Government Of United States Of America v Montgomery & Anor [1998] EWCA Civ 1175 (8 July 1998)

1. On 5 September 1997, Collins J. made Restraint Orders against Kathleen Montgomery and Lee Montgomery who are husband and wife. These orders were made ex parte on the application of the Government of the United States of America pursuant to the provisions of the Criminal Justice Act 1988 (Designated Countries and Territories) Order 1991 (“the 1991 DCO”). Their purpose was to aid in the enforcement of a judgment and order of the United States District Court, Middle District of Florida, Jacksonville Division, whereby on 15 November 1995, the Court ordered that a criminal forfeiture judgment against Kathleen Montgomery’s former husband, Larry Barnette of 15 October 1984 should be amended to provide that he forfeit $7,876,207.60 cents to the United States of America and, having adjudged Larry Barnette and Kathleen Montgomery guilty of contempt, ordered their arrest unless within 10 days they forfeited the same sum or deposited it into the Court’s Registry. Kathleen Montgomery and Lee Montgomery applied to Latham J. to discharge the Restraint Orders on the grounds that the Court had no jurisdiction to make them, that there was material non disclosure by the Government of the United States of America when it sought to obtain them, and that there has been undue delay, such that the Court in the exercise of its discretion should set aside the orders. On 20 February 1998 Latham J. set aside the order of Collins J. at an inter parties hearing. The United States Government now appeal with the leave of this Court.

2. The Criminal Forfeiture Order made on 15 October 1984 resulted from Larry Barnette’s conviction on 15 counts of fraud and racketeering. Between 1977 and 1981 Larry Barnette, through the medium of companies which he controlled, dishonestly obtained from the United States Government very substantial sums of money from contracts to launder clothes for the United States army. The prices which these companies obtained for the laundering services were inflated by the submission of false invoices purporting to represent the cost of providing those services. It was alleged that Larry Barnette siphoned off the excess profit, amounting to some $15,000,000 into a Panamanian company, set up and controlled by him, called Old Dominion S.A. (“ODSA”). The fraud was investigated between 1981 and 1983; and on 31 August 1983 Larry Barnette was indicted by a Grand Jury. Meanwhile, on 19 August 1983, Larry Barnette transferred to Kathleen Barnette and his two children all 900 shares which he held in ODSA; 800 into the name of Kathleen Barnette and 50 into the name of each child.

3. On 20 July 1984, Larry Barnette was convicted of 15 of the counts on the indictment; and the jury made a special Order of Forfeiture in the sum of $7,000,000 against him. On 15 October 1984, District Judge Black, the trial judge, ordered that Larry Barnette’s 900 shares in ODSA be forfeited. On 2 November 1984, Larry Barnette was sentenced to 5 years imprisonment, and the special Order of Forfeiture made by the jury was given effect by ordering that Larry Barnette pay $7.000,000 restitution to the United States army. On 17 November 1984, District Judge Black ordered that any sums collected under the Restitution Order, or the Forfeiture Order of 15 October 1984 were to be credited against each other. On 10 January 1985, Larry Barnette paid $7,000,000 to the Court pursuant to the Restitution Order.

4. Thereafter, Larry Barnette sought to persuade the Court that the payment of $7,000,000 had extinguished his liability under the Forfeiture Order. There were innumerable motions in which the relevant United States authorities attempted to discover the whereabouts of the assets of ODSA, and Larry Barnette sought to avoid disclosure. These culminated in a ruling by the District Court in February 1991 that the $7,000,000 was to be off-set against the Forfeiture Order but that the transfer of the shares in ODSA to Kathleen Montgomery and the children did not deprive the United States Government of its interest, because its interest vested at the time of the unlawful activity, which was prior to August 1982, and that Larry Barnette must provide evaluation of the stock of ODSA so that the Court could determine whether the payment of restitution extinguished his liability to meet the Forfeiture Order. On 15 December 1992, the Court ordered Kathleen Montgomery to disclose the assets of ODSA and the books and records of ODSA. In her affidavit in these proceedings, Kathleen Montgomery asserts that she complied with that order, although by then she was no longer resident in the United States, and had indeed renounced her United States citizenship in April 1992.

