#2538 - Tracing - Trusts and Equity

Proprietary Remedies: Following and Tracing

Proprietary Remedies

Advantages:

(i) Gives C priority over unsecured creditors in the case of D’s insolvency; and

(ii) Potentially it may also give access to increases in value of the asset claimed because you are claiming that that asset is yours, i.e. land goes up in value. E.g. In AG v. Reid the land was worth more than the bribes.

Proprietary remedies may take one of two forms:

(i) recovery of property in rem held by D, or of its exchange product in D’s hands; or

(ii) a security interest (e.g. a lien) over property held by the defendant. Appropriate where the property you are tracing is mixed with other property, so you cannot claim the whole asset, but only part as it represents some of your property.

Both forms of remedy give priority over unsecured creditors, but only recovery of property in rem gives access to increases in the value of the property. Both forms of remedy are defeated by the dissipation of the asset.

Personal Remedies

By contrast, personal remedies give neither priority over unsecured creditors in the case of insolvency, nor access to increases in value (they are for someone owed, not owned). It is really a monetary (liquidated or unliquidated sum) claim. They may however, be of particular utility where assets received by the defendant have declined in value; dissipation of assets will not defeat a personal remedy.

Personal remedies may be restitutionary - assessed by reference to the value of what D has received (e.g. an account for unauthorised profits/unjust enrichment based on the gain made – e.g. fiduciaries), or they may be compensatory, that is, assessed according to the loss suffered by the claimant (e.g. an action to restore the trust fund following unauthorised disbursements or an action for equitable compensation).

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Definitions

‘Tracing’: The general consensus is that tracing is not an independent, free standing cause of action. It is not a right or claim to trace. It is an evidential process/a mechanism to enable you to identify property. It is an equitable proprietary claim, a process of tracing and then an equitable proprietary remedy. After the process is complete the Bs may be able to make a claim.

+ Smith: Tracing ‘is not a right but an exercise’. Tracing gets you from A to B, to prove that property is yours.

• Foskett v. McKeown [2001];

+ Lord Millett: ‘Tracing is… neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the person who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property’.

‘Following’: Identification of C’s property may involve tracing into its value, or into its exchange product (i.e. a substitute asset); it may also involve following the property itself in the hands of third parties (identify your property as it passes).

Distinction:

• Foskett v. McKeown [2001];

+ Lord Millett: Following and tracing are, ‘both exercises in locating assets which are or may be taken to represent an asset belonging to the [Cs] and to which they asset 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.’

Problem Question Model of Analysis

• Foskett v. McKeown [2001]; concerned a claim brought by the beneficiaries of an express trust (prospective purchasers of property in Portugal).

Facts: Murphy paid for building of properties in Portugal. He set up an express trust so that he held money for potential purchasers (2.6million). Foskett was one of the prospective purchasers, so a beneficiary. Murphy set up a life assurance in 1986 policy on his own life, the Bs of which were his children. Annual premiums had to be paid – paid first three annual payments himself, but then stole 20,000 from trust to meet the next two premiums. He committed suicide and the life assurance policy paid death benefits to his children of 1million.

Bs claimed/raised an equitable proprietary claim. Claimed the money used to pay the premiums was theirs, and so they traced into the death benefit and so the remedy was that they should get 2/5 of the 1million. Children argued there should just be a lien over the property for the 20,000 stolen.

Decision: H of L held in favour of Bs 3:2.

Whose trustee had misappropriated their trust moneys, using them to meet two out of five annual premiums paid on a life assurance policy. When the trustee died, the beneficiaries successfully claimed a proportionate (i.e. 40%) share of the million pound death benefit paid out under the terms of the policy to the trustee’s children.

(1) CLAIM

Birks argued where a T mixes trust money with his own to purchase an asset with mixed funds the claim should not be proprietary, it should be personal only. H of L rejected.

The House of Lords accepted that the beneficiaries had an equitable property right in the money which were misappropriated and used to meet the two premiums. The trust money belonged in equity to the Bs. Was very clearly a property claim.

Per Lord Browne-Wilkinson at p. 108: “The crucial factor in this case is to appreciate that the purchasers are claiming a proprietary interest in the policy moneys and that such proprietary interest is not dependent on any discretion vested in the court. Nor is the purchasers’ claim based on unjust enrichment. It is based on the assertion by the purchasers of their equitable proprietary interest in identified property.” It is a case of “hard nosed property rights”.

(2) PROCESS

The beneficiaries’ money which was used to pay the two premiums was traced first into the insurance policy itself (which HL treated as an asset held by the trustee, taking the form of a chose in action) and thence into the death benefit paid out under the policy, which was followed into the hands of the children. Analysed like money mixed in a bank account – said life assurance claim is like a chose in action; so they could trace B’s money into the policy. Then traced from policy into death benefit (simple exchange of products). Then followed the death benefit into the hands of the children (who were the Ds).

The processes of tracing and following were held to involve attributing value, i.e. ascertaining whether the value of the claimant’s property can be identified in the substitute property. In the words of Lord Millett, “the question is one of attribution not causation” (p. 137) – children tried to argue there was no causation because the 1million would have paid given to them even if the last 2 payments had not been made. Millett said no – so held 2/5 – 3/5.

Per Lord Millett at p. 127: “The claimant succeeds… by virtue of his own title, not to reverse unjust enrichment. Property rights are determined by fixed and settled principles. They are not discretionary, they do not depend upon ideas of what is ‘fair, just and reasonable’. Such concepts… have no place in the law of property.”

(3) REMEDY

Proprietary remedy – was it a lien over the death benefit or was it actually recovery of their share of the asset themselves (400,000 – 2/5). Hoffman, Millett and BW were the majority. Held claimants have a choice of lien or the proportionate share.

Minority, Lords Steyn and Hope, only wanted to give them a lien.

It was held that, in a case like this where the beneficiaries’ money can be traced into an asset held by the trustee, the beneficiaries may elect between the remedy of a lien over that asset of the amount of their money or recovery of a proportionate share of the asset. In this case (the death benefit being worth much more than the sum of the premiums) the latter remedy was preferable. Hence they recovered two-fifths of the death benefit (400,000).

(4) DEFENCES?

No defence because they were volunteer recipients.

The children, being volunteers who had given no value in exchange for the death benefit, were unable to raise the defence of bona fide purchase.

• Lipkin; H of L decision concerning a partner in a solicitors firm called Mr Cass. He was an authorized signatory of Lipkin’s account with the solicitor firms. He withdrew large sums of money from their client account and placed the money in bets at a casino. He lost lots to the gambling club and become irrecoverable. Claim was framed at common law – Lipkin’s clients were the equitable owners of the money in the client account. A bank account is the debt owed to you – Lipkin showed bank owed by the debt to them in common law. Legal title passed to Mr Cass. Common law claim was traced into the money his withdrew, and followed into the third party gambling club. Lipkin clearly had a common law proprietary right (a chose in action) but the H of L gave a personal remedy. Held the gambling club personally liable to account to Lipkin for the net amount of money they received (reduced the remedy by the winnings made). It was not a proprietary remedy. Personal remedies are the norm at common law.

NB. There are common law cases of tracing, but I only need know those rules as a point of comparison with the equitable tracing.

1. The Claim – Identifying the Proprietary Interest

(i) Excursus: the requirement of a fiduciary relationship?

Rule: In order for a proprietary claim to lie in equity, the C must not only demonstrate that she has an equitable proprietary interest but also the...