MBF Australia Limited v Malouf

TEXTS CITED: Mark Hapgood (ed), Paget's Law of Banking (13th ed, 2007) par 15.27

PARTIES: MBF AUSTRALIA LIMITED (Appellant) Samuel John MALOUF (Respondent)

COUNSEL: M CASHION SC/ R SCRUBY (Appellant) B W WALKER SC/ N J OWENS (Respondent)

SOLICITORS: Cutler Hughes & Harris (Appellant) Strategy Legal (Respondent)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT DATE OF DECISION: 14 September 2007

LOWER COURT MEDIUM NEUTRAL CITATION: Samuel John Malouf v MBF Australia Limited [2007] NSWSC 1020

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40710/07 SC 6089/03

HODGSON JA IPP JA BASTEN JA

5 SEPTEMBER 2008 MBF AUSTRALIA LIMITED v Samuel John MALOUF Headnote

Facts Mr Hill represented to the respondent, Mr Malouf, that he could arrange a US$5 million business loan. Mr Hill said the loan would be protected by an insurance policy which Mr Hill would obtain at a cost of $165,000, upon Mr Malouf's payment to him of that sum. Mr Malouf did not have the necessary funds and through HSBC bank he borrowed $165,000 from a private lender. Upon Mr Hill's instructions, Mr Malouf made the cheque payable to the appellant, MBF.

As at November 2000, Mr Hill's company (SRL) was negotiating with MBF for a lease of MBF's property. MBF sent SRL a proposed lease document providing for a term of five years commencing 1 December 2000. It contained a requirement for payment of rent six months in advance, and a bank guarantee for a further six months rent. SRL executed the lease and sent it back to MBF to execute, along with bank cheque for $165,000. Immediately on the cheque being received, MBF permitted SRL as putative tenant to take occupation of the premises.

The promised loan to Mr Malouf never eventuated and the matter was reported to the police. On 13 February 2001, Mr Malouf spoke to Mr Hartley, a manager at MBF. Mr Malouf said he had been "conned" by Mr Hill and that funds paid by cheque to MBF had been dishonestly obtained. Mr Hartley phoned MBF's accounts department and advised Mr Malouf that MBF had received the cheque from Mr Hill. No further inquires were made by MBF.

SRL was unable to provide the bank guarantee required by MBF, but in early March 2001, MBF agreed to accept a security deposit instead and the lease was then signed by MBF. However, SRL paid no further money and moved out of the premises in about May 2001.

Mr Malouf brought proceedings against MBF for return of the $165,000. The primary judge held that MBF held the cheque proceeds on trust for Mr Malouf. MBF appealed.

Issues on appeal Issues arising on appeal were: (1) Did Mr Hill hold the bank cheque and/or its proceeds on trust for Mr Malouf when he caused it to be sent to MBF? (2) Did MBF on or about 6 December 2000 purchase the cheque or rights in respect of the cheque? (3) If so, what rights did MBF then purchase? (4) Did MBF acquire further rights to the cheque in early March 2001? (5) If so, was MBF then a bona fide purchaser of those rights for value without notice of Mr Malouf's interest? (6) What are the legal consequences?

HELD (dismissing the appeal): (Per Hodgson JA, Ipp JA agreeing) (1) The fraud committed by Mr Hill was equivalent to theft, and a trust arose immediately in favour of Mr Malouf: Evans v European Bank Limited [2004] NSWCA 82 at [111]-[116].

2. On 6 December 2000, MBF purchased the rights to: (a) Pay the cheque proceeds into its bank account; (b) Hold the proceeds until the lease was finalised; and (c) To apply the proceeds in discharge of SRL's obligations under the lease if and when the lease was entered into.

(3) MBF was not initially bound to enter into the lease because SLR never provided the bank guarantee. Before MBF voluntarily entered into a new contract in March 2001 by accepting something other than the guarantee, it received notice of Mr Malouf's rights. Hence, any subsequent consideration provided by MBF could not give it additional rights to the cheque.

(4) It was not reasonable for MBF to make no investigation of Mr Malouf's rights. In these circumstances, the onus of showing there was no notice of his rights was not discharged.

(5) MBF was a bona fide purchase for value without notice of certain rights acquired on or about 6 December 2000. MBF was not otherwise a bona fide purchaser for value without notice. But MBF contested the matter on an all or nothing basis, and provided no evidence of the value of the rights it acquired in December 2000. The whole of the cheque proceeds were thus held on trust for Mr Malouf.

( Per Basten JA ) (6) Any title to the cheque transferred by Mr Malouf to Mr Hill was defective because the cheque was obtained by fraud: s 3(3) Cheques Act 1986.

(7) Mr Hill's title was either void or voidable and he could give no better title to MBF. An effective rescission of a voidable agreement would revest property in Mr Malouf: Hunter v BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 at 433E. A question would then arise as to whether Mr Malouf could recover the proceeds where an innocent third party had intervened. However, the better analysis is that the agreement was void ; the fraud prevented any genuine contract coming into existence: Citibank Ltd v Papandony [2002] NSWCA 375 at [64].

