DEAK PERERA FAR EAST LTD. v. CHASE MANHATTAN BANK, N.A.

IN THE COURT OF APPEAL

1994, No. 23
(Civil)

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J U D G M E N T

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Penlington, J.A. :

1. This is an appeal from a judgment of Deputy Judge Wesley Wong of 27th January 1994 in which he ordered that a paragraph of the plaintiff's statement of claim herein be struck out but at the same time dismissed an application to strike out the entire claim against the 4th defendant (Chase). The writ and statement of claim are dated 27th May 1987.

Background

2. The plaintiff (DPFE) is in liquidation by the Official Receiver. It was previously a Hong Kong registered company carrying on business here as a deposit taker, money changer and dealer in precious metals. It was part of the well-known Deak Group of companies and its only directors were the 1st defendant, Mr. Nicholas Deak, (Mr. Deak), now deceased and the 2nd defendant, Mr. Otto Roethenmund, (Mr. Roethenmund).

3. The 3rd defendant, American National Bank of New York was formerly named Deak National Bank (Deak National). It was incorporated in the U.S.A. and was controlled by Mr. Deak and Mr. Roethenmund. Chase is a very large bank carrying on business in the U.S.A. and in many other countries. DPFE had an account with Chase in Hong Kong and in New York. The 5th defendant, Canadian Imperial Bank of Commerce (Canadian Imperial) is incorporated in Canada and carries on business there and elsewhere. DPFE had an account with it in Hong Kong and in New York.

4. The 6th defendant (Standard Chartered) is a bank incorporated in the United Kingdom carrying on business also in New York and in Hong Kong and DPFE had an account with it in New York. The 7th defendant (Union Bank) is incorporated in the U.S.A. and again DPFE had an account with it in New York.

5. DPFE, at all material times a subsidiary of Deak & Co. Incorporated (Deak & Co.), was a private company incorporated in New York of which Mr. Deak and Mr. Roethenmund were directors and had controlling interests. They both lived in New York.

6. In late 1984, the Deak group and in particular DPFE's parent company, Deak & Co., became insolvent. On 29th November 1984, Mr. Anthony Pong resigned as a director of DPFE in Hong Kong and the management of the company was taken over by two senior executives, Mr. Thomas Lai and Mr. David Mok. On 6th December 1984, Deak & Co. and two of its wholly owned subsidiaries petitioned the United states Bankruptcy Court in New York for relief under the provisions of Cap. 11 of the Unites States Bankruptcy Code (the Chapter 11 proceedings). Those provisions enable a court to issue orders whereby petitioning companies are given protection from execution by their creditors for a period of time during which their affairs may be reorganised. From the date of filing the petitions, i.e. 6th December 1994, Deak & Co. and its two subsidiaries were thus protected from legal process.

7. On the previous day, 5th December 1984, on the instructions of either Mr. Deak or Mr. Roethenmund, withdrawals were made from various DPFE bank accounts held with the defendant and another banks and the money was transferred to Deak National in New York. The total amount involved was US$2,161,191. The funds were then transferred to the companies which had petitioned in the Chapter 11 proceedings, a result being that these funds were no longer available to pay the debts of DPFE in Hong Kong.

8. The claim against the directors, Mr. Deak and Mr. Roethenmund, is that the transfer of the funds was made without any consideration flowing to DPFE and were not made in the ordinary course of business. They were made to increase the assets held by the companies protected by the Chapter 11 proceedings, to the detriment of DPFE. The transfers were made at a time when it was known that these companies were insolvent and were about to seek bankruptcy protection. It is alleged that Deak National was also aware of the circumstances and was a party to this fraudulent transfer.

9. The great bulk of the funds transfer to New York, i.e. US$2 million, came from Chase by way of a telex instruction dated 5th December from Mr. Deak. It is the plaintiff's claim that the terms of DPFE's contract with Chase were contained in a bank mandate authorised by the directors of DPFE whereby Chase was to withdraw and transfer funds out of the DPFE account pursuant to telex instructions only when an authorised test code was contained in the telex. The particular telex did not contain such a test code. As a result of that it is claimed that the transfer was unauthorised and wrongful and has had the effect of depriving DPFE of those funds. It was further claimed in paragraph 26 of the statement of claim as follows:

