Tracing

Tracing Lord Millett: Foskett v. McKeown Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. -

Cf. Tracing and following – Foskett v McKeown: Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as substitute for the old. The rules of following and tracing are evidential in nature, and are distinct from rules which determine substantive rights. Following and tracing are concerned with identifying property in other hands or in another form; claiming concerned with the rights that a claimant can assert against the property in its present form. Tracing at common law and in equity

The distinction between legal and equitable ownership is fundamental to English property law. This historic bifurcation has led to the development of two separate bodies of rules for tracing property, one operative for tracing ownership at common law and the other, for tracing the equitable ownership which arises under a trust. Common law tracing Re Diplock: operates in a strictly materialistic way. It could treat a person‘s money as identifiable as long as it had not been mixed with other money. - The common law has limited forms of relief. Specific relief as distinct from damages (the normal remedy at common law) was confined to a very limited range of claims as compared with the extensive uses of specific relief developed by equity.

Equitable tracing Re Diplock: Equity adopted a more metaphysical approach. It can regard a composite fund as an amalgam which is capable, in proper circumstances, of being resolved into its component parts. It is this metaphysical approach of equity coupled with and encouraged by the far reaching remedy of a declaration of charge that enabled equity to identify money in a mixed fund. - Equitable rules are considerably more generous and facilitate tracing through more complex transactions. The equitable rules also have a moral dimension, operating more harshly against a wrongdoer who misappropriates property than an innocent party.

Significance of a proprietary claim: 1. The person presently holding the identified assets may be insolvent. If the identified assets are subject to a proprietary claim they will not fall to be distributed amongst his general creditors, and as such, a claiming owner will enjoy a priority which could not be achieved through a personal claim. 2. The identified assets may be more valuable than the original property which has been traced into them. If so, a proprietary claim will enable the original owner to take the benefit of the appreciation that has occurred.

Nature of Tracing: 1. Restitution Burrows: Restitution is the response which consists in a defendant giving up to a plaintiff an unjust enrichment which he has received at his expense. It can be effected by restitution in the first measure which is the ‗value received‘, the extent to which he was unjustly enriched, or restitution in the second measure (proprietary measure) which is the ‗value surviving‘ in the defendant‘s hands. Rejects a proprietary analysis because of the perceived danger of a ‗geometric multiplication‘ in the P‘s wealth as he gains interests in all the exchange products for his property as well. (#, inhibited by no double claiming, cannot trace to bona fide purchaser.) 2. Proprietary process Pearce: while the use of tracing as a means of identifying the receipt of enrichment is unquestioned, it is submitted that the relegation of tracing to a mere process without proprietary implications is unduly reductionist and at odds wit both authority and principle. Value cannot exist in the abstract but only in the form of specific assets or property. The leading cases (Lipkin Gorman, Jones) support the view that tracing operates by descent of title so that a plaintiff can trace his property through mixtures and substitutions. If at any point he ceases to be owner, his right to trace comes to an automatic end, as when trust property is acquired by a bona fide purchaser. Foskett v McKeown: Lord Millet – the trasmission of a claimant’s property rights from one asset to its traceable proceeds is part of our law of property, not of the law of unjust enrichment. There is no unjust factor. The claimant succeeds if at all by virtue of his own title, not to reverse unjust enrichment. Common law tracing Clean substitution The common law rules of tracing are clearly capable of following the ownership of property through a clean substitution, through an exchange which did not involve any mixing of the original property with other property. Common law tracing through clean substitutions operates on the basis of the preservation of the plaintiff’s title to the property being traced. The plaintiff had legal title before any clean substitutions took place, and such substitutions were not able to deprive him of his title. Leading case: Taylor v Plumer The money could be traced into the bullion and securities and deemed the property of the claimant as it makes no difference in reason or law into what other form, different from the original, the change may have been made…for the product or the substitute for the original thing still follows the nature of the thing itself. The implication of R v Preddy seems to be that a direct transfer of money between bank accounts are not traceable by common law. However, as Pearce notes, this is fundamentally inconsistent with the other cases, and should not be followed – Banque Belge, Jones, Lipkin Gorman. Banque Belge (money can be traced at common law into a bank account)

