FEDERAL COURT OF AUSTRALIA

Imobilari Pty Ltd v Opes Prime Stockbroking Ltd [2008] FCA 1920

PRACTICE AND PROCEDURE – differences between strike-out and summary judgment – test to be applied – defective pleadings – discovery in aid – whether permissible

TRUSTS AND TRUSTEES – constructive trust – Barnes v Addy knowing receipt claim – necessary elements – requisite state of knowledge – declaration of trust – whether substantial shareholder notice amounts to declaration

Corporations Act 2001 (Cth) ss 602, 671B, 671C, 672B, 672F

Federal Court of Australia Act 1976 (Cth) s 31A

Federal Court Rules O 11 r 16


Baden v Societe Generale pour Favouriser le Development du Commerce et de l’Industrie en France SA [1993] 1 WLR 509
Barnes v Addy (1874) LR 9 Ch App 244
Bell-Atlantic Corp v Twombly (2007) 550 US 544
Bioprospect 01 [2008] ATP 8
Bioprospect 02 [2008] ATP 6
Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 70 IPR 146
Bristol and West Building Society v Mothew [1998] Ch 1
Ceneavenue Pty Ltd v Martin [2008] SASC 158
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371
Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R 232
Dey v Victorian Railway Commissioners (1949) 78 CLR 62
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125
Giumelli v Giumelli (1999) 196 CLR 101
Goldstein v MCI Worldcom 340 F3d 238 (5th Cir 2003)
Gray v Morris [2004] 2 Qd R 118
Hancock Family Memorial Foundation Ltd v Porteous (1999) 32 ACSR 124
Jefferson Ford Pty Ltd v Ford Motor Company of Australia Limited (2008) 167 FCR 372
Johnson Tiles Pty Ltd v Esso Australia Ltd (No 2) (2000) 97 FCR 175
Johnson v GEICO Casualty Co 516 FSupp2d 351 (DDel 2007)
Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557
Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16
Lonrho Plc v Fayed (No 2) [1992] 1 WLR 1
Luck; Re (2003) 203 ALR 1
Muschinski v Dodds (1985) 160 CLR 583
Newton v Merrill Lynch, Pierce, Fenner & Smith 259 F3d 154 (3d Cir 2001)
O’Sullivan v Parkin (2008) 169 FCR 283
Parsons v McBain (2001) 109 FCR 120
Pascoe v Boensch [2008] FCAFC 147
Pothuwila v Minister for Immigration and Citizenship [2008] FCA 1626
Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1
Schlesinger Investment Partnership v Fluor Corporation 671 F2d 739 (2d Cir 1982)
Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201
Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ACSR 285
Swain v Hillman [2001] 1 All ER 91
Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1
Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550
Weiss v Regal Collections 385 F3d 337 (3d Cir 2004)
White Industries Aust Ltd v Federal Commissioner of Taxation (2007) 160 FCR 298
Wickstead v Browne (1992) 30 NSWLR 1
Yorke v Lucas (1985) 158 CLR 661


7B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1785.3 (1969)  

IMOBILARI PTY LIMITED (ACN 091 464 729) v OPES PRIME STOCKBROKING LIMITED (in liquidation) (RECEIVERS & MANAGERS APPOINTED) (ACN 086 294 028), AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522), ANZ NOMINEES LIMITED (ACN 005 357 568) and MERRILL LYNCH INTERNATIONAL (AUSTRALIA) LTD (ACN 002 892 846)

VID 395 of 2008

FINKELSTEIN J

17 DECEMBER 2008

MELBOURNE

THE COURT ORDERS THAT:

1.                  The second and fourth respondents bring in short minutes of orders to give effect to these reasons by 4.15 pm on 23 December 2008.

2.                  Any submission by any party as to costs should be in writing and filed and served by 4.15 pm on 23 December 2008.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                     Imobilari Pty Limited commenced a class action on behalf of a group of investors against the failed stockbrokerage Opes Prime Stockbroking Limited and its financier banks Australia and New Zealand Banking Group Limited and Merrill Lynch International (Australia) Ltd.  The basic facts are well known.  The statement of claim alleges, based on various equitable, statutory and common law grounds, that the banks are legally liable for the allegedly misleading conduct engaged in by Opes in connection with share lending transactions it entered into with investors. 

2                     Opes itself is currently in liquidation and leave to proceed against it has not been sought.  The company is plainly insolvent and the liquidator is unlikely to recover assets that will discharge any significant proportion of the company’s debts, although there are likely to be some assets that investors will wish to pursue.  However, the substantive action, as a commercial reality, involves the claims against the banks. 

