THE CASE AGAINST THE EQUITABLE LIEN.

• Date: 01 April 2019
• Author: Crawford, Michael, Jr.

Contents I Introduction II Ownership and Security A A Brief Introduction to the Equitable Lien B Comparing Equitable Liens and Constructive Trusts III Instrumental Justifications A Trustees B Liquidators and Trustees in Bankruptcy C Solicitors IV Desert-Based Justifications for the Lien A Contracts for the Sale of Land B Contracts for Work and Materials C Contracts of Indemnity D Securing a Beneficiary's Claim against a Defaulting Trustee E Proprietary Restitution F Proprietary Estoppel V Conclusion I INTRODUCTION

An important project in contemporary private law scholarship has been the attempt to develop a principled basis for determining, across a range of claims, which plaintiffs should be awarded a proprietary remedy and which should be restricted to an award of damages. This attempt to place the law of remedies on a more rational footing has not come before time. As Bant observed, (1) the law has largely failed to disclose a coherent rationale for the divergent treatment of seemingly similarly situated plaintiffs. Given that the decision to grant or withhold a proprietary remedy has significant consequences for both the plaintiff and the defendant's general creditors, (2) the failure to explain why apparently like cases are treated differently is a serious deficiency in the law.

To date, the literature on proprietary remedies has principally focused on the constructive trust. Another important, though less prominent, remedy is the equitable lien. As a security right, the lien is not as intrusive or extensive as the constructive trust. Nevertheless, because it insulates the lienee from the consequences of his debtor's bankruptcy, it raises many of the same difficult questions.

Unlike other analyses of the lien, (3) the purpose of this article is not to explain the nature of the lien or to attempt to rationalise what Waters described as the 'themeless rag-bag' (4) of circumstances in which it arises. Instead, it asks whether this form of non-consensual security right can be justified at all. The unavoidable truth about the lien is that it can only be conferred on a plaintiff at the expense of the defendant's other general creditors. Thus, if the creation of a lien is to be justified, there must be some compelling reason for preferring the claims of some general creditors at the expense of others. The argument advanced in this article is that it is very difficult to demonstrate why some general creditors are more deserving than others. Excepting a handful of anomalous instances in which the lien can be justified on instrumental grounds, the effect of the equitable lien is to discriminate between creditors whose claims are, in all material respects, indistinguishable.

II OWNERSHIP AND SECURITY

A A Brief Introduction to the Equitable Lien

Though relatively few in number, existing analyses of the equitable lien provide excellent overviews of its nature and origins. (5) Deane J described the equitable lien as

a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness. Though called a lien, it is, in truth, a form of equitable charge over the subject property in that it does not depend upon possession and may, in general, be enforced in the same way as any other equitable charge, namely, by sale in pursuance of court order or, where the lien is over a fund, by an order for payment thereout. Equitable lien differs from traditional mortgage in that it does not transfer any title to the property and therefore cannot be enforced by foreclosure. While it arises by implication of some equitable doctrine applicable to the circumstances, its implication can be precluded or qualified by express or implied agreement of the parties. It can exist over land or personalty or both. (6) Unlike its common law counterpart, (7) the equitable lien does not depend on a transfer of possession to the creditor. (8) Equally significantly, and also unlike the common law lien, the equitable lien confers on the lienee, via the intermediary of the court, the power to obtain an order for sale in the event of the debtor's default. (9)

Although the essence of the lien is simple to describe, difficult questions attend its operation. For instance, until the decision of the High Court in Hewett v Court ('Hewett',) (10) it was unclear whether the lien only applied to transactions that were specifically enforceable in equity. (11) Likewise, though it applies to sales of intangible personalty, (12) it remains unclear whether a lien can apply to contracts for the sale of goods. (13) Whilst these questions are important and, at least in the case of goods, not satisfactorily resolved, (14) they are not the focus of this article. Its purpose is instead to ask the broader question: can the equitable lien be justified at all?

