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[2007] VSCA 275
Court of Appeal (Vic)
2007-12-04
MAXWELL P, CHERNOV and NETTLE JJA
Original judgment source is linked above.
This matter - all this has been before this court and your Honour on three previous occasions in different cases, one was with the McKinnons from Ararat, two was from the Walter family from Wodonga, and three, a grand jury application of documents which Your Honour has received and acknowledged.
Fractional reserve banking is the same as the following: it's credit creation, manufactured credit, bank credit or social credit. These references can be found in the following case: Bank of New Sales v Commonwealth ... Attorney-General of Alberta v Attorney-General of Canada; and Melbourne Corporation v the Commonwealth. And also it's been drawn to my attention over lunch that we have a witness in a Mr Michael Watts of Werribee, who could be a witness for us on these matters. He is very conversant with all the fractional reserve banking, he is an ex-banker, and things like that.
HIS HONOUR: You say that engaging in that practice, in terms of paragraph 38 of your defence, is breach of a duty of care, breach of a fiduciary duty, and breach of a duty not to commit fraud?
**14 The first application to set aside Mr Cicutto's subpoena was unsuccessful. The trial judge ruled that it was at least possible that Mr Cicutto could give evidence as to what was involved in the concept of 'fractional reserve banking.' Mr Main subsequently obtained instructions from Mr Cicutto by telephone as to his knowledge of fractional reserve banking. Mr Main then arranged for an affidavit by Mr Cicutto to be typed at his (Main's) office and brought to him at Court. Mr Main received several copies of the draft affidavit and then attended at Mr Cicutto's office. A number of alterations were made by hand to the wording of the affidavit and then it was sworn by Mr Cicutto.
15 In its final form, the affidavit was in these terms:**
(The underlining marks where the affidavit had been altered by hand.)
**16 Mr Main took the sworn affidavit back to Court and it was used in a further application to set aside the subpoena to Mr Cicutto. This time the application succeeded.
17 Mr McFarlane subsequently filed an affidavit in support of the application for leave to appeal against the judgment in the possession proceedings. In that affidavit, he complained that:**
(e) Justice Byrne dismissed our subpoena to Frank Cicutto on the evidence of an affidavit, which was not sworn.
(f) Justice Byrne allowed the Plaintiff to substitute an affidavit of Frank Cicutto, which is still technically wrong, over the lunch break of the sitting.
18 Mr Main filed an affidavit giving his account of what had occurred concerning Mr Cicutto's affidavit:
Upon a copy of the Affidavit which had been brought to Court with the original I hand wrote the amendments which had been made to the original before swearing and I printed the initials of Mr Cicutto and my name as the signatories on page 2. The original Affidavit was filed with the Court and a copy prepared in the manner I have described was given to Mr McFarlane. The content of the copy Affidavit served was identical to the content of the original. No substitution of the original thereafter occurred and the decision of Justice Byrne was made on the sworn original as filed.
19 The McFarlanes called Mr Michael Watts (Wataszczuk) to explain the concept of 'fractional reserve banking'. The proposition advanced by Mr Wataszczuk was that a customer who (like the McFarlanes) borrowed money from a bank upon the security of a mortgage was in fact a lender to the bank, because the bank only created a book entry and did not hand over any bullion, banknotes or coin and, therefore, that no lawful consideration was given for the mortgage.[2] Byrne J said:
It is apparent to me that this is arrant nonsense. It has no regard to the legal obligations which are created by a bank loan; it ignores the reality of modern commerce where it is money, in the broad sense of that term, including choses in action, and not only gold, banknotes and coin, or indeed legal tender, which plays a most important part.
The Bank in this case provided the money required by the McFarlanes, permitting them to use it to discharge their own liabilities, notably their liability to pay about $150,000 under a contract of sale for the purchase of the Angle Road property in 1988. The fact that the money was not provided in bullion, coin or banknotes is beside the point. ... Sufficient consideration has been provided for the mortgages.[3]
20 By a motion for mistrial dated 11 April 2002, the McFarlanes alleged that indictable offences had been committed which 'involved directly or indirectly, Mr F Cicutto, M Main, Mr Clarke and Justice Byrne.' (Mr P H Clarke SC had been senior counsel for the Bank in the possession proceedings.)
