Napier Keen Pty Ltd v Smith

[2023] NSWSC 1134

Supreme Court

New South Wales

Medium Neutral Citation:

Napier Keen Pty Ltd v Smith [2023] NSWSC 1134

Hearing dates:

10, 11, 13 October, 15 November; and 9 December 2022 and 30 March 2023 plus written submissions culminating in submissions dated 4 August 2023

Decision date:

20 September 2023

Jurisdiction:

Equity

Before:

Lindsay J

Decision:

Subject to allowing the parties an opportunity to be heard about the form of orders and costs:

(1) Judgment for the plaintiff against the first defendant in the sum of $1,062,461.49 plus interest under section 100 of the Civil Procedure Act 2005 NSW and costs.

(2) Order that the plaintiff’s claim against the second defendant be dismissed with costs.

(3) Declare that the plaintiff has no right, title or interest in the residence of the second defendant.

(4) Order that the plaintiff withdraw its caveat on the title of the second defendant’s residence.

Catchwords:

EQUITY – Fiduciary duties – Breaches of fiduciary duty – Rule in Barnes v Addy – Fraudulent misappropriation of funds by employee – Stolen funds banked in account in joint names of employee and spouse – Account operated solely by employee – Spouse had no knowledge of fraud – No knowing receipt of trust money – No accessorial liability

Legislation Cited:

Civil Procedure Act 2005 NSW

Evidence Act 1995 NSW

Cases Cited:

Australian Securities Commission v Buckley (1996) 7 BPR 15,024

Baden v Société Générale pour Favoriser le Developpement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161

Barnes v Addy (1874) LR 9 Ch App 244

Black v S. Freedman & Co (1910) 12 CLR 105

Briginshaw v Briginshaw (1938) 60 CLR 336

Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42

Hagan v Waterhouse (1992) 34 NSWLR 308

Heperu Pty Ltd v Belle (2009) 76 NSWLR 230

Jones v Dunkel (1959) 101 CLR 298

National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251

Re Global Finance Group Pty Ltd (in Liq) (2002) 26 WAR 385

Robb Evans of Robb Evans & Associates v European Bank Ltd (2004) 61 NSWLR 75

Category:

Principal judgment

Parties:

Plaintiff: Napier Keen Pty Ltd t/as Keen Lawyers ACN 105070675
First Defendant: Beverley Mary Smith
Second Defendant: Gregory John Frail

Representation:

Counsel:

Plaintiff: Mr HW Somerville
First Defendant: Self represented
Second Defendant: Mr D Moujalli

Solicitors:
Plaintiff: Keen Lawyers
First Defendant: Self represented
Second Defendant: Law Quarter, Solicitors

File Number(s):

2021/00032128

Judgment

INTRODUCTION

1. In proceedings commenced by a statement of claim, the plaintiff seeks a remedy against each of two defendants consequent upon the first defendant’s fraudulent misappropriation of $1,062,461.49 of its funds between 2 July 2012 and 28 October 2019 (inclusive) in the course of her employment (between 3 October 2003 and 30 October 2019 or thereabouts) as the plaintiff’s bookkeeper.

2. The second defendant is the de facto spouse of the first defendant. There is no allegation that he was an active party to the first defendant’s fraud, all knowledge of which before the plaintiff discovered the fraud, and informed him of it, he denies. What is alleged against him is that he “knowingly received” stolen monies via:

1. an account in the joint names of himself and the first defendant operated (he contends) by the first defendant exclusively;

2. payments from the joint account in reduction of their joint debt to a bank for a home loan secured over their “matrimonial home”; and

3. payments made from the joint account in reduction of his indebtedness to a bank on a credit card in his name, upon which the first defendant made online purchases of goods and services.

3. Title to the “matrimonial home” is and was at all material times registered in the name of the second defendant alone.

4. As against the first defendant, the plaintiff seeks a restitutionary money judgment in the form of an award of equitable compensation, or as money had and received by the first defendant to the use of the plaintiff, in the sum of $1,062,461.49.

5. As against the second defendant, the plaintiff seeks a restitutionary money judgment in the form of an award of equitable compensation (or as monies had and received by the second defendant to the use of the plaintiff) in the sum of $977,646.75, an amount equivalent to the total of misappropriated funds paid by the first defendant (between 2 July 2012 and 13 March 2019) into the defendants’ “joint account”.

6. The plaintiff also seeks against the second defendant a declaration that it is entitled to an equitable charge over the matrimonial home, into which some of the monies stolen by the first defendant can allegedly be traced via payments made by her from the joint account into the home loan account.

7. The amount of the charge claimed by the plaintiff is $80,510.90 or, alternatively, $58,404.00. The larger sum represents the total of deposits made by the first defendant to the home loan account after allowing for the fact that the second defendant routinely paid into the account every fortnight $900 from his wages as a police officer and otherwise effected no transactions on the account. The smaller amount represents the total of amounts withdrawn by the first defendant from the joint account and paid into the home loan account. The ultimate source of all funds paid into and from the Home Loan Account, allowing for redraws of loan funds, is not clear on the evidence. No systematic attempt has been made by the parties to trace particular funds in detail although the plaintiff has pointed to some ostensibly related transactions across accounts. Each case has been presented largely by reference to aggregate flows of funds.

8. The figures of $80,510.90 and $58,404 have their evidentiary foundation in the expert report of an accountant (Mr Haynes) retained by the plaintiff.

9. At the commencement of the hearing, counsel for the second defendant provisionally agreed to accept the analysis of Mr Haynes and, perhaps because of an ambiguity of expression in Mr Haynes’ report, the sum of $80,510.90 as a measure of any receipt of stolen funds in the Home Loan Account. In final submissions he corrected his qualified acceptance of the report by contending that, if the report’s analysis is to be accepted, then:

1. the correct figure is the sum of $58,404, not $80,510.90; and

2. as the Home Loan Account was a joint account of the defendants the second defendant could not be liable to the plaintiff for more than one half of $58,404 (ie $29,202).

10. In my opinion, if stolen funds of $58,404 are taken to have been received by the second defendant in the Home Loan Account (in co-ownership with the first defendant), the fact that the defendants were, as between themselves, “co-owners” of rights attaching to the Account does not disentitle the plaintiff from recovery of one half of the stolen funds deposited in the Account. It has not been contended that the defendants held such funds otherwise than as joint tenants, with a common entitlement to funds at the time of deposit. It would make no difference if, as between themselves, the defendants held such funds as tenants-in-common.

11. In his final submissions, counsel for the second defendant presented a case, not put to Mr Haynes in cross examination or otherwise presented during the hearing, that the source of funds withdrawn by the first defendant from the joint account and paid into the Home Loan Account could not be confidently characterised as stolen funds of the plaintiff because such funds could have been the first defendant’s legitimate wages, or a draw down of loan funds returned to the Home Loan Account or some other legitimate source.

12. Counsel for the plaintiff was justified in his objection to the second defendant’s belated change in the nature of his case. In my assessment, these proceedings should be determined on the basis that, if stolen funds can be traced through the joint account into the Home Loan Account (which I find is not the case), the total of amounts withdrawn by the first defendant from the joint account (into which monies stolen by her from the plaintiff were paid) and paid into the Home Loan Account was $58,404.

13. The plaintiff has lodged a caveat against the title of the matrimonial home. In the absence of a cross claim from the second defendant seeking an order that the caveat be withdrawn, the parties agreed that, should I find that the plaintiff has no estate or interest in the property, an appropriate course would be for a declaration to be made to that effect (a declaration to the “reverse” effect of the relief sought in the statement of claim), with a consequential order for the caveat to be withdrawn.

14. The first defendant has filed no defence to the plaintiff’s statement of claim. On her appearance at the final hearing, from a correctional centre in which she is currently serving a term of imprisonment for her crime, she admitted personal responsibility for her fraud and sought to deflect responsibility from the second defendant. She was self represented. She gave no evidence but was permitted, with no objection on the part of the plaintiff or the second defendant, to cross examine the second defendant and to make submissions.

15. The first defendant appeared before the Court only after the plaintiff’s evidence had closed. Her late appearance was the result of a failure on the part of the plaintiff to ensure that she had precise notice of the listing of the proceedings for a final hearing. Although she was represented in the early stages of the proceedings she ceased to be legally represented when her solicitor filed a notice of ceasing to act without alternative arrangements for her representation being made. At the commencement of the hearing, when I drew attention to a need for evidence confirmatory of their understanding that she had notice of the hearing, counsel for both the plaintiff and the second defendant invited the Court to proceed with the hearing pending confirmatory evidence. The plaintiff’s service on the first defendant of written notice of the hearing led to an application by her to appear at the hearing via a video link.

