=============================================================== ========== Date: Tue, 18 Jan 2005 17:47:02 +1300 Reply-To: Richard Sutton Sender: Enrichment - Restitution & Unjust Enrichment Legal Issues From: Richard Sutton Subject: Re: bank in a quandary In-Reply-To: Mime-Version: 1.0 Content-Type: text/plain; charset="us-ascii" ; format="flowed" Yes, it is an interesting case. It is noted and supported by Donald Dugdale in (2004) NZ Business Law Review 294, who contends (as I understand him) that the court should have gone even further in limiting the claimant's rights - if he has a plausible claim, this will justify a temporary injunction and he should get one, rather than putting everyone at risk by merely signifying an objection. Anyway, findings of Bank liability should be rare. He cites an early HL case, Gray v Johnston (1868) 3 HLC 1, as well as more recent authority indicating that banks are expected to trust their own customers. It will be seen that the reasoning, both in the judgments and in the Case Note, assumes that the whole thing has to be settled in the world of contract. The starting point is not the bank's original receipt of the money (after all, it has been recycled through two acts of bona fide purchase between Bank and customer since then, before the Bank had any idea that anything was wrong). It is the Bank's duty to comply with the terms of its banking contract. Why? The explanation seems to be that the case was one of "simple repatriation into the account from which the cheque was sourced" ([pars [13], [42]). But that doesn't change the origin of the money, or any equity that would attach to the customer's money when it was first paid into the bank, and continued to attach to it as it changed its form. Be that as it may, having reached that point it is logical that the only thing which will discharge the Bank from its duty to its customer is if the Bank knows facts showing that it is participating in some dishonest action against a third party - the classic illegality defence to a contract. And the claimant who wants to stop the payment being made to the customer, stands liable (if he is wrong) to an action for wrongful interference with the contract between the Bank and its customer (paras [3], [6]). To me, the other interesting thing is that in arranging the two payments the customer's manager appears to have had things to answer for. If his own company owned the money outright and had nothing to do with the claimant's operation (as he said when questioned by the bank) what business did he have tendering a bank cheque obtained with its funds, to the claimant's creditors? (See at para [57]) If this were a matter of property protection, a defence which smells of "I knew he was swindling someone, but I was mistaken about who it was" doesn't normally have much appeal. Here, the bank was expected to place a considerable degree of trust in its own customer, assuming contrition rather than some new wrongdoing. So the court's response here was markedly different from what we have seen elsewhere. What is it about this case which put it into the world of contract? Why does it not belong in (1) the world of restitution (eg, money paid to a bank by mistake, where the bank must advance the "ministerial receipt" defence, which is defeated by notice of the claim); or (2) the world of property and tracing? If (as it appears) there is no good ground for distinction, well then should not all cases of bank receipt be evaluated solely by reference to the world of contract? The bank's receipt of the money is never gratuitous. The receipt is part of a transaction which is transformed almost immediately into an obligation in debt to the customer, with an attendant duty to repay the money on demand. The customer's strong reliance interest leaves no room for squeamishness about the source of the money. So perhaps the Bank has a bona fide purchaser defence from the outset, with only such limitations on repayment as are envisaged in IML v Nat Bank? Is this the answer to Lionel's concerns? Richard >Here is a case from last year which might spark some discussion: US >International Marketing Ltd v. National Bank of NZ, [2004] 1 NZLR 589 >(CA). The plaintiff had two bank accounts with the defendant. One fine >day it bought a bank cheque for $15,000 payable to the High Court, in >order to try to stop the liquidation of another company, P Ltd. >Although these funds were tendered through counsel, P Ltd. went into >liquidation anyway so the cheque was not paid into court. The plaintiff >re-negotiated the cheque back into the same account from which funds >had been withdrawn to purchase it. The next day, P Ltd by its lawyers >wrote to the bank claiming that the funds previously embodied in the >cheque belonged to P Ltd and asking the bank to freeze the funds >pending P Ltd's attempt to get an injunction. Principals of the >plaintiff found that they could not operate either of the plaintiff's >accounts. Finally the plaintiff sent a letter to the bank indicating >that a business opportunity overseas would be lost if the plaintiff >could not access $10,000 from its account, and the plaintiff would hold >the bank liable for such losses if the accounts were not unfrozen. The >bank stood its ground and refused to pay. Later that day the court >order was indeed made, and the bank paid the money into court. The >order was discharged some months later. Now the plaintiff sued the bank >for breach of the banking contract, for its refusal to pay on demand, >claiming consequential losses of $731,000. The bank defended on the >ground that it did not have to pay if paying would put it in jeopardy >of being a dishonest assistant in a breach of trust. Held that the bank >was in breach of contract and should have paid (the quantum of >liability was separated by consent and the court seems to have had some >doubts about the lost business opportunity). A banker would be >justified in refusing to pay its customer only if to do so would be >dishonest (with the additional reference by Tipping J to the idea of >whether it would appear dishonest to a reasonable banker). > >Note that the Lexis version does not seem to mark where the judgments >begin and end. Tipping J is [1]-[22]; Anderson J is [23]-[76]; >Glazebrook J is [77]-[79]. The CA has refused leave to appeal to the PC >- I don't know whether the PC can itself be asked for leave to appeal? > >Is it right, and if so does it square with strict liability plus >defence of change of position for banks who receive trust money? The >bank clearly knew that P Ltd might later establish that the money was >held in trust for it by the plaintiff, and might well have been aware >that there is support for strict liability for receipt of trust >property, mitigated by defences. But could the bank have pleaded change >of position if it had paid out in full knowledge of the pending claim? >The court's decision that the bank had to pay seems to turn largely on >the holding that an honest bank is not in danger of liability to the 3d >party (P Ltd) under dishonest assistance. There was some mention in the >bank's submissions of liability for receipt, but if the bank's >liability there were strict, it seems much harder to require the bank >to pay its customer and cross its fingers that such payment will give >it a defence. The best hope would be to argue that the bank never >received the $15,000 at all, since it went into a bank account in >credit; but that is a difficult and contested bit of law. > >Lionel > >____________________________________________________________________ >This message was delivered through the Restitution Discussion Group, an >international internet LISTSERV devoted to all aspects of the law of >unjust enrichment. To subscribe, send "subscribe enrichment" in the >body of a message to . To unsubscribe, send >"signoff enrichment" to the same address. To make a posting to all >group members, send to . The list is run by >Lionel Smith of McGill University, . -- ***************************************** Richard Sutton Professor Faculty of Law University of Otago PO Box 56 Dunedin New Zealand phone: ++(64) (03) 479 8845. fax:(03) 479 8855 hm phone: ++ (64) (03) 4672-874 hm e- mail: kandr.sutton@xtra.co.nz ____________________________________________________________________ This message was delivered through the Restitution Discussion Group, an international internet LISTSERV devoted to all aspects of the law of unjust enrichment. To subscribe, send "subscribe enrichment" in the body of a message to . To unsubscribe, send "signoff enrichment" to the same address. To make a posting to all group members, send to . The list is run by Lionel Smith of McGill University, . =============================================================== ========== Date: Wed, 19 Jan 2005 09:25:30 +0000 Reply-To: Charles Mitchell Sender: Enrichment - Restitution & Unjust Enrichment Legal Issues From: Charles Mitchell Mime-Version: 1.0 Content-Type: text/plain; charset="us-ascii"; format=flowed Members of the group will find much to interest them in Monica Chowdry "Unjust Enrichment and Section 80(3) of the Value Added Tax Act 1994" [2004] BTR 620. Declaration of interest: Monica is my colleague here