Date: Wed, 3 Jul 1996 11:09:04 -0700 To: restitution@majordomo.srv.ualberta.ca From: liosmith@maildrop.srv.ualberta.ca (Lionel Smith) Subject: restitution Defences Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca Greetings to all, I am trying to finish up my book on tracing and I have been turning over a couple of thorny problems. At least so they seem to me. I would be very interested in any thoughts, or in any cases or writings which other list members could point me to. The first arises out of a case called Lyons v. Jefferson Bank & Trust, 793 F. Supp. 981 (D.Colo. 1992), aff'd 994 F.2d 716 (10th Cir. 1993). The plaintiff investment trust and the defendant bank both used the same investment manager, Steven Wymer. On 25 November 1991, the defendant was undergoing a bank examination. At that time, the defendant's account with Wymer showed $45 million held in debt securities. To prove the examiners that this account was liquid, the defendant instructed Wymer to liquidate the account. Later that day, a deposit of $45 million was made to the defendant's account with the Federal Reserve bank. It turned out that Wymer had previously embezzled the contents of the defendant's account. The value he transferred to the defendant on 25 November 1991 came (as to $43 million) from unauthorized sales of securities belonging to the plaintiff. The plaintiff having traced from its securities to the payment received by the defendant, it was decided that the defendant held the value representing the payment on trust for the plaintiff. The defendant was left with personal rights against Wymer and his corporations, Wymer being now in jail and bankrupt. The lawyers for the defendant seem to have mishandled the case rather badly. The appeal judgment considers very few of the issues substantively, but mostly decides that the issues now raised by the defendant were not properly raised at trial and so could not be considered on appeal. One of these was the issue of whether the defendant was a bona fide purchaser. What would the result have been if this issue had properly been raised? The defendant was owed a debt by Wymer, for breach of trust, but the defendant did not know it at the time it got the payment. Can it be a bfp? My reaction is that it cannot; the defence protects security of transactions, and that interest is not present where the character of the transaction is completely different from what the defendant understands it to be. Any views, or other cases? If the defence were allowed, the payment might still be a voidable preference, at least under US bankruptcy law. But it is not clear who would avoid it. The trustee in b would have no interest (on behalf of the creditors) in recovering the plaintiff's trust money. And a trust claimant cannot use powers held solely by the trustee; I doubt it could even use powers to avoid preferences/conveyances which are "void against creditors", because the recovery would not be on behalf of all creditors. On the other hand, perhaps if the bfp defence succeeded, the money would no longer be trust money; then if the trustee avoided the payment and got the money back, it would be part of the bankruptcy estate for all creditors (including now the plaintiff, who lost its equitable proprietary rights through the bfp transaction). Does that seem right? Hmm, I think that's enough for now. Maybe I will post the other issue later ... Many thanks for any thoughts, Lionel Smith Faculty of Law, University of Alberta Edmonton, Alberta, Canada T6G 2H5 Tel 403 492 2599; Fax 403 492 4924 liosmith@gpu.srv.ualberta.ca http://gpu.srv.ualberta.ca/~liosmith/lionel.html After 31 July 1996: St. Hugh's College Oxford, U.K. OX2 6LE Tel (0)1865 274 900; Fax (0)1865 274 912 lionel.smith@law.ox.ac.uk http://users.ox.ac.uk/~lawf0014/lionel.html Date: Wed, 3 Jul 96 13:48:36 EST From: "Allan Axelrod" X-Minuet-Version: Minuet1.0_Beta_16 X-POPMail-Charset: English To: restitution@majordomo.srv.ualberta.ca Subject: Re: restitution Defences Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca > >If the defence were allowed, the payment might still be a voidable >preference, at least under US bankruptcy law. But it is not clear who would >avoid it. The trustee in b would have no interest (on behalf of the >creditors) in recovering the plaintiff's trust money. and therefore the defendant would argue that what it had received was not preferential as not 'property of the estate'???? Allan Axelrod axelrod@andromeda.rutgers.edu Rutgers Law School 15 Washington St., Newark, NJ 07102 (201) 648-5373 Date: Thu, 4 Jul 1996 10:31:14 -0700 To: restitution@majordomo.srv.ualberta.ca From: liosmith@maildrop.srv.ualberta.ca (Lionel Smith) Subject: Re: restitution Defences Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca Eoin O'Dell wrote: >Yet, it seems to me that the ordering I have adopted is the logical >ordering, and this claim discloses the usual desperation of the plaintiff >whose primary action would fail seeking to find some (any) other >alternative remedy. I don't think there is any required order which must be pursued in claiming traceable proceeds? >If we treat the >relationship between the defendant and the third party simply as that >between customer and banker, when the defendant customer lodged his assets >with the third party banker, the customer generates a debt in his favour >(represented in a bank account), and also pays for and receives banking >services. On our facts, the defendant has satisfied that antecedent debt by >paying over the impugned payment. Though in advance, that payment is still >in exchange for the lodgement. I agree with that entirely, but I think the relationship between rogue and defendant was trustee-beneficiary, so: >In the alternative, if we use the language >of trust, and treat the relationship between the defendant and the third >party as that between beneficiary and trustee, when the defendant >beneficiary transferred his assets to the third party trustee, and >thereafter instructs the trustee to retransfer the trust assets to the >beneficiary, a debt arises at that stage by virtue of the instruction and >the defendant satisfies that debt by paying over the impugned payment. I'm not sure that's right. A debt only arises between trustee and beneficiary if there has been a misappropriation of trust property. If a beneficiary who has the right to call for the trust property does so, and he gets it, I don't think there is ever a time when he is an unsecured creditor. That is why I find this case difficult: defendant was an unsecured creditor without knowing it. By the way, if there has been a breach of trust and so a debt arises, and this debt is paid with property belonging to another trust, there is authority that bfp is available, which seems to make sense: Taylor v. Blakelock (1886), 32 Ch. D. 560 (C.A.). What is different about my case is the defendant's ignorance that he has become an unsecured creditor. >Finally, I thought that there might be a third possible idenftifiable end >product: the chose in action which the third party had against the >defendant (if one arises) I don't think that is a traceable product of any of the plaintiff's value. It was acquired in exchange for the defendant's own value, deposited earlier. Lionel Date: Thu, 04 Jul 1996 11:05:48 +0100 From: Simon Evans Organization: Gonville and Caius College, Cambridge CB2 1TA, UK To: restitution@majordomo.srv.ualberta.ca CC: sce1001@cus.cam.ac.uk Subject: restitution Lionel's query-Recovery of dissipated trust assets in bankruptcy. Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca The following (longish) chunk from the current draft (so E&OE) of my thesis may help on the preferences aspect of Lionel Smith's recent query: in short, there is a dispute as to who gets the preference recovery in this context, the trust or the general creditors but on principle it should be the general creditors. Sorry that I haven't had time to distil the American cases directly on point: but I am trying to submit next month and am up to my neck in proofreading!! (By the way, liquidators etc may sue to recover preferences though recovery only benefits the secured creditor - Kratzmann and Octavo say so more or less in Australia; I am not sure of the UK authority; in the US they can't.) Simon Evans. ---------------------------------------- Distributional patterns and policies. While the previous Subsection has determined that the proceeds of an action for breach of fiduciary duty or another claim to proprietary relief by an insolvent company may be subject to a charge, this is not the case in relation to the proceeds of some at least of the statutory avoidance powers. The distributional patterns for property recovered by a liquidator differ according to the particular grounds of recovery. Whereas the proceeds of a misfeasance action(1) are held subject to the chargee's interest (since the misfeasance action does not confer any new right but merely creates a summary procedure by which the liquidator may vindicate existing pre-insolvency rights of the company),(2) some controversy attends the distribution of recovered preferences and transactions at an undervalue and the proceeds of wrongful or insolvent trading actions.(3) The question, therefore, arises, when conduct may be characterised either as giving rise to a proprietary remedy or as triggering various statutory avoidance or recovery powers which distribution policy should prevail. Preferences. The Yagerphone principle. It was established in In re Yagerphone Ltd(4) that the proceeds of a preference action are held for distribution to the unsecured creditors and not subject to any securities. But, in Australia at least, it appears that, according to dicta of the High Court in N A Kratzmann Pty Ltd (in liq) v Tucker [No 2],(5) non-money preferences consisting of specific and identifiable property are, when recovered, subject to security interests attaching prior to the preferential disposition because the recovery is based on avoidance of the preferential disposition, and the security interest is treated as continuing throughout.(6) On the other hand, monies recovered in respect of a preferential payment are not the same monies as those paid away preferentially and title to them is not dependent on any prior rights in respect of the monies paid away so no security interest attaches.(7) [Discussion of the Yagerphone principle in Australian law omitted] The better view is that In re Yagerphone Ltd remains good law in Australia, an anomalous exception to the principle that insolvency law does not override proprietary entitlements determined by the general law.(16) [Omitted] In summary, therefore, it appears that recovered preferences, except for specific and identifiable property charged prior to its preferential disposition and the proceeds of such property, are to be distributed among the unsecured creditors of the insolvent. Applying the Yagerphone principle. It follows from the previous discussion if the liquidator proceeds under the preference provisions agaisnt the recipient of a preferential payment in respect of which a proprietary remedy is also available, the proceeds of recovety will be available for the general creditors alone.(19) However, if the secured creditor has a charge on the company's right of action for breach of fiduciary duty, it may require the liquidator to sanction enforcement of that right of action by the company.(20) In such cases the liquidator ought to allow the secured creditor to proceed. The discretionary power contained in s 588FF of the Corporations Law is sufficient to ensure that the recipient will not be subjected to a double liability. However, s 241(4) of the Insolvency Act provides that the powers conferred under ss 238-241 operate without prejudice to the availability of any other remedy. Nonetheless, the power conferred in s 239(3) is one to restore the position to what it would have been if the company had not given the preference. Given that limitation, it is unlikely that an order will be made under s 241 if the recipient has already been forced to disgorge its receipt by the secured creditor. It should not be thought surprising that the proceeds of recovery are applied in a different manner depending upon whether recovery occurs under the preference provisions or otherwise. In re Yagerphone Ltd is a policy motivated redistribution to unsecured creditors rather rhan a principled protection of their interests against preferential repayments. Recall that the "wronfulness" of preferential payments is the distortion of the process of rateable distribution. On the other hand, recovery of preferential payments on the basis of lack of authority to make them or a breach of fiduciary duty is more directed to preserving the quantum of assets in the estate. In both cases, if absent the preference the secured creditor would have had the benefit of security in the property, that ought to remain the case. There is no basis for extending the In re Yagerphone Ltd principle to recoveries under proprietary actions. Consider now the following case: Example 2: T, a trustee, commits a breach of trust by paying trust funds into its general account. It then uses those funds to discharge its own debt to D. The balance of the general account is dissipated. T becomes insolvent and its liquidator recovers the amount paid to D as a preference. B, the beneficiary of the trust, claims that the recovered preference represents the proceeds of the breach of trust and is held on constructive trust for it.(21) This case differs from Example 1 above in that the debt discharged is owed by, and not to, the fiduciary. Two issues arise. First, whether B has a proprietary claim to the recovered preference at all. Secondly, whether that claim prevails over the principle derived from In re Yagerphone Ltd. The decision of the Court of Appeal In re EVTR(22) supports B's argument that he or she should have a proprietary claim. The claimant lent money to a company for the specific purpose of enabling it to purchase a particular piece of equipment. The company went into liquidation before the equipment was supplied. The supplier repaid the purchase price to the company less some charges. The claimant asserted that the company's receivers held the repaid money on trust for him. On uncontroversial principles, typified by Barclays Bank Ltd v Quistclose Investments Ltd,(23) the borrower held the money received from the lender on trust to be applied for the specific purpose for which it had been lent. Again uncontroversially, one would expect that upon failure of the purpose for which the money was lent the borrower would hold the money on trust for the lender. Accepting the Court of Appeal's conclusion that the purpose had failed, is any difference made by the fact that at the time of the appointment of the receiver (or its decision not to proceed with the purchase) the borrower no longer held the money on the initial trust but had paid it to the supplier and financier? The Court of Appeal held that it did not. Dillon LJ applied what he described as "a long established principle of equity", namely, that if a trustee receives property "because of, or in respect of," trust property, he or she will hold in as a constructive trustee.