Evans & Associates v Citibank Ltd and Ors - [2003] NSWSC 204 - NSWSC 2003 case summary — Zoe

NSWNSWSC

Evans & Associates v Citibank Ltd and Ors

[2003] NSWSC 204

Supreme Court of NSW|2003-03-27|Before: Palmer J

View original source

At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2003-03-27

Before

Palmer J

Source

Original judgment source is linked above.

Judgment (64 paragraphs)

[1]

CITATION : Evans & Associates v Citibank Ltd and Ors [2003] NSWSC 204 HEARING DATE(S) : 3-6 and 10 & 11 February, 2003 JUDGMENT DATE : 27 March 2003 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Judgment for Defendants on Plaintiff's Statement of Claim; judgment for Cross Defendant on Cross Claim.

[2]

CATCHWORDS : PRIVATE INTERNATIONAL LAW - CORPORATIONS - RECEIVERS - PENAL AND PUBLIC LAWS - ENFORCEMENT - Plaintiff appointed as Receiver of assets of certain Defendants by United States Court upon application of United States Federal Trade Commission pursuant to United States Federal Trade Commission Act - Plaintiff seeks to enforce claims against Defendants in Australia - whether claims of Receiver are directly or indirectly for enforcement of foreign penal or public law - character of Receiver's claims under Federal Trade Commission Act - principles discussed. HELD: Receiver's claims were for direct enforcement of foreign public law and were unenforceable in Australian Courts. - BANKING AND FINANCE - TRUST - Money deposited by Vanuatu corporation on interest bearing deposit with Vanuatu bank - Vanuatu bank in turn invests money with Australian bank - Vanuatu bank issues confirmation note to Vanuatu corporation which discloses its deposit with Australian bank - whether Vanuatu bank declared itself express trustee of the deposit with Australian bank. HELD: No express trust. - BANKING AND FINANCE - FRAUD - KNOWING RECEIPT - CONSTRUCTIVE TRUST - Proceeds of fraud deposited with Vanuatu bank which in turn invests with Australian bank - whether Australian bank receives money as mere depository - whether mere depository is a "recipient" for purposes of first limb of Barnes v Addy - principles discussed. HELD: Australian bank was a mere depository of the fund - a mere depository is not chargeable as a "recipient" of misapplied trust funds. - BANKING AND FINANCE - FORCE MAJEURE CLAUSE - CONSTRUCTION - Vanuatu bank makes deposit in US dollars with Australian bank - deposit effected by crediting and debiting accounts of correspondent banks of parties in United States - funds standing to credit of Australian bank in United States seized by FBI - whether Australian bank "prevented" from repaying deposit in US dollars. HELD: Australian bank prevented from repaying within the meaning of Force Majeure clause. - BANKING AND FINANCE - WORDS AND PHRASES - "DUE PERFORMANCE" - Practice of bankers in international banking transactions. HELD: "Due performance" means performance in manner expected or intended by bankers in accordance with international banking practice. - United States Federal Trade Commission Act (15 USC 45) LEGISLATION CITED : - Vanuatu International Companies Act - Vanuatu Serious Offences (Confiscation of Proceeds) Act - s.20 - Agip (Africa) Ltd v Jackson [1992] 4 All ER 385 - Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86; (1988) 165 CLR 30 - Attorney-General (NZ) v Ortiz [1984] AC 1 - Barnes v Addy (1874) LR 9 Ch App 244 - Black v S. Freedman & Co (1910) 12 CLR 105 - Charter Reinsurance Co Ltd (in liq) v Fagan [1997] AC 313 - Foley v Hill (1848) 2 HL Cas 28 (9 ER 1002) - Foskett v McKeown [2001] 1 AC 102 - FTC v Pantron I Corp 33 F.3d 1088, 1095 (9th Cir 1994) at 1102-03 - Huntington v Attrill [1893] AC 150 - Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 - Joachimson v Swiss Bank Corporation [1921] 3 KB 110 - Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580 CASES CITED : - Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 - Menzies v Perkins (2000) NSWSC 40 - Petrotimor Companhia de Petroleos SARL v Commonwealth of Australia [2003] FCAFC 3 - Ray Brooks Pty Ltd v NSW Grains Board [2002] NSWSC 1049 - Schemmer v Property Resources Limited [1975] 1 Ch 273 - Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 All ER 1073 - Stephens Travel Service International Pty Ltd v Qantas Airways Ltd (1988) 13 NSWLR 331 - United States v Inkley [1989] 1 QB 255 - United States v Ward (1980) 448 US 242 - Westpac Banking Corporation v Savin [1985] 2 NZLR 41 - Wilson v Anderson (2002) 190 ALR 313 - Michael Bryan: When Does a Bank Receive Money [1996] JBL 165 - Nygh & Davies: Conflict of Laws in Australia, 7th Ed. (2000) para 18.5. - Paget's Law of Banking (11th Ed., 1996) at p.161 - Scott on Trusts (4th Ed) s324.4 Robb Evans & Associates - Plaintiff Citibank Limited - First Defendant/Cross Defendant Benford Limited - Second Defendant J.K. Publications, Inc. - Third Defendant MJD Service Corp. - Fourth Defendant PARTIES : TAL Services Inc. - Fifth Defendant Kenneth Taves - Sixth Defendant Teresa Taves - Seventh Defendant European Bank Limited - Eighth Defendant/Cross Claimant Citibank NA - Ninth Defendant Discreet Bill, Inc. - Tenth Defendant FILE NUMBER(S) : SC 4999/99 A.S. Martin SC, C.C. Hodgekiss - Plaintiff COUNSEL : M. Walton SC, E.A. Collins - First Defendant/Cross Defendant T.F. Bathurst QC, R.J. Webb SC - Eighth Defendant/Cross Claimant M. Walton SC, E.A. Collins - Ninth Defendant Deacons - Plaintiff SOLICITORS : Dibbs Barker Gosling - First Defendant/Cross Defendant Baker & McKenzie - Eighth Defendant/Cross Claimant Dibbs Barker Gosling - Ninth Defendant

[3]

1 During 1998 Kenneth Taves, a resident of California, defrauded about 900,000 credit card accounts of a total exceeding USD 47.5 million. How he succeeded in a scam of such stupendous audacity is a story in itself. This case, however, concerns a chase around the world after the proceeds of the fraud - a fund of money in US dollars which, in fact, has never left the United States. 2 The Plaintiff has been appointed by a United States Court as the Receiver of the assets of Mr and Mrs Taves, who are the Sixth and Seventh Defendants, and of the assets of the Second Defendant ("Benford"), the Third Defendant ("JK Publications"), the Fourth Defendant ("MJD"), the Fifth Defendant ("TAL"), and the Tenth Defendant ("Discreet"), all companies said to be controlled by Mr Taves. There has been no appearance on behalf any of these Defendants in the proceedings. It seems that Mr Taves has been convicted of offences in California and is now in gaol. 3 The Receiver claims the fund representing the remaining proceeds of the fraud from the Eighth Defendant, European Bank Limited, a Vanuatu corporation, because the fund was placed on deposit with it by Benford, also a Vanuatu corporation. 4 The Receiver claims the fund from the First Defendant, Citibank Limited, an Australian corporation, because European Bank invested the fund deposited with it by Benford on interest bearing deposit with Citibank Limited. In addition, the Receiver claims the fund from the Ninth Defendant, Citibank NA, because the fund deposited with Citibank Limited, being in US dollars, was actually held by its New York correspondent bank, Citibank NA, on account of Citibank Limited. 5 European Bank Limited, by its Cross Claim, claims repayment of the fund from Citibank Limited. European Bank says that it wants the fund back because it might have to pay it to the Receiver as a result of proceedings which he has commenced against it in Vanuatu. The Vanuatu Government has given notice that if European Bank succeeds in recovering the fund from Citibank Limited, it will move to confiscate the fund from European Bank as the proceeds of crime. 6 On 29 November 2000, the fund was seized by the FBI from Citibank NA and proceedings have been commenced in the United States seeking its distribution to the victims of the fraud. 7 Why the Vanuatu Government still wishes to confiscate the fund when it has already been seized by the FBI in the United States has not been explained. Why the Receiver has not abandoned his proceedings in Vanuatu to recover the fund from European Bank, why he is not content simply to participate in the proceedings in the United States for the distribution of the fund seized there by the FBI, and why he has commenced these proceedings in Australia, likewise, has not been explained. 8 All parties say, correctly, that this Court has jurisdiction to hear the proceedings because the subject matter of the dispute is said to include property in New South Wales, namely, a debt owed by Citibank Limited to European Bank arising from the interest bearing deposit which European Bank made with Citibank Limited. No party has sought a stay or dismissal of the proceedings on the basis of forum non conveniens or abuse of process; all parties say that they wish this Court to hear the case. Accordingly, I must accede to the parties' right to have the proceedings determined in this Court, although the effect of orders of this Court on the proceedings in Vanuatu and in the United States and their utility in general have not been made clear to me. The issues

