Trusts 19: constructive Trusts

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constructive Trusts

Constructive T as a response to unjust enrichment

Like wrongdoing, the most common response to unjust enrichment is the award to the C of a money payment from the D. if I pay you £100 by mistake, the CL=> you owe me £100. The same view is taken by EQ (e.g. undue enrichment)


can claim that you hold the £100 or its traceable proceeds for me on a court-imposed, i.e. constructive, T.

Chase Manhattan v Israel-British Bank [1981]
why did CT arise for mistaken payment?

because although the right at law had passed to the transferee, the effect of the mistake was such that the 'equitable property' of the transferor was retained. And since equitable property was in the transferor, and legal property in the transferee, the consequence was a T which arose by operation of law.

issue with reasoning in Chase Manhattan v Israel-British Bank [1981]

premised on the existence of 'equitable property' separate from 'legal property' prior to the mistaken transfer. However, as we saw in the discussion of the automatic resulting T in Chapter 12, this is not true. There is no pre-existing interest. If a T arises, then the equitable interest arises for the first time. For this reason, the analysis of Goulding J was rightly disapproved by Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC [1996]

note ART is actualy CT because it arises by law

Birks and Chambers : explanation for CT for mistaken payment

T which arises to reverse the unjust enrichment of the transferee, the transfer generally in such cases having been made by mistake.

issue with CT for mistaken payment

what still needs to be explained is why the law gives the transferor the benefit of a T in addition to his personal claim to recover the value of the right transferred. Why is one creditor being treated more favourably than the rest?

Allcard v Skinner (1887) : another example of CT for unjust enrichment

Rs transferred because of the undue influence of the transferee were held on CT for the transferor.note that this was a minority opinion. The majority said that the C had only a right to rescind the transfer and thereby create a T in her favour, a weaker species of right.

CTs responding to other miscellaneous events

which do not respond to either wrongdoing or unjust enrichment must by definition fall within this last category.

tracing

Rs in substitute assets are created when the original assets are substituted in an unauthorised fashion for other Rs. It should be noted that there are other responses to unauthorised substitutions, most notably the imposition of a 'charge'

Examples other than unauthorised substitutions where CT arise
VIMP

1. Dissolution of unincorporated associations
2. Specifically enforceable contracts of sale (Lysaght v Edwards)
3. Perfecting imperfect gifts and trusts (Milroy v Lord, but re Rose)
4. Transfer of rights 'subject to' pre-existing personal rights (Binions v Evans)
5. Quistclose trusts
6. Constructive trust of the proceeds of sale by lender

1. Dissolution of unincorporated associations

T were sometimes used by the courts to return Rs transferred to UAs when those associations were dissolved. The particular T in question were RTs, and nowadays we would recognise them as ART. Therefore CT. But exactly why a CT should arise in such cases has never been explained, and is in any case nowadays inconsistent with the contractholding theory, in which the Rs are held throughout for the members.

2. Specifically enforceable contracts of sale
Lysaght v Edwards (1876)
Vendor-Purchaser CT

the moment you have a valid contract for sale the vendor becomes in EQ a Tee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser.

arises for a reason which is neither a wrong nor an unjust enrichment. In fact, the only reason it would seem to do so is because of the incantation of a magic formula, that 'EQ looks upon as done that which ought to be done'.
problem is the implication for insolvency

3. Perfecting imperfect gifts and trusts

basic rule that courts of EQ would not impose T on right-holders in order to perfect imperfect gifts: Milroy v Lord (1862)

In some cases, however, this rule was departed from, generally with little justification. Thus we have the rule in re Rose, by which, provided certain conditions are met, the donor is turned into a CTee for his intended donee (review chap 6, were CTs merited?)

