2.3 - Tracing

Question 1

To trace something, must there be property to follow or trace?

Answer 1

yes! This is because tracing and following are proprietary concepts, they can only be used if there was initally and there remains an asset or property.

Question 2

Why use tracing?

Answer 2

• Trustee is insolvent
• where a profit has been made, so the claim to property itself would be more valuable than a personal claim for damages.

Question 3

What happens if the wrongdoer uses trust property to acquire an asset and then gives that asset away?

Answer 3

Foskett v McKeawn = the donee cannot get a better title than the wrongdoer so the stricter rules apply!!!

The point made in Foskett v McKeown is relevant to issues such as which rules you apply to mixed funds. In the example considered in lectures the trust funds were mixed with those of Simon so, in determining the rules to use, the issue is solely whether or not Simon is an innocent volunteer. If, on the other hand, Tim had mixed trust funds with his own money, withdrawn some to buy an asset and given that asset to Simon we would apply Re Hallett and Re Oatway to determine whether the beneficiaries could bring a claim against the asset even though the claim would be against Simon because the mixing was by Tim with his own money. Similarly, if Tim had spent trust money on a house he already owned and then gave that house to Simon, we would consider the tracing rules applicable against wrongdoers as the relevant actions were by Tim.

Question 4

What is tracing?

Answer 4

Lord Millett in Foskett v McKeown [2000] 3 All ER 97:

“Tracing is … neither a claim nor a remedy. It is merely the proces… The successful completion of a tracing exercise may be preliminary to a personal claim… or a proprietary one.”

Lord Steyn in the same case:

“In truth tracing is a process of identifying assets: it belongs to the realm of evidence.”

Question 5

Foskett v McKeown:

Answer 5

Lord Browne-Wilkinson, Foskett v McKeown:

“The [tracing] rules establishing equitable proprietary interestsThis case does not depend on whether it is fair, just and reasonable to give the purchasers an interest… It is a case of hard-nosed property rights.”

Question 6

Boscawen v Bajwa

Answer 6

To be innocent a person should neither know nor have reason to suspect the money or property is not his own

Facts:

Mr Bajwa had agreed to sell his house to another. The Abbey National BS had agreed to lend money to the purchaser. This money was paid to the purchaser’s solicitors in anticipation of completion of the purchase but they sent it to Mr Bajwa’s solicitors before completion. His solicitors mixed it with some of his own money and used it to pay off a charge on the property. The sale then fell through. Question: whether the money could be traced into the payment of the charge and whether a proprietary remedy was available against this property.

First issue: whether Mr Bajwa was an innocent volunteer or classified as a wrongdoer. There was no issue of dishonesty, neither Bajwa nor the solicitor was dishonest. However, it was also held that they were not innocent. The view of the CA was that the solicitors knew that the money should not have been used before completion and Mr Bajwa should have been taken to have known that. He made no arrangement to receive the purchase price before completion and if he had actually thought about it, he would have realised that the money was not his, but it was the balance of the purchase price.

As with Target Holdings v Redfearns, the money was paid to solicitor in anticipation, the solicitor should have held onto the money until purchaser acquired legal title but they didn’t.

Question 7

2. Direct substitutes

• Tim is a trustee. Briony and Ben are the beneficiaries. Part of the trust funds are invested in shares in a private company. Tim misappropriates the shares. Tim sells the shares to Max for £150,000, and Max transfers them to his son, Frank.*
• Tim uses the proceeds of sale as follows:*
• £100,000 is used to purchase a second home in the Lake District

Answer 7

You can follow value into unlimited forms, as long as this value is kept separate. In this case it is, there is no mixing of anyone else’s property - the value is kept separate so we can easily trace.

The HL in Foskett v Mckeown emphases that tracing is all about property rights. But it could be argued that the beneficiaries only have property rights in the shares and that the tracing rules actually gives them new property rights in the substitute property. The example given above seems justifiable, the house in lake district was ultimately brought by money belonging to the beneficiaries. But the emphasis on property rights being able to trace can lead to apparent unfairness in some situations.

Question 8

Foskett v McKeown.

Assets bought partly with the claimant’s money

What does the claimant get?

Answer 8

Claimant is entitled to a proportionate share of the asset.

Foskett v McKeown. T used trust funds to pay some premiums on a life insurance policy. The funds were traced into the policy and from there into the proceeds paid out after the death of T. The beneficiaries of the trust fund was held to be entitled to a proportionate share of the proceeds of the insurance policy.

Question 9

Re Hallett’s estate

Answer 9

Mixed funds - claim against a wrongdoer

Where money withdrawn had been dissipated but sufficient money remained in the account a beneficiary was held to be entitled to claim it on the grounds the trustee was deemed to have acted rightfully and preserved the trust fund and not to have used it for unauthorised purposes

Question 10

What is the rationale for Re Hallett’s Estate?

