Constructive Trust

A constructive trust is a legal concept created by the courts that describes the remedy that can be sought when a person holds the legal right to property that he should not be able to keep. This property is property that is illegally gained through fraud, wrongdoing, or some other kind of reprehensible behavior. The purpose of a constructive trust is to prevent unjust enrichment. To explore this concept, consider the following constructive trust definition.

Definition of Constructive Trust

Noun

  1. A trust imposed by a court as a remedy for unjust enrichment.

What is a Constructive Trust

A constructive trust is imposed by a court in order to benefit a party whose rights have been violated due to another person owning property that he should not possess. This illegal ownership may come about through fraud or another type of unconscionable behavior. The purpose of a constructive trust is to prevent unjust enrichment.

Unjust enrichment is a term used to describe a situation wherein one person profits at another person’s expense, without compensating that person for the value of his property. To put it simply, in a constructive trust the defendant has breached a duty he had owed to the plaintiff.

The most common example of a constructive trust is a breach of fiduciary duty. A fiduciary duty is the obligation of one party to act in the best interests of the other party. For instance, an attorney has a fiduciary duty to act in the best interests of his client. The breach of fiduciary duty comes when the attorney acts in a way that benefits his own interests, rather than the interests of his client.

Purpose of a Constructive Trust

Mentioned earlier, the purpose of a constructive trust is to prevent unjust enrichment. Unjust enrichment is present in almost every case that handles a constructive trust. However, the court does not necessarily need to find that the person in possession of the property deliberately acted in a way that defrauded the other party. Instead, the court may find the unjust enrichment exists due to other circumstances that render the other party unable to continue to hold the title to that property.

Examples of constructive trust types that the courts can impose, aside from those pertaining to family property disputes, include:

  • Profit by Crime – Those that will prevent a criminal from enjoying the benefits of the crime he committed
  • Profit by Mistake – Those that prevent a defendant from keeping money that he was paid by mistake
  • Profit by Fiduciary Relationship – Those that prevent a fiduciary from making a profit from a fiduciary relationship

Consider the following example of a constructive trust being imposed by a court:

Eddie steals $100,000 from Theresa, and uses that money to buy a house. The court can deduce that the house was actually purchased with Theresa’s money, and can therefore rule that the house is to be held in trust for Theresa. Eddie must then transfer the title of the house to Theresa, even if the value of the house increases by the time the transaction is completed.

However, if the value of the house decreases to $75,000 by the time Theresa takes possession of it, then Theresa can demand a remedy of money damages equal to the amount that was stolen from her. This means that, instead of being granted an equitable remedy, which would give Theresa the $75,000 value of the depreciated house, the Court can instead award her $100,000, which was the value of the house at the time the money was stolen from her.

Common Intention Constructive Trust

A common intention constructive trust arises in situations wherein there was an intention for one party to give the other party property, but the transfer failed for some reason. Now, because the transfer failed, the would-be beneficiary has suffered a loss due to his reliance on the transfer being properly executed.

In this case, a constructive trust would be imposed by the court to remedy the beneficiary’s loss. This is because there was a clearly communicated intention present that showed that the defendant was going to receive a beneficial interest and plainly did not when the transfer fell through.

For example:

Marcia and Lionel separated after having lived together, though not married, for eight years. The couple had two children together during that time. Marcia – who was a career woman – purchased the home just prior to Lionel moving in, with the intent that the couple would live there together. Throughout their relationship, Marcia worked full time, pushing her career on an upward path, and Lionel worked part time from home while raising the couple’s children.

When they separated, Marcia had told Lionel she was having an affair, and that she wanted him to move out. It was only logical, she said, because the house was in her name. Lionel consults with his attorney, however, and learns that all of the time he spent maintaining the home, and raising the family in the home, gave him certain rights to a portion of the home’s value.

In fact, because it was the intent of both parties to live together in the home, as a couple, the situation created a constructive trust that gave Lionel rights to the property. The purpose of a constructive trust of this type is to ensure things are fair.

Constructive Trust Example Involving an Irrevocable Trust

After 33 years of marriage, Margaret and Albert Nelson divorced in 1975. As part of their property settlement agreement, Albert was to create and maintain a Will to create a testamentary trust for the couple’s children – Albert H. Nelson, III and Markeyta Nelson Dewey – that would be funded by Albert’s “entire estate.” The property settlement agreement was approved by the district court and incorporated into the couple’s divorce decree.

However, the couple’s children (the “Appellants”) brought the settlement agreement before the court after Albert’s death in June of 2003, to argue over what exactly was meant by Albert’s “entire estate.” Their main concern was that Albert had violated the agreement by gifting substantial amounts of property in charitable donations, and to his second wife, Doris, which should have been preserved for them. They also believed they were slighted in that Albert did not include his “entire estate” in a trust for their benefit.

Shortly after Albert’s death, his attorney wrote to the Appellants, informing them that certain items of Albert’s personal property actually belonged to Doris, and were therefore not part of Albert’s estate. The attorney did not inform the Appellants that an irrevocable trust existed, and they first learned of its existence after receiving the tax return for Albert’s estate. As soon as they learned of this trust, Albert’s adult children (now referred to as the “Appellants”) filed a lawsuit against Doris and the schools to which their father had gifted property (now referred to as the “Appellees”).

The Appellants then filed a motion for partial summary judgment, arguing that they were entitled to a constructive trust on a portion of the assets that Albert had transferred to Doris. They also petitioned for an order requiring Doris to provide an income statement for all of the income generated since Albert’s death which was derived from the “gifted assets.”

Lastly, the Appellants filed for a money judgment against Doris for the amount they believed they should have received under the 1975 settlement agreement. This included any income that would have been earned after Albert’s death, but wasn’t earned due to his “substantial gifts to others.”

The Appellees filed a cross-motion in response, arguing that Appellants’ claims were time-barred due to the five-year statute of limitations expiring. Further, the Appellees alleged that the Appellants’ desire to modify or vacate the 1975 property settlement was a violation of the law.

In October of 2006, the district court denied the Appellants’ motion for partial summary judgment and granted the Appellees’ motion for summary judgment. The court found that, because Albert was the one who was alleged to have breached the property settlement agreement, then the Appellants should have brought their claims against his estate, rather than against the beneficiaries of his estate.

The Court of Appeals affirmed this decision, deciding that in addition to being time-barred, Appellants were also not entitled to a constructive trust whatsoever. The Appellants brought the case before the Supreme Court of the State of Kansas, and the Court agreed to hear the case. In the end, however, the Court affirmed both the district court and the Court of Appeals. Specifically, the Court held that:

“… the Appellants as third-party beneficiaries asserted a claim against the estate by alleging that Albert’s transfers of assets to the trusts were a breach of the property settlement agreement and, therefore, the transfers were void. This claim against Albert’s estate is barred by the Appellants’ failure to exercise the right of creditors to open an estate and make a timely claim as required by K.S.A. 59-2239(1).

Related Legal Terms and Issues

  • Appellant – A person who applies to a higher court for a reversal of a lower court’s decision.
  • Appellee – A party to a legal proceeding who has won at trial, but against whom the loser (the “appellant”) of the trial has filed an appeal with a higher court.
  • Defendant – A party against whom a lawsuit has been filed in civil court, or who has been accused of, or charged with, a crime or offense.
  • Fiduciary – A person to whom power, property, or assets have been entrusted for the benefit of another.
  • Irrevocable Trust – A trust that cannot be changed without the permission of the beneficiary.
  • Plaintiff – A person who brings a legal action against another person or entity, such as in a civil lawsuit, or criminal proceedings.

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