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Equity & Trusts– Winter 2006
Professor: Lionel D. Smith
Notes: Laurence Bich-Carrière
Of bad categorisations (again).
Table of Contents.
A. Introduction: History, Definitions, Classification and Distinctions
I. A bit of History
1. History of Law and Equity
2. Royal Justice and the Chancery
2. 1. Royal Justice
2.2. Another tricky term: Chancery
2. 3. The Early Chancery
2. 4. The Chancery as a Court
2. 5. And then came the 19th Century Reforms
3. The Trust: History
3. 1. The Use
3.2. The Statute of Uses (1536)
II. Definition and Classifications
1. Definitions.
1.1. Basic definitions of the parties involved
1.2. Capital and Income beneficiaries
1.3. Why would anyone want to create a trust?
2. Classification of Trusts
2.1. Many classifications
2.2. The SofF's three types of trusts
2.3. A little more on resulting trusts.
2.4. An alternative classification: Intentional trusts and TABOLs
III. Distinction between Trusts and Powers
1. Basic distinctions
1.1. Power or Trust?
1.2. Administrative or Dispositive Power? See also p. 20
3. On the spectrum [C. 135]
B. Creation of the Trust
I. Intentional Trusts.
0. The Requirements
1. Three certainties.
1.0. Introduction
1. 2. Certainty of Intention.
1.2.1. An Unilateral Act of Volition from the Settlor
1.2.2. What is required to find an intention to create a trust?
1.2. Certainty of Subject-Matter (Trust Property).
1.4. Certainty of objects (who benefits).
1.4.1. What is the certainty of object (COO)?
1.4.2. Where and when do problems arise?
1.4.3. Tests
1.4.3.1. The fixed trust.
1.4.3.2. The power
1.4.3.3. The discretionary trust.
2. Constitution of Express Trust
2.1. The intention requirement: Changing your mind
2. 2. Imperfect Gift.
2. 2.1. Equity will not perfect an imperfect gift and won't create a trust either
2.2.2. Exception
II. Trusteeship.
1. Trusteeship
1.1. Trusteeship is an Office
1. 2. Appointment of Trustees.
