Anthony Magafas & Anor v Peter Carantinos & Ors

Baden Delvaux and Lecuit v Societe General pour Favoriser le Developpement [1983] BCLC 325 Barnes v Addy (1874) LR 9 Ch App 244 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 CASES CITED : Fennell v Supervision and Engineering Services Holdings Pty Ltd (1988) 47 SASR 6 Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (No 2) [2001] NSWSC 6 Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16 Montagu's Settlement Trusts, Re [1987] Ch 264 Sargent v ASL Developments Ltd; Turnbull v ASL Developments Ltd (1974) 131 CLR 634 Schipp v Cameron, [Unreported, Supreme Court of New South Wales, Einstein J, 13 August 1998 [revised on 12 October 1998],

Anthony Magafas (First Plaintiff) Pac-Com Pty Limited (Second Plaintiff) PARTIES : Peter Carantinos (First Defendant) Fotini Carantinos (Second Defendant) Artesian Pty Limited (Third Defendant)

COUNSEL : Mr T Alexis SC, Mr S Golledge (Plaintiffs) Mr J Kelly SC, Mr A Bowen (Defendants)

SOLICITORS : Rockliffs (Plaintiffs) Munro Lawyers (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2670/06 Anthony Magafas & Anor v Peter Carantinos & Others JUDGMENT The remaining issues 1 Following the delivery of the reserved judgment on 15 May 2007 the parties have engaged in a continuance of the rigorous manner in which the proceedings had always been fought. The short judgment of 20 June 2007 made the point that following the decision of the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 ('Say-Dee'), the Court gave leave to permit the reserved judgment to be reopened in so far as the decision of the High Court could be said to affect the approach taken in the principal judgment at paragraphs 204 and following, dealing with the position of the second defendant, Mrs Carantinos. 2 Extensive submissions have been received on a number of occasions from both parties. Additional evidence was adduced in documentary form - cf Exhibit 16/7/07. 3 It is common ground that in Say-Dee the High Court held that even if Mr Elias had been acting as the agent for his wife and daughters and they had received property [for the purpose of the first limb of Barnes v Addy (1874) LR 9 Ch App 244], the Court of Appeal was wrong to impute the knowledge of Mr Elias to his wife and daughters for the purpose of establishing recipient liability [123]-[129]. Clearly the High Court at [130]-[131] rejected the proposition which had found favour in the Court of Appeal, namely that notice of the existence of the trust and of the facts constituting a breach were not essential conditions for the imposition of recipient liability. 4 That notwithstanding, the plaintiffs have correctly contended that the High Court judgment does not alter the law as to how notice is established for the purposes of recipient liability under the first limb of Barnes v Addy. The plaintiffs have contended [and the defendants have accepted] that a principal can be fixed with knowledge "gained by the agent in the course of the agency" so that the knowledge of the agent is treated as "imputed actual" knowledge of the principal: Sargent v ASL Developments Ltd; Turnbull v ASL Developments Ltd (1974) 131 CLR 634 and Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16. 5 The plaintiffs' contention has been that those principles did not apply in Say-Dee because the High Court found that "Mr Elias (the defaulting trustee) was not the agent of Mrs Elias and her daughters or that the latter had assigned or abdicated to the former, the task of investigating and reporting on the transaction which constituted the breach of trust": citing Say-Dee at [124]-[126]. However that is not what the High Court found. The Court at [115] rejected the Court of Appeal's conclusion that the first limb of Barnes v Addy applied for two reasons, namely, "there was no relevant receipt of property, and there was no relevant notice". Moreover, the Court noted at [125] that "the submissions of the appellants did accept that to some extent Mr Elias was acting as an agent for his wife and daughters" and proceeded to find that Mrs Elias and her daughters had no notice of any breach of duty by Mr Elias, notwithstanding the existence of that agency (at [129]). 6 The plaintiffs have sought to distinguish the present facts from those in Say-Dee, noting that the High Court had held that each case of agency and of a claim for imputed actual notice will depend upon its own facts. 7 The plaintiffs have contended that the evidence in MFI P13 supports an inference that the authority of Mr Carantinos extended to all aspects of the transactions which took place with respect to the purchase and the subsequent sale of number 43, including a duty to investigate and disclose to Mrs Carantinos, any irregular features of the transaction including the interest of Mr Magafas in respect of the properties. The contention is that there is nothing inequitable in those circumstances in fixing her with imputed knowledge of the breach of trust by her agent, when she had vested the agent with complete authority on her behalf to deal with all aspects of the transaction. The further proposition is that the Court should draw the inference that the evidence of Mrs Carantinos would not have assisted her. 8 Significantly the plaintiffs do not contend that Mr Carantinos gained knowledge of his breach in the course of his agency for Mrs Carantinos. 