RHONDA JEANINE POHN v. MAC RICHARD POHN AND OTHERS

HCA 1381/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1381 OF 2010

____________

____________

________________

JUDGMENT
________________

Introduction

1.  This is the Plaintiff’s action for recovery of the only issued share (the “subject share”) in the 2^nd Defendant (“Leeward”) issued to the 3^rd Defendant (“Goldern”) which is a company solely owned by the 1^st Defendant.   Leeward and Goldern did not appear.  This trial is only between the Plaintiff and the 1^st Defendant.

2.  The Plaintiff (the “Mother”) was the wife of her deceased husband (the “Father”).  They have four children: Karen, Diana, Benjamin and the 1^st Defendant.  The Mother is the executrix named in the Father’s will dated 23 February 2010 and has obtained a grant of probate dated 24 September 2014 from the High Court of Hong Kong.  She is suing in her capacity as the personal representative of the Father and in her personal capacity as his spouse in respect of her right under the law of California relating to “community property” of a matrimonial union. 

3.  The Father was a United States citizen who died domiciled in California in the United States on 2 April 2010.  He was a very successful and rich businessman.  He was diagnosed with skin cancer in early May 2009.  Ultimately, he passed away on 2 April 2010.   

4.  In 1985, the Father set up a family trust, the Pohn Family Trust (“the Trust”) to hold all his assets in the United States.  The Father, the Mother and their four children are beneficiaries under the Trust.  The Mother will have a life interest in the assets under the Trust; and after her death, the assets will be distributed to the four children in equal shares.  In 1991, the Father acquired Leeward for the purpose of holding his investments outside the United States.

5.  The 1^st Defendant is one of the Mother’s four children.  He is also known to the family as “Mackie”.  He had a strong desire to expatriate himself from the United States.  He had looked for various places to migrate to.  He lived in Thailand in 1991 until 2004 when he moved to Hong Kong.  He wished to apply for residency in Hong Kong under the Capital Investment Entrant Scheme.

6.  Leeward is a company incorporated in the British Virgin Islands (“BVI”) which was acquired by the Father in 1991 as a corporate vehicle through which to hold his overseas investments.  Leeward issued only one share, ie the subject share, which until November 2007 was held on trust for the Father by Chatham Limited (“Chatham”).  In turn, Chatham executed a declaration of trust of the beneficial interest in the subject share in favour of the Father.  Leeward has two bank accounts, one with Clariden Leu in Switzerland (which later became part of Credit Suisse) and one with Hong Kong and Shanghai Banking Corporation (“HSBC”).  Its account manager at Clariden Leu was Barbara Harris.

7.  Chatham, a company registered in Liberia, is one of the nominee companies of the Fortis Intertrust Group (“Fortis”). 

8.  Fortis was a secretarial service provider providing service to the Father and Leeward.

9.  Amy Kwan was an employee of Fortis which provided secretarial services to the Father until she left to join a rival company, Mazars CPA Limited (“Mazars”), at the beginning of November 2007. 

10.  Goldern is a shelf company incorporated in Hong Kong acquired by the 1^st Defendant in 1998.

11.  On or around 19 November 2007, the Father transferred his account with Fortis to Mazars so that Amy Kwan would continue to provide secretarial services to him and Leeward.  This necessitated the transfer of the subject share from Chatham to Goldern on 22 November 2007.  The transfer was effected by documents executed by someone purporting to be an authorized signatory acting on behalf of Chatham and by the 1^st Defendant acting on behalf of Goldern.  There is no evidence as to who gave instructions to Fortis or Chatham to transfer the subject share, the terms of those instruction and the reasons for the transfer.

Challenge on the Mother’s capacity

12.  After the close of the Mother’s case, the 1^st Defendant challenged the Mother’s capacity to institute the present proceedings.  The challenge was based on the Mother’s answers under cross-examination in which she said that she did not know why she was in court, that she did not know the answer to the questions asked of her and that the 1^st Defendant should ask her lawyers.  The 1^st Defendant submits that this hearing was his first opportunity to see the Mother after the mediation proceedings and hence he does not have medical evidence of her mental condition, but he believes the Mother was suffering from a diminished state which is being made used of by a group of accountants, lawyers and his greedy siblings.

13.  In reply, Mr Yin submits that there is nothing to suggest that the Mother has no capacity to commence the proceedings.  He relies on the presumption of sound mind.  He argues that there is a distinction between lack of capacity to commence proceedings and loss of capacity in the course of the proceedings.  He submits that Order 80 rule 2 of the Rules of the High Court applies to the former scenario such that a mentally incapacitated person may not commence proceedings except by his next friend.  But the rule has no application to the second scenario where proceedings have been properly commenced and instructions have been validly given to solicitors who can then carry out the instructions and conduct the proceedings on the plaintiff’s behalf.   He submits that even if the Mother has become incapacitated today, that does not have the effect of relating back and rendering the proceedings a nullity.  It would only stop the proceedings from going forward until a next friend is appointed.  He suggests that, if deemed necessary, the court may adjourn the proceedings for appointment of a next friend to make good the authority of the Mother’s solicitors.  I agree with Mr Yin’s submission on his construction of Order 80 rule 2 and the scope of its application.

