Adam Shepard in his capacity as Registered Trustee of the bankrupt estate of... [2011] NSWSC 1431 | Case summary

Supreme Court of NSW|2011-11-15|Before: Pembroke J

Introduction 1The facts of this case are so fantastic as to strain credulity but they are true. In October 2007 Dr Wallman was a recently divorced, middle-aged obstetrician and gynaecologist with adult children. He approached an introduction agency on the Gold Coast known as Hearts United (the third defendant) seeking love and companionship. On 4 November 2007 he signed an agreement with Hearts United the terms of which seem somewhat one-sided. For a consideration of $200,000 Hearts United promised to provide Dr Wallman, during a three year period, with a personal relationship consultant who would provide him with introductions. The only other services promised were "photo-viewing services" and an "escape package" to the Gold Coast. 2The agreement referred to terms and conditions that appear to have been non-existent. It also stipulated that refunds were not offered. It may seem surprising that Dr Wallman agreed to sign such a document. It is even more surprising that, before signing the document, Dr Wallman paid a number of lump sums to Hearts United totalling $180,000. He was persuaded to do so by a person known as "Rita", a sister of Mr Mladenis (the first defendant). Rita did not give evidence but it is obvious that during her lengthy telephone conversations with Dr Wallman to discuss his personal details, in which she canvassed his hopes and aspirations for love and companionship, she was understanding and sympathetic. She was also persuasive. At the conclusion of each telephone conversation she asked Dr Wallman for a large sum of money. Dr Wallman duly obliged, commencing with a payment of $40,000 followed by a series of further lump sums totalling $180,000. When Dr Wallman signed the agreement on 4 November 2007, it recited and gave him credit for the $180,000 he had already paid. Shortly afterwards, Dr Wallman paid the balance due under the agreement. 3Understandably, the plaintiff, who is the trustee of Dr Wallman's bankrupt estate, does not seek to recover the $200,000 paid by Dr Wallman pursuant to the 4 November 2007 agreement. But the payment of $200,000 was only the tip of the iceberg. Much greater sums became involved. And events turned sinister. At the centre of the further payments was another mysterious woman. She was known as "Lily". She did not give evidence and very little is known about her. 4Mr Mladenis was the person principally in control of the business of Hearts United. His wife (the second defendant) was the sole director and shareholder of the operating company (the third defendant). Mr Mladenis said that Lily was just another customer of Hearts United who was chosen as a suitable match for Dr Wallman. However the evidence about her was unsatisfactory and the records of Hearts United relating to her were deficient and suspect. No agreement signed by her was produced. Nor was any document produced on which her signature appeared. She was said to have paid $16,500 to Hearts United for relationship consulting services but this money was said to have been paid in cash. The cash was said to have been paid on 5 October 2007 but there was no correlative credit entry in the bank statements of Hearts United. Nor was there any photograph of Lily. Tellingly, Hearts United's standard member ID form relating to Lily was notable for the absence of relevant information for which the form normally provided. No occupation for Lily was included on the form. Nor were any telephone, mobile, email and address identified. 5The only indication of Lily's geographic provenance were the words "Sydney" and "Sydney City" but the postcode box on the form was not completed. The form stated, inconsistently with what purported to be a receipt, that her total package payment was $15,650 not $16,500. It also stated somewhat incongruously, that she was Australian/Chinese with blonde hair and that her surname was "Bolivique". Precisely who Lily really was remained an unresolved mystery. She appeared in Dr Wallman's life, courtesy of Mr Mladenis, then disappeared like a vanishing chimera. 6Lily's presence first emerged in late October 2007 when Rita told Dr Wallman that she had found someone for him and that her name was Lily. Mr Mladenis then became involved. He befriended and charmed Dr Wallman. Dr Wallman thought that Mr Mladenis was friendly, understanding and affable. From late October they were in constant contact and socialised often. Mr Mladenis travelled to Sydney and spent time with Dr Wallman. 7The commencement of Dr Wallman's relationship with Lily coincided with the commencement of his relationship with Mr Mladenis. Dr Wallman said that he bonded with Lily but Mr Mladenis appears to have been instrumental in facilitating the bonding. On Friday 2 November 2007, Mr Mladenis collected Dr Wallman from the airport and the three of them had dinner on the Gold Coast. On Sunday 4 November 2007 the three of them socialised again, this time over lunch. 8After the lunch, Lily told Dr Wallman that she would come down and see him in Gosford this week. A short time later Mr Mladenis spoke to Dr Wallman and said words to the following effect: Mate, things are going well for you and Lily, we can now offer you a special VIP package which covers you if you eventually marry Lily. It will pay for your wedding and honeymoon. It will give you peace of mind. Lily also has joined this level, and she has agreed to join this special VIP package. The cost of this package is $100,000. I know it's a lot but financially it's a good investment as you won't have to pay for any expensive wedding and honeymoon. 9Predictably, a day or two later, Lily cancelled her visit to Dr Wallman in Gosford. She said she had to go to Melbourne to visit her father who was sick. The turning point came on or about 10 November 2007. Lily telephoned Dr Wallman and asked him to lend her $200,000 to enable her "to release funds from my father's finances in Croatia". Before agreeing to her request, Dr Wallman sought an assurance from his trusted new friend Mr Mladenis. 10It will come as no surprise to learn that Mr Mladenis assured Dr Wallman that he could trust Lily; that she had the money and could pay it back in a few weeks; and that she had at least $5 million of her own. None of this made a lot of sense but what followed was sheer audacity. Mr Mladenis said, no doubt with the practised sincerity and unabashed self-belief that he demonstrated in the witness box, "I tell you what, it will be easier if you transfer the money to Hearts United". Dr Wallman did as Mr Mladenis suggested. 11Events then spiralled. Between late 2007 and mid-2009 Lily and Mr Mladenis asked Dr Wallman on at least twenty occasions for more and more money. Dr Wallman always obliged - in large sums. All of the monies were paid to Hearts United. No monies were ever paid to Lily. The reasons given for the requests for payment all related to some financial assistance for Lily. The major premise on which Dr Wallman paid the monies was that Mr Mladenis would cause Hearts United to make them available to Lily. That premise proved to be false. 12By about mid 2009, Dr Wallman had paid in excess of $2 million to Hearts United. None of it was paid to the mysterious Lily. The plaintiff's legal representatives stated at the outset of the hearing that if any monies were in fact paid to Lily, they would not seek their recovery. They did not need to worry. The defendants did not, and could not, prove that any of Dr Wallman's monies were paid to Lily. It never happened. 13During 2009 another false story was invented to induce Dr Wallman to continue to make payments to Hearts United. Mr Mladenis said, to use his words, that Lily "had done a runner back to Croatia". He said that he had also lent monies to Lily. He recommended that Dr Wallman join with him in commencing legal proceedings against Lily in Croatia and engaging lawyers to seek the return of their monies. Dr Wallman trusted Mr Mladenis and again he obliged. Over the next two years Dr Wallman made many further payments to Hearts United. He was encouraged to do so by express and implied statements by Mr Mladenis to the effect that lawyers were retained in Croatia; that lawyers were retained in Brisbane; that the proceedings against Lily were successful; that Lily had appealed; that the appeal had been dismissed and that the monies were coming. The further payments were needed, he said, to fund the process of recovering the several million dollars that Dr Wallman had already paid. 14It was, I am afraid to say, all lies. No monies had been paid to Lily and there were no monies to recover. To reassure Dr Wallman, Mr Mladenis provided him with a letter dated 18 March 2009 from a Serbian law firm called Radovic and Ratkovic. The letter was a forgery. The firm did not act on behalf of "Lily Bolovique" and had nothing to do with any fictitious legal process relating to her. Nor were there any Brisbane lawyers acting in connection with the matter. When Mr Mladenis was subsequently confronted by Dr Wallman's son, who is a solicitor, he asserted that the Brisbane firm of Hopgood Gamin was acting on behalf of Dr Wallman and Mr Mladenis. But Mr Mladenis was curiously unwilling to provide the name of the member of the firm, or the employed solicitor, who was handling the file. He gave a spurious reason for not doing so. The reason for his reluctance was clear. The firm had no instructions. Its supposed involvement was a fiction.

