The Nature of Beneficial Interests: A Historical and Economic Perspective

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
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 twentiethcentury. 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
*LLBandPhD,KingsCollegeLondon;LLM,LondonSchoolofEconomics.
1
See Wesley N. Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning, 23 YALE L. J. 16
(1913)andWesleyN.Hohfeld,FundamentalLegalConceptionsasAppliedinJudicialReasoning,26YALE L. J.710
(1917).
2
This list is not complete; these are just the better known participants. The following is a selection of
representative literature: FREDERIC W. MAITLAND, EQUITY:ACOURSEOFLECTURES (2nd ed. 1936); Austin W. Scott, The
NatureoftheRightsoftheCestuiQueTrust,17COLUM.L.REV.269(1917);ChristopherLangdell,ABriefSurveyof
EquityJurisdiction,1HARV.L.REV.55(1887);A.W.Whitlock,ClassificationoftheLawofTrusts,1CAL.L.REV.215
(1913); William F. Walsh, The Nature of Equitable Rights and Equitable Title, 18 GA. L. REV. 36 (1930); Percy
Bordwell,EquityandtheLawofProperty,20IOWAL.REV.1(1934);CHARLESHUSTON,THEENFORCEMENTOFDECREESIN
EQUITY(1915).
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.3 Scott
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.4 In 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.
3
4
SeeMaitland,supranote2,at106116.
Seeinfratextaccompanyingnote29.
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.5 These 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:
5
Theeconomicanalysisoftrustsisnotnewandthisessaysimplyaugmentstheexistingdiscussion.Seegenerally
John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE L. J. 625 (1995); Robert H. Sitkoff, An
Agency Costs Theory of Trust Law, 89 CORNELL L. REV. 621 (2004); Henry Hansmann & Reinier Kraakman, The
Essential Role of Organizational Law, 110 YALE L. J. 387 (2000); and M. W. LAU, THE ECONOMIC STRUCTUREOF TRUSTS
(2011).
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)
SeeJamesAmes,TheDisseisinofChattels,PartIII,3HARV.L.REV.337,339(1890).
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 Equity lectures, Maitland explains why the beneficiarys
interest is not a right in rem, but a right in personam.7 At 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 gives jus 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.8 To 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.9 Maitland 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
SeeMaitland,supranote2,lecturesIXtoXI.ThisbookwasposthumouslypublishedbyMaitlandsstudents.
SeeJOHNAUSTIN,LECTURESONJURISPRUDENCE;ORTHEPHILOSOPHYOFPOSITIVELAW377(5thed.1885).
9
SeeMaitland,supranote2,at106.
10
Seeid.at107.
8
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
11
Unlessindicatedotherwise,bonafidepurchasershallhereinaftermeanbonafidepurchaserforvaluewithout
notice.
12
Seeid.at108116.
13
Thecestuiqueuseisthebeneficiaryofauseandthefeoffeeisthetrustee.
14
Seeid.at114115.
15
Seeid.at118.
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 personam necessarily 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
16
Seeid.at117.
Seeid.at116.
18
SeeScott,supranote2.
19
Seeid.at273275.
20
Seeid.at274.
17
What Scott is referring to, of course, is the tort of intentional interference with the
performance of a contract, as found in Lumley 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 Englishspeaking 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
21
(1853)118Eng.Rep.749;2El.&Bl.215.
SeeHarlanF.Stone,TheNatureoftheRightsoftheCestuiQueTrust,17COLUM.L.REV.467,470(1917).
23
SeegenerallyLUSINAHO,TRUSTLAWINCHINA(2003);THEINTERNATIONALTRUST,(JohnGlasson&GeraintW.Thomas
eds.,2006);andJohnH.Langbein,TheSecretLifeoftheTrust:TheTrustasanInstrumentofCommerce,107YALEL.
J.165(1997).
22
and towards the end of the twentieth-century, it became part of a larger debate over the nature of
property. The bundle of rights conceptions of property that Hohfeld and Honor put forward
dominated legal thinking for most of the twentieth-century.24 It was only in the 1990s that neoconceptualists such as James Penner, Thomas Merrill, and Henry Smith revived the Blackstonian
idea of property based on exclusion. 25 As a result, the debate over the nature of trusts and
beneficial interests got another airing, if only with non-US scholars.26
What is interesting, if rather unfortunate, is that most of the renewed discussions are
rooted in old ideas. Ben McFarlane and Robert Stevens propose an idea of equitable property,
based on a right against a right; 27 Penner offers robust arguments on why McFarlane and
Stevens are mistaken.28 Yet they are all basing their arguments along Maitland and Scott
lines. In the case of McFarlane and Stevens, their conception of equitable property is designed to
resolve a problem. This being what they call the orthodox, but unattractive, view that English
law contains two competing laws of property.29 They continue on that view, if A holds his or
her right to a thing on trust for B, that thing has both a common law owner and an equitable
owner.30 To avoid this clash of ownerships, they conceive of equitable property as neither a
right against a thing (in rem) nor a right against a person (in personam). Rather, they argue, it is a
24
SeeHohfeld,supranote1,andTonyHonor,Ownership,inOXFORDESSAYSINJURISPRUDENCE:FIRSTSERIES(Anthony
Guested.1961).
25
