Trusts 5 Proprietary and Receipt-Based Claims

Principal Defence of an Equitable Proprietary Claim

That the purchase bought the asset without notice of the trust

Options when trustees misapply funds

Sue the trustee for breach of trust, sue the third party who assisted the breach of trust, make a claim against misapplied property or sue a third party who knowingly received the traceable proceeds of the breach

Principal Advantages of Equitable Proprietary Claims

1. Not affected by defendant’s bankruptcy or insolvency
2. Enables beneficiaries to capture increases in value of traceable proceeds
3. Does not depend on fault: it can be maintained against the defaulting trustee and against innocent recipients of the trust property or its traceable proceeds

Following

Process of “following the same asset as it moves form hand to hand”

Tracing

Process of “identifying a new asset as substitute for the old”

Claiming

The assertion of a personal or proprietary right in relation to misapplied trust property or its traceable proceeds

Diplock Conditions

Claimant can use following, tracing and claiming rules where: 1. they had a right or property recognised in equity in the asset and 2. the asset was held by a person who was in a fiduciary relationship with the claimant

Types of Mixed Funds

Wrongful and Innocent Mixture

Mixed Funds

Where misapplied trust money (or its traceable proceeds) is mixed with money derived from other sources

Wrongful Mixture

A mixed fund comprising misapplied trust money and the trustee’s own money

Innocent Mixture

Mixed fund comprising misapplied trust money and money derived from one or more innocent third parties

What assets can a beneficiary claim?

The misapplied trust property and assets purchased exclusively with misapplied trust money, purchased with a mixed fund or which have been improved or maintained using misapplied trust money

Types of Proprietary Claim

1. Claims beneficial ownership of the asset itself
2. claims a share of the asset
3. claims an equitable lien over the asset
4. Subrogation

Three models for tracing

Hallett, Oatway and Shalson

The Hallett Model

it is assumed that the trustee is paying out of her own money on investments which lose money and not the trust money

The Oatway Model

an investment in successful investments would be deemed to be an investment made out of the trust property

The Shalson Model

the beneficiary could attribute the trust money to the most profitable use made of the mixed fund (cherry-picking)

Cherry-Picking

In cases where the only contest is between the beneficiary and the trustee, the beneficiary can attribute the most profitable applications of the mixed fund to the trust money

Innocent Mixtures in a Current Bank Account

Have different rules to other withdrawals

Clayton’s Case

Established the first in first out rule

Barlow Clowes International Ltd v Vaughan

Disapplied Clayton’s Case where its application would be:

* Contrary to the intentions of the parties who contributed to the mixture
* Impracticable
* Unfair

Charity Commission for England and Wales v Framjee

Clayton’s Case may be displaced with relative ease in favour of a solution which produces a fair result

Alternative Methods to Clayton’s Case

Pari Passu ex Post Facto Method and the Rolling Charge Method

Claims on Innocent Parties

These can only be for a proportionate share of the asset

Claims where the breach has improved the trustee’s property

Little authority but it is suggested beneficiaries are entitled to either:

* an equitable lien
* a proportionate share of the asset

Subrogation

When one party takes on the legal rights of another, especially substituting one creditor for another

Boscawen v Bakwa

Beneficiaries can be subjugated to the mortgage lender security interests, treating the beneficiaries if they had lend that money to the trustee and allowing them to take a security interest over the Trustee’s House

Recipient Liability

Where the recipient of an asset can be liable to return the asset/ the value of the asset

El Ajou v Dollar Land Holdings (Requirements for a knowing recipient claim)

1. Misapplication of trust property or property holding another fiduciary capacity
2. Beneficial receipt by the defendant of the misapplied trust property or its traceable proceeds
3. knowledge on the part of the defendant that the property they received was misapplied trust property or its traceable proceeds

Trustor AB v Smallbone

“the receipt by the defendant should be for his own benefits or in his own rights, in the sense of setting up a title of his own to the property so received”

Agip (Africa) v Jackson

when money is paid to a bank to be credited to an account which is in credit, the bank does not receive the money beneficially

Uzinterimpex JSC v Standard Bank plc

Where a bank receives money into an account that is overdrawn, they may receive it beneficially depending on the extent of the debt

Re Montagu’s Settlement Trusts

The recipient of Misapplied trust property is not subject to a personal claim unless they had the requisite knowledge. If they dispose of the property or dissipate it before they acquire such knowledge, they do not incur any personal liability

Bank of Credit and Commerce International (Overseas) Ltd v Akindele

* Dishonesty is not a requirement for a knowing receipt claim, and 
* The recipient state of knowledge must be such as to make it unconscionable for him to retain the benefits of the receipt. 

Baden v Societe General

There is five types of knowledge:

* Actual knowledge. 
* Wilfully shutting ones eyes to the obvious. 
* Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make. 
* Knowledge of circumstances which would indicate the facts to an honest and reasonable man. 
* Knowledge of circumstances which would put an honest and reasonable man on inquiry. 

Armstrong v Winnington

Applied the Baden test to determine a recipient’s knowledge and whether to allow a claim