Re Hallett’s Estate (1880) 13 Ch D 696

Key Points

  • Where a wrongdoing trustee makes a withdrawal from a mixed account (containing trust money and his own money), there is a presumption that they dissipated their own money first

Facts

  • Hallett (H) was a solicitor who held a number of russian bonds on trust
  • H misappropriated these bonds from his clients and sold them
  • H died, with enough money to pay off the beneficiaires, but not enough to satisfy his creditors 
  • At trial, the court held that Clayton’s case applied, meaning that the first payment in was presumed to be the first payment out

Held (Court of Appeal)

  • Appeal allowed; H was presumed to have dissipated his own money first; the beneficiaries are entitled to the money
  • Clayton’s Case “first in, first out” rule was held not to apply in this situation

Lord Jessel MR

Presumption against the wrongdoer

  • There is a principle of the ‘good man theory of trust’: ‘where a man does an act which may be rightfully performed, he cannot say that that act was intentionally and in fact done wrongly’: p.727
  • ‘a trustee who has blended trust moneys with his own, it seems to me perfectly plain that he cannot be heard to say that he took away the trust money when he had a right to take away his own money’: p.727

On Clayton’s case

  • The rule in Clayton’s case is valid unless circumstances indicate that it should not be applied: p.728

When an asset is acquired

  • Where trust money is used exclusively to acquire the asset, “the beneficial owner has a right to elect either to take the property purchased, or to hold it as a security for the amount of the trust money laid out in the purchase”: p.709
  • Where the trustee mixes trust money and his own money, “there is this distinction, that the cestui que trust , or beneficial owner, can no longer elect to take the property, because it is no longer bought with the trust-money simply and purely, but with a mixed fund. He is, however, still entitled to a charge on the property purchased, for the amount of the trust-money laid out in the purchase; and that charge is quite independent of the fact of the amount laid out by the trustee”: p.709

Current case

  • At trial, Mr Justice Fry would not have applied Clayton’s case if he did not think he was bound by authority to apply it: ‘I should have been inclined to act on if I had been at liberty, but I am not at liberty’: p.728
  • As a matter of legal principle, Clayton’s case should not apply in this case

Commentary

  • Re Hallett’s Estate was a seminal case that altered the rule in Clayton’s case from a universal rule to a mere rebuttable presumption
  • Later rules have evolved since this case, including ‘pari passu’ distribution, the ‘lowest intermediate balance’ rule, and the North American ‘rolling charge’ approach. What rule applies in any given case is not always entirely clear