Moriah War Memorial College Association v Augustine Robert Nosti

Supreme Court of NSW|2020-06-29|Before: Hammerschlag J

Solicitors: Arnold Bloch Leibler - Plaintiff Dormer Stanhope - Second defendant File Number(s): 2019/346423

Introduction

HIS HONOUR: Augustine (Gus) Robert Nosti (Gus), the first defendant, is a thief.
Melynda Maree Nosti (formerly Bilbow) (Melynda), the second defendant, is married to him although, by all accounts, they separated when Gus's thievery was uncovered.
Christine Anne Padovan (Padovan), the third defendant, is Melynda's sister. No relief is sought against her. She is a party because, together with Melynda, she is registered on the title of Melynda's house at Edensor Park (the house) although she has no beneficial interest in it. Some of the stolen money can be traced into the house. At all material times, the house has been mortgaged to the ANZ Bank.
From January 2004 to March 2019, Gus was employed by the plaintiff private school (Moriah) as financial controller and financial manager. During that period, undetected, that is, over some 15 years, he stole $7,337,282 [1] from Moriah. He had control over Moriah's bank account and access to the tax portal on its behalf. He stole by transferring money from Moriah's bank account to various bank accounts in his name, bank accounts or credit card accounts in Melynda's name, and a joint offset bank account in his, Melynda's and Padovan's names, and by diverting tax refunds into such accounts.

THE BANK ACCOUNTs

Melynda was a named account holder (either as Melynda Nosti or as Melynda Bilbow) of the following bank and credit/debit card accounts: 1. ANZ Bank Joint Offset Account [2] jointly with Gus and Padovan (ANZ Offset Account); 2. ANZ Bank Joint Home Loan Account [3] jointly with Gus and Padovan (Home Loan Account); 3. Commonwealth Bank Credit Card Account [4] in her own name (Bilbow) (Melynda's Credit Card); and 4. Commonwealth Bank Streamline Account [5] in her own name (Melynda's Debit Card). Attached to this account was a debit card.
In his own name, Gus had a St.George Bank Account [6] (Gus's St.George Account), ANZ Credit Card [7] (Gus's Credit Card) and Commonwealth Bank Account [8] (Gus's CBA Account).
Between 30 July 2015 and 4 March 2019, Gus dishonestly diverted $3,965,892 of ATO refunds due to Moriah. Of this, $2,716,177 went into the ANZ Offset Account, $957,713 went into the Gus's CBA Account and $292,000 into Gus's St.George Account.
Between 22 December 2004 and 11 March 2019, Gus dishonestly diverted by way of 218 separate electronic funds transfers (EFTs) from Moriah's bank account $638,514 to the ANZ Offset Account, $425,214 to Gus's CBA Account and $668,653 to Gus's St.George Account.
Between 29 November 2010 and 15 April 2015, Gus dishonestly transferred $622,291 to the ANZ Credit Card from Moriah's bank account in 66 transfers and paid $1,052,116 to Melynda's Credit Card from Moriah's bank account.
A total of $599,916 can be traced into the Home Loan Account ($475,635), Melynda's Credit Card ($103,516) and Melynda's Debit Card ($16,765).

Melynda Nosti

Melynda was born on 7 April 1961. In 1984, she married David Bilbow, a naval officer. They have two sons, Joshua and James (known as Kentwell). They separated in 1988. She was thus a single mother from age 28.
Her father is Italian. He had no formal education. He ran a fruit and vegetable shop where her mother worked. Later he had an electrical shop and a stall at Flemington Markets selling electrical appliances. He was financially successful and retired early.
He discouraged Melynda from getting an education. He would describe his children as 'useless good-for-nothings.' Melynda was a very good swimmer. She says she swam the same time as Shane Gould. Her father would not let her take up a sponsorship in competitive swimming which Speedo offered her. She left school halfway through Year 9. She became an apprentice hairdresser in Willoughby and stayed in that job for about 18 years. Her father took her wages, to save, and gave her money to live on. She was not allowed to go out or to manage her own money until she married.
At the time of her divorce from David Bilbow, they owned the house. As part of their divorce settlement, she received his interest in the house, its contents and a Ford Falcon. The house was mortgaged. Her parents paid off the mortgage on condition that Padovan's name went onto the title. Padovan made it clear on many occasions that she has no beneficial interest in the house.
In February 2001, for the first time, Melynda obtained a credit card. She reached her limit and it took her a long time to pay it off. She was conscious of the fact that amounts owed on credit cards attract high interest.
In 2002, she won the tender to operate a hairdressing salon at the Montefiore Nursing Home which has a presence in the Sydney suburbs of Hunters Hill and Woollahra. She worked every Tuesday to Thursday in Hunters Hill and on Fridays in Woollahra. She employed staff, paid rent and business expenses, and operated bank accounts for her enterprise.

