What is Constructive Trust in Real Estate Litigation?

What is Constructive Trust in Real Estate Litigation?

 

What is Constructive Trust in Real Estate Litigation?

Constructive trust could be an effective tool when a real estate plaintiff wants to obtain title to a real property.  Through constructive trust the court will compel the defendant to convey title to the plaintiff, the rightful owner. In this article, we explore in some depth the requirements for imposition of a constructive trust.

 

STATUTORY BACKGROUND

Constructive trusts are specifically authorized by Civil Code Sections 2223, 2224. Under CC §2223, a person who wrongfully detains property “is an involuntary trustee thereof, for the benefit of the owner.” Under CC §2224 a person who gains property “by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act” is an involuntary trustee of the property for the benefit of the one who would otherwise have had it, unless that person has some other and better right to it.

 

PURPOSE OF CONSTRUCTIVE TRUSTS

As indicated, constructive trusts are used to obtain title to a property a defendant is inequitably in possession of.  The court effectuates a fictional or constructive trust. In doing so, the court realizes that the defendant holds title to the property, but the court decrees that the defendant holds title in trust, as a trustee of a trust created for the benefit of the plaintiff, as beneficiary. Constructive trust is not for money damages; but it is an equitable restitutionary remedy i.e. preventing unjust enrichment of defendant.

 

REQUIREMENTS FOR CONSTRUCTIVE TRUST

The conditions for a court of law to impose a constructive trust are as follows (Communist Party of the United States v Valencia, Inc. (1995) 35 CA4th 980, 990.:

  • “(1) The existence of a res (property or some interest in property);
  • (2) The right of a complaining party to that res; and
  • (3) Some wrongful acquisition or detention of the res by another party who is not entitled to it.”

 

 

  1. What Is Res?

A res in an identifiable property or interest in the property. It is important to note that if there is no res for the plaintiff to take control over, there could be no constructive trust. For instance, if Defendant obtains a property through fraud and then sells the property to a bona fide purchaser (a purchaser who bought the property without notice of the fraud), then the Plaintiff cannot impose a constructive fraud, because there is no res. On the other hand, if Defendant exchanged the fraudulently obtained property for another property, the new property could be subject to constructive trust. A constructive trust allows a claimant who has lost one asset, such as money, to trace that asset to its product, such as real property. Thus, if a defendant has taken a plaintiff’s money or property, sells it and uses the proceeds to buy real property, the plaintiff may impose a constructive trust on the newly acquired property. Church v Bailey (1949) 90 CA2d 501, 504.

 

  1. What Is Plaintiff’s Right to Res?

Res could be real property; however, plaintiff may not impose constructive trust over property the plaintiff has no right over. For instance, if the defendant owes the plaintiff an ordinary business debt, the plaintiff’s remedy is to obtain a money judgment. The plaintiff may not impose a constructive trust over some real property belonging to the defendant for the purpose of securing that debt. Deane v Superior Court (1985) 164 CA3d 292, 297. Similarly, if the defendant through fraud acquires the plaintiff’s shares of stock, the plaintiff may impose a constructive trust on the stock but may not instead choose to impose the trust on real property owned by the defendant. The real property is not the res in which the plaintiff has a right. See Pacific Lumber Co. v Superior Court (1990) 226 CA3d 371, 378.

 

  1. What is a Wrongful Acquisition?

Under Civil Code Section 2224:

“One who gains a thing by fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act, is, unless he or she has some other and better right thereto, an involuntary trustee of the thing gained, for the benefit of the person who would otherwise have had it.”

Hence, wrongful acquisition could be through: “fraud, accident, mistake, undue influence, the violation of a trust, or other wrongful act.”

 

SOME ADVANTAGES OF CONSTRUCTIVE TRUST OVER MONEY JUDGMENT

One advantage of imposing a constructive trust on real property is that the plaintiff can recover the specific property rather than a mere money judgment. This is advantageous to the plaintiff if the defendant is judgment-proof or has other creditors, or if the plaintiff has a personal desire to own the particular property in dispute.

A constructive trust may be much easier to enforce than a judgment for damages. As part of the judgment for a constructive trust, the court will order the defendant/trustee to convey the property to the plaintiff.

 

STATUTE OF FRAUD

The statute of frauds does not prevent the imposition of a constructive trust, because a constructive trust arises by operation of law, not by agreement. Stromerson v Averill (1943) 22 C2d 808, 815. n

 

This post was originally posted on Feb 19, 2015. It’s been updated on June 7, 2018

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