EQUITY AND TRUST- TRACING Notes PDF

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TRACING Where a trustee breaches his or her fiduciary duty dealing with trust property as if it were his or her own, he or she will be personally liable to the trust for any gain or loss there from. A personal claim is only enforceable against a defendant personally so that a judgment against him pe...

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TRACING 

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Where a trustee breaches his or her fiduciary duty by dealing with trust property as if it were his or her own , he or she will be personally liable to the trust for any gain or loss there from. A personal claim is only enforceable against a defendant personally so that a judgment against him personally is no use if he is insolvent. So if the trustee is insolvent ( 破产 ), the beneficiaries may opt to pursue a claim against the property that has been misused rather than a personal action against a trustee. This is called TRACING. Equity has developed identification rules to protect the plaintiff’s proprietary interest so that the value of the original property can be traced in new assets to ascertain the value surviving in the defendant’s hands no matter how many substitutions of one asset for another has occurred. The right to trace allows a claimant to identify and follow property into the hands of a third party even where the property has been mixed or the form of the property has changed.

** IT IS NOT A REMEDY upon breach of trust. Just a mean of how one can identify their property of which will be his remedy.’ *It is primarily, a means of determining the right of property.

Foskett v McKeown    

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Facts: The beneficiaries were M’s business clients. They tried to trace into the death benefit on a life insurance policy which M’s children had received on M’s death. M had made five premium payments on the policy: three of his own money and two of trust money. House of Lord held: That the beneficiaries could claim a share proportionate to the amount that the trust money contributed to the purchase price. Lord Millet: “Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to: (1) claim a proportionate share of the assets or (2) to enforce a lien upon it to secure his personal claim against the trustee for the amount of the mis-applied money. “ Tracing is just a mere preliminary process for the claimant to identify the traceable proceeds of the original assets and base his claim on it.

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Tracing at Common Law: At common law, tracing of property is allowed in a number of situations: (a)

A pre-existing common law cause of action

(b)

Clear succession to the property

(c)

That property remained identifiable

Re Diplock 

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Diplock left some money on trust in his will for charity. His executor was given absolute discretion to decide on the distribution of the gift, which he distributed to a number of welfare homes. When the will was found to be invalid, the heirs of Diplock’s estate brought an action for the return of the gifts by the welfare institutions. Issue: Can they follow the money into the hands of the recipients of the gift? Held: Common law takes a materialistic approach to mixed funds and looks at the physical identity of the property. CL tracing can only appreciate the physical identity of the property, not the components within it. Can still identify the money which becomes another form property, provided that the fund is not mixed with others

*Property MUST be physically identifiable and common law take materialistic approach.

Puma Australia Pty Ltd v Sportsman’s Australia What is clear is that the right to trace at law ceases when the thing, or more often the proceeds of its sale in the form of money, is intermixed with other things or money so as to lose its identity … Once that point is reached, the common law, acknowledging that ‘money has no earmark’ , abandons the pursuit of equity.

Agip v Jackson  

CL tracing is not subject to the requirement of fiduciary relationship. Pf must prove the money received by Df was Pf’s money.

Tracing of property in EQUITY requires (a) That there be a fiduciary relationship

(b) There must be continued existence of the property (c) Property must be Identifiable

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(d) Where Df mixes the monies belonging to two or more parties who are innocent and dissipates the money or invests in shares or buys property with the money-

Beneficiaries are entitled to trace into the shares. (a) That there be a fiduciary relationship (and a breach of that relationship)  

Relationship of a trustee and beneficiary. In fraud cases, not difficult to prove relationship as it usually involves the company’s agent.

Sinclair v Brougham     

Facts: A banking business set up by a buiding socirty went bust as it was found ultra vires (did not register under Building Society Act) A sum was left and its legal title belongs to the shareholders. Issue: the relationship between the shareholders and the depositors over the sum. Held: Best solution- was parri passu (eually stand) whereby both sides were to stand equally for a claim according to their respective payment. Equitable tracing is only allowed if there exists a fiduciary relationship.

