England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
(Commercial Court)
Mr Justice Eder
[2014] EWHC 191 (Comm), [2014] EWHC 755 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		10/03/2017

Lord Justice Henderson:

Introduction and background

1. On 13 December 2016 we heard an appeal by the fourth defendant, Yulia Balk ("Ms Balk"), challenging one aspect of a judgment on consequential matters given by the trial judge, Eder J, on 14 March 2014 ("the March Judgment"), following the comprehensive main judgment which he had handed down on 10 February 2014 ("the Main Judgment") in major fraud proceedings ("the Action") after a lengthy (46 day) trial between June and November 2013.
2. The claimants in the Action were Otkritie International Investment Management Limited and four allied corporate entities (together, or separately, "Otkritie"), which operated mainly in the commercial and investment banking sectors. The parent company of the Otkritie group was incorporated in the Russian Federation, and the banking business of the group was carried on throughout the Russian Federation, although Otkritie also had offices in London, New York, Cyprus and Hong Kong.
3. The first defendant, Georgy Urumov ("Mr Urumov"), is Ms Balk's husband. The second defendant, Denning Capital Limited ("Denning"), was a BVI company beneficially owned by Mr Urumov and Ms Balk. Mr Urumov was a very successful bond trader, having worked since 2009 for Knight Capital Limited. Ms Balk (who was born in Moscow in 1980) was educated in Switzerland and at the London School of Economics, where she met Mr Urumov in 1998. They married in 2007. She had her own property development business, for which she worked full time after returning from maternity leave in October 2010.
4. Very broadly, the Action concerned two separate alleged frauds: the so-called "Sign-On Fraud", which concerned the circumstances in which Mr Urumov came to be employed by one of the claimants; and the so-called "Argentinean Warrants Fraud", which concerned a single deal made on 9 March 2011 whereby Otkritie was deceived into purchasing some 1.65 billion Argentine GDP peso (ARS) denominated warrants at a price grossly in excess of their true value, involving an alleged overpayment of approximately US $150 million. The judge found that the Argentinean Warrants Fraud had been orchestrated by Mr Urumov and his associates.
5. So far as Ms Balk was concerned, the judge strongly suspected that she had been at least aware of, and possibly closely involved in, the Argentinean Warrants Fraud, but the evidence fell short of establishing to his satisfaction that she could be held liable for the fraud itself: see the Main Judgment (the neutral citation number of which is [2014] EWHC 191 (Comm)) at [398]. She was, however, found liable in dishonest assistance, knowing receipt and procuring breach of contract in respect of her involvement in laundering the proceeds of the fraud. In particular, the judge was satisfied that she had organised the acquisition of the corporate vehicles through which her and her husband's share of the fraud proceeds was laundered, including the third defendant, Dunant International SA ("Dunant"), a Panamanian company with bearer shares. As the judge found at [386], Dunant "was probably established to better disguise the trail of the fraud proceeds". Not only was it incorporated "in a notoriously opaque jurisdiction, but its bearer shares meant that there was no corporate record of its beneficial ownership".
6. By his final order made on 14 March 2014, Eder J ordered Ms Balk to pay the principal sum of US $36,978,000 as damages for procuring breach of contract, and as equitable compensation and/or pursuant to a personal liability to account for dishonest assistance and knowing receipt, together with interest and costs. Before judgment, Otkritie had elected to pursue only these personal compensatory remedies, and abandoned any claim against Ms Balk for a proprietary remedy.
7. At the hearing to deal with consequential matters on 14 March 2014, Ms Balk did not attend and was unrepresented, although throughout the trial she had been represented (together with her husband and Denning) by leading and junior counsel, instructed by Farrer & Co. One of the matters which the judge had to consider at this hearing was what, if any, deductions should be made from the sums awarded to Otkritie to take account of recoveries which they had already made. Such recoveries included a house on Avenue Road in St John's Wood, London ("the Avenue Road property"), which Mr Urumov and Ms Balk had bought in the name of Dunant with the proceeds of the fraud as their family home, but Okritie had succeeded in recovering before the trial from Dunant under a default order made by Flaux J on 1 March 2012 which declared that Dunant held the Avenue Road property on constructive trust for Otkritie and gave directions for transfer of the legal title from Dunant to Otkritie. In the March Judgment (the neutral citation number of which is [2014] EWHC 755 (Comm)) the judge took the value of the Avenue Road property as being approximately US $21.4 million as at the date when Otkritie recovered it and elected to retain and develop it. Other potentially relevant recoveries, in relation to Ms Balk, were two sums of US $1,856,981 and US $439,494 respectively, representing further traceable proceeds of the fraud recovered from Dunant's bank accounts on 1 October and 18 December 2012.
8. In relation to these, and other, recoveries, the questions of principle which the judge had to decide were (i) whether credit for them should be given at the stage of judgment, or only later at the stage of execution; and, if so, (ii) how such recoveries should be allocated or appropriated as between the different defendants: see the March Judgment at [8]. The primary submission advanced by Mr Steven Berry QC for Otkritie was that judgment should be entered against each of the defendants for the full amount, ignoring recoveries. The judge did not accept that submission, holding that "in the ordinary course … if relevant recoveries are made prior to judgment they operate to reduce the damage suffered by the claimant and thereby reduce the amount of any judgment that the claimant is entitled to": see [10]. On the second question, the judge was persuaded by Mr Berry's submissions that the claimants had a right to appropriate the recoveries as they chose, provided that the result was not "obviously unsustainable": see [11] to [13]. The judge considered that the order of appropriation proposed by Otkritie was not "obviously unsustainable", and should therefore be followed.
9. The result of applying this methodology was that no reduction was made in the sums for which judgment was entered against Ms Balk. This is the aspect of the March Judgment against which Ms Balk wishes to appeal, although she did not file her appellant's notice until 9 June 2015, some 15 months later. In due course, she was granted permission to appeal, together with the necessary extension of time for appealing, by Gloster LJ at a hearing on 9 December 2015. Ms Balk appeared in person at that hearing, as she has on subsequent occasions, including the hearing before us on 13 December 2016. The order made by Gloster LJ reads in relevant part as follows:

