Fistar v Riverwood Legion and Community Club Ltd

[2016] NSWCA 81

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:	Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81
Hearing dates:	26 February 2016
Decision date:	20 April 2016
Before:	Bathurst CJ at [1]; Leeming JA at [2]; Sackville AJA at [88]
Decision:	1. Appeal allowed with costs.  2. Set aside order 3 of the short minutes of order made on 6 May 2015 and orders 1 and 2 made on 12 May 2015, and in lieu thereof order that the proceedings be dismissed with costs as against the Fifth Defendant.
Catchwords:	EQUITY – fraud – victim “invested” money with fraudster – fraudster dissipated victim’s money – victim repaid largely using money stolen from Club – victim used money to acquire Torrens land – fraudster held bank cheque purchased with stolen funds on trust for Club – whether personal claim unavailable to Club because such a claim would “outflank” liability under Barnes v Addy – whether reasoning in Farah Constructions v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 inconsistent with, or confirmatory of, Club’s personal claim – nature of overlapping claims at common law and in equity considered – whether Club’s claim confined to direct recipient of stolen funds – whether victim was a volunteer – Austin v Khaliffe [1966] 2 NSWR 632 criticised and distinguished   MONEY HAD AND RECEIVED – availability against recipient of stolen funds – relationship with claims in equity – whether confined to direct recipient – whether recipient was a volunteer
Legislation Cited:	Registered Clubs Act 1976 (NSW) Supreme Court Act 1970 (NSW) Uniform Civil Procedure Rules 2005 (NSW), rr 6.3, 51.40
Cases Cited:	Agip (Africa) Ltd v Jackson [1990] Ch 265 Allen v Roughley [1955] HCA 62; 94 CLR 98 Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 Asher v Whitlock (1865) LR 1 QB 1 Austin v Khaliffe [1966] 2 NSWR 632 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; 253 CLR 560 Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Barnes v Addy (1874) LR 9 Ch App 244 Black v S Freedman & Co (1910) 12 CLR 105 Break Fast Investments Pty Ltd v Perikles Giannopoulos (No 5) [2011] NSWSC 1508 Breskvar v Wall (1971) 126 CLR 376 Bride v Shire of Katanning [2013] WASCA 154 Brindley v Scott (1902) 2 SR (NSW) 49 British America Elevator Company Ltd v Bank of British North America [1919] AC 658 Costello v Chief Constable of Derbyshire Constabulary [2001] EWCA Civ 381; [2001] 1 WLR 1437 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 Fischer v Nemeske Pty Ltd [2016] HCA 11 Forestview v Perpetual Trustees WA Ltd [1998] HCA 15; 193 CLR 154 Frazer v Walker [1967] 1 AC 569 Government of the Islamic Republic of Iran v The Barakat Galleries Ltd [2007] EWCA Civ 1374; [2009] QB 22 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230 Ierino v Gutta [2012] WASCA 222; 43 WAR 372 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 McKeown v Cavalier Yachts Pty Ltd (1988) 13 NSWLR 303 Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 Mulcahy v Curramore Pty Ltd [1974] 2 NSWLR 464 NIML Ltd v MAN Financial Australia Ltd [2004] VSC 449; 1 BFRA 204 Perry v Clissold [1907] AC 73 Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; 207 CLR 165 Rhone v Stephens [1994] 2 AC 310 Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82; 61 NSWLR 75 Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68; 208 CLR 516 Russell v Scott (1936) 55 CLR 440 Shalson v Russo [2003] EWHC 1637 (Ch); [2005] Ch 281 Sze Tu v Lowe [2014] NSWCA 462; 89 NSWLR 317 Thomson v Clydesdale Bank Ltd [1893] AC 282 Toksoz v Westpac Banking Corporation [2012] NSWCA 199; 289 ALR 577 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 Williams v Milotin (1957) 97 CLR 465
Texts Cited:	R Chambers, Resulting Trusts (1999, Clarendon Press, Oxford) J Dietrich and P Ridge, Accessories in Private Law, (2015, Cambridge University Press) D Fox, Property Rights in Money (2008, Oxford University Press) K Handley, “The Black v Freedman Trust: Vindicating Property Rights or Remedying Wrongs” in E Bant and M Bryan (eds), Principles of Proprietary Remedies (2013, Thomson Reuters) 117 D Jackson, “The first limb of Barnes v Addy: a taxonomy in tatters” in J McKenna and A Boylan (eds), Queensland Legal Yearbook 2014 (2015, Supreme Court Library Queensland) 285 A J Oakley, Parker and Mellows: The Modern Law of Trusts (9th ed 2008, London, Sweet & Maxwell) F Pollock and R Wright, An Essay on Possession in the Common Law (1888, Clarendon Press, Oxford) R Sackville, “The Torrens System – Some Thoughts on Indefeasibility and Remedies” (1973) 47 ALJ 526 A W B Simpson, Legal Theory and Legal History: Essays on the Common Law (1987, Hambledon Press) S Thomas, “Thieves as trustees: The enduring legacy of Black v S Freedman & Co Ltd” (2009) 3 Journal of Equity 52 L Tucker et al, Lewin on Trusts (19th ed 2015, Sweet & Maxwell)
Category:	Principal judgment
Parties:	Ms Tina Fistar (Appellant) Riverwood Legion and Community Club Ltd (Respondent)
Representation:	Counsel: C Birch SC, N Obrart (Appellant) H N Newton (Respondent)   Solicitors: Jordan Djundja Lawyers (Appellant) Thomson Geer Lawyers (Respondent)
File Number(s):	2015/142512
Publication restriction:	Nil
Decision under appeal	Court or tribunal: Supreme Court Jurisdiction: Equity Citation: [2015] NSWSC 383 Date of Decision: 09 April 2015 Before: Stevenson J File Number(s): 2014/92560

HEADNOTE

[This headnote is not to be read as part of the judgment]

On 18 December 2013, Ms Fistar gave a cheque in the amount of $598,853.53 to Ms Repaja, the sole director and shareholder of Repaja & Co. Ms Repaja was a fraudster who held herself out to be a financial adviser who could invest money in overseas “pools” at extremely high rates of interest. Ms Fistar provided the cheque to Ms Repaja on the basis that the money would be “invested” by Ms Repaja and returned in time for Ms Fistar to complete the purchase of a property in Dolls Point. Settlement was scheduled to take place in February 2014.

On 24 February 2014, Mr de Munck, the Chief Executive Officer and company secretary of the Riverwood Legion and Community Club, caused an amount of $800,000 to be transferred electronically from the Club’s bank account to that of Repaja & Co. By this time, most of the funds provided by Ms Fistar had been dissipated.

On 25 February 2014, Ms Repaja procured a bank cheque in the amount of $599,999.99, which was drawn using funds in Repaja & Co’s account and was made out to the vendor of the Dolls Point property. Ms Repaja provided that cheque to Ms Fistar’s solicitors, who delivered it to the vendor’s representatives at settlement on 27 February 2014.

The Club commenced proceedings in March 2014 against Ms Repaja, Repaja & Co, Mr de Munck and Ms Fistar. The Club obtained judgments in the amount of $800,000 against Ms Repaja, Repaja & Co and Mr de Munck, and no challenge is made to them. This appeal is confined to the judgment against Ms Fistar. The primary judge held that to the extent of $481,189.75, the bank cheque provided to Ms Fistar’s solicitors on 25 February 2014 was obtained using funds transferred to Repaja & Co by the Club. Applying Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230, the primary judge found Ms Fistar liable to an action at law for money had and received in respect of those funds. His Honour held that she received the funds as a volunteer (relying on Austin v Khaliffe [1966] 2 NSWR 632), that the funds were traceable in equity to Ms Fistar, that no change of position defence was available, and that Ms Fistar’s indefeasible title was no bar to the Club’s personal claim.

