J. P. MORGAN SE, LUXEMBOURG BRANCH v. LV GUANGXIN TRADE CO LTD

HCA 2/2023

[2023] HKCFI 1094

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2 OF 2023

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DECISION

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THE APPLICATIONS

1.  By a summons filed on 10 March 2023 (“the Summons”), the plaintiff, claiming to be a victim of email fraud, applies for:

(1)  Judgment to be entered against the defendant pursuant to Order 13 rule 6 and Order 19 rule 7 of the Rules of the High Court (Cap.4A, Laws of Hong Kong) (“the RHC”); and

(2)  Continuation of the injunction order granted by Johnny Chan J on 30 December 2022 (“the Injunction Order”) which was subsequently continued by this Court on 6 January 2023.

FACTUAL BACKGROUND

2.  The plaintiff was and is at all material times a bank having its headquarters in Frankfurt, Germany and part of the JP Morgan Chase Group. Its branch network includes operations in, among others, Luxembourg and London.

3.  Between 15 and 16 December 2022, the plaintiff received instructions (“the Fraudulent Instructions”) by emails and telephone calls from certain unidentified fraudster(s), which held itself out as a Mr Basu who was a genuine customer of the plaintiff, to transfer US$4,800,000 (“the Misappropriated Funds”) from the said Mr Basu’s account with the plaintiff (“Mr Basu’s JPM Account”) to the defendant’s account maintained with OCBC Wing Hang Bank Limited in Hong Kong (“the defendant’s OCBC Account”).

4.  Under the mistaken belief that the Fraudulent Instructions were genuine, the plaintiff effected the transfer of the Misappropriated Funds from Mr Basu’s JPM Account to the defendant’s OCBC Account with a value date of 16 December 2022.

5.  On 19 December 2022, the plaintiff was informed by the genuine Mr Basu that he had not authorised the said transfer of the Misappropriated Funds.

6.  In accordance with its regulatory obligations, the plaintiff credited US$4,800,000 to Mr Basu’s JPM Account, representing the funds paid out therefrom as a result of the unauthorised transfer.

7.  Upon discovery of the fraud, the plaintiff immediately requested OCBC Wing Hang Bank Limited to cancel the said unauthorised transfer. OCBC then informed the plaintiff that the defendant’s OCBC Account was informally suspended but that a total sum of US$559,059 had already been transferred away from the defendant’s OCBC Account to an account held by another entity with MBSB Bank Berhad.

THE PROCEDURAL HISTORY

8.  On 3 January 2023, the plaintiff issued the Writ of Summons herein which was duly served on the defendant at its registered office in Kwun Tong on the same day.

9.  The plaintiff then filed its Statement of Claim on 3 February 2023 which was also duly served on the defendant by leaving the same at its aforesaid registered address in Kwun Tong.

10.  No Notice of intention to defend or Defence has been filed herein by the defendant.

11.  As mentioned, the plaintiff took out the Summons on 10 March 2023, and caused the same to be served on the defendant by leaving at the defendant’s said registered address on 14 March 2023.

12.  On 30 December 2022, the plaintiff obtained an ex parte Mareva injunction order from Johnny Chan J. The Injunction Order was continued until trial or further order of the Court on 6 January 2023.

THE APPLICABLE LEGAL PRINCIPLES

13.  It is trite that the Court’s power to grant judgment under Order 19 rule 7 of the RHC is discretionary, and that the Court has to consider the plaintiff’s case according to the pleadings. While the plaintiff must show a case for the order which he seeks to obtain, it is not necessary for him to prove his case by evidence.

14.  As to declaratory relief[1], it is not the normal practice of the Court to make a declaration without a trial, particularly where the declaration is that the defendant in default of defence has acted fraudulently. This is, however, not a rule of law, but only a rule of practice which should not be followed when the plaintiff has a genuine need for the declaratory relief and if justice would not be done in the event such relief were denied.

15.  Indeed, declaratory relief has been granted in a number of email fraud cases on the basis that there is a genuine need for such a relief to secure the plaintiff’s proprietary as opposed to merely personal claim, particularly given that the defendant may have other creditors.

16.  Insofar as post-judgment injunction is concerned, DHCJ Keith Yeung (as he then was) had the following to say in China Citic Bank Corporation Limited (Quanzhou Branch) v Li Kwai Chun & others [2018] HKCFI 1800 at [32]:

“ … The mere fact that a judgment has been obtained does not by itself justify [a Mareva injunction]. But if a Mareva injunction is otherwise justified (applying the established considerations and with the fact that it is a post-judgment application factored in), a Mareva injunction may be granted (subject to the rider that it should normally be of limited and specific duration). It acts in personam on the defendant and works in tandem with the usual execution mechanism.”