"IT IS ORDERED that

1. The application for permission to appeal be granted in part.

2. Ms Balk is to supply the Court and the Respondents with revised grounds of appeal and a revised skeleton argument by 12 January 2016.

3. Ms Balk is given permission to appeal, limited to the ground that she should be given credit for the sums referred to in her Skeleton Argument at paragraph 3, namely $21,425,000, $1,856,961 and $439,494 and also on the ground that Ms Balk should be given credit for any further sums which the claimants have recovered and which satisfy the following conditions namely:

(a) that a proprietary claim in respect of those sums or the assets from which those sums are derived was made against her in the proceedings; and

(b) that the judge held that Ms Balk did indeed have a proprietary interest in such assets."

10. In her judgment on the application for permission to appeal, Gloster LJ said this (see [2015] EWCA Civ 1578):

"27. The position here was that by the time the default judgment against Dunant was obtained on 1 March 2012, effectively US $21,425,000 in respect of the value of 42 Avenue Road as at 23 March 2012 was received by the Claimants. That, as I have already said, was a property in respect of which the Claimants asserted as against Ms Balk a specific proprietary claim in relation to the monies that went to buy the property.

…

29. Although the judge at the end of the day came out in favour of the Claimants' arguments and said that basically the Claimant creditors could allocate recoveries at their choice (in accordance with the normal principles that a creditor can allocate appropriate payment to whichever debt he seeks), it does seem to me that it is realistically arguable that in this sort of circumstance when the claim is one for equitable compensation that it is wrong that a Defendant, albeit a dishonest Defendant, should not be given credit for the very proceeds of the proprietary claim which was made against her. There may be a dispute as to whether or not a proprietary claim was made against her, but it certainly seems … that it is reasonably arguable that there was such a claim."

11. In paragraph [40] of her judgment, Gloster LJ made it clear that the ground for which she was granting permission:

"… raised the sole issue of whether credit should be given to her for recoveries in respect of the proprietary claims of US $21,425,000, US $1,856,981 and US $439,494 and how those recoveries should be allocated."

12. When Ms Balk then produced her first revised grounds of appeal, it became apparent to Otkritie that she intended to raise factual issues which went beyond the scope of the limited permission which had been granted. Otkritie therefore wrote to Gloster LJ explaining their concerns, and a further hearing was convened which took place on 4 February 2016. On this occasion Ms Balk appeared, as before, in person, and Otkritie were represented by Mr Nathan Pillow QC. At the hearing, Ms Balk applied for further permission to argue that the amount of credit she should be given in respect of the Avenue Road property was greater than US $21,435,000. This application was firmly refused by Gloster LJ. As she said in her judgment ([2016] EWCA Civ 335):

"4. I am not going to give permission to Ms Balk to raise this valuation issue at this late stage. First of all, this was a matter that was before me on 9 December 2015 when I gave permission to appeal on specific terms which referred to the sums referred to in paragraph 3 of her skeleton argument, namely $21,425,000 and the other figures there set out. It is clear from the terms of my order and the terms of my judgment that I was not at that stage envisaging or permitting Ms Balk to run an additional valuation issue or to go behind that figure.

