Trustees: breach of trust - proprietary claims

Question 1

What is a proprietary claim?

Answer 1

A claim against a wrongdoing trustee to recover property

(attractive where trustee is bankrupt)

Question 2

What is tracing?

Answer 2

The process by which the Claimant identifies what happened to their property & who has handled / received it

Question 3

What are the 2 prerequisites for tracing in equity?

Answer 3

1. A fiduciary relationship between claimant & defendant
2. Claimant must have an equitable proprietary interest in the property (eg. beneficiary under trust, beneficiary under will)

Question 4

What is the limitation period for bringing a proprietary claim?

Answer 4

Proprietary claims (unlike personal claims) are not subject to statutory limitation period

but are subject to equitable doctrine of laches

Question 5

What is the equitable doctrine of laches & does it apply to proprietary claims?

Answer 5

Laches prevent a claimant from asserting a claim where:

1. C knows the facts that gave rise to the breach of trust

and

2. C delays in taking action

and

3. Delay is deemed to constitute acquiescence in the breach or waiver of the breach by the claimant or causes detriment or prejudice to the trustee (delay in itself not usually sufficient form of detriment - court will want to see evidence has caused prejudice)

Applies to personal and proprietary claims

Question 6

Who are the three different people property can be traced to?

Answer 6

1. The person who misapplied it
2. A person who received it with knowledge that it was misapplied
3. An innocent volunteer (was given property as a gift with no knowledge of where it came from)

It cannot be traced into the hands of equity’s darling (bona fide purchaser for value without notice)

Question 7

What are three of the limitations on tracing?

Answer 7

Dissipation: if property has been spent on asset that has no tangible value, will no longer be identifiable & cannot be traced

Equity’s darling: property can’t be traced into hands of a bona fide purchaser for value without notice

Inequitability: claim will not be allowed where it is inequitable

Question 8

Is tracing possible if the money has been dissipiated?

Answer 8

Dissipated = spent on asset that has no tangible value (eg. food, holiday, paying off bills, improving house without adding value, crashed uninsured car)

If the money has been dissipated it cannot be traced

Question 9

What if the wrongdoing trustee still holds the original trust property?

Answer 9

No tracing required because property is in its original form

Question 10

What if the wrongdoing trustee has done a straight exchange of the trust property for another asset?

(eg. using trust money to buy a car)

Answer 10

Where there is a clean substitution, the claimant has 2 options:

a. Ownership of the new property (preferable if eg. the car has increased in value)

or

b. A charge (lien) over the property for the amount spent on it (preferable if property has decreased in value *)

• trust could sell substitute property knowing it has secured some recovery & then attempt to recover remaining balance by a personal claim against the trustee

Question 11

What if the wrongdoing trustee has purchased an asset with a mixture of their money & the trust’s money?

(eg. buying car half with money from their own account, half from trust’s account)

Answer 11

Beneficiary can choose:

a. Ownership of a proportionate share of the purchased asset, eg. 50% of car (preferable where property as increased in value)

or

b. A charge over the property for the amount of trust money spent on it (preferable if has decreased in value)

Question 12

What if the wrongdoing trustee has paid trust money into their own bank account & has made withdrawals?

Answer 12

Tracing rules apply to establish which withdrawals are made with trust money & which are made with the trustee’s money

Rule 1: Where trustee spends part of the fund & dissipates it, trustee is presumed to have spent their own money first (Re Hallett)

but Rule 2: If first money spent on traceable asset & then later payments have been dissipated, the trustee is instead presumed to have protected the trust fund by dissipating their own money (Re Oatway)

also Rule 3: if there are sufficient funds left in the account, claimant may be able to cherry pick (ie. choose which payments out were theirs & which were D’s so that they can pick those payments which have increased in value most) - but only when it is simple contest between 1 beneficiary & wrongdoer (not multiple bens)

Question 13

What if the wrongdoing trustee has paid trust money into their own bank account?

Answer 13

The claimant will have an equitable charge on the bank account for the value of the money misappropriated ie. amount of money paid in

Question 14

Where a wrongdoing trustee has paid trust money into their account, spent some of those funds & then paid money into the account, will this constitute repayment to the trust?

Answer 14

No: payments into the account are not presumed to be repayments to the trust (because trustee would just pay trust instead of themselves)

→ Claimant’s interest is limited to the lowest balance of the trust funds

Question 15

What if the wrongdoing trustee has purchased an asset with trust money and money from another trust or an innocent volunteer?

Answer 15

Where all the parties are innocent victims of the mixing, must share ownership rateably

(eg. D puts Trust A’s £10k & Trust B’s £5k into an account. D dissipates £9k of the account. Remaining £6k is owned 2/3 Trust A & 1/3 Trust B)

Question 16

What if the wrongdoing trustee spends the trust’s money on an innocent volunteer’s pre-owned asset?

Answer 16

If the mixing adds no value to the pre-owned asset, the funds will have been dissipated & cannot be traced

If the mixing adds value, claimant is only entitled to a charge over the property for the money spent (not for proportionate ownership) (criticised as inequitable)

eg. D gives £100k of trust property to son S who owns a £200k house. S spends it on decorating their house, increasing value of house by £200k. Trust entitled only to charge over property for £100k spent, not for proportionate ownership of the now £400k house

Question 17

What if the wrongdoing trustee has paid multiple different trust moneys into an account?

(ie. claimant’s property mixed other trust(s) and/or innocent volunteer)

Answer 17

Depends what kind of account it is:

DEPOSIT ACCOUNT → balance of fund & any payments out of fund shared rateably

CURRENT ACCOUNT → rule is first in first out unless it is impractical, unjust or the fund is intended to be shared rateably

eg. Barlow Clowes: the investors regarded an investment fund as a common pool, so should share rateably in what remained, rather than first-in-first-out, because had experienced common misfortune