4. Transfer of Rs 'subject to' pre-existing personal Rs
Binions v Evans [1972]


Lord Strathcona Steamship Co v Dominion Coal Co [1926] :a conveyance of title to a steamship which was 'subject to' an existing charter in favour of the third party

held that transferees of a fee simple title to land who had agreed to take 'subject to' the Rs of a contractual licensee were constructive Tees for the licensee and therefore bound by her Rs. It is not clear whether these are T properly-so-called, for it is difficult to identify the subject-matter of any T.

may therefore be that the language of CTeeship here simply expresses a personal liability. Such cases do, however, directly contradict the then extant doctrine of privity of contract

criticism of Lord Strathcona Steamship Co v Dominion Coal Co [1926] due to contradiction of extant doctrine of privity of contract

Greenhalgh v Mallard [1943] 2 All ER 234 and Diplock J in Port Line Ltd v Ben Line Ltd [1958]
Diplock did not follow Dominion Coal

5 Quistclose trusts
Barclays Bank v Quistclose Investments Ltd [1970]

HL held that money lent for a particular purpose was held by the borrower on T for the lender when that purpose became incapable of fulfilment, which as a consequence meant that it was unavailable to the borrower's creditors when it become insolvent.

In Quistclose itself, Lord Wilberforce appeared to say that such T were consensual, in which case they would seem to be a type of express T. However, in the most recent decision on the case, Twinsectra v Yardley, all members of the HL spoke in terms which indicated that the T arises by operation of law, in which case it would be constructive. Unfortunately, none of their lordships saw fit to answer the question why the law should raise a T in such circumstances, to the detriment of the unsecured creditors.

Constructive trust of the proceeds of sale by lender

a lender is not a Tee for his mortgagor, and so has no fiduciary obligations in respect of the exercise of his powers under the M, he is a CTee of the proceeds of sale consequent upon his exercise of any power of sale contained in the M deed.

Tracing

a process by which the value a C has in Rs controlled by a D is, notionally, in the eyes of the law, held to reside in something the D exchanged for that right.

Tracing ex

BOT gives £10,000 of the T money to Sally, claim against Sally for the return of that money (Sally, having received the money in the form of a gift, is a volunteer, and thus not a bona fide purchaser for value without notice).If Sally spends the money on a title to a car, then you can 'trace' the value of your £10,000 into that title. Having traced your value in this way, -claim that the title is held for you on CT.

distinguish between following, tracing and claiming

One follows a physical thing when it passes from one person to another. One traces value from one right to another when the former is exchanged for the latter. Claiming antedates the tracing or following processes or a combination of both. For example, if in breach of T, the Tee gives a title to a painting held by him on T to John, the Bs can follow that title into John's hands, and make a proprietary claim against him, claiming that he holds it for them on CT.

tracing/following ex

BOT, gives a title to a painting held by him on T to John, the Bs can follow that title into John's hands, and make a proprietary claim against him, claiming that he holds it for them on CT. If John were to sell the title for £1,000, they can trace the value of the painting into that money, and likewise claim that the title to the money John received in exchange is held for them on CT. If John pays the money into a bank account, they can say that his chose in action against the bank is held on CT for them. If John assigns his chose in action to Stella, she will likewise hold it on CT for them. If Stella then withdraws money from the bank, the Bs can say that her title to the cash is held on CT for them. If Stella spends the money on a vacation, then, assuming the holiday company is a good faith purchaser for value, the process of tracing and following comes to an end, for Stella's title to the money is dissipated in a way that does not produce Rs capable of being held on T. However, the Bs can still make a personal claim against Stella to repay the sum she received if they can show that she is personally liable as a recipient of T property or its traceable proceeds

absence of tracing at common law: cases

Taylor v Plumer (1815)
Lipkin Gorman v Karpnale [1991]
Westdeutsche Landesbank Girozentrale v Islington LBC [1996]
Shalson v Russo [2003]

Taylor v Plumer (1815)- a broker misapplied the money purchasing american stock and bullion rather than exchequer bills.
-the money could be traced into the stock and bullion

tracing is not possible through a mixed fund at common law.

Taylor v Plumer (1815)- where the original thing has been turned into money and mixed, tracing becomes impossible at common law.

Lipkin Gorman v Karpnale [1991]

CL can allow that the right-holder has a power to assert title in the traceable proceeds.

requires an act on the part of the rightholder; he does not automatically, by operation of law, acquire an interest in traceable proceeds in the way the B does in respect of the traceable proceeds of T Rs. To the extent that this power to assert title counts as 'tracing at CL', it also appears that the rules governing tracing through mixtures are less developed here than in EQ.


HL unanimously established that the basis of an action for money had and received is the principle of unjust enrichment, and that an award of restitution is subject to a defence of change of position. This secured unjust enrichment English law as the third pillar of the law of obligations, along with contract and tort.

