Menzies v Perkins

[2000] NSWSC 40

CITATION:	Menzies v Perkins [2000] NSWSC 40
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 2965/99
HEARING DATE(S):	9.12.1999, 13.12.1999, 4.2.2000, 10.2.2000
JUDGMENT DATE:	11 February 2000
PARTIES :	Kelvin Edward Menzies & Ors v Jacob William Perkins (aka Jonathon Butt) & Ors
JUDGMENT OF:	Hunter J

COUNSEL :	Plaintiffs: P W Larkin First Defendant: J Chard (Solicitor) Fourth Defendant: G Nathan (Solicitor) Sixth Defendant: S E Anderson (Solicitor) & L Norris (Solicitor) Seventh Defendant: V Chapman (Solicitor) Eighth Defendant: A Scotting Receiver: D Ash Official Trustee: G Pignone (Solicitor)
SOLICITORS:	Paintiffs: Riley Lawyers First Defendant: Koffels Solicitors & Barristers Fourth Defendant: James Solicitors Fifth Defendant: Mallesons Stephen Jacques Sixth Defendant: Abbott Tout Seventh Defendant: Colin Biggers Paisley Eighth Defendant: Joe Ryan Solicitor Receiver: Abbott Tout
CATCHWORDS:	Summary judgment - constructive trust of proceeds of fraud - following property subject to trust - constructive trustee either bankrupt or shell company created solely for the perpetration of fraud.
LEGISLATION CITED:	Bankruptcy Act 1966 (Cth)
CASES CITED:	Black v S Freedman & Co (1910) 12 CLR 105 Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 Zobory v Federal Commissioner of Taxation (1995) 64 FCR 86 Cashflow Finance Pty Ltd v Westpac Banking Corporation (unreported, Einstein J 14 May 1990) Norilya Minerals Pty Ltd v Commissioner of State Taxation (1995) 16 WAR 266
DECISION:	Damages in sum of $1,324,433.60 for deceit: proceeds of fraud and property acquired by those proceeds subject to constructive trust in favour of plaintiffs: ancillary orders.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

HUNTER J 11 FEBRUARY 2000 2965/99 KELVIN EDWARD MENZIES & ORS v JACOB WILLIAM PERKINS & ORS

REASONS FOR JUDGMENT
1    This is an application for summary judgment against the first and second defendants. The Official Trustee in bankruptcy, in whom is vested the property of the first defendant, who had become a bankrupt on his own petition on 25 August 1999, appeared on the application, and while not consenting to the orders sought, did not oppose the making of those orders. The first defendant consented to the orders. However, since those orders affected the interests of the Official Trustee and of the second defendant, the plaintiffs’ application was heard on its merits, and was not disposed of consensually. 2    After the hearing of the application it came to my attention that the eighth defendant in these proceedings has instituted proceedings in this division (the eighth defendant’s proceedings) seeking similar relief against the first and second defendants to that sought by the plaintiffs in this application. To ensure that the orders made in this application are wedded to and consistent with the granting of any relief in the eighth defendant’s proceedings, both matters were listed before me on 4 and 10 February 2000. The avoidance of inconsistent orders and unnecessary duplication of proceedings has been achieved by agreement amongst the parties in the form of short minutes of order. In the case of the eighth defendant’s proceedings, orders were made by consent on 10 February 2000 in accordance with those short minutes. In the case of this application, although it has been heard on its merits, in order to facilitate the early termination of the receivership of property, the subject of both proceedings, I made orders on 10 February 2000 in accordance with those short minutes, schedule 2 to these reasons, and on the basis of the reasons which follow. 3    The first defendant appeared by his solicitor in the proceedings but did not give evidence. The second defendant did not appear; substituted service of the proceedings having been effected pursuant to order of the Court of 9 December 1999. 4    I have been assisted in these proceedings by extensive written submissions of counsel for the plaintiffs’ (the submissions), schedule 1 to these reasons, which I have attached for ease of reference to the substantial body of evidence tendered on this application, and as they contain the primary findings of fact which, in my view, should be made in these proceedings, based upon the evidence particularised in those submissions and which I have accepted. But for the particularity of those submissions and my agreement with the proffered appropriate findings of primary facts, a briefer expression of reasons for granting of summary judgment may have sufficed. 5    The nature of the proceedings brought against the first and second defendants is set out in the submissions which, for convenience, is quoted below.

