Plaintiffs v Defendant

2 Central to the plaintiffs' claim against the Fidelity Fund, and also in this proceeding, is their assertion that two solicitors, Michael Brereton and Roderick Lyle, each committed a 'default' as defined in s 3.6.2 of the LPA. Those 'defaults' are alleged to have been committed by the solicitors, on separate occasions, in respect of trust money entrusted to them by the plaintiffs. In the case of the alleged Brereton default, the money in question was deposited into the trust account of a law firm of which Brereton was a principal. In the case of the alleged Lyle default, the money in question was deposited in the trust account of the law firm then known as Deacons Lawyers ('Deacons') where Lyle was a partner.

3 In denying the claim and defending this proceeding the Board:

(a) first, in each case, denied that the solicitors committed any 'default' as so defined, and

(b) secondly and alternatively, but only in relation to the alleged Brereton default, relied upon statutory defences under s 3.6.6 of the LPA which deny recourse to the Fidelity Fund if the default occurred in connection with certain types of investment activity ('the investment defences').

4 So, it is for the plaintiffs to establish that each solicitor committed a default in respect of trust money. It is for the Board to make out its s 3.6.6 investment defences in relation to Brereton.

5 Both the plaintiffs and the Board have urged the court to make an order under r 47.04 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) ('Rules') that a question or questions be heard and determined before the trial of the proceeding. The plaintiffs seek the preliminary determination of two questions:

(a) Does section 3.6.6 of the Legal Profession Act 2004 or any other provision operate to exclude liability on the part of the Fidelity Fund in relation to any default alleged against Michael Richard Brereton and/or Brereton and Co?

(b) Did Deacons Lawyers receive the money referred to in paragraph B 20 of the Amended Statement of Claim in the course of legal practice by the practice?

6 The Board opposes having the first question tried as a preliminary question. Since it was the party that proposed the second question, it supports it. The plaintiffs' agreement to the second question being tried separately was conditional upon the Board confirming that it would not raise any investment defence under s 3.6.6(3) of the LPA in relation to the alleged Lyle default. The Board gave that confirmation.

7 In substance, the Board opposes the court trying the first question as a preliminary question because, in its view, the determination of that question will involve the determination of so many of the other factual issues in dispute that there is no advantage in having it tried before the trial of all issues. Worse than that, the Board argues that by trying the first question separately from other issues, some witnesses will have to give their evidence twice. Further, it says there is the very real risk that issues of credit relevant to the determination of the preliminary question will be relevant for the determination of other issues to be tried later, and vice versa.

8 The only third party who made submissions on the matter of the trial of a preliminary question was the first-third party, Brereton. Brereton now resides in the United States of America. Through his solicitor he said he was not opposed to the hearing of a preliminary question in principle, but if he is to be a witness in the case he would prefer only to have to give his evidence once.

9 Even though the principal protagonists both support the notion of a preliminary question, and are agreed on one of them, it remains a matter for the court to determine whether there should be a trial of the preliminary question(s) in accordance with well-known principles.

10 In addition to the preliminary question application, the Board filed a summons (on 25 June 2015) seeking summary dismissal of the claims in respect of the alleged Lyle default. That application takes issue with an allegation in the Amended Statement of Claim that the fifth plaintiff, Seachange Project Nominees Pty Ltd, replaced a deregistered company as nominee of a particular partnership of investors and, in that capacity, became entitled to the relevant rights and interests in the Deacons' trust account monies the subject of the alleged Lyle default. If that allegation is successfully challenged, there is no party with standing to make any claim in respect of the alleged Lyle default. The Board intends to proceed with that application.

11 Depending upon my ruling in relation to whether there should be a trial of one or more preliminary questions, it may be necessary for me to determine the sequence of the hearing and determination of the preliminary question(s) and the hearing and determination of the summary dismissal application.

The plaintiffs' claim and the issues that arise

12 At the outset it is convenient to set out the relevant sections of the LPA that are pivotal to the plaintiffs' claim and the Board's defences.

13 Section 3.6.7(1) provides for claims to be made against the Fidelity Fund. It provides:

A person who suffers pecuniary loss because of a default to which this Part applies may make a claim against the Fidelity Fund to the Board about the default.

