Category Archives: courts

Opes investors fail at first hurdle

I know that some people have lost a lot of money through the collapse of Opes Prime, so it seems a bit ghoulish to be fascinated by it – but there you have it, I can’t help myself – I’m fascinated. There are so many interesting equitable and property law questions raised by it (tracing, equitable mortgages, mere equities, trusts in undifferentiated property), not to mention corporate governance issues. Some of my favourite topics!

Anyway, I saw yesterday that Finkelstein J of the Federal Court had handed down an important judgment from the point of view of investors seeking to reclaim their shares (Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Limited [2008] FCA 594).

I should explain briefly how the Opes Prime arrangement worked before getting into the judgment. Investors “loaned” their shares to Opes Prime in return for a cash advance. As a term of the Securities Lending Agreement (SLA), Opes promised that when the money advanced to the investor was repaid to it, Opes would redeliver shares to the investor which were equivalent in number and type to those originally provided. The value of the cash advance supplied was less than the value of the shares provided to Opes. The difference between the value of the cash advance and the value of the shares is referred to as the “margin”. Problems occur if the value of the shares fall below the value of the cash originally advanced to the investor, because then the value of the security is less than the value of the loan, and will not be sufficient to recompense Opes if the investor does not pay it back. In those circumstances, a “margin call” should be made to the investor, whereby the investor is required to “top up” the amount of shares provided so that the value of the shares is again greater than the value of the cash. One of the issues seems to have been that margin calls were not made when they should have been made to certain significant and substantial investors. And of course, the general stock market slump contributed to the drop in value of the shares beyond the margin.

As Finkelstein J notes at [9]:

In this case credit risk is all important. Boiled down to its essence, a party’s exposure to loss in the event of default is equal to the margin. That is to say, if the non-defaulting party is on the short side of the margin (ie the value of the assets delivered to him is less than the value of the assets provided) he will suffer a loss and, in the case of insolvency, be required to prove for the difference in the insolvency of the defaulting party.

In other words, the investors will have to pay the difference if their shares are not adequate security for the cash advances they received.

The investors are alleging that they were told by Opes that they would retain some form of ownership in their original shares. In fact, this was not true from a legal perspective (as will be discussed in greater detail below). Opes loaned the shares received from investors to its bankers, ANZ Bank (the defendant in this case) and Merrill Lynch. In return for this, Opes received cash advances, which were presumably used in part to fund the provision of cash collateral to investors. However, ANZ became aware that Opes was in financial difficulties, and appointed receivers to the firm. ANZ and Merrill Lynch commenced selling the shares that had been provided by Opes as security for its loans. Presumably this drove the value of shares even further below the margin. It was at this point that shocked investors started challenging the sales, as they had thought they retained some kind of ownership in the shares, and that it was not in ANZ’s power to sell them off.

In Beconwood, the plaintiffs claimed that they had retained a proprietary interest in the shares which they had loaned to Opes in two ways:

  1. Through an equity of redemption pursuant to a mortgage of the legal title to the shares
  2. Through an equitable charge over the shares

Both of these interests are proprietary security interests. Let me explain the equity of redemption first. In general law land, the actual title to the property is transferred to the lender, but the borrower retains the beneficial interest in the property (so he or she can live there and enjoy the property). What happens when the borrower has paid back all of her loan? It is then that the equity of redemption comes into play – it means that the lender has to transfer the legal title back to the borrower – the borrower is entitled to “redeem” her property.

An equitable charge is a little different. Legal ownership in the security property is never transferred to the lender at all – the lender merely has a right to sell off the borrower’s property if the borrower defaults.

The investor failed to make out either kind of security interest. In essence, this came down to Clause 3.4 of the SLA between Opes and the Investor, which stated as follows:

Notwithstanding the use of expressions such as “borrow”, “lend”, “Collateral”, “Margin”, “redeliver”, etc., which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, all right title and interest in and to Securities “borrowed” or “lent” and “Collateral” which one Party transfers to the other in accordance with this Agreement will pass absolutely from one Party to the other free and clear of any liens, claims, charges or encumbrances or any other interest of the Transferring Party or of any third party (other than a lien routinely imposed on all securities in a relevant clearance system) without the transferor retaining any interest or right to the transferred property, the Party obtaining such title being obliged only to redeliver Equivalent Securities or Equivalent Collateral, as the case may be. Each Transfer under this Agreement must be made so as to constitute or result in a valid and legally effective transfer of the Transferring Party’s legal and beneficial title to the recipient.

