Commissioner of Police v Dotcom

[2015] NZHC 458

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-000033 [2015] NZHC 458

BETWEEN

COMMISSIONER OF POLICE

Applicant

AND

KIM DOTCOM First Respondent

BRAM VAN DER KOLK Second Respondent

TWENTIETH CENTURY FOX FILM CORPORATION, DISNEY ENTERPRISES INC, PARAMOUNT PICTURES CORPORATION, UNIVERSAL CITY STUDIOS PRODUCTION LLLP and WARNER BROS ENTERTAINMENT INC Interested Parties

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 A J Lloyd and N A Chamberlain for Mona Dotcom, an Interested Party M C Sumpter and L L Fraser for Twentieth Century Fox and Ors, Interested Parties
Judgment:	12 March 2015

JUDGMENT (1) OF COURTNEY J

[Variation of restraining orders to meet immediate legal expenses]

This judgment was delivered by Justice Courtney on 12 March 2015 at 4.30 pm

pursuant to R 11.5 of the High Court Rules

Registrar / Deputy Registrar

Date………………………..

COMMISSIONER OF POLICE v DOTCOM & OR [2015] NZHC 458 [12 March 2015]

Introduction

[1]      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 access to the restrained assets to meet specified expenses, including reasonable living costs and other expenses allowed by the court.  These provisions apply to foreign restraining orders  registered  under  the  Mutual  Assistance  in  Criminal  Matters  Act  1992

(MACMA).1  In determining whether to make such orders, the Court is required to

have regard to  the  ability of  the  person  to  meet  the reasonable living  costs  or expenses out of property that is not restrained property.2

[2]      Kim  Dotcom  is  a  person  whose  assets  are  subject  to  restraining  orders registered under MACMA.3    He is currently defending extradition proceedings brought by the United States Government in relation to copyright infringement and other serious offences.   The extradition proceedings are set down for a five-week trial starting on 2 June 2015.   Mr Dotcom says that he cannot be ready by then because he has no money to pay for either legal fees or living expenses.   He has

applied for an order allowing him to use restrained government bonds to meet these expenses.

[3]      The Commissioner of  Police opposes  the  application  on  the  ground  that Mr Dotcom has the ability to meet his expenses out of property that is not restrained, namely the assets of the Trust Me Trust.   Until November 2014 Dotcom was a discretionary beneficiary of this trust.  The Commissioner asserts that the Trust Me Trust is a sham and the deed by which Mr Dotcom purported to relinquish his status as a discretionary beneficiary ineffective, so that Mr Dotcom is the beneficial owner of the trust’s assets.

[4]      A group of film studios, who are interested parties in this proceeding, also oppose   the   application.4      They  have   commenced   civil   proceedings   against

1      Criminal Proceeds (Recovery) Act 2009, s 134(1)(d) and (g)-(j).

2      Criminal Proceeds (Recovery) Act 2009, s 28(3).

3      Commissioner of Police v Dotcom [2012] NZHC 634. These orders, registered under the Mutual

Assistance in Criminal Matters Act 1992, will expire on 18 April 2015.

4      Mrs Dotcom, also an interested party in this proceeding, initially opposed the application but withdrew her opposition on the day of the hearing.

Mr Dotcom and in November 2014 obtained a freezing order over the assets of the Trust Me Trust on the basis that it was reasonably arguable that the trust was a sham and Mr Dotcom was the beneficial owner of its assets.

[5]      I  have  decided  that  Mr  Dotcom  may  access  the  bonds  to  the  extent  of

$700,000 to meet immediate legal and living expenses.   Whether he should have further access to the bonds depends on the arguments raised regarding the Trust Me Trust that I will determine separately.  My reasons follow.

Background to the restraining orders

[6]      Restraining orders in respect of Mr Dotcom’s New Zealand assets were made in the United States following the return of the indictment in early 2012.   In a decision  delivered  on  18  April  2012,  Potter  J  registered  those  orders  under MACMA.5   The assets that were subject to the restraining orders included $10m in government bonds purchased by Mr Dotcom as a prerequisite for his immigration to New Zealand.  They will mature in April 2015 and, but for the restraining orders,

would be available to him then.

[7]      Potter J  subsequently varied the restraining orders to allow  Mr and  Mrs Dotcom access to $6m of the bonds to use as security to raise money for legal and living expenses.6    She put in place a procedure by which Mr Galbraith QC would supervise the payment of legal costs.  Approximately $5.4m of the bonds have been used to date.