Facts: a man who obtained cheques by fraud from his employers, which were paid into his bank account. He then passed the money to his mistress, who paid it into her bank account. Held: Previously it had been thought that common law would not trace money into a bank account at all, but the court held that, following the equity case of Re Hallet’s Estate, there was nothing to prevent the court from examining the details of the bank account. Bankes J held that as there had been no mixing of money in the bank accounts concerned, it was possible to trace the money at common law because it was a clean substitution. Tracing into substitutes and products Lipkin Gorman Facts: a solicitor had misappropriated money from his firm‘s client account in order to finance his gambling at the play boy club. His firm sought to recover restitution from the club of the misappropriated money it had received. The relationship of the bank with the solicitors was essentially debtor and creditor and such a debt constitutes a chose in action which is a species of legal property belonging to the solicitors at common law. The plaintiff firm of solicitors was entitled to trace money misappropriated from their client account as there is no reason why the solicitors should not be able to trace their property at common law in that chose in action [client’s account], or in any part of it, into its products, ie, cash drawn by Cass from their client account at the bank. Such a claim is consistent with their asserting that the money so obtained by Cass was their property at common law… and it further follows that the solicitors can follow their property from the hands of Cass into the hands of the respondents when it was paid to them at the PBC. (However, the common law rules will not permit tracing once money had become mixed with other money of the club. However, common law tracing rules did establish that the money that the club received belonged to the firm, and thus entitled them to maintain a common law action for money had and received.) Tracing into profits Trustees of FC Jones v Jones (money can be traced into profits made using one’s money) Facts: The D had received money drawn from the bank account of a firm which had committed an act of bankruptcy before it had been adjudicated bankrupt. The money was invested in an account held by a firm of commodity brokers which dealt in potato futures. The investment was highly successful and the account contained 5 times the money initially invested. The trustees went after the D not only for the money withdrawn, but the profits. Held: D had no title to the money, and as it was simply in her possession. The trustee was entitled to trace his funds (including his profits) by applying common law principles because the money and profits belonged to him at law. As such she could not retain the gains made from the Potato futures, and the Trustees could trace the money at common law into the account with brokers and subsequently into the account with Raphaels. [But, still an action in debt though the court said you can claim for the increase in value because the D had no legal title to the shares. THW: alternatively can construe the claim that there was a breach of fiduciary duty by D‘s husband by giving the money away] Tracing of tangible property (exception?)

The common law is able to trace tangible property which is mixed with identical property so as to create a bulk. Where such mixing occurs the owners of the goods which have been mixed become tenants in common of the whole in the proportions which they have contributed to it: Spence v Union Marine Insurance. (egs. Crude oil – Indian oil co ltd, oil mixed with a different grade or specification – Glencore International)

Tracing of money through mixed funds It was only possible to follow assets through clean substitution where they are able to be ascertained to represent the original property, and such ascertainment becomes impossible ‗when the subject is turned into money, and mixed and confounded in a general mass of the same description‘. Means of transfer through a clearing system Agip Africa v Jackson Tracing not possible in common law where money has been transferred between bank accounts and the means of exchange has inevitably involved some element of mixing. -

-

Millet J at the lower court 1) Denial of nature of transfer: Not possible to trace through telegraphic transfer in common law tracing, common law tracing requires clean substitutes: nothing passed between Tunisia and London but a stream of electrons. (Rejected in CA as it did not matter that the transfer had been by order rather than cheque) 2) Mixing: Not entitled to trace at common law because money must have been mixed with other money when the transfer took place through the New York clearing system between Agip and Lloyd‘s correspondent banks. (accepted) The CA held that the fact that it was electronically transmitted did not matter to common law tracing, but tracing failed because the money must have been mixed with other money when the money passed through the New York clearing system. However, MR Zdiri was a fiduciary as chief accountant and hence could trace the money in equity.