16. That application was granted. The first defendant appeared via video link. Despite my invitation that she apply for an adjournment to enable her to seek legal advice or to review evidence that had been adduced in her absence, she insisted that the hearing continue on the basis that she would, essentially, participate as an observer rather than as an active party. Counsel for the plaintiff and the second defendant joined in an application that the hearing continue on that agreed basis, which it did subject only to the qualification that, with the acquiescence of the plaintiff and the second defendant, the first defendant was permitted to cross-examine the second defendant and to make written and oral submissions at the conclusion of the evidence.

17. There is no dispute that the plaintiff is entitled to a judgment against the first defendant in the amount claimed against her in the statement of claim ($1,062,461.49) plus “pre-judgment” interest under section 100 of the Civil Procedure Act 2005 NSW and costs. The evidence justifies such an entitlement, independently of any entitlement the plaintiff may have to a default judgment based on the failure of the first defendant to file a defence.

18. The real controversy in these proceedings is whether the plaintiff has discharged the onus of proof it bears, on the balance of probabilities (to the standard required by section 140 of the Evidence Act 1995 NSW, informed by Briginshaw v Briginshaw (1938) 60 CLR 336) to satisfy the Court that the second defendant:

1. received stolen money when it was deposited in the joint account by the first defendant or when she transferred funds from the joint account, to the home loan account or the second defendant’s credit card account, in reduction of his bank liabilities;

2. received or retained stolen money with the requisite knowledge that it was stolen; and

3. acquired a benefit from stolen money for which he should, in good conscience, account to the plaintiff.

THE PARTIES

The Plaintiff

19. The plaintiff is a solicitor corporation, the principal of which is, and was at all material times, Mr Wayne Keen (“Mr Keen”), practising from premises in the western suburbs of Sydney.

20. Mr Keen was admitted to practice as a solicitor by this Court in December 1983. The legal practice of which he became part was acquired by the plaintiff upon its registration as a corporation on 12 June 2003. He has been the sole principal of the practice since 1996 and the sole director of the plaintiff since its incorporation. In essence, he has practised as a sole practitioner since 1996 albeit (since 2003) through the plaintiff as his corporate vehicle. The legal practice operated from the Emerton Village Shopping Centre from 1982 to August 2019 when it relocated to Bidwill Square Shopping Centre.

21. The work of Mr Keen’s legal practice was primarily personal injury litigation with some involvement with other litigation, conveyancing, estates and, to a lesser extent, family law. The personal injury litigation side of the practice routinely necessitated Mr Keen’s absence from his office and made him, in a practical sense, dependent upon the competency and honesty of a small number of employed staff, including the first defendant. It also involved a flow through the practice of substantial sums of money; substantial both in terms of funds outlaid to prepare cases and in terms of receipts of money, primarily from insurance companies, following the resolution of cases.

22. Mr Keen’s legal practice operated both a trust bank account and a general office bank account with the Commonwealth Bank of Australia. The first defendant’s misappropriation of funds occurred in connection with the general account, not the trust account. There is no evidence, or suggestion, of irregularities in management of the trust account.

23. Most of the financial transactions of Mr Keen’s legal practice, during (at least) the latter part of the first defendant’s employment as the plaintiff’s bookkeeper, were conducted by online banking.

24. As late as the first defendant’s cessation of her employment with the plaintiff on or about 30 October 2019 (on notice given to Mr Keen in August 2019 shortly after the plaintiff’s office relocated to Bidwill) Mr Keen did not know how to access the financial records of the plaintiff through its computerised accounts system in any great detail. So, when, shortly before her departure from the practice, he undertook a preliminary review of the first defendant’s recent performance of her duties as bookkeeper, he retained the plaintiff’s external accountants, Melrose Partners, to review its financial records one day when the first defendant was absent from the office.

25. Ms Deirdre Hall, of Melrose Partners, in the course of that review identified three transactions, totalling $13,248, which were recorded in the plaintiff’s records as payments to the Australian Tax Office but which, upon inquiries of the ATO and the Commonwealth Bank, were revealed to have been transferred to the Commonwealth Bank account of the first defendant into which her wages were routinely paid.

26. Upon discovering those three irregular transactions, Mr Keen attempted unsuccessfully to contact the first defendant. She did not respond to his telephone calls or text messages.

27. On 19 November 2019 Mr Keen reported his findings of financial irregularities to the Mount Druitt police station.

28. On about 18 or 19 November 2019 the first defendant attempted suicide and was admitted as a patient in the ICU Ward at the Nepean Hospital.

29. It was there that the second defendant received a telephone call from Mr Keen who asked for a meeting with him, followed up by a meeting between the two men in the main foyer of the hospital. It was then and there that Mr Keen informed the second defendant that the first defendant had taken funds from his law firm without his consent and, the second defendant says, he first learned of the first defendant’s fraud.

The First Defendant

30. The first defendant was born in January 1967 and, when she commenced her employment with the plaintiff in 2003, she was aged 36 years.

31. She commenced her employment with the plaintiff, on a permanent, part-time basis, on 3 October 2003. She remained in the company’s employ until about 30 October 2019.

32. There was no written contract of employment. Nor was there any written statement of her duties or mandated hours of employment.

33. Although her formal hours of employment routinely ranged from about 8:30 am to 1 pm, three days a week, she worked overtime from time to time and, in what was a small legal office, she was on-call as needed.

34. There is a dispute between the parties as to the number of hours routinely worked by the first defendant for the plaintiff; the amount of overtime the first defendant worked; the hourly rates of pay she received for her work; and the amounts and frequency of bonuses paid by the plaintiff to the first defendant.

35. The importance of this dispute is that the plaintiff contends that the second defendant “must have known” that the amount of money flowing through the defendants’ bank accounts by reason of transactions effected by the first defendant could not be explained as the product of her modest legitimate income from work as the plaintiff’s bookkeeper. On the plaintiff's case, the second defendant must have known, or ought to have known, that the first defendant was channelling illegitimate funds through bank accounts in his name.

36. In the absence of a written contract of employment, and evidence of timesheets of time worked, the evidence bearing upon the first defendant’s entitlements to remuneration, and her receipt of remuneration, during the period when misappropriations occurred (between 2 July 2012 and 28 October 2019 or thereabouts) remains imprecise in details.

37. Nevertheless, throughout that period of misappropriation the first defendant appears, generally, to have worked for about five hours a day, three days (sometimes four days) a week, at a rate of pay which was (by December 2018) no greater than $35.60 per hour supplemented, depending upon performance and the financial circumstances of the plaintiff’s practice, by bi-annual bonuses.

38. Although Mr Keen estimated that the first defendant generally worked for no more than 20 hours per week there was no agreed limit on the amount of time she spent on her work and there were times when she was required to work longer hours because of the amount of work to be done.

39. Although Mr Keen initially denied that the first defendant had ever received a bonus in the range of $4,000-$5,000 documentation presented to him in cross examination led him to concede that, at least in 2017, he had authorised payment of a bonus for the first defendant in a gross amount of $5,000.

40. Mr Keen’s evidence was that, during the period of the first defendant’s misappropriations, she was generally paid wages in the range of $30,000-$40,000 per annum. In the absence of precise, reliable records, that estimate is by nature imprecise. However, her legitimate salary was significantly less than what she told the second defendant it was.

41. The second defendant believed that her taxable income was as follows, as disclosed to him by her for disclosure in his tax returns and as then declared by him in his tax returns:

1. $115,000 for the year ended 30 June 2014 (the 2013/2014 year).

2. $115,000 for the 2014/2015 year.

3. $89,000 for the 2015/2016 year.

4. $68,000 for the 2016/2017 year.

5. $41,636 for the 2017/2018 year.

6. $45,000 for the 2018/2019 year.

42. By its statement of claim, the plaintiff alleges (and by his defence the second defendant admits) that, throughout the period of the first defendant’s employment by the plaintiff (between 3 October 2003 and 30 October 2019 or thereabouts) the first defendant was responsible for and authorised to undertake the following duties:

1. payment of disbursements associated with the conduct of litigation by the plaintiff in its capacity as a legal practice;

2. payment of staff wages and entitlements;

3. payment of general office expenses from day-to-day;

4. payment of taxation and other statutory liabilities of the plaintiff;

5. payment of rent and other outgoings of the plaintiff;

6. payment of insurance premiums, practising certificate fees and other professional expenses required to be met by the plaintiff in the conduct of its legal practice; and

7. recording and accounting for the plaintiff’s expenditure.

43. Throughout the period of her employment by the plaintiff the first defendant had access to the plaintiff’s bank accounts and, subject to supervision by Mr Keen, the sole responsibility for initiating authorised online banking transactions.

44. In cross examination. Mr Keen agreed that:

1. prior to August 2019 (when he started to suspect that something was not right) he was completely oblivious to the fact that the first defendant had misappropriated over $1 million from the plaintiff;

2. in the period between 2012-2019, when the first defendant’s misappropriations occurred, no member of the plaintiff’s staff or the plaintiff’s external accountants, expressed to him any concerns in relation to what was happening to monies received by the plaintiff; and

3. the only people who had access to the plaintiff’s financial records on a day-to-day basis were himself and the first defendant.

