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Proprietary claims & remedies (6.1) - Coggle Diagram
Proprietary claims & remedies (6.1)
Introduction
What are personal claims:
Personal claims are specific to a person: they are claims that say,
'do this'
2 types of personal claim to consider:
Personal claim
against the trustee
: in addition to their fiduciary duties, trustees are subject to various duties and responsibilities. Where trustees fail to comply with these duties, they can be found personally liable for breach of trust
Personal claims
against 3rd parties
: where a blameworthy 3rd party has assisted a trustee in committing a breach of trust, ow where a blameworthy 3rd party has received trust property in breach of trust, the beneficiary may be able to make a personal claim against the 3rd party
Personal claims usually lead to personal remedies, usually money, to compensate for any loss caused or to pay back any gain made as a result of the breach of trust
Terminology point:
Claiming - a process of establishing right
Remedy - what you may obtain once you have established your claim
Equitable proprietary claims - our focus is equitable proprietary claims only
D - any mention of D today/in reading - the person we're making a claim against, often the trustee
Fiduciary - any mention of fiduciaries today/in reading - for us, the trustee (Equitable proprietary claims are relevant for other fiduciaries too)
C - any mention of C for our purpose is a reference to the beneficiary
Limitations of personal claims:
Personal claims and remedies can be useful:
They allow for a wronged beneficiary to be compensated
Does not rely on the trustee or 3rd party having or retaining any trust property
But note the limitations of personal claims:
They do not give priority over creditors in the event of the trustee or 3rd party's insolvency
Where the misappropriated trust property is a unique or sentimental item a personal claim will not get the beneficiary what they want
Proprietary claims
A proprietary claim is a claim to a particular bit of property - it's a claim that says
'that's mine'
Potential of making a proprietary claim for the original property OR to any substitute property that
represents the value of the original
If we can make a proprietary claim, we mays seek a personal remedy or a proprietary remedy
Proprietary claims have advantages over personal ones:
Can reclaim the original property or its substitute
if the person who has the property goes insolvent, beneficiary gets priority on insolvency
If the property has increased its value, the beneficiary may be able to benefit from the increase
Can make claims to property in the hands of 3rd parties without needing to prove fault
But proprietary claims also have limitations:
The property must exist - if destroyed or lost, its not possible to make a proprietary claim
We cannot make a proprietary claim where the property is in the hands of a bona fide purchaser for value without notice
Equitable proprietary base:
Does C have a right to bring a claim? This requires us to understand the theory behind equitable proprietary claims - Key case Foskett v McKeown [2001]
Claims relating to the original trust property
Based on the beneficiary's continuing equitable proprietary interest in the original trust property - vindication of property rights - see Foskett v McKeown [2001]
Claims relating to substitute property:
Some commentators believe this is based on unjust enrichment, but this is not widely accepted (e.g. rejected by the HL in Foskett v McKeown [2001] and SC in Bank of Cyprus Ltd v Menelaou [2015]
The more accepted view is based on the vindication of property rights - we can make claims to substitute property because C had an equitable proprietary interest in the original property and that the right continues to subsist in the substitute
But establishing equitable proprietary base is not always straightforward...
