TRUSTS LAW TRACING – TERM 2 WEEK 4 m

Tracing Overview:

 See handwritten notes.

Tracing: Understanding Nature of Tracing Claim

 Introduction

 Tracing allows owner of property to go and recover property in the event it is taken from her involuntarily OR recover substitute property if original property can’t be
identified or recovered (for whatsoever reason)

 C literally “traces” her original property rights into substitute property that has been acquired using her original property.

 Tracing is basically detective work  where did your property rights of property to be held on trust went to?!! !

 Once tracing is done  and C can show given property was derived from her original property, it is for C beneficiary to tell court what remedy it seeks.

 Court can do the following (for remedies):

(1) Compensation order (Target Holdings v Redferns)

(2) Order that property be restored by direct transfer to rogiinal owner (Foskett v Mckeown)
(3) Order that property be held on RT (El Ajou v Dollar Land Holdings)
(4) CT (Westdesutche)
(5) Subject to charge (Barlow Clowes v Vaughn)

Examples to illustrate nature of issues:

E.g. 1. My $ from bank account stolen via electronic fraud and $ all used to buy computer – I can bring action which traced my prop rights in my $ through that computer.

So I will impose prop rights over the computer.

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E.g. 2 My $ from bank account stolen via electronic fraud, $ mixed with innocent peron’s $ in another bank account and $ used to buy computer, holiday in Spain &
smartphone.  Q is WHICH PROPERTY CAN THE INNOCENT PEROSN AND I CLAIM?

None of us want to have paid for Spanish holiday, although we both want to claim rights in computer & smartphone!

Levels tracing operate What C wants to recover? :

1. Owner seeking to recover original property from D. (Identifying original property)

2. Owner might be seeking to recover BOTH her original property & any profits which have been realized from D’s use of property (Substitute Property)

3. Owner may not have been able to recover her original property because that property has been mixed with other property or it cannot be found or some other
person has acquired good title to it by virtue for e.g. of having purchased it in good faith – Westdeutsche (Mixtures of property)

** C seeking to assert title to substitute property which might take the form of sale proceeds received on sale of original property OR property acquired with those sale
proceeds or of some composite property in which original property combined in some way. => What title C wants to assert is largely going to depend on what on earth D
did in breach of trust?

There’s a difference between original item previously owned & seeking to establish title to substitute property (“traceable proceeds”), which is not the exact property,
which was previously owned! (Illustration – AH Pg 848)

E.g. Trustee sold my car. Fact & proof. Car taken from me, I know via its registration plate, I get exact car back. Original ownership  VERY EASY. 

BUT if trustee sold my car and the car cant br found becus ethe buyer moved away, I am forced to bring proceedings against person who took my car from me and
recover sale proceeds from her  money which had never been previously belonged to me BUT clearly derived directly from sale of my property. To establish such a
claim I must TRACE MY PROPERTY RIGHTS from car INTO the cash which D had received from selling my car. => “morally correct” for D to go and give up $$ from sale of
my car.

Substitute property  “Traceable proceeds” of the original property 

TRACEABLE => Owner’s rights in original property are TRACED INTO substitute property.

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Worked example:

Tim a trustee physically removed painting that formed part of trust fund in breach of trust. Tim will therefore bear liability of breach of trust. Lets say painting was
subsequently transferred by Tim to Anne, HIS ACCOMPLICE. There are various factual scenarios to consider under which beneficiaries might seek to establish rights in
property.

NOTE: Tracing claims operate IN TANDEM with other principles involving breach of trust, dishonest assistance & knowing receipt.

Tracing claim

(a) Identifying original property

 Let’s say Tim has no money to go and make good loss to trust fund relating to his liability for breach of trust and that physical painting is with Anne. Claim no value to
beneficiaries because Tim doesn't make good loss.

 So beneficiaries can go and have painting reatored to tryst funs by positively identifying property that is with Anne which ahs been removed from trust fund 
Common Law Tracing : : FC Jones v Jones – potato futures case

 This claim vindicates beneficiaries’ rights with order of retransfer of painting to trust fund (Foskett v McKeown)

 Following is the process of following same asset as it moves from hand to hand – Foskett v McKeown.  FOLLOWING IS NOT TRACING.

(b) Substitute Property

 Let’s say Tim has no money to go and make good loss to trust fund relating to his liability for breach of trust. Claim no value to beneficiaries because Tim doesn't make
good loss.
 What’s worse, the physical painting is not with Anne but instead sole to a bona fide purchaser.
 Bona Fide Purchaser  this services as a COMPLETE DEFENCE to a (potential) tracing claim E.g. Anne sold my property and sells it to bona fide purchaser, the sale
would have the result that the bona fide purchaser would take good title in equity to property.
 Luckily Anne still has sale proceeds from painting sale = that’s clearly identifiable as substitue for property in which Tim and Anne took from trust, even though that
sale proceeds money did not form part of trust fund.
 Whether to bring common law or equitable tracing claim by beneficiary depends on whether there is a MIXTURE or not.

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 Sale proceeds if held distinct from all other property, very simple – use common law tracing claim (FC Jones v Jones) & get sale proceeds which serve as CLEAN
SUBSTITUTE for painting & not mixed with any other property. (*e.g. Sale proceeds in envelope under Anne’s bed)

 What beneficiaries need to do here is TRACING, because property in Anne’s hand is DIFFERENT PROPERTY ACQUIRED AS A SUBSTITUTE FOR THE PAINTING.

(c) Mixtures of Property  RMB: Only equitable tracing claims can handle mixtures. WHETHER MONEY IS BEING MIXED OR NOT IS SO SO SIGNIFICANT!

 What beneficiaries need to do here is TRACING, because property in Anne’s hand is DIFFERENT PROPERTY.
 THE LAW’S POSITION: EQUITABLE TRACING CLAIM WHEN THERE IS MIXTURE  IT IS UNCONSCIONABLE FOR TIM AND ANNE TO REFUSE TO TRANSFER $ TO TRUST
AS SUBSTITUTE FOR PAINTING TAKEN FROM TRUST FUND.
 Let’s say Anne doesn't have painting in her possession anymore, painting sold and now not obtainable  but Anne has sale proceeds to the painting but the thing
is the $ sale proceeds is mixed with other property unconnected to breach of trust. Difficulty is $ substituted for painting has been IRRETRIEVABLY COMINGLED
WITH OTHER $.
 SIGNIFICANT PREREQUISITE OF AN EQUITABLE TRACING CLAIM  C MUST HAVE AN EQUITABLE INTEREST IN THE ORIGINAL PROPERTY BEFORE SUCH AN ACTION
CAN BE COMMENCED.
 Q: HOW DO WE AWARD PROPRIETARY RIGHT TO BENEFICIARY OVER SUCH MIXED FUND?
 DIFFERENT SORT OF FACTUAL CIRCUMSTANCES GIVE RISE TO THREE DIFFERENT TYPES OF ACTIONS & DIFFERENT KINDS OF REMEDIES C BENEFICIARIES WOULD ASK
FOR.
 Summary of different approaches:

(1) Charge over mixed fund (Re Diplock), OR

(2) Entitled to proprietary rights in property acquired from that mixed fund (Clayton’s Case, Barlow Clowes v Vaughn), OR
(3) CT (Westdesutche) over such property (El Ajou v Dollar Land Holdings)
OR (4) Entitled to be subrogated to rights of some person with an interest in that fund (Boscawen v Bajwa)

Personal Liability:

RMB  Trustees owe duty to ACCOUNT to the beneficiaries for management of the trust:

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  Tim will be liable for breach of trust either (1) to provide compensation OR (2) reconstitute trust fund directly  under Breach of Trust topic principles (Target
Holdings v Redferns)

 Anne will be liable for unconscionable and knowing receipt of trust property (Re Polly Peck International)

What do we really mean when we say “personal liability”?

Personal Liability  Liability to pay an amount of compensation equal to loss suffered by trust. => This is a purely personal claim such that if Timothy OR Anne were to go
into insolvency, the C will have NO ADVANTAGE in that insolvency because C will have no proprietary rights.

Tracing rules focus  Establishing proprietary claim to specific property:

Where property is particularly valuable, OR likely to increase in value, the establishment of proprietary claim will enable C to claim entitlement to any profits derived from
that property  AG HK v Reid

Let’s say Anne organized means by which Tim can sell painting but she did not touch painting herself, Anne will face liability for DISHONEST ASSISTANCE.  Royal Brunei
Airlines v Tan

If Bert were to receive painting and store it before selling it on Tim’s behalf, Bert will face liability for KNOWING RECEIPT of property in breach of trust.  Re Polly Peck
International

Claims involving Anne and Bert are PERSONAL CLAIMS for value of property passed on to them, instead of any proprietary liability in favour of the beneficiaries.

TRACING  it’s about claim brought on behalf of beneficiaries to ASSERT PROPRIETARY RIGHTS TO RECOVER THE PAINTING ITSELF, OR ANY PROPERTY SUBSTITUTED FOR
THE PAINTING.

