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D'Aloia v Persons Unknown Category A & Ors
Factual and Procedural Background
The Claimant alleges he was the victim of a cryptocurrency scam involving multiple Defendants. The claim against the Second Defendant was settled, and the claim against the Fifth Defendant was struck out. The Claimant sought summary judgment against the First Defendants, the Third, Fourth, and Seventh Defendants. The trial primarily concerned issues between the Claimant and the Sixth Defendant, a cryptocurrency exchange. The Claimant alleges that the First Defendants fraudulently induced him to transfer approximately £2.5 million in cryptocurrency, which was then laundered through various blockchain wallets before being withdrawn as fiat currency by the Seventh Defendants. The Exchange Defendants, including the Sixth Defendant, are alleged to have held accounts used in this laundering process.
Legal Issues Presented
- What is the pleaded basis for the Sixth Defendant's alleged liability to the Claimant, including identification of the "Identifiable Cryptocurrency" and the basis for constructive trust claims?
- Whether USDT (Tether) is property under English law and the nature of such property rights.
- Whether the Claimant can establish, factually and legally, that his Identifiable Cryptocurrency reached the Sixth Defendant's wallet through following or tracing.
- Whether the Sixth Defendant has been unjustly enriched at the Claimant's expense and the availability of related defences.
- The applicability and scope of constructive trusts in the context of the alleged fraud and the Sixth Defendant's conduct.
- The proper legal characterization and admissibility of expert evidence on blockchain analysis and tracing methodologies.
- The availability and application of defences such as good faith purchase for value without notice, ministerial receipt, and change of position.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Foskett v McKeown [2001] 1 AC 102 | Distinction between following and tracing; tracing is a process to identify proceeds of property. | Used to clarify legal distinction between following and tracing in the context of cryptocurrency. |
| Westdeutsche Landesbank Girozentrale v Islington Borough Council [1996] AC 669 | Constructive trust principles where property is obtained by fraud. | Applied to determine that a constructive trust arose against the fraudulent Defendants, but not directly against the Sixth Defendant. |
| Martin J Halley v The Law Society [2003] EWCA Civ 97 | Fraudulent contracts may be void, giving rise to constructive trusts. | Accepted as binding authority for constructive trust arising from fraudulently induced contracts. |
| Bristol & West Building Society v Mothew [1998] Ch 1 | Rescission of contracts induced by fraud may give rise to constructive trusts. | Considered in relation to possible rescission-based constructive trust claims. |
| AA v Persons Unknown [2019] EWHC (Comm) 3556 | Cryptoassets such as Bitcoin are property under English law. | Supported the finding that USDT is property for tracing and other claims. |
| Tulip Trading v Van der Laan [2023] EWCA Civ 83 | Detailed analysis of Bitcoin’s operation and confirmation that cryptoassets are property. | Adopted to confirm that USDT satisfies the criteria for property under English law. |
| Agip (Africa) Ltd v Jackson [1991] Ch 547 | Tracing through mixed funds not permitted at common law. | Applied to hold that common law tracing through mixed funds is impermissible in this case. |
| Charity Commission for England and Wales v Framjee [2014] EWHC 2507 (Ch) | Methods of tracing in mixed funds including FIFO, pari passu, and rolling charge. | Referenced in discussion of tracing methodologies and their applicability. |
| Byers v Saudi National Bank [2023] UKSC 51 | Tracing includes both following and tracing as combined concepts; knowledge requirements for bona fide purchaser defence. | Used to address legal principles on tracing and defences in the context of cryptoassets. |
| Investment Trust Companies v HMRC [2017] UKSC 29 | Structured approach to unjust enrichment claims. | Applied to structure the analysis of unjust enrichment elements. |
| Relfo v Varsani [2014] EWCA Civ 360 | Sham transactions can be treated as direct payments for enrichment analysis. | Considered in assessing whether a sham transaction analysis applies to the Hops. |
| Boake Allen Ltd v HMRC [2006] EWCA Civ 25 | Importance of proper pleading to define issues for trial. | Applied to emphasize the need for clear pleadings in this case. |