But this will be easily established in our problem questions, as we will be advising a beneficiary as to their options for proprietary claims following a breach of trust
This means the beneficiary will have an equitable proprietary interest in any original trust property and these rights will be transferred into any substitute property
Finding the property: following and tracing
Before making a claim, must identify who has the original trust property, or who has substitute property that represents the value of the original property
There are
2 processes
to identify who has the property, following and tracing
Following and tracing are merely processes to establish whether C/beneficiary can make a claim. They don't tell us anything about rights to that property (Boscawen v Bajwa)
Being able to follow the original property or being able to trace the value of the original property into substitute property does not mean we have a claim
Claims based on following
Following is the process of 'following the property' from hand to hand (Foskett v McKeown [2001])
Proprietary claims based on following are usually straightforward
Limitations on following:
We cannot follow where the property has been dissipated
We cannot follow where the property has lost its identity due to being mixed with other property (so that the original property cannot be separated from the mixture)
Tracing: preliminary requirement:
Precondition to tracing in Equity:
the fiduciary requirement
Should be able to show that the property
passed to D through the hands of a fiduciary in breach of duty
(Shalson v Russo [2003])
Not necessary to show that D owed fiduciary duties to C
A controversial requirement see Agip (Africa v Jackson [1990])
This requirement is not problematic when dealing with a breach of trust by a trustee
Claims based on tracing:
Tracing can be straightfoward where the whole of the original property's value is represented by a substitute asset i.e. a clean substitution
e.g if the original trust property £10,000 was misappropriated by a trustee to buy a 2nd hand car and the car cost £10,000, the car represents the value of the original property and so we can trace into the car and make a proprietary claim
Limitation on tracing (as with following): we cannot make a claim based on tracing to property that has been destroyed, dissipated or lost
e.g. if the trustee takes £1000 of trust money and buys wine, then drinks all the wine, we can no longer make a proprietary claim based on tracing to the wine because it has been dissipated (claiming empty bottles is worthless)
Following or tracing?
e.g. 1:
A trustee in breach of a trust sells trust property to a friend
The friend who know nothing about the trust, pays about £500 for the bike
Can we follow or trace?
Trace.
because the price represents the value of the bike
e.g. 2:
A trustee in breach of trust sells trust property to a neighbour
The neighbour who knows the wine was not the trustees to sells, pays £2000 for the wine
Can we follow or trust?
e.g. 3:
A trustee in breach of trust gives the trust property to a 3rd party
The 3rd party sets fire to the paintings in drunken rage
Can we follow or trace?
no substitute property for the painting, cannot trace = no proprietary claim
no property
Defences
D will have a defence if they are a bona fide purchaser for value without notice. 2 requirements:
(1) Giving value - does not need to be adequate value provided there's some value
(2) Acting in good faith - means that D did not have actual or constructive knowledge of C's equitable proprietary interest
Constructive knowledge - is there anything in the circumstances known to the D that would cause a reasonable person to question the propriety of the transaction?
D must prove on the balance of probabilities that she can rely on the defence
Where the property has passed through the hands of a bona fide purchaser, its not possible to make a claim on it, because the proprietary interests will have been defeated, unless the trustee later reacquires the property (see Wilkes v Spooner [1911])
Overview of proprietary claim:
In principle, does C have a right to bring a claim? i.e. does C have an equitable proprietary base?
Do we need to apply the rules of following or tracing?
If tracing, which of Equity's tracing rules applies on these facts?
Can we make a proprietary claim?
Is D a bona fide purchaser for value without notice?
Which remedy is available/appropriate?
Conclusion: is a proprietary claim possible?
Trust (Express or Constructive)
D may have to hold the property on trust for C
If the whole property is held on trust for C - C can ask for the property
Or in some cases, a proportionate share of the property will be held on trust for C - the property may be divided, or may be sold and the proceeds shared in proportionate contributions
To determine whether the property is held on an express or constructive trust, we must look at the identity of D:
If the wrongdoing express trustee has the property claimed for, the property will be held on an express trust for the beneficiary
If a 3rd party has the property claimed for, the property will be held on constructive trust for C
A trust is particularly useful as a remedy where the property has increased in value
Trust: examples:
The trustee misappropriates trust property, a vase,, and gives the vase away
The friend is a 3rd party (or anyone else apart from the trustee) = constructive trust
The trustee misappropriates trust property, a painting and takes it to her house, then the beneficiary could make a proprietary claim based on following to the painting into the hands of the trustee
The trustee has the property (if its the trustee) = express trust
Equitable charge
Impose a charge on the property ot the secure repayment of the amount that D owes C. If D fails to pay, C can obtain an order for the sale of the property
With an equitable charge, you can only claim back the amount you lost in the first place. This means that if the property has increased in value, the beneficiary would not benefit from the increase in value
If the property has decreased in value, an equitable charge may be more beneficial to C than a trust (note an equitable charge won't always be available)
Equitable charge example:
The trustee uses £500 of trust property (in breach of trust) and £500 of her own money to buy vase
An equitable charge means:
C can secure a charge over the property up to the value of £500
If D/trustee fails to pay, C can force the sale of the vase
Personal remedy
There may be also a role for personal remedies when dealing with proprietary claims:
If no proprietary remedy is possible, or if the proprietary remedy does not get C all that they lost, then a personal remedy is an option (provided D is solvent)
Which remedy?