Bank Tejarat v Hong Kong - Applied the principle identified in Agip (Africa) Ltd and held that as the plaintiff‘s money would inevitably have become mixed with other money through the Frankfurt deutschmark clearing system, it was impossible to trace the money at common law into the hands of the defendants. (Cf. Jones: the mere transfer of money between accounts held at different domestic banks is effected through the clearing system and yet does not seem to have prevented common law tracing. Millet LJ: the trustee does not need to follow money from one recipient to another or follow it through the clearing system; he can follow the cheques as they pass from hand to hand. It is sufficient for him to be able to trace the money into the cheques and cheques into their proceeds.)  Pearce: No reason why the court should have been concerned with the means of transfer through the clearing system (use the Jones rationale). Surely it is enough to identify a debit from one account echoed by a corresponding receipt by another. This is as much a swap of a chose in action for another as if a cheque had physically changed hands. The refusal to allow common law tracing on the grounds of inevitable mixing during the process of transfer of funds involves an unduly literalistic analysis of the tracing process. Whenever transfers occur between banks, there should simply be an evidential presumption

that the money in question has passed from one account to another. The means of transfer should not prevent such an inference. Claiming at Common Law Clean Substitution - Historically: personal remedies- action in debt, conversion. Unjust enrichment. - Pearce: it is now clear that where a legal owner can identify assets in the hands of a third party as representing his original property, he will be entitled to claim them as his own. - Lipkin Gorman: Lord Goff stated that the legal owner of property was entitled to trace his property into its product. - Jones FC: a person who can trace his property into its product, provided that the product is identifiable as the product of his property, he may lay legal claim to that property. - Where an owner is entitled to claim specific assets at common law, he will be entitled to take advantage of any appreciation in value which they have received. Where tangible property has been mixed to form a bulk Where the bulk can be divided, the claimant will be entitled to claim a proportionate share. However, where the bulk cannot be divided, although admittedly rare, the original owner will be entitled to claim the entire bulk: Jones v De Marchant. Claiming personal restitution A proprietary claim will not be available where the property has been dissipated. A proprietary claim can only subsist in relation to some specific identifiable asset. As Lord Lane CJ observed in AG Reference, there can be no proprietary remedy unless there is an asset which can be identified as a separate piece of property. The original owners may however, be entitled to claim personal restitution form the recipient. Tracing operates as a process by which it can be demonstrated that a defendant was in fact enriched at the expense of the original owner by receipt of his property. A personal restitutionary claim may also be more advantageous to an original owner than a proprietary claim even where the property has not been dissipated if the assets which represent his property have subsequently fallen in value, since the measure of restitution will be determined by the value of the property at the point of receipt. Lipkin Gorman: The common law rules would not permit tracing once the money had become mixed with other money of the club. However, common law rules of tracing did establish that the club had received money which belonged to the firm, and thus entitled them to maintain the common law action for money had and received. (refer above why tracing worked – crucial because the firm‘s ability to trace the money from clients account to PBC vital to establishing that the money at the PBC was their property even though their claim was a personal basis). Tracing in equity The fiduciary relationship requirement Case law suggests that a fiduciary relationship is necessary for the operation of tracing in equity. In Re Diplock, the CA examined the judgments of the HOL in Sinclair v Brougham and concluded that a fiduciary relationship was a pre-requisite to tracing. Although the HOL in Westdeutsche overruled Sinclair v Brougham, Lord Browne Wilkinson stressed that this did not amount to a rejection of the requirement of a fiduciary relationship stated in Re Diplock.

