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IN
THE SUPREME COURT OF JUDICATURE
CHANF
94/0492
COURT
OF APPEAL (CIVIL DIVISION)
CHANF
94/0494
ON
APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY
DIVISION
Royal
Courts of Justice
Strand,
London, WC2A 2LL
Wednesday
4th November 1998
B
e f o r e :
LORD
JUSTICE EVANS
LORD
JUSTICE MORRITT
and
LORD
JUSTICE CHADWICK
-
- - - - - - - - - - - - - - - - - - - -
BETWEEN
MACMILLAN,
INC. (incorporated under the
laws
of the State of Delaware, USA)
MCC
PROCEEDS INC
(incorporated
under the laws of the State of Delaware as Trustee of
The
Maxwell Macmillan Realization Liquidating Trust)
Appellant
-and-
(1)BISHOPSGATE
INVESTMENT TRUST PLC
(2)SHEARSON
LEHMAN BROTHERS HOLDINGS PLC
(3)SWISS
VOLKSBANK
(incorporated
under the laws of Switzerland
)
1st
Respondent
(4)MORGAN
STANLEY TRUST COMPANY
(incorporated
under the laws of the State of New Jersey, USA
)
(5)CREDIT
SUISSE FIRST BOSTON, formerly CREDIT SUISSE
(incorporated
under the laws of Switzerland
)
2nd
Respondent
(6)PRUDENTIAL
SECURITIES INC
(incorporated
under the laws of the State of New York, USA
)
(7)PAINE
WEBBER INC
(incorporated
under the laws of the State of New York, USA
)
(8)ADVEST
INC
(incorporated
under the laws of the State of Delaware, USA
)
-
- - - - -
(Handed
down Transcript of Smith Bernal Reporting Ltd
180
Fleet Street, London EC4A 2HG
Tel:
0171 421 4040
Official
Shorthand Writers to the Court)
-
- - - - -
MR
D OLIVER QC
and
MRS
J GIRET
(Instructed by Messrs Herbert Smith, London EC2A 2HS) appeared on behalf of the
Appellant
MR
R POTTS QC
and
MR
W BLAIR QC
(Instructed by Messrs Curtis Davis Garrard, Staines, Middx TW19 7LN) appeared
on behalf of the 1st Respondent
MR
G MOSS QC
and
MR
W TROWER
(Instructed by Messrs Clifford Chance, London EC1A 4JJ) appeared on behalf of
the 2nd Respondent
-
- - - - -
J
U D G M E N T
(As
approved by the Court
)
-
- - - - -
LORD
JUSTICE EVANS: This is the judgment of the court to which all members have made
substantial contributions.
A. Introduction
1. In
these two appeals the appellant, as successor in title to the plaintiff below,
Macmillan Inc (“Macmillan”), appeals against so much of the orders
made by Millett J. on 25th January 1994 as dismissed Macmillan’s claims
against the third defendant, Swiss Volksbank, and the fifth defendant, Credit
Suisse First Boston, formerly Credit Suisse (“Credit Suisse”).
2. The
circumstances in which those claims arose can be stated shortly. In September
1991 Macmillan was the owner of 10.6 million shares of Berlitz International
Inc (“Berlitz”), a corporation quoted on the New York Stock
Exchange. On 27th September 1991 500,000 of those 10.6 million Berlitz shares
were pledged to Credit Suisse, without the authority of Macmillan, as security
for the indebtedness of Robert Maxwell Group Plc (“RMG”). On
12/13th November 1991 a further 2.4 million of those shares were pledged to
Swiss Volksbank; and a further 1 million shares were pledged to Credit Suisse.
Again, those shares were pledged, without the authority of Macmillan, as
security for the indebtedness of RMG. On 20th November 1991 Swiss Volksbank
made demand for repayment. The demand was not met. On 5th December 1991 RMG was
put into administration. On the same day Credit Suisse made demand for
repayment. Shortly thereafter Macmillan commenced these proceedings for purpose
of recovering, inter alia, the 3.9 million shares which had been pledged to
Swiss Volksbank and Credit Suisse.
3. Each
of the two banks claimed to be a bona fide purchaser for value in good faith
without notice of Macmillan's adverse claim. The Judge held that the question
whether that defence was available was to be determined by the law of New York.
That conclusion was affirmed (but on different grounds) by this Court at an
earlier stage in the present appeals - see
[1996] 1 All ER 585. On the basis
that the law of New York was the applicable law, Macmillan had contended at the
trial that the defence of bona fide purchaser was not available to a transferee
who had acquired through a financial intermediary non-specific stock held by a
clearing corporation in New York - as was the case in relation to the 2.4
million shares pledged to Swiss Volksbank and in relation to 1 million of the
shares pledged to Credit Suisse. The Judge rejected that contention. On the
facts as he found them to be, he upheld the claims of Swiss Volksbank and
Credit Suisse (in relation to all of the 1.5 million shares pledged to it) to
be purchasers without notice. Accordingly, Macmillan failed to establish its
claims to any of the 3.9 million Berlitz shares.
4. In
the present appeals Macmillan contends, first, that the Judge was wrong in his
finding as to New York law. It is said that, on a true understanding of that
law, the defence of bona fide purchaser is not open to Swiss Volksbank, and is
not open to Credit Suisse in relation to the 1 million shares. Secondly, that
the Judge was wrong to find, on the facts and having proper regard to the
relevant provisions of New York law, that Credit Suisse took any of the 1.5
million shares pledged to it without notice of Macmillan’s adverse claim.
5. The
shares were sold during the trial. The issue, now, is whether the two banks
have to account to the appellant for the proceeds of sale. That turns on
whether, at the time or times when each bank acquired a security interest in
Berlitz shares, it took free from the pre-existing interest of Macmillan as
beneficial owner. In that context, the relevant transactions under which
security interests were acquired are (i) the delivery to Credit Suisse, on 27th
September 1991 in London, of a stock certificate in the name of Bishopsgate
Investment Trust (“BIT”) in respect of 500,000 Berlitz shares with
an executed transfer form; (ii) a transfer to the order of Swiss Volksbank,
effected through the Depository Trust Company of New York (“the
DTC”) on 12th November 1991, of 2.4 million Berlitz shares; and (iii) a
transfer to the order of Credit Suisse, effected through the DTC on 13th
November 1991, of a further 1 million Berlitz shares. It is relevant to note
that the 500,000 shares comprised in the certificate which had been delivered
in London were registered, on 4th June 1992 (after these proceedings had
commenced), in the name of Credit Suisse Nominees Ltd. It was that subsequent
acquisition of title by registration which led the Judge, to the conclusion
that, in relation to the transaction on 27th September 1991 in London as well
as in relation to the transfers effected in New York on 12/13th November 1991,
the law of New York was the applicable law for the purpose of determining
whether or not the banks could rely on a defence of bona fide purchaser for
value without notice. This court reached the same conclusion (
[1996] 1 WLR 387) but on the ground that the law of New York applied as the law of the situs
of the shares.
B. Foreign
law - the correct approach
6. An
appeal to the Court of Appeal is by way of re-hearing (R.S.C. Order 59 rule 3).
The Court exercises its own judgment, independently of, though not uninfluenced
by the views of the trial judge. No-one doubts this, as regards issues of law.
7. The
same is true of issues of fact, though the inquiry takes a somewhat different
form. It is well established that the Court is reluctant to reverse a finding
of fact made by a trial judge after hearing and seeing the witnesses, though
the Court will do this if satisfied that the finding was wrong. The reluctance
is particularly great where questions of credibility and reliability arise, or
where for any other reason the trial judge who saw the witness was better able
to make the finding than the Court of Appeal, which has only a transcript of
the evidence, is able to do ; also, where questions of primary fact are in
issue, as distinct from inferences which the Court may be as well placed to
draw as the trial judge was. In relation to such questions, the Court will
consider whether there was evidence which entitled the judge to make the
finding which he did, rather than making its own decision afresh. This is
perhaps a relic of the approach which was called for when the facts were found
by a jury rather than the judge, and which still applies when appeals are
brought against jury verdicts.
8. These
principles are established by a number of well-known authorities, including
Benmax
v. Austin Motor Co. Ltd
[1955] A.C. 370
Thomas
v. Thomas
[1947] A.C. 484
The
Ikarian Reefer
[1995] 1 Lloyd's Rep. 455 at 458 and
Pickford
v. I.C.I. plc
[1998] 3 All ER 462. They are not in issue in the present case.
9. We
invited submissions, however, as to the correct approach when an appeal is
brought against the trial judge's findings on issues of foreign law. These are
issues of fact, for the purposes of the general principle stated above, but
they are factual issues "of a peculiar kind" :
Parkasho
v. Singh
[1968] P.233 per Cairns J. at p.250. These submissions revealed a difference
of approach. The respondents urged us to consider whether there was evidence
of New York law which entitled Millett J. to make the findings which he did.
Counsel for the appellants submitted that we should construe the statutory
provisions for ourselves and reach our own conclusions upon them.
10. It
is common ground, however, that the evidence of expert witnesses is necessary
for the Court to find that foreign law is different from English law. In the
absence of such evidence, or if the judge is unpersuaded by it, then he must
resolve the issue by reference to English law, even if according to the rules
of private international law the issue is governed by the foreign law.
11. The
Court of Appeal's approach to the trial judge's findings of fact is no
different when the finding is based on or takes account of the evidence of
expert witnesses. The same general principles apply. It is less likely in the
nature of things that questions of credibility will arise, but even so what is
called the demeanour of an expert witness and his response to questioning may
be important factors in deciding whether his evidence is reliable, or not.
12. So
we come to consider what the Court's approach should be when the trial judge
has heard expert evidence as to foreign law and made findings which are
challenged on appeal. What difference does it make that these are findings of
fact but of a ´peculiar kind' because they are concerned with issues of
foreign law?
13. In
our judgment, the answer varies according to the nature of the issue which
arises in the particular case and the kind of decision which the trial judge
and now the Court of Appeal is called upon to make. Sometimes the foreign law,
apart from being in a foreign language, may involve principles and concepts
which are unfamiliar to an English lawyer. The English judge's training and
experience in English law, therefore, can only make a limited contribution to
his decision on the issue of foreign law. But the foreign law may be written
in the English language; and its concepts may not be so different from English
law. Then the English judge's knowledge of the common law and of the rules of
statutory construction cannot be left out of account. He is entitled and
indeed bound to bring that part of his qualifications to bear on the issue
which he has to decide, notwithstanding that it is an issue of foreign law.
There is a legal input from him, in addition to the judicial task of assessing
the weight of the evidence given. The same applies, in our judgment, in the
Court of Appeal. When and to the extent that the issue calls for the exercise
of legal judgment, by reference to principles and legal concepts which are
familiar to an English lawyer, then the Court is as well placed as the trial
judge to form its own independent view.
14. In
Parkasho
v. Singh
(above) the Divisional Court was required to interpret an Indian statute. The
appellant argued that the magistrates' construction was wrong. Cairns J., with
whom Sir Jocelyn Simon P. agreed, approached the issue as follows :-
"Now
we are asked ... to say ... that the justices were wrong in their
interpretation of the foreign law. The question of foreign law being a
question of fact in our Courts, must this Court regard itself as bound by the
findings of the justices on this matter? In my view the question of foreign
law, although a question of fact, is a question of fact of a peculiar kind and
the same considerations do not apply in considering whether and to what extent
this Court should interfere with the decision of the magistrates, as in the
case of the ordinary question of fact which come before a magistrates' Court.
..... I think it is our duty in this case to examine the evidence of foreign
law which was before the justices and to decide for ourselves whether that
evidence justifies the conclusion to which they came" (p.250).
He
referred
inter
alia
to the Court of Appeal's judgment in
A/S
Tallina etc. v. Estonian State S.S. Line
(1947) 80 Ll.L.R.99.
15. These
remarks were approved by this Court in
Dalmia
v. National Bank of Pakistan
[1978] 2 Lloyd's Rep. 223 where Megaw L.J. added :-
"An
Appellate Court must not by an uncritical acceptance of a trial Judge's
conclusions of fact shirk its function of considering the evidence afresh and
forming its own view of the cogency of the rival contentions, whilst of course
always remembering that the trial judge had the undoubted initial advantage of
having seen and heard the witness" (p.286).
16. The
authorities were reviewed in
Bumper
Development Corpn. v. Comr. of Police of Metropolis
[1991] W.L.R. 1362 in unusual circumstances where the trial Judge rejected
evidence, upon which both parties' expert witnesses were agreed, as to the
"true import" of two judgments of the Indian Courts (see 1368G). The Court of
Appeal held that he was not entitled to do so. He had fallen foul of the rule
that the English judge must not conduct his own research into the foreign law
(see 1371B). That issue, however, was "largely academic" because there was
evidence which supported the judge's conclusion (1371C).
17. In
the judgment of the Court, Purchas L.J. approved what is now Rule 18 in
Dicey
and Morris
The
Conflict of Laws
(12th ed.) :-
"Rule
18
(1)
In any case to which foreign law applies, that law must be pleaded and proved
as a fact to the satisfaction of the judge by expert evidence or sometimes by
certain other means.
(2)
In the absence of satisfactory evidence of foreign law, the Court will apply
English law to such a case" (see 1369B)
The
judgment also approved the following further passages from
Dicey
& Morris
;-
"(1) An
English court will not conduct its own researches into foreign law ....
(2) If
the evidence of several expert witnesses conflicts as to the effect of foreign
sources, the Court is entitled, and indeed bound, to look at those sources in
order itself to decide between the conflicting testimony ...
(3) The
Court of Appeal, whilst slow to interfere as in all cases where the decision
involves findings of fact, may in appropriate cases be somewhat more ready to
question the trial judge's conclusions than in normal cases ..." (see 1369D,
1369G and 1370B).
18. We
are indebted to a recently published monograph
Foreign
Law in English Courts
(Clarendon Press 1998) by Richard Fentiman where the following passage appears
under the heading ´Expert evidence on appeal' :-
"It
is a recurring theme in this work that, although characterised as facts,
foreign laws are not invariably treated as such in English practice. One of
the more important respects in which the determination of foreign law belies
its factual status is that appeals are readily entertained from findings on
foreign law [citing the above authorities, also
Gruppo
Torras S.A. v. Al Sabah
[1996] 1 Lloyd's Rep 7, 18 and
G
& H Montague Goods H v. Irvani
(below, para. 24 ) at 691]. This may lead to a thorough re-examination of the
evidence, including transcripts of the oral examination of the parties' experts
at trial. Certainly, appellate courts are willing to engage in such review, no
doubt because it affects the legal rights and obligations of the parties ....
the more an issue of foreign law depends on matters of expert testimony rather
than construction, the effectiveness of appellate review diminishes" (p.201).
The
paragraph concludes :-
"It
should be noticed, however, that the Court of Appeal will confine itself to the
task of assessing the evidence as it was presented to the Court below. Its
task is to police errors by the trial judge, not to determine the question of
foreign law
de
novo
.
Indeed, it can hardly do otherwise since English Courts may not conduct their
own researches into foreign law, or depart from the evidence presented by the
parties' experts" (p.202).
19. It
seems to us that this is an accurate summary of the present state of the
authorities, and that, as the author observes, the precise limits of the Court
of Appeal's power and willingness to intervene may vary according to the type
of case. In our judgment, the limits depend not only on the Court's reluctance
to interfere with findings which must be based upon the expert evidence which
the judge has heard, whether or not they are described as findings of fact, but
also upon the nature of the finding which he has had to make. He is entitled,
indeed bound, to contribute his own legal skill and experience in reaching his
conclusion, so much so that he may, in a suitable case, form his own view of
the meaning of a statute which the expert witness tells him is the governing
foreign law, even if the expert's opinion as to its meaning is different from
his own : see
Dicey
& Morris
(12th ed.) p.233 and
Fentiman
(op.cit.) pp. 194 and 196. This is supported by the following dictum of
Scrutton L.J. :-
"I
can see no reason why a court is bound to accept the evidence of an expert
witness as to fact, when he supports it by a document the plain words of which
render his opinion impossible" (
Buerger
v. New York Life Assurance Co.
(1927) 96 L.J.K.B. 930 at 937).
20. The
question then arises, whether the judge is only entitled to reject the
expert´s opinion evidence as to the meaning of the statute when the
witness has put forward an "impossible" view ; as a corollary to this, it might
be said that the Court of Appeal is not entitled to substitute its own view
when there is acceptable evidence to support the judge's finding. But, in our
judgment, the trial judge's powers are not so limited, nor are the Court of
Appeal's, in a case where the English Court interprets the statute in
accordance with English rules of construction, there being no evidence that
different rules would govern the foreign court's interpretation, and where
there is no suggestion that any of the words of the statute has a special
meaning, different from its ordinary meaning, in the foreign context. Then,
the trial judge's finding as to the meaning of the statute, which is distinct
from his finding that the statute governs the issue before the court, is his
interpretation of the words used. He was influenced, of course, by the factual
´matrix' as he found it to be, and the Court of Appeal must have regard to
the same circumstances. In the background throughout is the rule that, unless
the evidence shows that the foreign rules of construction are different, the
English Court interprets the statute according to the English rules. To that
extent, the trial Judge's ´finding' is essentially a conclusion as to
statutory interpretation, and as such it should properly be regarded as an
issue of law.
21. This
approach is supported in our view by the judgment of Atkin L.J. in
Buerger
v. New York Life Assurance Co.
(above). There was uncontradicted evidence as to the effect of a Russian
decree, but the opposing party submitted that the Court should reject the
evidence in favour of its own construction :-
"It
is not sufficient to prove a foreign statute or code by a translation, and then
leave the Court to place its own construction on it. The code must be
interpreted by an expert in the foreign law. It is, of course, true that when
he vouches a statute to support his evidence the statute forms part of his
evidence and must be considered in the consideration of his evidence as a
whole. And it is also true that where experts on the foreign law differ among
themselves the Court will often have to resolve the conflict by looking at the
statutes or documents and deciding for themselves the more probable contention.
