Proprietary claims and the liability of third parties

Breach of trust and third parties Personal and proprietary claims Anything the law recognises as property can be subject matter of a proprietary claims both tangible and intangibles (eg shares, bank accounts, debts) Assertion of beneficial ownership is where you claim property is kept on trust for you But also.. Property can be co-owned so claim beneficial co-ownership Can assert charge/lien proprietary interest as it is capable of binding transferees of the property and because it gives priority in bankruptcy For proprietary interest need to show subsisting interest (proprietary interest is equitable so will be defeated by anyone who acquired a legal interest in thos easts for value and without notice of your interest) Claim also extinguished if property destroyed Tracing ameliorates fragility of proprietary interests Personal claims assertions of personal rights. Every personal right mirrored by corresponding obligation so can order to do this eg pay Not money claims b/c 1. Doesnt need to be an obligation to pay over sum of money 2. Money can also be object of proprietary claim (personal claim for money-pay 100, proprietary claim if 100 destroyed, bona fide purchaser lose it) Establishing you had a proprietary claim, at least at some point, is crucial to some personal claims

Tracing -

Need to establish proprietary interests Original trusts assets which have been misapplied will continue to belong (beneficially and in equity) to B as long as not destroyed and subject to bona fide rule Rules of tracing mean can establish interest in assets not originally held in trust Clean substitutes simplest Can explain it by saying its about locating value of original trust property Every time trust asset misapplied B has option to follow it into hands of recipient or trace its value into property acquired in exchange How to show asset Dholds is yours: Show asset once held by T and missaplied Establish interest in sassest that was acquired by T in exchange for original asset

Why traceable substitutes allowed Good to know why claims allowed because by knowing what rules are there to do in the first place can help determine scope and content eg unjust enrichment purpose then rules shoulw reflect other unjust enrichment rules Idea that claims are founded on unjust enrichment if use B money to buy car, if keep it, unjustly enriched But doesnt hold up why if exchange car for shares, can get shares too since cant say unjust enrichment there ( I think you can. Only have car because of B, therefore only have shares because of B) But lords rejected said tracing wasnt about unjust enrichment Foskett v McKoewn [2001]

Or Because benefits of beneficial interest is fact that you are the only one who can use that property to aquire new property. So others shouldnt be able to do that so we ensure that only B benefits from exchanges (cant you also argue here that unclear why later substitutes are covered?)

Prerequisites to tracing Relevant fiduciary relationship Common law had own rules of tracing that were narrower So C tried hard to show any fiduciary relationship to take adv of general equitable rules Courts allowed them to extend ambit of fiduciary relationships where though claims meritorious Eg Chase Manhattan bank v Israel British Bank [1981] Position changing Some say common law and equity rules should be same Some say are same, courts misinterpreting case law Also Lord Brown-wilkinson dictum in westdeutche landesbank grozentral v Islington Lonodn Borough Council [1996] said thief holds stolen property on constructive trusts for victim allows application of equitable tracing rules Odd because thief usually acquires no rights Although Solves problem of victim of theft being in worse position than a B whose property is misapplied If view takes hold basically no difference between common law and equity rules Also supports view that pre-existing fiduciary relationship not needed Another argumenet: if we allow C to trace into property acquired with their money under law ofresukting trusts evenw hen no fiduciairy relationships why not other contexts too?

Proprietary claims Popular to distinguish between rules for following + tracing and claiming But cases make no distinction Usually unclear which are identification rules and which are claiming rules So wont try to keep separate

Following trust property Where trust property mixed with innocent partys property entitled to share of moisture proportionate to contribution If mixed with wrong-doer some argument that entitled to all But likelihood that again proportionate though when some lost or withdrawn likely that can say that is only taken out of wrong-doer or trustee Where physical mistures when innocent contributor split propotionatly, where wrong doer contributer some support that all goes to B but likilehood wond and will also be proportionate Where impossible to retuten Bs contribution to finished product cant say original asset exchanged for another (eg paint on car) so likely that where other property is wrong-doers- entitled to whole and where other is innocent, split proportionately like in rules of tracing (can imagine loads of difficulties. Eg where wrong doer property far outweigh in value eg car + paint or how to get value out of innocent party without making them sell whole good or somehow interfere with their inetrets?) BUT practical difficulties meant court didnt adopt this in Borden

