Tracing Property and Tracing Action - Case Study Example

Tracing Property In each of the circumstances described James was a trustee either by assuming the role himself or by appointment. As a result he isrequired to account to the beneficiaries under each of the trusts in respect of the property that was the subject of each trust. To start with the 16, 000 pounds advanced to him by Fame Finance Company was advanced to him for a loan in good faith and for specific purposes. According to the ruling in Belmont Finance Corp v Williams Furniture Ltd. (no.2) 1 All ER 393, the transaction between James and Fame was a lawful transaction and by subscribing to it as he did James assumed the role of trustee over the funds advanced.1 Since James did in fact spend 8,000 pounds of the loan pursuant to the terms of the loan agreement those funds will not be subject to a claim of misuse of trust funds by Fame. There is a total of 8,000 pounds misused by James, 5416 that can be traced to this general bank account and as such can be recovered by James’ trustees in bankruptcy and paid to Fame. Tracing action is only possible when the property can be isolated and identified and the beneficiary has some title to it, whether it is legal or equitable. As Professor Phillip Pettit explains tracing is possible: “so long as the fund can be followed in a true sense, ie so long as, whether mixed or unmixed, it can be located and identified. It presupposes the continued existence of the money either as a separate fund or as part of a mixed fund as latent property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is helpless. Thus tracing in impossible where an innocent volunteer spends the trust money on a dinner or on an education or general living expenses.”2 Although James spent some of the money in the business account, it does not impact upon the Fame’s right to recover the funds placed in that account, provided there are sufficient funds remaining to cover the portion of the funds advanced by the bank and placed in that account. It is assumed that when funds are mixed the funds spent first are the funds of the person who commits the misuse.3 It was explained in Re Hallet’s Estate that whenever an act: “...can be done rightfully, one is not allowed to say, against the person entitled to the property or the right, that he has done it wrongfully.”4 It therefore follows that the funds can be identified. However there it is possible that Fame does not have the requisite interest in the funds since although James was obliged to use the fund in a specific way he had a duty to repay the fund to Fame. It was held in Lister v Cobb [1890] 45 ChD 1 that there was a distinction between money owed and money owned.5 Fame’s only recourse will likely be as a mere creditor. As for the funds deposited to James’ account in error, James is deemed to be a constructive trustee of those funds. In the ruling in Chase Manhattan Bank v Israel-British Bank (London) Ltd. [1981] Ch 105 it was held that a proprietary interest by virtue of a constructive trust will be inferred in the event of theft or fraud and thereby creating a fiduciary relationship between the thief and the true owner of the property.6 However, while those funds can be traced they were on the face of the facts spent by innocent third parties without notice of the constructive trust.7 The innocent third parties are James’ parents whose names were used to purchase the shares. Based on the ruling in Re Diplock James’ parents cannot be pursued by the bank. Although the funds can be traced they cannot be recovered since they have been lost. The bank like Fame can only claim the interests as creditors and the trustee in bankruptcy will have to assess repayment to the bank and Fame in the same manner they would any other creditor. The bank however has another remedy under the Torts Interference With Goods Act 1977 which permits a remedy for conversion. Conversion which was previously detinue applied when a party came into possession of another’s property and kept it without authorization. Detinue was abolished by the Torts Interference With Goods Act 1977 and has been replaced with conversion.8 The bank’s property remedy is therefore an action for conversion since the property cannot be recovered. The trustee in bankruptcy should advise the bank accordingly. The beneficiaries under the trust are clearly entitled to a tracing claim since they undisputedly own the trust funds that James withdrew and used to discharge a business debt. Those funds can be traced to the business account since James used the trust funds for the business. Although he did not directly deposit the funds to the business account, the trustees have acquired an interest in the business by virtue of the fact that their fund can be traced to the business. Jessel J explained in Re Hallet’s Estate that the beneficiary is at liberty to: “...elect either to take the property purchased, or to hold it as security for the amount of trust money laid out in the purchase, or, as we generally express it, he is entitled at his election either to take the property, or to have a charge on the property for the amount of the trust money.”9 As a result of this ruling the trustees are entitled to either recover the funds from the business account or they may hold an interest in the business which is equivalent to the funds used to discharge the business debt. However, the latter option is useless to the beneficiaries of the trust since James’ is insolvent, making his business nothing more than a liability. It makes no difference that the funds were used and converted by virtue of the debt discharged. It was established in the case of Taylor v Plumer [1815] 3 M and S 562 that once property was capable of being traced into the possession of the plaintiff via the form that it was converted to, whether that form was different from the original form of the property or not it could be recovered provided it was not mixed with property belonging to another innocent party. 10 Each of the remedies discussed are equitable remedies. Common law tracing is restricted since it does not allow tracing in circumstances where the funds allegedly misused have been mixed with other funds.11 As previously noted it is doubtful that Fame can recover the funds by the application of the equitable tracing remedy and most certainly will not be able to pursue a claim by common law. The bank has no other viable remedy aside from conversion. The beneficiaries to the trust are the only claimants that the trustee in bankruptcy can offer restitution to and should be governed accordingly. Bibliography Agip Africa v Jackson [1991] Ch 547 Belmont Finance Corp v Williams Furniture Ltd. (no.2) 1 All ER 393 Chase Manhattan Bank v Israel-British Bank (London) Ltd. [1981] Ch 105 Lister v Cobb [1890] 45 ChD 1 Pettit, Philip. (1993) The Law of Trusts. London: Butterworths Re Diplock [1948] 1 Ch 465 Re Hallet’s Estate [1880] 12 Ch D 696 Re Oatway [1903] 2 Ch. 356 Taylor v Plumer [1815] 3 M and S 562 Torts Interference With Goods Act 1977 Read More