| Loveridge v Healey [2004] EWCA Civ 173 | Parties may allow departure from pleaded case without amendment. | Referenced regarding the Claimant’s departure from pleaded case and evidential implications. |
| Markem Corp v Zipher Ltd [2005] EWCA Civ 267 | Procedural fairness in challenging expert evidence. | Referenced in relation to challenges to expert methodology. |
| High Commissioner for Pakistan v Prince Muffakham Jah [2019] EWHC 2551 (Ch) | Unauthorised payment as an unjust factor in unjust enrichment. | Accepted as authority for the Claimant’s pleading of unauthorised payment as an unjust factor. |
| Kleinwort Benson Ltd v Lincoln CC [1999] 2 AC 349 | Money paid under mistake can be recovered in unjust enrichment. | Applied to support the Claimant’s assertion of mistake as an unjust factor. |
| Terna Energy Trading v Revolut Ltd [2024] EWHC 1419 (Comm) | Analysis of enrichment and ministerial receipt in principal-agent contexts. | Considered in relation to the defence of ministerial receipt. |
| Jeremy D Stone Consultants Ltd v National Westminster Bank plc [2013] EWHC 208 (Ch) | Crediting an account is provisional; payment is required for ministerial receipt defence. | Preferred approach applied to reject ministerial receipt defence on basis of mere crediting. |
| Portman Building Society v Hamlyn Taylor Neck [1998] 4 All ER 207 | Defence of ministerial receipt requires no notice of claim when paying over funds. | Applied to analyze notice requirements for ministerial receipt defence. |
| Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 | Change of position as a defence in unjust enrichment claims. | Referenced regarding availability of change of position defence in cryptoassets context. |
| Gwinnutt v George [2019] EWCA Civ 656 | Property can exist absent enforceable legal rights. | Considered in analysis of the nature of property rights in cryptoassets. |
| Attorney-General of Hong Kong v Nai-Keung [1987] 1 WLR 1339 | Intangible property can exist without enforceable legal rights. | Applied to support recognition of property rights in USDT despite absence of claim rights. |
| Swift v Dairywise (No 1) [2000] 1 WLR 1177 | Statutory entitlements can be property and subject to trust despite limitations. | Used to illustrate context-specific nature of property and trust. |
| Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch) | Electronic intangible assets can be property; application of Ainsworth test. | Supported analysis that USDT is intangible property for tracing and trust purposes. |
| Shalson v Russo [2003] EWHC 1637 (Ch) | Constructive trust arising on rescission of fraudulent contract. | Considered in relation to the timing and effect of rescission-based constructive trusts. |
| Boake Allen Ltd v HMRC [2006] EWCA Civ 25 | Proper pleading is essential for fair trial and issue definition. | Referenced regarding importance of pleadings in this case. |
| R v Rogers [2014] EWCA Crim 1680 | Application of money laundering rules and standards. | Referenced in discussion of KYC/AML standards applicable to the Sixth Defendant. |
| MRH Solicitors Ltd v The County Court Sitting at Manchester [2015] EWHC 1795 (Admin) | Fairness in making conclusive findings of fraud without opportunity to rebut. | Cited in relation to the Claimant’s allegations of fraud against the Seventh Defendants. |
| Philipp v Barclays Bank plc [2023] UKSC 25 | Institutional competence of courts versus legislature in novel legal issues. | Referenced in public policy considerations regarding cryptoassets. |
| National Provincial Bank v Ainsworth [1965] 1 AC 65 | Test for property: definable, identifiable, capable of assumption, permanence. | Applied as the foundational test to USDT as property. |
| Agip (Africa) Ltd v Jackson [1991] Ch 547 | Tracing rules and limitations at common law. | Applied to hold tracing through mixed funds impermissible at common law. |
Court's Reasoning and Analysis
The court began by summarising the pleaded issues, focusing on the Claimant’s allegations against the Sixth Defendant (the Exchange Defendant) and the basis for constructive trust claims. It accepted that USDT (Tether) qualifies as property under English law, though it is neither a chose in action nor possession but a distinct form of property combining data and transactional functionalities. The court analysed expert evidence, particularly the Claimant’s blockchain tracing expert, and found significant methodological flaws and inconsistencies. The expert’s use of FIFO (first in, first out) tracing was contradicted by his own admissions and lacked a principled basis, undermining the factual demonstration that the Claimant’s funds reached the Sixth Defendant’s wallet.
