Bank of Ireland v Pexxnet Ltd. Maxximmo AG & Ors

The Claimant (“the Bank”) seeks recovery of €2,400,000 in respect of three instruments which were delivered on 14 September 2006 to the Bank for collection but turned out to be forgeries. The Bank credited €2,400,000 to the First Defendant’s (“Pexxnet”) bank account at the Bank’s Finchley Road branch before the instruments had cleared. By the time the Bank realised that the instruments were forgeries, €2,225,000 had been transferred by Pexxnet to the Fourth Defendant’s (“Montres Lunesa”) account at UBS AG (“UBS”) in Zurich. The Bank requested the return of the money, but this was declined by Montres Lunesa.

These proceedings were issued on 19 February 2009. Pexxnet was duly served, but has not participated in the proceedings.

The Second and Third Defendants (respectively “Maxximmo” and “Maxximmo Treuhand”) originally participated in the proceedings and served a joint defence. However, after the first Case Management Conference (“CMC”) in October 2009, they ceased to take part and failed to comply with the Court’s orders for the provision of further information about their defence and for disclosure of documents. They were debarred from defending by the Order of David Steel J. dated 7 May 2010.

Montres Lunesa participated in the proceedings until January 2010, shortly before it was due to give disclosure of documents. From that time it ceased to comply with the Court’s Orders. On 7 May 2010, David Steel J. made a peremptory order declaring that, unless Montres Lunesa complied with various Orders including disclosure by 28 May 2010, it would be debarred from defending the case. Montres Lunesa did not comply. It applied to Flaux J. on 2 July 2010 for relief from the sanction imposed by David Steel J. Flaux J. dismissed this application. Montres Lunesa applied to the Court of Appeal for permission to appeal but on 12 July 2010, Longmore L.J. refused permission to appeal. In his written decision, he said that litigants must appreciate that Court orders are to be complied with. The trial date had been fixed for many months and it was unreasonable to expect the Court to adjourn the trial so that disclosure could be given by Montres Lunesa at some indeterminate time in the future.

So Pexxnet has never taken part and all remaining defendants have been debarred from defending. That is entirely of their own making, but the result is that I have had to try this case in their absence. Very serious allegations are made against each Defendant and other individuals and I have carefully considered the evidence in the case.

At the trial I heard oral evidence from Pauline Mullarkey, a customer assistant at the Bank’s Finchley Road branch, and from John McParland, a Certified Accountant and the Special Project Manager for the Bank based in Belfast. I also heard expert evidence from Eva Stormann, a Swiss avocat and partner in Secretan Troyanov.

Pexxnet is a limited company incorporated in England and Wales. It was established in September 2004 by Hermann Brendel, a German businessman and citizen, resident in Munich. He was the ultimate beneficial owner of the company which (he told the Bank) was established for his specialist recruitment business. On 24 September 2004, Pexxnet applied to open Sterling and Euro bank accounts at the Bank’s branch in Finchley Road, North London. Mr Brendel signed the application forms. The accounts were opened on 30 September. Mr Brendel was the sole authorised signatory and could operate the accounts online via a Business Online facility. The Euro account was held in Belfast.

The accounts showed minimal activity until September 2006, when there were a credit balances of £543 and €148.82. There had been some concern at an attempt by Mr Brendel to make payments to himself and another individual of some €2 million in May 2006 when there was a credit balance of less that £3,000 but Mr Brendel claimed there had been a mistake in the decimal points in the instructions. In the light of what subsequently happened, I am doubtful as to the veracity of that explanation.

On 14 September 2006, Mr Brendel flew from Munich to London and attended at the Bank’s Finchley Road branch where he presented three instruments for collection. He dealt with Mrs Mullarkey. The instruments presented were (as they appeared):

Mr Brendel told Mrs Mullarkey that he had brought the cheques personally because he did not trust the post. Mrs Mullarkey said the drafts would have to be sent to Belfast, as the Finchley Road branch could not access foreign accounts. Mrs Mullarkey made copies of the instruments. She kept one copy for the branch and handed Mr Brendel another copy.

