Remedies for Breach of Trust PDF

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Detailed notes on the remedies for breach of trust. Lectures were delivered by Catey Thomas....

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Remedies for Breach of Trust Remedies for Breach of Trust u Trustee commits breach of trust u Beneficiaries looking to recoup losses, or recover gains made by trustee, eg u Trust property taken out of trust u Poor/wrongful investment u Trustee profiting from position u What kind of remedy might Beneficiary seek? 1. Personal remedy against trustee (previous learning cycle) 2. Proprietary remedy (against either trustee or third party) 3. Personal remedy against a third party

Personal or proprietary? 

Personal remedy  Claim that T (or another) must (personally) make good any losses or hand over value of any profits [from T’s own assets]



Proprietary remedy  Claim that specific assets (in the hands of T or elsewhere) should be returned to the trust

Webb & Akkouh: “[W]hereas a proprietary claim amounts to asserting ‘that thing is mine’, personal claims say ‘do this’.

Why does it matter? Which to choose? A proprietary remedy has certain advantages: 1. Enables recovery even if Trustee has disappeared or is bankrupt if you can identify in whose hands the property is. [subject to certain limitations ofc] 2. Priority for claimant (over other creditors) on Trustee’s insolvency [in personal claims, you’re in a queue along with other creditors if the trustee is insolvent] 3. Ability to recover secondary profits if property has increased in value (e.g. shares) 4. Tracing/following property into hands of other people and into new forms of property [even if the asset has been sold, it’s not the end in proprietary claims]

Certain disadvantages 

Only valuable if the property is still identifiable [i.e. you can say this is mine or this is the substituted form of what is mine]



Property value may have decreased  E.g. recovering shares would not make good the loss, so you may want to make a personal claim for shortfall



Fails once property in hands of bona fide purchaser for value without notice

 IN THESE CASES, A PERSONAL CLAIM MAY BE THE PREFERABLE / ONLY OPTION NB you can’t double recover but you can make both claims to recover the loss FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45

Issue: whether bribes paid in breach of a fiduciary duty gave rise to a proprietary or merely personal claim. Held: u in all cases where an agent has acquired a benefit in breach of his fiduciary duty, he is treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal. i.e. a constructive trust arises u This gives rise to a proprietary claim. u a principal will be able to elect between a personal and a proprietary remedy. The case addresses the importance of the distinction. Lord Neuberger: ‘The distinction is significant for two main reasons. First, if the agent becomes insolvent, a proprietary claim would effectively give the principal priority over the agent’s unsecured creditors, whereas the principal would rank pari passu, ie equally, with other unsecured creditors if he only has a claim for compensation. Secondly, if the principal has a proprietary claim to the bribe or commission, he can trace and follow it in equity, whereas (unless we develop the law of equitable tracing beyond its current boundaries) a principal with a right only to equitable compensation would have no such equitable right to trace or follow.

Seeking a proprietary remedy

u This requires the claimant to identify ‘their’ property in the hands of someone else u Effectively saying ‘that thing (or part of that thing) is mine’ u Pointing to trust property u Or assets representing trust property (ie substituted property) u Why do we allow claimant to assert rights in this way? u (Lord Millett) rejecting alternative theory based on unjust enrichment “[T]his branch of the law is concerned with vindicating rights of property” u How does the claimant identify the property in which he has an interest? u This process is known as following and/or tracing

Proprietary claim - tracing: requirements and limits Tracing: the process by which trust property, or the value inherent in trust property, can be identified. It enables the claimant to bring a claim for a proprietary remedy against the holder of property (or to provide the basis for a claim for a personal remedy against a third party). Foskett v McKeown – Lord Millett: “Tracing is … neither a claim nor a remedy. It is merely the process by which the claimant demonstrates what has happened to his property...”  Tracing is not a claim, you shouldn’t be talking about a tracing claim, you should talk about the claim established through tracing.

Following, tracing and claiming It is important to distinguish between these 3 elements: 

Following: Identifying trust property as passes from one person to another, ie locating the trust property itself



Tracing: Identifying asset which substituted for the trust property, ie locating where the value inherent in the trust property lies



Claiming: The claimant asserts his rights in the asset in order to recovered property

Foskett v McKeown [2001] 1 AC 102 – Lord Millett: “The process of ascertaining what happened to the plaintiff’s money involves both tracing and following. These are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The processes of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner. In practice his choice is often dictated by the circumstances.”

A simple example: following, tracing and claiming

T holds trust property (bracelet) for benefit of B

B has beneficial interest in the property [i.e. bracelet]

T (wrongfully) gives trust property to A [breach of trust]

B follows the property into the hands of A

A uses the trust property to buy a race horse from C

B traces the property into the racehorse [the value of the bracelet is now in the racehorse]

What can B do?