5. Eventually, in May 1995, the District Court heard motions to declare Larry Barnette and Kathleen Montgomery in contempt of court, and to resolve whether or not the original Order of Forfeiture had been met by the payment of $7,000,000 restitution. Kathleen Montgomery was neither present nor represented at these hearings. District Judge Moore gave his opinion on 18 August 1995. Having considered the valuation evidence presented to him, he found that the value of the 900 shares in ODSA as at 15 October 1984 was $11,217,833.1 cent, which left a liability to the United States Government of $4,217,833.1 cent. He found that Larry Barnette had engaged in a systematic effort designed to evade the terms of the original criminal forfeiture judgment and had systematically attempted over 10 years to impede the United States Government’s efforts to enforce its rights in relation to the shares in ODSA; he further found that Kathleen Montgomery had aided and abetted or acted in concert with him in his scheme to evade the criminal forfeiture judgment. He ordered that instead of forfeiting the ODSA shares Larry Barnette should forfeit $4,217,833.1 cent to the United States of America and that, having found Larry Barnette and Kathleen Montgomery in contempt, they should both be arrested and incarcerated unless they paid that sum to the United States Government or deposited it in the Court’s Registry.

6. That opinion was then challenged both by Larry Barnette and by the United States Government. In January 1995, the United States Government had seized $3,758,117 from ODSA accounts in Liechtenstein; Larry Barnette sought an order of the court that this sum be set off against the sum which District Judge Moore had determined to be the liability under the original Forfeiture Order; he also sought to have a further sum of $459,708.8 cents, which was apparently interest accrued on the deposit of the $7,000,000 in 1984, also credited, so as to leave a deficit of only $11. The United States Government, on the other had, sought an order that it was “entitled to interest on the withheld forfeiture that was due since October 15, 1984”; it also asked for reimbursement of investigative and legal fees, costs and expenses in the sum of $326,275.58 cents.

7. District Judge Moore, in effect, acceded to both applications. The result, however, was to add substantially to the amount due to the United States Government. He accepted that as a matter of principle, interest was due. He held that a District Court could grant interest on a criminal forfeiture judgment, to protect the Government’s interest in “forfeitable property” and to prevent a defendants continued unlawful gain. He concluded that to award only the sum he had held to be due and owing in his August opinion, without interest, would reward Larry Barnette “for his 10 years scheme of evasion”. He held that the award of interest was not intended as a punitive measure, but represented “a present value adjustment on a payment that was due 11 years ago”. The computation he made was based on the valuation of the stock, multiplied by a factor of 2.79, based upon published United States Treasury rates of interest from January 1985 to June 1995. He further added the legal, investigative and expert fees, but subtracted the assets seized in Liechtenstein and the interest on the $7,000,000 paid in January 1985. As a result, he amended his opinion of 18 August 1995 to substitute the sum of $7,876,207.60 cents for the figure in that order, and made the order referred to in paragraph 1. On 20 November 1997 the appeals of Larry Barnette and Kathleen Montgomery against the order were dismissed under the “fugitive disentitlement doctrine”. No decision was taken on the merits.

8. As far as the personal relationship between Larry Barnette and Kathleen Montgomery is concerned, Kathleen Montgomery has deposed in her affidavit that she separated from Larry Barnette in 1983 and has remained separated from him since then. She obtained a divorce in the Dominican Republic in summer 1995; she subsequently filed a petition for divorce in this country. A Decree Absolute was granted on 3 June 1996. She has now married Lee Montgomery, with whom she has been living since 1993. He is a mature student at Kings College London, and is, according to Kathleen Montgomery, dependent on her for financial support.

9. Latham J. discharged the restraint order on two grounds. First he held that the United States did not become a designated country in whose favour a restraint order could be made under the 1991 DCO until December 1996. He also held that the 1991 DCO had no retrospective effect and did not confer jurisdiction upon the High Court to make a restraint order to preserve assets for the satisfaction of an external confiscation order made in a designated country before the designated country became so designated. Secondly he held that the order made by the District Court on 15 November 1995 was not an external confiscation order, because it was neither an order for the purpose of recovering property obtained as a result of criminal conduct or the value of the property so obtained, or for depriving Larry Barnette or Kathleen Montgomery of a pecuniary advantage. On the contrary it was an award of interest on a sum which should have been paid earlier, which did not fall within the scope of the relevant section. He held that there had been no material non-disclosure on the part of the United States Government in obtaining the order from Collins J. and that any delay in applying for the order was wholly insufficient to justify the Court in discharging the restraint order.

