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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> FHR European Ventures LLP & Ors v Mankarious & Ors [2016] EWHC 359 (Ch) (02 March 2016) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2016/359.html Cite as: [2016] EWHC 359 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		2/3/2016

Master Clark:

1. This is my judgment on the claimants' application made by notice dated 26 March 2015.

The claim and the background to the application

2. The claim, commenced on 23 November 2009, was for undisclosed commission of €10 million ("the Fee") paid to the second defendant ("Cedar LLC") by the seller of (the issued share capital in the company that owned a long leasehold in) the Monte Carlo Grand Hotel ("the Hotel"), a luxury hotel in Monaco. The price paid was for the Hotel was €211.5 million. The first claimant was the purchaser, and the other claimants were interested in the purchase either as investors/joint venturers or as shareholders in the first claimant.
3. The first defendant, Mr Mankarious, was and is the moving force of both the second and third defendants (collectively "Cedar Capital Partners"), and the person by whom they acted in all material events in the claim. Cedar LLC is a Delaware company owned and controlled by a trust of which Mr Mankarious is a beneficiary, of which the third defendant ("Cedar Ltd") is a wholly owned subsidiary.
4. The Amended Particulars of Claim dated 23 November 2009 ("Amended POC") alleged that all 3 defendants owed all the claimants the following fiduciary duties:

(1) to act in their best interests and, in particular, to negotiate the best price at which the Hotel (or the shares in it) could be sold;

(2) not to put themselves in a position where their duty and interest conflicted;

(3) not to profit from their position.

5. These duties were alleged to arise from Mr Mankarious "through Cedar Capital Partners" (para 20) acting as agent of and advisor to the fourth and sixth claimants; and from Mr Mankarious personally conducting negotiations with the seller of the Hotel on behalf of all the claimants (para 26aa).
6. The Fee was payable under an agreement dated 24 September 2004 entitled "Exclusive Brokerage Agreement" between the seller and Cedar LLC, by which the seller granted Cedar LLC the exclusive right to secure a purchaser for the Hotel for a limited period, and provided for the payment of the Fee on completion of the purchase. The purchase completed on 22 December 2004, and the Fee was transferred into Cedar LLC's euro bank account with UBS in Jersey ("the euro account") on 7 January 2005. Before the transfer the balance in the account was zero. Transfers (including transfers to Mr Mankarious and the third defendant) were made out of the euro account, so that by 18 January 2007 the balance in it was again zero.
7. The claimants claimed that the receipt of the Fee by Cedar LLC was in breach of its duties set out above, and that it held the Fee as constructive trustee for them and was liable to account to them for it. Paragraph 30 of the Amended POC continues:

"To the extent that Cedar LLC has dealt with the €10 million or any part thereof:

a) the Claimants will seek an inquiry or account as to all such dealings and subsequent dealings;

b) the Claimants claim to be able to trace into the hands of any recipient in respect of its beneficial interest; and

c) in so far as any payment was made to Mr Mankarious or Cedar Ltd, that recipient is liable to account to the Claimants as a constructive trustee in respect thereof as having received it in breach of the said fiduciary duties, alternatively as having knowingly received it in breach of Cedar LLC's constructive trust."

8. The trial of the claim took place in July 2011 before Simon J, who held (in summary) that Cedar LLC was accountable for the Fee because it was received in breach of fiduciary duty, but that the Fee was not held, when received, on trust for the claimants. Simon J gave two judgments. In the first, dated 5 September 2011, he held that Cedar LLC would have received the €10 million Fee "subject to a Constructive Trust" in favour of the claimants (para 103); in the second, dated 15 November 2011, following further argument, he held that Cedar LLC was accountable in equity for the Fee, but that it was not subject to a constructive trust.
9. The claimants appealed against this second judgment and, on 29 January 2013, the Court of Appeal allowed the appeal, declaring that Cedar LLC had received the Fee on constructive trust for the claimants absolutely, and was liable to account to the claimants for it. On 16 July 2014, the Supreme Court dismissed Cedar LLC's appeal from the judgment of the Court of Appeal.
10. So far as the consequential relief sought in paragraph 30 of the Amended POC was concerned, the Judge's order dated 15 November 2011 provided:

"(4) The Claimants be at liberty to apply against each of the Defendants for such accounts, inquiries, and directions as are necessary and/or appropriate."

