Tracing

Question 1

What is the difference between ‘following’ and ‘tracing’?

Answer 1

‘Following’ is a process of identifying the actual money belonging to a beneficiary. ‘Tracing’ is identifying some property that has been purchased with trust funds.

Question 2

Which case tells us that a beneficiary may claim property that has been purchased with their trust fund money?

Answer 2

Taylor v Plumer (1815)

Question 3

What happened in Taylor v Plumer?

Answer 3

A trustee who had gone bankrupt bought gold bullion and promissory notes with trust funds and tried to escape to America.

Question 4

There are four equitable remedies to retain property from a breach of trust. What are they?

Answer 4

1. Equitable ownership
2. Equitable lien or charge
3. Subrogation
4. Personal remedy

Question 5

Which of the four equitable remedies used in tracing are proprietary?

Answer 5

1. Equitable ownership
2. Equitable lien or charge
3. Subrogation

Question 6

What are the advantages of a proprietary remedy over a personal remedy?

Answer 6

1. Priority over general creditors in insolvency
2. Take any increase in value
3. Under Limitation Act 1980 there is a limit of 6 years for personal claims. This doesn’t apply to proprietary claims.

Question 7

What are the limitations to tracing at common law?

Answer 7

1. Claimants must have legal title of property they are tracing (not useful for beneficiaries)
2. Property must be identifiable (mixed accounts cause issues)
3. Usually only results in a personal claim

Question 8

How did LJ Goff describe the defence of change of position in Lipkin Gorman v Karpnale Ltd?

Answer 8

‘where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay’

Question 9

What are the two requirements to use the defence of change of position given by LJ Goff in Lipkin Gorman v Karpnale Ltd?

Answer 9

1. There must be expenditure by the recipient based on reliance of the payment he received, which has ‘disenriched’ him;
2. The expenditure should be ‘extraordinary’, in that it would not have been made had the funds not been received.

Question 10

Which case tells us that the change of position defence can also be used when the defendant anticipates payment?

Answer 10

Dextra Bank & Trust Co Ltd v Bank of Jamaica

Question 11

In which case did the Court of Appeal keep open the possibility that a defendant who had not become ‘disenriched’ could rely on the defence of change of position?

Answer 11

Commerzbank AG v Gareth Price-Jones

Question 12

In Scottish Equitable Plc v Derby what was held not to be extraordinary expenditure? Why?

Answer 12

Payment of debts. They are considered to be payments in the ordinary course of business.

Question 13

What was so extraordinary about the expenditure incurred in Phillip Collins Ltd v Davis given the fact that the items bought were of an everyday nature?

Answer 13

The amount that had been bought was extraordinary and showed reliance.

Question 14

Who is not allowed the defence of change of position?

Answer 14

Those who spend money in bad faith ie know of the restitution claim

Question 15

What added advice did Moore J give on the notion of bad faith and change of position in Niru Battery Manufacturing Co v Milestone Trading (No 1)?

Answer 15

Bad faith ‘is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty’. He also pointed out negligence will not deprive the defendant of the defence.

Question 16

What two prerequisites are there for tracing in equity give in Re Diplock?

Answer 16

1. The claimant should have an equitable interest in the property claimed;
2. There should be a fiduciary relationship

Question 17

Which case approved that a fiduciary relationship must exist to trace in equity?

Answer 17

Westdeutsche Landesbanke Girozentrale v Islington London BC

Question 18

In which case does LJ Millett and LJ Steyn criticise the requirement for a fiduciary relationship to trace in equity?

Answer 18

Foskett v McKeown

Question 19

In Foskett v McKeown what might a fiduciary relationship have relevance to if not to determine whether you can trace in equity?

Answer 19

Whether the claim can be proprietary or merely personal.

Question 20

Which case tells us that the fiduciary relationship does not have to be between claimant and defendant?

Answer 20

Re Diplock. The next of kin was sueing the charities who had been paid by the trustees.

Question 21

The Australian case of Black v Freedman was approved by Lord Templeman in Lipkin Gorman v Karpnale Ltd and by Lord Browne-Wilkinson in Westdeutsche. But between whom was the fiduciary relationship established?

Answer 21

Thief and victim

Question 22

In Chase Manhattan Bank v Israel-British Bank (London) Ltd in what circumstances did the court find a fiduciary relationship?

Answer 22

Chase Manhattan Bank had mistakenly paid Israel-British Bank $2m. The recipients were said to hold on trust.

Question 23

Westdeutsche questioned the ruling in Chase Manhattan Bank v Israel-British Bank, that a mistaken payment could be held on trust by the recipient on mere receipt, but when might the recipient hold on constructive trust?

Answer 23

When the recipient has learned of the mistake.

Question 24

Whose account can you not trace into?

Answer 24

A bona fide purchaser for value without notice

Question 25

Does it matter if the consideration given by a bona fide purchaser without value is not adequate? What case gives us the answer?

Answer 25

No (Lipkin Gorman v Karpnale Ltd)

Question 26

When funds are dissipated they are said to be untraceable? How were funds dissipated in Bishopsgate Investment Management v Homan?

Answer 26

Paying off an overdrawn bank account.

Question 27

Which case tells us that even if a person expressly creates a trust and pays his trustee by cheque no trust will arise if it is paid into an overdrawn bank account?

Answer 27

Re BA Peters plc

Question 28

Which case tells us that if a wrongdoer has used trust funds to purchase personal property then the claimant may elect to take the property or put a charge over it?

Answer 28

Re Hallet’s Estate

Question 29

When might a beneficiary want to put a charge over property?

Answer 29

When it is likely to appreciate in value

Question 30

How did Foskett v McKeown apparently overrule Re Hallet’s Estate?

Answer 30

In Re Hallet’s Estate is was purportedly said that a claimant could only put a charge over property identified in a mixed fund. In Foskett v McKeown the claimant was given a right to choose between taking the property or taking a charge over it.

Question 31

In Re Diplock and Foskett v McKeown how was it said that funds should be attributed if two trust funds were mixed or if a trust fund was mixed with an innocent volunteer’s funds?

Answer 31

Rateable or pari passu

Question 32

What happens if the claimant’s trust funds are spent on an innocent volunteer’s pre-owned asset? Is the claimant able to claim their money back?

Answer 32

Only in special circumstances would a claimant be able to put a charge over the asset that has been improved. If it’s inequitable to do so or the asset has not gone up in value (Re Diplock) then the fund is said to be dissipated.

Question 33

When does subrogation occur?

Answer 33

When trust funds have been used to pay off a secured debt in breach of trust

Question 34

How does subrogation work?

Answer 34

The claimant revives the secured debt that was initially paid off on the same terms, effectively taking a charge over property.

Question 35

In which case was the presumption of honesty established when considering payments out of a mixed fund by a trustee in breach?

Answer 35

Re Hallet’s Estate

Question 36

In which case was the presumption of honesty said to be rebuttable where there is a good asset?

Answer 36

Re Oatway

Question 37

What is a good asset?

Answer 37

One that appreciates in value

Question 38

Which case does the lowest intermediate balance rule come from?

Answer 38

Roscoe v Winder

Question 39

What does the lowest intermediate balance rule say?

Answer 39

When trust money is mixed with a trustee’s, then dissipated, and then topped up with the trustee’s own money, the claimant will only be able to claim the amount left that was theirs from the start. The money paid in by the trustee will not go towards paying off the claimant’s loss.