The Nature of the Beneficial Interest (Trusts)

8/21/2019 The Nature of the Beneficial Interest (Trusts)

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THE NATURE OF THE BENEFICIAL INTEREST

HISTORICAL AND ECONOMIC PERSPECTIVES

M. W. Lau*

Doubtless no branch of the law has given greater opportunity for theorizing than the subject of

trusts. Since the days of the historic utterance as to the nimbleness of a use, students of the law

have taken great delight in speculating,- and, in most cases, it has been no more than a

speculation,- as to the difference between legal and equitable interests, the priority of the legal

interest, the nature of a cestui's right, the doctrine of bona fide purchasers as applied to such

right, and other questions of similar nature. It is quite unfortunate that, after so much discussion,

legal writers are still undecided as to the place to be allotted to Trusts in our system of

jurisprudence.

- A. N. Whitlock, Classification of the Law of Trusts, 1 CAL. L. REV. 215 (1912)

INTRODUCTION

The nature of the trust beneficiarys interest has been contested time and time again

throughout the ages. Whether it takes the form of sixteenth-century judgments or modern

economic analyses, the debate can be reduced to a simple question: is the beneficial interest a

form of property or merely a personal right? This question has engaged some of the most


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brilliant minds the common law world has ever known, yet we seem unable to express, in

agreeable terms, the exact nature of trusts and beneficial interests. Whitlocks exasperation one

hundred years ago remains just so true today. The appeal of this question endures for three

reasons. First, the trusts flexible nature defies easy categorization and therefore poses an

analytical challenge. Second, the trusts historical evolution means that scholars and judges in

every era have new contexts in which to revisit the question. Third, the questions answer is a

normative gold mine the trusts future course can be determined by the property/obligation

classification.

Despite its enduring appeal and the fact that modern scholars infuse it with new ideas

from time to time, the debate had its golden age during Whitlocks time in the early twentieth-

century. The period between the late 1800s and early 1900s was notable for all the legal

categorizations that took place and, of course, nobody epitomizes this movement better than

Wesley Hohfeld and his work on jural relations.1 The trust was certainly not spared and the

ensuing debate was rather heated. The list of participants on both sides of the debate reads like a

legal Whos Who: Frederic Maitland, Christopher Langdell, James Ames, and Thomas

Holland on the obligational side; John Austin, Austin Scott, John Pomeroy, and John Salmond

on the property side.2

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But despite this formidable starting lineup, the debate quickly became a stalemate. The

issues are myriad and complicated Whitlocks listing above neatly encapsulates them but the

debate was reduced to a narrow technical question: is the beneficial interest a right in rem or a

right in personam? Maitland argues that the beneficial interest does not bind the bona fide

purchaser and cannot possibly be a right in rem, therefore it must be a right in personam.3Scott

tries hard to salvage the situation by arguing that the beneficial interests in rem attributes are

indirect, but this does not hold as the whole point of an in rem right against the asset is that it is

directly enforceable against others. Maitland wins the technical argument hands down but we are

still none the wiser about the nature of the beneficial interest. Today, trusts and trust laws have

flourished and proliferated, seemingly unaffected by the trivial nature of this debate. The

formerly heated content of this debate have also cooled down into the footnotes of modern

textbooks.

The purpose of this essay is to pick up where Maitland and Scott have left off and explain

the nature of the beneficial interest. Many others have done this in recent years but somehow

they commit the same fallacy: they assume that Maitland and Scott are right in their respective

arguments and only seek to improve on pre-existing lines of thinking.4In particular, they assume

the validity of the two conventional wisdoms: law and equity were always on the verge of an

existential clash and the in rem/in personam dichotomy is a valid legal categorization. This essay

questions some of these conventionally accepted facts of legal understanding and argues why

Maitland is technically right but, in a broader sense, wrong.

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The approach this essay takes is novel and interesting. Maitland's key argument is that the

bona fide purchaser is not bound by the beneficial interest, otherwise there would be a clash

between law and equity. This essay presents a historical account of trusts to explain why trust

law turned out this way; in the process, it validates Maitland's technical arguments. But, more

importantly, the historical account shows how Chancery judges unmistakably developed a

second, equitable property system out of uses and trusts. This will show how Scott may have lost

on the technical details but certainly won the broader argument. If anything, history is

unequivocally on the side of the property argument.

The historical account of trusts and the relationship between law and equity are also

corroborated by economic analyses. Many of the questions raised by Whitlock the differences

between legal and equitable interests, the priority of legal interests, the nature of the beneficiary's

right, and the bona fide purchaser rule can be answered with economic theories on information

costs, modularity, and mental accounting.5These theories will show that the many features of

equitable property are improvements on information and cognitive limitations of the legal

property system.

What do historical and economic perspectives suggest about the great debate between

Maitland and Scott? If anything, they raise the question of why Maitland and Scott both got it so

wrong how come we are still missing the bigger picture. The explanation is crude but plausible:

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Maitlands in personam argument is largely a rebuttal of Austins conception of equitable rights,

which in turn is based on Austins works on the classification of law. It was Austin who

borrowed Roman conceptions of in rem and in personam rights and applied it to the common law.

Many have argued that Austin is wrong but his classification of rights has since become part of

the common laws DNA and the Maitland and Scott debate have been tattooed into every trust

tome. The reason for this is simple (and to borrow Ames quote): the power of a great name for

the perpetuation of error.6

This essay is organized as follows. Part I reviews the arguments and positions of

Maitland and Scott and their successors. In addition to understanding Maitlands and Scotts

rationales, one can observe the perpetuation of their lines of thinking in modern iterations of the

debate. Part II offers an extended historical account of trusts and uses. The trust is largely a

product of feudal politics and judicial rivalry and they are the key to understanding how

Chancery judges created a second property system under hostile and unaccommodating

circumstances. Part III corroborates the historical development of trusts with law and economics.

It shows how the development of trusts as a second property system conforms to generally

accepted economic rules on information costs and efficiency. It also shows how Chancery judges

were early adopters of the fund concept.

I. THE MAITLAND AND SCOTT DEBATE

A. Austin, Maitland, Scott (and Stone)

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The Maitland and Scott debate is really the Maitland and Austin debate. It was Austins

remarks that incensed Maitland, so much that Maitland devoted three lectures to rebut him. Scott

only joined the fray after Maitlands death, but his delay is more than made up by the robustness

of his analyses and arguments. As a result, most textbooks nowadays compare the works of

Maitland and Scott. Harlan Stone finishes off that eras debate with a rejoinder to Scott.

In three of his highly regarded Equitylectures, Maitland explains why the beneficiarys

interest is not a right in rem, but a right in personam.7At the beginning of lecture IX, Maitland

makes clear his displeasure with Austins remarks in his book Jurisprudence. In it, Austin states

that in equity a contract to sale at once vests jus in rem, or ownership, in the buyer, and the

seller has only jus in re aliena. Austin continues that in law, a sale and purchase without

certain formalities merely givesjus ad rem, or a right to receive ownership, not ownership itself:

and for this reason a contract to sell, though in equity it confers ownership, is yet an imperfect

conveyance, in consequence of the conflicting pretensions of law.8To this, Maitland responds

now as a piece of speculative jurisprudence this seems to me nonsense, while as an exposition

of our English rules, I think it not merely nonsensical but mischievous.9Maitland simply does

not believe that the beneficiarys interest is a right in rem. This is because for the beneficiarys

interest to be a right in rem and for it to be in direct conflict with the common law would have

meant anarchy.10

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Maitland is quite right. By definition, the beneficiarys interest in the trust asset cannot

possibly be a right in rem because it does not bind the entire world at large in particular, the

bona fide purchaser for value without notice.11

In substance, however, Maitland is willing to

acknowledge all of the beneficial interests proprietary attributes, such as transferability,

inheritability, and restrictions on inalienation. Despite the overwhelming proprietary nature of

trust rules, Maitland could not overcome his problem with the bona fide purchaser exception.

