AURORA FISHERIES LIMITED V AKIRA HOZUMI HC NEL CIV-2010-442-000511

AURORA FISHERIES LIMITED V AKIRA HOZUMI HC NEL CIV-2010-442-000511 30 September 2011IN THE HIGH COURT OF NEW ZEALANDNELSON REGISTRYCIV-2010-442-000511BETWEEN AURORA FISHERIES LIMITEDPlaintiffAND AKIRA HOZUMIDefendantHearing: 21 September 2011Counsel: M J Logan for PlaintiffJ M Fitchett for DefendantJudgment: 30 September 2011JUDGMENT OF ASSOCIATE JUDGE MATTHEWS[1] On 22 December 2010 the Court made an order freezing a property owned by the defendant at 4 Coleridge Place, Nelson, being the land in Certificate of Title NL9C/17, on certain terms including those set out in r 32.6(3) of the High Court Rules. The order was expressed to take effect until 31 March 2011.[2] On 31 March 2011 an order was made continuing the freezing order until 18 May 2011.[3] On 18 May 2011 the Court made an order varying the freezing order so that it continued to apply until further order of the Court.[4] On 26 July 2011 the Court made an order by consent varying the freezing order to permit the defendant to obtain an advance of $30,000 from the Bank of New Zealand secured by way of first mortgage against the incumbent property. The advance was for payment of legal fees.[5] The defendant has now applied to the Court for a further order varying the freezing order, to permit the defendant to obtain a further advance of $30,000 (or such lesser sum in excess of $15,000 as the Court may approve) from the Bank of New Zealand secured by way of first mortgage against the incumbent property. On this application, the defendant also asks for an award of costs on an indemnity basis or on a Category 3C basis. Again, the advance is to pay legal fees.[6] In support of the application the defendant filed an affidavit from CarolRobbins, a secretary with the defendant's solicitors, annexing three fee accounts inrespect of this proceeding. The first is dated 29 April 2011 and is for the sum of $6,044.68, the second is dated 25 May 2011 and is for the sum of $19,253.33, and the third is dated 13 September 2011 for the sum of $34,620.17. All these figures include disbursements and GST. The total is $59,918.18.[7] Ms Robbins went on to depose that payments totalling $45,000 have been made on account. That would appear to leave unpaid the sum of $14,918.18. An accompanying letter from Mr Morice, to the defendant, dated 13 September 2011 stated that a credit by way of reimbursement of airfares and disbursements totalling $439.50 had been passed. As a matter of simple arithmetic, this leaves a net sum of $14,478.68 owing; notwithstanding that, Mr Morice stated in the letter to the defendant that the balance owing was $12,985.67.[8] The plaintiff's application for summary judgment is set down for a fixture on6 October 2011. The defendant has recently filed an amended notice of opposition but has preparatory work to undertake for the fixture, and of course conduct of the defence at the fixture. It is estimated that additional fees yet to be incurred will amount to $3,250 plus GST. Therefore, depending on which set of figures correctly records the balance owing, the defendant will be indebted to his firm of solicitors in a sum between around $16,250 and $17,700 by the time the defence has been presented.[9] The plaintiff has been unable to locate any other assets owned by the defendant in New Zealand so is entirely dependent, for recovery of any sum for which judgment may be entered, on realisation of the Nelson property and receipt ofthe proceeds. Summary judgment is sought on liability only. In his affidavit in support of the application for summary judgment Mr J J Hufflett set out reasons why the claim could not be quantified at the time that affidavit was sworn in December 2010.[10] Rule 32.6(3) of the High Court Rules provides that a freezing order must not prohibit the person whose assets are frozen from dealing with those assets for the purposes of:(a) Paying ordinary living expenses; or(b) paying legal expenses related to the freezing order; or(c) disposing of assets, or making payments, in the ordinary course of the respondent's business including business expenses incurred in goodfaith.[11] It was common ground between the parties that this rule has been interpreted in such a way that the legal fees incurred by the defendant on this application for summary judgment are expenses within the terms of this paragraph of the rule. Notwithstanding that, this application has been brought because the plaintiff maintains that to be within the ambit of the rule the legal expenses incurred by the defendant must be reasonable. Mr Logan submitted that the legal fees incurred by the defendant were not reasonable and, accordingly, could not, as of right, be paid tothe defendant's solicitors from the frozen asset. In this case, if correct, this would prevent the defendant raising further funds from the BNZ for the purpose of paying fees. Thus, this application was filed, with costs sought against the plaintiff as notedabove, on the basis that the plaintiff's position is untenable.