21 The trial proceeded - as did the appeal - on the basis that to establish the tort of malicious prosecution a plaintiff must prove the following five elements, namely that -
(a) the defendant instituted or continued the proceeding complained of, or was actively instrumental in instituting or continuing that proceeding;
(b) the proceeding was terminated in favour of the person against whom it was brought;
(c) the proceeding was brought without reasonable and probable cause;
(d) in instituting or continuing the proceeding the defendant was activated by malice; and
(e) as a result damage of a relevant kind was caused to the plaintiff.[4]
**22 His Honour concluded that, as far as Mr Cicutto and Mr Main were concerned, the first element was made out. With respect, this was clearly correct, and there is no challenge to the finding. With respect to the second element, Mr McFarlane argued that it was not possible to say finally whether the charges against Mr Cicutto and Mr Main were 'determined in their favour' because they had never had their 'day in court.' Counsel for the plaintiffs argued that the discontinuance of the charges against both Mr Cicutto and Mr Main (first by the DPP under s 22(1)(b)(ii) of the Public Prosecutions Act 1994 and then by Mrs McFarlane pursuant to the order of Bongiorno J) amounted, for this purpose, to termination of the previous proceedings in favour of Cicutto and Main respectively.
23 I respectfully agree. The DPP concluded that the first set of informations could not be 'sustained in law.' In relation to the second set of informations, Bongiorno J said:**
In this instance, having read all of the material filed in support of the plaintiff's applications and having heard everything that Mr McFarlane wished to say, it is impossible not to come to a very firm conclusion that there is no basis whatsoever for the contentions which the defendants advance.
Their refusal to accept the finality of the orders of this Court is but the commencement point of their delusion. They then construct, by a series of ill-conceived and in many instances self-contradictory propositions, a purported case of criminality against the plaintiffs and, indeed, anyone else who in any way denies the justice of their original case; which case has, of course, been conclusively ruled upon by this Court as having no merit whatsoever.
... Whatever the defendants (or the second defendant particularly) have filed must be withdrawn.[5]
24 I turn to the third element, which concerns whether the charges against Mr Cicutto and Mr Main were brought without reasonable and probable cause. As the trial judge noted, in Hicks v Faulkner,[6] Hawkins J defined reasonable and probable cause as -
an honest belief in the guilt of the accused based upon a full conviction, founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary, prudent and cautious person placed in the position of the accuser to the conclusion that the person charged was probably guilty of the crime imputed.
There are both objective and subjective elements to the test. It requires a genuine belief, which is also reasonable.
25 The foundation of the perjury allegations against Cicutto and Main is the McFarlanes' contention that Mr Cicutto must have been familiar with the concept of 'fractional reserve banking' and that his sworn denial of any such knowledge must therefore have been false. Mr McFarlane provided to the Court a number of extracts from various publications, including the following extract from the Encyclopaedia Britannica which the judge set out in his reasons:
fractional reserve system, also called MINIMUM RESERVE SYSTEM, banking system followed by all modern banks in which less than 100 percent of bank deposits are held as reserves. The portion of the money not held as reserves is used to earn income by means of loans and investments; some of this portion eventually returns to the banking system as new deposits. Thus, the banking system is able to expand the money supply through the creation of new demand deposits.
Banks do not have unlimited freedom to expand deposits but must usually maintain required reserves, which may be held as currency or as deposits at the central bank. The ratio of the required reserves to a bank's total deposits may be set by custom or by law; use of legally required reserves appears to have originated in the United States.
The fractional reserve system is strengthened by the ability of banks to liquidate some of their assets quickly by calling in loans, selling short-term securities, or borrowing cash from the central bank.[7]
26 The other extracts relied on by the McFarlanes were:
**27 One of the grounds of appeal is that the judge 'selectively quoted' from the various extracts, by referring only to the Encyclopaedia Britannica extract. The collection of extracts was said to show 'what Mr Cicutto knew or ought to have known about credit creation and fractional reserve banking'. In my opinion, this ground is without substance. It was not necessary for his Honour to list all of the text book extracts. He plainly understood the submission which the extracts were designed to support - that the term 'fractional reserve banking' was in common usage, both in a general publication like the Encyclopaedia and in technical banking publications.
