Topic 7 - Equitable remedies and Tracing

Question 1

What are equitable remedies?

Answer 1

Equitable remedies are available in circumstances where common law damages would not be sufficient, such as asserting an equitable interest or when damages are inadequate.

Examples include specific performance, injunctions, search orders, and freezing orders.

Question 2

What is the nature of equitable remedies?

Answer 2

Equitable remedies are discretionary and guided by recognized principles in case law.

They are not specific to Trusts law and can be encountered in various areas of law.

Question 3

What are personal remedies in equitable law?

Answer 3

Personal remedies include:
* Equitable compensation
* Account of profits

Equitable compensation is awarded when there is a loss due to a breach of trust or fiduciary duty.

Question 4

What are proprietary remedies?

Answer 4

Proprietary remedies award the claimant a proprietary right, such as claiming a constructive trust over profits from a breach of the no-profit rule.

This allows the claimant to utilize tracing rules.

Question 5

What are the benefits of making a proprietary claim?

Answer 5

Benefits include:
* Not affected by the defendant’s bankruptcy
* Capture increases in value of traceable proceeds
* Maintainable against both defaulting trustees and innocent recipients

This protects beneficiaries’ rights against insolvency.

Question 6

What are the options available to beneficiaries when a trustee misapplies funds?

Answer 6

Options include:
* Sue the trustee for breach of trust
* Sue a third party who assisted the breach
* Claim against misapplied property or its traceable proceeds
* Sue a third party who received traceable proceeds

These options help beneficiaries recover losses.

Question 7

Define ‘following’ in the context of equitable remedies.

Answer 7

‘Following’ is the process of tracking the same asset as it moves from hand to hand to locate misapplied trust property.

It allows beneficiaries to trace assets through successive transfers.

Question 8

Define ‘tracing’ in the context of equitable remedies.

Answer 8

‘Tracing’ is the process of identifying a new asset as the substitute for the old asset, typically involving direct substitutions.

This is crucial in cases involving misapplied trust funds.

Question 9

What is a ‘claiming’ process in equitable law?

Answer 9

‘Claiming’ is the assertion of a personal or proprietary right concerning misapplied trust property or its traceable proceeds.

This is the final step in the tracing process.

Question 10

What are the Re Diplock conditions for using equitable tracing rules?

Answer 10

The conditions are:
1. The claimant had a right of property recognized by equity in the asset.
2. The asset was held by someone in a fiduciary relationship with the claimant.

These conditions are generally satisfied in cases of express trusts.

Question 11

What are the types of proprietary claims that beneficiaries can make?

Answer 11

Types of claims include:
* Beneficial ownership of the asset
* Beneficial ownership of a share of the asset
* Equitable lien over the asset
* Subrogation

Each type serves different circumstances and goals for the beneficiaries.

Question 12

What is the principal defense against equitable proprietary claims?

Answer 12

The principal defense is that of a bona fide purchaser for value without notice of the trust.

Such purchasers can deal with trustees as if they are the full legal owners.

Question 13

What is a ‘wrongful mixture’ in the context of tracing?

Answer 13

A wrongful mixture is a mixed fund comprising misapplied trust money and the trustee’s own money.

This complicates tracing due to the mixing of funds.

Question 14

What is an ‘innocent mixture’ in the context of tracing?

Answer 14

An innocent mixture is a mixed fund comprising misapplied trust money and money from innocent third parties.

Tracing rules apply differently compared to wrongful mixtures.

Question 15

What happens in the Hallet scenario involving mixed funds?

Answer 15

In the Hallet scenario, a trustee misapplies trust funds, mixes them with personal funds, and withdrawals complicate tracing.

Key case: Re Hallett’s.

Question 16

What is the basic rule for withdrawals from wrongful mixtures?

Answer 16

The beneficiary can attribute identifiable funds or traceable proceeds to the trust, regardless of withdrawal order, if some funds are dissipated.

Dissipation refers to applying money in a way that leaves no traceable proceeds.

Question 17

What is ‘cherry picking’ in the context of equitable claims?

Answer 17

Cherry picking allows beneficiaries to attribute the most profitable applications of a mixed fund to trust money when contesting against trustees.

This is not allowed when competing with unsecured creditors.

Question 18

What is the basic rule regarding withdrawals from wrongful mixtures?

Answer 18

Withdrawals from wrongful mixtures are attributed to the trustee’s own funds first before trust funds.

This is illustrated by the Hallet scenario where the trustee misapplies trust money and mixes it with their own.

Question 19

What key case is associated with the Hallet scenario?

Answer 19

Re Hallett’s Estate (1880) 13 Ch D 696

This case established the principle that a trustee cannot claim trust money was withdrawn before their own funds.

Question 20

In the Oatway scenario, what did the trustee do with the misapplied funds?

Answer 20

The trustee withdrew £1,000 from the account and used it to purchase shares, later dissipating another £1,000.

This case highlighted that the order of withdrawals does not determine which funds are traceable.

Question 21

What is ‘cherry picking’ in the context of trust funds?

Answer 21

Cherry picking refers to the ability of a beneficiary to attribute trust money to the most profitable use made of a mixed fund.

This concept is illustrated in the case of Shalson v Russo [2003] EWHC 1637.

Question 22

What happens when a beneficiary ‘cherry picks’ in a contest with the trustee’s creditors?

