Aequitas Ltd v Sparad No 100 Ltd [2001] NSWSC 14; (2001) 19 ACLC 1006

Applicant S70 of 2003 v Minister for Immigration and Multicultural and Indigenous Affairs [2003] FCA 1338

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588

Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 106

Backstop Nominees Pty Ltd v Goscor Pty Ltd [1990] VicRp 41; [1990] VR 468

Barlow Clowes International Ltd (in liq) v Vaughan [1991] EWCA Civ 11; [1992] 4 All ER 22

Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334

Beach Petroleum NL v Johnson [1993] FCA 283; (1993) 115 ALR 411

Birch v Ellames [1817] EngR 16; (1794) 2 Anst 427

Bishopsgate Investment Management Ltd (in liq) [1995] Ch 211

Bolwell Fibreglass Pty Ltd v Foley [1984] VicRp 8; [1984] VR 97

Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25

Boscawen v Bajwa [1966] 1 WLR 328

Carr v Finance Corp of Australia Ltd (No 1) [1981] HCA 20; (1981) 147 CLR 246

Cave v Cave (1880) 15 Ch D 639

Cordinup Resorts Pty Ltd v Terana Holdings Pty Ltd (1997) 143 FLR 18

Dean & Westham Holdings Pty Ltd v Lloyd (1991) 3 WAR 235

Dean v Lloyd [1990] WAR 42

Eastman v Director of Public Prosecutions (ACT) (2003) 198 ALR 1

Foskett v McKeown [1998] Ch 265

Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102

Frith v Cartland (1865) 2 Hem & M 417

Grugeon v Gerrard [1840] EngR 625; (1840) 4 Y & C Ex 119

Hagan v Waterhouse (1992) 34 NSWLR 308

Halifax Mortgage Services Ltd v Stepsky [1996] Ch 1

Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198

Heartwood Nominees Pty Ltd v Oakleigh Acquisitions Pty Ltd [2003] WASC 12

John F Goulding Pty Ltd v Victorian Railways Commissioners [1932] HCA 37; (1932) 48 CLR 157

Lancashire & Yorkshire Railway Co v McNicoll (1918) 88 LJKB 601

McKeown v Cavalier Yachts Pty Ltd (1988) 13 NSWLR 303

McLauchlan v Prince [2001] WASC 43

Monarch Petroleum NL v Citco Australia Petroleum Ltd [1986] WAR 310

Moscow Narodny Bank Ltd v Mosbert Finance (Aust) Pty Ltd [1976] WAR 109

Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583

Parsons v The Queen [1999] HCA 1; (1999) 195 CLR 619

Patrick v Simpson (1889) 24 QBD 128

Penfolds Wines Pty Ltd v Elliott [1946] HCA 46; (1946) 74 CLR 204

Perpetual Trustees WA Ltd v Walker [1982] WAR 224

Pott v Clegg [1847] EngR 212; (1847) 153 ER 1212; 16 M & W 321

Re Australian Home Finance Pty Ltd (in liq) [1956] VicLawRp 1; [1956] VLR 1

Re Dawson [1966] 2 NSWR 211

Re Diplock; Diplock v Wintle [1947] Ch 716

Re Global Finance Pty Ltd; Ex parte Read [2002] WASC 63; (2002) 26 WAR 385

Re Goldcorp Exchange Ltd [1955] 1 AC 74

Re Oakleigh Acquisitions Pty Ltd (in liq) [2003] WASC 75

Ryan v O'Sullivan [1956] VLR 99

Saunders v Vautier [1841] EngR 629; (1841) 4 Beav 115; 49 ER 282

Scook v Premier Building Solutions Pty Ltd [2003] WASCA 263

Space Investments Ltd v Canadian Imperial Bank Commerce Trust Co (Bahamas) [1986] UKPC 1; [1986] 1 WLR 1072

Taylor v London & County Banking Co [1901] 2 Ch 231

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107

Voss v Suncorp-Metway Ltd [2003] QCA 252

Wollongong City Council v Fregnan [1982] 1 NSWLR 244

Xenos v Wickham (1867) LR 2 HL 296

Young v Murphy [1996] 1 VR 279

1 PULLIN J: This is an application by the plaintiffs for summary judgment for a declaration that the plaintiffs are beneficially entitled to the sum of $100,457.84, held by the defendant in a bank account, and for an order that the defendant pay that sum to the plaintiffs.

2 This is another case arising out of the collapse of Rowena Pty Ltd trading as Graeme Grubb Finance Brokers ("Rowena"). The defendant is the liquidator of Rowena.

3 Rowena arranged a transaction between the plaintiffs and Cordova Pty Ltd and Mrs Pullella, whereby the plaintiffs were to lend money to Cordova and Mrs Pullella in exchange for a registered first mortgage over land as security for repayment. For convenience, I will refer to Cordova Pty Ltd and Mrs Pullella as "Cordova". In more detail, I find that the steps taken in the transaction were as follows.

4 On 1 July 1998, Rowena wrote to Cordova. The letter read:

"Dear Dr Cordova and Mrs Pullella,

RE: MORTGAGE LOAN $60,000 FOLIO 5981

Further to your loan application our folio 5981, we wish to confirm that your loan has been approved subject to the following terms and conditions;

1. LOAN AMOUNT

$60,000.00

2. TERM OF LOAN

1 year.

3. INTEREST RATE

(Interest rate details were inserted)

5 The letter went on to specify the penalty for early repayment and stated that payment was to be made by direct debit to the St George Trust Account maintained by Rowena. It specified the security as a first mortgage over 314 Walter Drive, Morley. It stated the insurance requirements, costs, and estimated funding date, which included within it a statement:

"The lender's Agent will use the best endeavours to obtain funding in a reasonable time ..."