See JAMES E. PENNER, THE IDEA OF PROPERTY IN LAW (1997); and Thomas W. Merrill & Henry E. Smith, What
HappenedtoPropertyinLawandEconomics?,111YALEL.J.357(2001).
26
SeePenner,supranote25,128138;JamesE.Penner,DutyandLiabilityinRespectofFunds,inESSAYSINHONOUR
OFSIRROYGOODE(JohnLowry&LoukasMisteliseds.,2005);RichardNolan,PropertyinaFund,120LQR108(2004);
RichardNolan,EquitableProperty,122LQR232(2006);andRichardNolan,UnderstandingtheLimitsofEquitable
Property,1J.EQ.18(2006).Americanscholarsarenotablyabsentfromthecurrentdiscussion.
27
SeeBenMcFarlane&RobertStevens,TheNatureofEquitableProperty,4J.EQ.1(2010).
28
See James Penner, Review of McFarlane (2008) The Structure of Property Law, 17 RLR 250 (2009); and James
Penner,TheNewObligationalTheoryoftheTrust(February2012)(Unpublishedmanuscriptonfilewithauthor).
29
SeeMcFarlaneandStevens,supranote27,at2.
30
Seeid.at2.
10
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.32 Scott 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,
31
Seeinfratextaccompanyingnote79.
See RESTATEMENT (SECOND) OF TRUSTS 280282 ; see also DAVID J. HAYTON, et al., UNDERHILL AND HAYTON THE LAW
RELATINGTOTRUSTSANDTRUSTEES1.1(3)(17thed.2006).
33
SeeScott,supranote2,at284287andBordwell,supranote2,at22.
32
11
the courts would seem merely to be acting with common sense in view of the trust relation and
not to be proceeding from anything very fundamental about the nature of the cestuis interest.34
The other way to counter Maitlands arguments is to play on the indirectness of the
beneficiarys in rem rights. Scott did this with the Lumley v. Gye type of indirect in rem right.
Recently, Penner argues for a different type of indirect in rem right for the beneficiary. In
responding to McFarlanes position on the beneficiarys position against a tortious converter,
Penner says but if [the beneficiary] has a right against [the trustees] ownership right, then he
has a right against whatever makes it the right it is, including its in rem aspects. Why then is [the
beneficiarys] right, indirect though it is, not a right in rem?35 But this indirectness factor is a
serious limitation: that it is intermediated through the trustee means that the trustee can frustrate
the beneficiarys right against third parties. As McFarlane and Stevens counter, what if the
trustee consents to a stranger damaging the trust asset? The beneficiary would have no case
against the tortfeasor (but he will have a case against the trustee for breach of trust).36
McFarlane and Stevens and Penner are not the only voices in the contemporary
discussion, but they are representative and are certainly the most vocal. Yet it is clear that we are
still captured by the views of a few nineteenth-century scholars and a few Latin terms. The next
two parts of this essay step back from the framework established by Maitland and Scott and look
at the key issues the relationship between law and equity and the bona fide purchaser, among
others from historical and economic perspectives.
34
SeeBordwell,supranote2,at22.
SeePenner(2008),supranote28,at254255.
36
See McFarlane and Stevens, supra note 27, at 4. Penner subsequently directed his arguments away from the
Scottmodelandemphasizestheideathatpropertyisnotjustaboutexcludingpeople,butaboutrealizingvaluein
theassetthroughvariousways,includinguseandsale.SeePenner(2012),supranote28,at816.
35
12
II. THE HISTORY OF USES AND TRUSTS
Bordwell divides Chancery equity history into three periods: the period of the use up to
the Statute of Uses (early-1500s to 1535); from the Statute of Uses to the Chancellorship of Lord
Nottingham (1535 to 1673); and from Nottinghams Chancellorship to the Judicature Acts
(1673-1875).37 These are useful divisions not only because of watershed events or personalities,
but also because of profound changes in equity jurisprudence in each of these periods. Modern
textbooks if they devote a section on trust history at all typically mention uses, the Chancery
as a court of conscience, and the Statute of Uses. This is unfortunate because trust jurisprudence
is the product of its own history. In turn, the trust has a long-winded, often tortuous, and
somewhat accidental history that is filled with feudal politics and judicial rivalry. What is clear
from the historical account is that as soon as they recognized the use in the fifteenth-century,
Chancery judges began constructing a second, equitable property system out of it. By the end of
the nineteenth-century, the idea of the equitable estate was firmly established as a property
interest. And contrary to Maitlands fears, legal property and equitable property function
smoothly, if not symbiotically, precisely because of the bona fide purchaser rule. This account
clearly and convincingly demonstrates that the law of trusts is rooted in property law. To
conclude otherwise, as Maitland did, is to ignore six hundred years of English legal history.
A. Uses
37
13
In the beginning, there were uses. Contrary to conventional wisdom, the word use is
not related to the Latin word usus. Rather it is derived from another Latin word opus, or
os in Old French. The phrase ad opus means to the use of (another person). Since ancient
days, chattels and property have been received or held for the use of another person. Maitlands
own research shows that as early as 809 A.D., instances of ad opus have been recorded in AngloSaxon land books.38 In 1224, there was even a case of the fabled Crusader who, before departing
