Neutral Citation Number: [2012] EWHC 1687 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 18/06/2012

Before :

MR JUSTICE FIELD
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Between :

	Aveng (Africa) Limited	Claimant	
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	Government of the Gabonese Republic
and
Citibank NA (London Branch)	Defendant

Third Party Applicant	

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Mr Guy Phillips QC (instructed by SNR Denton UK LLP) for the Third Party Applicant
Ms Vasanti Selvaratnam QCand Miss M Gibbons (instructed by Berwin Leighton Paisner LLP) for the Claimant

Hearing dates: 14 June 2012
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Judgment

Mr Justice Field : 

1.	There is before the court an application by Citibank NA's London branch ("CBL") to vary a freezing order made by Teare J. on 31 May 2012 against the Government of the Gabon Republic ("Gabon") at the behest of Aveng (Africa) Ltd ("Aveng").  That freezing order is expressed to apply inter alia to any money and bank accounts held by Gabon with CBL.  
2.	Aveng are judgment creditors of Gabon in the sum of £25,520,592.59, on which interest is accruing at the daily rate of £5,593.55. Aveng's judgment was entered against Gabon pursuant to an order made under Section 66(1) of the Arbitration Act 1996 by His Honour Judge Mackie QC to facilitate the enforcement of an arbitration award in favour of Aveng made in London on 20 October 2010.  The judgment remains wholly unsatisfied and the time for challenging Judge Mackie's order has expired.  
3.	It should be noted that Gabon has waived state immunity in wide terms with the result that Section 13 of the State Immunity Act 1978 does not prevent the taking of steps by Aveng to enforce its judgment against Gabon.
4.	Aveng applied for the freezing order in the expectation that CBL was going to receive funds from Gabon to be used to pay interest on Notes due in 2017 issued by Gabon (“the Notes”) with a coupon of 8.20 per cent p.a. payable semi‑annually in arrears on 12 June and 12 December. The expected funds, totalling US$35,860,445, were received by CBL on 11 June 2012 into a US dollar account in the name of Citibank NA New York and booked into a ledger which records all the funds received by CBL for the purpose of paying amounts due under dollar denominated notes.
5.	Under a Fiscal Agency Agreement dated 12 December 2007 between CBL and Gabon (“the FAA”) CBL is appointed the Fiscal Agent and the Paying Agent in respect of the Notes.  
6.	Section 14(a) of the FAA provides that the FAA shall be governed, and construed in accordance with, the laws of the State of New York.
7.	Section 9(b), (f) and (h) of the FAA provide:
 9(b) Agency. In acting under this Agreement and in connection with the Notes, each of the Agents, paying agents and transfer agents is acting solely as agent of the Republic and does not assume any obligation or relationship of agency or trust, for or with any of the owners or Holders of the Notes, except that all funds held by such Agent or any paying agent for the payment of principal of and any interest on the Notes shall be held in trust by such Agent or such paying agent, as the case may be, and applied as set forth herein and in the Notes; provided, however, that moneys held in respect of the Notes remaining unclaimed at the end of two years after such principal and such interest shall have become due and payable (whether at maturity or otherwise) and moneys sufficient therefor shall have been duly made available for the payment shall, together with any interest made available for the payment thereon, be repaid to the Republic.  Upon such repayment, the aforesaid trust, with respect to the Notes, shall terminate and all such liability of such Agents or any other paying agent with respect to such funds shall thereupon cease. 

9(f) Non‑liability for Interest. Except as otherwise agreed, none of the Agents, paying agents or transfer agents shall be liable for interest on moneys at any time received by them pursuant to any of the provisions of this Agreement or the Notes.  Money held by the agent need not be segregated except as required by law."

