Assume a friend holds real estate in trust for you while you are away travelling the world. He is the trustee who holds the property for your benefit and you are the beneficiary of the trust. When you return, you find out that your property has been sold in your absence and your friend has taken the money and bought another property. However, the new property is not held in your friend’s name but in the name of a stranger. It is not held in trust for you. What can you do to recover your losses?
In these circumstances, you could launch a lawsuit against the stranger for “knowing receipt of trust property.” You must prove (a) that the original property was subject to a trust in your favour, (b) that the money from the sale of the property, which your friend received, was taken from you in breach of trust, and (c) that the stranger did not take the property as a bona fide purchaser for value without notice. In other words, the stranger knew or ought to have known that the sale proceeds were impressed with a trust in your favour.
You could then trace the sale proceeds to the new property to establish that the stranger really holds the new property in trust for you because the original sale proceeds were impressed with a trust and are traceable to the new property because they were used to purchase the new property. One court has described the tracing process as follows: “Tracing is based on the retention by the claimant [you] of a beneficial interest in property. It is a process by which a beneficial owner of property traces what has happened to that property, identifies the persons who have handled or received it, and justifies his claim that the property, or the property into which it has been converted, can be regarded as belonging to him.”
Instead of launching a lawsuit to assert your beneficial ownership of the sale proceeds against the stranger, you could bring a personal claim directly against your friend for breach of trust. You must make sure, however, that you will be able to collect on a judgment against your friend. If your friend is “judgment proof,” your best course of action is to trace the sale proceeds to the stranger’s property.