#6818 - In Re Montagu’s Settlement Trusts - Restitution of Unjust Enrichment BCL

In Re Montagu’s Settlement Trusts

Facts

Under cl 14(B) of a settlement made in 1923 the future tenth Duke of Manchester assigned to the trustees of the settlement all chattels to which he was entitled in remainder after the death of the ninth duke, who was then still alive, to hold upon trust after the death of the ninth duke and to select and make an inventory of such of the chattels as the trustees in their absolute discretion considered suitable for inclusion in the settlement as heirlooms and to hold the residue, if any, in trust for the tenth duke absolutely. The ninth duke died in 1947 and was succeeded by the tenth duke but no selection of heirlooms or inventory was ever made by the trustees. Although the tenth duke's solicitor was aware of the effect of cl 14(B) of the settlement, all the settled chattels were treated as being the absolute property of the tenth duke and were either released to him by the trustees or with the trustees' assent were taken by him or sold by him, the proceeds being kept by him. After the tenth duke's death in 1977 the eleventh duke brought an action against the executor of the tenth duke's will and the surviving trustees of the 1923 settlement alleging, inter alia, that the trustees had acted in breach of trust in failing to make any selection and inventory of heirlooms and in releasing all the chattels to the tenth duke and claiming that the tenth duke had become a constructive trustee of the settled chattels.

The scheme under the 1923 settlement was this:

The general scheme of these three paragraphs seems clear enough. First, under para (A) provision was made for wiping the slate clean as regards any missing chattels; and for this a determinate period was laid down, namely from 23 December 1923 until 9 February 1948, which was one year after the death of the ninth duke. Second, under paras (B) and (C) there was the trust for carrying out a selection and making an inventory or inventories of the chattels which were to be heirlooms, and for this no fixed period was prescribed. It was to be done ‘after the death of the present Duke’, though if and so far as it might be found ‘practicable and convenient’ it was to be done during the lifetime of that duke.

Interpretation of Clause 14B by the Court: From the wording of cl 14(B) I think it is clear that a fiduciary duty was imposed on the trustees: they were not merely given a power. Furthermore, that duty was first to make a selection of such of the chattels as they considered suitable for being included in the settlement, and second to make an inventory or inventories of those chattels. Only when this duty had been performed (or at least the selection had been made, even if no inventory of the 'selected chattels' was made) could it be said what chattels fell into the residue which would thereupon become Lord Mandeville's absolutely. In other words, there was no direct duty or power to select chattels which would be Lord Mandeville's, but only an indirect trust to do this by selecting the 'settled chattels' and thereby identifying all those which were not selected as being part of the residue which was to be held in trust for Lord Mandeville absolutely

No inventory was actually made, Duke treated all property as if it were his own: As the evidence stands, counsel for the defendant had to accept that this duty was never performed. There is nothing to show that any process of selecting heirlooms took place, or that any inventory was made. Instead, there was simply a process of treating all the chattels as being the absolute property of the tenth duke. Many were sold by him in 1949.

Issue

Whether the tenth duke received any or all of the settled chattels with sufficient knowledge that the trustees were in breach of duty in allowing him to treat them as his own absolute property so as to make him a constructive trustee of them

Holding

What was the level of Duke’s knowledge, on facts?

The starting point, I think, is that it is plain from the evidence that the tenth duke at all material times had full notice of the terms of the 1923 resettlement. He had a copy of it, and his solicitor, Mr Lickfold, as I have mentioned, showed in his correspondence that he knew the effect of cl 14. From this it follows that the tenth duke had notice, both actual and imputed, of the terms of cl 14(B). Plainly he knew that the agreement of the trustees was needed before any of the chattels would become his, but I am far from sure that he in fact appreciated just how the paragraph was to work, or that before any of the chattels were to become his absolute property the trustees were required to select the chattels which they considered suitable for inclusion in the 1923 resettlement, and make an inventory of them…. I need only say that the mere absence of any such inventory does not seem to me necessarily to establish, by itself, that the process laid down by cl 14(B) had not been carried out so as to make any chattels the tenth duke's absolute property, and so, if he knew that no such inventory had been made, that does not establish his knowledge that none of the chattels had ever properly been made his.

The tenth duke was not, of course, a lawyer himself, and it seems reasonable to infer, in the absence of evidence to the contrary, that on legal matters he simply accepted what the lawyers told him.

Based on a letter written by the Duke’s solicitor, the court concluded as follows: This letter seems to me to indicate clearly enough that Mr Lickfold, despite various other correct references to the terms of cl 14(B), had by this time become infected by the idea that the paragraph worked by giving the trustees a power simply to release chattels from the 1923 resettlement to the tenth duke, and that they then merely had to list those that were left…. the general attitude at the time seems to have been one of the trustees leaving it to the tenth duke to say what chattels he wanted, and then concurring, expressly or tacitly, with his taking or disposing of those that he had decided upon.

It seems to me (1) that the tenth duke, although he knew of cl 14(B) of the 1923 settlement, did not himself know that the release of the settled chattels to him amounted to a breach by the trustees of the terms of the paragraph, and (2) that his solicitor, Mr Lickfold, though knowing the terms of cl 14(B), had at least for the time being come to regard it as operating in an inverted form, so that all that was required was for the trustees to decide to release the chattels to the tenth duke, and that the trustees had done this. How this happened I cannot say on the evidence that has survived; but I cannot reach the conclusion that Mr Lickfold, Col Nicholl or the trustees were acting in conscious disregard of the terms of cl 14(B).

Plainly there was a muddle, but, however careless it was, I think that it was an honest muddle. Mr Green, who knew Mr Lickfold pretty well, said that he was quite sure that Mr Lickfold would not have let the tenth duke deal with any property unless he was quite satisfied that he was entitled to it… Further, I do not think that the duke was at any relevant time conscious of the fact that he was not entitled to receive the chattels and deal with them as beneficial owner

Distinction between tracing and constructive trust

That brings me to the essential question for decision. The core of the question (and I put it very broadly) is what suffices to constitute a recipient of trust property a constructive trustee of it. I can leave on one side the equitable doctrine of tracing: if the recipient of trust property still has the property or its traceable proceeds in his possession, he is liable to restore it unless he is a purchaser without notice. But liability as a constructive trustee is wider, and does not depend upon the recipient still having the property or its traceable proceeds. Does it suffice if the recipient had 'notice' that the property he was receiving was trust property, or must he have not merely notice of this, but knowledge, or 'cognisance', as it has been put?

What is the Legal standard for the requisite level of knowledge?

Distinguishing between notice and knowledge: It seems to me that one must be very careful about applying to constructive trusts...