13. Remedies against Trustees: Proprietary Claims

Question 1

Goal of Proprietary Claims

Answer 1

In these claims, the beneficiary is seeking the return of property
owned by the trust (or, more usually, property in the hands of the trustee that represents trust property). The claim is ‘proprietary’ because the beneficiary is going after specific property.

Question 2

claim ‘in rem’

Answer 2

(proprietary claim)

Question 3

When are proprietary claims more advantageous than personal claims

Answer 3

1. Wrongdoing happened a long time ago
2. Trustee is insolvent
3. If trustee bought something the beneficiary wants (something that has appreciated)

Question 4

‘Clean Substitution’

Answer 4

Prop Claim: Trustee uses trust asset to purchase a new asset

Question 5

If a trustee uses trust property to buy an asset - what would a proprietary claim allow the beneficiaries to recover?

Answer 5

CLEAN SUB:
1. B’s can take the substitute property
2. B’s can sue trustee for compensation for loss to the trust and take a charge over the property for the amount the trust has lost (or ‘equitable lien’)

Question 6

When is an equitable lien over property preferable to taking the property outright?

Answer 6

If the property has decreased in value - an equitable lien represents total amount lost even if the asset is worth less

Question 7

If a trustee uses their money + the trust’s money to buy an asset - what would a proprietary claim outcome be?

Answer 7

1. Beneficiaries claim a proportionate interest in the mixed asset
2. Beneficiaries sue trustee for comp. for the loss to the trust and take a ‘charge’ or ‘equitable lien’ over mixed asset for amount lost

Question 8

Tracing rules available in proprietary claims when trust money is mixed with personal money in a bank account and subject to multiple withdrawals

Answer 8

1. Tracing Rule in Re Hallet
2. Tracing rule in Re Oatway

Question 9

Tracing Rule relevant when a trustee spends money in a mixed bank account and then pays in extra money in that account

Answer 9

Roscoe v Winder (Lowest Intermediate Balance Rule)

Question 10

Lowest Intermediate Balance Rule

Answer 10

The trust’s interest cannot be traced beyond the lowest balance which the account sunk to before extra money was paid in

Question 11

Tracing Rule in Re Hallet

Answer 11

First in First Out
- The first money in is deemed to have been spent on the first purchase etc etc.
- The trustee spends their own money first (if there is money in the account)

Question 12

If - through a proprietary claim - a beneficiary asserts an equitable lien over an asset (for an amount of that asset), if the asset increases in value does the claim extend to cover this increase?

Answer 12

Obiter in Foskett v McKeown suggests yes
- The beneficiary should be able to receive a proportion of the asset (rather than just an amount) proportionate to the amount of trust money used (ie. 80%)

Question 13

If applying Re Hallet (first in first out) benefits the wrongdoing trustee - are there other options for a beneficiary making a proprietary claim?

Answer 13

Yes, they can use the tracing rule in Re Oatway

Question 14

Re Oatway tracing rule

Answer 14

The beneficiary has a FIRST CHARGE on the mixed fund in the bank account or any property purchased from the fund
- the beneficiary gets ‘first choice’ over the asset they want to claim regardless of the order of payments

Question 15

Pari Passu

Answer 15

If a trustee uses funds from multiple trust funds to buy an asset, they will share in the asset in proportion of their contribution to the purchase price

Question 16

Tracing Rules which apply when a trustee transfers money from one trust and another trust into their own bank account and makes various withdrawals

Answer 16

1. Clayton’s Case
2. Barlow Clowes v Vaughan

Question 17

Clayton’s Case Tracing Rule

Answer 17

This rule states that, as
between two or more innocents, the first money paid in is the first money paid out – First In,
First Out (FIFO).

Question 18

Tracing Rule in Barlow Clowes v Vaughan - when is it used?

Answer 18

Generally, each investor takes a rateable share in any remaining assets

The courts will depart from Clayton’s case where

1. it is impossible to apply FIFO
2. FIFO would result in injustice OR
3. application of FIFO would be contrary to the parties’ intention

Question 19

If a trustee takes money from two innocent trust funds and mixes them with their own money (with various withdrawals) how are the tracing rules applied?

Answer 19

1. Apply Re Hallet and Re Oatway to put as much of the trustee’s money into dissipation as possible
2. Apply Clayton’s Case and Barlow Clowes to allocate any remaining assets between the innocent funds