Remedies Against Third Parties

Question 1

What is a ‘stranger to the trust,’ and when can claims be brought against them?

Answer 1

A stranger to the trust is any third party not formally appointed as a trustee but whose actions are connected to a breach of trust or fiduciary duty. Trustees owe fiduciary obligations to manage trust property for the benefit of beneficiaries. When trust property is mismanaged or misappropriated, third parties who are complicit or benefit may be held liable under equitable principles.

Types of Liability:
1. Recipient Liability:
* Focuses on whether the third party received trust property that was transferred in breach of trust.

2. Accessory Liability:
   * Centers on whether the third party dishonestly assisted the trustee in breaching their duties.
3. Intermeddling:
   * A third party acts as a trustee without formal appointment, becoming a trustee de son tort (a trustee of their own wrongdoing).

When Claims Are Appropriate:

• If the trustee is insolvent or bankrupt, a claim against the third party may be the only way to recover losses.
• If trust property is no longer traceable in the trustee’s hands, claims against strangers focus on the third party’s involvement.

Practical Consideration:
Strangers to the trust are not automatically liable for their involvement unless their actions or knowledge make it inequitable or unconscionable for them to retain or benefit from the property.

Key Case Example:
* Lyell v Kennedy (1889): An agent who collected rent on trust property after the trustee’s death was treated as a trustee de son tort because he managed trust property without proper authority.

Question 2

What is intermeddling, and how are intermeddlers held liable?

Answer 2

Intermeddling occurs when a third party assumes trustee-like powers or responsibilities without being legally appointed. By taking control of trust property, managing funds, or making decisions about trust assets, the third party essentially “steps into the shoes” of a trustee. This action imposes the same legal duties and liabilities as a formally appointed trustee.

Key Characteristics of Intermeddling:

1. The intermeddler takes control of trust property (e.g., collects rent, handles bank accounts).
2. The actions performed resemble those of a trustee.
3. Liability arises whether or not the intermeddler intended to act as a trustee.

Why It Matters:
* The law holds intermeddlers accountable to protect beneficiaries from unauthorized handling of trust property.

• Even well-meaning actions, like paying trust expenses without appointment, can result in liability.

Case Example:

• Lyell v Kennedy (1889):
• The agent collected rent for years after the trustee’s death, paying it into his account. The court found that by acting as a trustee, he became liable for accounting for the funds as if he were formally appointed.

Practical Example:
* A family member assumes control of a trust’s investments while the trustee is ill, making decisions about buying and selling shares. Despite their good intentions, they can be held liable as a trustee de son tort if losses occur.

Question 3

What is recipient liability, and what are its key elements?

Answer 3

Recipient liability focuses on third parties who receive trust property transferred in breach of trust. Unlike accessory liability, which focuses on dishonest actions, recipient liability requires proving that the recipient’s retention of property is unconscionable.

Key Elements of Recipient Liability:
1. Receipt of Trust Property:
* The third party must have received property originally belonging to the trust that was transferred in breach of trust.

• Example: A trustee transfers trust money to a friend to pay off personal debts.

2. Benefit: * The recipient must benefit personally from the property (e.g., spending the funds or retaining an asset).
3. Knowledge:
   * Liability depends on the recipient’s state of knowledge:

• Actual knowledge (e.g., they knew it was trust property).
• Willful blindness (e.g., they deliberately avoided confirming the property’s source).
• Suspicious circumstances (e.g., ignoring red flags about the origins of the funds).

Legal Standard:
* BCCI v Akindele [2000]: Introduced the “unconscionability” test, where liability is determined by whether it is inequitable for the recipient to retain the property.

Question 4

What types of knowledge can lead to recipient liability?

Answer 4

Recipient liability hinges on the state of knowledge of the third party. The law recognizes varying levels of knowledge that may make it unconscionable for the recipient to retain trust property.

Categories of Knowledge:
1. Actual Knowledge:

• The recipient knows the property belongs to the trust and was transferred in breach.
• Example: A trustee tells a recipient directly that the funds are unauthorized.

2. Willful Blindness:
   * The recipient avoids confirming the property’s source, despite suspicious circumstances.

• Example: A friend receives a large sum from a trustee’s “trust account” and avoids asking questions.

3. Constructive Knowledge (Debated):
   * The recipient has enough information to suspect wrongdoing but fails to act on it. Courts differ on whether this is sufficient for liability.