And this course will be more readily undertaken where the dispute is as to the
effect of legislation, as in the United States of America, expressed in English
in respect of a jurisprudence which is known to the English Judges. And it may
also happen occasionally that a foreign expert may arrive at results so
extravagant and involving such a misunderstanding of conception familiar to
lawyers of all countries that an English Court may have to reject his evidence,
and eventually come to the conclusion that they can safely interpret the words
for themselves, or fall back upon the presumption that the proper methods of
construction coincide with the English. But in the first instance the English
Courts must rely on the evidence of competent foreign lawyers" (pages 940-1).
22. In
the present case, none of the expert witnesses claimed that there is any
decision of a United States Court which is precisely in point. The English
Court must therefore make its own findings (see
Fentiman
op.cit.
at 190 ´Novel points of foreign law'). The witnesses debated the issues
at some length : see further below. Taking due account of their evidence, the
judge was called upon to form his own view as to the correct interpretation of
the relevant provisions of the New York Commercial Code. It seems to us that
we are entitled and bound to form our own view, independently of his, on the
issue of construction, though with due regard to the relevant circumstances or
´matrix' as found by him. This leads us to a consideration of the expert
evidence in the present case.
The
expert witnesses
23. In
our judgment, the function of the expert witness on foreign law can be
summarised as follows :-
(1) to
inform the Court of the relevant contents of the foreign law ; identifying
statutes or other legislation and explaining where necessary the foreign
Court's approach to their construction ;
(2) to
identify judgments or other authorities, explaining what status they have as
sources of the foreign law ; and
(3) where
there is no authority directly in point, to assist the English judge in making
a finding as to what the foreign Court's ruling would be if the issue was to
arise for decision there.
24. The
first and second of these require the exercise of judgment in deciding what the
issues are and what statutes or precedents are relevant to them, but it is only
the third which gives much scope in practice for opinion evidence, which is the
basic role of the expert witness. And it is important, in our judgment, to
note the purpose for which the evidence is given. This is to predict the
likely decision of a foreign court, not to press upon the English judge the
witness's personal views as to what the foreign law might be. Thus, in
G.
& H. Montage G.m.b.H v. Irvani
[1990] 1 W.L.R. 667 (C.A.), Mustill L.J. said this :-
"The
fact that the plaintiffs' expert was not able to do more than assert, in this
novel situation, his own view on how the German court would react when faced
with a similar problem does not disqualify his evidence from being relied upon.
There are many fields of law in which the books provide no direct answer and
where the skill of the lawyer lies precisely in predicting what answer should
be given. If the judge concludes that the expert's prediction is reliable, he
is fully entitled to give effect to it" (684G).
This
passage emphasised that the expert witness is entitled to give opinion evidence
in the absence of direct authority, but we would underline the restrictions
which it places upon him. His role is to "predict" what the foreign court
would decide, and only in this sense should he say "what answer should be given".
25. We
have to say, regretfully, that the expert witnesses were encouraged and allowed
to range far wider than this in the present case. The bulk of their evidence
in cross-examination on these issues came to resemble a debate, sometimes
almost philosophical, as to the nature of knowledge and to a lesser extent of
"notice", mostly expressed in general terms rather than focused on specific
issues which arise or might arise in the circumstances of the present case.
This could be justified, no doubt, as part of the exercise of determining the
legislative intention, which of course is a relevant and primary consideration.
Nevertheless, it seems to us that it was carried further than was necessary or
even appropriate in the present case.
26. The
Court was, and is, faced with the task of construing a small number of
provisions in the New York Commercial Code. Those provisions have to be read
against a background of common law which in all relevant respects is broadly
similar to our own and in a commercial and mercantile setting which is
international and not in any sense confined to a foreign state. The English
judge can properly be informed of factors which the New York Courts would be
likely to find influential ; of the sense in which words in the English
language might be differently understood in New York (this does not appear to
feature here) ; and of any special considerations which an English judge,
applying English rules of statutory construction, might not take into account.
That said, however, the judge's task is to interpret the statute, assisted by
submissions from counsel. It is not made easier by prolonged debate with each
of the expert witnesses, once they have dealt with specific matters which lie
properly within their own province. Moreover, such debate creates an
additional problem, if the experts' contributions to it are then treated as
evidence, which the judge is bound either to accept or to reject before forming
his own view. Counsels' submissions are then expanded to deal with that
evidence, and the construction exercise becomes far more complicated than it
ought to be.
27. Finally,
there is a yet further disadvantage when the meaning of the statute is debated
in the course of the evidence, before the judge has heard submission on the
factual evidence and his likely conclusions or the range of possible
conclusions have become known. The statute has to be construed, not in the
abstract but by reference to a comparatively limited number of actual
situations which arise or may arise in the instant case. An earlier debate
between counsel and the expert witnesses in the course of the trial tends
towards generalities and is more discursive than it needs to be. That tendency
too is evident in the transcripts we have read.
C. The
Law of New York
The
Uniform Commercial Code
28. It
is accepted by Macmillan for the purposes of this appeal that the question
whether or not Swiss Volksbank and Credit Suisse respectively obtained
interests in the Berlitz shares is to be determined in accordance with the
provisions of the Uniform Commercial Code adopted in the State of New York with
effect from 27th September 1964 (“the Code”). Article 8 of the Code
contains provisions in respect of “investment securities”. We have
been referred to the annotated text, as amended to 8th May 1990, set out in
McKinney’s Consolidated Laws of New York, on the basis that that text
contains the provisions in force at the relevant time.
29. Part
3 of Article 8 is directed to the purchase of investment securities. For this
purpose “purchase” includes taking by way of pledge; and
“purchaser” means a person who takes by purchase - see paragraphs
(32) and (33) of Section 1-201 (General Definitions).
Sections
8-301 and 8-302
30. The
determinative provisions, in the present context, are those contained in
Sections 8-301(1) and 8-302(3):
8-301 (1)
Upon transfer of a security to a purchaser (Section 8-313) the purchaser
acquires the rights in the security which his transferor had or had actual
authority to convey unless the purchaser’s rights are limited by
subsection (4) of Section 8-302.
8-302
(3)
A bona fide purchaser in addition to acquiring the rights of a purchaser
(Section 8-301) also acquires his interest in the security free of any adverse
claim.
Subsection
(4) of section 8-302 contains the safeguard (not material in the present
context) that, notwithstanding section 8-301(1), a transferee who has himself
been party to any fraud or illegality affecting the security or who, as a prior
holder of the security, had notice of an adverse claim, cannot improve his
position by taking from a later bona fide purchaser. Adverse claim”
includes a claim that the transfer was or would be wrongful or that a
particular adverse person is the owner of or has an interest in the security -
see subsection (2) of section 8-302. The position of a bona fide purchaser is
further protected by section 8-315(1):
8-315 (1)
Any person against whom the transfer of a security is wrongful for any reason
. . . may against any one except a bona fide purchaser
(a)
reclaim possession of the certificated security wrongfully transferred; . . .
31. In
relation to the Berlitz shares, Macmillan was, of course, a person having a
claim adverse to the interests of Swiss Volksbank and Credit Suisse. If the
rights acquired by the two banks are limited to those conferred on them as
purchasers by section 8-301(1), their respective interests in the Berlitz
shares are subject to the prior adverse claim of Macmillan. It is only if it
can take advantage of section 8-302(3) that either bank can take free of the
Macmillan claim. Accordingly, it is necessary for each to establish that it is
a bona fide purchaser for the purposes of that subsection.
32. “Bona
fide purchaser” is defined in section 8-302(1):
8-302 (1)
A “bona fide purchaser” is a purchaser for value in good faith and
without notice of any adverse claim
(a)
who takes delivery of a certificated security in bearer form or of one in
registered form issued to him or indorsed to him or in blank; or
(b)
to whom the transfer, pledge or release of an uncertificated security is
registered on the books of the issuer; or
(c)
to whom a security is transferred under the provisions of subparagraph (c),
(d)(i) or (g) of subsection (1) of Section 8-313.
33. The
only question, in relation to Swiss Volksbank, is whether it can bring itself
within subparagraph (c) of section 8-302(1) - that is to say, whether it was a
person to whom the security was transferred under the provisions of one or
other of subparagraphs (c), (d)(i) or (g) of section 8-313(1). It is not now in
dispute that Swiss Volksbank otherwise satisfied the requirements of
“purchaser for value in good faith and without notice of any adverse
claim”. The same question arises in relation to Credit Suisse in respect
of the 1 million Berlitz shares. For convenience we will refer to this question
as “the clearing corporation issue”.
34. Nor
is it now in dispute that, in respect of the 500,000 Berlitz shares, Credit
Suisse can bring itself within section 8-302(1)(a). But Macmillan does not
accept that Credit Suisse took either the 500,000 shares or the 1 million
shares in good faith and without notice of its adverse claim. This raises two
questions: first, what is the requirement as to notice under the Code
(“the notice issue”); and, second, did Credit Suisse have notice of
the nature required. The second question is, of course, a question of fact.
C(i). The
clearing corporation issue
35. The
question whether Swiss Volksbank and Credit Suisse (in respect of the 1 million
shares) can bring themselves within subparagraph (c) of section 8-302(1)
requires a detailed examination of certain of the provisions of sections 8-313
and 8-320. Before examining those provisions, it is necessary to set out the
underlying facts and a short description of the relevant depository trust
system through which the transfers were made on 12th and 13th November 1991.
The
underlying facts
36. Macmillan
was, until December 1989, the owner of 100% of the stock in Berlitz. In
December 1989, approximately 44.4% of the Berlitz stock was floated as an
initial public offering on the New York Stock Exchange. Macmillan continued to
be the owner of the remaining 55.6%, or 10.6 million, shares. On 5th November
1990 those 10.6 million Berlitz shares were transferred into the name of BIT,
as nominee for Macmillan.
37. Upon
transfer to BIT on 5th November 1990 the Macmillan holding of 10.6 million
Berlitz shares was split between twenty-one separate certificates. On 23rd
January 1991, fifteen of the certificates, representing together 7.6 million
Berlitz shares, were delivered to Morgan Stanley in London. On 7th March 1991
those fifteen stock certificates, with executed stock power forms, were sent to
Morgan Stanley's New Jersey office. They were delivered by that office to the
DTC for the account of Morgan Stanley.
38. The
DTC, as its name suggests, acted as a securities depository for corporate
stocks and bonds traded on various stock exchanges in the USA, including the
New York Stock Exchange. It accepted securities for deposit from participant
members, of which Morgan Stanley was one. Once securities had been deposited
with the DTC they could be transferred between participant members by a
“paperless" system; that is to say, they could be transferred without the
need for physical delivery of certificates or the issue of new certificates.
39. Between
March and September 1991 Morgan Stanley held the 7.6 million Berlitz shares to
the order of London & Bishopsgate International Investment Management Plc.
On 27th September 1991 Morgan Stanley was instructed, without the authority of
Macmillan, to hold those shares to the order of Bishopsgate Investment
Management Ltd (“BIM”).
40. On
12th November 1991, BIM gave instructions to Morgan Stanley to transfer a total
of 4 million Berlitz shares - being securities held to the account of Morgan
Stanley within the DTC system - to four different transferees. One of those
parcels, comprising 2.4 million shares, was to be transferred to the account of
Citibank, another DTC participant, for the order of Swiss Volksbank. That
transfer was effected by the DTC making appropriate entries on the accounts of
Morgan Stanley and Citibank, on 12th November 1991. A second parcel, comprising
1 million shares, was to be transferred to the account of Swiss American
Securities Inc (“SASI”), also a DTC participant, for the order of
Credit Suisse. That transfer was effected by the DTC making appropriate entries
on the accounts of Morgan Stanley and SASI on 13th November 1991.
The
operation of the securities depository system by the DTC
41. Upon
deposit of certificated securities with the DTC by a participant member the
amount of the securities comprised in the certificates are credited to the
member’s account and the certificates are returned to the issuer (or its
transfer agent) for cancellation. The securities comprised in the certificates
are registered by the issuer in the name of CEDE & Co ("CEDE") a New York
partnership. A certificate in respect of all securities of that class held by
CEDE from time to time is (or will already have been) issued and is retained by
the issuer (or its transfer agent). That certificate is non-specific. That is
to say, the certificate itself does not identify, by serial number or
otherwise, specific shares to which it relates; and it does not record the
number of shares held in CEDE’s name. It is expressed to be issued in
respect of the shares which are shown from time to time on the issuer’s
transfer sheets as represented by that certificate.
42. CEDE
holds the securities registered in its name as nominee for the DTC. The DTC
holds those securities for the account of such of its participant members as
are shown in its records to be entitled to securities of that class; and in the
amounts to which they are so shown to be entitled. The securities to which any
participant member is entitled are non-specific; they are not identified by
serial number or otherwise. On a transfer from one participant to another of
securities of a particular class appropriate entries are made in the books of
the DTC. The number of the securities shown as held for the transferor is
reduced by the amount of the transfer and the number of the securities shown as
held for the transferee is increased by the same amount.
43. The
participant members may, themselves, hold securities within the DTC for their
own clients or on their own account. The entries in the books of the DTC will
not differentiate between securities held for the participant member for his
own account and securities held by him for the account of his clients; nor
between securities held by the participant member for the account of one client
or another. The participant member can effect trades of securities between one
client and another, or (it seems) between itself and a client, by entries in
its own books without the need for corresponding entries in the books of the
DTC. Trades between participant members - whether on their own account or for
clients - can be aggregated and netted in the books of the participant members
inter se. The effect is that each transfer of securities made by a participant
member on behalf of a client is not necessarily reflected in a separate entry
on the books of the DTC.
Sections
8-813 and 8-320
44. Section
8-313(1) of the Uniform Commercial Code defines the circumstances in which the
transfer of a security can occur. The material provisions in the present
context are these:
8-313 (1)
Transfer of a security or a limited interest (including a security interest)
therein to a purchaser occurs only
(a)
when he or a person designated by him acquires possession of a certificated
security; or
(b)
when the transfer, pledge or release of an uncertificated security is
registered to him or a person designated by him; or
(c)
when his financial intermediary acquires possession of a certificated security
specially indorsed to or issued in the name of the purchaser; or
(d)
when a financial intermediary, not a clearing corporation, sends him
confirmation of the purchase and also by book entry or otherwise identifies as
belonging to, or subject to a limited interest in favor of, the purchaser
(i)
a specific certificated security in the financial intermediary’s
possession; or
(ii)
a quantity of securities which constitute or are part of a fungible bulk of
certificated securities in the financial intermediary’s possession or of
uncertificated securities registered in the name of the financial intermediary;
or
(iii)
a quantity of securities which constitute or are part of a fungible bulk of
securities shown on the account of the financial intermediary on the books of
another financial intermediary; or
. . .
(g)
when appropriate entries to the account of the purchaser or a person designated
by him on the books of a clearing corporation are made under Section 8-320; or
. . .
45. Paragraph
(g) of section 8-313(1) must be read with section 8-320. Subsections (1) and
(2) are in these terms:
8-320 (1)
If a certificated security
(a)
is in the custody of a clearing corporation or of a custodian bank or a nominee
of either subject to the control of the clearing corporation; and
(b)
is in bearer form or indorsed in blank by an appropriate person or registered
in the name of the clearing corporation or custodian bank or a nominee of
either;
or
(c)
if an uncertificated security is registered in the name of a clearing
corporation or custodian bank or a nominee of either;
and
such certificated or uncertificated security is shown on the account of a
transferor or pledgor on the books of the clearing corporation;
then,
in addition to other methods, a transfer or pledge of the security or any
interest therein may be effected by the making of appropriate entries on the
books of the clearing corporation reducing the account of the transferor or
pledgor and increasing the account of the transferee or pledgee by the amount
of the obligation or the number of shares or rights transferred or pledged.
(2)
Under this section entries may be with respect to like securities or interests
therein as part of a fungible bulk and may refer merely to a quantity of a
particular security without reference to the name of the registered owner,
certificate or bond number or the like and, in appropriate cases, may be on a
net basis taking into account other transfers or pledges of the same security.
46. For
the purposes of Article 8 - and, in particular, for the purposes of sections
8-301, 8-302, 8-313 and 8-320 - a security must be either a “certificated
security” or an “uncertificated security”. The expressions
are defined in section 8-102(1). It is common ground that the Berlitz shares
were certificated securities. “Financial intermediary” is defined
in section 8-313 (4):
8-313 (4)
A “financial intermediary” is a bank, broker, clearing corporation
or other person (or the nominee of any of them) which in the ordinary course of
its business maintains security accounts for its customers and is either acting
in that capacity or acting as transferor of a security or an interest in a
security, irrespective (in either case) of whether such person is also acting
in any other capacity.
It
is common ground that SASI, Citibank and the DTC are financial intermediaries
within that definition. It is also common ground that the DTC is a
“clearing corporation” for the purposes of sections 8-313 and 8-320.
47. The
concept of “fungible bulk” - employed in paragraphs (d)(ii) and
(d)(iii) of section 8-313(1), in section 320(2) and (as will be seen) in
section 8-313(2) - is not specifically defined; but the general definition
section does contain a definition of “fungible”:
1-201 (17)
“Fungible” with respect to goods or securities means goods or
securities of which any unit is, by nature or usage of trade, the equivalent of
any other like unit. Goods which are not fungible shall be deemed fungible for
the purposes of this Act to the extent that under a particular agreement or
document unlike units are treated as equivalents.
