A round-up of recent cases - November 2010 review
Kernott v Jones:1 normal service is resumed
Regular readers of Trust Quarterly Review will now be quite familiar with the Chancery Division decision of Mr Nicholas Strauss QC in Jones v Kernott.2 This authority was discussed in an earlier Round-up3 and also formed the starting point for a learned analysis by Donovan Waters QC in the last edition, in which Professor Waters analysed the divided attitudes in the common law world towards the remedial constructive trust.4 The case has now been up to the Court of Appeal as Kernott v Jones and the decision in the Chancery Division has been reversed (in a split decision) in favour of Mr Kernott. The majority decided that Mr Kernott and Ms Jones each had a 50 per cent interest in their property and that the judges below had been wrong to conclude otherwise. It is submitted that the approach taken by the Court of Appeal is more in accord with the weight of English precedent than the decisions below in that it rejects the idea that the Court has scope to bring about a ‘fair’ division in the absence of any evidence of the parties’ intentions. The Court of Appeal decision is also noteworthy for comments made by Lord Justice Jacob concerning the reference to ‘imputation’ in Baroness Hale’s speech in Stack v Dowden.5
By now well-known, the facts of Kernott v Jones were that Patricia Jones and Leonard Kernott together bought a property with joint legal title in May 1985 and lived there with their two children until their relationship ended in October 1993. Ms Jones had contributed GBP6,000 of the GBP30,000 purchase price, with the balance funded by an interest‑only mortgage. It was common ground that until October 1993 the parties held the property beneficially in equal shares. However, when Mr Kernott left, he stopped contributing to the mortgage and other outgoings. There was no evidence at all as to the parties’ subsequent intentions as to beneficial ownership. Mr Kernott’s evidence was that he had periodically broached with Ms Jones the subject of realising his interest but had ultimately decided to wait until the children were older.
At first instance, His Honour Judge Dedman had found that the property should be divided as to 90 per cent for Ms Jones and 10 per cent for Mr Kernott on the basis of what was just and fair, having regard to Ms Jones’s payment of the deposit and her disproportionate contribution of 81.5 per cent of the total mortgage interest payments, together with the lack of assistance provided by Mr Kernott in the care of their children. A first appeal to Mr Nicholas Strauss QC (sitting as a deputy judge of the Chancery Division) was dismissed. Mr Strauss QC decided that Mr Kernott’s submission that consideration of what is fair is not permitted suggested that fairness could not have been part of the parties’ intentions. This, the deputy judge held, would lead to a practical difficulty in establishing what the parties must be taken to have intended in light of their conduct, which was Baroness Hale’s characterisation of the search to be undertaken by the Court in Stack v Dowden.6 The deputy judge considered that where there is no evidence about intention, it is difficult to impute any intention to the parties other than that they intended that each should have a fair share. This fair share could be ambulatory in that the shares could be quantified at any given point but changed over time. Mr Strass QC upheld the decision below, explaining that His Honour Judge Dedman at first instance had decided that in the absence of any discernible intention, the parties intended whatever was fair and reasonable.7 In other words, held Mr Strauss QC, there had been no imposition of fairness but rather an imputation8 of what they must have intended.
Mr Kernott’s appeal to the Court of Appeal was allowed, with Lord Justices Wall and Rimer concurring and Lord Justice Jacob dissenting. Lord Justice Wall noted that there was also a total lack of evidence about intention and that the parties appeared not to have discussed the matter.9 Referring to Stack v Dowden, Wall LJ observed that it was well established that conveyance into joint names meant that the starting point was that beneficial interests were joint10 and that Baroness Hale had observed that cases where beneficial interests differed from legal title would be very unusual.11 The question for the Court, Wall LJ considered, was whether there was enough to infer a shift in the parties’ intentions to support the 90:10 division.12 It was held by Wall LJ that the case was unusual only because of the long period of delay between the end of the relationship (1993) and the severance of the joint tenancy (2008).13 His Lordship held that it was essential that there be something to displace the starting-point presumption of joint beneficial interests in order to depart from equal shares and that the passage of time alone was insufficient to do so.14 On the facts of Kernott v Jones, no shift in intention could be inferred from the parties’ subsequent conduct. There was simply no evidence from which an intention to depart could be extracted.15
It is apparent from Lord Justice Rimer’s comments in his concurring judgment that his Lordship found some of Baroness Hale’s analysis in Stack v Dowden difficult to grapple with. Lord Justice Rimer considered that Stack v Dowden may be regarded as presenting something of a challenge16 and in particular expressed difficulty with Baroness Hale’s comment that:
‘[t]he search is to ascertain the parties’ shared intentions, actual, inferred or imputed, with respect to the property in the light of their whole course of conduct in relation to it’.17
Lord Justice Rimer considered that because an ‘inferred’ intention must also be an ‘actual’ intention, Baroness Hale must have been using ‘actual’ as a synonym for an ‘express’ intention, in the sense of an intention expressly uttered either orally or in writing. If the parties did not voice their intention, it probably meant they did not have one and there was no basis to infer otherwise. Rimer LJ continued that he did not understand what Baroness Hale had meant by an ‘imputed’ intention. His Lordship considered that it was unlikely that Baroness Hale had meant by ‘imputed’ that the Court could ascribe an intention that the parties neither expressed nor inferentially had. Lord Justice Rimer rejected such a meaning because it would be inconsistent with Baroness Hale’s repeated references to finding the parties’ intentions, which his Lordship added must mean their real intentions.18 These difficulties Lord Justice Rimer expressed about imputation are reminiscent of Lord Neuberger’s dissenting judgment in Stack v Dowden, where Lord Neuberger found that:
‘An inferred intention is one which is objectively deduced to be the subjective actual intention of the parties, in the light of their actions and statements. An imputed intention is one which is attributed to the parties, even though no such actual intention can be deduced from their actions and statements, and even though they had no such intention. Imputation involves concluding what the parties would have intended, whereas inference involves concluding what they did intend.