In other words, it was clearly stated in the SLA that full ownership of the shares was transferred to Opes. All that the investor was entitled to upon repayment of the cash advance was equivalent shares – not necessarily the same shares as those which were originally provided to Opes. The point to be made about shares is that they are fungible – one share is very much like another, and it doesn’t particularly matter which one you get as long as you get an equivalent back. Finkelstein J makes the point that economically speaking, the arrangement was very much like a mortgage, but legally speaking, the analysis just could not be sustained.

The plaintiff then tried to argue that there was a necessary implied term in the SLA that the investor had a charge over any shares of the equivalent type held by Opes until it received its shares back, but it also failed in this respect too.

Finkelstein J’s judgment seems correct to me. Regardless of the representations Opes may or may not have made to its clients, it is the terms of the SLA which are fundamental, and the terms are explicit that the investors do not retain an interest in the shares. Clearly the investors did not read the terms of the SLA closely enough.

Finkelstein J makes an interesting analysis of US law. It is clear that the US has been using these kind of “securities lending arrangements” for longer than Australia, and that the market in the US is highly regulated in respect of these arrangements (unlike the Australian market). Perhaps the Australian regulators need to consider instituting US-style regulation if these kind of securities lending arrangements continue in popularity.

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Filed under courts, equity, Federal Court, insolvency law, law, property, shareholders, stock exchange, USA

Jah on their side…

This article about the collapse of a legal trial against some Rastafarians cracks me up.

Apparently the five Rastas had been charged with cannabis dealing, and the trial had been running for two weeks when one of the police officers recognised a paralegal from the defence team for one of the defendants. The paralegal was said to have telephoned the police and complained about alleged drug running at the Rastafarian temple, although she denied this. What were the chances of that?

The trial descended into chaos, and the prosecution decided not to tender any further evidence. The judge decided that the defendants should be acquitted.

(Hat tip to Dave Bath at Balneus)

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Judicial activism

The common law is an interesting and organic beast. To explain: our basic system of law is judge-made law. The common law became somewhat inflexible in medieval times, and thus many litigants started appealing to the King. The King got sick of dealing with the petitions, and palmed them off to the Lord Chancellor. Eventually, the Lord Chancellor set up his own court to deal with these questions, called the Court of Chancery (the court of Equity), which dealt with cases on the basis of conscience and fairness. It was a parallel system, separate from the common law, but when the two conflicted, it was equity which prevailed over common law: Earl of Oxford’s Case (1615) Mich 13 Jac 1; 21 ER 485. The Chancery courts used an inquisitorial system rather than an adversarial system, and accordingly, cases before these courts became increasingly drawn out and inefficient, as famously portrayed by Dickens in Bleak House. Thus, the legislature decided to “fuse” the two systems by means of the Judicature Acts of 1873 and 1875. Accordingly, a judge in a “fused” court could apply both rules of equity and the common law. In all Australian States apart from New South Wales, Judicature Acts were also enacted shortly after the UK versions were enacted. New South Wales did not fuse its common law and equitable courts until 1972. Consequently, the New South Wales Equity Bar produced some fine and learned equity lawyers, but they also tended to be very conservative indeed.

Obviously, these days, legislation (enacted by Parliament) plays a very much greater role in the development of the law, but the common law and equity are still important, and still keep developing.

Why the mini lecture at the start of this post? Well, I was reading a New South Wales Court of Appeal case called Harris v Digital Pulse Pty Ltd [2003] NSWCA 10, and it raises some interesting questions about “judicial activism”. Judicial activism is a perjorative term. It is directed at judges who ignore precendent, and instead mediate a dispute in accordance with their own personal prejudices about what is appropriate social and political policy. The Mason Court of the 1980s was frequently accused of judicial activism, as it produced decisions giving rise to an implied right of political freedom of speech in the Constitution and the Mabo decision, among others.

