ANNA DOROTHEA ERNA LUNGERSHAUSEN AND ANOTHERS v. THOMAS JOSEPH DILLON, Jr

HCMP1751/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1751 OF 2002

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R U L I N G

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1. The parties are or were all registered foreign lawyers in Hong Kong.  Originally Dr Lungershausen and Dr Dillon were partners in a firm called Dillon & Lungershausen (“DL”) which later became Dillon, Hall & Lungershausen (“DHL”).  Mr Smith says he also became a partner, but that is disputed.  Subsequently the applicants formed Lungershausen and Smith (“LS”).

2. In the Originating Summons, issued on 4 May 2002, the applicants seek declarations that DHL was lawfully dissolved with effect from 14 November 2001 and that LS has no responsibility for any of the liabilities of DL or DHL.  Dr Dillon was not then in Hong Kong.  The applicants obtained leave to serve the proceedings on him out of the jurisdiction.

3. Dr Dillon challenged the proceedings on various grounds, the most important being forum non conveniens.  He had, by this time, instituted proceedings in the USA against his former partners and others, and he wanted the whole matter dealt with there.  The challenge failed before me.  I gave judgment on 24 July 2003.  Dr Dillon appealed, but unsuccessfully; the Court of Appeal handed down its reasons on 5 February 2004.

4. Now by summons dated 11 April 2005, the plaintiffs apply under Order 28 of the Rules of the High Court for the proceedings to continue as if begun by writ, for leave to file a Statement of Claim in the terms of the lengthy draft attached to the summons and for consequent directions.

Further background

5. The background is set out in my judgment and that of the Court of Appeal, for the period up to the date of the appeal hearing.  In fact Dr Dillon commenced proceedings against the applicants in the Stuttgart Regional Court in Germany in May 2002, but later withdrew those proceedings.  In April 2003 he commenced proceedings in the US Federal Court against DCAG and some of its officers and the applicants, but withdrew those proceedings in November 2003 and then issued fresh proceedings in the Superior Court of the District of Columbia.

6. The applicants and other named defendants have, it appears, applied to dismiss the US proceedings on jurisdictional grounds.  There was a hearing in May 2004 but judgment on this application is still pending.

The claims

7. The applicants now seek to widen considerably the scope of their claims against Dr Dillon.  In addition to the existing declarations, they seek further declarations, accounts, damages and equitable compensation.  They now allege, inter alia, fraud and breach of fiduciary duty.

8. In brief, the plaintiff’s case is that from 1995 to 1998, Dr Dillon was directly employed by Daimler-Benz AG (DBAG) in Germany.  Thereafter, through a limited company he incorporated in Cyprus, he provided legal services for DBAG (which became Daimler-Chrysler AG (DCAG) as a sub-contractor to an American firm, Caroll Burdick & McDonough LL P (CB&M).  In 1999, he and Dr Lungershausen formed DL in Hong Kong.  DL and later DHL had a sole client, namely DCAG.  The firm was instructed and its fees were paid through CB&M.

9. In December 1999 Dr Lungershausen established two service companies, Product Safety Co-ordination Hong Kong Ltd (“PSCHKL”) and Product Safety Co-ordination International Ltd (“PSCIL”) which were used for the invoicing of the work done to the American law firm.  This was done because of an oral agreement between herself and Dr Dillon, in order to provide a lawful means of US tax avoidance for the latter.

10. Pursuant to this oral agreement, Dr Lungershausen beneficially owned the companies and Dr Dillon had no beneficial or other ownership in them, although share transfer documents were to be signed in blank, so that he could apply to be registered as a shareholder if he chose. Dr Lungershausen controlled the companies, as director, and the other director was a nominee, one Serannah Ltd.

11. All the fees came in to the service companies.  The income was to be distributed to reflect the agreed partnership ratio.  Dr Dillon was engaged as a consultant by PSCIL and his share of the fees was paid as consultancy fees; but payment was to be made to a “Rabbi Trust” deferred compensation account in accordance with applicable US Internal Revenue Service requirements.

12. To this end PSCIL entered into a trust agreement one Byrneco Ltd, a service company of an accounting firm in Hong Kong, and a deferred compensation agreement with Dr Dillon.  During 2000 and 2001, PSCIL deposited over $3 million into the Rabbi Trust.  The applicants say that Byrneco held the trust fund at all times on trust for PSCIL as sole beneficiary and had no authority to transfer it to anyone except on the instructions of PSCIL or otherwise as provided for in the trust agreement.

13. DL became DHL in January 2001, when a Mr Hall was employed.  Mr Smith came in as a 10% equity partner in July 2001, having worked for the firm as an independent contractor since June 2001. The applicants plead the percentage interests of the partners both during the existence of the firm and on its termination.  They also plead the duties owed by Dr Dillon as partner.

