Direct One Management Pty Ltd v Nafpaktos Pty Ltd
[2011] VCC 817
•28 June 2011
| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL GENERAL LIST
Case No. CI-10-01575
| DIRECT ONE MANAGEMENT PTY LTD | Plaintiff |
| (ACN 016 212 908) | |
| v | |
| NAFPAKTOS PTY LTD (ACN 088 127 084) | Defendants |
| & ORS |
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| JUDGE: | HER HONOUR JUDGE KENNEDY |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 16 June 2011 |
| DATE OF JUDGMENT: | 28 June 2011 |
| CASE MAY BE CITED AS: | Direct One Management Pty Ltd v Nafpaktos Pty Ltd & Ors |
| MEDIUM NEUTRAL CITATION: | [2011] VCC 817 |
REASONS FOR JUDGMENT
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Catchwords: Application to restrain solicitor and barrister from acting- application refused
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J.D. Loewenstein | Alliance Legal |
| For the Defendant | Ms S.F. Gaden | Gary Prince |
| HER HONOUR: |
Nature of application
1 This is the return of a summons of the defendants dated 8 June 2011 seeking orders, inter alia, that the plaintiff’s solicitor, Alliance Legal, and its counsel, Jeffrey D. Loewenstein, be restrained from acting further in this matter on behalf of the plaintiff. Various other matters were also before the court on 16 June 2011, but these have been the subject of separate determination by reasons given ex tempore.
2 The application is supported by a number of affidavits of the solicitor for the defendants, Mr Gary Alan Prince, primarily of 7 June 2011, but also of 9 June 2011, 15 June 2011, and 27 January 2010.
3 The application is opposed by the plaintiff, primarily on the basis of an affidavit of Mr Mario Anthony Merlo, solicitor for the plaintiff, of 10 June 2011.
4 There was some lack of precision as to the exact basis for the application. However, insofar as Alliance Legal was concerned, it was submitted that Mr Merlo was likely to be a significant witness in the case. There were also a myriad of additional factors raised. These centred on a suggestion that Alliance Legal had acted for Mr Karas, or interests associated with him, which would allegedly compromise Alliance Legal’s obligations to this court under the Harman principle.[1]
[1] Home Office v Harman [1983] 1 AC 280.
5 In terms of Mr Loewenstein, it was submitted that he was “tainted” by having been retained by Mr Merlo and, further, that he had acted for a Mr Georgakopoulos who was also associated with Mr Karas.
6 There were therefore two main issues in the case:
• Whether Mr Merlo was likely to be a significant witness; •
If no, whether the other factors cited together or individually justified the order sought.
7 In order to assess the likely significance of Mr Merlo as a witness it will be necessary to consider some background as well as the pleadings in the case.
Background
“who’s who”[2]
[2] The matters contained in this section were generally admitted matters in the pleadings and/or were taken from a flow chart supplied by Counsel for the defendants which was not challenged for the purposes of this application.
8 The director of the plaintiff is Ms Dimitra Tsucalas. Ms Tsucalas is a second cousin of Mr Kon Tsamis and Ms Martha Tsamis, the second and third defendants.
9 Mr Kon Tsamis is the sole appointed director of the first defendant, Nafpaktos. However, the defendants have admitted that Ms Martha Tsamis, Mr Tsamis’ sister, was in effective control of Nafpaktos Pty Ltd for the purposes of s.9 of the Corporations Act.[3]
[3] Defence dated 8 December 2010 para 4(c).
10 Nafpaktos is the trustee of:
(a) The Hub Unit Trust;
(b) The Tsamis Family Trust; and
(c) The Tsamis and Dromi Family Trust.
11 The units in the Hub Unit Trust were allotted as follows:
(a) 120 units issued to the plaintiff; (b) 80 units issued to Martha Tsamis; and (c) 80 units issued to Patrick Dromi. 12 The plaintiff alleges that, prior to 17 June, 2009, the Hub Unit Trust, in turn, held 280 units, or 25 per cent of the units in the Nicholson Street Unit Trust; an asset of this trust being a property located in Nicholson Street, Fitzroy (although this is denied by the defendants[4]).
