The High Court has recently considered the fraud exception to indefeasibility of title of land ownership.
The decision allows a wife to keep a half interest in a dairy farm property despite paying no consideration for it and only being the recipient of that interest because of her husband's fraud. The loser here is the party deprived of an interest in the land by fraud, whereas the winner is apparently the unwitting recipient of that interest. It is an outcome which may surprise most people.
(Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2)
Background facts
In the mid-1990s, Mr and Mrs Cassegrain's family company, GC&Co (which was the respondent in the High Court proceeding), received a $9.5m settlement from a court case against the CSIRO. Mr C then attributed half of the settlement monies to himself via a loan account entry in the company records. He had no entitlement to the money, so the loan account entry was found to be fraudulent.
Subsequently, Mr C caused GC&Co to transfer ownership of a dairy farm property to Mr and Mrs C as joint tenants. The consideration for the transfer was $1million, but that amount was paid via a reduction in the sham loan account. Later, Mr C transferred his interest in the joint tenancy to Mrs C so that she became the sole registered owner.
Importantly, the trial judge also found that there was insufficient evidence to say that Mrs C was aware of Mr C's fraud, either in relation to the original sham loan account or the transfers.
Mr and Mrs C's children (who were shareholders in the company) obtained permission to bring a derivative action on behalf of GC&Co against Mr and Mrs C. GC&Co sought equitable damages against Mr C for breach of fiduciary duties, as well as an order requiring Mrs C to transfer ownership of the whole of the property back to the company.
Mrs C successfully defended the claim at trial, but the decision was overturned by the NSW Court of Appeal. Mrs C then obtained special leave to appeal to the High Court and her appeal was (by a majority of 4:1) partly successful.
The relevant law
The decision centred on the relevant provisions of the NSW Real Property Act 1900 (RPA) dealing with indefeasibility of registered interests in land. Each State has similar provisions, although there are some differences between the legislation so care should be taken in applying the High Court's reasoning in each jurisdiction.
Relevantly, clause 42 RPA says that a registered proprietor of any estate or interest in land recorded in the register shall, except in case of fraud, hold their title subject to other registered interests, but free from all unregistered interests. This puts into effect the principle of "title by registration" as opposed to "registration of title" which is the hallmark of the Torrens title system.
Section 118(1) RPA then says that no action for possession or recovery of land lies against a registered proprietor of land except in limited circumstances including, relevantly:
"(d) proceedings brought by a person deprived of land by fraud against:
- ( a person who has been registered as proprietor of the land through fraud; or
- 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."
The decision
The High Court considered three main arguments:
Firstly, GC&Co argued that Mr C was Mrs C's agent for the purpose of the transfers, so his fraud ought to be attributed to her. The High Court noted that the trial judge found there was insufficient evidence that Mr C had acted as Mrs C's agent, either by actual or implied authority. Further, the High Court determined that Mr C did not become Mrs C's agent merely by acting in a way that gave her a benefit. Mrs C was merely a "passive recipient" and therefore she was not infected by her husband's fraud through an agency.
Secondly, GC&Co argued that, because Mr and Mrs C were first registered as joint tenants upon the transfer of the property, Mrs C was automatically infected by her husband's fraud. The High Court majority decision (French CJ, Hayne, Bell and Gageler JJ) rejected that argument and said that the fraud of one joint tenant is not "brought home to" the other joint tenant, so the innocent joint tenant's interest remains indefeasible.
In his dissenting judgment, Keane J disagreed with the majority on this point. His Honour decided that Mrs C's interest could be recovered, not because she claimed her title through the fraud of Mr C, but because of the nature of the interest she acquired in the first transaction – namely, a joint tenancy of a single estate which was obtained though fraud.
Thirdly, GC&O argued that the exception in section 118(1)(d) RPA (as set out above) applied here so the company could recover the whole title from Mrs C.
The High Court found that section 118(1)(d)(i) RPA did not apply because Mrs C was not a party to the fraud herself, so her registration could not be said to have been obtained through fraud.
The High Court then found that, although section 118(1)(d)(ii) RPA does enlarge the rights of a owner deprived of land by allowing the owner to recover from a person who derives their title from or through a person registered through fraud, this section only applied to allow recovery of the half interest which Mrs C had obtained from Mr C on the second transaction. To recap, the first transaction was to Mr and Mrs C as joint tenants and the second transaction was of Mr C's interest to Mrs C so as to make her the sole registered owner. The majority found that, although section 118(1)(d)(ii) applied to allow recovery of the half interest that Mrs C obtained from Mr C (because Mr C obtained his interest through fraud) this section did not apply to Mrs C's original interest as a joint tenant because she had not obtained that interest from a person who was registered as a proprietor of the land through fraud.
Accordingly, the orders made by the majority included an order that Mrs C transfer a half interest back to GC&O (which was the half interest that Mr C had transferred to her on the second transaction), but she was permitted to keep her own half interest in the dairy property and obtained an order for costs.
Comment
To many people it would seem fair that one person's fraud cannot be sheeted home to another person who has no knowledge of it, but unfair that the law would allow a person to retain an interest in a property which they obtained through the fraud of another person but paid no valuable consideration.
Of course it is important that the law maintains the integrity of the Torrens system by ensuring indefeasibility of title, but the fact is that Mrs C would not have had any interest in the property had Mr C not committed fraud against the company. It may be difficult for some to see why the law should protect a person's interest in a property in those circumstances.
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