The application

11. The application notice seeks in the usual way an order (and consequential directions as appropriate) for an account to be taken and/or an inquiry to be made against each of the defendants as to their dealings with the Fee. It also seeks:

"2(a) a declaration as to the extent of the claimants' equitable charge over the freehold property at Conduit Lodge, 41 Lyndhurst Road, London NW3 5PE ("the Property") or its proceeds of sale resulting from the claimant's entitlement to trace the Fee (or any part of it) into its purchase and/or improvement;

(b) an order for the sale of the Property under s.14(2)(a) of the Trusts of Land and Appointment of Trustees Act 1996 and such directions as the Court shall think fit for the distribution of the proceeds to discharge the claimant's equitable charge;

(c) an order joining Jennifer Lyn Mankarious as a defendant to this part of the claim under CPR r19.2(2)(a) as joint legal owner of the Property.

(d) declarations as appropriate upon the taking of the said account and/or the making of the said inquiry as to the extent of the claimant's equitable charge over any other property or asset into which it shall be determined that the claimants are entitled to trace the Fee or any part thereof together with such further directions as the Court shall think fit to enable such charge to be satisfied.

(e) monetary judgment as appropriate upon the taking of the said account and/or the making of the said inquiry against the first and third defendants respectively in the amount of all benefits received by them respectively from the Fee (save as already the subject of relief under paragraphs 2 and 3 above) on the basis of knowing receipt, alternatively equitable compensation for breach of fiduciary duty, alternatively liability to account as a constructive trustee;

(f) interest in equity or pursuant to statute on all sums found due from the first and third defendants …"

12. As a result of an agreement made on 1 May 2015 with Mrs Mankarious' solicitors, the claimants are not pursuing paras 2(b) or (c) of the application notice at this hearing. In addition, following the attendance and submissions made by Mr King of Mrs Mankarious' solicitors, Payne, Hicks, Beach, the claimants accepted that I should confine my declaratory relief to the extent of their interest in the property, with the issue of the extent of Mr Mankarious' interest to be determined at the adjourned hearing of the application to deal with the remainder of the relief sought in it.
13. Notwithstanding the terms of the application notice, the procedural course taken by the parties did not follow the relief sought in it. Even before the application was made, the defendants had given extensive disclosure of their bank statements, and the claimants used these documents to give an account (in the lay sense) of the various payments made using the Fee. These are set out in some detail in the first witness statement dated 23 March 2015 of Mr Shiu in support of the application. The defendants filed evidence in answer to Mr Shiu's evidence and the claimants filed evidence in reply.
14. At the hearing before me the claimants were not therefore seeking an order for an account or inquiry, on the basis that it was unnecessary to do so and, indeed, would only result in the replication of all the material already before the court. The parties also agreed that there were no factual issues requiring to be resolved, so that all the issues required to be determined by me were either legal issues, or issues as to the application of legal principles to the agreed factual position.
15. I therefore directed the parties to produce an agreed list of issues and an agreed statement of the facts relevant to those issues (the latter being lodged after the hearing).

Issues in the application

16. Taking the agreed list of issues as the starting point, I consider that the issues arising in the application are as follows:

Preliminary – the Fiduciary point

(1) Whether or not Mr Mankarious and Cedar Ltd are free to contend that they were not fiduciaries when receiving monies from or deriving from the Fee;

(2) If so, how that issue is to be resolved;

The Property

(3) The amount of the proportionate share in the Property which the claimants are entitled to claim:

(i) whether the £180,000 deposit was paid (or is to be treated as having been paid) with money derived from the Fee

(a) in full (Re Oatway); or

(b) only as to £78,982 thereof (Re Hallett)

(4) Whether or not the incidental costs of the purchase of the Property of £75,710 (paid from money derived from the Fee) are to be brought into account in calculating the relevant proportion.

(5) Whether or not the claimants are entitled to a further share of the Property representing Mr Mankarious' unrealised profit on his share in the Property on the basis that it is held on constructive trust for the claimants.

Life insurance policies

(6) Whether or not Cedar LLC holds 2 life insurance policies on trust for the claimants absolutely, or in proportion to the respective contributions to the premiums from the Fee and the defendants' own funds.

Monetary judgment against Mr Mankarious

(7) Whether or not Mr Mankarious is liable to account to the claimants from sums paid to him derived from the Fee

(i) as a fiduciary and constructive trustee thereof;

(ii) on the basis of knowing receipt.