14 The definition of a 'default' in s 3.6.2 is critical. It was defined to mean -

(a) in the case of a law practice -

(i) a failure of the practice to pay or deliver trust money or trust property that was received by the practice in the course of legal practice by the practice, where the failure arises from or is constituted by an act or omission of an associate that involves dishonesty; or

(ii) a fraudulent dealing with trust property that was received by the practice in the course of legal practice by the practice, where the fraudulent dealing arises from or is constituted by an act or omission of an associate that involves dishonesty;

15 'Trust money' is defined elsewhere (s 3.3.2(1)) as meaning, in relation to a law practice, 'money entrusted to the law practice in the course of or in connection with the provision of legal services by the practice'.[3]

16 It is important to note the two elements involved in the definition of 'default'. One concerns the circumstances attending the receipt of money by a practice; the other concerns the circumstances attending its disbursement out of the account.

17 Finally, for the purpose of this ruling, it is necessary to set out the 'investment defence' provisions found in s 3.6.6 of the LPA. Those relied upon by the Board (with key concepts emphasised in bold) are:

(1) This Part does not apply to a default of a law practice to the extent that the default occurs in relation to money or property that is entrusted to or held by the practice for or in connection with -

(a) ...

(b) ...

(2) Without limiting subsection (1), this Part does not apply to a default of a law practice to the extent that the default occurs in relation to money or property that is entrusted to or held by the practice for or in connection with -

(a) a managed investment scheme undertaken by the practice; or

(b) ...

(3) Without limiting subsection (1) or (2), this Part does not apply to a default of a law practice to the extent that the default occurs in relation to money or property that is entrusted to or held by the practice for investment purposes, whether on its own account or as agent, unless -

(a) the money or property was entrusted to or held by the practice -

(i) in the ordinary course of legal practice; and

(ii) primarily in connection with the provision of legal services to or at the direction of the client; and

(b) the investment is or is to be made -

(i) in the ordinary course of legal practice; and

(ii) for the ancillary purpose of maintaining or enhancing the value of the money or property pending completion of the matter or further stages of the matter or pending payment or delivery of the money or property to or at the direction of the client.

18 In substance, on the facts briefly outlined below, the plaintiffs allege that they suffered pecuniary loss because of a default (as defined), first, by Brereton in relation to money entrusted to his practice in 2000 and, secondly, by Lyle in relation to money entrusted to his firm, Deacons, in 2004. The board denies that, in either case, the money was received by the relevant practice 'in the course of legal practice by the practice'. It also denies in each case the money was disbursed other than in accordance with proper authority. So it denies the existence of the both elements necessary for there to have been a 'default'.

19 Additionally, in the case of the money in the Brereton trust account, the Board also alleges that if there was a 'default', the money was either entrusted to the practice in the first place in connection with a managed investment scheme (see s 3.6.6(2)(a)), or otherwise for investment purposes that lacked any of the saving features described in s 3.6.6(3)(a) and (b). So, it contends, the Part does not apply to the default and the plaintiffs are not entitled to claim against the Fidelity Fund.

20 A full description of the events lying behind this claim would take an unnecessarily long time to give for the purpose of this ruling.[4] I will confine myself to a brief and general description only taken, essentially, from the pleadings. Given that the following description is gleaned from the pleadings, it is by definition a collection of allegations rather than facts.

(b) De Simone Nominees Pty Ltd ('DS Nominees Co'), a company of which the two brothers are directors;

(c) three further companies called Seachange Management Pty Ltd ('Management Co'), Seachange Project Nominees Pty Ltd ('Project Co') and Seachange Village Nominees Pty Ltd ('Village Co').

22 Brereton and another man, David McLeod, promoted a commercial venture which was to involve the construction of a retirement village at Collendina on the Bellarine Peninsula, Victoria. Funding for the venture was in part to be sourced from investors. Brereton and McLeod produced an Information Report in about February 2000 to be shown to would-be investors. The investment was said to offer significant, first year tax advantages to investors and a written advice from a barrister on that subject had been obtained for investors to consider.

