LTC (BVI) LTD v. TEMPEST STORM COMPANY LTD AND OTHERS

HCA 535/2022

[2023] HKCFI 3167

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 535 OF 2022

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JUDGMENT

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1.  The Plaintiff has applied for summary judgment against the 3^rd Defendant in respect of sums which it says were defrauded from it via an identity theft email fraud. The 3^rd Defendant is a second level recipient of the Plaintiff’s money. The Plaintiff claims relief under both a proprietary claim and an unjust enrichment claim, as well as for various declarations.

2.  The fraud was a relatively common type of fraud in which the fraudster created false email addresses which differed in only minor respects from the genuine email addresses that were being impersonated. 

3.  The Plaintiff is an investment vehicle associated with the London Technology Club.  It intended to invest in a company in the USA called Outdoorsy, Inc..  It was liaising with the legal representatives of Outdoorsy Inc, Messrs BraunHagey & Borden LLP, for the purpose of making that investment.  During the course of negotiations and correspondence via email the genuine participants used the domain names @braunhagey.com and @outdoorsy.com.  However, email addresses from the domain @braunhageys.com and @outdoorsys.co became inserted into various communications instead of the original domains and as a result the fraudsters (who controlled the false domains) managed to persuade the Plaintiff to pay the sum of US$2,799,991.88 to the account of the 1^st Defendant in Hong Kong instead of to an account owned and operated by Outdoorsy Inc.

4.  The Plaintiff discovered the fraud when Outdoorsy informed it that no funds had been received for the purposes of the investment.

5.  The funds have been traced into the account of the 1^st Defendant and from there a sum of US$600,000, made in 3 payments, has been traced into the account of the 3^rd Defendant.  The question to be addressed, therefore, is whether the 3^rd Defendant has any defence to the claims for restitution and/or for unjust enrichment.

6.  One of the points which is argued by the 3^rd Defendant is that there is a triable issue as to whether or not the fraud in fact happened.  It is, with respect, somewhat difficult to understand the 3^rd Defendant’s case in this respect as it appears to have changed between the original points in its skeleton argument and the way it was put at the hearing.  However, it contends that there are 6 reasons why the fraud is “highly dubious” (to use its words).

6.1.  There is, according to the 3^rd Defendant, some evidence that a person within BraunHagey & Borden was one of the fraudsters.  They appear to be copied on various emails according to the 3^rd Defendant.  The 3^rd Defendant also suggests that a staff member of the Plaintiff may have been a party to the fraud.  In my view this point does not get the 3^rd Defendant anywhere and is pure speculation.  In any event, even if somebody within either BraunHagey & Borden or the Plaintiff itself was a party to the fraud, that does not mean that the Plaintiff has not been defrauded of the money.  There would need to be an attribution of those fraudulent acts to the Plaintiff itself, and the Defendant has made no attempt to suggest why those acts are attributable.  There can be no dispute that the money has disappeared, and I am satisfied that the Plaintiff has been defrauded, and the identity of the fraudsters does not alter that fact, and does not give rise to a triable issue. 

6.2.  There is a lacuna of evidence showing the Plaintiff urging investigations.  Again, I do not think that this makes any difference.  The Plaintiff has either been defrauded or it has not.  In my view it has, and I do not think that a lack of evidence (if there is one) of investigations subsequent to that fraud is at all relevant to what I have to decide. 

6.3.  It is “unthinkable” that the Plaintiff would not have seen the fraud at the time.  I do not accept that this proposition has any relevance to the matters I have to decide.  The Plaintiff is either entitled to recover its loss pursuant to normal principles governing a proprietary claim, and an unjust enrichment claim, or it is not.  As I now understand the 3^rd Defendant’s proposition, this point now goes to the novel proposition advanced by Mr But, Counsel for the 3^rd Defendant, that when assessing the unjust aspect of the claim in unjust enrichment the court should look also to the conduct of the Plaintiff.  For the reasons set out below, I reject that proposition.

6.4.  There is no evidence of correspondence between Outdoorsy and the Plaintiff.  I do not think that this is at all relevant to the issues that I have to decide.

6.5.  There would have been a great deal of discussion between the Plaintiff and Outdoorsy and BraunHagey and it is surprising that those discussions, with the genuine email addresses, during the relevant period have not been produced in evidence.  Again, I do not see why this is relevant to the issues that I have to decide, and I take the matter no further.

6.6.  The instruction to pay money into Hong Kong was an odd instruction and could not possibly have emanated from Outdoorsy.  Again, I do not see this as a relevant factor to what I have to decide.

7.  Mr But contended that whether the Plaintiff has conducted a reasonable enquiry into what has happened, whether it had any involvement in the fraud, or culpability in failing to detect the fraud prior to dispensing the money, are relevant factors for deciding whether there was unjust enrichment. 

