Commissioner of Police v Dotcom
[2015] NZHC 820
•23 April 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-000033 [2015] NZHC 820
BETWEEN COMMISSIONER OF POLICE
Applicant
AND
KIM DOTCOM First Respondent
BRAM VAN DER KOLK Second Respondent
MEGASTUFF LIMITED Third Respondent
TWENTIETH CENTURY FOX FILM CORPORATION, DISNEY ENTERPRISES, PARAMOUNT PICTURES CORPORATION, UNIVERSAL CITY STUDIOS PRODUCTION LLLP and WARNER BROS ENTERTAINMENT INC Interested Parties
MONA VERGA DOTCOM Interested Party
Hearing: 26 February 2015 Appearances:
D J Boldt and B F Fenton for Applicant
R M Mansfield and S L Cogan for First Respondent
P J K Spring for Second Respondent
No appearance for Third Respondent
A J Lloyd and N A Chamberlain for Mona Dotcom, an
Interested PartyM C Sumpter and L L Fraser for Twentieth Century Fox & Ors, Interested Parties
Judgment:
23 April 2015
JUDGMENT OF COURTNEY J [Reasons for order varying restraining orders]
COMMISSIONER OF POLICE v DOTCOM & OR [2015] NZHC 820 [23 April 2015]
Introduction
[1] Until 18 April 2015, Kim Dotcom’s assets were subject to restraining orders made by a US court and registered under the Mutual Assistance in Criminal Matters Act 1992 (MACMA). On 18 April 2015, before the orders expired, I issued a results judgment varying the order to allow Mr Dotcom access to restrained government
bonds.1 In this judgment I give the reasons for my decision.
Background
[2] The restraining orders were made in the context of criminal charges brought against Mr Dotcom in the US. In 2012 he was indicted on charges of copyright infringement and other serious offences arising from the operation of Megaupload Limited and he is currently defending extradition proceedings. The restrained assets included $10m in New Zealand government bonds. The restraining orders were later varied to allow Mr and Mrs Dotcom access to the bonds to use as security to raise
money for legal and living expenses.2 Approximately $5.4m was used for these
purposes.
[3] Leave was reserved to Mr Dotcom to apply for further directions varying the orders. In the present application Mr Dotcom sought to vary the restraining orders to allow him access to the remaining $4.6m of restrained bonds to meet his legal and living expenses, claiming that he had no money because all his assets were subject to the restraining orders.
[4] The Commissioner of Police opposed the application on the ground that Mr Dotcom has access to unrestrained assets from which he could meet his expenses, namely the assets of the Trust Me Trust of which Mr Dotcom was, until November 2104, a discretionary beneficiary, Appointor and director of its corporate trustee. The Commissioner asserted that the Trust Me Trust was a sham or,
alternatively, that Mr Dotcom’s powers as Appointor under the trust deed were
1 Commissioner of Police v Dotcom [2015] NZHC 761.
2 Commissioner of Police v Dotcom [2012] NZHC 2190.
tantamount to ownership and his purported relinquishing of those powers on
25 November 2014 was not effective.
[5] A group of film studios who are plaintiffs in separate civil proceedings against Mr Dotcom are interested parties in this proceeding. They supported the Commissioner’s position on the same grounds.3 In November 2014 the film studios had obtained an interim freezing order over the assets of the Trust Me Trust on the basis that it was reasonably arguable that Mr Dotcom was the beneficial owner of those assets.4 By the time the freezing order was made, however, Mr Dotcom had relinquished his status and powers under the trust deed.
Jurisdiction
[6] Under ss 28 and 33 to 36 of the Criminal Proceeds (Recovery) Act 2009 (CPRA), a person whose assets are restrained may seek orders allowing him or her access to the restrained assets for specified purposes. Some of these provisions apply to foreign restraining orders registered under MACMA.5
[7] The relevant provisions of s 28 CPRA are:
(1) A court may make a restraining order subject to any conditions the court thinks fit including, without limitation, conditions that provide for the following to be met out of a respondent's restrained property:
(a) the reasonable living costs of the respondent and any of his or her dependants:
(b) the reasonable business expenses of the respondent:
(c) the payment of any specified debt incurred by the respondent in good faith:
(d) any other expenses allowed by the court.
…
(3) In determining whether or not to make a restraining order subject to a condition, the court must have regard to the ability of a respondent to meet
3 Mrs Dotcom, also an interested party in this proceeding, initially opposed the application but withdrew her opposition on the day of the hearing.
4 Following the expiry of the restraining orders on 18 April 2015, Mr Dotcom’s previously
restrained assets also became subject to the interim freezing order by agreement.
5 Criminal Proceeds (Recovery) Act 2009, s 134(1)(d) and (g) – (j).
the reasonable living costs, expenses, or debt concerned out of property that is not restrained property.
