Allsop Investments Pty Ltd v Jerkovic & Ors

Does the evidence otherwise show a risk of dissipation of assets?

The plaintiff says that it can already be seen that on a final hearing its filed evidence demonstrates a strong case of the fraudulent misapplication of trust assets, from which on BTR principles a risk of dissipation of assets by the defendants should readily be inferred.
But as will be seen below the plaintiff is not yet capable of pleading this case in a satisfactory form, which itself is reason to doubt the case is as strong as the plaintiff says. But apart from that, the evidence of fraud and dishonesty against the first and second defendants is hardly convincing. The plaintiff's evidence demonstrates several breaches of trust by the third defendant, through the actions of the first and second defendants. These breaches of trust include the MUT's failure to account to the plaintiffs and the MUT's mixture of trust assets with the Jerkovics' personal assets.
But whether those breaches are also fraudulent is an entirely different question. The present analysis is not assisted by Mr Loupos alleging widespread and generalised fraud in the conduct of the defendants. Proof of fraud is not the main issue here. The relevant issue, as defined by BTR, is whether the Jerkovics' conduct justifies the conclusion that there is a danger that they would dispose of assets to defeat any judgment against them; and then whether that danger was sufficiently substantiated to warrant the grant of an injunction. But that danger may more readily be established, if there is evidence that the defendants have engaged in a fraudulent scheme.
Some further limited examination of the evidence is required in order to assess these matters. As this is an interlocutory application, this analysis is necessarily not comprehensive despite the voluminous amounts of evidence contested on this application. But rather, it focuses only upon some of the main issues debated between the parties.
In his main submissions, Mr Loupos sought to contend that the first and second defendants were guilty of fraudulent conduct in merging the operations of the MUT with GMJ. These reasons will refer to GMJ and the Riverwood franchise because the two do not need to be distinguished for present purposes. By taking the Court through parts of Exhibit A (the plaintiff's bundle of documents), Mr Loupos was able to show that there had been a substantial merger of the Mortdale and Riverwood businesses commencing in July 2015. Indeed, as will be seen, this merger is ultimately not the subject of controversy in these proceedings.
Mr Loupos can show that in FY15 LJ Hooker Riverwood was earning approximately $20,000 per month on account of the rental management income of the business. But from 1 July 2015, and throughout FY16 and the financial years thereafter, the Riverwood franchise income from managing rental properties effectively doubles from about $20,000 to about $40,000. The plaintiff submits that what has happened is that the Jerkovics commenced to pay the rental income from the MUT into the account of their Riverwood business conducted through GMJ. The figures are taken from the returns provided by the Riverwood and Mortdale LJ Hooker franchises to LJ Hooker head office, documents which could be expected to be reasonably accurate. The jump in the average monthly rental income figure is less consistent with organic growth in the Riverwood business than the circumstances to which the plaintiff points, namely the reallocation of income from the Mortdale office to the Riverwood office. This is further confirmed by the franchisee reports to LJ Hooker for the Mortdale office for FY16 and FY17 which show amounts of monthly income for less than $5,000 being declared for the Mortdale office.
These figures are consistent with the profit and loss statements and tax returns for the MUT. The profit and loss statement for FY15 declares the MUT's property management commission as $213,109, which is approximately consistent with income of about $20,000 per month. But the MUT's profit and loss statement for FY16 shows that property management commission dropped to $1,545. It seems unlikely that this income disappeared overnight. The inference is available that it was being booked to other accounts.
Based on this reallocation of property management income, the plaintiff alleges misapplication of a total of $852,000 of income covering the four years between FY16 and FY19. This figure is reached by multiplying an annual loss of income of $213,000 over four years. On top of that, Mr Loupos claims that there has been a misapplication, not just of property management fees but of sales commission as well. Sales commission is the other major component of the income in a real estate agency, although only the former income was generated from the rent roll.
The profit loss statement for the MUT shows that sales commission of $479,050 was earned for FY15, a figure that drops to only $28,920 for FY16. This drop is consistent with the diversion of sales commission from the MUT to GMJ or the Jerkovics' Riverwood business commencing in FY16. There is a corresponding increase in GMJ's sales commission from FY15 ($210,326) to FY16 ($534,511). This lift in sales commission is consistent with the MUT's sales commission being absorbed into the business of GMJ at the Riverwood LJ Hooker office. On the basis of evidence such as this, Mr Loupos submits that this is "fraud on a massive scale" and that these documents show "the extent of fraud that has happened here". Mr Loupos submits that this is a simple case of misappropriation of trust assets.
Mr Loupos submits that only two conceivable explanations exist for these changes: either GMJ purchased a rent roll from the MUT, or GMJ misappropriated MUT's rent roll. He submits there is no evidence of a rent roll being purchased, so the correct inference is that the MUT's business has been deliberately and dishonestly diverted to GMJ by the Jerkovics.