(24) "It is a long established principle of equity that, if a person who is a trustee receives money or property because of, or in respect of, trust property, he will hold what he receives as a constructive trustee on the trusts of the original property." So when the supplier and financier repaid the balance of the money to the borrower, it was received "because of, or in respect of," the trust money and was held on constructive trust for the lender.(25) Bingham LJ said that the repayment was a "direct result" of the original holding of the fund as trustee and the balance "may reasonably be regarded s not having been paid out at all".(26) "[T]the company certainly held the fund on trust in the first instance. The purpose for which the fund was paid out partially failed. The repayment to the [receivers] was a direct result of the company's original holding of the fund as trustee. The balance which was recovered may reasonably be regarded as not having been paid out at all." It seems, therefore, that this case supports the possibility of reconstitution of the trust, seemingly in a remedial manner,(27) despite the fact that the trustee has become a mere debtor to the beneficiary. (It does not appear to have been argued that the constitution of the secondary trust was preferential. Presumably it would have been valid as a condition attached by the lender to the property when first disposed of to the borrower.) The reconstitution need not be as a result of repayment of the traceable proceeds of the former trust money; it is enough if money or property is received because of or in respect of the trust property. An similar approach was adopted in the United States of America by the Court of Appeals for the Tenth Circuit on the first hearing of In re First Capital Mortgage Loan Corporation.(28) A trustee deposited trust funds in its general account and then used them preferentially to discharge its existing debts. The court accepted the argument for the beneficiary that the recovery of the preference by the trustee in bankruptcy amounted to a return of the trust property to the debtor-trustee's successor, revived the trust and created an equitable obligation on the bankruptcy trustee to return the funds to the beneficiary. (It is important to recall, however, that unlike In re EVTR the debtor-trustee's payment was a breach of trust.) The result would be similar if the trustee's creditor knew that the trustee's indebtedness was being discharged with trust money. Then, the money received is subject to a charge in favour of the beneficiary and if the money repaid to the liquidator comes from the charged fund the liquidator would on general principles hold the recovered funds subject to a charge in favour of the beneficiary. This was essentially the situation that faced the United States Court of Appeals for Fourth Circuit in Angeles Real Estate Co v Kerxton.(29) Simplifying somewhat, the insolvent assigned one-half of the proceeds of a promissory note to one of its creditors but, despite the assignment, when the note was collected, paid all the proceeds of the note to a third party in discharge of an antecedent debt. It does not appear that the third party knew of or had notice of the assignment. The payment was recovered as preferential and the assignee claimed that the trustee in bankruptcy held a one-half interest in the recovered proceeds for it. The court agreed, emphasising that "recovery of the preference was a recovery of those same funds" in which the assignee had at least an equitable lien as a result of the assignment(30) and, therefore, that there was a charge over the recovered preference in favour of the beneficiary. However, on the subsequent rehearing en banc of In re First Capital Mortgage Loan Corporation,(31) the Court of Appeals for Tenth Circuit reversed its earlier decision and distinguished Angeles Real Estate Co v Kerxton. It was held that the recovered preference was held for the unsecured creditors and the beneficiary had to prove as such because the Bankruptcy Code stipulated that the property was recovered "for the benefit of the estate".(32) The court pointed out that outside bankruptcy neither the trustee nor the beneficiary had any remedy against the company to which the payments had been made as it was a purchaser in good faith without notice. Moreover, to confer priority on the beneficiary, now an unsecured creditor, would frustrate the Congressional purpose of facilitating the prime bankruptcy policy of equality of distribution.(33) " As a practical matter ... we do not think it equitable that one general unsecured creditor of the bankruptcy estate should be made whole by virtue of the exercise of the trustee's avoidance powers while others must make do with their share of the bankruptcy estate ... Indeed, if such a result attended the exercise of the trustee's preference powers, Congress' purpose in granting the power [that is, facilitating the prime bankruptcy policy of equality of distribution among creditors of the debtor] would be frustrated". Returning, then, to the facts of Example 2, is the preference recovered, in the language of Re EVTR, "because of ... or in respect of" or as "a direct result of" the original trust property?(34) The better view must be that the preference is recovered by exercise of specific statutory powers that leave no room for the operation of the principle identified In re EVTR. (This may be a somewhat problematic distinction in the context of provisions that render the preferential payment void or treat it as never having occurred.) This must be so, because outside insolvency, B had no proprietary remedy against T once T paid the traceable proceeds of the trust funds(35) to D (and no proprietary remedy against D unless D had knowledge of the source of the money he or she received).(36) B thereupon became a unsecured creditor of T and ought to be treated as such in the insolvency. Outside insolvency, B's proprietary claim against T would be revived only if T repaid money into the account (or segregated a fund) with the intention thereby of reconstituting the trust.(37) So, in the absence of such a repayment, no proprietary remedy is available and the relationship between trustee and beneficiary in respect of the misappropriated money, as recognised in In re First Capital Mortgage Loan Corporation, is merely that of debtor and creditor. Were the position to be different in insolvency, B would have an inappropriate incentive to commence insolvency proceedings.(38) But suppose, then, that T had made such a payment into the account with the appropriate intention to reconstitute the trust. If this payment were effective to reconstitute the trust, it would have the effect that B would recover more on the insolvency than it would have done had the payment not been made. Therefore it would be a preference if the other statutory conditions were satisfied.(39) It follows that, as no action by T would be effective to reconstitute the trust,(40) B would be an unsecured creditor of T and there is no reason why recovery Date: Thu, 04 Jul 1996 11:05:48 +0100 From: Simon Evans Organization: Gonville and Caius College, Cambridge CB2 1TA, UK To: restitution@majordomo.srv.ualberta.ca CC: sce1001@cus.cam.ac.uk Subject: restitution Lionel's query-Recovery of dissipated trust assets in bankruptcy. Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca of the preference should change this.(41) Consider, now, a third case: Example 3: T, a trustee of a trading trust, uses trust funds to discharge debts owed to D that were incurred in the management of the trust business. T becomes insolvent and its liquidator recovers the amount paid to D as preferential. G represents the general creditors of T and D represents the trust creditors. This example is directly comparable with Example 2 except that the debt discharged with trust assets is a trust debt. The issue is among whom the recovered preference ought to be distributed, the trust creditors alone or all the creditors of the trustee. Normally, the non-trust creditors have no right of recourse to trust assets for the payment of their debts.(42) It follows that if the recovered preference is distributed among them they will receive a benefit they could not otherwise have received. In principle, therefore, the preference should be distributable among the trust creditors alone. this will have the additional effect of reducing the claims of the trust creditors on the non-trust assets. The principal problem in this context will always be the liquidator's unwillingness to fund the action, becasue it cannot have recourse to the recoveries and the costs of recovery are not costs of the liquidation having priority.(43) Now, if as in Example 3, that the trustee makes the payment from trust assets to discharge a debt owed to a trust creditor preferentially,(44) it is unclear whether the recovered preference should be available for all the creditors of the insolvent or bankrupt or merely for the trust creditors.(45) It follows from the previous paragraph that if the recovered preference is available for distribution among the general creditors of the trustee, they receive a benefit they could not otherwise have received, that is, recourse to (the proceeds of) trust assets for the payment of their debts. In principle, therefore, the recovered preference should be distributable among the trust creditors alone. McPherson JA of the Queensland Court of Appeal, writing extrajudicially, has justified this conclusion by reference to Re Suco Gold Pty Ltd (in liq)(46) and noted that to the extent that trust liabilities are reduced by recovery of the preference and distribution, non-trust assets are freed from the claims of trust creditors should the trust assets be insufficient to meet the claims of the trust creditors.(47) However, against this it must be observed that if the recovered preference is available only for the benefit of trust creditors then it has no impact on the net assets of the trust and liabilities to trust creditors. (McPherson JA does, however, observe that trust creditors may prove for a dividend from non-trust assets so long as the dividend paid to the general creditors equals or exceeds that paid to the trust creditors out of the trust assets. (ibid.%%%McPherson (1985), p 158.) To that extent alone non-trust assets are freed from the claims of trust creditors.) Moreover, there is scant statutory warrant for limiting the distribution of the recovered preference to the trust creditors.(48) It is also difficult to reconcile such a limitation with the construction of preference provisions In re Yagerphone Ltd requires. Accordingly, it appears to have been held In re McLernon; ex parte SWF Hoists and Industrial Equipment Pty Ltd v Prebble(49) that the recovered preference is available for distribution to the general creditors. This is to be regretted for the reasons of principle given above and here trust principles should prevail over insolvency principles. Preferences and the Yagerphone principle: conclusion. Except in the anomalous situation considered in Case 3, the In re Yagerphone Ltd principle prevails over other principles that might make recovered preferences available for proprietary claimants. But the secured creditor will generally be entitled to the benefit of the company's proprietary claim as part of the subject matter of its charge and may proceed against the recipient of the company's property. However, in such proceedings, it will not have the benefit of the presumptions of insolvency available to the liquidator and will have to prove an actual breach of duty if its claim is based on such a breach. (1) Insolvency Act, s 212; Corporations Law, s 598. (2) Coventry and Dixon's Case (1880) 14 ChD 660; Re Asiatic Electric Co Pty Ltd [1970] 2 NSWR 612. See Oditah (1992a). This was regarded as "an unwholesome state of things" in In re Anglo-Austrian Printing and Publishing Union [1895] 2 Ch 891, p 895. (3) [Omitted] (4) [1935] 1 Ch 392. Similarly, it appears that the United States, courts have rejected the argument that property recovered as a preference is the proceeds of a right to avoid a disposition, a right to which the security attached before the commencement of the insolvency: see Sanborn (1990), pp 1387-1388. One obvious reason is that the right to avoid preferences is not the company's right but the liquidator's. Another is that the right is not merely contingent on insolvency but does not come into existence until the insolvency commences: compare Prentice (1990), p 272. Because of 11 USC ¤522(a) (see above, n 174) it could be only by regarding the recovered preference as the proceeds of such a right that the recovered preference could be subjected to prior securities. For discussion of the theoretical doubts surrounding In re Yagerphone Ltd, see Wheeler (1993). (5) N A Kratzmann Pty Ltd (in liq) v Tucker [No 2] (1968) 123 CLR 295, pp 301-304. See also Re Margart Pty Ltd (in liq); Hamilton v Westpac Banking Corporation (1984) 9 ACLR 269; Bayley v National Australia Bank Ltd (1995) 16 ACSR 38; Starkey v APA Transport Pty Ltd (1993) 12 ACSR 15. (6) Note that if the recipient was a purchaser in good faith for value and without notice of the charge the security interest will not be enforceable against him or her. But if he or she knew or ought to have known that the company might become insolvent, the transaction will be avoidable as a preference. And arguably the security ought to be enforceable against the property in the company's hands: see Lowther v Carlton (1741) 2 Atk 242 [26 ER 549] and Wilkes v Spooner [1911] 2 KB 473 for the limitations of the good faith purchaser defence. (7) N A Kratzmann Pty Ltd (in liq) v Tucker [No 2] (1968) 123 CLR 295, pp 301-304. [Omitted] (16) [Omitted] (17) See also Keay (1994), p 570; O'Donovan (1993), p 67. Compare Goode (1990), p 54. (18) Starkey v DFC of T (1993) 11 ACLC 558, p 567 per McPherson JA; cited in Bayley v National Australia Bank Ltd (1995) 16 ACSR 38, pp 42-44. Both decisions concerned the legislation prevailing before the enactment of Pt 5.7B of the Corporations Law. (19) No case appears to hold that traceable money preferences recovered as such are subject to the principle of N A Kratzmann Pty Ltd (in liq) v Tucker [No 2] (1968) 123 CLR 295. (20) If the payment caused crystallisation of the charge, the money paid does not form part of the company's estate. It is then a question of priorities between the company and the chargee. On the traditional approach, because the company's entitlement depends on its having the payment set aside, its right will be characterised as an equity and the company's equitable interest will prevail. But see Linter Group Ltd v Goldberg (1992) 7 ACSR 580, above, text at n 51. Arguably the secured creditor will not need the liquidator's or court's leave to proceed, as the stay on actions in relation to the property of the company does not