Applicant v Respondent

[2009] VSC 274

PRACTICE AND PROCEDURE - Application for release from implied undertaking relating to documents discovered under order for preliminary discovery - Proposed use in English proceeding - Whether special circumstances warranting release - Whether injustice to objectors as result of release.

**1 The applicant ("Fortis") has obtained preliminary discovery from the respondent ("CBA") under orders made by an Associate Justice on 23 April 2009. Fortis now applies for a release from its implied undertaking not to use documents discovered by CBA ("the CBA documents") other than for the proper conduct of the proceeding between it and the CBA under the principle in Harman v Secretary of State for Home Department.[1]

2 Fortis wants to use the documents in a proceeding I will call "the English proceeding" which it commenced with Anglo Financial SA ("Anglo") in the Chancery Division of the High Court of Justice in England against Newsales Limited ("Newsales"), Brevard Limited ("Brevard"), Hirsch & Cie, Mr Robert Hirsch and Mr Carl Linde.

3 CBA neither consents to the application nor opposes it.

4 The application is, however, opposed by Mr Vaughan Blank and the companies STM 123 Pty Ltd ("STM 123") and STM 123 No 5 Pty Ltd ("STM 123 No 5"). Mr Blank is the author of a number of the documents discovered by CBA, STM 123 No 5 is also an author and the subject funds have been held by STM 123. Mr Blank and the STM 123 companies urge the Court not to release Fortis from the implied undertaking.

5 The only material filed in the application is from Fortis, in the form of affidavits sworn by Mr Simon Dollard of its solicitors. Mr Dollard has exhibited court documents filed in the English proceeding.**

**6 The following allegations are made in the Particulars of Claim in the English proceeding and appear to be common ground for present purposes. Fortis is a corporation formed under the laws of Delaware and Anglo is registered under the laws of Panama. Mr Louis Kestenbaum is an advisor and consultant to Anglo and managing member and chairman of Fortis. Newsales and Brevard are companies incorporated in the British Virgin Islands. Hirsch & Cie is a Swiss Limited Partnership. Mr Hirsch is a Belgian citizen and Mr Linde is a South African citizen. Brevard and Newsales are represented by and act through Mr Hirsch and Mr Linde, amongst others, and Hirsch & Cie is represented by and acts through Mr Hirsch.

7 In the English proceeding, Anglo seeks damages for deceit in relation to alleged loans to Newsales ("the Newsales loan") and Brevard ("the Brevard loan"). Anglo also claims the sum of 1,732,500 pounds from Newsales under the Newsales loan and 1,732,500 pounds from Mr Hirsch, under an associated guarantee, as well as 1,260,000 pounds from Brevard under the Brevard loan.

8 Fortis claims payment from Mr Hirsch of a judgment debt of US $6,829,540.07 under a guarantee dated 8 September 2008 relating to a loan it made under a loan agreement of the same date to Hirsch & Cie ("the Hirsch & Cie loan"). Fortis obtained judgment against Mr Hirsch in the New York Supreme Court on 11 March 2009.**

**9 On 1 May 2009, Henderson J made ex parte freezing orders against the defendants in the English proceeding on the application of Fortis and Anglo. The orders have been continued and the return date under the freezing order is now 30 June 2009.

10 Mr Linde has given notice that he will try then to have the freezing order set aside on various bases, including that there was no, or no adequate, evidence of a real likelihood that he would dissipate his assets unless restrained by such an order. Fortis wishes to use the CBA documents to support its contention that the orders should be continued.

11 Before describing the CBA documents, I will refer to the allegations in the affirmation made by Mr Louis Kestenbaum on 30 April 2009 in support of the application for the freezing order.**

**12 Mr Kestenbaum is the managing member and chairman of Fortis and an Advisor and Consultant to Anglo. He is a self-described successful business man with a property portfolio worth several hundreds of millions of dollars held through the Fortis Property Group.

13 Mr Kestenbaum alleges that Anglo has been the victim of fraud by Mr Linde, Mr Hirsch and Mr Stephen Goldberg and Fortis has been the victim of a fraud by Mr Linde, Mr Hirsch and Mr Medard Gahiga.

