Nicholson Street Pty Ltd v Letten (No 4)

[2017] VSC 307

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST

S CI 2014 03756  

NICHOLSON STREET PTY LTD (ACN 069 104 089) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS	Plaintiffs
v
MARK RONALD LETTEN & ANOR	Defendants

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JUDGE:	Judd J
WHERE HELD:	Melbourne
DATE OF HEARING:	10 April 2017
DATE OF JUDGMENT:	2 June 2017
CASE MAY BE CITED AS:	Nicholson Street Pty Ltd & Ors v Letten & Anor (No 4)
MEDIUM NEUTRAL CITATION:	[2017] VSC 307

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PRACTICE AND PROCEDURE – Application to amend statement of claim – Adequacy of pleading accessorial liability under the second limb of Barnes v Addy – Allegation of knowing assistance – Application refused.

SUMMARY JUDGMENT – No real prospect of success – Civil Procedure Act2010 s 63.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr R Strong	King & Wood Mallesons
For the First Defendant	Mr S Hibble	Baker & McKenzie
For the Second Defendant	Mr J Graham	Maddocks

HIS HONOUR:

1. The plaintiffs’ case against the second defendant, Paul James Lane, has been revised and re-pleaded on a number of occasions.[1]  It is unnecessary to elaborate on the background.  Following the judgment delivered on 28 February 2017, the plaintiffs applied by summons filed 24 March 2017 for leave to file and serve a further amended statement of claim substantially in the form of Exhibit MAT 1 to the affidavit of Mark Anthony Troiani, sworn 24 March 2017. 

   [1][2015] VSC 583; [2016] VSC 678; [2017] VSC 62.

1. The new case pleaded against Mr Lane involves some restructure and some new allegations.  In new allegations, the plaintiffs allege that Mr Lane knew that funds borrowed from Westpac, pursuant to facility documentation executed by him on behalf of the third plaintiff, was for the purpose of undertaking works at the Moorhouse Shopping Centre in New Zealand, Cimitiere House, Tasmania and for a subdivision of Heritage Estate, in the Yarra Valley.  The plaintiffs allege that none of those investments were assets of the relevant joint venture, Twinview JV. 

1. The plaintiffs allege that Mr Lane knew, when preparing the various loan applications, that the joint venture agreements authorised each plaintiff to borrow on security of the land held by them, for the purpose of the joint venture project managed by that plaintiff; and that he knew that LGHA (and each relevant plaintiff) did not intend to use the proceeds from borrowings for that particular project.  They plead, in paragraph 47:

By reason of his position in the LGHA Group as described in paragraph 45B above, and the performance of the functions described in paragraphs 45B(c), 45B, 45C and 45D above, Mr Lane had knowledge at the time of preparing applications for and negotiating each of the borrowings referred to in paragraph 45C and at the time of executing the facility documentation referred to in paragraph 45D that:

(a)the plaintiffs held the properties respectively registered in their names on behalf of investors who had been invited to invest and had invested money in a joint venture relating specifically to each property;

Particulars

The plaintiffs rely on Mr Lane’s admission of his knowledge of these facts in Admission 6 in Annexure 1A.

(b)the joint venture agreements signed by the plaintiffs included terms which:

(i)required the plaintiffs to open and maintain separate bank accounts and maintain all joint venture monies in those accounts;

(ii)expressly authorised the plaintiffs to borrow on the security of the land held by them for the purposes of the joint venture managed by them;

Particulars

Mr Lane had this knowledge alleged by reason that he was familiar with the contents of the joint venture agreements usually established by the Letten Group and had executed a number of those agreements.

(c)it was the policy of the LGH Group that where the value of properties held on behalf of the Letten Trusts increased, it would seek to maintain a level of borrowings on each property equal to 65% of the value of that property from time to time by drawing down additional borrowings from increased value with these funds utilised to develop the subject property and any other properties within the LGH Group;

Particulars

The policy was described in a document entitled “LGH Group of Companies Overview of Operations and Vision” which Mr Lane assisted to prepare and sent to Westpac in or about November 2006.  A copy of the document and the covering letter from Mr Lane is in the possession of the plaintiffs and may be inspected by appointment.

The plaintiffs rely on Mr Lane’s admission that he participated in the preparation of this document in Admission 9 in Annexure 1A.

(d)the proceeds of each of the borrowings by the plaintiffs referred to in paragraph 45C were to be paid to LGHA.

Particulars

The plaintiffs rely on Mr Lane’s admission of this fact in Admission 7 in Annexure 1A.