“9(h) No Implied Obligations. The duties and obligations of the Agents, paying agents and transfer agents, on one hand, and the Republic on the other hand, shall be determined solely by the express provisions of this Agreement and neither the Agents, paying agents and transfer agents nor the Republic shall be liable except for the performance of such duties and obligations as are specifically set forth in this Agreement and the Notes as applicable, and no implied covenants or obligations should be read into this Agreement or the Notes against the Agents, paying agents, transfer agents or the Republic."
8.	CBL contends that, by virtue of Section 9(b), the funds received from Gabon to pay the interest due on the Notes on 12 June are not assets belonging to Gabon but instead are held on trust by CBL on behalf of the Noteholders so that those funds cannot be the subject of the freezing order made against Gabon. Accordingly, CBL seeks an amendment to the freezing order providing that it should not preclude CBL from making payments from funds transferred to it by Gabon pursuant to the FAA.
9.	The primary task of the court on this application is to determine whether there is a good arguable case that Gabon has a proprietary interest in the funds held by CBL for the purpose of making payments under the FAA.  Aveng contends that it has such an arguable case.  CBL submits that I should conclude on this interlocutory application that there is no good arguable case that Gabon retains a proprietary interest in funds paid over to CBL for the purpose of making the payments to the Noteholders contemplated by the FAA.
10.	Both Aveng and CBL have adduced opinion letters produced by learned US Counsel which seek to inform the court as to what is required by the law of New York for a bank which holds funds provided by the issuer of notes for the purpose of making payment to Noteholders to be constituted a trustee of those funds on behalf of the Noteholders.  
11.	The experts on New York instructed on behalf of Aveng are two partners in Hughes, Hubbard & Reed LLP, Mr John Fellas and Mr Hagit Egul.  In an opinion dated 24 May 2012, Messrs Fellas and Egul state that the ownership status of the funds transferred by Gabon to CBL for payments under the FAA depends on the intent of Gabon and CBL as fiscal agent and that "there is a general presumption under New York law that a deposit for a specific purpose ‑‑ such as payment of interest to bondholders ‑‑ does not create a trust." Amongst the factors the court will consider when deciding if funds are held on trust are: 
(i) any express statement that the funds are held on trust for this purpose; (ii) the revocability of the authorisation to make the payments; (iii) the degree to which the depositor retains any control over the disposition of the funds.
12.	Messrs Fellas and Egul cite Ehag Eisenbahnwerte Holding AG. v Banca Nationala a Romaniei, 306 NY 24, a decision of the New York Court of Appeals, the highest court of New York.  There, the Kingdom of Romania in 1922 issued negotiable bonds bearing 4 per cent annual interest and the Romanian Government's Ministry of Finance entered into an agreement with the Romanian National Bank (“the Bank”) whereby the Ministry undertook to transfer monies to that bank, and the bank undertook, following instructions given by the Ministry, to make all payments out of those monies and to deposit the money's value in sterling at the Bank of England, from which, in accordance with the Ministry's wishes, payments would be made to British Overseas Bank. Under a separate agreement, British Overseas Bank was named as Trustee for the bondholders to pay interest and to retire the bonds out of monies received by it.  
13.	In 1941, the Romanian government suspended the servicing of its foreign debt.  The plaintiff was a bondholder who sued the Bank as beneficiary of the contact between the Ministry and the Bank and on the basis that the Bank was liable to it as a trustee. The New York Court of Appeals held that under the contract with the Ministry, the Bank assumed only the function of transmitting the necessary foreign exchange to the Bank of England.  The duty of making payments to bondholders was not on the Bank but on British Overseas Bank.  The court found that the Bank was not liable to the plaintiff as a trustee. At page 252 of its judgment (given by Fuld J) the court said:

The delivery of moneys by one person to another, with instructions that they be paid to a third person, may be effectual to create a trust for the latter's benefit, but only where the depositor's 'manifested intention read in connection with all the circumstances of the case indicates that the delivery was to be a finality, that the money was to be from that moment dedicated to the use of the third person...  On the other hand, no trust results, if 'the use of the money or property was intended to be subject to the directions of the person delivering it' or 'if the holding was for his benefit and under his orders...'. Thus, a trust may be created where moneys ‑‑ held by a depositary as a sinking fund for the redemption of bonds ‑‑ are irrevocably appropriated for that purpose and are not under the dominion of the depositor.  And a trust may likewise arise upon the payment of monies to a depositary charged with the function of paying interest on bonds, where the moneys are specifically received in trust for that purpose, free from further control by the depositor…
14.	Messrs Fellas and Egul also refer to Petrohawk Energy Corp v Law Debenture Trust Company of New York, 2007 WL 211096, a decision of the US District Court (S.D.N.Y.). Here the plaintiff assumed the responsibilities of the original issuer of notes due 2012.  Under the relevant Indenture, US Bank National Association, (“US Bank”) was named Indenture Trustee and the Bank of New York as the paying agent.  The paying agent's duties included an obligation to hold in trust for the benefit of the bondholders or the trustee all money held by it for the payment of principal, premium and interest. On 14 September 2006, the defendant commenced an action against the plaintiff in Delaware as the successor to US Bank as Indenture Trustee claiming breach of the Indenture, and obtained $1.2 million of the funds deposited by the plaintiff with the Bank of New York in order to fund this litigation.  The deposited funds had been paid by the plaintiff to Bank of New York in accordance with the paying agent agreement between the plaintiff and Bank of New York for the sole and exclusive purpose that such funds be held in trust and disbursed to Noteholders in satisfaction of Petrohawk's semi‑annual interest obligation. Petrohawk was obligated to deposit “by 11.00 am on or prior to the due date… a sum in same day funds sufficient to pay the principal of, premium, if any, or interest so becoming due, with such funds being “considered paid on the date due if on such date the Paying Agent holds, in accordance with this Indenture, money sufficient to pay”. 
15.	The plaintiff sued the defendant in the US District Court (S.D.N.Y.), seeking relief for conversion, tortious interference and constructive trust.  The defendant's motion to dismiss the action (in English parlance, to strike out the claim for disclosing no cause of action) was upheld by the court.  Judge Denise Cote held that the plaintiff did not have the necessary legal ownership or immediate right to possession of the funds alleged to have been converted. Judge Cote said (at pp-4-5):

The Indenture and the Paying Agent Agreement govern the status of the funds in this case.  Petrohawk was required 'on or prior to the due date of the principal of or premium, if any, or interest on any Securities', to deposit with Bank of New York, the Paying Agent, 'a sum in same day funds sufficient' to pay the amount due.  Such amounts were 'considered paid on the date due if on such date the Paying Agent holds in accordance with this Indenture money sufficient to pay' all amounts due.  The Paying Agent would hold the funds 'in trust for the benefit of Holders or the Trustee'.  The right of a Noteholder to receive payment for principal, premium, or interest, however, 'shall not be impaired or affected without the consent of such holder'.  After payment of all obligations, the Trustee and the Paying Agent were required to return to Petrohawk any excess money upon request.	The language of the Indenture dictates that the funds be held 'in trust'.  Moreover, funds held by a trustee or paying agent for the purpose of paying principal or interest to noteholders 'obtain the character of trust funds'… Once the funds were deposited to be held in trust for the purpose of paying the Noteholders, Petrohawk no longer had control over the funds…Petrohawk claims that the cases cited are inapposite because they arise in the context of attachment.  It is unclear why the heightened standard of attachment should matter, where the ultimate issue is the question of ownership.  What is important is whether there was an unambiguous intention to create a trust in the underlying Indenture.  The language of the Indenture shows a clear intent to place the funds in a trust and have the funds applied to the specific purpose of making interest payments to Noteholders.  Despite Petrohawk's conclusory claims of ownership, once it deposited the funds with Bank of New York, it relinquished control over the funds and cannot claim ownership of the funds.
16.	Messrs Fellas and Egul exhibit to their opinion of 24 May 2012 the documentation that was before the court in the Petrohawk case and state that, in their opinion, the court’s decision in this case was “fact specific”.  They then identify the following four factors in the instant case which they say support the argument that the deposit of funds for payment of interest under the FAA does not create a trust.
	