Monies Paid & Assets Acquired 15Between October 2007 and March 2011, Dr Wallman paid Hearts United $3,137,884. Putting aside the sum of $200,000 for which he accepts responsibility, the balance was paid by Dr Wallman on a false premise, induced by fraudulent and misleading representations and as a result of a dishonest trick, a ruse, a subterfuge. Dr Wallman entrusted the monies to Hearts United for a specific purpose that was not fulfilled and which was never intended to be fulfilled. As the express purpose was not fulfilled, there was also, as a matter of legal characterisation, a total failure of consideration. 16There were yet further advances by Dr Wallman. Between 9 March 2011 and 22 August 2011, he transferred $173,282 to the account of Mrs Mladenis. And between June and October 2009, he withdrew $352,000 in cash from his accounts and handed the cash to Mr Mladenis. All of the payments by Dr Wallman were amply proved, entry by entry, debit by debit. Except for his cash payments to Mr Mladenis, there was invariably a correlative credit entry in the bank statements of Hearts United demonstrating receipt of Dr Wallman's monies. None of the monies credited to Hearts United were paid out to Lily. Nor, I infer, were any of the cash payments. 17The business of Hearts United was not profitable. During the financial years ended 30 June 2008, 2009 and 2010, it made losses of $56,400, $324,012 and $331,296 respectively. The evidence that there was any other client besides Dr Wallman and the mysterious Lily was of dubious veracity. Only one other client was pointed to but I have serious reservations about the genuineness of this evidence. Mrs Mladenis had a modest restaurant business but besides it and the business of Hearts United, neither Mr nor Mrs Mladenis had any other source of significant income. 18Nonetheless, between October 2007 and April 2009, Mr and Mrs Mladenis purchased the following assets with monies from Hearts United: (a) Between October 2007 and June 2008, they expended $729,000 of Hearts United funds toward the acquisition of a Porsche ($170,000), a Lexus ($76,000), Gold Coast real estate ($383,000) and a BMW ($100,000). (b) Between October 2009 and April 2009, they expended $430,000 of Hearts United funds toward the acquisition of a Lamborghini ($180,000) and further Gold Coast real estate ($250,000).

