UNIT 6 NATURE OF EQUITABLE RIGHTS II
CONTENTS
1.0 Introduction
2.0 Objectives
3.0 Main content
3.1 The nature of the Rights of a Beneficiary under a Trust
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignments
7.0 References / Further Reading
1.0 INTRODUCTION
This unit is a continuation of the last unit. In the last unit, we considered the nature of equitable rights which evolved from the recognition of equity jurisdiction as a second force in the Nigerian legal system. In this unit, we will consider the nature of the rights of a beneficiary under a trust.
2.0 OBJECTIVES
By the end of this unit you should be able to:
(i) Describe the nature of the rights of a beneficiary under a trust.
3.0 MAIN CONTENT
3.1 The nature of the Rights of a Beneficiary under a Trust
The nature of the right of a beneficiary under a trust raises yet another controversy as to whether such right is a right in personam or in rem. See Scott, The Nature of the Rights of the Cestui que Trust (1917) 17 Col. L. Rev. 269; Cook, Powers of Courts of Equity (1915) 15 Col. L. Rev. 37; Maitland, Equity (Brunyate Ed.) 1949, pp. 110-116; Harlan Stone, The Field of Modern Equity (1929) 45 LQR 196.
However, the fact is that the determination or classification of this right should not depend exclu- sively on the consideration of abstract jurisprudence. A thorough examination and analysis of the practical issues involved in both the enforcement of this right and the extent to which this right confers proprietary right on the beneficiary is a sine qua non.
It will not be wholly correct to classify the right as merely right in personam nor will it be abso- lutely true to classify it as right in rem. A right in personam is of a definite kind enforceable against specifically determinate person(s) and a right in rem is a right residing in a person, which he can enforce against indeterminate number of persons. See Nathan & Marshall, A Casebook on Trusts (5th Ed.) p.1.
The equitable doctrine of tracing trust property permits the beneficiary to follow the trust prop- erty, either in its original or converted form into the hands of the trustee and into the hands of anyone except the bonafide purchaser for value without notice. See Re Hallett’s Estate (1880) 13 Ch. D. 696; Re Diplock (1948) Ch. 465. This is because ‘Equity has regarded trust money as a sort of inanimate Proteus, who must at all costs be retained through all his metamorphosis. It can be followed into the hands of a banker, into whatever investment it may be put, provided it can be identified, and even, as in Sinclair v. Brougham, beyond the range of actual identification… This high place into which the cestui que trust is pitchforked is what marks him as holding far more than a mere ius in personam.’
This shows the flexible manner in which the equitable doctrine of tracing could be employed. It is therefore possible for the beneficiary under a trust to enforce his equitable right and interest against an indeterminate number of persons except the singular case of the bonafide purchaser for value of the legal estate. Nevertheless, the view is widely held that because the equitable right of a beneficiary succumbs to the bonafide purchaser for value of the legal estate, the right is merely in personam and not in rem. See Harlan Stone, op. cit. At p. 467; Maitland, op. cit at pp.110-116.
According to a protagonist of this view, the effect of the equitable doctrine of tracing, which in fact raises the status of the right of the beneficiary under a trust far beyond ordinary right in per- sonam, has been minimised on the ground that ‘where equity imposes a trust upon third persons, it does so upon the theory that a new right in personam has been created against the third person, and that what equity actually does in following trust property into the hands of strangers, is to create successive rights in personam against successive takers of the trust res not essentially dif- ferent in character from the right which is asserted against the original trustee, although they dif- fer from it in their origin’. See Harlan Stone, op. cit. at 476.
No doubt, the above is a meaningful argument which serves as a reminder of the theory em- ployed by the early Chancellors to keep the doctrine of ‘uses’ alive. The medieval Chancellors emphasised the notion that the enforcement of ‘uses’ by the Chancery was based purely upon conscience and that the Chancellor never intended to create any new system of priority interest in property. But once the institution of trust had gained universal recognition and acceptance, it be- came clear that a new proprietary interest in property had evolved, an interest which has all the characteristics of a legal interest except that it cannot be enforced against a bonafide purchaser for value of the legal estate for the simple reason, though convenient and expedient, that where the equities are equal the law prevails.