NOTES:
if they can show that in the circumstances the club was unjustly enriched at the expense of the solicitors... The club received stolen money by way of gift from the thief; the club, being a volunteer, has been UEed at the expense of the solicitors from whom the money had been stolen and the club must reimburse the solicitors.

As a result, the defence of change of position was recognized for the first time in English law and it succeeded as a partial defence here. Because the winnings have been paid out to Casino, the club has effectively changed its position and its liability is limited to the remaining sum.

CL and mixing
no Rs following mix

It is also essential that involuntary X did not also X legal title, nor any succeeding X. If this has happened, property is also not recoverable under CL. Someone with an EQ interest in property but no legal title, as in MCC Proceeds v Lehman Brothers, cannot recover $ under CL

recipient of T Rs mixes them with his own, say by putting £1,000 of T money into his bank account which already has a balance of £500, and then spending some of it, say withdrawing £750 and having a slap-up meal. These rules determine whether the £750 withdrawn was T money or the recipient's own. Apparently, the CL will not allow the right-holder to assert any Rs over money withdrawn from the account following this mixing

Westdeutsche Landesbank Girozentrale v Islington LBC [1996]

LBW obiter that a title-holder need not rely upon the CL rules of 'tracing' or 'title assertion', but can 'trace in EQ'. Accordingly, his Lordship said that a thief will immediately hold the money he steals under a CT, and that the victim's beneficial interest under this T will entitle him to trace into the proceeds.

Westdeutsche Landesbank Girozentrale v Islington LBC : tracing criticism of LBW

thief does not acquire the rightholder's right in respect of the thing he steals - that remains with the victim of the theft. So the thief cannot hold his victim's title on any T, constructive or otherwise, for his victim.

Perhaps Lord Browne-Wilkinson only meant that the title-holder would have an interest under a CT in any proceeds the thief acquired with his victim's money, but there is no authority for such a proposition, and his Lordship did not deal with the difficulty that, if this is correct, the titleholder will retain title to the original thing but still acquire a T interest in respect of the proceeds, so that as a result of the theft and the sale of his stolen goods the original owner ends up with more Rs than he had to begin with.

Shalson v Russo [2003]

a thief ordinarily acquires no property in what he steals and cannot give a title to it even to a good faith purchaser...I cannot see how he can become a Tee of it for the true owner: the owner retains the legal and beneficial title.

Tracing in common law

CL tracing is where the C seeks to identify property that belongs to him at CL. This is where physical POS of the property passes, but not legal ownership. The problem with CL tracing is that the property must be identifiable; if it has been mixed with other property, such as money paid into an account with other money from a different source, it cannot be successfully recovered. It is also essential that the involuntary transfer did not also transfer the legal title, nor any succeeding transfer. If this has happened, the property is also not recoverable under the CL. Someone with an equitable interest in the property but no legal title, as in MCC Proceeds v Lehman Brothers, cannot recover the money under CL. Due to these limitations, " . many leading academics and judges" . have suggested that CL tracing should be completely merged with equitable tracing.

rules of tracing
generally requires a T but also possible with
The requirement of a fiduciary relationship

In order for an individual to have the advantage of the equitable rules of tracing, he must normally have an interest under a T, for it is the value of that right which is traced into proceeds. However, EQ is also willing to allow Cs to trace where a fiduciary breaches his duty and in the course of that mishandles his principal's Rs (re Diplock [1951]

requirement of a fiduciary relationship: Ex
Re Diplock
El Ajou v Dollar Land Holdings [1993]
Chase Manhattan v Israel-British Bank [1981]

if a company director uses his power to transfer the company's Rs in breach of his fiduciary duties, say by transferring company money to his own bank account, the company will have the advantage of the equitable rules of tracing to trace into any proceeds acquired with that money. Courts have shown themselves willing to find the existence of a fiduciary relationship in order for Cs to apply the tracing rules (El Ajou v Dollar Land Holdings [1993] 3 All ER 717), even where to do so is nonsensical (Chase Manhattan v Israel-British Bank [1981]

Foskett v McKeown [2001]
Whole and part 'ownership'

If the Tee uses £250 of T money and £250 of his own money to buy the title, it will be held by the Tee for himself and the Bs in equal shares

rules of Tracing
Tracing through mixtures

Tee or a third-party recipient of T rights mixes it with his own so that the original right cannot be identified? e.g. adding money to bank account which has traceable proceeds