With
this guidance it is reasonably clear - and it is not in dispute - that
securities are part of a fungible bulk for the purposes of the relevant
provisions where they are held by a financial intermediary (or for a financial
intermediary by another financial intermediary) with other securities of the
same description as a single corpus so that there is no differentiation
between those securities and any other securities forming part of the same
corpus. The securities constitute a fungible bulk where they comprise all the
securities of that description held by or for the financial intermediary.
The
inter-relation of section 8-313(1)(g) and section 8-320(1)
48. Unaided
by expert evidence, we would be led, by the language of sections 8-313(1)(g)
and 8-320(1) and (2), to the conclusion that transfers (i) of 2.4 million
Berlitz shares to Swiss Volksbank on 12th November 1991 and (ii) of 1 million
Berlitz shares to Credit Suisse on 13th November 1991 were effected by the
relevant entries made in the books of the DTC on those days. Section
8-313(1)(g) provides, in terms, that transfer of a security to a purchaser
occurs when appropriate entries to the account of the purchaser or a person
designated by him on the books of a clearing corporation are made under section
8-320. It seems clear enough that, where the purchaser is not himself a person
who has an account on the books of a clearing corporation, section 8-313(1)(g)
contemplates that he will be able to designate a person - a participating
member - who does have an account to which appropriate entries can be made. If
that is not the purpose of the words “or a person designated by
him” then it is difficult to see what purpose those words do serve. With
this in mind, section 8-320(1) must be read in such a way as to permit the
transfer of a security to a purchaser who is not himself a participating member
in the clearing corporation by appropriate entries to the account of a person
who is. The “transferee” referred to in section 8-320(1) must
include a participating member designated by the purchaser. Otherwise the
purpose evidenced by the inclusion of the words “or a person designated
by him” in section 8-313(1)(g) is frustrated. It must follow, reading
sections 8-313(1)(g) and 8-320(1) together, that a transfer to the purchaser
(not being a participating member) occurs when an appropriate entry is made
increasing the account of the participating member whom he has designated to be
“transferee” in respect of a transaction effected under section
8-320. In such a case it does not seem to be necessary (although, no doubt, it
will usually occur) that the person designated as transferee also sends to the
purchaser confirmation of the purchase and identifies, in his own books, a
quantity of securities as belonging to the purchaser.
49. We
are conscious that that approach produces the apparent anomaly that the
“transferee” referred to in section 8-320(1) will not be the person
to whom, as “purchaser”, the transfer must be taken to have been
made by reason of section 8-313(1)(g). But it is inherent in another provision
of section 8-313(1) that the purchaser to whom the transfer must be taken to be
made will not be the “transferee” in any ordinary sense. Section
8-313(1)(b) provides that a transfer to the purchaser will occur where the
transfer of an uncertificated security is registered to a person designated by
him. In such a case it is the purchaser, and not the person to whom the
transfer is registered, who is the transferee. Further, section 313(2)
contemplates that the purchaser will be the owner of a security transferred to
a financial intermediary for his account. That subsection is in these terms:
8-313 (2)
The purchaser is the owner of a security held for him by a financial
intermediary, but cannot be a bona fide purchaser of a security so held except
in the circumstances specified in paragraphs (c), (d)(i) and (g) of subsection
(1). Where a security so held is part of a fungible bulk, as in the
circumstances specified in sub-paragraphs (d)(ii) and (d)(iii) of subsection
(1), the purchaser is the owner of a proportionate interest in the fungible bulk.
It
is difficult to see how a purchaser can become the owner of a security
transferred to a financial intermediary for his account unless the transfer to
the agent is treated as a transfer to the principal. Be that as it may, if
there is indeed an anomaly (which we doubt), there appears to be no escape from
that anomaly if section 8-313(1)(g) is to be given the effect which it is
plainly intended to have - that is to say, to be a means of effecting a
transfer to a purchaser (who is not a participating member) of securities which
are transferred to his agent (who is a participating member) by entries to the
agent’s account in the books of a clearing corporation.
50. If
the analysis just set out is correct, then it would seem to follow that a
purchaser (not being a participating member in the clearing corporation) to
whom a transfer is made under the provisions of sections 8-313(1)(g) and
8-320(1) is entitled to bona fide purchaser status under section 8-302(1)(c);
provided, of course, that he takes for value in good faith and without notice.
The provisions of section 8-302(1)(c) have been set out earlier in this
judgment. They are reflected in the first sentence of section 8-313(2).
The
Judge’s approach
51. The
analysis set out above was favoured by the Judge. He identified the problem in
the following passage (transcript: page 576):
Article
8-320 describes the person to whom the shares are transferred as a "transferee"
or "pledgee" and not as a "purchaser" and contains no provision for enabling
the transferee to qualify as a bona fide purchaser. The question which arises,
therefore, is whether and if so how Article 8-320 can be linked with Article
8-302 (which defines "bona fide purchaser") so as to enable a person who
receives a transfer of securities through the DTC system to qualify for the
status of a bona fide purchaser.
52. After
referring to the fact that that question had produced complete disagreement
between the expert witness called on behalf of Swiss Volksbank (Mr Joseph
Levie) and the experts called on behalf of Credit Suisse (Professor Mooney and
Professor Reitz) - a disagreement which the expert called on behalf of the
plaintiff (Professor Felsenfeld) had sought to exploit - the Judge went on
(transcript: page 578):
I
have been unable to comprehend why, on the plain meaning of the words used,
Article 8-313(1)(g) does not fit the facts of the present case, especially
having regard to Article 8-313(2). To take the case of Credit Suisse in
relation to the 1 million shares: Credit Suisse was the purchaser (because the
intention was to create an interest in property - namely a security interest -
in Credit Suisse); appropriate entries were made to the account of SASI (the
"person designated by Credit Suisse") on the books of DTC (the clearing
corporation) under Article 8-320; Credit Suisse was (under Article 8-313(2))
the owner of the securities held for it by SASI (a financial intermediary), and
could be a bona fide purchaser because the circumstances were those specified
in Article 8-313(1)(g). It is possible that the transaction can also be
brought within the words of Article 8-313(1)(d)(iii) (which does not confer
bona fide purchaser status), but it is plain that there is some overlapping in
any event.
The
expert evidence on section 8-313(1)(g)
53. In
reaching that conclusion the Judge accepted the evidence of Mr Levie, which he
described in these terms (transcript: page 577):
Mr.
Levie's route had the advantage of being simple and straightforward, as
befitted a distinguished and experienced practising commercial lawyer. He
relied on Articles 8-302(1)(c) and 8-313(1)(g) to link with Article 8-320 in
order to enable the transferee of shares delivered through the DTC system to
qualify as bona fide purchaser.
He
dismissed the evidence of Professor Felsenfeld on this point (transcript: page
576-577):
Professor
Felsenfeld . . . was clearly in unfamiliar territory and contented himself with
accepting the reasons which each of the other contestants put forward for
rejecting the views of the other.
54. Mr
Oliver QC, on behalf of the appellant, did not seek to rely on the evidence
given by the expert witness whom he had called at the trial. He based his
submissions in this Court on the reasons given by Professor Mooney and
Professor Reitz for rejecting the route favoured by Mr Levie and the Judge. The
Judge summarised those reasons in a passage (transcript: pages 579-580) with
which Mr Oliver does not quarrel:
Professors
Mooney and Reitz, however, would have none of it. To come within Article
8-313(1)(g), they asserted, the purchaser must be a participant in the DTC
system. Most, though not all, of the participants are brokers, and it was never
intended (they assured me) that their clients should be able to attain bona
fide purchaser status unless specific securities were appropriated to them.
They pointed to the Official Comments to Article 8-302 in support. Official
Comment No. 2 states:
"Not every form of transfer can confer upon the purchaser the status of bona
fide purchaser. In particular, transfers effected ... through the
acknowledgement of a financial intermediary who holds for the transferee a
proportionate interest in a fungible bulk do not confer bona fide purchaser
status".
On
this interpretation, only specifically appropriated securities (Article
8-313(d)(i)) or
a
participant's
interest in the fungible bulk held by the clearing corporation or by another
participant are capable of attracting bona fide purchaser status.
The
explanation for this was attributed by the witnesses to what was described in
the course of argument as "the fungible bulk problem". It is described in
Official Comment No. 4 to Article 8-313:-
4. Subsection
(2) sets forth the principle that a purchaser is the owner of any security
"held for him" -i.e. controlled pursuant to his instructions- by a financial
intermediary. For example, a purchaser owns the securities in his custody
account with a bank or his margin account with a broker. However, unless
specific securities are separately identified as belonging to the purchaser, he
cannot become a bona fide purchaser. A bona fide purchaser takes particular
securities free of all claims and defenses. If bona fide purchaser status were
given to those whose securities are held as part of a fungible bulk, there
would be a possibility of inconsistent claims between two or more bona fide
purchasers, since if the bulk should prove to be smaller than was expected, the
claim of one or both must be compromised. An exception is made with respect to
securities held by clearing corporations, since the fact that those entities
hold only for customer accounts makes the chance of inconsistent claims small.
“
The
fungible bulk problem
”
55. Mr
Oliver’s reliance on the evidence of Professor Mooney and Professor Reitz
makes it necessary to examine in more detail than would otherwise be
appropriate the provisions of section 8-313(1)(d) and (2). Those provisions are
set out earlier in this judgment, but it is convenient to see them together:
8-313
(1)
Transfer of a security or a limited interest (including a security interest)
therein to a purchaser occurs only . . .
(d)
when a financial intermediary, not a clearing corporation, sends him
confirmation of the purchase and also by book entry or otherwise identifies as
belonging to, or subject to a limited interest in favor of, the purchaser
(i)
a specific certificated security in the financial intermediary’s
possession; or
(ii)
a quantity of securities which constitute or are part of a fungible bulk of
certificated securities in the financial intermediary’s possession or of
uncertificated securities registered in the name of the financial intermediary;
or
(iii)
a quantity of securities which constitute or are part of a fungible bulk of
securities shown on the account of the financial intermediary on the books of
another financial intermediary;
(2)
The purchaser is the owner of a security held for him by a financial
intermediary, but cannot be a bona fide purchaser of a security so held except
in the circumstances specified in paragraphs (c), (d)(i) and (g) of subsection
(1). Where a security so held is part of a fungible bulk, as in the
circumstances specified in sub-paragraphs (d)(ii) and (d)(iii) of subsection
(1), the purchaser is the owner of a proportionate property interest in the
fungible bulk.
56. The
argument, as developed by Mr Oliver, may be summarised as follows. Section
8-313(1)(d)(ii) is directed to the case where a financial intermediary (say, a
broker) holds securities as a fungible bulk. When the broker identifies, by
book entry or otherwise, a quantity of those securities as belonging to the
client purchaser he does so in circumstances in which there are no specific
securities within the broker’s holding that can be said to belong to the
client. In those circumstances the client is the owner of a proportionate
interest in the fungible bulk; but cannot have bona fide purchaser status
because he cannot be allowed to take free of the claims of other clients who
are in a similar position. If there is a shortfall in the total holding, the
proportionate interests must all abate. The reason why bona fide purchaser
status is withheld, in a case within section 8-313(1)(d)(ii), so it is
submitted, is because that is a necessary consequence of the second sentence of
section 8-313(2).
57. Section
8-313(1)(d)(ii) applies only where the financial intermediary who holds the
securities is not a clearing corporation. Typically, as we have indicated, it
applies where the securities are held by a broker. Where the financial
intermediary is a clearing corporation, the position is governed by section
8-313(1)(g) - at least in the case where the purchaser is a participant member
and has an account to which entries can be made on the books of the clearing
corporation. In such a case it is accepted that the purchaser can acquire bona
fide purchaser status. Although the securities identified by the clearing
corporation as belonging to the purchaser may (and usually will) constitute
part of a fungible bulk held by the clearing corporation, so that the problems
associated with shortfall could arise, the chance of a shortfall is said to be
so remote that the problem can be ignored. It must also be kept in mind that a
clearing corporation will, necessarily, be subject to supervision or regulation
pursuant to the provisions of federal or state banking laws or state insurance
laws - see the definition of “clearing corporation” in section
8-102(3). Those features, it is submitted, justify the exceptional treatment
of cases which - because the financial intermediary is a clearing corporation -
are taken out of paragraph (d)(ii) and brought back under paragraph (g).
58. We
interpose to note that, where the financial intermediary is a clearing
corporation but the purchaser is not a participant member, the case could not
have fallen within section 8-313(1)(d)(ii) in any event - that is to say, even
if there had not been an express exclusion in respect of a clearing
corporation. The reason is that the purchaser could not deal direct with the
clearing corporation; the transaction would have to be effected through a
participant member (who would, itself, be a financial intermediary). The case
would, necessarily, fall within section 8-313(1)(d)(iii).
59. The
shortfall argument is extended to section 8-313(1)(d)(iii). That section is
directed to the case where the broker does not, himself, hold the securities at
all. The securities are held by another financial intermediary. The
broker’s interest is in the fungible bulk shown on his account on the
books of that other financial intermediary. Again, when the broker identifies
by book entry or otherwise, a quantity of those securities as belonging to the
purchaser client, he does so in circumstances in which there are no specific
securities within the fungible bulk shown on the broker’s account on the
books of that other financial intermediary that can be said to belong to the
client. Further, if the other financial intermediary himself holds the
securities as a fungible bulk (as will usually be the case) there will be no
specific securities within that fungible bulk which can be said to be held for
the broker. In those circumstances the client is the owner of a proportionate
interest in the fungible bulk shown on the broker’s account on the books
of the other financial intermediary; and that fungible bulk may, itself, be
only a proportionate interest in the securities held as a fungible bulk by the
other financial intermediary. If there is a shortfall in either the securities
held by the other financial intermediary or in the quantity of those securities
shown on the broker’s account on the books of that other financial
intermediary, the interests of clients will have to abate. So, it is submitted,
bona fide purchaser status must be withheld.
60. There
is an apparent overlap between paragraphs (d)(iii) and (g) of section 8-313(1).
Paragraph (d)(iii) can apply where a broker (being a participant member of a
clearing corporation) identifies as belonging to a purchaser a quantity of
securities which constitute or are part of a fungible bulk of securities shown
on the account of the broker on the books the clearing corporation. There is no
reason, as a matter of language, why the “[an]other financial
intermediary” referred to in paragraph (d)(iii) should not be a clearing
corporation. But that will be a case in which “appropriate entries to
the account of . . . a person designated by [the purchaser]” - that is to
say, to the account of the broker - will have been made on the books of the
clearing corporation under section 8-320; and so will be a case which, prima
facie, will fall within paragraph (g) also.
61. Mr
Oliver did not suggest in argument that paragraphs (d)(iii) and (g) of section
8-313(1) were mutually exclusive. He recognised that, if they were, no effect
could be given to the words “a person designated by him” which
appear in paragraph (g). The words were introduced by amendment made in 1982.
Mr Oliver, perhaps understandably, did not embrace Professor Felsenfeld’s
view that those words might be there as the result of a mistake.
62. Mr
Oliver sought to explain the words “a person designated by him” on
the basis that both “purchaser” and “person designated”
were in some way, which never became wholly clear, qualified by the reference
to the existence of an account on the books of the clearing corporation. The
paragraph had to be read, so it was submitted, as if both the purchaser and the
person designated were participants. So, the only circumstances in which a
purchaser could designate another person as the person to whose account
appropriate entries were to be made were those in which the purchaser himself
had an account with the clearing corporation. The purchaser must be a
participant. The submission appears in the appellant’s skeleton argument
at paragraph 6.8:
.
. . the only logical interpretation to adopt is that both “the
purchaser” and the “person designated” must be participants
in the system: the alternative (that a purchaser need not be as long as the
person designated is) produces a conflict between the provisions of Article
8-313(1)(g) and 8-313(1)(d)(iii) which, in the light of the express words of
Article 8-313(2), it is impossible to resolve.
63. There
are a number of difficulties with that approach. The first, and perhaps the
most obvious, is that there is nothing in the language of paragraph (g) to
support a construction which restricts “purchaser” to a person who
is a participant. Indeed, it might be thought that the most obvious reason for
introducing the words “person designated by him” was to meet the
situation where the purchaser was not a participant and so did not have an
account of his own on the books of the clearing house to which entries could be
made. Secondly, the suggested approach does not, of itself, take the case out
of paragraph (d)(iii) and so avoid the overlap; it simply reduces the number of
cases in which the overlap will occur. Where a broker who is a participant
identifies as belonging to a client who is also a participant a quantity of
securities which are part of the fungible bulk of securities shown on the
account of the broker on the books of a clearing corporation, the case falls
squarely within paragraph (d)(iii) - whether or not it also falls within
paragraph (g). It was not suggested that paragraph (d)(iii) could be construed
so as to avoid that conclusion. If the case falls within paragraph (d)(iii)
then it also falls within the second sentence of section 8-313(2). The
supposed conflict which is said to require a special meaning to be given to the
word “purchaser” in paragraph (g) remains even if that special
meaning is adopted. Thirdly, the suggested approach does not meet the shortfall
problem; it distorts it. If there is shortfall on the account of the designated
broker, there is no reason why a client who happens to be a participant should
take to the prejudice of those clients who are not participants.
64. For
these reasons we have no doubt that the Judge was right to reject the evidence
of Professor Mooney and Professor Reitz on this point. He did so in the
following passage (transcript: pages 580-581):
Professors
Mooney and Reitz are extremely distinguished academic and practising lawyers
and amongst the leading exponents of Article 8 of the NYUCC in the United
States. Professor Mooney is legal adviser to the Drafting Committee of the
National Conference of Commissioners on Uniform State Laws which is currently
considering the revision of Article 8, and Professor Reitz is Chairman of the
Drafting Committee. Their opinions on the meaning and effect of Article 8 are
deserving of very great respect, especially when they appear to be supported by
the Official Comments on the NYUCC. Their views would, however, have been more
convincing if they had been able to explain to me how they were able to extract
the limited application of Article 8-313(1)(g) to which they subscribe from the
actual wording of the paragraph, and if those views did not lead to a paradox.
