HIS HONOUR: The defendants are wife and husband and for ease of reference I will so refer to them in these reasons. The wife was employed by the plaintiffs as its payroll administrator. There is no doubt (as she has consented to a verdict) that the wife abstracted $529,776.24 from the plaintiff without authorisation. The question for me to determine is whether the husband is liable to the plaintiff for that sum or part of it on the basis that he was a knowing recipient of money abstracted by the wife in breach of fiduciary duty.
I heard the case on 11 March 2015. Mr T Glover of counsel appeared for the plaintiff and Mr W Washington of counsel for the husband. Mr R Brading, solicitor, appeared for the wife, but took little part in the case in view of his client's consent to a verdict against her.
The basal principles applicable to this case are relatively clear. They derived from the classic passage in the judgment of Lord Selborne LC in Barnes v Addy (1874) LR 9 Ch App 244 at 251-2:
strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.
The form of liability referred to in the first part of the last sentence is often called the "first limb" of Barnes v Addy. It is this first limb with which I am concerned in the present case.
In Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 at 140 and following, [110] and following, the High Court recently discussed the application of the first limb in Barnes v Addy. The Court said that a plaintiff seeking to impose liability needed to prove, using the facts of the present case, (a) that the husband received money to which a fiduciary obligation attached, and (b) the husband had at least constructive notice that the relevant money was obtained in breach of fiduciary duty.
I must first of all note that the onus of proof is on the plaintiff. Although this is obvious I state it because Mr Glover constantly upbraided the defendants, that is, the husband and wife, for not providing corroborative evidence of their statements. Actually the plaintiff, if its case is to prevail, must go beyond showing that there is suspicion and the plaintiff must do this either by evidence or by cross-examination of the defendant showing that their version of the facts is not to be accepted. However, even here one must be careful because, just because a person tells a lie about a fact or is disbelieved in his or her version of the facts, does not necessarily mean that the opposing party has established the fact. Thus, if a witness is disbelieved in her statement that it rained on Sunday the 31st of January that does not establish of itself that it either rained or did not rain on the 31st of January.
This is really a case for a decision to be made on questions of fact.
The plaintiff needs to prove:
A. That the husband received the tainted money;
B. That the husband had at least constructive notice that the money was tainted.
Accordingly, I don't need to go into all the cases dealing with the first limb of Barnes v Addy.
Mr Glover did however, endeavour to present the case as a combined fact finding exercise that is at the question of fact as to whether the tainted money was received by the husband and whether the husband had at least constructive notice of its origin were conflated. I do not consider that this is a proper approach and I cannot find any authority nor did Mr Glover refer to any which justifies it. It seems to me the cases like the Say-Dee case show that both elements must be established before a plaintiff can succeed on the first limb.
I should say that this case commenced shortly after the defalcations were discovered by the plaintiff obtaining a freezing order for which it gave the usual undertaking as to damages from Brereton J. It is quite common in such cases for the employer to put together very hastily an affidavit as to the facts and judges dealing with interlocutory applications realise that whilst there may be some defects in those affidavits, shortness of time means that they are the best that can be prepared. In this case two salaried employees of the plaintiff, Ms Lucy Young and Ms Kim Ainscough, made affidavits setting out in fair detail the accounting records of the plaintiff which indicated that the wife had embezzled the moneys the subject of the claim. That that is actually so is conclusively established by the wife's current admission and consent to a verdict. However, it seems likely that the plaintiff's advisers assumed that that evidence prepared at an early stage was sufficient also to prove the case against the husband. Accordingly, no interrogatories appear to have been administered against the husband and although the file contains a notice to admit facts and the file does not contain any reply, this was not tendered in evidence against the husband.
Accordingly, the only evidence against the husband is what can be found in the affidavits of the two ladies to which I have already referred, plus the cross-examination of the wife and the husband. Neither Ms Lucy Young or Ms Kim Ainscough were cross-examined before me.
The case that would seem to be presented by the wife to protect her husband was that she was a very capable financial manager and that the husband knew nothing of the family's financial affairs. Indeed, the senior positions she has obtained with not only the present plaintiff but other employers show that the wife is as she says. Apart from her position with the plaintiff for which she seems to have been on a salary package of some $88,000 a year, she also was the key administrator of the family business which traded under the name of G-Valley Plants.
