Breach of Trust (Tutorial question) PDF

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Breach of Trust tutorial question...

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Equity

Breach of Trust Tutorial question

Nicola was entrusted by Ross to hold £100,000 on trust. However, she breached the terms of this trust by withdrawing a total of £80,000 from the trust and spent £5,000 on scuba equipment, and put the other £75,000 into a deposit account in her own name. She then dispersed the monies in a number of ways. In order for Ross to take pursue a claim against Nicola he must firstly show that he has an equitable interest in the property, then follow and trace the property before making a claim against Nicola or others involved. We must also consider any defences that Nicola or others may have. The easiest way to split this case up is between actions Ross should take against the trustee, in this case Nicola, and actions against third parties, including Daniel, Heather, and Chris. In the case of Nicola Ross could take either a personal claim, or a proprietary claim against her. If both proprietary and personal claims against the trustee are available, then the claimant (Ross) may choose which to go for. The core advantages of taking a proprietary claim are that there is a possibility to take action against third parties who retain the property, security over the property and claiming increases in the value. These are offset by the fact that the tracing of an equitable proprietary interest can be complex, and must not have dissipated, and the property may have decreased in value. On the other hand, Ross could take a personal claim against Nicola, which would be much simpler in establishing losses, as well as allowing him the possibility to go after ‘lost profits’ and profits that the trustee has gained in breach of trust. If Ross were to take a personal claim against Nicola he would have to show that Nicola has breached one of her duties as a trustee. Every trustee owes a fundamental duty t perform the trust honestly and in good faith for the benefit of the beneficiaries. In this case Nicola has clearly not been loyal to the trust. Nicola’s form of breach has been that of unauthorised action as she did not act in accordance with her duties and took money from the trust. As Nicola has taken away £75,000 form the trust she has caused a loss to Ross, the beneficiary. Therefore Nicola has fulfilled the criteria of breaching and infringing the claimant’s rights. If Ross’s aim with regards to the remedy is to merely recover the money that Nicola took from the account then a personal claim would be best as he can make a compensation claim for restitution of the trust fund. No causation is generally required and the actual losses are returned as long as sufficient funds are available, as they are in this case. However, if Ross wants to go after the profit Nicola has made in her lottery win then a proprietary claim would be the better choice as he can then trace the trust money. In Foskett v McKeown a number of steps were required for establishing a proprietary claim. Firstly there must be an equitable interest in the property. In this case, as the beneficiary, Ross automatically has an interest in the trust property. We then must follow or trace the trust property in several different directions. It should be noted that Ross will not be able to follow the £5,000 spent on the holiday as the money has dissipated completely (Re. Diplock), and the travel agency through which Nicola booked the holiday would be considered a bona fide purchaser for value without notice. However, it is the £75,000 and £100 that were taken from the trust property that we are more interested in. We will look at the money given from Nicola’s deposit account to Daniel and Heather later, currently the £100 she took from her deposit account is what is of interest. Prior to Nicola putting £75,000 of the trust money into the account, it had £5,000 in it, therefore the trust property constituted approximately 94% of the money in the account. In Foskett v McKeown it was decided that the claimants were entitled to a proportionate share of the insurance money, as 2/5 of the premiums had been paid out of the trust. If we were to apply these rules to Nicola’s lottery win, Ross would be entitled to £94,000 of that win. Nicola would not have a defence as she has misappropriated the trust funds.

Equity We now must move on to consider the £50,000 that Nicola gave to Daniel, and the £5,000 she gave to Heather. Firstly, the £50,000 given to Daniel; this money was given out of Nicola’s deposit account, and therefore a large portion of it is made up of the trust monies. However, Daniel has spent £20,000 on a conservatory, and therefore the money could be considered to have dissipated. That still leaves £30,000 in Daniel’s account, of which a significant proportion has come from the trust. Ross could make a claim asserting beneficial ownership of the property, with the identified asset (£30,000) held on trust. Although Daniel would have a defence with regards to the £20,000 spent on the conservatory, as the money has dissipated, he would not have one with regards to the £30,000. If we turn our attention to the £5,000 Nicola gave to Heather, we first must look at the fact it was put into Heather’s current account, rather than a deposit account. If we consider Heather to be an innocent volunteer, this will be subject to the exception of Clayton’s rule which states that were money is deposited in the account of an innocent volunteer there is a first in, first out rule. So in this case there was already £2,000 in the account before Nicola gave Heather £5,000 of the trust monies. Heather then went and spent £5,000 on a new car, bought from Chris. I don’t believe Ross would be able to launch a proprietary claim against Chris was the portion of the trust spent on the car as this would probably be considered inequitable and would go against the idea of fairness, which is important in equity, as Chris acted in good faith, and would not have been aware of the misappropriated trust funds. I would also advice Ross that is would not be worthwhile to try and recover the small amount in Heather’s current account, especially as it would be subject to Clayton’s rule. To conclude, I would advice Ross to take a proprietary claim against both Nicola and Daniel, as this would allow him to collect a majority of Nicola’s lottery win, a proportionate share of any money still left in her deposit account, as well as a proportionate share Daniel’s account. The funds gained from these claims would more than cover the amount taken from the trust....