Law Society of Upper Canada v. Toronto Dominion Bank

Law Society of Upper Canada v. Toronto Dominion Bank Collection Decisions of the Court of Appeal Date 1998-12-07 Docket numbers C23189 Judges Osborne, Coulter Arthur Anthony; Labrosse, Jean-Marc; Blair, Robert Ashley Subject Civil Decision Content DATE: 19981207 DOCKET: C23189 COURT OF APPEAL FOR ONTARIO OSBORNE and LABROSSE JJ.A. and BLAIR J. (ad hoc) BETWEEN: ) ) THE LAW SOCIETY OF UPPER ) Elizabeth K. Ackman CANADA ) for the appellant ) Applicant ) (Respondent) ) ) - and - ) ) Nancy J. Spies and THE TORONTO DOMINION BANK ) Robert MacKinnon ) for the respondent Respondent ) (Appellant) ) ) Heard: April 17, 1998 BLAIR J. (ad hoc): PART I B BACKGROUND AND FACTS [1] Between December 16, 1990 and September 24, 1991 Philip Upshall, a solicitor, misappropriated over $900,000 from his clients' trust account at the TD Bank. This appeal involves the claims of competing beneficiaries to the shortfall of funds remaining in that trust account when it was frozen on October 2, 1991, and the manner in which their respective shares are to be determined. It raises issues concerning what is known as "the rule in Clayton's Case" and a descendant concept called "the lowest intermediate balance rule" (frequently referred to by the acronym "LIBR"). [2] The account was frozen after the Bank was advised that Mr. Upshall had been hospitalized in a psychiatric ward and that the Law Society would be managing the operation of his trust account from that point on. Mr. Upshall was subsequently found guilty of misappropriating client monies by the Law Society of Upper Canada, and disbarred. He made an assignment into bankruptcy on December 21, 1993. [3] As is customary in the case of lawyers' trust accounts, the funds deposited for the account of Mr. Upshall's clients were co- mingled. Clients' claims to the trust funds in the account as at October 2, 1991 total $656,703.06, and there is a significant shortfall in what remains for distribution to the claimants. The evidence is that both the list of clients and the amounts credited to each client as deposits are known and not in dispute. [4] The last misappropriation from the trust fund occurred on September 24, 1991. At the time, the balance in the account was $66,242.68. On September 25th the TD Bank deposited the sum of $173,000 into the trust account. It did so to enable Mr. Upshall to advance mortgage funds to its client, Douglas Crump. Mr. Upshall was acting as solicitor for the Bank and for Mr. Crump in connection with this mortgage transaction. The funds were deposited on condition that they be released by Mr. Upshall to the borrower, or as the borrower may direct, once the solicitor was satisfied that the the Bank would have a good and valid first charge on title. The account was frozen before this transaction was completed. [5] On October 2nd B immediately following notification that Mr. Upshall had been hospitalized and that the Law Society would thereafter be managing the account B the Bank withdrew the $173,000 from the trust account, without authorization, and transferred it to another solicitor to complete the mortgage transaction. On the Application by the Law Society before Mr. Justice Farley the appropriateness of the Bank's conduct in doing this was very much in issue (he held it was inappropriate). Before this Court, the Bank took the position that the appeal should be decided on the basis that the monies which had been removed by it from the account were still in the account and available for distribution. It is therefore unnecessary to deal with the grounds of appeal initially raised which relate to the issue of the Bank's removal of the funds from the trust account. [6] The question on this appeal is whether all clients of Mr. Upshall with funds deposited in the trust account have a claim against the whole of the funds standing to the credit of the account as at the date of its being frozen (including the Bank's deposit of $173,000 made after the misappropriations had ceased), or whether the claims of those clients other than the Bank are confined to a smaller sum no larger than the $66,242.68 balance which existed at the time the last funds were wrongly removed. The appellant Bank argues for the latter position, on the basis of the lowest intermediate balance rule. The Law Society submits that the appropriate approach is that of a pro rata distribution based upon the entirety of the fund as at the date the account was frozen. [7] Farley J. held that the lowest intermediate balance rule did not apply in the circumstances of this case, and ordered that the co-mingled funds should be distributed on a pro rata basis. In summary, his reasoning was: a) that once trust funds are co-mingled in an account they lose their "earmarked" identity to particular clients and become a single mixed trust fund; b) that each client B although possessed of an individual trust claim against the trustee for the funds advanced to the trustee B then has an equal claim against the mixed account; c) that the timing of the misappropriations is irrelevant and the appropriate point in time for determining the claimants' entitlement is the date on which the trust account was frozen (or more technically, perhaps, the time when the last injection of funds was made), because it is the money in the mixed trust account which has been stolen and not that of any particular client B "the mixed trust account cannot be segregated into a 'tainted' pot (of X$) and an 'untainted' pot (of $173,000)"; and, d) that a trust account which involves co-mingled funds should be distributed on a pro rata basis in circumstances where the account is in a shortfall position and the clients, along with the deposits attributable to them are known: see, Re Ontario Securities Commission and Greymac Corp. (1985), 51 O.R. (2d) 212 (H.C.J.); affirmed (1986), 55 O.R. (2d) 673 (C.A.); affirmed (1988), 65 O.R. (2d) 479 (S.C.C.), and cases following that decision. [8] I agree with the conclusion of Farley J., for the reasons which follow. PART II B LAW AND ANALYSIS A. A CONSIDERATION OF "THE RULE IN CLAYTON'S CASE" AND THE "THE LOWEST INTERMEDIATE BALANCE RULE". Overview [9] The Bank's attempt to invoke the lowest intermediate balance rule in the circumstances of this case amounts to nothing more, in my opinion, than an attempt to re-invoke the rule in Clayton's Case, which was rejected by this Court and by the Supreme Court of Canada in Re Ontario Securities Commission and Greymac Credit Corporation, supra. The effect of applying the "lowest intermediate balance rule" to the competing claims of the trust fund beneficiaries is to permit the Bank B the last contributor B to recover what for practical purposes is all of its deposit1, exactly the result which would transpire upon the application of the rule in Clayton's Case. I do not think that result is called for in the circumstances of this case. The Rule in Clayton's Case [10] What is known as the rule in Clayton's Case derives from the decision of the English Court of Appeal in Devaynes v. Noble, Baring v. Noble; Clayton's Case (1816), 1 Mer. 572, 35 E.R. 781. The so-called rule B which is really a statement of evidentiary principle B presumes that in the state of accounts as between a bank and its customer the sums first paid in are the sums first drawn out, absent evidence of an agreement or any presumed intent to the contrary: see Clayton's Case, per Sir William Grant, at pp. 608 - 609, Mer. As Morden J.A. remarked in Greymac, (p. 677) "the short form statement of the rule ... is 'first in, first out' ". In the result, where there are competing claims against a shortfall, the shortfall is applied first to the first deposits made, and later contributors to the fund take the benefit of what remains. [11] The role of the rule in Clayton's Case in competing beneficiary cases, and its history, were examined thoroughly by this Court in Greymac. The application of the rule was rejected as being "unfair and arbitrary" and "based on a fiction" (p. 686). The Court concluded that it was not bound to apply the rule in Clayton's Case, and it did not do so. Nor, for that matter, did it apply the lowest intermediate balance rule. [12] Speaking for a unanimous Court in Greymac, Morden J.A. resolved that as a general rule the mechanism of pro rata sharing on the basis of tracing was the preferable approach to be followed, although he left room for other possibilities such as those circumstances where it is not practically possible to determine what proportion the mixed funds bear to each other, or where the claimants have either expressly or by implication agreed among themselves to a distribution based otherwise than on a pro rata division following equitable tracing of contributions (pp. 685-90). Whatever approach was chosen, Morden J.A. was concerned that it should be one which met the test of convenience B or "workability", as he termed it (p. 688). The core of the Court's conclusions is to be found in the following passage from his judgment, at p. 685: The foregoing indicates to me that the fundamental question is not whether the rule in Clayton's Case can properly be used for tracing purposes, as well as for loss allocation, but, rather, whether the rule should have any application at all to the resolution of problems connected with competing beneficial entitlements to a mingled trust fund where there have been withdrawals from the fund. From the perspective of basic concepts I do not think that is should. The better approach is that which recognizes the continuation, on a pro rata basis, of the respective property interests in the total amount of trust moneys or property available. [Underlining and underlining with italics added.] [13] Having determined that the rule in Clayton's Case ought not to be applied in cases involving the claims of competing trust beneficiaries, Morden J.A. concluded in Greymac that pro rata sharing based on the respective property interests of the claimants in the total amount of trust money or property available, should be applied. He accepted such pro rata sharing as the general method of determining such competing claims. Whether, as some have suggested2, he also recognized and incorporated into the pro rata sharing exercise the concept of the lowest intermediate balance rule, and if so to what extent, is an issue that will be dealt with momentarily. First, however, I propose to turn to an analysis of the history and application of the LIBR notion. The Lowest Intermediate Balance Rule: An Outline [14] The "lowest intermediate balance rule" states that a claimant to a mixed fund cannot assert a proprietary interest in that fund in excess of the smallest balance in the fund during the interval between the original contribution and the time when a claim with respect to that contribution is being made against the fund: see Maddaugh and McCamus, The Law of Restitution, at pp. 153 -154. [15] The LIBR concept is a descendant of the rule in Clayton's Case. It was originally articulated by Sargant J. in James Roscoe (Bolton), Limited v. Winder [1915] 1 Ch. 62. In that case the purchaser of a business, Mr. Winder, who had contracted to collect the outstanding book debts of the business and to pay them to the company, did the former but not the latter. Over time he collected ,455 and deposited the funds into his own general account, but he subsequently drew out all but ,25, before eventually putting in more monies of his own and, again, drawing on the account for his own purposes. There was a credit balance in the account of ,358 at the time of his death. The Court held that he was a trustee of the ,455 for the benefit of the company, but that