23 Giuseppe had a meeting with Brereton in about February or March 2000. Following that meeting he agreed to invest $50,000. After hearing what Giuseppe told him, Serafino also agreed to invest a further $50,000.

24 Investors organised themselves into a number of syndicates in the form of 'partnerships' and it appears that their investments were made via those partnerships. Each partnership, or perhaps various collections of partnerships, were represented by a separate nominee company. All those partnerships (or their nominee companies) were themselves members of a 'head' partnership called the Seachange Retirement Village Partnership. Village Co was its corporate nominee.

25 Giuseppe and Serafino were associated with a partnership called Galambos, represented by a nominee company of that name. Today, that partnership is called the Seachange Project Partnership. The plaintiff parties allege that the nominee company for that partnership is now Project Co. (Whether or not that is so is the subject of the Board's summary dismissal application.)

26 Lyle, was another investor. He was associated with a different partnership to the De Simone brothers. He also happened to be a partner with a law firm, Deacons.

27 Broadly speaking, an outline of the transactions envisaged by the project is as follows. Management Co bought land on which to build the retirement village. It was a company ultimately controlled by Brereton and McLeod. Management Co sold the land to Village Co (the nominee entity of all investor partnerships) for a price that incorporated the cost of developing the land into a retirement village as well as the land value itself. Investors were to collectively invest sufficient funds to cover the cost of the deposit to be paid by Village Co to Management Co under the sale contract. Further funding for the development of the land was either to be derived from the activities of the retirement village itself (I infer, pre-sales of interests in the village) or from mortgage loans from commercial lenders.

28 In due course, nearly $5.444m was paid into an account said to be the trust account of Brereton's legal practice. That money included, inter alia, the $100,000 contributed by the De Simone brothers along with money contributed by Lyle and the partnership with which he was associated.

29 The plaintiffs allege, in substance, that the money was entrusted by them to Brereton's trust account to be held by the firm as stakeholder for the parties to the sale transaction between Management Co and Village Co. The Board asserts that the several deposits to Brereton's trust account were the investors' actual investment in the scheme, paid for convenience directly to Brereton. In reality, the Board claims, the money belonged to Village Co and was held by Brereton as the payment of the purchaser's deposit for the purchase of the land from Management Co, and was either not received by Brereton in the course of his legal practice or received by Brereton acting as the vendor's solicitor.

30 The plaintiffs then claim that Brereton misappropriated their money by dishonestly disbursing some $4.436m of the sum deposited. Giuseppe and Serafino claim to have suffered the loss of their $100,000; Management Co (no longer under the control of Brereton or McLeod) and Village Co claim to have suffered the loss of the $4.436m (less any part thereof recoverable by the De Simone parties). The Board denies any misappropriation and characterises the disbursement as the authorised dealing by Brereton of his client, Management Co's, money.

31 I turn to the losses said to have arisen from the Lyle default. They emerge from related, but quite separate, events. In 2003 and 2004 a group of investors in the Collendina Village project commenced legal proceedings against Brereton and McLeod. In that litigation, the investors claimed that Brereton and McLeod had misappropriated monies in connection with the project. The investors who brought the claim included Lyle but did not include the Galambos Partnership partners (which included the De Simone brothers). The litigating investors are referred to in the pleadings in this action as the 'disputing partners'.

32 In May 2004 the disputing partners settled their claims against Brereton and McLeod. By a deed entered in August 2004, the disputing partners agreed to transfer their 'partnership assets' in the project to the Galambos Partnership upon payment of $4.02m. De Simone Nominees Pty Ltd allegedly contributed the funds for that pay out. The settlement sum was paid in three instalments into the Deacons' trust account to be held pending satisfaction of all conditions precedent under the Deed, at which point the money was presumably disbursed to the disputing partners.

33 The plaintiffs in the current proceeding allege that the dealing by Lyle with the money entrusted to the Deacons' trust account constitutes a 'default' (as defined in the LPA) and further allege that they have suffered a pecuniary loss because of it.

