WESTPAC NEW ZEALAND LIMITED AND TIMOTHY RENNER SARA-KATE HASTINGS JULIE STANTON
[2024] NZHC 3628
•2 December 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2024-404-228
[2024] NZHC 3628
BETWEEN WESTPAC NEW ZEALAND LIMITED
Plaintiff
AND
TIMOTHY RENNER
First Defendant
SARA-KATE HASTINGS
Second DefendantJULIE STANTON
Third Defendant
Hearing: 5 November 2024 Appearances:
No appearance required for Plaintiff A D Luck for First Defendant Second Defendant in Person
Third Defendant in Person
Judgment:
2 December 2024
JUDGMENT OF O’GORMAN J
This judgment was delivered by me on 2 December 2024 at 12 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
…………………………………
Solicitors:
Simpson Grierson, Auckland Meredith Connell, Auckland Hamilton Locke, Auckland
Copy to:
S-K Hastings, Second DefendantJ Stanton, Third Defendant
WESTPAC NEW ZEALAND LIMITED v RENNER [2024] NZHC 3628 [2 December 2024]
Introduction
[1] This is an interpleader proceeding commenced by a bank to determine who is entitled to funds in a bank account. The competing claimants to the funds are:
(a)the customer who held the account, Timothy Renner, who has used it to receive payments for selling cryptocurrency; and
(b)people who have been the victims of scams, resulting in their funds being paid into Mr Renner’s bank account to buy cryptocurrency.
[2] Unfortunately, the fraudster and recipient of the cryptocurrency cannot be located, so the fraud victims have been unable to achieve recovery that way.
[3] The facts involve a typical romance scam. The second and third defendants were separately duped by a man who called himself Mr Wilkinson. He met each of them using an online dating website and over time convinced each that they were in a romantic relationship. He sent gifts and courted them with poems, romantic songs and declarations of love. He said he intended to move to New Zealand, but that he temporarily needed money for the transition, including to access inheritance money overseas. The second defendant made payments of her own money at Mr Wilkinson’s direction into the third defendant’s bank account. The third defendant did as Mr Wilkinson directed and used those and other funds to purchase cryptocurrency from Mr Renner, then provided the digital wallet public and private keys to Mr Wilkinson. Both Mr Wilkinson and the cryptocurrency are now long gone.
[4] In advancing their claims against the funds in the bank account, the evidence and submissions of the second and third defendants were focused on establishing the nature and harm of Mr Wilkinson’s fraudulent conduct. None of that is disputed by Mr Renner. It is acknowledged that the second and third defendants are victims who have suffered significant financial loss from fraud, and resulting psychological damage of stress, depression and anxiety.
[5] However, Mr Wilkinson was the wrongdoer, not Mr Renner. The critical issue in this case is whether Mr Renner had actual or constructive knowledge of the fraud. Mr Wilkinson told the third defendant to purchase the cryptocurrency from Mr Renner, so the second and third defendants suspect that he must be involved with the fraudster in some way, and complicit with his scam.
[6] To the contrary, Mr Renner has provided evidence to substantiate that he has no connection whatsoever with the fraudster. Mr Renner’s sole dealings were with the third defendant, who assured Mr Renner that the funds were her own and she was not conducting the transactions for any other people (Mr Wilkinson coached her on what to say). Mr Renner relies on the well-established defence in equity of bona fide purchase for full value without notice, so the second and third defendants have no valid claim to the amount standing to Mr Renner’s credit in his bank account.
[7] As set out in this judgment, I accept Mr Renner’s arguments. As a seller of cryptocurrency, he has demonstrated that he implemented systems to identify when fraud or money laundering might be involved. He made reasonable inquiries in this case, and the answers did not give any indication that the third defendant was acting on behalf of others, using funds from others, or the victim of a scam. As someone innocent of the fraud, he was entitled to be paid for the cryptocurrency he sold in good faith.
[8] The second and third defendants no doubt have valid claims against Mr Wilkinson as the fraudster, but they would need to be pursued against him or his assets directly.
