Following and Tracing Flashcards

Question 1

Q

FOLLOWING AND TRACING

Answer

A

Following:

involves pursing the same asset (original asset which has been misappropriated) as it is transferred from one person to another.

Tracing:

is a process which upon the value inherent in an asset and which identifies that value in substitutes.

E.g. where C’s property has been exchnaged with another asset (simple exchnage).

E.g. where C’s property has contributed in part towards the acquisition of a new asset (mixed subsitution).

Leading case: Foskett v McKeown

Follow or trace? Depends on circumstances.

If asset is destoyed = trace.
Object increased in value = follow.
Defences - cannot trace against a good faith purcaser.

Question 2

Q

TRACING

Answer

A

Tracing is a process of identification (of the proceeds as his property)

Foskett v McKeown - C has to show ownership rights either at equity or law before making a claim.

Objectives of tracing

To bring a proprietary claim in relation to assets, which represent trust property.

Reasons to bring a proprietary claim:

Gain priority in insolvency (unsecured creditors)
Claim any enhanced value
Remove the asset from the reach of the Crown, which my seeking to confiscate the property (trustee committed an offence).

Identify the persons who have interacted with the asset or its traceable proceeds along the way to discover whether C has a personal claim against each or all of them (e.g. knowing receipt or dishonest assistance).

Note choice of actions and claims.

Question 3

Q

FOLLOWING AND TRACING

AT COMMON LAW

BASIC UNDERSTANDING ONLY.

Answer

A

Legal owner will use the common law to recover property (Lehman Brothers).

1. Conversion

E.g. O owns a painting and B steals it.

E.g. O owns a painting in his capacity as a trustee and B steals it.

Following the painting. Claim: common law action of conversion. Can be used regards to original product and mixtures.

Following into mixtures

Can follow tangible asset into a mixture:

(a) If it remains identifable, can recover.
(b) If it no longer identifable, he can claim a proportionate part of the mixture.

2. Action for money had and recieved

E.g. B takes O’s purse containing £500.

E.g. B takes O’s purse containing £500 of trust money.

Following the money (following if it is ‘exactly’ the same money). Used for tracing value of the money originally recieved if it is not the ‘exact’ money. Claim: common law action for money had and recieved.

Lipkin Gorman - partner dishonestly withdrew monet in a client account and spent it gambling. Legal owner once withdrawn. Firm used the Casion to recover the monet. Held could recover. Example - can trace through simple exchanges at common law.

Problem with money and bank accounts

Legal owner can trace and claim at common law where there have been simple echanges (including money):

Hambrouck - employee transfered large sum of employor’s money into his account and then his girlfriends. No mixing therefore could be recovered.

Legal owner can recover all profits made with his property:

Jones - profits made on the market with money beloning to another. Recover original money and profits made with the money.

However, C cannot trace at law where money is taken and passes through the bank’s clearing system into another bank account.

AGIP (Africa) - C’s money gone through NY clearing system. Not possible to sue. If the money ceases to be identifiable by being mixed with other money in the bank account derived from another source cannot followed at CL.

Law insists on physical possession. Envisages deposit of money is the same many that you withdraw later.

Foskett v McKeown - money paid into a bank account belongs legally and benefically to the bank and not the account holder.

Talking of tracing money into and out of an account but there is no money in the account. Merely a single debt of an amount equal to the final balance standing to the credit of the account holder.

CL cannot cope with this - sees the banking system as it was 300 years ago.

Why does the CL take a different appraoch to equity?

Historical misunderstanding of Taylor v Plumer

Broker exchnaged money for American securitites and billion. Simple exchange. Could trace.

Criticised as being an equtiy case thus principle is weak.

Appraoch CL and emphasis place on possession

Re Diplock - emphasis on poession and lack of remedies led to this position. Once money of B became mixed with the money of A its identification in physical sense became impossible.

CL takes an unrealistic appraoch towards mordern banking. No such thing as simple exchnage but that is where the line is drawn.

Reform

CL, no tracing is possible after the fund has been mixed and withdrawls made;
Equity, fiduicary relationship or continuing equitable proprietary right is precondition for the eqitable rules to apply.

Jones & Foskett- No merit in having distinct and differing tracing rules.

The way forward?

Note liberal interpretation taken by SC of Canada, ruled possible CL to trace funds into bank accounts if it is possible to identify the funds (BMP Global Distributors).

