Creditors’ claims against trustees and trust funds

Creditors’ claims against trustees and trust funds Abstract As the trustee is the legal owner of the trust assets and the only relevant legal person, any creditor access to trust funds must be through him. But the only right of access the trustee has is through his indemnity. Therefore, creditor access is dependent on this indemnity right. If anything severs that indemnity, creditor access is lost. This creates a substantial practical problem, namely that an unconnected breach of trust can destroy creditor access. This article aims to give a relatively detailed introduction to the law of trust creditors, and suggest a solution to the problem of unconnected breach. Introduction The principles by which creditors may enforce obligations against trustees and trust funds are both mysterious and (strangely) contested. In my years of conducting the research that partly forms the subject matter of this article, barristers, judges and legal academics (and one mathematician) have been astonished when I have described the oddities of the law. One well-known trust law academic even thought my chief talent was in conveniently making up case names (and presumably facts, issues and reasoning), because he had ‘never heard of any of them’. What a creative mind for English surnames he must have thought I possess. It is with this experience in mind that this article is written. Its aim, as might be expected, is to identify difficulties in, and develop a coherent approach to, the law of trust creditors. But perhaps unusually, it also aims give a relatively detailed account of the foundational cases in this field—the law is simply not widely known, and consequently not usefully summarized anywhere. This article aims firstly to fill this lacuna of important law, and secondly to provide some solutions to the tricky problems that basic trust law axioms give rise to when creditors are involved. The topic is of great practical importance—so much so that the Trust Law Committee in England issued a consultation paper on it in 1997,1 a report with recommendations for reform in 1998,2 and it was a part of the English Law Commission’s ninth and tenth programmes,3 though subsequently abandoned. The New Zealand Law Commission has also included it in its review of the law of trusts, with recommendations for reform that have now led to legislative proposals.4 The two main problems in this area are identified as (i) the problem of unconnected liabilities, whereby a trustee’s breach and liability to reconstitute the trust fund destroys the creditor’s access regardless of whether the breach had anything to do with the creditor; and (ii) the trust entity problem, whereby the trust begins to behave legally as though it was a private limited corporation and the trustee merely the director or manager. This article solves these issues with a careful reading of key case law, and shows that no legislative intervention is necessary once the issues involved are appreciated and the relevant case law brought to light. Trust law fundamentals The basic operation of this whole area of law derives from the fundamental structure of the trust as a property holding device vesting title and dispositive power in the trustee. A trust is, to choose one useful definition, [a]n equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property) for the benefit of persons (who are called beneficiaries or cestuis que trust5), of whom he may himself be one and any one of whom may enforce the obligation.6 As regards everyone who is a stranger to the trust, the trustee is the owner, which for the purposes of this chapter we may identify as being the one with exclusionary powers as regards the assets,7 and the ability to contract with third parties about those assets. This leaves the beneficiary with a personal claim over how the trustee’s powers of ownership are used (which can through equity be multiplied to control third party assignees of the legal estate). Internally the trustee’s access to the assets is limited by the terms of the trust. As Maitland noted: Equity did not say that [the beneficiary] was the owner …, it said that the trustee was the owner …, but added that he was bound to hold [the property] for the benefit of the cestui que trust.8 It is basic to the operation of trusts that the trustee has managerial control of the property as the titleholder, but is obliged to use it for the benefit of the beneficiaries and not permitted to access it other than in accordance with the trust’s terms. The trustee therefore contracts with creditors personally, and is personally liable,9 though the liability may be limited by (clear and unambiguous wording) to the amount of the trust assets.10 There is no other legal person who could contract on behalf of the trust, as the trust does not have legal personality of its own. Should the trustee incur costs in the administration of the trust, he is ultimately given access in the form of an indemnity out of the trust assets11 unless the trust deed stipulates otherwise, or such an indemnity is inconsistent with the conditions upon which beneficiaries have become so.12 It is this basic machinery of trustee indemnities that provides the main way in which a creditor can access the trust assets. The basic principle is that the trustee can only give what he has, and since the only access to the assets that the trustee can exercise is the right of indemnity, it is this right that the creditor’s fate depends upon. The basics of creditor access The basic operation of this area of law can be described almost in a single sentence. A trustee who authorizedly contracts with creditors while managing a trust business becomes personally liable to those creditors; he has a strong indemnity claim against trust assets, which claim may be subrogated to the creditors. Behind these simple propositions lie a host of difficulties: what is the nature of the indemnity; how may it be impaired, in relation to both trustee and creditors; and whether trustee’s obligations within the trust can affect external creditors’ claims. One type of cost in the administration of the trust is incurring debts as part of carrying on a business that the trust deed authorizes the trustee to carry on.13 The trustee will incur these debts personally, but will be indemnified out of the trust assets where the costs are ‘properly’ incurred.14 Where the trustee is personally insolvent, the creditors of the trustee may claim against the assets of the trust by stepping into the shoes of the trustee (henceforth referred to as ‘subrogation’) and claiming the benefit of his right of indemnity. The consolidated origin of this doctrine is In Re Johnson.15 Johnson involved a will whereby the executors were directed to call in all debts of the two businesses (‘London business’ and ‘Cambridge business’) of the testator, and convert all stock except that of the testator’s London business to cash. The executor Robinson carried on the business in his own name and did not call in the debts, nor wind up the London business. An action was brought by one of the residuary legatees who obtained a judgment for the administration of the testator’s estate, at which time it was found that monies were due from Robinson who was insolvent. Creditors who had supplied Robinson with goods to carry on the Cambridge business asked the court to order assignments of the trust assets to pay their claims. Sir George Jessel MR denied their claim because creditors were not parties to suit,16 but allowed them the liberty to present a petition. Jessel MR also responded to the point that counsel for the creditors argued, giving the following general statement of doctrine: I understand the doctrine to be this, that where a trustee is authorised by a testator, or by a settlor—for it makes no difference—to carry on a business with certain funds which he gives to the trustee for that purpose, the creditor who trusts the executor has a right to say “I had the personal liability of the man I trusted, and I have also a right to be put in his place against the assets; that is, I have a right to the benefit of indemnity or lien which he has against the assets devoted to the purposes of the trade.” The first right is his general right by contract … the second right is a mere corollary of those numerous cases in Equity in which persons are allowed to follow trust assets.17 In this passage Jessel MR established a right of a creditor, an external party to the trust, to gain access to the trust assets and in effect treated the trustee as holding his indemnity right on trust for the creditor. The Master of the Rolls did not cite a single case in direct support of the doctrine described in the quotation above. The earlier case of Ex Parte Garland18 was cited in argument, but held to be irrelevant as it did not determine the nature of the creditor’s right. As interpreted by Turner LJ in Ex Parte Edmonds,19Garland simply proceeded on the assumption, not at issue in that case, that ‘creditors of the trade are entitled to the benefit of the right of the trustee’s indemnity and thus become creditors of the fund to which the executor or trustee has a right to resort’.20In Re Johnson was therefore the first case in which the nature of the creditor’s access to the trust assets was directly discussed in the language we use today, and the modern foundation of the law regarding trustee’s creditors. The right of the creditor to claim against trust assets is consequently dependent on the right of the trustee. If there is no trustee with an indemnity right to claim through, there is no creditor claim to realize.21 A corollary is that subrogation into the rights of the trustee cannot make the creditor better off than the trustee himself. Indeed, this is mentioned as such in Johnson: ‘[The] title of the creditor, so to speak, to be put in the place of the trustee, is a title to get nothing [where] nothing is due to the trustee’.22 The nature of the trustee’s right As the creditor’s rights hinge on the trustee’s indemnity rights, it is useful to look at the nature of those rights more closely. This question can roughly be divided to cases concerning the strength and those concerning the type of the trustee’s right of indemnity. As to the former, the trustee’s indemnity gives him priority in an unascertained fund. That is to say, the payment of the indemnity is what ascertains the trust fund, and between trustees their costs are paid rateably.23 In Dodds v Tuke24 the beneficiaries of a trust had brought an action against the trustees. The trust funds had been paid into court to cover the costs, but it appeared they were insufficient to cover all of them. The defendant trustees asked to be paid in priority to the costs of the plaintiffs. In holding that the defendants have priority, Bacon VC stated that: It is a good rule that trustees should have priority for their costs, because until those costs are provided for it is impossible to say what the trust fund is.25 The type of the right is sometimes loosely described as a lien.26 The origin of this is probably due to a solidified misunderstanding of Evans v Evans.27 In that case the widow of a merchant of builders’ materials had carried on the business of the deceased without authority of the will. In doing this she bought a consignment of cement on credit. The son of the testator filed an administration action, and the cement was sold by the receiver. On the same day the cement merchants obtained judgment against the widow for the unpaid cement. They then claimed in the administration action that they were entitled to be paid out of the proceeds of the sale, and Kay J made an order declaring that they were entitled to a lien upon the beneficial interest of the widow in the estate (the right of indemnity) for the amount owed to them. The cement merchants were not satisfied with this, and appealed. It is possible this is because there is not enough money in the estate to pay all creditors, or that the widow was in some kind of default to the estate, although it is not clear as to why exactly the cement merchants were not satisfied with their lien over the right of indemnity, and wanted to claim a lien against the trust property directly. Cotton LJ reiterated the position that a creditor of the trustee cannot be in a better position than the trustee herself, and cannot claim directly against the estate. His Lordship then went on to say that the goods belong to the estate: subject to the right of the widow to be indemnified out of them against all claims in respect of them so far as she has not lost such right by being a debtor to the estate, and whether she has lost that right is a question depending on the result of the general account (emphases added).28 Lindley LJ pointed out that the cement merchants never had a right to seize the goods, because they never took out execution. His Lordship then noted: ‘these goods must, I think, subject to the right of the widow to indemnity, be considered part of the estate’ (emphasis added).29 This case clearly shows that the widow does not have a lien on any part of the property including the cement, as otherwise the cement merchants would have no objection to being put in the widow’s position. In any event, it appears the cement merchants were claiming for some kind of security that would entitle them to be paid out of the proceeds of the sale, which they would get by the order of Kay J if the widow’s right of indemnity had been in the nature of a lien. However, the dicta of Cotton LJ and Lindley LJ can be read to mean that the inclusion of the cement in the property of the estate is subject to the indemnity being paid. If that were the case, the widow would have right to hold on to the cement before her indemnity was satisfied—she would indeed have a lien. The obiter statements of Cotton and Lindley LJJ were seized upon in Jennings v Mather.30 Mather was assigned the trade assets of a business as trustee for the benefit of the creditors of the business. He ordered goods from Jennings and did not pay them, so Jennings obtained judgment against him and lawfully seized certain assets. Mather absconded bankrupt, and Gray was appointed his trustee-in-bankruptcy. Gray attempted to claim proceeds of the seized assets to divide them among Mather’s creditors. The county court judge found against Gray by virtue of the (then) section 44 of the Bankruptcy Act 1883, that goods held by the bankrupt on trust were not divisible among his creditors. Gray appealed. Kennedy J, citing Evans, reversed the county court judge’s decision, and expressly treated the right of indemnity as being ‘in the nature of a lien [allowing the trustee] to prevent any person from carrying away goods [belonging to the trust]’.31 Once his accounts were made up and if nothing was due to the trustee, his lien is gone.32 Mather therefore had a direct proprietary interest in the assets in the form of his indemnity lien, forming part of his estate and assignable to his trustee-in-bankruptcy, and thus it was available to his creditors. With respect, it would seem that the trustee’s indemnity and its nature has nothing to do with the trustee’s ability to prevent any person from carrying away the goods belonging to the trust, except perhaps indirectly. Rather, this is a natural incident of the trustee’s legal title over the trust property, which provides him with rights of exclusion. The only way in which the trustee’s indemnity bears any relevance to the topic of third party attempting to carry goods away is that the exercise of the indemnity ascertains the extent of the trust property, and in some cases, the extent of the beneficiary’s entitlement. In a simple donative trust, the trustee would claim his indemnity first and then present the remaining property to the beneficiary—his legal ownership of the assets only exists as long as his indemnity is not satisfied. But it is not this right of indemnity that directly prevents anyone from carrying away the goods. Rather, it is the trustee’s legal title that dictates this conclusion, which title incidentally happens to be extinguished when the trust is executed. It also appears that the principle laid down in Jennings v Mather, that the value of the trustee’s right is liable for execution of the trustee’s debts requires qualification. Namely, funds extracted from the trust under the trustee’s indemnity are to be applied to the satisfaction of that liability which created the right of indemnity, in priority to the trustee’s general creditors. That is, if the liability the trustee has incurred