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Lee v Wasan International Co Ltd (in liq) HC Auckland CIV 2009-404-1857 [2010] NZHC 754 (24 May 2010)

Last Updated: 20 June 2010

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2009-404-001857}

BETWEEN SANG ROK LEE AND YEON HWA CHOI

Plaintiffs

AND WASAN INTERNATIONAL CO LTD (IN LIQUIDATION)

First Defendant

AND EDWARD KANG Second Defendant

AND EUN KYONG CHUN (ALEX CHUN) Third Defendant

AND DUCK SEUNG AHN Fourth Defendant

AND MI RA YOON Fifth Defendant

Hearing: 24 May 2010

Appearances: H Sorensen for Sorensen Law

M Meyrick for Plaintiffs

Judgment: 24 May 2010

_{ORAL JUDGMENT OF ASSOCIATE JUDGE BELL}

Solicitors/Counsel:

Sorensen Law, PO Box 7029, Wellesley Street, Auckland

_{Berman & Burton, PO Box 11171, Ellerslie, Auckland}

S R LEE AND Y H CHOI V WASAN INTERNATIONAL CO LTD (IN LIQUIDATION) AND ORS HC AK CIV-2009-404-001857 24 May 2010

[1] In this case, Sorensen Law applies for the discharge of a charging order made on funds in its trust account. It applies to this Court under r 17.44 of the High Court Rules 2008 as a person prejudicially affected by the making of the charging order. The charging order was made on 20 May 2009. It was made after the plaintiffs, Sang Rok Lee and Yeon Hwa Choi, obtained judgment by default on 11 May 2009 against the fourth defendant, Duck Seung Ahn. The charging order was then served on Sorenson Law on 25 May 2009. The charging order says this:

To Duck Seung Ahn

This Court orders that the money for the sum of $10,000 held in the trust account of Sorensen Law received from you on or about 2 July 2008 and standing to your credit pursuant to the solicitor’s undertaking given by Sorensen Law and the money standing to your credit in your bank account at Kookomin Bank, Auckland branch, are charged with payment of the amount for which the entitled party, Sang Rok Lee and Yeon Hwa Choi, has obtained judgment. The amount charged is $300,000 less than the full amount of the judgment debt is being charged by this order.

[2] In fact, the amount for which the plaintiffs obtained judgment was in the order of about NZ$1.3 million, and the amount charged in Sorensen Law’s trust account is significantly less, namely $10,0000.

[3] The money had been paid into the trust account of Sorensen Law in July

2008. These funds had been paid out in November 2008, so that by the time the order was served, there were no funds in the name of Mr Ahn held by Sorensen Law on which the charging order could operate. That, however, does not dispose of the matter because the plaintiffs say that there are circumstances relating to this case which give them a right to look to Sorensen Law for payment of their costs. For that it is necessary to recount some of the background to the matter.

[4] In 2008, Mr Ahn was the plaintiff in a proceeding in the District Court at Auckland in a claim for defamation against a Mr Hong and a Mr Kim. At the time, Mr Ahn was resident in Korea and Mr Hong had applied to the District Court for security for costs because the plaintiff was living out of the jurisdiction and might not be good for costs unless security for costs had been provided. The application for security for costs in the District Court resulted in the parties in that proceeding coming to an agreed arrangement. That agreed arrangement was that $10,000 was to

be paid into the trust account of Sorensen Law, and Sorensen Law would give an undertaking. The undertaking was addressed to the District Court and said this:

We confirm that we have received $10,000 from Mr Ahn and undertake that we will deposit it on interest bearing deposit and will not release it unless agreement by parties or judgment in favour of the plaintiff and the appeal period has lapsed or Court’s order.

We further undertake that in the event of an appeal being lodged, the money will not be released unless parties agree or court orders otherwise.

[5] The claim for defamation went to a hearing before District Court Judge Hubble, who gave his decision on 25 November 2008. The Court held against Mr Hong and awarded the plaintiff damages against Mr Hong, but it found in favour of the other defendant, Mr Kim.

[6] The day after the judgment, Sorensen Law released the funds from its trust account. However, before the appeal period expired, Mr Hong filed an appeal in the High Court. Later on, in 2009, Mr Hong was made bankrupt on his own application. The Official Assignee reviewed matters and decided not to continue with the appeal. The appeal was ultimately dismissed on 27 May 2009 by Venning J. That was two days after the plaintiffs in this case had served the sealed charging order on Sorensen Law.

[7] It is also necessary to address one other matter, and that is the identity of the person who paid the money into the trust account of Sorensen Law.

