Samuel John Malouf v MBF Australia Limited - [2007] NSWSC 1020

No judgment structure available for this case.

CITATION: Samuel John Malouf v MBF Australia Limited [2007] NSWSC 1020

HEARING DATE(S): 30/8/07, 31/8/07

JUDGMENT DATE :
14 September 2007

JURISDICTION: Equity Division

JUDGMENT OF: Einstein J

DECISION: Plaintiff’s case made out. Parties to bring in short minutes of order on which occasion final orders can be made and costs may be argued.

CATCHWORDS: Equity - Fraud committed on plaintiff by third party - Proceeds of fraud automatically impressed with trust - Proceeds of fraud received by defendant - Whether defendant bona fide purchaser for value without notice - Barnes v Addy - Constructive trust - Lease contract between plaintiff and defendant executed subsequent to defendant acquiring notice - Contract - Whether an informal license or tenancy arrangement arose upon third party taking up possession of defendant’s premises - Want of consideration for the cheque received by the defendant - Defendant’s decision to allow tenant into possession was not the quid pro quo for the funds the defendant received

LEGISLATION CITED: Crimes Act 1900 (NSW)

CASES CITED: Agip (Africa) Ltd v Jackson [1990] 1 Ch 265
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Barnes v Addy (1874) LR 9 Ch App 244
Black v S Freedman & Company (1910) 12 CLR 105
Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671
David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353
Evans v European Bank Ltd (2004) 61 NSWLR 75
Kalls Enterprises Pty Limited (In Liquidation) v Baloglow [2007] NSWCA 191
Lazarus Estates Ltd v Beasley [1956] 1 QB 702
Lipkin Gorman v Karpnale Limited [1991] 2 AC 548
Menzies v Perkins [2000] NSWSC 40
Nelson v Larholt [1948] 1 KB 339
Orix Australia Corporation Limited v Moody Kiddell & Partners Pty Limited [2005] NSWSC 1209
Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516
Spangaro v Corporate Investment Australia Funds Management Limited (2003) 47 ACSR 285
SZFDE v Minister for Immigration and Citizenship [2007] HCA 35
Yaroomba Beach Development Co v Coeur De Lion Investments (1989) 18 NSWLR 398

PARTIES: Samuel John Malouf (Plaintiff)
MBF Australia Limited (Defendant)

FILE NUMBER(S): SC 6089/03

COUNSEL: Mr M Einfeld QC, Mr J Horowitz (Plaintiff)
Mr M Cashion SC, Mr R Scruby (Defendant)

SOLICITORS: Strategy Legal (Plaintiff)
Cutler Hughes Harris (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Friday 14 September 2007

6089/03 Samuel John Malouf v MBF Australia Limited

JUDGMENT

The proceedings

1 These proceedings are brought by Mr Samuel Malouf following a fraud committed upon him by a third party, Mr Sam Hill. They involve the circumstances in which the defendant MBF [which was negotiating to grant a lease to Mr Hill's company SRL Technologies Pty Ltd] became the payee of a particular cheque in the sum of $165,000 (‘the Cheque’). The plaintiff on a particular occasion, drew the attention of an employee of MBF to what the plaintiff claimed to have been a fraud committed upon him in relation to the $165,000 cheque MBF received. At the time the Cheque was received MBF held the proceeds in escrow for SRL Technologies pending its procuring a bank guarantee following which MBF intended to execute the lease. This was the state of affairs when MBF was put on notice of the fraud. In due course and after MBF executed the lease it treated the funds paid to it as moneys to which it was entitled by reason of the terms of the lease.

2 The essential principle upon which the plaintiff relies is that the fraudster held the funds on trust and could pass on to MBF, no better title than he himself had. The proposition is that upon receipt of the Cheque, MBF in the particular circumstances, held that Cheque [or to be more specific, the proceeds thereof] on trust for the plaintiff and continues presently to hold those proceeds on the same trust.

3 Although MBF contested the claim that a fraud had been committed, the clear finding on the evidence is that the commission of such a fraud took place.

The issues

The plaintiff’s case

4 Without being exhaustive the plaintiff’s case [put on various bases some of which overlap] includes the propositions that:

i. the subject Bank Cheque or its proceeds were held on trust by Mr Hill or his company for the plaintiff;

ii. Mr Hill’s actions in causing the Cheque to be paid to MBF was in breach of that trust; and

5 The plaintiff claims to be able to trace into the proceeds of the Cheque and/or that a constructive trust arose under the first limb of Barnes v Addy (1874) LR 9 Ch App 244. The circumstances are said to have been such as to put a reasonable man on enquiry. MBF is said to have failed to make such an enquiry. The employee of MBF [Mr Hartley] is said to have shut his eyes to the problems which faced MBF, and/or to have wilfully and recklessly failed to make such enquiries as a reasonable person would have made.

