FEDERAL COURT OF AUSTRALIA

Colonial Mutual Superannuation Pty Ltd ABN 56 006 831 983 v Flammia No 3 [2007] FCA 2104

COLONIAL MUTUAL SUPERANNUATION PTY LTD ABN 56 006 831 983 v LORENZO FLAMMIA & ANOR

NSD1714 OF 2005

EMMETT J

7 DECEMBER 2007

SYDNEY

THE COURT:

1.                  Grants leave to LawCover Insurance Pty Limited (LawCover), to the extent that leave is required, pursuant to section 58(3)(b) of the Bankruptcy Act 1966 (Cth), to file a Second-Cross Claim in the form of annexure A to the affidavit of Timothy Randolph Price sworn 22 November 2007, and to proceed upon that Second Cross-Claim.

2.                  Orders that the Second Cross-Claim be returnable instanter on a hearing for final relief and waives compliance with the Federal Court Rules to the extent necessary to allow that to occur.

3.                  Orders pursuant to Order 32 rule 2(1)(d) that the hearing for final relief referred to in 2 above proceed in the absence of the Cross-Respondent to the Second Cross-Claim (Flammia).

4.                  Declares that LawCover is not liable, by reason of Flammia’s dishonest and fraudulent acts as set out in Annexure A hereto, to indemnify Flammia under the contract of insurance between LawCover and Flammia covering the period 1 July 2004 to 30 June 2005 for any claims arising from the circumstances giving rise to the claim by Colonial against Flammia as set out in Colonial’s Application dated 16 September 2005 and Colonial’s Further Amended Statement of Claim.

5.                  Orders that Flammia pay LawCover’s costs of the proceedings generally, including LawCover’s costs of and associated with the Second Cross-Claim, and LawCover’s costs of and associated with LawCover’s defence of the First Cross-Claim.

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

REASONS FOR JUDGMENT

1                     As I said in my reasons of 1 November 2007, this proceeding arises out of a fraud committed on the applicant, Colonial Mutual Superannuation Pty Ltd (Colonial).  By the fraud, Colonial was induced to cause a cheque in the sum of $438,802.80 to be drawn in favour of Stanley G. Stevens.  The cheque was sent to the respondent, Mr Lorenzo Flammia.  Colonial brought this proceeding against Mr Flammia for recovery of the damages it has suffered by reason of the cheque having been presented and paid to Mr Flammia.

2                     As I also said in my reasons of 1 November 2007, Mr Flammia sought indemnity from the cross-respondent, LawCover Insurance Pty Limited (LawCover), under a professional indemnity policy of insurance that was in force between LawCover and Mr Flammia at the relevant time.  On 1 November, I ruled that the evidence adduced by Colonial and LawCover to date constituted reliable and cogent evidence in support of Colonial’s case in deceit against Mr Flammia and of LawCover’s allegation that Colonial’s claim against him arises out of fraudulent acts on his part.

3                     Accordingly, I indicated that Mr Flammia must elect whether to adduce evidence to rebut the conclusions that were provisionally open on the state of the evidence as it then was.  The matter was listed for directions on 9 November 2007.  On that day the solicitor then appearing for Mr Flammia sought leave to withdraw on the ground that Mr Flammia had informed the solicitor that he was unable to pay his costs incurred to date and that Mr Flammia proposed to present a debtors bankruptcy petition.

4                     On the same day, Mr Graham Fullick, solicitor, appeared before the Court and indicated that he had been instructed to represent Mr Flammia and that his instructions were that Mr Flammia had elected to go into evidence and intended to give evidence himself, to call evidence from a handwriting expert and to issue further subpoenas for further telephone records and banking documents.  I stood the matter over for further directions on 14 November 2007 and directed Mr Flammia to provide draft subpoenas and indicate the documents he was intending to have reviewed by the handwriting expert no later than 13 November 2007.

5                     After the directions hearing on 9 November 2007, Mr Flammia and Mr Fullick attended the Insolvency and Trustee Service of Australia and Mr Flammia filed a debtor’s petition and became a bankrupt.  Later on the same day, Mr Flammia withdrew his instructions for Mr Fullick to act for him.  On 14 November 2007, when the matter came before me again, Mr Fullick appeared and sought leave to withdraw on the grounds set out in an affidavit sworn by him on 14 November 2007.  I granted leave for him to withdraw.