28 I have read all of the extracts relied on. All but one are from American publications. What is striking is that the term 'fractional reserve banking' is used in each of the American textbooks referred to but does not appear in the lengthy extract from the sole Australian publication, Financial Institutions and Markets which, I note, was 'Published for and Approved and Recommended by the Australian Institute of Bankers'. The Australian extract deals with the very practices which the American texts describe as 'fractional reserve banking' but without using that term. The fact that an authoritative Australian text on banking does not mention the critical term, notwithstanding its obvious currency in the United States, strongly suggests that the term is not in common banking usage in this country. If that is so, it is not surprising, less still suspicious, that Mr Cicutto should have sworn that he had never heard of it.
29 Mr Cicutto gave evidence in the proceeding at first instance. He appeared in response to a subpoena issued by the McFarlanes. He said that his statement in the affidavit - that he had no knowledge of 'fractional reserve banking' - was true. He said he had contacted the Bank's then chief economist, Mr Alan Oster, in the course of preparing his affidavit and Mr Oster had told him that he also had no knowledge of 'fractional reserve banking.' Mr Cicutto said that the phrase 'fractional reserve banking' was not a technical expression with which he was familiar. Mr Cicutto said that, while the Bank lent more money than it held in deposits, it remained at all times within the lending ratio limits required by prudential regulators.
30 The trial judge noted that neither of the McFarlanes had given evidence in the proceeding before him and concluded that there was, as a result, no evidence that either of them held a genuine belief that Mr Cicutto was guilty of perjury. Were it necessary to decide, I would have been inclined to reach a different view. In my opinion, the manner in which the McFarlanes conducted the proceeding - including the summoning of Mr Cicutto to give evidence and the tendering of relevant extracts - justified the inference that their belief in Mr Cicutto's guilt was genuine.
31 In the event, however, it is unnecessary to decide that question as I respectfully agree with the learned judge that the McFarlanes' belief in Mr Cicutto's guilt was unreasonable. That is, I do not think that a 'reasonable, prudent and discreet' person, having made reasonable enquiries into the case and the evidence, would believe that Mr Cicutto was guilty of perjury or of attempting to pervert the course of justice.
32 A reasonable person would approach with some scepticism the proposition that the chief executive officer of one of Australia's largest banks would deliberately give false evidence to a court. Where the subject-matter of the litigation was - as here - litigation over mortgage transactions with which the chief executive officer had not the remotest connection, the reasonable person would regard the suggestion of perjury as highly improbable. Where the subject-matter of the evidence itself had not the remotest connection with the enforcement of the mortgages, the reasonable person would be surprised that the suggestion of perjury had even been made.
33 Very careful scrutiny of the circumstances would therefore be necessary before the reasonable person would accept that that was in fact what had occurred. In my opinion, examination of the circumstances would have served only to convince the reasonable person that the allegation of perjury was groundless.
34 I can deal more briefly with the remaining two elements of malicious prosecution, as no specific argument was advanced by the McFarlanes on either element. In my opinion, the judge was correct to conclude, for the reasons he gave, that the McFarlanes were actuated by 'malice' (in the legal sense). That is, the laying of the charges against Cicutto and Main was done 'to further their campaign to retain or win back their properties'.[8] This was an ulterior purpose sufficient to constitute malice. His Honour was also correct to conclude, for the reasons he gave, that both Cicutto and Main suffered compensable damage in consequence of the laying of the charges.
35 The finding of malice - based on ulterior purpose - was both necessary and sufficient to sustain the judge's conclusion that the Bank had made out its claim for collateral abuse of process. That conclusion was clearly correct.
36 I turn now to deal with the other grounds of appeal.**
1"> 37 This ground alleges that the trial judge -
erred in law and in fact, by restricting our constitutional rights under s 80 of the Commonwealth Constitution Act of 1900.
