Strauss v Warner [2018] TOCA 21; AC 11 of 2017 (7 September 2018)

IN THE COURT OF APPEAL OF TONGA
CIVIL JURISDICTION
NUKU’ALOFA REGISTRY

AC 11 of 2017
[CV 45 of 2016]

BETWEEN : 1. FRANZ STRAUSS
2. GUDRUN STRAUSS

- Applicants

AND : DIANNE WARNER
- Respondent

Coram : Handley J

Blanchard J

Hansen J

Counsel : Mr. D. Corbett for Applicants

Hearing : On the papers

Date of Judgment : 7 September 2018

JUDGMENT OF THE COURT

[1] Franz and Gudrun Strauss were heavily indebted to Juergen and Brigitta Wolf who obtained a judgment against them in the Supreme Court and subsequently, on 24 October 2012, obtained an order appointing Dianne Warner as receiver of their business assets, including their shares in Seaview Lodge Ltd and a restaurant business operating in the company’s premises in Vuna Rd.

[2] The receiver was empowered by court order to sell those assets. She consolidated all the business assets into the company and, on 15 April 2014, sold the shares to an arm’s length purchaser conditional upon the approval of the sale by the Court. That approval was given by an order made by Lord Chief Justice Scott on 8 April 2014 (recalled and re-issued on 13 May 2014). It approved the sale of the shares and directed their transfer to the purchaser. It terminated the receivership as from 15 April 2014 and released the receiver from all obligations relating to the receivership.

[3] After payment of the receiver’s fees and disbursements, including real estate commission and lawyer’s fees, and repayment of a secured loan to Westpac Bank of Tonga, there was not enough to repay the Wolfs in full. They are still owed nearly $400,000 plus accruing interest. Thus the shortfall is very substantial.

[4] The Strausses issued proceedings on 22 August 2016 against Ms Warner alleging, inter alia, that the sale had been unlawfully made at an undervalue. They allege that the shares alone were worth more than $1.2 million, yet the shares and the business were together sold for $907,000. They also challenge the quantum of the fees and various disbursements made by the receiver. They allege that they have suffered very substantial loss of income for the rest of their lifetimes. Their total claim, under a number of heads, is for more than $11.5 million.

[5] The Strausses, as well as suing Ms Warner, also originally sued the real estate agents and the lawyers instructed by her but they discontinued against those other defendants in January 2017. They filed an amended Statement of Claim on 31 March 2017, to which Ms Warner filed a Defence on 2 May 2017.

[6] On 2 June 2017, Ms Warner applied for security for costs, asking for security to be fixed at $58,000 which she quantified. (No question of delay has been raised concerning this application.) She made a detailed affidavit refuting the Strausses’ claims, to which they have not responded.

[7] An issue arose in relation to service of the application but the Lord Chief Justice recorded that pursuant to an arrangement between Mr. Corbett and Mr. Niu SC, who was then acting for Ms Warner, Mr. Corbett collected a copy of the application documents from Mr. Niu’s office on 15 June 2017. No opposition was filed, however, and the application was dealt with unopposed, “at counsel’s request” on the papers.

[8] In a ruling dated 22 June 2017 the Lord Chief Justice gave quite extensive reasons, guiding himself in accordance with this Court’s judgment in Public Service Association Inc v Kingdom of Tonga [2015] Tonga LR 439. He said that the Strausses had given no evidence of their present financial position or explanation of how they plan to fund the litigation, although they appeared, on the basis of Ms. Warner’s submissions, to have no assets or means to pay any costs award. Ms Warner’s counsel had assumed there might be a 5 day trial (the Judge thought 2 – 3 weeks more likely). Costs for a successful defendant could easily exceed $40,000. There was a real risk the Strausses were not “good” for this.

[9] The Lord Chief Justice said that “overwhelmingly” the claim appeared weak and / or unrealistic, even allowing for the fact that matters can take on a different complexion at trial. He said there was no evidence an order for security could stifle the claim. The impecuniosity of the plaintiffs was not caused by the receiver but by their own inability to pay a substantial debt to the Wolfs. Their claims were unfocused, which would inevitably create greater costs.

[10] The Lord Chief Justice ordered security in the sum of $30,000, with the proceedings to be stayed if that was not paid within 21 days.

[11] The Strausses then applied to set this order aside. There was an oral hearing on 3 August 2017 at which Mr. Corbett was heard for the Strausses. That would have cured any deficiency in the service of Ms. Warner’s application for security. In a second written ruling on 3 August 2017 the Judge declined to set aside his order, saying that no basis had been shown for doing so.

[12] The Strausses next applied for leave to appeal to this Court against the refusal to set aside the order for security. On 21 September 2017 leave was refused by a single Judge of this Court (Tupou J).

[13] It was not until some six months later that the Strausses, under Order 7 Rule 3 of the Court of Appeal Rules, renewed their application, but by that time it was too late for it to be heard at the next sitting. It has now come before us on the papers almost a full year after Tupou J’s decision.

[14] In their counsel’s submissions to us, the Strausses complain that they have been unable to complete discovery and they raise a large number of questions about “missing” documents and matters relating to the receiver’s conduct they say require explanations. They make allegations of concealment of documents said to be done to thwart their efforts to make their case. It appears that these complaints were not made in the Supreme Court and they are in any event only of tangential relevance to the question of security for costs.

[15] What the Strausses conspicuously have not done in their submissions to us is to engage with the reasons why the Lord Chief Justice made the order for security for costs. They have chosen not to reveal their financial position beyond asserting an inability to find $30,000. They have provided us with no analysis of the two rulings demonstrating how the Lord Chief Justice can be said to have fallen into error.

[16] This present application is of course seeking leave to appeal from an exercise of judicial discretion. Error on the part of the Judge appealed from must be shown: Public Service Association at [13].

[17] Having read the two rulings and the other materials put before us and those we have found on the Court file, we detect no error of principle in the Lord Chief Justice’s approach. We entirely agree with him that the Strausses’ case against Ms. Warner appears weak. The amounts claimed are extravagant, indeed fanciful. They have the appearance of claims made in terrorem. Counsel have a duty to the Court not to associate themselves with claims of this character. Moreover, the plaintiffs face the considerable obstacle that the Court has approved the sale and the receiver’s accounts and ordered the release of the receiver’s obligation in the receivership.

[18] We consider that the Judge was right to take the view that the defendant is likely to incur substantial costs and expenses, including the expense of bringing witnesses from New Zealand. If the Strausses are unsuccessful at trial, there could well be an award of costs to Ms. Warner in excess of the security. Ms Warner should be protected against that risk. The security ordered of $30,000 is in the circumstances far from excessive.

[19] The application for leave to appeal is therefore dismissed.

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Handley J

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Blanchard J

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Hansen J