3                     The banks seek to have the claims against them either struck out pursuant to O 11 r 16 of the Federal Court Rules or summarily dismissed pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth).  Both provisions are procedural vehicles for the summary resolution of claims, in the former case without a trial.  Moreover, under both procedures the court may be called upon to consider and resolve questions, even important ones, of law.  Nonetheless, there are significant differences between motions for strike out and summary judgment that are sometimes overlooked.  It is therefore appropriate to begin with a consideration of those differences and to decide whether, in light of them, O 11 strike out or s 31A summary judgment is the proper vehicle in which to run the arguments.

4                     The fundamental thing to understand about the strike-out rule, which the language of O 11 r 16 itself makes clear, is that the rule is concerned only with the adequacy of the pleading (or to be more precise, the allegations and the causes of action asserted therein) as a matter of law.  The rule does not permit or allow consideration of facts or evidence outside the pleadings:  Dey v Victorian Railway Commissioners (1949) 78 CLR 62, 91, 109; see also General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125, 129.  Indeed, as counsel for ANZ, Mr Archibald QC, correctly noted in his submissions, the court must, for purposes of deciding the strike-out motion and deciding whether a pleading discloses a reasonable cause of action, assume the truth of the allegations in the statement of claim and draw all inferences in favour of the non-moving party because the question is whether those allegations, even if proved, cannot succeed as a matter of law:  General Steel 112 CLR at 129.

5                     The United States Supreme Court recently reexamined the standard for a strike-out motion (called a motion to dismiss in the US) in Bell-Atlantic Corp v Twombly (2007) 550 US 544.  The Supreme Court reaffirmed that on a strike-out motion the court is required to assume the truth of all allegations.  Proceeding on that assumption, the Supreme Court held the only question is whether the allegations are enough to raise the applicant’s right to relief above the speculative level.  That is, the allegations must be plausible enough to create a reasonable expectation that discovery will reveal evidence to support the claim.  This plausibility test is consistent with the strike-out test expressed by the High Court in General Steel, where Barwick CJ said (112 CLR at 129):

“The test to be applied has been variously expressed; ‘so obviously untenable that it cannot possibly succeed’; ‘manifestly groundless’; ‘so manifestly faulty that it does not admit of argument’; ‘discloses a case which the Court is satisfied cannot succeed’; ‘under no possibility can there be a good cause of action’; ‘be manifest that to allow them’ (the pleadings) ‘to stand would involve useless expense’….  At times the test has been put as high as saying that the case must be so plain and obvious that the court can say at once that the statement of claim, even if proved, cannot succeed; or ‘so manifest on the view of the pleadings, merely reading through them, that it is a case that does not admit of reasonable argument’; ‘so to speak apparent at a glance’.”

6                     In contrast, a s 31A application not only permits, but requires, a consideration of matters outside the pleadings:  Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd (2006) 70 IPR 146 at [37].  The application is, after all, a trial albeit a summary trial.  In White Industries Aust Ltd v Federal Commissioner of Taxation (2007) 160 FCR 298 at [50], Lindgren J said that s 31A “is concerned with the bringing and defending of proceedings, not just with pleadings; with substance, not just with form”.  That is to say, the “no reasonable prospect of success” standard is designed to test the adequacy of the evidence in support of the allegations, not just the allegations themselves.  At the same time, it is important to understand that the court in deciding a motion for summary judgment does not, in testing that evidence, find any facts; rather, the court determines, as a matter of law, whether there are any facts that need to be found such that a trial is required:  Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1, 282.  To put the point another way (ie in language that perhaps had more resonance in the days when juries were still used in civil cases), the court determines whether there is a real or genuine dispute as to any material fact – whether any reasonable juror could find for the non-moving party on one or more of those material factual issues:  Boston Commercial 70 IPR 146 at [43].  If the answer to this question of law is no, then the judge can and must take the case from the jury and enter judgment accordingly. 

7                     Precisely what the summary judgment standard now is and how high (or low) the bar is in light of the reforms ushered in by s 31A was recently a matter of lengthy consideration, and no little dispute, in the Full Court, of which I was a member, in Jefferson Ford Pty Ltd v Ford Motor Company of Australia Limited (2008) 167 FCR 372.  One point that clearly emerges from the earlier cases is that the “no reasonable prospect” standard needs no amplification:  see eg Swain v Hillman [2001] 1 All ER 91, 92; Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R 232 at [13]-[14]; Gray v Morris [2004] 2 Qd R 118 at [12]-[13], [46]; Ceneavenue Pty Ltd v Martin [2008] SASC 158 at [81].  The other point that emerges is that it is easier to obtain summary judgment than strike-out because the moving party on a summary judgment application need only show that there is no real dispute of material fact, not that the allegations are implausible or admit of no reasonable argument.  Indeed, the summary judgment inquiry does not turn on the pleadings at all because the truth of the pleaded allegations is no longer assumed.  Instead, the court must look at the evidence to see if it discloses a cause of action or defence, or whether there is any ambiguity, contradiction, or other divergence with respect to a material fact such as to require a full trial.

