Robb Evans of Robb Evans and Associates v European Bank Limited

[2005] HCATrans 142

[2005] HCATrans 142

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S154 of 2004

B e t w e e n -

ROBB EVANS OF ROBB EVANS AND ASSOCIATES AS RECEIVER OVER J.K. PUBLICATIONS INC MJD SERVICE CORP TAL SERVICES INC. AND THEIR AFFILIATES AND SUBSIDIARIES AND AS RECEIVER OVER THE ASSETS OF KENNETH TAVES AND TERESA TAVES OF 11450 SHELDON STREET SUN VALLEY CALIFORNIA 91352-1121 USA

Applicant

and

EUROPEAN BANK LIMITED

Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 11 MARCH 2005, AT 10.24 AM

Copyright in the High Court of Australia

__________________

MR A.S. MARTIN, SC:   May it please the Court, I appear for the applicant with my learned friend, MR C.C. HODGEKISS, SC.  (instructed by Deacons)

MR T.F. BATHURST, QC:   If the Court pleases, I appear with MR J.A. HALLEY, for the respondent, European Bank Limited.  (instructed by Baker & McKenzie)

GLEESON CJ:   Yes, Mr Bathurst.  Mr Bathurst, we just wanted to ask you to explain to us a couple of aspects about the facts.  What, in particular, is the relevance of what appears on page 155 in the last paragraph there? 

MR BATHURST:   None, in our submission.  As a matter of history, what happened was this.  There were two issues down below.  The first was my learned friend’s claim and the second was a claim by my client, seeking to recover funds from Citibank – that it had invested with Citibank.  The respondent, my client, was unsuccessful before Justice Palmer on that issue, but succeeded in the Court of Appeal.  We say it has no relevance.

GLEESON CJ:   Just explain to us the position your client was in, in relation to the aspect of the litigation with which we are concerned.

MR BATHURST:   The position my client was in was this.  It had received a deposit from Benford in Vanuatu, which was a foreign currency deposit.  It entered into foreign currency correspondent arrangements with Citibank.  The relevant deposit my client made with Citibank was made with Citibank in this country.  It was enjoined from dealing with that.  Citibank itself had a corresponding deposit with Citibank NA in New York.  The United States authorities, issuing a warrant, seized those funds.  Citibank refused to pay.  At the time of the proceedings, subject to Vanuatu regulatory authorities, my client was liable to pay Benford, did not have the corresponding funds, because Citibank was declining to pay them.  At the end of the appeal, my client remains liable in debt to Benford.  That has never been disputed, but it now has the proceeds of the investment. 

GUMMOW J:   Now, looking at page 150, do paragraphs 13 and 14 encapsulate the heart of your case in resisting ‑ ‑ ‑

MR BATHURST:   Yes, our case is fairly simple.  It rests on two bases, that when Benford deposited the money with the bank, the money became the bank’s property and Benford had a chose in action making it liable, in which was liable to pay against the bank for the principal sum and interest on the agreed interest‑bearing deposit.  There is simply no operation in those circumstances, in our submission, for there to be any tracing, because the asset which Benford had always remained with Benford.

GUMMOW J:   And you are good for the money?

MR BATHURST:   There is no evidence that we are not.  We certainly contended down below we were.  The only reason it has not been paid is because of the freeze order put on the funds by the Vanuatuan authorities.  That is a consequence of being deposited in Vanuatu, not my client. 

GLEESON CJ:   Well, we will see what Mr Martin has to say about it.  Yes, Mr Martin.

MR MARTIN:   Your Honours, the application raises two issues which we submit merit the grant of special leave in this case.  The first, your Honours, is whether, as a matter of principle, a person can be deprived of his proprietary right to the traceable proceeds of fraud by reason of having a personal claim at law in a foreign jurisdiction.  The second issue is whether a bank, by taking a deposit of moneys which it knew to be the proceeds of fraud and then placing those moneys on deposit with another bank ‑ ‑ ‑

GLEESON CJ:   You say, “placing those moneys”, you see.  That is Mr Bathurst’s point.

MR MARTIN:   Well, your Honour, I will come to the facts, which need to be looked at fairly closely as to what happened specifically in Vanuatu relating to ‑ ‑ ‑

GLEESON CJ:   We are not talking about a bag of gold that has gone around the world.