apply to actions by a secured creditor to realise its security: Corporations Law, ss 471B and 500(2). (21) Compare, generally, Sherwin (1989), p 327, n 121. (22) Re EVTR; Gilbert v Barber [1987] BCLC 646. Similarly, if a solicitor acting for a company in administration and holding a lien for unpaid costs on the proceeds of an action taken on behalf of the company transfers tha sum from the client account to the office account, and, recognising that this is a contravention on the action to enforce a security without the consent of the administrator, retransfers the sum to the client account, the solicitor acquires a lien on the new balance of the client account: Euro Commercial Leasing Ltd v Cartwright and Lewis [1995] 2 BCLC 618. The case is, perhaps, explicable on the basis that the administrator's leave would have been given as of course. (23) [1970] AC 567. (24) [1987] BCLC 646, p 651b-c (25) Presumably, however, it was held on a constructive trust on the terms of the secondary trust (not the initial trust) which would arise on the failure of the purpose: see Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. (26) [1987] BCLC 646, p 652g. (27) However, it is difficult to see that there had been a breach of trust. (28) In re First Capital Mortgage Loan Corporation 872 F 2d 335 (10th Cir 1989). (29) Angeles Real Estate Co v Kerxton; In re Construction General Inc 737 F 2d 416 (4th Cir 1984). (30) id 737 F 2d 416 (4th Cir 1984), pp 419, 420. Compare N A Kratzmann Pty Ltd (in liq) v Tucker [No 2] (1968) 123 CLR 295 on recovery of the same property as that paid away preferentially. (31) In re First Capital Mortgage Loan Corporation 917 F 2d 424 (10th Cir 1990), p 429. (32) id917 F 2d 424 (10th Cir 1990), p 427, quoting from 11 USC §550(a). See also 11 USC §541(a)(3). (33) 917 F 2d 424 (10th Cir 1990), p 428. (34) It should make no difference that in a personal bankruptcy the preference is repaid to the trustee in bankruptcy. (35) This remains true even if the swollen assets theory of tracing explored in Chapter 4 is accepted, then. For if T retains property that that theory identifies as traceable proceeds of B's funds, then a proprietary claim should be possible in respect of them. But if T retains no such proceeds, that is, no assets of his or her own out of which he or she might have discharged the indebtedness to D, then there should be no proprietary claim. See below, Chapter 4, Section V. (36) It is clear that a secured creditor of the trustee has no proprietary remedy in respect of the repaid preference if the security became fixed after the preferential payment was made: In re Yagerphone Ltd [1935] 1 Ch 392. However, it is impossible to argue that by parity of reasoning the beneficiary ought to have no proprietary remedy because In re Yagerphone Ltd depends not on analysis but on policy considerations. (37) James Roscoe Ltd v Winder [1915] 1 Ch 62. (38) Prentice argues, in relation to Insolvency Act, s 238, that such incentives may be discounted because the fact of insolvency is a precondition of the avoidance power vested in the liquidator: Prentice (1987), p 77. However, this misses the point of the argument of Jackson (1986), Chapter 6, and others. The problem with such incentives to bring on insolvency proceedings is not that they exist--an argument which might legitimately be met by Prentice's argument--but that they are differential incentives for different creditors or classes of creditors, thus undermining the insolvency legislation's attempt to solve the common pool problem. In relation to s 238 there is no differential incentive so Prentice's conclusion, if not the reasoning, is correct. (39) These are likely to be satisfied as a matter of course. The intention to prefer (if one is required) is almost certainly to be found in the reconstitutive intention. (40) In the unusual circumstances where T could recover the money from D, it is arguable that the money should be held on constructive trust for B. (41) It has been suggested that the preference provisions do not apply to such a case because the trustee and beneficiary are not in a relationship of debtor and creditor, a precondition for the operation of the preference sections. The competing authorities are discussed in Ashburner (1933), p 149. The Insolvency Act appears to resolve the matter in favour of the view that such repayment may constitute a preference: ss 382(1) and 382(4) in the case of personal insolvency and Insolvency Rule 13.12, paras (1) and (4). In Australia, following dicta of Lord Halsbury in Sharp v Jackson [1899] AC 419, p 426, the matter has been settled in favour of the view that such a repayment may constitute a preference: see, for example, Re Donovan; Ex parte ANZ Banking Group Ltd (1972) 20 FLR 50, pp 68-69 (Fed Ct of Bankruptcy) [etc] (42) See, generally, McPherson (1985); Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. Nor do the trust creditors have any such direct right. (The trust creditors as between themselves are entitled to the trust assets in the order applied in administration actions, not the order specified by the bankruptcy or insolvency legislation (because these do not apply to assets held on trust, but see Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99) or in order of the creation of the debts (McPherson (1985), pp 154-155).) If the trustee discharges such a debt with his or her own funds, then he or she has a right of recourse to the trust assets for that amount and a lien on the trust assets to secure that right. A trust creditor may succeed to that lien by subrogation (McPherson (1985), p 150, n 87) and that lien constitutes property available for distribution amongst the trustee's general creditors in bankruptcy or insolvency. If, however, the trustee has not discharged the debt, he or she may have recourse to the trust assets but only in order to pay trust debts. That right may be exercised by the trustee in bankruptcy or liquidator. However, the funds recouped are not divisible among the trustee's general creditors but only among the trust creditors. (43) See Anderson (1992), pp 183-192. (44) [Omitted] (45) As a procedural matter, in an insolvency the recovered preference should be paid to the corporate trustee, but it was left unclear in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, pp 371-372, to whom the recovered preference should be paid in the case of a bankruptcy. However, In re McLernon; ex parte SWF Hoists and Industrial Equipment Pty Ltd v Prebble (1995) 130 ALR 609, it was held that the preferences should be paid to the trustee in bankruptcy and not to the trustee of the trust. (46) (1987) 33 SASR 99 (see McPherson (1985), p 157). (47) McPherson (1985), p 158. (48) Though s 588FF(1)(g) of the Corporations Law allows for an order "providing for the extent to which, and the terms on which, a debt that ... was released or discharged to any extent by ... the [preference] may be proved in the winding up of the company", this does not allow an order providing for the terms on which the other debts of the company may be proved. (49) (1995) 130 ALR 609. ------- Date: Thu, 4 Jul 1996 11:53:04 +0100 (BST) To: restitution@majordomo.srv.ualberta.ca From: eodell@tcd.ie (Eoin O' Dell) Subject: Re: restitution Defences Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca Hi, all: Lionel has, as usual, managed to bring us to the very edge of the subject. I haven't yet read Lyons v. Jefferson Bank & Trust, 793 F. Supp. 981 (D.Colo. 1992), aff'd 994 F.2d 716 (10th Cir. 1993) but I will. Lionel says of it that