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TRACING AND EQUITABLE REMEDIES, LIABILITY OF STRANGERS TO THE TRUST -…
TRACING AND EQUITABLE REMEDIES
THE TRACING RULES
Tracing unmixed funds into a new asset
Asset is acquired exclusively with misapplied trust money
The beneficiary can
trace asset and then make a proprietary claim for it
Tracing involving wrongful mix
Wrongful mix = mixed fund of misapplied trust money + trustee’s own money
IF trustee makes
withdrawals from a wrongful mixture, some of which are dissipated (not traceable)
> beneficiary can treat:
- dissipation = trustee’s money
- identifiable funds (traceable) = trust property
1. Hallett model
trustee’s
drawings for his own purposes ought = from his own funds NOT the trust
2. Oatway model
Order
of withdrawals is
not important
3. The Shalson model / Cherry picking
Withdrawals from a
wrongful mixture are used to acquire multiple traceable assets
:
IF contest is between
beneficiary and the trustee
:
most
profitable applications of the mixed fund = trust money
IF contest between
beneficiary and unsecured creditors
:
dissipation
=
trustee’s money
BUT most
profitable applications of the fund DO NOT = trust money
Tracing involving innocent mix
Innocent mix = mixed fund of misapplied trust money + money of one or < innocent third parties
Mixture of more than one trust fund
Withdrawals are
attributed proportionately to the contributors by both trusts to the mixture
Mixture of trust fund with
funds of innocent recipient
Withdrawals are
attributed proportionately to the contributors of trusts and 3P to the mixture
BUT different rules for withdrawals from bank account:
1. Clayton's Case
2. IF unfair / contrary to parties' intention = rolling charge
3. IF complex = pari passu ex post facto method
1. Clayton’s Case - first in = first out
Money that is
paid first into the account is attributable to the money that leaves the account first (2nd in = 2nd out so on)
3. The pari passu ex post facto method.
Identifying
amounts contributed to the account by each individual +
Attributing all the
withdrawals from the account fractionally to all the contributors
,
Regardless payment order
2. The rolling charge method
Each
withdrawal is attributed to the contributors' contributions to the account immediately before the withdrawal
Contributions are
recalculated every time a sum is credited to the account
.
Order of payments will
affect the amounts attributed to individuals
.
As a matter of principle, the rolling
charge method should be applied in preference to the ex post facto method (Barlow Clowes and Shalson)
.
BUT IF
too complex or expensive to apply, the ex post facto method should be applied
Equitable proprietary claims
Following = following the same asset as it moves from hand to hand
Tracing = identifying new asset as the substitute for the old
Claiming = assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds
PROPRIETARY CLAIMS
1. Misapplied trust property itself
2. Unmixed funds
Unmixed =
Assets purchased exclusively with misapplied trust money
(or its traceable proceeds) > beneficiary can:
- Assert beneficial ownership of the asset
OR
- Make a personal claim against the trustee for breach of trust and enforcing an equitable lien on the asset
3. Wrongful mixtures
Wrongful mix =
asset purchased with misapplied trust money (or its traceable proceeds) + trustee’s money
> beneficiary can:
Claim a
proportionate share of asset
(if asset increased in value, they get a corresponding proportion of the increase)
OR
Enforce a
lien upon asset to secure his personal claim against the trustee for the amount of the misapplied money
(trustee cannot claim their interest until the beneficiaries claim has been satisfied in full)
4. Innocent mixture OR
Wrongful + innocent mixtures
Innocent mix =
asset purchased with misapplied trust money (or its traceable proceed) + money of one or < innocent third parties > beneficiaries
can:
ONLY claim a proportionate share of the asset
5. Improving the trustee’s property
Misapplied
trust money (or its traceable proceed) to maintain or improve the trustee’s assets
> beneficiary can have:
An
equitable lien on the asset to secure repayment of the trust money used to maintain or improve it
OR
A
proportionate share of the asset if it increases in value by reason of the maintenance or improvement.
6. Paying trustees' debt
Misapplied
trust money (or its traceable proceed)is dissipated by the payment of a secured debt > beneficiary
can:
be
treated as if they had lent money to the trustee, and allowed to take a security interest over the trustee’s house
DEFENCES TO PROPRIETARY CLAIMS
The principal defence to an equitable proprietary claim is that of the
purchaser of a legal interest without notice of the trust.
LIABILITY OF STRANGERS TO THE TRUST
There are two key claims that can be made
against stranger to the trust:
1. Claim for accessory liability (dishonest assistance)
2. Claim against the recipient of the traceable proceeds of a breach of trust (knowing receipt)
ACCESSORY LIABILITY
Beneficiary personal claim against trustee who
dishonestly assisted / breached of trust / breached fiduciary duties
Fault-based claim =
defendant
ONLY liable if their assistance was dishonest
Requirements:
1. There was trust in existence at the material time
2. Trustee committed a breach of that trust
3. Defendant assisted trustee to commit that breach of trust
Sufficient if
defendant assists in planning / committing / covering up / instigating breach
Assistance MUST be
more than minimal + must make commission of breach easier
Defendant
cannot avoid liability by proving the trustee / fiduciary would have committed
breach even if defendant had not assisted
4. Defendant’s assistance was dishonest
ONLY liable if assistance was
dishonest
=
judge ascertains subjectively actual state of individual’s knowledge + objective standard of ordinary decent people
= to determine if his conduct was
honest / dishonest
Remedies
Dishonest assistant is liable for loss occasioned by breach they assisted
Claimant
NOT required to show direct link between the assistance and the loss
= ONLY that
conduct assisted breach of trust + but for breach loss would not have occurred
Dishonest assistant is
potentially liable for profits they acquire by participation in breach at court's discretion
(not allowed if disproportionate to assistant's wrongdoing)
Claimant must
demonstrate participation was real effective cause of the profits > ‘but for’ test is NOT appropriate
RECIPIENT LIABILITY
Beneficiary personal claim
against recipient of the misapplied trust property or its traceable proceeds
Fault-based claim = defendant
ONLY liable if they had the requisite degree of knowledge
Requirements:
1. Misapplication of trust property / property held in another fiduciary capacity
2. Beneficial receipt by defendant of misapplied property / its traceable proceeds
Receipt should be for
defendant's own benefit / his title
Receipt in a
by agent on behalf of principal is insufficient for knowing receipt of agent
(e.g money paid to bank UNLESS money towards overdraft)
3. Persistence of claimant’s equitable proprietary interest in property received by defendant
Continuation of
claimant’s equitable proprietary interest in property
= IF transfer of
misapplied property / its traceable proceeds to defendant extinguishes claimant’s equitable proprietary interest = no claim
4. Knowledge of circumstances by defendant making it unconscionable for them to retain benefit of receipt
ONLY liable if they
had the requisite degree of knowledge (either before / after receipt) + did not restore property
If they
dispose of property before acquiring knowledge they do not incur personal liability
Unconscionable knowledge
is based on
Baden
scale:
1. actual knowledge = unconscionable
2. wilfully shutting one’s eyes to obvious = unconscionable
3. wilfully and recklessly failing to make inquiries that reasonable man would make = unconscionable
4. knowledge of circumstances which would indicate facts to reasonable man = unconscionable only if on facts known by D
5. knowledge of circumstances which would put an reasonable man on inquiry = unconscionable only if on facts known by D
Remedies
Limited to the value of what has been beneficially received
by the third party.