STAR THERAPEUTICS, INC v. LEABON TECHNOLOGY (HK) LTD AND ANOTHER

HCMP 599/2021

[2021] HKCFI 1715

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 599 OF 2021

________________________

____________________

BETWEEN

________________

________________________________

REASONS FOR DECISION

_________________________________

1.  The plaintiff Star Therapeutics, Inc (“the Plaintiff”) claims to be a victim of an email fraud resulting in USD520,000 (“the Sum”) belonging to the Plaintiff being transferred out of its account with Silicon Valley Bank (“SV Bank”) to unknown persons among whom were Leabon Technology (HK) Ltd (“D1”) into whose account with Bank of China (Hong Kong) Limited (“the Bank”), the sum of USD519,972.30 was transferred.

2.  This is the Plaintiff’s application by originating summons dated 29 April 2021 against D1 and the Bank for a declaration that the sum of USD391,825.16 (“the Balance”) still remaining in D1’s account with the Bank are funds held on trust for the Plaintiff and an order that the Balance be forthwith released and returned to the Plaintiff, and for judgment against D1 for the sum less the balance.

Background

3.  The Plaintiff is a private Delaware LLC based in San Francisco. Its application is supported by an affidavit of Jeremy Boucher (“Mr Boucher”), a vice president of finance of the Plaintiff dated 16 April 2021.

4.  The Plaintiff’s accounting functions have been outsourced to Solutions On Call South LLC (“SOCS”) which has responsibility for keeping the plaintiff’s financial records and handling its bank accounts.

5.  There is an established protocol for any remittance transaction that SOCS makes on behalf of the Plaintiff which involved express instructions (with all necessary information and supporting documents) from the Plaintiff’s president (“Mr Rosenthal”) to, inter alia, a designated staff member of SOCS followed by a verbal confirmation.

6.  SOCS received email instructions on 7 January 2021 from Mr Rosenthal for a remittance of the Sum which instructions were carried out but the designated staff, in breach of protocol, did so without first seeking a verbal confirmation from Mr Rosenthal.

7.  4 days later, on 11 January 2021 SOCS received further email instructions for remittance of further funds to another bank account but as there were insufficient funds in the SV Bank account, SOCS contacted Mr Rosenthal and the fraud perpetrated on the Plaintiff came to light.

8.  The Plaintiff did not know and had had no dealings with D1 (the stated beneficiary of the remittance) who became enriched at the Plaintiff’s expense.

9.  None of the email instructions for remittance from Mr Rosenthal to SOCS on 7 and 11 January 2021 originated from him. It could only be explained on the basis that his email account had been hacked and the instructions were in fact given by unknown perpetrator(s) of the fraud.

10.  The Plaintiff took immediate action but the remittance had been processed. The matter was reported to the FBI and the Hong Kong Police Force.

11.  The plaintiff then obtained Norwich Pharmacal relief against the Bank and was able to confirm the identity of D1 as owner of D1’s account. Bank documents reveal that USD519,972.30 (after deduction of the Bank’s fees from the Sum) remitted from the Plaintiff’s account with SV Bank on 7 January 2021 was paid into D1’s account which prior to the deposit had a balance of USD203.82 (“the original balance”).

12.  4 attempts to remit monies out of D1’s account have been made since 8 January 2021 but only 2 were successful. Currently, USD392,029.54 remains in D1’s account which includes the original balance and accrued interest of USD0.56. The Balance is the net amount of the Sum (less the original balance and accrued interest) transferred from the Plaintiff’s account to D1’s account which remains in D1’s account.

13.  As appears from an affirmation of service of Chan Chun Wah Edwin dated 9 June 2021, a sealed copy of the originating summons, the supporting affidavit and the notice of appointment to hear the originating summons) were served by registered post at the registered address of D1 on 3 May 2021 (which have not been returned) and the plaintiff’s written submissions and list of authorities were served on D1 by leaving the same at its registered office on 7 June 2021.

14.  No acknowledgement of service has been filed by D1 who did not appear at the hearing.

15.  The Bank filed an acknowledgement of service and on 20 May 2021 stated that it takes a neutral stance in these proceedings.

