Sino Iron v Worldwide Wagering – a case of fraud and restitution “with the lot”

It has not been a good week in Australian courts for sports betting enterprises. On Thursday Tabcorp was fined $45million for breaching anti-money laundering and counter-terrorism financing laws. To less publicity, the day prior, the Victorian Supreme Court found another sports betting company and individuals and companies associated with it were liable for the consequences of receipt of stolen funds of over $2million. The case is Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101.

This was a case of fraud and restitution “with the lot” – the issues raised by the fraud and addressed in the judgment include money had and received (the stolen funds), Black v Freedman trusts and when they arise, Barnes v Addy claims against third parties for knowing receipt of trust funds and knowing assistance in breaches of trust, the Baden categories of knowledge, when knowledge of an agent will be imputed to the principal, the change of position defence, indefeasibility of title and the fraud and in personam exceptions, tracing issues, and more.

The facts as found by the Court

The two plaintiff companies were involved in the development of Australia’s largest magnetite mining and processing project, the Sino Iron Project, conducted at Cape Preston in the Pilbara, Western Australia. They incurred large debts to a company called Monadelphous Engineering Associates Pty Ltd.

The fraudster, pretending to be an authorised representative of Monadelphous, contacted the plaintiffs and directed payment of Monadelphous’ invoices to be paid into a new bank account. The bank account details given were those of the fourth defendant, a company incorporated in Norfolk Island called Worldwide Wagering Pty Ltd. Worldwide carried on an international sports betting business under the name “Pinnaclebet”.

The plaintiffs paid a total of $2,147,689 into Worldwide’s ANZ bank account on 30 May 2016. Worldwide’s sole director Mr H (the fifth defendant), and its general manager Mr O (the sixth defendant), initially suspected fraud when the funds were paid into their company’s account, as there had been a similar theft from La Trobe University about two weeks earlier. They reported it to the police. However they then spoke with a Worldwide customer known to them, a Mr S, who claimed an entitlement to bet with the funds, and on 1 June 2016 they arranged for Worldwide to credit the stolen funds to Mr S’s betting account. Mr O and Mr H gave evidence this was after checking by email with the police (see [140]-[142]), although the judge found on the evidence that the emails to the police excluded important information including Mr S’s surname, to protect Mr S from further enquiries by the detective (see [193]-[200]).

The stolen funds were then gambled on international sporting events. Most bets were lost. Worldwide paid out $550,000 to Mr S on winning bets. The Court found that most of the approximately $2million was used by Worldwide, Mr H, or related companies. The defendants admitted they had actual knowledge of the fraud at 1.13pm on 7 June 2016, six days after crediting the funds to Mr S’s betting account, and after Mr S had placed his last bet. However after that time, the stolen funds continued to be used by the defendants or related companies (see [8]). This included a sum of nearly $796,000 which passed through a related company The Odds Broker and was used by Mr H to purchase a bank cheque, which was then used to settle the purchase by Mr H and Mr O as tenants in common in equal shares of a property at Bondi Junction. See [6] – [12] of the judgment for summary details of the application of the funds. After Mr S’s last bet, the remaining credit in Mr S’s betting account was $70,479.40, which was later repaid to the plaintiffs.

The plaintiffs claimed the balance of the stolen funds ($2,077,210) or their specific traceable proceeds, on multiple grounds. See the list of claims held to have been successfully made out, in the next section below .

The defendants’ arguments included that prior to the time they had actual knowledge of the fraud, they were entitled to rely on Mr S’s statements that the stolen funds belonged to him or those for whom he acted as agent and were legally obtained. Hence, so they contended, the stolen funds were received by Worldwide, and thereafter dealt with by it and the other defendants, as a bona fide purchasers for value without notice of the fraud. They argued the change of position defence (see below). They also argued that Worldwide did not receive the stolen funds on trust as alleged, because at the time of receipt it had no knowledge of the fraud. (See [23]) They succeeded in this last contention, although it only delayed the arising of the trust for 48 hours after receipt of the funds. The question of when the Black v Freedman trust arose is discussed below.

THE SHORT VERSION 

For those wanting a short summary of the outcome of the decision, here it is: The Court held the plaintiffs had established an entitlement to relief on the following (co-existing and overlapping) grounds –

First, for $2,077,210 against Worldwide on the basis of:

  1. the common law claim for money had and received;
  2. the proprietary claim under Foskett v McKeown principles; and
  3. breach of its Black v Freedman trust obligations.

Second, against Mr H and Mr O for $2,077,210 for knowingly assisting Worldwide to breach its Black v Freedman trust obligations.

Third, against Mr O for knowingly assisting Worldwide, The Odds Broker and Mr H to breach their respective Black v Freedman trusts by disposing of the traceable proceeds of the stolen funds comprised in the $800,000 transferred from Worldwide’s ANZ account to a bank account of The Odds Broker, from whence it was transferred to personal bank accounts of Mr H.

Fourth, against Mr H for the traceable proceeds of the stolen funds comprised in the $800,000 on the basis of:

  1. money had and received; and
  2. knowing receipt of trust property.

Fifth, against Mr H and Mr O for the traceable proceeds of the stolen funds comprised in the $345,000, for knowingly assisting Worldwide to breach its Black v Freedman trust obligations.

Sixth, against Worldwide for proprietary relief in the form of an equitable charge over the Worldwide ANZ account to secure the traceable proceeds of the stolen funds remaining in that account.

Seventh, against Mr H and Mr O for proprietary relief in the form of an equitable charge over the Bondi Junction property to secure the traceable proceeds of the stolen funds used to purchase that property.