[8] On the face of the undertaking it appears that Sorensen Law were holding the funds for Mr Ahn. However, the information given by Sorensen Law satisfies me that it was not in fact Mr Ahn who paid the money into the trust account, but a third party. Initially, Mr Ahn’s employer, Wasan International Co Ltd, the first defendant in this case, paid a cheque for $10,000 to Sorensen Law. That cheque was not honoured by the bank. On 10 July 2008, there was further payment made by another person. Mr Sorensen takes what is, in my view, a rather cute point, that the second payment was not caught by the charging order because the charging order is only directed at the payment made in on or about 2 July 2008. That takes an unduly narrow view of matters. The charging order could have been drafted in wider terms

and certainly it is not intended to operate more widely than its terms expressly provide, but I do regard the words “on or about 2 July 2008” as being wide enough to cover a payment made on 10 July 2008.

[9] The third party paid the funds in on the basis that the funds were to be used to meet any award for costs that might be made, but were not otherwise to be used by Mr Ahn for his personal benefit. If the funds for security for costs were not required to meet a costs award, then they would go back to the person who paid the funds in.

[10] That finding is important because it means that as long as the funds were held by Sorensen Law, Mr Ahn did not have a beneficial interest in the funds except so far as they were there to meet any costs award that might be made.

[11] Sorensen Law was premature in paying the money out on 26 November

2008. That is because the appeal period had not expired at that date, and the money should have been held to see whether there was an appeal against the decision of District Court Judge Hubble. The undertaking itself said that the funds should be held until the expiry of the appeal period. The staff solicitor at Sorensen Law who was responsible has frankly admitted his mistake in paying the money out. Mr Sorensen pleads that the payment was made by inadvertence, and I accept that the payment may have been made by inadvertence but the point still remains, as Mr Meyrick said, that an inadvertent breach of an undertaking is still a breach of an undertaking. The person who has been prejudiced by this payment out is the successful defendant, Mr Kim. If Mr Kim were before the Court today, I would take a stern view of the conduct of Sorensen Law and would make sure that Mr Kim was not left out of pocket because of the breach of undertaking by Sorensen Law.

[12] But the matter is different so far as the plaintiffs in this case are concerned. The question I have to address is whether the plaintiffs in this case, who are not parties to the arrangement for security for costs in the District Court, can now come to this Court and invoke this Court’s inherent jurisdiction to discipline lawyers who breach an undertaking.

[13] Undertakings given by lawyers may be enforceable under contract law, but they are only enforceable by people who are parties to the undertaking, or can take advantage of the Contracts (Privity) Act 1982. It is also possible that a breach of an undertaking might give rise to remedies in tort. But aside from these normal common law causes of action, undertakings are enforceable by the Court in its inherent jurisdiction. The Court’s exercise of its jurisdiction to enforce undertakings is discretionary.

[14] The Court exercises its jurisdiction because of the Court’s inherent right to insist and require that its officers observe a high standard of conduct. The jurisdiction is ordinarily given effect to in one of two ways. First, the Court can make an order that the undertaking be fulfilled, or it can make an order compensating a person who suffers loss as a result of its non-fulfilment.

[15] Here, it is not possible to require that the undertaking be fulfilled to the letter because the funds have already gone. So the matter for the Court exercising its jurisdiction in respect of the undertaking comes down to the question of making a compensatory order. An example of the Court making a compensatory order is The Commissioner of Inland Revenue v Bhanabhai [2006] 1 NZLR 797 (HC). That was a case where compensation was ordered where an undertaking had been given to the Commissioner of Inland Revenue, and the Commissioner brought proceedings to enforce the undertaking. In this case, the plaintiffs are not parties to the undertaking in any way at all. The people for whom the undertaking was given are the District Court itself and the defendants in the proceedings in the District Court, Mr Hong and Mr Kim. What the plaintiffs are trying to do is to say that this undertaking was given, and they are entitled to invoke it because these sums really ought to have stayed in the trust account up until 25 May when the order was sereved. Mr Hong’s appeal was not dismissed until 27 May 2009, so in terms of the undertaking the funds had to be held until then. I asked Mr Meyrick whether he could give any authorities to support his argument that people in his clients’ position were entitled to invoke the Court’s disciplinary powers in such a case. Barring reference to authorities such as Bhanabhai, he was not able to do so. So far as I am aware, the only parties who come to the Court to hold solicitors to their undertakings are parties to those undertakings, that is, for example, in a conveyancing transaction, it would

be the people on the other side of the transaction, either the lawyers or the clients of those lawyers. Here, the plaintiffs in this case are complete strangers to the undertaking, and I am not aware of any authority which would allow this Court to invoke its jurisdiction to enforce an undertaking for their benefit. Judgment creditors try to enforce a judgment by a charging order in the hope that at the time of service of the order, there will be funds in place. From the point of view of these plaintiffs, it is simply unlucky that the funds have already gone. The fact that those funds were paid out in breach of an undertaking is irrelevant as far as their position is concerned.

