McPHAIL v DOULTON

Specificity within discretionary trusts is a virtual prerequisite should the settlor wish to enjoy its success; as while the courts are empowered to dispense as the creator intended, they are still subject to restrictive criteria that can often render them ineffective.

When a company owner took the liberty of constructing a trust deed for the benefit of past and present employees and their relatives and children, the duties assigned to the trustees were flexible enough to allow for common sense and equity to steer their decisions.

This was because the funds within the trust were limited, and therefore issue to selected employees was restricted on a yearly basis, with further provision for continuous investment in order to extend the lifetime of the trust.

Over twenty years after execution of the deed, and following the death of the owner, the validity of the trust was brought into question by his widow and certain family members, who having found themselves exempt from the pleasures of regular payments from the trustees, sought to challenge the terms of the instrument contained within clause 9, which read that:

“(a) The trustees shall apply the net income of the fund in making at their absolute discretion grants . . . in such amounts at such times and on such conditions (if any) as they think fit . . . (b) The trustees shall not be bound to exhaust the income of any year or other period in making such grants . . . and any income not so applied shall be . . . [placed in a bank or invested], (c) The trustees may realise any investments representing accumulations of income and apply the proceeds as though the same were income of the fund and may also . . . at any time prior to the liquidation of the fund realise any other part of the capital of the fund . . . in order to provide benefits for which the current income of the fund is insufficient.” 

On this occasion, it was argued that while the trust designated that a class of people were intended as beneficiaries, the list was wide enough to introduce uncertainty at to whether the discretion offered the trustees was construed as a power, rather than trust instructions. Andso under those circumstances, the trust had prima facie failed, and that whatever funds existed fell within the deceased’s estate. 

When heard in the Court of Chancery, the judge upheld the idea that such a power exceeded the delicate framework of a trust, and that clause 10 of the same deed indicated that the interest in the trust lay solely in the hands of the trustees; therefore any disposition of funds were in accordance with their discretion, which resulted in uncertainty as to exactly whom the beneficiaries were.

Heard again at the Court of Appeal, the original judgment was upheld, while granting leave to appeal to the House of Lords. 

Here, the issues surrounding the true intention of the settlor were given greater consideration, with particular regard to the limitations of the trust fund use, and the relatively ascertainable identity of the employees and their family members.

When looked at in context, it was apparent that the aim of the trust was one that afforded creativity of the funds after the needs of the beneficiaries were met; therefore, it could not be construed as self-serving and obstructive of the intended purpose.

Rather, it boiled down to poor drafting, that while in the immediate sense, lent to initial confusion of those unfamiliar with trusts and fiduciary duties, did not prevent the House from clarifying that the same degree of uncertainty could be removed in lieu of a perfectly functional instrument of generosity, while reminding that parties that:

“[W]here there is a trust there is a duty imposed upon the trustees who can be controlled if necessary in the exercise of their duty. Whether the trust is discretionary or not the court must be in a position to control its execution in the interests of the objects of the trust. Where there is a mere power entirely different considerations arise. The objects have no right to complain.”

BOARDMAN v PHIPPS

Fiduciary duty and the exploits of commercial enterprise often run counter to each other, while in this instance the opportunistic actions of a solicitor produces a profitable outcome for all involved, but not without a cost to the integrity of their working relationships.

Upon the death of a successful business owner, the second appellant and respondent’s father, the widow and surviving children were bestowed relatively equal portions of a company shareholding totalling 8,000 shares of a possible 30,000 held.

This particular firm operated in two countries, and control was divisible between two families; namely that of the deceased (Phipps), and another named Harris, who were the majority shareholders.  

Having read their latest financial returns, the trustee accountant Mr. Fox suggested that the company was in poor financial health, and that if one of the beneficiaries, Tom Phipps (the second appellant), were to the be appointed as director, they could look to improving the status of the firm; thereby increasing the annuity drawn by the children from the existing 8,000 shares.

Following a meeting with the family solicitor Thomas Boardman (the first appellant), it was agreed that the two men would attend the forthcoming annual meeting in order to secure Tom’s appointment; however, their bid was unsuccessful due to board hostilities.