[8]      Potter J reserved leave to Mr Dotcom to apply for further directions varying the  restraining  orders.    The  order  that  Mr  Dotcom  now  seeks  would  vary  the

restraining orders to allow him access to the remaining $4.6m of restrained bonds.

5      Commissioner of Police v Dotcom [2012] NZHC 634.

6      Commissioner of Police v Dotcom [2012] NZHC 2190.

Mr Dotcom  cannot  meet  his  immediate  legal  and  living  expenses  from  the property that is not restrained

Background to the Trust Me Trust

[9]      After the restraining orders were registered in 2012, Mr Dotcom began work to establish new businesses, Baboom Ltd and Mega Ltd, so that he could support his family from assets that were not restrained.  In July 2012 he established the Trust Me Trust as the vehicle to own those businesses.  Mr and Mrs Dotcom and their children were  discretionary beneficiaries.  Mr  Dotcom  held  the  power  of  appointment  of trustees and beneficiaries.   He appointed as trustee MD Corporate Trustee Ltd (MDCTL), of which Mrs Dotcom was the sole shareholder and director.  Mr Dotcom gifted some Baboom shares to the Trust Me Trust and subsequently the Trust subscribed for shares in both Mega Ltd and Baboom. The Baboom shares have since

been sold but the Trust Me Trust still owns 16.8 per cent of Mega.7    Those shares

have a current estimated value of about $31.6m.

[10]     Mr  and  Mrs  Dotcom  separated  in April  2014.  On  13  May,  Mr  Dotcom removed MDCTL and replaced it with Coatesville Trustee Services Ltd (CTS), a company of which he was the sole shareholder and director.   He also removed Mrs Dotcom as a beneficiary.  According to Mrs Dotcom, he took these steps over her protests.

[11]     In  September 2014  Mr  Dotcom  added  another  director  to  CTS,  solicitor Andrew Lewis, whom he described as an independent trustee.  I heard evidence from both Mr Dotcom and Mrs Dotcom regarding the administration of the trust.  I did not hear from Mr Lewis.

[12]     In November 2014 Mrs Dotcom applied to have CTS removed as the trustee and Mr Dotcom removed as the appointor.  The grounds were essentially the misuse by Mr Dotcom (through CTS) of the trust assets.  On 25 November 2014 Mr Dotcom settled  Mrs  Dotcom’s  application  by  a  Deed  of  Settlement.    Under  the  deed, Mr Dotcom relinquished his powers in respect of the Trust Me Trust to Mrs Dotcom

and his status as a discretionary beneficiary.  He also assigned his shares in CTS to

7     This figure comes from Mr Dotcom’s affidavit filed in support of this application.

her.  Before the deed was effected, however, the Trust Me Trust disposed of more than $600,000 in cash.

[13]     The  disposition  of  the  Trust  Me  Trust’s  cash  and  the  settlement  of Mrs Dotcom’s proceedings coincided with the film studios’ application for a freezing order over the Trust Me Trust’s assets.  By the time the freezing order was made on the afternoon of 25 November 2014, the trust assets comprised only the Mega shares, a debt owing on the sale of the Baboom shares of $250,000 and about $666 cash.

Ability to meet expenses from property that is not restrained

[14]     As I have noted, the Commissioner asserts that the Trust Me Trust is a sham and the Deed of Settlement ineffective.  I am satisfied that, even if the Commissioner is correct, Mr Dotcom does not have the ability to meet his immediate legal and living expenses from the trust’s assets.  As a result I do not deal with these issues at present.

[15]     Whether a person is able to meet expenses from unrestrained property must be determined by reference to the nature of the expenses and the nature of the unrestrained property.  If the expense in question is not an immediate one it may not matter that the property to which the person has access will take time to realise. Conversely, if the expense is one that must be met immediately he or she may not have the ability to meet the expense from the same property for the purposes of s 28(3).

[16]     Mr Dotcom’s need for funds to meet legal expenses is urgent; the fixture is less than three months away and extensive legal work will be required to prepare for it.   If Mr Dotcom cannot meet that immediate expense, either the fixture itself or Mr Dotcom’s defence will be jeopardised.

[17]     On the evidence before me the Trust Me Trust does not have assets from which Mr Dotcom could meet his immediate needs.  In an affidavit in support of this application Mr Dotcom said:

As at 25 November 2014 the balance of the assets of the Trust Me Trust were:

(a)       $666.74 in cash.

