Recovery of Property; tracing and following

Question 0

Following and Tracing

Answer 0

They are NOT remedies but rather are a process of discovery which then leads to an allocation of a sufficient and appropriate remedy.

Lord Millett identified tracing in Foskett.
However perhaps best summation of tracing = Shalson v Russo 2003, Rimmer J described tracing as ‘the process by which a claimant seeks to show that an interest he had in an asset has become represented by an interest in a different asset’.

Question 1

Following and tracing

Answer 1

Once an equitable proprietary interest has been identified, the claimant will then need to show that this interest can be identified in the property that has been received by the defendant.

Question 2

Following:

Foskett v McKeown and Others 2001

Answer 2

Following = process of identifying the same asset as it moves from person to person.

Foskett: following is the process of following the same asset as it moves from hand to hand.- if the claimants property had been lost or the property destroyed it can no longer be followed.
-where the claimants property is transferred directly to the defendant- following is the process.

Question 3

Tracing:

Answer 3

Tracing = the process of identifying a new asset as the substitute for the old.
Foskett v McKeown:Where the original property cannot be followed, it is necessary for the claimant to show that the value of the property in which he or she originally had a proprietary interest can be identified in property that has been received by the defendant.

Question 4

Foskett v McKeown

Answer 4

In reaching the conclusion that it was possible to trace into the death benefit, the majority identified 2 fundamental principles of tracing.

1) Attribution rather than causation
Tracing depends on attribution

2) Tracing value rather than identifying property
Tracing was not concerned with the identification of chains of property but instead focused on the identification of value within property.

Question 5

Tracing at Common Law

Answer 5

Where the claimants proprietary base is a legal rather than an equitable, proprietary right.

Common law tending rules are logical but restrictive because the claimant will be able to identify the value of his or her property in the substitute for that property as long as the substitute has bit ve one mixed with other property so that it loses its identity.

Question 6

Tracing into profits

Trustee of the property of FC Jones v Jones 1997

Answer 6

Court of Appeal held that the claimant can also trace at law into the profits that were made from the use of his or her property.

• Mr J transferred £11,700 in cheques from his potato growing firms bank account to Mrs Jones.
  Firm went insolvent which vested the account into the trustee in bankruptcy.
  -Mrs J bought potato futures and earned £50,760. This was put into an account - it was held that the trustee could recover everything because the profit derived from the original money without being mixed with any other money of the wife.

Question 7

Tracing into mixed products

Taylor v Plumer 1815
Banque Belge v Hambrouck 1921
Agip (Africa) Ltd v Jackson 1991

Answer 7

Major limitation on tracing at common law is that it is not possible to trace into a mixed product, save where it is possible to sepearte the components of the product.

Where such mixing has occurred the claimants legal title to the property will be extinguished.

Question 8

Tracing into and through a bank account.

Banque Belge v Hambrouck

Answer 8

D forged a number of cheques so that £6000 was debited from the account of his employer at the claimant bank and this sum was then credited to his own bank account.
-court of appeal held that the money in the account should be repaid as it had not been mixed

Question 9

Necessity for a physical transfer of property

Agip (Africa) Ltd v Jackson 1990

Answer 9

Claimant bank had been defrauded of substantial sums of money by its chief accountant.
Case focused on a payment to a company that had credited it to this account- before payment was made the company had nothing credited to this account.
Once payment had been made, the balance was transferred to the D firm of accountants and then to another company and finally oversees to the fraudsters.
Claimant sought to recover the value of the money.
Failed at law because of mixing, as there had not been a physical transfer of property merely a stream of electrons.

Question 10

Tracing in Equity

Re Hallett’s Estate 1880

Re Diplock 1948

Answer 10

Hallet:Main advantage of tracing in equity is that it not be defeated by the irretrievable mixing of property.

Diplock: difference in approach between common law tracing and tracing in equity is that equity is able to view property metaphysically as it assumes that even though property is mixed the claimants property will still exist albeit that it is not possible to say which bit is which.

Question 11

Re Haslett’s Estate 1880-

Answer 11

Reason equity can trace mixed funds is because when the claimant has traced an equitable proprietary interest into a mixed fund, an equitable charge will be be place on the whole fund as security for the claim.
Consequently, equity shoes not specifically regard any particular part of the fund as actually belonging to the claimant but is prepared to assume that the claimant has an equitable interest in the mixture by means of a charge on the fund.