[16] There is also an additional factor that arises in this matter. The charging order could apply only if Mr Ahn had a beneficial interest in the funds held for him by Sorensen Law. In this case, I am satisfied that a third party paid the funds into Sorensen Law on the clear basis that the funds were either to be used to meet any orders for costs that would be made, or the funds would be paid back to the benefactor who paid the funds in. That means that Mr Ahn did not have any beneficial interest in the funds while they were in the trust account except so far as he was required to meet any costs liability ordered by the District Court.

[17] What this means is that Mr Ahn had funds under what is loosely known as a Quistclose trust. This takes its name from the case Barclays Bank v Quist Close Investments Ltd [1970] AC 567. A Quistclose resulting trust was explained by Fisher J in Potter v Potter [2003] 3 NZLR 145, 153 (HC):

A refinement to that principle is that where the settlor transfers the legal title to property for an express purpose, the transferee receives it subject to a trust for the attainment of that primary purpose. If, for whatever reason, effect can not be given to the primary purpose effect must be given to the contingent secondary purpose of restoring the property to the settlor. The general principles are set out in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137; and Cossey v Bach [1992] 3 NZLR 612.

[18] Accordingly, even if the funds were still held in Sorensen Law’s trust account on 25 May 2009 when Sorensen Law was served with the charging order, the charging order would still have been ineffective, because a person claiming under a charging order cannot claim any greater interest in the subject matter of the charge than the judgment debtor. An authority for that proposition is Firth Concrete

Industries Ltd v Duncan [1973] 1 NZLR 188 (SC). In that decision at 190-191, McMullin J made it clear that a charging order is subject to all existing equities and encumbrances:

It has long since been laid down that a charging order against land is subject to all the liens and equities created over the land prior to the date of the registration of the charging order. In Re Beattie (1887) NZLR 5 SC 342, Williams J said:

The object and effect of a charging order absolute is to charge property to which a defendant is beneficially entitled, and not to charge property belonging to someone else, and in which the defendant has a bare legal interest" (ibid, 342-3).

The same point had been made in Re Mutual Benefit Building and

Investment Society; ex parte Baynes (1887) NZLR 5 SC 293, where at p 294

Johnston J said:

I am of opinion that this application must be allowed. A charging order binds the land, but only subject to all equities existing at the time the charging order was obtained. Baynes' equity gives him a right to register his transfer, and as he cannot do so without getting rid of the charging order, he is entitled to have it cancelled.

The subsequent cases of Messent v New Zealand Farmers' Co-operative Association of Canterbury Ltd [1925] NZLR 564; [1925] GLR 368 and Nicol v Raven [1925] NZLR 155; [1924] GLR 186 confirmed the principle.

[19] The Firth Concrete Industries case involved a charging order over land but the principle also applies to charging orders over other property such as funds in solicitors’ trust accounts. For that reason, in particular, I find that this charging order was ineffective, even at the time that it was made and even if the funds had remained with Sorensen Law up until 27 May. These plaintiffs could not have required the funds to be paid out to it under the charging order.

[20] For that reason, there is no basis for the charging order to remain. It is discharged.

[21] I have heard the parties as to costs. Mr Sorensen suggests costs on a 2B basis. Mr Meyrick suggests that costs be allowed to lie where they fall. In this case, I do take on board the fact that these solicitors did breach an undertaking and to a large extent it was inevitable that this matter was going to come before the Court because of the genuine belief by the plaintiffs that the funds were still in place. To

that extent, Sorensen Law has brought this application on itself by breaching the undertaking. A suitable way for the Court to express its disapproval of the breach of the undertaking is not to award any costs to Sorensen Law in this matter.

[22] There are two other matters I should also mention in closing. The first is that Mr Sorensen appeared today to argue the matter. He has explained to me that the counsel who has been acting in the litigation is absent overseas. Of necessity he has had to appear himself. I accept that he was not personally responsible for the breach of the undertaking. He has taken responsibility for the actions of his staff. I also record that he acted properly in the hearing today, notwithstanding the breach of undertaking by his firm.

[23] The other matter is that the parties advise me that there are other proceedings going on before the Law Society where Sorensen Law have been taken to task for the breach of the undertaking. Nothing that I have said today is intended to influence what action the Law Society might want to take in respect of the undertaking. I have expressed the Court’s disapproval of the actions of Sorensen Law, but the Law

_{Society is still entitled to take whatever action it seeks fit as well.}

R M Bell

Associate Judge