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Third Party Liability In Breach Of Fiduciary Duties Notes

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Equity 7 Duties

Third Party Liability in Breach of Fiduciary

THIRD PARTY LIABILITY IN BREACH OF FIDUCIARY DUTIES Abbreviations: C Claimant D Defendant T Trustee S Settlor B Beneficiary F Fiduciary P Principal PoA Power of Appointment CT Constructive Trust

PROPRIETARY CLAIMS COMMON LAW proprietary claims/remedies (briefly)

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Basically non-existent!

Trustee of the Property of FC Jones v Jones, 1997: even after showing that D received and retained property in which C has proprietary interest, typical remedy will still be a personal remedy for the value of the property, not a proprietary remedy. But there are EXCEPTIONS to this lack of proprietary claims:

1. If D misappropriated C's land, C will have claim for ejectment - assertion of proprietary rights over the land.

2. If D received goods in which C has legal proprietary interest, there is judicial discretion under Tortious Interference with Goods Act 1977, s3(3) to order the goods to be transferred to C. Why are proprietary remedies so limited? Because in most cases where property is misappropriated, will involve the crime of theft - criminal courts have power to order property to be transferred back. Hence, private law doesn't.

EQUITABLE proprietary remedies

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In contrast to the case at common law, equitable proprietary claims and remedies are awarded as of right, rather than at courts' discretion - Foskett v McKeown, 2001 (Lord Browne-Wilkinson)

1. Constructive trust

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Simple case: where C's property is stolen, sold and substitute property purchased - no mixing at all. D will then hold new property on constructive trust for C. Constructive trust arises by operation of law.
It is a bare trust, and C (beneficiary) can demand transfer of legal title back to him whenever.
Hence, remedy requires transfer of (substitute) property to C.
If C only has share of interest, then increase/loss will be shared proportionately.

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But when there is mixing, becomes more complicated! See previous notes. Might be mixture of:
- F's money and B's money
- B's money and that of innocent volunteer

2. Equitable charge or lien

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This proprietary remedy takes form of security interest over property - secures C's claim, giving C priority over other unsecured creditors.

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But C will NOT get benefit of any increase in value of property, unlike a constructive trust. Rather than being proportionate share of value of property, it is just for the fixed amount of contribution.

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Has to be used in some situations where C cannot assert CT - look to charge/lien instead!
Boscawen v Bajwa, 1996: here money is stolen by D but used it to maintain/improve existing property D already has - not used to acquire property, hence can't say property is to be held on CT.

1 Equity 7 Duties

Third Party Liability in Breach of Fiduciary

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Re Diplock, 1948: where trust money mistakenly transferred to innocent third party who uses money to maintain/improve his own property.

But on the facts, court didn't allow charge, cos it said it would be unjust (recipients were completely innocent!)

Virgo points out that justice arguments makes award of proprietary very discretionary... Foskett v McKeown, 1998: key qn was whether to award proportionate share (CT) or just fixed amt of contribution (lien/charge).
CA thought Bs could only get charge, not CT - said similar to case of maintenance of property, as opposed to acquisition. 4/5th premium not required to get payout - no direct contribution. Would just have kept policy afloat for longer period of time.
But HOL awarded CT (proportionate share) - drew analogy with T stealing from trust to acquire property, because focused on attribution not causation. Premiums contributed to eventual payout (even if no strict causation).

3. Subrogation

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This is a transfer of rights from one to another, by operation of law - Orakpo v Manson Investments,

1978. Where B's money used by T to discharge secured loan with third party creditor.

Security is recreated by fiction, enabling B to stand in the shoes of the creditor, giving B benefit of that security.

Remedy is that of a charge NOT proportionate share under CT.

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Cheltenham and Gloucester plc v Appleyard, 2004: Neuberger J classified subrogation as a proprietary remedy.

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2 ways to get it: i) By intention. Where T lies to B, and as a result, B transfers money expecting to get a security security will be created by equity.
- Boscawen v Bajwa, 1996: rare example of subrogation by intent. ii) Where B's money used to discharge secured debt (without B intending so). Security disappears but equity recreates it.
- justifiable by notions of unconscionability.But how is security recreated by equity?