"26. Further or in the alternative, Chase Manhattan, through its officers, assisted Mr. Deak and/or the 2nd Defendant in their above-pleaded breaches of fiduciary duty and breaches of trust comprised in the misapplication of DPFE's funds. The transfer was made in circumstances whereby Chase Manhattan knew or ought to have known, but virtue of the knowledge of its officers or employees, of the business affairs of the Deak Group in the U.S.A., Hong Kong and Macau, of the misapplication of funds by the directors of DPFE in breach of their fiduciary duty and/or in breach of trust. In particular Chase Manhattan through its officers :- (a) knew of circumstances which would indicate to a reasonable banker the fact of misapplication of DPFE's funds in breach of fiduciary duty and/or in breach of trust; and/or (b) knew of circumstances which would put a reasonable banker on enquiry; and/or (c) failed to make such enquiries which any reasonable banker would make.

Particulars

(i)	For several years before December 1984 Chase Manhattan had been DPFE's principal banker. In particular Chase Manhattan had acted as DPFE's banker in relation to a deposit-taking scheme in Hong Kong by which DPFE avoided the then-existing Deposit-taking Companies Ordinance with the assistance of the Hong Kong, Macau and New York branches of Chase Manhattan. That scheme was one of DPFE's largest trading operations in the early 1980's.
(ii)	In late 1984 Chase Manhattan, through its Hong Kong branch and its New York branch, was aware that the Deak Group of companies were experiencing financial difficulties.
(iii)	By the end of November 1984 Chase Manhattan, through its Hong Kong branch, knew that the financial difficulties of the Deak Group were causing financial difficulties for DPFE and Chase Manhattan took steps to limit or curtail the amount of credit given to DPFE;
(iv)	By at least the 6th December 1984 Chase Manhattan were aware that companies in the Deak Group (but not DPFE which was not a United States company) would seek protection under Chapter 11 of the United States Bankruptcy Code;
(v)	After receiving the telex referred to in paragraph 23 above on the 5th December 1984 Chase Manhattan transferred the funds in question and thereafter on the 6th December 1984 noted the transfer on its computer chart service whereby DPFE's Hong Kong management were able to monitor transactions on its accounts;
(vi)	Also on the 6th December 1984 Chase Manhattan's New York branch telexed DPFE, Hong Kong (where Chase Manhattan knew DPFE's telex test codes were kept) requesting that DPFE urgently telex the test code omitted from the 5th December 1984 telex referred to in paragraph 23 above;
(vii)	DPFE's Hong Kong management did not supply the test code requested and on the 10th December 1984 Chase Manhattan again telexed a request that it be supplied; and
(viii)	On a date unknow to the Plaintiff, but after the 6th December 1984 and/or after Chase Manhattan was aware of the afore-mentioned Chapter 11 proceedings and the wrongfulness of the 5th December 1984 transfer of funds by Mr. Deak, Chase Manhattan arranged for Mr. Deak and the 2nd Defendant to sign the telex referred to in paragraph 23 above in an attempt to ratify the transfer.

The Plaintiff is unable to give further and better particulars until after discovery and/or the delivery of interrogatories."

10. By a summons of 11th June 1993, Chase sought an order pursuant to order 18 rule 19 of the Rules of the Supreme Court and/or the inherent jurisdiction of the court to strike out paragraph 26 on the basis that (a) it discloses no reasonable course of action and/or (b) it is frivolous and vexatious and/or (c) it is an abuse of the process of the court.

11. By a summons dated the 13th September 1993 Chase sought an order striking out DPFE's entire claim against it on similar grounds but on the basis of a stipulation or settlement reached with Mr. Roethenmund, as a result of which Chase said DPFE had not suffered any loss.

12. By a summons dated the 4th November 1993 DPFE sought an order for discovery of a large number of documents which were or might have been in the custody or control of Chase.

13. When the summonses came before Deputy Judge Wong it was agreed that he should first deal with those of Chase seeking the strike-out orders.

14. At the hearing of Chase's summons to strike out paragraph 26 of the statement of claim, DPFE obtained an adjournment to consider whether an amendment to paragraph 26 was necessary, presumably in light of the dicta in Belmont Finance Corporation Ltd. v. Williams Furniture Co. Ltd. [1979] Ch. 250. When the matter came on again, DPFE applied to amend the first part of paragraph 26 of the statement of claim so as to read as follows:

"26 Further or in the alternative, Chase Manhattan, through its officers, transferred the said funds with actual knowledge that the transfer of the same had been procured by Messrs. Deak and/or Roethenmund dishonestly and in breach of their fiduciary duties to DPFE and/or in breach of trust alternatively it made the transfer wilfully shutting its eyes to the matters set out below and wilfully and recklessly failing to make such inquiries as an honest and reasonable banker would have made in the light of the said matters."

