TRACING GENERAL

The recipient can establish his or her entitlement to an asset through a process
known as "tracing". The claimant must be in a fiduciary relationship with the
defendant and have an equitable proprietary interest in the property at issue
for them to have the right to trace in equity, as this is the usual condition for
this right.
It is necessary for a person to have any sort of interest in a trust in order for
him to be eligible for the benefits of the equitable norms of tracing because the
value of the individual's right is what is ultimately what is traced into the
revenues. Yet, equity is ready to allow claimants to identify where other
fiduciaries break their obligation for example in the case of Re Diplock, equity
allowed claimants to investigate where other fiduciaries had breached their
duty or not. The United States Supreme Court has recently decided that bribes
and covert commissions that were gained by a breach of fiduciary duty are kept
on constructive trust for the principal of the fiduciary who obtained them
(FHR). The principal can be converted into proceeds if the fiduciary invests
those money on his own account afterward. This can be seen in the case of EL
Ajou v. Dollar Land Holdings and very easily by including situations where no
such relationship existed prior to the transfer for the claimant's property into
the hands of the defendant. Courts have demonstrated a willingness to find the
existence of fiduciary relationships in order for claimants to apply the tracing
rules. In an aside, Lord Browne Wilkinson offered the famous example in the
case of Westdeutsche Landesbank Girozentrale v. Islington London
Borough Council. He explained that if a criminal stole money from a victim, as
a result of his dishonest actions, he would keep the money in constructive
trust for the person he took the money from and this will create a fiduciary
relationship and an equitable propriety interest while also enabling the victim
to recover his losses.
Heavy backlash has been leveled at the mandate that an initial fiduciary
connection be established, mostly on the grounds that this requirement is not
backed by any authoritative sources. It has been contended that there was no
need for an initial fiduciary connection in the case of Sinclair v. Broughham,
and that this case was misread by the Court of Appeal in the case of Re
Diplock. Furthermore, it has been stated that this case is not justified in
principle. Goff and Jones contend that in light of the comments made by the
House of Lords in the case of Foskett v. Mckeown, it makes no sense to
continue adhering to different rules for tracing at law and in equity, and the
courts should no longer insist that a claimant must have a fiduciary
relationship before they can trace in equity. Goff and Jones make this
argument in light of the fact that there is no sense in maintaining different
rules for tracing at law and in equity. The contention that fair tracing should be
made available wherever there is a sufficient "proprietary base" has been taken
up by Professor Birks as his own position.
The first of these scenarios is unmixed funds, where equitable tracing remains
accessible against a trustee who wrongly misappropriates trust money since
the beneficiary preserves his equitable ownership to the trust property. Other
situations in which it is possible to trace in equity include when a fiduciary
receives earnings in violation of the trust placed in them, if a fiduciary receives
profits while acting in violation of trust, then such profits are considered to be
held on constructive trust for the principal, and the principal will have the
right to trace in equity. Next, if the beneficiary or principal of a trust or
fiduciary relationship discovers that the property subject to the trust or
fiduciary relationship has been transferred to an unknown third party in
breach of trust, he or she will have the legal right to investigate the
whereabouts of the trust property in the hands of the unknown third party. If
the third party was a bona fide purchaser for value without notice, then the
beneficiary's equitable title would be nullified.
The next topic on the agenda is a discussion of mixed funds. If the trustee has
combined trust property with his own property or combined trust money with
his own funds, then the burden of proof lies with the trustee to demonstrate
that a specific portion of the combined monies is his own. It is impossible to
regard the assets or the property purchased with mixed funds as being wholly
the product of the trustee's or the trustee's trust property alone. The
beneficiary claimant has a choice: either he can claim a lien over the asset that
was purchased with mixed funds that were wrongfully used by the trustee, or
he is entitled to a proportional beneficial interest in the mixed property, as can
be seen in the case of Foskett v. Mckeown. Both of these options are available
to the beneficiary claimant.
The bank account can also hold a combination of the trustee's personal funds
and trust funds. The most typical place for holding these mixed funds place is
in a banking account, and because of this, specialized restrictions have
developed. In situations in which a dishonest trustee or fiduciary has combined
trust property funds with his personal property in a bank account, the rules
act harshly against the trustee or fiduciary. However, this presumption that
the trustee withdraws his own money first can work to the claimant's
disadvantage, as illustrated in the case of Re Otway (1903), in which case an
opposite presumption applies. In this case, the trustee was presumed to have
withdrawn his own money before the claimant's money. The rule that was
established in the case of Re Oatway has come under fire for the fact that its
outcome has the potential to work to the detriment of the trustee's creditors,
and it is possible to question whether or not this is fair. The regulation is
beneficial to those who are the recipients of its benefits. In addition, it is not
possible to trace exactly where the money was spent. Tracing can be successful
against a mixed fund that is held in a bank account if it can be demonstrated
that the trust monies are still present in the account. This is the rule. If the
balance of the account drops below that amount, it must mean that some of
the money held in trust has been used (Roscoe v. Winder). If the trustee does
not demonstrate an intention to treat later payments as repayments of the
trust fund, then those payments will not be treated as such. In the event that
backward tracing is deemed acceptable, the regulation will be modified. In
Bishopgate, the rule was found to be valid.
Nonetheless, there are bounds to what can be considered equitable tracing.
Once trust property and the earnings from the property have been dispersed,
also known as used up, it is impossible to trace the property again because
there is no longer an asset that symbolizes the original property. In the case of
Re Diplock, the Court of Appeal came to the conclusion that it was impossible
to track down money that had been fraudulently transferred from a trust to
two charitable organizations and then used to pay off debts. In the cases of
Bishopgate and Foskett, it was determined that there was no way to trace the
money that was paid into an overdrawn bank account.
Tracing under common law through the use of clean replacements is
predicated on the idea that the claimant's title to the property that is being
tracked should be maintained. Even if a legitimate purchase is made, the
claimant will not be released from his or her initial title because the claimant's
legal title is valid against the entire globe and cannot be challenged or
invalidated. It would appear that this was the reasoning behind the case of
Taylor v. Plummers. In situations in which an owner or claimant has the legal
right to claim certain assets under common law, that person has the legal right
to benefit from any increase in value that those assets may have experienced.
This restriction has been the target of an excessive amount of criticism, and
even the origin of the restrictions themselves has been called into question by
Lionel Smith. Plumer was not a case that dealt with tracing under common
law. It would suggest that its origin is in the misconception that common law
cannot distinguish between different types of property funds.
There is no reason why a joint title to a mixed fund cannot be reorganized
under common law using an equitable tenancy in common arrangement. A
decision in a case called Spence vs Union Marine Insurance Co. Ltd
reorganized the possibility. If the common principles of tracing were to emerge
in order to facilitate tracing, there would be less of a need to artificially enlarge
the scope of fiduciary ties.
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