DATE: 19981207
DOCKET: C23189
COURT OF APPEAL FOR ONTARIO
OSBORNE and LABROSSE JJ.A. and BLAIR J. (ad hoc)
BETWEEN: )
)
THE LAW SOCIETY OF UPPER ) Elizabeth K. Ackman
CANADA ) for the appellant
)
Applicant )
(Respondent) )
)
- and - )
) Nancy J. Spies and
THE TORONTO DOMINION BANK ) Robert MacKinnon
) for the respondent
Respondent )
(Appellant) )
) Heard: April 17, 1998
BLAIR J. (ad hoc):
PART I B BACKGROUND AND FACTS
[1] Between December 16, 1990 and September 24, 1991 Philip
Upshall, a solicitor, misappropriated over $900,000 from his
clients' trust account at the TD Bank. This appeal involves the
claims of competing beneficiaries to the shortfall of funds
remaining in that trust account when it was frozen on October 2,
1991, and the manner in which their respective shares are to be
determined. It raises issues concerning what is known as "the
rule in Clayton's Case" and a descendant concept called "the
lowest intermediate balance rule" (frequently referred to by the
acronym "LIBR").
[2] The account was frozen after the Bank was advised that Mr.
Upshall had been hospitalized in a psychiatric ward and that the
Law Society would be managing the operation of his trust account
from that point on. Mr. Upshall was subsequently found guilty of
misappropriating client monies by the Law Society of Upper
Canada, and disbarred. He made an assignment into bankruptcy on
December 21, 1993.
[3] As is customary in the case of lawyers' trust accounts, the
funds deposited for the account of Mr. Upshall's clients were co-
mingled. Clients' claims to the trust funds in the account as at
October 2, 1991 total $656,703.06, and there is a significant
shortfall in what remains for distribution to the claimants. The
evidence is that both the list of clients and the amounts
credited to each client as deposits are known and not in dispute.
[4] The last misappropriation from the trust fund occurred on
September 24, 1991. At the time, the balance in the account was
$66,242.68. On September 25th the TD Bank deposited the sum of
$173,000 into the trust account. It did so to enable Mr. Upshall
to advance mortgage funds to its client, Douglas Crump. Mr.
Upshall was acting as solicitor for the Bank and for Mr. Crump in
connection with this mortgage transaction. The funds were
deposited on condition that they be released by Mr. Upshall to
the borrower, or as the borrower may direct, once the solicitor
was satisfied that the the Bank would have a good and valid first
charge on title. The account was frozen before this transaction
was completed.
[5] On October 2nd B immediately following notification that Mr.
Upshall had been hospitalized and that the Law Society would
thereafter be managing the account B the Bank withdrew the
$173,000 from the trust account, without authorization, and
transferred it to another solicitor to complete the mortgage
transaction. On the Application by the Law Society before Mr.
Justice Farley the appropriateness of the Bank's conduct in doing
this was very much in issue (he held it was inappropriate).
Before this Court, the Bank took the position that the appeal
should be decided on the basis that the monies which had been
removed by it from the account were still in the account and
available for distribution. It is therefore unnecessary to deal
with the grounds of appeal initially raised which relate to the
issue of the Bank's removal of the funds from the trust account.
[6] The question on this appeal is whether all clients of Mr.
Upshall with funds deposited in the trust account have a claim
against the whole of the funds standing to the credit of the
account as at the date of its being frozen (including the Bank's
deposit of $173,000 made after the misappropriations had ceased),
or whether the claims of those clients other than the Bank are
confined to a smaller sum no larger than the $66,242.68 balance
which existed at the time the last funds were wrongly removed.
The appellant Bank argues for the latter position, on the basis
of the lowest intermediate balance rule. The Law Society submits
that the appropriate approach is that of a pro rata distribution
based upon the entirety of the fund as at the date the account
was frozen.
[7] Farley J. held that the lowest intermediate balance rule did
not apply in the circumstances of this case, and ordered that the
co-mingled funds should be distributed on a pro rata basis. In
summary, his reasoning was:
a) that once trust funds are co-mingled in an account they
lose their "earmarked" identity to particular clients
and become a single mixed trust fund;
b) that each client B although possessed of an individual
trust claim against the trustee for the funds advanced
to the trustee B then has an equal claim against the
mixed account;
c) that the timing of the misappropriations is irrelevant
and the appropriate point in time for determining the
claimants' entitlement is the date on which the trust
account was frozen (or more technically, perhaps, the
time when the last injection of funds was made),
because it is the money in the mixed trust account
which has been stolen and not that of any particular
client B "the mixed trust account cannot be segregated
into a 'tainted' pot (of X$) and an 'untainted' pot (of
$173,000)"; and,
d) that a trust account which involves co-mingled funds
should be distributed on a pro rata basis in
circumstances where the account is in a shortfall
position and the clients, along with the deposits
attributable to them are known: see, Re Ontario
Securities Commission and Greymac Corp. (1985), 51 O.R.
(2d) 212 (H.C.J.); affirmed (1986), 55 O.R. (2d) 673
(C.A.); affirmed (1988), 65 O.R. (2d) 479 (S.C.C.), and
cases following that decision.
