A more recent version of these Liability Of Strangers notes – written by Cambridge/Bpp/College Of Law students – is available here.
The following is a more accessble plain text extract of the PDF sample above, taken from our GDL Equity and Trusts Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:
Topic 14 - Liability of Strangers??????If trust assets dissipated so nothing left to 'target' with proprietary claim?
o Personal claim = not against the trustee, but against 'strangers' who may have meddled in affairs of the trust. Stranger who receives trust property from breach of trust = maybe liable as 'knowing recipient' for breach of trust or breach of fiduciary duty (even if the trust assets/property never pass through the stranger's hands) o Helping trustee commit breach may render stranger personally liable for 'dishonest assistance' to the true owner. Personal claim = Strangers personally liable have to repay sum out of their own pockets. Can be used by defrauded beneficiary, if Plan A (Proprietary Tracing claim) won't work. Question for courts - how much does D have to know/guess before they are held personally liable for someone else's breach of trust (approach of courts not always consistent). Liability of 3rd parties (strangers to trust or fiduciary relationship):
= either received property gained through breach of trust/fidu OR assist that breach. Which one you go for is determined by facts of scenario. o Elements of Knowing Receipt (recipient liability) - Personal Claim: o Elements of Dishonest Assistance (accessory liability) - Personal Claim: Personal Claims = based purely on compensation. Depending on nature of claim, recipient/accessory/breach of trust/diplock claim - suing different people. Recover just losses plus simple interest. Proprietary Claims = Interest in property itself, recover that specific property. Personal Liability =
o Personal claim is based on compensation
? Breach of trust = sue trustee for breach, personal claim against them. Required to reconstitute trust fund from own pockets).
? Personal Diplock Claim = personal liability, suing personal representative of estate for what they caused you to used. If unsuccessful you can sue the recipient of the trust property. Proprietary Liability =
o Equitable proprietary tracing - following your property and tracing inter substitutions, belongs to me, recover it in tact. If substituted into another asset, take it back and take it completely in isolation from trustees creditors if T becomes insolvent. Trustee de son tort [personal claim] =
o Trustee not a true trustee. Their liability is purely personal, so NOT a proprietary claim against them. Why bring a personal claim against 'strangers': o Knowing receipt = of property traceable to a breach of trust. i.e. if your property received in breach of trust by 3rd party. If T steals it and gives it to
???son, if son knows it was obtained through breach of trust. What happens if artwork cant be located or destroyed (dissipated) = tracing pointless as cant identity property anymore or if destroyed has no value. Prop claim fail so sue son for knowing receipt, and he would have to compensate personally for what he caused you to lose by his actions. o Dishonest assistance = with a breach of trust. Individual assisted a trustee with stealing your trust property. If can trace as dissipated/no longer identifiable, useful to have another party (stranger) to compensate you for what is lost. I.e. good when trustee is bankrupt and suing them would recover no money from the personal claim. Someone else to sue to get compensated for what they assisted.
= NB - wouldn't purpose a personal claim against stranger, unless tracing claim fails, OR property unidentifiable/trustee bankrupt - useful then as well. Trustee de son tort [personal claim] =
Someone NOT expressly appointed a trustee, a third party/stranger to a trust relationship. 'A person who by mistake or otherwise assumes the character of a trustee - NOT true trustee as no trust ever placed on them. Just take on character of trustee by virtue of their conduct.
= A translation - A trustee of his own wrong [simply by virtue of what they've done by his action, treated as if they are a trustee]. Liable as if they were a trustee by virtue of own wrong. Lots of problems and never settled, still problematic and big case law. Barnes v Addy = is this person a trustee, do we treat them as a trustee, are they holding property on trust (also discussed in Central Bank of Nigeria). o "Strangers are not to be made constructive trustees just because they act as agents of trustees, UNLESS those agents 'receive and become chargeable with some part of the trust property (recipient of trust property) OR assist with knowledge in a dishonest/fraudulent design on part of trustees" =
treated as a constructive trustee. o = Wrongdoer liable to account as if he were a trustee - treated as a trustee but NOT a true trustee. BUT by making them a constructive trustee, imposing remedy of a constructive trust on them, not a true trust, which we don't recognise the remedial constructive trust.
= NO need to discuss in detail - no in depth look at the arguments!
? ? ? ? Recipient Liability o Limited category - apply to either volunteer (given property with knowledge, it came from breach of trust) or purchaser (paid for property with knowledge it came from breach of trust) = both equally liable as a recipient of property if have knowledge of breach that acquired it. o Cause of action (Hoffman in El Ajou v Dollar Land Holdings plc): - 3 stage test: o = assessing whether liable for knowledge of receipt use the test:
? Disposal of Cs assets in breach of trust/FD -was property gained from breach
Beneficiary receipt by D of assets which are traceable as representing Cs assets
? Knowledge on Ds part that the assets received are traceable to a breach of trust/FD, and should be liable.**What level of knowledge is sufficient to make you liable for knowing receipt. Beneficial receipt of property - occur in many circumstances: Ministerial capacity (agents) Banks (paying and collecting) - Agip Africa Ltd v Jackson = can overdrafts be treated as beneficial receipt? Yes, if circumstances are right.o o o??
Liability depends on recipients knowledge*
Baden Delvaux = [Baden Scale - where you fall into]
o Actual knowledge (move up, theres more dishonesty)
? 1. Actual knowledge = realms of dishonesty of knowing actual breach has occurred and know property received came from that breach. They should be liable for receipt.
? 2. Willfully shutting one's eyes to the obvious (Nelsonian Knowledge) - know what's happening but choose not to investigate.
? 3. Willfully/recklessly failing to make inquiries as an honest and reasonable man would make o Constructive knowledge (move down, more negligence)
? 4. Knowledge of circumstances which would indicate the facts to an honest/reasonable man
? 5. Knowledge of circumstances which would put an honest/reasonable man on inquiry.
? = negligence could/could not make you liable on facts. More negligent that pro-actively dishonest.
= difficult to apply, and decide where exactly case fitted on knowledge. Led to inconsistent case law. Borderline very narrow. o Re Montagu ST = in order to be liable for knowing receipt, had to fall into Category 1-3 (need actual knowledge). o Belmont v Williams = no need for actual knowledge, certain circumstances constructive knowledge is sufficient. But weren't clear on circumstances Baden Scale - lack of certainty where some applied rigidly and others applied liberally: o Case = BCCI v Akindele - what is sufficient level for the Baden Scale (complex way for deciding if D is liable or not for knowing receipt), and when will they be sufficient:
? D concealed fraudulent nature of scheme. Gave 10m but got shares from BCCI with option to sell back with 15%AIR. Reason he had knowledge:
? Loan arrangement and high interest rate = so unusual something fishy.
? Held AT the time initial investment made, nothing to indicate anything untoward was going on. When he did become aware BCCI was fraudulent, could have taken money out. Not liable for knowing receipt, didn't have sufficient knowledge of breach. o = replaced Baden Scale utility in knowing receipt (too convoluted and difficult to apply)
Buy the full version of these notes or essay plans and more in our GDL Equity and Trusts Notes.