Maitland traces the history of the trust and its predecessor the use to explain how it became

binding on more and more people, but not everybody, leaving us with the false impression that it

binds the world at large.

12

Initially, the Chancery court only enforced the cestui que uses right against the feoffee.13

As the law on uses developed, the Chancery court enforced the cestuis interest against the

feoffees heirs and personal creditors. This eventually expanded to cover volunteers who paid no

consideration for the use asset and to purchasers who had actual or constructive notice of the use.

Crucially, however, the use was not enforced against the bona fide purchaser for value without

notice. Maitland does not delve too deeply into why such a bona fide purchaser is not bound by

the use, only to say that he has acquired a legal right, has not undertaken any obligation, and his

conscience is unaffected.14

He does concede, however, that instances of the bona fide purchaser

for value without notice is exceedingly rare and is not a common object of the law courts.15

No

matter how rare and unlikely a cestui might encounter a bona fide purchaser, it still fatally


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wounds the notion that the cestuis right binds the whole world. Therefore, even if the cestuis

interest looks and smells like a right in rem in the normal course of things, it simply is not a right

in rem. He says that equitable estates and interests are rights in personam but they have a

misleading resemblance to rights in rem.16

It would be easy to understand if Maitland is simply

being pedantic about technical definitions, because he has a point. But he actually goes as far as

to agree with Frederick Pollock that equitable ownership is better understood not with notions of

real ownership, but of contracts.17

Maitland died in 1906 and in 1917 Scott wrote an article arguing why the beneficial

interest is a right in rem.18

In the article, Scott goes to great lengths to highlight the proprietary

nature of the beneficial interest, especially what Maitland terms its internal aspect. This is not

new and, to a large extent, is consistent with Maitlands view of the beneficial interests

proprietary features. Where Scott contributed to the debate is his description of the beneficial

interests in rem attributes.19

He says an obligee has, then, a right in personam against the

obligor; and he has in addition rights in rem, for he may insist that all the world refrain from

interfering intentionally and without excuse with his right against the obligor. The creation of a

right in personamnecessarily results in the creation of rights in rem. And of course an equitable

obligation as clearly as a legal obligation, is the subject of ownership. It is the property of the

obligee. If a third person intentionally and without excuse interferes with this property he lays

himself open to a suit for damages.20


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What Scott is referring to, of course, is the tort of intentional interference with the

performance of a contract, as found inLumley v. Gye.21

But the problem with using this line of

argument is that it treats all contracts as property in the in rem sense, rendering these labels

even more meaningless. To this Harlan Stone criticizes Scott for the destruction of what has

hitherto been regarded as a useful although not altogether scientific generalization expressed by

the phrase rights in rem rather than the establishment of any substantial identity in character of

the rights of the cestui with the rights of property hitherto commonly spoken of as rights in

rem.22

In truth, Scotts efforts were futile. Maitlands idea of in rem is not that of the Lumley v.

Gye type. It is the legal title type that he has in mind. Maitland chooses to benchmark the

beneficial interest against the world-binding, superior legal title. No amount of reasoning or

interpretation can fill the hole that the bona fide purchaser blows to beneficial interests in rem

character.

B. McFarlane and Stevens and Penner

After Maitland, Scott, and Stones exchanges, the matter largely faded into the

background for the remainder of the twentieth-century. During this period, the uses of trusts have

proliferated geographically and functionally.23

Trusts have expanded well beyond English-

speaking shores: they can now even be found in civil law countries such as Italy and China. In

addition to being the leading vehicle for the inter-generational transmission of wealth, trusts also

have a dominant role in the structuring of financial transactions. Yet the controversy lingers on

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right against a right. McFarlane and Stevens idea is not entirely novel: the right against a right

idea is structurally similar to Cokes sixteenth-century characterization of the beneficial interest

as being attached to the legal estate rather than the asset itself.31

In any case, they use the same

assumptions as those of Maitlands arguments: the clash of law and equity and the in rem/in

personam classification.

When McFarlane and Stevens root their design on Maitlands ideas, it should not come as

a surprise that their critics counter with Scott-like arguments. Maitland points out that the bona

fide purchaser takes the trust asset free of the beneficial interest and therefore the beneficiary

does not have an in rem right to the asset. There are typically two counterarguments to this and

neither really works. The first is what can be called the trespassers and thieves argument. It is

trite law that the beneficiary can sue trespassers and thieves to enforce his interest, and advocates

of the in rem view use this to support their position that the beneficiary indeed has an in rem

right against the asset. But the problem with this is that the beneficiary can only do so if the

trustee refuses to sue and he must then join the trustee as defendant.32Scott and Bordwell, among

others, have tried to rationalize this handicapped right against trespassers, thieves, and other third

parties violating the legal title (adverse possessors, in their examples).33

Bordwells observations

are typical of this line of thinking: however, in allowing the cestui to proceed against the

adverse possessor only in case the trustee fails to act and requiring the trustee to be made a party,

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involvement ceased around 1465, equally, for no particular reason, apart from the fact that by

then the use had become mainstream business in the Chancery court.

The Chancerys role as a court came about almost as informally as the origins of the use.

The Chancellors office was part of the royal secretariat and, according to Baker, this was where

royal writs and charters were drawn and sealed.45

The Chancellor held the great seal, which was

used to authenticate all royal documents. Initially, the only kind of judicial work were those

involving questions over royal grants and issues with Crown property. In fact, it was not out of

this paperwork that the Chancery court came to prominence. Bills of complaints (of common law

injustice) by citizens addressed to the king-in-council became more frequent from the fourteenth-

century onwards. It was initially not the job of the Chancellor to dispense justice. Rather, his job

was to refer these cases to the appropriate common law courts so that grievances could be

redressed. Through time, however, bill of complaints were addressed to the Chancellor

personally and they frequently contained requests for specific remedies. Instead of just acting as

a convenient clearinghouse, 46 the Chancellor responded to these bills directly and began

issuing decrees.