[8] I agree with the conclusion of Farley J., for the reasons
which follow.
PART II B LAW AND ANALYSIS
A. A CONSIDERATION OF "THE RULE IN CLAYTON'S CASE" AND THE
"THE LOWEST INTERMEDIATE BALANCE RULE".
Overview
[9] The Bank's attempt to invoke the lowest intermediate balance
rule in the circumstances of this case amounts to nothing more,
in my opinion, than an attempt to re-invoke the rule in Clayton's
Case, which was rejected by this Court and by the Supreme Court
of Canada in Re Ontario Securities Commission and Greymac Credit
Corporation, supra. The effect of applying the "lowest
intermediate balance rule" to the competing claims of the trust
fund beneficiaries is to permit the Bank B the last contributor B
to recover what for practical purposes is all of its deposit1,
exactly the result which would transpire upon the application of
the rule in Clayton's Case. I do not think that result is called
for in the circumstances of this case.
The Rule in Clayton's Case
[10] What is known as the rule in Clayton's Case derives from the
decision of the English Court of Appeal in Devaynes v. Noble,
Baring v. Noble; Clayton's Case (1816), 1 Mer. 572, 35 E.R. 781.
The so-called rule B which is really a statement of evidentiary
principle B presumes that in the state of accounts as between a
bank and its customer the sums first paid in are the sums first
drawn out, absent evidence of an agreement or any presumed intent
to the contrary: see Clayton's Case, per Sir William Grant, at
pp. 608 - 609, Mer. As Morden J.A. remarked in Greymac, (p. 677)
"the short form statement of the rule ... is 'first in, first
out' ". In the result, where there are competing claims against a
shortfall, the shortfall is applied first to the first deposits
made, and later contributors to the fund take the benefit of what
remains.
[11] The role of the rule in Clayton's Case in competing
beneficiary cases, and its history, were examined thoroughly by
this Court in Greymac. The application of the rule was rejected
as being "unfair and arbitrary" and "based on a fiction" (p.
686). The Court concluded that it was not bound to apply the rule
in Clayton's Case, and it did not do so. Nor, for that matter,
did it apply the lowest intermediate balance rule.
[12] Speaking for a unanimous Court in Greymac, Morden J.A.
resolved that as a general rule the mechanism of pro rata sharing
on the basis of tracing was the preferable approach to be
followed, although he left room for other possibilities such as
those circumstances where it is not practically possible to
determine what proportion the mixed funds bear to each other, or
where the claimants have either expressly or by implication
agreed among themselves to a distribution based otherwise than on
a pro rata division following equitable tracing of contributions
(pp. 685-90). Whatever approach was chosen, Morden J.A. was
concerned that it should be one which met the test of convenience
B or "workability", as he termed it (p. 688). The core of the
Court's conclusions is to be found in the following passage from
his judgment, at p. 685:
The foregoing indicates to me that the
fundamental question is not whether the rule
in Clayton's Case can properly be used for
tracing purposes, as well as for loss
allocation, but, rather, whether the rule
should have any application at all to the
resolution of problems connected with
competing beneficial entitlements to a
mingled trust fund where there have been
withdrawals from the fund. From the
perspective of basic concepts I do not think
that is should. The better approach is that
which recognizes the continuation, on a pro
rata basis, of the respective property
interests in the total amount of trust moneys
or property available. [Underlining and
underlining with italics added.]
[13] Having determined that the rule in Clayton's Case ought not
to be applied in cases involving the claims of competing trust
beneficiaries, Morden J.A. concluded in Greymac that pro rata
sharing based on the respective property interests of the
claimants in the total amount of trust money or property
available, should be applied. He accepted such pro rata sharing
as the general method of determining such competing claims.
Whether, as some have suggested2, he also recognized and
incorporated into the pro rata sharing exercise the concept of
the lowest intermediate balance rule, and if so to what extent,
is an issue that will be dealt with momentarily. First, however,
I propose to turn to an analysis of the history and application
of the LIBR notion.
The Lowest Intermediate Balance Rule: An Outline
[14] The "lowest intermediate balance rule" states that a
claimant to a mixed fund cannot assert a proprietary interest in
that fund in excess of the smallest balance in the fund during
the interval between the original contribution and the time when
a claim with respect to that contribution is being made against
the fund: see Maddaugh and McCamus, The Law of Restitution, at
pp. 153 -154.
[15] The LIBR concept is a descendant of the rule in Clayton's
Case. It was originally articulated by Sargant J. in James Roscoe
(Bolton), Limited v. Winder [1915] 1 Ch. 62. In that case the
purchaser of a business, Mr. Winder, who had contracted to
collect the outstanding book debts of the business and to pay
them to the company, did the former but not the latter. Over time
he collected ,455 and deposited the funds into his own general
account, but he subsequently drew out all but ,25, before
eventually putting in more monies of his own and, again, drawing
on the account for his own purposes. There was a credit balance
in the account of ,358 at the time of his death. The Court held
that he was a trustee of the ,455 for the benefit of the company,
but that the company's claim against the fund was limited to the
lowest intermediate balance in the account of ,25.
