GLEN ELVEN KELLER JR v. YING WAH TAK HOLDINGS LIMITED AND ANOTHER

1997, No.MP207

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H E A D N O T E

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A pledge of chose in action in the form of a credit balance in a bank account is invalid in law as there cannot be any delivery of possession of the property in question.

1997, No.MP207

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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J U D G M E N T

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Bankground and the Plaintiff's claim

1. The Plaintiff is the trustee of the liquidation of one Blinder Robinson & Co. Inc. ("Blinder Robinson"), having been appointed by the United States District Court, Dever, Colorado, pursuant to the United States Securities Investor Protection Act of 1970. Blinder Robinson Inc. was run by one Meyer and Lillian Blinder.

2. The Trustee claims, by way of Originating Summons, for a declaration that he is the beneficial and legal owner of the bank account held by the 2^nd Defendant ("BCCHK") in the name of "Meyer Blinder and/or Lillian Blinder" together with consequential orders for payment of the proceeds of the account. The account held by BCCHK in fact consists of two accounts, being Account No.2175404 and Account No.3157313, both accounts having been opened on 1^st June 1989.

3. The Trustee's right to bring the claim in respect of these accounts arises from three judgments entered in the Colorado Bankruptcy Court. A partial summary judgment and final judgment in bankruptcy was entered on 30^th December 1991 against Meyer Blinder for US$10,693,214. A final and all inclusive judgment in bankruptcy was entered on 12^th March 1992 against Meyer and Lillian Blinder for US$124,416,124. The judgment provided, inter alia, that all the individual and joint properties of Meyer and Lillian Blinder, whether directly or indirectly owned and wherever located, be held custodia legis by the Colorado Bankruptcy Court.

4. There was an appeal from the aforesaid final judgment. However, the appeal was settled by way of a Settlement Agreement dated 25^th August 1992. The Settlement Agreement was approved by the Colorado Bankruptcy Court on 2^nd September 1992 which provided, inter alia, that Meyer and Lillian Blinder should convey and deliver to the Trustee all their respective right, title and interest (legal or equitable) in all their real and personal properties wherever located and by whomever held other than certain specified assets which did not include the subject bank accounts. Accordingly, the Trustee claims to be entitled to the proceeds of the bank accounts.

The 1st Defendant's claim

5. The 1^st Defendant ("Ying Wah Tak") is a Hong Kong company incorporated on 28^th February 1991 as Gain Fortune Investments Ltd. It had then changed its name to Ying Wah Tak Holdings Limited on 11^th June 1991. The directors and shareholders of the 1^st Defendant are Walter Larry English and Caroyn N. Gary.

6. Ying Wah Tak claims to be entitled to the proceeds of the subject bank accounts by way of a guarantee dated 16^th September 1990 given by Meyer Blinder in respect of a loan to one Tele-Art Securities Ltd. for HK$3 million made by Ying Wah Tak. The guarantor purportedly pledged to Ying Wah Tak, Meyer Blinder's savings account at BCCHK in the name of Meyer or Lillian Blinder with the Account No.0217540002. A copy of the bankbook was stated to be attached to the pledge. This letter dated 16th September 1990 was in the following language -

"Ying Wah Tak Holdings Ltd.

Gentlemen:

Per your request I will personally guarantee the repayment of your loan to Tele-art Securities Ltd. for HK$3,000,000,000.00. I hereby pledge my savings account at the Bank of Credit and Commerce in the name of Meyer or Lilian Blinder account #0217540002

(copy of bank book attached) as collateral. If for any reason Tele-art Securities Ltd. has not repaid the loan by 16 September 1995 with interest of 10.5% per annum you have my authorisation to present this letter to the bank and receive all of the funds from this account.

Sincerely,

Sd. Meyer Blinder"

The Plaintiff's contention

7. There was no copy of the bankbook allegedly attached to this letter produced by the 1^st Defendant. According to the accountants of the Joint Special Managers of BCCHK, the Customer No.0217540002 was only assigned by the Joint Special Managers to the customer "Blinder Meyer Mr and/or Lillian Blinder Mrs" in 1992. It was created as a part of the system of accounts organisation implemented by the Joint Special Managers to link all the accounts maintained by any one customer at any of the branches of the bank.

8. Prior to the assignment of this account number, the accounts of Mr and Mrs Blinder were Nos.02175404 and 03157313. They were opened on 1^st June 1989. In other words, as at 16^th September 1990, there was no Account No.0217540002.

9. Further the former account No.02175404 was a Statement Savings Account and not a Passbook Savings Account. The latter account No.03157313 was a Term Deposit Account without any passbook either.

10. Furthermore, it is quite clear from the aforesaid chronology that Ying Wah Tak did not came into existence until 28^th February 1991 and did not take its name until 11th June 1991.