Claims based on tracing Clean substations cases easy Mixed more complicated Foskett v Mckeown [2001] HL B has choice in how to claim Claim a share of substitute proportionate to his contribution Do this when substitute rose in value because can get more than put in Lord Millett suggested that B should get all profit, not just proportion of it Claim charge on the substitute to the value of his contribution Do this when fallen in value because get full amount you put in and dont end up with proportion of reduced value Though when value fallen below contribution, entitled only to what value it does raise though shortfall can be recoverd by a personal claim against the trustee for breach of trust. I think reason dont always do this is because no point. May as well bring claim that the most beneficial straight away then say ask for proprotiona and then claim for shorfaal why bother. When value stay same, doesnt matter Provides choice in order to prefer B because innocent But this choice only available where other mixers are wrong-doers when innocent, only proportionate Whether get this choice and so this preferential treatment depends on who contributed to exchange, not who hold property now. So if give it for no value to someone who doesnt know of breach can still choose because wrongdoers property is the one mixed in it

Tracing in an out of bank accounts Can follow the money into hands of bank (likely to fail because bona fide purchase return is promise to pay back with interest) Can trace its value into account holders right to payment from bank Gets complicated when money withdrawn or transferred from account

Bank account where all contributors are innocent First in first out rule ^ only applies to bank accounts (suggestion that only current accounts too) Easy and convenient to apply Unfair results sometimes depends on fortuitous ordering of deposits and withdrawals Severe criticism Seems to be on way out CA Barlow Clowes International Ltd v Vaghan [1992] Said it was default rule But sometime wouldnt be applied Rule wont apply where it was the intention of the contributors to the account. so where intended it to be a common fund (as in this case_ Woolf J wouldnt apply where impracticable or result in injustice (probably would never apply then) Dillon LJ and Leggatt LJ did not go that far but did say didnt like rule In Russell-Cooke Trust co v Prentis [2002] Lindasy J showed support for Woolf saying it was more the exception than the rule

2 alternatives then Simple pari passu add up total contributions irrespective of when made and deduct losses proportionately rough justice but simple and less costly CA preferred it in Barlows Rolling pari passu at each stage, account treated as a fund in which contributors have a share proportionate to contributions Woolf and Legatt in Barlows said it was fairer and more coherent approach. But can sometimes be too complex and costly Will usually apply rolling rule when small number of deposits and withdrawals

Bank accounts where one contributor is wrong doer Mix of money and withdrawals If first in first out, could potentially lose all though can get compensation for breach of trust s Simple pari passu would better but still just give proportion CA Re Halletts Estate [1880] Presumption that T spends own money first Can still result in problems Re Oatway [1903] say T mixes, withdraws then bank balance 0 but at some point bought shares which by ordering was with his own money- so has shares of value rules above leave B with nothing B can cherry pick which withdrawals to be his and which the trustees Argued that doesnt give V anything more than a charge against the property so acquired up to the value of his contribution But it should follow that he can claim a beneficial interest in that property proportionate to his contribution Last q: Does ability to cherry pick only come up when re halletts estate woul give unjust result? (example of there still being money in account but also being shares bought which have increased in value) Turner v Jacob [2006] 0 Re hallett presumption applies get money Argument to still be able to cherry pick- some judges support and seems more in keeping with analogous situation of physical mixtures (how? There there is also likliehood it will be done proportionately. Probably only allow to take all when not possible to separate value or too difficult eg paint on car maybe car increases in value because of paint but how much? I suppose actually wouldnt be that difficult to figure out) I dont think it would be fair to allow this. Essentially rewarding B for having his trust money misappropriated? Why do this? Perhaps could base argument on fact that T may have not been able to make investments had he not had Bs money. Eg at the time of the investment, used Bs money and couldnt have made investment later because opportunity would have gone. But this is not the reasoning here. At it would have to be a very fact specific rule which may not be advisable Lowest intermediate balance rule Bs interest effectively capped at lowest balance of the account in the period between the deposit of the trust money and date of Bs claim this is the rule that means ifaccount was overdrawn at any period B will have no proprietary claim at all (does this only apply to unauthorised overdrafts?) - rule set down in James Roscoe (Bolton) Lts v Winder [1915] and endorsed by CA in Bishopsgate Investment Management v human [1995] Means even if money putin later B still cant claim unless T meant it reconstitute payments but almost never will