(8) The cheque was crossed not negotiable, with the result that MBF could not be a holder in due course for the purpose of s 50 of the Cheques Act . Although the cheque could be transferred by delivery, the person receiving the cheque received no better title than that of the person from whom it took the cheque: s 55. Hence, MBF obtained no legal title to the cheque.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40710/07 SC 6089/03

HODGSON JA IPP JA BASTEN JA

5 SEPTEMBER 2008 MBF AUSTRALIA LIMITED v Samuel John MALOUF Judgment 1 HODGSON JA: On 20 September 2007, pursuant to reasons given on 14 July 2007, Einstein J declared that the appellant (MBF) had since 8 December 2000 held $165,000 on trust for the respondent (Mr Malouf), ordered MBF to pay Mr Malouf $165,000 plus interest, and ordered MBF to pay Mr Malouf's costs of the proceedings. 2 MBF appeals from those orders.

Circumstances 3 The proceedings arose out of a fraud committed on Mr Malouf by a Mr Sam Hill, and negotiations between Mr Hill's company, SRL Technology Corporation Pty Ltd (SRL) and MBF for the grant of a lease by MBF to SRL. 4 Mr Malouf had met Mr Hill in October 2000. Mr Hill represented to Mr Malouf that, through his company Isagila Investments Pty Ltd (Isagila), he could arrange a US$5 million business loan for Mr Malouf. Mr Hill said the loan would be protected by an insurance policy with Lloyds of London, which Mr Hill would obtain at a cost of US$110,000; and that Mr Hill would arrange the loan upon payment to him of that sum. 5 Later Mr Hill told Mr Malouf that the insurance policy could be obtained for a full payment of AUD165,000. Mr Malouf did not have the funds with which to pay Mr Hill this sum, and he arranged with one Deborah Waters from the HSBC Bank to borrow $165,000 from a private lender on terms that it had to be repaid within 30 days. 6 Mr Malouf then spoke to Mr Hill, and was told that the cheque should be made payable to MBF. Mr Malouf asked why the cheque shouldn't be payable to Lloyds of London, and Mr Hill said: "I have funds overseas to cover that amount and they will issue me the policy and once the policy number is issued your funds will be transferred into your HSBC nominated account." 7 There are in evidence two mortgages in favour of Jarong Pty Limited dated 24 November 2000, expressed to be as security for loans of $65,000 and $100,000 respectively to Mr Malouf and his wife, to be repaid on 22 December 2000 together with a "success fee" ($10,000 in each case) and interest. The interest was to be "at a daily rate of fifteen per cent (15%) p.a.", the "p.a." being handwritten and signed by the witness to the mortgage. It is not necessary in these proceedings to decide what this means. 8 There is also in evidence a National Australia Bank cheque dated 23 November 2000 for $165,000 and drawn in favour of MBF. 9 On or about 23 November 2000, Mr Malouf met Mr Hill and Ms Waters at Ms Waters' office at HSBC. Ms Waters had the bank cheque and it was handed to Mr Hill either by Ms Waters or by Mr Malouf. On this or another occasion, Ms Waters stressed to Mr Hill the importance of providing money to pay back the loan. 10 There is also in evidence a document dated 24 November 2000, signed by Mr Malouf as borrower and Mr Hill for Isagila as lender, providing terms for a proposed loan of US$5 million. At the time that document was signed, Mr Hill said it would take ten days to two weeks for the money to arrive. 11 As at November 2000, SRL was negotiating with MBF for a lease of MBF's property at Level 10, MBF Centre, 97-99 Bathurst Street, Sydney. 12 On 4 December 2000, MBF sent a proposed lease to solicitors acting for SRL. The proposed lease provided for a term of five years commencing 1 December 2000 with an option for a further five years; and it contained a requirement for payment of rent six monthly in advance (subject to the first three months being rent free) and a bank guarantee for a further six months rent. 13 On 6 December 2000, SRL's solicitors sent MBF a letter enclosing the lease document executed by SRL, together with the bank cheque for $165,000. The letter was in the following terms: RE: SRL TECHNOLOGY CORPORATION PTY LIMITED LEASE FROM MBF PREMISES: LEVEL 10, 97-99 BATHURST STREET SYDNEY

My instructions are that our client will provide a Bank Guarantee for six months rent, i.e. in the sum of $148,422.00 directly to Frank Cluney in the course of the week.

On our calculation the $165,00.00 covers the following rent and outgoings;

(a) The first six months rent (the first three months are rent free) $74,211.00 GST: $7,421.11

(b) Six month's car parking at $1,350.00 per month $8,112.00 GST: $811.20

(c) Six months cleaning at $875.52 per month $5,253.12 GST: $525.31

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

The balance left is $68,566.26. Which should be applied towards the following six months rent falling due on 1 June 2000 [sic].