“2. By their Third Further Amended Statement of Claim (“the Claim”), the Plaintiffs contend that the First Defendant made a series of misrepresentations during the period from about June 1998 to November 1998. These misrepresentations, which will be considered in detail below, are specified in paragraphs 4 and 27Z of the Claim. The Plaintiffs allege that the First Defendant was the only director of the Second Defendant (paragraph 3 of the Claim) and that the First Defendant acted as “the principal and controller of, and an agent for, the Second Defendant”: see paragraph 12 of the Claim. The Plaintiffs allege that these misrepresentations were made “as part of a sequence of fraudulent conduct calculated to make financial gain” inter alia, for the First and Second Defendants: see paragraph 21 of the Claim. The Plaintiffs allege that the conduct of the First and Second Defendants constitutes, inter alia, the tort of deceit (see paragraphs 18 and 27BB of the Claim) and a series of contraventions of the Trade Practices Act and Fair Trading Act ( see paragraphs 8-14 and 27AF-27AG of the Claim).

4. The Plaintiffs also allege that, in consequence of these misrepresentations, a finance company, Heller Equipment Finance Limited (“Heller”), paid $1,107,500.00 to the Second Defendant on 27 November 1998: see paragraphs 16C and 27AB of the Claim). The Plaintiffs allege that these misrepresentations induced Heller to enter into contract (“the Purchase Agreement”) for the purchase of certain amusement machines from the Second Defendant (see paragraphs 27AJ-27AQ) for hire to the Third Plaintiff under a hire purchase agreement (“the Hire Purchase Agreement”). The Plaintiffs also allege that the Third Plaintiff was induced to enter into that Hire Purchase Agreement by reason of the misrepresentations and that the First and Second Plaintiffs were induced to guarantee (“the Guarantees”) the performance by the Third Plaintiff of the Hire Purchase Agreement: see paragraphs 16A and 16B of the Claim. The Plaintiffs contend that the First and Second Plaintiffs were induced to grant a mortgage (“the Mortgage”) over certain real estate at Moss Vale to support their Guarantees: see paragraph 16AA of the Claim. In addition, the Plaintiffs claim that they were induced to pay certain other sums, totalling $8,000.00, as holding deposits for the machines, direct to the Second Defendant: see paragraph 15 of the Claim.