(e)neither LGHA nor the relevant plaintiff intended to use the proceeds of each of the borrowings by the plaintiffs referred to in paragraph 45C above for the Nicholson St JV Purposes, the Glen Centre JV Purposes or the Twinview JV Purposes respectively;

Particulars

Mr Lane had knowledge of this fact by reason that:

(i)he knew of the policy referred to in paragraph 47(c);

(ii)he prepared the applications for and negotiated each of the borrowings;

(iii)he executed the facility documents relating to each of the borrowings (other than the borrowings referred to in paragraph 35(a)(i)-(iv));

(f)there were frequent transfers of money between the trustees of the Letten Trusts including the plaintiffs and LGHA which money was used by LGHA;

Particulars

The plaintiffs rely on Mr Lane’s admission of his knowledge of this fact in Admission 8 in Annexure 1A.

(g)Mr Letten controlled the transfers of money referred to in sub-paragraph (f);

(h)None of:

(i)the Moorhouse Shopping Centre in New Zealand;

(ii)Cimitiere House, Tasmania;

(iii)Heritage Estate, Yarra Valley,

were assets of the Twinview JV.

1. Thus, the plaintiffs alleged that Mr Lane knew that investor money (including borrowings) paid to LGHA would be invested by LGHA in projects which were not the joint venture projects.

1. By means of a reformulated allegation of knowing assistance in paragraph 48, the plaintiffs return to the ‘dishonest and fraudulent design’ of each plaintiff.  They allege:

Mr Lane assisted the plaintiffs respectively as alleged in paragraph 46 above with knowledge of the matters specified in paragraph 47, being circumstances that would indicate to an honest and reasonable person:

(a)that each breach of trust referred to in paragraph 19 was a dishonest and fraudulent design of the first plaintiff as described in paragraph 22 above.

(b)that each breach of trust referred to in paragraph 27 was a dishonest and fraudulent design of the second plaintiff as described in paragraph 30 above;

(c)that each breach of trust referred to in paragraph 35 was a dishonest and fraudulent design of the third plaintiff as described in paragraph 38 above.

1. The dishonest and fraudulent design of each plaintiff is unchanged, depending upon their intention to apply the borrowed and other investor funds ‘knowing that in doing so it [the relevant plaintiff] would deprive the investors [of each relevant joint venture] of the benefit of the use of those monies…’.

1. The plaintiffs submitted, taking the position of the third plaintiff as an example, that the relevant elements of the dishonest and fraudulent design were as follows:

(1)       monies were raised from investors for a particular purpose, namely the acquisition, development and sale of a property;

(2)       investor funds and the land was held by the third plaintiff as trustee to deal with it solely for the purpose of the project;

(3)       the plaintiffs mortgaged the land and transferred the loan funds to LGHA;

(4)       the plaintiff did not intend that those proceeds would be used for the joint venture;

(5)       the plaintiff knew that the proceeds paid to LGHA would not be applied to the joint venture property, and that the investors would be deprived of the benefit of their investment. 

This formulation corresponds generally with the pleading.

1. The plaintiffs submitted that the documentary evidence relied upon in support of the application was sufficient to establish that Mr Lane knew of the circumstances in which the plaintiffs held the joint venture properties; of the relevant terms of each joint venture agreement; of the borrowing policy of the group; and that the proceeds of the borrowings were paid to LGHA.  They allege that Mr Lane knew that the transfers to LGHA were under the control of Mr Letten, and the money was being invested by LGHA in projects other than the joint venture projects.  The plaintiffs do not allege that Mr Lane was on a frolic of his own, but acted at the direction of Mr Letten. 

1. The  plaintiffs submitted that knowledge of those limited facts would have made it obvious to an honest and reasonable person that the investors were to be deprived of the use of their funds, or the benefit of their investments.  The plaintiffs based their claim against Mr Lane on the fourth category of knowledge in Baden. 

1. The plaintiffs submitted that all that was required was a general understanding of the alleged fraud.  They contended that this court is bound by the test enunciated by Bryson JA in Yeshiva Properties No 1 Pty Ltd v Marshall,[2] where his Honour, referring to the judgment of the High Court in Consul Developments Pty Ltd v DPC Estates Pty Ltd,[3] said:

In the application of Stephen J’s test it is not necessary that the fraudulent scheme or purpose of the fiduciary or trustee should be fully known, or should be understood in any detail at all; the test is complied with if the known facts would communicate to a reasonable person a general understanding that there was a fraud, breach of trust or breach of fiduciary duty.

[2][2005] NSWCA 23, [22] (emphasis added).

[3](1975) 132 CLR 373.

1. The plaintiffs contended that a general understanding of the alleged dishonest and fraudulent design was satisfied by a general understanding of some breach of trust or fiduciary duty.  They argued that their pleading of knowledge in paragraph 47 clearly passed the test in Yeshiva, because, if the alleged facts were proved, Mr Lane had actual knowledge of a breach of trust involving a disbursement of monies for a different purpose.  That, according to the plaintiffs, was the essence of the fraudulent and dishonest design pleaded in paragraphs 22, 30 and 38.  They seemed to contend that, by application of this test, they were relieved of the necessity to establish knowledge of facts that would communicate their fraudulent intention and purpose to Mr Lane.