Gus Arrives on the Scene

Melynda met Gus in 2002, on an online dating site. She was 42 at the time. He was divorced and living with his parents. He had run an Italian restaurant in Maroubra, which had failed. He told her that his parents had secured a loan to buy the restaurant and they had lost their house, and now lived in a rented unit paid for by him. Her understanding was that he 'took the deeds from his parents' house' to provide security for a loan which had been called on, resulting in them losing their house. Gus did not bring any assets into the relationship. He was broke.
Gus was working as a contractor at AMP at the time. She told him that she had opened a business and needed an accountant and he said he would love to help. Gus may have worked as an accountant, but he did not have any tertiary qualifications.
Perhaps the early warning signs were there.
On 19 January 2004, under a written letter of employment signed on 18 December 2003, Gus started working for Moriah as Financial Controller, under the general direction of the Bursar. His commencing base salary was $91,000 per annum plus a package of up to 25% of his base salary.
Gus started staying over on weekends at the house. Occasionally, Melynda stayed over at his parents' unit on Thursday nights because of its proximity to her work in Woollahra.
In late 2004, Gus moved in with Melynda. He knew that she owned the house, at that time free of a mortgage liability.
It did not take Gus long to start stealing from Moriah. He stole $5,000 on 22 December 2004, $1,250 the next day and $2,674 on 29 December 2005. He stole $50,304 on 25 January 2005, and kept on stealing on an almost daily basis for the next 14 years, sometimes six figure amounts at a time. His thefts went undetected until 2019.
In the early part of their relationship, they entertained mainly at home and did not travel overseas. They went to Queensland in 2004. She took a holiday to Bali, Indonesia in April 2007 and another one to Indonesia and Thailand in May 2007.
In early 2009, they decided to renovate the house. They borrowed $200,000 from Capital First and were given $50,000 by Melynda's parents. The renovation went over budget and they borrowed a further $100,000 from Firstmac. Melynda recalls signing documents. She says Gus put them in front of her and she signed without reading them.
They married on 19 December 2009 at a function centre in Terrey Hills, in Sydney's north. By this time, Gus had stolen over $600,000 from Moriah.
Melynda says that Gus took full control of her business financial statements, accounts and tax obligations. She gave him her bank account details. He set her up for online banking with the Commonwealth Bank (known as NetBank). She used the system to pay her utility bills but says she did not log on otherwise. She says she never saw more than about $2000 in her account, except when she was overseas and Gus deposited more money.
At the end of 2011, she lost the tender for the hairdressing salon. She says that from that time she did not log onto NetBank and that Gus paid all the household bills. At this time, Gus told her he had just been given a pay rise and that she did not need to worry about working anymore. He said he would look after her and the boys and that nothing would make him happier than to support her absolutely.
She says that she had no reason to doubt him, he was her best friend. She was grateful that she had found someone to help her share the load, having been a single mum for so many years. He was an accountant, educated and did not mind her giving up work. He told her that he was smarter than her whole family put together and she believed him. She still thinks that he is the smartest person she has ever met.
She says that from the beginning of 2012, Gus completely controlled all their finances to her exclusion, including payment of household bills and the mortgage. She says she has never known Gus's salary or had access to his bank accounts electronically. She has asked Gus more than once how much he earned and his response was always, "It's my money, and you are on a need to know basis." By the beginning of 2012, Gus had stolen $1.054 million from Moriah.

Overseas Travel

From late 2010, Gus and Melynda started travelling overseas more often and to further away places. Mostly they travelled together but on 9 occasions Melynda went to Indonesia with a friend, Tracy Nikolaou. On one occasion, she went to Indonesia with her daughter-in-law, Jamie Kentwell. The following is a schedule of Melynda's international travel from 17 December 2010 to 29 September 2019: Destination Dates Indonesia 17 - 23 December 2010 Indonesia^ 19 - 26 February 2011 USA & Mexico 16 April - 1 May 2011 Indonesia & Malaysia 6 - 18 April 2012 Indonesia* 15 - 20 May 2012 Indonesia 13 - 20 September 2012 Indonesia 28 December - 5 January 2012 Indonesia 26 March - 2 April 2013 Hong Kong, Macau, Malaysia & China 13 - 29 September 2013 Indonesia and Thailand 5 - 15 January 2014 Indonesia 15 - 22 April 2014 USA 30 May - 8 June 2014 Indonesia 5 - 12 October 2014 USA - Hawaii 28 December 2014 - 8 January 2015 Indonesia 4 - 12 April 2015 Indonesia 18 - 28 July 2015 Indonesia 19 - 28 September 2015 Indonesia* 26 November - 1 December 2015 Indonesia 23 May - 1 June 2016 Indonesia 22 - 31 October 2016 Indonesia 27 December 2016 - 5 January 2017 Indonesia* 9 - 15 February 2017 Indonesia 6 - 14 April 2017 Indonesia 4 - 11 June 2017 Indonesia 22 - 30 July 2017 Indonesia* 29 October - 9 November 2017 Indonesia 27 December 2017 - 3 January 2018 Indonesia* 23 February - 4 March 2018 Indonesia* 27 April - 6 May 2018 Thailand & Indonesia 20 - 27 May 2018 Indonesia* 9 - 19 August 2018 Indonesia 18 - 26 September 2018 Indonesia* 22 - 29 November 2018 USA 26 December 2018 - 6 January 2019 Indonesia 1 - 19 June 2019 Indonesia* 22 - 29 September 2019