9 In my view the defendants' submissions are of substance. There is no basis to find as a fact on the evidence before the Court, that Mrs Carantinos was Mr Carantinos' alter ego. Mrs Carantinos is a natural person and not a mere cipher. The way in which the plaintiffs put their case and the Court's finding at [207], was that "the first defendant was acting as the authorised agent of Mrs Carantinos in relation to both the purchase and the sale of 43 Riverside Crescent". I accept that that is more appropriately described an agency for a limited purpose rather than as an alter ego. 10 Nor does the plaintiff's proposition that Mr Carantinos had a duty to investigate and disclose any irregular features of the transaction to Mrs Carantinos, serve to advance the plaintiffs' case. After referring with approval to the observation of Hoffmann LJ in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 that he knew of "no authority for the proposition that in the absence of the duty on the part of the principal to investigate, information which was received by an agent otherwise than as agent can be imputed to the principal, simply on the ground that the agent owed his principal a duty to disclose it", the High Court in Say-Dee observed at [127] that even if Mr Elias owed a duty to his family to disclose his conduct, they had no duty to investigate it. As the defendants have contended, the same proposition applies in the present case. 11 The judgment delivered on 20 June 2007 [revised on 21 June 2007] is self explanatory in terms of granting leave to the plaintiffs to now rely upon paragraphs 9 and 25 of the Amended Statement of Claim filed on 26 November 2006, hence opening up the entitlement of the plaintiffs to seek to prove the case against Mrs Carantinos by way of a category 4 Baden constructive notice claim: Baden Delvaux and Lecuit v Societe General pour Favoriser le Developpement [1983] BCLC 325. 12 It is of course the case that the fourth category of knowledge agreed between counsel in Baden is "knowledge of circumstances which would indicate the facts to an honest and reasonable man". It is to be contrasted with the fifth category, "knowledge of circumstances which would put an honest and reasonable man on enquiry", which is not part of the law of Australia: Say-Dee at [177]. 13 I turn then to the circumstances relied upon by the plaintiffs to put Mrs Carantinos on notice of her receipt of trust property, in terms of the fourth category in Baden. The circumstances so relied upon are the "receipt into her bank account of $296,000 and the payment off of her mortgage debt (in respect of her house and the property at number 43". In my view there is simply no evidence that Mrs Carantinos knew that the $296,000 was received into the joint bank account of her husband and herself or of the way in which her husband chose to apply the proceeds of that cheque, let alone any evidence that she was aware that the $296,000 cheque had been drawn in favour of Pac-Com Pty Ltd and endorsed by Mr Carantinos. 14 In truth the way in which the plaintiffs originally conducted their case was to seek to prove that Mrs Carantinos had confided the task of buying and selling 43 Riverside Crescent to her husband and that she had little, if anything, to do with those transactions. Accordingly, no questions were asked of Mr Carantinos in cross-examination about any discussion that may have taken place between himself and his wife concerning the receipt of the $296,000 cheque, or its endorsement, or the application of any funds. What was put to Mr Carantinos was that he received the cheque and banked it into his personal bank account, via the joint account that he held with his wife [transcript 711.49-53; 712.41-53]. As the defendants have observed, in that way the case which the plaintiffs now seek to make [following the grant of leave referred to above] is inconsistent with the case they earlier sought to prove, so that it is hardly surprisingly that there is no evidence to support a finding of category 4 knowledge against Mrs Carantinos. In truth the plaintiffs' contention of a category 4 circumstance in that

i. Mrs Carantinos should be found to have received the forfeited deposit of $296,000 as representing 75% of the entire purchase price of 43 Riverside Crescent that she jointly held with Mr Carantinos; and

ii. to have failed to recognise the impropriety of receiving those funds to which she was not entitled,