Would you kindly return the duly executed documents at your earliest convenience, so that my client may attend to stamping the Lease. Would you also please return the $23,000.00 paid as a security bond to C.B. Richard Ellis with the documents. 14 It was found by the primary judge (and not challenged on appeal) that immediately on the cheque being received, MBF permitted SRL as putative (or proposed) tenant to take occupation of the premises which were to be the subject of the lease. 15 The promised loan to Mr Malouf never eventuated. From 27 November 2000, Mr Malouf telephoned Mr Hill pursuing the matter every two or three days, and on 22 December 2000 he saw Mr Hill at his office in the MBF Building. He asked Mr Hill for "his money", and Mr Hill gave him a cheque for $186,034.25 payable to Jarong. This cheque was dishonoured. After further unsuccessful attempts to get "his money" (meaning presumably either the loan or money to pay Jarong), Mr Malouf reported the matter to the New South Wales Police. 16 On 13 February 2001, Mr Malouf was told by a person in Mr Hill's office that there was an envelope for him at the security desk of the MBF building. Mr Malouf went and collected the envelope, which contained a letter from Isagila purporting to terminate the loan contract. Having read the letter, Mr Malouf approached the security guard in a distressed state, wanting to find out whether MBF had received the bank cheque. 17 Mr Malouf was then taken to the first floor of the building, where he had a conversation with Mr Hartley, the National Property and Facilities Manager with MBF. There is some dispute as to the exact terms of the conversation, to which I will return, but it is clear that Mr Malouf claimed he had been "conned" by Mr Hill and that funds paid by cheque to MBF had been dishonestly obtained by Mr Hill, and it is also clear that Mr Hartley telephoned MBF's accounts department and then advised Mr Malouf to the effect that MBF had received a cheque from Mr Hill. 18 Mr Hartley made no further inquiries about the matter. And about a week after his meeting with Mr Malouf, Mr Hill spoke to Mr Hartley, asserting that Mr Malouf's concerns had nothing to do with MBF and that Mr Hill would "sort it out". 19 SRL was unable to provide the bank guarantee required by MBF, but in early March 2001 MBF agreed to accept a security deposit instead and the lease was then signed by MBF. SRL paid the stamp duty on the lease, but paid no further money; and it moved out of the premises in about May 2001. 20 Mr Hill was arrested on 11 May 2001, and charged with two counts of obtaining benefit by deception in amounts of $100,000 and $165,000.

ISSUES 21 I find it convenient to identify six issues arising from these circumstances, and to deal with these issues in turn. In relation to each issue, I will refer to any relevant evidence as to matters going beyond the circumstances set out above (which are either common ground or clearly established), to the primary judge's decision on that issue, and to relevant appeal submissions; and I will then give my decision on that issue. 22 The six issues are: (1) Did Mr Hill hold the bank cheque and/or its proceeds on trust for Mr Malouf when he caused it to be sent to MBF? (2) Did MBF on or about 6 December 2000 purchase the cheque or rights in respect of the cheque? (3) If so, what rights did MBF then purchase? (4) Did MBF acquire further rights to the cheque in early March 2001? (5) If so, was MBF then a bona fide purchaser of those rights for value without notice of Mr Malouf's interest? (6) What are the legal consequences? 23 The first issue is important, because if Mr Malouf's rights in respect of the cheque and/or its proceeds were any less than those of a beneficiary under a completely constituted trust, then his claim against MBF would be far weaker (in fact, in my opinion, it would be hopeless). 24 The third issue is important, because it does seem that, in relation to such rights as MBF may have purchased on or about 6 December 2000, it was a bona fide purchaser for value without notice.

Did Mr Hill hold the cheque on trust? 25 In relation to this issue, there was evidence from Keith Stern, the General Manager and a Director of Lloyds Australia Limited, as to the practices of Lloyds of London and of associated underwriters, to the effect that they did not provide insurance cover against the risk of non-payment of loans; and as to a search of Lloyds' Automated Transaction Monitoring System, which recorded all underwriting transactions written in the Lloyds' market, which search did not reveal any record of coverage in respect of Mr Hill or Isagila. 26 The primary judge found that Mr Hill did hold the cheque and/or its proceeds on trust, and I substantially agree with his reasons; although I think it is correct to have regard primarily to the cheque itself and only secondarily to the proceeds of the cheque. I will set out my own brief reasons concerning MBF's submissions to the contrary in this Court. 27 Mr Cashion SC for MBF made the following submissions: (1) Neither Mr Malouf nor Mr Hill obtained more than mere custody of the cheque. NAB was the drawer, MBF the payee, and the cheque was purchased with Jarong's funds. The mortgages were not executed until the day after the cheque had been issued, and in any event the circumstance that Mr Malouf and his wife became liable to pay Jarong could not alter the reality that the cheque was purchased with Jarong's funds. Delivery of the cheque to Mr Malouf and/or Mr Hill was consistent with delivery merely of custody. (2) In any event, the express purpose of both Mr Hill and Mr Malouf was that the cheque be made out to MBF and that MBF receive the proceeds of that cheque; and Mr Malouf intended not that the cheque be used to pay Lloyds, but that offshore funds under Mr Hill's control be so used. Accordingly, there could be no constructive or resulting trust and no trust under the principles in Barclays Bank Limited v Quistclose Limited [1970] AC 567. 28 Before dealing with these submissions, I note that at the hearing, MBF took no point as to whether or not Mrs Malouf needed to be joined as a party, and this position was not departed from on appeal. 29 In my opinion, the circumstance that the NAB cheque is dated 23 November 2000 while the mortgages are dated 24 November 2000 does not cast any doubt whatsoever on the clear position that the bank cheque in favour of MBF was provided by Jarong as the advance made in accordance with the terms of the mortgages. In those circumstances, it is not necessary to make any finding as to whether the meeting at HSBC when the cheque was handed over was actually on 23 November 2000 or a day or so later. The intention of Jarong was that Mr and Mrs Malouf become owners of the cheque, and the intention of Mr and Mrs Malouf was that Mr Malouf have it to pay Isagila in order to obtain the promised loan. Having regard to the previous paragraph, it is not necessary to decide whether or not Mrs Malouf retained any property interest in the cheque; and I will proceed on the basis that she did not. 30 The cheque was handed to Mr Hill either by Ms Waters or by Mr Malouf. If it was handed to Mr Hill by Ms Waters, she did so as Mr Malouf's agent. The result intended and achieved was that the cheque, previously owned by Mr Malouf, became the property of Mr Hill, subject to whatever contractual or equitable rights might have arisen from the transaction. 31 It is true that payment of the cheque to MBF was consistent with the intention of Mr Malouf and Mr Hill; and it is also true that Mr Malouf had not, prior to 6 December 2000 when the cheque was sent to MBF, terminated his contract with Isagila. However, this was a case not merely of a fraudulent misrepresentation inducing entry into a contract, but one where, on the evidence and findings of the primary judge, the whole transaction was a fraud perpetrated by Mr Hill. As found by the primary judge (Judgment [30]), Mr Hill never intended to carry out any part of the purported transaction: that is, he never intended to use overseas funds or acquire a Lloyds' policy, and he never intended to provide a loan to Mr Malouf. 32 I agree with the view expressed by the primary judge (Judgment [29]) that accordingly Mr Hill's fraud was equivalent to theft, and that a trust arose immediately: cf Evans v European Bank Limited [2004] NSWCA 82; (2004) 61 NSWLR 75 at [111]-[116] per Spigelman CJ (Handley and Santow JJA agreeing).