Where trust property has been misappropriated or misdirected, the essential requirement of a fiduciary relationship will be satisfied. In Chase it was suggested that although the two banks were commercial organizations dealing with each other at arms length and did not stand in a fiduciary relationship, the mistaken payment brought about a fiduciary relationship which entitled Chase Manhattan to trace the moneys: A person who pays money to another under a factual mistake retains an equitable property in it, and the conscience of that other is subjected to a fiduciary duty to his proprietary right. However, this rationale was disapproved in Westdeutsche as Browne Wilkinson could not agree that the mere fact that payment had been made by mistake meant that the payor retained equitable interest in the money paid when it had previously not been subject to a trust. Rather, the fact that the defendant knew about the mistake gave rise to a constructive trust. (Pearce #: reasoning as spurious. If the mistaken payment effected a transfer of ownership when it was received, no reason why a trust should be imposed later when the bank discovered that the mistake had occurred. Tracing should only be possible if the money was paid under a mistake of fact so fundamental as to prevent property passing.) The requirement for a fiduciary relationship has been criticized by Millet J in Foskett as there is no logical justification for allowing any distinction between common law tracing and tracing at equity to produce capricious results in cases of mixed substitutions by insisting on the existence of a fiduciary relationship as a precondition for applying equity's tracing rules. The existence of such a relationship may be relevant to the nature of the claim which the plaintiff can maintain, whether personal or proprietary, but that is a different matter. Criticism of fiduciary relationship requirement The requirement is artificial, the court being willing to find, or discover a fiduciary relationship whenever they feel tracing is justified, as in Chase Manhattan. Hayton: in Westdeutcsche, Lord Browne Wilkinson seemed to imply that a thief owes a fiduciary duty to his victim, with the result that the victim can invoke ‗equitable‘ rules in order to trace through the thief‘s sale of the stolen property and mixing of the proceeds in a bank account. Hayton: Given the objections to the fiduciary relationship requirement together with the dicta in Foskett v McKeown where Lord Steyn and Lord Millet both considered that there is now only one set of tracing rules in English law applicable to common law and equitable claimants alike. It seems likely that this obiter will be followed in future cases. Pearce: Follow Collins J in Commerzbank which sees the right to trace as existing because of the continuing proprietary rights of the true owner. The requirement of a fiduciary relationship conceals the true basis of equitable tracing which is the identification of a trust. A person will only be entitled to trace property in equity of which he was the equitable owner. Submits that the trust analysis should be adopted in place of the current requirement of a fiduciary relationship. However, such a development would not lead to any significant change in the operation of equitable tracing as there is such close connection between equitable ownership and a fiduciary relationship that the two terms could be seen as almost synonymous. [THW: The difficulty however is that this proprietary analysis is predicated on the splitting of title. However, the prerequisite to saying that one is a trustee (and hence the splitting of title) is that he is a fiduciary.] Equitable tracing 1. Clean substitutions Where trust property has been exchanged for other property, beneficiaries are entitled to trace.

2. Tangible property into mixed bulk Trace the trust property into the bulk and entitled a share of the equitable ownership proportionate to their contribution. 3. Money through a mixed fund Unlike common law rules of tracing, the equitable rules of tracing permit the trust property to be traced to a mixed fund of money and into assets acquired from it. El Ajou v Dollar Land Holdings Victims of fraud can trace in equity through mixed bank accounts because equity treats such accounts as charged with the repayment of their money. Hence, Millett J held that although they could not trace at common law because the money had been mixed, they could trace in equity because there was a fiduciary relationship between them and their agent who was bribed. Foskett v McKeown Case concerned a Mr Murphy who had taken out a unit-linked life insurance policy which provided for the payment of a death benefit of 1 million. The initial annual premiums due under this policy were paid by Mr Murphy but subsequent payments were paid from a bank account which he held on trust for the customers of a company he controlled which had contracted to buy land on their behalf. The proceeds of the life insurance policy were written in trust for the benefit of his children. When Mr Murphy died and his death benefit paid, the issue was whether the beneficiaries were entitled to trace their misappropriated money into the proceeds of the policy. Held: The HOL held by a bare majority that the beneficiaries were entitled to a share of the proceeds proportionate to the contribution of trust money to the payment of their premiums. Lord Millet: the beneficiaries were able to trace their trust money to the insurance policy itself and thence, into the proceeds of the policy. If a claimant can show that premiums were paid with his money, he can claim a proportionate share of the policy. - Question is whether the assets claimed are attributable to the original trust property – seemed to indicate that since this was a property claim, you will be entitled to vindicate your property rights by tracing. o The fact that the premiums did not in fact affect the value of the entitlement to the death benefit should not matter because ownership had to be assessed before the death of the trustee, not after. - Used a proprietary analysis to say that the beneficiary can trace unmixed money into its proceeds and assert ownership of the proceeds where the claimant‘s property has contributed in part towards the acquisition of the new asset. It is not necessary for the claimant to show in addition that his property has contributed to any increase in the value of the new asset. -

