U.S. v. Carolene Products Co. (1938)

US Constitutional Law

US v Carolene Products Co
Image: ‘Oreo Cookies and Milk’ by Mick McGinty

Amendment rights and the need to protect against fraud, are central to a case involving a distributor of food products and the intervention by Congress in the interests of public safety when in 1938, a corporate entity was indicted under §§ 61 and 62 of the Filled Milk Act 1923.

After having shipped a number of containers of ‘Milnut’, a product that fell within the scope of the Act, and which resulted in a sentence of either imprisonment or a $1000 fine as per § 63, the now appellee was charged with illegal distribution and misrepresentation, within which § 62 clearly expressed how:

“It is declared that filled milk, as herein defined, is an adulterated article of food, injurious to the public health, and its sale constitutes a fraud upon the public. It shall be unlawful for any person to ship or deliver for shipment in interstate or foreign commerce, any filled milk.”

Whereupon the matter was taken to appeal before the U.S. Supreme Court under the Criminal Appeals Act 1907. Here, the appellee demurred that application of the 1923 Act was subject to the limitations prescribed by the tenth amendment to the U.S. Constitution, which states that:

“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

And that seizure of the prohibited goods was a breach of the Fifth Amendment to the Constitution, which expresses how:

“No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury…nor be deprived of life, liberty, or property, without due process of law…”

Therefore the decision by Congress to create and apply prohibitive legislation which conflicts with the aims of the Constitution, was both ultra vires and an affront to the privacy rights and freedoms of the individual citizens of the United States of America.

Contrastingly, the Court drew reference to Hebe Co. v. Shaw, in which the Supreme Court ruled that any state law forbidding the manufacture and sale of filled milk under § 6(c) of the 1923 Act, which clarified how:

“The term ‘filled milk’ means any milk, cream, or skimmed milk, whether or not condensed, evaporated, concentrated, Powdered, dried, or desiccated, to which has been added, or which has been blended or compounded with, any fat or oil other than milk fat, so that the resulting product is in imitation or semblance of milk, cream, or skimmed milk, whether or not condensed, evaporated, concentrated, powdered, dried, or desiccated.”

Was not an infringement of the Fourteenth Amendment of the Constitution, which again stipulates that:

“No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

This translated that while the rights afforded under the Constitution were exempt from the wishes of Congress, the importance of public interest and compelling evidence submitted by the House Committee on Agriculture and the Senate Committee on Agriculture and Forestry in relation to ‘doctored’ milk, justified the prevention of misrepresentation through sensitive regulation, as opposed to wanton deprivation of liberty or distortion of justice. Thus it was for this fundamental reason that the Court dismissed the demurrer and reversed the judgment accordingly.

Hutto v. Davis (1982)

US Criminal Law

Hutto v Davis
Image: ‘Smoke on the Water’ by Barbara St. Jean

Disproportionate sentencing for non-violent offences, while not surprising in a multi-jurisdictional continent, becomes central to the hierarchical fragility of a country built upon fairness and constitutional rights, when a convicted felon receives life imprisonment for drug related offences valued at less than $200 at the time of arrest.

In 1973, Virginia state police raided and recovered nine ounces of marijuana from the home of the defendant, prior to his conviction for possession with intent to distribute. When awarding judgment, the court passed a sentence of forty years imprisonment with a fine of $10,000, after which the defendant successfully appealed under habeas corpus, while contending that such an exorbitant term was in contravention to art.VIII of the US Constitution which reads:

“Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”

And s.1 of art.XIV which reads:

“No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

Unfortunately, a US court of appeals panel reversed the decision on grounds that at no point in history had the Court been found liable for cruel and unusual punishment when sentencing under the guidance of state legislation, however when reheard in full judicial capacity, the court amended its earlier judgment back in favour of the appellant.

