Theft and the Civil Recovery of Funds paid under a Mistake

 

Consider whether a theft of funds has taken place in the following scenario:

Hackers using malware trigger an electronic transfer of million of dollars from a bank in New York to an account in the Philippines

Under English law on theft (Theft Act 1968 s4) property that is capable of being stolen for the purposes of theft include things in action, such as debts, bank accounts, credit balances, and other personal property.

On the facts, no actual notes or coins have been stolen from a bank in New York, neither has there been an appropriation of the funds in a bank account in NY, as it would be the case where a person presents a forged cheque to a bank , drawing funds from the victim’s account.( Note Chan Man-sin v AG for HK [1988] 1 AL ER 1PC).

The property that is appropriated for the purposes of theft in cases like Chan Man-sin is the victim’s right to draw from his own account (a chose in action).

The victim’s right to be paid the amount owed to him ( reflected by his credit balance with his bank) is a thing in action capable of being stolen by another. 

The facts in our question, however, indicate that a chose in action reflected by a bank customer’s credit balance was extinguished in NY bank, and a new chose in action was created in favor of the hacker in a bank in the Philippines.

Preddy [1996] UKHL 13 is a case in point. Here the victim was induced by a fraudster to carry out an electronic transfer of funds into his account. Prof. David Ormerod comments on the House of Lords analysis:

“As a matter of civil law the House of Lords held that the property which D had obtained is the new chose in action constituted by the debt now owed to him by his bank, and represented by the credit entry into his own bank account.

This item of property did not come into existence until the debt so created was owed to him by his bank , and therefore that new item of property never belonged to any one else.’ (Ormerod and Laird 2020, p. 375) 

Applying Preddy [1996] HL to the facts of our question, the crediting of the Hacker’s bank account in the Philippines with funds equivalent in amount to the millions of dollars that were debited from the New York bank account would not constitute theft of those funds. 

Rather, the credit balance in the Philippines account would be deemed a new chose in action, and not property belonging to another- the NY bank account holder;

the newly credited Philippines bank account would be a new intangible property right that the Fraudster hacker acquires as a creditor of his bank.  

A more appropriate Criminal charge that could possibly be brought against the hackers of the NY bank would be that of  Fraud by False Representation under the Fraud Act 2006 ; The elements of this offence include a false representation : s2(1) ( as to the fact that the hacker has the authorization to instruct the NY bank in respect of fund transfers)

This false representation has been made dishonestly by the hacker, submitted in any form designed to receive, convey or respond to communications with or without human intervention. Note s 2(5) Fraud Act 2006.

 

Consider an alternative situation in which;

D had her bank account mistakenly credited by her employer. D subsequently becomes aware of the mistaken overpayment but decides to retain those funds even though she did not withdraw them. 

Would D have committed theft of those funds? 

The relevant statutory provision in this case would be s5(4) of the Theft Act 1968, which provides:

where a person gets property by another person’s mistake, and is under an obligation to make restoration in whole or in part or its proceeds or of the value thereof , then to the extent of that obligation the property or proceeds shall be regarded (as against him) as belonging to the person entitled to restoration, an an intention not to make restoration shall be regarded accordingly as an intention to deprive that person of the property or proceeds.”

On facts that were similar to those of our question, the Court of Appeal in A-G’s Reference ( No 1 of 1983 [1985] QB 182) said that D was under no obligation to restore the money or its proceeds ( an overpayment of £74.74 made by her employer).

D was, however, under an obligation to restore the value thereof. Prof Ormerod argues that this case may be distinguished from others in that D had not spent the overpayment; it remained in her bank account. (Ormerod and Laird 2020, p.377).

An alternative analysis might involve assessing the nature of the mistake made by A when transferring funds or other property to D.

If the  Courts opine that the ‘mistake is not so fundamental that ownership does not pass and so D owns the property ……but the mistake is sufficient to mean that D is under an obligation to return the money or its proceeds‘,–

then s5(4) TA 1968 would operate to convict D of theft since the property would be property belonging to A . ( Jonathan Herring 2016, ‘Text, Cases and Materials’, 7th ed. p.504). 

So on the facts of our question, D’s retention of her employer’s mistaken overpayment creates an obligation owed to her employer to return a sum of money equivalent to that which her bank account was mistakenly credited with.

The overpayment credited in D’s bank account, however, would represent a chose in action: an intangible right vested in D’s favor which she could enforce against her debtor bank in a court of law.   

Shadrokh Cigari [1988] Crim LR 465 acts as a counterpoint; Here a bank in the United States in error credited the account of a child at an English bank with £268,000 instead of £268. D, the child’s guardian, got the child to sign banker’s draft and when D was arrested only £21,000 remained in the account’ (Ormerod and Laird 2020, p.377)

D’s conviction of theft from the English bank was upheld with the Court stating that the drafts belonged to the bank and although legal ownership passed to D by delivery, the bank retained an equitable interest in accordance with the principles in Chase Manhattan. (Ormerod and Laird 2020, p.377).

The question arises as to why the bank even retains an equitable interest in the funds. Does it have to do with the idea that Shadrokh Cigari never had a legal right to those funds he obtained when he cashed the bank draft?  

