515 South Orange Grove Owners Association v Orange Grove Partners [1995] CKHC 3; 208.1994 (11 March 1995)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(CIVIL DIVISION)
PLAINT NO. 208/94

BETWEEN

515 SOUTH ORANGE GROVE OWNERS ASSOCIATION,
a California Non-Profit Mutual Benefit Corporation
First Plaintiff

JAMES E LUDLAM
and JANE H LUDLAM
Second Plaintiffs

DEAN SCHNEIDER
as Trustee of the Schneider Trust
Third Plaintiff

GEORGE G LANCASTER
and FRANCES R LANCASTER
as Trustees of the GG and FF Lancaster Trust
Fourth Plaintiff

FRANK J NOBLE
and LOIS D NOBLE
Fifth Plaintiffs

JANE BURNHAM
as Trustee of the Jane D Burnham Trust
Sixth Plaintiff

GERALD J LYNCH
as Trustee of the Gerald J and M Romaine Lynch Family Trust
Seventh Plaintiff

RAY JUDSON
and MARY L JUDSON
as Trustees of the Judson Family Trust
Eighth Plaintiff

CONSTANCE J CORNET
Ninth Plaintiff

ROBERTA S MACDONALD
Tenth Plaintiff

AND

ORANGE GROVE PARTNERS
a California Corporation
First Defendant

VICTOR ILLIG
Second Defendant

EVANGELINE ILLIG
Third Defendant

25/25 HOLDINGS LLC
a limited liability company
a corporation established in the State of Nevada
Fourth Defendant

25/25 1993 INVESTMENT TRUST - VICTOR J ILLIG
an international trust registered
pursuant to the International Trusts Act 1984
Fifth Defendant

SOUTHPAC TRUST INTERNATIONAL INC.
an international company incorporated under the
International Companies Act 1981-82
as trustee of the 25/25 1993 Investment Trust - Victor J Illig
Sixth Defendant

Counsel: Mr Arnold for the Fifth and Sixth Defendants
Mr Manarangi for all the Plaintiffs

Hearing: By Counsels' Submissions during an International Conference Call
Date of judgment : 11 March 1995 (NZ time)

JUDGMENT OF DILLON J.

On 24 December 1994 this Court issued a Mareva Injunction ex parte in favour of the ten Plaintiffs.

The Fifth and Sixth Defendants applied for an Order that these proceedings be struck out or in the alternative to set aside that Injunction or in the alternative that these proceedings be stayed pending such time a security for costs has been paid by the Plaintiffs.

BACKGROUND

The background to these proceedings may be summarised as follows:

During an international conference call today lasting in excess of one hour both Counsel made further submissions - Mr Manarangi by applying for a further Mareva Injunction based on the Amended Statement of Claim that had been filed subsequent to the date of issue of the original Injunction on 24 December 1994; Mr Arnold by strenuously opposing the grant of any further injunction on the grounds that the Court had established that the proceedings, whether they be based on the first Statement of Claim or the Amended Statement of Claim fail to comply with the time constraints specified by Section 13B of the International Trusts Act 1984.

The Amended Statement of Claim relies on the legal principles associated with resultant and/or constructive trusts. While extensive legal argument had been presented by both Counsel on the question of constructive trusts the Court, relying on the provisions of Section 13B (3), found it unnecessary to discuss in detail the relevant case law referred to. Mr Manarangi, however, by persuasive submissions and legal argument, has sought a written judgment on the further Mareva Injunction he has now applied for based on the Amended Statement of Claim

These pleadings included here both for completeness and easy reference are as follows:

"AMENDED STATEMENT OF CLAIM

As a further and alternative cause of action the Plaintiffs by their Solicitor says-

1. The Plaintiffs repeat the allegations contained in paragraphs 1-9 of the Statement Of Claim herein

2. That the purpose for which the Fourth and Fifth Defendants were established, namely, to avoid enforcement of any judgment that might be awarded the Plaintiffs, was within the actual or constructive knowledge of the Sixth Defendant and the attorneys of the First, Second and Third Defendants.