The instruments were sent in the DX bag to Belfast. They were received in Belfast for processing on 15 September 2006. On 19 September the Bank processed the cheques and a value of €2,400,000 was lodged or “posted” to the Pexxnet Euro account. This meant that Pexxnet could see that the instruments had been presented but the funds were not available for the use of Pexxnet. The drafts were sent to Dresdner Bank in Germany for collection.

In the meantime, on 21 September 2006, a cleared value of €2,400,000 appeared in Pexxnet’s Euro account. This was generated automatically on the assumption that the Bank would normally receive good value and thus know the fate of the instruments within four days. This was an obvious weakness in the Bank’s systems, and I understand that the Bank has wisely changed this policy since. The result however in this case was that €2,400,000 was available for use by Pexxnet.

On Friday 29 September 2006 Mr Brendel input and authorised via Business Online a payment from the Pexxnet Euro account of €116,000 to himself at his personal account at UBS AG Zurich, Bahnhofstrasse 72.

On Sunday 1 October 2006 Mr Brendel input and authorised a payment of €2,225,000 from the Pexxnet Euro account to Montres Lunesa’s account no. 23046967579A also at UBS AG Zurich, Bahnhofstrasse 72 (“Montres Lunesa’s UBS account”). He entered the narrative “as per contract 20.09.06 (stille Beteiligung)” – which translates as “silent Partnership”.

These online requests were processed on Monday 2 October 2006. The funds were transferred at 1133 and 1148 hours respectively and they were posted to Mr Brendel’s and Montres Lunesa’s accounts at UBS later that day. The net sum received by Montres Lunesa was €2,224,975.

On Friday 29 September 2006 the Bank had been advised by SWIFT message from Dresdner Bank that the RV Bank draft would be dishonoured as a “fraud cheque”. Its International Operations Department was also advised by letter dated 27 September received on 29 September that one for the instruments was missing a signature. Late in the afternoon of 29 September the SWIFT message was bundled with other messages and sent to the Bank’s Remittances section. Unfortunately, it was not actioned until Monday 2 October, shortly after the payments to Mr Brendel and Montres Lunesa had been made.

On 2 October 2006 at 1416 hours, the Bank also received a SWIFT notification from Deutsche Bank that the bank draft would be dishonoured by reason of “cheque falsification”.

On 4 October 2006, the Bank was informed orally by Commerzbank that the Commerzbank cheque would be returned unpaid by reason of fraud.

Subsequent investigations have proved beyond doubt that the instruments were all forged. The RV cheque was a copy not an original, and RV Bank did not hold an account in the supposed customer’s name. The Deutsche Bank draft contained unauthorised entries and the account number on which the draft was drawn does not exist. The Commerzbank cheque was one of a number of similar counterfeit cheques supposedly drawn by Breitlander GmbH. The account number does not exist. None of the Defendants has ever disputed that the instruments were forgeries.

On 3 October 2006, Tracy Grazioli, Pexxnet’s relationship manager at the Bank’s Finchley Road branch, telephoned Mr Brendel. She told him that the cheques (Footnote: ¹) he had paid into his account had been returned unpaid because they were fraudulent. He alleged that he had told the lady at the counter that he needed to know that the cheques were bona fide and that the Commerzbank cheque was unsigned. He then became very angry and claimed that he had spoken to both Finchley and Belfast to check that the cheques were bona fide before he had made payments out of the account. Ms Grazioli asked him to contact the beneficiary to ask them to authorise the release of the funds back. He said he would call immediately.

The Bank also sought to recover the funds by SWIFT message. UBS replied on 5 October indicating that Montres Lunesa was not prepared to return the funds. However, UBS took steps internally to freeze the funds. The amount frozen was €2,138,550.96. By Order dated 12 October 2006, the Swiss prosecuting authorities froze the funds in response to a criminal complaint filed in Switzerland by the Claimant. On 6 February 2007, the Swiss prosecuting authorities made an additional Order securing the funds, following the request of the Crown Prosecution Service made by Letters Rogatory dated 2 February under the mutual legal assistance regime.