J. Ulph - explained that we have the law sorted when it comes to following goods when they become mixed, manufacured or added permanetly to other goods. Case BMP used to question if it can work for goods then why cannot it work for money therefore it is necessary to reform the law.

FHR - SC noted that it can learn from other jursidctions thus in the correct case there might be law reform. Followed Canada on a different issue.

MIGHT BE CHANGED! WHY?

CL preoccupied with possession - too radical change
Could give commercial people priority over unsecured creditors (buyers and sellers cannot use tracing rules).
Anyone in arms length relationship cannot use tracing.

Question 4

Q

TRACING

IN

EQUITY

Answer

A

Foskett -* traces the value in the asset.
Re Diplock* - Equity reagrds the mixture as capable of being resolved into compoent parts.

Fiduicary Relationship must be shown.

Re Diplock - D attempted to create a discretionary trust in his will for charitable and benevolent objects. Executors distibuted before deicing the trust failed as private purpose trust. D’s next of kin were entitled to the monet. Executors had a fiducairy relationship with the next of kin who were entitled to the Diplock money.

Criticsm of the need for a fiducairy relationship

Traditional FR include trustee and beneficary, principal and agent, client and solicior.

Thieves: WestDeutsche Landesbank - characterised as fiducaries as the characteristics are:

no unauthorised profits
no conflict of interest

This shows the problems of an aritifical constrain in the law. FR has been strained because of the tracing relationship.

Foskett v McKeown -no logical jsutification for allowing any distinction between them to produce capricious results in cases of mixed substitutions by insiting on the existence of a FR.

Question 5

Q

EVIDENTICAL PRESUMPTIONS:

TWO KEY PRINCIPLES

EQUITY

Answer

A

(1) INNOCENT v WRONGDOER

Where there is evidential confusion, everything is presumed against the wrongdoer. i.e. in a contest between the ‘innocent’ beneficary and the ‘guilty’ trustee, everything is presumed against the trustee.

(2) INNOCENT v INNOCENT

Where there is evidential confusion and both parties are innocent, they have equal standing in a contest between each other. i.e. innocents rank ‘pari passu’ (equal).

Question 6

Q

(1) INNOCENT v WRONGDOER

Answer

A

_{Against the wrongdoer, beneficary entitled to locate his contribution in any part of the mixture and to subordinate their claim to share in the mixture until his own contribution has been satisified (Foskett).}

_{Where no mixing has occurred}

_{If the trustee has used trust money to purchase property, the beneficary can choose either:}

_{(1) to take the property purchased, or }

_{(2) to have a charge on it: Re Hallett’s Estate (B can seek a personal remedy for any balance outstanding). }

_{A charge is where the property is held as security for the amount of trust money used in its purchase.}

_{Where mixing has occurred}

_{Where the trustee has used trust money and his own money in the purchase of property, the beneficary can choose either:}

_{(1) to have a charge on the property purchased. Means B can only claim the trust money and interest or }

_{(2) take a proportionate share of the property, including any increase in value (Foskett). }

_{Berg argues that B should be able to claim all profit given that T are not allowed to make profit out of their position (Boardman v Phipps). Could be argued B can only claim whole profit where it can be shown that T could only purchase the asset using trust money.}

_{Money mixed in a bank account}

_{Where T had paid trust money into his account, B can have a charge over the account.}

_{What if withdrawals are made?}

_{Withdrawal is presumed to be the trustee’s own money.}

_{Re Hallett’s Estate - Solicitor entrusted with money for investment. Mixed (1) her money (2) trust money and (3) own money. Died, insufficent money to meet personal debts repay Mrs C and the trust. Mrs C will be a B as there is a fiduicary relationship between solicitor and client. Trust beneficaries had priority.}

_{Rationale - Foskett - innocent B wins.}

_{What if withdrawals are made and the money is used to purcahse a valuable asset and then what is left in the account is dissipated? }

_{Withdrawal is presumed to be trust money.}

_{Re Oatway - T mixed trust money with his own money and had brought shares, still leaving enough money in the account to repay the trust fund. Spent rest of money. B could claim the shares.}

Displaces Re Hallett’s Estate - can trace into investment. Cherry-picking rule - can trace into any identifiable part of the trust fund.

_{Limits on B’s right to trace: ‘lowest intermediate balance rule’}

Where trust money is mised with the T’s money, B cannot bring a proprietary claim for money money than the lowest balance in the account at any point after the trust money was paid in.