14. The applicants say that from about 31 October 2000 the firm’s relationship with DCAG deteriorated, resulting in the termination of its retainer by CBM on 12 November 2001.  It was Dr Dillon’s conduct, of which particulars are given, which caused this deterioration and subsequent termination.

15. In addition, they say that Dr Dillon obtained Dr Lungershausen’s agreement to employ Mr Hall by misrepresentation.  This employment involved the setting up of an office in the USA, the payment of rent and other costs, which were paid by PSCIL in the form of loans to what is referred to as “the Georgia company”, a professional corporation incorporated in Georgia, USA, originally known as Dr Dillon Law Offices PC and later as Dillon, Hall and Lungershausen LLC.  Ultimately Mr Hall’s employment was terminated, but he sued and it cost about US$500,000 to pay him off.

16. The partnership was terminated, according to the applicants, on 9 November 2001.  Following negotiations, the business of DCAG was transferred to LS.  But, say the applicants, Dr Dillon removed accounting records of DHL’s German branch office and failed to give the applicants any information relating to its finances.

17. Then, say to the plaintiffs, in July 2002 Dr Dillon fraudulently communicated to Byrneco Ltd false information and false documents, showing inter alia that Dr Lungershausen had been removed as director of PSCIL, and that he had appointed himself director, and so induced Byrneco Ltd to transfer the trust fund which it held to his own tax advisor in the USA, a Mr Dana.  The plaintiffs first acquired some knowledge of this on 24 July 2002 but the full extent became known later.  PSCIL demanded the return of the trust funds, and on 27 September 2002 PSCIL’s board of directors resolved to forfeit all Dr Dillon’s rights under the deferred compensation agreement.

18. The plaintiffs also aver that as a result of other misrepresentations by Dr Dillon in connection with an employment lawsuit against DCAG in Germany, CB&M withheld payments of over US$400,000 due to PSCIL and has intimated a claim for about US$670,000 against PSCIL.

Dr Dillon’s claims in the US proceedings

19. As noted above, when the Originating Summons was filed, Dr Dillon had not issued any proceedings anywhere.  As I remember the Complaint in the Federal Court proceedings was before me in July 2003. The Complaint in the Washington DC proceedings was filed in November 2003 and it is as well to give a brief overview of it now.  Dr Dillon sues in his own name and those of the Georgia company and DHL.  The defendants are the present applicants, DCAG, Daimler-Chrysler Corporation (incorporated in Delaware), four officers of DCAG and CB&M.

20. In brief, Dr Dillon’s case is that the present applicants conspired with DCAG’s officers to exclude him from the firm, seize its assets, create a new firm and continue providing the same services to DCAG.  He claims against Dr Lungershausen for damages for breach of contract, breach of fiduciary duty, tortious interference with the business relationship between the plaintiffs and DCAG, conspiracy so to interfere, misappropriation of DHL property and an accounting.  Against Mr Smith he claims for tortious interference and conspiracy.  Against DCAG and its US arm he claims for wrongful termination, promissory estoppel and non-payment for services rendered.  Against the DCAG officers, he claims for conspiracy.  Against CBM he claims for wrongful termination, monies had and received, and to impose a constructive trust on any DHL funds in its possession.

The court’s power

21. Under Order 28 rule 8 the court has the power to order the proceedings to continue as if begun by writ, where it appears to the court at any stage of the proceedings that the proceedings should be so continued.  There is a general discretion.  It is not in dispute that the onus is on the applicants to show that it is just and convenient to make the order sought.

Dr Dillon’s case on the present application 

22. Dr Dillon’s case is basically that the applicants’ attempt to widen the scope of the proceedings in Hong Kong is an abuse of process. In the first place, the applicants failed timeously to prosecute the Originating Summons proceedings and they are now applying to convert the proceedings to a writ action in order to avoid dismissal for want of prosecution under Order 28 rule 10.

23. In the second place, leave was granted under Order 11 to serve the proceedings out of the jurisdiction and that leave is specific to the causes of action which were the subject of that application.  The other causes of action were known when the Order 11 application came before the court.  “Trojan horse” applications are an abuse of process.  The applicants, having earlier indicated to the courts that they wanted restricted remedies are now trying to expand the proceedings in order to wrest jurisdiction from the US court.

24. In the third place, some of the causes of action additionally pleaded should be brought by persons other than the applicants, such as PSCIL, and against persons other than Dr Dillon, such as CB&M and the Georgia company. 

25. In the fourth place Mr Barlow also argues that some of the new pleadings relate to the ouster of Dr Dillon by individuals in DCAG and CB&M who are all parties to the US proceedings.  There is here an attempt to bring in the same matters as are being litigated in the USA but the difference is that here, DCAG, CB&M and the individual officers will not be parties.  It is also said that Dr Lungershausen has widely misrepresented and mis-described the background and events relating to this application.