11. Although there was allegation that the pledge was created as a device of obtaining the proceeds of the subject bank account by fraudulent means and Ying Wah Tak's claim should be rejected, the Plaintiff took a preliminary point and submitted that in law the pledge as alleged by the 1^st Defendant was invalid.

The preliminary point of law

12. The Plaintiff submitted that a pledge may be effected by actual or constructive delivery of possession. It is dependent for its validity on the transfer of possession of the object in question with intent to pledge. In this case, the object in question is the bankbook for Account No.0217540002. As there can be no bankbook as the account never existed, it cannot be construed that the pledge related to some account in existence on 16^th September 1990.

13. A bank account is a chose in action which means a thing recoverable by action as contrasted with a chose in possession which is a thing of which a person may have not only ownership but also actual physical possession. See Halsbury's Laws of England, Vol 6, para.1.

14. It has been said in Ellinger's Modern Banking Law at p.693 that -

" A security over choses in action has to be effected in a form recognized as valid at law or in equity. Naturally, a pledge over a chose in action is ruled out by the fact that the concept of possession is inapplicable to mere rights³ . In the ordinary course, transactions over choses in action are effected by means of a statutory or an equitable assignment. A statutory assignment, which has to be effected in the manner prescribed by section 136 of the Law of Property Act, 1925, involves an outright sale or transfer of the debts to the assignee. Such an assignment is complete when notice thereof is given to the debtor. An absolute sale or transfer may, likewise, be effected by an equitable assignment, in which case notice to the debtor is advisable but not a requisite. An equitable assignment can also be used for an assignment by way of charge, effected to create a security."

³ footnote: A pledge of negotiable instruments and marketable securities is valid as these instruments constitute both choses in action and choses in possession; Chap.17 Sect.2(i), Chap.20 Sect.1(v), above. For the same reason they may be subject to a lien.

 

15. The requirement for possession is also discussed in Paget's Law of Banking and at p.559 it was said -

"A pledge, being created by and based upon the delivery of possession, is a security limited by the extent of the pledgee's possession. Thus, if he loses possession, he loses his security. The security extends only to what is in his possession, and no further; and the security is incapable of extending to anything which is not capable of being possessed. Thus, delivery of the title deeds to land may constitute a pledge of the title deeds, but cannot constitute a pledge of the land itself; and delivery of a share certificate cannot constitute a pledge of the underlying shares, not merely because the certificate does not represent the underlying shares but is merely evidence of title to them, but because possession of shares (being intangible assets, or choses in action) is an impossibility. Both transactions may constitute pledges of the relevant documents, which of themselves are of little or no value to the person in possession of them, and they may also constitute (or be taken as evidence of an intention to create) equitable mortgages of the underlying assets (land and shares), but they cannot constitute pledges of those assets.

The pledge is, therefore, a security of limited application, being founded upon actual physical possession."

16. Mr Cheung for the 1^st Defendant submitted that the pledge did not depend on either the delivery of possession or the transfer of ownership of the object in question but represented an agreement between the 1^st Defendant, creditor and Mr Blinder, debtor, that the 1^st Defendant should be entitled to look to the proceeds of the asset to discharge the indebtedness. He submitted that the agreement was an agreement to give security over future property, i.e. Account No.0217540002. He relied on Goode's Legal Problems of Credit and Security 2^nd Edn. 1988 in which the learned author said at p.124 that :-

"A customer's credit balance with his bank is, of course, an asset which he can mortgage, charge or (in case of a documentary intangible) pledge to a third party."

17. However, Mr Fok, with whom I agree, submitted that the learned author was qualifying the word "pledge" by restricting that to the case of a documentary intangible only. Earlier on the learned author has already said at p.32 that -

"In the case of pledge, delivery or possession

The sixth requirement for attachment is confined to pledges. A pledge requires delivery of possession, actual or constructive; an agreement for a pledge which is not accompanied or followed by delivery of possession is a mere contract conferring no real right on the intended pledgee."

In other words, I agree with Mr Fok's submission that the alleged pledge was invalid in law as and when it was created on 16^th September 1990 as there was no delivery of possession of the property in question. The 1^st Defendant could not rely on an assignment dated 5^th May 1996 by which Mr Blinder purportedly assigned all his rights, title and interest in BCCI Account No.0217540002 to Ying Wah Tak as full and complete settlement of his personal guarantee of the loan made on 16^th September 1990. By that time, Mr Blinder, by way of the Settlement Agreement dated 25^th August 1992, had already conveyed and delivered to the Trustee, i.e. the Plaintiff, all his properties wherever located.

18. In the end the Plaintiff is entitled to the two declarations sought in this Court with costs to the Plaintiff against the 1st Defendant.