Constructive Trust Concept - Essay Example

Johana Nadler Constructive Trust 3 Mar. 2006 Constructive Trust Whenever the word trust is mentioned, or written, one instantly concludes the implication of loyalty, honorability, and integrity. Equity does not stand far off either with its implied meaning of equality, fairness and justness, along with its representation of property value. And when these two words join in a sentence where a level of consciousness is reached to give a righteous decision, then we tend to believe that the judgment is an accurate one. So, what is the definition of trust in a legal context? There is a myriad of definitions because each trust case carries its specific characteristics making it a unique entity of its own. The simple definition found in a freshman’s law book is a person, whom we shall call the donor, who has complete confidence in another person, (a friend, a relative, or a lawyer), who shall be called the trustee, and gives this person the right to administer his affairs (be it a house, bonds, jewels, an estate, and so on). This is what one usually understands by the word trust. Judge Cardozo gave the following definition: “when a property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.”1 This is far from being that categorical, especially when a slew of other factors make it quite confusing, especially when there are differences between the US and the English interpretation of the constructive trust law. “Lord Wright MR2 deplored the absence of an English work on restitution and noted that the American principles [of constructive trust] stated appear to be consistent with the large and unanalyzed mass of English cases.… [furthermore,] in the Restatement (1937) Lord Wright treats the constructive trust as a remedy,” (Lacy p.1) and assesses the one difference between both countries as to the interpretation and that is one of analysis. If the British judges group the equitable jurisdiction as a restitutionary one, then the remedies must therefore be given by the common law courts. On the other hand, if the English judges take Cardozo’s statement as written then the British judicial system recognizes this US law a universal one regardless of its context. (Lacy p.1) The following cases, Barnes v Addys [1874] LR 9 Ch App 244, Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, Belmont Finance Corp v Williams Furniture Ltds [1968] 1 WLR 15555 at 1582, and R v Ghosh [1982] QB 1053, will be used to illustrate the ambiguity of the constructive trust. Barnes v Addys3 , the leading case used in English courts when dealing with constructive trusts, explains how a defendant can become liable in equity for “participation in a breach of trust by another.” (Lacy p. 2) The question was whether the defendant, who was also the trustee and solicitor at that time, could be held liable on a second degree and should be “declared as a constructive trustee, [and therefore,] liable to compensate the beneficiaries. The judges of the Court of Appeal all agreed that the solicitor could not be held liable unless it was proved that he had acted dishonestly and without knowledge of the relevant breach of trust.” (Lacy p. 2) In this case we are faced with three limitations: one, can a stranger to the trust be held liable as an accessory? Second, the ruling was reached based upon the assumption that no evidence of any knowledge of breach of trust or fraudulent breach of trust on the part of the defendant was found. Third and last, how does one interpret “dishonest and fraudulent” in these constructive trust cases? Ungoed Thomas J, in Selango United Rubber Estates v Cradock (No 3) [1968] 1 WLR 1555-1582, states that “the second category of constructive trusteeship is nothing more than a formula for equitable relief, [and] the court of equity says that the defendant shall be liable in equity, as though he were a trustee.” (Lacy p. 3) And he concludes by stating that “trusteeship and constructive trusteeship are equitable conceptions.” (Lacy p 3) However, the Court of Appeal rejected it (see Belmont Finance Corp v Williams Furniture Ltds4), leading to the following quandary: what are the criteria of a trustee if dishonesty is not one of them? The decision upheld by the Privy Council in Royal Brunei Airlines v Tan [1995] 2 AC 378 was that “the defendant against whom accessory liability is alleged must be proven to have acted dishonestly, by objective standards of honesty” (Lacy p. 4) To make matters even more complicated, let us take the case of Twinsectra Ltd v Yardley and Others Lloyd’s Rep Bank 438, which discusses liability involving a third party’s accountability. The matter at hand must evaluate whether a £1 million loan’s terms constitutes the creation of a constructive trust or not. The court decided that it did. However, the other issue was “whether the solicitor …acted …to satisfy the requirements of one or both forms of third party liability traditionally labeled ‘knowing receipt’ and ‘knowing assistance.’ [which is now called ‘dishonest assistance’ as per “the Privy Council decision in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.” (Speirs p. 1)] It is the second issue that is most difficult, and leads to the deliberation of whether “deliberately shutting [one’s] eyes … to the problems … was dishonesty within the valuable analysis by Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan ”[1995] 2 AC 378. Mr. Paul Leach, a solicitor acting as Yardley’s agent, provided the £1 million loan from Twinsectra, with specific agreement that it would only be used to acquire property at a later date. However, and here is where it becomes even more confusing, he did not deal directly with the company. Sims and Roper of Dorset (“Sims”) were Yardley’s representatives and when they acquired the loan gave it to Mr Leach upon Yardley’s request. So, Mr Leach, so far the third party, went along and distributed the money as per Yardley’s instructions using only £357.720,11 for the acquisition of property. When Sims took possession of Twinsectra’s loan and forwarded it to Leach to hold on Yardley’s account, “this was clearly a breach of the stipulation that the money was to be retained by Sims’s firm until applied in the acquisition of property.” (Speirs p. 3) The first and foremost claim to be resolved is the existence of a trust. In Barclays Bank v Quitscllose Investments Ltd. [1970] AC 567, we are facing two trusts, the “express trust, and a resulting trust which [attaches] to any portion of the loan not so used.” (Speirs p. 4) A loan does not exclude the creation of a trust. The fiduciary duty in this case demanded that the solicitor apply the money as per the initial terms, therefore, Sims did breach the contract by using the money as explained in the legal case. One distinction must be made between this case and Tan (from Royal Brunei Airlines Sdn Bhd v Tan); “[i]n Tan it had been clear that the funds were trust property, [in this case it is] far from clear.” (Speirs p. 5) With regard to the question of honesty, based on the findings of Royal Brunei Airlines Sdn Bhd v Tan, knowledge of facts does not lead to dishonesty. A dishonest state of mind , of consciousness, is what makes a person dishonest. Hence, Lord Hoffmann agreed with Lord Hutton “that the judge correctly applied this test and that the Court of Appeal was not entitled, on the basis of the written transcript, to make a finding of dishonesty which the judge who saw and heard Mr. Leach did not.” (Judgments 2002 par.20)5 Trusts, in general, are understood to be made for the benefit of beneficiaries, except for the charitable trusts and the purpose trusts. But more often than not establishing what is a trust or not requires more in-depth analysis of the facts. In Twinsectra, Sims appears to be holding the £1 million in trust for Twinsectra until the actual property acquisition occurs. How do we study the liability of third parties associated with breach of trust? “Lord Nicholls in Tan [clearly distinguishes] between knowledge and dishonesty. Knowledge was an ‘inapt criterion’ […] [whereas] dishonesty was meaningful.” (Speirs p. 7 & Tan p. 107) In Leach’s case there are three important points on access liability. First, did Leach know there was a trust to be breached? Second, was Leach dishonest? How do we classify the application of the funds themselves? Though Leach wasn’t aware of the existence of a trust, he did know all the facts relating to the creation of such trust and its breach. “Tan, makes clear that the concept of honesty imposes an objective standard leavened by a subjective element based upon the characteristics and knowledge of the particular defendant” (Speirs p. 7) Finally, with regard to the funds applied in the acquisition of property, “Potter LJ held that no equitable remedy arose against Leah. … there was [only] a breach of the letter rather than its spirit. … Equity holds trustees to a high standard and does not usually excuse because the breach was only technical.”6 The funds transfer from Sims to Leach was indeed a breach of trust, but Leach was not liable because he did not act dishonestly with regard to these funds. He was not “consciously dishonest.” “The test is whether an honest solicitor would receive funds from another solicitor, knowing that solicitor was … in breach of an undertaking, but also knowing that the funds were to be applied according to the lender’s stipulation.” (Speirs p. 8) However, the Court of Appeal did find him liable for assisting Sims’ breach of trust. Here again, we must discuss the term “dishonesty.” Is it subjective or objective? As per Lord Hutton, “there are three possible standards:… the purely subjective standard whereby a person is only regarded as dishonest if he transgresses his own standard of honesty.[…] This has been named the “Robin Hood test” but was rejected by the courts.” (Judgments par.26) So, if it is purely objective standard, then the person acts dishonestly “if his conduct is dishonest by the ordinary standards […] even if he does not realize this. [Finally,] the standard which combines an objective test and a subjective test [must be reached by comparison to] the ordinary standards of reasonable and honest people and that he, himself, realized that by those standards his conduct was dihonest. [This is called] the combined test.” (Judgments par.27) As we can see, there is no blue print to effectively plead a constructive trust without all the convoluted exceptions that one encounters. When Judge Cardozo stated in his ruling of Beattie v Guggenheim Exploration Co [1919] that “ a constructive trust is the formula through which the conscience of equity finds its expression,” one cannot disagree but one must realise that there are endless ramifications to take into account before pleading the case or ruling it. Work Cited Judgments: Twinsectra Limited v Yardley and Others, 21 Mar 2002. Session 2001-02 1 Mar. 2006. http://www.publications.parliament.uk/pa/ld200102/ldjudgmt/jd020321/yardle-1.htm Lacy de, Richard QC, Constructive trusts : Divided by Common Language ? 1 mar 2006. Google.com search for “Richard de Lacy: Constructive trusts”. www.3sb.law.co.uk/admin/seminars/ seminarpaper.2005-07-28.8224891521/DownloadPDF Speirs, Alistair, Caught in the Tangled Web. 2000 Web Journal of Current Issues with Blackstone Press Ltd. 1 Mar 2006. http://webjcli.ncl.ac.uk/2002/issue3/speirs3.html Read More