NOTE: does not regard this mixing as giving rise to co-ownership of the chose in action against the bank, as it does in the example of where T money and the Tee's money went to purchase a new asset, the title to the rare book. The T does not have a 2/3 share in the chose in action, the Tee a 1/3 share. EQ seems to hold that the T money and the Tee's money remain separately held, though which money belongs to whom is not distinguishable.
Because of this, if £300 is withdrawn from the bank account by the Tee and spent on title to an armchair, that title is not regarded as co-owned by them in 2/3 and 1/3 shares. Rather, EQ employs rules to determine whose money was withdrawn and spent to acquire the title.

mixing: rules governing wrongdoers
re Hallett (1880) cf re Oatway 1903

first 'presumption' is that a wrongdoer who mixes T money or its traceable proceeds with his own, and then takes money out of the mixture and spends it, is presumed to spend his own money first, so that anything which remains can be claimed by the Bs: re Hallett (1880) 13 Ch D 696. However, EQ very soon afterward admitted the opposite 'presumption' (re Oatway [1903] 2 Ch 356) where a B was able to make a claim to shares bought with money first taken from the mixture and where the rest was then dissipated with no traceable product.

explanation re Hallett (1880) cf re Oatway 1903

assumption that Tee always acts in the best interests of the T Bs.
However, that 'presumption' is inconsistent with another rule, the lowest intermediate balance rule.

lowest intermediate balance rule.

example, following the purchase of a title to a junk armchair, the Tee spends the rest of the money in the account on worthless shares, reducing the balance to zero. He then adds £500 of his own money. The courts have held that the B cannot claim that the new balance of £500 is hers. If the Tee spends all the T money and later replenishes the account, as in this example, it will not be presumed that he was paying back the T money he took, despite the fact that that is exactly what a Tee who was acting in the best interests of his Bs would do

James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62
affirmed by
Bishopsgate Investment Management v Homan [1995]

Bishopsgate case:
Homan administered the insolvent companies of MCC . Pension money for employees of MCC was kept in Bishopsgate Investment Management Ltd. Maxwell, in BOT, put the pension money into overdrawn accounts. Bishopsgate claimed it was entitled to trace the pension money to create an equitable charge over all the assets of MCC, and thus priority over unsecured creditors of MCC.

held that a tracing chain between the misappropriated money and the present assets of MCC could not be established. The misappropriated money was paid into an overdrawn account. At that point the mixed fund was exhausted. Unless there was evidence that payments were made to the overdrawn account with the intention of benefiting the T fund from which monies had been withdrawn, which in Maxwell's case appeared highly unlikely, no equitable charge could be imputed against the credit balance. BIM could therefore not recover any of the misappropriated pension fund monies from MCC in priority to the unsecured creditors. Dillon LJ held there was no particular asset into which property could be traced, if an account were overdrawn. He endorsed Vinelott J's, saying it was 'at least arguable' that there would be an equitable charge.

presumption of honesty does not work, also why should we presume honesty when all evidence indicates the opposite?

Bishopsgate Investment Management v Homan [1995]
held that backwards tracing was impossible.

there can be no equitable remedy against an asset acquired before misappropriation of money takes place, since according to assumptions made it cannot be followed into something which existed and so had been acquired before the money was received and without its aid

reconcile of re Hallett and re Oatway
James Roscoe (Bolton) Ltd v Winder
problems

not to think of 'presumptions' at all, but in terms of the resolution of evidential difficulties. In both re Hallett and re Oatway such difficulties existed. Somebody's money was left in the account in Hallett, while somebody's money bought the shares in Oatway. The difficulty was that the Tee's wrongful act of mixing made it impossible to tell whose it was. It might have been the Tee's own money, it might have been the T money, or it might have been a combination of both. That evidential difficulty having been caused by the Tee's wrongful act, the benefit of the doubt was given to the innocent party, the Bs.

reconcile of re Hallett and re Oatway
James Roscoe (Bolton) Ltd v Winder from Bs viewpoint

Thus, if it suited the Bs to say that T money had been spent first, as in re Oatway, then they could do so. On the other hand, if it suited them to say that the Tee's own money had been spent first, as in re Hallett, they could do that as well. But when we get to a case like Roscoe v Winder [1915] 1 Ch 62, there is no doubt to resolve beyond the lowest intermediate balance, for we know where the money came from which later increased the balance - from the Tee's own funds.

