What are the simplest ways to gain a Property/Proprietary Interest in equity shares held by a defendant?

Question

I don't understand how someone can have "a property interest that is not a security interest". I'm assuming the example below, of a claimant havinmg "a priorietary interest in shares that are held by the defendant" instantiates a property interest that's NOT a security interest?

But how can someone acquire "a proprietary interest in shares that are held by the defendant"? What does this mean exactly?

      Secondly, where the claimant has a property interest that is not a security interest, if the property in which the claimant has the interest has increased in value, the claimant will get the benefit of that increase. So, for example, if the claimant has a proprietary interest in shares that are held by the defendant, the claimant will be able to gain both the benefit of any dividends paid in respect of the shares and any increase in the value of the shares. Of course, if the claimant has a property interest in shares that have fallen in value, it may be preferable for the claimant to pursue a personal rather than a proprietary claim. So, for example, if the defendant trustee has misappropriated £200,000 from a trust fund which was held for the claimant beneficiary, the claimant will have a proprietary claim against the defendant to recover the £200,000 that was misappropriated and, alternatively, a personal claim for the amount misappropriated. If the defendant used the £200,000 to buy a house, the claimant will be able to claim the house instead of the money.71 But, if the value of the house has fallen to less than £200,000, it will be preferable for the claimant to rely on the personal claim to recover the amount of £200,000. In reality, in such a case it is unlikely that the defendant will have enough money to repay the claimant in full. The defendant may well be insolvent and so the claimant, who would be treated as an unsecured creditor as regards their personal claim, will have an equal claim with all the defendant’s other creditors to the defendant’s assets. It may, therefore, still be worth pursuing a proprietary claim to recover the value of the house, even though it is less than what the defendant actually owed to the claimant.

Virgo, The Principles of Equity & Trusts 2020 4th edn. Page 16. All boldings and italics are mine.

Answer 1

A security interest is an interest that only extends as a security, i.e. "Property that is given or pledged to guarantee the performance of an obligation".

So for example, a bank mortgaging a house has a security interest in the property, allowing them to do things such as force a foreclosure sale in certain circumstances, as well as claim their money immediately if the property is sold; likewise, a car title loan issuer has a security interest in the car their loan is based off of. This doesn't have to be a loan debt; it can be a performance bond, such as a bail bond to appear in court.

A security interest does not extend to the property itself, merely the obligation. So, for example, if you default on a home loan, the mortgage company can foreclose and force a sale, but they cannot claim all of the money of the sale, only the portion corresponding to the debt (e.g. if you default on a debt that is currently 100k, secured by one's house, and the house sells in foreclose for 200k, the bank can only keep 100k (plus allowed fees); the remainder must be paid to the former owner).

A property interest that is not a security interest is an interest in the property itself. So for example, owning a portion of a house, via an inheritance, is a property interest; because it is not a guarantee for anything, it is not a security interest. Or in other words, a property that is not a security interest is the "default" state, with said property interest only becoming a security interest if it is pledged in some manner.

Answer 2

In the example quoted, suppose that the shares are owned by Fred, but managed and controlled, with Fred's authorization, on Fred's behalf, by Charles Morgan, Inc. (which is the trust department of a brokerage).

IBM successfully sues Charles Morgan for misconduct. IBM, as a creditor of Charles Morgan, wants to collect its judgment out of Fred's shares.

Fred's claim to his shares is superior to IBM's claim to Fred's shares as the creditor of Charles Morgan.

Before modern equity jurisprudence was well developed, this wouldn't have been the result. The claim of IBM as a creditor of Charles Morgan, and the claim of Fred, would have been on equal footing. But, since Fred has a property interest either equitable or legal in the stock (i.e. a property right in it), Fred has a priority over claims of the person who possesses the shares, Charles Morgan.

As another example, suppose that Susan maintains an informal banking system for people in her sorority. She takes deposits of bitcoin that she converts to cash from her sorority sisters, giving them credits, and gives them cash back on demand, when they want it, so that they don't have to figure out how bitcoin works and don't have to worry about bitcoin prices when local bookstore co-ops give them rebates in bitcoin. Felicia has given Susan bitcoin in the past a few times which were exchanged for $4,000 of credit with Susan (just like a bank deposit, but outside the formal banking system). Susan doesn't pay her credit card bill for a while and gets sued for non-payment and National Bank gets a judgment of $10,000 against Susan. Since Felicia only has a contractual right to repayment from Susan and not a property interest in the credits she receives from Susan for her bitcoin, National Bank's claim against Susan's assets for $10,000 for unpaid credit card bills and Felicia's claim against Susan's assets for $4,000 for bitcoins that she gave to Susan have equal priority. But, if Felicia and Susan had set up a trust for Felicia with Susan as trustee, and Felicia transferred her bitcoin to Susan, as trustee, which Susan then converted to cash held under her mattress in a locked box, Felicia's $4,000 claim would be superior to National Bank's $10,000 claim.

Here is another example that is even more simple, even though it is less likely to come up in practice and doesn't involve shares of stock (I use tangible personal property instead because its makes the concept used in intangible personal property share of stock cases more concrete, which can help understanding).

Suppose that Fred gives a company called the Podunk Gun Shop his rifle to sell on consignment for him, which the company keeps on its shop floor on Main Street in Podunk. Podunk Gun Shop has an equitable possessory interest in the rifle as a result of the consignment, even though it does not have a beneficial interest in the rifle beyond a contractual right to collect its consignment fee out of the proceeds of a sale of the rifle, if Fred's rifle is sold to a third-party.

Business is bad because Podunk is so safe that no one has been a victim of a violent crime there for years, so Podunk Gun Shop isn't able to pay all of its rent for three months. Its landlord sues for unpaid rent and wins a default judgment for $100,000 against Podunk Gun Shop. Podunk Gun Shop ceases to do business and has no money or assets of consequence other than its inventory on its shop floor. To collect on its judgment, the landlord gets a writ of execution and attaches and levies upon the inventory of Podunk Gun Shop to collect its judgment. The landlord wants to take Fred's rifle which Podunk Gun Shop was holding for Fred to sell on consignment to satisfy the judgment owned by Podunk Gun Shop for unpaid rent. Fred's claim to the rifle, because he owns the rifle, is superior to the landlord's claim as an attaching and levying judgment creditor of Podunk Gun Shop to the rifle which was personal property in its possession with ownership not shown by a certificate of title.

Fred has a proprietary interest in the rifle held by the defendant.

Answer 3

Smith holds shares in a company.

Smith then executes a trust deed stating that they (Smith) hold the shares on trust for Jones.

Jones now has a proprietary interest in the shares.

Smith then commits some legal wrong in relation to their trusteeship of the shares.

Jones (claimant) brings a court claim against Smith (defendant)