Re Chapman, J. & anor Ex Parte Westpac Banking Corporation Ltd

[1992] FCA 576

Re: JOHN CHAPMAN and NICHOLAS JOSEPH GARGARO
Ex Parte: WESTPAC BANKING CORPORATION LIMITED
No. V N3887 of 1991
FED No. 576
Bankruptcy - Legal Practitioners

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Heerey J.(1)

CATCHWORDS

Bankruptcy - bankruptcy notice - application to set aside pending - application by debtor to restrain firm of solicitors from acting against him - whether solicitor in possession of information of substantial materiality to bankruptcy proceedings.

Legal Practitioners - bankruptcy proceedings - application by debtor to restrain firm of solicitors from acting against him - debtor previously partner in firm of accountants - work done for partnership by solicitor - dissolution of partnership - whether solicitor retained by debtor - whether solicitor in possession of confidential information - whether solicitor in possession of information of substantial materiality to bankruptcy proceedings.

D and J Constructions Pty Ltd v Head (1987) 9 NSWR 118

Mallesons Stephen Jaques v KPMG Peat Marwick (1991) WAR 357

Murray v Macquarie Bank Ltd (1991) 105 ALR 612

National Mutual Holdings Pty Ltd v The Sentry Corporation (1989) 22 FCR 209

Rakusen v Ellis, Munday and Clarke (1912) 1 Ch 831

HEARING

MELBOURNE

#DATE 28:7:1992

Counsel for the secondnamed
judgment debtor Mr J R Dixon

Solicitors for the secondnamed
judgment debtor: H S Wise Gershov and Co

Counsel for Clayton Utz: Mr T J North

ORDER

The Court orders that:

The application be dismissed.

1. The time for the secondnamed debtor to file and serve any material be extended to Friday 31 July 1992. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is an application by Nicholas Joseph Gargaro to restrain the firm of solicitors Clayton Utz from continuing to act in bankruptcy proceedings against him.

1. The bankruptcy proceedings are founded on a judgment obtained in the Supreme Court of Victoria on 16 March 1990 when Westpac Banking Corporation Limited (Westpac) obtained judgment against a company MEH Limited (MEH) and, amongst others, Mr Gargaro for the amount of $614,935.42 together with interest.

2. A bankruptcy notice was issued on 19 December 1991 and after an order for substituted service was obtained it was deemed to have been served on Mr Gargaro on 5 June 1992. The time for compliance with the bankruptcy notice has been extended and on 13 August next this Court will hear an application by Mr Gargaro to set aside the bankruptcy notice. The basis of that application is an allegation that, subsequent to the judgment, there was a compromise reached between Mr Gargaro and Westpac and that the attempted enforcement of the judgment through bankruptcy proceedings is a breach of that compromise.

3. The present application comes about because of work that a partner of Clayton Utz, Mr David Fagan, had done in connection with an accountancy firm of which Mr Gargaro was a member. This involvement arose as a result of Mr Fagan's relationship with one of the partners, Mr Michael Fotinelis. Mr Fotinelis and Mr Fagan are personal friends and Mr Fagan has his personal accountancy work done through Mr Fotinelis' firm. Mr Fotinelis and the third member of the firm, Mr George Demetriou, have had no connection with MEH and were not involved in the litigation which resulted in the judgment against Mr Gargaro.

4. In June 1987, Mr Fotinelis instructed Mr Fagan to act in relation to the dissolution of an existing partnership and the formation of a new partnership between Mr Fotinelis, Mr Gargaro and Mr Demetriou. Mr Fagan attended an initial meeting of the three partners at which the other two each had a solicitor present. Mr Fagan prepared a draft partnership deed and obtained instructions from the three partners as to amendments. He finally sent an engrossed deed. Clayton Utz charged fees which were subsequently paid by the partnership. Mr Fagan says that he was later advised by Mr Fotinelis that the proposed partnership deed would not be executed and the partners would instead simply rely upon the terms of heads of agreement which Mr Fagan had prepared.

5. Mr Fagan acted for the firm in 1989 and 1990 in relation to a dispute with a software supplier. Clayton Utz charged fees for that work. That matter seems to have been a straight forward commercial dispute and did not involve the receipt of any confidential information in relation to the personal affairs of the partners.

6. The only other connection that Mr Fagan had with the affairs of the firm commenced in late August 1991 when he was instructed by Messrs Fotinelis and Demetriou to act on their behalf in relation to a dispute with Mr Gargaro concerning his partnership capital account. This complaint arose from Mr Gargaro depositing fees received from MEH into the partnership bank account and then withdrawing those fees, allegedly in contravention of the agreed arrangements for salary and drawings.

7. On the instructions of Messrs Fotinelis and Demetriou, Mr Fagan obtained a report from Richard Judson and Company, a firm of chartered accountants. The report, which was dated 2 September 1991, was in evidence. It was addressed to Messrs Demetriou and Fotinelis and a covering letter states that the report is "furnished solely for the use and information of G Demetriou and M Fotinelis".

8. The report concluded that the capital account of Mr Gargaro and the partnership was overdrawn in an amount of $147,864.