remains unpaid when the trustee claims for indemnity, he must use the benefit of that indemnity to meet that specific creditor’s liability. This was decided in In Re Richardson.33 In that case a lessee had sold the beneficial interest of a lease to his wife, and had thus become her trustee of the leasehold. The wife was consequently liable to indemnify her husband for any rent arrears or damages for breach of covenant. The landlord obtained judgment against the husband (the lessee-trustee) for £711, which the husband was unable to pay because he was bankrupt. The landlord then brought an action jointly with the husband’s trustee-in-bankruptcy to enforce the indemnity, followed by an application to the court to ascertain which of them was entitled to the benefit. If the landlord received the benefit of the indemnity, it would have been at the cost of the general creditors. If the trustee-in-bankruptcy received it, he would have distributed it to all creditors and the landlord would have received a fraction of what he was owed. The Court of Appeal, reversing the first instance decision, decided for the landlord. In doing so, Cozens-Hardy MR drew attention to the absurdity of the result that if the benefit of the indemnity was applied to all creditors, the greater the trust liability incurred by the trustee, the greater the advantage to the personal estate. This, according to His Lordship, would be tantamount to profiting from his position as trustee,34 presumably because his bankrupt estate is treated as an extension of his own legal personality. Fletcher Moulton LJ reasoned among similar lines, that ‘[the common law] would not help a man to make a profit out of what was merely an indemnity’.35 The trustee could not have recovered one penny from the trust because he had not paid anything to the principal creditor, the landlord, but he did have a right of indemnity that could have been converted into a right to recover money by paying the landlord. The only use of the right was to pay the principal creditor.36 Buckley LJ clarified this by stating that the right of indemnity is not a right of action enforceable by the lessee for the benefit of the landlord—this would have made the lessee the trustee of the landlord. Instead, it is a right of action enforceable for the benefit of the lessee’s trustee-in-bankruptcy because its use will relieve the lessee and his estate from a debt which ought to be borne by the wife, the lessee-trustee’s beneficiary.37 The result of division among the general creditors would have been that the lessee’s estate was not in fact indemnified by the beneficiary’s payment—the landlord would have been paid pennies on the pound, and as shown by the fact that the landlord would have been entitled to another dividend if more money was realized by the trustee-in-bankruptcy, the remainder of his debt was still owing. The trustee’s estate would still have carried the liability.38 This decision reveals much about the nature of the creditor’s rights. In effect, the decision in In Re Richardson puts the personal creditors of a trustee in the position of a secured creditor if the trustee incurred the liability in the proper administration of the trust. The trustee’s right of indemnity has priority in an unascertained fund, and in the event of the trustee’s insolvency its benefit can only be applied to satisfy the claims of the creditor against whom the liability was incurred. It is submitted that the nature of the right of the subrogated creditor holds is not a lien. It is akin to a floating charge, in that it can only be applied for the benefit of that creditor and it operates to ascertain what is left for the beneficiary but it does not affect particular assets until it crystallizes.39 However, the right is not assignable under Richardson. To go back to In Re Johnson, Sir George Jessel MR stated: ‘It does not appear to me that … the creditor … who has only got the benefit of this equity, if I may say so, by means of the trustee, through the lucky accident of there being a trust ought to be put in a better position than any other creditor’.40 This was in the context of a defaulting trustee, given as justification of why the creditors of that trustee are not entitled to anything more than any other personal creditor. But they are put in a better position by the happy accident of there being a trust—the claim of a trustee’s creditor is secured to the extent of the trust assets, so long as the trustee is not in default. Trustee default A related issue which also stems from In Re Johnson is the issue of when the trustee is in default. As discussed above, the creditors claim in the trust assets through the trustee’s indemnity, and therefore their rights are dependent on the rights of the trustee. Where the trustee is in default, or owes money to the trust, his right of indemnity is correspondingly diminished or extinguished. Though these newly stated doctrines lacked firm precedent, Jessel MR gave policy reasons for the ability of the creditor to trace his claim to trust assets: The trust assets having been devoted to carrying on the trade, it would not be right that the [beneficiary] should get the benefit of the trade without paying the liabilities; therefore the Court says to him, You shall not set up a trustee who may be a man of straw, and make him a bankrupt to avoid the responsibility of the assets for carrying on the trade.41 Jessel MR continued to state the following principle: But if the trustee has wronged the trust estate, that is, taken money out of the assets more than sufficient to pay the debts, and instead of applying them to the payment of debts has put them into his own pocket, then it appears to me that there is no such equity [on the creditor to trace], because the [beneficiaries] are not taking the benefit. However, the key cases establishing this rule are not in fact cases of indemnity but, once again, cases where the trustee was beneficially entitled to a share in the trust assets. In Re Dacre,42 JG Womack appointed Henry Dacre to be his executor and trustee, and gave a £2000 legacy to Alice Dacre, Henry’s wife. Alice died without having received the £2000, and bequeathed all her property to Henry. Henry then died insolvent without having received his wife’s property. It was discovered that Henry had misappropriated a sum of £1500 from the estate of JG Womack. Henry’s creditors brought the action for the administration of his estate, and the surviving trustee of JG Womack claimed he was entitled to retain any such part of the £2000 legacy as was required to offset Henry Dacre’s liability for misappropriation. Sargant J upheld the claim, and Lord Cozens-Hardy MR affirmed it. The Master of the Rolls traced the authority from the judgment of Sir George Jessel in Jacubs v Rylance,43 through Doering v Doering44 and finally to In Re Towndrow,45 where Parker J stated: the real principle is that where there is an aggregate fund in which the trustee is beneficially interested and to which he owes something, he must be taken to have paid himself that amount on account of his share.46Jacubs v Rylance, the origin of this rule decided even before In Re Johnson, was in fact a case where the defaulting trustee was the father of the beneficiary who had died intestate. The father had therefore inherited the beneficial interest of his son as his next of kin, as well as being the (defaulting) trustee in the same trust. The case was a conflict between the surviving beneficiaries and their father’s, the defaulting trustee’s, insolvent estate. Sir George Jessel MR in one paragraph decided the case, stating that a defaulting trustee is taken to have paid himself all he can out of the trust assets.47 This brief statement was also the basis in Doering and Dacre, which were factually on all fours with Jacubs: the trustee had also become a beneficiary. However, the statement of Jessel MR in Jacubs v Rylance is broad enough to cover trustee indemnities, and His Lordship’s own statements in In Re Johnson support this view: [The creditors are given] some additional benefit [i.e., the benefit to have recourse to trust assets] so as to avoid a supposed injustice; but the injustice to be avoided is the injustice of the [beneficiary] walking off with the assets which have been earned by the use of the property of the creditor: but where the [beneficiary] does not get that benefit, there is no injustice as between him and the creditors, and there is no reason for the court interfering … to give [the creditors] a larger right than that they bargained for, namely, their personal right against the trustee.48 The problem with expanding the Jacubs v Rylance principle to indemnities in cases where trustees are not beneficiaries is that a creditor’s claim can be defeated by an unconnected liability the trustee has to the trust. For example, a previous and unconnected breach of trust can mean that a creditor’s has no recourse. This is perhaps the key problem in this area, as identified by the Trust Law Committee.49 Ultra vires An issue which is hinted at above is what is the extent of the creditor’s right to the trust fund when the trustee incurs liabilities that are outside his powers. As the law stands, it is clear in principle that if there has been a breach of trust or the trustee is otherwise in default the value of the creditor’s claim is correspondingly diminished. In Re Johnson referred to the trustee being authorised to incur debts,50 and dicta about the proper authority of the trustee in incurring debts can also be found in the line of cases starting with Evans v Evans.51 The early foundation case is Balsh v Hyham.52 That case concerned the South Sea Bubble, the 1720 crash of the South Sea Company which had been, among other things, buying its own stock with its assets and inflating the stock price. The plaintiff was a trustee for the defendant for £1000 South Sea stock. The defendant had instructed the trustee to borrow £4000 from the company on a mortgage of the stock, and received the money. Following the crash, an act of Parliament53 was passed which provided that if a borrower paid 10 per cent of what was owed by a certain date, the rest of the debt will be discharged. The beneficiary, apparently armed with the unusual authority to direct the trustee’s use of trust assets,54 directed the trustee not to pay, apparently thinking borrowers were not obliged to pay but could elect not to.55 The trustee did pay the 10 per cent, and claimed his costs from the beneficiary. King LC held the case to be: within the reason of that rule, where the … trustee has honestly and fairly, without any possibility of being a gainer, laid down money, by which the [beneficiary] is discharged from being liable for the whole money lent, or from a plain and great hazard of being so, the [trustee] ought to be repaid.56 That is to say, in the context of the trustee’s right of indemnity we inquire into the actual fraudulence or otherwise of the trustee to see whether his acting ultra vires will deny him his claim. If the trustee acted ‘honestly and fairly, without any possibility of being a gainer’ and benefited the trust, a mere exceeding of his authority will not defeat the creditor’s claim. This principle was followed by the Court of Appeal in Re German Mining Company.57 The case concerned an English joint stock company,58 which was to carry out mining in Germany. The directors were not given powers to raise additional capital except by issuing new shares. The capital proved to be insufficient to work the mines, and the directors were given authority to sell the mines. The miners’ wages being overdue the directors obtained advances from certain shareholders so that the company mines would not be seized under German law. An order was obtained from the English courts that the company was to be wound up. A call was made by the banks against the assets of the company, and the court decided that the company was not liable to the bankers. The directors paid the bankers, and asked for an indemnity. Turner LJ treated the case as essentially turning on whether the trust deed excluded the trustee-directors’ right to indemnity, and, citing Balsh v Hyham, held for the directors. Even if the liability of the shareholders was limited to their share of the £50, 000 capital, ‘where parties place others in the position of trustees for them, they are in equity personally bound to indemnify them’.59 What the directors had done was in bona fides and for the benefit of the shareholders,60 as it facilitated a more advantageous sale. These principles were tested at the highest level in Vyse v Foster,61 which deserves elaboration in some detail. The case involved a partnership and a partially overlapping trust. Most of the partners were members of the Vyse family. Richard Vyse was the senior and principal partner, who had invested over £90, 000 of the £137, 675 capital. In his will Richard Vyse had nominated three executors, one of whom was also a partner in the firm and another would later become a partner. The partnership deed had stipulated that upon the death of a partner, the surviving partners would buy the share of the deceased partner at a price to be ascertained from the last stocktaking, plus £5 per cent interest, to be paid in instalments over two years. At the testator’s death the partners marked the price to be paid to the testator’s estate as a debt of the firm with said interest, but the money was allowed to be in the hands of the firm for some years. All the residuary legatees had accepted and ratified this, except for the plaintiff who was 11 years old at the time of her father’s death. When she became entitled to her share of the payment, she refused and claimed an account of profits instead, claiming that her money had been obtained by the partnership in breach of trust. The defendant executor-partners (D) argued that since the price of the testator’s share had been ascertained and put in the books, it was really only at most debt which had not been paid on time, and for which interest had been accruing at a proper rate. The fact that the class of trustees included some of the same people as the class of partners was, according to the defendant, irrelevant. The manifest intention of the will was that the testator’s partnership capital was to be used as a loan to keep the business going, and this is what the trustees did. Bacon VC ordered an account of profits, on the basis that the D had failed to obey directions in the will, and permitted the use of a large portion of the estate in business which had generated large profits. The plaintiff was therefore able to elect to take a share of the profits of the firm. Bacon VC’s judgment is essentially one for strict enforcement of fiduciary duties, as established in the case law at the time. D appealed, and their case was argued by the then Solicitor-General George Jessel. The argument was substantially the same, with the added twist that here the executors never received any money with which they then traded improperly—the money remained due from the firm to them. This of course skipped over the fact that the partners included executors—the money was due from them to themselves. It was also argued that not all partners are parties to the breach of trust, but this argument was defeated on authority62: the liability for persons who knowingly receive trust-money is joint and several. The respondent (P) argued that the executors ought not have let the money remain in the hands of the firm without bargaining for additional profits. In other words, P argued that the executors acted improperly as trustees because they were on both sides of the loan agreement. The Court of Appeal reversed Bacon VC’s judgment. The first step of James LJ’s judgment was to shift the focus of the case by stating that it was not a case of partnerships at all—the testator had effectively sold his interest in the partnership property, and the only relation between the executors and the surviving partners was one of debtor and creditor. According to James LJ the effect was the same as if he had sold the business to perfect strangers in his lifetime, and died before the purchase money was payable. This shift in focus effectively unravelled the plaintiff’s arguments, without responding adequately to the issue of self-dealing. The issue was not discussed in the judgment. James LJ held that there was undeniably a breach of trust in not calling the money. But he also gave recognition to the argument that the executors only followed what was intended in the will, namely that the business was kept going