Competing Versions 19I reject Mr Mladenis' explanation of what occurred and why Dr Wallman paid so much money to Hearts United. Mr Mladenis said that the monies were paid for services rendered, pursuant to a contractual obligation, for the lifestyle that he provided for Dr Wallman. He pointed to a strange document, what appeared to be a subsequent agreement signed by Dr Wallman, that provided on its face for annual payments of $400,000 over five years. That document was executed in February 2008 in circumstances to which I will turn, and its legal validity is questionable, but it cannot explain the payments that were made by Dr Wallman. There is no correlation. The payments in question were not in fact paid pursuant to that document. 20This is not a case of having to choose between two competing uncorroborated versions of past events. cf Watson v Foxman (1995) 49 NSWLR 315. There are sufficient objective contemporaneous facts consistent with Dr Wallman's account, and inconsistent with that of Mr Mladenis, to make Dr Wallman's evidence more probable than not. I am amply satisfied of Dr Wallman's account, to the requisite standard, bearing in mind the nature and seriousness of the allegations made against Mr Mladenis: Briginshaw v Briginshaw (1938) 60 CLR 336 at 350. 21Some of the objective facts supporting Dr Wallman's account included the following: (a) In December 2010 Mr Mladenis did go (or said he went) via Dubai to a foreign country where it was "freezing" around Christmas time. I infer that he was in Croatia. (b) In August 2011 Mr Mladenis did go (or said he went) to Manilla in the Phillipines. (c) In connection with both trips, Mr Mladenis sent many text messages to Dr Wallman stating explicitly or by necessary implication that he was in each of those places for the purpose of chasing Lily on behalf of Dr Wallman, and on his own behalf, to get back the money that had been advanced to her. (d) A false story was created concerning the involvement of a Serbian firm called Radovic and Ratkovic in some legal process or proceeding in Croatia relating to Lily. (e) A false story was created about the involvement of the Brisbane firm of Hopgood Gamin in some legal process or proceeding in Croatia relating to Lily. 22Each of those facts is consistent with Dr Wallman's account of what he was told and why he paid the monies. Ultimately, the existence of any legal process or proceedings in Croatia involving Lily Bolivique was not proved. Nor did the defendants attempt to do so. They denied the whole story concerning Lily and Croatia but could not deny the objective facts to which I referred in paragraph [21] above. The stories told to Dr Wallman concerning the involvement of law firms in Croatia and Brisbane were fictional. I have formed the view that they were deliberate concoctions invented by Mr Mladenis. 23There are many further facts which weigh heavily in the balance in favour of Dr. Wallman's version of events: (a) First, even if one accepts all of the defendants' contentions as to the proper explanation for Dr Wallman's payments and their contractual justification, Dr Wallman paid Hearts United at least $1 million more than he was obliged to pay. (b) Second, by 31 January 2008 Dr Wallman had paid $1,175,820 to Hearts United when, on any view of the defendants' case, his only contractual obligation at that stage was to pay $200,000. (c) Third, even if one accepts the validity of the document that was described as an agreement and which was signed on 22 February 2008, Dr Wallman only became obliged to pay an annual fee of $400,000. In fact he paid much much more, to which Mr Mladenis' flippant and ludicrous rhetorical retort was in effect: "Is there a law against paying in advance?" (d) Fourth, the payments to Hearts United sought to be recovered were for random amounts paid on an ad hoc and haphazard basis corresponding to requests from time to time by Mr Mladenis and Lily. They did not fit any pattern of contractual obligation consistent with the supposed agreement signed on 22 February 2008. Rather than an annual payment of $400,000 the bank records after 22 February 2008 show that: (i) between 22 February 2008 to 21 February 2009, Dr Wallman paid $704,320 to Hearts United; (ii) between 22 February 2009 to 21 February 2010, Dr Wallman paid $1,058,274 to Hearts United; (iii) between 22 February 2010 to 21 February 2011, Dr Wallman paid $196,540 to Hearts United; (iv) since 22 February 2011, Dr Wallman has paid $173,282 to Hearts United Mrs Mladenis. 24Other matters concerned me. There was no reliable evidence that Hearts United had any clients besides Dr Wallman. I do not think that Lily was a genuine client. Her incomplete and suspect ID form only serves to reinforce my doubts. The only other client of which there was evidence was a "Mr Rust" supposedly from Perth. But the evidence of his existence consisted of no more than an ID form that was uncorroborated and could all too easily have been falsely created. It was produced by Mr Mladenis overnight during the course of the hearing. Given my findings of Mr Mladenis' dishonesty, his responsibility for the forged letter from Radovic and Ratkovic and the fictional involvement of Hopgood Gamin, I do not accept its genuineness. Additionally, I have already referred in paragraphs [17] - [18] to the trading losses incurred by Hearts United in the financial years ended 30 June 2008, 2009 and 2010 and the substantial assets consisting of motor vehicles and Gold Coast real estate acquired by Mr and Mrs Mladenis during the corresponding periods. 25I should return to the text messages to which I referred in paragraph [21] above. Mr Mladenis went to Croatia and Manilla ostensibly to locate Lily and secure the recovery of monies that he and Dr Wallman had supposedly paid for her benefit. Although the trips occurred, Mr Mladenis' stated purpose was, I have concluded, a false front. In connection with each trip, Mr Mladenis sent numerous text messages to Dr Wallman supposedly reporting on progress and frequently requesting more money. The text messages were, I have concluded, intended to mislead Dr Wallman and to encourage him to continue to make payments in connection with the fictional attempts to recover monies from Lily. 26The text messages were colourful and many are unpleasant. Their brazen dishonesty and impudence were astonishing. I will set out below a selection of them:

December 2010 - January 2011 Mate need u to do 10 thousand today so i can organise the rest of stuff today im in brissy i need this done so i can finish this over next few hours pal if i had it I wouldnt ask have used all my funds need u to do it - 08-Dec-10 In the plane mate talk to u when i land in dubai make sure u do what rita told y to do i am meeting with her so will fill u in then - 15-Dec-10 Hey mate arrived safely in dubai pal u can get me on this phone fuck im tired - 16-Dec-10 Need u to transfer money rita spoke to u about i don't want to here about the shit im freezing here and bating for u do it thanks - 21-Dec-10 R u serious pal god help me what do u want me to do im fighting 4 u -21-Dec-10 Im trying to get the xtra interest that needs to be paid for u and me mate do it -21-Dec-10 We r nearly done just waiting for fuckwit to complete her side she needs til the morning she reakons very stresfull for her pal fucken asshole she is ring u tomm when u wake up -23-Dec-10 Mate she stil fucking around it wil be done hopefully today mate fucking bitch -24-Dec-10 Mate plan b need 15 k from u and i have 20 k coming from my wife at home had enough of this shit coming home with the bacon in a few days fuck her no more mercy - 06-Jan-11 Im short another 2400 pls do it i cant ring the wife she wil kil me the euro got me here - 07-Jan-11 It will be mate she did a runner but the boys have found her will call u when i can - 13-Jan-11 Yeah shes done a runner to a different country with the docs will call u soon next few hours - 17-Jan-11

April - August 2011 Mate need u to transfer some money pal finished going threw - 09-Apr-11 Things with lawyers to settle the money - 09-Apr-11 Around 11,500 from u and the rest from me that's another 12000 ive organised im ready to go pal - 10-Apr-11 Mate on the phone overseas can u transfer 4-400 now - 09-May-11 Hey mate confirmed funds and transactions for wed got confirmation with bank today yeahy can u lend me 6500 till then so i can pay lawyers pls thanks mate - 04-Jul-11 Neil can u transfer 4700 to me now in a meeting pls just do it it will be bk in your acc by 9am tomm explain later - 26-Jul-11 Can u send me 9 k pls with lawyers now - 02-Aug-11 Mate I'm chasing down that bitch in mamilla with some heavy s trying to get her to sigh our money - 26-Aug-11 I know I was just about to ask u transfer me money there's no one there that can get to the bank till Monday I need to accommodation for the guys and find this bitch we have the add to her condo Fucken bitch the paper work was faxed if not I can get the hard copy for from Rita I need 4750 - 27-Aug-11 So what u can't transfer anything from your account that's bullshit - 27-Aug-11 Do the transfer so I can come bk or don't ask me to help u after u get paper work because that means u don't want to sort it out together I will get my money my self - 27-Aug-11 If I didn't give a fuck I wouldn't have comme here to fuck lily up with to bikers so do it and I will get Rita to give it bk to u with the papers on Monday - 27-Aug-11 27Those text messages reveal the sinister side of the events that occurred and the true character of Mr Mladenis. For some reason Dr Wallman did as he was asked to do. He did not know that Mr Mladenis was feeding him lies and disinformation.

Miscellaneous Issues 28There were some additional payments and other issues that require separate treatment. As I have mentioned, Dr Wallman paid $173,282 to Mrs Mladenis. He was requested to do so by Mr Mladenis who said that those monies should not be put through the books of Hearts United. Dr Wallman obliged. At the hearing, Mr Mladenis contended that the $173,282 represented rental payments by Dr Wallman to Mrs Mladenis as well as the repayment of loans advanced to him by her. I reject those contentions. There was no acceptable evidence of any loan to Dr Wallman, other than perhaps petty cash, let alone loans by Mrs Mladenis. 29As to the rental argument, Mr Mladenis swore in an affidavit that rental due by Dr Wallman while he stayed in one of the Gold Coast properties belonging to Mrs Mladenis, was paid to Hearts United. His oral evidence was inconsistent with that proposition and I reject it. I am not prepared to act on the basis that any of his evidence is reliable unless it is independently corroborated or against his interest. 30During the hearing, Mr Mladenis created, produced and tendered a schedule which he said recorded a large number of cash advances by him to Dr Wallman between 18 February 2008 and 7 February 2011. I do not accept the genuineness of this document. I allowed it to be tendered so that Mr Mladenis could be satisfied that his arguments were being addressed. But the document has no probative value and is inherently suspect, especially given my other findings against Mr Mladenis. Many of the supposed cash advances set out in the document are for very large amounts. There is no correlative deposit in Dr Wallman's bank statements for any of them. Additionally and frequently, the characterisation of particular items in Mr Mladenis' document is inconsistent with the information contained in the bank statements of Hearts United.