Through the application of Rummel v. Estelle, in which a Texan defendant had been unfairly sentenced to life imprisonment for fraudulent misrepresentation to the value of just under $121, the US Supreme Court ruled that despite the extremity of the sentences, there was nothing unconstitutional about the application of maximum penalty through approved legislative framework, and that on this occasion, when the lower courts had relied upon the four principles used in Hart v. Coiner:

  1. No element of violence and minimal, debatable danger to the person
  2. Examination of the purposes behind criminal statute and alternative mitigating remedies
  3. Evidence of excessive penalty beyond maximum recommendations
  4. Evidence of disproportionate sentencing through comparative state analysis

To allow the appeal, they had collectively failed to recognise that federal courts should be slow to review legislative sentencing mandates, and that tradition clearly showed how such instances were both rare and intrusive to the doctrine that amendments to statute were privy to Congress and not the courts. It was thus for these reasons that the US Supreme Court reversed the findings of the court of appeals, with explicit instruction to dismiss the habeas corpus, despite a majority dissent from within.

R v Lambie (1981)

English Criminal Law

R v Lambie
‘Red Purse’ by Vladimir Kush

Fraudulent misrepresentation and the need for proof of inducement, may at first seem like prudent adjudication, however when the facts are properly assembled, there is little doubt as to whether the act itself was one of corroboration through personal gain, or a simple exploitation of the contractual arrangements between credit and debtor.

In the winter of 1980, the now respondent was convicted for obtaining pecuniary advantage by deception under s.16(1) of the Theft Act 1968 after an indictment on two counts, one of which was quashed, while the second occurred during a period after the lending bank had recalled the credit card used.

Having been granted use of the card in spring 1977, the bank had, after a period of time, requested its return after the respondent had incurred a debt far in excess of the prescribed limit of £200. On 6 December 1977, the respondent agreed to return the card, after which she entered into a transaction in a Mothercare store on 15 December 1977, before returning the card on 19 December, at which point the debt had increased to a princely £1005.

At the trial, the jury returned a verdict against the respondent, after which she appealed on grounds that the store clerk had, by her application of store policy regards their relationship with the bank, allowed the transaction to proceed, not because she had been falsely induced, but rather because the credit card was (i) within the expiration date, (ii) not on the store’s ‘stop list’ and (iii) the respondent’s signature matched that on the card. It was also argued that the mere presentation of the card did not indicate anything more than that of a right to use it, as opposed to any representation on behalf of the bank, therefore liability for deception could not stand.

With doubts as to the exactness of related precedent, the Court of Appeal reluctantly overturned the conviction, during which Cumming-Bruce LJ remarked:

“By their contract with the bank, Mothercare had bought from the bank the right to sell goods to Barclaycard holders without regard to the question whether the customer was complying with the terms of the contract between the customer and the bank.”

At which point the County Chief Constable appealed under s.33(2) of the Criminal Appeal Act 1968, and the matter was again presented before the House of Lords. Here, the facts of R v Charles were given deliberate consideration, in particular the commentary by Diplock LJ who had explained:

“By exhibiting to the payee a cheque card containing the undertaking by the bank to honour cheques drawn in compliance with the conditions endorsed on the back, and drawing the cheque accordingly, the drawer represents to the payee that he has actual authority from the bank to make a contract with the payee on the bank’s behalf that it will honour the cheque on presentment for payment.

What creates ostensible authority in a person who purports to enter into a contract as agent for a principal is a representation made to the other party that he has the actual authority of the principal for whom he claims to be acting to enter into the contract on that person’s behalf.

[T]hen, is he bound by the contract purportedly made on his behalf. The whole foundation of liability under the doctrine of ostensible authority is a representation, believed by the person to whom it is made, that the person claiming to contract as agent for a principal has the actual authority of the principal to enter into the contract on his behalf.”

Which meant that despite the protestations of exemption from the transaction, the respondent was inevitably liable for deception when using the card in the knowledge that it was the property of the issuing bank, and that the period for its used had since expired. It was also noted by the House that when introducing the concept of inducement into any act of fraud, the words of Humphrey J in R v Sullivan reminded the judiciary that:

“[I]t is patent that there was only one reason which anybody could suggest for the person alleged to have been defrauded parting with his money, and that is the false pretence, if it was a false pretence.”

