Proprietary Claims: Following and Tracing Flashcards
What are these claims/their advantages?
This is a claim for the property itself - tracking it down and saying ‘this is mine’ rather than trying to make anyone personally liable.
With a proprietary claim, you are at the front of the queue with regards to other creditors in insolvency proceedings - you can take your item, or the amount you have a proprietary claim for, at the front of the queue and at the prejudice of other creditors.
Following definition
Where property subject to a trust, and is transferred by a trustee in breach of duty, the beneficiary may locate the property and make a proprietary claim.
This can continue indefinitely, unless the trust is extinguished.
Extinction
For chattels, two situations:
- Terms of trust authorised trustee to transfer the property.
- Bona fide purchaser defence
For land:
- Overreaching under s2 LPA 1925 - requires two or more trustees to approve
- Registrable dispositions for valuable consideration under s29 LRA 2002 (no bona fide requirement)
Extinction 1: Permission
If trustee permitted to make transfer, this extinguishes beneficiary’s beneficial interest in the property EVEN if the duty of care is breached because the investment is careless.
Essentially where trustee permitted, no following claim even if there is a breach of duty.
Extinction 2: Bona Fide Purchaser for value
Requirements:
Transferee is bona fide, and a purchaser for value (nominal consideration does not count)
Transferee does not have notice of the breach of the trust, however we may construct notice if a reasonable person in their position would have questioned the transaction (Papadimitriou).
Independent Trustees v GP Noble
Wife’s money from divorce settlement stolen by former husband from pension funds.
Bs brought claim, but D brought bona fide purchaser defence, as the value was given to her in an agreement to not pursue further claims under a court’s consent order. But the consent order had since been set aside.
C argued the setting aside of the court’s consent meant that D was no longer a BFP.
CA held: Claim should be allowed to succeed, BFP defence did not apply after a consent order is rescinded.
Extinction 3: Overreaching
Requires conveyance made by trustees of land and that there are two trustees
Extinction 4: Registrable disposition for valuable consideration
If you buy a registrable disposition for valuable consideration, you take priority over any earlier unprotected interests.
Then the question is if they are protected - if you have a notice or overriding interest.
Beneficiaries cannot enter a notice, so they must argue they are overriding, and the only thing that helps them is actual occupation.
Tracing
Allows you to claim for a thing which is sufficiently connected to your original item/money which was subject to a trust.
You can also trace and then follow.
There may be multiple proprietary claims in one question - you don’t get everything but you get options, and may decide to have the most valuable one.
Categories of tracing connections (finding a connection between asset 1 and 2)
1 - Exchanges
2 - Insurance policies
3 - Backwards tracing
4 - Mixtures
Tracing connection 1 - Exchanges
Most straightforward one - if you have a proprietary interest in an asset and it is exchanged for another, you can claim for the other.
Tracing connection 2 - Insurance Policies
Foskett v McKeown:
Man takes money from company he controlled, uses it to pay off 4th and 5th instalments of his life insurance, having paid the first three himself. He kills himself, children paid 1m under life insurance.
HL: Beneficiaries can claim proprietary right over the insurance policy proceeds, in proportion to the amount of trust money which paid for the instalments (here 40%) so 400k.
Cs can elect to take the proportionate ownership of the improved property, or whatever was taken from them - whichever is most advantageous.
Tracing connection 3: Backwards Tracing + General Rule
Applies most often when purchases happen on credit.
X buys helicopter on credit, delivery in 2021, payment in 2023. In 2023, in breach of trust he uses trust money to pay off the credit.
The issue is that he acquired the helicopter before he used the trust money, doesn’t look like a straight swap. Since he swapped the helicopter for a debt, then used trust money to pay off the debt.
General rule: No backwards tracing
Can also happen with overdrawn bank account cases - asset bought with overdraft, then paid off with trust money.
Can also happen where X pays Y, then trustee in breach pays X - looks like X transferred money on basis he would receive trust money.
Exceptions to general rule
- Where there is a close transactional link between the
acquisition and transfer of trust funds (Brazil v Durant) - matter for judicial discretion - Assets transferred ‘on the basis’ that trust funds would replace them (Relfo v Varsani)
Eg of 2: Severus transfers 1m to Rolanda on Monday. On Friday, Albus breaches trust and transfers £1m to Severus.
It seems here that Severus’ transfer was done on the basis that Albus would breach trust and give him 1m.
Tracing connection 4: Mixtures. Mixing between an innocent and a wrongdoer - the rules in Re Hallett and Re Oatway
Albus has £1m in bank account - he puts £1m of trust money in bank account (now £2m in bank account) and spends £1m on holiday. £1m remaining in account.
Re Hallett - The beneficiary can treat the £1m expenditure as the trustee’s and trace into the £1m remaining in the account.
Let’s say instead of a holiday, Albus bought a yacht which rose in value to £3m.
Re Oatway - beneficiary (if advantageous) can also treat the expenditure as trust money, and trace into the thing that was bought.
These two rules amount to cherry picking - B can cherry pick and decide whether to treat expenditure as the trustee’s or the beneficiary’s.
Mixtures - Innocent and Wrongdoer - Lowest intermediate balance rule
Albus has £1m in Monzo, transfers £1m of trust money into Monzo - now 2m in Monzo.
Albus spends 1.8m on holiday - account now has 200k.
Albus transfers 1m from his HSBC to his Monzo - now 1.2m,
Albus buys a yacht for £1m, trebles in value to £3m.
Can the beneficiary trace into the yacht?
Roscoe v Winder - cherry picking is subject to the lowest intermediate balance rule. Beneficiary can only say that the yacht was purchased with £200k of the beneficiary’s money. Since after the money was mixed, he spent 1.8m on holiday, 200k left in account. Therefore, 200k is the maximum amount the beneficiary can argue that their money was used to buy the yacht, as that was all that was left before trustee added his own money - at least 800k must be trustee’s own money.
Trustee only had 1m at the start yet spent 1.8m on holiday, so 800k of that holiday had to have been trust money - thus only 200k left could be trust money.
So, beneficiary can cherry pick and say that the 200k was the trust’s money and so 200k of his money was used to buy the yacht - so he gets a 1/5 interest in the yacht.
Mixing 2: Mixing between two innocents
Albus wrongfully transfers £1m from Harry and Hermione’s trust accounts into his Monzo, then buys a yacht which trebles in value.
What can Harry and Hermione trace and claim?
Default solution: First in, first out (Clayton’s case)
Harry’s funds go in first, so we treat them as having paid for the yacht. Hermione therefore gets the £1m remaining in the Monzo.
Often critiqued, since both Harry and Hermione are equally innocent, yet get treated very diffferently.
Fairer solution to mixing between two innocents - Pari Passu
Both innocent parties get 50% of yacht and 50% of bank account - here they both get £2m.
Test laid out in Barlow Clowes:
- 1 – Clayton inappropriate in cases involving large-scale fraud
- 2 – Clayton would be too expensive, impracticable or difficult to apply
- 3 – Clayton would be contrary to intentions of contributors to a scheme
- 4 – it would be unjust