-

Cf. Lord Hope (dissenting), who argued that causation is relevant to the extent that the particular terms of the policy involved sub-divided units o Since the later premiums did not affect the value of the entitlement to the death benefit, there is no causal link there; the purchasers were only entitled to claim the amount of the premiums paid using their funds. It is unclear whether causation is really out of the picture—it is arguable that Lord Millett‘s usage of the concept of ‗attribution‘ is really the concept ‗causation‘ in a different, more general form.

-

Alan Toy in Caterbury Law Review: the concept of attribution was simply the sophisticated form [of causation] in disguise. Presentation of tracing process as wholly neutral is fiction!

[cf. THW: policy motivation unarticulated: fiduciaries cannot use moneys in this way to provide for next of kin] 4. Money through the banking system Whether the balance in the bank account can be identified as the product of trust money – operate differently depending upon whether the mixture consisted of trust money and the money of wrongdoing trustee/money of the trust and of another innocent party. (a) Mixture in bank account consisting of the trust property and trustee’s own property When a wrongdoing trustee has mixed trust property with his own property in a bank account, the rules operate harshly against him. Hayton: Equity resolves the evidential problem (as to whose money spent on what) against the wrongdoer by allowing the beneficiaries to cherry pick from two rules in order to reach the best result for themselves. [Hayton: Definition of wrongdoer includes a recipient who takes the property with knowledge of breach of trust and hence owes duty as a constructive trustee to account for trust property but yet mixes his property with his own property. (Boscawen v Bajwa)] Re Hallett’s Estate If the mixed fund has been partially dissipated, any remaining balance are presumed to belong to the trust. The burden is on the wrongdoer to show that the asset represents his own money. Facts: A solicitor, who was a trustee of his own marriage settlement, was entrusted with money by a client for investment. He paid money from the trust and his client‘s money into his bank account, which also contained some of his own money. He later made various payments out and dissipated the money in the account. On his death, the issue was whether the money in the account could be said to be property of the trust and client, in which case they would gain priority over the general creditors. Held: The Court held that trustee must be presumed to have spent his own money first, and that the trust monies are preserved in the account. Jessel MR: it seems to me perfectly plain that he cannot be heard to say that he took away the trust money when he had a right to take away his own money. Pearce: This presumption could create problems if the trustee acquires assets with money withdrawn and thereafter dissipates all remaining assets in the account. He could claim that all the assets belong to him as he was presumed to spend his own money first. Therefore, the better interpretation is that this presumption is not absolute but a specific application of the maxim that ―everything is presumed against the wrongdoer.‖ Re Oatway Opposite presumption to Re Hallet applied. The trustee was presumed to have spent trust money first. Facts: Lewis Oatway was a solicitor and the trustee of a will. He misappropriated money from the trust and paid this into a bank account where it was mixed with his own money. He purchased shares using money from the account. At the time of purchase, he had enough of his own money in the account to purchase the shares. After the purchase, he dissipated the balance and died insolvent. The shares had by now appreciated in value. If the rule in Re