65. The
paradox to which the Judge was there referring arose from the attempts by
Professor Mooney and Professor Reitz, who had been called as witnesses to
support the contention of Credit Suisse that it was entitled to bona fide
purchaser status, to reach that conclusion by a different route - the
“shelter route”. The Judge rejected the shelter route. He described
it as tortuous and unconvincing. The Judge explained the paradox to which their
evidence gave rise (transcript: pages 581-582):
Having
asserted that it was never intended that bona fide purchaser status should be
conferred on non-participants, because of the fungible bulk problem and the
risk of abatement, and having given this as the reason for limiting the
operation of the otherwise clear language of Article 8-313(1)(g), they then
produced precisely the same result by a less attractive route. Moreover, it
did not stop there. Having agreed with Mr. Levie that it would be commercially
unacceptable to deprive purchasers of shares through the DTC system of bona
fide purchaser status unless they were participants, they assured me that a New
York Court would feel itself constrained to invoke Article 8-313(1)(g) if their
own preferred route was not adopted.
He
went on (transcript: page 582):
Unlike
Professor Felsenfeld, therefore, Professors Mooney and Reitz did not regard the
fungible bulk problem as an insuperable obstacle to conferring bona fide
purchaser status on a non-participant like Credit Suisse which took a transfer
of shares through the DTC system.
66. We
share the view that, on a proper analysis of the relevant provisions, what has
been described as the “fungible bulk problem” does not present an
obstacle to conferring bona fide purchaser status on a non participant who
takes a transfer of shares through the system operated by the DTC . We have
already pointed out that both paragraph (d)(ii) and paragraph (d)(iii) of
section 8-313(1) cover cases where the quantity of securities identified by the
broker as belonging to the purchaser (a) “constitute” or (b)
“are part of” a fungible bulk of securities. We have pointed out
that there is a distinction between those two cases. Securities are part of a
fungible bulk for the purposes of the relevant provisions where they are held
by a financial intermediary (or for a financial intermediary by another
financial intermediary) with other securities of the same description as a
single corpus so that there is no differentiation between those securities and
any other securities forming part of the same corpus. Securities constitute a
fungible bulk where they comprise all the securities of that description held
by or for the financial intermediary.
67. Where
all the securities of the same description in respect of which the financial
intermediary holds certificates - or, if uncertificated, in respect of which it
is registered - are held for the same purchaser, so that the securities
identified at the time of the transfer constitute the whole of the fungible
bulk, the purchaser becomes the owner of those securities upon transfer. Where
the securities identified at the time of the transfer do not constitute the
whole of the fungible bulk, then the purchaser does not become the owner of
specific securities; he becomes the owner of a proportionate property interest
in the fungible bulk - see the second sentence of section 8-313(2). The
distinction between those two factual situations is recognised by the
difference between the expression used in section 8-313(1)(d)(ii) -
“securities which constitute or are part of a fungible bulk” - and
that used in section 8-313(2) - “where a security so held is part of a
fungible bulk”.
68. The
second sentence of section 8-313(2) applies where the securities identified at
the time of the transfer are part of a fungible bulk; but has no application
where the securities identified at the time of the transfer constitute the
whole of the fungible bulk. Nevertheless, in cases where the financial
intermediary is not a clearing corporation, the purchaser cannot have
“bona fide purchaser status” in respect of the securities of which,
in that factual situation, he becomes owner. That is because the case falls
within paragraph (d)(ii) of section 8-313(1); and a case within paragraph
(d)(ii) cannot also fall within any of paragraphs (c), (d)(i) or (g) of that
subsection. The analysis shows that it is the first sentence of section
8-313(2) that prevents bona fide purchaser status arising in a case within
paragraph (d)(ii); not the second sentence of that sub-section.
69. The
position is not the same in relation to a case within paragraph (d)(iii) of
section 8-313(1). It remains the position that the second sentence of section
8-313(2) applies where the securities identified at the time of the transfer
are part of a fungible bulk of securities shown on the account of the broker on
the books of another financial intermediary; but has no application where they
constitute the whole of that fungible bulk. It remains the position that the
question whether the purchaser can have bona fide purchaser status is
determined by the first sentence of section 8-313(2); and not the second
sentence. But, although a case within paragraph (d)(iii) of section 8-313(1)
cannot also fall within paragraphs (c) and (d)(i) of that sub-section, it can
(for the reasons which we have already explained) fall within paragraph (g). It
does so where the other financial intermediary is a clearing corporation. Where
the case falls within paragraph (g), then the first sentence of section
8-313(2) - and section 8-302(1)(c) - allows bona fide status. There is no
reason why the second sentence of section 8-313(2) should be taken to deny what
the first sentence allows. To hold that it does would be to recognise a
distinction between a case where the securities identified at the time of the
transfer constitute the whole of the fungible bulk shown on the account of the
broker on the books of the clearing corporation (a case to which the second
sentence of section 8-313(2) can have no application) and a case where the
securities identified at the time of the transfer are only part of that
fungible bulk. There is no commercial reason to recognise that distinction -
which is likely to depend on circumstances which are wholly outside the
control of the purchaser and have nothing to do with the transaction into which
he has entered.
70. The
true position, as it seems to us, is that the second sentence of section
8-313(2) is not concerned with bona fide purchaser status. The sentence is
directed to the problem which could arise if security is held as part of a
fungible bulk and there is a shortfall. It meets that problem by treating the
purchaser as owner of a proportionate property interest in the fungible bulk -
thereby recognising that abatement may occur. But that is a problem which,
plainly, could arise even on the most restrictive interpretation of section
8-313(1)(g). It could arise in the straightforward case where all those having
interests in the fungible bulk acquired those interests as participants to
whose accounts appropriate entries had been made on the books of a clearing
house - a case in which there could be no doubt that they could all have bona
fide purchaser status by reason of section 8-313(1)(g). It is no answer to say
it is unlikely to do so. It could arise in the case where two or more
purchasers (who were themselves participants) designated the same broker (also
a participant) to be the person to whose account on the books of the clearing
house appropriate entries were to be made - a case in which the appellant
accepts that each purchaser could have bona fide purchaser status by reason of
section 8-313(1)(g). In that latter case, the shortfall could arise in the
fungible bulk held by the clearing house - which may be unlikely - or in the
fungible bulk shown on the account of the broker on the books of the clearing
house - which is the usual commercial risk. In any of those cases the
proportionate property interests of bona fide purchasers in a fungible bulk may
have to abate inter se. But that is no reason for denying to each of them, as
owners of proportionate property interests in the fungible bulk, bona fide
purchaser status as against a person whose adverse interest, if allowed to
prevail, would diminish the amount of the fungible bulk in which those
proportionate property interests exist. There is no reason to give the second
sentence of section 8-313(2) an effect which extends beyond the problem to
which it is directed.
71. For
these reasons we uphold the Judge’s decision on the first point - that is
to say, on the construction and effect of section 8-313(1)(g). It follows that
we dismiss the appeal in relation to Swiss Volksbank.
C(ii) The
notice issue
Section
8-304(4)
72. We
turn, therefore, to the provisions of New York law which determine whether a
person (in the present case, Credit Suisse) is a purchaser “in good faith
and without notice of any adverse claim”. In the context of Article 8,
the determinative provision is that contained in section 8-304(4):
8-304 (4)
Except as provided in this section, to constitute notice of an adverse claim
or a defense, the purchaser must have knowledge of the claim or defense or
knowledge of such facts that his action in taking the security amounts to bad
faith.
In
the present case that provision invites consideration of two questions: (i) of
what facts did the purchaser have knowledge; (ii) did the purchaser’s
action in taking the security with knowledge of such facts amount to bad faith.
Knowledge
73. It
is not in dispute that the effect of section 8-304(4) is to limit, in relation
to the defence of bona fide purchaser, the wider concept of
“notice” as defined in the general definition section - section
1-201. The general definition is in these terms:
1-201 (25)
A person has “notice” of a fact when
(a)
he has actual knowledge of it; or
(b)
he has received a notice or notification of it; or
(c)
from all the facts and circumstances known to him at the time in question he
has reason to know that it exists.
A
person "knows" or has "knowledge" of a fact when he has actual knowledge of it.
"Discover" or "learn" or a word or phrase of similar import refers to knowledge
rather than to reason to know. The time and circumstances under which a notice
or notification may cease to be effective are not determined by this Act.
74. It
is clear that, for the purposes of Article 8, a person will not have notice of
an adverse claim merely because from all the facts and circumstances known to
him at the time he has reason to know that it exists. What is required is that
he has actual knowledge of the claim (which is not this case) or that he has
actual knowledge of such facts that his action in taking the security amounts
to bad faith. The existence or non-existence of actual knowledge is a question
of fact. The question whether or not a person has actual knowledge of a fact
must be determined subjectively. That much, at least, is common ground. But a
subjective test does not, of course, rule out a conclusion that a person had
actual knowledge of facts of which, in evidence, he professes ignorance. The
court is entitled to infer actual knowledge from other circumstances. It is
entitled to conclude that, taking all the circumstances together, “he
must have known”. If it does so it is making a finding of fact on the
evidence.
75. The
person whose knowledge, or lack of knowledge, is relevant in the present
context is “the purchaser”. Where the purchaser is a non-natural
person, it can only acquire actual knowledge through the minds of individuals
who act on its behalf. Section 1-201(27) describes the circumstances in which,
generally, the knowledge of an individual is attributed to an organisation:
1-201 (27)
Notice, knowledge or a notice or notification received by an organization is
effective for a particular transaction from the time when it is brought to the
attention of the individual conducting that transaction, and in any event from
the time when it would have been brought to his attention if the organization
had exercised due diligence. An organization exercises due diligence if it
maintains reasonable routines for communicating significant information to the
person conducting the transaction and there is reasonable compliance with the
routines. Due diligence does not require an individual acting for the
organization to communicate information unless such communication is part of
his regular duties or unless he has reason to know of the transaction and that
the transaction would be materially affected by the information.
“Organization”
includes a corporation - see section 1-201(28).
76. It
is clear that section 1-201(27) cannot apply, without restriction, to the
attribution to a corporation of “knowledge” in the sense required
- that is to say, actual knowledge - for the purposes of Article 8. A
corporation cannot be said to have knowledge of a fact of which the individual
(or any of the individuals) conducting the transaction does not have actual
knowledge; notwithstanding that the fact would have been brought to the
attention of that individual if the corporation had exercised due diligence.
The corporation may have “notice” of that fact for other purposes;
but it will not have the knowledge which is required by section 8-304(4). But
it is plain enough that the knowledge of the individual conducting the
transaction is attributed to the corporation. If the individual has actual
knowledge of a fact, then so does the corporation.
77. The
Judge did not find it necessary to consider the question whether, where two or
more individuals are conducting the transaction, the knowledge of each is to be
attributed to the corporation. The question will only arise where (i) there is
more than one individual within the organisation who can be said, on a true
analysis, to have conduct of the transaction, and (ii) one of those individuals
has actual knowledge of a fact which the other or others do not have. The point
can be illustrated by an example, which (on one view of the facts) is pertinent
to the position of Credit Suisse in relation to the taking of security over the
500,000 Berlitz shares on 27th September 1991. Suppose that one individual, A,
has general conduct of the transaction and that A, quite properly, delegates
conduct of a particular aspect of the transaction to a subordinate, B. In the
course of conducting the particular aspect which has been delegated to him, B
acquires actual knowledge of a fact which materially affects the transaction. B
does not communicate his knowledge of that fact to A; and A has no actual
knowledge of it. Is B’s knowledge of that fact attributed to the
corporation; together with knowledge of other relevant facts of which A does
have knowledge but B does not?
78. Unaided
by expert evidence, we would be led by the language of section 1-201(27) to the
conclusion that, even for the purposes of section 8-304(4), the separate
knowledge of each individual having conduct of the transaction is to be
attributed to the corporation. There is nothing in section 1-201(27) which
suggests that, in every case, it is necessary to identify one single individual
- to the exclusion of all others within the corporation - who is be “the
individual conducting that transaction” for the purposes of the section;
and in the case of complex transactions within a large organisation it would
often be highly artificial to attempt to do so. If there can be more than one
individual who, for the purposes of section 1-201(27), can properly be said to
have conduct of the transaction - or of some relevant part of the transaction -
a natural reading of section 1-201(27) must lead to the conclusion that there
is to be attributed to the corporation knowledge of those facts which each of
those individuals actually know.
79. It
was submitted by Mr Moss QC, on behalf of Credit Suisse, that the conclusion to
which we would be led by the language of section 1-201(27) was not open to us
in the light of the evidence given by the expert witnesses. We do not accept
that submission. It was common ground amongst the expert witnesses that the
question whether the separate knowledge of two individuals could be attributed
to a corporation had not been addressed by any court in New York. The only
witness to address the point directly was Judge Meyer, a former judge of the
New York Court of Appeals who was called as a witness by Shearson Lehman
Brothers Holdings Inc (a party to the action, but not a party to the appeal).
The relevant passage in his cross-examination appears at day 92 (transcript:
page 118):
A: If
the corporation has knowledge through (a) of one fact and through (b) of
another, it can be argued that there is actual knowledge, provided that the
reasonable diligence test of 27 is . . .
Q: We
will come on to the reasonable diligence test. I have it well in mind. At the
moment the only thing I am concerned about is to establish with you, what I
think you should not have any difficulty in accepting, that whenever one is
dealing with a question of knowledge in a corporation, one is inevitably
dealing with a question of imputation.
A: Well,
somebody within the corporation, the person who is in charge of the
transaction, has to have knowledge, if what you say is his knowledge is
knowledge of the corporation, in that sense it is imputed, yes.
Q: That
is exactly what I am saying at this stage.
A: All
right.
Mr
Levie appeared to take the same view in the course of his evidence on day 99
(transcript: pages 135 - 142). We were referred to a number of other passages
in argument; but, on a proper analysis they do not address this point. Rather,
they are directed to the related point, to which we shall return shortly,
whether a corporation can be said to act in bad faith in circumstances in which
there is no single individual whose own subjective bad faith can be attributed
to it. At the moment we are not considering bad faith; we are considering
knowledge. We are satisfied that a purchaser who is a corporation has
knowledge, for the purposes of section 8-304(4), of those facts which are
actually known to the individual (or to any individual) who is conducting the
relevant transaction on its behalf.
“Bad
faith
”
80. The
requirement, under section 8-304(4), is that, in the light of the facts of
which he has actual knowledge, the action of the purchaser in taking the
security amounts to bad faith. "Bad faith" is not defined in the Code. The
Judge recorded that it was common ground that “bad faith” means the
absence of good faith.
"Good
faith" is defined by section 1-201(19). It means “honesty in fact in the
conduct or transaction concerned”. The Judge analysed the requirement in
the following passage (transcript: pages 595-596):
If
the words [of section 8-304(4)] were to be construed literally and purely as a
grammatical exercise without reference to the history and non-uniform character
of the subsection, there would be much force in Macmillan's contention that
they introduce an objective element into the inquiry. As Macmillan points out,
both limbs of the subsection are directed to the sufficiency of the facts
actually known to the purchaser. The first limb requires "actual knowledge
of
the claim
".
The second requires something less: "knowledge of
such
facts
...." It defines the facts which must be known to the purchaser, not his
state of mind. The question is whether the introduction of the phrase "bad
faith" in the second limb reintroduces the subjective element of dishonesty, in
which case it adds nothing to the requirement of good faith; or whether it
introduces the objective criterion of actual knowledge of such facts that
(viewed objectively) "his action in taking the security amounts to bad faith",
in which case it is a somewhat clumsy attempt to reproduce the English
requirement of "knowledge of such facts as would put an honest and reasonable
purchaser on inquiry."
The
reference in that passage to the “history and non-uniform character of
the subsection” is explained by the fact that, as the Judge had already
pointed out in a earlier passage, section 8-304(4) was introduced in 1982 into
the Code as adopted by the state legislature in New York in order to perpetuate
the existing, pre-code, law; it is non-uniform, and applies only in New York
and Virginia.
81. The
Judge went on to identify the cause of the problem which underlies the question
whether the use of the phrase “bad faith” in the second limb of
section 8-304(4) introduces an objective criterion. He said this (transcript:
pages 596-597):
The
problem is caused by the fact that the wording of the second limb seems to
assume that actual knowledge of the facts can be so extensive (though not
amounting to actual knowledge of the claim) that a finding of bad faith
must
(not may) follow. The truth is that knowledge of sufficient facts never does
itself constitute bad faith. It is merely evidence from which, in the absence
of some other explanation, bad faith may be inferred. The difference is best
brought out by considering the position of the purchaser who sees the facts
staring him in the face but is too stupid to put two and two together. He may
or may not be negligent or unreasonable in going ahead with the transaction,
but he is not dishonest.
82. The
Judge expressed his conclusion on this point in the following passage
(transcript: pages 602-603):
As
to the meaning of notice, I am satisfied that under New York law it is not
enough for Macmillan to establish that a Defendant "had reason to know" or
"ought to have known" of the adverse claim, still less that it "had cause to
suspect" or "ought to have suspected" it; or that the circumstances known to
the Defendant were sufficient to put an honest and reasonable man on inquiry.
It must be shown that the Defendant or one of its relevant employees actually
knew of the adverse claim; or actually suspected it and deliberately chose not
to make inquiry lest the truth be discovered.
