AGIP (AFRICA) LTD V JACKSON

Knowing receipt, constructive trustees and the effectiveness of traceability through multiple recipients form the basis of this Appeal Court hearing when the chief accountant of an oil drilling company systematically defrauded his employer of over $10m during a period of just two years.

This was carried out through a network of directors and business partners acting as authorised signatories for the sham companies, and who once a small number of deposits were made, closed the accounts, before opening new accounts that would then transfer the funds to a central account held in France.

This account belonged to a company that presented itself as a jewellery supplier, and which was owned by a French lawyer, who was the head of the fraudulent operation.

Party to this, was the manager of Lloyd’s Bank Holborn Street, whose role it was to receive funds from the chief accountant through his employer’s bank on a regular basis, before awaiting instructions as to which of the seven accounts the funds were to be transferred.

It was only after a money order destined for a shipping container firm was fraudulently altered, that the scheme became apparent and proceedings commenced.

In the first hearing, the respondent firm sued for payment under mistake of fact, and claimed that recovery was due either by the bank, or the account holders, who themselves took receipt of the funds under knowing deceit.

While relying upon the traceability of the monies paid out, it was held by the court that there had been too many displacements in both time and transactions to establish a clear path, therefore recovery under common law was too remote; however, when turning to equity the issue took an another form altogether.

While tracing through equity requires evidence of a fiduciary relationship, the chief accountant had by extension, held a fiduciary role; and so, it fell to the Court of Appeal to first explore knowing receipt and knowing assistance.

Here, it was held that while the appellants received the funds on behalf of their clients, they did so in the knowledge that the money had been obtained through fraud, and so for that reason were liable as constructive trustees for the respondent; particularly as no real effort was made to return the money once notification had been made by the issuing bank, while the court reminded the parties that:

“A person may be liable, even though he does not himself receive the trust property, if he knowingly assists in a fraudulent design on the part of a trustee (including a constructive trustee). Liability under this head is not related to the receipt of trust property by the person sought to be made liable…”

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…”

IN RE BADEN’S DEED TRUSTS NO.2

In what was to become an overly protracted and yet hotly debated case, the question of trust instrument validity and the limiting scope of trust powers, fell upon the English courts to answer, when what appeared at the time was judicial wisdom, later proved a confused doctrine that polluted similar cases in the years following its declaration.

Having become the director of a highly successful M&E company first established in 1927, and as a man of inherent providence, the deceased had taken it upon himself to draft a trust deed in 1941, that would allow his current and former employees to benefit from financial gifts on a potentially recurring basis, while in addition to this their immediate relatives were also to enjoy similar windfalls, as was contained in clause 9(a) of the trust, which read that:

“The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit and any such grant may at their discretion be made by payment to the beneficiary or to any institution or person to be applied for his or her benefit and in the latter case the trustees shall be under no obligation to see the application of the money…”

However upon his death in 1960, the appointed executors notified the trustees that the trust was void for uncertainty, as it would be almost impossible to distinguish one employee from another, never mind any relatives known to exist at the time of his passing, which was a position adopted in light of the company’s growth from 110 to 1,300 employees during the preceding years.

Commencing by way of an originating summons in 1967, the trustees argued that clause 9(a) merely represented a power to distribute funds to a class of beneficiaries, while the executors held that the use of the word ‘shall’ created instead, a mandatory trust that once unable to be fully executed, would nullify itself and thus fall within the residual estate.

In the first instance, the Court of Chancery examined the construction of the deed, and found that due to discretionary nature of clause 9(a), the trust conferred a power upon the trustees, and not an immutable instruction that once unfulfilled, rendered the trust void for uncertainty; a statement upon which the executors challenged the findings in the Court of Appeal.

