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Cite as: [1998] EWCA Civ 1680, [1999] CLC 417

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IN THE SUPREME COURT OF JUDICATURE CHANF 94/0492

COURT OF APPEAL (CIVIL DIVISION) CHANF 94/0494

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Wednesday 4th November 1998

B e f o r e :

LORD JUSTICE EVANS

LORD JUSTICE MORRITT

and

LORD JUSTICE CHADWICK

- - - - - - - - - - - - - - - - - - - - -

BETWEEN

~~MACMILLAN, INC. (incorporated under the~~

~~laws of the State of Delaware, USA)~~

MCC PROCEEDS INC

(incorporated under the laws of the State of Delaware as Trustee of

The Maxwell Macmillan Realization Liquidating Trust)

Appellant

-and-

(1)BISHOPSGATE INVESTMENT TRUST PLC

(2)SHEARSON LEHMAN BROTHERS HOLDINGS PLC

(3)SWISS VOLKSBANK

(incorporated under the laws of Switzerland )

1st Respondent

(4)MORGAN STANLEY TRUST COMPANY

(incorporated under the laws of the State of New Jersey, USA )

(5)CREDIT SUISSE FIRST BOSTON, formerly CREDIT SUISSE

(incorporated under the laws of Switzerland )

2nd Respondent

(6)PRUDENTIAL SECURITIES INC

(incorporated under the laws of the State of New York, USA )

(7)PAINE WEBBER INC

(incorporated under the laws of the State of New York, USA )

(8)ADVEST INC

(incorporated under the laws of the State of Delaware, USA )

- - - - - -

(Handed down Transcript of Smith Bernal Reporting Ltd

180 Fleet Street, London EC4A 2HG

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

- - - - - -

MR D OLIVER QC and MRS J GIRET (Instructed by Messrs Herbert Smith, London EC2A 2HS) appeared on behalf of the Appellant

MR R POTTS QC and MR W BLAIR QC (Instructed by Messrs Curtis Davis Garrard, Staines, Middx TW19 7LN) appeared on behalf of the 1st Respondent

MR G MOSS QC and MR W TROWER (Instructed by Messrs Clifford Chance, London EC1A 4JJ) appeared on behalf of the 2nd Respondent

- - - - - -

J U D G M E N T

(As approved by the Court )

- - - - - -

LORD JUSTICE EVANS: This is the judgment of the court to which all members have made substantial contributions.

A. Introduction

1. In these two appeals the appellant, as successor in title to the plaintiff below, Macmillan Inc (“Macmillan”), appeals against so much of the orders made by Millett J. on 25th January 1994 as dismissed Macmillan’s claims against the third defendant, Swiss Volksbank, and the fifth defendant, Credit Suisse First Boston, formerly Credit Suisse (“Credit Suisse”).

2. The circumstances in which those claims arose can be stated shortly. In September 1991 Macmillan was the owner of 10.6 million shares of Berlitz International Inc (“Berlitz”), a corporation quoted on the New York Stock Exchange. On 27th September 1991 500,000 of those 10.6 million Berlitz shares were pledged to Credit Suisse, without the authority of Macmillan, as security for the indebtedness of Robert Maxwell Group Plc (“RMG”). On 12/13th November 1991 a further 2.4 million of those shares were pledged to Swiss Volksbank; and a further 1 million shares were pledged to Credit Suisse. Again, those shares were pledged, without the authority of Macmillan, as security for the indebtedness of RMG. On 20th November 1991 Swiss Volksbank made demand for repayment. The demand was not met. On 5th December 1991 RMG was put into administration. On the same day Credit Suisse made demand for repayment. Shortly thereafter Macmillan commenced these proceedings for purpose of recovering, inter alia, the 3.9 million shares which had been pledged to Swiss Volksbank and Credit Suisse.

3. Each of the two banks claimed to be a bona fide purchaser for value in good faith without notice of Macmillan's adverse claim. The Judge held that the question whether that defence was available was to be determined by the law of New York. That conclusion was affirmed (but on different grounds) by this Court at an earlier stage in the present appeals - see [1996] 1 All ER 585. On the basis that the law of New York was the applicable law, Macmillan had contended at the trial that the defence of bona fide purchaser was not available to a transferee who had acquired through a financial intermediary non-specific stock held by a clearing corporation in New York - as was the case in relation to the 2.4 million shares pledged to Swiss Volksbank and in relation to 1 million of the shares pledged to Credit Suisse. The Judge rejected that contention. On the facts as he found them to be, he upheld the claims of Swiss Volksbank and Credit Suisse (in relation to all of the 1.5 million shares pledged to it) to be purchasers without notice. Accordingly, Macmillan failed to establish its claims to any of the 3.9 million Berlitz shares.

4. In the present appeals Macmillan contends, first, that the Judge was wrong in his finding as to New York law. It is said that, on a true understanding of that law, the defence of bona fide purchaser is not open to Swiss Volksbank, and is not open to Credit Suisse in relation to the 1 million shares. Secondly, that the Judge was wrong to find, on the facts and having proper regard to the relevant provisions of New York law, that Credit Suisse took any of the 1.5 million shares pledged to it without notice of Macmillan’s adverse claim.

5. The shares were sold during the trial. The issue, now, is whether the two banks have to account to the appellant for the proceeds of sale. That turns on whether, at the time or times when each bank acquired a security interest in Berlitz shares, it took free from the pre-existing interest of Macmillan as beneficial owner. In that context, the relevant transactions under which security interests were acquired are (i) the delivery to Credit Suisse, on 27th September 1991 in London, of a stock certificate in the name of Bishopsgate Investment Trust (“BIT”) in respect of 500,000 Berlitz shares with an executed transfer form; (ii) a transfer to the order of Swiss Volksbank, effected through the Depository Trust Company of New York (“the DTC”) on 12th November 1991, of 2.4 million Berlitz shares; and (iii) a transfer to the order of Credit Suisse, effected through the DTC on 13th November 1991, of a further 1 million Berlitz shares. It is relevant to note that the 500,000 shares comprised in the certificate which had been delivered in London were registered, on 4th June 1992 (after these proceedings had commenced), in the name of Credit Suisse Nominees Ltd. It was that subsequent acquisition of title by registration which led the Judge, to the conclusion that, in relation to the transaction on 27th September 1991 in London as well as in relation to the transfers effected in New York on 12/13th November 1991, the law of New York was the applicable law for the purpose of determining whether or not the banks could rely on a defence of bona fide purchaser for value without notice. This court reached the same conclusion ([1996] 1 WLR 387) but on the ground that the law of New York applied as the law of the situs of the shares.

B. Foreign law - the correct approach

6. An appeal to the Court of Appeal is by way of re-hearing (R.S.C. Order 59 rule 3). The Court exercises its own judgment, independently of, though not uninfluenced by the views of the trial judge. No-one doubts this, as regards issues of law.

7. The same is true of issues of fact, though the inquiry takes a somewhat different form. It is well established that the Court is reluctant to reverse a finding of fact made by a trial judge after hearing and seeing the witnesses, though the Court will do this if satisfied that the finding was wrong. The reluctance is particularly great where questions of credibility and reliability arise, or where for any other reason the trial judge who saw the witness was better able to make the finding than the Court of Appeal, which has only a transcript of the evidence, is able to do ; also, where questions of primary fact are in issue, as distinct from inferences which the Court may be as well placed to draw as the trial judge was. In relation to such questions, the Court will consider whether there was evidence which entitled the judge to make the finding which he did, rather than making its own decision afresh. This is perhaps a relic of the approach which was called for when the facts were found by a jury rather than the judge, and which still applies when appeals are brought against jury verdicts.

8. These principles are established by a number of well-known authorities, including Benmax v. Austin Motor Co. Ltd [1955] A.C. 370 Thomas v. Thomas [1947] A.C. 484 The Ikarian Reefer [1995] 1 Lloyd's Rep. 455 at 458 and Pickford v. I.C.I. plc [1998] 3 All ER 462. They are not in issue in the present case.

9. We invited submissions, however, as to the correct approach when an appeal is brought against the trial judge's findings on issues of foreign law. These are issues of fact, for the purposes of the general principle stated above, but they are factual issues "of a peculiar kind" : Parkasho v. Singh [1968] P.233 per Cairns J. at p.250. These submissions revealed a difference of approach. The respondents urged us to consider whether there was evidence of New York law which entitled Millett J. to make the findings which he did. Counsel for the appellants submitted that we should construe the statutory provisions for ourselves and reach our own conclusions upon them.

10. It is common ground, however, that the evidence of expert witnesses is necessary for the Court to find that foreign law is different from English law. In the absence of such evidence, or if the judge is unpersuaded by it, then he must resolve the issue by reference to English law, even if according to the rules of private international law the issue is governed by the foreign law.

11. The Court of Appeal's approach to the trial judge's findings of fact is no different when the finding is based on or takes account of the evidence of expert witnesses. The same general principles apply. It is less likely in the nature of things that questions of credibility will arise, but even so what is called the demeanour of an expert witness and his response to questioning may be important factors in deciding whether his evidence is reliable, or not.

12. So we come to consider what the Court's approach should be when the trial judge has heard expert evidence as to foreign law and made findings which are challenged on appeal. What difference does it make that these are findings of fact but of a ´peculiar kind' because they are concerned with issues of foreign law?

13. In our judgment, the answer varies according to the nature of the issue which arises in the particular case and the kind of decision which the trial judge and now the Court of Appeal is called upon to make. Sometimes the foreign law, apart from being in a foreign language, may involve principles and concepts which are unfamiliar to an English lawyer. The English judge's training and experience in English law, therefore, can only make a limited contribution to his decision on the issue of foreign law. But the foreign law may be written in the English language; and its concepts may not be so different from English law. Then the English judge's knowledge of the common law and of the rules of statutory construction cannot be left out of account. He is entitled and indeed bound to bring that part of his qualifications to bear on the issue which he has to decide, notwithstanding that it is an issue of foreign law. There is a legal input from him, in addition to the judicial task of assessing the weight of the evidence given. The same applies, in our judgment, in the Court of Appeal. When and to the extent that the issue calls for the exercise of legal judgment, by reference to principles and legal concepts which are familiar to an English lawyer, then the Court is as well placed as the trial judge to form its own independent view.

14. In Parkasho v. Singh (above) the Divisional Court was required to interpret an Indian statute. The appellant argued that the magistrates' construction was wrong. Cairns J., with whom Sir Jocelyn Simon P. agreed, approached the issue as follows :-

"Now we are asked ... to say ... that the justices were wrong in their interpretation of the foreign law. The question of foreign law being a question of fact in our Courts, must this Court regard itself as bound by the findings of the justices on this matter? In my view the question of foreign law, although a question of fact, is a question of fact of a peculiar kind and the same considerations do not apply in considering whether and to what extent this Court should interfere with the decision of the magistrates, as in the case of the ordinary question of fact which come before a magistrates' Court. ..... I think it is our duty in this case to examine the evidence of foreign law which was before the justices and to decide for ourselves whether that evidence justifies the conclusion to which they came" (p.250).

He referred inter alia to the Court of Appeal's judgment in A/S Tallina etc. v. Estonian State S.S. Line (1947) 80 Ll.L.R.99.

15. These remarks were approved by this Court in Dalmia v. National Bank of Pakistan [1978] 2 Lloyd's Rep. 223 where Megaw L.J. added :-

"An Appellate Court must not by an uncritical acceptance of a trial Judge's conclusions of fact shirk its function of considering the evidence afresh and forming its own view of the cogency of the rival contentions, whilst of course always remembering that the trial judge had the undoubted initial advantage of having seen and heard the witness" (p.286).

16. The authorities were reviewed in Bumper Development Corpn. v. Comr. of Police of Metropolis [1991] W.L.R. 1362 in unusual circumstances where the trial Judge rejected evidence, upon which both parties' expert witnesses were agreed, as to the "true import" of two judgments of the Indian Courts (see 1368G). The Court of Appeal held that he was not entitled to do so. He had fallen foul of the rule that the English judge must not conduct his own research into the foreign law (see 1371B). That issue, however, was "largely academic" because there was evidence which supported the judge's conclusion (1371C).

17. In the judgment of the Court, Purchas L.J. approved what is now Rule 18 in Dicey and Morris The Conflict of Laws (12th ed.) :-

"Rule 18 (1) In any case to which foreign law applies, that law must be pleaded and proved as a fact to the satisfaction of the judge by expert evidence or sometimes by certain other means.

(2) In the absence of satisfactory evidence of foreign law, the Court will apply English law to such a case" (see 1369B)

The judgment also approved the following further passages from Dicey & Morris ;-

"(1) An English court will not conduct its own researches into foreign law ....

(2) If the evidence of several expert witnesses conflicts as to the effect of foreign sources, the Court is entitled, and indeed bound, to look at those sources in order itself to decide between the conflicting testimony ...

(3) The Court of Appeal, whilst slow to interfere as in all cases where the decision involves findings of fact, may in appropriate cases be somewhat more ready to question the trial judge's conclusions than in normal cases ..." (see 1369D, 1369G and 1370B).

18. We are indebted to a recently published monograph Foreign Law in English Courts (Clarendon Press 1998) by Richard Fentiman where the following passage appears under the heading ´Expert evidence on appeal' :-

"It is a recurring theme in this work that, although characterised as facts, foreign laws are not invariably treated as such in English practice. One of the more important respects in which the determination of foreign law belies its factual status is that appeals are readily entertained from findings on foreign law [citing the above authorities, also Gruppo Torras S.A. v. Al Sabah [1996] 1 Lloyd's Rep 7, 18 and G & H Montague Goods H v. Irvani (below, para. 24 ) at 691]. This may lead to a thorough re-examination of the evidence, including transcripts of the oral examination of the parties' experts at trial. Certainly, appellate courts are willing to engage in such review, no doubt because it affects the legal rights and obligations of the parties .... the more an issue of foreign law depends on matters of expert testimony rather than construction, the effectiveness of appellate review diminishes" (p.201).

The paragraph concludes :-

"It should be noticed, however, that the Court of Appeal will confine itself to the task of assessing the evidence as it was presented to the Court below. Its task is to police errors by the trial judge, not to determine the question of foreign law de novo . Indeed, it can hardly do otherwise since English Courts may not conduct their own researches into foreign law, or depart from the evidence presented by the parties' experts" (p.202).

19. It seems to us that this is an accurate summary of the present state of the authorities, and that, as the author observes, the precise limits of the Court of Appeal's power and willingness to intervene may vary according to the type of case. In our judgment, the limits depend not only on the Court's reluctance to interfere with findings which must be based upon the expert evidence which the judge has heard, whether or not they are described as findings of fact, but also upon the nature of the finding which he has had to make. He is entitled, indeed bound, to contribute his own legal skill and experience in reaching his conclusion, so much so that he may, in a suitable case, form his own view of the meaning of a statute which the expert witness tells him is the governing foreign law, even if the expert's opinion as to its meaning is different from his own : see Dicey & Morris (12th ed.) p.233 and Fentiman (op.cit.) pp. 194 and 196. This is supported by the following dictum of Scrutton L.J. :-

"I can see no reason why a court is bound to accept the evidence of an expert witness as to fact, when he supports it by a document the plain words of which render his opinion impossible" ( Buerger v. New York Life Assurance Co. (1927) 96 L.J.K.B. 930 at 937).

20. The question then arises, whether the judge is only entitled to reject the expert´s opinion evidence as to the meaning of the statute when the witness has put forward an "impossible" view ; as a corollary to this, it might be said that the Court of Appeal is not entitled to substitute its own view when there is acceptable evidence to support the judge's finding. But, in our judgment, the trial judge's powers are not so limited, nor are the Court of Appeal's, in a case where the English Court interprets the statute in accordance with English rules of construction, there being no evidence that different rules would govern the foreign court's interpretation, and where there is no suggestion that any of the words of the statute has a special meaning, different from its ordinary meaning, in the foreign context. Then, the trial judge's finding as to the meaning of the statute, which is distinct from his finding that the statute governs the issue before the court, is his interpretation of the words used. He was influenced, of course, by the factual ´matrix' as he found it to be, and the Court of Appeal must have regard to the same circumstances. In the background throughout is the rule that, unless the evidence shows that the foreign rules of construction are different, the English Court interprets the statute according to the English rules. To that extent, the trial Judge's ´finding' is essentially a conclusion as to statutory interpretation, and as such it should properly be regarded as an issue of law.

