New South Wales Supreme Court CITATION : Commonwealth of Australia v The Official Trustee in Bankruptcy as Trustee of the Property of Stephen Vasil [2004] NSWSC 1155 HEARING DATE(S) : 20/7/04 and 29/10/04 JUDGMENT DATE : 2 December 2004 JURISDICTION: Equity Division JUDGMENT OF : Young CJ in Eq DECISION : Moneys in court to be paid out to the plaintiff. CATCHWORDS : BANKING [30]- Customer with series of fictitious accounts- Sale of properties with deficiency- Bank may combine accounts to cover deficiency. EQUITY [55]- Tracing- Mixed fund- Principles discussed. Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 Blackman v S Freedman & Co (1910) 12 CLR 105 Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426 Croton v Reg (1967) 117 CLR 326 Evans v European Bank Ltd [2004] NSWCA 82 Foley v Hill (1848) 2 HLC 28; 9 ER 1002 Menzies v Perkins [1999] NSWSC 40 CASES CITED : National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 735 Pennell v Deffell (1853) 4 De GM & G 372; 43 ER 551 Re Diplock [1948] Ch 465 Re French Caledonia Travel Service Pty Ltd (2003) 59 NSWLR 361 Re Global Finance Group Pty Ltd (2002) 26 WAR 385 Robb Evans v European Bank Ltd [2004] NSWCA 82 Scott v Surman (1742) Willes 400; 125 ER 1235 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 Young v Murphy [1996] 1 VR 279 PARTIES : Commonwealth of Australia (P) The Official Trustee in Bankruptcy as Trustee of the Property of Stephen Vasil (D) FILE NUMBER(S) : SC 5928/03 COUNSEL : K E Burke (P) SOLICITORS : Minter Ellison (P) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in EQ Thursday 2 December 2004 5928/03 – COMMONWEALTH OF AUSTRALIA v THE OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE PROPERTY OF STEPHEN VASIL JUDGMENT 1 HIS HONOUR: This is a claim by the Commonwealth that it is entitled to a fund of money, which has come into being through Westpac Banking Corporation ("Westpac") paying into Court on 1 November 2001, the amount of $395,615.66. That amount had previously lain in accounts operated by Stephen Vasil using a number of different aliases. Those accounts were: (a) George Panis $ 9,930.67 (b) Anthony Feros $ 8.57 (c) Peter Loupas $ 62,285.68 (d) Nicholas Costas $ 39,776.83 (e) Samuel Tsitsos $ 21,624.46 (f) Michael Savvas $ 51,579.89 (g) Stephen Kokalas $139,363.22 (h) Tom Kallas $ 4,058.27 (i) Peter Adamos $ 25,510.76 (j) Prestige Property Developments Pty Ltd $ 30,476.41 2 The above names were all aliases of Mr. Vasil. Prestige Property Developers Pty Ltd, now a deregistered company, was associated with Mr. Vasil. Mr. Vasil was declared bankrupt on 6 November 2000. 3 The evidence suggests that Westpac was induced to open these accounts because Mr Vasil produced a series of drivers' licences bearing his photograph in those various names issued in South Australia or the Northern Territory. 4 It is not necessary to go into full details, but essentially, the Commonwealth, through the Housing Loans Insurance Corporation Limited, paid out to Westpac claims made by it and obtained assignments from Westpac of any interest Westpac may have had in the fund. 5 The basal question is whether the $395,615.66 forms part of the bankrupt estate of Mr. Vasil, now administered by the defendant, or belongs at law or in equity to the Commonwealth. If the Commonwealth is entitled to succeed, can the moneys be paid out to the Commonwealth or is it necessary to have some intermediary process? 6 The proceedings came on for hearing before me on 29 October 2004, Ms K Burke appearing for the plaintiff. The hearing proceeded ex parte, as the defendant, The Official Trustee in the Bankrupt Estate of Mr. Vasil, whilst having been served in accordance with the rules of the Supreme Court of New South Wales, chose not to appear. 7 I am indebted to Ms Burke for her detailed submissions both on the complicated facts of this case and also the applicable law. I turn to consider the facts. These are very convoluted. Unfortunately there are missing documents so that the court, of necessity, has an incomplete picture. 