Eighth, against Worldwide for $8,500 as an account of profits made from its breach of trust.

Each of these findings involved rejection of the change of position and bona fide purchaser for value without notice defences, on the ground that the defendants did not act in good faith at relevant times because of their knowledge of the fraud to the level of the third Baden category (wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make). The indefeasibility defence also failed.See [452]-[462] for these conclusions. The proceeding was adjourned to allow further evidence and submissions before determining tracing issues.

For those interested in reading more about the claims and defences argued in this case, and a discussion of the legal principles involved, read on.

THE LONG VERSION

1. Knowledge of the fraud

In making his findings as to knowledge, Hargrave J first set out the 5 so-called “Baden categories of knowledge” at [27], derived from the well-known 1993 UK decision. The level of knowledge required to be proven to succeed in a relevant claim or defence varies according to the particular claim or defence. The Baden categories of knowledge are –

(1) actual knowledge;

(2) wilfully shutting one’s eyes to the obvious;

(3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;

(4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and

(5) knowledge of circumstances which would put an honest and reasonable person on inquiry.

(For a further discussion of these categories, see my 2012 article on Grimaldi v Chameleon Mining here.)

None of the parties alleged that Mr S was a party to the fraud. His Honour remarked that that remained an open question (see [63]), and applied the rule in Jones v Dunkel to drew an adverse inference from the defendants’ failure to call Mr S to give evidence (see [201]-[203]).

The defendants admitted they had actual knowledge of ‘a suspicion of’ the fraud at approximately 1.13pm on 7 June 2016, several hours after an ANZ officer initially told Mr H of it. By 1.13pm Mr H believed the stolen funds were ‘likely’ to have been fraudulent deposits and instructed a staff member to freeze Mr S’s betting account. The Court found that Mr H had actual knowledge of the fraud in the first Baden category from the time he gave that instruction on 7 June. (See [98]-[99])

Worldwide, Mr H and Mr O contended that at the time the stolen funds were credited to Mr S’s betting account 6 days prior, on 1 June 2016, they had made all reasonable inquiries to satisfy themselves that Mr S was entitled to bet with the funds (see [157]). Hargrove J did not accept these submissions.

His Honour took the view  that the knowledge that they had admitted to having at that time constituted circumstances which would have led an honest and reasonable person in their position to have made further inquiries before crediting Mr S’s account with the stolen funds. Thus they should have made those inquiries, including the ‘simple inquiry‘ of ascertaining the identities of the depositors of the stolen funds (the plaintiffs) from the internet bank statements, and contacting them to ask if the deposits had been made by the plaintiffs for the purpose of the international sports betting customer claiming the funds. His Honour found that had they done so, the fraud would have been revealed and Mr S’s betting account would not have been credited (see [158]-[159]).

That finding is suggestive of Baden category 5, possibly 4. However the Court went further, and held that Mr H and Mr H acted wilfully and recklessly in failing to make the ‘simple inquiry’ – see Baden category 3 above. His Honour observed that they also had a commercial motive to want to believe Mr S’s claims, being their plan to expand the business’s turnover and customer base to ready it for sale from which they each stood to profit. As a result, his Honour found, they accepted as true flimsy information from a man with, at best, a mixed reputation, and made only superficial inquiries (see [168]-[179]).

His Honour made his findings to the Briginshaw standard (see [180]-[182]). He found that the defendants had knowledge of the fraud in the third Baden category at the time Mr H and Mr O issued the instructions for Mr S’s betting account to be credited with the stolen funds, and thus before any bets were placed. If that were wrong, his Honour held that the defendants had that level of knowledge after the account was credited but before any bets were placed, or alternatively, prior to the final $1.3m in bets were placed on the morning of 7 June (see [272]).

2. Claims in restitution based on mistaken payments, money had and received

The principles his Honour identified from the authorities were these (see [275]-[279], [286]- [288]) –

  1. When money is paid under a mistake of fact, the person paying the money may recover it from the recipient in a common law action for money had and received. Recovery depends upon whether it would be inequitable for the recipient to retain the benefit. Retention may not be inequitable if the recipient has changed its position on the faith of the receipt and thereby suffered a detriment:  Australian Financial Services Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; (2014) 253 CLR 250, 568 per French CJ;
  2. Direct receipt is unnecessary; indirect receipt by a volunteer of traceable proceeds of the money paid by mistake is enough: Fistar v Riverwood Legion & Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732, 746 [62]-[64];
  3. In a common law action based on money paid by mistake, it is not necessary for the plaintiff to allege or prove that the retention of the money received by the defendant would be inequitable. That is a matter for defence, on which the defendant bears the onus: ASFL v Hills Industries at 593 [66]-[67]; David Securities Pty Ltd v CBA [1992] HCA 48; (1992) 175 CLR 353, 379;
  4. One such defence is change of position. Gageler J in AFSL v Hills Industries proposed two conditions for proof of this defence –
    1. That the defendant has acted or refrained from acting in good faith on the assumption that he/she/it was entitled to deal with the payment received. The defendant need not have relied on knowledge derived from the payer.
    2. That by reason of having so acted or retained from acting, the defendant would be placed in a worse position if ordered to make restitution of the payment than if the defendant had not received the payment at all. The detriment need not always be financial. If it is, it need not be established with precision. It can be an opportunity forgone. However it must, in every case, be shown by the defendant to be substantial: ASFL v Hills Industries at 625-626 [157];
  5. This formulation has been accepted by the Victorian Court of Appeal as consistent with the defence and the principles on which it is based as set out by the majority in AFSL v HillsSouthage PL v Vescovi [2015] VSCA 117; (2015) 321 ALR 383, 399 [65].
  6. A defendant relying on a change of position defence who, prior to the change of position, wilfully and recklessly fails to make such inquiries as an honest and reasonable person would make in all the circumstances (i.e. once they have knowledge to the 3rd Baden category), does not act in good faith on the assumption that he, she or it is entitled to deal with the mistaken payment (which is the 1st of Gageler J’s two conditions for this defence): Macquarie Bank Ltd v Sixty Fourth Throne PL [1998] 3 VR 133, 143-144.

