#5290 - Creation Of Title - Personal Property Law

Creation of Title

Substitution of Assets

The principles of substitution form the foundation for understanding how proprietary rights are created in mixtures of money and the proprietary consequences of defective payments of money through a dematerialised payment system.

Substitution itself is simply where property is exchanged for new property and the question connected to this is whether such an exchange gives rise to a right in the new asset.

Common law unauthorised substitution is where a defendant steals the original asset from its legal and beneficial owner, and transfers it to a third party in exchange for the substituted asset.

Equitable unauthorised substitution is where the defendant, in breach of trust, misapplies an original asset to which the claimant has an equitable title. The defendant then transfers the legal interest in the original asset to a third party in exchange for the substituted asset.

There is a difference between pure substitution and the tracing of value through a transaction. In substitution the value of the original asset survives in the substituted asset, but when tracing through a transaction the value in the new asset is simply attributable to the value in the original asset (Foskett v. McKeown)

There is a fundamental difference between an authorised and an unauthorised exchange:

In Common Law

An unauthorised exchange will concern a situation with a principal and an agent. If the agent is authorised to sell then the principle has no proprietary right to the proceeds of sale, merely a personal obligation to account for those proceeds. In an unauthorised exchange the agent does not have that authority and so the exchange can give rise to a proprietary claim for the principal.

At Equity

Equity is concerned with whether the third party acquires an interest which overreaches that of the claimant.

An authorised sale of trust assets will clear all existing equitable interests and the buyer will obtain property clean of all equitable interests. The third party will benefit from overreaching. This means an authorised disposition is like an unauthorised substitution, it can give rise to a proprietary claim against the proceeds.

An unauthorised sale of trust assets will not be subject to overreaching and so the third party will not acquire the property free of pre-existing equitable interests. The consequence of this is that, because there is no overreaching, the claimant may assert their priority to the property and reclaim the original trust asset or assert rights over the new assets. There is a choice.

In an authorised transaction the beneficiary will maintain full rights over the proceeds. In an unauthorised transaction then the beneficiary only has the right to pursue a lien over the proceeds. This does not give the same kind of vested right as would exist if it had been authorised.

Common law claims to substituted assets from an unauthorised exchange

Lipkin Gorman v. Karpnale

A partner in a solicitor firm withdrew client money in breach of fiduciary duty and spent it on gambling. The firm wanted to sue for money received and make the gambling club repay the funds.

The partner had signing authority to make withdrawals from the bank. But no authority to use the money for gambling.

When the partner withdrew the money then legal ownership passed to him. This could mean that the firm had no basis upon which to sue. But if this is actually viewed as a substitution then the firm will be able to find title which still exists and which can for the basis of a claim against the gambling club.

The firm had a legal title attached to the purported owner, this provided legal title but not a right of ownership such that it could confer a right to possess.

Because gaming contracts were, at the time, automatically void, the gambling club could not have received the money as a bona fide purchaser for value and so the firm was able to recover the money.

There was a chose of action destroyed and a credit balance created. This was the substitution. The exchange was authorised from the bank’s perspective, but not from the firm’s perspective.

The title of the firm was sufficient to found a restitutionary action for money had and received against a third party recipient. But it would have been vulnerable to a bona fide purchaser for value. The gambling club was unlucky that it was a gambling club. If it had just been a shop then it would not have been liable.

The principle of substitution can also be applied to incorporeal money.

FC Jones v. Jones

Jones paid money to his wife, but the money was actually property of his trustee in bankruptcy. His wife invested the money and made a lot of profit, the proceeds of this went into her own bank account. The trustee in bankruptcy wanted to recover the funds from the wife.

Millett LJ said Mrs Jones had never had legal title, she merely had an entitlement to deal with the money. Consequently the TinB should acquire a direct right against the bank and could recover the funds.

Fox thinks that the analysis of Millett LJ is wrong. He believes that Mrs Jones must still have a primary right to sue on the debt as she was the person owed money by the bank. Because she could make a withdrawal, and by doing so enable the bank to make a valid discharge, Fox believes that Mrs Jones must have had the primary legal claim against the bank. The TinB then had a secondary legal claim against the primary legal claim of Mrs Jones. (Different analysis but same end result on the facts).

Equitable claims to substituted assets from an unauthorised exchange

A trustee, in breach of trust, disposes of trust assets. This is not a transaction subject to overreaching if it is unauthorised and if it is authorised then the claimant has an equitable right over the proceeds.

The claimant has a proportionate interest in the proceeds of an unauthorised disposition (Foskett v. McKeown)

The exchange was unauthorised as an appropriation of an original asset in Foskett v. McKeown.

The claimant’s right is a mere equity. This is relevant to the application of priority rules.

The best equitable interest will have priority, but if they all are the same then first in time shall apply (Cave v. Cave)

Proprietary effect of mixtures

Proprietary effect of mixtures at common law

Where the property of one innocent party is mixed with property of another innocent party then it is essential to work out the quantity of each party’s original contribution and how much of each party’s original contribution remains in the mixture at the end.

Once it is known how much each contributor has a right over then it is possible to try and identify the property each will take upon division of the mixture.

Instead of asserting rights over separate shares in the mixture it may be possible to view the contributors as owners in common.

Indian Oil

A ship transporting oil, during transit some of the oil is lost.

The defendant had no authority to mix the claimant’s oil with his own and so the wrongdoer would be deemed to have lost his own oil and the contribution of the innocent party is unaffected.

Spence

Where the loss from the mixture is not due to one party wronging the other then the two innocent parties will share the loss proportionate to their relative contributions.

This is how the courts deal with indistinguishable chattels. If they are distinguishable then it’s easy.

Special rules for mixtures of money in common law

Money cannot be traced at common law through a mixture.

The general principle, stated by Pollock and Wright, that possession is prima facie evidence of title and ownership works against the claimant in mixtures of money.

If a thief steals property and mixes it with his own then Pollock and Wright’s principle means that the thief will have good title against the world at large however this can be rebutted by the true owner asserting that they have the best title. This is not the case for money.

In respect of money, the true owner’s attempts to prove superior title at common law will fail in relation to money in a mixture. Once the money is in the mixture an entirely new property right is created for the wrongdoer at common law and this will be unchallengeable in common law.

Money can be followed at common law into and out of a bank account and into the hands of a subsequent transferee provided that it does not cease to be identifiable by being mixed with other money derived from some other source (Millett J in Agip (Africa) v. Jackson)

Fox says that it is possible that there would be a claim in conversion for the money, but there are no proprietary rights retained at common law.

Jackson v. Anderson

Claimant had a quantity of Spanish dollars to be transported back to London. These went into a big barrel with lots of other Spanish dollars and the barrel owner tried to claim ownership of the whole lot in London.

The defendant was liable in conversion for converting the claimant’s Spanish dollars.

This shows that the mere fact of mixture is not sufficient to extinguish the title of the original owner; title must have still existed after the mixture for a claim in conversion to be able to arise when the Spanish dollars arrived in London.

There is a general rule that one co-owner cannot sue another co-owner in conversion. The fact that the action in conversion only becomes available when money is withdrawn from the mixture indicates that until that point the original owner retains an interest and title to the money at common law. For so long as the mixture has nothing removed from it then Fox says that each owner retains...