[12]

10 It will be convenient at this point to give an outline of the facts, most of which are not in dispute between the parties. 11 The nature of the fraud perpetrated by Mr Taves may be briefly recounted. Mr Taves and his accomplices obtained details of about 900,000 credit card accounts. They then debited to those accounts charges averaging about USD 20 per month, ostensibly as charges for access to web sites purveying pornography - access which the card holders had neither sought nor obtained. Perhaps Mr Taves hoped that the card holders would either not notice the debits or else would be too embarrassed to complain to the authorities, given the nature of the material said to have been purchased. 12 Mr Taves caused the proceeds of the fraud to be deposited initially with various banks in the United States in the names of companies controlled by him, namely JK Publications, MJD and Discreet. During 1998, most of the proceeds of the fraud were transferred out of these United States bank accounts. Ultimately, a substantial portion of the proceeds came to be deposited into an account in US dollars in the name of Media Buying Service Ltd ("Media") with Eurobank Corporation ("Eurobank"). Media was controlled by Mr Taves and Eurobank was a small bank incorporated in the Cayman Islands, British West Indies. Eurobank enjoyed a dubious reputation in the banking world. 13 Mr Taves' fraud was detected in late 1998. On 6 January 1999, on the application of the United States Federal Trade Commission, the United States District Court for the Central District of California, Western Division ("the Californian Court") ordered that the Plaintiff be appointed the temporary Receiver of all of the assets of JK Publications, MJD and their subsidiaries and affiliates. 14 Mr Taves was quick to remove the proceeds of the fraud further from the reach of the United States authorities. On 18 January 1999 he told Mr Ivan Burgess, Senior Assistant Manager of Eurobank, of the action taken by the Federal Trade Commission and gave instructions to move USD 500,000 per week out of the account at Eurobank. Mr Burgess helpfully suggested Vanuatu and Uruguay as places to which money might be sent and held in secret bank accounts. 15 On 3 February 1999, Mr Burgess sent a facsimile to European Trust Company Limited ("ETCL"), a company incorporated in Vanuatu and associated with European Bank Ltd which is, as I have noted, also incorporated in Vanuatu. Mr Burgess enquired about incorporating a company in Vanuatu for a client of Eurobank. The enquiry was dealt with by Ms Phelps, a director of ETCL and of European Bank. 16 On 8 February 1999, Mr Burgess informed Ms Phelps by facsimile that the new company's name was to be Benford Limited and asked that she arrange for an account to be opened in that company's name with European Bank. 17 Ms Phelps arranged for Benford to be incorporated in Vanuatu on 18 February 1999 and for an interest bearing deposit account to be opened in its name with European Bank, account number 8901-116101-0206 ("the Benford IBD Account"). The following amounts were then received into the Benford IBD Account: Date USD 26.02.1999 97,900 19.03.1999 700,000 19.03.1999 700,000 19.03.1999 700,000 19.03.1999 700,000 13.04.1999 4,630,000

[13]