[16] Sargant J. erected the LIBR foundation upon two principle
footings. The first of these was the premise that the rules of
proprietary tracing preclude a beneficiary, after a
mixed fund has been depleted, from reaching any subsequent
contributions made by others to that fund (in the absence of some
actual or presumed intention to replenish the fund). The second
was a rejection of the notion that the account may be treated as
a whole and the balance from time to time standing to the credit
of that account viewed as being subject to one continual charge
or trust. In outlining the rationale for his conclusion, Sargant
J. said (at pp. 68-69):
[Counsel] did say "No. I am only asking you
to treat the account as a whole, and to
consider the balance from time to time
standing to the credit of that account as
subject to one continual charge or trust."
But I think that really is using words which
are not appropriate to the facts. You must,
for the purpose of tracing, which was the
process adopted in In re Hallett's Estate3,
put your finger on some definite fund which
either remains in its original state or can
be found in another shape. That is tracing,
and tracing, by the very facts of this case,
seems to be absolutely excluded except as to
the 25l 18s.
. . . .
Certainly, after having heard In re Hallett's
Estate stated over and over again, I should
have thought that the general view of that
decision was that it only applied to such an
amount of the balance ultimately standing to
the credit of the trustee as did not exceed
the lowest balance of the account during the
intervening period.
[17] The LIBR principle has never been analysed by Ontario or
other Canadian Courts. However, it has been applied several times
at the trial level B in bankruptcy situations B in this Province:
see, Re Thompson, ex parte Galloway (1930), 11 C.B.R. 263 (Ont.
S.C. in Bankruptcy); Re Wineberg (1969), 14 C.B.R. (N.S.) 182
(Ont. S.C. in Bankruptcy, Registrar); Re 389179 Ontario Ltd.
(1980), 113 D.L.R. (3d) 206 (Ont. S.C. in Bankruptcy, Saunders
J). Its existence has been accepted (with very little comment) on
two occasions in this Court in decisions preceding Greymac: see,
Re Norman Estate [1951] OR. 752 (C.A.); and, General Motors
Acceptance Corp. of Canada Ltd. v. Bank of Nova Scotia (1986), 55
O.R. (2d) 438 (C.A.), at p. 443;. The LIBR concept has also been
accepted by the British Columbia Court of Appeal in British
Columbia v. National Bank of Canada et al., (1994), 119 D.L.R.
(4th) 669, at pp. 687-689; leave to appeal to S.C.C. refused,
September 28, 1995, and by the British Columbia Supreme Court in
Re 1653 Investments Ltd (1981), 129 D.L.R. (3d) 582, at p. 597,
sub nom. Coopers & Lybrand v. The Queen in right of Canada.
[18] No Canadian authority has attempted to describe how the LIBR
principle is to be employed. Nonetheless, from a review of the
foregoing authorities, I take the rationale underlying the LIBR
theory in relation to co-mingled trust funds to encompass at
least the following concepts:
1. that beneficiaries are entitled, through the equitable
and proprietary notion of tracing, to follow their
contribution into the mixed fund;
2. that beneficiaries of a such a fund have a lien or
charge over the totality of the trust fund to the
extent of their interest in it;
3. but that once a wrongful withdrawal has been made from
the fund, the claims of beneficiaries with monies in
the fund at the time of the withdrawal are thereafter
limited to the reduced balance, and that depositors to
the trust fund are not entitled to claim further
against any subsequent amounts contributed to the fund
either by the trustee (unless made with the intent to
replenish the withdrawn amount) or other by other
beneficiaries; and,
4. that this inability to claim against anything in excess
of the smallest balance in the fund during the interval
between the original contribution and the time of the
claim flows from the inability to claim a proprietary
right to subsequent amounts deposited, since it is not
possible to trace the original claimant's contribution
to property contributed by others.
[19] This latter concept is grounded, ultimately, on the premise
that tracing rights are predicated upon the model of property
rights. LIBR seeks to recognize that at some point in time,
because of earlier misappropriations, an earlier beneficiary's
money has unquestionably left the fund and therefore cannot
physically still be in the fund. Accordingly, it cannot be
"traced" to any subsequent versions of the fund that have been
swollen by the contributions of others, beyond the lowest
intermediate balance in the fund. Such is the theory, at any
rate.
The decision in Greymac and the Parameters and Practical
Application of LIBR
Greymac
[20] In Greymac this Court did not apply the lowest intermediate
balance rule. Indeed, it was not necessary for the Court to
consider LIBR. Once it had been decided that the claimants had a
right to trace their contributions to both the account into which
the deposits had originally been made and the second account at
Crown Trust into which the $4 million withdrawal had been placed,
there was only one balance to be concerned about. While Greymac
clearly rejects the rule in Clayton's Case as a means of
determining how the monies in a mixed trust account are to be
allocated in the event of a shortfall, and adopts the notion of
pro rata sharing based upon tracing as the general rule, it does
not apply the lowest intermediate balance rule in the context of
such pro rata sharing.
