Robb Evans of Robb Evans & Associates v European Bank Ltd - [2004] NSWCA 82

No judgment structure available for this case.

Reported Decision:
61 NSWLR 75

Court of Appeal

CITATION: ROBB EVANS of ROBB EVANS & ASSOCIATES v EUROPEAN BANK LIMITED [2004] NSWCA 82 revised - 29/03/2005

HEARING DATE(S): 8/12/03, 9/12/03, 10/12/03

JUDGMENT DATE:
25 March 2004

JUDGMENT OF: Spigelman CJ at 1; Handley JA at 184; Santow JA at 185

DECISION: Appeal dismissed with costs.

CATCHWORDS: PRIVATE INTERNATIONAL LAW - exclusionary rule - whether claim directly or indirectly for enforcement of laws securing governmental interest of foreign state - characterisation of consumer protection statutes - application of rule where proceedings brought for compensatory purpose of reimbursing defrauded consumers - TRUSTS - presumed or resulting trust over stolen funds - equivalent of express trust for purposes of duty to get in trust estate - equitable tracing - where legal owner has good claim at law - when election to trace in equity permitted - BANKING AND FINANCE - fraud - knowing receipt - special treatment of banks - bank as mere depository - whether conduct inconsistent with trust of which bank had constructive knowledge.

LEGISLATION CITED: Federal Trade Commission Act (United States) ss 1, 5, 13
International Companies Act No 32 of 1992 (Vanuatu) s 125
Proceeds of Crime Act 2002 (Vanuatu) ss 11, 12, 15, 20, 28, 29, 90
Securities Exchange Act 1934 (United States)
Serious Offences (Confiscation of Proceeds) Act No 50 of 1989 (Vanuatu) ss 2, 3, 4, 20

CASES CITED: Agip (Africa) Limited v Jackson [1990] Ch 265
Agip (Africa) Limited v Jackson [1991] Ch 547
Allen v Snyder [1977] 2 NSWLR 685
Attorney General of New Zealand v Ortiz [1984] AC 1
Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1988) 165 CLR 30
Australian Postal Corporation v Lutak (1991) 21 NSWLR 584
Bank of Credit and Commerce International (Overseas) Limited v Akindele [2001] Ch 437
Barnes v Addy (1874) LR 9 Ch App 244
Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566
Belmont Finance Co v Williams Furniture Ltd [1980] 1 All ER 393
Black v S Freedman & Co (1910) 12 CLR 105
Boscawen v Bajwa [1996] 1 WLR 328
Cigna Life Insurance New Zealand Limited v Westpac Securities Limited [1996] 1 NZLR 80
Coleman v Bucks and Oxon Union Bank [1897] 2 Ch 243
Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694
Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426
Damberg v Damberg (2001) 52 NSWLR 492
El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717
El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685
Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002
Foskett v McKeown [2001] 1 AC 102
Government of India v Taylor [1955] AC 491
Giumelli v Giumelli (1999) 196 CLR 101
Gray v Johnston (1868) LR 3 HL 1
Huntington v Attrill [1893] AC 150
In Re Norway's Application (No 1 and 2) [1990] 1 AC 723
International Sales and Agencies Limited v Marcus [1982] 3 All ER 551
Koorootang Nominees Pty Ltd v ANZ Banking Group Limited [1998] 3 VR 16
Lee v Sankey (1873) LR 15 Eq 204
Lipkin Gorman v Karpnale Limited [1987] 1 WLR 987
Loucks v Standard Oil Co of New York (1918) 120 NE 198
Moore v Mitchell (1929) 30 F(2d) 600
Peter Buchanan Limited v McVey (1954) Ir R 89; [1955] AC 516
Polly Peck International plc v Nadir [1992] 4 All ER 769
Port of Brisbane Corporation v ANZ Securities Limited (No 2) [2003] 2 Qd R 661
Rasmanis v Jurewitsch (1969) 70 SR (NSW) 407
Re Diplock [1948] Ch 465
Rich v Australian Securities and Investments Commission [2003] NSWCA 342
Roxborough v Rothmans of Pall Mall Australia Limited (1999) 95 FCR 185
Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516
Schemmer v Property Resources Limited [1975] Ch 273
Scott v Scott (1963) 109 CLR 649
Spedding v Spedding (1913) 30 WN (NSW) 81
Stephens Travel Service International Pty Ltd v Qantas Airways Limited (1988) 13 NSWLR 331
Thomson v Clydesdale Bank Limited [1893] AC 282
United States of America v Inkley [1989] QB 255
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Westpac Banking Corporation v Savin [1985] 2 NZLR 41
Young v Murphy [1996] 1 VR 279

PARTIES :
Robb Evans of Robb Evans & Associates
European Bank Limited

FILE NUMBER(S): CA 40359/03

COUNSEL: A Martin SC / C Hodgekiss SC / M Hirschern (Appellant)
T Bathurst QC / J Halley (Respondent)

SOLICITORS: Deacons (Appellant)
Baker & McKenzie (Respondent)

LOWER COURTJURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): 4999/99

LOWER COURT
JUDICIAL OFFICER : Palmer J

- 53 -

CA 40359/03
ED 4999/99

SPIGELMAN CJ
HANDLEY JA
SANTOW JA
Thursday 25 March 2004

Robb EVANS of ROBB EVANS & ASSOCIATES v EUROPEAN BANK LIMITED

FACTS
The Appellant is the receiver of Benford Limited, a company incorporated in Vanuatu. The Respondent conducts banking operations in Vanuatu, and between February and April 1999 it received funds totalling US$7,527,900 into a deposit account in the name of Benford Limited. Those funds were part of the proceeds of a fraud perpetrated by the controllers of Benford against numerous credit card holders in the United States. The Respondent subsequently placed the funds in a deposit in its own name with Citibank Limited in Sydney.

The Appellant brought proceedings in the Equity Division to recover those funds from the Respondent. The Respondent resisted the claim on the ground that the court lacked jurisdiction to entertain an action for the enforcement of a foreign penal or public law, namely the United States Federal Trade Commission Act . Palmer J held that the Appellant’s claim was unenforceable and must be dismissed. The Appellant challenged his Honour’s characterisation of the proceedings as for the enforcement of a foreign penal or public law. The Appellant also challenged his conclusion that the Respondent was not the constructive trustee for Benford Limited of the deposit with Citibank.

HELD
(per Spigelman CJ, Handley and Santow JJA agreeing)

A.

An exclusionary rule operates to prevent the enforcement in Australian courts of laws whose operation would secure a governmental interest of a foreign state, in the sense of the exercise of “powers peculiar to government”. [38], [42]

Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1988) 165 CLR 30 applied. Huntington v Attrill [1893] AC 150, Moore v Mitchell (1929) 30 F(2d) 600 referred to.

B.

Whether the enforcement of a statute constitutes a governmental interest of the relevant kind depends upon the scope, nature and purpose of the provisions being enforced and the substance, rather than the form, of the proceedings. Not all statutes which serve the public interest fall within the exclusionary rule. [42], [44], [45], [59], [60], [63]

C.

In the sphere of consumer protection, regulatory regimes may serve a public interest and be classified as public laws, without constituting a governmental interest of the relevant kind. [48], [62], [85]

Huntington v Attrill [1893] AC 150, Loucks v Standard Oil Co of New York (1918) 120 NE 198 discussed. Rich v Australian Securities andInvestments Commission [2003] NSWCA 342 referred to.

D.

The exclusionary rule does not apply in this case. The Appellant as receiver of Benford Limited sought, in substance, to recover funds for the compensatory purpose of reimbursing defrauded credit card holders. Neither the possibility of any undistributed surplus being returned to the United States Treasury, nor the fact that recouped funds will first be pooled, rather than directly refunded to particular defrauded credit card holders, should alter that characterisation of the proceedings. [83], [86], [87], [88], [89]

Schemmer v Property Resources Limited [1975] Ch 273 distinguished.

E.

Benford Limited held the stolen funds on a presumed or resulting trust for the defrauded credit card holders. Such a trust should be equated with an express trust for the purposes of the duty to get in the trust estate. [111], [112], [116]

Black v S Freedman & Co (1910) 12 CLR 105, El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, Spedding v Spedding (1913) 30 WN (NSW) 81, Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426, Westdeutsche Landesbank Girozentrale v Islington London BoroughCouncil [1996] AC 669, Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 referred to.

F.

The duty to get in the trust estate did not confer upon the Appellant, as receiver of Benford Limited, an equitable right to trace into and claim the Respondent’s deposit with Citibank Limited. The Appellant represents the owner of a legally enforceable debt. The legal owner of property who has a good claim at law cannot elect to trace in equity, at least in the absence of insolvency and where no issue of priority or of unjust enrichment has arisen. [118], [132], [143]

Foskett v McKeown [2001] 1 AC 102 considered. Roxborough v Rothmans of Pall Mall Australia Limited (1999) 95 FCR 185; (2001) 208 CLR 516 discussed. Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566, Giumelli v Giumelli (1999) 196 CLR 101 referred to.

G.

The Respondent’s deposit with Citibank was not a substitute for or transformation of Benford’s deposit with the Respondent and did not represent traceable proceeds of the defrauded funds. No separate equitable estate or interest arose in the Appellant when the deposit was made with Citibank. [138]-[141]

Foskett v McKeown [2001] 1 AC 102 applied. Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 referred to.

H.

Equitable relief in personam is not available against the Respondent. The Respondent did not receive the Benford deposit for the purposes of the ‘knowing receipt’ principle of accessorial liability in dealing with trust property. Nor did the Respondent deal with the Benford deposit in a manner inconsistent with the trust of which it had constructive knowledge. [165], [171], [175], [182]

Barnes v Addy (1874) LR 9 Ch App 244 considered. Stephens Travel Service International Pty Ltd v Qantas Airways Limited (1988) 13 NSWLR 331, Gray v Johnston (1868) LR 3 HL 1, Agip (Africa) Limited v Jackson [1990] Ch 265, Cigna Life Insurance New Zealand Limited v WestpacSecurities Limited [1996] 1 NZLR 80 discussed. Foley v Hill (1848) 2 HL Cas 28, Lee v Sankey (1873) LR 15 Eq 204 referred to.

ORDERS
Appeal dismissed with costs.

CA 40359/03
ED 4999/99

SPIGELMAN CJ
HANDLEY JA
SANTOW JA
Thursday 25 March 2004

Robb EVANS of ROBB EVANS & ASSOCIATES v EUROPEAN BANK LIMITED

Judgment

1 SPIGELMAN CJ: This is an appeal from a judgment of Palmer J in which his Honour held that the claims made by the Appellant in the proceedings were not enforceable on the basis that they fell within the rule of private international law that an Australian court will not entertain an action for the enforcement of a penal, revenue or other public law of a foreign state (“the exclusionary rule”). The basic Australian authority on this rule indicates that it should be expressed in terms of a refusal to enforce foreign governmental interests. (Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1988) 165 CLR 30 esp at 42.8 and 46.10-47.1. Hereafter “the Spycatcher case”.)

2 Palmer J went on to hold that, even if the Appellant’s claim was enforceable, he would have dismissed the proceedings for reasons which his Honour gave. It will be necessary to consider this second issue if the Appellant succeeds on the first.