Here, the court referred to In re Gestetner Settlement, in which Harman J had held that when ascertaining the exactness of a trust deed beneficiary class:

“[T]he trustees must worry their heads to survey the world from China to Peru…”

In re Gestetner Settlement

Which was to suggest an immense undertaking for trustees, unless it could be proven that the deed conferred a mere power, in which case, reasonable certainty of the beneficiary class ought then be shown. In light of this precedent, the court subsequently held that as before, the context of clause 9(a) was such that the trustees were afforded discretionary powers, and so held that:

“[C]lause 9 of the deed may properly be construed as the judge did, by holding that it creates a power and not a trust…”

At which point the executors along with the deceased’s widow, pursued their argument before the House of Lords on grounds that clause 9(a) represented a mandatory trust, and that as such, the ruling in the recent Inland Revenue Commissioners v Broadway Cottages directed the decision of the court when it held that:

“[A] trust for such members of a given class of objects as the trustees shall select is void for uncertainty, unless the whole range of objects eligible for selection is ascertained or capable of ascertainment…”

Inland Revenue Commissioners v Broadway Cottages

Which it was argued, was now impossible due to the vast number of both former and existing employees, causal employees and extended family members; a contention that left the House allowing the appeal by way of reference back to the Chancery Court for greater clarification, while also holding that in their opinion:

“[T]he trust is valid if it can be said with certainty that any given individual is or is not a member of the class.”

Once again in 1972, the court reviewed the position on the wording, and thereby meaning of trusts and powers, along with the validity of the trust in relation to section 164 of the Law of Property Act 1925, which stipulated that:

“1. No person may by any instrument or otherwise settle or dispose of any property in such manner that the income thereof shall…be wholly or partially accumulated for any longer period than one of the following…(a)the life of the grantor or settlor; or (b) a term of twenty one years from the death of the grantor, settlor or testator…” 

Law of Property Act 1925

And so with a thoughtful, albeit exhaustible, examination of the deed, the court held that a discretionary trust did exist, and that despite the 31 years since its execution, such an instrument was valid when called into purpose, which echoed the sentiment of the House when the court further held that the trust was valid on the principle that there were sufficient company records to show, and thereby establish, who was reasonably eligible for the benefit of the funds when distributed by the trustees, upon which the executors challenged the judgment before the Court of Appeal one final time.

Here, the executors argued that unless an individual could not be proven as falling outside the scope of the trust, the trust must fail, while the court reasoned that while operating within the bounds of practicality, the trustees had shown that they were equipped to trace staff records back to the inception of the company, and thereby allocate the majority of employees and their immediate relatives, whereupon the court conclusively dismissed the appeal, while simply holding that:

“[A] trust for selection will not fail simply because the whole range of objects cannot be ascertained.”

STRONG v BIRD

While English common law requires the perfecting of a gift through written documentation, the circumstances of that prerequisite can be somewhat altered when the moment calls. On this occasion, a testatrix was ultimately able to complete an oral debt release through the appointment of her debtor as an executor.

In 1866, the deceased was cohabiting with her son in-law when due to her sizeable wealth, she entered into an agreement whereby a significant amount of rent was paid on a quarterly basis.

After which, the defendant borrowed £1100 on the proviso that she deducted £100 per quarter until the balance owed was clear.

After only two payments, the deceased relinquished the debt, and explained that no further deductions were necessary.

This evidence was supported both by his wife and from handwritten notes left on the cheque counterfoils used before her demise.

Upon her passing, the beneficiary to her will contested that the £900 unpaid, was now owed under law, as the cessation of the loan had not been committed to any form of written notice aside from the cheque stubs, which were deemed insubstantial as proof.

Relying upon the essence of equity, the court examined the context in which her wishes had been executed, and knowing the oral and notary testimony were insufficient to stand as perfect, her appointment of the defendant as executor to her will, was evidence enough, and that while:

“The law requires nothing more than this, that in a case where the thing which is the subject of donation is transferable or releasable at law, the legal transfer or release shall take place. The gift is not perfect until what has been generally called a change of the property at law has taken place.”

Thus the court held that the deceased, having made no express acknowledgement of a debt within her will, was proof enough that the gift was perfect, and that its absence created in the defendant, an absolute right to title of the £900, therefore no challenge could be made, equitably or otherwise.

The court further noted that her further payments of full rent for a period of four years after the money had been loaned, showed again that she considered the sum paid in full, and so sought no recovery in death, as she might in life, while reminding the parties that:

“[T]he mere saying by a creditor to debtor, “I forgive you the debt,” will not operate as a release at law. It is what the law calls nudum pactum, a promise made without an actual consideration passing, and which consequently cannot be supported as a contract.”

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.

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