for the benefit of the family. His Lordship then drew attention to the fact that the plaintiff had received income from the business, which she would not have received had the will been carried out to the letter because it would have meant the break-up of the business. Furthermore, given that there was a complex agreement by which profits were shared (evidently not based on capital invested), it would have been very difficult to ascertain what portion of the profits was attributable to the plaintiff’s money. Finally, His Lordship stated that a court of equity is not penal, but only gives full compensation of any loss or damage through failure of some equitable duty. Here the case was one of a simple equitable debt,63 albeit one which was overdue. James LJ gave the following scenario: if the executors were to deposit money in a bank and leave it there for too long a time it would be startling if an account could be called on the profits of the bank. According to His Lordship, the case would have been different if there had been some improper motive or deception, but here there was none. The entire family knew that the money was in the hands of this firm, and if P did not know she could have asked her trustee. The case was then appealed to the House of Lords.64 The decision of James LJ was upheld, and all judgments (of Lord Cairns LC, Lord Hatherley, and Lord Selborne) treated the case essentially as one of contractual construction. The testator was said to have contracted to sell his partnership share by his will, and the will clearly intended there to be a loan of the partnership capital (to be paid over two years) to keep the family business going. A mere delay in paying did not strike at the heart of the agreement and therefore did not rescind the contract. An account of profits was not thought to be an appropriate remedy to be considered, and the fact that all the children of the testator had been benefited by the profitable running of the business was mentioned more than once, as was the fact that there is an absence of fraud. So it seems fraudulent intent is required to defeat the claim of a trustee to indemnity, and therefore of a creditor to the assets. In Blundell v Blundell,65 George Blundell, the defendant (D) in the main action, was the son of the testator, also appointed as trustee. D was given the option to buy his father’s business. If he did not wish to undertake it, he was to sell the business and realize all its value. D did not buy the business for himself, but he kept it going nevertheless and did not sell the goodwill. D’s solicitor advised him that he had no power, outside option in the will, to purchase the business for himself. In breach of trust D nevertheless proceeded to buy part of the plant and machinery belonging to the business, and had a friend buy the rest for him. The solicitors received the accounts of the sales which read ‘to amount purchased by Mr Blundell’s agents … ’. The sale was nevertheless completed, and the solicitors deducted their costs directly from the purchase-monies, as authorized by the trustee-defendant. A creditor of the estate took out summons, asking that the solicitor pay back what they had received from the trust. For our purposes there were two questions to be solved. Firstly, whether the solicitors could charge their costs to the trust fund directly as they had been authorized to do by the trustee; and secondly, whether they as creditors of the trustee were entitled to the money they had received. As regards the first question, Stirling J identified the question as one of the trustee’s right of indemnity, and continued: I apprehend that in equity, it is not a right of the trustee to be indemnified only after he has made the necessary payments to his solicitor … but that he is entitled to be indemnified, not merely against the payments made but against his liability.66 Relying on this principle, he held that the trustee was entitled to pay those he employed to assist him in the administration of the trust directly from the trust assets,67 even before he had personally made any payments. On the second question, quoting Lord Selborne in Barnes v Addy,68 Stirling J stated that ‘strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers’,69 and held that the solicitors are liable only if they can be treated as standing in the shoes of the trustees, that is, if they knew that the monies were used in a way that is inconsistent with the trust. In this case there was nothing suggesting improper receipt of the trust monies by the solicitors.70 So, to summarize: A third party contracts with the trustee personally, and the trustee is personally liable. The trustee has a right of indemnity, created by his incurring the liability in the administration of the trust personally, to be paid out of the trust assets. The creditor, if unpaid, can bring a claim against the trustee (or his executor) to be subrogated into the right of the trustee, thus gaining access to the trust fund to the extent of the indemnity. But this method of access can be cut where the trustee is liable to pay money back into the trust fund. This is because the creditor can have no access where the trustee has none, and is not in any way dependent on the trustee’s default being factually related to the creditor. The only recourse is against the trustee personally. Where the trustees technically act outside their powers but where they acted honestly to benefit the trust without a possibility of personal gain the indemnity is not denied, and therefore creditor access not limited. Towards a more rational law of creditor access This being the state of the law, it is in place to suggest methods of rationalization to provide solutions to some of the major issues in this area. Two particularly thorny issues are (i) the doctrinal problem of an any indebtedness by the trustee destroying the creditor’s access, regardless of whether that indebtedness was in anyway connected to the creditor, and (ii) the theoretical problem of creating a trust entity by treating the indemnity right as a lien, assignable and enforceable independently of the trustee’s rights of legal ownership. It is important to realize at the outset that these two problems are a dilemma. On the one hand, the reason that an unconnected liability destroys the creditor’s right is that the creditor must claim through the trustee. Only the trustee has access to the trust assets as their legal owner, whose fetter on personal access to the assets has been lifted by incurring a liability in the course of trust administration. If that fetter has not been lifted, or access is subsequently denied, the creditor gets nothing because the trustee has no access to give. On the other hand, if the creditor can claim against the trust assets directly and their right is not dependent on the trustee’s limited access (which is what the lien reasoning aims to achieve), it is the trust estate that holds the assets and the trustee is merely a manager. Either the creditor is subject to the injustices of the unconnected liability rules, or the trust is a legal entity. There is, however, a solution to both. Unconnected liabilities As we have seen, the basis for trustee’s lack of indemnity where the trustee is in default is the principle that the trustee is taken to have paid himself all he can out of the trust assets. The origin of this is the statement of Sir George Jessel MR in Jacubs v Rylance,71 a case where the trustee had become entitled to a beneficial share. The statement of Jessel MR, as noted above, is broad enough to encompass trustee’s indemnities, but there is a relevant factual difference between a right of indemnity and a beneficial interest that is acquired by the trustee. A beneficial interest under a trust does not, unless otherwise stipulated, carry conditions that the beneficiary must fulfil before he is entitled to the benefit of the property (so long as the trustee has made or will make the distribution in accordance with the trust’s terms), or specify the use that the beneficiary might make of his interest. A right of indemnity, by contrast, is only acquired when the trustee comes under a personal liability in his capacity as a trustee. It is entirely dependent on the conditions that a liability is incurred, and that it is incurred in the proper administration of the trust—before that, the interest does not even exist. This is precisely the reasoning given in In Re Richardson to support the principle that the indemnity must be used to pay the principal creditor and is not divided among the trustee’s general body of creditors. That the trustee cannot be allowed to claim a beneficial interest where he is also under a liability to pay money to the trust is to be expected. While the broad statement that he has ‘benefited’ from the trust assets might not apply to every default, the idea is simply that the money he owes to the trust can be deducted from his beneficial entitlement. Here the principle stated by Jessel MR is entirely on point: the trustee can be taken to have paid himself his beneficial interest. But that he is not allowed to claim an indemnity against costs he has properly incurred is odd: if the creditor is unpaid he can only apply the indemnity to the payment that creditor.72 If the creditor is paid, the trustee is using the indemnity to make good a loss he has made in the administration of the trust, which could be offset against any profits he has made. The trustee in default would not be allowed to profit from his office in either case. To base this area on the principle that the trustee has already paid himself the indemnity is problematic, and a set-off approach, concentrating on what the trustee has actually gained and lost, is to be preferred. The factual problem as regards creditors of trustees is of course that they cannot know whether the trustee is in default and do not normally have access to the internal accounts of the trust.73 The ‘taken to have paid himself’ approach forces the creditors to make inquiries about whether their debtors are in fact trustees, and whether those trustees are in default. This goes against the utility of the trust as a modularity device whereby the parties’ obligational complexity is kept internal while outsiders can simply deal with the trustee as the property holder.74 As a matter of logic and policy the approach introduced above is clearly preferable. The strongest doctrinal argument against this view, however, is of course Jessel MR’s judgment in Johnson, detailing the basis of creditor subrogation: [the creditors have] some additional benefit [i.e., the benefit to have recourse to trust assets] so as to avoid a supposed injustice; but the injustice to be avoided is the injustice of the [beneficiary] walking off with the assets which have been earned by the use of the property of the creditor: but where the [beneficiary] does not get that benefit, there is no injustice as between him and the creditors, and there is no reason for the court interfering … to give [the creditors] a larger right than that they bargained for, namely, their personal right against the trustee.75 In other words, the very basis upon which the creditor can be subrogated to the trustee’s indemnity claim is to avoid an unjust benefit on the beneficiary. That the beneficiary is not liable to indemnify even the properly accrued costs of the defaulting trustee is therefore merely the result of the upstream-question of why the court allows subrogation in the first place, and cannot be solved by tinkering with the downstream-question of how the internal accounts of the trust ought to be determined. However, the reasoning does not hold for a number of reasons. Firstly, it seems that this argument is doctrinally insensitive to the relevant difference between the unpaid creditor, who has the right to have the trustee’s indemnity applied to meet his claim and nobody else’s, and the paid creditor, in which case the trustee’s indemnity is used to meet the liabilities of general creditors of the trustee. In the former event, if indemnity is not given, the injustice of the beneficiary walking off with the creditor’s assets persists. Secondly, there are three legally relevant parties to the scenario, not two. In cases where the trustee owes money to the trust and a creditor has given value, the beneficiary’s total interest may not be correspondingly enlarged (and thus the beneficiary may not be enriched) because the trustee owes money to the trust that is equal or greater to the amount the creditor has given. But the injustice that the trustee’s indemnity seeks to avoid is not only that the beneficiary is unduly benefited, but it is also, and chiefly, that the creditor has suffered a detriment. Appreciating all three parties in the scenario, the beneficiary is not the only one who is legally relevant or subject to potential ‘injustices’ which ought to be avoided, and the ability of the beneficiary to extinguish a liability (to the creditor) with a loss (by trustee default) is certainly such an injustice.76 Thirdly, the creditor not only compensates the beneficiary for the faults of the trustee, but also ends up exonorating the trustee. The creditor has given value and received nothing, the beneficiary has been deprived of the amount of the trustee’s default, partially or fully compensated by the creditor’s given value, and the trustee has paid off his liability to the trust using the creditor’s money. The beneficiary may be closer to where she was supposed to be, but the creditor is wronged and the trustee is allowed to pay off one liability with another. The beneficiary is not enriched (though he has been compensated with the creditor’s money)—the trustee is.77 If the trustee is insolvent, the remaining personal claim against him is useless to the creditor. Much of insensitivity is, of course, due to the fact that In Re Richardson, the case recognizing this relevant difference between a paid and an unpaid creditor, was decided 31 years after In Re Johnson—there was no relevant difference in the legal position between such creditors then. Another way to counter Jessel MR’s concern is to say that it no longer applies after In Re Richardson. Based on the above, it is submitted that the problem of unconnected liabilities can be solved by giving due appreciation to the changed legal landscape after In Re Richardson. The case earmarks the indemnity of a trustee for the benefit of an unpaid creditor. In such cases, the trustee gains nothing if he is to be given his indemnity. It comes in through the door and out through the window, straight to the creditor. This approach does not offend the structure of trust law: the trust assets are still held by the trustee without creating a separate legal entity, liabilities are still accrued by him personally and the rights of the creditors are still dependent on the right of the trustee. The idea is only that the trustee’s indemnity is earmarked for the payment of an unpaid creditor, for which there is judicial precedent, coupled with the appreciation of the factual difference between a beneficial interest and an indemnity. This provides a just result for the creditor, and it is doctrinally more coherent. One legislative solution has recently been proposed by the New Zealand Parliament.78 Section 80 of the Trusts Bill (2017) proposes to allow creditor claims against trust assets either where the trustee has a right of indemnity (section 80(1)(a)), or where the creditor has given value, the trust has received a benefit and the creditor has acted in good faith (section 80(1)(b)(i)-(iii)). Good faith is in turn defined as knowledge of matters that limit the trustee’s indemnity (section 80(3)). The claim is limited to the extent of value given (section 80(4)(a)). In essence this legislative provision exemplifies an approach based on the unjust enrichment of the trust estate, though relying on the indemnity right of the trustee as its basic mechanism of claim. An unjust enrichment claim of the trust estate is main method of creditor access in the US law and is better left for another paper, but in brief such methods suffer from the basic inconsistency that the ‘trust estate’ has no separate personality from that of the trustee and therefore cannot be enriched independently. While legislature can carve out an exception, as they have in the US, such exceptions cannot always be consistently applied because they clash with this basic structure of trust law.79 Furthermore, based on the above points about appreciating all the parties involved, it is not always the case that the trust