The Plaintiff’s application

16.  Where fraud has been perpetrated, equity imposes a constructive trust on the fraudulent recipient of the stolen property which is recoverable and traceable in equity. Such a constructive trust arises by operation of law and a declaration granted upon an application for default judgment merely confirms the existence of the trust that had arisen in the past: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at 714 G and 716 C-D.

17.  I am satisfied on the evidence of Mr Boucher that the Plaintiff is the victim of an email fraud and that it has suffered loss in the amount of the Sum.

18.  The Plaintiff seeks declaratory relief in respect of the Balance that remains in D1’s account, for the same to be released by the Bank and paid to the Plaintiff, as well as a default judgment against D1 in respect of the difference between the Sum and the Balance.

19.  It is clear from the documents provided by the Bank that the Balance is traceable to the Sum that was transferred from the Plaintiff’s account and remains in D1’s account. In those circumstances, the Plaintiff is the beneficial owner of the Balance. Once that is shown, a vesting order may be made pursuant to section 52(1)(e)[1] of the Trustee Ordinance, Cap 29, vesting the Balance in the Plaintiff.

20.  Wismettac Asian Foods, Inc v United Top Properties Limited & Ors, [2020] HKCFI 1504 is a similar case. A detailed analysis of the application of section 52(1)(e) in such circumstances may be found at §§40-46. The plaintiff’s application was largely based on that analysis.

21.  The originating summons seeks (1) declarations to the effect that (a) D1 is liable to account to the Plaintiff for the Sum as constructive trustee; and (b) that the Balance remaining in D1’s account at the Bank represents funds held on constructive trust by the Bank for the Plaintiff; (2) orders that (a) the Balance be released and returned by the Bank to the Plaintiff; (b) D1 do pay the Plaintiff the Sum less the Balance returned under (2) (a) above; and (c) D1 to pay the Plaintiff’s costs of and incidental to these proceedings on an indemnity basis to be taxed if not agreed.

22.  In the present case, a constructive trust arose by operation of law when the Sum was credited to D1’s account with the Bank. The rule of the court that the declaration will not be granted when giving judgment by consent or in default without a trial is a rule of practice and not of law and will give way to the paramount duty of the court to do with the fullest justice to the plaintiff to which he is entitled: see 2021 HKCP at §15/16/2. In the present case, there is a genuine need for declaratory relief and it is appropriate to grant the declarations sought.

23.  As is clear from Wismettac, a vesting order in respect of the Balance is warranted. A draft order should be submitted for approval which should include such a provision.

The Bank’s costs

24.  At the hearing, Mr Dan Leung counsel for the Plaintiff produced recent correspondence[2] between those instructing him and solicitors for the Bank concerning the present application. In their letter dated 20 May 2021, the Bank’s solicitors stated that whilst the Bank takes a neutral stance in the application, they requested that an insertion be made to the proposed order as follows:

“The Plaintiff do pay the 2^nd Defendant costs of this application on an indemnity basis to be taxed if not agreed.”

25.  The Plaintiff did not consider this acceptable and on 9 June 2021 counter-proposed that there be “no order as to costs”. This prompted a response from the Bank’s solicitors on 10 June 2021 to the effect “it is trite law” that the costs of an innocent third party in a vesting order application shall be borne by the plaintiff, citing PT Adhyawarna Bumi Pelangi v YB (HK) Trading Co Limited [2018] HKCFI 1863 and Barclay Butera Inc v Tianxbang Trade Co Limited [2018] HKCFI 2258.

26.  In the YB Trading case, BOC’s costs were summarily assessed at HK$5,800 to be borne by the plaintiff. In the Barclay case, the bank’s costs were agreed at HK$7,000 to be borne by the plaintiff. While in neither case were the costs awarded on an indemnity basis, they support the proposition that in a vesting order application, the costs of an innocent third party such as the Bank should be awarded its costs.

27.  I do not agree with the Plaintiff that the appropriate order is that there should be no order as to costs. However minimal, some costs will have been incurred by the Bank in relation to this application and it should be entitled to be paid its fees, reasonably incurred, such fees to be summarily assessed.

28.  Accordingly, the Bank is directed to lodge its statement of costs within 14 days of this order, with liberty to the Plaintiff to file its objections (if any) within 7 days thereafter.