Restitution
front page

What's new?

Archive front page

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2007

2006

2008

2009

Bank of America v Arnell, 28 July 1999, Commercial Ct, Aikens J, contains several points of interest. A counterfeit cheque for US$97K made payable to a company controlled by D1 was presented to the claimant bank, which cleared the funds through the Bankers' Trust New York, and the company's bank then credited its account to the tune of £56K. D1 then caused the company to transfer this money through CHAPS to his personal account, withdrew £30K in cash from this account, and instructed his bank to credit the D4's account with her bank with the remaining £26K, which was done, again through CHAPS. D4 was a social acquaintance of D1 who had agreed without enquiry to help him 'clear' a sum through her bank account. She then withdrew £25K in cash and handed it over to him. He then absented himself from the scene. (D2 and D3 were the banks who were joined to obtain disclosure of documents, but against whom no substantive claims were made)

The claimant applied for summary judgment against D1, who did not appear and was not represented in the proceedings, for the whole £56K, and for judgment against D4 for £26K.

So far as the claim against D1 was concerned, Aikens J was not satisfied that D1 had no arguable defence to a common law claim for MHR, because 'the Bank's "money" or, more accurately, its right to a credit ... became mixed with other funds before it reached his account ...' as it passed through the Bankers' Trust New York and CHAPS clearing systems. Following AGIP, therefore, its claim at common law would inevitably fail. In other words, Aikens J - in an application for summary judgment at any rate - had no desire to engage either with Lionel Smith's argument that both in principle and on authority the common law actually has no problem with mixed accounts - or with his argument in Restitution and Banking Law Chap 8 that there is no need to trace through bank clearing systems in EFT cases because all one needs is a causal connection between a debit to P and a credit to D. Take a bow, Lionel, and drop a line (or two) to counsel.

Except that he won't be interested, because the prospects of an appeal seem pretty remote, and the Bank won on its second argument - namely, that D1 had no arguable defence to a proprietary claim. This was put in 3 ways - the first relied on Chase Manhattan for the proposition that 'if a claimant paid away money by mistake then any recipient (subject to defences) held the money or its product or substitute on trust, whether or not he knew of the mistake at the time that he received it' - this was rejected as 'on a summary judgment application where I have not had argument from D1, who might well have submitted that Chase Manhattan was wrongly decided, I am not prepared to accept, in the light of Lord B-W's critique [in Westdeutsche], that it is still good law.'

The second argument relied on was - you've guessed it - that D1 knew of the claimant's mistake when his account was credited and that following Lord B-W's 'explanation' of Chase Manhattan in Westdeutsche he therefore held the funds on trust for the claimant. Aikens J accepted this, as although there was no direct evidence of D1's state of mind to work with, the only possible inference to be drawn from his behaviour on the facts was that he had been dishonest, with the result that his conscience was affected and a trust arose.

The third argument, which also succeeded, was that D1 had acted in breach of fiduciary duty to the company when he caused it to transfer the funds out of its account and into his personal account. I am quite unable to see why a breach of fiduciary duty to the company should have been capable of generating a proprietary interest in favour of the bank, and Aikens J does not explain the thought processes which led him to this conclusion.

So far as D4 was concerned, the bank lost. She was not a constructive trustee of the money simply because it was paid by mistake and she ultimately received it, and she had no knowledge of the bank's mistake sufficient to bring a trust into being before she paid it over to D1. Nor could she be liable for MHR, because of the tracing problem which kiboshed the MHR claim against D1 as well. Nor was she a knowing recipient, as following Twinsectra v Yardley (CA, 28 April 1999) the test for liability nowadays is dishonesty, and on the facts she was not dishonest.

The move here and in Twinsectra (which is also an interesting case) towards dishonesty as the test for recipient liability seems to strengthen the hand of those who prefer to see this type of liability as wrong-based.

Aikens J seems to have had no trouble with the idea that it is possible to trace in equity through bank clearing systems with a view to asserting a proprietary claim to traceable proceeds at the end of the process, but as was discussed at the recent SPTL Restitution section meeting, it would be nice if the courts would spell out for us in cases like this why they think that a claimant such as the bank in the present case starts off with a proprietary right sufficient to form the basis of a proprietary claim, when all it had at the beginning of the story was a personal right of action against Bankers' Trust New York.

Dr Charles Mitchell
Lecturer in Law
School of Law
King's College London
Strand
LONDON WC2R 2LS

tel: 0171 848 2290
fax: 0171 848 2465