6 The plaintiff also claims that a Quistclose trust arose in the circumstances explained below.

7 The plaintiff also pursues a claim in restitution contending that MBF was unjustly enriched by the proceeds of the Cheque.

The defendant’s case

8 MBF disputes all of these contentions. Again without being exhaustive, MBF in general contends that the plaintiff’s case is misconceived by reference to two false propositions:

i. the first is that MBF received the Cheque as a volunteer;

9 MBF’s case is that:

i. it gave consideration for the Cheque;

ii. the Cheque was deposited into a bank account;

iii. its proceeds were immediately mixed with other funds;

iv. no trust ever arose in respect of the Cheque proceeds;

v. the plaintiff never had property in the Cheque so as to constitute Mr Hill a trustee;

Quistclose

10 MBF puts forward a number of alternate arguments concerning the plaintiff’s contentions of MBF’s failure to provide consideration.

11 In truth MBF put forward a plethora of suggested hurdles to the plaintiff’s case more appropriately dealt with after a recital of the facts.

The facts

12 Many of the facts were not in issue. I proceed to broadly summarise the factual findings;

[in effect by simply repeating the plaintiff’s chronology almost all of which was accepted by MBF as correct (where MBF took issue with particular facts having been proven its contentions in that regard are rejected)]:

i. in October 2000, Mr Malouf met Mr Sam Hill, a director of Isagila Investments Pty Limited (“Isagila”);

iii. Subsequently, Mr Hill informed Mr Malouf that the insurance policy could be obtained for a “full payment” of A$165,000; Mr Malouf agreed to pay Mr Hill the sum of A$165,000 for the purposes of obtaining the insurance cover from Lloyds.

iv. Mr Malouf did not have the funds with which to pay Mr Hill the A$165,000, and he [with his wife as co-borrower and co-mortgagor] arranged a short term loan of the funds required from Jarong Pty Ltd.

v. When Mr Malouf asked Mr Hill whether the cheque should be made out to Lloyds of London, Mr Hill directed Mr Malouf to make the cheque payable to MBF.

vi. On 23 November 2000, Mr Malouf delivered to Mr Hill a bank cheque no. 962193, dated 23 November 2000, made payable in the sum of $165,000 to MBF.

vii. On 24 November 2000, Mr Malouf and Mr Hill executed a document entitled “CONTRACT FOR LOAN FIVE MILLION UNITED STATES DOLLARS (USD$5,000,000.00)” (the “Contract”), whereby Isagila agreed to lend to Mr Malouf US$5 million; the Contract required Mr Malouf to pay to Isagila US$110,000 as the premium for insurance cover to be arranged by Isagila within ten days of receipt; the Contract also provided that if the Loan did not proceed the amount paid for the insurance premium would be returned to Mr Malouf.

viii. The Contract was executed by Mr Hill as managing director of Isagila [Malouf Aff. Ex. SM1, p.17]. Mr Hill advised Mr Malouf that it would take between 10 and 14 days for the Loan proceeds to be deposited into Mr Malouf’s bank account.

ix. From 27 November 2000, Mr Malouf telephoned Mr Hill every two or three days to enquire as to progress of the Loan; in early December 2000 Mr Hill informed Mr Malouf that he was “just waiting on a policy number from Lloyds of London” .

x. Following further enquiries and a final demand by Mr Malouf, on 22 December 2000 Mr Hill produced to Mr Malouf a cheque drawn on a bank account of Isagila for $186,034.25, made payable to the company which had lent to Mr Malouf the $165,000 previously paid by him. This cheque was delivered by Mr Malouf to his lender but was dishonoured on presentation.

Mr Malouf: “Your cheque has bounced.”

Mr Hill: “I stopped the cheque because I wasn’t comfortable. I am being pursued by William and all these people wanting their money back.”

