Aust Café Pty Ltd v Thushara de Soysa

[2019] VCC 237

IN THE COUNTY COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

GENERAL LIST

Case No. CI-18-01321

AUST CAFÉ PTY LTD (ACN 135196799) (as trustee of the Aust Café Unit Trust)	Plaintiff
v
THUSHARA DE SOYSA & ORS (according to the Schedule attached)	Defendant

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JUDGE:	HER HONOUR JUDGE A RYAN
WHERE HELD:	Melbourne
DATE OF HEARING:	18 February 2019
DATE OF RULING:	15 March 2019
CASE MAY BE CITED AS:	Aust Café Pty Ltd v Thushara de Soysa & Ors
MEDIUM NEUTRAL CITATION:	[2019] VCC 237

REASONS FOR RULING
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Subject:  REAL PROPERTY – CAVEAT

Catchwords:             Application for removal of caveat – serious issue to be tried - misappropriated funds – constructive trust – whether funds can be traced to mortgage debt repayments - balance of convenience

Legislation Cited:      Transfer of Land Act 1958 (Vic)

Cases Cited:            Alesco Corporation Ltd v Te Maari [2015] NSWSC 469

Black v Freedman (1910) 12 CLR 105

Bradto Pty Ltd v State of Victoria [2006] 15 VR 65

Dennis Hanger Pty Ltd v Brown & Ors [2007] VSC 495

Helou v Nguyen [2014] NSWSC 22

Goldstraw v Goldstraw [2002] VSC 491

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Gurvich	GI Law Pty Ltd
For the Second Defendant	Mr D Gibson	R & J Legal Services Pty Ltd
First and Third Defendants	No appearance

HER HONOUR:

1 By summons dated 25 September 2018, the second defendant seeks an order for the removal of a caveat lodged by the plaintiff. The application is brought under s90(3) of the Transfer of Land Act 1958. The second defendant relies upon her affidavits sworn 21 September 2018 and 7 December 2018. 

2       The plaintiff opposes the application. It relies upon the affidavits of Roger Lakkis sworn 28 November 2018 and Guy Arie Israeli, solicitor for the plaintiff, sworn 14 February 2019.

Background

3       The first defendant is the former husband of the second defendant.  They were both employed by the plaintiff at a café business operated by the plaintiff known as Aust Café located at the Austin Hospital in Heidelberg.  The first defendant was employed as floor manager and the second defendant as a food server.  The second defendant was employed from August 2009 until February 2104 when she was dismissed.  The third defendant, who is now married to the first defendant, was also employed as a food server at the café.

4       The plaintiff alleges in the amended statement of claim dated 1 October 2018, that the first and second defendants participated in a scheme whereby they misappropriated moneys from the Aust Café.  It is alleged they siphoned off money by improperly undervaluing customer transactions.  It is claimed the first defendant retained the difference between the correct price and the undervalued price and then distributed some of the stolen money to the second defendant.

5       As against the second defendant, the plaintiff claims it is entitled to recover the stolen moneys on a number of bases, including moneys had and received, breach of employment contract and breach of trust.

6       It is alleged the second defendant applied some of the stolen money to pay off a mortgage over her property, which is the subject of the plaintiff’s caveat.  Consequently, it is pleaded that she holds her property on trust to the value of the stolen money so applied.  Alternatively, an equitable charge is claimed.

7       The amended statement of claim makes separate claims for recovery of the moneys alleged to have been stolen as against the first and also the third defendant, the latter in her capacity as a volunteer. 

8       By her amended defence dated 29 August 2018, the second defendant denies she stole any moneys.  The second defendant brings a counterclaim against the plaintiff seeking various unpaid entitlements arising from her employment, including superannuation, holiday pay and long service leave entitlements which are said to be owing.  She also makes a claim for damages for economic loss and personal injuries.  The latter claim arises from the way she says she was treated by the plaintiff during an investigation into the alleged theft and by the plaintiff’s agent, a private detective, who conducted a record of interview.  The second defendant claims she was bullied during the interview and made an involuntary admission as a result of duress.