On 4 October, Ms Grazioli spoke to Mr Brendel again. She asked him to explain the underlying deal. In her note dated 13 October 2006 she recorded:

“Dr med Peter Hoffman, the representative of Docdiqmed (the payee in the cheques) wanted information on where he could source scrap metal. HB was dealing with a company called Maxximmo in Switzerland who were providing the information. HB said [Montres Lunesa] is the subsidiary of Maxximmo. HB met Dr Hoffman and took the cheques as payment for providing the information (as a middleman) and gave him the information on where the scrap metal could be sourced. He mentioned the Congo. ... HB said that he waited until the cheques cleared and had even telephoned Belfast to confirm they were paid and cleared for his use before he made payments out. I asked if he had some back up paperwork to show the details of the buying and selling which he agreed to provide when he returned to the office the next day. HB said that the funds he had sent to Switzerland for himself was his commission on the deal, he agreed that he would give the instruction to return the funds (Euro 116k). …”

The documents were not provided and Mr Brendel did not return telephone calls.

On 24 November 2006 the Metropolitan Police obtained copies of documents from Mr Brendel. These included a copy of a Commission Agreement purportedly made between Pexxnet and Docdiamed SL of Ibiza in Spain. It appeared to have been signed for Docdiamed S.L. on 14 May 2006 and by Mr Brendel for Pexxnet on 10 April 2006. The Agreement recorded:

Later Mr Raytchev of Montres Lunesa produced a Commission Agreement between Pexxnet and Maxximmo in the broadly same terms, mutatis mutandis, by which Pexxnet was the purchaser of the 750,000 tons of used rails and used metal and Maxximmo AG the nominator. It recorded that Maxximmo had nominated La Societe de Commerce et de Services SPR in Kinshasa represented by its President, Mr Pompom, in return for which Maxximmo was to receive €2,225,000 commission which was to be credited to an account called Clientis Sparlassa 1816. The Agreement had purportedly been signed by Mr Brendel for Pexxnet on 15 September 2006 and by an illegible signatory on behalf of Maxximmo on 20 September 2006.

On 6 October 2006, the Bank’s Swiss layers initiated a criminal complaint in Switzerland. Criminal investigations also started in Germany. Mr Brendel was interviewed by the Munich police on 20 November 2006. He said:

On 22 January 2009, Mr Brendel was interviewed again by the Public Prosecutor in Munich with Chief Inspector Pongratz. He gave a more elaborate version of the same explanation. Perhaps most strikingly he said that he first met Dr Hoffman in the Wiener Cafe in Moscow. Mr Brendel was looking into real estate in Moscow. The next day they met again and it was then that Dr Hoffman mentioned that he was looking for steel, “no matter how huge the amount would be”. Mr Brendel was not particularly interested. However, when he got back to Germany, he spoke to Herr Körfges and it appeared that he could provide a contact for scrap steel in large amounts. There followed about five telephone conversations. The amount required rose to 700,000 tons in the end and Herr Körfges said that there should be a multiple amount of this in Congo. He met Mr Hoffman again in Munich for a cup of coffee in about April 2006. He asked who needed this scrap steel but Dr Hoffman was rather vague.

Mr Brendel produced a photocopy letter dated 12 July 2006 signed by him addressed to Docdiamed, which (he claimed) had been sent by Pexxnet to Docdiamed nominating La Societe de Commerce et de Services SPR, Immeuble Flamboyam Nr. 10-11 Kinshasa/Gombe, represented by its President Mr Pompom. The seller had an export licence and was ready to deliver 380,000 tons at the world price. He also produced an acknowledgement for the cheques dated 11 September 2006, addressed to Docdiamed, which stated that the cheques had been deposited in “our bank”. They were not actually deposited until 14 September.

On 16 May 2007, Hans-Werner Körfges was interviewed by the Dusseldorf police. He said that he had received an order by a Congolese company called Prodec in Kinshasa to sell 3 million tons of steel scrap. The steel was stored on five sites in Congo and was watched by the military. “One third are railways and two thirds are mostly components of colonial factories”. In the middle of 2006, he had chosen Mr Brendel as co-broker, although he could not remember the exact dates. He concluded a broker agreement with Brendel which, as far as he could recall, covered 750,000 tons of this steel to be sold. In exchange Mr Brendel was to pay an advance payment of 1% of the transactions value, as is customary in steel business.

