The Rule in Clayton’s Case
In yesterday’s blog I touched upon the rule in Re Hallett’s Estate. In today’s blog I will touch upon the rule in Clayton’s Case (1816), 1 Mer. 529, 35 ER 767 (Ch.). Again, the rules stem from situations where a trustee mixes trust funds with their own funds or with a different trust’s funds.
The rule in Clayton’s Case is generally described as the "first in, first out" rule. It holds that where a trustee mixes money from two or more trusts in one account and then removes money from it, the trustee is deemed to have taken out the money that was first deposited in the account. The reason for the creation of the rule in Clayton’s Case appears to be to facilitate the tracing of funds in situations where the equities were equal and there may be difficulty in ascertaining the proportionate share to be awarded to each of the trusts in question. At its lowest common denominator, the rule in Clayton’s Case appears to be a rule of convenience and administrative expediency.*
For example, assume that a trustee deposits $20,000 belonging to trust A in a bank account. One week later, the trustee deposits $10,000 belonging to trust B into the same account. Two months later, a deposit of $5,000 belonging to trust C is made to the same account. The following week, the trustee withdraws $25,000 from the account.
At the conclusion of these transactions, $10,000 remains in the account. In this scenario, the rule would not permit trust A to recover anything from the account, trust B would recover $5,000 and trust C would recover $5,000. Trust A and trust B would have claims against the trustee personally for amounts not recovered from the account.
There are, however, exceptions to the rule in Clayton’s Case. These include the rule in Re Hallett’s Estate (trustee having and then removing his or her own funds from the subject account). The rule does also not apply when a withdrawal is designated to a specific trust, when transactions are entered in a bank account on the same day, where all claims can be satisfied and where a trustee properly withdraws money from a mixed account for the purposes of a particular trust beneficiary but then misappropriates it. In this case, the beneficiary may not plead the rule in Clayton’s Case as a method of allocating the loss to another beneficiary.
Thanks for reading and enjoy the long weekend.
Craig R. Vander Zee – Click here for more information on Craig Vander Zee.
* See: The Law of Trusts, A Contextual Approach (Second Edition) at page 681