Proprietary Remedies - Tracing Flashcards
FOUR advantages of using proprietary remedies -
- Provides claim to specific property.
- Gives beneficiaries priority over general creditors in the event of the insolvency of the defendant.
- Includes increases in the value of the property and any further profits made with it.
- Will have choice over recovery (if defendant is a wrongdoer, if not then only half) e.g. if £100,000 is traced into a £200,000 house, Claimant may claim a charge on the house for 100k or a charge on the house for half its worth (useful where there may be increase or decrease in value) - Better limitation periods than for personal claims
What three forms of proprietary remedies can be used?
- ownership rights under a constructive trust so may claim to be the sole owner of the trust property
- claim to own a proportion of the property under a constructive trust
- security rights – some kind of charge over the property
2 possible routes beneficiaries can take in seeking a proprietary remedy
following and tracing
What’s the difference between following and tracing?
Following is following the trust property and assert a proprietary claim against anyone who has that trust property now i.e. physically locating the trust property as it moves hand to hand
Tracing is where you can trace the value into other property acquired in exchange for it and then assert a proprietary claim against that other property
NB - until quite recently it used to be just tracing which covered everything so there may be lack of clarity in older cases when they use the terms “tracing claim” or “tracing remedy” - tracing is a process
What is the definition of the process of tracing according to the Pearce and Stevens textbook?
“ways in which a person who is entitled to property can continue to assert a claim to the property even if it is now in the hands of someone else, or even if it has been mixed with other property.”
Lord Steyn’s definition of tracing
in Foskett v McKeown [2000]
“In truth tracing is a process of identifying assets: it belongs to the realm of evidence.”
What circumstances using bring about a claim against a stranger who received the trust property as a liable constructive trustee to restore the trust fund?
in most, if not all, cases of tracing or following, the trustee will have acted in breach of trust and will personally be liable for any loss caused
BUT… if the trustee in breach is insolvent then then any remedy the beneficiaries may be able to maintain against them for breach of trust will be useless as a means of restoring the trust fund
Even though equitable tracing rules are just about pure property rights how is there a moral dimension to tracing rules in equity?
The equitable tracing rules are harsher against a wrongdoer who misappropriates property than against an innocent party.
ALSO - the presumptions on which the equitable rules are founded also take account of the moral blameworthiness of the parties whose funds have mixed.
Case which defined what an innocent volunteer is
Boscawen v Bajwa [1995] - CA
- To be innocent a person should neither know nor have reason to suspect the money or property is not his own
Case which held that the parties were not innocent volunteers but fiduciaries as they knew that the money received was money held on trust and was only available to D upon completion of sale.
Boscawen v Bajwa [1995]
FACTS - Bajwa had agreed to sell his house to another. The Abbey National BS had agreed to lend money to the purchaser. This money was paid to the purchaser’s solicitors in anticipation of completion of the purchase but they sent it to Mr Bajwa’s solicitors before completion. His solicitors mixed it with some of his own money and used it to pay off a charge on the property. The sale then fell through.
HELD - Bajwa and his solicitors weren’t innocent volunteers and the money could be traced into the property charge that was offset
Authority that if a wrongdoer has used trust property to acquire an asset and then gives that asset away, the donee cannot get a better title than the wrongdoer so the stricter rules apply
–> look this up cos im confused
Foskett v McKeown
What happens if the trust property has been exchanged for other property?
this is a direct substitute -
The beneficiaries are entitled to trace into the exchange product. It will follow value through unlimited changes before as long as that value is KEPT SEPARATE
Case which emphasised that tracing is all about pure property rights.
Foskett v McKeown – HoL
FACTS – a trustee wrongfully used trust money to pay the premiums due under his insurance. Court held that equitable tracing was available against a trustee who has wrongfully misappropriated trust property, because the beneficiary retains his equitable interest in the trust property.
- this is an example of a direct substitute
Criticisms of the equitable tracing rules for direct substitutes
- the tracing rules are concentrating on the rights of the claimant vs those with the benefit to the property and doesn’t take into account other creditors.
- e.g. dealing with an innocent volunteer, he’s given some proceeds of sale to a child of his and that child has no reason to expect that the property isn’t his fathers and therefore thinks it is genuinely given to him.
- Also, let’s say that the child uses that money to buy an asset which the child could have bought with his own money but IN FACT used the trust money. Since we can trace through direct substitute it would be irrelevant that the child could have bought the property even if he never intended to use the trust property, the property belongs to the beneficiaries.
- That’s even more unfair if the purchase has a profit because that would also belong to the beneficiaries.
An extreme example that highlights the potential for unfairness in the equitable tracing rules for direct substitutes
An innocent volunteer and gives his child some money, child uses some of that money to buy a lottery ticket and wins. That lottery ticket would belong to the beneficiaries and therefore the winnings would belong to the beneficiaries.
where the child didn’t know he was using trust funds, never intended to use trust funds – the beneficiaries get the winnings and the child loses the winnings and also if the child has any creditors then they can’t claim.
Example of the rule that where assets are bought partly with the claimant’s money and partly with the defendant’s money, the claimant is entitled to a proportionate share of the asset
Foskett v McKeown -
T used trust funds to pay some premiums on a life insurance policy. The funds were traced into the policy and from there into the proceeds paid out after the death of T.
- The beneficiaries were held to be entitled to a proportionate share of the proceeds of the insurance policy
What happens if the claimant’s property or the value of the claimant’s property has been dissipated?
not possible to make a proprietary claim
NB - That’s not saying no claim can be brought, just a proprietary claim can’t be brought
What are the 3 most likely avenues available to a claimant whose property has been dissipated, preventing them from bringing a proprietary claim?