Question 12

Tracing at law and the fiduciary relationship requirement.

Answer 12

Necessary to show that the property in which the claimant had an equitable proprietary interest passed to the D through the hands of a fiduciary in breach of duty. -there must have been an unauthorised disposition of property.

Question 13

Re Diplock

Answer 13

Executors of Diplocks will distributed money amongst 139 different charities.
Validity of will was successfully challenged by the next of kin who sought to recover the money that had been paid to the charities.
Held that their equitable proprietary claim succeeded even though their money had been mixed in some cases with the money already in charity accounts.
It was held sufficient that there had been a fiduciary relationship between the next of kin and executors who had transferred the estate in breach of fiduciary duty.

Question 14

Agip (Africa) Ltd v Jackson 1990

Answer 14

Millett J affirmed that in England, a fiduciary relationship is required to permit the assistance of Equity to be invoked (property must be passed through the prism of a fiduciary relationship), but he also accepted that this requirement has been widely condemned.
He is amongst those critics.

The fiduciary relationship requirement has been expressly rejected in New Zealand in Elders Pastoral Ltd v Bank of New Zealand 1989.

Question 15

Tracing Unmixed funds in equity.

Re Hallett’s Estate 1880

Answer 15

Clearly possible to trace value in Equity into an unmixed fund.

Hallett: if a trustee wrongly uses trust money to pay the whole purchase price in respect of a particular asset, the beneficiary can trace into that account.

Question 16

Tracing at equity into mixed funds

El Ajou v Dollar Land Holding 1993

Answer 16

Mixed fund= where money in which the claimant has an equitable proprietary interest has become mixed with somebody else’s money.

Millett J in El Ajou- equity allows tracing into and through a mixed fund.
-‘equity’s power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money not because it is theirs, but because it is derived from a fund which is treated as if it were subject to a charge in their favour’.

Question 17

Mixing with the fiduciary’s money

Lipton v White 1805

Answer 17

Where the fiduciary has mixed the claimant’s money with his or her own money, the onus is on the fiduciary to distinguish the separate assets; to the extent that they are unable to do so the assets will belong to the claimant.

-this is because where a fiduciary wrongly mixes his or her money with that of the claimant, the fiduciary has created an evidential difficulty as to what happened to the claimants money.
In such a case - evidential difficulty is resolved against the interests of the fiduciary, save where the fiduciary can show otherwise in the balance of probabilities. - Sinclair Investments Ltd v Versailles Trade Finance Ltd

Question 18

Re Tilley’s Will Trust 1967

Answer 18

-case in which it was held that the trustees had mixed trust funds with her own funds in her bank account and then bought some properties for development.

IT WAS HELD THAT THESE PROPERTIES WERE NOT PURCHASED WITH THE TRUST MONEY THAT HAD BEEN CREDITED TO HER BANK ACCOUNT, BUT FROM THE USE OF OVERDRAFT FACILITIES THAT WERE AVAILABLE TO HER.

Question 19

General principle relating to fiduciary’s creation of an evidential difficulty by mixing property is that the claimant is able to rely on one of two presumptions:

Answer 19

1) Fiduciary spent their own money first.

2) Fiduciary spent the claimants money first.

Question 20

1) Fiduciary spent their own money first.

Re Hallett’s Estate 1880

Answer 20

-presumption being that the fiduciary spent their money first, so the claimant will be able to trace into the sum remaining in the fund.

Hallett’s Estate: H, a solicitor, had settled money on trust for himself, his wife and his children.

• trustees of settlement transferred some of the trust property to H to invest.
• Sold the investments and paid the proceeds to his personal account.
• He was also looking after some bonds for another client, which he paid into his personal account.
• H died insolvent and the trustees of the settlement and claimants brought proprietary claims to the money that was still credited to his bank account.
• Court of Appeal held that H, who was in a fiduciary relationship with both trustees and the client should be presumed to have withdrawn his own money out of his account first- THE MONEY THAT REMAINED CREDITED TO THE ACCOUNT COULD BE DISTRIBUTED BETWEEN TRUSTEES AND THE CLIENT.

Question 21

2) Fiduciary spent the claimant’s money first

Re Oatway 1903.