6                     In the circumstances, I also indicated to Colonial that it should file and serve a notice of motion and supporting evidence seeking leave to continue its proceeding against Mr Flammia in the light of his bankruptcy.  I gave leave for the motion to be listed for hearing on 23 November 2007 and extended the time for Mr Flammia to comply with the earlier directions up to 20 September 2007.   Colonial filed its motion for leave to proceed on 21 November 2007.  On the same day, the solicitor for LawCover wrote to Mr Flammia’s trustee in bankruptcy, inquiring whether the trustee elected to proceed with or discontinue Mr Flammia’s cross-action against LawCover, under s 66(2) of the Bankruptcy Act 1966 (Cth). 

7                     On 22 November 2007, the Official Receiver, through a delegate, wrote to LawCover’s solicitors indicating that the Official Trustee was of the view that the claim for indemnity does not vest in the Official Trustee but that, should the chose in action vest in the trustee, the Official Trustee elects not to proceed with the cross-claim.  The Official Trustee also indicated that no objection was taken to LawCover seeking leave to file a cross-claim seeking a declaration that Mr Flammia is not entitled to indemnity.

8                     On 23 November when the matter came before me again, I granted leave to LawCover to file a motion seeking leave to file a second cross-claim against Mr Flammia seeking a declaration that LawCover had no liability to him under the policy arising out of Colonial’s claims.  I also stood over the motion filed by Colonial.  Both motions were listed for hearing today together with the substantive proceeding, assuming that leave to proceed is granted.

9                     On 23 November 2007, a communication from Mr Flammia dated 22 November 2007 was tendered.  A further copy of that communication is presently in evidence.  In that communication, which is addressed to the Court, Mr Flammia said that he was writing to inform the Court that, pursuant to the orders made on 14 November 2007, he wished to state a number of things including:

‘1.        I deny any allegations of fraud, deceit and misrepresentation.

 2.        As indicated to the Court I intended to give evidence, issue further subpoenas and call various witnesses,

 3.        Due to my financial position I find myself unable to fund the means by which I must defend this case.

 4         Further, as the Court is aware, I have unfortunately had to file for Bankruptcy.’

10                  On 23 November LawCover’s solicitors sent a communication by email to Mr Flammia enclosing by way of service copies of the notice of motion seeking leave and the affidavit of Timothy Randolph Price sworn in support of the motion.  The letter indicated that the motion was returnable before me on 7 December 2007 and that if Mr Flammia did not appear on that day the Court would be likely to determine the matter in his absence.

11                  On 4 December 2007, the solicitors for LawCover wrote again to Mr Flammia enclosing, by way of service, copies of the notice of motion filed on 23 November 2007, the affidavit of Mr Price sworn 22 November 2007 and outline of LawCover’s final submissions in support of their application for leave to proceed and for the final relief claimed in the cross-claim.  On 5 December 2007 those documents were served personally on Mr Flammia.

12                  Mr Flammia then forwarded a further communication addressed to the Court, dated 6 December 2007.  In that document which is headed “Written Submission”, Mr Flammia says he wishes to state a number of things including the following:

“1.       Further to my submission to the Court dated 22 November 2007, I deny any allegations of fraud, deceit and misrepresentation.

 2.        As the Court is aware I have unfortunately had to file for Bankruptcy.

 3.        The ONLY reason I have not defended this case is due to the fact that I do not have the financial means to successfully defend the case.

 4.        When such allegations are raised it is imperative that an officer of the Supreme Court of New South Wales defends him or herself.

 5.        I have been legally advised that to defend this case would require an amount of money which I did not have nor could I borrow.

 6.        My legal representation ceased acting for me as I could not pay their legal costs and disbursements.

 7.        I could not pay for subpoenas and other documentation that was essential to a successful defence.

 8.        As the Court is aware, I was not present at the last Direction Hearing.  I explained in my submission of 22 November, 2007 the reasons for my absence.

 9.        It is not disrespect to the Court, Your Honour or the other parties.

 10.      As previously indicated I am now bankrupt and my financial position is at the least, dire.  Any employment I have from time to time is essential for my family’s survival.  My current daytime employment has already issued me with a written warning not to miss any further work or the consequences would most definitely be expulsion.” [original emphasis]

The submission makes other assertions. 

13                  When the matter was called on for hearing today Mr Flammia did not appear. That is not surprising in the light of those communications.  Both Colonial and LawCover ask that I now proceed to deal with the proceeding on a final basis on the assumption that I give the leave sought in the motions. 