Mr Malouf: “What about my money?”

xii. In January 2001, Mr Malouf attempted on numerous occasions to contact Mr Hill, but was unable to do so. Mr Hill did not return any of Mr Malouf’s telephone calls.

xiii. Mr Malouf never received the Loan. No insurance cover was ever issued by Lloyds of London. Lloyds of London did not issue insurance cover of the type promised by Mr Hill. Mr Malouf then in late January 2001 reported Mr Hill to the police.

xiv. On 13 February 2001, Mr Malouf received a letter from Isagila (signed by Mr Hill), in which Mr Hill asserted that Isagila had “ no other option but to terminate and dissolve ” the Contract because Mr Malouf had not paid US$110,000 (the figure initially requested by Mr Hill), but only A$165,000 (the sum subsequently requested and received by Mr Hill).

xv. Mr Hill was arrested on 11 May 2001 and charged with obtaining money by deception in relation to the $165,000 that he received from Mr Malouf, and other monies obtained from another victim of a similar fraud. Mr Hill was subsequently indicted on six counts of obtaining money by deception under section 178BA of the Crimes Act 1900 (one of which related to Mr Malouf). The Director of Public Prosecutions accepted an offer from Mr Hill to plead guilty to two of those counts.

MBF’s Receipt of the Monies

xvi. As at November 2000, Hill was also a director of a company by the name of SRL Technology Corporation Pty Limited (“SRL”). SRL was engaged in negotiations with MBF to enter into a lease of MBF’s property at Level 10, MBF Centre, 97-99 Bathurst Street, Sydney (the “Premises”).

xvii. On 4 December 2000, MBF sent a proposed lease agreement (the “Lease”) and car park licence agreement (the “Licence”) to solicitors acting for SRL in relation to the proposed Lease.

xviii. On 6 December 2000, SRL’s solicitors returned to MBF copies of the Lease and Licence, as well as the Bank Cheque for $165,000 on account of rent and outgoings. The proposed Lease included a requirement that the lessee might obtain a bank guarantee acceptable to the lessor.

xix. On or about 8 December 2000, MBF deposited the Bank Cheque into its bank account number 0-10-03078-0 held with The Chase Manhattan Bank.

xx. on 12 February 2001, Malcolm Hartley, the National Property and Facilities Manager of MBF, wrote to SRL complaining of SRL’s failure to provide the Bank Guarantee required by MBF before it would grant the Lease. MBF demanded provision of the Bank Guarantee within seven days, in the absence of which it indicated its intention to let the Premises to an alternative tenant.

xxi. On or about 13 February 2001, Mr Malouf attended MBF’s building and met Mr Hartley. Mr Malouf informed Mr Hartley that Mr Hill had defrauded him of the sum of $165,000 and that the monies received by MBF from Mr Hill belonged to Mr Malouf and should be returned to him.

xxii. As at 13 February 2001, the Monies remained in MBF’s bank account as a credit balance.

xxiii. About a week later Mr Hill saw Mr Hartley, asked whether he had been harassed by Mr Malouf and said that the matter had nothing to do with MBF and the he would ‘sort it out’.

Findings on reliability

13 The evidence given by both Mr Malouf and Mr Harley constituted their best recollection of the events which occurred. The findings of fact in these reasons are reached by reference to the probabilities often aided by the contemporaneous documentary evidence. On the one issue as to whether as Mr Malouf contended but Mr Hartley did not accept: [vide that Mr Hartley had said to Mr Malouf, during the 13 February 2001 meeting, that MBF was holding a NAB cheque for $165,000 in trust], Mr Hartley’s version is accepted as reliable.

14 As to the disputed evidence of whether at the end of the 13 February 2001 meeting, Mr Hartley was told by Mr Malouf that he was required to investigate the matter and return the money to him, or that Mr Hartley had said to ‘leave [the matter] with me’, I accept that Mr Hartley [or MBF] did not, at least explicitly, undertake to investigate the matter further. During his cross-examination, Mr Hartley gave evidence that upon being told by Mr Malouf that he had reported the matter to the police, his understanding of the purpose of this was so that the police could investigate Mr Malouf’s complaint [T 56.35].

Dealing with the issues

Consideration

15 The evidence established that the Cheque was received under cover of a letter from SRL’s solicitors sent following negotiations between MBF's agent and SRL seeking to cement the terms of the Lease. The proposed Lease which was executed by SRL provided inter alia as follows:

[Item 6 in the schedule provided for a bank guarantee equivalent to six months rental to be provided.]

16 MBF had made plain that it would not itself execute the Lease until the bank guarantee of performance had been given to it.