9       The second defendant deposes that she was instructed by her employer, Mr Lakkis not to record large cash sales as large cash sales, but instead to record them as low cash sales.  He advised her that this was to avoid having a high valuation of the business for family law purposes as he was divorcing his wife.  She denies that she ever took any money as is alleged in the statement of claim.  She points to the fact that the cash registers were cleared of cash every 15 minutes or so by either Mr Lakkis or floor managers or Mr Lakkis’s children.  She deposes they would take the cash to the back office and she had no further handling of the money.  The second defendant also deposes that the cash register activity was recorded by CCTV surveillance and was used to monitor staff activity as well.  Presumably, this evidence is relied upon as proof that she could not have taken any money as alleged as the theft would have been detected because of the arrangements in place.

10      The second defendant is the registered proprietor of 6 Batavia Way, Wyndham Vale, being the land more particularly described in Certificate of Title Volume 10878 Folio 941 (“the property”).  She has owned the property since 2005. The property was subject to a mortgage in favour of the Australian & New Zealand Banking Group Ltd (“the ANZ Bank”) between 22 February 2006 and 24 August 2016.  The property is now subject to a mortgage with Westpac Banking Corporation which was registered on 24 August 2016.  The property is occupied by the second defendant and her two children.

11      Caveat No AQ9250248S was registered on the property on 16 April 2018 by the plaintiff claiming a freehold estate.  The grounds of the claim set out in the caveat, which is Exhibit SNP-2 to the second defendant’s affidavit of 21 September 2018, are listed as “Implied, Resulting or Constructive Trust”.

12 In her affidavit of 21 September 2018, the defendant deposes as to the reasons why the caveat only came to her attention on 6 June 2018. At that time, she was seeking to borrow further loans with an intention to use the property as security. The second defendant instructed her solicitors to file an application to the Registrar of Titles pursuant to s89A(3) of the Transfer of Land Act for the removal of the caveat. The Registrar gave notice subsequently under s89A(3)(b) that an application had been made to substantiate the claim of the caveator.

13      By contrast, the affidavit of Mr Lakkis, sworn 28 November 2018, paints a very different picture.  He deposes that the first and second defendant would, when processing a customer’s purchase, select items worth a lower amount on the cash register screen rather than the true item or value of the purchased item.  The effect of this was that there was more cash in the cash register than that recorded in the transaction journal.  He says the second defendant made admissions to a private detective retained by the plaintiff (which is denied by the second defendant).  The record of interview is Exhibit “RL-1” to his affidavit.  Counsel for the second defendant said his client was the subject of bullying during the interview. In the absence of a video, he argued the transcript would be inadmissible.  No doubt, these are matters which will be canvassed at trial and, in particular, whether the second defendant did confess to stealing as is alleged on the plaintiff’s case.  Having read the transcript, I am of the view that the approach taken by the interviewer was most unsatisfactory.  It is however, unnecessary for me to make a positive finding as to whether an admission was made for the purposes of this application.

14      Mr Lakkis categorically denies he instructed the second defendant to undervalue customer transactions in order to obtain an advantage in relation to family law proceedings with his ex-wife.

15      Mr Lakkis refers to bank statements in the name of the third defendant, the first defendant’s present wife, with the ANZ Bank.  These disclose that a total of $32,400 was transferred from the third defendant to the second defendant by way of regular payments of $600 between 29 November 2012 and 30 December 2013.  These sums are said to represent payments made by way of spousal maintenance by the first defendant to his former wife.  

16      The second affidavit of the second defendant sworn 7 December 2018 takes issue with a number of the matters set out in the affidavit of Mr Lakkis.  She continues to maintain her denial that she stole funds in conjunction with the first defendant.

17      In his affidavit of 14 February 2019, Mr Israeli deposes to payments being made into the second defendant’s bank account, being her home loan account.  Payments of $600 were made on a regular basis between 22 February 2013 and 8 January 2014.