In the circumstance, the argument in favour of the view that the right of the beneficiary under a trust is a right in personam is merely explaining the origin of the beneficiary’s right: it would not appear to have taken into consideration the subsequent development regarding the enforcement of equitable rights. Hence, the argument may be valid only in the context of abstract jurispru- dence. For, ‘the whole doctrine of the following of trust funds by a beneficiary shows that equi- table rights are a great deal higher than mere iura in personam, for the beneficiary emphatically claims a proprietary right, and will recover the trust proprietary right, and will recover the trust property in specie; he will not be relegated to a mere right to a dividend like an ordinary creditor of the trustee. Equitable rights and interests must, then, be regarded as hybrids, standing midway between iura in personam and iura in rem.’ See Hanbury, The Field of Modern Equity (1929) 45 LQR 196, 199.
It is now well established that the equitable doctrine of tracing which permits the beneficiary to follow the trust property into the hands of anyone except the bonafide purchaser for value of the legal (see Re Hallett’s Estate (1880) 13 Ch. D. 696; and Re Diplock (1948) Ch. 465.) confers some sort of proprietary right in the trust res upon the beneficiary. Harlan Stone, who holds the dissenting view that the right of a beneficiary under a trust is a mere right in personam, conceded ‘that the ultimate effect of enforcing a trust in equity, where the court makes its decree directing the turning over of trust property to the cestui que trust, is, in a great number of cases, the same as though the cestui que trust possessed a right in the property itself, cannot of course be ques- tioned.’ The nature of the Rights of the Cestui que Trust; (1917) 17 Col. L. Rev. 467, 468.
This proprietary right is further strengthened by the fact that the beneficiary is not only entitled to recover the trust property in specie, he can also recover the proceeds of the sale of trust property even where the proceeds are no longer identifiable. See Sinclair v. Brougham (1914) AC 855. There are other cases in which the right of a beneficiary under a trust has been given far more recognition than a mere right in personam. In Williams v. Cole (1952) 14 WACA 129, the West African Court of Appeal held that the beneficiaries of a trust have a better right to the possession of the trust property as against the trustee’s successors in title. Similarly, under the rule in Saun- ders v. Vautier (1841) LJ Ch. 354, a beneficiary, who is sui juris and absolutely entitled under the trust, can put an end to the trust by calling for the immediate transfer of the corpus of the trust either to himself or according to his direction. See further Jones v. Nichols (1938) 4 WACA 58.
For the purposes of income tax, the beneficiary may also be regarded as the real owner of the trust property. In Baker v. Archer-Shee (1927) AC 844 at 866, the majority opinion of the House of Lords held that the income of a trust fund belonged to the beneficiary so that the beneficiary is chargeable as if the fund accrued to him directly. Lord Wrenbury stated that the right of the bene- ficiary under the will in question was an equitable right in possession to receive during her life the proceeds of the shares and stocks of which she was a tenant for life. Her right was not to a balance sum, but to the dividends subject to certain deductions. His Lordship concluded that her right under the will was ‘property’ from which income was derived.
The decision has been criticised. (See Hanbury, A Periodical Menace to Equitable Principles (1928) 44 LQR 468). It has been suggested that the majority opinion in the House of Lords which recognised the proprietary claim of a beneficiary under a trust should be limited entirely on the widening interpretation of the Income Tax Act 1918; otherwise it would blur the distinc- tion between legal and equitable interest. But recognition of the proprietary claim of a benefici- ary under a trust is realistic assessment of the modern nature of equitable interests in property. Such recognition need not create any confusion between the ownership of the trustee and that of the beneficiary. On the contrary, it would appear unrealistic to deny a proprietary claim to an in- terest that can be alienated, assigned, mortgaged or disposed of by will in the same manner as a legal interest, merely because of the fear (which is unfounded) that such a recognition between the legal ownership of the trustee and the equitable ownership of the beneficiary.
In Senior v. Braden 295 US 422, 791 Ed. 1520, the United States Supreme Court reiterated its earlier opinion (see Brown v. Fletcher 235 US 589; 59 L. ed. 374) that the beneficiary under a trust had an interest in and to the property that was more than a bare right and much more than a chose in action. For he had an admitted and recognised fixed right to the present enjoyment of the estate with a right to the corpus itself. His estate in the property thus in possession of the trus- tee, for his benefit, though defeasible, was alienable to the same extent as though in his own pos- session. See Senior v. Braden 295 US 422, 433.
