8. Liability for Breach of Trust

Question 1

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

Answer 1

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.

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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

Question 4

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)?

Answer 4

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

Question 5

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

Answer 5

No

Question 6

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

Answer 6

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

Question 7

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

Answer 7

Joint and several

Question 8

What are the three main defences available to trustees?

Answer 8

1. Consent of beneficiaries
2. Limitation period
3. Exclusion clause

Question 9

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?

Answer 9

Any beneficiary who did not consent

Question 10

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

Answer 10

Six years

Question 11

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

Answer 11

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 (ie. proprietary claims)
4. Rolling breaches (eg. ongoing bad investments) reset the limitation clock each day

Question 12

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

Answer 12

1. Bad faith
2. Intentional breach
3. Fraud
4. Recklessness

Question 13

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

Answer 13

Up to and including gross negligence

Question 14

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

Answer 14

Trustee acted honestly and reasonably and ought fairly to be excused

Question 15

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

Answer 15

Court can apportion liability as it deems just and equitable by requiring a fair contribution from one or more trustees to another

Question 16

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

Answer 16

Breaching trustee:

1. Was alone guilty of fraud
2. Was the solicitor to the trust who advised the breach
3. Is a professional trustee with vastly superior knowledge, whilst the claiming party is a lay person (unless they also caused the breach)
4. Benefitting from the breach/had some extra moral culpability

Question 17

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

Answer 17

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

Question 18

Why is a proprietary claim advantageous?

Answer 18

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

Question 19

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

Answer 19

A personal claim against the trustee

Question 20

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?

Answer 20

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

Question 21

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?

Answer 21

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.

Question 22

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

Answer 22

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

Question 23

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?

Answer 23

Trustee is treated as spending (and dissipating) their own money first, and the beneficiaries may claim a charge over the bank account for the amount of trust funds in it

Question 24

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?

Answer 24

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.

Question 25

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

Answer 25

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

Question 26

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

Answer 26

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

Question 27

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

Answer 27

Personal claim against the trustee

Question 28

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

Answer 28

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

Question 29

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

Answer 29

The general rule is first in first out, but this may be replaced with parri passu (rateable post-facto) if inequitable

Question 30

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?

Answer 30

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

Question 31

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

Answer 31

The proportionate rule is the default rule

Question 32

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

What is a bona fide purchaser for value without notice?

Answer 32

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

Question 33

What is an innocent volunteer recipient?

Answer 33

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

Question 34

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

Answer 34

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

Question 35

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?

Answer 35

Beneficiaries can claim the asset

Question 36

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?

Answer 36

Beneficiaries can claim a proportionate share of the asset

Question 37

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?

Answer 37

Because the volunteer is an innocent party.

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

Question 38

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

Answer 38

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.

Question 39

What is subrogation?

Answer 39

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

Question 40

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?

Answer 40

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

Question 41

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

Answer 41

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

Question 42

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

Answer 42

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

Question 43

What five types of knowledge will satisfy this unconscionability requirement [for knowing receipt]?

Answer 43

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.

Question 44

What is a dishonest accessory?

Answer 44

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

Question 45

Can passive assistance amount to someone being a dishonest accessory?

Answer 45

Yes

Question 46

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

Answer 46

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.

Question 47

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

Answer 47

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