"11. Certificate of Appointment

Please find attached a Certificate of Appointment which should be executed by you, both witnessed and dated and returned to us together with your cheque for $160.00 and the executed copy of the loan approval letter."

7 The certificate of appointment stated that Cordova appointed Rowena to act on their behalf as a finance broker to arrange the mortgage loans referred to in an accompanying letter and to pay brokerage fees to Rowena, plus an agreed amount by way of legal costs incidental to the preparation, completion and registration of the mortgage, and stamp duty payable. Cordova signed a copy of the letter, which read that they "hereby accept this loan approval letter subject to the terms and conditions specified above". They also signed the certificate of appointment.

8 On 12 July 1998, Rowena wrote to the plaintiffs stating that it confirmed "your first mortgage investment", the principal amount being shown as $60,000, along with details about the interest rate and the term of the loan. (The interest rate and the term were the same as those set out in the letter of 1 July 1998 quoted above). The letter enclosed a deed of appointment for signature by the plaintiffs, but that document has not been located and therefore not exhibited. Counsel for the plaintiffs concedes, however, that the standard form of deed of appointment was enclosed and accepted by the plaintiffs. I was informed that the standard form was the same as in another case heard immediately after this case, namely the case of Patroni v Conlan [2004] WASC 16. The deed of appointment exhibited in that case reads:

"RECITALS This Deed of Appointment is to be read in conjunction with and ancillary to the Deed of Mortgage between the Borrower, the Lender and the Guarantor.

1. The Lender agrees to appoint the Broker as its agent and attorney for the following purposes:

1.1 Negotiating and giving full force and effect to the loan by the Lender of the sum described in the Schedule hereto ('the Principal Sum') to Rancher Enterprises Pty Ltd ('the Borrower') pursuant to the terms of a Deed of Mortgage to be made between the Borrower of the first part, Guarantor of the second part and the Lender of the third part ('the Deed of Mortgage') which loan is to be secured against a mortgage ('the Mortgage') granted by the owner described in the Schedule hereto ('the Owner') in favour of the Borrower over the land described in the Schedule hereto ('the Land').

1.2 Collecting payments made by the Owner pursuant to the Mortgage.

1.3 Apply and invest the repayments in the manner authorised by the Deed of Mortgage or conveyed to the Broker by the Lender.

1.4 To take such legal action as the Broker considers necessary or desirable for projecting the position of the Lender and for enforcing the Lender's rights and remedies pursuant to the Deed of Mortgage and Mortgage including:

(a) without further notice initiating legal proceedings on the Lender's behalf in the name of the Lender;

(b) drafting, preparing and issuing any and all legal documents and proceedings in the name of the Lender that the Broker considers necessary to enforce the terms of the Mortgage.

2. The Lender agreed to pay the Broker a fee calculated in the manner set out in schedule 1.

3. The Lender agrees to ratify and confirm any legal action taken by the Broker pursuant to this deed.

..."

9 On 13 July 1998, the plaintiffs drew a cheque for $60,000 in favour of Rowena. Rowena paid this into the trust account maintained by Rowena at St George Bank.

10 On 17 July 1998, Rowena authorised the drawing of a bank cheque from the trust account for $60,000 in favour of Cordova, which was paid to Cordova.

11 On a date unknown but before 27 July 1998, Cordova executed a mortgage ("Mortgage 1") as security for repayment for $60,000. It contained a covenant that Cordova would pay to the plaintiffs the "principal sum" in the manner provided in the mortgage. The principal sum was defined as the sum of $60,000. Another covenant by Cordova was that it would, on demand, pay to the plaintiffs the principal sum, provided that if there was observance and performance of all the covenants, terms and conditions in the mortgage, demand would not be made before the repayment date, which was stated to be 17 July 1999.

12 There was also a covenant 21, which provided that the mortgage should remain a security for payment to the plaintiffs and should not be redeemed or redeemable until payment to the plaintiffs of not only the principal sum and interest but also "such other sums of monies as shall from time to time be owing by [Cordova] ... to [the plaintiffs] on any account whatsoever ..."

13 In March 1999, Rowena proposed an increase of the original loan. This appears from the letter dated 19 March 1999, in which Rowena wrote to the plaintiffs proposing an increase of $40,000 to the loan to Cordova, once again on the basis of the security of a mortgage. The letter read:

"Dear Mr and Mrs Lane,

RE: PROPOSED FIRST MORTGAGE INVESTMENT - $100,000 ...

Further to our phone conversation, we wish to confirm as follows:

1 BORROWERS

Dr F Cordova & Mrs M Pullella of F. Cordova Pty Ltd ...

2 LOAN AMOUNT

$100,000.00 (Increase of $40,000.00)

14 The letter went on to specify the interest rate, when the interest was payable, the term of the loan, that the security was to be first mortgage over 314 Walter Drive, Morley, and to state the penalty for early repayment and other matters that I need not recount.

15 The letter provided that Rowena would collect all interest for a fee. The plaintiffs agreed to advance $35,000 rather than $40,000 on the terms set out in the letter of 19 March 1999.

16 On 31 March 1999, the plaintiffs paid $35,000 to Rowena and this was paid by Rowena into the St George Trust Account. On 1 April 1999, Rowena drew a cheque from the trust account for $34,205 (being $35,000 less brokerage fees) in favour of Cordova. On 6 April 1999, the cheque was "returned unpaid". On 16 April 1999, Rowena drew a new cheque on the trust account for $34,205 to replace the dishonoured cheque, and this was paid to Cordova.