14 Mr Kestenbaum records his 15 year friendship with Mr Linde who had set up a law firm with Mr Goldberg in the late 1990s. Mr Linde managed the affairs and assets of wealthy clients through an entity called Fidex. Mr Linde arranged for Mr Kestenbaum to make short term loans to his clients from in about 2000. Mr Linde represented that he had control over bank accounts held by his clients containing funds equal to the amounts lent and authority to repay the loans if they were not repaid by his client.

15 Mr Kestenbaum trusted Mr Linde and made a number of such loans over the following years, after relatively informal negotiations. The arrangement went well until, in December 2005, Mr Linde arranged an unsecured loan of US $1.157m to Mr Hirsch for the purchase of shares in a Jordanian bank. The loan has not been repaid, despite the extension of the date for repayment a number of times up to 31 December 2008.

16 In the meantime, on about 20 August 2008, Mr Hirsch offered Mr Kestenbaum the opportunity to invest in a mining business in Rwanda. Mr Kestenbaum wished to investigate the proposal and declined at that point to take an interest. He agreed, nevertheless, to make the Hirsch & Cie loan of US $5.2m on about 3 September 2008.

17 On 5 September 2008, Mr Linde directed that the Hirsch & Cie loan funds were to be paid into a CBA bank account in Sydney in the name of STM 123. Mr Kestenbaum alleges that Mr Linde told him the funds were to be sent to Australia because African governments kept assets offshore. A first draft of the Hirsch & Cie loan agreement between Fortis and Hirsch and CIE, the borrower, provided for the funds to be paid into the STM 123 account.

18 The instruction was varied on 8 September 2008, when Mr Linde directed that the funds be sent to a Hirsch & Cie account at the Clariden Lue Bank in Switzerland. The money was paid into that account on that day. The transaction was also documented on 8 September 2008 and the agreement provided for repayment by 8 January 2009.

19 Mr Hirsch and Mr Gahiga each agreed orally to repay the loan if Mr Kestenbaum did not convert it to equity after satisfactory due diligence. They each guaranteed the Hirsch & Cie loan. Mr Linde also assured Mr Kestenbaum that he stood behind Mr Hirsch's signature and that Mr Hirsch would have no problem repaying the loan on account of his wealth.

20 Mr Kestenbaum retained Mr Goldberg to assist with the due diligence in relation to the Rwandan venture.

21 Meanwhile, on 25 September 2008, Mr Linde requested Mr Kestenbaum to urgently recall the funds from the Clariden Leu Bank on the basis that they had been sent to an incorrect account. Then, on 26 September 2008, Mr Linde informed Mr Kestenbaum that Mr Hirsch wanted the funds sent to STM 123's Australian account.

22 On 2 October 2008, Fortis's bank confirmed that Clariden Leu had refused to repay the funds. Mr Linde, nevertheless, told Mr Kestenbaum that the problem relating to the destination of the funds had been resolved and that the funds had been sent from Clariden Leu to Australia as originally intended.

23 It was only almost six months later, shortly before making his affirmation on 30 April 2009 in the English proceeding that Mr Kestenbaum discovered that Fortis's funds had not been sent to the STM 123 account until 16 March 2009, after a block had been lifted from Hirsch & Cie's Clariden Leu account. Before that, the funds had been frozen at the behest of a creditor of Mr Hirsch.**

Mr Kestenbaum's references to Mr Blank and associated entities

24 Mr Kestenbaum specifically refers to Mr Blank and STM 123 in paragraphs [31-3] of his 30 April 2009 affirmation in the English proceeding, as follows :

Mr Blank

31. Mr Vaughan Blank is the former head of Glencore in Australia. He is resident in Sydney and the sole shareholder and director in STM 123 Pty Ltd ("STM"), which is a company incorporated under the laws of New South Wales. ... I had no knowledge of Mr Blank until recently.

32. As explained below, the proceeds of a loan of $5.25 m that Fortis made to Hirsch & Cie in September 2008 were paid on or about 16 March 2009 by Mr Hirsch to STM's account with the Commonwealth Bank of Australia in Sydney. I believe that Mr Hirsch always intended to use the proceeds of the Fortis loan for this purpose as I believe that Mr Hirsch has owed Mr Blank money for some period of time and has been placed under increasing pressure by Mr Blank to repay it.

33. I also understand that at all material times, Mr Blank owned or controlled Cotto Assets Limited ("Cotto"), a company incorporated in the BVI. I believe that Cotto was the vehicle through which Mr Blank held assets in Switzerland and Lichtenstein.

