DEINES-POLLAN SERVICES LLC v. LIAN SHUN INTERNATIONAL TRADING LTD

HCA 286/2023

[2024] HKCFI 2196

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 286 OF 2023

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J U D G M E N T

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Background

1.  This is the Plaintiff’s application for summary judgment against the 2^nd defendant (“D2”) by a summons dated 28 November 2023. The plaintiff (“P”) seeks payment of US$2,117,500 (the “D2 Funds”) with interest and a declaration that the D2 Funds are held on trust by D2 for P, and that P is entitled to trace into the D2 Funds and for an account from D2. P also seeks an interim payment of US$2,117,500 as an alternative relief.

2.  By consent, P had obtained an interim injunction against D2 on 31 August 2023 restraining D2 from removing assets of US$2,117,500 from Hong Kong.

The Plaintiff’s Case

3.  P claims to be a victim of online fraud by impersonation.

4.  P came into contact with a man online claiming to be one Tarasov Dmitry Vladimiorivich of a Russian company LLC “SREDNELENSKOE”. LLC “SREDNELENSKOE” offered P attractive pricing for the supply of fertilizers.

5.  P entered into a written agreement dated 14 July 2021 with LLC “SREDNELENSKOE” whereby it was agreed that P would purchase 60,000 metric tons of fertilizers from LLC “SREDNELENSKOE” at US$220 per metric ton (the “Agreement”). Under Clause 7 of the Agreement, LLC ‘SREDNELENSKOE’ would, upon loading of the fertilizers, issue to P a commercial invoice, a bill of lading, a certificate of quality and certificate of quantity (together, the “Shipping Documents”) and P would then make payment corresponding with the goods shipped.

6.  From around February to March 2022, P received the Shipping Documents from time to time from LLC “SREDNELENSKOE” in relation to the sale of the fertilizers. In reliance of the Shipping Documents, P then remitted approximately a total of US$8.2 million (the “Total Funds”) to various entities worldwide, thought to be part payments for the purchase price of fertilizer products from LLC “SREDNELENSKOE” under the Agreement. Specifically, the D2 Funds were transferred to D2 by P from P’s account at Commerce Bank (No. 442-586-028) as follows:

Date	Recipient Account	Amount
22 February 2022	Beneficiary: Lian Shun International Trading Limited (i.e., D2) Bank: Dah Sing Bank, Limited A/C No.: 6 539 007 644 (“D2’s Account”)	US$            617,500
7 March 2022		US$            800,000
8 March 2022		US$            700,000
	Total amount:	US$         2,117,500

7.  On about 15 March 2022, P discovered from the Shipping Documents a discrepancy in the name of the vessel shipping the fertilisers. It was later discovered that the Shipping Documents received by P were signed and stamped by an entity unrelated to the ship-owners and the destination of the vessel was different. The certificate of quality was also subsequently found to be forged. None of the fertilisers had been shipped or delivered. It was then that P discovered that it was trading with someone posing as LLC “SREDNELENSKOE” (the “Fraudster”).

8.  The Fraudster failed to return the Total Funds or the D2 Funds despite P’s demand by letter sent on 30 March 2022.

9.  A report to the Hong Kong Police was made by P on 1 April 2022.

10.  P makes a proprietary claim based on the following:

(1)  The Agreement is void due to a mistake on P’s part[1].

(2)  As the D2 Funds were obtained by fraud, equity imposes a constructive trust on the fraudulent recipient[2]. As there is no discernible reason for the D2 Funds to be paid to D2 directly, there is an irresistible inference that D2 must be a fraudulent recipient[3].

(3)  Having directly received the D2 Funds from P, it is prima facie unjust for D2 to be enriched with the D2 Funds which it would not have received at all had P known the true state of affairs[4].

11.  P claims a declaration to the effect that the D2 Funds are funds held by D2 on trust for P and ancillary reliefs including tracing and account. P also seeks a return of the D2 Funds.

D2’s Defence

12.  D2 claims to be a bona fide purchaser, carrying on a genuine business with a Filipino customer Buildwick Trading (the “Customer”). Upon receipt of a purchase order from the Customer (“PO”), D2 would source the goods from a company in the Mainland known as Shishi Chuangda Garment Trading Co., Limited (石狮市创达服饰贸易有限公司) (the “Supplier”).

13.  All goods ordered by the Customer were said to have duly been delivered by D2. As at 8 January 2022, the amount owed by the Customer to D2 under the various POs amounted to US$8,303,891.20. The Customer had since 13 January 2022 made (through its paying agents) various payments, including the D2 Funds, for the purpose of discharging the outstanding amount owed to D2.

