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Greetings to all,

I am trying to finish up my book on tracing and I have been turning over a couple of thorny problems. At least so they seem to me. I would be very interested in any thoughts, or in any cases or writings which other list members could point me to.

The first arises out of a case called Lyons v. Jefferson Bank & Trust, 793 F. Supp. 981 (D.Colo. 1992), aff'd 994 F.2d 716 (10th Cir. 1993). The plaintiff investment trust and the defendant bank both used the same investment manager, Steven Wymer. On 25 November 1991, the defendant was undergoing a bank examination. At that time, the defendant's account with Wymer showed $45 million held in debt securities. To prove the examiners that this account was liquid, the defendant instructed Wymer to liquidate the account. Later that day, a deposit of $45 million was made to the defendant's account with the Federal Reserve bank. It turned out that Wymer had previously embezzled the contents of the defendant's account. The value he transferred to the defendant on 25 November 1991 came (as to $43 million) from unauthorized sales of securities belonging to the plaintiff. The plaintiff having traced from its securities to the payment received by the defendant, it was decided that the defendant held the value representing the payment on trust for the plaintiff. The defendant was left with personal rights against Wymer and his corporations, Wymer being now in jail and bankrupt.

The lawyers for the defendant seem to have mishandled the case rather badly. The appeal judgment considers very few of the issues substantively, but mostly decides that the issues now raised by the defendant were not properly raised at trial and so could not be considered on appeal. One of these was the issue of whether the defendant was a bona fide purchaser.

What would the result have been if this issue had properly been raised? The defendant was owed a debt by Wymer, for breach of trust, but the defendant did not know it at the time it got the payment. Can it be a bfp? My reaction is that it cannot; the defence protects security of transactions, and that interest is not present where the character of the transaction is completely different from what the defendant understands it to be. Any views, or other cases?

If the defence were allowed, the payment might still be a voidable preference, at least under US bankruptcy law. But it is not clear who would avoid it. The trustee in b would have no interest (on behalf of the creditors) in recovering the plaintiff's trust money. And a trust claimant cannot use powers held solely by the trustee; I doubt it could even use powers to avoid preferences/conveyances which are "void against creditors", because the recovery would not be on behalf of all creditors. On the other hand, perhaps if the bfp defence succeeded, the money would no longer be trust money; then if the trustee avoided the payment and got the money back, it would be part of the bankruptcy estate for all creditors (including now the plaintiff, who lost its equitable proprietary rights through the bfp transaction). Does that seem right?

Hmm, I think that's enough for now. Maybe I will post the other issue later ...

Many thanks for any thoughts,

Lionel Smith
Faculty of Law, University of Alberta
Edmonton, Alberta, Canada T6G 2H5
Tel 403 492 2599; Fax 403 492 4924
http://gpu.srv.ualberta.ca/~liosmith/lionel.html

After 31 July 1996:
St. Hugh's College
Oxford, U.K.
OX2 6LE
Tel (0)1865 274 900; Fax (0)1865 274 912
http://users.ox.ac.uk/~lawf0014/lionel.html