RE HALLETT’S ESTATE

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.”

GISSING v GISSING

The imputation of beneficial rights to property based upon the conduct of the contending parties, has been a delicate issue for the courts for many years.

On this occasion, the lines of demarcation were drawn by the House of Lords, in order to prevent further abuses of equity and its associated maxims.

After marrying at a young age in 1935, the respondent in this appeal joined her husband in the purchase of their first home in 1951 for a sum of £2,695. The mortgage was held in sole title by her appellant husband, who contributed £500 by way of a loan, and £45 from his own savings; while the respondent paid £220 for a new lawn, household appliances and furniture.

During the time of their marriage, the mortgage was paid by the appellant, who also provided the respondent with regular weekly payments for housekeeping costs, while repaying the loan furnished him by his employer.

Prior to the purchase, the appellant had served time in the military, and after finding himself discharged following the war, the respondent secured him a position with a printing firm that she herself worked at.

While the respondent’s earnings remained at a stable £500 p.a, the appellant was successful in his endeavours, and soon established himself as director of the firm, with earnings  of around £3,000 p.a.

After twenty-five years of marriage and the raising of their son, the appellant committed adultery with a younger woman, before leaving the home and beginning a life with her.

This led to their divorce; during which, the appellant continued to pay the mortgage, loan and outgoings on their marital home, until the loss of his job and subsequent financial troubles.

Around this time, the respondent issued a summons declaring absolute ownership of the home, based upon the oral promise by the appellant that she could keep the house.

Under section 53(1) of the Law of Property Act 1925, any declaration of trust with regard to beneficial interest in property must be written; however, the courts can find the existence of such an agreement by equitable principles of resulting, implied and constructive trusts where sufficient evidence allows.

In order to establish this, the court would seek to infer through the conduct of the parties, reasonable proof that when engaging in the purchase of the home there had either been agreement as to how to apportionment of interest was to be divided, or the financial contributions made by each party for the duration of the marriage or occupancy.

In the first hearing, the court awarded that the appellant was, by extension of his financial payments and obvious legal title, the sole owner of the property, and allowed for repossession under law.

In the Court of Appeal, the decision was reversed by a majority, who held that the respondent was entitled to a fifty percent share of the home, while presented to the House of Lords, the recent outcome of Pettitt v Pettitt was taken under consideration, along with the principles of cestuis que trusts.

In Pettitt, the former wife pursued proprietary interest of the sole legal title held by her ex-husband under section 17 of the Married Woman’s Property Act 1882, on a home still subject to an outstanding mortgage.

Her contention was that having occupied the home for ten years, she was entitled to a beneficial interest due to her substantial contributions to both the deposit and subsequent repayments during the time of their marriage; whereupon the husband countered that his individual improvements to the house afforded him an equal share of the property. 

While on that occasion the judgment fell in favour of the wife, there was little with which to compare it to this case; and so, the equitable nature of trusts were explored through the conduct of the respondent.

Here it was held by majority, that while an oral declaration by the appellant suggested otherwise, there was absolutely no evidence that the respondent did, at any time, intend to contribute to the purchase of the home, or the upkeep of mortgage repayments, even when the appellant had suffered financial setbacks.

And so it was for those reasons, that suggestions of trusts of any kind were simply obiter dictum, and that for the purposes of natural justice, the appeal was upheld with costs, while the House reminded the parties that:

“Any claim to a beneficial interest in land by a person, whether spouse or stranger, in whom the legal estate in the land is not vested must be based upon the proposition that the person in whom the legal estate is vested holds it as trustee upon trust to give effect to the beneficial interest of the claimant as cestui que trust.”

TRUSTS

Originating from the latin phrase ad opus, the purpose of a trust is to provide the safe containment of assets (whether those of property or money) on condition that they will be of benefit to another party or parties.

There are many instances in which a trust can be created and it is the intention of this article that we have a look at the more common trusts used today, before explaining their application through suitable case law propositions.

Purpose Trusts

Subject to the same qualifying criteria as that of a will bequest, the terms of a valid trust require that three certainties must be readily ascertainable:

(i) The intention of the settlor
(ii) The subject matter of the trust
(iii) The identity(s) of the beneficiary(s)

The inherent problem with purpose trusts is that they are by nature, constructed so as to benefit an unlimited number of people, although often under a charitable intention.

An excellent example of a purpose trust is the one described in Re Denley, where the use of recreational ground was exclusively reserved for the current and future employees of an aircraft manufacturer; and that, despite presupposition of its failure, the judge upheld its validity on grounds that an approximation of the staff was, in the immediate sense, obtainable.