[12] Ms Robbins produced in her affidavit the firm's time records for attendanceson this proceeding from 24 February 2011 to 13 September 2011. These records show that two authors carried out work on this file, Mr Morice and Mr Fitchett, and contain a brief descriptive note of attendances (usually in code), a statement of the number of units of time taken (I was told these were measured in units of six minutes) and the fee calculated for those units at the authors' charge-out rate. ForMr Morice this would appear to be $200 per hour and for Mr Fitchett $300 per hour. The records show that 2,224 six minute units, or 224.4 hours have been logged to the defendant, which equates to a fee of $50,575.20. This closely approximates to the fees charged, excluding GST.[13] I am ill-equipped on this application to conduct an exercise even approaching in particularity the exercise undertaken on a costs review under the formal procedures provided for in the Lawyers and Conveyancers Act 2006. Having reviewed these records as best one can without a line by line explanation, it is my view that I am not in a position to make a ruling on whether the time claimed to have been spent was reasonable for each of the attendances described. Similarly I have no evidence challenging the hourly rates applied, so accept them as appropriate.[14] Mr Logan approached the matter the same way. He accepted that, rightly or wrongly, time to the extent shown in the records had been logged to the file, and that this time formed the basis of the fee accounts which have been rendered. He submitted, however, that if one views the total charges against the steps which have been taken, and takes into account whether those steps should have all in fact been taken, then on a broad view of the matter the fees incurred by the defendant could not possibly be seen as reasonable; from that Mr Logan argued that the freezing order should not be varied to accommodate fees at the level incurred.[15] The defendant has responded to the application for summary judgment by filing a notice of opposition, two affidavits from the defendant personally, and an affidavit of Mr P C Hufflett. Recently he has filed an amended notice of opposition. He also made interlocutory applications for an order for discovery and an order debarring Oceanlaw from acting for the plaintiff. On the present application to vary the freezing order, the plaintiff submits that the defences put forward by the defendant, at least up until the filing of the amended notice of opposition, if not including that document, are untenable, and that the applications for interlocutory orders were no more than tactical manoeuvres, first an endeavour to take out theplaintiff's solicitor who had been involved with investigation of the factssurrounding the defendant's fraud for some years, and secondly an attempt to obtain discovery of documents which was without merit. I will consider these two aspectsof the defendant's actions on this proceeding in turn, dealing first with the grounds of opposition.[16] In the judgment issued by this Court on 18 August 2011,1 extensive reference was made to the grounds of defence as they then stood – paragraphs [35] to [43] inclusive. It is not necessary nor desirable to paraphrase anything said in that judgment; it speaks entirely for itself. However, criticism of the way in which various defences were postulated is the subject of both veiled and overt criticism and adverse comment in these paragraphs.[17] In the amended notice of opposition dated 15 September 2011, which the defendant maintained had been filed but which was handed to me at the hearing andis not yet the subject of a formal filing record at the court, the defendant's positionhas changed materially. Now, the defence is stated thus:... although the defendant will admit (in a statement of defence to be filed in due course) certain of the allegations in the statement of claim including:[there follows a list]he has a defence in respect of the several claims against him, such defence being that at all times relevant to the allegations in the Statement of Claim another director of the Plaintiff (namely Munemoto Nakayama) was fully aware that some of the information included in the TCEPRs, CLRs and MHRs was inaccurate or false; and that other directors of the plaintiff were aware (or should have been aware) that some of the information included in the TCEPRs, CLRs and MHRs was inaccurate or false.