8                     Returning to Jefferson Ford, there is one last matter that requires mention in the present context.  It has long been settled law that a judgment in respect of a strike-out motion, regardless of in whose favour made and regardless of whether it is on all or less than all claims, is an interlocutory order from which no appeal may be taken without leave:  Re Luck (2003) 203 ALR 1, 4.  With respect to summary judgment, in contrast, what emerges from the fractured reasons for decision in Jefferson Ford is a majority view that, in some cases, an order granting summary judgment is final and appellable as of right.

9                     Some explanation is in order, as recent cases have demonstrated that there may be confusion as to the Court’s holding:  see eg Pothuwila v Minister for Immigration and Citizenship [2008] FCA 1626 at [6], where it was said, incorrectly, that the holding in Jefferson Ford was that an order granting summary judgment on all claims is interlocutory.  My view in Jefferson Ford was that an order granting summary judgment, regardless of whether made against less than all parties or on less than all claims, is always final.  Rares J took the opposite view, stating that an order granting summary judgment is never final.  Gordon J, on the other hand, took a middle position to the effect that an order granting summary judgment is final if it disposes of all claims against all parties.  In effect, then, there was a two-judge majority of Gordon J and myself for the proposition that orders granting summary judgment on all claims against all parties are final, and a two-judge majority of Rares and Gordon JJ for the proposition that orders granting summary judgment on less than all claims or against less than all parties are interlocutory. 

10                  The relevance of this to our contrast of strike-out and summary judgment is that the view has now crystallized that, in addition to the principal difference that strike-out deals with the pleadings and summary judgment goes beyond them, there is also the difference that summary judgment, at least in some cases, is considered a final judgment appellable as of right while a strike-out order never is.  In the instant case, that difference does not matter because the motion, even if dealt with under s 31A, would be interlocutory in that, even if successful, it would result in the disposition of less than all claims against all parties (at a minimum, certain claims against Opes would remain).  In other cases, however, the distinction may have important consequences, such as whether principles of res judicata or issue estoppel will apply, whether a party may apply for further relief on the same cause, or whether a judgment can be immediately executed.

11                  Coming back now to the instant motion and applying the foregoing principles, it is clear that the motion is properly considered under the strike-out rule, not s 31A.  First, not only was the Court not asked to go beyond the pleadings and consider the evidence, there is in fact no evidence yet before the Court to consider—the notice of motion was filed on 19 August 2008, only two weeks after the filing of the applicant’s amended statement of claim and prior to any discovery.  Second, as both the oral and written submissions make clear, the principal point of the banks’ argument (I put to one side for the moment secondary arguments that the pleading as it currently stands is insufficiently particularized or confusingly drafted) is that the applicant cannot (even if leave to amend or take discovery is granted) state a cause of action as a matter of law, either because the asserted causes are not known to the law or contain an element or elements which the applicant cannot satisfy.  Whether this is so is something I will consider with respect to the causes of action pleaded against the banks.

12                  Before undertaking that task, however, it is helpful to state at a more general level the two principal bases upon which liability is asserted against the banks.  The first is an equitable basis for recipient liability based on Barnes v Addy (1874) LR 9 Ch App 244.  The second is the statutory basis of secondary liability under s 75B of the Trade Practices Act 1974 (Cth) or s 79 of the Corporations Act 2001 (Cth).  That is to say, the causes of action against ANZ and Merrill Lynch are founded not on any allegations of direct wrongdoing on their part (with one exception to which I will come presently) but instead their alleged responsibility for the misconduct of Opes.  Given that the precise level of scienter and conduct required to establish the banks’ liability under either of these bases is a matter of some dispute, it would not be out of place to review those requirements now.

13                  To establish secondary liability under the TPA or Corporations Act, it is settled that in order for a defendant to be “knowingly concerned” in another party’s wrongdoing, actual knowledge of the essential facts is required:  Yorke v Lucas (1985) 158 CLR 661, 667-71; Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [9].  With respect to conduct, the defendant must have done some positive act amounting to participation:  Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201, 207-8.  The underlying claim put by the investors against Opes in which the banks are said to have been knowingly concerned is misleading and deceptive conduct under s 52 of the TPA, s 1041H of Corporations Act or alternatively s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth), on the basis that Opes made misleading representations to the investors that they retained the beneficial interests in loaned shares.  Notably, the investors will claim only damages in respect of this cause of action, not the return of any shares still held by the banks. 

14                  In defending this motion, the applicant now concedes that s 52 of the TPA does not apply to claims of misleading conduct in relation to financial services and has offered to withdraw that portion of the claim.  The banks do not otherwise challenge the propriety of the underlying claim as pleaded against Opes, so its validity as against the banks stands or falls based on the adequacy of the allegations of the banks’ involvement in the alleged misrepresentations.