[21] The view that Morden J.A. affirmed the lowest intermediate
balance rule4 B or at least acknowledged it with approval5 B in
the Greymac case has its source in the following passage from his
reasons, at p. 688:
...We are concerned with the resolution of
competing proprietary, not personal, claims.
At the time of the mingling of the trust
funds the companies [i.e. one group of
claimants] had $4,683,000 in the account.
Regardless of how much they had earlier in
the account, they cannot say that they had a
proprietary interest in any more than the
amount in the account to their credit on and
after December 15, 1982: see James Roscoe
(Bolton), Ltd. v. Winder, [1915] 1 Ch. 62,
and Re Norman Estate, [1951] O.R. 752, [1952]
1 D.L.R. 174.
[22] It is important to note that Morden J.A. made these remarks
in the context of dealing with an argument that more monies than
those to the credit of the claimants at the time the fund had
become a mixed fund should have been taken into account if the
funds were to be divided on a pro rata basis. The date referred
to B December 15, 1982 B was the date on which the funds had
become a co-mingled trust account. I therefore regard the
foregoing comments of Morden J.A. as referring as much to timing
as to anything else. He was concerned with determining when the
parties respective proportionate interests should begin to be
assessed B i.e. to the timing as of when the pro rata
calculations should be triggered (namely when the fund first took
on its character as a "mixed fund"). I note in particular in this
regard, that in the passage for which the Roscoe case is cited as
authority, Morden J.A. states that the claimants "cannot say that
they had a proprietary interest in any more than the amount in
the account to their credit at the time the funds were
intermingled. This is the language of deposits made by the
claimants. It is not the language of the lowest balance in the
account, which is what LIBR deals with. I do not interpret Morden
J.A.'s comments as indicating an intention to adopt the concept
of LIBR for purposes of calculating pro rata sharing in Greymac.
Parameters and Practical Application of LIBR
[23] The British Columbia Law Reform Commission seemed to endorse
a LIBR approach in its Report on Competing Rights to Mingled
Property: Tracing and the Rule in Clayton's Case (1983). In a
rare attempt to define both the problem which LIBR seeks to
address and the mechanics of its proposed solution, the
Commission stated (see pp. 53-54):
Terms like "pari passu", "pro rata",
"rateably", and "proportionately" are
inherently ambiguous. Do they mean that
shortfalls or accretions to a fund are shared
in proportion to the original interests
claimants to that fund possessed? Or do they
mean that shortfalls or accretions to a fund
are shared in proportion to those interests
claimants to that fund possess after each
transaction made with respect to that fund is
taken into account? In the Working Paper we
tentatively concluded that the latter meaning
was fairest. [Underlining and italics added.]
For example, A, a trustee, deposits
$1,000 of B's money in his account, mixing it
with $1,000 of his own money. A removes
$1,500. A then deposits $1,000 of C's money.
B and C should not share the fund of $1,500
equally, notwithstanding that B's original
interest in the fund was $1,000 and that C's
current interest is $1,000. B's interest in
the fund has been reduced by $500. B's lien
should be reduced from securing $1,000 to now
securing $500, the minimum balance of the
fund following the deposit of his money and
prededing the deposit of C's money. C would
be entitled to a lien of $1,000. No
transactions have occurred yet to reduce his
interest in the fund. To avoid confusion,
legislation enacting these recom-mendations
should define exactly how "pari passu"
sharing takes place. One possible formulation
is as follows:
If there are two or more persons with
interests in a fund, the amount of any
shortfall from or accretion to the fund which
would have affected their respective
interests, and which is not appropriated to a
specific interest or interests, is divided
and attributed to their respective interests
in such proportion as their respective
interests bore to the sum of those interests
before the shortfall or accretion occurred.
[Italics in original text.]
[24] As far as I am aware, no such legislation has ever been
enacted. In my view, however, this approach is too complex and
impractical to be accepted as a general rule for dealing with
cases such as this.
[25] It was precisely for this reason that a version of LIBR B
referred to as the "rolling charge" or "North American" approach,
because it was considered to be derived from various North
American authorities, including Greymac B was rejected by the
English Court of Appeal in Barlow Clowes International Ltd. (in
liq) v. Vaughan [1992] 4 All E.R. 22. Barlow Clowes International
involved a very large and complex insolvency. Saying that the
North American approach was "not a live contender" because of the
costs involved and the complexity of its application, Lord
Justice Woolf instead adopted what he labelled "the pari passu ex
post facto" solution. This solution involved a simple rateable
sharing of the remaining funds based upon "establishing the total
quantum of the assets available and sharing them on a
proportionate basis among all the investors who could be said to
have contributed to the acquisition of those assets, ignoring the
dates on which they made their investments." (supra, p. 36). It
is a solution which, in my opinion, makes sense in most
situations.
[26] None of the authorities to which we have been referred has
applied LIBR in the context of a relationship between innocent
beneficiaries; and whether the same set of assumptions as those
governing LIBR and outlined in the earlier portions of these
reasons, should operate to resolve situations where the
competition is not between trust claimants and the wrongdoer, but
between the trust claimants themselves in relation to a shortfall
of funds in the trust account, is to my mind a different
question.