8.  He confirmed that he had no authority for that proposition, and that it was a novel proposition.  In reply Mr Ng, Counsel for the Plaintiff, referred me to Zief Incorporated v Tekhandani Ajai Mohan (T/A D’Ziner Collections (Hong Kong)) & Others [2021] 3 HKC 69 at [23] where Recorder Eugene Fung SC held, citing Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349 at 399:

“The Defendant’s enrichment is unjust if it is caused by a mistake of fact or law made by the Plaintiff. It is prima facie unjust for a recipient of money to retain the payment when, if the payer had known the true state of affairs, he would not have paid.”

9.  That proposition, which I accept, puts paid to the novel point that Mr But articulated.  I reject his proposition. The “unjust” descriptor of the cause of action of unjust enrichment relates to and describes the enrichment, not the reasons behind the enrichment save and to the extent that those reasons render the enrichment itself either just or unjust.  Hence it looks to whether it is unjust that the Defendant should keep the money, and beyond assessing that question, it does not look at whether the Plaintiff was at fault in paying the money in the first place.

10.  Hence I am satisfied that the Plaintiff has demonstrated that it was the subject of a fraud, and that the money paid out of its account was paid out as a result of that fraud.  But that, of course, does not mean that the Plaintiff is entitled to Summary Judgment.

11.  The Plaintiff says that it is entitled to recover:

11.1.  The sum of US$600,000 on the basis of unjust enrichment in the event that it can establish that the 3^rd Defendant’s defence is hopeless.

11.2.  The sum of US$14,905.89 on the basis of a proprietary claim This sum is equivalent to the lowest intermediate balance in the bank account of the 3^rd Defendant between the day the money was paid into that account and the day that the account was effectively frozen by a Letter of No Consent.

12.  The Plaintiff refers to the principles on tracing identified by Au-Yeung J in Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd & others [2023] HKCFI 1292 at [18] (without citations):

“18. The general principles on tracing are as follows:

(1) A thief or fraudulent recipient holds the stolen property on constructive trust for the true owner.

(2) Evidential presumptions may be employed as to the intention of a recipient where there are mixed funds in their accounts, e.g. by applying the first in first out (“FIFO rule”) or the punitive presumption (“PP rule”).

(3) Funds lose their separate identities as a result of the mixing of the Defendant’s own money with money received from a Claimant to which the Defendant knows he is not entitled. The Defendant is deemed to have kept the Claimant’s money intact and to have spent his own money.

(4) The PP rule of identification applies where the other contributor to the bank account is a wrongdoer. It aims to preserve the value contributed by the Claimant to the mixed fund in the bank account at the expense of the value contributed by the wrongdoer. A reversed burden of proof operates. Hence, if a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so, they belong to the trust.

(5) The traditional approach has been to apply the rule in Clayton’s Case to allocate the mixture in the bank account between contributors of the money. Specific credits in the account are matched against specific debits. It is presumed that the money first withdrawn from the account is drawn against the contribution of the party whose money was first deposited. Once that contribution has been exhausted, later withdrawals are treated as made against the contribution of the party whose money was next deposited. In attributing withdrawals to one party or the other, the court does not take into account-as it would with a wrongdoer-whether the money withdrawn is dissipated or preserved.

(6)  A presumption would not apply where it was contrary to the actual presumed intention is of the contributors, or was unjust or impractical in its operation.”

13.  Although the Plaintiff is entitled to choose which principle of tracing is most advantageous to it (assuming that either might properly be applied), it accepts that the punitive presumption can only apply if it is established that the 3^rd Defendant is a wrongdoer. It says that if the 3^rd Defendant can be said to be a wrongdoer then the punitive presumption would apply such that Plaintiff is entitled to trace into the minimum intermediate balance of US$14,905.  However, if the 3^rd Defendant establishes its putative defence and is able to show that it is an innocent, the First in First out principle, as applied to the fund flows within the 3^rd Defendant’s bank account over the relevant time, would result in no traceable amount over which a proprietary claim could be established. 

14.  Therefore, the Plaintiff accepts that the entirety of its summary judgment application, including in relation to its proprietary tracing exercise, depends upon whether the 3^rd Defendant is able to establish a triable issue in its various defences to the unjust enrichment claim.  Consequently, it is necessary to consider the 3^rd Defendant’s defence in an appropriate level of detail to decide whether a triable issue has been shown.

15.  The essence of the 3^rd Defendant’s defence is that it is a company that trades in crypto currency.  It receives money from third parties, buys digital assets with that money, in particular a crypto currency known as USD Tether, and then deposits those digital assets into wallets owned by the third parties, and within that series of trades it arranges for a commission to be paid (usually by way of a reduced exchange rate between USD and Tether).  It says, and its bank statements support, that it receives hundreds of thousands, or even millions, of US Dollars every day, from numerous different third parties that it then converts into Tether.

