Tracing Flashcards
Foskett v McKeown [2001]
What is Tracing?
- Lord Millett – tracing is process of ascertaining what happened to the [property].’
- ‘Following is the process of following the same asset as it moves from hand to hand.’
- ‘Tracing is the process of identifying a new asset as the substitute for the old.’
- Tracing is a process used to identify property and then to establish proprietary claims over it, and if not possible, compensation
Bosacawen v Bajwa [1995]
Tracing
Tracing does not require the demonstration of fault by the parties through whose hands you trace.
Banque Belge v Hambrouck (1921)
Common Law Tracing
Tracing
- Once money deposited into wrongdoer’s bank account, if account is empty can identify money and so can be traced. However, if already contains their own funds, your money cannot be identified.
FC Jones & Sons v Jones [1996]
Common Law Tracing
- At common law have to be able to say that property is clearly identifiable as your own.
- Therefore, in a mixed bank account not possible to trace assets out of a fund because common law has no way of identifying whose assets have come out.
Mixing
- Funds mixed with wrongdoer’s funds in a bank account
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Defeats common law tracing
- NB – funds paid into an account won’t automatically defeat common law tracing, mixing will
Limitations of Common Law Tracing
- Legal proprietary base – common law only cares about legal title so unless you are the legal owner, you couldn’t use common law tracing
- Legatees and beneficiaries under a trust would not have a claim
- Agip (Africa) Ltd v Jackson [1990] – Can’t recover mixed funds using common law tracing
- Re Diplock [1948] - Absence of the, ‘far-reaching remedy of a declaration of charge’ - no proprietary claim
Advantages of equitable proprietary tracing
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Significantly more flexible rules
- Banque Belge v Hambrouck [1921] - ‘…the common law halted outside the banker’s door, [but] equity had the courage to lift the latch, walk in and examine the books.’ (per Atkin LJ]) – mixing doesn’t defeat equitable tracing
- Priority creditor status to the claimant – beneficiary or principal when they identify property owed to the
- Benefit of increase in value – equity allows proprietary claims – anything resulting from the money owed, can be recovered
- No limitation period for equity proprietary tracing
Re Diplock [1948]
Requirements for equitable proprietary tracing
- A fiduciary relationship
- Have to have an equitable proprietary interest
Chase Manhattan Bank NA v Israel-British Bank Ltd [1981]
Requirements for Equitable Proprietary Tracing
A Fiduciary Relationship
- Erroneous payment. Bank received twice what they should have received.
- Equity tracing was allowed as court ruled that on receipt of 2nd (mistaken) payment, a fiduciary duty was owed by defendant bank.
Westdeutsche Landesbank Girozentrale v Islington LBC [1996]
Requirements for Equitable Proprietary Tracing
A Fiduciary Relationship
- Credit swapping arrangements; fiduciary relationship found to be in place between a bank and a council.
Agip Ltd v Jackson [1990]
Requirements for Equitable Proprietary Tracing
A Fiduciary Relationship
‘[the fiduciary requirement is] readily satisfied in most cases of commercial fraud, since the embezzlement of a company’s funds almost inevitably involves a breach of fiduciary duty on the part of one of the company’s employees or agents.’ (per Millett J in Ch 265, 290) – case involving money laundering
Re Diplock [1948]
Requirements for Equitable Proprietary Tracing
A Fiduciary Relationship
Fiduciary relationship need not be between claimant and defendant.
Re Diplock [1948]
Equitable Proprietary Interest
- Claimant must have an Equitable proprietary interest:
- Equitable interest under a trust
- Equitable interest of beneficiaries under an estate
Into whose hands might property be traced?
- Trustee
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Innocent volunteer – someone who has received property but provided nothing in exchange for it - equity won’t assist a volunteer
- Subject to defences
- Recipient with knowledge they have committed a breach of trust/fiduciary duty
- CANNOT TRACE Equity’s darling - Bona fide purchaser for value without notice e.g. trustee sells house to bona fide purchaser, can’t get the property back, but could trace into the purchase monies.
What defeats equitable proprietary tracing?
- Where tracing would be Inequitable
- Dissipation
- Bona fide purchaser for value without notice
Re Diplock [1948]
Inequitable Tracing
What defeats equitable proprietary tracing?
- Maladministration of an estate – made charitable dispositions to a hospital but invalid.
- Trustees were unaware of this.
- Individuals who would have been entitled to the property, wanted their money back.