14.  The 1^st Defendant’s application was not properly made and not supported by medical evidence.  In any event, having seen the Mother giving evidence and observed her demeanour, I do not have the slightest doubt about her capacity to commence and conduct these proceedings. Despite her age, she is elegant and well presented.  Her answers to the 1^st Defendant’s questions have to be viewed in the context.  In my view, they are coherent and reflect the Mother’s frustration and feeling of helplessness upon being questioned by her son on the basis of assertions which she believed were untrue.  The 1^st Defendant’s application is frivolous and vexatious.  There is no need to compel the Plaintiff’s solicitors to appoint a next friend or to de-rail these proceedings.  The 1^st Defendant’s application is therefore dismissed.

The parties’ case

15.  The Mother’s primary case is that to begin with the Father was the beneficial owner of the subject share which was held under a declaration of trust by Chatham for his benefit. The transfer on 22 November 2007 was to relieve the Father of the tedious burden and inconvenience of having to sign documents relating to Leeward’s transactions and bank accounts.  The intention was to place Leeward and its underlying assets, including its bank accounts, under the control of the 1^st Defendant so that he would be in a position to operate the bank accounts and apply the funds of Leeward as may be directed by the Father from time to time. The Father remained the beneficial owner of Leeward. The transfer of the subject share from Chatham to Goldern was only effective to transfer the legal title but not the Father’s subsisting equitable interest in the subject share, which was passed onto the Mother as executrix of the Father’s Will. 

16.  In the event that the transfer to Goldern was effective to transfer both the legal and equitable interest in the subject share, the Mother’s alternative or secondary case is that under the California Family Law Code and/or Californian law generally, the subject share is community property which the Father had no right to dispose of without the written consent of his spouse.  Not having consented, the Mother is entitled to set aside the transaction to the extent of one half.

17.  The 1^st Defendant painted the present litigation as a “sibling rivalry” turned “civil rivalry” from the playroom to the courtroom.  He accused his siblings of greed and of taking advantage of the diminished capacity of the Mother to institute the present proceedings against him with the help of lawyers and accountants.  He even made an attempt to challenge the Mother’s mental capacity in instituting these proceedings, but failed.  

18.  The 1^st Defendant does not dispute the declaration of trust by Chatham.  His pleaded case is that on 22 November 2007, when the Father and the Mother visited him in Hong Kong, the Father had a meeting with Amy Kwan and Morrison of Mazars.  At the meeting, the Father orally instructed Amy Kwan to cause Chatham to transfer the subject share to Goldern and ordered cancellation of the declaration of trust executed by Chatham.  Amy Kwan had explained to the Father that it would be necessary to have Goldern to execute a declaration of trust if he was to retain beneficial interest in the subject share, but the Father confirmed that would not be necessary.  The 1^st Defendant therefore claims that the transfer was effective to transfer both the legal and equitable interest in the subject share to Goldern.  On 10 February 2010, the Father’s skin cancer turned critical.  The 1^st Defendant flew to visit him in California.  Shortly before his demise, the Father announced to the siblings the gift of Leeward to the 1^st Defendant, saying “give it to Mackie and that’s it” and “Mackie will make it equal”. That prompted some discontent amongst his siblings who questioned the fairness of the gift.  At the time the 1^st Defendant was planning to apply for Hong Kong residency under the Capital Investment Entrant Scheme and the Father was willing to assist him.  To qualify under the scheme, he had to have no less than HK$6.5 million worth of assets for two years prior to the application.  Upon the advice of his immigration advisor from Hong Kong, he requested the Father and his estate attorney for some legal document to prove his entitlement to 25% of the Pohn Family Trust to support his application.  This, the 1^st Defendant says, provided the catalyst for the events that followed after he left California on 24 March 2010 and which led to this litigation.  Those events include demands by the Father’s estate attorney for particulars of the assets held by Leeward and eventually an amendment to the trust deed of the Pohn Family Trust on 26 March 2010 by introducing “Article X” (the “equalisation provision”), which expressly provided for the reduction of the share of entitlement of any of the children under the Trust in respect of any lifetime gifts made to that child subsequent to 1 January 2004.

19.  Simply put, the 1^st Defendant’s case is that the Father made a gift of both the legal and equitable interest in the subject share to him orally during the meeting on 22 November 2007 and the gift was perfected by the transfer of the subject share from Chatham to Goldern. However, he chose not to adduce any evidence.  Thus, the above is only a summary of his pleaded case, his opening submission and closing submission.  It is not supported by any evidence.

20.  Though the 1^st Defendant said he was willing to be bound by Article X and would give credit to the value of the subject share when it comes to the ultimate distribution of the assets in the Pohn Family Trust so that he would not have any advantage over his siblings, his claim of the subject share as an immediate gift to be equalized after the expiry of the Mother’s life interest in the Pohn Family Trust has very serious tax consequences on the Trust[1]. Presumably, this is what made this litigation necessary.