[18] It is also stated that the Court should exercise its residual discretion against entering summary judgment so as to enable the defendant to join as a third party the solicitors who advised him in relation to his plea of guilty.[19] The defence I have quoted is referred to, at best vaguely, in paragraph 3(iii)of the defendant's first notice of opposition. Neither in that document, nor in theamended notice of opposition, is it stated how the knowledge claimed to have been held by one director, and either to have been held by other directors or to have been knowledge of which they should have been aware, in fact amounts to a defence to aclaim by the plaintiff based on the defendant's fraud. All other defences postulated1 Aurora Fisheries Ltd v Hozumi HC Nelson CIV-2010-442-000511, 18 August 2011.in the original notice of opposition appear therefore to have been withdrawn. As noted in the judgment of 18 August a number of other possible grounds for defence were postulated in the application for discovery, and in submissions of counsel for the defendant. Again, it does not appear that the defendant now intends to present a defence on any of those bases either.[20] In paragraph [39] of the judgment I made the following observation:In my view it would have been a straight-forward matter for the defendant in this case to have filed a notice of opposition which set out quite clearly the basis upon which he maintains he has a defence to the claim. This might amount, for example, to stating that for certain reasons (no doubt amplified in an affidavit) the facts relied upon by the plaintiff are wrong. Equally there could be a denial that the pleaded duties were owed, again no doubt supported by factual material in an affidavit. Similarly the notice of opposition could state with clarity the basic premises upon which any other defence might be based. All these propositions are simply matters of recording in the notice of opposition the defence(s) claimed to be arguable as a consequence of the instructions received from the defendant by the solicitor drafting the document. The notice of opposition fails entirely to achieve this; the closest it comes is the obscure reference to the possibility that there may be defences relating to the knowledge of the plaintiff or its directors of the activities that constituted the fraud.[21] In paragraph [40] of the judgment I went on to note that the possible defences outlined in support of the discovery order application took the matter no further.[22] The position of the defendant has now changed materially. Not only have a number of postulated possible defences ceased to be in play, but the defendant in the amended notice of opposition now accepts as correct that he had knowledge of the fraud being perpetrated by the Kanai employees on the vessel and that he did not tell any of the other directors of the plaintiff that information in the daily returns was false. He accepts that he received catch reports which provided a true record of the catch which were passed to Kanai in Japan and that he knew that daily reports which were sent to the plaintiff were false.[23] Further, in his affidavit dated 30 May 2011 Mr Hozumi swore (paragraph 5) that the problem with the Ministry of Fisheries (MOF) in relation to the Tomi Maru 87 first came to his attention in late 2008. Now, in contrast, he accepts that between 2007 and 2008 Kanai employees on the vessel inserted false data into the TCEPRsand CLRs, and that he took no steps to prevent the plaintiff from filing MHRs that he knew contained the false information. It is not clear why the defendant swore an affidavit in opposition to this application for summary judgment which did not, if his present admissions are correct, tell the truth. That is not an issue on which I need to make any findings at the present time. Nor do I need to comment on the evidence Mr Hozumi gave at paragraphs 19 and 20 of the same affidavit that he only pleaded guilty to the MOF charges to minimise damage to the plaintiff and damage to Kanai, and because of the instructions/advice, as he put it, from Kanai. Without that advicehe did "not think I would have pleaded guilty to the MOF charges. If I had known that I would be sued by Aurora, I would definitely have pleaded not guilty."[24] It is not necessary for me to undertake a more detailed analysis of the change in position of the defendant. I am satisfied that his position in relation to this claim has changed materially. I am satisfied that for that reason, and for the reasons which I have set out in the paragraphs referred to earlier from the judgment of 18 August,that the defendant's opposition to this claim has been lacking in focus and frankness, and until the filing of the amended notice of opposition has, by its expression in the first notice of opposition, the application for discovery, and counsel's submissions,amounted to a series of hypothetical postulations. I am quite satisfied that this approach to formulating opposition to a claim for summary judgment on liability arising from a very extensive fraud to which the defendant was party is not a reasonable approach and is likely, if not highly likely, to have materially inflated the fees incurred.