15                  For a knowing receipt claim under Barnes v Addy, there are three elements:  (1) receipt by the defendant of (2) trust property with (3) knowledge of the facts that (a) the property was trust property and (b) receipt was pursuant to a breach of fiduciary duty or misapplication of the property:  Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ACSR 285 at [54]-[60] and especially [55].  The banks attack both the second and third elements.  The second element of course depends on whether there was a trust over the loaned shares in the first place.  The applicant’s claim for the existence of a trust is founded in various causes of action:  (1) an equity of redemption based on the allegation that the investors mortgaged rather than sold their securities to Opes; (2) a claim for rescission based on the argument that the investors entered into the securities lending agreements with Opes under the unilateral mistake that they were mortgaging rather than selling the shares; (3) breach of express trust, on the basis that Opes made representations reflecting an intent by Opes to hold the shares on trust for the investors; (4) estoppel, based on the allegation that Opes made representations that the investors remained the beneficial owners of the shares and the investors relied on those representations to their detriment; and (5) breach of fiduciary duty, based on the allegation that Opes had a conflict of interest arising from its on-lending relationship with the banks (pursuant to which it wished to place the investors’ shares in jeopardy) giving rise to a fiduciary duty to disclose to the investors the true nature of the share lending transaction.

16                  The banks argue that the claims are bad as a matter of law and that, even if some or all of the claims are good as against Opes, they cannot have given rise at the relevant time (ie the time of transfer of the securities from Opes to the banks) to a trust such as would make the shares trust property for purposes of a knowing receipt claim.  For example, they argue that an equity of redemption, even if it is found to exist, is simply a free-standing equitable interest having nothing to do with trusts.  If that is so, then the success of the mortgage claim against Opes would not make the shares trust property and the second element of the knowing receipt claim could not be made out.  Similarly, the banks argue that rescission, even if granted, would not necessarily lead to the imposition of a (retrospective) constructive trust.  (The same point is taken in exception to the estoppel claim.)   In each case, therefore, the banks argue that at best (from the investors’ point of view) there would be an ordinary priorities conflict between the interests of the banks and the investors which would be resolved in the banks’ favour unless the investors could establish that the banks were not bona fide purchasers for value who took without notice of the prior interests.

17                  As the foregoing description suggests, there are various interesting questions regarding the nature of a constructive trust and when it can be said to arise (ie does it come into existence only upon a curial declaration or can it, at least in some circumstances, be said to have retrospective effect?).  The banks argue that even if some or all of the investors’ claims against Opes are made good and result in the imposition of the trust, that trust cannot be said to have had retrospective existence such that the transferred securities were trust property at the time the banks received them.  If that is so, then, again, the investors could not establish the second element of a knowing receipt claim. 

18                  As Gibbs CJ noted in Muschinski v Dodds (1985) 160 CLR 583, 595, the law of constructive trusts in this country is “ill-defined” (for my part, I would call it a mess).  A brief survey of the leading Anglo-Australian cases discloses apparent inconsistencies that are not easily synthesized.  For example, in Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371, 387-90, Brennan J said that a recipient of property pursuant to a contract the product of fraudulent misrepresentation does not become a constructive trustee until the transferor elects to avoid the contract (approved in Lonrho Plc v Fayed (No 2) [1992] 1 WLR 1, 11-12).  Similarly, in Bristol and West Building Society v Mothew [1998] Ch 1, 23, Millett LJ said that for tracing purposes equitable title does not revest retrospectively on rescission to cause application of trust property that was then proper to be treated as a breach of trust.  In Giumelli v Giumelli (1999) 196 CLR 101, 112, in a joint judgment, Gleeson CJ, McHugh, Gummow and Callinnan JJ said that a remedial constructive trust does not necessarily carry with it all of the fiduciary obligations of an express trust and can simply be akin to an order to convey identified property back to another.  Those cases may be compared with Muschinski v Dodds (1985) 160 CLR 583, 614, where Deane J said that “there does not need to have been a curial declaration or order before equity will recognize the prior existence of a constructive trust”.  See also Parsons v McBain (2001) 109 FCR 120, which held that a common intention constructive trust exists prior to any curial declaration.