The issues, the law and burden of proof

21.  Despite the rather spurious circumstances surrounding the transfer of the subject share from Chatham to Goldern as put by Mr Yin, the transfer and its legality were not queried by the Mother.  As Chatham was a nominee holding the subject share on trust for the Father, the fundamental question is whether the transfer by Chatham was effective to transfer the beneficial interest in the subject share also.  If the court’s finding is in the negative, that would be the end of the matter.  The Mother should have judgment.  If the court’s finding is in the affirmative, the next question is whether the gift is liable to be set aside to the extent of one half under Californian law.

22.  Particularly for shares, legal title goes hand in hand with equitable title.  However, in the present case, it is incontrovertible that there was a split between the legal interest and equitable interest in the subject share.  Chatham was the registered holder of the subject share who expressly held the beneficial interest in the share on trust for the Father.  As submitted by Mr Yin, the starting point here is that the position of a nominee is quite different from that of a person who is both the legal and beneficial owner of property.  Prima facie, a transfer of property by a person who is both its legal and beneficial owner has the effect of transferring both legal and beneficial interest in the property to the transferee.  A transfer by a nominee does not. Prima facie, a transfer by a nominee is only effective to confer a bare legal title on the transferee, the beneficial interest remains with the original beneficial owner.  If the transferee wishes to assert ownership of the beneficial interest in the transferred property, he bears the burden of proof that he has somehow acquired the beneficial interest as well.  

23.  Thus, on the fundamental question of whether the Father had made a gift of the beneficial interest of the subject share to the 1^st Defendant, the 1^st Defendant bears the burden of proof that the transfer by Chatham on 22 November 2007 was effective in transferring the Father’s beneficial interest in the subject share to Goldern, ie the authority given by the Father to transfer the subject share extended to transferring the beneficial interest in that share as well.

24.  Mr Yin submits that if the 1^st Defendant succeeds in proving Chatham’s authority to transfer the beneficial interest in the subject share, the Mother’s fallback position is that, being a volunteer, the 1^st Defendant holds the share on constructive trust for the Father because that must have been their presumed common intention.  With respect, I do not think such fallback position is available to the Mother.  If Chatham was authorised to transfer the beneficial interest in the subject share, that authority must have come from the Father.  I do not understand Mr Yin as talking about any authority other than actual authority, such as ostensible or implied authority.  Thus, if the authority is established, there could be no room for a contrary common intention to support a case of constructive trust for the Mother.

25.  If the 1^st Defendant succeeds in proving the gift, the Mother relies on her secondary case.  Then, conversely, as it is the Mother who pleads her entitlement under Californian law, she has the burden of proving the content of the Californian law and the prerequisites of her entitlement, namely that the subject share was community property and that she has not given written consent to the Father making the gift.

26.  Therefore the issues in this case are:

(1) whether the 1^st Defendant has discharged the burden of proof that Chatham had the Father’s authority to transfer the beneficial interest in the subject share to Goldern;

(2) if yes, whether the Mother has discharged the burden of proof:

(a) that under Californian law, a surviving spouse is entitled to set aside a gift of community property by the donor spouse made without his or her written consent as to one-half;

(b) that the subject share was community property; and

(c) that she has not given written consent to the transfer.

I have set out the proof required and on whom the burden of proof rests.  The standard of proof is the civil standard of balance of probability.  Insofar as possible the court will adjudicate the dispute between the parties on the basis of its finding of fact.  It is only when it becomes impossible to make the relevant finding of fact that it should resort to burden of proof. 

Credibility of witnesses

27.  The Mother and the sibling gave evidence.  The 1^st Defendant referred to his cross-examination of the Mother in which she said she did not know the answer or that the 1^st Defendant should ask her lawyers.  He suggests that the Mother did not know what this action was about; that she was suffering from diminished capacity and was being made use of by his siblings.  I can see the frustration and helplessness in the Mother’s face being cross-examined by her son and asserting rights which she thought he did not have.  She was acting on legal advice.  It was only natural that she rebuked her son by telling him to ask her lawyers.  I do not think those answers and her demeanour suggest in any way that her answers are unreliable or that she is an incredible witness.  I accept her evidence.

28.  The siblings gave evidence in a straight forward manner.  Their answers under cross-examination were prompt and direct.  Their evidence is inherently credible and consistent with one another and with the other witnesses.  Having tested their evidence against contemporaneous documents, the questions put to them by the 1^st Defendant and his submissions, I consider them credible and accept their evidence.

29.  The Mother’s tax advisor, investment advisor, accountant, her estate attorney and an expert on Californian law also testified. They are professionals.  Their evidence is supported by contemporaneous documents and is inherently credible and logical.  I accept their evidence.

The background

30.  This is a case of one man’s word against a deceased who is not able to be here to contest the allegations.  The Mother’s case has to rely on inferences of the Father’s intention to be drawn from contemporaneous emails and conduct of the Father and the 1^st Defendant. Such conduct has to be viewed against the factual background.  Hereunder are some incontrovertible background facts.

