13 - Remedies Against Trustees: Proprietary Claims Flashcards
What is a proprietary claim in trust law, and when can beneficiaries assert it?
A proprietary claim, or claim ‘in rem’, is a legal right allowing beneficiaries to reclaim property held by a trustee in breach of trust.
This claim arises when a trustee wrongfully asserts absolute ownership over trust property; beneficiaries can demand that the property be returned to the trust’s control.
Beneficiaries can also assert this claim on any new asset purchased by a trustee with trust money, provided the new asset can be identified as representing trust property.
When trust money is directly used to buy a new asset, identifying it as trust property is straightforward. However, if the trustee mixes trust funds with their own in a personal account, tracing rules are used to determine ownership.
Over time, equity has developed various tracing rules to address scenarios where trustees engage in complex transactions with trust assets.
In what circumstances might a proprietary claim against a trustee be unsuccessful?
- A proprietary claim may fail if the trustee has spent trust property on items or experiences that leave no tangible asset to reclaim, such as paying credit card bills or going on holiday.
- This is described as the trust property being ‘dissipated’, meaning there is no physical property remaining that could be claimed or traced back to the trust.
- Therefore, beneficiaries should assess the type and value of assets a trustee holds before pursuing a proprietary claim, as only traceable property can form the basis of a successful claim.
When might a proprietary claim be more advantageous than a personal claim against a trustee?
A proprietary claim can be preferable in several scenarios:
Insolvency: If a trustee is insolvent, a personal claim is ineffective as the beneficiary ranks as an unsecured creditor, likely receiving little in any bankruptcy proceedings. A proprietary claim allows beneficiaries to recover trust property in priority over other creditors since it is not part of the trustee’s bankruptcy estate.
Increased Asset Value: If a trustee uses trust property to purchase an asset that has appreciated in value (e.g., shares bought with stolen trust funds that doubled in value), a proprietary claim enables beneficiaries to reclaim the asset’s entire current value, benefiting from its increase.
No Statutory Limitation Period: Unlike personal claims, which are often statute-barred after six years from the date of breach, proprietary claims are not subject to statutory limitations (though they are still governed by the equitable doctrine of laches), making them potentially available even if the breach occurred over six years ago.
What are the limitations of a proprietary claim in trust law?
A proprietary claim is limited in effectiveness by the availability of the property to be recovered:
- If the trustee no longer possesses any identifiable property traceable to the trust (due to dissipation or other reasons), a proprietary claim is ineffective.
- The effectiveness of this claim hinges on the ability to trace the beneficiaries’ equitable interest into specific, existing property.
What is the difference between following, tracing and claiming in trusts law?
Following, tracing and claiming underpin equitable proprietary claims. The function of the following and tracing rules is to locate misapplied trust property and to identify assets which represent it.
Following is the process of ‘following the same asset as it moves from hand to hand’: Foskett. It is the process for locating misapplied trust property. Thus, if T misapplies £1,000 (cash) of the trust fund and gifts it to X, and X gifts it to Y, the beneficiaries can follow the £1,000 from T to X and then to Y.
Tracing is the process of ‘identifying a new asset as the substitute for the old’: Foskett. Generally, one asset is the traceable proceed of another if there is ‘a series of direct substitutions’ between them: Relfo Ltd (in liquidation) v Varsani [2014] EWCA Civ 360.
Claiming is the assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds: Foskett.
What is the role of a proprietary claim when a trustee still holds the original trust property?
- A proprietary claim enables beneficiaries to recover trust property if the trustee still holds it in its original form.
- No tracing is necessary, as the property is identifiable as the original trust asset.
Example: If a trustee holds a farm conveyed solely in their name, beneficiaries can use a proprietary claim to order the reconveyance of the farm back into joint trust ownership.
How does a proprietary claim apply when a trustee has acquired substitute property with trust funds?
If a trustee has sold trust property and used the proceeds to buy another asset, beneficiaries can assert a proprietary claim to the new asset, a process termed “clean substitution.”
The new asset is treated as belonging to the trust, and beneficiaries have two options:
- Option A: Take the substitute property if it has increased in value, benefiting from the asset’s appreciation.
