Melbourne University Law Students Society

1
Melbourne University Law Students
Society Student Tutorial Service Trusts 730-367 K
ara Ribbons
Sponsoring Partners Clayton Utz Mallesons
Stephen Jaques Leo Cussen Institute
2
DISCLAIMER These tutorials and the notes are
designed to assist students in their learning.
The tutorials and the notes are not a substitute
for the course material, nor should they be
relied upon as representative of the subject
matter of the course. Neither the Melbourne
University Law Students Society nor the student
tutor of these tutorials will take responsibility
for any consequences flowing from the use of the
material provided in the tutorials or in the
notes.
3
Tutorial Outline

• Proprietary remedies against the trustee
• Common law tracing (last week)
• Equitable tracing (last week)
• Defences
• Dissipation of the property in question
• Using the money to repay a debt
• Good faith purchase of the property for value
  without notice of the trust
• Good faith change of position
• Where it would be inequitable in the
  circumstances to permit a proprietary claim to
  succeed
• Remedies
• Election to take the property
• Defendant ordered to pay the plaintiff a sum of
  money equal to the value of the misappropriated
  trust property
• Account of profits
• Resulting trust
• Constructive trust

4

• Defences
•  
• If, invoking equitys special tracing rules, a
  plaintiff can trace misappropriated trust
  property into the hands of the defendant, a
  proprietary claim may be made, based either on
• The defendants breach of trust
• The doctrine of notice
• The fact that the defendant received the property
  in question as a volunteer
• However, a proprietary claim may be defeated by a
  defence
• Dissipation of the property in question
• Using the money to repay a debt
• Good faith purchase of the property for value
  without notice of the trust
• Good faith change of position
• Where it would be inequitable in the
  circumstances to permit a proprietary claim to
  succeed

5

• Good Faith Purchaser for Value without Notice (of
  the Trust)
•  
• Cannot trace against this person
• Dissipation
• Cannot trace when the property has been
  dissipated (e.g. spent on a holiday, at the
  races, etc.)
• Breaks the tracing chain

6

• Using the Money to Repay a Debt (Re Diplock)
•  
• However, contrast this with Lionel Smiths
  argument
• Where the repayment of a debt relates very
  specifically to a particular asset that was
  purchased through incurrent of the debt, you
  should be able to trace into an asset purchased
  with the debt
• If it is a secured debt like a mortgage or a
  charge, the court may be able to use the
  equitable doctrine of subrogation in its
  discretion to get around the repayment of a debt
  defence (Gertsch v Atsas)
• Subrogation is the substitution of one claim for
  another, especially the transfer of the right to
  receive payment of a debt (e.g. plaintiff
  beneficiary) to somebody other than the original
  creditor (e.g. the bank)
• This allows the court (on its discretion) to
  subrogate (substitute) the position of the
  plaintiff with that of the bank that had the
  mortgage (Gertsch v Atsas)
• This does not defeat the notion that you cannot
  trace into a debt, it is simply a way around it
  (Gertsch v Atsas)
• However, it is unlikely that this principle can
  be used for a non-secured debt (cf Gertsch v
  Atsas a mortgage is a secured debt)

7

• Good Faith Change of Position (Gertsch v Atsas)
•  
• Unjust enrichment principles are relevant when
  looking at the position of an innocent volunteer
  (Gertsch v Atsas)
• Defences therefore (based in unjust enrichment)
  such as good faith change of position are
  potentially available to volunteers and hence,
  the defendant (Gertsch v Atsas)
• Good faith change of position defence (Gertsch v
  Atsas)
• This defence does not admit of precise
  formulation (grey area)
• Need to look at the net detriment that the person
  has suffered in relying on the receipt of the
  money and balance it against the net benefit they
  have received from the money
• As part of this balancing, consider
• Whether repayment would cause great financial
  hardship
• The fact that the defendant may have left his/her
  job and many wages were foregone
• Do not take the money the defendant spent on
  ordinary living expenses into account (they would
  have spent this anyway)

8

• Where it would be Inequitable to Grant a
  Proprietary Remedy
• In Re Diplock, the court mentioned where it would
  be inequitable to grant a proprietary remedy
• Key Cases Re Diplock Gertsch v Atsas

9

• Remedies
•  
• Insofar as a proprietary claim may be made and is
  not defeated by any relevant defence, it can be
  said that the defendant holds the property on
  (constructive) trust for the plaintiff
• However, a court may respond to the proprietary
  claim in a variety of ways
• Plaintiff may be permitted to take the property
  away from the defendant
• Defendant may be ordered to pay the plaintiff a
  sum of money equal to the value of the
  misappropriated trust property
• May be accompanied by an equitable lien over
  property in the hands of the defendant
• Defendant may be ordered to account to the
  plaintiff for profits flowing from the breach
• May be accompanied by an equitable lien over
  property in the hands of the defendant
• Court may declare that the defendant holds
  property on resulting trust for the plaintiff
• Court may declare that the defendant holds
  property on constructive trust for the plaintiff
  and make orders requiring the defendant to
  perform that constructive trust

