Rheem Australia Pty Ltd v McInnes

Judgment

1. On 30 September I delivered my principal judgment in these proceedings: Rheem Australia Pty Limited v McInnes [2020] NSWSC 1313. This further judgment assumes familiarity with my principal judgment, paragraphs of which are referred to as "J". The same abbreviations used in the principal judgment are used in this judgment.
2. On delivery of my principal judgment I ordered that Rheem bring in short minutes of order giving effect to my conclusions. Following further argument on 26 October and 5 November, I made orders for final relief on 6 November. This judgment sets out the reasons for those orders and gives reasons for the costs orders which I will now make.

Final relief

1. I found that Rheem was entitled to judgment against Mr McInnes in the amount $2,098,608 fraudulently misappropriated by him: J [127]. Rheem calculated the statutory interest down to entry of judgment as $937,984.
2. Mr McInnes did not dispute the quantum of Rheem's calculation. He did complain about the length of time that the proceedings took to come to hearing.
3. Pre-judgment interest is awarded to reflect the fact that the money in question has been "fructifying in the wrong pocket": Newton v The Grand Junction Railway Company (1864) 16 M & W 139 at 141; 153 ER 1133 at 1134. Rarely if ever would the delay of the conduct of the proceedings result in the plaintiff not receiving interest at statutory rates. Most of the interest which has been calculated covers the period during which Mr McInnes concealed the fraud from Rheem. I see no reason to think that there is anything about Rheem's conduct which would warrant it being deprived of interest thereafter.
4. I found that Rheem was entitled to judgment against Mrs McInnes (jointly with Mr McInnes) in the sum of $237,480, representing the share of a mortgage repayment on the Menai property which could be traced to monies misappropriated by Mr McInnes from Rheem: J [184]. This entitlement arose under the restitutionary cause of action recognised in Heperu Pty Ltd v Belle (2009) 76 NSWLR 230: J [135].
5. Initially Rheem claimed pre-judgment interest at statutory rates from May 2010, the date on which the mortgage repayment was actually made. But the gravamen of the cause of action recognised in Heperu is retention of the financial benefit received by a volunteer after the volunteer becomes aware that the monies in question had been stolen from the plaintiff: Heperu at [164]. It was not suggested that Mrs McInnes was aware at the time that Mr McInnes was misappropriating money from Rheem.
6. Eventually the parties agreed that pre-judgment interest should run from 18 March 2019, the date on which Rheem joined Mrs McInnes as a defendant in the proceedings. Calculated from that date, the interest on the judgment against Mrs McInnes amounted to $19,182.
7. I found that Rheem was entitled to an equitable charge over assets belonging to Mr McInnes, to the extent that those assets were purchased, or mortgage liabilities on those assets were discharged, with monies that could be traced to the funds misappropriated from Rheem. The assets in question were: the two investment properties at Griffin in Queensland (J [80]-[84]); the cabin at Wisemans Ferry (J [87]); and Mr McInnes' half share of the Menai property (J [230]).
8. For the purposes of final relief, Rheem did not try to augment the traceable amounts I identified in my judgment with interest earned on the relevant bank accounts: see J [185]. Nor did Rheem seek to trace into the regular mortgage repayments on the Menai and Griffin properties (see J [76]-[86]), or to trace through the PPS account after untainted monies were paid into it on 4 September 2017 (see J [109]).
9. What Rheem did seek, as foreshadowed at J [199], was to have the equitable charge secure not only the traceable amounts but also pre-judgment interest on those amounts. This was resisted by Mr McInnes.
10. In addressing the issue I will deal first with the Griffin investment properties and the Wisemans Ferry cabin.
11. In each case the traceable monies were paid towards the purchase price of the asset in question. The asset was acquired by Mr McInnes with a mixture of his own monies and monies misappropriated from Rheem. Rheem could have taken a proportionate interest in the property by way of constructive trust, or a charge: Scott v Scott (1963) 109 CLR 649 at 661-662; Foskett v McKeown [2001] 1 AC 102 at 130-132. In each case Rheem elected to take a charge.