[8] As Mr Dotcom’s property is restrained under a foreign restraining order, legal expenses fall within s 28(1)(d). I have already determined that these expenses are not subject to a reasonableness requirement.6
[9] Living expenses are, however, required to be reasonable. The Act does not specify any mechanism for determining what are reasonable living expenses. Reasonableness is an objective standard but the assessment of what is reasonable cannot be conducted in a vacuum; it requires context. In this regard I agree with the
observations that Heath J made in Solicitor-General v Darwish7 in relation to the
predecessor of s 28(1)(a):8
That provision recognises the underlying reality of the situation, namely that accused are entitled to the presumption of innocence, but that society ought not to be prejudiced by the use of restrained funds if, ultimately, it is proved that those funds were acquired through criminal activity.
[10] I note also that in Darwish Heath J took into account information derived from Statistics New Zealand regarding household expenses, which gave average weekly expenses by reference to different income brackets. The Judge made assessment of what were reasonable living expenses taking into account both that information and “the assets seized and the lifestyle expectations” of the family.9
[11] Mr Boldt, for the Commissioner, relied on Venning J’s decision in Commissioner v Yan, in which the Judge made an assessment of what he considered to be reasonable with less regard for the family’s previous standard of living, including declining to allow funds to meet private school fees and high
accommodation costs.10
[12] I consider that the correct approach is to make an assessment of what is reasonable having regard to the factors referred to by Heath J and the circumstances
in which the family were living prior to the assets being restrained. This is not to
6 Commissioner of Police v Dotcom (No 1) [2015] NZHC 458.
7 Solicitor-General v Darwish HC Auckland CIV-2004-404-1603, 24 November 2004.
8 Proceeds of Crime Act 1991, s 42(2).
9 At [11].
10 Commissioner of Police v Yan [2014] NZHC 3367.
suggest that a defendant whose assets are restrained can generally expect access to funds sufficient to maintain his or her previous lifestyle. However, a family’s financial and other commitments must be considered.
The issues arising
[13] The first issue before me was whether Mr Dotcom had access to the assets of the Trust Me Trust. This issue engaged the Commissioner’s arguments that the Trust Me Trust was a sham; that Mr Dotcom’s powers as Appointor were tantamount to ownership of the trust assets; and that his actions on 25 November 2014 amounted to equitable fraud. The second issue was whether, even if the Commissioner prevailed in these arguments, the assets of the Trust Me Trust were such as to enable Mr Dotcom to meet his legal costs and reasonable living expenses.
[14] I have concluded that Mr Dotcom does not have the ability to meet his legal and reasonable living expenses from trust assets because, on the evidence, those assets are not sufficiently liquid. The implication of my conclusion is that, even if I held that Mr Dotcom was the beneficial owner of those assets by accepting the arguments advanced by the Commissioner and the film studios, Mr Dotcom would still succeed in this application. For that reason, and those that I set out next, I have decided that I will not make a finding on the arguments as to Mr Dotcom’s beneficial ownership of trust assets, nor even express a preliminary view.
[15] The Trust Me Trust’s corporate trustee, Coatesville Trustee Services (CTS), was asked to file submissions. It invited me to not address the question of whether the Trust Me Trust was a sham. Subsequently the film studios also expressed reservations about this issue being determined in this application. When I delivered my first decision I was of the view that I should determine this issue but I have reflected further and conclude that I need not and should not determine it at this stage.
[16] First, although Mrs Dotcom (the director of the original trustee company and now director of CTS) was represented (though in a different capacity) and gave evidence, none of the minor beneficiaries (Mr and Mrs Dotcom’s children) were
represented. The effect of a finding of sham could have serious implications for their interests. Secondly, the validity of the Trust Me Trust is a central issue in the substantive application by the film studios for a freezing order. I was not specifically addressed on whether the film studios, as interested parties, would be regarded as parties to this application so as to create an issue estoppel in the freezing order proceedings. But whether or not that is so, they did not adduce evidence and I expect that their submissions on that substantive application would be more extensive than was the case in this application. I have concerns about the effect on that proceeding of a finding in the context of this application as to whether the Trust Me Trust is a sham.
[17] For much the same reason, I have decided that it is neither necessary nor appropriate to determine the nature of Mr Dotcom’s powers as Appointor and whether his actions on 25 November 2014 amounted to equitable fraud. These arguments were raised at the very end of the hearing and I permitted counsel to file further submissions, which they did. It is, however, unsatisfactory to deal with such a significant issue in this way, particularly since any finding would have the potential to effectively determine a key issue in the freezing order proceedings.
Reasons for allowing application
[18] The trust’s major asset is its shareholding in Mega Ltd, said to be worth more than $30m. In evidence Mr Dotcom said that there were difficulties in selling Mega shares because they were blocked from being sold until the planned listing of Mega, which is now scheduled for late May 2015 (though it is possible that this date will be pushed back). There was no evidence to the contrary.
[19] On 17 April 2015 the Commissioner’s counsel filed a memorandum seeking to challenge the evidence by reference to (unspecified) share sales and the terms of the share sale agreement with the company through which the listing is to be undertaken. Counsel submitted that, whilst the agreement appears to create a bar to share sales, it is capable of being waived and has been waived. There was no evidence accompanying the memorandum and no indication that any evidence could be obtained. I can determine this issue only on the basis of evidence adduced. I am
not prepared to find, on the information I have, that Mr Dotcom has access on a day- to-day basis to the substantial funds that his circumstances require.
