DEAK PERERA (FAR EAST) LTD. v. R. LESLIE DEAK and Others

1987, No. A2951

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H E A D N O T E

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By a settlement approved by the New York Bankruptcy Court between the Plaintiff and The Deak & Co. Inc. and two of its wholly-owned subsidiaries in U.S.A. to which the 2nd Defendant was a director, the Plaintiff settled all claims against these companies and their affiliates. By a judgment from the same Court it was pronounced that the 2nd Defendant was an affiliate at the time of the settlement. The Plaintiff claims against the 2nd Defendant as a director of the Plaintiff that in breach of his duty he had wrongfully transferred accounts the Plaintiff held in various banks to Deak & Co. Inc. and its two subsidiaries. As a result the Plaintiff suffered loss in the sum of US$2.36 million.

The 2nd Defendant relied on the settlement as a defence.

Held: The parties and the issues in the New York Bankruptcy Court and in the present proceedings are the same and that the decision by the New York Court was a decision on merits by a Court of competent jurisdiction, accordingly the claim by the Plaintiff was barred by issue estoppel.

1987, No. A2951

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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THE PLAINTIFF'S CLAIM

1. The Plaintiff Deak Perera (Far East) Ltd. ("DPFE") in liquidation claims against the 2nd Defendant that he and/or Mr. Deak (directors of DPFE) on the 5th December 1984 withdrew from various bank accounts DPFE held with the 4th to 7th Defendants i.e. Chase Manhattan Bank, N.A., Canadian Imperial Bank of Commerce, Standard Chartered Bank and Union Bank and other banks totalling US$2,161,191.10 to the Deak National Bank (3rd Defendant) which in turn transferred those funds to Deak & Co. Inc., and its wholly-owned subsidiaries Deak Perera International Banking Corporation and Deak Perera Wall Street Inc. (hereinafter collectively called "the debtors" as in the proceedings in the New York Bankruptcy Court).

2. On the 6th December 1984 the debtors petitioned the United States Bankruptcy Court in New York for relief under the provisions of Chapter 11 of the United States Bankruptcy Code. By those proceedings the United States Bankruptcy Court made orders so that the debtors were protected from suits and executions by creditors for a certain period during which their affairs were re-organised.

3. By ordering the transfer of those funds to the debtors the 2nd Defendant was in breach of his fiduciary duty and breach of trust as a director of DPFE and had acted to the detriment of DPFE. As a result DPFE suffered loss in the sum of US$2,360,000.00 with interests.

4. DPFE now claims against the 2nd Defendant for the sum of US$2,360,000.00 and damages.

THE PROCEEDINGS IN UNITED STATES

5. On the 12th December 1985 DPFE entered into a Stipulation of Settlement in New York with the debtors. The terms of the Stipulation were as follows :-

"WHEREAS:

On December 6, 1984, Deak & Co. Inc. ("Deak"), Deak-Perera Wall Street, Inc. ("Deak Wall Street") and Deak-Perera International Banking Corporation (collectively the "Debtors") each filed a petition for reorganization under chapter 11 of the United States Bankruptcy Code ("Code") in the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court");

Deak-Perera Far East Ltd. ("DPFE") is a wholly owned subsidiary of Wall Street, the former having maintained its principal place of business in Hong Kong;

On February 4, 1985, a Winding-Up Order was made by the Supreme Court of Hong Kong ("Supreme Court") affecting DPFE and the office of the Official Receiver of the Registrar General's Department (the "Official Receiver") was duly appointed as the Official Receiver of DPFE and represents and warrants that the Official Receiver has succeeded to all rights and rights to property of DPFE;

The Official Receiver has asserted various claims of DPFE against the Debtors aggregating in excess of U.S.$13 million and has alleged that portions of the claim are secured and other portions thereof are entitled to administrative priority;

The Debtors and the official committee of unsecured creditors appointed in the chapter 11 cases (the "Creditors' Committee") have advised the Official Receiver that they dispute numerous defenses, offsets and counterclaims in connection therewith;

The Debtors, the Creditors' Committee and the Official Receiver desire to settle all claims of DPFE and the Official Receiver against the Debtors and their affiliates (as defined in S.101(2) of the Code and all subsidiaries thereof, hereinafter "Affiliates") including, but not necessarily limited to, Deak-Perera U.S. Inc. and its subsidiaries ("Deak U.S.") and Deak-Perera Finance Ltd. ("Deak Finance");

NOW, THEREFORE, in consideration of the premises, it is Stipulated, Consented to and Agreed by and among respective counsel for the Debtors, the Creditors' Committee and the Official Receiver:

1 The Debtors shall pay to the Official Receiver the sum of U.S. $2,360,000 in full settlement, release and discharge of all claims of every kind, nature and description, whether known or unknown, which DPFE or the Official Receiver may have against the Debtors and all Affiliates thereof including, but not necessarily limited to, Deak U.S. and Deak Finance, except as hereinafter provided.