To impute an intention would not only be wrong in principle and a departure from two decisions of your Lordships’ House in this very area, but it also would involve a judge in an exercise which was difficult, subjective and uncertain.’19
It would seem from Kernott v Jones that if there is any internal tension within Baroness Hale’s judgment in Stack v Dowden, then the Court of Appeal in Kernott v Jones considered that her Ladyship’s much-quoted phrase ‘[t]he search is to ascertain the parties’ shared intentions, actual, inferred or imputed...’20 should not be read in isolation without the qualification in the next paragraph, where Baroness Hale was clear that the Court’s survey of the whole course of dealing ‘does not enable the court to abandon that search [for what was the parties’ shared intentions] in favour of the result which the court itself considers fair’.21
Mr Nicholas Strauss QC had held below that where there was a total absence of evidence about intention, then it was reasonable to impute that the parties had intended that each should have a fair share.22 As noted above, Mr Strauss QC emphasised that this was not the Court imposing its own view of fairness but rather a finding that the parties had intended that the shares should be fair. However, the majority in the Court of Appeal held that fairness could only be assessed against the principles governing this type of dispute, presumably because otherwise the Court would have to determine what size the fair shares should be in the absence of any guidance from the parties about quantum beyond the general sentiment that the shares should be fair.
It is submitted that this must be the right approach in light of the English authorities. As I noted in my comments on the decision below in an earlier edition of Trust Quarterly Review,23 if the analysis in the Chancery Division was right, then in cases where there is no evidence of intention, the evidential gap must inevitably be filled by an imputation of ‘fair shares’. The quantum of such fair shares would then have to be measured by the Court. Such a position would be irresistible, because it would be practically unsustainable for a litigant to appear before a Court exercising a conscience‑based jurisdiction and try to argue to the contrary, i.e. that he or she did not intend that the shares should be fair or that he or she ought to get more than a fair share. It is much more likely that the parties would eagerly agree that each should have a fair share but would fight tooth and nail about what those fair shares were. This would simply shift the question for the Court from ‘What did the parties intend?’ to ‘What is fair?’, which would not be supported by even the most progressive reading of Baroness Hale’s speech in Stack v Dowden as an accurate account of the law in England.
In his dissenting judgment in Kernott v Jones, Lord Justice Jacob was concerned that what he termed ‘real world’ behaviour would not be altered by decisions of the Court. His Lordship considered that a strong policy of beneficial interests following the legal title would not stop people failing to protect themselves. Although Kernott v Jones was a cautionary tale, Lord Justice Jacob indicated that it would not stop cohabitants failing to enter into express agreements.24 His Lordship held that there could be no criticism of the deputy judge below who had correctly applied Baroness Hale’s test in Stack v Dowden. Lord Justice Jacob considered that Stack v Dowden had not been substituted for an imposition of what was ‘fair and just’. Instead, Mr Nicholas Strauss QC had found that the parties’ shared intentions were that each should have a fair and just share. It is respectfully submitted that the difficulty with Lord Justice Jacob’s analysis is that for the reasons given above it is impossible to anticipate a class of cases where the Court finds that there is no evidence about intention but simultaneously finds that the parties did not intend that each should have a fair share. This would mean that in cases where there is no evidence of intention, the Court would invariably find itself embarking on an inquiry into what quantum constitutes fairness. Whether or not such a shift in English law is desirable is a different question. Should such a change be considered desirable, then it is submitted that it should be implemented in a transparent and overt way, rather than based on the fiction that the imposition of normative fairness is grounded in shared intention. Although perhaps a harsh result for Mrs Jones, it is submitted that Kernott v Jones was rightly decided by the Court of Appeal in accordance with English law as it currently stands.