3 This case concerns funds of which United States credit card holders had been defrauded, some US$7.5 million of which had found their way to a deposit account in the name of Benford Limited (“Benford”) with European Bank Limited, the Respondent. Both Benford and the Respondent are incorporated in Vanuatu, where the deposit was made.

4 In proceedings in the Equity Division of this Court, the Appellant sought as, inter alia, receiver of Benford, to recover these funds. The Respondent filed a cross claim against Citibank Limited (“Citibank”), an Australian corporation, with which it had placed the funds on interest-bearing deposit. The cross-claim sought repayment of the amount. The appeal from the dismissal of the cross-claim is the subject of a separate judgment.

5 Two issues arise on this appeal.

6 First, the Appellant submits that Palmer J erred in his characterisation of the claim as one for the enforcement of a foreign penal or public law. According to the Appellant, the substance of the rights sought to be enforced against the Respondent did not derive from a foreign law of this type.

7 This issue arises because of the provisions of the United States Federal Trade Commission Act (15 USC §§41-58) (“FTC Act”). The credit card fraud perpetrated in the United States violated the provisions of this Act. Orders of a Californian court appointing the Appellant receiver of the persons and companies involved in the fraud, including Benford, were made on the application of the Federal Trade Commission.

8 Secondly, the Appellant challenges Palmer J’s conclusion rejecting his case that the Respondent was a constructive trustee for Benford Limited of the deposit with Citibank. The focus of these proceedings is, therefore, not the Benford deposit with the Respondent. The focus is the Respondent’s deposit with Citibank. Mr A S Martin SC, who appeared for the Appellant, informed the Court that if the Appellant succeeds in its claim against the Respondent, he will, as receiver of Benford, release the Respondent from the debt owed to Benford in Vanuatu.

9 The Respondent relies on a Notice of Contention to the effect that the Respondent’s assertion of beneficial ownership is not unconscionable, as the indebtedness of the Respondent to Benford continues and is acknowledged.

10 The findings of primary fact by Palmer J are not contested.

Background Facts

11 In November 1997, Kenneth Taves purchased a database of nearly one million credit card numbers from Charter Pacific Bank (Blue AB Vol 1, 16). Mr Taves and his associated companies proceeded to use credit card numbers from this database to process unauthorised charges to those accounts. Companies under Mr Taves’ control purported to charge for access to pornographic web sites by way of a small monthly access fee. The companies made use of a contract with an unrelated third party credit card transaction processing company to obtain credit authorisations and to pass approved charges to the relevant banks. Thousands of credit card numbers and amounts to be debited were provided to the transaction processing company each month. It added the card numbers to its database to be automatically charged on a recurring basis in future months. By this means, during 1998, Mr Taves and his companies debited around 912,125 credit card accounts amounts totalling US$47,512,530, supposedly for access to web sites. Most of this activity was fraudulent (see Blue AB Vol 1, 16).

12 The proceeds of the fraud were deposited in US bank accounts held by various Taves companies. The majority of the proceeds were then transferred to the Cayman Islands, including into a US dollar account in the name of a Taves controlled company incorporated in the Cayman Islands (Blue AB Vol 1, 24). This account was held with Eurobank, which was a small bank also incorporated in the Cayman Islands. (Eurobank should not be confused with European Bank, the Respondent.)

13 By late 1998, a number of consumers had complained to the Federal Trade Commission (“FTC”) that their accounts had been debited, by the Taves companies, for a service they had neither sought nor obtained. The fraud was detected. On 5 January 1999, the FTC filed in the United States District Court for the Central District of California, Western Division (“the Californian Court”) a “Complaint for Permanent Injunction and other Equitable Relief” (subsequently amended on 19 January), seeking preliminary and permanent injunctive relief, rescission of contracts, restitution, disgorgement and other equitable relief against Mr and Mrs Taves and the Taves companies. Relief was sought pursuant to the Californian Court’s general equitable jurisdiction, as well as pursuant to the powers enumerated in s13(b) of the FTC Act, 15 USC §53(b) empowering the Court to grant injunctions to prevent or remedy violations of laws enforced by the FTC. The relevant violation in this case was of s5(a) of the FTC Act preventing unfair and deceptive practices in commerce, 15 USC §45.

14 The appointment of the Appellant as receiver, with specified powers, was made in the Court’s equitable jurisdiction, not in the exercise of a statutory power. The FTC Act does not expressly empower the Court to appoint a receiver. Palmer J held that the Californian Court had the power within its general equitable jurisdiction in aid of the relief it could grant under 15 USC §53(b). The Appellant’s authority to pursue the claims made in this Court was not in issue on this appeal.

15 Palmer J found that Mr Taves transferred some of the proceeds of the fraud from his Cayman Islands account with Eurobank into an account in the name of Benford, commencing on 26 February 1999. Eurobank had previously instructed European Trust Company Limited (sister company of the Respondent) to incorporate Benford and to open an account in that name with the Respondent.

16 The Respondent took no steps to ascertain the identity of Benford’s controllers or the source of the funds. Nor were procedures for the prevention of money laundering applied.

17 The Respondent opened an interest bearing deposit (“IBD”) account in Benford’s name, and six separate transfers, totalling US$7,527,900, were made into the account between 26 February and 13 April 1999. All of this money was the proceeds of Mr Taves’ fraud. Each of the six sums transferred were placed for various periods on interest bearing deposits with the Respondent in the name of Benford and, other than the first and smallest deposit, each was rolled over on maturity. European Bank supplied Benford with a monthly statement of account reflecting the maturity and rollover date of each deposit.

18 On 28 May 1999, the Respondent was notified, by the Controllers who had been appointed by the Government of the Cayman Islands to Eurobank on 11 May 1999, that the funds transferred to Benford were the subject of a claim by the Appellant on the basis that they were the proceeds of fraud. The Respondent notified the Vanuatu authorities. It transferred the balance of the IBD Account into a current account in the name of Benford and froze the account on 31 May, save that fees and charges, including legal fees, were thereafter debited to the current account.

19 On 28 July, the Vanuatu Supreme Court, acting pursuant to the Respondent’s application, restrained it from releasing or otherwise dealing with the funds it held to the credit of Benford. On 23 September 1999, the Supreme Court ordered that those funds be placed in an interest bearing deposit account. This transfer was effected on 12 October 1999, and the original IBD account number was revived. The deposit has been subsequently rolled over, less deductions for fees.

20 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. On 21 June 1999, at a time when the Benford funds were in a frozen current account, these various deposits in the name of European Bank were combined with other funds into a single deposit, at first with Westpac, then with Citibank, then with ANZ Bank, and finally with Citibank again. There was an initial error in the placement of funds, confusing the offshore banking unit of Citibank NA, Sydney Branch, with Citibank Limited’s Offshore Banking Unit account, however, this was corrected on 13 December 1999 by transferring the funds to the latter’s account with Citibank NA in New York. As a result of injunctions granted by both the Vanuatu Supreme Court and this Court, the funds remained effectively frozen from this date onwards.

21 On or about 20 November 2000, a seizure warrant was served on Citibank NA by the FBI seeking seizure of the deposit with interest (US$8,110,073). On 29 November 2000, after verifying with Citibank Ltd that these funds could be traced to the original deposit by the Respondent in October 1999, Citibank NA paid the amount of the deposit plus interest to the US Marshal’s Service. These funds have not been returned to Citibank NA or Citibank Limited. This seizure is central to the dispute between the Respondent and Citibank which is the subject of a separate judgment delivered simultaneously herewith. Proceedings in California to determine the distribution of the seized fund have been stayed pending resolution of the present proceedings.

The Californian Proceedings

22 The FTC Act contains at 15 USC §45(a) a prohibition on unfair methods of competition and unfair or deceptive acts or practices. The Act is enforced by the Federal Trade Commission, a governmental regulatory authority. The Commission is empowered, after conducting hearings, to make orders requiring the cessation of methods of competition or practices which were in breach of the FTC Act.

23 Whilst the FTC is conducting internal procedures which may culminate in the making of a cease and desist order, the FTC Act provides a parallel process for the granting of injunctive relief by a court in §53(b) which relevantly provides:

“53(b) Temporary restraining orders; preliminary injunctions

Whenever the Commission has reason to believe –

(1) that any person, partnership, or corporation is violating, or is about to violate, any provision of law enforced by the Federal Trade Commission, and

(2) that the enjoining thereof pending the issuance of a complaint by the Commission and until such complaint is dismissed by the Commission or set aside by the court on review, or until the order of the Commission made thereon has become final, would be in the interest of the public –

the Commission by any of its attorneys designated by it for such purpose may bring suit in a district court of the United States to enjoin any such act or practice. Upon a proper showing that, weighing the equities and considering the Commission ' s likelihood of ultimate success, such action would be in the public interest, and after notice to the defendant, a temporary restraining order or a preliminary injunction may be granted without bond: Provided, however, That if a complaint is not filed within such period (not exceeding 20 days) as may be specified by the court after issuance of the temporary restraining order or preliminary injunction, the order or injunction shall be dissolved by the court and be of no further force and effect: Provided further, That in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction. …”

24 In the present case the FTC proceeded under 15 USC §53(b) in the Californian Court. The final version of the prayer for relief in the complaint filed by the FTC requested that the Court grant, inter alia (Blue AB Vol 1, 126):

“…such preliminary injunctive and ancillary relief as may be necessary to avert the likelihood of consumer injury during the pendency of this action and to preserve the possibility of effective final relief;

…

…such relief as the Court finds necessary to redress injury to consumers resulting from the defendants’ violations of the FTC Act, including but not limited to, the refund of monies paid, and the disgorgement of ill-gotten monies;”

25 On 6 January 1999, the Californian Court made a Temporary Restraining Order, which the included the appointment of a Receiver. On 15 March 1999, the Californian Court issued a preliminary injunction against Mr and Mrs Taves and certain corporations he controlled.

26 On 22 September 1999 the Californian Court retrospectively amended its orders of 15 March 1999, so as to appoint the Appellant permanent receiver of Benford (Blue AB Vol 13, 2692B). On 7 April 2000, the Californian Court granted the FTC’s motion for summary judgment against Mr and Mrs Taves and certain of the controlled corporations. After a further hearing before a US District Court Judge, the Court computed damages in the amount of US$37,566,577 in a judgment of 9 August 2000.

27 Several aspects of the United States statutory regime and its enforcement, which are relevant for the purposes of deciding the present appeal, are set out in the findings and conclusions of the judgment of 9 August (Blue AB Vol 13, 2740-2742) as follows:

28 The findings and conclusions in the judgment included the following:

“1. Defendants Herbal Care, JKP and MJD violated section 5 of the FTC Act, 15 U.S.C. §45(a). …

2. Defendants Ken Taves, Herbal Care, JKP and MJD engaged in the unfair practice of operating a fraudulent scheme by which they debited and charged card numbers without the cardholders’ authorization. …

3. This practice resulted in substantial injury to an untold number of consumers.

4. Defendants Ken Taves, Teresa Taves, Herbal Care, JKP and MJD are jointly and severally liable for the corporate defendants’ unfair practices.

5. In proper cases, Section 13(b) of the Federal Trade Commission Act provides that the FTC ‘may seek, and after proper proof, the court may issue, a permanent injunction.’ 15 U.S.C. §53(b).

FTC v. Pantron I Corp.

FTC v. H.N. Singer, Inc

Id

FTC v. Amy Travel Serv., Inc

Pantron I Corp.