G-Valley Plants was a business of hiring plants to commercial entities and servicing the hire by attending at the customer's premises, watering the plants regularly and exchanging plants from time to time. The wife did all the administration, handled literally all the financial arrangements of this business, the husband attended the customers' premises and watered the plants. That business was in many years quite successful. The wife's summary which is on page 16 of her affidavit of 5 March 2015, the figures of which were obviously accepted by the plaintiff in view of the submissions that Mr Glover made, show that in the year July 2012 to June 2013 its net profit was almost $81,000. However, business fell away in the financial year 2013 to 2014 so that the profit was only $19,500. Mr Glover endeavoured to make capital out of these figures but as I will indicate subsequently, to my view they tell against him. In addition to the business and to her employment, the wife also had a sideline of providing hampers and other small goods to friends, neighbours and associates. There seems little doubt that at least until relatively recently, the husband and wife and their family were not in need of cash.
The wife painted a picture of herself being the person in charge of the finances whereas the husband was presented as a person who was illiterate. He came through Australia as a migrant from Macedonia and was not au fait with any financial matter and was only able to do manual work. The evidence of the husband and the wife is that only once did he attend a bank, otherwise, all the banking was left to the wife.
I must confess that the picture of a poor, illiterate, recent immigrant with no skills was detrimentally affected by the way in which the husband conducted himself in the witness box. He gave evidence in English and, although counsel did not score any serious blow against his credibility, he was obviously a more capable person in Australian life skills than the initial picture of him would suggest. It also appeared that the wife was a very capable person and although she was quietly and thoroughly cross-examined, I do not consider that counsel for the plaintiff secured any blows to her credibility.
However, there were occasions where the wife would give a reasonable explanation for the husband's behaviour which was not picked up by the husband. For instance, the wife gave me the impression of the husband's health problems and loss of joie de vivre was the reason for him not wishing to continue to go to the clubs, particularly the Mounties Club at Mount Pritchard where previously the parties had spent considerable time. The husband denied this and said the reason he did not go to the Club was that he wanted to spend more time at the parties' farm.
Mr Glover's cross-examination went to the large amount of time that the records, even in the husband's own affidavit, showed they spent at clubs, particularly the Mounties Club. The husband's evidence was that he mainly spent time at the Club using money his wife gave him, she would give him a float, and then if she won she would give him one of the tickets that she won from her machine so that he could gamble, but that often he just waited for her and watched TV.
It would seem that at the Mounties Club each member had a membership card which would be inserted into a poker machine. The machine would then automatically record the amount of time spent by the card holder at the machine and the amount of winnings. The printouts of the material stored on the card of both the wife and the husband show that in each case quite a considerable amount of money was put in the machine. It is not completely clear that that amount was only put in by the wife or the husband. Particularly in the husband's case, this is so.
It would appear that the wife had a friend, Diane, and that Diane was a big player of poker machines and she played two machines at once. She only had one membership card so the wife gave her the husband's card so that Diane could put that in her second machine so the husband would get bonus points for some of Diane's playing.
The reason for getting points was that the Mounties Club graded members according to the amount they gambled. The top tier was diamond members. The wife gambled so much that she was a diamond member. The next step down was a platinum member and the husband was, at all material times, a platinum member. There were then, lower down the scale, gold and bronze members.
Mr Glover put that the mere fact that the wife was known to be a diamond member would show any reasonable person that the husband knew that she gambled a considerable amount. The evidence shows that he was a bit put out that although he had joined the Club before the wife did, he was only a platinum member, the next rung down, and she was a diamond member. It is probably reasonable to assume that he knew that she was gambling more than he was but on his story that is so in any event because he says that on a number of occasions, he had to just watch TV while his wife continued to gamble and he was needed to drive his wife home as she did not drive a car. However, the knowledge or even the constructive knowledge of the husband as to how much his wife was gambling and whether a reasonable person in the position of the husband would have realised that the wife must be gambling with money which she had embezzled, is sketchy in the extreme.