the plaintiff's securities were sold by the third party, and the proceeds of the sale were transferred to the defendant's account; the plaintiff succeeded in tracing the securities into the plaintiff's account. Lionel is troubled by the (non)availability of defences: I'm troubled by the fact of the liability in the first place. It seems to me that when the third party was finished, there were (at least) two possible idenfitiable end products: the shares in the hands of the purchasers from the third party; and the money paid by the third party to the defendant. As to the first, the purchasers are bona fide purchasers for value without notice, and therefore any claim against them would successfully be met with a defence, As to the second, this was used because the first would not yield a result. Yet, it seems to me that the ordering I have adopted is the logical ordering, and this claim discloses the usual desperation of the plaintiff whose primary action would fail seeking to find some (any) other alternative remedy. To me, the purchasers from the third party, and the defendants here, are in excatly the same position. The usual scenario for the defence of bona fide purchase is that the defendant has given value to the third party in exchange for the impugned receipt: the fact that the payment is in advance should not render it any the less in exchange (contrast re change of position: Svenska), and here, the payment is in advance but still in exchange, for the following reasons. If we treat the relationship between the defendant and the third party simply as that between customer and banker, when the defendant customer lodged his assets with the third party banker, the customer generates a debt in his favour (represented in a bank account), and also pays for and receives banking services. On our facts, the defendant has satisfied that antecedent debt by paying over the impugned payment. Though in advance, that payment is still in exchange for the lodgement. In the alternative, if we use the language of trust, and treat the relationship between the defendant and the third party as that between beneficiary and trustee, when the defendant beneficiary transferred his assets to the third party trustee, and thereafter instructs the trustee to retransfer the trust assets to the beneficiary, a debt arises at that stage by virtue of the instruction and the defendant satisfies that debt by paying over the impugned payment. Again, though in advance, that payment is still in exchange for the lodgement. Thus, on either view, there is a debt arising prior to the breach, which prior debt the payment in breach satisfies, and the prior purchase of the debt renders the receipt a bona fide purchase for value without notice. Lionel, however, considers that: >The defendant was owed a debt by Wymer, for breach of trust, but the defendant >did not know it at the time it got the payment. Can it be a bfp? My >reaction is that it cannot; the defence protects security of transactions, >and that interest is not present where the character of the transaction is >completely different from what the defendant understands it to be. Any >views, or other cases? If the only relevant debt were that arising from the breach I would (probably) have to agree, but on the view above there is also an initial debt arising from the prior deposit/transfer, and the security of that initial transaction is secured and protected by according the defendant the defence. As to whether that payment would thereafter be a voidable preference, as Lionel suggests, I will leave to Simon Evans' long and thoughtful discussion. Finally, I thought that there might be a third possible idenftifiable end product: the chose in action which the third party had against the defendant (if one arises) (and if it arises, then it would to my mind be intermediate between the first two identified above). Since all I know about tracing into the proceeds of a debt is derived from Lionel's CLJ article, I wouldn't even presume, but even if (contrary at least to Irish authority and to BIM v Homan) one can trace into a debt, it seems to me that there is in reality no debt owed by the defendant to the third party. What happened was that the defendant was itself owed a debt (the bank account), and that debt was satisfied by the third party's payment to it. No reverse debt arises, since (I think) the third party would have no action as against the defendant simply because he used the proceeds of a fraud to settle the debt. Thus, in theory, there are three recourses, and in the following order: the shares in the hands of the purchasers from the third party; the chose in action which the third party had against the defendant; and the money paid by the third party to the defendant. The first fails, the second also fails, it makes me really worry as to why the third might succeed, and, as I hope I have set out above, I don't think that it should it have at least at the level of the defence. Hope this helps, Eoin. EOIN O'DELL Barrister, Lecturer in Law Email: EODELL@mail.tcd.ie Trinity College ph (+ 353 - 1) 608 1178 Dublin 2 fax (+ 353 - 1) 677 0449 Ireland (All opinions are personal; no legal responsibility whatsoever is accepted.) Eunice and I got engaged last Saturday, 25 May 1996. !! Live Long and Prosper !! Date: Thu, 4 Jul 1996 19:12:19 +0100 (BST) To: restitution@majordomo.srv.ualberta.ca From: eodell@tcd.ie (Eoin O' Dell) Subject: Re: restitution Defences Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca Hello, again, all: In an earlier posting, I mused: >>if we use the language >>of trust, and treat the relationship between the defendant and the third >>party as that between beneficiary and trustee, when the defendant >>beneficiary transferred his assets to the third party trustee, and >>thereafter instructs the trustee to retransfer the trust assets to the >>beneficiary, a debt arises at that stage by virtue of the instruction and >>the defendant satisfies that debt by paying over the impugned payment. And Lionel replied: >I'm not sure that's right. A debt only arises between trustee and >beneficiary if there has been a misappropriation of trust property. If a >beneficiary who has the right to call for the trust property does so, and >he gets it, I don't think there is ever a time when he is an unsecured >creditor. That is why I find this case difficult: defendant was an >unsecured creditor without knowing it. On the point at issue, I must expose my ignorance, and pose the question: why is the duty of the trustee to pay money to the beneficiary not conceptualised or conceptualisable as a debt ? If it is either, then my original analysis stands; if it is not, then I agree that Lionel has run into a difficulty. One further and unrelated thought occurs to me: when the third party trustee breaches his duty to the defendant beneficiary, and remedies consequentially arise, then the defendant is an unsecured creditor if his remedies are personal, he is in the position of a secured creditor if his remedies are proprietary. If such remedies are restitutionary (and I would argue that when he misappropriated the property, he received it, and thus the remedies can be properly characterised as restitutionary), then the principles articulated by Lord Browne-Wilkinson in Westdeutsche (whatever one thinks of them otherwise) could apply: the third party trustee has knowledge of his unjust enrichment at the time of the appropriation, and there is a specific res over which the constructive trust can attach. Thus, when the third party trustee