MILESTONE ELECTRIC, INC v. MEIHOUKANG TRADING CO LTD

HCA 1015/2020

[2020] HKCFI 2542

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1015 OF 2020

________________

________________

______________

DECISION

______________

1.  In this action, the plaintiff claims to be a victim of an email fraud and seeks default judgment against the defendant.  At the hearing on 23 September 2020, I granted the plaintiff default judgment for monetary relief with interest and costs, but reserved my decision on its claim for a declaration that there be a constructive trust.  I now give the reasons for my decision for giving the monetary default judgment, and my decision on the plaintiff’s claim for declaratory relief.

A.   THE RELEVANT FACTUAL BACKGROUND

2.  According to the plaintiff:

(1)  the plaintiff is a company incorporated in Texas, United States and is in electrical, cooling, heating and plumbing business;

(2)  the defendant is a company incorporated in Hong Kong and is the holder of a bank account (“D’s Account”) in the Bank of China (Hong Kong) Limited (“BOC”);

(3)  on 21 May 2020, acting in accordance with an email purportedly from Mr Constantine Louis Antos, one of the plaintiff’s co-owners and directors, the Controller of the plaintiff (Ms Jeni Gant) remitted US$100,000 to D’s Account by wire transfer;

(4)  on 22 May 2020, acting in accordance with an email purportedly from Mr Mark Robison, another co-owner and director of the plaintiff, Ms Gant remitted US$250,000 to D’s Account by wire transfer;

(5)  on 26 May 2020, acting in accordance with another email purportedly from Mr Robison, Ms Gant remitted US$500,000 to D’s Account by wire transfer;

(6)  on or around 27 May 2020, Ms Gant realised that all emails requesting the above wire transfers were not actually originated by Mr Antos or Mr Robison, Ms Gant reported the matter to the United States Secret Service and the Hong Kong Police.

3.  On 19 June 2020, the plaintiff issued the Writ of Summons indorsed with the Statement of Claim and the same was served on the defendant at its registered office on 19 June 2020.

4.  On 10 July 2020, Mr Justice G Lam granted the plaintiff an injunction to prohibit the defendant from disposing its assets up to the sum of US$850,000 (or its Hong Kong dollar equivalent).

5.  The defendant has failed to acknowledge service of the Writ or to file its defence. 

6.  On 31 July 2020, the plaintiff served the summons for default judgment and the supporting affirmation on the defendant at its registered office.

B.   DEFAULT JUDGMENT

7.  In its Statement of Claim, the plaintiff claims against the defendant for, amongst other things, (1) a sum of US$850,000 (or its Hong Kong dollar equivalent) as money had and received by the defendant and (2) a declaration that the defendant holds US$850,000 (or its Hong Kong dollar equivalent) or all such assets derived from the sum or any part thereof which rightfully belong to the plaintiff on constructive or resulting trust for the plaintiff.

8.  This application for default judgment is made pursuant to RHC Order 19, rule 7.  I was satisfied that the plaintiff has duly served the relevant court documents on the defendant, and that its applications for default judgment was made after the expiration of the period fixed by or under the rules of court for the service of the defence in accordance with RHC Order 19, rule 7(1).

B1.   Default judgment for monetary relief

9.  The plaintiff has pleaded a claim in unjust enrichment against the defendant and relies on mistake and absence of consideration as the grounds for restitution.  I considered it appropriate at the hearing to grant default judgment for the monetary relief sought.

B2.  Default judgment for declaration for constructive trust

10.  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, only a rule of practice and can be departed from when the plaintiff has a genuine need for the declaratory relief and justice would not be done if such relief were denied.  Where declaratory relief is sought, the court will scrutinise the application for default carefully, and will not hastily grant the relief sought.  The court should not be expected to simply rubber‑stamp the uncontested application.  See Hong Kong Civil Procedure 2020 Note 19/7/20.