the company's claim against the fund was limited to the lowest intermediate balance in the account of ,25. [16] Sargant J. erected the LIBR foundation upon two principle footings. The first of these was the premise that the rules of proprietary tracing preclude a beneficiary, after a mixed fund has been depleted, from reaching any subsequent contributions made by others to that fund (in the absence of some actual or presumed intention to replenish the fund). The second was a rejection of the notion that the account may be treated as a whole and the balance from time to time standing to the credit of that account viewed as being subject to one continual charge or trust. In outlining the rationale for his conclusion, Sargant J. said (at pp. 68-69): [Counsel] did say "No. I am only asking you to treat the account as a whole, and to consider the balance from time to time standing to the credit of that account as subject to one continual charge or trust." But I think that really is using words which are not appropriate to the facts. You must, for the purpose of tracing, which was the process adopted in In re Hallett's Estate3, put your finger on some definite fund which either remains in its original state or can be found in another shape. That is tracing, and tracing, by the very facts of this case, seems to be absolutely excluded except as to the 25l 18s. . . . . Certainly, after having heard In re Hallett's Estate stated over and over again, I should have thought that the general view of that decision was that it only applied to such an amount of the balance ultimately standing to the credit of the trustee as did not exceed the lowest balance of the account during the intervening period. [17] The LIBR principle has never been analysed by Ontario or other Canadian Courts. However, it has been applied several times at the trial level B in bankruptcy situations B in this Province: see, Re Thompson, ex parte Galloway (1930), 11 C.B.R. 263 (Ont. S.C. in Bankruptcy); Re Wineberg (1969), 14 C.B.R. (N.S.) 182 (Ont. S.C. in Bankruptcy, Registrar); Re 389179 Ontario Ltd. (1980), 113 D.L.R. (3d) 206 (Ont. S.C. in Bankruptcy, Saunders J). Its existence has been accepted (with very little comment) on two occasions in this Court in decisions preceding Greymac: see, Re Norman Estate [1951] OR. 752 (C.A.); and, General Motors Acceptance Corp. of Canada Ltd. v. Bank of Nova Scotia (1986), 55 O.R. (2d) 438 (C.A.), at p. 443;. The LIBR concept has also been accepted by the British Columbia Court of Appeal in British Columbia v. National Bank of Canada et al., (1994), 119 D.L.R. (4th) 669, at pp. 687-689; leave to appeal to S.C.C. refused, September 28, 1995, and by the British Columbia Supreme Court in Re 1653 Investments Ltd (1981), 129 D.L.R. (3d) 582, at p. 597, sub nom. Coopers & Lybrand v. The Queen in right of Canada. [18] No Canadian authority has attempted to describe how the LIBR principle is to be employed. Nonetheless, from a review of the foregoing authorities, I take the rationale underlying the LIBR theory in relation to co-mingled trust funds to encompass at least the following concepts: 1. that beneficiaries are entitled, through the equitable and proprietary notion of tracing, to follow their contribution into the mixed fund; 2. that beneficiaries of a such a fund have a lien or charge over the totality of the trust fund to the extent of their interest in it; 3. but that once a wrongful withdrawal has been made from the fund, the claims of beneficiaries with monies in the fund at the time of the withdrawal are thereafter limited to the reduced balance, and that depositors to the trust fund are not entitled to claim further against any subsequent amounts contributed to the fund either by the trustee (unless made with the intent to replenish the withdrawn amount) or other by other beneficiaries; and, 4. that this inability to claim against anything in excess of the smallest balance in the fund during the interval between the original contribution and the time of the claim flows from the inability to claim a proprietary right to subsequent amounts deposited, since it is not possible to trace the original claimant's contribution to property contributed by others. [19] This latter concept is grounded, ultimately, on the premise that tracing rights are predicated upon the model of property rights. LIBR seeks to recognize that at some point in time, because of earlier misappropriations, an earlier beneficiary's money has unquestionably left the fund and therefore cannot physically still be in the fund. Accordingly, it cannot be "traced" to any subsequent versions of the fund that have been swollen by the contributions of others, beyond the lowest intermediate balance in the fund. Such is the theory, at any rate. The decision in Greymac and the Parameters and Practical Application of LIBR Greymac [20] In Greymac this Court did not apply the lowest intermediate balance rule. Indeed, it was not necessary for the Court to consider LIBR. Once it had been decided that the claimants had a right to trace their contributions to both the account into which the deposits had originally been made and the second account at Crown Trust into which the $4 million withdrawal had been placed, there was only one balance to be concerned about. While Greymac clearly rejects the rule in Clayton's Case as a means of determining how the monies in a mixed trust account are to be allocated in the event of a shortfall, and adopts the notion of pro rata sharing based upon tracing as the general rule, it does not apply the lowest intermediate balance rule in the context of such pro rata sharing. [21] The view that Morden J.A. affirmed the lowest intermediate balance rule4 B or at least acknowledged it with approval5 B in the Greymac case has its source in the following passage from his reasons, at p. 688: ...We