No one disputes that all of the funds which arrived in Benford's IBD Account were the proceeds of Mr Taves' fraud. 18 Ms Phelps arranged for the incorporation of Benford and for the opening of Benford's IBD Account with European Bank without taking any step to establish and verify the identity of the person or persons controlling Benford and the Benford IBD Account, or to ascertain the ultimate source of the substantial funds which were deposited in that account. She did not follow any of the procedures and safeguards established by the international banking community for the prevention of money laundering. 19 On 15 March 1999 the Californian Court ordered that the Plaintiff be appointed as permanent Receiver of all of the assets of Mr and Mrs Taves, JK Publications, MJD, TAL, Discreet and their subsidiaries and affiliates. The Plaintiff was not then appointed Receiver of Benford's assets because the United States authorities were still unaware of that company's existence. 20 The Receiver had, however, traced the movement of funds from the US banks to Eurobank and 26 March 1999 the Receiver's attorneys notified Eurobank that the money in the accounts of JK Publications and MJD had been unlawfully transferred and they requested a freeze on the accounts. Eurobank was evidently already in financial difficulties and on 11 May 1999 Controllers were appointed to the Bank by the Cayman Islands Executive Council. 21 The Controllers were able to trace the movement of funds from Eurobank into Benford's account at European Bank. On 28 May 1999, European Bank received a facsimile from the Controllers' attorneys notifying it of the appointment of the Plaintiff as Receiver of the assets of Mr and Mrs Taves and their companies arising from allegations of serious fraud, and putting European Bank on notice that the Receiver was asserting a proprietary claim over the funds in Benford's account. 22 On 31 May 1999, European Bank froze the Benford IBD Account and transferred the credit balance, then USD 7,431,924.56, into a current account in the name of Benford, number 8901-116103-0106 ("the Benford Current Account"). 23 On 28 July 1999, the Supreme Court of Vanuatu, upon application made by European Bank under the Serious Offences (Confiscation of Proceeds) Act and the Vanuatu International Companies Act , ordered that European Bank be restrained until further order from releasing or otherwise dealing with any funds standing to the credit of Benford with European Bank, provided that European Bank was authorised to deal with the assets of Benford only for the purpose of preserving its capital. 24 On 25 August 1999, the Receiver commenced proceedings in the Vanuatu Supreme Court against European Bank and Benford seeking an order that Benford's account with European Bank be frozen. On the same day, the Vanuatu Supreme Court made an interim order as sought. 25 On 21 September 1999, the Plaintiff, as Receiver of the assets of JK Publications, MJD, TAL and Mr and Mrs Taves, commenced proceedings in the Vanuatu Supreme Court against European Bank and Benford for a declaration that the Receiver was entitled to receive all monies standing to the credit of Benford's account with European Bank. 26 On 22 September 1999, the Californian Court amended its orders of 15 March 1999 retrospectively so as to appoint the Plaintiff permanent Receiver of Benford. 27 On 23 September 1999, the Vanuatu Supreme Court made an order in the proceedings commenced by the Receiver against European Bank and Benford that "all of the funds held by [Benford] with [European Bank] be forthwith placed in an interest bearing deposit account" . The Court then extended the interim freezing order on the account which it had made on 25 August 1999. 28 On 12 October 1999, pursuant to the Vanuatu Supreme Court's order of 23 September, European Bank transferred from Benford's Current Account into Benford's IBD Account the sum of USD 7,378,373.01 which was then the credit balance in the Benford Current Account. On the same day, European Bank issued to Benford an Interest Bearing Deposit Confirmation dated 12 October 1999 showing the maturity date of that deposit as 12 November 1999. An "amended" Confirmation dated 13 October 1999 was issued later in order, it is said, to correct errors which had appeared in the first Confirmation. Controversy surrounds the terms of those Confirmations and the circumstances of their issue. I will return to these questions later in more detail. 29 In order to obtain a return on the funds which it had received on deposit in the Benford IBD Account, European Bank itself had invested the funds on interest bearing deposit. On 21 June 1999, the funds on deposit in the Benford IBD Account had been combined with other funds and placed on deposit with Westpac Banking Corporation, Vanuatu, to mature on 21 July 1999. That deposit was rolled over to mature on 20 August 1999. On 20 August, the principal and accumulated interest was placed on interest bearing deposit with Citibank Limited to mature on 20 September 1999. On 20 September, the principal and accumulated interest was placed with ANZ Bank (Vanuatu) to mature on 20 October 1999. 30 On 18 October 1999, European Bank advised ANZ Bank (Vanuatu) by facsimile that the deposit maturing on 20 October would not be renewed and requested ANZ Bank (Vanuatu) to settle repayment of the deposit and interest due on 20 October, namely USD 7,593,532.48 by crediting European Bank's US dollar account with ANZ Bank (Vanuatu). On the same day, Ms Phelps sent a facsimile to Citibank Limited, Sydney, confirming "the following placing with you" , namely USD 7,593,532.48 as at 20 October, maturing on 19 November. The facsimile states: "Settlement by us from [and to, by you on maturity]: Our USD account number 36125294 Citibank NA OBU New Settlement to us by you to: A new USD IBD." 31 Ms Phelps gave evidence that she had thought that the account referred to in this facsimile was the account of Citibank Limited with its New York correspondent, Citibank NA. She said that she intended that the deposit be made with Citibank Limited. 32 The fund was received by Citibank NA, New York, on 20 October and was credited to the account shown in European Bank's facsimile to Citibank Limited of 18 October. However, the account referred to in that facsimile was not the account of Citibank Limited with Citibank NA; it was, in fact, the account of Citibank NA, Sydney Branch. 33 European Bank, Citibank Limited and Citibank NA say that European Bank's deposit on 20 October was intended to be with Citibank Limited, not Citibank NA, and that the fax of 18 October simply contained an error in the number identifying the account into which the deposit was to be made. The Receiver submits that the deposit was actually made with Citibank NA and that there was no error in the account number specified. The significance of the controversy will emerge later. 34 I am satisfied that I should accept the evidence of Ms Phelps, unchallenged in cross examination, that the deposit was intended to be made with Citibank Limited, not Citibank NA. The evidence is supported not only by the fact that the facsimile of 18 October was addressed to Citibank Limited and referred to a deposit "with you" , but is also supported by a facsimile dated 17 November 1999 in which European Bank gave instructions to roll over the deposit to 13 December 1999. That facsimile is addressed to Citibank Limited, Sydney, and repeats the wording "we confirm the following placing with you" . 35 Ms Phelps' evidence is lent credence by the evidence of Mr Christopher Moore, Vice President of Citibank Limited at the relevant time, who says that shortly before 13 December, when the deposit was due to mature, Citibank Limited received a fax from European Bank addressed to "Citibank Limited Sydney" and requiring roll over of the deposit from 13 December to 18 January 2000. Mr Moore says that he rang European Bank and had a conversation with someone, whose identity he cannot now recall, in which he said "Is Citibank Limited or Citibank NA your intended repository?" , and was told "Citibank Limited" . This evidence of Mr Moore was not challenged. 36 In arriving at the conclusion that the deposit was always intended to be made with Citibank Limited, I do not overlook the fact that on 10 December 1999 European Bank sent a facsimile to Mr Moore showing the company name as "Citibank NA". That facsimile notified Mr Moore of the allegation that the deposit into the Benford account with European Bank was alleged to be the proceeds of crime. However, I take into account that in Sydney Citibank Limited and Citibank NA operated out of the same office and shared the same facilities. It would not have mattered a great deal to European Bank in sending a facsimile personally addressed to Mr Moore whether the company identification, i.e. Citibank Limited or Citibank NA, was correct: what would have mattered was ensuring that Mr Moore received the facsimile advising of the alleged tainted source of the deposit. On the other hand, it would have been of importance to European Bank, when placing the deposit for investment in October 1999, to identify correctly the company with which it intended to invest. 37 On 30 November 1999, Citibank Limited received by facsimile a letter from the Receiver advising of the circumstances of his appointment and stating that the proceeds of the fraud had been traced to Benford and European Bank. On the same day, the Vanuatu Public Prosecutor commenced proceedings against Benford for money laundering in breach of s.20 of the Serious Offences (Confiscation of Proceeds) Act 1989 . 38 On 2 December 1999, the Supreme Court of Vanuatu, on the application of the Public Prosecutor, restrained Benford until further order from dealing with any of the money standing to its credit with European Bank. The Court also made orders which had the effect of staying the proceedings commenced by the Receiver against European Bank until discharge or variation of the injunction obtained by the Public Prosecutor. 39 On 10 December 1999, the Receiver obtained an ex parte injunction from this Court restraining Citibank Limited from disposing of any monies deposited with it in Sydney by or on behalf of Benford, JK Publications, MJD, TAL and Mrs Taves. A facsimile of the orders was sent to Citibank Limited on the same day. 40 As I have recorded in paragraph 36 above, on 10 December 1999 Mr Moore of Citibank Limited received from European Bank a facsimile letter enclosing a copy of the letter which European Bank had received from the controllers of Eurobank on 28 May. The facsimile and its attachments notified Mr Moore, and thereby Citibank Limited and Citibank NA Sydney Branch, of the allegation that the funds deposited with European Bank by Benford were the proceeds of crime. 41 On 13 December 1999 the deposit of USD 7,593,532.48, together with accrued interest (a total of USD 7,651,860.13), was rolled over and transferred from Citibank NA, Sydney Branch, OBU account number 36125294 with Citibank NA, New York, to account number 3611-2688 in the name of Citibank Limited, Offshore Banking Unit. Letters dated 13 December were sent from Citibank NA and Citibank Limited to European Bank notifying it that the deposit was repaid to European Bank and redeposited in the Citibank Limited account. The letters were computer-generated and were intended to implement a further roll over of the deposit with Citibank Limited. Repayment of the deposit by Citibank NA to European Bank and a new investment by European Bank with Citibank Limited were only notional transactions recorded to correct book entries. 42 By reason of the injunctions granted by the Vanuatu Supreme Court and by this Court, the deposit remained effectively frozen in the hands of Citibank Limited and Citibank NA, as its New York correspondent, from 13 December 1999 onwards. On about 20 November 2000, the FBI served a warrant on Citibank NA seeking seizure of the deposit held, then amounting, with accrued interest, to USD 8,110,073. 43 On 28 November 2000, Citibank NA sought confirmation from Citibank Limited that the funds standing to the credit of account 3611-2688 in the name of Citibank Limited could be traced to the original deposit by European Bank with Citibank Limited in October 1999. Mr Moore of Citibank Limited gave that confirmation and, on 29 November 2000, Citibank NA, in compliance with the seizure warrant, paid an amount equal to the credit balance in the deposit account to the US Marshal's Service. The amount was debited to the account of Citibank Limited Offshore Banking Unit. 44 As at the date of this trial the seized fund has not been returned to Citibank NA or Citibank Limited. On 21 December 2000 proceedings were commenced in the Californian Court to determine the manner in which the seized fund should be distributed. On 4 December 2001, the Californian Court stayed those proceedings pending resolution of the proceedings in this Court.

[15]

