L2 The Nature of the Trust

Question 1

• Thomas and Hudson, The law of Trusts

Answer 1

• A trust is said to be when a trustee ‘holds the property on trust’ for the beneficiary. There are four significant elements to the trust: that it is equitable; that it provides the beneficiary with rights in property; that it also imposes obligations on the trustee, and that those obligations are fiduciary in nature.
• Also classifies trusts as: express, implied, resulting and constructive.

Question 2

• **Westdeutsch Landesbank v Islington – per Lord Browne-Wilkinson

Answer 2

• ‘Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purposes for which the property was vested in him (express or implied) or which the law imposes on him by reason of his unconscionable conduct (constructive trust)
• Also set out a framework upon which the trust operates:
  o Equity operates in the conscience of the owner of the legal interest
  o The holder cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience.
  o In order to establish a trust there must be identifiable trust property.
  o Once a trust is established as from the date of its establishment the beneficiary has, in equity a property interest in the trust property.

Question 3

• s 53(2) Law of Property Act 1925

Answer 3

• Refers to ‘implied, resulting and constructive trusts’ in addition to express trusts. Hence, a trust can be classified in 4 different ways.

Question 4

• Bristol and West Building Society v Mothew, per Lord Millett LJ

Answer 4

• A fiduciary gives rise to an obligation of trust, confidence and loyalty.

Question 5

• Re Lehman Brothers

Answer 5

• Case concerning the certainty of subject matter to create a trust.
• Facts:
• Lehman Brothers International (Europe) had held money on behalf of many clients. According to the Financial Services Authority, if a firm failed, the client money distribution rules applied. A firm could either (1) pay money into a segregated account or (2) put the money into the firm’s own house account and then segregated it into the client accounts.
• Lehman had done the (2) option.
• Lehman Brothers International, the subsidiary of the parent company Lehman Brothers Holding Inc that had gone through bankruptcy proceedings held money on behalf of many clients.
• There was a lot of unsegregated client money in the firm’s account because of approach (2).
• Subsidiary: A company that is partly or wholly owned by another company.
• Judgment:
• High Court: Briggs J held there was a statutory trust imposed on the clients’ funds as soon as the firm received them. This was to achieve better protection.
• CA: Dismissed Lehman Brothers Holding Inc’s appeal. This is because it held that the pool comprised all identifiable client money and all were entitled to participate in the pool. The money could be said to be ‘fungible’ like in Hunter v Moss (Arden LJ).
• SC: Dismissed the appeal on the grounds that the company had segregated the money into its account to achieve a high level of protection for client money. Hence, there was a statutory trust created for the clients.
• Majority:
• Lord Dyson expressed that the issue was not fulfilling EU requirements but the construction of the Directives to provide a high level of protection for clients and safeguarding their rights to funds in the events of insolvency of the firm to which their funds have been entrusted.
• Dissent:
• Lord Hope dissented in the fact that under English Law segregating money into separate bank accounts is not sufficient to establish a propriety interest in those funds.
• Segregation is not enough to provide protection or to declare a trust in the case where the client’s money has been so mixed with the firm’s money that it cannot be traced.