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C.         CONSTRUCTIVE TRUSTS -WHEN WILL THEY BE IMPLIED?


A constructive trust is not really a trust at all.

Rather, "constructive trust" is the name
        a) given to a flexible equitable remedy (restitutionary equitable remedy)
                i) imposed by a court
                i) to prevent an unjust enrichment of one person
                        (a) at the expense of another
                        (b) as the result of
                                (i) wrongful conduct, such as
                                        (A) fraud,
                                        (B) undue influence, or
                                        (C) breach of a fiduciary duty.

The constructive trustee's only duty is
        a) to convey the property (similar to the resulting trust)
                i) to the person
                        (a) who would have owned it
                                (i) but for the wrongful conduct.

This permits the wronged party
        a) to receive the very property
                i) of which he was deprived.

This remedy is especially important

1) where property has increased in value
        a) since it was wrongfully acquired.  

Proof of the facts
        a) necessary to establish a constructive trust

1) must be
        a) by clear and convincing evidence.

1.         Constructive Trust Arising from Theft or Conversion

If Y
        a) steals or
        b) converts
                i) property from X,

1) title remains
        a) in X,
2) so there is no need
        a) to imply a trust
                i) to restore title to the owner, X.

But if Y uses the proceeds of his theft
        a) to buy other property,

1) he takes title to it.

X can
        a) trace to this new property and
        b) have a constructive trust
                i) imposed upon it
                ii) to prevent Y from profiting from his wrong.

1) X is the beneficiary of the constructive trust;
2) Y is the trustee.

Y's sole duty is
        a) to convey the property to X,

1) for
        a) once a constructive trust is declared
                i) a by a court to exist,

        b) it is a dry trust and
        c) the trustee has no active management duties.


Dry Trust
Also called a naked trust or a passive trust, with a dry trust, a person transfers assets into a trust in order to pass them on to heirs or beneficiaries.
How it works/Example:
Let's say John Doe is in a shaky marriage and wants to make sure $1 million of his money goes to his children rather than his second wife, whom he may divorce. He puts the money in a dry trust for his children.
The children are only 10 and 8 years old, but when they turn 18, they will have access to and control over the assets. In the meantime, John's wife cannot touch the assets, and a trustee manages the money on behalf of the children rather than on behalf of John Doe.
Why it Matters:
Dry trusts are a way to ensure that beneficiaries receive assets as intended, but they also mean the benefactor gives up control over the assets. Additionally, age is typically the only condition of a dry trust, meaning that the trustee can't withhold funds from the trust if, say, John's children drop out of college, become addicted to drugs, or marry someone John doesn't like. The children simply must be at least 18 years old to obtain full control over the money.


2.         Constructive Trust Arising from Fraud, Duress, Etc.

Where Y,
        a) by
                i) fraudulent misrepresentation or
                ii) concealment (see Multistate Torts outline),

        b) causes X
                i) to convey title to property to him,

1) X is entitled to a decree that
        a) Y holds the property
                i) in constructive trust for X's benefit.

Moreover,

if Y,
        a) after defrauding X out of property,
        b) sells or exchanges it
                i) for other items,

1) the items would be the subject of a constructive trust
        a) under the tracing doctrine.

a.         Property Conveyed to Third Party Who Is Not a Bona Fide Purchaser

If
        a) Y acquired title
                i) from X
                ii) by fraud and
        b) conveyed title        
                i) to a third party, Z,
                        (a) who is not a bona fide purchaser
                        (b) (e.g.,
                                (i) he did not pay value or
                                (ii) he knew that Y had acquired title by fraud),

1) the constructive trust could be imposed
        a) against Z,
        b) requiring him
                i) as "trustee"
                ii) to convey title back to the victim, X.

Accordingly,

where
        a) the third party, Z, has given value (i.e., pay value)
                i) to Y
                ii) to acquire X's property and
        b) has acquired it
                i) with notice of fraud,

1) the victim, X, will have a choice of
        a) two possible constructive trusts to pursue
        b) (i.e., X can
                i) have Z declared constructive trustee of
                        (a) the original property or
                ii) have Y declared constructive trustee of
                        (a) the proceeds from the sale to Z).

b.         Circumstances Giving Rise to Constructive Trust

As in the case of fraud,

a constructive trust will be declared
        a) against a party
                i) who obtains title to property
                        (a) by
                                (i) duress,
                                (ii) undue influence, or
                                (iii) mistake of fact.