17 The defendant was appointed provisional liquidator of Rowena on 16 July 1999 and liquidator of Rowena on 21 July 1999. Rowena is insolvent.

18 The second mortgage ("Mortgage 2") was executed by Cordova on 10 August 1999 to secure the principal sum of not only the $35,000 but also as further security for the $60,000. The principal sum was shown as $95,000. As in Mortgage 1, there was a covenant by Cordova to pay on demand.

19 The two mortgages executed by Cordova were never registered.

20 After the defendant was appointed as provisional liquidator, the plaintiffs contacted Cordova, and it was agreed that Cordova would make interest payments due under the mortgages direct to the plaintiffs. After the repayment dates in Mortgage 1 and Mortgage 2 passed, the plaintiffs made demand on Cordova to pay the moneys owing under Mortgage 1 and Mortgage 2. Cordova readied itself to pay to the plaintiffs the $95,000 and all interest and other moneys owing under the covenants and conditions contained in the two mortgages.

21 The defendant, as agent for Rowena, then disputed the plaintiffs' entitlement to the money, and all three parties agreed to the establishment of a bank account into which the moneys would be paid and then held by the defendant pending further directions from the Court. At settlement and discharge of the mortgage on 28 November 2000, the amount paid by Cordova was $100,457.84. The defendant is holding that sum plus interest which is accumulating pending the outcome of this case.

Why the Defendant disputes the Plaintiffs' entitlement to the money

22 The plaintiffs are at law entitled to the moneys paid by Cordova. The plaintiffs hold Mortgages 1 and 2, and covenants in those mortgages provide that they are the persons entitled to the principal sums of $60,000 and $35,000. The defendant submitted that the plaintiffs obtained only an equitable mortgage and that they were therefore not the bona fide purchasers of a legal interest. It is true that Mortgage 1 (and this also applies to Mortgage 2) was unregistered. This conferred only an equitable interest in the land which was mortgaged, but the plaintiffs are not relying on that aspect of the mortgages. The plaintiffs are entitled to the money in dispute because it was paid as a result of the covenant to repay in the mortgage. That covenant was a legal interest - a contract - enforceable in a court of law. The defendant refers to ASC v Melbourne Asset Management Nominees Pty Ltd [1994] FCA 1031; (1994) 49 FCR 334 and Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 and submits that these cases support his contention that the moneys in dispute should be held by Rowena for the benefit of all who have a claim on the fund. Those cases are distinguishable, because they concerned the question about what the trustee should do with money in the hands of the trustee. This case concerns the issue about whether there is any equity which would prevent the plaintiffs from having money which a court of law would award to them. The money in dispute is not held by the trustee (Rowena) in this case. The defendant only has the money in dispute here as an interim arrangement, pending the decision in this case. The defendant, however, seeks to invoke the equitable jurisdiction of the Court and says that Rowena was a defaulting trustee because (the defendant argues) the money paid by Rowena (and particularly the $35,000) can be shown by the technique or process of tracing, to be money paid by investors other than the plaintiffs, and that the chose in action (ie the covenant to repay in Mortgage 2) was given in exchange for a payment by those other investors and, as a result, the chose in action is said to be property held by the plaintiffs on trust for the other investors. As a result (the defendant argues), he must cause, and has on behalf of the defaulting trustee Rowena caused, Rowena to trace the other investors' money into the chose in action and thence into the moneys paid by Rowena in discharge of the promise to repay.

23 Even if the other investors can trace into those moneys (which the plaintiffs deny), the plaintiffs argue that they are bona fide purchasers for value without notice of any breach of trust and therefore have good title to the covenants, and therefore to the moneys paid by Cordova pursuant to the covenants. The defendant seeks to meet that argument by contending that the plaintiffs, if they are to rely on the bona fide purchaser doctrine, must show that they gave value, and that to show that value was given, the plaintiffs must be able to trace the money they paid to Rowena, into Rowena's account and out to Cordova in return for the covenants. The defendant says that the plaintiffs cannot do this, at least in respect of the $35,000, because after the $35,000 was paid into Rowena's trust account, the account was overdrawn, and so any attempt by the plaintiffs to trace the moneys out of the account must fail at that point: In re Diplock [1948] Ch 465 at 521. That contention is rejected by the plaintiffs.

24 The defendant, as liquidator of Rowena, has sworn an affidavit stating that persons by the name of Caccioppoli, Gebert, Clark, Brejnak, Glewis and Mobilia and Woodthorpe "may be able to claim a priority over [the plaintiffs] to the repayment of any principal and interest in respect of the $35,000".

25 As a result of the issues set out above, I must now refer to the St George trust account which was operated by Rowena. Rowena was entitled to operate one trust account rather than opening a separate trust account for each investor, because of the provisions of s 48 of the Finance Brokers Control Act 1975.

26 The trust account was maintained at the St George Bank, and, as Justice Owen found in Conlan v Registrar of Titles [2001] WASC 201; (2001) 24 WAR 299 at [5], on about 84 occasions between June 1996 and May 1999 the trust account was overdrawn at the close of business on a particular day, sometimes to a significant extent. A large number of other investors and mortgagors made payments into the trust account, and a large number of those persons have lost money as a result of the collapse of Rowena.

27 It is first necessary to inspect the trust account in the period from 13 July 1998 to 17 July 1998, when $60,000 was paid by the plaintiffs into the trust account and then $60,000 withdrawn by Rowena and paid to Cordova. There were various debits and credits in that period, but the lowest credit balance of the trust account between those dates was $180,118.96.