Mr Brendel had notified him of the transfer of the money – “the money has actually been booked on the trustee’s account in Switzerland, the Montres Lunesa AG, but was suddenly held back by the receiving bank UBS in Zurich because there was allegedly something wrong with the cheque”. He explained that Maxximmo was the trustee who had used Montres Lunesa. Montres Lunesa was not known to Herr Körfges until the date of actual transfer of the money. Maxximmo had asked him a couple of days earlier not to transfer the money to Maxximmo but to Montres Lunesa’s account. He already had a trust agreement with Maxximmo and he dealt with Herr Bechtold of that company, who he had met twice in all these time; otherwise they had corresponded.

In answer to further questions, he said:

Ludmil Raytchev was interviewed by Zurich prosecuting authorities with the Munich prosecutor in attendance later on 18 July 2007. He said he had never heard of Mr Brendel. His first contact with the Maxximmo Group was with the Chairman, Herr Bechtold. Mr Raytchev had been on the lookout investors for fairly long time. With the help of a German lawyer, they had signed the silent partnership agreement – they had first talked about it in July 2006.

Mr Raytchev produced a Vertrag über die Errichtung einer atypisch stillen Gesellschaft” or an “Ad Hoc Silent Partnership Agreement” between Montres Lunesa and Maxximmo Treuhand purportedly signed on 28 September 2006. It provided for a capital contribution of €2,250,000 into Montres Lunesa on which there was to be a profit participation of 8% p.a. The agreement was terminable on three month’s notice, “but for the first time as of 31 December 2007”. As security Montres Lunesa pledged all the machinery equipment, tools and patents listed in Appendix 1. Appendix 1 was an inventory of machinery and watch parts dated 31 December 2005 apparently owned by Lunesa AG.

Mr Raytchev said that Mr Bechtold had shown an interest in getting involved with Montres Lunesa but it came to nothing and Mr Raytchev thought the business had fallen through. He then received the draft silent partnership agreement for preliminary examination. The money was to be used mainly for the procurement of machines and special tools. He had needed €25-30 million to compete with the main Swiss watch producers. Mr Bechtold acted a trustee for Maxximmo Treuhand.

He had no connection with Pexxnet apart from the transfer, and did not know Mr Brendel, Docdiamed, Dr Peter Hoffman or La Societe de Commerce et de Services SPR. He had never heard of Herr Körfges.

It is convenient at this stage also to mention that Mr Raytchev also made a statement in these proceedings dated 18 June 2010 in connection with the application to be allowed to participate in the proceedings despite previous breaches on the peremptory order. In his statement he described Montres Lunesa and Lunesa SA as having a substantial business employing 27 employees, and as having designed developed and manufactured approximately 30 different movement calibres. The business needed capital to produce high quality mechanical movements for the big Swiss brands. They had received numerous orders, but could not fulfil them. Mr Raytchev had tried to raise capital in the United States through Olympus Securites LLC and White & Case. Originally Maxximmo was to invest US $15 million, but it was contingent on the conclusion of a contract for the sale and purchase of sugar. The sugar deal collapsed, but on 17 September Mr Bechtold came up with an alternative proposition for the investment of the smaller sum of €2.25 million. This resulted in the silent partnership agreement signed on 28 September 2008. The funding was received from Pexxnet on 2 October. This was the first time Montres Lunesa was aware of Pexxnet. The effect of the freezing order was that Montres Lunesa’s business had been halted and Mr Raytchev had been unable to pay its employees, fulfil any orders or expand the business in the way he had intended.

Ralph Bechtold was also interviewed by Zurich prosecuting authorities with the Munich prosecutor in attendance later on 18 July 2007. He said that Maxximmo is a VQF in Switzerland (Footnote: ²). Herr Bechtold knew Herr Körfges from about 2005. Herr Körfges wanted to set up two Swiss AGs (i.e. public limited companies) or to obtain share certificates. They met twice and Herr Körfges said he had very good contacts in Africa, and he had a business procuring scrap metal. He was asked:

In answer to further questions by the Munich prosecutor, Herr Bechtold said that Herr Körfges simply wanted to entrust the money to a Swiss trustee firm and to transact business across Switzerland in the future. It was important that the financial investment did not have too long an investment period and that he could have the money in the short term – within a three month period. In the meantime the two AGs had to be set up and the capital would then go into the AGs. He knew Raytchev though his business network and that the money was to be used for the purchase of new machinery.

