FHR European Ventures LLP & Ors v Mankarious & Ors

A fiduciary who receives money derived from a breach of fiduciary duty holds it on constructive trust and must account for benefits obtained from it. In tracing mixed funds, Re Oatway applies to money mixed in a single account; it does not extend across separate accounts merely because they are held with the same bank. Tracing is governed by property rights rather than considerations of fairness. Money used for legal fees, stamp duty or other incidental acquisition costs does not enlarge a claimant’s proportionate beneficial share in property. A fiduciary cannot retain profit attributable to the use of the principal’s money. In knowing receipt, knowledge of the relevant facts is sufficient; ignorance of the legal consequences does not prevent liability.

The claimants had obtained declarations that Cedar LLC received a €10 million brokerage fee on constructive trust for them. They applied for consequential relief concerning assets and payments derived from the fee, including an interest in a property, life insurance policies and monetary judgments against Mr Mankarious and Cedar Ltd.

The parties agreed the relevant facts and the issues were legal or involved applying legal principles to those facts. The court therefore determined whether the defendants could challenge their fiduciary status, how the fee should be traced through separate bank accounts, whether profits and insurance policies were recoverable, and whether the defendants were liable in knowing receipt.

1. Fiduciary status and breach. The defendants had admitted that they were fiduciaries and could not resile from that admission. The earlier judgment had not determined whether Mr Mankarious and Cedar Ltd were liable for later receipts, so that issue remained open. Their receipt of money derived from the fee placed their personal interests in conflict with their duties, and constituted breaches of fiduciary duty.
2. Tracing into the property. Under Foskett v McKeown, a claimant may elect between a proportionate share in an asset and a lien securing the misapplied money. Re Hallett’s Estate applies where trust and personal money are mixed in one account. Re Oatway does not extend the rule across separate accounts, even where the accounts are held with the same bank. The deposit was therefore treated as comprising £78,982.03 derived from the fee and £101,047.97 of the defendants’ money.
3. Legal fees, stamp duty and other incidental costs were not paid to the seller as part of the purchase price and did not augment the claimants’ proportionate share in the property.
4. Because Mr Mankarious was a defaulting fiduciary, he could not retain profit attributable to his share in the property. The claimants were entitled to that profit.
5. The claimants’ beneficial interest in the life insurance policies was proportionate to the premiums paid from fee-derived money. A separate qualification concerning continued validity of the policies was unnecessary.
6. Knowing receipt. The parties agreed the six requirements stated in Lewin, Trusts. The modern knowledge test was whether the recipient’s state of knowledge made it unconscionable to retain the benefit. Knowledge of the relevant facts was sufficient; ignorance of the legal remedies or consequences was irrelevant. Mr Mankarious was therefore accountable for the full $5.1 million transferred to him, including the $4.8 million paid to the United States Treasury.
7. The claimants were entitled to monetary judgments of £1,661,076.13 against Mr Mankarious, £51,755.11 in respect of sums transferred by Cedar Ltd to him, and £1,016,676.32 against Cedar Ltd. The Re Hallett basis, rather than the Re Oatway basis, governed the calculations.

1. High Court (Chancery Division): Simon J held that Cedar LLC was accountable for the fee but initially rejected the claim that it was subject to a constructive trust.
2. Court of Appeal: on 29 January 2013, the appeal was allowed and Cedar LLC was declared to have received the fee on constructive trust.
3. Supreme Court: on 16 July 2014, Cedar LLC’s appeal was dismissed.
4. High Court (Chancery Division): the present judgment determined consequential tracing, accounting and knowing-receipt issues.