Id

…

Febre

FTC v. Gem Merchandising Corp

Febre

Pantron I

29 On 31 August 2000, the Californian Court made similar orders of default judgment, permanent injunctive and ancillary relief against other Taves companies named in the original FTC complaint (Blue AB Vol 1, 174).

30 In the orders of 31 August 2000, a consumer redress program was proposed in the following terms (Blue AB Vol 1, 183):

“The Commission may apply all or any funds received from TAL and Discreet Bill, as well as the Receiver, pursuant to this Order, and any interest received thereon, to a consumer redress program and to related administrative expenses. If the Commission determines a consumer redress program is not feasible, or if there are funds remaining after full implementation of the redress plan, the Commission will deposit these funds into the United States Treasury.

In implementing a redress plan, the Commission shall have full and sole discretion to:

1. Determine the criteria for participation by individual claimants in any consumer redress program implemented pursuant to this Order;

2 Determine the manner and timing of any notices to be given to consumers regarding the existence and terms of such programs; and

3 Delegate any and all tasks connected with such redress program to any individuals, partnerships, or corporations; and pay the fees, salaries, and expenses incurred thereby from the payments made pursuant to this Order.”

The Vanuatu Proceedings

31 The Respondent commenced proceedings in Vanuatu relating to the money in the Benford accounts on 28 July 1999 (Blue AB Vol 12, 2647). Initially, it sought an order pursuant to s125 of the International Companies Act No 32 of 1992 (Vanuatu) and the Serious Offences (Confiscation of Proceeds) Act No 50 of 1989 (Vanuatu) (“Serious Offences (Confiscation of Proceeds) Act”), authorising it to disclose information in its possession about Benford to police and law enforcement agencies in Vanuatu. It also sought an order restraining dealing with any funds standing to the credit of Benford until further order of the court, except to preserve the company’s assets or meet the Respondent’s costs. Such an order was granted by the Supreme Court of Vanuatu on 28 July 1999 (Blue AB Vol 12, 2645).

32 On 25 August 1999, the Appellant commenced civil proceedings in the Supreme Court of Vanuatu against both the Respondent and Benford by way of ex parte summons, seeking a freeze on Benford’s account. The matter was consolidated with the earlier application by the Respondent. The Supreme Court ordered Benford restrained until further order from dealing with any money on deposit with the Respondent (Blue AB Vol 13, 2664). On 21 September 1999 the Appellant commenced further proceedings for a declaration that, as receiver of the Taves companies and over the Taves’ assets, he was entitled to all funds standing to Benford’s credit in its account with the Respondent. Following a hearing on 23 September, Justice Oliver Saksak ordered that all of the funds placed by Benford with the Respondent be placed in an interest bearing deposit account. His Honour extended the interim freezing order placed on the account in August.

33 On 30 November 1999, Benford was charged with possession of property suspected of being proceeds of crime contrary to s20(1) of the Serious Offences (Confiscation of Proceeds) Act 1989 (Vanuatu). The particulars of the offence were listed on the information laid against Benford as follows (Blue AB Vol 9, 1798):

“Benford Limited being a body corporate registered and incorporated in the Republic of Vanuatu, Was between January 1 1999 and May 31, 1999 received and or brought into Vanuatu the sum of seven million and Five Hundred US Dollars (US $ 7.5 million) the money reasonably suspected of being proceeds of crime.”

34 On 30 November 1999, the Public Prosecutor of Vanuatu applied pursuant to s8 of the Serious Offences (Confiscation of Proceeds) Act for an ex parte order restraining Benford from dealing with accounts in its name with the Respondent.

35 The order was made on 2 December 1999 (Blue AB Vol 13, 2697). On the same day, the Court ordered that written submissions in the case brought by the Appellant against European Bank need only be filed following any discharge or variation of the restraining order granted on the application of the Public Prosecutor (Blue AB Vol 13, 2698A). This had the effect of staying the civil proceedings pending the outcome of the criminal proceedings.

36 The criminal proceedings in Vanuatu have not been heard. Mr A S Martin SC informed this Court that the reason the criminal proceedings have not yet progressed is because the actual funds have not been returned to Vanuatu (T8/12/03, p 28, see also Black Book 170U-171D). On the evidence before Palmer J it appears that, if a guilty verdict is recorded against Benford, instructions have been issued to apply to the Supreme Court of Vanuatu for the confiscation of Benford’s assets pursuant to the provisions of the Serious Offences (Confiscation of Proceeds) Act (Blue AB Vol 4, 819).

The Exclusionary Rule

37 The exclusionary rule under consideration in the present proceedings has long been held to apply to laws of a foreign state classified as either revenue or penal laws and, in more recent times, has extended to a further, but indeterminate, category of “foreign public laws”. However, as the joint judgment in the High Court in the Spycatcher case noted: “The expression ‘public laws’ has no accepted meaning in our law.” (at 42.6). The High Court expressed a preference for characterising the relevant laws in terms of “governmental interests”, which it identified in terms of: “claims enforcing the interests of a foreign sovereign which arise from the exercise of certain powers peculiar to government” (at 42.8 and see at 44.5). The test that the Court applied in the circumstances of the case before it involved a classification of the relevant proceeding as an assertion of a “governmental interest” (at 47.1).

38 The concept of “governmental interest”, understood in terms of “powers peculiar to government”, encompasses both of the previous well-established categories, i.e. revenue laws and penal laws, and also identifies the particular kind of “other public law” which may also fall within the exclusionary rule.

39 In the Spycatcher case, the Court referred to the identification of the basis of the exclusionary rule by Lord Watson in Huntington v Attrill [1893] AC 150 at 156 in terms of the principle that all crimes are local. (See the Spycatcher case at 41.5.) The joint judgment went on, however, to express a preference for the formulation of Judge Learned Hand in Moore v Mitchell (1929) 30 F(2d) 600, which it said differed from that given by Lord Watson in Huntington v Attrill. Judge Learned Hand said (Moore v Mitchell (1929) 30 F (2d) 600 at 604):

“To pass upon the provisions for the public order of another state is, or at any rate it should be, beyond the powers of a court; it involves the relations between the states themselves, with which courts are incompetent to deal, and which are intrusted to other authorities. It may commit the domestic state to a position which would seriously embarrass its neighbour. … No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper.”

40 The joint judgment in the High Court went on to refer with approval to comments of a similar character by Kingsmill Moore J in Peter Buchanan Limited v McVey (1954) Ir R 89 at 106-107. (Also reported at [1955] AC 516 at 528-529.) His Honour expressed the rule in terms of a refusal to enforce “the governmental claims (including revenue claims) of a foreign State” (at 529.1). (See the Spycatcher case at 43.9.) This reference to “governmental claims” appears to be the origin of the formulation “governmental interests” adopted in Spycatcher.

41 This identification of the basis of the principle appears to accord with the views of Lord Keith of Avonholm in Government of India v Taylor [1955] AC 491 at 511 where his Lordship identified an explanation for the rule in terms of: “… an assertion of sovereign authority by one State within the territory of another … is (treaty or convention apart) contrary to all concepts of independent sovereignties”. Lord Goff of Chieveley expressed an inclination to agree with this basis for the exclusionary rule. (See In Re Norway’s Application (No 1 and 2) [1990] 1 AC 723 at 808A.) Lord Denning expressed the principle in the same terms. (Attorney General of New Zealand v Ortiz [1984] AC 1 at 20H-21C.) This is also the formulation favoured by the learned authors of Dicey and Morris on the Conflict of Laws (13th ed, 2000), pars [5-019] and [5-030]. The learned authors adopt the following formulation at [5-030]:

“The expression ‘other public law’ refers to all those rules (other than penal and revenue laws) which are enforced as an assertion of the authority of central or local government.”

42 The various formulations - “governmental interests” or “governmental claims” or “the exercise of powers peculiar to government” or “an assertion of sovereign authority” or “an assertion of the authority of government” - each identifies a specific and limited range of statutory provision which falls within the exclusionary rule. The identification of a public interest protected by legislation does not constitute sufficient grounds for the application of the exclusionary rule. Any statute can be characterised as in some manner serving a public interest. A more limited range of public laws is involved in the exclusionary rule. Insofar as it remains appropriate to distinguish penal, revenue and “other public laws”, the latter must be read down in the manner suggested.

43 In the Spycatcher case, the High Court was concerned with a particular kind of governmental interest, i.e. the maintenance of national security. In this context it repeated the formulation of “the exercise of powers peculiar to government” in the following passage at 44.3-44.5:

“[T]here are some claims in which the very subject-matter of the claims and the issues which they are likely to generate present a risk of embarrassment to the court and a prejudice to the relationship between it sovereign and the foreign sovereign. These risks are particularly acute when the claim which the foreign State seeks to enforce outside its territory is a claim arising out of acts of that State in the exercise of powers peculiar to government in the pursuit of its national security.”

44 The determination of whether or not the enforcement of a particular statute will constitute a “governmental interest” of the relevant kind must turn on the scope, nature and purpose of the particular provisions being enforced and the facts of the case. In the Spycatcher case, the interest of the State in the integrity of its security services was plainly on one side of the line. The present proceedings raise a combination of public and private interests of a completely different character.

45 Contemporary jurisprudence requires such issues to be determined in accordance with the substance and not the form of the proceedings. This was explicitly held in the joint judgment in the Spycatcher case where the Court said at 46.3:

“For the purposes of the principle of unenforceability under consideration the action is to be characterized by reference to the substance of the interest sought to be enforced, rather than the form of the action.”

Damberg v Damberg

United States of America v Inkley

46 A number of kinds of statutory intervention have been suggested to fall within the concept of governmental interests, in the sense of a power peculiar to government, in addition to penal and revenue laws, e.g. import and export regulations, trading with the enemy legislation, price control regulations and anti-trust legislation. (See Dicey & Morris at [5-036]; P E Nygh and M Davies, Conflict of Laws in Australia (7th ed, 2002), par [18.14.]) There are, however, many regulatory interventions, made in the public interest, which do not have the requisite governmental quality.

47 Over the years parliaments have created regulatory regimes which build on common law principles, perhaps by laying down rules of greater precision or by providing easier mechanisms of enforcement. In view of the costs of private litigation, of particular significance in the sphere of consumer protection, where the amount any one individual has lost may not justify litigation, publicly funded enforcement mechanisms are often established. Such forms of regulation serve a public interest. They do not, however, generally concern a governmental interest. Proceedings do not involve a governmental claim unless, of course, they seek a penal remedy.

48 This kind of differentiation was recognised over a century ago in the seminal authority of Huntington v Attrill, where Lord Watson said at 157-158:

actio popularis

49 Insofar as this passage places exclusive weight on the identity of an applicant in proceedings, it must now be read in the light of contemporary jurisprudence which emphasises matters of substance over those of form.

50 The significance of the purpose for which proceedings are brought was identified in a judgment of Cardozo J in Loucks v Standard Oil Co of New York (1918) 120 NE 198. In that case the court was concerned with a statute which provided for the payment of certain monies to the family of a deceased, which payments would vary between a minimum and maximum, in accordance with the culpability of the person who caused the death. Accordingly the damages were not only compensatory. Statutes of that character had been classified as penal for a number of purposes.