This allowance was expressed by Goff J who remarked:

“[T]here may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where that benefit is so indirect or intangible or which is otherwise so framed as not to give those persons any locus standi to apply to the court to enforce the trust, in which case the beneficiary principle would, as it seems to me, apply to invalidate the trust, quite apart from any question of uncertainty or perpetuity. Such cases can be considered if and when they arise.The present is not, in my judgment, of that character…”

Re Denley

Resulting Trusts

Ironically, resulting trusts are express trusts that by their lack of specificity, wound up benefiting the settlor, despite the very wish to relinquish title or interest.

As with the third element of a successful trust, where the identities of the beneficiaries are either remitted or withheld, the principles of equity would defer the construction of the trust to that of the settlor’s gain.

While in some instances the outcome causes little damage, there are equally those where a resulting trust inflicts financial loss, as was seen in Vandervell v IRC.

Appreciatively, there is rarely if ever, any intention to create a resulting trust; and so, the instances where they do emerge, rely upon clear conditions, as explained by Lord Millet in Air Jamaica v Charlton, when he remarked that:

“Like a constructive trust, resulting trust arises by operation of law, though unlike a constructive trust it gives effect to intention. But it arises whether or not the transferor intended to retain a beneficial interest – he almost always does not – since it responds to the absence of any intention on his part to pass beneficial interest to the recipient. It may arise even where the transferor positively wished to be part with the beneficial interest…”

Air Jamaica v Charlton

Charitable Trusts

One of the advantages of a charitable trust is that it enjoys exemption from the otherwise exactness of both beneficiary and subject; although in many cases, the charity of choice is typically named to avoid confusion within the court, or a need to invoke the cy-pres doctrine.

Another advantage is the avoidance of taxation, as charities are free from the burden of inheritance tax, capital gains tax and occupancy rates (where circumstances allow); while also outlined in s.1(1) of the Charities Act 2006, the trust beneficiaries must fall within the scope of legislation in order for the trust to succeed, and as found under s.2(2) of the 2006 Act, the possible forms such charities might take are reasonably extensive.

Constructive Trusts

Sharing a close relevance to the strictness of fiduciary duties, constructive trusts are a means of remedy where a trustee has immorally profited from another’s property through the dysfunction of their relationship.

Where evidence is found to support wrongful gain, a constructive trust is created that serves to hold the assets on trust for the now slighted settlor.

An example of this is Attorney-General of Hong Kong v Reid  , where Lord Templeman stressed that:

“As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured.”

Attorney-General of Hong Kong v Reid

Express Trusts

As with purpose trusts, an express trust is the standard form of trust, whereby the settlor makes a clear expression of his wish to create a trust, deliberately illustrates what form the trust takes (property or funds), who the beneficiaries are, takes the correct steps to transfer the property in accordance with statute and where necessary, makes it known who the acting trustees will be.

The reason for this is to facilitate court intervention in the event of contention, particularly where the settlor has since died,  leaving instructions within their final will or codicil.

Failure to demonstrate evidence of those key elements will result in a void trust, and in death, eventual lapse into the residual estate of the deceased.

An example of the exactness required for an express trust is found in Milroy v Lord, where despite having made verbal declarations as to his wish for his company shares to benefit his niece, his associate had failed to officiate the trust through the legal channels; resulting in the shares remaining on trust for himself (as would be the case in a purpose trust).

This was elaborated by Lord Justice Turner, who remarked:

“[I]n order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him.”

Milroy v Lord

Cestuis Que Trusts

Cestui que is an abbreviated version of ‘cestui a que use le foeffment suit fait‘, which means ‘the person for whose use the foeffment was made.’

Further simplified, ‘foeffment‘ represents any grant of freehold property, therefore a cestui que trust would be those holding property upon trust for the benefit of another named individual who retains legal title; although any beneficial interest remains in the hands of the cestui que trust (or person assigned the interest).

This translates that unlike other forms of trust, the legal owner acts as a trustee, while the actual beneficiary serves as operator of the trust, much like a reversal of roles.

The result of this is that should the trustee decide to convey the property, the cestui que trust can sue for breach of duty where no permission has been granted and no profits enjoyed.

This was explained by Austin Wakeman Scott in his Columbia Law Review article ‘The Nature of the Rights of the Cestui Que Trust’ (1917), when he wrote:

“If a trustee should destroy the trust res, or should sell it to a purchaser without notice of the trust and dissipate the purchase money, the cestui que trust may maintain a suit in equity against the trustee for breach of trust, and recover a sum of money, either the value of the trust res, or the amount of profits which should have accrued if no breach had been committed.”