Tracing through payment of a debt

Backwards tracing Idea that paying off debt should be end of tracing process Should be able to trace into property acquired when debt created and was the paid off with trust money Idea that exchange just delayed because acquire car first and later pay fully when pay off debt and that that shouldnt matter Argument examined in Bishopsgate Investment management Ltd v Homan [1995] No ultimate answer Vinelott J (at first instance) can do it either when 1. debt acquired with intention to pay off with trust money or o BUT why is intention relevant? Tracing not about intention but an exercise in identifying property 2. Trust money paid in to free up overdraft limit which is then used to acquire property o BUT doesnt seem to be example of backward tracing its another debt being taken on and only being taken on because trust money gives that possibility. But cant say it was an exchange in any way Dillon J of CA endorsed Vinelott J Leggatt J said impossible Henry LJ agreed with both of above Could make argument that every contract for sale is essentially paying off debt (lecture) so technically all backward tracing and if backward tracing not allowed, no tracing allowed Sometimes seem to have allowed it but without saying it Agip(Africa) Ltd v Jackson [1990]

Subrogation Ability to acquire creditors right to claim debt from T 2 distinct advantages for doing this (beyond getting money since technically already had that right) 1. Allows B to bring a claim against a a party where otherwise none would lie trust money held and used by an innocent done to pay off debt (usually no claim against debtor because not a knowing recipient) (dont understand) 2. Where T or some subsequent recipient uses trust money to pay off debt which is secured by mortgage or charge subrogation allows B to basically get same right the building or banks held against T as mortgagee B has proprietary claim (with all added benefits of that)(so what about the bank?)

Tracing and swollen assets theory Ability to trace into assets of innocent recipient of trustee money if can show used trust money for something he would have bought anyway eg bills, tax Because otherwise unjustly enriched Some judicial support Lord Templemn in Space Investments Ltd v Candian Imperial Bank of Commerce Trust co (Bahamas) [1986] Recently courts have moved away from this again - bishopsgate Rightly so because why can you do this for innocent recipients but then can if debt paid off by wrongdoer? Same enrichment. Would have had to pay it off anyway

Trust money spent improving, maintaining or repairing property Exchange occurs money for labour

Case law unclear about whether can trace into property on which work performed Foskett v McKeown [2001] Lord Brown Wilkinson - suggested B will have a charge against that property securing repayment of trust money spent on it Irrespective of whether increased value Where improves innocent partys property suggestion no claim Re Diplock [1948] 2 lines of reasoning 1. Money may have not added any value so money generates no traceable proceeds o BUT doesnt explain why cant trace where there is increase o Argumenty that should get increase, capped at total trust money spent 2. If tracing were possible it would be unfair to innocent party to require hms to sell his property to make good Bs claim o In this case would have been unfair to have to get rid of land o In Boscawen v Bajwa [1996] suggested that should have just delayed requirement to pay until innocent had chance to do it o Foskett v mcKeown endorsed Re Diplock case though that no proprietary interest should be awarded to B where trust money used to improve pr maintain another innocent persons property if granting such interest would be unfair.

Change of position Defence developed in unjust enrichment claims Idea that if got money innocently, and spent it on something that you otherwise wouldnt have bought, should have to give it back because would leave you out of pocket Could have applied it in Re Diplock charity made improvements to property that otherwise wouldnt have done Even if value increased. Because would have had to sell land to get the value back which would have prejudiced them Controversial idea Foskett v Mckeown seems to have rejected it because rejected idea that claims based on tracing were founded on unjust enrichment but Millett K has said extra-judicially that he did not intend to shut door to development of change of position defence in these cases so status unclear

Knowing receipt not dependent on continued retention of property personal claim for way he conducted while property in possession knowing receipt is claim based on wrong-doing broader than proprietary claim b/c dont need to retain narrower because liability requires fault B can bring both proprietary claim and claim in knowing receipt

Elements of knowing receipt claim Conduct requirement Fault requirement No claim is D bona fide purchase of value without notice or if at some point passed through bona fide B needs to show that D received an asset which either 1. Was originally help and misapplied by T on trust for the beneficiary;

