B e f o r e :
LORD JUSTICE GLIDEWELL
LORD JUSTICE SIMON BROWN
LORD JUSTICE PETER GIBSON
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HALIFAX BUILDING SOCIETY |
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THOMAS |
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Computer Aided Transcript of the Palantype notes of John Larking
Verbatim Reporters, Chancery House, Chancery Lane, London WC2
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MR. M. WATERS (Instructed by Dibb Lupton Broomhead, Leeds, LS1 5JX) appeared on behalf of the Applicant.
MR. G. ZELIN (Instructed by The Crown Prosecution Service, 50 Ludgate Hill, London, EC4M 7EX) appeared on behalf of the Respondent.
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HTML VERSION OF JUDGMENT
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Lord Justice Peter Gibson
This appeal gives rise to an interesting point of law. Where there has been a mortgage fraud, can the mortgagee, misled by fraudulent misrepresentations into making a mortgage advance, not only enforce its rights as a secured creditor to sell the mortgaged property and recover what it is owed but also, having recovered in full, take any surplus on the sale after the discharge of the mortgage? The Plaintiff mortgagee, the Halifax Building Society ("the Society"), argued before His Honour Judge Maddocks, sitting as a Judge of the High Court, that it can. The 2nd Defendant, the Crown Prosecution Service ("the CPS"), which obtained a confiscation order against the fraudster, the 1st Defendant, Mr. Thomas, argued that it cannot. The Judge agreed with the CPS. The Society now appeals.
The facts can be stated shortly. Mr. Thomas obtained a 100% mortgage advance from the Society to finance the purchase of a flat, 86 Lenton Manor, Nottingham. The purchase was completed on 17 February 1986 at a price of £23,950. To obtain that advance, Mr. Thomas made fraudulent misrepresentations to the Society as to his identity (he called himself George Robb, the name of an acquaintance) and as to his creditworthiness (he gave Mr. Robb's earnings as his own). In the course of 1986 Mr. Thomas made some payments of interest under the mortgage, but then defaulted. The Society commenced proceedings against him in his assumed name and on 2 September 1987 obtained an order for possession. On 18 November 1988 the Society learnt from the police the true identity of the mortgagor. Nevertheless it proceeded with the sale of the mortgaged property. On 6 March 1989 an offer to purchase the flat was made. That offer was accepted and on 12 April 1989 the Society as mortgagee sold the flat and recouped what was due to it under the mortgage. It placed the surplus, £10,504.90, into a suspense account.
On 31 May 1990 the Society commenced these proceedings, seeking a declaration that it was entitled to retain the surplus for its own use and benefit. In criminal proceedings against Mr. Thomas, he was charged with, and pleaded guilty to, conspiracy to obtain mortgage advances by deception from lending institutions, for which on 2 August 1991 he was sentenced at Nottingham Crown Court to 21 months' imprisonment. A confiscation order was made in respect of (inter alia) the suspense account and accrued interest, the moneys in the account, including interest, then being £12,101.11. On 15 October 1993 the CPS obtained from Auld J. a charging order nisi in respect of Mr. Thomas's interest in the sum of £12,101.11 and further interest held in the suspense account. The CPS was joined as the 2nd Defendant on the first day of the trial of the Society's action. Mr. Thomas took no part in the proceedings.
On 28 October 1993 the Judge dismissed the action. He said that the CPS stood in the shoes of Mr. Thomas and if Mr. Thomas could not have recovered the surplus from the Society, there was no beneficial interest of his to which the charging order could attach. He held that if the Society had a valid claim to take the surplus, it was not an objection to that claim that the Society had enforced its rights as mortgagee. The nub of his decision is contained in the following passage:
"Can I, nevertheless, discern an underlying principle which leads me to deny Mr. Thomas, and thereby the Crown Prosecution Service, his right to the surplus proceeds?
In my judgment, the law does not go so far. The Society here was induced by misrepresentation to make a loan. It was plainly entitled to recover the loan with interest and costs. If security had not been given, then it would no doubt have had a claim to treat as the security any property in the hands of Mr. Thomas which had been purchased or acquired with the loan money, and might have asserted a proprietary right to that extent. As it is, a valid legal charge was created, and that was not affected by the fraud.