[4] Defence para 6.
13 Mr Tom Karas was a sole director of 70 Nicholson Street Pty Ltd which was a trustee of the Nicholson Street Unit Trust. The other beneficiaries of this trust were Frank Georgakopoulos and Genesis Holdings (Aust) Pty Ltd; the sole director and shareholder of Genesis being Mr Nick Meletsis, who is Mr Karas’ brother-in-law.[5]
[5] See affidavit of Mr Prince of 27 January 2010 para 5.
14 There were two other entities mentioned, namely MDC Entertainment Pty Ltd and State Securities Pty Ltd.
15 Ms Martha Tsamis was the sole director and shareholder of MDC Entertainment Pty Ltd which was the licensee of Chasers night club. MDC was alleged to be the trustee of a unit trust known as the MDC Unit Trust.
16 Ms Irene Meletsis, Mr Karas’ wife, is the sole director and shareholder of State Securities.[6]
Other proceedings and terms of settlement
[6] See affidavit of Mr Prince of 27 January 2010 para 5.
17 There are a large number of proceedings referred to in the evidence and it was suggested that Ms Tsamis and Mr Karas had a “vendetta” against each other.[7]
[7] See the reference in the Prince affidavit of 7 June 2011 at para 10.
18 However, for the purposes of this application two proceedings were referred to, in particular:
•
proceedings described as “The Nicholson Street proceedings” issued in this court by Nafpaktos wherein Nafpaktos sought relief against the trustee, 70 Nicholson Street, including the removal of the trustee;
•
proceedings issued in the Supreme Court by State Securities Pty Ltd and Genesis Holdings Pty Ltd in which MDC was a defendant (the MDC proceedings)
19 A further factual matter is that the parties entered terms of settlement in relation to these proceedings on 16 June 2009. Those terms were before the court.[8] They were apparently executed by Mr Tsamis on behalf of and with the authority of Nafpaktos; Mr Tom Karas, on behalf of and with the authority of Nicholson Street Pty Ltd, himself and State Securities; Ms Tsamis, on behalf of herself and with the authority of MDC; Frank Georgakopoulos; and Nick Meletsis on behalf of and with the authority of Genesis Holdings.
[8] Affidavit of Mr Prince of 7 June 2011 at GP1.
20 These terms provided for the dismissal of both proceedings and included provision for the following:
•
Nafpaktos requested that 70 Nicholson Street redeem the Nafpaktos’ 280 Nicholson Street units and pay to the plaintiff the nominal sum of $1.00 (clause 1);
•
At the request of Ms Tsamis, Genesis Holdings agreed to transfer its 50 units in the MDC trust to Nafpaktos for a nominal value of $1.00 (clause 2);
•
For the purposes of clause 11 (a confidentiality clause) Tom Karas agreed that “he will not discuss these terms of settlement with Dimitra Tsucalas or in any way provide advice to Dimitra Tsucalas as to her rights against any of the parties pursuant to these terms.”
Issues between the parties
21 The first part of the Further Amended Statement of Claim (FASC) (especially at paragraphs 9-13) alleges that the Nicholson Street proceedings were a wasteful use of the resources of the Hub Unit Trust and that their commencement and continuation was a breach of the trust deed and of the fiduciary duties owed to the unit holders in that trust. It is also alleged that the proceedings were commenced and continued by the defendant for an improper purpose, namely as part of a strategy to place commercial and financial pressure upon Mr Karas and other persons and entities associated with him in connection with the MDC dispute. It is also alleged that the defendant had a conflict between the interests of its unit holders and of its director Ms M. Tsamis and further that the costs incurred (shown as a liability to Ms Tsamis) were incurred for the benefit of Ms Tsamis alone so as to advance her interests in the MDC proceeding.
22 Other breaches of fiduciary duties are alleged, including the failure to inform the plaintiff about various matters affecting the Nicholson Street proceedings, including an alleged failure to inform Direct One of the basis for, and prospects of, the proceeding and of offers of settlement. There is also an alleged failure to allow the plaintiff access to documents; and a failure to seek approval of the Hub unitholders and to make due and proper inquiries as to the value of the Nicholson Street property.