(b)       Approximately 16.8% of the shares in Mega Ltd (Mega); and

(c)       A debt of approximately $250,000 and a number of Mega shares owed the Trust Me Trust for the purchase of shares in Baboom Ltd.

[18]     In cross-examination Mr Dotcom was adamant that the Mega shareholding could not be sold until the company was listed.  He was not cross-examined on why that was, nor when listing might happen.  There was no other evidence on the point. It was put to Mr Dotcom that the shares could be used as security but Mr Dotcom did not accept that this was practical.  There was no evidence to the contrary.  There was no  evidence on  how  readily the debt  of $250,000  owing to  the  trust  might  be collected, nor whether the cash it held had increased since November 2014.

[19]     Further, even if I were to find that Mr Dotcom was the beneficial owner of the trust assets and the assets either included cash or could be realised to produce cash, there would still exist the barrier of the film studios’ freezing order.  Whilst I would regard frozen funds as “unrestrained” for the purposes of CPRA (this point was not argued), they could not be accessed without the freezing order being varied.

An application to vary the freezing order would be treated as urgent8 but one would

expect that, if opposed, it may require time to resolve.

[20]     I do not overlook that the film studios did offer to release funds from the freezing order to accommodate Mr Dotcom’s immediate needs.  However, it appears that the offer was for $100,000 and is no longer current.  Even if the film studios were to reinstate their offer, that amount would be inadequate for the substantial preparation and conduct of the long trial.

Are legal expenses funded from restrained assets required to be reasonable?

[21]     Section 28 CPRA provides that:

(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:

8      High Court Rules, r 32.8(2).

(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.

(2)       Despite subsection (1)(d), a court may not allow any legal expenses to be met out of a respondent's restrained property.

(emphasis added)

[22]     Although the use of restrained assets to meet legal expenses is specifically prohibited by s 28(2), the effect of s 134(d) is that the prohibition does not apply to property restrained under a foreign restraining order.9    It is therefore accepted that Mr Dotcom may apply under s 28(1)(d) for an order allowing him access to the bonds  for his  legal  expenses.    However,  the Commissioner argues  that  s  28(d) imports a requirement that “any other expenses” (in this case, legal) must be reasonable.

[23]     Potter J considered this issue when she made the order varying the restraining orders and concluded that there was no such requirement:10

Under s 28, the Court has a wide discretion to make a restraining order “subject to any conditions the court thinks fit, including, without limitation”, provision for the costs and expenses listed in the subsections to be met out of the restrained property.   To read in the word “reasonable” in s 28(1)(d) would significantly limit this wide discretion, and compelling reasons will be required to support its inclusion.  In this context, such reasons would include those which point towards the importance of the preservation of the State’s contingent interest in the restrained property and away from Mr Dotcom’s right to access of counsel of his choice.

Mr Dotcom’s rights under the NZBORA and the International Covenant on Civil and Political Rights further tip the balance in his favour.  The State’s contingent interest in the restrained property is of a punitive nature and limited to depriving Mr Dotcom of the fruits of his alleged offending.   In contrast, Mr Dotcom’s access to counsel is supported by his rights to natural justice, to be presumed innocent until proven guilty, and to consult and instruct  a  lawyer  and  to  have  adequate  time  and  facilities  to  prepare  a defence.   It is generally assumed that the right to access defence counsel

9      Under s 134(1)(d) Criminal Proceeds (Recovery) Act 2009, only s 28(1), (3) and (4) apply to foreign restraining orders.

10     Commissioner of Police v Dotcom [2012] NZHC 2190 at [43], [45] and [47].

includes the right to counsel of the defendant’s choice (though exceptions apply to legally-aided persons).

The contextual factors identified above are heavily weighted towards Mr Dotcom’s   right   of   access   to   counsel   of   his   choice   and   are   not counterbalanced by the State’s concern in preserving its contingent interest. Thus, in terms of the interpretation of s 28(1)(d), I do not consider that there are any strong principles that would direct the Court towards reading a reasonableness requirement into s 28(1)(d).