It seems to me that it would be taking the principles of unjust enrichment and constructive trust too far, and beyond any authority, to say that the Society could additionally lay claim to a beneficial title, that is to say, to the equity of redemption. There must be some reasonable and sensible limit to the application of the principles. I have in mind that in many instances to strip a wrongdoer of his property will serve only to deprive other creditors, who, unlike the Society here, will not have been paid in full, of assets otherwise available to them".
Mr. Waters for the Society has argued on this appeal, as he did before the Judge, that the Society is entitled as against Mr. Thomas to retain the surplus for its own benefit on the principle of unjust enrichment. That principle was defined in the American Restatement of Restitution as being that "a person who has been unjustly enriched at the expense of another is required to make restitution to the other". An overview of the law in this area is to be found in the statement of Lord Goff in A.-G. v Guardian Newspapers Ltd. (No.2) [1990] 1 AC 109 at p.286:
"That there are groups of cases in which a man is not allowed to profit from his own wrong is certainly true. An important section of the law of restitution is concerned with cases in which a defendant is required to make restitution in respect of benefits acquired through his own wrongful act - notably cases of waiver of tort; of benefits acquired by certain criminal acts; of benefits acquired in breach of fiduciary relationship; and, of course, of benefits acquired in breach of confidence. The plaintiff's claim to restitution is usually enforced by an account of profits made by the defendant through his wrong at the plaintiff's expense."
Mr. Waters accepts, as he must, that the surplus does not represent property which the Society has lost. Accordingly it cannot rely on the principle of subtractive unjust enrichment, to use the language of Professor Birks Q.C. in his influential work, Introduction to the Law of Restitution (1989). Instead it relies on the broad principle of restitution for wrongs : Mr. Thomas has been enriched at the Society's expense in the sense that he has gained by committing a wrong against the Society. Thereby the Society seeks a remedy enabling it "to obtain restitution of a benefit gained by the tortfeasor from a tortious act in circumstances where he has suffered little or no loss" (Goff and Jones : The Law of Restitution 4th ed. (1993) p. 715).
Mr. Waters puts the Society's case in each of two ways : Mr. Thomas should be required to account to the Society on the basis of the application of the doctrine of waiver of tort, alternatively as the beneficiary of a constructive trust of the surplus, and that if entitled to retain the surplus for its own benefit as against Mr. Thomas, it need not pay it over to the CPS. He lays emphasis on the fact that the surplus represents a profit from a fraud. He submits that it would be offensive to basic concepts of justice if a fraudster were to be allowed to take that profit, and whilst he accepts that in the present case the confiscation order has avoided that offensive result, he submits that the respective entitlements of the Society and Mr. Thomas must be looked at in the first place without regard to the confiscation order.
I accept that the starting point must be Mr. Thomas's position before the confiscation order. Indeed the charging order only applied to Mr. Thomas's interest in the suspense account. Prima facie that is governed by s.105 Law of Property Act 1925, dealing with the application of the proceeds of sale following the exercise by a mortgagee of his power of sale:
"The money which is received by the mortgagee, arising from the sale, after discharge of prior incumbrances to which the sale is not made subject, if any, or after payment into court under this Act of a sum to meet and prior incumbrance, shall be held by him in trust to be applied by him, first, in payment of all costs, charges, and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and secondly in discharge of the mortgage money, interest and costs, and other money, if any, due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or otherwise to give receipts for the proceeds of the sale thereof."
Mr. Waters however submitted that s.105 does not establish Mr. Thomas's entitlement in the present case. He says that if the surplus is a sum for which Mr. Thomas was liable to account to the Society, it was money "due under the mortgage" and secured by the mortgage by reason of condition 23 of the Society's Mortgage Conditions. This provides :
"The mortgage shall be security not only for the moneys primarily provided for by it but also for all moneys which may be or become owing by the Borrower to the Society on any account and at the discretion of the Society no property held by the Society as security for indebtedness of the Borrower shall be released until all moneys owing by the Borrower to the Society have been paid."
Mr. Waters therefore contends that the charging order, which by s.79(3) Criminal Justice Act 1988 has the like effect as an equitable charge created by the person holding the beneficial interest, can have no effect because by s.105 the surplus, like the mortgage money, interest and costs, was payable to the Society.