19                  While I do not consider it beyond the court’s power on a strike-out motion to resolve the constructive trust and other legal issues relating to the viability of the claims against Opes, I do not think it is necessary or appropriate in the circumstances.  The rule is that where a court determines on a strike-out motion that certain claims ought proceed, it will “hesitate before [striking out another claim] notwithstanding that the legal basis for it may be doubtful or problematic in circumstances where the court will nevertheless be required to hear and determine substantially the same factual matters in respect of the remaining cause of action”:  Johnson Tiles Pty Ltd v Esso Australia Ltd (No 2) (2000) 97 FCR 175 at [4], citing Wickstead v Browne (1992) 30 NSWLR 1, 5-6, affirmed (1993) 10 Leg Rep SL 2.  Here, all of the applicant’s claims, however formulated legally, essentially boil down to this:  Opes misled it into believing that it was opening a margin lending account (ie entering into share mortgage transactions where it retained beneficial ownership) rather than securities lending accounts (ie entering into straight sales of shares where it gave up all ownership interests), and the banks both knew (or ought to have known) that it was being misled and actively went along with it.  As the structure of the pleading explicitly demonstrates (it starts by setting out alleged representations and conduct and then each claim refers back to, and incorporates by reference, those same representations and conduct), each cause of action raises substantially the same factual matters—namely, the alleged conduct and misrepresentations of Opes as relating to ownership of the loaned shares, and the banks’ involvement in them. 

20                  Given that the applicant’s claims against Opes will inevitably proceed, I see no practical advantage to be gained at present by undertaking a detailed consideration of the claims against the banks.  It does not appear that, even if some of those claims were struck out, it would substantially shorten the trial or limit the amount of discovery required.  Moreover, the ultimate relevance of the various trust arguments is far from clear.  It appears that most, if not all, of the shares on-lent by Opes to the banks have now been sold on the open market to bona fide purchasers for value and are probably incapable of being traced.  Unless the banks or Opes happen to have some equivalent shares to which a trust, remedial or otherwise, might attach, it appears likely that the best the investors will be able to do in terms of relief, if successful, is to recover damages.  Or perhaps the facts and equities of the case will suggest that some equitable remedy short of a constructive trust is more appropriate.  In the circumstances, I consider that many of the thorny legal questions raised by the banks may well prove to be superfluous or moot in the end.  At a minimum, I think a proper resolution of any difficult questions of law that remain can only benefit from further factual development and refinement.

21                  There is one exception to this.  In my view, the applicant’s trust claim based on the filing of, and failure to file, substantial shareholding notices is clearly bad as a matter of law and should be struck out without further delay.  Specifically, the applicant alleges that the banks failed to lodge notices, pursuant to s 671B of the Corporations Act, that they were substantial shareholders (ie held more than 5% of the shares) of certain of the companies whose stock was lent by the investors to Opes and then on-lent by Opes to the banks.  The applicant also alleges that ANZ Nominees and Opes itself failed to make disclosures of (and thereby effectively disclaimed) their interests in the shares pursuant to s 672B of the Corporations Act. 

22                  Backtracking for a moment, the banks claim that, pursuant to the securities lending agreements between them and Opes, they received full legal and beneficial ownership of the shares they received from Opes.  The applicant, however, says that the failure to lodge substantial shareholding notices shows that, at least contemporaneously, the banks “conducted themselves and believed” that Opes or the investors as the case may be, rather than the banks or Opes, were the true legal or beneficial owners of the shares and therefore the banks were not required to file notices.  It also alleges, in the case of the s 672B notices, that the statements in them to the effect that the filer held no beneficial interest in the shares amounted to declarations of trust.

23                  This is a very curious way of pleading for several reasons.  It is curious, first, because there is no attempt to state a claim under ss 671C and 672F of the Corporations Act.  Those provisions state that a person whose failure to file a notice properly identifying the person’s interest in shares causes another person loss or damage is liable to that other person.  Whether those sections would give rise to a cause of action in the present circumstances (assuming that the banks were not exempt from the notice requirements) is an interesting question—the plain language might suggest that the answer is yes, but it might also be said that the plain language must be read down in light of the statutory purpose, which is to ensure that the acquisition of corporate control takes place in an informed market and other shareholders have a reasonable opportunity to participate in the benefits accruing under any such acquisition or takeover proposal:  Corporations Act, s 602.  There is a decent argument that, rather than creating open-ended statutory torts, ss 671C and 672F are, instead, intended only to compensate for damages arising out of a change in corporate control and thus would not provide a vehicle for the recovery of the investors’ losses here, where the banks and Opes did not seek to assert voting control or deprive the investors of benefits relating to an acquisition of a controlling interest:  see Bioprospect 01 [2008] ATP 8 and Bioprospect 02 [2008] ATP 6, where the Australian Takeovers Panel suggested that the appropriate course in such circumstances was simply for the banks to sell off their shares (which they were of course minded to do anyway).

24                  However that may be, the applicant has not in fact attempted to plead a statutory tort under ss 671C and 672F and so I need not consider the issue further.  What the applicant has instead pled is a declaration of trust which fails as a matter of law.  That is to say, the applicant alleges that by omitting to file substantial shareholder notices or by filing disclosures in which it was stated that Opes or the investors held the beneficial interest, the banks (and Opes) effectively disclaimed any beneficial interest in the shares and effectively declared, by implication, that they held the shares on trust for the investors. 