In Balir v. Commissioner of Internal Revenue 300 US 5 at 13-14, Chief Justice Hughes of the United States Supreme Court stated that the will creating the trust entitled the beneficiary during his life to the net income of the property held in trust. He thus became the owner of an equitable interest in the corpus of the property; and by virtue of that interest he was entitled to enforce the trust, to have a breach of trust enjoined and to obtain redress in case of breach. The interest was present property alienable like any other, in the absence of a valid restraint upon alienation. The beneficiary may thus transfer a part of his interest as well as the whole. Assignment of the bene- ficial interest by the beneficiary is not an assignment of a chose in action but of the right, title and estate in and to property.
The relationship between the dual ownership existing in trust property has been clearly stated: The trustee is a buffer between the cestui que trust and the world; as against the rest of the world he has the rights of an owner, and he has the duties of an owner; but these rights he holds for the benefit of the cestui que trust, and the burden of the du- ties he can, by the aid of a court of equity, shift to the trust property and even, in some cases, to the cestui que trust himself. But when it is necessary for the protection of the cestui que trust, equity will recognise that he is in very truth beneficial owner of the trust property. See Scott, The Nature of the Rights of the Cestui que Trust (1917) 17 Col. L. Rev. 269, 290.
However, it should be noted that there are a few other cases in addition to the doctrine of bon- afide purchaser for value of the legal estate which deny the beneficiary of the claim to proprie- tary ownership of the trust res. In Schalit v. Nadler (1933) 2 KB 79, the court held that a benefi- ciary of a trust property cannot sue or distrain for rent due from a tenant to whom a lease or ten- ancy of the trust property has been granted by the trustee. The trustee is the only person who can take such action, and his right to do so arise from the fact that he alone is the lessor. (A benefici- ary can sue, though he is obliged to bring such action in the name of the trustee who has the legal estate. See Ojikutu v. Fela (1954) 14 WACA 628).
The court further stated obiter that, the right of the beneficiary whose trustee has leased the trust property, is not to the rent, but to an account from the trustee of the profits received from the leasehold transaction. He has no right to demand a direct payment of rent from the trustee nor can he insist that the cheque received from the tenant or lessee be endorsed to him.
The ratio of this decision is not so much that the right of a beneficiary is merely a right in per- sonam; for, had the decision been different, a tenant who is already accustomed to paying his rent to the person appearing in his lease as lessor, might be faced with a demand, without previ- ous notice, from the beneficiary; and it is possible that before he, the lessee had had time to interplead, a distress might be levied at the instance of both the beneficiary and the trustee, and apparently neither would be wrongful. See Schalit v. Nadler (supra) at 84. Surely it would be in- equitable to the extreme to put a lessee of a trust property into such an unenviable position.
For a similar reason, a beneficiary cannot maintain an action for account against a debtor to the trust estate. In Ojikutu v. Fela (supra) at 630, the plaintiffs sued as beneficiaries under a will for an account of rents and profits collected by the defendant in respect of certain premises described as No. 39 Agarawu Street, Lagos. It was evident that the defendant was not a trustee under the will. Cousey, JA, delivering the judgment of the West African Court of Appeal said that if the will upon which the plaintiffs sued was of effect, the legal estate in the property mentioned vested in the trustees of the will. Therefore, the plaintiffs had no interest in the legal estate; it was not within their right to bring an action for account against a debtor to the trust estate.
Although a beneficiary may not institute legal proceedings in respect of the trust property in the name of the trustee without his authority, he may however file a bill against the trustee for the execution of the trust in accordance with the trust instruments, if the trustee would not take proper steps to enforce a claim due to the trust property.
SELF ASSESSMENT EXERCISE 1
What do you understand by the equitable doctrine of tracing?
4.0 CONCLUSION
Although a beneficiary may not institute legal proceedings in respect of the trust property in the name of the trustee without his authority, he may however file a bill against the trustee for the execution of the trust in accordance with the trust instruments.
5.0 SUMMARY
In this unit, we have considered the nature of the rights of a beneficiary under a trust. You should now be able to describe the nature of the rights of a beneficiary under a trust.
6.0 TUTOR-MARKED ASSIGNMENT
What do you understand by a bonafide purchaser for value?
7.0 REFERENCES / FURTHER READING
Hackney J., (1987) Understanding Equity and Trusts; London: Fontana press
Jegede M. I. (2007rep.) Principles of Equity; Ibadan: Unique Design/Prints