1. 3. Retirement and Removal
2. Trustees and their powers.
2.1. Administrative vs. dispositive
2.2. The duty of loyalty
2.2.1. The easy definition
2.2.2. The negative definition
2.2.3. The LiS definition
2.3. Review of exercise of power.
2.4. Trustees Must Act Jointly
3. Duties of Trustees
3.0. Three types of duties:
3.1. Duty of Care: the Background Duty
3.1.1. What is the duty?
3.1.2. Is there more than one standard?
3.3. Delegation.
3.4. The investment power.
3.4.1. What is the investment standard?
3.4.2. Today: the prudent investor standard
3.5. Impartiality.
3.5.1. The modern portfolio standard will have an impact here
3.5.2. The percentage trust
3.6. Accounts and information.
3.6.1. The Duty to Account [C. 983]
3.6.1. The Duty to Provide Information
3.7. The Protector
4. Modes of termination.
4.1. Modes of termination
4.2. Termination by Revocation
4.3. At the request of the beneficiaries: the rule in Saunders v. Vautier.
4.3.1. The rationale
4.3.2. The requirements for Saunders v. Vautier.
4.3.3. Ways to get around the rule in Sauders v. Vautier
4.3.4. Modern application.
5. Variation
5.1. Possible variations.
5.2. Example
5.3. Issues in Variation.
5.3.1. The Settlor's intention and Missing People
5.3.2. Drafting errors and changes in law!
5.3.2.1 Variation on behalf of competent adults
5.3.2.2 Variation not for the beneficiaries' benefit!
6. Formalities for Trust Creation
6.1. The Statute of Frauds: inter vivos gifts.
6.2. The Wills Acts (or Succession Law Reform Act).
C. Trusts arising by Operation of Law
I. Resulting Trusts
1. Introduction.
1.1. What are resulting trusts?
1.2. Theories of Resulting Trust
1.2.1. The Binary Theory
1.2.2. Robert Chamber's Unified Theory: of Non-Beneficial Intention
2. Trusts that fail.
2.1. The whole trust fails.
2.2. Partial failure
2.2.1. Surplus funds unnecessary for trust objects
2.2.1. Gap interest
2.2.2. Disclaimer by beneficiary of interest
2.3. Avoiding the RT
2.3.1. Of Gifts and Acceleration
2.3.2. The rule in Hancock v. Watson.
2.3.3. Of Unincorporated Associations.
3. Gratuitous enrichment
3.1. Purchase-money resulting trust [C. 560]......
3.2. Voluntary transfer resulting trust [C. 567]
3.3. Presumption of advancement [C. 574].
3.3.1. Traditional position
3.3.2. Recent development in Case Law
3.3.3. What the Legislation Added
4. Resulting trusts and unjust enrichment [see also C. 634].
4.1. Intro
4.2. The ambiguity of UE
4.2.1. UE by transfer/subtraction (or autonomous UE aka the “real UE”).
4.2.2. “UE” by wrongdoing
4.2.3. Four things in common
4.2.4. Four things not in common
II. Constructive Trusts......
1. Why do people want CTs?
2. The test for CT
2.1. UE by transfer – where giving back is often sharing what's left.
2.2. Disgorgement of wrongful gains: the Soulos test.
3. Institutional vs. remedial
3.1. Introduction
3.2. The “remedial CT”
3.3. Are CTs discretionary?
3.3.1. The relevance of the question: ending the discretionary remedialism debate
3.3.2 But are they discretionary?
4. The variety of CT – LiS's view
4.1. The flaw
4.2. And where does discretion go in all of this?
5. Wrongdoing and Breach of Fiduciary Duties
5.1. CTs arising from wrongdoing
5.2. Who owes fiduciary duties?
5.3. How to decide who owes them?
5.3.1. The Frame v. Smith Test
5.3.2. LiS's theory, the autonomy transplant theory
5.4. Remedies for breach of fiduciary obligations.
6. Perfecting Intentions
6.1. Introduction
6.2. The security problem: Equity treats as done what ought to be done.
7. Informal trust: Perfecting Intentions
7.1. The problem with informal trusts
7.2. Informal inter vivos trusts of land.
7.2.1. Going around the requirements
7.2.2. So what kind of trust is it if it's not RT?
7.2.3. More on Informal Trusts as Intentional Trusts (LiS's Theory)
7.2.3.1. The Theory
7.2.3.2. LiS's Theory and the SofF.
7.3. Informal testamentary trusts: secret trusts.
7.3.1. What are they?
7.3.2. Requirement for secret trusts.
7.3.3. Justify STs.
D. Breach of Trust
I. Introduction
1. What makes a breach?
2. Remedies via Accounting: personal remedies
2.1. The trustee must always be ready to provide an account (see p. 28)
2.2. Unlawful acts: Adoption or Rejection?
3. Tracing
3.1. Tracing, Following and Claiming.
3.2. The exercise of tracing
3.3. Foundational Principles.
3.4. Mixing.
3.4.1. Basic example
3.4.2. Mixing and Change in Value
3.4.3. Mixing and Withdrawals.
3.4.5.The Lowest Intermediate Balance Rule [C. 1118].
4. Remedies against third parties: the Stranger as a Constructive Trustee
4.1. Proprietary remedies
4.2. Personal remedies.
4.2.1. Knowing assistance in breach of trust
4.2.2.Knowing receipt of trust property (actual transfer of property).
4.2.3. "Trustee de son tort" (or de facto, or by his own wrong).
APPENDIX with extra readings circa p. 62.
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LBC 19011612.58-
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A. Introduction: History, Definitions, Classification and Distinctions
I.A bit of History
History [C. 1-12]
The trust is peculiar to the common law. Roman law has modern equivalent, but English Equity courts[1] really created something special. Even if some sort of fusion occurred, in case of conflict, equity prevails, therefore, the trust still exists today.