12. Where the plaintiff takes a proportionate ownership interest by way of constructive trust, the plaintiff will benefit from any increase in the asset's value since it was acquired. If the value of the asset has declined, the plaintiff can avoid or reduce the loss by taking a charge instead. The election may be made after the trial, with hindsight. The plaintiff thus has things both ways. But equity's attitude is that the defendant, who chose to use the plaintiff's money in acquiring the asset in question, cannot complain: as a wrongdoer "everything is presumed against him": Gray v Haig (1885) 20 Beav 219 at 226; 52 ER 587 at 590.
13. Against this background, it seems to me that if the plaintiff elects to take a charge, the amount secured by the charge should include interest on the traceable amount used in the purchase of the asset in question. Otherwise the proprietary relief given by the court would be incomplete. It would not reflect the full economic value, at the date of the trial, of the monies belonging to the plaintiff which the defendant used in the purchase.
14. In the present case Mr McInnes hid the misappropriations, and the subsequent use of the misappropriated monies to purchase of assets, from Rheem. I think it is particularly important in such circumstances that Rheem, as the defrauded party, should receive proprietary relief of full economic value. If the asset values have not increased in line with interest rates, the result will be to reduce the equity Mr McInnes has in those assets attributable to his own monetary contributions. But, again, as a wrongdoer Mr McInnes cannot complain.
15. In principle it is arguable that the interest secured by the charge should continue after judgment at the applicable statutory post-judgment interest rate. But this was not asked for and I say no more about it.
16. The equitable charge over the Menai property represents a proprietary remedy granted by way of subrogation, rather than by direct tracing: see J [230]-[241]. But for present purposes I think that makes no difference. The purpose of awarding a charge is the same in both cases.
17. In a true case of subrogation, the relevant interest rate would be that applicable to the mortgage debt which was discharged. But subrogation in the present case bears only a "very attenuated" relationship with subrogation in the strict sense (Bryson J in Challenger Managed Investment Ltd v Direct Money Corporation Pty Ltd [2003] NSWSC 1072, quoted at J [237]), and equity's remedies are said to be at their most flexible in subrogation cases of this type: ATCO Controls Pty Ltd v Stewart [2013] VSCA 132 at [234]-[235].
18. The loan was in fact paid off more than ten years ago, and I think it would be meaningless to insist on the interest under the charge being calculated by reference to the rates charged on such loans (if that could still be ascertained; the loan product may no longer be available from the bank). The inclusion of interest at statutory rates appropriately reflects the compensatory purpose of awarding a charge.
19. Counsel for Mrs McInnes submitted that interest under the charge on the Menai property should run only from 18 March 2019. Counsel pointed out that the principal liability is a joint one and that the interest against Mrs McInnes runs only from that date: see J [266].
20. This submission overlooks the fact that the charge is against Mr McInnes' share only. Rheem's entitlement against Mr McInnes is based on his appropriation of the monies, not receipt as an innocent volunteer. As against Mr McInnes' share, it is proper that interest runs from the date on which the appropriation was made, which is the date on which the payment was made to the mortgagor.
21. Rheem's interest calculations were not otherwise disputed. The result is that Rheem was entitled to charges over the following assets of Mr McInnes in the following amounts: Traceable amount Interest Total White Ibis Drive property $35,400 $12,107 $47,417 Apple Circuit property $62,990 $17,256 $80,246 Wisemans Ferry cabin $90,000 $17,522 $107,522 Half share of Menai $237,480 $160,860 $398,340 Property Total $425,870 $633,525