(8) If so, the amount of that liability

(i) Whether it includes the sum of $5.1 million

(ii) Whether Re Hallett or Re Oatway applies in the calculation of the sum due;

(iii) The relief to be granted in respect of monies derived from the Fee and paid first to Cedar Ltd and then to Mr Mankarious.

Monetary judgment against Cedar Ltd

(9) Whether or not Cedar Ltd is liable to account to the claimants from sums paid to it derived from the Fee

(i) as a fiduciary and constructive trustee thereof;

(ii) on the basis of knowing receipt.

(10) If so, the amount of that liability: whether Re Hallett or Re Oatway applies in the calculation of the sum due.

The preliminary point

17. The claimants' claim that the defendants were fiduciaries and in breach of their fiduciary duties is set out in paragraph 30 of their Amended POC (see paragraph 7 above). Although it could be said that, in their Amended Defence, the defendants did not unqualifiedly accept that they were fiduciaries, they did do so in their closing submissions at the trial. The defendants' counsel (who did not appear at the trial) accepted that this was an admission within CPR 14.1(2) and that it was too late to seek to resile from it.
18. It was accordingly agreed by the parties that at all material times, the defendants were fiduciaries in relation to the transaction.
19. The defendants' counsel submitted however that there was no allegation by the claimants or finding by the Judge that Mr Mankarious was in breach of fiduciary duty. The former is in my view unsustainable in the face of paragraph 30 of the Amended POC.
20. As for the latter, the claimants' counsel could not take me to any passage in the first judgment of the Judge where he made any finding that Mr Mankarious personally was in breach of his fiduciary duty. Indeed, the passage in the judgment where the Judge reaches his conclusions (paras 99 to 112) relates only to Cedar LLC's liability, and not to that of Mr Mankarious and Cedar Limited.
21. However, the claimants' counsel relied upon the second judgment, in which in the Judge dealt with the issue of costs. At that hearing the defendants' counsel argued that no order should be made against Mr Mankarious and Cedar Ltd, because there had been no finding of liability against them. The claimants relied upon the fact that all 3 defendants had admitted they owed fiduciary duties, but averred that they had been discharged. The Judge said (at para 5):

"The Claimants and the Defendants each proceeded on the broad basis that there was no material distinction between the Defendants either for the purposes of the claim or the counterclaim."

On this basis the Judge ordered all 3 defendants to pay the claimants' costs.

22. The difficulty with the claimants' counsel's argument is that the breaches on which he seeks to rely in the account are not the receipt by Cedar LLC of the Fee without disclosing it the claimants, but the subsequent receipt by Mr Mankarious and Cedar Ltd of monies comprising or derived from the Fee. There was no evidence before the Judge as to those payments, and he made no findings in respect of them. His order for an account was not based on a finding that there had been a breach of fiduciary duty in receiving those payments.
23. I consider therefore that whether or not those receipts were in breach of fiduciary duty is an issue which falls to be dealt with in this application. The only question is whether it can and should be determined on the basis of the evidence before me, or whether there is any reason why it would not be appropriate to do so.
24. Whilst the defendants' counsel was concerned to argue that there had been no finding of a relevant breach by the Judge, he did not suggest that there was any further evidence relevant to this issue, or that there was any dispute of fact on the available evidence. In my judgment I can and should determine this issue.
25. The defendants' counsel also did not put forward any basis on which it could be said that the receipts of monies derived from the Fee were not in breach of their fiduciary duty to the claimants. It was common ground that all 3 defendants were to be treated as having the same state of knowledge in relation to the material facts in this case. Mr Mankarious and Cedar Ltd knew therefore that the monies received by them were derived from the Fee and that Cedar LLC had not obtained the fully informed consent of the claimants to its receipt of the Fee. By receiving monies comprising or derived from the Fee, they placed themselves in a position where their duty to the claimants conflicted with their own interest. In my judgment therefore in receiving monies derived from the Fee Mr Mankarious and Cedar Ltd were in breach of their fiduciary duty owed to the claimants.