14.  D2 claims to have no knowledge of P’s prior rights or the alleged fraud. D2 had provided valuable consideration in supplying the goods under the POs to the Customer. The D2 Funds were used for reducing the indebtedness owed by the Customer to D2.

15.  D2 has tendered affidavit evidence from a representative of the Customer (“Xu”). Xu deposed that between 1 December 2021 to 8 January 2022, the Customer had sourced various goods from D2 in the sum of US$8,303,891.20. The payment period was 60 days. It is said that many of the buyers of the Customer are “in the Chinese community with ties in China”, they would thus make payment to the Customer in Renminbi in China.

16.  Xu deposed that the D2 Funds were procured by the Customer to be paid to D2 through a paying agent, to whom an equivalent sum in Renminbi was paid. Xu met someone in the name of 許清彻 (the “Agent”) who claimed to operate a licensed money exchange and was able to remit US dollars to Hong Kong. The Customer thus engaged the Agent to remit the money to D2. There were no problems with all sums remitted through the Agent other than the D2 Funds.

17.  Xu says that “the way in which [the Customer] made payments to [D2] is a matter for [the Customer] …[Xu] did not think that there was a need to disclose to [D2] the internal dealings of [the Customer].”

18.  The details of the remittance was eventually disclosed due to D2’s repeated requests as follows:

(1)  The Agent confirmed with Xu whether the D2 Funds had been received by D2,

(2)  After confirmation of receipt by D2, Xu would make to the Agent payment in Renminbi.

(3)  However, Xu has no knowledge of how the Agent procured the remittance to D2’s bank account.

19.  The Customer has provided a half page confirmation dated 4 December 2022 to the effect that it had sent to D2 US$617,500 on 23 February 2022, US$800,000 on 8 March 2022 and US$700,000 on 9 March 2022, as payment for goods supplied by D2.

20.  However Xu has no knowledge on how the Agent procured the D2 Funds to be paid to D2 in Hong Kong.

21.  D2 has also exhibited copies of all transactional documents between D2 and the Customer.

Legal Principles

22.  The applicable principles for summary judgment and interim payment are trite and the principles as set out by Mr Adrian Kwan, counsel for P, in his written submissions were not disputed.

23.  In Guanghua SS Holdings Ltd v Lim Yew Cheng and Anor[5], Ng J set out the applicable principles:

(1)  The defendant bears the burden of satisfying the Court that there is an issue or dispute that ought to be tried. He must show that his evidence is capable of being believed, and there is a fair and reasonable probability of the defendant having a real or bona fide defence[6].

(2)  The believability of the defendant’s assertions must be answered not by viewing them in isolation but by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute. The Court does not isolate each factual issue and consider where it is possible that the defendant’s assertion on that issue is credible. Rather, the Court must look at the whole situation[7].

(3)  Mere assertions in a defendant’s affidavit are not enough to ground leave to defend. Whilst the Court will not embark on a trial of affidavit evidence, the Court is not obliged to suspend its critical faculties and assume that the defendant’s evidence is accurate[8].

(4)  If having regard to inherent plausibility, inconsistency with contemporaneous documents and other compelling evidence, the defence is not credible, the Court must say so. And if the defendant’s evidence is incredible in any material respect, it cannot be said that there is a fair or reasonable probability that the defendant has a real or bona fide defence[9].

24.  A defendant cannot rely on an un-pleaded defence to resist an application for summary judgment[10].

25.  Even if the Court finds that a defendant’s case is “more than shadowy” but “less than probable”, leave to defend should only be granted upon the condition of D2 making full payment into Court[11].

26.  As to the defence of bona fide purchaser, Mr Kwan relies on Zief Incorporated v Tekchandani Ajai Mohan[12] in submitting that such a defence is not available to D2 in the present set of facts:

“(1) The defence of bona fide purchase for value without notice is an exception to the general rule of nemo dat quod non habet (no one gives what they do not have) to grant the defendant good title to a property in situation where the title would otherwise be defective. For example, when X steals P’s property and sells it to D, D will obtain title to the property if he is a bona fide purchaser for value without notice, even though X (being a thief) would not otherwise be able to confer title which he does not have.

(2) This is why the defence has been described by Professor Andrew Burrows as ‘bona fide purchase from a third party’ (The Law of Restitution (3^rd Ed, 2011), p 573).