Answer 10

Rationale: the trustee is deemed to have acted rightfully, he is deemed to have reserved the trust fund, deemed not to have used trust money for unauthorised purposes. Therefore, it was assumed that any money he has withdrawn (and on the facts he has dissipated) was of his own money. This is the starting point, it does not matter what type of account it is, it does not matter the order the money went into the account, it does not matter in what proportions in the account belong. If sufficient money is within the account to satisfy the claim, they are entitled to the full amount of money in the account.

Question 11

Re Oatway

Answer 11

Mixed funds - claim against a wrongdoer

Where no money remained in the account a beneficiary was entitled to claim shares bought with money first withdrawn (where the money later withdrawn had been dissipated) on the grounds the trustee was taken as owning any monies not recoverable and he was not free to use his own money free of the rights of the beneficiaries until the trust fund had been restored

Facts:

This concerned a bank account having money belonging to the trustee and trust money, problem here was that by the time the case came to the court, all the money in the account had been withdrawn. The money first withdrawn was used to purchase shares, the rest was then withdrawn and dissipated. At the time of the first withdrawal (money to buy the shares), there was sufficient money belonging to the trustee for him to purchase the shares.

On a strict paplication of Re Hallett’s Estate, we would say that when the trustee brought shares, he acted rightfully and used his own money - the problem with this would be that when the rest of the money was withdrawn and dissipated, this would have been trust money.

Held: the judge held in Re Oatway, that in these circumstances, the beneficiaries were entitled to claim the assets with the money that was first withdrawn for the shares. Justification: that the trustee could not claim that the trust money had been dissipated. Instead, any money not recoverable was to be regarded to the trustee personally. The judge said that the trustee was not free to use his own money free from the rights of the beneficiaries until the trust fund had been restored.

Question 12

Turner v Jacob

First instance decision

Answer 12

According to patten – no need to claim money in account first, but patten LJ in Turner v Jacob does not cite Shelson v Russo seemingly rejecting purpose of rules in re Hallett and oatway. First instance decision so may not be followed in the future.

Re Hallett’s Estate provides the general rule. (where sufficient money remained in the account and money withdrawn had been used to buy property).

Turner v Jacob – The Judge held that the general rule is that in Re Hallett’s Estate and that Re Oakley only reverses that rule in the particular circumstances of the case. Therefore, if there is sufficient money in the account, we apply Re Hallett’s Estate and the beneficiaries are entitled to that money in the account.

This was not inevitable conclusion, the judge could have said the issue was not covered by the authorities and that the beneficiaries had a choice whether they wanted the money in the account or the assets, but he did not.

Question 13

What happened if there is some money in the account, but insufficient to satisfy the beneficiary’s claim?

Mixed funds - claim against a wrongdoer

Answer 13

There is no direct authority:

Where some money remains in account but not enough and others withdrawn but not invested. Therefore, some money of trust money must have been used to buy the shares. How to deal with this?

Do you say that by extending Re Hallet’s Estate and Turner v Jacob, that the beneficiaries have to start by claiming the money remaining in the account and then they can only claim a proportion of any assets brought or do you say that there is no case on the point - the trustee has not preserved the trust fund and so we can decide what we want.

By deciding what we want, do you give beneficiaries a choice, give them a proportion of the money and the assets? Undoubtedly, extending turner v Jacob would be the simplest situation.

Question 14

What if there is no money in the account and two separate assets have been purchased?

Mixed funds - claim against a wrongdoer

Answer 14

This is a situation where there is no answer: nothing remains in the account.

Here, there is nothing in account but two assets purchased, do you use Re Hallett’s Estate and say that the money first withdrawn is that of the trustee, or do we bring in Re Oakway and say that if one asset has gone down in value, this represents that some assets are no longer recoverable, so this has to be the trustee’s money. Or do we again say it is not covered by authority, the beneficiaries get a proportionate share each or a choice. If there is any profit, does this go to the beneficiaries rather than the trustee? Do we bring in consideration of the trustees creditors?

Question 15

What did Virgo say about Re Hallett’s estate and Re Oatway?

Answer 15

The tracing rules can be manipulated.

Foskett v McKeown believed that proprietary rights should be vested at once and should not depend on subsequent events. But in Re Oatway it did depend on subsequent events.

Virgo therefore states that the approach in Re Oatway is more consistent with the evidential function of tracing rules and the principle in Foskett v McKown should be rejected.

Question 16

Roscoe v Winder

Answer 16

Mixed funds - claim against a wrongdoer

Claim to moneys in account limited to lowest intermediate balance. . In Roscoe v Winder: any moneys remaining in a bank account is limited to the lowest intermediate balance in the bank account.

Example: Tim pays the sales into his own account, Tim then makes withdrawals from his account until only £10,000 remains. He then pays in a lottery win of £5,000, bringing the balance up to £15,000.