10

• Election to Take the Property
•  
• On appropriate facts, if the plaintiff can trace
  through to the property, they can elect to take
  it (at their option)
• If trust money was exclusively used for the
  purchase of the investment
• Beneficiaries would be entitled to take the
  entire investment (Scott v Scott)
• If the investment was purchased using a mixed
  fund
• If severable ? beneficiaries may elect to take
  the part of it that bears the same proportion to
  their contribution to the purchase price (Scott
  v Scott)
• If not severable ? beneficiaries cannot take the
  asset (Scott v Scott)

11

• Charge or Lien (Used Interchangeably)
•  
• One of the main proprietary remedies that tracing
  gives access to
• If you have a charge or lien over property via
  tracing, you can enforce it by an order for sale
  of that property
• The charge of lien does give you a proprietary
  interest in the property, but it is a
  secondary/deferred proprietary interest
• It works in tandem with personal remedies that
  can be granted (e.g. compensation/an account of
  profits) can secure this personal remedy via a
  lien/charge
• This means that you will be awarded a monetary
  sum
• If the defendant does not pay the money to you,
  you can force the sale of the asset and take the
  proceeds

12

• Account of Profits Flowing from the Breach
  (Personal Remedy)
•  
• If there was an increase in the assets the
  plaintiff would want this remedy because they
  have profited from this breach
• This would be in proportion to the plaintiffs
  contribution
• You would want your proportion of that breach of
  trust
• May be accompanied (secured) by an equitable
  lien/charge over property in the hands of the
  defendant
• If the plaintiff has a charge/lien over property
  via tracing, they can enforce it by an order for
  sale of that property
• The charge or lien does give them a proprietary
  interest in the property, but it is a
  secondary/deferred proprietary interest
• It works in tandem with the account of profits
  (personal remedy) that can be granted
• This means that the plaintiff will be awarded a
  monetary sum
• If the defendant does not pay the money to the
  plaintiff, they can force the sale of the
  property and take the proceeds
• An account of profits at the date of judgment
  stipulates that the profit amount is as of the
  judgment date. However, if the house goes down in
  value, the account of profits amount remains the
  same
• Therefore, if the asset has decreased in value,
  the plaintiff would not want this

13

• Order to Pay the Plaintiff a Sum of Money Equal
  to the Value of the Misappropriated Trust
  Property
•  
• Defendant may be ordered to pay the plaintiff a
  sum of money equal to the value of the
  misappropriated trust property
• May be accompanied (secured) by an equitable
  lien/charge over property in the hands of the
  defendant
• If the plaintiff has a charge/lien over property
  via tracing, they can enforce it by an order for
  sale of that property
• The charge or lien does give them a proprietary
  interest in the property, but it is a
  secondary/deferred proprietary interest
• It works in tandem with the account of profits
  (personal remedy) that can be granted
• This means that the plaintiff will be awarded a
  monetary sum
• If the defendant does not pay the money to the
  plaintiff, they can force the sale of the
  property and take the proceeds

14

• Constructive Trust
•  
• A trust arising by operation of law, rather than
  the parties intention
• Effect of this is similar to the election to take
  the property
• Slight difference you can get (theoretically) a
  constructive trust over a proportion of an asset
  that is non-severable
• This differs to an account for profits if the
  house goes up in value, an interest under a
  constructive trust gives the plaintiff X share
  in the house from the moment the trust takes
  effect immediately and therefore you get the
  increase in value. Also, if the house goes down
  in value, the plaintiff must take this fall in
  value

15

• Resulting Trust
•  
• A trust arising by operation of law, rather than
  the parties intention
• A resulting trust arises where
• An express trust fails in whole or in part (e.g.
  one of the three certainties objects, intention
  or subject matter is not present, so the property
  results back to the settlor)
• An express trust is fully performed without
  exhausting the trust property
• A person has acquired the legal title to property
  but has not contributed to the cost of
  acquisition of the property
• Effect of this is similar to the election to take
  the property
• Slight difference the plaintiff can get a
  proportionate beneficial interest in the property
• This differs to an account for profits if the
  house goes up in value, an interest under a
  resulting trust gives the plaintiff X share in
  the house from the moment the trust takes effect
  immediately and therefore you get the increase in
  value. Also, if the house goes down in value, the
  plaintiff must take this fall in value

16
Next Class (Revision)

• We will be going through a few hypotheticals
  (details on next slide)
• E-mail me with any particular topics you would
  like me to cover (NB this will only be done
  briefly) k.ribbons_at_ugrad.unimelb.edu.au I will
  do my best to meet everyones requirements

17
Completed Hypotheticals

• For revision purposes, we have done the following
  hypotheticals
• Express trusts (proceeds subclause) Tutorial 3
• Express trusts (Quistclose trust) Tutorial 3
• Resulting trust Tutorial 6
• Charitable purpose trust Tutorial 6
• In the revision tutorial, the plan is to go
  through
• Semester 2, 2007 Question 4 (Tracing Question)
• Question 3 from the Hypothetical Problem Sheet
  (Express Trusts/Tracing Question) on the LSS
  Trusts Webpage