[20] I have already held that Mr Dotcom’s provision for legal costs should not be subjected to a test of reasonableness.11 It is beyond dispute that Mr Dotcom’s fees have been very high. He claims that to December 2014 he had spent over $10m and at the time of the hearing of this application still owed his former lawyers some $2m. He is presently defending extradition proceedings for which he has engaged senior counsel. He also now faces the Commissioner’s recent application to register the
forfeiture orders. His estimate of ongoing legal fees was $2m-4m. If correct, a significant portion of the remaining government bonds will be taken up in legal fees.
[21] I turn, then, to the provision for living costs. Mr Boldt argued that Mr Dotcom’s claim for $186,864.84 for living expenses was excessive. Mr Dotcom was cross-examined closely on this aspect of his claim. He gave evidence of the substantial cost of providing accommodation and care for his children. He has the shared care of five children, two of whom are autistic and require additional care. I accept that the usual level of care enjoyed by these children is very high, with staff engaged for this purpose. But I am not satisfied that it is unreasonable.
[22] The children are discretionary beneficiaries of the Trust Me Trust. However, discretionary beneficiaries have no interest in trust property, only the right to be considered for distribution. Mr Dotcom could make a request of the trustee CTS (of which the directors are Mrs Dotcom, from whom Mr Dotcom is now separated, and Andrew Lewis) on behalf of the children but there is no certainty that it would produce the necessary funds within the necessary time; at the least it would require a variation of the freezing order. In any event, I have already concluded that the liquidity of the Trust Me Trust assets does not provide a sufficiently certain source of funds to meet the immediate day-to-day needs of this family.
[23] It is the costs associated with the house that Mr Dotcom occupies that have been the subject of the most criticism. The nature of the accommodation is luxurious
and the staff costs required to manage the house are high (though Mr Dotcom claims
11 Commissioner of Police v Dotcom [2015] NZHC 458.
to have significantly reduced the level of staff in recent times). However, there are practical considerations in requiring a change to more modest accommodation. The largest single expense is the rent, at $1m per annum, payable at $250,000 per quarter (approximately $80,000 per month). Mr Dotcom occupies the property pursuant to a lease which expires in February 2016. The lease was entered into in February 2013, when the family enjoyed a good income from the Trust Me Trust and well before the film studios applied for the freezing orders.
[24] I accept that the lease was a debt incurred by Mr Dotcom in good faith and which comes within s 28(1)(c). If he were to terminate the lease in order to find a more modest home, he would immediately be exposed to a significant contractual liability for the existing rental in addition to the costs of any new accommodation. Little would be saved by requiring Mr Dotcom to move into more modest accommodation pending the expiry of the lease; it is more likely that the total amount required to house Mr Dotcom and his children and meet his lease commitment would actually prove greater than simply remaining where he is. I therefore accept that, in the particular circumstances of this case, a figure of $80,000 per month is reasonable for accommodation.
[25] The rates and insurance (not specified) can be expected to be commensurate with the size and nature of the house. Likewise, the high cost of utilities are reasonable having regard to the house. I consider the maintenance costs relating to the grounds and pool to be reasonable.
[26] I accept that the items relating directly to Mr Dotcom’s children are
reasonable.
[27] The remaining items of significance are $15,000 for security, $35,000 for staff and $20,000 for general household expenses. I accept that, in Mr Dotcom’s rather unusual circumstances, security is necessary and that item should be allowed.
[28] The staff costs of $35,000 relate to eight staff members. Mr Dotcom gave evidence that his level of staffing at the house has been reduced significantly. However, he did not provide details of the particular staff members and nor was he
cross-examined on those details. He did, however, indicate that his staffing decisions were to some extent driven by concern for the welfare of the staff involved. I accept that a level of staffing is necessary. Mr Dotcom has responsibility for a large property, the shared care of five young children (two with special needs) and is dealing with significant litigation. It is not practical to suggest that staff are not needed. I consider, however, that five staff would be sufficient to assist with cleaning, cooking, shopping, managing the grounds and caring for the children. I allow $25,000 per month for staff.
[29] The claimed amount for general household expenses (groceries, fuel, maintenance, etc) is $20,000. Again, there were no specifics provided. However, the cost of running this large household will inevitably be expensive. I also note that Mr Dotcom’s budget does not include many items that he and the children would require over the course of a year such as shoes and clothing, haircuts and so on. However, on the basis that the children’s mother can be expected to contribute to some of these costs I consider that the figure of $20,000 is a little high and would reduce that to $15,000 per month.
[30] On these figures a reasonable figure for living expenses is $170,000 per month. Mr Dotcom may have access to that figure each month pending the expiry of the lease on the property. At that point I would expect that the position will be
reviewed.
P Courtney J
This judgment was delivered by Justice Courtney on 23 April 2015 at 4.45 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date……………………….
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