Ruth Chong v Super Equity Invests Pty Ltd & Anor

EX TEMPORE Judgment 1This is another case in which parties before the court are left to debate which of them will bear the losses resulting from a person's alleged fraud upon all of them. 2The plaintiff, Ruth Chong, the first defendant, Super Equity Investments Pty Ltd ("Super Equity") and the second defendant, Sui Generis (Global) Pty Ltd, ("Sui Generis") are all claimants to a fund of money paid into court by Permanent Custodians Limited. The money, a sum of $318,494.17 plus interest was paid into court in December 2010. The funds so paid into court are the surplus proceeds of sale of a residential property in Angelo Street Burwood formerly owned by Ms Chong. 3The main point at issue that comes before the court today is the question of whether or not in the resolution of the competing claims to this fund the plaintiff is entitled to an order that the first defendant, Super Equity, a company in liquidation, should provide security for the plaintiff's costs of pursuing the fund. For reasons that I will explain in this judgment, I have reached the view that security should not be ordered. But the proceedings today have been useful in other ways in reducing the issues that exist between the parties.

Background 4Some background is required before identifying the issues for determination. The plaintiff was, until December 2004, the registered proprietor of the Burwood property. She alleges in these proceedings that she was friendly with a Mr Robert Chu for more than ten years prior to December 2004 and relied upon him for advice as to her business and personal affairs. She alleges that he advised her in September 2004 to transfer the Burwood property to him, so it is alleged, to "enable him to assist her to obtain money to repair her kitchen and he would then transfer the property back to her." 5The plaintiff was at that time aged 89 years and is now I am told 96 years of age. She is resident in a nursing home and has suffered a number of bone fractures to her legs. She alleges that, unbeknown to her, Mr Chu was a fraudster who was engaged in a scheme to induce her to transfer the property to him so that he could raise funds upon it for his own benefit. Indeed, that is what the allegations and the evidence suggest he did. He borrowed money from Permanent Custodians Limited which secured its advances by first mortgage over the Burwood property. 6It is further alleged in the proceedings that some time later Mr Chu borrowed more money on the security of the Burwood property. This time he gave the security of an unregistered mortgage to the first defendant, Super Equity. That mortgage was never registered. Instead the first defendant lodged a caveat notifying its interests as an equitable mortgagee. 7The second defendant did not make a separate advance to Mr Chu. Its involvement in the proceedings is somewhat different. The second defendant, Sui Generis, has a commercial funding relationship with Super Equity. Sui Generis was the source of the funds that Super Equity advanced to Mr Chu. 8The parties have been represented in these proceedings by Mr Raphael for the plaintiff, Ms Cirillo for the first defendant and Mr Oliveri for the second defendant. Mr Oliveri has made clear as a result of exchanges between the parties and the bench something which was perhaps not perfectly apparent before today: that Sui Generis' claim to the funds in court is only contingent upon the success of Super Equity. The plaintiff, therefore, really has no issue with the second defendant, because if the first defendant is successful against the plaintiff, then and only then, do issues arise between the first and second defendants. 9The parties have, as a result of some suggestions from the bench, agreed to craft a form of orders which will have the effect of: the plaintiff discontinuing the proceedings against the second defendant; the first defendant indicating in an undertaking to the second defendant, that, if it is successful against the plaintiff, it will only deal with the funds after issues between it and the second defendant have been resolved; and, the second defendant renouncing any claim to the funds in court. The parties will, subject to the court's directions, hand up a document to record that arrangement. 10Predictably, Mrs Chong was unaware of Mr Chu's fraud. Mr Chu did not pay the mortgages. Permanent Custodians exercised its power of sale over the Burwood property because of Mr Chu's default which sale was completed by late 2010. Permanent Custodians then became aware of the competing claims between Ms Chong and Super Equity. As a trustee of the surplus funds after its mortgage was paid out, Permanent Custodians took the course of utilising the mechanism under Trustee Act 1925 part 4 and UCPR part 55 Division 3 of paying the surplus into court to await determination of this action. Since then Permanent Custodians has taken no part in these proceedings. 11The procedure for dealing with funds in court in this situation is provided for under UCPR, part 55 rule 8 to 11:- "55.8 This Division applies to the payment of funds into court under Part 4 of the Trustee Act 1925 and to proceedings arising out of payment into court under that Part. 55.9 (1) If a trustee proposes to pay money or securities into court, the trustee must commence proceedings in the court by filing a summons seeking to have the money or the securities paid into court. (2) The summons: (a) must be supported by an affidavit that complies with rule 55.10, and (b) if the payment is wholly or partly money, must be accompanied by a cheque payable to "The Supreme Court of New South Wales" in the amount of the money to be paid into court. (3) If the money is paid into court by a cheque, the money is to be taken to have been paid into court on the filing of the summons, without the need for any further directions. (4) Unless the Supreme Court otherwise orders, the summons must not join any person as a defendant in the proceedings. (5) Unless the Supreme Court otherwise orders, a copy of the summons must be served on each person identified in the affidavit as a person interested in or entitled to the money or securities. (6) A person paying money or securities into court may make an application, by notice of motion in the proceedings in which the money or securities were paid, for an order that the person's costs be payable from the money or securities. 