51 In Loucks the court concluded that the statutes were not penal for the purposes of the exclusionary rule of private international law. Cardozo J said at 198-199:

“[T]he question is not whether the statute is penal in some sense. The question is whether it is penal within the rules of the private international law. A statute penal in that sense is one that awards a penalty to the state, or to a public officer in its behalf, or to a member of the public, suing in the interests of the whole community to redress a public wrong. … The purpose must be, not reparation to one aggrieved, but vindication of the public justice.”

52 His Honour concluded at 199:

“It is true that the offender is punished, but the purpose of the punishment is reparation to those aggrieved by his offence … The damages may be compensatory or punitive according to the statutory scheme … In either case the plaintiffs have a grievance above and beyond any that belongs to them as members of the body politic. They sue to redress an outrage peculiar to themselves. … Through all this legislation there runs a common purpose. … It is penal in one element and one only; the damages are punitive. … But the punishment of the wrongdoer is not designed as atonement for a crime; it is solace to the individual who has suffered a private wrong.”

“… [T]he dominant purpose … [is] reparation to those aggrieved. Other purposes may be served at the same time. … There are cross-currents and eddies in the stream. We follow the main course. The executor or administrator who sues under this statute is not the champion of the peace and order and public justice of the commonwealth of Massachusetts. He is the representative of the outraged family. He vindicates a private right.”

53 Cardozo J identified the issue as one of classification for purposes of the particular legal rule under consideration, i.e. the exclusionary rule of private international law pursuant to which a court will take the exceptional course of declining to exercise jurisdiction and to do so as a matter of principle, not in the exercise of a discretion.

54 This Court has recently emphasised the significance of purpose in the application of the rule against self-exposure to a penalty: See Rich v Australian Securities and Investments Commission [2003] NSWCA 342 esp at [93], [114], see generally [50]-[93].

The Reasons of Palmer J

55 In a passage of his judgment, which Mr T F Bathurst QC, who appeared for the Respondent, adopted in his submissions to this Court, Palmer J adapted a list of propositions first adumbrated by Purchas LJ in United States of America v Inkley at 265. Palmer J’s propositions were as follows (at [60]):

“(a) whether a claim brought in an Australian court is one which involves the assertion of the governmental interests of a foreign State and, therefore, directly or indirectly involves the enforcement of a foreign public law is a question to be decided according to Australian law;

(b) in deciding that question the Australian court will pay regard to the characterisation of the foreign law placed upon it by the courts of the foreign State; that characterisation will always receive serious attention and may, on occasions be decisive;

(c) the characterisation of an action brought in an Australian court as one which seeks to enforce a foreign public law or, in contradistinction, a foreign private right will depend upon the right asserted, the party in whose favour the right is said to have been created, the purpose of the foreign law upon which the right asserted is based, and on the general context of the case as a whole;

(d) the fact that the right asserted in the claim is penal in nature will not prevent a person who asserts a personal claim based on that right from enforcing the claim in Australian courts;

(e) on the other hand, if the purpose of the claim is the direct or indirect enforcement of a right asserting the governmental interests of the foreign State, the claim is unenforceable in Australian courts regardless of the way in which the cause of action is framed and no matter what principle of Australian law is also called in aid;

(f) the fact that in the foreign jurisdiction the right asserted may be enforced in a civil court or in a civil action will not necessarily affect the categorisation of the claim sought to be enforced in the Australian court.”

56 Palmer J held that the Appellant’s claims fell within the exclusionary rule on the basis that they were claims on behalf of an agency of a foreign state for the direct enforcement of a public law of that state. His Honour’s reasons can be summarised as follows:

· The proceedings were not brought to enforce the Appellant’s personal claim or the personal rights of the defrauded consumers. The Appellant claimed as the person appointed at the instance of an agency of the United States government in proceedings brought to enforce the FTC Act.

· The FTC Act is a foreign public law. His Honour said that, expressed in the terminology of the High Court in the Spycatcher case:

“[I]t is a law to secure the ‘governmental interests’ of the United States in regulating the manner of conducting commerce within its jurisdiction so as to protect a certain class of the public, namely consumers.” [84]

· His Honour drew particular attention to the fact that 15 USC §45(b) empowered only the Federal Trade Commission, as an agency of the government, to initiate action for violation of the Act and only then if it appeared to the Commission that such a proceeding “would be in the interests of the public”. Similarly his Honour noted that 15 USC §53(b) empowered the court to grant interim injunctions restraining violations of the FTC Act, if the Commission established that “such action would be to the public interest”.

· His Honour expressed the view that the FTC Act had the character of a penal law. He noted in this respect that the orders made by the Californian Court were not co-extensive with, or limited by, the total amount of loss which identified consumers could prove and claim in the “redress program”. He noted that the damages awarded to the Commission were measured by reference to the proceeds derived by the wrongdoers from the violations.

· His Honour characterised the purpose of the Act as:

“[T]o prohibit certain conduct within the jurisdiction of the United States Courts and to punish wrongdoers by requiring them to disgorge all of the proceeds of their violations of the Act, even if those proceeds exceed what is distributable to the defrauded consumers in a ‘consumer redress program’.” [86]

empower

direct

· His Honour held that the claim for relief made by the receiver “arises out of and is secured by an exercise of the prerogative of the [United States Government].” His Honour identified the receiver’s status as having been derived from legislation, which his Honour characterised as “enacted in the exercise of the prerogative of the United States Government” [88].

· His Honour held that the receiver’s claims were brought by way of “direct enforcement” of the orders obtained by the Commission from the Californian court for disgorgement and collection of assets, which were the proceeds of violation of the FTC Act [88].

· His Honour concluded that the case bears close factual resemblance to Schemmer v Property Resources Limited [1975] Ch 273. His Honour proceeded to adopt certain reasoning from the judgment of Goulding J in that case.

Does the Exclusionary Rule Apply?

57 The characterisation of a statute, or of legal proceedings, is a matter on which judicial minds may differ. Palmer J concluded that the FTC Act and these proceedings should be characterised as proceedings to secure a “governmental interest”. I have come to a different conclusion.

58 The issue before this Court is whether, as a matter of substance, the receiver is seeking to enforce, outside the territory of the United States, the governmental interests of that nation in the sense of the exercise of powers peculiar to government. Is this a governmental claim?

59 It is, of course, significant, as his Honour said, that the only person capable of instituting proceedings under the Act is a public body. That is indicative of a public purpose, but is not necessarily determinative of the character of the proceedings for the purposes of the exclusionary rule. To so treat the identity of the plaintiff or initiator would be, in my opinion, to prefer form over substance.

60 It is also significant to identify, as his Honour did, the public interest to be served by the particular provision of the statutory scheme which is being enforced, directly or indirectly, in the proceedings. But once it is recognised that not all public interests served by a statute or by its enforcement fall within the exclusionary rule, further analysis is required.

61 In his proposition (c), quoted in par [55] above, his Honour spoke of the characterisation of an action as one seeking to enforce either “a foreign public law” or “a foreign private right”. A similar distinction was made by Purchas LJ in Inkley at 265 in his proposition (3). It is not consistent with the authorities, as I understand them, to characterise legislation as either “public” or “private”, as if that was the only relevant distinction.

62 Statutes can be classified as a “public law” even though they do not constitute the assertion of the “governmental interests of a foreign State”, (as contained in Palmer J’s proposition (e) based on the Spycatcher case) or “the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity” (in Purchas LJ’s proposition (4) at 265, which appears to be derived from a statement of Lord Keith of Avonholm in Government of India v Taylor at 591 which I have quoted above at par [41]).

63 Once it is accepted that not every matter capable of a classification as a “public law” gives rise to the exclusionary rule, it becomes necessary to analyse the substance of the interests sought to be protected and to determine whether these constitute a “governmental claim” or “governmental interest”, in the sense of the “exercise of a power peculiar to government”.

64 As noted above, Palmer J concluded that there was a close factual resemblance between this case and Schemmer v Property Resources Limited. In that case the Securities and Exchange Commission of the United States, acting pursuant to the Securities Exchange Act 1934, had alleged in a District Court of the United States that certain persons were involved in fraudulent practices. A judge of the Court appointed a receiver to take possession of certain assets of companies controlled directly or indirectly by those persons. That receiver sought to have himself appointed receiver of the assets of some of those companies, which assets were located in the United Kingdom. He also sought injunctions against banks in London, which held money on behalf of one of those companies, restraining them from transferring monies otherwise than to himself as receiver.

65 Under the legislative scheme before Goulding J in Schemmer there was no express provision for the appointment of a receiver. The nature and purpose of such an appointment was, however, in a narrow compass. His Honour held:

“Counsel have … informed me that the federal courts possess a general equitable jurisdiction in fields within their competence, and under that jurisdiction appoint receivers when appropriate. If I understand the matter correctly, such an appointment at the suit of the commission under the Act of 1934 is purely conservative and directed to prevent the dissipation of assets by practices in violation of the Act of 1934. It does not effect any expropriation or involve the court or the commission in any execution of trusts or general administration of assets.”

66 Specifically, as Mr A S Martin SC noted in his submissions, the particular provisions of the 1934 Act under which the proceedings had been brought in the United States in which a receiver had been appointed were limited to proceedings seeking injunctive relief of a negative or positive character. There was no statutory provision relied upon in those proceedings capable of leading to compensatory orders. No doubt the assets would be preserved for the purposes of proceedings by individuals who may have suffered as a result of conduct found to be in contravention of the Act, but that was not a purpose for which the receiver had been appointed. Mr Martin SC submitted that that was an important distinguishing factor between Schemmer and the present proceedings.

67 In Schemmer the regulation which had been contravened was the prohibition of false and misleading conduct that had been promulgated by the Commission pursuant to a power which, as Goulding J emphasised at 283G, appeared in a number of sections of the 1934 Act, and was confined to regulations “necessary or appropriate in the public interest or for the protection of investors”.

68 It was in such a context that Goulding J concluded that the exclusionary rule applied. His Honour said at 288C-G:

Huntington v Attrill

‘… a delict may give rise to a purely civil remedy, as well as to criminal punishment. Although a right of action is given to the party aggrieved, it does not follow that the law of nations must regard his action as a suit in favour of the state.’

Here, however, I have nothing of that sort. Mr Schemmer comes before this court, in effect, as a public officer charged to reduce the London funds into possession in order to prevent the commission or continuation of offences against federal law. In my judgment, and in the absence of specific legislation founded on treaties, preventive criminal justice is no more a proper subject of international enforcement than retributive criminal justice. …”

69 Of significance is his Honour’s qualification that a private plaintiff who recovered compensation under the private remedies available to victims would be able to enforce any award by action in the United Kingdom. It was at the forefront of Mr Martin SC’s submissions that, as a matter of substance, the receiver in the present proceedings was seeking to recover funds on behalf of the victims and that, accordingly, the exclusionary rule did not apply.

70 It does appear that in Schemmer the receiver was appointed for the purpose only of freezing the assets. Whether or not this constitutes a governmental interest in the sense of the exercise of a power peculiar to the government, the appropriate test for the purposes of Australian law, need not be decided. Schemmer is not a case in which a receiver, albeit one appointed by public agency, is seeking in large measure, if not exclusively, to acquire funds for a compensatory purpose. If that is the proper characterisation of the receiver’s conduct in this case, as the Appellant contends, then the decision in Schemmer is distinguishable.