26. In Dr Dillon’s affirmation he suggests that the applicants are estopped from expanding the proceedings in Hong Kong because before the Court of Appeal Mr Whitehead SC indicated that the applicants would not do so unless ordered.  This seems to have been a factual error and the point was not argued.  He also suggests that there is an applicable arbitration clause in both the disputed agreements relating to payment and of the profits of the PSC companies, and so any dispute over these profits should go to arbitration.  Again this was not seriously argued as an independent issue and of course there is no application for stay to arbitration.

The applicants’ case

27. The applicants’ case is that any delay can be explained, and that the various added causes of action would in any event come under Order 11 rule 1(d)(iii) in that the claims are brought to enforce, rescind, dissolve, annul or otherwise affect a contract, or to recover damages or obtain other relief in respect of the breach of a contract, which is by its terms, or by implication, governed by Hong Kong law.  Jurisdiction has already been decided and Dr Dillon cannot now re-litigate the decisions of this court and the Court of Appeal.

Issues

28. The broad general issue is that of abuse of process.  Under this come the issues as to delay and the various issues as to whether the original Order 11 proceedings can be seen as a “Trojan horse” or a “sprat to catch a mackerel”.  The other matters set out above can be considered under this heading.

Abuse of process—delay

29. Mr Barlow, for Dr Dillon, argues that the applicants should have proceeded with their claims under the Order 28 procedure, which provides a time-table and the sanction of dismissal under rule 10 for failing to prosecute with due despatch.  There was nothing to stop them.  Although my judgment in July 2003 was appealed, there was no stay.

30. Dr Lungershausen in her 7^th affidavit says that since these proceedings were originally taken out in May 2002, Dr Dillon has raised actions in three courts, in Stuttgart and Washington DC.  The parties are awaiting the court’s ruling on jurisdiction in the latest case.  In the background have been the transfer of funds from the trust account in July 2002 and an attempt by Dr Dillon (heard by the Washington court, and dismissed) to block the settlement of Mr Hall’s case against the partnership.  All of these have been a significant burden to the applicants, who also have a busy legal practice.  In fact a draft of the Statement of Claim was prepared by July 2004 but then matters of practice and personal matters intervened.  The matter is complex and the applicants wanted to get it right.  Once counsel settled the Statement of Claim in early March 2005, notice of intention to proceed was given and the matter went ahead.

31. Obviously it would not make sense for the applicants to go ahead before the appeal had been heard, irrespective of the time periods provided for in Order 28 rule 1A.  There is no point in incurring costs, when the appeal may be allowed.  The explanations for the delay thereafter until March 2005 seem to me to be adequate and thereafter any delay is caused by the respondent’s opposition to this summons.  I do not therefore see that the delay is a significant factor to persuade me to refuse the application.

Abuse of process—“Trojan horse”

32. If a cause of action cannot be the subject of leave to serve out of the jurisdiction under Order 11, it cannot be introduced by way of amendment of a writ previously served under Order 11; see Waterhouse v.Reid [1983] 1 KB 743.  If proceedings are served out, and the plaintiff later seeks to bring in by amendment another cause of action which could also be the subject of leave to serve out, then it seems that the amendment is permissible, so long as no injustice to the opposite party will result.  See Beck v.Value Capital Ltd (No.2) [1974] 3 All ER 442.  It is argued for the applicants here that this case is distinguishable, because in Beck the amendments only came within Order 11 on technical grounds, whereas here they are all obviously within Order 11.

33. In Beck the plaintiffs argued that once the additional cause of action was shown to be generically within the scope of Order 11, that was an end of the matter.  The court must exercise discretion as if the case were a domestic one, and may not enquire whether leave would have been granted in the circumstances of the particular case.  Goulding J disagreed. At page 449 he said :

“No authority directly on the point has been cited.  In principle I find the plaintiff’s proposition unacceptable.  It seems to me manifestly unfair to a foreign defendant, and it would often enable a plaintiff to circumvent the court’s discretion under RSC Ord. 11 by the familiar device of throwing a sprat to catch a mackerel. ... It is enough to say that the discretion to allow an amendment… will not be exercised an injustice to the opposite party will result, and that it is in general unjust to amend a writ served under RSC Ord. 11 by adding something which the court would probably have refused to sanction under RSC Ord. 11.”

34. I respectfully agree.  If the order sought will result in injustice to Dr Dillon it cannot be made.  That must be right in any event because the decision whether to allow proceedings to continue as if begun by writ is discretionary and the discretion cannot be exercised so as to produce an unjust result.

35. Here Mr Barlow places much reliance on the fact that the remedies originally sought are relatively simple and he suggests that in refusing the challenge to the leave to serve out, I was much influenced by the simplicity of the applicants’ Originating Summons proceedings when compared with the potential complexity of the US proceedings.  He says that all the matters raised by the applicants in June 2003 suggested or implied that all they wanted was two simple declarations, which would assist them in their business; and they should not therefore be sent away to the USA to litigate.  However, he says, these suggestions were disingenuous.