The Property

26. The Property was purchased in the names of Mr and Mrs Mankarious as beneficial joint tenants and remains registered at HM Land Registry in their joint names under title number LN 35937. Completion of the purchase took place on 14 June 2005. The purchase price was £1,800,000, with incidental costs of £75,715.44.
27. As will be seen in more detail below, at the material times, Cedar LLC had 3 bank accounts with UBS in Jersey, in 3 currencies: the euro account, an account in pounds sterling ("the GBP account") and an account in US dollars ("the USD account").
28. The purchase was funded in the following way:

(1) The deposit payable was £180,000, paid for (via Mr and Mrs Mankarious' conveyancing solicitors, Roiter Zucker) by a transfer from the GBP account on 8 April 2005;

(2) The sum of £999,995 was borrowed by Mr and Mrs Mankarious from Halifax plc and secured against the Property on completion;

(3) The remaining sum required for completion was £695,715.44, made up of £620,000 as the balance of the purchase price, and the £75,715.44 in incidental costs. This was paid for (again via Roiter Zucker) by a transfer from the GBP account on 29 April 2005.

Deposit

29. It is agreed that the completion payment of £695,715.44 was made from moneys derived from the Fee. The first issue in relation to the Property is whether the deposit was paid, or to be treated as paid, entirely with moneys derived from the Fee (the claimants' case) or only as to £78,982.03 thereof with the balance of £101,047.97 coming from non-fee moneys (the defendants' case).
30. The detailed position is as follows. As at 25 January 2015, the balance on the GBP account was nil. On 1 February 2005 the sum of £251,137.97 was transferred into the GBP account. It is agreed that these monies (referred to as "the Savoy payment") were derived from another transaction and that the claimants have no claim to them. Various payments were made to Mr Mankarious from that sum so that on 1 April 2005, the balance in the GBP account was £101,047.97, all monies not derived from the Fee.
31. On 8 April 2005 Cedar LLC transferred £78,982.03 from the euro account to the GBP account. The same day the combined total of these monies, £180,000 was transferred as the deposit referred to above. The balance in the GBP account was thereby reduced to zero.

Tracing – the principles

32. In claiming a share in the Property the claimants rely upon the principle set out in Foskett v McKeown [2001] 1 AC 102: where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset, or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money.
33. In this case, where the deposit monies were paid from a fund in which the Fee was mixed with Cedar LLC's monies, the determination of the issue depends upon which of two competing principles of tracing should apply.
34. The first principle is to be found in Re Hallett's Estate (1880) 13 Ch D 696: where a trustee pays trust monies into an account and mixes it with his own monies, then the rule in Clayton's Case does not apply; withdrawals for the trustee's own purposes are presumed to made from his monies, thereby maximising the amount belonging to the beneficiary in the account.
35. The claimants' counsel submitted that the events in this case were to be analysed not in accordance with the Re Hallett principle, but by the decision in Re Oatway [1903] 2 Ch 356, relying on the following passage:

"when the private money of the trustee and that which he held in a fiduciary capacity have been mixed in the same banking account, from which various payments have from time to time been made, then, in order to determine to whom any remaining balance or any investment that may have been paid for out of the account ought to be deemed to belong, the trustee must be debited with all the sums that have been withdrawn and applied to his own use so as to be no longer recoverable, and the trust money in like manner be debited with any sums taken out and duly invested in the names of the proper trustees. The order of priority in which the various withdrawals and investments may have been respectively made is wholly immaterial. I have been referring, of course, to cases where there is only one fiduciary owner or set of cestuis que trust claiming whatever may be left as against the trustee. In the present case there is no balance left. The only investment or property remaining which represents any part of the mixed moneys paid into the banking account is the Oceana shares purchased for 2137l. Upon these, therefore, the trust had a charge for the 3000l. trust money paid into the account. That is to say, those shares and the proceeds thereof belong to the trust."

36. The claimants' counsel relied upon Re Oatway as authority for the proposition that the defendants, as fiduciaries, are not entitled to claim to be able to withdraw any sum from any account without having first restored the trust money to its rightful owners, the claimants. I consider that, by this submission, he invited me to treat all 3 of Cedar LLC's accounts as effectively one mixed fund, so that the monies derived from the Savoy payment should be treated as having been spent on Cedar LLC's own purposes, and the equivalent amount treated as derived from the Fee held in the euro account. He submitted that while there were funds in the 3 accounts as a whole, it was not open to the first defendant to say that he used his own monies in relation to the Property.
37. The defendants' counsel submitted that the broad proposition that the claimants' counsel sought to derive from Oatway was not consistent with the true nature of tracing, referring me to Lord Millett's judgment in Foskett v McKeown:

"The process of ascertaining what happened to the plaintiffs' money involves both tracing and following. These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. … Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner."

