Trusts - Breaches and Equitable Remedies

Question 1

Remedies against Trustees: Personal Claims

A personal claim is only as good as the…

In what three circumstances would it be inappropriate?

Answer 1

…financial solvency of the trustee.

(1) Trustee insolvent.
(2) Trustee may have used the trust property for something the beneficiaries want.
(3) Wrongdoing may have occurred six years after breach = statute-barred.

Question 2

Personal Claim vs Trustee

Are trustees vicarously liable for defaults of their co-trustees?

If more than one trustee has breached trust, their liability is… meaning the beneficiary can…

Answer 2

No.
Joint and several; choose either to bring a claim against all of them or one of them.

Question 3

Personal Claim vs Trustee: Causation

In Nestle v National Westminster Bank the heiress to the Nestle family fortune complained that the trustees failed to make proper investments, and would have received an inheritance four times greater than was the case. The Court confirmed that they failed to take legal advice and had fallen woefully short of maintaining the real value of the fund. Did Edith’s claim succeed?

Answer 3

No. She needs to show that no other reasonable trustee would have invested in the same way.

Question 4

Personal Claim vs Trustee: Value of claim

Provided the beneficiaries show that the trustees are the subject-matter and they caused the loss suffered by their breach, they have a personal claim of:

Answer 4

compensation equal to the loss + interest from date of breach.

Question 5

Personal Claim vs Trustee: Defences

What four defences might be available to trustees?

Answer 5

• Exemption clause in deed;
• Knowledge and consent of beneficiaries
• s.61 TA 1925;
• Limitation and laches

Question 6

Personal Claim vs Trustee: Defences

1. An exemption clause can relieve trustee from liability in relation to… but is void insofar as it tries to exclude liability for…
2. For knowledge and consent of beneficiaries to be a defence, they must have given… If only one beneficiary consents, is that enough to exclude liability?
3. Section 61 TA 1925 states that the court has a discretion to relieve trustees where…
4. A personal claim is subject to a six-year limitation period from date of breach. However, when does time start for a minor? What about remainder beneficiaries?

Answer 6

1. negligent and innocent breaches; fraud
2. fully informed and freely given; No. They are barred, but the others can still pursue.
3. they acted honestly and reasonable, and ought fairly to be excused.
4. When they reach 18; when their interest falls into possession (i.e. the life tenant dies).

Question 7

Personal Claim vs Trustee: Sharing the loss

If one trustee is sued for the entire loss, what two options may be available to share the loss among their co-trustees?

Answer 7

1. Equitable indemnity.
2. Contribution.

Question 8

Personal Claim vs Trustee: Sharing the loss

For equitable indemnity to arise, the trustee who is sued may recover full indemnity from a co-trustee who: (4 bullets)

The court can also order a co-trustee to make a contribution where it is…

Answer 8

(a) acted fraudulently when the others acted in good faith;
(b) is a solicitor who exercised such controlling influence that the others blindly followed;
(c) benefited personally from breach;
(d) is also a beneficiary and benefited.

…just and equitable.

Question 9

Proprietary Claim against Trustees

A proprietary claim may be advantageous in the following three circumstances:

Answer 9

a. Trustee is insolvent.
b. Trustee used trust property to buy something the beneficiaries want.
c. Trustee’s wrongdoing happened more than 6 years ago.

Question 10

Proprietary Claim against Trustees: Clean Subsitution

If the trustee holds the original trust property, the proprietary claim allows the beenficiaries to recover the property, and no tracing is required.

(1) What are the two optoins available where the trustee sold the trust property and purchased another asset?

Casper, a trustee, took £20,000 from the trust and used it to buy a painting.

(2) If the painting is now worth £25,000, what should the beneficiaries do?
(3) If the painting is now worth only £15,000, what should the beneficiaries do?

Answer 10

1. Options where there is clean substitution
   (a) Take the subsitute property.
   (b) Make a personal claim against the trustee to obtain compensation for the loss + take a charge over the new property for the amount lost.
2. Take the painting.
3. Bring personal claim against Casper for £20,000 + interest. Additionally, she can take a charge over the painting, ensuring she gets a minimum of £15,000 if Caspar’s personal funds are insufficient.

Question 11

Proprietary Claim against Trustees: Mix of trust and non-trust property

Where the trustee buys an asset partly with trust money and partly with their own money, this is a case of:

Where the trustee pays money from the trust into their bank account, and then makes various withdrawals this is a case of:

In the first case, what two options does the beneficiary have?

Answer 11

• Mixed asset
• Withdrawal from a mixed bank account

Question 12

Proprietary Claim against Trustees: Mixed asset

What two options are available to the beneficiary in these cases?

