Foskett v McKeown

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLORD BROWNE-WILKINSON,LORD STEYN,LORD HOFFMANN,LORD HOPE OF CRAIGHEAD,LORD MILLETT
Judgment Date24 May 2000
Judgment citation (vLex)[2000] UKHL J0518-1

[2000] UKHL J0518-1

HOUSE OF LORDS

Lord Browne-Wilkinson

Lord Steyn

Lord Hoffmann

Lord Hope of Craighead

Lord Millett

Foskett

(Suing on his own Behalf and on Behalf of all Other Purchasers of Plots of Land at Mount Eden, Herradodo Cerro Alto Diogo, Martins, Algarve, Portugal)

(Original Appellant and Cross-Respondent)
and
McKeown
(Original Respondent)

And Others (A.P.)

(Original Respondents and Cross-Appellants)
LORD BROWNE-WILKINSON

My Lords,

1

There are many cases in which the court has to decide which of two innocent parties is to suffer from the activities of a fraudster. This case, unusually, raises the converse question: which of two innocent parties is to benefit from the activities of the fraudster. In my judgment, in the context of this case the two types of case fall to be decided on exactly the same principles, viz. by determining who enjoys the ownership of the property in which the loss or the unexpected benefit is reflected.

2

On 6 November 1986, Mr. Murphy effected a whole-life policy ("the policy") with Barclays Life Assurance Co. Ltd. ("the insurers") in the sum of £1m. at an annual premium of £10,220. The policy (which was issued on 27 January 1987) provided that on the death of Mr. Murphy a specified death benefit became payable, such benefit being the greater of (1) the sum assured (£1m.) and (2) the aggregate value of units notionally allocated under the terms of the policy to the policy at their bid price on the day of the receipt by the Insurers of a written notice of death. The policy stated that "in consideration of the first premium already paid and of the further premiums payable and subject to the conditions of this policy the company will on the death of the life assured pay to the policy holder or his successors in title ("the policy holder") the benefits specified."

3

Although primarily a whole-life policy assuring the sum assured of £1m., the policy had an additional feature, viz. a notional investment content which served three purposes. First, it determined the surrender value of the policy. Second, it determined the alternative calculation of the death benefit if the value of the notionally allocated units exceeded the sum assured of £1m. Third, the investment element was used to pay for the cost of life cover after the payment of the second premium in November 1987. By condition 4 of the policy, units were notionally allocated to the policy upon receipt of the second and all subsequent premiums. By condition 6 of the policy, upon receipt of each premium resulting in the notional allocation of units under condition 4, the Insurers cancelled sufficient units to meet the cost of life cover for the next year. Condition 10 provided for conversion of the policy into a paid-up policy: units would thereafter continue to be cancelled under condition 6 so long as there were units available for that purpose. As soon as there were no units available, no death benefit or surrender value was to be available under the policy. Sir Richard Scott V.-C., [1998] Ch. 265, 275, summarised the position as follows:

"… if a premium is not paid, then (provided at least two years' premiums have been paid) the policy is converted into a paid-up policy and units that have been allocated to the policy are applied annually in meeting the cost of life insurance until all the allocated units have been used up. Only at that point will the policy lapse."

4

Five premiums were paid, in November 1986, 1987, 1988, 1989 and 1990. The 1986 and 1987 premiums were paid by Mr. Murphy out of his own resources. The 1989 and 1990 premiums were paid out of moneys misappropriated by Mr. Murphy from the plaintiffs. The source of the 1988 premium is disputed: unconditional leave to defend on issues relating to this premium has been granted.

5

The policy was directed to be held on trusts. On 15 March 1989 the policy was irrevocably appointed to be held in trust for Mr. Murphy absolutely. On 16 March 1989 he settled the policy on trust for his wife and his mother but subject to a power for him to appoint to members of a class which included his wife, his mother and his children but which excluded Mr. Murphy himself. By a deed of appointment dated 1 December 1989 Mr. Murphy appointed the policy and all moneys payable thereunder upon trust (in the events which happened) as to one-tenth for Mrs. Brigette Murphy and as to nine-tenths for his three children equally.