45. In his own words, Mr Keen trusted the first defendant as a “very good employee”. In his oral evidence he volunteered that “in terms of doing the bookkeeping, … she was quite good”.

46. He relied upon her and, and with minimal supervision, accepted that she was both competent and honest.

The Second Defendant

47. The second defendant was born in January 1963. At the time the first defendant commenced employment with the plaintiff in 2003 he was aged 40 years.

48. He commenced his relationship with the first defendant in 1983.

49. He joined the NSW Police Force in 1995. In 2005 he became a Police Sergeant. He held that an appointment until he ceased to be a police officer on 20 May 2022. He currently works in a warehouse as a storeman.

50. He held the office of Police Sergeant throughout the time when (between 2 July 2012 and 28 October 2019 or thereabouts) the first defendant misappropriated funds of the plaintiff. During that same period he often worked shift work. At the commencement of the period he was stationed at Quakers Hill Police Station. He finished his service at Blacktown Police Station. The precise date of his move from Quakers Hill to Blacktown is not clear from the evidence, but his memory is that he had spent close to seven years at Blacktown.

BANK ACCOUNTS IDENTIFIED

51. All the funds misappropriated by the first defendant (in 501 transactions between 2 July 2012 and 28 October 2019, inclusive) were transferred electronically, as a “Netbank Transfer”, from the plaintiff’s general account by the first defendant to one of two bank accounts operated by the first defendant.

52. Between 2 July 2012 and 13 March 2019 (inclusive) all misappropriated funds were transferred into the Commonwealth Bank account (with an account number ending in “007”) in the joint names of the first and second defendants, “the Joint Account”. During that period the first defendant effected 466 fraudulent transfers involving a total sum of $977,646.75.

53. During the period between 27 March 2019 and 28 October 2019 (inclusive) the first defendant transferred from the plaintiff’s general account to a Commonwealth Bank account (with an account number ending in “861”) in her name alone (“the first defendant’s personal account”) a total sum of $84,814.74 by way of 35 transactions. This account was the account into which, throughout the first defendant’s employment (between 3 October 2003 and 30 October 2019 or thereabouts), the plaintiff paid her legitimate wages.

54. In conducting a retrospective analysis of the first defendant's unauthorised transactions care needs to be taken to keep in perspective both the multiplicity of those transactions and the period of time over which she effected them. She did not simply steal $1,062,461.49 in one transaction. She stole that total amount in 501 separate transactions over seven years and about four months. She stole smaller amounts over a longer period than is implicit in an unqualified, but correct, statement that she stole $1,062,461.49. This should be borne in mind in attempts to understand why it was that Mr Keen’s supervision of his employee failed to detect her fraud over several years and why it is that the second defendant’s disclaimer of contemporaneous knowledge of the fraud may have a reasonable foundation.

55. The bank accounts on the defendants’ side of the record that require notice are the following:

1. the Commonwealth Bank account (the first defendant’s personal account) with the account number ending in “861” in the sole name of the first defendant, of which she alone was a signatory;

2. the Commonwealth Bank account (the Joint Account) with a number ending in “007” in the joint names of the first and second defendants which the first defendant operated but which the second defendant says he did not use after 28 May 2004;

3. the Commonwealth Bank account (“the Home Loan Account”) with a number ending in “602” in the joint names of the first and second defendants which was established to service a home loan granted by the Commonwealth Bank to the defendants, secured by a mortgage over the matrimonial home of which the second defendant alone was the registered proprietor. This “Home Loan Account” was closed on or about 22 January 2019 when the Commonwealth Bank mortgage was discharged and the second defendant, alone, borrowed funds from the Police Bank on the security of the matrimonial home; and

4. the Westpac Visa Account (“the second defendant’s Visa Account”), with a number ending in “565” (until about September 2012) and thereafter a number ending in “364”, in the name of the second defendant alone but which the first defendant also used for online purchases of goods and services. The account was paid out and closed by the second defendant in early 2019.

56. At about the same time the second defendant opened his Westpac Visa Account he also (on or about 28 May 2004) opened in his own name alone two other accounts with the Westpac Bank. His main Westpac account had an account number ending in “869”. His separate Westpac savings account had a number ending in “085”. The significance of these accounts relates not to particular transactions affecting them but to the evidence of the second defendant that, having opened the accounts, he did not at any time thereafter use the Commonwealth Bank joint account or view bank statements relating to the account. He says that from about 2004 he thought that the Commonwealth Bank account was inactive.

57. The home loan underlying the Home Loan Account was taken out by the defendants from the Commonwealth Bank on or about 10 July 1991 and refinanced by the second defendant on or about 22 January 2019.

58. At the instigation of the first defendant bank statements for both the first defendant’s personal account and the Joint Account were sent to an address in Silverdale or Goulburn, not to the matrimonial home in Minchinbury.

59. The bank statements in evidence relating to the first defendant’s personal account cover the period between 27 March 2019 and 28 October 2019 inclusive. The first entry records a direct credit of $1,137.04 from the plaintiff’s bank account, a misappropriation. One of the last entries (on 28 October 2019) was a direct credit of $1,965.03, another misappropriation.

60. Bank statements for the Joint Account in evidence cover the period between 2 July 2012 and 13 March 2019 inclusive. The first entry (on 2 July 2012) records a direct credit from the plaintiff’s bank account in the sum of $1,332.04, a misappropriation. One of the last entries on 13 March 2019 records a direct credit from the plaintiff’s account in the sum of $2,082.04, another misappropriation.

61. The bank statements for the Home Loan Account in evidence cover the period between 1 July 2012 and 31 December 2018 inclusive. They do not disclose any address to which they may have been sent. The absence of such an address is not the subject of any evidence and was not the subject of any comment during the hearing. The second defendant nevertheless admits that he, from time to time, saw statements relating to the home loan account.

62. The bank statements for the second defendant’s Visa Account in evidence cover the period between 12 June 2012 and 12 May 2019 inclusive. They were addressed to the second defendant at the matrimonial home in Minchinbury. That is not disputed by him, although his evidence is that he cannot recall looking at them regularly.

63. Upon an analysis of the bank statements for the Joint Account and the Home Loan Account during the period covered by the bank statements, the first defendant:

1. made deposits in the Home Loan Account in the total sum of $80,510 (funded, as to $58,404, by transfers from the Joint Account); and

2. withdrew from the Home Loan Account a total sum of $124,950.

64. The second defendant attaches significance to the fact that the first defendant withdrew from the Home Loan Account more than she deposited in the account, a differential of $44,440.

65. Upon an analysis of the Visa Account bank statements during the period covered by the bank statements, the first defendant:

1. effected purchases (withdrawals from the account) totalling $65,745.95; and

2. made repayments via Bpay (deposits into the account) totalling $52,410.00 and made cash repayments (deposits) of the order of $48,945.00, totalling $101,355.

66. The Visa account was used to fund a credit card and was thus always in debit. It was not used for a debit card, drawing upon a credit balance maintained in the account.

67. The second defendant attaches significance to the fact that (although the first defendant paid into the Visa account more than she withdrew from it, with a differential of about $35,609.05) she withdrew from the Home Loan Account $44,440 more than she deposited in that account. Setting off these two sums, the second defendant denies any receipt of a net benefit (and claims to have been a net loser) from the money flows directed by the first defendant through accounts in his name.

68. The Visa Account was closed when, the second defendant having refinanced his home loan and bank accounts and moved to the Police Bank from Westpac, the Police Bank made a final payment to the Visa Account on or about 7 February 2019.

69. The second defendant identified the first defendant’s purchases on the Visa Account as all debit transactions with the words “Apple Itunes” (of which there were many) in the description of the transactions and cash payments as credit transactions bearing the description “Cash”. He deposed that he may have made some minimal cash deposits over the years but only in small amounts, the dates of which he does not recall.

70. Upon an assumption that the plaintiff does not succeed on its primary case that the second defendant should be held liable for $977,646.75 (the total of the plaintiff’s funds transferred into the joint account by the first defendant), it contends that it is nevertheless entitled to an order that the second defendant pay it equitable compensation (or a money judgment for monies had and received) comprising the sum of:

1. an amount of $80,510.90 (or, more accurately, $58,404), said to represent the sum total of transfers by the first defendant to the Joint Account; and

2. $145,494.41, said by the plaintiff to represent the total of payments made by the first defendant to discharge the second defendant’s credit card liability on his Visa account.

