Norco v Kelly [2010] NSWSC 719

This was an action by a company that had been the victim of fraud by an employee. The misappropriated funds were used to discharge a mortgage over certain land. Title to the land was transferred to the fraudster’s partner. The company claimed a charge over the land equal to the interest obtained in paying off the mortgages using the misappropriated funds.

The defendants did not defend the proceedings. As a result they were taken to have admitted the allegations of fact pursuant to s 14.26(1) of the Uniform Civil Procedure Rules 2005.   

Judgement was given for an amount of $406,644.38 in respect of misappropriated funds, including interest.

Acting Justice Lindgren stated the law with respect to misappropriated funds, as follows:

Where money is misappropriated it is trust money in the hands of the person who has misappropriated it. It retains that character in the hands of a transferee unless that person took in good faith, for value and without notice: Black v S Freedman & Co (1910) 12 CLR 105 at 110 per O’Connor J.
 
The fraudster’s partner was taken to have had knowledge that the funds in their joint account which were used to pay off the mortgages were misappropriated.

The company became entitled to a charge over each of the properties when payments were made off the mortgages using the misappropriated funds, and that charge survived the transfer of title to the partner. The company was not entitled to a charge equal to the full amount of the misappropriated funds, only that part applied to paying off the mortgages. Further, the charge did not extend to include pre-judgement interest or the company’s costs of the proceedings. 

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