| Back to Articles |

Granville Gold Trust - Switzerland v Commissione Del Fullimento/ICB, 1997

Ref.: An alleged trust considered in International Law: The Granville Gold Trust Case

The Granville Gold Trust - Switzerland (CGT) was established by Robert Granville Higgins (RGH) in March 1996 naming the Inter Change Bank (ICB), a Swiss entity, as trustee.

ICB had powers, rights and duties under the laws of California except for the "performance" and "all financial transactions" which were to be governed according to the law of Switzerland.

The trust appears to have been established, nominally, for charitable purposes. When any annual donations were made by the trust, there would be a payment of ten percent interest to the Jesuit Order of the Roman Catholic Church for educational purposes throughout the world and ten percent interest to the Shrine for Crippled Children programme.

The trust agreement was signed only by RGH and not by ICB; the court, however, assumed that ICB did enter this agreement.

In 1966 RGH met ICB in New York to establish the trust; he made an initial deposit of $200 and later cash, gold certificates and other assets. These transfers allegedly amounted to over $600 million and were said to have come from the estate of RGH's brother.

ICB was a Swiss incorporated bank located in Chiasso in Switzerland in the Canton of Ticino and was supervised by the Federal Banking Commission under the Swiss Investment Trust Law of 1st July 1966. On 27th September 1967 ICB was placed in bankruptcy by the accountant of Canton of Ticino's civil court. Three commissioners the missione Del Fullimento (Commissione)e appointed. The commissioners took 22 years to wind up matters, and during that time the composition of the Commissisone changed with at least six individuals serving as commissioners. The Commissione was disbanded on 28th August 1989 when the Ticino Court of Appeals approved the liquidation and settlement.

According to the plaintiffs the proceedings took so long because ICB had many small creditors outside of Switzerland, particularly in Italy and South America, and to wind up ICB's assets the Commissione had to challenge public authorities and squatters in Venezuela where most of ICB's assets were located.

In the original list of depositors and customers assembled by the Commissione and by the Commissione's predecessor, the special receiver Dr Alberto Bernasconi, none of the plaintiffs nor RGH were included. The plaintiffs maintained that RGH had written to Dr Bernasconi requesting the transfer of the trust's assets, deeds and titles and papers of the trust to the Credit Suisse Bank.

The Commissione did not comply. RGH also wrote to the US Embassy in Berne requesting their help, but he claimed that their efforts were in vain.

No further action was taken for ten years by RGH or anyone else to recover the alleged assets. In 1977 he revived an interest and wrote to Bernasconi informing him that he had set up the trust in 1966 which had in it the equivalent of $600 million. Again there was a pause: no further action was taken for twelve years. Then in June 1990 when RGH appointed the plaintiff Abdul Hafeez Muhammad as the "principal beneficial interest holder of GGT" he irrevocably appointed him to assemble and restore the assets of the trust.

The second defendant was the Ufficio di Esecuzione e Fallimenti (Ufficio). This was the administrative unit of the Canton Ticino responsible for administering bankruptcy matters relating to non-banking entities. The plaintiffs maintain that Ufficio had become involved with the bankruptcy proceedings and could thereby be liable for the conversion of trust assets.

The plaintiffs originally brought an action in a New York State Supreme Court on 25th February 1993 claiming that ICB or the Commissione or Ufficio converted the assets of the trust. More than $600 million with interest at one per cent per month from 1996 resulted in a claim being made for $125 billion. In court there was argument about whether proceedings had been served properly. The defendants said no further attempts of service were made but the plaintiffs claimed that they were made through a Swiss Attorney. The defendants did not appear in the New York State court, and so the plaintiffs filed an amended notice of motion seeking a default judgment which the court issued on 5th May 1994. A default judgment for $125 billion was made on 3rd October 1994.

The defendants vigorously objected to the service of the proceedings. They counselled that the service did not conform either to Swiss law or any recognised international convention: that is why they did not attend.

