Tracing (Law)

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Tracing (law) 1 Tracing (law) In law, tracing is a process, not a remedy, by which a claimant demonstrates what has happened to his/her property, identifies its proceeds and those persons who have handled or received them, and asks the court to award a proprietary claim against the property, or an asset substituted for the original property or its proceeds. Tracing allows transmission of legal claims from the original assets to either the proceeds of sale of the assets or new substituted asset
  Tracing (law)1 Tracing (law) In law, tracing is a process, not a remedy, by which a claimant demonstrates what has happened to his/her property,identifies its proceeds and those persons who have handled or received them, and asks the court to award aproprietary claim against the property, or an asset substituted for the srcinal property or its proceeds. Tracing allowstransmission of legal claims from the srcinal assets to either the proceeds of sale of the assets or new substitutedassets.Tracing ordinarily facilitates an equitable remedy, and is subject to the usual limitations and bars on equitableremedies in common law countries. In many common law countries, there are two concurrent processes, tracing atcommon law and tracing in equity . However, because the right to trace at common law is so circumscribed, [1] theequitable process is almost universally relied upon, as equitable tracing can be performed into a mixed fund. Illustrations Tracing is thus neither a claim nor a remedy. It is merely a process by which a claimant demonstrates what hashappened to his property, identifies its proceeds and the persons who have handled or received them, and justifies hisclaim that the proceeds can properly be regarded as representing his property. -  Foskett v. McKeown For example, if A has money in a solicitor ’ s account and the solicitor takes that money to buy a painting, then A maybe able to make a claim against the painting. This claim will take priority even if the solicitor is bankrupt and hasother unsecured claims against him.Judicially, probably the most famous example of a tracing claim is  AG for Hong Kong v Reid  [1994] 1 AC 324,[1994] 1 NZLR 1 (PC), where Mr Reid, then the Solicitor General for Hong Kong, received bribes for passinginformation to organised crime in Hong Kong. Under Hong Kong law, the proceeds of those bribes were held onconstructive trusts for the government of Hong Kong. Mr Reid then investing the proceeds of the bribes in land inNew Zealand, and the land increased substantially in value. When he was caught, Mr Reid admitted that the moneywas subject to a constructive trust, but argued that he should only be liable to repay the amount of the bribes, andthen any profit attributable to the increase in value of the land in New Zealand was not connected with hiswrongdoing. However, the Judicial Committee of the Privy Council held that the government of Hong Kong's claimto the money could be traced into the land, and thus the claimant was entitled to the full value of the land, as withouthis wrong, Mr Reid would never have made those profits and it would be grossly inequitable for him to keep them. Advantages Tracing claims have two key advantages to claimants.ãFirstly, they are a  proprietary remedy (as opposed to a simple  personal claim ) which means that, if the defendantis insolvent, then the claimant can take title to the goods, rather than just receiving an award of damages whichmay be of little value against a defendant in bankrupcty. However, in some countries tracing may also lead to theaward of a personal remedy where for some reason a proprietary remedy is not appropriate (ie. it would upset  pari passu distribution upon insolvency, where it would not be appropriate to do so). [2] ãSecondly, as demonstrated in  AG for Hong Kong v Reid  , where the wrongdoer has made a profit, it allows theclaimant to recover a greater amount than their srcinal loss. The House of Lords applied the same reasoning in  Foskett v McKeown [2001] AC 102 where the claimants sought to enforce their rights against a third party. [3]  Tracing (law)2 Technical aspects The law of tracing is enormously complex, even to practitioners. Characteristically, tracing claims tend to involvefraud, and as a result most claims (and case law) are against the background of a complex factual matrix. However,the law itself is also complex, and a number of key aspects of the law remain ambiguous in many countries.