Remedies agaisnt third parties (and claim agaisnt T; tracing) > Trust law > FINISH, REWAD AHEAD

Personal v propreitary

Prop claims are fragile

• claim is destroyed if asset is destroyed

• claim is destroyed if goes through hands of bonafide purchaser
  
  

Personal claims are usually compensation (monetary value)

• Dont need the asset to still exist

• dont get insolvency priority

Proprietary claim > against TP

If T has misapplied the trust asset and it ends up with someone else, if B STILL has beneficial title, they can recover it from TP.

• Test > Does B still have equitable title?

Prop claims fail when:

Bona Fide Purchaser rule extinguishes B’s beneficial title.

Trust property is overrreached > LPA 1925, two or more trustees or trust corporation sell the land to a buyer

What is a Bona Fide Purchaser

A third party who:

• Gives value AND

• Does not have notice/knowlede that the property comes from a breached trust.

If fulfilled > B’s title is extinguished and TP has beneficial and legal title.

Later recipients of the misapplied asset (so ie if the TP passes it on) will ALSO be protected by this rule.

• UNLESS it comes back to the trustee

What is tracing?

The BFP rules limits what can be counted as trust property

Tracing rules EXPAND what can be counted as trust property

Tracing

Tracing looks to what was acquired in return for trust assets (looking at exchanges & substitutions)

Can be referred to following the VALUE of the trust asset

Once identifying this substitute asset, B has a claim to the submitted asset (or a portion of it, if acquired by mixed funds)

Following

Following trust assets as the pass from person to person.

It identified the physical trust asset as it changes hands.

Rationales to tracing

1. Unjust enrichment (academic view) Letting the trustee keep the car would unjustly enrich them at your expense, so you get the car instead. Problem: this gets strained when assets are swapped multiple times, and the House of Lords rejected this in Foskett v McKeown [2001].

• alos weak when applied to TP
  

2. "That's just how property works" (House of Lords view) The Lords said tracing is simply a matter of property law — if you own something, you're entitled to whatever it's exchanged for. Problem: this is basically no explanation at all.

3. Beneficial interest includes the right to exploit the asset (preferred academic view) This is the most convincing argument. If you're the beneficial owner of an asset, you alone are entitled to all benefits that flow from it — including the benefit of exchanging it for something else. So when a substitute asset is acquired using your property, you should get that too, because exploiting the asset was always your right.

• I agree, most rational justification

Dishonest Assistance

Dishonest assister commits own wrong, though accessory or ancillary to another breach by T 

• Accessory liability

Remedies

• compensation for losses

• disgorgment of gains

NB > Can be before or subsequent to the breach
- so those who are involved in the further disipersla of the funds AFTER the breach was sone can be liable too

Elements of Dishonest Assistance

Dishonesty > mental element

Assistance > conduct element

Dishonesty

This mental element used to be framed as knowledge > BUT rejected in Royal Brunei Airlines v Tan

• issue was WHAT LEVEL of knowledge was needed > actual knowledge, wilful blindness, constructive knowledge?

Now > Dishonesty is the mental element.

• Dishonesyt ONLY needs to be by D, T doesn't need to be dishonest too > eg cases of T being manipulated but TP (D)

Test for dishonesty > Twinsectra v Yardley > BOTH Needed.

• Objective – would D's conduct be seen as dishonest by honest & reasonable person?

• Subjective – did D know conduct would be seen as dishonest by honest & reasonable person?
  
  BUT > this approach was rejected but Privy Council in Barlow Closes v Eurotrust
  
  
  LEADING CASE >Barlow Closes v Eurotrust (mirrored too by Ivey v Genting)
  
  Objective only in light of what D subjectively knew about circumstances

• Barlow Closes v Eurotrust mirrored by Ivey v Genting

Assistance

Conduct element of Dishoinets assistance

D must procure, encourage or direct the trustees breach

• Eaves v Hickson [1861]: D procures breach (encouragement or direction)

• Brinks Ltd v Abu-Saleh (No. 3) [1996] HC: Need sufficient connection w/ breach

• Royal Brunei v Tan [1995] UKPC: If there’s a breach, trustee’s state of mind irrelevant to Q of D’s ancillary liability

• Twinsectra v Yardley [2002] UKHL: Liability in dishonest assistance can incur for anyone who subsequently assists in covering a breach, needn’t be involved from start

Uncertianty debate

In Brunei v Tan, the privy council rejects unconscionabuilty as being the mental element test for dishonest assistance

Because unconscnabity is an uncertain term > legal certainty reasons

BUT could argue
- has the test created fro dishonesty really impivrd clarity? > considering its a milage if objective and subjective.