[27] In the latter type of situation, everyone is a victim of the
wrongdoer. Presumptions about what the wrongdoer may or may not
have intended B in terms of replenishing the fund with subsequent
contributions, or in terms of being honest and using his or her
own funds first B are of little assistance. Moreover, competing
trust claimants are not in the same position as ordinary
creditors of the wrongdoer. They are wronged trust beneficiaries,
and as a result of that relationship they are entitled not only
to a personal remedy for breach of trust against the wrongdoer,
but also to a proprietary remedy against the fund in respect of
which the trust relationship exists. It is always open to a trust
contributor to gain protection from having to share a shortfall
with others by insisting upon the funds being placed in a
separate trust account.
[28] In determining how a pro rata distribution is to be effected
in circumstances of co-mingled trust funds, the issue whether
this proprietary remedy must be inflexibly tied to a pre-existing
proprietary right B i.e., the purely logical application of
tracing rules B is an important question. In my view, in
circumstances such as this, they need not be inflexibly tied
together, and the concept of the mixed trust fund as a "whole
fund", the balance of which from time to time is subject to a
continual charge or trust -- rejected by Sargant J in James
Roscoe (Bolton) Limited v. Winder, supra B should be
reconsidered.
[29] Sargant J's rejection of the "whole-fund continual-charge-or-
trust" notion was founded upon an interpretation of the earlier
decision in Re Hallett's Estate, supra. To the extent that there
is any support for this view in that case, however, it is limited
to an obiter dicta comment made by Thesiger L.J. in dissent (see
pp. 745-746); and in my reading of Re Hallett's Estate I can find
nothing which otherwise suggests or mandates any such conclusion.
I shall return to this issue later.
B. A CHOICE OF GOVERNING PRINCIPLES
[30] Where, then, does all of this lead?
[31] In the end, there remain two general approaches which may be
taken to the resolution of how pro rata distributions are to be
made in circumstances such as this case -- the rule in Clayton's
Case having now been discarded for such purposes. The first is
that of applying the lowest intermediate balance rule. The second
is that of applying what Woolf L.J. called the "pari passu ex
post facto" approach, in Barlow Clowes International. There seems
to be no binding authority compelling the application of one
approach or the other to circumstances such as those in this
case. The Court should therefore seek to apply the method which
is the more just, convenient and equitable in the circumstances.
[32] No authority has ever applied the lowest intermediate
balance rule in circumstances involving the rival claims of trust
beneficiaries, as I have already noted. The mechanics of how the
lowest intermediate balance rule actually works have never been
fully explained. Indeed, even in situations concerning defaulting
trustees and beneficiaries, where the rule has been invoked, it
does not appear to have been implemented in any case involving
more than a small number of competing beneficiaries and a
correspondingly small number of transactions. This, I suspect, is
because although LIBR may be "manifestly fairer"6 in the pure
sense of a tracing analysis, it is manifestly more complicated
and more difficult to apply than other solutions.
[33] What LIBR involves B as best I can ascertain it from the
authorities and the literature bearing on the subject B is a
transaction by transaction examination of the mixed fund, in
terms of deposits made by the beneficiaries and withdrawals taken
by the wrongdoer, and the application of a proportionality
formula in respect of each such transaction. This approach has
not found favour in cases where the problem has been faced, and
acknowledged, directly: see, for example, Barlow Clowes
International; and Windsor v. Bajaj (1990), 1 O.R. (3d) 714 (Gen
Div).
The Governing Principle
[34] In my view, the method which should generally be followed in
cases of pro rata sharing as between beneficiaries is not the
LIBR approach but the pari passu ex post facto approach, which
has the advantage of relative simplicity. This approach involves
taking the claim or contribution of the individual beneficiary to
the mixed fund as a percentage of the total contributions of all
those with claims against the fund at the time of distribution,
and multiplying that factor against the total assets available
for distribution, in order to determine the claimant's pro rata
share of those remaining funds.
[35] This solution is the type of resolution which has been
adopted, on a practical basis, in most cases involving more than
two or three competing beneficiaries. It is the solution applied
by this Court in Greymac, and by the English Court of Appeal in
Barlow Clowes International. It is the solution applied in a
number of other recent decisions at the superior court level in
this Province involving mixed trust funds,7 and it is the
solution applied by Farley J. in the case under appeal. But it
is not LIBR.
[36] It is, however, the approach which I favour.
[37] My conclusion in this regard is based both upon the
"convenience" aspect (or the "workability" aspect, as Morden J.A.
characterized it in Greymac) pertaining to the
application of the LIBR principle, and upon my analysis of the
concept of a mixed trust account and of its nature and purpose.
The "Convenience" Rationale
[38] First, with regard to "convenience", I note the following
comment of Morden J.A. in Greymac, at pp. 688 - 689:
While acknowledging the basic truth of Lord
Atkin's observation that "[c]onvenience and
justice are often not on speaking terms"
(General Medical Council v. Spackman, [1943]
A.C. 627 at p. 638), I accept that
convenience, perhaps more accurately
workability, can be an important
consideration in the determination of legal
rules. A rule that is in accord with abstract
justice but which for one or more reasons, is
not capable of practical application, may
not, when larger considerations of judicial
administration are taken into account, be a
suitable rule to adopt.