MR MARTIN:   No, your Honour.  We submit that the second issue raises the issue of whether the bank in such circumstances is liable to account as a constructive trustee under the first limb of Barnes v Addy.  Now, your Honours, on the facts, when the money was deposited by Benford into the account with the respondent in Vanuatu, the money that came in was exchanged for a debt in favour of Benford owed by the bank.  That debt was evidenced by the credit made by the respondent to the Benford account.  The credit was nothing more than an entry on the pass sheet of the relevant account of Benford with the respondent.  If no money had been deposited into that account, there would not have been a corresponding credit entry in the Benford account with the respondent. 

The trial judge, as your Honours are aware, found that the moneys that were deposited into the Benford account with the respondent represented the proceeds of fraud and bore the character of trust funds in the hand of Benford.  The trial judge also went on and found that the respondent had constructive knowledge of the fact that those funds were the proceeds of fraud. 

GLEESON CJ:   What is happening about this freezing order in Vanuatu?

MR MARTIN:   That order relates to ‑ ‑ ‑

GUMMOW J:   If it were not for that, you would not be here, would you?

MR MARTIN:   We would still be here, your Honour, because we are seeking to trace into the actual assets represented by the debt here rather than simply the debt that exists in Vanuatu.  Our submission is that the moneys that were deposited by Benford into the account with the respondent in Vanuatu at the time of the deposit did not become beneficially owned by the respondent, because of the knowledge that the respondent had that those funds represented the proceeds of fraud. 

The trial judge found, your Honours, and this is at page 12 of the application book, paragraph 29, that upon the receipt of the deposit in the Benford account, the respondent itself invested the funds on an interest‑bearing account in order to obtain a return on the funds itself.  Then subsequently your Honours will see the trial judge then found that those funds were placed on ‑ ‑ ‑

GUMMOW J:   He keeps talking about investing “the funds”.  I do not quite understand. 

MR MARTIN:   Your Honour, that is the finding made by the trial judge ‑ ‑ ‑

GUMMOW J:   I realise that.

MR MARTIN:   The money coming into the account.

GUMMOW J:   I realise that.  It is not expressed with legal precision.

MR MARTIN:   No.

GUMMOW J:   It is what a layman might think. 

MR MARTIN:   Yes, your Honour.

GUMMOW J:   We are not laymen.

MR MARTIN:   Yes.  What then happened, your Honour, is that the funds that had been deposited in the Benford account were then transferred and placed on deposit with the various other banks, your Honours will see, ultimately ending up on deposit with Citibank here.  Now, the Court of Appeal stated at page 75 of the application book, paragraph 20, that:

The deposits by Benford with the Respondent can be transactionally linked with the placement by European Bank of funds on deposit with other banks, which deposits were made in its own name and at a marginally higher rate of interest.

Then ultimately those funds were then deposited into the account with Citibank.

GUMMOW J:   You keep saying that, Mr Martin, but what do you say about page 113, paragraph 139?

MR MARTIN:   Your Honour, we submit that the Court of Appeal incorrectly identified the old asset for the purposes of the tracing exercise.  What happened was that the old asset represented the funds that were deposited in the Benford account with the respondent.  Immediately prior to the crediting of that account, there were no moneys in that account, there was no credit to Benford in that account.  Upon the moneys coming in, a credit was made to that account and then the respondent took those funds and deposited ultimately into the account with Citibank.  It is our submission, your Honours, that the old asset which was identified by Chief Justice Spigelman, being the credit in the Benford account, is an incorrect categorisation for the purposes of the tracing exercise; that the old asset was, in fact, the money that was coming into the account ‑ ‑ ‑

GUMMOW J:   The question is, when and why do you have a tracing exercise?

MR MARTIN:   We say, your Honours, that those moneys were trust moneys.

GUMMOW J:   I mean, in a lay sense, there are tracing exercises going on by the million every minute in the commerce of this country, but we do not look at it that way as lawyers, do we?

MR MARTIN:   No.  The money that came in, your Honours, was the old asset for the purposes of the tracing exercise as stated by Lord Millett, if your Honours will look at page 112, paragraph 136, where his Lordship says:

“Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or trace its value into the new asset in the hands of the same owner.”

We submit, on that analysis, the original asset into the hands of the new owner is the money that was credited to the account of Benford with the respondent.  The new owner became the respondent itself and what was exchanged in place of that original asset was the new asset, which was the debt that was created by the crediting of those funds to the account in Benford.  The funds, as found by the trial judge, represented stolen funds and, pursuant to Black v Freedman of this Court, there was a constructive trust, or otherwise a resulting trust, in favour of the defrauded credit card holders. 