ãEquitable tracing requires a  fiduciary relationship , while common law tracing does not. However, thisrelationship does not need to have existed before the misappropriation took place. [4] However, this differencebetween common law and equity has been criticized by Lord Millett and Lord Steyn in  Foskett v McKeown ,though they stopped short of deciding that the traditional precondition to equitable tracing should be overruled. [5] ãThe wrongdoer may mix the misappropriated funds with his own money, and then purchase an asset with themixed fund. [6] ãWhere there are multiple innocent claimants. [7] ãWhere there is mixing of the funds by an innocent volunteer. [8] Defences In most jurisdictions, there are several reasonably well establishing defences to tracing claims, although the case lawis not entirely consistent. The common defences to an equitable tracing claim are:1.good faith purchaser for value and without notice2.dissipation3.discharge of a debt (such that the proceeds are no longer traceable and there is no substitute asset)4.innocent change of position (usually, but not always, by an innocent third party [9] )Importantly, in each case it is only the remedy of tracing that is lost. The claimant may well still enjoy a  personal claim against the wrongdoer, even though they may have lost their proprietary right to trace into substituted assets. Remedies In common law countries there are a variety of remedies that can be imposed when the court is satisfied that anequitable tracing claim has been made. The principal remedies election to take the property (or a resulting trust  ) equitable charge over the account of profits, secured by an equitable lien4.a constructive trustIf an asset appreciates in value, the claimant may be well advised to claim proprietary right in the asset (no.1 and 4).If an asset depreciates in value, the claimant would be better off if he acquires a charge or lien over the asset (no. 2and 3) as he can still enforce the whole amount of the charge against the asset and recover the balance via a personalaction.  Tracing (law)3 Sources ãLionel Smith, The Law of Tracing , 1st ed., OUP [10] See also ã  Macmillan Inc. v. Bishopsgate Investment Trust plc (No. 3) ã Taylor v. Plumer [1815] 3 M & S 562 ãTracing in English law References [1]At common law, to trace the property must be identifiable and distinguishable from other property, see Taylor v Plumer  (1815) 3 M&S 562[2]Ordinarily the courts are quite comfortable ordering a proprietary remedy because, if the defendant had no legal claim to the srcinal assets,there is no loss to the defendant's creditors if that asset is removed from the pool available to pay creditors. To order otherwise would be toallow the defendant's creditors to benefit at the claimant's expense.[3]In  Foskett  , the deceased had paid two annual premiums of a life insurance policy with money misappropriated from a trust fund. Thedeceased later committed suicide, and the court upheld the claim of the defrauded beneficiaries of the trust against the children of thedeceased, even though the children would have been entitled to the same payout even had the two relevant annual premiums had not beenpaid.[4]The Court of Appeal in Re Diplock [1948] 1 Ch 465 saw Sinclair v Brougham [1914] AC 398 as requiring a fiduciary relationship beforeequitable tracing would be allowed. However both Chase Manhattan Bank v Israel-British Bank (London) Ltd [1981] Ch 105 and Westdeutsche Landesbank GiroZentrale v Islington London Borough Council [1996] AC 669 expanded this by illustrating that a proprietaryinterest in the form of a constructive trust can arise upon theft or fraud, creating a fiduciary relationship between thief and true owner.[5]Shalson v Russo [2003] EWHC 1637; [2005] Ch 281[6]The commonly held rule is that the wrongdoer is presumed to spend his own money first, and the misappropriated funds later (Re Hallett'sEstates), but this conflicts with other authorities (Re Oatway).[7]Authorities suggest that the innocent claimants should be treated rateably (  Keefe v Law Society of NSW  (1998) 44 NSWLR 451), but left openthe question where the claimants are not equally innocent, or where some claimants have exhibited carelessness in their own affairs.[8]See for example,  Re Diplock  [1948] 1 Ch 465 and Gertsch v Atsas [1999] NSWSC 898 where charities were the recipient of misappropriatedfunds.[9]See for example, Gertsch v Atsas [1999] NWSC 898[10]Without disagreeing with him, I have not followed Dr Smith's conventional division of the subject into 'following', 'tracing' and 'claiming', astechnical restatement of that nature are probably not best suited for a general usage medium such as Wikipedia.  Article Sources and Contributors4 Article Sources and Contributors Tracing (law)   Source : Contributors : Colonies Chris, Craddocktm, Eastlaw, Emeraude, Ironholds, Legis, Pstuart84, R'n'B, Wikidea,Willking1979, Woodshed, 17 anonymous edits License Creative Commons Attribution-Share Alike 3.0 Unported 
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