Supreme Court New South Wales

• Medium Neutral Citation: Heperu Pty Ltd & Ors v Patricia Belle [2011] NSWSC 1151
• Hearing dates: 21 June 2011
• Decision date: 16 September 2011
• Jurisdiction: Equity Division
• Before: Slattery J

Decision

The defendant should restore to the plaintiff the sum of $86,970.01 plus interest to be assessed.

• Catchwords: TRACING - personal liability for value remaining of misappropriated funds that can be traced into real property - tracing of misappropriated cheques into mortgage repayments made on real property - tracing through mixed fund - assessment of sum to be restored.
• Legislation Cited: Civil Procedure Act 2005 (NSW), s 100
• Cases Cited: Heperu Pty Limited v Belle (2009) 76 NSWLR 230; Heperu Pty Limited v Belle (No. 2) [2010] NSWCA 13; Heperu Pty Limited & Ors v Morgan Brooks Pty Limited & Ors (No. 2) [2007] NSWSC 1438; Re Sutherland; French Caledonia Travel Service Pty Limited (in liquidation) [2003] NSWSC 1008; 59 NSWLR 361
• Category: Principal judgment
• Parties: Plaintiff- Heperu Pty Ltd; Second Plaintiff- Kirisi Holdings Pty Limited; Defendant- Patricia Belle
• Representation: Plaintiff- G. Burton; C.L. Cochrane; Fourth Defendant- litigant in person; Plaintiff-T. Bray, Thomas Henry Bray Lawyer; Fourth Defendant- litigant in person
• File Number(s): 03/87360
• Publication restriction: No.

Judgment

1 This is the Court's fourth judgment in these proceedings between Heperu Pty Limited ("Heperu") and Ms Patricia Belle. The findings in the Court's prior judgments have determined all issues between Heperu and Ms Belle other than (1) assessing the value of any traceable benefit that she has received from misappropriated funds and (2) dealing with consequential issues including costs. This judgment determines the first of those questions and gives directions for the determination of the second.

2 The Court's prior findings, set out in the judgments of Palmer J ( Heperu Pty Limited & Ors v Morgan Brooks Pty Limited & Ors (No. 2) [2007] NSWSC 1438 and the two judgments of the Court of Appeal in August 2009 ( Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252) and in February 2010 ( Heperu Pty Limited v Belle (No. 2) [2010] NSWCA 13) provide the basis for an uncontentious narrative of fact for the Court's assessment of the value of any traceable benefit in Ms Belle's hands. Those judgments should be read with this judgment.

Mr Cincotta's 2001 - 2003 Frauds and their Consequences

3 Ms Belle's former husband, Mr Dominic Cincotta, was a fraudster. His frauds occasioned substantial loss to Heperu, and embroiled Ms Belle in this litigation. Heperu originally sought recovery of the misappropriated funds from Ms Belle and other parties, but now only from Ms Belle. The circumstances of his frauds provide important background to the issues on the current assessment.

4 Ms Belle and Mr Dominic Cincotta were married in 1981. They separated in about May 2004. Since August 2004 Ms Belle has lived in the Republic of Fiji.

5 Between August 2001 and November 2003 Dr Barry Landa, the controller of Heperu and a number of other companies, paid over $4 million to Mr Cincotta for investment purposes. Mr Cincotta fraudulently misappropriated these monies. Prior to the hearing before Palmer J only $1 million of the misapplied funds had been recovered. Mr Cincotta is now a bankrupt.

6 Before Palmer J, Dr Landa and his companies, including Heperu, sought to recover the balance of the misapplied investment funds from a number of parties, including Ms Belle, who were not direct participants in his fraud. Nothing turns in the proceedings upon the distinction between misappropriated funds sourced from Dr Landa, or Heperu, or from these other companies. Only Heperu now remains as a plaintiff. For convenience therefore I will refer, without distinction, to the current and former plaintiffs just as "Heperu".

7 The original defendants included Morgan Brooks Pty Limited ("Morgan Brooks"), a principal who provided investment services to Heperu under contract and who employed Mr Cincotta. Palmer J found Morgan Brooks liable for breach of contract in respect of Mr Cincotta's frauds.

8 Heperu's other claim was against Perpetual Trustee Victoria Limited ("Perpetual"). Palmer J found that Perpetual had converted the cheques that Heperu had deposited with it.

9 Soon after Palmer J's judgment Morgan Brooks and Perpetual settled with Heperu. The settlements take Perpetual and Morgan Brooks out of the Court's immediate focus, which now turns to Ms Belle.

10 Before Palmer J Heperu claimed that Ms Belle was knowingly concerned in Mr Cincotta's frauds and that she was liable to refund the misappropriated funds on a number of bases that assumed her guilty knowledge. Heperu failed on that contention before Palmer J and failed on appeal. The Court of Appeal confirmed that Ms Belle was not liable to Heperu on any basis which assumed either her authorisation of Mr Cincotta's frauds or her knowing participation in his activities or receipt of the proceeds of his frauds with dishonest knowledge.