- Option B: Sue the trustee for compensation (for the trust’s loss) and take an equitable lien over the new property if it has decreased in value. The lien grants security over the asset, allowing its sale if needed to satisfy the trust’s claim.
Example: If a trustee uses £20,000 from the trust to buy a painting, the beneficiary may:
- Take the painting if it has risen to £25,000, benefiting from the value increase.
- Bring a personal claim for £20,000 plus interest if the painting has depreciated to £15,000, securing an equitable lien over the painting to ensure partial recovery of trust funds.
What principles apply when a trustee mixes trust property with other funds, and what steps must beneficiaries take to assert a claim?
When a trustee mixes trust funds with either their own money or that of others, specific tracing rules are needed to identify the trust property.
The tracing approach depends on the nature of the mixing, and beneficiaries must first identify the relevant situation to apply the correct rules:
- Situation A: Trustee buys an asset using a mix of their own funds and misappropriated trust funds, creating a “mixed asset.”
- Situation B: Trustee deposits trust money into their personal bank account, where it is mixed with their own money, followed by various withdrawals.
- Situation C: Trustee uses funds from two different trusts (e.g., Trust A and Trust B) to buy a mixed asset.
- Situation D: Trustee mixes money from Trust A and Trust B in a bank account, followed by various withdrawals, requiring allocation between the different trust funds.
How can beneficiaries assert a claim when a trustee uses both trust and personal funds to acquire a “mixed asset”?
When a trustee wrongfully uses both trust funds and personal funds to acquire an asset, this creates a “mixed asset.”
The beneficiary has two options based on the asset’s value change:
- Option A: Claim a proportionate interest in the mixed asset if it has increased in value. This proportion reflects the trust’s contribution to the initial purchase price.
- Option B: Sue for compensation and assert an equitable lien over the mixed asset if it has decreased in value. This allows the trust to recover its losses by prioritising its claim over the trustee’s other creditors upon sale of the asset.
Example: If a trustee buys shares with £10,000 of trust funds and £5,000 of personal funds:
- If shares rise in value (e.g., from £15,000 to £24,000), the beneficiary can claim two-thirds (trust’s share) of the current value, totalling £16,000.
- If shares fall in value (e.g., from £15,000 to £12,000), the beneficiary can bring a personal claim for £10,000 plus an equitable lien over the shares to ensure full recovery from sale proceeds.
How does the Re Hallett principle apply when a trustee withdraws trustee funds and transfers it into their own bank account, making subsequent withdrawals from the mixed money?
Under Re Hallett’s Estate (1880), if a trustee mixes trust money with their own in a bank account and makes withdrawals, the trustee is deemed to spend their own money first. This principle protects trust assets from dissipation.
The beneficiary can choose the tracing rule that yields the best outcome for the trust, minimising losses.
Example: A trustee deposits £25,000 from the trust into their account, which already contains £10,000 of their own money, and then:
- Withdraws £10,000 to pay credit card bills: Under
Re Hallett, this payment is deemed to be the trustee’s money, so the beneficiary avoids dissipation of trust funds here.
- Withdraws £25,000 to purchase shares in Upsilon Limited: The beneficiary can trace into these shares, asserting a proprietary claim over them.
Re Hallett applies even if the trustee’s own funds are deposited after the trust funds, still assuming the trustee’s money is spent first. This enables the beneficiary to secure their claim over remaining assets.
What result does Re Hallett produce in a more complex scenario involving mixed funds and sequential withdrawals by the trustee?
When the trustee’s mixed funds are withdrawn in a specific order, Re Hallett still presumes that the trustee’s funds are withdrawn first, protecting the trust’s interest.
Example: If a trustee deposits £25,000 of trust funds and £10,000 of their own funds, and then:
- Withdraws £8,000 to pay for a luxury cruise: Re Hallett assumes this withdrawal was made from the trustee’s personal funds, ensuring that trust money is not dissipated by this expense.
- Withdraws £10,000 to buy Omega plc shares: This purchase is funded by £2,000 of trustee money and £8,000 of trust money, giving the beneficiary an equitable lien over the shares for £8,000.