In Harris, Heydon JA (now a judge of the High Court) had this to say about the role of creativity and the judiciary at [456] – [458]:

As to Sir George Jessel MR’s account of the development of equity in Re Hallett’s Estate, it is true that the rules of equity have changed from time to time, and true that individual Chancellors – and Masters of the Rolls, Lord Keepers and Vice Chancellors – have effected these changes. It is also true that the rules can be changed in future. But those deeds of single judges were done when there was no appellate jurisdiction in the House of Lords, or very limited access to it, at a time before modern parliamentary democracy had developed, and members of parliaments consisted largely of wealthy men who in turn supported Cabinets composed largely of aristocratic oligarchs whom it was difficult to interest in the details of private law. What individual judges did in those constitutional and forensic conditions is not a sound guide to what modern Australian courts, at least at levels below the High Court, can do. A single equity judge in the time of Sir George Jessel MR had the power, the competence, the authority and the capacity to compel acceptance from other judges which only the High Court has now, at least where the change goes beyond the application of existing principles in a new way or marginal extensions of the law.

In In re Diplock. Diplock v Wintle [1948] Ch 465 at 481-2 Lord Greene MR, Wrottesley and Evershed LJJ said of the equitable claim made in that case by next-of-kin against persons who had wrongly received the testator’s assets under an invalid bequest:

“if the claim in equity exists it must be shown to have an ancestry founded in history and in the practice and precedents of the courts administering equity jurisdiction. It is not sufficient that because we may think that the ‘justice’ of the present case requires it, we should invent such a jurisdiction for the first time.”

The defendants relied on those words. That is a sound modern approach, at least for courts below the High Court, and at least where anything more than non-radical change is involved.

Sir George Jessel MR’s judicial life coincided with the time when democracy in a modern form was beginning and the responsiveness of Parliament to social or legal ills was starting to develop. It was a time when the judiciary was small, highly skilled and united. It is now large, less skilled, and far from entirely united. For courts below the High Court to act in the manner of the single judges sitting in Chancery who made modern equity is to invite the spread of a wilderness of single instances, a proliferation of discordant and idiosyncratic opinions, and ultimately an anarchic “system” operating according to the forms, but not the realities, of law.

As I read it, his Honour is essentially saying that no judge except one who is on the High Court can develop a new doctrine of law or equity. Anything else is “judicial activism”. Lower court judges just have to apply “the law”. The judgment of the High Court in the case of Farah Constructions Pty Ltd v Saydee Pty Ltd [2007] HCA 22 displays a similar sensibility, which was one of the reasons why I suspect it was penned by Heydon J.

It is very important that like cases be decided in a like manner, otherwise unfairness could result. This is why the common law has the doctrine of stare decisis or following precedent. So if X fell off her bicycle and got compensation, and I fell of my scooter in almost identical circumstances, I would expect to be treated in much the same way as X. It would not be fair if the trial judge had an unreasoning dislike of scooters and decided that I should not get compensation because she did not like the proliferation of scooters in society. Nonetheless, if there was a “right answer” as to what the law was in every dispute, we lawyers would be out of a job. The whole point is that one can usually argue the point either way in cases which actually make it to trial.

Next point: not all cases will be exactly like a case which went before. Indeed, surely if it was exactly like a previous case, it is likely that one side’s solicitors would have advised them to settle. In the event, if the case is not quite like any previous case, the judge has to look at the cases and legislation which govern the area and decide how the law applies to this slightly different situation. The more different the situation is from anything that has gone before, the more difficult it is for the judge to decide on the basis of existing law. What a judge should do in this circumstance is develop principle in a way which is consonant with previous cases, but which also adapts to the new circumstances. In this way, the judge is not indulging in judicial activism. She is extending the law out to a new situation, but in a way which is consistent with principle.

Indeed, it could result in great inflexibility and injustice if a court cannot deviate from principle which has gone before even though the circumstances are different to anything which has gone before. This was one of the reasons why the law of equity arose: because of the failure of common law courts to adapt to changing circumstances and difficult situations created great injustice. Heydon JA’s judgment seems to me to be out of touch with the spirit and genesis of equity. Also, it may be scary for some lawyers to know this, but the law is slowly changing and developing all the time. Otherwise we would still be stuck applying some kind of medieval common law, unchanged for millennia.