When the Chancery court first took on use litigations is not conclusive. Vavasour J, a

sixteenth-century judge, dates it to the times of Edward III (1312-1377) but this cannot be

properly substantiated.47

An application to the Chancellor to protect certain uses of land took

place sometime between 1393 and 139948

and the first recorded decree in favor of a cestui was

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made in 1446.49

What is clear, however, is why the Chancery court took up use litigations. Uses

have become all too pervasive and although some concerned chattels, most concerned land and

this was simply too important to leave them unregulated. As Helmholz says, in the eyes of most

contemporaries, the end of ecclesiastical intervention against feoffees to uses and the rise of the

enforcement of uses by Chancery must have seemed a natural development. Although in form

the Church courts merely exercised in personam jurisdiction over feoffees, title to freehold land

was ultimately at issue, and the royal courts had long since declared a special interest in all

disputes over freehold.50

By 1502, the majority of land in England was held in uses.51

Since uses are so intimately

tied to land, the Chancery court began to dress what is nominally a conscience-based personal

obligation with the clothes of real property. This reification process is largely played out over the

question of who was bound by the use. The death of feoffees did not affect the use as it is passed

on to and bound the heirs of the last survivor.52

Third party transferees were also bound by the

use, except the bona fide purchaser for value without notice, for his conscience was deemed

clear.53

Rules on the trustees personal creditors and widow were not fully established until well

into the second period in the late 1600s.54

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The rule on the bona fide purchaser was established very soon in the uses nascent

development. There are two oft-cited reasons for the Chancery court to side with bona fide

purchasers. The first is that their consciences are deemed clear and therefore they can take the

asset free of the use. The second is that making an exception for the bona fide purchaser is a

good tradeoff between protecting the cestuis interest and ensuring the marketability and free

exchange of trust assets. Both of these are valid reasons for making an exception for the bona

fide purchaser, but there is also another reason. The bona fide purchaser for value without notice

is the theoretical limit of equitable property, if it is not meant to clash with legal property. If bona

fide purchasers were bound by the use, that would make the cestuis interest on par with, if not

stronger than, the trustees legal title.

It was never the Chancery courts intention to create a competing property system. One

of the keys to its early success is that it avoided antagonizing the common law courts. Bordwell

says despite occasional friction between Chancery and the common law judges, the use seems

to have met with little antagonism from the time of the early statutes against its abuse until well

towards the close of the first Chancery period. Langdell sums up the Chancery courts position

neatly: the moment [the asset] reaches a purchaser for value and without notice, equity stops

short; for otherwise it would convert a personal obligation into a real obligation, or into

ownership. Why is it, then, that equity admits as an absolute limitation upon its jurisdiction a

principle or rule which it yet seems always to be struggling against, namely that equity acts only

against the person, -equitas agit in personam? One reason is (as has already appeared) that equity

has no choice or option as to admitting this limitation upon its jurisdiction. Another reason is that

if equitable rights were rights in rem, they would follow the resinto the hands of a purchaser for


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value and without notice; a result which would not only be intolerable to those for whose benefit

equity exists, but would be especially abhorrent to equity itself. Upon the whole, it may be said

that equity could not create rights in remif it would, and that it would not if it could.55

But the bona fide purchaser was not the Chancerys only source of potential conflict with

the common law courts. In the early years of Chancery jurisdiction, the court was run by

ecclesiastical Chancellors, who often had no common law training. In addition to canon law,

their decisions were largely based on their own subjective conscience. The Chancery court

entertained suits even after judgment had been passed in the common law courts, severely

undermining the latter. Things came to a boil in 1616 with the Coke-Ellesmere controversy. Sir

Edward Coke was the chief justice of the common law courts at the time and he felt that Lord

Ellesmeres reopening of cases in the Chancery court was illegal. In a campaign against the

Chancery, Coke released prisoners jailed for being in contempt of the Chancery court (for cases

tried in the common law courts but subsequently reopened in the Chancery court) and

encouraged litigants to prosecute opponents for impeaching the judgment of the common law

courts. But this was, with hindsight, a wrong move. Coke, who did not have much political

capital to begin with, was fired by the king in the same year for other political reasons. To add

insult to injury, the king was persuaded to issue a decree affirming the superiority of the

Chancellors jurisdiction. Ellesmere died a year later and was succeeded by Francis Bacon in the

Chancery court. Bacon restored relations with the common law judges and began

institutionalizing the jurisprudence of the Chancery court, turning it from one of subjective

conscience into one of principles.

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The historical conflict between the common law and Chancery courts goes to show the

extent that luck played in the uses development. It is not too far-fetched to say that Ellesmere

might have decided against the bona fidepurchaser had such a case come across him, thereby

putting equitable interests in direct conflict with legal ones. Equally, had Coke been a better

politician and somehow won the day in his controversy with Ellesmere, equity jurisdiction may

not be what it is today. The post-Ellesmere Chancery period was about reconciliation with the

common law and the bona fide purchaser rule is consistent with Chancery judges recognizing

their jurisdictional limits and keeping the peace with their common law counterparts. But no

amount of judicial reconciliation could have saved the use from what was to come.

B. The Statute of Uses

The use became the predominant method to hold land and, outside of the common law

courts, the reality of ownership was increasingly recognized. While the cestuis interest cannot

bind the bona fide purchaser, a statute was passed in 1484 that enabled cestuis to pass good title

against the feoffees legal title.56

As Baker notes, since so much land was coming to be vested

in people who had no visible connection with it, third parties could be at a considerable

disadvantage in conveyancing...this remarkable measure enabled the beneficiary to convey

something he did not in law have; he was treated by fiction as if he were the legal owner, for the

purpose of conveying title.57

It is this statute that forced the common law courts, previously

living in splendid isolation, to confront the use. As title to the use became increasingly

mentioned in common law pleadings, Baker argues that the beneficiarys interest was in this

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way assimilated to legal property concepts; it could be seen as a thing, a thing which descended

to heirs on an intestacy, a thing which could be bought and sold or settled on a succession of

beneficiaries. Nevertheless, the new kind of ownership was inherently foreign to the common

law because it conflicted with the feudal system.58

This conflict should have been apparent from the outset; the only surprise is that it was

tolerated for so long. As Baker says, not much was done in the century between 1391 and 1490

to protect feudal revenues.59

Facing his own fiscal cliff, Henry VII promulgated statutes in 1490

and 1504 to impose on the heir of an intestate cestui the same feudal incidents as if his ancestor

has died with the legal title; but, bizarrely, this only addressed cases of intestacy. The elephant in

the room remains the testamentary disposition of land. Henry VIII continued the anti-use

clampdown. Initially, the king tried to negotiate with Parliament to legislate things right but

Parliament rebuffed his advances. So when the king could not get his law legislated, he changed

the judge-made law instead. He appointed Thomas Audley as Chancellor and directed a test case

(Lord Dacres Case) to the Chancery court.60 In Audley the king had a lawyer who is just as

abhorrent to the use as him. In 1526, he argued that uses may have been developed with good

intentions, but nevertheless to a great extent they have been pursued by collusion for the evil

purpose of destroying the good laws of the realm.61

To the horror of most people, Chancellor

Audley found that a will of a use was just as invalid as a will of the land itself. This completely

undermines the theoretical foundations of uses. Parliament relented as it is better to have an

orderly clampdown than a retroactive nullification of all existing uses.

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In 1536, the Statute of Uses was passed.62

The use could not simply be abolished by

Parliamentary might: to do so would make lawyers, who happen to be holding legal titles as

feoffees, outrageously rich. Instead, uses were executed, whereby seisin was livered to the

cestui, in effect making the cestui the legal owner and removing the feoffee from the picture.63

The Statute of Uses was a financial success for the king, but its legal effectiveness was poor. The

Statute did not execute uses of chattels and special uses where feoffees had active duties;64

in

effect, it only executed simple, passive uses much like todays bare trusts. The most glaring

loophole, however, was the use upon a use. This is a sub-use, or double-use where A holds land

to the use of B, who holds that use to the use of C. The common law courts executed the first use,

removing the feoffee and leaving the first cestui with the seisin (legal title). The courts, being no

more creative or cognizant than they were before the Statute, chose to ignore the second use as it

was deemed repugnant to the first.65

What one was left is the original conscience-based, use

scenario: a person holding land that is not beneficially his and his conscience having been

affected by the second use. As Baker says, the Chancery court had no choice but to exercise its

jurisdiction in conscience.66

Again, the Chancery court did not set out to undermine the Statute

or the common law courts: for the intervention of equity would have been otiose if the second

use had been caught by the statute.67

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It was through these judicially interpreted exemptions from the Statute that the use

became the trust. From the very beginnings of the use, it was always associated with trust and

confidence. As Bordwell notes, In the Statute itself no differentiation is made between use, trust,

and confidencethe Statute of Uses might just as well have been called the Statute of Trusts or,

the Statute of Confidences68

But judges took the liberty to call these nominally active uses

trusts and, in one stroke, conducted one of the greatest rebranding exercises in legal history.