9. Throughout the rest of 1991 there was a continuing dispute between Messrs Fotinelis and Demetriou on the one hand and Mr Gargaro on the other concerning his position in the firm and, in particular, his capital account. I find that Mr Fagan was throughout this period acting for Messrs Fotinelis and Demetriou and not for Mr Gargaro. Part of the services Mr Fagan provided was the drafting of letters to be sent by Messrs Fotinelis and Demetriou to Mr Gargaro. At a relatively early stage in October 1991, Mr Gargaro raised with Mr Demetriou his suspicion that Mr Fagan was preparing the letters, which Mr Demetriou admitted was the case.

10. Finally, in late December 1991 Messrs Fotinelis, Demetriou and Gargaro reached an accommodation as to the basis upon which their partnership would be dissolved. There was some discussion between them about whether a solicitor should be retained to prepare a deed of dissolution and, if so, who that solicitor should be. Mr John Chapman, who had previously acted for Mr Gargaro, was suggested but he was apparently occupied with other matters. According to Mr Demetriou's evidence, which I accept, Mr Gargaro said that he wanted Mr Chapman to check the document because Mr Fagan was acting for the other two. The brother of Mr Demetriou, a solicitor at Middletons, was mentioned but he was unable to do the work. Finally it was agreed that Mr Fagan would be asked to do the work. There was an expectation, which turned out to be justified, that Mr Fagan would render no bill. I should add that he had not charged Messrs Fotinelis and Demetriou for the work he had done from August onwards in relation to the dispute with Mr Gargaro.

11. Mr Fagan prepared a dissolution deed. It was sent to the office of the firm. Mr Fagan played no part in further negotiations between the three partners. On 8 January 1992 he received three phone calls, the first of those from Mr Fotinelis advising of certain amendments which Mr Gargaro had requested to the draft. The second was again from Mr Fotinelis but with Mr Gargaro present on a speaker phone. Mr Gargaro himself raised some amendments he wanted and there was a third call from Mr Fotinelis in which he advised that the discussion had concluded and they would sign the document.

12. I find that at the time of the dissolution of the partnership and the signing of the deed Mr Fagan was retained only by Mr Fotinelis and Mr Demetriou and not by Mr Gargaro. As to the preparation of the partnership deed I think, in the circumstances, what happened was no more than disputing parties agreeing that one solicitor should prepare a draft. This Mr Fagan did and Mr Gargaro, it would appear after getting his own advice, made comments in relation to that draft. He certainly never sought or received any advice from Mr Fagan.

13. The principle on which courts will restrain solicitors from acting against a former client were for many years found in the decision of the Court of Appeal in Rakusen v Ellis, Munday and Clarke (1912) 1 Ch 831 and in particular in the judgment of the Master of the Rolls, Sir H Cozens-Hardy, where his Lordship said (at 835:)
    

"... in my view we must treat each of these cases, not as a matter of form, not as a matter to be decided on the mere proof of a former acting for a client, but as a matter of substance, before we allow the special jurisdiction over solicitors to be invoked, we must be satisfied that real mischief and real prejudice will in all human probability result if the solicitor is allowed to act."

Similarly, Fletcher Moulton L.J. said at (841):

"As a general rule the Court will not interfere unless there be a case where mischief is rightly anticipated. I do not say that it is necessary to prove that there will be mischief, because that is a thing which you cannot prove, but where there is such a probability of mischief that the Court feels that, in its duty as holding the balance between the high standard of behaviour which it requires of its officers and the practical necessities of life, it ought to interfere and say that a solicitor shall not act."

Counsel for Mr Gargaro argued, correctly in my view, that recent Australian authority discloses a departure from the Rakusen test and the adoption of a less strict approach. In particular, in National Mutual Holdings Pty Ltd v The Sentry Corporation (1989) 22 FCR 209 at 228-230, Gummow J. criticised Rakusen. A similar view was taken by Spender J. in Murray v Macquarie Bank Ltd (1991) 105 ALR 612. There are rather lengthy passages in both judgments which I will not repeat. I simply say that I respectfully agree with both judgments. Finally, in Mallesons Stephen Jaques v KPMG Peat Marwick (1991) WAR 357 Ipp J. of the West Australian Supreme Court propounded the following test:

"... if, by a solicitor acting for a new client, there is a real and sensible possibility that his interest in advancing the case of the new client might conflict with this duty to keep information given to him by a former client confidential, or to refrain from using that information to the detriment of the former client, then an injunction will lie (to prevent the solicitor acting for the new client)."

Both counsel before me agreed that this was an appropriate test to follow and I do so.

1. Finally, I should add that one of the issues which may arise in such cases, and certainly does in the present case, is whether there was ever a retainer of the solicitor at all. The position if the Court finds there was no such retainer is simply whether the ordinary basis for the protection of confidential information is made out. See D and J Constructions Pty Ltd v Head (1987) 9 NSWR 118 at 123-124.