OR
2. Is a traceable substitute of an asset originally held and misapplied by trustee Requirement that property was received by D for his own use and benefit Means those who receive property on behalf of and so hold it only for the benefit of someone else are excluded from liability Sometimes referred to as cases of ministerial receipt Unclear why should not be liable Means knew property from breach but still handed it to his principal Would make sense if knowing receipt was about unjust enrichment but its not, its about wrongdoing Courts attached to wrongdoing analysis

Necessary level of knowledge Cases conflicting Bank of Credit and Commercial International (oversees) Ltd v Akindele [2001] Noted mess and the need for clear definition Court must ask whether D knew of the breach Then ask if unconscionable for him to keep benefits Akindele test weak because doesnt tell us what facts and what sort of knowledge is needed to support finding of unconscionability Saying something is unfair is not an answer because still dont know why Unhelpful especially in borderline cases where good arguments on both sides Can explain any number of alternative approaches or levels of fault Dont know if need actual knowledge or constructive knowledge Unconscionability does not describe a precise state of mind needed for liability to arise Only argument in support is that gives court more discretion to do justice to the specific facts Possible arbitrariness and injustice But maybe need discretion in this area? The stricter the standard, the more risk for those receiving property so need to make more inquiries Could be to detriment of commercial parties But would invoke higher standards More protection for B and trusts Good arguments on both sides Just because difficult to create standard in light of this doesnt mean courts should give up Benefit for flexibility can invoke different standard for commercial parties to not disrupt business but why water down for them? And wouldnt apply in slow transactions Even if did it, would just end up needing to frame 2 standards Knowledge can occur at any time, doesnt have to be at receipt Also distinguish question of whether a bona fide purchaser without notice and question of knowing receipt (because of problems with knowing receipt)

Justifying personal claims against recipients of trust property Argument that can justify personal claims against recipients of trust property on unjust enrichment and so whether or not acting wrongly is irrelevant should be liable to give up benefits because benefits only for beneficiary Means ok to impose liability on completely innocent person Argument matters because why we attach liability affects remedies available

E.g. if strict should only force D to give up any benefits he retains from receipt so limited to extent of his continued unjust enrichment Making argument that : Strict liability not harsh if you are just made to give up what you never should have had and you are left in same position as if nothing had happened But if spent on something you wouldnt otherwise have done should be able to use defence of change of position. Would mirror common law where non-trust property is transferred by mistake, under coercion or on a condition which fails Argument that strict liability should attach to recipients of trust property gains only minimal support from case law Just some obiter Lord Millett Twinsectra But in Westdeutch Browne- Wilkinson supported tradition view in obiter All direct authorities support fault based approach But if approach based on principle then neither here nor there with answer Arguments against strict liability 1. Akindele Nourse LJ would shift burden onto D to show change of position as defence. Otherwise B would have to prove that he received trust property and he had necessary knowledge. Easier for B to establish prima facie case, so more hassle for D to defend. 2. Difficulty of proving that wouldnt have otherwise spent that money on eg a holiday. So could fail just because of evidence 3. Receipt of trust property not the same as receipt of mistakenly transferred non-trust property so analogy misplaced. Because o Differences between legal beneficial title and equitable beneficial title o Can receipt of trust property properly be talked within framework of unjust enrichment? (why not?) Arguments in response to ^^^ 1. There is also the bona fide purchaser without notice defence which is a lot easier to satisify. So only small minority of innocent donees will be caught just because small amount of people affected is not a defence 2. In common law, defence of change of position has worked well. Courts have been conscious of difficult to prove so evidential burden not that high and have been sympathetic. So if not unworkable with common law, why not equity 3. Yes beneficial and legal title different. But when D received trust property,. He derives benefit from it by virtue of his equitable beneficial interest, is reserved for B Justifies why should give it up, whether or not he has any knowledge Basically ultimately good for B to have proprietary interest in trust assets which is why we should support introduction of strict personal liability

Dishonest assistance Based on wrongdoing Helping or procuring the trustee to breach his trust obligations So accessory or secondary liability Elements 1. Conduct element assist or procure breach Not much case law on what sort of participation Procure = encouragement or direction

2. Dishonesty -

Borderline assistance difficult Brinks Ltd v Abu-Saleh (no 3) [1996] going in car when driving cash out of country not breach because acting in capacity of wife, not helping if dishonest third party engineers breach though innocent and unwitting trustee counts as assistance doesnt matter what type of duty breached by trustee covers those who subsequently helped cover up Fault element D did it dishonestly