In the face of defeat, it was then suggested that the two appellants’ could offer to buy the remaining 30,000 shares in order to gain sufficient control and to improve the company’s financial standing.

This idea was rejected by the accountant trustee on grounds that such a move would require an application to the court; which on the face of the matter, would be dismissed as throwing good trust money after bad.

Left with no other options, the appellants arranged to self-finance the initiative; and so, set about writing to the shareholders, offering above-market purchase rates. 

After first securing 2,925 shares, the appellants went on to successfully buy all 21,986 shares at prices that proved to be significantly profitable to the beneficiaries, while explaining to the children that they were doing so not as representatives of the trust, but as private buyers acting in the best interests of the trust and those standing to profit from it.

Upon successful redistribution of the shares to the beneficiaries, the older son issued a writ, claiming that the appellants had simply been acting as constructive trustees, and therefore any profits made on the 21,986 shares were proportionately owed to the beneficiaries on grounds that the solicitor had been acting within a fiduciary capacity when making representations to the shareholders, and while accessing company information that would have otherwise been denied him when making his enquiries. 

In the first hearing, the appellants argued that they had made it clear on a number of occasions that their commercial strategies and undertakings were beyond that of the trust, and that support and acknowledgement of this had been given by the majority of the trustees and the respondent.

Relying upon the principles held in Aas v Benham, it was contended that:

“To hold that a partner “(or trustee)” can never derive any personal benefit from information which he obtains as a partner would be manifestly absurd.”

Aas v Benham

And, that the source of such information was secondary as to how it was applied; whereupon the respondent used the opinion of Russell LJ in Regal (Hastings) Ltd v Gulliver  to explain that:

“I have no hesitation in coming to the conclusion, upon the facts of this case, that these shares, when acquired by the directors, were acquired by reason, and only by reason of the fact that they were directors of Regal, and in the course of their execution of that office.”

Regal (Hastings) Ltd v Gulliver

Which underlined the argument that by an abuse of position, the appellants worked together to extract information privy only to the trustees and beneficiaries in order to secure financial gain, while partially disclosing their intentions to a percentage of the trustees, as opposed to the whole.

The first court found in favour of the respondents, and the same outcome was found in the Court of Appeal, before arriving at the House of Lords.

By a close margin, the House held that while the appellants conducted themselves with reasonable transparency, there had been oversights as to who was informed and how much they knew.

And that despite professing that they had acted outside the scope of the trust, there had also been a number of instances where veiled threats and coercive statements were used under the pretence of the trustees in order to gain important (and private) information, prior to the negotiation and procurement of the outstanding shares.

Hence, for those reasons the appeal was dismissed while the court reminded the parties that:

“[A] person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict.”

CARILLION PLC

On 15th January 2018, multi-national construction company Carillion plc folded under the weight of its economic ambitions.

This sudden collapse left investors, employees and clients angry, confused and concerned as to how something so apparently strong, was in fact, weak to its very core.

Shortly afterwards, BLACK LETTER LAW® was independently commissioned to investigate the legalities of that fateful event.

Here are the findings of that research.

 

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…”

BARCLAYS BANK LTD v QUISTCLOSE INVESTMENTS

Conditional lending, while perhaps overlooked during commercial and personal loans, forms the bedrock of such delicate transactions, and so should the borrower find themselves unable to apply the funds as expected, the nature of the agreement remains lawfully intact in favour of the lender.

In this matter, an insolvent debtor’s bank attempted to convert such monies into company assets at the expense of the lender, at which point the reassurance of equity intervened.

In 1964, the shareholders of a relatively successful enterprise took steps to issue dividends of around £210,000; however, upon inspection they discovered that without adequate liquidity, the payment would be impossible.

With that in mind, the company owner secured a conditional loan from the respondents, on the express condition that the funds were to be used for dividend issue only.

Once received, the owner wrote to the company bank, giving instruction to open a standalone account for the retention of the funds, while stipulating that:

“We would like to confirm the agreement reached with you this morning that this amount will only be used to meet the dividend due on July 24, 1964.”