*Generally, all these claims (personal OR proprietary) all pursued simultaneously by beneficiaries! – Lipkin Gorman v Karpnale

Search for solvent D => ANYBODY who can MAKE GOOD C’s LOSSESS!!!!

 Distinction between (1) FOLLOWING, (2) COMMON LAW TRACING, (3) EQUITABLE TRACING

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Following Common Law Tracing Equitable Tracing
 Following is the process of  Tracing is the process of identifying a new asset as substitute for the Old. - Foskett v McKeown.
following same asset as it
moves from hand to hand  Tracing concerns identifying the property OR value that has been substituted for C’s original property by means.
– Foskett v McKeown. 
FOLLOWING IS NOT
TRACING.
 Common law can't handle mixtures, meaning it  Equitable tracing  extensive jurisdiction, entitled C not just to rights in property
 Specific piece of property only allow following into original property that substituted for original property taken in breach of trust BUT ALSO rights in
being followed and was taken from original owner. MIXTURES in which such property is passed.
identified by original
common law owner, then  Common law tracing can trace into clean
returned to common law substitutions for that original property where
owner. original property is substituted by other property
but where substituent property is kept distinct
 Underlying idea is from all other property.
VINDICATING the original
owner ie. Beneficiary’s  Clean Substitute example  Sale of car held on
rights. trust – sale proceeds I clean bank account and
never mixed with other $$.
 Once tracing process is
pursued successfully &
target property has been
successfully identified, if
original property which
was taken from trust can
be identified separately
from all other property,
then a following claim will
be sufficient for court to
declare that the property
belong beneficially to the

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 beneficiaries of the trust 

 Tracing is a process, not a remedy. Tracing does not provide a remedy! – Boscawen v Bajwa

Steps to do for lawyers representing beneficiary C:

a) Trace into appropriate property.

b) Identify best remedy to bring against the property.

If C cannot prove any given property was derived from her original property, then there will be NO RIGHT to claim any sort of remedy – Ultraframe UK v Fielding

The eventual remedy is separate issue from Q of whether or not C can establish a tracing claim against identified property in the 1 st place. – Boscawen v Bajwa

Common law remedies may be available in relation to common law tracing, encompassing remedies such as common law action for $$$ had & received, which we met
in Westdeustche.

There are separate rules regarding Common Law & Equitable Tracing!

Common Law Tracing

 Introduction

Common Law Tracing allows C to identify a particular item of property belongs at common law to C.

Need C to be able to show property claimed is the very property which is to be restored OR that the property claimed has not been mixed with any other property. 
Lipkin Gorman v Karpnale (1991)

*** Lipkin Gorman v Karpnale (1991):

Facts: A partner used clients’ $ to gamble at a casino. Some of $ held separately by casino for partner. The partner’s firm sought to recover £ paid to casino which originally
came from client account via common law tracing.

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HELD: Right to claim in common law tracing  in respect to amounts of $ which were IDENTIFIABLE as having come from law firm’s client account => C could establish
common law tracing rights against sums of $$ held by casino to partner’s account which could be proven to have come from firm’s account & passed to D w/o being mixed
with other $$$, provided $$$ were NOT MIXED with other $$$.

HELD: Common law tracing cant take effect over telegraphic transfers between electronic bank accounts because that form of intangible property will not be clearly
identifiable.

Suggestion posed in FC Jones v Jones (1996) is that if $ (or rather credit representing that $) were ascribed to fresh account, to which no other credit has been ascribed,
then $ could be identifiable.

AGIP (Africa) v Jackson (1991):

Facts: D accountants arranged $$$ in a way that $ would be taken from C via forged payment orders made out in series of dummy companies. $$ would enter dummy
companies and then once $$ passed through their accounts, dummy shell companies would be wound up. Money Laundering Scheme! One of C’s claim was restitution at
common law of $ taken from them!

HELD: $ had been moved through numerous companies, currencies & bank accounts, it was held that it was no longer possible for original $ to be identified. NO COMMON
LAW TRACING AVAILABLE.

HELD: For Common Law tracing to be available, C MUST SHOW $ claimed was the VERY MONEY that has been wrongfully taken from trust by D’s fraud and that it has been
held separately from all other $$.

Extension of holding in AGIP case, property taken in breach of fiduciary duty & passed through number of companies, beneficiary of original fiduciary duty entitled to trace
her property rights through successive companies! (El Ajou)

 Understanding Limitations

Common law tracing cannot deal with mixtures. Mixtures  EQUITABLE TRACING.

Common way where beneficiary C cannot use common law tracing is where $$ has passed through numerous entities and jurisdictions – see AGIP case.

 New Direction  did common law tracing become broader?! What’s the scope of common law tracing?

** FC Jones v Jones (1996) – potato futures case

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 Facts:

 No suggestion transaction of partnership loaning $ to Mrs Jones (wife of 1 of partners) was illegal or wrongfully carried out.
 Mrs Jones used loan GBP11.7K to invest in potato futures and gained large profits.
 Mrs Jones had balance GBP49,860 from her investments in those future contracts!
 *** all that GBP49,860 held in a separate single bank account and never mixed with any other money.
 It transpired the partnership committed an act under Bankruptcy Act 1914 which meant that loan to Mrs Jones could not have been valid… => All partnership
property deemed to have passed retrospectively to Official Receiver (OR)
 OR entitled to get back GBP11.7K before it had been loaned to Mrs Jones!
 Claim by OR: Mrs Jones no title to original GBP11.7K & OR should be entitled to trace into Mrs Jones’s bank account to recover $ from her

Issue in Q:

 No doubt OR entitled to recover GBP11.7K before date of transfer to Mrs Jones.

 Q: WHETHER OR NOT OR WAS ENTITLED TO ENTIRE GBP49,860 WHICH MRS JONES HAD GENERATED FROM THAT INITIAL GBP11.7K IN HER INVESTMENTS IN
POTATO FUTURES!

HELD (CA): All of GBP49,860 could be paid to OR as part of common law tracing law claim.

** The rationales behind this holding suggest SIGNIFICANT DEVELOPMENT IN SCOPE OF COMMON LAW TRACING

Ordinary Understanding of Ruling in FC Jones v Jones Effects & Implications of ruling Future
Common Law Tracing [&
Equitable Tracing] before FC
Jones v Jones

OR can recover GBP11.7K but not
the further amounts unless OR
could show it had an equitable
interest in property (LINK to
Equitable tracing)
1. Millet LJ prepared to allow proprietary
common law claim on basis that $ at issue was
perfectly identifiable in a single bank account.
 because all monies held in 1 bank account
4. Order for Mrs Jones to transfer OR
GBP11.7K  violate property law? Q of
property law!
5. *** Profit made by Mrs Jones on potato
6. Common law won’t allow claim to pass interbank
clearing systems as original property in such
situations NOT CAPABLE OF BEING SUFFICIENTLY
CLEARLY to be able to say NO MIXTURE OF THAT
PROPERTY WITH ORTHER PROPERTY – FC v Jones v

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 2.
No equitable tracing because
partnership firm retained no
equitable interest in $$ lent to
Mrs Jones. Moreover, there’s no
fiduciary r/s between Mrs Jones
and OR so cant have equity claim
& equitable tracing claim
anyway…
3.
Millet LJ said nature of common law tracing futures investment could be traced at Jones
right is a PROPRIETARY RIGHT to claim common law.  about VINDICATION of
whatever was held in bank account, whether rights ?!!!
amount at the time of claim was more or less
than original amount deposited. He said
immaterial whether or not amount constituted
profits on original $, or simply original $ OR
combination of two.
Nourse LJ reached same conclusion, but he
mixed personal & proprietary claims 
Because of his construction. Claim he
expressed himself willing to grant was personal
claim for $ had & received but on these facts
that was explained as being right entitling OR
to right in property representing original
property (may be more than rogiinal $) and not
merely original property. Claim based on
CONSCIENCE  then suggestion here is this
claim is more an equitable one!

Equitable Tracing

1. Introduction

 Equitable Tracing is MORE EXTENSIVE MEANS OF tracing proprietary rights than is available at common law (because it can HANDLE MIXTURES).

 Equitable Tracing can handle mixtures, the significance is that 1 of a number of different equitable remedies may be used to reconstitute C’s property rights.

 RMB  C must have some equitable interest in property that is to be traced before equity will entertain client! (This equitable interest can be in the form of,
BI under express, Quiestclose, RT or CT

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Steps to do for lawyers representing beneficiary C:

a) Trace into appropriate property  Identify THE PROPERTY which stands as substitute for beneficiary C’s original property & against which she wishes to bring a
claim.

b) Having traced the property, next: Identify best equitable remedy to bring against / to be imposed over that property.

