The bona fide purchaser for value of a legal interest without notice PDF

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The bona fide purchaser for value of a legal interest without notice of a prior equityi

Views on the basis for the defence of the bona fide purchaser for value of a legal interest without notice. The defence of bona fide purchaser for value of a legal interest without notice of a prior equitable interest is a bar to any remedy being granted to the holder of an equitable interest (e.g. a beneficiary under a trust) against the property purchased in the hands of the purchaser. This fact gave rise to a shorthand description of such a purchaser as ‘equity’s darling’, as the courts of equity would not make any order against him. In the case of Pilcher v Rawlins (1871) L.R. 8 Ch. App. 259 the doctrine of the purchaser for value of a legal interest without notice received a classic exposition by James LJ. The bulk of the authorities on the defence are concerned with land. However, the defence applies more frequently on dealings with personalty, because constructive notice has a very weak application in such dealings. Whereas, for land there is a complex investigation of title, which involves both an investigation of documentary title and investigations on the site of the land, for personal property possession is usually considered sufficient evidence of title. Constructive notice1 is weak in its application to personalty because there is ordinarily no complex investigation of title of personal property, and has a powerful impact in its application to land because there is an established procedure for investigating title to land. However, the defence still requires that there be a purchase for value of a legal interest in personal property before it can be relied upon. Although the only type of notice that has traditionally been relevant for personalty has been actual notice the courts have never extended the defence to volunteers, or to those that purchase equitable interests for value. Finally, even for personal property ‘notice’ can mean notice of the facts that give rise to a trust, rather than express notice of a trust, see Quistclose Investments Ltd. v Rolls Razor Ltd [1968] 1 Ch. 540 (Court of Appeal), affirmed on the notice point by the House of Lords, [1970] A.C. 567 at 582.

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See Appendix

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Everyone except equity’s darling is affected by equitable interests. The category of ‘everyone except’ includes the following: Any volunteer, i.e. person who gives no consideration for receipt of the property, irrespective of notice. Any purchaser for value of an equitable interest, irrespective of notice. Anyone who comes to the property not by purchase, but by operation of law, e.g. by adverse possession or inheritance, irrespective of notice. Any purchaser for value with notice, of any type, i.e. actual, imputed, or constructive2. Thus, notice is only crucial for the imposition of a remedy against a bona fide purchaser for value of a legal interest. For non-purchasers, for purchasers that don’t give value, and for purchasers for value of equitable interests the absence of notice does not save them from liability to proprietary remedies against the property in their hands. For mala fide (bad faith) purchasers for value of a legal interest notice would usually be present as a part of the mala fides, however, it is conceivable that a purchaser could be mala fides despite a total lack of notice (if like the accountants in Agip (Africa) Ltd v Jackson [1990] Ch. 265; affirmed at [1992] 4 All ER 451, they think they are pursuing one improper end, but in fact are pursuing a different improper end, they may be mala fides without notice of the equitable interest they are actually violating)3. The recognition of equitable interests gives priority in bankruptcy because neither the trustee in bankruptcy, nor the creditors of the bankrupt, are purchasers for value of a legal estate of the property subject to the equitable interest. The general creditors of Rolls Razor Ltd. were in the same position, however, Barclays Bank Ltd. claimed to be a bona fide purchaser for value of a legal interest without notice of the equitable interest of Quistclose Investments Ltd. Hence the need for a discussion of notice in the Court of Appeal, which was affirmed in the House of Lords.4

The liability we are considering here is not personal liability. The remedy is against the property in the hands of the third party, either in its original form, or in the form of property it was exchanged for. Generally equity insists upon the conscience of a person (not being a trustee) being affected before it will impose a personal liability on that person. 2

See Appendix You will encounter this case when we look at Tracing and stranger liability. 4 Quistclose Investments Ltd. v Rolls Razor Ltd. [1968] 1 Ch. 540 (Court of Appeal); [1970] A.C. 567. 3

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The attenuation of notice in commercial dealings with personalty. The defence of the bona fide purchaser for value of a legal interest without notice was most fully developed in the context of dealings with land. The notice aspect of the doctrine was robust, encompassing not only actual notice, but imputed and constructive notice as well. Transactions involving land typically take place over weeks rather than hours, and there exists a well-developed system for the investigation of title. Both the paper title and the physical situation are the subject of investigations, and professional assistance is almost universally used. Since 1925 the role of the defence of the bona fide purchaser for value of a legal interest without notice has been severely limited in its application to land by the reforms of the 1925 property legislation. However, the defence still has a role to play, most importantly in connection with informal trusts of land. Our focus here is not upon land, but upon commercial dealings with personal property, and here the development of constructive notice has always been subject to strong constraint by the courts. We shall consider the use of the defence by banks. a. Purchaser for value? Payment into an overdrawn bank account. The position of a bank that receives money or cheques on behalf of a customer into an overdrawn account (i.e. an account that records a debt due to the bank) is analytically the same as the situation in Taylor v Blakelock (1886) 32 Ch. D. 560. The bank is considered to have given consideration by reducing the debt owed on the account. Therefore, whenever a bank receives money on account of an overdrawn account they will be purchasers for value of a legal interest. All that remains to be considered are bona fides and notice. b. Purchaser for value? Payment into an account in credit. Perhaps less obviously, a bank that receives money or cheques and credits them to an account that is in credit is also a purchaser for value. This is because the bank gives a promise to repay the sum credited to the customer upon demand, which promise in the context of a banker/customer relationship is valuable consideration (a debt, or chose in action). This proposition is supported by the following analysis by Harman LJ in Quistclose Investments Ltd. v Rolls Razor Ltd. [1968] 1 Ch. 540 at 555D: “The bank stands, however, in the position of an assignee for value, the consideration being the promise to repay; it is therefore, not bound by the trust unless it had notice of it, and that is the remaining question.” Therefore, whenever a bank receives money on account of account that is in credit they will be purchasers for value of a legal interest. All that remains to be considered are bona fides and notice.

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d. Notice of what? Where a bank does have actual notice of facts that indicate that a trust exists then they have notice of that trust. If we return to Quistclose Investments Ltd. v Rolls Razor Ltd. [1968] 1 Ch. 540 we find: “I would hold accordingly, that the bank accepted the money with knowledge of the facts which made it trust money not the free assets of Rolls Razor, and that therefore it cannot retain it against the plaintiffs’ claim.”5 “I consider that the right conclusion in the circumstances is that the bank was aware at the relevant time of the relevant nature of the arrangement between Rolls Razor and Quistclose. The fact that the bank purported to set off on the winding up only means that the bank erred in law in thinking that that arrangement did not make Rolls Razor a trustee.”6 The reasoning, and the decision, on notice in the Court of Appeal were approved by Lord Wilberforce in the House of Lords.7

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Harman LJ at 556C. Russell LJ at 563C. 7 [1970] A.C. 567, Lord Wilberforce at582B-G 6

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APPENDIX

Actual notice Actual notice includes knowledge of all those facts which together reveal the existence, and terms of any trusty (or other equitable interest), that exists in reference to property. Any fact actually known falls within the definition of ‘actual notice.

Constructive notice A purchaser is treated as knowing everything that he would have known if he had investigated the title of the seller as he should have. A purchaser must make all enquiries that that a prudent purchaser would make. In dealings with personalty the prudent purchaser can make very few enquiries, therefore constructive notice plays a minor role. Imputed notice If a purchaser relies on an agent to investigate title to property on his behalf then whatever that agent discovers, or should discover, is imputed to the purchaser.

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Adapted from notes by G Ferris...