45 European Bank, Citibank Limited and Citibank NA submit that this Court will not enforce the Receiver's claims against them because to do so would infringe the "well settled principle of private international law that … [Australian] Courts have no jurisdiction to entertain an action … for the enforcement, either directly or indirectly, of a penal, revenue, or other public law of a foreign State …" : Attorney--General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86, at 111 per Street CJ, at 136 per Kirby P; (1988) 165 CLR 30 at 40. 46 The parties are not in dispute as to the existence of such a principle; they differ as to whether these proceedings fall within it. 47 Mr Bathurst QC, who appears with Mr R.J. Webb SC for European Bank, submits that the Receiver's claims are by way of direct or indirect enforcement of the United States Federal Trade Commission Act (15 USC 45) ("the FTC Act") which, he says, is a penal or public law of a foreign State. Mr Bathurst's submissions have been adopted and supplemented by Mr Walton SC, who appears with Ms Collins for Citibank Limited and Citibank NA. 48 Mr Martin SC, who appears with Mr C. Hodgekiss for the Receiver, submits that the Receiver's claims do not seek the enforcement of a foreign penal or public law because the FTC Act does not have that character. He submits that the Act is a piece of "civil legislation" and that the substance of the rights which the Receiver seeks to enforce is, likewise, civil in character. In support of his characterisation of the FTC Act as "civil", Mr Martin relies on the classification in certain sections of the FTC Act of a proceeding brought under the Act as "a civil action" and on a number of decisions of the United States Supreme Court for the proposition that "only the clearest proof will suffice to over-ride legislative intent and transform what has been denominated a civil remedy into a criminal penalty" : see e.g. United States v Ward (1980) 448 US 242, at 249. None of the decisions relied upon directly concern the characterisation of the FTC Act. 49 Whether the law of a foreign State is penal or public in character for the purpose of the exclusionary rule is a question which is to be answered according to the law of the Court in which the action based on the foreign law is brought, not according to the law of the foreign State itself. This proposition has been unquestioned since Huntington v Attrill [1893] AC 150, which remains the starting point of any enquiry in this area of the law. 50 In Huntington , the appellant brought an action in an Ontario Court to enforce a judgment which he had obtained in a New York Court against the respondent. The claim was founded upon a section of a New York law which made officers of a corporation personally liable for the debts of the corporation if any public certificate or report given by those officers contained a false representation. The respondent successfully defended the enforcement proceedings in the Ontario Court on the ground that the proceedings were for the enforcement of a law of a foreign State which was penal in character. On appeal to the Privy Council, the respondent cited numerous New York cases to show that the Courts of that State had decided that the relevant New York legislation was penal in character. 51 Delivering the opinion of the Judicial Committee that the New York law was not penal in character, Lord Watson said at 155: "Their Lordships cannot assent to the proposition that, in considering whether the present action was penal in such sense as to oust their jurisdiction, the Courts of Ontario were bound to pay absolute deference to any interpretation which might have been put upon the Statute of 1875 in the State of New York. They had to construe and apply an international rule, which is a matter of law entirely within the cognizance of the foreign Court whose jurisdiction is invoked. Judicial decisions in the State where the cause of action arose are not precedents which must be followed, although the reasoning upon which they are founded must always receive careful consideration, and may be conclusive. The Court appealed to must determine for itself, in the first place, the substance of the right sought to be enforced; and, in the second place, whether its enforcement would, either directly or indirectly, involve the execution of the penal law of another State. Were any other principle to guide its decision, a Court might find itself in the position of giving effect in one case and denying effect in another, to suits of the same character, in consequence of the causes of action having arisen in different countries; or in the predicament of being constrained to give effect to laws which were, in its own judgment, strictly penal." 52 That statement of the law has been uniformly applied in Australia: see e.g. Heinemann 10 NSWLR, at 111, 139. 53 What then, according to the law of Australia, is a "penal" or "public" foreign law? Lord Watson was at pains to point out in Huntington that for the purpose of the exclusionary rule "penal" is not analogous to pertaining to punishment for a criminal offence. At 156-158 his Lordship said: "The rule has its foundation in the well-recognised principle that crimes, including in that term all breaches of public law punishable by pecuniary mulct or otherwise, at the instance of the State Government, or of some one representing the public, are local in this sense, that they are only cognizable and punishable in the country where they were committed. Accordingly no proceeding, even in the shape of a civil suit, which has for its object the enforcement by the State, whether directly or indirectly, of punishment imposed for such breaches by the lex fori, ought to be admitted in the Courts of any other country.

[18]

Their Lordships do not hesitate to accept that exposition of the law, which, in their opinion, discloses the proper test for ascertaining whether an action is penal within the meaning of the rule. A proceeding, in order to come within the scope of the rule, must be in the nature of a suit in favour of the State whose law has been infringed. All the provisions of Municipal Statutes for the regulation of trade and trading companies are presumably enacted in the interest and for the benefit of the community at large; and persons who violate these provisions are, in a certain sense, offenders against the State law, as well as against individuals who may be injured by their misconduct. But foreign tribunals do not regard these violations of statute law as offences against the State, unless their vindication rests with the State itself, or with the community which it represents. Penalties may be attached to them, but that circumstance will not bring them within the rule, except in cases where these penalties are recoverable at the instance of the State, or of an official duly authorized to prosecute on its behalf, or of a member of the public in the character of a common informer." 54 In Heinemann (165 CLR, at 41) the majority members of the High Court referred with approval to this passage and distilled from it that the exclusionary rule encompassed a civil action which had for its object the enforcement in the domestic Court by a foreign State, directly or indirectly, of punishment imposed by the foreign State for breach of its law. The Court, at 41-42, referred to the "contentious question" whether the rule is confined to "foreign penal laws" or extends to an additional category, namely, "foreign public laws" . In Attorney-General (NZ) v Ortiz [1984] AC 1, Lord Denning MR was prepared so to extend the rule but Ackner LJ was inclined against the extension. His Lordship did not, however, differ from the Master of the Rolls in the result. His Lordship held that the action by the New Zealand Attorney-General was one which sought to enforce a foreign penal law: the law was penal because it awarded a forfeiture to the State, or to a public officer on its behalf, to redress a public wrong. "The purpose must be, not reparation to one aggrieved, but vindication of the public justice" : at 33. 55 After referring to the differing views expressed in Ortiz , the majority members of the Court in Heinemann said at 42: "The expression 'public laws' has no accepted meaning in our law … It would be more apt to refer to 'public interests' or, even better, 'governmental interests' to signify that the rule applies to claims enforcing the interests of a foreign sovereign which arise from the exercise of certain powers peculiar to government." 56 At 46, their Honours said: "For the purposes of the principle of unenforceability under consideration the action is to be characterised by reference to the substance of the interest sought to be enforced, rather than the form of the action: cf Buchanan ([1954 Ir R at 104); Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd ([1986] AC at 439). Thus, to concentrate on the private law character of the causes of action or grounds for relief pleaded by the appellant is to overlook the appellant's central interest in bringing the action. That interest is to ensure the continued secrecy of the operations of the British Security Service …

[19]

Viewed in this light, the action is neither fully nor accurately described as an action to enforce private rights or private interests of a foreign State. It is in truth an action in which the United Kingdom Government seeks to protect the efficiency of its Security Service as 'part of the defence forces of the country' . The claim for relief made by the appellant in the present proceedings arises out of, and is secured by, an exercise of a prerogative of the Crown, that exercise being the maintenance of the national security. Therefore the right or interest asserted in the proceedings is to be classified as a governmental interest. As such, the action falls within the rule of international law which renders the claim unenforceable." 57 In the result, therefore, the High Court decided that the claim brought in Australia by the British Government to restrain Heinemann from publishing the memoirs of Mr Wright, a former MI 6 officer, in breach of the Official Secrets Act 1911 (UK) was not enforceable, not because the foreign law sought to be enforced was "penal" but because it was a "public" law, being one to protect "governmental interests" . If the distinction between a "penal law" and a "public law" is of any significance - and it may not be in most cases - the Court seems to have come down on the side of Lord Denning MR in Ortiz and of Kirby P who espoused the same view in Heinemann in the Court of Appeal: 10 NSWLR at 137. 58 One way of resolving the question is to say that the term "public law" is merely the "general umbrella under which both penal and revenue suits are embraced": see United States of America v Inkley [1989] 1 QB 255, at 264 per Purchas LJ. Thus, it may be more accurate to say that suits to enforce penal laws and suits to enforce revenue laws are but examples of litigation in the domestic court which involves the assertion of the governmental interests of a foreign State; the list of examples can by no means be regarded as exhausted due to the "the ingenuity of [foreign] governments to invent new means of intervention" : Nygh & Davies Conflict of Laws in Australia , 7th Ed. (2000) para 18.5. 59 In support of this proposition, I note that in Petrotimor Companhia de Petroleos SARL v Commonwealth of Australia [2003] FCAFC 3, Black CJ and Hill J at para 34 were content to state the rule simply as: "domestic Courts will not enforce foreign public law" . 60 From a consideration of these authorities I derive the following propositions which I regard as applicable to the resolution of this case; they are somewhat freely adapted from those enunciated by Purchas LJ in Inkley at 265:

[26]