11 But the Court of Appeal found that Palmer J had not fully dealt with Ms Belle's potential liability to repay Heperu as a volunteer who retained misappropriated funds. Before Palmer J at trial Heperu had contended that the proceeds of the misappropriated cheques could be traced into real estate in her name at the time, in December 2003 (referred to as "the relevant time"), when she was given notice of Mr Cincotta's frauds, when she was served with legal process. The Court of Appeal found Ms Belle was potentially liable as a volunteer in respect of the proceeds of any misappropriated cheques that she still held. But the question still to be determined was whether she had actually retained the benefit of the misappropriated funds.

12 The contention that Ms Belle retains, as a volunteer, the benefit of misappropriated funds is factually complex. But Mr Cincotta's dishonest scheme, like the central act of most frauds, was simple. Between August 2001 and November 2003 he misappropriated the cheques that Dr Landa gave Mr Cincotta for investment on behalf of Heperu. Mr Cincotta deposited these cheques into a Perpetual investment account in Ms Belle's name ("the Perpetual account"). Mr Cincotta then further misapplied the funds by withdrawing them from the Perpetual account and depositing them into a Westpac bank account also in Ms Belle's name ("the Westpac account"). Mr Cincotta had opened the Perpetual account and the Westpac account many years before these frauds were executed.

13 Mr Cincotta used the funds withdrawn from the Westpac account to pay off credit card debts and to make mortgage repayments for properties in the name of Ms Belle alone or Ms Belle and Mr Cincotta.

14 The Court of Appeal found that Ms Belle may be liable to Heperu as a volunteer, provided that the tracing exercise established that she did retain some of the misappropriated funds. It was unclear on the evidence and submissions before the Court of Appeal whether she did. For the reasons that follow, I find that she does.

Paying Off Ms Belle's Mortgage Obligations

15 The retained benefit upon which Heperu relies is the reduction in Ms Belle's liabilities on two real estate mortgages. Ms Belle is the registered proprietor of an apartment on the Pacific Highway at Coffs Harbour ("the Coffs Harbour apartment"). In August 2000 Ms Belle borrowed $275,000 from Perpetual Trustee Limited ("Perpetual") to acquire the Coffs Harbour apartment ("the First Coffs Harbour Loan").

16 Ms Belle is the joint registered proprietor of the second property, in Victoria St, Potts Point ("the Potts Point property"), with Mr Cincotta. In October 2001 she and Mr Cincotta borrowed $500,000 from Perpetual secured by a mortgage to acquire the Potts Point property ("the First Potts Point Loan").

17 Between 1 January 2001 and 25 August 2003, Mr Cincotta made repayments of both principal and interest to Perpetual from the Westpac account on the First Coffs Harbour Loan. Between 16 November 2001 and 15 August 2003, Mr Cincotta made repayments of principal and interest from the Westpac account on the First Potts Point Loan.

18 In the third and fourth weeks of August 2003, just four months before Ms Belle was joined to these proceedings, both the First Coffs Harbour Loan and the First Potts Point Loan were re-financed and paid out. The First Potts Point Loan was paid out on 22 August 2003 when Mr Cincotta and Ms Belle borrowed $800,000 from Perpetual Trustees Victoria Pty Limited ("PTV") ("the Second Potts Point Loan") and applied some of these borrowings to paying out the First Potts Point Loan. Thereafter, Mr Cincotta used the Westpac bank account to make payments of principal and interest on the Second Potts Point Loan from 4 September 2003 to 30 November 2003, the date that he was restrained from making further payments. A little over two weeks later, Ms Belle was joined as a defendant.

19 On 29 August 2003, Mr Cincotta and Ms Belle also re-financed the Coffs Harbour apartment. They borrowed $600,000 from PTV ("the Second Coffs Harbour Loan") and applied some of the proceeds to pay out the First Coffs Harbour Loan the same day. As with the Second Potts Point Loan, Mr Cincotta continued to make payments of principal and interest on the Second Coffs Harbour Loan from 29 September 2003 to 30 November 2003, the date that he was restrained by the Court from making any further payments.

20 Thus the overall pattern of relevant events is that commencing in 2001 (January for Coffs Harbour and October for Potts Point) Mr Cincotta made interest and principal payments to satisfy obligations to PTV on the Potts Point and Coffs Harbour apartments. Both properties were re-financed with the same mortgagee in August 2003. Further payments of interest in principal occurred until Mr Cincotta was restrained by this Court at the end of November 2003 from making any more. The events in question stretch over a period of very close to three years, 2001, 2002 and 2003.

From the Perpetual Account to the Westpac Account

21 It is now necessary to look at the payments that were made in more detail, starting with the payments of misappropriated cheques into the Perpetual account and then the payments from the Perpetual account into the Westpac account.

22 The payments of misappropriated cheques commenced on 23 August 2001 and concluded on 18 February 2003. During this approximately 18 month period the size of each of the misappropriated cheques paid into the Perpetual account was sufficient to ensure that, apart from a brief period from June to August 2002, and another period after March 2003, there were always sufficient misappropriated funds in the Perpetual account and the Westpac account to fund each of the mortgage payments made from the Westpac account. There were six misappropriated cheques in the period, each leading to its own further distributions to the Westpac account as follows.