[25] I turn now to the applications for discovery and for an order debarring Oceanlaw and/or Mr Sullivan from acting, which were dealt with in the judgment of 18 August. On these applications, little needs to be said in addition to the judgment itself. It is clear from that judgment that the defences postulated by the defendant, which are canvassed in detail in that judgment, did not and could not come near to satisfying the legal tests for making an order for discovery on an application for summary judgment.[26] As to the application to debar Oceanlaw and Michael Sullivan, the case put for the defendant both in documentation and in submissions entirely lacked anycomprehensive analysis of the principles to be applied by the Court, or analysis of the role and actions of Mr Sullivan by reference to those principles. This is undertaken at length in the judgment. Had an analysis of equivalent precision been undertaken by the defendant it should have been apparent to him that this application was extremely unlikely to succeed.[27] Both these applications must have materially contributed to the costs incurred by the defendant. They were argued on 26 July. The records produced by Ms Robbins showed that of the $50,575 charged to the file by 13 September, just under $3,000 was incurred between these dates, meaning that some $47,000 was expended up to that point.[28] Standing back, therefore, and looking at the fees charged by the solicitors for the defendant to date, and taking into account the observations I have made in this judgment, and in the judgment of 18 August, I am satisfied that there are stronggrounds to find that the fees charged by the defendant's solicitors to the defendantare not reasonable.[29] I therefore accept the position of the plaintiff that the provisions of r.32.6(3) do not permit further funds to be drawn down from the BNZ against the frozen asset to pay legal expenses, without an express variation to that order.[30] I am further satisfied that it is not appropriate to make the order sought by the defendant. Whether the defendant, who is in Japan, ultimately invokes his statutory right to review of the costs charged to him remains to be seen.[31] As noted earlier, the application for summary judgment is to be argued on 6 October. Mr Fitchett accepted that it was on his advice that the applications to debar Oceanlaw and Mr Sullivan, and for discovery, were made, and if the Court found that these were unreasonable steps in the context of this litigation the consequences of that finding would sheet home against his firm. In the circumstances, it was appropriate for Mr Fitchett to accept that position. He also accepted, appropriately, that he would continue to be involved and present the defence of Mr Hozumi to this claim, at the forthcoming fixture.[32] In my view a just outcome is to vary the freezing order so that a further advance of $4,000 can be obtained to cover the costs of Mr Fitchett, including GST, to the conclusion of that fixture. That is based on his estimate of the likely cost involved, rounded slightly to take account of the estimate possibly being found to beinsufficient. That will ensure Mr Hozumi's defence is presented and Mr Fitchett isremunerated for it, whilst leaving the balance of the fees charged to date, but unpaid, for payment from another source, if not reduced on a statutorily-based costs review.Outcome[33] The freezing order is varied to permit the defendant to obtain an advance of a further $4,000 from the Bank of New Zealand secured by way of first mortgage against the property.[34] Although the defendant has succeeded to the modest extent allowed, I am not satisfied that this should result in an award of costs to the defendant. Nor am I satisfied that the plaintiff has acted in a way that can be criticised in any respect, in relation to this application. Taking into account all factors the plaintiff is entitled in my judgment to costs on a 2B basis, less 10 percent to reflect the minor extent to which the defendant has succeeded.______________________J G MatthewsAssociate Judge____________________________________________________________________Solicitors:Pitt & Moore, PO Box 42, DX WC70013, Nelson 7040 for PlaintiffRout Milner Fitchett, PO Box 580/DX WC70014, Nelson for Defendant (john@rmf-law.co.nz)