As Simester and Sullivan note: ‘the essence of theft is to misappropriate, with intent to deprive, property which one is not legally entitled , and to do so without justification of excuse.’ ( A. Simester and G.R. Sullivan, ‘The Nature and Rationale of property Offences’ in R.A. Duff and S. Green (eds) Defining Crimes , Oxford OUP, 2005) 

Following this analysis, Shadrokh Cigari’s  misappropriation of funds belonging to the bank was actualized when he presented banker’s drafts to the cashier to withdraw significant sums of money from an account that the bank had mistakenly credited. 

In such a situation, the mistaken payment which Cigari was not legally entitled to was construed to effect a trust over the property, such that D held the property in trust for A who retains an equitable interest in the property;

A therefore remains the owner of the property under s5(1) TA 1968 which provides:

property shall be regarded as belonging to any person….having in it any proprietary right or interest ( Jonathan Herring 2016, ‘Text, Cases and Materials’, 7th ed. p.504).

These principles were largely derived from the case of Chase Manhattan Bank NA v Israel British Bank (London) ltd [1981] Ch 105. The claimant had mistakenly paid the sum of $2 million twice to the defendant. 

Goulding J stated: ‘A person who pays money to another under a factual mistake retains an equitable property in it and the conscience of the other is subject to a fiduciary duty to respect his proprietary rights.’ 

And yet, it is not always the case that a mistaken payment triggers an equitable proprietary interest in property as we noted in A-G’s Reference ( No 1 of 1983 [1985] QB 182). 

Prof. Graham Virgo explains:

‘the effect of his analysis [ Lord Browne Wilkinson’s analysis in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12] of Chase Manhattan Bank is that the fact that the defendant had been unjustly enriched at the expense of the Claimant by virtue of the receipt of a mistaken payment is not sufficient reason to trigger a constructive trust.’ (Graham Virgo, The Principles of Equity and Trust 2020, 4th ed. Oxford, p.276). 

Lord Browne Wilkinson did go on to state: 

“Although the mere receipt of the moneys, in ignorance of the mistake, gave rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust.’ 

From this perspective, A’s mistaken payment to D could possibly be subject to a constructive trust if D’s conscience had been affected,  such that it would be unconscionable for D to retain such property having become aware that it had been paid by A under a mistake.  

Such an analysis, however, raises more questions than answers.

For instance, why would D necessarily assume a Fiduciary duty to  ‘respect A’s proprietary rights’ simply because her conscience is affected?

This is especially if A evinced an intent to transfer absolute title in property to D, notwithstanding the existence of a mistake of fact or law. That being the case, A would have divested herself of proprietary rights in the property concerned. 

Further, what exactly would be the circumstances that constitute an unconscionable retention of property triggering a constructive trust? After all the term ‘unconscionable’ itself is a vague term capable of varied interpretations. 

Should the preceding issue be whether a claim in unjust enrichment arises such that D is liable to make restitution to A, ‘which will be the case if the money has been paid on a basis which is not fulfilled in any way.”( Virgo 2020, p. 277) 

As Prof. Virgo argues: “If there is such a restitutionary liability and the defendant is aware of the circumstances which establish the claim then the retention of the money should be considered to be unconscionable, so triggering a constructive trust.’ ( Virgo 2020, p. 277) 

The UKSC in Bailey v Angove’s Pty Ltd [2016] UKSC 47 considers ‘what good conscience is considered to require’ and that ‘just because a reasonable person would have returned the payment…does not necessarily follow that it should have been returned by the defendant.’ ( Virgo 2020, p. 277) 

An unconscionable retention of property mistakenly transferred to the Defendant by A may be deemed to be held on a constructive trust for A if the the  mistake was a fundamental one. Lord Sumption, without clarifying what this exactly meant, went on to state the following:

”where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is
(i) that that intention was vitiated, for example because the money was paid as a result of a fundamental mistake or pursuant to a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party. One or other of these is a necessary condition, although it may not be a sufficient one”

Bailey v Angove’s Pty Ltd [2016] UKSC 47

Applying Lord Sumption’s analysis to a contract under which payment was made, but one which was left unperformed by the defendant, Prof. Virgo opines:

‘there will be a personal liability to make restitution where the contract is void, and if the defendant is aware of the invalidity, but does not repay the money, they could be considered to have acted unconscionably so that the money paid pursuant to the void contract will be held on constructive trust.’ ( Virgo 2020, p. 278) 

Lord Sumption’s dictum, however, suggests that the mere fact that the transferor’s intention to benefit the transferee was vitiated by virtue of a fundamental mistake or rescinded contract may not in itself be a sufficient condition for a proprietary constructive trust to arise by law.

References;

Graham Virgo, The Principles of Equity and Trust, 2020, 4th ed. Oxford

David Ormerod and Karl Laird, Text, Materials and Cases on Criminal Law, 2020, 10th ed., Oxford.

Jonathan Herring 2016, ‘Text, Cases and Materials’, 7th ed.

A. Simester and G.R. Sullivan, ‘The Nature and Rationale of property Offences’ in R.A. Duff and S. Green (eds) Defining Crimes , Oxford OUP, 2005

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