3. That the Sixth Defendants knew or ought to have know of the existence of the proceedings between the Plaintiffs and the First, Second and Third Defendants in the Superior Court of the State of California for the County of Los Angeles.

4. That the sixth Defendant had actual or constructive knowledge of the First, Second and Third Defendants fraudulent and unconscionable design and conduct and by the sixth Defendant's acts and/or omissions encouraged and/or condoned the same.

5. That the powers of the Sixth Defendant as trustee of the Fifth Defendant are exercised subject to direction and control by the First and/or Second and/or Third Defendants.

6. That the First and/or Second and/or Third Defendants are the beneficiaries of the Fifth Defendant and as such they have been unjustly enriched at the expense of the Plaintiffs.

7. That in the circumstances the acts and/or omissions of the Sixth Defendant were fraudulent, unconscionable and without probity and to the detriment and prejudice of the Plaintiffs.”

There has been only one affidavit filed in support of the Mareva Injunction, namely that by Mr Joel A. Goldman, one of the Counsel Acting for the ten plaintiffs in the successful trial in the United States.(sic) There has been an affidavit filed by Mr Bruce Gridley, Counsel acting for the First, Second and Third Defendants. Finally there has been an affidavit filed by Leanne Mellissa Corvette described as a Trust Manager of Rarotonga. Her affidavit does nothing more than provide her interpretation of Sections 13B and 13K of the International Trusts Act 1984 relative to the judgment obtained in the Superior Court of Los Angeles. There is no identification as to who she works for or on whose behalf she has made the affidavit.

I turn now to the Amended Statement of Claim. That alleges that the Sixth Defendant had actual or constructive knowledge or knew or ought to have known

- of the purpose for which the Fourth and Fifth Defendants were established (clause 2);

- of the existence of the proceedings in the Superior Court (clause 3);

- of the fraudulent and unconscionable design and conduct of the First, Second and Third Defendants (clause 4)

and that as a result everything the Sixth Defendant has done was "fraudulent, unconscionable and without probity and to the detriment and prejudice of the Plaintiffs”.

Those allegations, in my opinion, cannot be supported by Mr Goldman's affidavit. True, he deposes to the establishment of the Fifth Defendant; to the incorporation of the Fourth Defendant; to the transfer of the interests detailed in Clause 12 of his affidavit; to the transfer of funds referred to in Clause 13 of his affidavit; to the draw down of a line of credit to which the Second and Third Defendants were entitled; and to the closing of the business account owned by the First, Second and Third Defendants.

It is significant, in my opinion, that Mr Goldman is able to depose in his affidavit to the dispositions and transactions of the First, Second and Third Defendants. Further, his affidavit refers to the involvement of the Sixth Defendant as the Trust and recipient of those properties and those identified funds.

However Mr Goldman makes no reference whatsoever to the Sixth Defendant having actual; or constructive knowledge; or that it know; or ought to have known that its involvement in the normal course of business in an international trust company was "fraudulent, unconscionable and without probity and to the detriment and prejudice of the Plaintiffs". These are the allegations set out in Clause 7 of the Amended Statement of Claim And of course am the foundation upon which the claim by the Plaintiff is based.

Reference in his affidavit is contained in Paragraphs 16 and 17 to the allegations upon which the first Statement of Claim was based but which, as will be seen have no relevance to the Amended Statement of Claim which has no further Affidavit to support it. In this regard I refer to Paragraph 16 and 17 of Mr Goldman's affidavit:

“16. That by virtue of the transfers referred to in paragraphs 12,13,14 and 15, the First, Second and Third Defendants did, with principal intent to defraud the Plaintiffs, divest themselves of the interest in such property, leaving the First, Second and Third Defendants without property to satisfy the judgment of the Plaintiffs and which interest, but for the transfers, would have been available to satisfy the Plaintiffs’ claim.