10. By their notice of appeal the appellants contend that the United States became a designated country on 1 August 1994 and not, as the judge held, in December 1996. It is conceded by Mr Alun Jones QC on behalf of the respondents that this is so, and that the judge was in error. If, therefore, as the judge would have held but for his decision on the second ground relating to interest, the order of 15 November 1995 was an external confiscation order, the judge’s first ground for discharging the restraint order must fail. In any event the appellants contend that the 1991 DCO applies to external confiscation orders made by a foreign court before that country becomes a designated country.

12. By their respondent’s notice, the respondents challenge the jurisdiction of the Court to entertain the appeal on the grounds that Latham J’s judgment was in ‘a criminal cause or matter’ (Supreme Court Act 1981, s.18(1)). They cross-appeal the judge’s finding that, but for the interest point, the order of 15 November 1995 would have been an external confiscation order. They also cross-appeal on the issues of non-disclosure and delay.

Mr Jones submitted that the judgment of Latham J. was in a criminal cause or matter. He invited the Court to conduct a review of the authorities starting with Ex Parte Woodhall (1888) 20 QBD 832 where it was said that ‘the widest possible interpretation’ should be given to the phrase and that it applied ‘to a decision of judicial determination of any question raised in or with regard to proceedings the subject matter of which is criminal’ . ( Per Lord Esher MR at p835 and 836) in Amand v Home Secretary and Minister of Defence of the Royal Netherlands Government [1943] AC 147. At p156 Viscount Simon LC said:-

14. Mr Jones referred us to a number of other authorities, but I did not find them of assistance because in my judgment the matter is determined, so far as this Court is concerned by the decision in Re. ‘O’ [1991] 2 QB 520. In that case a restraint order had been made pursuant to s.77 of the Criminal Justice Act 1988 (CJA 1988) against the applicants, who were subsequently charged with theft and conspiracy. On their application to vary the order the Crown Prosecution Service obtained a further order for disclosure. The applicants sought to appeal that order. The Court of Appeal determined a preliminary issue as to whether it had jurisdiction in view of s.18(1) of the Supreme Court Act 1981. It was held that sections 76 to 82 of the CJA 1988 established a regime in respect of restraint and charging orders which was both civil in character and collateral to the criminal regime provided by sections 71 to 75; and that accordingly an appeal lay from the disclosure order to the Court of Appeal (Civil Division). Lord Donaldson of Lymington MR, with whose judgment Glidewell and Ralph Gibson LJJ agreed, said at p527G:-

"The jurisdiction to make restraint orders under the Drug Trafficking Offences Act 1986 is mirrored by that under the Criminal Justice Act 1988 and a decision in relation to one Act will apply equally to the other. This is the first occasion upon which this court has been called upon to consider the Act of 1988, but we have entertained an appeal under the Act of 1986: see In re Peters [1988] Q.B. 871. We were told that the question of whether this court had jurisdiction was raised by counsel in that appeal, but it was not referred to in the judgments and that decision is therefore of no assistance.

The outstanding feature of the legislation is the clear dichotomy made between sections 71 to 75, which confer jurisdiction upon the Crown Court and magistrates’ courts to make confiscation orders in criminal proceedings and provide for enforcement procedures thereafter and sections 76 to 82 which confer jurisdiction upon the High Court to make restraint and charging orders designed to preserve assets upon which the orders of the criminal courts may bite at a later stage. In Gooch v Ewing [1986] Q.B. 791 it was the magistrates’ court which, having concluded criminal proceedings, embarked by the agency of its clerk on seeking a remedy which was civil in character. In the present appeal the division is clearer, because the Court concerned with criminal matters is not involved at all. It is the Crown Prosecution Service which applies for the restraint order. In my judgment the regime provided by sections 76 to 82 is wholly collateral to the criminal regime provided by sections 71 to 75 and is civil in character. I reach this conclusion with relief, because were it otherwise third parties such as banks and alleged donees of gifts would be left with no avenue of appeal if they were aggrieved at the orders of the High Court.”