[24]     In reaching this conclusion Potter J considered the decisions in the Solicitor- General v Panzer11 and Director of Public Prosecutions v Vella.12   Potter J preferred the approach taken in Vella, a decision of the Supreme Court of South Australia that concerned a provision similar to s 28(1)(d), permitting a restraining order to “provide for payment  of  specified  expenditure or  expenditure of  a specified  kind  out  of property subject to the order”.   Questions reserved to the Court  in  Vella asked whether  that  provision  conferred  the  power  to  allow  for  the  payment  of  legal expenses and, if it did, in accordance with what rate those expenses should be paid. King CJ, with whom Millhouse J agreed, considered that the fundamental principle

relevant to the exercise of the Court’s power to authorise the payment of legal expenses was that:13

…  a  person  accused  of  a  crime  is  entitled  to  employ,  out  of  his  own resources,  the  legal  representation  of  his  choice.     The  fundamental importance   of   that   principle   is   emphasised   by   its   inclusion   in   the International Covenant on Civil and Political Rights to which Australia is a party.

…

We are not dealing in this case with property which may not be in truth the property of the accused person but may be the property of another.  Where the property the subject of the restraining order can be identified, at least prima   facie,   as   property  which  was  obtained   by  theft   or  in   other circumstances which left the victim’s title to the property intact, other considerations would apply.   The words of Kirby P in Director of Public

Prosecutions v Saxon14 apply to the present case:

“It is, ostensibly, [the accused’s] own property which is restrained by the orders made under the Act.  How he accumulated that property may be a matter of speculation.  Doubtless it may be the subject of evidence and argument as his criminal proceedings unfold.  But he

11     Solicitor-General v Panzer [2001] 1 NZLR 224 (HC).

12     Director of Public Prosecutions v Vella (1993) 61 SASR 379 (SASC).

13     At 381.

14     Director of Public Prosecutions v Saxon (1992) 28 NSWLR 263 at 274 (NSWCCA).

should not be deprived of the use of his property for the proper

defence of those proceedings unless the Act obliges such a course.”

[25]     King CJ rejected the argument that if the defendant were to be given access to his property at all for his defence, that access should be restricted to costs on some limited scale, by reason of the State’s contingent interest in the property arising under the statute:15

I do not think that that is the correct approach. The restrained property is not property of which the State has or may have been deprived by the alleged criminal activity, nor is it a fund which may be required to compensate the State in respect of any loss which it has sustained.   The purpose of the legislation is not restitution or compensation but the deprivation of an offender of the fruits of his criminal activity.   The financial benefit to the State accruing from a forfeiture order is a mere by-product of that legislative purpose.   The legislative purpose is not defeated by an accused person’s access to his property to the extent necessary to secure legal representation of his choice.  If he is found not guilty, he has merely used his own money. If he is convicted and an order for forfeiture is made, the amount of the legal expenses, although not available for forfeiture, is nevertheless money of which the offender has been deprived by the proceedings against him, by reason of the necessity of paying for his defence.   An expensive defence, which does not go to the point of being wasteful, is not to be thought of as a luxury to which an accused person is not entitled out of property subject to forfeiture.

In general, I consider that the defendant should be entitled to engage the solicitor and counsel of his choice and to have his defence conducted in the manner which he and his legal advisers wish.  He should have access to his property to the degree necessary for that purpose, that is to say to the degree necessary to pay the fees ordinarily charged by the solicitor and counsel of choice for a case of this kind.

I do not think that it is the role of the court to regulate the fees charged on the basis of what it considers to be reasonable.  I think that the role of the court should be restricted to ensuring that the property potentially liable to forfeiture is not depleted wastefully or dishonestly.  It therefore has a role in relation to the number of lawyers employed on the case, to ensure that they are not wastefully employed.  It would be proper for the judge to determine whether it would be wasteful to employ more than two lawyers, or whether the defendant would not be sufficiently represented by either counsel and solicitor or two counsel supported by a solicitor’s clerk.   It would be necessary for the judge to be satisfied of the bona fides of the fees charged, that is to say that they are the fees ordinarily charged for that class of work by the counsel and solicitor chosen by the defendant.   Subject to these considerations of waste and bona fides, I think that the defendant ought to be left to negotiate his own agreements with his legal representatives.

(emphasis added)

15     At 382-383.

[26]     Mr Boldt, for the Commissioner, submitted that the Court should read into s

28(1)(d) a requirement for legal expenses to be reasonable, inviting me to take a different view from that taken by Potter J.  He relied on the decision of a Full Court of this Court in Panzer.