• Any claims asserted by the beneficiaries are limited to this £10,000, this is the lowest intermediate balance because the starting point is that this lottery win payment cannot represent the claimant’s money, it is Tim’s money only.

Question 17

Critisim of Roscoe v Winder by Virgo

Answer 17

In Re Hallett’s Estate, the CA accepted that where a trustee has acted, they should be regarded as acting in the best interests of the trust. it is for that reason that, when money is dissipated from a mixed fund, it is presumed to be the trustee’s money. So, surely, this presumption should work in the same way when money is subsequently credited to a band account: the trustee should be presumed to be returning trust money to the account.

Question 18

What is the exception to the lowest intermiate balance rule in Roscoe v Winder?

Answer 18

Exception 1: if that £5,000 paid in can be related to the claimants money which was originally withdrawn. Example: if you could say the lottery ticket had been brought by the claimants money, then this £5,000 would belong to the claimant, but you would need to be able to show that the money paid in ultimately came from the withdrawal of the claimants money.

Exception 2: if the trustee Tim, had expressly said that he would hold it for the beneficiaries, because then there would be an express trust.

This low intermediate balance rule only prevents a proprietary claim in the account, it does not prevent a personal claim being brought against the money.

Question 19

What is the basic rule where money has been mixed with that of an innocent volunteer?

Answer 19

Basic rule: pari passu: Sinclair v Brougham [1914] AC 398; Re Diplock [1948] Ch 465, CA.

Question 20

Sinclair v Brougham

Answer 20

A claim against an innocent volunteer :

Claimants money is mixed with that of an innocent volunteer

Basic rule: pari passu:

Question 21

Re Diplock

Answer 21

A claim against an innocent volunteer :

Claimants money is mixed with that of an innocent volunteer

Basic rule: pari passu

Question 22

Clayton’s Case

Answer 22

A claim against an innocent volunteer :

Claimants money is mixed with that of an innocent volunteer

However, there is a special rule for an active banking account, which would appear to mean a current account.

Special rule for an active banking account: the rule in Clayton’s Case (1861) 1 Mer 572 - first in, first out.

Question 23

Is Clayton’s Case principle unfair?

Answer 23

Example: There is a trustee of two separate trust funds A and B. He misappropriates £5,000 from each fund and takes them into a bank account in his name. It just so happens, he pays the money from trust A, one day before he pays the money from trust B into the account. £5,000 is paid into the current account, he then withdraws £5.000. The only asset remaining of which a proprietary claim which can be brought is £5,000 remaining in the account, so trust B gets all its money back and trust A gets nothing.

Question 24

Barlow Clowes v Vaughan

Answer 24

The rule in Clayton’s case was considered by the CA in Barlow Clowes.

The rule in Clayton’s Case has not been applied (and pari passu used instead):

• Where it is contrary to the intention of the parties: Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22, CA started by confirming that the rule in Clayton’s Case is prima facia the rule to be applied in the case of a current account. However, the CA was prepared to disapply the rule in Clayton’s Case on the facts before it. The CA said it would not be applying the rule in Clayton’s Case because it was contrary to the intention of the parties. The CA made it clear that the intention of the parties could be expressed/inferred or imputed.

Facts: concerned an investment scheme, investors sent their money which was mixed and then put into common funds. The court presumed that it was the intention of the parties that all assets owned by the fund would be shared pari passu. Therefore, all the assets which existed (which included money investment/money diverted etc) were held pari passu proportionately by all the investors in the fund.

Question 25

Russell-Cooke Trust Co v Prentis

Answer 25

The rule in Clayton’s Case has not been applied (and pari passu used instead):

• 478 the court refused to apply Clayton’s case, in fact the court said that the first in first out rule can be easily displaced. The court looked at the pattern of payments into and out of the bank account and comparing the two (payments in with payments out), said it was clear that Clayton’s case was inadmissible.

Question 26

What did the case of Barlow Clowes and Russell-Cooke have in common?

Answer 26

Both cases involved investment schemes

This is investment where they intentionally paid the money into the scheme and therefore, we could look to see what their expectation/intention was as to how the money was to be used in that scheme. This would be more difficult to apply with misappropriated funds because if a trustee misappropriates trust funds, and pays them into an account, the beneficiaries have no intention at all, because they do not even know that their money is being used. Therefore, you then look at how the scheme as a whole operated, not just the intentions.

Therefore, Clayton’s case will not apply where you can say it is clear that the parties did not intent that.

Question 27

Barlow Clowes

Woolf LJ

Answer 27

There was collective investment scheme: investors sent their money which was mixed and invested through a common fund. There was large scale fraud and a misapplication of the funds. The assets included money invested, money awaiting investment, and money diverted to the purchase of other assets, such as a yacht. Comments by Woolf LJ to the effect that Clayton’s case will not also apply where it is impractical or would produce injustice between the parties. He refers specifically to the situation where the costs of working out the application of the Clayton’s case would exhaust the funds.

