From: Lucas Clover Alcolea
<lucas.cloveralcolea@otago.ac.nz>
Sent: Friday 16 August 2024
01:06
To: Matthew Hoyle;
obligations@uwo.ca
Subject: RE: Dishonest
assistance/knowing receipt against a creditor?
Thanks
Matthew!
Indeed, for
scenario 2 the recipient has notice, but the question is whether that matters
if the equitable proprietary claim has been destroyed via payment of a debt
(I m not sure Byers can be confined to equity s darling/special
statutory rules as it appears to be written more broadly). The issue isn t
equity s darling, which B certainly is not, but whether any sort of proprietary
claim exists at all (if one treats payment of a debt as destroying the funds
used because, as was noted in Re Goode quoting the 26th ed
of Snell s Equity even if the recipient has used the trust money to pay
off secured or unsecured loans or other Identifiable debts, there can
be no
tracing; for the payment purchases no asset, but merely extinguishes the debt
and there is no equity to revive it or create a new debt in its place -). If,
as Lord Briggs suggests, a knowing receipt claim is necessarily tied to a
tracing claim, then if one loses the right to trace (as for instance if the
debt goes through an overdraft/ a debt where no specific asset is acquired/no
co-ordinated scheme see for example Bishopsgate v Homan, Re Goode and
the arguments in Durant) then a knowing receipt claim would likewise
fall by the wayside. On balance, I think one could say the proprietary
claim isn t destroyed unless and until the creditor wrongfully accepts trust
property as satisfaction of a debt, or I m simply misinterpreting Byers. In any
event, for scenario one the problem remains. Could a beneficiary bring a
personal claim against a bank for clearing an overdraft (or some other creditor
for clearing a debt) with misappropriated trust funds, where the narrow
exceptions allowing backwards tracing laid down in Durant, don t apply?
Thanks also
for the reference to Rowlands v National Westminster (which may well
solve the problem)!
After some
digging, I found a Supreme Court of Canada case Citadel General Assurance Co. v. Lloyds Bank
Canada [1997] 3 SCR 805 where the bank was found liable in knowing
receipt for allowing a debtor to offset its overdraft with funds it knew (in a
broad sense) arose from a breach of trust. The Court held that:
In this Court, the respondents argued that they could not be liable on the
basis of knowing receipt because they had not received the trust
property. The respondents took the position, accepted by the authorities,
that a bank deposit is simply a loan to the bank; see Foley v. Hill (1848),
[1843-60] All E.R. Rep. 16 (H.L.); Fonthill Lumber Ltd. v. Bank of
Montreal (1959), 1959 CanLII 148 (ON CA), 19 D.L.R. (2d) 618 (Ont. C.A.), at p.
628. Accordingly, the deposit of money in Drive On s account was characterized
as a debt obligation owed by the Bank to Drive On. This debt obligation
gave rise to a credit in Drive On s favour. On instruction from its customer, the Bank simply
transferred credits from Drive On s account to International Warranty s
account. The transfer of credits had the incidental effect of reducing an
overdraft in the International Warranty account. In other words,
the transfers between the accounts in July and August simply amounted to an
off-setting of debt obligations. In the respondents view, the Bank was not receiving trust
property but simply transferring credits from one account to another.
29
The respondents arguments are not convincing. A debt obligation is
a chose in action and, therefore, property over which one can impose a
trust .The respondents cannot avoid the property issue by characterizing the
deposit of trust monies in Drive On s account as a debt obligation. The
chose in action, constituted by the indebtedness of the Bank to Drive On, was
subject to a statutory trust in Citadel s favour. That same chose in
action can also be the subject of a constructive trust in Citadel s favour.
