The latest decision at the superior court level in Victoria dealing with restraint application is Santin v Sfameni [2020] VSC 26.  That judgement considers a case in which I appeared for the, unsuccessful, applicant, Pinnacle Living Pty Ltd v Elusive Image Pty Ltd [2006] VSC 202. 

FACTS

The dramatis personae are:

• Emilio Santin (“Emilio”), who died on 2 March 2017 [1].
• Rosanna Sfameni (“Rosanna”), Emilio’s daughter and executor of his estate [1].
• Carlo Santin (“Carlo”) and Bruno Santin (“Bruno”), Emilio’s sons and residuary beneficiaries under his last will dated 23 September 2011 [1].
• Carlo and Bruno are represented by a solicitor, John Whelan (“Whelan”) [3].
• Whelan acted for Emilio between about September 2015 and January 2017 [3].

Carlo and Bruno commenced proceedings seeking order that Rosanna be removed as executor and trustee of their father’s estate [2].

Rosanna  applied to restrain Whelan from continuing to act for Carlo and Bruno on the bases that:

• Whelan formerly acted for the deceased; and
• is likely to be a material witness in relation to contested issues [3].

The loan

Rosanna and her husband, Salvatore (Sam) Sfameni lent Emilio $473,385. They were the mortgagees of a mortgage registered by Rosanna on 29 September 2011 as security for that loan [7].  The loan was used to discharge an earlier mortgage in which Emilio acted as guarantor for a loan taken out by his eldest son, Giuseppe Santin (“Joe”), who had subsequently defaulted.

The mortgage was charged against Emilio’s property in Ascot Vale.

On 6 September 2017, Rosanna obtained a grant of probate of Emilio’s will. The Inventory of Assets and Liabilities disclosed:

• gross assets of $1,210,919.19, of which the Ascot Vale property  was valued at $1.2 million,
• a single liability of $876,823.80 owing to Rosanna and Sam pursuant to the mortgage [16].

Carlo and Bruno initially contended that:

• there is an arguable case that the mortgage granted over the Ascot Vale property in 2011 should be set aside on the grounds of unconscionability;
•  Rosanna and Sam took advantage of the deceased’s ‘special disabilities’:
  • that he spoke very limited English
  • he was effectively unable to read English,
  • that he trusted and relied on his children and Sam,
  • he was elderly and unsophisticated in commercial matters
  • had only one asset of consequence, being his residence in Ascot Vale.
• Emilio’s English was poor.
• while Emilio understood there was a caveat on his home but that he did not know or understand there was a registered mortgage on his home.
• when Emilio signed the document he had not been aware that he was signing a mortgage [9]
• Rosanna and Sam unconscionably took advantage of these special disabilities on the part of the deceased because:

(a) the mortgage granted in relation to the Ascot Vale property provided for interest only to be repayable;

(b) interest on the loan would accrue at 8.2% per annum, but if the instalment was not paid on time, interest would accrue at a higher rate of 10.2% per annum;

(c) the lower interest rate would mean that the monthly interest instalments were $3,234.79;

(d) unpaid instalments would be added to the principal and therefore bear interest as well;

(e) there would be a power of sale in the event of default;

(f) at the time of executing the mortgage, the deceased did not know or understand the nature of the document which he was signing and relied upon Rosanna and Sam to protect his interests;

(g) entering into the mortgage was against the deceased’s interests because:

(i) of the imposition of an interest rate which exceeded available retail interest rate;

(ii) of the imposition of a minimum monthly payment which exceeded the deceased’s income;

(iii) the deceased would inevitably be in default from the due date for the first instalment such that the defendant and Sam would have a power of sale over the property; and

(iv) the capitalisation of interest would inevitably consume the deceased’s equity in the property.