for the Holy Land, committed his land to his brother to keep to the use of his sons. The brother
reneged on his promise so the eldest son sued in a seigniorial court. They came to an out-of-court
settlement.39 The idea of separating legal title and beneficial enjoyment is therefore not a novelty
when the use became popular in the late thirteenth-century. But until the courts gave it proper
recognition, it was less a legal arrangement than a social custom based on genuine trust and
confidence.
The popularity of the use is largely a function of the economics of the feudal system. The
feudal system was based on land and military service. In return for an overlord granting a tenant
land, the tenant undertook to provide military service in times of war. This system worked well
only in long periods of conflict. As Baker notes, this model was collapsing by the 1200s. 40
Instead of providing military service in-kind, rents were being paid but this was being eroded by
inflation. Soon overlords found other ways to profit from the landlord-tenant relationship. These
were the so-called incidents of the tenurial relationship. The less important ones include aids
(a cash call for special situations, for example ransom money to free the overlord from captivity
or the knighting of his eldest son), fines on alienation (a transfer fee to be paid when the
38
SeeFredericMaitland,TheOriginofUses,8HARV.L.REV.127,131(1894).
Seeid.at133,citingBractonsNoteBook,pl.999.
40
SeeJ.H.BAKER,ANINTRODUCTIONTOENGLISHLEGALHISTORY238243(2002).
39
14
overlord consents to a change of tenant), and relief (another transfer fee, to be paid when a
tenant dies and his heir inherits the tenancy).
But the most lucrative incidents are escheat, wardship, and marriage. Escheat occurred
when a tenant died intestate and the overlord took back the land and was free to grant it to
another tenant. Wardship was where a tenant died with an heir who was still a minor and the
overlord took wardship of the land and child. He was entitled to all the profits and income from
the land until the minor became an adult. In return, he was financially responsible for raising the
child. As a lucrative bonus, the overlord was entitled to arrange for the childs marriage. The
child could refuse the arranged marriage but he must compensate the overlord for the value of
the marriage. The separation of apparent ownership and enjoyment offered by the use enabled
the avoidance of many of these feudal incidents.
The principle behind using the use to avoid escheat or wardship is simple. The tenant
(who is the feoffor, settlor-equivalent in a trust) would transfer his fee simple interest (a
feoffment) to a feoffee (the trustee) to hold it to the use of himself and, say, his minor son. The
feoffee undertakes, on the feoffors death, to hold the fee simple interest to the use of the minor
son and to transfer it to him when he reaches the age of majority. Simple and crude this may
sound by todays tax avoidance techniques, the scheme worked and escheats and wardships were
not triggered off. Uses also enabled testamentary dispositions of land, which were prohibited at
law. An inter vivos feoffment to a feoffee, as above, can achieve the same effect as a
testamentary disposition of land. It should not come as any surprise that the uses popularity
surged.
15
But the key the absolute key to the schemes success is that it must be informal. As
Baker notes, if the feoffees undertaking was a formal condition and the feoffee subsequently
breached this undertaking, the land reverted back to the feoffors heir, frustrating the feoffors
effort to make a testamentary disposition to, say, an unrelated third party.41 Equally, if full rights
of beneficial ownership were made to be a legal condition, it would be repugnant and void.42
This informality requirement was also the schemes biggest drawback. If the feoffee reneged on
his promise, the feoffor and the intended beneficiary would have no legal recourse whatsoever.
In the eyes of the common law courts who were severely formalistic the feoffees legal title
to the land was conclusive proof that he was the absolute owner. The feoffor and cestui were
considered to be random strangers with no connection to the land, embarking on opportunistic
litigation.43
It was only a matter of time before some feoffees broke their promises and feoffors and
cestuis sought relief outside the common law courts. Contrary to popular perceptions, the
Chancery court was not the first to help unfortunate feoffors and cestuis. Ecclesiastical courts
were likely the first courts to have extra-judicially enforced the use. In 1375, for example, a
group of feoffees were excommunicated for transferring land against the feoffors will.44 There
were no special reasons for why the ecclesiastical courts took up cases on uses. Their
41
SeeBaker,supranote40,at249250.
SeeBaker,supranote40,at250n.7.
43
David Seipp points out that although common law courts refused to recognize the use arrangement from a
property and inheritance perspective, they did recognize uses for other expedient purposes. Littleton CJ said in
1502thatbeneficiariesofusesmetthepropertyqualificationforjuryservice.SeeDavidSeipp,TrustandFiduciary
DutyintheEarlyCommonLaw,91B.U.L.REV.1011,1018(2011).
44
SeeRichardHelmholz,TheEarlyEnforcementofUses,79COLUM.L.REV.1503,1505(1979).