• Dishonesty has linguistic familiarity (compared to unconscinabilry) BUT in terms of the test ACTUALLY providing clarity, this is less certain > because the subjective limb has been baked into the objective test.
  
  Think deeper on this
  - do you agree?
  
  
  ALSO > askign a dishonesty (in th new test) is STILL asking a knowledge question > BUT JUST COVERTLY

• Knowledge is a cleaner test as it is a concrete, objective fact (yes or no). Meanwhile, dishonesty can only be assessed by looking at what the defendant knew so it ends up being about knowledge anyways.

• BUT, one reason why dishonesty is better than a knowledge test is because there may be cases where someone knowingly assisted a breach but for good reasons (e.g. they thought it benefited the beneficiary). A pure knowledge test would catch them; a dishonesty test might not. The better solution proposed is framing liability around intention and/or recklessness — did the defendant intend to act against the beneficiary's interests, or was he reckless about it?

Twinsectra v Yardley

Majority


Minorty judgement too

Knowing receipt (to do in lecture???_))

Barlow Clowes International Ltd v Eurotrust International Ltd

Facts
Barlow Clowes International (BCI) operated fruadieltn investment scheme. It liquidated. The liquidators of BCI claimed that Eurotrusts and its directors (ie Mr Henwood) were liable for dishonest assistance in breach of fiduciary duty by knowingly helping to move misappropriated funds.

Lower court:
The Deemster (trial judge; isle of white term) found Mr H liable for dishonest assistance

CA

Mr H

The Privy Council > restored the initial judges judgement. Mr H liable for dishonest assistance
Dishonest assistance requires a dishonest state of mind on the part of the person who committed the breach.

• This may consist of knowledge that the transaction is one in which he cannot honestly participate (for example, a misappropriation of other people's money), or

• it may consist in suspicion combined with a conscious decision not to make inquiries which might result in knowledge

• Although a dishonest saw fo mind is a subjective mental state, the standard that the law decides is objective > If by ordinary standards a defendant's mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards.

Strong suspicion is sufficient, concluded knowledge not necessary
Mr H was liable because the trial judge found that he ‘strongly suspected’ that the funs passing through were missporoaurted. He consciously decided NOT to make inquiries because he preferred to not run the risk of discoursing the truth. > the judge found that This state of mind, by the ordinary standrds is dishonest

• though Mr H may have well thought what he was doing was honest, this is not relevant By the standards of the ordinary person, this is dishonest.

No need for detailed knowledge of the mechanics A defendant does not need to know the precise contractual arrangements, internal business conduct, or exact roles of individuals involved. Broad knowledge of the general nature of a business can be sufficient to ground suspicion.

No requirement to know what a "trust" is A person can be liable for dishonest assistance even if they do not know the money is held on trust or even understand what a trust means legally. Suspecting a misappropriation of money is enough.

Barlow Clowes International Ltd v Eurotrust International Ltd > Ambiguiyyt debate

Lord Hutton's remarks in Twinsectra v Yardley had caused some confusion. Some academics interpreted them as requiring courts to investigate a defendant's own views about honesty — essentially asking "did he think he was being dishonest?" The Privy Council here rejects that reading. What Lord Hutton actually meant was simply that the defendant's knowledge of the transaction must be sufficient to make his participation contrary to normal standards of honesty. He does not need to have separately reflected on what those standards are.

Overall arguing that Twinsectra principles are consistent with the earlier Royal Brunei Airlines v Tan standard — dishonesty is assessed objectively against normal standards, based on what the defendant knew about the transaction, without needing to probe his personal ethical views.

Twinsectra v Yardley

Facts
Twinsectra Ltd lent £1 million to Mr. Yardley for purchasing real estate, with strict conditions that the funds be used solely for that purpose.

Solicitoe Mr Sims received the funds on behalf of Mr Yardley and gave an undertaking to hold the money for that specific purpose.

Instead of keeping the funds for the property deal, Mr. Sims released the money directly to Mr. Yardley, who used it for other purposes.

Twinsectra sued Mr Sims for dishonest assistance.

The HOL found that whilst there was a breach of trust. Mr Sims was not necessarily dishonest under the NEW formulated combined test > as they may not have realised they were actgm dishonestly by ordinary standards.

Overall the court held that the test for dishonesty is the combined one.