Purchase of the cheque on 6 December 2000 33 Relevant to this issue is the following evidence given by Mr Hartley: 3 It was my responsibility as the National Property and Facilities Manager of MBF Australia Pty Ltd I (MBF) to look after all facility aspects of the building at 99 Bathurst Street, Sydney, including floor 10 (SRL's premises). Also in this capacity, I negotiated leases on behalf of MBF over various properties owned by that corporation. I negotiated 5 or 6 leases during my time at MBF.

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

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

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

7 Although I have no specific recollection of going through the process described in paragraphs 5 and 6, above, in relation to SRL's premises in late 2000, I have no reason to think that I departed from the process described in those paragraphs on this occasion.

8 My practice during my time at MBF was that once a signed lease and a cheque for a deposit or advance rent was provided to MBF, the tenant was permitted to take possession of the premises in question. It was my responsibility to arrange access to those premises for tenants. This involved the tenants coming to me to collect keys and security access passes for the premises, including car parking access. I required that the tenant sign paperwork to acknowledge they had collected the keys and passes.

9 Although I have no specific recollection of any SRL representative coming to me to go through the process described in paragraph 8, above, I have no reason to think that I departed from the above practice in relation to SRL's lease over Level 10, 99 Bathurst Street. The process must have occurred because access to Level 10, 99 Bathurst Street (SRL's premises) would not have been possible unless security access passes had been obtained by SRL through me. MBF's legal department did not issue security access passes. 34 The primary judge made the following finding: [22] The short point is that there was a complete 'disconnect' between the purpose for which the Cheque was proffered [namely to be held in escrow pending the execution by MBF of a lease] and the decision by MBF to permit SRL into possession. The evidence falls well short of establishing that MBF delivered up possession because it received the funds. To the contrary, SRL intended that the funds be used to meet its obligations under the Lease if and when executed [Ex PX 11-12]; and MBF received the money on the basis that it could be used only in satisfaction of SRL's obligations if and when they arose under the proposed lease [T 68.7]. 35 Mr Cashion submitted that this was an error, because it was clear MBF gave up possession as a quid pro quo for the cheque. 36 In my opinion, the finding of the primary judge was not that the giving up of possession was not a quid pro quo for receipt of the cheque; but rather that receipt of the cheque did not entitle MBF to the proceeds of the cheque; and that what MBF had to prove was that it was a bona fide purchaser for value without notice of the proceeds of the cheque. 37 At this point, I am focussing on a different question: was MBF a purchaser of either the cheque or of some rights in respect of the cheque? In my opinion, the answer to that question is clearly yes. MBF did give value, that is, letting SRL into possession. Part of the quid pro quo received by MBF was the cheque. Accordingly, in my opinion, MBF was a purchaser for value of whatever rights it then received in relation to the cheque by that transaction.

What rights were purchased on 6 December 2000? 38 The finding of the primary judge was to the effect that MBF merely received the cheque to be held in escrow. 39 Mr Cashion submitted that MBF was entitled to bank the cheque, and was not required to put it in a trust account. He submitted that the finalisation of the lease justifying appropriation of the proceeds was then seen as a formality. 40 In my opinion, it is clear from the terms on which the cheque was provided by SRL, which were contained in the letter dated 6 December 2000 and which bound MBF, that MBF did not then become beneficially entitled to the proceeds of the cheque. Rather, the rights then obtained by MBF were: (1) To pay the cheque into its bank account. (2) To hold the proceeds until the lease was finalised. (3) Then to apply the proceeds in discharge of obligations of SRL under the lease, if and when such obligations arose. 41 It follows from this that the right to apply the proceeds in discharge of SRL's obligations under the lease would not arise until the lease was entered into, and would not arise at all if the lease was not entered into. Since the cheque for $165,000 was in substance property stolen by SRL, there is a question whether MBF could be bound by commitments made to SRL in return for this cheque. However, MBF did not then know the cheque was stolen; and on the basis of what MBF did know, I accept that if, within a reasonable time, SRL satisfied the pre-condition of providing the bank guarantee, MBF would have properly regarded itself as contractually bound to enter into the lease (letting SRL into possession both confirmed consensus as to terms and gave rise to part performance overcoming the need for a document executed by MBF). However, that contractual obligation in fact never arose, because SRL never provided the guarantee; and before MBF voluntarily entered into a new contract with SRL by accepting something other than the bank guarantee, it received the notice concerning the cheque which I will discuss shortly. In those circumstances, in my opinion, any subsequent consideration provided by MBF for the cheque by way of entry into the lease or permitting SRL to continue in occupation could not give MBF additional rights to the cheque or its proceeds. 42 I accept that, in circumstances where the lease was not entered into because SRL did not satisfy the pre-condition of providing the bank guarantee, it could well be that MBF could have applied so much of the $165,000 as was necessary to cover an occupation fee up to the time when it received notice, and damages, if any. For reasons I will give, it is not necessary finally to decide this; and I will assume that MBF did have this entitlement.