This is understandable though to call the surviving legal relation, be it an active use or a use

upon a use, a use again is to invite unwelcomed attention from the Statute and its sponsors. A

different label for what is essentially the same legal concept avoids unnecessary scrutiny and also

gives Chancery judges an opportunity to redesign the trust, as Lord Nottingham did during his

Chancellorship.

The Statutes usefulness was relatively short-lived. The Crowns motivation was to

revive revenue from feudal incidents but just a century after the Statute was passed, the feudal

system was effectively abolished through the Tenures Abolition Act 1660. With the feudal

system and its revenue streams abolished, opposition against legal avoidance schemes also

dissipated and trusts proliferated as greatly as uses did before the Statute. It was not until 1924

that the Statute of Uses was finally repealed.69

The functions of trusts in the sixteenth- and

seventeenth-centuries also shifted away from avoiding feudal incidents to purposes that resonate

with modern practice: caring for minor beneficiaries, providing for spendthrifts while protecting

the family fortune, holding property for married women, preserving secrecy, and generally

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achieving dynastic succession by preserving contingent remainders and avoiding the rule in

Shelleys Case.70

It is reasonable, but wrong, to think that the period between the Statute of Uses and the

abolition of feudal incidents was simply the dark ages for uses. The Statutes promoters

obviously thought that it would have killed off uses. Clearly, they did not see the judicially

sanctioned loopholes or the trust coming several decades later. Equally, they did not realize the

extent of the inadvertent reception the common law gave the use. The Statute of Uses executed

and converted uses into legal interests. The idea was clean and straightforward but the

implementation was less so. Where litigation involving former uses arise, common law judges

who for the most part pretended that uses did not exist suddenly found themselves having to

deal with them. Most importantly, they had to convert uses, both plain and exotic ones, into

equivalent legal interests. It was through this process that the use fought the legal-equivalent of

an insurgency. As Bordwell notes the old use had an airing in the common law courts that it

probably never had had while it remained in the seclusion of Chancery. The real issue was

whether the old land law had been preserved practically intact or on the other hand had been

thoroughly modernized.71

To understand the impact of the use on the old land law, one must understand the

foundation on which it was built. Before the age of title deeds and land registration, it was the

overt, ceremonial act of seisin that determined ownership. Baker describes seisin as the fact

of being in possession as a feudal tenanta term originally associated with the act of homage

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which clinched the lords acceptance of his man.72

In fact, as Baker notes, in the feudal

worldwe should think in terms of seisin rather than ownership.73

Conveyance was achieved

by livery of seisin, where the involved parties must be present on the land, observed by

witnesses and accompanied by the symbolic delivery of a clod of earth.74

The importance of these acts and ceremonies in the feudal property system cannot be

overstated. Bordwell remarks overt acts rather than the intent were regarded and alone felt to be

within the competence of the common law procedure. In a feudal and rather lawless age, if the

common law courts succeeded in maintaining a legal order based on known facts without

pretending an insight into the mental attitude of the actors they were doing a great deal.75

To

their credit, the common law judges created a system that was severely rigid and formal but at

least provided a high degree of certainty. But the creation and transmission of uses were the

antithesis of common laws formalism. Livery of seisin saw its all-important status chipped away

by clever Chancery practitioners who exploited loopholes in the law and the Statutes automatic

nature in executing uses. As a result, not long after the Statutes enactment, title could be

transferred without livery of seisin. This would not have happened but for uses and the Statute.76

Equally, the Statutes execution of uses into legal interests had the potential effect of

introducing unwanted flexibility and uncertainty through the backdoor. This was especially the

case regarding future interests and the question the common law judges faced in Chudleighs

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case was whether future uses had to conform to common law limitations on remainders.77

Unsurprisingly, the common law judges made uses conform to common law limitations on

remainders and the uses most brazen challenge to common law was put down. Out of

Chudleighs case, however, came the prequel to the Maitland and Scott debate.

How the Statute operated on uses turned largely on how uses are conceived as property

or as personal obligations. The obligational view was put forward in Chudleighs case by

someone no less than Sir Edward Coke. Before becoming Chief Justice, Coke served as

Solicitor-General in this case and argued on the same side as his arch rival, Francis Bacon. In

this case, Coke argues that a use is a trust or confidence, which is not issuing out of land, but as

a thing collateral annexed in privity to the estate, and to the person, touching the land, scil, that

cestuyque useshall take the profits, and that the ter-tenant shall make estates according to his

direction. So that, he who hath a use hath not jus neque in re neque ad rem, but only a

confidence and trust for which he hath no remedy by the common law, but his remedy was only

by subpoena in Chancery.78

Under this definition, the use was not an incorporeal hereditament. As Bordwell notes,

[the use] was annexed not to the land but to some estate in the land and ceased to run if such

estate ceased or was interrupted or destroyed.79

Tellingly, he continues it does not, however,

anticipate the Austinian classification of rights into rights in remand rights in personamor place

the use in the latter class. Coke annexes the use in privitie to the estate of the land. The

annexation to the person touching the land is distinctly secondary. The personal obligation is

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there but the annexation to the estate is given first place.80

Both Cokes and McFarlane and

Stevens conceptions of the beneficial interest involve a right not against the asset itself, but

against rights to the asset (the legal estate in Cokes case; the trustees right to the asset in

McFarlane and Stevens case). To this extent, McFarlane and Stevens right against a right idea

resonates strongly with Cokes definition.

Bacon, who later became Chancellor, liked the use. To quote Bordwell: He was not, like

Coke, enamoured of the old common law and saw in the logic of the use the chance to escape

from the confines of the latter...far from agreeing that uses imitated in any way the possession, he

urged that they stood upon their own reasons utterly differing from cases of possession in respect

to their raising, preservation, transfer and extinguishment.81

In his unfinished Reading on the

Statute of Uses, he states that usus est dominium fiduciarium: use is an ownership in trust.82

Quite how ownership in trust would work remains uncertain as Bacons work was unfinished

and the text preceding this characterization does not offer much clue. It was Cokes definition

that came to dominate legal thinking for decades, if not centuries. This is unfortunate because, if

anything, it was the Statute of Uses and the judicial interpretation of it that recognized the reality

that uses were a form of ownership.83

C. Trusts under Lord Nottingham

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At around the time when Coke was fired and Bacon became the Chancellor, the fiscal

reasons against uses disappeared and trusts, reincarnated from uses, began flourishing again. It

was during this period that trust law as we know it today was developed. Two themes stood out

in the trusts development: the development of the equitable estate and the Chancerys maxim

of equity follows the law. In the mid-1600s, Cokes definition of the use still holds sway but

judges were beginning to show flexibility when characterizing the trust. In the case of R. v.