Interpleader facts
[9] Between 7 September 2021 and 4 March 2022, the second defendant made 12 transfers totalling $543,214 to the third defendant’s bank account.
[10] Between 15 February 2022 and 16 March 2022, the third defendant made 12 payments totalling $359,700 to Mr Renner’s bank account. She later paid him $1 to prove to him her account was no longer suspended.
[11]At the time it was terminated, Mr Renner’s account had a balance of
$777,262.08. Of that sum:
(a)Westpac determined that it had received adverse claims totalling
$564,522.58, and so transferred that sum to a suspense account; and
(b)Westpac returned the balance of $212,739.50 to Mr Renner.
[12]The $564,522.58 is comprised of:
(a)the $359,701 referred to above, paid by the third defendant for cryptocurrencies (using funds from the second defendant); and
(b)the balance of $204,822 from other parties who purchased cryptocurrencies from Mr Renner during the relevant period, but who did not ultimately pursue claims in this proceeding.
[13]In addition, the third defendant has purported to raise other claims totalling
$50,000 that do not trace into the presently frozen funds — for “$34.500-00 sent via his Westpac account”, and for credit card debt and interest incurred by Mr Wilkinson. These are outside the scope of this interpleader proceeding, and I see no basis for such claims against Mr Renner (who is not Mr Wilkinson), given my analysis of the interpleader issues as set out below.
Legal principles
Introduction
[14] A recent English case, D’Aloia v Persons Unknown Category A,1 is helpful for its consideration of legal principles that arise when considering scams in a cryptocurrency context. Before turning to those principles, it is important to appreciate that the facts and pleadings in D’Aloia were quite different.
1 D’Aloia v Persons Unknown Category A [2024] EWHC 2342 (Ch).
(a)The claimant, Mr D’Aloia, alleged that the first defendants fraudulently induced him to hand over cryptocurrency in the form of Circle and Tether (USDT) totalling around £2.5 million. The first defendants then passed that cryptocurrency through a number of blockchain wallets before it was withdrawn as fiat currency (that is, government-issued currency) by the seventh defendants. Polo, Gate and Bitkub (the Exchange Defendants) were the cryptocurrency exchanges with whom the seventh defendants were said to have held their various accounts.
(b)In a judgment dated 12 September 2024, the Deputy High Court Judge determined the claims against Bitkub.2 The Court determined that Mr D’Aloia has failed to show on the balance of probabilities that Bitkub had received anything from him.3 In any event, the USDT 400,000 that Bitkub had received had been paid away, and no claim was asserted against Bitkub in knowing receipt, so Mr D’Aloia’s breach of trust claim failed.4
(c)Were it not for the above pleading and evidential failings, the claim might have succeeded because the Court found that Bitkub did not have any defence of good faith purchaser for value without notice — Bitkub had actual notice of money laundering and inexplicably failed to apply its policy requiring the accounts to be blocked.5
Tracing and following
[15] As noted in D’Aloia, tracing is an identifying process, rather than a cause of action or remedy:6
Tracing is thus neither a claim nor 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 that property.
2 Mr D’Aloia’s claims against the other defendants were settled, struck out or due to be determined separately.
3 At [382].
4 At [383].
5 At [379]–[380].
6 At [183], quoting Foskett v McKeown [2001] 1 AC 102 (HL) at 127D.
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.
[16] The process of tracing therefore accompanies a cause of action, often in restitution for unjust enrichment. The “unjust” element requires a ground that the law recognises as calling for restitution.7 Recognised grounds include lack of consent, mistake, failure of basis, and illegality. Theft is another well-established basis for restitution,8 and fraud or scams can give rise to similar constructive trust entitlements.9
[17] “Tracing” in its narrow sense involves substituted assets, which is different in that respect from “following”.10
Tracing through mixed funds
[18] Tracing is needed to deal with a situation of money being paid into a bank account mixed with other money.11 Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. It does not continue as identifiable property. Rather, there is a debtor/creditor relationship between a bank and its customer, with the balance reflecting the outcome of debit and credit transactions.12 Accordingly, it is not usually possible to make an adverse claim against money itself.13
7 Investment Trust Companies v HMRC [2017] UKSC 29, [2018] AC 275 at [46]; and Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones on Unjust Enrichment (10th ed, 2022, Sweet & Maxwell, London) at [1-08]. This has been described in reverse as “the absence of any juristic reason for the enrichment”: Peter Twist, James Palmer and Marcus Pawson Laws of New Zealand Restitution at [9].