23 Cheque (1) - $351,000 - 23 August 2001. This first misappropriated cheque then sourced the following funds into the Westpac account: $20,000 on 24 August 2001, $20,000 on 28 August 2001, $66,000 on 29 August 2001, and $150,000 on 5 September 2001, making a total sum of $256,000, leaving $95,000 unwithdrawn. Then Mr Cincotta withdrew $200,000 on 6 September 2001, $95,000 of which was referable to this first deposit of the $351,000.

24 Cheque (2) - $342,857 - 3 October 2001. There were no misappropriated funds transferred from Perpetual account to the Westpac account between the deposit of this misappropriated cheque and cheque (3).

25 Cheque (3) - $302,875 - 3 October 2001. The third misappropriated cheque was quickly followed by further payments into the Westpac account referable to those funds: $400,000 on 4 October 2001, $154,000 on 11 October 2001, $60,000 on 18 October 2001, and the first $31,732 of a $100,000 deposit on 25 October 2001. The available funds of $645,732 deposited by these two misappropriated cheques on 3 October 2001 accounted for the first three of these payments and part of the fourth payment.

26 Cheque (4) - $502,000 - 28 November 2001. The fourth misappropriated cheque led to the following payments into the Westpac account referable to its funds: $15,000 on 30 November 2001, $380,000 on 3 December 2001, and $100,000 on 7 December 2001. These cheques totalled $495,000.

27 Cheque (5) - $250,000 - 13 August 2002. The fifth misappropriated cheque led to the following payments into the Westpac account referable to it: $100,000 on 15 August 2002 and $70,000 on 20 August 2002. These payments only amounted to $170,000, leaving $80,000 of the $250,000 in the Perpetual account. There were no further payments from the Perpetual account to the Westpac account until the receipt of the sixth misappropriated cheque in December 2002.

28 Cheque (6) - $995,452.50 - 20 December 2002. This last payment into the Westpac account, together with the $80,000 left over from the August 2002 payment, funded a $1 million payment into the Westpac account which was used to repay monies to Heperu on 18 February 2003. This left a small residue of misappropriated funds in the Perpetual account. But this residue is not relevant for present purposes.

Mortgage Payments from the Westpac Account

29 The pattern of the deposit of these six cheques from the Perpetual account into the Westpac account assists in understanding when the Westpac account still held some proceeds of the misappropriated cheques.

30 Of the misappropriated cheques that had been paid into the Perpetual account, the first four cheques totalling $1,498,732 were paid from the Perpetual account into the Westpac account between 23 August and 28 November 2001. The next cheque, cheque (5), is not paid until 13 August 2002. What happened between November 2001 and August 2002 is that the funds in the Westpac account were paid out on account of Mr Cincotta and Ms Belle's expenses, to the point that by 4 June 2002 there were no misappropriated funds left in the Westpac account. The Westpac account remained without such funds between 4 June 2002 and the further infusion of funds by cheque (5) of $250,000 on 13 August 2002.

31 But the proceeds of cheque (5) did not last for very long under the burden principally of Mr Cincotta's expenditure. Indeed, the $250,000 was exhausted from the Westpac account by 21 March 2003. Thereafter, all mortgage and other payments that Mr Cincotta made out of the Westpac account did not use misappropriated funds. Cheque (6) of 20 December 2002 in the sum of $997,452.50, was used in a round robin of transactions to repay $1 million to Heperu. Its payment on 20 December 2002 into the Westpac account did not result in any further making of mortgage payments with misappropriated funds.

32 Thus, in summary the payment of monies out of the Westpac account which can be sourced to misappropriated funds paid into the Perpetual account occurred between 27 August 2001 to 4 June 2002 and then from 16 August 2002 to 21 March 2003.

33 Heperu established in evidence all of the payments made out of the Perpetual account into the Westpac account and all of the payments out of the Westpac account to the mortgagees of the Coffs Harbour and Potts Point apartments during the period 27 August 2001 to 19 December 2003. Summary schedules of those payments were provided to the Court and are the basis of my findings in this section. It is not necessary to reproduce the detail of those schedules in this judgment but merely their effect. I am satisfied on the basis of that evidence of the following:-

(1) that between 27 August 2001 and 4 June 2002 a total of $50,856.58 in mortgage payments was made from the Westpac account to the Coffs Harbour and Potts Point mortgagees.

(2) that between 16 August 2002 and 22 March 2003 further mortgage

payments were made to those mortgagees from the Westpac account of $68,075.52.

(3) thus, a total of $118,932.10 was paid from the Westpac account to mortgagees between 27 August 2001 and 21 March 2003.

(4) Within the period under examination, it is possible also to identify the monies which were paid from the Westpac account on account of mortgage payments for both apartments but not paid out of misappropriated funds. These were the payments made between 4 June 2002 and 12 August 2002 and then from 24 March 2003 through until 30 November 2003. Those respective payments are:

(a) for the period 4 June 2002 to 12 August 2002 - $28,351.77;

(b) for the period 24 March 2003 to 29 August 2003 - $34,990.64; and

(c) for the period 29 August 2003 to 30 November 2003 - $28,765.72.