34 The argument that these events constitute a 'default' relies on the allegations that Lyle: (1) knew that Brereton had been misappropriating money meant to be used for the project; (2) knew that those misappropriations had robbed the partnership assets that were being transferred of any value; (3) was a partner of the De Simone's and other investors and owed them a duty of candour; and yet (4) induced the Galambos Partnership to pay the $4.02m by fraudulently representing to the De Simone brothers (by his silence about the Brereton misappropriations) that the assets represented valuable consideration.

35 Conveniently, Derham AsJ of this Court recently summarised the principles relevant to the exercise of the court's discretion to order that a question be tried separately.[5] I gratefully adopt his Honour's summary:

(a) The discretion must be exercised with great caution, and only in a clear case;

(b) An order for the determination of a separate question before trial is generally only appropriate where the determination of the question will be likely to end the litigation or substantially narrow the issues in dispute, or where there is a clear demarcation between that issue and the other issues in the case;

(c) Where the preliminary question is one of mixed fact and law, it is necessary that the question can be precisely formulated (ensuring that the terms used have clear meaning) and that all of the facts that are on any fairly arguable view relevant to the determination of the question are ascertainable either as facts assumed to be correct for the purposes of the preliminary determination, as agreed facts or as facts to be judicially determined;

(d) The separate determination of the question should not be attempted where there is uncertainty inherent in the definition of the facts upon which the substantive question must be determined;

(e) In cases where the relevant facts are assumed by one party to be correct for the purposes of the preliminary determination, it is only possible to determine a question of law, not one of mixed law and fact;

(f) Care must be taken in utilising the procedure provided for in r 47.04 of the Rules to avoid the determination of issues not 'ripe' for separate and preliminary determination - for example, where it is simply one of two or more alternative ways in which an applicant frames its case, and determination of the issue would leave significant other issues unresolved;

(g) The advantages of trying separate questions for one party may unfairly disadvantage another party, including because the questions will be determined without the benefit of all the evidence relevant to the proceeding;

(h) Whether a question should be determined separately involves a two-stage process - the first stage requires that the questions for determination be identified clearly and with precision, while the second stage is the actual determination of the question - and the two stages should not be run together;

(i) If the questions involve issues of fact that need to be determined or proved, and the Court cannot see, on the basis of the material presently before it, that the facts can be properly determined, it is inappropriate to make the order;

(j) In some cases, perhaps most cases, it will be inappropriate to order the trial of preliminary questions before discovery of documents relevant to the questions, and before resolving grounds restricting production and inspection of them, such as client legal privilege or public interest immunity;

(k) Factors that tend to support the making of an order include that the separate determination of the question may:

(i) Contribute to the saving of time and cost by substantially narrowing the issues for trial, or even lead to disposal of the action; or

(ii) Contribute to the settlement of the litigation; and

(l) Factors that tell against the making of an order include that the separate determination of the question may:

(i) Give rise to significant contested factual issues both at the time of the hearing of the preliminary question and at the time of trial;

(ii) Result in significant overlap between the evidence adduced on the hearing of the separate question and at trial - possibly involving the calling of the same witnesses at both stages of the hearing of the proceeding - which will be of particular significance if the Court may be required to form a view as to the credibility of witnesses who may give evidence at both stages of the hearing of the proceeding; or

(iii) Prolong rather than shorten the litigation.[6]

36 His Honour also cited cautionary statements to the effect that savings in time and expense are often 'illusory'.[7]

37 The first proposed preliminary question (see [5](a) above) concerns the applicability of the investment defences to the claims for pecuniary loss allegedly suffered by the De Simone brothers, Management Co and Village Co because of the alleged Brereton default.

38 The plaintiffs claim that the operation of these defences can be neatly excised from the question of whether or not Brereton committed a default or, at least, from issues concerning whether or not he was dishonest in his dealings with the money once it had found its way into his trust account.

39 For their part, the Board strenuously resists that proposition. It argues, with some force in my view, that the question whether the money in Brereton's trust account could properly be characterised as trust monies, on the one hand, and the question whether he dishonestly dealt with the monies once it was within his trust account, on the other, both raise issues concerning Brereton's credit. It then argues that it would be very unwise for a court to hear and determine the first question in isolation from the second because findings about credit on the first will inevitably impact the court's view on the second, and vice versa.