With these propositions in mind, I turn to consider in more detail the contentions of the parties in this case. 61 Mr Martin SC does not deny that the Receiver's claims are for the enforcement, directly or indirectly, of the FTC Act. Rather, he says that "the purpose of the FTC Act is to protect consumers and accordingly the law should be treated as remedial" rather than penal. Mr Martin has made no submission that the FTC Act was not a "public law". 62 It is necessary to examine some of the provisions of the FTC Act and to consider the purpose for which the Receiver was appointed by the Californian Court. 63 The Federal Trade Commission ("the Commission") is established by 15 USC s41. It is composed of five Commissioners who are appointed by the President of the United States by and with the advice and consent of the Senate. A Commissioner may be removed by the President on stated grounds. 64 By s45(a)(1): "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful" . 65 By s45(a)(2) the Commission is "… empowered and directed to prevent persons, partnerships, or corporations, except [certain specified bodies] … from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce" . 66 s45(b) provides: "Whenever the Commission shall have reason to believe that any such person, partnership, or corporation has been or is using any unfair method of competition or unfair or deceptive act or practice in or affecting commerce, and if it shall appear to the Commission that a proceeding by it in respect thereof would be to the interest of the public , it shall issue and serve upon such person, partnership, or corporation a complaint stating its charges in that respect and containing a notice of a hearing upon a day and at a place therein fixed …" [Emphasis added.] 67 Provision is then made for the making of an order by the Commission requiring persons to cease using methods of competition or practices in breach of the FTC Act. A mechanism for review of such orders is provided and an order of the Commission becomes final in certain specified circumstances. 68 s45(l) provides: "Any person, partnership, or corporation who violates an order of the Commission after it has become final, and while such order is in effect, shall forfeit and pay to the United States a civil penalty of not more than $10,000 for each violation, which shall accrue to the United States and may be recovered in a civil action brought by the Attorney General of the United States. Each separate violation of such an order shall be a separate offense, except that in the case of a violation through continuing failure to obey or neglect to obey a final order of the Commission, each day of continuance of such failure or neglect shall be deemed a separate offense. In such actions, the United States district courts are empowered to grant mandatory injunctions and such other and further equitable relief as they deem appropriate in the enforcement of such final orders of the Commission." 69 s53(b) provides: "Whenever the Commission has reason to believe

[38]

Award such relief as the Court finds necessary to redress injury to consumers resulting from the defendants' violations of the FTC Act including, but not limited to, the refund of moneys paid, and the disgorgement of ill-gotten monies …" 77 On 6 January 1999, the Californian Court made temporary restraining and other orders, including an order for the appointment of the Plaintiff as temporary Receiver. There is no dispute that although s53(b) FTC Act does not expressly empower the Court to appoint a temporary Receiver, the Court had that power in its general equitable jurisdiction in aid of the relief which it could grant under s53(b). 78 On 15 March 1999, on the application of the Commission, the Californian Court appointed the Plaintiff as permanent Receiver of the corporate Defendants controlled by Mr Taves, other than Benford. Included in the powers given to the Receiver was the power to initiate proceedings in foreign Courts to preserve the assets of the defendants. As noted earlier, on 22 September 1999 this order was amended retrospectively to extend the Receiver's appointment to Benford. 79 On 7 April 2000, the Californian Court granted the Commission's motion for summary judgment against Mr and Mrs Taves, JK Publications and MJD. The Court held that "the undisputed facts demonstrate that these defendants are liable for unfair practices committed in violation of S5 of the FTC Act, 15 USC s45(a)" . On 14 and 15 June 2000, the Californian Court tried the issue of quantum of damages for which the defendants were liable to the Commission. 80 In Findings of Fact and Conclusions of Law issued on 9 August 2000, the Californian Court determined that the Defendants were jointly and severally liable in the amount of USD 37,566,577. At paragraph 15 of the Conclusions of Law the Court (United States District Judge Audrey B. Collins) said: "To the extent that it would be impossible or unfeasible for the FTC to distribute all of the $37,566,577 to injured consumers, the unpaid funds shall be deposited into the United States Treasury."

[39]

Her Honour relied upon a principle of law enunciated in FTC v Pantron 1 Corp 33 F.3d 1088, 1095 (9th Cir 1994) at 1102-03: "If the court reasonably concludes that it would be impossible or impracticable to locate and reimburse all of the consumers who have been injured … it may order some other remedy which requires [the defendants] to disgorge its unjust enrichment." 81 In a further Order of the Californian Court made in the proceedings on 31 August 2000, the Court ordered: "The Commission may apply any or all funds received from TAL and Discreet Bill, as well as the Receiver, pursuant to this Order, and any interest received thereon, to a consumer redress program and to related administrative expenses. If the Commission determines a consumer redress program is not feasible, or if there are funds remaining after full implementation of the redress plan, the Commission will deposit these funds into the United States Treasury." 82 In the light of the foregoing facts and circumstances, I conclude that the Receiver's claims in this Court fall within the exclusionary rule of private international law and are not enforceable: they are claims on behalf of an agency of a foreign State for the direct enforcement of a public law of that State. My reasons are as follows. 83 First, the proceedings are not brought by the Receiver to enforce his own personal right or the personal rights of individual defrauded consumers. Rather, he claims as the person appointed at the instance of the Commission, an agency of the United States Government, in proceedings brought by that agency to enforce the FTC Act: see paras. 70-71. 84 Second, the FTC Act is clearly a foreign public law. Expressed in the terminology used by the majority members of the High Court in Heinemann , it is a law to secure the "governmental interests" of the United States in regulating the manner of conducting commerce within its jurisdiction so as to protect a certain class of the public, namely consumers. So, for example, USC s45(b) empowers the Commission alone, as an agency of the Government, to initiate action for a violation of the FTC Act and then only if it appears to the Commission that such a proceeding "would be to the interest of the public" : see paragraph 66. USC s53(b) empowers the United States District Court to grant interim injunctions restraining alleged violations of the FTC Act if the Commission shows, inter alia, that "such action would be to the public interest" . 85 Third, if it be necessary to make such a finding, I would hold that, so far as is relevant to the claims being made by the Receiver in this Court, the FTC Act has the character of a penal law. As I have observed, the proceedings in the Californian Court wherein the Receiver was appointed are proceedings for relief which can only be sought by and granted to the Commission. It is true that the Commission can be said, in a sense, to be bringing the proceedings for the purpose of recovering funds for defrauded consumers because by s57b(a)(1) and (b) the Court trying the Commission's claim is given jurisdiction "to grant such relief as the court finds necessary to redress injury to consumers or other persons, … resulting from the … unfair or deceptive act or practice …" . But it is clear from the orders which the Californian Court has made in this case that the remedy which the Court may grant to the Commission is not co-extensive with, and limited by, the total amount of loss which identified consumers may be able to prove and for which they may be able to claim in a "redress program" formulated by the Commission after it has recovered damages from the Defendants. The damages awarded to the Commission are measured by reference to the proceeds derived by the wrongdoers from their violations of the Act. 86 It is true also that a proceeding under the FTC Act in a United States Court is described in that Act as a "civil action". But that description of the proceedings is not determinative of the characterisation of a claim derived from the FTC Act which is made in this Court. The description "civil action" may well be intended to have merely procedural consequences as far as actions under the Act in United States Courts are concerned, a consideration which does not affect the characterisation of the Act for the purposes of the exclusionary rule to be applied in Australian Courts. For example, s45(1) imposes a "civil penalty" for each violation of the FTC Act and provides that the penalty may be recovered in a "civil action". So far as is relevant to the Receiver's claims in this Court, the purpose of the Act is to prohibit certain conduct within the jurisdiction of the United States Courts and to punish wrongdoers by requiring them to disgorge all of the proceeds of their violations of the Act, even if those proceeds exceed what is distributable to defrauded consumers in a "consumer redress program". That the FTC Act empowers the Commission alone to seek this remedy, leaving defrauded consumers to seek their own remedies outside the FTC Act if they wish, confirms that the primary focus of the Act, as stated in s45(a)(2), is to "empower" and to "direct" the Commission to enforce Government policy as to the protection of consumers and to punish those who infringe by requiring them to forfeit to the State all the proceeds of their violations. 87 Fourth, and perhaps merely ancillary to the third reason, no decision of the United States Courts has been cited directly upon the question whether the FTC Act is penal in character. Were there such authority I would, of course, have given it serious and respectful consideration. As it is, however, I regard myself as compelled to decide the question solely by reference to Australian law. 88 Fifth, in the words of the majority members of the High Court in Heinemann , "the claim for relief made by [the Receiver] in the present proceedings arises out of, and is secured by, an exercise of a prerogative of the [United States Government] " . The Receiver derives his status from proceedings brought under the FTC Act, which is legislation enacted in the exercise of the prerogative of the United States Government. The Receiver's claims in this Court are brought by way of direct enforcement of the orders obtained by the Commission from the Californian Court for disgorgement and collection of assets which are the proceeds of violations of the FTC Act. 89 In this respect, the case bears a close factual resemblance to Schemmer v Property Resources Limited [1975] 1 Ch 273. There, the United States District Court, in proceedings brought by the Securities and Exchange Commission, appointed a receiver to take possession of certain assets. The receiver sought injunctions against banks in the United Kingdom restraining them from dealing with money said to be part of the assets over which the receiver claimed control. Goulding J refused the application on a number of grounds, one of which was that the Securities and Exchange Act was a penal law of a foreign State. 90 At p.288 his Lordship said: "The Act of 1934 is, in my judgment, a penal law of the United States of America and, as such, unenforceable in our courts. I have read enough of it to show that it was passed for public ends and that its purpose is to prevent and punish specified acts and omissions which it declares to be unlawful. It was, of course, enacted not merely in the interest of the nation as an abstract or political entity, but to protect a class of the public. In that it resembles the greater part of the criminal law of any country.