8 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL); and Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321.
9 D’Aloia v Persons Unknown Category A, above n 1, at [332]–[341], following Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669 (HL).
10 At [180], referencing Byers v Saudi National Bank [2023] UKSC 51 at [68]. See also Foskett v McKeown, above n 6, at 127B.
11 Money can be followed at common law into and out of a bank account and into the hands of a subsequent transferee, provided that it does not cease to be identifiable by being mixed with other money in the bank account derived from some other source: Agip (Africa) Ltd v Jackson [1990] Ch 265 at 285D-F, referencing Banque Belge pour l'Etranger v Hambrouck, above n 8.
12 Foskett v McKeown, above n 6, at 128B.
13 D’Aloia v Persons Unknown Category A, above n 1, at [183], referencing Foskett v McKeown, above n 6, at 127H.
[19] Equitable tracing nevertheless allows innocent parties to pursue their claims through bank accounts with mixed funds.14 As against the wrongdoer, the claimant has an option either to claim a proportionate share of a mixed fund or to enforce a lien upon it to secure the personal claim for misapplied money.15 If funds are mixed with those of other innocent victims, the position is quite different — innocent contributors must be treated equally so usually they all share rateably.16
[20]However, such claims are subject to any defences recognised in equity.
Defences
[21] Various defences may be available for a claim in unjust enrichment, including good faith change of position,17 consideration,18 and bona fide purchase for value without notice.19
[22] In this case, the focus is on the bona fide purchase defence. For such a defence, once it is established that the defendant provided consideration, usually no inquiry is made into the adequacy of the value that was exchanged.20 This is because the bona fide purchase defence aims to protect the security of certain classes of purchase transactions.21
14 At [185], referencing Foskett v McKeown, above n 6, at 128G. In contrast, tracing through mixed funds has been regarded as impermissible at common law, although the justification for such a distinction is recognised as hard to defend: see Byers v Saudi National Bank, above n 10, at [160]; and D’Aloia v Persons Unknown Category A, above n 1, at [196]–[200].
15 At [185], referencing Foskett v McKeown, above n 6, at 131G.
16 At [186], referencing Foskett v McKeown, above n 6, at 132D. In Ruscoe v Houchens [2024] NZHC 419 at [11] Palmer J notes that the traditional starting point of “first in, first out” is now exceptional.
17 D’Aloia v Persons Unknown Category A, above n 1, at [291]. In addition to the equitable change of position defence, there is a statutory one in the Property Law Act 2007, s 74B: See Laws of New Zealand Restitution, above n 7, at [17] and [93]–[96].
18 Laws of New Zealand Restitution, above n 7, at [98].
19 At [99].
20 At [99]; Goff & Jones on Unjust Enrichment, above n 7, at [29–09] and [29–13]; and Lipkin Gorman v Karpnale Ltd, above n 8, at 580–581 “…where bona fide purchase is invoked, no inquiry is made (in most cases) into the adequacy of the consideration”.
21 Goff & Jones on Unjust Enrichment, above n 7, at [29–14].
[23] Defendants relying on this defence must show not only that they had no actual notice, but they had no constructive notice of the equitable interest.22 A defendant is deemed to have constructive notice of matters that would have been known if reasonable inquiries had been made.23 Correspondingly, the concept of “good faith” can embrace a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty:24
…Greater difficulty may arise, however, in cases where the payee has grounds for believing that the payment may have been made by mistake, but cannot be sure. In such cases good faith may well dictate that an enquiry be made of the payer. The nature and extent of the enquiry called for will, of course, depend on the circumstances of the case…
[24] Similar issues of constructive knowledge arise in banking mandate cases, in which banks (subject to their contractual terms) have strong obligations to follow their client’s instructions unless they have actual knowledge of a breach of trust or if they are wilfully blind to that intention.25 In examining when suspicion amounts to dishonesty for the purposes of liability for dishonest assistance, the Supreme Court has held that the necessary state of mind could consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge.26
Analysis
Unjust enrichment factor
[25] In terms of the underlying basis for their claims, the second and third defendants refer to mistaken payment and the fact that the transfers were made based on fraud and misrepresentations by Mr Wilkinson. I readily accept that the second and third defendants have a basis for a claim for restitution in circumstances such as this, where the payments were induced by fraud.27