On appeal, Ms Fistar submitted that a personal action at law for money had and received could not be maintained because it would “outflank” a claim for knowing receipt under the first limb of Barnes v Addy. Ms Fistar also challenged, inter alia, the primary judge’s findings on whether she was the recipient of the funds and whether she was a volunteer.

Held by Leeming JA, Bathurst CJ and Sackville AJA agreeing, allowing the appeal:

Was a claim at law for money had and received available?

1. There are many overlapping claims available against recipients of stolen money in law and equity; it is not correct to say that such recipients can be liable only under the first limb of Barnes v Addy: at [36]-[51].

1. Recipients may be liable to claims based on title and claims under the first limb of Barnes v Addy; the former are based on property, the latter turn on conscience: at [44].

Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296, referred to

2. Liability under the first limb of Barnes v Addy is not the only way in which a recipient of trust property may become bound in conscience to account for it. A person who receives trust property, otherwise than as a bona fide purchaser for value without notice, but innocently, and thereafter acquires notice of the trust and deals with it in a manner inconsistent with the trust, will also be liable as a constructive trustee: at [45].

Agip (Africa) Ltd v Jackson [1990] Ch 265, Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391, J Dietrich and P Ridge, Accessories in Private Law, (2015, Cambridge University Press), applied; L Tucker et al, Lewin on Trusts (19th ed 2015, Sweet & Maxwell), Sze Tu v Lowe [2014] NSWCA 462; 89 NSWLR 317, referred to

2. The submission that personal claims for money had and received “outflank” recipient liability under the first limb of Barnes v Addy misapprehends [134] of Farah Constructions: at [52]-[53].

Barnes v Addy (1874) LR 9 Ch App 244, referred to; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89, considered

3. Per Sackville AJA, Bathurst CJ and Leeming JA agreeing, the High Court in Farah Constructions endorsed the proposition that restitution-based liability can co-exist with liability founded on the equitable principles stated in Barnes v Addy: at [1], [53] and [93].

Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89, NIML Ltd v MAN Financial Australia Ltd [2004] VSC 449; 1 BFRA 204, discussed

Who was the recipient of the funds?

4. Ms Fistar’s solicitors, acting as her agents, received the bank cheque from Ms Repaja and, in the same capacity, delivered that cheque to the vendor’s representatives at settlement in exchange for a signed memorandum of transfer and certificate of title. The result was that the bank cheque, previously owned by Ms Fistar, became the property of the vendor: at [61]-[62].

5. As a matter of law, once a volunteer becomes aware that he or she has received trust property or its traceable proceeds, his or her conscience is bound and, subject to defences, he or she is liable to a claim for money had and received. There is no reason to distinguish between direct and indirect recipients: at [62]-[64].

Was Ms Fistar a volunteer?

6. The reasoning in Austin v Khaliffe contains an element of circularity and is difficult to apply in circumstances where the relevant interest has been registered. If a debtor pays a creditor using funds belonging in equity to a third party, of which fact the creditor is unaware, then the creditor is not regarded as a volunteer and is not liable to a claim for money had and received: at [73]-[79].

Austin v Khaliffe [1966] 2 NSWR 632, criticised and distinguished; Frazer v Walker [1967] 1 AC 569, Breskvar v Wall (1971) 126 CLR 376, R Sackville, “The Torrens System – Some Thoughts on Indefeasibility and Remedies” (1973) 47 ALJ 526, referred to; Thomson v Clydesdale Bank Ltd [1893] AC 282, applied

7. Ms Fistar, by her solicitors, received the bank cheque in partial discharge of Repaja & Co’s existing and enforceable obligation to repay her; Ms Fistar’s entitlement to sue Repaja & Co for the $599,999.99 was extinguished when she received the bank cheque: at [71]-[72]. Ms Fistar did not receive the bank cheque as a volunteer: at [81].

Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321, Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, distinguished

Judgment

1. BATHURST CJ: I agree with the orders proposed by Leeming JA and with his Honour's reasons.

2. LEEMING JA: This appeal turns on whether the respondent Club enjoyed a personal claim to recover against the appellant, Ms Tina Fistar, in circumstances where both were victims of a fraudster, Ms Divna Repaja. There was no challenge to the findings of primary fact made by the trial judge, which may be summarised concisely as follows.

Factual background

3. Ms Repaja held herself out as a financial adviser, who could invest money in overseas “pools” at extremely high rates of interest. For example, she offered a monthly rate of 10.85% to Ms Fistar based on a short term investment of $10,000. Ms Repaja was the sole director and shareholder of Repaja & Co Pty Ltd.

4. In November 2013, Ms Fistar had exchanged contracts with the executrix of the late Leslie Phillip Gleeson to purchase a property at Dolls Point in southern Sydney for $711,500. Ms Fistar had sold another property the previous month, and had deposited the proceeds with the Commonwealth Bank of Australia.

5. On 18 December 2013, Ms Fistar gave Ms Repaja a bank cheque, made out in favour of Repaja & Co, in the amount of $598,853.53. She did so on the basis that the money would be “invested” by Ms Repaja and returned in time for Ms Fistar to complete the purchase of the Dolls Point property. Ms Fistar’s solicitors and Ms Repaja were in regular email contact in January 2014, and in February 2014 Ms Fistar’s solicitors directed Ms Repaja to supply a bank cheque in favour of the estate of the late Leslie Phillip Gleeson. After some delays, Ms Repaja provided a St George Bank bank cheque in the amount of $599,999.99 on 25 February 2014. That cheque was received by Ms Fistar’s solicitors and delivered to the vendor’s representatives at settlement on 27 February 2014.

6. The Club is a public company limited by guarantee which carries on business as a registered club under the Registered Clubs Act 1976 (NSW). On 24 February 2014, its Chief Executive Officer and company secretary, Mr Simon de Munck, had caused an amount of $800,000 to be transferred electronically from the Club’s bank account to that of Repaja & Co at the St George Bank. The primary judge found that those moneys were stolen by him to the knowledge of Ms Repaja. By the end of the trial there was no dispute, and the primary judge found, that to the extent of $481,189.75, the bank cheque procured by Repaja & Co on 25 February 2014 and provided to Ms Fistar’s solicitors was obtained using the funds transferred by the Club. The balance (of $118,810.24) of the purchase price of the cheque was obtained using what was left of the funds provided by Ms Fistar. What had happened to the balance of the funds lent by Ms Fistar some eight weeks earlier was not disclosed by the evidence.

7. Proceedings were commenced by summons filed on 27 March 2014 and freezing orders were obtained on the same date. Ms Fistar was joined on around 9 April 2014. However, by that time, Ms Fistar had become the registered proprietor of the Dolls Point property.

8. The Club obtained judgments in the amount of $800,000 against Ms Repaja, Repaja & Co and Mr de Munck, and no challenge has been made to them. Indeed, save for an unsuccessful application for an adjournment, Mr de Munck did not appear at the trial. There were no appearances at the trial for Ms Repaja or Repaja & Co, to which a liquidator had been appointed. This appeal is confined to the judgment obtained by the Club against Ms Fistar in the amount of $518,551.17, being the $481,189.75 plus interest.

Procedural history of the litigation

9. The outcome of this appeal turns upon the way in which the Club conducted its case against Ms Fistar, and it is necessary to address, with some precision, what was and what was not in issue in the litigation.

