Remedies for breach of trust Flashcards
Brudenell-Bruce v Moore [2014] EWHC 3679 (Ch)
equitable compensation - personal claims agianst trustees
Held (Newey J): trustee liable for ~£64k
Case concerns an estate which the family of the claimant (the Earl of Cardigan) has owned since soon after the Norman Conquest.
The estate is the subject of a trust established by a conveyance dated 29 September 1951 of which the claimant is a beneficiary.
The claimant challenges the remuneration that the first and second defendants (Mr Moore and Mr Cotton) have received as the present trustees of the trust and a variety of other breaches of duty by them. But for any breach, the trust estate would have been worth ~£64k more
He also seeks an order for the removal of the trustees of the estate.
Bartlett v Barclays Bank [1980] Ch 515
- the rule in Bartlett - personal claims against trustees
Held: the profit caused by the Guildford project could be set-off against the Old Bailey losses, the general rule was that set-off against different breaches of trust is only allowed if they were part of the same transaction. Brightman J noted how they both stemmed from the same policy of moving into riskier investments. He held that it would be ‘unjust’ to deprive the bank of set-off accordingly (at 538).
Facts: A trust was settled over a private company in which the wealth was vested for management. The trustee was Barclays Bank, who was subject to the duty of care of managing the trust. The investment policy of the company was changed to allow speculative property development. One project under this new policy, the ‘Old Bailey project’ was then instituted. It was later described as a gamble and not a good one (at 524). It eventually made a large loss. When the bank heard about the project, while they asked for information they did not receive it, and nor did they follow up this omission. They also did not seek further information about the arrangements the directors had made with an external investment company. Brightman J found that had it acted in time and if ‘the bank had been prepared to lead, in a broad sense, rather than to follow’, it could have stopped this project with little or no loss (at 530). Another endeavour was the ‘Guildford project’, which again was speculative. It was also poorly supervised by the bank. Unlike the Old Bailey project, however, it proved highly profitable. The beneficiaries sued, claiming the bank was liable to make good the losses accrued by permitting the company to engage in speculative property development.
AIB v Mark Redler [2014] UKSC 58
substitutive compensation
> “[A]bsent fraud, which might give rise to other public policy considerations that are not present in this case, it would not in my opinion be right to impose or maintain a rule that gives redress to a beneficiary for loss which would have been suffered if the trustee had properly performed its duties.” Lord Toulson
Lord Reed, giving the other reasoned judgment, directly addressed the point of whether the result was consistent with accounting principles. He accepted that a wrongful disbursement could be disallowed in the trustee’s account, but he also emphasised the distinction between liability and remedy. A disbursement may be falsified, creating liability, but “an obligation to reconstitute the trust fund does not inexorably require a payment into the fund of the value of misapplied property”.
> “[T]he model of equitable compensation, where trust property has been misapplied, is to require the trustee to restore the trust fund to the position it would have been in if the trustee had performed his obligation. If the trust has come to an end, the trustee can be ordered to compensate the beneficiary directly. In that situation the compensation is assessed on the same basis, since it is equivalent in substance to a distribution of the trust fund. … The measure of compensation should therefore normally be assessed at the date of trial, with the benefit of hindsight.” Lord Reed
Held: decision upheld by the SC. If the solicitors inAIB Grouphad performed their obligation, the lenders would have received an additional £300,000 from the sale of the land. An award of £300,000 was therefore the appropriate remedy.
Facts: AIB Group agreed to lend £3.3 million against a house valued at £4.5 million, but it naturally required a first legal charge. An existing mortgage, held by Barclays Bank, had to be redeemed. The borrowers executed a charge in favour of AIB Group, but the earlier Barclays security was never released. This was because the borrowers had two loan accounts with Barclays, with balances of £1.2 million and £300,000, but the solicitors only transferred enough money to close the first account. £300,000 was transferred to the borrowers instead of to Barclays, and despite repeated requests from the solicitors the borrowers did not return it. Thus £2.1 million was paid to the borrowers instead of the correct £1.8 million, and £1.2 million was paid to Barclays instead of the correct £1.5 million.