B claims race horse (in hands of A)

Following – original asset Tracing – as soon as there’s substitution Claiming – asserting equitable interest in the substituted property Tracing as a process u So tracing is a process whereby the beneficiary shows what has happened to his property, and thus justifies the claim that the new asset can properly be regarded as B’s property u See eg Shalson v Russo u The claimant (B): 1. Follows the trust property while it remains identifiable 2. Traces into any substitution 3. And then asserts his equitable interest in that substituted property u But there are requirements before tracing is possible u And there are limits on when tracing is available

Tracing at common law [not covered in this course] u Our focus is on tracing in Equity u Tracing (and following) is possible at common law. Eg -

Taylor v Plumer; Banque Belge v Hambrouck; F C Jones v Jones

u But common law tracing more limited than tracing in Equity -

Treats property as physical asset so does not allow tracing through a ‘mixed fund’: Re Diplock

-

See Agip (Africa) v Jackson [1992] 4 All ER 385 - ‘the common law stops at the bankers’ door’

u Pleas/indications that rules should be merged -

See eg F C Jones ; Foskett v McKeown ; Westdeutsche Landesbank

Tracing in equity Equitable tracing: u More flexible than common law tracing

u Allows tracing into ‘mixed fund’

u B follows asset, or traces into direct substitute -

B claims the relevant asset

u Can also trace into a larger/mixed fund -

Equity imposes equitable charge over the fund, representing B’s share of the larger fund

-

See eg Re Diplock

Tracing, mixing and substitution Prerequisites for equitable tracing u In order to trace in equity (Re Diplock): 1. The claimant must have an equitable proprietary interest [usually not a problem as claimants are often beneficiaries who have an equitable proprietary interest] 2. There must be a fiduciary relationship [doesn’t have to be between claimant and defendant – e.g. if the property is in the hands of a third party, there’s no fidicuiary relationship between claimant and defendant BUT there is a fiduciary relationship between trustee and beneficiary and that is enough] u No problem establishing these when misappropriation of property from trust, eg Foskett v McKeown -

And applies outside trustee-beneficiary relationship: Re Hallett

NB you should always mention the 2 requirements – Re Diplock is the authority u But requirements criticised eg Foskett v McKeown, although still accepted u Because of requirements, where court wants to use equitable tracing may stretch to find a fiduciary relationship -

Courts willing to find fiduciary relationship: Agip (Africa) v Jackson; Chase Manhattan v Israel-British Bank  courts are sympathetic towards equitable tracing. They want to use wherever they possibly can. Sometimes they even stretched things to find fiduciary relationship

-

Fiduciary relationship also arises where there is constructive trust: Westdeutsche Landesbank  So property need not have been subject of fiduciary relationship before transfer; transfer itself may create fiduciary relationship

Limits to equitable tracing 

B cannot trace into hands of bona fide purchaser for value without notice

-

“Equity’s darling” – bona fide purchaser – must be someone who has provided consideration (not just been given the property), did so in good faith and without notice (with no knowledge of the breach)

-

BFP will obtain good title (but B can trace into the proceeds)



B cannot trace if the property (or its traceable proceeds) ceases to exist

-

Once property is dissipated or destroyed, tracing ends

-

Lord Greene MR, Re Diplock: “If the fund … is spent upon a dinner, equity … could do nothing”.

A simple example: equity’s darling and dissipation

T holds trust property (bracelet) for benefit of B T (wrongfully) gives trust property to A

B has beneficial interest in the property

B follows the property into the hands of A

B traces the property into the racehorse

A uses the trust property to buy a race horse from C

B claims race horse (in hands of A)

What can B do? Can B follow the value in the bracelet into the hands of C?  NO. C is Equity’s darling. Only option is to trace the sale proceeds (which here are the horse)

Tracing: clean substitutions u ‘Following’ identifies trust property itself; ‘tracing’ identifies the value inherent in the property u Tracing therefore identifies assets that have been substituted for the trust property u Clean substitution: trust property directly exchanged for new asset -

Eg £20,000 from trust used to purchase a car

u What will B claim? -

B can claim either the substituted property, or a charge over the property for the amount of trust property that has been lost

 in the example above, B may not want the trouble of requiring a racehorse, so may decide to sit on a charge over the horse until the time it is sold to someone else and recover their money; or if the racehorse has increased dramatically in value they may want to claim the racehorse itself. Re Hallett (Jessel MR): “[T]he beneficial owner … is entitled at his election either to take the property or to have a charge on the property for the amount of the trust money.”

Tracing: mixed substitutions u Tracing identifies assets that have been exchanged for the trust property. Relatively straightforward if clean substitution

u But what if B’s property is combined with another’s property or used together with someone else’s property to obtain another asset? -

Can B trace into the new asset? Yes, it is possible to trace into mixed assets.

-

If so, what right does B have in the new asset? Depends on whose money it has been mixed with.

-

Should it make a difference if B’s property is mixed with the trustee’s own property or that of another innocent party? Yes

Trustee/third party’s property

Trust property

Mixed fund/ new asset

Mixing with the trustee’s own property 

What if:

-

The trustee mixes trust property with his own

-

Or combines trust money with his own money to buy a new asset?



