BRISTOL AND WEST BUILDING SOCIETY v MOTHEW

A potential breach of fiduciary duty proves central to a solicitor’s misgivings, when for atypical reasons a lender sought recovery of their loss through equitable principles after other options failed.

In the late 1980s, the respondents entered into a mortgage arrangement with a couple looking to secure a second property for £73,000; however, due to market instability, the respondents expressed that the £59,000 loaned was subject to the mortgagors paying the balance of the property purchase from existing capital to reduce the risk of default; after which, the acting appellant solicitor knowingly agreed to undertake the conveyance and provide a full report as contained in their contract. 

Prior to completion of the purchase, the mortgagors took out a small charge against their existing property for £3,350 in order to raise the funds needed to secure the mortgage and aware that the debt would be secured against the new house; and yet, the appellant continued with the purchase without reporting the change in financial circumstances.

Following a successful transaction, the mortgagors honoured only a handful of repayments before lapsing into default; whereupon, the new house was sold as part of the repossession process; however, the property crash had diminished the property’s value short of satisfying the debt by £6,000, therefore the respondents sought equitable damages from the solicitor on grounds of breach of fiduciary duty through non-disclosure of the loan terms.

In this instance, the court ruled in favour of the respondents and awarded damages to the effect of £59,000, less the funds raised from the sale; whereupon, the appellant challenged the judgment in the Court of Appeal.

Here, the court upheld the appeal on grounds that appellant’s oversight did not constitute a breach of fiduciary duty to either party as they had been consciously acting in good faith toward both throughout the disposition.

This translated that any lapse of skill or appreciation was accidental and not premeditated, as required under the rules of equity, while the Court also reminded the parties that:

“[I]f a fiduciary is properly acting for two principals with potentially conflicting interests he must act in good faith in the interests of each and must not act with the intention of furthering the interests of one principal to the prejudice of those of the other…”

BRAY v FORD

Profiting from a fiduciary position, while not expressly forbidden, is a feature that requires careful consideration by both trustees and beneficiaries, while in this matter, the billing of fees for legal services proved offensive and damaging for the party accused.

In 1895, the Governor of the Yorkshire College took issue with the vice-chairman after discovering that for a period of fourteen years, he had been providing legal function as a solicitor whilst holding a position based upon a voluntary footing.

Incensed at this opportunistic behaviour, the now appellant wrote a lengthy letter to the respondent, accusing him of a breach of fiduciary duty to the institution he served, while stressing that he had:

“[U]sed religious, educational and philanthropic schemes as a hypocritical cover for the purpose of serving his own ends.”

The respondent argued that the terms of the memorandum of association had provided him with rights to both charge and profit from his work, a contention that remained largely unproven at the point of litigation.

In the first hearing, the judge underemphasised the importance of the accusation levelled, instead focussing on the libellous tone used in the letter; which at the time, was circulated amongst three hundred other college governors.

Having convinced the jury that the respondent was justified in his collection of payment for legal services, the judge again placed greater weight upon the damaging effects of the written statements; after which, the jury returned a verdict in favour of the respondent with damages set at a lofty 600l.

Upon appeal, the appellant was left facing a similar outcome, after the Court agreed that the libel charges remained as effective as they would have should the respondent have been proved wrong, thus prompting a final plea before the House of Lords.

Here, the roots of the matter were revisited, along with Order XXXIX r.6 of the Rules of the Supreme Court 1883, which explained how:

“[A] new trial shall not be granted on the ground of misdirection or of the improper admission or rejection of evidence,…unless in the opinion of the Court to which the application is made some substantial wrong or miscarriage has been thereby occasioned in the trial…”

Rules of Supreme Court 1883

It was thus uniformly agreed by the House that from the outset, the nature of the action had been grossly overlooked, and that the trial judge had clearly failed to acknowledge the gravity of a fiduciary breach; which if proven correct, went some way to justifying the claims made by the appellant at the outset.

Hence, the House held that there had been a clear miscarriage of justice, and that in failing to recognise this the Court of Appeal had conversely erred in judgment.

After which, the House reversed the Court of Appeal’s decision, directed a re-trial under the Supreme Court Rules, and ordered repayment of all courts costs and damages to the appellant, while reminding the parties that:

“[H]uman nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect.”

REAM v. FREY

The essence of fiduciary duties run counter to the arms-length relationships navigated by contracting parties; and so, on this occasion the relinquishing of trustee duties by a regulated bank proved a reversal of fortune for an innocent employee.

While operating his construction company, the sole owner established a Profit Sharing 401(k) Plan for the benefit of his numerous employees. Almost six years later, the company filed for bankruptcy under Ch. 7 of the Bankruptcy Code; after which, one of its employees requested payment for the money he had invested during the life of the plan.