Roscoe v Winder [1915]

Mr Winder was the Tee in bankruptcy for Mr William Wigham, who had bought James Roscoe Ltd in March 1913. Mr Wigham had agreed to give the book debts that were received up to a certain date to the sellers. He collected £455 but kept them in his account, so breaching his agreement and fiduciary duty to the company. He spent all but £25, but put in his own money so the balance on his death was £358. James Roscoe Ltd sued to recover all the money in the account, asking to trace the £358. Mr Winder argued the maximum must be only £25, because that was the lowest intermediate balance. Necessarily the other money had been dissipated, and the surplus cash would need to go to pay other creditors.

held the company could only trace £25, not £358. Once the money was spent, it was gone, down to the lowest bank balance in the interim. The debtor would have needed to substitute money from others for the purpose of using it for the C in order to get a T impressed again.


there is no doubt to resolve beyond the lowest intermediate balance, for
we know where the money came from which later increased the balance - from the
trustee's own funds.

In re Hallett's Estate, 2 points which were decided

First, that when a Tee mixes T moneys with private moneys in one account the cestuis que T have a charge on the aggregate amount for their T fund; and, secondly, that when payments are made by the Tee out of the general account the payments are not to be appropriated against payments in to that account as in Clayton's Case, because the Tee is presumed to be honest rather than dishonest and to make payments out of his own private moneys and not out of the T fund that was mingled with his private moneys.

In re Oatway

if part of the mixed moneys can be traced into a definite security, that security will not become freed from the charge in favour of the T, but will, together with any residue of the mixed moneys, remain subject to that charge.

rules governing innocents

B does not have the benefit of any doubt against an innocent who mixes T money with his own. The rules attempt to be neutral as between them. However, the traditional rule chosen tends to lead to haphazard results. That rule, drawn from Clayton's case (1816) 8 LJ Ch 256, is the 'first in first out' rule,

Clayton's case (1816) 8 LJ Ch 256, is the 'first in first out' rule

Thus, if an innocent recipient added £500 of T money to his bank account already containing £250, then his money will be spent first. So the innocent recipient will acquire a 5/6 share of a title to an armchair bought for £300, since all of his £250 was used up in the purchase, and the B gets a 1/6 share, since to make up the £300 purchase price the innocent had to draw upon £50 of the T money. The remaining £450 in the account is all the B's, and so if it is spent on worthless shares, they are the B's alone.

CA in Barlow Clowes International Ltd v Vaughan [1992]

receivers of Barlow Clowes, a failed investment management firm, wished to know what order they should distribute assets to the creditors in Portfolios 28 and 68. Contributors to these managed investment plan accounts advanced money were aware the money was to be invested as a collective fund. Specific investments were not earmarked for specific investors. The assets were misapplied and mostly dissipated. Peter Gibson J held that the first in first out rule applied.

affirmed the general applicability of the 'first in, first out' rule, but it also acknowledged that it can work unfairly, and indeed in that case treated the Cs as having shares in the entire fund proportionate to their contributions, so that they shared pro rata in the traceable proceeds available.

held that contributors could not have intended that withdrawals from the account, and investments then purchased, could be allocated by reference to the order the contributions were made. So the first in first out rule is more of a default rule. It would not be applied if the result would be 'impracticable or result in injustice'. It was not intended that only a small number of investors would get the most out of the fund. They would share rateably, pari passu.

Backwards tracing

ccurs when the B traces into a right which was purchased on credit when the provider of that credit is paid off with T money. Thus, if a Tee or recipient of T funds buys a title to a car for £10,000 with money borrowed and then pays off the loan with T money, the B backwards traces and claims the title to the car as the traceable proceeds of the T money.

Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 (backwards tracing through the bank clearing system); El Ajou v Dollar Land Holdings plc (tracing through credit facilities); Foskett v McKeown (tracing into payments made on an asset, a life insurance policy, a right which had already been acquired)

Bishopsgate Investment Management Ltd v Homan,

example of denial of backward tracing

Read Bishopsgate Investment Management Ltd v Homan and explain what it decides, assessing whether the reasoning is persuasive.

