Foskett v McKeown is a landmark case in the field of trusts and equity, which provides an essential ruling on tracing and proprietary claims following a breach of trust. The House of Lords clarified the distinction between tracing and following, explored the nature of proprietary claims, and established principles surrounding the recovery of misappropriated funds.
This case is crucial for understanding how trust beneficiaries can assert a claim to assets obtained through a breach of trust, particularly where trust money is mingled with other funds to acquire a new asset.
Facts of Foskett v McKeown
Mr Murphy, who controlled a company into which over 200 investors, including Mr Foskett, had invested, used £20,440 of the trust funds for personal purposes. The funds were originally entrusted for the purchase of land in the Algarve, Portugal, but the land was never developed as promised. Instead, Mr Murphy used the trust money to pay the fourth and fifth premiums on his life insurance policy, having already paid the initial premiums using his own money.
After Mr Murphy’s death by suicide, the beneficiaries of his life insurance policy, including his three children, received £1,000,000. The investors, including Mr Foskett, claimed that they had a proprietary interest in the insurance proceeds because part of the premiums had been paid using their trust money.
The investors contended that at least 40% of the premiums were funded by their contributions, and as such, they were entitled to 40% of the total insurance payout. The defendants, Mr Murphy’s children, argued that the investors should only recover the amount misappropriated to pay the premiums, plus interest, and that an equitable lien, not a proprietary claim, should be recognised.
Issue
The key legal issue in Foskett v McKeown was whether the investors had a proprietary claim to the insurance proceeds or whether their claim was limited to an equitable lien for the amount of the misappropriated funds (i.e., £20,440 plus interest).
Specifically, the case raised questions about the nature of proprietary claims, the principles of tracing, and whether the investors were entitled to a share of the entire policy proceeds, or just the amount of the misappropriated funds used to pay the premiums.
House of Lords Judgement in Foskett v McKeown
The House of Lords, in a landmark decision, overturned the Court of Appeal’s ruling and held that the investors were entitled to a proprietary interest in the life insurance proceeds. The Lords discussed key legal principles, including tracing, following, and the distinction between claims for proprietary rights and those for unjust enrichment.
Lord Millett’s Judgement
Lord Millett delivered the leading judgement, focusing on the vindication of property rights. He explained that this case was about the recovery of property rights, not unjust enrichment. He emphasised that the claimants’ right to trace their money into the insurance policy proceeds was based on their proprietary interest in the misappropriated trust funds. The claimants could choose either to assert proportionate beneficial ownership of the policy or to enforce an equitable lien over the policy proceeds.
Lord Millett explained the difference between tracing and following:
- Following involves tracking the same asset as it moves from one party to another.
- Tracing involves identifying a new asset that has replaced the original one. When an asset is exchanged for another, a claimant can choose either to follow the original asset or trace its value into the new asset.
Lord Millett clarified that tracing and following are not remedies or claims but merely techniques to identify property to be claimed. In this case, the claimants had the right to trace the value of their misappropriated funds into the insurance policy proceeds. This was a proprietary claim, not a claim for unjust enrichment.
Lord Millett noted that, irrespective of whether the trustee mixed the trust money with his own funds in a single account or made separate payments, the beneficiaries could still claim a proportionate share of the asset or enforce a lien.
Lord Hoffmann’s Judgement
Lord Hoffmann agreed with Lord Millett, describing the case as a textbook example of mixed substitution (or confusio in Roman law). He supported the idea that the claimants were entitled to a pro-rata share of the insurance policy’s proceeds, based on the trust money used to pay the premiums.
Lord Hoffmann also agreed that the case involved the vindication of proprietary rights, not unjust enrichment, and that the claimants had a right to assert their ownership of the proportion of the policy purchased with their trust money.
Lord Browne-Wilkinson’s Judgement
Lord Browne-Wilkinson concurred with Lord Millett and Lord Hoffmann. He noted that the case concerned proprietary rights in an asset improved or acquired with trust money. He highlighted that, unlike Re Diplock (a case concerning unjust enrichment), the present case was about the claimants asserting a right to the proceeds of the insurance policy, which was obtained through a breach of trust.
He agreed that the claimants could assert a proprietary claim to the policy proceeds, irrespective of whether they were entitled to the entire sum or just a proportion of it.
Lord Steyn’s Dissent
Lord Steyn dissented from the majority, holding that the claimants should only be entitled to the return of the misappropriated funds—£20,440—plus interest. He argued that the misappropriated funds were not used to acquire the life insurance policy in its entirety and that the claimants had no proprietary interest in the entire policy proceeds.
Lord Steyn contended that the claimants were entitled only to the amount directly attributable to the misappropriated funds, not to a proportionate share of the entire policy. He expressed concern that the claimants’ recovery could exceed the value of their original proprietary interest under the trust.
Lord Hope’s Dissent
Lord Hope also dissented, asserting that the claimants should only recover the premiums paid from the misappropriated funds. He argued that the claimants had no proprietary claim to the entire value of the policy, as it was impossible to prove that the misappropriated funds directly contributed to the death benefit of the policy. According to Lord Hope, the proper remedy was an equitable lien, rather than a proprietary claim.
Conclusion
Foskett v McKeown is a pivotal case in understanding proprietary claims in trust law. It clarified the legal principles of tracing and following, while also addressing the rights of beneficiaries to assert ownership of new assets acquired through the misapplication of trust funds.
The decision underscores the importance of proprietary rights in trust law and offers a framework for resolving disputes over misappropriated funds, especially where the original trust property is exchanged or mixed with other assets. The case is significant not only for its implications in trusts and equity but also for its broader application to cases involving the protection of property rights.