The plaintiffs’ claim under this head was against Worldwide for all of the $2.14 million stolen funds (less the approx $70,000 balance at the end, already repaid), and against related company The Odds Broker for $800,000, and against Mr H for $800,000.

The Court held that the defendants could not avail themselves of the defence here because they had sufficient (Baden category 3) knowledge of the fraud at the time each bet was accepted (see [282]). Worldwide was held liable to the plaintiffs for money had and received for the approx $2million.

The Odds Broker and Mr H argued they were not direct recipients of the stolen funds from the plaintiffs. As regards The Odds Broker, $800,000 was paid to it from the Worldwide ANZ account which was substantially comprised of traceable proceeds of the stolen funds (see [290]). There was no evidence The Odds Broker provided any consideration for the payment or changed its position on the faith of the receipt. On the evidence, it did not act in good faith. It was held liable to the plaintiffs for the traceable proceeds of the $800,000 as money had and received.

As regards Mr H and the $800,000 on-paid by The Odds Broker to Mr H’s personal accounts and applied towards the purchase of the Bondi Junction property, the tracing exercise was not straightforward. However even on the defendants’ case, $731,349.45 of the $800,000 was traceable to the Bondi Junction property. The Court found Mr H did not act in good faith because he had the requisite degree of knowledge. Mr H was held liable to the plaintiffs for $800,000 (or its traceable proceeds) as money had and received. ( See [286]-[294])

3. The Black v Freedman trust on which Worldwide held the funds for the plaintiffs – and when it arose

Hargrove J considered the nature of the trust created by receipt of stolen moneys under the Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105 line of authorities from [306]. His Honour discusses these principles –

  1. Black v Freedman has been treated in Australia as a settled law that a thief holds stolen property on trust for the victim: Levy v Watt [2014] VSCA 60; (2014) 308 ALR 748, 766 [65] (see [313]);
  2. For volunteer recipients of stolen money from the fraudster:  a person entirely innocent of a fraud who comes to know that he or she has received and still retains the proceeds of, or taken advantage of, a fraud to which he or she was not party, cannot knowingly seek to retain those proceeds or that advantage without, in effect, becoming a party to that fraud and liable accordingly: Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230, 253 [92] (see [314]);
  3. The innocent recipient’s liability is limited to the amount of the stolen funds (or their traceable proceeds) remaining in the hands of the innocent recipient at the time sufficient knowledge of the theft is obtained: Heperu at 264-268 (145]-[163] (see [315]);
  4. In summary, a third party who receives stolen money as a volunteer is only obliged to account to the beneficial owner of the stolen property on Black v Freedman principles to the extent the recipient holds the stolen property or its traceable proceeds at the time the recipient obtains sufficient knowledge of the theft (see [316]).

(In relation to the first principle above, I note in passing that whilst that proposition is settled law, there has been much controversy about whether this is indeed the correct proposition for which Black v Freedman stands. In Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732 at [37] Leeming JA noted this and discussed the cases and academic writings . Leeming JA noted the principal perceived difficulty is that it is said that a thief can have no title to stolen property and so cannot become a trustee for the true owner. His Honour preferred the view on this of Dr Fox expressed in his 2008 book Property Rights in Money, that what the thief is treated as having is legal possession, and therefore a possessory legal title which is capable of being held on trust. A mere finder of a chattel who has nothing more than possession, has a right against other putative possessors who lack better title. This extends even to thieves. But the thief’s right to possess is exigible only against others, not against the true owner: see Bride v Shire of Katanning [2013] WASCA 154 at [72] per Edelman J (with whom Newnes JA agreed). I note that there are other points of controversy concerning Black v Freedman, including whether the reasons there were confined to property disposed of by those in a fiduciary position.)

His Honour concluded that a trust did not arise upon Worldwide’s receipt of the stolen funds. It had not been proven it had sufficient knowledge of the fraud when it received them on 30 May 2016 (see [316]). However, when the defendants did acquire sufficient knowledge of the fraud on 1 June 2016, Worldwide became liable in equity to account to the plaintiffs for the stolen funds, all of which were still in its hands. The Court held that from that time, Worldwide was a trustee of those funds for the plaintiffs under either a constructive or resulting trust (see [325] and the citations of Heperu at [154]-[155] and Sze Tu v Lowe [2014] NSWCA 462 at [141]-[162]).

4. Knowing receipt – Barnes v Addy first limb

On the findings of knowledge already made, it was held The Odds Broker knowingly received the $800,000 with sufficient knowledge of the fraud. The Odds Broker thus became liable to account to the plaintiffs for that amount as a constructive trustee. It breached that trust by paying the $800,000 or its traceable proceeds to Mr H (see [326]).