5. The Plaintiffs claim that the First and Second Defendants utilised the $1,107,500 provided by Heller and the $8,000 provided by the Plaintiffs, not to provide the amusement machines contemplated by the Purchase Agreement and the Hire Purchase Agreement, but fraudulently, for their own benefit: see paragraphs 20 and 21 of the Claim. It is alleged that out of these funds the First and Second Defendants acquired certain assets (“the Assets”), details of which are provided below. By a series of orders made on 2 July 1999, 11 August 1998, 13 August 1998 and 20 August 1999, Einstein J appointed Brian Raymond Silvia as Receiver to the Assets on an interlocutory basis.
6. On 6 July 1999, Heller terminated the Hire Purchase Agreement (see paragraph 27Q of the Claim and paragraph 5 of the affidavit of Edison Bayas sworn on 15 July 1999 (Exhibit O)). It sued the Plaintiffs and the First and Second Defendants in a cross claim brought in these proceedings. It sued for delivery up of the machines, for the $1,107,500 it had paid to the Second Defendant plus interest at the rate provided for in the Hire Purchase Agreement, plus costs. That cross claim was settled as against the Plaintiffs. On 17 November 1999, the First and Second Plaintiffs paid $1.1 Million to Heller pursuant to the Guarantees, and took an assignment of certain of Heller’s rights against the First and Second Defendants and the Eighth Defendant: see annexure “P” to the affidavit of John Mark Laxon sworn on 25 November 1999 (Exhibit S), and see paragraph 27A of the Claim. Heller also entered into a supplemental deed assigning certain rights to the First and Second Plaintiffs on 26 November 1999: see annexure “JML 11” of the affidavit of John Mark Laxon sworn 3 December 1999 (Exhibit U) and paragraph 27 AAA of the Claim. By this latter deed, Heller confirmed that it had assigned to the First and Second Plaintiffs “all of its right, title and interest (if any) in any cause of action it may have had”, immediately prior to the execution of the deeds, against the First and Second Defendants “claiming any interest in” the Assets.
7. The Plaintiffs seek declarations that the Assets are held by the First and Second Defendants upon constructive trust for them. They seek the declarations both in their own right and pursuant to the rights assigned to them by Heller. The Plaintiffs seek consequential orders for the delivery to them of the Assets.
8. On 25 August 1999, the First Defendant filed a debtor’s petition and became a bankrupt. The First Defendant’s trustee in bankruptcy has been represented on the hearing of the motion. In light, inter alia, of the declarations sought by the Plaintiffs, it is conceded by the Plaintiffs that the First Defendant is entitled also to be represented and heard on the hearing of the motion. On 3 December 1999, Hunter J granted the First Defendant such leave.
9. Although the Second Defendant had previously appeared by its solicitor and had filed a defence, it was not represented on the hearing of the Plaintiffs’ motion for summary judgment. On 9 December 1999, Hunter J made an order for substituted service on the Second Defendant of that motion.
10. On 9 December 1999, the First Defendant consented to the making of certain orders against him. The trustee in bankruptcy, whilst not actively opposing the making of the orders, did not consent to the making of the orders. Both for this reason, and because the Plaintiffs also seek summary judgment on all of their claims against the Second Defendant, it is accepted that it is necessary for the Plaintiffs to establish their entitlement to the orders and declarations sought.”

6    The findings of primary fact which I make, relying upon the evidence there particularised, are set out in pars 6, 11 to 116 inclusive of the submissions, noting that there is a typographical error in par 99(f) in which the amount “$177,00” should read “$177.00” and noting that the exhibit referred to in par 51 is Exhibit Y. In relation to the findings in accordance with par 6 of the submissions, I also find that written notice of the subject assignment was given by the plaintiffs as evidenced by pars 19 and 20 of Exhibit S. 7    In summary, the findings leave no room for doubt, in my view, that the first defendant and the second defendant, which was no more than an instrument of fraud and created for that purpose by the first defendant, set out to defraud the plaintiffs and the eighth defendant of considerable sums of money, as it transpired, in excess of $1,000,000, and perfected the fraud by recourse to a forged invoice in the name of Automatic Coin Machines Co (the forged invoice) for the sale of amusement machines and related property (the forged invoice property) to Heller Equipment Finance Limited (Heller) in the sum of $1,107,500. The forged invoice property, if it ever existed, was never in the capacity of the first or second defendant to sell, and, clearly, neither the first nor second defendant had any intention of acquiring that property to complete the sale to Heller. While Heller was clearly deceived by the forged invoice, the real victims of the first and second defendants’ fraud were the plaintiffs and the eighth defendant. By reason of the various false representations, as I have found were made by the first and second defendants, and by recourse to forged instruments, the first and second defendants falsely put forward the first defendant as a person of commercial integrity and of standing in the amusement machine industry and procured from one or other of the plaintiffs or the eighth defendant the several payments particularised in the submissions. 8    The principal fraud consisted of inducing the third plaintiff to enter a hire purchase agreement with Heller for the acquisition from Heller of the forged invoice property consequent upon the purported sale of that property under the forged invoice to Heller: inducing the third plaintiff to provide a charge over its assets and undertaking: inducing the first and second plaintiffs to guarantee the performance of that hire purchase transaction by the third plaintiff and inducing the first and second plaintiffs to provide mortgage security for the performance of the hire purchase agreement by the third plaintiff, all with the objective of defrauding the plaintiffs, the eighth defendant and Heller into making a payment of $1,107,500 to the second defendant. Part of that scheme involved the incorporation of the second defendant with a name deceptively similar to the vendor named in the forged invoice and the establishment of a bank account of the second defendant for the receipt of the proceeds of the first and second defendants’ fraud: those proceeds being particularised in paragraphs 98 - 101 inclusive of the submissions. Those fraudulently derived funds standing to the account of the second defendant and procured from or through the plaintiffs, were impressed, in my view, with a constructive trust in favour of the plaintiffs. 9    In Black v S Freedman and Co (1910) 12 CLR 105, the High Court treated stolen funds as being subject to a constructive trust. See also Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 at 589; Zobory v Federal Commissioner of Taxation (1995) 64 FCR 86 at 90; Cashflow Finance Pty Ltd v Westpac Banking Corporation (Unreported Einstein J 14 May 1999), and for a case where a constructive trust was held to attach to the proceeds of fraud see Norilya Minerals Pty Ltd v Commissioner of State Taxation (1995) 16 WAR 266. I can see no distinction in principle between the proceeds of theft and of fraud. In Black there was no conversion of the trust property, the stolen funds were transferred by the thief to a volunteer and were readily identifiable. The case was treated by Griffith CJ as one involving the following of trust property as expressed in the following passage (at 108-109):