1. Mr Lane submitted that the plaintiffs must go further and establish his general understanding of the intentional and purposive fraud of the plaintiffs.

1. In my opinion the amendments made to the pleading do not resolve the existing deficiency in the case pleaded against Mr Lane.  There is a material difference between knowledge of facts sufficient to convey a general understanding of a breach of trust, and a general understanding of an intention and purpose to deprive investors of the benefit of their investment.

1. Pleading accessorial liability, based on knowledge of an intentional and purposive fraud, requires care, precision and particularity.  As the New South Wales Court of Appeal pointed out in Yeshiva, precision is required in a pleading of fraud.  Bryson JA said:[4]

Many facts and issues were raised at the Trial and dealt with in cross-examination of the respondent’s principal witness Mr Ross Roxo for which there was little or no previous indication that they were alleged to be important, or were alleged at all, or that they were facts which to a reasonable man told of fraud or breach of fiduciary duty. It is not an appropriate way to conduct an Equity suit to dredge out every fact and circumstance which could be represented as in some way adverse to the defendant, and then sieve through them to piece together a ground of suit; but something very like that was sought to be accomplished in the present case.

It was also necessary to plead in clear terms the breach of fiduciary duty alleged against the Feldmans.  This too was not clearly stated in a manner which could be said to put the proceedings on a basis where the Trial could be fair.  The learned Trial Judge made no ultimate conclusion on this, and in my opinion the appeal can be disposed of without a conclusion on it on my part.

[4][2005] NSWCA 23, [15].

1. These observations of Bryson JA are consistent with those made by the High Court in Farah Constructions v Say-Dee,[5] acknowledging the seriousness of an allegation of knowing assistance, and restating the importance of proper pleadings and particulars to facilitate an assessment of the evidence to the standard required in Briginshaw v Briginshaw.[6]

   [5](2007) 230 CLR 89.

   [6](1938) 60 CLR 336.

1. As noted in previous interlocutory judgments in this proceeding, the pleading is most unusual because the plaintiffs plead, as against themselves, principal liability.  The New South Wales Court of Appeal in Yeshiva had occasion to consider the relationship between the party primarily liable and the party against whom a claim for accessorial liability is made. Although the structure of that case was different, the analysis highlights the conceptual anomaly in the plaintiffs’ case.[7] 

   [7][2005] NSWCA 23, [77].

1. The Victorian Court of Appeal held that the plaintiffs may represent the interests of the investors even though they identify themselves as the perpetrators of the fraud, and thus principally liable.[8]   The Court held that it is unnecessary for the investors to be parties to this proceeding.

   [8][2016] VSCA 157.

1. Notwithstanding the plaintiffs’ capacity to maintain the proceeding on behalf of investors, the conceptual anomaly embedded in their claim requires careful consideration when analysing the nature of the dishonest and fraudulent design, the position of the investors as victims, and the consequential accessorial liability of Mr Lane.  The plaintiffs distinguish their role as perpetrators of an intentional and purposive fraud from the investors, as the objects of their fraud.  The plaintiffs plead their own intention and purpose in transferring funds to LGHA, without attributing such an intention or purpose to Mr Lane. 

1. On the facts alleged against Mr Lane, the transfers might reasonably appear commercially unexceptional in the absence of further facts to convey the plaintiffs’ intention and purpose.  It must be remembered that the plaintiffs characterised LGHA as the group ‘in-house banker’.  Investment by an ‘in-house banker,’ of a pool of funds at its disposal, in other projects, would not necessarily constitute a breach of trust or fiduciary obligation, if undertaken in good faith and for the benefit of the investors.

1. It must be acknowledged that an innocent characterisation of the transaction is not without some difficulty for Mr Lane.  For example, the plaintiffs allege that he knew that no interest was paid by LGHA.  It might be said that, having regard to the joint venture agreements, Mr Lane was put on notice of a possible irregularity.  But the plaintiffs do not advance such a case, as to do so would be to rely on the fifth category of knowledge in Baden.  They rely instead on their intention to deprive the investors as the foundation for the dishonest and fraudulent design.

1. Thus, in the absence of knowledge of the plaintiffs’ intention and purpose, the transfers to LGHA, and investments made by it, may assume the character of relatively neutral events.  I say ‘relatively’, because of the fact that some aspects of the transfers and investments might have been sufficient to put Mr Lane on enquiry.