71. The second defendant contends (and I accept) that, if it be found that he would otherwise be held liable to account to the plaintiff for a benefit he obtained from stolen money, then (as held in Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42 at [121]-[128]):

1. the relevant enquiry as to the availability of an order that he (re)pay money to the plaintiff is as to the injustice of his retention (at the time when, on or about 19 November 2019, he first learned of the first defendant’s fraud) of any money or benefit received by him; and

2. that enquiry is to be addressed by reference to the substance of the matter, not form or legal technicality.

72. Upon that basis, the second defendant contends that:

1. the plaintiff’s claims against him should be dismissed because, on balance, he lost at the hands of the first defendant more than he gained from her frauds;

2. in any event, when he first learned of the first defendant’s fraud he retained no “benefit” from any fraud because the Home Loan Account and his Visa Account had been paid out several months earlier; and

3. there is no evidence that stolen funds paid into the Home Loan Account effected a reduction of the principal indebtedness on that Account.

73. The plaintiff, for its part, says that it should be entitled to recover funds it lost without reference to what might be found on an accounting as between the two defendants. It contends that the fact that the second defendant lost more than he gained from the first defendant’s frauds is irrelevant as between it and the second defendant.

THE PLAINTIFF’S ACCOUNTING SYSTEMS

74. Presentation of the plaintiff’s case appears to have been constrained by the absence of records in part, at least, due to the effluxion of time and the destruction of older records.

75. During the period 2012-2019 the plaintiff initially operated a Kalamazoo accounting system where wage records were recorded manually.

76. Some of those records, in the handwriting of the first defendant, were available to the parties in these proceedings for the period between May 2013-June 2015.

77. At an indefinite time after June 2015 the plaintiff entered into arrangements for the operation of legal software including an MYOB accounting system pursuant to which wage records of employees were recorded digitally by the first defendant without any critical supervision.

78. During the period 2012-2019 (when he says he could always access this information) Mr Keen routinely examined the wage records of all employees, including the first defendant, “maybe two or three times per year to review wages, hourly rates or consider the payment of bonuses”. He appears not to have undertaken, or caused anybody else to undertake, a critical review of the first defendant’s work (whether referable to wage records, operation of the plaintiff’s general account or otherwise) before his apprehension of something untoward in or about August 2019.

THE FIRST DEFTENDANT’S MODUS OPERANDI

79. The 501 fraudulent transactions of the first defendant on the plaintiff’s general account were all for odd amounts of money, not round sums likely to excite the suspicions of a casual observer. A few of the transactions were for amounts less than $500. A few were for amounts in excess of $5,000. Most fell somewhere between $1,000 and $5,000. They were all for substantial sums. The evidence before the Court does not include evidence of the descriptors attributed to the transfers by the first defendant in records of the plaintiff or evidence of how, if at all, transaction descriptions were tied to particular client files.

80. What the first defendant did with the money she misappropriated and her motivations were largely unexplored in the evidence. I infer from what evidence there is, and the course of the proceedings during which the plaintiff stressed the importance of establishing a proprietary interest in the defendants’ matrimonial home, owned by the second defendant alone, that she invested substantial sums gambling unsuccessfully on poker machines.

81. In cross-examination the second defendant suggested that, in retrospect, she appears to have routinely played poker machines between the time of her departure from work at about 1 pm and her collection of their children at about 3 pm. He says that, at the time she has since been found to have misappropriated money, he thought that she may have been gambling but, because she had a pattern of putting money into their Home Loan Account as well as taking money out, he did not consider gambling to be an explanation for her conduct.

82. For his part, Mr Keen swore an affidavit which included paragraphs to the following effect:

“I became aware through my discussions with Detective Coleman that [the first defendant] was alleging in her criminal proceedings of a gambling addiction [sic] and that the monies obtained from the plaintiff were used for that purpose.

From my analysis of the financial records of the defendants I do not believe that to be the case and as a consequence I was asked by Detective Coleman to prepare a further statement.”

83. Mr Keen’s “further statement” was dated 14 May 2021, supplementing an earlier statement dated 26 February 2020.

84. It included observations to the following effect:

“[5]   In April 2020, [my] former employee [the first defendant] was charged with defrauding my legal practice of $1,062,461.69 over a seven-year period between 2012 and 2019.

[6]   Since that date, I have undertaken a detailed analysis of the transfers initiated by [the first defendant].

[7]   During the period from 27 April 2021 to the 12 May 2021 I carried out a detailed analysis of the unauthorised transfers from the [general account of the plaintiff] to the personal accounts of the former employee [the first defendant]. In doing so I looked at all the bank statements covering that entire period [between 2012 and 2019] and identified a clear nexus between transfers entering [the first defendant’s] account and thereafter internal transfers into the mortgage account and payments towards her and her husband’s credit cards, general living expenses as well as payments into a credit card for and on behalf of her mother.

[8]   I ascertained that during the period 26 July 2012 to 21 February 2019 she deposited the sum of $58,604 into repayment of the mortgage account in respect of the property in which she was residing with her husband at Minchinbury.

[9]   In the period from 17 October 2012 to 25 October 2019 I ascertained that she transferred over $400,000 as payment of the following:

(a)   monies to a superannuation account;

(b)   money into a TAL Life account;

(c)   transfers to other CBA Accounts in payment of [the second defendant’s] Visa account ;

(d)   in payment of her own bank card accounts; and

(e)   in payment of her mother’s bank card accounts.

[10]   In addition, I also ascertained from an examination of the bank records that she would regularly use the transfer monies from [the plaintiff’s general account] to pay normal day-to-day living expenses. As an example, I ascertained from the period 8 July 2014 to 18 November 2014 the following payments were made:

(a)   Alex Day Care $200;

(b)   Minchinbury News Agency $55.30;

(c)   BCC Children’s Services $500;

(d)   Woolworths $557.36;

(e)   BP Minchinbury $192.00;

(f)   Angels Clothing $54.50;

(g)   KFC Minchinbury $43.00;

(h)   Mount Druitt Veterinary $88.55;

(i)   IGA Minchinbury $49.64;

(j)   Woolworths Prospect $257.51;

(k)   CTC Minchinbury $41.70;

(l)   Woolworths $54.11;

(m)   BCC Children’s Services … $500; and

(n)   Chemsafe Pharmacy $22.65.

[11]   The reference [to a named individual in paragraph 10(m)] I believe is a reference to [the first defendant’s son]. …

[12]   It is apparent to me from a complete review of all banking statements that monies were used for a variety of purposes other than alleged gambling debts.

[13]   I can also confirm from an analysis of these bank records that these payments are made either on the same day that the monies are transferred out of the [plaintiff’s general account] or on the following day when prior to the transfer of monies from [the plaintiff’s general account] there was insufficient money in her account to meet these payments. …”

85. The correctness or otherwise of Mr Keen’s complete analysis has not been explored in these proceedings, though a perusal of bank statements relating to the first defendant’s personal account and those relating to the Joint Account might be thought to support his thesis. Apart, possibly, from the sum of $58,604 referred to in his witness statement (in these proceedings claimed to be $58,404) transferred from the Joint Account into the Home Loan Account relating to the defendants’ matrimonial home, and payments off the second defendant’s Visa card, there is no clear evidence of what became of the funds misappropriated by the first defendant.

86. I infer from the whole of the evidence that, if the first defendant had a gambling habit, it was not obvious to either Mr Keen or the second defendant in real time.

87. The possibility that the first defendant routinely went to clubs and pubs during the period between 1 pm and 3 pm on working days (put by the plaintiff to the second defendant in cross examination) may explain a point of difference between the evidence of Mr Keen and that of the second defendant.

88. When cross-examined about his belief as to the first defendant’s working hours the second defendant responded as follows:

“My belief of her hours was she worked from 8 or 8.30 in the morning. She could generally drop the kids and get to work pretty close on time. I believe she was in the office till about 1, and then after that she did running around for work, and then generally was able to pick the kids up at 3. So my understanding of her hours generally, were from 8 to 8.30 to roughly 3.”

89. In his evidence Mr Keen deposed that the first defendant routinely finished work at about 1 pm on a working day and that it was no part of her routine to attend to chores for the plaintiff out of the office.

90. Accepting the evidence of both Mr Keen and the second defendant, I infer that the first defendant generally only worked until 1 pm but led the second defendant to believe that she routinely worked until about 3 pm. The possibility that she was less than frank with the second defendant about her activities cannot be excluded. It is more likely than not that she did, in fact, deceive him.

QUESTIONS OF CREDIT

91. The plaintiff, in support of its case, adduced evidence from Mr Keen, his legal secretary of many years (Ms Howard), the external accountant who for many years attended to preparation of the plaintiff’s tax returns and financial statements and who assisted Mr Keen in discovery of the first uncovered of the first defendant’s misappropriations (Ms Hall), the bookkeeper who replaced the first defendant and who assisted Mr Keen to identify further fraudulent transactions (Ms Mennell) and the expert accountant, Mr Haynes.