- Leaves a £7,000 balance in the account: This balance belongs entirely to the trust if the balance remains positive.
According to Re Hallett, beneficiaries can trace trust money into any positive balance, protecting trust assets when withdrawals are made, even in cases where part of the funds were used and spent by the trustee.
How does Re Hallett, supported by Foskett v McKeown, impact the beneficiary’s claim to traced assets if those assets have increased in value?
Re Hallett, further supported by obiter comments in Foskett v McKeown [2001], allows the beneficiary’s proprietary claim to extend to any increase in value of traced assets. This secures gains on assets purchased with a mix of trust and trustee funds.
Example: In a case where Omega plc shares were purchased using £8,000 of trust money and £2,000 of trustee money, if the shares appreciate from £10,000 to £20,000, the beneficiary can claim a proportionate interest in the increased value.
- Since 80% of the purchase price was trust money, the beneficiary’s proprietary claim would now cover 80% of the current share value, amounting to £16,000.
This approach benefits the trust by allowing the beneficiary to claim gains on assets bought in part with trust funds, reinforcing equity’s aim to provide the beneficiary with the best possible outcome against a wrongdoing trustee.
How does the Re Oatway principle provide an alternative to Re Hallett in tracing trust funds from a mixed bank account?
Re Oatway [1903] applies where Re Hallett does not benefit the beneficiary, ensuring a fairer result by giving the beneficiary a first charge on the mixed fund (the trustee’s bank account) or any property purchased from it.
This is particularly attractive where there is a healthy balance on the trustee’s bank account, because the court will use the rule to trace trust property into that balance.
- This rule provides that the beneficiary has a first charge on the mixed fund (ie the amount sitting in the trustee’s bank account) or any property that is purchased from that fund. In essence, the beneficiary gets ‘first choice’ and can therefore generally choose how best to satisfy their proprietary claim.
- Re Oatway thereby allows the beneficiary to ‘cherry-pick’ how best to secure the trust’s interest.
The trustee must wait until the beneficiary’s claim is fully satisfied before accessing any funds or assets themselves.
Some commentators view Re Oatway as presuming that the trustee spends trust money first, the opposite of Re Hallett, although Re Oatway is fundamentally about giving the beneficiary first choice.
How does Re Oatway protect the beneficiary’s interests in a scenario where trust and trustee funds are mixed, and the trustee’s withdrawals are disadvantageous under Re Hallett?
Re Oatway counters any disadvantage to the beneficiary that might result under Re Hallett by securing the trust’s interest in valuable assets purchased with mixed funds.
Example: If a trustee deposits £50,000 of trust money and £150,000 of their own funds, then:
- Withdraws £150,000 to purchase a flat, using the remaining funds to pay off debts.
- Under Re Hallett, the trust money would be deemed dissipated on debt repayments.
- Applying Re Oatway, however, the beneficiary can assert a £50,000 equitable lien on the flat, securing a proprietary claim over the asset rather than dissipated funds.
As in Re Hallett, if the flat appreciates in value, the beneficiary benefits from the increase. For instance, if the flat’s value rises from £150,000 to £180,000, and the trust contributed one-third of the purchase, the beneficiary’s claim would now be valued at £60,000, reflecting the trust’s proportional interest.
What is the limitation on tracing rules regarding additional funds added to a trustee’s account, as established in Roscoe v Winder?
Roscoe v Winder [1915] limits the tracing rules by restricting the beneficiary’s claim to the ‘lowest intermediate balance’ in the trustee’s bank account before any new funds are added.
If the trustee dissipates funds from their mixed account, and additional money is later deposited, this deposit is not seen as replacing the original trust funds unless specifically intended to do so.
Example: If a trustee, Carrie, deposits £40,000 of trust money into her account with £10,000 of her own money, spends £20,000 on a luxury cruise, and £28,000 on medical care, only £2,000 remains.
If Carrie’s father then gifts her £3,000, this amount cannot be claimed by the trust, as it is not considered a replacement for dissipated trust funds.
Therefore, the trust’s proprietary claim is limited to the £2,000 balance, which is the lowest intermediate balance before Carrie’s father’s gift, as further additions are not claimable by the trust.