21. This approach is supported in our view by the judgment of Atkin L.J. in Buerger v. New York Life Assurance Co. (above). There was uncontradicted evidence as to the effect of a Russian decree, but the opposing party submitted that the Court should reject the evidence in favour of its own construction :-

"It is not sufficient to prove a foreign statute or code by a translation, and then leave the Court to place its own construction on it. The code must be interpreted by an expert in the foreign law. It is, of course, true that when he vouches a statute to support his evidence the statute forms part of his evidence and must be considered in the consideration of his evidence as a whole. And it is also true that where experts on the foreign law differ among themselves the Court will often have to resolve the conflict by looking at the statutes or documents and deciding for themselves the more probable contention. And this course will be more readily undertaken where the dispute is as to the effect of legislation, as in the United States of America, expressed in English in respect of a jurisprudence which is known to the English Judges. And it may also happen occasionally that a foreign expert may arrive at results so extravagant and involving such a misunderstanding of conception familiar to lawyers of all countries that an English Court may have to reject his evidence, and eventually come to the conclusion that they can safely interpret the words for themselves, or fall back upon the presumption that the proper methods of construction coincide with the English. But in the first instance the English Courts must rely on the evidence of competent foreign lawyers" (pages 940-1).

22. In the present case, none of the expert witnesses claimed that there is any decision of a United States Court which is precisely in point. The English Court must therefore make its own findings (see Fentiman op.cit. at 190 ´Novel points of foreign law'). The witnesses debated the issues at some length : see further below. Taking due account of their evidence, the judge was called upon to form his own view as to the correct interpretation of the relevant provisions of the New York Commercial Code. It seems to us that we are entitled and bound to form our own view, independently of his, on the issue of construction, though with due regard to the relevant circumstances or ´matrix' as found by him. This leads us to a consideration of the expert evidence in the present case.

The expert witnesses

23. In our judgment, the function of the expert witness on foreign law can be summarised as follows :-

(1) to inform the Court of the relevant contents of the foreign law ; identifying statutes or other legislation and explaining where necessary the foreign Court's approach to their construction ;

(2) to identify judgments or other authorities, explaining what status they have as sources of the foreign law ; and

(3) where there is no authority directly in point, to assist the English judge in making a finding as to what the foreign Court's ruling would be if the issue was to arise for decision there.

24. The first and second of these require the exercise of judgment in deciding what the issues are and what statutes or precedents are relevant to them, but it is only the third which gives much scope in practice for opinion evidence, which is the basic role of the expert witness. And it is important, in our judgment, to note the purpose for which the evidence is given. This is to predict the likely decision of a foreign court, not to press upon the English judge the witness's personal views as to what the foreign law might be. Thus, in G. & H. Montage G.m.b.H v. Irvani [1990] 1 W.L.R. 667 (C.A.), Mustill L.J. said this :-

"The fact that the plaintiffs' expert was not able to do more than assert, in this novel situation, his own view on how the German court would react when faced with a similar problem does not disqualify his evidence from being relied upon. There are many fields of law in which the books provide no direct answer and where the skill of the lawyer lies precisely in predicting what answer should be given. If the judge concludes that the expert's prediction is reliable, he is fully entitled to give effect to it" (684G).

This passage emphasised that the expert witness is entitled to give opinion evidence in the absence of direct authority, but we would underline the restrictions which it places upon him. His role is to "predict" what the foreign court would decide, and only in this sense should he say "what answer should be given".

25. We have to say, regretfully, that the expert witnesses were encouraged and allowed to range far wider than this in the present case. The bulk of their evidence in cross-examination on these issues came to resemble a debate, sometimes almost philosophical, as to the nature of knowledge and to a lesser extent of "notice", mostly expressed in general terms rather than focused on specific issues which arise or might arise in the circumstances of the present case. This could be justified, no doubt, as part of the exercise of determining the legislative intention, which of course is a relevant and primary consideration. Nevertheless, it seems to us that it was carried further than was necessary or even appropriate in the present case.

26. The Court was, and is, faced with the task of construing a small number of provisions in the New York Commercial Code. Those provisions have to be read against a background of common law which in all relevant respects is broadly similar to our own and in a commercial and mercantile setting which is international and not in any sense confined to a foreign state. The English judge can properly be informed of factors which the New York Courts would be likely to find influential ; of the sense in which words in the English language might be differently understood in New York (this does not appear to feature here) ; and of any special considerations which an English judge, applying English rules of statutory construction, might not take into account. That said, however, the judge's task is to interpret the statute, assisted by submissions from counsel. It is not made easier by prolonged debate with each of the expert witnesses, once they have dealt with specific matters which lie properly within their own province. Moreover, such debate creates an additional problem, if the experts' contributions to it are then treated as evidence, which the judge is bound either to accept or to reject before forming his own view. Counsels' submissions are then expanded to deal with that evidence, and the construction exercise becomes far more complicated than it ought to be.

27. Finally, there is a yet further disadvantage when the meaning of the statute is debated in the course of the evidence, before the judge has heard submission on the factual evidence and his likely conclusions or the range of possible conclusions have become known. The statute has to be construed, not in the abstract but by reference to a comparatively limited number of actual situations which arise or may arise in the instant case. An earlier debate between counsel and the expert witnesses in the course of the trial tends towards generalities and is more discursive than it needs to be. That tendency too is evident in the transcripts we have read.

C. The Law of New York

The Uniform Commercial Code

28. It is accepted by Macmillan for the purposes of this appeal that the question whether or not Swiss Volksbank and Credit Suisse respectively obtained interests in the Berlitz shares is to be determined in accordance with the provisions of the Uniform Commercial Code adopted in the State of New York with effect from 27th September 1964 (“the Code”). Article 8 of the Code contains provisions in respect of “investment securities”. We have been referred to the annotated text, as amended to 8th May 1990, set out in McKinney’s Consolidated Laws of New York, on the basis that that text contains the provisions in force at the relevant time.

29. Part 3 of Article 8 is directed to the purchase of investment securities. For this purpose “purchase” includes taking by way of pledge; and “purchaser” means a person who takes by purchase - see paragraphs (32) and (33) of Section 1-201 (General Definitions).

Sections 8-301 and 8-302

30. The determinative provisions, in the present context, are those contained in Sections 8-301(1) and 8-302(3):

8-301 (1) Upon transfer of a security to a purchaser (Section 8-313) the purchaser acquires the rights in the security which his transferor had or had actual authority to convey unless the purchaser’s rights are limited by subsection (4) of Section 8-302.

8-302 (3) A bona fide purchaser in addition to acquiring the rights of a purchaser (Section 8-301) also acquires his interest in the security free of any adverse claim.

Subsection (4) of section 8-302 contains the safeguard (not material in the present context) that, notwithstanding section 8-301(1), a transferee who has himself been party to any fraud or illegality affecting the security or who, as a prior holder of the security, had notice of an adverse claim, cannot improve his position by taking from a later bona fide purchaser. Adverse claim” includes a claim that the transfer was or would be wrongful or that a particular adverse person is the owner of or has an interest in the security - see subsection (2) of section 8-302. The position of a bona fide purchaser is further protected by section 8-315(1):

8-315 (1) Any person against whom the transfer of a security is wrongful for any reason . . . may against any one except a bona fide purchaser

(a) reclaim possession of the certificated security wrongfully transferred; . . .

31. In relation to the Berlitz shares, Macmillan was, of course, a person having a claim adverse to the interests of Swiss Volksbank and Credit Suisse. If the rights acquired by the two banks are limited to those conferred on them as purchasers by section 8-301(1), their respective interests in the Berlitz shares are subject to the prior adverse claim of Macmillan. It is only if it can take advantage of section 8-302(3) that either bank can take free of the Macmillan claim. Accordingly, it is necessary for each to establish that it is a bona fide purchaser for the purposes of that subsection.

32. “Bona fide purchaser” is defined in section 8-302(1):

8-302 (1) A “bona fide purchaser” is a purchaser for value in good faith and without notice of any adverse claim

(a) who takes delivery of a certificated security in bearer form or of one in registered form issued to him or indorsed to him or in blank; or

(b) to whom the transfer, pledge or release of an uncertificated security is registered on the books of the issuer; or

(c) to whom a security is transferred under the provisions of subparagraph (c), (d)(i) or (g) of subsection (1) of Section 8-313.

33. The only question, in relation to Swiss Volksbank, is whether it can bring itself within subparagraph (c) of section 8-302(1) - that is to say, whether it was a person to whom the security was transferred under the provisions of one or other of subparagraphs (c), (d)(i) or (g) of section 8-313(1). It is not now in dispute that Swiss Volksbank otherwise satisfied the requirements of “purchaser for value in good faith and without notice of any adverse claim”. The same question arises in relation to Credit Suisse in respect of the 1 million Berlitz shares. For convenience we will refer to this question as “the clearing corporation issue”.

34. Nor is it now in dispute that, in respect of the 500,000 Berlitz shares, Credit Suisse can bring itself within section 8-302(1)(a). But Macmillan does not accept that Credit Suisse took either the 500,000 shares or the 1 million shares in good faith and without notice of its adverse claim. This raises two questions: first, what is the requirement as to notice under the Code (“the notice issue”); and, second, did Credit Suisse have notice of the nature required. The second question is, of course, a question of fact.

C(i). The clearing corporation issue

35. The question whether Swiss Volksbank and Credit Suisse (in respect of the 1 million shares) can bring themselves within subparagraph (c) of section 8-302(1) requires a detailed examination of certain of the provisions of sections 8-313 and 8-320. Before examining those provisions, it is necessary to set out the underlying facts and a short description of the relevant depository trust system through which the transfers were made on 12th and 13th November 1991.

The underlying facts

36. Macmillan was, until December 1989, the owner of 100% of the stock in Berlitz. In December 1989, approximately 44.4% of the Berlitz stock was floated as an initial public offering on the New York Stock Exchange. Macmillan continued to be the owner of the remaining 55.6%, or 10.6 million, shares. On 5th November 1990 those 10.6 million Berlitz shares were transferred into the name of BIT, as nominee for Macmillan.

37. Upon transfer to BIT on 5th November 1990 the Macmillan holding of 10.6 million Berlitz shares was split between twenty-one separate certificates. On 23rd January 1991, fifteen of the certificates, representing together 7.6 million Berlitz shares, were delivered to Morgan Stanley in London. On 7th March 1991 those fifteen stock certificates, with executed stock power forms, were sent to Morgan Stanley's New Jersey office. They were delivered by that office to the DTC for the account of Morgan Stanley.

38. The DTC, as its name suggests, acted as a securities depository for corporate stocks and bonds traded on various stock exchanges in the USA, including the New York Stock Exchange. It accepted securities for deposit from participant members, of which Morgan Stanley was one. Once securities had been deposited with the DTC they could be transferred between participant members by a “paperless" system; that is to say, they could be transferred without the need for physical delivery of certificates or the issue of new certificates.

39. Between March and September 1991 Morgan Stanley held the 7.6 million Berlitz shares to the order of London & Bishopsgate International Investment Management Plc. On 27th September 1991 Morgan Stanley was instructed, without the authority of Macmillan, to hold those shares to the order of Bishopsgate Investment Management Ltd (“BIM”).

40. On 12th November 1991, BIM gave instructions to Morgan Stanley to transfer a total of 4 million Berlitz shares - being securities held to the account of Morgan Stanley within the DTC system - to four different transferees. One of those parcels, comprising 2.4 million shares, was to be transferred to the account of Citibank, another DTC participant, for the order of Swiss Volksbank. That transfer was effected by the DTC making appropriate entries on the accounts of Morgan Stanley and Citibank, on 12th November 1991. A second parcel, comprising 1 million shares, was to be transferred to the account of Swiss American Securities Inc (“SASI”), also a DTC participant, for the order of Credit Suisse. That transfer was effected by the DTC making appropriate entries on the accounts of Morgan Stanley and SASI on 13th November 1991.

The operation of the securities depository system by the DTC

41. Upon deposit of certificated securities with the DTC by a participant member the amount of the securities comprised in the certificates are credited to the member’s account and the certificates are returned to the issuer (or its transfer agent) for cancellation. The securities comprised in the certificates are registered by the issuer in the name of CEDE & Co ("CEDE") a New York partnership. A certificate in respect of all securities of that class held by CEDE from time to time is (or will already have been) issued and is retained by the issuer (or its transfer agent). That certificate is non-specific. That is to say, the certificate itself does not identify, by serial number or otherwise, specific shares to which it relates; and it does not record the number of shares held in CEDE’s name. It is expressed to be issued in respect of the shares which are shown from time to time on the issuer’s transfer sheets as represented by that certificate.

42. CEDE holds the securities registered in its name as nominee for the DTC. The DTC holds those securities for the account of such of its participant members as are shown in its records to be entitled to securities of that class; and in the amounts to which they are so shown to be entitled. The securities to which any participant member is entitled are non-specific; they are not identified by serial number or otherwise. On a transfer from one participant to another of securities of a particular class appropriate entries are made in the books of the DTC. The number of the securities shown as held for the transferor is reduced by the amount of the transfer and the number of the securities shown as held for the transferee is increased by the same amount.

43. The participant members may, themselves, hold securities within the DTC for their own clients or on their own account. The entries in the books of the DTC will not differentiate between securities held for the participant member for his own account and securities held by him for the account of his clients; nor between securities held by the participant member for the account of one client or another. The participant member can effect trades of securities between one client and another, or (it seems) between itself and a client, by entries in its own books without the need for corresponding entries in the books of the DTC. Trades between participant members - whether on their own account or for clients - can be aggregated and netted in the books of the participant members inter se. The effect is that each transfer of securities made by a participant member on behalf of a client is not necessarily reflected in a separate entry on the books of the DTC.

Sections 8-813 and 8-320

44. Section 8-313(1) of the Uniform Commercial Code defines the circumstances in which the transfer of a security can occur. The material provisions in the present context are these:

8-313 (1) Transfer of a security or a limited interest (including a security interest) therein to a purchaser occurs only

(a) when he or a person designated by him acquires possession of a certificated security; or

(b) when the transfer, pledge or release of an uncertificated security is registered to him or a person designated by him; or

(c) when his financial intermediary acquires possession of a certificated security specially indorsed to or issued in the name of the purchaser; or

(d) when a financial intermediary, not a clearing corporation, sends him confirmation of the purchase and also by book entry or otherwise identifies as belonging to, or subject to a limited interest in favor of, the purchaser

(i) a specific certificated security in the financial intermediary’s possession; or

(ii) a quantity of securities which constitute or are part of a fungible bulk of certificated securities in the financial intermediary’s possession or of uncertificated securities registered in the name of the financial intermediary; or

(iii) a quantity of securities which constitute or are part of a fungible bulk of securities shown on the account of the financial intermediary on the books of another financial intermediary; or

. . .

(g) when appropriate entries to the account of the purchaser or a person designated by him on the books of a clearing corporation are made under Section 8-320; or

. . .

45. Paragraph (g) of section 8-313(1) must be read with section 8-320. Subsections (1) and (2) are in these terms:

8-320 (1) If a certificated security

(a) is in the custody of a clearing corporation or of a custodian bank or a nominee of either subject to the control of the clearing corporation; and

(b) is in bearer form or indorsed in blank by an appropriate person or registered in the name of the clearing corporation or custodian bank or a nominee of either;

(c) if an uncertificated security is registered in the name of a clearing corporation or custodian bank or a nominee of either;

and such certificated or uncertificated security is shown on the account of a transferor or pledgor on the books of the clearing corporation;

then, in addition to other methods, a transfer or pledge of the security or any interest therein may be effected by the making of appropriate entries on the books of the clearing corporation reducing the account of the transferor or pledgor and increasing the account of the transferee or pledgee by the amount of the obligation or the number of shares or rights transferred or pledged.

(2) Under this section entries may be with respect to like securities or interests therein as part of a fungible bulk and may refer merely to a quantity of a particular security without reference to the name of the registered owner, certificate or bond number or the like and, in appropriate cases, may be on a net basis taking into account other transfers or pledges of the same security.

46. For the purposes of Article 8 - and, in particular, for the purposes of sections 8-301, 8-302, 8-313 and 8-320 - a security must be either a “certificated security” or an “uncertificated security”. The expressions are defined in section 8-102(1). It is common ground that the Berlitz shares were certificated securities. “Financial intermediary” is defined in section 8-313 (4):

8-313 (4) A “financial intermediary” is a bank, broker, clearing corporation or other person (or the nominee of any of them) which in the ordinary course of its business maintains security accounts for its customers and is either acting in that capacity or acting as transferor of a security or an interest in a security, irrespective (in either case) of whether such person is also acting in any other capacity.

It is common ground that SASI, Citibank and the DTC are financial intermediaries within that definition. It is also common ground that the DTC is a “clearing corporation” for the purposes of sections 8-313 and 8-320.

47. The concept of “fungible bulk” - employed in paragraphs (d)(ii) and (d)(iii) of section 8-313(1), in section 320(2) and (as will be seen) in section 8-313(2) - is not specifically defined; but the general definition section does contain a definition of “fungible”:

1-201 (17) “Fungible” with respect to goods or securities means goods or securities of which any unit is, by nature or usage of trade, the equivalent of any other like unit. Goods which are not fungible shall be deemed fungible for the purposes of this Act to the extent that under a particular agreement or document unlike units are treated as equivalents.