^ with Jamie Kentwell * with Tracey Nikolaou The other trips were with Gus

From 2005 to 2010, their annual travel expenditure did not exceed $15,000. From 2011 to 2019, their annual travel expenditure was as follows: Year Travel Expenditure 2011 $24,303.96 2012 $41,750.81 2013 $41,189.53 2014 $69,881.52 2015 $42,894.15 2016 $21,894.22 2017 $39,751.64 2018 $71,544.84 2019 (partial) $13,783.31

Melynda gave evidence that she did not know about, or ever use, the CBA Credit Card in her name. This was not true. She used it, amongst others, in Bali when she was there without Gus. I am satisfied that she used it to buy other things such as weight loss and beauty products.
Gus and Melynda stayed mostly in 4-star accommodation on their overseas trips. In Bali in April 2015, they joined a luxury club, for which they paid $11,765. This gave them reward points from which they could get trips and accommodation. They sometimes flew business class, including to the United States in December 2018. The flights cost $17,665.
She gave evidence that she thought Gus was paying for their lifestyle and travel costs by credit card and paying them off. She also believed he was paying for things from his gambling winnings.
From 2013 to 2015, their travel expenses were at least $153,965 and, from 2016 to 2019, they were not less than $146,974.

The Swimming Pool

In mid-2011, they decided to build an in-ground swimming pool at the house. They refinanced the mortgage to pay for it.
Melynda gave evidence of the following conversation: Melynda: Blue Haven have a special on, $28,000 for a pool. I'm going to get them out to give a quote, but only if we can afford it Gus because I know there is only one wage coming in. Gus: Yes that's right there is only one wage, but we will [make it] work somehow.
As it turned out, the pool cost more than $28,000 because they added a water feature and a mineral pump. Under cross-examination, Melynda agreed that she knew it was 'going to be a bit of stretch' to afford the swimming pool.

Cars, Boats and Caravans

Gus had a penchant for luxury motor cars. He also liked boats, although he never used them much. From December 2011 to January 2018, Gus bought the following second-hand cars for the following prices. In most cases, he sold the preceding car at some stage but there were instances where he had two cars at the same time. These included having the Porsche Cayenne and a BMW simultaneously: Date Car Amount 23 December 2011 BMW E53XF $26,800 26 October 2012 Mercedes Benz Model 164 $37,700 20-24 December 2013 Audi Q7 $34,000 9 May 2015 BMW 330CI Convertible $16,000 29-30 August 2015 Porsche Cayenne $55,990 19 March 2016 BMW 135I Convertible $42,950 17 January 2018 Audi S5 $27,000

Gus bought a Bayliner fibreglass cruising boat in September 2005 and he apparently sold it in October 2010. In July 2014, he bought a Stingray speedboat for $70,000. Gus had a number of boat trailers which he sold. In about 2013, Gus bought an Inspiration caravan for $50,000. This replaced an earlier caravan which was apparently stolen. An insurance payout was received.
In an email to the ANZ Bank on 30 June 2017, Gus valued the cars and boats that he then owned at $195,000. He also had a fully maintained company car which he did not include in his list of assets. He did, however, include the house (which was actually Melynda's) which he valued at $1.1 million.
The cars, boats and caravans were kept at the house.

Increase in Expenditure

Their expenditure excluding living expenses and travel expenses increased from around $28,000 in 2010 to around $78,000 in each of 2011 and 2012. It was around $141,000 for 2013, $77,000 for 2014, $101,000 for 2015, $118,000 for 2016, $84,000 for 2017 and $112,000 for 2018. These expenses included asset finance, the boats, caravans and swimming pool.