1. Finally, I made findings about the payments totalling $405,000 from Mr McInnes to Mrs McInnes in December 2018, the residue of which (being $392,897) was paid into Court by Mrs McInnes in March 2019. I found both that the payments by Mr McInnes were dispositions to defraud creditors caught by the Conveyancing Act 1919 (NSW), s 37A (J [259]), and that they included traceable proceeds of the monies misappropriated from Rheem in the sum of $286,215 (J [219]). I also found, subject to the question of election discussed below, that Rheem was entitled to judgment against Mrs McInnes in the sum of $286,215 on the restitutionary basis recognised in Heperu (J [220]).
2. There was no dispute that Rheem had a proprietary entitlement to the traceable amount of $286,215. I will return to this below. But there was some debate about what orders the Court should make under s 37A with respect to the balance.
3. The effect of s 37A is that a disposition with intent to defraud creditors is void. The ordinary result is that the property reverts to the disponor where it can be pursued by the disponor's creditors. But counsel for Rheem sought, as foreshadowed at J [261], a "make-available" order of the type I made in Nguyen v Corbett (No 2) [2018] NSWSC 441. That case also concerned a disposition of property made by a husband, separated but not formally divorced, in favour of his estranged wife. The property concerned was the former matrimonial home. I found that the transfer was caught by s 37A. Rather than ordering the wife to transfer the property back to the husband, my make-available order required her to apply the property directly to the creditors in discharge of the husband's debts.
4. In Nguyen v Corbett the value of the property comfortably exceeded the amount owed to the husband's creditors. After they were paid out, therefore, the order would entitle the wife to retain the balance rather than return it to the husband. This reflected the fact that as between the husband and the wife, the transfer had been a gift. There was no reason to undo the gift beyond what was required to satisfy the husband's creditors. But the present case is different. Mr McInnes' liability to Rheem greatly exceeds the amount received by Mrs McInnes.
5. Furthermore, in Nguyen v Corbett the husband no longer lived in Australia and therefore no question of bankruptcy would have arisen even if the debt had exceeded the value of the property. In the present case, Mr McInnes says that he lacks sufficient assets to meet Rheem's judgment against him, and bankruptcy is thus a real possibility. A make-available order (which contains provisions for the identification of creditors: see Nguyen v Corbett at [27]) might cut across, or duplicate, bankruptcy administration.

Costs

1. For the purpose of dealing with the costs issue which arise, it is necessary to recount some of the details about the claims and issues in the proceedings as they developed, and refer to some of the offers exchanged between the solicitors for the parties.
2. As noted at J [23], the proceedings were commenced by Rheem on 18 January 2019. At that stage Mr McInnes was the sole defendant. The initiating summons claimed a declaration that the $2.1 million misappropriated by Mr McInnes was held on trust for Rheem. It sought, among other things, orders that Mr McInnes account for those monies (with interest). In particular orders were sought that Mr McInnes hand over any property acquired, directly or indirectly, with the monies.
3. Mr McInnes retained HWL Ebsworth ("HWLE") to act for him. On 1 February 2019 HWLE sent a Calderbank letter to Rheem's solicitors, DLA Piper ("DLA"). The letter noted interest on the $2.1 million claimed by Rheem then amounted to approximately $800,000. It canvassed Mr McInnes' financial position, arguing that recovery through bankruptcy would be limited, uncertain and expensive. In particular, it stated that Mrs McInnes intended to bring family law proceedings against Mr McInnes.
4. The letter proposed a settlement under which Mr McInnes would sell the Griffin properties and the equity (after the secured lenders were paid out) would be paid over to Rheem. Mr McInnes would also pay the sum of $350,000 in cash. The parties would also enter into a deed of release which would include confidentiality and non-disparagement clauses.
5. DLA's response came on 11 February. It was uncompromising. In the course of the letter DLA said: Your letter is predicated on the erroneous assumption that our client is a willing participant in a commercial dispute and its decisions in relation to the proceedings are governed solely by a cost benefit or commercial analysis. … To be clear, our client is the victim of a longstanding fraud perpetrated by your client. Our client held your client in a position of fidelity and trust. Your client deliberately and dishonestly misappropriated our client's assets for his own use and benefit. … Our client will not entertain any "settlement" that involves the payment of anything less than full compensation including interest over a 10 year period and costs on an indemnity basis. Further, our client will not agree to any arrangement under which it is subject to contractual restrictions relating to confidentiality or non-disparagement, particularly in relation to conduct that is egregious and both civilly and criminally unlawful. Our client intends to pursue the litigation until judgment. …

