Creation Of Title Notes

Creation of Title

Substitution of Assets

The principles of substitution form the foundation for understanding how proprietary rights are created in mixtures of money and the proprietary consequences of defective payments of money through a dematerialised payment system.

Substitution itself is simply where property is exchanged for new property and the question connected to this is whether such an exchange gives rise to a right in the new asset.

Common law unauthorised substitution is where a defendant steals the original asset from its legal and beneficial owner, and transfers it to a third party in exchange for the substituted asset.

Equitable unauthorised substitution is where the defendant, in breach of trust, misapplies an original asset to which the claimant has an equitable title. The defendant then transfers the legal interest in the original asset to a third party in exchange for the substituted asset.

There is a difference between pure substitution and the tracing of value through a transaction. In substitution the value of the original asset survives in the substituted asset, but when tracing through a transaction the value in the new asset is simply attributable to the value in the original asset (Foskett v. McKeown)

There is a fundamental difference between an authorised and an unauthorised exchange:

In Common Law

An unauthorised exchange will concern a situation with a principal and an agent. If the agent is authorised to sell then the principle has no proprietary right to the proceeds of sale, merely a personal obligation to account for those proceeds. In an unauthorised exchange the agent does not have that authority and so the exchange can give rise to a proprietary claim for the principal.

At Equity

Equity is concerned with whether the third party acquires an interest which overreaches that of the claimant.

An authorised sale of trust assets will clear all existing equitable interests and the buyer will obtain property clean of all equitable interests. The third party will benefit from overreaching. This means an authorised disposition is like an unauthorised substitution, it can give rise to a proprietary claim against the proceeds.

An unauthorised sale of trust assets will not be subject to overreaching and so the third party will not acquire the property free of pre-existing equitable interests. The consequence of this is that, because there is no overreaching, the claimant may assert their priority to the property and reclaim the original trust asset or assert rights over the new assets. There is a choice.

In an authorised transaction the beneficiary will maintain full rights over the proceeds. In an unauthorised transaction then the beneficiary only has the right to pursue a lien over the proceeds. This does not give the same kind of vested right as would exist if it had been authorised.

Common law claims to substituted assets from an unauthorised exchange

Lipkin Gorman v. Karpnale

A partner in a solicitor firm withdrew client money in breach of fiduciary duty and spent it on gambling. The firm wanted to sue for money received and make the gambling club repay the funds.

The partner had signing authority to make withdrawals from the bank. But no authority to use the money for gambling.

When the partner withdrew the money then legal ownership passed to him. This could mean that the firm had no basis upon which to sue. But if this is actually viewed as a substitution then the firm will be able to find title which still exists and which can for the basis of a claim against the gambling club.

The firm had a legal title attached to the purported owner, this provided legal title but not a right of ownership such that it could confer a right to possess.

Because gaming contracts were, at the time, automatically void, the gambling club could not have received the money as a bona fide purchaser for value and so the firm was able to recover the money.

There was a chose of action destroyed and a credit balance created. This was the substitution. The exchange was authorised from the bank’s perspective, but not from the firm’s perspective.

The title of the firm was sufficient to found a restitutionary action for money had and received against a third party recipient. But it would have been vulnerable to a bona fide purchaser for value. The gambling club was unlucky that it was a gambling club. If it had just been a shop then it would not have been liable.

The principle of substitution can also be applied to incorporeal money.

FC Jones v. Jones

Jones paid money to his wife, but the money was actually property of his trustee in bankruptcy. His wife invested the money and made a lot of profit, the proceeds of this went into her own bank account. The trustee in bankruptcy wanted to recover the funds from the wife.

Millett LJ said Mrs Jones had never had legal title, she merely had an entitlement to deal with the money. Consequently the TinB should acquire a direct right against the bank and could recover the funds.

Fox thinks that the analysis of Millett LJ is wrong. He believes that Mrs Jones must still have a primary right to sue on the debt as she was the person owed money by the bank. Because she could make a withdrawal, and by doing so enable the bank to make a valid discharge, Fox believes that Mrs Jones must have had the primary legal claim against the bank. The TinB then had a secondary legal claim against the primary legal claim of Mrs Jones. (Different analysis but same end result on the facts).

Equitable claims to substituted assets from an unauthorised exchange

A trustee, in breach of trust, disposes of trust assets. This is not a transaction subject to overreaching if it is unauthorised and if it is authorised then the claimant has an equitable right over the proceeds.

The claimant has a proportionate interest in the proceeds of an unauthorised disposition (Foskett v. McKeown)

The exchange was unauthorised as an appropriation of an original asset in Foskett v....

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