Rights obtained subsequently. 43 In about early March 2001, when MBF signed the lease, it became entitled for the first time to apply the proceeds for its own benefit, in satisfaction of SRL's obligations under the lease. In accordance with the findings of the primary judge, and except to the extent considered under the previous heading, this was not disputed by either party. 44 I repeat that MBF was not under any obligation to SRL, prior to early March 2001, to execute the lease. SRL at no time provided the bank guarantee, which was something required by MBF as a condition for entry into the lease.

Was MBF then a bona fide purchaser for value without notice? 45 There is no question raised about the bona fides of MBF; and this question depends upon what conclusion concerning notice should be drawn from the evidence of what happened on 13 January 2001. 46 Mr Malouf's version of the conversation was as follows: Hartley said: " What is the problem ?"

I replied: " You have a tenant in your building by the name of Sam Hill and whose business SRL Technologies is on the 10th floor ".

I said: " Mr Hartley, MBF received a National Bank bank cheque for $165,000 made payable to MBF from Mr Hill. That money is mine and it has been obtained by deception and the police are now involved. Mr Hartley, my wife has just given birth to two twins and this person has conned me, I need you to look into this for me please ."

He picked up the telephone on his desk and called someone about the bank cheque. He said to the person at the other end of the telephone: " Can you verify whether we have received a National Bank cheque for $165,000 for S.R.L. Technologies ?"

Hartley then completed the telephone call and said to me: " Mr Malouf, yes, we are holding a National Bank cheque for $165,000 in trust ."

I said: " That's mine. That's the money Hill obtained by deception ."

Hartley said: " Mr Malouf even though I don't disbelieve you, we are a third party to this cheque and we were not to know ."

I said: " That's fine but I'm putting you on notice now that the monies were obtained by deception. That's my money and I want it investigated and returned to me. The police are involved. Please, Mr Hartley, this will destroy my life ."

Hartley said: " I'm sorry Sam. Even though I sympathise with you, we are a third party to this cheque ."

I said: " Well that's why I am here to tell you the police are involved and to put you on notice to have this problem investigated ."

I then said to Mr Hartley: " How much of the money has been used ?"

Hartley said: " I'm sorry Sam, I can't tell you that. I can only say that there is still negotiation between MBF and Mr Hill in relation to the other monies he promised to have in place ."

I said: " Please Mr Hartley could you look into this for me, it's very important ."

I left my name and mobile number with Mr Hartley. Hartley then shook my hand and said: " I'm sorry Sam, but leave it with me and I have your number ."

I then left Hartley's office. 47 Mr Hartley's version was as follows: 8 A gentleman came to my office and identified himself as Sam Malouf. It was apparent after greeting Mr Malouf that he was upset. I recall the following conversation: Malouf: " I have had business dealings with Sam Hill. Sam Hill is renting level 10 of this building and he owes me a lot of money. He has conned me and ripped me off and this is going to destroy my family. Has MBF been paid by Sam Hill ." I said: " Just hold on a second. I don't know you, but if what you say is true I do feel sorry for you, however, I cannot comment on the business dealings between MBF and SRL ." Malouf: " Ring your legal department. They will be able to verify it ." I said: " The dealings between MBF and its tenant are confidential. There is nothing that I can do for you ." Mr Malouf continued to urge me to check that we had received a cheque. Because I had not seen the cheque. nor was I aware if the cheque had been honoured, I decided to make a call to MBF's accounts department. I no longer recall who I spoke to in MBF's accounts department but I remember being given confirmation that a cheque had been received and it had been honoured. I then said to Mr Malouf: I said: " Yes we did receive a cheque and it has been honoured ." Malouf: " I am sure you took the funds from SRL in good faith but those funds were dishonestly obtained by Sam Hill ." I said: " Look Mr Malouf, my hands are tied, I can't discuss with you business dealings between MBF and SRL Technologies ." Malouf: " That's fine. I have involved the police to investigate this matter ." I said: " That sounds like the best idea ." My conversation with Mr Malouf lasted for approximately 15 minutes. The conversation was amicable and Mr Malouf left my office without fuss.

9 I have read the affidavit of Mr Malouf sworn 18 November 2005. In response to paragraph 32 I disagree with the specifics of the conversation, its tone and the language set out in that paragraph. In particular, I: (a) deny that I said to Malouf that we are "holding a National Bank cheque for $165,000 in trust

(b) deny Mr Malouf saying that I was "required to investigate the matter and return the money to him"

(c) deny Mr Malouf asking how much money "has been used".