10. Proceedings were originally commenced by summons, no doubt because of the urgency of the relief which was sought and obtained. Very properly, having regard to the allegations of fraud (see r 6.3(c) of the Uniform Civil Procedure Rules 2005 (NSW)), the Club filed a statement of claim on 15 July 2014. The only claim made against Ms Fistar in that pleading was a proprietary claim – that Ms Repaja or her company held the bank cheque on trust for or subject to an equitable charge in favour of the Club, and that Ms Fistar received that cheque as a volunteer, such that when she received first the cheque, and later title to the Dolls Point property, each was held subject to the Club’s existing equitable interest.

11. Ms Fistar denied that she was a volunteer. Her verified defence alleged, inter alia, that the cheque was received “in repayment of the funds advanced by [Ms Fistar] to Ms Repaja and/or Repaja & Co in accordance with the commercial terms of their agreement”.

12. At the commencement of the trial, the Club formally abandoned its proprietary claim against Ms Fistar and by amendment (which was not opposed) added a personal claim. This was done because, notwithstanding that Ms Fistar’s indefeasible title as registered proprietor had not been pleaded, counsel formed the view that the decision of Break Fast Investments Pty Ltd v Perikles Giannopoulos (No 5) [2011] NSWSC 1508, endorsed in Sze Tu v Lowe [2014] NSWCA 462; 89 NSWLR 317 at [243], stood in the way of its proprietary claim. The point was put with commendable clarity by counsel for the Club:

“[U]ltimately [Break Fast] was a case where a third party received money as a volunteer, and that money was paid into real property. And the question similarly to that which I submit is applicable in this case was whether or not that third party had to disgorge the benefit they had received. And in terms of the proprietary claim, his Honour found that section 42 prevented such a claim, section 42 of the Real Property Act, but the claim in unjust enrichment was not prevented ... So although, your Honour, section 42 hasn’t been pleaded against me in this case, rather than it being raised either by your Honour or on appeal or if it didn’t happen, in this case I thought it is clearly appropriate to raise it and proceed on the basis which could be sustained.”

13. The new allegations – which were the only allegations pressed against Ms Fistar – were drafted as follows:

“Unjust enrichment

58 Ms Repaja was not authorised by the Plaintiff to provide the Property Bank Cheque to Ms Fistar.

59 By her receipt of the Property Bank Cheque Ms Fistar received a benefit namely $599,999.99 (the Benefit), which she has retained by using the Benefit to finance her purchase of the Dolls Point Property.

60 By April 2014, Ms Fistar was aware that the Plaintiff’s claim that the Property Bank Cheque had been purchased by Ms Repaja without the Plaintiff’s authority and using the Plaintiff’s property.

Particulars

She became aware at least by the time she was joined to these proceedings in April 2014.

61 Upon becoming aware of the Plaintiff’s claim, Ms Fistar’s retention of the Benefit is unjust.

62 In the premises, Ms Fistar is liable to repay the amount of the Bank Cheque, being $800,000, on the grounds of restitution.”

14. Ms Fistar did not file a defence to the amended statement of claim. The trial proceeded on the basis that the new allegations were in issue, and (expressly) on the basis that she would seek to adduce evidence directed to a change of position defence.

Submissions and evidence before the primary judge

15. Ms Fistar gave evidence that she had spent roughly $70,000 to $80,000 renovating the Dolls Point property after she had acquired it. She said she had documents which showed the expenditure, but none was tendered. She said that the renovations lasted eight weeks and commenced “as soon as I had the key”; it is not clear whether the renovations began before settlement.

15. Ms Fistar was cross-examined, relatively briefly, but not so as to suggest any awareness of the fraud.

16. It is important to observe what the Club was not alleging. It made no proprietary claim against the Dolls Point property at all. It did not allege that Ms Fistar had procured, or had participated in, or was even aware of, Ms Repaja’s fraud. It did not allege that at any time prior to April 2014 Ms Fistar was aware that money taken from the Club had been used to acquire the bank cheque which was delivered at settlement on the Dolls Point property.

17. The Club’s sole submission at trial was as follows:

“The [Club’s] claim against Ms Fistar is a personal claim in unjust enrichment. In Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230, Allsop P (with whom Campbell JA and Handley AJA agreed) held that an action at law in money had and received is available to restore the value of the benefit retained by a volunteer where that benefit is traceable in equity from misappropriated funds (at [144], [153]). That is the situation that applies in this case.”

19. In response to the Club’s claim, Ms Fistar submitted that (a) she was not a volunteer, (b) the bank cheque was not traceable to her, but instead to the vendor, (c) she had changed her position, and (d) her indefeasible title to the Dolls Point property was an answer to the claim.

The reasoning of the primary judge

20. The primary judge ruled against Ms Fistar on each of those four submissions. His Honour characterised the Club’s claim against Ms Fistar in the terms in which it had been advanced, by reference to [144] and [153] of Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230.

21. His Honour accepted that Repaja & Co was obliged to repay Ms Fistar, but concluded that she was still, relevantly, a volunteer. His Honour said that Myers J had come to the same conclusion in indistinguishable circumstances in Austin v Khaliffe [1966] 2 NSWR 632. His conclusion was as follows (at [197]):

“Beyond that $118,810.24, Repaja & Co was purporting to ‘repay’ Ms Fistar from money which it held on trust for the Club. To that extent, provision by Repaja & Co to Ms Fistar’s solicitors of the 25 February 2014 bank cheque did not discharge Repaja & Co’s obligation to Ms Fistar which obligation survived (and indeed, so far as the evidence reveals, still survives). It follows, to that extent, that Ms Fistar is, vis-à-vis the Club, a volunteer.”

22. His Honour had no difficulty in concluding that the Dolls Point property reflected the traceable proceeds of the bank cheque drawn in favour of the vendor. His Honour rejected the change of position defence, on the basis that Ms Fistar was bound to complete the purchase, and there was no evidence that the property was worth less than it was at the time it was acquired. Finally, his Honour held that the unavailability of a proprietary remedy by reason of Ms Fistar’s indefeasible title did not preclude the Club’s entitlement to a personal remedy against Ms Fistar.

Submissions on appeal

23. The submissions made by Ms Fistar on appeal were more elaborate than those advanced at trial. First, Dr Birch SC, who had not appeared at trial, called in aid Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89, where the High Court said at [134] that one reason for rejecting the restitutionary basis for the relief by way of constructive trust ordered in the court below was that it was “an avenue which tends to render the first limb [of Barnes v Addy] otiose”. Ms Fistar submitted that the availability of a claim against her for money had and received similarly would “outflank” the well-recognised claim under the first limb of Barnes v Addy for knowing receipt. She observed that the claim did not include any requirement of knowledge or notice on the part of Ms Fistar and that a claim under the first limb of Barnes v Addy was not merely proprietary but also extended to a personal claim against the recipient.

24. Secondly, Ms Fistar contended that a claim for money had and received was only available against the direct recipient of the plaintiff’s money, and that was not Ms Fistar.

25. Thirdly, Ms Fistar submitted that she was not a volunteer because the provision to her of the bank cheque in accordance with her solicitor’s instructions was in the discharge of the debt owed to her by Repaja & Co.

26. Fourthly, Ms Fistar pointed to the indefeasibility of her title, and fifthly, she submitted that the primary judge erred in rejecting the change of position defence.

27. The Club opposed each of those submissions. It added, not inaccurately, that the submission based on Farah Constructions had not been advanced in the court below, and submitted that if the consequence of that decision was that the Club’s action for money had and received was no longer available, then equity would subrogate the Club to the vendor’s lien in respect of the Dolls Point property. The Club sought, by notice of contention, to maintain the primary judge’s decision on that basis in the alternative.

28. The convenient course is to deal with the submissions arising on Ms Fistar’s notice of appeal and the Club’s notice of contention in the order summarised above. It will be seen that Ms Fistar’s submissions about indefeasibility and change of position and the Club’s notice of contention fall away, but that the first, second and third of the submissions advanced by Ms Fistar are more substantive.