31.  First, the Father generously provided for and maintained his wife and their children.  It was the Father’s intention that the Mother, if she survives him as she does, should have a life interest in his estate and that after her death the remaining estate should be distributed equally among their four children.  On 7 October 1985, the Father executed a trust deed to set up the Pohn Family Trust holding all his assets in the United States.  In 1991, he incorporated Leeward for the purpose of holding his assets outside the United States.  Until the end of 2008, the maintenance of the children was drawn from the bank accounts of Leeward.

32.  Second, the Father was an extremely rich businessman with a very substantial estate.  He had engaged accountants, investment advisors and estate attorneys to look after his investments and tax matters.  He must have been properly advised about his investments and tax implications on his investments or estate.  On 26 October 2000, he entered into a mutual community property agreement with the Mother transmuting all his separate property into community property.  Obviously, the Father was aware of the law about gift of community property and gift tax implications.  By reason of the agreement, the subject share and Leeward must have been transmuted as community property.

33.  Third, in 2007 the United States Inland Revenue Service conducted a tax audit on the Father’s and the Mother’s income.  Prior to that audit, no income tax had been reported in respect of the income from Leeward.  As result of the audit, the tax situation was regularised.  Back tax was paid.  Thereafter, income, capital gains and disposal of assets by Leeward were reported under the Father’s and the Mother’s personal income and tax was paid by the Father.  The Father was very anxious to cancel his and the Mother’s Visa card accounts with HSBC, a recurrent feature seen in his contemporaneous emails relating to the transfer of the subject share.  Presumably it was HSBC’s reporting of bank accounts and Visa card accounts held by United States citizens outside the United States which led to the income tax audit.

34.  Fourth, at the material time, gift tax is chargeable in respect of disposals by way of gift.  The tax is payable by the donor.  A donor has an annual tax free exemption not exceeding US$12,000 per donee.  The exemption is subject to a lifetime exemption of US$ 1 million.  In default of payment of the gift tax, a monthly penalty of 0.5% of the tax defaulted is chargeable, subject to a maximum of 25% of the tax defaulted.  In addition, the donor has to pay interest on the outstanding tax.  The interest rate varies from year to year.  It was 8% per annum in 2007 and 3% for the last three years.  According to Beth Regan, the Mother’s tax advisor, had the Father made a gift of the subject share in 2007, gift tax of US$ 1.8 million would have been payable.  By 2015, that gift tax together with penalty and interest would have accumulated up to the tune of US$ 3.8 million.  If the Father had intended to make an immediate gift of Leeward to the 1^st Defendant, he would most probably have reported the gift and paid the gift tax forthwith instead of remaining silent and incurring back tax, extremely heavy penalty and very high rate of interest.

The Mother’s evidence of the Father’s intention

35.  The Father and the Mother visited Hong Kong in November 2007 to meet the 1^st Defendant and his new girlfriend or his third wife.  While not contesting the transfer of the subject share, the Mother insisted that the Father never gave Leeward to the 1^st Defendant absolutely.  Being his spouse, the Mother must be in the best position to know of the Father’s intention.  Her insistence is not a bald one.  She gave good reasons.  The Father was becoming elderly and declining in health.  He wished to rid himself of the burden and inconvenience of having to give instructions relating to the operation of bank accounts; attending to the execution of banking transactions; and to enable the 1^st Defendant to have ready access to monies when monies were needed for purposes approved by the Father.  Hence, the Father placed Leeward and its bank accounts under the control of the 1^st Defendant who would then act as directed by the Father.  Though this is not evidence coming from the Father who is deceased, the Father’s intention is borne out by the contemporaneous emails issued by the Father and the 1^st Defendant; and the subsequent conduct of the 1^st Defendant which I am going to refer to under the next two sections. 

The contemporaneous emails and conduct of the Father and 1^st Defendant  

36.  Conduct and declarations of the parties before or at the time of the transaction or so immediately after it as to constitute part of the transaction are admissible in evidence for or against the party who did the act or made the declaration: Snell’s Equity[2].

37.  The contemporaneous emails starting from 27 May 2007 before the arrangement for the November 2007 meeting was first discussed are relevant.  In the email dated 27 May 2007, the Father reprimanded the 1^st Defendant in strong terms and demanded an apology for his behaviour, stressing that such behaviour will not be tolerated then or in future.  He also criticised the 1^st Defendant for his mistakes and for having squandered the funds given to him.   The Father ended that email saying he would not want to see the 1^st Defendant unless he changed his tune.  The Father could not have been pleased with the 1^st Defendant’s behaviour as a son and with the way he managed his financial affairs.  It is most improbable that he would have made the 1^st Defendant a gift of several million American dollars just a few months later.  That email set the stage for the emails which followed. 

38.  In an email dated 9 June 2007, the 1^st Defendant wrote to the Father seeking signatory power on the accounts of Leeward.  He wrote:

“ … Just ask Amy to send you an authorization you can get this and then send together to make me a signatory on the acct. - With limited powers to be able to transact on behalf of you and Amy is to act on e-mail advice received from my father. This could be formal or just a safety pack between you Amy and me making things smoother later.

