Hillsan Pty Limited v Federico Vaccaro & Ors

Judgment 1The plaintiff, Hillsan Pty Ltd ("Hillsan") is a finance company. Federico and Maria Vaccaro are a couple who own a property at Narellan. The certificate of title (CT) of that property was held at the office of their solicitor, Lorenzo Flammia, at Penrith. At some time prior to the end of November 2003, that CT was taken from Mr Flammia's office. It was used fraudulently to obtain a substantial loan from Hillsan secured by a mortgage over the Narellan property. It seems that Hillsan was approached about the loan on or about 27 November 2003, when it engaged its solicitor, John Hancock, to handle the matter. The mortgage was executed on 23 December 2003. 2The signatures of Mr and Mrs Vaccaro on the mortgage were forgeries. They purported to be witnessed by a man said to be a solicitor, but there was no such person on the role of legal practitioners at the time and it seems that he was fictitious. It appears to be accepted (whether or not it has been proved) that the perpetrator of this fraud was another client of Mr Flammia, Angelo Caradonna. Of course, the Vaccaros saw none of the money which Hillsan had advanced, and they did not become aware of these events until the institution of these proceedings. 3In September 2006, Hillsan commenced proceedings against the Vaccaros for possession of the property, following default in repayment of the loan. It pursues that claim notwithstanding the fraud, relying upon the indefeasibility of title conferred by the subsequent registration of the mortgage. The mortgage was not registered until almost 2 years after it was executed, but nothing turns on that for present purposes. 4Since the proceedings were instituted the statement of claim has been amended. In its current form, Hillsan seeks possession of the property against the Vaccaros as the first and second defendants. In the alternative, it seeks damages for breach of contract and negligence against its solicitor, Mr Hancock, as the third defendant. That claim is founded upon Mr Hancock's delay in registering the mortgage but, relevantly for present purposes, also on his failure to check the authenticity of the signatures on the mortgage purporting to be those of the Vaccaros and the solicitor witnessing their signatures. 5The Vaccaros have filed a defence to the proceedings, together with a cross-claim against Hillsan and Mr Hancock in which, put shortly, it is alleged that both were on notice of the fraud. Mr Hancock has defended Hillsan's claim and the Vaccaros' cross-claim. Pursuant to the Civil Liability Act 2002, he has also pleaded proportionate liability against Mr Flammia on the basis that he owed a duty to parties in the position of Hillsan, and to the Vaccaros, to keep the CT secure. It will be necessary to examine this aspect of Mr Hancock's case more closely. 6In 2007, the Vaccaros themselves commenced proceedings in this Court against Mr Flammia for negligence in relation to the manner in which he kept the CT ( Vaccaro & Anor v Flammia , 20237/07). I shall refer to these as "The Vaccaro proceedings". At the relevant time Mr Flammia held a professional indemnity insurance policy with LawCover Insurance Pty Ltd ("LawCover"). In those proceedings the Vaccaros sought leave to join LawCover as a party, pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 ("LRMP Act"). 7Relevantly, s 6 of that Act provides: "(1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. ... (4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken." Subsection (2) is not relevant in this case. 8On 11 December 2008 that application was granted by Johnson J: Vaccaro & Anor v Flammia [2008] NSWSC 1322. LawCover had resisted the application on the basis that it was entitled to disclaim liability because of a provision in the policy which excluded indemnity for a claim arising from dishonest or fraudulent acts or omissions by a sole practitioner, partner or officer of a law practice. It relied on evidence from which, it was said, it should be inferred that Mr Flammia was complicit in the fraud perpetrated by Mr Caradonna. Johnson J found that, for the purpose of the application, the evidence fell short of establishing dishonesty or fraud on the part of Mr Flammia, so that the Vaccaros had an arguable case that his failure to secure the CT was the product of negligence, not dishonesty: at [140]. 