- Court ruled Hospital didn’t have to pay the money back as they were an innocent party and would maybe have to re-mortgage, sell equipment etc and that would be inequitable.
Foskett v McKeown [2001]
Inequitable Tracing
What defeats equitable proprietary tracing?
- Millett says that inequitability should be confined to the conditions in re Diplock.
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Diplock conditions:
- selling off pre-existing property
- dealing with a large sum - £250,000 in 1940s
- Only a defence to a proprietary claim
- Outside of this context, won’t be successful.
- e.g. you bought an MRI machine with the money you’d incorrectly received and just had to sell the MRI machine to recover the money, Diplock conditions would not be satisfied and tracing would not be inequitable.
Dissipation
Tracing
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Recipient of property has used your money on something that has no value. Therefore, nothing to trace into.
- E.g. money spent on a party, holiday, utility bills, purchase something that has been destroyed and isn’t insured
- Re Diplock [1948] - Dinner
- Re Diplock [1948] - Ongoing expenses
Re Diplock [1948]
Aesthetic Property Improvements
Dissipation
Tracing
- Aesthetic’ property improvements – e.g. repaint house – distinguish between aesthetic and non-aesthetic.
- If painting improves property’s value, not treated as dissipation and can trace into the property.
Foskett v McKeown [2001]
Aesthetic Property Improvements
Dissipation
Tracing
Browne-Wilkinson – if non-aesthetic improvements, can trace into the house but cannot recover more than your original sum.
Bishopsgate Investment Management v Homan [1995]
Dissipation
Tracing
Overdrawn bank account/high street loans are examples of dissipation
FC Jones & Sons (Trustee) v Jones [1997]
Tracing in Equity
Unified Process
- ‘there is no merit in having distinct and different tracing rules at law and in equity’ (per Millett LJ)
Foskett v McKeown [2001]
Tracing in Equity
Unified Process
- Obiter dicta in Foskett v McKeown [2001] 1 AC 102 (Lords Millett and Steyn) - suggestion should be a more unified process with more consistent requirements, e.g. why should there be a fiduciary relationship in order for equity tracing to be allowed
Shalson v Russo [2003]
Tracing in Equity
Unified Process
- ‘it cannot be said that Foskett has swept away the long recognised difference between common law and equitable tracing’ (per Rimer J in EWHC 1637, para 104)
Smith (The Law of Tracing) [1996]
Tracing in Equity
Unified Process
- ‘By the light of reason, the tracing rules should be the same whether the proceeding be at law, [or] in equity…’ (Smith, The Law of Tracing (1996): 279) – ACADEMIC VIEW
Re Hallett’s Estate [1880]
Tracing through a bank account - Unmixed funds
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If wrongdoer has used claimant’s money to purchase an asset claimant has an option:
- Can take the property (as their money was used to buy it) – if property has kept its value, will want to take the property
- If property has decreased in value, can take a Charge over the property and use it as security for recovery of debt.
Foskett v McKeown [2001]
Tracing through a bank account - Unmixed funds
- When exercising his right to take the property or a charge when wrongdoer has used claimant’s money to purchase an asset, ‘He (the claimant) will normally exercise the option in the way most advantageous to himself.’ (per Lord Millett)
Tracing through a bank account - Mixed funds
Different Scenarios
- Several different scenarios
- C’s property mixed with trustee’s property
- C’s property mixed with another trust fund or innocent volunteer’s property
- C’s property mixed with innocent volunteer’s pre-owned asset
Re Hallett’s Estate [1880]
Claimant’s Property Mixed with Trustee’s Property
Tracing through a bank account - Mixed funds
Different Scenarios
Where the claimant’s property is mixed with the trustee’s property, claimant can take an Equitable charge (lien) but you cannot take advantage of any increase in value – just recover original losses
Re Tilley’s Working Trust [1967]
Claimant’s Property Mixed with Trustee’s Property
Tracing through a bank account - Mixed funds
- Even when a piece of property had been purchased with wrongdoer and claimant’s property, questioned decision in Hallett because claimant still benefits – claimant can take a Proportionate share
Foskett v McKeown [2001]
Claimant’s Property Mixed with Trustee’s Property
Tracing through a bank account - Mixed funds
- ‘the beneficiary is entitled at his option either to claim a proportionate share of the asset OR to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money.’ (per Lord Millett: 131) CURRENT RULE
Re Hallett’s Estate [1880]
Presumption of Honesty
Claimant’s Property Mixed with Trustee’s Property
Tracing through a bank account - Mixed funds
- Presumption of honesty – in a mixed fund containing wrongdoer and claimant’s assets, it is presumed that the wrongdoer’s money is used first. Therefore, when claimant realises and seeks to recover, will still be in the account
Re Oatway [1903]
Presumption of Honesty
Claimant’s Property Mixed with Trustee’s Property
Tracing through a bank account - Mixed funds
- Rebuttal of presumption – trustee stolen money from beneficiary and put money into their own bank account; bought shares that were extremely valuable; remainder of account was dissipated.
