MCC Proceeds Inc v Lehman Brothers International (Europe)

Conversion requires actual possession or an immediate legal right to possession of the chattel. An equitable interest alone does not suffice, although an equitable owner may sue where it also has a possessory title.

Where shares and certificates are held by a trustee with legal title, the beneficiary’s equitable interest does not make the arrangement a bailment. A bona fide purchaser for value without notice acquires good legal title to the shares and certificates, overreaching the equitable interest. The beneficiary therefore cannot sue that purchaser in conversion or by a reversionary-interest claim. A prior Court of Appeal statement suggesting otherwise was treated as obiter and not good law.

The appeal arose from an action by MCC Proceeds, as successor to Macmillan, against Lehman Brothers International (Europe) concerning five Berlitz share certificates.

In the earlier proceedings, reported as Macmillan Inc v Bishopsgate Investment Trust PLC and Others (No 3) [1995] 1 WLR 978, Millett J held that BIT held the shares as trustee for Macmillan, but that Lehman Brothers had acquired good legal title as a bona fide purchaser for value without notice. The claim to recover the shares was dismissed.

Harman J struck out the new conversion claim under Order 18 rule 19 of the Rules of the Supreme Court. He held that Lehman Brothers had acquired good title to the certificates and rejected the alternative abuse-of-process argument. The appeal concerned whether the certificates could support a conversion claim and whether the second action was barred as a relitigation of matters arising from the first action.

The appeal was dismissed with costs. The conversion conclusion was unanimous. Mummery LJ gave the leading reasoning; Pill LJ agreed, and Hobhouse LJ reached the same result for substantially the same reasons.

1. Conversion. A claimant must have actual possession or an immediate legal right to possession of the chattel at the time of the alleged conversion. An equitable interest alone does not confer title to sue. An equitable owner may sue only where it also has the necessary possessory title.
2. Trust and bailment. The nominee agreement created a trust, not a bailment. BIT held the legal title to the Berlitz shares and possessed the certificates as incidents of that legal title. Macmillan’s right to require transfer of the shares was the ordinary obligation of a bare trustee and did not create an immediate possessory right in Macmillan.
3. Effect of the transfer. BIT’s transfer of the shares and certificates to Lehman Brothers gave Lehman Brothers good legal title as a bona fide purchaser for value without notice. Macmillan’s equitable interest was overreached and extinguished. The dealings with the certificates, including their cancellation and transfer into the paperless system, therefore did not constitute conversion. The proposed claim concerning a reversionary interest failed for the same reason. The court also held that the broader equitable-title reasoning in International Factors Ltd v Rodriguez [1979] 1 QB 351 was obiter and not good law, while accepting that case’s reliance on an immediate contractual right to delivery.
4. Alternative res judicata ground. Mummery LJ and Pill LJ would also have struck out the action as an abuse of process. Applying the principles in Henderson v Henderson (1843) 3 Hare 100, the essential issue of title had already been decided, Lehman Brothers and Shearson Lehman had a sufficient community of interest, Lehman Brothers could have been joined, and no special circumstances justified a second action. This was alternative reasoning only. Hobhouse LJ disagreed, considering that, if the conversion claim had had a realistic prospect of success, the different parties, property and cause of action would not have made the second action abusive.

Formal order: appeal dismissed with costs. Leave to appeal to the House of Lords refused.

• Court of Appeal (Civil Division): Appeal dismissed with costs. Leave to appeal to the House of Lords was refused.
• Chancery Division (Harman J): On 5 February 1996, the statement of claim was struck out and the action dismissed under Rules of the Supreme Court Order 18 rule 19. The conversion claim was held to disclose no reasonable cause of action. The res judicata and abuse-of-process objection was rejected.