15 The matter inheres in the lack of evidence. The proposition for which the plaintiffs contend is that Mrs Carantinos should be held to have failed to recognise the impropriety of receiving any share of the forfeited deposit of $296,000 and the whole of the proceeds of sale of 43 Riverside Crescent, because 39 and 41 Riverside Crescent were owned by the second plaintiff and number 43 was held on trust for the partnership or joint venture. The plaintiffs' proposition is that it would have been readily apparent to an ordinary person applying the standards of such person, that there was no entitlement to the whole of that sum of $296,000. The proposition is that the Court should make this finding on the balance of probabilities. The proposition is that the failure of Mrs Carantinos to give evidence on the point ought to lead the Court to infer that she has no explanation for that impropriety. 16 There is simply no evidence that Mrs Carantinos knew that the $296,000 was received into the joint bank account of her husband and herself or of the way her husband chose to apply the proceeds of that cheque, let alone any evidence that she was aware that the $296,000 cheque had been drawn in favour of Pac-Com and endorsed by Mr Carantinos. Mrs Carantinos is not shown to have knowingly assisted in breaches of fiduciary obligation. She is not shown to have assisted with knowledge in a dishonest and fraudulent design. She is not shown to have had actual knowledge of the circumstances upon which the plaintiffs now rely to establish category 4 knowledge. She is not shown to have failed to recognise the impropriety of receiving funds to which she was not entitled. Indeed there is no evidence at all as to what, if anything, she was ever told or understood in relation to these matters [cf In Re Montagu's Settlement Trusts [1987] Ch 264 at 278H, 285D and 279 A - where Sir Robert Megarry VC observed that the Court should not be astute to impute knowledge where no actual knowledge exists]. 17 In the result the plaintiffs have simply failed to prove an essential element of the cause of action upon which they rely in the same manner as the plaintiffs in Say-Dee had failed to prove that element. 18 Nothing in the following facts now in evidence alters the above conclusions:

i. the proceeds of sale of 440 Marrickville Road having been paid into the mortgage account of Mr Carantinos. It extinguished his then indebtedness to the bank of $270,399.75 to a credit balance of $133,812.28. of $120,000 was then transferred from the account, for a purpose that was not explained by Mr Carantinos in the evidence. This left a small credit balance of $11,291;

ii. by the time of the settlement of the purchase of 43 Riverside Crescent, Mrs Carantinos came to be named on the bank statement as a joint owner of the account. Presumably, this arose because she became a joint owner and mortgagor of 43 Riverside Crescent. Before the settlement, the bank statement shows Mr and Mrs Carantinos were indebted to the NAB for $19,102.63. They borrowed $190,000 to complete the purchase, which increased their indebtedness to the NAB to $209,102.63.

iii. by the time of the sale, Mr and Mrs Carantinos were indebted to the NAB by $265,323.37. The receipt of the deposit of $296,000 extinguished that indebtedness and they then held $30,767.63 in that account.

iv. that bank statement shows the $150,000 being paid, which was used in part to fund the Artesian purchase. Equitable compensation 19 The plaintiffs contend that the first defendant has a liability to pay equitable compensation [or equitable damages] to the plaintiffs in the circumstances in which Mrs Carantinos has been found to have no obligation to account for either the profits from the sale of number 43 nor for her receipt of any part of the proceeds of sale of numbers 39-41. 20 The defendants submit that there is a fundamental misconception in the application, referring to Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (No 2) [2001] NSWSC 6 at [37], where Austin J observed as follows:

"An order for an account of administration is made for the taking of account of moneys received and dispersed by the person who is responsible for the administration of a business enterprise or fund or other property and for payment of any amount found to be due by that person upon the taking of accounts. For example, a court routinely orders the taking of accounts for the administration of an estate by an executor or upon the dissolution of a partnership or of the administration of property by a mortgagor in possession or of a trust fund such as a solicitor's trust account. In such a case the making of an order need not imply any wrongdoing by the defendant." 21 The critical factor to be underlined is that upon the taking of the account it follows that there should be then be payment of any amount found to be due by that person. 22 The further contention put by the defendants is that as what was sought by way of relief (cf Judgment at [203]), was an account as opposed to proprietary relief. The proposition is that in the ordinary course by putting into effect the plaintiffs' entitlement to the relief identified in the Judgment at [203], accounts would be taken and if upon the taking of those accounts, it transpires that there is an amount which is properly accountable back in favour of the partnership [or the company] then the mechanism of the usual form of order would retrieve that amount by way of this obligation for payment. The proposition is that it is unnecessary for any concept of equitable compensation to be introduced and indeed, that to now make an order for equitable compensation would inevitably produce a double counting: the same amount of money to which the first defendant would be found properly accountable, would then be made the subject of the payment obligation referable to the partnership. 23 I accept this submission as of substance. For that reason the principled exercise of the discretion is to reject as ill-founded the plaintiffs now claim to equitable compensation. Costs 24 The plaintiffs have resoundingly succeeded against Mr Carantinos in the primary litigation. Hence it is clear that the principled exercise of the discretion is to order that Mr Carantinos pay the plaintiffs' costs of the proceedings. The plaintiffs seek those costs on a party/party basis up to 13 February 2007 and on an indemnity basis on and from that date. The claim to indemnity costs is grounded upon a Calderbank letter from the plaintiffs' solicitors to the defendants' solicitors of 13 February 2007. In my view the decision as to whether or not indemnity costs should be ordered should stand over to be determined following the taking of the accounts to be ordered. That is simply because the result on the taking of accounts could have a bearing upon whether or not indemnity costs should be ordered. Bullock Order 25 In Schipp v Cameron [Unreported, Supreme Court of New South Wales, 13 August 1998 (revised on 12 October 1998)], the principles applicable to the circumstances appropriate for the making of either a Bullock or Sanderson order were examined. I adopt those principles for present purposes. In particular reference was laid to Fennell v Supervision and Engineering Services Holdings Pty Ltd (1988) 47 SASR 6 where King CJ said (at 7):