Herr Bechtold also explained that Maxximmo Treuhand was a shelf company “in the own holdings of Maxximmo, which I did not need any more and relabelled as Maxximmo Treuhand”. He did not want to sell it on because it still had past service liabilities.

Dr Peter Hoffman was interviewed voluntarily by the Munich Prosecutor on 16 October 2007 in Ibiza. He said that he was an anaesthetist and had been head of department at the municipal hospital in Solingen. He was currently working at the Johannniter Hospital in Geesthacht. With a colleague, Mr Schockenhoff, he had set up Doc Dia Med in order to organise training seminars in conjunction with the Schleswig-Holstein Medical Association in Ibiza, where Mr Schockenhoff had an apartment. He knew Herr Körfges as a financial adviser but had carried out no concrete business with him. “About a year ago he said to me that our [Doc Dia Med] would exist in duplicate”. He seemed to suggest (but the interview note is unclear) that Herr Körfges had suggested the founding of Doc Dia Med. It was possible he had mentioned the name Brendel in connection with this. Dr Hoffman had never been to Moscow or Russia. Montres Lunesa meant nothing to him, nor did Maxximmo or Maxximmo Treuhand. He had never heard of Ludmil Raytchev, Erich Blum, Ralph Bechtold or Pexxnet.

Mr Andrew Hunter of counsel submitted on behalf of the Bank that the various stories advanced by or on behalf of the Defendants were all false. Pexxnet was liable in deceit for presenting the forged drafts. All Defendants were liable for the tort of conspiracy to defraud the Bank. Further the monies were received by Pexxnet as a constructive trustee. It was a breach of that trust to transfer the monies to Montres Lunesa. Montres Lunesa received the monies as a constructive trustee with notice of the fraud. Maxximmo and Maxximmo Treuhand had dishonestly assisted Pexxnet to transfer the monies to Montres Lunesa in breach of trust, and Pexxnet had dishonestly assisted Montres Lunesa to retain them and put up a false explanation.

Mr Hunter submitted that the applicable law was English. The constructive trust arose when the Bank credited Pexxnet’s account with €2,400,000. Relying on the Court of Appeal’s decision in Trustor AB v. Smallbone (No. 3) [2000] EWCA Civ 150, he submitted that as a matter of English conflict of law principles, the applicable law of the constructive trust was English law. Under English law, Montres Lunesa became constructive trustees on receipt of the money with knowledge of the fraud. Montres Lunesa holds the funds on trust for the Bank and is liable to repay them.

If that were wrong and Swiss law applied to Montres Lunesa’s position, relying on Ms Stormann’s evidence, Mr Hunter submitted that, as a matter of Swiss law, Montres Lunesa is liable to repay the specific monies to the Bank.

I have considered the explanations advanced by each the Defendants carefully. In particular, I have borne in mind that, even if I concluded that some were acting dishonestly, others might have been innocent participants.

I have reached the clear conclusion, however, that all the Defendants were knowingly involved in a dishonest conspiracy to defraud the Bank by presenting forged instruments in order to obtain €2,400,000. I set out my reasons below.

Mr Brendel’s story as to how he came to receive the instruments by way of commission on the introduction of a buyer of 700,000 tons of scrap steel is absurd. He had no expertise or involvement in the steel scrap market. I cannot see how anyone who wanted to buy a very large quantity of steel scrap should ever wish to use Mr Brendel to find a supplier. His evidence that he bumped into Dr Hoffman in a Moscow cafe, having never met him before, and was asked to find a supplier makes the story all the more ridiculous, even more so when there is no reason to think that Dr Hoffman had any connection with buyers of large quantities of steel scrap, let alone that he could buy it. The Commission Agreement is a wholly uncommercial document. I cannot envisage a principal agreeing to pay a commission of €2,400,000 unless and until a contract was actually concluded and the steel scrap delivered. Further, even under the terms of the Agreement, the commission was not payable until DocDiaMed had begun negotiations with the seller and there had been a satisfactory check of the quantity and quality of the steel offered. That check never took place – nor could it for the reasons explained below. Nor is there any suggestion that any negotiations began between DocDiaMed and the supposed Congolese sellers.