Applicable legal principles

18 Under s90(3), the onus rests upon the plaintiff as caveator to establish:

(1)there is a serious question to be tried that the plaintiff has the interest in the property which it claims; and

(2)the balance of convenience favours the caveat being maintained.[1]

[1]Piroshenko v Grojsman (2010) 27 VR 489 [7]

19      The first limb requires the caveator to show a prima facie case with sufficient likelihood of success to justify the caveat being maintained.[2]

[2]Ibid at [22]

20      Counsel for the plaintiff referred to a number of decisions where the issue of misappropriated funds was held to give rise to a caveatable interest.  Reliance in particular was placed upon the decision of Warren CJ in Dennis Hanger Pty Ltd v Brown & Ors [2007] VSC 495 (30 November 2007). In dealing with the general principles to be applied, her Honour noted the Court has a wide discretion under s90(3) and the onus is on the caveator to justify the maintenance of the caveat. Her Honour also noted that the caveator must persuade the Court there is a serious question to be tried as to the existence of the equitable interest claimed. If there is a serious question to be tried, the Court will not normally remove the caveat on the basis of affidavit evidence unless the balance of convenience favours removal. At paragraph [34], her Honour said as follows:

“In relation to the plaintiff’s claimed interest, the relevant principles of equity are as follows.  A person who misappropriates funds holds those funds on trust for the defrauded party.   Where those trust funds are used exclusively to acquire property, ‘so long as the trust property can be traced and followed into other property into which it has been converted, that remains subject to the trust’.  The beneficiary does not lose its equitable rights by the mere fact that the misappropriated funds are mixed with other funds.  The beneficiary may claim a charge over the acquired property to the value of the misappropriated funds.”  (citations omitted) 

21      The plaintiff also relied upon the decision of New South Wales Supreme Court of Alesco Corporation Ltd v Te Maari [2015] NSWSC 469. In that case, relief was sought by the plaintiff in respect of moneys which were said to have been misappropriated by the first defendant while she was an employee of the plaintiff. Hallen J noted that where money has been stolen or misappropriated, equity imposes a constructive trust on the thief immediately upon receipt of those stolen moneys (at paragraph [142]). His Honour then made reference to another decision quoting an earlier decision of the High Court of Black v Freedman, as authority for the proposition that where money has been stolen, it is trust money in the hands of the thief and he cannot divest it of that character. 

“[143]  In Sze Tu v Lowe[2014] NSWCA 462, per Gleeson JA (with whom Meagher and Barrett JJA agreed) wrote, at [141]–[152].

Black v Freedman is authority for the proposition that ‘where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character’ (O’Connor J at 110).  See also Griffith CJ at 108–109 (Barton J agreeing at 110).

Where the thief makes a gift of the funds to a third party, the volunteer recipient is amenable to equitable jurisdiction.  In Black v Freedman the volunteer recipient had no notice of the theft at the time of the receipt but discovered it while the funds were still in her hands.  In such a case the equitable obligation arises when this knowledge is acquired:  Black v Freedman at 109 (Griffith CJ); Agip (Africa) Ltd v Jackson [1990] Ch 265 at 291 (Millett J); Port of Brisbane Corporation v ANZ Securities Ltd[2002] QCA 158 at [33] (McPherson JA; Davies JA and Mullins J agreeing); Lurgi (Australia) Pty Ltd v Gratz at [74]–[75] (Byrne J).

…

It is also important to recognise that the trust rests on the existence of property rights and in that sense is not purely remedial.  The court declares that a trust exists and existed (though the innocent volunteer did not know it)…

…

Whether the trust based on a Black v Freedman claim is more properly characterised as a resulting trust: (Robb Evans at [112]–[117]); or a constructive trust: (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] NLJR 877; AC 669 at 716 (Lord Browne-Wilkinson)), the trust is properly viewed as being of an institutional rather than simply a remedial character.  It arises because the conscience of the thief is bound: Heperu at [154]–[155]; Wambo Coal Pty Ltd v Ariff[2007] NSWSC 589 ; 63 ACSR 429 at [40] (White J).