Case Example:
* BCCI v Akindele [2000]: The Court of Appeal emphasized that liability depends on whether retaining the property is unconscionable.

Question 5

What is accessory liability, and what must be proven to establish it?

Answer 5

Explanation:
Accessory liability arises when a third party assists a trustee in committing a breach of trust. Unlike recipient liability, this claim focuses on the third party’s actions rather than their possession of trust property.

Key Elements:
1. Existence of a Breach of Trust:
* A breach of trust or fiduciary duty must occur.

• Example: A trustee misappropriates funds with help from a third party.

2. Active Assistance:
   * The third party plays a role in facilitating the breach (e.g., creating false documentation or transferring funds).
3. Dishonesty:
   * Dishonesty is judged objectively: Would reasonable people consider the actions dishonest?

• Royal Brunei Airlines v Tan (1995): Clarified that dishonesty is an objective standard, focusing on conduct rather than subjective intent.

Practical Example:
* A lawyer knowingly drafts documents to allow a trustee to sell trust property below market value, enabling the trustee to pocket the difference.

Question 6

What is the difference between recipient liability and accessory liability?

Answer 6

Recipient Liability:

• Focuses on possession of trust property.
  -Requires proof of unconscionable knowledge.
  -Example: A recipient knowingly spends trust funds.

Accessory Liability:

• Focuses on actions assisting a breach of trust.
• Requires proof of dishonesty.
• Example: A solicitor helps falsify trust documents.

Question 7

What practical factors should beneficiaries evaluate before bringing claims against strangers to the trust?

Answer 7

Explanation:
1. Trustee Solvency:
* Claims against third parties may be necessary if trustees are insolvent or bankrupt.

2. Tracing Rules:
   * Proprietary claims rely on the ability to trace the property into the hands of the third party.
3. Strength of Evidence:
   * Recipient liability requires evidence of knowledge.

• Accessory liability requires evidence of dishonesty.

4. Remedies:
   * Personal Claims: Limited to the financial capacity of the defendant.

• Proprietary Claims: Depend on whether trust property is identifiable.

Practical Example:

If a trustee transfers trust property to an accomplice, both recipient and accessory claims may be available, but evidence of dishonesty or knowledge will dictate the approach.

Question 8

What is an equitable proprietary claim, and why might beneficiaries pursue one?

Answer 8

An equitable proprietary claim is a legal action used by beneficiaries to recover trust property that has been transferred to a third party, as long as the property remains identifiable in its original form or as a substitute asset.

• Advantages of Proprietary Claims:

1. Priority in Bankruptcy:
   * Beneficiaries’ claims are ranked above those of unsecured creditors if the third party holding the property is bankrupt.
2. Tracing Property:
   * Beneficiaries can trace the property into its substitutes or into mixed funds.

Expanded Example:
* If a trustee wrongfully uses £20,000 of trust funds to buy a car, beneficiaries can trace into the car and assert a proprietary claim. They are treated as having an ownership interest in the car, making them a priority over general creditors in bankruptcy proceedings.

Key Insight:

Unlike personal claims (which rely on the financial solvency of the defendant), proprietary claims target specific property, making them more secure and effective.

Question 9

What are the three categories of third parties in proprietary claims, and how does liability vary?

Answer 9

1. Bona Fide Purchaser for Value Without Notice (Equity’s Darling):

• A third party who paid value for the property (e.g., money or services) and had no knowledge that the property belonged to a trust.
• Protection:
• Equity protects these purchasers, ensuring commercial transactions are secure and fair.
• No proprietary claim or personal liability can be brought against them.
  Example:
• Sarah buys a house from a trustee, pays market value, and has no knowledge of the trust. Beneficiaries cannot pursue her, as she is protected as “equity’s darling.”

2. Wrongdoing Recipient:
   * A third party who knowingly receives trust property in breach of trust.
   * Liability:
   * Beneficiaries can bring proprietary claims and apply strict tracing rules against wrongdoing recipients.

Example:

• A trustee transfers £10,000 of trust funds to their friend, who knows it was misappropriated. Beneficiaries can trace into any substitute asset purchased with those funds.

3. Innocent Volunteer:
   * A third party who received property without paying value and had no knowledge of the breach of trust.

• Liability:
• Beneficiaries can bring proprietary claims but must rely on kinder tracing rules. Equitable defences, like the Re Diplock defence, may apply.