2. Need for prior equitable interest

The traditional rule

 RMB: PREREQUISITE  C must have some equitable interest in property that is to be traced (original property) OR the person who transferred property away
had some fiduciary r/s to C (such as being a truste) before equity will entertain client! – Re Diplock’s Estate

 This equitable interest can be in the form of, BI under express, Quiestclose, RT or CT

 There MUST be a pre-existing fiduciary r/s which calls the equitable jurisdiction into being & Example of application of Principle: Boscawen v Bajwa

Facts:

 Purported contract for sale of land which was not completed.

 Bajwa had charged the land by way of mortgage with Halifax before exchanging contract for sale of property with purchasers. So, purchasers sought mortgage
with Abbey National. Loan $ provided by Abbey National were paid to solicitors who were entitled to use $ only as part of purchase.
 Mistakenly, solicitors thought transaction was going properly but sale was never completed.
 Result was solicitors used Abbey National’s $ to pay off Bajwa’s mortgage with the Halifax, but did not acquire legal charge in favour of Abbey National as purchase
didn't take place.
 Solicitors who were holding purchase money went into insolvency so sale could not be completed.

Issue:

 Abbey National was to recover $ which had been held on express trust for it by solicitors & then used to pay off Bajwa’s debt with Halfax.
 Q: WHETHER OR NOT BANK WAS ENTITLED TO TRACE INTO DEBT WIH BUILDING SOCIETY & CLAIM A RIGHT IN SUBROGATION TO THE DEBT OWED BY BUILDING
SOCIETY.

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$ held on trust from outset  $ could therefore ve followed into solcicitor’s client account  ISSUE: Whether it could be traced further into payment of the building
society.

Holding:

 “Equity’s power to charge mixed fund with repayment of trust $ enables C to follow $, not because it is his but because it is DERIVED FROM A FUND which is
TREATED AS IF IT were SUBJECT TO A CHARGE IN HIS FAVOUR.” 
 Bajwa & solicitors were not dishonest in mixing bank’s $ & Bajwa’s $. So, Bajwa & bank could be treated as ranking pari passu in making of payments.
 Solicitors were fiduciaries & Bajwa MUST HAVE KNOWN THAT HE WAS NOT ENTITLED TO THE $ until contracts were completed.
 Therefore, Bajwa COULD NOT KEEEP sale proceeds & title to the property & Bajwa could not rely on favourable tracing rules set out in Re Diplock for innocent
volunteers

Liability to equitable tracing even of innocent volunteers

Re Diplock  the “charitable, benevolent purpose” case!

*D need not have acted unconscionably. Rather, the unconscionability will be DENYING rights of beneficiary to their property

Re Diplock :

Facts: Ds recipients of grants made to them by personal representatives of Deceased testator accd to that will. The gift was afterwards held to be void in other litigation on
which trust not charitable. Residue to passed on an intestacy. The NOK, entitled on intestacy brought an action to recover $ which had been paid away by personal
representatives.

HELD: Ds had acted in good faith and had every reason to think it was their property BUT they were nevertherless held to be subject to rights of residuary beneficiaries to
trace after $ in equity, even though they had not themselves acted unconscionably! Beneficiaries’ property rights held to bind even “volunteers provided that as a result of
what has gone before some equitable proprietary interest has been created and attached to the property in the hands of volunteer.”

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What this means is that it would not matter that ultimate recipients were innocent of any breach of trust provided there was some preceding breach of equitable duty by
somebody else…

Souce of property rights in hands of person under fiduciary duty

VS

Remedy  Which might then be sough against the volunteers who then held property….

Court will seek to protect beneficiary under original fiduciary duty rather than allow subsequent innocent volunteer to retain any rights in windfall which he has received.
 Foskett v McKeown

HELD: Beneficiaries under trust were entitled to trace in equity into proceeds of insurance policy after trustee’s death. So even though children paid no role in the breach of
trust, beneficiaries could assert their rights to trace, on top children’s rights in lump sum paid on maturity of insurance policy!

*This means innocent volunteer is prima facie liable in a tracing action with precise remedy to be decided.

Order Made in Diplock: Innocent Volunteers & Beneficiary Claimants should take pro rata share under an equitable charge in property held in that commingled fund!!

** Not just a matter of conscience & remedy recognises continued rights of innocent volunteer only in that part of fund not derived by trust!!

AIM: Vindicate property rights of beneficiaries of original trust in items of property which were mistakenly paid away.

Equitable tracing claim  Predicated on eistence of original equitable r/s & consequently, recognises original duties of good conscience owed to Claimant-Beneficiary
=> Merely enforcing that person’s rights via equitable tracing.

3. Benefits of equitable tracing

The Benefits

THERE MUST BE A FIDUCIARY R/S WHICH CALLS THE EQUITABLE JURISDICTION INTO BEING.  AGIP V JACKSON
EQUITY CAN TRACE INTO COMPLEX MICTURES OF PROPERTY BEYOND COMMON LAW JURISDICTION.  AGIP V JACKSON

AGIP v Jackson:

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Facts:

 C (Banque du Sud Tunis) is an oil exploration company’s transmitted payment to Lloyds Bank London to be passed on to a specific person.
 C chief account fraudulently altered payment instruction so that $ was passed on to another company (Baker Oil Ltd)
 Before fraud uncovered, Llyods paid out under C Chief Accountant’s Instruction Baker Oil before receiving payment from C Company view NYC Payment system.
 Account closed, money transferred via Isle of Man to numerous recipients controlled by D – Ds are independent accountants who ran a number of shell
companies.

Issue:

 Issue arose whether or not the value received by Baker Oil constituted traceable proceeds of property transferred from C oil company.

HELD:

 Either principal or agent can go and sue on equitable tracing claim & role of C not restricted to C in this case. Bank had not paid Baker Oil with its own bank money
but on instruction from C which was its customer…
 Impossible to trace $ at common law where value had been transferred by telegraphic transfer, thus making it impossible to identify specific money that had veeb
misapplied!
 Because C’s fiduciary acted fraudulently, it was open to C to trace $ in equity through shell companies and into D’s hands.
 Personal liability also imposed on those persons who had knowingly received misapplied funds OR who had dishonestly assisted in misapplication of funds.

Limitations on right to trace in equity

Roscoe v Winder:

 HELD: Beneficiaries CANNOT claim an amount exceeding the lowest intermediate balance in bank account after money was paid in! => C not entitled to trace
into any such property where the account has been run overdrawn at any time since the property claimed was paid into it.

 Possible for C to trace into account where $ paid subsequently.

 BUT reality is, E.g.

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  Fraudster took $ belonging beneficially to C to pay into UK Bank account then removes all $$$ from UK Bank account to another bank account in another country
that will not enforce UK Judgments, then loss of right to trace into UK Account will effectively signal LOSS of any feasible hopes of recovering C’s $$ at all 

 Equitable Tracing into Mixed Funds

1. Mixture of trust money with trustees’ own money  Situation where trust property is misapplied in such a way that it is MIXED with property belonging to
trustee

Fungible VS Non-Fungible Mixtures  MUST KNOW.

Fungible  mutually interchangeable… Mixtures involving $$$$ taken from trust with property beneficially belonging to ben eficiaries.. Other intagible items… E.g. $$ in
bank account, Sugar A mixed with Sugar B

Fungible Property => Segregation of trust property and other property cannot be performed easily.

Where it is impossible to separate 1 item of property from another, it will be impossible to affect common law following claim.

KEY thing is to identify title in property in funds, which are made up both of trust property and other property.

NOTE: Courts’ attitude is to use whatever legal construction/ method will give the JUST RESULT.

Different outcomes can be achieved with different approaches on same set of facts.

Seminar Qn: “Tracing is a set of evidential presumptions ruled by one over-arching presumption: that all presumptions must operate against the wrongdoer” Is this
statement consistent with the authorities?

(A) THE HONEST TRUSTEE APPROACH  Re Hallett

Problem mixtures presents  How to decide whether property acquired with $ from that mixture is to be treated as having been taken from the trust OR as having
been taken from trustees’ own $$?

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IN RELATION TO INVESTMENTS  trustee is required to invest trust property to achieve best possible return for trust (Cowan v Scargill) & the trustee is required to
behave honestly in respect to trust property, court is likely to assume trustee intended to use trust property to make successful investments & use her own $$ for any
inferor investments…

In Re Hallett, what this means is that it Is assumed when trustee has $ in personal bank account to which trust $ is added, trustee is acting honestly when payng $out of
that bank account. => Assumed trustee is paying out her own $ on investments which lose £ and not trust ££. Trustee must be assumed to have acted honestly so that
he lost his own money and invested trust $$$ appropriately.

SIGNIFICANCE  (1) Holding D trustees to standard posed by EQUITY => D cannot act against his own conscience.Holding any benefit to derive from property held
wpuld be passed to the benficiaries.. (2) Investment in successful investments would be deemed to be investments made out of trust property!

Useful legal fiction  Needs trustee to protect beneficiary’s position at the expense of its own!