"Tracing

We speak of money at the bank, and of money passing into and out of a bank account. But of course the account holder has no money at the bank. Money paid into a bank account belongs legally and beneficially to the bank and not to the account holder. The bank gives value for it, and it is accordingly not usually possible to make the money itself the subject of an adverse claim. Instead a claimant normally sues the account holder rather than the bank and lays claim to the proceeds of the money in his hands. These consist of the debt or part of the debt due to him from the bank. We speak of tracing money into and out of the account, but there is no money in the account. There is merely a single debt of an amount equal to the final balance standing to the credit of the account holder. No money passes from paying bank to receiving bank or through the clearing system (where the money flows may be in the opposite direction). There is simply a series of debits and credits which are causally and transactionally linked. We also speak of tracing one asset into another, but this too is inaccurate. The original asset still exists in the hands of the new owner, or it may have become untraceable. The claimant claims the new asset because it was acquired in whole or in part with the original asset. What he traces, therefore, is not the physical asset itself but the value inherent in it.

Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property."

38. He also referred me to Ungoed-Thomas J in Tilley's Will Trusts [1967] Ch 1179:

"In re Oatway did not raise the question whether a beneficiary is entitled to any profit made out of the purchase of property by a trustee out of a fund consisting of his personal moneys which he mixed with the trust moneys, and so the judgment was not directed to and did not deal with that question." (emphasis added)

39. The defendants' counsel submitted therefore that Oatway was not authority for the broader proposition put forward by the claimants.
40. One way of testing the claimants' counsel's submissions is to consider the following scenarios where money from the Fee and the defendants' money are both used to purchase an asset:

(1) the Fee is retained in cash (not paid into an account) and the defendants' money is in an account;

(2) the Fee is paid into an account and the defendants' money is retained as cash;

(3) the Fee is paid into an account with one bank and the defendants' money is paid into an account with a different bank.

(4) the Fee is paid into an account with one bank and the defendants' money is paid into another account with the same bank – as in this case.

In the first 3 cases it cannot be said that the Fee has been paid into a mixed account and Re Oatway would not apply. In my judgment, there is no distinction in principle to be drawn between these cases and the fourth case even though the accounts are at the same bank – as a matter of fact, the funds are not mixed. As the defendants' counsel submitted, tracing is a matter of "hard-nosed property rights", not on whether it is fair, just and reasonable to treat the claimants as entitled to the entirety of the deposit (see Foskett v McKeown at p109C-D).

41. In this case, the Fee was paid into the euro account and the defendants' money was paid into the GBP account, where it was mixed with the £78,982.03 derived from the Fee, but was not mixed with any other part of the Fee. For the purpose of the rule in Oatway, I do not consider that the part of the Fee remaining in the euro account is to be treated as having been mixed with the funds in the GBP account.
42. I therefore accept the defendants' counsel's submission. Oatway was concerned with a single account in which monies belonging to the trustee and to the beneficiary were mixed. In support of the claimants' counsel's submission that it should be of broader application, he did not refer me to any statements of principle in the reported cases on this topic. To accept his submissions would be to extend the application of Oatway, but the only basis put forward for doing so was that the defendants' position was as unattractive as that of the trustee in Oatway.
43. I conclude therefore that Oatway does not apply on the facts of this case, and that the £101,047.97 paid by Cedar LLC is not to be treated as funds derived from the Fee.

Incidental costs

44. So far as the incidental costs of the purchase of £75,715.44 are concerned, the claimants' counsel submitted that these costs should be treated as part of the acquisition costs of the Property; and since they were paid for with monies derived from the Fee augment their proportionate share in the Property accordingly.
45. He referred me to Foskett at p131G where Lord Millett refers to "the cost of acquiring an asset". However, this passage is plainly not directed to the point in issue in this case. He also referred me to Gissing v Gissing [1971] AC 886 at pp907E-H and similar passages in which Lord Diplock refers to the "cash contribution to the deposit and legal charges" by a wife where a property is bought in the husband's sole name as giving rise to the inference of a common intention that she should have a beneficial interest in the property in the proportion which her original cash contribution bore to either the total amount of the deposit and legal charges or to the full purchase price.
46. These dicta are however in a wholly different context from that of the present case, and an illuminating commentary is found in Gray & Gray, Elements of Land Law 5^th edn at para 7.2.15:

"Over the years the courts have strained to incorporate within resulting trust theory various other forms of financial contribution made at the point of purchase of a legal estate in land. The rationale for such contributions has usually been the idea that the basis of calculation under the resulting trust should be the "aggregate" or "gross" cost of the purchase in hand. …. However, in so far as these kinds of contribution arise within a domestic context, their effect (and indeed the many problems of computation which they present) are nowadays best resolved within the more flexible framework of the constructive trust. Here the court can more sensitively factor the individual circumstances of the case into an overall quantification of the beneficial shares taken by the parties."