(5) Thus, the total payments made to mortgagees in the period under examination was $92,108.13, being $28,351.77 plus $34,990.64 plus $28,765.72.

Total Amounts Paid in the Period under Examination

34 So far the Court's findings have focused upon mortgage payments out of the Westpac account to the mortgagees of the Coffs Harbour and Potts Point apartments. The plaintiff claimed that those payments were one of the ways that Ms Belle's retained benefit might be measured.

35 But there are two other ways that Heperu put its retained benefit case. Heperu's argument starts with the observation that there clearly was an excess of misappropriated monies over mortgage payments in the period under examination 23 August 2001 to 30 November 2003. The total of misappropriated monies paid into the Westpac account during that period was $1,744,402.50. During the same period the total mortgage payments made out of the account totalled only $211,040.23. Heperu's argument, which is examined below, was that it was legitimate to "quarantine" the misappropriated funds notionally from other transactions and that there would at all times have been sufficient misappropriated funds to meet all the mortgage payments during the period for examinations.

36 This was said to found a claim that all those mortgage payments in the total amount of $211,040.23 could now be recovered. The expression used by Heperu in this argument was that the misappropriated monies "be quarantined from other transactions" and for convenience therefore I will call this argument, "the Quarantine Argument" and it is dealt with below. But the findings necessary to deal with this argument are reproduced here.

Reduction in the Balance Owing to Mortgagees

37 The final way that Heperu put its argument for recovery of a retained benefit from Ms Belle was to contend in the alternative that if the other arguments were unsuccessful that Heperu was at least entitled to recover the decrease of the principal indebtedness of Ms Belle to the Coffs Harbour and Potts Point apartment mortgagees during the period under examination, 27 August 2001 to 30 November 2003, as the retained benefit. That argument is analysed later in these reasons. The Court finds that this is the proper measure of Heperu's retained benefit. But it is necessary at this point to make the factual findings that are the substratum of this argument.

38 Before I make precise findings as to the reduction in principal indebtedness, the Court's arithmetic differs slightly from that in Heperu's submissions, and I will make findings based upon the Court's arithmetic. But I will give leave to the parties after judgment to allow these figures to be adjusted if they disclose any unintended error.

39 Although the period under examination is 27 August 2001 to 19 December 2001, there was no relevant increase or decrease in the principal indebtedness on the refinanced mortgages between 29 August 2003 and 30 November 2003, when the Court made orders freezing these accounts. Thus the focus for reduction in the principal indebtedness is in respect of the first Coffs Harbour loan and the first Potts Point loan up to the point of refinance.

40 Events in that period on the evidence are clear. The principal on the Coffs Harbour mortgage was reduced by the sum of $113,091.08 between 27 August 2001 ($248,399.37) which was reduced by 29 August 2003 to $135,308.29. Heperu reaches a slightly different figure for this reduction of $115,855.08. The difference of $2764 is no doubt capable of being reconciled. The reduction in principal indebtedness in respect of the Potts Point apartment was far less over the same period being merely $9,349, being the difference between $500,000 on 18 October 2001 and $490,651.80 on 22 August 2003, leaving a difference of $9,348.20.

41 Of course this measure of the reduction of principal indebtedness includes reduction in the principal indebtedness by reason of payments during the period 4 June 2002 to 16 August 2002 and 21 March 2003 onwards, that cannot all be sourced to misappropriated funds. If one removes the mortgage payments that resulted in a reduction of principal indebtedness during this particular period then the net reduction in principal indebtedness over the full period under examination, but referable only to misappropriated monies, is $86,970.01.

Events After December 2003

42 At the time of the hearing before Palmer J in April 2007 there were freezing orders in place preventing the sale of the Coffs Harbour and Potts Point apartments pending resolution of the proceedings. Palmer J gave judgment on 12 December 2007 and discharged the freezing order on 4 February 2008, a discharge order for which was entered on 12 March 2008. No application was made to restore the order pending appeal. Ms Belle has sold her interest in the relevant properties. The hearing did not receive any detailed evidence about what happened to those funds. Nor was any put before the Court of Appeal: Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [165].

43 Heperu has made clear that it does not make a proprietary claim against Ms Belle. Rather the task is to decide whether Ms Belle as a volunteer held at the relevant time, when she was given notice of Heperu's claim, any identifiable property owned at law or in equity by Heperu. There is an obligation upon Ms Belle touching her conscience to recognise Heperu's entitlement to restoration of the funds derived from her husband's misappropriation, to the extent that as a volunteer she retained the funds or their traceable products when she had notice of Heperu's claim: Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [163].

44 It is now necessary to look to the three questions that Heperu raised. These questions are: (1) whether Heperu is entitled to claim recovery of the whole of the mortgage payments, in the sum of $211,040.23, during period under examination, 23 August 2001 to 30 November 2003; (2) whether Heperu is entitled to recovery of interest paid during the period under examination in addition to amounts paid to reduce the principal indebtedness to the mortgagees, who received the payments; and (3) whether the August 2003 refinancing of the Coffs Harbour and Potts Point apartments in any way alter the conclusion that the Court should draw about whether Ms Belle retained funds derived from her husband's misappropriations or their traceable products when she received notice of Heperu's claim.