With an estimated $14,000 owed, the employer agreed to settle the matter with a payment of $21,000 to cover court fees incurred while pursuing the debt on grounds of a fiduciary breach.

Unfortunately, the employer paid only $18,500; after which, he escaped jurisdiction and was never seen again. This left the employee with no option other than to claim the remaining $3,000 from the now appellant bank, who in accordance with the terms of the plan, was an acting trustee under the Employee Retirement Income Security Act of 1974 (ERISA).

At the point of litigation, it became clear that while serving as a trustee, the bank was under duty to inform where possible, all plan beneficiaries of its decision to rescind its appointment, as expressed under art. 15.6 of the plan, which allowed the bank to resign by written notice;

After which, any outstanding funds would be transferred to a successor trustee; however, should one not be available, the administrator of the plan would automatically occupy that position.

Unbeknown to the employee, the bank had been struggling to communicate with the employer for a number of months, and after resigning as trustees with the knowledge that the trustee-administrator relationship had broken down, and that the company was now also in financial trouble, the bank had handed $53,000 of plan funds to the employer without notifying the beneficiaries of their decision.

It was at this point, that the employer converted the assets for his own personal use, sometime before part-settling with the employee and disappearing.

When heard in the district court, the judge awarded in favour of the claimant employee, whereupon the bank appealed to the court of appeals, who investigated further, the nature of the plan and associated case precedents.

Here it was agreed that under § 106 of the Restatement (Second) of Trusts, a trustee was able to resign in accordance with a trust with express permission of the beneficiaries or consent of the court; yet at no point, had the bank alerted the employee(s) of either the decision to resign, or the uncertain future of the employer.

It was also noted that under s. 11.4 of the plan, that the bank could be could liable:

“[T]o the extent it is judicially determined that the Trustee/Custodian has failed to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.”

While the bank argued that under such circumstances, legal remedy would be sustainable only as a class action involving all the beneficiaries, the court held that in Varity Corp. v. Howe, individual remedy was viable under ERISA § 502(a)(3), which provides that equitable relief is granted to individuals in order to “redress any act or practice which violates any provision of this title”.

The court also noted that § 173 of the Restatement (Second) of Trusts provides that:

“[The Trustee] is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person.”

It was for these salient reasons that the appeal court supported the district court ruling and awarded in favour of the employee for the remaining balance of the plan monies, while adding that had the bank been in a position to hand over money of its own to the employer, things may have taken quite a different turn, especially when considering the vulnerability of the beneficiaries.

ATTORNEY-GENERAL FOR HONG KONG v REID

The phrase ‘two wrongs do not make a right’ is virtuous to the truth that misdeeds can never amount to anything more than loss, yet when adopted for equitable purposes, the exact opposite can be found.

After rising through the ranks of Hong Kong administration, a solicitor turned Director of Public Prosecutions positioned himself to where he was able to accept sporadic bribes in exchange for his obstruction of justice through the failed convictions of known criminals.

Having taken over HK $12m in payments, the respondent in this matter invested the funds into three properties, two of which were in title to himself and his wife and the third to his solicitor.

The discovery of his fraudulent behaviour and subsequent criminal prosecution raised the question of whether by his breach of fiduciary duty as a servant of the Crown, the sums paid were now held upon constructive trust for his former employers, and that any monetary gain following the purchase of the homes was composite to that trust.

Common law principles surrounding fiduciary breach and profit from such breaches have been long held to apply in favour of the trust beneficiary, despite the illegality on the part of the fiduciary when in receipt of bribes from third parties.

This is because when acting beyond the remit of the trustee, and in a manner that is dishonest, the action itself becomes legitimate, if only for the benefit of those the fiduciary/trustee was appointed to serve.

This translates that although the respondent allowed himself to selfishly receive bribes in exchange for personal profit, equity would ascribe that his deceit was immediately converted into a positive gesture conferring direct gain to his employers, as no fiduciary can be seen to profit from his breach as previously mentioned.

This, by virtue of the fact of those principles, altered the manner in which the respondent not only executed his plans, but provided the Crown with privilege to acquire beneficial interest in the properties purchased, along with any increase their value since initial conveyance.

When considered by the Privy Council, it was quickly agreed that any conditions imputed by the respondents upon the entitlement of his employers to seek recovery of the debts through the homes, failed to override the fundamental obligations owed to him while serving and acting under fiduciary capacity, despite any notion of separateness or mixed investment on his part; and so dismissed his appeal, while holding that:

“[A] fiduciary acting dishonestly and criminally who accepts a bribe and thereby causes loss and damage to his principal must also be a constructive trustee and must not be allowed by any means to make any profit from his wrongdoing.”

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