#15555 - Tracing Stranger Liability - GDL Equity and Trusts

Equity & Trusts: Tracing & Liability of Strangers

STRUCTURE for an exam question

• Intro

  • What is tracing?

  • Advantages of proprietary claim:

  • Who are claimants

  • Requirements for tracing in equity (Diplock)

    • (1) fiduciary relationship [[note Millett, Foskett, criticises this requirement]].

    • (2) an equitable proprietary interest

  • Could be unavailable if (Re Diplock):

    • (1) dissipation;

    • (2) property into hands of equity’s darling (bona fide purchaser for value without notice)

    • (3) inequitability (Diplock).

• Trace

• Proprietary tracing

• Claim:

  • Proprietary, 3 types of remedy:

  • Equitable Ownership

  • Equitable Charge (lien)

  • Subrogation

  • Personal, against trustee : but might be insolvent.

  • Personal, against strangers:

    • Against innocent volunteer, possibly Re Diplock claim [CF proprietary claim against an innocent volunteer, above, if hasn’t been dissipated]

    • Not innocent volunteer:

      • Knowing recipient

      • Dishonest assistant

Intro

• What is tracing, Foskett v McKeown, Lord Millett—a ‘process’—of identifying a new asset as the substitute of the old’. Tracing is the process, not a claim or remedy.

• Common law tracing, limitations

  • (1) Won’t work if C doesn’t have a legal interest in the property to trace

  • (2) Absence of proprietary remedies

  • (3) Mixing: inability of common law to trace through mixed funds (Agip v Jackson).

• Advantages of proprietary claim:

  • (1) priority creditor status;

  • (2) can take benefit of any increase in value, can trace into substitute assets;

  • (3) no technical statutory limitation period (s21(1) Limitation Act 1980). [[although is subject to doctrine of laches, ‘delay defeats equity’.

• Who are claimants

• Requirements for tracing in equity (Re Diplock)

  • (1) fiduciary relationship;

    • eg trustee/B; executor/legatee (like Diplock); solicitor/client (Re Hallett); account/employer (Agip v Jackson); mistaken payment (Chase Manhattan Bank v Israel-British Bank); even thief/victim (Black v Freedman

    • [[note Millett, Foskett v McKeown, criticises this requirement: no logical justification for needed fiduciary relationship when not needed for common law tracing; why 2 sets of rules?]].

    • Judicial & academic support for unifying equity & common law rules.

  • (2) an equitable proprietary interest

    • eg under a trust; or of a beneficiary under an estate. Easy to find—Diplock found for next of kin against executors even before estate administered.

    • Could be Quistclose trust, Quistclose v Barclays Bank [[unlikely to come up]]: (1) loan; (2) made solely for a specific purpose; (3) money segregated from borrower’s other assets.

• Into whose hands can you trace in equity:

  • (1) An innocent volunteer (subject to Diplock inequitable defence) [if not dissipated]

  • (2) Recipient with knowledge, even if they have provided value

  • (3) CANNOT trace into Equity’s Darling hands—bona fide purchaser for value without notice [[although you could trace into the proceeds of sale given by the Equity’s Darling for the property]].

  • [[CF, if funds are dissipated—making a personal claim against eg knowing recipient]].

• Limitations, what can defeat equitable proprietary tracing: Could be unavailable if (Re Diplock):

  • (1) dissipation;

    • Diplock egs: dinner; ongoing expenses (eg utility bills); ‘aesthetic property improvements’ not adding value.

    • If used to pay off unsecured debts—dissipation (Diplock).

    • Money paid off into overdrawn bank account = dissipation (Bishopsgate Investment v Homan), form of unsecured d.

  • (2) property into hands of equity’s darling (bona fide purchaser for value without notice). Cannot trace if: (i) received property in good faith; (ii) no knowledge of breach; (iii) provided something of value. [[CF: can trace into innocent volunteer (no value/consideration); and into knowing recipient (knowledge of breach)]].

  • 3) Inequitability defence (Diplock): hospital spent money on improving pre-owned property; inequitable to allow a charge on the hospital; would have been enforceable by sale [[NB: amount claimed was disproportionately low to the value of whole property]].

    • NB: is a defence for (1) tracing claim; & (2) subrogation.

    • NB, Boscawen v Bajway, Millett LJ, restricts inequity defence: allowing the hospital to escape from proprietary claim is itself an inequity against the legatees who have lost their money; should be confined to circumstances of Diplock—charity using money to improve pre-existing property/pay off mortgage; low claim to value of property ratio; would mean having to sell off property.

  • + 4—change of position defence can defeat a subrogation claim

TRACING through a bank account

Unmixed funds

• C’s money paid into wrongdoer’s bank account—C has an equitable charge on bank account for the amount of money paid in (Re Hallett’s Estate).