White v Williams:25 the moneylenders in the temple
If Kernott v Jones proved yet again how difficult it is to establish intention amid the subtleties and complexities of a cohabiting relationship, White v Williams demonstrated the extraordinary difficulties associated with the even more nebulous idea of the spirit of a gift for the purposes of an application for cy-près distribution. Where, as in White v Williams, the gift is made to a religious organisation concerned altogether with the spiritual realm, such as the Bibleway Church UK, the difficulty is all the greater. A theological schism in the church coinciding with the intrusion of Mammon into its activities meant that Mr Justice Briggs had an unenviable task in seeking to locate the spirit that formed the basis upon which valuable places of worship were owned.
The Bibleway Church UK was founded by Mr Leon White, who styled himself ‘Bishop White’. It was the British branch of the considerably larger Bible Way Church of Our Lord Jesus Christ World Wide Inc., founded in the United States by Dr Smallwood Williams. Both the U.K. and U.S.A. branches were established in 1957 following an earlier schism within another Pentecostal church. Not long after the Bibleway Church UK was set up, Bishop White founded the first British congregation in Lewisham. A deed of trust over the assets of the church was executed in 1971. This trust was known as the Bibleway Trust. The church’s Lewisham place of worship was purchased in 1977. Other property was acquired over the years, including buildings at Bethnal Green, Cambridge, Mitcham and Bedford. The church expanded in size and by 1997 there were about 40 congregations of varying sizes in the U.K. Following the death in the United States in 1991 of the parent church’s founder, Bishop Smallwood Williams, a further schism occurred in the U.S.A. branch of the church in 1997.
Two factions emerged in the U.S.A., one led by a Bishop Campbell and another led by a Bishop Rogers. However, there was not a clear two-way split in the U.K. branch. Bishop White aligned himself with the American faction led by Bishop Campbell and was subsequently purportedly expelled from the church by the other faction led by Bishop Rogers. The Cambridge congregation adhered to the faction led by Bishop Rogers. Other congregations (including Lewisham) seceded altogether and became independent. Between 1997 and 2006, there was a period of stalemate in the Bibleway Church UK. During this period the now elderly Bishop White retired and subsequently died.
This difficult background had an important effect. By 2006, as a consequence of happenstance, retirement and ill‑health, all the trustees of the Bibleway Trust were members of the Cambridge congregation. Crucially, Cambridge had been the only significant congregation in England to adhere to the Bishop Rogers faction in the U.S.A. However, the Bibleway Trust owned the premises at Lewisham, Bethnal Green and Mitcham, which were all occupied by worshippers who did not follow Bishop Rogers. This meant that the legal title to all the significant property of the Bibleway Church UK was vested in trustees who were not part of the same communion as the users of those properties.
The claimants were members of the Lewisham congregation. The first claimant was the pastor of the Lewisham congregation, who was also the son of the late Bishop White, the founder of the UK branch of the church and of the Lewisham congregation. A cy-près scheme was sought by the claimants on the basis that the Lewisham building was held by the trustees of the Bibleway Trust who were not part of, nor in meaningful communication with, the Lewisham congregation. It was further argued that the defendant trustees were using the Lewisham building in ways that were outside the spirit of the gift to the Bibleway Trust. During the course of proceedings, both the Bethnal Green and Mitcham congregations (who were not parties to the claim) communicated to the judge that they also wished to have their own places of worship transferred cy-près.
The first defendant, Bishop Lynwal Williams, was the leader of the Cambridge congregation and was in effective control of the Bibleway Trust. Bishop Williams argued that the spirit and purpose of the Bibleway Trust could be fulfilled by the existing trustees. However, it emerged in the proceedings that Bishop Williams had presided over various unsuccessful business ventures, including a computer training business and a planned multicultural community centre. These activities had been undertaken by the defendants on the security of the Cambridge premises, which had led to those premises being sold in 2007 and Bishop Wiliams’ followers moving to rented accommodation. Further speculation by Bishop Williams had led to a three-month loan of GBP73,000 having been taken out from a Mr Alistair Abrahams in October 2007. The loan from Mr Abrahams was expressed to be secured by a charge on the Lewisham building, although no charge had been registered at the date of the proceedings. However, Mr Abrahams had obtained judgment and an interim charging order over the Lewisham building. It seems that Bishop Williams had not only invited the moneylenders into the temple but he had offered them proprietary rights over it.