47. In my judgment, I should also approach this issue on the basis of the fixed rules and settled principles of property rights, without straining to achieve the equitable result that the courts have sought to achieve in the domestic co-ownership cases. Money expended on legal fees or stamp duty is not as a matter of fact paid to the seller as part of the purchase price; it is paid for legal services and to discharge a liability to HMRC. The monies from the Fee used for this purpose should not in my judgment be treated as augmenting the claimants' share in the Property.

Claim to profit in respect of Mr Mankarious' share in the Property

48. The claimants also claim a share in the profit made by Mr Mankarious in respect of his share in the Property. Their counsel submitted that since Mr Mankarious is a fiduciary, he is not entitled to retain any benefit he makes from the use of his principals' money and holds any benefit he does make on constructive trust for his principals.
49. He also submitted that, if Mr Mankarious' only "contribution" to the purchase is by way of a loan secured upon the property, he is not to be treated as having made any contribution of his own towards the acquisition, so that the claimants take the whole of any profit, relying on Paul A. Davies (Australian) Pty Ltd v Davies [1983] 1 NSWLR 440 and Hanbury and Martin, Modern Equity, 20^th ed, para 26-015). That is equally the position, he submitted, where a trustee has contributed his own money but the asset could not have been purchased without the trust contribution (Hanbury and Martin, ibid, and Re Tilley's Will Trusts [1967] Ch 1179 at 1189).
50. He relied on these authorities for the proposition that the defaulting trustee (or fiduciary) cannot profit from his position: he is only entitled to recoup his expenses.
51. In this case, Mr Mankarious' (or Cedar LLC's) only contribution to the purchase of the Property was his covenant on the mortgage for the joint loan of £999,995 required to complete the purchase. The claimants submitted that he cannot retain any profit for himself, and that as between Mr Mankarious and the claimants, the claimants own the profit.
52. The defendants' counsel did not seek to challenge the propositions of law put forward by the claimants. He argued that Mr Mankarious was not a defaulting fiduciary and therefore that these principles did not apply to him. However, since I have found that Mr Mankarious was in breach of his fiduciary duty to the claimants, it follows that they are entitled to any profit in respect of his share in the Property.

Life insurance policies

53. On 26 March 2008, Cedar LLC entered into two term life insurance policies with American General Life Insurance Company (numbered YME0672215 and YM00593635) by which the sums of $5,500,000 and £7,500,000 are payable in the event of the death of Mr Mankarious before 14 March 2028.
54. The first annual premiums payable under those policies (totalling $15,505) were paid by Cedar LLC on 26 March 2008 from moneys derived from the Fee. Each year further annual premiums of $15,505 have been due.
55. The position as to whether and if so how many premiums have been paid since the inception of the policies was unclear at the hearing. I permitted the defendants to lodge further evidence (in the form of a letter dated 20 November 2015 from their solicitors setting out the factual position and attaching photocopies of relevant bank statements). The claimants have not challenged the position as set out in the letter.
56. In summary, all of the premiums paid since the first premiums have been paid using non-Fee monies.
57. The defendants' counsel accepted that the claimants are entitled to a beneficial interest in the policies but only to the extent that (i) any interest is pro rata in accordance with the premiums paid from funds deriving from the Fee; and (ii) the Policies remain valid. As for (i), this is in accordance with Foskett v McKeown and I agree that the claimants' interest is to be determined in that way. As for (ii), this seems unnecessary: if the policies lapse or Mr Mankarious lives beyond 14 March 2028, then no sums will be payable on his death, and there will no funds for either side to have an interest in.

Monetary judgment against Mr Mankarious and Cedar Ltd

Mr Mankarious and Cedar Ltd as fiduciaries and constructive trustees

58. I have already dealt with the issue of whether Mr Mankarious and Cedar Ltd are defaulting fiduciaries. It follows from my finding on that issue that they each hold sums derived from the Fee on constructive trust for the claimants.