Fictional Example:

 Trustee used money in bank account (trust $ mixed with trustee’s own $) to make good investment and pay for an expensive meal. (Assuming half hald ) The
expensive meal will be said to be paid by trustee’s $, good investment shares used trust $$  In this manner, trust is able to recover shares from trustee & recoup
value of trust fund.

**Re Hallett’s Estate (1880)  Trustee mixed his own property with the trust property. Source of mixture. In Re Hallett, we have some Russian bonds. Old days, all
securities placed in physical form, like banknotes. You are presumed to be owner if you have physical bonds in your hands. Hallett is a solicitor who holds bonds for his client.
Solicitor also in his own capacity owned identical bonds. He basically put 2 holdings of bonds together in a safe. Hallett’s bonds of his own marriage settlement. Then later,
Hallett later sold all of bonds – those that belonged to his client and his own.. All sale proceeds placed in his own personal bank account. Putting sale proceeds in account
and dying…

Hallett died. Q: who owned what in sale proceeds?

Client said  My solicitor held bonds on trust. Pre existing equitable interest 

From sale proceeds that remain  how to work out whose is whose? What belongs to Client beneficially and which one belongs to Hallett’s own estate.

What court did was to take fictional approach. Court wanted to say of $ left in Hallett’s bank account  money should be applied first to client for money he was owed to
sale proceeds for bond. Court said assume trustee acted honestly and when Hallett spent money out of mixed account - the money was his own not client’s. Real fiction 

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you cannot prove this. It’s a convenient way of saying if Hallett spent money on own living expenses, whatever left was Client’s so he could trace into whatever money to get
to sale price.

Clearly directed and avoiding trustee from taking any benefit by mixing their own property with trust property  very useful legal fiction

(B) BENEFICIARY ELECTION APPROACH  Re Oatway

*Re Oatway (1903)  gives another approach from Hallett case. We call Re Oatway the “beneficiary fiction” approach. Let beneficiary choose what to claim?

Re Oatway:

 Trustee holding GBP 4077 on trust in separate bank account to begin with.

 Trustee took GBP 3K from trust fund out and mixed it with money on his own.

 GBP 7077 in mixture now. Situation – trustee starts to spend $ out of mixture. Trustee then goes and buys shares.

 GBP 2137 out of mixture by purchasing shares.

 Remainder $ (GBP 4077 – GBP 2137) dissipated = wasted on ordinary expenditure so that no specific property could be recovered.

 Beneficiaries sought to trace from GBP 3K taken out of bank into shares and then to impose a charge over these shares. The shares themselves rose in value to GBP
2474, so shares had increased in value by time came for trial. + Beneficiaries also sought further accounting in cash to make up balance of GBP 3K taken from trust
fund.

HELD:

 From the onset, a trustee is supposed to keep her own $$ and trust $$ distinct and separate.
 Where trustee wrongfully mixed her own $ and trust $, trustee cannot say investment made with her own $ and trust $ had been dissipated.
 Beneficiaries are entitled to elect either decide if they want to trace money left in bank account OR they can elect instead to trace into the shares that were bought in
bank account and still have claim in bank account for balance to make up GBP 3K.
 To be more precise  Beneficiaries could decide to have property subject to a charge as security for amounts owed to them by trustee OR that unauthorised
investments be adopted as part of trusts fund.

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 Idea that trustee obligations towards beneficiaries are STRICT  CRF to Foskett v McKeown
 Ultimate e.g. court assume everything against trust… Problem you cannot prove whether trustee’s money or trust money used to buy shares. So beneficiaries should
be able to choose what claim they want.  again all fictitious, gets us to result they want.

One case made exception to be against trustees, is Re Tilly  Situation where there is a trustee who has trustee holds money on trust on trust account and also has her
own personal money which is used to invest. She has overdraft over personal investment account and she is breaching limit of overdraft but she wants to keep investing.
Tough. So what she does is take money from trusts account and put money in her own account to reduce her overdraft meaning she has more money to spend in personal
account. Overdraft limit reduced. She goes up to limit, invest fresh money, beneficiaries found out and sue her. Beneficiaries argue can trace money into her account for
investment. She argue its her bank account. Yes, beneficiaries argued she used their money so that her overdraft could be reduced. Court held for her instead of
beneficiaries – court said money used for investment simply paid into her account… Cannot trace into investment…

*** Really goes against Hallett and Oatway cases, Hudson is not comfortable with the ruling in Re Tilly. She wouldn’t have been able to make those investments without
putting in trusts money into her own bank account. That’s her overdraft. Hudson’s view is that Re Tilly should have used Foskett v McKeown analysis, which would be to
find that “if trust money made investment possible, the trust should be taken to have contributed traceable funds into acquisition of those investments”

*Foskett v McKeown (1997)  We have a trust fund. Trustee involved. Trustee has personal life and has children. Trustee had taken out an insurance policy over his own
life in favour of his children. Insurance policy, trustee must pay out premiums to keep policy going. Last 2 out of 5 premiums he runs out of money so he dipped into trusts
fund and uses trusts money to make last 2 premium payments on insurance policy. GBP 20K taken from trusts fund to pay off last 2 premiums. Policy pays out in the end
about GBP 1M. Trusts $ paid 2/5 out of total premium payment, therefore trusts payment paid GBP 400K worth of total payout. Trustee committed suicide after 5 th
premium payment made. Triggered payment out of insurance policy. Beneficiaries found out – litigation started.

Beneficiaries argued that insurance payout funded 2/5 by trusts fund. Therefore they should be entitled to trace to 2/5 of total payout.

Children of trustee argued GBP 20K taken from rtusts fund and therefore all required should be pay back beneficiaries GBP 20K.

HELD (CA) for the children. But appeal went to HOL. HOL held for beneficiaries.

HELD (HOL)   pre-existing equitable interest – so could go for equitable tracing. Mixture of trusts money mixed up with trustee’s personal $ to pay for children’s
insurance policy . HOL took Lord Millet’s view – leading speech. Beneficiaries should be able to trace – it is their GBP 20K that is effectively being invested away which
generated 2/5 of total lump sum payout. Therefore, beneficiaries should be taken to have proprietary right of insurance payment….

If you feel sympathetic for children, you will think their argument works.

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 2. Mixture of two trust funds or mixture with innocent volunteers’ property  Situation where trust property is misapplied in such a way that it is MIXED with
property belonging to innocent 3rd party.

General Principle(s):

 Rationale behind allowing beneficiaries to go and trace property even though mixture involved innocent volunteers’ properties  It will be contrary to
equity that innocent volunteer occupy better position than person who was responsible simply by reason of her innocence. : Foskett v McKeown

 Mixture of two trust funds or mixture with innocent volunteers’ property  You cannot identify one of those property owners as being a wrongdoer as
in Hallett OR Oatway.

 General Principle in cases involving tracing actions being brought by 2 or more innocent parties into mixture is that property will be held for them IN
PROPROTION TO SIZE OF THEIR CONTRIBUTION TO THE MIXTURE!  this principle holds good for all kinds of property, except bank accounts.

 In relation to the general principle: Re Diplock  Entitlement of beneficiary to mixed fund should rank pari passu (or in = step, or proportionately) with
the rights of the innocent volunteer(s).

 *** “Where an innocent volunteer [not bona fide purchaser] mixes money of his own with money which in equity belongs to another person. Or is
found in possession of such a mixture, although that other person cannot claim a charge on mass superior to claim of the volunteer, he is entitled
nevertheless to a charge ranking pari passu with claim of volunteer….Such a person is not in conscience bound to give precedence to equitable owner
of the other of the two funds.” – Re Diplock

 *** “The primary rule regaeding a mixed fund is that gains and losses are borned by contributors in proportionate shares rateably! Beneficiary’s right
to elect instead to enforce lien to obtain repayment is an exception to primary rule, exercisable when fund is deficient and claim is mmade gaianst
wrongdoer and those claiming through him”  Foskett v McKeown

 Tracing into Bank accounts are governed by separate rules

RECAP:

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Foskett v McKeown (1997)  We have a trust fund. Trustee involved. Trustee has personal life and has children. Trustee had taken out an insurance policy over his own
life in favour of his children. Insurance policy, trustee must pay out premiums to keep policy going. Last 2 out of 5 premiums he runs out of money so he dipped into trusts
fund and uses trusts money to make last 2 premium payments on insurance policy. GBP 20K taken from trusts fund to pay off last 2 premiums. Policy pays out in the end
about GBP 1M. Trusts $ paid 2/5 out of total premium payment, therefore trusts payment paid GBP 400K worth of total payout. Trustee committed suicide after 5 th
premium payment made. Triggered payment out of insurance policy. Beneficiaries found out – litigation started.

Beneficiaries argued that insurance payout funded 2/5 by trusts fund. Therefore they should be entitled to trace to 2/5 of total payout.

Children of trustee argued GBP 20K taken from rtusts fund and therefore all required should be pay back beneficiaries GBP 20K.

