Articles :: Constructive Trusts

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Constructive Trusts

BY DAVID R. LAWSON & F. LADSON BOYLE
Probate Practice Reporter
Volume 4, Number 2
Published February 1992

Trusts have traditionally been divided into two categories: express or direct trusts and those that arise by operation of law. Included in the category of trusts that arise by operation of law is the constructive trust. It is defined as "a device used by chancery to compel one who unfairly holds a property interest to convey [it] to another to whom it belongs." Bogert, Trusts and Trustees, at § 471 . Courts have applied many labels to constructive trusts, including trust ex maleficio, trust ex delicto, trust in invitum, trust de son tort, implied trust, and involuntary trust. However, despite this variety of labels, their application is the same: Wherever the circumstances of a transfer of property are such that the party who has taken legal title to the property cannot also enjoy the benefit of the property without offending equity, the court will impose a trust on the property, treating the holder of legal title as trustee for another.

Various courts and statutes have defined the requirements for imposition of a constructive trust in different ways, including: the existence of a confidential or fiduciary relationship between the grantor and the trustee and violation of this relationship through repudiation of an oral promise made by the trustee; fraud, misrepresentation, concealment, undue influence, or duress by a trustee that results in the unjust enrichment of the trustee; a confidential or fiduciary relationship between the grantor and trustee, a promise by the trustee, transfer by the grantor in reliance on this promise, and the trustee's unjust enrichment; a transfer made by a grantor contemplating death; unjust enrichment of the trustee despite the absence of a confidential or fiduciary relationship between the grantor and trustee; and whenever the circumstances of a transaction are such that a person who has taken property ought not to be allowed by equity to retain and enjoy the beneficial interest. Although constructive trusts often arise under circumstances that suggest actual or constructive fraud by the trustee - and some courts view constructive trusts in an exclusive fashion, restricting their application to remedying fraudulent activity by the trustee - this view appears to unnecessarily limit the possible scope of their application; many courts find it unnecessary to make this determination and instead look exclusively to the unjust enrichment of the trustee, considering as crucial the trustee's wrongful retention of the property and not the means by which the trustee acquired the property.

An Example

Matter of the Estate of McKim, 807 P.2d 215 (N.M. 1991), illustrates the various circumstances that might result in imposition of a constructive trust. The decedent and his spouse married in 1981, agreeing that property owned by each prior to the marriage and acquired by each subsequent to the marriage would remain separate property. When the wife's corporation experienced financial difficulty, she conveyed its properties to her husband in consideration of his paying the balance on a loan secured by the properties. Subsequently, to avoid foreclosure of the properties by his wife's mortgagee and the IRS, the husband took out additional loans and executed a new property agreement with his wife that designated the properties as his separate property. Before his death in 1986, the husband attempted to convey the properties to his wife, requesting deeds from his title insurer and attorney but not signing them. The estate rejected the widow's claim against the estate for recovery of the properties. Upholding the trial court's decision that the estate held the properties as constructive trustee for the widow, the Supreme Court reviewed the circumstances that might result in a constructive trust. Relying on the Restatement (Second) Of Trusts § 44 and the Restatement of Restitution § 182, it stated that the mere existence of a fiduciary or confidential relationship, regardless of the lack of abuse of this relationship, is adequate to justify finding that a transferee of property is a constructive trustee when retention of the property would result in the transferee's unjust enrichment. It found that the trial court was correct in holding that a fiduciary relationship was established between the decedent and his spouse when the properties were transferred to the decedent, although neither the decedent nor his spouse intended for him to receive a beneficial interest in the property, and that the estate would be unjustly enriched if allowed to retain the properties.