45 The Court of Appeal has simplified the task for me as the trial judge by giving directions as to the principles that should be applied on the present assessment. The Court of Appeal has directed the assessment should be limited to the evidence led before the primary judge: Heperu Pty Limited v Belle (No 2) [2010] NSWCA 13 at [9]. The assessment to be undertaken was to be founded on the premises set out in the Court of Appeal's first judgment, at Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [111] - [118]. Of those paragraphs the specific directions of law as to the manner in which the assessment should be done are set out in [111] - [116] as follows:-

" [111] It was not suggested in the evidence that any other funds in the two accounts were the produce of fraud or breach of fiduciary obligation.

[112] There was a mixing of stolen (trust) funds with funds of the rogue and Ms Belle. The proper characterisation of the non-trust funds is important. They were funds to which Mr Cincotta and his wife were entitled in an undifferentiated way. They were funds which, on the evidence, Mr Cincotta controlled. In these circumstances, and in the light of the general authority given by Ms Belle to Mr Cincotta to operate the family's finances (lawfully obtained) the two accounts must, it seems to me, be seen as a mixture of trust funds and personal funds of the effective defaulting fiduciary (Mr Cincotta) rather than trust funds and funds of an innocent third party.

[113] I refer to (and, if I may respectfully put it thus, pay tribute to) the scholarly judgment of Campbell JA when a judge of the Equity Division in discussing the rules of tracing in Re Sutherland; French Calendonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; 59 NSWLR 361 . Many of the complexities which his Honour was obliged to confront in that case do not concern the court here.

[114] In examining the accounts in question, the rule in Clayton's case ( Devaynes v Noble (1816) 1 Mer 572; 35 ER 781) does not apply here. Clayton's case is a rule of a running account: Re Sutherland at [20]-[34]. In examining withdrawals, it is to be assumed that withdrawals that are dissipated are taken first from the trustee's own funds: Re Hallett's Estate and Re Sutherland at 375-382 [43]-[65]. The obligation of a fiduciary even a defaulting one (here a thief, as constructive trustee, dealing with stolen funds) is to preserve, not dissipate, the property of others wrongly obtained. That it may not be the actual intention of the wrongful fiduciary to act with propriety does not affect equity's concern with what he or she should do: Re Oatway; Hertslet v Oatway [1903] 2 Ch 356, where, Joyce J said at 360-361:

'... when any of the money drawn out has been invested, and the investment remains in the name or under the control of the trustee, the rest of the balance having been afterwards dissipated by him, he cannot maintain that the investment which remains represents his own money alone, and that what has been spent and can no longer be traced and recovered was the money belonging to the trust. In other words, when the private money of the trustee and that which he held in a fiduciary capacity have been mixed in the same banking account, from which various payments have from time to time been made, then, in order to determine to whom any remaining balance or any investment that may have been paid for out of the account ought to be deemed to belong, the trustee must be debited with all the sums that have been withdrawn and applied to his own use so as to be no longer recoverable, and the trust money in like manner be debited with any sums taken out and duly invested in the names of the proper trustees. The order of priority in which the various withdrawals and investments may have been respectively made is wholly immaterial. I have been referring, of course, to cases where there is only one fiduciary owner or set of cestuis que trust claiming whatever may be left as against the trustee.'

[115] This statement in Re Oatway was explained (in effect as a form of protective election) and approved by Learned Hand J, sitting as a District Court Judge, in Primeau v Granfield 184 F 480 at 484-485 (1911). See also Boscawen v Bajwa [1996] 1 WLR 328 at 336; Scott v Scott [1963] HCA 65; 109 CLR 649 at 664; Brady v Stapleton [1952] HCA 62; 88 CLR 322 at 336; Stephens Travel Service at 346; and Jacobs' Law of Trusts at 675 [2707].

[116] Any potential difficulties in dealing with the falling of the relevant account into overdraft ( Hagan v Waterhouse ( 1991) 34 NSWLR 308 at 358-59) do not arise here. In Hagan v Waterhouse at 358, Kearney J quoted with approval a passage from D Hayton Underhill and Hayton Law Relating to Trusts and Trustees ((14th Ed) 1987 Butterworths) at 756 which reflected the importance of maintaining flexible choice to the beneficiary in circumstances of mixing the beneficiary's money with the trustee's own and not using the rules from Re Hallett's Estate as a means of advantaging a wrongdoer by reference to the facts as they fall out. The passage from Hagan v Waterhouse at 358 was as follows:

'... His conduct prevented proper accounts from being kept so it is up to the beneficiaries to resolve the book-keeping as they wish, and it is the trustee's own fault that his mixing of moneys prevents him from disputing such book-keeping. The beneficiaries can choose to treat withdrawals that are dissipated as representing the trustee's money and profitable withdrawals as representing the trust moneys ... "everything is presumed against him", Gray v Haig (1855) 20 Beav 219 at 226 per Romilly MR'

The Court of Appeal (Priestley JA with whom Sheller JA and Powell JA agreed) in Keefe v Law Society (NSW) (1998) 44 NSWLR 451 at 461 specifically approved passages from Hagan v Waterhouse at 358-359, including this passage."

