Yacht Brokers / Dealers and safeguarding clients money- Time for legislation

[DAKA]

That's not the whole story, just your side of it.

I think jfm has given you the answer already to your principal point (to the extent it is possible to be sure about it): client funds withdrawn from a client account in breach of trust can be replaced if that is the trustee's intention. The replacement funds will be protected in the same way as the original funds.

It is possible to make the following general statements about client accounts:

- a properly operated client account is effective to protect client monies against the claims of creditors generally
- the protection is weakened if the account is not operated conscientously. That is a matter for the trustee (not the bank)
- sweeping client account funds to an 'own funds' account in order to reduce borrowing costs is undesirable because it may (not necessarily will) put the client funds at risk. This question was not tested in the BA Peters case because the practice ceased before the administration occurred
- sweeping client account funds to an overdrawn account is particularly likely to prejudice the trust status bacuse the trust funds cease to exist (although a specific transfer back to the client account, instigated by the trustee [edit]not the bank][/edit], would still recover the position)

None of the above requires further law or regulation, just conscientious discharge of the trustee's responsibilities. If buyers or sellers wish to make use of broker's client accounts (the alternative being to use a solicitor, which is safer but more expensive), the practical steps that they can take are:

- positively verify with the bank that the client account is a client account
- only pay money into the client account (direct transfer)
- insist on being provided with unambiguous rules about how the client account is operated

That's not enough to guarantee security because the trustee may still misappropriate. It may be possible to "trace" misappropriated trust funds and recover them but that is difficult and ultimately uncertain. If that risk remains a concern, use a solicitor and pay a bit more.

Thankyou Observer for staying with this.
earlier I had agreed to drop this on the basis jfm, yourself and tranona all disagreed with me so I reluctantly accepted I must be wrong.

I'm not sure why you all decided to put so much effort in to converting a loan voice but I appreciate your efforts .........

mission accomplished

 

[DAKA]

Still left with the same question I asked this morning.

having decided that the thread contains a lot of individually accurate statements but when taken out of context as a whole become misleading , whats the best way to rectify the thread.

a) I can delete the rest of my posts save the last one

b) ask the mods to delete it

c) other suggestions welcome ?

 

[jfm]

- sweeping client account funds to an overdrawn account is particularly likely to prejudice the trust status bacuse the trust funds cease to exist

All generally agreed T. But the bit I've quoted raises complex legal questions involving existence or not of assets, equitable remedies (which are quite different from common law if you are geekish about it), tracing, as so on.

One thing worth reflecting on is "what is a bank account?". We talk about them as though they are things. If I have £100 in my current account A and £1000 in my current account B at Bank X, what do I really have? I might or might not have one single debt claim for £1100, in law, and I likely don't care. BUT, if I'm holding all this money as a trustee, and I breach the trust by misappropriating £25, it matters enormously whether I have two separate current debt claims or one debt claim against the bank, because the answer there will generally determine whose £25 I have lost (trust funds like these are rarely fungible and if I lose that £25 and have several broker clients you have to try to work out exactly whose £25 it is. This is not a pro rata job, other than as a last resort). Fiendishly complex stuff

Now, if I'm a yacht broker and both my business account and client account are in credit, and the bank sweeps the client account to consolidate for overnight money-market depositing, is that bad? Overnight, the asset that the trustee has legal title to is one or more debt claims against the bank and the assets in the trust fund are in clear existence or at least easily traceable. So, much as one wouldn't approve, the clients are unlikely to have lost anything in this scenario and for sure (contrary to Daka's claim) the money put back into the client account the next morning IS subject to the trust

Now what if the business account is overdrawn £1000 and say £300 of client money is swept to reduce the overdraft down to £700? One might read BA Peters briefly and thing this money has "disappeared" to use the words of the High court judge. But it hasn't, and the Peters judgement didn't say it did. It ONLY disappears if it was never ever paid into the trust account to begin with. I therefore disagree the bit of your post that I've quoted above (though admittedly on a very fine technicality and I'm not picking a fight!). So, in my 300-700 example here, there is a perfectly good argument, though you wouldn't stick your head into the jaw of this lion without good reason, that the bank has an equitable (and legal, if it connived in the sweeping which it would be doing in all of Daka's examples) debt obligation of £300 to the trust and has a £1000 claim on the broker, and as merely a business practice it has organised its computer to pay nil interest to the trust and charge the broker interest on only £700. NOTHING in the Peters case says otherwise