92. The only witness called on the defendants’ side of the record was the second defendant himself.

93. Mr Haynes was not required for cross examination.

94. No challenge has been made to the credit of the plaintiff’s legal secretary, external accountant or replacement bookkeeper. They each gave evidence which was relatively formal.

95. In her affidavit the plaintiff’s replacement bookkeeper deposed to her examination of banking records and her cross-referencing of those to other (unidentified) records, testing how particular entries had been described by the defendant and the destination of funds. Neither her evidence, nor that of Mr Keen descended, into detail beyond identification of the fraudulent transactions made by the first defendant, accepted by the first defendant as having been made by her.

96. The parties’ competing submissions about the credit of the principal witnesses (Mr Keen and the second defendant) have to be understood in the context of the evidence as a whole. That is particularly so in relation to the plaintiff’s attack on the credit of the second defendant.

97. Much of the evidence adduced in the proceedings was documentary and, more than that, confined to bank statements (particularly those on the defendants’ side of the record) evidencing transfers of money unaccompanied by underlying primary documentation or the like evidencing the context of particular transfers.

98. That bare evidence is supported by reference to an uncontested “Master Spreadsheet” prepared by the NSW Police Force for the purpose of its investigation of the first defendant’s fraud. The spreadsheet takes the form of a tabular presentation of the 501 fraudulent transactions effected by the first defendant. It shows the date of each transaction, the amount of each transaction, the means by which each transaction was (electronically) effected from one account to another, the account from which funds were transferred in each transaction (uniformly, the plaintiff’s general account), and the accounts to which funds were transferred in each transaction (initially, the account in the joint names of the defendants and subsequently the account in the first defendant’s sole name).

99. The plaintiff sought to challenge the second defendant’s denial of knowledge of the first defendant’s fraudulent transfers largely by inviting him to accept (by reference to bank statements, without underlying primary materials) that a selection of transfers from the joint account, or other transactions, “must have” been effected by him, or to his knowledge, because, on the face of bank statements, they appeared to relate to payments (eg for petrol, motorcycle accessories, clothes, food or alcohol) that might, by a critical bystander, be attributed to him.

100. In my assessment, that line of cross examination was unproductive because:

1. the second defendant adhered to his evidence that he had not operated the joint account from the time in 2004 at which time he opened separate Westpac accounts in his own name;

2. his evidence about the circumstances in which he opened his separate accounts was not challenged;

3. his denial of ownership of particular transactions put to him was not contradicted by primary materials underlying bank statement entries; and

4. the passage of time between the particular transactions put to him and his cross examination contributed to the plausibility of a denial of ownership of what were distant transactions listed with no more than short formal descriptions in a bank statement.

101. The second defendant was not cross-examined to suggest that his evidence was false or unreliable in so far as he deposed that his decision to open his own separate bank accounts in 2004 was related to a period of separation from the first defendant; that he believed that the first defendant was repaying money owed to her mother; and that his decision to refinance the defendants’ Commonwealth Bank mortgage loan with a Police mortgage of his own in 2019 was related to a need to pay out the first defendant’s mother’s “granny flat” interest in the matrimonial home. The plaintiff did not contend that I should not accept this evidence. In the absence of a challenge to it I accept it.

102. The plaintiff did not suggest to the second defendant in cross-examination, or submit to the Court, that the second defendant’s departure from the police force in May 2022 was in some or other way connected with the pendency of these proceedings.

103. There is no suggestion that the second defendant lived an extravagant lifestyle that might ground a suspicion that he participated in activities supported by funding beyond his means. He led an ordinary life dominated by the shift work required of him as a police officer.

104. In my assessment, the second defendant gave his evidence in a calm, measured way that was responsive to questions put to him. He demonstrated a preparedness to make reasonable concessions. He was not, as the plaintiff contends, evasive. I accept him as a witness of truth.

105. I accept Mr Keen also as a witness of truth. Criticism of the reliability of his evidence, in my assessment, reflects no more than the fallibility of memory about particular transactions or events in the absence of primary records.

THE DILEMMA OF THE FIRST DEFENDANT: JONES v DUNKEL

106. From the perspective of both the plaintiff and the second defendant, the first defendant’s participation in the final hearing of the proceedings was awkward.

107. At the commencement of the proceedings both the plaintiff and the second defendant were content to proceed with the hearing notwithstanding doubts about whether the first defendant had been given sufficient notice of the listing of the proceedings for a final hearing. To the credit of both parties, however, steps were taken to communicate with the first defendant, with a view to her having an opportunity to appear at the hearing, which she did.

108. Without objection by any other party she participated in the hearing as an observer and, at the end of the plaintiff’s cross examination of the second defendant, she sought, and was allowed, an opportunity herself to cross examine the second defendant on terms that allowed the plaintiff a further opportunity to cross examine him before he was re-examined.

109. The first defendant did not seek an opportunity herself to give evidence. She confined herself to submissions which included admissions of fraudulent conduct, an assertion that she had deceived the second defendant as well as Mr Keen, and a complaint of unfairness attending the plaintiff’s pursuit of a judgment against the second defendant.

110. Neither the plaintiff nor the second defendant sought an opportunity to adduce evidence from the first defendant or to put questions to her. That was, I assume, a matter of forensic judgement.

111. In these circumstances, I decline to embrace the plaintiff’s submission that in assessing the evidence of the second defendant I should (by reference to Jones v Dunkel (1959) 101 CLR 298) draw against him an inference that no evidence adduced from her would have assisted his case.

112. Throughout the hearing of the proceedings counsel for the second defendant was scrupulous in the pains he took to distance his client from the first defendant notwithstanding their ongoing family connection. Counsel for the plaintiff, for his part, made no suggestion that the first and second defendants were in some way colluding in presentation of the second defendant’s case. In any event, any inference able to be drawn against the second defendant by reference to Jones v Dunkel cannot, of itself, displace the plaintiff’s onus of proof against the second defendant.

THE PLAINTIFF’S CASE AGAINST THE SECOND DEFENDANT

113. The starting point for analysis of the plaintiff’s claims against the second defendant is that, as an employee of the plaintiff charged with responsibility for managing funds in the plaintiff’s general account, the first defendant owed the obligations of a fiduciary to the plaintiff and, when she fraudulently misappropriated such funds, a trust attached to the misappropriated funds: Black v S. Freedman & Co (1910) 12 CLR 105; Robb Evans of Robb Evans & Associates v European Bank Ltd (2004) 61 NSWLR 75 at [111]-[116]; Heperu Pty Ltd v Belle (2009) 76 NSWLR 230.

114. The plaintiff frames its primary case against the second defendant upon an allegation that the second defendant knowingly received trust property so as to impose upon him accessory liability for the first defendant’s breach of trust according to the “first limb” of Barnes v Addy (1874) LR 9 Ch App 244 at 251. The plaintiff does not allege that the second defendant assisted the first defendant with knowledge of her dishonest and fraudulent design so as to attract the operation of the second limb of Barnes v Addy.

115. The plaintiff claims to have established that the second defendant:

1. is liable to it as a knowing recipient of trust property under the first limb of Barnes v Addy;

2. is liable to pay equitable compensation to the plaintiff in an amount commensurate with the sum misappropriated by the first defendant that he knew of;

3. in the alternative, is liable to pay equitable compensation to the plaintiff in an equivalent sum referable to the monies which were applied for his benefit by the payment of his credit card liabilities, his mortgage liabilities and household expenses;

4. further, or in the alternative, holds the plaintiff’s interest in the matrimonial property (registered in the name of the second defendant alone) on trust for the benefit of the plaintiff as constructive trustee, such interest being attributable to the plaintiff’s monies which were stolen by the first defendant and applied from the joint account in the names of the defendants against the “relevant” mortgage account.

116. The plaintiff contends that the second defendant “received” trust property of the plaintiff:

1. as a signatory to the joint account when stolen funds were transferred from the general account of the plaintiff into the account in the joint names of the defendants;

2. alternatively, when monies were transferred by the first defendant from the joint account into the credit card account of the second defendant; and

3. when monies were transferred into the mortgage account, thereby increasing the equity of the second defendant in the matrimonial home.

117. In a cascading set of submissions, made by reference to categories of knowledge identified in Baden v Société Générale pour Favoriser le Developpement du Commerce et de l’Industrie en FranceSA [1992] 4 All ER 161 at 242; [1993] 1 WLR 509 at 582, the plaintiff contended that the second defendant had knowledge of the first defendant’s dishonest and fraudulent design (within the first four Baden categories) in that:

1. the second defendant actually knew that the monies transferred into the joint account were the product of the first defendant’s fraud at the time those monies reached the joint account;

2. alternatively, the second defendant wilfully shut his eyes to the obvious, being large tranches of funds which he knew were not referable to the first defendant’s wages and which were the product of fraud (travelling through the joint account);

3. further, or in the alternative, the second defendant was put on inquiry in July 2012 when he discovered a pattern of withdrawals and deposits made by the first defendant in respect of the “mortgage” (home loan) account, when considered in reference to her previously reported wages and the wages to be expected of a part-time bookkeeper earning, at that time, $30 per hour; and

4. further, or in the alternative, the second defendant’s knowledge of the large amounts of money travelling through the “mortgage account”, in contradistinction to the first defendant’s previously reported and expected lawfully derived income as a part time bookkeeper, would have indicated to an honest and reasonable person that the monies passing through the joint account were obtained fraudulently.