HELD (CA) for the children. But appeal went to HOL. HOL held for beneficiaries.

HELD (HOL)   pre-existing equitable interest – so could go for equitable tracing. Mixture of trusts money mixed up with trustee’s personal $ to pay for children’s
insurance policy . HOL took Lord Millet’s view – leading speech. Beneficiaries should be able to trace – it is their GBP 20K that is effectively being invested away which
generated 2/5 of total lump sum payout. Therefore, beneficiaries should be taken to have proprietary right of insurance payment….

HOL  Policy consideration: HOL chose to VINDICATE property rights of beneficiaries by means of recognising th at the contributions which trust fund made to
insurance policy ENHANCED final lump sum and the comparatively small contributions to those premiums acquired proportionate proprietary rights in much larger
lump sum paid out on policy’s maturity => So contribution of only GBP 20K landed a share of GBP 1 Mil policy pay out because that GBP 20K constituted 2/5 of all the
premiums!!!

If you feel sympathetic for children, you will think their argument works. However, justice would not necessarily be achieved by recognising children’s rights.

Deeper underlying consideration behind HOL’s decision  it was recognising fact that trustee ought to have been investing in trust fund properly & that for
beneficiaries simply to have looted cash returned to them would NOT give them return they would otherwise have expected on their capital if trustee had managed
and invested properly.

Suggestion is that children would otherwise have receive windfall (in the form of size of insurance policy pay-out) w.o recognising beneficiaries’ unwitting contribution
to wealth!

So, beneficiaries are entitle dot pursue their property rights into any fund of $$ if D cannot give defence to a claim for its recovery.

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* Law of tracing requires if beneficiaries deserve a share in investment  Clark v Cutland : When 1 of shareholders organised diversion of company’s assets into his
personal pension fund, HELD: company entitled to trace into that pension fund (applying Foskett v McKeown) HELD: Appropriate portion of value taken from penson find
shouldbe held on CT for company….

*Foskett v McKeown (1997)  good backdrop. Lord Millet  this area of law based on property law principle not unjust enrichment.

Re Hallett  it's about the remedy part.

Lionel Smith tracing  whole of tracing got to do with reversing unjust enrichment? We give proprietary claims to recognise because if property taken from you in some
way end up in D’s hands, instead of D unjustly enriched at your expense  you should be able to use equitable tracing and impose a RT on that property (Westdeustche) 
RT 2 categories  everything operate in basis on conscience.

*Foskett v McKeown (1997)  Lord Millet says not basing argument on beneficiary – just borrow idea from Graham Virgo. Professor at Cambridge, that “we are protecting
somebody’s property right” … TWE is D enriched?  THIS IS NOT THE Q. Q is VINDICATING AND PROTECTING UNDERLYING PROPRIETARY RIGHTS…

Trusts Money mixed with Trustee’s Personal Money  Foskett v McKeown.. Ditto: Re Hallett

General rule approved by Lord Millet in Foskett v McKeown  when you have a mixture:

“Where an innocent volunteer purchaser value w/o notice mixes money of his own with another person found in possession….. he is entitled to a charge ranking pari
passu with claim of volunteer…”

When you contribute to mixture of property – you each take proprietary right in that mixture in proportion of size of contribution. E.g. you contributed 40%, you are
entitled to 40% of what property is worth – pari passu, pro rata. 

Okay, so what does law of tracing seek to do?

*Award proportionate interests in the fund available and this will be the case whether fund increases or decrease in value. (Esp shares) – E.g. AH Pg 868-869

*Difficulties will come in when property cannot be divided by parties rateably because the property itself (for e.g. a fur coat) cannot reasonably be cut into pieces &
divided.

“If a man mixes trust funds with his own the whole will be treated as trust property, except in so far he can distinguish what is his own.” –Foskett v McKeown

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  See handwritten notes & diagrams

Q: How to decide which property has been used to acquire which items of property ?

1st in 1st out Approach – Clayton’s Case Proportionate Share – Barlow Clowes v Vaughan Approach by other jurisdictions!

Money deposited first is used first! (Rigid
accounting principle)
Money paid first must be deemed money to first
exit the account!
Barlow Clowes: Investors in collapsed Barlow Clowes
organizations had losses met in part by Department of
Trade & Industry. Sec State then sought to recover in
effect amounts that had been paid away tp those former
investors by tracing compensation paid to investors into
assets of Barlow Clowes.
HELD (CA): Favoured distribution between rights of
various investors on pari passu basis, Clayton’s case too
formalistic and arbitrary
Canadian approach  “Rolling charge”: SO investors
would need to consider not only size of contribution of
fund but also the length of time for which $$$ was part of
the fund!
Longer the time, >> $$$ expected to be made?\
Effect: Share impact of losses.
Taking proportionate size of contributions into account
 IDEAL!

**BUT NOTE Clayton’s case not overruled. ON Barlow Clowes facts, calculating separate
entitlements would have been particularly complicated
given large number of investors & huge range of
investments made by funds at issue.

*CAVEAT  some investors would have had investments

in fund longer than others so credit should be received
for duration of investment
Which Approach is Preferred?

 Barlow Clowes is preferred by the English Courts and they would resile from Clayton’s Case if possible.
 Clayton’s Case not formally overruled, it’s just criticized and distinguished  That is all! Clayton’s case is still binding but can be distinguished on the fats of any
given case. (Russell-Cooke Trust v Prentis  Q was asked: Which was the more appropriate principle?)

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  So Clayton’s case will NOT be used if it will cause injustice and unfairness between parties, or demonstrate a contrary intention in their dealings.  Commerzbank
v IMB – not practical to make distribution based on which investor paid first => Not practical.
 2 innocent parties’ properties mixed together  Court will decide in a way to bring justice to these 2 parties.
 Sheer volume of $$$ donations given by donors make it impracticable to operate Clayton’s case  Charity Commission v Framjee : Charitable trust operated
website that purported to raise $ for different charities and CC investigated this trust because there was a large shortfall between amount of money raised via
website and amount of money actually distributed to charitable purposes.
 Large number of transactions involved  Barlow Clowes is the ideal approach. Clayton will not be approached if results will be too arbitrary, irrational OR
impracticable to apply!

3. Tracing payments made by mistake

Q: What happens when A mistakenly pays $ to B so B has no true entitlement to it? Would A be entitled to trace that payment and enforce a remedy to recover it from B?

A: Yes. Property should be held on trust for payer and deemed to be held on trust for it => protecting payment from the insolvency. – Chase Manhattan Ban v Israel-British
Bank
Westdeustche  Lord Browne-Wilkinson prepared to accept decision correct on basis that a CT arose at time when property was received and the recipient KNEW of the
mistake.  the COMBINATION of knowledge of mistake & Effect on recipient’s conscience would be sufficient to justify the creation of a CT. Same token, ignorance of
mistake would not give rise to equitable proprietary right.

Loss of Right to Trace

1. Loss of right to trace – general principle

 A Claimant in a tracing claim will lose her right to trace if the property (the substitute property) into which she is seeking to trace her rights either ceases to exist
OR cannot be found. – Ultraframe v Fielding

 Baking cake analogy  Sugar held on trust, mixed with butter and eggs to become cake mixture. No trust property left in sugar bowl. So beneficiaries LOSE RIGHT
TO TRACE because all their property in that sugar bowl has gone. Instead, beneficiaries will seek to trace into mixture in a large mixing bowl instead because it
can be proved their property is now a part of that mixture in the large mixing bowl.

 Loss of right to trace is considered in the electronic bank accounts context.

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  If a bank account has zero $, C will lose her right to claim in that bank account because the $ that represented her property has clearly passed out of that account
by the tim the level of that account reached zero – Westdeutsche

 NOTE: Loss of right to trace means loss of right to trace AGAINST ONE PARTICULAR ITEM OF PROPERTY, but it does not necessarily mean the end of the tracing
process if there is another substitute item of property somewhere else.  Westdeutsche

 Westdeutsche  the $ acquired from bank was paid into bank account and then all $ was spent such that account later went overdrawn. HELD: Loss of right to
trace into THAT PARTICULAR BANK ACCOUNT. If it could have been shown $ was spent on acquiring some other property, then beneficiary can go and trace into
that property…..

 In Westdeutsche, $ was spent on local authority’s general expenses and not used to buy any specific property against which tracing actions could be brought…. Right
to trace died as there was no property the bank could point to and identify to bring an action.

Ultraframe v Fielding

Facts:

 C sought to claim D earned profits by misusing C’s IP in breach of trust to manufacture high quality double glazing components.
 C argued D’s provits came from C’s property.
 C however couldn't show unbroken chain of property rights leading from itself to D.