The Körfges story is equally absurd, all the more so when the scale of the purchase of 750,000 tons of scrap steel from the Congo is understood, as Mr McParland demonstrated in his evidence. 750,000 tons is equivalent to between 12,500 and 18,750 kilometres of railway track. Even if one third was to be sourced from railways, it would represent more than half the entire Congolese track network. The entire capacity of Congo’s main port at Matadi is 25,000 containers per annum, equivalent to an annual export capacity of 1.25 million tonnes. A shipment of 750,000 tons of scrap steel would have tied up Matadi for over six months. Enquiries of Onatra, the entity mentioned by Herr Körfges as having 3 million tons of scrap metal for sale, show that it was the state transport company responsible for the country’s rail and river transport and the ports. It had never sold more than 30,000 tons of steel scrap a year.

I also find it incredible that Herr Körfges would have been willing to divulge the identity of the supplier to Mr Brendel without first having a written contract in place entitling him to commission of €2.25 million. No businessman would be prepared to repose that much trust in a counterparty in connection with a transaction involving so much money, all the more so when there had been no prior dealings between them.

Finally, I note that there is a large and irreconcilable discrepancy between the evidence of Herr Körfges and Herr Bechtold.

In my judgment the commission agreements and the documents produced by Mr Brendel are forgeries produced in an attempt to provide documentary support for Mr Brendels’ and Herr Körfges’ explanations as to why a commission of €2,400,000 was paid to Pexxnet and then split between Mr Brendel and Herr Körfges.

Herr Bechtold’s explanations are equally incapable of belief. It is not credible that a businessman would be prepared to make a short term investment in a business like Montres Lunesa without making a due diligence investigation as to the merits of the investment and Montres Lunesa’s ability to repay, and as to the value of the assets pledged as security. There is no evidence of any such investigation. Had even a basic investigation been made, it would have been obvious that Montres Lunesa had no business or substantial assets and was highly unlikely to be able to repay the money even in the long term, let alone the short term.

Additionally, as Ms Stormann explained, the Silent Partnership Agreement is completely unsuitable for establishing a Swiss partnership. It appears to be more suited to a German partnership. A properly drawn Swiss partnership agreement would make clear whether it is constitutive of an “einfacher Gesellschaft” (a type of partnership in which the partners share profits as well as losses) and which provisions of the Swiss Federal Code of Obligations were to apply. Further, the security provided on the assets listed in annex 1 is null and void in Swiss law which prohibits a security on moveable assets which remain in the sole control of the pledgor. In a partnership involving an investment of €2.25 million, I would expect Swiss legal advice to have been taken and an agreement drawn up which complied with the requirements of Swiss law.

Mr Raytchev’s explanations are similarly incredible. I would add:

In my view, therefore, all the Defendant’s explanations are false and Mr Brendel, Herr Körfges, Herr Bechtold and Mr Raytchev have been lying throughout. I am sure that they were involved in a conspiracy to deceive and defraud the Bank by presenting what they knew were forged instruments. Montres Lunesa’s account at UBS was used to receive and launder the money probably because it would have been difficult to use Maxximmo, given that it was a VQF in Switzerland and subject to regulatory requirements. They may also have hoped that the Swiss Authorities would invoke bank secrecy laws in order to prevent investigations into Swiss bank accounts. If so, the conspirators will have been sorely disappointed, because the Swiss authorities have offered their fullest co-operation into the investigation.

The Defendants were all “in it together”. They are jointly and severally liable for the Bank’s losses.