25                  I will spare the reader a tedious recitation of the authorities setting out the three certainties—that is, the three required elements—of an express trust (intent, object of the trust, and beneficiary):  see generally Pascoe v Boensch [2008] FCAFC 147.  Suffice it to say that the argument fails because the applicant cannot, taking all pleaded allegations as true, discharge the onus of establishing, through these notices, that the banks or Opes held the contemporaneous intention of creating a trust.  The problem is that, at their highest, the notices contain only statements of fact as to interests already held; they do not manifest an intent to create a new interest.

26                  That is not to say that the filing of, or failure to file, ss 671B and 672B notices has no relevance at all.  While such conduct cannot in itself serve as the basis for a claim, it may well be that, in connection with other facts, facts relating to the notices support an inference of contemporaneous knowledge on the part of Opes or the banks of beneficial interests in the shares already held by the investors.  On the other hand, the banks or Opes might lead evidence that they filed (or omitted to file) notices out of inadvertence, in the belief that they were exempt from filing notices where shares were obtained pursuant to securities lending agreements, or for some other reason unrelated to any knowledge of a beneficial interest purportedly retained by the investors.  Again, care must be taken to distinguish between acknowledgement of an interest already held by, or created in favour of, another (which is what the notices might be evidence of) and the present intent to create such an interest (which is what the investors effectively contend that the notices evince).  Accordingly, that part of the pleading alleging a declaration of trust in respect of the statutory notices must be struck out.

27                  It is convenient now to move to the question of knowledge.  As noted earlier, actual knowledge is required to establish secondary liability in respect of the statutory claims.  Precisely what constitutes knowledge for purposes of a Barnes v Addy knowing receipt claim has not been explicitly settled by the High Court, but I consider that the cases establish that it is sufficient to plead and prove knowledge of facts that would put an honest and reasonable person on notice (but not merely inquiry) of a real and not remote risk that the transfer was in breach of trust or fiduciary duty or involved the misapplication of trust property:  Kalls Enterprises Pty Ltd (in liq) v Baloglow (2007) 63 ACSR 557 at [199]; Spangaro at [60]; see also Baden v Societe Generale pour Favouriser le Development du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, 575-76; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [148]-[158]; Hancock Family Memorial Foundation Ltd v Porteous (1999) 32 ACSR 124 at [79]; Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16, 85 and 105.

28                  However, what that formulation means is itself debatable.  As I noted in Spangaro (at [58]), the proliferation and refinement of various categories of “knowledge” in this area of the law is unhelpful at best.  In my view, it would be simpler to adopt a uniform approach to Barnes v Addy scienter based on the standard categories of mens rea (in descending order):  (1) intent; (2) actual knowledge; (3) recklessness (which I would define in these circumstances as a conscious disregard of a substantial and unjustifiable risk that the property was subject to a trust and was received pursuant to a breach of trust or of fiduciary duty or a misapplication of trust property); (4) negligence (here, a failure to perceive a substantial and unjustifiable risk that the property was so received); and (5) strict liability.  Categories (1) and (2) are self-explanatory and clearly sufficient to establish liability; it is also now clear, after Say-Dee, that strict liability (ie an unconscionability or unjust enrichment approach) is not applicable.  There is a bit more difficulty with categories (3) and (4), but I think it is also safe to say that negligence is out.  In Say-Dee, the High Court suggested (at [175]-[178]) that the fifth Baden category (knowledge of facts sufficient to put an honest and reasonable person on inquiry) would not suffice to establish Barnes v Addy liability in Australia.  To my mind, the rejection of a duty of inquiry is effectively the rejection of a negligence standard. 

29                  On the other hand, the notice standard (Baden category four, which was approved in Say-Dee)—particularly as formulated in Kalls in terms of real and not remote risk—closely dovetails with the standard formulation of recklessness.  This view is supported by a contrast with the next category up in the Baden hierarchy.  The third Baden category of scienter is described as wilful and reckless failure to make such inquiries as an honest and reasonable person would make.  To the extent this formula has any cogency (no doubt “wilful and reckless” must be treated as a term of art to be read as a unit; but as a matter of plain language, I have always found it difficult to understand how something can be both wilful and reckless except to the extent that the greater [wilfulness] might include the lesser [recklessness], in which case the lesser is superfluous), it must mean something like “recklessness plus.”  That is, it must amount to something more than ordinary recklessness but less than “wilful blindness,” which is the second Baden category.  