February 2008 Agreement 31Finally, I mentioned the document that was signed by Dr Wallman on 22 February 2008. On its face, the document appears to have obliged Dr Wallman to pay $400,000 to Hearts United each year for the next five years. But once signed, it seems never to have been referred to again. Certainly Mr Mladenis never requested, and Dr Wallman never made, any payments by reference to it. The signed document, or a copy, was never given to Dr Wallman and he did not subsequently see it until these proceedings were commenced. 32The circumstances in which the document was signed by Dr Wallman were instigated and controlled by Mr Mladenis and deliberately fuelled by alcohol and expectation. Mr Mladenis engaged in an orchestrated charade designed to induce Dr Wallman to sign the document without considering its effect or appreciating its supposed consequences. The central events surrounding the signing of the document on 22 February 2008 were a dinner at Doyles Restaurant at Circular Quay and a night spent at the Quay West apartments. 33Dr Wallman and Mr Mladenis gave competing accounts of this evening but once again the objective contemporaneous evidence favours Dr Wallman's account. There were only four persons at the dinner - Mr Mladenis and Dr Wallman, the mysterious Lily and a glamorous employee of the business of Hearts United. A substantial amount of alcohol was consumed. Most of the drinking was by Dr Wallman and Mr Mladenis. Dr Wallman became intoxicated. Mr Mladenis denied this and boasted that he was a big drinker and that it was he who had consumed most of the alcohol, not Dr Wallman. The restaurant bill included the following: 5 Bundaberg rums, 5 Jack Daniels, 3 Becks beer, 1 Jim Beam, 1 glass of champagne, 1 bottle of Chardonnay and 1 bottle of Moet & Chandon. 34Dr Wallman explained the circumstances in which the February 2008 agreement was signed by him. I accept his evidence unreservedly on this issue and will set it out: 7 Approximately one week prior to the Dinner, I had a conversation with Mr Mladenis during which Mr Mladenis said to me words to the following effect: 'Neil, given that you and Lily have formed a successful relationship, we are going to celebrate with a dinner in Sydney.' 8 At the Dinner, I recall having a number of alcoholic drinks and following the Dinner Mr Mladenis, Lily and Rita (Christy) and I attended the Quay West Apartments, where Mr Mladenis, Lily and Rita (Christy) had booked a room. I had planned to stay at North Sydney that night. 9 At Quay West Apartments, I was encouraged to drink to the relationship that Lily and I had built after being introduced to her by Hearts United. I drank a number of spirits, which I do not normally drink. 10 I became heavily intoxicated, so much so, that at the end of the celebrations, I was vomiting on a number of occasions in the apartment. 11 At some stage during the night or early in the morning I was then presented with a number of documents by Mr Mladenis and Rita (Christy). I did not read the documents presented to me nor do I recall what the documents were that I signed. 12 After signing a number of documents presented to me, I attempted to leave Quay West Apartments to return to North Sydney. 13 However, given my level of intoxication, I was unable to properly walk out of Quay West Apartments. It is for this reason that I stayed at Quay West Apartments after Mr Mladenis paid for a room for me at some time that night or early the next morning. 35At the time that this dinner took place, Dr Wallman did not need any further services from Hearts United. He had signed and paid for the agreement of November 2007. He had been introduced to Lily, with whom he was infatuated. Indeed he foolishly thought he wanted to marry her. He attended the dinner to celebrate their relationship. He did not need or seek "weekly introductions and personal consultations" for the next five years. He did not need to be "working with two senior relationship consultants" for the next five years. In fact, the services purportedly covered by the document signed on 22 February 2008 were no more than "Introduction Services" which he had already successfully received. They were defined in the document to mean: The selection and introduction process undertaken by Hearts United International Consulting Services Pty Ltd where our consultants endeavour to introduce the Customer to one or more persons of the opposite sex for the purpose of establishing a long term relationship or friendship with the Customer. 36Notwithstanding the unnecessary and inappropriate nature of this purported agreement in the circumstances that applied to Dr Wallman in February 2008, let alone the additional financial commitment of $2 million over five years that it supposedly imposed, Dr Wallman signed the document. In fact, he and Mr Mladenis signed 10 consecutive pages. None of those pages contains any reference to the payment of $400,000 per annum for five years. That important and supposed feature of the February agreement appears only on a separate page that has features that cause me to doubt its genuineness: (a) The separate page contains little to indicate that it is necessarily connected to the 10 pages of the agreement that Dr Wallman signed on 22 February 2008, save for the fact that it is headed "Schedule". (b) The separate page is in two parts which could easily have been copied together. The defendants did not tender the original. (c) Only the top half of the separate page purports to be a "Schedule". The schedule is not signed by Dr Wallman. It is the only place where an obligation is recited that the "Customer" must pay $400,000 per annum. (d) The bottom half of the separate page is a blank and meaningless credit card debit authority, apparently signed by Dr Wallman, but containing no information whatsoever - no statement of the amount to be debited and no identification of the credit card. (e) Dr Wallman's signature on that part of the separate page that contains the credit card debit authority does not necessarily indicate his assent to the terms, or even the existence, of the schedule on the other part. 37The glamorous employee at the dinner was Christy Taffe. She gave evidence that she only drank lemonade and that Lily drank Chardonnay. In his cross-examination, Mr Mladenis sought to account for the large quantity of alcohol. He asserted that "the Bundy rums are definitely Christy's". This evidence was implausible and seemed contrived. It became obvious during the cross-examination that Mr Mladenis had temporarily forgotten that Ms Taffe's affidavit, which he had seen, stated that she did not drink alcohol that night. When her turn came, Ms Taffe gave evidence that I did not believe. It was apparent that she was aware of the evidence given by Mr Mladenis. She was with him in court for several days, sitting beside him, talking to him and following the evidence. She volunteered, when presented with the opportunity, that she was given Bundy rums which she did not drink. On her evidence, the Bundy rums must have simply lined up on the table untouched. 38In my opinion, Ms Taffe was not a witness whose evidence was always truthful. She clearly wanted to assist Mr Mladenis and must have felt some obligation towards him. She said that Dr Wallman was not intoxicated at the dinner and that Mr Mladenis and Dr Wallman discussed the terms of the February agreement before the dinner, not afterwards as Dr Wallman explained. I do not consider this evidence by her to be reliable. I formed an adverse view of her credit. In my view, she was partial and sought to give the evidence that she perceived would assist Mr Mladenis. Dr Wallman's evidence was more probable having regard to other proved facts and objective circumstances. 39Mr Mladenis contended that the February 2008 agreement had been discussed 20 to 30 times and that Dr Wallman had agreed to it two to three weeks before the dinner. This is not consistent with Mr Mladenis' or Dr Wallman's pattern of behaviour. Indeed I regard it as ludicrous. I do not accept it. Given my other findings concerning Mr Mladenis' conduct, including my conclusion that he concocted the stories about the involvement of law firms in Serbia and Brisbane in some Croatian legal process, I do not regard Mr Mladenis' evidence as a reliable or truthful basis for making any findings of fact on any contentious issue. I am only prepared to do so where there is independent corroboration or where his evidence is against his own interest. 40The questionability of the February 2008 document is reinforced by two other curious documents produced by the defendants. During cross-examination on 3 November 2011, the solicitors for the defendants produced, unannounced, another supposed written agreement dated 2 June 2009. It required Dr Wallman to pay $180,000 for four years. It recited that "the membership amount of $180,000 has been paid in full". It made little sense. Dr Wallman knew nothing of it. His signature appeared in connection with a blank credit card debit authority but the details relating to a $180,000 obligation on the same page could have been added at any time. 41Then there was a letter from Hearts United dated 20 February 2008 which was signed by Dr Wallman and contained an acknowledgement that he had received a loan of $77,000 from Hearts United. There was no such loan. Mr Mladenis' evidence on this issue in cross-examination was non-responsive and disingenuous. The letter contained statements that were false and untrue. Mr Mladenis knew that. I infer that Mr Mladenis caused Dr Wallman to sign this letter along with the February 2008 agreement during the evening of the dinner at Doyles Restaurant.