(1) The provision in section 9(f) of the FAA that the fiscal agent is not required to segregate funds, which arguably suggests that Gabon holds a general account at CBL creating the relationship of debtor/creditor and not a relationship of trust.
 (2) The fact that the deposit is not explicitly made irrevocable, a feature that they say distinguishes the instant case from the Petrohawk case. 
(3) The provision in section 9(h) of the FAA that there are no implied obligations imposed on the fiscal agent, from which it appears that Gabon would continue to be liable under its obligations to Noteholders if the fiscal agent failed to pay interest due on the Notes. 
(4) In contrast to the position in Petrohawk, the lack of an express provision in the FAA and the Prospectus that Gabon's deposit of funds with the fiscal agent will satisfy its obligations to the Noteholders.
17.	Messrs Fellas and Egul then go on to list the following five factors which might be 
argued to be suggestive of a trust.
(1) The Prospectus at page 76 (section 10 of the Terms and Conditions of the Notes) provides that any money unclaimed from the fiscal agent within four years shall be repaid to Gabon, which allows for the argument that Gabon has no right to repayment until this contingency occurs. 
(2) The Prospectus at page 80 (section 14 of the Terms and Conditions of the Notes) states that: “[t]he Fiscal Agent and the other agents are agents of the Republic and none of them is a trustee or fiduciary for any of the holders of the Notes 'except in the limited circumstances expressly provided for in the Fiscal Agency Agreement'."  [Emphasis supplied](3) Section 4 of the FAA provides that Gabon "shall provide the Fiscal Agent in immediately available funds such amount in US dollars as is necessary to make a payment of any interest on the notes which shall be due and the Republic hereby authorises and directs the Fiscal Agent from funds so provided to it, to make or cause to be made payment of interest on the Notes." [Emphasis supplied]
(4) Section 4 of the FAA further states that "Payment of interest on the Notes shall be made in the manner set forth in the Notes.  The Fiscal Agent shall not be bound to make payment until it is satisfied that full payment has been received from the Republic", which language allows for the argument that once Gabon has made full payment to the Fiscal Agent, the Fiscal Agent is bound to transfer that payment to the Noteholders and that such payment cannot be used for any other purpose.
	