Question 28

Commerzbank v Morgan

Answer 28

The rule in Clayton’s Case has not been applied (and pari passu used instead):

Where application would be impractical/ onerous: Commerzbank

Woolf LJ’s comments were applied in Commerzbank: where the court refused to apply Clayton’s case on the basis that it would be onerous and impossible to apply the Case. This was due to the particular bank account in Commerzbank. It was a correspondent account operated on behalf of a foreign bank. The correspondent account is not necessarily a withdrawal, it could be sent to another account. Therefore, it would be very difficult if not impossible to apply Clayton’s case.

When dealing with a current account, Clayton’s case is the basic rule but in certain circumstances it would not apply. It is not enough to say that Clayton’s case will not apply, because it is the basic rule. But if there is a good reason to apply it: good reason or impractical, the court will not apply it.

Question 29

Shalson v Russo

Answer 29

It has been suggested that a wronged beneficiary can cherry pick the more fruitful claim.

Shelson v Russo combines the rules in Re Hallett’s estate and Re Oatway. Turner v Jacob says claim money in account first. First instance decision does not cite authorities in tracing properly, so could be a weak precedent and might not be followed in the future.

Example by Rimer J about the unfairness of Clayton’s case. Facts: trustee of three different trusts. He misappropriates funds from trust A and B and paying those funds into a bank account, he then withdraws money from that account and buys a car, after that withdrawal and purchase he then misappropriates money from trust C and pays it into the account. A simple application of the pari passu rule requires you simply to look at how much money from Trust A, B and C went into the account, and to apply that proportion to the money remaining in the account and the care. Thinking about the timings of withdrawals and payments in, the money to pay for the car was withdrawn before the money from trust C went in. So in reality, none of trust C’s money was used to buy the care and all the trust C’s money remains in the account. But the pari passu rule does not recognise that. This is the cherry picking rule.

Question 30

Should we have a rolling charge?

Answer 30

There is another way the courts could resolve the issue, known as the ‘rolling charge’, It is based on the pari passu principle but takes into account the timing of the withdrawals and deposits. Therefore, you would look at whose money was in the account when he brought the car and you would apply the relevant proportion to the car and the remaining amount and recognise that the claimant’s money went in there after and still remained. The problem is that if you have an account into which there have been a large number of deposits and out of which a large number of withdrawals over time, it can be time consuming and expensive to calculate whose money is where using the rolling charge.

For this reason, the rolling charge was rejected by the court in Barlow Clowes and Russell-Cooke. So, the fairest solution is something that the courts at present are not prepared to use because it is too complicated a method. It may be that the rolling charge will be used in simpler cases. In Shalson v Russo comments were made to the effect that the lowest intermediate balance may be taken into account in simpler cases, but subject to this, you have Clayton’s case which disadvantages the earlier claimants, and the pari passu which may disadvantage the later claimant.

Question 31

Can you trace into an unsecured debt?

Answer 31

It is not possible to trace into an unsecured debt (Re Diplock) or an overdrawn account (Bishopsgate Investment Management Ltd v Homan [1995] Ch 211). It may be possible to trace into a secured debt: contrast Re Diplock with Boscawen v Bajwa.

Question 32

Can the claiamnt trace into a debt?

Answer 32

Starting point: tracing is impossible. The money is dissipated, once a debt has been repaid it ceases to exist, so there is no property remaining – there is nothing in existence to represent the claimants property. The authority: Re Diplock. The position is the same where money is paid into an overdrawn account. An overdrawn account is non-existent so again, the claimant’s money basically disappears – there is nothing in existence to represents the claimant’s property (Bishopsgate).

Question 33

Re Diplock

debt

Answer 33

Starting point: tracing is impossible. The money is dissipated, once a debt has been repaid it ceases to exist, so there is no property remaining – there is nothing in existence to represent the claimants property. The authority: Re Diplock. The position is the same where money is paid into an overdrawn account. An overdrawn account is non-existent so again, the claimant’s money basically disappears – there is nothing in existence to represents the claimant’s property (Bishopsgate).

Question 34

Bishopsgate v Homan

Answer 34

One cannot trace into an overdrawn account

Question 35

Boscawen v Bajwa,

Answer 35

Re Diplock took the view that where a secured debt is paid, the debt and the security disappears.

However, in Boscawen v Bajwa, where the claimant’s money was used to pay off a charge, the CA were prepared to trace the money to the discharge of the charge and gave the claimant the remedy of charge by subrogation. Effectively, the charge did not cease to exist, the debt ceased to exist but the charge continued in existence for the benefits of the claimant. Millet LJ in Boscawen v Bajwa was of the view that Re Diplock was confined to its facts and that it should be traced into the repayment of the secured debt.