17 The evidence established that:

i. the Cheque was paid as the first 6 months’ rent, car parking fees, cleaning fees, and as part payment of the rent for months 7-12;

“On our calculation the $165,000 covers the following rent and outgoings:

GST: $ 525.31

Total: $96,433.74

In other words all rent car parking and cleaning has been paid for the first six months of the Lease; ie up to and including 31 May 2001.

18 The finding is that immediately upon the Cheque being received MBF permitted SRL as the putative tenant to take occupation of the premises. So much is clearly proven by the letter from SRL’s solicitors of 21 February 2001.

19 The evidence given by Mr Hartley [who was at the relevant time the MBF National Property and Facilities Manager with responsibilities including the negotiation of lease terms with prospective tenants] included the following (at [4]-[7] of Mr Hartley’s 24 November 2006 affidavit):

4. My general practice when MBF had space to lease was to engage an agent who would locate prospective tenants. Once a prospective tenant was located, I would negotiate lease terms with the prospective tenant together with MBF’s legal department. The lease documentation itself was prepared by MBF’s legal department.

5. It was my practice to ensure that the lease was signed by the prospective tenant and returned to MBF, either to me or to the legal department, with a cheque for the deposit or advance payment of rent before a tenant was allowed to occupy the premises. All of the leases I negotiated during my time at MBF contained a requirement that the tenant pay a deposit or advance payment of rent of some kind at the commencement of the lease. I do not recall ever departing from this practice during my time at MBF.

6. If a tenant had wanted possession of premises before a lease had been signed or payment of a deposit or rent in advance I would not have been comfortable with this and would have sought advice from MBF’s legal department. I do not recall any tenant seeking to occupy premises before signing a lease or paying a deposit or rent in advance during my employment with MBF, or ever seeking legal advice from MBF’s legal department in this regard.

20 Close attention was given during submissions as to whether or not MBF had given consideration for the cheque which it had received. It is important to be clear on one finding: there was no explicit contractual arrangement covering any obligations of SRL in respect of the period of time during which it would be in possession prior to MBF signing the formal lease. The proper inference is that MBF anticipated that the provision by SRL of the bank guarantee was but a formality, to take place fairly shortly, and that having received such a large amount in terms of the bank cheque, MBF gave little or no thought to the possibility that the informal arrangements permitting SRL into possession would require to be documented or would cause difficulties of any kind. The draft lease signed by SRL was dated 5 December 2000. However as the subsequent events unfolded it became clear to MBF that the tenant was having considerable difficulty obtaining a bank guarantee.

21 Although there are cases where consideration other than ‘on the face’ of a particular agreement [usually called "additional consideration"], has been found to exist, this is not such a case [cf Yaroomba Beach DevelopmentCo v Coeur De Lion Investments (1989) 18 NSWLR 398 per Giles at 407-408]. That is because the terms of the above letter of 6 December 2000 do not embrace any suggestion that the cheque or the deposit moneys could be used to cover any occupation fee incurred by reason of the informal license or tenancy arrangement by which SRL had been allowed into occupation pending execution of the Lease by MBF. Further the clear evidence given by Mr Hartley was that he had become aware that SRL had provided a bank cheque on account of the monies ‘that would become payable under the lease when the lease was put in place’ [T 44.1].

22 The short point is that there was a complete ‘disconnect’ between the purpose for which the Cheque was proffered [namely to be held in escrow pending the execution by MBF of a lease] and the decision by MBF to permit SRL into possession. The evidence falls well short of establishing that MBF delivered up possession because it received the funds. To the contrary, SRL intended that the funds be used to meet its obligations under the Lease if and when executed [Exhibit PX 11-12]; and MBF received the money on the basis that it could be used only in satisfaction of SRL’s obligations if and when they arose under the proposed lease [T 68.7].

23 Having now dealt with the question of consideration as between the plaintiff and the defendant, it becomes necessary to travel through the alternative submissions pursued by the defendant. I proceed accordingly.

Whether a trust ever arose?

24 MBF pursues several submissions in the alternative:

No relevant total failure of consideration as between the plaintiff and Mr Hill

i. that there was no relevant total failure of consideration as between the plaintiff and Mr Hill;

ii. that at the time Mr Hill relinquished custody of the Cheque, the time for performance by Mr Hill of the Loan Contract had not arrived;

iii. that in consequence no trust arose at any time at which Hill had custody of the Cheque;

iv. that a trust could only have arisen at a subsequent time, viz when the time for performance by Mr Hill had passed and at that point in time there was no property in Mr Hill's hands to which the trust could attach.

