Johnson v Watt
| Jurisdiction | Cayman Islands |
| Judge | (Kellock, Ag. J.) |
| Judgment Date | 11 February 2002 |
| Court | Grand Court (Cayman Islands) |
| Date | 11 February 2002 |
(Kellock, Ag. J.)
A.J. Jones for the plaintiffs;
D.A. Magner for the fifth defendant bank.
(1) Bank of New S. Wales v. Goulburn Valley Butter Co. Pty. Ltd., [1902] A.C. 543; (1902), 71 L.J.P.C. 112, applied.
(2) Bentinck v. London Joint Stock Bank, [1893] 2 Ch. 120; (1893), 62 L.J. Ch. 358, applied.
(3) Gray v. JohnstonELR(1868), L.R. 3 H.L. 1; 16 W.R. 842, referred to.
(4) Lipkin Gorman v. Karpnale Ltd., [1992] 4 All E.R. 331; on appeal, [1992] 4 All E.R. 409; on further appeal, [1991] 2 A.C. 548; [1992] 4 All E.R. 512, dicta of May, L.J. applied.
(5) London Joint Stock Bank v. Simmons, [1892] A.C. 201; (1892), 61 L.J. Ch. 723, dicta of Lord Herschell applied.
(6) Macmillan Inc. v. Bishopsgate Inv. Trust PLC (No. 3), [1995] 1 W.L.R. 978; [1995] 3 All E.R. 747, referred to.
(7) Thomson (J.R.) v. Clydesdale Bank Ltd., [1893] A.C. 282; (1893), 62 L.J.P.C. 91, applied.
(8) Union Bank of Australia Ltd. v. Murray-Aynsley, [1898] A.C. 693; (1898), 67 L.J.P.C. 123, applied.
Confidential Relationships (Preservation) Law (1995 Revision) (Law 16 of 1976, revised 1995), s.3(2)(b)(v): The relevant terms of this subparagraph are set out at para. 47.
Banking-banker and customer-fiduciary duty-no element of trusteeship or fiduciary duty in ordinary banker/customer relationship-bank free to deal with funds as its own, subject to customer”s right to repayment
Banking-banker and customer-fraud by customer-no obligation to investigate source of funds unless bank on actual or constructive notice of trust in favour of third party-may pay out to customer”s order without liability to third party owner, e.g. estate from which funds embezzled by executor
Banking-banker and customer-fraud by customer-funds embezzled from third party and pledged as security for loan to customer repayable to owner once loan discharged-bank”s interest in funds expires even if bona fide purchaser for value as against owner
The plaintiffs brought proceedings against, inter alia, the fifth defendant bank to recover moneys deposited with it in breach of trust.
The executrix of a will, W, embezzled moneys from the deceased”s estate and deposited them with the fifth defendant bank. She then pledged the moneys as security for her personal guarantee of a business loan, under a credit agreement between, inter alia, herself, her business enterprise, and the bank. W was replaced as executrix when the fraud was discovered. The bank became aware of the origin of the funds when W instructed it to pay over the deposit to the plaintiffs as the new executors, having admitted her fraud. It refused to transfer the deposit, and the executors brought proceedings to recover it as money had and received by the bank, by which it had been unjustly enriched, together with an accounting of the dealings between the bank and W”s business. They initially sought only disclosure of documents relating to the deposit and the bank”s dealings with it, but later, without the court”s leave, amended their writ to include the present claims. They applied for summary judgment.
They submitted that (a) since it had been established that they had had legal title to the money when it was received by the bank, they had only to show that the bank had been unjustly enriched at their expense; (b) the
bank was not in the position of a bona fide purchaser for value without notice, since it had negligently failed to investigate the source of the moneys and its contractual obligation to repay W the deposit did not amount to sufficient value or consideration; and (c) they were entitled to recover the deposit save to the extent that the bank had detrimentally altered its position on the assumption that the moneys were W”s, and since it might not make a loss on the business loan, that element was not proved.
The bank submitted in reply that (a) it was not obliged to repay the moneys, since it had a valid charge over them and was a bona fide purchaser for value without notice of W”s fraud; (b) in the absence of circumstances giving notice that W had not been entitled to deposit the moneys, it was at liberty to deal with her as with any other customer and to retain the moneys as security for the loan; and (c) summary judgment could not be given on the basis of the plaintiffs” statement of claim, which was defective because the amendment to it had raised a new cause of action, requiring the leave of the court.