• Payments made out of account: C can trace the funds back out of the account and into substitute property.

Mixed funds (1) C’s property mixed with T’s property:

• (1) Presumption of honesty, Re Hallett’s Estate: presumption that T spends own money first; T cannot deny he acted as a good T.

• (2) Rebutting presumption of honesty where rest of funds dissipated, Re Oatway: can rebut if works against B (shares went up in value, rest dissipated); honest T taken to have acquitted property for trust [[NB: in this case, the rest of the property had been completely dissipated]]

  • Turner v Jacob: Oatway rebuttal only applies if there’s been complete dissipation of everything else in bank account. [[but note: unusual case, family dispute; hadn’t been a deliberate breach of an express trust like Shalson and Hallet--> might have influenced court.

• (3) ‘Cherry picking’, Shalson v Russo: even if bank account contains enough to satisy C’s claim---B can choose to trace earlier payments out of account; everything is presumed against wrongdoer [[NB: only works if only contest is between beneficiary and wrongdoer]].

  • CF, Turner v Jacob, can only trace an earlier payment out if rest of fund is dissipated: cannot trace payment out if enough money left in account to satisfy C’s claim.

• Shalson VS Turner:

  • Both High Court.

  • academic approval of Shalson cherry picking; more in line with Foskett v McKeown, and dovetails with general rules of evidence (Armory v Delamirie)—that evidential uncertainty created by wrongdoing will be resolved against wrongdoer.

Deposit money in—T deposits their own money into account (having spent C’s)—mixed funds

• Lowest intermediate balance rule, Roscoe v Winder: wrongdoer deposits own assets into mixed fund --> assets belong to wrongdoer, not repaying B.

• UNLESS T shows clear intention to be repaying B (Roscoe v Winder): eg by repaying money into a separate account opened for the trust.

• Rule affirmed in Bishopsgate v Homan: if account is exhausted before deposit made, B cannot trace at all.

  • [+ also separate point: B money paid into overdrawn bank account = dissipation]].

• + applied in Re Goldcorp

Mixed funds (2)—funds of innocent parties mixed. C’s money mixed with another trust fund or innocent volunteer

• (deposit)Savings account:

  • Money in the account:--> two funds share the mixture rateably/pari passu (Re Diplock; Sinclair v Brougham).

  • same for payments made out of account, shared rateably

• Current account

  • First In, First Out (FIFO) (Re Clayton’s case): applied eg in Diplock, between trust & innocent contributor.

  • FIFO/Clayton still good law, but subject to contrary intention, which courts will easily find (Barlow Clowes v Vaughan), CA ---> apply pari passu instead: No FIFO if:

    • (1) Contrary to express/implied intentions of Claimants

    • (2) Impractical

    • (3) Would cause injustice

    • --> rateably/pari passu instead

    • [re an investment pool, was shared rateably, was regarded by the investors as a common pool].

  • Charity Commission v Framjee, Henderson J: Clayton’s FIFO rule still the ‘default rule’; but since Barlow FIFO can be displaced with ‘relative ease’; by even a ‘slight counterweight’--> Clayton’s now effectively the exception rather than the rule.

  • Russell-Cooke Trust v Prentis: didn’t apply FIFO re an investment pool.

• [NB, remember, Clayton’s/Barlow applies to claim between two (or more) beneficiaries, or between a beneficiary and innocent contributor: it does not apply between the beneficiaries and trustee with mixed funds (Re Hallett; Re Oatway rules apply there). So you might apply Hallett/Oatway rules as between the innocent funds & trustee’s; and THEN the above rules as between the innocent funds.

Proprietary claim

Property/sale still identifiable (rare):

• Where stolen property or its proceeds of sale can simply be followed—B can claim the property itself or claim the proceeds of sale.

(Unmixed) funds used to acquire substitute property

• Re Hallett’s Estate: can either:

  • (1) Take the property (a proportionate share = the whole amount since unmixed fund)

  • OR (2) equitable charge/lien over property for the full amount of money expended on its purchase.

  • [[if property has appreciated, C will take the property; if depreciated, charge and sue D for balance]].

  • [[applies regardless of whether the property is held by the original wrongdoer or an innocent volunteer]]

C’s property mixed with T’s, still in T’s bank account:

• C exercises charge (Re Hallett) over the account

C’s property mixed with T’s property to acquire asset

• Foskett v McKeown: same rules as Hallett (re unmixed funds) applies: either:

  • (1) take proportionate share of the asset (Foskett; Re Tilley’s WT

  • or (2) charge/lien (Re Hallett).

  • Lord Millett: B can choose freely [[if appreciated, C will probs take proportionate share]].

C’s property with mixed...