Official Assignee as Liquidator of Financial Planning Limited (in liquidation) v Kloogh
[2023] NZHC 1054
•5 May 2023
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE
CIV-2022-412-6
[2023] NZHC 1054
BETWEEN THE OFFICIAL ASSIGNEE AS LIQUIDATOR OF FINANCIAL
PLANNING LIMITED (IN LIQUIDATION)
First PlaintiffAND
THE OFFICIAL ASSIGNEE AS LIQUIDATOR OF IMPACT
ENTERPRISES LIMITED (IN LIQUIDATION)
Second Plaintiff
AND
THE OFFICIAL ASSIGNEE IN BANKRUPTCY OF THE PROPERTY OF BARRY EDWARD KLOOGH
Third Plaintiff
AND
BARRY EDWARD KLOOGH (Bankrupt) and ANDERSON LLOYD TRUSTEEE
COMPANY (2013) LIMITED as trustees of the Barry Kloogh Family Trust
First Defendant
Parties continued over page
Hearing: 15 December 2022
Further amended statement of claim and further submissions received on 31 January 2023.
Appearances:
D M L Dingwall for Plaintiffs
J G O’Neill for Third Defendant (Excused) A W Belcher for Ms Spectra
Judgment:
5 May 2023
JUDGMENT OF DUNNINGHAM J
THE OFFICIAL ASSIGNEE AS LIQUIDATOR OF FINANCIAL PLANNING LIMITED (IN LIQ) v KLOOGH [2023] NZHC 1054 [5 May 2023]
AND SVIATLANA VLADMIROVNA SKVARNIK AND OND TRUSTEES
LIMITED as Trustees of the Lana Kloogh Family Trust
Second DefendantAND
O’NEILL DEVEREUX
Third Defendant
This judgment was delivered by me on 5 May 2023 at 10.30 am, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Introduction
[1] This is a claim by the Official Assignee (the Assignee) as liquidator of both Financial Planning Ltd (in liq) and Impact Enterprises Ltd (in liq), and as administrator of the bankrupt estate of Barry Edward Kloogh, on behalf of the victims of Mr Kloogh’s offending.
[2] Mr Kloogh operated a Ponzi scheme which defrauded approximately 81 clients out of nearly $16,000,000. He was charged in relation to this offending and sentenced to imprisonment in 2020. There has been virtually no recoveries for his victims.
[3] This proceeding concerns funds which were misappropriated by Mr Kloogh and used to facilitate property acquisitions for two family trusts, which have enjoyed capital gains. The plaintiffs say that both the stolen funds transferred to the trusts, and the gains made by the trusts, should be paid to Mr Kloogh’s victims rather than remain with the defendants, and they seek orders from the Court confirming this.
Background
[4] On 31 July 2020, Mr Kloogh was sentenced to eight years 10 months’ imprisonment on a range of charges, including charges of theft by a person in a special relationship, false accounting, false statement by a promoter, forgery and obtaining by deception.1
[5] On 29 August 2019, the Official Assignee (Assignee) was appointed liquidator of the two companies through which Mr Kloogh had carried on his Ponzi scheme: Financial Planning Ltd (FPL) and Impact Enterprises Ltd (IEL).
[6] On 18 November 2019, Mr Kloogh was adjudicated bankrupt on his own petition. The Assignee administered his bankruptcy.
[7] In the process of administering the liquidations of FPL and IEL and Mr Kloogh’s bankruptcy, the Assignee discovered that some funds that Mr Kloogh had misappropriated when conducting these businesses were used to purchase properties which were later owned by two trusts established by Mr Kloogh and his wife, Lana Kloogh, (who is now known as Svetlana Spectra).
[8] The properties have been sold and the net proceeds of sale, are currently held in the trust account of the third defendant, the law firm O’Neill Devereux. At the time of hearing the firm advised that the balance held in the firm’s trust account on behalf of the trustees of the Barry Kloogh Family Trust, the first defendant, is $233,350.53, and the balance held on behalf of the trustees of the Lana Kloogh Family Trust, the second defendant, is $233,579.67. Thus, the total amount held on behalf of both trusts as at 15 December 2022 is $466,930.20.
