Indefeasibility and Fraud Assoc Prof Cameron Stewart (c) Cameron Stewart 2009 Exceptions to indefeasibility - Fraud A person who acquires a registered interest through fraud has a defeasible interest: RPA ss 42, 43 Eg their interest can be set aside The requirements for setting aside such an interest are: • the registered proprietor’s interest must have been acquired through implication in the fraud; and • the implication may be personal or through the acts of an agent (c) Cameron Stewart 2009 Section • No comprehensive definition of fraud is set out in the Real Property Act However, the Act stipulates in s 3(1) that fraud ‘includes fraud involving a fictitious person’ • Obviously an attempt to deal with Gibbs v Messer (c) Cameron Stewart 2009 Section 42 • 42 Estate of registered proprietor paramount • (1) Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded except: (c) Cameron Stewart 2009 Section 43 • 43 Purchaser from registered proprietor not to be affected by notice • (1) Except in the case of fraud no person contracting or dealing with or taking or proposing to take a transfer from the registered proprietor of any registered estate or interest shall be required or in any manner concerned to inquire or ascertain the circumstances in or the consideration for which such registered owner or any previous registered owner of the estate or interest in question is or was registered, or to see to the application of the purchase money or any part thereof, or shall be affected by notice direct or constructive of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding; and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud (c) Cameron Stewart 2009 Section 118 118 Registered proprietor protected except in certain cases (1) Proceedings for the possession or recovery of land not lie against the registered proprietor of the land, except as follows: (a) proceedings brought by a mortgagee against a mortgagor in default, (b) proceedings brought by a chargee or covenant chargee against a charger or covenant charger in default, (c) proceedings brought by a lessor against a lessee in default, (d) proceedings brought by a person deprived of land by fraud against: (i) a person who has been registered as proprietor of the land through fraud, or (ii) a person deriving (otherwise than as a transferee bona fide for valuable consideration) from or through a person registered as proprietor of the land through fraud, (e) proceedings brought by a person deprived of, or claiming, land that (by reason of the misdescription of other land or its boundaries) has been included in a folio of the Register for the other land against a person who has been registered as proprietor of the other land (otherwise than as a transferee bona fide for valuable consideration), (f) proceedings brought by a registered proprietor under an earlier folio of the Register against a registered proprietor under a later folio of the Register where the two folios have been created for the same land (c) Cameron Stewart 2009 What is fraud? • Assets Co Ltd v Mere Roihi [1905] AC 176 - Assets became registered proprietor of certain lands formerly owned by certain Maoris There were allegations of fraud against predecessors to Assets and from whom Assets purchased the land However, there was no fraud committed by Assets The Privy Council ruled that there was ‘no fraudulent statement made by the company’s agents … nor any bribery, corruption, or dishonesty’ Nor had Assets ‘refrained from making inquiries which an honest purchaser would have made’ (c) Cameron Stewart 2009 What is fraud? • In Assets Co Ltd v Mere Roihi [1905] AC 176, at 210, the Privy Council defined fraud as follows: • [B]y fraud in [the legislation] is meant actual fraud, that is dishonesty of some sort, not what is called constructive or equitable fraud … [T]he fraud which must be proved in order to invalidate the title of the registered proprietor for value … must be brought home to the person whose registered title is impeached or to his agents Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents The mere fact that he might have found out fraud if he had been more vigilant, and had made further inquiries which he omitted to make, does not of itself prove fraud on his part But if it be shown that his suspicions were aroused, and that he abstained from making inquiries for fear of learning the truth, the case is very different and fraud may properly be ascribed to him (c) Cameron Stewart 2009 When is fraud relevant? • Situations: • A previously registered proprietor seeks to set aside a transaction imputed by fraud; or • A holder of an unregistered instrument seeks to set aside a later registered instrument in favour of another on the ground that the other has been guilty of fraud (c) Cameron Stewart 2009 Exceptions to indefeasibility - Fraud • • • • • General principle: unless the fraud can be brought home to the registered proprietor, registration will confer indefeasibility Definition of fraud: actual dishonesty, which can be attached to the registered proprietor’s title Sometimes said to be “moral turpitude”: Butler v Fairclough (1917) 23 CLR 604 at 630 In Wicks v Bennett (1921) 30 