A classic resulting trust

I don’t know if I have the courage to attempt to explain to a lay (ie, non-lawyer) reader:

  1. the concept of a trust;
  2. the concept of a resulting trust; and
  3. the concept of a constructive trust.

As to (1), most people know that you have a trust when somebody (a trustee) appears to own something, but really they only own it on behalf of somebody else or for some special purpose (or sometimes a combination of those things).

One kind of resulting trust is when the purpose of a trust has come to an end.  Then there is said to be a resulting trust back to the person who gave the property to the trustee in the first place.  (There are some sophistications to this which I must pass over for the sake of simplicity.)

Another common type of resulting trust is when person A gives something to person B, or provides person B with the purchase price for an asset which is then apparently owned by the person B, but it was never the intention to actually give anything to person B or for person B to truly (the term of art is “beneficially”) own the asset.  In such cases, person B never became the true owner of the thing given or the asset purchased, and they held it on a resulting trust for person A.

Often, in the factual circumstances, this will overlap with a constructive trust, which is where, because of a range of possible circumstances surrounding how person B became the owner of an asset, the court will order that person B holds that asset on trust for person A.

Shang v Zhang [2007] NSWSC 856 is a recent judgment of Justice Young in the Supreme Court of NSW which shows how these doctrines may overlap, and which also has the advantage of some rather colourful facts.

In 1999, Mr Shang, the plaintiff, who lived in Hong Kong, planned to send his adult son, Jin, to live in Sydney on a student visa with his nephew, Nick (Anglicized name) and Nick’s wife, Ms Zhang (the first defendant and an Australian citizen).  As part of this plan, Shang provided substantial funds, transferred via Jin’s bank account in Australia, which were used to purchase various properties in Zhang’s name, to repay the mortgage on one of those properties and to fund a company which purchased and ran a pizza shop in Glebe.

To quote from the judgment:

As things worked out, the first defendant and Nick separated on 18 January 2004 and divorced in 2005. The first defendant and Jin formed a romantic relationship and a daughter, Dorothy, was born of this relationship in February 2006.

OK.  Just to recap before we go further:

  • Shang is the rich father in Hong Kong – he was the plaintiff;
  • Jin is his son;
  • Zhang is the wife of Nick, Zhang’s nephew and Jin’s cousin, subsequently Jin’s lover and the mother of Jin’s daughter, Dorothy – she was the first defendant.

I know you will be confused if you don’t keep this clearly in mind, even though it is a lot simpler than those Russian novels with all those patronymics and matronymics. 

In April 2006, Jin returned to China (the judge may mean Hong Kong SAR).  In June 2006, his father, Shang, found out about Jin’s relationship with Zhang and about their daughter (and his granddaughter) Dorothy.  It can probably be assumed that he was not pleased with such a family scandal.  He demanded that Zhang return the properties or their proceeds to him. 

By this stage, Zhang:

  1. Owned a house in Chatswood, which had been purchased in 2005 for $1.2 million.  The court subsequently found that this was made up of $150K from Zhang; $250K of Shang’s money from Jin and a bank loan to Zhang of $800K;
  2. Had received a further $250K of Shang’s money from Jin which she had used to pay down the mortgage on the Chatswood property; 
  3. Owned an apartment in Sussex Street which had been purchased with $500K of Shang’s money in 2001;
  4. Had retained all the proceeds of the sale of the pizza shop, and deregistered the company which had been used as a vehicle to buy it without repaying the $350K of Zhang’s money which had been lent to the company.

Zhang appears to have taken the position that the properties either belonged to Jin, or that they or the funds provided by Jin were gifts to her.  After Shang asked for repayment of the money or return of the properties, Zhang mortgaged the Chatswood and Sussex Street properties for a further $600K and passed these amounts through her father’s bank account in Hong Kong to purchase “financial products” there.  Something similar appears to have happened previously involving her mother in relation to the money from the sale of the pizza shop.

Shang sued Zhang and her mother, as well as, for procedural reasons which are too complicated to go into here, his son, Jin (who in fact gave evidence in his father’s case). 

The basis on which Justice Young upheld the claim was of a resulting trust, although it is probably more accurate to say that, for the properties, there was a chain of resulting trusts: the money which Jin contributed was Shang’s; the assets bought with that money were not given to Zhang and were in turn held on a resulting trust for Jin as trustee for Shang; the moneys raised against the properties in 2006 and the investments purchased with them were the proceeds of those assets. The loans by Jin to the company for the pizza business and to Zhang to pay down the mortgage were owed to Jin on a resulting trust in favour of Shang.

In the end there was no claim upheld against Zhang’s mother, because it could not be established that she knew that any transactions she was involved in related to funds held on trust for Shang or in breach of those trusts.  However, Justice Young said:

I do not believe her evidence in the witness box. She was willing to lend her name to the first defendant [her daughter] to assist in hiding money and I do not consider that she should receive any costs of these proceedings.

There was also an alternative claim for a constructive trust, apparently on the basis of knowing participation by Zhang in a breach of trust by Jin, in that she knew that the money was provided to him for one purpose but assisted him in using it for a different purpose.  In Australia this is known as the “second limb of Barnes v Addy.”  This refers to a leading English case of 1874.  Funnily enough, a few years ago when I was in England speaking to lawyerly witnesses for a big law case I was involved in, it became clear that this case is less well known there than here.  It appears that Australians are peculiarly fixated on this case as a classical and almost statutory exposition of principle.

It is also possible, since Zhang received trust assets, that the claim was for knowing receipt – known in Australia as the “first limb of Barnes v Addy.”

There has been some judicial controversy as to the degree of knowledge or dishonesty required to enliven liability under the “second limb.”The English courts appear to require a higher degree of dishonesty than the Australian courts do before making a third party liable who has not actually received the trust property.  This is why I take it that the case was approached at some stage as being advanced under the “second limb.”

Justice Young does not seem to have been particularly concerned to spare the feelings of the parties. Even though it was unnecessary to do so, he offered a passing comment on this claim.  He said:

66 As I hope my reasons have shown, there is no need to get into this area because the case is a clear one on the facts for a simple resulting trust. The plaintiff never ever intended that the first defendant should end up with almost $2 million of his property.
67 However, it was put that the pleadings do not indicate any dishonesty on behalf of the first defendant. So far as the resulting trust case is concerned, that is right, but it is irrelevant.
68 However, I said earlier that I would deal with the question of the first defendant’s behaviour whether honest or otherwise. It seems to me that when one knows the following: (a) that one’s consort has virtually no money of his own and that all his money comes from his father; (b) that when the father asked for the money back the person who has it borrows on the trust assets to the hilt, moves the money from her own name to that of her parents and then off-shore; (c) launders money from the trading company by deregistering it and giving it to her mother – one can only explain that conduct by dishonesty or by a misguided sense of self protection.

This doesn’t really seem to settle the matter at all, since he doesn’t say what the consequences of a “misguided sense of self protection” would be.  All the same, you don’t often see “consort” used in this sense in this day and age, do you?

For the law nerds, there is another interesting point in this case invoking the application of section 56 of the Civil Procedure Act, but I think it is just too technical for general consumption, even beyond the bounds of what I have related already.

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