42
16
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 fourteenthcentury 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
45
Seeid.at101n.21.
47
PerVavasourJ.inDodv.Chyttynden,(1502)116SS391.
48
SeeHuston,supranote2,at91.
46
17
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
49
Myrfynev.Fallan,(1446)2Cal.Proc.Ch.XXI.
SeeHelmholz,supranote44,at1512.
51
52
Seeid.at251.
53
Bakertracesthebonafidepurchaserrulebacktothe1450s.CardinalBeaufortsCase,31Hen.VI,StathamAbr.,
Subpena,pl.[1],reprintedinJOHNBAKER,SOURCESOFENGLISHLEGALHISTORY:PRIVATELAWTO1750(2010),106.Butthe
mostcomprehensiveelaborationoftherulecanonlybefoundin1673:Bassettv.Nosworthy,(1673)23Eng.Rep.
55,Rep.Temp.Finch102.
54
Medleyv.Martin,(1673)23Eng.Rep.33,Rep.Temp.Finch63(creditors);Nashv.Preston,(1630)79Eng.Rep.
767,ICro.Car.190(widows).
50
18
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 res into the hands of a purchaser for
19
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 rem if 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.
55
SeeLangdell,supranote2,at5960.
20
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 fide purchaser 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
56
57
1Ric.III,c.1,reprintedinBaker,supranote53,at110111.
21
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.
58
Seeid.at251252.
Seeid.at253.
60
Y.B.Pas.27Hen.VIII,fo.7,pl.22,reprintedinBaker,supranote53,at127.
61
SeeThomasAudley,Readingon4Hen.VII,c.17(InnerTemple,1526),reprintedinBaker,supranote53,at118.
59
22
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
62
27Hen.VIII,c.10.
Onseisin,seeinfratextaccompanyingnotes6870.
64
Auseisconsideredpassiveifthecestuitooktherentsandprofitsdirectly.Butthecourtsheldthatwherethe
feoffeetooktherentsandprofitsandthenpassedthemontothecestuiaseeminglytokendutytheusewas
consideredactiveandthusexemptedfromexecution.SeePercyBordwell,TheConversionoftheUseintoaLegal
Interest,21IOWAL.REV.1,13n.64(1935).
65
Tyrrelscase,1And.37,pl.96,reprintedinBaker,supranote53,at141.
66
67
Seeid.at291.
63
23
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
68
69
LawofProperty(Amendment)Act,1924,15Geo.V,c.5,sched.1.
24
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
70
71
25
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
72
Seeid.at230.
74
Seeid.at305.
75
76
73
26
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
cestuy que use shall 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 rem and rights in personam or 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
77
(1594)1Co.Rep.113;76Eng.Rep.270.
76Eng.Rep.273274.
79
78
27
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
80
Seeid.at12.
Seeid.at1213.
82
See The Learned Reading of Sir Francis Bacon upon the Statute of uses (1642), at 7, reprinted in Baker, supra
note53,at150n.125.
83
Afterall,itwastheStatutethatequateduseswithlegalestates.
81
28
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
84
82Eng.Rep.498,499,23Car.Banc.Reg.20,21.
SeeD.E.C.Yale,Introduction,79SS90(1961).
86
Tasselv.Hare(1675)73SS230,n.339.
87
SeeBordwell,supranote2,at17n.103.
85
29
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 the Duke 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
88
(1678)22Eng.Rep.931,3Ch.Cas.1.
SeeS.F.C.MILSON,HISTORICALFOUNDATIONSOFTHECOMMONLAW6(1981).
90
The equity of redemption is the right of a mortgagor to redeem the mortgaged property once the mortgage
liability has been discharged. In the days before registered mortgages, a mortgagor would transfer title to the
property to the mortgagee and title would be transferred back once liability has been discharged. Whilst the
mortgagorholdsthetitleandislegalowneroftheproperty,themortgagorholdstheequityofredemptionandis
recognized as equitable owner of the property. See generally RICHARD W. TURNER, THE EQUITY OF REDEMPTION : ITS
NATURE,HISTORYANDCONNECTIONWITHEQUITABLEESTATESGENERALLY(1931).
91
Casbornev.Scarfe,26Eng.Rep.377,379,1Atk.603,605.
92
Pawlettv.AttorneyGeneral,(1667)145Eng.Rep.550,552,Hard465,469.
93
SeeGregoryS.Alexander,TheTransformationofTrustsasaLegalCateogry,18001914,5LAW&HIST.REV.303,
327(1987).
89
30
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
31
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 propertysystem-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.
32
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
94
33
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
95
Foranaccountofthefunctionsoftrustsandhowtheyextendthebenefitsofproperty,seeLau,supranote5,at
137164.
96
Themodernliteratureontheeconomicsofpropertyisextensive.Thefollowingisjustasmallsample:RICHARDA.
POSNER,ECONOMICANALYSISOFLAW3234(6thed.2003);HaroldDemsetz,TowardsaTheoryofPropertyRights,57
AM.ECON.REV.347(1967);RichardA.Epstein,PastandFuture:TheTemporalDimensionintheLawofProperty,64
WASH.U.L.Q.667(1986);ThomasW.Merrill,ThePropertyStrategy,160U.PA.L.REV.2061(2012);andHenryE.
Smith,ExclusionVersusGovernance:TwoStrategiesforDelineatingPropertyRights,31J.LEG.STUD.453(2002).
97
SeegenerallyBaker,supranote40,at249.
34
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
98
Onequitysroleincheckingopportunism,seeHenryE.Smith,AnEconomicAnalysisofLawandEquity(2010)
(unpublished
manuscript),
available
at
http://www.law.northwestern.edu/colloquium/law_economics/documents/2011_SmithLawVersusEquity.pdf.
35
