Lipkin Gorman (a firm) v Karpnale Ltd

[1991] 2 AC 548

The Structure of Property Law: D4:2.2.2

Lipkin Gorman v Karpnale: Initial position

Z Bank

B

- B (the partners of a firm) have a bank account: a personal right against Z Bank

- C (a partner of the firm) has the authority to withdraw money from the account

Lipkin Gorman v Karpnale: C’s fraud

Z Bank

B

- C, acting without the permission of the other partners, withdraws money for his own purposes

CPayment

C2

- C then gambles with that money in C2’s casino – and loses

Payment

Lipkin Gorman v Karpnale: Question 1

Z Bank

B

CPayment

C2Payment

- Does B have a direct right against C2?

- The House of Lords says Yes: C2, by its receipt of money from C, is unjustly enriched at B’s expense

Lipkin Gorman v Karpnale: Problems with the decision?

- So it is hard to see how C2, when receiving the money from C, was unjustly enriched at B’s expense: the money it received belonged wholly to C (see pp 294-5)

- When C received money from Z Bank, that money belonged to C: B had no property right in the money

- but there may be an alternative explanation for the result…

Lipkin Gorman v Karpnale: Question 2

Z Bank

B

C’s right to the money

Payment

- Does B have a persistent right against C’s right to the money?

- Yes: C, by his receipt of the money, is unjustly enriched at B’s expense (an equal sum is validly deducted from B’s account). C is therefore under a duty to B not to use the money for C’s benefit: so C holds its right to the money on Trust for B

Lipkin Gorman v Karpnale: Question 2

Z Bank

B

C2’s right to the money

- B has a power to impose a duty on C2

- It is crucial that, when C2 learns of B’s initial persistent right, C2 still has the money received from C or its traceable product

C’s right to the money

Lipkin Gorman v Karpnale: Question 3

Z Bank

B

C2’s right to the money

- Does C2 have a defence to B’s persistent right?

- No: e.g. C2 was not a “bona fide purchaser” of the money: it provided nothing of legal value in return for it

C’s right to the money

Defence for C2?

Lipkin Gorman v Karpnale: An alternative explanation

- When Z Bank paid money from the account to C, B had a persistent right against C’s right to the money and C2 has no defence to that right

- So, if C2 still has that money (or its traceable product) B has a power to impose a duty on C2 not to use that money for C2’s own benefit (see pp 295-8)

- This explanation may also be used in other cases such as Banque Belge pur l’Estranger v Hambrouck and Agip v Jackson (see following slides)

Banque Belge pur l’Etranger v Hambrouck

[1921] 1 KB 321

The Structure of Property Law: D4:2.2.2

Banque Belge v Hambrouck: Initial position

B Bank

X

- X has an account with B Bank (Banque Belge)

Banque Belge v Hambrouck: C’s fraud

B Bank

X

- C, an employee of X, fraudulently obtains cheques drawn on X’s account with B Bank

CPayment

C2

- C presents those cheques and money is paid from B Bank into C’s account at another bank

Payment

- C pays money from that account to C2’s account at a further bank

Banque Belge: Court of Appeal’s decision

- As the money was obtained by C’s fraud “it was never [C’s] property” (per Scrutton LJ at 328, explaining the reasoning of the court below in finding in B’s favour) – that money can now be traced to £315 in C2’s bank account – and so C2’s bank can be made to pay £315 to B

Banque Belge: Problems with the decision?

- In a modern bank transfer, B Bank does not transfer its Ownership of any specific notes – instead there is a debit to B Bank and a credit to C’s bank (see eg Agip (Africa) Ltd v Jackson: later slides) – so B Bank cannot show that C has received any property of B Bank

- Even if B Bank had paid specific notes to C, if C’s fraud does not cause B Bank to be mistaken as to B’s identity, it does not prevent a transfer of B Bank’s Ownership of the notes (see D1:2.2.2(ii))

- but there may be an alternative explanation for the result…

Banque Belge: Question 2

B Bank

B Bank

C’s right against C’s bank

Payment

- Does B have a persistent right against C’s right?

- Yes: C, by its receipt of the money, is unjustly enriched at B Bank’s expense. C is therefore under a duty to B Bank not to use his right against C Bank for C’s own benefit: so C holds his right on Trust for B Bank (see D4:3.2.2)

Banque Belge: Question 2

B Bank

B Bank

- B has a power to impose a duty on C2

- It is crucial that, when C2 learns of B Bank’s initial persistent right, C2 still has the right received from C or its traceable product (in this case, C2’s personal right to £315 from C2’s bank)

C’s personal right against C’s bank

C2’s personal right against C2’s bank

Banque Belge: Question 3

B Bank

B Bank

C2’s right v C2’s bank

- Does C2 have a defence to B Bank’s persistent right?