83. We
agree that knowledge of facts does not, of itself, constitute bad faith. What
is required is that, with knowledge of the facts of which he does have actual
knowledge, the purchaser’s action in taking the security should amount to
bad faith; that is to say, that the purchaser, in taking the security with
knowledge of those facts, was not acting in good faith. To revert to the
definition in section 1-201(19), the purchaser, in taking the security with
knowledge of the facts of which he did have actual knowledge, was not acting
with “honesty in fact . . . in the transaction concerned”. If so,
then the purchaser is not a “bona fide purchaser” within section
8-302(1). The facts of which he has actual knowledge must be such that to take
the security in those circumstances is not consistent with the essential
requirement that he be “a purchaser . . . in good faith”. As the
Judge pointed out (transcript: page 601) the objection that, on this view as to
the nature of the notice which section 8-304(4) requires, the requirement as to
notice adds little or nothing to the requirement as to good faith:
loses
its force in the light of the often repeated statements of the New York Courts
that these are not separate but interdependent requirements. Each is viewed in
the light of the other.
84. We
agree, also, that it is not enough that others, having knowledge of the facts
of which the actual purchaser had knowledge, would or might have chosen not to
enter into the transaction, on the grounds that the circumstances excited
suspicion. We accept that a purchaser who was able to satisfy the court that,
in the Judge’s words, he was “too stupid to put two and two
together”, could not be held to have notice within the interpretation to
be given to the requirement in section 8-304(4) under the law of New York. But
we part company with the Judge when he puts the test as high as “actually
knew of the adverse claim; or actually suspected it and deliberately chose not
to make inquiry lest the truth be discovered”. We have no doubt that
actual knowledge of the claim, or actual suspicion coupled with a deliberate
choice not to make inquiry, will suffice; but our own analysis of the relevant
authorities, in the light of such help as we are able to obtain from the
evidence of the expert witnesses, leads us to the conclusion that, in the
absence of actual knowledge of the claim, actual suspicion is not a necessary
ingredient. It is enough that the purchaser decides not to make the inquiry
which, in the light of the facts known to him, an honest and prudent banker
would make in order to satisfy himself that he was not taking as security stock
over which some other party had some existing inconsistent claim. For a banker
to take security in the knowledge that he has not made (and will not make) the
inquiry that an honest banker would make - and so, by necessary implication,
not caring whether or not some other party has an existing inconsistent claim -
seems to us to fall short of the “honesty in fact in the conduct or
transaction concerned” which good faith requires. In our view it is
properly to be regarded as acting in bad faith. We are satisfied from an
examination of the authorities, to which we now turn, that a court in New York
would take the same view.
85. The
earliest of the New York authorities to which we were referred is
Soma
v
Handrulis
277 N.Y. 223 (1938), a decision of the New York Court of Appeals on the law as
it stood before the adoption of the Uniform Commercial Code. Nevertheless, the
case is in point because the requirement as to “knowledge of such facts
that his action in taking the instrument amounted to bad faith” preceded
the adoption of the Code. The facts and conclusion appear from the following
passage, at page 233:
(4)
The indorsement of Sarah Alkoff was neither special, restrictive nor
conditional, but was rather an indorsement in blank without any indication by
appropriate words that she indorsed in any other capacity and represented to
those who thereafter came into possession of the instrument that she was the
owner (
White
v Continental Nat
.
Bank,
64 N.Y. 316, 320). The Federal Reserve bank must rely on that rule and assert
that Alkoff had title as a holder in due course for its authority to undertake
to collect on the check and be relieved from liability for conversion. But the
indorsement of the payee told that bank that Sarah Alkoff was not the owner.
Her indorsement destroyed its negotiability for any purpose. To constitute
notice of a defect in the title of one negotiating the instrument or of
infirmity in the instrument, a person subsequently dealing with it “must
have actual knowledge of the infirmity or defect, or knowledge of such facts
that his action in taking the instrument amounted to bad faith” (Neg.
Inst. Law, para 95) Here, actual knowledge of the non-negotiable character of
the check was brought home to the collecting bank. It is said that negligence
is not enough and that bad faith must exist (
Coopersmith
v Maunz
,
227 App. Div. 119). Even so, gross carelessness may constitute evidence of bad
faith (
Canajoharie
Nat. Bank v Diefendorf
,
123 N.Y. 191). Even if the actual good faith of the Federal Reserve Bank in
dealing with the instrument is not questioned, if the facts shown by the
instrument itself should have led it to inquire, and by inquiry it would have
discovered the true situation, in a commercial sense it acted in bad faith and
the law will withhold from it such protection as it would otherwise have been
entitled to receive (
Hoberg
v Sofransky
,
217 App. Div. 546;
Ward
v City Trust Co
,
192 N.Y. 61 ,69, 70) We think the indorsement by the payee showing that she
retained legal ownership of the check and its proceeds, coupled with the
indorsement in blank of Sarah Alkoff importing ownership in her, put the bank
on inquiry. Inquiry would have disclosed the irregular transaction and would
have shown the theft of the check. Failure to make this inquiry establishes, in
a legal and commercial sense, bad faith on the part of the bank and makes it
liable to the plaintiff for the diversion and loss of the check and its
proceeds (Neg Inst. Law paras. 94, 95) even within the reservations of limited
liability of a collecting bank under the Negotiable Instruments Law (para.
350-d) and section 5 of Regulation J of the Federal Reserve Board.
That
passage, as it seems to us, contains a clear recognition that, because the
facts actually known to the bank were such as “should have led it to
inquire” - that is to say, were such as would have led an honest and
prudent banker to make inquiry, the decision to proceed with the transaction
without inquiry was to be regarded as bad faith.
86. The
requirement under section 8-304(4) - which then appeared in the Code as
subsection (3) of section 8-304 - was considered by a federal court, the
United States Court of Appeals for the Second Circuit, in
Gutenkunst
v Continental Insurance Company
486
F .2d 194 (1973). A bank, Manufacturer Hanover Trust Company had accepted
bearer bonds as security for a loan to a borrower, Schwartzman, of whom it had
no previous knowledge, and with minimum inquiry as to their provenance. In fact
the bonds had been stolen from the rightful owner. In an action for conversion,
the bank set up the defence of bona fide purchaser. The court upheld that
defence. The reasoning is set out in the following passage, at pages 195-196:
Appellant
asserts that Manufacturers acted in bad faith because it dealt with a total
stranger without making any investigation of him or his right to negotiate the
securities. Reliance is placed on
Canajoharie
National Bank v Diefendorf
,
123 N.Y. 191, 25 N.E. 402 (1890), and its progeny, for the principle that
negligence in dealing with negotiable instruments may be so gross as to
constitute bad faith.
Despite
some broad language in the cases the New York law is that only actual knowledge
or disregard of suspicious circumstances may constitute evidence of bad faith .
These decisions have been codified in UCC para. 8-304(3) which requires that
the purchaser have “knowledge of such facts that his taking of the
security amounts to bad faith” (Emphasis added). Plaintiff concedes,
however, that Manufacturers did not know any facts which should have aroused
its suspicion. The entire argument proceeds from the premise that because the
bank knew nothing about either Schwartsman or the bonds it acted in bad faith
in failing to investigate. This assertion must fail before the clear rule set
forth in the New York decisions and statute that it is not ignorance, but
guilty knowledge or conduct that can be equated with guilty knowledge, that can
give rise to bad faith.
The
test “actual knowledge or disregard of suspicious circumstances”
has been adopted and applied in the later cases. It is, however, important to
note that the plaintiff failed because he conceded that the bank “did not
know any facts which should have aroused its suspicion”. In the light of
that concession it was not necessary for the court to consider whether, if the
bank had known facts which should have aroused its suspicion, the plaintiff
needed also to establish that it did actually suspect that there might be an
adverse claim. As a matter of language the phrase “disregard of
suspicious circumstances” is apt to cover both the position where the
circumstances actually known to the purchaser are objectively suspicious and
the position where there is actual suspicion by the purchaser.
87. The
test was applied, with a different result, by the United States District Court,
in New York, in
Garner
v First National City Bank
465 F. Supp. 372 (1979). The plaintiff alleged that certain stock, converted by
third parties, had been purchased by the bank in circumstances which ought to
have put the bank on inquiry. The court said this, at pages 382-383:
The
test for what constitutes “bad faith” under N.Y.U.C.C. para.
8-304(3) has recently been stated by the Second Circuit in a diversity case in
which the court applied New York law.
Gutenkunst
v Continental Insurance Company
486 F .2d 194 (2d. Cir. 1973). In Gutenkunst, the only issue was whether
“[defendant] enjoyed the status of a bona fide purchaser under paras.
8-301 to 8-304 of the New York Uniform Commercial Code, so as to cut off the
rights of [plaintiff], the ‘true’ owner”. Id. at 195. On this
issue the court set forth as New York law “that only actual knowledge or
disregard of suspicious circumstances may constitute evidence of bad
faith.” Id. at 195-96 (emphasis added). On the basis of that test the
court affirmed a judgment for defendant largely on the grounds that the
plaintiff conceded that defendant “did not know any facts which should
have aroused its suspicion” Id. at 196.
Application
of the Gutenkunst test in this case produces a different result than that
reached in Gutenkunst itself. Here there was such disregard of suspicious
circumstances on the part of the defendant as to constitute “bad
faith” within the meaning of N.Y.U.C.C. para. 8-304(3). . . . Thus
defendant knew “facts which should have aroused its suspicion”
Gutenkunst,
supra 486 F.2d. at 196. Only Citibank’s “disregard of suspicious
circumstances” id. at 195, permitted Citibank to go forward with the
loan/pledge transaction without making an inquiry as to the question of who
owned the collateral.
There
was no finding of fact in that case that the bank, or any relevant officer of
the bank, actually did suspect that the stock which it was invited to purchase
was, or might be, the subject of an adverse claim. The court was content to
find that the facts actually known to the bank ought to have aroused its
suspicion; and that to proceed with the transaction in the light of that
knowledge, and without inquiry, was to take the securities in bad faith.
88. The
test was considered, again, by the Court of Appeals of New York in
Chemical
Bank
of Rochester v Haskell
432 N.Y.S.2d. 478 (1980). Judge Meyer, who gave evidence in these proceedings,
was party to that decision as a member of the court. The point arose in the
context of the bank’s claim to be a holder in due course of negotiable
promissory notes. The relevant provision as to notice is that contained in
section 3-304(7) of the Code, which is in the same terms as section 8-304(4).
The court explained the test in a passage at page 480:
Good
faith under the code is defined as “honesty in fact in the conduct or
transaction concerned” (Uniform Commercial Code, para. 1-201, subd. [19])
and it is clear that the draftsmen intended that this language set a subjective
and not objective standard. In fact, so that no confusion would persist on this
score, a proposed draft of section 3-302 which explained good faith in terms
related to commercial reasonableness was amended to delete the offending
language (White and Summers, Uniform Commercial Code [2d ed.], para. 14-6. p.
563; 1954 Report of N.Y.Law Rev.Comm., vol 1, pp.203-205). Thus, the inquiry is
not whether a reasonable banker in Chemical’s position would have known,
or would have inquired concerning the alleged breach by Stanndco of its
partnership duties, but rather the inquiry is what Chemical itself actually
knew. If Chemical did not have actual knowledge of some fact which would
prevent a commercially honest individual from taking up the instruments, then
its good faith was sufficiently shown (see 1955 Report of N.Y.Law Rev.Comm.,
vol 2, pp. 906-907).
Again,
although the court made clear its view that the language of section 3-304(7) -
and, so by analogy, the language of section 8-304(4) - set a subjective and not
an objective standard, it is plain that it was directing that observation to
the question of knowledge. In relation to knowledge the test is: what did the
purchaser actually know? But, having stressed the need to identify, as a matter
of fact, what the bank did actually know, the court then posed the next
question in a different form: did the purchaser have actual knowledge of some
fact which would prevent a commercially honest individual from taking up the
instruments? The second question, as it seems to us, does not require a finding
of conscious dishonesty. It is enough that an honest banker, having the
knowledge which the Chemical bank actually had, would not have proceeded, or
would not have proceeded without inquiry.
89. We
were referred to two decisions of federal appellate courts arising out of the
same insolvency. In the first, reported as
In
the matter of Legel Braswell Government Securities
Corp.,
Bankrupt, Irving Trust Company v Westchester County Savings and Loan
Association,
648 F. 2d. 321 (1981), the United States Court of Appeals for the Fifth Circuit
identified the test in terms which are, by now, familiar. The following passage
appears at page 328:
[5]
New York U.C.C. para 8-304(3) provides that, in order for a purchaser to have
notice of an adverse claim, that person must have either knowledge of the
adverse claim or knowledge of such facts that his taking the security amounts
to bad faith. Subsection (3) of 8-304 “may be construed to modify the
otherwise applicable rules of U.C.C. para. 1-205(25), “which defines
“notice”. McKinney’s New York U.C.C. para 8-302, Practice
Commentary. Under section 8-304(3) “the New York law is that only actual
knowledge or disregard of suspicious circumstances may constitute evidence of
bad faith”; mere negligence is not enough. . . . Circumstances must put
a purchaser on notice of wrongful transfer before his failure to inquire
constitutes lack of good faith or gives rise to an inference of notice of an
adverse claim.
In
the second, reported as
In
the matter of Legel Braswell Government Securities Corp
.,
Bankrupt,
Plano Savings & Loan Association v Irving Trust Company
,
695 F. 2d. 506 (1983), the Court of Appeals for the Eleventh Circuit said this,
at pages 511-512:
Plano’s
most persuasive argument is that Irving Trust had knowledge of such facts that
its action in taking the certificate amounted to bad faith. This would
constitute notice within the meaning of subsection (3) of section 8-304. Before
analyzing Plano’s contentions under subsection (3), however a brief
discussion of the unique aspects of New York law is in order. Subsection (3) is
a non-uniform provision added to the New York statute. The significance of this
addition is that it “may be construed to modify the otherwise applicable
rules of U.C.C. para 1-201(25)” defining “notice”. Id. para.
8-302, Practice Commentary. Thus, under this subsection, “in order to
charge a purchaser of investment securities with notice of adverse claims it is
necessary to prove knowledge of such facts that the purchaser’s taking of
the security amounts to bad faith”
Legel
Braswell I
,
648 F.2d. at 327. Moreover, “New York law is that only knowledge or
disregard of suspicious circumstances may constitute evidence of bad
faith”
Gutenkunst
v Continental Insurance Company
486 F .2d 194, 195-96 (2d. Cir. 1973). . . . From this analysis, it is
apparent that, under New York law, the concepts of notice and good faith are
interrelated in the assessment of bona fide purchaser status. See, e.g.
Chemical
Bank v Haskell
,
51 N.Y.2d 85, 432 N.Y.S.2d. 478, 411 N.E.2d 1339 (1980) (recently applying this
analysis in the context of a bona fide purchaser claim under a similar
provision in U.C.C. Article III). Bearing in mind this interdependence and the
potential impact of this non-uniform provision, we turn to the facts in hand.
We
cite those passages to show that the principles which we have earlier set out
are well recognised and consistently applied. We do not find anything in those
two decisions which advances the principles beyond the position reached in
earlier cases.
90. We
were referred, also, to a decision of the United States District Court for the
District of Massachusetts in a case heard after the trial in the present
proceedings,
Securities
and Exchange Commission v Pinez
989 F.Supp 325 (1997). We think that this recent statement of the law, in a
passage at page 59, is helpful:
The
test of good faith and actual knowledge under New York law is a subjective one.
See
Hartford
Accident & Indemnity Co. v American Express Co
.,
74 N.Y.2d. 153, 162, 544 N.Y.S.2d 573, 542 N.E.2d 1090 (1989) (interpreting the
analogous provision in section 3-304(7) of the N.Y.U.C.C. and concluding that
“holders in due course are to be determined by the simple test of what
they actually knew, not by speculation as to what they had reason to know, or
what would have aroused the suspicion of a reasonable person in their
circumstances.”). In arguing that both the federal and New York Uniform
Commercial Code “actual knowledge” tests are subjective in nature,
Lehman maintains that “there is virtually no distinction between the
state and federal standards”. . . . What Lehman fails to acknowledge,
however, is that even a subjective test does not absolve a person with actual
knowledge of suspicious circumstances to meet a duty of reasonable inquiry. See
Fallon
v Wall Street Clearing Co
.,
182 A.D.2d 245, 586 N.Y.S. 2d 953, 956 (1992) (holding that transferee of
investment securities who claims to be a bona fide purchaser “is under
obligation to investigate suspicious circumstances which might suggest the
existence of an adverse claim”);
In
re Legel
Braswell
Gov’t Sec. Corp. v Irving Trust Co
695 F2d 506, 512 (11th Cir. 1983) (interpreting New York’s bona fide
purchaser laws and concluding that the purchaser’s “disregard for
suspicious circumstances, of which it had actual knowledge, constitutes a
taking in bad faith”.);
Garner
v First Nat’l City Bank
465 F. Supp. 372, 382-83 (S.D.N..Y. 1979) (concluding that a pledgee exhibited
“such disregard of suspicious circumstances” that it
“constituted ‘bad faith’ within the meaning of N.Y. bona
fide purchaser law);
Gutenkunst
v Continental Ins. Co
.,
486 F.2d 194, 195-96 (2d. Cir. 1973) (per curiam) (“New York law is that
only actual knowledge or disregard of suspicious circumstances may constitute
evidence of bad faith”).
The
Court therefore concludes that even if New York law governs the standard for
Lehman’s status as a bona fide purchaser, a failure to act on actual
knowledge of suspicious circumstances constitutes bad faith on the part of a
lien holder.
The
passage contains a clear statement of the view, to which we had already been
drawn by the language of section 8-304(4) and an examination of the earlier
cases, that the subjective test does not absolve a person with actual knowledge
of suspicious circumstances from meeting a duty of reasonable inquiry.