Problem raised in Re Diplock: one of the mistaken payments made to a Charity (Leaf Homeopathic Hospital). LHH used it to discharge mortgage over it property - could Bs claim security of the mortgage?

CA said NO! Otherwise, effect will be to insist on sale of the contribution.

If true, this will dramatically restrict possibility of subrogation.

But Virgo thinks this decision turned on its facts - here, wasn't actually possible to show C's money had been used to discharge the mortgage - there was a problem with tracing!

Millett LJ in Boscawen v Bajwa explained this on basis that C had defence of change of position - but Virgo disagrees!

Defence of change of position unavailable in proprietary claims (Millett LJ himself said so in Foskett)

Using money to discharge debt is not a change of position! Merely substituting C as creditor instead!

SO the better view is Virgo's explanation, such that subrogation still available where trust money used to discharge secured debt.

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Bofinger v Kingsway Group, 2009: Australian High Court held that subrogation is triggered not by unjust enrichment, but by vindication of property rights. Virgo agrees!
Relevance of backwards tracing: where T uses trust money to discharge mortgage owed to third party, B has equitable proprietary interest in money - can trace! But what next?

1. B can be subrogated to mortgagee's position, to gain security of mortgage.

2. Can we backwards trace? Virgo thinks yes (see previous notes). If so, either

B gets a charge over house for sum of misappropriated money (same effect as subrogation), or

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Third Party Liability in Breach of Fiduciary

Argue that B's money used to help acquire house so as to get CT (held in proportionate shares according to contribution for B and T. If B's money used to discharge whole mortgage, representing whole price, Virgo thinks C should get CT of whole house! Bare trust?)-

3 Equity 7 Duties

Third Party Liability in Breach of FiduciaryPERSONAL CLAIMS COMMON LAW personal claims/remedies (briefly)

1. Action for money had and received

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Lipkin Gorman v Karpnale, 1991: solicitor stole from firm, and gambled with it at D's casino. HOL held that firm could sue casino for amount it had received!

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Virgo thinks this case is difficult to justify: the firm did have legal title to stolen money, but money was mixed before D got it. So he proposes that it was actually not possible to trace at law, but barrister got confused and conceded that it was possible.

2. Tort of conversion

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If D receives property belonging to C, C can sue D for tort of conversion and recover value of property received Torts (Interference with Goods Act) 1977, s3(2)-
EQUITABLE personal claims/remedies

1. Administration of estates

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**Ministry of Health v Simpson, 1951: this is the appeal from Re Diplock, which then came before HOL. Personal reps of deceased mis-interpreted will, and transferred property to charities instead of Bs. Here, Bs brought personal claim against charities for property received (already dissipated - no proprietary claim).
HOL: in equity, strict liability claim recognised where property is improperly administered in the execution of an estate.

Confined to personal reps who distributed property wrongly.

Fault will be irrelevant in this personal liability!
But Bs can only sue third party recipients if they have exhausted all remedies against personal reps themselves.

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Although the above ruling is very specific and fact-confined, it has subsequently been used to extract a general remedy; that personal claims are recognised against third party recipients who will be personally liable without proof of fault (strict liability).
General rule employed in GL Baker Ltd v Medway Building and Supplies, 1958: T mistakenly distributed trust property; B allowed to bring strict liability personal claim against recipient.

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But this can be criticised!
When deceased's estate is being administered, Bs only have rights not expectations. Hence this is a cause of action where Bs are not suing in own names, but suing on behalf of the estate
- explains why Bs must first exhaust remedies against personal reps.
If so, it should be confined to the facts! Shouldn't extend to being a general rule.

2. Subrogation

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Usually a proprietary remedy, but can be awarded as personal remedy.

3. Action for knowing/unconscientious receipt

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Equity recognises that third party recipient of property transferred in breach of trust/in breach of F duty is personally liable to account to B for value of property received.

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Note that if third party recipient still has the property, then B will usually seek an order that property be restore the property, because of liability to account. Duty is to restore property immediately (different from duty of express trustee).

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But if third party makes unauthorised disposition of property, that is when he will be personally liable for value of the property.

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But there is requisite element of fault!-

NECESSARY ELEMENTS i) Receipt of property

Must show that D actually received property, and that this property is traceable to B. D must have received legal title, otherwise it will just be personal liability (can't impose CT)

Usually a question of fact. 4

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