Rights and Remedies

Rights and Remedies Associate Professor Cameron Stewart

Appointment, retirement and removal of trustees • Only a legal person (a natural person or corporation) with the capacity to hold and deal with property can be appointed as a trustee • If, for whatever reason, a prospective trustee is unable to take up the office of trustee, the trust will not fail • Most trusts will contain an express power of appointment. In the absence of an express power of appointment, most jurisdictions have granted powers of appointment to particular classes of individuals

Appointment, retirement and removal of trustees • Retirement • Removal -If the trust instrument is silent on the issue of removal, only the court has the power to remove a trustee who wishes to remain in office. The welfare of the beneficiaries is the dominant consideration in determining whether or not it is proper to remove a trustee

Rights of trustees • The right to reimbursement and exoneration • The right of contribution • The right to impound a beneficial interest • The right to get directions from the court

Powers of trustees • Powers of sale • Powers of management • Powers of maintenance and advancement • Powers of investment

Duties of trustees • Duty to obey the terms of the trust • Duty to inquire • Duty to keep accounts and give information to beneficiaries -Re Londonderry’s Settlement • Duty to correctly pay beneficiaries • Duty not to profit from the trust

Duties of trustees • Duty to act impartially between beneficiaries • Duty to sell trust property • Duty to invest • Duty to act personally, unfettered and unanimously • Duty to consider the exercise of trust powers

Interests of beneficiaries Fixed and discretionary Exhaustive non exhaustive Taxation Family Law Immigration

Rights of beneficiaries • The right to compel performance • The right to restrain a breach of trust • The right to possession of trust property • The right to approach the court • The right to information • The right to extinguish the trust • Right to trace

Personal remedies • Equitable compensation • Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at 500, a unanimous High Court said: • [T]here must be a real question whether the unique foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation even in this limited way with the measure of compensatory damages in tort and contract. It may be thought strange to decide that the precept that trustees are to be kept by courts of equity up to their duty has an application limited to the observance by trustees of some only of their duties to beneficiaries in dealing with trust funds.

Personal remedies • Set-off • Account of profits • Just allowance • Personal claims against third parties

Proprietary remedies — tracing • Tracing is available as a remedy in common law as well as in equity. Common law tracing differs from equitable tracing in that equity recognises that a beneficiary retains his or her property rights over trust property in cases where the trust property is mixed with other property or converted into a new type of property

Proprietary remedies — tracing • Foskett v McKeown [2000] 3 All ER 97: 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. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim

Proprietary remedies — tracing • The existence of a prior fiduciary relationship is an essential prerequisite to a claim of tracing in equity • The effect of grounding tracing in the exclusive jurisdiction is to substantially limit its availability. Many commentators have been critical of this view of tracing’s origins because, in the absence of a prior fiduciary relationship, any person whose property is stolen by a thief will be unable to trace that property in common law or equity, if the thief mixes the property

Proprietary remedies — tracing • In addition to the requirement that there be a pre-existing fiduciary duty between the parties, a claimant seeking to trace trust property must also establish that he or she had an equitable interest in the property prior to the breach of fiduciary duty and that the property now lies in the hands of the defendant. • In equity it does not matter, for the purpose of identification, that the property has become mixed with other property. Nor does it matter that trust funds have been used to purchase other property. • Equity presumes that the trust property continues to exist in both situations

Tracing property into the hands of trustees • If trustees misappropriate trust property and use it exclusively to purchase other property in their own name, equity allows the beneficiaries to trace the funds into the newly acquired property • The beneficiaries can choose to enforce their beneficial interests in the new property by eitherasserting beneficial ownership of it, or by bringing a personal claim against the trustee for breach of trust. This claim can be enforced by an equitable lien or charge over the new property

Mixed property — the rule in Re Hallett’s Estate • Equity presumes in such circumstances that, once funds are mixed in an account, any following transactions come from the trustee’s personal funds first. Any funds remaining in the account are treated as trust funds

The lowest intermediate balance rule • How do you calculate beneficial proprietary interests in cases where deposits and withdrawals are made over time to accounts of mixed funds? • The lowest intermediate balance rule states that the beneficiaries’ claim is limited to the lowest account balance in the period starting from the date of mixture to the date of the claim against the account.