1. Mr McInnes' defence declined to plead to Rheem's allegations of misappropriation on the grounds that to do so might prejudice Mr McInnes' defence of criminal proceedings. Mr McInnes made no admissions that Rheem had any entitlement to any of the relief claimed.
2. Mrs McInnes' defence denied knowledge of the alleged misappropriations. She too made no admissions that Rheem was entitled to any of the relief claimed.
3. On 8 July 2019, there was a mediation in the proceedings. It was unsuccessful. Following its failure, DLA wrote to HWLE and Mrs McInnes' solicitors, Yeldham Price O'Brien Lusk ("YPOL"), indicating that Rheem was open to resolving the proceedings.
4. This resulted in a further Calderbank letter from HWLE, sent on 11 July. Under the offer Mr McInnes would make over to Rheem the Griffin properties (subject to the registered mortgages on those properties); the Wisemans Ferry cabin; and the boat. If Rheem preferred, he would sell the Griffin properties and pay the net proceeds over to Rheem. Mr McInnes would also "consent" to the $393,000 Mrs McInnes had paid into Court, together with accrued interest, being released to Rheem. Again, the offer required entry into a formal deed of release which would include confidentiality and non-disparagement clauses.
5. HWLE noted in passing that the monies in the joint account had been exhausted by payments for living expenses and legal fees (which were permissible under the freezing orders). This does not appear to have been disputed.
6. The offer also contained no interest in the Menai property. HWLE argued that, of the sums paid towards the Menai property which were the subject of Rheem's proprietary claim, only a maximum of $142,417 (representing monies which passed through the Power Saver account: see J [141]) could give rise to a proprietary entitlement. In particular, they argued, citing Re Diplock [1948] Ch 465 (see J [202]), that the building expenditure (J [91]) did not give rise to any proprietary interest in the property.
7. HWLE also argued that Rheem would have trouble enforcing any proprietary claim, once established. On division of the assets in the family law proceedings, Mrs McInnes would be claiming at least fifty per cent and up to seventy per cent of the value of the Menai property. As a minority holder in the property Rheem would not be able to obtain an order for sale (presumably referring to an application under the Conveyancing Act, s 66G). Any security interest Rheem might obtain could not be exercised while the Family Law proceedings were pending, and they were likely to be protracted.

1. It will be recalled that Mr McInnes' offer was to "consent" to the release of the monies in Court. This reflects the fact that in law, as between Mr McInnes and Mrs McInnes, those monies belonged to her. Strictly speaking, it may be that they should not form part of the comparison for present purposes. Even so, on the figures in the table Rheem was substantially less successful on its proprietary claim than the offer allowed (although there is no evidence to support the valuation of $776,763 in the letter for the assets offered).
2. But acceptance of the offer would have required Rheem to give up the judgment and to agree to a confidential settlement with non-disparagement obligations. These terms were not defined and strictly speaking the "offer" was therefore not capable of acceptance. There is, however, a more fundamental problem.
3. For the purposes of offers under the Rules, the comparison is between the judgment offered and the judgment obtained. On the face of it, the same should be so for a Calderbank offer. I am not sure it would be proper to deprive a successful plaintiff of costs on the basis of an offer less than the amount of the judgment ultimately obtained, on the ground that the amount offered is more than the plaintiff is ultimately likely to recover. If that is permissible at all, it seems to me that it could only be justified where it is indisputably clear that the plaintiff was being uncommercial and unreasonable in rejecting the offer.
4. In the present case it was, in my view, reasonable for Rheem to pursue the proceedings for the purpose of obtaining judgment against Mr McInnes, irrespective of whether anything could be collected under it. Nor could Rheem reasonably be required to accept a confidential settlement with non-disparagement obligations. Rheem has a legitimate commercial interest in making an example, publicly, of those who defraud it.
5. In any event, in the present case it is far from clear that Rheem's rejection of the offer and pursuit of judgment was uncommercial. Although the result of the proceedings leaves Mr McInnes with more equity than his offer did, Rheem appears likely to be Mr McInnes' major creditor. Whether or not bankruptcy ensues Rheem is likely to be the major beneficiary of any equity Mr McInnes has retained. Contrary to the suggestions made in HWLE's letter, it is far from clear that the equity in Mr McInnes' share of the Menai property will necessarily go to Mrs McInnes.