**38 The McFarlanes contend that they were entitled to trial by jury. Mr McFarlane informed the Court that an application for trial by jury had been made before Byrne J but he was unsure whether such an application had been made before the start of the present proceeding.
39 This ground is wholly misconceived. Section 80 is confined to the trial of indictable offences against Commonwealth law.**
erred in law and in fact, by protecting an indictable offence, ie fraudulent conversion when the National Australia Bank Limited used fractional reserve banking practices against the appellants/defendants and others.
In argument, Mr McFarlane contended that the Bank had committed fraud by its failure to disclose, at the time the original mortgages were taken, that the Bank proposed to use the mortgaged properties to raise funds for lending to them and others.
41 This ground is wholly misconceived. There was no non-disclosure of any matter relevant to the entry of the McFarlanes into the mortgages. The allegation of fraud is without foundation.
42 This ground alleges that the trial judge erred -
by restricting our legal right of a Grand Jury hearing pursuant to s 354 of the Crimes Act 1958, which is already before the Full Court of the Supreme Court of Victoria.
This ground is also wholly misconceived. I have already referred to the rejection of the McFarlanes' application for a grand jury. Even if the application had been on foot, this would not have provided any basis for an adjournment. I note that, at the hearing of the appeal, Mr McFarlane was uncertain whether an adjournment had even been sought on this ground.
Ground 4: borrowing money on the public credit of the Commonwealth
43 This ground alleges that the trial judge erred 'by protecting a legal breach of s 51(iv) of the Commonwealth Constitution.' This ground is also misconceived. Section 51(iv) of the Constitution empowers the Commonwealth to pass laws for the peace order and good government of the Commonwealth with respect to borrowing money on the public credit of the Commonwealth. Self-evidently, this legislative power, which resides in the Commonwealth Parliament, has nothing whatever to do with the matters which arose in this proceeding.
Ground 5: legality of the Constitution Act 1975 (Vic)
44 This ground alleges that the trial judge erred 'in making a judgment based on the Constitution Act 1975 (Vic) being legal.' This ground, too, is wholly misconceived, for the reasons given by Dodds-Streeton J in National Australia Bank v Walter.[9]
45 This ground alleges that the trial judge erred 'by creating a conflict of power, or an inter se between the Supreme Court of Victoria and the right to a trial by jury pursuant to s 80 of the Constitution.' This ground is simply unintelligible.
displayed bias because he refused to stand down from hearing the matter even though he was asked to and because of his personal financial interests with the National Australia Bank Limited.
This ground is without substance. At the commencement of the trial, the judge disclosed that parcels of shares in the Bank were held, respectively, by his superannuation fund, his wife and his mother's estate. His Honour also disclosed that he banked with the National Australia Bank and that the Bank held a mortgage over property, on which money was still owing. The judge stated that he had no difficulty bringing an independent and impartial mind to the case.
47 Shares in banks are widely held throughout the community. It is a commonplace that judges, or their relatives or related entities, hold shares in one or more banks. Invariably, the size of the shareholding is infinitesimally small relative to the issued capital of the bank in question. No fair-minded observer aware of the facts would remotely think that this judge - or any other judge in a similar position - might not bring an impartial mind to the resolution of the questions to be decided.[10]
failed to give proper consideration to the evidence concerning the obtaining and swearing of the affidavits of Francis John Cicutto dated 10 April 2002.
did not state which affidavit of Mr Cicutto dated 10 April 2002 he relied on to come to his judgment in the above matter.
**49 The McFarlanes appear to harbour some deep suspicion that there was trickery and/or impropriety and/or irregularity in the process whereby Mr Cicutto's affidavit was prepared, sworn, filed and served. In an affidavit sworn 29 January 2007, Mr McFarlane expressed concerns about 'the switched affidavit'; about the fact that Mr Main had always used a coloured pen to sign correspondence, whereas the affidavit appeared to have been altered with a black felt tip pen; and about there having been no court stamp on the copy of the sworn affidavit handed to Mr McFarlane after the lunch break. In argument before this court, however, Mr McFarlane accepted that, whatever 'switching' between draft and unsworn and sworn copies might have occurred, the substance of the affidavit was unchanged. He accepted, moreover, that Mr Cicutto had sworn the amended affidavit on which the court and the parties relied.