(5) The words "except that all funds held by such agent shall be held in trust by such agent and applied as set forth herein in the Notes” in section 9(b) of the FAA.
18.	In conclusion, Messrs Fellas and Egul say in this first opinion that the factors against the existence of a trust should lead the court in New York to hold that the presumption under New York law that a deposit for a particular purpose does not create a trust is not displaced on the facts of the instant case.  
19.	CBL rely on an opinion given by Mr John F Baughman, a partner in the New York firm of Paul Weiss Rifkind Wharton & Garrison LLP, in a letter dated 10 June.  In his opinion, Mr Baughman states that a trust is a contractual statement and it is a basic principle of contractual interpretation in New York that where the language of a contract is unambiguous, extrinsic evidence cannot be considered.  Where, however, the language is ambiguous, the court will look at the words and conduct of the parties, including in a case involving money held in a bank account, the following factors: (i) the language of any governing documents; (ii) whether the account was segregated; (iii), whether the depositor ever draws on the account; (iv), whether any funds were ever returned to the depositor or if a request of such return was ever made; (v) whether the depositor earned interest on the account; and (vi), any other relevant course of conduct.
20.	In Mr Baughman’s view, the language of section 9(b) clearly and unambiguously creates a trust over money paid by Gabon to CBL for the making of payments under the FAA.  Even if the language of section 9(b) were not found to be dispositive, he is of the opinion that there are two factors weighing in favour of a trust.  First, the funds are segregated in the sense that they are placed exclusively with other funds from which US dollar denominated bond payments are to have been made from London.  Second, Gabon does not receive interest on this account which is additional evidence that it does not retain an ownership interest in the funds.  
21.	Mr Baughman goes on to make a number of comments on Messrs Fellas and Egul's opinion letter of 24 May 2012.  He notes that the court in Petrohawk did not consider the issue of irrevocability and goes on to say that the context makes it clear in the instant case that revocability is not contemplated by the parties since there is no provision in the FAA providing for a means for Gabon to withdraw money paid into the account of CBL.  And CBL is directed, in Section 4 of the FAA, to make or cause to be made payments to Noteholders out of funds provided by Gabon and is not bound to make such payment until it is satisfied that full payment has been received from Gabon.  
22.	Mr Baughman also observes that the court in Petrohawk did not rely on any provision that payment to the bondholders was completed upon the money being deposited by the issuer.  
23.	Messrs Fellas and Egul produced a lengthy responsive opinion in a letter dated 13 June 2012.  In this document they maintain that because the language in Section 9(b) relied on by CBL as creating a trust comes in an exception to the preceding declaration that each of the agents does not assume any obligation or relationship of agency or trust for or with any of the owners or holders of the Notes, Section 9(b) is ambiguous and, accordingly extrinsic evidence developed through disclosure and testimony would be admitted by a New York court in construing the FAA, including the drafting history of the agreement, the parties' course of conduct and industry practice.
24.	Indeed, Messrs Fellas and Egul go further, stating that even if there were an unambiguous reference to the creation of a trust in favour of the Noteholders, that would not be dispositive because it has long been settled under New York law that the use of the words "in trust", or their equivalent, is not dispositive and will not necessarily give rise to the creation of a trust.  Instead, the nature of the account in which the deposited funds are held depends on the rights and obligations intended by the parties.  As illustrative of this point, they cite the case of Surrey Strathmore Corp v Dollar Sav Bank of New York, 36 NY2d 173, a decision of the New York Court of Appeals. Here a corporate mortgagor brought action against a bank acting as a mortgagee for an accounting of payments received on the mortgage tax account, together with income earned thereon, and for judgment against the mortgagee for all interest/income earned. The mortgage document contained an agreement that the mortgagor would make payments to the mortgagee for real estate taxes on the mortgaged premises whereupon the mortgagee shall "hold such monthly payments in trust to apply the same against such taxes when due". In denying the mortgagor's request for a trust accounting, the New York Court of Appeals said:
	
"In the circumstances of the relationship between these parties it does not advance our inquiry into the determination of the rights of the mortgagor or of the obligations of the mortgagee to proceed in reliance on categorical concepts suggested by such labels as 'trust', 'agency', 'escrow', 'debtor‑creditor', for it must be evident that the relationship here does not fall essentially under any one of such classical headings or any identifiable combination of them.  Reasoning predicated on such concepts would accordingly be untrustworthy.  We cannot, for instance, ground any conclusion on the use of the words 'in trust' in this particular mortgage clause.  Resolution of the issues must depend rather on what rights and obligations the parties are found to have intended to create as manifested by the words they used in their written agreement, with parol evidence admissible to clarify ambiguities, if any, under recognised canons of construction.” (p.176)
	"We observe that the written expression of the agreement of the parties contains no explicit provision, one way or the other, with respect to payment of interest or earnings on the tax payments.  The payment of interest or earnings was not indispensible to effectuate the objectives of the mortgage agreement and there is no other provision of the written instrument from which it may be inferred that the parties intended that there be payment of interest or earnings.  Indeed, from the parties' silence the inference may be drawn that no such payment was intended.  Even the canon of construction that a written instrument is to be interpreted against the party responsible for its draftsmanship cannot be employed conclusively to fill hiatuses in the instrument or to supply terms as to which the parties themselves omitted to make any provision.  There being no express agreement of the parties and no predicate for any inference that such an agreement was intended, we conclude that this mortgagor is not entitled to the relief it now seeks." (p.179)
25.	Citing In re Ames Department Store, 274 BR 600, a decision of the US Bankruptcy Court (S.D.N.Y.), Messrs Fellas and Egul also repeat the point made in their first opinion that, whether funds are required to be segregated is a material indicium of the parties' intent to create a trust. Here, a store entered into an agreement with one of its vendors whereby the vendor would sell its goods at the store, the store would collect the sales proceeds and, according to the parties' contract, hold such proceeds in trust for the vendor until such time they are paid over to the vendor.  The agreement did not require the store to segregate the vendor's proceeds and, in fact, the store collected the proceeds through its own cash registers and maintained the funds in its general accounts along with the proceeds of sales from other vendors and used the funds to settle its own accounts.  The store filed for bankruptcy and the vendor sought to recover payment due for sold goods, asserting that its sales proceeds were to be kept in trust and thus were not part of the bankrupt estate. The court found that notwithstanding the contractual language which stated that the proceeds should be kept "in trust", the claim of trust was defeated. Amongst the observations made by the court when giving judgment were the following:
	