First submission: would Ms Fistar’s liability “outflank” Barnes v Addy?

29. Ms Fistar’s first submission was that where property was received by a third party following a breach of fiduciary duty, the third party could only be liable under the first limb of Barnes v Addy. There was no dispute about the principles governing that form of liability. Where the recipient of trust property has sufficient knowledge of the breach of trust, then the recipient will be accountable as a constructive trustee under the first limb of Barnes v Addy. That is so irrespective of whether the recipient retains the trust property: Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 at [253]. It is sufficient if the recipient had knowledge of circumstances that would indicate the facts to an honest and reasonable person, but it is insufficient if the recipient merely had knowledge of circumstances which would put an honest and reasonable person on inquiry: Grimaldi at [268]-[269].

30. Heperu holds that an innocent volunteer who receives stolen money may be required to restore the fund remaining in his or her hands, whether in its original form or in its traceable product, when the true position is discovered. Allsop P said that “the extent of the personal equity involved, created by the circumstance in question, is the touching of the conscience of the volunteer recipient to deal with the property of another conformably with the interests of the owner, now discovered”: at [154].

31. Although it may seem a little odd for a claim for an action at law for money had and received to be available in respect of the value of the traceable product (obtained by applying equitable principles) of property received by the volunteer, the position resembles the traditional concept of a trustee being held to account, as stated by Viscount Haldane in British America Elevator Company Ltd v Bank of British North America [1919] AC 658 at 663-4:

“[A] general declaration of liability on the ground of breach of trust, and for an account to be taken of all the sums so received, in which case the result of the account, after any proper deductions had been claimed and established on the initiative of the respondents, would have been followed by a judgment on further consideration for the balance found due”.

Consistently with this, the High Court has very recently confirmed that a trustee who admits to an unconditional obligation to pay a specified sum of money to a beneficiary can thereby become liable to an action at law for the recovery of that amount as money had and received to the benefit of the beneficiary: see Fischer v Nemeske Pty Ltd [2016] HCA 11 at [16], [81], [105] and [187]. But it is not necessary for the purposes of this appeal to deal in any more detail with the principles underlying the liability of an innocent volunteer recognised in Heperu.

32. Ms Fistar pointed to the similarities between liability under the first limb of Barnes v Addy and the claim for money had and received which the Club had advanced against her, and especially the dilution of the requirement of knowledge in the latter, to support the conclusion that the two forms of liability could not coexist.

33. The submission was advanced orally in the following terms:

“[W]hen one looks at Farah Constructions what they say is that you can't outflank the notice requirement under the first limb of Barnes v Addy by simply repackaging the claim as a restitutionary claim where what you are doing is seeking the repayment of moneys that were paid away in breach of trust or fiduciary duty.”

34. At some stages during the course of argument, Ms Fistar’s submission as to the exclusive effect of first limb Barnes v Addy liability was confined to cases where the third party was not the direct recipient of trust property. At other times, it was put more broadly, including in the following exchange:

“BATHURST CJ: Can I just ask you this? The money is paid by [Mr de Munck], the man from the club, to Ms Repaja. Would you agree that she would have been liable in a restitution claim?

BIRCH: Sorry ... a restitutionary claim?

BATHURST CJ: A claim for money had and received.

BIRCH: Well your Honour I'm not accepting that. I'm saying that in circumstances where the receipt of funds by her has come about as a result of a payment that's been procured by a breach of fiduciary duty or breach of trust then there isn't a restitutionary claim, it's a Barnes v Addy claim.

BATHURST CJ: You say in those circumstances there's no opportunity or no room for what I'll call loosely restitutionary claims to operate?

BIRCH: Yes, correct, yes.

SACKVILLE AJA: Your proposition, just to make sure I understand it, is that it is inconsistent with the reasoning in Farah to hold that there can be a common law remedy for moneys had and received against someone who has no notice that the moneys that she has received were obtained by the fraudster in breach of an equitable duty [or] fiduciary duty?

BIRCH: Yes.”

35. Ms Fistar’s submission, whether in its narrower or broader form, is, with respect, unsound. There are at least three reasons why that is so.

First, there are many overlapping claims against recipients of stolen property

36. The first and most fundamental way in which that may be seen arises from considering the nature of stolen property in the hands of a third party. In Australia it is settled law that “[w]here money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character”: Black v S Freedman & Co (1910) 12 CLR 105 at 110 (O’Connor J). In England the same was said by Lord Browne-Wilkinson, in obiter, in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 716:

“Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity”.

37. That proposition is controversial in some quarters. It was rejected by Rimer J in Shalson v Russo [2003] EWHC 1637 (Ch); [2005] Ch 281 at [110]-[111], as well as by a number of academic commentators (including R Chambers, Resulting Trusts (1999, Clarendon Press, Oxford) at 117, A J Oakley, Parker and Mellows: The Modern Law of Trusts (9th ed 2008, London, Sweet & Maxwell) at 22-145 and S Thomas, “Thieves as trustees: The enduring legacy of Black v S Freedman & Co Ltd” (2009) 3 Journal of Equity 52). 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. However, as Dr Fox has explained, the reason for imposing a trust is entirely pragmatic, and the objection as to title is answered by the fact that the thief is treated as having legal possession, and therefore a possessory legal title which is capable of being held on trust: D Fox, Property Rights in Money (2008, Oxford University Press) at 140, 143. Possessory title has very deep roots in the common law. The point of Armory v Delamirie (1722) 1 Stra 505; 93 ER 664, after all, is that a mere finder, who has nothing more than possession, has a right against other possessors who lack better title. This extends even to thieves. Possession of a chattel gives rise to a possessory title, and even a thief obtains a good possessory title against someone who is a wrongdoer to the thief: see Costello v Chief Constable of Derbyshire Constabulary [2001] EWCA Civ 381; [2001] 1 WLR 1437 at [14] and [22] (Lightman J, Robert Walker and Keene LJJ agreeing); see also Bride v Shire of Katanning [2013] WASCA 154 at [72] (Edelman J, Newnes JA agreeing). Frederick Pollock was conscious of the difficulty in explaining the “apparent anomaly” why the law should ascribe possession to wrongdoers, but under no doubt that that was the case: F Pollock and R Wright, An Essay on Possession in the Common Law (1888, Clarendon Press, Oxford) at 3. The historical position was described by Lord Phillips of Worth Matravers CJ, Wall and Lawrence Collins LJJ in Government of the Islamic Republic of Iran v The Barakat Galleries Ltd [2007] EWCA Civ 1374; [2009] QB 22 at [15]:

“Originally the common law did not differentiate between possessory title and proprietary title. Possession of a chattel gave title to it. Where there was an involuntary transfer of possession, as a result for instance of loss or theft of the chattel, the person who had first possessed the chattel would have a superior title to the subsequent possessor.”

Far from there being any conceptual difficulty, the notion that a thief having a title which can be subject to a trust is soundly based in the history of the common law. And of course the consequence is the availability of a suite of causes of action against the thief and third parties connected with the wrongdoing or with the stolen property.

38. It may be acknowledged that that is not the only difficulty with Black v S Freedman & Co. Griffith CJ, with whom Barton J agreed, expressed himself more narrowly than O’Connor J, confining his reasons to property disposed of by persons in a fiduciary position. Moreover, the decision was delivered ex tempore (something which may be inferred from the way in which it is reported in the Commonwealth Law Reports, and is confirmed by contemporaneous newspaper reports). No member of the Court gave an explanation of how the trust arose or its nature. There continues to be a dispute as to whether the trust which undoubtedly exists is a constructive trust or a resulting trust.