Where proprietary remedy are possible, you don't get a choice of remedies
Where there is a choice between the proprietary remedies - which is most advantageous for C?
If both proprietary remedy and a personal remedy are possible, determine which is most advantageous, and consider things like:
If making a claim based on following, do you want the original property back?
Note that proprietary remedies have advantages over personal remedies, including: 1) priority on insolvency; 2) may be able to benefit from increase in value if selecting a trust as a remedy; 3) claims against 3rd parties don't require proof of fault
Tracing: mixed substitutions
Tracing is a more complicated exercise when the trustee has mixed trust property so that we are tracing into a mixed substitution
e.g. the trustee may mix £10,000 of trust money with £5,000 of her own money and uses the combined £15,000 to buy car
The beneficiary can still trace into the car because the car was partly paid for with trust money
The tracing rules for cases of mixed substitutions differ depending on the identity of the other contributor - we must ask whether they are an innocent volunteer or a wrongdoer
Mixed substitutions: innocent contributors
Someone who does not know that C has an equitable proprietary interest in the property and has given no consideration
Where the other contributor is a beneficiary of another trust, they will be treated as an innocent volunteer
The general rule is that the property will be divided proportionately between innocent contributors (Re Dipock [1948])
The only proprietary remedy available is a trust because we cannot prioritise one innocent party over another
Innocent parties share equally in any loss/gain. Where there is a loss, can bring a personal claim against the trustee for compensation for breach of trust
eg. 1:
T takes £2,000 in cash from Trust Fund A
T takes £1,000 from Trust Fund B
T uses £3,000 to purchase a painting
Painting doubles in value
e.g. 2:
T takes £2,000 in cash from Trust Fund A
T takes £1,000 in cash from Trust Fund B
T uses £3,000 to purchase a painting
Painting doubles in value, trace into painting
Proportionate shares:
Trust fund A gets £4,000
Trust fund B gets £2,000
e.g. 2:
T takes £2,000 in cash from Trust Fund A
T takes £1,000 in cash from Trust Fund B
T uses £3,000 to purchase a painting
Painting halves in value
T takes £2,000 in cash from Trust Fund A
T takes £1,000 in cash from Trust Fund B
T uses £3,000 to purchase a painting
Painting halves in value, trace into the painting
Proportionate shares -
Trust fund A gets £1,000
Trust fund B gets £500
Personal claim against T for the rest
Mixed substitutions: wrongdoing contributor
A wrongdoer is someone who knows, or ought to have known, that C had an equitable proprietary interest in the property (Boscawen v Bajwa [1996]) This could be the defaulting trustee or a 3rd party
In this situation, C will get to choose their remedy (Foskett v McKeown [2001])
A trust/proportionate share over the property OR an equitable charge over substitute other the value of her contribution
Supposedly, this choice means that the wrondoer will not profit from the breach (see Lord Millett in Foskett), but this is not always the case
e.g. 1
T Takes £500 in cash from Trust Fund A
T takes £500 of her own money
T uses £1000 to purchase a painting
Painting worth £1000
T takes £500 in cash from Trust Fund A
T takes £500 of her own money
T uses £1000 to purchase a painting
Painting worth £1000, trace into painting
Choice of remedies:
Charge for £500 or
Trust/proportionate share - C gets £500, T gets £500
e.g. 2:
T takes £200 in cash from Trust fund A
T takes £1000 of her own money
T uses £3000 to purchase a painting
Painting doubles in value
T takes £2000 in cash from Trust Fund A
T takes £1000 of her own money
T uses £3000 to purchase painting
Painting doubles in value, traces into the painting
Choice of remedies
Charge - C limited to £2000 or
Trust/proportionate share - C gets £4000, T gets £2000