It is worth remembering how unique the Peters case is. There was (a) money never ever credited to the client account to begin with, (b) an over drawn business account propped up by paying cheques into the business account directly, and (c) a weird situation whereby the valid claims of clients to money in the trust account added up to less than the balance on that account - ie the client account was strangely in a surplus scenario. Peters gave an answer to what happens in those circumstances, but the chances of any of us seeing those circs ever against are pretty much zero. So I repeat, Peters does NOT say the £300 trust money in my preceding paragraph is lost - quite the contrary in fact.

The real lesson (lost in much fog!) to learn from the Peters case is that both buyer and seller will benefit if they make sure the buyer's money is transferred to the correct account, namely the client account. Now, Peters was 1997 when we had cheques and pretty much no internet, whereas this is 2014 where cheques almost don't exist. So the very thing that caused the Peters clients to lose out, ie the fact Peters had power to choose where to pay the cheques in, no longer exists because the payor is now the guy who chooses which bank account to pay to.

So a tiny side effect of the creation of the internet is that the Peters problem has been fixed - how nice is that! We don't need any new law; we just need to take note of the law that already exists.

Sorry, I didn't mean to go on so long. I think we've done this to death 10x over! Best wishes

 

[Observer]

All interesting stuff, jfm. Thanks for reminding us that this stuff really is complex and (with very due respect) I imagine there is very little certainly of outcome because of the possible nuances in the permutations of available fact patterns.

As I was rescanning the BA Peters judgments earlier, I did find that I took issue (possibly) with one aspect that I would welcome your views on. It is this: it is very clearly stated that the trust can be created by the settlor alone and is created if money is paid into a client account even if that is not required by the terms agreed between settlor and beneficiary. Thus it was stated that a trust was created (or would have been created) by Peters where deposit payments under a 'dealer sale' contract were paid to the client account, even if that was not required.

Up to a point, that makes complete sense. If I wish to declare a trust in my property for the benefit if my children then clearly I can do that without their involvement. The problem I have with this in the BA Peters context is that a trust status is incompatible (in the ordinary way) with a dealer sale transaction. At some point in the transaction process the dealer will want to appropriate the funds to his own account. Absent specifically agreed terms on that process, is it really possible that a settlor can create a trust in respect of an asset that in an ordinary commercial context he would own and then unilaterally undo the settlement according to rules of his own making?

Not sure I've explained this well so apologies if my thinking appears incoherent.

 

[jfm]

As I was rescanning the BA Peters judgments earlier, I did find that I took issue (possibly) with one aspect that I would welcome your views on. It is this: it is very clearly stated that the trust can be created by the settlor alone and is created if money is paid into a client account even if that is not required by the terms agreed between settlor and beneficiary. Thus it was stated that a trust was created (or would have been created) by Peters where deposit payments under a 'dealer sale' contract were paid to the client account, even if that was not required.

Up to a point, that makes complete sense. If I wish to declare a trust in my property for the benefit if my children then clearly I can do that without their involvement. The problem I have with this in the BA Peters context is that a trust status is incompatible (in the ordinary way) with a dealer sale transaction. At some point in the transaction process the dealer will want to appropriate the funds to his own account. Absent specifically agreed terms on that process, is it really possible that a settlor can create a trust in respect of an asset that in an ordinary commercial context he would own and then unilaterally undo the settlement according to rules of his own making?

Not sure I've explained this well so apologies if my thinking appears incoherent.

All well explained. As a backdrop, the leading Peters speech is David Neuberger's - one of the finest legal minds of our times. He gave the judgement sitting in the Court of Appeal, but he was already at that stage in the Lords and is still our youngest ever law lord. He went on to be Master of the Rolls, which leaves only one more promotion which he subsequently got, namely president of the Supreme Court. And, sitting with him in Peters was John Dyson, who went on to be Master of the Rolls after David Neuberger's promotion. So, if trying to find any flaw in BA Peters, you'll have to try very hard

I've just scanned it and assume you're referring to para 9. I agree with you that creating a trust might well often be incompatible with commercial norms when making stage payments on a boat build (or on lots of other instalment transactions) but I think he was merely stating that it could happen as a matter of principle. His speech went on to say that the actions of the trustee have a huge bearing on whether a trust is even created over the purported trust property, so this was perhaps important scene setting.