Orders

1. The final orders made on 6 November were: 1. Judgment for the plaintiff against the first defendant, on account of the monies obtained from the plaintiff by the first defendant by fraud, in the principal sum of $2,098,608, together with pre-judgment interest of $937,984, totalling $3,036,592. 2. Judgment for the plaintiff against the second defendant (jointly with the first defendant), on account of the $290,000 repayment made on the Menai property mortgage on 17 May 2010, in the principal sum of $237,480, together with pre-judgment interest of $19,182, totalling $256,662. 3. Declare that the plaintiff is entitled to an equitable charge over the following properties: 1. the first defendant's undivided one-half share in the property at 22 James Close, Menai, NSW (being the land comprising Lot 68 in Deposited Plan 879724) (Menai Property), to secure payment of the principal sum of $237,480, together with pre-judgment interest of $160,860, totalling $398,340 owed to the plaintiff by the first defendant (of which an amount of $256,662 is owed jointly by the first defendant and the second defendant pursuant to Order 2 above); 2. the property at Unit 66, 1 White Ibis Drive, Griffin, QLD (being the land comprising Lot 66 in Survey Plan 249241, Title Reference 50961745) (White Ibis Drive Property), to secure payment of the principal sum of $35,400, together with pre-judgment interest of $12,107, totalling $47,417 owed to the plaintiff by the first defendant; 3. the property at 2 Apple Circuit / Unit 1, 21 Fern Parade, Griffin, QLD (being the land comprising Lot 1 in Survey Plan 278271, Title Reference 51006868) (Apple Circuit Property), to secure payment of the principal sum of $62,990, together with pre-judgment interest of $17,256, totalling $80,246 owed to the plaintiff by the first defendant; 4. the moveable cabin in the name of the first defendant at the Koveda Holiday Park at Wiseman's Ferry, NSW (Cabin), to secure payment of the principal sum of $90,000, together with pre-judgment interest of $17,522, totalling $107,522 owed to the plaintiff by the first defendant. 1. Declare that the disposition of amounts of money totalling $405,000 by the first defendant to the second defendant in December 2018 is void pursuant to s 37A of the Conveyancing Act 1919 (NSW). 2. In respect of the sum of $392,897 that was paid into Court by the second defendant, being the balance of the amounts of money totalling $405,000 by the first defendant to the second defendant in December 2018 (Monies in Court): 1. Declare that the first defendant is the owner of the Monies in Court, together with any interest earned thereon; 2. Declare that the plaintiff is entitled to an equitable charge over the Monies in Court, together with the interest earned thereon, to secure payment of the principal sum of $286,215, together with pre-judgment interest of $26,525, totalling $312,740 owed to the plaintiff by the first defendant; 3. Order that the sum of $312,740 be paid out of Court to the plaintiff forthwith; and 4. Order that the balance of the Monies in Court remain in Court until further order, and that any further orders in respect of those monies are to be made in the Family Law proceedings between the first defendant and the second defendant.

Amendments 02 March 2021 - amend [80] to add "of the claim against that defendant" 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: 02 March 2021