estate is enriched where the trustee is in default. The concept of giving value is also not always clear cut,80 and could give rise to difficulties where the creditor has given value but that the recipient does not regard as valuable. If someone was to paint my house bright orange, their work has value but I prefer my house the way it is. This principle, in turn, leads to quantification of liability based on the subjective preferences of the recipient. In the trust context ‘giving value’ is especially difficult, as the trust estate is not a legal person and cannot have preferences. In that case, is it the trustee’s preference or the beneficiary’s that determines what value is given? Fortunately, there is a ready doctrinal solution to this problem. All we have to do is to give it the space it deserves in our textbooks, causing positive ramifications all over the law of trust creditors. Trust entity Another important issue is that of treating the trust as a legal entity. Where a creditor is an assignee of the trustee’s ‘lien’, there appears to be nothing to stop the creditor from claiming against the trust assets directly and following them from one set of hands to another, treating the trustee at the time as nothing more than an agent or manager of the property. As such the creditor’s right is no longer dependent on the trustee’s personal right of access, and the trust behaves like a limited liability company rather than an enterprise based on the trustee’s duty-engrafted rights as a holder of legal title. In essence this turns on the conflict of Jennings v Mather and In Re Richardson, the former solidifying the lien reasoning in English law (and followed in Australia) to allow the trustee’s general creditors access,81 while the latter denying such access in favour of the specific creditor. As Richardson is a subsequent Court of Appeal decision and Jennings is only first instance, it is naturally the case that any inconsistency between the two is to be resolved in favour of Richardson, but there are also good reasons in principle for doing so. The description of the trustee’s right as a lien grants a creditor the ability to follow the pool of assets independently of the trustee. This is because a lien is an assignable property right—it can be held just as well by a creditor as the trustee himself, and no reference need be made to the trustee’s personal liability or limited right to access the assets. The mechanism of creditor access changes from the trustee being personally liable and satisfying that liability from the trust assets in accordance with the trust’s terms, to the creditor contracting (i) through the trustee, (ii) with the trust estate, (iii) for a lien on the trust assets. Thinking of the trustee’s indemnity as a lien therefore severs the creditor’s dependence on the trustee’s right. An assignee of this lien has a claim directly against the pool of assets in the trust, just as we would expect in the case of limited liability companies. The logic of the trustee indemnity lien is that the trustee’s indemnity right is what ascertains the beneficiary’s entitlement by removing certain assets from the trust corpus. Before that happens, the trustee is entitled to withhold the trust property from the beneficiaries until his claim is satisfied. So the trustee’s indemnity ‘lien’ is clearly against the trust property, allowing the trustee to resist the beneficiary’s claim to it. But the view is more problematic than might at first seem. If the trustee has a lien over property that he holds legal title to, who or what right is that lien against? The answer might be that it is an equitable lien, against the beneficiary’s right to the assets. But the beneficiary does not have a direct right to the trust property,82 so it cannot be against the beneficiary’s property rights—in fact, it is the exercise of the trustee’s indemnity that ascertains whether the beneficiary has any right in any property. If the lien is against the beneficial title generally, how would a lien against an equity operate? The lien reasoning in Jennings and subsequent Australian cases was aimed at protecting the creditors of a trustee who was no longer in office, and therefore no longer holds legal title to the property. It is submitted that there is no need to classify the trustee’s right as a lien. This is ensured by the solution offered above to unconnected liabilities, by appreciating the principle in In Re Richardson that earmarks an indemnity to trust creditors, coupled with the principle in Dodds v Tuke83 that it is the exercise of the trustee’s indemnity which ascertains the pool of trust assets available. The unpaid trust-creditors of the old trustee have an earmarked priority claim to the assets by claiming subrogation to the old trustee’s indemnity right, so long as the liability was incurred while the old trustee still held his office. The creditor’s right of subrogation exists only against the trustee and his personal estate, but as the trustee’s personal right to be indemnified out of the trust assets survives a change of trustee because it is the exercise of that right that ascertains the extent of trust assets in the first place, the subrogation right also retains its potency as the central creditor remedy. Where this approach is taken, the trust is not analogous to a legal entity of its own, as the trust estate is not subject to rights independently of the trustee. The real problem solved by the lien-reasoning is in essence the same as that of unconnected liabilities, namely that the trustee’s right of indemnity can be destroyed by his misconduct or by a change of trustee. Once In Re Richardson is given its proper due, this ceases to be a problem and the dubious logic (both in terms of positive authority and central principles) of indemnity liens can be put to rest. Conclusion This, then, is a brief introduction to the law of trust creditors. The trustee incurs the liabilities pertaining to the trust activity personally, and is only indemnified from the trust.84 If the trust assets are exhausted by an indemnity, the personal assets of the trustee are liable for execution of the creditors’ claims.85 The creditor gets access only through subrogation to the trustee’s indemnity right, and if anything severs that indemnity the creditor is left only with a claim against the trustee’s personal assets, or nothing if the trustee is insolvent. This is so even where the event that severed the trustee’s indemnity had nothing to do with the creditor. Attempts to deal with the harsh effects of these doctrines has led the courts to develop compromises (such as allowing an indemnity where the trustee’s breach is made to benefit the trust without personal gain) and some strained interpretations (most notably of Evans v Evans as being a lien, clearly at odds with the reasoning and result in that case, so interpreted in Jennings v Mather and followed in Vacuum Oil and Octavo Investments in Australia) to protect creditor rights. These interpretations not only weaken the logical foundations of the results they establish, but threaten the basic integrity of trust law. If the trustee’s indemnity is an assignable property right, the creditor’s suit to be put in the position of the trustee really becomes a suit to gain possession of the indemnity lien, which can then be enforced against the trust estate directly. The trust is thereby analogous to a legal person, and the trustee reduced to a mere manager or agent. The main argument of this article is that the latter is increasingly at odds with the basic conceptual structure of trusts, namely that the trustee is the legal owner of the property and not just a manager, and that the trust does not have its own legal personality. In Re Richardson provides a solution that is doctrinally coherent and theoretically satisfactory. When the trustee’s indemnity is earmarked for the benefit of that creditor whose dealings created the right in the first place, unrelated breaches of trust become irrelevant and creditor access is clearly through the trustee’s personal rights, successfully piloting the waters between lack of creditor protection and conceptual incoherency. Aleksi Ollikainen-Read is Senior College Lecturer in Trusts, Keble College, University of Oxford. Email: aleksi@ollikainen.eu I must thank Professor Joshua Getzler, Professor Paul S Davies, Professor Ben McFarlane and Dyson Heydon AC QC for their comments on earlier iterations of this article Footnotes 1. Trust Law Committee Consultation Paper ‘Rights of Creditors against Trustees and Trust Funds’ 1997. 2. Trust Law Committee Report ‘Rights of Creditors against Trustees and Trust Funds’ 1998. 3. See <http://lawcommission.justice.gov.uk/areas/rights-of-creditors.htm> accessed 22 April 2014. 4. Law Commission (NZ), ‘Court Jurisdiction, Trading Trusts and Other Issues’ 2011, ch 7. <http://www.lawcom.govt.nz/sites/default/files/projectAvailableFormats/NZLC%20IP28.pdf> accessed 17 September 2017, with a bill introduced to the New Zealand Parliament on 1 August 2017 <http://www.legislation.govt.nz/bill/government/2017/0290/latest/DLM7382815.html> accessed 17 September 2017, pt 4(2). 5. The plural of cestui que trust corrected by the author; see C Sweet, ‘Cestui que Use: Cestui que Trust’ (1910) 26 LQR 196. 6. C Mitchell, D Hayton and P A Matthews (eds) Underhill and Hayton, Law of Trusts and Trustees (19th edn, Lexis Nexis 2016) 2. Approved by Cohen J in Re Marshall’s Will Trusts [1945] Ch 217 219; Romer J in Green v Russell [1959] 2 QB 226, 241. 7. This appears to be the modern net effect of Burgess v Wheate (1759) 1 WmBl 123, 1 Eden 177 See further, P Matthews, ‘Burgess v Wheate (1759)’ in C. Mitchell and P Mitchell (eds), Landmark Cases in Equity (Hart Publishing 2012), 115: Burgess v Wheate is about who can affect the conscience of the trustee (144). That is to say, there is a set of persons who ‘affect the trustee’s conscience’, or limit his powers as regards the property, but others, such as the crown or the next of kin as in Burgess v Wheate, he may exclude. 8. F Maitland, Equity: a Course of Lectures (2nd edn, CUP 1936) 17. 9. See, eg Muir v City of Glasgow Bank (1879) 4 AC 337; In Re Johnson (1880) 15 Ch D 548, 552. 10. In Re Robinson’s Settlement [1912] 1 Ch 717, particularly at 729; Warborough Investments Ltd v Berry and Others [2003] EWHC 3152 (Ch). 11. See eg Balsh v Hyham (1728) 2 P Wms 453; In Re Johnson (1880) 15 Ch D 548, upholding the basic right to indemnity. 12. Wise v Perpetual Trustee Company Ltd [1903] AC 139. 13. Where the trustee lacks this authority will be returned to below under ‘Ultra Vires’. 14. For elaboration of ‘properly’ incurred costs, see MS Donald, ‘The “Proper” Approach to a Trustee’s Right to Indemnity out of Trust Assets’ (2014) 8 J Eq 283. 15. In Re Johnson (1880) 15 Ch D 548. 16. ibid 552. 17. ibid. 18. Ex Parte Garland (1804) 10 Ves 111, 32 ER 786. 19. Ex Parte Edmonds (1862) 4 DeG F & J 488, 45 ER 1273. 20. ibid 498. 21. In Re Leslie (1883) 23 Ch D 552. 22. In Re Johnson (n 15), 552. 23. In Re Griffith [1904] 1 Ch 807. 24. Dodds v Tuke (1884) 25 Ch D 617. 25. ibid 619. 26. Relatively modern examples of this are the Australian cases of Vacuum Oil Company Proprietary Limited v Wiltshire (1945) 72 CLR 319, 335; and Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360, 362. 27. Evans v Evans (1887) 34 Ch D 597. 28. ibid 601. 29. ibid 603. 30. Jennings v Mather [1901] 1 QB 108. 31. ibid 113. 32. ibid 114. 33. In Re Richardson [1911] 2 KB 705. 34. ibid 711. 35. ibid 712. 36. ibid 713–14. 37. ibid 715. 38. ibid 716. 39. Evans v Rival Granite Quarries Ltd [1910] 2 KB 979. 40. In Re Johnson (1880) 15 Ch D 548, 552–53. 41. ibid 552. 42. In Re Dacre (1916) 1 Ch 344. 43. Jacubs v Rylance (1873-74) LR 17 Eq 341. 44. Doering v Doering (1889) 42 Ch D 203 (where the trustee had also become entitled to a beneficial interest). 45. In Re Towndrow [1911] 1 Ch 662. 46. ibid 666. 47. Jacubs v Rylance (n 43), 342. 48. In Re Johnson (n 40), 555–56. 49. Trust Law Committee Consultation Paper ‘Rights of Creditors against Trustees and Trust Funds’ 1997. 50. n 17 et seq. 51. Evans v Evans (1887) 34 Ch D 597, 601. 52. Balsh v Hyham (1728) 2 P Wms 453. 53. 7 Geo 1, sess. 2, known as The National Debt Act 1721, s 7. 54. His argument was merely that the trustee had acted against his ‘express instructions’, and this argument was not rejected. Not much is said about this in the case report, but this could therefore be a case where the trustee was the beneficiary’s agent as well as trustee. 55. The report is unclear as to whether this view, or the view of the trustee which appears to be that he is obliged to pay, is mistaken. 56. Balsh v Hyham (n 52), 810–11. 57. Ex Parte Chippendale, Re German Mining Company (1854) 43 ER 415. 58. Essentially a partnership with certain special features, see KG Reid, ‘Embalmed in Rettie: The City of Glasgow Bank and the Liability of Trustees’ in Burrows et al (eds) Judge and Jurist – Essays in Memory of Lord Rodger of Earlsferry (OUP, Oxford 2013), 489, 491. 59. Re German Mining Company (n 57), 428. 60. ibid 421. 61. Vyse v Foster (1872-73) 8 Ch App 309. 62. Flockton v Bunning [1864] F 89, the entire judgment being given in argument. 63. Equitable by operation of the will. 64. Vyse v Foster (1872-73) 8 Ch App 309. 65. Blundell v Blundell (1889) 40 Ch D 370. 66. ibid 376–77. 67. ibid 377. 68. Barnes v Addy (1873-74) 9 Ch 244, 251. 69. ibid 251. 70. Blundell v Blundell (n 65), 381. 71. Jacubs v Rylance (1873-74) LR 17 Eq 341 n 43 and accompanying text. 72. In Re Richardson [1911] 2 KB 705. 73. One of the key problems of this area as identified by the Trust Law Committee Consultation Paper ‘Rights of Creditors against Trustees and Trust Funds’ 1997. 74. On modularity more specifically, see H Smith, ‘Property as the Law of Things’ (2012) 125 Harv LR 1691. 75. In Re Johnson (1880) 15 Ch D 548, 555–56. 76. See HF Stone, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Colum LR 527, 529. 77. This is one reason why the basic US law claim of unjust enrichment of the trust estate is not a suitable solution—aside from the double standard of having to claim the trust estate can be enriched independently of the trustee despite having no independent legal personality, the trust estate is not actually enriched in these cases. What was a liability by the trustee towards the trust has simply been paid using the creditor’s money. 78. NZ Parliament, Trusts Bill 290-1 (2017), s 80. <http://www.legislation.govt.nz/bill/government/2017/0290/latest/DLM7382815.html> accessed 18 September 2017. 79. See Blair v Claflin, 37 NE 2d 501 (Mass 1941 and Taliaferro v Taliaferro, 7 P 3d 1241 (Kan 2000). 80. See, eg Benedetti v Sawiris [2013] UKSC 50; C Mitchell, P Mitchell and S Watterson, Goff & Jones The Law of Unjust Enrichment (9th edn, Sweet & Maxwell 2016) paras [4-04]–[4–08]; P Birks, Unjust Enrichment (2nd edn, Clarendon Press 2005) 52–63; Sempra Metals v IRC [2008] AC 561, para 119; Ministry of Defence v Ashman (1993) 25 HLR 513; A Lodder, Enrichment in the Law of Unjust Enrichment and Restitution (Hart Publishing 2012), 51–53, ch 6; J Edelman, ‘The Meaning of Loss and Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations for the Law of Unjust Enrichment (OUP 2009) 211, 235–9. 81. Vacuum Oil Company Proprietary Limited v Wiltshire (1945) 72 CLR 319, 335; and Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360, 362. 82. Gartside v IRC [1968] AC 553 (Lord Denning, at 566–67 describes the interest that the beneficiary possesses as analogous to the interest of a participant in a beauty pageant in the prize money, and Salmon LJ, at 575, describes the beneficiary’s right as one to have the trustees ‘honestly and fairly consider whether any … income shall be allotted to him’. The House of Lords in the same case went even further, and stated in clear terms that the beneficiary has no interest in the trust assets, only a right to require the trustees to exercise their power per Lord Reid, 608); see also Sainsbury v IRC [1970] Ch 712. 83. Dodds v Tuke (1884) 25 Ch D 617. 84. In Re Johnson (1880) 15 Ch D 548. 85. As happened in Muir v City of Glasgow Bank (1879) 4 AC 337. © The Author(s) (2017). Published by Oxford University Press. All rights reserved. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Trusts & Trustees Oxford University Press

Creditors’ claims against trustees and trust funds

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Oxford University Press
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© The Author(s) (2017). Published by Oxford University Press. All rights reserved.