Example:
* A person receives £5,000 of trust money as a gift and unknowingly spends it on home renovations.

3. Innocent Volunteer:
   * A third party who received property without paying value and had no knowledge of the breach of trust.
   * Liability:
   * Beneficiaries can bring proprietary claims but must rely on kinder tracing rules. Equitable defences, like the Re Diplock defence, may apply.
   Example:
   * A person receives £5,000 of trust money as a gift and unknowingly spends it on home renovations.

Question 10

Who is a bona fide purchaser for value without notice, and why are they protected?

Answer 10

• Definition:
  A bona fide purchaser is a third party who acquires property:

1. In good faith.
2. For value (e.g., money or services).
3. Without knowledge of the trust’s interest in the property.

• Why Protected?
  Equity protects these purchasers to promote security in commercial transactions. Without this protection, buyers would hesitate to engage in transactions due to fear of unknown equitable interests.

Expanded Example:
* Sarah unknowingly buys trust property for £50,000. She is protected as equity’s darling, ensuring that her ownership is not disturbed despite the trustee’s breach of trust.

Key Insight:

Claims against bona fide purchasers would undermine confidence in the transfer of property, creating uncertainty in business and personal dealings.

Question 11

What are wrongdoing recipients, and how do proprietary claims apply to them?

Answer 11

• Definition:
  A wrongdoing recipient is a third party who receives trust property in breach of trust and has knowledge that makes retention unconscionable.
• Key Points for Proprietary Claims:

1. The beneficiary uses strict tracing rules to follow the property.
2. Beneficiaries can assert ownership over the property or its substitute.
3. The recipient’s liability is based on their knowledge of the breach.

Expanded Example:

• Robert receives £30,000 from a trustee who misappropriated trust funds. Robert suspects the money is from the trust but deliberately avoids asking questions and uses it to buy a car. Beneficiaries can pursue a claim over the car, as Robert’s knowledge makes retention unconscionable.

Key Insight:

Strict tracing rules allow beneficiaries to claim against wrongdoing recipients as if they were trustees, increasing accountability for their actions.

Question 12

Who are innocent volunteers, and how do proprietary claims apply to them?

Answer 12

• Definition:
  Innocent volunteers are third parties who:

1. Received trust property without providing consideration.
2. Had no knowledge or notice of the trust’s interest.

• Proprietary Claims Against Innocent Volunteers:

1. Beneficiaries can assert claims over identifiable property or its substitute.
2. Kinder tracing rules apply, focusing on fairness.

Example:
* Vida unknowingly receives £10,000 of trust money as a gift and spends it on home renovations. Beneficiaries cannot force the sale of her home if it would be inequitable (Re Diplock defence).

Question 13

What tracing rules apply to wrongdoing recipients in proprietary claims?

Answer 13

1. Original Form:
   * Beneficiaries can assert a claim if the property remains unchanged.
2. Clean Substitution:
   * If the property has been replaced, beneficiaries can trace into the replacement asset.
3. Mixed Funds (Bank Accounts):
   * Re Hallett’s Rule: The wrongdoer is presumed to spend their own money first.

• Re Oatway’s Rule: Beneficiaries can claim remaining assets if dissipation has occurred.

Expanded Example:

Robert mixes £30,000 of trust money with £20,000 of his own and buys a car for £35,000. Under Re Oatway’s Rule, beneficiaries can claim most of the car’s value.

Question 14

What is the Re Diplock defence, and when does it apply?

Answer 14

• Definition:
  A defence used by innocent volunteers when enforcing a proprietary claim would result in inequity.
• Conditions:
  1. If the trust funds improve property without adding significant value.
  2. If forcing a sale would create undue hardship.

Example:

Vida uses trust funds to install a kitchen in her home. Beneficiaries cannot enforce a claim that would require the sale of her house under the Re Diplock defence.

Question 15

What is accessory liability, and what are its key elements?

Answer 15

• Definition:
  Accessory liability arises when a third party dishonestly assists a trustee in committing a breach of trust.
  
  • Key Elements:
    1. Existence of a Breach: A breach of trust or fiduciary duty must have occurred.
    2. Assistance: The third party must have actively facilitated the breach (e.g., drafting documents).
    3. Dishonesty: Judged by the standards of ordinary, reasonable people.

Case Law:
* Royal Brunei Airlines v Tan (1995): Dishonesty is determined objectively, based on what a reasonable person would consider dishonest.