The orders sought
[9] The plaintiffs seek orders requiring the net proceeds of sale after administration expenses be paid to the first plaintiff to then distribute to Mr Kloogh’s victims, on the grounds that the first and second defendants have been enriched by Mr Kloogh’s offending and it would be unjust for them to retain those benefits.
1 Serious Fraud Office v Kloogh [2020] NZDC 15575.
[10]The legal basis relied on to support such orders are:
(a)a claim for monies had and received; or
(b)a claim that the funds are held on constructive trust for the victims.
[11] If the orders sought are made, the first plaintiff would ringfence those funds and distribute them to the victims of Mr Kloogh’s offending on a pari passu basis. Mr Dingwall notes that, even with those funds, distributions to the victims are not expected to exceed 2.5 cents on the dollar.
[12] Mr Kloogh consents to those orders being made, and there is no opposition from any of the other defendants. However, Mr Kloogh’s wife, Ms Spectra appears, in her personal capacity, claiming an interest in the sum of $35,000 held in the Lana Kloogh Family Trust. She does this on the grounds she contributed that sum to the purchase of a property which was then transferred to the trust and she had no knowledge of her former husband’s fraudulent activities.
The relevant financial transactions
[13] The financial transactions which give rise to this application are detailed in the affidavit of Robert Gordon McDonald affirmed on 18 January 2022, and further clarified in a supplementary affidavit affirmed on 10 June 2022 and in a third affidavit affirmed on 16 January 2023. Mr McDonald is the regional manager of the Insolvency and Trustee Service for the southern region of New Zealand and has been involved in administering the liquidations of FPL and IEL along with the bankruptcy of Mr Kloogh.
[14] In summary, Mr McDonald explains that Mr Kloogh was stealing funds from clients from 1993 until mid-2019 under the guise of acting as a financial advisor. The clients believed their funds were being deposited directly with investor platforms, and cheques would be written out to “Discovery Portfolio Services” or “Consilium Account”, being the names of the investor platforms. However, unbeknown to the investors, Mr Kloogh had named subaccounts of IEL’s bank account at the BNZ Bank as “Discovery Portfolio Services” and “Consilium Account”. Once he had an
investor’s cheque in his possession, he would use another stamp to add “Impact Enterprises Ltd” to the “Pay to” line of the cheque and thus was able to bank the cheque into one of IEL’s subaccounts and then use those funds for his own use.
[15] On 11 September 2014, Mr Kloogh and his wife purchased a property at 43 Joe Brown Avenue, Dunedin (Joe Brown Avenue) for $610,000. It was funded by a payment of $87,000 from Mr Kloogh, a payment of $35,000 from his wife, and a loan facility of $488,000 from a mortgagee company operated by ASB Bank Ltd.
[16] Mr McDonald has analysed the origin of the $87,000 which was provided by Mr Kloogh and concludes that at least $74,000 but probably $82,690 comprised funds stolen directly from clients. He identifies two sums of $45,000 and $29,000 which were taken from an IEL account which contained misappropriated client funds. He also identifies other sums which were already in one of Mr Kloogh’s ASB accounts which came from accounts used to operate various aspects of the Ponzi scheme. Some of these existing funds were also used to pay the deposit.
[17] Having considered the evidence, I am satisfied that the total of $82,690 comprised misappropriated client funds. This accords with Judge Crosbie’s observation at sentencing that “[e]very cent you have spent is effectively someone else’s”.2
[18] In early 2015, Mr Kloogh instructed the law firm Anderson Lloyd to establish trusts for himself and his wife. Relying on records from that law firm, Mr McDonald says that in December 2015:
(a)Mr Kloogh and his wife gifted their half shares of Joe Brown Avenue to the first and second defendant trusts respectively; and
(b)the first and second defendants purchased another property, 85 Conroys Road (Conroys Road), for $760,000.
2 At [38].
[19] A further amount of $71,806.18 which was taken from client funds was used for the deposit on Conroys Road, with the balance secured by a mortgage facility with the Co-operative Bank. At the same time, the mortgage originally taken out to buy Joe Brown Avenue was paid off.