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1752-2110
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10.1093/tandt/ttx202
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Abstract

Abstract As the trustee is the legal owner of the trust assets and the only relevant legal person, any creditor access to trust funds must be through him. But the only right of access the trustee has is through his indemnity. Therefore, creditor access is dependent on this indemnity right. If anything severs that indemnity, creditor access is lost. This creates a substantial practical problem, namely that an unconnected breach of trust can destroy creditor access. This article aims to give a relatively detailed introduction to the law of trust creditors, and suggest a solution to the problem of unconnected breach. Introduction The principles by which creditors may enforce obligations against trustees and trust funds are both mysterious and (strangely) contested. In my years of conducting the research that partly forms the subject matter of this article, barristers, judges and legal academics (and one mathematician) have been astonished when I have described the oddities of the law. One well-known trust law academic even thought my chief talent was in conveniently making up case names (and presumably facts, issues and reasoning), because he had ‘never heard of any of them’. What a creative mind for English surnames he must have thought I possess. It is with this experience in mind that this article is written. Its aim, as might be expected, is to identify difficulties in, and develop a coherent approach to, the law of trust creditors. But perhaps unusually, it also aims give a relatively detailed account of the foundational cases in this field—the law is simply not widely known, and consequently not usefully summarized anywhere. This article aims firstly to fill this lacuna of important law, and secondly to provide some solutions to the tricky problems that basic trust law axioms give rise to when creditors are involved. The topic is of great practical importance—so much so that the Trust Law Committee in England issued a consultation paper on it in 1997,1 a report with recommendations for reform in 1998,2 and it was a part of the English Law Commission’s ninth and tenth programmes,3 though subsequently abandoned. The New Zealand Law Commission has also included it in its review of the law of trusts, with recommendations for reform that have now led to legislative proposals.4 The two main problems in this area are identified as (i) the problem of unconnected liabilities, whereby a trustee’s breach and liability to reconstitute the trust fund destroys the creditor’s access regardless of whether the breach had anything to do with the creditor; and (ii) the trust entity problem, whereby the trust begins to behave legally as though it was a private limited corporation and the trustee merely the director or manager. This article solves these issues with a careful reading of key case law, and shows that no legislative intervention is necessary once the issues involved are appreciated and the relevant case law brought to light. Trust law fundamentals The basic operation of this whole area of law derives from the fundamental structure of the trust as a property holding device vesting title and dispositive power in the trustee. A trust is, to choose one useful definition, [a]n equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called trust property) for the benefit of persons (who are called beneficiaries or cestuis que trust5), of whom he may himself be one and any one of whom may enforce the obligation.6 As regards everyone who is a stranger to the trust, the trustee is the owner, which for the purposes of this chapter we may identify as being the one with exclusionary powers as regards the assets,7 and the ability to contract with third parties about those assets. This leaves the beneficiary with a personal claim over how the trustee’s powers of ownership are used (which can through equity be multiplied to control third party assignees of the legal estate). Internally the trustee’s access to the assets is limited by the terms of the trust. As Maitland noted: Equity did not say that [the beneficiary] was the owner …, it said that the trustee was the owner …, but added that he was bound to hold [the property] for the benefit of the cestui que trust.8 It is basic to the operation of trusts that the trustee has managerial control of the property as the titleholder, but is obliged to use it for the benefit of the beneficiaries and not permitted to access it other than in accordance with the trust’s terms. The trustee therefore contracts with creditors personally, and is personally liable,9 though the liability may be limited by (clear and unambiguous wording) to the amount of the trust assets.10 There is no other legal person who could contract on behalf of the trust, as the trust does not have legal personality of its own. Should the trustee incur costs in the administration of the trust, he is ultimately given access in the form of an indemnity out of the trust assets11 unless the trust deed stipulates otherwise, or such an indemnity is inconsistent with the conditions upon which beneficiaries have become so.12 It is this basic machinery of trustee indemnities that provides the main way in which a creditor can access the trust assets. The basic principle is that the trustee can only give what he has, and since the only access to the assets that the trustee can exercise is the right of indemnity, it is this right that the creditor’s fate depends upon. The basics of creditor access The basic operation of this area of law can be described almost in a single sentence. A trustee who authorizedly contracts with creditors while managing a trust business becomes personally liable to those creditors; he has a strong indemnity claim against trust assets, which claim may be subrogated to the creditors. Behind these simple propositions lie a host of difficulties: what is the nature of the indemnity; how may it be impaired, in relation to both trustee and creditors; and whether trustee’s obligations within the trust can affect external creditors’ claims. One type of cost in the administration of the trust is incurring debts as part of carrying on a business that the trust deed authorizes the trustee to carry on.13 The trustee will incur these debts personally, but will be indemnified out of the trust assets where the costs are ‘properly’ incurred.14 Where the trustee is personally insolvent, the creditors of the trustee may claim against the assets of the trust by stepping into the shoes of the trustee (henceforth referred to as ‘subrogation’) and claiming the benefit of his right of indemnity. The consolidated origin of this doctrine is In Re Johnson.15 Johnson involved a will whereby the executors were directed to call in all debts of the two businesses (‘London business’ and ‘Cambridge business’) of the testator, and convert all stock except that of the testator’s London business to cash. The executor Robinson carried on the business in his own name and did not call in the debts, nor wind up the London business. An action was brought by one of the residuary legatees who obtained a judgment for the administration of the testator’s estate, at which time it was found that monies were due from Robinson who was insolvent. Creditors who had supplied Robinson with goods to carry on the Cambridge business asked the court to order assignments of the trust assets to pay their claims. Sir George Jessel MR denied their claim because creditors were not parties to suit,16 but allowed them the liberty to present a petition. Jessel MR also responded to the point that counsel for the creditors argued, giving the following general statement of doctrine: I understand the doctrine to be this, that where a trustee is authorised by a testator, or by a settlor—for it makes no difference—to carry on a business with certain funds which he gives to the trustee for that purpose, the creditor who trusts the executor has a right to say “I had the personal liability of the man I trusted, and I have also a right to be put in his place against the assets; that is, I have a right to the benefit of indemnity or lien which he has against the assets devoted to the purposes of the trade.” The first right is his general right by contract … the second right is a mere corollary of those numerous cases in Equity in which persons are allowed to follow trust assets.17 In this passage Jessel MR established a right of a creditor, an external party to the trust, to gain access to the trust assets and in effect treated the trustee as holding his indemnity right on trust for the creditor. The Master of the Rolls did not cite a single case in direct support of the doctrine described in the quotation above. The earlier case of Ex Parte Garland18 was cited in argument, but held to be irrelevant as it did not determine the nature of the creditor’s right. As interpreted by Turner LJ in Ex Parte Edmonds,19Garland simply proceeded on the assumption, not at issue in that case, that ‘creditors of the trade are entitled to the benefit of the right of the trustee’s indemnity and thus become creditors of the fund to which the executor or trustee has a right to resort’.20In Re Johnson was therefore the first case in which the nature of the creditor’s access to the trust assets was directly discussed in the language we use today, and the modern foundation of the law regarding trustee’s creditors. The right of the creditor to claim against trust assets is consequently dependent on the right of the trustee. If there is no trustee with an indemnity right to claim through, there is no creditor claim to realize.21 A corollary is that subrogation into the rights of the trustee cannot make the creditor better off than the trustee himself. Indeed, this is mentioned as such in Johnson: ‘[The] title of the creditor, so to speak, to be put in the place of the trustee, is a title to get nothing [where] nothing is due to the trustee’.22 The nature of the trustee’s right As the creditor’s rights hinge on the trustee’s indemnity rights, it is useful to look at the nature of those rights more closely. This question can roughly be divided to cases concerning the strength and those concerning the type of the trustee’s right of indemnity. As to the former, the trustee’s indemnity gives him priority in an unascertained fund. That is to say, the payment of the indemnity is what ascertains the trust fund, and between trustees their costs are paid rateably.23 In Dodds v Tuke24 the beneficiaries of a trust had brought an action against the trustees. The trust funds had been paid into court to cover the costs, but it appeared they were insufficient to cover all of them. The defendant trustees asked to be paid in priority to the costs of the plaintiffs. In holding that the defendants have priority, Bacon VC stated that: It is a good rule that trustees should have priority for their costs, because until those costs are provided for it is impossible to say what the trust fund is.25 The type of the right is sometimes loosely described as a lien.26 The origin of this is probably due to a solidified misunderstanding of Evans v Evans.27 In that case the widow of a merchant of builders’ materials had carried on the business of the deceased without authority of the will. In doing this she bought a consignment of cement on credit. The son of the testator filed an administration action, and the cement was sold by the receiver. On the same day the cement merchants obtained judgment against the widow for the unpaid cement. They then claimed in the administration action that they were entitled to be paid out of the proceeds of the sale, and Kay J made an order declaring that they were entitled to a lien upon the beneficial interest of the widow in the estate (the right of indemnity) for the amount owed to them. The cement merchants were not satisfied with this, and appealed. It is possible this is because there is not enough money in the estate to pay all creditors, or that the widow was in some kind of default to the estate, although it is not clear as to why exactly the cement merchants were not satisfied with their lien over the right of indemnity, and wanted to claim a lien against the trust property directly. Cotton LJ reiterated the position that a creditor of the trustee cannot be in a better position than the trustee herself, and cannot claim directly against the estate. His Lordship then went on to say that the goods belong to the estate: subject to the right of the widow to be indemnified out of them against all claims in respect of them so far as she has not lost such right by being a debtor to the estate, and whether she has lost that right is a question depending on the result of the general account (emphases added).28 Lindley LJ pointed out that the cement merchants never had a right to seize the goods, because they never took out execution. His Lordship then noted: ‘these goods must, I think, subject to the right of the widow to indemnity, be considered part of the estate’ (emphasis added).29 This case clearly shows that the widow does not have a lien on any part of the property including the cement, as otherwise the cement merchants would have no objection to being put in the widow’s position. In any event, it appears the cement merchants were claiming for some kind of security that would entitle them to be paid out of the proceeds of the sale, which they would get by the order of Kay J if the widow’s right of indemnity had been in the nature of a lien. However, the dicta of Cotton LJ and Lindley LJ can be read to mean that the inclusion of the cement in the property of the estate is subject to the indemnity being paid. If that were the case, the widow would have right to hold on to the cement before her indemnity was satisfied—she would indeed have a lien. The obiter statements of Cotton and Lindley LJJ were seized upon in Jennings v Mather.30 Mather was assigned the trade assets of a business as trustee for the benefit of the creditors of the business. He ordered goods from Jennings and did not pay them, so Jennings obtained judgment against him and lawfully seized certain assets. Mather absconded bankrupt, and Gray was appointed his trustee-in-bankruptcy. Gray attempted to claim proceeds of the seized assets to divide them among Mather’s creditors. The county court judge found against Gray by virtue of the (then) section 44 of the Bankruptcy Act 1883, that goods held by the bankrupt on trust were not divisible among his creditors. Gray appealed. Kennedy J, citing Evans, reversed the county court judge’s decision, and expressly treated the right of indemnity as being ‘in the nature of a lien [allowing the trustee] to prevent any person from carrying away goods [belonging to the trust]’.31 Once his accounts were made up and if nothing was due to the trustee, his lien is gone.32 Mather therefore had a direct proprietary interest in the assets in the form of his indemnity lien, forming part of his estate and assignable to his trustee-in-bankruptcy, and thus it was available to his creditors. With respect, it would seem that the trustee’s indemnity and its nature has nothing to do with the trustee’s ability to prevent any person from carrying away the goods belonging to the trust, except perhaps indirectly. Rather, this is a natural incident of the trustee’s legal title over the trust property, which provides him with rights of exclusion. The only way in which the trustee’s indemnity bears any relevance to the topic of third party attempting to carry goods away is that the exercise of the indemnity ascertains the extent of the trust property, and in some cases, the extent of the beneficiary’s entitlement. In a simple donative trust, the trustee would claim his indemnity first and then present the remaining property to the beneficiary—his legal ownership of the assets only exists as long as his indemnity is not satisfied. But it is not this right of indemnity that directly prevents anyone from carrying away the goods. Rather, it is the trustee’s legal title that dictates this conclusion, which title incidentally happens to be extinguished when the trust is executed. It also appears that the principle laid down in Jennings v Mather, that the value of the trustee’s right is liable for execution of the trustee’s debts requires qualification. Namely, funds extracted from the trust under the trustee’s indemnity are to be applied to the satisfaction of that liability which created