The plaintiffs served restraining notices on 23rd December 1994 on various financial institutions, including the Federal Reserve Bank of New York, seeking to restrain the funds of Ufficio, the Commissione, the Swiss Canton of Ticino, all other Swiss Cantons, the National Bank of Switzerland all other banks and the Confederation of Switzerland up to the amount of the default judgment. Information subpoenas were served on all the financial institutions. Not surprising the Federal Reserve Bank itself sought an injunction against the plaintiffs and a temporary restraining order to prevent the plaintiffs from enforcing their own order or the information subpoenas.

The New York court vacated the default judgment on 28th February, 1996 under Federal Rule of Civil Procedure 60(b). They said:

'... the serious and complex issues of proper service, jurisdiction and comity in this international litigation, combined with the enormity of the judgment, the very existence of which threatened to create havoc in the financial markets - even if the judgment were subsequently held void - made a compelling case for resolving the issues on the merits and not via a default judgment'.

The plaintiffs maintained that the further deposits were authenticated through a "balance sheet of Granville Gold Trust as of 14th September 1966" as prepared by an accountant for GGT. They also maintained that ICB verified "the presence of substantial amounts in Granville Gold Trust under the control of ICB as trustee". Telegrams had been sent, they claimed, to various individuals verifying the considerable documents on deposit and they issued letters to potential trust depositors. They also produced a letter from a former counsel, Campana, to ICB addressed to Muhammad stating that he was the liquidator for ICB in charge of all the agreements between the banks and his customers and claimed first hand knowledge of GGT's being assets in excess of US$600 million in 1966 comprising real estate, mining properties, gold and silver certificates, and other evidence of properties. Campana verified his knowledge of the alleged US$600 million in an undated affidavit which was submitted to the court.

The defendants claimed that not only were the plaintiffs not creditors, depositors or customers on the list compiled by Bernasconi in 1967 but that Campana, had no personal knowledge of the alleged deposit. There was considerable conflicting evidence on the existence of the documents relating to the property alleged to have been held in trust. The defendants maintained that neither the plaintiffs nor RGH had a trust of which ICB was the trustee: the plaintiff's only evidence of such a depositor trustee relationship was a copy of what purports to be an agreement attached to a complaint. Whatever this was, it was not signed by ICB.

The defendants requested that the case should be dismissed. At least nine reasons were given for this request. These included lack of subject matter jurisdiction pursuant to the Foreign Immunity Act.

The court decided that only this reason needed to be examined as it was evident that subject matter jurisdiction was lacking.

The plaintiffs in their turn requested permission to amend their complaint to add the individual commissioners as defendants. However, the court had only to consider questions of fact, the most significant of which was the content of Swiss law.

The relevant aspect of US law was that the Federal Court jurisdiction only existed in suits against a foreign sovereign as allowed under the Foreign Sovereign Immunity Act (FSIA) 28 USC s1602). A court lacks subject matter jurisdiction over the sovereign unless one of the exceptions in that act apply. These exceptions include commercial activity by a foreign state; waiver by a foreign state; property present in the United States taken in violation of international law; an arbitration agreement between the parties; and various admiralty proceedings.

For the purpose of this law a foreign state includes "a political sub-division of a foreign state or an agency or instrumentality of a foreign state" as defined. The history of the act shows that this term needs to be interpreted broadly. Ufficio was within the scope of the definition. The Commissione was merely a title conferred upon three individuals by the Ticino Court of Appeals and was charged with a specific task of liquidating a bank in bankruptcy. Individuals are not within the scope of the FSIA when they are sued in their individual capacity. The individuals concerned were not citizens of the United States nor was the Commissione established under the laws of a third country. Unless an exception of the FSIA applied neither the individual member of the Commissisone nor the Ufficio could be sued in the United States' courts. The plaintiffs maintained that the commercial activity exception applied. For this purpose commercial activity means a regular course of commercial conduct or a particular commercial transaction or act. The commercial activity has to be determined by reference to the nature of the course of conduct or of a particular transaction or act, rather than by reference to its purposes. (Supreme Court rules 28 USC s1603 (d).) If a foreign state is engaged in an activity which can be performed by an individual citizen the activity is then generally considered commercial.