11.  In the Affidavit of Stephen Marc Schultz filed on 31 July 2020 included in the hearing bundle, it was mentioned that the plaintiff’s solicitors had received a letter from BOC on 12 June 2020 stating that the whole of the US$100,000 and US$250,000 that were transferred, and part of the US$500,000 that was transferred, had been debited from D’s Account.  At the hearing, Mr Payne informed the Court that the plaintiff’s solicitors were told by the Hong Kong Police on 20 July 2020 that a sum of US$244,000 odd has remained in D’s Account.

12.  On the basis of the plaintiff’s pleading, it seems to me that the plaintiff’s claim for a constructive trust does not rest on its pre-existing proprietary right to the US$850,000.  Rather, the plaintiff appears to be asserting that it has proprietary restitutionary rights in the US$850,000 and is seeking a constructive trust to effect or realise such rights.

13.  The plaintiff submits that it is a victim of fraud and is therefore entitled to a constructive trust.  To support this position, the plaintiff relies on Guaranty Bank and Trust Company v Zzzik Inc Ltd (unreported, HCA 1139/2016, 18 July 2016) and Skandinaviska Enskilda Banken SA v Hong Kong Liling Trading Limited [2018] HKCFI 2676.  In both of these cases, the Hong Kong courts stated that “when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient”, which is taken directly from Lord Browne-Wilkinson’s speech in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 716C. 

14.  Constructive trusts provide proprietary relief.  To obtain proprietary relief in relation to the US$850,000 transferred to the defendant or assets derived from it, the plaintiff must establish that the assets claimed can be identified by the tracing process as representing the original trust property.  In Federal Republic of Brazil v Durant International Corpn [2016] AC 297, Lord Toulson at §17 said:

“The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. If it has ceased to exist, it cannot metamorphose into a later property interest. Ex nihilo nihil fit: nothing comes from nothing.”

15.  For the reasons given below, I am not satisfied that the plaintiff can now seek proprietary relief in relation to the US$850,000.

(1)  It is well-established that a plaintiff who seeks a proprietary remedy must usually prove that the property to which he lays claim is still in the ownership of the defendant (Boscawen v Bajwa [1996] 1 WLR 328 at 334H (Millett LJ)).

(2)  Given that over US$600,000 of the US$850,000 had already been withdrawn from D’s Account as at July 2020, it is no longer possible for the plaintiff to assert its rights in the US$850,000.  The statement in P’s Statement of Claim that D retains the benefit of the US$850,000 therefore appears to be incorrect.

(3)  Whether or not the plaintiff can assert its rights in the remaining credit balance in D’s Account is not something that the Court is currently in a position to determine. The question depends on a number of considerations including (but not limited to) whether or not there has been any mixing of money in D’s Account, and whether the intermediate balance has fallen to or below zero, since the deposits of the three sums of money transferred from the plaintiff in May 2020, none of which has been pleaded by P in its Statement of Claim. 

16.  Given the views expressed in the previous paragraph, it is unnecessary for me to consider the application of the authorities referred to in paragraph 13 above, or the question of whether the constructive trust sought by the plaintiff is an appropriate remedy to effect or realise its asserted proprietary restitutionary rights.

17.  In 800 Columbia Project Company LLC v Chengfang Trade Ltd [2020] HKCFI 1293, I made a declaration in favour of the plaintiff that sums of money transferred to the defendant pursuant to an email fraud should be held on a constructive trust for the plaintiff.  At the time, I did not have the benefit of any submissions on tracing, and my judgment on the granting of the declaratory relief in that case should therefore be read and understood in this light. 

18.  For the reasons given above, I decline to make a declaration that the defendant holds US$850,000 on a constructive trust for the plaintiff.

19.  I note that the Court did not at the hearing on 23 September 2020 make an order to continue the injunction obtained by the plaintiff.  I consider that it is appropriate to order that the injunction granted by Mr Justice G Lam on 10 July 2020 be continued until further order of the Court or until payment by the defendant of the sum of US$850,000 (or its Hong Kong dollar equivalent at the time of payment), whichever is earlier.  I so order.