Question 36

Will the court follow Boscawen v Bajwa?

Answer 36

One point made about the judgment in Boscawen v Bajwa which may influence whether courts would be prepared to follow it: at the time of Boscawen v Bajwa was decided, it was thought, or at least Millett LJ thought that innocent volunteers would have available to them a defence based on fairness. Therefore, in theory it would be possible to trace into the security of the debts, in the case of an innocent volunteer, the court could refuse to grant a remedy on the basis of fairness. Since then, the HL in Foskett v McKeown has expressed the view that no such defence is available.

Therefore, Millett LJ was envisioning the tracing is possible but there was a discretion as to the remedy. The position now seems to be that if tracing is possible, then there is definitely a charge by subrogation and the innocent volunteer has no defence. Therefore, rather than say: allow tracing because there may be a defence, now the court says: either they allow tracing and remedies or say tracing is impossible. It is impossible to predict what the court might do.

Question 37

Is it possible to trace backwards into an asset acquired in exchange for incurring a debt?

Answer 37

unclear

In both the CA in Bishopsgate and Foskett, there were both one judge in favour and one judge against backwards tracing, so the main argument against:

Against: it would allow the claimant rights in an asset that the defendant had acquired before he received the claimant’s money. Logically, this asset cannot have been acquired with the claimant’s money. This reason was given by Leggatt LJ in Bishopsgate and Hobhouse LJ in Foskett.

FOR: based on the substance of the associated transactions, the argument that in reality, practically, the asset was brought by using the claimant’s money and the courts decision should not be restricted by the precise order by the payment.

Question 38

Westdeutsche Landesbank

Answer 38

Until recently, backward tracing was only clearly used one by the courts in the first instance of the Westdeutsche Landesbank case. Various academics claimed other cases as authority for backwards tracing but in none of those cases that such a reason explicit. But now there is a PC decision in Brazil v Durant in which backwards tracing was accepted.

Question 39

Brazil v Durant

PC

Answer 39

Backwards tracing

The case concerned bribes that had been received by a mayor in Brazil, he moved these into three bank accounts, and the PC were particularly concerned with payments which had been made out an account before the final bribes had been paid into that account. Question: whether the bribes could be traced from the first account, to second to third, when actually, the payment out of the first account was before the bribe payment had been put in. There was good consideration of all the authorities. In reaching its decision, the PC said that:

“court should not allow a camouflage”

But: note that the PC imposes a restriction on backward tracing as it referred to a coordinated scheme.

Requirement: “[T]he claimant has to establish a coordination between the depletion of the trust fund and the acquisition of the asset

Question 40

Is the decision in Brazil v Durant going to be followed?

Answer 40

Virgo thinks it would be followed since there is no conflicting English authority from a superior court: Wilers v Joyce

Although the case concerned credit and debits between bank accounts, it will be of wider significance as regardss proprietary claims involving previously purchased assets, but only where it can be shown that the purchase of the asset and the discharge of liability is sufficiently coordinated.

Question 41

What court is the decision in Brazil v Durant?

Answer 41

PC

Privy Council

Question 42

What is the requirment in Brazil v Durant?

Answer 42

But: note that the PC imposes a restriction on backward tracing as it referred to a coordinated scheme.

Requirement: “[T]he claimant has to establish a coordination between the depletion of the trust fund and the acquisition of the asset

Question 43

Bishopsgate Investment Management and Scott V – C in Foskett v McKeown,

Answer 43

This idea of a coordinated scheme, that they are looking an intention is reflective of comments made by Dillon LJ in Bishopsgate Investment Management and Scott V – C in Foskett v McKeown, who were in favour of backwards tracing. They were in favour of backwards tracing but only in certain circumstances, for example: where a defendant always intended to repay the loan with trust money or always intended to make a purchase with the claimant’s money but use their overdraft facilities as an interim measure. According to the PC, backwards tracing is available, it is available if you have this coordinated scheme. The PC decision is not binding and the other authorities in favour of backwards tracing are not strong.

Question 44

Has backwards tracing gone too far?

Answer 44

We go further in allowing proprietary rights to a claimant because tracing itself allows you to have proprietary rights not only against what was originally your property but also against other property which you never actually owned but where money was used to buy. This goes further to give rights where actually if you just look at timing, was never used to actually buy property.

The PC did say that the court should be cautious with its finding of proprietary remedies in the fact that they might adversely affect third parties. In the circumstances, they were happy that even if third parties were adversely affected, it was still appropriate to expound to availability of proprietary remedies in that case, but in another situation, perhaps the rights of third parties might prevent the extension of the proprietary remedies.

Question 45

What happens where there is Expenditure on maintenance or improvement of property?