Gus's Gambling

Gus was a heavy gambler and, by all accounts, a heavy drinker. In his evidence, he described his gambling as a terrible addiction. He said he did not remember when he first took money from Moriah to gamble but he had a foolish idea that he could repay it when his luck improved. But, unfortunately, he kept on losing and kept on taking more and more to win back what he'd lost.
His evidence was that Melynda knew that he liked to go to a local hotel and gamble on Friday evenings after dinner and Sunday afternoons, but that he kept the extent of his gambling a secret from her and others around him. Often when he was working, he would go to a hotel or club to gamble during his lunch break or after work. When he came home late, he told Melynda he had meetings after work.
Sometimes, he told Melynda he was winning and showed a bundle of cash or sent her a picture of a gaming machine showing a large credit balance. She rarely went out with him to play as she did not understand the machines and was not interested in them. She says she thought Gus was a really lucky and good gambler, but she also understood that if he was 'winning big' he also had to be 'losing big'.
She gave evidence that she knew that Gus liked to play the pokies but had no idea, before this case, of the amount that he played. She said that she did not know that he played before coming home each weeknight but he did tell her, on one occasion, that every now and again he went to the Coogee Bay Hotel as a stress reliever during his lunch break.
The family had dinner on Friday nights. After dinner, Gus used to go to the Greenfield Tavern to gamble. Often he had drunk a lot, sometimes a whole bottle of scotch. Melynda was unhappy about him driving. He also used to go to the Greenfield Tavern on Sunday afternoons and they went to a club once every couple of months. Sometimes Gus won significant amounts at the Greenfield Tavern and came home with cheques from $2,000 to $12,000 or cash up to $2,000. Her evidence was that, until this case, she thought Gus was just really lucky and a good gambler. He told her that he only used his winnings to gamble. Once he won $100,000 on what is referred to as 'the link'. She suggested he put $50,000 on the mortgage. It is not clear whether he did this but in the weeks that followed he bought expensive shoes and clothes.
About once a fortnight, Gus would give her between $1,000 and $2,000 in cash from what she thought were his pokies winnings. She kept this money in a drawer beside her bed.
There are text messages between them which show that he was, to her knowledge, gambling while she was in Bali.
On 15 August 2018, when she was in Bali, there was an exchange of text messages in which he told her that he was at the Greenfield Tavern and that her 'stash' was going up. She asked, 'How is my ac going?'
Melynda was back in Bali on 18 September 2018. There was an exchange of text messages on 18 and 19 September 2018 during which Gus referred to being at the Greenfield and she referred to him as 'you winning spunk.'
She was back in Bali again on 23 November 2018. An exchange of texts reveals that Gus was at the Greenfield Tavern.
On 5 October 2019, Gus sent her a photograph of a pokie machine showing that he was $6,382 in credit. She messaged him to take it. He responded that he would 'at 5' (presumably meaning $5000). He sent her another text message a little later showing that his credit was $9,186. The evidence does not reveal how this ended up.
Gambling was undoubtedly an issue at home and was often the subject of discussion between the extended family. Melynda's daughter-in-law, Jamie Kentwell, gave the following evidence: Q. …The topic of gambling would come up at least once a fortnight, wouldn't it? A. About that, yes. Q. So it was a regular discussion? A. Yes. Q. And that was a discussion that would involve Mrs Nosti as well? A. Most of the time she would be around, yes. Q. Mr Nosti would talk about how he bet big during those discussions? A. Not all the time, no. Q. But sometimes he would say things like, "I think it's funny that people think they can win big on the pokies when they are only betting low amounts"? A. That's correct, he would say you can't win big without playing big. Q. And that would be a conversation that would occur in front of Mrs Nosti from time to time? A. From time to time. Q. It was not uncommon, was it, at the end of these family dinners, around 10 or 11 o'clock for Mr Nosti to head to the Greenfield, the pub? A. Yes, that would happen often. … Q. To your knowledge, what did you understand Mr Nosti was heading to the pub to do? A. I would assume he would be going to the tavern to have some more drinks, and yep, maybe play the pokies, socialise. Q. So pokies was a thing that you knew he would be likely be doing if he went to the Greenfield? A. That would be my assumption, yes. Q. Did you talk to Mrs Nosti about that from time to time? A. Occasionally. She wouldn't be happy that he would be going all the time, but he did.
Melynda's son Joshua Kentwell gave evidence that Gus spoke about the pokies quite a bit and that it was a subject that came up every couple of weeks.
On occasions, Melynda went to a club with Gus and gambled.

