Civil Fraud Claims

12 February 2013

Civil Fraud Claims

Presented by

Chris GreenwellClaire HerbertNatalie Howes

Crimes

• Fraud is a crime• This is an intentional deception made for

personal gain or to damage another• Crimes are about offences against the

public and regulation of people and entities by the state

• The primary penalty in crime is conviction and subsequent sentence

The overlap

• As well as being a criminal wrong fraud may be a civil wrong

• Civil law in relation to fraud is about the regulation of matters between entities or individuals rather than the state

• The criminal law has overlapping power. It can take precedence if a fair trial might be prejudiced. It can freeze fraudulently obtained assets and it can confiscate and recover assets deriving from fraud

The overlap

• The objective of the civil law is to preserve and recover lost assets and broadly speaking not to punish (NB aggravated/exemplary punitive damages)

• So civil fraud is about A acting against B to get money back that A claims B has wrongfully taken

• Civil remedies are often preferable to the party that has been defrauded

The burden of proof

• In criminal cases to ‘win’ a case must be proved beyond reasonable doubt

• In civil cases to ‘win’ a case must be proved on the balance of probability

• Therefore easier to win in a civil case

The burden of proof • There are very strict rules on the stating of Civil

Fraud cases to the court

‘In order to be sustainable an allegation of fraud in a pleading must be clearly expressed. If the facts pleaded are consistent with innocence, it is not open to the court to find fraud unless an allegation of fraud or dishonesty is expressly made. Thus an allegation that a Defendant ‘knew or ought to have known’ is not a clear an unequivocal allegation of actual knowledge and will not without more support a finding of fraud’. (Armitage -v- Nurse 1998. Millet J)

Species of fraud – criminal

• Hugely wide ranging but broadly prosecuted under either:

1. The Theft Act 1968• Obtaining property by deception• Obtaining pecuniary advantage by

deception• False accounting• There are many other offences under the

Theft Act

Species of fraud – criminal

2. Or Fraud Act 2006• Principally fraud • Fraud by false representation • Failing to disclose information • Or abuse of position.

• There are also many other offences under the Fraud Act

Species of fraud – civil

• Civil fraud is far less codified but broadly all criminal offences are also actionable fraud falling within the general common law definition or other civil wrongs

Deceit

‘A false representation by the Defendant of an existing fact made knowingly or without belief in its truth or recklessly, careless whether it be true or false with the intention that the Claimant should act on it and which results in damage to the Claimant’

Deceit

• Some examples of deceit:-• C is a high street store. Its director of

property colludes with my client to siphon money out of the high street store.

• Though my client (a former international cricketer) knows nothing of property, he raises invoices to the store apparently for sophisticated property services supplied

Deceit

• There are no services. It is a scam• The director of property pays invoices from

the store to my client.• He receives the money and they divide it

up. It is deceit. It is dishonest assistance, and it comprises a secret profit

Deceit

• The assets of the deceivers are frozen. No one is prosecuted until the civil claim is over.

• The money is recovered.• My client is ruined.• Another example (Vahey -v- Kenyon

reported this month)

Deceit

• The Claimant buys a property from the Defendant. Before he buys it, he asked if it has been the victim of flooding. The Defendant says no. That’s a lie.

• Even though the purchaser might have bought the property anyway (so D claimed there was no loss), this comprised a deceit and the purchaser was able to claim against the seller for the very considerable reduction in value caused by the purchaser being saddled with a property which flooded.

Deceit

• Another example, D colludes with a valuer, V (acting behind his employer’s back), to lie about the true value of properties by inflating values in order to obtain mortgages far in excess of the true value of properties. This happens many times to create a small empire.

• In 2007 the world changes. The mortgages are already far higher than the properties’ true worth and they are now standing the lenders a substantial paper loss (£6 million).

Deceit

• In fact the claim is brought by the valuation company worried that they will in turn face claims by the lenders and they act to freeze the assets of D and V.

• A deal is done, and the valuation company take over management of the properties in an effort to ensure that the value is enhanced and the lenders suffer no loss.

• D lost her interest in all the properties; a claim is brought against her in respect of conspiracy to deceive and common law fraud

Unjust enrichment

• The Defendant is enriched• At the expense of the Claimant• It must be unjust • There is no defence for the Defendant

Unjust enrichment

• What is unjust?• A mistake is made• Ignorance • Duress • Undue influence • Failure of consideration• Illegality

Unjust enrichment

• Defending allegations of unjust enrichment• Change of position• Bona fide purchaser• Ministerial receipt • Limitation

Unjust enrichment

• Examples • ‘Employer’ pays PAYE for an ‘employee’

who has received all the money gross. The employer has misunderstood the tax treatment of the income. The employer sues the employee, claiming he is unjustly enriched to the extent of the tax paid. The employee has to repay the employer.