Answer 45

Unclear law

The law here is unclear, not much authority and most authority comes from dicta in Foskett v McKeown. In this case, it concerned the claimant’s money which was put towards the purchase of a life insurance policy. The CA thought that this was similar to expending the claimant’s money on property already owned by the defendant. Therefore, made relevant comments. The HL did not think the situation was similar but nevertheless there are brief relevant comments in the HL.

Question 46

Expenditure on maintenance or improvement of property

Foskett v McKeown

Answer 46

The position appears to be (suggesting), according to relevant dicta in Foskett v McKeown and also pointing to the issues as to whether tracing should be possible. The first point to make is that the availability of tracing seems to depend on 2 factors:

1. Who the property belongs to that the money has been spent on.
2. Has the expenditure increased the value of that property or not?

Question 47

What is the position where property has not increase in value and the claim is against property belonging to an innocent volunteer.

Answer 47

This is probably the only point we can make with certainty: the money is regarded as having been dissipated. This does seem to be reasonably established on the authorities, in support we have the support from CA in Re Diplock as cited by 2 members of CA in Foskett v McKeown, this seems acceptable. If the property on which the money has been spent has not been increased in value at all because of expenditure, then there is nothing to represent that expenditure. And if you were to allow tracing, the innocent volunteer would suffer loss.

Question 48

What about where property has not increase in value and the claim is against property belonging to a wrongdoer.

Answer 48

Logically, the money has still disappeared, there is still nothing to represent that expenditure. The only problem is that there are dicta by Scott V-C in Foskett v McKeown seems to think it is possible to trace in this situation.

The courts could decide as a matter of policy that it ought to be possible to trace into property belonging to the wrongdoer when he spent someone else’s money on that property. But logically and consistently with the position where the defendant is an innocent volunteer that money has surely disappeared.

Question 49

What about where the property has increased in value as a result of the expenditure?

Wrongdoer

Answer 49

Expenditure on property belonging to a wrongdoer where that property has increased in value and again, although the authority is not quite as strong, this seems to be a case where we can say with reasonable certainty that tracing is possible.

In support we have two members of CA in Foskett v McKeown Hobhouse and Scott and two members of HL in the same case: Hope and Browne-Wilkinson. As a matter of policy that seems to be the right conclusion because if tracing was not possible, the wrongdoer would profit from his wrongdoing. Although it is clear that tracing is possible where property has increased in value, it is unclear what value can be traced.

Question 50

What did Browne-Wilkinson in Foskett v McKeown think about where property has increased in value as a result of expenditure?

Answer 50

The only comment by any judge is by Browne-Wilkinson in Foskett v McKeown who expressed the view that the max that can be traced is the expenditure plus interest.

That was the only clear statement by any judge, this appears to be wrong because if the increase in value is £20,000 and we only allow the claimant to trace 10,000 then the wrongdoer profits from his wrongdoing. So, it is almost certain that the court would actually allow tracing to the amount of the increase in value caused by the expenditure.

Although other judges were not quite as clear, this seems to be what they were suggesting.

Question 51

What about where the property has increased in value as a result of the expenditure?

Innocent volunteer

Answer 51

Comments in Foskett v McKeown, the CA lord Scott and Hobhouse, in HL Lord Browne-Wilkinson who all suggested that tracing may be possible but not if it were unfair.

It is not clear what they meant by what is unfair, they referred expressly to Re Diplock who said it would be unfair to trace where there was no increase in value. But what they did not say is whether it would be unfair to trace in any other circumstances.

Question 52

The problem with allowing tracing where property has increase in value as a result of expenditure?

Answer 52

In favour of allowing tracing: the innocent volunteer equally should not be able to profit from someone else’s money.

The problem with allowing tracing: is that the claimant will automatically be entitled to a proprietary interest in the innocent volunteers property. And this will almost certainly give the claimant the right to insist that this property is sold. So, the innocent volunteer risks losing their property unless they come up with the money to pay the claim. Obviously, the property has increased in value, so one could say that the innocent volunteer should take out a loan secured on the property to repay the claimant. But this will not work if the innocent volunteer has no income, they will not get a loan. Therefore, it could end up, in some circumstances, with the innocent volunteer loosing their home. This might be seen as unfair.

Final point: if tracing is possible against an innocent volunteer, where property has increased in value and it is not unfair. How much? This cannot be greater than any increase in value because Re Diplock tells us that if no increase in value, it has disappeared, it must be the same.

Is the claim limited to the amount of the expenditure, or can the claim be for the increase in value greater than the expenditure? Hobhouse LJ thought the max should be the expenditure. Browne Wilkinson would have thought the same presumably as he thought the max as against wrongdoer was the expenditure.

Here there is no clear argument., if the max is the expenditure the innocent volunteer could profit from the use of the claimants money, but he is no a wrongdoer, so we cannot say wrongdoer should not profit. Balance between does the innocent volunteer profit, or does the claimant get the increase in value? The argument is not so clear.