15. The particulars relied upon remain the same as originally pleaded including the final paragraph "the plaintiff is unable to give further and better particulars until after discovery and/or the delivery of interrogatories."

16. The basis of DPFE's case against Chase was that Chase was liable to it as a constrictive trustee, a relationship imposed in equity, by reason of Chase's transfer of funds at the direction of DPFE's fraudulent directors under circumstances when Chase knew or, as a prudent banker, ought to have known that DPFE would be likely to losing the funds so transferred.

17. Deputy Judge Wong considered, inter alia, the authorities of Belmont Finance Ltd. v. Williams Furniture, Polly Peck Intl. Plc. (no. 2) Eagle Trust v. SBC Securities Ltd. [1992] 4 AER 488 and Agip (Africa) Ltd. v. Jackson [1992] 4 AER 385. He said that:

"From those authorities it is clear that constructive knowledge of the breach of trust is insufficient. It must be shown that there must be dishonesty or want of probity on the part of the 4th Defendant by having actual knowledge of the dishonest breach of trust or turning a blind eye to the obvious. It is on this basis that the summons for striking out para. 26 is taken out."

18. As regards the proposed amendments he went on to say that "DPFE was now alleging that Chase had actual knowledge of the breach of trust and fiduciary duty of Mr. Deak and Mr. Roethenmund and was liable as a constructive trustee but the particulars relied on fall far short of particulars that Chase had knowledge that on the 5th December 1984 the Deak Group would seek Chapter 11 protection." He then said.:

"It is obvious from the pleading that without the active assistance or the turning a blind eye to the obvious by the 4th Defendant fraud by the 1st and 2nd Defendants would not have been perpetrated. The 4th Defendant is therefore by necessary implication a party to the fraud. Counsel should not plead fraud 'unless he was clear and sufficient evidence to support it", per Lord Denning MR in Associate Leisure Ltd. v. Associated Newspapers Ltd. [1970] 2 QB 450 at 456. Charges of fraud must be pleaded with utmost particularity (Garden Nepture Shipping v. Accidental Worldwide Investments [1989] 1 Lloyd's Rep. 305 at 308). (emphasis added)

The question whether particulars will be ordered before or after discovery, according to Mortimer J. as he then was in Civil Appeal No. 88 of 1992 Aktieselskabet Dansk Skibsfinansiering v. Wheelock Marden & Co. Ltd. & Ors., 'depends upon the circumstances of each case. The exception is where fraud is alleged'.

From the afore-mentioned authorities, in my judgment, neither the original para. 26 nor the proposed amendment of para. 26 has been adequately pleaded. I therefore order that para. 26 be struck out."

19. He went on to find however that an amendment to the statement of claim, which he allowed, had cured the deficiencies in the pleadings upon which the summons to strike out the entire claim was based and refused to so strike out. However he ordered that DPFE should pay Chase's costs of that summons.

20. It is the case for DPFE here, propounded eloquently by Mr. Lewis, that a statement of claim, or part thereof, should only be struck out if it is "plain and obvious" that it can't succeed. That was not so here. While the summonses to strike out had been heard before DPFE's summons for discovery they should be looked at in the light of what DPFE contended was a hitherto very poor discovery by Chase and the fact that the applications to strike out were not made until over 6 years from the service of the statement of claim. It was DPFE's case that in fact they were only brought in the face of the summons for discovery which Chase found to be embarrassing.

21. It was the main ground of appeal argued before us by Mr. Lewis that the deputy judge had failed to distinguish the plain allegations of fraud made against Mr. Deak and Mr. Roethenmund with the allegation of want of probity, resulting in a constructive trust, against Chase. He had, furthermore failed to consider the two alternatives pleaded to actual knowledge by Chase of the imminent Chapter 11 application. These were that Chase shut its eyes to the obvious (the "ostrich" case) or a wilfully failure by Chase to make such inquiries as an honest and prudent banker would have done. The deputy judge had failed to appreciate that the proposed amended paragraph 26 closely follows the form set out in Polly Peck Intl. Ltd. v. Nadir (no. 2) and thus approved by the English Court of Appeal. We do not consider that proposition is supported by the dicta of Scott L.J. relied on in Polly Peck Intl. v. Nadir but it should be noted that that decision was an appeal from the granting of a Mareva injunction and Scott, L.J. at 780 said:

"This is not of course the trial of the action. It is possible that discovery may bring to light documents which do suggest some knowledge or at least provide the basis for suspicion by the Central Bank of impropriety attending the currency transfers. That seems to be authority for the contention of Mr. Lewis that in appropriate cases full particulars of a claim against a bank for 'lack of probity' may be given after discovery." (my emphasis)

22. It was furthermore the case for Chase that the allegation of "constructive knowledge" was expressly denied by Chase in its defence of 3rd June 1988. The summons now issued after more than six years later is hopelessly out of time. By pleading to the allegation of such knowledge Chase had admitted that the question was one for trial.

23. For Chase, Mr. William Stone contended that DPFE had to cite particulars in its statement of claim showing dishonesty on the part of Chase either as a party to the fraud of Messrs. Deak and Roethenmund, or knowledge of the breach of trust or deliberate avoidance of such knowledge.

24. Mr. Stone contends that, on the recent authorities such as Polly Peck Intl. (no. 2) v. Nadir per Scott L.J. at 274 and Eagle Trust plc. v. SBC Securities Ltd. per Vinelott J. at 494-500 there is no such thing as "constructive knowledge". This was virtually conceded when DPFE asked for an adjournment and then sought to amend its pleading to allege actual knowledge. There is clear authority in A.D.S. v. Wheelock Marden and Ors. Civil Appeal 88/1992, that if fraud is alleged "full particulars must be given in the original pleading and if not so given will be ordered before discovery" per Mortimer JA at 10. He does however go on to say that: "although in appropriate cases there remains the possibility of their being supported after discovery."

25. DPFE's claim, as contained in the amended paragraph 26, is now of actual knowledge by Chase that the transfer of the funds to New York by Messrs. Deak and/or Roethenmund was fraudulent. That clearly is an allegation also of fraud against Chase. Dealing with the proposed amendment to paragraph 26 he went on to hold that the amendment was an allegation of fraud and that "proper particulars of such an allegation must be pleaded otherwise the allegation will be struck out Cannock Chase District Council v. Kelly [1978] 1 WLR 1 and Belmont Finance Co. Ltd. v. Williams Furniture Co. Ltd. Deputy Judge Wong then held that the particulars relied on falls far short of particulars that the 4th defendant (Chase) had knowledge that on the 5th December 1984 the Deak Group would seek protection under Chapter 11. What is now pleaded is a bare allegation that the 4th defendant had been guilty of bad faith and been dishonest".

26. He then went on to say that the amended pleading by necessary implication meant that it was alleged that Chase had been party to a fraud and that should not be pleaded unless there was clear and sufficient evidence to support it. Furthermore DPFE must supply such full particulars before discovery. He therefore struck out paragraph 26 of the claim.

27. This is not an easy matter but with respect to the Deputy Judge DPFE has given considerable particulars of the alleged bad faith of Chase. It is said that they knew of the financial difficulties of the Deak Group and of that was causing problems for DPFE in Hong Kong. Chase knew on the 6th December that the Deak Group would seek Chapter 11 protection and Chase's New York branch urgently telexed DPFE on the 6th December asking for the test code which was omitted from the telex of 5th December requesting the transfer of the funds. Thereafter Chase is in an apparent effort to ratify the transfer of 5th December, Chase arranged for Mr. Deak and Mr. Roethenmund to sign the telex of that date.

28. In my view those particulars, as DPFE concedes, may be amplified after discovery, are sufficient to inform Chase of the claim they have to meet. This is not a case of a party saying "we think you have defrauded us and now wish to look at your records to see if we can prove it." Full particulars of fraud do have to be given but in my view this is an appropriate case where the plaintiff, DPFE is entitled to discovery before giving such full particulars.

29. There is an alternative pleaded, a lack of probity in carrying out its duties as DPFE's banker but on the authority of Cannock Chase District Council v. Kelly that must be regarded also as an allegation of dishonesty.