28 It is also necessary to examine the trust account entries in the period 31 March 1999 to 16 April 1999, which was when the $35,000 transaction took place.

29 On 31 March 1999, when $35,000 amount was deposited into the trust account by the plaintiffs, the trust account was in credit and increased by the amount of that deposit, bringing the balance of the account on that day to $50,269.83.

30 On 1 April 1999, when Rowena drew a cheque for $34,205, that reduced the trust account balance to $48,103.80, and by the end of the day the trust account was overdrawn to the extent of $19,289.94. On 6 April 1999, the account went further into overdraft, and the closing balance on that day was $50,357.44. As I mentioned, the cheque for $34,205 was dishonoured and the account recredited with that amount on 6 April 1999. Between 6 April 1999 and 16 April 1999, the account was sometimes in credit and sometimes overdrawn, and before the cheque was drawn but other moneys were deposited.

31 On 16 April 1999, a cheque was drawn by Rowena on the account in the sum of $34,205 and paid to Cordova on that day. This cheque was honoured on presentation. The account had been overdrawn at the beginning of 16 April 1999. The following shows the entries in the trust account statement:

"I believe that on 16 April 1999 there was a settlement of an unrelated transaction. In particular, a mortgage the subject of folio 4384 was discharged on 16 April 1999 and the sum of $212,652.27 was paid to the trust account. The mortgagor was Anthony Raphael Caccioppoli and Patricia Thelma Caccioppoli. The mortgagee under a second mortgage G87956 was [Gebert, Clark, Brejnak, Glewis and Mobilia and Woodthorpe]. Based on the documents listed below, I believe there is evidence that ... all the mortgagees (other than perhaps Mr Kevin Woodthorpe) did not receive re-payment of their principal and interest from the settlement sum of $212,652.67. Those mortgagees may be able to trace their moneys into the payment of $34,205 from the trust account to [Cordova] on 16 April 1999. They may be able to claim a priority over [the plaintiffs] to the repayment of any principal and interest in respect of the $35,000."

"I have no evidence that Mr Woodthorpe ever received repayment of any principal that he may have paid into the Rowena trust account and therefore, I do not know if he has a claim to any repayment of the $35,000 by [Cordova]."

34 The defendant has written to each of these other mortgagees (who I will refer to as "Caccioppoli"), enclosing a copy of the writ, the application for summary judgment, and the supporting affidavits from the plaintiffs. The defendant has suggested that they seek legal advice in relation to any claim to the moneys and, if they wished to pursue the claim, to take steps to become joined to the plaintiffs' action prior to the special appointment on the hearing of the summary judgment application. The defendant has confirmed that he did write to these people where he had their address. No-one sought to intervene in the proceedings or to appear on the application. Nevertheless, the defendant, by withholding the moneys repaid by Cordova, seeks, in effect, to act as a trustee seeking to recover what he says may be the trust moneys of Caccioppoli, or alternatively the trust moneys of the entire pool of trust claimants.

"13. Apart from the question as to the proper defendant raised in paragraph 3 above, I have no interest in the outcome of this matter and Rowena will abide by the decision of the Court.

14. If the plaintiffs' claim is unsuccessful then the proceeds in the Account ... would be available to the trust claimants generally. I have not given nor, unless directed by the Court, intend to give notice of the plaintiffs' claim to every claimant against Rowena the Rowena trust account."

36 This latter reference is a reference to the large pool of investors who advanced money to Rowena for the purposes of lending the money on security to mortgagors, and who did not obtain security and who cannot recoup the lost moneys, save through the liquidation process. The defendant therefore seems to contend that he is seeking to recover the moneys for Caccioppoli, or alternatively for the whole pool of trust creditors who have been left languishing after the collapse of Rowena. The books and records of Rowena are in a "mess" (see Conlan v Registrar of Titles (supra) at [7]) and it is doubtful that they can be reconstructed.

The contracts between the Plaintiffs, Cordova and Rowena

37 It is also necessary that I make some findings about the contractual arrangements between the plaintiffs, Cordova and Rowena.

38 I find that the plaintiffs and Cordova, via the agency of Rowena, entered into two contracts. The first was entered into about 12 July 1998. Under this agreement, the plaintiffs, in consideration of Cordova agreeing to pay interest and to execute a registrable mortgage over Cordova's land containing a covenant to repay the loan, promised that they would advance $60,000, which sum was to be paid to Rowena, and then paid by Rowena to Cordova.

39 The second contract was entered into about 31 March 1999, pursuant to which the plaintiffs, in consideration of Cordova agreeing to pay interest and to execute a registrable mortgage over Cordova's land containing a covenant to repay the loan, promised to advance $35,000, which sum was to be paid to Rowena, and then paid by Rowena to Cordova.

40 The position of Rowena as agent was considered in Conlan v Registrar of Titles (supra) in relation to another transaction involving the same form of certificate of appointment and the same form of deed of appointment. Owen J considered the "agency question" between [214] and [230] of his reasons and concluded:

"I am prepared to assume that [Rowena] was the agent of the individual investors for the purpose of receiving the moneys to be advanced to [the Mortgagor] and arranging the preparation and registration of the relevant security documents. This does not mean it was agent for the investors only. The description given by one of the parties was that '[Rowena] was a limited ad hoc agent for the investors and the borrower'. I think this is an apt description."