1. You send E-mail your instructions to Amy.

2. Amy types the letter on your advice for chop as usual (e-mail copy to you for ref.)

3. Then I go in to chop it only.  She is not to act on my instructions for the account only yours.”

The tone of this email suggests that the 1^st Defendant was only seeking limited signatory power over Leeward’s accounts; that the Father retained ultimate and overall control of Leeward; and the arrangement was to relieve the Father from the burden over the paper work etc.  The fact that this email came from the 1^st Defendant makes it a piece of strong evidence which supports the Mother’s evidence as to the purpose of the transfer.

39.  The emails thereafter among the Father, the 1^st Defendant and Amy Kwan were about the mechanics of bringing about the transfer of the subject share and moving Leeward from Fortis to Mazars.  The Father’s email to Fortis dated 19 November 2007, which was just a few days before the transfer, is particularly telling.  In that email, the Father terminated the secretarial services provided by Fortis to Leeward in preparation for moving Leeward over to Mazars.  He wrote:

“ … We are going to have our son take care of some of the tasks that I have been doing …”

(My emphasis added)

From this email, it is obvious that the Father’s intention was, as the Mother said, to pass over only some of the burden of signing documents and bank accounts of Leeward to the 1^st Defendant.  It is inconsistent with a gift of the beneficial interest of the subject share.  The overwhelming inference is that the Father continued to retain the beneficial interest in the subject share and the overall control of Leeward.

40.  The intervening emails made no mention whether the beneficial interest in the subject share was to be transferred.  The general theme was to cancel the Father’s and Mother’s Visa cards issued by HSBC so that the Father and Mother kept no bank account in Hong Kong but kept the assets in Leeward.  The mention about cancelling the Visa cards pinpoints the timing of this series of emails as being after the 2007 tax audit when the Father had knowledge about gift tax and its implications.  These emails are equivocal, but in the light of the above three emails, the absence of any mention of a transfer of the beneficial interest rebuts the 1^st Defendant’s assertion of a gift and strengthens the inference of a continuation of the pre-existing status quo of the Father retaining the beneficial interest and control over Leeward.

41.  After the Father’s and Mother’s return to California from the November 2007 trip, the Father told his estate attorney, Lawrence Branton, that he had US$ 6 million worth of assets outside the United States, by which he must be referring to the assets in Leeward.  There is no reason to doubt he was not telling the truth as that conversation was made in the course of seeking professional advice.  That conversation is corroborated by Lawrence Branton who had prepared an attendance note of that conversation and who testified at the trial.  It must be treated as part of the whole scheme associated with the transfer of the subject share from Chatham to Goldern. Similarly, he consistently told his accountants, financial advisors and estate planning attorneys as well as Barbara Harris of Clariden Leu (in which bank Leeward had maintained an account) that Leeward belonged to him.  

42.  The Father’s and Mother’s subsequent treatment of their tax affairs in connection with Leeward may also be treated as part of the whole scheme of tax management in which the transfer form part.  It is also contemporaneous conduct.  The Father and the Mother reported their interest in Leeward on the annual “Report of Foreign Bank and Financial Accounts” (Form TDF 90-22.1).  The Father continued to report all income associated with the Leeward as his and the Mother’s income in their individual tax returns and paid United States income tax on such income in subsequent years since 2007 until his death in 2010.  This course of conducts extended over a number of years.  If his reporting of the Leeward income in 2007 is regarded as contemporaneous, there is no reason why the consistent course of conduct thereafter pursuing the same objective should not be treated as contemporaneous.  Even if not, that consistent course of conduct thereafter strengthens the inference to be drawn from the conduct in 2007.  Such conduct clearly reflects that the Father considered himself as the beneficial owner of the subject share and of Leeward as he was before the transfer on 22 November 2007, but inconsistent with the 1^st Defendant’s allegation that the Father wished to dispose of his beneficial interest in Leeward and found it unnecessary to require Goldern to execute a deed of trust.  Besides, the 1^st Defendant offered no reason why the Father would particularly want to favour him amongst all his children with this enormous gift.  All these cast his assertion about what happened at the meeting on 22 November 2007 (not evidence, there being none) into suspect.

43.  Towards his final months, the Father also told Beth Regan, his tax advisor, and Lawrence Branton the same respectively in January and February 2010.  These were communications with his professional advisors and must have been intended to act on by them in advising him on his affairs.  The communications must truly reflect his intention as to the purpose the transfer.  Such conduct is inconsistent with the Father having parted with his beneficial interest in the subject share.  For the same reasons as above, even if this is not contemporaneous conduct, it must be treated as a consistent course of conduct supporting the Father’s contemporaneous conduct in 2007.

The 1^st Defendant’s subsequent conduct

44.  Subsequent declarations and conduct of a party is admissible as evidence against the party who made them, but not in his favour: Snell’s Equity[3].  The 1^st Defendant could refer to no such conduct by the Father, but there is overwhelming evidence of conduct on his part which rebuts his assertion of a gift of the beneficial interest in the subject share.

45.  For nearly a year after the transfer, the Leeward accounts were still being used to pay the siblings’ allowances pursuant to standing autopay instructions.  It was not until nearly a year later (via two emails dated 21 August 2008 and 21 October 2008) that with the Father’s approval, the 1^st Defendant was permitted to cancel that autopay instruction. That suggests Leeward was not an absolute gift to the 1^st Defendant and the Father retained the beneficial interest of the subject share and control over Leeward.