(3) In his article ‘Restitution and Bona Fide Purchase’ in The Limits of Restitutionary Claims: A Comparative Analysis (1997), Professor William Swadling at p 94 said:

‘… the defence of bona fide purchase has no work to do in the standard two-party situation. As we have seen, the defence forms an exception to the normal rule of nemo dat. It operates to allow a transferor to confer a title which he does not have. By contrast, two-party restitution cases are concerned with transfers by persons who had a good title to the enrichment concerned. Although their intent to give may be in doubt, their capacity to do so is not in question. And since the transferor in the two-party restitution case starts with a good title to the enrichment in question, there will be no need for the transferee to invoke any exception of nemo dat. The fact that the defendant gave value in exchange for what he received should not blind us to this fundamental fact.’

(4) In A Burrows, A Statement of the English Law of Unjust Enrichment (2012), the defendant is said to have a defence of purchaser in good faith, for value and without notice if he/she ‘(a) is a purchaser in good faith of the benefit for value, without notice, of the claimant’s right to restitution, from a person other than the claimant, and (b) can rely on an exception to the rule that no person can give a better title than the person has.’ (section 27(1)) …

(5) Similarly, Justice James Edelman and Professor Elise Bant describe the defence as operating ‘in cases including those brought for unjust enrichment where more than two parties are involved’ and state that the ‘requirement for more than two parties is because in the simple two-party case the transferor usually has good title’. They further state that in ‘unjust enrichment, the bona fide purchase defence operates only in relation to a three-party situation in which the defendant is a subsequent purchaser from a third party whose title to an asset is defective’. See Unjust Enrichment in Australia (2^nd Ed, 2016), pp 372-373” (emphasis added)

27.  Mr Alexsander Wong, counsel for D2, submitted that despite Zief Incorporated, the defence of bona fide purchaser is still available to D2. Reliance is put on the case of Great Investments Ltd v Warner[13]. It was submitted that based on the following judgment by the Full Court of Australia, the bona fide purchaser defence applies in the present case”:

“105. The concept of a “purchaser” in the doctrine of bona fide purchase is not used in its colloquial sense. The doctrine originated in land law. There, a “purchaser” was a person who acquired an estate otherwise than by descent or escheat: see, for instance, Commissioners of Inland Revenue v Gribble [1913] 3 KB 212 at 218-219 (Buckley LJ); HL Bolton (Engineering) Company Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 at 170 (Denning LJ). The transaction in this case involved a purchase. However, the defence of bona fide purchase applies in equity in cases where the purchase is of an applicant’s rights from a third party. The doctrine might be better described as “bona fide purchase from a third party for value without notice” because it “logically applies in those cases in which a defendant has received a benefit under a contract with a third party”: see Barker K, “After Change of Position: Good Faith Exchange in the Modern Law of Restitution” in Birks P (ed), Laundering and Tracing (Clarendon Press, 1995) pp 191, 193.”

Analysis

28.  I agree with Mr Kwan’s submission that as D2 is the direct recipient of the enrichment from P, based on Zief Incorporated, there is no scope for applying the bona fide purchaser defence. It is irrelevant that D2 thought that the D2 Funds were for discharging the Customer’s indebtedness, even if such assertion were believable.

29.  I do not see how the case of Great Investments Ltd v Warner gave a different understanding of the defence. Mr Wong has not referred the court to paragraphs 106 and 108 of Great Investments Ltd v Warner where it was held:

“106. No case of which we are aware has decided that the doctrine cannot be applied in equity where the purchase is of the applicant’s rights from the applicant. However, the reasons for the existence of the defence support its availability being restricted to purchases from a third party. One reason for the defence has been said to be that the defence operates as an exception to the rule of nemo dat quod non habet. In other words, it has the effect of creating a good title where a defendant would not otherwise have received one for the purposes of transactional security. In cases where the applicant has good title to give there is no role for the exception: Swadling W, “Restitution and Bona Fide Purchase” in Swadling W (ed), The Limits of Restitutionary Claims: A Comparative Analysis (UKNCCL, British Institute of International and Comparative Law, 1997) pp 79, 94. Another view was that the defence only operates in equity to show that the recipient has a right to retain the benefit. A defendant could not assert a right to retain a benefit based on the very transaction which requires the benefit to be given back: see Ames JB, “Purchase for value without notice” (1887) 1 Harv LR 1; Fox D, Property Rights in Money (Oxford University Press, 2008) p 274 [8.21].

…

108. The defence of bona fide purchase could have been rejected in this case on the simple basis that the transaction was not with a third party. However, even if it could be applied to a two party transaction there would, at least need to be evidence that value has passed to the transferor, or has passed to another at the transferor’s request. As the primary judge observed (at [280]), that did not occur in this case.”

