UK appeal court overturns payment bank 'trust' finding

The Court of Appeal overturned a High Court finding of breach of trust against First City Monument Bank Plc (FCMB), a Nigerian bank, ruling that various transfer instructions made by a customer did not create a trust in favour of Zumax, the Nigerian company for whose benefit those transfers were made. Zumax, or the customer, therefore did not have a proprietary claim against FCMB, and could only bring a breach of contract claim, it ruled.

Civil fraud and asset recovery expert Andrew Barns-Graham of Pinsent Masons, the law firm behind Out-Law.com, said that while the case did not create new law, the judgment provided a useful summary of the existing law on express and 'Quistclose' trusts and the circumstances in which they can arise in the context of a banker-customer relationship.

"The judgment makes clear that it will only be in exceptional cases that a banking customer can establish that a bank holds funds under an express trust or a Quistclose trust," he said.

"However, although this closes off one potential avenue - and rightly so given the huge repercussions for the banking sector had the first instance judgment been upheld - there are other grounds on which a claimant may be able to bring a proprietary claim against a bank. For example, a victim of fraud or bribery may still be able to trace the proceeds of the fraud or bribe into an asset of equivalent value held by a bank. It is also sometimes possible to trace monies paid to or via a bank by mistake, although the law on this issue is not certain," he said.

Zumax provided engineering and other services to oil companies, for which it invoiced in US dollars. The oil companies paid for the work into an account held by Redsear Ltd, a company incorporated in the Isle of Man which was a nominee of Zumax and which held the funds received by Zumax's customers on trust for Zumax. Money in the Redsear account was used to meet Zumax's US dollar business needs, with any surplus funds then transferred to Zumax in Nigeria.

Between 2000 and 2002, Redsear made a number of payments ultimately destined for Zumax into 'correspondent' accounts at Commerzbank held by IMB International Bank, which has since been absorbed into FCMB. A correspondent bank is one that provides services for another financial institution, something which is often required for the purposes of international money transfers. Redsear alleges that these funds were never transferred on to Zumax. It argued that, once the money was paid into Commerzbank accounts, FCMB held it on trust for Zumax which retained an equitable proprietary interest in the funds.

The High Court granted summary judgment in favour of Zumax on the grounds of breach of trust, after finding that FCMB had no real prospect of successfully defending the proceedings. The High Court judge ruled that the transactions created an 'express trust' benefitting Zumax, or failing that a 'Quistclose' trust. An express trust is one which meets the 'three certainties' case established by case law: certainty as to intention to create the trust; certainty as to subject matter; and certainty as to objects of the trust, or its beneficiaries. A 'Quistclose' trust, which takes its name from a 1970 banking case, can in certain circumstances arise where money or other property is transferred to someone else for a particular purpose.

FCMS appealed, arguing that no trust had been created. The Court of Appeal agreed. It referred back to previous case law and noted that a Quistclose trust did not, without more, arise "merely because money is paid for a particular purpose". Here, the payment instructions given to Commerzbank referred to an intention to "credit" the money to Zumax, without creating a trust. The funds were not "segregated in any meaningful way", as was typically the case in 'Quistclose' trust cases; and there was nothing in the context of the transactions that suggested there was to be a trust.

Lord Justice Newey, giving the judgment of the court, said that the transfers were made because Zumax banked with IMB, now FCMB. Case law has established that the basic banker-customer relationship is that of debtor and creditor, and not of trustee and beneficiary, he said.

"The principle that 'money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases' is both long-established and fundamental to how banking is carried on," the judge said. "Of course, it is possible for a banker to become a trustee for a customer, but that is very much the exception rather than the rule."

"In the present case, Zumax's submissions, if accepted, could confuse and complicate the operation of correspondent accounts. After all, were the transfers in dispute held on trust, would it not follow that payments into correspondent accounts must commonly be subject to trusts? … It seems to me that, having accepted the various transfers that had been made for the credit of one of its customers (viz. Zumax), IMB was obliged to credit Zumax with them ... I do not, however, consider that IMB became a trustee," he said.

Civil fraud expert Alan Sheeley of Pinsent Masons said: "despite 50 years of case law since the Quistclose case, applying the principles of a Quistclose trust is still not straightforward. This is a complicated area of law and in the event of a fraud victims really do need expert advice as soon as possible if they are to claim such a trust and ultimately be successful with such a claim. Therefore, it is of vital importance that victims liaise with expert civil fraud lawyers as soon as they identify an issue if they are to maximise their chances of recovering money.