9On the evidence before Johnson J, which is also before me, LawCover sought to make out a circumstantial case of Mr Flammia's involvement in Mr Caradonna's fraud. There was no direct evidence of it. There was evidence that in 2000, to Mr Flammia's knowledge, Mr Caradonna pleaded guilty to three counts of defrauding the Commonwealth, for which he was sentenced to a term of imprisonment, that Mr Flammia looked after Mr Caradonna's financial interests while he was serving that sentence, and that by late 2001 there was a well established relationship between them: see the judgment at [21] - [22]. 10There was also evidence of Mr Flammia's involvement with Mr Caradonna in fraudulent activity on two specific occasions, one of which was the subject of proceedings before Emmett J in what was referred to in the judgment as "the Colonial proceedings": [23] ff. Those proceedings, to which both Mr Flammia and LawCover were parties, related to events which occurred towards the end of 2001. In the course of two judgments in the proceedings, Emmett J found that Mr Flammia was aware of Mr Caradonna's conviction of fraud offences, and that in the matter at hand both men had been involved in a fraudulent scheme to deprive another person of his superannuation entitlement. 11Before me in the present proceedings is a similar motion by Hillsan, that is, that LawCover be joined as a defendant pursuant to s 6(4) of the LRMP Act. Mr Flammia is bankrupt, and Hillsan also seeks an order that he and the Official Trustee in Bankruptcy be joined as defendants. That application is acknowledged to be subject to and conditional upon an order being made by the Federal Magistrates Court granting Hillsan leave to commence proceedings under s 58(3) of the Bankruptcy Act 1966 (Cth). In addition, an order is sought that these proceedings be heard at the same time as the Vaccaro proceedings. 12In a second motion, pursued only if an order to join LawCover as a defendant is refused, Hillsan seeks an order striking out those paragraphs of Mr Hancock's defence pleading proportionate liability against Mr Flammia. Before me also is a motion by LawCover seeking an order that Hillsan provide further and better particulars of its proposed claim, and that Hillsan's motions seeking joinder of LawCover and the joint hearing of the two sets of proceedings be adjourned until those particulars have been provided. Hillsan resists that application but, in the light of it, seeks leave to add to its second notice of motion an application that Mr Hancock provide those particulars. The purpose of these motions will appear as I explain the issues and the parties' submissions. 13The central issue is whether LawCover should be joined as a defendant. LawCover and the Vaccaros resist such an order. It was not opposed by Mr Hancock. All parties are agreed that, if LawCover is joined, it is appropriate that these proceedings and the Vaccaro proceedings be heard together. That is undoubtedly so, as the two sets of proceedings raise overlapping issues. 14Hillsan claims that Mr Flammia owed it a duty of care, which he breached. It seeks the joinder of LawCover on the basis that LawCover is bound to indemnify Mr Flammia in respect of damages for that breach. Hillsan's case on this issue is to be found in paras 19 - 25 of a (third) further amended statement of claim, and a further order which is sought in its motion is leave to amend the existing statement of claim accordingly. It is proposed that LawCover be joined as the fourth defendant, Mr Flammia as the fifth defendant, and the Official Trustee in Bankruptcy (as trustee of Mr Flammia's bankrupt estate) as the sixth defendant. 15This new pleading is expressed to be "further or in the alternative to" the claim against Mr Hancock. The claim is that Hillsan suffered loss as a result of Mr Flammia's negligence, and that Mr Flammia is entitled to be indemnified in respect of his liability for that loss by LawCover. Hillsan seeks a declaration that, in accordance with s 6(1) of the LRMP Act, the amount of that liability is a charge on all insurance money that is or may become liable in respect of it, and an order that LawCover pay that amount to Hillsan. 16It is at this point that Mr Hancock's proportionate liability claim against Mr Flammia must be considered. That claim appears in paras 18 - 26 of his defence, and in the proposed amended statement of claim Hillsan adopts those paragraphs. As I have said, Mr Hancock asserts a duty of care on the part of Mr Flammia to Hillsan and the Vaccaros. It is sufficient to refer to paras 18 - 23 of his pleading, as the remaining two paragraphs are concerned with Mr Flammia's duty to the Vaccaros. 