Constructive Trust

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CONSTRUCTIVE TRUST

A relationship by which a person who has obtained title to property has an equitable duty to transfer it to another, to whom it rightfully belongs, on the basis that the acquisition or retention of it is wrongful and would unjustly enrich the person if he or she were allowed to retain it.

A constructive trust does not arise because of the expressed intent of a settlor, one who establishes a trust. It is created by a court whenever title to property is held by a person who, in fairness, should not be permitted to retain it. It is frequently based on disloyalty or other breach of trust by an express trustee (the person appointed or required by law to execute a trust), and it is also created where no express trust is created but property is obtained or retained by other unconscionable conduct. The court employs the constructive trust as a remedial device to compel the defendant to convey title to the property to the plaintiff. It treats the defendant as if he or she had been an express trustee from the date of the unlawful holding of the property in question. A constructive trust is not a trust, in the true meaning of the word, in which the trustee is to have duties of administration enduring for a substantial period of time, but rather it is a passive, temporary arrangement, in which the trustee's sole duty is to transfer the title and possession to the beneficiary.

The right to a constructive trust is generally an alternative remedy. The aggrieved party can choose between a trust and other relief at law, such as recovery of money wrongfully taken, but cannot obtain both types of relief.

A constructive trust, as with an express trust, must cover specific property. It cannot be predicated on mere possession of property, or on a breach of contract where no ownership of property is involved.

The court decides what acts are required of the plaintiff as conditions precedent to the securing of a decree (a court order that determines the rights of all the parties to the suit). For example, if the defendant has acquired title to property of the plaintiff by means of fraud, the plaintiff will be required to return any consideration (inducement to enter into a contract) received from the defendant. In addition, if the defendant has, during his or her period of wrongful retention of the property, spent money for the preservation or protection of the property, such as by paying taxes or the principal or interest on a mortgage, reimbursement might be required of the plaintiff. If the defendant has made improvements or performed services in managing the property, some courts require the plaintiff to compensate the defendant to the extent of the benefits inuring to the plaintiff through the imposition of a constructive trust, particularly in cases in which the defendant was not an intentional wrongdoer, but rather acted under mistake or ignorance.

The decree establishing the constructive trust requires the defendant to deliver possession and convey title to the property and to pay to the plaintiff profits received or rental value during the period of wrongful holding and otherwise to adjust the equities of the parties after taking an accounting.

Mistake, Undue Influence, or Duress

If by mistake of fact the plaintiff conveys title to the wrong person, or the wrong property is conveyed to the intended person, or the plaintiff is otherwise induced to act by reason of mistake, the transfer can be set aside. An alternative is to obtain a decree which reforms the instrument of conveyance so that it expresses the intent of the parties. In these cases, the conveyance is not void (without legal effect). The plaintiff actually intends a transfer, but the circumstances which cause the plaintiff's mind to operate are such that the court considers it unfair for the transferee to retain the property.

The same doctrine applies where the plaintiff is induced to make the conveyance through the exertion of undue influence (conduct by a person that dominates and destroys the free will of another). If the conduct of the defendant goes beyond persuading the plaintiff to convey—if it encompasses violence, threats of violence or restraint, or other injury—there is an even stronger case for charging the transferee as a constructive trustee on the ground of duress.

Fraudulent Misrepresentation or Concealment

The courts hold in numerous cases that a transferee who uses fraud to obtain the transfer of property is a constructive trustee. Such situations might involve an affirmative assertion of the truth of a material fact or concealment of the existence of a material fact when there was a duty to speak. The state of the defendant's mind is a material fact and might be a basis for a constructive trust—such as when the defendant promises to use the property for certain purposes beneficial to the plaintiff but intends at the time of the transfer to retain it for himself or herself. The defrauded party can also proceed on the theory of setting aside the transfer, which is substantially equivalent to obtaining a constructive trust, or the defrauded party can sue for damages.

Property Obtained by Homicide

If a person obtains property through a will or intestacy by wrongfully and intentionally killing the owner, a constructive trust can be decreed as to the property obtained. The beneficiaries of the constructive trust imposed on the murderer are those persons who would have taken by intestacy or will or otherwise from the murdered person, as if the murderer had predeceased the victim.

Statutes in many states prevent the murderer from acquiring or retaining the property of the victim. They vary from state to state, but most require that the excluded person must be convicted of wrongfully and intentionally causing the death of the property owner. None applies to negligent killing. It is not necessary for the murderer to have committed the crime for the purpose of acquiring the property. The statutes apply if the murderer commits suicide immediately after killing the property holder. They do not apply, however, to an insane murderer or to one who kills in self-defense.

Gift by Will or Intestacy Based upon Broken Promise

If a property owner is induced to make an absolute gift to the defendant by will due to reliance on an oral promise by the defendant to apply all or part of the property to the use of another designated person and, after the death of the testator, the defendant refuses to do as promised, he or she can be made a constructive trustee. The same result will hold when the property owner is induced to die intestate on the faith of an oral agreement by his or her heir or next of kin.

If the recipient by will or intestacy promises to hold for others to be later described by the property owner and no description is communicated to the recipient until after the death of the property owner, the recipient will hold as a trustee of a resulting trust for the heirs, next of kin, or residuary legatees or devisees of the property owner. No trust will be established for the intended beneficiaries but such persons might take the property as the recipients of the resulting trust.