The Mortgage Discussion Event

Melynda gave affidavit evidence that she did not recall ever reading bank statements for their home loan account. However, about two years ago, she says that an ANZ bank statement arrived at the house. It was addressed to her. She did not open it straight away but put it in the fruit bowl in the kitchen to look at later. When her son, Joshua, arrived for family dinner later that day, she opened the envelope, read the statement and handed it to him. She says that a conversation to the following effect took place: Melynda: This doesn't look right. Can you look at it? Joshua: Your house should have been paid off by now. Joshua handed Melynda the statement. Melynda: Josh, I can't look at it now. I will have to discuss it with Gus.
Melynda put the statement in the fruit bowl. By the time Gus came home, Melynda had had a couple of glasses of wine. She said, 'A bank statement arrived today. How much do we owe on the mortgage?' He replied along the lines, 'The mortgage goes up and down depending on our bills. You don't understand.'
Because it was a Friday and she had had a couple of glasses of wine, she thought the conversation was best left for the next day. She got up and walked away without saying anything further. The following day, she went to the fruit bowl to retrieve the ANZ bank statement so she could read it. It was not there.
Gus and she had a conversation, part of which was to the following effect: Melynda: Where did the bank statement go? I put it here last night. Gus: I don't know I haven't seen it. Melynda: Come on Gus. I know I put it here. Gus: I don't know, I haven't seen it. Anyway why do you care, you have clothes on your back, food on the table, everything is paid for. I am taking care of things.
She says that Gus's tone suggested that he was angry and she did not press the matter further at that time. It does not appear that she pressed it further ever, although she continued to look for the statement but did not find it.
She says that Gus was secretive about his bank accounts, email and phone and, at one stage, she thought he was cheating on her. On one occasion when she asked him why he was so secretive about his phone, he said because it was his work, it was confidential, or it was his and none of her business. His behaviour led her to ask him whether he was having an extramarital affair. He denied it.
She says she accepted Gus' explanations, she loved him. He looked after her and her family. Part of her was scared that if she pushed these issues, he would leave her and, also, she was raised not to question men about finances. On occasion, Gus would say, 'I'm moving money around, that's what I do.'
Joshua Kentwell also gave evidence about the mortgage conversation. Under cross-examination, he said that he looked at the statement and said to Melynda that 'it looks like money has come out of it' at which Melynda got quite annoyed. Finding out about the withdrawal was a surprise. He remembered the event because Melynda and Gus had 'a bit of a heated argument over it.'

Operation of Melynda Nosti's Bank Accounts and Benefits Received by Her

There are numerous examples of stolen money being paid into Melynda's accounts and her benefiting by it, directly or indirectly.
Examples of the benefits received by her include: 1. On 25 January 2012, $9,293 was paid from the Moriah bank account into Melynda's Credit Card, reducing its balance. Debit transactions immediately preceding the payment and contributing to the balance reduced by it included items purchased by Melynda for herself and her family. 2. On 22 February 2012, $32,775 was paid from the Moriah bank account into the ANZ Offset Account. $10,000 of this was paid to Blue Haven Pools on 24 February 2012. It is safe to infer that this was for the pool at the house. 3. On 12 October 2016, an ATO refund of $78,104 was paid into the ANZ Offset Account. $2,262 of it was transferred to the Home Loan Account and contributed to a reduction in the balance owing to the bank. 4. Amounts diverted from the ATO to the ANZ Offset Account and then on-paid into Melynda's Credit Card and transferred from there into Melynda's Debit Card and, in part, used to pay for her personal expenditure.

The hearing

The hearing was conducted remotely because of the current viral pandemic. The hearing took three days. The court book runs to seven volumes comprising over 5,000 pages, much of which is bank material.
Gus and Melynda gave evidence and were cross-examined.
The Court had the benefit of comprehensive written submissions and oral argument.

THE BARNES v ADDY CLAIM

To succeed, Moriah must establish that Melynda was a recipient of trust property and that she had knowledge of Gus's breach of trust. This requires proof that she knew both of the trust and of the breach. Here, the trust and the breach are in substance the same thing, Gus's theft.