In Robb Evans, Spigelman CJ said (at [113]) that the thief holds any property into which the stolen property has been converted on trust in a manner which should be seen as automatic.  That is, a trust arises immediately upon the acquisition of the property, not when recognised by a court.  He continued (at [115]):

If appropriately characterised as ‘constructive’, the trust that arises upon receipt of stolen funds by an active participant in the theft is of an institutional rather than remedial character…

The authors of Jacob’s Law of Trusts in Australia (7th ed, LexisNexis Butterworths) observe (at [1310]) that there is a remedial flavour about various constructive trusts, including that in Black v Freedman. Nonetheless they state (at [1311]) that ‘it does not follow that the constructive trust in such cases is “remedial” in the sense that it first has existence and effect only upon the Court making its decree’. The authors point out that in Black v Freedman, O’Connor J meant (at 110) that the thief became a trustee forthwith.

The institutional character of such a constructive trust may be seen as ‘connoting a relationship which arises and exists under the law independently of any order of the Court’:  Muschinski v Dodds [1985] HCA 78 ; 160 CLR 583 at 614 (Deane J), although his Honour doubted (at 613) that there was any perceived dichotomy between institutional and remedial constructive trusts, preferring to view a constructive trust both as an institution and a remedy.

In Grimaldi v Chameleon Mining NL (No 2) (Grimaldi)[2012] FCAFC 6; 200 FCR 296 the Full Federal Court (Finn, Stone and Perram JJ) at [504]–[505] distinguished the remedial use of the constructive trust from those cases where, on proof of particular facts in a given context, the circumstances are ‘construed’ as giving rise to a constructive trust. Earlier, at [256], the Court noted the distinction between those cases ‘where a constructive trust is sought to be imposed by way of remedy on extant property which a delinquent fiduciary or a third party participant in fiduciary or trust wrongdoing has derived on their own account as a result of their wrongdoing’ and those cases ‘where the property or interest sought to be recovered (or its traceable proceeds) is, or had been, the property of the claimant’.

The Court continued (at [256]) by observing that in the former cases, the constructive trust is used as a remedy in addition, or as an alternative, to the well accepted personal remedies available against fiduciaries and knowing participants in fiduciary wrongdoing.  In the latter cases, proprietary relief by way of imposition of a constructive trust should be granted ‘if appropriate’: Grimaldi at [255]. The latter category may be taken to include cases based on the Black v Freedman claim.”

22      At paragraph [144], Hallen J referred to another decision relating to the ability to trace misappropriated funds.  He referred to Helou v Nguyen [2014] NSWSC 22 as noting that the plaintiff bears the onus of proving the money stolen can be traced into the real estate acquired and developed by the defendants after the theft. Additionally:

“… The complexity that can attend the process of tracing money should not obscure the purpose, and nature, of the exercise.  It involves a demonstration, by an application of logic and experience to evidence, of what has in fact happened to identified property, with changes of form, over time.  It is a process of identification to ascertain whether property can be traced from one form to another, culminating in a finding that property in its current form can properly be regarded as a substitute for the claimant’s original form of property.”  (paragraph [144]

23      In order to support a caveat, the interest claimed must be one which equity can give specific relief against the land.  This could include the provision of a registrable interest or ordering a sale to enable a charge to be satisfied out of the proceeds.  An interest based on a constructive trust can form the basis of a caveat.[3]

[3]Goldstraw v Goldstraw [2002] VSC 491 at [24] and [26]

24      The second defendant’s counsel argued the caveat was defective in form because there was no implied or resulting trust as alleged.  That appears to be correct.  He said the claim for a constructive trust failed because a constructive trust did not come into existence until such time as the Court made a declaration to that effect. Therefore, the plaintiff did not have a caveatable interest at the time the caveat was lodged. It is clear from the authorities quoted above that this argument can be readily disposed of when these authorities establish clearly a trust is formed immediately upon the misappropriation of the funds, such that a trust is properly viewed as being of an institutional rather than simply of a remedial character.

