Proprietary Remedies

benefits of proprietary remedies

- traceable and has protections from insolvency

-allows the beneficiary to take the uplifting value of the property

- The increase in value will accrue to the beneficiary if the beneficiary has ownership (full beneficial interest in property)

only applies if the remedy is not a charge

requirements for a proprietary claim

1. proprietary base (Right)

2. rules of following

3. claim

4. no defence

Following

following a particular property through the hands of different defendants

tracing

the identification of value is substitute assets → e.g. holding a house on trust → swap it for a boat → swap it for a car

- The claimant can trace the value of the house into the car and get an equitable interest in the car

Claim

beneficiary asserts their rights in a particular asset

what are the two defences

1. bona fide purchase for value without notice

2. change of position

Foskett v McKeown

facts: Murphy had a life insurance policy of £1mil and to maintain it he had to pay a £10k/year premium, he paid 3 premiums with his own money and 2 with trust money, when he died the beneficiaries of the trust argue they should be entitled to 2/5 of the £1 mil rather than £20k

decision: they were entitled to 2/5 as they had a proprietary base and it was not possible to follow the money from the premium so it had to be traced to the insurance payout

what did the minority in Foskett think?

- the beneficiary's property was used to maintain an asset rather than to buy a new one

- It is unfair to give a constructive trust in these scenarios and the remedy should be limited to a charge

why was there no defence of bona fide purchaser in Foskett?

The children were volunteers and received a gift, so there was no defence of being a bona fide purchaser

choice within following

Where one asset is exchanged for another, the 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

mixture

mixing a claimant's asset with a new asset

why is mixing problematic

it is hard to distinguish between a claimant's asset and another's (indistinguishable mixture)

what happens when the mixing is done innocently

a tenancy in common arises over the mixture

what happens when the mixing is not innocent

the property belongs entirely to the innocent party

diffusion debate

whether equity and law should have one set of rules for tracing and mixing

Jones v De Marchant

facts: a husband made a coat made out of 18 of his own beaver skins and 4 of his wife's and gave it to his mistress

Decision: the coat belonged to the wife because the mixing was not done innocently

- since you cannot separate the beaver skins, she would have a claim to the value of 4 skins

Lord Millet in Foskett

tracing is a process used to show how a claimant's interest in one asset moves to another asset

equitable rule in tracing

everything is presumed against the wrongdoing trustee and in favour of the innocent beneficiary

Re Hallet's Estate

the presumption that the wrongdoing trustee pays away their own money first

Re Oatway

the presumption that the trustee spends the beneficiary's money first

Cherry picking (Shalson v Russo)

Beneficiary can choose whether to rely on Hallet or Oatway

gives the beneficiary the most security

- some argue cherry picking gives beneficiaries too much protection

Turner v Jacob

beneficiaries should not be able to cherry-pick when it would allow them to trace into a purchased asset in situations where there is enough money left to satisfy their claim

Clayton's case

The money that was first put into the account is the money that is first taken out of the account

Barlow Clowes International

first in first out was only a presumption which could be rebutted either because the intentions of the parties point to a different result or because the rule is impractical

Alternative → Every time money leaves the fund, you have to recalculate what the proportions are

- this was hard to apply in this case as there were multiple investors so the money was just distributed equally

Limitations of Tracing

If the property has been dissipated, there is no specific property into which the claimant can trace so there is no proprietary claim

Roscoe v Winder

facts: purchaser collected debts and held it on trust for the seller, the purchaser paid £455 into a private account and spent it until £25 was left, the account then went back up to £350 and the seller wanted a charge over it

decision: the charge could only be set up to £25 as the lowest intermediate balance of the account

The beneficiary's money was dissipated and the new money added in was not trust money, so the beneficiary has no claim to it

criticisms of Roscoe

when the money goes back up, the trustee may have been doing this to restore the trust fund to the appropriate money → therefore, the money should belong to the beneficiary

backwards tracing

tracing through a debt

- not possible

why is backwards tracing not possible

the debt is held by a creditor acting in good faith — they have the defence of bona fide purchase for value without notice

reason for rejecting backwards tracing

most judges object to backwards tracing because it might give too much protection to beneficiaries at the expense of other unsecured creditors