are concerned with the resolution of competing proprietary, not personal, claims. At the time of the mingling of the trust funds the companies [i.e. one group of claimants] had $4,683,000 in the account. Regardless of how much they had earlier in the account, they cannot say that they had a proprietary interest in any more than the amount in the account to their credit on and after December 15, 1982: see James Roscoe (Bolton), Ltd. v. Winder, [1915] 1 Ch. 62, and Re Norman Estate, [1951] O.R. 752, [1952] 1 D.L.R. 174. [22] It is important to note that Morden J.A. made these remarks in the context of dealing with an argument that more monies than those to the credit of the claimants at the time the fund had become a mixed fund should have been taken into account if the funds were to be divided on a pro rata basis. The date referred to B December 15, 1982 B was the date on which the funds had become a co-mingled trust account. I therefore regard the foregoing comments of Morden J.A. as referring as much to timing as to anything else. He was concerned with determining when the parties respective proportionate interests should begin to be assessed B i.e. to the timing as of when the pro rata calculations should be triggered (namely when the fund first took on its character as a "mixed fund"). I note in particular in this regard, that in the passage for which the Roscoe case is cited as authority, Morden J.A. states that the claimants "cannot say that they had a proprietary interest in any more than the amount in the account to their credit at the time the funds were intermingled. This is the language of deposits made by the claimants. It is not the language of the lowest balance in the account, which is what LIBR deals with. I do not interpret Morden J.A.'s comments as indicating an intention to adopt the concept of LIBR for purposes of calculating pro rata sharing in Greymac. Parameters and Practical Application of LIBR [23] The British Columbia Law Reform Commission seemed to endorse a LIBR approach in its Report on Competing Rights to Mingled Property: Tracing and the Rule in Clayton's Case (1983). In a rare attempt to define both the problem which LIBR seeks to address and the mechanics of its proposed solution, the Commission stated (see pp. 53-54): Terms like "pari passu", "pro rata", "rateably", and "proportionately" are inherently ambiguous. Do they mean that shortfalls or accretions to a fund are shared in proportion to the original interests claimants to that fund possessed? Or do they mean that shortfalls or accretions to a fund are shared in proportion to those interests claimants to that fund possess after each transaction made with respect to that fund is taken into account? In the Working Paper we tentatively concluded that the latter meaning was fairest. [Underlining and italics added.] For example, A, a trustee, deposits $1,000 of B's money in his account, mixing it with $1,000 of his own money. A removes $1,500. A then deposits $1,000 of C's money. B and C should not share the fund of $1,500 equally, notwithstanding that B's original interest in the fund was $1,000 and that C's current interest is $1,000. B's interest in the fund has been reduced by $500. B's lien should be reduced from securing $1,000 to now securing $500, the minimum balance of the fund following the deposit of his money and prededing the deposit of C's money. C would be entitled to a lien of $1,000. No transactions have occurred yet to reduce his interest in the fund. To avoid confusion, legislation enacting these recom-mendations should define exactly how "pari passu" sharing takes place. One possible formulation is as follows: If there are two or more persons with interests in a fund, the amount of any shortfall from or accretion to the fund which would have affected their respective interests, and which is not appropriated to a specific interest or interests, is divided and attributed to their respective interests in such proportion as their respective interests bore to the sum of those interests before the shortfall or accretion occurred. [Italics in original text.] [24] As far as I am aware, no such legislation has ever been enacted. In my view, however, this approach is too complex and impractical to be accepted as a general rule for dealing with cases such as this. [25] It was precisely for this reason that a version of LIBR B referred to as the "rolling charge" or "North American" approach, because it was considered to be derived from various North American authorities, including Greymac B was rejected by the English Court of Appeal in Barlow Clowes International Ltd. (in liq) v. Vaughan [1992] 4 All E.R. 22. Barlow Clowes International involved a very large and complex insolvency. Saying that the North American approach was "not a live contender" because of the costs involved and the complexity of its application, Lord Justice Woolf instead adopted what he labelled "the pari passu ex post facto" solution. This solution involved a simple rateable sharing of the remaining funds based upon "establishing the total quantum of the assets available and sharing them on a proportionate basis among all the investors who could be said to have contributed to the acquisition of those assets, ignoring the dates on which they made their investments." (supra, p. 36). It is a solution which, in my opinion, makes sense in most situations. [26] None of the authorities to which we have been referred has applied LIBR in the context of a relationship between innocent beneficiaries; and whether the same set of assumptions as those governing LIBR and outlined in the earlier portions of these reasons, should operate to resolve situations where the competition is not between trust claimants and the wrongdoer, but between the trust claimants themselves in relation to a shortfall of funds in the trust