[39] LIBR is difficult to apply in cases involving any
significant number of beneficiaries and transactions. Even in
this age of computer technology, I am not convinced that trustees
of mixed funds B who might be in a position of having to sort out
misappropriation transactions on such an account and the
distribution of what remains B should be assumed or required to
possess the software to enable a LIBR type of calculation to be
done in the myriad of situations that might arise. Indeed, there
is no evidence that such software programs exist, although it may
well be that they do B at what cost and difficulty we do not
know.
[40] In this case it is not practicable to conduct the LIBR
exercise. There are over 100 claimants. There were
misappropriations in the area of $900,000.00 in bits and pieces.
It is not even clear that each deposit and debit can be looked at
individually, on the state of the record, although the total
amounts deposited by each of the claimants are apparently known.
Notwithstanding this, if the LIBR principle is to be applied to a
pro rata distribution in the circumstances of this case, it would
be necessary to consider not only the deposits of each individual
claimant and the timing of such deposits, but also what was the
lowest balance in the Upshall account between each deposit and
the imposition of the freeze. This would involve analysing the
pattern and timing of each misappropriation and applying the
results to each individual depositor's circumstances. It is not
at all clear on the evidence that this exercise can be done.
The Rationale Based Upon the Nature and Purpose of a "Mixed"
Trust Fund
[41] On broader principles as well, in my opinion, the preferred
approach in cases involving competing beneficiaries is that of
pro rata sharing based upon the proportion of a claimant's
contributions to the total contributions of all claimants,
multiplied by the amount to be shared B i.e., the "pari passu ex
post facto" approach. This method spreads the misappropriations
rateably amongst the contributors who remain, but at the same
time does not arbitrarily affect earlier contributors adversely
by limiting their charge or constructive trust in relation to the
fund to the lowest balance in the account. It preserves what
Morden J.A. referred to in Greymac (at p. 684) as the
participant's claim to "an equitable lien . . . to secure the
amount of its total contribution", and it is consistent with his
statement (at p. 685) that,
The better approach is that which recognizes
the continuation, on a pro rata basis, of the
respective property interests in the total
amount of trust moneys or property available.
(Emphasis in both citations added.)
[42] In regard to this conclusion, it is useful to consider both
the practical considerations pertaining to a mixed trust fund and
the nature of such a fund itself.
[43] A mixed trust fund is a device whereby a trustee B
typically, but by no means exclusively, a lawyer B holds funds in
trust for different persons or entities. It is in many ways a
mechanism of convenience, i.e., it avoids the necessity, and the
cost, and the cumbersome administrative aspects of having to set
up individual trust accounts, and the records relating to such
accounts, for the transactions relating to every beneficiary.
This practical characteristic of mixed trust funds should be
recognized in considering the nature of such funds. It provides
an economic and organizational benefit to the public. As Farley
J. noted, in the context of this case, "Upshall was effectively
acting as a banker in a safekeeping capacity".
[44] What follows from this, it seems to me, is that a mixed fund
of this nature should be considered as a whole fund, at any given
point in time, and that the particular moment when a particular
beneficiary's contribution was made and the particular moment
when the defalcation occurred, should make no difference. The
happenstance of timing is irrelevant. The fund itself B although
an asset in the hands of the trustee to which the contributors
have recourse B is an indistinguishable blend of debits and
credits reflected in an account held by the trustee in a bank or
other financial institution. It is a blended fund. Once the
contribution is made and deposited it is no longer possible to
identify the claimant's funds, as the claimant's funds. All that
can be identified, in terms of an asset to which recourse may be
had, is the trust account itself, and its balance.
[45] The theme of a co-mingled trust account as a blended fund is
reflected in the reasons of Woolf L.J. and Dillon L.J. in Barlow
Clowes International (at pp. 27 and 35) and in those of Morden
J.A. in Greymac (at p. 6828). In Clayton's Case itself, Sir
William Grant, in introducing his "first in, first out" concept,
stated (at p. 608, Mer):
But this is the case of a banking account,
where all the sums paid in form one blended
fund, the parts of which have no longer any
distinct existence. Neither the banker nor
customer ever thinks of saying, this draft is
to be placed to the account of the ,500 paid
in on Monday, and this other to the account
of the ,500 paid in on Tuesday. There is a
fund of ,1000 to draw upon, and that is
enough. [Emphasis added.]
This notion of co-mingled sums as being "in form one blended
fund, the parts of which have no longer any distinct existence"
continues to describe correctly the nature of a mixed trust fund,
in my view.
[46] In contrast to the blended fund concept is that of the mixed
fund as an amalgam of the contributions which have been placed in
it, identifiable for some purposes. This approach is reflected in
such decisions as Re Diplock's Estate, [1948] 2 All E.R. 318
(C.A.). In that case, Lord Greene M.R. attributed to Equity the
adoption of "a more metaphysical approach" to the nature of a
mixed fund. "[Equity] found no difficulty, he said (at p. 346),
in regarding a composite fund as an amalgam
constituting the mixture of two or more funds
each of which could be regarded as having,
for certain purposes, a continued separate
existence. Putting it in another way, equity
regarded the amalgam as capable, in proper
circumstances, of being resolved into its
component parts.