Mr Justice Briggs reviewed the position for a cy-près distribution following the Charities Act 1993. The judge noted that it was no longer a requirement (as it had been before the Charities Act 1960) to show that it had become impossible or impracticable to carry out the specified purpose. Instead, sections 13 and 14B of the Charities Act 1993 provided that a cy-près distribution could be ordered where the original purposes had ceased to be a suitable and effective method of using the property having regard (inter alia) to the spirit of the original gift.26 The judge observed that Varsani v Jesani27 was the leading case concerning a schism within a religious organisation and derived a number of points of principle from it. Firstly, the Court is ill-equipped to determine who represents the true faith. Secondly, the spirit of the gift is to be ascertained at the time the gift is made. It will usually be the case that the appropriation of the property to one of the factions will be contrary to that spirit and the use of that property for the advancement of one faction to the exclusion of the other will no longer be a suitable and effective method of using that property. Thirdly, the spirit of the gift is to be ascertained more broadly than by a slavish application of the trust deed, to establish the basic intention or substance of the gift rather than the words used to express it.28
An important part of Bishop Williams’ argument on behalf of the defendants was that the Bibleway Church UK was a single unincorporated association with a single membership. Briggs J rejected that submission and held that the evidence was overwhelming that the decision to purchase any particular place of worship and its funding was a matter for each congregation locally.29 The judge concluded that each congregation was a distinct association, able to associate or dissociate from the national church at will.30 However, the evidence fell short of supporting the claimants’ principal argument that the Lewisham building was held on a special trust for the exclusive benefit of the Lewisham congregation, rather than for the general purposes stated in the Bibleway Trust deed.31 Nonetheless, the spirit of the gift was that the Lewisham building was to be used as the place of worship of the Lewisham congregation and its value should continue to be applied in that way for as long as there remained a Lewisham congregation.32 It is submitted that this is perhaps a distinction without a difference but it enabled the Court to find that its jurisdiction to order a cy-près scheme was engaged and that such a scheme was indeed required. White v Williams shows that whether an apparent body comprises one or several unincorporated associations will be answered by looking carefully at the evidence with regard to substance rather than form.
The appropriateness of the cy-près distribution was particularly apparent, given that Bishop Lynwal Williams had been an unsatisfactory witness, who was consistently evasive33 and his co‑trustees did not have the level of understanding to be expected of charitable trustees and had left the major decision‑making to Bishop Williams.34 Unsurprisingly, the propriety of the defendants’ borrowings and their decision to charge the Lewisham building was found to be in serious doubt.35 Significantly, Briggs J held that the willingness of the defendants to expose the Lewisham building to the claims of creditors demonstrated their readiness to use the building in a manner alien to the spirit of the gift and the interests of the Lewisham congregation.36
Unfortunately for those with a stake in the future activities of the Bibleway Trust UK, this six-day hearing in the Chancery Division was not the end of the story. Mr Justice Briggs considered that given the indications he had received from the Bethnal Green and Mitcham congregations that they would also like to secede, it would be preferable to make a scheme in respect of those properties at the same time as the Lewisham property. In light of the circling creditors of Bishop Williams’ unsuccessful business activities, Briggs J considered that separate and sequential treatment of the properties might leave the last of the three unfairly exposed to those claims.37 Consequently the precise terms of the scheme (and the rights of Mr Abrahams and the other creditors) were left to be decided at a subsequent hearing.38 It is not known at the time of writing whether the moneylenders are to be turned out of the temple or whether the temple will ultimately be turned over to the moneylenders.
Nordea Trust Company (Isle of Man) Limited:39 Trustees released from a difficult task
The amateur trustees in White v Williams had fallen well below the standards to be expected of those with fiduciary responsibilities and had allowed Bishop Williams to get on with it. Prudent professional trustees take no such chances. Usually trustees (whether amateur or professional) are under a duty single‑mindedly to preserve and protect the bounty of the trust for the beneficiaries. In Nordea Trust Company, the applicant professional trustees successfully sought permission from the Court not to commence proceedings to secure trust assets and to retire.
The application concerned a deed of gift dated 6 May 2004 to the Chelsea Anne Moir Trust, which had been established by a deed of settlement made on 4 May 2004. Parties to the proceedings were Nordea, Frederick Graham Moir (the donor under the deed of gift), Julie Moir (Mr Moir’s former wife), Freddie Wullf Nielson (the settlor) and two purported additional trustees. The Chelsea Anne Moir Trust had been declared under the laws of the Isle of Man and provided for its funds to be held on discretionary trusts for the beneficiaries. At the date of the proceedings, the only beneficiary was Chelsea Anne Moir, the daughter of Mr and Mrs Moir. By the deed of gift, Mr Moir gave one of two shares in F Moir Investments Pty Limited (a company incorporated in Victoria, Australia) to Nordea to hold on the terms of the trust. By clause 3 of the deed of gift, Mr Moir declared that he would use his best endeavours to register the share in Nordea’s name and in the meantime that he would hold the share on trust for Nordea. On 21 July 2004, Moir Investments issued a share certificate in Nordea’s name. There were no other trust assets of any significance other than the share.
