3. Tracing & Liability of Strangers

Question 1

TRACING

Answer 1

The PROCESS of identifying a new asset as the substitute for the old (Foskett v McKeown per L Millet)

Question 2

T: Personal or Proprietary Claim?

Answer 2

Personal Claim

• EQUAL ranking with claims of other creditors as claim against individual, NOT property itself.
• 6 year limitation period to bring claim for breach of T (Limitation Act 1980).
• NOT possible to claim for increase in value of an asset that T’ee purchased with T property.
• NO USE against 3rd parties/E’sD.

Proprietary Claim

• prop. remedy has PRIORITY over claims of unsecured creditors as claim attached to property itself.
• – Asset considered to be property of B, not the bankrupt T’ee, so not subject to creditor’s claims.
• NO limitation period (s21(1)(b) Limitation Act 1980)
• IT IS possible to claim increase in value of an asset purchased with T money, also potential ability to claim interest in an asset T purchased with their own money.

Question 3

T: To Trace in E or Common Law

Answer 3

Tracing in E certainly preferred because:

COMMON LAW LIMITATIONS

• Legal title required, B CANNOT use common law tracing.
• Typically, mixed funds CANNOT be traced (Agip v Jackson)
• NOT possible to obtain a charge over the asset (Re Diplock)
• Property must be physical AND identifiable
• – Money identifiable where paid into bank account and remains unmixed (Banque Belge v Hambrouck)
• – Tangible property may be identifiable even when mixed (India Oil v Greenstone Shipping)
• T’ee may use change of position defence!

EQUITY ADVANTAGES

• C CAN trace into mixed funds.
• Proprietary claim more readily available
• Range of remedies available is greater
• – Subrogation
• – E ownership
• – Equitable charge or lien

Question 4

T: REQUIREMENTS FOR E TRACING

Answer 4

There are two requirements (Re Diplock):

• An E Proprietary Interest
• A Fiduciary Relationship

Two additional requirements:

• Traceable Recipient
• Identifiable Property

Question 5

T: Requirements - AN E PROP. INTEREST

Answer 5

C must hold an E proprietary interest in the property. This can be an E interest under either (Re Diplock):

• a TRUST, OR
• an ESTATE (a will)

Question 6

T: Requirements - FID. RELATIONSHIP

Answer 6

There MUST be a fid. relationship between C and D OR transferor of property to the D.
Established Fid. Relationships:
- T/B (Re Oatway)
- Executor/B of an estate (Re Diplock)
- Administrator of an estate/B
- Transferor/transferee of funds (Chase Manhattan Bank)
- Solicitor/Client (Re Hallett)
- Accountant/Employer (Agip v Jackson)
- Thief/true owner (Black v Freedman)

Question 7

T: Requirements - TRACEABLE RECIPIENT

Answer 7

Recipient of property MUST be traceable. Property can be traced to the following:

• T/wrongdoer
• A recipient with knowledge
• An innocent volunteer (Re Diplock)
• – “volunteer”, one who has provided no consideration. “innocent”, has NO KNOWLEDGE of the source of the property.
• – These individual do have defences available however.

NB, it is NOT possible to trace assets bought by a BONA FIDE PURCHASER FOR VALUE WITHOUT NOTICE (Equity’s Darling.
- it may be possible to obtain the monetary value of the property (sale proceeds) from T’ee.

Question 8

T: Requirements - IDENTIFIABLE PROPERTY

Answer 8

The property must be identifiable (i.e. not dissipated). If not, then a proprietary claim is impossible (Re Diplock)

Property will be DISSIPATED if spent on:

• Food that is then consumed (Re Diplock)
• Ongoing expenses (Re Diplock)
• – Like gas or electricity bills.
• Non-substantial improvements to a property (Re Diplock)
• – improvements will be “non-substantial” if they don’t significantly increase the value of the property.

If B’s property is money it will be dissipated if it is:

• Paid into an overdrawn bank account (Bishopsgate Investment v Homan)
• – unless overdraft is secured.
• Used to pay off unsecured debts (Re Diplock)

Question 9

T: Scenario - T’ee transfers C funds into own account, UNMIXED

Answer 9

Remedy:

C can issue a charge over T’ee’s bank account for the funds (Re Hallett)

Question 10

T: Scenario - T’ee transfers C funds into own funds, MIXED

Answer 10

Remedies:
C can claim either (Foskett v McKeown)
- a proportional share of the mixed funds
OR
- a lien over mixed funds for vlaue of their own.