Fraud & Deceit 42Fraud and deceit undoes everything. Lord Denning once said that fraud "unravels everything": Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712. Over 200 years ago, Buller J said that fraud "vitiates everything": Master v Miller (1791) 1 Smith's LC 780 at 799. It matters not that the victim is foolish and gullible. Persons who are vulnerable because of their gullibility are the very persons who are more likely to be the targets of fraud and deceit. And they are often easy targets. Dr Wallman exemplifies such a person. But he is no less entitled to the protection of the law simply because it is difficult to comprehend the stupidity of his conduct. 43For that reason, contributory negligence is not a defence to a claim based on deceit or fraudulent misrepresentation: Standard Chartered Bank v Pakistan National Shipping Corpn (Nos 2 and 4) [2003] 1 AC 959 at 967 (Lord Hoffmann). Nor could it rationally be a defence to an action for money had and received where the claim is for the recovery of money obtained by deceit. Nor is it, for different reasons, a defence to a claim based on misleading conduct: Henville v Walker (2001) 206 CLR 459 . 44The plaintiff in this case pleaded many causes of action. He was spoilt for choice. Deceit, misrepresentation, misleading conduct and breach of trust were the central elements. I am satisfied that the plaintiff's case has been amply proved. In reaching that conclusion I have taken into account the seriousness of the allegations made, the inherent likelihood or unlikelihood of the events in question having occurred and the gravity of the consequences to the defendants that will inevitably follow if I make the findings of fact for which the plaintiff contends. Ultimately the proved facts were overwhelmingly against Mr Mladenis' implausible explanations. The submissions on his behalf were entirely factual, concerned with the proper characterisation of the events that occurred. Their primary contention was that "the question of how Mr Mladenis has seduced Dr Wallman to part with over $3 million has not been answered". To the contrary, I think it has. In my view, Mr Mladenis was dishonest. He caused Hearts United to obtain monies from Dr Wallman by dishonest means.