HELD:

 Where C could not identify any particular item of property constituting traceable proceeds of original trust property, then it would NOT be possible to trace into
any profits which D had made because no link between it and any property taken in breach of trust had been proven.
 C must show property in D’s hands constitute traceable proceeds of C’s property , profit was DERIVED from C’s property…
 Any break in chain of then C will lose rights.  principle supported in Bishopgate v Homan

You can’t trace $ into an overdrawn account on basis that property from which traceable substitute derives is said to have disappeared  Bishopgate v Homan
No equitable remedy can be enforced against an asset which was acquired before misappropriation of $$ - can’t trace into property which had been acquired w/o aid of
misapplied property.

Sequence of events matter:

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Anne buys car 1 Jan, subsequently misappropriates trust fund on 1 Feb, beneficiary cannot go and trace her prop rights into car. CANNOT be said trust property made it
possible to acwqure car because she got money after getting car.

Backwards Tracing:

Backwards Tracing is a particular kind of problem which is presented by certain scenarios.

Federal Republic of Brazil v Durant (PC) - money laundering scheme, where Brazilian officials received bribes.

$ laundered through various accounts. Ds operated money laundering operations to make it look as though amounts were debited from bank accounts before traced $ has
even been paid to them.

Transfers not connected yet accepted by court these debits and credits were part of reciprocal transactions & C could trace into D’s acct even though it appeared D had
made payment before receiving C’s property!

E.g  Debt discharged seemingly before C’s property reached D but where C’s property was necessary to fund acquisition.

I buy car with loan and then discharge the loan the next day by using trust $ to discharge loan using trust $.

Lord Toulson  He said backwards tracing could be permitted because these particular payment flows had been coordinated and choreographed by Ds to make it
appear as though traving should be impossible.

In Federal Republic of Brazil v Durant (PC) , D’s made it appear as though $ had been paid before C’s property reached the account!

Academic Critique (AH): Lord Toulson’s judgment was sensible, because it would be too easy for the court to “become befuddled by a spurious debit being taken from an
account before the traced property is added to that account so that the two appear to cancel one another out such that there is no property to trace.”

Benefit of equitable tracings => “penetrate shields which money-launderers seek to erect to protect their ill-gotten gains” & look at substance of matter rather han being
misld by form (Relfo v Varsani)

2. Lowest Intermediate Balance (AH Pg 879-880)

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 It’s a principle that accounts for circumstance in which property is taken away from a mixed fund and new property is then added subsequently.

 General Principle for loss of right to trace does not deal with the aforementioned scenario…

 Q arises whether C beneficiary can go recover the whole of her loss from that account OR only the GBP 20 which could be said to represent her property.

 Q arises whether C ought to be able to trace into any property held in a fund to which her own property had been added OR whether C should be restricted to tracing
ONLY in property which can be demonstrated to have derived from original misappropriation of property

 RULE lies in Roscoe v Winder  C only has right to claim lowest intermediate balance of that property! C can ONLY trace into lowest value of property held between
date of its misapplication & date of claim being brought because that’s the largest amount which could possibly be said to have resulted from her contribution to the
mixture originally!

Roscoe v Winder :

Facts:

 $ taken from trust, paid into bank account and mixed with other $ such that sums were paid into & out of that account on numerous occasions, causing fluctuating
balances in that account over time. Issue is to ascertain which level in the bank account should be considered to be the one against which claimant could claim.

HELD:

 Assuming trust $ was the last to be paid out of the account, C could assert a claim only against lowest level in that account because (by definition), any money paid into
the account after that lowest level had been reached could NOT be said to have been derived from the trust!

3. Tracing through electronic bank accounts

When considering way in which tracing applies to $$ held in accounts, conceiving of that $$ as being tangible rather than being simply an amount of value, creates
problems, exp in relation to LOSS OF RIGHT TO TRACE.

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  Westdeutsche, $ was spent on local authority’s general expenses and not used to buy any specific property against which tracing actions could be brought…. Right to
trace died as there was no property the bank could point to and identify to bring an action, given that it had been paid to bank accounts which subsquemntly been
run into overdraft on a number of occasions.

 Bank account  Once $$ bank account goes overdrawn OR $$ is spent, that $$$ disappears. (Lord Browne-Wilkinson, Westdeustche)

 Acdemic Critique (AH) : English law remains determined to understand property in terms of tangible property and not value which attaches to different items of
property (tangible or intangible) from time to time. Now, there’s an irony here because purpose of the law of tracing is to recognise that property rights may
continue to exist even though original property itself is BEYOND REACH 

Claiming: Trusts & Remedies (EQUITABLE REMEDIES)

After understanding NATURE of tracing process, must know types of claim & forms of remedy that might be imposed as a result of it.

STRUCTURE:

(1) Tracing process carried out according to principles listed above.

(2) Having identified property which is to be the subject matter of the claim (via tracing), C seeks to impose a trust or some equitable remedy over that property.

*There are no clear rules as to which remedy should be applied in which situation but rather courts seem to be prepared to impose whichever remedy seems to be
most appropriate in the circumstances & whichever remedy provides most convenient solution for successful Cs.

1. What form of remedy would be most appropriate: (1) CHARGE, (2) LIEN, (3) CT, (4) SUBROGATION?  need all these remedies to deal with mixture cases
EQUITABLE REMEDIES.

 Onus on C to decide what is the most appropriate remedy to claim for.

 This will be based on nature of property & whether or not there are innocent 3 rd parties involved.

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 2. CT recognised in response to equitable tracing claims

 CT entitles C to an equitable proprietary interest in traced property.

 Typically, C likes to go for CT so that C can become absolute beneficial owner of property and acquire any future increase in value in that property.
 CT likely to be sought if property is intrinsically valuable or when it is likely to be of use to C. (E.g. Shares)
 CT is imposed so that D would not act against his conscience (D must know some factor that would affect his conscience)  Westdesutche (HOL)
 Pre existing equitable interest (Re Diplock) & Identifiable Property to be subject matter of trust (Westdeustche)

Westdeustche in closer detail:

Facts:

Bank paid $ to local authority under interest rate swap contract that was later found to be void ab intio..

Issue:

Whether bank could demonstrate that local authority should be required by virtue of common mistake as to validity to contract OR failure of consideration when contract
was avoided to be treated as constructive trustee of $$ paid into it such that bank would be able to trace $ into LA general fund.

HELD:

 LA would NOT be treated as having been constructive trustee of $ paid to it by bank as from time it received $ until time at which it dissipated those $, it had no
knwoeldge that contract was void ab intiio AND could not have dealt unconscionably with $$$.

 No CT, No trust of any kind.

 No equitable interest sufficient for equitable tracing claim.

Academic Critique over when to impose CT:

CT imposed when C’s conscience is affected (Westdeutsche) OR CT imposed further to equitable tracing claim to protect C’s property rights in circs in which D’s conscience
doesn't see affected (Re Diplock)

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 3. Charges in tracing C paid amount of $ & Charge and Lien require property can be identified separately from other property

 Charge will give proportionate right to fund of property = to given value & no need to segregate property within that fund as required for creation of trust  Re
Goldcorp
 Charge is a means of granting security interest over property to C w/o need to compensate beneficiaries for loss of trust….
 Charges only arise in equity and entitled C to seize property and get a court order to sell it if D does not pay C whatever debts D owed C under terms of charge.  it’s
the nature of charge as a form of security that gives this extra benefit!

 Fixed Charges , Floating Charges  (Company Law)

4. Liens in tracing

 Lien entitles C to take physical possession of property & retain property until D pays C whatever C owed.
 C needs possession of property before seeking permission to sezie property (In Equity)
 A lien is a RIGHT ONLY to DETAIN property & NOT RIGHT TO SELL IT.
 If C wants to sell asset, C must go and apply for permission from court.
 Lien can arise in common law (form of contractual right, express contractual provision) & in equity (imposed by court)
 Is lien a primitive remedy? Self help remedy?
 Examples when court will award equitable liens  Pg 887 AH TB

5. Subrogation  C paid amount of $ & Charge and Lien require property can be identified separately from other property

 Powerful, equitable remedy in tracing

 Very useful in tracing claims when original property has been dissipated OR cannot be traced  What C can do is to DD that any obligation which was discharged with
original property is henceforth owed to C instead.
 Simple illustration  B used A’s $$ to pay off debt B owed to C, then equitable subrogation would permit A to insist B owed / owes the same debt to A .
 Boscawen v Bajwa  Leading case for this remedy
 Remedy of subrogation allows C to trace her property into D’s possession and then even if that property has been used to pay off debt and ostensibly has therefore
disappeared, C can become D’s creditor for debt which was discharged.

6. Choice of Remedies

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 The equitable doctrine of election

It is open for C to elect between remedies under doctrine of election!  Tang v Capacious Investments

 In Tang v Capacious Investments, possibility of 2 parallel remedies arose in relation to breach of trust!
 HELD in Tang v Capacious Investments : 2 remedies existed in the alternative and therefore the Plaintiff could claim both, not being required to elect
between them until judgment was awarded in its favour
 Crittenden v Bayliss  it would be an ABUSE of process of court for C to elect not to bring a tracing claim and then later stage of litigation seek to bring
tracing claim in any event. So if C wants tracing claim to be pursued, do from onset.

