8. Liability for Breach of Trust Flashcards

1
Q

What is the question to ask in assessing whether a trustee breached a duty, and what is the situation if the answer is no?

A

Was the act one that the trustee was authorised to perform or omission one that they were not required to perform under the trust instrument or by law?

If the answer is no, the trustee is in breach of duty regardless or good faith, skill, diligence, or benefit to the trust.

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2
Q

What must be considered if the answer is yes, and the act/omission was proper?

A

Whether the trustee acted in accordance with the relevant standard of care

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3
Q

Who has the burden of proof where the trustee is accused of causing loss?

A

The beneficiary, and if they cannot prove loss, the trustee has no liability

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4
Q

What is the consequence of the rule that gains from one breach cannot be used to offset losses of an earlier breach (unless part of a linked investment scheme)?

A

The beneficiaries can keep the gain from the profitable breach, but still sue for the loss

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5
Q

Is a trustee vicariously liable for the acts of a co-trustee?

A

No

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6
Q

Whilst a trustee is not vicariously liable for the acts of co-trustee, what could they be liable for?

A

Their own separate breach of trust, e.g. failure to supervise the actions of the trustee in breach

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7
Q

What is the liability of breaching trustees where more than one is in breach?

A

Joint and several

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8
Q

What are the three main defences available to trustees?

A
  1. Consent of beneficiaries
  2. Limitation period
  3. Exclusion clause
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9
Q

Whilst a beneficiary of full age and capacity who consents to the act with full knowledge of all material facts is barred from suing for breach, to whom will a trustee still be liable?

A

Any beneficiary who did not consent

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10
Q

What is the general limitation period in which an action for breach of trust must be brought?

A

Six years

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11
Q

What are the three considerations which affect the six year limitation?

A
  1. The six year clock does not run for a beneficiary with a remainder interest until the interest vests
  2. No limitation where trustee was a party to fraud
  3. No limitation to recover trust property or proceeds from a trustee
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12
Q

Whilst clauses purporting to exclude trustee liability are strictly construed, they will generally be enforceable in the absence of what four things?

A
  1. Bad faith
  2. Intentional breach
  3. Fraud
  4. Recklessness
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13
Q

What is the extent of breaches that the courts have actually allowed an exclusion clause to exclude?

A

Up to and including gross negligence

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14
Q

Even where the other defences are not met, in what circumstance does the court have discretion to award relief from liability?

A

Trustee acted honestly and reasonably and ought fairly to be excused

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15
Q

Although liability is generally joint and several, what is the court’s power when more than one trustee is in breach?

A

Court can apportion liability as it deems just and equitable

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16
Q

In what three circumstances will the court allow a trustee to claim an indemnity from the conduct of another trustee?

A

Breaching trustee:

  1. Was alone guilty of fraud
  2. Was the solicitor to the trust who advised the breach
  3. Is a professional trustee, whilst the claiming party is a lay person (unless they also caused the breach)
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17
Q

Regarding equitable tracing, what is the difference between (1) a personal claim and (2) a proprietary claim?

A
  1. Personal: Claim for breach of trust against the trustee personally
  2. Proprietary: Claim against trust property or proceeds when it is known to be in the trustee’s possession
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18
Q

Why is a proprietary claim advantageous?

A
  1. Personal claims are a waste of time if trustee is insolvent
  2. In proprietary claim, beneficiaries have priority over other creditors
  3. In proprietary, if value of property increases, beneficiaries get this value
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19
Q

What is also available if property in the hands of a trustee is exhausted?

A

A personal claim against the trustee

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20
Q

In a proprietary claim, (1) what can the beneficiaries do if the original trust property is in the hands of the trustee, and (2) what are their two options where the trustee has substituted the property?

A
  1. Original trust property: Claim it back
  2. Substituted: Either claim that asset or a charge over it covering the loss
21
Q

In a situation where the trustee has substituted the property, giving the beneficiary a right to claim the asset or claim a charge over it, when might they use one approach over the other?

A

Claiming the asset outright is preferable if it has gone up in value, as the beneficiaries will be able to keep any profit above the initial trust property that was taken.

Claiming a charge for the loss is preferable if the value has gone down, such that the asset now no longer covers the initial trust property that was taken. This allows the beneficiaries to wait and see if the value will rise again, at which point they can enforce their charge and take the asset.

22
Q

What are the beneficiaries’ options when the trustee combines trust funds with their own to purchase an asset?

A

The beneficiaries may:

  1. Claim a proportionate part of the asset, or
  2. Claim a charge over the asset for the amount of trust property used
23
Q

Where a trustee places trust money into a bank account with the trustee’s own money, how are subsequent transactions treated, and what are the beneficiaries’ options?

A

Trustee is treated as spending their own money first, and the trustee’s may claim a charge over the bank account for the amount of trust funds in it

24
Q

What occurs when the trustee uses mixed money to purchase an asset and then dissipates the balance, and why is it considered an exception to the spend own money first rule?

A

If trustee uses mixed money to purchase an asset and then dissipates the balance, the beneficiaries can claim a share or charge over the asset up to the value of the trust property taken, as if the trustee had actually spent trust money first.