17Paragraphs 18 - 20 of Mr Hancock's defence plead that Mr Flammia held the Vaccaros' CT for safe keeping at his office, that on a date unknown the CT was obtained by Mr Caradonna or by persons unknown, and that Mr Caradonna or persons unknown fraudulently used the CT to obtain the mortgage. In the defence the Narellan property is referred to as "the Property" and the CT as "the Certificate". Paragraphs 21 and 22 are as follows: "21 Flammia owed a duty of care to parties in the plaintiff's position, being a party who might enter into a transaction in connection with the Property or the Certificate including: (a) adequately to secure the Certificate; (b) adequately to secure the Certificate to prevent its being used to raise loans on the security of the forged mortgages; (c) not to permit third parties access to the Certificate; (d) not to permit a third party access to the Certificate in circumstances in which Flammia was aware of the third party's criminality. 22 Flammia breached the duty of care in that: (a) he failed adequately to secure the Certificate; (b) permitted Caradonna access to the Certificate in circumstances in which he was aware that Caradonna had served a gaol sentence for fraud; (c) permitted access to persons unknown to the Certificate." 18It is unnecessary to recite the principles governing an application under s 6(4) of the LRMP Act. They were summarised by Johnson J, with reference to authority, in his judgment in the Vaccaro proceedings at [102] ff. In general terms, the question in such an application is whether, on the evidence available, it is arguable that the insured had a claim under the relevant policy. That question is not to be determined as it would be at a final hearing at which the insurer had been joined as a party to the proceedings. 19In the present case, whether LawCover should be joined as a party depends on two questions: (1)Is it arguable that Mr Flammia owed a duty of care to Hillsan? (2)If so, is it arguable that his conduct, as alleged, was negligent rather than dishonest? 20It is convenient to deal with the second question first. Mr Blake SC, who appeared with Mr Edwards for Hillsan, submitted that I should accept Johnson J's findings on this issue. Counsel for LawCover, Mr Flynn, did not suggest otherwise. However, he argued that Hillsan's pleading on this issue, adopting that of Mr Hancock, could convey that it is dishonesty on the part of Mr Flammia that is being alleged. He noted the reference in the quoted paragraphs of Mr Hancock's defence to the duty of Mr Flammia not to "permit" third party access to the CT, particularly in circumstances in which he was aware of the third party's criminality, and the breach of that duty because he "permitted" Mr Caradonna access to the CT in circumstances in which he was aware of Caradonna's conviction for fraud. 21Mr Flynn referred to correspondence between the solicitors for Hillsan, Mr Hancock and LawCover on this issue. By letter of 28 July 2010 to Mr Hancock's solicitors, Hillsan's solicitors sought particulars of the duty of care on the part of Mr Flammia alleged in the defence. In their reply of 5 August 2010, Mr Hancock's solicitors asserted "a duty on the part of any prudent solicitor entrusted with the safe keeping of a certificate of title for a client", in particular, "duties to parties who might lend money on security of a forged mortgage obtained with the Certificate". Combined with that duty, there was asserted to be: "a duty arising because of facts or circumstances relating specifically to Mr Flammia. This is clear from subparagraph 25(d) of our client's defence in which it is pleaded that Mr Flammia permitted Mr Caradonna access to the certificate of title for the land the subject of the proceedings in circumstances in which Mr Flammia was aware that Mr Caradonna had served a gaol sentence of (sic) fraud." Subparagraph 25(d) of the defence is part of the pleading of Mr Flammia's breach of duty to the Vaccaros. However, it is the same as the allegation of breach of duty to Hillsan pleaded in subparagraph 22(b), quoted above. 