Re Diplock  

There must be a breach of the trust of fiduciary obligation first before equitable tracing can be done. The principle can operate against the fiduciary agent and also volunteers who received the interest as a result of the breach of trust by the fiduciary agent. (continuing liability of breach of trust)

Agip v Jackson    

P’s company chief accountant fraudulently althered payment order to B company specifically set up for the purpose. Held: Fiduciary is someone who assume that position that gives him control of the fund or enables him to misapply them The chirf accountant stood in a fiduciary relationship with Agip as he was entrusted with the signed drafts/orders upon banks. Strangers (Bank and Df) in this can be made liable as a constructive trustee in equity: (i) Knowing receipt of or dealing with trust property (ii) Knowing assistance, even though he does not himself receive the trust property.

(b)

There must be continued existence of the property 

-but the real advantage of equitable tracing is that it is not defeated by the property having been mixed with other property.

Re Diplock 3

There must be continued existence of the money, be it in the form of a separate fund, mixed fund, property acquired by the fund, actual or notional –  to enable equity to grant specific relief.  Otherwise, equity is as helpless as common law itself. Equity can do nothing if the fund, mixed or unmixed, is spent upon a dinner because it deals only with specific relief, NOT damages.  The alternative would be common law. 

(c) 

Property must be Identifiable (But this is given a liberal interpretation) Property that is mixed might still be followed into the hands of another.

Re Hallett’s Estate 

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Facts: A solicitor mixed trust funds with his own money in a bank account. He then made various payments out of and into the funds. At his death the balance exceeded the amount of the trust but not sufficient to meet his other debts as well. Held: The beneficiaries were entitled to a charge for the full amount of trust moneys ahead of the other creditors. He was assumed to have spent his own money first. If the property is bought exclusively with trust fund:  Beneficiary can choose whether to take the property if it is identifiable or to have a charge on the property for the amount to the trust fund.  ie: trustee lent the trust fund to A on a bond/promissory note- beneficiary can take the promissory note or impose a charge of them for the amount if trust money. If Mixed fund [trust fund + other ppl’s fund (ie: trustee own money)]  Beneficiary can only impose a charge on the property for the trust money  ie: trust lends the mixed fund to A on a promissory note- beneficiary have to charge for the amount of the trust money on the promissory note. Where money is withdrawn from the mixed fund and dissipated, it is presumed that the fiduciary’s money will be withdrawn first. Trustee is deemed to have spent his own money first.

Re Diplock Equity adopted a more metaphysical approach. It found no difficulty in regarding a composite fund as an amalgam constituted by the mixture of two or more funds each of which could be regarded as having for certain purposes, a continued separate existence.  Putting it in another way, equity regarded the amalgam as capable, in proper circumstances, of being resolved into its component parts … it was the metaphysical approach of equity coupled with and encouraged by the far reaching remedy of a declaration of charge that enabled equity to identify money in a mixed fund. (d) Where Df mixes the monies belonging to two or more parties who are innocent and dissipates the money or invests in shares or buys property with the money- Beneficiaries are entitled to trace into the shares.

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Re Oatway    

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A trustee purchased shares with money from a mixed fund and then dissipated the remaining amount. In this case, the trust property should be traced into the share, this will overturned the presumption in Re Hallett’s Estate (trustee uses his own money first) Df cannot maintain the investment represents his own money alone. Exception: if the trustee bought property from a bank account containing his own money and trust finds and then dissipates the rest of the money in the account  The beneficiaries can claim he property purchased as against the trustee

Where the defendant transfers property of monies to a third party

UMBC v Aluminex (M) Sdn Bhd   

UMBC granted a loan facility to Ap to purchased glass for its business (being a subcontractor). The payment in advanced was made to the glass supplier. As a security, Ap assigned alls the payment accurred to A under the sub-contracts. Held: although the legal ownership to the glass has been transferred to Ap, the glass is still subject to an equitable charge for the benefit of UMBC.