Now, a very important point. What happens if I have a novel legal situation, but I cannot afford to appeal all the way to the High Court (as Heydon JA seems to think necessary)? In that circumstance, it is up to the trial judge to make the best and fairest decision that he can, and to show some creativity. We can’t all afford to take litigation up to the High Court and hire silks. (Well, I doubt if I could afford to indulge in any litigation whatsoever, but fortunately for me, that’s not an issue I’ve had to face). Obviously a trial judge cannot overrule a High Court decision, and cannot ignore law that has gone before. But I definitely think there is room for a trial judge to show creativity in a situation which is novel and does not bear any analogy to a previous case. And it should not be necessary to require litigants to go all the way to the High Court. Such a point of view is unrealistic and elitist.

Aaah. I feel much better now I’ve gotten that off my chest.

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Toddlers as witnesses

The other day, I was driving my 2 year old daughter to creche. She announced with satisfaction and great confidence from the back of the car, “One day, Mummy broke my fingers.” I saw her make an illustrative wiggle of the said fingers in the rear view mirror.

“What?” I cried with horror. “I have never done that. What are you talking about?”

“Mummy shut my fingers in the door at Nanny and Papa’s and I did cry and Nanny got bandaids for me,” she explained.

This incident is the bane of my life. About a month ago, I had started closing the door to the outside loo at Mum and Dad’s when a little Miss stuck her finger in between the hinges, and the door started to close on two of her fingers. Of course, as soon as I heard the cry, I stopped the door swinging, and although there was a little bruising, there was no blood. I was simply horrified, and also burst into tears. What was worse was that my daughter blamed me, and wouldn’t give me a kiss when she went to bed. But all was forgiven the next day when she woke up and announced, “I love you Mummy!” Or so I thought…

She keeps bringing the incident. Clearly, I am not entirely forgiven. Like her mother, she is a bit of a drama queen, and “Mummy broke my fingers” sounds far more dramatic than “Mummy accidentally bruised two of my fingers, but I was fine by the next morning.”

The moral of this story is: Never trust a two year old to recount events accurately.

I couldn’t help thinking of this when I read of a legal bid for a toddler to give evidence at a murder trial. Apparently, half way through the trial, it became apparent that the poor little boy could have possibly witnessed the killing of his mother. He was two years and five months old at the time of her death, and is now four years old. The boy’s account suggested that it was not the defendant who “hurt” his mother, but the defendant’s son (also the boy’s father). Justice Lasry refused the application for the boy to give evidence. In the event, the defendant was acquitted of murder but convicted of manslaughter.

Of course I can understand why the defence would have wished to lead the child’s evidence, but I think that the judge was correct to refuse the application. My own experience with my daughter the other day has convinced me even more firmly that the evidence of a toddler is not reliable!

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Filed under courts, criminal law, law, motherhood

Some people will try anything

I thought I’d seen all the pathetic excuses possible for trying to get out of legal proceedings (including seceding from Australia, declaring the Court to be a hotbed of Freemasons and/or claiming that the Constitution is invalid for spurious reasons). But this is one of the best:

Richard James Howarth was remanded to appear in the Ipswich Magistrate’s Court to answer a string of traffic offences, including four counts of driving with a blood alcohol content more than three times the legal limit.

However, his lawyers said he failed to appear after having earlier informed them he would not talk to them because he is was [sic] the almighty and above answering to Queensland laws.

Early this month, Aboriginal and Torres Strait Islander Legal Service solicitor Kevin Rose, for Howarth, told the court his client refused his office’s attempts to talk to them.

A court and a mental health expert have already deemed Howarth was mentally fit for trial, but Mr Rose maintained he has obvious mental health issues.

Mr Rose said he did not doubt Howarth genuinely believed he was God.