On 12 July 2005, Mr and Mrs Moir entered into a consent order in matrimonial proceedings between them in the Family Court of Australia. The matrimonial order recited that Mr Moir owned the share that he had purportedly transferred to the trust by the deed of gift. On 14 November 2006, Mr Shaw (Mr Moir’s Australian lawyer) sought confirmation from Nordea that Nordea had no interest in the share on the purported basis that Mr Moir had ultimately decided not to go ahead with the transfer to the trust. Various apparent board documents were produced to support the argument that the share had not been transferred to Nordea. Further arguments were raised on Mr Moir’s behalf to suggest that the transfer had not been effective for various technical reasons and that the deed of gift was invalid as being for an illegal purpose to frustrate Mrs Moir’s claim in the matrimonial proceedings.
His Honour Deemster Kerruish, sitting in the Chancery Division of the High Court of the Isle of Man held that on the basis of Australian legal opinions obtained by Nordea, the only way for Nordea to establish its rights to the share would be by issuing proceedings in Australia.40 Even if there were arguments against the legal ownership having vested in Nordea, there was a strong case that beneficial ownership had vested.41 The arguments made by Mr Moir’s Australian lawyer were without merit, misconceived or could be met with argument to the contrary.42
Given the conduct of Mr Moir to date, Deemster Kerruish concluded that proceedings would be complex, lengthy and expensive. Ordinarily Nordea would have a duty to seek to recover the share for the benefit of the Chelsea Anne Moir Trust. However, Deemster Kerruish held that the duty on a trustee to recover trust assets was limited by the rule that a trustee who has not caused a default need not take proceedings at his own expense to seek such recovery.43 There was no fault or breach of trust on the part of Nordea that would require it to bring proceedings at its own expense44 and the trust’s assets were insufficient to contemplate proceedings. Nordea was granted permission not to procure that proceedings were brought against Mr Moir or any other party. Nordea was further granted permission to retire as trustee and released from further liability.45
Tasarruf v Merrill Lynch:46 the true nature of a power of revocation
Another recent case concerning a trust settled in an offshore financial centre was Tasarruf v Merrill Lynch, which examined whether a power of revocation should be considered to be property for the purposes of equitable execution. The case has implications for those seeking to pursue (or to shelter) assets held in such settlements. Tasarruf sought enforcement by way of equitable execution against the sixth defendant (Mr Demirel) of a judgment obtained against Mr Demeril on 22 May 2007. Mr Demirel was the settlor of two Cayman Island trusts and had a power of revocation over them, unfettered by fiduciary obligations. Tasarruf sought the appointment of receivers, directions mandating the revocation of the trusts and orders to allow the receivers to take possession of the trust assets.
Tasarruf’s argument had two components. Firstly, that the powers of revocation held by Mr Demirel ought to be regarded as property and capable of being the subject of a receiver’s appointment. Secondly, that the powers were choses in action and were thus deemed property by the Cayman Islands Interpretation Law (1995 Revision) and were accordingly capable of being exercised by receivers by way of equitable execution. Tasarruf contended that there were no absolute boundaries to the jurisdiction of equitable execution, which was in a state of development and extension.
The defendants responded that the difference between powers and property was long established at common law. A power could only be treated as property where statute so provided. The defendants added that the cases showed that a receiver could only be appointed over a beneficiary’s receipts from a trust and there was no authority to compel the exercise of a power of revocation held as a settlor rather than as a beneficiary. Furthermore, while an option to determine may be regarded as a chose in action, there was no authority to regard a power of revocation as a chose in action.
Chief Justice Smellie in the Grand Court of the Cayman Islands refused the application. The Chief Justice held that equitable execution was discretionary and only available where the common law is unable to reach the property, which would principally be where the property was merely equitable.47 Although Lawrence Collins LJ had held in Masri v Consolidated Contractors International Co SAL48 the jurisdiction of equitable execution permitted of gradual and incremental improvement, the distinction between a power and property was indeed fundamental at common law as the defendants had argued: a power is an individual personal capacity to do something and it is immaterial whether it leads to property being vested in the donee of the power.49
Certain statutes (such as the Cayman Island Bankruptcy Law (1997 Revision)) did indeed provide for a power to be deemed property but the Chief Justice held that such treatment is permissible only as a matter of statute.50 The Chief Justice held that the appointment of a receiver by way of equitable execution has no proprietary effect and operates in personam only.51 It operates by way of injunction to restrain a judgment debtor from receiving property subject to the receivership if it is not already in his possession. This meant that to vest the trust property in receivers, it would be necessary to direct Mr Demirel to exercise his power and if he refused for the Court to exercise the power on his behalf. Consequently, what was proposed was an order that Mr Demirel delegate his power but the case law indicated that a personal power could not be delegated. There was no power in the trust instrument to allow Mr Dermirel to delegate. In the absence of a statutory provision allowing the court to vest a donee’s power in someone else, the Chief Justice added that the proposed mechanics were impermissible.52
Chief Justice Smellie considered that Tasarruf’s argument was appealing, particularly where a worthy judgment creditor was seeking the exercise of an equitable jurisdiction. However, to construe a power of revocation as property tantamount to ownership of trust assets would not be an incremental refinement but rather the setting aside of settled common law principles that had for hundreds of years distinguished powers from the property they affect. The proposal would strike at the heart of the trust concept.53
Tasarruf appealed to the Court of Appeal of the Cayman Islands.54 The Court of Appeal upheld the Chief Justice but approached the issues slightly differently. Justice of Appeal Vos considered that the task was firstly to determine whether the court had jurisdiction to appoint receivers and secondly whether as a matter of policy any discretion that might exist should be exercised for the first time over a power of revocation. Vos JA was clear that even if the first question were answered in Tasarruf’s favour, it would not necessarily follow that the second question would be too. The Court of Appeal concentrated on the policy question and concluded that it would be unwise to allow a power of revocation to be regarded as property by the kind of incremental advance envisaged by Lawrence Collins LJ in Masri.55 Such an advance had to wait for legislation.