Similarly, Mr H received the on-payment from The Odds Broker with knowledge of the fraud. Mr H gave evidence he did not know the money was sourced from the stolen funds when he received it into his bank account. However it was held this made no difference, because Mr O knew all the relevant facts and acted as Mr H’s agent in arranging the transfer of the $800,000 to Mr H’s account to enable the purchase of the property. Mr O’s knowledge was attributable to Mr H, so Mr H knowingly received the traceable proceeds of the $800,000 and thus became liable to account to the plaintiffs as a constructive trustee for that amount. He beached that trust when Mr O, as Mr H’s agent, used the traceable proceeds to purchase the Bondi Junction property (see [327]).

5. Knowing assistance – Barnes v Addy second limb

To be liable under the second limb of Barnes v Addy for knowing assistance, his Honour pointed out at [331] that it must be established that –

  1. The defendant assisted a trustee or fiduciary in a breach of trust or fiduciary obligation;
  2. That breach of trust or fiduciary obligation is characterised by the Court as a ‘dishonest and fraudulent design’, and
  3. The assistance was given with the requisite degree of knowledge of that dishonest and fraudulent design.

As to the third element – the requisite degree of knowledge by the recipient – it was accepted that Baden categories 1 to 4, but not category 5, are sufficient for both the first and second limbs of Barnes v Addy. This is consistent with authority: Farah Constructions (2007) 230 CLR 89, 163-4 [177]; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296, 362 [262]; Mathieson Nominees v Aero Developments [2016] VSC 131 [166]. Category 5 is a form of constructive notice, rather than knowledge, and is considered insufficient. (See [332])

The Court concluded at [359] that –

  1. Mr H and Mr O knowingly assisted Worldwide to breach its trust obligations in respect of the whole of the stolen funds and hence each was liable to the plaintiffs for equitable compensation for the unpaid balance of that amount (just over $2million),
  2. Mr H and Mr O were also liable for knowing assistance in respect of the traceable proceeds of the stolen funds comprised in payments totalling $345,000,
  3. Mr O was liable for knowingly assisting Worldwide and The Odds Broker to breach their respective trust obligations regarding the traceable proceeds of the stolen funds comprised in the $800,000,
  4. Mr O was also liable for the traceable proceeds of the stolen funds comprised in the $800,000 for knowingly assisting Mr H to breach his Black v Freedman trust obligations, by using those proceeds to purchase the Bondi Junction property.

These liabilities overlapped with each other and other grounds of liability.

The plaintiffs also made proprietary claims over assets which remained to hand, including the Bondi Junction property.

6. Traceable into the Bondi Junction property?

The plaintiffs claimed entitlement to a proprietary remedy against the property in the form of a charge or equitable lien. This was on the basis that the Bondi Junction property was purchased with a bank cheque sourced from the traceable proceeds of the stolen funds comprised in the $800,000. (Hargrove J noted here that the plaintiffs’ claims against the Bondi Junction property were also established on the basis that Mr H funded the purchase of it in breach of his Black v Freedman obligations, with Mr O’s knowing assistance. See [364])

His Honour noted the following tracing principles –

  1. The beneficial owner of misappropriated property can recover it or its traceable proceeds from the person holding the asset, subject only to the defence that the holder is a bona fide purchaser for value without notice: Foskett v McKeown [2000] 1 AC 102, 129, 108-9, 115;
  2. Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset: Foskett v McKeown, the ‘basic rule’ stated by Lord Millett at 131.

Here, the plaintiffs’ property was constituted by their choses in action against their bank representing funds held to their account, including the stolen funds. When their bank mistakenly paid the amount of the stolen funds to Worldwide, the plaintiffs’ property was extinguished and Worldwide obtained a chose in action against its bank ANZ, which became the traceable substitute for the plaintiffs’ former property. In turn, further traceable substitutes for lesser amounts were created by the subsequent movement of the $800,000 (or its traceable proceeds) to the bank accounts of The Odds Broker and Mr H and, subsequently, the relevant bank cheque and the Bondi Junction property (see [365]).

In accordance with Lord Millett’s ‘basic rule’, the plaintiffs had elected to claim a charge on the Bondi Junction property to secure their personal claims against Mr H and Mr O for the traceable proceeds of the stolen funds comprised in the $800,000. Subject to the defendants’ defence based on indefeasibility of title, the Court held those claims should succeed (see [367]).

7. Is this claim against the property defeated by indefeasibility of title?

The defendants argued that Mr H and Mr O’s title to the Bondi Junction property was indefeasible by operation of s 42 of the Real Property Act 1900 (NSW). The merits of this argument turned on whether the events in this case brought it within the fraud exception to indefeasibility of title, as provided in s 42(1).

Hargrove J noted it has been held that –

  1. ‘Fraud’ in s 42(1) means ‘actual fraud, moral turpitude’ or ‘dishonesty of some sort’: Farah Constructions (2007) 230 CLR 89, 169 [192]; Bahr v Nicolay (No 2) (1988) 164 CLR 604, 614 (see [373]);
  2. The 3rd Baden category of knowledge is a species of actual knowledge (as opposed to constructive knowledge): Farah Constructions (2007) CLR 89, 163 [174] (see [375]);
  3. Causing registration on title in circumstances of wilful blindness (failing to make such enquiries as an honest and reasonable person would make) may be dishonest, and was categorised by Tadgell JA as fraudulent in Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] 3 VR 133, 143-4 (see [375]).