55.10 The affidavit under rule 55.9 must set out the following: (a) a short description of the trust and of the instrument creating it or, as the case may be, of the circumstances in which the trust arose, (b) the amount and description of the funds, (c) the name and address, so far as known to the deponent, of each person interested in or entitled to the funds, (d) if any person interested in or entitled to the funds is a minor: (i) the name and address, so far as known to the deponent, of a parent or guardian of the minor's person or estate, or (ii) if the minor has no such parent or guardian or any such parent's or guardian's name or address is unknown to the deponent, the name and address, so far as known to the deponent, of a person with whom the minor resides or in whose care the minor is, (e) if any person interested in or entitled to the funds is a protected person: (i) the name and address, so far as known to the deponent, of the protected person's manager, or (ii) if the protected person has no manager or any such manager's name or address is unknown to the deponent, the name and address, so far as known to the deponent, of a person with whom the protected person resides or in whose care the protected person is, (f) the name of the person paying the funds into court and his or her address for service. 55.11 (1) Funds that have been paid into court may only be paid out of court pursuant to the directions of the Supreme Court. (2) An application for such directions is to be made by filing a notice of motion in the proceedings in which the funds were paid into court." 12It is noteworthy that UCPR, part 55 rule 11(2) simply requires, before payment out, that there be a motion filed for directions, which then provides a platform for the court's analysis of the competing priorities, followed by payment out. 13At a directions hearings before this matter came to me, the Registrar made directions for the plaintiff to file a Statement of Claim pleading her claim and for each of the defendants to plead their defences. If I may say so, with respect to both the parties to and the Registrar, this was a sensible course given the complexity of the issues raised here which are more detailed than most simple payment out cases. 14In a number of prior judgments I have dealt with a number of the requirements of proof in the ordinary case under UCPR, part 55 rule 11, where a party seeks payment out of court. I identified those requirements in Commonwealth Bank v Estate of late Slieman [2010] NSWSC 661 the following way:- "[8] An applicant under UCPR r 55.11 must establish three matters to justify an order for the payment of money out of court. The first is to identify the person who is primarily entitled to any funds paid into court and the basis of that entitlement. It is fundamental that the person be identified from the best evidence available, so that the court can be sure that the person has been given appropriate notice of the application and can if necessary contest it. [9] The second matter that needs to be proved by a claimant is that he or she is not merely an unsecured creditor against the person primarily entitled to the fund but is a person who has an beneficial interest in the very fund that has been paid into court. The same evidence that demonstrates a person's primary entitlement to the funds in court often establishes this second matter. [10] Thirdly, it is necessary for an applicant to identify the other potential claimants to the fund in court and to prove that those persons were notified of its claim. Those persons may consent to the claim. Alternatively, the applicant may prove that those persons either do not have valid claims against the fund or that their claims do not have priority over the applicant's claims. [11] The court requires strict proof as to who has the entitlement to the funds in court. There is a heavy burden placed on a party seeking payment of money out of court under Trustee Act s 98 and UCPR r 55.11. It is necessary for that party not only to prove his or her entitlement to the funds but also to prove that all other potential claimants to the funds in court have been properly notified. Otherwise there is a risk of incorrect payments being made." 15See also La Trobe Capital & Mortgage Corp Ltd, Re [2009] NSWSC 1118. 16The plaintiff initiated proceedings against Mr Chu, who consented to judgment in the Equity Division of this Court. But he did not have the funds to meet the plaintiff's obligations under the registered first mortgage. So the first mortgagee exercised its power of sale. I am told that Mr Chu's conduct in this transaction has been referred to the New South Wales Police for investigation. 17In her Statement of Claim the plaintiff asserts exclusive right to the moneys in court by virtue of the breaches of the proprietor Mr Chu, the fraudster, holding a property under constructive trust for her on the basis of the well-known principle that a thief or fraudster holds the property stolen on constructive trust for his victim: Black v Freedman & Co (1990) 12 CLR 105, Greater Pacific Investments (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 and Muschinski v Dodds (1985) 160 CLR 583. 18The issues raised through the first defendant's defence are that the first defendant had no knowledge of the fraud, is the next valid equitable interest entitled to the surplus proceeds of sale of the Burwood property after Permanent Custodians, and is now therefore entitled payment of the moneys in court, either under Real Property Act 1900, s 58(3) or under general equitable principles. 19The matter has become more complicated in another way. The plaintiff commenced professional negligence proceedings in the District Court of New South Wales against Mr Michael Lee, a solicitor who advised both herself and Mr Chu in respect of the transfer of the Burwood property. She also commenced proceedings against other solicitors who were apparently retained to pursue Mr Chu and other persons at an early stage but failed to do so. 20I am told from the bar table that the plaintiff's proceedings against Mr Michael Lee, have been settled. An incidental part of the motion before the Court today which has now been dealt with largely by agreement is whether or not those terms of settlement should be made available in response to the second defendant's notice to produce to the plaintiff. As I have indicated in argument, I see no reason, subject to the defendants giving undertakings about keeping that material confidential, why it should not be produced. The parties have now agreed to file consent orders about this issue.