Scott v Scott

Probate of the will of the testatrix was duly granted to the executors and trustees therein named but by deed dated 16th December 1959 and made between the two executors and the plaintiff William John Maplesden Scott, Alexander Lewis Scott retired from the office of trustee and the said plaintiff was appointed in his place.

Some unspecified time before 13th March 1959 William Henry Scott remarried and on the date mentioned he made a will whereby he gave devised and bequeathed all his real and personal estate to his wife Susan Eleanor Isabel Scott for her own use absolutely and appointed her sole executrix. William Henry Scott died on 21st September 1960 and probate of his will was duly granted to Susan Eleanor Isabel Scott who was the defendant in the suit and is the appellant in this appeal.

The most substantial asset in the estate of Rosamond Maplesden Scott was the family home - a six-roomed weatherboard house situated on land at Preston which was valued for probate purposes at £1,400. William Henry Scott was an officer in the military forces and his duties obliged him during the war to spend a great deal of time away from home and out of Melbourne and, according to the learned judge of first instance, "the idea was conceived that it would be for the benefit of the family including the infant members thereof to dispose of the home at Preston and in its place acquire one in the East Malvern district where they could reside in close proximity to the eldest daughter". "This plan", his Honour says, "appears to have been approved not only by the children but also by A. L. Scott". It should be mentioned, however, that at this time four of the children were minors but nevertheless the property was sold pursuant to a contract dated 25th June 1942 for the sum of £1,225. On the same day W. H. Scott paid a deposit in relation to the purchase of the property known as 22 Coolgardie Avenue East Malvern for £1,700. The amount of the deposit was £20 and a receipt for this deposit acknowledged payment of that sum by the "Trust Estate of Rosamond Maplesden Scott (Executors W.H. Scott and A.L. Scott)". Subscribed at the foot of this receipt was a memorandum in the following terms: "I agree to the above Sale and agree to sign Contract of Sale Table "A" Transfer of Land Act when called upon to do so". This memorandum was signed "W. H. Scott - Executor for R. M. Scott". On the following day W. H. Scott wrote to his solicitors informing them that he had purchased the property in question and giving the name of the agent who had negotiated the sale together with brief particulars of the terms of the sale. His letter was acknowledged and at a later stage, on 2nd July 1942, his solicitors wrote to him informing him that they had received the contract of sale and had observed that he and his brother were purchasing as trustees of the deceased estate. "This" they said, "would constitute a breach of the Trustee Act as trustees are not permitted to purchase real estate as a trust investment". They noted that four of the children were still under twenty-one but added that "If other money could be found as a deposit it might be arranged by your taking a transfer in your name and your brother lending the balance on mortgage out of the trust moneys on a trustee margin". In reply to this letter W. H. Scott, who seems not to have been altogether happy with this advice, wrote to his solicitors asking whether it was possible to make an application to the Court for authority to invest the money. He added, that it was well known to his family, and, he believed, to his brother, that it was his wife's desire to sell the Preston property as soon as possible, and to invest the money in property in East Malvern, so as to be near their married daughter. However, no such application was made and the contract was amended so as to show W. H. Scott as the purchaser. Originally the contract that had been presented for approval showed as the purchaser:

Trust Estate of Rosamond Maplesden Scott (decd) Trustees William Henry Scott Civil Engineer and Alexander Lewis Scott, Retired Life Assurance Society Officer. 82 Cramer St, Preston W. 13 Gisborne Street, Elsternwick.

The amendment made to the contract was effected simply by striking out the reference to the trust estate and to Alexander Lewis Scott and leaving only the name description and particulars of William Henry Scott. As already appears the purchase price for this property was £1,700 and it was provided, as to £1,014, out of the proceeds of the sale of the Preston property, as to £500 by a loan from A. L. Scott and, as to the balance £186, by William Henry Scott himself. W. H. Scott became the registered proprietor on 9th September 1942 and on 19th October following he executed a memorandum of mortgage to Alexander Lewis Scott for the sum of £1,514. On the same day A. L. Scott executed a declaration of trust which recited the giving of the mortgage and declared that "of the sum of £1,514" he stood possessed "of the sum of £1,014" thereof upon trust for the estate of Rosamond Maplesden Scott deceased. Earlier, on 14th October 1942, W. H. Scott had also executed a declaration of trust which recited the purchase of the property at East Malvern and acknowledged that it had been purchased with money which was not his "proper money" and declared that he stood possessed of the said land as follows: "Firstly As to the sum of one thousand and fourteen pounds for and on behalf of the estate of the said Rosamond Maplesden Scott deceased. Secondly As to the sum of five hundred pounds for and on behalf of the said Alexander Lewis Scott and Thirdly As to the balance for himself the said William Henry Scott".