CLR 80, at 91, Knox CJ and Rich J referred to fraud as ‘something more than mere disregard of rights of which the person sought to be affected had notice’ What about equitable fraud? (c) Cameron Stewart 2009 Knowing receipt In Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] VR 133, a majority of the Victorian Court of Appeal decided that a registered mortgage under the Torrens system could not be set aside in a situation where the mortgagee acted honestly but with constructive knowledge that the mortgage document was a forgery, in breach of trust (c) Cameron Stewart 2009 Knowing receipt But what if the registered proprietor has actual knowledge that their interest came via breach of trust? On this issue the authorities are split In Tara Shire Council v Garner [2003] Qd R 556, a majority of the Queensland Court of Appeal accepted that knowing receipt could apply in circumstances where a registered properietor had actual knowledge that the property was trust property and that the registered transaction was a breach of trust (c) Cameron Stewart 2009 Knowing receipt A similar approach was taken in Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] VR 16 at 105, although that case is distinguishable because it involved actual dishonesty on the part of the registered proprietor, in addition to knowing receipt The plaintiff was a trustee company and the second defendant, Jeffries, was its managing director Jeffries' own businesses were in financial difficulties and owed money to ANZ Jeffries informed ANZ that the plaintiff was the trustee of a non‑active trust and consequently security was taken over the trust property But the bank had notice that this was not correct; the plaintiff was the trustee of merged family estates and held the property on trust for the beneficiaries Hansen J found that the banks had actual knowledge that the property was trust property and were wilfully blind to the question whether the trust property had been misapplied (which therefore also constituted actual knowledge) (c) Cameron Stewart 2009 Knowing receipt In contrast, the Full Court of Western Australia rejected this use of knowing receipt principles in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517 Anderson, Steyler and Pullin JJ all found that, absent ‘Torrens-style’ fraud, knowledge of a breach of trust would not defeat a registered interest, and knowing receipt principles could not be applied to set aside a registered interest (c) Cameron Stewart 2009 Knowing receipt Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 Building development in a joint venture whic stalled due to lack of land One party bought up more land and registered it as owner Claim of breach of fiduciary duty and Barnes v Addy HC finds that no there was no fiduciary relationship and that no trust property was received Obiter: HC says that knowing receipt cannot be applied apart from types of Torrens fraud (c) Cameron Stewart 2009 Knowing receipt "Fraud" in s 42(1) means "actual fraud, moral turpitude.” The findings above negate actual fraud or moral turpitude not only on the part of Mrs Elias and her daughters, but also on the part of Mr Elias; and Lesmint is in the same position as Mr Elias Even if the Court of Appeal's factual findings about disclosure were not reversed, Mr Elias's nondisclosures cannot be described as amounting to "actual fraud", and the other parties are in no worse position (c) Cameron Stewart 2009 Fraud and Agency • A final aspect of fraud to be noted relates to fraud by the agent of the registered proprietor If the fraud by the agent is within the scope of the agent’s actual or apparent authority, on ordinary agent principles that fraud binds the registered proprietor, even if the registered proprietor was innocent and the agent was acting for his or her own fraudulent purposes If the agent’s fraud is not within his or her actual authority then the registered proprietor is not affected by that fraud: Schultz v Corwill Properties Pty Ltd (1969) 90 WN (NSW) (Pt 1) 529 (c) Cameron Stewart 2009 Fraud and Agency • Mrs Schultz invested money with a Mr Galea, solicitor, who lent it on mortgage to Corwill Properties Pty Ltd • Mr Galea was in fact the controller of that company • Mr Galea used Mrs Schultz's money for his own purposes, and without authority he had affixed Corwill's seal to the memorandum of mortgage over its land and forged his mother's signature as a codirector The mortgage was registered • L W Street J held that Mr Galea was not authorised by the company to commit the fraud, that fraud did not affect the registered proprietor Accordingly Mrs Schultz's suit failed (c) Cameron Stewart 2009 Fraud and Agency • In Dollars & Sense Finance Ltd v Nathan [2008] NZLR 557, a mortgage was registered in favour of a lender as security for a loan that it had made to a borrower The borrower had forged the signature of the mortgagor, in circumstances where the lender had forwarded the relevant documentation to the borrower to obtain the signature of the mortgagor In these circumstances, the New Zealand Supreme Court held that the borrower had acted as agent for the lender and that the forgery was an act done within the