(Under modern decisions,

even a unilateral mistake
        a) of material fact
                i) by the owner of property,
                ii) causing him to convey it,

   is a sufficient basis
        a) for implying a constructive trust.)

c.         Where Will Is Concealed or Fraudulent

Where Y
        a) conceals X's true will (2nd will) and
        b) takes property
                i) under a prior will (1st will) or
                ii) by intestacy,

1) he holds the property
        a) as constructive trustee
        b) for the aggrieved
                i) devisees and
                ii) legatees.

Where a party takes title to property
        a) under a
                i) forged or
                ii) fraudulent
                        (a) will,

1) he is a constructive trustee
        a) for decedent's aggrieved
                i) heirs or
                ii) devisees,

2) even if he was innocent of wrongdoing. (i.e., 3rd party BFP)

d.         Interference with Contract Relations

The constructive trust remedy is also available
        a) against a party
                i) who obtains title to property
                        (a) by committing the tort of
                                (i) interference with contract relations.

3.         Constructive Trust Arising from Breach of Fiduciary Duty

a.        Fiduciary Relationship Defined

One
        a) who stands in a fiduciary relationship
                i) to another person

1) owes that person a duty
        a) to deal
                i) fairly
                ii) with his property.

Examples of the fiduciary relationship are
        a) attorney to client,
        b) guardian to ward,
        c) director to his orporation,
        d) trustee to trust beneficiary,
        e) executor to estate, etc.

The fiduciary's duty prohibits him
        a) from taking title to property
                i) belonging to the beneficiary
                ii) (at least not without making full disclosure as to its value, etc.), and
        b) from seizing
                i) for himself
                ii) an opportunity to acquire property
                        (a) that comes to him
                                (i) in his capacity as fiduciary.
        (See, e.g., the Corporations outline
                i) on the duty of a director
                        (a) not to "usurp a corporate opportunity.")

b.        Breach of Fiduciary Duty

If the fiduciary violates this duty,

1) he will be required
        a) to hold the property
                i) he thereby acquires
                ii) in constructive trust
                        (a) in favor of the person
                                (i) to whom he owes the duty.

Under the same principle,

1) if an attorney
        a) advising a client
                        i) on his will

   permits the client
        a) to leave property
                i) to the attorney
        b) without the attorney's making full disclosure
                i) of all he knows
                ii) concerning its value,

1) the attorney will,
        a) on the client's death,
        b) hold title to the property
                i) in constructive trust
                        (a) for the estate of the client.

4.         Constructive Trust Arising from Homicide

If one person
        a) kills another and
        b) is convicted of
                i) murder or
                ii) manslaughter,

1) he holds any property
        a) he acquires from the victim
                i) by will or
                ii) intestacy
        b) as constructive trustee
                i) in favor of
                        (a) whomever would have taken the property
                                (e.g., a more distant relative of the victim)
                        (b) had the killer predeceased the victim. (See Wills outline.)

a.         Where Victim and Killer Held Property in Joint Tenancy

Where the victim held property
        a) in joint tenancy with the killer,

1) the killer obtains full legal title to the property.

However,

he holds at least one-half interest therein
        a) as constructive trustee
                i) for the estate of the victim.

In some states,

he holds
        a) the whole fee
                i) in constructive trust
                        (a) for the victim's estate,
        b) less his own life estate
                i) in one-half.

5.         Constructive Trust Arising from Breach of Promise

a.         General Rule - No Constructive Trust


Generally,

a person's mere breach
        a) of a promise (i.e., contract)

1) is not a sufficient basis
        a) for implying a constructive trust.

Thus,

where
        a) A conveys real property to B         
                i) on B's oral promise either
                        (a) to hold it as trustee for C (i.e., secret trust) or
                        (b) to convey it to C (i.e., as agent), and
        b) B later repudiates his promise,

1) there is no constructive trust.

(If the rule were otherwise,

1) the purpose of the Statute of Frauds would be frustrated.)