Holland, lawyers for the cestui argued that he only had a chose in action, whilst opposing

counsel argued that he had a real interest in the land. Taking an it depends approach, the court

noted that a trust is not a thing in action, but may be an inheritance or a chatell as the case falls

out.84

D.E.C. Yale credits this case for allowing Lord Nottingham to construct an elaborate

notion of the equitable estate.85

Nottingham re-reified the trust and made it an even stronger

property interest. The trustees personal creditors cannot satisfy their claims with trust assets, but

this was also the case for uses. Where the cestuis interest was strengthened was in the rules

concerning dowers and curtesies. The use was not good against them in the past but now widows

and widowers take subject to the trust.86

Nottingham also reduced the element of trust and

confidence involved in trusts by recognizing that corporations and the king can be reposed with

them; that was previously not the case with the use.87

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More importantly, Nottingham injected substantial content into the notion of the

equitable estate with rules on alienation and future interests, the most notable being his

exposition on the rule against perpetuities in theDuke of Norfolks Case.88

The added proprietary

substance was bolstered by the maxim equity follows the law. If Chancery judges had property

aspirations for the trust, there was no better way to imitate the legal kind than to copy its rules.

Viewed from this perspective, S.F.C. Milson is quite right that equity is trying to counterfeit the

phenomenon of property.89

As the equitable estate developed, judges were confident enough to

equate equitable ownership as ownership in land. Commenting on the equity of redemption,90

Lord Hardwicke says the person therefore intitled to the equity of redemption is considered as

the owner of the land91

Importantly, in going beyond Bacons usus est dominium fiduciarium

characterization of ownership, Hale C.B. said that a power of redemption is an equitable right

inherent in the land, and binds all persons in the post, or otherwise.92

This, of course, trumps

Cokes description of the use annexed only to the estate rather than the land itself.

At the same time as assimilating trust and property, as Gregory Alexander notes, judges

were also developing trust doctrines that categorically separated trust from other areas of law.93

According to Alexander, this was done by establishing rules on formalities, certainty of

beneficiaries, and the requirement of the trust res. This was timely because by the time the

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Judicature Acts were promulgated and the common law and equity courts were combined, trust

law became a distinct, independent legal category. It was this trust that Maitland and his English

and American contemporaries knew and on which they based their arguments. Land law and

trust law have moved on since then, but the fundamental philosophy behind them is largely the

same. Perhaps the most significant developments of trust law in the twentieth-century were the

advent of discretionary trusts and the development of rules on trust investments. These

developments are part of the evolutionary response to the changing nature of trust assets and

trustee duties, as well as changes to the taxation framework. Active powers and duties

concerning trustee investment and distribution were the finishing touches to the trust as a modern

wealth management vehicle. For sure, the further dislocation of the beneficial interest in

discretionary trusts and the increasingly intangible nature of trust assets seem to strengthen

Maitlands arguments that the beneficial interest is an in personam right. But Maitland should

not be given the benefit of foresight, for he and his contemporaries were largely dealing with a

trust law that was land- and fixed-interest-based.

In this respect, it is all the more perplexing that Maitland and his followers went beyond

technical Roman categorizations and claim that trusts are better understood as contracts. From

the history of uses and trusts, there is no doubt that their origins lie in personal obligations. But

even before they were enforced by Chancery judges, uses were predominantly about control of

land future control, in particular. The Chancery judges acknowledged this and developed the

notion of equitable estate that is mapped out, almost identically, along legal estate lines. The

resulting, second property system respects and relies on legal property and the two function

smoothly together. Maitlands problem can be summed up as follows: if equitable property


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were on par with legal property, there would be anarchy; if it was not on par, it cannot possibly

be property. The next part of this essay shows why Maitland misses the point.

III. AN ECONOMIC ACCOUNT OF TRUST HISTORY

The historical account of trusts demonstrates that Chancery judges succeeded in creating

a second, equitable property system. Many interesting questions arise and their answers go a long

way to address Maitlands arguments. To begin with, why did Chancery judges create a second

property system at all? Is one not enough? Obviously, they would not have done it had there

been no purpose or benefit. Equally, if not more importantly, why did Lord Nottingham and his

successors create a second property system that looks just like the existing one? We know

historically why equity had to follow the law, but it seems rather redundant from a property-

system-design point of view. On the bona fide purchaser rule, how damaging is it to the

beneficial interest as property? Law and economics can provide explanations to many of these

questions. Of course this does not mean that sixteenth-century judges were consciously applying

any economic principle to the law. But by analyzing the history of trusts in economic terms, it

can be shown that Chancery judges developed a second property system that is compatible with

various economic and cognitive rules.

This part is divided into four sections. The first section explains why Chancery judges

recognized the use in the first place and why they developed it into a second property system.

The second section shows how Chancery judges adopted information cost-saving strategies so

successfully that there is hardly any information cost implications on users of legal property.


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More importantly, borrowing on the modular concept of property, it shows how beneficial

interests are also semi-autonomous property modules, albeit vertical ones. The third section

argues that the bona fide purchaser rule is an efficient interface between vertical property

modules. The fourth section synthesizes the information cost-saving strategies and the interface

the bona fide purchaser rule provides to argue that the trust is property in a fund. Borrowing

ideas from Roman history and behavioral economics, it shows how Chancery judges breathed

legal life into what is largely a cognitive phenomenon.

A. Competition and End-User Demand

In a general sense the early Chancery provided jurisdictional competition for common

law courts. Many of the early Chancellors took the view that the common law was too inflexible

and delivered too many unjust results.94

Nothing better epitomizes the jurisdictional competition

than Sir Thomas Mores dealings with common law judges. Baker notes that when More

continued his predecessors practice of issuing injunctions inhibiting common law actions,

common law judges complained to him. He suggested that they should mitigate and reform the

rigor of the law. If they do that, he will stop issuing injunctions. Although this advice was not

heeded by the common law judges, Chancery jurisdiction certainly played its competitive role

and provided impetus for judicial innovation in the common law courts.

But when it comes to property, the Chancery was not at all competing with the common

law courts. Equitable property was never meant to compete with or override legal property. If it

serves a purpose, this second property system exploits the existence of the original one to extend

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its functions and benefits. Trusts are a functional extension of property.95

What motivated

Chancellors in developing uses and trusts is end-user demand. People wanted more out of the

feudal property system and Chancellors simply responded to that. All functioning property

systems incentivize and coordinate economic activities.96

The feudal property system performed

these functions as well, it just was not optimal. On the incentivizing function, for example, the

inability of individuals to freely make testamentary dispositions of land meant that they did not

have the maximum incentives to care for and improve on it. On the coordination function, the

intimate ties between title and possession created incapacity problems. The classic example of

this was land held for the benefit of Franciscan monks, who were forbidden from owning land.

97

The use, where land and property were held by one to the use of others, provides a solution to the

incapacity problem. The uses role in solving the incapacity problem, of course, extends to the

fabled Crusader, who may not return from the Crusades for many years, if at all.

