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.

Seinfeld makes it to court

I’ve written previously on how Alice in Wonderland has made it into many Court judgments. Well, now Jerry and Elaine have made it into a judgment too!

In Parish Oil Co Inc v Dillon Companies Inc, the US Court of Appeals in Colorado mentioned Seinfeld in an anti-trust case:

Indeed, the plaintiffs’ reading would apparently render unlawful in the State of Colorado a promotional gimmick so common that it features in an episode from Seinfeld:

JERRY: “Atomic Sub”? Why are you eating there?

ELAINE: I got a card, and they stamp it every time I buy a sub. Twenty four stamps, and I become a Submarine Captain!

JERRY: What does that mean?

ELAINE (embarrassed): Free sub.

Seinfeld: The Strike (NBC television broadcast Dec. 18, 1997).

If the first twenty-four sandwiches are sold for $4 apiece at a cost to the maker of $3, the customer who follows through and redeems the offer will have spent $96 to buy $75 worth of sandwiches. But the last one is sold below cost (in fact, it is “free”), making it illegal under the plaintiffs’ version of the UPA. We do not believe the Colorado legislature would have acted so cavalierly as to ban such customer-rewards programs—indeed, to make them criminal—without more clearly expressing an intent to do so.

The plaintiff had sought to challenge a scheme whereby consumers at a particular supermarket got reduced cost petrol from a particular supplier if they had purchased groceries of a specified value. I’m sure this is familiar to all and sundry (our house abounds in vouchers for cut-price petrol from various outlets).

I think it’s awesome that the Court used Seinfeld to illustrate its point.

Now my only wish is that a court use the episode from Treehouse of Horror IV  to illustrate the concept of nemo dat quod non habet (you cannot give what you do not have). In a portion of this episode, Ned Flanders appears as the devil and tempts Homer with a donut in exchange for his soul. Homer, of course, accepts the offer and signs the contract. He cannot resist eating all of the donut, and the devil appears to claim his soul. However, Marge and Lisa are able to show that Homer could not give his soul to the devil because he had already given his soul to Marge on their wedding day (Marge produces a signed photo as evidence of this). Accordingly, the devil cannot take Homer’s soul, but turns his head into a huge donut… There you have it: nemo dat quod non habet in a nutshell.

Well, I’m a property lawyer, of course my wishes are nerdy.

(Via Core Economics)

Property law and the One Ring

Can it really be true? Yes, it is true. The blog Law is Cool features an essay about Lord of the Rings from a property law perspective! Here is a brief extract:

Consider the following facts which seem ripped from a first year property law exam:

1. Sauron holds ownership in the Ring through accession, by working one thing (base metals) into a new thing (a ring of power)
2. He is dispossessed by Isildur, who now holds possession in the Ring.
3. Isildur loses the Ring (he has a manifest intent to exclude others but no physical control) when it slips off his finger as he was swimming in the Anduin river to escape from Orcs.
4. Déagol finds the Ring.
5. He is dispossessed by Sméagol (a.k.a. Gollum).
6. Gollum loses the Ring and it is finally found by Bilbo.
7. Bilbo gifts the Ring to Frodo. Later, Aragorn (the heir of Isildur) tells Frodo to carry the ring to Mordor, making Frodo his bailee.
8. Sam, assuming that Frodo is dead, takes the Ring according to instructions to help Frodo with the Ring in grave circumstances. Sam is acting here as a (fictional) bailee and he returns possession to Frodo after finding him still alive.
9. At the end of the book, Gollum restores his possession of the ring. Seconds later, he and the Ring are both destroyed. At this point all property held in the Ring disappears.

Gee, I wish I’d thought of that. It is just too cool for words. My favourite part is where the priorities battle between the various parties is described. Perhaps I will use it as an example in future classes.

I have a number of thoughts on the matter, but I’ll have to wait until I’m more awake to develop them.

(via The Volokh Conspiracy)

P.S. check out the comments at both Law is Cool and the Volokh Conspiracy – hilarious.

Feelin’ blue about blogging

Lately, I just haven’t felt inspired by blogging. I don’t know why. Perhaps it’s the midwinter blues. Perhaps I’ve just been working too hard (full time thesis, preparing for next semester, doing consulting work, looking after baby, blogging…all too much?)

Or perhaps it’s finding out that we have to move again when our lease ends in November. I am sad. I love the place we are presently living in. It’s close to Mum and Dad, it’s spacious, it’s not too far from either of my or my husband’s workplaces.

