14 - Liability of Strangers to Trusts Flashcards
How can beneficiaries bring claims against third parties entangled in a breach of trust or fiduciary duty?
Beneficiaries may bring claims against third parties who become entangled in a breach of trust or fiduciary duty in two primary ways:
Recipient Liability: This allows for personal and/or proprietary claims against a third party if they receive trust property given to them in breach of trust or fiduciary duty.
Accessory Liability: This permits personal claims against a third party if they assist a trustee in a breach of trust or fiduciary duty.
What types of equitable claims can beneficiaries bring against third parties?
Beneficiaries can pursue several types of equitable claims against third parties:
Equitable Personal Actions Against Third Parties: These arise when third parties act as a trustee, known as ‘intermeddling’.
Equitable Personal Actions Against Third Party Recipients: This primary claim is often called ‘knowing receipt’.
Equitable Proprietary Actions Against Third Party Recipients: Beneficiaries can claim proprietary interests against third parties who receive trust property.
Equitable Personal Actions Against Third Party Assistors: The primary claim in this case is often referred to as ‘dishonest assistance’.
What practical considerations should beneficiaries keep in mind when identifying claims against third parties?
Beneficiaries should consider the following practical aspects when deciding which claims to bring against third parties:
- Financial Solvency: Personal claims depend on the financial solvency of the defendant.
- Value of Property: Proprietary claims are only as good as the recoverable property using tracing rules.
What is the principle of intermeddling in the context of third-party involvement with trusts?
third party who is not expressly appointed as a trustee, but takes it upon themselves to act as if they were, will be held personally liable for any losses caused by their actions as if they were an expressly appointed trustee. Such third parties are often referred to as a ‘trustee de son tort’ (a trustee of their own wrongdoing).
Example:
- In Lyell v Kennedy (No 4) (1889) 14 App Cas 437, an agent of a trustee collected rent from tenants of trust property and paid that rent into a separate bank account in the agent’s name.
- The agent continued to do so after the death of the trustee, paying rent into the same bank account until, a few years later, he claimed that the money in the account belonged to him.
- The agent’s mandate to collect rent ceased on the death of his principal (the expressly appointed trustee), meaning he was no longer acting as an agent.
- However, by continuing to collect the rent—i.e. handling trust income—the agent was doing acts characteristic of a trustee.
- Therefore, the agent was personally liable for his actions and had to account for the rent he had collected to the trust.
What is the overview of the principle of equitable personal recipient liability (knowing receipt) in relation to third-party involvement with trust property?
If a third party receives trust property, it may be possible to bring a personal claim against them up to the value of the trust property they received (plus interest from the date of receipt).
A key element of this claim is that the third party’s liability is fault-based; unless and until the third party is aware that they have received trust property, they can treat that property as their own without any liability attaching to them.
The elements of this claim include:
(a) The third party has received property in breach of trust or fiduciary duty.
(b) The third party has received that property for their own benefit.
(c) While in receipt of the property, the third party has such knowledge that makes it unconscionable for them to retain or deal with the property as if it were their own.
What is the first element of knowing receipt, and how is it applied?
The first element of knowing receipt is that the third party has received property in breach of trust or fiduciary duty.
- This element ensures that the property was received in a manner that contravenes the terms of the trust.
- For example, in the case of James, a trustee who wrongfully transferred £200 of trust funds to his girlfriend Katherine as a birthday present, Katherine had no idea that the £200 had been stolen from the trust. Therefore, she did not possess the necessary knowledge of the breach while she was in receipt of the funds.
What is the second element of knowing receipt, and how does it function?
The second element of knowing receipt is that the third party has received that property for their own benefit.
- This means that the third party must benefit personally from the property they have received.
- For instance, in the example of Ainka and Elsa, Ainka transferred £20,000 of trust funds to her girlfriend Elsa, stating that she had taken the money from the trust without authorisation. Elsa benefitted from this amount, making her liable for knowing receipt as she received the trust property for her own use.
What is the third element of knowing receipt, and how does it relate to the knowledge of the third party?
The third element of knowing receipt is that while in receipt of the property, the third party has such knowledge that makes it unconscionable for them to retain or deal with the property as if it were their own.
- This knowledge must reach a level where it would be considered unconscionable for the third party to keep the property.
- For example, Colin received £20,000 from his husband Matthew, who informed Colin that the money was from his bank account. Upon checking his bank statement, Colin observed that the payment was made from the ‘Hardingham Trust Account.’ Colin’s knowledge of this detail makes it likely that he will be liable for knowing receipt, as he effectively ignored the obvious source of the funds.
How does the concept of constructive knowledge apply to the principle of knowing receipt?
Constructive knowledge relates to whether a third party had suspicions that the property belonged to a trust, even if they assert they did not have any such suspicions.
- Some judges have considered this type of knowledge to establish liability for knowing receipt, suggesting that ignorance does not protect the third party if they had enough information to raise suspicions.