40 In this proceeding, the plaintiffs have a special reason for enthusiasm for any preliminary question which might aid an early resolution of the case. Apart from desiring the usual efficiencies of early resolution, they are conscious of the default rule in these cases[8] that costs are not ordinarily recoverable against the losing party. Accordingly, every dollar spent by the plaintiffs on costs hereafter may well be unrecoverable even if they succeed. Added to that, the plaintiffs say they have been severely hampered by their inability to obtain documents that were in the possession of the Legal Services Commissioner when conducting the investigation into Brereton's practice for disciplinary purposes.[9] Those documents are mostly required to establish the dishonesty of Brereton's dealings with the money and to quantify the plaintiffs' claim and, so they say, they need not incur that cost now if the court is merely to hear the proposed preliminary questions.

41 Accordingly, the plaintiffs are eager to obtain even a partial determination of this case without having to incur the expense of pursuing those documents which they will need to pursue if the whole matter goes to trial. It is that commercial imperative that largely lies behind the plaintiffs' enthusiasm for the hearing and determination of a preliminary question or questions.

42 I well understand that imperative and I have certainly taken it into account. But the court must take a closer view of the relationship between issues, factually and legally, to be confident that a division of issues for trial will ultimately work an efficiency rather than an inefficiency, or worse still, an injustice.

43 In advancing the first preliminary question the plaintiffs were not able to inform me in any satisfactory detail of the division between the evidence required only for the preliminary question, and the evidence required for remaining issues.[10] I rather suspect that the plaintiffs' difficulty in attempting to do so is indicative of the problem: most of the issues are in fact inextricably entwined.

44 After argument, it remains unclear what evidence would be called in favour of their position on the first preliminary question; what evidence they would not need to call but which would otherwise be necessary for the determination of remaining issues; or how the question of whether there was a 'default' (incorporating both the elements I have described) could be satisfactorily excised from the issue concerning the applicability of the investment defences. That issue is particularly important when it is seen that the defences only operate on the assumption that a 'default' has occurred.

45 I am not satisfied that the question of whether or not there was a 'default' can readily be excised from the question whether one or other of the investment defences would succeed. It appeared to me that Mr Sandbach, appearing for the plaintiffs, was ready to concede that the first element of the definition of default (ie the character of the receipt of the monies) would probably have to be addressed at the same time as the court addressed the issue whether the monies were held for a managed investment scheme or for investment purposes. But Mr Sandbach appeared to argue that the question about the disbursal of the monies from the Brereton trust account, and whether it occurred in circumstances of dishonesty, need not be canvassed on the hearing of the first preliminary question.

46 The Board strenuously disagreed with that proposition largely for the reason I have already mentioned concerning issues of credit.

47 In my opinion, this is not a 'clear case' for the exercise of my discretion to order the hearing of a preliminary question. The determination of the proposed preliminary issue will involve mixed questions of fact and law. The definition of the terms involved in the statutory test are far from obvious and have not previously been the subject of authoritative decision, apart from the High Court's decision of Legal Services Board v Gillespie-Jones,[11] which was decided in a very different context. Here, a preliminary question should only be ordered if all of the facts that are arguably relevant are either to be assumed to be correct, or agreed between the parties, or are clearly identified for judicial determination. Not only are they not to be assumed or agreed, I have had a good deal of difficulty in ascertaining just what those facts would be.

48 In my view, as best as I can tell, there is likely to be a significant amount of contested factual issues on the hearing of the first proposed preliminary question. Again, as best as I can tell, there is also likely to be a significant overlap between the evidence adduced on the hearing of the separate question and the evidence to be heard at a later stage on the trial of the remainder of the issues. Credibility of witnesses who may give evidence at both stages will be a matter that the court has to assess twice, on different bodies of evidence.

49 In view of these considerations I will not order the hearing and determination of the first proposed question.

50 The second proposed preliminary question (see [5](b) above) concerns the issue of whether any dealing with the money held in the Deacons' trust account could amount to a 'default' so as to enable a claim on the Fidelity Fund.