Brazil v Durant

backwards tracing is allowed but there are some requirements:

1. close, causal, transactional link

2. coordination between the depletion of the trust fund and the acquisition of the asset

Serious Fraud Office v Hotel Portfolie

Brazil v Durant is an exception to the rule that backwards tracing is not possible and should be interpreted very narrowly

what are the 3 proprietary remedies

1. Constructive trust (beneficial interest under a trust)

2. Equitable charge/lien

3. Subrogation

define equitable charge/lien

a certain value which secures your interest over the property up to a certain value → not akin to ownership

define subrogation

stepping into someone's shoes

when would a constructive trust arise

If the asset is bought exclusively with the beneficiary's money, the asset will belong to the beneficiary under a constructive trust

Recognise rights in the asset and beneficial interest in it

Foskett anf McKeown exmaple of a constructive trust arising

- trustee wrongfully takes £2 from trust fund and buys lottery tickets and wins millions

- assume everything against wrongdoing trustee

- B can trace into the lottery ticket and payout

- because B exclusively owned the £2, they exclusively own the payout

criticisms of the Foskett example

Some people think this approach is too harsh, especially when the trustee is not a wrongdoer and made an innocent mistake without acting in bad faith, especially since the s61 Trustee act only applies to personal and not proprietary claims

asset purchased through a mixed fund

- intially, it was thought the remedy would be an equitable charge/lien

- election → trustees can elect a constructive trust or charge

T Uses Trust Money to Pay a Debt which is Secured on T's Asset

- e.g. trustee uses trust money to pay off a mortgage

- T cannot say B is a bona fide purchaser

- remedy is B being subrogated to the rights of the bank through an operation of law

Kevin Grey

"operation of magic" the charge the bank had, which was paid off, springs back to life, and it is now a charge in favour of the beneficiary

Happens regardless of the intention of the parties

subrogation rule + what does this mean

The person who gets subrogation (subrogated to the discharged debtor's right) cannot be in a better position than the debtor

- if the house goes up in value, B cannot claim for the increase in value and only gets the value of the property taken away from the trust fund

Boscawen v Bajwa

LJ Millet justifies subrogation as without it the trustee would be unjustly enriched → has a property without any mortgage over it

bona fide purchaser for value without notice

Where a defendant has purchased legal title to a property and provided value for that purchase and did not have notice of the claimant's equitable interest, they take the property free from the claimant's equitable proprietary interest

value?

The value the purchaser gives can be value of any source → e.g. discharging a debt

when can you not rely on the bona fide purchaser defence?

if the defendant would have discovered the beneficiary's equitable rights if they had taken reasonable steps to investigate them, then equity would say that the person was not acting in good faith and cannot rely on the defence

Independent Trustee Services Ltd v GP Noble

facts: Mr Norris agreed to pay a lump sum amount of £1.5 mil in a divorce proceeding, Mrs Norris suspected he hid some wealth so she asked the judge to set aside the court order. She found that her husband was taking money in breach from different pension schemes and the trustees who had be defrauded wanted to trace into her £1.5mil

decision: at the time of recipet, Mrs Norris was a bona fide purchaser for value w/o notice, however at the time of the claim the consent order had been set aside so the defence could not apply

- she was holding the money on constructive trust

Credit Agricole Corporation and Investment Bank v Papadimitriou

facts: the proceeds of sale of an antique were misapplied in breach of trust

decision: since the money was laundered, through several countries, the bank ought to have made enquiries before the transaction, since they did not they cannot say they were without notice

Change of position

when you do something you would not ordinarily have done

- partial defence

- requires good faith

What is the purpose of the change of position defence?

protects the principle of security of receipt → if you receive property you want to be able to trust you can use the property

Re Diplock

facts: executor's of a will mistakenly paid money to a hospital and the hospital used it

deicison: hospital had the defence of change of position

equitable allowance

there is a possibility that the court should recognise an equitable allowance when the defendant has used labour/skill to acquire an asset and there is no defence of change of position or bona fide purchaser,