41 While I agree that Rowena was the agent for both parties, I need to say more about Rowena's position, both in relation to the money which was paid to Rowena and in relation to the contractual position between Rowena and the plaintiffs. On the latter point, I conclude that Rowena agreed with the plaintiffs that it would act as the plaintiffs' agent, performing all of the work necessary to carry the two contracts between the plaintiffs and Cordova into effect, that is to arrange for the preparation of a mortgage, to arrange for the mortgage to be signed and registered, and to pay the agreed sums of money to Cordova in exchange for the mortgages.

42 Further, in my opinion, Rowena received the $60,000 and the $35,000 as stakeholder. This is because in each case when payment was made there was an enforceable contract on foot between the plaintiffs and Cordova, whereby the plaintiffs agreed to advance moneys to Cordova on condition that a mortgage was executed. The essence of stakeholding is that a binding contract has been entered into: Sorrell v Finch [1977] AC 728 at 745. A stakeholder holds money in medio to abide an event: Maloney v Hardy and Moorshead [1971] 2 QB 442. In this case, the event was the execution of the mortgage. Once that happened, Cordova was entitled to the money. Before the event, neither party had the right to the moneys, but, of importance to this case, the plaintiffs had no right to call for repayment of the money during the time allowed for Cordova to execute the mortgages. Rowena, as stakeholder, held the money as trustee for both parties to await the event: Skinner v Trustee of the Property of Reed [1967] Ch 1194 at 1200.

43 This case is similar in some ways and different in others from the circumstances in Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112. That was another case of investors like the plaintiffs in this case claiming moneys which had been paid by a mortgagor pursuant to a covenant in an unregistered mortgage. The liquidator again intervened and held the money pending a resolution by the court. In the case of ASIC v Rowena Nominees Pty Ltd (ibid), a sum of $655,000 had been paid into the trust account by the person in the position of the plaintiffs in this case. There were, in that case, many transactions on the trust account, but between the time when the plaintiff's money was paid into the account and drawn out to pay to the mortgagor, the account balance never went into overdraft, although it did at times reduce to a figure below the amount which the plaintiff had paid into the trust account. In that case, I held that, because the mortgagor was a bona fide purchaser for value without notice, other investors who may have attempted to trace moneys into the covenant, and hence into the moneys held by the liquidator, would be defeated in a claim to the moneys because the mortgagor was a bona fide purchaser for value without notice. I should have gone on to say in that case that the plaintiff also gave value for the covenant to repay. In that case, the cheque drawn by Rowena to make the advance to the mortgagor was from a fund in which the plaintiff had an interest. The plaintiff in that case was a bona fide purchaser for value without notice.

45 The $60,000 was paid by Rowena on 17 July 1998. The trust account was never overdrawn before $60,000 was paid out of the account to Cordova. Indeed, as I have already found, the trust account balance was never lower than $180,118.96. The cheque paid to Cordova was drawn from the trust account which contained a pool of money in which the plaintiffs had an interest. The plaintiffs were therefore bona fide purchasers for value without notice of any breach of trust by Rowena. There is no evidence to show whether the pool was in any way reduced by misappropriation of money by Rowena, but even if that were the case, it would not matter because the plaintiffs also had an interest in that pool, so that when Rowena drew $60,000 to exchange for Mortgage 1, the plaintiffs gave value for the covenant in that mortgage. The plaintiffs had no knowledge of any breach of trust by Rowena at the time of that transaction. Therefore, on any view of the case, the plaintiffs are entitled to judgment for the repayment of that sum (plus interest).

46 What then of the $35,000? I should begin by dealing with the issue about whether the plaintiffs could claim this was payable under the covenants in Mortgage 1 and Mortgage 2, or only under the covenant in Mortgage 2. In my view, the covenant in Mortgage 1 obliged Cordova to pay only $60,000. Covenant 21 in Mortgage 1 does not assist the plaintiffs, because it only applied if the plaintiffs resorted to the mortgage as a security, which they do not seek to do. Thus, I hold that the plaintiffs had to rely on Mortgage 2 to recover the $35,000. The covenant in Mortgage 2 was not given until Mortgage 2 was executed on 10 August 1999. Mortgage 2 was executed as a result of Cordova's promise (before 31 March 1999) to do so in consideration for the plaintiffs' promise to advance $35,000.

47 By 16 April 1999 the $35,000 which the plaintiffs had paid to Rowena on 31 March 1999 to be used in relation to the Mortgage 2 transaction, had been entirely misappropriated by Rowena. This was because the trust account was overdrawn between the time that the plaintiffs paid moneys to Rowena and the time when Rowena drew moneys out in relation to the Mortgage 2 transaction on 16 April 1999. When $34,205 was withdrawn and paid to Cordova, the defendant claims that the money withdrawn was not the plaintiffs' money. As a result, the defendant says that Rowena, as trustee for Caccioppoli, may trace that payment into Mortgage 2, into Cordova's covenant to repay $35,000, and hence into the money now held by the defendant.

48 The plaintiffs on the other hand, in par 12 of the statement of claim, plead that it is the plaintiffs who have an immediate right to the cheque which was paid by Cordova to the liquidator in November 2000. That is a very sparse pleading of the case in relation to the $35,000 based on Mortgage 2, but no objection was made about the adequacy of the pleadings, and the defendant via counsel made submissions on the basis that the plaintiffs were claiming the $35,000 under both Mortgage 1 and Mortgage 2, and both mortgages were put in evidence.

49 If the plaintiffs can show that they are bona fide purchasers for value of Mortgage 2 and the covenant to repay contained in it, without notice of any breach of trust, then the plaintiffs will be entitled to the moneys paid by Cordova in November 2000 in discharge of the covenant to repay in Mortgage 2.

