MCC Proceeds Inc. v Bishopsgate Investment Trust Plc
| Jurisdiction | England & Wales |
| Judge | Evans,Morritt,Chadwick L JJ. |
| Judgment Date | 04 November 1998 |
| Court | Court of Appeal (Civil Division) |
| Date | 04 November 1998 |
Evans, Morritt and Chadwick L JJ.
Court of Appeal (Civil Division).
Conflict of laws — Banking — Correct approach on appeal to judge's findings of foreign law — Whether pledgee of shares was purchaser for value in good faith without notice under New York law.
These were appeals by the successor in title to the plaintiff below (“Macmillan”) against orders of Millett J dismissing Macmillan's claims against two bank's to which shares belonging to Macmillan had been pledged without authority.
In 1991 Macmillan, a subsidiary of Maxwell Communications Corp plc, was the owner of 10.6m shares in Berlitz, a company quoted on the New York stock exchange. In September 1991 500,000 of those shares were pledged to the first respondent, Credit Suisse, without the authority of Macmillan, as security for the indebtedness of Robert Maxwell Group plc (“RMG”). The transaction was effected by delivery to Credit Suisse in London of a stock certificate in the name of Bishopsgate Investment Trust plc (“BIT”), a subsidiary of RMG, as nominee for Macmillan. In November 1991 a further 2.4m shares were pledged to Swiss Volksbank and a further 1m to Credit Suisse, again without the authority of Macmillan, as security for the indebtedness of RMG. Those transactions were effected by transfers of shares held by a clearing house, the Depository Trust Co of New York (“DTC”). The shares were held by a DTC participant, Morgan Stanley, to the order of Bishopsgate Investment Management Ltd (“BIM”) and were transferred respectively to Citibank and SASI, also DTC participants, to the order of Swiss Volksbank and Credit Suisse. RMG failed to repay the banks and went into administration. Macmillan commenced proceedings to recover the proceeds of sale of the shares which had been transferred to the banks and sold. The banks claimed to be bona fide purchasers for value in good faith without notice of Macmillan's adverse claim. Millett J, applying New York law, which the Court of Appeal held was the applicable law as the law of the situs of the shares ([1996] 1 WLR 387), held that the banks were bona fide purchasers under the New York Uniform Commercial Code (“UCC”). MCC, the successor in title of Macmillan, appealed against Millett J's order dismissing Macmillan's claims against the banks. Macmillan accepted that Credit Suisse was a bona fide purchaser within s. 8-302(1)(a) of the UCC in relation to the 500,000 shares because it had taken delivery of a certificated security, but argued that Credit Suisse did not take those shares in good faith and without notice of Macmillan's claim. In relation to the shares held by DTC Macmillan argued that the banks were not bona fide purchasers under s. 8-302(1)(c) to whom securities were transferred under s. 8-313(1)(c), (d)(i) or (g). Macmillan further argued that in relation to those shares Credit Suisse (but not Swiss Volksbank) did not take the shares in good faith and without notice of Macmillan's adverse claim. Good faith was defined in s. 1-201(19) as honesty in fact in the conduct or transaction concerned and s. 8-304(4) provided that to have notice a purchaser had to have knowledge of the claim or of such facts that his action in taking the security amounted to bad faith (being the absence of good faith).
Held, dismissing the appeal in relation to Swiss Volksbank and allowing the appeal in relation to Credit Suisse:
1. The trial judge's findings on issues of foreign law were issues of fact but were “of a peculiar kind”. The evidence of expert witnesses was necessary for the court to find that foreign law was different from English law which otherwise had to be applied. In the present case there was no US decision precisely in point. The English court therefore had to make its own findings. Taking due account of the expert evidence, the judge was called upon to form his own view as to the correct interpretation of the relevant provisions of the UCC. Unless the evidence showed that the foreign rules of construction were different, the English court interpreted the statute according to English rules. To that extent, the trial judge's finding was essentially a conclusion as to statutory interpretation and was to be regarded as an issue of law. On appeal the Court of Appeal was entitled and bound to form its own view on the issue of construction, though with due regard to the factual matrix as found by the judge. (Parkasho v SinghELR [1968] P 233 andBuerger v New York Life Assurance Co(1927) 96 LJKB 930applied.)
2. As the judge held, Credit Suisse and Swiss Volksbank were bona fide purchasers under s. 8-302(1)(c) as persons to whom a security was transferred when appropriate entries to the account of the purchaser or a person designated by him were made on the books of a clearing corporation (i.e. DTC) under s. 8-313(1)(g). The banks were the purchasers and Citibank and SASI as DTC participants were the persons designated by them for the purposes of para. (g). “Purchaser” in para. (g) was not restricted to DTC participants. The transactions were within para. (g) even if also within s. 8-313(1)(d)(iii), because the securities were part of a fungible bulk, which did not confer bona fide purchaser status. The appeal in relation to Swiss Volksbank was dismissed.