With this guidance it is reasonably clear - and it is not in dispute - that securities are part of a fungible bulk for the purposes of the relevant provisions where they are held by a financial intermediary (or for a financial intermediary by another financial intermediary) with other securities of the same description as a single corpus so that there is no differentiation between those securities and any other securities forming part of the same corpus. The securities constitute a fungible bulk where they comprise all the securities of that description held by or for the financial intermediary.

The inter-relation of section 8-313(1)(g) and section 8-320(1)

48. Unaided by expert evidence, we would be led, by the language of sections 8-313(1)(g) and 8-320(1) and (2), to the conclusion that transfers (i) of 2.4 million Berlitz shares to Swiss Volksbank on 12th November 1991 and (ii) of 1 million Berlitz shares to Credit Suisse on 13th November 1991 were effected by the relevant entries made in the books of the DTC on those days. Section 8-313(1)(g) provides, in terms, that transfer of a security to a purchaser occurs when appropriate entries to the account of the purchaser or a person designated by him on the books of a clearing corporation are made under section 8-320. It seems clear enough that, where the purchaser is not himself a person who has an account on the books of a clearing corporation, section 8-313(1)(g) contemplates that he will be able to designate a person - a participating member - who does have an account to which appropriate entries can be made. If that is not the purpose of the words “or a person designated by him” then it is difficult to see what purpose those words do serve. With this in mind, section 8-320(1) must be read in such a way as to permit the transfer of a security to a purchaser who is not himself a participating member in the clearing corporation by appropriate entries to the account of a person who is. The “transferee” referred to in section 8-320(1) must include a participating member designated by the purchaser. Otherwise the purpose evidenced by the inclusion of the words “or a person designated by him” in section 8-313(1)(g) is frustrated. It must follow, reading sections 8-313(1)(g) and 8-320(1) together, that a transfer to the purchaser (not being a participating member) occurs when an appropriate entry is made increasing the account of the participating member whom he has designated to be “transferee” in respect of a transaction effected under section 8-320. In such a case it does not seem to be necessary (although, no doubt, it will usually occur) that the person designated as transferee also sends to the purchaser confirmation of the purchase and identifies, in his own books, a quantity of securities as belonging to the purchaser.

49. We are conscious that that approach produces the apparent anomaly that the “transferee” referred to in section 8-320(1) will not be the person to whom, as “purchaser”, the transfer must be taken to have been made by reason of section 8-313(1)(g). But it is inherent in another provision of section 8-313(1) that the purchaser to whom the transfer must be taken to be made will not be the “transferee” in any ordinary sense. Section 8-313(1)(b) provides that a transfer to the purchaser will occur where the transfer of an uncertificated security is registered to a person designated by him. In such a case it is the purchaser, and not the person to whom the transfer is registered, who is the transferee. Further, section 313(2) contemplates that the purchaser will be the owner of a security transferred to a financial intermediary for his account. That subsection is in these terms:

8-313 (2) The purchaser is the owner of a security held for him by a financial intermediary, but cannot be a bona fide purchaser of a security so held except in the circumstances specified in paragraphs (c), (d)(i) and (g) of subsection (1). Where a security so held is part of a fungible bulk, as in the circumstances specified in sub-paragraphs (d)(ii) and (d)(iii) of subsection (1), the purchaser is the owner of a proportionate interest in the fungible bulk.

It is difficult to see how a purchaser can become the owner of a security transferred to a financial intermediary for his account unless the transfer to the agent is treated as a transfer to the principal. Be that as it may, if there is indeed an anomaly (which we doubt), there appears to be no escape from that anomaly if section 8-313(1)(g) is to be given the effect which it is plainly intended to have - that is to say, to be a means of effecting a transfer to a purchaser (who is not a participating member) of securities which are transferred to his agent (who is a participating member) by entries to the agent’s account in the books of a clearing corporation.

50. If the analysis just set out is correct, then it would seem to follow that a purchaser (not being a participating member in the clearing corporation) to whom a transfer is made under the provisions of sections 8-313(1)(g) and 8-320(1) is entitled to bona fide purchaser status under section 8-302(1)(c); provided, of course, that he takes for value in good faith and without notice. The provisions of section 8-302(1)(c) have been set out earlier in this judgment. They are reflected in the first sentence of section 8-313(2).

The Judge’s approach

51. The analysis set out above was favoured by the Judge. He identified the problem in the following passage (transcript: page 576):

Article 8-320 describes the person to whom the shares are transferred as a "transferee" or "pledgee" and not as a "purchaser" and contains no provision for enabling the transferee to qualify as a bona fide purchaser. The question which arises, therefore, is whether and if so how Article 8-320 can be linked with Article 8-302 (which defines "bona fide purchaser") so as to enable a person who receives a transfer of securities through the DTC system to qualify for the status of a bona fide purchaser.

52. After referring to the fact that that question had produced complete disagreement between the expert witness called on behalf of Swiss Volksbank (Mr Joseph Levie) and the experts called on behalf of Credit Suisse (Professor Mooney and Professor Reitz) - a disagreement which the expert called on behalf of the plaintiff (Professor Felsenfeld) had sought to exploit - the Judge went on (transcript: page 578):

I have been unable to comprehend why, on the plain meaning of the words used, Article 8-313(1)(g) does not fit the facts of the present case, especially having regard to Article 8-313(2). To take the case of Credit Suisse in relation to the 1 million shares: Credit Suisse was the purchaser (because the intention was to create an interest in property - namely a security interest - in Credit Suisse); appropriate entries were made to the account of SASI (the "person designated by Credit Suisse") on the books of DTC (the clearing corporation) under Article 8-320; Credit Suisse was (under Article 8-313(2)) the owner of the securities held for it by SASI (a financial intermediary), and could be a bona fide purchaser because the circumstances were those specified in Article 8-313(1)(g). It is possible that the transaction can also be brought within the words of Article 8-313(1)(d)(iii) (which does not confer bona fide purchaser status), but it is plain that there is some overlapping in any event.

The expert evidence on section 8-313(1)(g)

53. In reaching that conclusion the Judge accepted the evidence of Mr Levie, which he described in these terms (transcript: page 577):

Mr. Levie's route had the advantage of being simple and straightforward, as befitted a distinguished and experienced practising commercial lawyer. He relied on Articles 8-302(1)(c) and 8-313(1)(g) to link with Article 8-320 in order to enable the transferee of shares delivered through the DTC system to qualify as bona fide purchaser.

He dismissed the evidence of Professor Felsenfeld on this point (transcript: page 576-577):

Professor Felsenfeld . . . was clearly in unfamiliar territory and contented himself with accepting the reasons which each of the other contestants put forward for rejecting the views of the other.

54. Mr Oliver QC, on behalf of the appellant, did not seek to rely on the evidence given by the expert witness whom he had called at the trial. He based his submissions in this Court on the reasons given by Professor Mooney and Professor Reitz for rejecting the route favoured by Mr Levie and the Judge. The Judge summarised those reasons in a passage (transcript: pages 579-580) with which Mr Oliver does not quarrel:

Professors Mooney and Reitz, however, would have none of it. To come within Article 8-313(1)(g), they asserted, the purchaser must be a participant in the DTC system. Most, though not all, of the participants are brokers, and it was never intended (they assured me) that their clients should be able to attain bona fide purchaser status unless specific securities were appropriated to them. They pointed to the Official Comments to Article 8-302 in support. Official Comment No. 2 states:

"Not every form of transfer can confer upon the purchaser the status of bona fide purchaser. In particular, transfers effected ... through the acknowledgement of a financial intermediary who holds for the transferee a proportionate interest in a fungible bulk do not confer bona fide purchaser status".

On this interpretation, only specifically appropriated securities (Article 8-313(d)(i)) or a participant's interest in the fungible bulk held by the clearing corporation or by another participant are capable of attracting bona fide purchaser status.

The explanation for this was attributed by the witnesses to what was described in the course of argument as "the fungible bulk problem". It is described in Official Comment No. 4 to Article 8-313:-

4. Subsection (2) sets forth the principle that a purchaser is the owner of any security "held for him" -i.e. controlled pursuant to his instructions- by a financial intermediary. For example, a purchaser owns the securities in his custody account with a bank or his margin account with a broker. However, unless specific securities are separately identified as belonging to the purchaser, he cannot become a bona fide purchaser. A bona fide purchaser takes particular securities free of all claims and defenses. If bona fide purchaser status were given to those whose securities are held as part of a fungible bulk, there would be a possibility of inconsistent claims between two or more bona fide purchasers, since if the bulk should prove to be smaller than was expected, the claim of one or both must be compromised. An exception is made with respect to securities held by clearing corporations, since the fact that those entities hold only for customer accounts makes the chance of inconsistent claims small.

“ The fungible bulk problem ”

55. Mr Oliver’s reliance on the evidence of Professor Mooney and Professor Reitz makes it necessary to examine in more detail than would otherwise be appropriate the provisions of section 8-313(1)(d) and (2). Those provisions are set out earlier in this judgment, but it is convenient to see them together:

8-313 (1) Transfer of a security or a limited interest (including a security interest) therein to a purchaser occurs only . . .

(i) a specific certificated security in the financial intermediary’s possession; or

(iii) a quantity of securities which constitute or are part of a fungible bulk of securities shown on the account of the financial intermediary on the books of another financial intermediary;

(2) The purchaser is the owner of a security held for him by a financial intermediary, but cannot be a bona fide purchaser of a security so held except in the circumstances specified in paragraphs (c), (d)(i) and (g) of subsection (1). Where a security so held is part of a fungible bulk, as in the circumstances specified in sub-paragraphs (d)(ii) and (d)(iii) of subsection (1), the purchaser is the owner of a proportionate property interest in the fungible bulk.

56. The argument, as developed by Mr Oliver, may be summarised as follows. Section 8-313(1)(d)(ii) is directed to the case where a financial intermediary (say, a broker) holds securities as a fungible bulk. When the broker identifies, by book entry or otherwise, a quantity of those securities as belonging to the client purchaser he does so in circumstances in which there are no specific securities within the broker’s holding that can be said to belong to the client. In those circumstances the client is the owner of a proportionate interest in the fungible bulk; but cannot have bona fide purchaser status because he cannot be allowed to take free of the claims of other clients who are in a similar position. If there is a shortfall in the total holding, the proportionate interests must all abate. The reason why bona fide purchaser status is withheld, in a case within section 8-313(1)(d)(ii), so it is submitted, is because that is a necessary consequence of the second sentence of section 8-313(2).

57. Section 8-313(1)(d)(ii) applies only where the financial intermediary who holds the securities is not a clearing corporation. Typically, as we have indicated, it applies where the securities are held by a broker. Where the financial intermediary is a clearing corporation, the position is governed by section 8-313(1)(g) - at least in the case where the purchaser is a participant member and has an account to which entries can be made on the books of the clearing corporation. In such a case it is accepted that the purchaser can acquire bona fide purchaser status. Although the securities identified by the clearing corporation as belonging to the purchaser may (and usually will) constitute part of a fungible bulk held by the clearing corporation, so that the problems associated with shortfall could arise, the chance of a shortfall is said to be so remote that the problem can be ignored. It must also be kept in mind that a clearing corporation will, necessarily, be subject to supervision or regulation pursuant to the provisions of federal or state banking laws or state insurance laws - see the definition of “clearing corporation” in section 8-102(3). Those features, it is submitted, justify the exceptional treatment of cases which - because the financial intermediary is a clearing corporation - are taken out of paragraph (d)(ii) and brought back under paragraph (g).

58. We interpose to note that, where the financial intermediary is a clearing corporation but the purchaser is not a participant member, the case could not have fallen within section 8-313(1)(d)(ii) in any event - that is to say, even if there had not been an express exclusion in respect of a clearing corporation. The reason is that the purchaser could not deal direct with the clearing corporation; the transaction would have to be effected through a participant member (who would, itself, be a financial intermediary). The case would, necessarily, fall within section 8-313(1)(d)(iii).

59. The shortfall argument is extended to section 8-313(1)(d)(iii). That section is directed to the case where the broker does not, himself, hold the securities at all. The securities are held by another financial intermediary. The broker’s interest is in the fungible bulk shown on his account on the books of that other financial intermediary. Again, when the broker identifies by book entry or otherwise, a quantity of those securities as belonging to the purchaser client, he does so in circumstances in which there are no specific securities within the fungible bulk shown on the broker’s account on the books of that other financial intermediary that can be said to belong to the client. Further, if the other financial intermediary himself holds the securities as a fungible bulk (as will usually be the case) there will be no specific securities within that fungible bulk which can be said to be held for the broker. In those circumstances the client is the owner of a proportionate interest in the fungible bulk shown on the broker’s account on the books of the other financial intermediary; and that fungible bulk may, itself, be only a proportionate interest in the securities held as a fungible bulk by the other financial intermediary. If there is a shortfall in either the securities held by the other financial intermediary or in the quantity of those securities shown on the broker’s account on the books of that other financial intermediary, the interests of clients will have to abate. So, it is submitted, bona fide purchaser status must be withheld.

60. There is an apparent overlap between paragraphs (d)(iii) and (g) of section 8-313(1). Paragraph (d)(iii) can apply where a broker (being a participant member of a clearing corporation) identifies as belonging to a purchaser a quantity of securities which constitute or are part of a fungible bulk of securities shown on the account of the broker on the books the clearing corporation. There is no reason, as a matter of language, why the “[an]other financial intermediary” referred to in paragraph (d)(iii) should not be a clearing corporation. But that will be a case in which “appropriate entries to the account of . . . a person designated by [the purchaser]” - that is to say, to the account of the broker - will have been made on the books of the clearing corporation under section 8-320; and so will be a case which, prima facie, will fall within paragraph (g) also.

61. Mr Oliver did not suggest in argument that paragraphs (d)(iii) and (g) of section 8-313(1) were mutually exclusive. He recognised that, if they were, no effect could be given to the words “a person designated by him” which appear in paragraph (g). The words were introduced by amendment made in 1982. Mr Oliver, perhaps understandably, did not embrace Professor Felsenfeld’s view that those words might be there as the result of a mistake.

62. Mr Oliver sought to explain the words “a person designated by him” on the basis that both “purchaser” and “person designated” were in some way, which never became wholly clear, qualified by the reference to the existence of an account on the books of the clearing corporation. The paragraph had to be read, so it was submitted, as if both the purchaser and the person designated were participants. So, the only circumstances in which a purchaser could designate another person as the person to whose account appropriate entries were to be made were those in which the purchaser himself had an account with the clearing corporation. The purchaser must be a participant. The submission appears in the appellant’s skeleton argument at paragraph 6.8:

. . . the only logical interpretation to adopt is that both “the purchaser” and the “person designated” must be participants in the system: the alternative (that a purchaser need not be as long as the person designated is) produces a conflict between the provisions of Article 8-313(1)(g) and 8-313(1)(d)(iii) which, in the light of the express words of Article 8-313(2), it is impossible to resolve.

63. There are a number of difficulties with that approach. The first, and perhaps the most obvious, is that there is nothing in the language of paragraph (g) to support a construction which restricts “purchaser” to a person who is a participant. Indeed, it might be thought that the most obvious reason for introducing the words “person designated by him” was to meet the situation where the purchaser was not a participant and so did not have an account of his own on the books of the clearing house to which entries could be made. Secondly, the suggested approach does not, of itself, take the case out of paragraph (d)(iii) and so avoid the overlap; it simply reduces the number of cases in which the overlap will occur. Where a broker who is a participant identifies as belonging to a client who is also a participant a quantity of securities which are part of the fungible bulk of securities shown on the account of the broker on the books of a clearing corporation, the case falls squarely within paragraph (d)(iii) - whether or not it also falls within paragraph (g). It was not suggested that paragraph (d)(iii) could be construed so as to avoid that conclusion. If the case falls within paragraph (d)(iii) then it also falls within the second sentence of section 8-313(2). The supposed conflict which is said to require a special meaning to be given to the word “purchaser” in paragraph (g) remains even if that special meaning is adopted. Thirdly, the suggested approach does not meet the shortfall problem; it distorts it. If there is shortfall on the account of the designated broker, there is no reason why a client who happens to be a participant should take to the prejudice of those clients who are not participants.

64. For these reasons we have no doubt that the Judge was right to reject the evidence of Professor Mooney and Professor Reitz on this point. He did so in the following passage (transcript: pages 580-581):

Professors Mooney and Reitz are extremely distinguished academic and practising lawyers and amongst the leading exponents of Article 8 of the NYUCC in the United States. Professor Mooney is legal adviser to the Drafting Committee of the National Conference of Commissioners on Uniform State Laws which is currently considering the revision of Article 8, and Professor Reitz is Chairman of the Drafting Committee. Their opinions on the meaning and effect of Article 8 are deserving of very great respect, especially when they appear to be supported by the Official Comments on the NYUCC. Their views would, however, have been more convincing if they had been able to explain to me how they were able to extract the limited application of Article 8-313(1)(g) to which they subscribe from the actual wording of the paragraph, and if those views did not lead to a paradox.