50 If the plaintiffs are bona fide purchasers for value without notice, they must first show that they gave value or consideration for Mortgage 2, and therefore for the covenant by Cordova to pay $35,000 to the plaintiffs. Consideration must be valuable and not nominal, but it need not be adequate: Park v Dunn [1916] NZLR 761. If there is some consideration, then the Court will not make enquiry about its adequacy: Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 580-581. It must also move from the purchaser: Redman v Permanent Trustee Co of New South Wales Ltd [1916] HCA 47; (1916) 22 CLR 84.

51 Did the plaintiffs, in relation to the covenant in Mortgage 2, give value? The defendant submits that the plaintiffs did not give value, because, according to the defendant, the plaintiffs lost their money when the account was overdrawn, and that Caccioppoli can trace their money into the money which Rowena drew out of trust to pay Cordova $34,205 on 16 April 1999; and (the defendant submits) no consideration therefore moved from the plaintiffs to Cordova in exchange for Mortgage 2. I am here proceeding on the basis that the plaintiffs' contractual promise to pay $35,000 was not value: see Scott & Fratcher: "The Law of Trusts", 4th Ed, Vol IV, par 302.

52 If, as the defendant contends, the plaintiffs were the sole beneficiaries of the $35,000 paid to Rowena, then, according to the defendant, Rowena misappropriated all of the plaintiffs' money and then misappropriated the other investors' trust money in order to restore the plaintiffs' money and complete the Cordova transaction. If this is so, then, to use the words of Bacon VC in Taylor v Blakelock (1886) 32 Ch D 560 at 564, this is one of those painful cases in which, as between two innocent persons, a loss having been sustained, the court is to decide upon whom that loss should fall.

53 That brings into consideration the case of Taylor v Blakelock (supra). In that case, trust money was misappropriated by a trustee. The defaulting trustee, who was also the trustee of another trust, then misappropriated moneys in that second trust in order to restore the trust moneys in the first trust. The rogue trustee in Taylor v Blakelock was a man called Carter, who was a member of a firm of solicitors. Carter was a trustee with the plaintiff in the Gyhon Trust. Carter was also the trustee with the defendant in another trust called the Pearson Trust. Carter misappropriated moneys in the Pearson Trust. His co-trustee in each trust, the plaintiff and the defendant, were both unaware of this misappropriation. To restore the money misappropriated in the Pearson Trust, Carter then sold some property of the Gyhon Trust and misused the proceeds by paying the money to the Pearson Trust, or rather on its behalf, to permit it to purchase some Caledonian stock to the value of the amount that he had previously misappropriated from the Pearson Trust. Again, the plaintiff and defendant had no notice of this conduct. Carter then died. Taylor took action on behalf of the Gyhon Trust, arguing that he was entitled to follow the misappropriated proceeds into the Caledonian stock purchased on behalf of the Pearson Trust with moneys from the Gyhon Trust. Bacon VC dismissed the claim. The matter then went on appeal, but the appeal was dismissed. In the Court of Appeal, Cotton LJ described the case of the plaintiff. Cotton LJ said that the plaintiff: "... says 'this was purchased with or was my trust fund, and as I have identified it I have a right to follow it'."

54 Cotton LJ also made an obiter comment about the position of a volunteer. He said:

"If the Defendant held it simply as a transferee without any consideration, of course he would stand in no better position than the transferor; that is to say, as the fund in the hands of Carter would have been subject to the trusts of the Gyhon will, anyone who took it from him simply as a volunteer could not say that he had any better title, and would still be bound by the trusts of the Gyhon will."

"But is that the position here of the Defendant? At the time when this transfer was made to him, when this fund got into his name, he had a right to sue his co-trustee for the purpose of getting that money, which had got into his hands or into the hands of his firm; either way Carter would have been liable. When he took the transfer of this stock into the name of himself and of Carter he, by accepting the transfer, lost and put an end to the right of action which he had as against Carter in order to make him bring back this fund, and invest it for the purposes of the Pearson settlement. Therefore he gave up by accepting this stock a valuable right. He gave valuable consideration just as much as if he had actually parted with money; for he gave up, lost, parted with the right to sue Carter, which up to the time when this stock was transferred he had. In my opinion, independently of any question of pressure, that was valuable consideration, and prevents it being alleged on the part of the Plaintiff, or those cestuis que trust whom he represents, that Blakelock holds this debenture stock in the same position as Carter did. It is not suggested for one moment that he had any notice of the breach of trust committed by Carter. He had no notice at all of the fact, but simply took from Carter, without any notice at all of any breach of trust committed by him, the sum of money which purchased this stock transferred into their joint names."

56 I reach the same conclusion in this case. It will be seen that the reasoning and much of the language I use in the next paragraph is the same as the reasoning and the language used by Cotton LJ in the passage just quoted, but with the names of the parties in this case substituted for the names of the parties in that case.

57 At the time when Rowena drew $34,205 from its trust account on 16 April 1999, the plaintiffs had a right to sue their trustee, Rowena, for the purpose of getting back the money which Rowena had misappropriated, and Rowena would have been liable. (I am assuming that, in accordance with the defendant's submission, Rowena held the money as trustee for the plaintiffs and not as stakeholder). This is because a trustee who wrongly pays away trust money, commits a breach of trust and comes under an immediate duty to remedy such breach. See Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 196 ALR 482 at [35]. When Rowena drew from trust $34,205 and paid it to Cordova in exchange for Cordova's promise to execute Mortgage 2, the plaintiffs lost and put an end to any right of action they might have had against Rowena in order to make Rowena bring back the moneys Rowena had misappropriated. Therefore, the plaintiffs gave up a valuable right by accepting the benefit of the moneys used by Rowena to obtain the covenant in Mortgage 2. The plaintiffs gave valuable consideration just as much as if they had actually parted with moneys; for the plaintiffs gave up, lost, and parted with, the right to sue Rowena, which, up to the time when Rowena paid money to purchase Mortgage 2, they had. In my opinion, that was valuable consideration for the $34,205 which Rowena then gave to Cordova. As a result, the plaintiffs did give value for Mortgage 2. See also Thorndike v Hunt [1859] EngR 282; (1859) 3 DE G & J 563; 44 ER 1386, and particularly the judgment of Lord Justice Knight Bruce.