Question 11

T: Scenario - T’ee purchases asset with ONLY C’s funds

Answer 11

Remedies:
C can claim either (Re Hallett)
- The property itself
--- preferred where increase in value.
OR
- a lien over the property
--- preferred where decrease in value.

Question 12

T: Scenario - T’ee purchases asset with mixture of own/C’s funds

Answer 12

Remedies:
C can claim either (Foskett v McKeown)
- a % share of the property, share corresponds to the contribution of C’s funds.
— preferred where increase in value.
OR
- a lien over the property for the sum of C’s funds used.
— preferred where decrease in value.

Question 13

T: Scenario - T’ee gives C funds to an INNOCENT VOLUNTEER

Answer 13

Remedies:
C could make a PROPRIETARY CLAIM
- Property can be traced to an IV if has not been dissipated.

A RE DIPLOCK PERSONAL CLAIM (Re Diplock; Ministry of Health v Simpson)

• REQ:
• – C must attempt to sue wrongdoer first.
• – C can only sue for principal sum, i.e. not interest can be claimed.
• can ONLY be brought against an IV where C is B under a will (Re Montagu’s Settlement).

(- Typically no defences to this claim. Though has merely been suggested in (Lipkin Gorman v Karpnale) that the ‘Change of Position’ defence may be available.

• – where IV changed position after receiving C’s property in such a way that it would be unjust to make them repay.
• – REQ (Lipkin Gorman v Karpnale)
• IV spent money in reliance of receiving funds.
• – anticipation of above can suffice (Dextra Bank v Bank of Jamaica)
• Extraordinary expenditure
• – IV spent money they would not otherwise have done
• – Things purchased need not be extraordinary (Philip Collins v Davis)
• – Payment of debts is NOT extraordinary (Scottish Equitable v Derby)
• IV must have acted in good faith (Lipkin Gorman)
• – Negligence will not make something in bad faith (Niru Battery v Milestone Trading) )

Question 14

T: Scenario - T’ee uses C funds to pay off debt

Answer 14

Remedies:

(simple) SUBROGATION (Boscawen v Bajwa)
- SECURED debt that T’ee paid off is ‘revived’ and C given lien over the property. C now the creditor.
- The terms of this revived debt must be the same as the original and must not prejudice the lender.

NB if debt is UNSECURED, money is dissipated.

Question 15

T: Scenario - T’ee sells asset belonging to C

Answer 15

Remedy:

C entitled to proceeds of the sale but NOT the property itself (E’sD).

Question 16

T: Scenario - C funds MIXED with IV’s asset

Answer 16

Remedy depends on whether the money spent has INCREASED the value of the asset.

• NO: C funds are dissipated (Re Diplock)
• YES: lien may be obtained to recover funds used by IV (Foskett v McKeown OBITER per Lord Browne-Wilkinson).
• – NB, risk that would be considered INEQUITABLE as would force sale of IV’s property (Re Diplock).

If IV PURCHASES an asset with mixture of own/C’s funds, asset is shared RATEABLY (Re Diplock).

Question 17

T: Scenario - C funds MIXED with T’ee’s asset

Answer 17

Remedies:
C may either (Foskett v McKeown per Lord Millett)
- Obtain lien over T’ee’s account for the funds (Re Hallett)
OR
- Take a proportion of the property (Re Tilley)
— includes original property and any PROFIT.
— Preferred where increase in value.

Question 18

T: Scenario - C funds withdrawn from mixed account (only T’ee’s funds)

Answer 18

Remedies:
GR: The Presumption of Honesty (Re Hallett)
- Court assumes that T’ee has spent own money as far ass is possible, before using C’s funds.
- C can obtain lien over account for REMAINING funds (Re Hallett)
- Where D spent the funds on an asset, not possible for C to claim asset whilst sufficient funds are in the account to cover their loss (Foskett v McKeown)

EX 1: T’ee purchases a traceable asset THEN dissipates the funds (Re Oatway)

• typically full dissipation required.
• With partial dissipation of C funds, C may cherry pick funds (Shalson v Russo), but ONLY if insufficient funds remain in the account (Turner v Jacob)
• – C can (Re Tilley; Foskett)
• – claim a charge over the asset (if increase in value)
• – claim a proportion of ownership (if likely decrease)
• The primary aim here is that the C receives the asset whilst the wrongdoer suffers as much of the dissipation as possible.