[41]

92 The Receiver sues European Bank as Receiver of the assets of Benford for payment of the debt owing by European Bank to Benford in respect of the deposit of money by Benford into the Benford IBD Account. 93 This is a straightforward common money count. European Bank admits that as at the date of these proceedings it remains indebted in respect of the Benford IBD Account "to Benford or such other person or entities who are entitled to claim it" . European Bank says, however, that it has not made any payment in discharge of the debt because it is prevented from doing so by the three injunctions granted by the Vanuatu Supreme Court, to which I have referred. 94 The Receiver's claim against European Bank in debt is unenforceable in this Court for the reasons I have set out above. However, even if the claim had not failed on this ground, I would not have granted any relief in respect of it in these proceedings, for the following reasons. 95 I would not have ordered European Bank to repay the debt because compliance with that order would have placed European Bank in contempt of the orders made by the Vanuatu Supreme Court, as they presently stand. Mr Martin accepts that position and does not seek the entry of judgment against European Bank. He suggests that a declaration of right should be made. 96 However, I would have made no declaration of right as to the person or entity to whom European Bank is liable in respect of the Benford IBD Account because the Receiver has commenced proceedings in the Vanuatu Supreme Court to determine that very issue and those proceedings have not yet been concluded. A declaration of right by this Court in such circumstances might well have embarrassed the conduct of the proceedings in the Vanuatu Supreme Court. How such a declaration of right could have facilitated the proceedings in Vanuatu has not been explained. 97 Further, apart from the fact that European Bank has agreed to submit to this Court's jurisdiction, this Court would have had no jurisdiction to entertain the Receiver's claim. Neither the Receiver, Benford nor European Bank is a resident of, or carries on any business activity within, the jurisdiction of this Court. The debt sued upon was contracted in Vanuatu and its location in law is in Vanuatu. An order or declaration made by this Court in respect of the debt could not be given effect within this jurisdiction. 98 All of the foregoing indicates that this Court, while accepting and exercising jurisdiction in respect of this claim, should nevertheless, in its discretion, decline to make any declaration of right in respect of the debt and should leave the Receiver to pursue his claim in Vanuatu, if he still sees any point in doing so.

[44]

The Confirmation is a standard form document. The remaining terms are of no consequence. There is no express reference in the document to a trust. 103 The Receiver, however, submits that an intention on the part of European Bank voluntarily to create a trust is evidenced by the words: "Bank with whom deposit made:- Citibank Limited, OBU Sydney" . I am unable to accept this submission for the following reasons. 104 First, putting aside for the moment the evidence of Ms Ihrig of European Bank that the words relied upon were included as a result of administrative error corrected the following day, the words are incapable of evidencing a clear intention on the part of European Bank to hold as trustee the money deposited with it and which it, in turn, placed with Citibank Limited. The words simply record a fact, namely, where European Bank itself had invested the money which Benford had deposited with it; nothing is said about the capacity in which European Bank is receiving the deposit from Benford or investing it with Citibank Limited. 105 Second, banks do not take upon themselves the role of express trustee of clients' funds unless asked. There is no evidence that Benford itself, whether its governing mind as at 12 October 1999 was that of the Receiver, Mr Taves or someone else, ever intended that the deposit with European Bank be upon terms that the investment made by European Bank with that money be held on trust and communicated that intention to European Bank. 106 Third, as Mr Martin concedes, in the absence of special terms the relationship between depositor and banker is that of debtor and creditor: Foley v Hill (1848) 2 HL Cas 28 (9 ER 1002); Joachimson v Swiss Bank Corp [1921] 3 KB 110, at 118. Consequently, how the bank invests the money deposited with it in order to earn a profit for itself is no concern of the depositor: see Paget's Law of Banking (11th Ed., 1996) at p.161. It would take clearer words than those in the Confirmation relied upon by the Receiver in this case to indicate an intention on European Bank's part voluntarily and unilaterally to depart from the normal relationship of debtor and creditor by declaring itself to be an express trustee. Mr Martin frankly concedes that there is no apparent commercial reason why European Bank would wish to do so. 107 Fourth, European bank's responsible officer, Ms Ihrig, gave evidence that the words relied upon were included in the Confirmation by administrative error and were corrected in a Confirmation issued the following day. Her evidence was challenged, not on the basis that she was deliberately not telling the truth, but on the basis that she did not have any independent recollection of making the correction on the following day. 108 Ms Ihrig freely conceded that she had no independent recollection of making the correction and that she was relying upon her usual practice and upon what appeared in the documents. However, she remained adamant that the critical words had been included in the Confirmation in error and that the error was corrected shortly after it was discovered. Ms Ihrig's evidence was consistent, inherently probable, not shown to be inaccurate by reference to any other documentary evidence, and it had the firm ring of truth about it. I have no hesitation in accepting it. 109 For these reasons, I conclude that the Receiver's claim founded upon express trust, if otherwise enforceable in these proceedings, would have failed.

[50]

European Bank was not a purchaser for value without notice of the funds originally deposited into Benford's IBD Account: it failed to make the enquiries as to the source of the funds which a competent banker in the circumstances would have made so that it was affixed by constructive notice that the funds had been defrauded from the credit card holders. 111 With all respect to Mr Martin's very capable argument, in my opinion this reasoning breaks down at two points. 112 First, it may be accepted without hesitation that the funds deposited in Benford's IBD Account were defrauded funds and therefore bore the character of trust funds in the hands of Mr Taves and the companies which he controlled, including Benford. But who are the beneficiaries of that trust? Clearly, they are the true owners of the funds, namely, the defrauded credit card holders. 113 The Receiver is not the agent of the defrauded credit card holders for the purpose of collecting the funds on their behalf. If he is the agent of anyone as far as this Court can recognise, he is the agent of the Commission for the purpose of taking possession of the assets of Benford and the other Defendants controlled by Mr Taves to enable those assets to be dealt with in accordance with the orders of the Californian Court in proceedings to which the defrauded credit card holders are not, and cannot be, parties. 114 In those circumstances, it has not been satisfactorily explained how the Receiver can claim that the proceeds of the fraud, now said to be represented by European Bank's deposit with Citibank Limited, are held upon a constructive trust for Benford or for him. 115 The second difficulty is that the Receiver seeks to make European Bank liable as constructive trustee on the first limb of Barnes v Addy , i.e. as having knowingly received misapplied trust property. However, I would take it as now established law that "receipt" for the purpose of liability under this limb means that the recipient has received the trust property for its own use and benefit and not as agent or depository. Accordingly, a bank which merely collects or pays money for a customer is not liable as a recipient as it is acting only as the agent of the customer: see Westpac Banking Corporation v Savin [1985] 2 NZLR 41, at 69 per Sir Clifford Richmond, and Stephens Travel Service International Pty Ltd v Qantas Airways Ltd (1988) 13 NSWLR 331, at 362 where Hope JA (with whom Kirby P and Priestly JA agree) cites with approval a passage from Scott on Trusts (2nd Ed) s324.4 in which the statement is made that a bank is not chargeable with notice of a breach of trust where it had no personal interest in the transaction but was acting merely as a depository; see also Agip (Africa) Ltd v Jackson [1992] 4 All ER 385, at 404 per Millet J. 116 I would take as accurately reflecting the law the following statement from an illuminating article by Michael Bryan, When Does a Bank Receive Money [1996] JBL 165, at 168: "The bank will not be liable for knowing receipt when a fiduciary pays trust money into an account and later withdraws it; it is cast in the role of a passive agent and is not regarded (in equity at least, whatever use the bank may make of the money in practice) as beneficially enjoying that money. …