Trusts come from the old uses. Conveyance of land to a friend for the benefice of yourself (or your son) was a way to (1) avoid the feudal burdens of wardship and marriage; (2) evade escheat for treason; (3) evade the statutes of Mortmain (can't give to a corporation in perpetuity); (4) defeat creditors; (5) acquire something akin to testamentary power. Of course, there was always the risk that the feoffee to uses would not let the beneficiary benefit. At first, Chancery didn't care. Then, around 1400, it started enforcing the beneficiary's rights. Uses being less risky, more and more people started to use them. Also, equity didn't care about the common law remainder rules, so that made uses even more attractive. Perhaps a little too attractive; in 1535 came the Statute of Uses which did not abolish the uses, but made the equitable and legal title merge. However, people found ways around it: the SofU didn't apply to (1) personal property; (2) where the feoffee has an active duty[2]; (3) corporations; (4) the use of one's self; (5) where there is a use upon a use (at first, the second use was deemed void, but equity changed its mind). In 1540, the Statute of Wills made testamentary dispositions of land (as you wished) possible. Trusts of personalty only came in later. [discussion of fusion]
1. History of Law and Equity
The first courts were local, custom-based and found all around England (and Europe, as a matter of fact, for the continent and the Island shared the joys of feudalism) because it was the lord's duty to administer justice to its tenants. However, custom was not always useful for solving disputes, and the common law courts began to sit regularly under Henry II (reigned 1154-1189), as an extraordinary alternative to the local courts.In this time, the local courts were more important than the royal courts (you wouldn't make a long and dangerous trip to London if your lord or your priest could do it). Before that, the royal court was ad hoc (the dual meaning of a King's Court and a Court of Justice comes from the fact that justice was rendered in the king's whereabouts).
They were the royal courts: created and staffed by the King. They applied the law that was common to all of England: the “common law” (as they understood [and were shaping] it), and not local customs, as were the local courts. Over time they took over the main business of adjudication.
2. Royal Justice and the Chancery
2. 1. Royal Justice
As the supralord, the King remained ultimately responsible for the doing of justice in his kingdom. He was subject to petitions for justice, with all sorts of complains and requests. Very often the answer was: start a lawsuit, baby (in many cases the response would be that the petitioner should use the royal courts)[3].
By the 14th century, we see specialization in handling of petitions. If complaint was general, might lead to legislation by the King's Council (ancestor of Parliament).
2.2. Another tricky term: Chancery
Today, it's the court that created equity, but in the origin, it was a royal secretariat (what we could today call the public services; this is where the documents were created and authenticated). The Chancellor was very important: he kept the royal seal (and applied it) and at, first, is sole function was to issue the “writs”[4] by which common law litigation was commenced. However, also in the 14th century, petitions to the King started complaining of injustices in the course of the common law. These were referred to the Chancery: (a complaint about what's happening in a particular piece of litigation: we are not getting fair treatment, because the judges are not hearing the case impartially because the opponent is wealthy or the evidence rules are too strict [local courts should keep the trivial stuff], especially regarding deeds[5]). Before long, they were addressed directly to the Chancellor, a senior civil servant(usually an ecclesiastic by training[6]).
2. 3.The Early Chancery
Early Chancery proceedings were very informal and they were inquisitorial (he just summoned people and asked them questions under oath[7]). The Chancellor was not administering a system of law (all he did was hear problems with the system and correct them: people are behaving lawfully but against the conscience). He had a lot of powers, by virtue of his position: he could make orders, based on conscience, sanctioned by imprisonment. Such decisions were not about being legally bound to do something, rather about being unconscionable (in an ecclesiastic sense), a defendant/plaintiff's putting is own soul in mortal peril[8].
2. 4. The Chancery as a Court
Between 1400 and 1600, they became more like a court, the proceedings and the Chancellor's way of treating problems are regularised. It is still conceived as repairing deficiencies of the common law (enforcement of trusts[9]; production of documents[10]).But increasing tension; conflict in 15th century (constitutional crisis!) and especially 1616. There was a very serious dispute: Chief Justice Cook began to take issue with Chancery proceedings, especially were the common law proceedings were finished (intervention was somewhat ok, but overruling was seen as an undue interference). Cook CJ. took a proceeding against the Chancellor, the King got involved and equity won, so to speak: rule is, in the case of direct conflict, the Chancery rule prevails[11].
This announcement was followed by an increase in the Chancery development (mostly in property law), and eventually, 1600-1800, the “Equity” of Chancery became a system of law: We also start to get law reportings –there is no formal rule of stare decisis but already some normative force.From equity (fairness and unanticipated injustice) in the broad same we went to Equity, just a body of law, that is administered in another Court. Meanwhile, the local courts became of less and less important; they gradually petered out. On the face, it's absurd to have two sets of law, especially when from then on, the rules of Equity, to avoid being called arbitrary and tyrannical, became as rigid as the common law courts (which defeated their purpose they first served: flexibility and avoidance of rules so strict they sometimes went against natural justice). But the historical justifications for this absurdity are excellent.