8 When a person (the Customer) opens a banking account with a trading bank, he or she enters into a contract with the Bank under which the money deposited by the Customer in his or her account becomes the property of the Bank and the relationship of debtor and creditor is created between banker and customer: Foley v Hill (1848) 2 HLC 28; 9 ER 1002; Croton v Reg (1967) 117 CLR 326 at 330. 9 That contract is governed by the documents signed when the account is opened. However, in default of agreement, where the Customer has multiple accounts with the Bank, the Bank has the right to combine the balances of those accounts, sometimes called "set off" or (inaccurately) "bankers' lien": National Westminster Bank Ltd v Halesowen Presswork & Assemblies Ltd [1972] AC 735. 10 It matters not that some of the accounts are in fictitious names. 11 The documents governing the opening of the accounts in the instant case do not take it out of the usual. 12 Accordingly the Bank in the instant case "owned" the moneys in the accounts described in para 1 of these reasons. It had the right to set them off against the debt owing by Vasil. That right was assigned to the Commonwealth. The moneys thus should be paid out to the Commonwealth. 13 Before the latest amendment to the claim, the plaintiff sought to establish its claim by resort to the rules of tracing in equity. However, the Commonwealth being at law entitled to the money, it is wrong to delve into the rules of equitable tracing; see Evans v European Bank Ltd [2004] NSWCA 82 [143]. 14 Counsel provided detailed submissions on this aspect of the claim and I should deal briefly with the case in equitable tracing against the possibility that my prime treatment of the case is erroneous. 15 Where property or its product is deposited into an account that is mixed with other moneys, ("mixed funds"), a plaintiff may be able to trace its moneys into those mixed funds and obtain an equitable charge on the mixed funds: Re Diplock [1948] Ch 465 at 520-523. 16 There has been some debate as to whether it is necessary for the plaintiff to establish that there has been a fiduciary relationship and/or breach of trust; see eg Jacobs' Law of Trusts in Australia 6th ed [2703] and Lord Millett Tracing the Proceeds of Fraud (1991) 107 LQR at pp 71-85. The law was fully considered by Campbell J in Re French Caledonia Travel Service Pty Ltd (2003) 59 NSWLR 361. 17 I do not need to explore this avenue as the existence or otherwise of a fiduciary relationship is not an issue in this case, because, if anything, the relationship between Vasil and Westpac was initially as lender borrower, and thereafter, the very conduct of Vasil (to which I refer to in the facts set out below) imposed a relationship as one of Vasil holding Westpac's moneys on trust. 18 Where money has been stolen, including stolen by deception or by fraud, equity imposes a constructive trust on the thief immediately upon receipt of those stolen moneys: Blackman v S Freedman & Co (1910) 12 CLR 105 at 110 per O'Connor J; Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426 at 432; Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 at 589 per Bryson J; Robb Evans v European Bank Limited [2004] NSWCA 82 at 27 per Spigelman CJ; Menzies v Perkins [1999] NSWSC 40 at [5] per Hunter J; Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 716 per Lord Browne- Wilkinson. 19 The equitable doctrine of tracing is explained in simple terms in Ashburner's Equity, 2nd ed p 142, a passage based on Pennell v Deffell (1853) 4 De G M & G 372; 43 ER 551: "If A mixes moneys to which he has no title, whether at law or in equity, with his own moneys, a court of equity gives the true owner a charge on the aggregate mass for the amount of his own moneys paid into it. If A removes part of the aggregate mass, he will be deemed to be removing his own moneys, and not the moneys which it would be fraudulent for him to remove." 20 An equitable charge over mixed funds may arise in at least two different ways. First, where a trustee has wrongfully applied money from a trust fund, the trustee has an obligation to return the misapplied moneys to the trust fund to make restitution and until the funds are put back in specie, a charge arises as soon as the wrongful application or mixing of the trust funds takes place: see Young v Murphy [1996] 1 VR 279 at 281-286 per Brooking JA; Re French Caledonia Travel (2003) 59 NSWLR 361 at paras 64 and 83 per Campbell J. Secondly, the charge may arise by reason of the Court granting a remedy of a charge over all of the assets which are or have derived from the mixed funds: Re French Caledonia Travel at para 83. 