I will now consider the two vital questions. A, did the husband receive any of the funds embezzled by the wife and B, did the husband have even constructive notice of the fact that the relevant moneys were derived from a breach of fiduciary duty. As I have said, Mr Glover says that it is erroneous to look at these two questions separately. I suppose they do overlap in some respects in that evidence on one question may also be evidence on the other, and it seems to me that the authorities do treat them separately, and I will do so.
[3]
Question A
The evidence of Ms Lucy Young is that the wife placed the moneys which she had embezzled from her employer into three separate bank accounts. Paragraph 40 of Ms Young's first affidavit sets out details of the three accounts.
Account number one is the account of G-Valley Plant Hire. That is an account for a business conducted by the husband and the wife, but the business name is registered in the sole name of the husband. Ms Young reckons that $305,245.02 was transferred to this account in an unauthorised way from the plaintiff's moneys. Later this was amended to $350,095.62. The amount was embezzled between 16 July 2012 and 4 February 2014.
Account number two is a "Smart Access" account in the name of the wife and $134,871.41 was embezzled and placed in this account between 23 April 2013 and 11 February 2014.
Account number three was the wife's "Streamline Account" and $44,809.21 was embezzled between 13 March 2013 and 17 September 2013.
The plaintiff's claim against the husband is for the $350,095.62, which it is said went into his bank account because it was his business and the $44,809.21, which is said to have gone into the account to pay the everyday living expenses of the husband and wife.
In his written submissions, Mr Glover put that the husband received a benefit from the unauthorised transactions having regard to "the unauthorised transactions returned the balances in the accounts from debit to credit". For example, in relation to account one, the deposit made on 16 July 2012 and that on 24 July 2012, converted a debit balance into a credit. He referred to the bank statement behind tab 5 of exhibit LY1.
The bank statement shows that account number one was with the Commonwealth Bank and it was a premium business cheque account in the name of the wife and the husband trading as G-Valley Plants. It was from time to time in debit to a small amount, but mostly in credit. However, as of the 15th of July it was in debit to $486.71. On the 16th July 2012, $5,000 was deposited marked "salary SBA weekly pay ADJ FSBA". FSBA is the abbreviation for the former name of the plaintiff. That deposit of $5,000 left the account substantially in credit.
On 24 July the bank statement again shows salary deposits from the plaintiff, two amounts, one of $3,064 and the other of $3,403. They were the only amounts to which counsel drew my attention but if one trawls through the bank statements there are other transfers from the plaintiff into this bank account through to 2014. However, there was no attempt by the plaintiff to prove that apart from these first two amounts referred to in counsel's submissions (at para 28a) that the payments were made not just for some authorised salary, but for some unauthorised moneys described as salary.
Mr Glover said that the fact that the business name was in the husband's sole name and the fact that he was a co-signatory to this number one account and that the $350,000 odd found its way into this bank account, shows that there was a receipt by the husband of that money.
This must be balanced against the fact that not only was the husband a signatory to this account, but the wife was listed as the first of two account holders (this may be because her name was Suzi and his was Thomas or it may be for some other reason I was not told) that the wife on all the evidence handled all the financial affairs of the marriage. The husband only ever went to the bank once to open the account and the husband's evidence was that he left all the accounting to his wife, he did not look at any financial documents and that he was handed money by his wife from time to time to pay bills in cash or to conduct some recreational gambling.
The mere fact that a business is registered in the name of X with ASIC is not conclusive evidence for all purposes that that person is the proprietor of the business. All the evidence in the instant case shows that this business was one which was a joint enterprise of the husband and the wife, the husband doing the day to day work and the wife doing the administration and the finance.
The sub-question arises as to whether payment into a joint bank account which is solely administered by the wife can be said to be a receipt for the moneys put into that account by the other joint holder, the husband.
I mentioned during argument, though neither counsel cited them to me, the cases that have been decided on the Yerkey v Jones [1939] HCA 3; 63 CLR 649 principle. Under that principle, if a wife is a mere volunteer yet at law becomes liable for a guarantee for her husband's business dealings she may be excused in equity if she is a volunteer, that is, if she does not receive any substantial benefit from the transaction.