- For example, Katrina received £20,000 from her boyfriend Dirk, who claimed it was a present. Despite her suspicions regarding the large amount and Dirk’s previous claims of limited finances, she chose not to ask questions. This choice to remain uninformed makes her liable for knowing receipt, as she effectively shut her eyes to the potential truth regarding the money.
What is the baden scale for determining knowledge?
The Baden scale was articulated by Peter Gibson J in Baden v Société Générale pour Favoriser le Développement du Commerce et de L’Industrie en France SA [1993] 1 WLR 509, para 250.
It comprises five types of knowledge:
1. Actual knowledge
2. Wilfully shutting one’s eyes to the obvious
3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make
4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man
5. Knowledge of circumstances which would put an honest and reasonable man on inquiry
In what scenarios might a claim for knowing receipt not succeed?
A claim for knowing receipt might not succeed if the third party was not aware they received trust property in breach of trust while they were in receipt of those funds.
- For example, Ruth, a beneficiary of a complex family trust, sold family heirlooms she received from the trustees, unaware of her lack of entitlement to them. Since there was no indication she deliberately shut her eyes to the obvious or had suspicions about her rights, she is unlikely to be held liable for knowing receipt.
- However, if Ruth had known that the heirlooms did not belong to her, she would be liable for knowing receipt even if the trustees did not know that they were transferring property in breach of trust. This illustrates that recipient liability focuses on the conscience of the receiver; it is not necessary to prove that the trustees knew they were breaching the trust.
What are the principles surrounding equitable proprietary claims when a trustee has transferred trust property to a third party?
When a trustee transfers trust property to a third party who still holds that property (in its original or replacement form), beneficiaries may assert a proprietary claim to recover that property.
The practical advantages of this claim include priority in situations such as the third party becoming bankrupt.
The first step is to categorise the third party into one of three groups:
(a) Bona fide purchaser for value without notice: If they paid for the property and were unaware it belonged to a trust, they take it free from equitable interests; thus, no proprietary claim can succeed against them. This group is known as ‘equity’s darling.’
(b) Wrongdoing recipient: If the third party has intermeddled or has been guilty of knowing receipt, a proprietary claim can be made to recover the property, applying harsher tracing rules since they are considered wrongdoers.
(c) Innocent volunteer: If they have no knowledge of the breach of trust and provided no consideration for the property, a proprietary claim can still be made, but the kinder tracing rules apply against them.
What are the specific wrongdoing tracing rules applicable to proprietary claims against third parties?
When beneficiaries bring a proprietary claim against a wrongdoing recipient, they use tracing rules akin to those against a wrongdoing trustee. The applicable rules include:
(a) If the third party still holds trust property in its original form, beneficiaries can assert a proprietary claim to recover it.
(b) If the third party has used trust property to acquire new property, beneficiaries can claim a proprietary interest in that new property (referred to as ‘clean substitution’).
(c) If the third party mixes trust funds with their own to purchase property in their name, beneficiaries can claim a proportionate share in the mixed asset or an equitable lien over it, depending on its value fluctuations.
(d) If the third party deposits trust funds into their own bank account, mixed with personal funds, tracing rules from Re Hallett and Re Oatway will determine which forms of property beneficiaries can trace.
How do the tracing rules apply in the context of a specific example involving trust funds and a third party?
In the example where Alastair transferred £30,000 of trust money to Robert’s bank account, Robert had knowledge of Alastair’s position as a trustee and the strained relationships with beneficiaries.
Despite his suspicions regarding the origin of the funds, Robert chose not to inquire further, likely making him a wrongdoing recipient.
- The beneficiaries would first establish whether Robert is a wrongdoing recipient or an innocent volunteer due to his awareness and decisions regarding the trust funds.
- They would apply tracing rules from Re Hallett and Re Oatway to trace the trust money into the Jaguar XE car Robert purchased and his credit card debts.
- The payments from Robert’s account would be traced with the principle that a wrongdoer is deemed to spend their own money first, but ultimately, the beneficiaries would assert a lien over the mixed fund, claiming that most of the value in the car belongs to them.
What are the principles governing innocent tracing rules when beneficiaries make a proprietary claim against a third party volunteer with no knowledge of trust property?
When a beneficiary asserts a proprietary claim against an innocent third-party volunteer who had no knowledge or notice that the property belonged to the trust, they utilise the same tracing rules applicable against other innocent parties.
The following rules apply:
(a) If the third party still holds trust property in its original form, beneficiaries can assert a proprietary claim to recover it.
(b) If the third party has used trust property to buy something new, beneficiaries can claim a proprietary interest in that new property, known as ‘clean substitution.’
(c) If the third party mixes trust funds with their own to purchase property in their name, beneficiaries can assert a proprietary claim against the mixed asset, claiming a proportionate share regardless of whether the asset’s value has increased or decreased.
(d) If trust funds are deposited into the third party’s bank account and mixed with personal funds before withdrawals are made, beneficiaries will follow the tracing rules from Clayton’s Case and Barlow Clowes v Vaughan to determine the traceable property.