The court distinguished between following and tracing, confirming that the Claimant’s pleadings supported a claim based on tracing, which includes substitutes for original property, and that the Claimant was entitled to advance claims on that basis despite some imprecision in terminology. It reaffirmed that tracing through mixed funds is not available at common law but may be possible in equity, a distinction relevant to the Claimant’s claims.
On unjust enrichment, the court applied the structured approach requiring enrichment at the Claimant’s expense and an unjust factor. Although the Sixth Defendant was enriched by receipt of USDT, the Claimant failed to prove that his funds were part of that enrichment. The court accepted that the Claimant had established unjust factors of unauthorised payment and mistake, but the absence of evidence tracing his funds to the Sixth Defendant’s wallet was fatal.
The court examined defences raised by the Sixth Defendant, including good faith change of position and ministerial receipt. It found that the Sixth Defendant had actual knowledge of suspicious transactions and breaches of withdrawal limits, failed to investigate adequately, and therefore could not rely on these defences. The defence of counter-restitution being impossible was rejected as irrelevant since the Claimant had no benefits to return.
Regarding constructive trusts, the court analysed four possible bases: (i) a trust imposed on the fraudulent First Defendants under Westdeutsche principles; (ii) a trust arising from vitiated intention or rescission under Angove; (iii) a rescission-based trust arising prospectively from commencement of proceedings; and (iv) a trust imposed directly on the Sixth Defendant based on its alleged failure to act commercially reasonably. The court accepted that a constructive trust arose against the First Defendants but found no basis for a direct trust against the Sixth Defendant, which was not pleaded and for which no breach of trust was established. The Claimant’s failure to prove receipt of his funds by the Sixth Defendant was fatal to any claim against it, including knowing receipt claims, which were not pursued.
The court also addressed the public policy arguments against recognising property rights in cryptoassets and concluded that existing English law supports treating USDT as property capable of tracing and trust claims. It rejected arguments that public policy or institutional competence concerns should prevent the court from deciding the issue.
Overall, the court found the Claimant’s case legally complex and factually unsupported in key respects. The Claimant failed to show on the balance of probabilities that his USDT reached the Sixth Defendant’s wallet, and the pleaded constructive trust claims against the Sixth Defendant were either unpleaded or unsupported. The defences raised by the Sixth Defendant were rejected on the facts, but this was insufficient to save the Claimant’s claims given the evidential shortcomings.
Holding and Implications
The court dismissed the Claimant’s claims against the Sixth Defendant. The Claimant failed to prove that any of his USDT reached the Sixth Defendant’s wallet, undermining tracing and unjust enrichment claims. The constructive trust claims against the Sixth Defendant were not pleaded or supported by evidence. The court rejected the Sixth Defendant’s defences of good faith purchase, ministerial receipt, and change of position, finding actual knowledge of suspicious activity and failure to investigate.
The direct effect is that the Claimant’s claims against the Sixth Defendant fail. No new legal precedent was established; the court applied existing principles on tracing, property in cryptoassets, unjust enrichment, and constructive trusts. The judgment clarifies the application of these principles in the context of complex cryptocurrency fraud and highlights the importance of clear expert evidence and precise pleadings in such cases.
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