65. The paradox to which the Judge was there referring arose from the attempts by Professor Mooney and Professor Reitz, who had been called as witnesses to support the contention of Credit Suisse that it was entitled to bona fide purchaser status, to reach that conclusion by a different route - the “shelter route”. The Judge rejected the shelter route. He described it as tortuous and unconvincing. The Judge explained the paradox to which their evidence gave rise (transcript: pages 581-582):

Having asserted that it was never intended that bona fide purchaser status should be conferred on non-participants, because of the fungible bulk problem and the risk of abatement, and having given this as the reason for limiting the operation of the otherwise clear language of Article 8-313(1)(g), they then produced precisely the same result by a less attractive route. Moreover, it did not stop there. Having agreed with Mr. Levie that it would be commercially unacceptable to deprive purchasers of shares through the DTC system of bona fide purchaser status unless they were participants, they assured me that a New York Court would feel itself constrained to invoke Article 8-313(1)(g) if their own preferred route was not adopted.

He went on (transcript: page 582):

Unlike Professor Felsenfeld, therefore, Professors Mooney and Reitz did not regard the fungible bulk problem as an insuperable obstacle to conferring bona fide purchaser status on a non-participant like Credit Suisse which took a transfer of shares through the DTC system.

66. We share the view that, on a proper analysis of the relevant provisions, what has been described as the “fungible bulk problem” does not present an obstacle to conferring bona fide purchaser status on a non participant who takes a transfer of shares through the system operated by the DTC . We have already pointed out that both paragraph (d)(ii) and paragraph (d)(iii) of section 8-313(1) cover cases where the quantity of securities identified by the broker as belonging to the purchaser (a) “constitute” or (b) “are part of” a fungible bulk of securities. We have pointed out that there is a distinction between those two cases. Securities are part of a fungible bulk for the purposes of the relevant provisions where they are held by a financial intermediary (or for a financial intermediary by another financial intermediary) with other securities of the same description as a single corpus so that there is no differentiation between those securities and any other securities forming part of the same corpus. Securities constitute a fungible bulk where they comprise all the securities of that description held by or for the financial intermediary.

67. Where all the securities of the same description in respect of which the financial intermediary holds certificates - or, if uncertificated, in respect of which it is registered - are held for the same purchaser, so that the securities identified at the time of the transfer constitute the whole of the fungible bulk, the purchaser becomes the owner of those securities upon transfer. Where the securities identified at the time of the transfer do not constitute the whole of the fungible bulk, then the purchaser does not become the owner of specific securities; he becomes the owner of a proportionate property interest in the fungible bulk - see the second sentence of section 8-313(2). The distinction between those two factual situations is recognised by the difference between the expression used in section 8-313(1)(d)(ii) - “securities which constitute or are part of a fungible bulk” - and that used in section 8-313(2) - “where a security so held is part of a fungible bulk”.

68. The second sentence of section 8-313(2) applies where the securities identified at the time of the transfer are part of a fungible bulk; but has no application where the securities identified at the time of the transfer constitute the whole of the fungible bulk. Nevertheless, in cases where the financial intermediary is not a clearing corporation, the purchaser cannot have “bona fide purchaser status” in respect of the securities of which, in that factual situation, he becomes owner. That is because the case falls within paragraph (d)(ii) of section 8-313(1); and a case within paragraph (d)(ii) cannot also fall within any of paragraphs (c), (d)(i) or (g) of that subsection. The analysis shows that it is the first sentence of section 8-313(2) that prevents bona fide purchaser status arising in a case within paragraph (d)(ii); not the second sentence of that sub-section.

69. The position is not the same in relation to a case within paragraph (d)(iii) of section 8-313(1). It remains the position that the second sentence of section 8-313(2) applies where the securities identified at the time of the transfer are part of a fungible bulk of securities shown on the account of the broker on the books of another financial intermediary; but has no application where they constitute the whole of that fungible bulk. It remains the position that the question whether the purchaser can have bona fide purchaser status is determined by the first sentence of section 8-313(2); and not the second sentence. But, although a case within paragraph (d)(iii) of section 8-313(1) cannot also fall within paragraphs (c) and (d)(i) of that sub-section, it can (for the reasons which we have already explained) fall within paragraph (g). It does so where the other financial intermediary is a clearing corporation. Where the case falls within paragraph (g), then the first sentence of section 8-313(2) - and section 8-302(1)(c) - allows bona fide status. There is no reason why the second sentence of section 8-313(2) should be taken to deny what the first sentence allows. To hold that it does would be to recognise a distinction between a case where the securities identified at the time of the transfer constitute the whole of the fungible bulk shown on the account of the broker on the books of the clearing corporation (a case to which the second sentence of section 8-313(2) can have no application) and a case where the securities identified at the time of the transfer are only part of that fungible bulk. There is no commercial reason to recognise that distinction - which is likely to depend on circumstances which are wholly outside the control of the purchaser and have nothing to do with the transaction into which he has entered.

70. The true position, as it seems to us, is that the second sentence of section 8-313(2) is not concerned with bona fide purchaser status. The sentence is directed to the problem which could arise if security is held as part of a fungible bulk and there is a shortfall. It meets that problem by treating the purchaser as owner of a proportionate property interest in the fungible bulk - thereby recognising that abatement may occur. But that is a problem which, plainly, could arise even on the most restrictive interpretation of section 8-313(1)(g). It could arise in the straightforward case where all those having interests in the fungible bulk acquired those interests as participants to whose accounts appropriate entries had been made on the books of a clearing house - a case in which there could be no doubt that they could all have bona fide purchaser status by reason of section 8-313(1)(g). It is no answer to say it is unlikely to do so. It could arise in the case where two or more purchasers (who were themselves participants) designated the same broker (also a participant) to be the person to whose account on the books of the clearing house appropriate entries were to be made - a case in which the appellant accepts that each purchaser could have bona fide purchaser status by reason of section 8-313(1)(g). In that latter case, the shortfall could arise in the fungible bulk held by the clearing house - which may be unlikely - or in the fungible bulk shown on the account of the broker on the books of the clearing house - which is the usual commercial risk. In any of those cases the proportionate property interests of bona fide purchasers in a fungible bulk may have to abate inter se. But that is no reason for denying to each of them, as owners of proportionate property interests in the fungible bulk, bona fide purchaser status as against a person whose adverse interest, if allowed to prevail, would diminish the amount of the fungible bulk in which those proportionate property interests exist. There is no reason to give the second sentence of section 8-313(2) an effect which extends beyond the problem to which it is directed.

71. For these reasons we uphold the Judge’s decision on the first point - that is to say, on the construction and effect of section 8-313(1)(g). It follows that we dismiss the appeal in relation to Swiss Volksbank.

C(ii) The notice issue

Section 8-304(4)

72. We turn, therefore, to the provisions of New York law which determine whether a person (in the present case, Credit Suisse) is a purchaser “in good faith and without notice of any adverse claim”. In the context of Article 8, the determinative provision is that contained in section 8-304(4):

8-304 (4) Except as provided in this section, to constitute notice of an adverse claim or a defense, the purchaser must have knowledge of the claim or defense or knowledge of such facts that his action in taking the security amounts to bad faith.

In the present case that provision invites consideration of two questions: (i) of what facts did the purchaser have knowledge; (ii) did the purchaser’s action in taking the security with knowledge of such facts amount to bad faith.

Knowledge

73. It is not in dispute that the effect of section 8-304(4) is to limit, in relation to the defence of bona fide purchaser, the wider concept of “notice” as defined in the general definition section - section 1-201. The general definition is in these terms:

1-201 (25) A person has “notice” of a fact when

(a) he has actual knowledge of it; or

(b) he has received a notice or notification of it; or

A person "knows" or has "knowledge" of a fact when he has actual knowledge of it. "Discover" or "learn" or a word or phrase of similar import refers to knowledge rather than to reason to know. The time and circumstances under which a notice or notification may cease to be effective are not determined by this Act.

74. It is clear that, for the purposes of Article 8, a person will not have notice of an adverse claim merely because from all the facts and circumstances known to him at the time he has reason to know that it exists. What is required is that he has actual knowledge of the claim (which is not this case) or that he has actual knowledge of such facts that his action in taking the security amounts to bad faith. The existence or non-existence of actual knowledge is a question of fact. The question whether or not a person has actual knowledge of a fact must be determined subjectively. That much, at least, is common ground. But a subjective test does not, of course, rule out a conclusion that a person had actual knowledge of facts of which, in evidence, he professes ignorance. The court is entitled to infer actual knowledge from other circumstances. It is entitled to conclude that, taking all the circumstances together, “he must have known”. If it does so it is making a finding of fact on the evidence.

75. The person whose knowledge, or lack of knowledge, is relevant in the present context is “the purchaser”. Where the purchaser is a non-natural person, it can only acquire actual knowledge through the minds of individuals who act on its behalf. Section 1-201(27) describes the circumstances in which, generally, the knowledge of an individual is attributed to an organisation:

1-201 (27) Notice, knowledge or a notice or notification received by an organization is effective for a particular transaction from the time when it is brought to the attention of the individual conducting that transaction, and in any event from the time when it would have been brought to his attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information.

“Organization” includes a corporation - see section 1-201(28).

76. It is clear that section 1-201(27) cannot apply, without restriction, to the attribution to a corporation of “knowledge” in the sense required - that is to say, actual knowledge - for the purposes of Article 8. A corporation cannot be said to have knowledge of a fact of which the individual (or any of the individuals) conducting the transaction does not have actual knowledge; notwithstanding that the fact would have been brought to the attention of that individual if the corporation had exercised due diligence. The corporation may have “notice” of that fact for other purposes; but it will not have the knowledge which is required by section 8-304(4). But it is plain enough that the knowledge of the individual conducting the transaction is attributed to the corporation. If the individual has actual knowledge of a fact, then so does the corporation.

77. The Judge did not find it necessary to consider the question whether, where two or more individuals are conducting the transaction, the knowledge of each is to be attributed to the corporation. The question will only arise where (i) there is more than one individual within the organisation who can be said, on a true analysis, to have conduct of the transaction, and (ii) one of those individuals has actual knowledge of a fact which the other or others do not have. The point can be illustrated by an example, which (on one view of the facts) is pertinent to the position of Credit Suisse in relation to the taking of security over the 500,000 Berlitz shares on 27th September 1991. Suppose that one individual, A, has general conduct of the transaction and that A, quite properly, delegates conduct of a particular aspect of the transaction to a subordinate, B. In the course of conducting the particular aspect which has been delegated to him, B acquires actual knowledge of a fact which materially affects the transaction. B does not communicate his knowledge of that fact to A; and A has no actual knowledge of it. Is B’s knowledge of that fact attributed to the corporation; together with knowledge of other relevant facts of which A does have knowledge but B does not?

78. Unaided by expert evidence, we would be led by the language of section 1-201(27) to the conclusion that, even for the purposes of section 8-304(4), the separate knowledge of each individual having conduct of the transaction is to be attributed to the corporation. There is nothing in section 1-201(27) which suggests that, in every case, it is necessary to identify one single individual - to the exclusion of all others within the corporation - who is be “the individual conducting that transaction” for the purposes of the section; and in the case of complex transactions within a large organisation it would often be highly artificial to attempt to do so. If there can be more than one individual who, for the purposes of section 1-201(27), can properly be said to have conduct of the transaction - or of some relevant part of the transaction - a natural reading of section 1-201(27) must lead to the conclusion that there is to be attributed to the corporation knowledge of those facts which each of those individuals actually know.

79. It was submitted by Mr Moss QC, on behalf of Credit Suisse, that the conclusion to which we would be led by the language of section 1-201(27) was not open to us in the light of the evidence given by the expert witnesses. We do not accept that submission. It was common ground amongst the expert witnesses that the question whether the separate knowledge of two individuals could be attributed to a corporation had not been addressed by any court in New York. The only witness to address the point directly was Judge Meyer, a former judge of the New York Court of Appeals who was called as a witness by Shearson Lehman Brothers Holdings Inc (a party to the action, but not a party to the appeal). The relevant passage in his cross-examination appears at day 92 (transcript: page 118):

A: If the corporation has knowledge through (a) of one fact and through (b) of another, it can be argued that there is actual knowledge, provided that the reasonable diligence test of 27 is . . .

Q: We will come on to the reasonable diligence test. I have it well in mind. At the moment the only thing I am concerned about is to establish with you, what I think you should not have any difficulty in accepting, that whenever one is dealing with a question of knowledge in a corporation, one is inevitably dealing with a question of imputation.

A: Well, somebody within the corporation, the person who is in charge of the transaction, has to have knowledge, if what you say is his knowledge is knowledge of the corporation, in that sense it is imputed, yes.

Q: That is exactly what I am saying at this stage.

A: All right.

Mr Levie appeared to take the same view in the course of his evidence on day 99 (transcript: pages 135 - 142). We were referred to a number of other passages in argument; but, on a proper analysis they do not address this point. Rather, they are directed to the related point, to which we shall return shortly, whether a corporation can be said to act in bad faith in circumstances in which there is no single individual whose own subjective bad faith can be attributed to it. At the moment we are not considering bad faith; we are considering knowledge. We are satisfied that a purchaser who is a corporation has knowledge, for the purposes of section 8-304(4), of those facts which are actually known to the individual (or to any individual) who is conducting the relevant transaction on its behalf.

“Bad faith ”

80. The requirement, under section 8-304(4), is that, in the light of the facts of which he has actual knowledge, the action of the purchaser in taking the security amounts to bad faith. "Bad faith" is not defined in the Code. The Judge recorded that it was common ground that “bad faith” means the absence of good faith. "Good faith" is defined by section 1-201(19). It means “honesty in fact in the conduct or transaction concerned”. The Judge analysed the requirement in the following passage (transcript: pages 595-596):

If the words [of section 8-304(4)] were to be construed literally and purely as a grammatical exercise without reference to the history and non-uniform character of the subsection, there would be much force in Macmillan's contention that they introduce an objective element into the inquiry. As Macmillan points out, both limbs of the subsection are directed to the sufficiency of the facts actually known to the purchaser. The first limb requires "actual knowledge of the claim ". The second requires something less: "knowledge of such facts ...." It defines the facts which must be known to the purchaser, not his state of mind. The question is whether the introduction of the phrase "bad faith" in the second limb reintroduces the subjective element of dishonesty, in which case it adds nothing to the requirement of good faith; or whether it introduces the objective criterion of actual knowledge of such facts that (viewed objectively) "his action in taking the security amounts to bad faith", in which case it is a somewhat clumsy attempt to reproduce the English requirement of "knowledge of such facts as would put an honest and reasonable purchaser on inquiry."

The reference in that passage to the “history and non-uniform character of the subsection” is explained by the fact that, as the Judge had already pointed out in a earlier passage, section 8-304(4) was introduced in 1982 into the Code as adopted by the state legislature in New York in order to perpetuate the existing, pre-code, law; it is non-uniform, and applies only in New York and Virginia.

81. The Judge went on to identify the cause of the problem which underlies the question whether the use of the phrase “bad faith” in the second limb of section 8-304(4) introduces an objective criterion. He said this (transcript: pages 596-597):

The problem is caused by the fact that the wording of the second limb seems to assume that actual knowledge of the facts can be so extensive (though not amounting to actual knowledge of the claim) that a finding of bad faith must (not may) follow. The truth is that knowledge of sufficient facts never does itself constitute bad faith. It is merely evidence from which, in the absence of some other explanation, bad faith may be inferred. The difference is best brought out by considering the position of the purchaser who sees the facts staring him in the face but is too stupid to put two and two together. He may or may not be negligent or unreasonable in going ahead with the transaction, but he is not dishonest.

82. The Judge expressed his conclusion on this point in the following passage (transcript: pages 602-603):

As to the meaning of notice, I am satisfied that under New York law it is not enough for Macmillan to establish that a Defendant "had reason to know" or "ought to have known" of the adverse claim, still less that it "had cause to suspect" or "ought to have suspected" it; or that the circumstances known to the Defendant were sufficient to put an honest and reasonable man on inquiry. It must be shown that the Defendant or one of its relevant employees actually knew of the adverse claim; or actually suspected it and deliberately chose not to make inquiry lest the truth be discovered.

83. We agree that knowledge of facts does not, of itself, constitute bad faith. What is required is that, with knowledge of the facts of which he does have actual knowledge, the purchaser’s action in taking the security should amount to bad faith; that is to say, that the purchaser, in taking the security with knowledge of those facts, was not acting in good faith. To revert to the definition in section 1-201(19), the purchaser, in taking the security with knowledge of the facts of which he did have actual knowledge, was not acting with “honesty in fact . . . in the transaction concerned”. If so, then the purchaser is not a “bona fide purchaser” within section 8-302(1). The facts of which he has actual knowledge must be such that to take the security in those circumstances is not consistent with the essential requirement that he be “a purchaser . . . in good faith”. As the Judge pointed out (transcript: page 601) the objection that, on this view as to the nature of the notice which section 8-304(4) requires, the requirement as to notice adds little or nothing to the requirement as to good faith:

loses its force in the light of the often repeated statements of the New York Courts that these are not separate but interdependent requirements. Each is viewed in the light of the other.