36. It has, I think, always been fairly clear that the proceedings might ultimately be tried as if begun by writ, whether because Dr Dillon brought a counterclaim or for other reasons.  At that stage the court was not told that the applicants might add some kind of monetary claim, but it would not be surprising if one were added, because ultimately partnerships are about money and it would be unlikely for only one side to have a monetary claim.  It is however also true that by June 2003, though not when the Originating Summons was issued, the applicants knew of their monetary claim arising from Dr Dillon’s appropriation of the funds in PSCIL but did not, as I remember, tell the court about that.

37. It is also argued that some of the new causes of action pleaded involve other parties.  In particular, the parties to the PSC trust agreement were PSCIL and Byrneco Ltd, so the only possible plaintiff for any claim relating to it would by PSCIL.  The same applies to the deferred compensation agreement, to which the parties were PSCIL and Dr Dillon.  As to the service agreement with CB&M the parties were PSCIL and PSCHKL and CB&M.  As to the transactions involving Mr Hall in Washington DC, the proper defendants are the Georgia company and the landlord, Ashland.

38. Finally there is the argument that the final disposal of the matters need the inclusion of parties to the US proceedings, in particular DCAG and its officers and CBM.

39. I think it must be remembered that this is a partnership action.  As presently pleaded the partners in a new firm are seeking to establish that they have no liability to the old firm.  Now they seek to expand the proceedings to cover liabilities between partners in the old firm.  They say that Dr Dillon was in breach of his fiduciary duties as a partner in the old firm.  This court found as a provisional or tentative conclusion, for the purposes of Order 11, that it was a partnership governed by Hong Kong law.  I do not see why, in principle, such an expansion should not be made because all the claims, new and old, arise out of the relationship of partners.  It would be neither just nor practical so say that the parties can litigate only some of the issues of partner relationship in the Hong Kong proceedings.

40. It is true that there is a heavy involvement of the PSC companies.  That sort of thing is a fact of partnership life; lawyers practise in partnership because they cannot (in this jurisdiction) practise as a limited company, but they may agree to set up service companies for all sorts of ancillary purposes and that is what happened here.  The monies going through the PSC companies and into the trust were partnership earnings.  The applicants are not seeking to have monies returned to the trust or to the PSC companies.  What they are seeking is accounting for partnership funds and damages for breach of duty relating thereto.

41. I think it would be wrong to say that an account of partnership funds cannot be sought because they went through a service company without bringing in the service company unless perhaps some order is sought relating to the service company.  I do not see that the PSC companies, or CB&M or any other entity needs to be included in these proceedings because orders in favour of or against those entities are neither sought nor needed.

42. I do accept, however, that the prayer at paragraph 66.3 is probably bad because it seeks a declaration relating to PSCIL and Serannah Ltd and I do not see how such a declaration can be made without those companies being a party to these proceedings.

43. As to the inclusion of DCAG and its officer and CB&M, it is not the applicants who are pleading conspiracy, but Dr Dillon.  It is true that parts of the Statement of Claim deal with events involving DCAG.  There is also some mention of confidential information to be obtained from DCAG.  But these are matters of evidence and not remedies sought.

44. With reference to the complaints against Dr Lungershausen’s truthfulness, it is difficult to see how I can make any finding on this at this stage; I think these are matters for trial.

45. As to the general proposition that the applicants are now seeking to widen the scope of proceedings in order to wrest jurisdiction from the US courts, again I think it has to be remembered that the proceedings have been allowed to proceed in Hong Kong on the basis that the partnerships were prima facie Hong Kong partnerships and this is the proper jurisdiction.  It is also relevant to remember that the US proceedings are presently subject to a jurisdictional challenge, and will remain hanging in the air until that is resolved.  If it is resolved in favour of the defendants in those proceedings there will be nothing to wrest away.

Conclusion

46. I conclude that the proposed expansion of the proceedings is not an abuse of process.  I will therefore make an order in terms of the applicants’ summons, subject to the deletion of the prayer for relief at paragraph 66.3 of the Statement of Claim. 

Costs

47. In his skeleton argument Mr Barlow advanced an argument that a successful applicant under Order 28 rule 8 who has put a respondent to the inconvenience and wasted expense of obtaining legal advice on the Originating Summons proceedings should compensate the respondent for costs thrown away as a result of his fickleness, including the costs of the Order 28 application.  However, there was no specific argument on this point at the hearing.

48. I will order costs in the cause as applied for by the applicants.  Notwithstanding the risk of having the parties come back to incur further costs in arguing costs, because this ruling is to be handed down the costs order will be nisi.