Prior to his death W. H. Scott, in October 1959, borrowed the sum of £2,000 on a mortgage of the subject property and with the bulk of this sum paid off the mortgage given by him to A. L. Scott in 1942. It is common ground that £1,014 of the moneys then paid to A. L. Scott thereupon became subject to the trusts of the will of Rosamond Maplesden Scott but no interest was at any time paid on this sum, W. H. Scott claiming that as he was the life tenant he should not be required to make payments of interest.

The primary claim made by the statement of claim was for a declaration that the defendant holds the subject property, subject to the existing mortgage for £2,000, on trust for the estate of the deceased testatrix. In the result, the learned trial judge declared that the respondent W. J. M. Scott, as trustee of the estate of the testatrix, was entitled, subject to the said mortgage, to a charge on the property to secure payment of the sum of £2,236. This amount was arrived at by ascertaining the increase in value of the property between the date of its purchase and its value at the date of the institution of the suit, namely £3,750, and then by apportioning the "profit" so ascertained between the estate of the testatrix and the appellant. The share of the profit to which his Honour held the estate entitled bore the same proportion to the total amount of profit as the amount of trust moneys which had been employed in the purchase of the property bore to the amount of the purchase price, that is, as £1,014 is to £1,700. It is against this declaration and consequent orders that the appeal is brought and there is no cross-appeal so that we have no occasion to consider whether upon the facts which we have recited the respondents were entitled to any more extensive relief than that which the order afforded.

There was no question in the Supreme Court that the application by W. H. Scott of trust funds to the extent of £1,014 in the purchase of the property in question was a breach of trust. But it was the contention of the appellant that at no time was the estate of the testatrix entitled to anything more than an equitable lien on the property for the precise amount which had been misapplied. It was not, it was said, a case where the trustee had improperly embarked trust moneys in a business venture or speculation of his own and had, therefore, become accountable for profits, or for interest, and, even if it were, W. H. Scott would not be so accountable for he was also the life tenant. But the profit which the trustee is said to have made in this case out of the unauthorized use of trust funds is represented by a capital accretion which, if there be a liability to account for it, was not a liability to account for the benefit of the life tenant.

The questions which arise in the case are not such as are likely to arise frequently in a time of stable land values and, probably, they have arisen in the present case merely because of the degree of inflation to which this and other countries were subjected to during and after the war. But whatever the cause was the fact remains that by improperly using trust funds together with moneys of his own W. H. Scott purchased a dwelling in 1942 for £1,700 and at the date of the commencement of the suit it was worth £5,450. The trust funds were improperly applied in the purchase, it was the duty of the trustee to remedy the breach of trust and, unless the repayment of the sum of £1,014 in 1959 constituted a remedying of the breach, he had failed to do so before his death. But if all that the remainderman were entitled to was repayment to the estate of the amount misapplied then the effect of the remedy that would have been available against W. H. Scott in his lifetime would have been merely to confirm the misapplication of that sum and to condone the breach of trust. This would mean, in effect, that the trustee was, in 1942, at liberty to use trust moneys in conjunction with moneys of his own in purchasing the property subject only to a liability to account for the trust moneys so used and to keep for himself the whole of the profit made upon any resale of the property. The proposition has only to be stated not only to realize its injustice but also to show that it is completely inconsistent with the proposition that has been consistently stated on so many occasions over the last two centuries and which was reformulated comparatively recently in Regal (Hastings) Ltd. v. Gulliver [1] . In that case Lord Porter said that: "The legal proposition may be broadly stated by saying that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or, if he does he must account for the profit so made" [2] . In the same case Lord Macmillan spoke of the equitable doctrine invoked in that case as being "one of the most deeply rooted in our law" [3] . The relevant principle is stated in Underhill's Law of Trusts and Trustees 11th ed. (1959) p. 390 and its application is abundantly illustrated by the many and diverse cases which are cited in the following pages. It is sufficient to observe, in relation to the present case, that "a trustee must not use or deal with trust property for his own advantage" and that if he does so and a profit results a constructive trust thereof will arise. As was said as long ago as 1778 by Lord Kames Equity prohibits a trustee from making any profit by his management, directly or indirectly. (Principles of Equity 3rd ed. (1778) vol. 2, p. 87).