16.  It says that the USD600,000 that was paid into its account by the 1^st Defendant on 18 May 2021 was arranged by an intermediary that it has dealt with before, and it had no reasons to suspect, and did not suspect, that the USD600,000 was in any way tainted by wrongdoing.  As far as the 3^rd Defendant was concerned, it was simply another transaction as part of its trading business in Tether. 

17.  Crypto currency trading is, or at least was in 2021, almost entirely unregulated and it did not, and was not obliged to, carry out any “know your client” checks.  The industry was almost deliberately shrouded in secrecy, and that does not affect the validity of its defence.  It says that the various whatsapp messages that have been exhibited are messages that record the transactions between it and its intermediary, who had arranged for the 1^st Defendant to pay money to the 3^rd Defendant to finance the trades in question.  The numbers in the messages match entirely with the amounts deposited, and demonstrate how much Tether was bought, and the wallets into which it was placed.

18.  Consequently, the 3^rd Defendant says that it is entirely innocent, in the sense that it had absolutely no knowledge of any wrongdoing that affected the three deposits.  It is in the position of a Bona Fide Purchaser for Value without Notice and in any event has changed its position as a result of the receipt of funds, in that it has purchased the Tether and placed it in the wallet of the intermediary.  It would not have done that had it thought that the money was tainted. Consequently, it says that it has a complete defence to the claims of the Plaintiff, whether through a proprietary claim or a personal claim for unjust enrichment.

19.  Each of these points has been articulated in some detail, both through the evidentiary material that has been placed before the court, and through the submissions of counsel.

20.  The Plaintiff argues that the evidentiary material does not establish the defences.  It says that:

20.1.  The 3^rd Defendant’s case has been through substantial changes over time and in particular between the defence and the 1^st and then 3^rd affirmation of Wu Tak Yuen.  That renders it unreliable and not capable of belief. 

20.2.  Its story about operating through intermediaries is improbable in the extreme, particularly where the intermediaries are apparently unknown to the person dealing with them (Mr Wu) other than through their nicknames used on whatsapp and had allegedly just been introduced by Mr Wu’s superiors (who remain unidentified and have not given evidence).

20.3.  The alleged business of crypto currency trading cannot be supported.  The Business Registration does not support the proposition that the 3^rd Defendant is a crypto currency trader, but instead it is registered to trade in agricultural by-products, electronic products, cosmetics, international logistics and energy.  It has failed to adduce any audited accounts, any tax records, meeting minutes or books and records, all of which would be expected of a legitimate business. 

20.4.  Whilst the whatsapp messages do show the relevant numbers, they do not demonstrate a transaction of the type alleged by the 3^rd Defendant.  There is no identification of the individuals involved, and to the extent that any suggestions can be made from the material as to identities, it is inconsistent with the names of individuals now relied upon.  There is no proof that the 3^rd Defendant’s staff are involved in the various whatsapp groups, and there is no identification of who owns the wallets that the Tether was deposited into.  Hence the transactions relied upon remain little more than bare assertion.

20.5.  There is no evidence of any valid contract that would support a case of Bona Fide Purchaser for Value without Notice, and the 3^rd Defendant has not established that it was paid any commission, or that it was indeed payable.  That is fatal to the allegation of a Bona Fide Purchase for Value without Notice.

20.6.  The 3^rd Defendant either knew, or ought to have known that the money was tainted by wrongdoing.  Hence the defences are not available.

20.7.  In any event, the deposits into the wallets either are, or ought to be, capable of being reversed such that the defence of change of position is not available to the 3^rd Defendant.

21.  I have considered the various propositions of each of the Plaintiff and the 3^rd Defendant carefully.  In my view it is appropriate that I should give the 3^rd Defendant leave to defend the action.  In those circumstances, given that whatever issues arise in the defence of the claim will have to be tried, it would not be appropriate for me to say more than is necessary in order to explain the reasons for my decision.  Therefore, I will explain the basis of the decision but will not descend into too much detail, despite the fact that much of the evidence does address detailed points and propositions.

22.  There can be no doubt that the bank statements of the 3^rd Defendant demonstrate a very significant turnover.  Significant sums of money are paid into its bank account every day by numerous third parties.  That undeniable evidence would appear to me to support a proposition that the 3^rd Defendant was involved in some form of trading.

23.  It is also clear from the evidence, if I take that evidence at face value, that the 3^rd Defendant trades in crypto currencies.  It appears to have access to digital wallets, which are normally the basis for such trading, and Mr Wu has stated in evidence that it purchases crypto currency and then deposits it into the wallets of its intermediaries.  Therefore, it seems to me to be a plausible explanation from the 3^rd Defendant as to the reasons why it received money from the 1^st Defendant, and what it did with that money.  I can well see the possibility that the 3^rd Defendant will establish that the money was paid to it for the purposes of buying crypto currency, which it then did and deposited the crypto currency into the wallet of a third party.