misappropriates the funds of the defendant beneficiary, the beneficiary is (in the position of) a secured creditor vis a vis the trustee. Eoin. EOIN O'DELL Barrister, Lecturer in Law Email: EODELL@mail.tcd.ie Trinity College ph (+ 353 - 1) 608 1178 Dublin 2 fax (+ 353 - 1) 677 0449 Ireland (All opinions are personal; no legal responsibility whatsoever is accepted.) Eunice and I got engaged last Saturday, 25 May 1996. !! Live Long and Prosper !! Date: Fri, 05 Jul 1996 11:48:27 +0100 From: Simon Evans Organization: Gonville and Caius College, Cambridge CB2 1TA, UK To: liosmith@maildrop.srv.ualberta.ca, eodell@tcd.ie CC: sce1001@cus.cam.ac.uk Subject: Re: restitution Defences There is a faint suggestion in the judgment of Gummow J in Re Stephenson Nominees (1987) 76 ALR 485, p 507, that giving up unknown rights may be amount to valuable consideration, citing Taylor v London and County Banking Company [1901] 2 Ch 231, p 257, which is in the same line of authorities as Taylor v Blakelock (1886) 32 ChD 560 (CA). Lionel distinguishes Taylor v Blakelock on the ground that the defendant in the American case was unaware that he had become an unsecured creditor. But that also seems to have been the case in Taylor v Blakelock (there does not seem to be any suggestion of such knowledge in the facts and see p 564 in the report of the argument, distinguishing Thorndike v Hunt 3 DeG & J 563). I agree that at one level it does seem odd that I can give up rights that I do not know that I have. I get the best of both worlds: acquiescence, election, waiver and so on require knowledge of the rights I am giving up, so I can turn around and say I didn't know I was giving up something of value to me; but if the giving up turns out to be beneficial I can adopt it. But on the facts we are considering does what I know really make a difference? I think I am getting $45m in exchange for a right to call on you to vest $45m in me; in fact I am getting $45m in exchange for a right to have you pay me $45m that I got in exchange for the right to call on you to vest $45m in me. Had I known that you had stolen my investment I could have sued you or otherwise required you to make over $45m to me in the same way. How does the difference in what I know affect the relative merits of the claim that I have against you and the claim that the tracing claimant has? (Knowledge of the existence of my claim is distinct from my knowledge of the source of the funds that you use to satisfy it.) If I do know that you have stolen my money, I win and the other claimant loses. If I don't know, what difference does it make? In any event, ultimately insolvency law will result in proration of the available $45m between the two claimants (modulo everything happening in the right time frame), because *both* claimants have become unsecured creditors without knowing it. Seems fair to me. Simon. From: MR PAUL N TODD To: restitution@majordomo.srv.ualberta.ca Date: Wed, 10 Jul 1996 14:50:17 GMT Subject: restitution Re: Hebrew Univ papers 1990 X-Confirm-Reading-To: "MR PAUL N TODD" X-pmrqc: 1 Priority: normal Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca Does anyone know how I can get hold of a copy of Equity and Contemporary Legal Developments (ed Goldstein 1992), or in particular the paper by Peter Birks referred to by the HL in Westdeutche? I gather that these were papers first presented at the Hebrew University of Jerusalem in 1990, and that they have been published by Mishpatim (whoever they may be) for stlg50. But I have no publishers' address, and would prefer to avoid payment of the stlg50 if it can be avoided !! Thanks, Paul Todd (Cardiff, UK) Date: Thu, 11 Jul 1996 08:34:08 -0700 To: restitution@majordomo.srv.ualberta.ca From: liosmith@maildrop.srv.ualberta.ca (Lionel Smith) Subject: Re: restitution Re: Hebrew Univ papers 1990 Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca Paul, Pursuant to your question and to the followups about the Goldstein book: I am fortunate in that our library has a copy. Looking at it, I do not see Mishpatim anywhere; they might be a distributor. As John Glover noted, the volume was published by (or, in the words of the Introduction, under the auspices of) the Harry and Michael Sacher Institute for Legislative Research and Comparative Law, Hebrew University of Jerusalem. The address there (out of the SPTL directory) is Faculty of Law, Hebrew University, Mount Scopus, Jerusalem 91905. Perhaps you could write to Stephen Goldstein who is on the faculty there. If they still have copies they may be letting them go cheap. Some the papers have been published in law journals, but to my knowledge not the one by Peter Birks. On another point, list members might be interested in a new article by C.T. Wonnell of U of San Diego: "Replacing the Unitary Principle of Unjust Enrichment" (1996) 45 Emory LJ 153. I found it on Westlaw, and it is probably on Lexis. Those who were discussing corrective justice earlier might be interested to know that Wonnell cites some recent changes of mind by Coleman, reflected in J. Coleman, "The Practice of Corrective Justice" (1995) 37 Arizona LR 15. Lionel From: "GP. McMeel" Subject: Re: restitution Re: Hebrew Univ papers 1990 To: restitution@majordomo.srv.ualberta.ca Date: Thu, 11 Jul 1996 08:48:33 +0100 (BST) Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca The book is very hard to come across. The Bodleian Law Library copy has gone walkabouts, but behind the desk thay have a photocopy of the Birks article on Resulting Trusts. Happy hunting! Gerard McMeel (gerard.mcmeel@bris.ac.uk) Date: Thu, 11 Jul 1996 13:02:14 -0600 (EDT) From: Andrew Kull To: restitution@majordomo.srv.ualberta.ca Subject: Re: restitution Defences X-Sender: akull@law.emory.edu Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca I permit myself a belated addendum to the recent correspondence re: Lyons v. Jefferson B & T and the availability of a defense in the nature of b.f.p (which US practice would characterize in such a case as "discharge for value," referring to Restatement sec. 14). What strikes me about the case here is something that neither Lionel nor Eoin emphasizes, the simple fact that plaintiff and defendant are really consecutive victims of what is basically the same swindle. That is, > . . . a deposit of $45 million was made to the > defendant's account with the Federal Reserve bank. It turned out that Wymer > had previously embezzled the contents of the defendant's account. The value > he transferred to the defendant on 25 November 1991 came (as to $43 > million) from unauthorized sales of securities belonging to the plaintiff. So to my mind the closest analogies are found in that rich vein of cases involving "restitution between consecutive victims of the same fraud," the classic facts being successive borrowings on forged security, with proceeds of the subsequent borrowing being used, in part, to repay the prior lender; when the truth comes to light, the most recent victim sues the most recently repaid victim in restitution, claiming to have traced his money into defendant's hands--all just as happened here. And the typical case is resolved by a dispute about whether the defendant gave value, inasmuch as the claim he surrendered was worthless, etc etc, very much like last week's exchange between Lionel and Eoin. The US cases I refer to are typified by Associates Discount v. Clements, 321 P.2d 673 (Oklahoma 1958), and Nat'l Shawmut v. Fidelity Mutual, 61 N.E.2d 18 (Mass. 1945), but there are a great many of them. My reaction to all these