the right of indemnity, in priority to the trustee’s general creditors. That is, if the liability the trustee has incurred remains unpaid when the trustee claims for indemnity, he must use the benefit of that indemnity to meet that specific creditor’s liability. This was decided in In Re Richardson.33 In that case a lessee had sold the beneficial interest of a lease to his wife, and had thus become her trustee of the leasehold. The wife was consequently liable to indemnify her husband for any rent arrears or damages for breach of covenant. The landlord obtained judgment against the husband (the lessee-trustee) for £711, which the husband was unable to pay because he was bankrupt. The landlord then brought an action jointly with the husband’s trustee-in-bankruptcy to enforce the indemnity, followed by an application to the court to ascertain which of them was entitled to the benefit. If the landlord received the benefit of the indemnity, it would have been at the cost of the general creditors. If the trustee-in-bankruptcy received it, he would have distributed it to all creditors and the landlord would have received a fraction of what he was owed. The Court of Appeal, reversing the first instance decision, decided for the landlord. In doing so, Cozens-Hardy MR drew attention to the absurdity of the result that if the benefit of the indemnity was applied to all creditors, the greater the trust liability incurred by the trustee, the greater the advantage to the personal estate. This, according to His Lordship, would be tantamount to profiting from his position as trustee,34 presumably because his bankrupt estate is treated as an extension of his own legal personality. Fletcher Moulton LJ reasoned among similar lines, that ‘[the common law] would not help a man to make a profit out of what was merely an indemnity’.35 The trustee could not have recovered one penny from the trust because he had not paid anything to the principal creditor, the landlord, but he did have a right of indemnity that could have been converted into a right to recover money by paying the landlord. The only use of the right was to pay the principal creditor.36 Buckley LJ clarified this by stating that the right of indemnity is not a right of action enforceable by the lessee for the benefit of the landlord—this would have made the lessee the trustee of the landlord. Instead, it is a right of action enforceable for the benefit of the lessee’s trustee-in-bankruptcy because its use will relieve the lessee and his estate from a debt which ought to be borne by the wife, the lessee-trustee’s beneficiary.37 The result of division among the general creditors would have been that the lessee’s estate was not in fact indemnified by the beneficiary’s payment—the landlord would have been paid pennies on the pound, and as shown by the fact that the landlord would have been entitled to another dividend if more money was realized by the trustee-in-bankruptcy, the remainder of his debt was still owing. The trustee’s estate would still have carried the liability.38 This decision reveals much about the nature of the creditor’s rights. In effect, the decision in In Re Richardson puts the personal creditors of a trustee in the position of a secured creditor if the trustee incurred the liability in the proper administration of the trust. The trustee’s right of indemnity has priority in an unascertained fund, and in the event of the trustee’s insolvency its benefit can only be applied to satisfy the claims of the creditor against whom the liability was incurred. It is submitted that the nature of the right of the subrogated creditor holds is not a lien. It is akin to a floating charge, in that it can only be applied for the benefit of that creditor and it operates to ascertain what is left for the beneficiary but it does not affect particular assets until it crystallizes.39 However, the right is not assignable under Richardson. To go back to In Re Johnson, Sir George Jessel MR stated: ‘It does not appear to me that … the creditor … who has only got the benefit of this equity, if I may say so, by means of the trustee, through the lucky accident of there being a trust ought to be put in a better position than any other creditor’.40 This was in the context of a defaulting trustee, given as justification of why the creditors of that trustee are not entitled to anything more than any other personal creditor. But they are put in a better position by the happy accident of there being a trust—the claim of a trustee’s creditor is secured to the extent of the trust assets, so long as the trustee is not in default. Trustee default A related issue which also stems from In Re Johnson is the issue of when the trustee is in default. As discussed above, the creditors claim in the trust assets through the trustee’s indemnity, and therefore their rights are dependent on the rights of the trustee. Where the trustee is in default, or owes money to the trust, his right of indemnity is correspondingly diminished or extinguished. Though these newly stated doctrines lacked firm precedent, Jessel MR gave policy reasons for the ability of the creditor to trace his claim to trust assets: The trust assets having been devoted to carrying on the trade, it would not be right that the [beneficiary] should get the benefit of the trade without paying the liabilities; therefore the Court says to him, You shall not set up a trustee who may be a man of straw, and make him a bankrupt to avoid the responsibility of the assets for carrying on the trade.41 Jessel MR continued to state the following principle: But if the trustee has wronged the trust estate, that is, taken money out of the assets more than sufficient to pay the debts, and instead of applying them to the payment of debts has put them into his own pocket, then it appears to me that there is no such equity [on the creditor to trace], because the [beneficiaries] are not taking the benefit. However, the key cases establishing this rule are not in fact cases of indemnity but, once again, cases where the trustee was beneficially entitled to a share in the trust assets. In Re Dacre,42 JG Womack appointed Henry Dacre to be his executor and trustee, and gave a £2000 legacy to Alice Dacre, Henry’s wife. Alice died without having received the £2000, and bequeathed all her property to Henry. Henry then died insolvent without having received his wife’s property. It was discovered that Henry had misappropriated a sum of £1500 from the estate of JG Womack. Henry’s creditors brought the action for the administration of his estate, and the surviving trustee of JG Womack claimed he was entitled to retain any such part of the £2000 legacy as was required to offset Henry Dacre’s liability for misappropriation. Sargant J upheld the claim, and Lord Cozens-Hardy MR affirmed it. The Master of the Rolls traced the authority from the judgment of Sir George Jessel in Jacubs v Rylance,43 through Doering v Doering44 and finally to In Re Towndrow,45 where Parker J stated: the real principle is that where there is an aggregate fund in which the trustee is beneficially interested and to which he owes something, he must be taken to have paid himself that amount on account of his share.46Jacubs v Rylance, the origin of this rule decided even before In Re Johnson, was in fact a case where the defaulting trustee was the father of the beneficiary who had died intestate. The father had therefore inherited the beneficial interest of his son as his next of kin, as well as being the (defaulting) trustee in the same trust. The case was a conflict between the surviving beneficiaries and their father’s, the defaulting trustee’s, insolvent estate. Sir George Jessel MR in one paragraph decided the case, stating that a defaulting trustee is taken to have paid himself all he can out of the trust assets.47 This brief statement was also the basis in Doering and Dacre, which were factually on all fours with Jacubs: the trustee had also become a beneficiary. However, the statement of Jessel MR in Jacubs v Rylance is broad enough to cover trustee indemnities, and His Lordship’s own statements in In Re Johnson support this view: [The creditors are given] some additional benefit [i.e., the benefit to have recourse to trust assets] so as to avoid a supposed injustice; but the injustice to be avoided is the injustice of the [beneficiary] walking off with the assets which have been earned by the use of the property of the creditor: but where the [beneficiary] does not get that benefit, there is no injustice as between him and the creditors, and there is no reason for the court interfering … to give [the creditors] a larger right than that they bargained for, namely, their personal right against the trustee.48 The problem with expanding the Jacubs v Rylance principle to indemnities in cases where trustees are not beneficiaries is that a creditor’s claim can be defeated by an unconnected liability the trustee has to the trust. For example, a previous and unconnected breach of trust can mean that a creditor’s has no recourse. This is perhaps the key problem in this area, as identified by the Trust Law Committee.49 Ultra vires An issue which is hinted at above is what is the extent of the creditor’s right to the trust fund when the trustee incurs liabilities that are outside his powers. As the law stands, it is clear in principle that if there has been a breach of trust or the trustee is otherwise in default the value of the creditor’s claim is correspondingly diminished. In Re Johnson referred to the trustee being authorised to incur debts,50 and dicta about the proper authority of the trustee in incurring debts can also be found in the line of cases starting with Evans v Evans.51 The early foundation case is Balsh v Hyham.52 That case concerned the South Sea Bubble, the 1720 crash of the South Sea Company which had been, among other things, buying its own stock with its assets and inflating the stock price. The plaintiff was a trustee for the defendant for £1000 South Sea stock. The defendant had instructed the trustee to borrow £4000 from the company on a mortgage of the stock, and received the money. Following the crash, an act of Parliament53 was passed which provided that if a borrower paid 10 per cent of what was owed by a certain date, the rest of the debt will be discharged. The beneficiary, apparently armed with the unusual authority to direct the trustee’s use of trust assets,54 directed the trustee not to pay, apparently thinking borrowers were not obliged to pay but could elect not to.55 The trustee did pay the 10 per cent, and claimed his costs from the beneficiary. King LC held the case to be: within the reason of that rule, where the … trustee has honestly and fairly, without any possibility of being a gainer, laid down money, by which the [beneficiary] is discharged from being liable for the whole money lent, or from a plain and great hazard of being so, the [trustee] ought to be repaid.56 That is to say, in the context of the trustee’s right of indemnity we inquire into the actual fraudulence or otherwise of the trustee to see whether his acting ultra vires will deny him his claim. If the trustee acted ‘honestly and fairly, without any possibility of being a gainer’ and benefited the trust, a mere exceeding of his authority will not defeat the creditor’s claim. This principle was followed by the Court of Appeal in Re German Mining Company.57 The case concerned an English joint stock company,58 which was to carry out mining in Germany. The directors were not given powers to raise additional capital except by issuing new shares. The capital proved to be insufficient to work the mines, and the directors were given authority to sell the mines. The miners’ wages being overdue the directors obtained advances from certain shareholders so that the company mines would not be seized under German law. An order was obtained from the English courts that the company was to be wound up. A call was made by the banks against the assets of the company, and the court decided that the company was not liable to the bankers. The directors paid the bankers, and asked for an indemnity. Turner LJ treated the case as essentially turning on whether the trust deed excluded the trustee-directors’ right to indemnity, and, citing Balsh v Hyham, held for the directors. Even if the liability of the shareholders was limited to their share of the £50, 000 capital, ‘where parties place others in the position of trustees for them, they are in equity personally bound to indemnify them’.59 What the directors had done was in bona fides and for the benefit of the shareholders,60 as it facilitated a more advantageous sale. These principles were tested at the highest level in Vyse v Foster,61 which deserves elaboration in some detail. The case involved a partnership and a partially overlapping trust. Most of the partners were members of the Vyse family. Richard Vyse was the senior and principal partner, who had invested over £90, 000 of the £137, 675 capital. In his will Richard Vyse had nominated three executors, one of whom was also a partner in the firm and another would later become a partner. The partnership deed had stipulated that upon the death of a partner, the surviving partners would buy the share of the deceased partner at a price to be ascertained from the last stocktaking, plus £5 per cent interest, to be paid in instalments over two years. At the testator’s death the partners marked the price to be paid to the testator’s estate as a debt of the firm with said interest, but the money was allowed to be in the hands of the firm for some years. All the residuary legatees had accepted and ratified this, except for the plaintiff who was 11 years old at the time of her father’s death. When she became entitled to her share of the payment, she refused and claimed an account of profits instead, claiming that her money had been obtained by the partnership in breach of trust. The defendant executor-partners (D) argued that since the price of the testator’s share had been ascertained and put in the books, it was really only at most debt which had not been paid on time, and for which interest had been accruing at a proper rate. The fact that the class of trustees included some of the same people as the class of partners was, according to the defendant, irrelevant. The manifest intention of the will was that the testator’s partnership capital was to be used as a loan to keep the business going, and this is what the trustees did. Bacon VC ordered an account of profits, on the basis that the D had failed to obey directions in the will, and permitted the use of a large portion of the estate in business which had generated large profits. The plaintiff was therefore able to elect to take a share of the profits of the firm. Bacon VC’s judgment is essentially one for strict enforcement of fiduciary duties, as established in the case law at the time. D appealed, and their case was argued by the then Solicitor-General George Jessel. The argument was substantially the same, with the added twist that here the executors never received any money with which they then traded improperly—the money remained due from the firm to them. This of course skipped over the fact that the partners included executors—the money was due from them to themselves. It was also argued that not all partners are parties to the breach of trust, but this argument was defeated on authority62: the liability for persons who knowingly receive trust-money is joint and several. The respondent (P) argued that the executors ought not have let the money remain in the hands of the firm without bargaining for additional profits. In other words, P argued that the executors acted improperly as trustees because they were on both sides of the loan agreement. The Court of Appeal reversed Bacon VC’s judgment. The first step of James LJ’s judgment was to shift the focus of the case by stating that it was not a case of partnerships at all—the testator had effectively sold his interest in the partnership property, and the only relation between the executors and the surviving partners was one of debtor and creditor. According to James LJ the effect was the same as if he had sold the business to perfect strangers in his lifetime, and died before the purchase money was payable. This shift in focus effectively unravelled the plaintiff’s arguments, without responding adequately to the issue of self-dealing. The issue was not discussed in the judgment. James LJ held that there was undeniably a breach of trust in not calling the money. But he also gave