FENG BO v. DELA CRUZ ANABELLE-GAMOSO

HCA 1319/2023

[2024] HKCFI 1819

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1319 OF 2023

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DECISION

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1.  By summons dated 7 March 2024 (“Summons”), P applies for default judgment against D pursuant to O.19 r.7 of the Rules of the High Court (Cap. 4A) on account of D’s failure to file her defence.

2.  I have read the 2^nd Affirmation of Lau Wai Lin and I am satisfied that the Summons was duly served on D. D has due notice of the present hearing and has opted not to be present. I shall proceed to consider P’s application in her absence.

3.  It is trite that on an application for default judgment under O.19 r.7, the facts on which P’s claim is based are deemed to be admitted. The court looks to the pleaded case alone and no evidence is permissible: Lam Chi Fat v Liberty International Insurance [2002] 3 HKLRD 480 per Ma J (as Ma CJ then was) at §27.

4.  In a nutshell, P’s allegation in his Amended Statement of Claim is that as a result of the fraud perpetuated by D, he was defrauded into transferring 182,278.44 “Tether” tokens (a type of cryptocurrency commonly known as “USDT”) to D via a cryptocurrencies trading platform known as Binance Holdings Ltd (“Binance”). P now seeks both personal and restitutionary reliefs against D.

5.  Mr Lam, for P, helpfully gives me an accurate summary of the pleaded case of P, which is as follows.

(a)  P was and is an investor in blockchain-based cryptocurrencies (“crypto”).

(b)  One of the crypto trading platforms used by P for buying, trading and holding crypto is Binance.

(c)  The registered user ID of P’s Binance account is “324328552” and his nickname is “hyouhakuhk” (“P’s Binance Account”).

(d)  P did not know D, nor did he have any business relationship with her.

(e)  In the morning of 25 April 2023, P noticed an advertisement posted by another Binance user on the Binance App (the “Buyer”), who was identified by the nickname “apple1413”, offering to buy USDT at the price of HK$7.90 per unit.

(f)  Later on the same day, P communicated with the Buyer via the Binance App and agreed to sell to the Buyer a total of 182,278.44 units of USDT at the agreed price of HKD7.90 (i.e. totalling HKD1,439,999.68) (the “Agreed Price”) and the agreed payment method was by way of bank transfer.

(g)  Between 11:53 a.m. and 13:38 p.m. on the same day, via the Binance App and/or its P2P chat function, the following matters took place:-

(i)     The Buyer placed formal orders with P for the purchase of the said 182,278.44 units of USDT at the Agreed Price;

(ii)    The Buyer produced screenshots which purported to show the bank transfer confirmations to P, represented to P that payments for the purchase of the said 182,278.44 units of USDT had been duly made to P by way of bank transfer, and thereafter requested P to release and transfer the said 182,278.44 units of USDT to the Buyer by way of 36 sell orders; and

(iii)    After reading the aforesaid screenshots produced by the Buyer, and after checking the balance of the HSBC Account (which showed a credit entry in the exact amount of the Agreed Price and also acting on the faith and truth of the aforesaid representations and requests of the Buyer, P effected the release and transfer of the said 182,278.44 units of USDT to the Buyer via their respective accounts on the Binance App.

(h)  At around 2 pm on the same day (i.e. 25 April 2023), P initiated, via phone banking with HSBC, a conversion of the HKD1,439,999.68 to Euro dollars but the staff of HSBC informed P that the instructions could not be executed on the ground that the said sum of HKD1,439,999.68 had been paid into P’s Account by way of cheque deposits but the relevant cheques had bounced.

(i)  P then realized that the screenshots produced by the Buyer or the contents therein were fake, and the Buyer’s representation that the Agreed Price was duly paid into the HSBC Account by way of bank transfer was false and untrue. P therefore immediately contacted Binance to cancel and stop the release and transfer of the said 182,278.44 units of USDT to the Buyer.

(j)  However, P was notified by Binance that only the last two sell orders for 5,063.29 units of USDT each were cancelled and stopped, and the other 34 sell orders had already been executed, with the result that 172,151.86 units of USDT (“the Scammed Cryptos”)were released and transferred to the Buyer from P’s Binance Account to the Buyer’s Account on Binance. P requested Binance to help him recover the Scammed Cryptos from the Buyer, but he was later informed that a substantial amount of the Scammed Cryptos was already disposed of by the Buyer and transferred out of the Buyer’s Account.

(k)  On the next day, i.e. 26 April 2023, P made a report of the matter to the Police.

(l)  After investigation, the Police arrested D and another suspect named Ms Minozo, Remedios-Cabonegro (the “Other Suspect”) for the offence of obtaining property by deception.