2 The Official Receiver hereby waives and relinquishes any and all security interests, pledges, liens or other encumbrances affecting any of the property of the Debtors and all their Affiliates including, but not necessarily limited to, the pledge by Deak of 8000 shares of Foreign Commerce Bank.

3 In consideration of the Official Receiver's settlement and release of claims as herein set forth, the Debtors and the Creditors' Committee hereby waive and relinquish any and all claims defenses, offsets and counterclaims of every kind, nature and description, whether known or unknown, which the Debtors or the Creditors' Committee may have against DPFE or the Official Receiver.

4 Nothing contained herein shall be deemed to affect the rights of DPFE or the Official Receiver to pursue claims, if any, with respect to: (a) bank account balances maintained at American National Bank f/k/a Deak National Bank which do not exceed U.S. $25,000; (b) amounts due and owing from Deak-Perera Washington, Inc. which do not exceed $25,000; (c) any directly or indirectly owned subsidiaries of DPFE; and (d) Deak & Co. (Macau), Ltd.

5 The Debtors and the Creditors' Committee shall promptly apply to the Bankruptcy Court and the Official Receiver shall promptly apply to the Supreme Court for respective orders approving this Stipulation and authorizing implementation thereof. All parties hereto shall use their best efforts to obtain the necessary approvals in the respective courts.

6 The Official Receiver shall withdraw any proofs of claim heretofore filed, and agrees not to file any other proofs of claim, in the Bankruptcy Court.

7 The terms and provisions of this Stipulation shall become effective when orders approving this Stipulation entered by the Bankruptcy Court and the Supreme Court shall have become final and non appealable.

Dated:

New York, New York December 12, 1985 LEVIN & WEINTRAUB & CRAMES Attorneys for the Debtors By: Herbert Stephen Edelman, P.C.

By:	Signed

Herbert Stephen Edelman, Pres.

ANDERSON RUSSELL KILL & OLICK, P.C.

Attorneys for the Creditors' Committee

By:

Signed Arthur S. Olick

BOTEIN, HAYS & SKLAR Attorneys for the Official Receiver

By:

Signed Sheldon Lowe

Official Receiver as Liquidator of DPFE

By:

Signed Nicholas Clement-Jones"

6. The Debtors on 13th December 1985 applied to the United States Bankruptcy Court for the Southern District of New York for the Court's approval of the Stipulation.

7. On the 26th December 1985 an order approving the Stipulation of Settlement was made by Judge Lifland of the United States Bankruptcy Court.

8. By the Stipulation of Settlement DPFE and the Official Receiver settled all claims against the Debtors and their affiliates as defined in S.101(2) of the United States Bankruptcy Code. "Affiliate" means "an entity that directly or indirectly owns, controls or holds with power to vote, 20% or more of the outstanding voting securities of the debtor" and the term "entity" as defined in S.101(14) of the Code includes "persons".

9. On the 21st August 1991 the 2nd Defendant filed a complaint for Declaratory Judgment and Permanent Injunctive Relief in the United States Bankruptcy Court, Southern District of New York. The purpose was to seek the New York Court's direction that the terms of the Stipulation extended to him since he was an "affiliate" within the meaning and contemplation of the Stipulation.

10. On 8th November 1991 the Official Receiver took out a notice of motion in the same Court to dismiss the complaint by the 2nd Defendant.

11. On the 11th March 1992 the motion was heard by the same Judge Lifland who approved the Stipulation.

12. The Court ruled that "the settlement was calculated to and did by its terms released the Deak debtors and their "affiliates" from all further liability to a major creditor DPFE" and dismissed the Official Receiver's motion to dismiss the 2nd Defendant's complaint for a declaration.

13. The New York Court ruled that the Official Receiver must file an answer to 2nd Defendant's declaratory judgment by 26th March 1992.

14. The Official Receiver filed a memorandum instead of an answer. In the memorandum the Official Receiver indicated to the New York Court that he has decided to limit himself to one jurisdiction and did not intend to have further participation in the United States Court.

15. As a result on the 20th April 1992 a default declaratory judgment was obtained by the 2nd Defendant to the effect that:

(1) The 2nd Defendant was an affiliate at the time of the Stipulation of Settlement and

(2) DPFE had released and discharged all claims which DPFE or the Official Receiver have or may have against the 2nd Defendant.

DEFENDANT'S CASE

16. The 2nd Defendant now applies to strike out the Plaintiff's claim against him under O.18 r.19.

17. Mr. Faulkner for the 2nd Defendant relied on the fact that the Plaintiff's claim had been resolved by a compromise validity of which had not been challenged. Even though the applicability of the compromise to the 2nd Defendant had been challenged, that point had been decided upon by a New York Court and that point is now res judicata.