“It is suggested that in following trust property there is a distinction between real and personal property which gets into the hands of a volunteer. But the rule appears to be the same with respect to all kinds of property. It is so laid down in the old case referred to in Lewin on Trusts, and it is so stated in the last edition of White and Tudor in the notes to Dyer v Dyer. Dealing with this particular point, Sir George Jessel M.R.., in the case of In re Hallet’s Estate , said this, amongst other things:- ‘The modern doctrine of equity as regards property disposed of by persons in a fiduciary position is a very clear and well established doctrine. You can, if the sale was rightful, take the proceeds of the sale, if you can identify them. If the sale was wrongful, you can still take the proceeds of the sale in a sense adopting the sale for the purpose of taking the proceeds, if you can identify them?” He points out that you very often cannot identify the proceeds. In the present case I think they are sufficiently identified - I mean there is a sufficient prima facie case of identification in the absence of any explanation. Of course it is not sufficient if the money is taken by the other party bona fide for valuable consideration. There the money cannot be recovered back. But it has been laid down in cases decided long ago that if the alienee is a volunteer the estate may be followed into his hands whether he had notice of the trust or not.”

10    Barton J agreed with the reasons for judgment of the Chief Justice adding, “I do not wish to waste words on this endeavour to retain the fruits of a crime”: a sentiment that echoes in the reasoning applicable to the facts of this case. O’Connor J also agreed with the reasons for judgment of the Chief Justice and added the following (at 110):

“I think the law applicable is that which is laid down in the passage to which Mr. Brockman referred in White and Tudor , in the notes to Dyer v Dyer. Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person’s hands. If, of course, that other person shows that it has come to him bona fide for valuable consideration, and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not.”

11    Once it is accepted that the proceeds of the fraud were imprinted with a constructive trust in favour of the plaintiffs, from my findings it follows that the trust attaches to the property acquired by the application of those proceeds. Whether the constructive trust attaching to the acquired property should be seen as one attracting the principles of tracing I think is an academic question, the resolution of which is of no practical utility in the circumstances of this case. The overlap between concepts of constructive trusts and tracing was described by the learned authors of Jacobs’ Law of Trusts 6th ed. as “vexed”. The conceptual relationship was described thus (at 739-740):

