Mingled funds – returning funds to the true owners

A bank has been faced with needing to make a decision about what to do with mingled funds in bank accounts. The case of Commerzbank plc v IMB Morgan, on which judgment has just been handed down, has considered the practicalities of the bank's position where the funds had been deposited by a number of innocent parties who had been duped by an advance fee fraud. The court considered the nature of the parties' claims to the funds and the method which should be used to calculate their entitlement.

Practical steps

The case provides insight into the steps a bank can take where it has to decide (with the aid of the court) who is entitled to receive a refund and in what proportion. The accounts of IMB (which were correspondent accounts) had been closed upon strong evidence of money laundering. Correspondence in the bank's Investigations Section and with the former customer was reviewed and every claim was, on the advice of the Financial Investigations Unit of the City of London Police followed through with a detailed questionnaire designed to establish the honesty of the claim. The claims were then submitted to court for a decision.

Right of claimants to mingled funds

To show that they had a right to a share in the funds, each claimant had to show they had a proprietary right, i.e. a right in property (the actual money) and not simply a debt due from the bank's customer IMB. Generally speaking, a person who has been defrauded may trace property into the hands of the recipient. The court also said the claimants could base their claim on grounds of mistake (the mistake being, paying their money to a fraudster and not in the circumstances they believed were true). It is not clear that a person who makes a payment by mistake actually has a proprietary claim but the court was happy to get round this on the fact of this case given that there was an identifiable fund, the recipient had notice of the claim and it would be unconscionable for the recipient to continue to hold the funds.

Did Clayton's Case apply?

Because the amount of valid claims exceeded the amount available for distribution, the court considered whether the rule in Clayton's Case should apply. According the rule, payments out of an account are attributed to payments into the account in the order in which payments were made in. Thus the later the payment into the account, the greater the prospect of that payment not being attributed to payments out and as the sum would still be represented in the remaining credit balance, the greater the chances of the payer receiving his funds back. Clayton's Case was not about tracing. Because in this case the court decided it would be "extremely onerous and perhaps impossible" to determine what sums had been paid away out of the account (it was a correspondent bank account) the court decided Clayton's case would not apply.

Decision

The court ordered the funds in the accounts be paid to the claimants in the proportions of their claims.

Comment

This case provides practical helpful guidance to a bank faced with the position of receiving a number of claims from apparently innocent parties who have paid money into accounts held by the bank for a customer who turns out to be operating a fraud

The court took into account the nature of the operation of correspondent bank accounts as opposed to a single account operated in the name of a customer and concluded that it would not be fair in such circumstances to apply the rule in Clayton's Case. Having satisfied itself that the bank had taken appropriate steps to establish the integrity of the claimant's to the mingled funds, it then considered each claimant in turn and decided the validity of the claim. Having done that, the court ordered the payment out of the funds to the claimants in proportion to their claims. The claimants rights were based on proprietary rights to the money, enabling them to trace the funds into the account (instead of having to prove that they were simply owed a debt).

For further information, please contact Ruth Pedley on +44 (0) 20 7367 2098 or at [email protected]