84. We agree, also, that it is not enough that others, having knowledge of the facts of which the actual purchaser had knowledge, would or might have chosen not to enter into the transaction, on the grounds that the circumstances excited suspicion. We accept that a purchaser who was able to satisfy the court that, in the Judge’s words, he was “too stupid to put two and two together”, could not be held to have notice within the interpretation to be given to the requirement in section 8-304(4) under the law of New York. But we part company with the Judge when he puts the test as high as “actually knew of the adverse claim; or actually suspected it and deliberately chose not to make inquiry lest the truth be discovered”. We have no doubt that actual knowledge of the claim, or actual suspicion coupled with a deliberate choice not to make inquiry, will suffice; but our own analysis of the relevant authorities, in the light of such help as we are able to obtain from the evidence of the expert witnesses, leads us to the conclusion that, in the absence of actual knowledge of the claim, actual suspicion is not a necessary ingredient. It is enough that the purchaser decides not to make the inquiry which, in the light of the facts known to him, an honest and prudent banker would make in order to satisfy himself that he was not taking as security stock over which some other party had some existing inconsistent claim. For a banker to take security in the knowledge that he has not made (and will not make) the inquiry that an honest banker would make - and so, by necessary implication, not caring whether or not some other party has an existing inconsistent claim - seems to us to fall short of the “honesty in fact in the conduct or transaction concerned” which good faith requires. In our view it is properly to be regarded as acting in bad faith. We are satisfied from an examination of the authorities, to which we now turn, that a court in New York would take the same view.

85. The earliest of the New York authorities to which we were referred is Soma v Handrulis 277 N.Y. 223 (1938), a decision of the New York Court of Appeals on the law as it stood before the adoption of the Uniform Commercial Code. Nevertheless, the case is in point because the requirement as to “knowledge of such facts that his action in taking the instrument amounted to bad faith” preceded the adoption of the Code. The facts and conclusion appear from the following passage, at page 233:

(4) The indorsement of Sarah Alkoff was neither special, restrictive nor conditional, but was rather an indorsement in blank without any indication by appropriate words that she indorsed in any other capacity and represented to those who thereafter came into possession of the instrument that she was the owner ( White v Continental Nat . Bank, 64 N.Y. 316, 320). The Federal Reserve bank must rely on that rule and assert that Alkoff had title as a holder in due course for its authority to undertake to collect on the check and be relieved from liability for conversion. But the indorsement of the payee told that bank that Sarah Alkoff was not the owner. Her indorsement destroyed its negotiability for any purpose. To constitute notice of a defect in the title of one negotiating the instrument or of infirmity in the instrument, a person subsequently dealing with it “must have actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith” (Neg. Inst. Law, para 95) Here, actual knowledge of the non-negotiable character of the check was brought home to the collecting bank. It is said that negligence is not enough and that bad faith must exist ( Coopersmith v Maunz , 227 App. Div. 119). Even so, gross carelessness may constitute evidence of bad faith ( Canajoharie Nat. Bank v Diefendorf , 123 N.Y. 191). Even if the actual good faith of the Federal Reserve Bank in dealing with the instrument is not questioned, if the facts shown by the instrument itself should have led it to inquire, and by inquiry it would have discovered the true situation, in a commercial sense it acted in bad faith and the law will withhold from it such protection as it would otherwise have been entitled to receive ( Hoberg v Sofransky , 217 App. Div. 546; Ward v City Trust Co , 192 N.Y. 61 ,69, 70) We think the indorsement by the payee showing that she retained legal ownership of the check and its proceeds, coupled with the indorsement in blank of Sarah Alkoff importing ownership in her, put the bank on inquiry. Inquiry would have disclosed the irregular transaction and would have shown the theft of the check. Failure to make this inquiry establishes, in a legal and commercial sense, bad faith on the part of the bank and makes it liable to the plaintiff for the diversion and loss of the check and its proceeds (Neg Inst. Law paras. 94, 95) even within the reservations of limited liability of a collecting bank under the Negotiable Instruments Law (para. 350-d) and section 5 of Regulation J of the Federal Reserve Board.

That passage, as it seems to us, contains a clear recognition that, because the facts actually known to the bank were such as “should have led it to inquire” - that is to say, were such as would have led an honest and prudent banker to make inquiry, the decision to proceed with the transaction without inquiry was to be regarded as bad faith.

86. The requirement under section 8-304(4) - which then appeared in the Code as subsection (3) of section 8-304 - was considered by a federal court, the United States Court of Appeals for the Second Circuit, in Gutenkunst v Continental Insurance Company 486 F .2d 194 (1973). A bank, Manufacturer Hanover Trust Company had accepted bearer bonds as security for a loan to a borrower, Schwartzman, of whom it had no previous knowledge, and with minimum inquiry as to their provenance. In fact the bonds had been stolen from the rightful owner. In an action for conversion, the bank set up the defence of bona fide purchaser. The court upheld that defence. The reasoning is set out in the following passage, at pages 195-196:

Appellant asserts that Manufacturers acted in bad faith because it dealt with a total stranger without making any investigation of him or his right to negotiate the securities. Reliance is placed on Canajoharie National Bank v Diefendorf , 123 N.Y. 191, 25 N.E. 402 (1890), and its progeny, for the principle that negligence in dealing with negotiable instruments may be so gross as to constitute bad faith.

Despite some broad language in the cases the New York law is that only actual knowledge or disregard of suspicious circumstances may constitute evidence of bad faith . These decisions have been codified in UCC para. 8-304(3) which requires that the purchaser have “knowledge of such facts that his taking of the security amounts to bad faith” (Emphasis added). Plaintiff concedes, however, that Manufacturers did not know any facts which should have aroused its suspicion. The entire argument proceeds from the premise that because the bank knew nothing about either Schwartsman or the bonds it acted in bad faith in failing to investigate. This assertion must fail before the clear rule set forth in the New York decisions and statute that it is not ignorance, but guilty knowledge or conduct that can be equated with guilty knowledge, that can give rise to bad faith.

The test “actual knowledge or disregard of suspicious circumstances” has been adopted and applied in the later cases. It is, however, important to note that the plaintiff failed because he conceded that the bank “did not know any facts which should have aroused its suspicion”. In the light of that concession it was not necessary for the court to consider whether, if the bank had known facts which should have aroused its suspicion, the plaintiff needed also to establish that it did actually suspect that there might be an adverse claim. As a matter of language the phrase “disregard of suspicious circumstances” is apt to cover both the position where the circumstances actually known to the purchaser are objectively suspicious and the position where there is actual suspicion by the purchaser.

87. The test was applied, with a different result, by the United States District Court, in New York, in Garner v First National City Bank 465 F. Supp. 372 (1979). The plaintiff alleged that certain stock, converted by third parties, had been purchased by the bank in circumstances which ought to have put the bank on inquiry. The court said this, at pages 382-383:

The test for what constitutes “bad faith” under N.Y.U.C.C. para. 8-304(3) has recently been stated by the Second Circuit in a diversity case in which the court applied New York law. Gutenkunst v Continental Insurance Company 486 F .2d 194 (2d. Cir. 1973). In Gutenkunst, the only issue was whether “[defendant] enjoyed the status of a bona fide purchaser under paras. 8-301 to 8-304 of the New York Uniform Commercial Code, so as to cut off the rights of [plaintiff], the ‘true’ owner”. Id. at 195. On this issue the court set forth as New York law “that only actual knowledge or disregard of suspicious circumstances may constitute evidence of bad faith.” Id. at 195-96 (emphasis added). On the basis of that test the court affirmed a judgment for defendant largely on the grounds that the plaintiff conceded that defendant “did not know any facts which should have aroused its suspicion” Id. at 196.

Application of the Gutenkunst test in this case produces a different result than that reached in Gutenkunst itself. Here there was such disregard of suspicious circumstances on the part of the defendant as to constitute “bad faith” within the meaning of N.Y.U.C.C. para. 8-304(3). . . . Thus defendant knew “facts which should have aroused its suspicion” Gutenkunst, supra 486 F.2d. at 196. Only Citibank’s “disregard of suspicious circumstances” id. at 195, permitted Citibank to go forward with the loan/pledge transaction without making an inquiry as to the question of who owned the collateral.

There was no finding of fact in that case that the bank, or any relevant officer of the bank, actually did suspect that the stock which it was invited to purchase was, or might be, the subject of an adverse claim. The court was content to find that the facts actually known to the bank ought to have aroused its suspicion; and that to proceed with the transaction in the light of that knowledge, and without inquiry, was to take the securities in bad faith.

88. The test was considered, again, by the Court of Appeals of New York in Chemical Bank of Rochester v Haskell 432 N.Y.S.2d. 478 (1980). Judge Meyer, who gave evidence in these proceedings, was party to that decision as a member of the court. The point arose in the context of the bank’s claim to be a holder in due course of negotiable promissory notes. The relevant provision as to notice is that contained in section 3-304(7) of the Code, which is in the same terms as section 8-304(4). The court explained the test in a passage at page 480:

Good faith under the code is defined as “honesty in fact in the conduct or transaction concerned” (Uniform Commercial Code, para. 1-201, subd. [19]) and it is clear that the draftsmen intended that this language set a subjective and not objective standard. In fact, so that no confusion would persist on this score, a proposed draft of section 3-302 which explained good faith in terms related to commercial reasonableness was amended to delete the offending language (White and Summers, Uniform Commercial Code [2d ed.], para. 14-6. p. 563; 1954 Report of N.Y.Law Rev.Comm., vol 1, pp.203-205). Thus, the inquiry is not whether a reasonable banker in Chemical’s position would have known, or would have inquired concerning the alleged breach by Stanndco of its partnership duties, but rather the inquiry is what Chemical itself actually knew. If Chemical did not have actual knowledge of some fact which would prevent a commercially honest individual from taking up the instruments, then its good faith was sufficiently shown (see 1955 Report of N.Y.Law Rev.Comm., vol 2, pp. 906-907).

Again, although the court made clear its view that the language of section 3-304(7) - and, so by analogy, the language of section 8-304(4) - set a subjective and not an objective standard, it is plain that it was directing that observation to the question of knowledge. In relation to knowledge the test is: what did the purchaser actually know? But, having stressed the need to identify, as a matter of fact, what the bank did actually know, the court then posed the next question in a different form: did the purchaser have actual knowledge of some fact which would prevent a commercially honest individual from taking up the instruments? The second question, as it seems to us, does not require a finding of conscious dishonesty. It is enough that an honest banker, having the knowledge which the Chemical bank actually had, would not have proceeded, or would not have proceeded without inquiry.

89. We were referred to two decisions of federal appellate courts arising out of the same insolvency. In the first, reported as In the matter of Legel Braswell Government Securities Corp., Bankrupt, Irving Trust Company v Westchester County Savings and Loan Association, 648 F. 2d. 321 (1981), the United States Court of Appeals for the Fifth Circuit identified the test in terms which are, by now, familiar. The following passage appears at page 328:

[5] New York U.C.C. para 8-304(3) provides that, in order for a purchaser to have notice of an adverse claim, that person must have either knowledge of the adverse claim or knowledge of such facts that his taking the security amounts to bad faith. Subsection (3) of 8-304 “may be construed to modify the otherwise applicable rules of U.C.C. para. 1-205(25), “which defines “notice”. McKinney’s New York U.C.C. para 8-302, Practice Commentary. Under section 8-304(3) “the New York law is that only actual knowledge or disregard of suspicious circumstances may constitute evidence of bad faith”; mere negligence is not enough. . . . Circumstances must put a purchaser on notice of wrongful transfer before his failure to inquire constitutes lack of good faith or gives rise to an inference of notice of an adverse claim.

In the second, reported as In the matter of Legel Braswell Government Securities Corp ., Bankrupt, Plano Savings & Loan Association v Irving Trust Company , 695 F. 2d. 506 (1983), the Court of Appeals for the Eleventh Circuit said this, at pages 511-512:

Plano’s most persuasive argument is that Irving Trust had knowledge of such facts that its action in taking the certificate amounted to bad faith. This would constitute notice within the meaning of subsection (3) of section 8-304. Before analyzing Plano’s contentions under subsection (3), however a brief discussion of the unique aspects of New York law is in order. Subsection (3) is a non-uniform provision added to the New York statute. The significance of this addition is that it “may be construed to modify the otherwise applicable rules of U.C.C. para 1-201(25)” defining “notice”. Id. para. 8-302, Practice Commentary. Thus, under this subsection, “in order to charge a purchaser of investment securities with notice of adverse claims it is necessary to prove knowledge of such facts that the purchaser’s taking of the security amounts to bad faith” Legel Braswell I , 648 F.2d. at 327. Moreover, “New York law is that only knowledge or disregard of suspicious circumstances may constitute evidence of bad faith” Gutenkunst v Continental Insurance Company 486 F .2d 194, 195-96 (2d. Cir. 1973). . . . From this analysis, it is apparent that, under New York law, the concepts of notice and good faith are interrelated in the assessment of bona fide purchaser status. See, e.g. Chemical Bank v Haskell , 51 N.Y.2d 85, 432 N.Y.S.2d. 478, 411 N.E.2d 1339 (1980) (recently applying this analysis in the context of a bona fide purchaser claim under a similar provision in U.C.C. Article III). Bearing in mind this interdependence and the potential impact of this non-uniform provision, we turn to the facts in hand.

We cite those passages to show that the principles which we have earlier set out are well recognised and consistently applied. We do not find anything in those two decisions which advances the principles beyond the position reached in earlier cases.

90. We were referred, also, to a decision of the United States District Court for the District of Massachusetts in a case heard after the trial in the present proceedings, Securities and Exchange Commission v Pinez 989 F.Supp 325 (1997). We think that this recent statement of the law, in a passage at page 59, is helpful:

The test of good faith and actual knowledge under New York law is a subjective one. See Hartford Accident & Indemnity Co. v American Express Co ., 74 N.Y.2d. 153, 162, 544 N.Y.S.2d 573, 542 N.E.2d 1090 (1989) (interpreting the analogous provision in section 3-304(7) of the N.Y.U.C.C. and concluding that “holders in due course are to be determined by the simple test of what they actually knew, not by speculation as to what they had reason to know, or what would have aroused the suspicion of a reasonable person in their circumstances.”). In arguing that both the federal and New York Uniform Commercial Code “actual knowledge” tests are subjective in nature, Lehman maintains that “there is virtually no distinction between the state and federal standards”. . . . What Lehman fails to acknowledge, however, is that even a subjective test does not absolve a person with actual knowledge of suspicious circumstances to meet a duty of reasonable inquiry. See Fallon v Wall Street Clearing Co ., 182 A.D.2d 245, 586 N.Y.S. 2d 953, 956 (1992) (holding that transferee of investment securities who claims to be a bona fide purchaser “is under obligation to investigate suspicious circumstances which might suggest the existence of an adverse claim”); In re Legel Braswell Gov’t Sec. Corp. v Irving Trust Co 695 F2d 506, 512 (11th Cir. 1983) (interpreting New York’s bona fide purchaser laws and concluding that the purchaser’s “disregard for suspicious circumstances, of which it had actual knowledge, constitutes a taking in bad faith”.); Garner v First Nat’l City Bank 465 F. Supp. 372, 382-83 (S.D.N..Y. 1979) (concluding that a pledgee exhibited “such disregard of suspicious circumstances” that it “constituted ‘bad faith’ within the meaning of N.Y. bona fide purchaser law); Gutenkunst v Continental Ins. Co ., 486 F.2d 194, 195-96 (2d. Cir. 1973) (per curiam) (“New York law is that only actual knowledge or disregard of suspicious circumstances may constitute evidence of bad faith”).

The Court therefore concludes that even if New York law governs the standard for Lehman’s status as a bona fide purchaser, a failure to act on actual knowledge of suspicious circumstances constitutes bad faith on the part of a lien holder.

The passage contains a clear statement of the view, to which we had already been drawn by the language of section 8-304(4) and an examination of the earlier cases, that the subjective test does not absolve a person with actual knowledge of suspicious circumstances from meeting a duty of reasonable inquiry.

91. Mr Levie, who was called as an expert witness by Swiss Volksbank, set out his understanding of the position as to notice in paragraph 26 of his written report. At sub-paragraph (e) he identified the question to be addressed:

26(e) Here, the relevant question is accordingly whether SVB and/or Citibank had (i) actual knowledge of the fact that the Berlitz shares belonged to Macmillan and were being dealt with in breach of duty or (ii) had actual knowledge of facts which would (and not might) have induced an honest banker to conclude that the Berlitz shares belonged to Macmillan and were being dealt with in breach of duty or (iii) had actual knowledge of facts which would (and not might) have induced an honest banker to make investigations to determine whether the Berlitz shares belonged to RMG.