22 At [29–10].
23 At [29–10].
24 Niru Battery Manufacturing Co v Milestone Trading Ltd [2003] EWCA Civ 1446, [2004] QB 985 at [164].
25 Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 75 1 at [29].
26 At [26], adopting Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164 at [10]–[12].
27 See [16] above.
Tracing into bank account
[26] The evidence of bank transfers substantiates that funds amounting to $359,701 from the second defendant were paid through the bank account of the third defendant to Mr Renner, for the acquisition of cryptocurrencies. Thus, the second and third defendants have an equitable entitlement to trace the funds into the mixed account, subject to defences recognised in equity.
Defence of bona fide purchase
[27] For simplicity, it is only necessary to consider the defence of bona fide purchase for value without notice, but this will often coincide with similar defences of change of position and consideration.
[28] The first issue is whether the transactions qualify as a relevant type of property exchange. After extensive debate, it is now broadly accepted that cryptocurrencies are a form of property, actively traded in markets.28 Accordingly, I accept that a trade or sale and purchase transaction occurs when a person exchanges cryptocurrency for fiat currency. The seller of the cryptocurrency provides value and there is a “bona fide purchase” for the purposes of the defence, just as the seller of a car for money could so qualify.29
[29] Once it is established that consideration was provided, it is unnecessary to assess the adequacy of the value exchanged. Nevertheless, in this case it is clear that valuable consideration was provided. Mr Renner provided a total of 5.5516213 Bitcoin (BTC) across the various transactions.30 The price of a single Bitcoin fluctuates, but at the time the price was around NZD60,000 or more. The current price is now more than double that. In other words, from Mr Renner’s perspective, by undertaking these transactions he has given up the value of 5.5516213
28 Ruscoe v Cryptopia Ltd (in liq) [2020] NZHC 728, [2020] 2 NZLR 809 at [69], [120], [129] and [132]–[133]; and D’Aloia v Persons Unknown Category A, above n 1, at [173].
29 Another analogy can be made to a bank receiving funds which can be considered a “purchaser” for the purposes of the defence. In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch. 435 at [94] the Court said: “There is no dispute that they [the defendant banks] were ‘purchasers’ for value, in the sense that the money they received was used in partial discharge of Mr Cushnie’s secured liabilities to them”.
30 The operation of Bitcoin is summarised in Tulip Trading v Van der Laan [2023] EWCA Civ 83 at [21]–[25].
BTC. With hindsight, the net effect for him cannot be said to be an enrichment, compared with the position he would be in now if the transactions had not occurred.
[30] Accordingly, each transaction by Mr Renner was a purchase for value. That leaves the question of whether he acted in good faith, without actual or constructive notice of the fraud, when he sold those cryptocurrencies.
[31] I start with acknowledging that there is an increased risk of money laundering and fraud with cryptocurrency. Cryptocurrencies are uniquely suited to facilitate illicit behaviour, because such transactions may occur anonymously, outside traditional banking systems.31 On the other hand, the sale of cryptocurrency can be undertaken entirely legitimately. As noted on Financial Market Authority’s website, people may want to buy cryptocurrency as a speculative investment (to make a profit if the cryptocurrency increases in value), or to benefit from low (usually zero) transaction fees and faster processing compared with traditional banks. For these reasons, cryptocurrency is moving towards acceptance as a mainstream method of payment used by many merchants.