[27]     Panzer was decided under the predecessor to CPRA, the Proceeds of Crime Act 1991, which specifically limited orders allowing the use of restrained property for legal expenses to “[T]he person’s reasonable expenses in defending any criminal proceedings”. Under this wording the issue was not whether legal expenses should be subject to a requirement of reasonableness but, given that such a requirement existed, how such expenses should be assessed. As a result, the decision that the base Crown Solicitors’ fee provided for in the Crown Solicitors Regulations was the appropriate guideline for determining what reasonable legal fees would be is not apt in this case. In fairness, the Commissioner does not suggest that Mr Dotcom should be constrained in the quantification of legal fees by the Crown Solicitors Regulations but does maintain that any legal fees permitted to be paid from restrained assets must be reasonable.

[28]     I consider that the approach taken in Vella and followed by Potter J was correct.  It is not for the Court to impose any constraint on expenditure for legal fees other than that the restrained funds should not be depleted wastefully or dishonestly. Mr Dotcom has, as Potter J discussed, rights under the New Zealand Bill of Rights Act 1990 and under the International Covenant on Civil and Political Rights.  These

rights, and in particular, his rights to natural justice,16 to be presumed innocent until

proven guilty,17  to consult and instruct a lawyer and to have adequate time and facilities  to  prepare a defence18   cannot  be assured  without  the funds to  engage appropriate counsel for a matter of this gravity.

[29]     In New Zealand there is a constraint imposed indirectly by r 9 of the Lawyers and  Conveyancers Act  (Lawyers:  Conduct  and  Client  Care)  Rules  2008,  which prohibits a lawyer from charging more than a fee that is fair and reasonable for the

services provided, having regard to specified factors.  So whilst it is not for the Court

16     Section 27(1).

17     Section 25(c).

18     Section 24(c) and (d).

to impose a specific requirement of reasonableness, the effect of these rules is that fees rendered must be reasonable.   However, that is a matter between Mr Dotcom and his advisers, not one over which the Court can exert control in relation to restrained funds accessed for this purpose.

Should the validity of the Trust Me Trust be determined in this application?

[30]     Mr Lloyd, for Mrs Dotcom, argued that I should not, and perhaps could not, determine the validity of the Trust Me Trust in the context of this application because the trustee, CTS, was not a party to the application and although Mrs Dotcom had given evidence she had not done so in her capacity as a trustee.

[31]     It was clear from the papers filed on behalf of both the Commissioner and the film studios that the validity of the trust was being put in issue, with the Commissioner asserting that the trust’s assets had always been and still were beneficially owned by Mr Dotcom.   CTS, as the trustee, had notice of the issue because Mrs Dotcom participated in the application as an interested party.  When she gave evidence it was as the Commissioner’s witness and she was questioned only about the administration of the Trust Me Trust.   Had CTS wished, it could have sought to be heard as an interested party.  Indeed, that may have been a prudent step given the potential effect on the beneficiaries of the trust of any finding regarding its validity.

[32]     I consider that I must determine the issues regarding the Trust Me Trust. However, I will allow CTS the opportunity to make submissions if there are matters it wishes to raise that have not already been covered by the submissions made on behalf of Mr Dotcom and Mrs Dotcom.

Summary and result

[33]     The Commissioner acknowledges that Mr Dotcom must have funds for legal and living expenses.  That need is an immediate one.  I am satisfied that Mr Dotcom is not able to meet his immediate expenses from unrestrained property and that the only practicable source of funds is the restrained bonds.  I therefore order that:

(a)      The restraining orders are varied to allow Mr Dotcom access to the government bonds to meet immediate legal and living expenses up to

$700,000.

(b)The regime that Potter J put in place for supervising the payment of legal fees by Mr Galbraith QC will continue.19

[34]     Whether Mr Dotcom can meet further expenses from the restrained bonds will depend on the status of the Trust Me Trust and the Deed of Settlement.   In addition, there is a question as to whether the children’s living expenses, which account for the majority of the costs described by Mr Dotcom, should be met from the trust’s assets. In relation to these issues I direct that:

(a)      CTS be served with the documents filed in this proceeding, including counsel’s submissions;

(b)CTS may file submissions within seven days. If it wishes to adduce evidence it should file any affidavits within the same time period. If matters are raised that require the Commissioner or the film studios to respond (beyond the submissions they have already made), they may do so within a further seven days.

[35]     The question of costs should await determination of the remaining issues.

P Courtney J

19     Mr Galbraith has confirmed to Mr Mansfield that he is willing to undertake this task.   If the position changes counsel or Mr Galbraith should advise the Court.