NB - the Lowest Intermediate Balance Rule (Roscoe v Winder; Re Goldcorp Exchange)

• Where T’ee adds own additional funds to mixed account, C may ONLY claim from fund total before the addition of the new funds, UNLESS T’ee added the new funds to replace C’s funds that they removed.
• C cannot make any claim in tracing if in the intermediate period the account was exhausted (Bishopsgate Investment Management v Homan)

Question 19

T: Scenario - C funds withdrawn from mixed account (someone other that T’ees funds)

Answer 19

Remedies will vary DEPENDING ON THE BANK ACCOUNT TYPE.

SAVINGS ACCOUNT - remaining funds shared RATEABLY (in proportion to each part’s original contributions to the sum before dissipation (Re Diplock; Foskett v McKeown)

CURRENT ACCOUNT - “First In, First Out” rule (Re Clayton’s Case)

• whichever B’s money went into the account first is regarded as the first money to leave it.
• will NOT apply where contrary to intention of Cs. impractical or causes injustice/is inequitable. (Barlow Clowes International v Vaughan)
• – if rule doesn’t apply because of the above, funds split rateably (Russell-Cooke Trust Co v Prentis)

NB: where mix of T’ee AND multiple B’s money, starting point is always Presumption of Honesty, move to the above if T’ee money doesn’t cover it.

Question 20

LIABILITY OF STRANGERS

Answer 20

GR: C should sue the T’ee/D under personal/proprietary claim in order to recover loss.

BUT, where not possible, C may sue 3rd parties involved in the appropriation of funds/property if they were:

• T’ees DE SON TORT, or
• DISHONEST ASSISTANCE, or
• KNOWING RECEIPT

A personal claim CANNOT be brought against an IV unless they knew it was trust property before they dissipated it (Re Montagu’s Settlement; Independent Trustee v GP Noble)

Question 21

LofS: T’EE DE SON TORT

Answer 21

Where a person interferes with or assumes the duties of a T’ee, may become a constructive T’ee and be liable in the event of a breach of trust (Mara v Browne)

Question 22

LofS: KNOWING RECEIPT

Answer 22

Def: 3rd party liability for receiving T property with KNOWLEDGE that it is RECEIVED IN BREACH OF T.

TEST: 3 REQs (El Ajou v Dollar Land Holdings per Hoffmann LJ):

• Assets must be disposed of in breach of T/FidD.
• Recipient must receive/purchase assets belonging to C that are TRACEABLE.
• Recipient must KNOW that they have received/purchases assets as a result of breach of T/FidD.
• – TEST: their state of knowledge must be such that it would be unconscionable for them to retain the benefit (BCCI Akindele). There is no requirement for dishonesty.
• – Recipient may deal with the property as they like, provided that they don’t know it belongs to C (Independent Trustee Services; Re Montagu’s Settlement)
• – Recipient need not be particularly rigorous in asking questions or be ‘unduly suspicious’ (El Ajou). Entitled to proceed on assumption of ‘dealing with honest men’ (Macmillan v Bishopsgate Investment Trust per Millett J)

Question 23

LofS: DISHONEST ASSISTANCE

Answer 23

Def: 3rd party liability for assisting in the breach of a T.

REQ:
- Breach of T/FidD must have been by someone other than the 3rd party

• they must have provided ASSISTANCE in the breach
• – Must be a causal link between their actions and the BREACH (NB the breach, not the loss (Grupo Torras v Al-Sabah (No. 5))). No defence to say it would have happened anyway (Balfron Trustees v Peterson)
• – Assistance could be the facilitating of the breach, its preparation or concealing a breach.
• – They need not fully understand the nature of T’ee’s duties (Ultraframe v Fielding)
• They must have been ‘DISHONEST’
• – TEST: did D act as an honest person would, taking into account their qualifications, expertise, knowledge, skill etc (Barlow Clowes v Eurotrust)
• – NB both OBJ. and SUBJ. elements to the test.

Following would likely constitute dishonest assistance (Brunei Airlines v Tan per Lord Nicholl)

• knowing participation in breach
• deliberately not asking appropriate questions
• deliberately being ignorant of a breach.