“… there is the increasingly vexed question of the relationship between tracing and the constructive trust. The constructive trust may be used to describe a personal liability to account for a profit or to restore losses (as in the case of the solicitor from whom indemnification was sought in Barnes v Addy ) . In this aspect, there is no overlap with tracing because no proprietary claim to any asset or fund in specie is made, and this is so even if both constructive trust and tracing are seen as remedial rather than substantive institutions. But the constructive trust may be proprietary in the sense of attaching to particular assets (eg, a parcel of land bought by a trustee from profits he made improperly). The attempt by the plaintiff in Hospital Products Ltd v United States Surgical Corp to attach a constructive trust to the defendants’ businesses (successful in the Court of Appeal but not the High Court) affords a striking example. In this class of case, what practical utility or conceptual clarity is there in treating the trustee who has bought a parcel of land with an illicit profit (and usually is called a constructive trustee of the land) any differently from a trustee who has bought land with proceeds of a bank account he held on the trusts of a settlement (and usually is treated as an express trustee subjected to a tracing remedy)? In each case, the acquisition of the land flowed from a breach of trust and there is a proprietary remedy. Thirdly, the subject will intensify in difficulty and obscurity if the Australian courts take up the suggestion by Deane J in Hospital Products Ltd v United States Surgical Corp that the constructive trust (presumably in both its personal and proprietary aspects) may be a remedy in cases of tort and contract; this may be compared with what, as to tracing, was said 70 years ago by Lord Haldane LC in Sinclair v Brougham. However it appears still to be a prerequisite of the right to trace an equity that there be a fiduciary relationship, for it is this which enlivens equitable jurisdiction.”

12 The “prerequisite” referred to by the learned authors is satisfied once it is established that a constructive trust attached to the proceeds of the defendants’ fraud. 13 In relation to the relief claimed, the findings sought in paragraphs 121-125,134 and 135 of the submissions are made. I am satisfied that an award of damages against the bankrupt first defendant and the ‘shell’ second defendant would be an inadequate remedy. 14 Although it is clear from the evidence and from the terms of the short minutes of order, schedule 2, that a third party may claim interest in the Nissan vehicle referred to in par 4(b) of those short minutes, I think the evidence supports a finding that the Nissan is held on constructive trust for the benefit of the plaintiffs. 15 The evidence disclosed that the vehicle was purchased in the name of KBP Management on 4 December 1998. It is not disputed that KBP Management was a business name used by the first defendant. It was in that name that the vessel known as “Hells Bells” was purchased out of the fraudulently obtained funds. On the day preceding the purchase of the Nissan the first defendant caused a withdrawal of cash of $45,000 from the second defendant’s bank account and I have no doubt that some of that cash withdrawal was used to acquire the Nissan. 16 The first defendant admitted that $10,000 was applied by him in purchasing it. In proceedings before the Court on 2 July 1999 it was conceded by counsel on behalf of the first and second defendants that the funds obtained by the first and second defendants in the subject transaction with Heller were applied to the “purchase of the yacht” and “were also spent on the car”. This concession was the subject of an unequivocal confirmation in the letter of the plaintiffs’ solicitor to the solicitor for the first and second defendants of 13 July 1999 seeking the defendants’ consent to a declaratory order in relation to that property. While the reply of the defendants’ solicitor of 14 July 1999 declined to accede to that request, the concession by counsel was not challenged. In an affidavit sworn 13 July 1999 the first defendant asserted that he owned the motor vehicle “in conjunction with (his) stepson”, asserting that the “balance of the $25,000 purchase price was paid in cash from (his) stepson”. In an affidavit of Peter Roger Grealish, an accountant in the office of the receiver of the Nissan, he evidenced the fact that the first defendant had stated to him that the vehicle “was owned 40% by him and 60% by another party”. In the absence of the first defendant from the witness box I would infer from that evidence that the vehicle was purchased by the first defendant from the trust funds. 17 Clearly the property, the subject of the constructive trust so found, does not fall within the property of the bankrupt vested in the Official Trustee, either as being the property of the second defendant, or as property falling within the provisions of s116(2)(a) of the Bankruptcy Act 1966 (Cth). The action for damages for deceit falls within the provisions of s 82(2) of the Bankruptcy Act. 18 For those reasons and with the consent of the signatories to schedule 2, I have given judgment and made the orders set out in that schedule on 10 February 2000. 19 In relation to the order made in terms of par 2 of the short minutes, the sum of $1,324,433.60 has been calculated in accordance with Exhibit Z, the affidavit of John Laxon sworn 10 February 2000, as the measure of damages in deceit.

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Last Modified: 09/25/2000