1. [1942] 1 All E.R. 378. 2. [1942] 1 All E.R., at p. 395. 3. [1942] 1 All E.R., at p. 391.

In the present case the proposition was advanced by the appellant that prior to the repayment to the estate of the sum of £1,014 the full measure of the relief to which the estate of the testatrix was entitled was a payment in discharge of a lien for that sum which, it was conceded, had arisen in favour of the estate. But the rights of the estate, it was said, extended no further. This proposition it was sought to support by cases such as Phayre v. Peree [1] ; Price v. Blakemore [2] and Hopper v. Conyers [3] . But in those cases the form of relief sought was such that the present problem did not and could not arise. Nor did it arise in In re Hallett's Estate; Knatchbull v. Hallett [4] where the observations [5] now relied upon were made in a case concerned with the tracing of moneys to and the identification thereof in the hands of a banker. We observe in passing that the word "identification", when used in relation to the tracing of moneys, is scarcely appropriate as, for instance, a comparison of the decisions in In re Hallett's Estate [4] and in In re Oatway; Hertslet v. Oatway [6] will show. In speaking of Phayre's Case [1] Sir John Stuart in Mathias v. Mathias [7] said: "Lord Eldon and Lord Redesdale, in the case of Phayre v. Peree [1] , in the House of Lords, laid it down as clear law that the trustees can never deal with the trust fund for their own benefit. Lord Redesdale said that the father, who was only tenant for life, could not take the purchase for his own benefit solely, and that his purchase of leasehold property, although unauthorized by the trust, being a beneficial purchase, the benefit must belong to the trust fund". Hopper v. Conyers [3] and In re Pumfrey [8] may, perhaps, be thought to throw some light on the present problem but since it appears that it was intended, or presumed to have been intended, that the purchase in each case, made as it was with a mixed fund, was intended to be for the benefit of the estate we do not further refer to them. Nor, in the absence of a cross-appeal, do we find it necessary to consider whether it can properly be said in the present case that, notwithstanding the form which upon the legal advice tendered to the trustee, the transaction ultimately took, the purchase was really intended for the benefit of the estate. We merely observe that if it were clear that this was so the rights of the remaindermen could not have been affected by the declaration of trust executed after the purchase was made.

1. (1815) 3 Dow. P.C. 116 [ 3 E.R. 1008]. 2. (1843) 6 Beav. 507 [49 E.R. 922]. 3. (1866) L.R. 2 Eq. 549. 4. (1880) 13 Ch. D. 696. 5. (1880) 13 Ch.D., at p. 709. 6. (1880) 13 Ch. D. 696. 7. [1903] 2 Ch. 356. 8. (1815) 3 Dow. P.C. 116 [ 3 E.R. 1008]. 9. (1858) 3 Sm. & Giff. 552, at pp. 563, 564. [ 65 E.R. 777, at p. 781]. 10. (1815) 3 Dow. P.C. 116 [ 3 E.R. 1008]. 11. (1866) L.R. 2 Eq. 549. 12. (1882) 22 Ch. D. 255.

What must be borne in mind in the case is that the order appealed from rests upon a twofold basis and it is on this basis that the respondents' argument primarily attempts to support it. It rests upon the liability of W. H. Scott to make good a breach of trust and also upon his liability to account for a profit which accrued to him, or to his estate, as the result of his misuse of trust funds. These are two different and distinct notions. A trustee's liability to account for profits accruing to him may arise without any positive breach of trust; on the other hand, a trustee may become liable to make good a misapplication of trust moneys with interest even though he has made no profit by the misapplication. But where the expenditure of moneys constitutes a breach of trust the remedies may overlap for the beneficiaries may have both a proprietary and personal remedy and, of course, if they choose to pursue the former this will be the full measure of the relief available to them.

There is, of course, abundant authority for the proposition that if trust moneys have been exclusively used in the purchase of property the beneficiary may elect to take the property itself. There is also authority for the proposition that if trust funds from two different estates are exclusively used by a common trustee in the purchase of land in his name which has increased in value each estate will be held entitled to a proportionate part of the increase: The Lord Provost etc. of Edinburgh v. Lord Advocate [1] . In such a case it would be unthinkable that each estate should be entitled merely to a charge for the amount misapplied with, perhaps, some allowance for interest, and the trustee left with a residual profit. Why, then, should a trustee who has mixed moneys of his own with trust moneys for the purpose of purchasing lands which have greatly increased in value be held entitled, upon repayment of the trust moneys misapplied, to retain the whole of any profit which has resulted, at least in part, from the misuse of the trust moneys?

