Tracing II
Background - tracing is a process - not a remedy or cause of action
Exists in common law and equity - disadvantages with common law
Equitable proprietary tracing
1) Fiduciary relationship
2) Equitable proprietary interest
Permitted tracing into mixed funds - rules developed for dealing with
Unmixed funds - as long as can identify, can recover
Assets - when sold, can claim for proceeds of sale
Turns on knowledge of purchaser - can't claim against bona fide purchaser for value without notice
Money - when used to purchase an asset - claimant's choice of claim - Re Hallett's Estate (1880)
Property - good option if has retained or increased in value
Charge - using property as security - if can't repay, then can sell to recover - if there is a shortfall, must make personal claim against wrongdoer - not good if insolvent
"He will normally exercise the option in the way most advantageous to himself" - per Lord Millett in Foskett v McKeown (2001)
Mixed funds
- C's property mixed with trustee's property
- C's property mixed with another trust fund or innocent volunteer's property
- C's property mixed with innocent volunteer's pre-owned asset
Equitable charge (lien) - Re Hallett's Estate (1880) - using property as security for individual losses - can't take advantage of increase in value - essentially means wrongdoer benefits
Proportion - Re Tilley's WT - pointed to inadequacies of equitable charge option - but not overruled until Foskett v McKeown (2001)
"The beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money" - per Lord Millett
Can now take proportion of current value depending on how much put it - usually better
Rateably - pari passu (Re Diplock [1948] ) - everybody shares - can't take charge if in competition with innocent volunteer
"Where the beneficiary's claim is in competition with the claims of other innocent contributors, there is no basis upon which any of the claims can be subordinated to any of the others...; all must share rateably in the fund" - per Lord Millett in Foskett v McKeown (2001)
Does mixing add value to the pre-owned asset?
If no - dissipation
If yes, proprietary lien to recover money expended - Foskett v McKeown (2001) - not fair to take advantage of increase
Subject to inequitable defence - Diplock confined to facts - charity would have had to sell existing assets to repay
Presumption of honesty - Re Hallett's Estate (1880) - when purchase made out of mixed fund, assumption that wrongdoer's money used first - distribution rule
Rebuttal of presumption - Re Oatway (1903) - presumption of honesty won't be used against beneficiary's interest - aka if money used first is for valuable share and the rest is dissipated - ask if property purchased is worth retaining
Recent developments
"Cherry picking" - Shalson v Russo (2003) - when in competition with the wrongdoer, it is up to the claimant to "cherry pick" assets from everything bought since the money was deposited - applies even when there are sufficient funds left in account - in line with Foskett idea of providing every advantage to the beneficiary
Turner v Jacob (2006) - specific case relating to applied trust of the home - no real legal changes
Rule relating to deposits
Roscoe v Winder (1913) - "lowest intermediate balance" - beneficiary cannot claim trustee's money when deposited into trust bank account, unless clear evidence that intended to repay beneficiaries - can only claim the amount that was there before they deposited their own funds
Confirmed in Bishopsgate Investment Management Ltd v Homan (1995)
Difference between deposit account and current account
Deposit account - shared rateably (pari passu) - Re Diplock (1948); Sinclair v Brougham - basically anything but a current account
Look at proportion going in - apply to anything that goes out
Active current account - first in first out rule - Re Clayton's Case (1816) - whoever's money goes in first comes out first - unfair if one has more value - disliked by the courts
Barlow Clowes International Ltd v Vaughan (1992) - situation now - won't apply first in first out rule if...
Contrary to express/implied intentions of claimants
Impractical
Would cause injustice
Also see Commerzbank Aktiengessellschaft v IMB Morgan Plc and Others (2004); National Crime Agency v Robb (2014
Other actions
Personal Diplock action
Overpayments under a will - if owed property under execution of a will and haven't received full value, can bring personal action against recipient
Must sue wrongdoer first - can only sue recipient once that claim is exhausted
Receive principle sum only - plus simple interest
No current defences - change of position may apply in future - Lipkin Gorman v Karpnale Ltd (1991)
Not available to beneficiary under a trust - Re Montagu's ST (1987)
Subrogation
Substituting one party for another in a claim
Used to reverse unjust enrichment - Banque Financiére De La Cité v Parc (Battersea) Limited (1999) - when secured debt paid off with stolen funds (e.g. mortgage)
Bank classed as a bona fide purchaser without notice - but can resurrect the debt so trustee owes to claimant - claimant then has the same rights as any mortgagee
Boscawen v Bajway (1995) - referred to change in position defence