_{Roscoe v Winder - C sold their business to W agreed he should collect certain debts. Did and paid £450 into his account. Withdrew money leaving £26. Died leaving £360. C could only recover £26.}

_{If the trustee spends trust money then pays in money of his own, this is not presumed to be repayment to the trust fund unless the trustee shows an intention to do so. Principle reaffirmed in Bishopsgate Investment Managment - M transferred money from employees’ pension funds into bank acconts of MCC, a company controlled by M. All accounts were overdrawn at later date. Not possible to trace - LIB gone to zero.}

_{Followed: Atkinson - customers’ money was not paid into the trust account but into a current account, which was overdrawn. Not recover - cannot claim money in other accounts (no proprietary rights). This is because the money paid in was to satisfy a debt.}

_{THERE MUST BE A TRASNACTIONAL LINK! }

_{Backward Tracing}

_{E.g. T purchased an asset with credit card then used trust money to pay the credit card company.}

_{E.g. T uses trust money to reduce his bank overdraft so that he can purchase an asset.}

_{Issue - appears that the lost money is lost because it has gone to repay overdrawn account: Bishopsgate Investment}

_{Dillion LJ - left Q open}
_{Leggatt - dobuted the agrument}
_{Henry - agreed with both judgements}

_{Position is not clear.}

_{Foskett - suggests that if there is evidence that the fraudster had intended to use trust money to buy an asset then B could trace into it.}

_{Arguably less emphasis upon a precise link between trust money recieved and the timing of the acquisiton of an asset since HL decision: Foskett.}

_{C had transffered money to T purchase home in Portugal. T wrongfully misappropriated trust money, mixed it with his own, used it to pay for an asset. Committed suicide and question arose as wo could claim the £1 million death benefit. Although trust money was used to 4th and 5th premiums, the full insurance became payable after the first premium was paid and the trustee has used his money to pay this.}

_{B did have proprietary rights. Choice (a) charge or proporitonate share. HL stated that sequence of payments did not matter but must have been a transactional link.}

_{Adds to idea that in appropriate circumstances could backwards trace.}

_{Conaglen - argues on policy grounds that B should not be able to backwards trace because it disadvantages T’s unsecured creditors.}

_{FRAUD:}

Sinclair Investments - can trace even where has been a rapid cross-firing of cheques. Burden on wrongdoer to show that C’s money has in fact disappeared on the balance of probabilites (argued that the money could not be identified because of the several trasnactions).

Relfo Ltd v Varsani - director misappropriated company’s money. Transferred portion of money to company called Mirren. Another company called Intertrade paid simlar sum to Varsani. Intertrade recieved a similar sum from Mirran.

B could trace the money into V’s hands. Court considered simailrity in the amount of money involved, timing and evidence of relationship between the parties to establish a transactional link.

Question 7

Q

(2) INNOCENT v INNOCENT

Answer

A

_{Competing claims between two beneficaies or beneficary and innocent volunteer.}

_{The key principle is: innocents rank ‘pari passu’. }

_{Foskett - rank equally (pari passu) and loss is born proportionately.}

_{Active bank accounts: Clayton's Case applies prima facie, although usually displaced.}

_{PURCHASE OF ASSETS}

An innocent volunteer is someone who takes trust property innocent (without notice) but does not give value, i.e. is not a purchaser.

What is the position where an innocent volunteer recieves trust property and mixes it with his own and purchases an asset?

Equal but ptopotionate shares: Re Diplock; Foskett.

[EXAM: if T is involved you must use one set of rules against the trustee and a different against an innocent purchaser.]

Trust A - contributes £100,000, Trust B- contributes £100,000 and T contributes £100,000. House goes up in value £600,000

TA - £200,000, TB - £200,000, T - £200,000

If the house goes down in value to £150,00 T gets nothing because his interest is subordinated to their interest (less important).

WHERE THE TRUSTEE PAYS MONEY BELONGING TO ONE INNOCENT PERSON INTO HIS BANK ACCOUNT AND THEN PAYS MONEY FROM ANOTHER INNOCENT PERSON INTO HIS BANK ACCOUNT

Active current bank accounts: the rule in Clayton’s case.