We think that that is an accurate summary of the effect of the requirement as to notice contained in section 8-304(4) of the Code. Mr Levie went on, in sub-paragraph (g), to say this:

26(g) A person taking a secured interest can only be characterised as having acted in bad faith where he has such actual knowledge of facts falling within (e) above that it can legitimately be concluded that he has deliberately or wilfully or recklessly disregarded those facts . . . Concepts of “bad faith” and “notice” in New York law are accordingly not distinct concepts but inter-dependent concepts.

We think that there is force in Mr Moss’s criticism that it is unhelpful, and may lead to confusion, to introduce a concept, “recklessness”, which is not present in the language of section 8-304(4) itself. Further, it is not clear to us what distinction, if any, Mr Levie seeks to draw between “deliberately” and “wilfully” in this context. In our view it is more satisfactory to adopt the language of section 8-304(4): a banker can be said to take a security in bad faith when, with actual knowledge of facts which would have led an honest banker to make investigations as to whether the security belonged to another, he decides not to make those investigations.

92. We conclude, therefore, that the relevant question, in the present context, is: did Credit Suisse, through those having conduct of the transaction, decide not to make the inquiry which, in the light of the facts known to the bank, an honest and prudent banker would have made in order to satisfy himself that he was not taking as security stock over which some other party had some existing inconsistent claim. If it did so decide, then that is evidence of such an indifference to the rights of that other party that it can aptly be said to have acted in bad faith.

D. Did Credit Suisse have notice in fact ?

93. This question arises separately in respect of the receipt by Credit Suisse of 500,000 Berlitz shares on 27th September 1991 and of a further 1m. Berlitz shares on 12th/13th November 1991. It is convenient to recapitulate material facts to which we have already referred in order to set the scene for our consideration of these questions.

94. Macmillan was a company incorporated in the State of Delaware and was at all material times a subsidiary of Maxwell Communications Corporation plc. (“MCC”) MCC and its subsidiaries comprised what was known as the public side of the empire of Mr. Robert Maxwell because the shares of MCC were quoted on various stock exchanges. The public side was to be contrasted with the private side of the Maxwell empire of which Mirror Group plc, which, on 10th April 1991, changed its name to Robert Maxwell Group plc (“RMG”), formed part.

95. From December 1989 to 5th November 1990 Macmillan was the registered holder and beneficial owner of 56% of the issued share capital of Berlitz (10.6m shares), the remaining 44% having been sold by Macmillan to members of the public pursuant to an initial public offering made in December 1989. On 5th November 1990 Macmillan transferred its 56% holding in Berlitz to Bishopsgate Investment Trust plc (“BIT”). BIT was then a wholly owned subsidiary of RMG and held such shares as nominee for Macmillan. At that time the 56% holding was comprised in 21 separate stock certificates.

96. By 23rd January 1991 15 of the stock certificates representing 7.6m. shares had found their way into the possession of London & Bishopsgate International Investment Management plc, another company in the private side of the Maxwell empire, and were delivered by that company to Morgan Stanley. On 7th March 1991 Morgan Stanley delivered such stock certificates to the Depository Trust Company of New York with a view to such shares being held within the DTC. The appropriate registration into the name of CEDE was effected on 11th March 1991. Thereafter 7.6m of the 10.6m shares to which Macmillan was beneficially entitled were registered in the name of CEDE as nominee of the Depository Trust Company of New York and were held within the DTC for the account of Morgan Stanley by whom they had been lodged. Morgan Stanley held them for the account of London and Bishopsgate International Investment Management plc.

97. Thus of the two transfers with which we are directly concerned one, that relating to 500,000 shares effected on 27th September 1991, came from the balance of 3m. Berlitz shares not held within the DTC; the other, effected on 12th/13th November 1991, related to 1m. shares forming part of the 7.6 m shares held within the DTC. It is not in dispute that immediately before the respective transfers the shares in question were beneficially owned by Macmillan. Likewise it is accepted by Macmillan for the purposes of this appeal that the question whether Credit Suisse had notice so as to take the shares subject to the rights of Macmillan is to be determined as at the time of the respective transfers and in accordance with the law of the state of New York.

98. Credit Suisse was involved with both the public side and the private side of the Maxwell empire. In the case of the public side it was one of a consortium of banks by whom a $3bn. facility, (formally called a Multiple Tranche Financing Facility Agreement but colloquially described as a “Jumbo Facility”) had been granted to Macmillan on 23rd October 1989. This facility contained a negative pledge which precluded Macmillan or any of its subsidiaries from charging any of their respective assets as security for any other indebtedness. In the case of the private side, on 7th September 1990 Credit Suisse granted to RMG a £50m. 6 month loan facility to be drawn down and secured in accordance with the facility letter of that date. This facility was renewed for a further twelve months on revised terms on 21st March 1991. The Berlitz shares received by Credit Suisse on 27th September and 12th/13th November 1991 were retained by Credit Suisse as security for the amounts due to it from RMG pursuant to this facility.

99. Subject to the overall directions of the credit committee of the London Branch of Credit Suisse and departments at the headquarters of Credit Suisse in Zurich the individual officers or employees of Credit Suisse responsible for the Maxwell group accounts were Miss Julie Maitland, her immediate superior, Mr Paul McDonnell, and a junior employee, Mr Rene Mueller. The individual from the Maxwell Group with whom they primarily dealt was Mr Kevin Maxwell. The question whether Credit Suisse had notice of the rights of Macmillan when receiving the Berlitz shares on 27th September and 12th/13th November 1991 depends on the knowledge of Miss Maitland, and, with regard to the receipt on 27th September 1991, of Mr Mueller. Accordingly it is necessary to explain their prior involvement in some detail.

100. Miss Maitland joined the London Branch of Credit Suisse in May 1989. Her responsibilities included discussing the customer’s requirements, considering and making recommendations in respect of applications for new facilities, and managing existing loan facilities. She was described by the Judge (transcript: page 377) as

“an extremely capable and conscientious officer. Her file notes of meetings with customers and her credit recommendations are detailed, lucid and a model of their kind.”

As the Judge held (transcript: page 380)

“By the end of 1989 Miss Maitland was familiar with the basic structure of the Maxwell group and the more important trading companies. She knew that MCC was a listed public company in which Mr. Maxwell and his family owned a controlling interest and, as she acknowledged in evidence, she was aware:

(i) that Macmillan was a wholly owned subsidiary of MCC;

(ii) that immediately prior to the initial public offering in December 1989 Berlitz was a wholly owned subsidiary of Macmillan;

(iii) that as part of an asset disposal programme Macmillan had made an initial public offering of shares in Berlitz; and

(iv) of the existence of the negative pledge clause in the MCC jumbo facility.”

101. On 26th January 1990 Mr McDonnell and Miss Maitland met with Kevin Maxwell and Mr Stoney, the managing director of Pergamon AGB, a company then in the public side, for the purpose of reviewing that company’s banking facilities and to consider a possible restructuring of it in the light of the proposal that it should be moved to the private side. The events of this meeting in fact had no relevance to anything we have to decide. But, for reasons we will explain later, it featured prominently at the trial and in the Judge’s evaluation of the credibility of Miss Maitland’s evidence.

102. In February 1990 Miss Maitland was concerned with an application by London and Bishopsgate Holdings plc (“LBH”) for a short term £50m. facility to enable it to buy an interest in a Scottish investment trust. In the event, though approved, the facility was never drawn down. Its relevance is that it formed the model for the later facility granted to RMG. It was primarily in this context that Miss Maitland became aware of the advice of Norton Rose and foreign lawyers instructed by them as to the precautions which should be taken to ensure that Credit Suisse obtained a good title to securities lodged as security for facilities such as that granted by Credit Suisse to RMG. Thus on 23rd May 1990 Mr Whale of Norton Rose wrote to Miss Maitland pointing out the precautions which should be taken so that the transaction might not subsequently be set aside in the event of the liquidation of the company providing the security.

103. On 3rd July 1990 Miss Maitland and Mr McDonnell attended a meeting with Kevin Maxwell and Mr Bunn, another director of RMG, to discuss a request from the latter for a short term £50m facility for RMG. Shortly thereafter Miss Maitland sent to RMG the term sheet setting out the principal terms for such a facility, if it were to be granted, which were based on those previously offered to LBH. On 9th July 1990 Mr Bunn suggested that the security provisions were unsuitable for RMG because

“ with a consolidated net worth of £750 million [it] has marketable securities which are predominantly strategic stakes and therefore substantially larger percentages. It would be impractical from our point of view to split these into smaller holdings for collateral purposes.”

Instead he offered holdings in four specified companies, not including Berlitz, to a total value of £62.5m. On 20th July 1990 Mr Anselmini, the deputy chairman of RMG, wrote again to Miss Maitland offering a wider spread of collateral securities by the inclusion of holdings in a basket of 38 blue chip Japanese stocks. On 23rd July 1990 Miss Maitland confirmed that Credit Suisse would require that the collateral package should not have a concentration of more than 5% of the stock of any one company and that no one stock should comprise more than 5% of the total value of all the collateral. With these amendments the terms for the facility proposed by Miss Maitland to Kevin Maxwell were submitted by her to the head office of Credit Suisse in Zurich and approved by them on 23rd July. Miss Maitland made no specific reference to RMG having any holding in Berlitz.

104. The preparation of the requisite documents was then referred by Credit Suisse to Norton Rose. These comprised a facility letter dated 7th September 1990, a memorandum of deposit relating to shares and other securities to be executed by RMG and a Third Party Memorandum of Deposit relating to shares and other securities to be executed by companies other than RMG. When sending the latter two documents to Miss Maitland on 7th September 1990 Mr Whale of Norton Rose wrote

“You should ensure that all securities delivered to Credit Suisse as part of the Security Portfolio are accompanied by a letter or memorandum from [RMG] or the relevant charging subsidiary stating that they are being delivered to you pursuant to the terms of the Facility Agreement. Such a letter or memorandum will evidence the requirement of the Memorandum of Deposit and Third Party Memorandum of Deposit that the charge only attaches to securities delivered pursuant to the terms of the Facility Agreement.”

The security portfolio required by the Facility Agreement required cover of 125% by value in fully paid stocks quoted in UK, US, France, Germany, Switzerland and Japan but subject to the limitations referred to by Miss Maitland in her letter of 23rd July 1990. RMG or the charging subsidiary, as the case might be, were to be entitled to substitute other stocks to an equivalent value. The Facility Agreement contained a warranty by RMG that it or a charging subsidiary was or would be the beneficial owner of any stock delivered by them respectively to Credit Suisse. On 13th September 1990 RMG accepted the terms set out in the letter dated 7th September and executed the Memorandum of Deposit. On 18th September 1990 Pergamon Holdings Ltd (later Headington Holdings Ltd) executed the Third Party Memorandum of Deposit. It was the only company to do so.

105. RMG drew down the £50m facility in four tranches on 18th and 20th September, 19th October and 8th November. In connection with each drawdown suitable securities were lodged by RMG with Credit Suisse. In the case of the fourth drawdown Kevin Maxwell on behalf of RMG wrote to Miss Maitland requesting a transfer of £13m to a specified account of RMG with National Westminster Bank plc and added

“please find enclosed a list of securities we have arranged to deposit with you.”

The list specified, amongst others, a holding of 500,000 shares in Berlitz with a value of £3,700,000. On receipt of that letter and list Miss Maitland sent a memorandum to the Securities department of Credit Suisse to inform them that those shares were to be held in respect of the facilities advanced to RMG. On 14th November 1990 Mr Khawam, an associate of Miss Maitland, sent by fax to RMG a list of shares, confirmed by Credit Suisse’s securities department, to be held by them and noted that “this does not include as yet...Berlitz Int’l...”

106. In respect of this earlier deposit of 500,000 Berlitz shares the Judge held (transcript: page 404)

“The number of the certificate cannot now be identified, but it must have been in the name of BIT. It is not in dispute that it was one of the certificates brought back from New York on 6th. November by Miss Ghislaine Maxwell.

Miss Maitland wrote a note to the Securities Department explaining that the shares were to be held in respect of facilities advanced to RMG. It is not clear whether the certificate and transfer forms accompanied the note. Miss Maitland told me that she did not recollect seeing the Berlitz certificate, and thought it unlikely that she would have collected the package delivered by the messenger, though she did so on occasions when no one else was available. She told me that she was not conscious at the time of the fact that the Berlitz certificate was in the name of BIT and that she did not see the transfer forms.

The stock power indorsed on the back of the certificate had not been completed. Instead the certificate was accompanied by a separate U.K. share transfer form. The Securities Department advised that this should be replaced by a U.S. stock power form. On 15th. November a duly executed U.S. stock power form in respect of the Berlitz shares was delivered to Credit Suisse under cover of a letter from RMG signed by Mr. Fuller as Group Treasurer. Mr. Fuller was, of course, also Group Treasurer of MCC.

Beyond noticing this administrative error, Credit Suisse appears to have had no reservations in accepting the Berlitz shares.”

107. As we have already observed, the facility was renewed for a further twelve months on 21st March 1991. However the terms as to what security was required were altered. First the security had at all times to have an aggregate value of 150% of the amount outstanding. Second, in addition to the existing 5% limits, it was provided that Maxwell related stocks should not represent more than 5% by value of the whole security portfolio. The 500,000 Berlitz shares were returned by Credit Suisse to RMG on 4th April 1991 because at that time their value was more than 5% of the security portfolio and they were Maxwell related stocks. They were replaced by alternative security sent by RMG to Credit Suisse the same day under cover of a letter from RMG complying with the advice given by Mr Whale to Miss Maitland in his letter to her dated 7th September 1990.

108. A Memorandum of Deposit in favour of Credit Suisse was executed by RMG and Headington Holdings Ltd on 1st August 1991 following the name change of both companies. On 22nd August 1991 a formal agreement between Morgan Stanley, RMG and Credit Suisse was entered into whereby in consideration of Credit Suisse releasing £1.5m to LBG as agents for RMG, Morgan Stanley as agent for RMG agreed to deliver to a bank in Tokyo specified shares to be held as security under the terms of the Memorandum of Deposit executed by RMG in favour of Credit Suisse on 1st August 1991. On 5th September 1991 RMG entered into a Charge Agreement conferring a charge over its interest in moneys standing to the credit of an account of Credit Suisse with Midland Bank plc and agreed an amendment to the Facility Agreement dated 21st March 1991 so as to regularise Credit Suisse’s security over cash sums deposited with Credit Suisse by RMG.

109. Early in September 1991 Credit Suisse decided not to renew the £50 million facility when it expired in March 1992 because the administrative inconvenience occasioned by the frequent substitutions of security which were taking place was not justified by the level of fees generated. At a meeting with Mr. Trachtenberg, the managing director of LBG, attended by Miss Maitland and Mr. McDonnell on 11th September Mr. Trachtenberg was informed of Credit Suisse's decision. Mr. Trachtenberg indicated that the facility would be repaid in March 1992 and in the meantime offered to pay increased charges for its administration. On 19th September in response to a request by Credit Suisse RMG (by Kevin Maxwell) wrote to the Bank confirming that with respect to all matters relating to the RMG facility Credit Suisse could take instructions both verbal and written from Mr. Trachtenberg.

110. On Thursday 26th September 1991 Mr Trachtenberg telephoned Mr Mueller and subsequently confirmed his conversation by fax stating that

“in exchange for your receiving the shares as detailed on the attached list you will transfer sterling to the RMG account at National Westminster (details attached) for value today.”

After consulting with Miss Maitland Mr Mueller confirmed to Mr Trachtenberg that Credit Suisse would release £6m from the deposits held as security against delivery of such shares as substitute security. Later that day a portfolio of shares was delivered to Credit Suisse by Bank of America. The certificates were in the name of Bank of America Nominees Ltd. A/c m.2304 and were accompanied by a letter headed “Re Thorntons/MGPT”. There was no reference to RMG or the RMG facility nor were the securities said to be delivered by way of security. But the shares corresponded with those listed in the fax from Mr Trachtenberg. Mr Mueller checked the share certificates, signed a receipt for them and placed the letter from Bank of America in the file. In the circumstances described by the Judge in some detail (transcript: page 429 et seq) several telephone conversations between Mr Pedley of Bank of America and Mr Mueller took place during one of which Mr Pedley indicated to Mr Mueller that the shares delivered by Bank of America to Credit Suisse were assets of a pension fund. In respect of this conversation the Judge concluded that (transcript: page 437)

“Mr. Pedley attached much more importance to the fact that the assets belonged to a pension fund than did Mr. Mueller. Mr. Mueller was not concerned to inquire into the source or ownership of securities held by the Bank. Moreover, he was a Swiss national, and it was his understanding that it was common practice in Switzerland for a company's pension funds to be pledged to secure borrowings by the company.”