scope of the agency, even though the lender had no knowledge of the forgery and the forgery was done exclusively for the benefit of the lender (c) Cameron Stewart 2009 Fraud and agency • Davis v Williams [2003] NSWCA 371 - Mr and Mrs Williams purchased a house and land together as joint tenants in 1956 The property was owned by the Housing Commission and was to be registered in the Williams' name once payment was completed • In 1969 the couple separated, but never formally divorced The house was fully paid off in 1987 • In 1993 Mr Williams saw a solicitor, who arranged for a signed transfer from the Commission in favour of the Williams as joint tenants (c) Cameron Stewart 2009 Fraud and agency • Mrs Williams' whereabouts were unknown and attempts were not made to contact her • The registration was effected by documents that had, without the knowledge of any other parties, been changed by the registration clerk She changed the registration from joint tenancy to tenancy in common • Later Mrs Williams claimed the whole house and said that her interest had been affected by fraud • Did the registration of the transfer effect an indefeasible tenancy in common? (c) Cameron Stewart 2009 The clerk • Hodgson JA at [25] - For my part, however, I not see that as being, in this case, a requirement distinct from those I have already raised If the registration clerk made a representation to the Registrar-General, knowing it to be false in a material respect, and intending that the Registrar-General be induced by the representation to act in a way materially different from what otherwise would have been done, then I think that would be sufficient dishonesty or moral turpitude, irrespective of whether she had any intention that anyone be disadvantaged by this If a lie is material in respects such as these and understood to be so, I not think that lack of intent to harm can justify treating it as a "white lie" and as excluding dishonesty or moral turpitude • On the facts there was not enough to find knowledge of dishonesty (c) Cameron Stewart 2009 The solicitor • 32 Questions concerning the authority of agents arise in various circumstances One area concerns an agent's authority to make a contract binding on the principal Another concerns the vicarious liability of employers for wrongful acts committed by their employees And another concerns a vicarious liability of persons for wrongful acts committed by other persons who are not their employees This case seems to fall within the last area: the wrongful act was committed, not by an employee of the registered proprietor but by a contractor engaged by his solicitor (c) Cameron Stewart 2009 The solicitor • 34 In the case of alleged agents who are not employees, it appears that a person may be liable as principal on a similar basis to an employer, if the wrong-doer was carrying out some activity as the principal's authorised representative in dealing with a third party: A person may also be liable as principal where the wrong-doer is carrying out a task that the principal has undertaken to do, at least where the wrong-doing is merely negligent: If a person commits an unauthorised wrong-doing while acting as the authorised representative of another in dealing with a third party, then it seems that much the same question would arise as in the case of an employee, namely whether the connection between the wrongdoing and the authorised acts is sufficiently close to regard the wrongful act as being within the scope of the engagement In both cases, the question whether the wrong-doing was for the benefit of the wrong-doer or the alleged principal will be a relevant, but not on its own conclusive, factor (c) Cameron Stewart 2009 The solicitor • No benefit to the RP • 40 In this case, in substance the only "benefit" of the fraud to Mr Williams is that he obtained registration as tenant in common through the registration of one document rather than two, with a relatively trivial saving of government charges Mr Williams cannot give up this "benefit" without also giving up what he would have obtained in the absence of fraud, because, for reasons discussed by Young CJ in Eq., the second transfer cannot now be registered In my opinion, the "benefit" accepted by Mr Williams is insufficiently substantial, or insufficiently a matter of choice for Mr Williams, to require that he be considered answerable for the fraud of his agent According, if I had considered that the registration clerk was guilty of fraud, I would not have found Mr Williams to be answerable for it (c) Cameron Stewart 2009 ... allegations of fraud against predecessors to Assets and from whom Assets purchased the land However, there was no fraud committed by Assets The Privy Council ruled that there was ‘no fraudulent statement... fraud (c) Cameron Stewart 2009 Exceptions to indefeasibility - Fraud • • • • • General principle: unless the fraud can be brought home to the registered proprietor, registration will confer indefeasibility. .. Equitable fraud • Equitable fraud is constructive fraud – when the RP should have realised that the transaction was fraudulent • In Bahr v Nicolay (No 2) (1988) 164 CLR 604, Mason CJ and Dawson