- Could bring a personal claim – for the value i.e. compensation
- There may be a breach of trust or breach of fiduciary duty
- Or personal liability imposed on the basis of knowing receipt (discussed in the next topic)
What is a claim for a proprietary right in a mixed fund dependent on?
Whether the mixture consists of trust money and the money of a wrongdoer or trust money and the money of an innocent volunteer.
Where do you start when considering a claim against a wrongdoer which has mixed funds?
Re Hallett’s Estate (1880)
What is the presumption in Re Hallett’s Estate (1880) for claims on accounts with mixed funds against a wrongdoer?
Where the account balance has been reduced by withdrawals which have been dissipated, the court will presume that the remaining balance represents the trust property and that the wrongdoer’s own money has been dissipated.
this presumption that the trustee has preserved trust money and spent his own first is also known as the ‘irrebuttable presumption’
Re Hallett’s Estate (1880)
FACTS - solicitor, who was a trustee of his own marriage settlement, was entrusted with money by a client for investment. He paid money from the trust and his client’s money into his bank account which also contained some of his own money. Made various payments using this account. On his death, the account contained enough money to satisfy the claims of the trust and the client, but not his other creditors.
- Question was whether the money in the account could be said to be the property of the trust and client, in which case they would gain priority over the general creditors.
HELD - the trustee must be presumed to have spent his own money first and to have preserved the trust monies. therefore the money in account was seen as all trust money which is given priority over the general creditors.
Which case is regarded as modifying the rule in Re Hallett in certain circumstances?
Re Oatway [1903]
- Where application of the presumption in Re Hallett’s would have facilitated an injustice then the opposite presumption applies i.e. the trustee spent the trust money first.
Rule which can enable tracing of trust money from mixed funds from a wrongdoer where there is no money left in the bank account
Re Oatway [1903] -
FACTS - Trustee mixed his own money and trust money, he bought shares with the money then dissipated the rest on other purchases. So a strict application of Re Hallett’s would say that when the trustee bought the shares he did so rightfully and was using his own money and thence would be part of his general assets.
HELD - the trust money could be traced into the shares even though it was the first purchase.
Where no money remained in the account a beneficiary was entitled to claim shares bought with money first withdrawn (where the money later withdrawn had been dissipated) on the grounds the trustee was taken as owning any monies not recoverable and he was not free to use his own money free of the rights of the beneficiaries until the trust fund had been restored
Why is it argued that Re Hallett’s Estate and Re Oatway aren’t actually in conflict with each other?
Because it is still applying the general principle that the trustee should be estopped from asserting that he has preserved his own money at the expense of trust funds i.e. preventing the wrongdoer from benefitting.
What happens if the wrongdoer has withdrawn money from the account with mixed funds and it has been used to make a profitable investment?
Apply the Turner v Jacob [2006]
Case which shows at common law property can’t be traced through a mixed bank account. So in exam always quote and say we will trace in equity.
Agip (Africa) v Jackson -
Claimants money could be traced into the first wrong bank account but could not be traced out of it.
for a personal action against a 3rd party - in a COMMON LAW personal claim you can’t trace into the hands of a bona fide purchaser for value without notice. Consideration need not be adequate. Therefore money used to pay off debts cannot usually be traced
Lipkin Gorman v Karpnale
- once the breach has been established it is ‘unjust’ for the recipient to retain the benefit
FACTS - solicitor removed money from a client account and used the money for gambling at the playboy club. this was a breach of the solicitor’s fiduciary obligations. the playboy club received that money under a void contract (gambling contracts were void at the time). as the playboy club had no legal claim to the money it was required to return its value to the ‘real’ owner
even though the playboy club was unaware of the breach by the solicitor, it was the fact that it had received the money that gave rise to the claim for restitution. the club had to return the value received (subject to defences)
Example of where subrogation could be used i.e. standing in someone else’s shoes
CHECK THIS IS RIGHT
Boscawen v Bajwa
Standing in somebody else’s shoes. For insurance purposes in tracing. Works in the case of secured debts e.g. Mortgage. Same terms are preserved, so when claimant steps into mortgagee’s shoes may have to wait long for full repayment…
Presumption of honesty when making a claim of mixed funds against a wrongdoer. Had an equitable charge on a mixed bank account. When a defendant makes a payment-out, it is presumed that it is his own money which he pays out first.
Re Hallett’s Estate (1880)
Case which discusses what would happen where a trustee (wrongdoer) mixes his own money with trust funds and then makes a profitable purchase, but leaves enough money in the mixed account to satisfy the claims of beneficiaries
Turner v Jacob [2006]
What is the ‘irrebuttable presumption’?
Derived from the decision in Re Hallett’s
- Where there is some money in the account of mixed funds, but it’s insufficient to satisfy the beneficiary’s claim the trustee (wrongdoer) is presumed to have preserved trust money and spent his own first
Arguably what claim could be brought in this example situation -
Tim pays £20,000 of trust money into bank account with some of his own money.
£10,000 remains in the account; £20,000 has been withdrawn and successfully invested in shares in Defco Plc.
The situation doesn’t easily fit within any of the authorities -
options -
1. Do you say that by extending Re Hallett’s and Turner v Jacob the beneficiaries have to start by claiming the money remaining in the account and then they can only claim a proportion of any asset bought?
2. do you say there are no cases in point, the trustee has clearly not preserved the trust fund and so we can decide what we want?
- But then if we decide what we want then what do we do? – do we give beneficiaries the choice? Do we give beneficiaries a proportion of the money and the asset?
Arguably the simplest option would be no.1