At which point the House unanimously reversed the decision of the Court of Appeal and awarded due judgment for the Crown, while holding that:

“[W]here the direct evidence of the witness is not and cannot reasonably be expected to be available, reliance upon a dishonest representation cannot be sufficiently established by proof of facts from where an irresistible inference of such reliance can be drawn.”

Hasham v Zenab (1960)

English Equity & Trusts

Hasham v Zenab
‘Palace Gate, Udaiper’ by Colin Campbell Cooper

Specific performance and cessation of contract on grounds of mistake, are both viable arguments for either continuation of contractual obligations, or the cessation of a transaction for reasons non-detrimental to both contractees. However, both approaches rely upon the honesty and accountability of at least one party should the courts take a view to upholding either of them.

In this instance, a Gujarati widower entered into an agreement to convey a determinate plot of land for an agreed sum, yet immediately after signing the disposition, she tore up the document and refused to continue with the transaction on grounds that she had been misled as to (i) the size of the plot, and (ii) the identity of the individual to whom the purchaser was planning to sell it to.

During initial litigation in the Supreme Court of Kenya, her argument for the fraudulent misrepresentation was based upon her limited grasp of the English language, and so she had elected a representative to be present with her at the time of signing. However, it was also argued that no mention had been given of the size of the plot, which in the first instance was alleged to be half an acre, and not the two acres contained within the conveyance, a fact discovered only after the signing.

When cross-examined, the respondent was proven to have falsified the statement, and thus her witness was accused of perjury, whereas contrastingly, the appellant contested that during preliminary talks, the proposed plot was described as two acres, and not the half-acre suggested.

The contract itself was signed in the presence of a third party, however the respondent also relied upon the contention that at no point during an earlier meeting did anybody translate the contents of the contract, despite the appellant claiming that not only did he explain it, but that the respondent’s cousin had also clarified its contents to her.

It was likewise argued by the appellant that the respondent tore up the contract, not because of the plot variation, but upon the knowledge that the land was to be resold to an individual she disliked, however this was also proven to be untrue after lengthy cross-examination and questioning of oral evidence.

Upon summation, the trial judge awarded in favour of the appellant, despite reservations around the integrity of both parties, and so when presented to the Court of Appeal of East Africa, the Court took issue with the reliability of the appellant’s statements and proceeded to reexamine the facts, before reaching the same conclusion as the lower court.

Take finally to the House of Lords, it was noted that vol. 2 of ‘Williams on Vendor and Purchaser’ clearly illustrated that:

“[A]s a rule, either party to a contract to sell land is entitled to sue in equity for specific performance of the agreement. This right is, in general, founded on a breach of the contract, but not in the same manner as the right to sue at law. The court has no jurisdiction to award damages at law except in case of a breach of the contract; while the equitable jurisdiction to order an agreement to be specifically performed is not limited to the cases in which at law damages could be recoverable.”

Which translated that when contracting parties hold a good account of themselves throughout their dealings, equity would provide sufficient weight as to instigate specific performance; yet on this occasion, neither party had been anywhere near as truthful as a court would rightfully expect, and so on this principle it was impossible to uphold the appeal, nor enforce the equitable rights of the appellant, or those forwarded by the respondent, thus the appeal was dismissed while the House held that:

“In equity all that is required is to show circumstances which will justify the intervention by a court of equity.”

Healey v Brown (2002)

Succession Law

Healey v Brown
‘The Pact’ by François Bard

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 s.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 now 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.

Fraud

Insight | May 2017

Fraud
Image (left) ‘Self-Potrait with Pallette’ by Vincent Van Gogh (Right) Forgery

Finding effect through the inception of the Fraud Act 2006 there are three means by which fraud can occur; namely fraud by false representation, failure to disclose information and by abuse of position. Here we shall look at each one respectively and support with suitable cases where applicable.

Fraud by False Representation

S.2(1) of the Fraud Act clearly states that a person is guilty of fraud by false representation when it is proven that they did so to (i) cause gain for themselves or another party or (ii) cause or expose another person to loss or a risk of loss (this can be achieved in a number of ways and so oral and written methodology equally apply). This was demonstrated in R v Lambie in which a consumer continued to use her credit card despite exceeding her credit limit and after being asked by the bank to return it.