30                  Again, one might justifiably question whether even the trained legal mind is capable of making such fine distinctions (and even if so, whether there is any utility in making them).  But putting that quibble to one side and accepting the third Baden category as “recklessness plus,” it then suggests that the next category down must be ordinary recklessness.  If that is right, then I think this area of the law would be much improved if all the various categories were abolished and replaced with the simple rule that knowing receipt will be established where the plaintiff shows that the defendant acted recklessly (at a minimum—of course any greater showing of culpability would suffice as well) in receiving trust property that was misapplied or transferred in a breach of trust or fiduciary duty.

31                  But whether the minimum mental element required is formulated as recklessness or “knowledge of circumstances which would indicate to an honest and reasonable person that the property received is trust property transferred in breach of trust” or in some other manner, the submission put by the banks in the present case is that the applicant has not pleaded, and cannot plead, facts sufficient to establish the requisite level of knowledge.  I accept the first part of that submission but not (at least at this point) the second. 

32                  The amended statement of claim in its current form does not plead facts giving rise to an inference of recklessness (for the Barnes v Addy claims), actual knowledge (for the statutory claims) or notice sufficient to preserve an equity of redemption or other equitable interest not giving rise to a trust against the claim by the bankers that they are bona fide purchasers for value.  The amended statement of claim relevantly alleges only that the banks had “notice or constructive notice” of the prior interests of the applicant and the other investors.  The sparse particulars alleged in support of this allegation are that:  (1) the Financial Services Guide (FSG) provided by Opes to the investors (and available to the banks) contained the ANZ logo, stated that ANZ was the custodian bank and that the investors retained a beneficial interest in shares transferred to Opes; (2) the Opes website, which also contained statements to the effect that the investors retained a beneficial interest in shares transferred to Opes, was “freely available” to the banks; and (3) the scale of lending and borrowing activities between the banks and Opes was such that the banks should have conducted appropriate due diligence on Opes, including a consideration of the Opes website and FSG.

33                  Even assuming these allegations to be true, and drawing all inferences favourable to the applicant, there is no suggestion that the banks had actual knowledge or notice of any allegedly wrongful conduct by Opes or prior interests of the investors in the on-lent shares.  Therefore, the statutory claims and any claims that the banks’ interests in the shares should be subordinated or postponed because they took with notice of the investors’ interests would fail.  At best, the allegations would establish that the banks had knowledge of circumstances that would have put an honest and reasonable person on inquiry.  Or, to put it another way, the banks were negligent in failing to keep aware of what Opes was up to.  The problem, of course, is that the fifth Baden category will not assist the investors and thus the knowing receipt claims would not be made out either.

34                  But while the applicant’s pleading as currently drafted fails to state a claim against the banks, that is not the end of the inquiry.  In the amended statement of claim, the applicant promises to provide further particulars of the banks’ scienter after discovery.  The real question, as I suggested to counsel for the banks at the hearing of the motion, is whether the applicant should be permitted to take that discovery and then replead.  The banks said no, on the basis that if the applicant did not have a sufficient basis for pleading its case the proper course was for it to have sought pre-action discovery under O 15A.  The banks argued that the failure to take this step meant that the applicant should not now be allowed to make a belated fishing expedition.

35                  In effect, the banks submitted that there exists (or should exist) a rule that an applicant pleading fraud or related claims that require particularization of scienter gets only one bite at the pleading apple.  I cannot accept this submission.  For my part, I can see no reason to distinguish between a situation where a party seeks discovery and then brings an action and a situation where a party brings an action and then seeks discovery.  There might, I suppose, be a case for making a costs order against an applicant who rushes to court with a hastily drafted pleading containing obscure and unsupported allegations.  But if a party can state a claim that, while deficient, is not wholly speculative or otherwise an abuse of process, why should it matter that he or she has not sought discovery first?  If anything, the existence of the first pleading will likely assist the court and the parties in tailoring discovery in a way that pre-action discovery, where there is no pleading to focus the process, could not.

36                  Not only did the banks cite no authority in support of the proposition that pre-action discovery is mandatory, such a view would conflict with established principles that leave to amend pleadings should be freely granted and that the threshold for obtaining discovery subsequent to the filing of an action is not high.  Although speaking in the context of discovery requests in judicial review applications, the Full Court in O’Sullivan v Parkin (2008) 169 FCR 283 recently undertook a survey of the case law on when discovery will be permitted.  The basic principle that emerges is that whether it is appropriate to make a discovery order will depend on the nature of the case and the stage of the proceedings.