71 The basic structure of the FTC Act is, relevantly, twofold. First, a statutory prohibition of unfair practices in or affecting commerce (15 USC §45(a)). Secondly, pending proceedings culminating in orders by the FTC itself, the United States District Court may grant interlocutory injunctions (15 USC §53(b)).

72 As noted above, it was in a proceeding under §53(b) that the receiver, the Appellant in this Court, was appointed. This interlocutory proceeding occurred in a context in which final orders may be made either by the FTC or, on application by the FTC and only by the FTC, by a court.

73 When the court in California granted final injunctions, entered summary judgment, and assessed damages, in an amount calculated by the addition of the debits made to defrauded credit cards, it said it was acting under 15 USC §53(b). Such relief is available expressly only under §57(b). (See Blue AB Vol 1 at 114H, 174V, 175S.) Mr Bathurst QC suggested that the Court must have been relying on its ancillary powers as the above quoted reasons indicate. The Appellant did not suggest that anything turned on this.

74 The Californian Court relied on authorities to the effect that, where it would be impracticable to reimburse all of the injured consumers, the Court could, in its discretion, order the perpetrators to disgorge any unjust enrichment. Such an order was made in the present case. Accordingly, funds not paid to injured consumers will be paid to the United States Treasury.

75 The mechanism for distributing funds to injured consumers was established as a “consumer redress program”. This program empowered the FTC to apply funds. However, the FTC has the discretion to determine the criteria for participation in the program. Any excess funds will be paid into the United States Treasury.

76 This is one aspect of the proceedings which does suggest a governmental, indeed even penal, element in the proceedings. The orders of the Californian Court contemplate a situation in which the funds recovered exceed those distributable. In such an eventuality, the surplus will be expropriated by the United States government.

77 In his submissions to this Court Mr T F Bathurst QC relied on this aspect of the order of the Californian Court. He submitted:

“Whether or not it was a feature of the receivership that the defrauded (or some of them) would obtain repayment of monies they lost, Palmer J correctly took into account another, more certain feature of the Receiver’s role which was that the fraudsters would be required to disgorge what remained of their ill-gotten gains, whether or not it would be possible to use those funds to compensate the defrauded credit-card holders. That is a right the assertion of which is peculiar to a government. It is not a private right which could be asserted at the suit of the individual defrauded credit-card holders.”

78 Mr A S Martin SC submitted that the Commission has stated that a consumer redress program is feasible and that there were likely to be no funds remaining after full implementation of the program. Mr Bathurst submitted that this was an irrelevant consideration. He submitted that Palmer J correctly turned his mind to the nature of the right asserted, rather than to the ultimate effect of the assertion of that right.

79 I would not accept the Respondent’s submissions. They appear to me to be concerned with matters of form rather than of substance, contrary to the principles applicable in this area of the law.

80 The evidence which would enable the Court to assess the prospects of the contingency that some of the funds would not be able to be distributed is in a narrow compass. It would be better if the Court had had available to it more precise calculations, even in general terms, of what is likely to be recovered. Proceedings have been taken in Liechtenstein (Blue AB vol 9, 1787-1788) and it appears likely that an amount of US$9.8 million will be recovered from Eurobank in the Cayman Islands. (See Blue AB vol 13, 2783, Blue AB vol 1, 34-35.) This is considerably less than the amount defrauded.

81 The Court was not addressed on where the onus of proof of this matter lay. In my opinion, the onus lay on the party objecting to the exercise by this Court of its current jurisdiction. Be that as it may, I believe that this aspect of the scheme is not of such significance as to form the basis for characterising the proceedings.

82 The combined effect of the fact that what is involved in these proceedings is only a proportion of the total funds defrauded, the overwhelming probability that there will be leakages in the system and the costs involved in the enforcement processes, strongly suggests that the probability that there will be a surplus not able to be distributed so small as not to be of any relevant legal significance in determining whether the exclusionary rule should be applied.

83 The scheme does contemplate the possibility that some of the funds may not be able to be distributed to the consumers who were defrauded. In that contingency, provision is made for the payment of any surplus to the United States Treasury. With the benefit of hindsight it may appear that, as matters work themselves out, there was a penal element in the orders made. However, nothing in the materials before the Court suggests that this is anything other than an allowance for a contingency which is not expected to eventuate. In my opinion, it cannot be used to characterise the nature of the proceedings. As the High Court emphasised in the Spycatcher case, relying on earlier authorities, the issue is one of substance not of form. In my opinion, as a matter of substance, this is a proceeding designed to compensate persons who have been defrauded.

84 By legislation, the United States has established a standard of commercial behaviour, the breach of which can lead to a number of consequences. One of the consequences is the reimbursement to persons of the loss or damage suffered by reason of the breach of the standard. In the circumstances of this case, the application of the statutory standard would not relevantly differ, in this regard, from the common law right to the recovery of amounts of which the individual consumers were defrauded. Indeed, in any civilised system of law simple theft, of the character that occurred in this case, will give rise to a right to recover the monies stolen.

85 As is so often the case, particularly with conduct affecting persons in their capacity as consumers, the cost of litigation over small amounts is such that, in the absence of special measures, the individuals would not be able to recover their losses. The State has provided a mechanism which enables that to occur.

86 The FTC Act empowers the FTC to approach the Court for a range of relief, some of which would have the requisite governmental character. However, the aspect of the relief which is indirectly sought to be enforced in these proceedings is not of that character.

87 The substance of these proceedings is to recoup funds so that they can be placed in a pool of funds to be used for the purpose of reimbursing persons defrauded, in the manner hitherto described. The particular funds sought to be recouped in these proceedings will be placed in a pool. They will not be directly refunded to the particular individuals whose credit cards were the subject of the specific deductions which, assuming that it is practicable to do so, can be traced through various steps in the transmission of the funds to Sydney. However, the pool will include the recoupment of funds which will be made available to those particular credit card holders from other accounts into which monies from other credit card holders had found their way.

88 No doubt because the particular mechanism of fraud involved monthly deductions, the funds that happened to be taken from individual credit card holders went via different routes from time to time. Pooling the funds in the manner proposed for the purposes of the consumer redress program appears to be the sensible and, perhaps, the only practical, course. This aspect of the relief ought not be used to characterise the transaction as somehow constituting the exercise of a power to serve a governmental interest.

89 The recoupment of funds with a view to their return to persons deprived of those funds is a normal consequence of the application of the civil law. In my opinion, as a matter of substance, that is what is occurring in the present proceedings. There is nothing in this case of the character of a governmental interest in the sense in which that concept is applied in the Australian authorities, i.e. as the exercise of a power peculiar to government. In my opinion the particular proceedings before the Court should not be characterised in that manner. The exclusionary rule does not apply and this Court should not decline jurisdiction.

The Appellant’s Claim

90 The Appellant is appointed by the Californian Court as receiver of the property of Benford which was one of the corporate entities controlled by the persons responsible for defrauding the credit card holders. The receiver comes before the Court in a formal sense as the representative of the fraudster, rather than of the defrauded.

91 Benford is the owner of the deposit with the Respondent which is a debt situated in Vanuatu. The Respondent does not contest that indebtedness. Accordingly, the Appellant has the right to recover the debt in Vanuatu and, indeed, has instituted proceedings to do so.

92 The funds deposited in the account with the Respondent in Vanuatu are, as noted above, linked to a deposit by the Respondent with Citibank in Sydney. It is the location of that deposit which gives this Court jurisdiction to determine the dispute. The Sydney deposit is a debt owed by Citibank to the Respondent. The Appellant has no legal right to the deposit. It claims, however, to have an equitable right. The case before this Court focuses, and focuses only, on the Appellant’s claim to the Respondent’s deposit with Citibank.

93 The Appellant submits that the chose in action constituted by the debt owed by Citibank to European Bank is held in trust for Benford. Before Palmer J, the Appellant asserted an express trust. He has not appealed from his Honour’s rejection of that case. In this Court, he asserts that his Honour erred in rejecting his case based on a constructive trust.

94 One of the difficulties faced by the Appellant is that he has a perfectly good claim for the debt, a legal rather than an equitable right, constituted by the initial deposit with Eurobank and enforceable in Vanuatu. There are no findings or admissions as to why the Appellant prefers to pursue its remedies in this Court, rather than in Vanuatu. Two matters were, however, raised in the course of submissions.

95 First, there is a risk that some or all of the funds may be forfeited to the Republic of Vanuatu pursuant to the legislation to which I have referred above. Secondly, it appears that a number of charges have been made to the account by the Respondent, including for the cost of litigation in Australia, which deductions the Appellant would prefer to avoid. There may be other reasons. The issue was not fully explored in this Court. It was not submitted that anything turned on the motivation of the Appellant for seeking to proceed in this Court.

96 In this Court, the decision not to sue on the debt in Vanuatu was put in terms of an “election”, that Benford had made, not to pursue its legal rights against the Respondent in Vanuatu in favour of pursuing what it asserted to be its equitable rights by instituting these proceedings in Australia. It does not appear that this “election” was ever made expressly, until the proposition was stated in those terms by Mr A Martin SC, during the course of oral submissions in this Court. Such an “election”, if properly characterised as such and otherwise permissible, may very well have been implicit in the institution of the proceedings and the submissions made before Palmer J.

The Decision of Palmer J

97 Palmer J rejected the Appellant’s submissions for two reasons:

“[112] First, it may be accepted without hesitation that the funds deposited in Benford’s IBD Account were defrauded funds and therefore bore the character of trust funds in the hands of Mr Taves and the companies which he controlled, including Benford. But who are the beneficiaries of that trust? Clearly, they are the true owners of the funds, namely, the defrauded credit card holders.

[113] The Receiver is not the agent of the defrauded credit card holders for the purpose of collecting the funds on their behalf. If he is the agent of anyone as far as this Court can recognise, he is the agent of the Commission for the purpose of taking possession of the assets of Benford and the other Defendants controlled by Mr Taves to enable those assets to be dealt with in accordance with the orders of the Californian Court in proceedings to which the defrauded credit card holders are not, and cannot be, parties.

[114] In those circumstances, it has not been satisfactorily explained how the Receiver can claim that the proceeds of the fraud, now said to be represented by European Bank’s deposit with Citibank Limited, are held upon a constructive trust for Benford or for him.

Barnes v Addy

Westpac Banking Corporation v Savin

Stephens Travel Service International Pty Ltd v Qantas Airways Ltd

Scott on Trusts

Agip (Africa) Ltd v Jackson

…

Barnes v Addy.

[119] For these reasons, I conclude that the Receiver’s claim against European Bank founded upon constructive trust, even if otherwise enforceable in these proceedings, would have failed.”

98 It is also relevant to note certain findings made by Palmer J as to the state of the Respondent’s knowledge. His Honour concluded:

Selangor United Rubber Estates Ltd v Craddock (No 3)

Linter Group Ltd (in liq) v Goldberg

99 His Honour found that the Respondent “did not conform to the standards of a competent and reasonable banker in the manner in which it opened the Benford IBD Account”. In particular, he found that officers of the Respondent did not inquire about the beneficial ownership of the funds and their source. There was, his Honour further found, no basis for the Respondent to assume that Eurobank, the Caribbean bank involved in the fraud, was trustworthy or to make any assumptions about the credentials and honesty of its clients.

100 His Honour did not hold that the Respondent was in any way dishonest or recklessly indifferent to these matters. However, his Honour concluded:

“[125] …I am satisfied that the circumstances in which the Benford account was opened should have put European Bank upon enquiry as to the true identity of those interested in the funds and as to the source of those funds.”