Considerations such as these carried considerable weight with the learned trial judge and in a careful and learned judgment he discussed the classic cases of Docker v. Somes [1] and Vyse v. Foster [2] not only for the purpose of emphasizing that a trustee may not make a profit out of the trust, but also to show that his duty to account is not necessarily confined to cases where trust funds have been wrongly embarked in the trustee's business but extends to "all profits received by a trustee who deals with the trust fund for his own advantage". It is, we think, important to observe that the liability of a trustee to account in such cases is not confined to a limited group of categories but extends to all cases where such a profit has, in fact, been made. We agree with his Honour's analysis of the cases to which he referred and we agree with his conclusion. The argument to the contrary is, we think, based upon an erroneous conception of the true principle. No doubt it is true to say that in this case the estate was entitled to assert a lien upon the property purchased with the mixed fund to secure the amount misapplied. But it is erroneous to say that in the circumstances of this case this was the full measure of the relief to which the estate was entitled. It was, of course, conceded that where property is, in breach of trust, bought exclusively with trust moneys the beneficiaries may, instead of pursuing their personal right against the trustee, elect to take the property. Again it was conceded that where property is purchased, in breach of trust, with a "mixed fund" the beneficiaries may, if the property is "specifically severable", elect to take such part thereof as bears the same proportion to the whole as the misapplied trust moneys bore to the purchase price. Property may be thought to be "specifically severable" where it consists of bonds or a parcel of shares: Brady v. Stapleton [3] . This may also be the position if the property purchased consists of a flock of sheep or a herd of cattle or so many bales of wool and so on though difficulties might arise where the severance could not be made at a point precisely commensurate with the amount of trust moneys misapplied. This, however, is by the way. In its final analysis the appellant's argument on this branch of the case seems to rest upon the assertion that it cannot be said that there was any liability to account for any part of the profit which accrued to the trustee or, ultimately, to his estate, unless it can be established that the estate of the testatrix became entitled to a beneficial interest in the property which W. H. Scott purchased. This, it was said, could not upon the authorities be established. Upon this latter proposition we will make some observations presently. But for the moment we are content to assume that this could not be established for the basic contention finds no support in the innumerable and varied cases in which trustees have been held liable to account for profits arising from the misapplication of trust moneys. Nevertheless it is asserted that in cases such as the present where the breach of trust is said to have been constituted by the application of trust moneys together with other moneys in the purchase of property which is not "specifically severable", there is no liability to account for profit made on a resale. This is so, it is said, because equity provides the beneficiaries only with a lien to secure the amount of trust moneys applied in breach of trust and denies them the right to claim a proportionate interest in the property. But even if these propositions should be fully accepted what have they to say concerning the liability of a trustee to account for profits made by the improper application of trust funds for the trustee's own advantage? We may, for instance, take the case of a trustee who, in breach of trust, purchases shares for £2,000 by the use of £1,000 of trust moneys together with £1,000 of his own. There is no doubt that the beneficiaries might elect, either, to take one-half of the shares or, alternatively, to claim a lien on the shares for £1,000. But they may not know of the purchase and do neither. Then suppose that prior to any election by the beneficiaries the trustee sells the shares for £3,000 and retains the proceeds in his hands. Is it to be thought that the right of the beneficiaries at this stage will be limited to a claim on those moneys for the specific sum of £1,000? The case, of course, would be one where the beneficiaries had never become entitled to any proprietary interest in the shares and where the proceeds of sale were not attributable in any measure to the sale of property to which they had become beneficially entitled. But there can be no doubt that they would be entitled not only to have the sum originally misapplied made good but also to obtain one-half of the resultant profit. We think the same conclusion must inevitably follow even if the property purchased with the mixed fund is property which is not "specifically severable" and that the argument to the contrary must be rejected.

1. (1834) 2 My. & K. 655 [39 E.R. 1095]. 2. (1874) 7 H.L. 318. 3. (1952) 88 C.L.R. 322.