When does a resulting trust arise

v. That a total failure of consideration does not give rise to a resulting trust as a matter of law;

No relevant property in the cheque or the proceeds

vi. that neither the plaintiff nor Mr Hill ever had any property in the Cheque or the proceeds to which a trust could attach;

Submission based upon plaintiff’s alleged intention

vii. that the plaintiff intended that MBF receive the Cheque and its proceeds;

Interference with third party rights

25 I turn to deal with these contentions.

No relevant total failure of consideration as between the plaintiff and Mr Hill

26 Signal significance attaches to the circumstance that a fraud was committed. I accept that in order that property obtained by fraud be held by a fraudster on trust for his victim, it is necessary for the victim to have been the owner of that property prior to transfer. I accept also that a trust arises because legal title is transferred from the victim to the fraudster in circumstances in which, because of the fraud, equity regards the beneficial interest as remaining with the victim – hence the characterisation of such a trust as "resulting" and not "constructive": cf Evans v European Bank Ltd (2004) 61 NSWLR 75 at [113]-[114].

27 MBF's submission turns upon all or some of the integers in the following analysis:

i. the plaintiff never had property in the Cheque;

ii. the NAB, and not the plaintiff, was the drawer;

iii. MBF, and not the plaintiff, was the payee;

iv. the funds of Jarong Pty Ltd, and not the plaintiff’s funds, were used to “purchase” the Cheque from the drawer;

v. payment on the Cheque by the collecting bank was not a disposition of the plaintiff’s property, but instead was a disposition of Jarong’s property, if its account with the NAB was in credit, or, if not, of the NAB’s property;

vi. Mr Hill was never a trustee of the Cheque because he never obtained anything more than mere custody of it;

vii. he could not have obtained payment on it, he could not have negotiated it, and he had no right to require that it be dealt with in any particular way;

viii. it was unnecessary, at the time Mr Hill received the Cheque, for equity to impose a trust to prevent the unconscionable exercise of legal rights;

28 None of these submissions are of substance. From a timeline perspective they fail to acknowledge that in due course MBF came to hold the proceeds of the Cheque in escrow pending the Lease being signed – so that if not signed the funds would have to be returned. Importantly they eschew the need to unravel the fraud and the extent thereof. The misconception is revealed in the attempt to characterise each of the steps involved in the fraud as a discrete and separable parameter. The vice is seen in the failure to treat the fraud as a holistic exercise. In short the circumstances proven in relation to the fraud committed by Mr Hill include the following:

i. insurance of the kind which Mr Hill represented to Mr Malouf would be obtained could not be obtained. There was no practice at Lloyd’s of London whereby Lloyd’s underwriters wrote insurance cover against the risk of non-repayment of loan monies. No contrary evidence was led by MBF;

ii. the Lloyd’s Regulation, which permitted cover with approval from the Committee, extended only to the risks identified in the Schedule, and these did not include non-repayment of loan monies;

iii. in any event, no cover had been in place at Lloyd’s in respect of Mr Hill, either as to Mr Malouf or anyone else. Neither Lloyd’s nor First City Insurance Brokers had dealt with Mr Hill;

29 Hence it is apparent that Mr Hill’s fraud was equivalent to theft: Menzies v Perkins [2000] NSWSC 40 at [9]; Orix Australia Corporation Limited v Moody Kiddell & Partners Pty Limited [2005] NSWSC 1209 at [156]. It follows that the funds represented by the NAB bank cheque for $165,000, borrowed by the Maloufs from Jarong Pty Limited, were impressed with a trust which prevailed against a recipient of the funds, unless that recipient was a bona fide purchaser for valuable consideration without notice: Black v S Freedman & Company (1910) 12 CLR 105 at 109-110.

30 Clause 7 of the contract for loan cannot be relied upon by MBF in support of the proposition that the time for performance by Mr Hill of the Loan Contract had not arrived at the time when he relinquished custody of the cheque. This is because the entirety of the contract is shown to have been nothing more than a fraud. The very exercise involved in entry into the instrument masquerading as a contract was infected by the fraud and was an integral part of it. The very close examination of timing is simply misconceived in these circumstances. Mr Hill never intended to carry out any part of the purported transaction.