Unfortunately, on July 17th 1964, the company entered into voluntary liquidation, whereupon the monies held remained unused, as per the instructions given at the point of receipt.

Some time later, the respondents demanded repayment of the money loaned; after which, the appellant bank argued that it had since become a corporate asset, and was therefore subject to the priorities of all associated creditors involved in the bankruptcy process.

At the point of litigation, the respondents held that the money loaned was subject to a resulting trust, and that the bank by virtue of their position, were now under a fiduciary liability as constructive trustees for the amount loaned.

In the first hearing, the judge awarded in favour of the appellants, on grounds that equitable principles did not apply when arms-length dealings fail.

Whereupon, the respondents appealed and the Court held that in matters involving third parties to a failed transaction, recovery under equity was a principle long enjoyed, and routinely evidenced through a number of judgments across hundreds of years.

Presented again to the House of Lords, the House examined the complexity of the transaction and noted that in Toovey v Milne, Abbot CJ had ruled that failure to apply the money loaned in the way originally intended, allowed for recovery of the funds during insolvency, under the principle that:

“[T]his money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid.”

Toovey v Milne

Here again, reference was made to the express conditions applied to the loan, as well as the statement made in the letter at the time the money was passed to the appellant bank.

It was further noted that while in circumstances where the lender agrees to loan on non-specific terms, there is an implied assumption that such funds become part of the corporate estate (albeit not entirely free of equity).

However, on this occasion there was ample testimony that the respondents had bargained with the borrowers on clear conditions, therefore the House uniformly and unreservedly held that the Appeal Court decision was to remain untouched and the bank’s appeal dismissed, while the House reminded the parties that:

“[T]he law does not permit an arrangement ” to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender.”

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.

HEALEY v BROWN

As can often result from mutual wills, the overlapping fields of contract law and equity become central to the resolution of this property dispute, after a claimant intervenes in the immoral acquisition of sole title to the matrimonial home of a son’s parents.

The drafting of mutual individual wills reflected that upon death, the surviving spouse became under law, the sole beneficiary of that person’s equitable and legal interest in the property occupied at the time of death.

Where neither party were survivable, the individual wills stated that the wife’s niece was to become the beneficiary of the equally held share of the leasehold, and that the father’s son would inherit the remainder of the estate.

Following the death of the wife, the husband took the liberty of transferring his now sole title to that of a shared (or joint) title to the property with his son; an act that in and of itself, contravened the earlier agreement within their final (and irrevocable by declaration) wills.

This transgression had remained unaddressed until the death of the father, preceding a naturally vehement claim by the niece that the transfer of title constituted fraud, and that under those circumstances, the son now held both parents’ share of the property upon trust for her, and that despite any contractual arrangements made between the father and son, the binding nature of the mutual wills superseded any administrative effects constructed under the laws of property.

Despite drawing argument against mutual testation under the property doctrine of survivorship, it remained evident that the father was acting within a fiduciary capacity when surviving his wife’s death, and so by avoiding the duties prescribed him, he breached that obligation in favour of his son’s expectation to benefit.

Again, as with the rules of equity and proscription of contract law, there appeared to be a lack of clarity surrounding the written intentions of the testator and testatrix, while the basis for this opposition relied upon section 2 of the Law Reform (Miscellaneous Provisions) Act 1989, where the disposition of land requires a single co-signed document containing the terms of the arrangement (or at the very least an exchange of those documents) as proof of intention; yet as the mutual wills were never signed by their respective partners, any desire to enforce their bequests became invalid under the Act itself.

This essentially meant that:

“No disposition of land can be challenged unless done so with a written and signed document contrary to the one drafted by the person charged.”

Sadly, the nature of the wills were such that neither party co-signed the others wills prior to their deaths, which thereby prevented a contract of sorts to exist.

So, on this occasion the judges decided that instead of the property becoming the sole title to the claimant (as was the design of the mutually drafted wills) the home was now held in equal shares for both parties to enjoy, albeit through the framework of a constructive trust, while reminding the parties that:

“Constructive or other trusts may arise or be imposed as a remedy in many circumstances where a contract is absent.”

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.”