The Magistrate issued a warrant for Howarth’s arrest. Now if Howarth can turn the handcuffs into loaves and fishes, he might have some possibility of being believed…

Incidentally, if he is God, I have a number of questions for Him:

  • Why do bad things happen to good people?
  • Whose God are you? It would sure help if You mediated some religious conflicts waged in Your name.
  • What is your point of view about homosexuality? (a la Southpark)
  • If you are God, why couldn’t you just magic the alcohol away from your bloodstream before you got into the car? (I’m thinking here of Aziraphale and Crowley in Good Omens

(Via Iain Hall)

Update:

A friend has asked that I recount one of my own craziest litigant in person stories. I came across this litigant in person who had exhibited the Magna Carta to his affidavit. Now that’s pretty stock standard with these guys. But the extraordinary thing was that his primary source for the Magna Carta seemed to be a novelty tea towel. I’m guessing it was a tea towel because of the fabric weave visible in the photocopy. Also there was kitschy gothic script. None of the judges commented on it, and I’m not sure that anyone else noticed.

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Filed under cars, courts, crazy stuff, criminal law, driving, law, mental illness, religion

Updates

Update 1:

Thomas Towle, the Mildura driver who killed 6 teens and seriously injured 4 others, has been sentenced to 10 years in gaol. I told you it would be interesting to see what his sentence would be! Although Towle was convicted of dangerous driving (a lesser offence), he will be serving more time than the average sentence for culpable driving (a greater offence). Cummins J chose to treat the sentence as culmulative rather than concurrent, meaning that Towle was sentenced for a longer time. The defence had tried to argue that because the maximum penalty for dangerous driving was 5 years, the greatest Towle could face would be 5 years.

Update 2:

Someone else is thinking about whether animals with higher cognition should have more legal rights. I got there first! (thanks to Dave Bath)…

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The law weighs in on the side of gingers

I was commenting to a learned friend and colleague that the posts which receive the highest hits on this blog are the ones which deal with discrimination towards red heads. The comment threads on the posts reveal that there’s a lot of proud gingers, and a lot of insane people with a prejudice against red hair. My colleague told me that discrimination against those with red hair is in fact enshrined in the law as the epitome of unreasonable exercise of executive power.

Any lawyer who has studied administrative law knows of the concept of Wednesbury unreasonableness, where a decision of an administrative power can only be overturned by a Court if it is “[s]o outrageous in its defiance of logic or accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.” (Council of Civil Service Unions v Minister for the Civil Service (the GCHQ case) [1985] AC 374, 410 per Lord Diplock).

In Associated Provincial Picture Houses v Wednesbury Corporation [1948] 1 KB 223, a cinema challenged the exercise of discretion by the Wednesbury Corporation to grant a licence for the operation of a cinema with the condition that no children under 15 were admitted on Sundays. The Court said the decision of the Corporation could only be challenged if it had been shown that it had taken into account matters which should not have been taken into account, or failed to take into account matters which should have been taken into account, or made a decision so unreasonable that no reasonable authority could have made it. The cinema failed to make out any of these bases.

In explaining what kind of a decision represented an unreasonable one, Lord Greene MR said:

It is true the discretion must be exercised reasonably. Now what does that mean? Lawyers familiar with the phraseology commonly used in relation to exercise of statutory discretions often use the word “unreasonable” in a rather comprehensive sense. It has frequently been used and is frequently used as a general description of the things that must not be done. For instance, a person entrusted with a discretion must, so to speak, direct himself properly in law. He must call his own attention to the matters which he is bound to consider. He must exclude from his consideration matters which are irrelevant to what he has to consider. If he does not obey those rules, he may truly be said, and often is said, to be acting “unreasonably.” Similarly, there may be something so absurd that no sensible person could ever dream that it lay within the powers of the authority. Warrington L.J. in Short v. Poole Corporation [1926] Ch. 66, 90, 91 gave the example of the red-haired teacher, dismissed because she had red hair. That is unreasonable in one sense. In another sense it is taking into consideration extraneous matters. It is so unreasonable that it might almost be described as being done in bad faith; and, in fact, all these things run into one another.

{emphasis added}

So, all you anti-gingers out there are guilty of Wednesbury unreasonableness – a decision so unreasonable that no reasonable person could take it. No lesser authority than the English Court of Appeal tells you so. (Hmm…I wonder if Lord Greene had red hair?)

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