Equitable Proprietary Claims

In October 2010 Trevor is appointed the sole trustee of the Nestegg Settlement, of which Barry is the object of special power of appointment vested in Trevor as donee. Mistakenly believing that the terms of the trust instrument entitle him to receive remuneration out of the trust fund, in October 2010 Trevor withdraws £10,000 from the Trust's bank account in payment for his administrative work over the past years. He pays the money into his own bank account, which at the time was overdrawn by £2,000.

In January 2012 Trevor unexpectedly receives from Legal and Equitable plc a £20,000 lump sum under a personal pension plan into which he has been paying for many years, and he pays this sum into his bank account. In the light of this windfall, Trevor makes the following withdrawals from his account: i. £18,000 in January 2012, with which he purchases a new car; ii. £3,000 in February 2012, which he spends on a holiday in the Caribbean; iii. £1,000 in March 2012, with which he purchases a block of shares in Quickbuck plc; iv. £5,000 in April 2012, which he uses to discharge in part the mortgage on premises from which he runs a business as a minicab operator.

Each month from January to April 2012 Trevor pays into his bank account £1,000 of the profits from his minicab business. The shares in Quickbuck plc are currently valued at £5,000.

The manager of Legal and Equitable plc has recently written to Trevor to inform him that the payment to him of £20,000 was the result of an administrative error, and that the terms of his pension plan only entitles him to a £10,000 lump sum. Trevor has also received a letter from Barry's solicitors, querying his right to remuneration for his services as trustee of the Nestegg Trust. Advise Trevor.

In a case such as this it is clear that both Barry and Legal and Equitable plc will attempt to found proprietary claims against Trevor. This will involve a four stage analysis of firstly whether the claimants are capable of establishing a proprietary base, secondly whether they are able to trace/follow the asset/funds in question, thirdly what remedy they will be entitled to i.e. proprietary or personal; and lastly, in connection with this whether there are any "defences" available to Trevor.

Answer:

To begin, Trevor's mistaken belief that he was entitled to remuneration from the trust fund in the form of £10,000 is a clear example of a breach of trust in that it was not authorised by the trust instrument itself. As Barry is the object of the special power of appointment he can be considered a beneficiary and an archetypal case where an equitable proprietary claim may lie because, holding beneficial title only, he may not bring an action at common law. Here it is also evident that a fiduciary relationship exists in that a fiduciary relationship will always arise from a division of the legal and beneficial ownership in the monies sought to be traced.

Although remuneration is sometimes authorised by s29 of the Trustee Act 2000 such is inapplicable here as Trevor is not a trust corporation (section 29(1)(a)). It is also unlikely that a court would authorise remuneration under its inherent jurisdiction for past services rendered, as in Foster v Spencer, because in that case itself it was recognised remuneration was exceptional and only made out because the work was completely outside scope of that originally contemplated. Here it is clear Trevor has not made any special effort in terms of his work, he has merely performed administrative duties which would be expected of him in any case. With breach established it is now prudent to analyse what Trevor did with the £10,000.

Trevor proceeded to place the £10,000 into his own, overdrawn, account. As Woolf LJ noted in Barlow Clowes where an account is overdrawn, any tracing claims are exhausted. Indeed Lord Diplock notes that an equitable proprietary remedy is contingent upon the continued existence of the asset. If such is not established "equity is helpless". However, this would apply only to the £2,000. Since the £8,000 remained, and was not mixed with Trevor's own funds, it could have been followed as an original asset by Barry into Trevor's bank account and returned. This is analogous to Chase Manhattan Bank, which showed that in situations such as these, namely where money turned over due to a mistake, the money is held on constructive trust for the beneficiary (albeit an alternative conception is that it is the retention the money after becoming aware of the mistake that creates the constructive trust). In any case the events after October 2012 have occurred resulting in the £8,000 no longer remaining in the account. Barry's claim now rests on whether he can follow and/or trace the £8,000 through the subsequent events.

In terms of Trevor's £20,000 pension payout Barry's money becomes mixed upon payment of such a sum into his bank account. Although at common law there is no tracing through a mixed fund the fact that Barry is a beneficiary under a constructive trust for £8,000 in that account and he can proceed on an equitable basis and take advantage of the more flexible equitable rules on following and tracing so that the initial mixing of the funds would not vitiate his £8000 proprietary claim.

However, relevant to mixing here is the Clayton's case... [end of extract]