37                  On this point, the applicant submits that the nature of a class action claim for secondary liability for misrepresentations is such that the evidence of a corporate respondent’s knowledge is likely to be obtainable only upon discovery because, by definition, the investors did not transact directly with the banks.  Not having done business directly with the banks, the applicant argues that it cannot be expected to provide evidence of the banks’ knowledge without discovery:  see eg Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550, 553 (stating that it is commonplace for actions against companies to depend upon documentary evidence without discovery of which it will be impossible for the applicants to prove their case).   Indeed, it is still the case in the US, where the Private Securities Litigation Reform Act 1995 imposed strict limitations on discovery in securities class actions, for a complaint to be filed, struck out for insufficient particulars of scienter, and leave given to replead after discovery:  see eg Goldstein v MCI Worldcom 340 F3d 238, 256-58 (5th Cir 2003) (rejecting the proposition that scienter must be properly pled on the first go-round); Schlesinger Investment Partnership v Fluor Corporation 671 F2d 739 (2d Cir 1982) (granting leave to replead scienter after discovery); see also Bell-Atlantic Corp v Twombly (2007) 550 US 544 (acknowledging in a class action that the court should be cautious in dismissing an antitrust complaint before discovery and stating that the complaint need only plead enough “fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement”).

38                  In short, this is not a “fishing expedition” where there are only bare allegations unsupported by a “tittle” of evidence.  The applicant has, even at this early stage of the case, pled particulars that would support a negligence claim.  It is not an overly speculative leap from the proposition that the banks “should have made due diligence inquiries” to the conclusion that, perhaps, the banks did make such inquiries from which they would have found out (through readily available materials such as the FSG and website materials) what Opes was representing to investors.  In those circumstances, I consider that enough has been shown to ground a suspicion that the investors have a “good case proof of which is likely to be aided by discovery.”

39                  I should note before concluding that the banks go on to allege a number of other ways in which the applicant’s amended statement of claim is deficient.  Many of these additional purported defects can be grouped together under the heading “class action deficiency” problems.  For example, Merrill Lynch submits that the pleading is defective because it does not properly disclose whether there are in fact at least seven class members who have claims against Merrill Lynch.  Similarly, Merrill Lynch complains that the amended statement of claim does not properly plead which shares, if any, were on-lent to it (as opposed to ANZ or some other party) by Opes.  There is a second group of additional complaints that can be grouped under the heading “technical” problems (these are the complaints of insufficient particularization and confusing drafting that I put to one side earlier).  For example, the banks complain that it is not clear whether certain claims are pleaded in the alternative.

40                  Given that I have already decided that the amended statement of claim must be repleaded, I think it would be a waste of time to rule on these, and other, remaining points.  First, I consider it likely that, with the benefit of discovery and the complaints that the banks have now made, as well as these reasons for decision, the amended pleading will be in a significantly different form.  The appropriate course is to allow the banks time to consider any further amended statement of claim and then bring a renewed strike-out motion if they are so advised. 

41                  Second, as to the class action issues, I think postponing them until after discovery is the better course as well.  If it emerges that the applicant still cannot plead knowledge, the class action issues will become moot.  Moreover, it is only with the benefit of discovery that the parties and the court will be properly positioned to assess whether there are common questions such as to justify the continuation of the proceeding in its present form:  see eg Johnson v GEICO Casualty Co 516 FSupp2d 351, 357 (DDel 2007) (declining to hear arguments relating to class certification in connection with a motion to dismiss and postponing their consideration until class certification proceedings to be conducted after discovery); see also Weiss v Regal Collections 385 F3d 337, 347 (3d Cir 2004) (stating that federal courts do not “require or encourage premature certification determinations”); Newton v Merrill Lynch, Pierce, Fenner & Smith 259 F3d 154, 166 (3d Cir 2001) (noting that issues related to class certification should be considered separately from strike-out issues because it may be necessary to go behind the pleadings to determine whether an action should proceed on a class basis); 7B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1785.3 (1969) (“[C]ourts frequently have ruled that discovery relating to the issue whether a class action is appropriate needs to be undertaken before deciding whether to allow the action to proceed on a class basis.”). 

42                  For example, it will likely turn out that there are some investors whose shares went to only one of the banks, some whose shares went to none of the banks, and some whose shares went to both.  It may also turn out, after discovery, that the banks had differing levels of knowledge or that they had knowledge only in respect of Opes’ transactions with particular investors.  Further, suppose that one bank makes a settlement offer but not the other.  In short, it is neither possible nor desirable at this stage to determine whether the creation of subclasses might be necessary due to divergence or adversity of interest between class members or whether decertification under s 33N of the Federal Court Act might be in the interests of justice because any common questions are ultimately outweighed by issues of particular representations or agreements made by Opes to particular investors and particularized knowledge of the banks in respect of particular investors or Opes transactions.

43                  The immediate consequence of these reasons is that there will be orders for the current statement of claim to be struck out with leave to file and serve a further amended statement of claim.  I will hear the parties as to the further orders that should be made in consequence of these reasons, including orders and timetables for discovery.  I will also hear submissions on the question of costs, although my present view is that the applicant should pay the banks’ costs of the motion.

Associate:

Dated:         17 December 2008