The Court found that Mr O’s actions in causing his registration as an equal proprietor of the Bondi Junction property were dishonest (at [375]). It found he wilfully and recklessly failed to make such enquiries as an honest and reasonable person would make before instructing a staff member to credit the stolen funds to Mr S’s betting account on 1 June 2016, thus allowing the stolen funds to be used to place bets on that account. This fell within the 3rd Baden category of knowledge. Other evidence of Mr O’s showed that the $800,000 transferred from Worldwide to The Odds Broker  was directly referable to the stolen funds (see [376]). Moreover, on the defendants’ admissions of when they acquired actual knowledge of the fraud at 1.13pm on 7 June 2016, Mr O completed the purchase after obtaining this actual knowledge. He nevertheless proceeded to do so.

Notably, his Honour observed at [378]: “Although Mr O… may not have appreciated that his actions were dishonest, they were.” His Honour so found based on the evidence, and on the High Court’s observation in Farah Constructions at [173] that: “As a matter of ordinary understanding, and as reflected in the criminal law in Australia, a person may have acted dishonestly, judged by the standards or ordinary, decent people, without appreciating that the act in question was dishonest by those standards.

The Court also found that Mr H’s registration as an equal proprietor of the Bondi Junction property was procured by fraud for which he was responsible (from [379]). The plaintiffs contended that even if Mr H did not know the money in his personal bank account used to purchase the bank cheque to buy the property was sourced from the stolen funds, he had authorised Mr O to act as his agent in obtaining the moneys required for settlement of the purchase and that Mr O’s knowing use of the stolen funds should be imputed or “brought home” to Mr H as principal.

On this question of attributing the knowledge of an agent to the principal, at [389] Hargrave J noted the reasoning of the High Court in Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2; (2015) 254 CLR 425 as follows –

  1. The title of a registered proprietary may be invalidated on the ground of fraud ‘brought home’ to the registered proprietary or to his agents: Cassegrain 436-7 [32], citing Assets Co Ltd v Mere Roihi [1905] AC 176, 210;
  2. Whether fraud by an agent will be brought home to the registered proprietor depends upon the ‘scope of authority and whether the agent’s knowledge of the fraud is to be imputed to the principal [registered proprietor]’: Cassegrain 439 [40]. This involves consideration of why the fraudster’s knowledge should be imputed to the registered proprietor: Cassegrain 439 [41];
  3. It is not sufficient to impute the agent’s fraud to the registered proprietor whether the registered proprietor is ‘no more than the passive recipient of an interest in land’: Cassegrain 439 [41];
  4. In order to bring fraud home to the registered proprietor, it is necessary to show that the agent’s fraud was within the scope of the agent’s authority given by the registered proprietor: Cassegrain 439 [42].

In the present case, the Court found Mr H gave a broad general authority to Mr O to move funds between the relevant accounts and he expected that the money required to complete the purchase of the property would be moved into his personal account from one of the accounts Mr O was authorised to operate. Hargrave J found that Mr O’s authority was sufficiently broad to encompass using the stolen funds if that was the only available source at the time to enable completion of the purchase. The Court found that given that Mr H had the same knowledge of the fraud as Mr O at relevant times, and thus acted dishonestly in instructing Mr O to arrange for Mr S’s betting account to be credited with the stolen funds, the Court was satisfied on the evidence that Mr O’s broad authority encompassed him acting fraudulently by using the stolen funds to complete the purchase if that was necessary. (See [391]-[392])

8. The in personam exception to indefeasibility of title

In addition to the statutory fraud exception to indefeasibility of title under s 42 of the Act, Hargrave J went on to find that indefeasibility also did not accrue as the in personam exception to indefeasibility of title was also made out. His Honour noted that in personam exception was generally described as existing ‘in relation to certain legal or equitable causes of action against the registered proprietor’ in Farah Constructions (2007) 230 CLR 89, 169 [193]. This language echoes the requirement that the in personam exception depends on the establishment of a known legal or equitable cause of action: Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] 3 VR 133, 146-7. (See [394]) Hargrave J also noted the statements of Brennan J in Bahr v Nicolay (No 2) (1988) 164 CLR 604, 653 to the effect that the in personam exception does ‘not infringe the indefeasibility provisions of the Act. Those provisions are designed to protect a transferee from defects in the title of the transferor, not to free him from interests with which he has burdened his own title‘.

On the findings in this case, the plaintiffs’ claim for an equitable lien or charge over the Bondi Junction property arises from their establishing the known legal causes of action based on (1) Foskett v McKeown tracing principles, (2) Mr H’s breach of his Black v Freedman trust obligations, and (3) knowing assistance in that breach by Mr O. The Court held that the conduct of Mr H and Mr O, before registration of their interests as proprietors of the Bondi Junction property, had burdened their interests. (See [394]-[397])

(Sidenote: Hargrave J’s seemingly unexamined acceptance here that a knowing assistance Barnes v Addy claim is a personal equity which may defeat indefeasibility of title under the in personam exception appears to be directly inconsistent with obiter in the judgment last year of Vickery J in Mathieson Nominees Pty Ltd v Aero Developments Pty Ltd [2016] VSC 131. In that decision his Honour noted the debate on this point between various courts and confirmed the effect of ratio in Farah Constructions v Say-Dee [2007] HCA 22; 230 CLR 89, 140 [193]-[196] to the effect that a claim under Barnes v Addy is not a personal equity which defeats statutory indefeasibility of title. See my review of the Mathieson Nominees decision and discussion of this issue here.)

9. Traceable into the Worldwide ANZ account? Mixed funds

His Honour discussed the tracing issues that arose here at [398]-[435]. There were complications. He sets out a useful review of the competing tracing rules and principles that may be applied in cases of tracing into (and out of) mixed funds – see in particular at [408]-[422].