118. The plaintiff’s secondary claim for restitution of “money had and received” folds into its Barnes v Addy claim.

119. Paraphrasing the plaintiff’s final written submissions, its case based on an allegation of monies had received is summarised in the following terms:

“[40]   … This remedy is appropriate in relation to the monies which have been dissipated by way of transactions on the Joint Account. It is submitted that the ‘dissipation’ occurred by reason of the following:

(a)   The discharge of [the second defendant’s] credit card liabilities;

(b)   the purchase of household goods and services; and

(c)   the cash withdrawals that were made during the period following the misappropriation of funds.

[41]   In circumstances where the funds have been dissipated, it is accepted that [the second defendant] will not be liable if he is a volunteer who did not possess the requisite knowledge at the time of the dissipation. However, it is the plaintiff’s case that [the second defendant] did possess that knowledge and as such, he ought to be characterised as a knowing recipient under the first limb of Barnes v Addy.”

THE DEFENDANTS’ RELATIONSHIP

120. The second defendant’s state of knowledge (or, perhaps, more accurately, any notice he may have had) of the first defendant’s fraudulent misappropriation of the plaintiff’s funds, and the timing of any knowledge to be attributed to him or any notice he may have had of the misappropriations, needs to be assessed in the context of his familial relationship with the first defendant.

121. The evidence on that topic is essentially that of the second defendant. Much of it was not challenged in cross examination or otherwise.

122. The evidence about the defendants’ domestic life is fragmentary. In an affidavit affirmed on 15 November 2021 the second defendant deposed that the first defendant and himself “have been in a relationship since 1983”.

123. In cross examination of the second defendant about particular transactions ostensibly involving private expenditure, the second defendant deposed that the transactions appeared to be expenditure by the first defendant related to activities of a son (a young motorbike enthusiast) or a daughter (whose interest in horses could explain where, to and from a horse paddock, the first defendant obtained fuel for her car). The evidence makes no mention of any other children.

124. The only other family member mentioned in the evidence is the mother of the first defendant (the second defendant’s “mother-in-law”) who shares a first name the same as that of the first defendant. The older woman financed the building of a granny flat, for her own occupation, on the land upon which the defendants’ matrimonial home is built. After a falling out within the family, the older woman was paid out of funds made available to the second defendant when he refinanced, with the Police Bank, the home loan earlier provided by the Commonwealth Bank on the security of the matrimonial home.

125. The second defendant purchased in 1989 the land upon which the matrimonial home was built in the latter part of 1991. The evidence includes a Commonwealth Bank letter dated 10 July 1991 recording the approval of a “building loan” to the defendants.

126. 2004 was a seminal year for the defendants. In the early part of that year they refinanced their home loan with a Commonwealth Bank as they planned some alterations to the matrimonial home. It was at that time that they set up the Commonwealth Bank account (with a number ending in “007”) in their joint names. At about the same time there was a short period of separation as the first defendant moved out of the matrimonial home, with the children, for a period of time not specified in the evidence. On 28 May 2004 the second defendant opened his own bank accounts with Westpac: a main account, a savings account and a Visa account.

127. In 2015 the second defendant’s mother-in-law built a granny flat in the rear yard of the matrimonial home for her to live in. She paid for the construction. On 13 July 2015 she and the second defendant executed a “Granny Flat Agreement” prepared in the office of the plaintiff which acknowledged that the mother-in-law had constructed the granny flat at a cost of $135,000 for which the second defendant granted her a life tenancy on terms that permitted the agreement to be terminated by either party on 12 weeks’ written notice, with provision for a financial adjustment to be made upon termination.

128. In 2018 the defendants’ relationship with the older woman deteriorated to the point she requested to terminate the Granny Flat Agreement. In order to “payout” his mother-in-law and to provide funds for renovation of the matrimonial home, the second defendant refinanced the Commonwealth Bank home loan by a personal borrowing from the Police Bank which provided funds to discharge the Commonwealth Bank mortgage and to pay out his mother-in-law. His loan application to the Police Bank was dated 14 August 2018

129. In evidence is a bank statement printed by Police Bank Ltd (on 9 November 2021) recording transactions on the second defendant’s “Goldrate Home Loan” for the 2019 calendar year.

130. The refinancing arrangement was settled on 22 January 2019. The Commonwealth Bank was paid out with a payment of $41,755.20. The second defendant’s mother-in-law was paid out with a payment of $142,375. The balance of the Police Bank’s $250,000 loan was applied to the payment of expenses and otherwise transferred to an account which, in cross examination, was identified by the second defendant as his “personal account”.

120. It was to that “personal account” the second defendant on 6 December 2019 transferred from his Police Bank home loan account the sum of $13,248 shortly thereafter paid to the plaintiff in response to a letter written by Mr Keen (not reproduced in the evidence) in which he identified the three fraudulent “ATO” transfers that had been identified by Mr Keen with the help of his external accountant.

THE SECOND DEFENDANT’S (NON) USE OF THE JOINT ACCOUNT

132. The Plaintiff’s Pleaded Case. In paragraphs 10 and 13(a) of its statement of claim, the plaintiff describes the Joint Account as “the First and Second defendant’s Bank Account” [sic] and alleges that the second defendant “had access to and was a signatory in respect of the First and Second Defendant’s Bank Account” [sic] throughout the time the first defendant misappropriated the plaintiff’s funds.

133. The statement of claim includes no express allegation that the second defendant in fact accessed the Joint Account or caused transactions on the account to occur.

134. The second defendant accordingly advances the following submission:

“It is not alleged that [the second defendant] in fact accessed the joint account or otherwise caused transactions to occur on it. It cannot now be alleged, as a matter of procedural fairness, that [he] accessed funds in the joint account knowing that the joint account to contain funds derived from criminal and fraudulent conduct. It must also follow that [he] cannot be criticised for having failed to address a handful of specific transactions amongst the thousands recorded in the bank statements for the joint account in the absence of any pleading or particularisation that he was the person who caused the transactions.”

135. The pleading point may be well taken but no objection was taken to the plaintiff’s cross-examination of the second defendant designed to establish that he personally effected particular transactions and, therefore, must be taken to have known that the Joint Account remained open between 2004-2019. The cross examiner’s questions were relevant to the second defendant’s credit if not particular pleaded issues.

136. As it happens, I am satisfied, on the evidence, that the second defendant did not in fact access the joint account or cause transactions on the account to occur during the time the first defendant misappropriated the plaintiff’s funds.

137. The Character of the Joint Account, 2004-2019. I accept the second defendant’s evidence that he did not use the Joint Account after 28 May 2004, the date upon which he opened his own Westpac accounts; that he did not receive bank statements relating to the Joint Account after 28 May 2004; and that he believed that the account had been closed in 2004. As between the first and second defendants the Joint Account was to all intents and purposes an account of the first defendant alone. Bank statements were directed by the first defendant to an address other than the matrimonial home.

138. The fact that the second defendant remained a (non-active) signatory on the Joint Account does not, of itself, justify a finding that he used the account or that it was materially otherwise than an account of the first defendant alone.

139. The Commonwealth Bank “Discharge/Refinance Authority Form”. This assessment is not displaced by the fact that, in anticipation of his refinancing arrangement with the Police Bank, he on 3 January 2019 (in common with the first defendant) signed a Commonwealth Bank form entitled “Discharge/Refinance Authority Form” (in the form of a printed form with typed entries) by which the defendants, as borrowers, directed the Commonwealth Bank to deposit any “excess funds” from their Commonwealth Bank home loan account into the Joint Account.

140. The second defendant deposed that when he signed the form in 2019 he thought that the joint account had been closed in 2004; that, when he signed the form, he did not notice the reference to the joint account; and that, because the Commonwealth Bank home loan was being paid out by the Police Bank on a refinancing of the Commonwealth Bank loan, he did not expect that there would be any excess funds.

141. Significance may attach to the facts that the form appears to have been signed by the defendants on the same date and, in a typed entry, the first defendant’s name and ostensibly her mobile number and email address are recorded against the descriptor “Main contact details”.

142. The form is consistent with the second defendant’s evidence that he left accounting business to the first defendant, as indeed did Mr Keen in his sphere.