25      In the case of Hanger Pty Ltd v Brown[4], although phrased slightly differently, the plaintiff there sought:

“An interest pursuant to a constructive trust over the land arising from the use of the Caveator’s funds to acquire an interest in the land in the name of the registered proprietor.”  (paragraph [28] 

[4][2007] VSC 495

26      In that case, the caveat was maintained as Warren CJ was satisfied there was a serious question to be tried and the balance of convenience favoured the caveator.  The caveat relied upon here does claim a constructive trust which, as the authorities demonstrate, is a matter that can arise as soon as moneys are misappropriated.  That being so, the plaintiff would be entitled to seek to recover any stolen funds by way of tracing, including funds which have been used to pay the mortgage held by the second defendant on the property.

27      There is considerable controversy on the facts here as to whether a theft has occurred.  The second defendant maintains she was acting in accordance with instructions provided to her by Mr Lakkis, the director of the plaintiff, and she did not steal.  Counsel for the second defendant sought to argue the evidence showed there was no triable issue.  In particular, it was said the evidence fell short of establishing that moneys were stolen and that such moneys were then applied by the second defendant towards the payment of her mortgage.  The case as pleaded is that the third defendant paid the second defendant, applying stolen moneys. The second defendant in turn then applied those moneys to pay off the mortgage.  The second defendant argues it has not been proved the third defendant used stolen funds when making the payments to the second defendant, such that no triable issue arises.  Whilst there may be some argument that the money trail evidence is not entirely conclusive, these are matters which will need to be agitated in full at trial and are not capable of being resolved in an interlocutory application of this nature.

28      I am satisfied there is a serious question to be tried on the affidavit material filed.  There is a serious question to be tried about whether the second defendant colluded with her former husband to defraud the plaintiff. Another issue is whether the second defendant received stolen moneys via the third defendant and, finally, whether any stolen moneys were applied towards her mortgage repayments.

29      As for the balance of convenience, the evidence of the second defendant does not point to any current prejudice in terms of dealing with her property.  In paragraph 31 of her affidavit sworn 21 September 2108, the second defendant deposes as follows:

“Plaintiff’s caveat has caused financial hardship to me as I have not been able to refinance the loan keeping Wyndham Vale property as security and I have also missed an opportunity to purchase an investment property due to plaintiff’s unreasonable action.”

This evidence of disadvantage is rather general in terms and not particularly persuasive.  Counsel on her behalf said she was not able to pursue other projects but this was not the subject of evidence.  When assessing the balance of convenience, the Court should take the course which appears to carry the lowest risk of injustice.[5]  If the caveat is lifted, the plaintiff may suffer prejudice if the property were sold and the sale proceeds disposed of so that its prospects of recovery could be adversely affected.

[5]Piroshenko at [38]-[39]; Bradto Pty Ltd v State of Victoria [2006] 15 VR 65 at [35]

30      Given the paucity of evidence of prejudice from the second defendant, I am of the view the balance of convenience favours the maintenance of the caveat pending the hearing and determination of this matter.  The case is listed for trial on 9 May 2019, which is only some months away.  The plaintiff has discharged its onus of satisfying the Court that the caveat should remain in place.

31 The second defendant also sought leave in her summons to amend her counterclaim to make a claim for compensation under s118 of the Transfer of Land Act and to plead laches given the delay she says the plaintiff took in commencing these proceedings.  I will make an order granting the second defendant leave to amend her defence and counterclaim in the manner outlined.  I will also allow the plaintiff leave to file and serve any amended reply and defence to the counterclaim consequent upon the amendment by the second defendant.

32      The second defendant failed in her substantive application to remove the caveat. Having failed in that application, and subject to any submissions to be made to the contrary, I consider costs should follow the event.  I propose ordering the second defendant pay the plaintiff’s costs of and incidental to the application on the standard basis to be taxed in default of agreement.

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Certificate

I certify that these 10 pages are a true copy of the Reasons for Judgment of Her Honour Judge A Ryan delivered on 15 March 2019.

Dated: 15 March 2019

Associate to Her Honour Judge A Ryan