Barclays was still owed £300,000 and so did not release its first charge. Eventually the AIB Group security was registered as a second charge. In due course the property was repossessed and sold for £1.2 million. The first £300,000 was paid to Barclays and AIB Group recovered the remaining £900,000.
The solicitors’ error meant that AIB Group lost £300,000, because, if the money had been disbursed correctly, Barclays would have released its mortgage and AIB Group would have recouped all of the £1.2 million sale proceeds. The solicitors admitted liability in this amount. However, AIB Group claimed equitable compensation in the amount of £2.4 million. They argued that all £3.3 million had been paid out in breach (and gave credit for the £900,000 recovered).
Procedure: Court of Appeal held that all £3.3 million had been paid away in breach of trust, but nonetheless limited AIB Group’s recovery to £300,000. Although £3.3 million had been paid out in breach of trust, the only effect of that breach was that AIB Group had security worth £900,000 instead of £1.2 million. Most of AIB Group’s loss was caused by the borrowers’ default and the fact that the mortgaged property was worth much less than it was thought to be.
Main v Giambrone & Law [2017] EWCA Civ 1193
susbtiutive compensation - personal claims against trustees
> 60. On this issue I accept the submissions of the respondents. The essential difference between this case andTargetor[AIB] is the solicitors’ role in relation to the security. It was not the function of Giambrone to liaise with the providers of the guarantees. Giambrone had no input into the drafting of the guarantees or any of the other formalities under Italian law. Giambrone’s role was to receive whatever guarantees the developers provided and to check whether or not they complied with Decree 122. If (and only if) the guarantees did comply, then the solicitors were under a duty to release the deposits. In the language of Lord Toulson in[AIB])at [76], that was “the content” of the “relevant obligation”.
> 61. The position was different inTargetand[AIB]. InTargetthe solicitors were under a duty to take active steps to secure a charge over the property, before releasing the monies. In[AIB]the solicitors were under a duty to take active steps to secure the removal of prior charges before releasing the money.
> 62. In the circumstances which unfolded in the present case, I would characterise the solicitors’ obligation as an obligation to act as custodians of the deposit monies indefinitely. Compliant guarantees never appeared. Therefore Giambrone should have remained as custodians of the deposit monies until the preliminary contracts were rescinded, and then paid those monies back to their clients.
> 63. InTargetthe plaintiff’s claim failed on the “but for” test. In the present case the claimants’ claim passes the “but for” test. In[AIB]the claimants’ loss was limited to that which would have been recoverable in contract, because the trust was “part of the machinery for the performance of a commercial contract”. In the present case the trust was part of the machinery for the performance of the solicitors’ contract of retainer. Giambrone’s breach of contract consisted of wrongfully paying out deposit monies which it had undertaken to keep safe. The contractual measure of damages is the amount of the deposits, because those monies have now vanished. This is a case where equitable compensation and contractual damages run in tandem
Holding: Court purported to apply rules of Reparative Compensation (AIB)
Trustee’s rejected argument: Reparative Compensation = £0
But for breach, guarantee would have been transferred to settlor, and deposit paid to seller. But settlor would not be better-off as guarantee would not have paid out(The guarantee on the facts did not protect me in any circumstances). Therefore, no consequential loss.
Court’s reasoning: Reparative Compensation = £Deposit
Trustee breached duty to act as custodian, therefore but for any breach the trustee would have returned the deposit to the settlor.
Distingusishing: In Giambrone, Jackson LJ, with the agreement of Underhill and Moylan LJJ on the point, distinguishedTarget HoldingsandAIB Groupby noting that inMain v Giambrone & Lawthe solicitors were not themselves required to take any positive steps to obtain the bank guarantees (in contrast to the duties of the solicitors in respect of the charges inTarget HoldingsandAIB Group). Instead, the duty of the solicitors inMain v Giambrone & Lawwas to do nothing until the developers produced appropriate guarantees.