22These particulars were adopted by Hillsan's solicitors in a letter of 6 August 2010 to the solicitors for LawCover. That letter was written in response to LawCover's motion for particulars of Hillsan's claim against it. 23In written submissions prepared before the day these motions were heard, Mr Flynn argued that the particulars tended to confirm the impression from the pleading itself that dishonesty was being alleged, in which case Hillsan's claim against LawCover would inevitably be defeated by the exclusion clause in the policy. That conclusion would be strengthened by what he submitted were issue estoppels binding Mr Flammia arising from the findings of Emmett J in the Colonial proceedings, to which I have referred. Those findings, in turn, would bind Hillsan, whose rights against LawCover would be no better than those of Mr Flammia's. 24It is against this background that LawCover's motion seeking particulars of Hillsan's claim against it, and the adjournment of Hillsan's motions for joinder of LawCover and the joint hearing of the two sets of proceedings until those particulars had been provided, must be understood. On 13 August 2010, a few days before the hearing of the motions, LawCover's solicitors wrote to the solicitors for Hillsan seeking still more particulars of its claim. I shall turn to that letter shortly. Hillsan's solicitors wrote to the solicitors for Mr Hancock, asking that they provide those further particulars. However, in their response of 18 August 2010 Mr Hancock's solicitors declined to do so. It was for this reason that Hillsan sought to amend its second notice of motion to seek an order that Mr Hancock provide those particulars. 25As it happens, both LawCover's motion and the additional application in Hillsan's second notice of motion were overtaken by events. In its letter of 13 August to Hillsan's solicitors, LawCover's solicitors sought the following further particulars: "1 In relation to the words " Mr Flammia permitted Mr Caradonna access to the certificate of title ", please identify any specific acts or omissions of Mr Flammia which are relied upon to constitute the permission alleged. 2. In relation to the words " Mr Flammia permitted Mr Caradonna access to the certificate of title ", please identify more precisely ... what knowledge on the part of Mr Flammia in relation to Mr Caradonna's possession of the certificate of title is intended to be alleged by those words. ... ... 3. Please confirm that it is alleged that prior to Mr Flammia permitting access (within the meaning particularised in answer to questions 1 and 2 above) and at all material times thereafter, Mr Flammia had knowledge of Mr Caradonna's conviction for defrauding the Commonwealth and gaol sentence." 26Hillsan's solicitors responded by letter of 18 August 2010, the day before the hearing. They answered the three questions as follows: "1 The Plaintiff is unaware of: (a) any specific acts; and (b) except to the extent that Mr Flammia failed adequately to secure the Certificate, any specific omissions of Mr Flammia which constitute the permission alleged. 2 The Plaintiff alleges that Mr Flammia did not actually know, but ought to have known, that Mr Caradonna was capable of obtaining from Mr Flammia's office physical possession of certificates of title of one or more of Mr Flammia's clients. 3 The Plaintiff alleges that Mr Flammia had knowledge that Mr Caradonna had been convicted of a criminal offence capable of being described as defrauding the Commonwealth, and had been imprisoned for a period of time." 27In the light of this material, Mr Flynn did not press an argument that Hillsan's motion for the joinder of LawCover should be refused because the exclusion clause in the policy clearly applied. Nor did he press LawCover's motion for the provision of further particulars by Hillsan. However, he did argue that I should not order the joinder of LawCover on the basis of the pleading as it stands. He submitted that, notwithstanding the particulars supplied by Hillsan in the letter of 18 August, the ambiguity inherent in that pleading remained, and that an order joining LawCover should not be made unless, with the leave of the Court, Hillsan amended its pleading to clarify its position. 28However, it appears to me, as was submitted in response by Mr Blake, that in the letter of 18 August Hillsan nailed its colours to the mast. It is clear that Hillsan alleges negligence, not dishonesty. Its case is that Mr Flammia failed adequately to secure the CT. His knowledge of Mr Caradonna's criminal history is no more than a particular of that negligence. In effect, what is alleged is that Mr Flammia should have secured the CT so as to ensure that someone with the criminal propensity of Mr Caradonna could not have access to it. 29It may yet be desirable for Hillsan to amend its pleading and, if it sought leave to do so, I would consider such an application. However, if LawCover is to be joined as a party, I would not refrain from doing so at this stage for that reason. Hillsan's claim against Mr Flammia is in negligence and I am satisfied that it is arguable that his conduct, as alleged, was negligent rather than dishonest. 