31 Mr Malouf entrusted Mr Hill with the funds to be applied by Mr Hill in furtherance of what is now proven to have been Mr Hill’s fraudulent scheme. The plaintiff's knowledge and approval of the Cheque being made payable to MBF was elicited in ignorance of the fraud being perpetrated. Once Mr Malouf entrusted Mr Hill with his money, Mr Hill held the funds on trust, and absent the defence of bona fide purchaser for valuable consideration without notice, those funds became traceable in the hands of the ultimate recipient. Payment on the Cheque by the collecting bank was in the circumstances, a disposition of the plaintiff’s property [or equitable interest in such property] and not of the property of either Jarong or NAB.

No relevant property in the Cheque or the proceeds

32 MBF's contention that Mr Malouf never had property in the cheque so as to constitute Mr Hill a trustee is rejected for the following reasons:

i. MBF’s proposition addresses the wrong question. The relevant question is not whether there was a trust of the cheque , but rather, whether a trust arose in the cheque proceeds . Otherwise, Black v Freedman (Black banked cash into his own account but then drew a cheque subsequently cashed) and Lipkin Gorman v Karpnale Limited [1991] 2 AC 548 (cheques converted to cash) would have been differently decided.

ii. Mr and Mrs Malouf acquired title to the funds from Jarong pursuant to the loan agreement embodied in the mortgages. In the deeds of mortgage, the Maloufs acknowledged receipt of the $165,000 borrowed from Jarong, and became jointly and severally liable to repay the borrowed funds to Jarong;

iii. the fact that the funds were represented by a bank cheque drawn on Jarong’s account (and by agreement between Mr Hill and Mr Malouf made payable to MBF) cannot alter the position that the Maloufs intended to borrow and in fact borrowed the funds from Jarong, and Jarong intended that the funds be borrowed by the Maloufs as occurred. As between them, title to the funds passed to the Maloufs, to be dealt with at their direction;

Resulting trust

33 MBF contended that:

i. in order to show that a trust arose on the principles in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, the plaintiff needs to show that it was the mutual intention of the parties that the Cheque would be used solely for the purpose of obtaining insurance monies;

ii. the Court could not make such a finding because there can be no doubt that both Mr Hill and the plaintiff intended that MBF receive the Cheque and use its proceeds;

iii. the plaintiff acted on Mr Hill’s request that the Cheque be made out to MBF;

iv. in these circumstances, it cannot be said that there was a mutual intention that these monies would be used for the purpose of obtaining insurance;

v. that the above, no doubt, was what the plaintiff thought he would obtain from Mr Hill if he gave Mr Hill a cheque made out to MBF – but that is very different from there being a mutual intention that the Cheque and its proceeds would be applied towards any such policy;

vi. alternatively, but for the same reason, the handing by Mr Hill of the Cheque to MBF was not in breach of any trust created;

34 These submissions mischaracterise the purpose for which the funds were provided to Mr Hill. In short:

i. Mr Malouf provided to Mr Hill $165,000 in order that Mr Hill would procure the insurance policy;

ii. Mr Malouf did not know that the reason Mr Hill directed the cheque to MBF was as payment for rental obligations under a proposed lease. Mr Malouf’s enquiry of Mr Hill disclosed no such intention;

iii. whilst Mr Malouf’s acceptance of Mr Hill’s direction may have been naïve, it did not alter the given fact: Mr Malouf’s purpose in providing the funds was so that Mr Hill would obtain the Lloyd’s policy and thence the Saudi loan;

Interference with third party rights

35 MBF's submission is that the imposition of a trust for the benefit of the plaintiff at the time Mr Hill received the cheque would have interfered with third party rights. The proposition is as follows:

i. Jarong and the NAB both had rights to require that the Cheque be delivered to MBF;

ii. the plaintiff does not and cannot assert any right to rescind either the transaction he and his wife entered into with Jarong or the transaction Jarong entered into with the NAB;

36 The submission is rejected. It treats with a point in time anterior to that being litigated and with entities whose transactions are not being impugned. It flies in the face of the proposition that the fraud was practised on the plaintiff and that equity will unravel all in the case of a fraud: Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712-713; SZFDE v Minister for Immigration and Citizenship [2007] HCA 35 at [15] et seq. The so-called contract induced by the fraud of Mr Hill was void for fundamental mistake.

