Subrogation and Tracing

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Abstract

D holds title to cash on trust for C and D spends the cash in breach of trust.  If tracing shows that D exchanged title to the cash for title to a painting, then D holds title to the painting on trust for C.  Alternatively, if tracing shows that D exchanged title to the cash for the discharge of X's mortgage over D's property, then C is subrogated to the extinguished mortgage.  In other words, C acquires a new mortgage over D's property, which resembles the extinguished mortgage which X used to have.

The only difference between these two scenarios is that in the first D acquires a right, whereas in the second D discharges its debt.  The dominant view is that this factual difference is normatively insignificant: subrogation to traceably discharged debts is subject to the same conditions, and is justified by the same reason, as trusts over traceably acquired rights.

This paper interrogates that assumption.  It agrees with the orthodoxy that trusts over traceably acquired rights and subrogation to traceably discharged debts share a single justification.  However, the paper departs from the orthodox view of what that justification is.  This has implications for the leading and controversial cases of BFC and Menelaou.