[47] It is noteworthy that both the "fund as amalgam" and the
"fund as a blend" approaches enable equity to offer the remedy of
a charge, lien or constructive trust vis à vis the remaining
balance in the fund. The former has the affect, however, of
limiting the reach of these proprietary remedies. To my mind such
a restriction is not necessary. While "proprietary tracing" may
serve as the equitable vehicle which enables a claimant to have
recourse to a mixed trust fund in the first place, equity can
move beyond the strictures of that doctrine to provide a remedy
to the claimant once the connection to the fund has been made.
The nexus is to be found in the concept of the equitable charge,
lien or constructive trust. These concepts need not, in my view,
be confined to any part of the fund because, by their very
nature, they have always been applied against the whole of the
fund.
[48] This idea is well expressed in a critique of the analysis in
Re Diplock's Estate, in an article by Dennis R. Klinck entitled "
'Two Distincts, Divisions None': Tracing Money into (and out of)
Mixed Accounts " (1987 - 1988) 2 Banking & Finance Law Review
147. Having dealt with Lord Greene M.R.'s "amalgam" concept, the
author states, at p. 179:
The alternative conceptualization of
equitable tracing in this context is implied
in the notion of a charge on the mixed fund.
Rather than purporting to distinguish parts
of the funds and attribute them to particular
claimants, this approach sees the claimants
as having a proportional claim on the whole
fund. If the whole diminishes in extent or
value, the proportional claims remain the
same, albeit that what the claimants get will
be less because the fund is reduced.
Arguably, this does not, strictly speaking,
involve "tracing" because there is no
pretence that that fund is being divided and
a particular claimant's property identified.
[49] I accept, and adopt, the blended fund approach. At the end
of the day, when the trust account has been frozen and there is a
shortfall, that shortfall must be divided amongst the
beneficiaries who continue to have claims against the fund. I do
not think that an analysis which is based on the premise that
some beneficiaries' interests in the fund have been reduced by
earlier misappropriations and therefore that their respective
claims have been reduced accordingly, should be preferable to one
which simply says that each beneficiary has suffered a loss
relating to the same misappropriations from the same mixed fund
by the same wrongdoer, and accordingly their charge or
constructive trust should continue to apply against the whole
fund to the proportionate extent of their contributions i.e. the
shortfall should be divided in such proportions as their
respective interests bear to what is to be divided up at the
particular time.
[50] The fund is still the fund, and as Farley J. noted in this
case, it is not the Bank's money or the money of any particular
contributor that has been stolen; it is the fund which has been
wrongfully depleted. I agree with his comments in the following
passages from his first Reasons released on October 26, 1995, (at
pp. 3-4):
If the Bank had insisted upon a separate
trust bank account being set up, then it need
not be worried about the claims of other
clients. However all funds advanced by those
concerned were deposited by Upshall in a
mixed trust bank account at the Bank. As a
result each client (including the Bank) had a
claim concerning that mixed account. When the
Bank's funds went into that account they went
the same way as other fungible funds
attributable to the other clients. The funds
in that account were not individually ear-
marked dollar by dollar for any particular
client. Rather all clients as beneficiaries
would have a claim against all the funds . . .
And at pp. 5-6:
Let me observe that a bank account involves a
debtor (bank) - creditor (depositor)
relationship. . . . When funds are deposited
to a mixed trust account they lose their
earmarked identity. Thus each client through
the trust relationship with Upshall/Society
has a claim upon the loan granted to the Bank
through the operation of this mixed trust
account. . . . It is the money in the mixed
trust account which has been stolen; not that
of any particular client. (emphasis added)
PART III B CONCLUSION
[51] The significant problem with LIBR is that its application,
in a form true to its tracing origins and rationale, is too
complicated. It may be "manifestly fairer" than the rule in
Clayton's Case in the sense that it attributes debits from the
account equally and proportionately amongst the contributors.
"Fairness" may be relative, however. Is the rule necessarily
"fairer" when it limits contributors to the lowest intermediate
balance in the account between the times of contribution and
distribution? The rule in Clayton's Case works "unfairly" against
the first contributors to the fund, because it attributes the
first wrongful withdrawals to those contributions, eliminating
some claims but allowing others to be compensated in full. The
application of LIBR can have a similar effect, as the
circumstances of this case indicate, because its "last in, first
out" regime favours later contributors. At the same time, a pro
rata sharing based simply on the claimants' contributions
measured proportionately to the assets available for distribution
can work against late depositors, as the circumstances of this
case also illustrate.
[52] What is at play here, in reality, is a choice of fictions.