6

I turn then to consider the source of the moneys which constituted the fourth and fifth premiums. In 1988 Mr. Murphy, together with an associate of his, Mr. Deasy, acquired control of an English company which itself owned and controlled a Portuguese company. Those two companies between them marketed plots of land forming part of a site in the Algarve in Portugal to be developed and sold by them to purchasers. Each prospective purchaser entered into a contract with one of the companies for the purchase of his plot. The contract required each purchaser to pay the purchase price to Mr. Deasy, to be held by him upon the trusts of a trust deed ("the Purchasers trust deed") under which the purchasers' money was to be held in a separate bank account until either the plot of land was transferred to him or a period of two years had expired, whichever first happened. If after two years the plot had not been transferred to the purchaser the money was to be repaid with interest. Some 220 prospective purchasers entered into transactions to acquire plots on the building estate and paid some £2,645,000 to Mr. Deasy to be held by him on the terms of the purchasers trust deed. However, the land in Portugal was never developed. When the time came for the money to be refunded to the purchasers it was found that it had been dissipated and that £20,440 of those funds had been used to pay the fourth and fifth premiums due under the policy.

7

Mr. Murphy committed suicide on 9 March 1991. On 6 June 1991 the insurers paid £1,000,580-04 to the two surviving trustees of the policy. Mrs. Murphy has been paid her one-tenth share. The dispute, for the rest, lies between Mr. Murphy's three children (as beneficiaries under the policy trust) and the purchasers of the plots in Portugal, from whose money £20,440 has been applied in breach of the trusts of the purchasers trust deed in paying the fourth and fifth premiums. The purchasers allege that, at a minimum, 40 percent of the premiums on the policy have been paid out of their moneys and that having traced their moneys through the policy into the policy moneys, they are entitled to 40 percent of the policy moneys. On the other side, the children contend that the purchasers are not entitled to any interest at all or at most only to the return of the sum misappropriated to pay the premiums, viz. £20,440 plus interest. The Court of Appeal, by a majority (Sir Richard Scott V.-C. and Hobhouse L.J., Morritt L.J. dissenting) [1998] Ch. 265, held that the purchasers were entitled to be repaid the amount of the fourth and fifth premiums together with interest but were not entitled to a pro-rata share of the policy proceeds.

8

The purchasers appeal to your Lordships claiming that the policy moneys are held in trust for the children and themselves pro rata according to their respective contributions to the premiums paid out of the purchasers' moneys on the one hand and Mr. Murphy personally on the other, i.e. they claim that a minimum of 40 per cent. (being two out of the five premiums) is held in trust for the purchasers. The children, on the other hand, seek to uphold the decision of the majority of the Court of Appeal and, by cross-appeal, go further so as to claim that the purchasers are entitled to no rights in the policy moneys.

9

As to the cross-appeal, I have read in draft the speech of my noble and learned friend Lord Hope of Craighead. For the reasons which he gives I would dismiss the cross-appeal.

10

As to the appeal, at the conclusion of the hearing I considered that the majority of the Court of Appeal were correct and would have dismissed the appeal. However, having read the draft speech of Lord Millett I have changed my mind and for the reasons which he gives I would allow the appeal. But, as we are differing from the majority of the Court of Appeal I will say a word or two about the substance of the case and then deal with one minor matter on which I do not agree with my noble and learned friend Lord Millett.

11

The crucial factor in this case is to appreciate that the purchasers are claiming a proprietary interest in the policy moneys and that such proprietary interest is not dependent on any discretion vested in the court. Nor is the purchasers claim based on unjust enrichment. It is based on the assertion by the purchasers of their equitable proprietary interest in identified property.

12

The first step is to identify the interest of the purchasers: it is their absolute equitable interest in the moneys originally held by Mr. Deasly on the express trusts of the purchasers trust deed. This case does not involve any question of resulting or constructive trusts. The only trusts at issue are the express trusts of the purchasers trust deed. Under those express trusts the purchasers were entitled to equitable interests in the original moneys paid to Mr. Deasy by the purchasers. Like any other equitable proprietary interest, those equitable proprietary interests under the purchasers trust deed which originally existed in the moneys paid to Mr. Deasy now exist in any other property which, in law, now represents the original trust assets. Those equitable interests under the purchasers trust deed are also enforceable against whoever for the time being holds those assets other than someone who is a bona fide purchaser for value of the legal interest without notice or a person...

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