When individuals began to informally hold property to the use of another whether to

the use of monks or to hold until a minor becomes an adult they were simply overcoming limits

inherent in the feudal property system. Viewed in this way, people simply took the existing

property system they had, added informal arrangements to it, and thereby extended its functions

and benefits. The missing element legal enforceability was rather crucial and Chancery

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judges eventual enforcement of uses was as much about preventing feoffees opportunism as

addressing the limits of the existing property regime.98

The rule against perpetuities is another example of the Chancery responding to end-user

demand for extending the temporal limits of property. Landed families were using uses and trusts

to enable dynastic successions but this was largely frowned upon as being against public policy,

as resources were being tied up for excessive periods of time. Nottingham struck a compromise

between the demands of trust users and public policy by legalizing future interests but regulating

them with the archaic rule that we come to know. Equally, the development of uses took the

direction of property rather than obligations because it is what feoffors and cestuis wanted. Uses

were certainly enforced as personal obligations in the beginning and Chancellors certainly had a

choice to develop them along obligational lines. But they recognized early on that control and

ownership of land is ultimately at stake, not the enforceability or content of mere promises and

actions. By developing trusts along the lines of property and ownership, Chancellors were simply

matching the law with the economic reality.

B. Information Costs and Modularity

If trusts were developed as a second property system to extend the functions of the

existing legal one, and not to compete with or override it, it is crucial that the second system

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interacts well with the first and that they jointly do not produce excessive information costs;99

and this is how trust law is designed. The common law system of property functioned relatively

well at the time. Recall that Bordwell justifies the rigidity of the law on property and its

emphasis on acts and ceremonies.100

From an information cost point of view, this made

tremendous sense. In an age when means of communication and documentation were poor and

unreliable, possession (as represented by seisin) was the best marker of ownership.

The use, being so informal and initially requiring no documentation whatsoever, had the

potential to throw a wrench into the works of legal property. This is because if uses were legally

enforceable property interests, there would be no apparent public information about them. What

one sees would no longer be what one gets; the potential for misinformation and disruption was

too great. The strategy that was pursued is well known and comes in many names, for example

the trust screen101

or information hiding102

. To build upon legal property and extend its

functions, the use, ironically, hides behind it. The use hides behind legal property for two

important reasons. First, because the use does not exist to improve on, say, propertys protection

against external parties, it has no need to touch on such areas already covered by the common

law. Second, the exact arrangement in each use varied widely and it would become very

expensive if prospective purchasers had to go beyond the standard forms of legal interests and

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investigate the precise content of underlying uses. By relieving external parties the need to

consider uses or trusts in their dealings with the property whether in a dispute or in a sale

unnecessary information processing costs are eliminated.103

Viewed from the lens of information cost, the trespassers and thieves arguments offered

by Scott and Bordwell are misguided. It is true that the beneficiary can sue trespassers and

thieves, but the conditions imposed on this procedure (only when the trustee refuses to do so and

even then he must be joined as a defendant) betray the true nature of this right. Trust law is not

concerned with improving propertys protection against external parties, that is why trust law has

not developed a plethora of rights and remedies for the beneficiary against external parties

(except for wrongful transfers, of course). Like prospective purchasers, trespassers and thieves

would not necessarily know whether the beneficiary is really the beneficial owner of the property.

Also, by increasing the number of parties who can sue, the certainty that any negotiation or

settlement is final is reduced. By limiting the beneficiarys right to sue trespassers and thieves,

the law is only being consistent with its information cost-reduction strategy.

Although it is clear that the trust screen or information hiding strategy conserves on

information costs and leaves legal property largely intact, one must question its overall benefits

when coupled with the strategy equity follows the law. Put simply, why do we have a second

property system that hides behind the first and then, for the most part, duplicates it? How does

this hiding and duplicating strategy really extend the benefits of property? As discussed above,

the trust screen only conserves information processing costs by minimizing the interaction

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between the legal and beneficial interests. Behind the screen, Chancery judges could have

devised completely different property rules that are alien to the common law, but they chose to

largely duplicate things under the maxim equity follows the law. The historical and

jurisprudential reasons for equity following the law and the superiority of the legal title are clear

and have already been discussed. The functional reasons for equity following the law are twofold:

information costs and modularity.

Conserving on information costs was never the ultimate aim of a second property system,

for there would not be additional information costs but for its very existence. As such, the

information cost rationale of equity following the law is distinctively secondary. By charting

equitable interests along legal ones, Chancery judges are reducing information processing costs

on two fronts. First, all those who deal with trusts judges, lawyers, and end-users do not have

to learn a completely new system and will immediately be familiar with the vocabulary of trusts.

Second, and crucially, because beneficiaries ultimately obtain legal title to trust assets, keeping

the two types of interests in sync all along would avoid the need to convert alien equitable

interests into legal ones later on a harrowing experience for sixteenth-century common law

judges when executing uses into legal interests. Therefore, the idea of equity following the law

can partly be justified on grounds of information costs.

But the genius of equity hiding behind the law and then following it really lies in the

modular nature of the arrangement. The modular nature of property law is a relatively new idea

whose development is credited to Henry Smith.104

This idea largely builds on information costs

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theory and explains that property law as a whole can be broken down into many semi-

autonomous modules. Smith says property law provides for management of much complexity

through modularity. The exclusion strategy is the starting point in property, and the effect of this

strategy is to economize on information costs. By setting up cheap and rough proxies like

boundary crossings, property law can indirectly protect a wide range of largely unspecified

interests in use, and the details of those use are of no particular relevance to those who are under

a duty to respect the rightthe basic (rebuttable) presumption is property law is delegation to the

owner through the right to exclude, which serves to economize on information costs. In effect,

the exclusion strategy allows the system of uses of resources to manage complexity with

modularity, with much information hidden in property modulesfrom the dutyholders

perspective, property is like a black box, a module, in that much information about uses and

users is simply irrelevant to the dutyholders duty of abstention.105

Smith continues only in specialized contexts does the law start inquiring into uses more

directly, as where one landowner is annoying another with odors; these governance rules of

nuisance law can be thought of as the interface between adjacent bundles of rights. But it is the

exclusion factor that keeps the bundles lumpy and opaque, and operating as modules in which

interactions and interdependencies are intense inside but sparse across the interface connecting

modules. As a result, actions within a module do not have hard-to-predict ripple effects through

the entire system. On the information-cost theory, the combination of exclusion and governance

in property furnishes modules and interfaces for actors taking potentially conflicting actions with

respect to resources.106


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What Smith is describing above is essentially horizontalmodules between different legal

owners (of, say, neighboring plots of land). The exclusion strategy economically delineates

property into modules that, in the normal course of things, have minimal interactions. And even

when they interact or conflict, the information burden of the interface remains on a need-to-know

basis, as in the case of nuisance law. The contribution of the trust screen and equity following

the law to this modular conception of property is that it enables vertical modules, or sub-

modules within modules. The beneficial interest as a module enables multiple parties to have an

interest in the asset the trustee is holding yet the information burden on the outside world is

minimal. The beneficial interest as modular property also epitomizes Smiths idea of

recursiveness; the possibilities of having horizontal (e.g. life interest plus reversion) and vertical

modules (e.g. sub-trusts) by using basic building blocks of property interests are infinite. And

beneficial interests as modular property can do all of this without having any real right to exclude.