Now, your Honours, what happened was that the respondent simply left in place the credit in the Benford account evidencing the debt, then pocketed itself the moneys that had been credited to that account and placed it ultimately into the account with Citibank here.  The Court of Appeal held at page 114, paragraph 143, that:

In the present kind of case in my [the Chief Justice’s] opinion, the legal owner of property who has a good claim at law cannot elect to trace in equity, at least in circumstances in which no issue of solvency of the person who owes the obligation at law has arisen. 

We submit the right the applicant had to seek to enforce against the debt owed by Citibank to the respondent was a proprietary one, and that right he could not be deprived of by reason of having other remedies, in this case, a legal remedy to the debt that existed in Vanuatu.  The basis for that proposition is the judgments in the House of Lords in Foskett v McKeown, which your Honours were given reference to. 

The Court of Appeal held it was unable to trace because of this categorisation of the new asset being constituted by the debt owed by Citibank to the respondent.  Chief Justice Spigelman found that the new asset was not regarded as a substitute for the old asset and his reasoning is contained at page 113, paragraph 139.  We submit, starting at 138, your Honours will see:

No issue of an election between following and tracing arose here.  The original asset, i.e. the debt in Vanuatu, was not passed on.  In the present circumstances, only tracing was material.  The “election” to which Lord Millett referred, did not arise.

Furthermore, in property law, the new “asset” constituted by the European Bank deposit with Citibank, was not, to use Lord Millett’s terminology, a “substitute for the old [asset]”, constituted by the Benford deposit with European Bank.  That “old asset” has never been transformed or “substituted” into any thing.  The funds had been employed by the bank, but the “old asset” always existed and still exists. 

Just pausing there, your Honours, the funds that the Chief Justice identified that had been employed by the bank were the funds that were deposited by the respondent into the account with Citibank.  The old asset that was identified by the Chief Justice, we submit, was incorrect.  The old asset was never the debt created on the lodgement of the funds in Vanuatu.  The old asset was the funds itself, which as the Chief Justice identified, had in fact been deposited with Citibank here in Sydney. 

Your Honours, the Court of Appeal found at page 112, paragraph 134 that in this case:

it is possible to trace, in the sense of identifying a causal chain, from the Benford deposit with the Respondent into the Respondent’s deposit with Citibank. 

So as a matter of fact – and that was consistent with the trial judge’s findings – there was no problem about tracing for the purpose of identifying where the funds went to.  The only basis upon which the court was unable to trace was the categorisation of this old asset, being the debt that never existed until the moneys had been deposited.  We submit that is incorrect.  It was, in fact, the new asset that had been created by the deposit.  The old asset represented the funds itself. 

As further stated by Lord Millett, the practice of electing which asset to trace is a choice that is often dictated to by the circumstances itself.  In this case, the applicant elected to follow the funds that had been deposited in the Benford account and trace those funds into the debt created by the deposit of the moneys by the respondent with Citibank here in Sydney.  Contrary to what Chief Justice Spigelman had found, the applicants’ legal remedy to the debt in Vanuatu was far from adequate.  Difficulties in relation to obtaining a recovery in relation to the debt in Vanuatu were four‑fold. 

Firstly, there was a risk, as identified by Chief Justice Spigelman at page 110, paragraph 128 of the judgment, that the interest earned on the debt, and possibly the whole debt itself, could be confiscated by the Vanuatu Government under their money laundering legislation.  Secondly, the amount of the debt in Vanuatu had incurred a number of debits made to it by the respondent as at 31 December 2001.  That amount of debit was in the vicinity of US$236,000.  Thirdly, there was an issue as to whether the Vanuatu Supreme Court would even recognise the applicant, being a person who was appointed by a US court over a company, being Benford, which was a Vanuatu based incorporation ‑ ‑ ‑

GLEESON CJ:   What has happened about all those issues?

MR MARTIN:   Your Honour, effectively, all the proceedings have been stayed over there, awaiting, essentially, the Vanuatu prosecutor to proceed with the prosecution that it has brought for money laundering against Benford.  There has been, in effect, a stay, and nothing more has happened. 