Mr. Waters accepts that, in relation to his argument on waiver of tort, only if he is right in his submission based on condition 23 can he succeed in escaping the effect of s.105. In relation to his argument on constructive trust, he submits that the Society owned the equity of redemption by means of a constructive trust imposed by equity in its favour to prevent Mr. Thomas benefiting from his fraud.
Let me assume for the moment that the Society has a valid claim against Mr. Thomas for an account. Does that mean that the liability to account for the surplus comes within the words of condition 23? The point is a short one and largely a matter of first impression and that may explain why the Judge merely gave his conclusion and not his reasons for saying that the personal claim would fall within the Society's charge by virtue of condition 23. I am unable to agree. An "all accounts" provision is common form in mortgages where a borrower may have more than one account with a bank or building society. The relationship between the borrower and the bank or building society in respect of any such account is that of debtor and creditor and that is reflected in the words of condition 23, "moneys ... owing ... on any account". There is nothing in the mortgage that suggests that the parties ever contemplated that Mr. Thomas might incur some liability other than debt to the Society. If, for example, he caused damage to the property of the Society for which he was held liable in negligence, I would not regard any damages awarded against him as moneys owing on any account to the Society within the scope of condition 23. So also with any liability to account for the surplus. In my judgment on the sale of the mortgaged property by the Society in 1989 Mr. Thomas became entitled under s.105 to the surplus and the Society could not have claimed the surplus on the ground of a further liability to account being established against him in subsequent proceedings.
But in any event is the claim for an account in the circumstances of the present case a valid one? Mr. Waters frankly acknowledges that there is no English authority that goes so far. Indeed he accepts that there is no English authority to support the proposition that a wrongdoing defendant will be required to account for a profit which is not based on the use of the property of the wronged plaintiff. Cases where a fiduciary is required to account for a profit are plainly distinguishable from the facts of the present case. So too is the one authority cited by Mr. Waters of an action for an account which was not based on the use of the property of the plaintiff, the decision of the New York District Court, Federal Sugar Refining Co. v United States Sugar Equalization Board (1920) 268 F. 575. In that case a buyer contracted to purchase from the plaintiff, the defendant procured the buyer to break that contract and purchase from itself instead, and the plaintiff's claim to recover from the defendant the profit made on the sale was upheld on demurrer.
Mr. Waters' difficulty is that the Society's only interest was that of a secured creditor who has fully recovered all that it was entitled to recover under the mortgage. When it discovered the fraud, it could and did affirm the mortgage and proceed to enforce its rights as mortgagee. Mr. Zelin for the CPS pointed out that the Society could have sought foreclosure and by that route become the absolute owner of the mortgaged property. However it may be doubted whether that was a realistic possibility today, given the power of the court to order sale under s.91(2) Law of Property Act 1925 (and see the comments of Sir Donald Nicholls V.-C. in Palk v Mortgage Services Funding plc [1993] Ch.330 at p.336 on the rarity of foreclosure actions). Or it could have exercised a right inconsistent with the affirmation of the mortgage, that is to say, to seek the setting aside of the mortgage, obtained as it was by fraud. It might then have claimed in equity that it remained the owner of the moneys advanced and traced those moneys into the flat and the sale proceeds, or it might have made a common law claim for money had and received to the Society's use. Mr. Waters accepts that the mortgage was voidable by the fraud, not void, and, absent avoidance, it cannot assert a property right.
Mr. Waters submits that there were two further remedies available to the Society, neither of them inconsistent with the affirmation of the mortgage. One was to sue in tort, claiming damages for deceit. He points out that the tort was committed even though in the event by reason of the full recovery under the mortgage no loss was suffered. Had the recovery been less than full, the Society, he submits and Mr. Zelin concedes, could have sued in tort for the shortfall (though the more obvious course, one would have thought, would have been to sue on the covenant in the mortgage). The other, he says, was to waive the tort, in the sense that that term has been explained in United Australia Ltd. v Barclays Bank [1941] A.C.1 as meaning that the plaintiff chooses not to sue in tort for damages but sues instead in restitution for the recovery of the benefit taken by the wrongdoer. In the United Australia case the House of Lords did away with the fiction that the restitutionary claim was dependent on an implied promise by the wrongdoer. So, Mr. Waters says, there is no inconsistency between the affirmation of the mortgage and the recovery thereunder on the one hand and the restitutionary claim on the other, and there is no dispute but that deceit is a tort that is waivable.
