Finikiotis v Knight Frank (SA) Pty Ltd [2001] FCA 12 (19 January 2001)

Last Updated: 19 January 2001

FEDERAL COURT OF AUSTRALIA

Finikiotis v Knight Frank (SA) Pty Ltd [2001] FCA 12

Matter No. S 71 of 2000

EFSTATHIOS FINIKIOTIS & CHRISSAFINA ZERVOS v KNIGHT FRANK (SA) PTY LTD, HEINE MORTGAGE MANAGEMENT PTY LTD & SANDHURST TRUSTEES LTD

O'LOUGHLIN J

ADELAIDE

19 JANUARY 2001

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S 71 OF 2000

BETWEEN:	EFSTATHIOS FINIKIOTIS and CHRISSAFINA ZERVOS APPLICANTS
AND:	KNIGHT FRANK (SA) PTY LTD, HEINE MORTGAGE MANAGEMENT PTY LTD and SANDHURST TRUSTEES LTD RESPONDENTS
JUDGE:	O'LOUGHLIN J
DATE OF ORDER:	19 JANUARY 2001
WHERE MADE:	ADELAIDE

THE COURT ORDERS THAT:

1. The within proceedings be dismissed.

2. The applicants, Efstathios Finikiotis and Chrissafina Zervos, pay the costs of all respondents up to and including this day.

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

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S 71 OF 2000

BETWEEN:	EFSTATHIOS FINIKIOTIS and CHRISSAFINA ZERVOS APPLICANTS
AND:	KNIGHT FRANK (SA) PTY LTD, HEINE MORTGAGE MANAGEMENT PTY LTD and SANDHURST TRUSTEES LTD RESPONDENTS

JUDGE:	O'LOUGHLIN J
DATE:	19 JANUARY 2001
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

1 The applicants in these proceedings are Efstathios Finikiotis ("Dr Finikiotis") and Chrissafina Zervos ("Ms Zervos"). On 13 July 2000 they instituted proceedings in this Court naming Knight Frank (SA) Pty Ltd ("Knight Frank") as the first respondent, Heine Mortgage Management Pty Ltd ("Heine") as the second respondent and Sandhurst Trustees Limited ("Sandhurst") as the third respondent. The applicants did not have the benefit of legal advice and it would appear that the application, the statement of claim and Dr Finikiotis' affidavit were prepared by Dr Finikiotis.

2 The applicants were, at one stage, the directors of Gallerie Investments Pty Ltd, the former owner of a shopping centre in the City of Adelaide. That company borrowed $3.398 million from Sandhurst on the security of a mortgage over the shopping centre; in addition the applicants guaranteed the company's obligations under the mortgage. As events transpired, the company and the applicants were unable to meet the obligations under the mortgage. As a consequence, Sandhurst instituted proceedings in the Supreme Court of South Australia and obtained a judgment against the company and the applicants. Sandhurst also entered into and took possession of the shopping centre pursuant to the mortgage. As part of the Supreme Court proceedings Dr Finikiotis and Ms Zervos filed a defence and a counter claim. However the counter claim was against Knight Frank and Heine only; they did not name Sandhurst as a respondent to their counter claim; the counter claim was, in due course, struck out.

3 The statement of claim as filed by the applicants in these proceedings was, in relative terms, a short document of one and a half pages. Its contents are recorded below:

"The applicants are directors of Gallerie Investments Pty. Ltd. amd Anacon Enterprises Pty. Ltd. In reliance on a true and proper valuation by Knight Frank SA Pty. Ltd. engaged by Jones Lang Wootten managers for Gallerie Investments the applicants executed the Guarantee and Indemnity, Mortgage over the Gallerie Centre 20 Gawler Place and the Facility Agreement pertaining to a loan of $3.6 million approved by Heine on behalf of Sandhurst on or about 12 August 1997.

In addition to the initial valuation prior to the first advance on 20 August 1997, further valuations were made by Knight Frank and sent directly to Heine for approval prior to further advances on 29 August 1997, 11 September 1997, 16 October 1997 and 28 January 1997.