recognition to the argument that the executors only followed what was intended in the will, namely that the business was kept going for the benefit of the family. His Lordship then drew attention to the fact that the plaintiff had received income from the business, which she would not have received had the will been carried out to the letter because it would have meant the break-up of the business. Furthermore, given that there was a complex agreement by which profits were shared (evidently not based on capital invested), it would have been very difficult to ascertain what portion of the profits was attributable to the plaintiff’s money. Finally, His Lordship stated that a court of equity is not penal, but only gives full compensation of any loss or damage through failure of some equitable duty. Here the case was one of a simple equitable debt,63 albeit one which was overdue. James LJ gave the following scenario: if the executors were to deposit money in a bank and leave it there for too long a time it would be startling if an account could be called on the profits of the bank. According to His Lordship, the case would have been different if there had been some improper motive or deception, but here there was none. The entire family knew that the money was in the hands of this firm, and if P did not know she could have asked her trustee. The case was then appealed to the House of Lords.64 The decision of James LJ was upheld, and all judgments (of Lord Cairns LC, Lord Hatherley, and Lord Selborne) treated the case essentially as one of contractual construction. The testator was said to have contracted to sell his partnership share by his will, and the will clearly intended there to be a loan of the partnership capital (to be paid over two years) to keep the family business going. A mere delay in paying did not strike at the heart of the agreement and therefore did not rescind the contract. An account of profits was not thought to be an appropriate remedy to be considered, and the fact that all the children of the testator had been benefited by the profitable running of the business was mentioned more than once, as was the fact that there is an absence of fraud. So it seems fraudulent intent is required to defeat the claim of a trustee to indemnity, and therefore of a creditor to the assets. In Blundell v Blundell,65 George Blundell, the defendant (D) in the main action, was the son of the testator, also appointed as trustee. D was given the option to buy his father’s business. If he did not wish to undertake it, he was to sell the business and realize all its value. D did not buy the business for himself, but he kept it going nevertheless and did not sell the goodwill. D’s solicitor advised him that he had no power, outside option in the will, to purchase the business for himself. In breach of trust D nevertheless proceeded to buy part of the plant and machinery belonging to the business, and had a friend buy the rest for him. The solicitors received the accounts of the sales which read ‘to amount purchased by Mr Blundell’s agents … ’. The sale was nevertheless completed, and the solicitors deducted their costs directly from the purchase-monies, as authorized by the trustee-defendant. A creditor of the estate took out summons, asking that the solicitor pay back what they had received from the trust. For our purposes there were two questions to be solved. Firstly, whether the solicitors could charge their costs to the trust fund directly as they had been authorized to do by the trustee; and secondly, whether they as creditors of the trustee were entitled to the money they had received. As regards the first question, Stirling J identified the question as one of the trustee’s right of indemnity, and continued: I apprehend that in equity, it is not a right of the trustee to be indemnified only after he has made the necessary payments to his solicitor … but that he is entitled to be indemnified, not merely against the payments made but against his liability.66 Relying on this principle, he held that the trustee was entitled to pay those he employed to assist him in the administration of the trust directly from the trust assets,67 even before he had personally made any payments. On the second question, quoting Lord Selborne in Barnes v Addy,68 Stirling J stated that ‘strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers’,69 and held that the solicitors are liable only if they can be treated as standing in the shoes of the trustees, that is, if they knew that the monies were used in a way that is inconsistent with the trust. In this case there was nothing suggesting improper receipt of the trust monies by the solicitors.70 So, to summarize: A third party contracts with the trustee personally, and the trustee is personally liable. The trustee has a right of indemnity, created by his incurring the liability in the administration of the trust personally, to be paid out of the trust assets. The creditor, if unpaid, can bring a claim against the trustee (or his executor) to be subrogated into the right of the trustee, thus gaining access to the trust fund to the extent of the indemnity. But this method of access can be cut where the trustee is liable to pay money back into the trust fund. This is because the creditor can have no access where the trustee has none, and is not in any way dependent on the trustee’s default being factually related to the creditor. The only recourse is against the trustee personally. Where the trustees technically act outside their powers but where they acted honestly to benefit the trust without a possibility of personal gain the indemnity is not denied, and therefore creditor access not limited. Towards a more rational law of creditor access This being the state of the law, it is in place to suggest methods of rationalization to provide solutions to some of the major issues in this area. Two particularly thorny issues are (i) the doctrinal problem of an any indebtedness by the trustee destroying the creditor’s access, regardless of whether that indebtedness was in anyway connected to the creditor, and (ii) the theoretical problem of creating a trust entity by treating the indemnity right as a lien, assignable and enforceable independently of the trustee’s rights of legal ownership. It is important to realize at the outset that these two problems are a dilemma. On the one hand, the reason that an unconnected liability destroys the creditor’s right is that the creditor must claim through the trustee. Only the trustee has access to the trust assets as their legal owner, whose fetter on personal access to the assets has been lifted by incurring a liability in the course of trust administration. If that fetter has not been lifted, or access is subsequently denied, the creditor gets nothing because the trustee has no access to give. On the other hand, if the creditor can claim against the trust assets directly and their right is not dependent on the trustee’s limited access (which is what the lien reasoning aims to achieve), it is the trust estate that holds the assets and the trustee is merely a manager. Either the creditor is subject to the injustices of the unconnected liability rules, or the trust is a legal entity. There is, however, a solution to both. Unconnected liabilities As we have seen, the basis for trustee’s lack of indemnity where the trustee is in default is the principle that the trustee is taken to have paid himself all he can out of the trust assets. The origin of this is the statement of Sir George Jessel MR in Jacubs v Rylance,71 a case where the trustee had become entitled to a beneficial share. The statement of Jessel MR, as noted above, is broad enough to encompass trustee’s indemnities, but there is a relevant factual difference between a right of indemnity and a beneficial interest that is acquired by the trustee. A beneficial interest under a trust does not, unless otherwise stipulated, carry conditions that the beneficiary must fulfil before he is entitled to the benefit of the property (so long as the trustee has made or will make the distribution in accordance with the trust’s terms), or specify the use that the beneficiary might make of his interest. A right of indemnity, by contrast, is only acquired when the trustee comes under a personal liability in his capacity as a trustee. It is entirely dependent on the conditions that a liability is incurred, and that it is incurred in the proper administration of the trust—before that, the interest does not even exist. This is precisely the reasoning given in In Re Richardson to support the principle that the indemnity must be used to pay the principal creditor and is not divided among the trustee’s general body of creditors. That the trustee cannot be allowed to claim a beneficial interest where he is also under a liability to pay money to the trust is to be expected. While the broad statement that he has ‘benefited’ from the trust assets might not apply to every default, the idea is simply that the money he owes to the trust can be deducted from his beneficial entitlement. Here the principle stated by Jessel MR is entirely on point: the trustee can be taken to have paid himself his beneficial interest. But that he is not allowed to claim an indemnity against costs he has properly incurred is odd: if the creditor is unpaid he can only apply the indemnity to the payment that creditor.72 If the creditor is paid, the trustee is using the indemnity to make good a loss he has made in the administration of the trust, which could be offset against any profits he has made. The trustee in default would not be allowed to profit from his office in either case. To base this area on the principle that the trustee has already paid himself the indemnity is problematic, and a set-off approach, concentrating on what the trustee has actually gained and lost, is to be preferred. The factual problem as regards creditors of trustees is of course that they cannot know whether the trustee is in default and do not normally have access to the internal accounts of the trust.73 The ‘taken to have paid himself’ approach forces the creditors to make inquiries about whether their debtors are in fact trustees, and whether those trustees are in default. This goes against the utility of the trust as a modularity device whereby the parties’ obligational complexity is kept internal while outsiders can simply deal with the trustee as the property holder.74 As a matter of logic and policy the approach introduced above is clearly preferable. The strongest doctrinal argument against this view, however, is of course Jessel MR’s judgment in Johnson, detailing the basis of creditor subrogation: [the creditors have] some additional benefit [i.e., the benefit to have recourse to trust assets] so as to avoid a supposed injustice; but the injustice to be avoided is the injustice of the [beneficiary] walking off with the assets which have been earned by the use of the property of the creditor: but where the [beneficiary] does not get that benefit, there is no injustice as between him and the creditors, and there is no reason for the court interfering … to give [the creditors] a larger right than that they bargained for, namely, their personal right against the trustee.75 In other words, the very basis upon which the creditor can be subrogated to the trustee’s indemnity claim is to avoid an unjust benefit on the beneficiary. That the beneficiary is not liable to indemnify even the properly accrued costs of the defaulting trustee is therefore merely the result of the upstream-question of why the court allows subrogation in the first place, and cannot be solved by tinkering with the downstream-question of how the internal accounts of the trust ought to be determined. However, the reasoning does not hold for a number of reasons. Firstly, it seems that this argument is doctrinally insensitive to the relevant difference between the unpaid creditor, who has the right to have the trustee’s indemnity applied to meet his claim and nobody else’s, and the paid creditor, in which case the trustee’s indemnity is used to meet the liabilities of general creditors of the trustee. In the former event, if indemnity is not given, the injustice of the beneficiary walking off with the creditor’s assets persists. Secondly, there are three legally relevant parties to the scenario, not two. In cases where the trustee owes money to the trust and a creditor has given value, the beneficiary’s total interest may not be correspondingly enlarged (and thus the beneficiary may not be enriched) because the trustee owes money to the trust that is equal or greater to the amount the creditor has given. But the injustice that the trustee’s indemnity seeks to avoid is not only that the beneficiary is unduly benefited, but it is also, and chiefly, that the creditor has suffered a detriment. Appreciating all three parties in the scenario, the beneficiary is not the only one who is legally relevant or subject to potential ‘injustices’ which ought to be avoided, and the ability of the beneficiary to extinguish a liability (to the creditor) with a loss (by trustee default) is certainly such an injustice.76 Thirdly, the creditor not only compensates the beneficiary for the faults of the trustee, but also ends up exonorating the trustee. The creditor has given value and received nothing, the beneficiary has been deprived of the amount of the trustee’s default, partially or fully compensated by the creditor’s given value, and the trustee has paid off his liability to the trust using the creditor’s money. The beneficiary may be closer to where she was supposed to be, but the creditor is wronged and the trustee is allowed to pay off one liability with another. The beneficiary is not enriched (though he has been compensated with the creditor’s money)—the trustee is.77 If the trustee is insolvent, the remaining personal claim against him is useless to the creditor. Much of insensitivity is, of course, due to the fact that In Re Richardson, the case recognizing this relevant difference between a paid and an unpaid creditor, was decided 31 years after In Re Johnson—there was no relevant difference in the legal position between such creditors then. Another way to counter Jessel MR’s concern is to say that it no longer applies after In Re Richardson. Based on the above, it is submitted that the problem of unconnected liabilities can be solved by giving due appreciation to the changed legal landscape after In Re Richardson. The case earmarks the indemnity of a trustee for the benefit of an unpaid creditor. In such cases, the trustee gains nothing if he is to be given his indemnity. It comes in through the door and out through the window, straight to the creditor. This approach does not offend the structure of trust law: the trust assets are still held by the trustee without creating a separate legal entity, liabilities are still accrued by him personally and the rights of the creditors are still dependent on the right of the trustee. The idea is only that the trustee’s indemnity is earmarked for the payment of an unpaid creditor, for which there is judicial precedent, coupled with the appreciation of the factual difference between a beneficial interest and an indemnity. This provides a just result for the creditor, and it is doctrinally more coherent. One legislative solution has recently been proposed by the New Zealand Parliament.78 Section 80 of the Trusts Bill (2017) proposes to allow creditor claims against trust assets either where the trustee has a right of indemnity (section 80(1)(a)), or where the creditor has given value, the trust has received a benefit and the creditor has acted in good faith (section 80(1)(b)(i)-(iii)). Good faith is in turn defined as knowledge of matters that limit the trustee’s indemnity (section 80(3)). The claim is limited to the extent of value given (section 80(4)(a)). In essence this legislative provision exemplifies an approach based on the unjust enrichment of the trust estate, though relying on the indemnity right of the trustee as its basic mechanism of claim. An unjust enrichment claim of the trust estate is main method of creditor access in the US law and is better left for another paper, but in brief such methods suffer from the basic inconsistency that the ‘trust estate’ has no separate personality from that of the trustee and therefore cannot be enriched independently. While legislature can carve out an exception, as they have in the US, such exceptions cannot always be consistently applied because they clash with this basic structure