Proprietary Claims and Remedies

Question 1

What is the difference between following and tracing?

Answer 1

Foskett v McKeown
* Following: Process of following the same asset as it moves from hand to hand
* Tracing: Identifying a new asset for the substitute of an old one. What is tarced is the value inherent in the old physical asset (Lewin)
* Where one asset is exchanged for another, a claimant can elect whether to follow the original asset to the new owner or trace its value to the new asset by the original owner

Question 2

What is the difference between a clean and mixed substitution?

Answer 2

• Clean: Where the whole value inherent in the new asset is attributable to the whole value of the old one
• Mixed: Where it is not wholly attributable to the old asset and comes from different sources

NOTE: Common law does not allow tracing into a mixture of money (Agip (Africa) v Jackson), whereas equity does. However suggested in Foskett that there could be a fusion in the future

Question 3

How do mixtures and mixed funds differ from one another?

Answer 3

• Mixture: New asset acquired from two separate sources so a mixed substitution has taken place
• Mixed Funds: Number of assets become mixed up so it is difficult or impossible to tell which assets came from which source (either due to lack of evidence or similar nature of assets)

Question 4

What does the case of Foskett v McKeown tell us about tracing?

Answer 4

Beneficiaries cannot follow trust money once it reaches a bank or insurance company since identity is lost

Question 5

What are the rules on mixed accounts and withdrawals from such by a wrongdoer?

Answer 5

• Re Hallet: Where a wrongdoing trustee makes a withdrawal form a mixed account, it is presumed they dissipated their own money first
• Re Oatway: Where the wrongdoer withdraws money from the mixed fund and uses it to purchase a substitute before dissipating the remainder, the wrongdoer will be seen as dissipating their own money, and claimant can trace the new substitute
• Shalson v Russo: Suggested that cherry picking may be avaiable, so that where trust money is withdrawn to buy multiple assets, the claimant can decide which case to follow

Question 6

What is the rule in Claytons case?

Answer 6

First in, first out
If a trust mixes multiple funds of innocent claimants in a single account and then makes transactions these are presumed to be using the money on the same basis as it went in

Question 7

When can the rule in Claytons case be rejected?

Answer 7

Barlow Clowes v Vaughan
1. It would be inappropriate (large scale fraud)
2. It would be too expensive, impractical or difficult to apply
3. It would be contrary to the presumed or actual intention of the contributors
4. It would be unjust

Rule in Claytons case is only a presumption that can be easily rebutted

Question 8

What are the two alternatives methods that may be preferred to the rule in Claytons Case?

Answer 8

• Simple Pari Passu: Dividing any remaining funds in proportion to each claimants initial contribution. Any deposits or withdrawals between the initial contribution and remedy being sought are ignored
• Rolling Charge: Each contributor is entitled to proportionate share of the mixed funds corresponding to the size of their contribution, this being recalculated each time a deposit and withdrawal is made

Question 9

What is the lowest intermediate balance rule?

Answer 9

James Roscoe v Winder
Where trust money was misappropriated into a mixed fund and withdrawals were subsequently made by the trustee, claims cannot be made for any money put in after this (i.e. if the account had £100, £80 was spent before another £50 was put back in, the claimant would be allowed only £20)

Question 10

What are the rules on backwards tracing?

Answer 10

• The action of tracing money through payment of a debt (i.e. if the wrongdoer had bought a car on loan before misappropriating the money, but then used the money to pay off the loan). Said to be impossible per Shalson v Russo and Bishopgate Investments v Homan
• HOWEVER, Brazil v Durant International Corp, Privy Council held that backwards tracing would be available in the case of a coordinated scheme between depletion of trust fund and acquisition of the asset
• Accpeted there were limited possible cases in Serious Fraud Office v Hotel Portfolio II

Foksett v McKeown said it is not the physical asset traced but the value inherent in it, why should backwards tracing not occur? Smith has argued for such and could do so in a PQ

Question 11

What is claiming?

Answer 11

Foskett v McKeown
Tracing is simply the process used to support a claim, nature of a proprietary claim will depend on the original proprietary right. If legal this will be a legal claim, if equitable then equitable

Question 12

What are the main equitable proprietary remedies that will be available?

Answer 12

Foskett v McKeown: claimant will be able to decide either remedy they want
* Beneficial ownership
* Equitable charge or lien

Question 13

How do we determine what the better remedy is to impose?

Answer 13

If money from a trust fund is used solely to buy a new asset, then the beneficiary can assert beneficial ownership of this asset. A constructive trust may arise by operation of law and the defendant can be forced to transfer property to the claimant

Foskett v McKeown
* A proportionate share under a constructive trust is best justified by analogy to the acquisition of an asset
* HOWEVER an equitable lien / charge was more appropriate if the analogy was made to maintaining or improving already acquired property (cannot be divided)
* Cases where money has been used on alterations raise special problems as the property is incapable of being divided, therefore rules on tracing through mixed funds cannot apply
* In cases where the wrongdoer has misappropriated money and used it to acquire other forms of property which increase in value, courts consistently refuse to limit to an equitable lien

Depends upon facts of the case. In Re Diplock it was said that money could be traced into mixed funds of an innocent volunteer but could not be traced into property on which money had been used for alterations

Question 14

What defences are available to tracing?

Answer 14

Bona fide purchaser for value without notice
* Credit Agricole Corp v Papadimitriou: Establishing the defence lies on the defendant. Where in the particular commercial contract involved he has failed to draw inferences that ought to be drawn or has not queried about a third party due to knowledge of suspicious circumstances indicative of wrongdoing by the transferor will the defence fail

Change of position, where an innocent defendants position will be so changed as to cause an injustice greater than denying the plaintiff restitution