• upon entering into the mortgage, there immediately arose a conflict between the Emilio’s interests and Rosanna’s interests [11]
• Emilio was unable to meet a single repayment on the mortgage with the consequence that interest accrued at 10.2% per annum and was added to the capital of the loan [12].
• on 25 March 2015 and then on 23 May 2015, Emilio and Rosanna entered into contracts for Rosanna to purchase the Ascot Vale property from the deceased. Neither sale proceeded [13].
• On 1 September 2016, Rosanna’s solicitors served on the deceased a ‘Notice to Pay’ demanding $833,590 pursuant to the mortgage and threatened the power of sale of the property if there was a failure to comply with the demand within one month. Another notice of default was served on 23 December 2016 [14].
• the Inventory of Assets and Liabilities lodged by Rosanna omitted certain of the deceased’s assets [17]
• in the period of nearly two years between when Emilio died and when the Ascot Vale property was purchased by Sam, the property was never rented out to generate income [23].
• allege that, from the purchase price of $1,250,000 paid by Sam, Rosanna caused:
  • $1,048,566.86 to be paid to herself and Sam pursuant to the mortgage over the property,
  • $116,896.50 to be paid to herself for reimbursement of various personal expenses including her legal fees associated with her dispute with Emilio
  • the balance of $62,437.76 to be paid equally to herself, Carlo and Bruno pursuant to the terms of deceased’s will ($20,812.58 each) [24].

Claim of conflict

By letter dated 13 April 2018 Whelan:

• advised Rosanna’s solicitor that he acted for Carlo [19].
• stated that Rosanna was ‘hopelessly compromised as executor’ [19];
• advised that Rosanna’s options were:

1. 1. renounce her appointment as executor; or
   2. make application to seek directions whether she might be exonerated from continuing to act in the face of the conflict between her duty to the beneficiaries and her personal interest claimed under the contract of sale and the mortgage; or
   3. remain as executor and not cease to enforce the alleged contract of sale or mortgage.

of which the 2nd and 3rd options would be rejected and Rosanna should renounce her appointment as executor and an independent executor would need to be appointed, recognising that there will be litigation [19].

On 7 June 2018, Rosanna’s solicitors informed  Whelan that Rosanna would not seek to enforce the contract of sale of the Ascot Vale property but would sell the property as executor and apply the funds to discharge the mortgage [20].  Whelan responded, on 8 June 2018, that Rosanna ‘remains compromised’ and could not ‘discharge a mortgage in favour of herself and her husband on terms that allow[ed] [her] to make her own calculation as to the amount due under the mortgage’ [21].

On 20 October 2018, Rosanna and Sam entered into a contract of sale which provided for Sam to purchase the Ascot Vale property for $1,250,000. The contract settled on 3 December 2018 [22].

Carlo and Bruno contend that Rosanna is hopelessly conflicted between her personal interests and her duties as executor of Emilio’s estate and she should be removed because:

• by paying herself $1,048,566.86 to discharge the mortgage over the Ascot Vale property, Rosanna breached her duty as executor not to place herself in a positon of conflict between her position of trust and her own interests [25]
• an executor cannot make a payment to herself from the estate assets; all the more so in circumstances where the liability which she asserts may be tainted by unconscionability’ [25].
• where it is at least arguable that Rosanna and Sam acted unconscionably in taking advantage of the Emilio’s special disabilities the propriety of the mortgage transaction required ‘careful investigation’ [25]
• whether Emilio was truly liable to Rosanna and Sam and in what sum, was not a matter which Rosanna could fairly and independently investigate [26].
• Rosanna had expressly acknowledged her conflict of interest, but continued to act and to pay out the mortgage despite the fact that Carlo and Bruno clearly did not consent to her doing so or for her to continue to act as a conflicted fiduciary [26].

Whelan’s involvement

Whelan acted for Emilio between about September 2015 and January 2017 in relation to a dispute about the repayment of the loan made to Emilio by Rosanna and Sam [30]. Whelan notified Rosanna and Sam that he acted for the deceased on 28 September 2015 [31].

Whelan wrote Rosanna and Sam on:

• 22 October 2015, Whelan notifying them that Emilio had decided to sell the Ascot Vale property [32];
• 7 October 2016, regarding the notice to pay which he stated that it was defective and that the amount required to discharge the mortgage was ‘plainly incorrect’ [33];
• 18 October 2016, stating, amongst other things, that ‘it appears that your method of calculating interest is compounding. The mortgage does not allow for this’ [34];
• in late 2016 and represented Emilio at an informal mediation on 25 January 2017 [35].