In English law, it is clear that the monies transferred by the Bank to Pexxnet’s bank account were held by Pexxnet as constructive trustees. The classic modern exposition of the law in this area is that of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] AC 669 at 715:

“… I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive, not a resulting, trust. Although it is difficult to find clear authority for the proposition, when property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity. Thus, an infant who has obtained property by fraud is bound in equity to restore it: Stocks v. Wilson [1913] 2 K.B. 235 , 244; R Leslie Ltd v. Sheill [1914] 3 K.B. 607 . Moneys stolen from a bank account can be traced in equity: Bankers Trust Co v. Shapira [1980] 1 W.L.R. 1274 , 1282C–E: see also McCormick v. Grogan (1869) L.R. 4 H.L. 82, 97.” (emphasis added)

A more recent summary of the law is contained in the judgment of Lawrence Collins J (as he then was) in Commerzbank v. IMB Morgan [2004] EWHC 2771 (Ch). This was an interpleader claim in which the bank asked the Court to determine whether monies held on a bank account, which were the proceeds of a fraud by its account holder, belonged to its account holder, or whether the victims of the fraud had proprietary claims. The judge held that the victims could claim parts of the fund. He held at para 36:

“In order to establish a claim to a share in the fund, claimants must show that they have a proprietary right, i.e. a right in property and not simply a debt due from IMB. There are three relevant bases for such a claim, and most of the claimants have a claim (if any) under the first basis, which is that a person who has been defrauded may trace property into the hands of the recipient. “… [W]hen property is obtained by fraud equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity”: Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] AC 669, 716. The victims of fraud can follow their money in equity through bank accounts where it has been mixed with other money because equity treats the money in such accounts as charged with the repayment of their money: El Ajou v. Dollar Land Holdings plc (No. 1) [1993] 3 All ER 717 (rev’d on other grounds [1994] 1 All ER 685). See also Bristol and West Building Society v. Mothew [1998] Ch 1; Bankers Trust Co. v. Shapira [1980] 1 WLR 1274, 1282. In Bank of Credit and Commerce International (Overseas) Ltd (in liquidation) and another v. Akindele [2001] Ch 437 it was held that the recipient's state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt. Consequently, even if IMB Morgan was not a party to the frauds, the defrauded claimants have a tracing remedy. The second basis for a claim is that a payment was made by mistake. Whether a person who has made a payment by mistake has a proprietary claim is by no means clear. But I am satisfied that in a case of this kind, where (as in the case of the payment by Citizens Union Bank) double payment was made at the request of the recipient (IMB Morgan), where there is an identifiable fund, and where the recipient has notice of the claim, it would be unconscionable for IMB Morgan (and in effect the other claimants to the fund) to retain the benefit of that payment: Chase Manhattan Bank v. Israel-British Bank [1981] Ch. 10, as explained in Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] AC 669, 714–715; Virgo, Principles of the Law of Restitution (1999), pp 630–632; and see also Papamichael v. National Westminster Bank plc [2003] EWHC 164 (Comm), [2003] 1 Lloyd's Rep 341 (Judge Chambers QC). Third, where money is paid for a purpose which is not fulfilled, the recipient holds the money on trust for the payer: Barclays Bank Ltd v. Quistclose Investments Ltd [1970] AC 567; Carreras Rothmans Ltd v. Freeman Matthews Treasure Ltd [1985] 1 All ER 155… .”

In the light of these authorities and the well established principles they enunciate, it cannot be in doubt that the monies were held by Pexxnet as a constructive trustee for the Bank.

It is also clearly established in that under English conflict of law principles, that English law would govern the basis upon which Montres Lunesa received the money and would hold that it also held the money it received on constructive trust. In Trustor AB v. Smallbone (No. 3) [2000] EWCA Civ 150, money was paid out of Trustor’s accounts into a Barclays Bank account in London opened for Trustor without its authority. The money was then paid to another Barclays account in London in the name of Introcom (International) Limited, incorporated in Gibraltar and controlled by Mr Smallbone. Most of that money was then paid out to an account in Luxembourg where it was frozen, but some £426,000 was also paid to Mr Smallbone personally. In the Court of Appeal, Sir Richard Scott, V-C, held as follows:

“59.

The payments made to Introcom were made from Trustor’s account in England to Introcom’s account in England. The consequences of these payments, in an English court at least, are therefore to be determined by English law.