"Plaintiff acknowledges that the relationship between contracting parties must be determined by its real character rather than by the form the parties have given it where the public interests or the rights of third parties are involved." (p.615) (Amongst the cases cited is Pan American Airways v Shulman Transport). 
Taken together, the authorities relied on by the court in Shulman suggest that principles of fairness and equity can override the express terms of an agreement in a bankruptcy case where there are indicia of a contrary understanding”. (Pp. 615-616)
	It is firmly established that if a recipient of funds is not prohibited from using the funds as his own and the recipient is not prohibited from commingling the funds with his own monies, a debtor‑creditor relationship, not a trust relationship, exists.  (p.623)
	In New York, if there is no distinct trust fund but merely a general obligation to ultimately pay a sum of money, then there is no trust, but only a debt.” (p.624)  
	Here, Ames has commingled the Net Sales Proceeds with all other proceeds from its stores since 1987.  It is undisputed that the Agreement contained no provision that required that Ames place the Net Sales Proceeds in a segregated bank account  ... the court finds that the parties never manifested an intent to create a true trust mechanism and therefore Ames was not a fiduciary to LFD. (p.624)
26.	Messrs Fellas and Egul also cite another bankruptcy case to similar effect, In re Black & Geddes, 35 BR 830.  
27.	It is common ground that whether the funds paid to CBL for payment out to the Noteholders are held on trust by CBL for the benefit of the Noteholders depends on the intention of the parties to the FAA, Gabon and CBL, which in turn requires a consideration of the rights and obligations intended by the parties. In my opinion, the wording of Section 9(b) of the FAA, construed in the light of the FAA as a whole, is unambiguous.  I reject the submission that an ambiguity arises in light of (i) the fact the words relied on by CBL appear as an exception to the previously stated declaration that each of the agents, in acting under the FAA, is acting solely as agent of Gabon and does not assume any obligation or relationship of agency or trust for or with any of the owners or noteholders; and/or (ii) Section 9(f) which relieves CBL of any obligation to segregate the funds, except as may be required by law; and/or, (iii) the certification process provided for in section 9(g) of the FAA.  On the contrary, I am of the view that it is open to the court on the material before it to conclude, as I do, that under Section 9(b) it is plain that CBL agrees with Gabon that all funds held by it for the payment of principal and any interest on the notes shall be held in trust and applied as set forth in the FAA and in the notes.
28.	It follows, in my opinion, that this is not a case where under the law of New York extrinsic evidence would be admissible on the issue of how section 9(b) is to be construed.  As I read the opinions of the New York law experts, the absence of an obligation to hold funds in a segregated account is an indicium of intention but it is not a necessary precondition to the finding that a trust is constituted pursuant to the agreement of the parties, for otherwise the court in Petrohawk would have paid some attention as to whether the funds were to be kept segregated, which it did not.  The evidence before the court shows that the funds are held separately from CBL's funds in an omnibus ledger account containing monies received for the purpose of making payments due on dollar denominated notes and bonds. This is not full segregation but it is machinery quite different from the situation that obtained in Ames which, like Black & Geddes, was a bankruptcy case where the court took a particular approach conditioned by the fact that the rights of third party creditors were vitally involved.
29.	Accordingly, for the reasons I've given, I find that there is no good arguable case that Gabon has a proprietary interest in funds transferred to CBL for payment to noteholders under the FAA, and it follows that CBL's application for an amendment to the freezing order succeeds.