30The remaining question, then, is whether it is arguable that Mr Flammia owed a duty of care to Hillsan. As I have said, both Hillsan and Mr Hancock assert that he did. The argument that he did not was shouldered by Mr Beale, who appeared with Mr Vesper for the Vaccaros. Mr Flynn did not address this issue on behalf of LawCover but, of course, he made no concession about it. 31Argument centred upon the decision of Bryson AJ in Chandra v Perpetual Trustees Victoria Ltd [2007] NSWSC 694. The plaintiffs in that case, a married couple, owned a property at Kingsford. A fraudster approached a solicitor, purportedly on behalf of the plaintiffs, presented a forged statutory declaration stating falsely that the plaintiffs had lost the certificate of title to the property, and instructed the solicitor to apply for a duplicate certificate. The solicitor did so and, in due course, furnished the fraudster with the new certificate. Using it and other false documents, the fraudster obtained substantial advances of money from Perpetual Trustees Victoria. 32For present purposes, there is no need to examine these proceedings and Bryson AJ's judgment in detail. It is sufficient to say that the plaintiffs sued Perpetual Trustees and the solicitor, and Perpetual Trustees cross-claimed against the solicitor. The issue of relevance here is whether the solicitor owed a duty of care to Perpetual Trustees. After lengthy examination of the law relating to duty of care and economic loss (at [74] ff), Bryson AJ concluded that he did not. 33His Honour noted that what was under consideration was not the solicitor's duty of care "to an indeterminate class of persons who might deal with the property in the future", but his duty "to persons who were directly and immediately affected by his bringing a new Certificate of Title into existence and giving the new Certificate of Title to [the fraudster]". His Honour also noted that, when that man approached the solicitor, there was on the face of it a well-advanced loan application which required no more than the replacement CT and some other formalities before Perpetual Trustees would be in a position to respond to it: [114]. 34His Honour said that there was no difficulty in confining the class of persons to whom the solicitor's duty was owed to reasonable limits, "that is, to an intending mortgagee of whose existence he knew": [115]. He observed that the solicitor's opportunity to exercise control, so as to guard against loss to that mortgagee, was clear: [116]. In this respect he referred to authority dealing specifically with control of the criminal conduct of others: Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254; Graham v Hall [2006] NSWCA 208. 35Nevertheless, his Honour found that there were countervailing factors which led to the conclusion that the solicitor did not owe a duty to Perpetual Trustees. There was "no element of reliance" by that company upon the solicitor: [118]. He found that, in the reasonable foresight of the solicitor, it would be expected that a finance house such as Perpetual Trustees would have conducted identity checks and would not simply have relied upon the production of the CT by the person seeking the loan. As his Honour put it, in the reasonable foresight of the solicitor, "much more would have been done by the mortgagee to establish who the mortgagee was dealing with than merely seeing that the person it was dealing with had a Certificate of Title to the security property". Within that reasonable contemplation, before the solicitor was consulted "the mortgagee would have made its own decision, on material suitable to it, ... about whether the persons it was dealing with were truly the persons they claimed to be": [122]. 36His Honour found that Perpetual Trustees was not vulnerable, in the sense in which that expression is used in the context of negligence law: [126]. Adopting an expression from Sullivan v Moody (2001) 207 CLR 562 at 576, he concluded that it could not be said that there was a "real and not a far-fetched possibility" that a careless act or omission on the part of the solicitor "might cause harm to a mortgagee in this class": [123]. 