In answering this question, two features of the lien are material. First, because it is a pure security right, the lienee's interest in the encumbered asset is limited to the value necessary to discharge the debt it secures. Unlike a beneficiary under a constructive trust, the lienee is neither entitled to the income generated by the charged asset, nor will she benefit from any increase in its value. Secondly, as is the case with the constructive trust, the equitable lien confers effective priority in bankruptcy. (15) As a consequence, the relationship between the lienee and the debtor's other unsecured creditors is perfectly zero-sum. Every dollar that is captured by the lien is a dollar that is not available for distribution amongst other general creditors. Because of its prejudicial effect on other unsecured creditors, it is essential that the law be able to justify the preferential treatment afforded to equitable lienees.

B Comparing Equitable Liens and Constructive Trusts

Equitable liens and constructive trusts share two important characteristics. First, neither is created by the consent of the party whose assets are subjected to these power-liability relationships. (16) Secondly, assuming that the secured asset is more valuable than the outstanding debt, each has the virtue of saving certain creditors from the catastrophic consequences of their debtor's insolvency. It is thus unsurprising that analyses of the equitable lien often commence by comparing it with the constructive trust. (17) The analysis offered below will also commence by comparing the lien with the constructive trust. However, what is stressed is not their similarities, but their differences.

The crucial distinction between the constructive trust and the lien is that between ownership and security. (18) Though trusts can be used as security devices, (19) the interest of a beneficiary under a constructive trust, like the beneficiary of any bare trust, is ownership. (20) A beneficiary is entitled to the income generated from the trust asset and will benefit from any increase in its value. This is not true of a lienee. Because the lien is a pure security right, (21) the lienee's interest in the encumbered asset is limited to the proceeds of sale equal to the value of the outstanding debt.

This distinction between ownership and security warrants emphasis for the following reason: because the beneficiary under a constructive trust is effectively the owner of the relevant asset, there may be non-bankruptcy reasons for awarding or denying a trust. A trust may be justified because, as a matter of corrective justice, those who are unjustly enriched should make restitution of the very subject matter of the enrichment. (22) Alternatively, a trust may be justified because it is the most effective way of ensuring that a fiduciary disgorges the entirety of any gain made in breach of fiduciary duty.

Consider Attorney-General (Hong Kong) v Reid, (23) in which the fiduciary invested the proceeds of bribes into New Zealand real estate. In principle, it would be possible to strip any gains by ordering an account of profits. However, this personal remedy suffers from two weaknesses. First, it requires the court to engage in the potentially difficult exercise of valuing the gain. (24) If the valuation is low, the order will fail to disgorge all the gain. If the valuation is high, the order will be illegitimately punitive. (25) Secondly, because damages are awarded on a once-and-for-all basis, even if the valuation is accurate, an account of profits cannot guard against subsequent appreciation in the value of the asset acquired in breach of duty. (26) If Reid had merely accounted for the value of the land, any appreciation in the value of New Zealand real estate would have resulted in him making a profit in the long term.

To take another example, whilst it may be appropriate to impose a constructive trust over the proceeds of a bribe or secret commission received in breach of fiduciary obligation, (27) it will be inappropriate to impose a trust over the assets of a business that has prospered due to the efforts of the breaching fiduciary. (28) In cases that are factually analogous to Warman International Ltd v Dwyer ('Warman'), the remedy is properly limited to an account of profits, (29) which may also be subject to an allowance reflecting the fiduciary's expertise, effort and skill. (30)

Whether the appropriate remedy is personal or proprietary need not turn on considerations that are peculiar to the relationship between the plaintiff and defendant. As in Giumelli v Giumelli ('Giumelli', (31)) a monetary award may be substituted for a constructive trust, not because of some redeeming quality in the defendant, but instead because of the unduly prejudicial effect that a proprietary remedy would have on innocent third parties. (32)

These are just some of the many considerations that may lead a court to exercise its discretion to grant or refuse a proprietary award. (33) Whether one agrees with the outcomes in these cases, they are examples of situations in which the exercise of remedial...