23 In terms of the first part of the FASC, the defendants generally deny the allegations therein and, in particular, deny that a number of the alleged duties existed. The defence also alleges that the costs of the 70 Nicholson Street proceeding escalated due to unforeseeable conduct of 70 Nicholson Street including its entry into voluntary administration (para 11(b)).
24 In terms of the alleged failure to inform of offers, the defendants say that no duty or terms were properly pleaded. They further cite a number of offers which appear to include written offers and offers made to a previous solicitor for the plaintiff, a Mr Zervas. There is however one offer cited dated 17 April 2009 to purchase Nafpaktos’ interest in the trust in an amount of $150,000 which is said to have been rejected by Mr Merlo.
25 The second part of the proposed pleading (at paragraphs 14 - 25) makes complaint in relation to the entry into the terms of settlement and alleges that entry into and implementation of the terms was a breach of fiduciary duty and of the trust deed. It is also alleged that the plaintiff was not in any way “involved in” the terms nor was it advised or consulted in relation to the terms (para 17).
26 The essence of the complaint in the second part of the FASC appears to be that the plaintiff‘s units in the Hub Unit Trust were transferred so that the units held by the plaintiff became valueless; and further that Nafpaktos as trustee of the Tsamis and Dromi Family Trust became the holder of the MDC units rather than Nafpaktos as trustee of the Hub Unit Trust (see in particular para 20).
27 In relation to this second part of the claim, the defendants admit entry into the terms of settlement. However, the defendants deny any breach of fiduciary duties or duties under the trust deed and allege that the plaintiff has neglected to identify the duties to which Nafpaktos was allegedly subject.
28 The defendants also allege that Nafpaktos invited Direct One, through its director, to become involved in the settlement discussions but that Direct One “chose not to become involved in the settlement discussions” (para 15(b)).
29 The defence also alleges that at the time of the settlement the 70 Nicholson Street Trust was insolvent (para 20(b)).
30 In supporting their claim that the plaintiff was invited “to become involved” the defence, inter alia, relies on a telephone call of 15 June 2009 wherein the solicitor for Nafpaktos advised Mr Merlo of an offer of Ms Tsamis, the substance of which was that she would pay Direct One the sum of $50,000 from her own funds. The defence continues:
“… on the morning of 16 June 2009 Prince again telephoned Merlo and urged Merlo to obtain instructions from his client regarding the offer. Merlo confirmed to Prince that he had spoken to his client and recommended that she accept the offer and confirmed that his client was looking upon the offer favourably;
”Prince again telephoned Merlo on 16 June 2009 and again urged Merlo to obtain instructions as the 70 Nicholson street proceeding had to settle that day. Merlo told Prince that he was experiencing difficulties contacting his client.
Further attempts were made to contact Tsucalas through Merlo on 16
June 2009 to no avail.”
31 In the third part of the FASC (para 26- 34), the plaintiff alleges that the second and third defendants breached fiduciary duties which they themselves owed by entering and implementing the terms of settlement. Further that they had also conspired to “defraud and injure” the plaintiff as a unit holder of the Hub unit trust by entering and implementing the terms and by failing to advise the plaintiff of the terms and the effect thereof.
32 The defendants generally deny the allegations in the third part of the claim and, in particular, deny the existence of the duties alleged.
33 The relief sought by the plaintiff includes orders for full access to records; damages; an order for the MDC units to be transferred, and an order that Nafpaktos be removed as trustee.
34 By the plaintiff’s Reply of 23 December 2010, the plaintiff, inter alia, denies that it was involved in negotiations to settle the Nicholson St proceeding or that it agreed to the terms of settlement. The plaintiff also notes that there was a specific clause in the terms that there was to be no discussion with Ms Tsucalas of the terms and that the plaintiff only obtained the terms after it made application to the court to compel production.
35 The pleadings therefore suggest there are a large number of issues between the parties. These include what were the fiduciary/ trust deed duties owed by Nafpaktos in issuing and continuing the Nicholson Street proceeding and/or in entering and implementing the terms of settlement. Further, whether any of these duties have been breached. There is also a separate issue as to the content of any duties owed by the second and third defendants in entering into the terms, and whether any of these duties have been breached.