30
Nonetheless, the respondents arguments reflect a difficulty with the
traditional conception of receipt in knowing receipt cases. In my
view, the receipt requirement for this type of liability is best characterized
in restitutionary terms. In Lac Minerals Ltd. v. International Corona
Resources Ltd., 1989 CanLII 34 (SCC), [1989] 2 S.C.R. 574, at p. 669, I stated
that a restitutionary claim, or a claim for unjust enrichment, is concerned
with giving back to someone something that has been taken from them (a
restitutionary proprietary award) or its equivalent value (a personal
restitutionary award). As well, in Air Canada v. British Columbia, 1989
CanLII 95 (SCC), [1989] 1 S.C.R. 1161, at pp. 1202-3, I stated that the
function of the law of restitution is to ensure that where a plaintiff has
been deprived of wealth that is either in his possession or would have accrued
for his benefit, it is restored to him. The measure of restitutionary
recovery is the gain the [defendant] made at the [plaintiff s] expense. In the present case, the Bank
was clearly enriched by the off-setting of debt obligations, or transferring of
credits between the Drive On and International Warranty accounts. That
is, the amount due to the Bank was reduced. As well, the Bank s
enrichment deprived Citadel of the insurance premiums collected on its
behalf. Moreover, the fact that the insurance premiums were never in
Citadel s possession does not preclude Citadel from pursuing a restitutionary
claim. After all, the insurance premiums would have accrued to Citadel s
benefit. The Bank has been enriched at Citadel s expense. Thus, in
restitutionary terms, there can be no doubt that the Bank received trust
property for its own use and benefit.
31 The
first requirement for establishing liability on the basis of knowing receipt
has been satisfied. The Bank received the trust property for its own
benefit and, in doing so, was enriched at the beneficiary s expense. The
second requirement relates to the degree of knowledge required of the Bank in
relation to the breach of trust. With regard to this knowledge
requirement, there are two lines of authorities. According to one line of
jurisprudence, the knowledge requirement for both knowing assistance and
knowing receipt cases should be the same. More specifically,
constructive knowledge should not be the basis for liability in either type of
case. A second line of authority suggests that a different standard
should apply in knowing assistance and knowing receipt cases. More
specifically, the authorities favour a lower threshold of knowledge in knowing
receipt cases
56 In
light of the Bank s knowledge of the nature of the funds, the daily emptying of the
account was in the trial judge s view very suspicious . In these
circumstances, a reasonable person would have been put on inquiry as to the
possible misapplication of the trust funds. Notwithstanding the fact
that the exact terms of the trust relationship between Citadel and Drive On may
have been unknown to the Bank, the Bank should have taken steps, in the form of
reasonable inquiries, to determine whether the insurance premiums were being
misapplied. More specifically, the Bank should have inquired whether the use of
the premiums to reduce the account overdrafts constituted a breach of
trust. By failing to make the appropriate inquiries, the Bank had constructive
knowledge of Drive On s breach of trust. In these circumstances, the
Bank s enrichment was clearly unjust, thereby rendering it liable to Citadel as
a constructive trustee.
However, I
wonder whether Courts outside Canada, which don t accept the unjust enrichment
understanding of these claims, or for trusts more generally, would accept the
reasoning of the SCC?
On the
other hand, if the trustee dissipates the assets gambling at a casino and the
casino has no knowledge of the breach of trust/that trust assets were even
involved, they can t be sued for knowing receipt Paton (Estate) v Ontario Lottery and Gaming
Commission 2015 ONSC 3130.
All the
best,
Lucas
|
|
Dr Lucas Clover-Alcolea |
From: Matthew Hoyle <MHoyle@oeclaw.co.uk>
Sent: Friday, August 16, 2024 11:32 AM
To: Lucas Clover Alcolea <lucas.cloveralcolea@otago.ac.nz>;
obligations@uwo.ca
Subject: RE: Dishonest assistance/knowing receipt against a creditor?
I m not sure I follow the point of the second
scenario, as the recipient has notice and therefore the trust rights while
persist in relation to the money paid. Even if A did not tell them the source
of the money was a trust fund, I imagine the creditor would have difficulty
substantiating any bona fide purchase defence. In and of itself B s actions
constitute intimidation and moreover, in England, likely also various criminal
offences including blackmail and harassment of a debtor.
