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Third Parties Knowing Receipt Dishonest Assistance Trustees De Son Tort Notes

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Third Parties (Knowing Receipt + Dishonest Assistance + Trustees de Son Tort)
A. KNOWING RECEIPT
A recipient of trust property may be subject to a personal claim called knowing receipt. As this is a personal claim based on D's conduct when he had the trust property, a knowing receipt claim does not depend on D's continued retention of the trust property.

Knowing receipt claims developed as a claim based on wrongdoing, and the recipient in knowing receipt is NOT a (constructive) trustee (Lord Sumption JSC at
[31] of Williams v Central Bank of Nigeria; a person in knowing receipt "has accepted trust assets knowing that they were transferred to him in breach of trust and that he had no right to receive them. His possession is therefore at all times wrongful and adverse to the rights of both the true trustees and the beneficiaries. …
His sole obligation of any practical significance is to restore the assets immediately.
… It does not make him a trustee").

By contrast, a proprietary claim does not require fault, but does require D to retain the trust property.

It is first worth noting a couple of points about what constitutes 'actual notice' and
'constructive notice'. This is relevant both to the BFP for value without notice defence, and the 'knowledge' requirement for knowing receipt claims.

1. Lord Clarke at [14] of Papadimitriou v Crédit Agricole distinguished and explained each of actual and constructive notice:
a. Actual notice i. "Where [D] in fact appreciates that a proprietary right in the property probably exists"
b. Constructive notice i. "Where a reasonable person with the attributes of [D] should have appreciated based on facts already available to it that the right probably existed"

1. OR
ii. "Where [D] should have made inquiries or sought advice which would have revealed the probable existence of such a right."

1. "The bank must make inquiries if there is a serious possibility of a third party having such a right or, put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction."
c. NB: Lord Sumption JSC agreed with Lord Clarke's reasoning in the case, but
"would eschew with words like 'possible', which set the bar too low, or
'probable' which suggest something that would justify a forensic finding of fact." Lord Sumption preferred a test whereby "if there are features of the transaction such that if left unexplained they are indicative of wrongdoing,
then an explanation must be sought before it can be assumed that there is none".
Also see the tracing rules from Week 6

Elements of a knowing receipt claim:

1. Receipt a. D was at some point in receipt of trust property. B must show that D received an asset which either:
i. was originally held on trust by T for B (and then misapplied), or ii. is a traceable substitute of a trust asset originally held and misapplied by T
b. D must have received the property "for his own use and benefit" (Millett J in
Agip v Jackson) - NB: See below for why we may be better rejecting this i. This excludes from liability those, such as agents, who receive property only on behalf of, and so hold it only for the benefit of,
someone else.

1. BUT: Webb questions why those who receive property on behalf of others should be immune from liability in knowing receipt. A person will be immune from liability even if he knew full well that the property derived from a breach of trust, but instead of returning it to B, handed it over to his principal.
a. Webb claims that the requirement would make sense if knowing receipt claims were based on D's unjust enrichment rather than wrongdoing, though.
i. This unjust-enrichment-based view is favoured by Lord Millett, who endorsed the beneficial receipt requirement in Agip and Twinsectra.
ii. BUT: The authorities are still tied to the wrongdoing approach. Thus, we may be better off rejecting Millett J's beneficial interest requirement.
c. Pilcher v Rawlins - BFPs for value without notice are immune from liability
- personal and proprietary. They have "an absolute, unqualified,
unanswerable defence".
i. Sir WM James LJ: Once a purchaser has shown that he acted in good faith, for value and without notice, "this court has no jurisdiction whatever to do anything more than to let him depart in possession of that legal estate, that legal right, that legal advantage which he has obtained, whatever it may be. In such a case a purchaser is entitled to hold that which, without breach of duty, he has had conveyed to him". ii. Webb: There will also be no claim in knowing receipt where the asset
D received had previously passed through the hands of a BFP
following the initial breach of trust but prior to its receipt by D. In such cases, D did not receive trust assets.

2. Knowledge a. OLD LAW:
i. The courts used a framework set out in Baden v Société Générale which identified five types or degrees of knowledge:

1. Actual knowledge

2. Wilfully shutting one's eyes to the obvious

3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make

4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man

5. Knowledge of circumstances which would put an honest and reasonable man on inquiry ii. No consensus developed as to which sufficed for imposing liability in knowing receipt.

1. Re Montagu said that only categories 1-3 were sufficient

2. Agip v Jackson said that all 5 categories were sufficient iii. Other times the courts instead asked whether D needed to have actual or constructive knowledge (or notice) of the breach of trust.
But here too there was no agreement.

1. NB: 'Constructive knowledge' = D did not know, but could and should have known b. CURRENT LAW:
i. CoA in BCCI v Akindele acknowledged the need for a single standard which could be applied in all future cases. The court's conclusion was set down by Nourse LJ at p455: "The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than the other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made."

1. Thus, the court must determine:
a. Knowledge. What did D know of the breach?
b. Unconscionability. In the circumstances and given what D knows (or does not know) would it be unconscionable for D to keep the benefits he derived from his receipt and use of the trust property?
c. Re Montagu - "a person is not taken to have knowledge of a fact that he once knew but has genuinely forgotten: the test (or a test) is whether the knowledge continues to operate on that person's mind at the time in question."

3. Unconscionability a. The problem is that Akindele does not tell what 'unconscionability' entails.
i. Webb points out the term 'unconscionable' by itself is vague and empty - there must be some reason why we consider conduct unconscionable. If the law simply required 'what is fair in good conscience', it would be useless at guiding behaviour.
ii. In Akindele itself, D had neither actual nor constructive knowledge,
(and so escaped liability)  Given D's lack of knowledge, we have no indication of what would have been sufficient.
b. The later cases offer no guidance as to 'unconscionability'.
i. Armstrong v Winnington Networks - Stephen Morris QC in the EWHC
effectively held that either actual or constructive notice was sufficient to hold D liable.
ii. Arthur v AG of the Turks and Caicos Islands - UKPC assumed that constructive notice was insufficient.
c. Therefore, the 'unconscionability' requirement will simply require an assessment on the facts.

4. The fault standard a. Beneficial interest of trust property + _______ = knowing receipt claim b. The state of mind of D needed to complete the equation must be identified.
i. The term 'unconscionability' does not indicate any particular state of mind, BUT it gives the court flexibility and (supposedly) greater freedom to do justice on the facts.
ii. The stricter the fault standard, the more inquiries a person receiving property must make  detrimental to commercial parties who want to deal with assets quickly, BUT promotes higher standards of conduct
+ more protection to Bs.

1. The flexibility given to courts allows them to treat commercial and non-commercial cases differently.
a. BUT: This is merely a justification for making two rules
- not just leaving the court carte balance to make things up as they go along.
c. Although the standard of knowledge is clear, it is clearly sufficient that D
gains the necessary knowledge at any point while the property is in his possession.
d. THEREFORE:
i. If D had no knowledge of the fact that the property derived from breach of trust, and he gave value  D is a BFP for value without notice  immune from liability, whether proprietary or personal.
ii. If D did not know, and could not have been expected to discover,
that the property derived from a breach of trust, but did not give value for it (i.e. he is an innocent donee), then so long as that

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