There have been a series of cases which indicate what is considered to be a substantial benefit in this connection which in my view by analogy are useful in the present context.
What must be received is the tainted property or at least an interest in the tainted property. If the fraudster converts the property and then makes a gift of what was the outcome of the conversion then the receipt of the tainted property might not be established.
It does not seem to me in the instant case that this factor comes into the mix because it was, at least so far as account number one is concerned, the actual money that came from the plaintiff that found its way into account number one.
However, insofar as the husband may have received a benefit for paying his household expenses is concerned it would seem to me that quite a long line of authority shows that there is no benefit.
One line comes from the old death duty cases of which the classic example is Sargood's case (Perpetual Trustee Co Ltd v Commissioner of Stamp Duties (1935) 36 SR (NSW) 160 at 170). Although I mentioned this case a few times during the argument no one took it up. The facts in Sargood's case in essence were that a man gave money to his fiancée and the intention of his gift was for the fiancée to buy a house. She used the money to buy a house and she lived there with the donor who became her husband for a year or so when the husband died. Because he died within three years of the gift it could be caught up in the estate for death duty purposes as notional estate if the husband had not entirely excluded himself from benefit of the gift. The Full Court of this Court held that "his only benefit was due to his matrimonial rights under and by virtue of his marriage and … it cannot be attached in any way to the gift transaction". See also Union Trustee Co v Webb [1915] HCA 40; 19 CLR 669 and O'Connor v Commissioner of Succession Duties (SA) [1932] HCA 28; 47 CLR 601 at 612-13.
The other line of cases which goes in exactly the same direction is cases dealing with whether a woman who is a director of the family company or a member of a partnership running the family business, but apart from receiving dividends, is a completely inactive director or partner, is a volunteer so that she can take advantage of the Yerkey v Jones principle referred to earlier.
The authorities are unanimous on the point that in order to be excluded the wife must be the recipient of real benefit and that incidental benefit which accrues generally to the family of which the wife is a member is not sufficient benefit … see Armstrong v Commonwealth Bank of Australia (1999) 9 BPR 17035 at 17053-4 and State Bank of NSW v Chia (2000) 50 NSWLR 587 at 601. Both Hamilton J in the former decision and Einstein J in the latter decision reminded everyone that in Warburton v Whiteley (1989) 5 BPR 11628 at 11634, McHugh JA had said that it was clear that it was on the financier to prove that there was a benefit in all the circumstances.
Accordingly, I have great doubt on the facts of this case of the relatively skimpy evidence presented by the plaintiff, the lack of cross-examination of the husband and wife as to the operation of the business and the husband's more substantial interests in it than he confessed to, that there has been a receipt of the benefit of the fraudulent transaction of the moneys received through the breach of fiduciary duty.
[4]
Question B
However, any doubt as to the answer to Question A is of minor significance because it seems to me on the evidence of this case that there has been no establishment that there has been no sufficient case made out by the plaintiff that the husband even had constructive notice of the wife's fraud.
The Lender relies on, as many financial bodies have in the past (see Armstrong's case at 17053), that the spouse was a partner in the business and was receiving, at least, indirect benefits in having his domestic lifestyle well looked after. That on the authorities is not enough.
In this particular case I pressed Mr Glover for particulars as to the knowledge of the husband. In his written submissions as I have indicated he referred to the transactions of the 12th and 24th of July 2012. He said on more than one occasion that when one looked at the evidence, the business of the plant hire was very much decreasing so that he must have known that his lifestyle could not have been supported by the business as theretofore. Unfortunately that submission overlooks the real facts. As I have set out earlier, in 2012 to 2013, the business made a profit of over $80,000. It was this financial year in which the deposits were made into the number one account in July 2012. Nothing about the failure or success of the business had any relevance at that time at all.
Although I was presented with a sheaf of figures, there was very little indeed to link the sheaf of figures with whether all the deposits into the number one account were "unauthorised" transactions or whether they were part of the wife's general income. Indeed, had the husband looked at the bank statements he would have seen the notation - "Salary FSBA".
In any event, because of the line of authorities on benefits that I have already referred to, one does not presume that benefits that a spouse has received in a matrimonial relationship are the consequence of some nefarious transaction on behalf of the spouse.