[20] On 5 August 2016, Joe Brown Avenue was sold for $675,000. The net proceeds were used to reduce the debt to the Co-operative Bank and to purchase another property at 3 Highgrove, Dunedin.
[21] The property at 3 Highgrove was sold on 14 November 2018 and the sale proceeds used to reduce borrowing.
[22] On 5 November 2019, Conroys Road was sold by the Co-operative Bank as mortgagee sale and the sale proceeds of $1,115,959.13 were used to repay the loan facility at the Co-operative Bank. This left a surplus of $455,442.19 which was then transferred to the trust account of the third defendant.
[23] Mr McDonald also points out that, in addition to the amounts taken from client funds and used to pay the deposits on the property acquisitions, a total sum of $210,808 was paid to the Co-operative Bank as mortgage repayments, out of a sum of $256,149 which was transferred directly from the IEL account that Mr Kloogh used to operate his Ponzi scheme.
[24] Accordingly, I am satisfied that the following amounts of stolen client funds were transferred to the two trusts and used to acquire the properties or service loans on the properties:
(a)$82,690 which was used to purchase Joe Brown Avenue;
(b)$71,806.18 which was used to fund the purchase of Conroys Road; and
(c)$210,808 in loan repayments that were derived from transfers from the IEL account that held funds stolen from Mr Kloogh’s clients.
Claim for monies had and received
[25] The plaintiffs’ first claim against the defendants is for monies had and received. Mr Dingwall submits it would be unjust for the defendants to retain the money that was misappropriated by Mr Kloogh and any part of the capital gain made utilising that money. Mr Dingwall refers to the decision in Torbay Holdings Ltd v Napier, which provides the following useful summary of the elements of this cause of action:3
A claim for monies had and received is a personal restitutionary remedy based on the concept of unjust enrichment. It requires only receipt of money by a defendant who has no right to retain it or who has improperly disposed of it. The claim does not depend on proof of any wrongdoing or impropriety on the part of the recipient, or ongoing retention of the money or its value. The cause of action is complete when the money is received. Although based on the doctrine of unjust enrichment, the claim is not the same as a cause of action for unjust enrichment. Unjust enrichment is simply a term for the underpinning doctrine of law behind various restitutionary remedies.
[26] Other statements articulating the basis of a claim for monies had and received include Hudson v Robinson, where Lord Ellenborough CJ said:4
… an action for money had and received is maintainable wherever the money of one man has, without consideration, got into the pocket of another.
[27] Similarly, in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd, Lord Wright said:5
It is clear that any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep.
[28] Finally, the principles underlying this cause of action were endorsed in the decision of Lipkin Gorman v Karpnale Ltd, where the House of Lords unanimously stated that the basis of an action for money had and received is the principle of unjust enrichment and that an award of restitution is available subject only to a defence of change of position.6 In that case, a solicitor misappropriated funds from his firm’s trust account and gambled them at a club owned by the respondent. Despite some
3 Torbay Holdings Ltd v Napier [2015] NZHC 2477, [2015] NZAR 1839 at [164] (footnotes omitted).
4 Hudson v Robinson (1816) 4 M&S 475, 105 ER 910 (KB) at 911.
5 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL) at 61.
6 Lipkin Gorman v Karpnale Ltd, [1991] 2 AC 548 (HL).
wins, his net losses amounted to approximately £175,000. The firm successfully recovered those funds from the club on the basis that the club had been unjustly enriched by the solicitor’s payment to the club. Of relevance was the fact that the gambling contract was void so the club could not rely on having given good consideration for the payments. Importantly, the firm was entitled to recover against the club, despite the club having been entirely innocent of any wrongdoing.
The claim to capital gains on the misappropriated funds
[29] In most cases involving such claims, the plaintiff is simply seeking the return of the monies received or what remains of those funds. However, in the present case, the misappropriated funds were invested for gain. That raises the issue of whether a claim for monies had and received entitled the plaintiffs to receive not just the return of the misappropriated funds, but any gain to the defendants by the use of those funds. Pursuant to leave granted, the plaintiffs filed supplementary submissions on this point following the hearing.