Question 53

Re Diplock, confirmed by HL in the Westdetutsche case.

Answer 53

The need for a fiduciary relationship

Cases establish that before you make use of the equitable tracing rules, it has to be shown that at some time, the property passed through a fiduciary relationship.

This does not mean that there must be a fiduciary relationship between the claimant and defendant. All we are looking for is that at some time, the property passed through a fiduciary relationship. This requirement causes no problem at all where there is a misappropriation of trust funds because the trust funds were held under a fiduciary relationship. This problem arises in commercial situations. But in fact, it does not seem to cause much problems, in most cases there is a breach of fiduciary duty and in other cases, the courts have taken the view that the misappropriation or transfer of property has given rise to a resulting or constructive trust.

Question 54

FHR v Ceder capital

SC

Answer 54

the courts have actually made the decision that there is a resulting or constructive trust in order to allow tracing and this is what the SC did in FHR v Ceder capital – the court decided that there was a breach of the fiduciary duty which gave rise to a constructive trust, so that tracing was possible. Ultimately, this requirement of the property having passed through a fiduciary relation ship at some time is because in order to trace in equity, the claimant has to show that he has an equitable proprietary interest in the original property. He needs to show that he has an equitable proprietary interest in property as a result of the fiduciary relationship. A person who is the sold the legal and equitable owner of the property, cannot use the equitable tracing rules.

Question 55

The remedies available in specific situations

(a) Original property or its proceeds of sale remains intact

Answer 55

Situation: Trustee still has the shares belonging to the trust or he sold the shares and has the proceeds of sale, which he kept separate.

Ownership under a constructive trust.

Question 56

The remedies available in specific situations

(b) Claim to money in a bank account

Answer 56

Situation: mixing in the bank account. If no mixing this would be the previous one, (a) above. Here the remedies are different depending on whose is the other money in the bank account.

Claimants MONEY AND wrongdoer:

If the claimant is entitled to a lien over that account, he gets as much money of this remains in the account plus interest.

Claimant money and innocent volunteer

Claimant is similarly entitled to a relevant proportion of the money in account under a constructive trust, this is because basic rule that an innocent party should be treated equally.

Lien for amount of personal claim against wrongdoer; proportionate constructive trust with innocent volunteer.

Question 57

The remedies available in specific situations

(c) Asset purchased with claimant’s money only

Answer 57

Starting point: the asset can be seen as belonging to the claimant, so the defendant will hold it on constructive trust for the claimant, but the claimant has an alternative available.

Therefore, the claimant can choose that rather than claiming ownership under a constructive trust, instead the claimant can assert a lien over that asset as security for his personal claim against the trustee plus interest. Authority: Re Hallett’s Estate and Foskett v McKeown. This seems to be fair because the claimant did not choose this asset. But in fact, the choice of the claimant whether to assert the beneficial ownership under a constructive trust or to claim a lien (security personal claim) depends on:

1. Whether the claimant wants the actual property
2. Present value of that asset.

Question 58

The remedies available in specific situations

(d) Asset partly purchased with claimant’s money

Answer 58

The starting point: is for proportionate share of equitable ownership under a constructive trust, see how much claimant’s money went to purchase the asset and then how much someone else’s money was spent – they share in those proportions.

This will be the only remedy available where the money came from an innocent volunteer.

But if the other money used to purchase the asset came from a wrongdoer, the claimant gets a choice of remedies and can choose instead to assert a lien to secure his personal claim.

How does this work? A claimant would go for a lien where the assets have gone down in value, because this ensures that any loss is suffered by the wrongdoer first.

Proportionate ownership under a constructive trust with option against wrongdoer of a lien to secure personal claim.

Question 59

Is the option of a lien available where the purchase of the asset came from an innocent volunteer?

Answer 59

This option of a lien is not available where the purchase the asset came from an innocent volunteer, because the claimant and the innocent volunteer are treated equally.

If there is a loss, they share it, if there is an increase in value they share it.

Question 60

Criticism of the remedy where assets partly purchased with the claiamnts money

Answer 60

1. where the claimant’s money has been mixed with that of a wrongdoer and the asset has increased in value because in this situation. The claimant will choose a proportionate share under a constructive trust because that enables the claimant to gain a proportion of the increase in value, as well as the return of the value belonging to the claimant. But the problem with that is that the wrongdoer will also be entitled to a proportionate increase in that value. It is argued that this is not always appropriate.

relates to the other situation where the claimant’s money was used alongside money of an innocent volunteer to buy the asset in question. It is argued that in this particular situation, the claimant this time should not get any increase in value, the whole of any increase in value should belong to the innocent volunteer. The first situation:

2. Where the innocent volunteer could have brought the asset using his own money, in fact did not because of the tracing rules, but did have enough money for his/her to buy the assets on their own.
   