How the Courts Give Relief through Tracing (a) An order to restore the monies that have not been mixed (where the defendant holds the original property) (b)

Order or declaration of a charge over the mixed funds or property.

Re Hallett’s Estate 

The beneficial owner has a right to elect either to take the property purchased, or to hold it as a security for the amount of the trust money laid out in the purchase; or as we generally express it, he is entitled at his election either to take the property, or have a charge on the property for the amount of the trust money.

TRACING STEPS: 1) Mixing of trust moneys with personal money of a trustee – Equity presumes that the trustee uses his personal funds first, so that any amount remaining is trust monies.

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Re Hallett,s Estate  

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The trustee, a solicitor, mixed moneys held on trust for a client with his own money. The trustee subsequently died insolvent. The client was allowed to trace her money into the bank account and claim the balance remaining as trust moneys thereby removing those moneys from the pool to be distributed among the trustees general body of creditors. It cannot be argued that the money spent is the beneficiary’s and that the remaining balance is the trustee’s. In this case, the beneficiary is entitled to priority over the remaining balance as against the trustee’s creditors. RULE: Trustee is deemed to have spent his own money first.

2) Equity limits the beneficiary’s claim -

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to the lowest balance in account between the date of wrong deposit and the date the claim was made UNLESS there is evidence of the trustee’s intention to restore the funds in the depleted account. Assuming that the mixed fund has been exhausted; if non-claimant’s or fiduciary money is being added to the mixed fund, claimant cannot trace into the mixed fund. Where after unlawful spending, a sum is still left in the mixed fund, C cannot trace to a higher amount than the initial sum [Lowest intermediate Balance]. EXCEPTION: unless there is evidence of the trustee’s intention to restore the funds in the depleted account.

Roscoe (Bolton) v Winder    

Df as fiduciary, misappropriate $455 of the company’s money. After the misappropriation and dissipation, only $25 was left. Before it was mixed with Df’s own money and the balance become $358. Held: Claimant could only trace through to only $25. Claimant had no equitable right to subsequent deposit by the fiduciary UNLESS there is intention to restore the money that was wrongly used.

3) The principle is not restricted to money – may apply to other

property Re Hallet’s Estate 

Equities are not defeated if a trustee mixes trust moneys with his own moneys and with the mixture purchases a grey horse and a black horse, or a grey horse alone. In such a case equity imposes a charge on the two horses or the one horse. But where it is possible to give effect to the rights of a cestui que trust by simply taking out so much money or so many bonds or so many shares, the cestui que trust may elect whether he will take property in specie out of the mass or have a charge on the mass.. 6

[t]hat distinction is well illustrated by the contrast between the case, instanced above, where a trustee has mixed trust moneys with his own and bought a horse, and the case where he has mixed trust bonds with bonds of his own. Yet a horse is an ‘indistinguishable mass’ in almost the opposite sense. The horse is an ‘indistinguishable mass’ in the sense that it is no tracticable to attribute one part of him to the trust fund and another part of him to the trustee’s own funds. The bonds are an ‘undistinguishable mass’ in the sense that there is no practical reason for differentiating one bond from another and it is quite possible to take out so many bonds as will suffice to make a good trust fund. The real distinction which equity draws is between the case where it is, and the case where it is not; practicable to give effect to the rights of the cestui que trust by approaching to him a specific severable part of the available properly.

4) Property must be in existence to permit tracing -

Whether the property to be traced is money, shares or other property, the property must be in existence. The right to trace ends when the property is dissipated. For instance, equitable tracing cannot be pursued through an overdrawn (and therefore, non-existent) bank account.