The current Rule in Dicey, Morris & Collins on The Conflict of Laws (14^th ed.) is Rule 230. The learned editors refer to the Court of Appeal’s decision in Trustor AB v. Smallbone (No. 3) at footnote 65 on page 1888, without (it might be said) according full recognition to the decision.

By parity of the reasoning in the Trustor decision, the monies received in Pexxnet were held on constructive trust. That trust was governed by English law. On receipt of the monies in Switzerland with full knowledge of the fraud, Montres Lunesa held the monies subject to the same constructive trust.

Immediately prior to the receipt of the money, Montres Lunesa’s UBS account was in credit by €2,118.87. The net sum received was €2,224,975. Shortly after receipt Mr Raytchev arranged for €88,558.38 to be paid out, mainly to members of his family. English law presumes that non-trust monies were used first. So €86,439.51 was paid out improperly. When the monies were frozen, there was €2,138,550.96 remaining. That sum (and any accruing interest) was held in constructive trust for the Bank.

I should add however, that even if Swiss law governs the status of the monies in Montres Lunesa’s UBS account, I am satisfied that as a matter of Swiss law, Montres Lunesa would be liable to repay those monies to the Bank. Ms Stormann was of the opinion, that in addition to a liability in tort, Montres Lunesa was probably liable to return the monies on the grounds of unjust enrichment under Article 62 of the Swiss Federal Code of Obligations which provides:

“Whoever has been unjustly enriched out of another person’s property shall make restitution of such enrichment.

In particular, this obligation shall arise if a person has received something without any valid cause, or for a cause which did not materialise, or which subsequently ceased to exist.”

The prerequisites for liability are:

An action for unjust enrichment is not a proprietary claim in Swiss law but it is generally accepted that enrichment which is still available may be claimed back in kind. In her view, the Bank would definitely have a claim in unjust enrichment if it were established, as I have held, that the Defendants had acted in concert to defraud the Bank.

Ms Storrman cited one case where she was involved as advocate. It was a case where an English solicitor had defrauded a number of clients by misappropriating funds which had been entrusted to him for the repayment of the mortgages of these clients. The fraudulent solicitor transferred part of the monies to a company in Neuchatel, Switzerland. A criminal complaint was filed based on suspicion of money laundering and an order was made freezing the assets in the account. The fraudster himself was never found. It is believed that he may have been killed. There could be no proceedings against him. The recipient in Switzerland died shortly before the criminal court in Switzerland could reach a judgment against him and the proceedings had to be discontinued. He had said that he had received the monies on a completely genuine basis. However, the question remained about the fate of the assets in the Swiss bank account, which had been frozen, and the question was then, shall they be confiscated and devolved to the State because they obviously originated from the fraud committed in the United Kingdom, or should they be returned to the victim, which was the Law Society of England and Wales which had indemnified all the victims in England. The Tribunal de Criminale Correctionelle in Canton Neuchatel ordered the restitution of the monies derived from the offence.

For the reasons given by Ms Storrman, I am satisfied that a Swiss court would also order the return of the monies frozen in Montres Lunesa’s UBS account to the Bank, plus accrued interest.

Lastly I observe that the facts of this case predate the coming into force of the Rome II Regulation EC/864/2007 on the Law Applicable to Non-Contractual Obligations.

For the reasons I have given, I find that the Defendants are each jointly and severally liable for conspiracy to deceive and defraud the Bank. They are liable in damages in the amount of €2,400,000 and I shall award interest at the rate of 2% above the Euribor Euro rate from 21 September 2006 until the date of judgment.

I shall also declare that the Fourth Defendant, Montres Lunesa, holds the balance remaining of the €2,225,000 received into in its UBS account – viz €2,138,550.96 plus any interest accrued on that money – on constructive trust for the Bank and I order Montres Lunesa to take all steps necessary to repay those monies to the Bank forthwith. I will hear counsel as to the precise order. Of course any monies recovered from Montres Lunesa’s UBS account will reduce the damages payable by the Defendants. I should also add that I am not asked to make any declaration of trust in relation to the €116,000 paid to Mr Brendel personally. I understand that steps are in hand to repay the monies to the Bank.