46.  Very significantly, the 1^st Defendant acknowledged that the equitable interest in the subject share remained with the Father.  In Leeward’s letter to Clariden Leu dated 22 April 2008, five months after the transfer, the 1^st Defendant wrote on behalf of Goldern in its capacity as director of Leeward:

“ … we are happy to confirm that the beneficial ownership of the company has not changed since the inception of the bank account.”

This is an unequivocal admission by the 1^st Defendant on behalf of Goldern that the subject share was held by Goldern as nominee on trust for the Father just as it was held by Chatham before.  This letter wholly destroyed the 1^st Defendant’s claim of a transfer of the beneficial interest of the subject share on 22 November 2007.

47.  Again, in his email to Joel Jastromb dated 19 November 2008 discussing exit tax for United States expatriates, the 1^st Defendant stated that he did not have assets in excess of US$600,000.  That was a communication seeking professional advice.  There is no reason to believe the 1^st Defendant was not telling the truth to his investment advisor.  He would not have said so to his advisor, if he considered himself as the owner of Leeward which was worth between US$4million to US$6 million.

48.  In another email dated 16 June 2009, he requested his Father to cause Joel Jastromb to issue him a certification of his interest in the Pohn Family Trust to support his application for Hong Kong residency.  He would not have done so, if he considered himself the absolute owner of Leeward.

49.  The following series of emails in August 2009 is particularly telling.  Barbara Harris of Clariden Leu wrote to the 1^st Defendant seeking information as to whose name to be used in filling in some United States (presumably income tax) forms.  She wrote:

“ Have received your mom’s W-9. All ok. We are learning fast with filing/information in connection with the USA.

For a BVI company we have to provide one name only – who should that be – ie your mum or dad?  pls advise asap.”

Immediately, the 1^st Defendant sought instruction from the Father.  He wrote on 19 August 2009:

“ I got this msg from Ms. Harris let me know how you want to answer her. They are all getting chicken …”

Having received no reply from the Father, the 1^st Defendant wrote to the Father again on 30 August 2009:

“ I never got anything in writing from you on this do you want to use moms name we talked but I wasn’t sure you made a decision. Let me know thanks.”

Having somehow received instruction from the Father, the 1^st Defendant reverted to Ms Barbara Harris and wrote:

“ I just got my dads answer to your question regarding the w9 he said can use my moms name as joint return.”

This series of emails is very telling in that at least 21 months after the transfer, the 1^st Defendant still acknowledged the Father as the beneficial owner of the subject share and in control of Leeward.  

50.  During the 1^st Defendant’s 43 days’ stay in California before the Father’s death, a lot of things were said about Leeward and its assets in his presence.  But he never for once claimed ownership of Leeward or its assets.

51.  According to Diana, on 12 February 2010, the Father, the Mother, the 1^st Defendant and she herself were discussing some possible things which could be done about the Leeward assets, including setting up a foreign interest trust or sending them to Cedar Hill and Joel Jastromb, the Father’s investment advisor.  The 1^st Defendant did not protest saying that “it is my money, what are you talking about?” Instead, all that he said was, “you should leave the money overseas because Obama might raise the estate tax to 98%”.  He said he did not want the money to come back because “I don’t want to have to pay taxes on my inheritance.”  He also said “I want to get my share of the estate from the overseas money, so that I don’t have to pay taxes.”  These are not reactions of a man who is the absolute owner of the assets which were the subject matter of such a discussion.  His response reflected his acknowledgement that the Father was the beneficial owner of Leeward and its assets.

52.  Following that, according to Diana, the Father asked the 1^st Defendant for documents about Leeward requested by Beth Regan, the Father’s tax advisor, so that they could look into the possibility of setting up a foreign interest trust.  The 1^st Defendant said he would have his people to look into it.  He did not protest, though he did not comply.  His conduct is not consistent with his being the beneficial owner of the subject share.  

53.  On 23 February 2010, Lawrence Branton had a meeting with the Pohn family.  He asked the siblings to get all information regarding the Father’s assets and specifically asked the 1^st Defendant to get information about the Leeward assets.  The 1^st Defendant neither protested nor claimed those assets were his absolute gift from the Father.  Instead, he discussed with Lawrence Branton about his immigration needs and asked for a letter stating that he had a 25% share in the Pohn Family Trust.  He had a lengthy discussion with Lawrence Branton.  Lawrence Branton explained that he could not write such a letter as the 1^st Defendant’s interest is only a future interest, but would be happy to write something which had to be factually accurate.  That incident is what the 1^st Defendant said was the catalyst which triggered the amendment of the trust deed by Article X.  However, the 1^st Defendant’s silence to Lawrence Branton’s request for information about the Leeward assets is inconsistent with his assertion that he is the beneficial owner of the subject share.  It is also remarkable that while he was so urgently in need of a certification by Lawrence Branton about his entitlement to a 25% share in the Pohn Family Trust to support his application for Hong Kong residency, he never sought to rely on his ownership of Leeward.  All these cast serious doubts on his assertion about the gift of the beneficial interest in the subject share.