account, is to my mind a different question. [27] In the latter type of situation, everyone is a victim of the wrongdoer. Presumptions about what the wrongdoer may or may not have intended B in terms of replenishing the fund with subsequent contributions, or in terms of being honest and using his or her own funds first B are of little assistance. Moreover, competing trust claimants are not in the same position as ordinary creditors of the wrongdoer. They are wronged trust beneficiaries, and as a result of that relationship they are entitled not only to a personal remedy for breach of trust against the wrongdoer, but also to a proprietary remedy against the fund in respect of which the trust relationship exists. It is always open to a trust contributor to gain protection from having to share a shortfall with others by insisting upon the funds being placed in a separate trust account. [28] In determining how a pro rata distribution is to be effected in circumstances of co-mingled trust funds, the issue whether this proprietary remedy must be inflexibly tied to a pre-existing proprietary right B i.e., the purely logical application of tracing rules B is an important question. In my view, in circumstances such as this, they need not be inflexibly tied together, and the concept of the mixed trust fund as a "whole fund", the balance of which from time to time is subject to a continual charge or trust -- rejected by Sargant J in James Roscoe (Bolton) Limited v. Winder, supra B should be reconsidered. [29] Sargant J's rejection of the "whole-fund continual-charge-or- trust" notion was founded upon an interpretation of the earlier decision in Re Hallett's Estate, supra. To the extent that there is any support for this view in that case, however, it is limited to an obiter dicta comment made by Thesiger L.J. in dissent (see pp. 745-746); and in my reading of Re Hallett's Estate I can find nothing which otherwise suggests or mandates any such conclusion. I shall return to this issue later. B. A CHOICE OF GOVERNING PRINCIPLES [30] Where, then, does all of this lead? [31] In the end, there remain two general approaches which may be taken to the resolution of how pro rata distributions are to be made in circumstances such as this case -- the rule in Clayton's Case having now been discarded for such purposes. The first is that of applying the lowest intermediate balance rule. The second is that of applying what Woolf L.J. called the "pari passu ex post facto" approach, in Barlow Clowes International. There seems to be no binding authority compelling the application of one approach or the other to circumstances such as those in this case. The Court should therefore seek to apply the method which is the more just, convenient and equitable in the circumstances. [32] No authority has ever applied the lowest intermediate balance rule in circumstances involving the rival claims of trust beneficiaries, as I have already noted. The mechanics of how the lowest intermediate balance rule actually works have never been fully explained. Indeed, even in situations concerning defaulting trustees and beneficiaries, where the rule has been invoked, it does not appear to have been implemented in any case involving more than a small number of competing beneficiaries and a correspondingly small number of transactions. This, I suspect, is because although LIBR may be "manifestly fairer"6 in the pure sense of a tracing analysis, it is manifestly more complicated and more difficult to apply than other solutions. [33] What LIBR involves B as best I can ascertain it from the authorities and the literature bearing on the subject B is a transaction by transaction examination of the mixed fund, in terms of deposits made by the beneficiaries and withdrawals taken by the wrongdoer, and the application of a proportionality formula in respect of each such transaction. This approach has not found favour in cases where the problem has been faced, and acknowledged, directly: see, for example, Barlow Clowes International; and Windsor v. Bajaj (1990), 1 O.R. (3d) 714 (Gen Div). The Governing Principle [34] In my view, the method which should generally be followed in cases of pro rata sharing as between beneficiaries is not the LIBR approach but the pari passu ex post facto approach, which has the advantage of relative simplicity. This approach involves taking the claim or contribution of the individual beneficiary to the mixed fund as a percentage of the total contributions of all those with claims against the fund at the time of distribution, and multiplying that factor against the total assets available for distribution, in order to determine the claimant's pro rata share of those remaining funds. [35] This solution is the type of resolution which has been adopted, on a practical basis, in most cases involving more than two or three competing beneficiaries. It is the solution applied by this Court in Greymac, and by the English Court of Appeal in Barlow Clowes International. It is the solution applied in a number of other recent decisions at the superior court level in this Province involving mixed trust funds,7 and it is the solution applied by Farley J. in the case under appeal. But it is not LIBR. [36] It is, however, the approach which I favour. [37] My conclusion in this regard is based both upon the "convenience" aspect (or the "workability" aspect, as Morden J.A. characterized it in Greymac) pertaining to the application of the LIBR principle, and upon my analysis of the concept of a mixed trust account and of its nature and purpose. The "Convenience" Rationale [38] First, with regard to "convenience", I note the following comment of Morden J.A. in Greymac, at pp. 688 - 689: While acknowledging the basic truth of Lord Atkin's observation that "[c]onvenience and justice are often not on speaking terms" (General Medical