   1. We assume that if the innocent volunteer had known that some money was not his, he would have used his own money to buy the asset, so in this situation it is argued that if there is any increase in value, it should belong to the innocent volunteer and the claimant should only get a charge, or his own money to be returned.
3. Where property has increased in value and the reason for the increase is because of work done or skills belonging to the innocent volunteer.
   
   1. If the volunteer brought a run-down property and has personally renovated it which has led to the increase in value. Again, it is felt that that increase in value, ought to belong to the innocent volunteer and not partly to the claimant. Some academics suggest that the innocent volunteer should keep all the increase in value, other academics would argue that the innocent volunteer should be given an allowance for work and skill similar to allowance in Boardman v Phipps and that once that has been paid, any profits/increase in value should be split proportionately.

Question 61

David Hayton in his casebook illustrates

Answer 61

He discusses the situation where the asset which has been brought could not have been brought without the claimant’s money. He gives the example of the purchase of shares where the particular shares in question could only be brought in blocks costing £100,000. He said: what if, the particular block of shares was brought using 90,000 trust money and 10,000 of trustee’s own money. Under the existing law, the beneficiaries under the trust would claim proportionate ownership of those shares under a constructive trust and will get 9/10^th of any increase in value and the trustee would get 1/10 of any increase in value. Hayton argues that the trustee should not get any increase in the proportion of the value because the trustee could not have brought any of those shares without using the trust money. To allow the trustee any increase in value is inconsistent with Boardman v Phipps, it allows the trustee to profit from his position. Hayton argues that in that situation, the beneficiaries should be able to claim complete ownership of the shares subject to an obligation simply to repay to the trustee the money the trustee personally put into the purchase.

Question 62

The remedies available in specific situations

(e) Claimant’s money used to alter, improve or maintain another’s property

Answer 62

It seems from comments made from CA and HL in Foskett v McKeown that there is only one remedy available in this case which is a: lien.

Question 63

Does Claimant’s money used to alter, improve or maintain another’s property.

Is having a lien consistent?

Answer 63

This is inconsistent with all previous situations we have considered because in every situation looked at so far, a lien is not available against an innocent volunteer because it gives priority and as against an innocent volunteer, the claimant should not have priority.

Favour of lien: It means that the claimant does not have a share in the future increase of value of property. This is beneficial to the defendant.

Against the imposition of a lien: A lien is a security interest, if the claimant is not repaid, the claimant can insist that the property is sold. If instead the claimant has an interest under a constructive trust, the claimant cannot insist that the property is sold. The claimant can simply apply to the court for an order of sale under s.14 TOLATA if talking about land, if talking about other property there is still no right to insist on the sale.

Under s14 TOLATA the court has a discretion, it does not have to order a sale, it can be creative and postpone a sale, giving time to pay.

Question 64

What does s14 TOLATA have to do with a lien?

Answer 64

. The claimant can simply apply to the court for an order of sale under s.14 TOLATA if talking about land, if talking about other property there is still no right to insist on the sale.

Under s14 TOLATA the court has a discretion, it does not have to order a sale, it can be creative and postpone a sale, giving time to pay.

Question 65

Criticism of a lien:

Answer 65

where the property is owned by a wrongdoer. For example: if the claimants’ money is used to improve property which increases in value and then over the years, the property further increases in value you can argue that a proportion of any further increase in value is because of the expenditure. The lien does not allow for the claimant to get a proportion of any further increase in value. Although one member of the CA in Foskett v McKeown (V-C Scott) thought a constructive trust might be available, two members of the HL (Hope and Wilkinson) were very clear it would not be.

Lien: Foskett v McKeown (Hobhouse LJ, Lords Hope and Browne-Wilkinson Cf Scott V-C).

Question 66

The remedies available in specific situations

(f) Claimant’s money used to pay off a secured loan

Answer 66

Charge by subrogation: Boscawen v Bajwa.

The authority of Boscawen v Bajwa is that there is a charge by subrogation.

Question 67

What is the defence against whom a proprietary claim is brought?

Answer 67

The only possible defence: Bona fide purchaser for value of a legal estate without notice (as modified by statute).

This is the only defence since the HL in Foskett v McKeown dismissed the possibility of a change of position defence and make it clear that this is all about property rights, there is no discretion. Therefore, this is the only defence available.

Question 68

Lord Clarke in Crédit Agricole Corporation

Answer 68

Bona fida purchaser of legal state without notice. NOTICE

Types of notice

1) Actual notice
2) should have known (constructive notice)
3) should have made inquiries (constructive notice for land).

Question 70

What did McFarlane and mitchell believe we should follow this rules?

Answer 70

They prefered Rimer J’s views of the merits. If the principle that underlies the law is that presumptions should be made against trustees who wrongfully create evidential uncertainty by mixing trust property with their own property, they believe this principle should be extended to giving beneficiaries the right to choose which presumption produces the best result