawyers are entitled to interest since the bills were originally given.
The costs order was that the law firm pay the costs of the creditors’ petition in which they were successful as well as in the application to set aside the sequestration order in which they were unsuccessful. His Honour reasoned as follows at [16] to [17]:
‘[16] As I have already stated, there are circumstances in which an unsuccessful petitioning creditor will receive an order for costs notwithstanding the dismissal of the petition. Those circumstances include where the respondent debtor’s conduct has caused costs to be incurred unnecessarily. The petitioning creditor presented extensive authorities relating to such circumstances [footnote 5: For example see Jones v Porsche Centre Melbourne Pty Ltd [2000] FCA 1423; Winn v Brian Ward and Partners Pty Ltd [2007] FMCA 1090; Hall and Wilcox (A Firm) v O’Meara [2005] FMCA 1838]. I am not persuaded that this case is an example of such a circumstance where there should be a costs order in favour of the unsuccessful petitioning creditor. It is apparent from exhibit R2, tendered on behalf of Ms Jackson, that Mr Morris’ solicitors had a poor opinion of him and of their ability to recover outstanding costs from him. They obtained a third party funding agreement from Ms Jackson so that they might, if necessary, make a claim on the residential property of Ms Jackson and Mr Morris. Given the obvious interest of the firm in protecting its position on costs, they should have paid close attention to their obligations under the Legal Profession Act in order to secure that position. It appears that they did not do so. The demand for payment made against Ms Jackson should not have been made and the recovery action taken against her should not have been taken. There was no proper basis for the bankruptcy notice issued against Ms Jackson and the creditor’s petition subsequently presented.
[17] Ms Jackson is not a legal practitioner and had no reason to be aware of the notification requirements under the Legal Profession Act. The petitioning creditor, however, is a large firm of solicitors, and could be expected to be aware of those obligations. Ms Jackson should not be criticised for not defending the legal proceedings taken against her and for not resisting the bankruptcy notice. She was not to know that she had a defence until it was pointed out to her. Once it became apparent to counsel for Ms Jackson that there was an issue in relation to the requirements of the Legal Profession Act not having been met, the petitioning creditor was notified and a notice to produce documents was issued. The petitioning creditor initially asserted an inability to comply with that notice on the basis that the trustee held the firm’s files. However, it later transpired that documents were held in electronic form and were produced. The fact was that the firm was not in a position to state whether or not it had complied with the requirements of the Legal Profession Act until it had conducted its own search of its own documents. It ultimately transpired that the firm was unable to establish compliance with the Legal Profession Act and was therefore required to concede the review proceeding.’