58 Both Taylor v Blakelock (supra) and Thorndike v Hunt (supra) were referred to without disapproval in Eccles v Hall (1894) 13 NZLR 433. In Eccles v Hall, however, the defendant was not able to establish on the facts that value was given for the legal estate, and therefore the defence of bona fide purchaser for value without notice did not succeed. I have not been able to find any Australian cases referring to Taylor v Blakelock or Thorndike v Hunt. Meagher Gummow and Lehane (supra) at 8-285 refer to Taylor v Blakelock uncritically as authority for the proposition that the bona fide purchase doctrine applies to personalty as well as realty.

59 The defendant seeks to distinguish Taylor v Blakelock and Thorndike v Hunt, and refers to Wall v Cockerell [1863] EngR 342; (1863) 10 H L Cas 229; (1863) 11 ER 1013 as an authority suggesting that the plaintiffs did not give value. Wall v Cockerell was another case of a trustee of two trusts misappropriating money from the first trust and transferring the title deeds, being property of the second trust, to the beneficiaries of the first trust to cover up the first misappropriation. The defaulting trustees, Messrs Hall, were solicitors. In my opinion, Wall v Cockerell is distinguishable. In that case, there was no third party transaction as there was in Taylor v Blakelock and as there is in this case, and the money paid by the respondents, the beneficiary of the first trust, to Messrs Hall, was not "ever paid by the Respondents to the Appellant or his agents ... for the purpose of [the] mortgages.": Wall v Cockerell (supra) at 242-243. That latter fact was one of the points which led the Court of Appeal in London Freehold & Leasehold Property Company v Baron Suffield [1897] 2 Ch 608 to distinguish and not to follow Wall v Cockerell, along with the point that in Wall v Cockerell there was no authority to borrow on the security of the impeached deed and the mortgagor was induced to execute the mortgage by misrepresentation. In Thompson v Palmer [1933] HCA 61; (1933) 49 CLR 507, Wall v Cockerell was considered but in the context of issue estoppel which had arisen in Thompson v Palmer (see p 546).

60 Wall v Cockerell was a case of one party to a deed applying to set aside the deed. That distinguishes the case from the present, where a person who is not a party to Mortgage 2 is attempting to recover money paid under Mortgage 2 but not seeking to set the mortgage aside. Eccles v Hall (supra) is likewise distinguishable. It was a case like Wall v Cockerell, which involved a contest relating to a transaction between the two affected trusts. There was no third party involved in Eccles v Hall.

61 The situation can also be analysed, or explained in slightly different terms, by reference to the High Court's analysis of Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] AC 421 in the Youyang case (supra) at [45] to [47]. The High Court noted that it was necessary to examine the "underlying commercial transaction" to determine whether there was compensable loss recoverable from a defaulting trustee. In this case, the underlying commercial transaction was a transaction whereby a contract was entered into by the plaintiffs and Cordova, whereby money was to be advanced by the plaintiffs to Cordova in exchange for a mortgage containing the covenant to repay. That transaction was completed. Until the underlying commercial transaction was completed, Rowena could have been required by the plaintiffs and/or Cordova to restore the stakeholder moneys which had been misappropriated. However, once the underlying commercial transaction had been completed, there was no longer any right in the plaintiffs or Cordova to compel Rowena to restore their misappropriated trust moneys, because the plaintiffs ended up suffering no compensable loss.

62 Further and alternatively, my conclusion that Rowena was a stakeholder means that as soon as Rowena received the $35,000 from the plaintiffs, the plaintiffs had given value. This was because the plaintiffs thereupon lost control of the money in the sense that they could not demand repayment of it unless the transaction did not proceed. On the other hand, Cordova gained an interest in the moneys in the sense that it was then held by Rowena on trust for Cordova as well as the plaintiffs, and Cordova had the right to call for payment of the money if it performed its part of its contract with the plaintiffs.

63 For those reasons, I consider that the plaintiffs were purchasers for value of the covenant to repay in Mortgage 2.

64 The next question is whether or not the plaintiffs had notice of the other investors' claim, and if so, whether it means in the circumstances that the plaintiffs were not bona fide purchasers for value without notice.

65 This question is said, by the defendant, to arise because Mortgage 2 was not executed by Cordova until 10 August 1999. There is no suggestion that the plaintiffs knew about the alleged breach of trust when they entered into the contract to advance the $35,000, or on 16 April 1999 when Rowena paid Cordova. However, between 16 April 1999 and 10 August 1999, the Supreme Court appointed the defendant as provisional liquidator and then as liquidator. Did any of those events result in the plaintiffs obtaining notice that there had been a breach of trust which relevantly affects the plaintiffs' claim? The defendant argues that they did, and that it does.

