MBF Australia Limited v Malouf - [2008] NSWCA 214

NEW SOUTH WALES COURT OF APPEAL

CITATION:
MBF Australia Limited v Malouf [2008] NSWCA 214

FILE NUMBER(S):
40710/07

HEARING DATE(S):
6 June 2008

JUDGMENT DATE:
5 September 2008

PARTIES:
MBF AUSTRALIA LIMITED (Appellant)
Samuel John MALOUF (Respondent)

JUDGMENT OF:
Hodgson JA Ipp JA Basten JA

LOWER COURT JURISDICTION:
Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):
SC 6089/03

LOWER COURT JUDICIAL OFFICER:
Einstein J

LOWER COURT DATE OF DECISION:
14 September 2007

LOWER COURT MEDIUM NEUTRAL CITATION:
Samuel John Malouf v MBF Australia Limited [2007] NSWSC 1020

COUNSEL:
M CASHION SC/ R SCRUBY (Appellant)
B W WALKER SC/ N J OWENS (Respondent)

SOLICITORS:
Cutler Hughes & Harris (Appellant)
Strategy Legal (Respondent)

CATCHWORDS:
EQUITY – Fraud committed on plaintiff by third party – Proceeds of fraud impressed with trust – Proceeds of fraud received by defendant – Whether defendant bona fide purchaser for value without notice – What interest in proceeds acquired when value given without notice – Effect of subsequent notice before full beneficial interest in proceeds acquired.
BILLS OF EXCHANGE – Cheques – Effect of crossing cheque “not negotiable” – Whether defendant acquires rights of a holder in due course.

LEGISLATION CITED:
Cheques Act, s 55

CATEGORY:
Principal judgment

CASES CITED:
Barclays Bank Limited v Quistclose Limited [1970] AC 567
Barnes v Addy (1874) LR 9 Ch App 244
Bavins Junior & Sims v London and South Western Bank Limited [1900] 1 QB 270
Black v S Freedman & Company [1910] HCA 58; 12 CLR 105
Citibank Ltd v Papandony [2002] NSWCA 375
Commercial Bank of Australia Ltd v Flannagan [1932] HCA 51; 47 CLR 461
Evans v European Bank Limited [2004] NSWCA 82; (2004) 61 NSWLR 75
Great Western Railway Company v London and County Banking Co Ltd [1901] AC 414
Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420
Midland Bank Plc v Brown Shipley & Co Ltd [1991] 1 Lloyd’s Rep 576
Morison v London County and Westminster Bank Ltd [1914] 3 KB 356

TEXTS CITED:
Mark Hapgood (ed), Paget’s Law of Banking (13th ed, 2007) par 15.27

DECISION:
Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40710/07
SC 6089/03
HODGSON JA
IPP JA
BASTEN JA
5 SEPTEMBER 2008

MBF AUSTRALIA LIMITED v Samuel John MALOUF

Headnote

Facts
Mr Hill represented to the respondent, Mr Malouf, that he could arrange a US$5 million business loan. Mr Hill said the loan would be protected by an insurance policy which Mr Hill would obtain at a cost of $165,000, upon Mr Malouf’s payment to him of that sum. Mr Malouf did not have the necessary funds and through HSBC bank he borrowed $165,000 from a private lender. Upon Mr Hill’s instructions, Mr Malouf made the cheque payable to the appellant, MBF.
As at November 2000, Mr Hill’s company (SRL) was negotiating with MBF for a lease of MBF’s property. MBF sent SRL a proposed lease document providing for a term…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2008] NSWCA 214
Decision Date: 5 September 2008

CaseChat Overview and Summary

The appeal concerned a dispute between MBF Australia Limited ("MBF") and Mr Malouf, with Mr Malouf seeking to recover $165,000 from MBF. The Equity Division had declared that MBF held this sum on trust for Mr Malouf since 8 December 2000 and ordered MBF to pay the sum with interest. The case was heard in the Court of Appeal of New South Wales.

The legal issues before the court included whether MBF was a bona fide purchaser for value without notice of the cheque or its proceeds, and what interest in the proceeds MBF acquired if value was given without notice. The court also considered the effect of subsequent notice before the full beneficial interest in the proceeds was acquired, and whether the crossing of the cheque "not negotiable" affected the rights acquired by MBF, particularly in relation to the rights of a holder in due course.