Resulting Trusts Compared

Courts often confuse constructive trusts with the second category of trust that might arise by operation of law, the resulting trust, and might use these terms interchangeably. Although both involve conflict between one party that holds legal title to property and another that claims the beneficial interest in this property, and both arise through the equitable intervention of a court, constructive and resulting trusts are distinguishable. Generally, a court will find a resulting trust and treat the parties as trustee and beneficiary when it would be inequitable for a party to retain legal title to personal or real property for which another has paid consideration. In finding the existence of a resulting trust, the court presumes that the party holding legal title intended to hold the property for the benefit of another. Conversely, a court will impose a constructive trust regardless of any actual or presumed intent of the parties, and despite the absence of consideration, as an equitable remedy to a wrong, fraudulent, or otherwise unconscionable act by the trustee holding or retaining legal title to the property. Accordingly, although a wronged party often will and should ask the court to impose a resulting trust, and in the alternative a constructive trust, the constructive trust remains the more flexible device, available to a party who would have been a donee of the property except that another prevented the gift and, although consideration was paid, available despite the absence of evidence of payment.

The Importance of Intent

Thor v. McDearmid, 817 P.2d 1380 (Wash. App. 1991), illustrates the importance of intent in distinguishing between constructive and resulting trusts. At trial, the surviving children of the appellant's brothers and sister brought a partition action, claiming to be tenants in common in 1,200 acres of pasture land with their aunt, who counterclaimed, alleging ownership through resulting and constructive trusts. The trial court divided the land. Although the aunt argued that she provided the purchase money for the land to her father and paid the large part of the annual taxes on the land, that she possessed the land except for occasional recreational use by her co-tenants, and that title was taken by her father (and subsequently by her mother) as trustee for her benefit, the appellate court upheld the trial court's refusal to consider the aunt's testimony (and that of a niece not a party to the action) that the aunt had paid the purchase price. The court based its decision on the "dead man's statute" and the hearsay rule, and refused to impose a resulting or constructive trust on the property. The court reasoned that a resulting trust arises when a person pays for property under circumstances that suggest that the payor did not intend the person receiving legal title to receive a beneficial interest in the property. If a person has paid the purchase price, the presumption is that the payor intended to retain beneficial title. The presumption can be overcome by evidence of contrary intent. The court observed that a resulting trust must be proved by clear, cogent, and convincing evidence. It found that, when the land was conveyed by the father to the mother, there was no evidence that the mother held it as successor trustee for the appellant. It considered as substantial evidence of contrary intent the appellant's distribution (as administrator of her mother's estate) of the 1,200 acres as part of the estate and her purchase of a sibling's share of this acreage (this acreage was not subject to the partition action). Although the court observed that the intent to retain beneficial title is irrelevant to the imposition of a constructive trust, it found that absent evidence of the appellant's payment of the purchase price, there was no unjust enrichment of the respondents, except to the extent the appellant had paid a disproportionate share of the taxes.

Burden of Proof

The burden of proving the existence of an express trust is on the party who alleges its existence. Similarly, the putative beneficiary of a constructive trust must prove the existence of a confidential relationship, fraud, unjust enrichment of the trustee, or other facts that establish a constructive trust within that jurisdiction, and must overcome the presumption that the putative trustee has not misappropriated the property or performed the duties of an express trustee inadequately. Because a constructive trust does not arise by written agreement or other document but through the presence of fraudulent or wrongful actions that result in unjust enrichment, it may be proved by parol evidence that contradicts documentary evidence and may be imposed despite the disposition of property by will.

Many states have modeled their statutes of frauds after the English Statute of Frauds, which specifically excepts evidence of trusts that arise by implication, construction, or operation of law from exclusion by the statute. This exception appears unnecessary. Intended to prevent the consummation of fraud and unjust enrichment, the Statute of Frauds cannot be construed to exclude parol evidence that establishes a constructive trust without defeating the intent of the statute. As with express and resulting trusts, courts generally articulate a rigorous standard of proof for constructive trusts, requiring "clear and convincing evidence" and, on occasion, evidence that is "beyond a reasonable doubt." This rigorous standard reflects judicial caution in accepting parol evidence that is intended to contradict absolute conveyances by deed or will or to overturn record title.