Attractively though Mr. Waters has argued the point, I remain wholly unpersuaded that in the circumstances of the present case the law should accord a restitutionary remedy to a secured creditor who has elected not to avoid the mortgage but to affirm it and has received full satisfaction thereunder. To my mind there is an inconsistency between a person being such a creditor and yet claiming more than that to which he is contractually entitled and which he has already fully recovered. Once the creditor has so elected and recovered in full, I do not see why the law should come to his aid to allow him to make a further claim. In Re Simms [1934] Ch. 1 this court refused to allow a trustee in bankruptcy, who had elected to treat a receiver as a tortfeasor for converting to his own use the chattels of a bankrupt, to recover the profits made by the receiver as money had and received. The authority of that case is weakened by the reliance by this court on the now exploded implied promise theory, but I note that it is still cited in text books (see, for example, Chitty on Contracts 27th ed. (1994) 29-052) and it serves to illustrate that not every action for an account of profits from a wrongdoer, even where there has been use of the plaintiff's property, will be allowed, and that it may be barred when there has been an election for another remedy.
Further I am not satisfied that in the circumstances of the present case it would be right to treat the unjust enrichment of Mr. Thomas as having been gained "at the expense of" the Society, even allowing for the possibility of an extended meaning for those words to apply to cases of non-subtractive restitution for a wrong. There is no decided authority that comes anywhere near to covering the present circumstances. I do not overlook the fact that the policy of law is to view with disfavour a wrongdoer benefiting from his wrong, the more so when the wrong amounts to fraud, but it cannot be suggested that there is a universally applicable principle that in every case there will be restitution of benefit from a wrong. As Professor Birks says : "there are some circumstances in which enrichment by wrongdoing has to be given up. That is, the wrong itself is not always in itself a sufficient factor to call for restitution." (Birks, Introduction to the Law of Restitution p.24). On the facts of the present case, in my judgment, the fraud is not in itself a sufficient factor to allow the Society to require Mr. Thomas to account to it.
I would add that in so far as the Society relies on the submission that to allow a fraudster to take a profit derived from his fraud would be offensive to concepts of justice, the House of Lords in Tinsley v Milligan [1994] 1 AC 340, although divided in their decision, were unanimous in rejecting the "public conscience" test as determinative of the extent to which rights created by illegal transactions should be recognised. It is not appropriate to ask whether the allowance of a claim would be an affront to the public conscience. The correct test is whether a claimant to an interest in property must plead or rely on an illegality. If so, he will not be entitled to recover. That question does not arise in the present case where it is the Society which is claiming a declaration.
For these reasons I conclude that s.105 required the Society to hold the surplus in trust for Mr. Thomas, unless a constructive trust operated in its own favour. To that question I now turn.
Mr. Waters again relies on the fact that the surplus represents a profit derived from a fraud, which, he submits, justifies allowing the Society the benefits of a proprietary claim to the surplus. Again Mr. Waters is unable to cite any English authority that lends direct support to this claim. He referred us to the statement of Lord Westbury in McCormick v Grogan (1869) L.R. 4 H.L. 82 at p. 97:
"The jurisdiction which is invoked here by the Appellant is founded altogether on personal fraud. It is a jurisdiction by which a Court of Equity, proceeding on the ground of fraud, converts the party who has committed it into a trustee for the party who is injured by that fraud."
But that statement must be read in the context in which it was made, namely the jurisdiction where a secret trust is alleged. It cannot be elevated into a universal principle that wherever there is personal fraud, the fraudster will become a trustee for the party injured by the fraud.
Again in the present case there is the difficulty that the Society, having affirmed the mortgage, remained only a secured creditor. I cannot accept that the wrongdoing of the mortgagor can translate the mortgagee into the owner of the entire beneficial interest in the property when the mortgage has not been set aside. That appears to have been the view too of Hoffmann J. in another case of mortgage fraud, Chief Constable of Leicestershire v M [1989] 1 W.L.R. 20 where he said at p.21:
"None of the lenders have made any claim by way of constructive trust or otherwise to the profits made on the houses bought with their money. They have preferred to affirm the advances and enforce their rights under the mortgages."