Importantly shortly before the hearing of Rosanna’s application to restrain Whelan from acting, Carlo and Bruno sought leave to amend their Originating Motion to abandoning their claims seeking declarations that:

• Rosanna caused loss to the estate by:
  • failing to refinance the loan secured by mortgage over the estate property,
  • failing to let the property, and
  • failing to account for identified items
• Rosanna and Sam be prohibited from recovering interest pursuant to the mortgage over hte property at a rate about hte reasonably obtained market rate [27] & [28].

Rosanna neither consented to, nor opposed, this application and the Court granted leave to amend the Originating Motion [28].

DECISION

His honour noted that the court has inherent jurisdiction to restrain solicitors from acting in a particular case [1].

The grounds upon which that jurisdiction may be exercised include the following relied on by Rosanna being:

(a) to protect the due administration of justice where a reasonably informed member of the public would conclude that a solicitor should be prevented from acting; and

(b) if a reasonable person informed of the facts might reasonably anticipate danger of misuse of confidential information of a former client of the solicitor, and that there is a real and sensible possibility that the interest of the practitioner in advancing the case in litigation might conflict with the practitioner’s duty to keep the information confidential and to refrain from using that information to the detriment of the former client.

The application is considered in the context of the proceeding  confined to the application for the removal of Rosanna as executor of the deceased’s estate and the appointment of an independent administrator in her stead [29].

The Court referred, at [37] to the principles set out by Whelan J in  Pinnacle Living Pty Ltd v Elusive Image Pty Ltd being:

(1) The Court will restrain a legal practitioner from continuing to act for a party to litigation if a reasonable person informed of the facts might reasonably anticipate danger of misuse of confidential information of a former client, and that there is a real and sensible possibility that the interest of the practitioner in advancing the case in litigation might conflict with the practitioner’s duty to keep the information confidential and to refrain from using that information to the detriment of the former client.

(2) The danger of misuse of confidential information is not the sole touchstone for curial intervention where a solicitor acts against a former client. There is also an independent equitable obligation of loyalty which forbids a solicitor acting against a former client in the same or a closely related matter. Intervention may also be justified on this ground in the exercise of a Court’s supervisory jurisdiction over its own officers.

(3) There is an overriding jurisdiction to intervene so as to protect the due administration of justice arising where a reasonable informed member of the public would conclude that solicitors should be prevented from acting.

The court regarded the application was developed principally by reference to:

• the third of these grounds (‘the administration of justice ground’),
• to the first ground (‘the misuse of confidential information ground’) [38].

The Court in reviewing the authorities stated:

•  the Court’s jurisdiction to restrain a solicitor from acting on the administration of justice ground is exceptional and is to be exercised with caution [39]
• referred to Middleton J’s statement in  Bahonko v Nurses Board of Victoria (No 3) that the ‘Court must be careful not to intervene unless it is absolutely required in the circumstances of the case’ and that the Court ‘should be mindful that sometimes applications for restraining legal practitioners may be misused or quite inappropriately pursued by a party to proceedings’ [39]
•  quoted the test set out by Brereton J in Kallinicos v Hunt, as :

… is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a legal practitioner should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice.

and that in exercising that jurisdiction:

… consideration is to be given to the prima facie right of a party to be represented by the lawyer of its choice, to the inconvenience, cost and disruption which might be occasioned by requiring a party to change lawyers, and to the “exceptional” nature of the jurisdiction.

The Cout summarised Rosanna’s principal objections to Whelan acting for Carlo and Bruno as:

(a)  Whelan may be required as a material witness in the proceeding regarding Carlo and Bruno’s claims of unconscionability;

(b) Whelan possessed confidential information relating to his representation of the deceased; and

(c) that when the unconscionability issue falls to be determined, Whelan’s conduct when representing the deceased may be called into question.

The court noted that Rosanna’s claim is based on the contradiction of the ‘serious allegations of impropriety and misconduct’ made against her compared with Whelan raising no such concerns when he acted for Emilio and provided ‘no suggestion of unconscionable conduct’ on her part [43].  Rosanna’s submission was that either Emilio said nothing to Whelan to support  unconscionability, or he rejected advice provided by Whelan to the effect that the mortgage was unconscionable. As such Whelan’s conduct will be in issue generally and his professional conduct as to why the deceased did not challenge the mortgage during his lifetime in particular [44].  Rosanna arguing the administration of justice ground, relied on Kallinicos, where a solicitor was likely to be a material witness on controversial issues of substance submiting Whelan’s position is almost the same [45].