at King's. But still, I think it's a great piece! Charles Professor Charles Mitchell School of Law King's College London Strand London WC2R 2LS tel: 020 7848 2290 fax: 020 7848 2465 ____________________________________________________________________ This message was delivered through the Restitution Discussion Group, an international internet LISTSERV devoted to all aspects of the law of unjust enrichment. To subscribe, send "subscribe enrichment" in the body of a message to . To unsubscribe, send "signoff enrichment" to the same address. To make a posting to all group members, send to . The list is run by Lionel Smith of McGill University, . =============================================================== ========== Date: Wed, 19 Jan 2005 06:25:01 -0500 Reply-To: Martin Laforet Sender: Enrichment - Restitution & Unjust Enrichment Legal Issues From: Martin Laforet Subject: Ponzi scheme MIME-Version: 1.0 Content-Type: multipart/alternative; boundary="----=_NextPart_000_0027_01C4FDEF.9B000F60" This is a multi-part message in MIME format. ------=_NextPart_000_0027_01C4FDEF.9B000F60 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable At 06:46 PM 7/29/2004 -0400, Martin Laforet wrote: Here is a case that we could debate and discuss. It concerns a = unliscenced person who took in a total of three million dollars from = investors and deposited it all in a central bank account. In return she = would issue statements as she was supposedly buying and selling stocks = for these investors. At the same time she was writing cheques out of the = same account to pay other people off who decided to withdraw some of = their supposed profits. The whole thing lasted approximately three years = until all assets were frozen by the OSC. All of this occurred = approximately eight years ago. In the end the mastermind behind this = scheme went to prison for three months. It was determined that, other = then some silver and gold certificates, no securities were ever = purchased. None of her inside people were ever convicted of any crime = even though they knew what was going on at the time. There were a few = unsuspecting investors who were encouraged to go out and invite other = people to invest in the scheme as well but none of these people were = ever convicted of any wrongdoing either. The trustee in bankrupcy was = able to recuperate approximately one million dollars initially. The = trustee also threaten legal action (constructive trust resulting in = unjust enrichment) against all of those who collected more money then = they had originally invested. The problem is that the accounting was a = nightmare and it is difficult to trace some of the funds so the trustee = in bankruptcy is still not exactly sure who owes what after eight years. = The question is that after all of this time do the investors who lost = money have any claim (in the laws of unjust enrichment through the = trustee in bankruptcy) to money paid out to investors who profited by = taking more than their original investment out of the phoney company.=20 Regards, Mark From: Lionel Smith=20 To: ENRICHMENT@LISTS.MCGILL.CA=20 Sent: Tuesday, July 29, 2004 8:16 PM Subject: Re: [RDG:] Ponzi scheme These cases are fiendishly complicated. You implicate at least the = following issues: -when a later investor is paid out of funds in the hands of the = fraudster, are those funds traceable proceeds of the investments of an = earlier investor(s)? -if so, does the earlier investor have a debtor-creditor or = trustee-beneficiary relationship with the fraudster? a question of fact, = which in turn may lead to an issue whether a fraudulently induced = contract has been avoided, and if so, when; -assuming an earlier investor shows a trust and can trace to the = payment to the later investor, nonetheless can the later investor show = that s/he was a good faith purchaser of a legal interest for value = without notice? although 'value' for this defence must be 'new value', = still the present discharge of an antecedent debt IS new value, a subtle = distinction which can keep one up at night; -but even if not, can the trustee show that the payment to the later = investor was a fraudulent/voidable preference? and if so, who benefits? = seemingly, NOT any trust beneficiary who can trace to that payment, but = all unsecured creditors. Few of the reported cases are impressively argued and reasoned. These = cases are best settled by agreement because the professional costs in = litigating all those issues to resolution will devour the assets = remaining. There is some discussion of this at the very end of the Law = of Tracing (1997) but it ends rather suddenly as it all got too = difficult for me. There is probably a long article or a book in it. Lionel =20 Sorry that I didn't get back to you sooner on this as I had hoped. In = answer to your questions I feel that I have left too much out so I will = expand on the details of this case: The bankrupt's business was a sole proprietorship which as a business = consisted of obtaining money from more than 800 people purporting to = invest the sums in the stock market and other enterprises and then = paying back the investors on their investments after deducting fees. The = bankrupt was technical in a fiduciary relationship with all of the = investors as she had total control of the money which they had deposited = with her (she issued account opening statements with investment = agreements). The bankrupt did not segregate investor's money from her = own money nor did she segregate investor's monies from each other. The = bankrupt did place some of the money entrusted to her in the investment = firms of Nesbitt Burns and Glendale securities. However, it was later = revealed that neither of these firms made payment of funds of profit to = the bankrupt. The bankrupt eventually plead to seven offenses under the = Criminal Code of Canada. The bankrupt further confessed that she did not = receive any payment of funds from investment firms but rather that funds = received from later investors were used to satisfy earning and dividends = promised to earlier investors.It was determined that a large protion of = the monies received by the bankrupt was never invested but was converted = for personal use and benefit of herself. The bankrupt lured persons to = invest by issuing fictitious account reports to her investment clients = and a number of clients received their money back and in some cases = profited handsomely. These handsome profits caused word of her = investment prowess to spread resulting in additional investors.=20 The trustee in bankruptcy is of the opinion:=20 That the payments made to those who profited handsomely, is subject to = a constructive trust wherein the recipients of the money holds the funds = in trust for the trustee.=20 That monies paid to investors who profited came soley from funds paid = by other investors to the bankrupt and as such should be repaid by an = Order of restitution. In the end some of the proceeds are traceable while some are more = difficult.=20 Hope this expansion answers your questions Mark _________________________________________________________________ ------=_NextPart_000_0027_01C4FDEF.9B000F60 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable
 At 06:46 PM 7/29/2004 -0400, Martin Laforet wrote:
Here is a case that we could debate = and discuss.=20 It concerns a unliscenced person who took in a total of three million = dollars=20 from investors and deposited it all in a central bank account. In = return she=20 would issue statements as she was supposedly buying and selling stocks = for=20 these investors. At the same time she was writing cheques out of the = same=20 account to pay other people off who decided to withdraw some of their = supposed=20 profits. The whole thing lasted approximately three years until all = assets=20 were frozen by the OSC. All of this occurred approximately eight years = ago. In=20 the end the mastermind behind this scheme went to prison for three = months. It=20 was determined that, other then some silver and gold certificates, no=20 securities were ever purchased. None of her inside people were ever = convicted=20 of any crime even though they knew what was going on at the time. = There were a=20 few unsuspecting investors who were encouraged to go out and invite = other=20 people to invest in the scheme as well but none of these people were = ever=20 convicted of any wrongdoing either. The trustee in bankrupcy was able = to=20 recuperate approximately one million dollars initially. The trustee = also =20 threaten legal action (constructive trust resulting in unjust = enrichment)=20 against all of those who collected more money then they had originally = invested. The problem is that the accounting was a nightmare and it is = difficult to trace some of the funds so the trustee in bankruptcy is = still not=20 exactly sure who owes what after eight years. The question is that = after all=20 of this time do the investors who lost money have any claim (in the = laws=20 of unjust enrichment through the trustee in bankruptcy) to money = paid out=20 to investors who profited by taking more than their original = investment out of=20 the phoney company.