46 I now turn to deal with these questions.

(1) The Claim for All Mortgage Payments - The Quarantine Argument

47 Heperu's Quarantine Argument, described at times by counsel for Heperu, Mr Burton SC as the "looser view" of tracing, as distinct from a stricter view, was in substance that because the misappropriated monies paid into the Westpac account between 23 August 2001 and 30 November 2001 of $1,744,452.50 were quite sufficient to account for all the mortgage payments made out of that account during the period, that all those mortgage payments totalling $210,040.23 should be treated as the product of the misappropriated monies.

48 Heperu submitted that the Court of Appeal's own reasons ( Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [120]) are a basis for accepting this looser view of tracing, the Quarantine Argument. That paragraph provides as follows:-

" [120] The funds that I have identified as paid into the Westpac account and referable to the funds representing misappropriated cheques were used for various purposes. It is clear that payments to the mortgage accounts came out of the Westpac account. That said, to show what Westpac account funds derived from the misappropriated cheques went to the mortgage accounts a careful process of examining the funds remaining at any given time in the Westpac account would be required. For instance, if a balance of funds in the Westpac account, taken from the Perpetual account was exhausted, as reflected in a low intermediate balance, one would need to wait for a fresh Perpetual account deposit in order to attribute a mortgage account payment to the funds from the Perpetual account."

49 In my view, this paragraph ([120]) upon which Heperu relies does not justify any departure from recognised rules for tracing misappropriated funds which are already carefully summarised by the Court of Appeal in paragraphs [111] to [116] of the same judgment. Indeed in [120] itself, the third sentence appears to me to strongly emphasise that what is required is "a careful process of examining the funds remaining at any given time in the Westpac account" in order to determine the destination of the proceeds of misappropriated cheques. In my view the applicable rules of tracing are clear: cf Re Sutherland; French Caledonia Travel Service Pty Limited (in liquidation) [2003] NSWSC 1008; 59 NSWLR 361. There is no basis for the looser view contended for. The only mortgage payments made from the Westpac account that are referrable to misappropriated funds are those payments made when Westpac account had a sufficient credit balance of misappropriated funds within it, taken from the Perpetual account, to allow for the making of the whole or part of the mortgage payment. In this case, as the factual analysis above shows, that is a total amount of $118,932.10.

50 But in my view this is not the correct measure of the misappropriated funds retained by Ms Belle. This is because the amount of $118,932.10 contains both principal and interest. This leads to the next question in relation to interest.

(2) The Claim for Interest in Addition to Capital

51 In my view the appropriate measure of Ms Belle's obligation to restore funds derived from her husband's misappropriations to the extent as a volunteer she retains those funds, is to identify what benefits are in her hands when she receives notice of Heperu's claim. In my view that is the reduction on the principal indebtedness to the mortgagees for the Coffs Harbour and Potts Point loans brought about by the use of the application of the misappropriated funds. That is a figure already identified of $86,970.01.

52 The Court of Appeal has already indicated in its preliminary view of the authorities on this question that "it is not self evident that the interest payments increase the value of her equity. Of course payments of interest kept alive the opportunity of the equity redemption and capital appreciation thereof. The relevance of this to a restitutionary claim is not however self evident": Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [156].

53 As Allsop P pointed out in Heperu Pty Limited v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [158] "retention of the fund is the gravamen of such a claim, consistently with the reasoning in Bancque Belge L'Etrager v Hanbrook [1921] 1 KB 321 and Black v S Freedman & Company [1910] ACA 58; 12 CLR 105 and see also Ford v Perpetual Trustees Victoria Limited [2009] NSWCA 186.

54 In my view it is consistent with these authorities that the monies that Ms Belle paid in interest to maintain the equity of redemption in the Coffs Harbour and Potts Point properties are not properly part of the fund that she retains against which Heperu may have an order for restoration. That means that the actual mortgage payments made when there were misappropriated funds in the Westpac account totalling $118,932.10, which mortgage payments included interest and principal, are not the correct measure of the misappropriated funds Ms Belle retained when she received notice of the Heperu's claim. Rather, it is the figure of $86,970.01, which is the reduction in principal indebtedness on the mortgages, excluding any reduction in indebtedness attributable to non misappropriated funds.

55 The parties did debate what interest entitlements Heperu might have on this sum $86,970.01. But it seems to me that the correct measure of Heperu's entitlement to interest on that sum is for it to be assessed under the rates prescribed for interest up to judgment under Civil Procedure Act , s 100.

(3) The Effect of the August 2003 Refinancing

56 Heperu only relies negatively upon the 22 August 2003 refinancing of Ms Belle's mortgage obligations over the Coffs Harbour and Potts Point properties. It seeks to establish that the event of refinancing each property did not destroy what it claims was Ms Belle's retained benefit from the misappropriated funds held as equity in these properties as at that date. It does not seek to establish that the act of refinancing itself increased Ms Belle's retained benefit in either property; but rather that it did not diminish that retained benefit between the date of refinancing (22 August 2003) and the date that Ms Belle received notice of Heperu's claim (19 December 2003).