17. I believe that the transfers referred to in paragraphs 12, 13, 14 and 15, have rendered the First, Second and Third Defendants insolvent and without property to satisfy the Plaintiffs’ claim as evidenced by the Plaintiffs’ efforts to enforce the judgment referred to in paragraph 6 hereof...."

These are the allegations set out in Clause 7.

The involvement of the Sixth Defendant may well justify it being branded as fraudulent and unconscionable. But on Mr Goldman's sworn evidence there is no such allegation nor even inference He traces the transfer of funds and dispositions certainly. But that is the normal business engaged in by all international trust companies. Surely each process undertaken by an international trust company cannot automatically be stigmatised as fraudulent and unconscionable and without probity. Certainly every fraudulent and unconscionable involvement of an international trust company which is established by acceptable evidence and substantiated proof can then be the subject of strictures of complicity in allegations that may be made against it.

In this connection Mr Manarangi's submissions are helpful He has referred to the case of Selangor United Rubber Estates v Craddock (3) (1968) WLR 1555. He says that based on that decision it is sufficient that a constructive trustee ought to have known that his involvement in transactions were both improper and dishonest. However the Selangor case was concerned with the involvement of certain directors of that company and its bankers. The equivalent of those Parties in this case would be represented by the First, Second and Third Defendants; and possibly by the Fourth and Fifth Defendants. It is not possible, however, to involve the Sixth Defendant on the principles enunciated in the Selangor case.

Indeed I have not been able to find any authority to support the submissions presented by the Plaintiffs.

Here we have a registered international trust company operating in the Cook Islands and subject to and governed by Cook Island law. The transactions referred to in Mr Goldman's affidavit are the usual and normal business activities of the Sixth Defendant and indeed of all International trust companies. It cannot be implied that such transactions by themselves create a constructive trust or that the Sixth Defendant is a constructive trustee. In the present case Mr Goldman's affidavit does not allege the involvement of the Sixth Defendant in any way as a constructive trustee or that the transactions that he described in some detail do in fact create a constructive trust.

Counsel for the Plaintiff concedes that the standard of proof required is one based on the balance of probability. The normal business activities of the Sixth Defendant do not, without more evidence, satisfy this Court of the imputations now alleged by the Plaintiffs that "the acts and/or omissions of the Sixth Defendant were fraudulent, unconscionable and without probity and to the detriment and prejudice of the Plaintiffs" as claimed in the Amended Statement of Claim. There is, in my opinion, no evidence to support those allegations, nor is there evidence that the Sixth Defendant ought to have known about the allegations now made by the Plaintiffs.

Counsel for the Plaintiffs has conceded in his supplementary submissions filed earlier today that the International Trusts Act is peculiar to the Cook Islands. He further conceded that there am no cases directly on point upon which he can rely for the establishment of a constructive trust that he now claims. Both Counsel have produced authorities. These would indicate that the approach by the American courts to constructive trusts is more liberal than the approach at present current in Commonwealth jurisdictions. It is not necessary to consider in detail those authorities. That would have been necessary if the Plaintiffs had produced evidence sufficient to satisfy the Court that based on the balance of probability there is substance in the allegations. This they have not done.

I have already made findings in my earlier judgment on the implications of Sections 13B and 13K relevant to these proceedings. It is not necessary to refer further to the decisions already made. Section 13I has also been referred to. It is not necessary, however, to further consider those sections in relation to the issues of a constructive trust and a constructive trustee. My findings on the complete lack of evidence, not against the First, Second and Third Defendants; probably not against the Fourth and Fifth Defendants; but certainly against the Sixth Defendant make further considerations of the relevant sections of the International Trust Acts 1984 unnecessary.

For those reasons the Mareva Injunction issued on 24 December 1994; which was cancelled and discharged on 10 March 1995; is now reconfirmed as cancelled and discharged.

The two alternative orders applied for by the Sixth Defendant stand adjourned pending further submissions.

The question of costs is reserved.

DILLON J