21 A number of complications have recently been introduced into the equitable law of tracing by academics and others who wish to subsume it under the amorphous head of restitution. Again, those complications do not become significant in the present case. I will generally follow the summary of the law given by McLure J in Re Global Finance Group Pty Ltd (2002) 26 WAR 385, 406 et seq which, I say with respect, is as good a summary as one can find as to the present state of the law. 22 Pursuant to s 58(1) of the Bankruptcy Act 1966 ("the Act"), where an individual has been declared bankrupt, the property of a bankrupt vests in the Official Trustee in Bankruptcy. The "property of a bankrupt" is defined under s 5(1) to be divisible amongst creditors of the bankrupt. However, section 116(2)(a) of the Act specifically excludes from the definition "property held by a bankrupt in trust for another person". 23 Authority exists to support the view that where a plaintiff seeks an amount equivalent to the original moneys that have been mixed with other funds, equity will protect that plaintiff to the extent that the plaintiff will rank before other unsecured creditors in bankruptcy. This is on the basis that the assignment of the bankrupt's property is confined to property to which the bankrupt was "consciously entitled to": Scott v Surman (1742) Willes 400 at 404-405; 125 ER 1235 at 1238; see also the cases referred to in Jacobs' Law of Trusts in Australia 6th ed, at [2702]. 24 With this brief conspectus of the law in mind, I turn to the essential facts that have been established from the voluminous documents tendered by the plaintiff. 25 The Commonwealth has through a chain of evidence established that Vasil, using the aliases Costas and Dinnas, caused to be deposited into other alias accounts, certain settlement moneys as listed in the table below: Loan Name Account Name into which settlement cheque deposited Amount Dinnas Loan Peter Adamos $41, 385.00 Nicholas Costas $40,750.00 Costas Loan Anthony Feros $60,281.50 Stephen Dinnas $78, 649.00 TOTAL: $221, 065.50 26 As to the Round Robin transactions, the table below provides in summary a detail of the transactions effected by Vasil: Date Account Name Withdrawal Date Account Name Deposit 6.8.97 Feros $58,000 6.8.97 Kallas $29,000 6.8.97 Kokalas $29,000 6.2.98 Dinnas $90,000 6.2.98 Adamos $90,000 16.12.97 Feros $3,000 16.12.97 Prestige Property $3,000 TOTAL $151,000 27 From this it can be seen that the balance of the accounts in the fictitious names of Feros, Adamos, Costas and Kallas wholly contain "trust money" and $29,000 of the amount in the Kokalas account is in the same plight. Although the Prestige Properties account is in the name of a separate entity, the parties seemed at all times to have ignored this fact, so that the $3,000 in the Prestige Properties account should be added to these. 28 The amount that can be gained on the evidence by equitable tracing on my calculations totals $101,354.43. It may well be that further documents will disclose more transactions or that some evidentiary presumption will enable a court to bring in more transactions. However, in view of what I have said earlier, it is unnecessary for me to consider this. 29 It follows that the plaintiff is entitled to an order that the moneys in court, including accrued interest be paid out to it. 30 A certificate should be obtained from the appropriate officer of the court and short minutes should be brought in for an order that that amount be paid out to the plaintiff. The exhibits may be returned. The defendant Trustee in Bankruptcy has taken a very proper stance merely to make the plaintiff prove its claim. There does not appear any sense in making an order for costs and I do not do so. ***************** Last Modified: 12/14/2004 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.