Peter Finn liable as an accessary
41The next question is whether Mr Finn became personally liable to account to the plaintiffs for the moneys received into the Finn Warner & Associates bank account and disbursed by him on the ground that he assisted with knowledge in a dishonest breach of trust by Sam Hraiki.
42Mr Finn deposed that in about May 1993 he established a taxation practice then known as Finn Maher & Associates ("FMA") in partnership with a Mr Adrian Maher. In about February 2006 Mr Warner purchased Mr Maher's interest in the practice and became an equal partner with Mr Finn. They carried on business as partners under the name of Finn Warner & Associates ("FWA"). That partnership was dissolved upon Mr Finn's becoming a bankrupt on 31 March 2008.
43Mr Finn deposed that he first met Shadi Hraiki in the late 1990s and completed his personal income tax returns from 1997 to 2007. He arranged a loan for one of his clients through Shadi Hraiki who was a mortgage broker at the time. Mr Finn deposed that he first came to know Sam Hraiki in about 1995 and since that time completed Sam Hraiki's personal income tax returns and in later years the income tax returns for a company with which Sam Hraiki was associated. He also deposed as follows:
" 17. In or about 2003, I commenced to lend money from time to time to Sam, or money to persons introduced to me by Sam. Lending transactions on this basis took place regularly through me personally or FBI, but never through FWA, nor FMA. All these loans were on a short term basis - 3, 6 or 12 month durations.
18. From time to time, Sam would deposit varying amounts into bank accounts maintained by FMA and FWA. As Sam was an existing client of the practices for a number of years, therefore I would agree to Sam's numerous requests that he pay loan and property transaction proceeds into the accounts of FMA and FWA from time to time. Sam would often need the settlement of funds urgently and could not wait for normal clearance times, therefore I would draw on the deposited funds on the same day.
19. The payment of $260,426.52 on 28 September, 2007, into the FWA Business Management Account maintained with the National Australia Bank and numbered [xx-xxx-xxxx] ( Bank Account ), was one such transaction.
...
30. I recall these cheques being drawn, but I cannot recall the circumstances surrounding how they were drawn. What I do recall about the deposit and the drawing of the cheques on the Account is:-
I recall a conversation with Sam in which the following words or words to the following effect were said:
Sam said: Pete, I have a bank cheque on a settlement of one of my properties. Can I get it made out to Finns Bin Investments? I need the money quick.
I said: I can't give you the cleared funds until the cheque clears because I don't have sufficient funds in the Finns Bin Investments bank account.
Sam said: What about Finn Warner?
I said: Yeah, we do have funds there. That would be OK.
On 28 September, 2007, I recall attending the National Australia Bank at Burwood with Sam and cheque 1209 drawn on the Account. At this time, cheque 1209 was cashed at the teller at the Bank and the cash of $100,000.00 was given to Sam who took it away with him.
Cheque 1211 was money owing by Sam to [Finns Bin Investments] in relation to the payment earlier made by [Finns Bin Investments] in relation to a telephone account held by Sam.
Cheque 1210 was handed to Sam on 28 September, 2007, which he took away with him from my office ."
44In oral evidence in chief Mr Finn said that when he referred to " Sam " in para 18 of his affidavit, he was referring to companies associated with Sam Hraiki. He later added that there were also other third parties who deposited money into the FMA or FWA account and that " we should add other third party mortgages totally unrelated to Sam that he would have organised ". He said that moneys flowed on from these short term mortgages on a regular basis when he (Mr Finn) was lending money. Mr Finn said that through Finns Bin Investments he would lend money to third parties under short term mortgages organised by Sam Hraiki. He said that when money was repaid it was often needed again quickly, sometimes on the same day, to re-lend under a new short term mortgage and Mr Finn would draw on the FMA or FWA account before the funds from the previous mortgagor had been cleared, rather than have the repayments deposited to Finns Bin Investments' account and drawn from that account. He could draw on the FMA or FWA account before the deposited cheque was cleared because it was in credit.
45As at the close of business on 27 September 2007 (the day before the deposit of $260,426.52) the Finn Warner account was in credit to the extent of $256,911.55. This was due to the crediting to the account of payments from the Australian Taxation Office, evidently as tax refunds for clients of the practice. Although the account was not styled or operated as a trust account, Finn Warner & Associates would have been required to account to its clients for the moneys received, less, presumably, any fees it was entitled to deduct from the receipts. I infer that this was also the position for the earlier periods in respect of which Mr Finn described his practice of drawing on the account to provide loans through Finns Bin Investments to clients of Sam Hraiki before cheques deposited to the account in repayment of earlier loans had been cleared.