Parol Evidence

The recent case of Richardson v. Richardson , 409 S.E.2d 148 (Va. 1991), illustrates the distinction between resulting and constructive trusts and the availability of parol evidence to prove a constructive trust in real property. The decedent and his spouse were married in 1967. Prior to filing for divorce in 1977, the decedent conveyed a tract of land to his mother, who subsequently conveyed the property to the decedent's brother. Although the decedent and his spouse were able to reconcile their differences, never divorcing and continuing to live in a trailer on the land, the property remained titled in the decedent's brother. Upon the decedent's intestate death in 1989, the spouse, as administratrix of the decedent's estate, petitioned "'to enjoin and restrain the defendants from retaining title to the matrimonial domicile.'" Despite the absence of fraudulent activity, the trial court imposed a constructive trust on the property, considering the following as clear and convincing evidence that the decedent's brother would be unjustly enriched by retention of the property: (1) the decedent's statement that he could regain title "anytime he wanted," (2) the testimony of the decedent's adult children that the decedent stated his desire "to have the land transferred into his and [the spouse's] name," (3) and the decedent's instruction to his spouse prior to his death to have a deed prepared that would return the property to his estate. On appeal, the Virginia Supreme Court rejected the appellant's argument that there was insufficient evidence of the intention of the parties to create a constructive trust and that the appellant would be unjustly enriched by retention of the property. Quoting from § 462 of Minor on Real Property , it observed that "constructive trusts arise, independently of the intention of the parties, by construction of law... [and] occur... where [the property] has been fairly and properly acquired, but it is contrary to the principles of equity that it should be retained, at least for the acquirer's own benefit." The court found that the mother's and brother's failure to pay consideration upon transfer of title into their names, as well as the decedent's statements indicating that he had retained beneficial title to the property, constituted clear and convincing evidence that the decedent's brother would be unjustly enriched by his retention of the property.

In contrast to the clear and convincing standard applied to the constructive trust in Richardson, the court in Matter of Estate of McKim (discussed above) questioned the appropriateness of this higher level of scrutiny. Relying on Scott, The Law Of Trusts, at § 462.6, it observed that the appropriate evidentiary standard should be proof by the preponderance of the evidence or that applied to other restitutionary remedies when there is no fraud and when the goal is to prevent unjust enrichment. Because neither party had questioned the trial court's use of the clear and convincing standard, the Supreme Court applied this higher standard in its review of the trial court decision.

Equity Rules

A party who seeks to impose a constructive trust is subject to the normal rules of equity: The party must come into court with clean hands and must do equity to obtain equity. Accordingly, a party who seeks a constructive trust is barred if the transfer of property was made in fraud of the party's creditors. A recent decision from Maine illustrates these principles. In Hamm v. Hamm, 584 A.2d 59 (Me. 1990), the court considered a probate court's refusal to impose a constructive trust because of the plaintiff's "unclean hands." In 1983, after divorcing his spouse, the decedent transferred title in real property to his brother, ostensibly to conceal it from the decedent's ex-spouse. The decedent continued to manage the property, receiving income from the property and paying expenses associated with it. The decedent died testate in 1986. His personal representative sought a declaratory judgment in probate court on the rights of the parties in the property. The court refused to impose a constructive trust on the property, concluding that the estate should not benefit from the decedent's concealment of the property from his ex-spouse. On appeal, the court rejected the lower court's application of the clean hands doctrine to prevent imposition of a constructive trust, finding that the decedent's transfer to his brother was not misconduct because the decedent's ex-spouse had no interest in the property; their marital property had been divided prior to the decedent's transfer to his brother.

Conclusion

As Justice Cardozo observed in Beatty v. Guggenheim Exploration Co., 122 N.E. 378 (N.Y. 1919), "a constructive trust is the formula through which the conscience of equity finds expression. When... the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." As observed in Scott On Trusts, Justice Cardozo's statement is misleading: A constructive trustee does not acquire the many and onerous duties of an express trustee, but merely the duty to reconvey the property to the beneficiary of the constructive trust or to pay damages if the property has been acquired by a bona fide purchaser. When mistake and good faith by the trustee characterize the transfer to the trustee, courts have required that the beneficiary of a constructive trust reimburse the trustee for taxes paid on the property, expenses in preserving the property, payments that free the property from a mortgage, or the purchase price paid by the trustee. However, the courts have been unanimous in their denial of these benefits to a trustee who acted in bad faith or fraudulently.

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