Proprietary Claim Case Law

In a recent decision, the Irish High Court held that if an investor has paid money to a firm based on a fraudulent misrepresentation, the payer has a proprietary claim to the payment (In re Custom House Capital; Scott v Wallace 2013 IEHC 559). This is obviously crucial where a firm is in insolvent liquidation. The Irish High Court (Justice Finlay Geoghegan) held that monies held on account by Custom House Capital Limited ("CHC") before its winding up were held on trust for one of its clients. The client of CHC had, between April and July 2009, transferred most of her personal savings and pension funds to CHC for investment, including a sum of €145,000 ($202,000), referred to as a deposit. The client had agreed that the latter sum would be invested by way of a subordinated loan agreement.

The key event in the case was a meeting at the client's home in March 2010, at which the client met with a director of CHC and discussed her investment. The Central Bank of Ireland ("CBI"), (which regulates firms such as CHC), became concerned about CHC's business. This information was in the public domain and the CHC representative told the client she had nothing to worry about and that her investment was safe. CHC offered her the option of either continuing to participate in the loan agreement, or to have CHC repay the loan together with interest. In reliance on CHC's assurances, the client decided to leave her money with them.

The CBI became concerned about CHC's solvency. In particular, it appeared that the CBI's concerns focused on CHC's practice of raising finance from its customers through subordinated loans by them. In July 2011, the CBI appointed inspectors to the firm, and shortly after CHC went into insolvent liquidation. The inspectors' final report was admitted as evidence in the case.

CHC's liquidator sought to treat the client's claim as an unsecured claim. The client claimed that the sum of €145,000 was held on trust by CHC before the liquidation and that she therefore had a proprietary claim to the repayment of the money. One of the arguments on which the client contended she had a proprietary claim was that CHC stood as a fiduciary to her. The court rejected this, and held that the client had entered into a commercial arrangement, in which it was clearly agreed that CHC had a contractual obligation to provide investment services.

The applicant also contended that the circumstances gave rise to a constructive trust due to fraudulent or...