- Court said presumption of honesty will never be used against beneficiary’s interests – under presumption wrongdoer’s money would have been used on the shares and the trustee’s had dissipated. Reversed in this situation.
Shalson v Russo [2003]
Claimant’s Property Mixed with Trustee’s Property
Tracing through a bank account - Mixed funds
- ‘cherry picking’ – up to the claimant to cherry pick best assets when they’re in competition with the wrongdoer, but nobody else
Roscoe v Winder [1913]
Claimant’s Property Mixed with Trustee’s Property
Tracing through a bank account - Mixed funds
- ‘lowest intermediate balance’ – when wrongdoer’s money is paid into a fund and mixed with beneficiary’s, it must be treated as their own, unless trustee was intending to repay the beneficiary.
- Can only claim the money in the account before wrongdoer invested their own money
Foskett v McKeown [2001]
C’s property mixed with another trust fund or innocent volunteer
- ‘Where the beneficiary’s claim is in competition with the claims of other innocent contributors, there is no basis upon which any of the claims can be subordinated to any of the others…; all must share rateably in the fund.’ (per Lord Millett in] 1 AC 102, 132D)
- None of the parties are given preference and everyone is treated equally as everyone is innocent
- Use rateable distribution (parri passu) and everyone shares equally and can’t take a charge over that property.
Re Diplock [1948]
C’s property mixed with another trust fund or innocent volunteer
Where dealing with money traced to a deposit account, parties share the funds rateably (pari passu)
Example (deposit account):
- Trust A - £10,000
- Trust B - £5,000
- Bank deposit account - £15,000
- Withdrawal - £9,000 – car
- Car – rateably between Trust A and Trust B
- Trust A contributes £6000 and Trust B contributes £3000
Re Clayton’s Case (1816)
First in, First Out
C’s property mixed with another trust fund or innocent volunteer – no wrongdoer here
- When you have a current bank account, First party’s money paid in, is the First money paid out
- Can lead to completely unfair results
- £5000 paid in – used to buy shares
- £5000 paid in 5 seconds later – dissipates
- Party B would lose out
Barlow Clowes International Ltd v Vaughan [1992]
First in, First Out
C’s property mixed with another trust fund or innocent volunteer
- First in, first out is contrary to express / implied intentions of claimants;
- Was impractical;
- Would cause injustice.
- Therefore, although it is the presumption, first in first out is seldom used.
Charity Commission v Framjee [2014]
First in, First Out
C’s property mixed with another trust fund or innocent volunteer
- Disapplied Clayton’s Case when distributing assets of a fundraising website, illustrating that the rule would now seem to be very easily displaced and that rateable distribution should be applied most of the time.
Foskett v McKeown [2001]
C’s property mixed with innocent volunteer’s pre-owned asset
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Does mixing add value to the pre-owned asset?
- No?
- Dissipation
- Yes?
- No?
- ‘at the most, to a proprietary lien to recover the moneys so expended.’ (per Lord Browne-Wilkinson] - person who received the property is innocent and so are only able to recover a charge for the amount you have lost; can’t enjoy the increase in value as owner is an innocent party.
- Inequitable defence – innocent volunteer could say would be inequitable to repay this money – but note Diplock has to be confined to its facts – otherwise can’t give priority to innocent volunteer over claimant.
Banque Financière De La Cité v Parc (Battersea) Limited [1999]
Subrogation
- Reverse unjust enrichment
- E.g. If wrongdoer steals from trust fund and use money to pay off mortgage on own home. Lender (bank) is gone because bona fide.
- Subrogation allows the debt/mortgage to be reincarnated, but the debt is owed to the claimant, as opposed to the bank.
Boscawen v Bajwa [1995]
Subrogation
- Millett refers to change of position defence – receiving property as a bona fide but not having to pay it back