_{Where money belonging to innocent volunteers is paid into an active current bank account, it is presumed that the money first paid into the account is the money used on the next withdrawal (‘first in, first out’).}

_{E.g, T pays in £3,000 of TX’s money and £5,000 of TY’s money. Withdraws £2,000 and dissipates it. Would have come out of TX’s money.}

_{NOT APPLY TO DEPOSIT ACCOUNTS & CAN BE REBUTTED}

_{Barlow Clowes International - investors put money into two portfolios operated by Barlow Clowes International Ltd. Question arose as to the principles which should be applied in returning the money to the investors after the collapse of the investment scheme. CA considered three possible ways of distributing the funds:}

_{Clayton’s Case: ‘first in, first out’ rule - prejudices early investors.}
_{Pari passu: all the traceable trust funds remaining at the time of judgement are share equally but proportionatly amongest investors. Prejudices later investors who will not recover all their money.}
_{Rolling charge: investors rank equally but proportionatrly and this assessment is applied every time a withdrawal is made to work out whose money was used in the withdrawal. Complex.}

_{CA confirmed the rule in Clayton’s Case applies, however this presumption could be displaced it:}

_{it was contrary to the express or implied intent of the beneficaries}
_{it would produce injustice - B took part in a single investment shceme and to differentiate between them wpuld be capricious and arbitrary.}
_{it would be impractical due to the number of deposits with withdrawls.}

_{Held C’s share equally and proportionately (pari passu) because this was a common investment fund.}

_{Russell- Cook - investment scheme ran by solicitor (500 investors). Considered whether the rule in Clayton’s Case should be applied. Held Pari Passu best solution as it was a common investment fund.}

_{Charity Commission - F operated a website, the purpose of which was to invite people to makencharitable donations to the charities of their choice. CC found there was substantial shortfall betwee funds on trust and amounts paid. Court needed to consider how these funds would be distributed.}

_{Held Clayton would be displaced and rolling charge could only be applied completely. Pari passu rule applied so that charities shared equally.}

_{LOANS}

_{What if the trustee or innocent recipient pays off a personal loan?}

_{Cannot trace into the hands of a good faith purchaser.}

_{What if the trustee or innocent recipient pays off a mortgage? This is a loan secured by a charge on an asset. Use propreitary subrogation to step into the shoes of the mortgagee i.e. the claimant may take over the proprietary rights of the former creditor.}

Bajwa - B owned a house subject to a mortgage with the Halifax Builiding Society. Abby National agreed to lend money to a prospective purchaser. This money was released early and Halifax mortgage was paid off. Sale fell though. Held AN could trace its money through into the payment into the Halifax mortgage and take over the mortgage of B’s house.

Question 8

Q

LOSS OF THE RIGHT TO TRACE

Answer

A

_{1. The property must be identifiable. If the property has ceased to exist, equity can do nothing: Re Diplock (trust money to buy wine but drank it).}

_{2. Beneficaries cannot trace into the hands of a bona fide purchaser (‘equity’s darling’). It is a complete defence.}

_{Good faith}
_{Without notice of any adverse claims to the asset}
_{Paid value for the asset.}

_Includes:

_{Someone providing a service for a fee}
_{A creditor who is repaid}
_{A bank which has provided overdraft facilites}

_{3. Change of position. Pleaded where the innocent defendant spent the money (or dealt with the property) in a way where the injustice of making him repay outweighs the injustice which the claimant will suffer if he is denied a remedy.}

_{Basis - unjust enrichment.}
_{E.g. the common law action for money had and recieved}
_{E.g. the Diplock personal action in relation to administration of estate.}

_{Lipman Gorman - club able to rely on the defence of change of position to reduce the amount repayable to reflect the winnings paid to the partner.}

_{Used to be the case that tracing would not be allowed if the result would be inequtiable: Re Diplock. Defence has been absored within the broader defence of change of position.}

_{Failure of trust. Executors had already transferred money to charities. Charities could rely on chnage of position.}

Partial defence to the extent that the recipient’s position has changed.

Question 9

Q

PERSONAL LIABILITY

OF

THIRD PARTIES

IN EQUITY

Answer

A

_{Personal liability (which is strict) for property transferred in the adminstration of an estate wrongly or by mistake to someone else.}

_{Re Diplock: next of kin were able to use personal action to recover the balance of the Diplock money from the charities.}

_{Personal liability for knowing reciept or dishonest assistance.}

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Following and Tracing Flashcards

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