Trusts - Claims Against Third Parties (9)

Question 1

What are the remedies against third parties?

Answer 1

Remedies Against Third Parties: Third parties may be subject to personal and proprietary claims for aiding breach or receiving misappropriated trust property.

Question 2

When is it appropriate to claim against third parties?

Answer 2

Electing Claim: Third parties may be appropriate to claim against where:
Original trustee is bankrupt or missing;
Stolen property is in third-party hands;
Third party is insured, whereas trustee is not;
Both trustee and third party are sued jointly to maximise prospect of successful claim.

Question 3

What are the different types of claim against third parties?

Answer 3

Types of Claim: Claims may be both personal and proprietary. Generally, some level of knowledge is required in respect of personal claims.

Question 4

What are personal claims against third parties?

Answer 4

Overview
Personal Claims: Beneficiaries may launch personal claims against strangers if they can establish any of:
Accessory Liability;
Recipient Liability;
Intermeddling.

Limitation Period
Limitation Period: Claimants must observe the statutory limitation period of six years, unless the third party committed fraud (s21 LA 1980).

Accessory Liability
Accessory Liability: Third parties are liable to personal claim if they: a) knowingly and dishonestly assisted a breach of duty; b) which caused loss to the trust.

(1) Knowing: Third party knew they were aiding some form of illicit enterprise or wrongdoing - need not know it was a breach of duty (Barlow Clowes).

(2) Dishonesty: Third party did not act as an honest person would in the circumstances, accounting for factors such as their experience and intelligence (Royal Brunei v Tan). This is objective (Barlow Clowes v Eurotrust).

(3) Assistance: Assistance is any positive act towards assisting a breach of duty (Brinks v Abu Saleh).

(4) Loss: There must have been a breach of duty and a loss to the trust.

Recipient Liability
Recipient Liability: Third party ‘knowingly received’ property transferred through breach of duty, in a manner regarded as unconscionable.

(1) Knowing Receipt: a) Trustee transferred property in breach; b) third party received property for their own benefit; c) third party had requisite knowledge of breach, or later acquired it and nonetheless retained the property.

(2) Unconscionability: Trustee’s knowledge must have made it ‘unconscionable’ for them to retain the property (BCCI v Akindele), meaning they were ‘consciously improper’ (Re Montagu’s Settlement).

(3) Conscious Impropriety: The third party knew (actual knowledge) or reasonably suspected (constructive knowledge) the breach of duty. This is subjective.
Constructive Notice: It is not enough that a reasonable person would have been suspicious, so long as the third party was not.

Intermeddling
Intermeddling: Third party acted as a trustee, despite not being one, and caused a loss to the trust (Mara v Browne).

(1) Liability: Liable as if they were a trustee, known as a ‘trustee de son tort’ (trustee of his own wrong).

Question 5

What are the proprietary claims against third parties?

Answer 5

Overview
Proprietary Claims: Beneficiaries may launch proprietary claims against strangers if they can establish any of:
Wrongdoers’ Liability;
Innocent Volunteers’ Liability.

Equity’s Darling Exception
Equity’s Darling Exception: ‘Equity’s darling’ cannot be made liable to a proprietary claim. This means a third party who constitutes a bona fide purchaser of the misappropriated property for value without notice of the trust existing.

Wrongdoers’ Liability
Wrongdoers’ Liability: Wrongdoers are ‘consciously affected’ third parties, under the same definition of intermeddlers and knowing recipients.

(1) Clean Substitution: Beneficiaries may claim the replacement property outright.

(2) Mixed Asset (No Bank): If trust money and wrongdoer money was combined to purchase a replacement asset, beneficiaries may claim a lien or proportionate share of it (Foskett v McKeown).

(3) Mixed Bank (Withdrawals): If trust money was mixed with wrongdoer money and then spent, beneficiaries can apply whichever of Re Hallet or Re Oatway is beneficial.
Re Hallett: Wrongdoer’s money spent first.
Re Oatway: Wrongdoer’s money dissipated first.

Innocent Volunteers’ Liability
Innocent Volunteers’ Liability: Innocent volunteers had no knowledge or notice of breach, but provided no consideration for the misappropriated property (so are not equity’s darling).

(1) Clean Substitution: Beneficiaries may claim the replacement property outright.

(2) Mixed Asset (No Bank): If trust money and innocent money was combined to purchase a replacement asset, beneficiaries may claim only a proportionate share of it.

(3) Mixed Bank (Withdrawals): If trust money was mixed with innocent money and then spent, then Clayton’s Case will apply unless impractical or unfair.
Clayton’s Case: First money in, first money out. Beneficiaries entitled to proportion of replacement.
Pari Passu: Innocent parties and beneficiaries share assets and funds pari passu proportionate to their ownership (Barlow Clowes v Vaughan; Russell-Cooke v PRentis).

(4) Defence: Innocent volunteers can defend proprietary claims if they result in inequity.
Case Law: Hospital did not have to relent hospital assets to a claimant, but were liable in personal claim (Re Diplock).