Rosanna also submitted:

• that Whelan is in receipt of confidential information that is subject to legal professional privilege which if deployed to advance Carlo and Bruno’s case he would be in breach of his obligations as Emilio’s solicitor.
• there is a risk that Whelan may withhold information obtained from Emilio and relevant to Carlo and Bruno’s case [48].

The court stated that Rosanna failed to appreciate that the proceeding is limited to an application to remove Rosanna as executor of the deceased’s estate and appoint an independent administrator in her place [49] and it is unnecessary for the Court to finally determine whether or not Rosanna and Sam did in fact engage in unconscionable conduct towards the deceased in relation to the grant of the mortgage over the Ascot Vale property [50]. The nature of the removal case is wholly limited to Rossana’s conduct since her appointment as executor and do not turn at all on the claims of unconscionable conduct [51].

The Court noted that the claim regarding the ‘mortgage discharge conflict’ and the connected ‘unconscionability conflict’ is that Rosanna should be removed and an independent administrator appointed because of her failure to carefully investigate the mortgage transaction where it was at least arguable that she and Sam had engaged in unconscionable conduct towards the deceased [52].  The court stated this was an orthodox claim for removal based upon an executor’s alleged conflict of interest. No submission was advanced to the contrary [52] and as such it would be unnecessary for the Court to finally determine the claims of unconscionable conduct and  this ground of removal would turn on:

(i) whether Rosanna and Sam arguably engaged in unconscionable conduct when the mortgage was entered into in 2011; and

(ii) an examination of the propriety of Rosanna’s conduct as executor and in particular her conduct in paying out the mortgage.

In that context Whelan’s previous representation of the deceased is wholly unrelated to the determination of that issue [54].

The court made the “general observation” that Whelan’s dealings with Emilio in 2015–2017 could only be indirectly relevant to whether Rosanna and Sam engaged in unconscionable conduct in 2011. An examination of the communications between Whelan and Emilio and the correspondence sent byWhelan to Rosanna could could only be, at best,  of limited relevance to determining whether Rosanna and Sam arguably engaged in unconscionable conduct [55].

The Court found the claimed difficulty in reconciling the current allegations of unconscionable conduct with the correspondence sent to Rosanna by Whelan on behalf of Emilio is overstated and based on commentary taken out of context [56] – [59]. 

The court noted, without expressing a firm view, that Rosanna’s capacity to compel Whelan to give evidence was constrained by questions of relevance but issues of legal professional privilege [60].  Whelan would have at least an arguable basis to seek to set aside any subpoena which might issue to compel him to give evidence in Rosanna’s case on the basis of legal professional privilege [60].  The court quoted Riordan J stated in ACN 092 675 164 Pty Ltd v Suckling :

Of course, each case must be determined on its own facts, but critically the practitioner in each of the above cases was alleged to be a significant actor in a critical event in the proceeding.

The Court found that Whelan was not a significant actor in the critical events relevant to Carlo and Bruno’s removal application and he did  not consider that a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that  Whelan be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice [62].

The court also took into account:

• Carlo and Bruno’s prima facie right to be represented by their lawyer of choice
• the inconvenience, cost and disruption if required to change legal representatives.
• the exceptional nature of the Court’s jurisdiction to restrain a lawyer from acting [63].

The court found the claim that confidential information may be misused as to be without substance. Rosanna did not demonstrate any actual or likely conflict between Emilio’s interests and those of Carlo and Bruno which might reasonably give rise to such an apprehension [64].  If anything, the material suggests that the interests of Carlo and Bruno and those of Emilio are broadly aligned [65].  

The Court dismissed the application [68].

ISSUE

Restraint applications are complex and difficult.  Orders restraining parties from engaging solicitors/counsel of their choice are made relatively infrequently and never lightly. 

The bases for making such an application are settled and it is important that evidence in support of a ground must be well grounded in fact or strong inference, not supposition.

More importantly it is necessary to understand the basis of the claim made.  That is critically important when alleging that a legal representative will be a material witness.  In this case the amendment to the Originating Motion completely undermined the nature of the application because it was not tenable to claim that Whelan would be a material witness.  As a result of the amendment much of the detailed and involved facts relied upon by the applicant was rendered irrelevant before argument commenced.