91. Mr
Levie, who was called as an expert witness by Swiss Volksbank, set out his
understanding of the position as to notice in paragraph 26 of his written
report. At sub-paragraph (e) he identified the question to be addressed:
26(e) Here,
the relevant question is accordingly whether SVB and/or Citibank had (i) actual
knowledge of the fact that the Berlitz shares belonged to Macmillan and were
being dealt with in breach of duty or (ii) had actual knowledge of facts which
would (and not might) have induced an honest banker to conclude that the
Berlitz shares belonged to Macmillan and were being dealt with in breach of
duty or (iii) had actual knowledge of facts which would (and not might) have
induced an honest banker to make investigations to determine whether the
Berlitz shares belonged to RMG.
We
think that that is an accurate summary of the effect of the requirement as to
notice contained in section 8-304(4) of the Code. Mr Levie went on, in
sub-paragraph (g), to say this:
26(g) A
person taking a secured interest can only be characterised as having acted in
bad faith where he has such actual knowledge of facts falling within (e) above
that it can legitimately be concluded that he has deliberately or wilfully or
recklessly disregarded those facts . . . Concepts of “bad faith”
and “notice” in New York law are accordingly not distinct concepts
but inter-dependent concepts.
We
think that there is force in Mr Moss’s criticism that it is unhelpful,
and may lead to confusion, to introduce a concept, “recklessness”,
which is not present in the language of section 8-304(4) itself. Further, it is
not clear to us what distinction, if any, Mr Levie seeks to draw between
“deliberately” and “wilfully” in this context. In our
view it is more satisfactory to adopt the language of section 8-304(4): a
banker can be said to take a security in bad faith when, with actual knowledge
of facts which would have led an honest banker to make investigations as to
whether the security belonged to another, he decides not to make those
investigations.
92. We
conclude, therefore, that the relevant question, in the present context, is:
did Credit Suisse, through those having conduct of the transaction, decide not
to make the inquiry which, in the light of the facts known to the bank, an
honest and prudent banker would have made in order to satisfy himself that he
was not taking as security stock over which some other party had some existing
inconsistent claim. If it did so decide, then that is evidence of such an
indifference to the rights of that other party that it can aptly be said to
have acted in bad faith.
D. Did
Credit Suisse have notice in fact
?
93. This
question arises separately in respect of the receipt by Credit Suisse of
500,000 Berlitz shares on 27th September 1991 and of a further 1m. Berlitz
shares on 12th/13th November 1991. It is convenient to recapitulate material
facts to which we have already referred in order to set the scene for our
consideration of these questions.
94. Macmillan
was a company incorporated in the State of Delaware and was at all material
times a subsidiary of Maxwell Communications Corporation plc.
(“MCC”) MCC and its subsidiaries comprised what was known as the
public side of the empire of Mr. Robert Maxwell because the shares of MCC were
quoted on various stock exchanges. The public side was to be contrasted with
the private side of the Maxwell empire of which Mirror Group plc, which, on
10th April 1991, changed its name to Robert Maxwell Group plc
(“RMG”), formed part.
95. From
December 1989 to 5th November 1990 Macmillan was the registered holder and
beneficial owner of 56% of the issued share capital of Berlitz (10.6m shares),
the remaining 44% having been sold by Macmillan to members of the public
pursuant to an initial public offering made in December 1989. On 5th November
1990 Macmillan transferred its 56% holding in Berlitz to Bishopsgate Investment
Trust plc (“BIT”). BIT was then a wholly owned subsidiary of RMG
and held such shares as nominee for Macmillan. At that time the 56% holding
was comprised in 21 separate stock certificates.
96. By
23rd January 1991 15 of the stock certificates representing 7.6m. shares had
found their way into the possession of London & Bishopsgate International
Investment Management plc, another company in the private side of the Maxwell
empire, and were delivered by that company to Morgan Stanley. On 7th March
1991 Morgan Stanley delivered such stock certificates to the Depository Trust
Company of New York with a view to such shares being held within the DTC. The
appropriate registration into the name of CEDE was effected on 11th March 1991.
Thereafter 7.6m of the 10.6m shares to which Macmillan was beneficially
entitled were registered in the name of CEDE as nominee of the Depository Trust
Company of New York and were held within the DTC for the account of Morgan
Stanley by whom they had been lodged. Morgan Stanley held them for the account
of London and Bishopsgate International Investment Management plc.
97. Thus
of the two transfers with which we are directly concerned one, that relating to
500,000 shares effected on 27th September 1991, came from the balance of 3m.
Berlitz shares not held within the DTC; the other, effected on 12th/13th
November 1991, related to 1m. shares forming part of the 7.6 m shares held
within the DTC. It is not in dispute that immediately before the respective
transfers the shares in question were beneficially owned by Macmillan.
Likewise it is accepted by Macmillan for the purposes of this appeal that the
question whether Credit Suisse had notice so as to take the shares subject to
the rights of Macmillan is to be determined as at the time of the respective
transfers and in accordance with the law of the state of New York.
98. Credit
Suisse was involved with both the public side and the private side of the
Maxwell empire. In the case of the public side it was one of a consortium of
banks by whom a $3bn. facility, (formally called a Multiple Tranche Financing
Facility Agreement but colloquially described as a “Jumbo
Facility”) had been granted to Macmillan on 23rd October 1989. This
facility contained a negative pledge which precluded Macmillan or any of its
subsidiaries from charging any of their respective assets as security for any
other indebtedness. In the case of the private side, on 7th September 1990
Credit Suisse granted to RMG a £50m. 6 month loan facility to be drawn
down and secured in accordance with the facility letter of that date. This
facility was renewed for a further twelve months on revised terms on 21st March
1991. The Berlitz shares received by Credit Suisse on 27th September and
12th/13th November 1991 were retained by Credit Suisse as security for the
amounts due to it from RMG pursuant to this facility.
99. Subject
to the overall directions of the credit committee of the London Branch of
Credit Suisse and departments at the headquarters of Credit Suisse in Zurich
the individual officers or employees of Credit Suisse responsible for the
Maxwell group accounts were Miss Julie Maitland, her immediate superior, Mr
Paul McDonnell, and a junior employee, Mr Rene Mueller. The individual from
the Maxwell Group with whom they primarily dealt was Mr Kevin Maxwell. The
question whether Credit Suisse had notice of the rights of Macmillan when
receiving the Berlitz shares on 27th September and 12th/13th November 1991
depends on the knowledge of Miss Maitland, and, with regard to the receipt on
27th September 1991, of Mr Mueller. Accordingly it is necessary to explain
their prior involvement in some detail.
100. Miss
Maitland joined the London Branch of Credit Suisse in May 1989. Her
responsibilities included discussing the customer’s requirements,
considering and making recommendations in respect of applications for new
facilities, and managing existing loan facilities. She was described by the
Judge (transcript: page 377) as
“an
extremely capable and conscientious officer. Her file notes of meetings with
customers and her credit recommendations are detailed, lucid and a model of
their kind.”
As
the Judge held (transcript: page 380)
“By
the end of 1989 Miss Maitland was familiar with the basic structure of the
Maxwell group and the more important trading companies. She knew that MCC was
a listed public company in which Mr. Maxwell and his family owned a controlling
interest and, as she acknowledged in evidence, she was aware:
(i)
that Macmillan was a wholly owned subsidiary of MCC;
(ii)
that immediately prior to the initial public offering in December 1989 Berlitz
was a wholly owned subsidiary of Macmillan;
(iii)
that as part of an asset disposal programme Macmillan had made an initial
public offering of shares in Berlitz; and
(iv)
of the existence of the negative pledge clause in the MCC jumbo facility.”
101. On
26th January 1990 Mr McDonnell and Miss Maitland met with Kevin Maxwell and Mr
Stoney, the managing director of Pergamon AGB, a company then in the public
side, for the purpose of reviewing that company’s banking facilities and
to consider a possible restructuring of it in the light of the proposal that it
should be moved to the private side. The events of this meeting in fact had no
relevance to anything we have to decide. But, for reasons we will explain
later, it featured prominently at the trial and in the Judge’s evaluation
of the credibility of Miss Maitland’s evidence.
102. In
February 1990 Miss Maitland was concerned with an application by London and
Bishopsgate Holdings plc (“LBH”) for a short term £50m.
facility to enable it to buy an interest in a Scottish investment trust. In
the event, though approved, the facility was never drawn down. Its relevance
is that it formed the model for the later facility granted to RMG. It was
primarily in this context that Miss Maitland became aware of the advice of
Norton Rose and foreign lawyers instructed by them as to the precautions which
should be taken to ensure that Credit Suisse obtained a good title to
securities lodged as security for facilities such as that granted by Credit
Suisse to RMG. Thus on 23rd May 1990 Mr Whale of Norton Rose wrote to Miss
Maitland pointing out the precautions which should be taken so that the
transaction might not subsequently be set aside in the event of the liquidation
of the company providing the security.
103. On
3rd July 1990 Miss Maitland and Mr McDonnell attended a meeting with Kevin
Maxwell and Mr Bunn, another director of RMG, to discuss a request from the
latter for a short term £50m facility for RMG. Shortly thereafter Miss
Maitland sent to RMG the term sheet setting out the principal terms for such a
facility, if it were to be granted, which were based on those previously
offered to LBH. On 9th July 1990 Mr Bunn suggested that the security
provisions were unsuitable for RMG because
“
with a consolidated net worth of £750 million [it] has marketable
securities which are predominantly strategic stakes and therefore substantially
larger percentages. It would be impractical from our point of view to split
these into smaller holdings for collateral purposes.”
Instead
he offered holdings in four specified companies, not including Berlitz, to a
total value of £62.5m. On 20th July 1990 Mr Anselmini, the deputy
chairman of RMG, wrote again to Miss Maitland offering a wider spread of
collateral securities by the inclusion of holdings in a basket of 38 blue chip
Japanese stocks. On 23rd July 1990 Miss Maitland confirmed that Credit Suisse
would require that the collateral package should not have a concentration of
more than 5% of the stock of any one company and that no one stock should
comprise more than 5% of the total value of all the collateral. With these
amendments the terms for the facility proposed by Miss Maitland to Kevin
Maxwell were submitted by her to the head office of Credit Suisse in Zurich and
approved by them on 23rd July. Miss Maitland made no specific reference to
RMG having any holding in Berlitz.
104. The
preparation of the requisite documents was then referred by Credit Suisse to
Norton Rose. These comprised a facility letter dated 7th September 1990, a
memorandum of deposit relating to shares and other securities to be executed by
RMG and a Third Party Memorandum of Deposit relating to shares and other
securities to be executed by companies other than RMG. When sending the latter
two documents to Miss Maitland on 7th September 1990 Mr Whale of Norton Rose
wrote
“You
should ensure that all securities delivered to Credit Suisse as part of the
Security Portfolio are accompanied by a letter or memorandum from [RMG] or the
relevant charging subsidiary stating that they are being delivered to you
pursuant to the terms of the Facility Agreement. Such a letter or memorandum
will evidence the requirement of the Memorandum of Deposit and Third Party
Memorandum of Deposit that the charge only attaches to securities delivered
pursuant to the terms of the Facility Agreement.”
The
security portfolio required by the Facility Agreement required cover of 125% by
value in fully paid stocks quoted in UK, US, France, Germany, Switzerland and
Japan but subject to the limitations referred to by Miss Maitland in her letter
of 23rd July 1990. RMG or the charging subsidiary, as the case might be, were
to be entitled to substitute other stocks to an equivalent value. The
Facility Agreement contained a warranty by RMG that it or a charging subsidiary
was or would be the beneficial owner of any stock delivered by them
respectively to Credit Suisse. On 13th September 1990 RMG accepted the terms
set out in the letter dated 7th September and executed the Memorandum of
Deposit. On 18th September 1990 Pergamon Holdings Ltd (later Headington
Holdings Ltd) executed the Third Party Memorandum of Deposit. It was the only
company to do so.
105. RMG
drew down the £50m facility in four tranches on 18th and 20th September,
19th October and 8th November. In connection with each drawdown suitable
securities were lodged by RMG with Credit Suisse. In the case of the fourth
drawdown Kevin Maxwell on behalf of RMG wrote to Miss Maitland requesting a
transfer of £13m to a specified account of RMG with National Westminster
Bank plc and added
“please
find enclosed a list of securities we have arranged to deposit with you.”
The
list specified, amongst others, a holding of 500,000 shares in Berlitz with a
value of £3,700,000. On receipt of that letter and list Miss Maitland
sent a memorandum to the Securities department of Credit Suisse to inform them
that those shares were to be held in respect of the facilities advanced to RMG.
On 14th November 1990 Mr Khawam, an associate of Miss Maitland, sent by fax to
RMG a list of shares, confirmed by Credit Suisse’s securities department,
to be held by them and noted that “this does not include as yet...Berlitz
Int’l...”
106. In
respect of this earlier deposit of 500,000 Berlitz shares the Judge held
(transcript: page 404)
“The
number of the certificate cannot now be identified, but it must have been in
the name of BIT. It is not in dispute that it was one of the certificates
brought back from New York on 6th. November by Miss Ghislaine Maxwell.
Miss
Maitland wrote a note to the Securities Department explaining that the shares
were to be held in respect of facilities advanced to RMG. It is not clear
whether the certificate and transfer forms accompanied the note. Miss Maitland
told me that she did not recollect seeing the Berlitz certificate, and thought
it unlikely that she would have collected the package delivered by the
messenger, though she did so on occasions when no one else was available. She
told me that she was not conscious at the time of the fact that the Berlitz
certificate was in the name of BIT and that she did not see the transfer forms.
The
stock power indorsed on the back of the certificate had not been completed.
Instead the certificate was accompanied by a separate U.K. share transfer form.
The Securities Department advised that this should be replaced by a U.S. stock
power form. On 15th. November a duly executed U.S. stock power form in respect
of the Berlitz shares was delivered to Credit Suisse under cover of a letter
from RMG signed by Mr. Fuller as Group Treasurer. Mr. Fuller was, of course,
also Group Treasurer of MCC.
Beyond
noticing this administrative error, Credit Suisse appears to have had no
reservations in accepting the Berlitz shares.”
107. As
we have already observed, the facility was renewed for a further twelve months
on 21st March 1991. However the terms as to what security was required were
altered. First the security had at all times to have an aggregate value of
150% of the amount outstanding. Second, in addition to the existing 5% limits,
it was provided that Maxwell related stocks should not represent more than 5%
by value of the whole security portfolio. The 500,000 Berlitz shares were
returned by Credit Suisse to RMG on 4th April 1991 because at that time their
value was more than 5% of the security portfolio and they were Maxwell related
stocks. They were replaced by alternative security sent by RMG to Credit
Suisse the same day under cover of a letter from RMG complying with the advice
given by Mr Whale to Miss Maitland in his letter to her dated 7th September 1990.
108. A
Memorandum of Deposit in favour of Credit Suisse was executed by RMG and
Headington Holdings Ltd on 1st August 1991 following the name change of both
companies. On 22nd August 1991 a formal agreement between Morgan Stanley, RMG
and Credit Suisse was entered into whereby in consideration of Credit Suisse
releasing £1.5m to LBG as agents for RMG, Morgan Stanley as agent for RMG
agreed to deliver to a bank in Tokyo specified shares to be held as security
under the terms of the Memorandum of Deposit executed by RMG in favour of
Credit Suisse on 1st August 1991. On 5th September 1991 RMG entered into a
Charge Agreement conferring a charge over its interest in moneys standing to
the credit of an account of Credit Suisse with Midland Bank plc and agreed an
amendment to the Facility Agreement dated 21st March 1991 so as to regularise
Credit Suisse’s security over cash sums deposited with Credit Suisse by
RMG.
109. Early
in September 1991 Credit Suisse decided not to renew the £50 million
facility when it expired in March 1992 because the administrative inconvenience
occasioned by the frequent substitutions of security which were taking place
was not justified by the level of fees generated. At a meeting with Mr.
Trachtenberg, the managing director of LBG, attended by Miss Maitland and Mr.
McDonnell on 11th September Mr. Trachtenberg was informed of Credit Suisse's
decision. Mr. Trachtenberg indicated that the facility would be repaid in
March 1992 and in the meantime offered to pay increased charges for its
administration. On 19th September in response to a request by Credit Suisse
RMG (by Kevin Maxwell) wrote to the Bank confirming that with respect to all
matters relating to the RMG facility Credit Suisse could take instructions both
verbal and written from Mr. Trachtenberg.
110. On
Thursday 26th September 1991 Mr Trachtenberg telephoned Mr Mueller and
subsequently confirmed his conversation by fax stating that
“in
exchange for your receiving the shares as detailed on the attached list you will
transfer
sterling to the RMG account at National Westminster (details attached) for
value today.”
After
consulting with Miss Maitland Mr Mueller confirmed to Mr Trachtenberg that
Credit Suisse would release £6m from the deposits held as security against
delivery of such shares as substitute security. Later that day a portfolio of
shares was delivered to Credit Suisse by Bank of America. The certificates
were in the name of Bank of America Nominees Ltd. A/c m.2304 and were
accompanied by a letter headed “Re Thorntons/MGPT”. There was no
reference to RMG or the RMG facility nor were the securities said to be
delivered by way of security. But the shares corresponded with those listed in
the fax from Mr Trachtenberg. Mr Mueller checked the share certificates,
signed a receipt for them and placed the letter from Bank of America in the
file. In the circumstances described by the Judge in some detail (transcript:
page 429 et seq) several telephone conversations between Mr Pedley of Bank of
America and Mr Mueller took place during one of which Mr Pedley indicated to Mr
Mueller that the shares delivered by Bank of America to Credit Suisse were
assets of a pension fund. In respect of this conversation the Judge concluded
that (transcript: page 437)
“Mr.
