Foskett v McKeown [2001] 1 AC 102 (HL)

Facts

• The claimants had provided Mr. Murphy, a trustee, with funds for investment in Portuguese land.
• Mr. Murphy misappropriated £20,000 of the trust funds to pay two-fifths of the premiums on a life insurance policy held on trust for his wife and children.
• Mr. Murphy later committed suicide, leading the insurance company to pay out £1 million to his family.
• The claimants sought to assert a proprietary claim to a proportionate share of the insurance payout, contending that their misapplied funds were traceable into the policy proceeds.
• The defendants (Mr. Murphy’s family) argued that the claimants were limited to an equitable lien over £20,000 rather than a share of the proceeds.
• The main legal question was whether the claimants could trace their funds into the insurance policy and, if so, whether they were entitled to a proportionate share of the proceeds or only a lien for the misappropriated amount.

Issues

1. Whether the claimants could trace their misapplied trust funds into the insurance policy proceeds.
2. Whether the claimants were entitled to a proprietary share of the proceeds or merely an equitable lien.
3. Whether tracing establishes a proprietary right for beneficiaries over substitute assets.
4. How the claimant’s remedy interacts with the rights of innocent recipients and the defence of bona fide purchaser.
5. Whether the claimants could assert proprietary rights even when trust funds were mixed with non-trust funds.

Decision

• The House of Lords held that tracing in equity allowed the beneficiaries to claim a proprietary interest in the traceable proceeds of trust property.
• The claimants were entitled to elect between a beneficial share in the insurance proceeds proportionate to their contribution (here, 40%) or an equitable lien for the amount misappropriated.
• A proprietary claim could be asserted against all recipients of trust property except bona fide purchasers for value without notice.
• The judgment confirmed that tracing does not depend upon establishing unjust enrichment.
• The proprietary claim is not discretionary and is proportionate to the contribution made by the beneficiaries; claimants cannot recover both a share and a lien.
• The House of Lords clarified the distinction between tracing and following, strengthening the remedy options for beneficiaries.
• The court recognised parallels between common law and equitable tracing, citing Jones v De Marchant as persuasive authority.

Legal Principles

• Tracing is the process of identifying a new asset derived from the original asset subject to a trust or fiduciary relationship, distinct from following, which tracks specific assets through successive transfers.
• Beneficiaries have a right to a proprietary claim in the traceable proceeds of misapplied trust funds, binding all recipients except bona fide purchasers for value without notice.
• The beneficiary can elect a remedy: either a beneficial ownership interest in the substitute asset or an equitable lien to secure restoration of the trust fund.
• A proprietary claim is not dependent on proof of unjust enrichment, nor is it discretionary.
• Remedial entitlement is proportionate (pro rata) to beneficiaries’ contributions if assets are acquired by pooled funds.
• Innocent recipients (donees) do not take better title than the wrongdoer; parallels can be drawn between common law (accession) and equitable principles.
• The decision set foundational principles later extended to the possibility of backwards tracing, though not decided directly.

Conclusion

Foskett v McKeown establishes that beneficiaries may trace misapplied trust funds into substitute assets and elect a proprietary claim proportionate to their contributions or an equitable lien. This clarified the law on tracing, distinguished it from following and unjust enrichment, and fortified beneficiaries’ rights against wrongdoers and innocent recipients, with principles influencing subsequent tracing cases.