Mr Mankarious' and Cedar Ltd's accountability on the basis of knowing receipt

59. The claimants put forward an alternative ground for liability on the part of Mr Mankarious and Cedar Ltd of knowing receipt. The parties were agreed as to the applicable requirements, which are summarised in Lewin, Trusts, 19th ed (2014), para 42-023:

(1) There is property subject to a trust;

(2) The property is transferred;

(3) The transfer is in breach of trust;

(4) The property (or its traceable proceeds) is received by the defendant;

(5) The receipt is for the defendant's own benefit;

(6) The defendant receives the property with knowledge that the property is trust property and has been transferred in breach of trust, or if not a bona fide purchaser of a legal estate without notice, retains the property, or deals with it inconsistently with the trust, after acquiring such knowledge.

60. There was no issue between the parties that on the facts (and subject to an issue in relation to Mr Mankarious' payment to the US tax authorities – see paras 71 to 75 below) the first 5 requirements were fulfilled.

Knowledge

61. As to the 6th requirement of knowledge, the modern test is as stated in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 (at 455 per Nourse LJ):

"the recipient's state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt"

62. For these purposes, a recipient cannot escape liability if he knew all the relevant facts but not the legal consequences. Thus in Belmont Finance Corp v Williams Furniture Ltd (No. 2) [1980] 1 All ER 393, the defendant (City) was held liable because the company's money "found their way into the hands of City with City's knowledge of the whole circumstances of the transaction" (Buckley LJ at p. 405f to g). Goff LJ said (p. 412e to g)

"Then did City know, or ought it to have known, of the misfeasance or breach of trust? In my judgment the answer to that question must plainly be yes, for they are fixed with all the knowledge that Mr James had. Now, he had actual knowledge of all the facts which made the agreement illegal and his belief that the agreement was a good commercial proposition for Belmont can be no more a defence to City's liability as constructive trustees than in conspiracy.

Apart from this, clearly, in my judgment, Mr James knew or ought to have known all the facts I have rehearsed, showing that there was in the event a misfeasance apart from illegality. He knew of the conflict of interest … yet neither he nor his team took any steps whatever to see that Belmont was separately advised"

63. The claimants' counsel submitted that Mr Mankarious and through him Cedar Ltd had the knowledge which made it unconscionable for each of them to retain the benefit of the monies derived from the Fee. He referred me to the following passage in the Judge's judgment (para 56):

"In my judgment Mr Mankarious knew very well that the Joint Venture partners would object to the size of the fee and this was why he did not tell them. This meant that what he told BoS about the fee had to be said in such a way that he would not be asked questions which might oblige him to reveal the amount. It seems to me that the strong likelihood is that Mr Mankarious wished to give the impression that the fee was an immaterial or "minor issue" in the overall context of the transaction, and that he succeeded in conveying this impression."

64. On this basis, the claimants' counsel made the following submissions. Mr Mankarious knew that he had to disclose the Fee and the amount of the Fee, and that the claimants would object to it; and he sought to avoid disclosure. Mr Mankarious was instrumental in all the relevant events: his decisions and acts were Cedar LLC's and Cedar Ltd's acts. For all practical purposes , he was Cedar LLC and Cedar Ltd: his knowledge is to be imputed to them (and vice versa). Mr Mankarious was aware of the conflict or potential for conflict between Cedar LLC's interests and the claimants' interests. When he received monies derived from the Fee from Cedar LLC, he did so knowing the facts which led to the claim being successful.
65. The defendants' counsel accepted that Mr Mankarious knew all the relevant facts relating to the claimants' claim against Cedar LLC and that this knowledge was shared with the Cedar Capital partners. He submitted that the knowing receipt claim is based on receipt and dissipation, and that the cause of action arises at the time of dissipation. Thus, he argued, the relevant knowledge is the knowledge at that time. He did not suggest that Mr Mankarious and Cedar Ltd lacked the requisite knowledge when receiving the moneys received by them.
66. However, he made the following submissions in respect the payment by Mr Mankarious of US$4.8 million to the US Treasury (considered in more detail in paras 71-75 below). Mr Mankarious' knowledge when making that payment was not such as to render it unconscionable that he should retain the benefit of that money. It was on the contrary evidence of his bona fides; and it could not have been within his contemplation that there would be a proprietary remedy in respect of the Fee. There was no finding that the Fee was a corrupt payment or a bribe.
67. I do not accept the defendants' submissions on this issue. Mr Mankarious had knowledge of all the facts on which the finding that Cedar LLC held the Fee on constructive trust was based. His lack of knowledge as to the remedies available as a result of the constructive trust, so that he believed he could properly make the payment, is in my judgment irrelevant to the question of unconscionability. He is to be treated as knowing that the Fee was effectively the claimants' property, and therefore as knowing he could not properly pay it to a third party, even the US Treasury.