30. I would allow the appeal and the amendments sought to paragraphs 15 and 26 of the statement of claim.

Costs

31. Although Chase's second summons to strike out the whole of DPFE's claim was dismissed, costs were awarded against it on the basis that it was only because the statement of claim had then been amended to allege that DPFE had suffered a loss in excess of the US$2.36 million originally pleaded. That was because of a "stipulation" i.e. a settlement of DPFE's claim against Mr. Roethenmund for that sum. In an earlier decision relating to that settlement Deputy Judge Wong had said, obiter, that it seemed to him that because of the settlement DPFE had not suffered any loss as a result Chase's transferring the funds to New York on the 5th December 1984.

32. It is contended by Mr. Lewis that the amendment was not in fact necessary, it simply removed any doubt, and the costs of the summons should have followed the event. Mr. Stone says the amendment was necessary and without it the summons would have succeeded. Moreover leave is required to appeal an order for costs and no such leave has been obtained.

33. The question of costs is essentially one for the trial judge unless he is clearly wrong. I do not consider that is the case here and I would dismiss the appeal against the award of costs of Chase's second summons dated 11th June 1988.

34. We should hear the parties on the question of the costs of Chase's first summons of 3rd June 1988 here and below and as to the form of the order.

35. It only remains for me to express regret for the delay in delivery of this judgment, responsibility for which is entirely mine.

Nazareth, V-P :

36. I also agree.

37. Since we are disagreeing with the judge, I would add a few words of my own. As was observed by Buckley L.J. in Belmont Finance v Williams Furniture CA [1979] 1 Ch 250 at 268B, to cite but one expression of the well-established nature of the requirements relating to the pleading of fraud or dishonesty "An allegation of dishonesty must be pleaded clearly and with particularity".

38. The averment in the proposed paragraph 26, in the statement of claim, that Chase Manhattan transferred the funds with actual knowledge that the transfer of the same had been procured by Deak and/or Roethenmund dishonestly and in breach of their fiduciary duties to DFPE and/or in breach of trust, seem to me amply to meet the requirements of clarity required of allegations of fraud and dishonesty. In particular, actual knowledge of the matters in question is expressly averred.

39. As to the requirement of particularity, I will not repeat the full page of closely typed particulars given, which are specified by Penlington J.A. in his judgment. It suffices to say that the facts particularised raise a strong inference of the knowledge averred and in my view constitute sufficient particulars.

40. Similarly, the alternative averment that Chase Manhattan made the transfer wilfully shutting its eyes to matters specified in the particulars, and wilfully and recklessly failing to make such enquiries as an honest and reasonable banker would have made in the light of those matters is, in my view, also clear. And likewise here, too, the facts in the particulars, in my view, raise a strong inference of the relevant averments, and are also sufficient.

41. Those conclusions are not affected by the possibility that further particulars might be given after discovery.

42. I would add that, given the circumstances and the nature of what is averred and particularised, Chase Manhattan should be left in little doubt as to the plaintiff's case that it has to meet, particularly as the matters involved seem to be peculiarly within its own knowledge and unlikely to be within that of the plaintiff.

43. That is not to say that a judge, to whom application is made, may not deem it proper to require particulars of specific matters or documents relied upon and within the knowledge or control of the plaintiff to be provided; but that would now not be a matter of strike-out for failure to plead without clarity and particularity. As to the possibility mentioned of a free ranging fishing expedition on the part of the plaintiff, the court will be there to exercise its discretion and control.

Mortimer JA :

44. I agree for the reasons given by Penlington JA that this appeal should be allowed. This is not an easy case but, in my judgment, justice requires this Court to set aside the judge's decision and exercise its own discretion. In these circumstances I would add a few general words of my own.

45. It is well settled that fraud must only be pleaded when there is sufficient evidence. It must then be pleaded specifically and the party must give full particulars of the case upon which he relies. If he fails to particularise his case in his original pleading, he will be ordered to do so before discovery. This is so even in cases such as this where some of the facts are known only to the other party.

46. The principle is that it is not just to permit a party to raise a vague unparticularised case on the pleadings in the hope of making it good after discovery. Equally, if a party has evidence of fraud and he gives sufficient particulars, justice requires that he be allowed to proceed even if his case is augmented after discovery.

47. Here, the plaintiff has pleaded fraud specifically and unequivocally and if made out at trial the particulars given are sufficient to establish fraud. In these circumstances, it would be unjust to strike out the allegation.

48. The question remains whether the defendant can justifiably ask for any averment to be further particularised before discovery, but I am not to be taken as indicating that any further particulars are necessary.