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Tracing: Shalson V Russo-Combined Effects - Where Evidential Uncertainty, Bs Can Cherry-Pick How They

B can trace misappropriated trust property into the hands of third parties, except for bona fide purchasers. There are two forms of tracing - legal tracing, which requires legal title, and equitable tracing, which requires equitable title through a fiduciary relationship like a trust. Equitable tracing follows mixtures of trust property unless there is evidential uncertainty. It also allows for proportionate sharing of losses and gains from mixtures. Tracing of mixtures in bank accounts uses presumptions like the lowest intermediate balance rule or FIFO. Exceptions exist for innocent mixtures between trusts, where proportions or chronology may be used. Tracing ends once assets are dissipated, acquired by a bona fide purch

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112 views3 pages

Tracing: Shalson V Russo-Combined Effects - Where Evidential Uncertainty, Bs Can Cherry-Pick How They

B can trace misappropriated trust property into the hands of third parties, except for bona fide purchasers. There are two forms of tracing - legal tracing, which requires legal title, and equitable tracing, which requires equitable title through a fiduciary relationship like a trust. Equitable tracing follows mixtures of trust property unless there is evidential uncertainty. It also allows for proportionate sharing of losses and gains from mixtures. Tracing of mixtures in bank accounts uses presumptions like the lowest intermediate balance rule or FIFO. Exceptions exist for innocent mixtures between trusts, where proportions or chronology may be used. Tracing ends once assets are dissipated, acquired by a bona fide purch

Uploaded by

bigboi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Tracing

B’s equitable ownership allows them to chase misappropriated trust property- equitable ownership
binds all except equity’s darling.

Why trace instead of the existing personal claim for breach of trust- repayment?

- Trust assets may be more valuable, or T may have gone bankrupt.

Following- tracing trust property which has not changed, but changed owner, comes to an end if in
an innocent non-fungible mixture- different assets are mixed which change the character of the
original.

Tracing available at common law, but requires legal title, while equitable title requires the equitable
interest and a fiduciary relationship, which a trust is.

Equitable tracing’s rules:

1. Similar to following-
a. Pure substitutions are unproblematic
b. Mixtures with no evidential uncertainty are unproblematic.
c. Losses and gains borne rateably:
i. E.g. T takes £50 from A, £100 from trust B, uses to buy shares- co-owned
both trusts 1:2. Mixes own assets, so losses come from wrongdoer and gains
derive from trust assets.
d. If no uncertainty, must be accepted (in mixture).
i. Can benefit T- mixes 10k of TP with 10k of own money- buys one painting for
12k which doubles in value, one for 8k which halves- 2k of first painting
must be T’s (so he’d receive 4k of value and lose the 4k on the other
painting, which is entirely his- the entire 10k of the TP is assumed to flow
into the gained painting, but not all of it because T’s money is also there.

Equitable tracing through mixtures in bank accounts

Wrongdoer mixtures- T mixes money with his own

Re Hallett’s Estate- presumption solicitor’s untraceable withdrawals were from his own money first.

But not applied in Re Oatway- presumption that T acted so as to preserve trust fund as had duty to
do so- presumed to have bought shares using trust money?

Roscoe v Winder- lowest intermediate balance rule- if T mixes money, dissipates some of mixture
then later pays more into account, Bs cannot trace into later payment. (Would still have personal
claim for outstanding money)

Shalson v Russo- combined effects- where evidential uncertainty, Bs can cherry-pick how they
interpret withdrawals from a mixed account

But Turner v Jacob- no cherry-picking where enough money remains in account to repay Bs.

Shalson the right approach? Maybe they are reconcilable.


Limitations- cannot trace withdrawals of more than trust property. If 50k of TP mixed, and 60k from
account is used to but shares, can only trace into 5/6ths. Even if decreases in value, 10k of the
purchase price is still T’s own money.

Innocent Mixtures

T mixes money from different trusts

If savings accounts, Bs share losses and gains proportionately- Re Diplock.

But if running accounts (current accounts), different rules-

Clayton’s Case- withdrawals are not proportionate, but chronological- First In, First Out- FIFO

Controversial:

a) Barlow Clowes- affirmed Clayton’s general application, but with an exception for common
investment fund where money is pooled.
b) Further disapplication in Russell-Cooke- was another common investment fund.

Proportionate split can still cause unfair results.

Another possibility- Rolling Charges- canadian approach, calculate things as they stand immediately
before each result- advocated in Shalson v Russo. Rejected in Barlow Clowes- too expensive.

Tracing ends when:

1. Dissipation- assets used to purchase consumable goods, assets destroyed or used to pay
debt.
2. Assets fall into hands of equity’s darling
3. All assets identified

Exception to debt rule- if trust assets used to pay off a secured loan, can be brought back to life as
subrogation using a legal fiction- resurrected mortgage with Bs as creditors.

Also backwards tracing permissible per Brazil v Durant (Privy Council) if, looking at transaction as a
whole, there is a link between trust loss and fraudulent gain.

So, what happens once traced? CLAIMING

If:

- TP survives in original form:


o In T’s hands: B’s can insist on transfer to replacement Ts.
o In 3rd party hands (who isn’t equity’s darling): B can assert ownership.
- Traceable proceeds in T’s hands:
o Bs can adopt purchase OR, where ownership disadvantageous, can elect to have a
lien over new asset- an equitable charge where T is personally liable to repay what is
owed. If does not pay, Bs can sell asset and take proceeds
- Trust money mixed with T’s to buy new asset:
o Bs can choose between proportionate co-ownership or a lien.
- Money from 2+ trusts mixed to buy asset-
o Foskett v McKeown- proportionate co-ownership only.
- Traceable proceeds in hands of 3rd party- (not equity’s darling):
o Re Montagu’s ST- Bs can claim outright ownership of new asset. (Is this fair?)
- Trust money traced into discharge of a debt:
o Possibility of backwards tracing or subrogation.

Problem Questions

1. What are the assets?


2. Rank the assets- what is the least wanted?- this is because of the cherry-picking from
3. Give worst assets to trustee
4. Apply FIFO
5. Comment on whether FIFO is fair- if not, apply pro rata-
6. Explain the issues with pro rata, offer alternative of rolling charge, not accepted in UK- so we
go back to FIFO
7. Now that we’ve traced, what are the options for claiming?

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