I am really “over” renting.  The way in which renting operates in Australia means that you don’t have any sense of permanency or security. Typically, leases are short (6 months to a year) and tenants don’t have any rights even to hang pictures on the wall. But I don’t see how we could afford to buy a place right now. I am still “on contract”, and uni will only confirm that it is renewing my contract at the end of the year. And what if we want to have another child?
I’ve heard a few politicians say things about housing affordability lately. Kevin Rudd, for one, said that the housing affordability crisis had to be alleviated. That’s welcome news. But I’m a bit worried about the practicalities, and as far as I can see, Rudd didn’t get into the nitty gritty detail. As Andrew Bartlett pointed out recently, it is a complex problem and not one that will be easily fixable. For example, my sister has recently bought a place – if prices suddenly fall, her place will be worth less than she paid for it. And what of people who have invested in property with a mind to retirement? As Bartlett also argues, this doesn’t mean that we shouldn’t at least try to do something! I commend him for addressing the issue, and having a look at some of the complexities rather than just producing nice shiny sound bites.

Then I heard the Victorian government banging on about its 2030 plan, which means promoting high density living in “urban centres”. I am afraid I won’t be buying an apartment any time soon. For one thing, a “family sized” apartment is likely to cost nearly as much as a house anyway, so if I’m going to be indebted for life, I’d rather get a house. And the main thing which turns me off apartment living is noise and privacy issues. I worry that people might complain about our little girl if she cries or shouts. On the other hand, I also worry that people might party all night, like those Colombian exchange students two units down from us at our last place – they had regular weeknight parties which went until at least 3am in the morning, and the common living areas were trashed afterwards. These places had solid brick walls (unlike many modern apartments) and the noise still carried. I don’t think new places are built solidly enough (those plasterboard walls are hopeless).

I don’t know what the answer is. And I don’t know what we’ll do. I’m sure it will all work out in the end. As Mum says, I tend to fall on my feet, one way or another.

Anyway, that’s just an explanation of why I don’t think my blogs have been as sharp as normal, and why I haven’t been commenting as often.

Property and the body

The thing I love about this blogging gig is coming across other interesting blogs and people. Can I recommend that you read this post over at Balneus by Dave Bath about property in body parts?

The EU generally prohibits sale for profit of body parts, and Dave queries if there should be an exception for the sale of items such as hair for profit. He makes the good point that real hair can be used for wigs for people suffering from alopecia or baldness for other medical reasons (eg, undergoing chemotherapy). I know that some ladies in India sell their hair to be used in hair extensions for Western women. Well, if it keeps the family fed and healthy, why not?

It’s an interesting question. Coincidentally, the other day someone sent me this crazy site where you can purportedly sell your DNA for profit. The idea makes me feel squeamish. No way anyone’s gettin’ near my DNA. It worries me that companies might seek to patent people’s DNA and use the patent to monopolise the pharmaceutical benefits which might be derived from it. Sound neurotic and far-fetched? Uh-uh. Have a look at the case down below and you’ll see why lawyers become such neurotic beasts – they see the worst behaviour from everyone. Anyway, for reasons I will discuss, the sale of DNA would not be legal in Victoria.

It should be noted that, generally speaking, neither the selling nor buying of human tissue is legal in Victoria: ss 38(1) and 39(1), Human Tissue Act 1982 (Vic). However, there is an exception in s 39(2) which provides that the Minister may give a permit to a person to buy human tissue for profit in certain circumstances. Tissue is defined to mean “an organ, or part, of a human body or a substance extracted from, or from a part of, the human body.” Therefore even the sale of human hair or fingernails would not be legal in this State, unless a Minister was prepared to licence someone to purchase hair. Sperm, ova and foetal tissue are not covered by the provisions dealing with donation of human tissue. These types of tissue are covered by the Infertility Treatment Act 1995 (Vic).

As I said in comments at Dave’s site, there’s a famous case called Moore v Regents of the University of California (1990) 793 P 2d 479 about property in body parts. Nasty people like me make poor students write essays about the case.

Moore was treated for leukaemia at the University of California Medical Centre. His spleen was removed as part of his medical treatment. His doctor and a researcher established a “cell line” with his spleen cells. Because the cells were cancerous, they produced a particular protein in large quantities for an indefinite period. They patented the cell line and made a profit. Moore sued them, saying that he had not consented to the use of his cells in this way.

One of Moore’s claims was that the spleen cells were his “property”, and that by using them without his consent, the University had committed the tort of conversion. They had been detached from him, and therefore were separate from him – did this mean they could be owned by him, as they were derived from him? A majority of the Supreme Court of California said that they were not Moore’s property. However, the University was found to have breached its fiduciary duty towards Moore (namely its duty not to profit at his expense without obtaining his consent).

I was trying to think why I find the sale of human hair less problematic than the sale of human DNA. My thought is that there is a distinction between cells which are living at the point of excision from the body (cell lines, ova, sperm, foetuses, blood etc) and cells which are dead at the point of excision from the body (hair, toenails etc).

Still, I think the only way you could safely allow for-profit use of hair and toenail clippings is to create an express exception for it: eg, “a prohibition on making the human body and its parts as such a source of financial gain, excepting toenail clippings and hair.” What are your thoughts?

P.S. Just realised that this is my first post with a category of “property”. I can’t believe it’s taken me this long to post about property law.