Answer 21

The claimant will want to rely on this presumption where the fiduciary has used money from the mixed fund to purchase an asset and dissipated the remaining amount of the fund.
-CLAIMANT CAN TRACE INTO PURCHASED ASSET BY PRESUMING THAT THE FIDUCIARY INTENDED TO PURCHASE THAT ASSET USING CLAIMANTS MONEY RATHER THAN THEIR OWN MONEY.

Question 22

Re Oatway 1903

Answer 22

Trustee in Oatway had paid trust money into his bank account that was already credited with own money.

• trustee then withdrew money from the account used to buy shares
• remaining money credited to the account was then dissipated.
• HELD THAT THE BENEFICIARY COULD TRACE INTO THE SHARES, EVEN THOUGH WHEN THE SHARES WERE PURCHASED THE BALANCE TO THE CREDIT OF THE BANK ACCOUNT EXCEEDED VALUE OF SHARES.
• but trustee was not entitled to withdraw anything from bank account until trust money had been restored to the trust.

Question 23

Tracing and the Foskett v McKeown principle.

Answer 23

Foskett: that proprietary rights should be vested at once and not depend on subsequence events.

However Re Oatway essentially evidential function of the tracing rules and the principle in Foskett should be rejected.

Question 24

Mixing with the money of an innocent third party.

Sinclair v Brougham 1914

Answer 24

Sinclair:
where the mixed fund consists of money in which the claimant has an equitable interest and also money from an innocent third party, such as the beneficiary of another trust fund, the general rule is that the money in the mixed fund will be assumed to belong equally to both parties.

Question 25

Third party as Innocent volunteer.

Boscawen v Bajwa 1996

Answer 25

Third volunteer= meaning someone who had not given consideration for the claimants property and who had no reason to suspect that somebody else had a Proprietary inferential in the money.

Boscawen: if the 3rd party did know, or had reason to suspect that somebody else had a proproetary interest in the property, then they will be treated as a wrongdoer and the tracing rules relating to mixing by fiduciaries will apply.

Question 26

Re Diplock 1948 & Innocent volunteer tracing rules:

Answer 26

‘In the case, of a volunteer who takes without notice… If there is no question of mixing, he holds the money on behalf of the true owner whose equitable right to the money still persists as against him.

-On the other hand, if the volunteer mixes the money with money of his own, or receives it mixed from the fiduciary…. He must admit the claim of the true owner, but is not precluded from setting up his own claim in respect of the money’s of his own which have been contributed to the mixed fund: the result is that they share pari passu.

Question 27

Sinclair v Brougham 1914

Answer 27

Pari passu = that the claimant and the innocent volunteer share the fund in proportion to their contribution.

Question 28

Rule in Clayton’s Case 1817

Answer 28

Exception to general rule that claimant and third party rank equally in their claim to the fund arises where mixing takes place in a current bank account but not a deposit account.
Clayton’s rule= the money that was first paid into the bank account is deemed to be the money that was first paid out of it.

-rule applies to current accounts because current accounts are active so there may be a large number of transactions involving Thea count every day which makes it difficult to establish whose money has been withdrawn from account.

Question 29

Clayton Rule

Answer 29

Only applicable where the mixed fund considers of contributions from different trusts or contributions from trust funds and innocent volunteers that have been wrongfully mixed.

-Clayton is only a presumption and will not operate if it can be rebutted.

Question 30

Commerzbank AG v IMB Morgan Plc 2004

Barlow Clowes International Ltd v Vaughan 1992

Answer 30

Commerzbank: rule in Clayton is inapplicable if it is impracticable or unjust to rely on it.

Barlow Clowes: rule was not applied because the large number of proprietary claims made the operation of the rule impracticable.- rather the Diplock rule (?) as the money was distributed proportionately accoutring to amount that had been contributed to fund.

Question 31

Clayton’s Rule

Answer 31

Consequently very weak, perhaps now seen as the exception to the rule that the money should be distributed rateably between the innocent volunteers who contributed to the mixed fund.

-In Re Walter J Schmidt & Co it was described as apportioning ‘a common misfortune through a test which has no relation whatever to the justice of the case.

Question 32

Restrictions on equitable tracing

Answer 32

Equitable teaching enables the claimant to trace value into a specific asset or fund ONLY WHERE IT IS POSSIBLE TO SAY THAT SOME OR ALL OF THE VALUE OF THE FUND OR ASSET REPRESENTS THE VALUE OF THE PROPERTY IN WHICH THE CLAIMANT ORIGINALLY HAD AN EQUITABLE INTEREST.