Held, ordering summary judgment for the plaintiffs:
(1) Since the bank had suffered no prejudice by reason of the plaintiffs” amending their statement of claim, leave would be granted retrospectively for that amendment. The bank had been aware of the purpose of the proceedings from the outset and had indicated in correspondence with the plaintiffs and the court that it was prepared to address the substantive issues once leave to amend had been obtained. Furthermore, by failing to disclose the documents requested until the plaintiffs had applied for summary judgment, the bank had impeded an early settlement of the dispute. The rules of practice were to be used to promote the most expeditious and cost-effective determination of disputes, not as tools in a game unconnected with the merits of the cause of action (para. 11; paras. 42–48).
(2) The ordinary contractual relationship between banker and customer in relation to a current account was that of debtor and creditor, and excluded any element of trusteeship or fiduciary duty. The bank was not concerned to inquire into the source of the moneys deposited. It was free to deal with deposited moneys as its own, and the customer retained only the right to repayment. By way of exception to the general rule governing property belonging to a third party, when a bank received money or a negotiable instrument from a person dealing with it without authority, it could acquire title even as against the true owner. Only if the bank had actual or constructive knowledge of the existence of a trust in favour of a third party would the rights of that third party prevail (para. 21; para. 23; paras. 26–28; paras. 30–31).
(3) As the bank had had no knowledge of any defect in W”s title when she deposited the moneys, nor any reason to suspect that she was not
entitled to do so, it had been entitled to deal with her as with any other customer and would have been entitled, if instructed, to pay out the moneys to her order without liability to the plaintiffs. The deposit had retained its character as a debt owed by the bank to W when pledged as security for the loan. The bank held conditional title to the chose in action, and the original obligation to repay became subject to its right to retain the money and realize the deposit if the business defaulted on the loan. The making of the loan was valuable consideration for the receipt of the deposit, and since the bank had thereby changed its position to its potential detriment, it was a bona fide purchaser for value (para. 29; paras. 36–38).
(4) However, although the bank”s interest in the moneys as security took priority over that of the plaintiffs, if the business loan were discharged and security were no longer required, that interest would expire and the bank would have no further claim to the money. Subject to the bank”s interest, the plaintiffs were entitled to it with accrued interest and the court would make a declaration to that effect. Since the parties” rights over the deposit were established, no issue remained that required resolution by trial (para. 39; para. 41; paras. 49–50).
1 KELLOCK, Ag. J.: On December 8th, 1998, Cornelius Beukenkamp M.D., who was then residing in the Cayman Islands, made his last will and testament, leaving the bulk of a large estate to two American universities and a foundation established in his name. He left small bequests to some members of his family and indicated that other family members had already been adequately provided for. Dr. Beukenkamp then appointed Cherry Watt (who is described in a letter written by the doctor in October 1999 as ‘my loyal friend for 15 years’) as the sole executrix and trustee. He died in November 1999 and in due course a grant of probate was made to Cherry Watt (‘Watt’) on June 23rd, 2000.
2 Within a very short period of time, Watt commenced distributing the doctor”s funds to herself although she was not a beneficiary of the estate and was not entitled to do so.
3 On February 8th, 2001, Watt opened a new account with the fifth defendant, CIBC Bank & Trust Co. (Cayman) Ltd. (‘CIBC’), into which she deposited US$170,000 of Dr. Beukenkamp”s money. This deposit, which I will call the ‘Watt deposit,’ was made by way of a Royal Bank of Canada draft, payable to CIBC (see the first affidavit of Christopher Johnson). By virtue of a credit agreement between Café del Sol Ltd. and several individuals, including Watt and CIBC, the US$170,000 became a ‘hypothecated fixed deposit’ which was pledged as security for a loan to Café del Sol Ltd. of CI$190,000.
4 It seems that on the day before (February 7th, 2001), Watt had signed a direction or authorization to CIBC authorizing it to-
‘retain and hold all monies, both principal and interest, payable in respect of all term deposits in the name of the undersigned, which now are or which from time to time may be placed with your branch whether or not evidenced by money market investment certificates, term deposit receipts or other documents, as a general and continuing collateral security for the payment of all present and future indebtedness and liability of the undersigned to the bank wheresoever and howsoever incurred and any ultimate unpaid balance thereof (“the indebtedness”).
The bank may from time to time upon default of the payment of any part of the indebtedness and without notice, appropriate the said...
To continue reading
Request your trial