The Knight Frank valuation relies excessively on the success of the Homewares tenancy the relocation of the basement tenancies, the J.L.W. Advisory Asset Management Strategy Report and revised letter of 18 April 1997 which give an anticipated gross income of $1.5 million and an anticipated nett income of $830,000 approximately which the Knight Frank valuers knew or should have known was excessively overestimated and could not be achieved. The representation pertaining to the income was false and consequently the applicants have suffered loss and damage.

The calculation schedules show that the Knight Frank valuation V 12324 May 1997 was misleading and deceptive as the capitalised value of $6.3 million as at 1^st November 1997 upon which the loan of $3.6 million was approved should have been only $2. million without the `imputed' rent. The representation by Knight Frank that the valuation as at 1^st November 1997 would be $6.3 million was false and the applicants refer to the Land Valuers Regulations 1995, the Land Valuers Act S.A., 1994 and the Fair Trading Act S.A. 1987.

Knight Frank was negligent as it owed a duty of care to provide a true and proper valuation. As a consequence of the above the applicants have suffered loss and damage.

A conflict of interest existed between Heine Management Pty. Ltd., Sandhurst Trustees Ltd, Heine Management Ltd. [trustee] and the Heine Retirement Fund and consequently the flawed and false valuation was missed as there was no independent body to make an arms length appraisal and the applicants refer to the Superannuation Industry Supervision Act 1993 [Section 109] Heine Mortgage Management Pty Ltd was negligent as it owed a duty of care to make a proper appraisal of the valuation prior to loan approval on behalf of Sandhurst Trustees and as a consequence the applicants have suffered loss and damage.

The applicants relied on and accepted the expertise of Knight Frank and Heine. As a result of the breach of duty of care and negligence of Knight Frank and Heine the applicants have suffered loss and damage.

Loss of income and capital value;

Annual rental as at 31 March 1997 equals $881,589

Minus John Martins rental $275,000

Minus annual rental Sept. 1999 approx $200,000

Equals $406,589 capitalised at 11.3% equals $3,598,132. approx.

For projected gross income of $1.5 million;

Minus annual rental Sept 1999. Approx $200,000

Equals $1.3 million capitalised at 11.3% equals $10,833,330.

Continuing future loss in income, value, damages, costs and interest."

4 Heine and Sandhurst filed a joint defence on 20 September 2000, Knight Frank having earlier filed a separate defence on 18 September 2000. Without descending to detail it is sufficient to say that their defences in combination, denied that the valuation of Knight Frank was false or incorrect; they also denied issues of reliance on the part of the applicants.

5 All three respondents joined in filing a notice of motion on 2 November 2000 in which they sought orders as follows:

"1. that the within proceedings be dismissed pursuant to Order 20, rule 2;

2. that the proceedings against the respondents be struck out as disclosing no cause of action and/or due to non-compliance with the rules."

The respondents also sought an order for costs.

6 Order 20, r 2(1) of the Rules of Court provides as follows:

"(1) Where in any proceeding it appears to the Court that in relation to the proceeding generally or in relation to any claim for relief in the proceeding:

(a) no reasonable cause of action is disclosed;

(b) the proceeding is frivolous or vexatious; or

(c) the proceeding is an abuse of the process of the Court;

the Court may order that the proceeding be stayed or dismissed generally or in relation to any claim for relief in the proceeding."

7 In my opinion the respondents are entitled to an order that the proceedings be dismissed. There are obvious as well as inherent defects in the statement of claim, some of which can be identified in summary form:

* the applicants have not established that they have standing to bring any action. The alleged losses were initially suffered by the registered proprietor of the shopping centre and the extent to which the applicants, as guarantors, may have suffered losses has not been pleaded with any, or any sufficient, particularity. For example how can it be said that the applicants suffered a loss of rental income of $881,589? If such a loss were sustained it would, presumably, have been a loss of the company.