In Lister & Co. v Stubbs (1890) 45 ChD 1 this court considered the case of a servant who received a bribe. Lindley L.J. at p.15 said that the relationship between the plaintiff employers and the defendant servant in respect of that bribe:
"is that of debtor and creditor; it is not that of trustee and cestui que trust. We are unable to hold that it is - which would involve consequences which, I confess, startle me."
That decision has been subjected to much criticism and was disapproved by the Privy Council in A.-G. for Hongkong v Reid [1994] 1 AC 324 on the basis that it was inconsistent with basic principles of equity affecting the conduct of a fiduciary. In Daly v Sydney Stock Exchange Ltd. (1986) 160 C.L.R. 371 at 379 Gibbs C.J. refused to accept that money lent by an investor to a firm in a fiduciary relationship with him should be treated as subject to a constructive trust. He said (at p.379) that the reasons of Lindley L.J. in the Lister case appeared to him to be "impeccable when applied to the case in which the person claiming the money has simply made an outright loan to the defendant." In the present case there was no fiduciary relationship between Mr. Thomas and the Society in respect of the mortgage but merely that of debtor and secured creditor.
English law has not followed other jurisdictions where the constructive trust has become a remedy for unjust enrichment. As is said in Snell's Equity 29th ed. (1990) at p.197:
"In England the constructive trust has in general remained essentially a substantive institution; ownership must not be confused with obligation, nor must the relationship of debtor and creditor be converted into one of trustee and cestui que trust."
In considering whether to extend the law of constructive trusts in order to prevent a fraudster benefiting from his wrong, it is also appropriate to bear in mind that Parliament has acted in recent years (notably in Part VI of the Criminal Justice Act 1988) on the footing that without statutory intervention the criminal might keep the benefit of his crime. Moreover Parliament has given the courts the power in specific circumstances to confiscate the benefit rather than reward the person against whom the crime has been committed. I bear in mind the wise comment of Hoffmann J. in the Chief Constable of Leicestershire case, supra, at p.23:
"The recent detailed interventions of Parliament in this field suggest that the courts should not indulge in parallel creativity by the extension of general common law principles."
Accordingly I would reject the argument based on constructive trust.
No other argument is put forward by the Society for defeating the title of Mr. Thomas to the surplus immediately before the confiscation and charging orders made by the CPS or for defeating those orders. For these reasons I would dismiss this appeal.
Lord Justice Simon Brown
I agree.
Lord Justice Glidewell
I have read in draft the judgment of Peter Gibson LJ. I agree entirely both with his reasoning and his conclusions.
The proposition that a wrongdoer should not be allowed to profit from his wrongs has an obvious attraction. The further proposition, that the victim or intended victim of the wrongdoing, who has in the event suffered no loss, is entitled to retain or recover the amount of the profit is less obviously persuasive. In order to succeed in this appeal, Mr Waters is required to establish that the second proposition is correct, and that English law provides a mechanism by which it can be given effect. Despite his able argument, I cannot discern that there is any such general established principle. Indeed, Mr Waters has to concede that there is no English authority upon which he can rely to establish his right to succeed either in the law of restitution, under the head of unjust enrichment, or in the law of constructive trusts. The sole American decision which appears to be directly in point, that of the New York District Court in Federal Sugar Refining Co v United States Sugar Equalisation Board (1970) 268 F 275 is not sufficiently persuasive to secure a visa for admission into English jurisprudence. Like Judge Maddocks, in the passage from his judgment quoted by Peter Gibson LJ, I cannot conclude that the principle for which Mr Waters contends is at present established as part of our law.
When Parliament enacted Part VI of the Criminal Justice Act l988, it provided, within closely defined limits, a mechanism by which the Crown Court may confiscate the gain which a criminal would otherwise derive from his crime. As it happens, the circumstances of Mr Thomas's offences came within the Crown Court's powers under the Act of l988, and a confiscation order was therefore made. In consequence, whatever the result of this appeal, Mr Thomas will not benefit from his wrongdoing.
The enactment of this legislation does not, of course, lead inevitably to the conclusion that neither common law nor equity provides a means by which Mr Thomas could be prevented from enjoying the profit of his crime. Nevertheless the readiness of Parliament to address the problem by legislation weakens the case for providing a solution by judicial creativity. In this I echo the words of Hoffmann J in Chief Constable v M (1989) 1 WLR 20.
I too would therefore dismiss this appeal.
Order: Appeal dismissed with costs.