PLAINTIFF'S ARGUMENT

18. The Plaintiff, by Mr. Lewis, on the other hand argued that:

(1) The 2nd Defendant is not released from his fiduciary liabilities as director.

(2) The Official Receiver did not intend to include the 1st and 2nd Defendants in the Stipulation and that the term "affiliate" can include an individual is not known in this jurisdiction nor was "third party beneficiary" status known to the local law.

(3) Court of Appeal had considered the defence put up by the 2nd Defendant when granting leave to Plaintiff to issue concurrent unit.

(4) Court of Appeal had found an arguable case.

(5) 2nd Defendant never raised nor claimed to be an affiliate as a defence until now.

(6) 2nd Defendant is the subject of 3rd party proceedings.

(7) The New York Court's decision was by default.

ISSUE ESTOPPEL

19. In Carl Zeiss Stiftung v. Rayner & Keeler Ltd. (No.2) [1967] AC 853 at p.855 per Lord Reid, Lord Hodson, Lord Upjohn and Lord Wilberforce "Issue estoppel can be on a foreign judgment, although in such a case the doctrine should be applied with caution because of the uncertainties arising from the differences of procedure in foreign countries".

20. In order to create an issue estoppel Lord Brandon of Oakbrook in The Sennar (No. 2) [1985] 1 WLR 490 at p.499 said that the three requirements have to be satisfied namely :-

"The first requirement is that the judgment in the earlier action relied on as creating an estoppel must be (a) of a Court of competent jurisdiction, (b) final and conclusive and (c) on the merits. The second requirement is that the parties (or privies) in the earlier action relied on as creating an estoppel and those in the later action in which that estoppel is raised as a bar must be the same. The third requirement is that the issue in the later action, in which the estoppel is raised as a bar, must be the same issue as that decided by the judgment in the earlier action."

In the same judgment on the same page he went on,

"a decision on the merits is a decision which establishes certain facts as proved or not in dispute; states what are the relevant principles of law applicable to such facts; and expresses a conclusion with regard to the effect of applying those principles to the factual situation concerned."

21. On the same point per Lord Diplock at p. 494:

"What it means in the context of judgments delivered by Courts of Justice is that the Court has held that it has jurisdiction to adjudicate upon an issue raised in the cause of action to which the particular set of facts give rise; and that its judgment on that cause of action is one that cannot be varied, re-opened or set aside by the Court that delivered it or any other Court of co-ordinate jurisdiction although it may be subject to appeal to a Court of higher jurisdiction."

22. In SCF Finance Co. Ltd. v. Masri (No. 3) [1987] QB 1028 it was held that:

"an order of the Court dismissing proceedings gave rise to issue estoppel even though the Court had not heard argument or evidence on the merits."

23. In the present case the 2nd Defendant alleges that by reason of the proceedings and the decision in the New York Bankruptcy Court it gave rise to issue estoppel and the claim by the Plaintiff is now res judicata.

24. The crux of the matter is whether the 2nd Defendant was an "affiliate" and whether the claim by the Plaintiff has been resolved by the Stipulation of Settlement.

25. The 2nd Defendant sought a declaration from the New York Court that he was an "affiliate" within the meaning and contemplation of the stipulation. The Plaintiff sought to set aside or dismiss the 2nd Defendant's claim. After hearing argument from both sides, Judge Lifland ordered the Plaintiff to file answer which the Plaintiff failed to do. As a result a judgment declaring that the 2nd Defendant was an "affiliate" and DPFE had released all claims against 2nd Defendant.

26. On the facts which were not disputed it is clear that the 2nd Defendant has satisfied the three requirements (set out by Lord Brandon of Oakbrook in The Sennar (No. 2)) to create an issue estoppel in that the parties are the same, this issue is the same, the judgment was conclusive and on merits and that it was pronounced by a Court of competent jurisdiction. Since the Plaintiff has submitted to the jurisdiction of the New York Court and the judgments were final decisions on merits, they are binding on the Plaintiff. Carl Zeiss Stiftung v. Ravner & Keeler (No. 2) [1967] 1 AC 853 and The Sennar (No. 2) [1985] 1 WLR 490.

27. Even if the Plaintiff elected not to argue or file answer to the 2nd Defendant's complaint for declaration by reason of the decision in SCF Finance Co. Ltd. v. Masri & Another (No. 3) [1987] QB 1028 the Plaintiff is likewise estopped.

28. By reason of the Plaintiff's submission to the New York Court's jurisdiction it is not open for the Official Receiver now to say that he did not intend to include the 2nd Defendant in the Stipulation nor can he challenge the defence based on the settlement.