[30] In their supplementary submissions, the plaintiffs submit there is authority for determining that the capital gains realised by the first and second defendants may also be recovered and distributed to the victims of Mr Kloogh’s fraud.
[31] In Trustee of the Property of F C Jones & Sons v Jones, the Court of Appeal of England and Wales held that misappropriated funds and the profits made using them may be recovered applying the principles of unjust enrichment.7 In that case, the plaintiff was the trustee in bankruptcy of a partnership. After the act of bankruptcy, but before adjudication, one of the partners withdrew £11,700 from an account of two of the partners and those funds transferred to his wife’s account with a commodity broker. She received two cheques from the brokers totalling £50,760 as profit. The trustee in bankruptcy claimed what remained of those funds as part of the partnership assets.8 The trial judge found that the wife held the money on constructive trust.9
7 Trustee of F C Jones v Jones [1997] Ch 159 (CA).
8 At 163.
9 At 164.
[32] On appeal, Millet LJ rejected this analysis, finding that Mr Jones had no legal title to transfer and therefore the payment of the cheques into her account was ineffective to pass legal title. Nevertheless, he held that the remaining profits were available to the trustee in bankruptcy in addition to the sum withdrawn, saying:10
If she made a profit, how could she have any claim to the profit made by the use of someone else’s money? In my judgment she could not. If she were to retain the profit made by the use of the trustee’s money, then, in the language of the modern law of restitution, she would be unjustly enriched at the expense of the trustee. If she were a constructive trustee of the money, a court of equity, as a court of conscience, would say that it was unconscionable for her to lay claim to the profit made by the use of her beneficiary’s money.
[33] Mr Dingwall submits that the position of the first and second defendants in the present case is analogous to Mrs Jones’ position in Jones. The first and second defendants are the recipients of misappropriated funds which were subsequently used to achieve a profit. The funds taken remained the property of the victims from whom they were stolen, as was any profit made on their use.
[34] Mr Dingwall also refers to the decision in Foskett v McKeown.11 In Foskett, the plaintiffs wished to purchase property in Portugal and Mr Murphy held their purchase money on express trust for that purpose. However, he used some of that money to pay the premiums on his own life insurance policy. Upon his death, Mrs Murphy and his children obtained the benefit of his life insurance payment.12 The plaintiffs claimed a share of the insurance proceeds in proportion to the contributions they had unknowingly made to the premiums.
[35] In that particular case, it was found that had the premiums not be paid, the insurance policy would not have lapsed, nor would the amount of the pay-out have changed. So, in those circumstances, it was not a claim to reverse unjust enrichment.13 However, the House of Lords nevertheless held that the plaintiffs had property rights in the fund and could elect between claiming a proportionate beneficial ownership or an equitable lien for the amount of the misapplied money, whichever was most
10 At 168.
11 Foskett v McKeown [2001] 1 AC 102 (HL).
12 At 107.
13 At 110 and 129.
advantageous to them.14 The analogy used was the example of a fraudster purchasing a winning lottery ticket in part using misappropriated funds.15 In such a case, the victim would be entitled to a proportionate share of the winnings. As a result, the majority awarded the plaintiffs a share of the insurance payout in proportion to their contribution to the payment of policy premiums.
The constructive trust claim
[36] After leave was granted to allow the plaintiffs to amend their pleadings to include a claim that the funds were subject to a constructive trust, Mr Dingwall argues that the same result is available under this alternate cause of action. While Mr Dingwall takes some time to explain why Mr Kloogh was in the position of a fiduciary and thus held the money on trust from the outset, the most straightforward argument he presents is that the courts have held that proceeds of theft will be held on constructive trust for the victims and the property is recoverable and traceable in equity.16
[37] A simple example of this is found in Black v S Freedman & Co, where Mr Black regularly stole from his employer and paid some of it into an account in his wife’s name.17 The High Court of Australia held that the stolen funds could be identified in the wife’s account and the employer could claim the return of them. O’Connor J stated:18
Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person’s hands. If, of course, that other person shows that it has come to him bona fide for valuable consideration, and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there was notice or not.