The appellants appealed against a decision holding them liable to compensate the respondent purchasers who had lost money during prospective off-plan purchases of properties in the Calabria region of Italy. The fourth appellant (G) was an Italian lawyer who practised in Italy and England, and had established the first appellant firm. The purchasers were resident in England or Ireland, and had paid deposits in 2007/08 in the expectation that the development would be finished in 2009. In 2013, development ceased when police seized the site during an investigation into alleged money laundering by the mafia. The purchases were never completed. The purchasers claimed for the loss of their deposits.
Issues: The central question arising on this issue is how the court should assess equitable compensation for that breach of trust. It is common ground that, perhaps surprisingly, the events at Brancaleone did not constitute a “crisis” situation which triggered the obligation of the guarantors to pay out. Throughout the turbulent events on site, neither RDV nor Veco ever became insolvent.
- Against that background, Mr Flenley argues that the measure of equitable compensation must be nil. Even if Giambrone had obtained compliant guarantees before paying out the deposits, the claimants would be in no better position.
- Ms Bhaloo and Mr Majumdar, on the other hand, argue that the measure of equitable compensation must be the amount of the deposits which Giambrone wrongly paid out.
Re Pauling’s Settlement Trust [1962] 1 WLR 86 (Ch)
personal claims against trustees - consent
-Target Holdings Ltd v Redferns [1995] UKHL 10, [1996] AC 421
personal claims against trustees - reparative compensatio
Held: Target was successful before the Court of Appealbut lost in the House of Lords. Lord Browne-Wilkinson, with whom the other Law Lords agreed, focused on the causation of loss rather than on the fact that the disbursements had been made without authority and in breach of trust. The result of the case—that Redferns were not liable to Target Holdings—can therefore be defended on two grounds. First, it can be said that Redferns’ breach simply did not cause any loss to Target. This analysis was the basis of Lord Browne-Wilkinson’s speech. Secondly, however, the same result can be achieved through the traditional trust accounting mechanism: although the disbursement was falsifiable, the later acquisition of the correct securities balanced the account so that no deficit remained owing.
Facts: A finance company, Target Holdings, agreed to lend money to Crowngate Developments to enable Crowngate to purchase two plots of land for £2 million. In fact Crowngate was participating in a fraud and the true value of the land was only £775,000.36In reliance on a surveyor’s report prepared by another defendant, Target agreed to provide £1.7 million towards the supposed £2 million purchase price. That advance was to be secured by first legal charges on the properties. Redferns solicitors were instructed to act for both Crowngate and Target.
Only £1.525 million of the £1.7 million loan was to be used for the purchase of the land. Target duly transferred £1.525 million to Redferns’ client account, but £1.49 million was subsequently paid away in breach of trust before the proper securities were granted to Target. Those charges were eventually acquired some time later. Crowngate then defaulted on the mortgage repayments and was eventually wound up. Target sold the properties for £500,000 and claimed equitable compensation from Redferns of £990,000, being £1.49 million less the £500,000 obtained by the sale.
Re Salmon (1889) 42 Ch D 351 (CA))
following
Papadimitriou [20] (Lord Clarke))
following - bona fide
Appeal dismissed; D had been put on constructive notice and failed to make reasonable inquiries which would have revealed the probable existence of C’s right
The claimant (C) had been the owner of a valuable art deco furniture collection
A fraudulent art dealer sold the collection and deposited $10.3m of the proceeds of sale in an account with the defendant bank (D)’s Gibraltar branch. The money in the account was used to secure a loan taken out by the dealer and $9.8m from the account was later used to pay off the loan, with the remaining balance dissipated by the dealer. C brought proceedings in Gibraltar claiming, inter alia, that the bank was liable as constructive trustee to account to her for the funds received from the dealer.