Principles
36 Neither party made reference to any relevant authority. However, Counsel for the defendant appeared to generally accept the principles cited by Hollingworth J in the decision of TJ Board and Sons Pty Ltd v Castello[9] when this decision was referred to by the court during the course of oral submissions. That decision was concerned with an application to restrain a solicitor who was a potential witness in the case.
[9] [2008] VSC 91.
37 In TJ Board, Her Honour summarised the general grounds on which a court may restrain a legal practitioner from continuing to act as follows:
(a) Where there is a danger of misuse of confidential information; (b) Where there is a breach of a fiduciary duty of loyalty not to act against a former client in the same or a closely related matter; (c) Under the court’s inherent jurisdiction to control the conduct of solicitors as officers of the court. 38 Counsel for the defendants suggested that primary reliance was placed on the inherent jurisdiction of the court.
39 In terms of this inherent jurisdiction Hollingworth J cites the decision of Kallinicos v Hunt[10] wherein Brereton J helpfully summarised the following principles:
[10] [2005] 64 NSWLR 561 at 582-3.
(a)
The test to be applied in the inherent jurisdiction is whether a fair- minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a lawyer should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice;
(b) The jurisdiction is exceptional and is to be exercised with caution; (c)
Due weight should be given to the public interest in a litigant not being deprived of the lawyer of his or her choice without due cause; and
(d)
The timing of the application may be relevant, in that the cost, inconvenience and impracticality of requiring lawyers to cease to act may provide a reason for refusing to grant relief.
40 In terms of a solicitor being a potential witness, Her Honour noted that:
“There is no dispute that where a solicitor for a party is personally interested in the outcome of proceedings, or is likely to be a substantive witness for a party at the trial ... it may be inappropriate for the solicitor to continue to act for the party. Whether that will be so obviously depends on the facts of each case.”[11]
[11] [2008] VSC 91 at 8.
41 Her Honour also noted that in none of the cases she was referred to was a solicitor or their firm removed merely because he/she was likely to be a witness. Rather, in each case there was some “additional factor”.
42 When these passages were raised with Counsel for the defendant she cited a number of “additional factors” which will be dealt with below.
Materiality of Mr Merlo as a witness
43 As is described by the summary of the pleadings above, evidence may be called from Mr Merlo in relation to the alleged communication of an offer of 15 June, 2009 in an amount of $50,000 and also in relation to an earlier offer of 17 April, 2009.
44 In relation to the alleged offer of 17 April, 2009, in an affidavit of 27 January, 2010 (at paragraph 23), Mr Prince states that this offer was communicated to Mr Merlo orally who advised that his client would not accept this offer. However, given Mr Prince also states that the offer was “subsequently reduced to writing” any oral evidence of Mr Merlo does not appear to be of significance.
45 In relation to the offer of 15 June, paragraph 4 of the affidavit of Mr Prince of 7 June 2011 states:
“I personally communicated an offer to Mario Merlo of Alliance Legal, then acting for the plaintiff in this proceeding, on 15 June 2009. Mr Merlo told me that he would recommend the offer to his client.”
46 Counsel however, also sought to rely on the earlier affidavit of Mr Prince of 27 January 2010. Paragraph 29 of that affidavit details his communication of Ms Tsamis’ offer of $50,000 to Mr Merlo on 15 June. Mr Merlo responded that he had already conveyed the offer (which he had become aware of through another source). Mr Merlo further said he had recommended that his client accept the offer but advised that his client would be leaving for overseas on 17 June because her grandmother was ill and that she would be hard to get hold of. In paragraph 32 of that affidavit Mr Prince also states that he telephoned Mr Merlo on 16 June and that Mr Merlo stated that “he had spoken to Dimitra and that she was looking at the offer ‘favourably’”. The affidavit continues, saying that 30 minutes later Mr Prince rang Mr Merlo again seeking an acceptance of the offer. In response, Mr Merlo said he had been unsuccessful in contacting his client but had left a message. A short time later, Mr Prince also rang but was unable to contact Mr Merlo. In the result, then, the offer was not accepted and instead, the terms of settlement were entered into. Moreover, Mr Prince states that it was not until after the terms were entered into, on 22 July, that Mr Merlo told him that his client had rejected the offer (para 36).
