Thanks!

However, if payment into an overdrawn account means that the misappropriated funds “ceased to exist” (Re Goldcorp, Bishopsgate, Re Diplock) and so could not be traced I’m not entirely sure why the same would not be true of payment to another creditor. The point is put more broadly by the New Zealand Court of Appeal in The Fish Man v Hadfield [2017] NZCA 589 where they say “The usual rule is that misappropriated funds cannot be traced further after they have been paid to discharge a debt”, and in the earlier case of Re Registered Securities [1991] 1 NZLR 545 “as a matter of logic it seems evident that where a claimant's money is paid into an overdrawn account there is no fund or property to which resort can be had.” So, at least in the case of overdrafts/bank debts, I’m not sure one can simply trace into the funds received by the bank.

The cases about personal claims as against creditors are (very!) helpful, but I wonder what happens if, as Lord Briggs suggests, knowing receipt is tied to the existence of the underlying proprietary rights and, at least for overdrafts, those rights no longer exist, does the knowing receipt claim also fail? I suppose, as you say, I may be wrong to use the terminology ‘backward tracing’ and what I really mean is tracing through a debt a la Durant, i.e., asserting that X $ in Z account represents the substitute assets of misappropriated trust funds notwithstanding the fact that the funds passed through Y overdrawn account (see para 11 of Brazil v Durant). Taking the facts of Citadel where the bank had accepted instructions to use trust funds in account A to pay off overdrafts in accounts A and B, in circumstances where the bank had at least constructive knowledge that the funds were held on trust, could we justify a claim in knowing receipt against the bank on the property-based understanding of that claim (as opposed to the SCC’s restitutionary/unjust enrichment understanding of it) set out in Byers? Or would you say that the beneficiaries should have been able to trace into the bank’s accounts in those circumstances?

All the best,

Lucas



Thanks Matthew!

 

Indeed, for scenario 2 the recipient has notice, but the question is whether that matters if the equitable proprietary claim has been destroyed via payment of a debt (I’m not sure Byers can be confined to equity’s darling/special statutory rules as it appears to be written more broadly). The issue isn’t equity’s darling, which B certainly is not, but whether any sort of proprietary claim exists at all (if one treats payment of a debt as ‘destroying’ the funds used – because, as was noted in Re Goode quoting the 26^th ed of Snell’s Equity “even if the recipient has used the trust money to pay off secured or unsecured loans or other Identifiable debts, there can

be no tracing; for the payment purchases no asset, but merely extinguishes the debt and there is no equity to revive it or create a new debt in its place”-). If, as Lord Briggs suggests, a knowing receipt claim is necessarily tied to a tracing claim, then if one loses the right to trace (as for instance if the debt goes through an overdraft/ a debt where no specific asset is acquired/no co-ordinated scheme – see for example Bishopsgate v Homan, Re Goode and the arguments in Durant) then a knowing receipt claim would likewise fall by the wayside.  On balance, I think one could say the proprietary claim isn’t destroyed unless and until the creditor wrongfully accepts trust property as satisfaction of a debt, or I’m simply misinterpreting Byers. In any event, for scenario one the problem remains. Could a beneficiary bring a personal claim against a bank for clearing an overdraft (or some other creditor for clearing a debt) with misappropriated trust funds, where the narrow exceptions allowing backwards tracing laid down in Durant, don’t apply?

 

Thanks also for the reference to Rowlands v National Westminster (which may well solve the problem)!

 

After some digging, I found a Supreme Court of Canada case Citadel General Assurance Co. v. Lloyds Bank Canada [1997] 3 SCR 805 where the bank was found liable in knowing receipt for allowing a debtor to offset its overdraft with funds it knew (in a broad sense) arose from a breach of trust. The Court held that:

 

     In this Court, the respondents argued that they could not be liable on the basis of “knowing receipt” because they had not received the trust property.  The respondents took the position, accepted by the authorities, that a bank deposit is simply a loan to the bank; see Foley v. Hill (1848), [1843-60] All E.R. Rep. 16 (H.L.);  Fonthill Lumber Ltd. v. Bank of Montreal (1959), 1959 CanLII 148 (ON CA), 19 D.L.R. (2d) 618 (Ont. C.A.), at p. 628.  Accordingly, the deposit of money in Drive On’s account was characterized as a debt obligation owed by the Bank to Drive On.  This debt obligation gave rise to a credit in Drive On’s favour.  On instruction from its customer, the Bank simply transferred “credits” from Drive On’s account to International Warranty’s account.  The transfer of credits had the incidental effect of reducing an overdraft in the International Warranty account.  In other words, the transfers between the accounts in July and August simply amounted to an off-setting of debt obligations.  In the respondents’ view, the Bank was not receiving trust property but simply transferring credits from one account to another.

 

29    The respondents’ arguments are not convincing.  A debt obligation is a chose in action and, therefore, property over which one can impose a trust….The respondents cannot avoid the “property” issue by characterizing the deposit of trust monies in Drive On’s account as a debt obligation.  The chose in action, constituted by the indebtedness of the Bank to Drive On, was subject to a statutory trust in Citadel’s favour.  That same chose in action can also be the subject of a constructive trust in Citadel’s favour.

