TRACING Flashcards
What are the advantages of tracing?
- It is not affected by the defendant’s bankruptcy or insolvency.
- It enables beneficiaries to capture increases in the value of traceable proceeds.
- It does not depend on fault: it can be maintained against the defaulting trustee and against innocent recipients of the trust property or its traceable proceeds.
What is following in tracing terms?
- It is the process for locating misapplied trust property.
- the process of ‘following the same asset as it moves from hand to hand’(Foskett)
What is tracing?
- the process of ‘identifying a new asset as the substitute for the old’(Foskett)
- Generally, one asset is the traceable proceed of another if there is ‘a series of direct substitutions’ between them:Relfo Ltd (in liquidation) v Varsani
What is claiming in tracing terms?
- the assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds (Foskett)
What conditions must be satisfied to use the equitable following, tracing and claiming rules?
Re Diplock criteria:
- The claimant had a ‘right of property recognised by equity’ in the asset which they seek to follow and/or trace
- The asset was held by a person who was in a fiduciary relationship with the claimant
What are the two types of mixed funds?
- A mixed fund comprising misapplied trust money and the trustee’s own money (‘a wrongful mixture’)
- A mixed fund comprising misapplied trust money and money derived from one or more innocent third parties (‘an innocent mixture’)
What is a defence to an equitable proprietary (tracing) claim?
Bona fide purchaser for value without notice
- person had no notice of the trust
What are the potential options that a trustee has when an asset has been identified?
- The beneficiary claims beneficial ownership of the asset itself: where the asset is acquired exclusively with the traceable proceeds of the breach.
- The beneficiary claims a share of the asset
- The beneficiary claims an equitable lien over the asset: Generally a beneficiary will want to do this where the asset has decreased in value, meaning that claiming the asset would result in a loss. It effectively turns their personal claim for breach of trust into a secured claim.
- Subrogation: This is a claim that can be made where misapplied trust funds (or their traceable proceeds) are used to pay off a debt. It allows the beneficiary to step into the shoes of the creditor, treating the beneficiary as if they had loaned the money.
What are the 3 tracing rules in connection with wrongful mixtures?
- TheHallettmodel
- TheOatwaymodel
- TheShalsonmodel
What is the Hallett model/ rule?
Trustee spent his own funds first not the trust fund “cannot be heard to say that he took away the trust money when he had a right to take away his own money”
What is the Oatway model/ rule?
If there is a choice between a traceable asset and a dissipation, the trustee should be treated as protecting the trust funds and dissipating their own.
What is the Shalson model/ rule?
Cherry picking can be used when there are multiple assets which the beneficiary could potentially trace into (most profitable application)
- cannot be used if it would prejudicially affect third parties
What is the general rule applying to withdrawals from an innocent mixture (not bank account)?
- must be attributed rateably to the contributors to the mixture
- does not apply for innocent mixtures in a current bank account
What is the general rule applying to withdrawals from an innocent mixture in a current bank account?
Clayton’s case - first in, first out rule
When will Clayton’s case ‘first in, first out’ rule be disapplied?
- contrary to the intentions of the parties who contributed to the mixture;
- impracticable (ie too complex or expensive to apply); or
- unfair
What two methods are available to withdrawals from an innocent mixture in a current bank account?
The pari passu ex post facto method.
- fraction of the contribution calculated at the end
The rolling charge method.
- each attribution is calculated fractionally to the account immediately before the withdrawal
When is money dissipated?
when it is applied in such a way that there is no traceable proceed
What are the options available if the misapplied trust money is used to improve the trustee’s property?
- An equitable lien on the asset to secure repayment of the trust money used to maintain or improve it.
- A proportionate share of the asset if it increases in value by reason of the maintenance or improvement.
What are the options available if the misapplied trust money is used to improve the trustee’s property?
- Where trust money (or its traceable proceed) is used to maintain or improve an asset owned by an innocent third party, the beneficiaries cannot assert any claim to the asset.
- InRe Diplock, the court indicated that the maximum extent of the beneficiaries’ claim would be an equitable lien to secure repayment of the trust money expended.
- However, the court held that even that claim should not be available on the facts of the case because it would be inequitable to compel an innocent party to sell an asset which they already owned.
What is a knowing receipt claim?
- personal claim against a recipient of the misapplied trust property/ traceable proceeds
- not an innocent third party because they had a degree of knowledge that it came from a trust
what are the requirements for a knowing receipt claim?
- A misapplication of trust property (or property held in another fiduciary capacity).
- Beneficial receipt by the defendant of the misapplied trust property or its traceable proceeds.
- Knowledge on the part of the defendant that the property they received was misapplied trust property or its traceable proceeds.
What is a Diplock personal claim?
- where a personal representative misappliesa deceased person’s estate, the persons entitled to the estate can bring a personal claim against the recipients of the misapplied property or its traceable proceeds.
- can be used against innocent parties
What is the beneficial receipt requirement for a knowing receipt claim?
The defendant receives the trust property/ traceable proceeds for their benefit
- does not count if there is receipt by an agent on behalf of a principal
- when money is paid to a bank to be crediting to an account, the bank does not receive the money beneficially (unless the account is overdrawn)
What are the limitations to a Diplock personal claim?
- The persons interested in the estate must exhaust their remedies against the personal representative before they can sue the recipient. And they can only recover the deficiency from the recipient.
- The claim is limited to the principal sum only: the recipient is not liable for interest on that sum.
