Occasionally this Blog draws on recent cases in the firm and this Blog is one of them.
A fraudster provided a fake cheque as form of payment for a piece of equipment and the company selling the piece of equipment (XYZ Co.) gave title to the fraudster. The fraudster then sold the equipment to ABC Company (a company whose business is to buy and sell that type of equipment) after ABC Company searched title and confirmed that fraudster had legal ownership of the equipment. ABC Company sold the equipment to John Doe. The day after the equipment was sold to John Doe, XYZ Co. advised the police the equipment had been obtained by fraud and registered a lien against the equipment.
The legal issue was: when there are three innocent victims of a fraud, who is the party who bears the loss? Thankfully, this is a settled area of law and the quick answer to the above fact situation is XYZ Co.
The legal answer is a bit more complicated, but an important one as in our case, the police didn’t know the correct answer and returned the equipment to XYZ Co. before we got involved and had it returned back to John Doe.
The first legal concept to understand is that the above fact situation is not a situation of “theft”, rather it is a situation where title was obtained fraudulently. If the equipment had been stolen (say by putting it on a truck and driving away with it after hours) John Doe would be out of luck.
However, because XYZ Co., gave title to the fraudster, then that title is valid to be passed on, until such time XYZ Co. declares that it no longer want to be bound by that agreement – which in our case was the day after the sale to John Doe.
The second legal concept to understand is “bona fide purchaser without notice”. This requires ABC Co and John Doe to both have done the types of title searches that are normal for this type of transaction. Because they did, they are truly without notice of the fraud and able to pass title legally.
Why does this matter? The simple answer in our case is that because the police got it wrong, John Doe was without the equipment for over 10 days, potentially in default of a financing agreement to purchase the equipment and incurred legal fees to get back equipment he was the lawful owner of.
Sometimes the law is complicated, this is why it’s important to understand all of the facts before acting, particularly when the impact on others can be significant.