Proprietary claims Flashcards
Appeal of proprietary claims
a) Priority in insolvency
b) Capturing increases in value of asset
c) Availability against third parties
Trustee has legal title to trust property that she takes for herself and keeps in its original form
Beneficiaries can directly identify the property that is the subject of the proprietary claim
When is the problem?
When the trust property has been conveyed to a third party
Distinctions between following, tracing, claiming
Foskett v McKeown
Following, tracing
Following, tracing - evidential exercise, to locate the assets –> identify the value inherent in one property right as representing value inherent in another property right
Following - following same asset as it moves from hand to hand
Tracing - identifying new asset as substitute for the old
Criticism of tracing
Cutts: no abstract existence of ‘value’
- Can’t be value as in market value –> can’t say that 20k painting becomes 40k car
Smith: ‘value’ as ‘potential for exchange inherent in an assignable right’
Continuity because the same actor uses one right to acquire another
- Response by Cutts: doesn’t work for bank transfers (supported by Mitchell and MacFarlane)
Claiming
Determining type of proprietary claim that can be made against trust property or traceable proceeds
Subject to defences
Following for fungible mixtures (interchangeable and separable without causing damage)
Intact mixture - proportionate share as their property (Lupton v White)
Not intact mixture (depleted) - dependent on whether there has been wrongdoing (Foskett v McKeown)
- Wrongdoing: resolved against wrongdoer, losses come out of her portion first
- No wrongdoing: apportioned between contributors
Following for non-fungible mixtures (mixture not interchangeable, and not easily separated)
CANNOT FOLLOW IF PROPERTY IS DESTROYED + DEEMED TO BE DESTROYED IF:
a) Accession (asset physically attached to another that it would cause serious damage or be disproportionately expensive to separate them) (Hendy Lennox v Grahame Puttick)
b) Fixtures (asset physically attached to land and becomes fixture (Elitestone v Morris)
c) Specification (asset combined with other assets to make whole new product)
Exception: if mixing is performed by wrongdoer (Jones v De Marchant)
Tracing overview of scenarios
a) T with own money
b) T1 + T2
c) T + 3rd party innocent
d) Payment of debts, backwards tracing
Tracing - T with own money
Approach 1: Evidential uncertainty resolved by deeming the trustee to have done the right thing by keeping B’s money intact and spending his own money (Re Hallett’s Estate)
Approach 2: Evidential uncertainty resolved against the trustee by deeming her to have used B’s money to purchase property (Re Oatway)
Tracing - T with own money - choice of approach
Can cherrypick?
Mitchell and McFarlane: yes
Shalson v Russo: yes
Turner v Jacob: not really, where the balance account contains amount equal to remaining trust fund, B’s right to trace is limited to that fund
Mitchell and MacFalane: rationale in Shalson is preferable even if Turner v Jacob is closer to Re Oatway
Lowest intermediate balance rule
Absent any payment in of money with intention of making good earlier depredations, tracing can’t account for mixed account for any larger sum than is lowest balance in the account between the time B’s money goes in, and the time remedy is sought (Roscoe v Winter)
e.g. A’s 50K + T 50K, withdraw 80K, deposit 30K –> evidential certainty that at least 30k is from A so B can only claim for up to 20K
Exception: transactions part of bigger scheme e.g. money laundering (Republic of Brazil v Durant)
Tracing - T1 + T2
a) Pro rata (in proportion with contributions) (Re Diplock)
b) First in, first out (Clayton’s Case)
- General application (Barlow Clowes)
BUT NOW TREATED AS EXCEPTION (Russell-Cooke Trust, Commerzbank AG v IMB Morgan)
c) Rolling charge (Barlow Clowes)
- General application (Shalson v Russo)
- But not cost-efficient, so courts usually still use pro rata route
Tracing - T + 3rd party innocent
Good faith (no knowledge) required
Knowledge or notice (Boscawen v Bajwa): wrongdoing
No knowledge: rule of presumptions where money is mixed
Tracing - payment of debts, backwards tracing
Cannot trace into overdrawn bank account as the money wrongfully paid is not represented by property (Rea v Russell, NZ)
Exception: defendant borrows money and uses it to buy an asset, then uses trust money to repay creditor (backwards tracing)
