Zelden v Sewell; Henamast Pty Ltd v Sewell

[2011] NSWCA 56

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Zelden v Sewell Henamast Pty Limited v Sewell [2011] NSWCA 56

Hearing dates:

4 March 2011

Decision date:

04 March 2011

Before:

Campbell JA at [1]
Young JA at [30]

Decision:

Each application dismissed with costs.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Catchwords:

FRAUD, MISREPRESENTATION AND UNDUE INFLUENCE - Remedies and procedure - Pleading - whether it is open for a judge to make a finding of dishonest conduct against a party when fraud has not been specifically pleaded against that party - whether particulars need be given of knowledge

PRACTICE - Procedural fairness - Allegation of dishonesty - requirement can be met by notification in pleadings

APPEAL - Leave to appeal - relevance of consequences of success or failure in an appeal to the individuals concerned - relevance of the quantum of the claim

APPEAL - Leave to appeal - Interference with judge's findings of facts - whether there was sufficient material for inferences to be drawn

EQUITY - remedies - breach of fiduciary duty - account of profits - equitable wrongdoer not permitted to keep the benefit derived from the wrongdoing

Legislation Cited:

Uniform Civil Procedure Rules

Cases Cited:

Carolan v AMF Bowling Pty Limited [1995] NSWCA 69
Clyne v NSW Bar Association (1960) 104 CLR 186
Farah Constructions v Say-Dee Pty Limited (2007) 230 CLR 89
Network Group Pty Ltd v Club of the Clubs Pty Ltd [2008] NSWCA 344; (2008) 69 ACSR 172
Rockcote Enterprises Pty Ltd v F S Architects Pty Ltd [2008] NSWCA 39
Sewell v Zelden [2010] NSWSC 1180

Category:

Principal judgment

Parties:

Boris Zelden (Applicant)
Henamast Pty Limited (Applicant)
Elena Zelden (Applicant)
Phillip Malcolm Sewell (Respondent)

Representation:

Counsel:
D Bennett QC; S Reuben (Boris Zelden)
D E Baran (Henamast Pty Ltd & Elena Zelden)
G Drew (Respondent)
Solicitors:
Zelden Solicitors (Boris Zelden)
Colin Daley Quinn (Henamast Pty Ltd & Elena Zelden)
Ian Williams & Co (Respondent)

File Number(s):

09/287105

 Decision under appeal 

Citation:

Sewell v Zelden [2010] NSWSC 1180

Date of Decision:

2010-10-01 00:00:00

Before:

Rein J

File Number(s):

09/287105

JUDGMENT - Extempore

1. CAMPBELL JA : The Court has before it two related applications for leave to appeal from a judgment of Rein J: Sewell v Zelden[2010] NSWSC 1180.

1. The plaintiff in the court below, who is the respondent to the present application, approached Mr Zelden, a solicitor, in 2005 to act for him concerning the purchase of a home unit in Surry Hills. The respondent had never owned real estate before. Mr Zelden interested him in acquiring an additional property, namely a home unit at Eastwood that was owned by Henamast Pty Limited. That company was one in which Mr Zelden's wife was the sole shareholder.

1. The respondent agreed to purchase the Eastwood unit for $315,000. That price was suggested to him by Mr Zelden, and Mr Zelden told him that the unit was a really good buy. The deposit was only $500. Finance was arranged through a broker suggested by Mr Zelden, and at Mr Zelden's suggestion the finance took the form of an interest only loan rather than a loan requiring repayment of principal and interest. It was only by adopting this method of financing that the respondent could afford to buy a second home unit. He bought the unit without inspecting it, and, on the basis of Mr Zelden's advice that he did not need one, without a Strata report. Unbeknownst to the respondent, the property had been listed for sale with L J Hooker since October 2004 but had not been sold.

1. The judge found that Mr Zelden did not inform the respondent about his wife's connection with the property, did not inform the respondent that he had acted for Henamast on the purchase of the property the previous year, and did not inform him that Henamast had purchased the property a year earlier for $60,000 less than the price at which Mr Zelden indicated that the respondent could purchase it. Nor did he inform the respondent that the proceeds were to be used to pay off a mortgage over the house in which Mr and Mrs Zelden lived.

1. The judge gave a verdict against each of Mr Zelden, Mrs Zelden and Henamast. The verdict against Mr Zelden was on the basis of him having engaged in a breach of his fiduciary duty to his client. The verdict against Mrs Zelden and Henamast was on the basis of knowing assistance in a fraudulent and dishonest breach of fiduciary duty. The judge gave a judgment for $60,000 plus interest against each of them. The total verdict against each was a little less than $91,000. Mr Zelden was ordered to pay the costs of the respondent on an indemnity basis while Mrs Zelden and Henamast were ordered to pay those costs on the ordinary basis.

1. Mr Zelden makes an application for leave to appeal, and Mrs Zelden and Henamast make a separate application. While Mr Zelden's draft notice of appeal contains eighteen grounds, his counsel's submissions in support of the grant of leave identify four separate questions that are said to justify the grant of leave. Two of them relate to matters of liability and the adequacy of the trial process while the other two relate to quantum.