10 Whilst I agree that Mr Malouf gave his mobile telephone number to me, it was never discussed nor agreed that MBF or myself would investigate the allegations that he was making. In fact, Mr Malouf indicated that he had involved the Police and I agreed that that was probably the best idea. 48 The primary judge made the following factual findings: [13] The evidence given by both Mr Malouf and Mr Harley constituted their best recollection of the events which occurred. The findings of fact in these reasons are reached by reference to the probabilities often aided by the contemporaneous documentary evidence. On the one issue as to whether as Mr Malouf contended but Mr Hartley did not accept: [vide that Mr Hartley had said to Mr Malouf, during the 13 February 2001 meeting, that MBF was holding a NAB cheque for $165,000 in trust], Mr Hartley's version is accepted as reliable.

[14] As to the disputed evidence of whether at the end of the 13 February 2001 meeting, Mr Hartley was told by Mr Malouf that he was required to investigate the matter and return the money to him, or that Mr Hartley had said to 'leave [the matter] with me', I accept that Mr Hartley [or MBF] did not, at least explicitly, undertake to investigate the matter further. During his cross-examination, Mr Hartley gave evidence that upon being told by Mr Malouf that he had reported the matter to the police, his understanding of the purpose of this was so that the police could investigate Mr Malouf's complaint [T 56.35]. 49 As to whether this constituted notice, the primary judge made the following findings: [40] Where MBF on or about 13 February 2001 [when Mr Hartley met with Mr Malouf], was on notice of Hill's deception of Mr Malouf, and had by then not granted the Lease [pursuant to the terms of which SRL purportedly delivered the Bank Cheque to MBF], MBF became and remains liable to pay to Mr Malouf, the $165,000 it has retained in its bank account, with interest. In the circumstances, the knowledge of MBF and its subsequent conduct rendered it unjust for MBF to retain the subject funds. MBF's conduct makes plain that it had relevant notice as from on or about 13 February 2001 when it was informed of the fraud by Mr Malouf. Under cross-examination Mr Hartley accepted that at that time: i. he knew the bank cheque received from SRL was entirely discordant with any identifiable amounts payable under the proposed Lease [T 46.3-42; T 63.7-13];

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

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

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

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

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

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

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

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

xi. instead, Mr Hartley treated matters between MBF and Mr Hill as none of Mr Malouf's business, and treated matters between Mr Hill and Mr Malouf as none of MBF's business [T 53.49-54.7; T 56.5-6].

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

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

[44] The circumstances set out amounted to relevant knowledge of MBF for the purposes of the first limb of the rule in Barnes v Addy : i. in terms of the Baden categories, the evidence given by Mr Hartley now substantiates MBF's knowledge within categories (ii) ("he did not want to know") and (iii) ("none of his business"): Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 at 293G;

ii. Mr Hartley shut his eyes to the problem; he wilfully and recklessly failed to make such enquiries as any reasonable person would have made; he would have seen a real and not remote risk that the funds Mr Hill gave to MBF were the ill-gotten proceeds of Mr Hill's deception of Malouf: Kalls Enterprises Pty Ltd (in liq) v Baloglow [2007] NSWCA 191 at [125], [179] and [199]. 50 Mr Cashion submitted the question was whether MBF ought to have been aware that what it received from SRL was trust property, and had been provided to MBF in breach of trust; and that a commercial entity receiving a bank cheque from NAB made out to it would be entitled to assume the cheque and its proceeds were not the subject of any trust. The receipt of a complaint from Mr Malouf was not enough to displace this. 51 I accept that for MBF to know that there was an allegation that Mr Hill had defrauded Mr Malouf, and even an allegation that the very cheque handed over to it was property in respect of which the fraud had been perpetrated, would not of itself amount to notice to MBF. However, in circumstances where MBF had no more than the limited rights to the cheque referred to earlier, and would in the future be giving further valuable consideration to SRL in order for MBF to become beneficially entitled to the proceeds of the cheque, and also having regard to the substantial amount of the cheque, it was not in my opinion reasonable for Mr Hartley to make no investigation of the matter so as to be able to reach a reasonable belief as to whether or not there was a trust affecting the proceeds of the cheque. 52 In my opinion, Mr Hartley should have obtained from Mr Malouf an account of what happened. There can be no certainty as to what this would have produced, but it seems probable that it would have led to Mr Hartley seeing the loan document, learning of the dishonoured cheque for $186,034.25, and also making contact with Ms Waters and the police; and it would also have led to his seeking a detailed response from Mr Hill. There cannot be certainty whether this procedure would have led to the situation where Mr Hartley would as a reasonable person have believed there was a trust. However, the onus is squarely on MBF to show there was no notice, and in circumstances where MBF did not undertake the enquiries which it should have undertaken, in my opinion this onus is not discharged. 53 I may not have made a positive finding of notice for the purposes of the first limb of Barnes v Addy (1874) LR 9 Ch App 244; but where the question is whether a person receiving trust property was a bona fide purchaser for value without notice, the onus of excluding notice lies squarely on that person.