Pedley attached much more importance to the fact that the assets belonged to a
pension fund than did Mr. Mueller. Mr. Mueller was not concerned to inquire
into the source or ownership of securities held by the Bank. Moreover, he was
a Swiss national, and it was his understanding that it was common practice in
Switzerland for a company's pension funds to be pledged to secure borrowings by
the company.”
111. The
first receipt with which we are directly concerned occurred on Friday 27th
September 1991. The events which occurred were described by the Judge in the
following terms (transcript: pages 439 to 440):
“Miss
Maitland spent Friday 27th September 1991 with clients at Ascot. During
the
previous day she learned from Mr. Trachtenberg that there was to be a further
substitution of security which would take place on the Friday, and that this
would include 500,000 shares in Berlitz. On her instructions Mr. Mueller
prepared for her to sign in advance a memorandum to the Securities Department
dated 27th September and recording the new deposit. Miss Maitland left Mr.
Mueller to deal with the delivery of the shares.
On
27th September 1991 shares in six different companies were delivered to Credit
Suisse. They included 500,000 shares in Berlitz. The other five shares, which
in aggregate amounted to only a small proportion by value of the shares which
were delivered, were all registered in the name of RMG. The 500,000 Berlitz
shares were represented by a single certificate (No. BI 233) in the name of BIT
indorsed with a stock power duly executed in blank and signed by Mr. Kevin
Maxwell and Mr. Ian Maxwell. Mr. Mueller examined the certificate, but neither
Miss Maitland (who was out of the office) nor Mr. Khawan saw it at the time.
Credit Suisse in general, and Miss Maitland in particular, have assumed that it
was the same certificate as that which had been deposited with Credit Suisse
between November 1990 and April 1991; and it may well have been. The
certificates were accompanied by a covering letter from LBG signed by Mr.
Trachtenberg which described the shares as being exchanged for sterling and
requested that the money be paid to an account at Barclays Bank in the name of
LBG. Miss Maitland knew that LBG was not a subsidiary of RMG but another
private side company which was a subsidiary of Headington Investments. Mr.
Mueller, however, dealt with the matter in Miss Maitland's absence and did not
show her the covering letter. He realised that LBG and RMG were two different
companies, but he arranged for the money (which amounted to £2.5 million)
to be paid to LBG in accordance with Mr. Trachtenberg's directions.”
112. On
8th October 1991 there was a meeting between Kevin Maxwell, Miss Maitland and
Mr McDonnell to discuss the financial performance of the Group, both public and
private sides, and its corporate strategy. In respect of the public side she
recorded in her note that MCC had been approached by Reader’s Digest to
sell its stake in Berlitz at a premium over the then quoted price. In respect
of the private side she noted that the liquidation of non-core assets was
continuing. As the Judge observed (transcript: page 442) Miss Maitland’s
note and her understanding that the sale of shares in Berlitz to Reader’s
Digest was of Macmillan’s 56% only was inconsistent with a belief that
there was a small private side holding in Berlitz which had been pledged to the
Credit Suisse.
113. By
a written agreement made between RMG and Credit Suisse on 22nd October 1991
Credit Suisse agreed to release on that day £12.8m held as security for
the RMG facility by transfer to the account of LBG with Barclays Bank. The
consideration for that promise and its performance was the promise of RMG to
deliver to Credit Suisse the share certificates together with the corresponding
share transfer forms in respect of the shares described in the schedule thereto
to be held by Credit Suisse as security under the terms of the Memorandum of
Deposit dated 21st March. RMG agreed that if such shares were not received by
23rd October 1991 it would provide collateral in the form of freely available
funds to Credit Suisse on 23rd October 1991 to meet such shortfall. The shares
described in the Schedule did not include shares in Berlitz.
114. On
25th October 1991 Credit Suisse released a further £6 million in cash held
as security for the RMG facility against RMG's agreement to a permanent
increase in the security cover requirement from 150% to 160%; the temporary
deposit of Maxwell-related stocks to provide security cover of 200%; and an
undertaking that the security portfolio would be brought back within the agreed
requirements by 28th October. On Friday 1st November 1991 Credit Suisse wrote
to RMG pointing out that the security was well below the agreed requirements
and demanding the deposit of £18m. in cash or £23m. in shares. No
response was received to this demand, which was overtaken by the death of
Robert Maxwell on 5th November. The position improved somewhat in the days
which followed. On 7th November 1991, it was announced by the Board of MCC
that Macmillan had entered into a letter of intent with Fukutake for the
transfer of all or substantially all the 10.6m shares in Berlitz. According
to a fax sent by Credit Suisse to RMG on Friday 8th November, £11m. in
cash and £17m. in shares was then needed to bring the cover up to the
required 160%.
115. On
8th November Miss Maitland and Mr. McDonnell met Mr. Trachtenberg and Mr. Bunn
to discuss the security cover for the RMG facility. Mr. Trachtenberg stated
that he would be in a position to deliver £7 to £8 million worth of
shares in the middle of the following week to address the shortfall, and in the
meantime offered to pledge additional Berlitz shares which were held in the DTC
system. Mr. Trachtenberg asked for details of Credit Suisse's DTC agent for
delivery of up to £12 million worth of shares by Monday in New York. Mr.
Trachtenberg was given the details of Credit Suisse's DTC account with SASI,
and agreed to set up the transfer of 1 million Berlitz shares that night for
value Monday 11th November. Miss Maitland and Mr. McDonnell saw the offer as
another bridging arrangement which Credit Suisse was entitled to reject but
which they, that is Miss Maitland and Mr McDonnell, were persuaded to accept on
a short-term basis, to be replaced within a matter of days by security of the
kind stipulated for by the facility.
116. The
transfer of the 1m shares in Berlitz occurred on 12/13th November in the
circumstances described by the Judge (transcript: pages 453 and 454) in the
following terms:
“During
the afternoon of Tuesday 12th November (Mr. Trachtenberg did not keep hisword
to make the arrangements on the Friday for value on the Monday) instructions
were given by electronic transmission by BIM to Morgan Stanley to transfer a
total of 4 million shares in Berlitz in four parcels to four different
transferees. One parcel of 1 million shares was to be transferred to SASI's
DTC account for the order of Credit Suisse. These instructions were confirmed
by BIM by fax dated 12th November signed by Mr. Trachtenberg and Mr. Cook.
According to Mr. Cook's evidence, he was acting on Mr. Kevin Maxwell's
instructions. The transfer was affected by the making of appropriate entries
on the accounts of Morgan Stanley and SASI with the clearing corporation DTC.
This appears to have taken place on 12th November.
On
13th November SASI received from DTC a Delivery Advice recording the delivery
of 1 million Berlitz shares and a Participant Statement showing that they had
been deposited on 12th November. On 13th November SASI made an entry in its
books crediting 1 million Berlitz shares to Credit Suisse's account with SASI,
and sent Credit Suisse a Receiving Ticket confirming that it held on behalf of
Credit Suisse 1 million Berlitz shares received from Morgan Stanley.”
117. The
subsequent events may be shortly summarised. On 5th December 1991 Credit
Suisse demanded repayment of the amount due under the facility. On the same
day RMG was put into administration. The writ in this action was issued by
Macmillan on 9th December 1991. By a letter dated 11th December 1991 the
solicitors acting for Macmillan claimed from Credit Suisse the return of the
certificates and other documents relating to the 1.5m Berlitz shares then held
by Credit Suisse. Thus Credit Suisse obtained actual knowledge of the claim of
Macmillan by 12th December 1991 at the latest.
118. Thereafter
Credit Suisse sought to perfect its legal title to the 1.5m Berlitz shares. On
6th May 1992 Credit Suisse instructed SASI to withdraw the 1m shares from the
DTC system and to arrange for them to be registered in the name of Credit
Suisse Nominees Ltd. On 12th May 1992, in respect of the 1m shares and on 4th
June 1992 in respect of the 500,000 shares Credit Suisse Nominees Ltd was
registered as the owner of such shares. This course was available to Credit
Suisse because the interlocutory injunction previously obtained by Macmillan
was discharged because Macmillan was unable to give an adequate
cross-undertaking in damages subsequent to the time when it went into
administration in England and Chapter 11 in New York. The discharge of the
injunction was described by the Judge (transcript: pages 474 to 476) as
“a
serious mistake. It left the Defendants free to take whatever steps were open
to them to improve their position against Macmillan, and Swiss Volksbank and
Credit Suisse both took advantage of this. This would not have been possible
if the injunctions had been replaced by an order restraining the Defendants
from obtaining the registration of their holdings, or if they had been required
to give undertakings that they would not at the trial rely on steps taken in
relation to the security after the date on which the original injunctions were
discharged.
The
failure to exact such an undertaking has been particularly serious in the case
of the 500,000 shares held by Credit Suisse, since it left Credit Suisse free
to register the shares in its own name, and to rely upon its registered
ownership to defeat Macmillan's claim.”
.....
“Credit
Suisse took advantage of the absence of any injunction or undertaking to do
everything it could to frustrate Macmillan's claim to the shares, and was now
the registered owner. In relation to the 500,000 shares, it thereby not only
altered the applicable law but, in the event, determined the outcome of the
Action. This is not due to any peculiarity of New York law; the same would
have been true in an entirely domestic case with no foreign element.”
This
court decided (
[1996] 1 WLR 387) that the law of New York applied because it
was the law of the situs of the shares. The consequence was that the discharge
of the injunction did not enable the applicable law to be changed by the
process of registration for New York law had applied throughout.
119. As
we have already indicated, though the events at the meeting between Miss
Maitland and Kevin Maxwell on 26th January 1990 are not relevant to anything we
have to decide they featured prominently in the trial. The reason appears
clearly from the judgment of Mr Justice Millett (transcript: pages 382 to 392).
For present purposes it is sufficient to note that one issue arising on the
witness statements of Miss Maitland and Mr McDonnell was when and why they
thought that there was a private side holding of shares in Berlitz available
for deposit as security for the debts of RMG. It only emerged when Miss
Maitland came to give her oral evidence that, after conferring with Mr
McDonnell, she had concluded that she was told of such a holding by Kevin
Maxwell at the meeting on 26th January 1990.
120. Not
surprisingly, this late change in the evidence of Miss Maitland caused counsel
for Macmillan to concentrate a large part of his cross-examination on whether
Miss Maitland had then been so informed. But this issue only went to her
credibility, not to the crucial issue of her knowledge on 27th September and
12th November 1991. In the event the Judge was not prepared to go as far as
counsel for Macmillan submitted that he should. Millett J. concluded
(transcript: pages 391 et seq):-
“It
is sufficient for me to find, as I do, that Mr. Kevin Maxwell did not, at any
time prior to November 1990, tell Miss Maitland or Mr. McDonnell that the
private side had acquired a holding in Berlitz; and that neither Miss Maitland
nor Mr. McDonnell understood him to say so at the time. But I reject as
unfounded Macmillan's allegation that Miss Maitland's evidence, and Mr.
McDonnell's, is pure invention. I think that it is due to misrecollection
under pressure. Throughout their evidence they have insisted that they
believed that the Berlitz shares which were pledged to Credit Suisse belonged
to RMG, but (this episode apart) they have been unable to put forward any
ground for their belief. I have little doubt that when their instructions were
being taken for their witness statements they were pressed to explain why they
believed that the shares belonged to RMG, and whether Mr. Kevin Maxwell had
ever told them so. From a dim but accurate recollection that Mr. Kevin Maxwell
had mentioned the Berlitz shares in connection with the initial public
offering, and had said something to the effect that it was his or the family's
view that they were a good investment, they have convinced themselves that Mr.
Kevin Maxwell said something about their ownership that in fact he could not
have said. Accordingly, while I reject the charge that they are dishonest
witnesses who have been guilty of deliberately inventing evidence, I do find it
necessary to approach their evidence with some caution.”
121. Later
in expressing his conclusions on the relevant issues, on the footing that the
issue of notice was to be determined in accordance with the law of the state of
New York, the Judge said (transcript: pages 623 et seq.):-
“The
relevant dates in this case are 27th. September 1991 and 12th. November 1991.
The principal actor whose knowledge and state of mind are attributable to the
Bank is Miss Maitland.
Miss
Maitland is a highly intelligent and conscientious person. She is of
conspicuous ability, and made it her business to know far more about her
customers' affairs than did any of the other witnesses who had dealings with
the Maxwell group and gave evidence before me. She knew all about Macmillan's
56% holding in Berlitz; she would have castigated herself if she had not. If
she had a defect, it was that she had little imagination. She tended to accept
and report what she was told without asking herself whether it was plausible or
consistent with other information in her possession.
I
found her an honest and truthful witness, though her evidence needed to be
approached with caution, for two reasons. In the first place, she gave
evidence with a suppressed belligerency which may have been due to outrage that
her competence should be questioned, but which I suspect was attributable to a
basic insecurity. As a result she often did herself less than justice in her
answers. In the second place she had genuinely convinced herself about an
incident which never happened. Throughout her evidence she has always insisted
that she believed that the Berlitz shares which were pledged to Credit Suisse
belonged beneficially to RMG; but I have little doubt that when her
instructions were being taken for her witness statement she was repeatedly
pressed to explain why she believed this, and was eventually persuaded to put
forward one mis-remembered incident as the ground for her belief. But she had
a far more impressive ground; the shares were pledged to Credit Suisse by RMG
and on the basis that they belonged to RMG. Of course it is right to test her
protestations that she believed that they belonged to RMG. But in doing so the
right question is not: why did she believe it? but what grounds did she have
for not believing it?
Berlitz
shares were originally pledged to Credit Suisse on 9th. November 1990, when
they were deposited as part of the security for a further draw down of the
facility. The shares were delivered by RMG and she simply assumed that they
belonged to RMG. It never crossed her mind that they might belong to
Macmillan. If this had occurred to her, she would not have accepted them as
security. This is self-evident. She had no incentive whatever to accept
security to which the title was doubtful; she had no reason to think that
alternative security could not have been provided.
When
the shares were released from security they were returned to RMG. In September
1991 Miss Maitland was offered what she took to be the same shares, this time
as substitute security. Once again she was offered them by RMG, and she
assumed that they were still owned by RMG. A more imaginative person might
perhaps have asked herself why RMG had retained the shares having regard to its
policy of asset disposals. But it was a small holding, and its continued
retention by RMG was not so inconsistent with the known policy of the group as
to warrant suspicion. It is self-evident that it did not in fact occur to Miss
Maitland that the shares did not still belong to RMG. If she had suspected
that they did not she would not have accepted them. She had no incentive to do
otherwise. She would simply have refused to release the existing security
until satisfactory alternative security had been provided.
On
12th. November 1991 Credit Suisse took a further 1 million Berlitz shares as
additional security. By this time Miss Maitland knew of the proposed sale of
Macmillan's holding to Fukutake, and she also knew that, if the shares now
being pledged to Credit Suisse belonged to RMG, then RMG had a total holding of
at least 1.5 million shares or about 8% of the total issued share capital of
Berlitz. A more imaginative person than Miss Maitland would certainly have
asked herself why RMG had retained a holding of this size in view of its asset
disposal programme; and I am surprised that she did not at least inquire of
Mr. Kevin Maxwell why the shares were not included in the sale. But I am
satisfied that these thoughts never entered her head. The shares were offered
by RMG and she assumed that they belonged to RMG. Since they belonged to RMG,
they were not part of the holding being sold to Fukutake. QED. She simply
never questioned her own assumptions.
I
am completely satisfied that neither Miss Maitland nor Mr. McDonnell knew or
suspected that RMG was not the beneficial owner of all the shares which it had
pledged to Credit Suisse. They were both honest and loyal employees, but
neither was in a position to exercise major responsibility. Had either of them
suspected anything improper, he or she would have reported it at once to
Zurich. That is sufficient to dispose of the case against Credit
Suisse.”
122. Millett
J. then proceeded to consider the question of notice on the footing that the
principles of English law applied. In that context he said (transcript: page
628):
“In
case the matter is taken further, I also find that neither Miss Maitland nor
Mr. McDonnell had reason to know or cause to suspect that the shares formed
part of Macmillan's holding. I have considered with some anxiety whether the
assumptions which Miss Maitland plainly made were plausible and consistent with
the information in her possession, or whether they were so unreasonable that
she was not entitled to make them. Even without the benefit of hindsight, it
is tempting to think that an honest and reasonable banker in Miss Maitland's
position would have been put on inquiry. But I have come to the conclusion
that this is not the case. He would, I think, have been surprised to learn
that RMG had retained such a substantial holding of Berlitz shares and, if of a
naturally curious disposition, might well have asked
why
it had done so. But he would not, in my judgment, have thought it necessary to
inquire
whether
it had done so. He would also, I am sure, have inquired why RMG was not
selling its holding to Fukutake; and in his own interest have pressed to have
the pledged securities included in the sale, if necessary at Macmillan's
expense. But in my judgment he would not have found the situation so
implausible that it called into question RMG's good faith and the ownership of
the shares which it was pledging, and made it imperative for him to seek
verification of that fact before proceeding further. In this regard I have
borne in mind what Bowen L.J. said in
Sanders
v MacLean
(1883), 11 Q.B.D. 377 at p. 343:-
"But
the practice of merchants, it is never superfluous to remark, is not based on
the supposition of possible frauds. The object of mercantile usages is to
prevent the risk of insolvency, not of fraud; and any one who attempts to
follow and understand the law merchant will soon find himself lost if he begins
by assuming that merchants conduct their business on the basis of attempting to
insure themselves against fraudulent dealing. The contrary is the case.
Credit, not distrust, is the basis of commercial dealings."