101 These findings were not challenged on the appeal.

The Appellant’s Submissions

102 The Appellant is the receiver of Benford. The Appellant has not been appointed as receiver of the traceable equitable interests of the defrauded credit card holders. The starting point of the Appellant’s case is the proposition that Benford was a constructive trustee for the defrauded credit card holders over the proceeds of the fraud deposited into the Benford account with European Bank. As receiver of Benford, with power to act in its name and assert its rights, he comes to this Court, he submits, to fulfil Benford’s duty to get in the trust estate.

103 The Appellant asserts that, in Benford’s capacity as a trustee obliged to get in the trust property, it had a “right to trace” the “trust funds” into the Respondent’s deposit with Citibank. He submits that he, acting as Benford, could elect to pursue that remedy, in lieu of his ability to assert Benford’s rights as a legal owner of the debt located in Vanuatu.

104 Alternatively, the Appellant submits that the Respondent can be made liable by reason of its knowing receipt of trust property. This is often referred to as the first limb of Barnes v Addy (1874) LR 9 Ch App 244 at 251-252. Palmer J rejected this submission because the bank was a “mere depository” of the funds. If there was a “receipt” for purposes of “knowing receipt”, it may be necessary to consider whether his Honour’s findings are sufficient for the requisite mental element of “knowing receipt”.

105 In this regard, the Appellant submits that his Honour erred in concluding that the funds were received as a mere depository. He submits that the bank received the funds for its own use and benefit.

106 Alternatively, the Appellant submits that, after the initial receipt, the Respondent dealt with the funds in a manner inconsistent with the trust of which it was aware. It did this by investing the funds in its own name, receiving a higher rate of interest than it paid to Benford. He submits that it should have kept those funds in a separate account in the name of Benford.

107 The Appellant also submits that, by dealing with the trust funds in a manner inconsistent with the original trust, the Respondent became a trustee de son tort. This was not the subject of any ground of appeal. I do not see how it could be said that the Respondent intermeddled or acted as a trustee. In any event, no different result would flow from this submission than from that based on inconsistent dealing. Indeed, none was suggested in the submissions, which relied on the same factors in each respect.

108 By way of Notice of Contention, the Respondent submits that his Honour’s conclusion can be supported on the alternative basis that, because the Respondent acknowledges, and has always acknowledged, its indebtedness to the Appellant, its assertion of beneficial ownership of the account with Citibank is not against good conscience.

The “Election” to Claim Traced Funds

109 The Appellant’s starting point is the obligation of Benford to get in the trust estate, i.e. the defrauded creditors’ funds. That a trustee has such a duty is well established. The case on which the Appellant relied, Young v Murphy [1996] 1 VR 279 esp at 281-286 per Brooking JA, is a clear application of the principle.

110 Mr T Bathurst QC submitted that this right and power applies to an express trustee but not to a constructive trustee. In the latter case, he submitted, there is not the same degree of privity between trustee and beneficiary. In my opinion, that submission should be rejected. Privity is not a useful concept in this area of the law. Often beneficiaries have no prior relationship with an express trustee. The relationship is not necessarily closer because of the mode of creation of the fiduciary obligation.

111 As the Vanuatu emanation of the fraudsters, Benford Limited held the stolen funds as trustee for the defrauded credit card holders (Black v S Freedman & Co (1910) 12 CLR 105 at 110; Spedding v Spedding (1913) 30 WN (NSW) 81; Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426 at 432; Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 716C-E; Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 at 589D-E.)

112 The trust so created is, in my opinion, better described as a presumed or resulting trust, rather than as a constructive trust. There is no authoritative statement as to when trusts should be classified as presumed, resulting or constructive. (See e.g. R P Meagher and W M C Gummow, Jacobs’ Law of Trusts in Australia (6th ed, 1997) esp par [303]; H A J Ford, W A Lee and P McDermott, Principles of the Law of Trusts at [1120]; Robert Chambers, Resulting Trusts (1997), esp 44-47; M Cope, Constructive Trusts (1992) at 5-8; Westdeutsche Bank, at 707-709; Philip Pettit, Equity and the Law of Trusts (9th ed, 2001) at 62-67, chapter 9; A J Oakley, Parker and Mellows: The Modern Law of Trusts (8th ed, 2003) at 38 and 39, 42-45; Allen v Snyder [1977] 2 NSWLR 685 at 698; Port of Brisbane Corporation v ANZ Securities Limited (No 2) [2003] 2 Qd R 661 at [31]-[37]; P J Millett, “Restitution and Constructive Trusts” (1998) 114 Law Quarterly Review 394 at 400-402; Margaret Stone and Alistair McKeough, “Tracing in the Age of Restitution” (2003) 26 University of New South Wales Law Journal 377 at 385-386.)

113 A case of simple theft involves a transfer of property about which the transferor was entirely unaware. The transferee holds any property into which the stolen property has been converted on trust in a manner which should be seen as automatic. (See Chambers, Resulting Trusts esp at 22-23, 116-118.) The Australian authorities indicate that a trust arises immediately upon the acquisition of the property, not when recognised by a court. (As in Black v S Freedman & Co, see also Rasmanis v Jurewitsch (1969) 70 SR (NSW) 407.)

114 As Millett J (as his Lordship was) said in a case involving fraudulent misappropriation: “the trust which is operating in these cases is not some new model remedial constructive trust, but an old-fashioned institutional resulting trust”. (El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 at 734; see also P J Millett, “Tracing the Proceeds of Fraud” (1991) 107 Law Quarterly Review 71 at 81.)

115 If appropriately characterised as “constructive”, the trust that arises upon receipt of stolen funds by an active participant in the theft is of an institutional rather than remedial character. (The terminological difficulties which plague this area of the law are discussed in P J Millett, “Restitution and Constructive Trusts” at 399-400, 402).

116 In my opinion, a constructive trust that arises in this way – or, as I would prefer to describe it, a presumed or resulting trust – should be equated with an express trust for purposes of the duty to get in the trust estate. In both cases, this duty is necessary to ensure that the objectives of the trust are achieved by what will often be the most efficacious means, i.e. proceedings by the trustee rather than the beneficiaries. In any event, the duty is fundamental to the performance of all other duties and does not vary in strength from one class of trust to another.

117 The Appellant asserts that he has a “right to trace” and, accordingly, that he can elect whether to pursue his right to enforce the debt in Vanuatu or to claim another asset into which the funds Benford deposited in Vanuatu had been converted.

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.

119 At the time of the laying of the information in Vanuatu in 1999, the Serious Offences (Confiscation of Proceeds) Act 1989 made provision for the imposition of a pecuniary penalty with respect to the proceeds of crime. It appears that under s3 and s4 of this Act the amount able to be imposed by way of pecuniary penalty could not exceed the interest accrued on laundered funds. However, under the Proceeds of Crime Act 2002 (“Proceeds of Crime Act”), which commenced on 3 February 2003, the whole of the proceeds of a fraud may be forfeited to the government.

120 Section 89 of the Proceeds of Crime Act repeals the Serious Offences (Confiscation of Proceeds) Act. The transitional provision, s90, provides: “A request or order that was made under the Serious Offences (Confiscation of Proceeds) Act No. 50 of 1989 and has not been finalised at the commencement of this Act is taken to be a request or order made under this Act.”

121 Part 3 of the Proceeds of Crime Act deals with “Forfeiture orders, pecuniary penalty orders and related matters”. A forfeiture order may be made following conviction for a serious offence if the court is satisfied that the property is “tainted property” in relation to the offence – namely property used in, or proceeds of, the offence (s20). In the alternative, the Attorney-General may apply for a pecuniary penalty order on conviction, equal to the value of the person’s benefit from the offence (s28). Section 28(2) requires the court to assess the value of the benefit derived by a person from the offence, in accordance with the statutory procedure laid out in ss29-33. Section 29(1) provides that “If a person obtains property as a result of, or in connection with committing, a serious offence, the person’s benefit is the value of property so obtained.” The amount to be recovered from a person under a pecuniary penalty order is, as provided in s31, the amount that the court assesses to be the value of the person’s benefit from the offence.

122 The limited concept found in s3(1)(b) of the Serious Offences (Confiscation of Proceeds) Act, restricting confiscation orders to “the value of the profits assessed” – i.e. the interest accrued on the monetary proceeds of crime – does not appear in Proceeds of Crime Act.

123 The Appellant submits that the whole of the proceeds of the fraud is at risk of being forfeited to the Vanuatu government should the Respondent succeed in its cross-appeal against Citibank (relying on the evidence of Ms Phelps at Black Book 170K-P). The Appellant does not, however, submit that the Proceeds of Crime Act operates retrospectively. Mr Martin SC for the Appellant pointed out that in order to make an application for a forfeiture order or pecuniary penalty order under that Act, it is necessary for the offence to have been committed after the commencement of the new legislation (s15(1)).

124 However, Mr Martin submitted that the provisions of the Serious Offences (Confiscation of Proceeds) Act relating to the quantum of a confiscation order are unclear. There remains, according to Mr Martin, a risk that the whole of the proceeds could be confiscated to the Vanuatu Government, despite the inapplicability of the new legislation. This is because s3(1)(b) of the Serious Offences (Confiscation of Proceeds) Act, which the Appellant submits is the governing definition for the purposes of quantifying a confiscation order, contains no reference to the concept of “profits assessed” from the commission of an offence, and refers instead to the “value of the proceeds”. This, Mr Martin submitted, could refer to proceeds of the commission of the offence – that is principal plus interest (T9/2/03 p2). The Appellant submits that this proposition is supported by the nature of the relief granted to the Public Prosecutor in Vanuatu, restraining the disposal of the whole of the money standing to the credit of Benford, as opposed to merely the interest (T/12/03 p3).

125 Mr Bathurst QC for the Respondent submitted that the transitional provision (s90) in the Proceeds of Crime Act refers only to requests or orders. The Serious Offences (Confiscation of Proceeds) Act contains no reference to requests, only to applications or orders. In order for an application for a confiscation order to be made, there must be a conviction for a serious offence, which has not yet occurred in the criminal proceedings against Benford in Vanuatu. Although a restraining order was made by the Vanuatu Supreme Court, there has been no request for, nor grant of, a confiscation order pursuant to ss2-4 of the Serious Offences (Confiscation of Proceeds) Act.

126 Mr Bathurst further submitted that the situation at the present time is that the provisions relating to confiscation orders in the Serious Offences (Confiscation of Proceeds) Act cannot apply because that Act has been repealed (T9/12/03 p 46). He accepted what he described as the Appellant’s concession on this subject, based upon the wording of s15 of the Proceeds of Crime Act, and also pointed to ss11 and 12 of the Proceeds of Crime Act which criminalise, relevantly, possession of property suspected of being proceeds of crime if such possession takes place “after the commencement of this Act”. Mr Bathurst conceded that there may be an argument that s12 could apply to the present facts, however he noted that by reading the term “possesses” in s12 ejusdem generis, it would seem to connote some element of entering into possession, rather than being in possession, particularly in circumstances where both the Respondent and Benford were restrained from divesting the funds.

