Court: House of Lords
Citation: [2001] 1 AC 102
Date: 2001
Area of Law: Trusts, Equitable Remedies, Property Law
Facts of Foskett v McKeown
The case of Foskett v McKeown concerns the principle of tracing and following in the context of a trust. The case arose after the defendant, McKeown, had embezzled a sum of money from a trust, which had been set up by a family for the benefit of the claimant, Foskett, and other beneficiaries.
McKeown misappropriated funds from a life insurance policy, and, in turn, used the money to purchase a new property. This led to a dispute over whether the trust could reclaim the money from the property purchased by McKeown with the embezzled funds.
The claimants, Foskett and the other beneficiaries, argued that they were entitled to a proportion of the newly acquired property, as the funds used to purchase the property were traceable back to the trust. The issue before the House of Lords was whether the claimants could trace the misappropriated funds into the property and assert their claim over it.
Legal Issue
The primary legal issue in Foskett v McKeown was whether the claimants, as beneficiaries of a trust, were entitled to trace misappropriated funds into a property purchased by the defendant, McKeown, and whether they had a claim over the property.
The case centred on the equitable principles of tracing and following and the extent to which they could be applied in situations where trust money had been used for the purchase of a new asset.
The case also raised questions about the nature of the claimants’ rights in relation to the property, and whether McKeown’s action of purchasing a new property with the embezzled funds could be challenged by the beneficiaries.
The House of Lords’ Judgement in Foskett v McKeown
The House of Lords ultimately ruled in favour of the claimants, agreeing that they were entitled to trace the misappropriated funds into the new property. The judgement clarified several important points of law in relation to tracing and following in the context of trust law.
Lord Millett’s Judgement
Lord Millett, delivering the leading judgement, explained that the principles of tracing and following were essential to determining the rights of the claimants. He distinguished between the two concepts:
- Tracing: The process of identifying the proceeds of a trust, or the property into which the trust money has been converted.
- Following: The process of tracing the same property as it moves from one person to another, in order to assert a claim over it.
In Foskett v McKeown, the court held that the claimants could use the principle of tracing to identify the property that was acquired with their trust’s misappropriated funds, even though the money had been transferred into a new asset.
Lord Millett recognised that tracing and following were not remedies in themselves but were mechanisms for determining ownership and rights over property that had been transferred or converted.
He emphasised that these principles were crucial in situations involving the misappropriation of trust funds, as they allowed the rightful owners of the trust to reclaim their property, even if it had been converted into something else.
The Claimants’ Right to Tracing
The House of Lords held that the claimants had a right to trace the misappropriated funds into the new property purchased by McKeown. The court found that the trust beneficiaries could trace the money from the life insurance policy through its subsequent use to purchase the property.
This judgement was significant because it reaffirmed the ability of beneficiaries to use equitable tracing to reclaim misappropriated assets, even when those assets had been transformed into new property.
However, the court also recognised that the tracing process was not absolute, and the claimants would need to demonstrate that they could establish a clear connection between the original trust funds and the new property. This would involve showing that the money had been used to acquire the property and that it could be identified as traceable to the misappropriated trust funds.
Equitable Rights and Proportionality
One of the key aspects of Foskett v McKeown was the court’s emphasis on the proportionality of the claimants’ right to the property. The House of Lords considered the question of whether the claimants were entitled to the full value of the property or just a proportionate share, based on the amount of the trust funds that had been misappropriated and used to purchase the property.
Lord Millett concluded that the claimants were not automatically entitled to the entire value of the property. Instead, they were entitled to a proportionate share of the value of the property based on the extent to which the misappropriated funds had contributed to its purchase.
This decision clarified the nature of the equitable remedy and reinforced the principle that a claimant’s entitlement to an asset should be proportionate to the extent to which the asset was acquired using trust funds.
The Outcome
In the end, the House of Lords ruled in favour of Foskett and the other beneficiaries, allowing them to trace the misappropriated trust funds into the property purchased by McKeown. The court’s ruling provided important guidance on the application of equitable tracing and following and clarified the extent to which claimants can assert their rights over property obtained through the misappropriation of trust funds.
Conclusion
The case of Foskett v McKeown remains a landmark decision in the field of trust law, particularly regarding the principles of tracing and following. It reaffirmed the ability of trust beneficiaries to reclaim misappropriated funds by tracing them into new property, provided they could establish a clear connection between the funds and the asset.
Additionally, the judgement clarified that claimants are only entitled to a proportionate share of the property’s value, based on the amount of trust funds used to acquire it. This case has had a significant impact on the development of equitable remedies and continues to be a leading authority in cases involving the misappropriation of trust assets.