24.  I recognise that the Plaintiff criticises the veracity of that evidence and suggests that there are difficulties with, in particular that there is no evidence as to the ownership of the wallets, no evidence that they relate to the transactions which are in dispute in this action, and no evidence that the 3^rd Defendant’s staff are directly involved in the WhatsApp groups.  Those criticisms may ultimately be proved correct, but I do not think that it is appropriate to grant a summary judgment based on those criticisms in circumstances where I am told by the 3^rd Defendant that the wallets are all part and parcel of its trading mechanism.  Ultimately this will have to be a matter for trial.

25.  I accept, for the purposes of this hearing, that crypto currency trading was, in 2021, largely unregulated.  In those circumstances, and quite probably in any event, it does not come as a great surprise that there may be operators within the industry who transacted in huge sums of money without the safeguards that one would normally expect of a significant business.  Therefore, whilst I understand the various criticisms of the 3^rd Defendant’s case which have been made by the Plaintiff, I do not think that they are such as to render the propositions of the 3^rd Defendant as mere moonshine. 

26.  I also accept that the Plaintiff may ultimately prove correct in its suggestion that the intermediaries are unidentified and that the 3^rd Defendant cannot demonstrate a proper business of the type alleged being carried out through them.  It is perhaps surprising to many that such huge sums could be transacted with unknown persons using nothing other than a nickname and a WhatsApp message.  The 3^rd Defendant has, on its side of the transaction, the safety of the receipt of money prior to purchasing crypto currency, but the intermediary would not have such safety, and it is perhaps here that the surprise might come.  However, the mere fact that something is surprising does not justify a summary judgment if the court is told, perhaps with some justification, that the industry does indeed work in this manner.  The propositions will have to be tried on the basis of full evidence.

27.  I have also considered the suggestion that the 3^rd Defendant either knew or ought to have known that the money it received from the 1^st Defendant was tainted.  Again, the Plaintiff may prove to be correct, but in my view there is clearly a triable issue in that regard.  US$600,000 does not appear to be a particularly large sum from the 3^rd Defendant’s perspective.  It was a minority portion of the US$3,687,032 received on 18 May 2021.  That US$3,687,032 was received in 23 different transactions most of which appear to be with different counterparties.  I can easily recognise that there is a triable issue over why the 3^rd Defendant should consider the particular US$600,000 which was stolen from the Plaintiff as being tainted.  As far as the 3^rd Defendant might be concerned there was nothing special about that US$600,000.  It was simply one (or in fact three) of the 23 transactions that took place that day.

28.  Further, I do not accept the proposition that because the way in which the 3^rd Defendant has described its business has changed (according to the Plaintiff significantly) is sufficient to eradicate the triable issues that I have identified above.  I accept that the 3^rd Defendant may demonstrate that its changes of case are in fact not as significant as the Plaintiff asks the court to accept.  I accept that the 3^rd Defendant may not have very carefully described its business or its customers to its previous lawyers, and I accept that Mr Wu may have been mistaken.  Ultimately, of course, whilst a change of case goes to credibility and may have an effect on whether a court subsequently believes a party’s case, I do not think that the credibility issues raised in this case are sufficient to overcome the triable issues for the purposes of summary judgment.

29.  I have thought carefully about whether conditional leave to defend should be given.  I have come to the conclusion that the US$600,000 is protected from dissipation by an undertaking given by the 3^rd Defendant, which undertaking Mr But has confirmed to me in court during the course of the hearing. 

30.  In the light of that undertaking, I do not think that it is necessary to grant conditional leave to defend.  The Plaintiff is fully protected from dissipation of its money in the event that it is ultimately able to establish a proprietary claim.  In the event of a personal claim for unjust enrichment, the money remains in a bank account in order for the Plaintiff to make a claim over it (without of course reaching any conclusion as to priority).  The only benefit of requiring that money to be paid into court would be that the money would be under court protection rather than the protection of an undertaking.  However, in my view this is not sufficient to justify the difference between unconditional leave to defend and conditional leave to defend.

31.  In the event of any further risk to the money materialising as a result of any changed circumstances the Plaintiff will always be free to seek injunctive relief if so advised.  The availability of that injunctive relief would of course be a matter for the court on any occasion in which such an application was to be heard.

32.  Therefore, I grant the 3^rd Defendant unconditional leave to defend the action.

33.  The parties have addressed me on costs and both parties have agreed that the appropriate order for costs in the event that I grant unconditional to defend is costs in the cause.  Therefore, that is the order I shall make.