Equitable remedies and tracing? Flashcards
Equitable remedies?
Where common law damages would not be enough – discretionary in naturr
Personal remedies
- Include monertary remdies such as equitable compsenaion – where breach gives rise to loss OR account of profits – where it gives rise to profit
Propritory remedies – incolve a proprietary right – like breach of no profit – and claiming a constcutive trust over profit – this allows claimaint ability to use trading rules
Following, tracing, claiming?
When trustee misapplied funds
Sue the trustee for breach of trust.
Sue a third party who has assisted the breach of trust.
Make a claim against the misapplied property or its traceable proceeds.
Sue a third party who knowingly received the traceable proceeds of the breach
Equitable proprietary claims
A proprietary claim has three principal advantages:
(a) It is not affected by the defendant’s bankruptcy or insolvency.
(b) It enables beneficiaries to capture increases in the value of traceable proceeds.
(c) It does not depend on fault: it can be maintained against the defaulting trustee and against
innocent recipients of the trust property or its traceable proceeds.
Definition of following, tracing and claiming?
Following: Following is the process of ‘following the same asset as it moves from hand to hand’
(Foskett). It is the process for locating misapplied trust property. Thus, if T misapplies £1,000
(cash) of the trust fund and gifts it to X, and X gifts it to Y, the beneficiaries can follow the
£1,000 from T to X and then to Y.
Tracing: Tracing is the process of ‘identifying a new asset as the substitute for the old’
(Foskett). Generally, one asset is the traceable proceed of another if there is ‘a series of direct
substitutions’ between them (Relfo Ltd (in liquidation) v Varsani [2014] EWCA Civ 360).
Claiming: Claiming is the assertion of a personal or proprietary right in relation to misapplied
trust property or its traceable proceeds (Foskett).
CLAIMS?
Claimant may want to make a claim with misapplied trust property
- Assets purchases exclusivey with misapplied trust money
- Assets purchased with a mixed fund
4 potential claims once the asset has been identified
- Beneficiary claims beneficial ownership of the asset – where its been aquired exclusively with trust funds
- Beneficially claims beneficial ownership of a shate of assets – mixed fund
- Beneifiay claims an equitable lien over the asset – where its deceased in value
- Subrogation – where misapplied tryst funds are used to pay off a secured debt
TWO REQUIREMENTS FOR folllowing, tracing and claiming?
The claimant had a ‘right of property recognised by equity’ in the asset which they seek to
follow and/or trace - EASY IF YOU HAVE AN EXPRESS TRUST
(b) The asset was held by a person who was in a fiduciary relationship with the claimant
Tracing rules?
Tracing unmixed funds into a new asset – simple case- can trace into asset easily
Mixed funds
- Mixed fund comprising misapplied trust money and trustees own money
- mixed fund comprising misapplied trust money and money derived form one or more innocent rhid party
wuthdrawals from wrongful mixtures
- basic rule – trustee makes a withdrawa from a wrongful mixture – beneficiary can treat dissipation as the trustees money and attribute identifiable funds to the trust regardless of the order threy made.
- Cherry picking – if mixed funds used to aquire multiple assets – beneficiary can attribute the mst profitable applciations fo the mixed fund
- EXCEPTIONS TO CHERRY PICKING IF IT WILL EFFECT UNSECURED CREUDTORS OR THIRD PARTIES
Withdrawals from innocent mixtures
- Money from two or more trusts mixed by a common trustee
- Innocent reicpent of misssaplied trust money mixes it with their own
Claims calcualtions?
The general rule applying to withdrawals from an innocent mixture is that withdrawals are
attributed rateably to the contributors to the mixture: Re Diplock.
* Half of the dissipated £500 was from trust A and half was from trust B. Therefore, trust A and B
also share the £1,500 that remains in the mixed fund in these proportions.
* Each trust fund has a proprietary claim worth £750 over the money in the mixed fund (and a
personal claim of £250 against the trustee in respect of their share of the dissipated money).
IF it was innocent reicpeint in wallet then
trust money. This would not seem fair here as X does not know about the breach of trust.
The rule from Re Diplock therefore applies again here, even though the funds were mixed by X:
* Since 2/3 of the £1,500 was trust money, and 1/3 was X’s money, withdrawals from the £1,500
are attributed to X and the trust in those fractions.
* Therefore, £400 of the £600 which was dissipated is attributable to the trust money, as is £600
of the £900 in the wallet.
CURRENT ACCOUNT IS DIFFERENT?
Claytons case – first in first out rule – but this is arbitrary – this rule can be disapplied when its contray to the intentions of parties who contributed to the mixture
Impracticable
Unfair
Two other methods
Pari passu ex post facto method –
- Idneitfying the amounts contributed to account – fractionally to all contirbitors regardless of when – single clauclation after the event
Rolling charge method
- Each individual is attributed frationally to contirbuors to the account immeditaly before the withdrawal
As a matter of principle, the rolling charge method should be applied in preference to the ex post facto method (Barlow Clowes and Shalson). However, if the rolling charge method is too complex or expensive to apply, the ex post facto method should be applied. To date, there are no examples of the rolling charge method being applied.
Rolling charge method example?
Recall the example:
* T misapplies £1,000 of trust fund A and pays it into a current bank account (‘the account’).
* T misapplies £1,000 of trust fund B and pays it into the account.
* T withdraws £1,000 from the account and uses it to purchase shares.
* T misapplies £1,000 of trust fund C and pays it into the account.
* T withdraws £1,000 from the account and dissipates it.
* £1,000 is still credited to the account.
If the rolling charge method is applied, immediately before the first withdrawal, £2,000 was
credited to the account. Trust A and trust B contributed £1,000 each to that sum. Thus, the first
withdrawal and the shares are attributable to trust A and trust B in equal shares.
Immediately before the second withdrawal, £2,000 was credited to the account. Trust A and trust
B contributed £500 each to that sum and trust C contributed £1,000. Thus, the second withdrawal
and the sum remaining in the account are attributable to trust A, trust B and trust C in the
fractions 1/4, 1/4 and 1/2 respectively.
Propritary claims?
Where trustees misapply trust property beneficiaries can assert prorpitary interest in trust property or its tracebale proceeds
Unmixed funds
- Wher etracing can be done – can porpriatry interest in the property
- Where an asset is purchased exclusibley with trust money the beenifcary can choose between
- Asserting beenfical ownership of the asset
- Making a personal claim against the trustee for rbeach of trust and enforcing an ewuitable lien – becomes a secured creditor – DECRASED IN VALUE
Wrongful mixtures
- Claim a prorpitante shar eof asset
- Enforcing a lien upon it to secure their eprosnal claim against trustee for maount of misapplied trust money
Example: Traceable proceed decreases in value A trustee mixes £500 of their own money with £500 of trust money and uses it to purchase shares. The shares have decreased in value to £500. The beneficiary can trace into the shares. The best option is to claim an equitable lien over the shares. The first £500 of the sale proceeds will be used in payment of the debt. In this case, the beneficiary will recover the full £500 and there will be nothing left for the trustee.
Innocent mictures
- If more than one innocent rhid party
- - proprtiante share of the asset
Wrongful and innocent mixtures
- Propritante share
Subrogation?
Subrogation
- The beneficiaries can be subrogated to the mortgage lender’s security interest (treating the beneficiaries as if they had lent the money to the trustee, and allowing them to take a security interest over the trustee’s house). The security interest granted to the beneficiaries in these circumstances must be on the same terms as the original security.
Defences
- Purhcaosre of a egal interest without notice of the trust
