Prof. Nichols Remedies – Fall 2003 Restitution: Tracing Rules and Examples There are two kinds of tracing to focus on: Direct Exchanges and Commingled Accounts. Direct Exchanges: Examples Starting assumption: D wrongfully misappropriates Costebelle (a house, per Hicks v. Clayton in the casebook) from Plaintiff. 1. D sells Costebelle for $10,000, and purchases a $10,000 Certificate of Deposit (“CD”) with the proceeds from the sale of the house. P can impress a constructive trust on the CD. 2. D sells Costebelle for $10,000, and purchases a 10K CD with the proceeds from the sale of the house. D then withdraws the 10K from the CD, and uses it to buy a parcel of land. D then sells the land for 10K and uses the proceeds to buy stock. D then sells the stock, and uses the proceeds to buy a car. At any point in time, P can impress a constructive trust on any of D’s purchases of the CD, the land, the stock, and the car, so long as D still owns the exchanged property at the time the constructive trust remedy is awarded. This is because the subsequently acquired property was directly exchanged for the original property or its equivalent. P’s claim to the original property also applies to after acquired property that is directly traceable to the original property. 3. D owned one 10K CD at the time he sold Costebelle. D sold Costebelle for 10K and purchased a second 10K CD with the proceeds of the sale. D then cashed and spent the proceeds of the first 10K CD on an around-the-world trip. D still owns the second 10K CD. P can still impress a constructive trust on the second 10K CD. 4. Assume the same facts as #3, except that D spent the proceeds from the second 10K CD (which came from the sale of the house) on the around-the-world trip, and retained ownership of the first 10K CD. P cannot trace the sale of the house to the first 10K CD, and therefore the ability to trace is cut off by D’s spending of the proceeds of the sale of the house. 5. D sells Costebelle for full value to a bona fide purchaser (“BFP”) who took title to Costebelle without notice of P’s fraud and restitution claims, and who paid a full and fair price for the house. P can no longer place a constructive trust on Costebelle. P’s rights to trace are cut off by the sale to a BFP – defined as one who (a) takes (purchases) without notice; and (b) pays full price for the property. P can, however, place a constructive trust on the proceeds of the sale in D’s possession. P could also place a constructive trust on the house if the new buyer was not a BFP. *****
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Prof. Nichols Remedies – Fall 2003 Commingled Funds: Rules When a defendant wrongfully commingles her money with that of the plaintiff in a common bank account, courts have difficulty identifying which money belongs to the defendant and which belongs to the plaintiff. The difficulty is magnified by subsequent activity in the account (whether deposits or withdrawals). The tracing rules were designed to alleviate some of these difficulties. Courts therefore apply some common “fictions” and rules, including: 1. P can claim the lowest intermediate balance (LIB) between successive deposits and withdrawals from a commingled account. 2. The Wrongdoer spends her own money first. 3. The Wrongdoer invests the victim’s money first. 4. Deposits by the Wrongdoer are treated factually, not fictionally. 5. P can use the tracing fictions to her advantage in maximizing the amount of funds claimable by P. Examples 1. 2. 3. 4. Bank account: $5.00 (P) plus $5 (D); Balance (B) equals $10 total. D withdraws and spends $5 on a trip; B equals $5 (P). (tracing rule #2) D deposits $5; B equals $10; $5 is P’s. (LIB rule and tracing rule #4) D withdraws $5 to invest in land; B equals $5 (D) (tracing rule #3, 5)
5. D deposits $5; B equals $10; $5 can be P’s or P can claim the land. (choice between tracing rule #3 or LIB rule, per tracing rule #5) 6. D withdraws $10 and spends it on a vacation. B equals zero; the next day D deposits $10. B now equals $10. The LIB is now Zero (0). P can not benefit from the LIB rule now. P would have to claim the land Further examples Defendant’s Bank Account $200 (Defendant) $300 (Plaintiff) a. b. c. d. e. f. Total Balance is $500 (Commingled Account). Plaintiff has a claim for $300. D withdraws $300 and spends the money on a trip to Hawaii. Total Balance is $200, and P can claim the $200 as hers under the LIB rule. D deposits $300 (of her own money). Total Balance is now $500. P can only claim $200 as hers (LIB rule). D then withdraws $300 and invests it in stock. 2
Prof. Nichols Remedies – Fall 2003 g. Total Balance is now $200. P can claim the 2/3 of the stock, or could claim the $200 in the account. h. D deposits $200 (of her own money). i. Total Balance is now $400. P can still claim $200 under LIB Rule, or could claim 2/3 of the stock. j. k. l. m. D withdraws $400 and spends it on trip to San Francisco. Total Balance is now zero. D deposits $500 (of her own money). Total is now $500, and LIB is now Zero.
n. Plaintiff can’t claim anything in the account now. P can still claim 2/3 of the stock. o. Assume the stock has appreciated in value to $800. p. If D is insolvent, P will be able to claim an equitable lien for $300 (her total loss) of the stock’s value, as the rest will go to D’s other creditors. If D is solvent, however, P can probably claim the appreciated stock in its entirety (all $800) in a constructive trust.
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