At first instance, Vinelott J was willing to allow backwards tracing in limited circumstances, more specifically, when the Tee purchased a right on credit with the intention of later paying off the credit advance with T money. This seems flawed in principle, for intention should not determine where traceable proceeds arise; what should be determinative is simply which money was used in which transaction. Nevertheless, in the CA, Dillon LJ accepted this limited form of backwards tracing. Leggatt LJ, on the other hand, rejected the possibility of backwards tracing outright, on the basis that it was inconceivable that a claim could be made to an asset acquired before any T money was misappropriated. But this claim of inconceivability is unfounded - the whole system of credit operates on the basis that assets are acquired on the expectation of later money to fund the purchase.

Proprietary and personal claims reliant upon tracing
tracing is essential feature in establishing personal not just proprietary claims, e.g.

if the Tee transfers money in BOT to a 3P, Sam, who adds it to his bank account, any proprietary claim against Sam will involve tracing the T money into the bank account or into assets purchased from withdrawals from the account. Similarly, a personal claim can be reliant upon the tracing process. Let us say that Sam now draws a cheque for £1,000 on the account in favour of his cousin, Madeleine, telling her that it is a birthday present, and let us further assume that one can trace some of the T money into that payment. Now assume that Madeleine finds out that the money was wrongly taken from the T, but decides to spend the money on a holiday to Italy regardless. Madeleine will be liable to a personal claim for her 'knowing dealing', as she dishonestly dealt with a T right, or rather the traceable proceeds of a T right. That is, though no proprietary claim can arise against Madeleine, for she has 'blown' the T money, she is personally liable to restore the T. And unless we had followed and traced the T rights from the Tee to Sam, and then traced through his bank account into an asset (the cheque) which we followed into Madeleine's hands, this personal claim could not arise.

2 standard proprietary claims made in traceable assets:
1 asset has risen

traceable proceeds consist of a right that has risen in value, the B will claim that that right is held for him on CT, or a co-ownership share under a CT where the tracing process indicates that only part of the purchase price of that asset can be attributed to T money, because he will then have the advantage of the rise in the asset's value.

2 standard proprietary claims made in traceable assets:
2 asset has fallen VIMP

Where the asset has declined in value, the B can, rather than taking an ownership interest in the asset, elect to charge the right with the repayment of the T money that went into acquiring it. A charge is an entitlement to have a right sold to pay off a debt, if the debt in question is not paid off by the debtor.

A charge will be most convenient to the B in the case where the purchase price of a right that has declined in value is made up of both his and the wrongdoer's money. So, for example, consider the case where the tracing rules indicate that £5,000 of T money and £5,000 of the Tee's own money went on the purchase of a title to a car which is now worth only £7,000. If the Bs claim an ownership share, they will have a half-interest in the car worth only £3,500. They would be better to forego that right, and demand that the Tee repay them £5,000 from his own pocket (a personal claim against him to restore the T) and claim a charge on the car to secure that obligation. Thus if the Tee does not pay back the £5,000, the Bs can have the title to the car sold, for £7,000, of which they have the right to £5,000. Thus by foregoing the ownership share they get all their money back.

In BOT, Thomas transfers £10,000 to Victor, telling him that the money is a birthday present. Victor pays the money into his bank account, raising the balance to £13,000. He then withdraws £5,000 and uses it to buy a title to a painting, now worth £7,000. He next withdraws £4,000, which he spends on a round-the-world cruise. He is then informed of the fact that the £10,000 he received was transferred in BOT. He thereupon spends a further £3,000 from the account to buy a title to a car, which has since decreased in value, leaving a balance of £1,000. Advise the B of the T.

involves tracing between innocents, the B and Victor, to begin with, and then, if the proportionate share rule is applied to tracing amongst innocents, between a wrongdoer and an innocent, after Victor finds out the money was T money. On the 'first in, first out' rule, Victor spends the £3,000 of his own money that was in the account at the beginning plus £2,000 of T money to buy the title to the painting. The rest of the money is T money, going on the cruise, which provides no proceeds, and into the traceable proceeds of the car. The remaining money in the account is the T's. If a proportionate share rule is adopted between innocents, 10/13ths of the value of the title to the painting is the T's, as is 10/13ths of the remaining £8,000, and then of the £4,000 that remains after the cruise expenditure. Victor is now no longer innocent, and so the B has the advantage of the re Hallett's and re Oatway rules; consequently, the B can claim that all of Victor's money (3/13 x £4,000 = £923) went to buy the title to the car, which has decreased in value, although the remainder of the £3,000 purchase price must be T money, but the B can claim the entire £1,000 balance that remains in the account.