15. Mr Jones submitted that the decision in Re ‘O’ was per incuriam because the cases of Woodhall and Amand were not cited to the Court and that since the underlying proceedings in the United States against Mr Barnette were criminal, s18 (1) applied. I cannot accept this. While it is true that the Court does not appear to have been referred directly to those cases, a number of the authorities to which they were referred themselves made reference to them. Moreover I cannot accept that such an experienced Court could possibly have overlooked these authorities. Lord Donaldson MR was a party to the decisions in Carr v Atkins [1987] 1 QB 963 and Day v Grant [1987] 1 QB 972 in both of which Amand’s case was referred to. For my part I can find nothing inconsistent with those earlier authorities and the decision in Re ‘O’.

16. Mr Jones also sought to distinguish Re ‘O’ . I confess that I found his submission hard to follow. It is true of course that the 1991 DCO is concerned with the enforcement of external confiscation orders, the order being made as a rule by a foreign criminal court. This mirrors the provisions of sections 71 to 75 of the CJA 1988 which confers similar powers on the Crown Court in the domestic jurisdiction. We are not here concerned with the procedure of the foreign court, provided it has made an external confiscation order. Sections 76 to 82 contained in Schedule 3 of the 1991 DCO mirror the provisions of sections 76 to 82 of the CJA 1988 with appropriate modifications. It is quite plain in my judgment that orders made under these provisions are civil in character and collateral to the criminal regime.

17. Furthermore in the case of Mrs Montgomery the orders of 18 August and 15 November 1995 were in fact orders in civil contempt; they were coercive and not punitive. In Re Londono. Restraint Order: External Confiscation Order [1996] QB 272 it was held that the corresponding provisions of the Drug Trafficking Offences Act 1986 (Designated Countries and Territories) Order 1990 applied to a civil external confiscation order made in rem.

18. Like Lord Donaldson MR in Re ‘O’ I reach the conclusion with relief because I cannot believe that Parliament intended there to be no appeal in such cases. Mr Jones accepted that the consequence of his submission was that there would be no appeal. He submitted that this was the fault of the Rules committee for not assigning the business to the Divisional Court. I do not agree. I accept the submission of Mr Mitchell QC who appeared for the appellants, that if Parliament had thought Re ‘O’ was wrongly decided, it has had plenty of opportunity to put the matter right since then, but has declined to do so, for the obvious reason in my view that it is plainly right.

"(2) In relation to a designated country. Part V1 of the Act shall apply, subject to the modifications specified in Schedule 2 to this Order, to external confiscation orders and to proceedings which have been or are to be instituted in the designated country and may result in an external confiscation order being made there, and accordingly, in relation to such orders and such proceedings, Part V1 of the Act and Schedule 4 thereto shall have effect as set out in Schedule 3 to this Order."

22. Mr Jones submitted that the order of 15 November 1995 was not an external confiscation order. He accepted that the original order made in 1984 against Mr Barnette, amended by the orders of 1995 was properly so called, but he submitted that so far as Mrs Montgomery is concerned the order is in the form of a finding of civil contempt which could only be purged by the payment of a sum of money. At one time he submitted that the order for payment against her was a punishment for her contempt, but later he accepted that this was not so; it is plainly in my view a coercive order for the purpose of recovering property or the value of property or for depriving her of a pecuniary advantage obtained as a result of her connection with crime, albeit the crime was that of her ex-husband and not hers. Like the judge I have found Mr Jones’ submission on this point difficult to follow. Provided the order is made for the required purpose, it matters not how it is expressed. Since the orders of 18 August and 15 November 1995 both post-dated the coming into force of the 1991 DCO in respect of the United States, contrary to what the judge thought, there is no question of retrospective effect.