54.  On a date in early March 2010, Karen was with the Father in the computer room looking for information to assist the 1^st Defendant with his immigration plan and for information about Leeward assets requested by Lawrence Branton during the meeting on 23 February 2010.  Just as the 1^st Defendant was entering the room, the Father told Karen that “the Hong Kong money was in trust” and “Mackie and mom were the trustees of the trust”.  This is an accusation in the face which calls for a response from the person to whom it is addressed, if it is not true.  The 1^st Defendant did not correct the Father or assert his ownership of Leeward.  The inference is that the assertion by the Father is true and the 1^st Defendant did not dare to confront his Father.

55.  On 22 March 2010, Joel Jastromb visited the Father.  He had a meeting with the Father during which the Father told him that he had given the 1^st Defendant effective control over the assets of Leeward.  Joel Jastromb also met with the siblings individually.  During his meeting with the 1^st Defendant, the 1^st Defendant showed him a pie chart indicating his proposed division of the Father’s assets.  The 1^st Defendant expressed his frustration that his siblings did not understand his previous discussions with them when he put it to them that in exchange for his retaining the US$3.4 million Leeward assets, he would agree to reduce his share of other assets upon the death of both the Father and the Mother.  Obviously, the 1^st Defendant did not regard himself as being the absolute owner of Leeward and its assets otherwise he would not have talked about the possibility of “retaining them in exchange” for the other assets of the Father.

56.  According to Lawrence Branton, the Father was very concerned that his children be treated equally.  However, the 1^st Defendant had not been responding to the Father’s requests for information about the Leeward assets.  Since the 1^st Defendant had signature power over Leeward, Lawrence Branton was rightly concerned that the 1^st Defendant might claim a gift over Leeward after the Father died.  He also wished to avoid having to obtain probate in different jurisdictions.  Hence, he proposed introducing Article X to the trust deed as a fail-safe precaution against the 1^st Defendant hijacking Leeward.  I consider that as what a prudent attorney would have done in the circumstances.  The Father accepted that advice and made the amendment.  There is no substance in the 1^st Defendant’s emotionally charged statement about his greedy siblings with the help of lawyers and accountants took advantage of his Mother’s diminished capacity and amended the trust deed two days after he left California.

Discussion

57.  On the fundamental issue of whether the Father’s authority to transfer the subject share extended to the transfer of the beneficial interest in that share, the 1^st Defendant bears the burden of proof.  In essence, his case is that during the meeting on 22 November 2007, the Father gave instruction to Amy Kwan to transfer both the legal and beneficial interest in the subject share to Goldern.  Such authorisation or authority, if given, could only have been validly and properly given to Fortis as the Father’s secretarial service provider or Chatham as the holder of the subject share, not to Amy Kwan or Mazars.  At the time of the meeting, Amy Kwan had left the employment of Fortis and could not have been in the position to accept instructions from the Father on behalf of Fortis.  Evidence of such authority could only be given by Fortis or Chatham, not Amy Kwan or Mazars. There is no evidence of such authority from Fortis or Chatham. 

58.  That apart, the 1^st Defendant’s case of oral instruction is fraught with difficulties.  In all fairness to the 1^st Defendant, Mr Yin accepts that it is legally permissible to dispose of equitable interest in share orally.   Unlike in the United Kingdom where section 53(1)(c) of the Law of Property Act 1925 provides that subsisting equitable interest cannot be disposed of except by writing, that requirement was abolished in Hong Kong with the repeal of section 6(1)(c) of the Law Amendment and Reform Consolidation Ordinance by the Conveyancing and Property Ordinance (“CPO”) in 1984.  Under the CPO, the requirement in writing only applies to disposal of equitable interest in land, but not to disposal of equitable interest in shares: Yung Shu Wu v Vivienne Sung Wu[4].   While it is legally permissible to dispose of equitable interest in share orally, in view of the value of the gift which was in the tune of US$4 to US$6 million, one must view such assertions with great caution and there are reasons to be sceptical. 

59.  First, in view of the value of the subject share and the separation of legal and beneficial interest prior to the transfer, it is difficult to believe any reasonable secretarial service provider would not have advised or even insisted a written instruction confirming the transfer of the beneficial interest in the subject share, if not for good record keeping, at least for his own protection.  Amy Kwan and Morrison were two very experienced Chartered secretaries.  They would not have failed to be alerted of the desirability for written instruction in the circumstances.  It would have taken no time to prepare a brief instruction of a couple of sentences and secure the Father’s signature forthwith at the meeting. 

60.  Second, it is remarkable that if the Father had authorised Chatham to make an absolute gift of Leeward to the 1^st Defendant, the original documents recording that the only issue share of Leeward was held by Chatham on trust which were handed over to the Father by Chatham in 1991, such as the declaration of trust executed by Chatham, the share certificate, the blank instrument of transfer and the bought and sold notes executed by Chatham should have all remained in the possession of the Father instead of having been utilised to effect the alleged gift or retrieved by Chatham for cancellation.