Tara, a Tee of the Adams family T and of the Khan family T, improperly withdraws £20,000 from the Adams T and deposits it in her bank account, raising the balance to £30,000. She then withdraws £15,000 from the account to buy shares which have since doubled in value. She then, in breach of T, adds to the same account £40,000 from the Khan family T, raising the balance to £55,000. She then spends £10,000 on shares which have also doubled in value, and then £25,000 on a title to a car now worth half that amount, and later £15,000 on her general living expenses. She then adds £20,000 of her own money, raising the balance to £25,000.

involving tracing between a wrongdoer and two innocents. As between the innocents themselves, the rules governing tracing between innocents apply, and as between the innocents, whether singly or together, and the Tee, the rules dealing with wrongdoers apply. The first transaction following mixing is the purchase of the shares; here only the Adams T and the Tee are involved, and the T will choose to say that the entire purchase was funded with T money, for the shares have doubled in value. The Khan money is now added, so the account stands £10,000 to the Tee, £5,000 to the Adams T, £40,000 to the Khan T. First, assume the 'first in, first out' rule for innocents is applied. The innocents will want to claim the value of the second share purchase, as, like the first, it has risen in value. The £5,000 Adams T money is spent first under the rule, plus £5,000 of the Khan money to make up the purchase price. The account now stands £10,000 to the Tee, £35,000 to the Khan T. There is no more mixing of the innocents' moneys. The car has declined in value, some money has been expended on traceable proceeds, and £5,000 of money which might represent T money remains in the account; under the lowest intermediate balance rule the Khan T cannot benefit from Tara's addition of her own £20,000 at the end, unless there is evidence she did so to restore the T, and there is no such evidence. The Khan T will require all of the £5,000 in the balance to represent T money, £25,000 of the money spent on the car to have been T money (though it has declined in value, the only other alternative is the money spent on living expenses which generated no traceable proceeds) and £5,000 of the T money to have been dissipated on general living expenses. All of Tara's £10,000 is treated as having been dissipated. If we apply the proportionate share rule, the Adams T will have a 1/9 share, the Khan T an 8/9 share in the £45,000 of T money in the account immediately after mixing. They will then apply the rules together against Tara, taking proportionate shares in the entire value of the second share purchase, in the £5,000 balance in the account, in the entire value of the car, and £5,000 of the money dissipated.

claims that might be made

In BOT, Thomas transfers £10,000 to Victor, telling him that the money is a birthday present. Victor pays the money into his bank account, raising the balance to £13,000. He then withdraws £5,000 and uses it to buy a title to a painting, now worth £7,000. He next withdraws £4,000, which he spends on a round-the-world cruise. He is then informed of the fact that the £10,000 he received was transferred in BOT. He thereupon spends a further £3,000 from the account to buy a title to a car, which has since decreased in value, leaving a balance of £1,000. Advise the B of the T.

e B will claim a share under a CT of the title to the painting, as it has risen in value. If 'first in, first out' rules are applied, then the B will claim that the title to the car is held for him on CT absolutely and the balance of £1,000. There is no point in merely charging the car, for the B has the full interest in it anyway. For the money lost through the decline in value of the car and that dissipated, the B can bring a personal action against Victor to restore the T, as he made those expenditures dishonestly. If the proportionate share rules apply, the only difference will be that the Bs will charge the title to the car with the repayment of their money, rather than taking a proportionate CT interest.

claims that might be made

Tara, a Tee of the Adams family T and of the Khan family T, improperly withdraws £20,000 from the Adams T and deposits it in her bank account, raising the balance to £30,000. She then withdraws £15,000 from the account to buy shares which have since doubled in value. She then, in breach of T, adds to the same account £40,000 from the Khan family T, raising the balance to £55,000. She then spends £10,000 on shares which have also doubled in value, and then £25,000 on a title to a car now worth half that amount, and later £15,000 on her general living expenses. She then adds £20,000 of her own money, raising the balance to £25,000. Advice the Bs of the two T.

