· 2021-10-19T08:51:27+0000 · 750 posts

Appeal Against Litigation Funding Made Against Third Party

Lao & Zeng [2021] FedCFamC1A 17 (23 September 2021)

A litigation funding order was made in relation to the husband’s application for property settlement and to set aside transactions. The wife's mother appealed such order made against her as a third party pursuant to s 117(2) of the Act. The Court, in resolving this dispute, determined the merit of the grounds involving irreversibility and the causal connection between the appellant’s actions and the costs the husband would incur .

Facts:

The husband is married to Ms Jing (“the wife”). The appellant is the wife’s mother, Ms Lao. The parties conducted commercial ventures, including property and retail business development in Australia. The husband played a substantial role in the acquisition and development of the first property (“J Street”) which may prove to be the springboard for the wealth that followed.

The wife owned or controlled most of the entities through which the ventures were conducted. The appellant claims that she invested in the vicinity of $5.5 million in the ventures as recorded in company and trust records as loans and not capital contributions. It reflects profit from the Australian ventures and funds borrowed from Australian banks. Without informing the husband, the appellant and the wife relinquished control and ownership of most of the parties’ private corporate entities in favour of the appellant and her and hence the husband being removed as beneficiaries of the family trusts.

The wife also withdrew in excess of $1 million from various mortgage and bank accounts. By reason of the impugned transactions, the appellant became the sole director and shareholder of E Pty Ltd. Thus, the husband commenced proceedings against the wife under Pt VIII of the Act for a property settlement and asset preservation orders. The husband seeks to set aside the impugned transactions.

In the substantive proceedings the appellant seeks declarations pursuant to s 78 of the Act that the wife holds a property at R Street, Suburb S and her 20 per cent interest in a property at G Street, Suburb B (“G Street”), on trust for the appellant. She also seeks that the husband pay her $250,000 he received by way of partial property settlement pursuant to consent orders made on 31 July 2018 (from property in the wife’s name) and reimburse the appellant for $34,650 which the appellant said he removed from her accounts after the spouse parties’ separated. She now seeks $730,000 from the husband (plus costs).

With the wife and the appellant mounting a case that the husband should receive no more than 30 percent of the spouse parties’ interest in a residential property in City E property in China, the property proceedings became even more complex and expensive. Thus, by his Amended Application in a Case filed on 8 July 2019, the husband sought various interlocutory orders, including against the wife and/or the appellant, requiring them to pay him $350,000 to enable him to fund his legal expenses. Irrespective of the outcome of the application, the wife had arrangements in place with the appellant for the appellant to pay her legal expenses, albeit by way of a loan.

The order was made against the appellant in the amount sought which is to be paid in three tranches. The first tranche of $100,000 has been paid. The parties agreed that payment of the balance would be stayed pending the Court's determination. By Amended Notice of Appeal filed on 4 November 2020, the appellant seeks leave to appeal against a litigation funding order in favour of the husband on 25 June 2020.

Issues:

I. Whether or not the appeal against a litigation funding order made against third party pursuant to s 117(2) of the Act should be granted.

II. Whether or not it was open to the primary judge to proceed on the basis of his stated intention that the interim litigation funding order be taken into account at the final hearing was achievable.

Applicable law:

F amily Law Act 1975 (Cth) Pt VIII s 79 - empowers the Court to make such an order altering the interests in property of the party to the marriage as it considers appropriate.

F amily Law Act 1975 (Cth) Pt VIII s 80, 85A, 106B - provides for the broad range of available orders and in whose favour they may be made in altering the interests in property.

Family Law Act 1975 (Cth) Pt VIII s 117 - provides that each party to proceedings under this Act shall bear his or her own costs.

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170; [1981] HCA 39 - provided that the test for the grant of leave to appeal almost invariably required the establishment of good reason to suspect an error was made at first instance.

Australian Coal and Shale Employees' Federation v The Commonwealth(1953) 94 CLR 621; [1953] HCA 25 - provides that in the test for the grant of leave of appeal, the presumptive correctness of the primary judge’s decision remains intact.

Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353; [1956] HCA 28 - where the wife’s voluntary transfer of the shares to the applicant in 2018, for no consideration, then raises the presumption of a resulting trust in the wife’s favour, in which case the beneficial interest in the shares results back to the wife.

Chester v Chester (1995) FLC 92-612; [1995] FamCA 26 - where the property owned by the parties was known and there was no real dispute about its value, in this case those issues are contentious. It is also common ground that much more evidence will need to be gathered before the Court will be in a position to make clear findings about these matters.

Gronow v Gronow (1979) 144 CLR 513; [1979] HCA 63 - provides that a different view by an appellate court only on matters of weight by no means justifies a reversal of a decision of the primary judge.

Hall v Hall (2016) 257 CLR 490; [2016] HCA 23 - where former interests in the family trusts may still be relevant to the property settlement proceedings as financial resources of the wife.

House v The King(1936) 55 CLR 499; [1936] HCA 40 - sets out principles regarding exercise of discretion.

Kendling v Kendling(2008) 39 Fam LR 404; [2008] FamCAFC 70 - provides that it is uncontroversial that more than one order may be made to fund the litigation expenses of a party and such orders may be made under different heads of power.

Kennon v Spry(2008) 238 CLR 366; [2008] HCA 56 - where the trust arrangements were varied to exclude the spouse parties from receiving any part of the capital of the trust.

Knight v FP Special Assets Ltd (1992) 174 CLR 178; [1992] HCA 28 - provided that the question confronting the judge was whether the discretionary power to make the subject costs order should be wielded.