Receipt

Melynda argues that, because she had no knowledge of the activity on the bank accounts in her name, she is not to be treated as a recipient of the stolen money which found its way into those accounts. She placed reliance on the decision of the High Court in National Commercial Banking Corporation v Batty (1986) 160 CLR 251 (Batty).
Davis, Batty's partner in an accounting firm, dishonestly obtained monies belonging to a company client of the firm of which Davis was a director by procuring debtors of the company to draw cheques in its favour which Davis dishonestly endorsed and paid into the firm's trust account. He then used the proceeds for his own purposes.
First, the bank argued that Batty was liable for Davis's wrongdoing under section 10 of the Partnership Act 1892 (NSW), [9] on the footing that Davis acted in the ordinary course of the business of the firm or with the authority of Batty. Second, the bank argued because monies had been paid into the trust account in respect of which Batty was a named account holder, he had and received money to the use of the bank.
As to the first, the Court concluded that Davis had acted outside of the ordinary course of the business and without Batty's authority. As to the second, the Court doubted that the money was the property of the bank once paid into the trust account but concluded that, because Batty neither knew nor ought to have known that he had possession or control of it, Batty was not liable to the bank as for monies had and received. The receipt by the partnership of the money into its account was a mere technical receipt. Batty had no de facto control. He neither knew nor ought to have known of its presence so that he as a partner might properly have been regarded as holding it to the use of the bank: see Gibbs J at 268-9 and Dawson J at 299-300.
At 268-9, Gibbs CJ said: Where, because of the action of a servant or agent acting outside the scope of his authority, or for that matter because of the action of a complete stranger, money has been paid into the account of the defendant, who has technically received it, although he is quite unaware of that fact, and the money is then misappropriated, still without the knowledge or intervention of the defendant, there seems to be no reason in justice or equity why the defendant should be answerable for the money simply because theoretically he had the means of knowing that the money was in the account. In principle, in those circumstances, the defendant ought not to be liable unless, before the money was misappropriated, he knew or ought to have known that he had possession or control of it. In other words, where the defendant has not had the benefit of the money, has not played any part in disposing of it and was ignorant of the fact that it was theoretically under his control, he should not be liable in the absence of fault on his part.
Batty is not this case. First, Melynda consciously and deliberately left the operation of the accounts to Gus largely to the exclusion of herself. Second, she not only knew that Gus was depositing into the accounts but, amongst others, was depositing money for her use. Third, she operated some of the accounts herself.
It seems to me, however, that the concepts considered in Batty have little or no role to play in this case. Batty is not a Barnes v Addy case. If the evidence establishes that Melynda had knowledge of the existence of the trust and Gus's breach of it, it must follow that she had knowledge sufficient to consider her a recipient. If Moriah does not prove that she had knowledge, it will fail in any event.