[38] Applying these observations, Mr Dingwall points out that Mr Kloogh’s victims did not intend to make payments to him, even as trustee. Rather, they believed his
14 At 130.
15 At 134 – 135.
16 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 (HL) at 716.
17 Black v S Freedman & Co (1910) 12 CLR 105 at 107.
18 At [110].
assurances that their payments were being made directly to legitimate investor platforms when this was not the case. As a consequence, Mr Kloogh held the stolen money on constructive trust for his clients, whether as a fiduciary, or simply as a thief, and accordingly the proceeds are traceable in equity to the trusts.19 As the trusts received the funds as a gift, they, too, can be required to return the funds and the capital gains earned on the funds.
[39] For either cause of action, it is submitted on behalf of the plaintiffs that the amounts stolen by Mr Kloogh and applied towards the three properties, and a proportionate share of the capital gain realised on those amounts, plus any interest accrued on them, should after payment of the plaintiffs’ fees and expenses, be paid to the victims of Mr Kloogh’s offending on a pari passu basis.
The position of Ms Spectra
[40] As already noted, Ms Spectra filed submissions claiming an interest in the amount of $35,000 in respect of claims against the trustees of the second defendant, namely the trustees of the Lana Kloogh Family Trust. She did so on the basis that the
$35,000 was contributed from her own money to the purchase of the property at Joe Brown Avenue, that the amount was still identifiable as funds held by the second defendant, and she was not complicit in and had no knowledge of the fraudulent activities of her husband, Mr Kloogh.
[41] The plaintiffs initially opposed her claim on the basis that although she contributed $35,000 to the Lana Kloogh Trust, in the years following that contribution she had otherwise been enriched by the receipt of misappropriated funds even if she did not know they were misappropriated. In that regard, the plaintiffs relied on the evidence of Mr McDonald to show that distributions of stolen funds were made to Ms Spectra, including to support her beauty therapy business and to pay rent on a property Ms Spectra was living in prior to them living together.
19 Westdeutsche Landesbank Girozentrale v Islington London Borough Council, above n 16; Foskett v McKeown, above n 11; Sinclair v Brougham [1914] AC 398 (HL) at 441–442; and Lipkin Gorman v Karpnale Ltd, above n 6.
[42] However, at the hearing, I queried how Ms Spectra could claim a personal interest in these funds when they had been gifted to the Lana Kloogh Family Trust. At best, that contribution (and any capital gains on it), would remain in the trust for the benefit of the beneficiaries of that trust.
[43] The parties subsequently accepted that Ms Spectra could claim no personal interest in the funds but, if the evidence that this contribution was made was accepted, then that sum, plus a proportionate share of the capital gain and interest on it, should remain in the Lana Kloogh Family Trust.
Discussion
[44] The causes of action advanced by the plaintiffs depend on the following factors being established:
(a)Mr Kloogh committed fraud by taking funds which were intended to be paid to investment platforms and instead placed them into bank accounts over which he had control;
(b)the funds held in the third defendant’s trust account (leaving aside for the moment Ms Spectra’s claim) represent the traceable proceeds of those stolen funds; and
(c)the first and second defendants received those funds as volunteers and not as bona fide purchasers for value without notice.
[45] None of these factors are contested and I am satisfied they are established based on Mr Kloogh’s convictions and the associated sentencing notes, along with the evidence provided in support of this application by Mr McDonald.
[46] Importantly, the trusts did not receive the payments in good faith for valuable consideration but as volunteers, so there is no impediment or defence to the trusts being required to make repayment under the principles in Black v Freedman or Foskett
v McKeown.20 The plaintiffs, on behalf of the victims, are simply seeking to recover misappropriated funds, and their traceable proceeds, from a third party recipient or volunteer, so I do not need to engage in the argument of whether there was an existing fiduciary relationship between Mr Kloogh and his victims.