The restitutionary claim

37 When and after it received the relevant notice, MBF was enriched by $165,000. MBF propounds the following bases for its submission that, on the facts, MBF is nevertheless entitled to retain those funds:

i. the funds were not the plaintiff’s, and

38 Each of these bases have already been rejected in the above reasons.

39 Up until the time MBF came to apply the monies it had received against rental and outgoings due under the Lease after its execution on or about 1 March 2001, MBF had not given consideration for the funds it had received from Mr Hill. When money has been paid for a consideration which has failed, or upon a condition or for a purpose that is not fulfilled, or in contemplation of a state of affairs which does not materialise, there will be a failure of consideration giving rise to an unjust enrichment of the party receiving the money: David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353 at 382; Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at 525, 557; Spangaro v Corporate Investment Australia Funds Management Limited (2003) 47 ACSR 285 at 301-2.

40 Where MBF on or about 13 February 2001 [when Mr Hartley met with Mr Malouf], was on notice of Hill’s deception of Mr Malouf, and had by then not granted the Lease [pursuant to the terms of which SRL purportedly delivered the Bank Cheque to MBF], MBF became and remains liable to pay to Mr Malouf, the $165,000 it has retained in its bank account, with interest. In the circumstances, the knowledge of MBF and its subsequent conduct rendered it unjust for MBF to retain the subject funds. MBF's conduct makes plain that it had relevant notice as from on or about 13 February 2001 when it was informed of the fraud by Mr Malouf. Under cross-examination Mr Hartley accepted that at that time:

i. he knew the bank cheque received from SRL was entirely discordant with any identifiable amounts payable under the proposed Lease [T 46.3-42; T 63.7-13];

ii. Mr Malouf was asserting that the cheque received by MBF had been obtained from him through Mr Hill’s fraud [T 53.11-33];

iii. Mr Hartley thought it strange that Mr Malouf was able to tell him details of the payment by SRL to MBF [T 53.40-47];

iv. Mr Hartley knew that Mr Malouf had reported the fraud to the police [T 56.34-40];

v. Mr Hill’s promises to provide the bank guarantee remained unfulfilled; SRL was a new company and was having trouble obtaining the bank guarantee [T 58.43-59.21];

vi. despite regarding the matter as serious [T 55.1-12], Mr Hartley listened with “half an ear” and “turned a blind eye” to Mr Malouf’s complaints [T 57.5-7; T 55.14-26];

vii. he completely ignored the complaints;

viii. he made no further enquiries of Mr Malouf, of Mr Hill or of the police;

ix. he made no note of the incident or discussion with Mr Malouf;

x. he did not consult his superiors nor, apparently, his legal department;

41 In the fraud context, it will be sufficient for notice “if the circumstances were such as to put a reasonable man on enquiry, and he made none, or if he was put off by an answer that would not have satisfied a reasonable man”: Nelson v Larholt [1948] 1 KB 339 at 343. This is such a case. Mr Hill’s attempts to treat with the subject when he later approached Mr Hartley were not such as would have satisfied a reasonable man in these circumstances where such a large discordant sum had been received: an out of the ordinary position. On this occasion, Mr Hill asked Mr Hartley if he had been harassed by Mr Malouf to which Mr Hartley replied that Mr Malouf had come to see him but did not harass him. Mr Hill told Mr Hartley that Mr Malouf had no right talking to him, that “it had nothing to do with you or MBF” and that he would sort it out. The Court’s finding is that to absolve MBF from any requirement to further investigate the matters upon which it had been given notice, at the least it would have been necessary for Mr Hartley to far more closely test Mr Hill on what the problems or issues were, so as to satisfy himself that Mr Hill’s word could be accepted, in a situation where Mr Hartley had been given such a vivid, focussed and impassioned account of the fraud by Mr Malouf approximately a week prior.

42 It is also necessary to recall that Mr Hartley accepted that Mr Hill’s fraud on Mr Malouf, of which Mr Malouf complained, might have explained the “random” sum [T 46.40] received by MBF in the form of the bank cheque [T 54.32-39].

43 Armed with such notice, MBF nevertheless determined (a) to execute the Lease with SRL which occurred sometime after Mr Hartley’s unexpected meeting with Mr Malouf on or about 13 February 2001, but on or before 1 March 2001; (b) to use up the funds provided to apply as against rent after 1 March; and (c) not to evict SRL until after the funds had run out [T 67.50-68.14].