Kyriakos & Kyriakos(2013) FLC 93-528; [2013] FamCAFC 22 - the Full Court simply observed that when litigation funding orders are sought by a spouse against a third party to the marriage, it is important to identify the source of power being relied upon to make the order.

McAlpin and McAlpin(1993) FLC 92-411; [1993] FamCA 71 - where although in the primary judge’s reasons the discussion of the conduct of the appellant and the wife is more extensive than is set out below, what follows is sufficient to demonstrate that the primary judge was satisfied there is a causal connection between the appellant’s role in the impugned transactions and thus the costs which the husband would now incur in order to present his case.

Medlow & Medlow (2016) FLC 93-692; [2016] FamCAFC 34 - the test for a grant of leave is conjunctive and an appellant must establish that the decision is attended by sufficient doubt to warrant it being reconsidered by the Full Court and that substantial injustice would result if leave were refused, supposing the decision to be wrong.

Northern Territory v Sangare(2019) 265 CLR 164; [2019] HCA 25 - provides that the Full Court may permissibly formulate principles to guide the exercise of discretion under the Act, including the discretion proscribed by s 117(2) of the Act as to costs, as guidelines help avoid arbitrariness and serve the need for consistency, but the width of the statutory discretion cannot be narrowed by legal rules devised to control its exercise.

Penfold v Penfold(1980) 144 CLR 311; [1980] HCA 4 - where the general rule enunciated by s 117(1) is that each party should bear his or her own costs is not paramount to s 117(2) and that the former will yield to the later where there are circumstances that justify an order as to costs.

Re JJT; Ex Parte Victoria Legal Aid(1998) 195 CLR 184; [1998] HCA 44 - provides that the power under section 117(2) of the Act is broad; indeed so broad that, in exceptional circumstances, it even authorises costs orders against persons who are not parties to the proceedings.

Salvage & Fosse(2020) FLC 93-966; [2020] FamCAFC 144 - provides that it is only necessary for the primary judge to be satisfied the substantive case raised by the applicant, as to its nature and prospects, is such as to justify the interim order for costs being sought.

S v S (1997) FLC 92-762; [1997] FamCA 19 - a case where orders have been made but none of these imposes a test of exceptional circumstances nor say anything which would cast doubt over his Honour’s decision.

Strahan & Strahan (Interim Property Orders) (2011) FLC 93-466; [2009] FamCAFC 166 - the majority noted the question of whether, if an order is made under s 117(2) of the Act, it is also necessary for the Court to consider whether in the circumstances it will be possible to take into account in the final property proceedings any sum that might be payable under the order.

Zschokke and Zschokke(1996) FLC 92-693; [1996] FamCA 79 - held that orders made to enable a party to meet anticipated legal expenses in family law financial proceedings are reasonably common and may be made under various heads of power. Different considerations apply to each and when analysing the authorities it is important that the principles that apply in one setting are not misapplied to a different setting.

Analysis:

By Ground 1, the appellant contends that an interim litigation funding order made under s 117(2) against a third party cannot be reversed at the final hearing and thus cannot properly be made. He contends that if the husband’s 106B application fails, he “may be bereft” of funds and an order that he repays the appellant would be futile. On the question of reversibility, the primary judge, applied the principle in Zschokke where even though the amount paid may not be able to be made subject to an order as discussed or be taken into account in the final hearing, the interests of justice may nevertheless justify an order under s 117(2) for interim funding or security for costs. Nothing indicates that reversibility is a requirement and failure to be satisfied is fatal to an order being made under s 117(2).

As to the second aspect of Ground 1, it was argued that assuming that the husband’s s 106B application failed, even if he received the entire City E property, given that the appellant claimed $730,000 from him, the husband would be unable to reimburse the $350,000 payment. The $730,000 includes the $410,000 lost on the Suburb FF venture. As this transaction is the subject of the agreement between the appellant and the wife made in 2017 for repayment, there is no reason to proceed on the basis that the husband would be ordered to repay the amount from his interest in this property.

For Ground 2, the appellant contends that the husband had sufficient income and assets under his control to meet his legal expenses. However, this submission sits uncomfortably with her submission that his financial circumstances were so parlous that any amount she advanced might be irrecoverable as was her support for the wife’s position that the City E property be sold to fund the spouse parties’ legal expenses and for the payment of the earlier sums pursuant to the orders dated 31 July 2019.

Ground 3 concerns the husband’s substantive claim for relief which the appellant asserts the primary judge misunderstood. The husband needed to establish that his s 106B application was of sufficient merit to justify the litigation funding order sought and that his application for a property settlement order was of sufficient merit and value to justify that course. He, however, failed. Still, the husband’s failure to articulate the relief he will ultimately seek, should not be treated as fatal.

Conclusion:

The Court concluded that Ground 1 of the appeal was not established. It was open to the primary judge to proceed on the basis of his stated intention that the interim litigation funding order be taken into account at the final hearing was achievable because the husband had sufficient equity in the City E property which would enable an adjustment in favour of the appellant. The determination that the husband did not have sufficient income and assets to meet his legal expenses was amply justified. The argument that the husband failed to establish an arguable case for relief in relation to his s 106B and s 79 applications is rejected. The Court concluded that the appellant’s contention that she is a disinterested third party was properly rejected. It is appropriate that the appellant pays his party/party costs in the amount sought. By consent, orders 1(b), 1(c), 2 and 3 of the orders made by a judge of the Family Court on 25 June 2020 are stayed until the determination of this appeal. The Court reserved judgment.

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