Twinsectra v Yardley > Lord Hutton (re read this case)

Tests for dishonesty in law

Robin Hood test

• Purely subjective > a person is regarded dishonest if he transgresses HIS OWN standard of honesty. Even of this is contrary to the reasonable standard of honest people.

Purely objective test

• A person acts dishonest if his conduct is dishonest by the ordinary standards of reasonable and honest people, even if he does not realise this.
  

Combined test

• combines subjective and objective > must be established that the defendant's conduct was dishonest by the ordinary standards of reasonable and honest people and that he himself realised that by those standards his conduct was dishonest.

Twinsectra > Lord Millet Minority (read)

Requirements for tracing

1. C must have equitable right in original property 

2. Transactional links between original property & substitute property 

3. Doubtful point: fiduciary relationship 

   1. We already appear to be dropping need for fiduciary relationship before C can take advantage of equitable tracing rules in certain cases of resulting trusts

      1. If A & B both contribute to the purchase of property put in B’s name, B will hold it on trust in shares proportionate to the parties’ contributions (RT)

         1. this is Similar to tracing > occurs without fid relationship present.

1. So, suggest that we shouldn’t require a fiduciary relationship before applying equity’s tracing rules in other contexts

ALSO

• Fid relationship not needed for equitable tracing in cases of theft ((LBW< WDL Dicta)
  (pg 338 of text book)

• Expansiron of the courts too > Goulding J in Chase Manhattan declared that there was a fid relationship between the banks in order to allow tracing > showing how the courts have expanded ambit of fid relationships j to access tracing.

Tracing > Types of substitution

Clean substitution - Newly acquired property acquired in exchange solely for trust property

Mixed substitution - Where property’s acquired in exchange partly for beneficiary’s property & partly for someone else’

Mixed substitution

Mixed with wrongdoer/ trustee

HL confirmed in Foskett v McKeown [2001] that B has choice:

1) Claim a share of the substitute proportionate to her contribution

• So that if the substitute asset appreciated, B can also gain in proportion 

2) Claim a charge over the substitute to the value of her contribution

• So that if the substitute asset depreciated, B doesn’t bear loss – gets back her contribution 

• But tactically it’ll depend on whether asset is more or less valuable than misappropriated amount (B will choose charge if asset goes down in value, if goes up will want proportion of value)

example:

In breach of trust T uses 5000 of trust money and 5000 of his own money to buy a car. > Car depreciates to 7000. B can have the car sold and recover 5000. T (wrongdoer) is left to bear the cost of depreciation.

Mixed with innocent sources

1) Substitute property will be held on trust for the contributors in proportion to their contributions

2) Substitute sold & proceeds divided proportionately unless substitute assets can be physically divided 

If substitute property falls in value:

• Loss borne by innocent party A & beneficiary B in proportion to their contributions (but any resulting loss can be claimed from T as compensation for her breach of trust)

example
In breach of trust T uses 5000 of trust money and 5000 of Innocent TP money to buy car. If car deprecates ad is sold, BOTH TP and B will bear the cost of reduction and get proceeds proportionate to their contribution (here equal)

Normative considerations > Mixed substation wrongdoer rule

The rule reflects how the law seeks to protect beneficiaries s as they’re innocent victims of trustee’s breach of trust

1. Any loss from substitute falling in value is borne first by wrongdoer & only in the last resort by the beneficiary

2. Explains why option of a charge isn’t open to a beneficiary in cases of mixed substitutions where other contribution comes from property of another innocent 

BUT > Ought the law go FURTHER to protect B agaisnt wrogndoer?
If we want to ensure that T doesn’t profit from her position as trustee – ALL the increase in value should go to B rather than giving T a proportionate share of its increased value

• effectively similar to disgorgement imo

Bank Account

A bank account is an asset. > an intangible property

This property conveys a right that you have agaisnt the bank to the payment of the credit balance

This asset can be held under trust (seen in Paul v Constance)

A payment into a bank. account is a sort of exchange/substution

• The payer exchanges the money, for a right against the bank

Tracing becomes complicated when bank accounts are involved.

Tracing into bank accounts

When money is paid into a bank account, there are 2 possibilities:

• Follow

• Trace

But, normally:

• Banks will always be BFP

• The bank account paid into will usually already have some credit (money) > becomes mixed substation dilemma.

Tracing > Mixed substitutions bank accounts (innocent contributors)

B has claim to share of the account that is proportionate to his contribution.