Hallet was applied, Oatway would have been considered to have spent his own money on the shares, thereby making the shares his own. Joyce J held that the shares did not belong to Oatway‘s estate, but were to be regarded as the product of the trust money. A trustee cannot after dissipating the balance, maintain that the investment represents his money alone, and that which has been spent and no longer be traced was money belonging to the trust. (THW: alternatively use agency principles. As principal you ratify your agent‘s wrongdoing and hence take benefit of the shares) Pearce: This decision and Re Hallett are not contradictory even though they had different outcomes based on similar fact patterns. This is rather the application of a general principle that the trustee is estopped from asserting that he has dissipated trust money before his own. This principle will operate differently depending on the individual facts of each situation. Re Tilley’s Will trust Where the property has increased in value, the charge will not merely be for the amount for the trust moneys but for a proportionate part of the increased value (b) Mixture in bank account consisting of the trust property and property of an innocent volunteer In such cases, we cannot presume anything against the volunteer as he is not guilty of any wrongdoing, the rules reflect te moral blamelessness of the parties whose money as been mixed and aim to do substantive justice between them. Hence, gains and losses are generally shared pro rata as the beneficiaries will have equally strong claims to a rateable share of gains and equally weak claims to avoid taking a rateable share of losses to the mixed fund. Equitable lien over the property (if deficient) not possible though, a pro rata share in the property only: Foskett below. CURRENT ACCOUNT Clayton’s Case This case presumes that money is paid out of a current account in the same order in which it had been paid in. In other words, that the first money to be spent from the account represents the first money that was paid in. This rule is known as the First in, First out rule However, this presumption is not absolute and will not be applied if the result is unjust – starting with Barlow clowes, the trend of recent cases has been to apply the rule only in most exceptional circumstances. This approach is premised on the notion that the Clayton’s case rule is merely a convenient evidential rule in some cases and should not be applied when it causes injustice. In Rusell- Cooke Trust Co v. Prentis, Lindsay J went so far as to suggest that the fact that the FIFO principle will not usually be applied where beneficiaries have shared a common misfortune means that it might more accurate to refer to the exception

NOT CURRENT ACCOUNT Where the mixing of the trust property and the property of an innocent volunteer takes place in a bank account other than the current account, the rule in Clayton’s case will not apply. In Sinclair and Re Diplock, it was held that parties will share parri passu in any assets that have been purchased out of the mixed fund and any balance remaining in the account. They will also bear any increase or loss in value proportionate to their contributions.

that is, rather than the rule in Clayton’s case. In Barlow, some investors argued that Clayton’s Case should be applied, with the consequence that the earlier investors would get their money back but the later investors would recover nothing. Clayton’s Case affirmed as good law. However, Woolf LJ stated that the rule is only applied when it is convenient to do so and when its application does broad justice taking into account all competing claims. It is not applied just because the beneficiaries want it to be applied. It is also not applied when the cost of applying it is likely to exhaust the fund available for the beneficiaries such that some beneficiaries have nothing left to claim. Held: it would be inequitable to apply the rule in Clayton’s case as it would mean some investors recovering everything to the exclusion of the rest (without any relation to the equities of the case), and instead, the investors should share pari passu in what remained as they had experienced a common misfortune. [cf. rolling charge suggestion in Hayton pg 540] Clayton’s case not applied in Commerbank too as it would be impracticable and unjust to do so and the balance in the account should be divided in proporiton amongst clients as that was the only fair way. (c) Tracing into substituted asset purchased out of a mixed fund Claiming assets which were acquired from a mixed fund: prior to Foskett a distinction appeared to be drawn between the rights of beneficiaries where assets identified as representing the original trust property were acquired from a mixed fund with an innocent party‘s funds or one mixed with the property of the wrongdoing trustee. HOL: Lord Millet held that no distinction was to be drawn between the right of beneficiaries to claim a proportionate share of assets acquired from a mixed fund. Re Diplock CA suggested that the use of trust property to improve a house where improvement added no value to the house or even caused a loss of value would amount to a dissipation preventing tracing as there would be nothing to trace, as the ‗money will have disappeared leaving no monetary trace behind‘. CA also considered that there should be no tracing if an innocent volunteer used trust property to improve land. To impose a charge over the land for the increase in value in such circumstance would not in the court‘s view, produce an equitable result. The reason for this is

that a charge is enforceable by sale, and the result is that the innocent volunteer could be compelled to sell his house. - There was suggestion in Re Diplock that the use of trust property to improve a house where the improvement added no value to the house, or if it caused a loss in value, would amount to a dissipation preventing tracing. In such circumstances, there is nothing to trace because the money will have disappeared leaving no monetary trace behind.  Whether it will be inequitable to trace will depend on the circumstances of the case. Re Diplock concerned charities who were innocent volunteers. As Goff and Joes suggest, the result might have been different if the innocent volunteer had been a rich banker who had used trust money wisely to increase the value of his country house and has ample liquid assets to dispell the charge. What if it was the fiduciaries who improved the property? Restrictions on equitable tracing Restrictions on equitable tracing - There must be a limit on equitable tracing. If there are no limits, then it gives the beneficiaries indestructible rights. - One rule is that you must be able to point to a discrete asset to show that it is a representation of an asset that you have lost. It is not enough to say that you have received my property. (1) Bona fide purchaser for value without notice (2) Dissipation of the asset or fund General Rule: Once money has been dissipated, there can be no tracing because there is clearly no asset which represents the original property. Equitable remedies presuppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If the money ceases to exist, equity is helpless: Re Diplock -