5. … This was an issue that should have been addressed by Ms Balk at the trial or indeed at a much earlier stage.

…

7. It is also clear to me that she is not entitled to go into the valuation of the property at the time of sale or to claim that she is entitled to credit for the sale price of a property after the claimants had spent a lot of money on it. What matters for the purposes of any credit to which she is entitled, which is the subject matter of the appeal, is what is the value of the property as at the date when, effectively, the claimants appropriated it, which they did pursuant to the order of Flaux J as at 23 March 2012. There has to be finality in litigation.

8. I take into account also … the fact that Ms Balk's application for permission to appeal, which I granted in limited part on the last occasion, was very considerably out of time. I would not have exercised my discretion to extend her time to bring an appeal in relation to this point …"

13. At the hearing before us on 13 December, it soon became clear that Ms Balk was still seeking to argue that she should be given credit for the value of the Avenue Road property in a sum substantially exceeding $21,425,000, notwithstanding the limited scope of her permission to appeal, and the refusal to extend it at the hearing on 4 February 2016. Furthermore, she still wished to prosecute her appeal even though Otkritie had made an offer in open correspondence on 9 March 2016 to give her credit for all three of the sums referred to in her revised grounds of appeal (i.e. the three sums which I have mentioned), together with certain other recoveries as set out in the letter. No substantive response to the offer had been received from Ms Balk, apart from an email on 21 March 2016 saying that she had not yet been able to decide whether to accept the offer. The offer was not withdrawn by Otkritie, and remained on the table down to, and including, the hearing before us.
14. In these circumstances, we permitted Ms Balk to open her appeal, but made it clear that we had serious concerns:

(a) whether it was open to her to argue any points relating to the value of the Avenue Road property; and

(b) whether the appeal was in any event futile, because Otkritie's open offer gave her as much, if not more, than she could hope to obtain if her appeal succeeded.

After Ms Balk had made her submissions, we heard briefly from Mr Pillow QC on behalf of Otkritie, and then from Ms Balk in reply. We decided to dismiss the appeal, for reasons to be given in writing later.

15. This judgment contains the reasons which led me to conclude that the appeal should be dismissed.

Ms Balk's intended argument

16. The argument which Ms Balk wished to run may be summarised as follows. She says it is unfair that she should be bound by the value which Otkritie assigned to the Avenue Road property at the date of its recovery from Dunant, namely US $21,425,000. She referred us to a letter sent by her solicitors, Farrer & Co, to Hogan Lovells LLP, the solicitors then acting for Otkritie, on 6 July 2012, which gave notice that the two valuations of the property which Otkritie had obtained (from Savills and Knight Frank) were not agreed, and would be in issue should the question become relevant at trial. She also showed us a letter sent by Farrer & Co to Hogan Lovells on 18 February 2014, less than a month before the hearing on consequential matters before Eder J, which proposed a valuation mechanism to be agreed before the forthcoming hearing. She told us that no response had been received to this letter by 10 March 2014, when Farrer & Co came off the record because she and her husband could no longer afford to pay their fees.
17. To add colour to her suggestion that the value assigned to the Avenue Road property by Otkritie might be unreliable, Ms Balk pointed out that the property had originally been purchased by Dunant on 31 March 2011 for US $30 million, and that it was subsequently sold by Otkritie in June 2015 for US $35 million. She said that she should in any event be allowed credit for the full US $30 million which Dunant had paid for the property.
18. In my judgment, it is clear that these arguments were not open to Ms Balk. As I have explained, her limited permission to appeal was confined to seeking a credit for the Avenue Road property in the sum of $21,425,000, as stated in her grounds of appeal and original skeleton argument. At the further hearing on 4 February 2016, she was expressly refused permission to reopen questions of valuation, and was told by Gloster LJ that she would never have been granted permission for such a late appeal if any questions of valuation were to be in issue. No good reason was suggested to us why the court should depart from that clearly stated position, and for my part I would dismiss Ms Balk's appeal on the simple ground that the only matter of substance which she wished to argue fell clearly outside the grounds which she had permission to pursue.
19. For completeness, I should add that the valuation argument, such as it was, appears to me to be wrong in principle, and speculative in relation to the facts. As a matter of principle, it seems to me correct that the appropriate date at which to value the Avenue Road property, if a credit for it is properly to be allowed to Ms Balk, is the date when it was recovered by Otkritie from Dunant. On the facts, there was evidence to support the valuation of $21,425,000, which was the average of two valuations obtained from reputable valuers. The fact that Dunant may have paid $30 million for the property a year earlier is not necessarily inconsistent with this. Quite apart from the possibility of changes in market conditions, at the top end of the London property market, Dunant may well have been prepared to pay an inflated price because it wished to launder proceeds of fraud. As to the subsequent sale by Otkritie in June 2015, it appears that substantial works of improvement and development of the property were carried out by Otkritie before the sale, so no helpful comparison can be drawn with its value some three years earlier.