111. The first receipt with which we are directly concerned occurred on Friday 27th September 1991. The events which occurred were described by the Judge in the following terms (transcript: pages 439 to 440):

“Miss Maitland spent Friday 27th September 1991 with clients at Ascot. During the previous day she learned from Mr. Trachtenberg that there was to be a further substitution of security which would take place on the Friday, and that this would include 500,000 shares in Berlitz. On her instructions Mr. Mueller prepared for her to sign in advance a memorandum to the Securities Department dated 27th September and recording the new deposit. Miss Maitland left Mr. Mueller to deal with the delivery of the shares.

On 27th September 1991 shares in six different companies were delivered to Credit Suisse. They included 500,000 shares in Berlitz. The other five shares, which in aggregate amounted to only a small proportion by value of the shares which were delivered, were all registered in the name of RMG. The 500,000 Berlitz shares were represented by a single certificate (No. BI 233) in the name of BIT indorsed with a stock power duly executed in blank and signed by Mr. Kevin Maxwell and Mr. Ian Maxwell. Mr. Mueller examined the certificate, but neither Miss Maitland (who was out of the office) nor Mr. Khawan saw it at the time. Credit Suisse in general, and Miss Maitland in particular, have assumed that it was the same certificate as that which had been deposited with Credit Suisse between November 1990 and April 1991; and it may well have been. The certificates were accompanied by a covering letter from LBG signed by Mr. Trachtenberg which described the shares as being exchanged for sterling and requested that the money be paid to an account at Barclays Bank in the name of LBG. Miss Maitland knew that LBG was not a subsidiary of RMG but another private side company which was a subsidiary of Headington Investments. Mr. Mueller, however, dealt with the matter in Miss Maitland's absence and did not show her the covering letter. He realised that LBG and RMG were two different companies, but he arranged for the money (which amounted to £2.5 million) to be paid to LBG in accordance with Mr. Trachtenberg's directions.”

112. On 8th October 1991 there was a meeting between Kevin Maxwell, Miss Maitland and Mr McDonnell to discuss the financial performance of the Group, both public and private sides, and its corporate strategy. In respect of the public side she recorded in her note that MCC had been approached by Reader’s Digest to sell its stake in Berlitz at a premium over the then quoted price. In respect of the private side she noted that the liquidation of non-core assets was continuing. As the Judge observed (transcript: page 442) Miss Maitland’s note and her understanding that the sale of shares in Berlitz to Reader’s Digest was of Macmillan’s 56% only was inconsistent with a belief that there was a small private side holding in Berlitz which had been pledged to the Credit Suisse.

113. By a written agreement made between RMG and Credit Suisse on 22nd October 1991 Credit Suisse agreed to release on that day £12.8m held as security for the RMG facility by transfer to the account of LBG with Barclays Bank. The consideration for that promise and its performance was the promise of RMG to deliver to Credit Suisse the share certificates together with the corresponding share transfer forms in respect of the shares described in the schedule thereto to be held by Credit Suisse as security under the terms of the Memorandum of Deposit dated 21st March. RMG agreed that if such shares were not received by 23rd October 1991 it would provide collateral in the form of freely available funds to Credit Suisse on 23rd October 1991 to meet such shortfall. The shares described in the Schedule did not include shares in Berlitz.

114. On 25th October 1991 Credit Suisse released a further £6 million in cash held as security for the RMG facility against RMG's agreement to a permanent increase in the security cover requirement from 150% to 160%; the temporary deposit of Maxwell-related stocks to provide security cover of 200%; and an undertaking that the security portfolio would be brought back within the agreed requirements by 28th October. On Friday 1st November 1991 Credit Suisse wrote to RMG pointing out that the security was well below the agreed requirements and demanding the deposit of £18m. in cash or £23m. in shares. No response was received to this demand, which was overtaken by the death of Robert Maxwell on 5th November. The position improved somewhat in the days which followed. On 7th November 1991, it was announced by the Board of MCC that Macmillan had entered into a letter of intent with Fukutake for the transfer of all or substantially all the 10.6m shares in Berlitz. According to a fax sent by Credit Suisse to RMG on Friday 8th November, £11m. in cash and £17m. in shares was then needed to bring the cover up to the required 160%.

115. On 8th November Miss Maitland and Mr. McDonnell met Mr. Trachtenberg and Mr. Bunn to discuss the security cover for the RMG facility. Mr. Trachtenberg stated that he would be in a position to deliver £7 to £8 million worth of shares in the middle of the following week to address the shortfall, and in the meantime offered to pledge additional Berlitz shares which were held in the DTC system. Mr. Trachtenberg asked for details of Credit Suisse's DTC agent for delivery of up to £12 million worth of shares by Monday in New York. Mr. Trachtenberg was given the details of Credit Suisse's DTC account with SASI, and agreed to set up the transfer of 1 million Berlitz shares that night for value Monday 11th November. Miss Maitland and Mr. McDonnell saw the offer as another bridging arrangement which Credit Suisse was entitled to reject but which they, that is Miss Maitland and Mr McDonnell, were persuaded to accept on a short-term basis, to be replaced within a matter of days by security of the kind stipulated for by the facility.

116. The transfer of the 1m shares in Berlitz occurred on 12/13th November in the circumstances described by the Judge (transcript: pages 453 and 454) in the following terms:

“During the afternoon of Tuesday 12th November (Mr. Trachtenberg did not keep hisword to make the arrangements on the Friday for value on the Monday) instructions were given by electronic transmission by BIM to Morgan Stanley to transfer a total of 4 million shares in Berlitz in four parcels to four different transferees. One parcel of 1 million shares was to be transferred to SASI's DTC account for the order of Credit Suisse. These instructions were confirmed by BIM by fax dated 12th November signed by Mr. Trachtenberg and Mr. Cook. According to Mr. Cook's evidence, he was acting on Mr. Kevin Maxwell's instructions. The transfer was affected by the making of appropriate entries on the accounts of Morgan Stanley and SASI with the clearing corporation DTC. This appears to have taken place on 12th November.

On 13th November SASI received from DTC a Delivery Advice recording the delivery of 1 million Berlitz shares and a Participant Statement showing that they had been deposited on 12th November. On 13th November SASI made an entry in its books crediting 1 million Berlitz shares to Credit Suisse's account with SASI, and sent Credit Suisse a Receiving Ticket confirming that it held on behalf of Credit Suisse 1 million Berlitz shares received from Morgan Stanley.”

117. The subsequent events may be shortly summarised. On 5th December 1991 Credit Suisse demanded repayment of the amount due under the facility. On the same day RMG was put into administration. The writ in this action was issued by Macmillan on 9th December 1991. By a letter dated 11th December 1991 the solicitors acting for Macmillan claimed from Credit Suisse the return of the certificates and other documents relating to the 1.5m Berlitz shares then held by Credit Suisse. Thus Credit Suisse obtained actual knowledge of the claim of Macmillan by 12th December 1991 at the latest.

118. Thereafter Credit Suisse sought to perfect its legal title to the 1.5m Berlitz shares. On 6th May 1992 Credit Suisse instructed SASI to withdraw the 1m shares from the DTC system and to arrange for them to be registered in the name of Credit Suisse Nominees Ltd. On 12th May 1992, in respect of the 1m shares and on 4th June 1992 in respect of the 500,000 shares Credit Suisse Nominees Ltd was registered as the owner of such shares. This course was available to Credit Suisse because the interlocutory injunction previously obtained by Macmillan was discharged because Macmillan was unable to give an adequate cross-undertaking in damages subsequent to the time when it went into administration in England and Chapter 11 in New York. The discharge of the injunction was described by the Judge (transcript: pages 474 to 476) as

“a serious mistake. It left the Defendants free to take whatever steps were open to them to improve their position against Macmillan, and Swiss Volksbank and Credit Suisse both took advantage of this. This would not have been possible if the injunctions had been replaced by an order restraining the Defendants from obtaining the registration of their holdings, or if they had been required to give undertakings that they would not at the trial rely on steps taken in relation to the security after the date on which the original injunctions were discharged.

The failure to exact such an undertaking has been particularly serious in the case of the 500,000 shares held by Credit Suisse, since it left Credit Suisse free to register the shares in its own name, and to rely upon its registered ownership to defeat Macmillan's claim.”

.....

“Credit Suisse took advantage of the absence of any injunction or undertaking to do everything it could to frustrate Macmillan's claim to the shares, and was now the registered owner. In relation to the 500,000 shares, it thereby not only altered the applicable law but, in the event, determined the outcome of the Action. This is not due to any peculiarity of New York law; the same would have been true in an entirely domestic case with no foreign element.”

This court decided ([1996] 1 WLR 387) that the law of New York applied because it was the law of the situs of the shares. The consequence was that the discharge of the injunction did not enable the applicable law to be changed by the process of registration for New York law had applied throughout.

119. As we have already indicated, though the events at the meeting between Miss Maitland and Kevin Maxwell on 26th January 1990 are not relevant to anything we have to decide they featured prominently in the trial. The reason appears clearly from the judgment of Mr Justice Millett (transcript: pages 382 to 392). For present purposes it is sufficient to note that one issue arising on the witness statements of Miss Maitland and Mr McDonnell was when and why they thought that there was a private side holding of shares in Berlitz available for deposit as security for the debts of RMG. It only emerged when Miss Maitland came to give her oral evidence that, after conferring with Mr McDonnell, she had concluded that she was told of such a holding by Kevin Maxwell at the meeting on 26th January 1990.

120. Not surprisingly, this late change in the evidence of Miss Maitland caused counsel for Macmillan to concentrate a large part of his cross-examination on whether Miss Maitland had then been so informed. But this issue only went to her credibility, not to the crucial issue of her knowledge on 27th September and 12th November 1991. In the event the Judge was not prepared to go as far as counsel for Macmillan submitted that he should. Millett J. concluded (transcript: pages 391 et seq):-

“It is sufficient for me to find, as I do, that Mr. Kevin Maxwell did not, at any time prior to November 1990, tell Miss Maitland or Mr. McDonnell that the private side had acquired a holding in Berlitz; and that neither Miss Maitland nor Mr. McDonnell understood him to say so at the time. But I reject as unfounded Macmillan's allegation that Miss Maitland's evidence, and Mr. McDonnell's, is pure invention. I think that it is due to misrecollection under pressure. Throughout their evidence they have insisted that they believed that the Berlitz shares which were pledged to Credit Suisse belonged to RMG, but (this episode apart) they have been unable to put forward any ground for their belief. I have little doubt that when their instructions were being taken for their witness statements they were pressed to explain why they believed that the shares belonged to RMG, and whether Mr. Kevin Maxwell had ever told them so. From a dim but accurate recollection that Mr. Kevin Maxwell had mentioned the Berlitz shares in connection with the initial public offering, and had said something to the effect that it was his or the family's view that they were a good investment, they have convinced themselves that Mr. Kevin Maxwell said something about their ownership that in fact he could not have said. Accordingly, while I reject the charge that they are dishonest witnesses who have been guilty of deliberately inventing evidence, I do find it necessary to approach their evidence with some caution.”

121. Later in expressing his conclusions on the relevant issues, on the footing that the issue of notice was to be determined in accordance with the law of the state of New York, the Judge said (transcript: pages 623 et seq.):-

“The relevant dates in this case are 27th. September 1991 and 12th. November 1991. The principal actor whose knowledge and state of mind are attributable to the Bank is Miss Maitland.

Miss Maitland is a highly intelligent and conscientious person. She is of conspicuous ability, and made it her business to know far more about her customers' affairs than did any of the other witnesses who had dealings with the Maxwell group and gave evidence before me. She knew all about Macmillan's 56% holding in Berlitz; she would have castigated herself if she had not. If she had a defect, it was that she had little imagination. She tended to accept and report what she was told without asking herself whether it was plausible or consistent with other information in her possession.

I found her an honest and truthful witness, though her evidence needed to be approached with caution, for two reasons. In the first place, she gave evidence with a suppressed belligerency which may have been due to outrage that her competence should be questioned, but which I suspect was attributable to a basic insecurity. As a result she often did herself less than justice in her answers. In the second place she had genuinely convinced herself about an incident which never happened. Throughout her evidence she has always insisted that she believed that the Berlitz shares which were pledged to Credit Suisse belonged beneficially to RMG; but I have little doubt that when her instructions were being taken for her witness statement she was repeatedly pressed to explain why she believed this, and was eventually persuaded to put forward one mis-remembered incident as the ground for her belief. But she had a far more impressive ground; the shares were pledged to Credit Suisse by RMG and on the basis that they belonged to RMG. Of course it is right to test her protestations that she believed that they belonged to RMG. But in doing so the right question is not: why did she believe it? but what grounds did she have for not believing it?

Berlitz shares were originally pledged to Credit Suisse on 9th. November 1990, when they were deposited as part of the security for a further draw down of the facility. The shares were delivered by RMG and she simply assumed that they belonged to RMG. It never crossed her mind that they might belong to Macmillan. If this had occurred to her, she would not have accepted them as security. This is self-evident. She had no incentive whatever to accept security to which the title was doubtful; she had no reason to think that alternative security could not have been provided.

When the shares were released from security they were returned to RMG. In September 1991 Miss Maitland was offered what she took to be the same shares, this time as substitute security. Once again she was offered them by RMG, and she assumed that they were still owned by RMG. A more imaginative person might perhaps have asked herself why RMG had retained the shares having regard to its policy of asset disposals. But it was a small holding, and its continued retention by RMG was not so inconsistent with the known policy of the group as to warrant suspicion. It is self-evident that it did not in fact occur to Miss Maitland that the shares did not still belong to RMG. If she had suspected that they did not she would not have accepted them. She had no incentive to do otherwise. She would simply have refused to release the existing security until satisfactory alternative security had been provided.

On 12th. November 1991 Credit Suisse took a further 1 million Berlitz shares as additional security. By this time Miss Maitland knew of the proposed sale of Macmillan's holding to Fukutake, and she also knew that, if the shares now being pledged to Credit Suisse belonged to RMG, then RMG had a total holding of at least 1.5 million shares or about 8% of the total issued share capital of Berlitz. A more imaginative person than Miss Maitland would certainly have asked herself why RMG had retained a holding of this size in view of its asset disposal programme; and I am surprised that she did not at least inquire of Mr. Kevin Maxwell why the shares were not included in the sale. But I am satisfied that these thoughts never entered her head. The shares were offered by RMG and she assumed that they belonged to RMG. Since they belonged to RMG, they were not part of the holding being sold to Fukutake. QED. She simply never questioned her own assumptions.

I am completely satisfied that neither Miss Maitland nor Mr. McDonnell knew or suspected that RMG was not the beneficial owner of all the shares which it had pledged to Credit Suisse. They were both honest and loyal employees, but neither was in a position to exercise major responsibility. Had either of them suspected anything improper, he or she would have reported it at once to Zurich. That is sufficient to dispose of the case against Credit Suisse.”

122. Millett J. then proceeded to consider the question of notice on the footing that the principles of English law applied. In that context he said (transcript: page 628):

“In case the matter is taken further, I also find that neither Miss Maitland nor Mr. McDonnell had reason to know or cause to suspect that the shares formed part of Macmillan's holding. I have considered with some anxiety whether the assumptions which Miss Maitland plainly made were plausible and consistent with the information in her possession, or whether they were so unreasonable that she was not entitled to make them. Even without the benefit of hindsight, it is tempting to think that an honest and reasonable banker in Miss Maitland's position would have been put on inquiry. But I have come to the conclusion that this is not the case. He would, I think, have been surprised to learn that RMG had retained such a substantial holding of Berlitz shares and, if of a naturally curious disposition, might well have asked why it had done so. But he would not, in my judgment, have thought it necessary to inquire whether it had done so. He would also, I am sure, have inquired why RMG was not selling its holding to Fukutake; and in his own interest have pressed to have the pledged securities included in the sale, if necessary at Macmillan's expense. But in my judgment he would not have found the situation so implausible that it called into question RMG's good faith and the ownership of the shares which it was pledging, and made it imperative for him to seek verification of that fact before proceeding further. In this regard I have borne in mind what Bowen L.J. said in Sanders v MacLean (1883), 11 Q.B.D. 377 at p. 343:-

"But the practice of merchants, it is never superfluous to remark, is not based on the supposition of possible frauds. The object of mercantile usages is to prevent the risk of insolvency, not of fraud; and any one who attempts to follow and understand the law merchant will soon find himself lost if he begins by assuming that merchants conduct their business on the basis of attempting to insure themselves against fraudulent dealing. The contrary is the case. Credit, not distrust, is the basis of commercial dealings."

As Steyn J. pointed out in Barclays Bank plc. v Quincecare Ltd., (1992) 4 All E.R. 363 at p. 377:-

"The relationship between merchants is very different from the relationship between a banker and a customer. But it is right to say that trust,not distrust, is also the basis of a bank's dealings with its customers. And full weight must be given to this consideration before one is entitled, in a given case, to conclude that the banker had reasonable grounds for thinking that the order was part of a fraudulent scheme".