Onus is on trustee: Re Tilley

-

For trustee to show what part of the mixed property is his

-

What he can’t show to be his, belongs to the trust



Where trustee can show that part of the mixed property is his, Bs can claim either

-

Charge over property to value of trust property, or

-

Proportional beneficial interest in the mixed property

-

Best option will depend on whether the property has increased or decreased in value – if something has increased in value, you’d want to take a proportionate benefit of that increase, if it’s fallen in value, then taking charge may be the better option.

Foskett v McKeown u Facts: -

Development trust held money (£2.6m) for investors (the beneficiaries)

-

T had life insurance policy (£1m) on his own life, with the benefit settled on children

-

T paid annual premiums (£10k) for 3 years himself but stole money from the trust and used it to pay for premiums year 4-5.

-

Died  £1m death benefit paid out to the children

-

(Benefit would have been payable even without premiums 4-5)

u Issue: Could B trace into death insurance benefit?  the loss for the trust was £20k but the pay-out received by children was £1m u What rights should B have in the death benefit? -

Amount taken from trust (£20k)? OR

-

Proportionate share of £1m? [the trust paid 2/5 of the premium] OR

-

Nothing? [because benefit would have been paid even without premiums 4-5]



Held (HoL):



Beneficiaries had equitable interest in money misappropriated from trust fund [one of pre-requisites + there was fiduciary duty]



It was possible to trace money first into premiums paid to insurance co, on into the insurance policy, and then into the death benefit – ‘transactional links’



So Beneficiaries could claim against money in hands of children [i.e. 40% of £1m = £400k]

-

Not looking for value attributable to the trust property, not a question of causation

-

It was simply a proportionate share reflecting contribution of ‘their’ money to the original asset – i.e. the trust contributed 40% to the insurance policy, they trace it to the proceeds and take 40% of the proceeds

 clearly more preferable to take a proportionate interest if the value has increased than taking charge over £20k.

Mixing with another’s property: competing claims u What if trust property instead mixed with property of another trust, or property of an innocent volunteer? -

B does not have same rights as had against T: Foskett v McKeown

u Re Diplock -

Only option: each party can claim a proportionate share in the mixed property

-

Benefit rateably from any increase in value; suffer loss rateably from any decrease in value  doesn’t matter if increases or decreases in value – both take a proportionate benefit

Tracing: Important things to remember [CHECK LIST] u Have you considered the possibility of a personal claim against the trustee? u Have you clearly made the distinction between tracing and following and claiming? u Need to establish pre-requisites for bringing an equitable proprietary claim u Are there any limits to tracing this property? u If there is mixing is it with the trustee’s own money or that of an innocent third party? u If you cannot recover the full amount through a proprietary claim consider a third party personal claim.

Tracing, mixing and bank accounts Mixing in bank accounts with trustee’s own money u If trust property paid into new account, no tracing problem -

Cannot technically claim through following into hands of bank as bank is bona fide purchaser for value without notice (exchanges property for right to payment)

-

But can trace into value (ie right to payment by the bank) – B can claim the contents of the account from the bank

u But what happens where trust property paid into account and: -

Trustee’s money already in there, and/or

-

Further monies are paid in by the trustee, and/or

-

Monies paid out from account?

The rule in Re Hallet u E.g. a bank account that has the money belonging to the trust and the trustee u The rule in Re Hallett is that  T is assumed to spend his own money first u Re Hallett -

H paid trust property into own account. Withdrew and spent some

-

Held: withdrawals should be treated as withdrawals of H’s own money. The trust could claim its property from what was left Jessel MR: “[H]e cannot be heard to say that he took away the trust money when he had the right to take away his own money …”

u But the rule might lead to injustice where initial expenditure invested/substituted, and further sums dissipated. E.g Hallett spent the first money taken from the account on house, and then the remaining money dissipated in some way – e.g. he gambled the remainder away.

Departing from Re Hallet – the rule in Re Oatway u Re Oatway: if earlier payments invested and later sums dissipated, court will assume T used the trust property to make the investment: -

T paid trust money into own account. Used some to buy shares. Then dissipated the rest. Held: B could trace into shares

Joyce J: “[H]e cannot maintain that the investment which remains represents his own money alone and what has been spent and can no longer be traced and recovered was the money belonging to the trust.”

u So rules are used to protect B’s interests  Assumptions are made against T’s interests

The lowest intermediate balance rule

u There are limits on the courts’ generosity u Remember that B is tracing value of his own property [asserting ‘that is mine, give it back’] u So what if: -

Trust money and T’s own money mixed in bank account

-

Then some / all spent

-

Then T pays in more of his own money

-

Can B trace into the account and claim that money?



If all has been spent: Cannot trace through account that has been emptied or overdrawn and then topped up, i.e. you can’t trace into the topped up money – it’s not the trust’s asset, the trust’s assets had been dissipated.

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Shalson v ...