23. Mr Jones made two submissions to the effect that the 1991 DCO did not apply to the external confiscation order in question, first because the 1991 DCO does not apply when the order itself was made before 1 August 1994 and secondly it did not apply where the proceedings giving rise to the order was instituted prior to 1 August 1994. If I have correctly understood the first of these submissions, Mr Jones contends that the external confiscation order was in fact made in 1984 at the criminal trial, and that what happened in 1995 was simply an amendment of this order. In support of this he prays in aid the first paragraph of Latham J’s judgment, which is in substantially the same terms as paragraph 1 of this judgment. I do not accept this. Whatever the position may have been as to Mr Barnette, no order had been made against Mrs Montgomery until 18 August 1995, which could amount to an external confiscation order. As to the second point the proceedings against Mrs Montgomery which led to the orders in 1995 were instituted in June 1994, before the 1991 DCO applied to the United States.

So far as domestic proceedings under that Act are concerned though the provisions as to enforcement apply where the crime is committed before the Act came into force, they do not where the proceedings were instituted in respect of the crime before the Act came into force. Mr Jones submits that this enshrines a well known principle of statutory construction that penal legislation is not retrospective, unless Parliament has used clear words to that effect. The difficulty about this submission is that s.102(4) is omitted from 1991 DCO and deliberately omitted (see Schedule 2, para 21(b)). It is impossible in my judgment to read the 1991 DCO as if s.102(4) of the CJA 1988 was incorporated.

“References in this Part of this Act to property obtained, or to a pecuniary advantage derived, in connection with the commission of an offence include a reference to property obtained, or to a pecuniary advantage derived, both in that connection and in some other connection, and whether received before or after the commencement of the Criminal Justice Act 1988 (Designated Countries and Territories) Order 1991 .”

26. Faced with this difficulty Mr Jones submitted that the 1991 DCO was ultra vires in so far as it omitted s.102(4). He relied upon the case of Welch ECHR 1/1994/448. In that case at the time when Welch committed the drug-related offence for which he was convicted, the confiscation provisions of the Drug Trafficking Offences Act 1986 had not come into effect. The European Court of Human Rights held that to impose a confiscation order upon him violated Article 7 of the Convention on Human Rights in as much as it was a heavier penalty than the one that was applicable at the time of the offence. Mr Jones submits that we should construe the 1991 DCO consistently with Article 7 and the case of Welch.

28. But Mr Jones’ submission that the 1991 DCO was ultra vires is also untenable in my judgment. The vires is to be found in s.96 of the CJA itself which I have set out in paragraph 19. The power expressly relates to ‘external confiscation orders and to proceedings which have been or are to be instituted’ (my emphasis). There is nothing repugnant to the rules against retrospective penal legislation, because the external confiscation order has been made in a foreign country in accordance with the laws of that country. The situation is quite different from that which prevails when the domestic provisions of the CJA 1988 apply to offences committed in the United Kingdom.

29. Although the ODSA shares had been forfeited in the original order of October 1984, it was not possible until August 1995 to value them as at the time of forfeiture, or to see whether the payment of $7,000,000 in January 1995 satisfied the order for forfeiture. By his order of August 15, 1995, the District Judge valued the shares as at 1984 at $11,217,833.1. The forfeiture order had not been satisfied to the extent of $4,217,833.1. In November 1995 the judge allowed to be set-off against this sum the $3,758,117 recovered from ODSA accounts in Liechtenstein and a further sum of interest, leaving a deficit of $11. But because of the delay in payment he increased the amount payable to $7,876,207.60 (this sum including $326,275.58 in respect of costs, expenses and legal fees).

30. Mr Jones submitted to the judge that the sum of $7,876,207 did not represent and was not arrived at by reference to the present value of the shares, but was an amount of interest, together with costs, resulting from the fact that the property, that is the shares or their value was not handed over in 1984 as required by the order of forfeiture. There is, he submitted, no provision for the award of interest in the 1991 DCO, unlike the amended provisions of the CJA 1988, where s.75A was introduced in 1995. The judge acceded to the argument. He said at p17G:-

“It seems to me, however, that as the United States Government was asking for interest, as the Court expressly awarded interest, and as the figure was reached by reference to relevant interest rates, it is difficult to escape the conclusion that the award was, in truth, an award of interest. The remark to the effect that it represented a present value adjustment seems to me to have by way of recognition on the part of the judge that the August order had been based on historic values, so that an award of interest might provide at least some acknowledgement of the fact that the present day value of the assets would be higher. It does not mean, in my view, that the exercise that the Court was engaged upon was, in any real sense, an attempt to find an up to date value of the property.”