In my judgment the facts known to Miss Maitland, (and a fortiori those known to Mr. McDonnell) were not sufficient to put Credit Suisse on inquiry or to justify the conclusion that it had reason to know or cause to suspect that RMG was not the beneficial owner of the shares.”

123. In paragraph 5.14(a) of their notice of appeal Macmillan contended that the Judge was wrong to have found Miss Maitland to be an honest and truthful witness. In their written argument Macmillan submitted that the Judge should have found that the evidence of Miss Maitland and Mr McDonnell was dishonest and that neither of them were to be believed without other corroborating evidence. The argument was buttressed by references to comments made by the Judge either when the evidence was being given or in his judgment to the effect that the evidence was “inconsistent”, “quite astonishing”, or “strange”. But the credibility of a witness is pre-eminently a matter for the trial judge. He has the advantage, denied to the Court of Appeal, of seeing and hearing the witness give his or her evidence. On the evidence we have read it would have been open to Millett J. to conclude that Miss Maitland was a dishonest witness. He did not do so and we do not consider that this court should take a different view. In any event we see no need to do so. As we have sought to explain in our analysis of the law the question we have to determine is the narrower one whether on the knowledge to be attributed to Credit Suisse, pursuant to Section 1-201(27), on 27th September and 12th November 1991 the bank had notice, as defined in Section 8-304(4), of an adverse claim, as defined in Section 8-302(2).

124. It is convenient to deal first with that question as at 27th September 1991. As we have pointed out in the section dealing with the law the first question is of what facts did Credit Suisse have actual knowledge. The answer to that question depends in part on identifying the individual or individuals conducting the transaction on behalf of Credit Suisse as provided in Section 1-201(27). There is no doubt that Miss Maitland was one of such individuals with the consequence that her knowledge is to be attributed to Credit Suisse. In our view Mr Mueller’s knowledge is also to be attributed to Credit Suisse for either or both of two reasons. It is plain that Miss Maitland, in expectation of her day at Ascot on Friday 27th September, on Thursday 26th September delegated to Mr Mueller her responsibility to receive and check the securities promised by Mr Trachtenberg as the condition for the release of the cash for which they were to be substituted. In accordance with ordinary principles of the law of agency either she was entitled so to do, in which case Mr Mueller was the person thereafter conducting the transaction on behalf of Credit Suisse and his knowledge is to be attributed to Credit Suisse; or she was not, in which case his knowledge as her agent acquired in the performance of her duties must be attributed to her and, as part of her knowledge, to Credit Suisse.

125. In the section of this judgment dealing with the law we have also considered the meaning of bad faith for the purposes of Section 8-304(4). As we have pointed out the rights of the adverse claimant otherwise exercisable pursuant to Section 8-315 are excluded if the claim lies against one who comes within the definition of “bona fide purchaser” contained in Section 8-302(1). If the purchaser claims under any of the transactions described in Section 8-302(a)-(c) then taking the security free from the adverse claim will constitute bad faith if he knows of the adverse claim for it will amount to a denial of the rights of the claimant. But the alternative form of notice, namely “knowledge of such facts that his action in taking the security amounts to bad faith”, involves a similar concept. The bad faith lies in taking the security presumptively free from the adverse claim with knowledge of certain facts. Thus it is necessary to ascertain the facts as known to the purchaser, namely Credit Suisse, and then to determine whether with knowledge of those facts it would constitute bad faith on the part of Credit Suisse to take the security free from the adverse claim of Macmillan.

126. Of certain facts there can be no doubt. First, Credit Suisse knew that 500,000 Berlitz shares had been deposited as security for the loan to RMG on 8th November 1990 and had been returned by Credit Suisse to RMG on 4th April 1991 because the value and nature of the holding did not comply with the conditions imposed by Credit Suisse as to what security was acceptable. Credit Suisse knew that its possession of the relevant certificate had not been questioned by anyone either while it retained it or subsequently. During the 6 months the certificate was retained the value of the Berlitz shares comprised in it was regularly accounted for in the statements of securities held sent by Credit Suisse to RMG. In these circumstances it seems to us to be (and to have been) of no relevance (save as to credibility) whether or not Kevin Maxwell had told Miss Maitland of the existence of a private side holding on 26th January 1990. Equally the existence of such a holding on 4th April 1991 was no guarantee that such a holding still existed on 27th September 1991.

127. Second, it is beyond dispute that Miss Maitland did nothing to ensure that the shares delivered on 27th September 1991 were delivered by RMG or that RMG had the right to do so. All she knew was what she had been told by Mr Mueller, and possibly Mr Trachtenberg, on the previous day, including the contents of the memorandum she signed on 26th September, though dated 27th September. In this she signally failed to observe the advice given to her by Mr Whale in his letter of 7th September 1990 to ensure that all securities delivered to Credit Suisse as part of the security portfolio were accompanied by a letter or memorandum from RMG or the charging subsidiary stating that they were being delivered pursuant to the terms of the facility agreement. She saw no such letter. Moreover, unlike the earlier transaction of 22nd August 1991 or the later one of 22nd October 1991, each of which was comparable, she made no attempt to obtain any warranty as to the title of the depositor, whether RMG or another, to these Berlitz shares.

128. In these circumstances it is clear to us that if the question whether Credit Suisse took the Berlitz shares without notice is to be judged by reference to the knowledge and actions of Miss Maitland alone then the taking of the security by Credit Suisse free from the adverse claim of Macmillan would constitute bad faith for she deliberately abdicated her responsibility to the prejudice of Macmillan. We accept that it would not be right to ignore the fact, as known to Miss Maitland, that she had left Mr Mueller in charge. But, on her own evidence, all she instructed him to do was to check the share certificates against the list set out in the memorandum, value the shares in accordance with the closing prices for the previous day, from those figures calculate the amount of cash which might be released on the substitution of such security and contact Graeme Hutchison, another account officer, if he had any problems. None of these functions, if performed, would have constituted compliance with the advice of Mr Whale or a check on the identity or right of the person purporting to deposit the securities. Similarly the fact, relied on by Miss Maitland in her evidence, that, in the ordinary course of events, the share certificates and stock power forms would have been checked by the Securities Department can be of no avail for Miss Maitland accepted that that Department never saw the advice from Norton Rose and was not responsible for checking the adequacy of the security documentation.

129. Third, the knowledge of Mr Mueller cannot assist Credit Suisse either. Mr Mueller could see from the face of the share certificate and of the letter dated 27th September 1991 that RMG did not have any ostensible interest in the shares, was not giving the instructions to Credit Suisse to effect the exchange and was not to be the recipient of the cash released. He knew nothing of BIT in whose name the shares were registered nor of LBG from whom the instructions had come. On the information available to Mr Mueller both the depositor, LBG, and the shares were foreign to the transaction of which Miss Maitland had left him in charge. And all this occurred in the context of the contemporaneous attempt of Mr Trachtenberg to deposit securities registered in the name of Bank of America and beneficially owned by the trustees of a pension fund.

130. It was suggested that the omission of Mr Mueller to question the transaction was somehow excused by the fact that Miss Maitland knew that LBG was by then a subsidiary of RMG. We reject this submission. First it is contrary to the finding of the Judge on page 440 of the transcript of his judgment. Second we do not think that the evidence relied on to contradict that finding entitles us to differ from the views of the judge. It is true that there are two documents prepared by Miss Maitland in July/August 1991 suggesting that LBG was or would shortly become a subsidiary of RMG but there are others produced by her in the same period which suggest the contrary. Third she denied any such knowledge. In any event no one has suggested that LBG was a charging subsidiary for the purpose of the Facility Agreement.

131. We were much pressed with the conclusion of the Judge we have quoted in paragraphs 121 and 122 above. It was contended for Credit Suisse that to justify a finding of bad faith not only must the circumstances be objectively suspicious but that Miss Maitland must have appreciated the existence of such suspicion but took no steps to allay it. In the section of this judgment in which we have considered the law we have rejected the submission that it is necessary that the individual conducting the transaction should in fact appreciate that the circumstances are suspicious. In any event we do not accept this submission on the facts for the Judge seems to have misunderstood them. In the passage we have quoted in paragraph 121 above he said

“In September 1991 Miss Maitland was offered what she took to be the same shares, this time as substitute security. Once again she was offered them by RMG, and she assumed that they were still owned by RMG.”

The fact is that she was offered them by LBG. The shares were registered in the name of BIT and, not having inspected either the share certificate deposited on 8th November 1990 nor that delivered on 27th September 1991, Miss Maitland had no reason to assume that they were the same shares as those deposited nearly a year earlier. It was submitted for Macmillan that this oversight led the judge into error by failing adequately to analyse the facts or to consider the submissions made on behalf of Macmillan.

132. In our view the Judge reached the wrong conclusion in respect of the 500,000 shares deposited on 27th September 1991 whether one has regard to the knowledge of Miss Maitland alone, Mr Mueller alone or knowledge imputed to Credit Suisse from each of them. Neither of them had any reason to believe that RMG had any right to deposit these Berlitz shares as security for its debts. Miss Maitland abstained from making any enquiry at all as to what shares were deposited or by whom; she delegated those tasks to Mr Mueller. The facts as known to Mr Mueller indicated that the shares belonged to BIT or LBG, neither of whom, to his knowledge, was associated with or a charging subsidiary of RMG. The issue is whether it would amount to bad faith for Credit Suisse with the knowledge of Miss Maitland and Mr Mueller to take the security free from the adverse claim, that is to say free from any “claim that the [deposit with Credit Suisse] was wrongful”. In our view it would.

133. We turn then to the events surrounding the deposit of the 1m Berlitz shares on 12th November. The principal person conducting the transaction on behalf of Credit Suisse for the purpose of Section 1-201(27) was Miss Maitland. By then she knew of the September transaction and its details. As the Judge recorded (transcript: pages 440/1)

“Miss Maitland saw a copy of Mr. Trachtenberg's fax a few days later. Mr. Mueller had marked it up with the names of the companies which appeared on the certificate. Miss Maitland then discovered that the Berlitz shares were in the name of BIT. She told me that she assumed, from the fact that the Securities Department raised no queries, that the transfer forms were in order, and included transfers from BIT to RMG. But she did not take steps to verify this.”

In addition she knew that the promise to deposit further securities in exchange for the release of cash made in the document dated 22nd October 1991 had not been performed, Robert Maxwell had been lost at sea and there was a shortfall on the security required by the Facility Agreement, as amended, of £10m.

134. On Friday 8th November 1991 Mr Trachtenberg offered the 1m Berlitz shares as a stop-gap until securities complying with the Facility Agreement could be deposited. The 1m Berlitz shares were transferred within the DTC system on Tuesday 12th/Wednesday 13th November. On Thursday 14th Credit Suisse received confirmation of the receipt of such shares free of payment from Morgan Stanley. From beginning to end of this transaction there is no suggestion that Credit Suisse were told or had any information as to the beneficial ownership of these shares. Even when, later, Credit Suisse sought to obtain some comfort as to the beneficial ownership of the shares it received two letters dated 21st November 1991 from Mr Trachtenberg, writing on behalf of RMG, but in different terms. One of them purported to confirm that BIT was a wholly owned subsidiary of RMG, the other stated that the Berlitz shares “are in the name of [BIT] which is a wholly owned subsidiary of [RMG]”.

135. In the case of this deposit also we consider that Credit Suisse had notice for the purpose of Section 8-304(4) of the adverse claim. No steps were taken to check that the shares were being deposited by RMG or a charging subsidiary or that the depositor had a right so to do. There was no letter or memorandum from RMG or any one else. In the passages from the judgment we have quoted in paragraphs 121 and 122 the Judge acquitted Miss Maitland of knowledge or suspicion of the adverse claim on the ground that she was unimaginative in the sense that she saw everything from the perspective of Credit Suisse. But, in our view, this is an insufficient reason for acquitting Credit Suisse of such notice. The Judge had earlier (transcript: page 450) described Miss Maitland’s assumption that the 1m Berlitz shares belonged to RMG and were not included in the proposed sale to Fukutake as “astonishing”, particularly if she was unimaginative in the sense the Judge used that word. In our view for a bank with the knowledge that Miss Maitland had, including the gaps in such knowledge, to take the 1m shares free from any adverse claims would amount to bad faith. We conclude that Credit Suisse had notice of the adverse claim for the purpose of Section 8-304(4) in this case also.

136. In short Credit Suisse failed to take the steps which an honest and competent banker would take to ascertain the title of RMG or any charging subsidiary to any of the 1.5m Berlitz shares deposited as security for the loan from Credit Suisse. It chose not to do so. In these circumstances, in our view, it does amount to bad faith to take the shares free from the claim of Macmillan, otherwise maintainable pursuant to Section 8-315, that the transfer of the shares to Credit Suisse was wrongful. We would allow the appeal of Macmillan on the notice point in respect of all 1.5m. shares in Berlitz.

E. The appeal hearing

137. By previous direction of Morritt L.J. the appeal was heard in two stages. The first stage, where the issue was the availability of bona fide purchaser status to a purchaser acquiring shares through the DTC, involved all three parties and each was separately represented. If we had accepted Mr Oliver's submissions on behalf of Macmillan, that the banks were not entitled to raise the bona fide purchaser defence, then it would have been unnecessary for us (subject to any appeal to the House of Lords) to consider the factual issues which arose between Macmillan and Credit Suisse alone. We indicated, however, after hearing submissions on the first issue, that we would uphold the judge's ruling on that issue, and we proceeded to hear Macmillan's appeal on the notice issue, the appeal which we have allowed.

138. At both stages there were formal applications to adduce further evidence. The applications were supported by the kind of voluminous documentation which has characterised the proceedings throughout. During the first stage, dealing with the DTC issue, we allowed Mr Oliver to refer to a learned article published in the United States since the trial of this action, notwithstanding Mr Moss's objection that the author had not been called as an expert witness and the article had not been produced in evidence at the trial. Mr Moss however did not require formal proof that the article was written and published as appeared from the document itself, and in the result Mr Oliver did not claim the formal status of evidence for it. He referred us to passages in it which he adopted as part of his submissions.

139. During the second stage, a more substantial application was made. Credit Suisse was also a defendant in other proceedings brought by pension funds trustees in respect of securities lodged for the same RMG facility as in the present case. The trial of those other proceedings began in October 1994. They were settled by agreement after a trial lasting no less than 161 days. Miss Maitland, Mr McDonnell and Mr Muller each gave evidence and they were cross-examined for an extraordinary period extending over more than 30 days.

140. The proceedings were closely followed by Herbert Smith, Macmillan's solicitors, who read the daily transcripts and were able to identify a number of documents which were disclosed by Credit Suisse in those actions but which had not been disclosed to Macmillan in this.

141. The number of such undisclosed documents was small, and perhaps it was inevitable that some documents were overlooked when discovery was made in the present action, under pressure of time in order to meet an expedited trial date. Clifford Chance, Credit Suisse's solicitors, confirmed to us by affidavit that this was so.

142. Macmillan's application was to adduce further evidence consisting of eight such documents, which were said to be relevant to the evidence given by the three witnesses in the present case, or relevant to their credit, and eleven short excerpts from the transcript of the evidence which they gave in the pension fund proceedings.

143. Mr Oliver urged upon us that the three requirements of Ladd v. Marshall [1954] 1 WLR 1489 were all satisfied. The evidence was not available at the trial ; "if given, it would probably have an important influence on the result of the case, though it need not be decisive" ; and it was apparently credible. He did not shrink from proposing that, if necessary, we should order a retrial of the relevant issues.

144. We were conscious throughout of how far-ranging Mr Oliver's submissions were. When successive trials have taken place on similar or related issues there could be no end to successive appeals, each challenging a judgment by reference to evidence heard in other proceedings after the judgment was given. But we can recognise the possibility of an exceptional case where after the judgment a witness contradicts his evidence given at the trial and it might be unjust not to take account of the later evidence on appeal. That is far removed, however, from the present case where the most that can be said is that some further lines of cross-examination might have been opened up if the document had been disclosed or the later transcripts had been available.

145. In the result, we dismissed the applications on the ground that we were satisfied that the second of the three Ladd v. Marshall requirements was not fulfilled. The documents and transcripts, if admitted, were not capable, either singly or cumulatively, of having an "important influence" on the outcome of the appeal.

F. Conclusion

146. For the reasons given above, we dismiss Macmillan's appeals against Swiss Volksbank and Credit Suisse on the first (Clearing corporation) issue, and we allow the appeal against Credit Suisse on the second (notice) issue.

ORDER: Appeal against Swiss Volksbank and Credit Suisse on the first issue dismissed. Appeal against Credit Suisse on the second issue allowed. All other consequential orders adjourned to a date to be fixed.

(Order not part of approved judgment)

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