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Tracing Stranger Liability Notes

GDL Law Notes > GDL Equity and Trusts Notes

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A more recent version of these Tracing Stranger Liability notes – written by Cambridge/Bpp/College Of Law students – is available here.

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Equity & Trusts: Tracing & Liability of Strangers STRUCTURE for an exam question
? Intro o What is tracing?
o Advantages of proprietary claim: o Who are claimants o Requirements for tracing in equity (Diplock)
? (1) fiduciary relationship [[note Millett, Foskett, criticises this requirement]].
? (2) an equitable proprietary interest o Could be unavailable if (Re Diplock):
? (1) dissipation;
? (2) property into hands of equity's darling (bona fide purchaser for value without notice)
? (3) inequitability (Diplock).
? Trace
? Proprietary tracing
? Claim: o Proprietary, 3 types of remedy: o Equitable Ownership o Equitable Charge (lien) o Subrogation o Personal, against trustee : but might be insolvent. o Personal, against strangers:
? Against innocent volunteer, possibly Re Diplock claim
[CF proprietary claim against an innocent volunteer, above, if hasn't been dissipated]
? Not innocent volunteer:
? Knowing recipient
? Dishonest assistant

Intro?What is tracing, Foskett v McKeown, Lord Millett---a 'process'---
of identifying a new asset as the substitute of the old'. Tracing is the process, not a claim or remedy. Common law tracing, limitations o (1) Won't work if C doesn't have a legal interest in the property to trace o (2) Absence of proprietary remedies o (3) Mixing: inability of common law to trace through mixed funds (Agip v Jackson). Advantages of proprietary claim: o (1) priority creditor status;

1 o (2) can take benefit of any increase in value, can trace into substitute assets; o (3) no technical statutory limitation period (s21(1) Limitation Act 1980). [[although is subject to doctrine of laches, 'delay defeats equity'.
? Who are claimants
?????Requirements for tracing in equity (Re Diplock) o (1) fiduciary relationship;
? eg trustee/B; executor/legatee (like Diplock); solicitor/client (Re Hallett); account/employer (Agip v Jackson); mistaken payment (Chase Manhattan Bank v Israel-British Bank); even thief/victim (Black v Freedman
? [[note Millett, Foskett v McKeown, criticises this requirement: no logical justification for needed fiduciary relationship when not needed for common law tracing; why 2 sets of rules?]].
? Judicial & academic support for unifying equity &
common law rules. o (2) an equitable proprietary interest
? eg under a trust; or of a beneficiary under an estate. Easy to find---Diplock found for next of kin against executors even before estate administered.
? Could be Quistclose trust, Quistclose v Barclays Bank
[[unlikely to come up]]: (1) loan; (2) made solely for a specific purpose; (3) money segregated from borrower's other assets.
? Into whose hands can you trace in equity: o (1) An innocent volunteer (subject to Diplock inequitable defence) [if not dissipated]
o (2) Recipient with knowledge, even if they have provided value o (3) CANNOT trace into Equity's Darling hands---bona fide purchaser for value without notice [[although you could trace into the proceeds of sale given by the Equity's Darling for the property]]. o [[CF, if funds are dissipated---making a personal claim against eg knowing recipient]].
? Limitations, what can defeat equitable proprietary tracing: Could be unavailable if (Re Diplock): o (1) dissipation;
? Diplock egs: dinner; ongoing expenses (eg utility bills); 'aesthetic property improvements' not adding value.
? If used to pay off unsecured debts---dissipation (Diplock).
? Money paid off into overdrawn bank account =
dissipation (Bishopsgate Investment v Homan), form of unsecured d.

2 o (2) property into hands of equity's darling (bona fide purchaser for value without notice). Cannot trace if: (i) received property in good faith; (ii) no knowledge of breach; (iii) provided something of value. [[CF: can trace into innocent volunteer (no value/consideration); and into knowing recipient (knowledge of breach)]]. o 3) Inequitability defence (Diplock): hospital spent money on improving pre-owned property; inequitable to allow a charge on the hospital; would have been enforceable by sale
[[NB: amount claimed was disproportionately low to the value of whole property]].
? NB: is a defence for (1) tracing claim; & (2) subrogation.
? NB, Boscawen v Bajway, Millett LJ, restricts inequity defence: allowing the hospital to escape from proprietary claim is itself an inequity against the legatees who have lost their money; should be confined to circumstances of Diplock---charity using money to improve pre-existing property/pay off mortgage; low claim to value of property ratio; would mean having to sell off property. o + 4---change of position defence can defeat a subrogation claim

TRACING through a bank account Unmixed funds
? C's money paid into wrongdoer's bank account---C has an equitable charge on bank account for the amount of money paid in (Re Hallett's Estate).
? Payments made out of account: C can trace the funds back out of the account and into substitute property. Mixed funds (1) C's property mixed with T's property:
?????(1) Presumption of honesty, Re Hallett's Estate: presumption that T spends own money first; T cannot deny he acted as a good T.
?????(2) Rebutting presumption of honesty where rest of funds dissipated, Re Oatway: can rebut if works against B (shares went up in value, rest dissipated); honest T taken to have acquitted property for trust [[NB: in this case, the rest of the property had been completely dissipated]]
o Turner v Jacob: Oatway rebuttal only applies if there's been complete dissipation of everything else in bank account. [[but note: unusual case, family dispute; hadn't been a deliberate breach of an express trust like Shalson and Hallet--> might have influenced court.

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