Some of the most fundamental duties of a trustee are to preserve the trust assets and to give the beneficiary an account of the trustee's management of those trust assets, when called upon to do so. Prima facie, the figures to which Mr Loupos points show that the MUT's trust assets and trust income were not kept separate from those of the Jerkovics and were deliberately mixed with the property of GMJ and the business managed from the Riverwood LJ Hooker office since 1 July 2015.
Mrs Jerkovic's evidence gives an explanation for the accounting changes that occurred on 1 July 2015. She explains that there was a fire at the Mortdale premises in August 2013 and that a large number of hard copy documents were destroyed. Following the fire, the business premises of the Mortdale LJ Hooker were moved to the premises in Riverwood, conducted by GMJ. The MUT did not trade from the Mortdale premises until those offices were refurbished by about April 2014. But Mrs Jerkovic says a large number of documents relating to the MUT were lost in the fire and the need to have soft copy backups of those documents was not apparent until the fire occurred. But Mrs Jerkovic says that the whole time during which the MUT conducted the Mortdale franchise until 30 June 2013, the financial records for the MUT and the Riverwood franchise were kept separately.
She then goes on to explain in paragraphs [63] - [66] the decisions that were made about the conduct of the Mortdale franchise and the Riverwood franchise after 1 July 2015; events which involve a degree of merger between the two. As she explains herself, this merger was necessary because of the unviability of the Mortdale office business: "63. The usual requirement by LJ Hooker Head Office was that each franchise have a minimum gross income requirement. The Mortdale Trust performed poorly. In about 2014 LJ Hooker Head Office wrote to Mortdale Trust to the effect: "Due to poor performance the franchise of LJ Hooker Mortdale is being reviewed." In my view the business of Mortdale Trust was not viable and had been making substantial losses. In order to maintain the business income of Mortdale Trust in order that LJ Hooker would not terminate Mortdale Trust franchise, Joe diverted listings in Riverwood which would have otherwise been for Riverwood, to Mortdale Trust. By this the business of Mortdale Trust was being artificially increased. I have summarised the commissions from the commission returns provided by Mortdale Trust to LJ Hooker and forming pages X - Y thereof is a copy the summary which set out in respective columns the month, the commissions from sales (under the heading franchise sales) and income from rental properties (under Franchise Returns PIM, PIM standing for Property Investment Management). At the end of each year I have set out the amount of income derived from properties which were properties not within Mortdale but which Joe allocated to Mortdale Trust. 64. However, from 1 July 2015 both businesses used the Riverwood Estates Pty Ltd data base and as well as its Trust banking account in which to deposit rents received from tenants on behalf of landlords and to pay out to respective landlords the rents less the respective commissions of Riverwood Estate Pty Ltd and Mortdale Trust, respectively. 65. Also, from 1 July 2015 the income and expenses of the Mortdale Trust were recorded in the computer accounting system conducted by Riverwood Estate Pty Ltd. I made frequent entries to the computer accounting system or I supervised entries being made and the expenses and income relating to the Mortdale Trust were made under a specific job code, being Job Code 3. The financial affairs of Mortdale Trust and Riverwood Estate Pty Ltd were kept distinct by the use of Job Code 3. If any property was listed by an employee who was employed by Mortdale Trust immediately after 1 July 2015 then that property was allocated to Mortdale Trust by using Job Code 3 and the commissions derived from it allocated to Mortdale Trust. 66. Also, from 1 July 2015 the businesses of both the Riverwood franchise and Mortdale franchise were conducted as "L. J. Hooker Riverwood/Mortdale". I had concluded by at this time that Mortdale was not viable, so Riverwood Estates Pty Limited paid from its bank account the expenses of the Mortdale Trust account and all income of Mortdale Trust deposited into that bank account; although the transactions for Mortdale Trust were recorded in the financial records separately, as aforesaid."
Several things may be said about this explanation. First, if Job Code 3 was designed to keep the affairs of the MUT separate from those of the Riverwood franchise, the use of Job Code 3 has not been demonstrably successful so far. It has not allowed Mr Vella to separate the MUT from the operations of the Riverwood franchise very easily. It is quite clear from Mr Vella's letter to the Court of 7 May 2021 (particularly paragraphs 20 to 24) that he is struggling to make sense of the MUT's accounting systems and to allocate income and expenditure between the MUT and the Riverwood franchise with certainty. Whatever the Job Code 3 system was, it did not enable Mr Vella to quickly pick up which income and assets belonged to the MUT and which belonged to the Riverwood franchise conducted by the Jerkovics.
The second observation about Mrs Jerkovic's explanation is that although it is presently untested by cross-examination, it represents a plausible explanation for what was done on 1 July 2015, which is not consistent with the case of fraudulent misappropriation being made by the plaintiff. And indeed, Mrs Jerkovic's explanation, if accepted, would provide a basis to reject an inference of fraud. Thus, this is not the easy case that the plaintiff sought to propound for a freezing order, where there is a strong inference that fraudulent misappropriation of trust assets occurred.
