Trusts 5 - Breach + Remedies

Question 1

Personal claims

Answer 1

Trustee wrongdoing causes a loss, can seek compensation for trust. Against trustee personally.

Question 2

Advantages and Disadvantages

Answer 2

• Trustee may be insolvent. Trustee ranks as unsecured creditor.
  -Whether the money has been spent on tangible property (proprietary claim)
• personal (six year statute barred limitation period) whereas proprietary not subject to this.

Question 3

Breach of trust

Answer 3

Must be some wrongdoing in running trust (earlier cards).

Question 4

Liability?

Answer 4

Personal claim - must be in breach. Not vicariously liable for defaults of other trustees.
More than one - severally and jointly.

Question 5

Causation

Answer 5

‘But for’ test. Loss would not have occurred without the breach of trust.
Nestle v National Westminster Bank (1993) - establish the decision was one that no reasonable trustee could have made.

Question 6

Value of personal claim

Answer 6

Recover value equal to the loss. Rate of interest in court discretion but usually on court’s short term investment account.

Question 7

Defences to personal claim

Answer 7

• exemption clause in trust deed
  -knowledge and consent of the beneficiaries
  -s61 of the TA 1924
  -limitation and laches

Question 8

Exemption clauses

Answer 8

Express clause. Must take steps to make sure settlor aware of the clause (effect and meaning). Ambiguity in clause will work against the professional.

Question 9

Knowledge and consent of the beneficiaries

Answer 9

Fully informed and freely given. Adults and of full capacity. If one does they lose that right but other beneficiaries can.

Question 10

S61 Trustees Act 1925

Answer 10

Court discretion - if trustees acted honestly and reasonably and ought fairly to be excused (wholly or in part).
Reluctant to excuse passive trustees

Question 11

Limitation and laches

Answer 11

Personal - six year limitation (s21 Limitations Act) Remember minor starts to run when they are 18. Remainder beneficiaries when life tenant dies.

Does not count towards fraudulent breaches.

Equitable doctrine of laches (prevent a personal claim);
- claimant knows the facts that gave rise to the breach
-the claimant delays in action
-the delay is deemed to constitute acquiescence or waiver of the breach or cause detriment or prejudice to the trustee.
Schluman v Hewson (2002) - knew of breach for 15. Material witnesses now dead.

Question 12

Indemnity and contribution

Answer 12

Equitable indemnity and Contribution

Question 13

Equitable indemnity

Answer 13

Can recover full indemnity from co-trustee who;
-acted fraudulently when the others acted in good faith
-is a solicitor who exercised such a controlling influence that the other trustees blindly followed the solicitors advice
-has benefitted personally from the breach
-is also a beneficiary and benefitted from the breach (limited to value of their equitable interest).

Question 14

Contribution

Answer 14

S1 Civil Liability (Contribution Act) 1978- court orders to make a contribution that is just and equitable having regard to the extent of that co-trustees responsibility for the loss (up to 100% of the compensation ordered). Reflect on blame-worthiness of the trustees.

Question 15

Proprietary claims

Answer 15

If trustee exerts absolute control. Recover the asset and bring the asset back within the trust’s control.
Identify the new asset belongs to the trust.

Question 16

‘Dissipated’

Answer 16

Cannot trace (e.g. credit card bills).
Only as good as the property it can be traced to

Question 17

Advantages v Disadvantages

Answer 17

Insolvency (personal claim), however if still hold property can recover with priority *does not belong to that trustee’s estate.

If used on shares (which increased in value) recover all back. Attractive option.

No statutory limitation period (however still equitable doctrine of latches).

Does not work when no property to recover.

Question 18

Original form

Answer 18

No tracing required. Proprietary claim will allow it to be brought back.

Question 19

Substitute property (purchased asset with sale of proceeds)

Answer 19

Clean substitution (simply a swap). New asset treated as though it belongs to the trust.

Can choose -
- to take substitute property (good if increase)
-sue trustee for compensation and take charge (equitable lien) over property for amount lost (good if decrease).

Question 20

Mixes trust with own property

Answer 20

• buys an asset using partly own money and wrongly drawn funds.
  -pays money into bank account mixing it with own money making various withdrawals.
• pays from Trust A and Trust B (trustee has access to multiple trusts)
  -transfers money from A and from B both going into bank account mixing the money and making withdrawals.

Question 21

Mixed asset (trust + trustee funds)

Answer 21

Remedies;
- claiming proportionate interest in mixed asset (good if increase)
-Suing trustee for compensation for loss and taking equitable lien (good if decrease).

Question 22

Withdrawals from a mixed bank account (trust + trustee funds)

Answer 22

Tracing rule 1 - Re Hallett -
Trustee deemed to spend their own money first

Foskett v McKeown - beneficiary can take benefit of any increase in the value in the assets which they are tracing. Proportionate to rate trust contributed (if bought 60% with trust money entitled to 60% of the shares)

Question 23

Re Oatway (1903)

Answer 23

First charge on mixed fund. Beneficiary gets first choice.
Must wait before claim satisfied before giving away property.

Foskett valuation applies.

Question 24

If Re Hallett does not benefit the beneficiary?

Answer 24

Equity ‘everything is presumed against a wrongdoer’
Equity will apply another tracing rule

Question 25

Roscoe v Winder

Answer 25

Pays money into mixed account and then pays extra money into account.
Lowest intermediate balance - lowest balance to which the account sank before extra money was paid into it.

Question 26

Mixed assets - several trusts

Answer 26

Pari passu - share in same proportion as the funds contributed to the purchase price.

Question 27

Trustee pays money from one trust and another and makes several withdrawals from account

Answer 27

Clayton’s Case (1816) -
Between two or more innocents first money paid in is the first money paid out.

Only applied if does broad justice having regard to competing claims disentangled.

Question 28

So?

Answer 28

Barlow Clowes International Ltd (in liquidation) v Vaughan -
Can depart from Clayton if-
-impossible to apply
-would result in injustice
-contrary to the parties intention

Dissapplied by a slight counterweight.
- Generally each investor takes a rateable share in any remaining assets.

Question 29

Trustee takes money from two funds and mixes money with own money before making various withdrawals

Answer 29

First - Re Hallett and Re Oatway (as much as trustees money into dissipation).
Then - Clayton and Barlow Clowes v Voughan allocating remaining assets between the trusts.

Question 30

Other fiduciaires?

Answer 30

Tracing applies to other fiduciary relationships. The principal can use the rules.
Example - director and company.