Remedies against trustees: proprietary claims Flashcards
Brief revision
Two types of claims against wrongdoing trustees:
1. Personal claims. These are claims for monetary compensation brought against the wrongdoing trustee(s). The claim is ‘personal’ because the wrongdoing trustee (s) must satisfy the claim from their own property or funds.
2. Proprietary claims. In these claims, the beneficiary is seeking the return of property owned by the trust. The claim is ‘proprieatry’ because the beneficiary is going after specific property. In order to identify property that now represents trust property, the beneficiary utilises so-called ‘tracing rules’, which trace property into the hands of the trustee.
A proprietary claim may be appropriate or advantageous in the following circumstances:
a) If the trustee is insolvent;
b) the trustee may have used trust property to buy themselves something that the beneficiary considers attractive.
c) Proprieatry claims are not subject to any statutory limitation period. In contrast, the pesronal claima are statute-barred six years aftre the date of breach.
Mixed asset (trust + trustee funds)
A trustee whongfully uses trust money to provide part of the cost of acquiring an asset, the balance coming from the trustee’s own funds. This is a ‘mixed asset’ because the trustee has purchased the asset with a mixture of their own money and the trust’s money.
In these situations, the beneficiary has the option of:
a) claiming a proportionate interest in the mixed asset. The beneficiary should take this option where the mixed asset has increased in value; or
b) suing the trustee for compensation for the trust and take a charge (or ‘equitable lien’) over the mixed asset for the amount that the trust has lost. The beneficiary should take this option where the mixed asset has decreased in value.
Withdrawals from a mixed bank account (trust + trustee funds)
In this scenario, the trustee transfers money from the trust into their own bank account and then makes various withdrawals from that bank account.
TRACING RULE 1: Re Hallett
The rule provides that the trustee is deemed to spend their own money first. It is attractive where there is a healthy balance on the trustee’s bank account, because the court will use the rule to trace trust property into that balance.
TRACIN RULE 2: Re Oatway
This rule provides that the beneficiary has a first charge on the mixed fund or any property that is purchased from that fund. In essence, the beneficiary gets first choice and can therefore generally choose how best to satisfy their proprietary claim.
LIMITATION ON THE TRACING RULES: Roscoe v Winder
The trust’s interest cannot be traced beyond the ‘lowest inermediate balance’ - the lowest balance to which the account sank (погрузился затонув) before extra money was paid in. For example, the trustee spent all the money. His father then gifts him the 3000, which thustee pays into his account. This sum can not be traced as they came from sources other than the trust.
Mixed asset (trust +trust funds)
A trustee may be a trustee of several trusts. It is possible that such a person could take money from a number of trusts in breach of trust and mix those together. In these sircumstances, the beneficiary of each trust must use tracing rules to unravel (разгадать, распутать) what each trust owns.
Let us first consider the scenario where the trustee takes money from one trust, mixes it with money from another trust, and then uses the entire mixed fund to buy an asset in their own money.
In these sitiations, the beneficiaries of each trust will share pari passu in the mixed asset purchased (ie ratebly in the same proportion as their funds contributed to the purchase price).
As between two innocent trusts the ouncome is always that each trust is entitled to a proportionate share in the mixed asset whether that asset has inreased or decreased in value.
Withdrawals from a mixed bank account (trust + trust funds)
In this scenario, the trustee transfers money from one trust and money from another trust into their own bank account and then makes various withdrawals from that bank account.
Example: A trustee pays 10 000 from the Chapman trust and later 20 000 from the Dawson trust into a newly opened bank account. From this bank account, trustee then uses 15 000 to pay off his credit card debts and, subsequently, uses the balance of 15 000 to purchase company shares.
TRACING RULE 1: Clayton’s Case.
This rule states that , as between two or more innocents, the first money paid out - First In, First Out.
In this scenario, the Chapman trust money has been disspated on paying off John’s credit card bills, whereas the company shares belong beneficially to the Dawson trust.
TRACING RULE 2: Barlow Clowes v Vaughan
The end result might be that each trust fund is entitled to assert a proportionate interest in the company shares rateable to the original amount of trust funds that were taken by John, ie:
*The Chapman trust can assert a proprietary claim the shares valued at 5 000; and
* the Dawson trust can assert a proprietary claim the shares valued at 10 000
Withdrawals from a mixed bank account (trust + trust + trustee funds)
Where the trustee takes money from two innocent trust funds and mixed that money with the trustee’s own money, before making various withdrawals. In this sitiation:
a) you should first apply the Re Hallett and Re Oatway with the aim of pushing as much of the trustee’s own money into dissipation as possible; and
b) you should then apply the rules from Clayton’s Case and Barlow Cowes v Vaughan to allocate any remaining assets between the two (or more) innocent trusts.