The bank raised the bona fide purchaser defence
The Court of Appeal of Gibraltar held that C should be allowed to trace the proceeds of sale form the furniture collection to the $9.8m held by D on the basis that D had constructive notice of a third party right to the money and failed to make inquiry into not just the source of the funds but also the commercial purpose of the transaction; D appealed
Foskett v McKeown [2001] 1 AC (HL)
tracing - life insurance policies
Appeal allowed; beneficiaries have the option to choose between a proportionate equitable co-ownership interest or an equitable lien
The claimants enlisted Mr. Murphy as their trustee, intending for the money to be used to purchase land for investment in Portugal
Murphy bought a life insurance policy using his own money, on trust for his children and wife
Murphy, in breach of trust, used approximately £20,000 of trust money to pay for two fifths of the insurance premiums. Murphy then committed suicide and the insurer paid £1 million to his family
Claimants sued the family, arguing they had an equitable proprietary interest of a 40% share in the policy monies
Family argued that the claimants were at best entitled to a lien on the proceeds of the policy for the £20,000 of trust money paid into the premiums.
Issue: Were the claimants entitled to trace their funds into the insurance payout?
*Federal Republic of Brazil v Durant International Corp [2015] UKPC 35, [2016] AC 297
tracing - backwards tracing
- Follows a debate between Smith (1995) 54 CLJ 290 and Conaglen (2011) 127 LQR 432, the former arguing in favour of backwards tracing and the latter against. Both consider that allowing backwards tracing is ultimately a matter of policy because it increases the strength of the proprietary claim. As the Privy Council noted, it has the potential of prejudicing unsecured creditors, because the tracing claimant has super-priority over them.
- The expansion of tracing raises questions about its nature and the principles in it. The starting point is thatDurant International, likeFoskett v McKeown[2001] 1 AC 102(HL) (also noted inEssential Cases), sees tracing as a process of identifying where the value has gone—tracing value. But, as Cutts (2016) 79 MLR 381 notes, the proposition that we trace value is problematic. She gives an example where a trustee misappropriates £10 and buys a bottle of wine worth £100. The beneficiary can claim the wine. The transmission theory justifies this claim very simply (but cannot justify backwards tracing). But the basis of tracing value only justifies a claim to £10. Since the claim to the wine worth £100 is uncontroversially permitted in equity, one is not making a connection through the value but through the transaction (at 395) and the exchanger’s intention is a key principle in doing so (from 397). Transaction and intention may be the true principles at work here.
- In this respect, it does appear that there is a role for intention in backwards tracing givenDurant International. A direct appeal to intention was key to allowing backwards tracing inRelfo, where Arden LJ had held that the ordering of transactions was not important if the transferor ‘acted on the basis that he would receive reimbursement for the monies he transferred out of the trust funds’ (at [63]). The Privy Council’s formulation is indirect. It is perhaps more practical—the testimony of fraudsters is likely to be worthless—but ultimately it appears to be a proxy for intention. There is thus an unresolved tension inDurant International: tracing is said merely to be the tracing of value, but it appears to depend on the exchanger’s intention.
- Finally, one might ask if an absolute bar to tracing into a debt is in step with other proprietary claim cases. As the Supreme Court noted inFHR European Ventures LLP v Cedar Capital Partners LLC[2014] UKSC 45, [2015] AC 250 [43] (noted inEssential Cases), the monies should not be in the defendants’ estate at all, which justifies the proprietary claim and priority over other creditors. Perhaps backwards tracing will be extended to the case of tracing into a debt where the connection is sufficiently close in time and the payment is intended to be made from the illegitimate funds.
Held:
The Privy Council said that Ds’ view was ‘doctrinally sound’ and supported by much authority (from [18]), but rejected it. It was ‘inaccurate’ to speak of tracing from one asset to another. Instead, ‘the court is concerned with tracing the value inherent in a trust asset’ (at [32]). It should concentrate on the substance of the transaction and not the form.