Council v. Spackman, [1943] A.C. 627 at p. 638), I accept that convenience, perhaps more accurately workability, can be an important consideration in the determination of legal rules. A rule that is in accord with abstract justice but which for one or more reasons, is not capable of practical application, may not, when larger considerations of judicial administration are taken into account, be a suitable rule to adopt. [39] LIBR is difficult to apply in cases involving any significant number of beneficiaries and transactions. Even in this age of computer technology, I am not convinced that trustees of mixed funds B who might be in a position of having to sort out misappropriation transactions on such an account and the distribution of what remains B should be assumed or required to possess the software to enable a LIBR type of calculation to be done in the myriad of situations that might arise. Indeed, there is no evidence that such software programs exist, although it may well be that they do B at what cost and difficulty we do not know. [40] In this case it is not practicable to conduct the LIBR exercise. There are over 100 claimants. There were misappropriations in the area of $900,000.00 in bits and pieces. It is not even clear that each deposit and debit can be looked at individually, on the state of the record, although the total amounts deposited by each of the claimants are apparently known. Notwithstanding this, if the LIBR principle is to be applied to a pro rata distribution in the circumstances of this case, it would be necessary to consider not only the deposits of each individual claimant and the timing of such deposits, but also what was the lowest balance in the Upshall account between each deposit and the imposition of the freeze. This would involve analysing the pattern and timing of each misappropriation and applying the results to each individual depositor's circumstances. It is not at all clear on the evidence that this exercise can be done. The Rationale Based Upon the Nature and Purpose of a "Mixed" Trust Fund [41] On broader principles as well, in my opinion, the preferred approach in cases involving competing beneficiaries is that of pro rata sharing based upon the proportion of a claimant's contributions to the total contributions of all claimants, multiplied by the amount to be shared B i.e., the "pari passu ex post facto" approach. This method spreads the misappropriations rateably amongst the contributors who remain, but at the same time does not arbitrarily affect earlier contributors adversely by limiting their charge or constructive trust in relation to the fund to the lowest balance in the account. It preserves what Morden J.A. referred to in Greymac (at p. 684) as the participant's claim to "an equitable lien . . . to secure the amount of its total contribution", and it is consistent with his statement (at p. 685) that, The better approach is that which recognizes the continuation, on a pro rata basis, of the respective property interests in the total amount of trust moneys or property available. (Emphasis in both citations added.) [42] In regard to this conclusion, it is useful to consider both the practical considerations pertaining to a mixed trust fund and the nature of such a fund itself. [43] A mixed trust fund is a device whereby a trustee B typically, but by no means exclusively, a lawyer B holds funds in trust for different persons or entities. It is in many ways a mechanism of convenience, i.e., it avoids the necessity, and the cost, and the cumbersome administrative aspects of having to set up individual trust accounts, and the records relating to such accounts, for the transactions relating to every beneficiary. This practical characteristic of mixed trust funds should be recognized in considering the nature of such funds. It provides an economic and organizational benefit to the public. As Farley J. noted, in the context of this case, "Upshall was effectively acting as a banker in a safekeeping capacity". [44] What follows from this, it seems to me, is that a mixed fund of this nature should be considered as a whole fund, at any given point in time, and that the particular moment when a particular beneficiary's contribution was made and the particular moment when the defalcation occurred, should make no difference. The happenstance of timing is irrelevant. The fund itself B although an asset in the hands of the trustee to which the contributors have recourse B is an indistinguishable blend of debits and credits reflected in an account held by the trustee in a bank or other financial institution. It is a blended fund. Once the contribution is made and deposited it is no longer possible to identify the claimant's funds, as the claimant's funds. All that can be identified, in terms of an asset to which recourse may be had, is the trust account itself, and its balance. [45] The theme of a co-mingled trust account as a blended fund is reflected in the reasons of Woolf L.J. and Dillon L.J. in Barlow Clowes International (at pp. 27 and 35) and in those of Morden J.A. in Greymac (at p. 6828). In Clayton's Case itself, Sir William Grant, in introducing his "first in, first out" concept, stated (at p. 608, Mer): But this is the case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence. Neither the banker nor customer ever thinks of saying, this draft is to be placed to the account of the ,500 paid in on Monday, and this other to the account of the ,500 paid in on Tuesday. There is a fund of ,1000 to draw upon, and that is enough. [Emphasis added.] This notion of co-mingled sums as being "in form one blended fund, the parts of which have no longer any distinct existence" continues to describe correctly the nature of a mixed trust fund, in my view. [46] In contrast to the blended fund concept is that of the mixed fund as an amalgam