-

-

If property has been used to discharge a debt, nothing would be left that could be said to represent the trust property. A debt is a chose in action and once it is paid, it ceases to exist. In Re Diplock, it was held that it was impossible to trace trust money wrongfully transferred to two charities who had used it to discharge debts. Money paid into an overdrawn account cannot be traced as such payment only reduces the amount of the overdraft. This is simply a debt owed by the customer to the bank and such monies are considered dissipated and as such cannot be traced: Re Tilly’s Will Trusts and Bishopsgate v. Homan. Swollen Assets Theory: In Bishopgate, as the plaintiffs could not identify which particular asset represented the trust moneys, they tried to argue that the beneficiaries had a charge over all the assets of MCC based on Obiter Dicta by Templeman LJ from a PC case Space Investments v. Canadian Imperial Bank. This theory states that where it is impossible to trace monies into any particular asset, then the money could be traced to all the assets and an equitable charge could be placed over all the assets. The Swollen Assets Theory was doubted by Dillon LJ in Bishopsgate v. Homan and he held that it was strictly Obiter. - THW: This makes sense because with the Swollen Assets Theory, the beneficiaries just have to prove receipt to be able to enforce their rights. - Hayton: Serious Fraud Office v Lexi Holdings – for an equitable charge to attach [to assets in the trustee‘s hands] it must attach to assets in existence which derive from the misappropriated trust funds. There must be a nexus. Were it otherwise, the principles of following and tracing could become otiose.

-

Doctrine of specification – the asset is deemed to be destroyed where the asset is combined with other items to form a wholly new product - Borden UK v Scottish Timber Products: The right to trace will be lost where tangible property is not merely mixed to form a bulk but is consumed in the manufacture of an entirely new product so as to lose its identity altogether i.e. the original product had been dissipated. The plaintiff‘s claim to recover resin could not be traced into the chipboard that the resin was used to manufacture s the chipboard was a wholly new product. [However, cf. Jones v De Marchant where a husband wrongfully took 18 beaver skins from his wife and used them together with his own skins to make up a fur coat which he gave to his mistress. The court held that the wife was allowed to trace her property to the new coat. Hayton: this is explained on the basis that the mixing in Jones was done by the wrongdoer and hence, the owner of the assets which are wrongfully used to create a new aset can follow his property into his new asset. The mistress as a volunteer derived her title from the wrongdoer and hence could not get better title than her predecessor.]

Exceptions 1) Where a beneficiary‘s money is used in breach of trust to discharge a secured debt, the beneficiary will be entitled to be subrogated to the position of the secured creditor and therefore can recover the amount of the discharged loan from the debtor: Boscawen v. Bajwa 2) Backward tracing - Can misappropriated money can be traced in equity into an asset acquired before trust property was received? In Bishopgate, Dillon LJ was willing to accept that in some circumstances trust money could be traced into a pre-acquired asset. The first instance judge had suggested that tracing would be possible if property had been acquired with borrowed money, either by way of loan or overdraft, and there was an inference that when the borrowing was incurred it was the intention that it should be repaid with the misappropriated money. He considered that the beneficiary would be entitled to a charge over the asset acquired provided the connection between the misappropriation and the asset was sufficiently proved. In contrast, Leggatt LJ entirely dismissed the possibility of such backward tracing: there can be no equitable remedy against an asset acquired before misappropriation of money takes place, since ex hypothesi it cannot be followed into something which existed and so had been acquired before the money was received and therefore without its aid. In Foskett v McKeown, Scott VC expressed the opinion that it should be possible to trace into assets acquired with borrowed money if the trust money was used to repay the borrowing and it has always been the intention that the trust money would be used to acquire the asset. (3) Lowest intermediate balance Whether a fund consists of a mixture of trust money with the wrongdoer‘s own or the money of an innocent volunteer, if money has been dissipated from the account and hten further money is paid into the account, the trust has no claim to any of that other money. The trust is limited to what is the LIB as it is impossible that anything in the account above that figure represents trust property. James Roscoe: A wrongdoer misappropriated 455pounds and paid it into his own account. After a few days, the balance was reduced to 25 pounds. When he died, the balance had risen to 358 pounds. It was held that a charge could only cover 25 pounds.