One possibility, that money used to pay a debt could always be traced into what was acquired in return for the debt (‘tracing into a debt’), was rejected for being too broad. As a proprietary claim, the remedy gives priority over the funds to the claimant, which would prejudice unsecured creditors (at [33]). That is why a close causal and transactional link is required. This is the case in money laundering situations where interconnected debits and credits are often used. Then, backwards tracing is permitted if the claimant can:
> [E]stablish a co-ordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund.
This case concerns the availability of ‘backwards tracing’ and the conditions for it to be permitted.
A municipality in Brazil was the victim of a fraud. Its mayor received bribes and exchanged them for US dollars. The proceeds’ final destinations were the Jersey bank accounts of Durant and its subsidiary, the defendants. As is usual in bribes and secret commissions cases, the monies are treated as though trust assets. The municipality’s claim therefore required a link under the equitable rules of tracing to the monies in those accounts.
$7.7m could be traced using uncontroversial tracing rules. However, there was an additional $2.8m which had been paid out of an intermediate accountbeforethe proceeds of the bribes had been paid in. The link between input and output was therefore backwards in time, so on a strict analysis the money paid out could not be attributed to the money paid in. This can be contrasted with the forwards in time tracing of the $7.7m, where the proceeds of the bribe were first paid into the account and thereafter out to its final destinations, where the output much more clearly represents the input.
The Royal Court of Jersey allowed the municipality’s claim to both sums. The defendants appealed to the Court of Appeal of Jersey, which dismissed the appeal. The defendants then appealed to the Privy Council. The defendants argued there was no sound doctrinal basis for backwards tracing. To trace, one looks at the original property and what was substituted for it. If the substitute could only have other origins, it could not represent the original property
*Serious Fraud Office v Hotel Portfolio II UK Ltd [2021] EWHC 1273 (Comm) [22]–[48]
tracing - backwards tracing
see the interesting quotes in the notion tutorial page: https://www.notion.so/Remedies-for-breach-of-trust-2-Following-and-tracing-Tutorial-16-1b0b7843d56d80198828d0aabc42aa76
Holding: Following careful consideration of the conceptual issues, and previous decisions that had considered similar claims (see paragraphs 20-48), Foxton J held that:
“… the present state of English law is that backwards tracing into assets acquired prior to the misuse of trust assets is not permitted, save in certain narrow (but, for all that, soft-edged and overlapping) exceptions where a strict insistence on chronological sequence would fail to reflect the substance of the position.” (Emphasis added)
Those exceptions included where (see paragraph 46):
- One party pays another through the banking network, but at one or more stages in the process, a recipient account was credited before the paying account was debited;
- The debit from trust assets and the credit which it is sought to be traced into “were effected as part of a single transaction intended to achieve that outcome through a series of co-ordinated elements, whatever the chronological ordering of those elements“;
- An asset is acquired on the basis of an undertaking that the trust property will be (and then is) exchanged for it (referred to as “anticipatory substitution“); and
- In an otherwise conventional transaction, payment (using trust monies) for an asset is made after title to the asset has passed to the purchaser.
On the claim before him in the HPII Judgment, and having decided that English law does not generally permit backwards tracing, Foxton J considered whether (relevantly) it could be argued that the second exception above applied. The Judge decided that it did not. He held that what was important was to have regard to the substance of the transactions, and not to fall into “too ‘minute’ an analysis of the different steps in a composite transaction”. In this case, Foxton J observed that, in substance, the wrong-doing fiduciary had not just repaid the lender under the prior loan facility, but was then immediately substituted as lender to the same borrowers under a new facility. Seeking to cut off the analysis at the point of repayment – so as to say that HPII should be entitled to trace into the property acquired with the original loan facility, rather than (e.g.) into the newly-created debt owed to the wrong-doing fiduciary by the borrowers – involved just such a ‘too-minute analysis’ (see paragraph 80).
Facts: The factual background to the application was, in simplified summary, that a party owing fiduciary obligations had (it was said) breached the ‘no-profit’ rule, and had then used the ill-gotten profits to repay a loan facility. That loan facility had been obtained in order to fund, and was secured against, valuable property abroad. The ‘victim’, Hotel Portfolio II Limited (in liquidation) (“HPII”), argued that it should be allowed to trace the value of its interest in those wrongfully-acquired profits into the property that had earlier been acquired with the benefit of the loan facility.