The Court of Appeal departed from Chief Justice Smellie in respect of the Chief Justice’s finding that to regard a power of revocation as property for the purposes of equitable execution would strike at the very heart of the trust concept. Vos JA expressed himself unable to see much conceptual difference between including such powers in a bankrupt’s estate (as prescribed by the Bankruptcy Law) and allowing equitable execution over them. However, it was for the legislature to draw the line.56 Despite these minor differences, the appeal was dismissed and the judgment of the Chief Justice was upheld.
Starglade v Nash:57 Whether ignorance of trust law is an excuse
Tasarruf v Merril Lynch showed that the meaning of words and concepts used in a technical sense in trust law can still give rise to complicated appellate litigation and learned debate even after many years of use. Starglade v Nash illustrated what can happen when lay people execute documents containing legal terminology used in a technical way that they do not understand. Trust terminology may well lead to this problem more than some other areas, given that words such as ‘trust’, ‘benefit’, ‘account’ and ‘power’ have commonly used lay meanings as well as their special meanings as terms of art. Starglade v Nash was a case where a lay person was able to avoid being held to account because his failure to understand that a trust meant that the property belonged to someone else meant that he was not dishonest. This was despite that trust arising from an arm’s-length commercial negotiation and embodied in a formal legal document executed with the benefit of legal advice. The judgment also provides authority for the proposition that improper and morally dubious conduct is not necessarily dishonest for the purposes of a breach of trust.
Starglade was a property company. In 2001 it sold a piece of land to Larkstore Limited. Mr Nash was Larkstore’s managing director and was the first defendant. The other defendants were Larkstore’s solicitors. Three years prior to the sale of the land by Starglade to Larkstore, Starglade engaged a firm of soil experts to report on soil conditions. After the sale to Larkstore, there was a landslip at the site. The owners of the properties that had been built on the site took action against Larkstore. Larkstore asked Starglade to assign Starglade’s rights under the negligent soil report to Larkstore to enable Larkstore to bring proceedings. Starglade insisted on 50 per cent of any recoveries in consideration of the assignment. A formal assignment was executed in 2004. The assignment provided that Larkstore would hold all monies received from Technotrade on trust for 50:50 division between Larkstore and Starglade. Following proceedings in the Court of Appeal, the action between Larkstore and the soil experts was settled in January 2007. The defendant solicitors remitted GBP309,154.98 to Larkstore. It was common ground that 50 per cent of this sum was held on trust by Larkstore for Starglade. In breach of trust, Larkstore paid nothing to Starglade and instead paid it all away to other creditors, including some to Mr Nash and associated parties. It was common ground that this was a breach of trust.
Starglade claimed that Mr Nash was liable for half the money recovered from the negligent soil experts on the basis of dishonest assistance and also claimed that Mr Nash was liable for the sum of GBP15,500 paid to Mr Nash himself (as a creditor of Starglade) on the basis of knowing receipt. The dishonesty was said to arise either from Mr Nash’s knowledge that half the money belonged to Starglade or, if he was ignorant of Starglade’s proprietary rights, that Mr Nash behaved dishonestly in preferring other creditors when Larkstore was insolvent, simply because Mr Nash believed Starglade had taken advantage of him. Starglade argued that once a company was insolvent, the only honest course (in the absence of creditor pressure) was to share assets fairly between creditors. Mr Nash argued in response that he did not understand what holding on trust meant and thought Starglade was just an ordinary creditor. He also claimed to have been advised by his solicitor that Larkstore was entitled to prefer other creditors.