of the contributions which have been placed in it, identifiable for some purposes. This approach is reflected in such decisions as Re Diplock's Estate, [1948] 2 All E.R. 318 (C.A.). In that case, Lord Greene M.R. attributed to Equity the adoption of "a more metaphysical approach" to the nature of a mixed fund. "[Equity] found no difficulty, he said (at p. 346), in regarding a composite fund as an amalgam constituting the mixture of two or more funds each of which could be regarded as having, for certain purposes, a continued separate existence. Putting it in another way, equity regarded the amalgam as capable, in proper circumstances, of being resolved into its component parts. [47] It is noteworthy that both the "fund as amalgam" and the "fund as a blend" approaches enable equity to offer the remedy of a charge, lien or constructive trust vis à vis the remaining balance in the fund. The former has the affect, however, of limiting the reach of these proprietary remedies. To my mind such a restriction is not necessary. While "proprietary tracing" may serve as the equitable vehicle which enables a claimant to have recourse to a mixed trust fund in the first place, equity can move beyond the strictures of that doctrine to provide a remedy to the claimant once the connection to the fund has been made. The nexus is to be found in the concept of the equitable charge, lien or constructive trust. These concepts need not, in my view, be confined to any part of the fund because, by their very nature, they have always been applied against the whole of the fund. [48] This idea is well expressed in a critique of the analysis in Re Diplock's Estate, in an article by Dennis R. Klinck entitled " 'Two Distincts, Divisions None': Tracing Money into (and out of) Mixed Accounts " (1987 - 1988) 2 Banking & Finance Law Review 147. Having dealt with Lord Greene M.R.'s "amalgam" concept, the author states, at p. 179: The alternative conceptualization of equitable tracing in this context is implied in the notion of a charge on the mixed fund. Rather than purporting to distinguish parts of the funds and attribute them to particular claimants, this approach sees the claimants as having a proportional claim on the whole fund. If the whole diminishes in extent or value, the proportional claims remain the same, albeit that what the claimants get will be less because the fund is reduced. Arguably, this does not, strictly speaking, involve "tracing" because there is no pretence that that fund is being divided and a particular claimant's property identified. [49] I accept, and adopt, the blended fund approach. At the end of the day, when the trust account has been frozen and there is a shortfall, that shortfall must be divided amongst the beneficiaries who continue to have claims against the fund. I do not think that an analysis which is based on the premise that some beneficiaries' interests in the fund have been reduced by earlier misappropriations and therefore that their respective claims have been reduced accordingly, should be preferable to one which simply says that each beneficiary has suffered a loss relating to the same misappropriations from the same mixed fund by the same wrongdoer, and accordingly their charge or constructive trust should continue to apply against the whole fund to the proportionate extent of their contributions i.e. the shortfall should be divided in such proportions as their respective interests bear to what is to be divided up at the particular time. [50] The fund is still the fund, and as Farley J. noted in this case, it is not the Bank's money or the money of any particular contributor that has been stolen; it is the fund which has been wrongfully depleted. I agree with his comments in the following passages from his first Reasons released on October 26, 1995, (at pp. 3-4): If the Bank had insisted upon a separate trust bank account being set up, then it need not be worried about the claims of other clients. However all funds advanced by those concerned were deposited by Upshall in a mixed trust bank account at the Bank. As a result each client (including the Bank) had a claim concerning that mixed account. When the Bank's funds went into that account they went the same way as other fungible funds attributable to the other clients. The funds in that account were not individually ear- marked dollar by dollar for any particular client. Rather all clients as beneficiaries would have a claim against all the funds . . . And at pp. 5-6: Let me observe that a bank account involves a debtor (bank) - creditor (depositor) relationship. . . . When funds are deposited to a mixed trust account they lose their earmarked identity. Thus each client through the trust relationship with Upshall/Society has a claim upon the loan granted to the Bank through the operation of this mixed trust account. . . . It is the money in the mixed trust account which has been stolen; not that of any particular client. (emphasis added) PART III B CONCLUSION [51] The significant problem with LIBR is that its application, in a form true to its tracing origins and rationale, is too complicated. It may be "manifestly fairer" than the rule in Clayton's Case in the sense that it attributes debits from the account equally and proportionately amongst the contributors. "Fairness" may be relative, however. Is the rule necessarily "fairer" when it limits contributors to the lowest intermediate balance in the account between the times of contribution and distribution? The rule in Clayton's Case works "unfairly" against the first contributors to the fund, because it attributes the first wrongful withdrawals to those contributions, eliminating some claims but allowing others to be compensated in full. The application of LIBR can have a similar effect, as the circumstances of this case indicate, because its "last in, first