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 screen 101 or information hiding 102 . 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
99
In the context of standardization of property interests, Thomas Merrill and Henry Smith sum up the idea of
informationcostsonproperty:Whenpropertyrightsarecreated,thirdpartiesmustexpendtimeandresources
todeterminetheattributesoftheserights,bothtoavoidviolatingthemandtoacquirethemfrompresentholders.
The existenceof unusual property rights increases thecost of processing informationabout allproperty rights.
See ThomasW.Merrill &Henry E.Smith, OptimalStandardization in the Law of Property: TheNumerus Clausus
Principle, 110 YALE L. J. 1, 8 (2000). Beneficial interests, being enforceable yet infinitely customizable property
interests,havethepotentialtodrasticallyincreaseinformationprocessingcostswhentheyinteractwithandare
attachedtolegalinterests.
100
Seesupratextaccompanyingnote75.
101
SeeBernardRudden,ThingsasThingandThingsasWealth,14OJLS81,90(1994).
102
SeeHenryE.Smith,PropertyastheLawofThings,125HARV.L.REV.1691,1703(2012).
36
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
103
On how trusts perform this information costsaving function, see Thomas W. Merrill & Henry E. Smith, The
Property/ContractInterface,101COLUM.L.REV.773,848(2001).
37
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
104
SeeHenryE.Smith,OntheEconomyofConceptsinProperty,160U.PA.L.REV.(forthcoming2012),availableat
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1989464.
38
theory and explains that property law as a whole can be broken down into many semiautonomous 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
105
106
Seeid.at1718.
Seeid.at18.
39
What Smith is describing above is essentially horizontal modules 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 submodules 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
40
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 a party 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 interest modules? 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
107
Seesupratextaccompanyingnote20.
41
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
108
ThetrusteesdutyofimpartialityandtheinvestmentdilemmahefacesarediscussedinRESTATEMENT(THIRD)OF
TRUSTS79.
109
Formoreonequityactinginpersonam,seeSmith,supranote98,at2123.
42
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.112 Where 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
110
The idea of subtrusts specifically, and vertical modules generally, can be seen in judicial recognition of uses
uponusesduringtheapplicationoftheStatuteofUsesinthe1500s.Astotheoriginsofusesuponuses,seeNeil
Jones,TheUseUponaUseinEquityRevisited,33CAMBRIANL.REV.67(2002).
111
The modular conception of trusts primarily highlights the extension of propertys temporal function, i.e. the
creationofcomplexandtemporalpropertyinterests.Tounderstandhowtrustsextendthecoordinationfunction
ofproperty,seeLau,supranote5,at144156.
112
SeeSmith,supranote104,at2526.
43
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
113
Althoughthenumberofpossibleverticalmodulesareinfinite(i.e.onecanhaveinfinitelevelsofsubtrusts),the
benefitsandvalueofsuchinterestsdecreaseasoneisfurtherremovedfromtheactualasset.Thisisespeciallythe
casewithtangibleassetswhocherishesbeingthesubsubsubsubbeneficiaryofalifeinterestinahouse?The
benefitsandvaluedepreciateless,however,withnonusableandnonpossessoryfinancialassetswhosevalueonly
liesinitsrealizableproceeds.Seenextsection.
114
SeeSmith,supranote104,at2526.
44
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
115
See Grant Gilmore, The Commercial Doctrine of Good Faith Purchase, 63 YALE L. J. 1057 (1954); William D.
Warren,CuttingOffClaimsofOwnershipUndertheUniformCommercialCode,30U. CHI. L. REV.469(1963);and
HaroldR.Weinberg,MarketsOvert,VoidableTitles,andFecklessAgents:JudgesandEfficiencyintheAntebellum
DoctrineofGoodFaithPurchase,56TUL.L.REV.1(1981).Recently,PeterWendelexploredthemeritsofthebona
fide purchaser rule as applied to trusts. Special considerations for trust cases include the inability of many
beneficiariestoselecttheirtrusteesandthehindsightbiasthatjudgestendtohavewhendealingwithtrustcases.
SeePeterT.Wendel,TheEvolutionoftheLawofTrustee'sPowersandThirdPartyLiabilityforParticipatingina
BreachofTrust:AnEconomicAnalysis,35SETONHALLL.REV.971(2005).
116
Thisistherulebasedonthemaximnemodatquodnonhabet,ornoonecangivewhathedoesnothave.If
thetransferordoesnothavegoodtitle,hecannotpassgoodtitletoanother.SeeWendel,supranote115,at976.
117
AParetosuperiortransactionisonethatmakesatleastonepersonbetteroffandnooneworseoffinother
words,thecriterionofParetosuperiorityisunanimityofallaffectedpersons:SeePosner,supranote96,at12.
118
UndertheKaldorHickscriterion,aslongassomepartiesarebetteroffandtheycouldcompensatetheaffected
parties,itisdeemedefficientwhetherornotthelatterareactuallycompensated.Seeid.at1315.
45
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 interfaces that 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 interface between 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
119
SeeWendel,supranote115,at983985.
46
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
120
This is still the rule today in England and Wales. See Cory v. Eyre, (1863) 46 Eng. Rep. 58, 1 D., J., & S. 149;
Dearlev.Hall,(1823)38Eng.Rep.475,3Russ.1;andPhillipsv.Phillips,(1862)45Eng.Rep.1164,4DeG.F.&J.
