Norco Co-Operative Limited v Kelly

LEGISLATION CITED : Civil Procedure Act 2005 (NSW) Uniform Civil Procedure Rules 2005

CASES CITED : Black v S Freedman & Co (1910) 12 CLR 105

Norco Co-Operative Limited (Plaintiff) PARTIES : Hazel Kelly (First Defendant) Fabre Kelly (Second Defendant)

COUNSEL : Mr D Lloyd (Plaintiff) No Appearance (Defendants)

SOLICITORS : Lee & Lyons (Plaintiff) No Appearance (Defendants)

• 7 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

09/287863 NORCO CO-OPERATIVE LIMITED V HAZEL KELLY JUDGMENT 1 There is affidavit evidence of service on the defendants. They have not appeared or filed a defence to the Amended Statement of Claim. They were notified of the final hearing which took place on 28 June 2010. They were called outside the court room at the beginning of the hearing but did not appear. 2 The hearing proceeded on the basis that the defendants are taken to admit the allegations of fact made in the Amended Statement of Claim: see r 14.26(1) of the Uniform Civil Procedure Rules 2005. 3 The following account of the facts is founded on that deemed admission and on certain short affidavit evidence that was read. 4 Between 26 March 2001 and 10 February 2009, the plaintiff (Norco) employed the first defendant (Hazel - without intending any discourtesy and only for convenience, I will use the defendants' first names). 5 At various times between 2 December 2005 and 2 September 2008, Hazel fraudulently and dishonestly misappropriated various amounts totalling at least $316,657.98 (the Misappropriated Funds) from Norco and deposited the Misappropriated Funds into personal bank accounts controlled by Hazel or the second defendant (Fabre) or both of them. 6 It is alleged that by reason of these circumstances, Hazel and Fabre held the Misappropriated Funds on trust for Norco. However, this is not an allegation of "fact" within r 14.26(1) and is therefore not deemed to be admitted. 7 Prior to the period mentioned above, Hazel had become the owner of one property and Hazel and Fabre had become the joint owners of three properties as follows: 1. On 27 June 2001 Hazel became the registered proprietor of Lot 511 Crown Plan M5512, Title Reference 16308234 (Lot 511) subject to mortgage number 704857815 to National Australia Bank Limited which was registered on that same date.

2. On 8 October 1998 Hazel and Fabre became registered as proprietors a joint tenants of Lot 171 Registered Plan 862765 Title Reference 18644058 (Lot 171) subject to registered mortgage number 702943409 to Suncorp-Metway Limited which was registered on that same date.

3. On 24 October 2001 Hazel and Fabre became registered as proprietors as joint tenants of Lot 9 Registered Plan 891053, Title Reference 50068238 (Lot 9) which, on 6 September 2005, became subject to registered mortgage number 708953729 to National Australia Bank Limited.

4. On 24 October 2001 Hazel and Fabre became registered as proprietors as joint tenants of Lot 10 Registered Plan 891053, Title Reference 50068239 (Lot 10) which became subject to a mortgage number 708953729 registered on 6 September 2005 to National Australia Bank Limited. 8 In the case of Lot 511, Hazel, and in the case of each of Lots 171, Lot 9 and Lot 10, Hazel and Fabre, used part of the Misappropriated Funds "to discharge or reduce liability over the property". I understand and read this allegation as an allegation of payment off the amount secured by registered mortgage over the relevant property. It is an allegation of fact and is deemed admitted. 9 Hazel has failed to repay any part of the Misappropriated Funds. 10 Norco commenced this proceeding against Hazel alone on 10 March 2009. By consent as between Norco and Hazel a Freezing Order was made in respect of Hazel. That was on 19 March 2009. Hazel did not attend Court but had, on 18 March 2009, signed the form of Consent Orders. It was ordered that Hazel must not remove from Australia or in any way dispose of, deal with or diminish the value of any of her assets in Australia (Australian assets) up to the unencumbered value of AUD$375,000. The Australian assets were defined to include Hazel's interests in the four properties mentioned earlier. 11 Fabre's name appeared as that of the second defendant for the first time in the Statement of Claim that was filed on 3 February 2010. Fabre was served with that document on 18 February 2010. She has been served with subsequent documents and, as noted earlier, she was notified of the final hearing to take place on 28 June 2010. 12 I have not been able to locate any record of an order formally adding Fabre as second defendant. On 19 November 2009 there was a direction that the plaintiff file and serve a statement of claim. It may be that the form of the statement of claim showing Fabre as second defendant was before the Court when the direction was made. Be that as it may, I will make an order adding Fabre as second defendant nunc pro tunc as on and from 19 November 2009. 13 Norco is entitled to judgment against Hazel for the amount of the Misappropriated Funds plus interest on the respective amounts misappropriated from the dates of the respective misappropriations down to judgment. There is evidence of the dates and amounts. They also appear in the tables about to be mentioned 14 Annexed to these reasons for judgment are two tables showing calculations of interest. The first table (Annexure 1) is based on the recently made Practice Note SC Gen 16 - Supreme Court - Pre-judgment interest rates. That Practice Note commences tomorrow, 1 July. It is based on a recommendation of a Harmonisation Committee appointed by the Council of Chief Justices of Australia and New Zealand. The second table is based on the rates for post-judgment interest that appear in Schedule 5 to the Uniform Civil Procedure Rules which are in fact commonly adopted by Judges when making orders under s 100 for pre-judgment interest. The former gives a total interest amount of $89,986.40, while the latter gives an amount of $89,530.98 - an astonishingly close similarity. 15 Counsel for Norco suggested that use of the harmonised rates would be appropriate as reflecting current thinking. I agree. 16 The total amount of the interest of $89,986.38, when added to the amount of the Misappropriated Funds of $316,657.98, brings the total up to $406,644.38. There will be judgment for Norco against Hazel in that amount. 17 Norco also seeks a declaration that it has a charge securing the amount of the judgment over the properties. On the hearing affidavit evidence showed that the position in relation to the four properties as at a search date of 21 June 2010 is as follows:

1. By a Transfer signed by her on 15 February 2010, stamped on 26 February 2010 and registered on 3 March 2010, Hazel transferred for $124,000 Lot 511 to Cameron Roy Donahue free of encumbrances.

