The tracing of funds through the principles of equity are now integral to the protection of trusts and beneficiaries; however, in the late nineteenth century things were not as clear cut.
In this matter, the discrepancies of a solicitor left both his family and a third party investor out of pocket, and forced to argue over the remaining bank balance upon his death.
Prior to his passing in 1878, Mr Henry Hughes Hallett was in the habit of investing money on behalf of private clients, whereupon he would take a commission as payment for services rendered.
In addition to this, he had an existing marriage settlement for the benefit of his wife and children to the sum of £2,300, which had been placed into his personal bank account before being used for a number of other small investments.
A Mrs Cotterill employed the deceased for general legal duties, but also to receive and invest sums of money for her eventual profit.
On this occasion, she had allowed Mr. Hallett to invest £2,692 for Russian bonds, while he himself used £2,590 of the marriage settlement trust funds to do the same.
Having taken £1,554 worth of the trust bonds for himself before depositing the remaining £1,036 worth of bonds into his bank account, Mr. Hallett proceeded to sell £450 and £2,442 of Mrs Cotterill’s bonds, and £1,036 of the trust funds, subject to his taking a commission on all three.
Following a number of other transactions, the bank balance on the date of his demise was £3,029; of which, £2,600 had been paid into a court relating to the administration of his estate.
At the point of litigation, there were claims by both the trustees for his marriage settlement for £770 and £1,554, as used for the purchase of bonds, along with that of Mrs. Cotterill for £1,708.
Previous to this case, the law surrounding recovery of funds once mixed, was not one that favoured the claimant, and in many instances the court awarded against recovery on grounds that unless the money was ear-marked, it was simply indistinguishable from that which it had joined, thus to reach into the account and take it arbitrarily was simply untenable.
This changed in the case of Pennell v Deffell; in which, the Court of Appeal held that the claim of the trustees or cestui que trusts were of greater weight than that of a creditor.
However, in the later Clayton’s Case, the Court of Appeal then held that in such instances the court would determine the first sum of money drawn out from a bank account as that belonging to the first sum paid in, therefore unless there were grounds to suspect fraud on the part of Mr. Hallett, £2,324 of the money left in the account was that of the marriage settlement, while the remaining £705 was that of Mrs. Cotterill.
In the first instance, the Judge awarded priority of claim in favour of Mrs. Cotterill, on grounds that a fiduciary relationship existed between her and the deceased; whereupon the trustees for Mr.Hallett’s estate appealed, while Mrs. Cotterill also appealed.
On this occasion, the Court of Appeal reversed the decision, awarding priority to the trustees for Mr. Hallett’s estate on the equitable grounds that when a trustee mingles assets with that of his own, he is held to withdraw that which is his property when leaving a balance behind.
This translated that whatever money Mr. Hallett had taken out prior to his death was that to which he was entitled, therefore the residual balance was that of the trustees and not one of a mere creditor.
“[W]here a trustee has mixed the money with his own, there is this distinction, that the cestui que trust, or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust-money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust-money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee.”