In the second situation involving Tara, the Adams T will claim that the shares are held for them on CT, as they have risen in value. Tracing between innocents under the 'first in, first out' rules, the two T will claim interests under CTs of the second lot of shares, as they too have risen in value. The Khan T will claim an interest under a CT of the title to the car, as though it has declined in value it was purchased entirely with T money so there is no advantage in foregoing the T interest and charging the car instead. The value lost on the decline in the value of the car and through dissipation can be claimed against the Tee personally. On the proportionate share analysis, the T will claim a shared entitlement under a CT in the second lot of shares, and in the car - there is no advantage in charging the car, for as innocents they must act together, and one cannot have the advantage of a charge as against the other innocent. The advantage of a charge only operates where the wrongdoer contributes to the purchase price, such that a charge will operate to his disadvantage. Again, the Bs can claim personally against Tara for the T value which has been lost and cannot be recovered by claiming ownership shares in the purchased assets.

subrogation

Subrogation occurs when A acquires B's rights against C by operation of law. The insurance context provides an illustration: assume that an insurer, A, insures B against negligent injuries by a 3P. If C, a 3P, negligently injures B, B will have a right of action in tort against C for damages to compensate B for his injury. However, when A the insurer pays B an insurance award to cover his loss, A acquires by subrogation B's right of action against C. A is said to be 'subrogated' to B's right of action against C. Similarly, in certain circumstances, if A pays off a debt B owes C, then A will be subrogated to the claim against B which A has just paid off. In other words, A can now bring an action against B for the amount B owed C.

Rights to subrogation reliant upon tracing

can be acquired by a B if T money is used to discharge a debt. The T will be subrogated to the creditor's right of action against the debtor whose debt was discharged with T money. This will be particularly useful if T money was used to discharge a secured debt, such as a M, for there will be subrogation both to the debt and the security for that debt. If, for example, T money is used to pay off the Tee's M on his house, the T will be subrogated to the right of the M lender, and this right will include the right to sell the property and recoup it from the proceeds of sale if the debt is not repaid. Such a right will be very valuable where, for example, the Tee is bankrupt, because a bankrupt Tee will not be able to satisfy a merely personal claim to restore the T, whereas the charge on the Tee's house will ensure that the proceeds from the sale of the Tee's house will go first to paying off the debt owed to the T.

Boscawen v Bajwa and explain the decision.

D Bajwa intended to sell his Md title to land, and immediately following the sale Bajwa would normally have been required to use the sale money to discharge the outstanding amount of the M debt. The purchase money was raised by the intending purchasers from a different, second, lender who, of course, required that a M on the land was obtained in its favour when the purchase went through. The purchase money was transferred into a solicitor's client account (which is a T account) in advance of the purchase. By mistake, and in breach of T, the money was advanced before the title to the house was transferred, Bajwa using the money to pay off the M. As a result, Bajwa ended up with a clear title to his house, without a M, and the second lender had advanced its funds and received no M in return. The CA held that the second M lender was entitled to be subrogated to Bajwa's lender's M on the land which its money had been used to discharge.

backwards tracing summary

tracing into a right purchased on credit where the T money has been used to pay off the bank, lender, or credit card company that advanced the credit. Although it represents an entirely sensible application of the tracing rules, it has not been authoritatively recognised in English law, and the CA decision in Bishopsgate was against it, but certain cases can only be explained on the basis that the plaintiff was allowed to backwards trace.

Tracing can be a basis for both proprietary and personal claims. In certain circumstances it may be to the advantage of Bs to claim a charge against traceable proceeds rather than an ownership share.

Rights to subrogation can arise at the end of a tracing process, and are advantageous where T assets are used to discharge a secured debt.

Agip (Africa) Ltd v Jackson

an Agip Ltd employee, changed name on a payment order of $518,000 to Baker Oil Services Ltd, a puppet controlled by Mr Jackson and other accountants, who acted on clients' instructions. $ was Xred from Banque du Sud in Tunisia to Baker Oil's account with Lloyds Bank in London. All but $43,000 was then paid on to unknown parties. Agip Ltd sued Mr Jackson for return of $.

upheld Millett J's decisions, but did not allow a claim at CL, because Agip Ltd's $ had been mixed in New York clearing system and could not therefore be traced.

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