In a simple trust relationship where a trustee holds asset for the beneficiary, the trustee

adequately represents the beneficiary and is under a duty to exercise his legal right to exclude

unwanted third parties. The trust screen means that the world at large does not need to know

about the trust. But, more importantly, it is impossible for the world at large to know about the

trust at all. When most people walk by a random house on the street, they know that they are

under a duty not to enter the house unless they have the legal owners consent. This is the right to

exclude and the duty to abstain in normal operation. But very rarely, if ever, do people think of

life tenants and sub-beneficiaries when they walk by a house. The point being made here is that

the world at large can hardly know about the beneficial interest, let alone violate it. This is why


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except in cases of wrongful transfers beneficiaries are not armed with an independent right to

exclude outsiders from the legal interest. Scotts assertion that the world has an in rem right to

respect the trust and not to deal with the trust asset in any manner inconsistent with the trust may

theoretically be true (i.e. anyone in the world could possibly be aparty to a breach of trust),107

but from an information cost point of view this simply does not hold.

But how would beneficiaries protect their beneficial interestmodules? A better question

to ask first is what makes a beneficial interest a property module? Recall that in Smiths modular

conception of property, it is the in rem right to exclude that conceptually demarcates each

property module. It is the right to exclude that makes each module lumpy and opaque and this

forms the baseline of each semi-autonomous module. But this narrative is only most relevant to

property of tangible assets such as houses or cars. As an intangible sub-module, the beneficial

interest cannot be seen or touched, let alone be physically trespassed upon.

In beneficial interests, there is simply no physical or conceptual tool that functions like

the right to exclude. Instead, the terms of the trust and the trustee operate jointly to demarcate

each module. The trust deed may stipulate that A has a life interest and B has the reversion; and

it is up to the trustee to give effect to these terms. As long as A and B are clear of the terms of

their entitlements and as long as the trustee gives effect to them, the boundaries are illuminated

and A and B are free to do whatever they want within their own modules and will know when

someone has violated them. In this way, beneficial interests are largely private property in the

sense that their existence, violation, and protection are hidden from the public domain. The

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relationships, rights, and duties are all very intense, but they only affect a very limited number of

parties.

Most violations of beneficial interests would only involve the trustee and other

beneficiaries. In the case of a life tenant and remainderman, the formers beneficial interest can

be violated if, say, the trustee allows the remainderman to enjoy the asset during the life tenants

lifetime or, in the case of investments, disproportionately favor capital gains over income.108

In

such a case, the remedy is not to exclude anybody (as one would with legal property). The

remedy is to seek recourse against the trustee and, possibly, the remainderman. In these cases,

the interaction and flow of information is strictly between the several parties. This is also why

equity only needs to act in personam; to broadcast or publicize such a court order for public

compliance is unnecessary and prohibitively expensive.109

To speak of a right to exclude others,

especially the world at large, from the beneficial interest is just nonsense.

Understanding how beneficial interests are delineated as modular property and how they

are protected is only the beginning. Their beauty lies in what can be done with these modules. As

discussed above, the outside world needs not concern what lies behind the trustee. But, equally,

the trustee needs not concern what lies behind beneficiaries and each beneficiary needs not

concern what lies behind other beneficiaries. As long as the trustee faithfully and diligently

performs his duties, he needs not care what the beneficiary does with his beneficial interest. The

beneficiary could have declared a sub-trust over his beneficial interest, and thereby owes duties

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to a sub-beneficiary.110

Or the beneficiary can be insolvent and his personal creditors can claim

his beneficial interest to satisfy outstanding debts. In theory, none of these actions affect the

behavior of the trustee for the same reasons that one landowners internal actions do not affect

the behavior of an adjacent landowner because the actions and consequences are contained

within their respective modules. The same goes for beneficiaries: they do not need to care what

other beneficiaries do with their beneficial interests because, in principle, their actions should be

contained within their respective modules.

It is through these modules and sub-modules that the benefits and functions of property

are extended. Extending the temporal function of property by enabling the settlors dynastic

intentions is achieved efficiently with this modular approach.111

Determining how and when

assets are used and by whom are the key variables in post-mortem asset disposition and the

modular approach of beneficial interests offers a great degree of freedom in achieving this. Smith

uses the analogy of Lego-like building blocks to describe the basic pieces of property interests:

fee simple, life interests, and reversions.112Where a settlor wants to create a complex chain of

successions and multiple property interests (e.g. to A for life then to B for life then remainder to

C), he would employ the trust and create what could be understood as three sub-modules under

the original, legal module. These three sub-modules are placed horizontally under the legal

module, not vertically as chronology of succession may suggest. It is horizontal in the same

way as two adjacent land owners modules would precisely because there is significant

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opportunity for these modules to interact. The law against waste here is analogous to the law

against nuisance; they are both interfaces between horizontal modules. Equally, if A and C

pledged their beneficial interests and later become insolvent, B is unaffected by this because A

and Cs actions are contained within their respective modules: B still holds a life interest that

begins when A dies and ends when B himself dies. Further vertical modules would only appear if

A, B, or C declares sub-trusts over their beneficial interests.

The possibilities with the modular approach to beneficial interest are almost infinite and

this also explains why, functionally speaking, equity can simply follow the law rather than invent

new property concepts.113

Using the Lego brick analogy again, one can create almost any form of

property interest using the basic blocks of legal property. This is Smiths idea of recursiveness at

work.114

The alternative for achieving the same result would be to melt the Lego pieces together

into one unsightly block. By doing that, however, one loses the semi-autonomous delineation and

interfaces that came with the modular approach. Given the flexibility of the modular approach

and the information cost savings of equity following the law, it should now be clear why, apart

from historical and jurisprudential reasons, equity is happy to just follow the law when it comes

to property interests.

C. Efficient Boundaries between Legal and Equitable Property

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Equity avoids a clash with the law by hiding behind it. This can be explained on

information cost grounds and the modular nature of property also means that many degrees of

interests, in depth and in breadth, can be constructed. What still begs for explanation, however, is

the bona fide purchaser rule. Conventional economic analyses of law focus on the efficiency of

the bona fide purchaser rule as applied to the sale of commercial goods and the typical narrative

is as follows:115

the law originally favored the owner by giving him absolute protection under the

nemo dat rule;116

this was also a Pareto-efficient rule.117

As the economy became more

mercantile and commercial exchanges with strangers became a fact of life, the rule evolved into

protecting the bona fide purchaser instead; this was deemed Kaldor-Hicks efficient so long as the

rule resulted in net benefits to society as a whole.118

Put simply, the benefits of commercial

exchange to society at large outweigh the rare harm caused to unfortunate owners. Out of the

bona fide purchaser rule sprang various related rules and doctrines that expand or fine-tune the

basic idea. These include the market overt rule, the different levels of duties of inquiry imposed

on the purchaser, and the various doctrines of notices. For the same reasons that favor the rule in

the commercial goods setting, the rule as applied to trusts is also economically sound, taking into

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account the need to maximize marketability of assets, the rarity of wrongful transfers, and the

precautions settlors and (some) beneficiaries can take.119

But there is another important aspect to the bona fide purchaser rule when beneficial

interests are understood as property sub-modules. The trustee adequately represents the

beneficiaries in most dealings against the outside world and the interactions between beneficial

interests as sub-modules are governed by various trust rules, such as the duty of impartiality and

the law against waste. Such rules are horizontal interfacesthat govern the interactions between

horizontal modules, just like the law on nuisance that governs certain interactions between

adjacent land owners. The only instance not covered by this account is the interaction between

beneficiaries and purchasers of the trust asset. Viewed in this way, the bona fide purchaser rule is

the vertical interfacebetween beneficiaries and purchasers, who can dislocate beneficial interests

from trust assets. Recall that Maitland is not concerned with the beneficiaries mutually violating

each others beneficial interests. He is only concerned with the beneficial interests being

dislocated from the original asset. This, of course, presents a much bigger problem than mere

violations of beneficial interests. Under the modular theory of property and trusts, beneficial

interests subsist under legal property and build sub-modules below. Without legal property, there

is simply no conceptual basis for their existence.