61.  Most importantly, the 1^st Defendant bears the burden of proof.  He chose not to testify or to call any witness. There is no evidence to support his case other than his opening speech and submissions (which are not evidence) and the questions he put in cross-examining the Mother and her witnesses which insofar as they tend to advance his case are all denied. 

62.  The only evidence before the court is the evidence of the Mother and her witnesses.  In essence, their evidence is that the transfer of the subject share to Goldern was only for the purpose of relieving the Father’s burden of having to handle paper work and signing bank accounts in view of his declining health and aging conditions.  It was not the Father’s intention to make a gift of the beneficial interest of the subject share to the 1^st Defendant.  The Mother’s and her witnesses’ evidence is consistent and inherently credible.  It is not contradicted by evidence coming from the 1^st Defendant.  It has not been seriously or successfully challenged.  I have no doubt about their veracity and accept their evidence. 

63.  The Mother’s and her witnesses’ evidence is supported by the contemporaneous conduct of the Father and the 1^st Defendant; and the subsequent conduct of the 1^st Defendant.  The Father’s contemporaneous conduct, in particular what he told his professional advisors and his reporting of the income of Leeward for tax purpose, is consistent with his having retained the beneficial interest in the subject share.  On the other hand, the 1^st Defendant’s acknowledgement via Leeward’s letter to Clariden Leu dated 22 April 2008; his seeking instructions from the Father as to whose name to put in the w-9 form; his request for certification of his entitlement to a share in the Pohn Family Trust; his repeated assertions about the small size of his assets; and his conduct during his stay in the Father’s home in February and March 2010 are inconsistent with his case of having been given the beneficial interest in the subject share.  Not only that, his subsequent conduct actually corroborates the Mother’s evidence and strengthens the inference to be drawn from the Father’s contemporaneous conduct.  I reject the 1^st Defendant’s case that the Father had given instruction to transfer the beneficial interest in the subject share to Goldern.  In any event, there is not a scintilla of evidence from the 1^st Defendant in respect of his case at all.

64.  The 1^st Defendant seeks to rely on the presumption of advancement.  That presumption only operates when there is no evidence one way or the other, for example, a father buying a motor car for his son and giving him the key.  If a son asked his father for a loan and the father gave him a cheque a few days later, saying “here, I lend you the money”, the son cannot turn around and say he is not obliged to repay because of the presumption of advancement.  There is clear evidence of a loan.  The presumption could not be raised or that it is rebutted by the evidence.  The position is the same, even if the father said nothing when handing over the cheque.  The intention could be readily inferred.  This is exactly the position here.  The presumption could not be raised on the facts of the present case. The 1^st Defendant simply failed to discharge the burden of proving the gift of the beneficial interest in the subject share. 

65.  In conclusion, not only that the 1^st Defendant has utterly failed to discharge his burden of proof, I am able to draw as the only reasonable inference that the beneficial interest in the subject share had never passed to the 1^st Defendant.  The transfer of the subject share on 22 November 2007 was only effective to transfer the legal interest but not the beneficial interest in the subject share which remained with the Father.  In view of the above conclusion, there is no need to deal with the Mother’s secondary case based on community property under Californian law.

Conclusion

66.  For the above reasons, I reject the 1^st Defendant’s defence that by the transfer of 22 November 2007 the Deceased had made a gift to him of both the legal and beneficial interest in the only issued share in the 2^nd Defendant.  Accordingly, that share is held by the 3^rd Defendant as nominee on trust for the Father.  The Plaintiff as executrix of the Father’s will is entitled to judgment.   

67.  Therefore, as against the 1^st and 3^rd defendants, I make an order:

(1) that they shall give an account of all the monies withdrawn from the 2^nd Defendant’s bank accounts since the transfer of the only issued share in the 2^nd Defendant to the 3^rd Defendant;

(2) that they shall pay what is due upon taking of such account; and

(3) that each of them shall do all such acts as may be necessary to effect a transfer or convey to the Plaintiff the said share in the 2^nd Defendant forthwith.

The above relief is adequate for the Plaintiff.  There is no need to make the declaration sought.

68.  The 1^st Defendant is a fiduciary agent holding through his company, the 3^rd Defendant, the subject share in the 2^nd Defendant on trust for his Father.  He is trying to hijack his Father’s company.  He did so regardless of the injury to the Mother’s feeling.  He even had the audacity to challenge his Mother’s mental capacity and accuse his siblings taking advantage of the Mother’s diminished capacity with the help of their accountants and lawyers.  He is entitled to a share in the assets of the Pohn Family Trust only after his Mother’s death.  For his personal and selfish reasons, he is attempting to take Leeward out of the assets of the Trust and to secure it as an immediate gift resulting in a huge tax liability to the Trust.  His conduct is spiteful.  To show the court’s disapproval of such conduct, I make a costs order nisi that the 1^st and 3^rd Defendants shall pay the Plaintiff’s costs of this action on an indemnity basis.  Any party dissatisfied with the above costs order nisi, should make formal application by summons to have it varied within fourteen days, otherwise the costs order will become absolute.