The principle in Re Hallett would only apply to consider the lowest balance in the account standing to the trustee‘s credit as representing the remnants of the trust money. Subsequent payments into the account cannot be considered. Payments into a general account cannot be considered as the replacement of trust money which has been improperly mixed with that account and drawn out unless there is proof of express intention that these payments were specifically intended to replenish trust funds. -

*This has been approved in Bishopsgate v. Homan. Dillion LJ approved of Roscoe v. Winder and held that the maximum amount that could be traced was the lowest balance of the account standing to the credit of the trustee in the intervening period.

Claiming in equity Assert a proprietary claim to the assets identified/an equitable lien to restore the trust fund/personal claim to restitution. Claiming assets which are acquired from a mixed fund. General rule – right to elect between claiming a proportionate share of an asset acquired from a mixed fund and enforcing an equitable lien: Lord Millet in Foskett Proprietary claim: enable priority over general creditors in an insolvency, take advantage of any increase in value of the assets. Such proprietary claim will not however, be advantageous if the assets acquired from the mixed fund have fallen in value, since it will force the beneficiaries to bear a rateable share of the loss. In that case Equitable lien: Claim to enforce an equitable lien against the mixed fund to secure one‘s personal claim against the trustee to have the trust fund restored (Re Hallet and Foskett). However, lien only available where the mixed fund consists of a wrongdoing trustee’s own property and not where it consists of property of equally innocent parties. This is because innocent contributors must be treated equally inter se and there is no basis upon which any of the claims can be subordinated to any of the others. Assets that are dissipated Where assets dissipated so that there are no longer any assets remaining which can be identified as its traceable proceeds, beneficiaries will not be able to assert a proprietary claim.  personal restitution in equity. In this context the rules of tracing operate as a process by which it can be established that a stranger had in fact received trust property. Unitary System in law and in equity Strong authority arguing that there should be no different rules for tracing in law and in equity, but however, the law as it stands still sees a distinction. -

Millet J in Jones: there is no merit in having distinct and different tracing rules at law or in equity, given that tracing is neither a right nor a remedy but merely a process by which the plaintiff establishes what has happened to his property.

Criticisms: - There is no reason why the common law cannot recognize joint title to a mixed fund through a tenancy-in-common. This has been recognized in Spence where bales of wool were mixed but court held that there was a tenancy in common. In principle the recognition of a tenancy in common at law should enable the common law to trace through mixtures.

-

The inability of common law to trace into mixed funds has had the effect of turning plaintiffs to seek relief in equity since equitable rules permit tracing through a mixed fund. As equitable tracing is dependent on the existence of a trust relationship, the desire to trace in equity tended to lead to an expansion of the circumstances in which the misappropriated property will be treated as subject to a constructive trust. Pearce: no reason in principle or in practice for common rules to be emasculated. If the rules were to develop, there would be less need for an expansion of equity, trusts and fiduciary relationships into the commercial sphere as adequate restitutionary remedies would be available to a plaintiff whose property had been misappropriated.

Foskett v McKeown Steyn LJ and Millet reasoning Steyn LJ quoted from Professor Birks who said: Tracing is neither a claim nor a remedy. It is a process through which a claimant establishes his claim. It is distinct from claiming and does not affect or establish a claim. Tracing is genuinely neutral as to the rights exigible in respect of the assets into which the value in question is traced and hence, there is nothing legal or equitable about it.