2. 5. And then came the 19th Century Reforms
Also, at the beginning, the Chancery was about the Chancellor (only one), helping the administration of a fair justice. But the Chancellor is not only a judge, he's a part-time senior civil servant as well; there's also the Master of the Roles[12], who is understood to be a delegate of the Chancellor, that is they could not sit at the same time and that anything the Master of the Roles would decide, the Chancellor could still review!, so cases were backing up for years). Against that, you have twelve common law judges! This somewhat was remedied in the 19th century: a Vice-Chancellor was added in 1813, and two more in 1842 (more dispatch).
Charles Dickens' Bleak House shows that mid-18th century chancery litigation was expensive and slow, a disaster. The system that was created to fix the defects of the common law was becoming a quagmire. Paradox! Parliament took interest and then began a procedural fusion in 1850s: the common law courts could issue some procedural things for the Chancery and the Chancery could award damages and common law courts injunctions!
Eventually, this led to the Judicature Acts[13] (1873 and 1875), even if equity screamed and kicked a lot (thought it would lose a lot) and the creation of one single High Court [there had been no such thing before] to administer both systems.
There is successor legislation in all common law provinces of Canada (and basically the world). For example, the Supreme Court Act, RSPEI[14] 1988, c. S-10, which states: «29. (1) The court shall administer concurrently all rules of equity and the common law.(2) Where a rule of equity conflicts with a rule of common law, the rule of equity prevails. 1987,c.66,s.29.»
3. The Trust: History
3. 1. The Use
Best guess is that is comes from the Latin phrase "ad opus" (for a project, undertaking). In the old days, a transfer of the legal estate was called a feoffment. A use was a transfer of land to the "feofee to uses", subject to uses. It allowed the transfer to do things otherwise impossible:
- Making a will of land: at common law, you had no say in what was to happen to your land after your death (primogeniture, like the Crown of England today). Say A has two children and wants to leave his land equally to both of them. So A conveys the land (feoffment) to D (feoffee to uses) under the obligation, for instance, that A uses it for the rest of his live, and then, D would have to convey it B and C.
- Giving benefit of land to those unable to hold it. This is especially the story of the Franciscan monks, who had make vow of absolute poverty and couldn't hold any land. Same applies for corporations.
- Avoid burdens arising on legal transfers. Feudal fees, especially wardship: the lord could take advantage of the land where the son was underage (under 21). Stricto sensu, the conveyance of land is a gift. No descent, so no burden.
Typically, the use was a bare use, that is the feoffee to uses's job was to do whatever he was told. So the feoffee to uses was holding it for the benefit of the conveyor (or a third party in the case of the Franciscans). The transferor/beneficiary was called cestui[15] que use.
The very early enforcement of uses is a mystery (it took place in the 14th century, but by whom? ecclesiastical courts? in the case where the feoffee to uses doesn't do what he said he'd do? deed is there sometimes, but not always + ceremonylivery of seisin, i.e. delivery of feudal possession). In any case, Chancellor begins to enforce this in the 15th century. Moreover, the interest of cestui que use begins to be treated as an interest in land (not just a personal claim). Not only does D have to do what D promised (not just a contract), it's also a bit like A still owes the land.
Let's take one kind of faithless conduct by D. D conveys the land to E. The transferee with notice of use is bound (more than D's obligations as a promise: there are third-party effects, affects more than the promisors). Now, if D dies, the land descends to his son F: F is not a collusive buyer like E, he was just given the land. But the Chancery said:a donative transferee is bound with or without notice[16]. Finally, say G is owed money by D: as a creditor, he has access to the debtor's assets to get paid. G's a good faith-person and he's not being donated anything. But equity has its darlings and said: creditors of feoffee to uses are denied access. This all shows a creation and enlargement of the use. Only the true darling, H, the bona fide purchaserof the estate in land held by D, for value[17]at the time[18] and without notice of the use/trust. This rule survives today. Note: none of E-F-Gwere bound to carry out the use; there are "bound" in the sense that they are denied the benefit of the property, because their consciences were affected. Hard luck that D was faithless, only H has a clear conscience. It doesn't affect all third parties the way all property interests do, but still pretty much all parties. In this way, obligations (relating to specific property) were used to create what amounted to property rights (in that property). This is why people are trying to create when they say trusts create divided ownership: it has characteristic of ownership, A's interest must be respect. Equitable ownership is a shorthand to describe this whole story. A retains a recourse against D for "breach of trust" (well today): the trust property becomes the purchase price (the value is now my trust property), unless D has a gambling problem, then it's only an obligation problem.