39. But there can be no doubt that the position in Australia that a thief holds stolen property on trust is settled law. It was described as “well accepted” in Grimaldi at [255] (Finn, Stone and Perram JJ) and “well established” in Ierino v Gutta [2012] WASCA 222 at [20]; 43 WAR 372 at [22] (Edelman J, Pullin and Newnes JJA agreeing). It has been applied in unanimous reported decisions of this Court at least four times since 2004: see Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82; 61 NSWLR 75 at [111] (Spigelman CJ, Handley and Santow JJA agreeing); Heperu at [93] (Allsop P, Campbell JA and Handley AJA agreeing); Toksoz v Westpac Banking Corporation [2012] NSWCA 199; 289 ALR 577 at [5] and [11] (Allsop ACJ, Hoeben JA and Sackville AJA agreeing); and Sze Tu v Lowe [2014] NSWCA 462; 89 NSWLR 317 at [141]-[149] (where Gleeson JA, with whom Meagher and Barrett JJA agreed, considered most of these authorities); see also K Handley, “The Black v Freedman Trust: Vindicating Property Rights or Remedying Wrongs” in E Bant and M Bryan (eds), Principles of Proprietary Remedies (2013, Lawbook Co) 117 at 118, who regarded the position as settled.

40. It follows therefore that the victim of theft may have a variety of claims when a third party receives trust property. In practice, there may be claims based on the victim’s legal title to the property, and, because any dealing with trust property by the thief to a third party will be in breach of the trust, there may be equitable claims consequent upon that breach.

41. However, if the recipient is a bona fide purchaser for value without notice, he or she is under no liability to a claimant whose title is equitable. Plainly enough, that is the position of the executrix of the deceased estate of Leslie Phillip Gleeson, who delivered title to the Dolls Point property in exchange for a bank cheque purchased in large measure with money taken from the Club.

42. Finn, Stone and Perram JJ drew an important distinction in Grimaldi at [251] between Barnes v Addy claims and claims based upon title:

“Importantly notice here extends beyond actual notice and includes constructive notice in its traditional equitable sense. Such constructive notice will attribute notice of a fact to a person who, while lacking knowledge of it, had knowledge of facts which would put a reasonable person on inquiry. ... What requires present note is that a third party who has only this form of notice when receiving trust property in breach of trust cannot avail of the bona fide purchaser defence. In consequence that person will be liable in proprietary, in rem, proceedings to make specific restitution to the ‘true owner’ of such trust property (or its traceable proceeds) as remains in his or her hands. While this type of claim is, potentially, available to be made in Barnes v Addy ‘knowing receipt’ cases, it is a separate and distinct liability. It is, in essence, a claim to priority.”

43. Most claims against third parties based on title are equitable. Cases at law are relatively rare, because commonly what is stolen is money, or assets which are converted into money, and there are limitations upon tracing at common law. On any view, the equitable rules are more developed and permit the assertion of a property right in respect of the traceable proceeds of trust property in the hands of a third party. Those principles were reviewed extensively by Campbell J in Re Sutherland; French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; 59 NSWLR 361, and their detail is not presently material. It suffices to observe that if the recipient is not a bona fide purchaser for value without notice (because, say, the recipient is a volunteer or has at least constructive notice), then the recipient’s title is potentially liable to be defeated by a superior title of the beneficiary.

44. For the purposes of identifying why Ms Fistar’s submission is unsound, two points are presently relevant. The first is that claims based on title are quite different from claims under the first limb of Barnes v Addy. The latter turn upon conscience, rather than property: Grimaldi at [267].

45. The second is that liability under the first limb of Barnes v Addy is not the only way in which a recipient of trust property may become bound in conscience to account for it. A person who receives trust property, otherwise than as a bona fide purchaser for value without notice, but innocently, and thereafter acquires notice of the trust and deals with it in a manner inconsistent with the trust, will also be liable as a constructive trustee. Although this is similar to first limb Barnes v Addy liability, it is conceptually distinct, because it is the subsequent dealing, rather than the receipt of property, that founds liability, as Professors Dietrich and Ridge have observed: J Dietrich and P Ridge, Accessories in Private Law, (2015, Cambridge University Press) at 203. This class of liability was identified by Millett J in Agip (Africa) Ltd v Jackson [1990] Ch 265 at 291 and by the Court of Appeal in Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 at 474; see also L Tucker et al, Lewin on Trusts (19th ed 2015, Sweet & Maxwell) at 2103-9. The distinction drawn by Millett J in Agip was cited with evident approval in Sze Tu at [143].

43. An unstated premise of Ms Fistar’s submission that personal liability for money had and received could not co-exist with liability under the first limb of Barnes v Addy was that that was the only way in which recipients of trust property could be liable. The premise is not established. It is not established once one bears in mind claims at law for the recovery of chattels (see McKeown v Cavalier Yachts Pty Ltd (1988) 13 NSWLR 303 at 307-8). It is not established once one bears in mind proprietary claims in equity based on a better equitable title. And it is not established even if one confines attention to equitable claims based on the conscience of the recipient, as opposed to the property rights of the victim, because inconsistent dealing is different from knowing receipt.

44. Given all those well-established forms of liability, there is nothing antithetical or incoherent about there being a further species of liability on the part of a volunteer who receives trust property, or the traceable proceeds of trust property, and who subsequently learns the true position, such that he or she is obliged in equity to account for the identifiable property remaining: Heperu at [92], [143]-[155]; Sze Tu v Lowe at [142]-[145]. To the contrary, the liability of an innocent volunteer to account for the traceable proceeds insofar as they remain in his or her possession is a natural extension of inconsistent dealing, and it is to be noted that Allsop P in Heperu expressly distinguished between the liability of a volunteer and the liability that would be imposed in accordance with Barnes v Addy: see at [154].

45. More generally, there is nothing foreign to the Australian legal system in a plaintiff having alternative claims arising out of the same facts, a point noted by D Jackson, “The first limb of Barnes v Addy: a taxonomy in tatters” in J McKenna and A Boylan (eds), Queensland Legal Yearbook 2014 (2015, Supreme Court Library Queensland) 285 at 299-300. One example is that a plaintiff suing an adviser may and commonly will have claims in contract, tort and in equity – each of which may have different elements, different tests for breach and causation and different ways of calculating a pecuniary remedy (see the claims summarised in Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; 207 CLR 165 at [9]-[12] for negligence, breach of contract and in equity). Another example is the “overlay” of the equitable relationship of trustee and beneficiary with the legal relationship of debtor and creditor to which Gageler J referred in Fischer v Nemeske Pty Ltd at [105]. A third is the overlap between trespass to the person and negligence considered in Williams v Milotin (1957) 97 CLR 465 at 473-474. Examples could readily be multiplied.

46. What in truth is foreign to the Australian legal system is the notion that causes of action are structured in such a way that there can be no such overlap. Submissions to that effect are advanced from time to time, such as the unsuccessful submission in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 that a loan transaction, giving rise to a legal action for debt, necessarily excluded the implication of any trust. It was said that “a transaction may attract one action or the other, it could not admit of both”. Lord Wilberforce writing for the House rejected the submission, saying at 581 that he should be “surprised if an argument of this kind – so conceptualist in character – had ever been accepted” and that “[t]here is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies”.

47. The same applies more generally throughout the Australian legal system. In large measure, that is a consequence of history. The Australian legal system is ultimately derived from a multiplicity of courts, all of limited jurisdiction, in competition with each other for litigation, each developing and favouring particular causes of action. Professor Simpson once emphasised, pointedly but aptly, the way in which the common law is the opposite of the regularly ordered taxonomy of causes of action which underlies Ms Fistar’s primary submission:

“We must start by recognizing what common sense suggests, which is that the common law is more like a muddle than a system, and that it would be difficult to conceive of a less systematic body of law”: A W B Simpson, Legal Theory and Legal History: Essays on the Common Law (1987, Hambledon Press) 359 at 381.