2,3& 4 By a Transfer executed by them on 25 November 2009, stamped on 3 March 2010 and registered on 8 March 2010, Hazel and Fabre transferred Lot 171, Lot 9 and Lot 10 to Fabre alone. The space in the form of transfer providing for a statement of the "Consideration" was filled in: "pursuant to an oral agreement". 18 Relevant to Fabre's knowledge or reason to believe or suspect that the Misappropriated Funds had been misappropriated by Hazel is the fact that Hazel and Fabre are life partners. Paragraph 4 of the Amended Statement of Claim alleges that at all material times they were "in a de facto relationship". On 1 August 2005 Hazel filled in a "Commencement Form" for Norco identifying Fabre as her "partner" and the person to be contacted in case of emergency. She also gave as Fabre's address the same address as her own. I infer that Hazel and Fabre are life partners and have been at least since 1 August 2005. 19 Where money is misappropriated it is trust money in the hands of the person who has misappropriated it. It retains that character in the hands of a transferee unless that person took in good faith, for value and without notice: Black v S Freedman & Co (1910) 12 CLR 105 at 110 per O'Connor J. 20 Norco does not press for declaratory relief in relation to Lot 511: Mr Donahue appears to have been bona fide purchaser of a legal estate for value without notice. 21 In relation to the other three properties, Fabre does not, in my opinion, satisfy the description of a bona fide purchaser for value without notice. The Misappropriated Funds were held by Hazel upon trust for Norco. Hazel and Fabre held the relevant parts of them in the accounts in trust for Norco. Hazel and Fabre paid those parts off the mortgages, thereby increasing the values of their equities in the three properties. Neither at the times when parts of the Misappropriated Funds were so paid nor on 8 March 2010 when Hazel and Fabre transferred the three properties to Fabre alone (nor at the earlier time when the parts were paid into the accounts), can it be said that Fabre provided valuable consideration in good faith and without notice of the defect touching Hazel's title to the moneys. 22 I infer from the facts referred to earlier, namely, the allegations of fact deemed to be admitted and the relationship between Hazel and Fabre, that Fabre knew or had reason to believe or suspect that the amounts that she and Hazel were paying off the mortgages were monies that Hazel had misappropriated from Norco. Fabre's state of knowledge, and reason for suspicion were the same when she subsequently took the apparently gratuitous transfer of the three properties from Hazel and herself. 23 In my opinion a charge in favour of Norco came into existence over each of the three properties now registered in Fabre's name, when the payment or payments were made off the mortgage over that property and that charge survived the transfer to Fabre. But the charge is only in respect of that part of the Misappropriated Funds that was paid off the mortgage over the particular property. Norco did not become entitled, as claimed by it, to a change over each property for the full amount of the Misappropriated Funds. 24 Does the charge extend to (a) pre-judgment interest; and (b) Norco's costs which Hazel and Fabre will be ordered to pay? 25 In each case the answer is "No". An award of damages in the sum of $316,657.98 is sought against Hazel alone. Section 100 of the Civil Procedure Act 2005 (NSW) provides that in proceedings for the recovery of money, the court may include interest in the amount for which judgment is given. Judgment will not be given for a money amount against Fabre against whom the only remedy sought is the declaration of the existence of the charge. 26 Hazel and Norco will be ordered to pay Norco's costs in accordance with the usual exercise of the discretion as to costs in favour of the successful party. The liability of Hazel and Fabre to pay costs arises upon and by reason of the making of the order for costs and there is no basis for adding the amount of the costs to the amounts of the charges. 27 Quantification of the amount paid in respect of each property is not essential for my declaration of the existence of the charges, but I will reserve liberty for Norco to apply in that respect. It is desirable, though no necessary, that there be a determination and declaration of the amount in this proceeding rather than further down the track, such as if and when Fabre might sell. 28 The orders of the Court will be:

That Fabre Kelly be joined as second defendant nunc pro tunc as from the making of the Court's order on 19 November 2009 for the filing and service of a Statement of Claim.

Judgment for the plaintiff against the first defendant for $316,657.98 and interest under s 100 of the Civil Procedure Act 2005 of $89,986.40, totalling $406,644.38.

A declaration that each of the three properties mentioned below is charged in favour of the plaintiff as security for that part of the sum of $316,657.98 referred to in the Amended Statement of Claim filed in proceedings 09/287863 in the Equity Division of the Supreme Court of New South Wales that was paid in reduction of the amount secured by registered mortgage over that property: a. Lot 171 Registered Plan 862765 Title Reference 18644058. b. Lot 9 Registered Plan 891053, Title Reference 50068238. c. Lot 10 Registered Plan 891053, Title Reference 50068239.

That the defendants pay the plaintiff's costs of the proceeding.

That the plaintiff have liberty to apply in relation to the determination of the three amounts (or any of them) referred to in para 3 above.

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