1. The first of them is whether it is open to the judge to make a finding of dishonest conduct against a party when fraud has not been specifically pleaded "against" that party.

1. It is not the law that a defendant is free to ignore parts of a pleading that do not set out the facts by virtue of which the plaintiff contends that that particular defendant is liable: cf Rockcote Enterprises Pty Ltd v F S Architects Pty Ltd[2008] NSWCA 39 at [62]-[63]. It is correct that the portion of the statement of claim that pleaded the case against Mr Zelden did not go beyond alleging a breach of fiduciary duty. However, the portion of the statement of claim that pleaded the case against Mrs Zelden and Henamast stated that certain identified matters comprised a dishonest and fraudulent design on the part of Mr Zelden including, but not limited to, because Mr Zelden did or failed to do these things in particular circumstances referred to in certain identified paragraphs of the statement of claim.

1. The judge expressly rejected a submission that was made to him that the case alleging fraudulent conduct was inadequately articulated. As well as the pleading, he referred to a statement of the respondent's counsel in opening that Mr Zelden's conduct transgressed the ordinary standards of honest behaviour. The judge set out portions of the cross-examination of Mr Zelden. He concluded, " I do not think that Mr Zelden or those advising him could have been in any doubt as to the degree to which his conduct was impugned." In my view, there are insufficient prospects of establishing that this conclusion of the judge, who sat through the trial, is mistaken.

1. In connection with Mr Zelden's challenge to the finding of a dishonest and fraudulent design, Mr Bennett QC for Mr Zelden submits that the dishonesty was not adequately pleaded and particularised. However, there was a specific averment in the pleading that Mr Zelden engaged in a dishonest and fraudulent design. The particulars specifically alleged that Mr Zelden knew that the $315,000 exceeded the market value of the property. The provisions of UCPR 15.4 specifically state that particulars need not be given of knowledge.

1. It is also contended that there was an insufficiency of evidence for the judge's finding of dishonesty. Mr Bennett points out that the sale of the Eastwood unit the previous year was a mortgagee sale, that property values change with the lapse of time, and that while there was a selling agency agreement with L J Hooker in which the agent had estimated a value for the property of $300,000, there was no evidence that Mr Zelden knew of that estimate. However, this is a case where nearly all the relevant matters were within the knowledge of Mr Zelden. In my view, accepting the correctness of this submission of Mr Bennett, there was still sufficient material for an inference to be open that the actions of Mr Zelden did amount to a dishonest course of conduct.

1. Next, it was contended that it was not open to the judge to make a finding that Mr Zelden had knowledge that the sale price of the Eastwood property exceeded its market value at the time of the sale. There was evidence of Mr Zelden knowing the price for which Henamast had purchased the property because he acted for Henamast on that purchase. He dealt with the letting agent of the property after it was purchased and he dealt with a real estate agent on behalf of Henamast concerning listing the property for sale. As well, there is other conduct that the judge itemised, including Mr Zelden falsely representing to the respondent that the owner of the property, with whom Mr Zelden had a conversation, was a male with an Asian name. These are matters that provide, in my view, part of the evidentiary matrix that made it open for the judge to draw the inference that he did.

1. A further contention is that the allegation of dishonesty was not adequately put to Mr Zelden in cross-examination. However, it is well-established that all that is required for procedural fairness is that a party should know the allegations that are made concerning him and have the opportunity of giving his version concerning them. That requirement can be met by means other than cross-examination, including by notification in pleadings.

1. In my view, there are insufficient prospects of success concerning any of these challenges.

1. The second question that Mr Zelden raises is whether the decision in Farah Constructions v Say-Dee Pty Limited(2007) 230 CLR 89 concerning the second limb of Barnes v Addy , requiring there be both a dishonest and fraudulent design of the fiduciary and knowledge of this dishonest and fraudulent design by the third party, as explained in King Network Group Pty Ltd v Club of the Clubs Pty Ltd[2008] NSWCA 344; (2008) 69 ACSR 172, provides a "backdoor method" of leaving it open to a trial judge to make a finding of fraud against the fiduciary in the absence of a specific averment of fraud.

1. In my view, this sets up a false issue. For the purpose of deciding whether Mr Zelden was denied natural justice or was unacquainted with the allegations that would be made concerning him, it is of no importance that the facts that the statement of claim alleged were the basis upon which Mr Zelden should be found liable for breach of fiduciary duty, did not include an allegation of fraud. What matters is that the allegation of fraud or dishonesty was clearly made in the pleading that was served on him.