However,

A may be able
        a) to get a constructive trust imposed
                i) in his favor.

(A growing number of cases and the Restatement (Third) of Trusts say he can.)

A can then convey the property
        a) directly
        b) to C (the equitable beneficiary).

The theory is that
        a) to permit B to keep the property would result in
                i) unjust enrichment,
                        (a) which thwarts the purpose of the Statute of Frauds.

1)        Consideration for Promise Irrelevant

The general principle that
        a) a mere breach of promise will not raise a constructive trust

1) uniformly applies
2) even where there was consideration
        a) for the promise.

A may
        a) recover damages and,
        b) in some circumstances, obtain specific performance,��

2) but a constructive trust will not be imposed.


b.        Exceptions to General Rule

1)         Breach of Fraudulent Promise -Fraud in the Inception

If
        a) A conveys land to B
                i) on his oral promise
                        (a) to hold it for, or
                        (b) convey it to,
                                (i) C, and
        b) at the time he made the promise
                i) B did not intend to keep it,

1) there is almost certainly fraud (misrepresentation) and
2) a constructive trust will be imposed
        a) against B
        b) in favor of C
        c) (or perhaps in favor of A,
                i) who will then be able to convey directly to C).

2)         Breach of Promise by One in Confidential Relationship

Where the grantee
        a) who orally promises
                i) to hold the property in trust
   is
        a) in a confidential relationship
                i) with the grantor
                ii) (e.g.,
                        i) family relation,
                        ii) attorney-client,
                        iii) business partners),

1) the breach
        a) of the grantee's oral promise

   is constructively
        a) fraudulent and

2) the agreement
        a) to hold in trust

   may be shown
        a) for the purpose of imposing a constructive trust
                i) for the benefit of the intended beneficiaries.

The grantee's promise must be proved
        a) by clear and convincing evidence.

This is the big loophole
        a) in the Statute of Frauds.

Such a confidential relationship exists
        a) not only where there is a fiduciary relationship
                i) such as attorney-client,
        b) but also where the transferor,
                i) because of
                        (a) family relationships or
                        (b) otherwise,
                ii) is accustomed to being guided
                        (a) by the judgment of the transferee.

Very seldom will a person give a deed of land to another
        a) on an oral trust

1) where a confidential relationship does not exist.

3)         Breach of Promise Concerning a Will or Inheritance

Broken promises
        a) to a decedent
        b) concerning devolution of his property
                i) on death

1) are a major exception
        a) to the general rule that
                i) a mere breach of promise is an insufficient basis
                        (a) for imposing a constructive trust.

This exception appears
        a) to stem from the fact that
                i) when the promise is broken,
                ii) the promisee is
                        i) already dead,
                        ii) thus unable to personally seek enforcement, and
                        iii) thus particularly in need of assistance from equity.

Examples:         1) H wills all of his property to W in reliance on her oral promise to leave it to H's children at her death.

        H dies; W takes the property, but on her death wills it to X.

        X(the 3rd party) holds title as constructive trustee for H's children. (See Wills outline on will contracts.)

        2) a) A writes his will leaving his property to B (or forgoes changing a prior will in favor of B) in reliance on B's promise to hold the property for C or to convey it to C.

        A dies; B takes title and does not carry out his promise.

        The majority rule holds that B is a constructive trustee for C.


        b) The same rule applies where A forgoes writing any will and dies intestate in reliance on a promise by his intestate heir, B, to hold for or convey to C. (See discussion of secret and semi-secret trusts, II.B.2.b., supra.)

        

        In both examples 1) and 2), the required promise of the constructive trustee can be implied, as where the testator asks him if he will dispose of the inheritance or bequest in a certain manner and he remains silent under the circumstances, suggesting acquiescence.

        3) X renders services to Y in reliance on Y's promise to leave property to X, and Y does not do so.

        Some courts will find the heir or devisee of Y who has taken title on Y's death to be a constructive trustee for X, particularly (a) where X's services are difficult to value so that an action for quasi-contract against Y's estate is not an adequate remedy; or(b) where X would suffer unconscionable injury because he has been induced to make a detrimental change of position in reliance on the oral agreement.

        Other jurisdictions hold that the Statute of Wills or the Statute of Frauds bars the constructive trust remedy in this context.