"The principle of justice upon which the Bullock order rests may, in my opinion, be stated thus. The unsuccessful defendant has caused the litigation by his wrongful act and by disputing liability for it. He therefore ought to pay all costs reasonably incurred by the plaintiff in connection with the litigation. If it was reasonable, as between plaintiff and unsuccessful defendant, for the plaintiff to sue the successful defendant, the unsuccessful defendant ought therefore in justice be liable to indemnify the plaintiff against the costs of so doing, including those which he is ordered to pay to the successful defendant. In many cases the basis for the plaintiff's claim of reasonableness in joining the successful defendant will be the conduct of the unsuccessful defendant in placing the blame on the successful defendant. That conduct is however secondary to the underlying principle of justice indicated above." 26 In my view the principled exercise of the relevant discretion is to order that the plaintiffs are entitled to recover from Mr Carantinos, any costs which they have to pay to Mrs Carantinos. There is no doubt that Mr Carantinos had caused the litigation by his wrongful acts and by disputing liability for those acts. He ought be ordered [by Bullock order], to pay all costs reasonably incurred by the plaintiffs in connection with the litigation. It was plainly reasonable in the circumstances as between the plaintiff and Mrs Carantinos, for the plaintiffs to sue Mrs Carantinos. 27 It is also clear that the first plaintiff has been completely successful in respect of the monetary claim made in the transferred District Court proceedings and that the second plaintiff has successfully resisted the claim made by the first defendant in his cross-claim. Hence the defendant must bear the burden of costs. Orders 28 The parties are to bring in short minutes of order to provide as follows:

That the partnership or joint venture between the first plaintiff and the first defendant was formed in April 1995 and terminated on 1 May 2006 ("the partnership").

That upon the termination of the partnership, the first plaintiff is entitled to be repaid his financial contributions to the partnership with interest from the date of contribution to the date of repayment at 8% per annum capitalised and that the remaining assets of the partnership are to be divided equally between the first plaintiff and the first defendant.

That the first plaintiff made financial contributions to the partnership, including:

(a) payments made to the first defendant from November 1995 to March 2002 totalling the sum of $480,000;

(b) a payment made to the second plaintiff on 14 March, 2002 in the sum of $500,000; and

(c) a payment made to the second plaintiff on 11 December, 2002 in the sum of $600,000.

That the first defendant held the property known as 43 Riverside Crescent, Dulwich Hill and holds the proceeds of sale and all profits arising from the sale thereof on trust for the partnership.

That the first defendant holds the two ordinary shares in the third defendant upon trust for the second plaintiff.

(a) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as 39 and 41 Riverside Crescent, Dulwich Hill;

(b) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale by Artesian Pty Limited of the property known as the Hoechst site at 60-82 Princes Highway, St Peters, and the second plaintiff's beneficial interest as a shareholder in Artesian Pty Limited;

(c) is liable to account to the first plaintiff in relation to the financial contributions made to the partnership referred to in the declaration made in paragraph 3 hereof; and

(d) is liable to account to the second plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as Felton Woods Manor at 88 Lurine Street, Katoomba.

7. That the first defendant is liable to account to the first plaintiff in relation to the proceeds of sale and all profits arising from the sale of the property known as 43 Riverside Crescent, Dulwich Hill.

8. That the first defendant provide the first plaintiff with an accounting, verified by affidavit, in relation to all amounts paid and received and all dealings of the partnership and the second plaintiff, with respect to the transactions referred to in the declaration made in paragraphs 6 and 7 hereof, from April 1995 to the date hereof, such accounting to include: (a) specification in chronological order of each payment and receipt, the date and amount thereof, to whom the amount was paid, from whom the amount was received and the purpose for which the amount was paid or received as the case may be;

(b) the assets and liabilities of the partnership as at 1 May 2006;

(c) the assets and liabilities of the second plaintiff as at 30 June 2007; and

(d) the respective interests of the first plaintiff and the first defendant in the partnership and the respective interests of the first plaintiff and the first defendant in the second plaintiff as at 30 June 2007.