208.ButthemodernruleintheUnitedStatesappearstotreatthebonafidepurchaserthesame,regardlessof
whetherheispurchasingalegalorequitableinterest;seeRESTATEMENT(SECOND)OFTRUSTS284285.
47
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 Paretoefficient because the loser in a transaction where the rule successfully operates the
48
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
121
OnemayarguethattheruleisnotParetoefficientbecausethebeneficiarywholostdidnotconsenttothesale
and may have assigned nonfinancial (e.g. sentimental) value to the asset. But if one considers the beneficial
interestasaninterestinafundandthereforetheinterestisinthevalueoftheassetsasopposedtotheassets
themselves,thenthemarketpricepaidfortheassetmakesthebeneficiarynoworseoffthanbefore.Seeinfratext
accompanyingnote122.
122
3FREDERICW.MAITLAND,THECOLLECTEDPAPERSOFFREDERICWILLIAMMAITLAND272(1911).
123
Fordifferinglegalaccountsoffunds,seePenner,supranote26andNolan(2004),supranote26.
49
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.
124
This is a particularly English term, not often seen in American textbooks and statutes. For the equivalent
provisions,seeRESTATEMENT(SECOND)OFTRUSTS283284.
125
Judicialmentioningofthetermoverreachingcanbefoundincasesintheearlynineteenthcentury.Seefor
exampleWheatev.Hall,(1809)34Eng.Rep.31,34,17Ves.80,86.
126
LawofPropertyAct,1925,15Geo.V,c.20,2.Overreachingofbeneficialinterestsappliestotrustsofallassets,
notonlyland.
127
Swiftv.DairywiseFarms,[2000]1AllER320.
128
DonKingProductionsv.Warren,[1998]2AllER608.
129
See Richard Helmholz, Trusts in the English Ecclesiastical Court 13001640, in ITINERA FIDUCIAE: TRUST AND
TREUHAND IN HISTORICAL PERSPECTIVE 160, (Richard Helmholz & Rienhard Zimmermann eds., 1998); and Neil Jones,
TrustsinEnglandaftertheStatuteofUses:AViewfromthe16thCentury,inITINERAFIDUCIAE:TRUSTANDTREUHANDIN
HISTORICALPERSPECTIVE179,(RichardHelmholz&RienhardZimmermanneds.,1998).
50
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 word fundus, 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, the fundus must be considered primarily
130
See Trustee Act, 2000, c.29, 3(1): Subject to the provisions of this Part, a trustee may make any kind of
investmentthathecouldmakeifhewereabsolutelyentitledtotheassetsofthetrust..
131
SeegenerallyLangbein,supranote23.
132
SeePOCKETOXFORDLATINDICTIONARY79(2005).
133
SeeP.W.DeNeeve,FundusasEconomicUnit,52TIJDSCHRIFTVOORRECHTSGESCHIEDENIS3(1984).
51
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 relevant fundusthis does not imply how the yields
were obtained, in other words: how the fundus was exploited. The yields could have been
obtained by exploiting the fundus as one business concern, but also, for example, by partitioning
the fundus among several tenants, for rentals were also accounted to be reditus and without any
doubt were entered in the bookkeeping account of the fundus.135
The Roman use of the fundus idea goes to show that it is largely a bookkeeping or
accounting phenomenon. This is important because even if one strips a modern fund of all its
legal status and asset-partitioning attributes,136 the fund concept can still exist in contemplation.
The fund-in-contemplation is a classic example of our human tendency to categorize and
organize information in a way that supposedly aids decision-making.137 A typical family whose
finances are simple may have many funds for administrative and bookkeeping purposes: lunch
money; weekly allowance; college savings account; grocery budget; and so on and so forth. We
organize and process information this way because humans suffer from bounded rationality.138
134
Seeid.at7.
Seeid.at8.
136
Thisreferstothelawsshieldingofanentitysownersfromitsliabilitiesand,crucially,theshieldingoftheentity
fromitsownerspersonalliabilities.SeegenerallyHansmann&Kraakman,supranote5;HenryHansmann&Ugo
Mattei,TrustLawintheUnitedStates.ABasicStudyofItsSpecialContributions,46AM.J.COMP.L.133(1998);and
HenryHansmann&UgoMattei,TheFunctionsofTrustLaw:AComparativeLegalandEconomicAnalysis,73N.Y.
U.L.REV.434(1998).
137
See generally Pamela W. Henderson & Robert A. Peterson, Mental Accounting and Categorization,
ORGANIZATIONALBEHAVIORANDHUMANDECISIONPROCESSES92(1992).
138
This is wherehumans try to be rational butbecauseofinherent neuropsychological limits ofprocessing and
storing information, we are only rational to a limit. This is a term first coined by Herbert Simon but later
135
52
By thinking like this, we are also framing information, problems, and decisions. 139 In
behavioral economics and finance terms, these are mental accounts wealth accounts in
particular. 140
How we perceive reality and organize information affects how we act on them and make
decisions. A lottery ticket (before the draw) and a bank account are both legal choses in action
and the holders of both can procure a cash payout upon meeting certain conditions (winning the
lottery or having a positive balance with a solvent and liquid bank). Yet most people assign a
much higher level of importance to bank accounts when counting their wealth. This is because of
the much higher perceived certainty of securing a payout from the bank account. This higher
perceived certainty is largely the result of habit (successful cash payout on all previous occasions)
and goodwill towards the bank (stemming from the banks marketing and past services). As such,