* as to the first respondent, Knight Frank, the applicants have not pleaded the basis of any duty of care that was allegedly owed by Knight Frank to them nor any degree of proximity which would have given rise to such a duty: and furthermore, of course, there has been no plea of any contractual relationship between the applicants and Knight Frank;

* the applicants have failed to plead the basis upon which they alleged that they were entitled to rely upon Knight Frank's valuation;

* in respect of all three respondents the applicants have failed to plead, with appropriate particularity, the respective relationships which existed between the applicants on the one hand and each of the respondents on the other: nor have they pleaded the circumstances under which they commissioned (if indeed they did) the valuation and the manner in which they relied upon the valuation (if indeed they did).

8 The submissions that were lodged on behalf of the applicants in response to the respondents' notice of motion appear to have been prepared by Dr Finikiotis alone. Rather than being submissions in support of the statement of claim as it presently stands, the document that was filed appears to be a further and better explanation of some of the allegations that were contained in the statement of claim. For example the applicants now assert some form of contractual relationship because the following passage appears in the written submissions:

"The contractual relationship was in the form of an oral agreement, the invoices and letters indicating Gallerie paid for all valuation fees."

9 The obvious deficiencies in such a statement, even assuming that they could properly form part of the statement of claim include:

* a failure to identify the parties to the contract;

* a failure to supply the usual particulars as to how, when and by whom the contract was formed;

* a failure to establish any breach of any such contract and any consequential loss flowing from that breach.

10 The applicants in their submissions claimed that the first respondent Knight Frank was engaged by a company which was alleged to be "Managers for Gallerie" and it was further alleged that Knight Frank "represented and warranted that it had the necessary expertise, experience and facilities to competently carry out a true and proper valuation." The inadequacy of such a statement is apparent; to whom were the representations made? When were they made and how were they made?

11 I quote as a further example of the inadequacies in the applicants' case the following section from their written submissions:

"On 26 June 1997 specific and detailed instructions were given to Knight Frank by Heine for the preparation of the second [revised] valuation for mortgage security purposes. The instructions requested that the report must include the following Trustee reliance clause; `The property represents suitable security for the investment of trust funds up to 66.66% of our valuation. Further funds may be advanced with Mortgage Insurance cover', also `The following should be authorised to rely on your report for mortgage insurance purposes';

HLIC

MGICA Ltd.

Sun Alliance & Royal Insurance Ltd.

Commercial Union Lenders Mortgage Insurance Ltd."

12 The quoted passage cannot assist the applicants in any shape, manner or form. Assuming that the quoted passage accurately reflects the content of some document it is highly significant that it makes no reference to the applicants or to any of their companies. Rather than assisting the applicants the quoted passage suggests that it might negate any question of reliance on their part.

13 These observations on the submissions that have been made on behalf of the applicants have not covered all assertions that Dr Finikiotis has made but they are sufficient to explain that I have been unable to find any support for the retention of the applicants' pleadings in their present form. I earlier mentioned that the financial difficulties that the applicants have suffered with respect to the shopping centre have already been the subject of litigation in the Supreme Court of South Australia. I am aware that the applicants' proceedings in the Supreme Court have been dismissed but I am not aware whether the circumstances of that dismissal would amount to an estoppel in favour of any of the respondents; that particular matter was not the subject of submissions on behalf of any of the respondents. In my opinion the appropriate order is that the within proceedings be dismissed against each of the three respondents on the ground that in respect of each such respondent no reasonable cause of action has been disclosed. I further order that the applicants, Dr Finikiotis and Ms Zervos pay the costs of all respondents up to and including this day.

I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Loughlin.

Associate:

Dated:

The Applicants were unrepresented:
Solicitors for the 1st Respondent:	Messrs Phillips Fox
Solicitors for the 2nd and 3rd Respondents:	Messrs Lynch & Meyer
Written submissions were received on behalf of the respondents on 20 October and 2 November 2000
Written submissions were received on behalf of the applicants on 4 December 2000
Date of Judgment:	19 January 2001