The knowing receipt component of Starglade’s claim against Mr Nash as a creditor of Larkstore succeeded because there was no dishonesty requirement. The single test was whether the recipient’s state of mind made it unconscionable for him to retain the benefit of the receipt. Mr Nicholas Strauss QC (sitting as a deputy judge of the Chancery Division) held that Mr Nash’s knowledge, combined with his failure to re-read the agreement with Starglade or to enquire further as to the law, meant nobody could reasonably think it right for Mr Nash to retain the GBP15,500 he had received.58
The dishonest assistance claim (which was valued at GBP309,154.98, making it by far the most significant part of Starglade’s claim) failed. Mr Strauss QC found that Mr Nash’s action only made sense if he did not understand that half the money belonged to Starglade. If the mention of a trust made any impression on Mr Nash, it was no more than a fleeting one. Mr Nash did not know, at the time he made the payment, that Larkstore held the money on trust for Starglade. This meant that the main way in which Starglade had argued that Mr Nash was dishonest failed: Mr Nash was simply unaware of Starglade’s proprietary rights when he assisted in the breach of trust.59
Turning to the second the way in which Starglade had alleged dishonesty, two questions arose: firstly, was it dishonest deliberately to prefer other creditors; and secondly, it was necessary for a finding of dishonest assistance for the dishonesty to relate directly to the breach of trust itself?60 As to the first question, the deputy judge found that although directors could sometimes be personally liable for misfeasance in a subsequent liquidation following preferential payments, Mr Nash had sought legal advice from his solicitor but had not been advised that a preferential payment was liable not merely to be set aside but might also be regarded as unlawful. Mr Strauss QC decided that had Mr Nash been so advised, it is very unlikely he would have given the preferences.61 There was no sense in which this was a cash of blind eye knowledge.62
Turning to the second question, Mr Nicholas Strauss QC began by recounting what ‘dishonesty’ means. The deputy judge considered the advice of the Privy Council in Barlow Clowes Ltd v Eurotrust Ltd63 that a dishonest state of mind could either be knowledge that the transaction was one in which a person could not honestly participate or a suspicion combined with a conscious decision not to make inquiries.64 Dishonesty was an objective standard but the extent of a person’s knowledge was subjective, as was the person’s intelligence, experience and general attributes.65 It is usually obvious if the conduct is objectively dishonest: it is conduct that would be regarded as such by any right‑thinking person and is conduct that all normal people would regard as dishonest.66 Applying this definition of dishonesty to the facts, the deputy judge held that while Mr Nash’s behaviour might be regarded as improper, morally dubious or borderline, it was not outright dishonest. It is submitted that this is a fine distinction and the stopping-off point between the dishonest and the morally dubious will often be a matter of some subtlety. There is little guidance in Starglade v Nash about where the stopping-off point will be.
It was strictly unnecessary for the deputy judge to decide whether the dishonesty had to relate to the trust, because of the conclusion that Mr Nash had not been dishonest in making preferential payments. However, Mr Nicholas Strauss QC considered that where both dishonesty and a breach of trust were present, there was no need for the dishonesty to relate directly to that breach of trust. It was therefore not a necessary condition for a finding of dishonest assistance that the assistant had knowledge of the trust.67 It seems from Starglade v Nash that to establish a defence to an accusation of dishonest assistance, it is not sufficient for the defendant to prove that he knew nothing about the trust or fiduciary relationship. The dishonesty could arise from some other conduct not directly concerned with the trust itself, although behaving in an ‘improper’ or ‘morally dubious’ way would not necessarily be enough. However, on the facts and in practical terms, Mr Nash’s ignorance of Starglade’s proprietary rights seemed to do enough to prove he was not dishonest in assisting in the breach of trust.
Holliday v Musa68
Domicile provided the context for an early skirmish in a dispute for provision under the Inheritance (Provision for Family and Dependants) Act 1975. The Court of Appeal was faced with a difficult mixture of the subjective and objective in determining the question of Mr Ramadan Hussein Guney’s domicile. Their Lordships reiterated the threefold test in Re Fuld,69 emphasised the narrow focus of their inquiry and criticised the judge below for allowing extraneous matters to muddy the waters. Mr Guney’s adult children appealed from a decision that their father had died domiciled in England and Wales. This was a preliminary issue in a claim brought under the 1975 Act by the respondent to the appeal, Ms Holliday, a lady with whom the deceased had had a child. The question of domicile was a crucial matter because whether or not the deceased had died in England and Wales determined whether or not Ms Holliday’s 1975 Act claim could be entertained.
Mr Guney had been born of Turkish descent in 1932 in Cyprus but had moved to England in 1958 during sectarian violence. He had become a man of substance in England through business activities and a leading figure in the Turkish Cypriot community. From 1974 the deceased had undertaken regular visits to Cyprus. He had repeatedly represented to the Inland Revenue that he remained domiciled in Cyprus and intended to retire there. In 1998 Mr Guney had commenced a relationship with Ms Holliday and in 1999 they had a child together. Mr Guney had died in 2006.