47 Mr Merlo’s affidavit of 10 June 2011 post dates both affidavits of Mr Prince. Mr Merlo makes particular reference to paragraph 4 of Mr Prince’s affidavit of 7 June and states (at para 3):
“At no stage was I involved in the settlement of the 70 Nicholson Street proceeding nor was I provided with any information as to the proposed settlement. My client was not a party to the 70 Nicholson Street proceeding. On the other hand Mr Prince did convey to me on 15 June 2009 an offer for my client to settle [this] proceeding… My conversations with Mr Prince in relation to the Offer and my ability to obtain instructions are not in dispute. However, my client and I both dispute that we were at any time advised or consulted about the proposed terms of settlement….Indeed, after settlement of the 70 Nicholson Street proceeding Mr Prince refused to disclose to me the terms of the settlement as a result of which I was forced to make an application to this Honourable Court…” (emphasis added)
48 In the light of the evidence before me, I am unable to determine that Mr Merlo will be a witness of substance in this proceeding. I say this because:
• Mr Merlo suggests that his conversations with Mr Prince in relation to the offer of $50,000 “are not in dispute.” In such circumstances, I am unable to determine that he will even necessarily be called; • any discussion in relation to a specific offer does not appear to be of particular significance, when viewed in the overall context of the number of issues currently between the parties (as described, above); • the terms actually signed were executed after the alleged discussions referred to on 16 June with Mr Merlo. Neither Mr Merlo nor his client were a party to the terms. Nor is there any suggestion that Mr Merlo was involved in the preparation of those terms, or that he gave advice on them. Rather, the terms appear to reflect a very different arrangement to that encompassed in the earlier offer. In particular, they make no provision for any payment of $50,000 to the plaintiff. 49 Given the seemingly peripheral relevance of Mr Merlo’s evidence to the various disputed issues in the proceeding, I am unable to be satisfied that he is likely to be a significant witness at trial, if he gives evidence at all.
Additional matters
50 The defendants then relied on a myriad of other matters in support of their application. Much of what was said appeared to be based on the defendants’ evident dislike of Mr Karas and their concern that Mr Merlo was “conspiring with Mr Karas to further his vendetta.”[12] However, such concern does not amount to evidence.
[12] See, for example, correspondence of Mr Prince of 25 May 2011 at GP2 of his affidavit of 7 June 2011.
51 Counsel for the defendant did rely on some of the factors referred to in the affidavit of Mr Prince of 7 June 2011 (especially at paragraph 13 and in GP2). In particular, these matters were that:
•
Alliance occupies an office within a suite of offices operated by State Securities, and shares facilities such as fax machines, secretarial services and a website with State Securities;
•
Alliance had acted from time to time for various entities associated with Mr Karas, namely, for:
o State Securities (as was demonstrated by a caveat lodged by State Securities with Alliance named as the party to receive notices therein); o Mr Frank Georgakopoulos in this court in a proceeding Deputy Commissioner of Taxation v Georgakopoulos. (Mr Georgakopoulos was said to be a “close associate” of Mr Karas[13]);
o Nick Meletsis in this court in a proceeding being Deputy
Commissioner of Taxation v Nick Meletsis;
[13] Affidavit of Mr Prince of 27 January 2010 at para 5.
o Mr Karas’ brother, Bill Karas in Deputy Commissioner of Taxation v
Bill Karas, a proceeding in the Magistrates’ Court;
•
Alliance had also taken affidavits and received documents from Mr Karas in these proceedings, some of which involved a breach of the confidentiality clause in the terms of settlement, and some of which were inconsistent.
52 As indicated already, a central submission of the defendants was that Mr Merlo would be unable to discharge his obligations to the Court under the Harman principles in the light of his relationship with Mr Karas.