1. The plaintiffs might have, but do not, allege that Mr Lane knew of facts that, if established at trial, conveyed that investor funds transferred to LGHA would not benefit investors, or would be applied to projects from which they would derive no benefit.  Such facts, if pleaded and established at trial, may be sufficient to support the necessary inference of knowledge of the plaintiffs’ dishonest and fraudulent design.

1. The plaintiffs submitted that they were not required to plead such facts.  I reject that submission for three reasons.  First, the facts as pleaded against Mr Lane are not, if established at trial, sufficient to make it obvious to an honest and reasonable person that the transfers to LGHA and the consequential investments were intended to deprive the investors of the benefit of their investments.  The intentional and purposive deprivation of investors is the crucial element of the plaintiffs’ dishonest and fraudulent design.

1. Second, the character of the transfers by the plaintiffs, absent their intention and purpose, is capable of an innocent commercial explanation, involving the use of an ‘in house banker’.  The plaintiffs must displace this reasonable hypothesis.  

1. Third, the plaintiffs have chosen to introduce into their case an affirmative hypothesis consistent with innocence, by pleading Mr Lane’s explanation for conduct that might otherwise point to a breach of trust or fiduciary duty.  Thus by the structure of their case, and the unusual pleading of Mr Lane’s explanation for the transfers, the plaintiffs have assumed a burden to establish that he was aware of facts which would contradict the claim that the borrowing and payments were made for the benefit of the investors.

1. On 5 April 2017, Mr Lane filed a summons in which he sought an order that the proceeding be dismissed against him pursuant to s 63 of the Civil Procedure Act 2010, rules 23.01, 23.02 and/or 24.01 of the Supreme Court (General Civil Procedure) Rules 2015, or the inherent jurisdiction of the court.

1. Rule 23.01 authorises summary judgment where a claim is scandalous, frivolous or vexatious or an abuse of the process of the court. Rule 23.02 authorises the court to strike out pleadings, and rule 24.01 authorises the dismissal of a proceeding for want of prosecution. Mr Lane’s application is to have the proceeding finally terminated as against him. Thus, his real remedy is under s 63 of the Civil Procedure Act. 

1. While there remains a role for different pathways to dismissal under the rules of court, the statutory regime under the Civil Procedure Act now provides the paramount source of power when the court is in a position to assess the prospects for success. Section 63 of the Civil Procedure Act provides:

Summary judgment if no real prospect of success

(1)Subject to section 64, a court may give summary judgment in any civil proceeding if satisfied that a claim, a defence or a counterclaim or part of the claim, defence or counterclaim, as the case requires, has no real prospect of success.

(2)A court may give summary judgment in any civil proceeding under subsection (1)—

(a)on the application of a plaintiff in a civil proceeding;

(b)on the application of a defendant in a civil proceeding;

(c)on the court’s own motion, if satisfied that it is desirable to summarily dispose of the civil proceeding.

1. The test for summary judgment under s 63 of the Civil Procedure Act was considered by the Court of Appeal in Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd:[9]

Upon the present state of authority:

a)the test for summary judgment under s 63 of the Civil Procedure Act 2010 is whether the respondent to the application for summary judgment has a ‘real’ as opposed to a ‘fanciful’ chance of success;

b)the test is to be applied by reference to its own language and without paraphrase or comparison with the ‘hopeless’ or ‘bound to fail test’ essayed in General Steel;

c)it should be understood, however, that the test is to some degree a more liberal test than the ‘hopeless’ or ‘bound to fail’ test essayed in General Steel and, therefore, permits of the possibility that there might be cases, yet to be identified, in which it appears that, although the respondent’s case is not hopeless or bound to fail, it does not have a real prospect of success;

d)at the same time, it must be borne in mind that the power to terminate proceedings summarily should be exercised with caution and thus should not be exercised unless it is clear that there is no real question to be tried; and that is so regardless of whether the application for summary judgment is made on the basis that the pleadings fail to disclose a reasonable cause of  action (and the defect cannot be cured by amendment) or on the basis that the action is frivolous or vexatious or an abuse of process or where the application is supported by evidence.

[9][2013] VSCA 158, [35].

1. The plaintiffs’ failure to plead the necessary additional facts is, I must assume, based on the absence of any evidence to support such allegations.  The plaintiffs have had numerous opportunities to allege such a case.  The nature and structure of their case requires additional facts to be pleaded from which an honest and reasonable person would conclude that it was the plaintiffs’ intention, when transferring funds to LGHA, or applying those funds to other projects, to dishonestly deprive the investors of the benefit of their investments.  I must conclude that the plaintiffs are unable to do so.  In the absence of such facts pleaded and established at trial, the claim against Mr Lane must fail.  It has no reasonable prospects of success.

1. The plaintiffs’ application for leave to file and serve the proposed further amended statement of claim is refused with costs.  The plaintiffs’ claim against Mr Lane is dismissed with costs.