Introduction
The Lowest Intermediate Balance Rule (“LIBR“) is an essential concept in the legal world, particularly in cases involving the tracing of funds. It is an evidential rule that assumes that when a person commingles their own funds with funds belonging to someone else, they are assumed to have spent their own funds first. This blog post will provide an in-depth analysis of LIBR, its definition, and its application in legal cases.
Definition of the Lowest Intermediate Balance Rule
The LIBR is an evidential rule that relates to the tracing of funds. It assumes that when a person commingles their own funds with those of another person, they are assumed to have spent their own funds first. Once their funds are exhausted, they are assumed to have begun spending the funds that do not belong to them. A lowest intermediate balance analysis requires careful tracing of two sets of funds: those owned versus those not owned by the subject. The funds flow assumption uses the owned funds first and the non-owned funds last.
Origin and Development of LIBR
The LIBR concept is a descendant of the rule in Clayton’s Case and was originally articulated by Sargant J. in James Roscoe (Bolton), Limited v. Winder [1915] 1 Ch. 62. The rule has since been applied in various jurisdictions, including Ontario and British Columbia, in cases involving bankruptcy and trust funds.
The rationale underlying the LIBR theory in relation to commingled trust funds encompasses the following concepts:
- Beneficiaries are entitled, through the equitable and proprietary notion of tracing, to follow their contribution into the mixed fund.
- Beneficiaries of such a fund have a lien or charge over the totality of the trust fund to the extent of their interest in it.
- 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. Depositants 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any subsequent amounts contributed to the fund either by the trustee (unless made with the intent to replenish the withdrawn amount) or other beneficiaries.
- The 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.
Practical Application of LIBR
The LIBR has been applied in numerous cases, particularly those involving bankruptcy and trust funds. However, no Canadian authority has attempted to describe how the LIBR principle is to be employed in practice. One proposed method is the “pari passu ex post facto” solution, which involves 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.”
This solution is relatively simple and practical, making it a suitable choice for most situations. However, it is important to note that none of the authorities referred to have applied LIBR in the context of a relationship between innocent beneficiaries. Whether the same set of assumptions governing LIBR 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, remains a question open for debate.
Limitations of LIBR
LIBR is not without its limitations. In some cases, the application of LIBR may be too complex and time-consuming, particularly when there are multiple transactions and extensive commingling of funds. Additionally, the rule may not be suitable for cases where funds were commingled unintentionally, or when there is no clear evidence of wrongful intent.
Another limitation of LIBR is that it may produce inequitable results in certain situations. For example, when multiple innocent parties are involved, the rule can potentially favor one party over another due to the timing of their transactions. This might not reflect the actual intentions of the parties involved or the nature of their contributions to the commingled funds.
Possible Alternatives to LIBR
In light of the limitations of LIBR, there are alternative tracing methods that can be considered in legal cases involving commingled funds. These include:
- Pro Rata Rule: Under this rule, the funds in the commingled account are treated as being owned by each claimant in proportion to their original contributions. This approach may be seen as more equitable since it does not prioritize one claimant over another based on the timing of their transactions.
- LIFO (Last-In, First-Out): This method assumes that the last funds deposited into the account are the first ones to be withdrawn. LIFO is often used in accounting and inventory management but may also be applied in tracing commingled funds when it can provide a more equitable result than LIBR.
- FIFO (First-In, First-Out): Similar to LIFO, FIFO assumes that the first funds deposited into the account are the first ones to be withdrawn. This method is also used in accounting and inventory management and may be a suitable alternative in certain legal cases involving commingled funds.
- Tracing through Subrogation: This method involves tracing the claimant’s interest in the commingled funds by subrogating it to the rights of the person whose funds were used to acquire new assets. This approach can be particularly useful in cases where the commingled funds have been used to acquire new assets, and the claimant seeks to assert a proprietary claim over those assets.
Conclusion
The Lowest Intermediate Balance Rule (LIBR) is an essential concept in the legal world, particularly in cases involving the tracing of commingled funds. While LIBR is useful in many situations, it is not without its limitations, and alternative methods may sometimes provide more equitable results. It is crucial for legal practitioners to understand the principles underlying LIBR, its applications, and its limitations, as well as to be familiar with alternative tracing methods to determine the most appropriate approach for their clients. In the end, the ultimate goal is to ensure that justice is served, and the rights of all parties involved are protected.
Example 1: Law Society of Upper Canada v. Toronto-Dominion Bank
The Bank appealed an order that granted the Law Society’s request for a pro rata distribution of a lawyer’s trust funds. Upshall, a lawyer, misappropriated over $900,000 from his clients’ commingled trust account at the Bank. The final misappropriation took place on September 24, 1991, leaving a balance of $66,000. The following day, the Bank deposited $173,000 into the trust account while Upshall represented them in a mortgage transaction. Upon learning of Upshall’s professional misconduct, the Bank froze the account, resulting in a substantial shortage for client distribution. The Law Society argued that all funds, including the Bank’s deposit, should be distributed to the clients on a pro rata basis. The Bank, however, contended that other clients’ claims should be limited to the lower balance available at the time of the last misappropriation. The trial judge ultimately ordered a pro rata distribution of all funds. Given the nature of a commingled trust fund, the fairest and most practical method involved calculating each client’s claim as a percentage to establish each claimant’s pro rata portion of the funds. The misappropriation dates were not pertinent, and the proper moment for determining claimants’ entitlement was when the account was frozen. The appeal was denied.
Example 2: Theberge v. Twitchell
The plaintiff, Professional Corporation, appealed against an attachment order granted in another case initiated by Theberge. Both the appellant and Theberge had invested money with Xpress Entertainment to finance a film. They both filed separate lawsuits against Xpress for reimbursement of the funds they provided. While the appellant sought to recover trust property, Theberge aimed to recover a debt. Xpress defaulted in both cases.
The appellant secured an order directing Xpress to return the invested funds, but Xpress failed to comply. Subsequently, the appellant obtained another order that required a third party to transfer any funds related to Xpress to the appellant’s lawyers. Theberge then acquired an attachment order against the appellant’s attorneys, mandating them to hold the funds in trust until the order expired. The appellant contended that the trust funds were their property as they were the sole party claiming ownership.
The court ruled in favour of the appeal. The order to pay the funds to the appellant’s lawyers effectively restored the trust property to the appellant via the attorney’s trust account. The orders demanding Xpress to repay the funds and the payment to the appellant’s lawyers implicitly established that the funds were held in trust for the appellant. Theberge’s legal documents did not assert any ownership interest in the funds. Theberge’s failure to claim a trust earlier disqualified them from the equitable relief they sought.