**25 Mr Kestenbaum goes on to record a loan to Cotto of $1.06m, at Mr Linde's request, by Mr Kestenbaum's family charitable corporation WMSBG Kolel Damsek Eliezer Inc, (of which he is trustee) ("the Cotto loan"). The Cotto loan funds were paid on 17 October 2008 into the CBA STM 123 account, but neither Mr Kestenbaum nor his colleague, Mr Hurwitz, recognised the account details as those given on 5 September 2008 as the destination for the Hirsch & Cie loan funds.

26 Mr Linde and Mr Goldberg executed the Cotto loan agreement and provided personal guarantees. Mr Kestenbaum only discovered shortly before 30 April 2009 that Mr Blank was the beneficiary of the Cotto loan. It was repaid on 27 April 2009, after a month of repeated assurances by Mr Goldberg that payment was imminent.

27 Mr Kestenbaum alleges that, in late February or March 2009, Mr Goldberg informed him that the representations made by Mr Linde and Mr Hirsch before the Newsales, Brevard and Hirsch & Cie loans were untrue. According to Mr Goldberg, Mr Hirsch and Mr Linde had always intended to use the proceeds of the Hirsch & Cie loan to make a payment for the benefit of Mr Blank. Mr Blank was a friend of Mr Linde from South Africa who had, through Mr Linde, invested funds with Mr Hirsch which Mr Hirsch had misused and lost. Mr Goldberg told Mr Kestenbaum that Mr Blank had placed considerable pressure on Mr Linde and Mr Hirsch for repayment and that they had intended to use the Hirsch & Cie loan funds for that purpose. They had concocted the Rwandan investment scheme in order to repay Mr Blank.

28 Mr Goldberg also said that the Hirsch & Cie loan monies had been placed in a sub-account, purportedly on behalf of Cotto, in September 2008, to reassure Mr Blank, pending the transfer of the funds to STM (as Mr Kestenbaum refers to the company), because the necessary documents had not been created to suggest a loan from Hirsch & Cie to STM.

29 Mr Goldberg told Mr Kestenbaum on 15 March 2009 that the block on the Clariden Leu account had recently been lifted and that Mr Hirsch was trying to transfer the money out of the account. Mr Kestenbaum instructed his Swiss lawyers to write on the following day, 16 March 2009, informing Clariden Leu of the circumstances in which the funds had been paid, in the hope of preserving them in the Clariden Leu account. Mr Kestenbaum alleges that Mr Hirsch had, however, already had the proceeds of the Hirsch & Cie loan paid to STM 123's CBA account.

30 Fortis unsuccessfully applied to this Court for a freezing order in relation to the STM account monies, but was not prepared to put up security considered adequate by the Court. Mr Kestenbaum believes that the monies have been withdrawn by STM from the account.

31 It was in that context that the preliminary discovery order relating to that payment was made on 23 April 2009 against CBA. As I understand, it was argued that CBA might be liable under the second limb of the principle in Barnes v Addy[2] as a knowing assistant to a breach of a Quistclose trust arising because the Hirsch & Cie loan monies were not applied for the intended purpose of purchasing an interest in the Rwandan venture[3] or a resulting trust arising because the monies were lent as a consequence of deceit. It was also put in submissions by counsel for Fortis that CBA received the funds with notice of the trusts.**

**32 The CBA documents to which Fortis wants to refer in the English proceeding are copies of printouts of emails between Mr Vaughan Blank and CBA officers and Mr Goldberg, internal CBA email correspondence and attached documents. I will briefly refer to their contents.

33 On 17 March 2009, Mr Brad Rourke of CBA was advised that the Clariden Leu bank had emailed CBA, requesting that the sum of US $6m received by STM 123 be returned to Switzerland. Mr Rourke was asked to contact Mr Blank to facilitate the request. Mr Rourke advised that the monies would have been sent from a large Swiss based company, Glencore Pty Ltd, as they had been every quarter for the last couple of years. He subsequently informed the CBA Assessment Unit that Mr Blank had told him that the monies had been transferred from a Swiss company, Greencart Ltd ("Greencart"), which was conducted by a business colleague. Mr Rourke noted that Mr Blank had told him that the funds were legitimate and the "tail end of a business transaction that were already delayed from last year". Mr Blank said that he did not want the funds returned and wished to make his own inquiries.