The Nature of the Rights of the Cestui Que Trust’ (1917)

Fixed Trusts

These are typically used where multiple beneficiaries exist, while the nature of the fixed trust is to state exact figures or quantities of benefit to each party, so as to avoid inequitable profit by those in receipt or miscalculation by the appointed trustees.

The criteria for a fixed trust was established by Jenkins LJ in Inland Revenue Commissioners v Broadway Cottages Trust, where having examined the specificity of the trust, there was insufficient evidence to obtain certainty of the beneficiaries, thus the trust failed with the reasons given that:

“[T]he trust of the capital of the settled fund for all the beneficiaries living or existing at the termination of the appointed period, and if more than one in equal shares, must be void for uncertainty, inasmuch as there can be no division in equal shares amongst a class of persons unless all the members of the class are known.”

Inland Revenue Commissioners v Broadway Cottages Trust

Secret Trusts

Undoubtedly designed to protect the identity and interest of the beneficiary(s), the settlor is able to draft and execute a secret trust that can be both observed during life, and inserted into a will under the pretence that a named beneficiary will inherit absolutely, when in fact they will act as trustees for those with the intended benefit (similar arrangements can fall under intestacy provided prior agreement was arranged by the deceased).

Similarly, there are half-secret trusts that operate beyond the terms of a will but under the duties of a trustee, this translates that the dispositions of the trustee remain unknown, although there is no uncertainty as to where the trust property resides.

The framework of secret trusts was outlined by Peter Gibson LJ in Kasperbauer v Griffith, when he said:

“[T]he authorities make plain that what is needed is: (i) an intention by the testator to create a trust, satisfying the traditional requirements of three certainties (that is it say certain language in imperative form, certain subject matter and certain objects or beneficiaries); (ii) the communication of the trust to the legatees, and (iii) acceptance of the trust by the legatee, which acceptance can take the form of acquiescence…it is an essential element that the testator must intend to subject the legatee to an obligation in favour of the intended beneficiary. That will be evidenced by appropriately imperative, as distinct form precatory language.”

Kasperbauer v Griffith

Discretionary Trusts

While operating much like a typical trust, the discretionary trust allows the trustee(s) to regulate and thus self-determine, the extent of the distribution to assigned beneficiaries.

With two differing types, the exhaustive discretionary trust provides full and complete distribution of trust assets; whereas the non-exhaustive trust allows the trustee(s) to decide how much is awarded, and to specify what, within the trust, is granted to the beneficiaries.

Statutory Trusts

Brought about through the disposition of land under co-ownership and the rules of intestacy, these trusts are designed to protect the interests of those in title.

First introduced through s.34-36 of the Law of Property Act 1925 the intervention, or at least creation of statutory trusts, was also enforced through s.33 of the Law of Administration Act 1925, before consolidation of both Acts came through the Trusts of Land and Appointment of Trustees Act 1996.

In the former instance, there is an automatic trust power to sell and retain under co-ownership, and in the latter, a power to sell through personal representative where no will was executed.

Public Trusts

There is little to explain here other than that unlike a private trust, a public trust is created by the settlor with the express intention of benefitting certain members (or sections) of the general public.

This is often achieved through the use of a charitable trust, as deemed valid through the requirements of rules required by the Charities Act 2006.

Bare (or Simple) Trusts

Perhaps the most basic of trusts, the bare or ‘simpletrust serves only to hold property or funds in favour of a beneficiary, yet with no trustee duties attached.

In this instance, the trustee is replaced with the title of nominee until transfer is required.

Special Trusts

Unlike the previous trusts, special trusts are created with prerequisite trustee instructions, albeit divided into two categories, namely ministerial and (as above) discretionary trusts.

In the former, those duties may include rent collection and administrative functions, whereas the latter affords the trustee with powers to decide how best go about his or her role.

Quistclose Trusts

Running parallel to laws of contract, the quistclose trust was brought about in Barclays Bank v Quistclose Investments Ltd; in which, the lender took steps to clarify that the money loaned was on condition of use, and held within the bank until the borrower chose to redeem the funds.

When the borrower lapsed into liquidation, the lender asserted property rights against the bank under the principle that the funds were held on trust, and that the bank was now acting as a trustee; thus circumventing the rights of other creditors, while holding the funds in safe reserve for the lender as acting settlor.

This unique approach was supported by the House of Lords, and explained well when Lord Wilberforce remarked:

“In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it.”

Barclays Bank v Quistclose Investments Ltd