Trusts - Proprietary Claims Against Trustees (8) Flashcards
What are proprietary claims against trustees?
Proprietary Claims Against Trustees: Proprietary claims (claims in rem) are brought by beneficiaries to recover stolen trust property from a trustee, or seize assets funded by that stolen trust property (replacement property).
How is a proprietary claim established?
Establishing Claim: To establish a successful claim, the following elements must be met:
Breach: Trustee must have committed a breach of duty, which caused loss to the trust or resulted in an unauthorised gain.
Tracing: If stolen trust property has ‘changed form’, the new property must be traced.
When will a proprietary caim be approrpriate?
Appropriate Claim: Proprietary claims may appropriate or advantageous where:
Trustee is insolvent, as beneficiary will rank above other creditors;
Trustee has used money to buy an appreciating asset (a relative gain);
Beneficiary’s personal claim is statute barred.
What is tracing?
Tracing: If a trustee has simply stolen and retained trust property, it can be recovered simply. However, if trust assets have been used to fund ‘replacement property’, it must be traced (Boscawen v Bajwa).
(1) Recoverable Property: Only certain replacement property can be recovered.
(2) Irrecoverable Property: If property has been ‘dissipated’, meaning used to fund untraceable assets such as holidays, debts and bills, it cannot be recovered (Yugraneft v Abaramovich).
Legal and Equitable Tracing
Legal and Equitable Tracing: Tracing may be pursued at common law or in equity.
(1) Common Law: Claimants must have a legal interest in stolen property. Usually prohibits beneficiaries (Taylor v Plumer).
(2) Equity: Claimants must have a beneficial interest in stolen property, and a fiduciary relation with the thief (Re Diplock).
Advantage: Equitable tracing extends to electronic transfers, whereas common law does not (Agip v Jackson).
Types of Tracing
Types of Tracing: The type of tracing method used depends on the type of misappropriation (below).
What is clean substitution?
Clean Substitution: Trustee has wholly substituted trust property for another asset. Beneficiary has the right of election, meaning they can seize the property or take a charge over it (Re Hallett’s Estate).
(1) Appreciating Asset: If the asset is appreciating, it is preferable to take it directly.
(2) Depreciating Asset: If the asset is depreciating, a charge is preferable, as the trustee must repay what they have stolen. Personal claim is also preferable if appropriate.
What is mixed substitution?
Mixed Substitution: Trustee has purchased replacement property using partly their own funds, and partly those of the trust. Beneficiary has right of election, meaning they can take a proportion of the asset, or a charge over it (Foskett v McKeown).
(1) Appreciating Asset: If the asset is appreciating, it is preferable to take a proportionate share of it.
(2) Depreciating Asset: If the asset is depreciating, a charge is preferable, as the trustee must repay what they have stolen. Personal claim is also preferable if appropriate.
What happens if trust money is paid into the trustee’s personal bank account?
Overview
Trust Money Into Personal Bank Account: Rather than using trust funds to directly purchase replacement property, trustees may pay funds into their own bank accounts.
No Withdrawals
No Withdrawals: If trust money is paid into a personal bank account, but no withdrawals have been made since, the beneficiary may take a charge over the account to the value of loss (Re Hallett).
Withdrawals
Withdrawals: Trustee mixed trust funds amongst their personal funds, and has since used the account to make purchases.
(1) Basic Rule: The trustee spent their own money before trust money (Re Hallett).
(2) Equitable Rule: If the trustee first spent their own money on a traceable asset, and then trust money was dissipated, the ‘Doctrine of the Honest Trustee’ reverses the presumption, and suggests own money was dissipated instead (Re Oatway).
(3) Lowest Intermediate Balance: Any money added to a personal account after the trust funds is not traceable, even if trust money was dissipated (Roscoe v Winder).
Withdrawals (Multiple Trusts)
Withdrawals w/ Multiple Trusts: Trustee mixed multiple trust funds amongst their personal funds, and has since used the account to make purchases.
(1) Basic Rule: The trustee spent their own money before trust money (Re Hallett). Trust funds are spent on the basis of ‘first in first out’ (Clayton’s Case). Trustees can claim proportions of replacement property, but not charges over them (unless wholly theirs).
(2) Equitable Rule: If the basic approach is impractical or results in injustice, then the trust funds and replacement assets are divided pari passu amongst the trusts in proportion to makeup of the account (Barlow Clowes v Vaughan).
(3) Lowest Intermediate Balance: Any money added to a personal account after the trust funds is not traceable, even if trust money was dissipated (Roscoe v Winder).