Smith: should be allowed
Criticism of Smith: doesn’t make sense if there is a big time difference between purchase and repayment (Bishopsgate)
Academic response to backwards tracing
Lord Scott in Foskett v McKeown: only when trustee intended to repay debt with trust funds
Law Society v Hider: can
Rimer LJ in Shalson v Russon obiter: no reason why B’s interest should not prevail
Relfo v Varsani: implicitly approved doctrine
Federal Republic of Brazil v Durant International Corp: applied backwards tracing (bribery)
Re D’Eye obiter: backwards tracing can be used (bankruptcy)
Conceptual difficulty with backwards tracing
Connection between asset and trust money breaks down because there is no traceable substitute once liability is repaid
May affect trustee’s other creditors since the asset will be taken out of the pool
Swollen Assets Theory
Beneficiary should be granted equitable lien over all/any assets of trustee to prevent unjust enrichment of the trustee (broader than orthodoxy that only allows beneficiary to assert right in substitute asset)
Similar basis to backwards tracing that allows tracing even where not possible to trace claimant’s value into any specific asset, so long as there is a causal connection
Response to Swollen Assets Theory
Obiter: endorsement of the theory by Lord Templeman (Space investments v CIBC)
Mitchell, MacFarlane: wrong analysis
- Misinterpretation of Re Hallett’s Estate
- Inconsistency with Roscoe v Winder (presumption against wrongdoer only when there is evidential uncertainty)
Express rejection of Lord Templeman’s endorsement (Serious Fraud Office v Lexi Holdings)
Claiming overview for types of claims
a) T misappropriates trust property for herself
b) T makes unauthorised investment
c) T misdirects trust property to 3P that is not a bona fide purchaser for value without notice
d) T uses trust money to discharge debt
T misappropriates for herself - original form
Seek order requiring T to reconstitute the trust propety, convey legal title
T misappropriates for herself - traceable proceeds
a) B only: equitable proportionate interest + lien
b) T + B: equitable proportionate interest + lien (for value of misapplied money)
c) B1 + B2: equitable proportionate interest
d) Buy property in T’s name, with mortgage loan under T’s name: equitable interest in WHOLE property
e) Improvements to land: lien (Re Diplock, Foskett v McKeown obiter)
T makes unauthorised investment
a) Falsify
d) Adopt
T misdirects trust property to 3P that is not bona fid epurchaser for value without notice - original form
Claim subsisting equitable interest in the trust property (constructive trust) (Independent Trustee Services v GP Noble Trustees)
T misdirects trust property to 3P that is not bona fid epurchaser for value without notice - traceable proceeds
a) B only - equitable propertionate interest (Re Montagu, Independent Trustee Services) + lien (Foskett v McKeown)
b) B + 3rd P - proportionate equitable interest (Re Diplock, Foskett) + lien (Re Diplock) –> regardless of knowledge
c) Improvements to land - proportionate equitable interest only
T uses trust money to discharge debt
a) Debt to obtain money to buy an asset - backwards tracing
b) Pay debt secured on T’s proeprty - subrogation (McCullough v Marsden, Boscawen v Bajwa, Primlake v Matthews)
c) Pay debt secured on X’s property - subrogation (Menelaou v Bank of Cyprus)
Subrogation - sustitute mortgage lender’s rights with B who get a lien over house to value of property –> revived via legal fiction, only applies to secured debts
Source of beneficiaries’ proprietary rights
Equitable proprietary interest in trust assets ‘subsists’ in traceable proceeds (Foskett v McKeown)
a) T agreed to hold both original trust assets and their traceable proceeds on trust (Lord Millett, Virgo)
b) letting T or 3P keep traceable proceeds = letting them keep profits of wrongdoing
c) Letting T or 3P keep traceable proceeds = letting them keep unjust enrichment (Birks, Chambers, Burrows)
Defence: bona fide purchase of property without notice
a) Good faith (Midland Bank v Green)
b) Provision of value (no need for contract) (Independent Trustees v GP Noble Trustees)
c) Lack of actual notice
d) Lack of constructive notice (Barclays Bank v O’Brien)
For banks - onus on them to show they didn’t have constructive notice (Credit Agricole Corp v Papadimitriou)