When carrying out a purchase in a Mothercare store the appellant in the appeal case was accused by the defedant of knowingly encouraging a transaction in the knowledge that the bank had no longer given the respondent authority to continue using the card. This argument was stringently dismissed while emphasis was placed squarely upon the intention of the respondent to knowingly defraud the store. An illustration of fraud by false representation was summed up by Lord Roskill who explained:

“[I]t is in my view clear that the representation arising from the presentation of a credit card has nothing to do with the respondent’s credit standing at the bank but is a representation of actual authority to make the contract with, in this case, Mothercare on the bank’s behalf that the bank will honour the voucher upon presentation.”

This ethos was also outlined in Rex v Sullivan where Humphreys J stressed:

“[T]he facts are such that it is patent that there was only one reason which anybody could suggest for the person alleged to have been defrauded parting with his money, and that is the false pretence, if it was a false pretence.”

Fraud by Failure to Disclose Information

Subject to s.3 of the Fraud Act a person dishonestly failing to disclose information when (i) under a legal duty to so and (ii) by intention gains for themselves or another or causes or exposes another to a loss or risk of loss is thus guilty (where proven) of fraud.

As this relates more to those in public body roles or parties to contract, the establishment of guilt falls to the judicial interpretation of civil law and statute as opposed to the collective opinion of a jury. An example of this R v Padellec in which a man accused of harbouring indecent images on his computer refused to disclose the encryption password as required under s.53 of the Regulation of Investigatory Powers Act 2000. After being summarily convicted the appellant appealed under plea in order to reduce his sentence at which point Singh J exclaimed:

“The whole point of requiring access is so that it can be seen what was in fact there. We express the hope that in a situation such as arose in this case, and in the context of an offence under the Regulation of Investigatory Powers Act (section 53), there will never again be a basis of plea accepted which is based upon keeping the contents secret and the defendant saying, to his advantage, what was or was not contained.”

Fraud by Abuse of Position

S.4(1) of the Fraud Act convicts those (again where proven) for gainful abuse of a position held to safeguard and preserve the financial interests of another. The gain can be both personal or on behalf of third party(s) while such profits must cause (or expose those assigned protection) loss or risk of loss.

Given the nature of the breach it is typically applied to fiduciary or professional relationships where trust has been given under express conditions, however it could just as easily apply to family matters depending upon the relationship shared and the declarations made. As with fraud by failure to disclose information the judgments are typically free from jury persuasion and will benefit from equitable principles as much as civil laws for guidance.

An example of this was found in R v Conway (Catherine) in which a domestic care worker abused the trust placed in her by her client by obtaining and then keeping the victim’s debit card before defrauding her of £27,000 over a period of three years. Once caught and convicted, the defendant then accused the victim’s family members of conspiring to the fraud before admitting full liability. When passing sentence, Weir LJ illustrated the gravity of the abuse when he said:

“This was the calculated and systematic theft over years of a vulnerable lady’s life savings by the very person employed to assist and befriend her at a time in her life when she was at a low ebb and grateful for the help which this appellant cynically pretended to be giving her by buying her a few necessaries using her post office savings card.”

Lifting the Corporate Veil

Insight | March 2017

Lifting the Corporate Veil
Image: ‘NY City Brooklyn Bridge’ by Ylli Haruni

As a doctrine under question, the effects of lifting the corporate veil can be far-reaching if supported through case law, and yet it appears that the judiciary are reluctant to apply it unless under extreme circumstances, and even then with some trepidation.

The primary function of ‘lifting’ or ‘piercing’ the veil of corporations is one of transparency. As is no stranger to the world of enterprise, many an entrepreneur has undoubtedly found themselves at odds with where the boundaries are with conversion of assets, or even fiduciary duties in line with corporate ownership. When matters reach a level that requires legal intervention, the venturing of the courts into financial accounts and expenditure records, is something that rests uneasily on the shoulders of judges.