- No: eg C2 was not a “bona fide purchaser” of her right: she provided nothing of legal value in return for it

C’s right v C’s bank

Defence for C2?

Banque Belge: An alternative explanation

- When B Bank made the payment, C acquired a right against C’s bank – C acquired that right at B Bank’s expense and, as C was a fraudster, there was no legal basis for C to have the benefit of that right

- As a result, C held his right against C’s bank on Trust for B Bank (a Resulting Trust)

- C2 acquired a right that depended on C’s right against C’s bank – and C2 had no defence against B Bank’s pre-existing persistent right

- B Bank therefore had a power, which it exercised, to impose a duty on C2 to use for B Bank’s benefit her right to receive £315 from her bank

Agip (Africa) Ltd v Jackson

[1991] Ch 547

The Structure of Property Law: D4:2.2.2

Agip v Jackson: Initial position

Z Bank

B

- B (the partners of a firm) have a bank account: a personal right against Z Bank

Agip v Jackson: A and C’s fraud

Z Bank

B

C’s personal right against C’s bank

- A, an accountant employed by B, changes the payee of cheques drawn on B’s account with Z Bank

- As a result, C acquires a personal right to $518,000 against C’s Bank; and B’s account with Z Bank is debited by $518,000

- Before the receipt of the $518,000, C’s account with C’s Bank was empty

Agip v Jackson: A and C’s fraud

Z Bank

B

C’s personal right against C’s bank

C2’s personal right against C2’s bank

- C then transfers the entire value of $518,000 to C2’s account with the same bank

- C2’s account was previously $7,000 in credit and so is now $525,000 in credit- On C’s instructions, C2 then pays that money out to various parties nominated by C – as a result, the credit in C2’s account is reduced to $45,000

Agip v Jackson: B’s claim

- B also brought a claim against C3 & C4 (the two partners in C2) and C5 (an employee of C3 & C4)

- C2’s bank had already paid into court the remaining $45,000 credited to C2’s account – there was no objection by C2 to B taking that money

- Millett J found that none of C3, C4 and C5 had held any right on Trust for B: none had received and held for his own benefit any part of the $518,000 ([1990] 1 Ch 265 at 292 – B did not appeal against that finding). But Millett J found that C and C2 had held on Trust for B; and C3, C4 and C5 had committed the wrong of dishonestly assisting C and C2 to breach their fiduciary duties, as trustees, to B (see D3:2.3.6)

Agip v Jackson: the Court of Appeal’s decision

- but the Court of Appeal upheld Millett J’s decision: C3, C4 and C5 had committed the wrong of dishonestly assisting in a breach of Trust

- C3, C4 and C5 appealed, arguing that neither C nor C2 had held any right on Trust for B and so C3, C4 or C5 could not have assisted in any breach of Trust

Agip v Jackson: the Court of Appeal’s reasoning

- However, it is possible for B to “trace in equity”: to show that, in equity, the rights received by C and then C2 are the product of B’s initial right against Z Bank

- The approach adopted by the Court of Appeal in Banque Belge cannot apply: the credit to C’s account came from C’s Bank not from B – so B cannot show that C or C2 has received B’s property

- so C (and C2) held a right on Trust for B; and C3, C4 and C5 dishonestly assisted in breaching that Trust by assisting C (and C2) to dispose of the value of that right

Agip v Jackson: Question 2

Z Bank

B

C’s right against C’s bank

Payment

- Does B have a persistent right against C’s right to the money?

- Yes: C, by his receipt of the money, is unjustly enriched at B Bank’s expense. C is therefore under a duty to B Bank not to use his right against C Bank for C’s own benefit: so C holds its right on Trust for B (see D4:3.2.2)

Agip v Jackson: Question 2

Z Bank

B

- B has a power to impose a duty on C2

- C2 is under a duty to B when it acquires sufficient awareness of B’s initial persistent right: ie when B makes a request for the return of the money

C’s personal right against C’s bank

C2’s personal right against C2’s bank

Agip v Jackson: Question 3

Z Bank

B

C2’s right to the money

- Does C2 have a defence to B’s persistent right?

- No: eg C2 was not a “bona fide purchaser” of its right to the money: it provided nothing of legal value in return for it

C’s right to the money

Defence for C2?

Agip v Jackson: The Court of Appeal’s decision

i) C2 held its bank account on Trust for itself and B

- It thus seems accurate to say, as the Court of Appeal did, that:

- So, given the finding of Millett J, upheld by the Court of Appeal, that C3, C4 and C5 were dishonest, each must have committed the wrong of dishonestly assisting C2 to breach its duties, as trustee, to B

ii) C3, C4 and C5 assisted C2 in breaching its duties, as trustee, to B