51 The second question relates only to the alleged Lyle default and purports to extract the allegedly simple issue of whether the monies were received by Deacons in the course of legal practice. This question is apparently designed to answer the issue whether the first element of the definition of default (namely the 'receipt' element) was satisfied in the circumstances of the case. The parties before me argued that if that element cannot be satisfied then it would be unnecessary to canvass the question of how the monies were then disbursed and whether they were disbursed with dishonesty.

52 But the parties' agreement ceased at the point of agreeing the question should be put.

53 The Board contended that the resolution of that question would be a simple matter of looking at the transaction documents and inquiring whether any legal service was provided to the plaintiff parties in connection with the deposit into the trust account. For their part, the plaintiffs contended that it would still be necessary for the court to consider whether the plaintiffs were induced by Lyle's fraud to pay the money at all. The plaintiffs' even went a step further arguing that it would also be necessary to canvass the conduct of Brereton and Lyle's knowledge of it.

54 If all or some of that is so, then once again a real potential exists for significant overlap between issues concerning the receipt of the money, on the one hand, and the disbursal of it, on the other. In my view there is sufficient force in the plaintiffs' argument in this regard to cast considerable doubt on the alleged simplicity of the division of issues as argued by the Board.

55 The most obvious way in which that overlap arises is in respect of the credit of Lyle himself. As noted, the plaintiffs contend that the money held in Deacons' trust account necessarily remained monies belonging to them because the premise upon which they paid it was false and known by Lyle (the partner of Deacons) to be false. On that logic, the plaintiffs argue, it could not have been lawfully disbursed by Deacons to anyone other than to them. So, say the plaintiffs, the knowledge of Lyle of Brereton's misappropriations will necessarily have to be addressed in determining the true character of the money in Deacons' trust account.

56 The plaintiffs ran that argument in order to persuade me that, were I to allow the second question as a preliminary question, I should also allow the first. But, not being minded to allow the first, if it is the case that the second question raises for consideration the same factual issues that would have been raised by the first, then I ought not to hear the second question either.

57 Of course, I make no determination at this stage that the plaintiffs' contention is necessarily correct. But there is simply too much uncertainty about the interrelationship of issues to enable the court to be confident that a preliminary trial of the issue the Board has proposed will produce efficiency and not inefficiency.

58 Once again, neither party was really prepared to address in any detail what would be the precise factual matters that could either be agreed, or assumed or would need to be determined for the resolution of the second proposed question. Worse still, as I have just mentioned, they appeared to disagree on what facts would be necessary at all.

59 In all the circumstances, it seems to me that the savings in time and expense are more likely to be illusory than real. Despite the agreement of the plaintiffs and the Board that the court should hear the second proposed question as a preliminary issue, I am left unconvinced that it should do so.

60 Given that I am not prepared to order the hearing of either preliminary questions it follows that the Board's application for summary dismissal ought to proceed as soon as practicable. There were a number of oral applications made by the Board which were deferred pending this ruling but which need to be addressed before that application is finally to be heard.

61 I dismiss the applications for the trial of a preliminary question. I will proceed to hear from the Board in relation to its oral applications, and adjourn its summary dismissal application to be heard on a date to be fixed.

SEACHANGE PROJECT NOMNIEES PTY LTD (ACN 149 258 033)

SEACHANGE VILLAGE NOMINEES PTY LTD (ACN 091 526 215)

[1] The name of the Board has recently changed to Victorian Legal Services Board following the commencement of the Legal Profession Uniform Law Application Act 2014 (Vic), which itself repealed the LPA on 1 July 2015.

[3] The definition proceeds to expressly include particular species of receipt which I will not list here.

[4] For further detail as to the background, see De Simone v Legal Services Board [2015] VSC 9 (Derham AsJ) [4]-[32].

[5] Vale v Daumeke [2015] VSC 342.

[6] Ibid [31] (extensive citation omitted)

[9] See De Simone v Legal Services Board [2015] VSC 9 (Derham AsJ).

[10] I gave consideration to allowing the parties to prepare witness outlines of evidence and lists of documents for the trial of each preliminary question as an aid to considering whether to allow such a trial. In the end, I was not persuaded that such a step would be productive of efficiency either as a matter of time or cost.

[11] [2013] HCA 35; (2013) 249 CLR 493.