53 Dealing with each of these:
•
In terms of the alleged sharing of a suite of offices, the sworn evidence of Mr Merlo is that his firm leases three offices from a company related to State Securities Pty Ltd. His firm does not share facilities with State Securities as alleged; instead his firm has its own staff, fax machine, telephone numbers and website;[14]
•
Mr Merlo accepts that he has undertaken and does undertake work on behalf of State Securities, Frank Georgakopoulos, Nick Meletsis and Bill Karas. However, he claims that the matters in which he continues to act for these clients (which appear to be tax matters) have “nothing at all to do with this litigation.”[15] The court was not provided with the pleadings in relation to the various matters referred to, so that there is nothing to suggest that Mr Merlo’s claims are incorrect;
•
There is also nothing wrong in Mr Merlo taking evidence or documents from a potential witness, Mr Karas. Inconsistency of itself is also not a ground for removal of a solicitor. If there has been a breach of the terms of settlement by reason of the information provided in any of these affidavits, the proper respondent to any complaint would also appear to be Mr Karas (who was a party to the terms) rather than Mr Merlo;
•
Finally no evidence was adduced to support the proposition that Mr Merlo was likely to breach the Harman principles. He himself cites the decision and notes again that the proceedings in which he acts for the “Karas interests” have nothing to do with the issue in dispute in this proceeding.[16] The court cannot prevent a solicitor from acting on the basis of speculation.
[14] Affidavit of Mr Merlo of 10 June 2011 para 5(b).
[15] Affidavit of Mr Merlo of 10 June 2011 para 5(c).
[16] Affidavit of Mr Merlo of 10 June 2011 para 7.
54 Overall, the alleged additional factors did not, either individually or cumulatively, warrant the removal of Alliance Legal.
55 I am also fortified in this approach given the current case does not appear to come within the cases cited in TJ Board[17] wherein a solicitor was removed (which generally involved former-client conflicts and/or circumstances where the solicitor had a personal interest in the outcome of a proceeding).
Resolution of the matter
Alliance Legal
[17] [2008] VSC 91 at [9] –[10].
56 On the basis of the evidence before this court, it is not established that a fair- minded, reasonably informed member of the public would conclude that the proper administration of justice requires that Alliance Legal should be prevented from acting. This is particularly so, given that the jurisdiction is exceptional and is to be exercised with caution. I have also given due weight to the public interest in a litigant not being deprived of the lawyer of his or her choice.
57 To these considerations must also be added the important question of the timing of the application. The plaintiff originally issued the proceeding in 2008, wherein the plaintiff sought access to records and the appointment of a new trustee.[18] From at least April, 2010 the plaintiff also sought to directly challenge the events surrounding the entry into the terms of settlement in 2009.[19] Indeed, the affidavit of Mr Prince (referred to already) which sets out his exchanges with Mr Merlo in relation to the relevant offer is dated 27 January 2010. On any view, the current application is thereby considerably delayed.
[18] See Statement of Claim in proceeding 08-03339 dated 15 August, 2008.
[19] See Statement of claim in proceeding 10-01575 dated 14 April 2010; which has effectively overtaken the 2008 proceeding
58 There was little explanation for such delay apart from the suggestion that the defendants only recently realised the “seriousness” of events. In circumstances where there is a trial fixed for 14 September this year, this is an inadequate explanation. Rather, the cost, inconvenience and impracticality of a change of solicitor is a highly significant factor weighing against the defendants’ application.
59 In these circumstances, I am not satisfied that an order should be made against Alliance Legal.
Mr Loewenstein
60 In terms of Mr Loewenstein, the application was without merit. In the result, only two matters were relied upon; namely, that he acted for Mr Georgakopoulos in an unrelated tax matter; and, secondly, that he was somehow “tainted” by Mr Merlo’s contact with Mr Karas.
61 Neither of these matters are sufficient.
Conclusion
62 The application by the defendants for orders that the plaintiff’s solicitor, Alliance Legal, and its counsel, Jeffrey Loewenstein, be restrained from acting further in this matter is refused.
63 I will hear from the parties on the question of costs.
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Certificate
I certify that these 16 pages are a true copy of the reasons for decision of Her Honour
Judge Kennedy, delivered on 28 June 2011.
Dated: 28 June 2011
Sonja Mileska
Associate to Her Honour Judge Kennedy
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