It is not uncommon after all for businessmen and investors to construct fake companies to provide cover for illegal dealings, no more than shareholders to dominate the actions of their corporations under the guise of boardroom decision making. Paradoxically, it is precisely this subterfuge that beckons court intrusion, and yet for reasons that can be appreciated in their overall meaning, it does not bode well for the victims of those immoral undertakings when the rule of law refuses to fully extend.

Starting at the roots of this clearly under utilised principle, it is important to understand  that supply always creates demand, and so examination of how this doctrine has flourished reveals that the limited liability of incorporation almost invites abuse, regardless of the stakes in hand.

Salomon v Salomon, which dates back to 1897, is considered the birthplace of limited liability, as during the liquidation of a failed business, the shareholder and company were held as separate entities, and therefore unencumbered by obligation to one another. This perhaps dangerous distinction, served well the rule of law, but consequently opened the way to defendants establishing unaccountability for the deviances behind insolvency, or the withholding of property release during matrimonial disputes, as was seen in Prest v Petrodel Resources Ltd and Others, where despite having grounds to ‘pierce’, the judges went instead with beneficial interest accrued through powers conferred under the Matrimonial Causes Act 1973. Since Prest is now considered the leading authority on the protection or exposure of corporate misdeeds, it might pay to look at overseas opinion.

Despite taking a similar vein in most U.S. courts, the small State of Delaware has become reputed as the home for around sixty-five percent of the Fortune 500 companies, and the reasons are clear. Aside from most other county-wide laws shared between States, there appears to be consolidated support for the protection of the corporate veil, under the strongly held belief that without it, the wheels of commerce simply cannot turn. A notable 2014 case Cornell Glasgow LLC. v. Nichols, is now considered the poster boy for the prevention of access to corporate transactions in middle America, however when the facts of the case are examined, there appears no justifiable reason to pierce the corporate veil, despite such clandestine and unprofessional behaviours on the part of the defendants. In fact, when taken in its proper context, the whole matter was tantamount to a classic breach of contract and nothing more.

This over complication of the argument does beg the question of whether claimants are all too quick to attack the character of those accused, in order to alleviate doubts as to a right of claim, where proper evaluation of the facts would likely reveal a swift path to justice that allows reduced costs and minimised court time.

In Canada, the controversial Chevron Corp. v. Yaiguaje has now become the watermark for corporate exposure, coming close to setting a precedent for foreign enquiry into asset liability and covert misdeeds, after the indigenous peoples of Ecuador were subject to extreme pollution through the actions of an overseas corporate subsidiary. While pursuing them through the Canadian courts, and almost becoming a pivotal argument for the extension of ‘piercing’ qualification, it was ultimately overturned in the Superior Court by Justice Hainey, who explained:

“Chevron Canadaʼs shares and assets are not exigible and available for execution and seizure by the plaintiffs in satisfaction of the Ecuadorian judgment against Chevron Corporation.”

This overruling stance (amongst other cases) also fell back on the domestic line taken in Adams v Cape Industries Plc, where it had been decided that:

“Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.”

While this principle already poses great resistance to those seeking damages, the primary reason the courts declined to lift the corporate veil in Chevron, was simply that since the inception of the claim, no suggestions of fraudulent behaviour were levelled toward the defendants, so no matter how aggrieved the claimants felt, it was held inequitable to overstep the boundaries set by the incorporation and limited liabilities enjoyed by many firms, in order to achieve remedy for damages arising from contractual breach on the part of the actual offending party Texaco; who soon after acquiescing to the judgment bought against them in Ecuador, were taken over by Chevron California (the parent company). In fact quite why the claimants were pursuing Chevron Canada is frankly unfathomable given the background to the matter, therefore it comes as no great surprise that the ruling to ‘pierce’ was quickly dismissed.

So to summarise, it would suggest that on the strength of the cases discussed, it is not really an issue of judicial reluctance as much as a failure for the right matter to present itself. It would also pay to exercise caution when supporting foreign claims that display absolutely no logical bearing on (i) how this confused claim should ever have been initiated, and (ii) why any jurisdiction would move to lend credence to such a fruitless endeavour; while from an equitable perspective, the principle of traceability immediately springs to mind when seeking restitution from companies no longer in existence, and whose assets have long since been laundered.