In dismissing Mr Guney’s children’s appeal, the Court of Appeal nonetheless criticised the approach of the judge below because she had failed to keep in mind that there was only one issue: had the deceased at any stage formed the intention to settle in England indefinitely and abandon his domicile of origin?70 Their Lordships considered that this difficult question was based on a combination of residence and intention. The correct test was the threefold approach set out in Re Fuld.69 Firstly, domicile of origin adheres until displaced by evidence of acquisition and continuance of domicile of choice. Secondly, domicile of choice is only acquired if there is evidence of an independent intention to reside there indefinitely. There is a distinction to be drawn between an intention of an individual to return to the land of his birth on a clearly foreseen contingency (which means that the intention to acquire a domicile of choice is lacking), and a vague possibility of return (which does not mean the intention to acquire a domicile of choice is lacking). Thirdly and finally, if evidence is lacking about the individual’s state of mind or if his mind was not made up, then domicile of origin adheres.71
Mr Guney’s long residence in England was a starting point and the longer the residence in England the more likely it was that there was a permanent intention to remain. However, it was important to balance against this the deceased’s continued connections with Cyprus and to bear in mind the possibility that the deceased’s mind was not made up either way so that domicile of origin adhered.72 There were strong indications that the deceased had the intention to set up a family home with the respondent and their child. For many years the deceased’s family home had been in England and he only had a vague intention to retire to Cyprus, which intention by the time of his death seemed to have disappeared. The indications were that he had his permanent home in England and intended to die and be buried in England.73
- 1 EWCA Civ 578. This case is expected to be reported in the November 2010 edition (104) of Wills and Trusts Law Reports.
- 2 WTLR 1771.
- 3Trust Quarterly Review, vol 8 iss 2 (2010), 25-6.
- 4Trust Quarterly Review, vol 8 iss 3 (2010), 5-9. A much earlier article by Professor Waters in Canadian Bar Review, 53 (1975), 366 was quoted with approval in the Supreme Court of Canada by Dickson J and provided the foundation for his leading judgment in Pettkus v Becker  2 SCR 834, the landmark case that saw Canadian law diverge from English law on the matter of the remedial constructive trust.
- 5 2 WLR 831.
- 6 2 WLR 831, .
- 7 WTLR 1771, .
- 8 WTLR 1771, . It is notable that the deputy judge carefully used this word, which seems to have attracted more controversy than any other used in Baroness Hale’s speech in Stack v Dowden.
- 9 EWCA Civ 578, -.
- 10 EWCA Civ 578, .
- 11 EWCA Civ 578, .
- 12 EWCA Civ 578, -.
- 13 EWCA Civ 578, .
- 14 EWCA Civ 578, .
- 15 EWCA Civ 578, -.
- 16 EWCA Civ 578, .
- 17 2 WLR 831 .
- 18 EWCA Civ 578, 
- 19 2 WLR 831, -.
- 20 2 WLR 831, 
- 21 2 WLR 831, 
- 22 EWCA Civ 578, -.
- 23Trust Quarterly Review, vol 8 iss 2 (2010), 26. .
- 24 EWCA Civ 578, .
- 25 WTLR 1083.
- 26 WTLR 1083, -.
- 27 Ch 219.
- 28 WTLR 1083, -.
- 29 WTLR 1083, .
- 30 WTLR 1083, -.
- 31 WTLR 1083, -.
- 32 WTLR 1083, .
- 33 WTLR 1083, -.
- 34 WTLR 1083, .
- 35 WTLR 1083, .
- 36 WTLR 1083, .
- 37 WTLR 1083, -.
- 38 WTLR 1083, -.
- 39 WTLR 1393.
- 40 WTLR 1393, .
- 41 WTLR 1393, .
- 42 WTLR 1393, .
- 43 WTLR 1393, .
- 44 WTLR 1393, .
- 45 WTLR 1393, -.
- 46 WTLR 1285.
- 47 WTLR 1285, -.
- 48 2 WLR 621.
- 49 WTLR 1285, .
- 50 WTLR 1285, -.
- 51 WTLR 1285, .
- 52 WTLR 1285, -.
- 53 WTLR 1285, .
- 5413 ITELR 1. This appeal is expected to be reported in a future edition of Wills and Trusts Law Reports.
- 5513 ITELR 1, .
- 5613 ITELR 1, .
- 57 WTLR 1267.
- 58 WTLR 1267, .
- 59 WTLR 1267, -.
- 60 WTLR 1267, .
- 61 WTLR 1267, .
- 62 WTLR 1267, .
- 63 WTLR 1453.
- 64 WTLR 1267, .
- 65 WTLR 1267, -.
- 66 WTLR 1267, .
- 67 WTLR 1267, .
- 68 WTLR 839.
- 69 a b  P 675.
- 70 WTLR 839, .
- 71 WTLR 839, .
- 72 WTLR 839, .
- 73 WTLR 839, .
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