46There was no evidence to corroborate Mr Finn's evidence of that practice. He had been subpoenaed by the plaintiffs to produce any correspondence with Sam Hraiki between 1 January 2007 and 31 December 2008. No documents were produced. He said he had lost all his emails. He was subpoenaed to produce documents in relation to deposits made by Sam Hraiki into bank accounts of Finn Warner & Associates as described in para 18 of his affidavit. He produced no such documents on the ground that the deposits were made not by Sam Hraiki, but by companies associated with Sam Hraiki. This was notwithstanding that Mr Finn had deposed by affidavit that the deposits were made by Sam Hraiki.
47Mr Finn accepted in cross-examination that the transaction of 28 September 2007 with Sam Hraiki which he described in his affidavit was not a transaction of the kind he described in paras 17 and 18 of his affidavit.
48Mr Finn gave oral evidence in cross-examination in connection with the deposits and withdrawals of 28 September 2007 that went beyond the recollection to which he deposed in para 30. He said that Sam Hraiki told him that he was under financial distress and pleaded with Mr Finn to get at least some of the money as cash (T56). Sam Hraiki told Mr Finn that he was threatened with physical violence unless he paid $100,000 in cash the next day. According to Mr Finn, Sam Hraiki told him that the reason he was drawing a cheque payable to his sister was that he owed his sister money. Mr Finn said that Sam Hraiki told him that he could not clear funds quickly enough through his own bank account. Mr Finn said that " no doubt he was having problems with his bankers " but also said he was not aware of that at the time.
49Mr Finn understood that Sam Hraiki had financial troubles at the time. On 24 August 2007 a cheque for $165,000 had been deposited to the Finn Warner & Associates account. It was dishonoured. According to Mr Finn, Sam Hraiki explained this transaction by saying that the cheque had been deposited in error. Mr Finn said that at that time he asked Sam Hraiki why he put the cheque in the bank. He said he could not remember Sam Hraiki's answer, but he was told that Sam Hraiki was under financial stress (T56).
50Mr Warner did not call evidence to corroborate Mr Finn's evidence. I was told that Sam Hraiki was in prison. That did not mean that he was not a compellable witness. There was no evidence to corroborate Mr Finn's assertion that Sam Hraiki owned property in Wollongong. Nor was there any evidence to contradict Mr Finn's evidence that Sam Hraiki did own real property.
51I do not consider that Mr Finn was a credible witness. His evidence as to the practice of deposits being made to the account of Finn Warner & Associates shifted from his saying that deposits were made by Sam Hraiki, to saying that they were made by companies associated with Sam Hraiki, to saying that they were made by borrowers from Finn Bin Investments unrelated to Sam Hraiki except through his having organised the loans. His evidence that the transaction on 28 September 2007 involving the payment of $260,426.52 was " one such transaction " (as described in para 18 of his affidavit) was inconsistent with the rest of his evidence. Mr Finn gave his evidence as if each shift were a clarification of what he had attempted to convey earlier. This was not credible.
52In cross-examination Mr Finn said that having been asked by Sam Hraiki to clear funds through Finn Warner's account, he received a telephone call from a lady who said she was from the office of Adam Ly & Associates who said to him words to the effect " We have a property settlement relating to Mr Hraiki and he has asked us to put the funds into Finn Warner. Is that correct? " Mr Finn said that he said that that was okay and that he checked with his bank that the bank cheque had been deposited. He gave no evidence of that in his affidavit. Mr Ly gave evidence that he gave no instructions to anyone from his firm to contact Mr Finn and he was the only person in the firm who had any dealings with any of the participants in the loan transactions. He said that although there was a woman in the office working as a clerk, she had no dealings in relation to the matter and he gave no instructions to anyone to make any phone calls in relation to it. I accept that evidence. I do not believe Mr Finn's evidence that he received a call from Adam Ly & Associates about the pending deposit to the Finn Warner account.