127 It is unnecessary, indeed inappropriate, for this Court to resolve issues of Vanuatu law. No attempt was made to establish the law of Vanuatu in an appropriate way. This Court was invited, effectively, to construe the Vanuatu statutes. This Court should limit itself to an assessment of the risks. The Appellant bore the onus of establishing that the risks were of such an order that a court of equity should act to protect the Appellant. In my opinion that onus has not been discharged.

128 I am not satisfied that there is real risk that the entirety of the funds may be confiscated by the Vanuatu Government. There is a higher risk of loss of earned interest. No reason was advanced why this possibility should create a right where none exists.

129 Reference was also made to the deduction of fees and charges from the Vanuatu account by the Respondent. However, no attempt was made to challenge, let alone put in issue in these proceedings, the validity of those deductions. Far from constituting a reason for allowing the election, this consideration dictates against it. Indeed, if otherwise entitled to trace, the Appellant’s claim would, as far as presently appears, be subject to an equitable lien in favour of the Respondent in this regard.

130 Finally, a perfunctory attempt was made to question the solvency of the Respondent. This was based on comparison of the Respondent’s assets at the end of 1997 with the size of the Benford deposit, were that to be forfeited to the Vanuatu government. (See Blue AB Vol 8, 1607.) This did not represent the Respondent’s financial position at the relevant time. In any event, no attempt was made in the Appellant’s case to actually assess solvency in a formal way.

131 It is unnecessary for this Court to consider the debate about whether or not tracing is “restitutionary”. (See, e.g. Simon Evans “Rethinking Tracing and the Law of Restitution” (1999) 115 Law Quarterly Review 469; Ross Grantham and Charles Rickett, “Tracing and Property Rights: The Categorical Truth” (2000) 63 Modern Law Review 905; Stephen Moriarty, “Tracing, Mixing and Laundering” in Peter Birks (ed), Laundering and Tracing (1995) 73.) No attempt was made to establish that the Respondent was unjustly enriched. There was a marginal differential in the interest rates received and paid, but that was never the focus of attention. The Appellant claimed the whole of the deposit with Citibank, not just such amount as reflected the interest differential.

132 The Appellant seeks to trace as of right and as a matter of property law. He represents the owner of a legally enforceable debt. He asserts that Benford is entitled to elect between the debt and its traced form and to do so even if Benford’s debtor is solvent, no issue of priority with other creditors has arisen and no issue of unjust enrichment has arisen. There is no authority for such a proposition.

133 As Lord Millett has pointed out:

“Tracing is … neither a claim or a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim.”

Foskett v McKeown

134 In the present 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. That identification does not, however, of itself, establish a right of any kind. Something more is required. The terminology of a “right to trace” can be, and in the present case is, misleading. The process of identification should not be confused with a proprietorial right.

135 This is not a case in which a beneficiary – a defrauded credit card holder, in this case – elects to take property which his fiduciary has acquired with trust property. (See, e.g. Scott v Scott (1963) 109 CLR 649 at 660; Foskett v McKeown at 130-131.) The election asserted in this case extends to a third party who holds property that is causally linked to the property to which the beneficiary remains entitled.

136 The Appellant’s assertion that he could elect between claiming the debt in Vanuatu and the deposit in Sydney was based on the following sentence in Lord Millett’s judgment in Foskett v McKeown at 127C:

“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 to trace its value into the new asset in the hands of the same owner.”

137 This sentence was immediately preceded by the following:

“The processes of following and tracing are … distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old.”

138 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.

139 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. The Benford account was always in credit, whether as a deposit account or as a current account. There was no occasion on which the value inherent in the account, which Benford held as trust property, had become located in the value inherent in the deposit with Citibank. No process of the character referred to by Lord Millett as ‘substitution’ has occurred.

140 In his written submissions, the Appellant asserted that Benford had “a continuing beneficial interest” in the defrauded funds and also in their “traceable proceeds”. This proposition commits the fallacy which Viscount Radcliffe identified in Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 at 712:

“… for it assumes mistakenly that for all purposes and at every moment of time the law requires the separate existence of two different kinds of estate or interest in property, the legal and the equitable … Equity in fact calls into existence and protects equitable rights and interests in property only where their recognition has been found to be required in order to give effect to its doctrines.”

141 It is not possible to separate an equitable estate or interest from the legal chose in action constituted by the debt in the deposit in Vanuatu and then trace that equitable interest into the deposit with Citibank. The intervention of equity requires the identification of a duty or interest arising pursuant to the doctrines of equity.

142 In this, as in some other respects, the submissions for the Appellant appear to me to elide the distinction between the position of Benford as a constructive trustee vis-à-vis the beneficiaries, and its assertion of an equitable right vis-à-vis the Respondent.

143 In the present kind of case, in my 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.

144 In a case where retailers sought to recover from a wholesaler the amount of a tax incorporated in the price paid, after the tax had been declared constitutionally invalid and, therefore, had not been paid by the wholesaler, Gyles J said:

Roxborough v Rothmans of Pall Mall Australia Limited

145 On appeal, Gummow J quoted this sentence with approval and added:

Roxborough v Rothmans of Pall Mall Australia Limited

146 His Honour went on to conclude at [57] on the facts of the case:

“Nor, given … the adequacy of the legal remedy available to the appellants, is there any occasion to consider whether, and, if so, when and on what terms, there arose in their favour a constructive trust... .”

147 (See also Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566, 584 at [42]; Giumelli v Giumelli (1999) 196 CLR 101, 113 at [10].)

148 I can see no proper basis for the “election” to trace as a right of property which the Appellant asserted.

The Claim in Personam

149 Equitable relief in personam will be available only if there is established something in the nature of unconscionable conduct. (See, e.g. Re Diplock [1948] Ch 465 at 532).

150 Lord Browne-Wilkinson enunciated an elementary proposition in Westdeutsche Landesbank at 705C-D:

“Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust).”

151 Two such considerations have been raised by the Appellant in its submissions: knowing receipt and inconsistent dealing. As noted above, the knowing receipt claim is based on the first limb in Barnes v Addy. The inconsistent dealing basis is a distinct claim.

The Bank’s Receipt of Funds

152 When the Respondent received formal notice of the dubious origins of the Benford funds, it took steps to freeze and separate the funds, first in a current account and then, pursuant to an order of the Supreme Court of Vanuatu, in an interest bearing deposit. The effect of his Honour’s finding is that the Respondent had constructive notice of the origins of the funds at an earlier time, namely at the time of original receipt. The Respondent did not challenge these findings.

153 Mere notice, however, although relevant, is not enough. The issue is whether or not it acted in any way in relation to the trust property which would bind its conscience as the legal owner of the debt constituted by the deposit with Citibank.

154 The factual findings of Palmer J require this Court to proceed on the basis that the Respondent knew that its client Benford was a trustee. Accordingly the Respondent was obliged to treat the account as a trust account, giving rise to duties on the part of the bank to the beneficiaries. Such knowledge calls for special vigilance on the part of a banker. However, no issue arose in this regard on the facts of the present case. The beneficiaries are not before the Court alleging that they have suffered any loss for which the Respondent is liable.

155 The Respondent did no more than receive a deposit. This created a simple debtor/creditor relationship. The money that was deposited became the property of the bank, able to be applied by it for any purpose it chose. It applied the funds immediately to a US dollar account in its own name, and at a marginally higher rate of interest, eventually with Citibank, again creating a simple debtor/creditor relationship. This in turn became part of a current account between Citibank and Citibank NA.

156 No doubt the Respondent could speculate in currency and enter into contracts by which it promised to repay the borrowed funds in any currency it chose. However, on the evidence, a banker, acting as such, as the recipient of a US dollar deposit, would invest the same amount, directly or indirectly, with a bank located in the United States.

157 The evidence establishes that inter-bank movements in US dollars are completed by transfers between banks in the United States. A bank located outside the United States, like European Bank, which deals in US dollars, requires a correspondent banking relationship with a bank in the United States or, as in this case, requires such a relationship with another bank outside the United States (Citibank) which in turn has a correspondent banking relationship with a bank in the United States (Citibank NA). (Blue AB Vol 5, 1019-1020).

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 considerable debate, without clear resolution. The Appellant propounds a case of ‘knowing receipt’ of trust property, generally referred to, as noted above, as the first limb in Barnes v Addy, at 251, which adopted the formulation “receive and become chargeable with some part of the trust property”.

159 Whilst many trees have been felled in explication of Lord Selborne’s judgment, little attention has been given to what his Lordship meant by the words “and become chargeable with”. A clue is given in the preceding sentence, where his Lordship referred to “responsibility in equity” attaching to persons who were not trustees but “are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee”.

160 In my opinion, it is an essential aspect of accessorial liability for ‘knowing receipt’ that the act of transfer of the property – relevantly the deposit by Benford with the Respondent – must be in breach of a fiduciary obligation. The claim arises in equity’s exclusive jurisdiction and does not give rise to the apparent difference between English and Australian law as to whether tracing in equity requires a pre-existing fiduciary relation. (See e.g. Agip (Africa) Limited v Jackson [1990] Ch 265 at 290B; Agip (Africa) Limited v Jackson [1991] Ch 547 at 566H-567A; Boscawen v Bajwa [1996] 1 WLR 328 at 335G and cf Black v S Freedman & Co (1910) 12 CLR 105; R P Meagher and W M C Gummow, Jacobs’ Law of Trusts in Australia (6th ed, 1997) par [2706]; R P Meagher, J D Heydon and M J Leeming, Meagher, Gummow & Lehane’s Equity, Doctrines & Remedies (4th ed, 2002) at [5-025], [5-230].)

161 This proposition has been variously expressed in the authorities:

· “there must … be some misapplication, some breach of trust”: Gray v Johnston (1868) LR 3 HL 1 at 11.

· “the payment is being made in fraud of a third person”: Thomson v Clydesdale Bank Limited [1893] AC 282 at 287-288.

· “the money is being applied in breach of trust”: Coleman v Bucks and Oxon Union Bank [1897] 2 Ch 243 at 250, 254.

· “misapplied funds”: Belmont Finance Co v Williams Furniture Ltd [1980] 1 All ER 393 at 405.

· “the transfer to him was a breach of trust”: Agip (Africa) Limited v Jackson [1990] Ch 265 at 291G. See also Lipkin Gorman v Karpnale Limited [1987] 1 WLR 987 at 1006B.

· “a disposal of his assets in breach of fiduciary duty” (El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 at 700; Bank of Credit and Commerce International (Overseas) Limited v Akindele [2001] Ch 437 at 448.

· trust money was “misapplied”. See El Ajou v Dollar Land Holdingsplc [1993] 3 All ER 717 at 739-740; Polly Peck International plc v Nadir [1992] 4 All ER 769 at 777; Koorootang Nominees Pty Ltd v ANZ Banking Group Limited [1998] 3 VR 16 at 105, line 35.

162 As a trustee of the funds for the defrauded credit card holders, Benford had an obligation to refund the money to them as soon as they could be ascertained. That was by no means able to be done immediately, even if all the knowledge of Mr Taves and his associated companies was to be fictionally attributed to Benford. Until the beneficiaries could be identified and the precise total of the monthly debits computed in each case, Benford was under a duty to properly invest the trust fund. An interest bearing deposit with a bank in the currency of the fraud would appear to me to be perfectly appropriate. If European Bank is to be credited with constructive knowledge of the fraud, there seems no reason why it should not also have such knowledge of the processes required for repayment.