34 On 19 March 2009, Clariden Leu told CBA that it had filed a money laundering report with relevant authorities, as it had been informed that the funds had been obtained by the sender by fraudulent means. It considered the allegations plausible and sought CBA's cooperation in blocking the funds.

35 Later on 19 March 2009, Mr Blank forwarded to CBA copies of documents, all dated 5 September 2008, being a loan agreement between Greencart "represented by Carl Linde" and STM 123 No 5 "represented by Vaughan Blank, its sole Director" ("the Greencart loan agreement"), a promissory note in favour of Greencart, executed by STM 123 No 5, for the loan amount of US $6m payable on 6 September 2010 and a guarantee by Mr Blank of the borrower's obligations under the Greencart loan agreement. The 5 September 2008 Greencart loan agreement refers to a loan being advanced "hereby".

36 On 23 March 2009, Mr Rourke informed Mr Blank of the allegations that Fortis had been fraudulently induced to transfer funds to Clariden Leu Bank under an agreement with Mr Hirsch, that Clariden Leu had transferred the funds to the credit of the STM 123 account and that Fortis claimed beneficial ownership of the money. He also told Mr Blank that Fortis had obtained judgment against Mr Hirsch on 11 March 2009. Mr Blank responded that he was skiing in Canada and had found the situation confusing and messy; he would forward the documents to Mr Linde for an explanation.

37 On 25 March 2009, Mr Blank emailed Mr Goldberg stating that Fortis's Melbourne lawyers had informed CBA that Mr Goldberg was representing STM 123. Mr Blank sought "clarification" and told Mr Goldberg to note that he had not been appointed to represent the company and nor had that ever been discussed. Mr Goldberg responded that he was certainly not representing the company and had never represented that he did so.

38 On 25 March 2009, Mr Blank told Mr Rourke that Mr Goldberg was an acquaintance of his friend, Mr Linde, and he had never been authorised or engaged to act upon STM 123's behalf. He did not know Mr Goldberg's profession and said that, if he were a lawyer, he might be acting for Mr Linde or Greencart. He also mentioned that Mr Goldberg had been involved in a conference call between Mr Blank and Mr Linde when Mr Blank had been trying to sort out the matter from Canada.

39 On 15 April 2009, Mr Blank instructed Mr Rourke that CBA was not permitted to divulge any of his confidential information without his prior written consent. He said that he did not know of Fortis and had not had any dealings with it. He had engaged solicitors.**

40 Mr Linde made an affirmation on 4 June 2009 under the freezing order, disclosing his assets valued at above 2,000 pounds.

**41 The principles relating to the release of a party from its implied undertaking are common ground. It is accepted that the outcome of the application depends upon the Court's assessment as to whether there are "special circumstances" warranting the use of the documents in the English proceeding and whether their disclosure would cause injustice to Mr Blank and STM 123 or STM 123 No 5.[4] The Court should consider both whether Fortis has shown circumstances taking the matter out of the ordinary course under which the production of discovered documents involves the implied undertaking to it and whether the exercise of the Court's discretion to release a party from the undertaking would be in the interests of justice.[5]

42 It is also common ground that an applicable description of "special circumstances" is to be found in the judgment of Wilcox J in Springfield Nominees Pty Ltd v Bridgelands [6]:**

For "special circumstances" to exist it is enough that there is a special feature of the case which affords a reason for modifying or releasing the undertaking and is not usually present. The matter then becomes one of the proper exercise of the court's discretion, many factors being relevant. It is neither possible nor desirable to propound an exhaustive list of those factors. But plainly they include the nature of the document, the circumstances under which it came into existence, the attitude of the author of the document and any prejudice the author may sustain, whether the document pre-existed litigation or was created for that purpose and therefore expected to enter the public domain, the nature of the information in the document (in particular whether it contains personal data or commercially sensitive information), the circumstances in which the document came into the hands of the applicant for leave and, perhaps most important of all, the likely contribution of the document to achieving justice in the second proceeding.[7]

43 In Citicorp Life Insurance Ltd v Lubransky; Bagiotas v Citicorp Life Insurance Ltd[8] Hargrave J added to the Springfield list the factor of "the extent to which the information contained in the documents under consideration has entered the 'public domain'."