4)         Promise Causing Debtor to Forgo Bidding at Foreclosure Sale

Some jurisdictions will impose a constructive trust on the promisor

1) where his promise
        a) to buy and
        b) convey
                i) land to the debtor

   causes the debtor
        a) to forgo bidding
                i) at the foreclosure sale.

Example:    A��s land is to be sold in a foreclosure sale. B promises to buy the land for A's benefit; in reliance, A does not bid at the sale.

        B buys the land but breaks his promise to hold for A or convey to A.

        A number of jurisdictions will hold B a constructive trustee for A, on condition that A repay B's expenses, particularly where B's actual damages are hard to value.

        Other jurisdictions hold that the Statute of Frauds bars the constructive trust remedy under such facts.

c.         Standard of Proof -Clear and Convincing Evidence

The party
        a) seeking to have a constructive trust imposed

1) must prove
        a) the facts
                i) he relies on
                ii) (e.g.,
                        (a) fraud,
                        (b) breach of confidence,
                        (c) theft)
        b) by clear and convincing evidence (i.e., more than a mere preponderance).

D.         OBLIGATIONS OF TRUSTEE OF CONSTRUCTIVE OR RESULTING TRUST

1.         Duty to Convey Title

From the time
        a) the court declares
                i) a constructive or
                ii) resulting trust
                        (a) to exist,

1) the sole duty of the trustee is
        a) to convey legal title
                i) to the beneficiary.

If he does not do so,

1) he is responsible for the profits
        a) the beneficiary would have earned.  
        b) (thus, not restitutionary, but actual compensational damages)

This problem is usually avoided
        a) by the court
        b) decreeing title to be in the beneficiary
                i) at the time it finds
                        (a) an implied trust to have arisen. (i.e. retroactively from the acquisition)

2.         Other Trustee Duties and Liabilities -Constructive Trusts

When a court declares a constructive trust to exist,

1) such a trust is retroactive
        a) to the later of:
                (i) the date
                        (a) the trustee took title; or
                (ii) the time of
                        (a) the fraud,
                        (b) breach of promise, or
                        (c) other wrongful conduct
                                (i) on which the trust is based.

a.         All Profits Taken from Property

From that date,

1) the trustee is accountable
        a) to the beneficiary
        b) for all profits
                i) he has taken from the property and,

        c) if he has used it himself,
                i) its fair rental value.

b.         Profits on Transactions in Breach of Fiduciary Duty

Also, from that date,

1) the trustee owes a fiduciary duty
        a) to the beneficiary
                i) to deal fairly with the property and
                i) to make full disclosure, and

2) he will be accountable for profits
        a) made on transactions
                i) where he breached this duty.


c.        Liability for Damage to Property

        a) During this period of time and        
        b) prior to conveying title to the beneficiary,

1) the trustee will be held liable for damages
        a) to the property
        b) that he
                i) willfully or
                ii) negligently
                        (a) causes.

d.        No Duty to Invest

The trustee has no duty to invest the trust property.

3.         Other Trustee Duties and Liabilities -Resulting Trusts

The rules above are also applicable
        a) to trustees of resulting trusts
        b) from the date
                i) on which they arise
                ii) which is as follows :

        a. In the case of a resulting trust
                i) on failure of an express trust,

                        (a) from the date
                                (i) the express trust becomes void, or
                        (b) from the date
                                (i) it becomes inoperable
                                        (A) for lack of a beneficiary;

        b. In the case of
                i) excess corpus,
        
                        (a) from the date        
                                (i) the trust purpose is completed; and

        c.  In the case of
                i) a purchase money resulting trust,

                        (a) from the date
                                (i) the trustee takes title to the property.

4.         Tracing Assets

The doctrine of tracing trust assets is fully applicable
        a) to dealings
                i) by the trustee
                        (a) of a constructive or resulting trust
                ii) with
                        (a) trust property and
                        (b) the profits from trust property.


E.         APPLICATION OF EQUITABLE PRINCIPLES

Actions
        a) in which a party seeks a declaration
                i) imposing
                        (a) a resulting or
                        (b) constructive trust

1) were historically
        a) actions in equity.

Thus, most equitable principles are applicable.

1.         

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