Tracing valuable purchases from a mixed fund • An exception to the rule in Re Hallett’s Estate applies when the fiduciary makes a purchase of valuable property from the mixed fund and then proceeds to dissipate the rest of the account. In such circumstances the fiduciary is not entitled to use the rule in Re Hallett’s Estate to prevent tracing into the valuable property. In Re Oatway [1903] 2 Ch 356, a trustee misappropriated trust funds by placing them in his account and then proceeded to use two-thirds of the money to buy shares. The rest of the account was then dissipated. The court found that the trust property should be traced into the shares, overturning the presumption in Re Hallett’s Estate that transactions come from the trustee’s personal funds first.

Tracing mixed funds into appreciating property • In cases where trustees mix funds and profitably invest the mixture, beneficiaries will ordinarily be entitled to a proportionate share of any gain made by the investment

Mixed property in the hands of trustees from more than one trust • Unfortunately, it is not unusual for defaulting trustees to mix funds from more than one trust. In this situation two rules can be applied to apportion whatever property remains between the different beneficial interests traced into the mixed fund.

Mixed property in the hands of trustees from more than one trust • The general approach — pari passu For example, if $3000 from Trust A together with $2000 from Trust B were used to purchase 500 shares of equal value, 300 shares would be held in favour of Trust A and 200 shares in favour of Trust B.

Mixed property in the hands of trustees from more than one trust • The rule in Clayton’s case It displaces the pari passu rule and states that all beneficial interests in a mixed bank account are subject to a ‘first in, first out’ rule.

Mixed property in the hands of trustees from more than one trust • Presume that a trustee mixes $1000 from Trust A with $2000 from Trust B and $3000 from Trust C, in successive days, totalling $6000. • On the next day the trustee withdraws $2000 from the account, leaving a balance of $4000. Under the rule in Clayton’s case the withdrawal is presumed to come from Trust A’s funds and from Trust B’s funds. • The remaining funds in the account are therefore said to be traced to Trust B for an amount of $1000, and Trust C for an amount of $3000.

Mixed property in the hands of trustees from more than one trust • The rule in Clayton’s case is difficult to apply where the facts concern large estates with complex bank accounts. It also works unfairly against the first victims of a breach of trust, by practically eliminating their attempts to trace.

Mixed property in the hands of trustees from more than one trust • In Australia it has been found that if there are large numbers of beneficiaries it is better to apply the pari passu rule to prevent injustice: Re Australian Home Finance Pty Ltd [1956] VLR 1.More recently, Campbell J overviewed the entire history of the rule in Clayton’s case and decided that it should not be applied in Australia: Re French Caledonia Travel [2003] NSWSC 1008

Tracing property into the hands of third parties • Bona fide purchasers for value without notice of the breach of trust are immune from tracing claims • However, if a third party recipient has actual or constructive knowledge of the breach of fiduciary duty, or if the recipient is a volunteer, the property may be traced into his or her hands.

Tracing property into the hands of third parties • Foskett v McKeown[2000] 3 All ER 97, a trustee misappropriated money from the trust fund and used it to pay the last two of five premiums on a life insurance policy. The policy was in favour of the trustee’s children. After the trustee’s suicide, the children received the policy money

Tracing property into the hands of third parties • The beneficiaries under the trust claimed that they were entitled to trace their money through the policy into the sum paid out by the insurers. They believed they were entitled to a proportionate share of the policy money. • The majority of the Court of Appeal upheld the beneficiaries’ claim but limited it to the amount of the two premiums together with interest. The beneficiaries were denied a proportionate share of the policy proceeds.

Tracing property into the hands of third parties • A majority of the House of Lords upheld an appeal by the beneficiaries: . Lord Browne-Wilkinson said at 102: Therefore the critical question is whether the assets now subject to the express trusts of the purchasers trust deed comprise any part of the policy moneys, a question which depends on the rules of tracing. If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no room for any consideration whether, in the circumstances of this particular case, it is in a moral sense ‘equitable’ for the purchasers to be so entitled

Defences • Consent, acquiescence and release • Laches

Relief from liability • Indemnity provided in the trust instrument • Indemnity provided by co-trustees • Excusing a breach of trust- acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the Court in the matter in which the trustee committed the breach

Rights and Remedies