66 It is first important to eliminate one possible source of notice, namely Rowena's own knowledge that it was acting in breach of trust. A principal will have imputed notice of information known to an agent, whether such information is communicated by the agent to his principal or not. However, the presumption of imputed notice will be rebutted when the information arises from the agent's own fraud: Dempster v National Companies & Securities Commission (1993) 9 WAR 215; J C Houghton & Co v Nothard, Lowe & Wills Ltd [1928] AC 1.

67 However, the liquidator says that the plaintiffs must have become aware of Rowena's breach of trust by reason of the publicity which surrounded the collapse of Rowena, the appointment of a provisional liquidator and a liquidator. This assumes that the relevant date for notice is 10 August 1999, when the mortgage was executed, rather than March and April 1999, when the contract was entered into and consideration was given by the plaintiffs. On that assumption, I asked counsel for the liquidator whether there was any evidence to show that there must have been knowledge on the plaintiffs' part which would defeat their claim that they were bona fide purchasers for value without notice in relation to Mortgage 2. Counsel appearing for the liquidator said in answer:

"Only the facts of the liquidation. We haven't produced evidence of the newspaper articles or anything. There were letters that Mr Conlan sent by circular mail to people.

PULLIN J: Is that in the material before me?

HAWKINS MR: No it's not."

68 The affidavit of Mr Lane, sworn in support of the application for summary judgment, does not depose that he did not have knowledge of any breach of trust as a result of the publicity surrounding the appointment of a provisional liquidator and then liquidator of Rowena.

69 There is a detailed discussion about who bears the onus of proof in these circumstances in Meagher, Gummow and Lehane, Equity, Doctrines and Remedies", 4th Ed, 8-300. The authors say that the majority of what cases exist on the topic would support the view that it is for the holder of the legal estate wishing to avail himself of the doctrine to plead and prove both that he acquired the legal estate for value and that at the relevant time he had no notice. The authors go on, however, to say that after a review of authorities that it is impossible to elicit any coherent statement of principle from the authorities. See also Goff & Jones, "The Law of Restitution", 6th Ed, 2-052 to 2-053. I will assume for present purposes, however, that the onus is on the person claiming to rely on the bona fide purchaser doctrine, ie the plaintiffs.

70 However, even if the plaintiffs had, by 10 August 1999, received knowledge of the breach of trust, is that any reason for denying the plaintiffs' claim? The result in cases where the person acquiring the legal estate receives notice of a prior equity between the time when he furnished consideration and the time when the legal estate is acquired, differs. It is clear that if a purchaser cannot acquire a legal estate without participating in the commission of a breach of trust, then the purchaser will not come within the bona fide purchaser doctrine and will not defeat an earlier equitable interest: Meagher, Gummow and Lehane (supra) 8-255; Harpham v Shacklock (1881) 19 Ch D 207; Taylor v Russell [1892] AC 244. However, in Scott & Fratcher "The Law of Trusts", 4th Ed, Vol IV, par 312, it is explained that:

"... if a purchaser has paid value and the breach of trust is so far completed before he has notice that no further act on the part of the trustee is necessary to complete it, he is a bona fide purchaser, although he had not acquired the legal title to the property before he received notice of the breach of trust."

71 See also Bailey v Barnes [1894] 1 Ch 25 at 36 - 37 per Lindley LJ; Powell v London & Provincial Bank [1893] 1 Ch 610 at 615; Blackwood & Ibotson v London Chartered Bank of Australia (1874) LR 5 PC 92 at 111, per Lord Selbourne LC; and Meagher Gummow and Lehane (ibid). Lord Millett's obiter in Macmillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 3 All ER 747 at 772, criticising the application of the rule in certain circumstances, does not apply here because of my finding that the plaintiffs, in April 1999, gave value for the moneys Rowena paid to Cordova, and therefore for the covenant in Mortgage 2.

72 I will now return to the circumstances of this case.

73 Cordova was a bona fide purchaser for value of the moneys it received from Rowena. Cordova was not a trustee of those moneys. All Cordova did, in executing Mortgage 2, was to belatedly fulfil the promise it made in March 1999 to execute Mortgage 2. It made this promise in consideration of the promise of payment and the payment of $35,000 (less brokerage), which it received on 16 April 1999. Cordova did not commit, or participate in, any breach of trust or violate any duty to any person in executing Mortgage 2 and giving it to the plaintiffs. The plaintiffs gave value for Mortgage 2 on 16 April 1999 without notice of any breach of trust. The plaintiffs obtained Mortgage 2 on 10 August 1999 without having to deal with the trustee Rowena. The plaintiffs, even if they had notice of Rowena's breach of trust on 10 August 1999, did not commit, or participate in, any breach of trust or violate any duty in receiving Mortgage 2, which had been promised in the contract with Cordova. In fact, on 10 August 1999, the plaintiffs did nothing at all. That was the day when Cordova executed Mortgage 2, thereby conferring the title to the chose in action on the plaintiffs. In my opinion, there is nothing in those circumstances warranting the intervention of equity in favour of Caccioppoli or any other of Rowena's trust creditors.

74 The result is that even if the plaintiffs (not having knowledge of the breach of trust in March or April 1999, when the contract was entered into and value given) learned subsequently (and before 10 August 1999) of the breach of trust by Rowena, this is not any reason for denying the plaintiffs' claim.

75 In my opinion, the plaintiffs have established that they were bona fide purchasers for value of a legal interest (namely the covenant to repay in Mortgage 2) without notice of any breach of trust by Rowena. The plaintiffs are therefore entitled to the moneys paid by Cordova pursuant to the covenant. For all of the reasons given above, the plaintiffs have established their right to judgment for the $35,000 and interest.

76 In my opinion, the plaintiffs are entitled to summary judgment for the full amount of the claim.