163 The deposit with Benford only lasted a few months before the account was frozen in the way described above. In these circumstances, I do not believe that the Benford deposit with European Bank should be seen to involve a misapplication of trust funds on the part of Benford.

164 This case was, however, argued on a more precise basis. The Respondent sought to uphold the conclusion of Palmer J, that the deposit by Benford with European Bank did not constitute a receipt for purposes of the ‘knowing receipt’ principle.

165 It has been well established, at least since Foley v Hill (1848) 2 HL Cas 28 at 36-37; 9 ER 1002, that money deposited with a bank becomes its own property which it can apply for its own use and benefit. There is, however, clear authority, which may appear to be in tension with this proposition, that a bank may be treated in equity as if money deposited with it was not deposited for its own use and benefit. (On the tension, see, e.g. Michael Bryan “The Liability of Banks to Make Restitution for Wrongful Payments” (1998) 26 Australian Business Law Review 93 at 106-109. See also Michael Bryan, “When Does a Bank Receive Money” [1996] Journal of Business Law 165; C E F Rickett, “When is a Bank Liable for Receipt in Equity?” [1995] New Zealand Law Journal 78; William F Fratcher, Scott on Trusts (4th ed, 1989) Vol 4, §324.)

166 There is no authoritative statement of the basis on which this special treatment of banks rests. It may be an application of the maxim that equity looks to the intent not to the form.

167 The best known example is where a bank credits and debits amounts to a current account in the normal course of operations of such an account. The bank is not treated as having ‘received’ the money for purposes of this area of the law, unless it appropriates the receipt to a definitive reduction of the overdraft.

168 A clear example of the application of this principle is Stephens Travel Service International Pty Ltd v Qantas Airways Limited (1988) 13 NSWLR 331, where the bank was liable to repay monies received into a trust account from the time that it appropriated payments to reduce the overdraft and, therefore, “the account was not continued as a current account in the ordinary way” (366B).

169 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” (at 11.9, 13.2, 13.7). The principle applied by Lord Cairns in that case was whether the bank was in some manner “privy” to the trustee’s misapplication. His Lordship held that such privity would exist where a “benefit” to the bank was “designed or stipulated for” (11.8-11.10). His Lordship concluded that where the payment diminished the overdraft on a temporary basis in the ordinary course of conducting a current account:

“… it appears to me wholly impossible to imagine that the bankers can have been influenced, in any degree, in their conduct by the indirect and incidental benefit which they thus derived”. (13.7)

170 As Lord Westbury put it in the same case at 15:

“No balance was struck upon that account; no special application was made of the money; the account continued to be a current account in the ordinary way.”

171 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 a bank’s involvement which constitutes a relevant receipt. In Agip (Africa) Limited v Jackson [1990] Ch 265 at 291F-G and 292A-C where Millett J, as his Lordship then was, used this terminology and observed that “receipt-based liability” ought “be properly confined to those cases where the receipt is relevant to the loss” (292C).

172 In another case Lawson J contrasted money received “for his own benefit” with a person “who acts a channel through which funds disposed of … reach other quarters”. (International Sales and Agencies Limited v Marcus [1982] 3 All ER 551 at 557G-H and cf “for his own purposes” at 558A-C). In Westpac Banking Corporation v Savin [1985] 2 NZLR 41 at 69, Richmond J referred to a person “acting as mere depository”.

173 In Cigna Life Insurance New Zealand Limited v Westpac Securities Limited [1996] 1 NZLR 80, Greig J adopted the terminology of a mere “depository” or “channel”, when rejecting the proposition that there had been a knowing receipt when the bank received money at interest with a view to using that money by investing it at a margin. This reasoning is the closest to the circumstances of the present case:

“… it is obvious that a trading bank uses its customers’ money as part of its stock-in-trade to make profit. It is not just a question of fees for transactions but the benefit or the profit out of the use or investment of the money over a short or longer term. Nonetheless as between a plaintiff claiming a constructive trust, I think it is right to treat a trading bank defendant as merely a depository or channel through which the moneys are transferred to achieve the fraudulent purpose. The money is then gone and is not retained or held by the bank. It claims no entitlement to it and cannot be said to be chargeable as receiver. It is, of course, different if the bank retains the money as creditor to reduce an overdraft or in some other way for its own benefit.” [at 87]

174 It is not necessary to decide whether any term deposit with a bank is received as a “mere depository” or “channel” in the sense employed in the above authorities. Nor is it necessary to decide what would be the position if the Respondent had taken on itself the currency risk.

175 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.

176 In this regard the appeal should be dismissed.

The Bank’s Application of Funds

177 The alternative basis of the Appellant’s claim was the allegation that the Respondent acted in a manner inconsistent with the trust of which it had constructive knowledge. This was said to establish responsibility, either in itself, or by constituting the bank a trustee de son tort. This alternative basis does not require the Appellant to establish that the original payment to the Respondent was made in breach of trust.

178 The authority primarily relied on was Lee v Sankey (1873) LR 15 Eq 204. The relevant passage at 211 states:

“… a person who receives into his hands trust moneys, and who deals with them in a manner inconsistent with the performance of trusts of which he is cognizant, is personally liable for the consequences which may ensue upon his so dealing.”

179 In the present case, the conduct inconsistent with the trust was said to be opening the account with Citibank in the Respondent’s own name rather than in that of Benford, which account was at a marginally higher rate of interest. As I have noted, the Appellant has never made an equitable claim for the interest rate differential. It pursues, and pursues only, a claim to the whole deposit by the Respondent with Citibank.

180 To suggest that the nomenclature of the Citibank deposit is conduct inconsistent with a trust is to prefer form over substance. In any event, at all material times, the Respondent maintained an account in Vanuatu in Benford’s name for the amount deposited with interest. This was full acknowledgement of the bank’s obligation.

181 Finally, I refer to the observation in Lee v Sankey quoted above that a third party who deals inconsistently with trust monies is “personally liable for the consequences which may ensue upon his so dealing”. I am unable to discern any such “consequences” here.

182 The funds received in Vanuatu can be causally linked to the deposit by the Respondent with Citibank. However, the Respondent acknowledges its liability on the Vanuatu debt. Nothing has been lost. I can discern no relevant “consequence”, let alone one which binds the conscience of the Respondent, which has always acknowledged its obligations in Vanuatu, with respect to the beneficial ownership of its deposit with Citibank.

Conclusion

183 The appeal should be dismissed with costs.

184 HANDLEY JA: I agree with Spigelman CJ.

185 SANTOW JA: I agree with Spigelman CJ.

**********

Last Modified: 07/16/2007

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Citations

Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82

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Cited Sections

CITATION:	ROBB EVANS of ROBB EVANS & ASSOCIATES v EUROPEAN BANK LIMITED [2004] NSWCA 82 revised - 29/03/2005
HEARING DATE(S):	8/12/03, 9/12/03, 10/12/03
JUDGMENT DATE:	25 March 2004
JUDGMENT OF:	Spigelman CJ at 1; Handley JA at 184; Santow JA at 185
DECISION:	Appeal dismissed with costs.
CATCHWORDS:	PRIVATE INTERNATIONAL LAW - exclusionary rule - whether claim directly or indirectly for enforcement of laws securing governmental interest of foreign state - characterisation of consumer protection statutes - application of rule where proceedings brought for compensatory purpose of reimbursing defrauded consumers - TRUSTS - presumed or resulting trust over stolen funds - equivalent of express trust for purposes of duty to get in trust estate - equitable tracing - where legal owner has good claim at law - when election to trace in equity permitted - BANKING AND FINANCE - fraud - knowing receipt - special treatment of banks - bank as mere depository - whether conduct inconsistent with trust of which bank had constructive knowledge.
LEGISLATION CITED:	Federal Trade Commission Act (United States) ss 1, 5, 13 International Companies Act No 32 of 1992 (Vanuatu) s 125 Proceeds of Crime Act 2002 (Vanuatu) ss 11, 12, 15, 20, 28, 29, 90 Securities Exchange Act 1934 (United States) Serious Offences (Confiscation of Proceeds) Act No 50 of 1989 (Vanuatu) ss 2, 3, 4, 20
CASES CITED:	Agip (Africa) Limited v Jackson [1990] Ch 265 Agip (Africa) Limited v Jackson [1991] Ch 547 Allen v Snyder [1977] 2 NSWLR 685 Attorney General of New Zealand v Ortiz [1984] AC 1 Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1988) 165 CLR 30 Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 Bank of Credit and Commerce International (Overseas) Limited v Akindele [2001] Ch 437 Barnes v Addy (1874) LR 9 Ch App 244 Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566 Belmont Finance Co v Williams Furniture Ltd [1980] 1 All ER 393 Black v S Freedman & Co (1910) 12 CLR 105 Boscawen v Bajwa [1996] 1 WLR 328 Cigna Life Insurance New Zealand Limited v Westpac Securities Limited [1996] 1 NZLR 80 Coleman v Bucks and Oxon Union Bank [1897] 2 Ch 243 Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426 Damberg v Damberg (2001) 52 NSWLR 492 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 Foley v Hill (1848) 2 HL Cas 28; 9 ER 1002 Foskett v McKeown [2001] 1 AC 102 Government of India v Taylor [1955] AC 491 Giumelli v Giumelli (1999) 196 CLR 101 Gray v Johnston (1868) LR 3 HL 1 Huntington v Attrill [1893] AC 150 In Re Norway's Application (No 1 and 2) [1990] 1 AC 723 International Sales and Agencies Limited v Marcus [1982] 3 All ER 551 Koorootang Nominees Pty Ltd v ANZ Banking Group Limited [1998] 3 VR 16 Lee v Sankey (1873) LR 15 Eq 204 Lipkin Gorman v Karpnale Limited [1987] 1 WLR 987 Loucks v Standard Oil Co of New York (1918) 120 NE 198 Moore v Mitchell (1929) 30 F(2d) 600 Peter Buchanan Limited v McVey (1954) Ir R 89; [1955] AC 516 Polly Peck International plc v Nadir [1992] 4 All ER 769 Port of Brisbane Corporation v ANZ Securities Limited (No 2) [2003] 2 Qd R 661 Rasmanis v Jurewitsch (1969) 70 SR (NSW) 407 Re Diplock [1948] Ch 465 Rich v Australian Securities and Investments Commission [2003] NSWCA 342 Roxborough v Rothmans of Pall Mall Australia Limited (1999) 95 FCR 185 Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516 Schemmer v Property Resources Limited [1975] Ch 273 Scott v Scott (1963) 109 CLR 649 Spedding v Spedding (1913) 30 WN (NSW) 81 Stephens Travel Service International Pty Ltd v Qantas Airways Limited (1988) 13 NSWLR 331 Thomson v Clydesdale Bank Limited [1893] AC 282 United States of America v Inkley [1989] QB 255 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 Westpac Banking Corporation v Savin [1985] 2 NZLR 41 Young v Murphy [1996] 1 VR 279
PARTIES :	Robb Evans of Robb Evans & Associates European Bank Limited
FILE NUMBER(S):	CA 40359/03
COUNSEL:	A Martin SC / C Hodgekiss SC / M Hirschern (Appellant) T Bathurst QC / J Halley (Respondent)
SOLICITORS:	Deacons (Appellant) Baker & McKenzie (Respondent)

LOWER COURTJURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	4999/99
LOWER COURT JUDICIAL OFFICER :	Palmer J