14                  There may be some question as to whether leave is required for LawCover to file a cross-claim seeking declaratory relief.  However, it is clear that it is desirable that the question of Mr Flammia’s entitlement to indemnity under the policy be finally determined.  Having regard to the operation of the Bankruptcy Act, the cross‑claim presently on foot is taken to be discontinued or abandoned, without final resolution of the issues raised by it.  Colonial has undertaken not to enforce against Mr Flammia any judgment given in the proceeding otherwise than by proving in Mr Flammia’s bankruptcy, or if it is permitted, having regard to s 153 of the Bankruptcy Act, by enforcing judgment after his discharge from bankruptcy. 

15                  In those circumstances, I consider that it is appropriate that, to the extent that leave is required, by reason of the provisions of s 58(3) of the Bankruptcy Act and the bankruptcy of Mr Flammia, that Colonial have leave to continue and take fresh steps in the proceeding against Mr Flammia, and that LawCover have leave to proceed upon a second cross-claim in the form annexed to Mr Price’s affidavit.  That cross-claim has been filed in Court today. 

16                  As I indicated in my reasons of 1 November 2007, Colonial relies upon several causes of action against Mr Flammia.  The primary cause of action upon which Colonial relies is an action against Mr Flammia for breach of his implied or express warranty of authority to act on behalf of Stanley G. Stevens, a member of the SuperTrace fund.  The basis of the cause of action is a common law right; whereby it can be said that a person purporting to act on behalf of a principal is deemed to warrant that he in fact has authority from the principal to do the act (see Starkey v Bank of England [903] AC 114). 

17                  I indicated in my reasons on 1 November 2007 the findings that I would provisionally make in relation to that matter.  That is to say, Mr Flammia expressly stated that he was acting on behalf of Stanley G .Stevens, the member of the SuperTrace fund.  That statement was clearly false.  For present purposes it does not matter whether it was false to the knowledge of Mr Flammia. 

18                  There is no doubt that, if it was not expressly warranted, Mr Flammia impliedly warranted that he had authority to act on behalf of Stanley Gordon Stevens in seeking payment to him of Mr Stevens’ entitlement under the SuperTrace fund.  Colonial paid to Mr Flammia a cheque in the sum of $438,802.80 which was presented and paid.  Colonial has clearly suffered damage to the extent of the amount of the cheque and the circumstances that I set out in more detail in my earlier reasons.  In the circumstances, I am persuaded that there should be judgment for Colonial against Mr Flammia in the sum of $438,802.80. 

19                  In the second cross-claim, LawCover claims a declaration that it is not liable, by reason of Mr Flammia’s dishonest and/or fraudulent acts as pleaded and particularised in paragraph 10.5 of LawCover’s amended defence of 21 September 2007, to indemnify Mr Flammia under the policy for any claims arising from the circumstances giving rise to the claim by Colonial against Mr Flammia, including the claim in respect of which I have just indicated Colonial should have judgment. 

20                  I indicated in my reasons of 1 November 2007 the inferences that I considered that could be drawn from the evidence that has been adduced in the proceeding thus far.  Mr Flammia instructed counsel in the proceeding up to the time when, after the cases of Colonial and LawCover closed, he asked for a ruling as to whether or not he had a case to answer on the claims of fraud alleged both by Colonial and LawCover.  It is significant that he had filed in the proceeding an affidavit of 14 August 2006, in which he purported to set out in some detail his version of the events relating to the request to Colonial to send to him a cheque payable to Mr Stevens. 

21                  There has been no explanation as to why Mr Flammia could not at least have attended Court in order to adduce evidence in terms of the affidavit and to endeavour to rebut the inferences that I have indicated can clearly be drawn from the evidence otherwise before me.  He has chosen not to do so.  The Court, therefore, can feel somewhat more confident in drawing the inferences that are otherwise available.  As I have already said, and as I said in my reasons of 1 November 2007, I would confidently conclude that there is presently before me reliable and cogent evidence in support of Colonial’s case in deceit against Mr Flammia. 

22                  More importantly, if LawCover’s allegation that Colonial’s claim against Mr Flammia arises out of fraudulent acts on his part, in the circumstances, I have no difficulty in making findings in terms of the provisional findings that I have foreshadowed in my reasons of 1 November 2007.  It will follow, therefore, that I would be prepared to make the declaration claimed in the second cross-claim. 

Associate:

Dated:         14 January 2008