Question 33

Dissipation of the asset or fund.

Answer 33

Where the asset in which the claimant has an equitable interest has been destroyed, or where the fund has been dissipated and no specific asset can be identified that derives from it, tracing will fail.

-it is not possible to trace through an overdrawn account.

Question 34

Lowest intermediate balance

James Roscoe (Bolton) Ltd v Winder 1915

Re Goldcorp Exchange Ltd 1995

Answer 34

If the claimants money is mixed with other money, for example in a bank account and subsequently the balance of that account is reduced to less than the amount of the claimants money that has been deposited, the amount that the claimant can recover is necessarily limited to the maximum amount that can be regarded as representing their money.

Question 35

James Roscoe (Bolton) Ltd v Winder 1915

Answer 35

• £455 of trust money was paid into a bank account by a trustee.
• balance of that account fell to £25 but at time of trustees death it had increased to £358.
• held that the account could be charged only £25 for the benefit of the trust since this was the lowest intermediate balance in the account after the trust money had been paid in.
• it was considered whether the amount that had subsequently been credited to the account could be regarded as being impressed with the trust- rejected because of insufficient evidence that trustee intended the subsequent payments to be subject to the trust.

-seems inconsistent with general proposition of Hallett that when money is dissipated from a mixed fund it is presumed to be trustees money.

Question 36

Backward Tracing

Bishopgate Investment Management Ltd v Homan 1995

Answer 36

Orthodox view = claimant is not able to trace into property that was already in the defendants possession before the claimants money was received.
-Because the defendants property cannot be regarded as representing the claimants money, even if the claimant’s money was used to pay for the property by discharging a debt that had been incurred in respect of it.

Question 37

Conaglen 2011

Answer 37

Tracing appears to be concerned only with forward looking exchanges of value and cannot be considered to have any retrospective operation.
-consistent with precedent and with principles and policies that underlie laws of tracing.

Question 38

Foskett v McKeown 1998

Answer 38

Court of Appeal Sir Richard Scott recognised the principle of backward tracing although declined to decide the point - the availability of equitable remedies ought to depend upon the substance of the transaction in question and not upon the strict order in which associated events happened.

Question 39

Shalson v Russo

Answer 39

The backward tracing principle should be recognised in English law.

Claimant could in principle trace through the discharge of an overdraft debt into a yacht for which the D had partially paid through the overdraft borrowing - although necessary for the claimant to show that the overdraft could not have been paid off without the misappropriated money.

Question 40

Law Society v Haider 2003

Answer 40

Case concerned a clam to trace funds that a firm of solicitors had used in breach of trust to redeem a mortgage of one property, which was then sold and the proceeds used to buy a second property.
-held that it was possible to trace into the second property.

(Weak authority as the judge did not analyse tracing, let alone backward tracing as it held that tracing was a remedy,Mather than a process which leads to remedy).

Question 41

Recognition of backward tracing

Answer 41

Key justification for the recognition of backwards tracing is that the purchase of the property and the discharge of the loan incurred to purchase that property can be considered to form part of the same series of events.

Question 42

Inequitable to trace?

Answer 42

In Re Diplock the Court of Appeal recognised that tracing would be defeated where it would be inequitable to allow the claimant to trace into property held by the defendant. - where an innocent volunteer has used the money received to improve or alter their land.

-better view is that the ‘bar’ does not defeat tracing, rather the bar operates at the subsequent claiming stage when determining whether the claimant can assert a right against the traceable asset.

Question 43

Move to a more pragmatic approach?

Answer 43

Despite the orthodox position of equitable tracing requiring clear representation of the value of the claimants property in the asset or fund that is in the defendants possession/under their control.

-dicta in some cases suggested that possible to trace into defendants general assets even though no specific asset can be identified as representing the claimants money.

Question 44

Swollen assets theory.

Answer 44

Tracing into the defendant’s general assets can be justified on the basis that, if the defendant has dissipated those assets in which the claimant had a proprietary interest, then, because the defendant digit bave dissipated over assets that he or she owned, it is right that the claimant should be able to make a claim against those other assets.

Question 45

Future of tracing rules.

Answer 45

Orthodox position of rules of tracing at equity and in common law are distinct there are calls for their assimilation.

Denning in Nelson v Narholt calls for a unified approach to tracing is required that incorporated the acceptable features of both regimes.