The choice of equitable remedies: A Summary

 Which remedy is most important depends on circumstances.

 Where property is subject to tracing claim is capable of being separated from other property so that it could form the subject matter of a trust, a CT ,ay be the
most appropriate remedy.
 If property not so segregated, then we cannot impose a trust (or CT for matter) over the property because the subject matter of that trust will NOT be
identifiable!!!
 E.g. Traceable proceeds of C’s original property mixed with property belonging to other innocent parties  more appropriate approach would be to award a
charge to each party in proportion to their contribution to total fund (THINK OF rationale  I’m sure the C doesn't want the other stuff inside, not useful to
C)!!!
 Alternatively, C might be awarded a lien in circs in which compensation in $$$ would be appropriate but so that C would have protection of lien in the event
payment not made!!

Brief Comparison between the characteristics of various remedies:

 Advantage,  Disadvantage

 CT : C acquires equitable title in specific property and then after that C can take title to any increase in value of that property
 Fixed Charge  : Does grant property rights which will be enforceable in the event of an insolvency by means of granting C a right to be paid an amount of $$
but if debtor defaults, giving C right to SEIZE specific property to realise the claim! – Paul Davies v Davies
 Charge  : Once repossessed property is sold, C is entitled only to recover amount of debt, not to take absolute title in the property, having to account to
debtor instead for any surplus!

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What’s the court’s position on PROPORTION?!!!

C acquires equitable title in specific property and then after that C can take title to any increase in value of that property under a CT.

Foskett v McKeown addresses matter of WHICH remedy should apply! Foskett v McKeown says should do it for C’s advantage! There is no single remedy that court is forced
to impose on Cs, it will impose the appropriate remedy, bearing in mind what is convenient for the claimant!

If a trustee buys property partly with his own $ & partly with trust $, beneficiary should have option of taking a proportionate part of new property OR a lien upon it, as
may be most for his advantage.

Defences

(1) C allowed to mount tracing claim

(2) But there will also be situastions in which recipient of traceable proceeds of the C’s property will be able to resist the claim.

1. Change of position

Change of position defence will be available to D who has received property & on faith of receipt of that property, suffered some change in her personal circumstances.
– Lipkin Gorman v Karpnale (Solicitor firm partner gambled client account $ away in casino.)

Injustice innocent D so changed that he will suffer injustice is called to repay or repay in full > Injustice of denying D restitution  Defence available  (Westdeutsche)

Which is more unjust?

Letting D keep property given the harm that would cause C OR Forcing D to return property to C if D had acted in some way in reliance on having received that
property!

Lord Goff’s judgment in Westdeustche :

“mere fact D spent $ in whole of in part does not itself render inequitable that he should be called upon to repay as expenditure might in any event have been incurred by
him in the ordinary course of things.”

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“I fear that the mistaken assumption that mere expenditure of $ may be regarded as amounting to a change of position for present purposes has led in the past to
opposition by some to recognition of a defence which in fact is likely to be available only on comparatively rare occasions.”

Types of scenarios for COP defence use:

(1) D changed position after receipt of traced property before action comes to court.
(2) D changed position by committing herself to legal liabilities which take effect ONLY in the future

(a) Open nature of D of change of position

 Doesn't mean D spent money will mean change in position!

 E.g. If recipient encourages payer to make payment, whether innocently OR deliberately, recipient will not be likely to make out this defence of change of
position!!!

 Expenditure will need to be balanced AGAINST the injustice of permitting C to trace their property rights into the property in D’s hands.

 D will itself arise on technical bases which are to be established in future.

 However, open nature of defence makes it doubtful whether change of position is a RESTITUTONARY DEFENCE or just ANOTHER WY OF UNDERSTANDING
HOW EQUITY WILL DEAL IN GOOD CONSCIENCE WITH THE PARTIES.

(b) Bad faith as barrier to defence of change of position

 E.g. Commercial person receives huge source of $ and does not enquire where $ comes from, then you cannot say that person had acted in good faith!
 E.g. of good faith  D made payments to a company, without knowing that that company was fictitious!
 Tinsley v Mulligan  Person who performed an illegal act cannot rely on that illegal act as basis for rights in property nor could that person by extension
defend an action for tracing or in knowing receipt. So D must account for entire amount received.

(c) Measurement of comparative inequity OR harm to be caused to each party

 General purpose of this test  Measure comparative inequity of recovering property from D or denying such recovery to C if D has changed her position in
some way.

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 (d) Activity which WILL constitute change of position (elab Pg 894 AH TB)

 Change of position could be embodied either by (1) Taking steps which would not otherwise have been taken OR by refraining from some action which would
otherwise have been taken.
 Defence of COP seems to include ALL SUMS expended by D in reliance on any representation OR payment made by C, including cost of financing proposed
transaction between parties.
 Whatever it is D must have good faith when seeking COP defence.

Change of position in relation to mistaken and to windfall payments (elab Pg 894-895)

Cases involving pension funds.

 Scottish Equitable v Derby

 Philip Collins v Davis

Change of position as an equitable defence to effect justice. (elab Pg 896)

 View COP as a RESTITUTONARY DEFENCE & WAY OF UNDERSTANDING HOW EQUITY WILL DEAL IN GOOD CONSCIENCE WITH THE PARTIES. (General equitable
principles)
 Can be misunders†oof on basis of equitable notions of fairness.`

Types of scenarios for COP defence use:

(1) D changed position after receipt of traced property before action comes to court.
(2) D changed position by committing herself to legal liabilities which take effect ONLY in the future

Whether incurring future liabilities can amount to change in position. (Pg 897)

 E.g. Reliance on valuable piece of machinery held on trust, D entered into contract to supply electronic components made with machinery. D would claim to
have changed her position on basis she will in future be liable to perform contract so her position would be changed…. => Is such a change going to make this
defence valid?! !!
 COP MUST take place AFTER receipt of the property  South Tyneside v Sevenska
 Can allow future obligation to be considered change of position when that change of position is contractually or similarly connected to receipt in property.

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Whether change of position can occur before receipt of property

 YES, change of position CAN take place before property is received  Commerzbank AG v Price

2. Estoppel by Representation

 Estoppel will be made out when D to tracing action can demonstrate that some representation had been made to her that that representation was
deliberately OR accidentally false, that C knew representation would be acted upon, that D acts to her detriment in reliance upon representation and no
defence to estoppel
 Estoppel is recognised in common law & equity
 *NatWest Bank v Somer – a testament of more modern approach in light of old cases.  This case shows you that on equitable principles, it is POSSIBLE to
limit D’s entitlement to rely on estoppel ONLY to extent that it had suffered detriment. This happens when courts think it is unconscionable for D to be
entitled to receive the WHOLE OF THE PAYMENT!

3. Passing On

 Passing on requires D has passed the property on OR some expense has been incurred such that the value of property has effectively been passed on to some
3rd person.
 D will have to claim she doesn't have possession over the property NOR of its traceable proceeds, because that property has been transferred to another
person w/o receipt of any traceable proceeds.
 Tracing is a PROPRIETARY CLAIM  THAT IS WHY MUST SHOW SOME TRACEABLE PROCEEDS IN D’S HANDS. OTHERWISE, TO IMPOSE LIABILITY ON D TO
ACCOUNT TO C WITH SOME PROPERTY WHICH WAS NOT THE TRACEABLE PROCEED OF C’S ORIGINAL PROPERTY WOULD BE TO IMPOSE A PERSONAL
CLAIM ON D RATHER THAN PROPRIETARY CLAIM!
 E.g. Kleintworth Benson v Birmingham CC (AH Pg 901)

4. Bona Fide Purchaser for value w/o notice *meaning purchaser for value w/o notice of V’s right in property –“Equity’s darling”

Person who lost property to a wrongdoing fiduciary VS Person who buys property in all innocence

Bona Fide Purchaser  this services as a COMPLETE DEFENCE to a (potential) tracing claim - Westdeustche

E.g. Thief sold my property and sells it to bona fide purchaser, the sale would have the result that the bona fide purchaser would take good title in equity to property which
they acquire.

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Rationale for this defence  To protect free markets by ensuring that bona fide purchaser for value w/o notice of rights of a beneficial owner is entitled to assert good title
in property in such situations.

5. Consensual Transfer  rare

Tracing Lecture Problem Question:

Jonathan is the trustee of the Richardson Family Trust and the Clark Family Trust. He takes £100,000 from the Richardson Trust and pays it into his personal current
account, which already contained £60,000 of his own money. He withdraws £40,000 to buy shares in Megacorp plc, which have doubled in value. He then pays in £60,000
from the Clark Trust into his account. He makes two further withdrawals, one of £60,000 which he uses to pay of the mortgage on his house, Blackacre, and then a second
of £100,000 which he uses to buy a Ferrari, which he fails to insure and which he writes off in a serious crash. Finally, he empties the account and with the remaining
money buys shares in Bigbucks Ltd, which have quadrupled in value.