Stephan, a trustee for Lauren, takes £10,000 from the trust and uses this, together with £5000 of his own funds, to buy £15,000 worth of shares in Sigma. The shares are now worth £24.000. What should Lauren do?

Answer 12

• Claim a proportionate interest in the mixed asset.
• Make a personal claim vs the trustee + charge over the property.

Claim a proportionate interest: Two-thirds of the new property was used by trust money, therefore she can claim two-thirds of the new property = £16,000.

Question 13

Proprietary Claim against Trustees: Withdrawal from mixed account

A trustee takes £25,000 from the trust and pays into their own account, which already contains £10,000. He then makes the following withdrawals:
- £10,000 is used to pay off credit car bills; subsequently,
- £25,000 to buy shares in Upsilon Limited.

What can the beneficiary do and under what tracing rule?

Answer 13

Under Re Hallett , the trustee is deemed to have spent his money first: £10,000 credit card bills spent with the trustee’s money. £25,000 of shares are subject to a proprietary claim from the beneficiary.

I really don’t understand why the rules aren’t simply: whichever assets are dissipated are the assets of the trustee.

Question 14

Proprietary Claim against Trustees: Withdrawal from mixed account

Alexandra, a trustee for Niall, takes £25,000 from the trust and pays into her bank account, which already contains £10,000 of her own money. She makes the following withdrawals:

£8000 for a luxury cruise.
£10,000 to buy shares in Omega.
Balance on account: £17,000.

(1) What can the trust claim back and how?

(2) In the above example, if the shares increased in value to £20,000, what can Niall do?

Re Hallett

Answer 14

(1) Under Re Hallett:

• The £8000 luxury cruise is used up by Alex’s money.
• Alex’s remaining £2000 is used up on the shares.
• The remaining £8000 of the shares is subject to a proprietary claim from the beneficiary (a charge).
• The £17,000 balance belongs to the trust.

(2) Niall is entitled to a proportionate claim to the shares: since 80% of the original £10,000 shares were purchased by the trust, Niall is entitled to 80% of the £20,000 shares = £16,000.

Question 15

Proprietary Claim against Trustees: Withdrawal from mixed account

Re Hallett doesn’t always work to the beneficiary’s advantage:

Jack, a trustee for Bronwen, takes £50,000 from the trust and pays it into his own bank account, which already contains £150,000. He then makes the following withdrawals:

• £150,000 to purchase a flat.
• £50,000 for debts.

What can Bronwen do under Re Oatway

Re Oatway

Answer 15

Under Re Oatway, the beneficiary can assert her propriety claim by charging £50,000 against an asset of her choice, in this case the flat.

If the flat increased in price to £180,000, Bronwen gets a proportionate share: £60,000.

Question 16

Proprietary Claim against Trustees: Withdrawal from mixed account

Carrie, a trustee, steals £40,000 and pays into her own bank account which already contains £10,000. She spends £20,000 on a luxury cruise and a further £28,000 on private medical care, leaving a balance of £2000. Her father then gifts her a sum of £3000.

How much is the trust’s propietary claim?

Limiitation on tracing: Roscoe v Winder

Answer 16

£2000. The £3000 gift is not to be taken, under Roscoe vs Winder

Question 17

Proprietary Claim against Trustees: Mixed trust + trust funds

Stephan is a trustee for the “A” trust and the “B” trust. He takes £10,000 from A and £20,000 from B to buy £30,000 worth of chares in Sigma.

(1) The shares are now worth £36,000. How much is each trust entitled to?

(2) The shares are now worth £24,000. How much is each trust entitled to?

Answer 17

(1) A has a proprietary claim of £12,000. B has a proprietary claim of £24,000.
(2) A has a proprietary claim of £8000. B: £16,000.

Question 18

Proprietary Claim against Trustees: Mixed trust + trust funds

A trustee John pays £10,000 from trust A and later £20,000 from trust B into a newly opened bank account. John then uses £15,000 to pay off his debts and subsequently, £15,000 to purchase company shares.

What is each party entitled to under Clayton’s case?

When is Clayton’s case not used? (3 cases)

Answer 18

Using Clayton’s Case, the first payment into the account is applied against the first payment out:

• Trust A’s £10,000 is used up on the debt. The remaining debt of £5000 is used up by Trust B.
• Trust B’s remaining £15,000 is used against the shares.

Clayton’s case is not used where:
- it is impossible to apply;
- it results in injustice; or
- it would be contrary to the parties’ intention.

Question 19

Proprietary Claim against Trustees: Trust + Trust + Trustee’s funds

Daniel, a trustee, wrongfully transfers £20,000 from the Edis trust and £30,000 from the Fletcher trust to his own bank account which already contains a balance of £10,000. He makes the following withdrawals:

£10,000 on debts.
£30,000 on new kitchen installation.
£10,000 on new artwork.
£10,000 on a long holiday.