Anyway, he must be right: creating a trust can be unilateral as you say, as it needs as a minimum a mere act by the settlor, without needing the agreement of the beneficiary. As for your worry about the trustee undoing the settlement "according to rules of his own making" that is indeed perfectly ok because in a unilateral trust the rules are ALWAYS of the settlor's making (and public trust law). Thus, if I have a stage payment on a new boat build due 31 March, and I hand over my trade-in boat on 31 Jan and dealer sells for cash on 28th Feb, it is entirely possible for my boat dealer to put the cash into trust (without asking me) on 1st march on terms that (i) the money is in trust for me until 31 March but (ii) the trust shall terminate on that day and the trustee shall then have power to offset the trust fund money then due to me against my stage payment debt to the dealer that crystallises the same day. If the dealer suddenly went bust on 15 March I would have a proprietorial ownership claim over the trust money rather than having to stand in line with all the other unsec creditors, and the fact that came as a complete (pleasant) surprise to me is neither here nor there

I'd think the same as you - that this is very unlikely to happen in normal dealings. But I think Lord Neuberger was just describing the principle in a scene-setting way. So to answer the Q in last sentence of your third para, yes it most certainly is possible. The rules about how trust property may be dealt with are contained in the terms of the trust (and the public law). They are not found in, nor do they require, any "specifically agreed terms" between trustee and beneficiary. Thus, if the settlor creates the settlement unilaterally, he also makes the rules about busting it unilaterally.

Completely separate geeky point: I have slipped into using the word "settlement" because you started it )). I should really have stuck to "trust". I forget the law on this because it is very subtle but I think settlements are a subset of trusts and a settlement requires bounty (ie a bountiful act or intent by the settlor), whereas a trust doesn't. Something like that anyway! It can be important in UK tax law because there are taxes that apply to settlements but not to all trusts. I'm sketchy on this though and mention it just as an anorak curiosity

 

[DAKA]

Now what if the business account is overdrawn £1000 and say £300 of client money is swept to reduce the overdraft down to £700? One might read BA Peters briefly and thing this money has "disappeared" to use the words of the High court judge. But it hasn't, and the Peters judgement didn't say it did. It ONLY disappears if it was never ever paid into the trust account to begin with. I therefore disagree the bit of your post that I've quoted above (though admittedly on a very fine technicality and I'm not picking a fight!). So, in my 300-700 example here, there is a perfectly good argument, though you wouldn't stick your head into the jaw of this lion without good reason, that the bank has an equitable (and legal, if it connived in the sweeping which it would be doing in all of Daka's examples) debt obligation of £300 to the trust and has a £1000 claim on the broker, and as merely a business practice it has organised its computer to pay nil interest to the trust and charge the broker interest on only £700. NOTHING in the Peters case says otherwise

This post is not intended as an argument in any way. Earlier in the thread I said I would look for link to case history , I have now found it, it may or may not be of interest to you.

james roscoe (bolton) Ltd v winder http://en.wikipedia.org/wiki/James_Roscoe_(Bolton)_Ltd_v_Winder

It was always that bit that caused me so much confusion in the past, I think Tranona once posted a link to the summing up of the original trial. In the 'issues' section I believe there was mention to the above case history.

Bearing in mind it was established that borrowing from the clients account had stopped some months prior to Peters going bust the case history had no relevance in the Peters case (agreeing with you).
I am left wondering why the judge appears to have felt the need to mention the past deed and specifically quote the roscoe v winder case .
I took his mention as a warning that if the clients account (£850k ish) had continued to be swept to the overdrawn current account (-£5.5m ish) then the clients account would be close to worthless.

I think from your posts on this thread you are saying that the bank could actually have been responsible for the shortfall so the clients trust remains safe (which makes my concern irrelevant).