Unjust enrichment

• Examples • A retiring partner allows his remaining

partner to keep capital not realising there is £100,000 too much having been misadvised by his accountant. The allegation is that the £100,000 is a ‘windfall’ entitling the retiring partner to have all the money back.

Breach of fiduciary duty ‘A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship with trust and confidence. The distinguishing obligation is the obligation of loyalty. The principal is entitled to the single minded loyalty of his fiduciary. The core liability has several facets. The fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal…they are the defining characteristics of the fiduciary…’

Breach of fiduciary duty

• This arises as between• Trustee and beneficiary• Solicitor and client • Agent and principal • Director and company • Partner and partnership• Parties to a joint venture

Breach of fiduciary duty

• For example• A financial adviser advises a client to

invest in a speculative instrument without paying adequate regard to either the client’s appetite for risk or the inherent high risk in the instrument.

• The world changes, the value falls, the financial adviser may be in breach of fiduciary duty.

Breach of fiduciary duty • Another example

• A solicitor acts for seller, buyer and lender. The solicitor has to investigate title for the lender and report on it so the lender lends the money to the purchaser.

• The solicitor has information about the purchaser which he ought to disclose to his client the lender but does not.

• A potential breach of fiduciary duty arises for failing to disclose this information and acting in conflict.

Breach of fiduciary duty

• It will be evident that in relation to unjust enrichment, and in relation to breach of fiduciary duty, ‘fraud’ or ‘dishonesty’ have very wide applications in civil law encompassing recklessness or carelessness rather than what might conventionally be thought of as out and out dishonesty.

Dishonest or knowing assistance

• The constituent elements of the claim for dishonest assistance• The existence of a trust or fiduciary

relationship• A breach of that trust or fiduciary relationship• No requirement in fact for the trustee or

fiduciary to be dishonest• The Defendant must have induced or

assisted in the breach of trust or fiduciary relationship

Dishonest or knowing assistance • The Defendant must have acted dishonestly

in providing the assistance • In the example of the retail store defrauded

by its property director and the cricketer, the cricketer would be guilty of dishonestly or knowingly assisting the director breach the fiduciary duties owed to the store. (NB in this example, the director was as dishonest as the cricketer, although there is no requirement for the fiduciary to be dishonest).

Knowing receipt

• The constituent parts of a claim for knowing receipt:

1. Assets are held under a trust or fiduciary duty

2. Disposal of those assets is made in breach of trust or fiduciary duty

Knowing receipt

3. There is beneficial receipt of those assets or traceable proceeds by the Defendant

4. The knowledge of the Defendant is sufficient so as to render it unconscionable for him to retain the assets

Knowing receipt

• So for example husband is guarantor of lendings in relation to a property transaction.

• He knows the personal guarantee is going to be called on for £260,000.

• The family home is in the husband’s name only. He creates a false ‘loan’ from wife and enters a restriction on his property to endeavour to distance the beneficial interest in the property to the extent of the loan from his creditors.

Knowing receipt

• The wife knowingly receives a beneficial interest that she knows she does not have.

• The wife also knowingly assists in the attempt to facilitate the transaction entered into to defraud creditors.

Key considerations

• The fraud

• The assets • The Crown

Key considerations

• Fill the document and information deficit • Preserve the assets and funds • Be aware of making elections

• Consider the interface with the Crown

Key considerations

• Identifying and locating assets and the fraudsters• Pre-action disclosure• Search orders • Third parties:

• equitable jurisdiction• discovery jurisdiction

Key considerations

• Protecting the assets • Freezing injunctions:

• Good arguable case/risk of dissipation• Evidence obtained illegally• Standard freezing/proprietary injunction • Information

Key considerations The Crown

• Staying the civil claim until the criminal case is concluded• privilege only applies where there is

compulsion;• a stay is discretionary and the burden is

on the Defendant;• a lesser order may be appropriate

Key considerations Confiscation proceedings

• Restraint Order• Confiscation for the Crown• Compensation for the victim ‘the Super

Order’• Interim Judgment in civil proceedings

-beware!• Notification to the Crown

Questions