[51]

When, therefore, a dishonest fiduciary pays the principal's money into an account and later withdraws the money from the account the bank cannot on this analysis be liable on the basis of "knowing receipt" since the money has not been beneficially received for the purposes of this branch of constructive trusteeship. The bank may well also be excusably ignorant of the source of the money, but the failure to establish "beneficial receipt" is logically anterior to the inquiry into knowledge." 117 The rationale underlying the law's attitude to banks which act only as depositories is explained in the following passage from Scott on Trusts (4th Ed) s324: "Where the trustee sells or mortgages or pledges trust property to a third person, and the third person has notice that the property is held in trust, he is under a duty to make inquiry as to the extent of the authority of the trustee and whether he is exceeding his authority. A depository of trust funds is in a somewhat different position. It has not the same financial interest in the transaction. It is true that it may derive a financial benefit from the receiving of the deposit, but its financial interest is quite different from that of one who is purchasing trust property or receiving it as security for an indebtedness. A depository of trust funds, therefore, has not the same duty of inquiry as to the authority of the trustee in making a deposit of trust funds or in subsequently withdrawing them. It is true that if the depository seeks to apply the deposit to a personal indebtedness of the trustee to it, it is under a duty of inquiry to the same extent as any mortgagee or pledgee. It is not under the same duty of inquiry where it merely receives and pays out the funds. Even in the latter case, however, it incurs a liability where the circumstances are such that it knows or ought to know that the trustee is committing a breach of trust either in depositing or in withdrawing the funds. But the circumstances where the depository ought to know that the trustee is committing a breach of trust are not the same as those where a person who receives trust property for his own benefit, as purchaser or mortgagee or pledgee, ought to know that he is committing a breach of trust, since it is not under the same duty to make inquiry." 118 In the present case, European Bank at all times acted as a mere depository of the money in Benford's IBD Account. At the time of its receipt, Benford had no indebtedness to European Bank; on the contrary, the bank became, by reason of the deposit, indebted to Benford. European Bank, was therefore, not a "recipient" of the "trust monies" in the Benford IBD Account for the purpose of the first limb of Barnes v Addy . Accordingly, whether and when it acquired constructive knowledge of the fact that the funds were the proceeds of fraud is of no further relevance. 119 For these reasons, I conclude that the Receiver's claim against European Bank founded upon constructive trust, even if otherwise enforceable in these proceedings, would have failed.

[52]

120 The Receiver has severely criticised the conduct of European Bank and of Ms Phelps in particular in opening the Benford IBD Account without making enquiries to vouch the identity of the persons beneficially entitled to the funds and to ascertain their source. In case I am wrong in all of the foregoing points and in justice to the arguments of the parties, I shall set out briefly my findings and my reasons. 121 I am satisfied that European Bank did not conform to the standards of a competent and reasonable banker in the manner in which it opened the Benford IBD Account. It did not make any of the enquiries set out in "The Forty Recommendations" issued by the Financial Action Task Force on Money Laundering. In particular, Ms Phelps did not require a verified copy of the passport of Ms Clyde, who was said to be the controller of Benford; she did not enquire of Ms Clyde whether she was the beneficial owner of the funds and what was their source. She did not make those enquiries of Mr Burgess. She quite frankly conceded that, in opening the Account, all that she relied upon was what she believed to be the trustworthiness of Eurobank in requesting the opening of an account on behalf of a customer. 122 However, European Bank knew nothing at all about Eurobank except that it held a banking licence, that European Bank's chairman had once met a director of Eurobank at a conference in London and that Eurobank had, some time previously, requested ETCL to incorporate a company in Vanuatu for one of Eurobank's clients. In my opinion, on this meagre information, neither European Bank nor Ms Phelps could reasonably form a view as to the trustworthiness of Eurobank or as to the credentials and honesty of the client on whose behalf Eurobank was acting. 123 Despite my conclusion that European Bank and Ms Phelps fell short of the standard of competent bankers in the manner in which the Benford IBD Account was opened, I cannot find that they were dishonest in what did nor that they were recklessly indifferent to whether or not the Benford funds were legitimately derived. Ms Phelps very frankly conceded that she was inexperienced, naïve and too trusting of Eurobank and Mr Burgess. She said that European Bank was a very small bank and that it did not then have in place the detailed procedures for opening bank accounts to guard against money laundering which it has now adopted as a result of the Benford incident. 124 Having observed Ms Phelps in the witness box, I accept her evidence as truthful. No evidence has been adduced which suggests that she had anything to gain personally from acting as she did or that European Bank derived any benefit from the transactions other than normal banking fees and profits. 125 Nevertheless, I am satisfied that the circumstances in which the Benford account was opened should have put European Bank upon enquiry as to the true identity of those interested in the funds and as to the source of those funds. European Bank knew nothing about the supposed customer of Eurobank, Ms Clyde; it knew nothing of any substance about Eurobank; it had no good reason to trust Eurobank to the point where it could dispense with any other enquiry. Further, when a verified copy of Ms Clyde's passport was not immediately produced, European Bank's suspicions should have been aroused even further. To a competent banker, the circumstances in which the Benford account was opened should immediately have set alarm bells ringing as to the real possibility that the account would be used for money laundering. 126 I am further of the view that European Bank is to be deemed to have constructive knowledge of the fact that the funds in the Benford account were the proceeds of a fraud. Where further enquiries would include questions to be answered by someone, the law assumes that true answers will be given: see e.g. Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 All ER 1073, at 1118; approved in Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580, at 636-7. Ms Phelps should have made the appropriate enquiries at least from Mr Burgess, who knew the truth about who really controlled Benford and why the identity of the controller was being concealed. Although as a matter of reality it is highly doubtful whether Mr Burgess would have been forthcoming with the truth, the law does not, on that account, excuse European Bank from enquiry and from the consequence of failing to enquire.

[54]

129 The Receiver's case against Citibank Limited depends upon the facts set out in paragraphs 30 to 41. The Receiver contends that on 13 December 1999 Citibank Limited received USD 7,651,860.13 from Citibank NA by transfer from Citibank NA's account number 3612-5294 (Citibank NA's Sydney Branch account) into Citibank NA's account number 3611-2688 (Citibank Limited's account with Citibank NA). The Receiver says that by 13 December 1999 Citibank Limited had actual knowledge that the debt owed to it by Citibank NA represented the traceable proceeds of trust property so that Citibank Limited is liable to the Receiver as constructive trustee of that debt as a "knowing recipient" under the first limb of Barnes v Addy . 130 In view of the facts found and the principles discussed earlier in this judgment, I may state in summary form my reasons for concluding that the Receiver's claim against Citibank Limited fails. 131 First, of course, the Receiver's claim is unenforceable in this Court for the reasons given in paragraphs 45 to 91. 132 Second, Citibank Limited did not receive the funds beneficially but as a depository: European Bank was making a deposit in US dollars with Citibank Limited which Citibank Limited was required to repay with interest and the deposit in US dollars could only be made with Citibank Limited by means of a credit to Citibank Limited's account with Citibank NA as its New York correspondent bank. In those circumstances, for the reasons set out in paragraphs 115 to 118, Citibank Limited was not a "recipient" of the fund represented by the "debt" owed to it by Citibank NA for the purpose of the first limb in Barnes v Addy . 133 Third, by 13 December 1999 Citibank Limited had actual knowledge of the circumstances giving rise to the Receiver's claim that the fund was the traceable proceeds of fraud and was, therefore, trust property. But Citibank Limited did not "receive" the fund for the first time on 13 December 1999. For the reasons which I have given in paragraphs 30 to 36, I am satisfied that Citibank Limited first "received" the fund represented by the "debt" owed to it by Citibank NA on 20 October 1999. Since that date Citibank Limited has not dealt with the fund inconsistently with the rights of those beneficially entitled to it because all that Citibank Limited has done has been to hold the fund pending directions as to its disposition from someone properly authorised to give it a release. In the meantime, the fund has been seized by the FBI. 134 Fourth, if the fund was ever held by Citibank Limited as constructive trustee for anyone, it was held for the benefit of the true owners of the money, that is, the defrauded credit card holders and not the Receiver, for the reasons given in paragraphs 112 to 114. 135 For these reasons, I conclude that even if the Receiver's claim against Citibank Limited had been enforceable, it would have failed.