In the end Hargrave J concluded more evidence was needed to finally determine the tracing issues, much of which he noted was in the hands of the defendants. His Honour adjourned the proceeding to allow further evidence and submissions as to the remaining tracing issues – see [423]-[430] and [434].

For completion, I should note that an additional claim was made for recovery of the stolen funds under s 2.6.3 of the Gambling Regulation Act 2003, but was unsuccessful (see [440]-[450]).

Conclusion

The judgment is only two days old, so we cannot yet know whether an appeal will be pursued. In the meantime, on a practical level, the case stands as a salient warning to betting companies and those associated with them, and potentially similar entities which may receive questionable deposits into accounts held with them. Each case will turn on its own facts, and certainly here there was, amongst other things, an unusually timely warning of another fraud just 2 weeks prior. However in circumstances where a recipient is put on enquiry in some way, before on-paying or releasing the funds, it may be prudent to make the so-called ‘simple inquiry’ as described by Hargrave J at [158]-[159]: to seek to ascertain the identity of the depositor of the funds, contact them, and inquire as to whether they intended to make the deposit or payment to the benefit and for the purposes of the person or entity claiming to be entitled to access or control the funds. It is worth bearing in mind that whatever the circumstances are, the Baden categories of knowledge (see above) direct attention to what would an honest and reasonable person consider or do in those circumstances and with that awareness. As this case illustrates, a failure to meet that standard may have significant consequences for recipients of suspicious payments

Newsflash – High Court judgments today in Newtronics and Hills Industries

Further to my post on Sunday, the High Court has earlier this morning handed down two important judgments – one in insolvency law (Universal Distributing principle) and one in restitution (change of position defence): Stewart v Atco Controls Pty Ltd (in liquidation) [2014] HCA 15 and Australian Financial Services and Leasing Pty Ltd v Hills  Industries Limited [2014] HCA 14.

First, the High Court unanimously allowed the appeal of the liquidator of Newtronics Pty Ltd (in liquidation) from the Victorian Court of Appeal’s decision in Atco Controls Pty Ltd (in liquidation) v Stewart [2013] VSCA 132. The High Court held that the liquidator was entitled to an equitable lien over a fund constituted by a settlement sum with respect to costs and expenses incurred in getting in the fund, being his costs and expenses in litigation against the respondent, a secured creditor, and receivers appointed by the respondent.

The bench of Crennan, Kiefel, Bell, Gageler and Keane JJ held that:  “there is no basis for excepting this case from the application of the principle in Universal Distributing (at [65]). You can read the judgment in full here, the High Court’s judgment summary here, and my analysis of the Victorian Court of Appeal decision from which this appeal was brought here.

Secondly, the High Court unanimously dismissed the appeal of Australian Financial Services and Leasing Pty Ltd from the decision of the NSW Court of Appeal in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380; (2012) 295 ALR 147, holding that the first and second respondents would not be required to repay monies that had been mistakenly transferred to them by the appellant as a result of a fraud committed by a third party, because each respondent had established a defence that they had changed their position on the faith of the receipt of the payments.

While the decision was unanimous, three judgments were written. The joint judgment was that of their Honours Hayne, Crennan, Kiefel, Bell and Keane JJ. Their Honours French CJ and Gageler J each wrote a separate judgment. You can read the judgment in full here, the High Court’s judgment summary here, and my analysis of the NSW Court of Appeal judgment from which this appeal was brought here (the second case discussed there).

More to follow – I will endeavour to return to analyse the High Court judgments in each case as soon as time allows.

Heads up – High Court to deliver two important decisions on Wednesday

This coming Wednesday 7 May 2014, the High Court of Australia will deliver two important decisions – one in restitution law, the other in insolvency law.

The first is an appeal from the decision of the NSW Court of Appeal in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380; (2012) 295 ALR 147. This is a case concerning mistaken payments due to fraud, and in particular the change of position defence. I wrote on that decision in detail last year – you can read my review of it here (second case discussed there).

The second is an appeal from the decision of the Victorian Court of Appeal in Atco Controls Pty Ltd (in liquidation) v Stewart [2013] VSCA 132. In this case the central issue concerns liquidator’s equitable liens and the Universal Distributing principle. I wrote about this case in March – you can read my review of it here. The precedent the High Court decision sets here is likely to be important for liquidators moving forward, as to there being certainty regarding whether and when they can expect to be compensated for their time and money spent in recovering assets covered by a creditor’s security.

Developments – Mistaken payments due to fraud – change of position defence

1. Citibank v NAB 

In October 2011 I reported on the decision of Hammerschlag J of the NSW Supreme Court in William Co-Buchong v Citigroup Pty Ltd & National Australia Bank Ltd [2011] NSWSC 1199 (link). This was an interesting contest between two banks, neither of which had acted negligently or outside of standard banking practices, and both of which had been the victim of fraud.

In that case, the customers involved were joint account holders with both Citibank and the NAB. Citibank had transferred money via the SWIFT system from its customers’ account on the basis of a fraudulent faxed instruction, to those customers’ account at the NAB. The NAB then also received fraudulent instructions, by way of three International Transfer Application Forms, and paid out the money in three tranches to accounts held in various names at HSBC Hong Kong Ltd.

Citibank’s claim was put as one for restitution. It had paid the money to NAB on the fundamentally mistaken belief that it had been so instructed by its customers. Absent restitution, claimed Citibank, NAB would be unjustly enriched. NAB’s defence was that it changed its position to its detriment by paying away the funds on the faith of the receipt.