The fourth problem in relation to recovery is the usual problem, that is, of a personal judgment against an entity in a foreign jurisdiction.  As Chief Justice Spigelman said at page 107, your Honours, paragraph 118:

The Appellant asserts a “right to trace” even if he can receive full value by enforcing his direct right to the debt.  A number of matters were raised which suggested that he may not receive the same amount in Vanuatu – by confiscation of proceeds of crime or by deduction of fees and charges by the Respondent.  However, such a contingency was never established to be of a character which a court of equity would take into account. 

Our point is, our legal remedy in Vanuatu is not adequate.  The problems that we have identified raise substantial issues concerning the action itself and the recoverability of the funds, and that is the basis why we seek to assert a proprietary right to trace here into a debt that exists in this jurisdiction. 

On the second issue, your Honours, the applicant submits that the respondent is liable to account as a constructive trustee under the first limb of Barnes v Addy, by taking from the Benford deposit moneys which it knew at the time of receipt to be the proceeds of fraud and then placing those moneys on deposit with Citibank for its own use and benefit. 

GLEESON CJ:   Now, what did the Court of Appeal say about that claim?  The personal claim.

MR MARTIN:   They said, your Honours, that the respondent was a “mere depository” or “channel” for the funds – that is contained at page 122 of the application book – and for the purposes of the first limb in Barnes v Addy the respondent did not receive the benefit of the deposit.  Now, as Chief Justice Spigelman acknowledged at page 117, paragraph 158:

The circumstances in which secondary or accessorial liability will attach to the conduct of persons who deal with property affected by breach of trust has been the subject of –

resolution on the authorities.  His Honour, in particular, at page ‑ ‑ ‑

GUMMOW J:   Well, his Honour said, what has been lost?

MR MARTIN:   Your Honour, what has been lost is the actual asset, the moneys itself.  We are only left with a debt in Vanuatu, for which we say we do not have an adequate or proper legal remedy.  His Honour, at page 119, paragraph 165, referred to the tension between the authorities:  on the one hand, Foley v Hill, which established that once money is deposited with a bank, it becomes beneficially and legally owned by the bank, and the proposition that the bank may be treated in equity, when a deposit is made, as not being the legal and beneficial owner of those funds.  That was developed, your Honours will see, over at page 120, paragraph 166, where the statement:

There is no authoritative statement of the basis on which this special treatment of banks rests. 

Your Honours, our position is that the appropriate principle to be applied for the first limb of Barnes v Addy is found in the judgment of Justice Millett, as he then was, in Agip (Africa) v Jackson, contained in the second tab of our bundle of authorities, at page 291H, where his Honour said this:

The second and, in my judgment, distinct class of case is that of the person, usually an agent of the trustees, who receives the trust property lawfully and not for his own benefit but who then either misappropriates it or otherwise deals with it in a manner which is inconsistent with the trust.  He is liable to account as a constructive trustee if he received the property knowing it to be such, though he will not necessarily be required in all circumstances to have known the exact terms of the trust. 

We say that is the appropriate principle.  It was found by the trial judge, your Honours ‑ ‑ ‑

GUMMOW J:   Liable to account where?  There are submerged choice of law questions in all these cases.  It is really all about, to be crude about it,

you trying to find a safe haven in which to litigate these questions, Vanuatu not being very satisfactory. 

MR MARTIN:   That is correct, your Honour, and therefore our legal remedy over there is far from adequate.

GUMMOW J:   Well, that is as you perceive it.

MR MARTIN:   Yes, your Honour.

GUMMOW J:   It is not yet thrashed out there.

GLEESON CJ:   Yes, thank you Mr Martin.  Yes, Mr Bathurst.

MR BATHURST:   The fallacy of my learned friend’s first proposition can be demonstrated by one example.  Let it be assumed that Benford, when it deposited the money, sent along with it a declaration of an express trust.  The position would remain the same.  Benford would have a chose in action against the bank.  The bank could do anything it liked with the money for the purpose of investing for its own purposes, subject to the liability which it had ultimately to pay in accordance with the terms of the deposit.  That, in our respectful submission, has been the law since Foley v Hill.  We gave your Honours a reference to Foley v Hill, but your Honours are familiar with the judgment of the Lord Chancellor in that case and I do not propose to take your Honours to it.  That was correctly, in our respectful submission, recognised by the Court of Appeal.  The Chief Justice, giving judgment of the court, dealt with the matter at page 116, paragraph 155.

GUMMOW J:   The Chief Justice and I used to get involved in these bank advising matters.  Foley v Hill was under the pillow of the chief security officer down at the Bank of New South Wales.

GLEESON CJ:   What would have happened if the money had been used simply to pay off a debt?

