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Published online by Cambridge University Press: 02 January 2018
A trustee or fiduciary may mix trust money with his own, purchase property, and make a profit upon its sale when the property subsequently increases in value. Frequently, however, the trustee will use the misapplied money in order to raise further funds by way of a loan with which he then purchases the property. In the first case, equity’s conventional approach is to apportion the increase in value rateably between the funds from the trust and the trustee’s own contribution so that the trust obtains that proportion of the profit derived which the misapplied funds bear to the purchase price. This result flows from the decision of Hudson J in the Supreme Court of victoria in Scott v Scott from which no cross-appeal was taken to the High Court of Australia.
1 For an overview, see Hodkinson ‘Tracing and Mixing Funds’ [1983] Conveyancer and Property Lawyer 135.
2 Scott v Scott [1964] VR 300 (Hudson J Supreme Court of Victoria); (1963) 109 CLR 649 (High Court of Australia). In Re Hallett's Estate (1880) 13 Ch D 696,708–709 it is suggested in dicta that the beneficiary's only remedy is a charge over the property but this view must now be taken as qualified by Scott and In re Tilley's Will Trusts; Burgin v Croad [1967] 1 Ch 1179, 1188 where Ungoed-Thomas J explains Lord Parker's judgment in Sinclair v Brougham [1914] AC 398, 442. See, for a full discussion of the area, Meagher and Gummow Jacobs' Low of Trusts in Australia 1986, 5th edn para 2715. In Canada, the trustee appears to be entitled to a proportionate share of the profit: Waters The Low of Trusts in Canada (1984) pp 1048–1049, citing BC Teachers' Credit Union v Betterby (1975) 61 DLR (3d) 755, 760.
3 Martin (ed) Hanbury and Maudsley: Modern Equity (13 edn) pp 638–639, citing Scott v Scott (1963) 109 CLR 537; In re Tilly's Wills Trusts; Burgin v Croad [1967] 1 Ch 1179, 1193 per Ungoed-Thomas J. Professor Birks has recently suggested that, by analogy with Lupton u White (1808) 15 Ves Jun 432;33 ER 817 the trustee could be deprived of all the profit except that which he can demonstrate flows directly from his contribution. See, Birks ‘Trusts in the Recovery of Misapplied Assets’ in McEndrick (ed), Commercial Aspects of Trusts and Fiduciary Obligations (1992) p 157 n 22.
4 [1964] VR 300.
5 (1963) 109 CLR 649.
6 An economic analysis of the fiduciary's entitlement is beyond the scope of this article. For a strong argument that the fiduciary's obligations should be tailored to reflect economic realities, see Bishop and Prentice, ‘Some Legal and Economic Aspects of Fiduciary Remuneration’ (1983) 46 Mod LR 289. The case made by the authors is a strong one but unlikely ever to find overt support in any Anglo-Australasian judgment due to the court's reluctance to evaluate it, because of the court's evidentiary inability to assimilate the relevant economic factors which should guide its decision.
7 Australian Postal Corporation v Lutak (1991) 21 NSWLR 584, 593 per Bryson J.
8 Oesterle ‘Deficiencies of the Restitutionary Right to Trace Misappropriated Property in Equity and in UCC section 9-306’ (1983) 68 Cornell LR 172, cited by Birks op cit, n 3.
9 Ibid at 195–196, n 48.
10 [1964] VR 300, 315.
11 Ibid at 304.
12 Ibid at 305.
13 Ibid at 313. Hudson J spoke of a ‘pro rata’ division of profit according to ‘the capital contributed from the funds of the estate and the fund which [the trustee] contributed either out of his pocket or from loan money obtained from his brother and for which he made himself responsible.’
14 [1967] 1 Ch 1179, 1193.
15 Hansbury and Maudsley op cit, 639.
16 In Tilley, it must be noted, the trustee had ample overdraft facilities with which to fund the acquisition so the source of the particular moneys used on any one occasion would have been a matter of indifference to her. Furthermore, she always acted in good faith. Whether this should affect the principle is not examined at all in the judgment.
17 Paul A Davies v Davies [1983] 1 NSWLR 440, In the Marriage of Wagstaff (1990) 99 FLR 390; Australian Postal Corporation v Lutak (1991) 21 NSWLR 584.
18 Boardman v Phipps [1964] 1 WLR 993, 1018 per Wilberforce J; O'Sullivan v Management Agency and Music Ltd [1985] 1 QB 428,458 per Dunn LJ; Estafe Realties v Wignall [1992] 3 NZLR 615,629 per Tipping J.
19 (1991) 21 NSWLR 584 (Bryson J, Supreme Court of New South Wales).
20 [1983] 1 NSWLRM; (1983) 1 ACLC 1,091.
21 (1982) 1 ACLC 66.
22 Paul A Davies PQ Ltd v Davies [1983] 1 NSWLR 440,442 per Moffitt P.
23 Ibid at 444.
24 (1982) 1 ACLC 66, 71.
25 Per Moffitt P, at 447.
26 Ibid. Quaere whether Moffitt P is correct in so characterising the loan in Scott. Hudson J there described it as a personal loan but it was clearly secured by the mortgage which was covering the misapplied funds: [1964] VR at 303–304.
27 (1963) 109 CLR 649.
28 Ibid at 448.
29 Ibid.
30 Ibid at 451.
31 [1967] 2 AC 46.
32 [1985] 1 QB 428.
33 [1990] 2 AC 663.
34 Lord Templeman at 694 said that such an allowance would only be available in ‘exceptional circumstances’.
35 Ibid at 665.
36 See above n 6.
37 Austin ‘The Melting Down of the Remedial Trust’ (1988) 11 University of New South Wales LJ 66, 76.
38 Ibid at 77.
39 (1990) 99 FLR 390 (Full Court of the Family Court of Australia).
40 The deed contemplated sale of the first matrimonial home but was characteristed by the Full Family Court as ‘ambiguous’: (1990) 99 FLR 390, 397.
41 Ibid at 397. The breach was ‘innocent’ because of legal advice which the wife had received.
42 [1967] 2 AC 46.
43 Tilley's Will Trusts: Re Burgin u Croad [1967] 1 Ch 1179, 1193; Scott u Scott (1963) 109 CLR 649,664.
44 (1990) 99 FLR 390, 399.
45 (1990) 99 FLR 390,399–400.
46 (1991) 21 NSWLR 584 Bryson J.
47 Ibid at 586.
48 Ibid at 586.
49 (1991) 21 NSWLR 584, 590.
50 Black v S. Freeman and Co (1910) 12 CLR 105, 110 per O'Connor J is clear Australian authority that a thief may be a constructive trustee.
51 (1991) 21 NSWLR 584, 591.
52 Ibid at 593.
53 [1964] VR 300.
54 (1963) 109 CLR 649, 657. Bryson J suggested that the judgments in the Court of Appeal in Davies did not necessarily mean that if the amount borrowed in that case ‘were treated as a capital contribution by the constructive trustees themselves, it would follow that they were entitled to a share in the profits’: (1991) 21 NSWLR at 593.
55 [1983] 1 NSWLR 440,457 discussed at (1991) 21 NSWLR 584, 594.
56 [1983] 1 NSWLR 440,458.
57 Ibid at 596.
58 (1991) 21 NSWLR 584,596. This approach prefigures that by Professor Birks noted above at n 3.
59 (1991) 21 NSWLR 584,597.
60 Ibid.
61 Ibid.
62 See the text to notes 29 to 36.