FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE – joinder – Mareva Injunction - transfer of property – whether serious question to be tried - whether reasonably arguable that assets of respondents and prospective respondents could be diminished or dissipated – balance of convenience.

Federal Court of Australia Act 1976, (Cth) s 23

Bankruptcy Act 1966 (Cth), s 121

LED Builders Pty Limited v Eagle Homes Pty Limited (1997) 78 FCR 65, applied

Jackson v Sterling Industries Pty Limited (1987) 162 CLR 612, followed

NATIONAL AUSTRALIA BANK LIMITED V

ILANA ELENKA STERN AND JOSEPH POLLAK

NG 936 OF 1996

TAMBERLIN J

SYDNEY

21 DECEMBER 1998

ORDERS IN RESPECT OF HARRY STERN, AANA POLLAK AND STERN NOMINEES PTY LIMITED

Upon the Applicant giving to the Court:

(a)        the usual undertakings as to damages; and

(b)        an undertaking to keep the terms of the following orders confidential and, in particular, not to communicate the terms of such order to any other financial institution or financial reporting agency.

The Court orders that:

1.         Harry Stern, Aana Pollak and Stern Nominees Pty limited be joined as third, fourth and fifth respondents in proceedings NG 149 of 1996, NG 936 of 1996 and NG 81 of 1998.

2.         Until further order, each of the third, fourth and fifth respondents be restrained from selling, disposing of or dealing with any interest in any assets whatsoever and wherever situated in which they have had any interest transferred to them either directly or indirectly by the first two respondents after 1 January 1994 without giving the solicitor for the Applicant at least twenty-eight days prior written notice.

3.         Within fourteen days from the date hereof, the third, fourth and fifth respondents file and serve on the Applicant, affidavits giving details of their interests in any property whatsoever and wherever situated, transferred to them either directly or indirectly by the first two respondents, after 1 January 1994 and giving full details as to any sale, disposition or dealing by either of them of any interest in any such property.

4.         The third, fourth and fifth respondents pay the costs of the Applicant on this application in relation to the orders made against them.

5.         Liberty to apply on 24 hours notice.

ORDERS IN RESPECT OF JOSEPH POLLAK AND ILANA STERN

Upon the Applicant giving to the Court:

(a)        the usual undertakings as to damages; and

(b)        an undertaking to keep the terms of the following orders confidential and, in particular, not to communicate the terms of such orders to any other financial institution or financial reporting agency.

The Court orders that:

1.         Until further order, the first and second respondent be restrained from selling, disposing of or dealing with any interest in any assets whatsoever and wherever situated in which they have any interest without giving the solicitor for the Applicant at least 28 days prior written notice.

2.         Within fourteen days from the date hereof, the first and second respondents file and serve the Applicant with affidavits giving details of any interest in any property which has been transferred by either of them since 1 January 1994, directly or indirectly, whatsoever or wherever situated, to any person or body.

3.         The first and second respondents pay the costs of the Applicant on this application in relation to the orders made against them.

4.         Liberty to apply on 24 hours notice.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT ON MAREVA INJUNCTION APPLICATION

The Court is part-heard in the principal proceeding in this matter. The non-expert evidence has concluded and cross-examination of Ilana Stern and Joseph Pollak has been completed.  On the sixth day of the hearing, Counsel for the National Australia Bank Limited (“the Bank”) foreshadowed an application to join Harry Stern, Aana Marta Pollak and Stern Nominees Pty Limited as the third, fourth and fifth respondents to the proceedings (“the prospective respondents”).

The purpose of joining the prospective respondents was to obtain a Mareva injunction against them to prevent them from disposing of property until further order.  The primary property in question is any property which may have been transferred to them from the first and second respondents, Ilana Stern and Joseph Pollak, who are brother and sister.  Harry Stern is the husband of Ilana Stern.  Stern Nominees is the trustee of a Stern family trust.  Aana Pollak is the wife of Joseph Pollak.  The application was filed on 10 December 1998 and these reasons concern the question of joinder and the question of whether a Mareva injunction should be granted.

Background facts

The relevant facts for the purposes of this application are in short compass and can be briefly stated as follows.  On 25 March 1995, a judgment was obtained by the Bank against Ilana Stern and Joseph Pollak for an amount of approximately USD 3.58 million.  The judgment was given by the Superior Court for the State of California.  On 23 October 1995, Joseph Pollak, who is both a medical practitioner and a barrister, entered into a Deed with his wife, Aana Pollak, whereby he agreed to transfer his interest in three home units at Point Piper for AUD 1.125 million.  The transfer of the three properties occurred on that date.

There is, in evidence, a letter from the accountants for Joseph Pollak to the Los Angeles branch of the Bank, which lists the three Point Piper units as having total value of AUD 3.6 million and which shows the total value of his real estate assets as being AUD 13.05 million and his net assets as being AUD 8.025 million.  This statement shows assets as at 11 August 1988.  There is also a later statement in relation to Joseph Pollak as at November 1989, which shows the units as having a value of USD 2.7 million, being the owner’s estimate of the present value at that time.  On 30 June 1992, an estimate was given of the three units as being worth, in total, AUD 3.1 million.  The position with respect to real estate was again stated to be, at that time, about AUD 13 million.

