What is the process of tracing in civil litigation?

Tracing is a mechanism by which civil litigants which may be able to show how certain property has ‘travelled’ over time.  This means, that it can be shown by a claimant that certain property, such as money, has moved from one point to another.  This can be useful as money or other property the subject of a cause of action can be ‘traced’ to an original place in time to combat any efforts undertaken to hide it or escape culpability by an original wrongdoer.  An example of this principle arose in the case of Toksoz v Westpac Banking Corporation [2012] NSWCA 199 (3 July 2012) (Toksoz).

The principle of tracing is illustrated in the Toksoz case

Alsop CJ in Toksoz, citing Foskett v McKeown and Others (a United Kingdom House of Lords decision) considered that:

“tracing has been said not to be a right or a remedy but a process or demonstration or proof of what has happened to property”.  

The Toksoz case provides a useful summary of the legal principles involved in tracing moneys in cases of misappropriation of moneys.  This case considered whether there was sufficient proof to attribute civil liability to Mrs Gulay Toksoz, the wife of a thief, Mr Ersever Toksoz.  Mr Toksoz had stolen over $1million by identity theft and over $600k of that sum was controlled by Mrs Toksoz without explanation.

Mr Toksoz was involved in defrauding 27 separate victims who were all customers of Westpac.  Mr Toksoz would call Westpac, armed with knowledge of a customer’s details and apply to have that customer’s access code and password changed.  Once these details were changed, new cards would be issued, and the customer’s account could then be plundered.  These accounts saw their cash balances rapidly withdrawn or transferred to other accounts.

In the end, the Court saw fit to “trace” the moneys under the control of Mrs Toksoz to the fraud of Mr Toksoz, and thus open various remedies to those that he had defrauded.

The legal principles involved in tracing

Before turning to the facts in Toksoz, Alsop CJ listed the principles to be followed in tracing cases starting at paragraph 7 of the judgement.  These principles are summarised as follows:

• tracing is not a right or remedy, but a process to demonstrate or prove what has happened to property;
• money can be traced regardless of whether the follower can connect each link in the chain of accounts; and
• common sense and reasonable inference are involved especially if there is fraud involved.

Allsop CJ reviewed a variety of cases across the area of tracing, and determined a sensible, robust approach to the tracing of moneys from theft.  His Honour held at paragraph 9 of the judgment that:

“The expression ‘tracing by exhaustion’ is sometimes used.  Where the facts as proved are sufficient to permit the inference that moneys have been received or property bought without there being an honest source available to explain the wealth and the sums or value can be seen as referable to the following party’s property wrongfully obtained, such that the inference is open that the wrongfully obtained funds were the source of the wealth, the funds can be so treated.  One does not need to be able to show every link in the chain of accounts from and through which the money passed.  Inferences will be more easily drawn, as here, in circumstances where the funds were stolen, the person who is said to have provided the funds was one of the thieves who stole money from the follower, when the recipient has an apparent close relationship with the thief, which recipient gave no value for it, has no personal source of income and gives no explanation as to the course or circumstances of the receipt of the money or any honest source of it.”^[1]

The above passage does not express an established principle of law, rather an approach approved by the Courts which is to be adopted, or at least considered, when tracing moneys subject to an alleged impropriety.  Tracing is an evidentiary process, not a remedy in and of itself, and is concerned of establishing a causal chain or connexion from the original property and property now in the hands of another.^[2]

Recall that the Court saw fit to trace the defrauded moneys back to Mrs Toksoz.  There are multiple factors which led to this finding, some of which include:

• Mrs Toksoz’s has ‘actual knowledge’ that the moneys were defrauded;
• Mrs Toksoz, unexplainedly, did not provide evidence explaining how she came into the assets which she now held;
• Mr and Mrs Toksoz, prior to coming into the defrauded moneys, had relatively modest assets; and
• Mrs Toksoz had no income, other than social service benefits, and Mr Toksoz had very modes income.

These factors can be considered as ‘foundational’ to the tracing of the defrauded moneys to Mrs Toksoz.  Against the backdrop of these foundational factors, perhaps the most critical factors to such tracing are as follows:

• Mr Toksoz had a number of sizeable deposits in accounts which he controlled;
• Mr Toksoz made funds of a sizeable nature available to Mrs Toksoz; and
• the amounts of said sizeable funds correlated with the amounts stolen by Mr Toksoz.

Takeaways

The Courts, logically, are open to the tracing of property from their current ownership status back in time, through various chains or transfers of ownership, to a previous circumstance where such property may have been owned by a third party.  It is not the case that expert evidence will necessary be required to give effect to such tracing.  The Court will make inferences to determine the extent to which property can be traced.  As a result of such tracing, remedies which otherwise would not have been available to a claimant are able to be pursued.

Links and further references

Cases

Foskett v. McKeown and Others [2000] UKHL 29; [2000] 3 All ER 97 (18th May, 2000)

Robb Evans v European Bank Ltd [2004] NSWCA 82

Kadam v MiiResorts Group 1 Pty Ltd (No 5) [2018] FCA 1086 (20 July 2018)

Leighton Contractors Pty Ltd v O’Carrigan & Ors [2016] QSC 223 (30 September 2016)  

Further information about civil litigation and tracing

If you need advice on civil litigation and tracing, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1]     See also Robb Evans v European Bank Ltd [2004] NSWCA 82 [133].

[2]     Kadam v MiiResorts Group 1 Pty Ltd (No 5) [2018] FCA 1086 [48].

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