MR BATHURST:   That raises two issues.  If it had been used to pay off a bank debt, a bank overdraft for example, there would have been a misapplication of funds. 

GLEESON CJ:   No, what if the bank, upon receipt of the funds, had used them to discharge a liability of the bank, an obligation of the bank?

MR BATHURST:   In those circumstances, there would have been no misapplication of funds.  If a bank ‑ ‑ ‑

GLEESON CJ:   How would any concept of tracing apply there?

MR BATHURST:   We submit it does not.  One gets back, in those circumstances, to the proposition which we say underpins this, that there is no right to go beyond the asset, namely, the chose in action.  To take your Honour’s example, assume the money was used in the commercial sense to pay off a liability of the bank.  It probably was, on a day‑in and day‑out basis.  The bank remains liable to pay its customer.  The fact that it uses it for its own purposes, be it to pay off a liability, to speculate for profit or for whatever other reason, in our respectful submission, makes no difference. 

That is subject, we say, to only two exceptions.  Firstly, if it used it to discharge a liability of the customer, knowing the customer held the moneys on trust.  That is what happened in, for example, Qantas v Stephens Travel and why in that case Qantas was successful in recovering the funds.  The second possible circumstance where the bank could be liable is where it complied with the direction of the defaulting trustee in relation to a misapplication of the funds.  In those circumstances, it might be liable under the second limb of Barnes v Addy, but that is not this case and it has not been suggested to be this case. 

GUMMOW J:   What is the significance, if any, of Foskett v McKeown in this setting?

MR BATHURST:   None, because Lord Millett expressly accepted these principles.  If your Honours go to page 128 of the report, the top of the page, his Lordship said this:

Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder.  The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. 

The qualification “usually” is, in our respectful submission, to take account of the situations which I just put in answer to the question of the Chief Justice. 

That was the approach on the Barnes v Addy question taken by the Court of Appeal.  Your Honours can find that at paragraph 169, which is page 120 of the book, where his Honour deals with:

The formulation adopted in the basic authority on the issue, Gray v Johnston, was whether a “personal benefit” to the bank was “designed or stipulated for” –

He then referred to what Lord Cairns has said and paragraph 171, at the top of page 121:

The fact that all monies received by a bank are used for the general purposes of the bank is not, of itself, a relevant “benefit”.  The monies are not received for its “use and benefit”, terminology frequently used to identify the nature of the bank’s involvement which constitutes a relevant receipt. 

And then at paragraph 175 at page 122:

The issue arises, in this case, with respect to a foreign currency deposit which, on the evidence, will, in the normal course of banking, be paid by the bank, directly or indirectly, into an account with a corresponding bank located in the nation of the currency of the deposit.  This involves the ministerial role of a “mere depository” or “channel”.  In my opinion, the deposits in the present case should be so characterised.  For purposes of the ‘knowing receipt’ principle, the Respondent did not ‘receive’ the Benford deposit.

We submit, with the greatest respect, that is entirely orthodox.  There is nothing in Foskett v McKeown or any of the other cases to the contrary of those principles and it follows, we submit, that on that issue as well, the Court of Appeal applied correctly, with respect, quite well‑established principles, and leave should not be granted. 

GLEESON CJ:   Mr Martin, is there anything you want to add?

MR MARTIN:   Yes, your Honour.  Your Honours, we submit that Foley v Hill is inapplicable, because at the time of the initial deposit the respondent had knowledge that the funds represented the proceeds of fraud and therefore bore the character of trust property, as found by the trial judge.  Secondly, we point out to your Honours that the respondent sued in this Court at first instance initially, unsuccessfully, for the very debt that was created upon the moneys being deposited with Citibank here in Sydney, and initially lost at first instance, but successfully appealed and obtained judgment in its favour for the very debt that represents the proceeds of this fraud. 

We submit, your Honours, that there is no distinction between the respondent using the funds after they were deposited with Benford to discharge an indebtedness it may have had to Benford in an overdraft from it actually taking the funds, depositing the funds into an account in its own name, where it claimed that it was legally and beneficially entitled to those moneys, as ultimately it was found to be, pursuant to the judgment of this Court. 

GLEESON CJ:   We are of the view that there are insufficient prospects of success of an appeal to warrant a grant of special leave in this matter and the application is dismissed with costs.

We will adjourn for a short time to reconstitute.

AT 10.57 AM THE MATTER WAS CONCLUDED