The bona fide purchaser rule serves as the vertical interface because it operates to safely

dislocate the beneficial interest from the trust asset and relocates it to somewhere else; and it

does this in a Pareto-efficient manner. Why must the beneficial interest be dislocated from the

trust asset when it meets the bona fide purchaser and why is this outcome Pareto-efficient? For a


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vertically modular system of property to work, the vertical modules must remain detachable from

the top, legal module. The modular nature of this second property system and all the benefits

that come with it simply disappear if we allow the beneficial interest to be stuck onto the legal

interest. The idea of modular equitable property is to add on to the existing legal module, not to

change its original nature or cannibalize it by being attached to it permanently. Of course, this

goes back to the reasoning behind the numerus clausus principle: the information processing

costs of allowing assets with exotic beneficial interests attached to them to circulate in the

economy are too great.

This reasoning is confirmed by the differing treatment of bona fide purchasers of legal

and equitable interests. The rule in Maitlands time is that the bona fide purchaser of an equitable

interest will take it subject to pre-existing equitable interests.120

The standard explanation for this

is the equitable maxim of between equal equities, the first in time shall prevail, but no amount

of principled rationalization can mask the fact that the Chancery court has double standards when

it comes to bona fide purchasers. The conscience of the bona fide purchaser should in theory be

the same whether he is purchasing a legal interest or an equitable interest, so out goes the

conscience and fairness argument. There is only one legal reason and one economic reason for

this double standard. The legal one is crude but straightforward: in setting the bona fide

purchaser rule, the Chancery court had no choice but to yield to the superiority of legal interests.

But when it came to domestic, internal equitable interests, Chancery judges can act with

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48

impunity within its own domain and create property interests that effectively bind the whole

world.

The economic explanation is also based on information costs. A purchaser of an equitable

interest is buying a derivative, intangible interest. Unlike tangible property like a house or a car,

there are no visible boundaries or ownership attributes. Being offered a beneficial interest from a

rogue sub-trustee is very different from being offered a stolen car from a thief. The prospective

purchaser must investigate very diligently just to understand what he is buying. This is not the

case for purchasers of legal interests, especially interests in physical goods, where transactions

are rapid and often conducted at face value. The high information processing costs experienced

by a purchaser of an equitable interest are relatively rare and the diligence required is likely to

yield hidden information (i.e. pre-existing beneficial interests). Therefore, reversing the bona

fide purchaser rule in the case of equitable interests is Kaldor-Hicks efficient (i.e. it produces a

net benefit to society by protecting common beneficiaries at the expense of rare purchasers of

equitable interests).

But, going back to bona fide purchasers of legal interests, how does it make the outcome

Pareto-efficient? The rule is a stringent one, requiring the purchaser to be purchasing in good

faith, pay with value, and be without notice of the trust. Successful operation of the rule is

confined to what are essentially innocent strangers who transact at arms length. These

purchasers are also the one most likely to have paid market value for the asset and it is in the

purchase money where the beneficial interest has relocated. In other words, the rule is Pareto-

efficient because the loser in a transaction where the rule successfully operates the


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beneficiary is financially no worse off than prior to the transaction.121

Of course, nothing

guarantees that the trustee will not run off with the purchase money or gamble it away. But that

is not the business of the bona fide purchaser rule as long as the rule yields valuable

consideration from an innocent stranger transacting at arms length, it has done its job.

D. Funds, Mental Accounting, and Value

The bona fide purchaser rule ensures that the beneficial interest dislocates from the

disposed asset and relocates into the proceeds of the sale. This reinforces Maitlands assertion

that the beneficial interest cannot possibly be an in rem interest in the asset. Still, despite this

seemingly fatal flaw, Maitland himself praises the trust as the greatest and most distinctive

achievement performed by Englishmen in the field of jurisprudence.122

The brilliance of the

trust does not lie in its creation of a property system in legal assets, but arguably in a second

property system that is based on the original one. In particular, it is this second property system

that enables property in a fund.123

The very weakness that obligational theorists pick on the fact that the beneficial interest

does not bind the bona fide purchaser is also the very attribute that makes property in a fund

possible. The necessary corollary of the bona fide purchaser rule is the doctrine of

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overreaching.124

Whenever the bona fide purchaser rule operates or whenever an authorized asset

disposition is made, the beneficial interest is relocated from the disposed asset to the proceeds. It

is difficult to pinpoint the origins of the doctrine125

but the 1925 Law of Property Act certainly

codified it.126

The result of this is that beneficial interests will always exist and, crucially, always

exist as a sub-module under a legal interest. The asset may change but the content and the

attributes of the beneficial interest itself remain the same.

The fungible nature of the beneficial interest is the essential legal component for the fund

concept. Two other important features of trusts, though not absolutely critical, perfect it as

property in a fund. The first is the fact that almost anything of value can be the subject matter of

a trust everything from land and chattels to debts, milk quotas,127

and benefits of a contract.128

This was largely the case from the very beginning: apart from land, chattels have long been

recognized as subject-matters of uses.129

The universal nature of trust assets means that one can

have property in almost anything but through a fund. The second important attribute is the

power of disposition or investment, without which would render the fund much less dynamic.

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Powers of investments were interpreted very restrictively in the nineteenth-century but modern

trust laws provide trustees with significant freedom of operation.130

The trust was used dynamically as property in a fund only from the nineteenth-century

onwards. This was largely due to changes in the economy at around that time. With the industrial

revolution, the English economy moved away from agriculture and into industrial production.

Land as a factor of production and as a source of wealth became less important as debt and

stocks played an increasing role in the economy. As a result, the nature of trust assets tilted

towards financial capital. Trust law, especially the rules on investments, also developed rapidly

in the nineteenth- and twentieth-centuries to accommodate the changing assets and functions of

trusts. Today, we take the fund nature of trusts for granted. We speak of the trust fund and we

use trusts to structure and give effect to various investment funds.131

It is the trust as a fund and

the beneficial interest as property in a fund that makes it so special.

But surely Chancery judges did not invent the fund concept. After all, the word fund

came from the Latin wordfundus, which means land, farm, or estate.132

Rather, in the historical

and economic context of this essay, it is worth analyzing how uses and trusts conceptually

developed as a fund. An obvious starting point is to ask exactly: what is a fund? In Roman times,

fundus was physically a large farm or estate. But historians have also interpreted fundus as

having economic, managerial, and accounting meanings.133

As an economic unit, it was merely a

factor of production. But, as P.W. De Neeve observes, thefundusmust be considered primarily


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as an administrative unit in a rather broad sense of the term. It was primarily a book-keeping, a

managerial unit for the owner, who determined the unit. Moreover it was an administrative unit

for the authorities who, if necessary, registered the fundi under the name determined by the

owner.134

He continues: the yields (reditus) of the fundus as a whole were registered in the

bookkeeping under one heading, that of the relevantfundusthis does not

Documents

The Nature of the Beneficial Interest (Trusts)