[47] Leeming JA endorsed the principle in Black v Freedman in the Australian decision Fistar v Riverwood Legion and Community Club Ltd, saying:21
[39]But there can be no doubt that the position in Australia that a thief holds stolen property on trust is settled law. …
[40]It follows therefore that the victim of theft may have a variety of claims when a third party receives trust property. In practice, there may be claims based on the victim’s legal title to the property, and, because any dealing with trust property by the thief to a third party will be in breach of the trust, there may be equitable claims consequent upon that breach.
[41]However, if the recipient is a bona fide purchaser for value without notice, he or she is under no liability to a claimant whose title as equitable. …
[48] Similarly, in New Zealand, Black v Freedman was the authority relied on by Venning J to impose a trust over property wrongfully taken from an elderly woman using a power of attorney and received by a family trust of which the third defendants were trustees.22 Likewise, in “A Taxpayer” v Commissioner of Inland Revenue, the New Zealand Court of Appeal restated the principle in Black v Freedman saying “an embezzler is liable to return or repay the stolen property and the innocent party to an embezzlement retains the right to trace the property or its proceeds into the hands of the embezzler”.23
[49] In the present case, the first and second defendants are clearly volunteers, the funds being gifted to the trusts and, at least in respect of the first defendant, with Mr Koogh, as trustee, being aware of the source of the funds. I am satisfied the stolen funds can be returned to the victims.
20 Black v S Freedman & Co, above n 17; and Foskett v McKeown, above n 11.
21 Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81, (2016) 91 NSWLR 732.
22 Lines (as Administrator of the Estate of Hurihanganui) v Pikia [2013] NZHC 503 at [119].
23 “A Taxpayer” v Commissioner of Inland Revenue (1997) 18 NZTC 13, 350 (CA) at 13,358 citing
Black v S Freedman & Co, above n 17 and Lipkin Gorman v Karpnale Ltd, above n 6.
[50] The next issue is whether, rather than simply requiring the trust to refund the face value of the stolen money, they should also refund any gains made while using those funds. That question is readily answered by the decision in Foskett v McKeown.24 Any profit attributable to the use of that money should also be returned to the beneficial owners, the victims of Mr Kloogh’s offending.
[51] In respect of the funds used by Ms Spectra to purchase Joe Brown Avenue and traceable to the second defendant, I accept that must be treated separately from the funds which were received by that trust which were originally from the victims. Indeed, in their further submissions, the plaintiffs acknowledge that because Ms Spectra’s contribution is not tainted by Mr Kloogh’s offending, a proportionate share of the capital gain and interest should remain in the hands of that trust for the benefit of the beneficiaries of the trust. I agree, and the orders I make will reflect that position.
Orders
[52] As a consequence of my findings, and in the absence of any remaining objection by any party, including the trustees of the trusts, I make the following orders which reflect, in substance, the orders sought by the plaintiffs:
(a)payment is to be made to the second defendant of:
(i)$35,000 being the total amount of Ms Spectra’s contribution to that trust;
(ii)$4,819.06 of capital gain; and
(iii)all interest that has accrued on those amounts since 5 November 2019;
(b)payment is to be made to the first plaintiff of:
24 Foskett v McKeown, above n 11.
(i)$365,304.18 being the total money stolen by Mr Kloogh and applied towards the three properties; and
(ii)$50,318.95 being the capital gain realised on that amount; and
(iii)all interest that has accrued on those amounts since 5 November 2019;
(c)under s 284 of the Companies Act 1993, that on receipt of the funds payable to it, the first plaintiff is to distribute them as follows:
(i)first, to the plaintiffs’ fees and expenses properly incurred by him as liquidator and carrying out the duties and exercising the powers as liquidator, including the costs of this application, and his remuneration; and
(ii)to the victims identified by the first plaintiff as being the victims of Mr Kloogh’s Ponzi offending on a pari passu basis and pro-rated commensurately against their investment losses.
[53] Leave is reserved to revert to the Court should any matter have been overlooked or any difficulty arise in implementing these orders.
Solicitors:
D M L Dingwall for Official Assignee O’Neill Devereux, Dunedin
Copy To:
A W Belcher, Barrister
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