The court's reasoning focused on the proposition that the money, having been obtained by fraud, was impressed with a trust for Mr Malouf. This was supported by authorities such as *Black v S Freedman & Company*, which establishes that thieves hold stolen funds on trust for the owner. The court also considered alternative bases for a trust, including a resulting trust arising from the failure of the purpose for which the cheque was provided, as per *Barclays Bank Ltd v Quistclose Investments Ltd*. Crucially, the court determined that MBF was not a bona fide purchaser for value without notice, meaning the proceeds of the cheque were held on trust for Mr Malouf. The court also noted that the crossing of the cheque "not negotiable" was a relevant factor, potentially leading to the same conclusion.

The appeal was dismissed with costs.

Orders

Orders of the court

Appeal dismissed with costs.

Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

MBF was not otherwise a bona fide purchaser for value without notice of the cheque or its proceeds. The result is that the proceeds of the cheque came to be held on trust for Mr Malouf. It is not necessary to consider whether or not Mr Malouf also had a restitutionary claim. CONCLUSION For those reasons, in my opinion, the following order should be made: Appeal dismissed with costs. Since writing the above, I have read the judgment of Basten JA. His analysis of the consequences of the cheque being crossed “not negotiable” seems to be correct; but I would prefer not to express a concluded view on this, as it was not the subject of submissions. However, this analysis would appear to be another route to the same conclusion. IPP JA: I agree with Hodgson JA and the order he proposes. BASTEN JA: The original proceedings in this matter were brought by Mr Malouf, seeking to recover an amount of $165,000 from MBF Australia Ltd (“MBF”). In the Equity Division, Einstein J declared that MBF held the sum on trust for Mr Malouf and had done so since 8 December 2000. His Honour further ordered that MBF pay Mr Malouf that sum together with interest. I agree with Hodgson JA that the appeal should be dismissed and that MBF should pay Mr Malouf’s costs of the appeal. Because of the manner in which the case was pleaded, the focus of the argument has at all stages been on the proposition that MBF, and prior to it, Mr Hill, held the money on trust for Mr Malouf. That conclusion was supported on a number of alternative bases, including, first, that the money, having been obtained by fraud, was equivalent to stolen funds so that the thief held the money on trust for the owner, in accordance with Black v S Freedman & Company [1910] HCA 58; 12 CLR 105. Alternatively, it was suggested that a resulting trust arose in the moneys as a result of the failure of the purpose for which the cheque was provided to Mr Hill, in accordance with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. However, the prior question is whether any legal title passed to MBF. If it did not, no question of any resulting trust arose. MBF argued that because neither Mr Malouf nor Mr Hill had any title in the cheque, no resulting trust could have arisen in favour of Mr Malouf. If Mr Malouf obtained title to the cheque and transferred it to Mr Hill, the title so transferred was undoubtedly “defective” for the purposes of s 3(3) of the Cheques Act 1986 (Cth) because the cheque was obtained by fraud. In that event, Mr Hill’s title was either void or voidable and he could give no better title to MBF. If the title were void, MBF converted the cheque by collecting and appropriating the funds received. If it were voidable, it was arguable that no different result would eventuate. On 13 February 2001 Mr Malouf received a letter from Mr Hill, on behalf of Isagila Investments Pty Ltd (“Isagila”) purporting to terminate the contract. (There are documents in evidence giving different versions of the company name, but the same ACN 085 593 200.) By that stage, Mr Malouf had already reported the matter to the police. It seems likely that Mr Malouf rescinded the contract at about that time, although there is no factual finding in that regard. In any event, if there were no other act of rescission, the commencement of proceedings in the Equity Division would have had that effect. An effective rescission of a voidable agreement would have revested the property in Mr Malouf. As explained by Giles J in Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 at 433E:“For present purposes, if A rescinds the transaction whereby as a result of fraudulent representations by B he transferred goods to B he may regain his property, inter alia, by claiming its value in an action for conversion, or the proceeds thereof as money had and received. This is because at least where no formality is required the rescission causes the property which has passed to revest ….”

Ratio Decidendi

Legal Principle Established

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