Any shortfall at this stage is the subject of a personal claim against the trustee.

25
Q

If after this, the trustee tops up their account with their own money, is this treated as replacing trust money?

A

Not unless the trustee shows a clear intention that this is the case

26
Q

What is the lowest intermediate balance in this situation and what is the effect of it?

A

It is the account balance after the last payment out but before the next payment in topping up the account, and it is the limit that the beneficiary can claim in a proprietary claim

27
Q

Where lowest intermediate balance is less than the trust property that was taken, what is the beneficiaries’ only remedy?

A

Personal claim against the trustee

28
Q

Where a trustee mixes funds from two or more funds in the trustee’s personal account, what determines how the funds are treated?

A

The type of bank account, i.e. current or savings

29
Q

What is the rule where the trustee’s personal account is a current account?

A

The general rule is first in first out

30
Q

In what three instances will the general rule of first in first out be abandoned in favour of dividing the withdrawals proportionately to the deposits?

A
  1. FIFO rule is contrary to express/implied intention of the claimants
  2. Impractical to apply rule
  3. Rule would cause injustice to the parties
31
Q

What is the rule where the trustee’s personal account is a savings account?

A

The proportionate rule is the default rule

32
Q

Away from liability of trustees, and onto liability of third parties:

What is a bona fide purchaser for value without notice?

A

A third party who acquires legal title to trust property for value and without notice of the trust

33
Q

What is an innocent volunteer recipient?

A

Similar to a bona fide purchaser for value without notice, except instead of purchasing for value, they were gifted it or otherwise came into possession

34
Q

Can a beneficiary bring a personal claim against an innocent volunteer recipient?

A

Not unless one specific exception applies

35
Q

What are the three requirements for a beneficiary to bring a proprietary claim against an innocent volunteer recipient?

A
  1. Property was subject of fiduciary relationship
  2. Property or proceedings identifiable using equitable tracing rules
  3. Property is not in the hands of a bona fide purchaser for value without notice
36
Q

In a proprietary claim against an innocent volunteer recipient, what is the beneficiary’s option when property is in its original form or has been substituted for another asset?

A

Beneficiaries can claim the asset

37
Q

In a proprietary claim against an innocent volunteer recipient, what is the beneficiary’s option when trust property is mixed with the volunteer recipient’s own property to purchase an asset?

A

Beneficiaries can claim a proportionate share of the asset

38
Q

In a proprietary claim against an innocent volunteer recipient where trust property is mixed with the volunteer recipient’s own property to purchase an asset, why is there no option for the beneficiary to claim a charge over the asset like they can with a trustee, and what is the effect of this?

A

Because the volunteer is an innocent party.

Loss in value is therefore shared proportionately between innocent volunteer and trust beneficiaries.

39
Q

What is the situation where an innocent volunteer places trust funds in a bank account containing their own funds?

A

The same as when two trust funds are mixed, i.e. FIFO or proportionate.

Loss in value of the account through dissipation or otherwise is shared proportionately between innocent volunteer and trust beneficiaries, because again, there can be no charge against an innocent volunteer.

40
Q

What is subrogation?

A

The process whereby upon an innocent volunteer using the trust funds to discharge a secured debt, the beneficiary can trace the money into the repayment and bring the debt back to life, making the beneficiary the creditor on the original terms

41
Q

What is the exception to the rule that a personal claim cannot be brought against an innocent volunteer where the three-part test is otherwise not met?

A

Where a person if the wrongful recipient of a deceased estate, and all other remedies have been exhausted, a personal claim can succeed against the recipient

42
Q

What is a knowing recipient, and what claim is available against them?

A

A third party who receives money or property traceable to a breach of trust with knowledge of the breach will be treated as if they were a trustee, and as such a personal claim will be available

43
Q

What must a claimant show of the recipient’s knowledge for a personal claim to be available?

A

That they had sufficient knowledge of the breach to make retaining the property unconscionable

44
Q

What five types of knowledge will satisfy this unconscionability requirement?

A
  1. Actual knowledge
  2. Willful ignorance
  3. Willfully failing to make reasonable inquiries
  4. Knowledge of circumstances that would indicate facts to a reasonable person
  5. Knowledge of circumstances that would put a reasonable person on inquiry

Basically knew or should have known.

45
Q

What is a dishonest accessory?

A

A third party who facilitates a breach of trust will be treated as if they were a trustee if their assistance was dishonest, i.e. a constructive trustee liable for a personal claim

46
Q

Can passive assistance amount to someone being a dishonest accessory?

A

Yes

47
Q

What is the conscious impropriety requirement for dishonest accessory and what is the highly examinable effect of it?

A

Dishonesty requires not acting as an honest person would in the circumstances.

The dishonest accessory does not need to know they are participating in a breach of trust. They must merely know that the scheme they are involved in is somehow dishonest or improper.

48
Q

Why is a proprietary claim not usually relevant in the case of a dishonest accessory?

A

Because the accessory is unlikely to have received trust property in the course of facilitating the breach of trust, which is the basis of a proprietary claim