In any event when the wife, as she did in 2012, had at least three sources of income - her legitimate salary, the profits of her plant hire business, and her side activities, - and the husband had been accustomed to receiving benefits, one could not say in the 2012 to 2013 financial year that the husband should have, as a reasonable man might have in all the circumstances, suspected that not only was the wife supplying him with moneys other than the business or her salary, but that she was receiving them because of a breach of a fiduciary duty.
It may be that towards the end of the 2013 financial year (it must be remembered that the fraud stopped in February 2014 only two thirds of the way through that year) a reasonable man might have started to form some suspicion but there was not strong cross-examination on this and what there was of the husband, he responded by saying that he was not at all aware. One can well understand that a person who is used to a particular lifestyle and who may not have access to the exact figures of his business would not have recognised that the wife must be supplementing the funds he was receiving from some other source or even take the further step that that other is illegitimate.
Now the wife said that the husband would not have understood that the business was failing because she did all the administrative work of the partnership and he only did manual work such as watering the plants. Although he contradicted her in other ways, such as the reason for not going to the Club, it did not seem to me that that particular piece of evidence was shown to be incorrect in the cross-examination.
There is no doubt and, indeed, the wife continually confessed that she did keep from her husband her continued excessive gambling. Even though he was not driving her to the Club she would get a taxi. She would tell him that she was going to visit her sick mother and stay overnight whereas in actual fact she was spending many hours at the Club gambling. She also said that she was a diamond member and that there was a special diamond room for high flyer gamblers such as herself to play and that her husband being only a platinum member was not involved so he would not observe it. I have some doubts as to this because it would seem from the husband's gambling figures that he spent more time gambling himself than he would admit though it is very difficult to make any final finding on this because of the wife using the husband's membership card to increase his bonus points by giving it to her friend Diane or other people who were using two machines.
In all of this the onus of proof is on the plaintiff and it does not seem to me that that onus has been discharged.
I should mention the case of Heperu Pty Ltd v Morgan Brooks (No 2) [2007] NSWSC 1438 and on appeal, sub nom Heperu Pty Ltd v Belle [2009] NSWCA 252. Palmer J at first instance at [122] of the judgment and following said that Ms Belle did have a bank account into which the disputed moneys were paid. That account was opened for her by the fraudster and she knew nothing about it. It fact the fraudster managed all of Ms Belle's family affairs in an apparent trustworthy manner. The plaintiff in the case argued that Ms Belle could have found out what the true situation was, but didn't. Palmer J said at 126, "a person who has the means of finding out about something does not thereby have an obligation in law to find out unless there is some apparent reason to do so''. That utterance is relevant for the present case. However he also found that Ms Belle did not receive the funds. His Honour followed National Commercial Banking Corporation of Australia Ltd v Batty [1986] HCA 21; 160 CLR 251 at 268, that just 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 the 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.
Again, although in this particular case it was not a stranger who put the money in the account, but rather his wife, the husband is in similar plight. Essentially the appeal was dismissed but Allsop P, as his Honour then was, entered into a considerable amount of discussion of the relevant principles which is not contrary to anything I think I have said in these reasons.
Reliance was also placed on the decision of Kelly J in Artcraft Pty Ltd v Dickson [2014] SASC 108. His Honour followed Heperu in the Court of Appeal, but acknowledged that the matter was a question of fact and on the facts found that the plaintiff's claim based on the first limb of Barnes v Addy must succeed. With respect I do not consider it as adding anything further to what I have already discussed.
Accordingly, it follows that the plaintiff's claim against the husband fails because I am not satisfied on the balance of probabilities of either of the two matters which the plaintiff has to prove. Accordingly, there is a verdict for the husband and the plaintiff must pay the costs of the husband of the litigation.
As I mentioned earlier, a freezing order was made over both the wife and husband's property. So far as the husband is concerned that freezing order should not have been made as the facts have now been established. Accordingly, I order that the husband have liberty, if and only if he files a notice of motion within 28 days of the date of delivery of these reasons, to apply for damages for loss suffered by reason of the freezing order. The exhibits may be returned after 28 days.
[5]
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: 31 March 2015