**44 Fortis argues that the CBA documents would contribute towards achieving a just outcome in the English proceeding. It contends that they demonstrate Mr Linde's involvement in the arrangement whereby the Hirsch & Cie loan monies were paid to the STM 123 account. The documents demonstrate Mr Linde and Mr Hirsch's capacity to move assets at short notice and are highly relevant to the freezing order application.

45 Counsel for Fortis argue that the loan documents show the means employed to effect the transfer in breach of trust by Hirsch & Cie and, or Mr Hirsch. They fortify Mr Kestenbaum's hearsay evidence by demonstrating the methods employed by Mr Linde to achieve the fraudulent result.

46 Counsel for Mr Blank and the STM 123 companies respond that the requisite special circumstances have not been established to justify the release sought. They contend that the CBA documents would be of no utility as they add nothing, or nothing significant, to the material already before the English court. If the representations relating to the Rwanda mining venture were fraudulent, they say, they are not made more fraudulent by reference to the CBA documents and the transaction between Mr Blank, the STM 123 companies and Mr Linde or Greencart. It is already clear from the evidence of the early direction given by Mr Linde that the Hirsch & Cie loan funds were destined for the STM 123 account.

47 Counsel for Mr Blank point out that Fortis has entered judgment against Mr Hirsch in the USA and submit that he shows no sign of setting it aside, so that the merits of the claim against him are unlikely to be ventilated in the English proceeding. Further, there is no fraud allegation involving Mr Linde or at all in that proceeding which was brought under Mr Hirsch's guarantee of the Hirsch & Cie loan. The Greencart documents are irrelevant to it and involve persons who play no part in the Hirsch & Cie loan transaction.

48 Fortis maintains that it would wish to further investigate whether the Greencart loan agreement and associated documents are genuine or merely a sham to conceal Mr Hirsch's indebtedness to Mr Blank and the true nature of the arrangements between them to discharge that debt by misuse of the Rwanda funds.

49 Mr Blank and the STM companies answer that there is no genuine basis for alleging that the Greencart loan is a sham, that that issue is irrelevant to the Fortis proceeding against Mr Hirsch, that any such investigation does not require the disclosure and that the stated objective is one to be achieved outside the English proceeding. Further, the fact of the transfer by 16 March 2009 was already established by the evidence in Mr Kestenbaum's affirmation at 1 May 2009 when the freezing order was made.

50 Mr Blank and his companies argue that the material before the High Court already sufficiently establishes Mr Linde's close relationship with Mr Hirsch and the Greencart loan documents do not take the allegations of his involvement in a scheme to dissipate assets any further.

51 Fortis also contends that the CBA documents demonstrate that Mr Linde has not complied with the disclosure order, because he has failed to refer to his interest in and control of Greencart and yet has been described as its representative in the CBA documents.

52 Mr Blank and the STM 123 companies respond that a company search would establish the connection and the Greencart loan documents are not necessary or effective for that purpose.

53 Counsel for Mr Blank argue that there would be injustice to Mr Blank and the STM 123 companies by the prejudice resulting from their association in the English proceeding with the allegedly fraudulent activities of Mr Hirsch and Mr Linde. The disclosure of the CBA documents has the potential to embroil them in the English proceeding. They also maintain that they would be prejudiced by the disclosure of their private financial dealings.

54 Counsel for Fortis respond that the mere fact that Mr Blank or one of his companies might regard the Greencart documents as confidential does not cause injustice to them. They cite the general public interest in the proper administration of justice which they contend is not outweighed by the Blank parties' desire to protect the confidentiality of the documents sought.[9] Fortis argues that Mr Blank and his companies have involved themselves in the situation voluntarily and must accept the consequences.**

**55 I am satisfied that there are special circumstances warranting the release of Fortis from its undertaking in relation to the Greencart loan documents, but not that relating to the balance of the CBA documents. I consider the correspondence in the emails involving Mr Blank and others irrelevant or insufficiently relevant to the issues in the application for the continuation of the freezing order.