[55]

136 The Receiver's claim against Citibank NA likewise depends on the facts set out in paragraphs 30 to 41. The Receiver contends that on 20 October 1999 Citibank NA received funds from European Bank by way of deposit with Citibank NA, those funds being the traceable proceeds of fraud and, therefore, trust property. On 13 December 1999, Citibank NA had actual knowledge of the Receiver's claim and the circumstances founding it. On that date, Citibank NA dealt with the fund inconsistently with the Receiver's rights by transferring the fund to Citibank Limited, so that Citibank NA is liable as a constructive trustee under the first limb of Barnes v Addy . 137 In view of the facts found and the principles discussed earlier in this judgment, I may state in summary form my reasons for concluding that the Receiver's claim against Citibank NA fails. 138 First, of course, the Receiver's claim is unenforceable in this Court for the reasons given in paragraphs 45 to 91. Second, Citibank NA did not itself receive the fund by way of deposit with it by European Bank on 20 October. It received the fund as the correspondent bank of Citibank Limited, with whom the deposit was made. The reasons for this conclusion are set out in paragraphs 30 to 36. Accordingly, on 13 December 1999 Citibank NA did nothing more than continue to hold the fund for the account of Citibank Limited for another roll-over term. There was no disposition of the fund on that date, as alleged. 139 Third, the roll-over of the deposit on 13 December 1999 was not a disposition inconsistent with the rights of those beneficially entitled to the fund because all that Citibank NA was doing was continuing to hold the fund pending directions as to its disposition from someone properly entitled to give it a release. 140 Fourth, if the fund was ever held by Citibank NA as constructive trustee for anyone, it was held for the true owners of the money, that is, the defrauded credit card holders, for the reasons given in paragraphs 112 to 114. 141 For these reasons, the Receiver's claim against Citibank NA fails.

[59]

A "Force Majeure Event" is defined as meaning: "any event which occurs due to reasons beyond the reasonable control of Citibank so as to prevent the due performance of an obligation. It includes, but is not limited to, an event due to acts of God, technological breakdown, political or civil unrest, fires, labour disputes or any requirement of governmental agency." 145 There is no dispute that the seizure of the funds from Citibank Limited's account with Citibank NA was an event beyond the reasonable control of Citibank Limited. There is no dispute that the seizure was an act of a "governmental agency" within the definition of "Force Majeure Event". The only question for determination is whether the seizure of the fund occurred "so as to prevent the due performance" of Citibank Limited's obligation to repay the Deposit. 146 The argument of Mr Bathurst QC for European Bank is disarmingly simple. The seizure of the fund in Citibank Limited's account with Citibank NA does not "prevent" Citibank Limited paying back the Deposit, he says, because Citibank Limited does not need the money in that account in order to be able to pay: it has plenty of money in its own pocket which it is not prevented from using. Citibank Limited may well suffer a loss in paying out of its own pocket but the loss is a misfortune, not a "prevention". 147 I am unable to accept that submission; it adopts a narrow, literalist approach to the construction of the clause and ignores the context in which the contract of deposit was made, to the knowledge of both parties. That is not the approach to construction which the Courts now adopt. The time has passed when contracts are isolated from the matrix of the circumstances in which they were set and interpreted on purely internal, linguistic considerations. Courts now regard the construction of a contract as "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract" : per Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, at 912-913; see also Charter Reinsurance Co Ltd (in liq) v Fagan [1997] AC 313, at 391; Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, at 774-775; Wilson v Anderson (2002) 190 ALR 313, at para 9; and see as to whether ambiguity is necessary before a course may be had to extrinsic circumstances Ray Brooks Pty Ltd v NSW Grains Board [2002] NSWSC 1049 at paras 41-68, 80. 148 In the present case, European Bank made the Deposit with Citibank Limited in US dollars. As a matter of banking practice accepted throughout the world, European Bank could only make the Deposit if it could draw upon an account in US dollars with a bank in the United States which was in credit to the amount which was to be deposited; it could only make the deposit with Citibank Limited if Citibank Limited itself had an account with a bank in the United States which could be credited with the Deposit; the Deposit could only be effected by European Bank instructing its correspondent United States bank to debit European Bank's account in favour of Citibank Limited's account with Citibank Limited's United States correspondent bank. 149 In other words, the transaction could only be effected by the debiting and crediting of the relevant accounts. A bank would not pay out money to anyone on behalf of a customer unless it had a customer's account to debit, nor would it receive money on behalf of a customer unless it had a customer's account to credit. As Lord Millett said in Foskett v McKeown at 127-128 "We speak of money at the bank, and of money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debits and credits which are causally and transactionally linked."

[60]

150 All this is so elementary that, to bankers, it goes without saying; it is the common understanding in the light of which the contractual obligations of bankers must be understood. 151 Clause 7.1 of the General Account Conditions recognises explicitly that the obligations of the parties to the contract are obligations which must be performed "in respect of an Account" , that is, they are obligations which are to be performed by the making of the appropriate debits and credits in the records relating to European Bank's account with Citibank Limited. That account is an account in United States dollars; the contract requires repayment of the Deposit only in United States dollars. In order to repay the Deposit to European Bank, Citibank itself cannot debit its own account in Sydney with a sum of United States dollars; it must ask its United States correspondent bank, Citibank NA to debit Citibank Limited's account with it to the requisite amount in United States dollars. Citibank NA will not comply with that request unless Citibank Limited's account with it is in credit to the amount to be debited. If that account has already been debited for the whole of the amount of the Deposit because Citibank NA has been compelled to pay an amount equal to the Deposit to the FBI, Citibank NA will not comply with Citibank Limited's request. All this is part of the common understanding that both parties to the Deposit contract must, as bankers, reasonably have had at the time that the contract for the Deposit was mad. 152 Mr Bathurst is, doubtless, correct in saying that nothing prevents Citibank Limited from repaying the Deposit to European Bank out of its own pocket, that is, repaying other than by setting in train the "series of debits and credits which are causally and transactionally linked" if Citibank Limited is to pay by causing its account with Citibank NA to be debited. But to do so would cause a loss to Citibank Limited and Citibank Limited, in accepting the Deposit, did not covenant to repay without qualification, regardless of whether the repayment would cause it loss. It qualified its obligation to repay by stipulating that it would not be liable, and therefore would avoid loss, if an event occurred beyond its reasonable control such as would prevent "the due performance of an obligation" , the obligation being "in respect of an Account" . 153 The word "due" has important work to do in qualifying the word "performance" in the definition of "Force Majeure Event". "Due" is a word which can embrace several shades of meaning simultaneously in certain contexts. It can mean "owing or payable" , "that ought … to be done" , "fitting, proper, rightful, appropriate" , "adequate, sufficient" , or "expected, intended" : Shorter Oxford English Dictionary . 154 In the context of definition of "Force Majeure Event" I think that "due" means more than just "that ought to be done"; it also means "fitting or appropriate" and "expected, intended". "Due performance" in this context, therefore, means "performance in a manner which is not only in accordance with the obligations of the contract but which is in a manner fitting or appropriate, or expected or intended, having regard to the common intention of the parties in the light of the transactions to be carried out". 155 If "due performance" is read in this way, it recognises that the obligation of Citibank Limited to repay the Deposit is conditional upon its not being prevented from repaying in a manner which accords with the normal expectations or intentions of bankers, that is, by means of a series of causally and transactionally linked debits and credits, necessarily involving the ability of Citibank Limited to cause a debit to be made to its account with Citibank NA. 156 There is no dispute that Citibank Limited cannot cause Citibank NA to debit Citibank Limited's account with the Deposit for so long as the FBI or some other agency of the United States Government withholds from Citibank NA the amount seized on 29 November 2000. In my opinion, therefore, on the true construction of Clause 7.1 of the General Account Conditions and in the events which have happened, Citibank Limited is not obliged to repay the Deposit to European Bank unless and until the amount seized by the FBI has been returned to Citibank NA for credit to the account of Citibank Limited. 157 For these reasons, while a declaration can be made that as at 29 November 2000 Citibank Limited owed the Deposit to European Bank - a matter not in dispute - European Bank's Cross Claim for immediate repayment of the Deposit must be dismissed.