2. Turning into the facts of the present case, as will have been apparent from what I have said earlier I find that there never was a relevant retainer by Mr Gargaro of Mr Fagan or the firm of Clayton Utz. Apart from the dispute about the software, which is not suggested to be relevant for present purposes, I do not think Mr Fagan acted for Mr Gargaro at all either in the formation or the dissolution of the partnership. In particular, in relation to the dissolution of the partnership, I find that Clayton Utz acted for parties who were in dispute with Mr Gargaro and in relation to that very dispute.

3. The question then arises as to what information was communicated by Mr Gargaro to Mr Fagan and whether that was communicated in terms which imposed an obligation of confidentiality.

4. It seems to me in the circumstances of this case that there was no confidential information which came into the possession of Mr Fagan or Clayton Utz. Leaving aside for the moment the Judson Report, Mr Fagan denies that he received any confidential information from or in relation to Mr Gargaro and Mr Gargaro does not suggest that there was any such information. Moreover, the circumstances of the case, to my mind, make it inherently unlikely that there was any confidential information provided.

5. The reality seems to be that because of the personal friendship between Mr Fagan and Mr Fotinelis, Mr Fagan, a partner in a large city commercial firm did occasional work for Mr Fotinelis which related to the formation and dissolution of the partnership and perhaps the occasional commercial dispute between the partnership and some outsider. Given the relationship that existed between Mr Fagan and Mr Fotinelis, insofar as there was confidential information, it passed from Mr Fotinelis to Mr Fagan in relation to the affairs of Mr Fotinelis only and I might add, Mr Demetriou, whose interests came to coincide with those of Mr Fotinelis.

6. The Judson Report was clearly not provided for Mr Gargaro. That conclusion is not altered by the fact that subsequently Messrs Fotinelis and Demetriou showed him a copy of it; nor is it altered by the fact that payment for the report was apparently subsequently made out of partnership funds. Counsel for Mr Gargaro really appeared to accept that, at the time of its coming into existence, the Judson Report was not information provided for his client. But he argued that by the time of the completion of the dissolution, the relationship of solicitor and client had been established between Mr Fagan and Mr Gargaro and therefore that altered the basis on which Mr Fagan held the Judson Report. The immediate answer to this argument is, as I have said, I do not think that Mr Fagan ever became the solicitor for Mr Gargaro but in any event I do not see how Mr Fagan could, as counsel for Clayton Utz put it, "inherit a confidence", particularly in circumstances where the whole purpose of the Judson Report was to advise people who were in dispute with Mr Gargaro. It is clear on the evidence that Mr Gargaro never accepted the views of the Judson Report, so no question arises of an admission against interest.

7. I conclude therefore that I am not satisfied there is a real and sensible possibility that Mr Fagan or Clayton Utz have come into possession of information which is confidential to Mr Gargaro.

8. Counsel for Mr Gargaro referred to passages in Mallesons in which Ipp J. considered two matters which arose out of the facts of that case. The first was the intimidating and unsettling effect which might occur to a client knowing that he was being prosecuted by the very firm of solicitors with whom he had previously consulted to advise him on several of the very issues which form the subject matter of the prosecution; see Mallesons at 368. Also his Honour held, on the facts of that case, that there was a public interest element in that the appearance of justice being done which would not survive any general impression that a firm of solicitors could readily change sides to assist in a criminal prosecution, even though they had previously advised the accused defendant of many of the issues which were the subject matter of the prosecution. His Honour thought that the countenancing by the courts of such a volte face would give rise to such an impression; see Mallesons at 374.

9. Counsel for Mr Gargaro fairly conceded that the facts of the Mallesons case were much stronger, and I agree. The issue in Mr Gargaro's application to set aside the bankruptcy notice is essentially whether an agreement, alleged to be partly oral, was reached between Westpac and the debtors, and also whether there are any variations of that agreement. It was not put to me that there was any way that matters in the Judson report could directly impinge on the issues in that application. At the most, it was suggested that they could be relevant as to credit. But in the circumstances where there has been a judgment outstanding for over two years against Mr Gargaro for a substantial amount and the only real issue is whether a compromise agreement has been breached, there would seem to be realistically not much doubt that Mr Gargaro has had solvency problems.

10. I therefore think that the only concrete piece of information which has been identified as being in the possession of Clayton Utz is not shown to be of any substantial materiality at all in the bankruptcy proceedings. I find that Mr Gargaro has not made out a sufficient case to warrant the restraint by injunction of Clayton Utz for continuing to act for Westpac, and the application will be dismissed.

11. As to costs, they would of course normally follow the event, but this is a case where, as the recent cases which I have mentioned indicate, the Court is particularly sensitive to avoid the reality or the appearance of any risk that a client might suffer prejudice when involved in litigation. I am satisfied that the order sought should not be made. I do not think that it was entirely unreasonable for Mr Gargaro to bring this application and I think his concern was genuine. It was not suggested that his application was brought as a tactical measure to gain some disruption or disadvantage to Westpac's case.

12. Of course, at the same time, I do not by that suggest any criticism of Clayton Utz or Mr Fagan, who I do not find have acted improperly in any way. But I think in all the circumstances I shall make no order as to costs.

13. I will direct that the time for the debtor to file and serve any material be extended to Friday 31 July 1992.