When money is withdrawn:

Traditional rule:
Clayton’s Case (1861): First in, first out principle applies

• assume money that came in first was spent first. (so if trust money came in firs, before innocent TP, then tryst money was spent first and B would trace to what was bought)
  

Modern approach > Proportionare allocation

• Simple pari passu > add all contributions & give each contributor proportional share of final balance (Barlow Clowes v Vaughan, Woolf LJ > use if the case is complex as its cheaper and simpler to administer)
  

• Rolling pari passu > account treated as a fund, i.e. contributors have a share proportionate to their contributions at time of each payment (Barlow Clowes, Woolf LJ > this should be the first resort as its fairer and ensures precise justice)
  
  
  eg:

• Day 1: A pays in £1,000 → fund = £1,000 (100% A's)

• Day 2: £1,000 withdrawn → falls entirely on A as he owns 100% of fund at this point

• Day 3: B pays in £1,000 → fund = £1,000 (100% B's)

So B is protected because their money wasn't even in the account when the bad withdrawal happened.

Tracing > Mixed substitutions bank accounts (wrongdoer)

So when trust fund is mixed with T’s own money.

When this is done, its though that B can choose remedy.

Trad approach

Re Hallett > Presumtion that T’s money is spent first

BUT > this could work against the B’s favour > eg if the money spent first is invested well and makes a profit.

SO Cherry picking disgorgement approach > Re Oatway

• follows rationale seen earlier, courts prefer for B to benefit rather than T for three wrongdoing. (Prophylactic effect)

BUT REMEMBER > Bishopsgate v Homan [1994] CA: Lowest intermediate balance rule – B can only claim interest on withdrawals up to trust money deposited

• so if trust accounts fo r. 50% of the account, B can only claim for 50%, BUT can choose what 50% (ie from part withdrawn or the part left over)

BUT > there is doubt as to whethwe its a free choice for B, or whether it is ONLY restricted to when the Hallett rule would leave them worse off than the initial contribution (how???)

• considering that Re Hallett is a CA case and Re Oatway is only a HC case)

Tracing > Overdrawn bank accounts

When a bank holder owes money to a bank, relationship is reversed. The person become the debtor and the bank has right.

Money added to the overdraw account is sued to pay off the debt.

If misapplied trust property ends up in this account at first glance seems like tracing is not possible as there is no asset > so B has no prop claim

• this was the traditional approach
  
  BUT recent years courts have changed tune.
  - Backwards tracing

Backwards tracing

B can trace untie the asset whose acquisition generated the debt.

Only used in situations when credit is used to buy something (ie, buy now pay later, overdraft etc)

To circumvent,vent the traditional approach, courts have reframed seeing this exchange as paying of a debt to rathe just paying the purchasing price, JUST LATER down the line. (delayed payment)

So in this sense, trust money is being used to buy the asset, NOT to pay the debt.

Federal Republic of Brazil v Durant Intl. Corp [2016] UKPC (CA): Test = need ‘close causal & transactional link between incurring of a debt & use of trust funds to discharge it’

• This case partially accepts > only sometimes will BT be used. NOT ALL THE TIME. > WHEN is not detailed in this case.

Subrogation

When trust money pays off a debt, the beneficiary can step into the shoes of the original creditor.

1) where the recipient of the trust money was an innocent donee, giving no other basis for a claim; > here subrogration fills the gap, giving B a claim they wouldn't otherwise have

2) When trust money is used to pay off a secured debt, subrogation here allows B to have proprietary rights under the mortgage/charge as well as personal rights to recover debt > Boscawen v Bajwa.

This is different backwards tracing > only available when T uses trust fund to pay off debt that he acquired in the purchase of something else.

Essentially, subrogation rules are a way to circumvent the traditional rules blocking B’s claims in cases of trusts being misapplied to pay down debt.

Swollen assets > Tracing

There must be a specific identifiable asset in order fro tracing to be done.

If trust moimney is spent in a way that leaves no traceable asset (eg paying a utility bill) then the claim fails.

If trust money used to improve or repair property: 

The disticmiton comes down to WHO’s property

Wrongdoers?

Foskett v McKeown, Lord Browne-Wilkinson: If T uses trust money to improve, maintain, or repair own property, B can claim charge on property to secure repayment of trust funds, regardless of any increase in value

Foskett v McKeown, Sir Richard Scott VC: If property’s value increases such work, B can claim beneficial share reflecting proportion of trust money used

Innocent party’s?
Re Diplock [1948] CA, Lord Greene MR: If trust money used to improve innocent party’s property, no claim > notions of fairness expressed in judhgeemrt.