51. One may question whether the complexity, which is also a product of overlapping and sometimes competing principles, is desirable or otherwise. But there is no denying that it is antithetical to the concept underlying Ms Fistar’s submission.

Second reason: a misreading of [134] of Farah Constructions

52. Secondly, Ms Fistar’s submission misapprehends the force of [134] of Farah Constructions. That passage was critical of the decision of this Court in reformulating the liability of a recipient of property taken in breach of fiduciary obligations such that it was (speaking generally) strict subject to defences. It is not necessary to summarise the reasoning of the Court of Appeal, which was held to be erroneous. What matters is what the High Court said of that reasoning, which was as follows:

“Either the Court of Appeal is to be treated as abandoning the notice test for the first limb of Barnes v Addy, or it is to be treated rather as recognising a new avenue of recovery, which exists alongside the first limb. Although Say-Dee submitted that the law should develop by recognising a new but additional avenue of recovery, the Court of Appeal's approach was to abandon the notice test for the first limb. [After dealing with the decisions standing against that course, the joint judgment continued] Leaving aside any technical question about whether the doctrine of stare decisis strictly applied, abandonment of the rule that the plaintiff must prove notice on the part of the defendant is not an appropriate step for an intermediate court of appeal to take in relation to so long-established an equitable rule – for other illustrations of it both before and after Barnes v Addy can be found, its existence had been acknowledged in the Court of Appeal itself the previous year, and its correctness has been assumed in this Court. If, on the other hand, the Court of Appeal is to be treated not as abandoning the notice test for the first limb of Barnes v Addy, but rather as recognising a new and additional avenue of relief, it is an avenue which tends to render the first limb otiose. That too is not a step which an intermediate court of appeal should take in the face of long-established authority and seriously considered dicta of a majority of this Court” (citations omitted).

53. The point which was made by the High Court was that neither the abandonment of the existing liability under Barnes v Addy, nor the creation of a new and more readily satisfied liability, was an appropriate course for an intermediate court of appeal to take, given the state of Australian authority. The High Court was saying nothing about the existence of a common law right to recover damages. As much is confirmed, as Sackville AJA has observed, by the reference subsequently to NIML Ltd v Man Financial Australia Ltd [2004] VSC 449; 1 BFRA 204. I agree with what his Honour has said in that regard. Nor was the High Court denying the essential disorderliness of the Australian legal system, in which overlapping causes of action are a familiar feature, as has already been noticed. That much is readily seen from the citation with evident approval at [151] of Farah Constructions of what Gummow J had earlier written in Roxborough v Rothmans of Pall Mall Australia Ltd [2001] HCA 68; 208 CLR 516 at [74]:

“There is support in Australasian legal scholarship for considerable scepticism respecting any all-embracing theory in this field, with the treatment of the disparate as no more than species of the one newly discovered genus.”

Third reason: inconsistency with authority and principle

54. A third way in which Ms Fistar’s submission may be seen to be unsound emerges from a consideration of the decisions which, if it were to be accepted, would have been wrongly decided. Dr Birch came close to accepting in argument that he had to contend that Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 was wrongly decided. It is difficult to see how, if Ms Fistar be correct, the innocent recipient Ms Belle could have been found liable in Heperu itself, although I did not understand Ms Fistar to seek to overrule Heperu in terms, and certainly no application was made for this Court to be constituted by five judges for that purpose.

55. More generally, acceptance of Ms Fistar’s submission would mean that the only civil redress for the victims of theft and fraud against third party recipients was in a court with an equitable jurisdiction. But it is to turn basal notions of the role of equitable principles and remedies on their head to use them to supplant and deny the availability of common law actions and relief. Equity supplements but does not contradict the common law, as Lord Templeman observed in Rhone v Stephens [1994] 2 AC 310 at 317; see also Forestview v Perpetual Trustees WA Ltd [1998] HCA 15; 193 CLR 154 at [15].

56. For those reasons, I would reject the submission based upon the liability imposed upon Ms Fistar “outflanking” liability under the first limb of Barnes v Addy.

Second submission: are only direct recipients liable?

57. Ms Fistar’s second submission seized upon the facts that in Heperu, Ms Belle received property directly from the fraudster, Mr Cincotta, as did Mlle Spanoghe in Banque Belge pour l’Etranger v Hambrouck [1921] 1 KB 321. She submitted in writing that:

“The appellant was not the relevant recipient of the proceeds of the Club’s money paid into the account of Repaja & Co. These monies were converted into a bank cheque delivered to the vendor of the property.”

58. Ms Fistar maintained in oral submissions that she was not the direct recipient of the funds, on the basis that the bank cheque was made out to the vendor.

59. Those submissions are not sound either as a matter of fact or law.

60. As a matter of fact, they are incorrect insofar as they assert that Ms Fistar never received the cheque which had been partly purchased with the Club’s money. Although there was no evidence about precisely what occurred at settlement of the Dolls Point property, it may readily be inferred that both possession of and title to the bank cheque were given to the solicitors acting for Ms Fistar. What else could have occurred? There was no suggestion that the bank cheque was delivered by Ms Repaja directly to the vendor’s conveyancer. To the contrary, the documents suggest a settlement taking place on 27 February 2014 in the conventional way.

61. It follows that Repaja & Co held the “money in the bank account” – more accurately, the debt owed to Repaja & Co by St George Bank in the amount of $800,000 – on trust for the Club. The bank cheque in favour of the estate of the late Leslie Phillip Gleeson was acquired using that trust property, to the extent of $481,189.75. On conventional principles, the Club enjoyed an equitable charge over the chattel, which was the bank cheque, to secure the repayment of the $481,189.75. (For completeness, I note that there was no challenge to the finding of fact that the bank cheque was acquired using $481,189.75 of the Club’s money, and $118,810.24 of the funds provided by Ms Fistar, nor was there any attempt on appeal to trace the entirety of the purchase price of the cheque to the funds stolen from the Club.) Ms Fistar’s solicitors received that cheque as agents for Ms Fistar. In the same capacity, they thereafter delivered it and the balance of the purchase price to the conveyancer acting for the vendor in exchange for a signed memorandum of transfer and a certificate of title, and in substantial performance of Ms Fistar’s obligations under the contract of sale. The result intended and achieved was that the bank cheque, previously owned by Ms Fistar, became the property of the executor of the deceased estate. It is simply not correct to say that property in the cheque was never received by Ms Fistar from Repaja & Co.

62. The submission that only a direct recipient of trust property is liable is also bad in law. Suppose a thief steals a painting and gives it to his mother, who in turn, not liking it, donates it to a gallery. The owner can sue the gallery in detinue.

63. Likewise, I do not understand it ever to have been held that claims based upon equitable title, or upon the knowing receipt of trust funds, are confined to the direct recipients of such funds. The principles governing tracing in equity do not stop after the property or its traceable proceeds have passed through one person’s ownership. It cannot be the case that a claim can be defeated merely by, say, the direct recipient purchasing a bank cheque and delivering it to another person who has the same knowledge that the funds have been obtained in breach of trust.

64. Ms Fistar pointed to no authority in support of the proposition that as an indirect recipient of the traceable proceeds of trust property, she could not be liable. Principle confirms that an indirect recipient can be liable. Once a volunteer becomes aware that he or she has received trust property or its traceable proceeds, his or her conscience is bound. There is no reason to distinguish direct and indirect receipt.

Third submission: Ms Fistar was not a volunteer

65. It was common ground at first instance and on appeal that, in accordance with the formulation of principle in Heperu, the Club’s claim against Ms Fistar turned on whether she was a volunteer. Ms Fistar’s submission that she was not turns on the proposition that the bank cheque was received by Ms Fistar in discharge of Repaja & Co’s obligation to repay her.