37Obviously, while there is some similarity between the facts of Chandra and the present case, there are also differences. Mr Beale acknowledged as much. His submission, however, was that in Chandra there was a stronger case for finding a duty on the part of the solicitor than there is here. In the present case the duty said to be owed by Mr Flammia was to an indeterminate class, that is, parties in the position of Hillsan. At the relevant time no loan application was in train and there was no identifiable prospective mortgagee. Mr Beale submitted that it could not be said that Mr Flammia had an opportunity to exercise control of the kind to which Bryson AJ referred at [116]. There was no element of reliance by Mr Hancock, as Hillsan's solicitor, on Mr Flammia, and Mr Hancock was not vulnerable in the relevant sense. Mr Beale argued that it was not within the reasonable foresight of Mr Flammia that a person in the position of Mr Hancock would deal with the CT without making proper inquiries. 38These are arguments of substance which, no doubt, would be advanced at the trial of the proceedings. However, I am not persuaded that they warrant a decision at this interlocutory stage that the allegation of a duty of care by Mr Flammia to Hillsan is unsustainable. Mr Blake's submissions to that effect were supported by Mr Walsh, counsel for Mr Hancock. 39Mr Blake referred to Bryson AJ's judgment at [94], where his Honour referred to Hill v Van Erp (1997) 188 CLR 159. It is not necessary to recite the facts of that case, which are markedly different from the present case. However, Bryson AJ observed that "that decision is now part of the general law and makes it difficult to see anomaly in imposing on a solicitor a duty of care to persons from whom he does not have a retainer in situations in which risk to them is foreseeable to the solicitor". His Honour added at [95] that this was not to increase a solicitor's responsibility "in the sense of extending the range of things the solicitor should do". Rather, it was to "extend the class of persons to whom the solicitor owes a duty of care", although requiring "only the careful performance of work which the solicitor already owed the client a duty to do". 40Clearly, those general principles apply here. It appears that there is no decision on all fours with the present case. Bryson AJ's decision in Chandra was the result of the application of principle to the facts of that case. True it is that his Honour arrived at his decision after taking into account factors favourable to finding a duty of care which are absent here. Nevertheless, it cannot be said that his reasoning founds a conclusion that in the present case the duty of care is unarguable. 41Accordingly, I am satisfied that LawCover should be joined as a defendant and that these proceedings should be heard together with the Vaccaro proceedings. It follows that I would grant leave to Hillsan to amend the existing statement of claim in accordance with the proposed third further amended statement of claim. It also follows that Hillsan should be granted leave to join Mr Flammia and the Official Trustee in Bankruptcy as defendants, provided the relevant leave under the Bankruptcy Act is granted by the Federal Magistrates Court. I shall hear the parties as to whether that order should be made immediately or should abide the result of the application to the Federal Magistrates Court. I shall also hear the parties on ancillary orders sought by Hillsan concerning evidence, which were not the subject of argument before me. 42LawCover's motion is dismissed. The application in Hillsan's second notice of motion that the paragraphs of Mr Hancock's defence pleading proportionate liability against Mr Flammia be struck out was to be pursued only if I declined to order that LawCover be joined, and then primarily on the basis that I found that there was not an arguable case that Mr Flammia owed Hillsan a duty of care. As I have found in favour of Hillsan on that issue, that application is not pressed. As I understand it, for the same reason it is not necessary for Hillsan to press its application that the second notice of motion be amended to seek an order that Mr Hancock provide particulars of his allegation that Mr Flammia owed a duty of care to Hillsan. If I be wrong in that, and Hillsan seeks those particulars in any event, I shall deal with that matter. 43When those outstanding matters are resolved, I direct the parties to bring in short minutes to give effect to my decision. I shall also hear the parties on costs, as it was foreshadowed at the hearing that argument on that issue might be necessary. The question was also raised whether this matter might be appropriate for case management by the Court rather than the registrar, and I shall hear the parties on that also.