Legal consequences 54 The primary judge made findings to the effect that MBF had no entitlement as against Mr Malouf to the proceeds of the cheque, that MBF gave no consideration for the cheque, and that MBF had been unjustly enriched. 55 Mr Cashion submitted that MBF had given consideration, and that even if it had not done so, Mr Malouf could not bring a restitutionary claim. 56 In my opinion, MBF was a bona fide purchaser for value without notice of certain rights in respect of the cheque, namely those rights acquired on or about 6 December 2000 as set out above. If MBF had sought to identify, quantify and value those rights, it could have resisted Mr Malouf's claim to the extent of those rights. However, MBF did not do this. In particular, it made no attempt whatsoever to identify, quantify and value MBF's rights in respect of the cheque as at 13 January 2000, which might for example have extended to an occupation fee up to that date and certain additional damages. MBF contested the matter on an all or nothing basis. In circumstances where the onus lay squarely on MBF, in my opinion it has no pro tanto defence. 57 MBF was not otherwise a bona fide purchaser for value without notice of the cheque or its proceeds. The result is that the proceeds of the cheque came to be held on trust for Mr Malouf. It is not necessary to consider whether or not Mr Malouf also had a restitutionary claim.

CONCLUSION 58 For those reasons, in my opinion, the following order should be made: Appeal dismissed with costs. 59 Since writing the above, I have read the judgment of Basten JA. His analysis of the consequences of the cheque being crossed "not negotiable" seems to be correct; but I would prefer not to express a concluded view on this, as it was not the subject of submissions. However, this analysis would appear to be another route to the same conclusion. 60 IPP JA: I agree with Hodgson JA and the order he proposes. 61 BASTEN JA: The original proceedings in this matter were brought by Mr Malouf, seeking to recover an amount of $165,000 from MBF Australia Ltd ("MBF"). In the Equity Division, Einstein J declared that MBF held the sum on trust for Mr Malouf and had done so since 8 December 2000. His Honour further ordered that MBF pay Mr Malouf that sum together with interest. I agree with Hodgson JA that the appeal should be dismissed and that MBF should pay Mr Malouf's costs of the appeal. 62 Because of the manner in which the case was pleaded, the focus of the argument has at all stages been on the proposition that MBF, and prior to it, Mr Hill, held the money on trust for Mr Malouf. That conclusion was supported on a number of alternative bases, including, first, that the money, having been obtained by fraud, was equivalent to stolen funds so that the thief held the money on trust for the owner, in accordance with Black v S Freedman & Company [1910] HCA 58; 12 CLR 105. Alternatively, it was suggested that a resulting trust arose in the moneys as a result of the failure of the purpose for which the cheque was provided to Mr Hill, in accordance with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. However, the prior question is whether any legal title passed to MBF. If it did not, no question of any resulting trust arose. MBF argued that because neither Mr Malouf nor Mr Hill had any title in the cheque, no resulting trust could have arisen in favour of Mr Malouf. 63 If Mr Malouf obtained title to the cheque and transferred it to Mr Hill, the title so transferred was undoubtedly "defective" for the purposes of s 3(3) of the Cheques Act 1986 (Cth) because the cheque was obtained by fraud. In that event, Mr Hill's title was either void or voidable and he could give no better title to MBF. If the title were void, MBF converted the cheque by collecting and appropriating the funds received. If it were voidable, it was arguable that no different result would eventuate. 64 On 13 February 2001 Mr Malouf received a letter from Mr Hill, on behalf of Isagila Investments Pty Ltd ("Isagila") purporting to terminate the contract. (There are documents in evidence giving different versions of the company name, but the same ACN 085 593 200.) By that stage, Mr Malouf had already reported the matter to the police. It seems likely that Mr Malouf rescinded the contract at about that time, although there is no factual finding in that regard. In any event, if there were no other act of rescission, the commencement of proceedings in the Equity Division would have had that effect. An effective rescission of a voidable agreement would have revested the property in Mr Malouf. As explained by Giles J in Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 at 433E: "For present purposes, if A rescinds the transaction whereby as a result of fraudulent representations by B he transferred goods to B he may regain his property, inter alia, by claiming its value in an action for conversion, or the proceeds thereof as money had and received. This is because at least where no formality is required the rescission causes the property which has passed to revest …." 65 If the correct analysis is that the transaction by which title in the cheque was passed to Mr Hill and hence to MBF was voidable and that the revesting of title in Mr Malouf depended upon rescission of the transaction, a question would arise as to whether Mr Malouf could rescind the transaction, so as to recover title to the cheque or its proceeds, in circumstances where rights of an innocent third party had intervened. On the other hand, if the fraud prevented any genuine contract coming into existence, "the payments were not pursuant to merely voidable transactions, which would need to be avoided before there was entitlement to recover; but rather were induced by a thorough-going fraudulent scheme, in respect of which any purported consideration was non-existent or illusory": see Citibank Ltd v Papandony [2002] NSWCA 375 at [64] (Hodgson JA, Meagher and Heydon JJA agreeing). The latter description fits the present case on the findings of fact properly made by the primary judge. 66 On this approach, there would be no reason to deny the relief obtained by Mr Malouf in the Equity Division, it not being argued that he failed because he sought a remedy in equity, rather than at common law. What was relied upon by the appellant was the premise underlying relief on either basis, namely that Mr Malouf obtained any property in the cheque, which would permit him to obtain relief against MBF for conversion, money had and received or by way of a resulting trust. MBF argued that Mr Malouf never obtained any title to the cheque and could not have obtained payment on the cheque, could not have negotiated it and could not have "stopped it". 