31. Mr Mitchell submits that the judge was in error in this conclusion. He submits that as against Mr Barnette the original forfeiture order of October 1984 remained in force because it was not satisfied by the payment of $7,000,000. What had to be considered was the value of the shares, adjusted to take account of the subsequent changes in the value of money (1991DCO section 74(6)). The notional interest was used to calculate the change in the value of the forfeited stock since 1984. This is shown he submitted because the U.S. court said that ‘the imposition of interest represents a present value on a payment that was due eleven years ago’. He submits that the use of U.S. interest rates to calculate the present value of the shares does not disqualify the November 1995 order from being an external confiscation order. Furthermore so far as Mrs Montgomery is concerned, the contempt order against her is a coercive order to make her comply with the order for forfeiture or pay the current value of the shares. It is clear, he submits, that the shares are worth more than the sum ordered to be paid, since otherwise she would have handed over the shares. It matters not how the foreign court values these shares, since this will depend on the material available to it. There is a difference between awarding interest on non-payment of a sum of money which has been due for many years, and working out the present value of property subject to forfeiture. It had not been possible to value the shares until 7 August 1995 because of the obstruction of Mr Barnette and Mrs Montgomery. It was only possible to assess the present value by adopting notional interest because it was not known what the present assets of ODSA were, for the same reason. I have found Mr Mitchell’s submissions persuasive. I consider that the November order was made for the purpose of recovering property, i.e. the ODSA shares obtained as a result of Mr Barnette’s offences, or the value of the shares (s.71(1)(a)) updated in accordance with s.74(6).

32. But if I am wrong in that conclusion it seems to me clear that the purpose of the November order was to deprive a person, i.e. both Mr Barnette and Mrs Montgomery of the pecuniary advantage obtained by them as a result of Mr Barnette’s crime, within s.71(1)(b). I see no reason to give a restricted meaning to the wide words ‘pecuniary advantage’. It is repugnant to common sense to suggest that someone who has retained valuable shares for eleven years (now fourteen) in defiance of a court order, who has meanwhile been drawing dividends on them and whose value may be expected to have increased over that time, has not obtained a pecuniary advantage from the crime. I would therefore also accede to Mr Mitchell’s alternative argument.

33. That being so it is not necessary to consider the further argument advanced by Mr Mitchell that Mrs Montgomery is caught by the provisions of the 1991 DCO relating to gifts. He submitted that the property, i.e. the shares, were given to her by Mr Barnette who was a defendant, at a time after he had committed the crimes and that it was appropriate in all the circumstances to take the gift into account (see s.74(1)(c), s.74(2)(b)(ii) and s.74(10). I think there is considerable force in this submission. I am not impressed by Mr Jones’ answer that it was not a gift, but a division of the matrimonial assets between husband and wife. That flies in the face of the District Court’s finding that the transfer was knowingly made to defeat the temporary restraint order in 1983 and the further holding that Mr Barnette never had any title to the shares which at all material times since 1982 were the property of the U.S. Government.

34. Mr Jones submitted that this Court should reverse the judge’s finding that there was no material non-disclosure. The judge said that ‘the affidavit of Mr Booker of the Serious Fraud Office, dated 3 September 1997, adequately set out the history and did not either deliberately or unintentionally fail to deal with matters which should properly have been put before the Court’. In his oral submissions Mr Jones did not develop his submission; but he invited the Court to consider and adopt what was said in his skeleton argument. I have carefully considered these submissions; but I can see no basis for differing from the learned judge on this point.

35. Although the respondent’s notice complains that the judge should have discharged the order on the grounds of delay, there is nothing in the skeleton argument to support this ground and Mr Jones addressed no oral submissions upon it. I see no reason therefore to differ from the judge on this point, although I think strictly speaking the delay to be considered is from November 1995, i.e. the making of the order, and not as the judge thought December 1996, when he believed, wrongly, that the 1991 DCO first applied to the United States.

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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Government Of United States Of America v Montgomery & Anor [1998] EWCA Civ 1175 (8 July 1998) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1998/1175.html Cite as: [1998] EWCA Civ 1175, [1999] 1 All ER 84

England and Wales Court of Appeal (Civil Division) Decisions