Used to be loads of confusion about what it meant Appeared to have been fixed by Royal Brunei Airlines Sdn Bhd v Tan [1995] question is is it dishonest to do what the defendant did given what he knew and believed at the time? So subjective element is precursor to objective element Matter than confused again: HL Twinsectra [2002]- detailed examination of dishonesty test Leading judgement Lord Hutton combined test 1. Objective test: would honest and reasonable people view the defendant conduct as dishonest? 2. Subjective test: did the defendant realise that honest and reasonable people would view his conduct as dishonest? Need to answer yes to both Lord Hutton thought this was he test meant in Tan even though Lord Nicholls never mentioned need for D to realise conduct dishonest by standards of others Said second q important because of how serious it is to find that someone as dishonest o Getting things the wrong way round. Attach the label because conduct is dishonest, if the label is a problem, change that Lord Millett dissented on that issue said fact that constituted intentional wrongdoing should be sufficient o While true that civil law prepared to find fault and liability where criminal doesnt, doesnt mean it should be concerned with genuine moral wrongdoing Ultimately, good reason to drop combined test is because of the requirement that D realise he is transgressing standards of honesty held by honest and reasonable people even if court doesnt just take word for it, there is a route for wrongdoers to escape but thats the case everywhere But should be particularly ware of giving defendant this opportunity of avoiding liability, if the requirement makes little or no moral difference to the case against the D Issues In Twinsectra seems to be assumed by all that genuine moral fault requires consciousness that you are breaching standards of honest and reasonable people. but why? What of those people who think their actions still acceptable or dont know of standards? Also confusing meaning of subjective and objective fault or MR in general law or criminal law. Subjective usually means eD either knew or ought to have known that actions were wrong morally or legally. Dont need them to be actually aware or actually accept that fact. Reality is that fault requirement is subjective but standard applied is objective objective because standard applied whether D likes it or not Barlow Clowes [2005] seems to have now gone correct way Disingenuously said that no real difference between Nicholls in Tan and Hutton

Affirmed that only test is whether D given what he knew, was dishonest by standards of honest and reasonable people Privy council case so technically Twinsectra still law But if believe it just clarifies rather than changes, then no issue Additional point that dont need to know of specific goings on for dishonest assistance, just need to know somehow misappropriating money or property

A return to knowing assistance? Lord Hoffman Barlow Clowes finding of dishonest depends and derives from Ds knowing or suspecting that he was participating in or assisting a breach of trust or other unlawful scheme Unresolved issue How is this requirement of dishonest and different from requirement of knowledge Lord Millett in Twinsectra dissenting thought no difference between such formulations Issue that dishonesty is not a fact but knowledge is. Dishonesty doesnt help us unless its basically knowledge but then why have dishonesty as a concept brought in at all? Lord Nicholls in Tan thought dishonest formulation avoided difficulties in required level of knowledge But dishonest depends on what D knew so again back to knowledge Maybe better to just drop dishonesty Courts seem to be doing that Only benefit of dishonest is where we think breach doesnt merit liability eg judicious breach Maybe even if he did it misguidingly, may still feel doesnt warrant liability Possible solution: Frame fault requirement in terms of intention and/or reckless rather than knowledge (acting contrary to beneficiarys interest is a precise state of mine) So what are the issues with this?

Combining claims Can combine claims as long as 1. They dont lead to double recovery o So can get compensation from say trustee and dishonest assistance but cant claim in full against both for same thing o Also if trustee makes gain and B loss from breach cant get both full compensation and full gains 2. They are not mutually inconsistent o For instance following shares and also tracing into money that was received for those shares Only needs to make choice after judgement is given and knows what will recover Suggested that where T misapplied property, B cant combine personal claim against trustee for compensation wile a claim, whether proprietary or in knowing receipt , dependent on tracing Explanation when trace into property, essentially adopting transaction and therefore if (say a car) care loses value, cant then claim loss in value from T because already got car and logically that was the transaction adopted (and pretending it was authorised) If did it, would inconsistent and incompatible claims Air of unreality In Foskett v Mckeown HL view was that being able to trace was not about authorising a transaction but was a consequence of a beneficiary equitable beneficial interest in trust property

Accordingly, CAN claim title to traceable proceeds of misapplied trust assets and claim from his trustee or third party wrong doer, for any compensation for remaining loss caused by breach