Remedies 45The plaintiff is entitled as against all defendants to declarations of trust and an accounting in respect of all monies paid by Dr Wallman, other than the $200,000 paid pursuant to the November 2007 agreement. The plaintiff is also entitled to damages. There are several bases on which these remedies should be awarded.

Monies Had & Received 46The general principles concerning recovery of "money had and received" were summarised by Gummow J in Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516 at [62]. They included the following statement of principle by Viscount Haldane in Royal Bank of Canada v The King [1913] AC 283 at 296: It is a well-established principle of the English common law that when money has been received by one person which in justice and equity belongs to another, under circumstances which render the receipt of it a receipt by the defendant to the use of the plaintiff, the latter may recover as for money had and received to his use. The principle extends to cases where the money has been paid for a consideration that has failed. 47Gummow J pointed out that the doctrinal basis for this kind of action did not arise from the "implied contract theory" (at [63]) but was more closely linked to "unjust enrichment theory" (at [70] ff), although caution needed to be exercised in the use of this. 48In order to succeed in a claim for money had and received, the recipient of the relevant payment must have exercised control over that payment: Houston v Donovan (1902) 28 VLR 418 at 423. 49In this case, each of the defendants actually received portions of the payments by Dr Wallman: (a) $2,899,000 was transferred to accounts held by Hearts United. These accounts were operated and controlled by Mrs Mladenis. (b) $352,000 in cash was given by Dr Wallman to Mr Mladenis. (c) $173,282 was transferred to Mrs Mladenis' bank account. 50In the case of the monies paid to Hearts United, both Mr Mladenis and Mrs Mladenis had control over those monies as they both had access to, and control over, those accounts. 51The following sums from Hearts United were used to acquire the following assets for Mrs Mladenis: (a) On 18 March 2008, $383,000 was used to buy her home at Weatherly Avenue, Mermaid Beach. (b) Mortgage payments relating to the loan taken out to purchase that property were sourced from Hearts United. (c) On 20 June 2008, $100,000 was used to buy a BMW in the name of Hearts United. Mr Mladenis said that this was Mrs Mladenis'. Mrs Mladenis said it was Mr Mladenis' car. (d) On 31 October 2008, $180,000 was used to buy her Lamborghini. Mrs Mladenis said it was Mr Mladenis' car. (e) On 15 April 2009, $250,000 was used to buy another property in her name at Mermaid Beach. (f) Mortgage payments relating to the loan taken out to purchase that property were sourced from Hearts United. 52Further, $170,000 from Hearts United was used on 31 October 2007 to acquire Mr Mladenis' Porsche. All of these payments, and the assets into which they were converted, will require careful and more precise consideration on an accounting before an Associate Justice. The hearing before me was not the occasion for the detailed tracing of Dr Wallman's monies.

Breach of Trust 53When monies are paid by one party to another with the intention that those monies should not form part of the assets of the other, but should be used for a particular purpose, a trust will arise if the purpose of the payment fails: Australasia Conference Association Limited v Mainline Constructions Proprietary Limited (in liquidation) (1978) 141 CLR 335 at 353; Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. 54Likewise, when monies are paid as a result of fraud or mistake, they are impressed with a trust in favour of the payer, who is entitled to the return of those monies: Cashflow Finance v WestpacCOD Factors [1999] NSWSC 671 at [408]. 55The existence and scope of the trust is ordinarily determined by the intention of the parties which will, in appropriate cases, be inferred from the language of the parties. See for example, Walker v Corboy (1990) 19 NSWLR 382; Re Elizabethan Theatre Trust (1991) 30 FCR 491 at 502 ff; and Ying v Song [2010] NSWSC 1500 at [253]. 56The terms of the conversations between Dr Wallman and Mr Mladenis made it plain that the payments made to Hearts United up until late 2009, were made for the sole purpose of being paid to Lily to enable her to recover property from her father's estate. 57Similarly, the terms of the conversations between Dr Wallman and Mr Mladenis made it plain that the payments made to Hearts United and Mrs Mladenis after late 2009, were made for the sole purpose of funding the fictional attempts brought against Lily to recover the payments made to her. 58In these circumstances, those monies in the hands of the recipients were impressed with a trust that they would only be paid in accordance with the stated purposes. 59The evidence demonstrates that in breach of the trust, neither Hearts United nor Mrs Mladenis paid those monies in accordance with the stated purposes.