Briefly, NAB won; its defence of change of position succeeded. His Honour considered the earlier decisions of the NSW Court of Appeal in State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350 and in Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2000] NSWCA 84; (2009) 76 NSWLR 195 and held in favour of NAB. Both banks were duped. However Citibank paid first without the customers’ authority as a result of which NAB credited the customers’ account rendering it vulnerable to the fraud to which it succumbed. His Honour remarked that:

“In these circumstances and where neither party criticises the other for falling for the fraud, it would lead to an inequitable result were Citibank to be made whole at the expense of NAB.”

For a more detailed discussion of the analysis, see my earlier post here.

I did not report on this at the time, but on 4 December last year the NSW Court of Appeal (a five judge bench) unanimously dismissed Citibank’s appeal, upholding his Honour’s decision that NAB had established its change of position defence. NAB, as the recipient of the funds from Citibank, had acted in “detrimental reliance” on the receipt “in good faith”, and had thereby displaced Citibank’s prima facie right of recovery for mistaken payment – Citigroup Pty Ltd v National Australia Bank Limited [2012] NSWCA 381.

It is to be noted that in his judgment Barrett JA discusses Hammerschlag J’s view as to three interconnected requirements emerging from State Bank of NSW Ltd v Swiss Bank Corporation (outlined in my earlier post). At [101] his Honour observes that if Hammerschlag J’s formulation limits the information upon which the relevant recipient (here the NAB) can rely to information received from the payer, it is too narrow. It is true that a payer who instructs that the transferred funds be placed to the credit of a particular customer’s account does not expressly sanction subsequent payment out to that customer. But as Barrett JA observes, such payment out is a natural corollary; and sanctioning of it comes from the context in which the transfer is made and the instruction is given, which must recognise that the customer will have resort to the funds in the customer’s own account. As his Honour then says at [102] –

“This emphasises the point that matters of context already known to the recipient may properly be taken into account. As recognised in Port of Brisbane Corporation v ANZ Securities Ltd, action by the recipient that is inconsistent with the payer’s instruction will not be action taken in reliance on or on the faith of the receipt. But as explained in Perpetual Trustees Australia Ltd v Heperu Pty Ltd, the causal link between the receipt and the subsequent action will exist if that action has a foundation of information obtained in connection with the receipt considered in the attendant circumstances.”

Bathurst CJ, Allsop P and Meagher JA agreed (at [5]).

Citibank was left solely liable to bear the whole loss of repaying the funds to its customers. It is not yet clear whether or not Citibank has lodged an application for special leave to appeal to the High Court of Australia.

Interestingly, of the five judge bench of the NSW Court of Appeal who delivered judgments in that case, Macfarlan JA and Barrett JA (who wrote the initial draft judgment to which the others referred) delivered individual judgments, and there was a joint judgment of the remaining three judges – Bathurst CJ, Allsop P and Meagher JA. Those three judges also delivered judgment on the same day, in the next case I discuss below, and refer to it in their joint judgment in Citigroup v NAB.

2. Hills Industries v Australian Financial Services and Leasing 

On the same day, 4 December last year, the NSW Court of Appeal also handed down its judgment in Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380. This was another case where the Court had to choose between two innocent parties, as to who would bear the loss resulting from mistaken payments due to fraud on the part of a third party.

In order to avoid the collapse of the Total Concept Projects group of companies (TCP) a director sought finance from the Australian Financial Services and Leasing Pty Ltd (ASFL). The TCP director in question approached ASFL and fraudulently claimed to be seeking finance for the acquisition of goods from two suppliers. In fact, TCP already owed those suppliers (Hills Industries Ltd and Bosch Security Systems Pty Ltd) considerable sums of money, and the finance was really sought to pay the debts, in order to stave off liquidation. The director Mr Skarzynski created false invoices and AFSL was convinced to pay the money directly to the suppliers for the non-existent goods. The suppliers had been told by TCP that their old debts were being paid by funds obtained from a third party, and processed the payments accordingly.

On the evidence, it was clear that AFSL had made the payments to the suppliers under a mistake (ie that the money was paid to acquire goods TCP sought to purchase) and that the threshold requirements for restitution for mistaken payment existed. For a useful and learned discussion of the relevant principles of restitution for mistaken payment in Australia, I commend you to read the judgment of Allsop P at [66]-[75], and the passages which follow at [76]-[166], discussing the potential defences to such claims and reviewing the authorities in some depth.

The question on appeal was whether relief should be denied, on the basis that the suppliers had established the change of position defence such that they were entitled to retain the money paid to them by ASFL.

The Court of Appeal held that both suppliers had. Although only Bosch had succeeded on this defence at first instance, their Honours held that the payments were received by the suppliers Hills and Bosch in good faith and in the ordinary course of business as moneys owed to them by the TCP companies. They both gave up, to their detriment and on the faith of the receipt, both the debts owing by the TCP companies, and a real and potentially valuable opportunity to enforce or secure payment from them. Having received the moneys, Hills refrained from taking proceedings it would otherwise have taken against Mr Skarzynski and his companies. It also continued to trade with those companies, albeit at a lower credit limit. Bosch, when it received the funds, consented to the setting aside of default judgements that it had already obtained against the TCP companies and abandoned other proceedings then on foot. It refunded certain overpayments to the TCP companies and continued to trade with them, on a COD basis. Those circumstances were such as to make it unjust to order restitution.

It is rumoured that AFSL may be seeking special leave to appeal to the High Court from this judgment, however that is not yet confirmed on the High Court’s website. I will endeavour to keep an eye on the lists.