Joseph Pollak has tendered three valuation letters in relation to the units dated 21 February 1995.  The author of that letter was not called to support the valuation set out in his letters nor was any affidavit filed by him.  The writer states that he looked at the units and made some inquiries with other estate agents.  He does not set out the instructions he was given but does indicate that the valuations were made solely for stamp duty purposes and there is a disclaimer.  No satisfactory evidence was given by Joseph Pollak to explain how the units could have fallen in value from the estimate of about AUD 3 million in 1992 to a figure in the order of one-third of that amount by early 1995.  The fact that the valuations were obtained in February 1995 for stamp duty purposes is consistent with a conclusion that it was in contemplation, at that time, that the units might be transferred by Joseph Pollak.

There was tendered in evidence by Joseph Pollak in re-examination some notes which were claimed to provide an indication as to the reasons for reduction in the asset position since about the end of the 1980s: see Exhibit 2.  However, I am not persuaded that these notes satisfactorily explain the dramatic reduction in his financial position over the relevant period.

On 23 February 1996, Joseph Pollak and Ilana Stern commenced proceedings in this Court to restrain the Bank from obtaining or enforcing the Californian judgment.  This application was dismissed on 29 February 1996 and a grant of leave to appeal to the Full Court was revoked on 12 March 1996 by the Full Court.  The appeal was, therefore, dismissed as incompetent.

On 26 June 1996, a deficiency judgment was obtained from the Superior Court of California, which required Joseph Pollak and Ilana Stern to pay USD 3.813 million plus costs to the Bank.  As noted earlier, the Deed and transfers of the units occurred on 10 October 1996.

On 8 November 1996, the Bank filed proceedings in the Supreme of  Court of New South Wales (No SG 233 of 1996) seeking judgment against the defendants for USD 3.799 million plus costs and interest.

On 2 December 1998, Joseph Pollak gave evidence before me that his only remaining assets comprised some personal property, such as furniture, a car and clothing.  He stated that he had no real estate anywhere.  He went on to say that he had about $20,000 to $30,000 comprised of borrowed funds in the Commonwealth Bank to keep his medical practice afloat. This medical practice is carried out under the name of “Mens Medical Clinic”.  He said that he was the owner of one non-voting share valued at $1 in that practice and agreed that this would only amount to a tiny fraction of the assets of that operation.  He has borrowed $100,000 from the Commonwealth Bank.  This was secured by the property of his wife, Aana Pollak.  Joseph Pollak gave evidence that he does not have the funds to finance the present litigation and that the bulk of the funding is coming from his brother-in-law, Dr Harry Stern, who is the husband of his sister Mrs Ilana Stern.  Harry Stern was not called to give evidence.

Joseph Pollak also gave evidence that he understood at the time the transfers took place that a possible consequence of the transfer of the Point Piper units to his wife was that it would put the Bank’s ability to enforce its judgment at risk.  However, although he said that was not the only consideration or even the main consideration in the signing of the transfers.

In relation to Ilana Stern, her financial circumstances have also been reduced to the stage where she does not appear to have any substantial assets available to meet any judgment which may be given by this Court.  This diminution of her assets appears to have taken place since 25 May 1995 when the first Californian judgment was given.

As at 20 May 1992, a statement signed by Ilana Stern estimated that the net assets of her husband Harry Stern and herself were in the order of AUD 10 million, with total assets of AUD 13.3 million.  Between 14 May and 6 June 1996, the public property records show that Ilana Stern transferred her interest in a number of properties to her husband Harry Stern.  Other property was transferred to Stern Nominees Pty Limited for $549,000.  That company was registered on 20 May 1995.  As noted above, it is a trustee for a Stern family trust.  Other directors of that company are Harry Stern and Ilana Stern.  Ilana Stern is also the Secretary.  The other shareholders appear to be the children of Harry and Ilana Stern.  Their address is shown as 49 Kambala Road, Bellevue Hill.

The evidence indicates that on 6 June 1996, 49 Kambala Road was sold and transferred to Harry Stern for AUD 1.625 million. The purchase price, on the evidence of Ilana Stern, was invested into a restructuring of the family trust, although this is not explained in detail.  Ilana Stern said that this was organised by her accountants and lawyers.  She does not know on what basis the proceeds of the purchase money went into the trust.  She also said that the United States judgments, given on 25 May 1995 and 26 June 1996, which were for an amount over USD 3 million, had nothing to do with the transfer.  She explained that restructuring took place because one of her daughters was born after the original trust had been set up.  She said that she wanted her daughter to be included in the trust.  The daughter in question was born in 1977.  Counsel for the Bank points out that Ilana Stern and Harry Stern have waited approximately 19 years before restructuring the trust and have selected a time for doing so which was close to the latest judgment in the United States.  No satisfactory explanation was given for the timing of this restructuring.  The last day for hearing on the application for deficiency judgment in California was 26 April 1996 and the judgment was delivered on 26 June 1996.