53Mr Finn's evidence is inconsistent with the facsimile from Ms Fabriola to Charles Kolotas dated 20 September 2007 which states that the lender's solicitor and Mr Finn, had agreed on the loan amount of $600,000 (at [18] above). I would not reject his evidence on that account. As I have said, Ms Fabriola was not called. Mr Finn gave no evidence about that letter and was not asked about it in cross-examination. I infer that both counsel took a forensic decision as to whether to broach the matter. There were arguably two competing principles at play. On the one hand, where a party fails to ask a witness questions in chief about a relevant topic, it may be inferred that the party fears to do so lest the examination in chief expose facts unfavourable to the party ( Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418). As Ms Fabriola's facsimile had been tendered and admitted without objection it might have been expected that Mr Finn would have been asked questions in chief to explain or contradict the conclusion that might otherwise be drawn from the document that he was aware that the moneys deposited to the account were the proceeds of a loan to a client of Mr Hraiki's. On the other hand, there is also a principle that if a party intends to submit that an inference adverse to a witness should be drawn from evidence adduced in the case, the relevant matter should be put to the witness in cross-examination so that the witness can deal with it ( Browne v Dunn (1893) 6 R 67; see generally Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation (Cth) [1983] 1 NSWLR 1 at 22-23).
54No notice was given in any of the affidavits that the plaintiff might rely upon the document in question as contradicting Mr Finn's evidence. It was tendered as an exhibit. In his affidavit Mr Finn said that he did not become aware of George or Colleen Hraiki, or know of them until the commencement of the proceedings. He was not challenged on that evidence. The correspondence from Ms Fabriola cannot be relied on to contradict that evidence. He also gave evidence in his affidavit as to his understanding of the source of funds deposited to the Finn Warner account which was inconsistent with the conclusion that could otherwise be drawn from Ms Fabriola's facsimile.
55In those circumstances I think that it was necessary for counsel for the plaintiffs to put to Mr Finn that he had agreed with the lender's solicitor the amount of the loan and was aware that the source of the funds was from a loan organised by Sam or Shadi Hraiki, if that submission was to be put.
56In any event, in the absence of evidence from Ms Fabriola, I would infer that the information that she conveyed to Mr Kolotas was information given to her by Sam or Shadi Hraiki, but not that the information so provided to her was true. Such a statement may well have been made to allay any query from her as to the disposition of the balance of the loan.
57Nonetheless, the transaction must have appeared suspicious to Mr Finn. On his version of events Sam Hraiki was directing payment of the proceeds of sale of one of his properties. One of the payments was to be made to his sister to repay a debt owed to her. Mr Finn could advance no plausible legitimate reason why, if Sam Hraiki wished to repay money he owed to his sister, he would not have simply drawn a cheque on settlement payable to her and provided it to her. There was no advantage in obtaining a quick clearance of moneys by obtaining a bank cheque payable to Finn Warner & Associates, and then drawing a personal cheque of that firm payable to Sam Hraiki's sister which she would then have to clear.
58Moreover, Mr Finn knew that Sam Hraiki was in financial distress. On his version of events he was told that Sam Hraiki was having dealings with an underworld figure who threatened physical violence if he was not paid $100,000 in cash. He knew that Sam Hraiki organised loans for clients. He must have known that passing the proceeds through the Finn Warner account could be a means of making it difficult to trace the money in the hands of its recipients to the source of payment. In the vernacular, Sam Hraiki was laundering the money through the account. The fact that the moneys in the account, or a substantial part of them, had to be accounted for to clients of the firm (whether or not they were strictly trust moneys) should only have heightened the need for inquiry.
59I accept Mr Finn's evidence that he understood that Sam Hraiki was in financial distress. That was corroborated by the dishonour of the earlier cheque for $165,000. That transaction was not explained. Mr Finn said that he asked Sam Hraiki why he put the cheque for $165,000 in the bank, but said he could not remember his answer, except to say that it was done in error. That is hardly a satisfactory explanation. Mr Finn gave no evidence that he was expecting any deposit from Sam Hraiki by way of a repayment of a loan of the kind he described elsewhere in his evidence. He did not say that Sam Hraiki wanted to clear those funds quickly by drawing on the credit balance of the account, and that is not what happened. It was an event that called out for explanation.
60Mr Finn assisted Sam Hraiki's breach of trust by agreeing to his depositing the payment of $260,426.52 to the Finn Warner & Associates bank account and withdrawing cash and drawing cheques on his direction. Although Sam Hraiki was a constructive trustee and not an express trustee, Mr Finn is also potentially liable as an accessary to Sam Hraiki's breach of trust if he assisted the breach with the requisite knowledge ( Orix Australia Corporation Ltd v Moody Kiddell & Partners Pty Ltd [2005] NSWSC 1209 at [159]-[160]).