3. Under s. 1-201(27) and 8-304(4) of the UCC there could be more than one individual within Credit Suisse whose knowledge of the relevant transaction would be attributed to Credit Suisse in order to decide whether its action in taking the shares as security in the light of that knowledge amounted to bad faith. A purchaser who was a corporation had knowledge of those facts actually known to the individual or individuals conducting the relevant transactions on its behalf.
4. The requirements of notice and good faith were interdependent. Knowledge of facts did not, of itself, constitute bad faith. What was required was that, with knowledge of the facts of which he did have actual knowledge, the purchaser's action in taking the security should amount to bad faith; in other words, that the purchaser, in taking the security with knowledge of those facts, was not acting in good faith. In the absence of actual knowledge of the claim, actual suspicion was not a necessary ingredient. It was enough that the purchaser decided 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 had not made (and would not make) the inquiry that an honest banker would make fell short of the “honesty in fact in the conduct or transaction concerned” which good faith required and was properly to be regarded as acting in bad faith. The test of knowledge was subjective but did not absolve a person with actual knowledge of suspicious circumstances from meeting a duty of reasonable inquiry.
5. Credit Suisse failed to take the steps which an honest and competent banker would have taken to ascertain the title of RMG to the shares deposited as security. It chose not to do so. It amounted to bad faith to take the shares free from Macmillan's claim that the transfer to Credit Suisse was wrongful. The judge held that an honest and reasonable banker in Credit Suisse's position would not have been put on inquiry. His conclusion was wrong. The bank had no reason to believe that RMG had any right to deposit the shares as security. In the case of the second deposit of 1m shares Credit Suisse also had notice for the purpose of s. 8-304(4) of the adverse claim. Again no steps were taken to check that the shares were being deposited by RMG or that the depositor had a right to do so. With that knowledge, including gaps in its knowledge, it would amount to bad faith for the bank to take the security free from Macmillan's claim. The appeal in relation to Credit Suisse was allowed.
The following cases were referred to in the judgment of the court:
Benmax v Austin Motor Co LtdELR [1955] AC 370.
Buerger v New York Life Assurance Co (1927) 96 LJKB 930.
Bumper Development Corp v Commissioner of Police of the MetropolisWLR [1991] 1 WLR 1362.
Chemical Bank of Rochester v Haskell (1980) 432 NYS 2d 478; 51 NY 2d 85; 411 NE 2d 1339.
Dalmia Dairy Industries Ltd v National Bank of PakistanUNK [1978] 2 Ll Rep 223.
G & H Montage GmbH v IrvaniWLR [1990] 1 WLR 667 (CA).
Garner v First National City BankUNK (1979) 465 F Supp 372.
Gutenkunst v Continental Insurance Co (1973) 486 F 2d 194.
Ladd v MarshallWLR [1954] 1 WLR 1489.
Legel Braswell Government Securities Corp, Bankrupt, Re, Irving Trust Co v Westchester County Savings & Loan Association(1981) 648 F 2d 321.
Legel Braswell Government Securities Corp, Bankrupt, Re, Plano Savings & Loan Association v Irving Trust Co(1983) 695 F 2d 506.
National Justice Compania Naviera SA v Prudential Assurance Co Ltd (“The Ikarian Reefer”)UNK [1995] 1 Ll Rep 455.
Parkasho v SinghELR [1968] P 233.
Pickford v Imperial Chemical Industries plcWLR [1998] 1 WLR 1189.
Securities & Exchange Commission v PinezUNK (1997) 989 F Supp 325.
Soma v Handrulis (1938) 277 NY 223.
Tallina Laevauhisus (A/S) v Estonian State Steamship LineUNK (1947) 80 Ll L Rep 99.
Watt or Thomas v ThomasELR [1947] AC 484.
David Oliver QC and Jane Giret (instructed by Herbert Smith) for the appellant.
Robin Potts QC and William Blair QC (instructed by Curtis Davis Garrard) for Swiss Volksbank.
Gabriel Moss QC and William Trower (instructed by Clifford Chance) for Credit Suisse First Boston.
(Delivered by Evans LJ)
This is the judgment of the court to which all members have made substantial contributions.
1. In these two appeals the appellant, as successor in title to the plaintiff below, Macmillan Inc (“Macmillan”), appeals against so...
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