Re Diplock   

Is the money from mixed funds used by someone of the charities to improve or erect new building tracable? Held: the building work might not have improved the value if the property. Where a building has not been objectively improved there is not traceable product and the money should instead be treated as dissipated.

Bishopsgate Investment Management Ltd v Homan     

A trust fund as pension was misappropriated and transferred by the boss into company’s overdrawn account. Can clamaint impose a charge over the company’s asset for the trust money appropriated and thus acquiring priority over the company’s unsecured creditors? HELD: NO, money paid into an overdrawn account ceases to be traceable is deemed exhauste. An overdrawn bank account constitutes a debt owed by its customer to the bank. The company’s overdrawn account was a debt owed by it to the bank. Impossible that claimant could trace the misappropriated money to the company’s present assets.

5) Increases in value of property traced -

Trustees must account to the beneficiaries for any profit made from the trust fund whether by breach of trust or in the ordinary course of management of the trust.

Re Tilley;s Will Trust

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A mother mixed a trust fund belonging to her daughter and son with her private funds and buy a house. At mother’s death. Her estate was worth 94k pounds. ISSUE: whether the daughter and son were entitled to a proportionate share of the value of the property, or limited to the initial 2237 pounds? HELD: if property bought with the ixed fund has increased in value, a beneficiary can claim a proportionate share UNLESS the trustee intended to use only her own money or overdraft facilities to make the purchase. In this case, mother made an overdraft facility, the trust money was only applied to reduce overdraft Hence, beneficiaries were only entitled to charge the property for the trust fund.

Re Oatway 

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Trustee made an investment with a sum from bank account containing mixed fund and the investment remains in the trustee’s name with the rest of the money in the account being dissipated He cannot maintain the investment made with his money alonr and what has been spent is no longer traceable Beneficiary claims whatever may be left against the trustee. In this case, there is no balance left, the only thing left was the investment which represents parts of the mixed fund. He is entitled to impose a charge on the investment for the trust fund and profits in proportion to his contribution

Per Joyce J: When any of the money drawn out has been invested and the investment remains in the name or under the control of the trustee, the rest of the balance having been afterwards dissipated by him, he cannot maintain that the investment which remains represents his own money alone and that what has been spent and can no longer be traced and recovered was the money belonging to the trust.

Mixing of property from more than one trust – the allocation step (a)

First issue is - the identification of the property.

(b)

Second issue - involves the distribution of the property among the trusts involved

1) General rule of distribution is - pari passu Sinclair v Brougham 

The mixed fund comprised money of the depositors and money of the society’s shareholders, both of which are innocent. 8

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HELD: they are ranked equally in accordance to the proportion of their contribution.

2) Mixing of funds in one bank account -

The general rule for mixed funds in a bank account is “First in, first out“.

Devaynes v Noble (Clayton’s Case)    

Where there are various funds in an account, first funds placed into the account is the first to be taken out. Displaces the parri passu rule, staes that all beneficial interest in a mixed account are subject to a FIFO rule Unfair against the first victim of a breach of trust as it eliminate their attempts to trace. This rule will not be applied if there is a preferable alternative.

When does it apply?    

If a trustee holds multiple trust funds, the beneficiaries may have been mixed. Equity allows them to trace their fund according to their individual contribution provided they remain identifiable. When some of the funds have been spent, the balance is not equally divided among them. Hnce, Clayton’s rule comes in.

EXCEPTION: (a)

Where there is a specific contrary agreement between client and banker

Barclays Bank Ltd v Quistclose Investments Ltd    (b)

When the trustee went bust, the purpose of the trust cannot be fulfilled. Resulting trust occurs and the money fall back to L Thus, the fund kept in the account for the specific purpose cannot be claimed by the bank Where specific withdrawals are indicated as belonging to a particular trust

Re Diplock  

The rule will not apply if the fund is unmixed and a specific withdrawal is earmarked as trust money. Accordingly, a charity that paid $1500 trsut money into its current account and...