Otkritie's open offer

20. I have already referred to the open offer made by Otkritie in the letter of 9 March 2016, sent to her by Otkritie's present solicitors Steptoe & Johnson. The stated purpose of the letter was to set out Otkritie's position in relation to the allocation of recoveries, "in an attempt to narrow the issues and to dispose of the appeal, and in so doing, to save costs and avoid a waste of the Court's time". It was then pointed out that, following the hearing on 4 February 2016, Ms Balk had no permission to reopen issues of valuation. The letter continued:

"The position of the Claimants remains that they are prepared to consent to giving due credit for all those amounts that may be attributable to you as set out in paragraph 3 of the Order [i.e. Gloster LJ's order of 4 February 2016]. In that regard we enclose a spreadsheet showing the calculation of recoveries and interest accrued since the date of Judgment.

You will see from the attached spreadsheet that the Claimants are prepared to give you full credit for all amounts referred to in paragraph 3 of the Order and your revised grounds of appeal, namely US $21,425,000 (recovered from Avenue Road) and US $1,856,981 plus US $439,494 (both recovered from Dunant's accounts at Bordier)."

21. The letter went on to list a number of further substantial credits that Otkritie were also prepared to give Ms Balk "in the interests of simplifying matters and saving costs and Court time". The letter concluded:

"In summary, were your appeal to succeed in full (on the basis permitted by the order), you would still be liable for approximately US $19 million based on recoveries to date, as set out in the attached spreadsheet.

Please confirm that you agree with these figures so we can write jointly to the Court of Appeal with a request that your appeal be disposed of by consent.

If you do not agree, please set out brief reasons why so we can write to Lady Justice Gloster explaining the position, as our clients have no desire to incur further costs in this matter.

We look forward to hearing from you."

22. As I have already recorded, no answer to this offer was received from Ms Balk, apart from a holding email which she sent on 21 March 2016 saying she had not yet been able to make a decision. At the hearing before us, Mr Pillow confirmed that the offer remained open for acceptance by Ms Balk. He told us that Otkritie had been prepared to make the offer on pragmatic grounds and to save costs. The issues of law thrown up by the appeal were not straightforward, and Otkritie did not wish to have them resolved if no practical benefit would be achieved by doing so. Even on the most favourable basis to Ms Balk, the spreadsheet of recoveries showed that she still owed Otkritie a sum in excess of $16.5 million. Since there was no realistic prospect of recovering such a sum from Ms Balk, nothing would be gained by arguing the points of law raised by her appeal.
23. In my view, Otkritie were fully entitled to adopt this stance, and the only reasonable course for Ms Balk would have been to accept the offer. Furthermore, it would have been a waste of this court's time and resources to hear the appeal on the questions of law which Ms Balk had permission to pursue, when Otkritie was ready to concede all that she asked and more. Not only would hearing the appeal on its merits have been an exercise in futility, but it would also have run counter to all the modern principles of case management which include encouraging the settlement of disputes, concentrating on the real issues between the parties, and making the best use of scarce judicial resources.
24. Put bluntly, therefore, I consider that Ms Balk was abusing the process of the court by her refusal to engage with the open offer made by Otkritie, and her insistence in bringing her appeal before us. For this reason too, I was satisfied that her appeal should be dismissed.
25. For the avoidance of doubt, I should make it clear that I express no view whatever about the merits of the issues relating to credit for recoveries and appropriation which were dealt with by Eder J in the March Judgment. It is still possible that these issues may arise and require resolution in relation to other defendants. Our dismissal of this appeal, in the circumstances which I have set out, has nothing to do with the merits (or otherwise) of Ms Balk's case on those issues, and we heard no argument on them.

Conclusion

26. These are the reasons which led me to agree that Ms Balk's appeal should be dismissed.

Lord Justice Irwin:

27. I agree.

Lady Justice Gloster:

28. I also agree.