Sums derived from the Fee paid to Mr Mankarious

68. It is agreed that the following substantial sums derived from the Fee were paid to Mr Mankarious. They fall into 3 categories:

(1) $5,100,000 paid to Mr Mankarious' personal account from which $4,800,000 was paid to "United States Treasury" ("the US tax payment");

(2) Transfers totalling £1,661,076.13 (on the Re Hallett basis) by Cedar LLC to Mr Mankarious' personal account with Barclays Bank plc;

(3) Transfers totalling £51,755.11 (on the Re Hallett basis) by Cedar Ltd to Mr Mankarious' personal account with Barclays Bank plc.

69. Most of the transfers totalling £1,661,076.13 were spent on renovations to the Property. No tracing claim is made in respect of these. There are no moneys left to repay these transfers. The position as to how the monies transferred to Mr Mankarious by Cedar Ltd were spent is unclear.
70. The claimants seek a monetary judgment in respect of each of these sums, contending in the case of (2) and (3) that it should be on the Oatway basis. Since I have concluded above that Re Oatway does not apply in these factual circumstances, the claimants are entitled to money judgments in sums set out in (2) and (3) above.

The US Tax Payment

71. On 11 April 2006, Cedar LLC transferred $5,100,000 from its USD account to D1's personal account with Citibank. This payment was made from funds derived from the fee.
72. Mr Mankarious' evidence was that this sum "was distributed by [Cedar LLC] to the shareholding trust, which thereafter deposited such sum into my joint account in the US held with Citibank".
73. On 24 April 2006, the sum of $4,800,000 was paid out of Mr Mankarious' Citibank account, pursuant to a cheque dated 11 April 2006 in favour of "United States Treasury". All of this payment was in respect of tax due in respect of the Fee.
74. The payment was made to discharge the tax due from Mr Mankarious pursuant to his personal US tax return. Mr Mankarious' evidence was that:

(1) Cedar LLC has at all material times been classified as a disregarded entity that does not exist for US income tax purposes;

(2) Cedar LLC does not file a separate tax return with the IRS; and

(3) the assets of both Cedar LLC and its shareholding trust are deemed owned and controlled by Mr Mankarious for US tax purposes.

Accordingly, he said (in para 31 of his 3^rd witness statement dated 24 July 2015):

"the IRS could pursue payment from me of any tax liability incurred as a result of [Cedar LLC]'s business activities as those activities are considered to be owned and controlled directly by me as a sole proprietor".

75. The defendants' counsel submitted that the payment was made on behalf of Cedar LLC and that the liability discharged was that of Cedar LLC. However, this submission is directly contradicted by Mr Mankarious' own evidence above. No US tax was payable by Cedar LLC. The liability to the US tax authorities was a personal liability of Mr Mankarious, and the payment made for his benefit. In my judgment therefore, he is the accounting party in respect of it, and the claimants are entitled to a monetary judgment for the full $5,100,000 (or its sterling equivalent).

Monetary judgment against Cedar Ltd

Sums derived from the Fee paid to Cedar Ltd

76. The defendants admit that between 25 January 2005 and 21 July 2010 (on a Re Hallett basis of calculation) Cedar LLC transferred sums totalling £1,016,676.32 to Cedar Ltd's account with Barclays Bank plc. All these sums were paid from moneys derived from the Fee.
77. Cedar Ltd used the moneys to pay its business expenses, including the payments by it to Mr Mankarious referred to at paragraph 58 above. There are no moneys left to repay these transfers.
78. The claimants claim that a Re Oatway basis of calculation is the correct one, in which event the total figure is £1,537,939.60. The defendants do not dispute this figure but deny Re Oatway applies. Since I have decided that the correct basis of calculation is the Re Hallett basis, the claimants are entitled to a monetary judgment in the sum of £1,016,676.32.