Other factors also tend to displace the inference of fraud. It is unnecessary to go into the detailed accounting put before the Court, but there is evidence of regular money flows from GMJ and the Jerkovics back into the business which they say was the continued business of the MUT. Although the Jerkovics did not inform Mr Allsop as to what they were doing, and although they did not authorise the 1 July 2015 change with resolutions of the MUT, they took one single step to merge the MUT's business with that of the Riverwood franchise and did not obviously attempt, on the available evidence so far, to further remove the business from the reach of the MUT or the plaintiff. They say they continued to operate the MUT as a kind of subset of a larger composite business being run out of Riverwood and the documents are broadly consistent with that explanation. Thus, the common badges of fraudulent concealment and multiple steps to hide assets are not present.
Rather, the picture here is rather of an ill-advised, poorly executed decision to merge the MUT with the Riverwood franchise in a structure which was persisted in and then drifted into a thorough mixture of the Jerkovics' private affairs with the MUT. This reached the point where trying to unravel the two now involves an immense amount of accounting and legal time, all of which could have been avoided had the two been kept separate. The costs of this mixture is no better exemplified than in the contest that has taken place about expenditure allegedly on behalf of the MUT that has apparently taken place through the personal credit cards maintained by the Jerkovics.
It can be accepted for the sake of argument that the Jerkovics did not want to apply for separate finance for the MUT business, because they did not think that they would be able to successfully win finance approval and that they therefore turned to credit cards to fund the MUT's ongoing business operations. But they did not use separate credit cards solely devoted to the MUT's business. They used their own personal credit cards interspersing entries for personal expenditures such as school fees and household items with the MUT business expenditure.
The fire damage at the Mortdale premises was rectified by 1 July 2015. There is no real warrant for conducting the MUT's business after that date by mixing up the Jerkovics' private affairs with those of the MUT in this way.
What should have happened on 1 July 2015 is quite different from what did happen. As a trustee estate administering the MUT, appreciating that the MUT appeared to be insolvent, it should have called a meeting of unit holders, including Mr Allsop (who then held 10%) to propose the winding up of the trust, or the injection of funds into the trust by clear and transparent means. If the trust were to be wound up, the rent roll and other business of the MUT could have been sold to the Jerkovics or to a third party and the proceeds of sale distributed to trust members, including the plaintiff.
But there is no evidence that any such meeting was held, or that Mr Allsop or the plaintiff was consulted about any of the decision-making preceding the forced merger with the Riverwood franchise. There is no evidence that he was asked to consent to this course. But the Court is not making final findings about this matter in this interlocutory judgment.
The question here for determination is whether these facts justify the conclusion that there is a danger that the Jerkovics would dispose of assets in order to defeat any judgment that may be obtained against them and that such danger is sufficiently substantial to warrant the granting of an injunction. In my view, a case is well maintainable at final hearing that the Jerkovics, who were in control of the MUT and its trustee Estate, persistently engaged in breaches of fundamental trust duties to the beneficiary, the plaintiff, without consulting it or seeking its consent as a unit holder, and without explaining to him or accounting to the plaintiff for what they had done. This persistent conduct behind the plaintiff's back grounds an inference that the Jerkovics are prepared to deal with trust assets over the long term in a highhanded fashion without regard to the interests of beneficiaries of the MUT, such as the plaintiff. In my view, such conduct must have been recognised in disregard of the beneficiaries' rights over a long period. That conscious disregard for the beneficiaries has predictably led to great expense in ascertaining what are trust assets. This course of conduct justifies the conclusion that there is a danger that the Jerkovics would dispose of assets in order to defeat a judgment which may be obtained against them and that such a danger is sufficiently substantial to warrant the grant of a freezing order. The Court will extend the existing orders.
Because of its conclusion, it is not necessary for the Court to consider the arguments that were advanced arising out of the application of the proceeds of sale of the MUT's rent roll to the Noonan interests. Nor is it necessary to enter further into the various debates about particular entries in the accounts about employees, about mortgage, and about other alleged unauthorised expenditure by the Jerkovics with MUT funds.
The Court will hear the parties on costs. But ordinarily, where a freezing order has been successfully applied for, as it has here, the Court will make an order that the costs of the application be the successful party's costs in the cause. So much has had to be decided at this stage of the proceedings on the basis of untested and conflicting evidence, that in my view (subject to hearing from the parties), whoever is ultimately successful in these proceedings should have their costs of this application but not otherwise.
I would finally note that at various times during argument Mr Loupos expressed the relief that he was seeking as being in terms of the provision of security in the sum of $180,000 for the plaintiff's claim. He talked of "setting aside, this sum from the proceeds of sale and keeping it in a separate account for the benefit of the plaintiff", should the plaintiff be successful in this action. The purpose of asset preservation orders is not to create security for the plaintiff but rather to restrain the defendant from disposing of specific assets until after judgment, and thereby to frustrate the processes of the court by depriving the plaintiff of the fruits of any judgment obtained in the action: Stirling at 625 per Deane J. But it is a rare case that such an order would require the defendant to deliver assets to a named person or even to the court: Stirling at 625 per Deane J. None of the features of this case would justify the making of such order. This is not a case where such an order would be warranted.

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Cases Cited (16)

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