framing and mental accounting are probably the reasons why bank accounts are treated as
property. 141 The study of behavioral finance is largely concerned with identifying and
preventing suboptimal financial decisions that stem from framing and mental accounting. In
particular, by thinking in terms of accounts and categories, fungible wealth are variously
sectioned off and rendered non-fungible, adversely affecting resource allocation.142
popularized by Oliver Williamson. See OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST
IMPLICATIONS11(1975).
139
Inbehavioralfinance,theframingofdecisionsreferstothedecisionmaker'sconceptionoftheacts,outcomes,
andcontingenciesassociatedwithaparticularchoice.Theframethatadecisionmakeradoptsiscontrolledpartly
bytheformulationoftheproblemandpartlybythenorms,habits,andpersonalcharacteristicsofthedecision
maker.SeeAmosTverskyandDanielKahneman,TheFramingofDecisionsandthePsychologyofChoice,211
SCIENCE453,453(1981).Inthebroadercontext,howweperceivereality,organizeinformation,act,andmake
decisionsalldependoneachindividualspersonalnorms,habits,andcharacteristics.
140
Definedasthesetofcognitiveoperationsusedbyindividualsandhouseholdstoorganize,evaluate,andkeep
trackoffinancialactivities.SeeRichardH.Thaler,MentalAccountingMatters,12JOURNALOFBEHAVIORALDECISION
MAKING183,183(1999).
141
Foranexampleofhowchosesinactionarerationalizedasproperty,seePenner,supranote25,at129132.
142
SeeThaler,supranote140,at193197.
53
What is clear is that since time immemorial, individuals accumulate and use assets be
they land or money or shares in ways that are more complex than their basic attributes can
express or organize. Assets may be grouped together like the Roman fundus or sectioned off, but
these complexities only exist in contemplation. The Chancerys adoption of uses was also the
adoption of the fund concept. To do this, it needed to achieve two basic attributes of the fund
concept: allocation of purpose and fungibility of assets. The whole idea behind uses ad opus
is based on the categorization process and specifically allocates the asset to a purpose. When
money is received to the use of another or when land is conveyed to a church to the use of a dead
saint, we are earmarking the asset for a purpose or person.143 The early judicial history of uses as
funds is about securing the allocation of purpose. This is logical as one can (barely) have a fund
ring-fenced for a purpose but with non-fluctuating assets. Also, the need for fungibility did not
truly arise until the nature of trust assets changed from land to money and financial instruments.
Therefore, the early years of use jurisprudence rightly focused on securing the cestuis interests
and binding subsequent takers of the asset. The fungibility attributes of the use/trust as a fund
took a very long time to get right. As soon as the bona fide purchaser rule was established and
the doctrine of overreaching operates to relocate beneficial interests into other assets, the use as a
fund acquires its core fungibility attribute. But it was only in the twentieth-century that modern
financial theories were impressed upon trust law. Income and capital gain investment preferences
were rendered obsolete by modern portfolio theory, emphasizing on total returns. So although
143
To the extent that allocating anasset toa personusually coincides with allocating it to a purpose (e.g.to
allocatethismoneytoXforhiscollegestudiesor,tobemorefarfetched,toallocatethishousetoXtolethim
enjoyitabsolutely),PaulBaxendaleWalkerisnot,atfunctionalandphilosophicallevels,entirelywrongwhenhe
saysthatallprivatetrustswithhumanbeneficiariesareactuallynoncharitablepurposetrusts.SeePAULBAXENDALE
WALKER,PURPOSETRUSTS(1999).
54
Chancery judges did not invent the fund concept, they certainly adopted it, turned it into a legal
concept, and perfected it.
What is so interesting about the trust as a fund is that it is ownership in value. Maitland
and his followers grumble how beneficiaries do not have an in rem right to the asset. Of course
they do not. Beneficiaries do not really own any assets until they actually receive it by way of
legal transfer from the trustee. Value is only the economic potential that could be realized from
assets (usually through use or sale) and only exists in contemplation. But it is an excellent mental
accounting tool with which to make economic and financial decisions. The Romans use of
fundus as an administrative and bookkeeping unit to sum up sources and report composite
figures and the reverse of sectioning sub-units of fundi goes to show the timelessness of our
tendency to categorize information into accounts. In the case of funds, we categorize disparate,
unrelated assets into a single unit of account and evaluate it on the basis of its composite
realization potential. As such, the funds overall realization potential is as much about financial
fungibility as mental fungibility. Most importantly, this realization potential becomes so
dominant in our evaluation process that its cognitive importance can supersede that of the assets
themselves. Property in value may appear to be very illusory; that is because it is indeed a
cognitive illusion.
What is more, by adopting this cognitive illusion, Chancery judges were innovatively
enhancing the usefulness of the trust fund beyond a single beneficiarys mental accounting habits.
