Practice and Procedure

PETER SHALSON & ORS (Claimants) & JEAN-CLAUDE MIMRAN & ORS (Part 20 Claimants) v ONOFRIO RUSSO & ORS (Defendants) (2003)

PUBLISHED July 16, 2003

A claim to trace money into a valuable motor yacht and a bank account failed where the interest was dependant on there being a fiduciary relationship sufficient to invoke equity's tracing ability and there was no justification for the suggested consolidation of a current account with a deposit account to enable the claimant to say that the account was in credit rather than debit and was therefore an asset rather than a liability.Claims arising out of frauds practised on the claimants by the first defendant ('R'). The proceedings were started by a claim form dated 12 March 2001 on behalf of Peter Shalson ('S') and companies owned by S. R had induced S to part with ?19.45m over the course of their association. The issue of the claim form was followed by early interim orders which R breached and on 9 July 2001 R was committed to prison for contempt for two years and on 3 October 2001 summary judgment was entered against him for £20m plus interest. The claim against the second to fifth defendants ('Cantrust') was settled. The sixth defendant was Westbond International Bank Ltd ('WIB'), a bank that was at all material times under R's de facto control. It had an account with a Swiss bank, PKB Privatbank AG ('PKB'). S's £19.45m was paid into that account. On 3 October 2001 summary judgment was entered against PKB for that sum. On 9 October 2003 an order was made appointing provisional liquidators of WIB and on 28 November 2001 it was ordered to be wound up. The eighth and ninth defendants were Mr Mimran and his company Oceanwave International Holdings Ltd ('the Mimran parties') who were also victims of R's frauds. On 3 October 2001 the application to be joined to the proceedings was allowed. On 29 January 2002 they served a Part 20 claim, joining as defendants the claimants (S) and two new parties. The Mimran parties claimed to have been swindled out of at least US $7.5m by R, which they too paid into WIB's account with PKB. Their primary claim was to trace the money into a valuable motor yacht, "Mosaique", which was constructed and acquired pursuant to a joint venture between S and R. The Mimran parties' tracing claim was resisted by S. On 21 June 2001 it was ordered that all tracing claims should be heard together. The Mimran parties also asked for money judgments against R and WIB with a view to assisting the enforcement of any judgment against R they asked for a declaration that the Brookscastle settlement (a settlement set up by R and involving the second to fifth defendants, Cantrust), was a sham and a device in respect of which the true settlor and sole beneficiary was R and that he used it to pretend that assets which were really his were in fact assets of the settlement to prevent those assets being applied in satisfaction of his personal obligations.HELD: (1) As held in Foskett v McKeown & Ors (2001) 1 AC 102, tracing was neither a claim nor a remedy. It was the process by which a claimant sought to show that an interest he had in an asset had become represented by an interest in a different asset. Foskett (supra) did not decide that there was no longer any difference between the common law and equitable rules of tracing or that there was no need to identify a fiduciary relationship as a precondition to tracing into a mixed fund. Each of the three ways that M claimed to set up a proprietary interest was dependant on there being a fiduciary relationship sufficient to invoke equity's tracing ability: (i) on the implied rescission of the loan contracts effected by the bringing of his Part 20 claim, M had revested in him the property in the money he advanced entitling him to trace it into assets into which it was subsequently applied; (ii) no Quistclose trust was created in the present case; (iii) R did not owe M fiduciary duties in respect of the monies advanced. They chose to conduct the venture through a company and it was simply to the company that each would have owed fiduciary duties. (2) M was entitled to trace his money into WIB's PKB account. WIB was not an innocent, independent bank in no way privy to R's dishonesty. (3) There was no justification for the suggested consolidation of the current account with the deposit account to enable M to say that the account was in credit rather than debit. Therefore the bulk of M's tracing claim failed because the WIB/PKB account was overdrawn and was therefore not an asset. (4) S was a good faith purchaser for value of some of the loans without notice of M's claim to trace into the loans and therefore took his charge free of M's claim. (5) In the event no claim as regards the Brookscastle settlement was made. No finding was made that the settlement was a sham or that it was appropriate to pierce the settlement's veil and declare that the assets duly vested in it in fact belonged exclusively to R. (6) The Mimran parties' tracing claims failed, as did their claim against Cantrust. Oceanwave's claim against WIB failed. M was entitled to judgment against R for: (a) $8.5 million plus interest from 1 January 1997; (b) $2.5 million plus interest from 2 February 2000; and (c) damages of $7.5 million plus interest on the four loans making up that sum from their respective dates of payment. He was also entitled to judgment against WIB for the same sum of damages and interest.Judgment accordingly.

[2003] EWHC 1637 (Ch)