He then pays in £50,000 from an independent company.

What are the trusts’ claims?

Answer 19

You must first apply Re Hallett and Re Oatway with the aim of pushing the trustee’s money into dissipation.

You must then apply Clayton’s case:

Re Hallett - Trustee deemed to spend their money first. £10,000 on debts. This achieves the objective.

Clayton’s case:

Edis trust £20,000: Kitchen.
Flether’s trust: £10,000 on Kitchen, £10,000 on artwork, £10,000 dissipated on holiday.

The money from the company belongs to Daniel.

Court may disapply Clayton if unjust.

Note: proprietary claims are not only confined to beneficiaries. e.g. director stealing money from company and other fiduciary relationships.

Question 20

Remedies against Third Parties: Knowing receipt - Personal claim

What are the three elements to this claim?

Answer 20

(a) Third party received property in breach of trust or fiduciary duty.
(b) For their own benefit.
(c) While in receipt, they had such knowledge that makes it unconscionable for them to retain/deal with the property as if it were their own.

Question 21

Remedies against Third Parties: Knowing receipt - Personal claim

In the following cases, which one is not knowing receipt, and explain why each of the others are liable:

a. A trustee transfers £20,000 to her friend. She told the friend that she had taken the money without authorisation.

b. A trustee transfers £200 to his girlfriend on her birthday. The girlfriend spent the money. A month later, the beneficiaries write to katherine that she had received trust property.

c. Colin receives £20,000 from his husband Matt. Matt tells Colin that the money came out of his bank account, but when Colin checks the bank statements, he sees it is from Hardingham Trust. Colin knows that Matt is a trustee for his sister Ms Hardingham. Colin spends the money.

2. Does recipient liability require that the trustees knew they were in breach?

Answer 21

A = liable. Knows it is trust property.
B = Not liable.
C = Liable. Wilflully shutting their eyes to the obvious.

2. No. It focuses on the conscience of the receiver.

Question 22

Remedies against Third Parties: Equitable Proprietary Claims

What are the three categories of third parties in relation to potential proprietary claims? In all cases, state the liability and what tracing rules apply.

Answer 22

(a) Bona fide purchaser for value without notice. No claim (neither personal nor proprietary)
(b) Wrongdoing recipient - Harsh tracing rules apply.
(c) Innocent volunteer - Lenient tracing rules apply.

Question 23

Remedies against Third Parties:Equitable Proprietary Claims

a. If the third party holds trust property in its original form, the beneficiaries can…
b. If the third party used trust property to buy something new, the beneficiaries can…
c. If the third party took trust funds and mixed with their own money to purchase a property in their own name, the beneficiaries can…
d. If the third party took trust funds, paid into their own bank account, and then made several withdrawals, the beneficiaries can…

Wrongdoing tracing rules

Answer 23

a. …assert a proprietary claim against the property.
b. …assert a proprietary claim against the new property.
c. …assert a proprietary claim against the asset (a proportionate share) or assert a charge over it.
d. Use Re Hallett and Re Oatway.

Example in book, page 193.

Question 24

Remedies against Third Parties:Equitable Proprietary Claims

There is a key defence which is outlined in the following example:

Vida receives £15,000 from a trust, but did not know it came from a trust. She uses the money to install a new kitchen. Can the beneficiaries assert a proprietary claim against Vida’s house?

other than against wrongdoing recipients, when does this defence not apply?

Innocent Tracing Rules

Answer 24

No. She used the money to improve a building she already owns.

It doesn’t apply to mixed assets: i.e. where an innocent third party takes trust money, combines with their own to buy a new asset.

If the improvement decreases the value of the house, the trust money has dissipated.
If it increased the value, it would be inequitable to force the innocent party to sell their house.

Question 25

Claims arising out of breach of fiduciary duy

Claims are not simply confined to beneficiares. Can be principals of other fiduciary duties.

No answer to this slide.

Question 26

Remedies against Third Parties: Dishonest Assistance - Personal

(1) There are three elements to this claim:

(2) Does it need to be a positive act from the third party?

(3) What is the test for dishonesty in this context?

(4) Does the third party need to know they are assisting a breach of trust?

Answer 26

1. Three elements
   a. Breach of trust (not necessarily dishonest or intentional)
   b. Third party assisted the breach;
   c. Third party acted dishonestly.
2. Yes.
3. Whether an ordinary honest person would have acted differently, with the actual knowledge of that third party.
4. No. They must know they are actively assisting an illegal scheme.

Often this is where there is a professional relationship e.g. solicitor drafting documents to help trustee commit a breach; accountant drawing up accounts to hide a breach.