Knowledge

In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 (Farah) at [171]-[178], the High Court adopted the five category classification of knowledge (actual or constructive) famously identified by Peter Gibson J in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France [1993] 1 WLR 509 at 574-87, namely: 1. actual knowledge 2. wilfully shutting one's eyes to the obvious 3. wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make 4. knowledge of circumstances that would indicate the facts to an honest and reasonable person 5. knowledge of circumstances that would put an honest and reasonable person on enquiry.
Only categories (1) to (4) but not category (5) suffice for Barnes v Addy liability, but it is to be borne in mind that it is a pitfall to treat each category as being exclusive and rigid: see Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 398 and 412-3; Koorootang Nominees Pty Ltd v Australian and New Zealand Banking Group Ltd [1998] 3 VR 16; Hancock Family Memorial Foundation Ltd v Porteous (1999) 151 FLR 191 (Hancock Memorial Foundation) at 209; Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1 (Bell) at [4741]-[4748]; Grimaldi v Chameleon Mining NL & Another (No 2) (2012) 200 FCR 296 at [251]-[286].
Owen J pointed out in Bell at [931] that categories (2) and (3) are often referred to as species of actual knowledge whereas categories (4) and (5) are forms of constructive knowledge, although proof of category (4) or (5) knowledge may be sufficient to allow a court to infer, in the absence in proof to the contrary, that a person had one of the subjective states of mind referred to in categories (1), (2) and (3).
I am comfortably satisfied that Melynda had no inkling that any of the money coming in was stolen, let alone from Moriah. It is not suggested that she had category (1) actual knowledge of this.
It is, however, argued that she had 'sufficient knowledge to fall within the constructive knowledge categories' (2), (3) and (4). Categories (2) and (3), however, are species of actual knowledge because they require wilful (that is, conscious) abstention. But for present purposes the conceptual dividing line is immaterial.
The thrust of Moriah's submissions is that the money they were spending was beyond their obvious means to the extent that it conveyed to her or would have indicated to an honest and reasonable person that there was an unexplained source of income, in the face of which Melynda chose to look the other way.
In Farah at [112], the High Court said persons who received trust property become chargeable if it is established they received it with notice of the trust. In Hancock Memorial Foundation at 209, Anderson J referred to knowledge at the time of receipt of the property that it was trust property and it was being misapplied. In Spangaro v Corporate Investment Australian Fund Management Ltd (2003) 54 ATR 241 at [55], Finkelstein J talked of knowledge that the property received was trust property and of circumstances attendant on the transfer of that property that made the transfer a breach of trust. In Bell at [4748], Owen J, after referring to these various formulations, referred to knowledge of facts which to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication.
These authorities make it clear that knowledge, actual or constructive, of an unexplained source of income, simpliciter, is insufficient to get Moriah home. It does not meet the criteria which the authorities have laid down; that there must be knowledge both that the property was trust property and that is was being misapplied. An unexplained source of income does not bring with it a necessary inference or implication that the explanation is nefarious activity. It does not bring with it a necessary inference or implication that there is a trust or misapplication of trust money. It is not suggested (nor could it reasonably be) that anything Melynda knew would have given rise to an inference or implication that Gus was stealing, let alone that this was obvious. On this footing, Moriah fails at the first hurdle.
But, in any event, assessing the evidence as a whole, I am not satisfied that Moriah has shown that Melynda wilfully shut her eyes to the obvious (assuming the obvious to be an unexplained source of income), wilfully and recklessly failed to make enquiries as an honest and reasonable person would have made (assuming an honest and reasonable person would have considered that there was an unexplained source of income), or that the circumstances known to her would have even indicated the existence of an unexplained source of income let alone the existence of a trust and breach of it.
Moriah placed particular reliance on the decision of Kelly J in Artcraft Pty Limited v Dickson [2014] SASC 108 (Artcraft).
In Artcraft, a husband misappropriated goods from his employer and converted the goods into cash which was paid into bank accounts in his and his wife's (the defendant's) name. The defendant had shared access to the bank accounts which were used by her to pay household expenses. A large amount of expenses were paid for in cash. The plaintiff claimed that the defendant, who had not been involved in the misappropriation, was liable as a knowing recipient of amounts paid into the accounts.
In finding for the plaintiff, Kelly J found that during the period September 2008 to August 2011, the couple took six interstate and overseas holidays, to Bali, Sydney, Melbourne and New Zealand: at [247]. The combined family income was around $100,000 to $120,000 in the relevant period. Her Honour considered it unlikely that a family in that position, with five children, three of whom were fully dependent, could have undertaken such interstate or overseas trips unless they had access to cash beyond those legitimate sources of income: at [258].
Her Honour found that the defendant shared equal responsibility for the household bills, she was aware of the manner in which the bills were paid, and could not have failed to have been aware that significant amounts of cash in excess of their income were being used to pay those bills: at [290]. Her Honour concluded that the defendant was aware that her husband was bringing cash into the household which could not be explained by his legitimate source of income and that it was being used to fund their lifestyle: at [292]. Her Honour considered that the common sense inference to be drawn from the bank records was that the defendant was either aware or should have become aware of this because she was equally responsible for the payment of joint family expense and had access to banking records forwarded to their home address. The family's joint expenses were of such a magnitude that no honest and reasonable person could fail to have been put on enquiry: [293]. She was the beneficiary of significant amounts of cash which were used to fund their lifestyle which included numerous holidays: at [296].
Her Honour was satisfied that the defendant had the requisite knowledge either because she had actual knowledge of the theft by her husband or, if she did not have actual knowledge, she deliberately shut her eyes to the obvious in the sense that, realising that their living expenses so far exceeded their joint legitimate income, she nevertheless refrained from asking any questions or making any enquiries as to the source of the funds which any honest or reasonable person in her position would have made: at [297].
Moriah also referred to the statement of Basten JA in Silversea Cruises Australia Pty Ltd v Abellanoza [2019] NSWCA 306 (Silversea Cruises) at [102] that 'the critical question was whether [the third party] had knowledge of circumstances which would tell a reasonable and honest person that [the fraudster] had an unexplained source of income.'
Moriah argues that Melynda had knowledge as at the end of 2011 or as at the end of 2015.
As to her knowledge as at the end of 2011, Moriah relies on the facts that:

Melynda had stopped working and Gus was the only breadwinner but he (or they) had bought various luxury cars, boats and caravans and had undertaken extensive renovations on the house including building a swimming pool, which Melynda knew was going to be 'a bit of a stretch'
in that calendar year, they went on three overseas holidays including a trip to the USA and Mexico (although in fact they only went on two)
Melynda knew of Gus's gambling, the quantum and frequency of which was only explicable if he was obtaining funds beyond his legitimate source of income. She knew he could 'lose and lose big' and that gambling losses on pokies were notorious.
from 2009 to 2012, there had been a significant increase in their discretionary expenditure, amongst others, entertaining, eating out and furniture.

As to her knowledge as at the end of 2015, Moriah relies, additionally, on the facts that:

from 2013 to 2015, they took eight trips to Indonesia (one of which included Thailand), one trip to Hong Kong, Macau, Malaysia and China, and two trips to the USA and Mexico
they stayed in 4-star accommodation
in April 2015, they took out the expensive luxury club membership.