1. Mr Bennett stresses the importance of the proceedings so far as Mr Zelden is concerned. While of course any finding of dishonesty against a solicitor is important for him, there are some ways in which an appeal is unlikely to alter completely any impact that the first instance proceedings will have had. For instance, nothing that happens on an appeal could alter the historical fact that a judge has disbelieved him in a direct conflict of evidence with the respondent. Further, unlike the situation in which the High Court granted special leave in Clyne v NSW Bar Association(1960) 104 CLR 186 at 205, an appeal in this case would not be on the topic of disciplinary action against a legal practitioner. If it were to be that a complaint that has been made about his conduct should result in disciplinary proceedings in the Administrative Decisions Tribunal, it would be the duty of the Administrative Decisions Tribunal in those proceedings to make up its own mind on the basis of the charge before it, and any evidence and any submissions before it. As well there is, in my view, no special rule that entitles any section of the community, whether they be solicitors or other professionals or company directors, to special treatment concerning the grant of leave to appeal. The consequences of success or failure in an appeal to the individuals concerned can be a legitimate consideration to take into account in deciding whether to grant leave to appeal. But it is not the law that anyone who has been found dishonest should be granted leave to appeal.

1. In light of the other matters that I have mentioned, in my view the importance of the matter to Mr Zelden does not warrant granting him leave to appeal.

1. It is convenient next to deal with the challenges to liability raised by Mrs Zelden and Henamast. The conclusion at which the judge arrived was that either they knew that Mr Zelden was in breach of his fiduciary obligations to the respondent or, if they did not, they wilfully shut their eyes to the obvious, wilfully and recklessly failed to make such enquiries as an honest and reasonable person would make, or had knowledge of the circumstances which would indicate the facts to an honest and reasonable person.

1. One substantial matter that Henamast and Mrs Zelden contend warrants a grant of leave to appeal is that there was insufficient basis for the judge to reach this conclusion. So far as Henamast was concerned, the basis available for the judge's findings included a finding that Mr Zelden was Henamast's agent at the time of negotiation of the purchase price at least. Other matters included that Mrs Zelden knew that Mr Zelden was acting for the respondent, knew the differential between the price at which the property was purchased and the price at which it was to be sold to the respondent, knew that she and her husband were beneficiaries of the sale to the respondent, and knew that Mr Zelden discussed with her requisitions on behalf of the respondent.

1. Mrs Zelden did not give evidence, and thus the judge was not provided with such explanation as she might have been able to give of why it was that her maiden surname rather than her married surname was used in connection with the sale, and why it was that the contract contained a false or misleading mailing address for Henamast. In my view, the challenges of Mrs Zelden and Henamast to the findings of liability have insufficient prospects of success.

1. It is of some importance to reiterate the principles that were stated in Carolan v AMF Bowling Pty Limited[1995] NSWCA 69, where Sheller JA said that an applicant for leave must demonstrate something more than that the trial judge was arguably wrong in the conclusion arrived at. Cole JA relied on a principle that where small claims are involved, it is important that there be early finality in determination of litigation, otherwise the costs that will be involved are likely to swamp the money sum involved in the dispute. Those principles are ones that, in my view, apply in the present case.

1. Both applications also challenge the remedy that the judge granted. About 83% of the net proceeds of sale of the Eastwood unit were paid into the joint bank account of Mr and Mrs Zelden, and the remaining 17% was credited to a bank account of Henamast which Mr and Mrs Zelden had guaranteed. Those payments had the effect that the home of Mr and Mrs Zelden was left unencumbered. Mr and Mrs Zelden owned the home as joint tenants as to 70%, with Henamast owning the remaining 30% as a tenant in common. The principle on which the judge relied in granting a remedy was the uncontroversial principle that an equitable wrongdoer should not be permitted to keep the benefit derived from the wrongdoing. The judge held that all three of them were liable to repay $60,000.

1. The complaints that are made about the remedy the judge granted relate to the manner in which he calculated the benefit.

1. One complaint is that the judge ignored the fact that the value of the property had increased over time. To some extent this complaint ignores the fact that this species of equitable remedy is not designed to compensate for loss but rather to ensure that a defendant does not gain by a breach of equitable obligation. It is submitted that the judge should have measured the benefit by the difference between the sale price and the market value of the property at the time of sale, which amounts to $35,000, rather than the difference between the price of acquisition and the sale price, which was $60,000. The difference of $25,000 does not warrant the grant of leave to appeal, particularly when it is shared between the three applicants.

1. There is also a complaint about the manner in which the judge dealt with liability for taxes and duties that would arise in connection with the sale. The amount that depends on that point is comparatively small. Overall, there is no clear question of principle arising concerning the judge's decision on quantum.

1. In this matter, the judge was applying the uncontroversial principle that I have mentioned to an unusual fact situation where all three respondents had benefited, although some of them indirectly, from the discharge of the debts that were owed to the bank. He recognised the basic equitable principle that a remedy has to be tailored by an exercise of judicial discretion to the facts of the instant case. After all the rights of contribution are worked out, the verdict, even with interest, is only a little more than $30,000 against each respondent.

1. In circumstances where leave is not granted concerning liability, it is not appropriate to grant leave concerning quantum alone.

1. In my view, each application should be dismissed with costs.

1. YOUNG JA : I agree.

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Decision last updated: 17 March 2011