As
Steyn J. pointed out in
Barclays
Bank plc. v Quincecare Ltd.,
(1992) 4 All E.R. 363 at p. 377:-
"The
relationship between merchants is very different from the relationship between
a banker and a customer. But it is right to say that trust,not distrust, is
also the basis of a bank's dealings with its customers. And full weight must
be given to this consideration before one is entitled, in a given case, to
conclude that the banker had reasonable grounds for thinking that the order was
part of a fraudulent scheme".
In
my judgment the facts known to Miss Maitland, (and
a
fortiori
those known to Mr. McDonnell) were not sufficient to put Credit Suisse on
inquiry or to justify the conclusion that it had reason to know or cause to
suspect that RMG was not the beneficial owner of the shares.”
123. In
paragraph 5.14(a) of their notice of appeal Macmillan contended that the Judge
was wrong to have found Miss Maitland to be an honest and truthful witness.
In their written argument Macmillan submitted that the Judge should have found
that the evidence of Miss Maitland and Mr McDonnell was dishonest and that
neither of them were to be believed without other corroborating evidence. The
argument was buttressed by references to comments made by the Judge either when
the evidence was being given or in his judgment to the effect that the evidence
was “inconsistent”, “quite astonishing”, or
“strange”. But the credibility of a witness is pre-eminently a
matter for the trial judge. He has the advantage, denied to the Court of
Appeal, of seeing and hearing the witness give his or her evidence. On the
evidence we have read it would have been open to Millett J. to conclude that
Miss Maitland was a dishonest witness. He did not do so and we do not consider
that this court should take a different view. In any event we see no need to
do so. As we have sought to explain in our analysis of the law the question
we have to determine is the narrower one whether on the knowledge to be
attributed to Credit Suisse, pursuant to Section 1-201(27), on 27th September
and 12th November 1991 the bank had notice, as defined in Section 8-304(4), of
an adverse claim, as defined in Section 8-302(2).
124. It
is convenient to deal first with that question as at 27th September 1991. As
we have pointed out in the section dealing with the law the first question is
of what facts did Credit Suisse have actual knowledge. The answer to that
question depends in part on identifying the individual or individuals
conducting the transaction on behalf of Credit Suisse as provided in Section
1-201(27). There is no doubt that Miss Maitland was one of such individuals
with the consequence that her knowledge is to be attributed to Credit Suisse.
In our view Mr Mueller’s knowledge is also to be attributed to Credit
Suisse for either or both of two reasons. It is plain that Miss Maitland, in
expectation of her day at Ascot on Friday 27th September, on Thursday 26th
September delegated to Mr Mueller her responsibility to receive and check the
securities promised by Mr Trachtenberg as the condition for the release of the
cash for which they were to be substituted. In accordance with ordinary
principles of the law of agency either she was entitled so to do, in which case
Mr Mueller was the person thereafter conducting the transaction on behalf of
Credit Suisse and his knowledge is to be attributed to Credit Suisse; or she
was not, in which case his knowledge as her agent acquired in the performance
of her duties must be attributed to her and, as part of her knowledge, to
Credit Suisse.
125. In
the section of this judgment dealing with the law we have also considered the
meaning of bad faith for the purposes of Section 8-304(4). As we have pointed
out the rights of the adverse claimant otherwise exercisable pursuant to
Section 8-315 are excluded if the claim lies against one who comes within the
definition of “bona fide purchaser” contained in Section 8-302(1).
If the purchaser claims under any of the transactions described in Section
8-302(a)-(c) then taking the security free from the adverse claim will
constitute bad faith if he knows of the adverse claim for it will amount to a
denial of the rights of the claimant. But the alternative form of notice,
namely “knowledge of such facts that his action in taking the security
amounts to bad faith”, involves a similar concept. The bad faith lies in
taking the security presumptively free from the adverse claim with knowledge of
certain facts. Thus it is necessary to ascertain the facts as known to the
purchaser, namely Credit Suisse, and then to determine whether with knowledge
of those facts it would constitute bad faith on the part of Credit Suisse to
take the security free from the adverse claim of Macmillan.
126. Of
certain facts there can be no doubt. First, Credit Suisse knew that 500,000
Berlitz shares had been deposited as security for the loan to RMG on 8th
November 1990 and had been returned by Credit Suisse to RMG on 4th April 1991
because the value and nature of the holding did not comply with the conditions
imposed by Credit Suisse as to what security was acceptable. Credit Suisse
knew that its possession of the relevant certificate had not been questioned by
anyone either while it retained it or subsequently. During the 6 months the
certificate was retained the value of the Berlitz shares comprised in it was
regularly accounted for in the statements of securities held sent by Credit
Suisse to RMG. In these circumstances it seems to us to be (and to have been)
of no relevance (save as to credibility) whether or not Kevin Maxwell had told
Miss Maitland of the existence of a private side holding on 26th January 1990.
Equally the existence of such a holding on 4th April 1991 was no guarantee that
such a holding still existed on 27th September 1991.
127. Second,
it is beyond dispute that Miss Maitland did nothing to ensure that the shares
delivered on 27th September 1991 were delivered by RMG or that RMG had the
right to do so. All she knew was what she had been told by Mr Mueller, and
possibly Mr Trachtenberg, on the previous day, including the contents of the
memorandum she signed on 26th September, though dated 27th September. In this
she signally failed to observe the advice given to her by Mr Whale in his
letter of 7th September 1990 to ensure that all securities delivered to Credit
Suisse as part of the security portfolio were accompanied by a letter or
memorandum from RMG or the charging subsidiary stating that they were being
delivered pursuant to the terms of the facility agreement. She saw no such
letter. Moreover, unlike the earlier transaction of 22nd August 1991 or the
later one of 22nd October 1991, each of which was comparable, she made no
attempt to obtain any warranty as to the title of the depositor, whether RMG or
another, to these Berlitz shares.
128. In
these circumstances it is clear to us that if the question whether Credit
Suisse took the Berlitz shares without notice is to be judged by reference to
the knowledge and actions of Miss Maitland alone then the taking of the
security by Credit Suisse free from the adverse claim of Macmillan would
constitute bad faith for she deliberately abdicated her responsibility to the
prejudice of Macmillan. We accept that it would not be right to ignore the
fact, as known to Miss Maitland, that she had left Mr Mueller in charge. But,
on her own evidence, all she instructed him to do was to check the share
certificates against the list set out in the memorandum, value the shares in
accordance with the closing prices for the previous day, from those figures
calculate the amount of cash which might be released on the substitution of
such security and contact Graeme Hutchison, another account officer, if he had
any problems. None of these functions, if performed, would have constituted
compliance with the advice of Mr Whale or a check on the identity or right of
the person purporting to deposit the securities. Similarly the fact, relied
on by Miss Maitland in her evidence, that, in the ordinary course of events,
the share certificates and stock power forms would have been checked by the
Securities Department can be of no avail for Miss Maitland accepted that that
Department never saw the advice from Norton Rose and was not responsible for
checking the adequacy of the security documentation.
129. Third,
the knowledge of Mr Mueller cannot assist Credit Suisse either. Mr Mueller
could see from the face of the share certificate and of the letter dated 27th
September 1991 that RMG did not have any ostensible interest in the shares, was
not giving the instructions to Credit Suisse to effect the exchange and was not
to be the recipient of the cash released. He knew nothing of BIT in whose name
the shares were registered nor of LBG from whom the instructions had come. On
the information available to Mr Mueller both the depositor, LBG, and the shares
were foreign to the transaction of which Miss Maitland had left him in charge.
And all this occurred in the context of the contemporaneous attempt of Mr
Trachtenberg to deposit securities registered in the name of Bank of America
and beneficially owned by the trustees of a pension fund.
130. It
was suggested that the omission of Mr Mueller to question the transaction was
somehow excused by the fact that Miss Maitland knew that LBG was by then a
subsidiary of RMG. We reject this submission. First it is contrary to the
finding of the Judge on page 440 of the transcript of his judgment. Second we
do not think that the evidence relied on to contradict that finding entitles us
to differ from the views of the judge. It is true that there are two documents
prepared by Miss Maitland in July/August 1991 suggesting that LBG was or would
shortly become a subsidiary of RMG but there are others produced by her in the
same period which suggest the contrary. Third she denied any such knowledge.
In any event no one has suggested that LBG was a charging subsidiary for the
purpose of the Facility Agreement.
131. We
were much pressed with the conclusion of the Judge we have quoted in paragraphs
121 and 122 above. It was contended for Credit Suisse that to justify a
finding of bad faith not only must the circumstances be objectively suspicious
but that Miss Maitland must have appreciated the existence of such suspicion
but took no steps to allay it. In the section of this judgment in which we
have considered the law we have rejected the submission that it is necessary
that the individual conducting the transaction should in fact appreciate that
the circumstances are suspicious. In any event we do not accept this
submission on the facts for the Judge seems to have misunderstood them. In
the passage we have quoted in paragraph 121 above he said
“In
September 1991 Miss Maitland was offered what she took to be the same shares,
this time as substitute security. Once again she was offered them by RMG, and
she assumed that they were still owned by RMG.”
The
fact is that she was offered them by LBG. The shares were registered in the
name of BIT and, not having inspected either the share certificate deposited on
8th November 1990 nor that delivered on 27th September 1991, Miss Maitland had
no reason to assume that they were the same shares as those deposited nearly a
year earlier. It was submitted for Macmillan that this oversight led the judge
into error by failing adequately to analyse the facts or to consider the
submissions made on behalf of Macmillan.
132. In
our view the Judge reached the wrong conclusion in respect of the 500,000
shares deposited on 27th September 1991 whether one has regard to the knowledge
of Miss Maitland alone, Mr Mueller alone or knowledge imputed to Credit Suisse
from each of them. Neither of them had any reason to believe that RMG had any
right to deposit these Berlitz shares as security for its debts. Miss
Maitland abstained from making any enquiry at all as to what shares were
deposited or by whom; she delegated those tasks to Mr Mueller. The facts as
known to Mr Mueller indicated that the shares belonged to BIT or LBG, neither
of whom, to his knowledge, was associated with or a charging subsidiary of RMG.
The issue is whether it would amount to bad faith for Credit Suisse with the
knowledge of Miss Maitland and Mr Mueller to take the security free from the
adverse claim, that is to say free from any “claim that the [deposit with
Credit Suisse] was wrongful”. In our view it would.
133. We
turn then to the events surrounding the deposit of the 1m Berlitz shares on
12th November. The principal person conducting the transaction on behalf of
Credit Suisse for the purpose of Section 1-201(27) was Miss Maitland. By then
she knew of the September transaction and its details. As the Judge recorded
(transcript: pages 440/1)
“Miss
Maitland saw a copy of Mr. Trachtenberg's fax a few days later. Mr. Mueller
had marked it up with the names of the companies which appeared on the
certificate. Miss Maitland then discovered that the Berlitz shares were in the
name of BIT. She told me that she assumed, from the fact that the Securities
Department raised no queries, that the transfer forms were in order, and
included transfers from BIT to RMG. But she did not take steps to verify
this.”
In
addition she knew that the promise to deposit further securities in exchange
for the release of cash made in the document dated 22nd October 1991 had not
been performed, Robert Maxwell had been lost at sea and there was a shortfall
on the security required by the Facility Agreement, as amended, of £10m.
134. On
Friday 8th November 1991 Mr Trachtenberg offered the 1m Berlitz shares as a
stop-gap until securities complying with the Facility Agreement could be
deposited. The 1m Berlitz shares were transferred within the DTC system on
Tuesday 12th/Wednesday 13th November. On Thursday 14th Credit Suisse received
confirmation of the receipt of such shares free of payment from Morgan Stanley.
From beginning to end of this transaction there is no suggestion that Credit
Suisse were told or had any information as to the beneficial ownership of these
shares. Even when, later, Credit Suisse sought to obtain some comfort as to
the beneficial ownership of the shares it received two letters dated 21st
November 1991 from Mr Trachtenberg, writing on behalf of RMG, but in different
terms. One of them purported to confirm that BIT was a wholly owned
subsidiary of RMG, the other stated that the Berlitz shares “are in the
name of [BIT] which is a wholly owned subsidiary of [RMG]”.
135. In
the case of this deposit also we consider that Credit Suisse had notice for the
purpose of Section 8-304(4) of the adverse claim. No steps were taken to check
that the shares were being deposited by RMG or a charging subsidiary or that
the depositor had a right so to do. There was no letter or memorandum from RMG
or any one else. In the passages from the judgment we have quoted in
paragraphs 121 and 122 the Judge acquitted Miss Maitland of knowledge or
suspicion of the adverse claim on the ground that she was unimaginative in the
sense that she saw everything from the perspective of Credit Suisse. But, in
our view, this is an insufficient reason for acquitting Credit Suisse of such
notice. The Judge had earlier (transcript: page 450) described Miss
Maitland’s assumption that the 1m Berlitz shares belonged to RMG and were
not included in the proposed sale to Fukutake as “astonishing”,
particularly if she was unimaginative in the sense the Judge used that word.
In our view for a bank with the knowledge that Miss Maitland had, including the
gaps in such knowledge, to take the 1m shares free from any adverse claims
would amount to bad faith. We conclude that Credit Suisse had notice of the
adverse claim for the purpose of Section 8-304(4) in this case also.
136. In
short Credit Suisse failed to take the steps which an honest and competent
banker would take to ascertain the title of RMG or any charging subsidiary to
any of the 1.5m Berlitz shares deposited as security for the loan from Credit
Suisse. It chose not to do so. In these circumstances, in our view, it does
amount to bad faith to take the shares free from the claim of Macmillan,
otherwise maintainable pursuant to Section 8-315, that the transfer of the
shares to Credit Suisse was wrongful. We would allow the appeal of Macmillan
on the notice point in respect of all 1.5m. shares in Berlitz.
E. The
appeal hearing
137. By
previous direction of Morritt L.J. the appeal was heard in two stages. The
first stage, where the issue was the availability of bona fide purchaser status
to a purchaser acquiring shares through the DTC, involved all three parties and
each was separately represented. If we had accepted Mr Oliver's submissions on
behalf of Macmillan, that the banks were not entitled to raise the bona fide
purchaser defence, then it would have been unnecessary for us (subject to any
appeal to the House of Lords) to consider the factual issues which arose
between Macmillan and Credit Suisse alone. We indicated, however, after
hearing submissions on the first issue, that we would uphold the judge's ruling
on that issue, and we proceeded to hear Macmillan's appeal on the notice issue,
the appeal which we have allowed.
138. At
both stages there were formal applications to adduce further evidence. The
applications were supported by the kind of voluminous documentation which has
characterised the proceedings throughout.
During
the first stage, dealing with the DTC issue, we allowed Mr Oliver to refer to a
learned article published in the United States since the trial of this action,
notwithstanding Mr Moss's objection that the author had not been called as an
expert witness and the article had not been produced in evidence at the trial.
Mr Moss however did not require formal proof that the article was written and
published as appeared from the document itself, and in the result Mr Oliver did
not claim the formal status of evidence for it. He referred us to passages in
it which he adopted as part of his submissions.
139. During
the second stage, a more substantial application was made. Credit Suisse was
also a defendant in other proceedings brought by pension funds trustees in
respect of securities lodged for the same RMG facility as in the present case.
The trial of those other proceedings began in October 1994. They were settled
by agreement after a trial lasting no less than 161 days. Miss Maitland, Mr
McDonnell and Mr Muller each gave evidence and they were cross-examined for an
extraordinary period extending over more than 30 days.
140. The
proceedings were closely followed by Herbert Smith, Macmillan's solicitors, who
read the daily transcripts and were able to identify a number of documents
which were disclosed by Credit Suisse in those actions but which had not been
disclosed to Macmillan in this.
141. The
number of such undisclosed documents was small, and perhaps it was inevitable
that some documents were overlooked when discovery was made in the present
action, under pressure of time in order to meet an expedited trial date.
Clifford Chance, Credit Suisse's solicitors, confirmed to us by affidavit that
this was so.
142. Macmillan's
application was to adduce further evidence consisting of eight such documents,
which were said to be relevant to the evidence given by the three witnesses in
the present case, or relevant to their credit, and eleven short excerpts from
the transcript of the evidence which they gave in the pension fund proceedings.
143. Mr
Oliver urged upon us that the three requirements of
Ladd
v. Marshall
[1954] 1 WLR 1489 were all satisfied. The evidence was not available at the
trial ; "if given, it would probably have an important influence on the result
of the case, though it need not be decisive" ; and it was apparently credible.
He did not shrink from proposing that, if necessary, we should order a retrial
of the relevant issues.
144. We
were conscious throughout of how far-ranging Mr Oliver's submissions were.
When successive trials have taken place on similar or related issues there
could be no end to successive appeals, each challenging a judgment by reference
to evidence heard in other proceedings after the judgment was given. But we
can recognise the possibility of an exceptional case where after the judgment a
witness contradicts his evidence given at the trial and it might be unjust not
to take account of the later evidence on appeal. That is far removed, however,
from the present case where the most that can be said is that some further
lines of cross-examination might have been opened up if the document had been
disclosed or the later transcripts had been available.
145. In
the result, we dismissed the applications on the ground that we were satisfied
that the second of the three
Ladd
v. Marshall
requirements was not fulfilled. The documents and transcripts, if admitted,
were not capable, either singly or cumulatively, of having an "important
influence" on the outcome of the appeal.
F. Conclusion
146. For
the reasons given above, we dismiss Macmillan's appeals against Swiss Volksbank
and Credit Suisse on the first (Clearing corporation) issue, and we allow the
appeal against Credit Suisse on the second (notice) issue.
ORDER:
Appeal against Swiss Volksbank and Credit Suisse on the first issue dismissed.
Appeal against Credit Suisse on the second issue allowed. All other
consequential orders adjourned to a date to be fixed.
(Order
not part of approved judgment)
_____________________________________
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