In a previous case, Drexel Burnham Lambert Group Inc v Committee or Receivers for Galadari 12 F3d 317 (2dCir 1993), the court denied the existence of this commercial activity where a committee, similar in nature to the Commissione, had been established by the government of Dubai for the purpose of liquidating a bank's assets because there was no direct effect in the United States of the commercial activity.

In this case the court said that the plaintiffs had misinterpreted completely the majority opinion in Drexel. The plaintiffs also asserted that the Commissione was accountable for ICB's actions but they cited no authority for that proposition nor offered any expert opinion. Evidence was shown that the Commissione was not a successor in interest to the bank nor did it assume any of the banks liabilities. The Commissione was not a successor in interest to ICB.

In a previous case, FDIC v O'Melveny & Myers 61 F3d 17, 19 (9th Cir 1995), the Court of Appeals said:

'A receiver, like a bankruptcy trustee ... does not voluntarily step into the shoes of the bank; it is thrust into those shoes. It was neither a party to the original inequitable conduct, nor is it in a position to take action prior to assuming the bank's assets to cure any associated defects or force the bank to pay for incurable defects'.

The court said that despite the year spent preparing this motion, providing 3,000 pages of documents, the plaintiff's have not pointed to any evidence that the Commissione was doing anything other than winding up the activities of the bank.

Even if the commercial activity exception did apply, then there was an exception to that exception namely, the lack of direct effect of the commercial activity in the United States which would also eliminate jurisdiction in the US courts. The plaintiffs maintain there was such a direct effect. Again they were misstating the Drexel principal. They say the mismanagement of the trust caused a detrimental effect on the plaintiffs in the United States rather than a loss of funds in Switzerland. In the Drexel case the alleged funds were also not in the United States and there was no direct effect.

The plaintiffs relied also on the decision in Texas Trading case (647 F2d) which found that there had been a commercial activity having a direct effect in the United States. There the government of Nigeria actively sought and created contracts in the United States for the purchase of cement. A contract to purchase goods and services in the United States is a commercial activity but in the present case there was no contract to purchase goods or services between the defendants and plaintiffs. Consequently, subject matter jurisdiction did not exist in the US.

The court then had to consider a request by the defendants for sanctions to be imposed upon the plaintiffs and their counsel for their:

'distortion of the facts; their failure to make good faith arguments; and their unsupported, untrue statements in their memoranda'.

The defendants pointed out that the individual plaintiffs and both RGH and his brother had previously been convicted of various forms of fraud. The court said sanctions (under Rule 11) should be imposed with caution: here the issue was a close one. The case had all the tell-tale signs of a scam, but the plaintiffs did provide the court with documentation indicating that the trust had probably been created and a letter from one member from the Commissione indicated that there was some substance to the complaint. This letter was later recanted.

Although the plaintiffs' complaint lacks subject matter the principal reason for not imposing sanctions is the failure of Campana, former counsel to ICB, to make copies of the GGT certificates he allegedly turned over to Muhammad in 1993. If he had made copies and obtained a receipt, this litigation might have been avoided, or, alternatively, would have been established as unquestionably fraudulent.

The conclusion was that because the Commissione, its members and Ufficio were either agent(s) or instrumentalities of a foreign state and none was involved in commercial activities having a direct effect to the US Foreign Sovereign Immunity Act the action was barred from being litigated in the US court. The defendants' request for Rule 11 was also denied.

Granville Gold Trust - Switzerland v Commissione Del Fullimento/Inter Change Bank (1997) 6 Bank LR.

Comment (by John Goldsworth): Although the case is notable for the enormity of the claim, the possibility of fraud and the lengths of the delays, it illustrates the international problems which can arise on the insolvency of a trustee of an international trust and of the need for the appointment of an institution as trustee which can adopt procedures so as to provide irrefutable evidence of the existence and identity of the trust assets.