Constructive trust – Barnes v Addy

44 The circumstances set out amounted to relevant knowledge of MBF for the purposes of the first limb of the rule in Barnes v Addy:

i. in terms of the Baden categories, the evidence given by Mr Hartley now substantiates MBF’s knowledge within categories (ii) ( “he did not want to know” ) and (iii) ( “none of his business” ): Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 at 293G;

Kalls Enterprises Pty Limited (In Liquidation) v Baloglow

The alleged mixing of the proceeds of the cheque with other funds within MBF

45 MBF further contended that the cheque was deposited by it into an account that contained moneys from a variety of different sources. The contention is that moneys were deposited into and withdrawn from that account between the time the cheque was received and 13 February 2001. The contention was that because the proceeds of the cheque had been mixed with other funds, there were no traceable proceeds of the cheque at that point in time.

46 These submissions are rejected. The findings are as follows:

i. as at February 2001, the monies remained in MBF’s General Administration Account at its bank and remained as a credit balance in MBF’s General Ledger (i.e. had not been credited or transferred to a rent account) [SFASC paras. 12, 17(a); Defence ara. 18(a)];

Black v Freedman

Lipkin Gorman v Karpnale Limited

Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corp

Acquiescence

47 MBF in its final argument contended that the Court was required to refuse relief because the plaintiff, by procuring the cheque to be made payable to MBF, acquiesced in the conduct of which he now complains. There is no substance whatsoever in this submission.

Necessity to join Mrs Malouf as a party

48 Early in the hearing leading counsel for the plaintiff raised the question of whether or not it was necessary to join Mrs Malouf as a party to the proceedings. The parties reached an accommodation [T 15.45-16.16] from which I understood that MBF did not take the point.

Short minutes of order

49 The parties are required to bring in short minutes of order on which occasion costs may be argued. The formal orders and declarations sought included certain alternative/overlapping claims and the plaintiff requires to elect as to the precise final orders to be pursued in light of the above reasons. Naturally each party will be heard on the matter.

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Citations

Samuel John Malouf v MBF Australia Limited [2007] NSWSC 1020

Most Recent Citation

Westpac Banking Corporation v Victor Warren Ollis [2008] NSWSC 824

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2

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Westpac Banking Corporation v Victor Warren Ollis [2008] NSWSC 824

Cases Cited

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Statutory Material Cited

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CITATION:	Samuel John Malouf v MBF Australia Limited [2007] NSWSC 1020
HEARING DATE(S):	30/8/07, 31/8/07
JUDGMENT DATE :	14 September 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Einstein J
DECISION:	Plaintiff’s case made out. Parties to bring in short minutes of order on which occasion final orders can be made and costs may be argued.
CATCHWORDS:	Equity - Fraud committed on plaintiff by third party - Proceeds of fraud automatically impressed with trust - Proceeds of fraud received by defendant - Whether defendant bona fide purchaser for value without notice - Barnes v Addy - Constructive trust - Lease contract between plaintiff and defendant executed subsequent to defendant acquiring notice - Contract - Whether an informal license or tenancy arrangement arose upon third party taking up possession of defendant’s premises - Want of consideration for the cheque received by the defendant - Defendant’s decision to allow tenant into possession was not the quid pro quo for the funds the defendant received
LEGISLATION CITED:	Crimes Act 1900 (NSW)
CASES CITED:	Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Barnes v Addy (1874) LR 9 Ch App 244 Black v S Freedman & Company (1910) 12 CLR 105 Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 David Securities Pty Limited v Commonwealth Bank of Australia (1992) 175 CLR 353 Evans v European Bank Ltd (2004) 61 NSWLR 75 Kalls Enterprises Pty Limited (In Liquidation) v Baloglow [2007] NSWCA 191 Lazarus Estates Ltd v Beasley [1956] 1 QB 702 Lipkin Gorman v Karpnale Limited [1991] 2 AC 548 Menzies v Perkins [2000] NSWSC 40 Nelson v Larholt [1948] 1 KB 339 Orix Australia Corporation Limited v Moody Kiddell & Partners Pty Limited [2005] NSWSC 1209 Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 Spangaro v Corporate Investment Australia Funds Management Limited (2003) 47 ACSR 285 SZFDE v Minister for Immigration and Citizenship [2007] HCA 35 Yaroomba Beach Development Co v Coeur De Lion Investments (1989) 18 NSWLR 398
PARTIES:	Samuel John Malouf (Plaintiff) MBF Australia Limited (Defendant)
FILE NUMBER(S):	SC 6089/03
COUNSEL:	Mr M Einfeld QC, Mr J Horowitz (Plaintiff) Mr M Cashion SC, Mr R Scruby (Defendant)
SOLICITORS:	Strategy Legal (Plaintiff) Cutler Hughes Harris (Defendant)