57 If as a result of the refinancing Mr Belle's overall equity in either property were on or about 22 August 2003 either extinguished or diminished below the value of the retained benefit that the Court has found ($86,970.01), then Heperu would pro tanto arguably lose its personal right to recover the retained benefit from her, because she would, by reason of the refinance, no longer retain the benefit.

58 But in my view, Heperu has established its negative case on the refinancing. It has made out that the August 2003 refinancing did not diminish Ms Belle's equity in both the Coffs Harbour and Potts Point properties. I will deal with each property in turn.

The Coffs Harbour Apartment

59 Ms Belle purchased the Coffs Harbour apartment for $330,000 in 1995, funded by mortgage borrowings of $270,000. As we have seen between 20 August 2001 and 29 August 2003 the amount outstanding on the mortgage was reduced from $248,809.83 to $135,308.29. But an advance of $600,000 was made on the Coffs Harbour apartment as part of a scheme in which Mr Cincotta persuades Ms Belle to execute mortgages to assist in the purchase of an investment property at Pommeroy apartments, Potts Point for $1.4 million. To pay the purchase price for the Pommeroy apartment the idea was $600,000 would be raised by mortgage on Coffs Harbour and $800,000 raised on Ms Belle and Mr Cincotta's Potts Point apartment. The mortgages were indeed executed although Ms Belle says, and there is no reason to doubt this, that she did not receive independent legal advice at the time the mortgage was signed and she was under some pressure from her then husband, Mr Cincotta, to sign the documents so that the Pommeroy apartment purchase could proceed.

60 PTV advanced the $600,000 which discharged the existing mortgage on the title to the Coffs Harbour apartment, in an amount of very close to $135,000. The remaining $465,000 is accounted for the following way: $160,000 was used to pay the deposit that was required on the exchange of contracts to purchase the Pommeroy apartment. The remaining $305,000 was paid to Venecom Pty Limited to satisfy a business liability of Mr Cincotta's. Ms Belle says, and I accept, that she was unaware of and gave no approval to the application of the mortgage monies to Venecom Pty Limited.

61 After Heperu commenced these proceedings against Mr Cincotta and Ms Belle, the contract to purchase the Pommeroy apartments was rescinded and the deposit of $150,000 returned and quarantined in the trust account of the solicitors for Heperu. This deposit has been largely been applied to pay Ms Belle's legal costs and disbursements in the relation to these proceedings. But there is evidence that in addition to these monies that ultimately came back to Ms Belle's use that there was other equity in the Coffs Harbour property that remained in the Coffs Harbour property at the time of refinancing.

62 There are several sources of evidence about the value of the Coffs Harbour apartment at the time of the refinancing. In an affidavit in these proceedings sworn on 5 November 2004 Ms Belle says that "the Coffs Harbour unit is presently valued between $750,000 - $850,000" and she deposes to her intention to sell the property.

63 Mr Cincotta gave an estimate of the value of the property in a residential mortgage application made to the Morgan Brooks group on 12 August 2003 of $1.1 million. In a second residential mortgage application on 21 August 2003 for the advance of $600,000 on the security of the Coffs Harbour apartment itself, Mr Cincotta described in similar circumstances its value as $875,000. Given the findings that have been made about Mr Cincotta, the reliability that evidence is certainly doubtful. The same application is on the face of it signed by Ms Belle but whether she actually assented to anything like such a detailed estimate of the value of the Coffs Harbour property is questionable. But PTV did in fact advance $600,000 on the property secured by first mortgage over the property. Combined together, Ms Belle's later affidavit, Mr Cincotta's application and the fact of the advance, are sufficient in my view to infer that Ms Belle retained an equity in the property in the order of at least $100,000 as at August 2003. This was greater than the total of the retained benefit that I have found she held in December of that year. There is no evidence of that remaining equity being further eroded between August and December 2003. Thus, Ms Belle still retained the benefit of $86,970.01 of misappropriated funds at the time that she was joined to these proceedings, which is the date upon which her liability to repay that sum springs up. Indeed, the evidence of the conduct of the second Coffs Harbour loan account, the loan account maintained upon the refinancing, is that mortgage payments were made in an orderly way until 30 November 2003 when the Court intervened. There is certainly no evidence of any further advances on this account that might be said to diminish the equity in the Coffs Harbour apartment.

The Potts Point Apartment

64 Ms Belle and her then husband Mr Cincotta purchased in joint names the Potts Point apartment in 2002. Ms Belle lived there with her daughter Dominique, who was then at school and completed Year 12 in 2003. It is unclear on the evidence what the original mortgage finance was on the Potts Point property.

65 The other component of the August 2003 financing was also borrowing $800,000 from PTV over the Potts Point apartment, secured by first mortgage over the Potts Point apartment. In the residential mortgage application for the $800,000 advance, lodged through the Morgan Brooks Group, Mr Cincotta was the author of a valuation estimate of the Potts Point apartment at $1.35 million, also stating at the same time that the current balance of the mortgage was $490,000, which would imply an equity at the time of the refinancing of $860,000. Mr Cincotta referred to the same property with the same value in the residential mortgage application for the advance of $600,000 over the Coffs Harbour property. There is no evidence from Ms Belle directly as to her estimate of the value of the Potts Point apartment at about this time, as there was with the Coffs Harbour property. Nevertheless, PTV did advance the $800,000 on 29 August 2003 and there is no evidence in the second Potts Point loan account of any additional advances being made prior to 30 November 2003 when the Court intervened to prevent the making of any further payments.