If a will provides that a gift is to be made to a recipient as trustee, but no description of the beneficiary appears in the will, and the recipient verbally agrees to hold it for beneficiaries who are orally or otherwise informally described to the recipient, the successors of the decedent can enforce a resulting trust in their favor against the recipient. The courts rely on the argument that a property owner who wishes the property to pass to others than the heirs at his or her death must give it to those others by a formally executed will.

Breach of Express Trust by Disloyalty

If a trustee of an express trust acquires property by a breach of trust—for example, by a violation of an obligation to be loyal to the beneficiary—a constructive trust can be imposed on such property. The constructive trust can be applied not only to the property originally obtained by disloyalty, but also to its products and proceeds. It can be used against persons who succeed the disloyal trustee as the owner of the products of the disloyalty if they are not bona fide purchasers.

It is immaterial that the trustee acted innocently because of ignorance or in the belief that the conduct was not disloyal. It is unnecessary to prove that the acquisition of the property by dis-loyalty damaged the beneficiary, since it is sufficient to show the receipt by the trustee of property obtained by breach of his or her duty.

In addition, the duty and the remedy exist with respect to persons who are in a confidential relation. This term has no exact definition but entails dominance and superiority of one individual over another because of such elements as a close familiar relationship, an enduring practice of entrusting business matters to the knowledge of a confidant, and differences in age, health, and education.

Breach of Duty in Direct Dealing with Beneficiary

The trustee has a duty to make a complete disclosure and to treat the beneficiary with the utmost fairness when there is a direct conveyance, contract, or other transaction between them. This duty extends to everyone who acts as a fiduciary and to persons in a confidential relation, similar to the duty of loyalty in the administration of a trust. It is a duty arising from the superiority and dominance of the fiduciary and the danger of overreaching or undue influence.

The trustee or other representative can be declared a constructive trustee of any property obtained through a transaction where there was a breach of the duty to make full disclosure and to act fairly. Such clearly inequitable conduct justifies the imposition of a constructive trust. If, therefore, a trustee purchases the interest of one of the beneficiaries under the trust for an inadequate price, without revealing facts that the beneficiary did not know concerning the value of the interest being sold, and later the trustee realizes a profit on the transaction, a constructive trust can be imposed to remove this gain from the trustee.

Statute of Frauds

The statute of frauds, an old english law adopted in the United States that requires certain contracts to be in writing, does not apply to constructive trusts. The courts create constructive trusts, whether the evidence on which they are based is oral or written and whether the property involved is real or personal.

However, public policy favors the security of titles to property. Therefore, reluctant to disturb record title or other apparent ownership, courts require the plaintiff to prove his or her case for a constructive trust by clear and convincing evidence. In nearly all suits to establish constructive trusts, the defendant appears to be the complete owner of the property, by virtue of deeds, wills, records, or otherwise. As a result, the courts reject the plaintiff's claim if the evidence is vague, conflicting, or dubious.

Breach of Unenforceable Contract to Convey Ordinarily the breach of an oral contract to convey realty by deed or will is not a basis for charging the defendant as a constructive trustee, where the defendant employs the statute of frauds as a defense and refuses to perform the contract. The statute provides that contracts to convey interests in land are not enforceable when they are not in writing and no memorandum was signed by the seller. To decree a constructive trust in such a case would usually constitute an evasion of the statute. The plaintiff can be protected adequately by an award of damages that, in effect, mandates a return of any consideration paid for the promise to convey.

With respect to the breach of some contracts, however, the constructive trust is occasionally used to prevent unjust enrichment, as in the case of a contract to leave property by will in return for personal services that have been rendered, the value of which is not computable in money.

Breach of Oral Trust of Realty by Retention of Property When the plaintiff conveys land by absolute deed (a document that transfers real property without restriction) based on an oral promise by the defendant to hold it in trust for the plaintiff or for a third person, and the defendant retains the property for his or her own benefit, refusing to execute the trust because it violates the statute of frauds, the majority of courts refuse to make the defendant a constructive trustee for the plaintiff or for the intended beneficiary of the oral trust. The courts reason that to construct a trust in such a case would circumvent the purpose of the statute of frauds.

A minority of courts grant the decree for a constructive trust for the intended beneficiary of the oral trust because they view it as dishonest for the defendant to withhold the land from the intended beneficiary by employing the statute.

If the defendant obtains the land by misrepresentation of the state of his or her mind as to intended performance of the oral trust or other false statement and later refuses to perform the trust, the court will enforce a constructive trust against him or her.

If the defendant was in a confidential or fiduciary relation with the plaintiff at the time of the deed and the oral promise to hold in trust, the defendant is usually made a constructive trustee for the intended beneficiary of the oral trust because the wrong entailed a violation of the relationship by repudiation of the promise.

Product of Theft

The remedy of constructive trust applies to personal property that is stolen or misappropriated and used to purchase other property in the name of the perpetrator. A constructive trust in favor of the aggrieved party can be imposed on such property, so long as it remains in the hands of the wrongdoer or any person to whom the wrongdoer transfers it who is not a bona fide purchaser. In order to facilitate the unimpeded flow of commercial transactions, bona fide purchasers are not subject to the application of a constructive trust.