William Co-Buchong v Citibank & NAB – fraud – mistaken payment by bank – defence of change of position

Last week’s decision by Hammerschlag J of the NSW Supreme Court in William Co-Buchong & Anor v Citigroup Pty Ltd & National Australia Bank Ltd [2011] NSWSC 1199 was an interesting contest between two banks, both of which had been the victim of fraud.

The plaintiffs were customers of both Citibank and NAB. Both banks were parties to the SWIFT international clearing house system of international funds transfers which facilitates electronic bank to bank fund transfers.

Citibank had transferred money via the SWIFT system from its customers’ account on the basis of a fraudulent faxed instruction, to those customers’ account at the NAB. The NAB then also received fraudulent instructions, by way of three International Telegraphic Transfer Application Forms, and paid out the money in three tranches to accounts held in various names at HSBC Hong Kong Ltd.

The plaintiffs from whose accounts at Citibank the funds had originally been drawn, sued claiming damages from both banks on the basis that moneys were paid out of their accounts without their knowledge or authority. As between the plaintiffs and the banks, those proceedings were settled, with the plaintiffs being made whole.

What remained on foot was the cross claims between the banks. Each claimed relief against the other on the basis that the other should bear the loss. The question became whether Citibank is entitled to be paid back the money it had paid over to NAB.

Cibitank’s claim was put exclusively as one for restitution. It had paid the money to NAB on the fundamentally mistaken belief that it had been so instructed by its customers. Absent restitution, claimed Citibank, NAB would be unjustly enriched.NAB’s defence was that it changed its position by paying away the funds on the faith of the receipt.

It became a significant point, that neither party asserted the other acted negligently or failed to meet any relevant standard of banking practice such as checking signatures against a signature verification system or checking that there were cleared funds in the relevant account.

From paragraph [19], his Honour discusses the change of position defence as considered by the NSW Court of Appeal in State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350, and more recently again by the NSW Court of Appeal in Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84; (2009) 76 NSWLR 195. (Incidentally, I note that the High Court granted special leave in Heperu, and heard the appeal in May 2010, but the September 2010 High Court Bulletin disclosed that as at that month the case was either not proceeding or had been vacated.)

Hammerschlag J then considers these two Court of Appeal decisions. He discusses State Bank, and notes that at p355 of their judgment, the Court of Appeal held that to succeed in its defence of change of position in that case, the bank needed to show that it paid the money away “on the faith of the receipt”. His Honour then identifies three requirements from the Court of Appeal’s decision in State Bank, see p 356 of that judgement in particular, that NAB in this case would need to establish to succeed in their argument that their payment away of the funds was “on the faith of the receipt”, namely –

(a) it must have known or thought it knew more than the fact of the receipt standing alone;

(b) the information must have come from Citibank; and

(c) the information must be information which, if true, would have entitled NAB to deal with the receipt as it did [at 27].

Together with the mere fact of the payment, NAB received a SWIFT message which included information that the transaction was at the behest of its customers, the plaintiffs, and involved a transfer from their account at Ctitbank to their NAB account [at 30]. This was treated by his Honour as information from Citibank to NAB that it could treat the funds as being available for disbursement at the behest of the plaintiffs. However, were his Honour to have followed State Bank, Citibank would succeed because the NAB meets only two of the three requirements (i.e. it meets (a) and (b) but not (c) – see [28-31].

His Honour then discusses the NSW Court of Appeal’s decision in Heperu, decided 14 years after State Bank [from 32]. The Court of Appeal observed there that care should be taken not to overextend what was said in State Bank beyond the facts of that case. Hammerschlag J highlighted a passage from paragraph [133] of Heperu, to the effect that the payments there were taken to be on the faith of the receipts because they would not have been made unless the receipts had been recognised as valid…The payments would not otherwise have been made, the change of position being thereby causally linked to the receipt [at 37].

Applying that here, his Honour said at [38] that although the occasion for the withdrawal was the fraud of the imposter, NAB nevertheless undoubtedly recognised the receipt as valid. The receipt from Citibank was credited to the plaintiffs’ account as a consequence of the information in the SWIFT communication. Had it not recognised this validity, it would not have then paid away the money. His Honour found it significant, as mentioned above, that there was no assertion of any negligence or failure by NAB to meet banking practice [at 38].

Thus the necessary causal link, as articulated in Heperu is met though, as his Honour observed, not requirement (c) of the State Bank formulation. Hammerschlag J recognises that the two decisions by the same court are irreconcilable and, as Heperu is the later in time, finds he is bound to follow Heperu [at 40].

His Honour concludes that applying Heperu, Citibank must fail as NAB has succeeded in making out its defence of change of position [at 41].

His Honour refers finally to the 2010 article by the Hon Justice W M C Gummow Moses v Macferlan: 250 years on (2010) 84 ALJ 756, where Gummow J considers the change of position defence and expresses the view at p 762 that “Over-definition and dissection of the phrase ‘change of position’ may only serve to divert attention from what is the central question, whether it would be an inequitable result for the claimant to require repayment.”

Hammershclag J takes the view that also on this approach, NAB would succeed in its defence. Both banks were duped. However Citibank paid first without the customers’ authority as a result of which NAB credited the customers’ account rendering it vulnerable to the fraud to which it succumbed [at 43]. His Honour remarks that: “In these circumstances and where neither party criticises the other for falling for the fraud, it would lead to an inequitable result were Citibank to be made whole at the expense of NAB.”