In a fund with multiple shifting assets but a single beneficiary, the beneficiary can bravely say
that he is the beneficial owner of the assets at any one time. But in a fund with multiple shifting
55
assets and multiple beneficiaries, the constant allocation of specific assets to specific
beneficiaries becomes, if possible at all, an information-burdensome exercise. By framing
beneficial interests as property in value, beneficiaries can be allocated their accurate share of
realizable value but without imposing excessive information costs on the trustee and other
beneficiaries. The idea of wealth and value, it turns out, is also an information cost-reducing
device.
CONCLUSION
Maitland is still right. The beneficial interest can be defeated by the bona fide purchaser
and therefore should not be considered an in rem right to the asset. By reviewing the history of
uses and trusts and the courts that developed them, it should be clear why and how things turned
out this way. In particular, the relationship between law and equity and, consequently, the bona
fide purchaser rule, were the outcomes of political history and severe judicial rivalry. By
understanding the history of trusts, it should be clear that Maitland, by picking on the bona fide
purchaser rule, was just shooting a barrel in a fish and misses the point. William Walsh criticizes
Maitland and his followers for [ignoring] the actual facts of ownership and [recognizing] only
the form by which Chancery was able in such extensive measures to take over and control the
law of land.144 Similarly, Whitlock argues that the narrow focus on procedure and method of
enforcement does not reflect the nature of the right being protected.145
144
145
SeeWalsh,supranote2,at3942.
SeeWhitlock,supranote2,at2178.
56
On the other hand, the economic analysis of the trusts historical development attempts to
shed light on the complex design and construction of a second property system. Demand and
jurisdictional competition may have spurred Chancery judges into action, but they faced the great
challenge of mitigating information costs and avoiding disruption to the legal property system
whilst creating a second system that extends the functions and benefits of property. At the end,
the very thing that Maitland picked on the bona fide purchaser turns out to be the beneficial
interests saving grace as it enabled property in a fund.
Donovan Waters may have alerted us to the error of fixating ourselves with the in rem
and in personam labeling.146 But our continued, unquestioned referencing to the Maitland and
Scott debate is also attributable to that other great legal authority. It was Austins work on legal
classifications that brought us in rem and in personam rights.147 Austins intentions were great
he sought to devise a universal classification of law but his approach was wrong. 148 The
Roman classification system may have suited civil law systems, which, of course, was based on
Roman law. But it simply has no place in our common law system. As John Tarrant sums it up
eloquently: [Austin] takes the Roman classification of things and the Roman classification of
actions, and merges the two classifications together to produce a classification of rights
comprising property rights and non-property rights. He does this by simply asserting that rights
that are protected by actions in rem are property rights and rights that are protected by actions in
146
SeeDonovanWaters,TheNatureoftheTrustBeneficiary'sInterest,45CANB.R.219,219226(1967).
Of course, the real problem beyond Austin is that the English language and legal system cannot deal with
complex ideas of property. In terms of vocabulary, we simply are not able to express all our conceptions of
propertywithaverylimitedsetofwordstitle,possession,ownership,property,interestand,whenwetryto,
wegetterriblyconfusedoverwhattheymean.Beyondvocabularypoverty,wealsosomehowcannotgetaround
theideathattherecanbemorethanonesetofpropertyrulesthatgovernresourceownership.Thisconceptual
stumbling block may have its roots in our original expression of property in land and tangible assets, which has
reducinginformationcostsasitstoppriority,andisthereforeinherentlysimple,standardized,andinflexible.
148
See generally James W. Simonton, Austin's Classification of Proprietary Rights, 11 C.L.Q. 277 (1926); John
Tarrant,ObligationasProperty,34UNSWLJ677(2011);andTurner,supranote90,at138156.
147
57
personam are nonproperty rights. No such assertion, or conclusion, was ever made in Roman law
by Gaius or Justinian.149
149
SeeTarrant,supranote148,at686.
58

The Nature of Beneficial Interests: A Historical and Economic Perspective

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THE NATURE OF THE BENEFICIAL INTEREST

HISTORICAL AND ECONOMIC PERSPECTIVES

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

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

I. THE MAITLAND AND SCOTT DEBATE

A. Austin, Maitland, Scott (and Stone)

B. McFarlane and Stevens and Penner

II. THE HISTORY OF USES AND TRUSTS

B. The Statute of Uses

C. Trusts under Lord Nottingham

III. AN ECONOMIC ACCOUNT OF TRUST HISTORY

A. Competition and End-User Demand

B. Information Costs and Modularity

C. Efficient Boundaries between Legal and Equitable Property

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

D. Funds, Mental Accounting, and Value

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