It was this passage which caused my previous concern ........

the claim to beneficial ownership of money in a bank account
requires the continued existence of the money either as a separate fund,
or as part of a mixed fund, or as latent in property acquired by means of
such a fund. Where money is paid into a bank account, which then
becomes overdrawn, the fund ceases to exist. Equitable tracing therefore
cannot be pursued through an overdrawn account, and the beneficiary
cannot claim a proprietary interest in other assets belonging to the trustee
in priority to other unsecured creditors on the ground that his assets had
been misappropriated in breach of trust: see Bishopgate Investment
Limited -v- Homan [1995] Ch.211 per Dillon L.J. 216d-f and 218e – 220-h
4. tracing is only possible to the extent that the balance ultimately standing
to the credit of the trustee in the bank account does not exceed the
lowest balance of the account during the period since the money was paid
into the account: James Roscoe (Bolton) Limited -v- Winder [1915] 1



NB, I have no way of being able to verify if the above passage is a direct quote from the original Judges summing up, it is a direct copy past from a link that Tranona sent to me to read several years ago, the link no longer works, I had thought it was the juidges summary but it shouldnt be taken as such.



Please note this is not tendered as an argument, it's an explanation to you, Tranona , Observer and the rest of the forum why I sounded the alarm .



I accept your explanations however I do still wonder how many forum members would have been happy to trust their boat with BA peters had they known what was going on .

 

[jfm]

Daka, thanks. This is very complex stuff. I've made a few replies below. Sorry for the legal jargon, and anyone reading this please feel free to tune into a different channel:

1. You gotta remember that judges, especially ones this good, speak with incredible precision. You mustn't take what they say to mean anything else, or to apply to similar-but-different circumstances, in the same way you might do with something someone says in a pub. The passage you quote is very specifically about proprietary claims, claims of benefical ownership, and tracing, which are matters of property law and equity. IF money has disappeared and cannot be "traced" so no proprietary claim can be made in relation to it, that does not mean OTHER types of claim cannot be made - for example, a claim for proprietary ownership of something other than money, or some other form of claim. The law allows you to attack a single problem from many differ angles

2. In my 700-300 example, depending on the terms, there might be two separate balances that the bank has netted off thus leaving the 300 fund intact. But let's assume we have not got that lucky. It still remains the case that (a) the fund is re-created the next day when the 300 is credited back, and therefore the point made earlier that you cannot put something back is just not correct, and (b) if the bank connived (which in all the examples you gave it did) then the trust has a claim against the bank for 300. It may not be a proprietary claim or a claim in equity, and might for example be a simple claim in tort, but unless the bank is bankrupt that distinction is neither here nor there. So the trust would get its 300 back if the broker went bust. I did say at the beginning that I wouldn't choose to put my head into these particular lion's jaws, however.

3. One could debate (but it wasn't necessary in this case) the judge's use of the concept "money". When you have money in the bank what you actually own is a debt claim against the bank, and the bank has a debt liability owed to you. Money is merely a unit of measure, just like mm is a measure of length. The thing you own is the debt claim, and if you use a ruler to measure it (showing £ not mm) you can say it is "£300". Remember, btw, the total amount of money (as distinct from wealth) in the world is ALWAYS zero.

4. Roscoe v Winder was 1915 when accounts were literally quill pen and very simple. These computerised days we have multiple accounts with netting and offset provisions agreed with the bank. Thus, the scenario in the first sentence of #2 above will often exist, yet Roscoe is written in a world when it didn't. So you need to be careful extrapolating these judgements because there is much devil in detail. None of this was argued out in Peters because it didn't need to be

5. The para you've quoted is very complex. It contradicts itself doesn't it? It says in the first sentence that a proprietary claim can be brought if you can find property in which the "lost" fund is latent, yet in the last sentence it doesn't allow for that. Actually the first sentence is dealing with a proprietary claim, and the last is dealing with the rules of tracing so they're on slightly separate points but I don't think that justifies the judge's inconsistency. All this proves is that this is a complex topic!

I still say put the boat into trust not the money. It is obviously much harder for a dishonest person to get away with stealing a physical boat with a GPS tracker than stealing money in a bank account he has the online password to

 

[Aardee]

Just a quick note to Observer, jfm and indirectly DAKA - Thank you, I've no legal background at all but have really learned (and above all enjoyed learning) from your input to this thread!!