Tuesday, February 9, 2016

When will a person who assists a trustee to commit a breach of trust be liable as a constructive trustee


218 THE MODERN LAW REVIEW [Vol. 50 (2) When will a recipient of trust property transferred in breach of trust be liable as a constructive trustee? At least two possible types of claim may lie against such a recipient.8 If the property is still in the recipient’s hands in a traceable form, the claimant may bring an in rem tracing claim enforceable by means of a lien. Such a claim will fail if the recipient was a bona fide purchaser without notice, or if the property has become untraceable. Whether or not such a claim will lie, the recipient may be liable in the alternative to an in personam claim as a constructive trustee on the grounds of knowing r e ~ e i p t . ~ The point of contention is whether constructive notice or actual knowledge on the part of the recipient is necessary before liability will be imposed.’O On this point, the three cases are not unanimous. Re Montagu’s Settlements In 1923, Viscount Mandeville, who was entitled in remainder to a large collection of chattels (in which his father, the 9th Duke of Manchester, had a life interest), assigned his interest to two trustees. Under the terms of the trust, the trustees were, on the death of the 9th Duke, to select such of the chattels as they in their absolute discretion thought fit, for inclusion in a settlement. Those chattels would be held on the same trusts as the lands to which Viscount Mandeville would become entitled on the death of his father. Any chattels not so selected were to be held for Viscount Mandeville absolutely. The 9th Duke died in 1947 and Viscount Mandeville succeeded to the Dukedom. By then both the trustees and the 10th Duke’s solicitor had forgotten the precise terms of the 1923 settlement. No selection of chattels was ever made, and all parties assumed in good faith that the 10th Duke was entitled to them absolutely. Many were sold by him in 1949, and the rest shipped to Kenya where the Duke had taken up ~~~ ~~ * There is a third possibility. Should a personal representative pay money from the estate to someone not entitled to it. any next of kin, legatee or creditor of the estate may bring an in personam claim to recover that payment from the recipient: Ministry of Health v. Simpson (19511 A.C. 251. A claim of this kind was pleaded both in Re Montagu and in Lipkin Gorman. In each case, it was doubted whether such a claim lay in respect of dispositions made by a trustee of an inter viwos trust. In the former, the claim was stood over, and in the latter dismissed, because the plaintiff had not pursued his claim against the defaulting trustee first. MAR.19871 NOTES OF CASES 219 220 THE MODERN LAW REVIEW [Vol. 50 the trustees. Even if the doctrine of imputed notice did apply, the Duke would not thereby have been fixed with notice.’] Two themes underpin Megarry V.-C.’s judgment. The first is a unitary view of the basis of liability as a constructive trustee for intermeddling. All forms of such liability depend upon there being some “want of probity” on the part of the alleged trustee. This view derives from certain passages in Carl Zeiss Srifrung v. Herbert Smirh & Co. (No.2).12The second theme is that the concept of notice with its overtones of being put upon inquiry had no place where a donee rather than a purchaser was involved. Megarry V.-C. laid great stress on a passage in Re DiplockI3 to this effect. These two distinct points are interwoven and treated as one in the judgment. With some diffidence, it is suggested that although the result of the case is plainly correct, the reasoning is open to doubt: (i) Historically, liability for knowing receipt grew up inextricably with the in rem liability to a tracing claim with no differentiation between the threshold of knowledge that was required for each.14 (ii) There is some authority that imputed notice will suffice for liability for knowing re~eipt,’a~nd a number of decisions where a wholly honest recipient of trust property has been held liable as a constructive trustee because of a failure to make inquiries or to draw inferences from facts.I6 John v. Dodwell and Company, Lrd.17 is a case in point. The respondents’ manager drew cheques on their account to pay for shares which he had purchased for himself from the appellant broking firm. The appellants then paid over the moneys so received (after deduction of commission) to the sellers. The appellants received the payments honestly but with notice from the face of the cheques that the moneys did not belong to the manager. The Privy Council held the Megarry V.-C. found that the Duke had notice of the terms of the 1923 settlement. It does not follow that the Duke had notice that a breach of trust had been committed. l2 (19691 2 Ch. 276, 298, Sachs L.J.; 301, Edmund Davies L.J.-cf. Danckwerts L.J. at p.290. In both judgments in Re Monragu, Megarry V.-C. expressed the view obiter that constructive notice would not suffice for liability for knowing assistance. I’ (19481 Ch. 465, 478-479. I‘ Hill v. Simpson (1802) 7 Ves. 152 and M’Leod v. Drummond (1810) 17 Ves. 152, both tracing cases, were influential in the early evolution of knowing receipt; see, e.g., Keane v. Robarts (1819) 4 Madd. 332, and Wilson v. Moore (1834) 1 My. & K. 337. Is Midgley v. Midgley [1893] 3 Ch. 282, 303-304, Lopes L.J.; John v. Dodwell and Co. Lid. [1918] A.C. 563, 569, Viscount Haldane. l6 Bryson v. The Warwick and Birmingham Canal Company (1853) 4 De G.M. & G. 711; Mayor and Corporation of Berwick v. Murray (1856) 26 L.J.Ch. 201; Gray v. Lewis (1869) L.R. 8 Eq. 526; Reckilt v. Barnerr, Pembroke and Slarer, Lrd. (19291 A.C. 176; Belmonr Finance Corporation Lrd. v. Williams Furniture Lid. (No.2) (198Ol 1 All E.R. 393; and Nelson v. Larholt [1948] 1 K.B. 339 (a case of wilful shutting of eyes?). See too Rolled Sreel Products (Holdings) Ltd. v. Brirish Sreel Corporation (19863 Ch. 246, 298, Slade L.J.; 303, Browne-Wilkinson L.J. I’ [1918]