143. An inference that the first defendant and/or the Commonwealth Bank prepared the document and the second defendant simply signed it without a close reading is consistent with his denial of knowledge of the continuing existence of the Joint Account. He did not deny that he signed the form or that he would have read it before signing it. Nevertheless, the fact of the signature, upon an internal record of the Commonwealth Bank designed to bring a relationship with the Commonwealth Bank to an end, is not sufficient to persuade me that the second defendant “must have” known of and operated the Joint Account between 2004-2019 notwithstanding the second defendant’s denials and unchallenged evidence of the circumstances in which the second defendant says that he ceased to use the Joint Account in 2004 and thereafter did not receive bank statements directed away from the matrimonial home.

144. The first defendant was not questioned about the “Discharge/Refinance Authority Form” by either the plaintiff or the second defendant.

145. Private Expenditure Recorded in Bank Statement Entries. In my opinion, there was no force in the plaintiff’s cross examination of the second defendant on Commonwealth Bank statements for the Joint Account in respect of entries ostensibly relating to the purchase of meals at Quakers Inn (on four occasions in 2016 and two in 2018); the purchase of fuel at the BP service station in Quakers Hill (on three occasions in 2013) and the purchase of motorcycle accessories (on one occasion in 2016 and another in 2017).

146. The second defendant denied ownership of those transactions and, without contradiction beyond assertions of the cross examiner, offered explanations to the effect that they may have been effected by the first defendant. She had occasion to pay for meals at the Quakers Inn and to buy fuel at the BP service station in Quakers Hill. Contrary to an assumption of the plaintiff, she herself owned a motorcycle and the defendants’ son was a young motorcycle enthusiast.

147. The plaintiff’s attempt to link the second defendant personally with entries in Commonwealth Bank bank statements evidencing occasional payments of energy bills, water bills and council rates was based upon evidence of the second defendant that the general division of family expenses, as between himself and the first defendant, was that he paid utility bills.

148. The plaintiff’s attempt to brand the second defendant with authorship of transactions on the joint account relating to the payment of utility bills failed, in my assessment, because the plaintiff’s reading of the second defendant’s evidence was not a fair reading of the evidence. The second defendant did not say that he always paid all utility bills, and there was nothing to link him to the payment of the isolated examples of transactions to which he was taken in cross-examination.

THE DEFENDANTS’ COMMONWEALTH BANK HOME LOAN ACCOUNT

149. Although the title to the defendants’ matrimonial home is and was at all material times registered in the name of the second defendant alone, it was mortgaged to the Commonwealth Bank between mid-1991 and early 2019 as security for a home loan made by the Bank to both defendants.

150. The Home Loan Account was an account in the names of both defendants. Both had authority to operate the account.

151. The evidence of the second defendant (which I accept) is that the only transactions on the account effected by him were routine fortnightly payments of $900 into the account, from his income as a police officer, to service the Bank’s loan.

152. I infer that all other transactions on the account (withdrawals and deposits) were transactions effected by the first defendant.

153. Between 1 July 2012 and 31 December 2018 or thereabouts the first defendant withdrew a total of $124,950 from the Home Loan Account.

154. During the same period the first defendant transferred from the defendants’ Joint Account to the Home Loan Account the total sum of $58,404.

155. The first defendant treated the Home Loan Account as a personal banking facility, regularly redrawing loan funds and making payments off the loan, reflected in debit and credit entries, and a fluctuating debit balance (trending downwards) for the account, recorded in bank statements.

156. Debit transactions (other than those relating to interest charges) were commonly described simply as “Repayment Redraw Netbank”. Credit transactions were commonly described simply as “Repayment/Payment”. Entries were no more informative than that. The second defendant’s fortnightly repayments of $900 from his Police income appeared in the bank statements as a “Repayment/Payment”.

157. All entries relating to a “redraw” or “payment” transaction in the Home Loan Account related to round sums of money.

158. The first defendant’s transactions on the account not uncommonly involved debit and credit entries of a similar magnitude in close proximity in a manner consistent with the second defendant’s perception that the first defendant generally “repaid” much of the money which she redrew against the loan, a pattern which the second defendant noticed in 2012 and counselled the first defendant against because, to his annoyance, it delayed repayment of the loan.

159. Upon an analysis of the bank statements for the Home Loan Account and the Joint Account undertaken by the second defendant for the purpose of these proceedings, which I accept, during the period between 2012 and 2019 the first defendant transferred from the Home Loan Account to the Joint Account a total sum of $94,600: $6,590 in 2012; $15,520 in 2013; $15,700 in 2014; $17,500 in 2015; $16,350 in 2016; $14,350 in 2017; $8,590 in 2018; and $0 in 2019.

160. On the second defendant’s analysis, which I accept, between 2012 and 2019 the first defendant transferred from her personal account (into which the plaintiff paid her legitimate wages) into the Joint Account a total sum of $195,749.38: $4,351 in 2012; $8,232 in 2013; $35,003.56 in 2014; $40,424 in 2015; $44,175 in 2016; $37,227.82 in 2017; $22,009 in 2018; and $4,327 in 2019.

CONSIDERATION OF THE PLAINTIFF’S CASE AGAINST THE SECOND DEFENDANT

The Second Defendant’s Non-Receipt of Funds in the Joint Account

161. I reject the plaintiff’s primary submission that the second defendant “received” stolen funds of the plaintiff when the first defendant deposited them in the defendants’ joint account, at all material times operated by the defendant alone. The fact that the second defendant remained a signatory on the account is not enough, of itself, to attribute to him receipt of funds deposited to the account.

162. As acknowledged by the Court of Appeal in Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42 at [124], National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251 at 268-269 is “authority for the proposition that in circumstances where funds have been placed in a bank account of a party, that party will not be taken to have received the funds unless he, she or it ought to have known of their presence through some fault. In those circumstances, the relevant fault of the recipient and the consequent conclusion that he, she or it ought to have known of the receipt will then suffice for non-repayment of the funds to be unjust or against justice and equity”.

163. The passage of the judgment of Gibbs CJ in National Commercial Banking Corporation of Australia Ltd v Batty reformulated by the Court of Appeal in Ford v Perpetual Trustees Victoria Ltd is in the following terms:

“Where, because of the action of a servant or agent acting outside the scope of his authority, or for that matter because of the action of a complete stranger, money has been paid into the account of the defendant, who has technically received it, although he is quite unaware of that fact, and the money is then misappropriated, still without the knowledge or intervention of the defendant, there seems to be no reason in justice or equity why the defendant should be answerable for the money simply because theoretically he had the means of knowing that the money was in the account. In principle, in those circumstances, the defendant ought not to be liable unless, before the money was misappropriated, he knew or ought to have known that he had possession or control of it. In other words, where the defendant has not had the benefit of the money, has not played any part in disposing of it and was ignorant of the fact that it was theoretically under his control, he should not be liable in the absence of fault on his part.”

164. In my opinion, the second defendant was ignorant of the fact that stolen money in the joint account was theoretically under his control; he played no part in deployment of the joint account as a repository for stolen funds; he derived no benefit from stolen funds in the joint account; and no fault can be attributed to him in his non-involvement in the operation of the joint account after he had ceased operating the account following his temporary separation from the first defendant.

The Plaintiff’s Claim to a Proprietary Remedy via the Home Loan Account

165. I accept that the first defendant paid into the Home Loan Account from the Joint Account the total sum of $58,404 and that those monies can arguably be characterised as stolen funds “received” by the second defendant. However, the plaintiff’s claim for a proprietary remedy in the form of a charge over the second defendant’s residence must fail. First, because the second defendant lacked the knowledge of the first defendant’s fraud necessary to charge his property. Secondly, because trust money cannot be traced into an overdraft bank account (that is, as was the Home Loan Account, an account recording an indebtedness to the bank).

166. The second defendant’s lack of contemporaneous knowledge. I accept that at the time that those monies were deposited in the Home Loan Account by the first defendant the second defendant had no actual or constructive knowledge of any taint attaching to them and any benefit enjoyed by him had been realised no later than when the defendants’ joint home loan with the Commonwealth Bank was discharged from funds borrowed by the second defendant from the Police Bank, well before the second defendant acquired knowledge of the first defendant’s fraud.

167. The plaintiff’s case for a finding of constructive knowledge in the second defendant of the first defendant’s theft (and, hence, her appropriation of funds to which a constructive trust attached) lacks clarity as to what the second defendant is alleged to have known, and when.

168. I accept the evidence of the second defendant that, as a fact, he had no knowledge of any wrongdoing on the part of the first defendant until Mr Keen, on or about 19 November 2019, told him that she had taken funds from the plaintiff’s law firm without Mr Keen’s consent.