 

30   Nonetheless, the respondents’ arguments reflect a difficulty with the traditional conception of “receipt” in “knowing receipt” cases.  In my view, the receipt requirement for this type of liability is best characterized in restitutionary terms.  In Lac Minerals Ltd. v. International Corona Resources Ltd., 1989 CanLII 34 (SCC), [1989] 2 S.C.R. 574, at p. 669, I stated that a restitutionary claim, or a claim for unjust enrichment, is concerned with giving back to someone something that has been taken from them (a restitutionary proprietary award) or its equivalent value (a personal restitutionary award).  As well, in Air Canada v. British Columbia, 1989 CanLII 95 (SCC), [1989] 1 S.C.R. 1161, at pp. 1202-3, I stated that the function of the law of restitution “is to ensure that where a plaintiff has been deprived of wealth that is either in his possession or would have accrued for his benefit, it is restored to him.  The measure of restitutionary recovery is the gain the [defendant] made at the [plaintiff’s] expense.”  In the present case, the Bank was clearly enriched by the off-setting of debt obligations, or transferring of credits between the Drive On and International Warranty accounts.  That is, the amount due to the Bank was reduced.  As well, the Bank’s enrichment deprived Citadel of the insurance premiums collected on its behalf.  Moreover, the fact that the insurance premiums were never in Citadel’s possession does not preclude Citadel from pursuing a restitutionary claim.  After all, the insurance premiums would have accrued to Citadel’s benefit.  The Bank has been enriched at Citadel’s expense.  Thus, in restitutionary terms, there can be no doubt that the Bank received trust property for its own use and benefit.

 

31 The first requirement for establishing liability on the basis of “knowing receipt” has been satisfied.  The Bank received the trust property for its own benefit and, in doing so, was enriched at the beneficiary’s expense.  The second requirement relates to the degree of knowledge required of the Bank in relation to the breach of trust.  With regard to this knowledge requirement, there are two lines of authorities.  According to one line of jurisprudence, the knowledge requirement for both “knowing assistance” and “knowing receipt” cases should be the same.  More specifically, constructive knowledge should not be the basis for liability in either type of case.  A second line of authority suggests that a different standard should apply in “knowing assistance” and “knowing receipt” cases.  More specifically, the authorities favour a lower threshold of knowledge in “knowing receipt” cases…

 

56 In light of the Bank’s knowledge of the nature of the funds, the daily emptying of the account was in the trial judge’s view “very suspicious”.  In these circumstances, a reasonable person would have been put on inquiry as to the possible misapplication of the trust funds. Notwithstanding the fact that the exact terms of the trust relationship between Citadel and Drive On may have been unknown to the Bank, the Bank should have taken steps, in the form of reasonable inquiries, to determine whether the insurance premiums were being misapplied. More specifically, the Bank should have inquired whether the use of the premiums to reduce the account overdrafts constituted a breach of trust.  By failing to make the appropriate inquiries, the Bank had constructive knowledge of Drive On’s breach of trust.  In these circumstances, the Bank’s enrichment was clearly unjust, thereby rendering it liable to Citadel as a constructive trustee.

 

However, I wonder whether Courts outside Canada, which don’t accept the unjust enrichment understanding of these claims, or for trusts more generally, would accept the reasoning of the SCC?

 

On the other hand, if the trustee dissipates the assets gambling at a casino and the casino has no knowledge of the breach of trust/that trust assets were even involved, they can’t be sued for knowing receipt Paton (Estate) v Ontario Lottery and Gaming Commission 2015 ONSC 3130.

 

All the best,

Lucas

 

<image001.jpg>	Dr Lucas Clover-Alcolea Lecturer Faculty of Law University of Otago | Te Whare Wānanga o Otāgo Richardson Building, 85 Albany Street, Dunedin | Ōtepoti New Zealand | Aotearoa Email lucas.cloveralcolea@otago.ac.nz <image002.png> Linkedin

 

 

From: Matthew Hoyle <MHoyle@oeclaw.co.uk>
Sent: Friday, August 16, 2024 11:32 AM
To: Lucas Clover Alcolea <lucas.cloveralcolea@otago.ac.nz>; obligations@uwo.ca
Subject: RE: Dishonest assistance/knowing receipt against a creditor?

 

I’m not sure I follow the point of the second scenario, as the recipient has notice and therefore the trust rights while persist in relation to the money paid. Even if A did not tell them the source of the money was a trust fund, I imagine the creditor would have difficulty substantiating any bona fide purchase defence. In and of itself B’s actions constitute intimidation and moreover, in England, likely also various criminal offences including blackmail and harassment of a debtor.

 

As such, I’m not sure the court would permit a defendant to say their actions constituted a ‘bona fide’ purchase and allow them to rely on their own illegal conduct in order to put themselves within the Byers scenario. The requirement the purchase be “bona fide” as well as “without notice” is seldom discussed in case law (see Midland Bank v Green [1981] AC 513, 528), but if Lord Wilberforce is right that it has any content at all I can’t think of a better case than this.