(m)  The Police’s investigation revealed, among other matters, that at the material times, both D and the Other Suspect were working as foreign domestic helpers in Hong Kong and the Buyer’s Binance Account registered in the name of D with her HKID number actually belongs to the Other Suspect.

6.  On these facts, P avers that

(a)  D was and is the holder/owner of the Buyer’s Account.

(b)  The Scammed Cryptos were transferred to D:-

(i)    as a result of the fraudulent scheme in which D was involved; and

(ii)   on P’s mistaken belief that the contents of the screenshots produced by the buyer were true and that the Buyer had already duly paid the Agreed Price for the Scammed Cryptos.

(c)  In the result, P was defrauded and suffered loss and damage whilst D was unjustly enriched.

7.  I am satisfied that all the causes of action against D are established. To me, this is a clear case of fraud and unjust enrichment.

8.  Where property has been obtained by fraud, equity imposes a constructive trust on the fraudster recipient so that the property is recoverable and traceable in equity: Mesirow Financial Administrative Corporation v Best Link Industrial Co., Limited, HCMP1846/2015 (unreported, 25.1.2016) per Recorder Lisa Wong, SC (as she then was) at §33.

9.  Whether cryptocurrency is a property capable of being held on trust and forming the subject matter of other equitable reliefs has been considered in quite a number of local and overseas judicial decisions.

10.  In Re Gatecon Ltd (In Liq) [2023] 2 HKLRD 1079, after reviewing the relevant authorities in different jurisdictions (§§46-58), Linda Chan J held (at §59) that cryptocurrency is a “property” capable of forming the subject matter of a trust, see also Nico Constantijn Antonius Samara v Stive Jean-Paul Dan [2022] HKCFI 1254; Tippawan Boonyaem v Persons Unknwon [2023] EWHC 3180 (Comm); ByBit Fintech Ltd v Ho Kai Xin [2023] SGHC 199.

11.  In the present case, I am convinced that a constructive trust should be imposed over the Scammed Cryptos as it was received by D by the use of her fraud. D is the perpetrator of the fraud and the owner of D’s Binance Account to which the Scammed Cryptos were transferred.

12.  I also accept the submission of Mr Lam that even if D is not a party to the fraud, D has knowledge of the fraud because of her ownership of D’s Binance Account, the SOC and the Summons, which in any event makes it unconscionable for her to receive and retain the Scammed Cryptos: Guaranty Bank and Trust Company v ZZZIK Inc Ltd., HCA1139/2016 (unreported, 18.7.2016) at §§34-35.

13.  As regards the declaratory relief sought by P, I agree that it will assist P in his proprietary claim for the Scammed Cryptos and will enable P to trace the Scammed Cryptos.

14.  I agree that a declaration by the Court that the Scammed Cryptos were held on trust for P is necessary to earmark Scammed Cryptos as P’s property: Mesirow Financial Administrative Corporation at §38; JP Morgan SE, Luxembourg Branch v LV Guangxin Trade Co Ltd [2023] 2 HKLRD 893 at §21.

15.  In the absence of such a declaration, there is a risk that other creditors of D may lay their hands on the Scammed Cryptos. P then has to share them with other creditors of D as an unsecured creditor: IQ Solutions Inc v WKJ Limited [2024] HKCFI 559. This is grossly unfair to P.

16.  It follows that justice will not be done if such a declaratory relief is denied.

Conclusion

17.  For the reasons given, this court is satisfied that the pleaded facts which are taken as proved do give rise to the reliefs sought. A draft order was handed up to me at the hearing. I approve the terms thereof and make the following orders:

(1)  A declaration that the 172,151.86 USDT (“Cryptos”), which were transferred by P on 25 April 2023 to the D’s account maintained with Binance by the user nickname “apple1413” (the “Buyer’s Account”), and/or its traceable substitutes and/or its traceable proceeds (if any, and if they are held by D), were and are at all material times held on constructive trust by D for P;

(2)  An order that D do make restitution of and/or deliver up and/or transfer the Cryptos remaining in the Buyer’s Account to P;

(3)  In respect of the remainder of the Cryptos (the “Other Cryptos”):-

(a)  D do give an account of the Other Cryptos and/or its traceable substitutes and/or all assets and monies derived from the Other Cryptos (and or its traceable substitutes) or any part thereof, and all necessary inquiry be made to enable P to trace and recover such assets and the monies.

(b)  An order that D do pay or transfer to P such assets and/or monies found due upon the taking of the aforesaid account and inquiry.

(4)  Further or alternatively, an order that D shall pay equitable compensation/damages to P in the event that P is unable to recover the Cryptos or its traceable substitutes (or any part thereof) with quantum to be assessed.

(5)  D do pay P costs of this action including the costs of the Summons, to be taxed if not agreed.