THE PLAINTIFF'S OTHER POINTS

29. When the Court of Appeal in Hong Kong say that the Plaintiff has a good arguable case when applying for service outside jurisdiction in December 1990 the 2nd Defendant has not yet obtained the judgment in the New York Court. In any event the fact that the 2nd Defendant never raised nor claim to be an affiliate until now does not bar him from raising this by way of defence bearing in mind that the declaratory judgment was obtained in April 1992.

30. The fact that the 2nd Defendant is the subject of 3rd party proceedings is not something I should consider in deciding whether the Plaintiff's claim should be struck out under O.18 r.19.

31. Finally, the Official Receiver argued that the 2nd Defendant is not released from his fiduciary liabilities as directors. The wrongful acts complained of were set out in paragraph 13 of the Statement of Claim which are as follows :-

"13. On the previous day, that is the 5th day December 1984, on the instructions of Mr. Deak and/or the 2nd Defendant, withdrawals were made from various DPFE bank accounts held with the 4th to 7th Defendants and other banks, and the said funds were transferred to the 3rd Defendant, the Deak National Bank, who thereupon transferred those funds (together with the sum of US$198,808.90 by which the Deak National Bank was indebted to DPFE) to some or all of the three petitioning companies in the Chapter 11 proceedings.

Particulars of the transfers to the Deak National Bank

and the alleged "Directors' Liability" were set out from paragraph 14 to paragraph 18 of the Statement of Claim which are as follows :-

"THE DIRECTORS' LIABILITY

14. At all material times Mr. Deak and/or the 2nd Defendant were directors of DPFE and therefore owed fiduciary duties to DPFE. The fiduciary duties obliged the said directors to faithfully serve DPFE and in particular to observe the following duties :-

(a) To act in the best interests of DPFE and not to act in a manner prejudicial to DPFE's interests; and

(b) to ensure that the funds of DPFE were not misapplied.

15. The said transfers of funds were made without consideration flowing to DPFE and were not made in the ordinary course of business, nor for the benefit of DPFE. In truth and in fact these transfers were made to augment the protected assets held by the companies protected by the said Chapter it proceedings to the detriment of DPFE.

16. The said transfers were made on the instructions of Mr. Deak and/or the 2nd Defendant acting in breach of the fiduciary duty they owed to DPFE by virtue of their office as directors.

Particulars of breaches of fiduciary duty

The transfers were made, without consideration flowing to DPFE, in order to enrich those companies in the Deak Group (and in particular Deak and Co. Inc.) protected by the Chapter 11 proceedings at a time when those companies were insolvent and at a time when, to the knowledge of Mr. Deak and the 2nd Defendant, the United States Companies in the Deak Group were preparing to seek or had sought Chapter 11 bankruptcy protection. To the knowledge of Mr. Deak and the 2nd Defendant the said transfers were not made in the interests of DPFE, but against the interests of DPFE, when it was known that the transfers would cause the insolvency and liquidation of DPFE. Alternatively the transfers constituted fraudulent preferences by the directors of DPFE contrary to Section 266 of the Companies Ordinance, Cap. 32.

17. By transferring those funds of DPFE, without consideration, in the manner aforesaid, Mr. Deak and/or the 2nd Defendant acted in breach of trust, and are accountable to DPFE as Constructive trustees for the funds or their monies equivalent.

18. As a result of Mr. Deak's and/or the 2nd Defendant's aforesaid breaches of fiduciary duty and breaches of trust, the Plaintiff has suffered loss in the sum of US$2,360,000.00 together with interest accruing thereon from the date of the transfers."

The acts by the 2nd Defendant, the subject matter of the Plaintiff's complaint were the acts of transferring DPFE's bank accounts held with the 4th to 7th Defendants totalling US$2,161,191.10 to the "debtors" and as stated in paragraph 18 the breaches of fiduciary duty and trusts resulted in the Plaintiff suffering loss in the sum of US$2,360,000 with interests.

32. Since the Plaintiff has reached a settlement with the debtors in the sum of US$2.36 million, the Plaintiff has suffered no loss.

33. The Plaintiff has attempted to file a Reply to the 2nd Defendant's defence. As the present application concerns the striking out of the Plaintiff's claim, I am concerned with the Plaintiff's claim only. If it is the Plaintiff's case as stated in his written submission that "the Reply makes it clear that liability is alleged against the 2nd Defendant whatever the status of the Stipulation now relied upon by the 2nd Defendant, and whatever the outcome of the proceeding in New York" counsel should have applied to amend the Statement of Claim. Since he has chosen not to amend then I am bound by what was pleaded.

34. In view of the fact that the decision of the New York Court that the 2nd Defendant was an affiliate was a decision on merit, and that the issues here are the same as the issues in the New York Court, accordingly the Plaintiff's claim against the 2nd Defendant is barred by issue estoppel and the Plaintiff's claim is struck out with costs.