66. Against this, at one stage the Club appeared to maintain that the relationship between Ms Fistar and Repaja & Co was one of trust, rather than contract. The Club pointed to evidence that Ms Fistar understood that “she was having her own money returned to her”. But Ms Fistar’s subjective understanding is irrelevant and certainly cannot be determinative. The “money” was “hers” in a colloquial, but not a legal, way. People often speak of “money” in a bank account, although they are (unless they have corporeal money stored in a vault) merely creditors of the bank: see Russell v Scott (1936) 55 CLR 440 at 450-1. Plainly enough, there was a contractual relationship between Ms Fistar and Repaja & Co.

67. The Club relied upon two decisions in which the third party recipients of property were held to be volunteers: Banque Belge pour l’Etranger v Hambrouck and Lipkin Gorman v Karpnale Ltd. Both decisions emphasise the limited nature of the exception where a claim is made against a third party. The transactions involving the third party were, in both cases, of a very special nature.

68. In Banque Belge pour l’Etranger v Hambrouck, the defendant had given the money to a person described as his “mistress”, Mlle Spanoghe, in exchange for continued cohabitation. Scrutton LJ said at 328 that:

“[A]s Mlle Spanoghe gave no legal consideration for its transfer to her, but only the immoral consideration of past or future cohabitation, she cannot acquire a title to the money as a purchaser for value without notice of any defect in the transferor’s title.”

69. Likewise, in Lipkin Gorman, the House of Lords addressed, at some length, the threshold defence raised by the Club, rejecting the submission that consideration had been provided because the gaming contracts were void as a matter of public policy. Lord Templeman said at 562:

“The club cannot as against the solicitors retain the stolen money save by relying on the gaming contracts which, as between the club and Cass, entitled the club to retain the solicitors’ money which Cass lost at the gaming table. Those gaming contracts were void.”

70. Lord Goff said at 577:

“However, contracts by way of gaming or wagering are void in English law. What is the effect of this? It is obvious that each time a bet is placed by the gambler, the agreement under which the bet is placed is an agreement by way of gaming or wagering, and so is rendered null and void. It follows, as I have said, that the casino, by accepting the bet, does not thereby give valuable consideration for the money which has been wagered by the gambler, because the casino is under no legal obligation to honour the bet.”

71. Those are cases where no consideration was provided by the recipient of money because of the nature of the transaction. Both stand in marked contrast with the present facts. Ms Fistar (by her solicitors) received the bank cheque in partial discharge of Repaja & Co’s existing and enforceable obligation to repay her, in accordance with the demands from Ms Fistar’s solicitors over the previous weeks.

72. The primary judge concluded that Repaja & Co was subject to an obligation to repay, but that the provision of the bank cheque “did not discharge Repaja & Co’s obligation to Ms Fistar which obligation survived”. I suspect that his Honour was led to reason in that fashion by the similar reasoning process in Austin v Khaliffe, and I respectfully cannot agree. On the day preceding Ms Fistar’s receipt of the bank cheque, Ms Fistar was entitled to bring an action in debt against Repaja & Co. Ms Fistar could not, the day following her receipt of the bank cheque, sue for the $599,999.99. Repaja & Co’s liability to Ms Fistar was to that extent discharged by the provision of the cheque.

73. Austin v Khaliffe [1966] 2 NSWR 632 was heard and determined by Myers J in September 1961. Why it took five years to be reported (and why the one and half page judgment was reported at all) is unknown. His Honour was sitting in the Equity Division, prior to the enactment of the Supreme Court Act 1970 (NSW), hearing a suit brought by Ms Austin, the client of a fraudulent solicitor, Mr Easton, against the defendants, also clients of Mr Easton. The solicitor was retained by the defendants to purchase a property for £13,000, and they deposited £11,000 into the firm’s trust account to be paid at completion. Mr Easton dissipated the majority of those funds prior to completion. In order to acquire the bank cheque to be used at the Khaliffes’ settlement, Mr Easton used the remainder of the funds held by him on trust for the Khaliffes, with the balance (£8,204) provided by funds held in trust for Ms Austin. Settlement proceeded, but the transfer remained unregistered for some months until both Ms Austin and the Khaliffes found the fraud. Although a new solicitor acting for the Khaliffes lodged the transfer, Ms Austin had lodged a caveat.

74. Myers J found that both Ms Austin and the Khaliffes had equitable interests in the bank cheque which Mr Easton had purchased in breach of his fiduciary obligations. Their interests corresponded with the amount of money of each used to acquire it. It was common ground that Ms Austin’s interests continued to attach if the fiduciary parted with the property subject to the charge, provided only that the new owner was a volunteer. The Khaliffes denied that they were volunteers.

75. Myers J rejected that contention at 633:

“If [the Khaliffes] are not volunteers, it can only be because value passed in some way between them and Easton. They find that, as they claim, in the fact that the payment of the bank cheque to the vendor discharged Easton of his liability to them in respect of the sum of £11,000 which they had given him. But such an argument begs the question, because that payment only operated as a discharge if it extinguished the plaintiff’s equitable interest in the cheque and in the land which was acquired by means of it. All that Easton did was to exchange one form of property in which [Ms Austin] had an equitable interest for another form which he caused to be vested in the [Khaliffes]. For that they gave no value. They simply acquired property which was represented in part by their money and as to the rest by the money of [Ms Austin], which was applied for the purpose without her authority by the fiduciary agent of both parties.

The case tends to be obscured by the fact that the defendants had paid £11,000 to Easton, most of which he stole, but it appears to me that the case would have stood on no different footing if the defendant had paid to him no more than the £2796, which was all that was left, and he had then completed the transaction by taking the plaintiff’s money to provide the balance.

There is no difficulty in tracing the plaintiff’s money into both the cheque and the land and since the defendants took the land as volunteers in relation to Easton, the plaintiff is entitled to the charge which she claims.”

76. With due respect to Myers J, there are three difficulties with the reasoning in Austin v Khaliffe.

77. The first is that, as the Chief Justice observed during argument, there is an element of circularity in the reasoning. According to Myers J, the payment only operated as a discharge if it extinguished the plaintiff’s equitable interest. But because, so it was said, it did not extinguish that interest, it did not operate as a discharge. With respect, much the same circularity in reasoning appears in [197] of the reasons of the primary judge.

78. The second is that, as Sackville AJA observed during argument, there is a difficulty in applying Myers J’s reasoning in circumstances where title has been registered. Although the Khaliffes’ interest was not registered, Myers J said, “Further [Ms Austin’s] charge would attach to the land even if [the Khaliffes] had the legal estate and even if [s 43A] had provided that they should be deemed to be registered proprietors.” That reasoning reflects an understanding of deferred indefeasibility, which predates and cannot be reconciled with Frazer v Walker [1967] 1 AC 569 and Breskvar v Wall (1971) 126 CLR 376. For an analysis of the lengthy delay before traditional notions of land law were modified to reflect the Torrens legislation, of which the reasoning of Myers J is illustrative, see Professor R Sackville, “The Torrens System – Some Thoughts on Indefeasibility and Priorities” (1973) 47 ALJ 526 at 528-532.

79. The third is that it surely cannot be right that if a debtor pays a creditor using funds belonging in equity to a third party, of which fact the creditor is entirely unaware, then the creditor can be regarded as a volunteer and therefore, subject to other defences, is liable to disgorge the funds through a claim of money had and received. That would amount, as was said by Sackville AJA during the hearing, to a “substantial change to the conduct of commercial transactions”. In my view, that understates the position. Lord Herschell LC said in Thomson v Clydesdale Bank Ltd [1893] AC 282 at 287:

“It cannot, I think, be questioned that under ordinary circumstances a person, be he banker or other, who takes money from his debtor in discharge of a debt is not bound to inquire into the manner in which the person so paying the debt acquired the money with which he pays it.”