17.  It is well established that when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, and the property is recoverable and traceable in equity: Creative Impact (Hong Kong) Ltd v Luckon Travel Ltd [2021] HKCFI 1552, at [14].

18.  Even if the recipient was not a party to the fraud, if his state of knowledge is such as to make it unconscionable for him to retain the property, the defrauded claimant has a tracing remedy. Further, knowledge does not have to be acquired at the time of receipt, and it can be acquired subsequently while the property is in the recipient’s hands: Guaranty Bank and Trust Company v Zzzik Inc Limited (HCA 1139/2016, unreported, 18 July 2016) at [32] – [33].

19.  Regarding the claim based on unjust enrichment, money paid under a mistake of fact is prima facie recoverable provided that the payer did not intend the payee to have the money in any event, the money was not paid for good consideration and the payee has not in good faith changed his position: Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd & Another [1980] QB 677.

DISCUSSION

20.  Having considered the plaintiff’s Statement of Claim filed herein, I am satisfied that the plaintiff has properly pleaded a case against the defendant on constructive trust, unjust enrichment and knowing receipt:

(1)  In the present case, the defendant knew or ought reasonably to have known that it was probable that someone else had a proprietary right to the Misappropriated Funds, and that there was a serious cause to question the propriety of the transfer of the said funds to the defendant’s OCBC Account in that it might have been transferred pursuant to a fraudulent scheme;

(2)  In any event, the defendant has knowledge of the fraud because of the Injunction Order, the Statement of Claim filed herein, and the Summons, all of which have been duly served on it at its registered address. Moreover, the defendant must have been aware of the suspension of its OCBC Account. Be that as it may, the defendant has neither paid nor made any attempt to return the Misappropriated Funds to the plaintiff;

(3)  It is unconscionable for the defendant to retain the Misappropriated Funds because there was no legitimate reason for the defendant to receive the same in the first place and its knowledge of the fraud;

(4)  The defendant has been unjustly enriched because the Misappropriated Funds were paid by the plaintiff to the defendant in the mistaken belief that the Fraudulent Instructions were given by Mr Basu himself. The defendant has not changed its position. The defendant was thereby unjustly enriched at the expense of the plaintiff;

(5)  The Misappropriated Funds were not transferred to the defendant to discharge a valid legal obligation or for good consideration.

21.  In my view, fairness and justice dictate that a declaratory relief should be granted in respect of the plaintiff’s proprietary claim, given that a large part of the Misappropriated Funds remain in the defendant’s OCBC Account. Little is known about the defendant, except that this shell company has received the Misappropriated Funds obtained by fraud and that it has no connection whatsoever with the plaintiff previously. In these circumstances, I do not think the plaintiff should face any possible risk of having to pursue its claim in competition with other creditors. Hence, an order should be made so that the plaintiff will be able to earmark the remaining sum of the Misappropriated Funds in the defendant’s OCBC Account.

22.  A repayment order in respect of the Misappropriated Funds should also be made as the plaintiff is plainly entitled to recover the sum deceived.

23.  In relation to interest, I take the view that the plaintiff is entitled to be compensated for its loss of the use of the Misappropriated Funds from 16 December 2022 (the date on which the subject transfer to the defendant’s OCBC Account was made) at prime rate plus 1%: Chow How Yeen Margaret v Wex Pharmaceuticals Inc [2018] 3 HKLRD 163, at [45] and [56] (CA).

24.  Given the nature of this case, I am also satisfied that the Injunction Order should be continued as an aid to enforcement. None of the circumstances which justified the grant of the Injunction Order on 30 December 2022 have materially changed to date. I therefore order that the Injunction Order be continued for a further six months from the date of this order.

ORDER

25.  For the above reasons, I make an order in terms of the Schedule attached to and paragraph 2 of the Summons, save that the declaratory relief shall be limited to the sum of US$4,240,941 being the balance of the Misappropriated Funds remaining in the defendant’s OCBC Account.

26.  Interest on the Misappropriated Funds from 16 December 2022 shall be paid by the defendant at The Hongkong and Shanghai Banking Corporation Limited prime rate plus 1% to the date of judgment and thereafter at judgment rate until full payment.

COSTS

27.  Costs should follow the event. I make a costs order that the defendant shall bear the plaintiff’s costs of this action (including the costs of the Summons and all costs reserved). Such costs are grossly assessed at $380,000 and shall be paid within 14 days after the sealed order herein is served on the defendant.