9. That the first defendant pay to the first plaintiff all sums found to be due to the plaintiffs upon the taking of accounts.

That the first defendant file and serve his accounts and verifying affidavits, on or before a date to be agreed upon between the parties or determined by the Court.

That the plaintiffs provide the first defendant with notice of surcharges and falsifications, in accordance with Rule 46.7 of the Uniform Civil Procedure Rules 2005 , on or before a date to be agreed upon between the parties or determined by the Court.

That the plaintiffs file and serve any further affidavits together with a list of earlier affidavits to be relied upon by the plaintiffs on or before a date to be agreed upon between the parties or determined by the Court.

That the first defendant file and serve any affidavits in reply together with a list of earlier affidavits to be relied upon by the first defendant, on a date to be agreed upon between the parties or determined by the Court.

That the plaintiffs have leave to approach an Associate Judge on a date to be agreed upon by the parties or determined by the Court, for placement of the proceedings in the next Associate Judge's call over list.

That order 6 made on 27 November 2006 be varied so as to allow the sum of $46,271.77 standing to the credit of the second plaintiff in the trust account of Colin Biggers & Paisley, Solicitors, to be paid forthwith to Stephen John Rockliff and held by him in accordance with his undertaking noted in paragraph 24 hereof.

That order 9 made on 27 November, 2006, order 4 and the undertaking of the third defendant noted by the Court on 7 December 2006 and order 1 made on 7 February, 2007 be varied so as to allow Athena Touriki, solicitor for the third defendant, to pay one-half of the balance of the deposit and one half of the nett proceeds of sale (that is, the sale price, less adjustments for council and water rates, land tax and less reasonable legal costs for the vendor, the amount payable for real estate agents commission and the amount due under the mortgage to the National Australia Bank Limited) of the property known as 60-82 Princes Highway, St Peters upon completion of the sale, to Stephen John Rockliff to be held by him in accordance with his undertaking noted in paragraph 25 hereof and the remaining half to Gregory Gav, or to whom he may direct.

That all documents produced to the Court pursuant to order 10 made on 27 November, 2006 and on subpoenae by Michael Egan, Accountant and Kevin Munro, Solicitor, remain with the Court, until further order.

That the parties have liberty to apply to Einstein J in relation to the declarations and orders made herein, on 48 hours notice.

That the first defendant pay the plaintiffs' costs of the proceedings, including reserved costs, as agreed or assessed and that the plaintiffs' claim for indemnity costs on and from 13 February 2007 be reserved pending the taking of the accounts.

That the assessment of the plaintiffs' costs proceed forthwith and be expedited. 22. That the first defendant pay the plaintiff interest on costs and disbursements as agreed or assessed, pursuant to Section 101(4) of the Uniform Civil Procedure Act , from the date of any payment of those costs and disbursements to the date of reimbursement by the first defendant, at the rates prescribed by Schedule 5 of the Uniform Civil Procedure Rules .

23. (a) That the plaintiffs pay the costs of the second and third defendants as agreed or assessed. (b) That the first defendant pay to the plaintiffs all costs which the plaintiffs pay to the second defendant.

24. The undertaking of Stephen John Rockliff, solicitor, to the Court that upon receipt of the monies referred to in paragraphs 17 and 18 hereof, he will repay to the first plaintiff the financial contributions to the partnership referred to in the declaration made in paragraph 3 hereof (without interest and totalling the sum of $1.580M) and place the balance on term deposit with Westpac Private Bank in the name of the second plaintiff, until further order of the Court. 29 The appropriate verdict and judgment to be entered in favour of the plaintiff against the defendant in proceedings No. 4152 of 2006 [formerly District Court No. 1551 of 2006) is a verdict and judgment in the sum of $160,555.90 inclusive of interest pursuant to section 100 of the Uniform Civil Procedure Act. The appropriate order is again to stand over the indemnity costs claim until after the taking of accounts. Subject to that reservation, the order should be for the first defendant to pay the plaintiffs' costs of the proceedings as agreed or assessed pursuant to s.101(4) of the Uniform Civil Procedure Act from the date of any payment of these costs and disbursements to the date of reimbursement by the defendant, at the rates prescribed by Schedule 5 of the Uniform Civil Procedure Rules. The parties are also to bring in short minutes of order to reflect these matters. 30 The parties have leave to address submissions on any matter which they contend to have been inadvertently omitted from the above orders.

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