As the opening words of that sentence indicate, there are exceptions to its generality, but none can apply here where the creditor is wholly innocent of any knowledge of breach of trust.

80. All of that said, it is not necessary for present purposes formally to overrule Austin v Khaliffe (a decision which was mentioned, but not critically, in Heperu at [136]). It is sufficient to observe that Austin can have no precedential weight in the present facts, because Austin was a proprietary claim in equity to recognise a charge over land. Austin says nothing and can say nothing about a personal claim at common law against the recipient of misappropriated funds or their traceable product. Indeed, it is far from clear to me that such an action could even have been brought in the suit heard and determined by Myers J. A common law action would have ordinarily been required to be brought in the Common Law Division, and could not have been granted in the Equity Division if the equitable claim had failed: see Brindley v Scott (1902) 2 SR (NSW) 49 at 55.

81. I conclude that the Club must fail in its Heperu claim against Ms Fistar. Far from receiving the bank cheque as a volunteer, it was a repayment by Repaja & Co of an existing and enforceable debt.

Subsidiary issues

82. Ms Fistar conceded that if the claim were viewed as a personal claim at law for the recovery of money, then indefeasibility of title did not apply. That concession was rightly made. It makes no difference whether a third party recipient of trust property (say, money) buys shares or Torrens title land or a motor vehicle: his or her personal liability is unaffected. To be clear, I do not understand the passage in Farah Constructions at [190]-[198] about the inapplicability of principles governing the receipt of trust property to title derived from registration under Torrens legislation to qualify the principles governing tracing in equity, or the personal liability of a volunteer to account for the value of the traceable proceeds of trust property retained by him or her. The Club made no submission that it did.

83. In light of the foregoing, Ms Fistar’s challenge to the rejection of her defence of change of position can make no difference to the outcome. In those circumstances, it is not appropriate to address the defence in any detail. It is sufficient to note that it was an agreed fact that the Dolls Point property was sold in April 2015 for $945,000, some $230,000 more than its purchase price a little more than a year previously, an increase which considerably exceeds the amount which Ms Fistar claimed had been spent on renovations. I do not see how in those circumstances error can be established in the primary judge’s rejection of the defence, irrespective of such complexities as may accompany the defence in light of Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; 253 CLR 560.

84. I turn to the Club’s notice of contention which sought that it be subrogated to an unpaid vendor’s lien. Very large difficulties confront this endeavour. First, such a claim was not pleaded, nor the subject of evidence, nor submissions, nor was it addressed by the primary judge. Secondly, it is difficult if not impossible to reconcile that claim with the unequivocal abandonment by the Club of any proprietary claim at trial. Thirdly, this claim cannot be brought by way of notice of contention. A notice of contention may be used to support orders challenged by an appeal, but if different orders are sought, then a cross-appeal is required: UCPR r 51.40(1). In reality, the Club was seeking different orders (recognising the vendor’s lien to which it claimed to be entitled to be subrogated) which had not been made by (or for that matter sought from) the primary judge. For this, a cross-appeal was necessary.

85. There are other difficulties which need not be elaborated, for counsel for the Club acknowledged in argument, properly, that the notice of contention only arose if the Club overcame all Ms Fistar’s defences save for her “outflanking” submissions based on Farah Constructions. That aspect of Ms Fistar’s submissions is not sound, and has been rejected. In any event, Ms Fistar is not relevantly a volunteer. It is not necessary to say anything more about the notice of contention.

Orders

86. For those reasons, I propose that the appeal be allowed, the judgment in favour of the Club against Ms Fistar ordered on 6 May 2015 and the costs order made on 12 May 2015 be set aside, and in lieu thereof, the Club’s proceedings be dismissed against Ms Fistar. The Club must pay Ms Fistar’s costs at first instance and on appeal.

87. The formal orders I propose are:

1. Appeal allowed with costs.

2. Set aside order 3 of the short minutes of order made on 6 May 2015 and orders 1 and 2 made on 12 May 2015, and in lieu thereof order that the proceedings be dismissed with costs as against the Fifth Defendant.

88. SACKVILLE AJA: I have had the advantage of reading the judgment of Leeming JA in draft. I agree with the orders proposed by his Honour and, with his Honour’s reasons. I make two additional observations.

89. First, as Leeming JA points out, the common law has long recognised the principle that a person in possession of chattels has a title to the chattels good against all the world, save for someone with a better title. The same principle applies to land. In Allen v Roughley,[1] for example, Fullagar J applied the principle that possession is good title against all but the true owner. There is nothing odd in the notion of a thief in possession of goods or other personal property having a possessory title, just as there is nothing odd in a person wrongfully in possession of land having a good title against all the world except someone with a superior title.

    1. [1955] HCA 62; 94 CLR 98 at 130, citing Asher v Whitlock (1865) LR 1 QB 1 at 6 (Cockburn CJ). See also Perry v Clissold [1907] AC 73; Mulcahy v Curramore Pty Ltd [1974] 2 NSWLR 464 at 476 (Bowen CJ in Eq, Hope JA agreeing).

90. Secondly, Leeming JA concludes that a common law cause of action for money had and received can co-exist with the principle conventionally known as the first limb of Barnes v Addy. [2] In my view, not only is that conclusion not inconsistent with the reasoning of the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [3] (Farah), but the reasoning in Farah supports the conclusion.

    2. (1874) LR 9 Ch App 244.

    3. [2007] HCA 22; 230 CLR 89.

91. In Farah, the High Court referred with apparent approval to the judgment of Harper J in NIML Ltd v MAN Financial Australia Ltd (NIML). [4] His Honour there observed that it was an essential element in the case pleaded by the plaintiff, insofar as it was founded on the first limb of Barnes v Addy, that the recipient of money fraudulently misappropriated by another person had constructive knowledge of the nature of the dishonesty. [5] His Honour found that the plaintiff had not made out the elements of this claim.

    4. [2004] VSC 449; 1 BFRA 204.

    5. [2004] VSC 449 at [53].

92. Harper J then went on to consider an alternative claim by the plaintiff for money had and received. [6] His Honour pointed out that the basis of the common law action for money had and received lies in restitution and unjust enrichment. While Harper J rejected the plaintiff’s alternative claim, he did not suggest that the plaintiff was precluded from relying on the cause of action for money had and received because the first limb of Barnes v Addy somehow occupied the field to the exclusion of other longstanding principles.

    6. [2004] VSC 449 at [74] ff.

93. Significantly for present purposes, the High Court noted that NIML recognised not only that the first limb of Barnes v Addy was right but that it “operates alongside restitution-based liability”. [7] I read this comment as endorsing the proposition that restitution-based liability, applied in accordance with established common law principles, can co-exist with liability founded on the equitable principles stated in Barnes v Addy. That proposition is inconsistent with the argument advanced on behalf of the appellant (Ms Fistar).

    7. [2007] HCA 22; 230 CLR 89 at [145].

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Endnotes

Amendments

01 November 2016 - [22] - "Mr" replaced with "Ms"

[31] - "found" inserted between "balance" and "due"

[39] - "well established" replaced with "well accepted"; "'well established' in" inserted before "Ierino v Gutta"; "at [22]" inserted after "43 WAR 372"; "Thomson Reuters" replaced with "Lawbook Co"

[53] - "MAN" replaced with "Man"

[60] - "was" replaced with "were"

[78] - "Remedies" replaced with "Priorities"

20 April 2016 - [30] - "not" replaced with "now"

Decision last updated: 01 November 2016