Answer 22

The beneficiary can only attribute trust money to the sum credited to the account, and not to dissipated funds.

This means the beneficiary’s claims may be limited when creditors are involved.

Question 23

What is the general rule for withdrawals from innocent mixtures?

Answer 23

Withdrawals are attributed rateably to the contributors to the mixture.

This principle was established in the case of Re Diplock.

Question 24

What is the rule in Clayton’s Case regarding withdrawals from a current bank account?

Answer 24

The first in, first out rule: the sum first paid in is the first drawn out.

This rule can lead to arbitrary results, as shown in various cases including Barlow Clowes.

Question 25

What was the outcome in the case of Barlow Clowes regarding Clayton's Case?

Answer 25

The Court of Appeal held that the rule could be disapplied if its application would be contrary to the intentions of the parties or impractical. ## Footnote This case marked a shift away from strict adherence to the Clayton's Case rule.

Question 26

What is the 'pari passu ex post facto method'?

Answer 26

This method attributes all withdrawals from the account fractionally to all contributors, regardless of the order of payments. ## Footnote It contrasts with the 'rolling charge' method, which recalculates contributions before each withdrawal.

Question 27

What is the 'rolling charge method'?

Answer 27

A dynamic method that attributes each withdrawal fractionally to contributors based on their contributions immediately before the withdrawal. ## Footnote This method is preferred if it's not too complex or expensive to apply.

Question 28

What can beneficiaries assert when trustees misapply trust property?

Answer 28

Beneficiaries can assert a proprietary interest in the misapplied trust property or its traceable proceeds. ## Footnote Common claims include the misapplied trust property itself and assets purchased with trust money.

Question 29

What happens when beneficiaries can follow misapplied trust property?

Answer 29

They can assert their equitable proprietary interest in the property, requiring restoration to the trust fund. ## Footnote This principle was established in the case of Foskett.

Question 30

What options do beneficiaries have when an asset is purchased exclusively with trust money?

Answer 30

* Asserting beneficial ownership of the asset * Making a personal claim against the trustee for breach of trust ## Footnote Beneficiaries typically choose the option that is most advantageous based on the asset's value.

Question 31

In the example of innocent mixtures, how is the dissipated amount attributed?

Answer 31

The dissipated amount is attributed to the trust and the innocent party in proportion to their contributions. ## Footnote This is illustrated by the mixing of funds from trusts and an innocent recipient.

Question 32

What is beneficial ownership in the context of trust assets?

Answer 32

Asserting beneficial ownership of the asset. ## Footnote This grants the beneficiary rights over the asset directly.

Question 33

What personal claim can a beneficiary make against a trustee for breach of trust?

Answer 33

Making a personal claim against the trustee for breach of trust and enforcing an equitable lien on the asset. ## Footnote This action transforms the beneficiary into a secured creditor.

Question 34

What is preferable for a beneficiary if traceable proceeds have increased in value?

Answer 34

To claim the increased value. ## Footnote This allows the beneficiary to assert beneficial ownership of the asset.

Question 35

What should a beneficiary do if traceable proceeds have decreased in value?

Answer 35

Make a personal claim against the trustee for the original amount and assert an equitable lien over the asset. ## Footnote This secures the claim against the asset until the trustee fulfills the obligation.

Question 36

What happens when a trustee misapplies funds and the asset increases in value?

Answer 36

The beneficiary can trace into the asset and assert beneficial ownership. ## Footnote Example: If a trustee misapplies £1,000 to purchase shares that increase to £1,500, the beneficiary can claim ownership of the shares.

Question 37

What should a beneficiary do when an asset purchased with trust money has decreased in value?

Answer 37

Claim an equitable lien over the shares. ## Footnote The first proceeds from a sale will be used to satisfy the personal claim against the trustee.

Question 38

In wrongful mixtures, what options does a beneficiary have?

Answer 38

* Claiming a proportionate share of the asset * Enforcing a lien upon it to secure a personal claim against the trustee. ## Footnote The trustee's interest is subordinated to the beneficiaries’ interest.

Question 39

What principle governs the treatment of innocent parties in cases of innocent mixtures?

Answer 39

Innocent parties must be treated equally. ## Footnote This means beneficiaries can only claim a proportionate share of the asset.

Question 40

What is the outcome for beneficiaries when trust funds are mixed with funds from innocent third parties?

Answer 40

Beneficiaries can only claim a proportionate share of the asset. ## Footnote The courts have not clarified if beneficiaries can assert an equitable lien limited to their proportionate share.

Question 41

What is the effect of subrogation in trust law?

Answer 41

Beneficiaries can be ‘subrogated’ to the rights of the creditor when misapplied trust money is used to pay a secured debt. ## Footnote This allows beneficiaries to take a security interest over the trustee’s asset.

Question 42

What is a primary defense against an equitable proprietary claim?

Answer 42

The defense of the purchaser of a legal interest without notice of the trust. ## Footnote This protects buyers who acquire an asset without knowledge of the trust breach.

Question 43

What happens if a trustee sells shares purchased with misapplied trust funds to a third party?

Answer 43

The beneficiary cannot make a proprietary claim against the purchaser if the purchaser had no notice of the breach. ## Footnote The beneficiary can only assert an interest in the dissipated sale proceeds.