169. The second defendant had no prior knowledge of the first defendant’s fraud and even then (when Mr Keen spoke to him) the extent of his knowledge of her fraud was limited to the three transactions totalling $13,248 drawn to his attention by Mr Keen. His prompt reimbursement of that amount to the plaintiff I take to be indicative of the conduct of an honest man. There has been no suggestion that he reimbursed the plaintiff to forestall further investigation of the first defendant’s misconduct, either personally or in collusion with the first defendant.

170. I do not accept the plaintiff’s contentions that constructive knowledge of the first defendant’s fraud should be attributed to the second defendant because, the plaintiff alleges, he wilfully shut his eyes to the obvious; he was put on inquiry; or his knowledge would have indicated to an honest and reasonable person that monies passing through the joint account were obtained fraudulently.

171. Throughout the period she stole money from the plaintiff the first defendant actively concealed her fraud from Mr Keen, his staff and the second defendant. Mr Keen uncovered the fraud (and, more particularly, its extent) only with professional accounting assistance after the departure of the first defendant from the firm. That fact does not bear directly on the second defendant’s state of knowledge, but it does lend support to the proposition that the second defendant’s denial of actual or constructive knowledge of the first defendant’s fraud has a reasonable foundation.

172. I do not regard the second defendant’s knowledge that the first defendant had developed a pattern of “re-drawing” funds available on the home loan account, or suspicions about the possibility that she was gambling, as putting him on inquiry about the possibility that the first defendant was deploying stolen funds or as an objective indicator of that fact. The second defendant’s concern was reasonably directed to delays in payment down of the home loan if the home loan account was not consistently paid down. He reasonably took comfort from the fact that the first defendant’s pattern of behaviour included payments of the home loan as well as re-draws.

173. The second defendant had less reason than Mr Keen to maintain a personal oversight over her financial transactions. Both men relied upon her competency in dealing with financial matters, not suspecting misconduct. Both men were preoccupied with their own work. The second defendant knew, in addition, that the first defendant was repaying money owed to her mother.

174. The second defendant did not know that the first defendant had a gambling problem until after the event. Even then, when informed of the fact that she had a gambling problem, Mr Keen did not believe it. She had covered her tracks in her dealings with both men.

175. Trust money cannot be traced into an overdrawn bank account. At the time the second defendant (on about 19 November 2019) first acquired knowledge of the first defendant’s fraud, he held no stolen funds of the plaintiff. Stolen funds of the plaintiff cannot be traced into the mortgaged property by reason only of the second defendant’s discharge of the mortgage. Trust monies cannot be traced into an overdrawn bank account: Australian Securities Commission v Buckley (1996) 7 BPR 15,024 at 15,036; Re Global Finance Group Pty Ltd (in Liq) (2002) 26 WAR 385 at [129]-[135]. Cf, Hagan v Waterhouse (1992) 34 NSWLR 308 at 358. The plaintiff does not contend that it was subrogated to rights of the Commonwealth Bank by reason of a reduction in the mortgagor’s debt attributable to stolen funds credited against the home loan account. No reduction in liabilities owed by the second defendant on the home loan account, can support a finding that the second defendant received and retained stolen funds of the plaintiff chargeable against his property.

176. At the time when (on or about 19 November 2019) he first learned of the first defendant’s fraud he held no property of the plaintiff for which he was liable to account to the plaintiff.

The Plaintiff’s Claim to a Personal Remedy Against the Second Defendant

177. The plaintiff’s case for a personal remedy against the second defendant was squarely based upon an acceptance that the second defendant could not be held liable if he “did not possess the requisite knowledge” of the defendant’s fraud at the time funds were “dissipated by way of transactions on the joint account”.

178. I am satisfied that the second defendant had no knowledge (in any degree) of the first defendant’s fraud at the time the first defendant transferred “stolen funds” into the Home Loan Account, or made payments against the second defendant’s Visa account, to pay down debt on those accounts.

177. I am satisfied that at the time the second defendant first learned of the first defendant’s fraud (on or about 18 or 19 November 2019) he held no property of the plaintiff for which he should, in conscience, account.

178. I am satisfied that the second defendant cannot be held liable, in conscience, to account to the plaintiff for any alleged “benefit” said to have accrued to him through the first defendant’s deployment of funds in the joint account (operated exclusively by her) at a time when he lacked all knowledge of her fraud. The evidence does not extend to an appropriation of the first defendant’s payments into the Home Loan Account as between principal and interest or of any change related to those payments in the value of the property. The first defendant’s payments of the second defendant’s Visa card debts funded her own transactions and were in the character of current, rather than capital expenditure. I accept that, in all the circumstances of the case, the second defendant was in substance a victim of the first defendant’s fraud, not a beneficiary. Financially, he was a net loser. At her hands, he lost more than he gained from her fraudulent deployment of funds.

179. In any event, the second defendant discharged any liability he had on the Home Loan Account and the Visa Account, paid out his mother-in-law’s entitlement to “granny flat” compensation, and assumed fresh liabilities with the Police Bank well before he had any knowledge of the defendant’s fraud.

Overview

182. The plaintiff and the second defendant both claim to have lost money to the first defendant’s fraud without fault on their part. On one view, accepting that both Mr Keen and the second defendant were ignorant of the first defendant’s fraud until 18 or 19 November 2019 or thereabouts, an underlying question for determination by the Court might be thought to be whether the plaintiff can share some of its loss with the second defendant by reason of the first defendant’s deployment of the joint account as a vehicle for her fraud.

183. The plaintiff has placed emphasis on its proprietary claim, not forgetting its personal claim, against the second defendant. It is necessary to consider the two types of claim separately, as I have hitherto done. There are, however, some common questions.

184. First, did the second defendant “receive” stolen money when it was deposited or retained in the joint account? My answer is, “No”. He was not involved in the operation of the joint account at the time of the first defendant’s thefts. He had no knowledge of the operation of the account at that time. Fault is not to be attributed to him by reason of his lack of knowledge or control of the account. He did not benefit from the deposit of stolen monies in the account or their retention there.

185. Secondly, what, if any, knowledge did the second defendant have of the first defendant’s fraud; when did he first acquire that knowledge; and what was the extent of his knowledge? My answer is that, the second defendant had no actual or constructive knowledge of the first defendant’s fraud until Mr Keen alerted him to it on 18 or 19 November 2019, and the extent of the funds stolen was not known until some later date.

186. The significance of this is that it is only when the second defendant acquired actual or constructive knowledge (in trust law and the law of restitution) that he may have acquired an obligation, in conscience, to account to the plaintiff for monies held by him.

187. In so far as a consideration relevant to any obligation the second defendant may have to account to the plaintiff for any “benefit” received by him, at what time or times is an assessment of benefit to be made? This is relevant because the first defendant was engaged in “contra” dealings with both the Home Loan Account and the Credit Card Account. Moreover, at the time an obligation to account to the plaintiff may have arisen, the second defendant held no stolen funds of the plaintiff, the first defendant had utilised a significant amount of funds on his account, at his expense so that he too suffered a loss at the first defendant’s hands, and he had (without notice of any fraud) reordered his affairs by discharging his liabilities on the Home Loan Account and the Visa Account, paying out a debt owed to his mother-in-law referrable to his residence, and assuming a fresh liability to the Police Bank. There is no evidence that any deployment of “stolen funds” effected, or was accompanied by, a change in the value of the mortgaged property or that the first defendant’s payments from the joint account (controlled exclusively by her) were appropriated against principal or interest in a way that conferred a measurable benefit on the second defendant in all the circumstances of the case.

188. In relation to the plaintiff’s claim for an equitable charge over the title to the second defendant’s residence, can stolen money be traced into the second defendant’s residence through its deposit in the Home Loan Account? My answer is “no” for the following reasons:

1. Trust money cannot be traced into an overdraft account.

2. At the time the second defendant’s conscience was engaged the Home Loan Account had been closed as a consequence of discharge of the Commonwealth Bank’s mortgage.

189. I am not satisfied that the plaintiff has discharged its onus in proving its case against the second defendant.

CONCLUSION

190. Subject to allowing the parties an opportunity to be heard as to the form of orders to be made and costs, I propose to make orders to the following effect:

1. JUDGMENT for the plaintiff against the first defendant in the sum of $1,062,461.49 plus interest under section 100 of the Civil Procedure Act 2005 NSW.

2. ORDER that the plaintiff’s claim against the second defendant be dismissed.

3. DECLARE that the plaintiff has no right, title or interest in the residence of the second defendant.

4. ORDER that the plaintiff withdraw its caveat on the title of the second defendant’s residence.

5. ORDER that the first defendant pay the plaintiff’s costs of the proceedings against her.

6. ORDER that the plaintiff pay the second defendant’s costs of the proceedings against him.

191. I will entertain submissions about the date, or dates, from which pre-judgment interest should accrue against the first defendant. In the absence of any submissions I will order that interest accrue from 19 November 2019, the date upon which Mr Keen reported the first defendant’s fraud to the police.

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Decision last updated: 20 September 2023