As such, I m not sure the court would permit a
defendant to say their actions constituted a bona fide purchase and allow
them to rely on their own illegal conduct in order to put themselves within the
Byers scenario. The requirement the purchase be bona fide as well as
without notice is seldom discussed in case law (see Midland Bank v Green
[1981] AC 513, 528), but if Lord Wilberforce is right that it has any content
at all I can t think of a better case than this.
I think the upshot of that is that wherever there is
knowing receipt, there will also be notice sufficient to make the trust bite.
The Byers situation only arises in special scenarios where a statute
provides for purchaser protection by clearing off any encumbrances on the
buyer s title.
As for dishonest assistance, there is no reason why a
bank would not be liable regardless of whether its receipt extinguishes the
trust (although it is hard to conceive of a case where the defendant knows
enough to make him dishonest, but doesn t have constructive notice of the
breach of trust perhaps a case like Brink's Ltd v Abu-Saleh
[1996] CLC 133 where the alleged assister believes that they are helping to
facilitate tax evasion rather than a fraud (although that claim failed on other
facts). I m not aware of a case where a bank specifically has been found liable
for receiving money into an overdrawn account, but in Rowlands v National
Westminster [1978] 1 WLR 798, the judge accepted as correct a statement in
Paget s Banking Law that a bank has no particular special position, and that:
The banker
obviously must not be a party or privy to any fraud on the beneficiaries, any
misapplication of the trust fund. He could not, on the mere instruction of the
customer, transfer trust funds to private account, to wipe out or reduce an
overdraft. It is with the cheque that difficulties arise
Matthew
Hoyle
Barrister
One Essex Court
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From: Lucas Clover Alcolea <lucas.cloveralcolea@otago.ac.nz>
Sent: Thursday, August 15, 2024 11:10 PM
To: obligations@uwo.ca
Subject: Dishonest assistance/knowing receipt against a creditor?
Hi all,
I ve been
puzzling over a scenario in my head, mainly as a result of reading Byers v
Saudi National Bank and Brazil v Durant, and was wondering if anyone
had any thoughts on it.
Are there
any cases where beneficiaries have sought to bring dishonest assistance or
knowing receipt claims against a creditor who has been wrongfully paid, in
satisfaction of a debt, by an embezzling trustee with misappropriated trust
funds? In particular, imagine that no discrete asset has been acquired, and
there isn t a co-ordinated scheme , but rather the debtor s overdraft at a
bank has merely been paid off, but the bank has some sort of constructive
knowledge of dodgy dealings. I m not sure we could engage in backward tracing
(to the extent we believe that is permissible, if at all) in that scenario, but
could some sort of personal claim not be brought against the bank? If Byers is
right then a knowing receipt claim would fall as the equitable proprietary
interest would be destroyed by payment into a debt, unless we say that the
dishonesty exception the court hints at could be engaged by merely
constructive knowledge (but where no discrete asset has been acquired, I m
still not sure how one would trace, even backwards, here so presumably we d be
looking at a knowing receipt claim).
Alternatively,
imagine that Trustee A has a gambling debt to B, who threatens to break their
legs unless they repay the debt, A says they can only do so with trust funds as
their personal funds are exhausted, but B nevertheless insists on payment in
satisfaction of the debt (assume also that the debt is a valid one). If we
can t trace the funds, because B is merely an intermediary for C nefarious
criminal organisation so transfers the funds and we can t find them, surely the
beneficiaries of the trust administered by A could bring a claim against B in
dishonest assistance and/or knowing receipt?
The
scenario is entirely hypothetical, but it seems to me that if we allow tracing
into/through debts, then we must also allow at least the possibility of claims
in knowing receipt and/or dishonest assistance against a creditor (who has
accepted payment of misappropriated trust funds in satisfaction of a debt owed
by the trustee to them) in similar circumstances as we do for ordinary non-debt
claims (for example where the assets have been dissipated/tracing isn t viable
for whatever reason and the beneficiaries are best bringing a personal claim).
Alternatively, of course, we might just say backwards tracing is wrong in the
first place (which I don t necessarily disagree with, but doesn t help with how
the law actually is).
All the
best,
Lucas
|
|
Dr Lucas Clover-Alcolea |
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