61In Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89 the High Court held that the requirement of " knowledge " for the purposes of the second limb of Barnes v Addy (1874) LR 9 Ch App 244 at 254 was satisfied by any of the following states of mind:
" i. actual knowledge;
ii. wilfully shutting one's eyes to the obvious;
iii. wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
iv. knowledge of circumstances which would indicate the facts to an honest and reasonable man. "
62It is not sufficient if the third party merely has knowledge of circumstances which would put an honest and reasonable man on inquiry (at [171]-[178]).
63Counsel for George Hraiki submitted that Mr Finn wilfully and recklessly failed to make such inquiries as an honest and reasonable man would have made. For the reasons above I agree with that submission. Even if I were to accept Mr Finn's evidence that he was told by Sam Hraiki that the moneys to be deposited to the Finn Warner account were the proceeds of sale of a property owned by Sam Hraiki, the position called out for inquiry, in particular, as to why moneys to be paid to Sam Hraiki's sister should first be passed through the Finn Warner account. At one point it was submitted by counsel for Mr Warner that the reason may have been that only a limited number of cheques could be obtained on settlement of a conveyancing transaction. There was no evidence to that effect and that was not an explanation put forward by Mr Finn.
64Mr Finn knew that Sam Hraiki was a mortgage broker, and therefore had the ability to deal with other people's money, and he knew that Sam Hraiki was in financial distress. Even if he were told by Sam Hraiki that the moneys in question were the proceeds of a sale of one of Sam Hraiki's properties, he still needed to satisfy himself as to why the proceeds of sale were to be passed through Finn Warner's account before being disbursed. Even if I were to accept Mr Finn's evidence as to what he was told by Sam Hraiki, I would be satisfied that he nonetheless wilfully and recklessly failed to make inquiries. That is to say, I would be satisfied that he deliberately did not make inquiries for fear of what he might learn.
65As it is, I am not persuaded by Mr Finn's uncorroborated evidence as to what he was told by Sam Hraiki. Although there is nothing to contradict Mr Finn's version, I am simply not persuaded that he is a credible witness.
66As I do not accept Mr Finn's evidence of his discussions with Sam Hraiki, I am left in the position that Mr Finn was aware that Sam Hraiki was a finance broker who had the ability to deal with other people's money, was himself in financial distress, and used the Finn Warner account in a way consistent with his wishing to make it more difficult for someone to trace a recipient of funds with the source of the funds. In my view Mr Finn's failure to make inquiries was deliberate and satisfies the third of the categories of knowledge sufficient to satisfy the requirement of knowledge expressed in the second limb of Barnes v Addy .
67This conclusion is strengthened by my further conclusion that Mr Finn received a substantial personal reward for allowing Sam Hraiki to use Finn Warner's bank account. In cross-examination he gave the following evidence (T57):
" Q. Why did you also write him a cheque for $155,000?
A. I assumed that that was his money, keeping in mind the assumption was $260,000-odd was his money. I gave him the balance back - I think I drew a cheque to his sister and he owed me some money for a few bills I paid for him, well, Finns Bins actually.
Q. There was, in fact, a shortfall of some thousands of dollars which remained in the Finn Warner account, that was so, was it not?
A. There was a fee.
Q. Yes, but the cheque was for $260,000?
A. I must have paid that out at a later date. Okay, yes, there would have been a fee at that point in time in the Finn Warner account ."
68This evidence was not easy to follow. Mr Finn had deposed in his affidavit that after paying $100,000 in cash and $155,500 to Sam Hraiki's sister, Rita Aoun, a cheque was drawn to Finns Bin Investments for $4,870 that was "in relation to the payment earlier made by [Finns Bin Investments] in relation to a telephone account held by Sam". The difference between the amount received and the amount paid out was only $56.52. I infer that the so-called "fee" was the payment of $4,870 to Finns Bin Investments that Mr Finn elsewhere said was in relation to earlier payments made by Finns Bin Investments for Sam Hraiki. There was no corroboration of his evidence that Finns Bin Investments had paid a telephone or any other account for Sam Hraiki. The "fee" was not paid to the partnership.
69George Hraiki has established that Mr Finn was under a personal liability to account as constructive trustee for the moneys paid into the Finn Warner account.
70However, Mr Finn is bankrupt and the proceedings against him are stayed. The question is whether Mr Warner is vicariously liable for the same amount. It is not suggested that Mr Warner had any knowledge of the facts giving rise to Mr Finn's liability. He did not authorise the transaction.