Legal principle

Relevant principles covering the grant of Mareva injunctions against third parties were recently considered by the Full Court in LED Builders Pty Limited v Eagle Homes Pty Limited (1997) 78 FCR 65.  Special leave to appeal to the High Court was granted and the appeal has been heard but the Court has reserved its decision.  The import of the Full Court’s decision was that the Federal Court has jurisdiction to grant a Mareva injunction against a non-party and that it is not essential that an applicant requesting relief should have a proprietary interest in the assets in the hands of the third party when relief is sought.

After referring to the authorities, Beaumont and Branson JJ concluded, at 78:

“At a jurisdictional level, the only real questions for the primary judge were first, whether there was a serious question to be tried as to whether assets presently under the control of Ultra and Mr and Mrs Cardile [the prospective respondents] could be available to satisfy a judgment against Eagle in favour of the applicant, and secondly, whether there was a danger of such assets being dealt with by Eagle, or the prospective respondents so that the Court’s process would be frustrated”

A similar view was expressed by Tamberlin J at 88.

The Court in that case reviewed the authorities in some detail and there is no need to repeat those references here.  Essentially, their Honours applied the principles in respect of the jurisdiction to grant a Mareva injunction, as set out in the High Court decision of Jackson v Sterling Industries Limited (1987) 162 CLR 612 at 617-9; 621, 623, 634 and 639.

In addition, the Court considered that s 23 of the Federal Court of Australia Act 1976 (Cth) was sufficiently wide to confer power to make the orders.

Admissibility

Objection was taken to the use of certain evidence given by the first and second respondents against the prospective respondents.  The present hearing is an interlocutory application.  The evidence of the first two respondents is, in my view, admissible as part of the factual context in which the joinder and Mareva injunction questions fall to be considered.  Such evidence cannot be treated as an admission as against any of the prospective respondents but it is not sought to be used in that way.  Nor can it be said that the evidence given by the first and second respondents was done in any capacity as agent for the respective respondents.  It is only for the limited purpose of providing background material from which inferences might be drawn.

Consideration of the application

At the outset, Counsel for the respondents reserved his rights in respect of the question of jurisdiction of the Court in view of the High Court appeal.  It is not in contention on this application that in the principal proceedings by the Bank there is a serious question to be tried.

The first submission in relation to the present application is that the evidence is not sufficient to support the conclusion that there is any real risk of any assets in the hands of the prospective respondents being diminished or dissipated by further disposal.  However, having regard to the timing of the transfers of property which have taken place and also to the dramatic diminution in the assets of Joseph Pollak and Ilana Stern, I am satisfied that there is a real risk that this would occur.  Whilst it is true that there does not appear to have been any disposal of the assets by either of them to date, I do not think this answers the case made by the Bank. 

The issue for determination is whether there is a reasonable risk of disposal or diminution in the assets, which might render fruitless a judgment in favour of the Bank.  There may be many reasons why the prospective respondents have not disposed of the assets transferred to them by the first and second respondents.  Harry Stern and Aana Pollak did not give any evidence in respect of their intentions in relation to such property.  However, commercial and family considerations point to a danger that they might do so, having regard to the activity three years ago in respect of the movement of property.

A further question which arose is whether there is a reasonably arguable case that the assets were disposed of to the prospective respondents in such a way that they could be recovered by, for example, a trustee in bankruptcy acting under s 121 of the Bankruptcy Act 1966 (Cth).

On the limited material presently before me, the circumstances and considerations outlined above when considered cumulatively persuade me that there is a reasonably arguable case to the effect that a trustee in bankruptcy could set aside the dispositions of property by the first and second respondents to the prospective respondents if the Bank is ultimately successful .

A further matter which must be considered is the balance of convenience.  No evidence has been called by the prospective respondents to identify any significant inconvenience which could not sound in damages if the interlocutory orders were made.  In circumstances, where the Bank has proffered undertakings as to damages, I am satisfied that the balance of convenience is in favour of keeping any transferred assets in the ownership of persons or entities in which they are presently held.  There is no doubt as to the financial ability of the Bank to make good its undertakings as to damages.  Some of the possible hardships referred to in argument are speculative only.  In my view, the balance of convenience favours the joinder of the prospective respondents and the grant of appropriate Mareva relief against all respondents.

The extent of the restraint

I have been furnished with a set of Draft Orders for consideration in the event that I should reach the conclusion that any restraining order should be made. On behalf of the respondents, it is made clear that the submission of Draft Orders is in no way to be taken as a concession that any order is appropriate.

I have considered the Draft Orders submitted and have decided that the appropriate orders are those outlined in this judgment.

Associate:

Dated:              21 December 1998