UK: Trusts Case Note - Trust Money Misused By Bank

Last Updated: 22 November 1996
When the Bank of Credit and Commerce International SA (BCCI) in the Isle of Man closed its doors in 1991 it was acting as trustee for a timeshare scheme which was being set up by Parque Santiago owners.

The liquidator brought a petition before the Chancery Division of the Isle of Man Court to determine whether or not moneys paid in regard to the scheme formed part of the assets of the bank in liquidation or were to be regarded separately as trust assets.

The scheme was being set up by developers on behalf of persons who were already owners of apartments on Tenerife to safeguard the value of their properties which had been adversely affected by some previous owners having sold their apartments on a timeshare basis.
The essence of the scheme was that the owners should place their title deeds with the bank and pay an initial fee of œ2,000 to join the scheme. The bank in return gave an undertaking to those doing so ãto hold the initial fee in escrow until the agreement (between owner and developers) is countersigned ... at which time the initial fee shall be paid to the developer or the company to be formed ...à The account, called the Parque Santiago Owners Account, was asked to hold the fees and to place them in a high yield account on a weekly basis. The bank placed the money in an account with its own name ie ãBCCI re Parque Santiagoà. The bank used the deposited money for general business purposes but paid interest into the account. However the owners and developers never signed any agreement and the timeshare scheme was abandoned and the title deeds duly returned to the owners. Unfortunately œ70,000 remained with the bank. The owners sought the return of their funds on the grounds that the wording of the banks undertaking had created a trust in their favour with BCCI as trustee and the instructions to hold the money in a ãhigh yield account on a weekly basisà was given by the second owner-developer as a developer and not on behalf of the owners.

The case for the owners was that in the absence of express power in the trust instrument, or express instructions, the bank, as trustee, was in breach of trust in investing the funds with itself and using them for its own profit.

The matter came before Deemster Corrin on 1st June 1994. After considering the terms of the letter appointing BCCI, counsel for the liquidator asked the court for a ruling on whether the money formed part of the assets of BCCI, or otherwise that the account at the bank was in the nature of a partnership account between the developers and the owners.

The Deemster said that although it may well be the arrangement it might be construed as a partnership in the light of the written undertaking of BCCI and there was no doubt in his mind that money was held by the bank as trustees for the owners. He then had to decide what were the terms of the trust. There was a scarcity of express conditions. The undertaking created the trust and provided how the trust would be brought to a conclusion but did little else.

In the absence of such express terms the provisions of the Trustee Act 1961 applied. The bank, as trustee of the money, had to operate in accordance with the code of conduct specified by the Act, or only with the express consent of the owners or beneficiaries of the trust fund. As far as the latter is concerned the question of the investment of the trust money in a high yield account on a weekly basis (ie the opening of a deposit account at a licenced bank) does not appear to be an authorised trustee investment within the meaning of the Act. A trustee can place money in a National Savings Bank account, a trustee savings bank or a building society but he cannot leave the money in a bank account even if it earns interest. The letter to BCCI from one of the owners specified that the money should be held in a ãhigh yield account on a weekly basis for the time beingà and a later letter which requested BCCI to ãplease add this sum to the high yield deposit account on a weekly basis until further noticeà was bad news for the owners. However counsel for the owners suggested that this letter gave instructions not as an owner but as a developer of the timeshare scheme.

The instructions were not on behalf of the owners: in other words these were not express instructions to place them on such account.

Consequently BCCI was in breach of trust in placing the monies in a bank deposit account. The Deemster also found that this owner, as well as representing the interests of the developers, was in another sense at least acting as the agent for the owners to ensure that all the initial fees paid by the owners should be protected and not transferred until the individual agreements had been countersigned. He asked the owners to send cheques to him but he was acting only in this very limited sense. If, therefore, the placing of the œ72,000 in a high yield account was a breach of trust then the instructions given to BCCI as trustees of the money by the owner were given on behalf of the owners as beneficiaries of these moneys and that BCCI was accordingly not in breach of trust. But the matter went further than that.

Counsel for the owners put forward the view that what BCCI did was to receive the œ72,000 and place it in a high yield account in its own name with itself ie the money was placed on deposit in the name of the trustee BCCI with BCCI, which used the money for the general commercial purposes of the bankås business at a profit.

Counsel submitted that in the absence of an express power contained in the trust instrument or express instructions there is a breach of trust if a trustee invests the trust funds with himself. That was what BCCI did. This fell foul of a well known principle that the trustee is not to profit from his trust, as stated by Lord Herschell in Bray v Ford 1896 A.C. 51:

âIt is an inflexible rule of a court of equity that a person in a fiduciary position ... is not, unless other expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.å

Evidence showed that there had been considerable talk about remuneration. But that was in regard to the bankås position as trustee of the proposed timeshare scheme and not in its relation to its position as constructive trustee of the initial fees. It was obvious that BCCI had made a profit in using the œ72,000 for its own commercial purposes. This was acknowledged by the payment of interest into the account. A breach of trust can arise from the mere fact of profit having been made by the trustee without permission. The Deemster examined the legal principles of the Privy Council case of Space Invs. Ltd. v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd. 1986 3 All ER 75.where it was held that where a bank trustee is insolvent trust money wrongfully treated as being on deposit with the bank must be repaid in full out of the bankås assets in priority to other unsecured debts. Where, however, a bank trustee lawfully deposits trust money with itself as banker pursuant to express authority conferred by the trust instrument the beneficiaries are entitled to approve a winding up of the bank only of the amount outstanding to the credit of the bank and accordingly are unsecured creditors.

Lord Templeman in the Privy Council decision said that under these circumstances the beneficiaries have a chose in action, an action against the trustee bank for damages for breach of trust, and in addition they possess the equitable remedy of tracing the trust money to any property to which it has been converted directly or indirectly. However where the bank uses all deposit money for general purposes of the bank it is impossible for the beneficiarieså interest in the money which has been misappropriated from their trust to trace their money into any particular asset belonging to the trustee bank. But equity allows beneficiaries or a new trustee appointed in place of the insolvent bank to protect the interest of beneficiaries and to trace the trust money to all the assets of the bank. They may recover the trust money by the exercise of an equitable charge over all the assets of the bank and on insolvency this charge has priority over the claims of customers in respect of their deposits and over claims of all other unsecured creditors. The distinction is that the customer as an unsecured creditor is taken to have accepted the risk unlike the settlors and beneficiaries.

When a settlor places trust money with a bank he should be certain that the trustee will never make use of the funds for its own purposes. The principle expressed in re Hallets Estates also applied ãif a man mixes trust funds with his own, the whole will be treated as trust property. The trust property comes firstà.

In this case the bank had clearly been in breach of trust by making an unauthorised profits from its position and the owners were therefore entitled to trace the trust money to all the banks assets giving them priority over the claims of other customers and unsecured creditors.

In the matter of Bank of Credit and Commerce International S.A. 1993/95 MLR 272.

J G Goldsworth

The views expressed in this article are the personal views of the author concerned and should not be taken to be the views or opinion of any other person, firm or company whose name or work appears on this web site and should not without further professional advice form the basis on which any action is taken.

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