 

I think the upshot of that is that wherever there is knowing receipt, there will also be notice sufficient to make the trust bite. The Byers situation only arises in special scenarios where a statute provides for purchaser protection by clearing off any encumbrances on the buyer’s title.

 

As for dishonest assistance, there is no reason why a bank would not be liable regardless of whether its receipt extinguishes the trust (although it is hard to conceive of a case where the defendant knows enough to make him dishonest, but doesn’t have constructive notice of the breach of trust – perhaps a case like  Brink's Ltd v Abu-Saleh [1996] CLC 133 where the alleged assister believes that they are helping to facilitate tax evasion rather than a fraud (although that claim failed on other facts). I’m not aware of a case where a bank specifically has been found liable for receiving money into an overdrawn account, but in Rowlands v National Westminster [1978] 1 WLR 798, the judge accepted as correct a statement in Paget’s Banking Law that a bank has no particular special position, and that:

 

“The banker obviously must not be a party or privy to any fraud on the beneficiaries, any misapplication of the trust fund. He could not, on the mere instruction of the customer, transfer trust funds to private account, to wipe out or reduce an overdraft. It is with the cheque that difficulties arise”

 

Matthew Hoyle

Barrister

One Essex Court

 

This message is confidential and may be privileged. If you believe you have received it in error please delete it immediately and inform the sender.

 

Regulated by the Bar Standards Board.

 

From: Lucas Clover Alcolea <lucas.cloveralcolea@otago.ac.nz>
Sent: Thursday, August 15, 2024 11:10 PM
To: obligations@uwo.ca
Subject: Dishonest assistance/knowing receipt against a creditor?

 

Hi all,

 

I’ve been puzzling over a scenario in my head, mainly as a result of reading Byers v Saudi National Bank and Brazil v Durant, and was wondering if anyone had any thoughts on it.

 

Are there any cases where beneficiaries have sought to bring dishonest assistance or knowing receipt claims against a creditor who has been wrongfully paid, in satisfaction of a debt, by an embezzling trustee with misappropriated trust funds? In particular, imagine that no discrete asset has been acquired, and there isn’t a “co-ordinated scheme”, but rather the debtor’s overdraft at a bank has merely been paid off, but the bank has some sort of ‘constructive knowledge’ of dodgy dealings. I’m not sure we could engage in backward tracing (to the extent we believe that is permissible, if at all) in that scenario, but could some sort of personal claim not be brought against the bank? If Byers is right then a knowing receipt claim would fall as the equitable proprietary interest would be destroyed by payment into a debt, unless we say that the ‘dishonesty exception’ the court hints at could be engaged by merely constructive knowledge (but where no discrete asset has been acquired, I’m still not sure how one would trace, even backwards, here so presumably we’d be looking at a knowing receipt claim).

 

Alternatively, imagine that Trustee A has a gambling debt to B, who threatens to break their legs unless they repay the debt, A says they can only do so with trust funds as their personal funds are exhausted, but B nevertheless insists on payment in satisfaction of the debt (assume also that the debt is a valid one). If we can’t trace the funds, because B is merely an intermediary for C nefarious criminal organisation so transfers the funds and we can’t find them, surely the beneficiaries of the trust administered by A could bring a claim against B in dishonest assistance and/or knowing receipt?

 

The scenario is entirely hypothetical, but it seems to me that if we allow tracing into/through debts, then we must also allow at least the possibility of claims in knowing receipt and/or dishonest assistance against a creditor (who has accepted payment of misappropriated trust funds in satisfaction of a debt owed by the trustee to them) in similar circumstances as we do for ordinary non-debt claims (for example where the assets have been dissipated/tracing isn’t viable for whatever reason and the beneficiaries are best bringing a personal claim). Alternatively, of course, we might just say backwards tracing is wrong in the first place (which I don’t necessarily disagree with, but doesn’t help with how the law actually is).

 

All the best,

Lucas

 

<image001.jpg>	Dr Lucas Clover-Alcolea Lecturer Faculty of Law University of Otago | Te Whare Wānanga o Otāgo Richardson Building, 85 Albany Street, Dunedin | Ōtepoti New Zealand | Aotearoa Email lucas.cloveralcolea@otago.ac.nz <image002.png> Linkedin

 

 

 

Disclaimer

The information contained in this communication from the sender is confidential. It is intended solely for use by the recipient and others authorized to receive it. If you are not the recipient, you are hereby notified that any disclosure, copying, distribution or taking action in relation of the contents of this information is strictly prohibited and may be unlawful.

This email has been scanned for viruses and malware, and may have been automatically archived by Mimecast, a leader in email security and cyber resilience. Mimecast integrates email defenses with brand protection, security awareness training, web security, compliance and other essential capabilities. Mimecast helps protect large and small organizations from malicious activity, human error and technology failure; and to lead the movement toward building a more resilient world. To find out more, visit our website.