out" regime favours later contributors. At the same time, a pro rata sharing based simply on the claimants' contributions measured proportionately to the assets available for distribution can work against late depositors, as the circumstances of this case also illustrate. [52] What is at play here, in reality, is a choice of fictions. The rule in Clayton's Case and LIBR are both fictions. Any other rationale which endeavours to establish a rule or principle on which equity will divide a shortfall amongst those entitled to claim against it is a fiction. Farley J. recognized the role of fictions, or "artificial rules" when he said, in his second Reasons, at pp. 6-7: I do not see it as fair, equitable or practicable in the circumstances (and more especially since the Bank effected an inappropriate and unauthorized self help remedy to the detriment of the other claimants) to invoke libr. It seems to me somewhat artificial (recognizing that all the rules involved in this area are artificial rules which must be applied with caution so as to maintain the closest approximation of fairness, equity and reasonability, while recognizing practicality) to invoke libr which by its very nature "rewards" those innocents who are later on the scene as compared with those innocents who have been taken advantage of earlier when it is fairly clear that the wrongdoer would continue to fleece all the innocents if given the chance. Recovery should not be so dependent on a fortuitous accident of timing. [53] I agree. Earlier in these reasons I alluded to this Court's rejection, in Greymac, of the rule in Clayton's Case as "unfair and arbitrary" and "based on a fiction". In this latter regard, Morden J.A. cited (supra, at p. 686) the following oft-quoted passage from the decision of Learned Hand J. in Re Walter J. Schmidt & Co. (1923), 298 Fed. 314, at p. 316: The rule in Clayton's Case is to allocate the payments upon an account. Some rule had to be adopted, and though any presumption of intent was a fiction, priority in time was the most natural basis of allocation. It has no relevancy whatever to a case like this. Here two people are jointly interested in a fund held for them by a common trustee. There is no reason in law or justice why his depredations upon the fund should not be borne equally between them. To throw all the loss upon one, through the mere chance of his being earlier in time, is irrational and arbitrary, and is equally a fiction as the rule in Clayton's Case, supra. When the law adopts a fiction, it is, or at least it should be, for some purpose of justice. To adopt it here is to apportion a common misfortune through a test which has no relation whatever to the justice of the case ... Such a result, I submit with the utmost respect, can only come from a mechanical adherence to a rule which has no intelligible relation to the situation. [Emphasis added.] [54] Such is the case here, in my view. To apply the LIBR principle in the circumstances of this case would be "to throw all the loss upon [some], through the mere chance of [their] being earlier in time". It would be "irrational and arbitrary". It would be "to apportion a common misfortune through a test which has no relation whatever to the justice of the case". I do not favour it. [55] In Greymac, Morden J.A. observed that "if the application of the pro rata approach is seen as an alteration in the rule to be applied [i.e., the rule in Clayton's Case], it is one that involves improvement and refinement". Here, I am satisfied that the application of the mechanics of such a pro rata approach in the form I have advocated B the "pari passu ex post facto approach B as opposed to the application of the LIBR principle in such circumstances, also involves what Jessel M.R. characterized in Re Hallett's Estate, supra, at p. 720, as "the gradual refinement of the doctrine of equity." [56] For the foregoing reasons, I would dismiss the appeal with costs. Released: December 7, 1998 _______________________________ 1 The Bank concedes that the amount of its deposit into the trust account, $173,000.00, must be reduced by a small amount of approximately $2,500.00 to accommodate some minor transactions which occurred following its deposit and before the freezing of the account. The application of LIBR would result in the Bank retaining $170,448.45 of the $173,000.00 deposited. 2 See, Maddaugh, Peter D. and McCamus, John D., The Law of Restitution, Canada Law Book, pp. 153-154; British Columbia v. National Bank of Canada et al. (1994), 119 D.L.R. (4th) 669 (B.C.C.A.) at pp. 688-89. 3 (1880), 13 Ch. D. 696 4 See Maddaugh and McCamus, The Law of Restitution, supra at pp. 153-154. 5 See British Columbia v. National Bank of Canada, supra at pp. 688-689. 6 Per Woolf L.J. in Barlow Clowes International Ltd. at p. 35. LIBR is said to be fairer because it approaches the allocation problem from the perspective of the "proportions [that] the different interests in the account . . . bear to each other at the moment before the withdrawal is made" (p. 35). 7 See: Winsor v. Bajaji (1990), 1 O.R. (3d) 714 (Gen Div.); Chering Metals Club Inc. (Trustee of) v. Non-Discretionary Cash Account Trust Claimants (1991), 7 C.B.R. (3d) 105, at p. 111 (Austin J.); The Law Society of Upper Canada v. Paul Douglas Squires (Ont. Gen. Div., unreported decision of Farley J. released Oct. 17, 1994); The Law Society of Upper Canada v. Estate of John Alexander Sproule (unreported decision of Pitt J., released April 7, 1995 (Ont. Gen Div.); Holden Financial Corp. v. 411454 Ontario Ltd. (unreported decision of Rosenberg J. released August 28, 1992, at p.33); Ontario Securities Commission v. Consortium Construction Inc. (unreported decision of Rosenberg J. released June 21, 1993, at paras 76-77). 8 Citing from Scott, The Law of Trusts, Vo. 5, 3rd ed. (1967), at pp. 3620 and 3624.