30.  There is no dispute that P, as the transferor, has good title to give. As such, based on Great Investments Ltd v Warner, there is no room for the exception to the rule of nemo dat. There is also no evidence in the present case showing that any value has been passed to P or to another at P’s request. I therefore do not see any basis for Mr Wong to submit that the bona fide purchaser defence applies to the present set of facts.

31.  Even if I were wrong in the inapplicability of the bona fide purchaser defence, I find that the D2’s defence of bona fide purchaser is not reasonably capable of belief for the following reasons:

(1)  Essentially, D2 is suggesting that the D2 Funds were the amount transferred by the Customer via the Agent into D2’s Account. However, the bank statements show that P was the direct transferor of all 3 sums constituting the D2 Funds. Mr Wong accepted that the D2 Funds all came from P’s account.

(2)  There is evidence in the form of the payment invoices sent by LLC “SREDNELENSKOE” in support P’s case that the transfers were NOT for payment to D2. The amount of the 3 sums, being US$617,500, US$800,000 and US$700,000 are the same as those demanded from the payment invoices dated 19 February 2022, 7 March 2022 and 7 March 2022 respectively, purportedly issued by LLC “SREDNELENSKOE”.

(3)  There is no evidence of P having any connection with D2, the Customer, or the Agent.

(4)  The Customer’s confirmation memo is not a contemporaneous document and serves little purpose and carries little weight against the other available evidence.

(5)  I therefore do not see on the evidence how D2 can assert that the D2 Funds were paid by the Agent in discharge of the Customer’s indebtedness to D2.

(6)  Out of the 8 bills of lading exhibited, 4 of them are undated and none of it showed the Supplier as the shipper and the Customer as the consignee. In any event, despite exhibiting hundreds of POs and invoices, there is no documentary evidence in support of how the 3 transfers, in the exact amounts sent to D2 could be attributed to the Agent paying on behalf of the Customer.

(7)  There is no evidence that there is a system in place whereby D2 would keep track of each payment into its account and ascertain the sender of such funds. It is therefore not known how D2 would normally keep records of the Customer’s running indebtedness, as none of the payments corresponded with the invoiced amount and came from unknown senders.

(8)  Even if the court were to accept D2’s allegation that it had no knowledge of the conduct and dealings of the Agent, such conduct shows a lack of good faith on the part of D2:

(a)  D2 claims to have only discovered in December 2022 that the Customer had used a remittance agent in respect of the D2 Funds.

(b)  D2 provided no reason why a remittance from a company incorporated in the United States would be seen as normal, when its business is in the Philippines or Mainland China.

(c)  D2 does not explain if it often receives remittances from unknown entities and why.

(d)  Each tranche of the D2 Funds remitted into D2’s account were all immediately transferred out to different entities, with no explanation on what were the purposes for such onward transfers.

(9)  There is no explanation on why the Agent was able to obtain a copy of P’s wire transfer authorisation and sent it to the Customer, before commenting: “昨天莫斯科汇出80万美元，还是上次那个公司账户”. The authorisation from P should only have been available to the recipient of the transfer, i.e., the Fraudster. The fact that the Agent has it in his possession seems to point to the Agent being linked to the Fraudster.

32.  Having considered the above, I am of the view that the defence put forward by D2 is unbelievable and there is no triable issue raised by D2.

Relief

33.  As there has been a mixing of the D2 Funds with other funds in D2’s Account, Mr Kwan accepted that proprietary relief is not available to P. However, as P has pleaded in the Amended Statement of Claim that D2 is liable for knowing receipt of the D2 Funds in circumstances where it knew or ought to have known that they belong to P, Mr Wong accepted that P is entitled to the relief of an account and equitable compensation if I find D2’s defence to be unbelievable.

Order

34.  I thus grant the following orders:

(1)  Judgment be entered against the 2^nd defendant for US$2,117,500 (or the Hong Kong dollars equivalent).

(2)  Interest be calculated from:

(a)  22 February 2022 to date of Judgment at prime rate + 1% for US$617,500;

(b)  7 March 2022 to date of Judgment at prime rate + 1% for US$800,000;

(c)  8 March 2022 to date of Judgment at prime rate + 1% for US$700,000,

and thereafter at judgment rate until payment.

(3)  The 2^nd defendant do account for or make equitable compensation to the plaintiff of US$2,117,500 (or the Hong Kong dollars equivalent) in knowing receipt.

(4)  There be a costs order nisi that costs of the Application and of the action be to P, with certificate for counsel, to be taxed if not agreed.

35.  The costs order nisi will become absolute if there is no application to vary it within 14 days hereof.