Jonathan is now bankrupt. Advise the beneficiaries of the trusts as to any proprietary claims they may have.

Tracing Seminar Problem Question:

Trevor is a trustee of two trusts, Black’s Settlement and White’s Settlement, each comprising £50,000 in cash. The trust monies are kept in separate bank accounts. Trevor
also has a private bank account in which he holds £100,000. Suppose that the following events take place, in the following order:

 Trevor withdraws all the monies from the Black’s Settlement account and places them in his own private account.

 Trevor withdraws all the monies from the White’s Settlement account and places them in his own private bank account.

 Trevor withdraws £100,000 from his own account in order to purchase a piece of fine art.

 Trevor withdraws £50,000 from his account and uses the monies to pay off the building society mortgage on his house.

 Trevor withdraws the balance of his private account and spends the monies on a luxury world cruise.

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  Trevor finally pays £10,000 into his private account.

Advise the beneficiaries of the two trusts.

Worksheet 13: Tracing and Recovering Trust Property (Week 5) Jonathan Garton

Lecture Outline

A. Overview

When trust assets have been misappropriated the beneficiaries can chase after them and exert a claim over the assets or their proceeds. They can do this because
they are collectively the equitable owners of the trust property – their equitable ownership gives them rights in the trust property which can be enforced even if
the assets end up in the hands of some third party, because equitable ownership rights will bind everyone except the ‘Equity’s darling’: the bona fide purchaser of
the legal title for value without notice.

Following: following the same asset from person to person

Tracing: following an asset through substitutions and mixtures

e.g. T colludes with X and gives him £10,000 of trust property in return for an oil painting. T gives the oil painting to his sister and X uses the money to buy a sports
car from Y.

Claiming: follows tracing and / or following

Per Millet LJ: “tracing is neither a right nor a remedy but merely a process by which the plaintiff establishes what has happened to his property and makes good his
claim that the assets represent his property.” (Trustee of the Property of F C Jones & Sons (A Firm) v Jones [1996] 3 WLR 703)

B. Following

Generally straightforward

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 e.g. T gives an oil painting from the trust to X

Fungible mixtures
e.g. T takes 10 barrels of oil from the trust and mixes it with 30 barrels of his own

Non-fungible mixtures
Jones v De Marchant (1916) 28 DLR 561

C. Tracing

1. Common law tracing

Requires legal title

2. Equitable tracing
Requires a fiduciary relationship + equitable title
Foskett v McKeown [2001] AC 102

On the traditional view, common law tracing does not permit you to trace payments out of a bank account in which the assets had been mixed with other funds,
whereas equitable tracing allows this.

e.g. X mixes Y’s money with his own in a bank account, then withdraws all the money and uses it to buy a sports car

D. The rules of equitable tracing

1. Pure substitution
e.g. T buys a Rolex for himself using trust assets

2. Mixtures of assets where there is no evidential uncertainty

e.g. T uses £50,000 from the trust and £100,000 of his own money to buy a house

3. Mixtures of assets where there is evidential uncertainty

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(a) Innocent mixtures: loses and gains borne proportionately
e.g. T takes £50,000 from Trust A and £100,000 from Trust B and buys a portfolio of shares, some of which go up in value and some of which go down

(b) Wrongdoer mixtures: evidential uncertainty resolved against the wrongdoer  Legal construction needs to be formed for benefit of beneficiary.
e.g. T mixes £5,000 of trust property and £5,000 of his own money in a pot, then buys two paintings for £5,000 each, one of which is destroyed in fire.

Rules only apply where there is evidential uncertainty

e.g. T mixes £10,000 of trust property and £10,000 of his own money in a pot, then buys a car for £12,000 and a Rolex for £8,000. He then writes the car off in an
accident.

Rules can work in the trustee’s favour

e.g. T mixes £10,000 of trust property and £10,000 of his own money in a pot, then buys one painting for £12,000 which doubles in value and a second painting for
£8,000 which halves in value.

4. Tracing through mixtures in unbroken bank accounts

(a) Where T mixes trust money with his own

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

Re Oatway [1903] 2 Ch 356

Lowest intermediate balance rule

Roscoe v Winder [1915] 1 Ch 62
e.g. T mixes £20K from the trust with £10K of his own money. He withdraws £10K to buy an oil painting, and dissipates £20K on a luxury cruise. He then repays
£10,000 into the account.

Cherry-picking?
Shalson v Russo [2005] Ch 281
Turner v Jacob [2008] WTLR 307

Cannnot trace withdrawals amounting to more than the initial value of the trust property
e.g.1 T mixes £50,000 of trust money with £50,000 of his own and buys £60,000 worth of shares which treble in value

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 e.g.2 T mixes £50,000 of trust money with £50,000 of his own and buys £60,000 worth of shares which go down in value to £50,000. T then dissipates the
remaining money in the account

(b) Where T mixes two trust funds together

Deposit accounts: losses and gains borne proportionately

Re Diplock [1948] Ch 465
e.g. T mixes £5K from Trust A, £5K from Trust B and £10K from Trust C in a deposit account. He then withdraws all the money and spends £15K on shares which
treble in value and £15K on shares which become worthless.

Running accounts: first in, first out (FIFO)

Clayton’s Case (1816) 1 Mer 529
e.g. T pays in £5,000 from Trust A and then £10,000 from Trust B into a current account. He then withdraws £5,000 and spends it on a luxury holiday.

FIFO may be disapplied in favour of a proportionate approach

Barlow Clowes v Vaughan [1992] 4 All ER 22
Per Woolf LJ: “The rule need only be applied when it is convenient to do so and when its application can be said to do broad justice having regard to the nature of
the competing claims. It is not applied if this is the intention or presumed intention of the beneficiaries. The rule is sensibly not applied when the costs of applying
it is likely to exhaust the fund available for the beneficiaries.”

Russell-Cooke Trust v Prentis [2003] 2 All ER 478

Commerzbank AG v IBM Morgan plc [2005] 1 Lloyd’s Rep 198

Even proportionate approach unfair?

e.g. T mixes £10K from Trust A, £10K from Trust B and £10K from Trust C. £29,999 is withdrawn and spent on a round the world cruise. Then T puts in £10K from
Trust D.

Rolling charge approach

e.g. T mixes £10K from Trust A and £10K from Trust B in a current account. He then withdraws £15K to buy shares in KCL, which treble in value. He pays in £5K
from Trust C, and then withdraws £9K to buy shares in UCL, which plummet in value. Finally he pays in £10K from Trust D.

Shalson v Russo [2005] Ch 281

Barlow Clowes [1992] 4 All ER 22

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 Charity Commission v Framjee [2014] EWHC 2507 (Ch)

(c) Where trust money is mixed with money belonging to a third party

5. When does the tracing process come to an end?

(a) Equity’s darling

Re Diplock [1948] Ch 524

(b) Dissipation
Re Diplock [1948] Ch 524

(c) Subrogation (see below)

(d) Backwards tracing

See Lionel Smith, The Law of Tracing (OUP 1997)

eg T takes £30K from the trust and uses it to pay off the loan he took out to buy his sports car

Bishopsgate Investment Management v Homan [1994] 3 WLR 1270

Foskett v McKeown [1997] 3 All ER 392 (CA)
Shalson v Russo [2005] Ch 281
Law Society v Haider [2003] EWHC 2486 (Ch)
Federal Republic of Brazil v Durant International Corporation (Jersey) [205] UKPC 35

E. Claiming

1. Original assets

2. Traceable proceeds of a single trust in the hands of a wrongdoer

Ownership v lien

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 e.g.1 T misappropriates £10,000 from the trust. She spends £5,000 on shares now worth £10,000 and £5,000 on a painting now worth £4,000

Wright v Morgan [1926] AC 788

e.g.2 T mixed £10,000 from the trust with £10,000 of her own money to buy an oil painting

Foskett v McKeown [2001] 1 AC 102

Paul Davies Pty Ltd v Davies [1983] NSWLR 440

3. Traceable mixtures of two or more trusts

Foskett v McKeown [1998] Ch 265 (Court of Appeal judgment)
Per Scott V-C: “neither set of Bs can claim a first charge of the assets to recover its money. The equities as between the two sets of Bs will be equal. Neither will
be entitled to priority as against the other. It follows that they must share proportionately in the asset, bearing pro rata any shortfall and enjoying pro rata any
increase in value”

4. Traceable proceeds in the hands of a third party

Re Montagu’s ST [1987] Ch 264
Foskett v McKeown [2001] 1 AC 102
Re Diplock [1948] Ch 524

5. Subrogation revisited
Boscawen v Bajwa [1996] 1 WLR 328
Primlake Ltd (in liq) v Matthews Assocs [2007] 1 BCLC 666 [340]

e.g. T uses B’s money to pay off a mortgage on his home, which he took out to buy a sports car

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