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

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 Hills: Southage 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 $2 million.

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