50 In my opinion, the suspicions which the McFarlanes hold are without foundation. Both these grounds of appeal must be rejected.**
made false statements of fact in relation to the "further charges" on Mr Cicutto and Mr Main when he stated that they were struck out by the Magistrates' Court.
This ground is wholly erroneous. Although Bongiorno J had ordered that the charges be stayed, rather than struck out, they were ultimately struck out in the Magistrates' Court following the receipt of his Honour's order.
failed to seek or consider any evidence in relation to the later charges by Mrs McFarlane, which were the cause of the originating motion in this matter, because of the charges placed on the Victorian Director of Public Prosecutions, which prevented him from taking over the charges and discontinuing them.
To the extent that this ground is intelligible, it is without substance. The trial judge considered all of the evidence before him regarding all of the charges laid by the McFarlanes.
54 I have had the advantage of reading the reasons for judgment of the learned President. I agree, for the reasons that his Honour gives, that the appeal should be dismissed.**
**55 I have had the advantage of reading in draft the reasons for judgment of Maxwell P and I agree with his Honour that the appeal should be dismissed.
56 I wish to add only that, unlike his Honour, I do think it surprising that Mr Cicutto had 'never previously heard of this concept [of fractional reserve banking]' and had 'no understanding or knowledge of the concept'.
57 When Mr Cicutto swore that was so, he had been a banker for 37 years and he was the managing director and chief executive officer of one of Australia's largest trading banks. For 20 of his 37 years of banking, trading banks in this country had operated under the Reserve Bank statutory reserve deposit scheme and, since then, they have operated under the non-callable deposits system.[11] No doubt, the nomenclature here is a little different to the 'fractional reserve banking' argot of the United States. But the concepts are identical - as indeed they are throughout the western world - and, according to Mr Cicutto's entry in Who's Who in Australia, he was the bank's Executive Vice President, Americas (New York) during the 1980s.
58 So to say in no way implies that Mr Cicutto gave false evidence. He pledged his oath to having no knowledge of the concept of fractional reserve banking and, as the judge below found, his testimony was not impeached by cross-examination. But the appellants acted without the benefit of that cross-examination and it seems to me that they may well have found it perplexing that a man of Mr Cicutto's position and experience professed himself ignorant of a conception so fundamental to his trade.
59 Be that as it may, the judge below was right to hold as he did. For as his Honour stated, even if the McFarlanes did believe that Mr Cicutto was guilty of perjury, it was not a reasonable belief. It was necessary to decide the matter according to whether an honest, reasonable and discreet person would have considered that guilt could be established beyond reasonable doubt, and I agree with his Honour that an honest, reasonable and discreet person would not have been satisfied of that.**
[1] Mr McFarlane's name and signature appear on the documents but have been crossed out.
[2] National Australia Bank Limited v McFarlane [2002] VSC 116, [7].
[3] Ibid [7], [9]. See also Smart v ANZ Ltd [2002] VSCA 111, [22] (Batt JA).
[4] Little v Law Institute of Victoria (No 3) [1990] VicRp 25; [1990] VR 257, 262, 265 (Kaye and Beach JJ).
[5] National Australia Bank Limited v McFarlane [2003] VSC 19, [11]-[13].
[6] (1878) 8 QBD 167, 171 (quoted with approval by Dixon J in Sharp v Biggs [1932] HCA 54; (1932) 48 CLR 81, 109).
[7] The New Encyclopaedia Britannica (1987) vol 4 Micropaedia, 915 cited in National Australia Bank Limited v McFarlane [2005] VSC 438, [43].
[8] National Australia Bank v McFarlane [2005] VSC 438, [53].
[9] [2004] VSC 36, [269]-[275].
[10] See Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2001) 205 CLR 337.
[11] M J Phillips, Central Banking - A Parting View (1992) Reserve Bank of Australia Bulletin 14, 17; Edna Carew, The Language of Money 3 (Revised ed 2003).
McFarlane
National Australia Bank Ltd & Ors [2007] VSCA 275