56 The Greencart loan documents are different. Even though it may have been accepted that funds were transferred to the STM 123 account on 16 March 2009, I agree with Fortis that the Greencart loan documents may provide an essential missing piece of the jigsaw of evidence before the High Court. Mr Kestenbaum deposes to Mr Goldberg's explanation for the payment into STM 123's account of the moneys lent under the Hirsch & Cie loan agreement as the satisfaction of an existing liability. Mr Goldberg is alleged to have told Mr Kestenbaum that Mr Hirsch and Mr Linde always intended to use the Hirsch & Cie loan monies to repay Mr Blank. The Greencart loan documents provide evidence of Mr Linde's involvement in a transaction which suggests the possibility of a sham loan agreement providing a mechanism for effecting that purpose or his involvement in the alleged deceit in relation to the Hirsch & Cie loan. I am not persuaded that they add nothing to the evidence in the freezing order application because there is already evidence of a close relationship between Mr Hirsch and Mr Linde.

57 The Greencart loan documents are thus relevant, in my opinion, to an assessment of the likelihood Mr Linde assisting or cooperating with Mr Hirsch to dissipate assets. They may be accepted by the court as evidence of their capacity for quick action to facilitate the movement of a large sum, and their propensity to dissipate assets otherwise potentially available to Fortis. Whilst Mr Hirsch's liability under the guarantee might not be before the High Court and the evidence may not establish that Mr Blank and the STM 123 companies are involved in the Hirsch & Cie loan transaction, the issue is the relevance of the documents to the application for the freezing order.

58 Although counsel for Mr Blank and the STM 123 companies argue that the continuation of the order may be challenged only on the basis that there is more than enough real property available to satisfy any judgement (as opposed to a challenge to the merits of the claims), I remain of the view that the propensity of Mr Linde or Mr Hirsch to attempt to dissipate assets is relevant to the analysis of any such challenge. The fact that Henderson J may have been influenced by the chronology of events in relation to the movement of the money from the Clariden Leu account to the STM 123 CBA account does not alter my view of the significance of the Greencart loan documents in the freezing order application.

59 I have taken into account the opposition of Mr Blank and the STM 123 companies. They argue that they will be prejudiced by reason of their potential involvement in the English proceeding. It suffices to say that allegations relating to them and their involvement in events are already to a large extent in the public domain as the subject of Mr Kestenbaum's evidence. Nor am I persuaded by their submission that the Greencart loan documents are commercially sensitive and ought to be protected, in the absence of any material supporting that submission.

60 I have not ignored the fact that the CBA documents were produced in an application for preliminary discovery and that there is no proceeding on foot between Fortis and the CBA in which they might be adduced in evidence. Nevertheless, I am persuaded that the Greencart loan documents may make a significant contribution to the achievement of a just outcome in relation to the freezing order application by supporting the evidence as to Mr Linde's involvement in the transfer of funds to STM 123.

61 Finally, it is appropriate that the application for release is made in the proceeding in which the implied undertaking has been given.[10] I agree with counsel for Fortis that it would have been likely to have met with the same objection, had it tried to obtain non-party discovery of the Greencart loan documents in the English proceeding.

62 The application should be allowed, only with respect to the Greencart loan documents.**

[1] [1983] 1 AC 280; see: Crest Homes Plc v Marks [1987] AC 829 at 853.

[2] (1879) 9 Ch App 244.

[3] See: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 576.

[4] Crest Homes Plc v Marks [1987] AC 829 at 860; Holpitt Pty Ltd v Varimu Pty Ltd [1991] FCA 269; (1991) 29 FCR 576 at 579 per Burchett J; Springfield Nominees Pty Ltd v Bridgelands (1992) 38 FCR 217 at 225 per Wilcox J; Citicorp Life Insurance Ltd v Lubransky; Bagiotas v Citicorp Life Insurance Ltd [2005] VSC 101 at [63] per Hargrave J.

[5] Holpitt Pty v Varimu Pty Ltd [1991] FCA 269; (1991) 29 FCR 576 at 579 per Burchett J.

[6] (1992) 38 FCR 217.

[7] (1992) 38 FCR 217 at 225.

[8] [2005] VSC 101 at [65].

[9] Referring to : National Society for the Prevention of Cruelty to Children [1977] UKHL 1; [1978] AC 171 per Diplock LJ at 218.

[10] See: Holpitt v Varimu Pty Ltd [1991] FCA 269; (1991) 29 FCR 576 at 577 per Burchett J.