[32] Mr Renner acknowledges the risks and has given comprehensive evidence about the steps he takes as a matter of course to protect against being involved in money laundering or fraud when selling cryptocurrencies. He took those precautionary steps for these transactions with the third defendant (he never dealt with the second defendant, nor did he have any knowledge of or reason to suspect her involvement):
(a)The third defendant purchased cryptocurrencies from Mr Renner on multiple occasions prior to the transactions that are at issue in this proceeding. She first did so in May 2021, via a peer-to-peer (P2P) platform called Paxful. She transacted using an account that was verified with a New Zealand government-issued ID and a New Zealand phone number. She also sent Mr Renner photos of herself holding her licence and a piece of paper confirming her intention to purchase
31 Lida Ayoubi “Cryptocurrencies and consumer rights in New Zealand: Risky business” [2018] NZLJ 4:108.
Bitcoin and confirming that no-one had asked her to make the purchase. She confirmed her intentions in a telephone call. The third defendant continued to buy Bitcoin from Mr Renner in the months that followed.
(b)When doing so, she expressly stated that she was purchasing Bitcoin on her own account and for her own investment purposes, initially using some of the proceeds from the sale of her house, then using funds from that source as they matured from term deposits.
(c)When there was a succession of large transactions within a short period of time (within one week, including two on one day), Mr Renner again called to confirm this position and was reassured that the funds for the purchases had originally come from the sale of her house back in May 2021, and she was making the purchases “hoping for a quick gain”, not for anyone else.
(d)During the verification calls, Mr Renner specifically cautioned the third defendant not to give access to her Bitcoin to anyone else (expressly noting an instance of a woman who lost a significant sum in a romance scam). This response from the third defendant was typical: “Absolutely. It’s just common sense, isn’t it”.
(e)Reviewing the transcripts of the calls, I accept that the third defendant would have presented as genuine, confident, relaxed, mature, and competent to make financial decisions for herself to protect her own interests.
[33] The answers given by the third defendant throughout these transactions did not suggest that any fraud was involved. This contrasts with other instances referred to in Mr Renner’s evidence, when responses did not allay his concerns (for instance, when they say they are purchasing cryptocurrency for a boyfriend they have never met in person). In such different circumstances, Mr Renner has declined to transact, and he has notified banks and the police.
[34] The fact that Mr Wilkinson told the third defendant to purchase the cryptocurrency from Mr Renner does not suggest that Mr Renner was complicit in the fraud. It merely establishes that Mr Renner was known to be someone who sells cryptocurrency. The third defendant readily admitted that Mr Wilkinson coached her about how to lie to Mr Renner in a way that would not arouse suspicion, and this is what she did. None of that would have been necessary if Mr Renner were complicit.
[35] Accordingly, on the evidence before me, I accept that Mr Renner acted in good faith, genuinely believing that the third defendant was making investment purchases of cryptocurrency with her own funds. He made reasonable inquiries to assess whether money laundering or fraud might be involved, and the answers did not alert him to any such problems. On those facts, Mr Renner did not have any actual or constructive notice of the fraud, so he is entitled to rely on the bona fide purchase defence. This means that Mr Renner is beneficially entitled to the corresponding amounts credited to his bank account for selling the cryptocurrency. The second and third defendants’ claims to the funds in the Westpac account in this interpleader fail, because Mr Renner has a valid defence which has succeeded.
[36] Any remaining rights the second and third defendants may have against the fraudster and/or tracing through the cryptocurrency are outside the scope of this interpleader proceeding and would not involve Mr Renner.
Result
[37] I declare that Mr Renner has established his entitlement to the full amount of the disputed sums in the suspense account, along with any interest accrued on those sums.
[38] I order the plaintiff to lift the suspension and follow the directions of Mr Renner for payment of the amount standing in that account, save for $70,000 which may be retained pending determination of cost issues in this proceeding.
[39] I direct the parties to seek to reach agreement on costs by 16 December 2024, in which case a joint memorandum should be filed. If disputed issues remain, then any party seeking costs should file a memorandum by that date, and any reply memorandum should be filed by 31 January 2025. I will then determine costs on the papers and make orders for payment of the remaining $70,000.
O’Gorman J
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