The rule in Clayton's Case and LIBR are both fictions. Any other
rationale which endeavours to establish a rule or principle on
which equity will divide a shortfall amongst those entitled to
claim against it is a fiction. Farley J. recognized the role of
fictions, or "artificial rules" when he said, in his second
Reasons, at pp. 6-7:
I do not see it as fair, equitable or
practicable in the circumstances (and more
especially since the Bank effected an
inappropriate and unauthorized self help
remedy to the detriment of the other
claimants) to invoke libr. It seems to me
somewhat artificial (recognizing that all the
rules involved in this area are artificial
rules which must be applied with caution so
as to maintain the closest approximation of
fairness, equity and reasonability, while
recognizing practicality) to invoke libr
which by its very nature "rewards" those
innocents who are later on the scene as
compared with those innocents who have been
taken advantage of earlier when it is fairly
clear that the wrongdoer would continue to
fleece all the innocents if given the chance.
Recovery should not be so dependent on a
fortuitous accident of timing.
[53] I agree. Earlier in these reasons I alluded to this Court's
rejection, in Greymac, of the rule in Clayton's Case as "unfair
and arbitrary" and "based on a fiction". In this latter regard,
Morden J.A. cited (supra, at p. 686) the following oft-quoted
passage from the decision of Learned Hand J. in Re Walter J.
Schmidt & Co. (1923), 298 Fed. 314, at p. 316:
The rule in Clayton's Case is to allocate the
payments upon an account. Some rule had to be
adopted, and though any presumption of intent
was a fiction, priority in time was the most
natural basis of allocation. It has no
relevancy whatever to a case like this. Here
two people are jointly interested in a fund
held for them by a common trustee. There is
no reason in law or justice why his
depredations upon the fund should not be
borne equally between them. To throw all the
loss upon one, through the mere chance of his
being earlier in time, is irrational and
arbitrary, and is equally a fiction as the
rule in Clayton's Case, supra. When the law
adopts a fiction, it is, or at least it
should be, for some purpose of justice. To
adopt it here is to apportion a common
misfortune through a test which has no
relation whatever to the justice of the case
... Such a result, I submit with the utmost
respect, can only come from a mechanical
adherence to a rule which has no intelligible
relation to the situation. [Emphasis added.]
[54] Such is the case here, in my view. To apply the LIBR
principle in the circumstances of this case would be "to throw
all the loss upon [some], through the mere chance of [their]
being earlier in time". It would be "irrational and arbitrary".
It would be "to apportion a common misfortune through a test
which has no relation whatever to the justice of the case". I do
not favour it.
[55] In Greymac, Morden J.A. observed that "if the application of
the pro rata approach is seen as an alteration in the rule to be
applied [i.e., the rule in Clayton's Case], it is one that
involves improvement and refinement". Here, I am satisfied that
the application of the mechanics of such a pro rata approach in
the form I have advocated B the "pari passu ex post facto
approach B as opposed to the application of the LIBR principle in
such circumstances, also involves what Jessel M.R. characterized
in Re Hallett's Estate, supra, at p. 720, as "the gradual
refinement of the doctrine of equity."
[56] For the foregoing reasons, I would dismiss the appeal with
costs.
Released: December 7, 1998
_______________________________
1 The Bank concedes that the amount of its deposit into
the trust account, $173,000.00, must be reduced by a small amount
of approximately $2,500.00 to accommodate some minor transactions
which occurred following its deposit and before the freezing of
the account. The application of LIBR would result in the Bank
retaining $170,448.45 of the $173,000.00 deposited.
2 See, Maddaugh, Peter D. and McCamus, John D., The Law
of Restitution, Canada Law Book, pp. 153-154; British Columbia v.
National Bank of Canada et al. (1994), 119 D.L.R. (4th) 669
(B.C.C.A.) at pp. 688-89.
3 (1880), 13 Ch. D. 696
4 See Maddaugh and McCamus, The Law of Restitution, supra
at pp. 153-154.
5 See British Columbia v. National Bank of Canada, supra
at pp. 688-689.
6 Per Woolf L.J. in Barlow Clowes International Ltd. at
p. 35. LIBR is said to be fairer because it approaches the
allocation problem from the perspective of the "proportions
[that] the different interests in the account . . . bear to each
other at the moment before the withdrawal is made" (p. 35).
7 See: Winsor v. Bajaji (1990), 1 O.R. (3d) 714 (Gen
Div.); Chering Metals Club Inc. (Trustee of) v. Non-Discretionary
Cash Account Trust Claimants (1991), 7 C.B.R. (3d) 105, at p. 111
(Austin J.); The Law Society of Upper Canada v. Paul Douglas
Squires (Ont. Gen. Div., unreported decision of Farley J.
released Oct. 17, 1994); The Law Society of Upper Canada v.
Estate of John Alexander Sproule (unreported decision of Pitt J.,
released April 7, 1995 (Ont. Gen Div.); Holden Financial Corp. v.
411454 Ontario Ltd. (unreported decision of Rosenberg J. released
August 28, 1992, at p.33); Ontario Securities Commission v.
Consortium Construction Inc. (unreported decision of Rosenberg J.
released June 21, 1993, at paras 76-77).
8 Citing from Scott, The Law of Trusts, Vo. 5, 3rd ed.
(1967), at pp. 3620 and 3624. |