We have spoken of the profit which accrued to the trustee but it is said that if there was a profit in his lifetime it was an unrealized profit and that no obligation could arise until he had sold the property at an enhanced price and so realized a profit. But we think that this argument is without substance. Clearly enough the estate was entitled as against W. H. Scott to seek an order for sale to enforce its lien and upon any such sale the profit would have been realized. It is true, no doubt, that if the property had not increased in value the trustee, in his lifetime, might have chosen to avoid a sale by repayment of the amount for which the lien subsisted. But no such choice can be said to have been open to him in this case for he could not be allowed to escape his liability to account merely by repayment of the amount of trust moneys misapplied. Accordingly, we take the view that repayment of the sum of £1,014 in 1959 did not operate to defeat the beneficiaries' right to a sale; this, we think, could have been defeated only by an accounting for profits as on a notional sale. For this purpose the learned judge of first instance took the value of the property as at the commencement of the suit. As it was then worth somewhat less than it was at the date of W. H. Scott's death and there is no cross-appeal it is unnecessary for us to express any opinion concerning the time at which the value of the property should be ascertained.

Upon this branch of the case it is only necessary to add that upon the pleadings the same relief was available against the appellant as was available against the trustee in his lifetime: Moons v. De Bernales [1] ; Knatchbull v. Fearnhead [2] ; and In re Franklyn [3] .

1. (1826) 1 Russ. 301 [38 E.R. 117]. 2. (1837) 3 My. & Cr. 122 [ 40 E.R. 871]. 3. (1913) 30 T.L.R. 187.

The matter which we reserved for subsequent comment was concerned with the second ground upon which the respondent sought to support the order. It was, in effect, that, notwithstanding the fact that the property which W. H. Scott purchased could not be said to be "specifically severable" property, the estate, nevertheless, became entitled to claim a proportionate interest in it. We think, in principle, that there is much to be said for this proposition. Some support may, perhaps, be found for it in Lord Provost, etc. of Edinburgh v. Lord Advocate [4] and we observe that equity has had no difficulty in holding parties beneficially entitled to proportionate shares in property where they have jointly provided the purchase money and title is taken in the name of one only: The Venture [5] ; Diwell v. Farnes [6] ; Bull v. Bull [7] ; and Gravesend Corporation v. Kent County Council [8] . It was said in argument that the principle applied in these cases rests upon the intention, or the presumed intention, of the parties. But if this be a fundamental distinction it introduces a curious anomaly into the law as will appear from the following illustration. If A. contributes one-half of the purchase price for the purpose of purchasing Blackacre and B., providing the other one-half, takes Blackacre in his own name they will each be beneficially entitled to a one-half interest. But if B. in breach of trust, purchases, not Blackacre, but Whiteacre, A. will be denied any right to a like proportionate interest in that property. This, of course, would follow from the appellant's argument and we confess to some difficulty in seeing why this should be so. It is, however, unnecessary for us to pronounce upon the respondents' alternative argument but we cannot fail to observe that the Courts of the United States have carried the matter to its logical conclusion. In effect, they have held that where trust moneys are mixed with moneys of the trustee and the mixed fund is used in acquiring other property which is not "specifically severable", the beneficiaries are, nevertheless, entitled to claim a proportionate interest in the property. The matter is dealt with at length in Scott on Trusts 2nd ed. p. 3289 et seq. and a number of cases are cited in support of the proposition. We think it necessary to refer, however, only to passages in the Restatement of the Law, Trusts, vol. 1, (1935) pp. 540, 541 and the Corpus Juris Secundum vol. 90, pp. 844-849 and an interesting judgment of Learned Hand J. in Primeau v. Granfield [1] in which he rejects the contention that the proposition in question is in conflict with observations made in In re Hallett's Estate [2] . However, as we have already said, it is unnecessary to express any concluded view on the point and it may well be left for further consideration.

1. (1879) 4 App. Cas. 823. 2. [1908] P. 218, at p. 229. 3. [1959] 2 All E.R. 379. 4. [1955] 1 Q.B. 234. 5. [1935] 1 K.B. 339. 6. (1911) 184 Fed. R. 480. 7. (1880) 13 Ch. D. 696.

The only other matter to which the appeal requires us to direct our attention is whether this is a proper case for relief under s. 67 of the Trustee Act. We think it is sufficient simply to say that we agree with Hudson J. that that section has no application in the circumstances of this case.

For these reasons the appeal, we think, should be dismissed.