Relfo v Varsani [2014] EWCA Civ 306
tracing - backwards tracing
Appeal allowed; R could trace into the Varsani account.
Mr Goercia (G), the director of Relfo (R),had, in breach of fiduciary duty, transferred £500,000 from the company into a separate account
That same day, £500,000 was transferred into Varsani (V)
There were evidential difficulties in proving that the funds had been transferred from the separate account to V
R sought to trace the £500,000 into the Varsani Account
Re Hallett (1880) 13 Ch D 696 (CA)
tracing - mixtures
Held: Appeal allowed; H was presumed to have dissipated his own money first; the beneficiaries are entitled to the money
Clayton’s Case “first in, first out” rule was held not to apply in this situation
Where a wrongdoing trustee makes a withdrawal from a mixed account (containing trust money and his own money), there is a presumption that they dissipated their own money first
Facts: Hallett (H) was a solicitor who held a number of russian bonds on trust
H misappropriated these bonds from his clients and sold them
H died, with enough money to pay off the beneficiaires, but not enough to satisfy his creditors.
At trial, the court held that Clayton’s case applied, meaning that the first payment in was presumed to be the first payment out
Re Oatway [1903] 2 Ch 356
tracing - mixtures
Could the beneficiaries under the will trace into the proceeds of the Oceana shares?
Mr Oatway was the trustee of a will
In breach of trust, Mr Oatway paid trust money into his personal bank account, which was then used to purchase Oceana shares using a cheque
Following this, the rest of the money in the account was dissipated
Mr Oatway claimed that the money which was dissipated constituted the trust money and that the Oceana shares were purchased from his own money
Roscoe v Winder [1915] 1 Ch 62
tracing - mixtures - lowest intermediate balance rule
Held: C was only entitled to £25, the lowest intermediate balance in the account.
Established the ‘lowest intermediate balance’ rule; where trust money was misappropriated into a mixed fund and withdrawals were subsequently made by the trustee, the claimants cannot claim for more than the lowest balance in the account at any point of time from the misappropriation to when the claim was brought.
A company (C) sold its business to Wigham (W), on the condition that any book debts prior to a certain date were to be paid to the company.
When these book debts were paid, W put the sums into his private bank account.
W withdrew most of the money in this account and used it for his own purposes W later paid in money of his own into the account. On W’s death, C brought an action to recover all the money in the account, seeking to trace £358 collected from the book debts. The trustee in bankruptcy for W argued that only the lowest intermediate balance (£25) in the account after the date the money was misappropriated into the account was owed to C
Clayton’s Case
tracing - mixtures
pricniple: This case is the origin of the “Rule in Clayton’s case”: if a trustee mixes the trust funds from two innocent beneficiaries into an account, any withdrawals from the account are presumed to be made in the same order as the payments in, on a “first in, first out” basis
Held: D’s estate was not liable, as the £453 had been fully discharged by the payments made by the surviving partners to C at the time of D’s death
Devaynes (D), the senior partner of a banking firm died and the firm, a partnership, went bankrupt a year later
A creditor, Clayton (C), sought to reclaim his bank deposits
At the time of D’s death, C had £1713 in his account
The remaining partnership had paid Clayton more than £1713 but this did not satisfy the entire amount that was owed to Clayton, since he made additional deposits after the death of D
Clayton sought a claim of £453 against D’s estate – the amount of his bank balance following withdrawals he made after D’s death and before making any additional deposits
Barlow Clowes v Vaughan [1992] 4 All ER 22 (CA
tracing - mixtures
The tracing rule in Clayton’s Case will not be applied where it is contrary to the express or inferred or presumed intention of the beneficiaries of the trust, such as when they are investors who intended their money to be contributed into a common pool of investment funds.
