Remedies Against Trustees: Personal Claims

Question 1

What is a personal claim, and when should beneficiaries consider bringing one?

Answer 1

A personal claim is a monetary claim brought by beneficiaries against trustees who breached their fiduciary duties, resulting in a financial loss to the trust. It is ‘in personam’, meaning the trustee must personally satisfy the claim from their own property or funds.

When to bring a personal claim:

1. When trust property is lost, and there is no identifiable asset or substitute to recover.
2. If the trustee is solvent, ensuring they can pay the awarded compensation.
3. When no proprietary claim is available (e.g., the trustee spent funds on intangible benefits such as paying debts or vacations).

When NOT to bring a personal claim:
1. Trustee Insolvency:
* A personal claim is ineffective against an insolvent trustee, as beneficiaries will rank as unsecured creditors and recover little or nothing.

• Example: Asher used trust funds to purchase a painting and later declared bankruptcy. A proprietary claim to recover the painting would be preferable.

2. Appreciation of Property:
   * If the trustee used trust funds to purchase property (e.g., shares or artwork) that has since increased in value, a proprietary claim ensures the trust can recover the asset and its appreciation.

• Example: The painting purchased by Asher doubled in value. A proprietary claim would recover the full value for the trust.

3. Time Barred:
   * Personal claims are subject to a six-year limitation period under the Limitation Act 1980, except in cases of fraudulent breaches.

Question 2

What actions or omissions constitute a breach of trust?

Answer 2

A breach of trust occurs when trustees fail to fulfill their fiduciary duties, either through improper actions or omissions. Breaches often result from fraudulent actions, negligence, or failure to follow trust terms.

Actions Constituting Breach:
1. Fraudulent Misconduct:

• Misappropriating trust funds for personal use.
• Example: A trustee steals trust money to fund personal expenses.

2. Negligence and Mismanagement:

• Failing to act with the care of an ordinary prudent businessperson.
• Example: Breesha invested £250,000 in unsuitable shares without seeking financial advice, breaching her duty under the Trustee Act 2000 (TA 2000).

3. Failure to Supervise Co-Trustees:
   * Trustees must monitor and correct their co-trustees’ actions.

• Example: Yvonne countersigned blank cheques, enabling Susan to steal £50,000.

4. Contravention of Trust Deed:
   * Acting against explicit restrictions in the trust document.

• Example: Rose invested in foreign shares despite the trust deed prohibiting non-UK investments.

Omissions Constituting Breach:
1. Inaction:
* Failing to review investments, take legal advice, or act promptly in the trust’s interests.

2. Allowing Co-Trustee Control:
   * Blindly relying on a co-trustee without oversight.

Question 3

Who can be sued in a personal claim, and how is liability determined?

Answer 3

Who can be sued?
* Only trustees who have personally breached their fiduciary duties.

• Trustees are not vicariously liable for the actions of their co-trustees unless they failed to supervise or intervene.

Extent of Liability:
1. Joint and Several Liability:

• Beneficiaries can sue all wrongdoing trustees collectively or any one trustee for the entire loss.
• This ensures beneficiaries can recover fully, even if one trustee cannot pay.

2. Proportionate Liability:
   * Trustees can apportion responsibility among themselves through indemnity or contribution (see Flashcard 8).

Examples:
1. Rose and Matthew: Rose violated the trust’s investment terms, and Matthew failed to supervise her. Both are jointly and severally liable, but beneficiaries may sue Rose alone if she is wealthier.
2. Yvonne: Her negligence allowed Susan to steal £50,000, making her liable for the full loss.

Question 4

How is causation established in a personal claim for breach of trust?

Answer 4

Beneficiaries must prove causation, meaning:

1. A breach of trust occurred, and
2. The breach directly caused the loss, determined by the ‘but for’ test.

‘But For’ Test:

• The loss would not have occurred “but for” the trustee’s breach. If the loss would have happened regardless, the claim fails.

Examples:
1. Yvonne: Her failure to supervise Susan directly caused the theft of £50,000. But for her negligence, the loss would not have occurred.

2. Nestle v National Westminster Bank [1993]: Trustees’ poor management did not cause the trust’s loss, so the claim failed.

Question 5

What defenses can trustees raise in personal claims for breach of trust?

Answer 5

1. Exemption Clauses:
   * Found in the trust deed, exempting trustees from liability for negligent or innocent breaches.

• Fraudulent breaches cannot be excluded.

2. Beneficiary Consent:
   * Beneficiaries must give fully informed and voluntary consent to the breach.

• If all beneficiaries consent, no claim can be brought.

3. Section 61, Trustee Act 1925:
   * Trustees acting honestly, reasonably, and fairly excused may avoid liability.

• Courts are less likely to excuse professional trustees.

4. Limitation Period:
   * Personal claims are barred after six years, except for fraudulent breaches.
5. Laches:
   * Delayed action by beneficiaries that prejudices trustees can bar equitable relief.

Examples:
1. Katie: A lay trustee withheld income from a beneficiary due to an honest misunderstanding. She may be excused under s 61, TA 1925.

2. Rima: Failing to monitor her co-trustee likely makes her ineligible for s 61 relief.

Question 6

How can trustees apportion liability among themselves for breach of trust?

Answer 6

1. Equitable Indemnity:
   * A trustee sued can recover the entire compensation from a co-trustee who:

a. Acted fraudulently.
b. Exercised controlling influence.
c. Benefited personally from the breach.

2. Contribution under the Civil Liability (Contribution) Act 1978:

• Courts apportion liability based on each trustee’s degree of responsibility.

Examples:
1. Sadie and John: If Sadie blindly followed John’s advice and was sued, she could recover full indemnity from John.

2. Rima and Sarah: Rima may seek contribution from Sarah, who made the reckless investment.

Question 7

What are the differences between personal and proprietary claims, and when should beneficiaries use each?

Answer 7

1. Personal Claim:
   * Seeks monetary compensation from trustees’ personal assets.

• Best when trust property is lost or converted into intangible benefits.

2. Proprietary Claim:
   * Seeks recovery of specific property or traceable substitutes.

• Preferred if property has appreciated or trustee is insolvent.

Examples:
1. Personal Claim: Breesha’s mismanagement caused a £250,000 loss. Beneficiaries should pursue monetary compensation.

2. Proprietary Claim: Asher’s painting purchased with trust funds should be reclaimed due to its appreciation in value.

Question 8

What is the process for assessing liability, defenses, and apportionment in a personal claim involving two trustees?

Answer 8

1. Determine Breach of Duty:
   * Has Trustee 1 or Trustee 2 breached their fiduciary duties in the running of the trust?
2. Establish Causation:
   * Did the breach cause the trust to suffer a loss?
3. Joint and Several Liability:
   * If both trustees breached their duties and caused a loss, they are jointly and severally liable for the full loss (including interest). Beneficiaries can recover the total loss from one or both trustees.
4. Examine Defenses:
   * Trustees may raise the following defenses:

• Exemption Clause: Protection under the trust deed for negligent or innocent breaches.
• Fully Informed Beneficiary Consent: Beneficiaries consented freely and with full knowledge of the breach.
• Section 61, Trustee Act 1925: Trustee acted honestly, reasonably, and fairly excused.
• Limitation Period or Laches: Claim is time-barred (6 years under Limitation Act) or barred due to prejudicial delay.

5. Indemnity or Contribution:
   * If one trustee is held liable for the entire loss, they can seek indemnity or contribution from the other trustee based on:

• Blameworthiness (fraud, controlling influence).
• Proportional responsibility under the Civil Liability (Contribution) Act 1978.