Moriah argues that the following evidence of Melynda should not be accepted:

that Gus completely controlled all her finances from 2012
that in 2008, she had a specific recollection about not reading or looking at the finance documents
her denial that she did not know about or use Melynda's Credit Card;
the mortgage discussion event did not raise a suspicion in her own mind as to Gus's use of their bank account
that she just trusted Gus when he said they could afford the expenditure
that it was not occurring to her that the spending was not adding up in terms of what he was earning or that she was not turning her mind to such matters.

Moriah submitted that Melynda attempted to downplay her knowledge of the extent of Gus's gambling and attempted to overplay her financial naivety.
Moriah contends for a finding that, on the balance of probabilities, bank statements were sent regularly to the house. It submits that she could have obtained statements directly from the bank or electronically by logging in.
Moriah contends that the mortgage discussion event is evidence of an occasion where Melynda had an actual suspicion that her husband was engaging in suspect financial activities.
In my opinion, the evidence does not establish knowledge on Melynda's part, actual or constructive, of the existence of a trust and its breach. The evidence also does not establish that there was absent an available and reasonable explanation for them being able to afford their expenditure. Put the other way, there were available reasonable explanations.
I do not think that the evidence goes so far as to establish category (5) knowledge which would be insufficient for Barnes v Addy liability in any event.
It has not been shown that Melynda had knowledge of circumstances which would tell an honest and reasonable person that Gus had an unexplained source of income.
I do not consider that an honest and reasonable person would easily infer that a school accountant had been stealing large sums of money from the school over years, undetected.
If, however, the evidence rose to the height of establishing knowledge of circumstances which would have told an honest and reasonable person that Gus had an unexplained source of income, as articulated by Basten JA in Silversea Cruises, I respectfully suggest that this is a lower threshold than that set by Farah, which binds me, and the other persuasive decisions of first instance judges which are referred to earlier.
Artcraft is a very different case to this one. There the defendant shared equal responsibility for the household bills and Kelly J considered that she could not have failed to have been aware that significant amounts of cash were being used to pay those bills. She had access to the bank accounts which were forwarded to their home address and was the beneficiary of significant amounts of cash which were used to fund their lifestyle. There was a finding that the defendant either had actual knowledge of her husband's theft or deliberately shut her eyes to the obvious.
Melynda's evidence was not without its imperfections but, in my view, she was overall a truthful witness.
I believe her when she says that she implicitly trusted Gus and left everything to him. She was vulnerable to him and he dominated her with respect to financial matters in a bullying way. My observation of him in the witness box fortifies me in this conclusion. He duped her and he deftly kept her from knowing anything that would create true suspicion.
Melynda may not have had the benefit of higher education but she is no fool, and I do not think that she is naive. I have no reason to think that, had she any inkling of what Gus was doing, she would have gone along with it.

Restitutionary claim

Near the end of final submissions, Moriah modified its restitutionary claim to assert that at the time Melynda received notice of its claim, she retained the benefit of $77,905. This figure is supported by the accounting evidence.
I made it clear to the parties that I intended to proceed on the footing that this figure was not in contest unless Melynda properly put it in contest. Counsel for Melynda said 'I'd be pretty happy about that, your Honour, if we got to 70,000,' (I took this to mean the figure actually claimed by Moriah).
The second defendant was given the opportunity to put the figure in issue by way of supplementary submissions but the opportunity was not taken up.
The restitutionary claim accordingly succeeds. There will be judgment of $77,905 against Melynda.

Conclusion

The Court will make a declaration that the first defendant breached his fiduciary duties to the plaintiff by stealing from it $7,337,282 and there will be judgment against him for that amount, together with an order that he pay the plaintiff's costs of the proceedings against him.
There will be judgment against the second defendant for the sum of $77,905 as at 5 November 2019.
The proceedings against the third defendant will be dismissed, with no order as to costs.
I will stand the matter over to a convenient date to enable the parties to bring in short minutes reflecting this outcome, including any adjustments required to take account of pre-judgment interest, to deal with the asset preservation orders that are currently on foot and to enable the parties to draw to my attention any other matters which still require to be dealt with.
I will hear the plaintiff and the second defendant on costs if agreement between them cannot be reached.
The exhibits are to be returned.

Endnotes

No account of cents is taken in this judgment.
No. ending 5619.
No. ending 1327.
No. ending 1083.
No. ending 6153.
No. ending 8546.
No. ending 0305.
No. ending 5004.
Section 10 of the Partnership Act 1892 (NSW) provided, 'Where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.' DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 July 2020

At a glance

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Judgment (22 paragraphs)

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Cases Cited (12)

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