67 Further, no question would arise as to whether MBF purchased the cheque for value without notice of the fraud. As the cheque was payable to bearer, it was transferable by negotiation which means by delivery by the holder to another person: Cheques Act, ss 29 and 40(3). The cheque was delivered by or for Mr Malouf to Mr Hill and by Mr Hill, on behalf of SRL Technology Corporation Pty Ltd ("SRL"), to MBF. However, the cheque was crossed, with the result that MBF could not be a holder in due course for the purposes of s 50 of the Cheques Act. Although the cheque could be transferred by delivery, the person receiving the cheque received no better title than that of the person from whom it took the cheque: Cheques Act, s 55 and see Mark Hapgood (ed), Paget's Law of Banking (13th ed, 2007) par 15.27. 68 The cheque was drawn by the National Australia Bank Ltd ("the NAB") on itself, in consideration of funds supplied by Jarong Pty Ltd ("Jarong"), at the request of Mr Malouf. The loan from Jarong was arranged by an officer of Mr Malouf's bank, HSBC. At Mr Malouf's request, the cheque was made payable to MBF. NAB had no intention with respect to the cheque other than to comply with the directions of Jarong, which provided the funds for the cheque. Jarong intended the funds to be provided to, or at the direction of, Mr Malouf. Mr Malouf was entitled to have the cheque and do with it what he wished. No person other than Mr Malouf had any entitlement to dispose of the cheque, once issued. As it was a bearer cheque, he would have been entitled to deposit it in his account, although some explanation might have been required by his bank as he was not the payee: see Commercial Bank of Australia Ltd v Flannagan [1932] HCA 51; 47 CLR 461. Mr Malouf could have held the cheque or arranged for its discharge. None of Jarong, the NAB nor Mr Malouf had any obligations of payment to MBF. Accordingly, Mr Malouf obtained title to the cheque whether it was handed to his agent, the HSBC officer or to himself personally. Either he or the agent handed the cheque to Mr Hill, an act which was the product of Mr Hill's fraud. In accordance with the reasoning in Papadony, Mr Hill obtained no legal title to the cheque. 69 It follows that MBF, not having obtained title to the cheque, converted the cheque which was still owned by Mr Malouf, by depositing it in its account. It must account to Mr Malouf for the proceeds: Great Western Railway Company v London and County Banking Co Ltd [1901] AC 414 at 418 (Earl of Halsbury LC) and 424 (Lord Lindley); and Morison v London County and Westminster Bank Ltd [1914] 3 KB 356 at 364-365 (Lord Reading CJ), 378-379 (Phillimore LJ). Mr Malouf was entitled to recover the proceeds of the cheque from MBF. 70 If, contrary to the view that Mr Hill obtained no title to the cheque, he obtained a voidable title, in accordance with the approach adopted in Midland Bank Plc v Brown Shipley & Co Ltd [1991] 1 Lloyd's Rep 576 (Waller J), then the relevant question is whether collection and appropriation of the funds prior to notice of rescission renders the rescission ineffective: see Bavins Junior & Sims v London and South Western Bank Limited [1900] 1 QB 270 (UKCA) at 277 (Collins LJ). 71 If it were necessary to deal with the case on the basis that the transaction between Mr Malouf and Isagila was voidable, rather than void, it would be necessary to inquire whether MBF gave value for the cheque prior to receiving notice of the defect in the title of Mr Hill (for SRL). In this respect, two dates are relevant. The first is that on which SRL entered into occupation of premises owned by MBF, being on or shortly after 6 December 2000. The second is the earliest date upon which MBF could be treated as being on notice of the defect in SRL's title to the cheque, namely 13 January 2001, when there was a conversation between Mr Malouf and Mr Hartley of MBF, set out at [46]-[47] above. As explained by Hodgson JA, when MBF took the cheque, it had a limited interest in the proceeds and held at least part of the proceeds on a resulting trust for SRL. It then received information which put it on notice as to the defect in title of SRL. Accordingly, so long as it is permissible to treat differentially parts of the proceeds of the cheque for the purposes of rescission, the receipt of the cheque by MBF should not prevent rescission to the extent that it had not, at the time it received notice of the defect in title, validly appropriated part of the proceeds. If it had appropriated part of the proceeds, it was at least arguable that rescission would be permitted subject to an adjustment with respect to those amounts which it had taken prior to being put on notice. Such a result would have minimised any demonstrated injustice to MBF. 72 Because the transaction is to be viewed, in accordance with Papandony, as void and because, as Hodgson JA explains, a similar result may be reached by considering the equitable interests in the proceeds of the cheque, it is not necessary to reach any final conclusion with respect to the availability of rescission in respect of a voidable transaction. 73 The primary judge stated at [22] - set out at [34] above - that "there was a complete 'disconnect' between the purpose for which the cheque was proffered (namely to be held in escrow pending the execution by MBF of a lease) and the decision by MBF to permit SRL into possession". As explained by Hodgson JA, that appears to be a finding that the receipt of the cheque did not entitle MBF to the proceeds: at [36]. However, if MBF obtained title to the cheque, it undoubtedly obtained title to the proceeds of the cheque. The question is therefore whether it gave value for the cheque. 74 The answer to that question cannot depend upon an assessment of the value of the consideration provided. It is sufficient that it gave valuable consideration, by handing over possession of identified premises to SRL. There was no suggestion that the cheque would not be cashed, or that the proceeds would be returned intact, if, after a period, SRL failed to enter into a lease. 75 As explained by Hodgson JA, it does not follow that MBF had obtained, prior to 13 January 2001, a beneficial entitlement to all of the proceeds of the cheque. However, as it did not seek to establish any more limited entitlement than a beneficial entitlement to the full face value of the cheque, the appeal must be dismissed. **********

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