Regards, = Mark
From:=20 Lionel=20 Smith
Sent: Tuesday, July 29, 2004 = 8:16=20 PM
Subject: Re: [RDG:] Ponzi = scheme

These cases are fiendishly complicated. You implicate = at least=20 the following issues:

-when a later investor is paid out of = funds in=20 the hands of the fraudster, are those funds traceable proceeds of the=20 investments of an earlier investor(s)?
-if so, does the earlier = investor=20 have a debtor-creditor or trustee-beneficiary relationship with the = fraudster?=20 a question of fact, which in turn may lead to an issue whether a = fraudulently=20 induced contract has been avoided, and if so, when;
-assuming an = earlier=20 investor shows a trust and can trace to the payment to the later = investor,=20 nonetheless can the later investor show that s/he was a good faith = purchaser=20 of a legal interest for value without notice? although 'value' for = this=20 defence must be 'new value', still the present discharge of an = antecedent debt=20 IS new value, a subtle distinction which can keep one up at = night;
-but=20 even if not, can the trustee show that the payment to the later = investor was a=20 fraudulent/voidable preference? and if so, who benefits? seemingly, = NOT any=20 trust beneficiary who can trace to that payment, but all unsecured=20 creditors.

Few of the reported cases are impressively argued = and=20 reasoned. These cases are best settled by agreement because the = professional=20 costs in litigating all those issues to resolution will devour the = assets=20 remaining. There is some discussion of this at the very end of the Law = of=20 Tracing (1997) but it ends rather suddenly as it all got too difficult = for=20 me.

There is probably a long article or a book in=20 it.

Lionel

 
Sorry that I didn't get back to you = sooner on=20 this as I had hoped. In answer to your questions I feel that I have = left too=20 much out so I will expand on the details of this case:
 
The bankrupt's business was a sole = proprietorship=20 which as a business consisted of obtaining money from more than 800 = people=20 purporting to invest the sums in the stock market and other = enterprises and=20 then paying back the investors on their investments after deducting = fees. The=20 bankrupt was technical in a fiduciary relationship with all of the = investors=20 as she had total control of the money which they had deposited with = her (she=20 issued account opening statements with investment agreements). = The=20 bankrupt did not segregate investor's money from her own money nor did = she=20 segregate investor's monies from each other. The bankrupt did place = some of=20 the money entrusted to her in the investment firms of Nesbitt Burns = and=20 Glendale securities. However, it was later revealed that neither of = these=20 firms made payment of funds of profit to the bankrupt. The bankrupt = eventually=20 plead to seven offenses under the Criminal Code of Canada. The = bankrupt=20 further confessed that she did not receive any payment of funds from=20 investment firms but rather that funds received from later investors = were used=20 to satisfy earning and dividends promised to earlier investors.It was=20 determined that a large protion of the monies received by the bankrupt = was=20 never invested but was converted for personal use and benefit of = herself. The=20 bankrupt lured persons to invest by issuing fictitious account reports = to her=20 investment clients and a number of clients received their money back = and in=20 some cases profited handsomely. These handsome profits caused word of = her=20 investment prowess to spread resulting in additional investors. =
 
The trustee in bankruptcy is of = the opinion:=20
 
That the payments made to those who = profited=20 handsomely, is subject to a constructive trust wherein the recipients = of the=20 money holds the funds in trust for the trustee.
 
That monies paid to investors who = profited came=20 soley from funds paid by other investors to the bankrupt and as such = should be=20 repaid by an Order of restitution.
 
In the end some of the proceeds are = traceable=20 while some are more difficult.
 
Hope this expansion answers your=20 questions
 
 
Mark
____________________________________________ ___= __________________=20 ------=_NextPart_000_0027_01C4FDEF.9B000F60-- ____________________________________________________________________ This message was delivered through the Restitution Discussion Group, an international internet LISTSERV devoted to all aspects of the law of unjust enrichment. To subscribe, send "subscribe enrichment" in the body of a message to . To unsubscribe, send "signoff enrichment" to the same address. To make a posting to all group members, send to . The list is run by Lionel Smith of McGill University, . =============================================================== ========== Date: Wed, 19 Jan 2005 22:34:09 +0800 Reply-To: CHONG_Chin_Chin@AGC.GOV.SG Sender: Enrichment - Restitution & Unjust Enrichment Legal Issues From: CHONG_Chin_Chin@AGC.GOV.SG Subject: Chin Chin CHONG/AGC/SINGOV is out of office MIME-Version: 1.0 Content-type: text/plain; charset=US-ASCII I will be out of the office starting 19/01/2005 and will not return until 24/01/2005. I will respond to your message when I return. ____________________________________________________________________ This message was delivered through the Restitution Discussion Group, an international internet LISTSERV devoted to all aspects of the law of unjust enrichment. To subscribe, send "subscribe enrichment" in the body of a message to . To unsubscribe, send "signoff enrichment" to the same address. To make a posting to all group members, send to . The list is run by Lionel Smith of McGill University, .