of trust law.79 Furthermore, based on the above points about appreciating all the parties involved, it is not always the case that the trust estate is enriched where the trustee is in default. The concept of giving value is also not always clear cut,80 and could give rise to difficulties where the creditor has given value but that the recipient does not regard as valuable. If someone was to paint my house bright orange, their work has value but I prefer my house the way it is. This principle, in turn, leads to quantification of liability based on the subjective preferences of the recipient. In the trust context ‘giving value’ is especially difficult, as the trust estate is not a legal person and cannot have preferences. In that case, is it the trustee’s preference or the beneficiary’s that determines what value is given? Fortunately, there is a ready doctrinal solution to this problem. All we have to do is to give it the space it deserves in our textbooks, causing positive ramifications all over the law of trust creditors. Trust entity Another important issue is that of treating the trust as a legal entity. Where a creditor is an assignee of the trustee’s ‘lien’, there appears to be nothing to stop the creditor from claiming against the trust assets directly and following them from one set of hands to another, treating the trustee at the time as nothing more than an agent or manager of the property. As such the creditor’s right is no longer dependent on the trustee’s personal right of access, and the trust behaves like a limited liability company rather than an enterprise based on the trustee’s duty-engrafted rights as a holder of legal title. In essence this turns on the conflict of Jennings v Mather and In Re Richardson, the former solidifying the lien reasoning in English law (and followed in Australia) to allow the trustee’s general creditors access,81 while the latter denying such access in favour of the specific creditor. As Richardson is a subsequent Court of Appeal decision and Jennings is only first instance, it is naturally the case that any inconsistency between the two is to be resolved in favour of Richardson, but there are also good reasons in principle for doing so. The description of the trustee’s right as a lien grants a creditor the ability to follow the pool of assets independently of the trustee. This is because a lien is an assignable property right—it can be held just as well by a creditor as the trustee himself, and no reference need be made to the trustee’s personal liability or limited right to access the assets. The mechanism of creditor access changes from the trustee being personally liable and satisfying that liability from the trust assets in accordance with the trust’s terms, to the creditor contracting (i) through the trustee, (ii) with the trust estate, (iii) for a lien on the trust assets. Thinking of the trustee’s indemnity as a lien therefore severs the creditor’s dependence on the trustee’s right. An assignee of this lien has a claim directly against the pool of assets in the trust, just as we would expect in the case of limited liability companies. The logic of the trustee indemnity lien is that the trustee’s indemnity right is what ascertains the beneficiary’s entitlement by removing certain assets from the trust corpus. Before that happens, the trustee is entitled to withhold the trust property from the beneficiaries until his claim is satisfied. So the trustee’s indemnity ‘lien’ is clearly against the trust property, allowing the trustee to resist the beneficiary’s claim to it. But the view is more problematic than might at first seem. If the trustee has a lien over property that he holds legal title to, who or what right is that lien against? The answer might be that it is an equitable lien, against the beneficiary’s right to the assets. But the beneficiary does not have a direct right to the trust property,82 so it cannot be against the beneficiary’s property rights—in fact, it is the exercise of the trustee’s indemnity that ascertains whether the beneficiary has any right in any property. If the lien is against the beneficial title generally, how would a lien against an equity operate? The lien reasoning in Jennings and subsequent Australian cases was aimed at protecting the creditors of a trustee who was no longer in office, and therefore no longer holds legal title to the property. It is submitted that there is no need to classify the trustee’s right as a lien. This is ensured by the solution offered above to unconnected liabilities, by appreciating the principle in In Re Richardson that earmarks an indemnity to trust creditors, coupled with the principle in Dodds v Tuke83 that it is the exercise of the trustee’s indemnity which ascertains the pool of trust assets available. The unpaid trust-creditors of the old trustee have an earmarked priority claim to the assets by claiming subrogation to the old trustee’s indemnity right, so long as the liability was incurred while the old trustee still held his office. The creditor’s right of subrogation exists only against the trustee and his personal estate, but as the trustee’s personal right to be indemnified out of the trust assets survives a change of trustee because it is the exercise of that right that ascertains the extent of trust assets in the first place, the subrogation right also retains its potency as the central creditor remedy. Where this approach is taken, the trust is not analogous to a legal entity of its own, as the trust estate is not subject to rights independently of the trustee. The real problem solved by the lien-reasoning is in essence the same as that of unconnected liabilities, namely that the trustee’s right of indemnity can be destroyed by his misconduct or by a change of trustee. Once In Re Richardson is given its proper due, this ceases to be a problem and the dubious logic (both in terms of positive authority and central principles) of indemnity liens can be put to rest. Conclusion This, then, is a brief introduction to the law of trust creditors. The trustee incurs the liabilities pertaining to the trust activity personally, and is only indemnified from the trust.84 If the trust assets are exhausted by an indemnity, the personal assets of the trustee are liable for execution of the creditors’ claims.85 The creditor gets access only through subrogation to the trustee’s indemnity right, and if anything severs that indemnity the creditor is left only with a claim against the trustee’s personal assets, or nothing if the trustee is insolvent. This is so even where the event that severed the trustee’s indemnity had nothing to do with the creditor. Attempts to deal with the harsh effects of these doctrines has led the courts to develop compromises (such as allowing an indemnity where the trustee’s breach is made to benefit the trust without personal gain) and some strained interpretations (most notably of Evans v Evans as being a lien, clearly at odds with the reasoning and result in that case, so interpreted in Jennings v Mather and followed in Vacuum Oil and Octavo Investments in Australia) to protect creditor rights. These interpretations not only weaken the logical foundations of the results they establish, but threaten the basic integrity of trust law. If the trustee’s indemnity is an assignable property right, the creditor’s suit to be put in the position of the trustee really becomes a suit to gain possession of the indemnity lien, which can then be enforced against the trust estate directly. The trust is thereby analogous to a legal person, and the trustee reduced to a mere manager or agent. The main argument of this article is that the latter is increasingly at odds with the basic conceptual structure of trusts, namely that the trustee is the legal owner of the property and not just a manager, and that the trust does not have its own legal personality. In Re Richardson provides a solution that is doctrinally coherent and theoretically satisfactory. When the trustee’s indemnity is earmarked for the benefit of that creditor whose dealings created the right in the first place, unrelated breaches of trust become irrelevant and creditor access is clearly through the trustee’s personal rights, successfully piloting the waters between lack of creditor protection and conceptual incoherency. Aleksi Ollikainen-Read is Senior College Lecturer in Trusts, Keble College, University of Oxford. Email: aleksi@ollikainen.eu I must thank Professor Joshua Getzler, Professor Paul S Davies, Professor Ben McFarlane and Dyson Heydon AC QC for their comments on earlier iterations of this article Footnotes 1. Trust Law Committee Consultation Paper ‘Rights of Creditors against Trustees and Trust Funds’ 1997. 2. Trust Law Committee Report ‘Rights of Creditors against Trustees and Trust Funds’ 1998. 3. See <http://lawcommission.justice.gov.uk/areas/rights-of-creditors.htm> accessed 22 April 2014. 4. Law Commission (NZ), ‘Court Jurisdiction, Trading Trusts and Other Issues’ 2011, ch 7. <http://www.lawcom.govt.nz/sites/default/files/projectAvailableFormats/NZLC%20IP28.pdf> accessed 17 September 2017, with a bill introduced to the New Zealand Parliament on 1 August 2017 <http://www.legislation.govt.nz/bill/government/2017/0290/latest/DLM7382815.html> accessed 17 September 2017, pt 4(2). 5. The plural of cestui que trust corrected by the author; see C Sweet, ‘Cestui que Use: Cestui que Trust’ (1910) 26 LQR 196. 6. C Mitchell, D Hayton and P A Matthews (eds) Underhill and Hayton, Law of Trusts and Trustees (19th edn, Lexis Nexis 2016) 2. Approved by Cohen J in Re Marshall’s Will Trusts [1945] Ch 217 219; Romer J in Green v Russell [1959] 2 QB 226, 241. 7. This appears to be the modern net effect of Burgess v Wheate (1759) 1 WmBl 123, 1 Eden 177 See further, P Matthews, ‘Burgess v Wheate (1759)’ in C. Mitchell and P Mitchell (eds), Landmark Cases in Equity (Hart Publishing 2012), 115: Burgess v Wheate is about who can affect the conscience of the trustee (144). That is to say, there is a set of persons who ‘affect the trustee’s conscience’, or limit his powers as regards the property, but others, such as the crown or the next of kin as in Burgess v Wheate, he may exclude. 8. F Maitland, Equity: a Course of Lectures (2nd edn, CUP 1936) 17. 9. See, eg Muir v City of Glasgow Bank (1879) 4 AC 337; In Re Johnson (1880) 15 Ch D 548, 552. 10. In Re Robinson’s Settlement [1912] 1 Ch 717, particularly at 729; Warborough Investments Ltd v Berry and Others [2003] EWHC 3152 (Ch). 11. See eg Balsh v Hyham (1728) 2 P Wms 453; In Re Johnson (1880) 15 Ch D 548, upholding the basic right to indemnity. 12. Wise v Perpetual Trustee Company Ltd [1903] AC 139. 13. Where the trustee lacks this authority will be returned to below under ‘Ultra Vires’. 14. For elaboration of ‘properly’ incurred costs, see MS Donald, ‘The “Proper” Approach to a Trustee’s Right to Indemnity out of Trust Assets’ (2014) 8 J Eq 283. 15. In Re Johnson (1880) 15 Ch D 548. 16. ibid 552. 17. ibid. 18. Ex Parte Garland (1804) 10 Ves 111, 32 ER 786. 19. Ex Parte Edmonds (1862) 4 DeG F & J 488, 45 ER 1273. 20. ibid 498. 21. In Re Leslie (1883) 23 Ch D 552. 22. In Re Johnson (n 15), 552. 23. In Re Griffith [1904] 1 Ch 807. 24. Dodds v Tuke (1884) 25 Ch D 617. 25. ibid 619. 26. Relatively modern examples of this are the Australian cases of Vacuum Oil Company Proprietary Limited v Wiltshire (1945) 72 CLR 319, 335; and Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360, 362. 27. Evans v Evans (1887) 34 Ch D 597. 28. ibid 601. 29. ibid 603. 30. Jennings v Mather [1901] 1 QB 108. 31. ibid 113. 32. ibid 114. 33. In Re Richardson [1911] 2 KB 705. 34. ibid 711. 35. ibid 712. 36. ibid 713–14. 37. ibid 715. 38. ibid 716. 39. Evans v Rival Granite Quarries Ltd [1910] 2 KB 979. 40. In Re Johnson (1880) 15 Ch D 548, 552–53. 41. ibid 552. 42. In Re Dacre (1916) 1 Ch 344. 43. Jacubs v Rylance (1873-74) LR 17 Eq 341. 44. Doering v Doering (1889) 42 Ch D 203 (where the trustee had also become entitled to a beneficial interest). 45. In Re Towndrow [1911] 1 Ch 662. 46. ibid 666. 47. Jacubs v Rylance (n 43), 342. 48. In Re Johnson (n 40), 555–56. 49. Trust Law Committee Consultation Paper ‘Rights of Creditors against Trustees and Trust Funds’ 1997. 50. n 17 et seq. 51. Evans v Evans (1887) 34 Ch D 597, 601. 52. Balsh v Hyham (1728) 2 P Wms 453. 53. 7 Geo 1, sess. 2, known as The National Debt Act 1721, s 7. 54. His argument was merely that the trustee had acted against his ‘express instructions’, and this argument was not rejected. Not much is said about this in the case report, but this could therefore be a case where the trustee was the beneficiary’s agent as well as trustee. 55. The report is unclear as to whether this view, or the view of the trustee which appears to be that he is obliged to pay, is mistaken. 56. Balsh v Hyham (n 52), 810–11. 57. Ex Parte Chippendale, Re German Mining Company (1854) 43 ER 415. 58. Essentially a partnership with certain special features, see KG Reid, ‘Embalmed in Rettie: The City of Glasgow Bank and the Liability of Trustees’ in Burrows et al (eds) Judge and Jurist – Essays in Memory of Lord Rodger of Earlsferry (OUP, Oxford 2013), 489, 491. 59. Re German Mining Company (n 57), 428. 60. ibid 421. 61. Vyse v Foster (1872-73) 8 Ch App 309. 62. Flockton v Bunning [1864] F 89, the entire judgment being given in argument. 63. Equitable by operation of the will. 64. Vyse v Foster (1872-73) 8 Ch App 309. 65. Blundell v Blundell (1889) 40 Ch D 370. 66. ibid 376–77. 67. ibid 377. 68. Barnes v Addy (1873-74) 9 Ch 244, 251. 69. ibid 251. 70. Blundell v Blundell (n 65), 381. 71. Jacubs v Rylance (1873-74) LR 17 Eq 341 n 43 and accompanying text. 72. In Re Richardson [1911] 2 KB 705. 73. One of the key problems of this area as identified by the Trust Law Committee Consultation Paper ‘Rights of Creditors against Trustees and Trust Funds’ 1997. 74. On modularity more specifically, see H Smith, ‘Property as the Law of Things’ (2012) 125 Harv LR 1691. 75. In Re Johnson (1880) 15 Ch D 548, 555–56. 76. See HF Stone, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Colum LR 527, 529. 77. This is one reason why the basic US law claim of unjust enrichment of the trust estate is not a suitable solution—aside from the double standard of having to claim the trust estate can be enriched independently of the trustee despite having no independent legal personality, the trust estate is not actually enriched in these cases. What was a liability by the trustee towards the trust has simply been paid using the creditor’s money. 78. NZ Parliament, Trusts Bill 290-1 (2017), s 80. <http://www.legislation.govt.nz/bill/government/2017/0290/latest/DLM7382815.html> accessed 18 September 2017. 79. See Blair v Claflin, 37 NE 2d 501 (Mass 1941 and Taliaferro v Taliaferro, 7 P 3d 1241 (Kan 2000). 80. See, eg Benedetti v Sawiris [2013] UKSC 50; C Mitchell, P Mitchell and S Watterson, Goff & Jones The Law of Unjust Enrichment (9th edn, Sweet & Maxwell 2016) paras [4-04]–[4–08]; P Birks, Unjust Enrichment (2nd edn, Clarendon Press 2005) 52–63; Sempra Metals v IRC [2008] AC 561, para 119; Ministry of Defence v Ashman (1993) 25 HLR 513; A Lodder, Enrichment in the Law of Unjust Enrichment and Restitution (Hart Publishing 2012), 51–53, ch 6; J Edelman, ‘The Meaning of Loss and Enrichment’ in R Chambers, C Mitchell and J Penner (eds), Philosophical Foundations for the Law of Unjust Enrichment (OUP 2009) 211, 235–9. 81. Vacuum Oil Company Proprietary Limited v Wiltshire (1945) 72 CLR 319, 335; and Octavo Investments Proprietary Limited v Knight (1979) 144 CLR 360, 362. 82. Gartside v IRC [1968] AC 553 (Lord Denning, at 566–67 describes the interest that the beneficiary possesses as analogous to the interest of a participant in a beauty pageant in the prize money, and Salmon LJ, at 575, describes the beneficiary’s right as one to have the trustees ‘honestly and fairly consider whether any … income shall be allotted to him’. The House of Lords in the same case went even further, and stated in clear terms that the beneficiary has no interest in the trust assets, only a right to require the trustees to exercise their power per Lord Reid, 608); see also Sainsbury v IRC [1970] Ch 712. 83. Dodds v Tuke (1884) 25 Ch D 617. 84. In Re Johnson (1880) 15 Ch D 548. 85. As happened in Muir v City of Glasgow Bank (1879) 4 AC 337. © The Author(s) (2017). Published by Oxford University Press. All rights reserved.

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Trusts & TrusteesOxford University Press

Published: Mar 1, 2018

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