successive-fraud cases is that there is something artificial and anomalous about finding unjust enrichment of one fraud victim and the expense of another, at least in any case where we would conclude that the plaintiff and defendant are identically situated vis-a-vis the swindler: you cannot even say the defendant has been enriched unless you can say "he had already lost his money without knowing it," and this is unsatisfactory because it is arbitrary and question-begging. (I discuss this at greater length in my recent article in 83 Calif. L. Rev. 1191, 1234-36.) I think this means that unless we can come up with a technique for splitting losses between identically situated victims, the loss lies where it falls, not because the defendant has a particularly convincing claim to be a b.f.p. (for reasons Lionel advances inter alia), but because plaintiff cannot convincingly show dft's unjust enrichment. Of course, in many comparable situations there is an effective loss-splitting mechanism in the form of bankruptcy. For me the important rule of Cunningham v. Brown (the original Ponzi case), 265 U.S. 1 (1923), is that we do not allow b.f.p. defense to an earlier fraud victim who was lucky enough to get his money out ahead of the general crash because bankruptcy, and equity generally, seek to give similar treatment to persons similarly situated. This means that you can neither resist nor assert constructive trust in bankruptcy where the result is to afford preferential treatment to a claimant who cannot adequately distinguish his situation vis-a-vis the debtor from that of the other creditors. I think this reasoning supports, in a general way, finding the means to split the $45 million between the bank and the investment fund in Lyons v. Jefferson. US doctrine about constructive trust is sufficiently liberal (i.e. loose) that a US court would have no difficulty finding that the bank (or a bankruptcy trustee, if it comes to that) held the disputed funds in CT for the two fraud victims (assuming for simplicity two victims identically situated), in proportion to their losses from the embezzlement. Best regards. Andrew Kull akull@law.emory.edu X-PMrqc: 1 Date: Thu, 11 Jul 1996 16:27:13 +1000 From: JOHN GLOVER Subject: Re: restitution Re: Hebrew Univ papers 1990 To: restitution@majordomo.srv.ualberta.ca Organization: Law Faculty Priority: normal Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca > Date: Wed, 10 Jul 1996 14:50:17 +0000 (GMT) > From: MR PAUL N TODD > Subject: restitution Re: Hebrew Univ papers 1990 > To: restitution@majordomo.srv.ualberta.ca > Reply-to: restitution@majordomo.srv.ualberta.ca > Priority: normal > Does anyone know how I can get hold of a copy of Equity and > Contemporary Legal Developments (ed Goldstein 1992), or in particular > the paper by Peter Birks referred to by the HL in Westdeutche? I > gather that these were papers first presented at the Hebrew > University of Jerusalem in 1990, and that they have been published by > Mishpatim (whoever they may be) for stlg50. But I have no publishers' > address, and would prefer to avoid payment of the stlg50 if it can be > avoided !! > > Thanks, > > Paul Todd (Cardiff, UK) > Mr Todd, I think that the article you are seeking is "Restitution and Constructive Trusts" in Goldstein, S. (ed) Equity and Contemporary Legal Developments (Harry and Michael Sacher Institute for Legislative Research and Comparative Law, Hebrew University of Jerusalem: 1992), 335. Yours, John Glover Monash University Clayton, Victoria Australia Date: Sun, 21 Jul 1996 10:45:07 -0700 To: restitution@majordomo.srv.ualberta.ca From: liosmith@maildrop.srv.ualberta.ca (Lionel Smith) Subject: Re: restitution Defences Sender: owner-restitution@majordomo.srv.ualberta.ca Reply-To: restitution@majordomo.srv.ualberta.ca Andrew Kull wrote: >I permit myself a belated addendum to the recent correspondence re: Lyons >v. Jefferson B & T and the availability of a defense in the nature of >b.f.p (which US practice would characterize in such a case as "discharge >for value," referring to Restatement sec. 14). > >What strikes me about the case here is something that neither Lionel >nor Eoin emphasizes, the simple fact that plaintiff and defendant >are really consecutive victims of what is basically the same swindle. [snip] >So to my mind the closest analogies are found in that rich vein of >cases involving "restitution between consecutive victims of the same >fraud," the classic facts being successive borrowings on forged >security, with proceeds of the subsequent borrowing being used, in >part, to repay the prior lender; I am looking forward to reading those cases. On the other hand, it sounds as though they are all cases in which the defendant extended credit to the rogue, and thus they are not directly applicable to whether an unknowing victim of a breach of trust can claim bfp when he gets trust funds belonging to another trust. One who has extended credit is not under a misapprehension that he is getting back something he has always owned. >Of course, in many comparable situations there is an effective >loss-splitting mechanism in the form of bankruptcy. For me the >important rule of Cunningham v. Brown (the original Ponzi case), >265 U.S. 1 (1923), is that we do not allow b.f.p. defense to an earlier >fraud victim who was lucky enough to get his money out ahead of the >general crash because bankruptcy, and equity generally, seek to give >similar treatment to persons similarly situated. I don't read it quite that way. The court denied that those who got money out could show that the money they got out was traceably theirs. The primary holding was that the defendants were creditors who were uncontroversially preferred. The secondary holding was that even if they were not creditors because they had rescinded their contracts, they could not claim to have recovered "their" money because they had not adequately traced. A victim of breach of trust who recovers money other than that held in trust for her is just a preferred creditor. >This means that you >can neither resist nor assert constructive trust in bankruptcy where >the result is to afford preferential treatment to a claimant who >cannot adequately distinguish his situation vis-a-vis the debtor from >that of the other creditors. I think this reasoning supports, in a >general way, finding the means to split the $45 million between the >bank and the investment fund in Lyons v. Jefferson. US doctrine about >constructive trust is sufficiently liberal (i.e. loose) that a US >court would have no difficulty finding that the bank (or a bankruptcy >trustee, if it comes to that) held the disputed funds in CT for the two >fraud victims (assuming for simplicity two victims identically >situated), in proportion to their losses from the embezzlement. But I would say that the function of bfp is exactly to distinguish one's situation from another's. If a thief steals my car and sells it to you, I can take it away from you, and I don't think the loss can be split even if there is a bankruptcy. On the other hand, if I bail it to a rogue with instructions to sell for no less than $5,000 and he sells it to you for $3,500, I can't take it away from you (in every jurisdiction I know of) and there is no way to split the loss even if the rogue has absconded or is bankrupt and so I have no way to get my $3,500. Rules about how property behaves operate to allocate losses, and are (with narrow exceptions) not affected by the supervention of bankruptcy. That is why we need a rational set of rules. Lionel