Knowing Assistance & Receipt 60Mr Mladenis and Hearts United had actual knowledge of the breach of trust because Dr Wallman's conversations were with Mr Mladenis and because Mr Mladenis was the person in effective practical control of Hearts United. 61Mrs Mladenis also satisfies the requisite categories of knowledge explained in Farah Constructions Pty Ltd v Say-Dee Pty Limited (2007) 230 CLR 289. Her knowledge is to be inferred from the following matters. First, Hearts United was formed by both Mrs Mladenis and Mr Mladenis. Second, Mrs Mladenis was and is the company's sole director, secretary and shareholder. In that capacity, she had various statutory duties imposed upon her. Those duties included, for example, a duty to ensure that the company did not trade while insolvent and a duty to ensure that Hearts United maintained, at all times, financial records that properly explained its transactions. The effect of these obligations was that she was required to: (a) review the income and expenditure of Hearts United; and (b) review the contracts which had been entered into by Hearts United; and (c) identify monies which were paid into the Hearts United accounts which were not part of its business "income" and to understand what those monies related to. 62Third, Mrs Mladenis in fact controlled the bank accounts of Hearts United; was the authorised signatory of those bank accounts; was an employee of Hearts United; and executed documents on behalf of Hearts United including, for example, a Deed of Charge granted by Hearts United to secure the loan for the purchase of one of the properties at Mermaid Beach. 63Further, even if a person such as Mrs Mladenis does not know of the fraud, but still retains the proceeds of the fraud or has otherwise profited from the fraud, that person cannot knowingly seek to retain those proceeds or that profit without becoming a party to that fraud and liable accordingly: Black v S Freedman & Company (1910) 12 CLR 105 and Heperu Pty Ltd v Belle (2009) 76 NSWLR 230.

Tracing of Trust Funds 64Where there is no balance remaining in the trustee's account, but assets have been acquired by the trustee with trust monies, the law assumes that the trustee intended the investment to be for the benefit of the trust irrespective of the order of withdrawal: Re Oatway [1903] 2 Ch 356 and Australian Receivables Ltd v Tekitu Pty Ltd [2011] NSWSC 1306 at [145] and [149]. 65Where a trustee wrongfully uses trust monies to provide part of the cost of acquiring an asset, the beneficiary is entitled to claim a proportionate share of the asset or enforce a lien upon it to secure his personal claim against the trustee. It does not matter whether the trustee mixed the trust money with his own before the acquisition: Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102 at [131]; Scott v Scott (1963) 109 CLR 649 at 662 and Australian Receivables Ltd v Tekitu Pty Ltd (supra) at [146]. 66The evidence establishes that $2,899,000 was wrongly paid into the accounts of Hearts United. The evidence also establishes that the accounts of Hearts United have been depleted and that the funds were used by Mr and Mrs Mladenis to acquire assets in their own names. I have already set out in paragraphs [49] - [52] above, subject to a more precise accounting in due course, the respective sums and the assets into which they were converted. In addition, throughout 2011, Hearts United lent substantial sums to Chrysafi Greek Taverna Pty Ltd which is owned by Mrs Mladenis.

Deceit & Misleading Conduct 67The tort of deceit has been well and truly established. So also have the claims based on misleading conduct. Mr and Mrs Mladenis were knowingly concerned in those contraventions for the reasons explained in paragraphs [60] - [62] above. If necessary, the findings of fact that I have made provide an ample basis for monetary judgments against Hearts United and Mr and Mrs Mladenis for the loss suffered by Dr Wallman.

Conclusion 68The plaintiff is entitled to succeed against each defendant for the recovery of all monies paid by Dr Wallman, other than the monies paid pursuant to the November 2007 agreement. Interest should be included from the dates of payment. More importantly, the plaintiff is entitled to succeed against each defendant on the breach of trust claim. If an election is made to pursue the proprietary remedy, assuming an election is necessary, the proceedings should be referred to an Associate Justice for an accounting and the tracing of trust property. Freezing orders against the defendants and their assets should continue until further order. 69I will list the proceedings before me in the Expedition List on 2 or 9 December 2011 for final orders and any limited further submissions. The relief sought in the Amended Statement of Claim ranges rather wider than appears to be necessary. I will hear submissions, if requested, about for example, the necessity for declarations concerning the February 2008 agreement or the loan acknowledgement. I have already made clear what I think of them. The defendants should pay the plaintiff's costs. The solicitors for the plaintiffs should deliver proposed short minutes to my associate and inform her whether the proceedings are to be listed on 2 or 9 December.

Amendments 28 November 2011 - Typographical amendments Amended paragraphs: Paragraphs 5, 23(b), 42 and 46 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 November 2011

Adam Shepard in his capacity as Registered Trustee of the bankrupt estate of Dr Neil Gordon Stuart Wallman v Paul Mladenis & Ors

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