66 Mr Cincotta's estimate of $1.35 million is only slight evidence of he and Ms Belle's joint remaining equity in the property. Because of his fraudulent activities I am reluctant to infer that there was equity of $550,000 ($1.35 million minus $800,000). However, PTV did proceed with the advance and it, in my view, is reasonable to infer that there was a joint equity of at least a further $200,000 in this property at the time of the refinancing. All that occurred between then and Ms Belle being given notice of the proceedings is that a small number of mortgage payments (about ten in number) in the sum of $1,500 were made and the principal outstanding remained at $800,000. Unfortunately the loan account statements are obscured but in mid October there appears to have been a repayment of about $150,000 and a redrawing of that sum in early December, but the total amount owing on the mortgage did not exceed $801,000 at any time during this period.

67 I conclude therefore that nothing that happened in relation to the refinancing of either the Coffs Harbour or the Potts Point apartments diminished or eliminated Ms Belle's equity in the apartments, so as to destroy any retained benefit that she held in them.

Consequential Matters

68 There are two consequential matters. The first is the question of costs. The second is the ordering of the repayment of the amount of the benefit that I have found Ms Belle received from the misappropriated funds. Both these matters may require further submissions from the parties. The Court of Appeal contemplated that both would be dealt with in addition to the assessment of the amount of any benefits payable to Heperu: Heperu Pty Limited v Belle (No. 2) [2010] NSWCA 13 at [10].

69 On the issue of the costs of the first hearing before the trial judge, submissions will be required. As I was not the trial judge, I will need to be made familiar by the parties with the course of evidence and submissions at trial, to enable me to fairly determine the issues of costs now arising. Heperu will probably wish to contend that Ms Belle should pay its costs of the proceedings against her. Just how those costs are to be isolated from Heperu's costs of conducting the proceedings against other parties is an important issue. It is to be expected that Ms Belle will contend: that Heperu failed on many of its contentions and causes of action against her; that it only succeeded against her for a relatively small sum by comparison to what was in issue; and, that it should not recover all its costs as a result.

70 I will be assisted by each party referring me to aspects of the course of trial founding its or her submissions as to costs. In the course of the hearing before me it was anticipated that this would be able to be done without Ms Belle returning from the Republic of Fiji. Accordingly, I will make directions at the conclusion of these reasons for the filing of submissions in relation to costs which will allow Ms Belle to put what she needs to in writing and communicate it by email from Fiji. I propose, subject to any application to pursue a different course, to determine the question of costs on the papers and the submissions provided to me. Clarity will be needed on both sides as to just what evidence is before me for the making of that determination, because I was not the trial judge. But I will assume that everything which was before the trial judge will be regarded as being before me, unless either party wishes to submit otherwise. Although I will need to be specifically referred to anything that a party wishes me to take into account on these questions of costs.

71 The Court of Appeal also contemplated that after my assessment was complete that I would make an order for the payment to Heperu of any such sum found to be a benefit: Heperu Pty Limited v Belle (No. 2) [2010] NSWCA 13. At the hearing before me on 21 June 2011 Ms Belle raised an issue of whether the satisfaction of Heperu's judgment against her upon this assessment may involve a degree of double compensation. Ms Belle submitted that Heperu had pursued both her and Perpetual for the same amount and she claims that Heperu has recovered fully from Perpetual.

72 Whether that is correct or not I do not know at this stage. It is currently merely an allegation before me. Ms Belle also claims that Heperu has recovered monies from Mr Cincotta or his trustee in bankruptcy. The submissions have not revealed what the final position was as between Heperu and Morgan Brooks.

73 It seems to me that these issues do not prevent judgment being entered in Heperu's favour for the amount that I have assessed against Ms Belle. But, subject to hearing further submissions from Mr Burton, my inclination is to stay that judgment for a period to allow Ms Belle to ventilate any issue of possible double compensation. If that kind of issue is to be agitated I do see that it may require a further oral hearing, as it may be necessary to issue subpoenas to third parties such as Perpetual, unless Heperu gives a full account of what it has received from these persons. Ultimately, if Ms Belle does not return to Australia to argue this question, she may have to retain paid or pro bono legal assistance to argue the matter. But the stay that I will grant in the judgment will only be for a short period to enable Ms Belle to set in motion or abandon such course as she is advised on this issue. Given that she is in Fiji a stay of 2 months is appropriate for this purpose. That will be reflected in the directions that I give at the end of this judgment.

Conclusions and Orders

74 In the result therefore, I found the plaintiff, Heperu, is entitled to recover $86,970.01 plus interest from Ms Belle. The parties should bring in short minutes of order to give effect to these reasons.

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Decision last updated: 26 September 2011