Constructive Trusts: A Primer
Most people know the old saying that goes: if it looks like a duck, walks like a duck, and quacks like a duck, most likely it’s a duck. The same reasoning holds true for trusts. The theory behind the constructive trust is: if it has all the makings of a trust, it probably really is a trust.
Consider the following example:
John and Mary are brother and sister. Mary owns a house. Mary just went through a period of unemployment and fell behind in her mortgage. Mary ends up in foreclosure and John offers to help Mary by taking on a mortgage since his credit is good. In order for John to get the mortgage, Mary must convey the property to John by deed. She does so, but the understanding between the siblings is that he will reconvey it back to her as soon as she is back on her feet and can take a mortgage in her own name. While John holds title to the property, Mary lives in the house, pays the mortgage directly to the bank, and pays for all the repairs and upkeep of the house. Everyone in the family knows that the house is really Mary’s, regardless of what the deed says.
Like the express trust, a constructive trust is where a trust arrangement is implied in the relationship where title is held by one person for the benefit of another.
The elements of a constructive trust are usually stated as follows:
1. A confidential or fiduciary relationship (such as parent-child, siblings, etc.),
2. A promise to reconvey the property, express or implied (in our example, John promised to reconvey to Mary);
3. A transfer in reliance on the promise (Mary transferred the house to John relying on his promise to reconvey to her in the future); and
4. Unjust enrichment if the promise is not enforced (in other words, not enforcing John’s promise would lead to an unfair windfall to John).
What about this example:
Grandfather owns a house; his tenant trashes the place and moves out; Grandfather says to Grandson “if you repair the tenant’s apartment, and live in it, and pay for all of the repairs and upkeep of the property, I’ll sell the house to you for $100,000.” Grandson performs his end of the bargain. He repairs the whole house, including an apartment he does not live in, he replaces the roof and installs a security system throughout the building. Grandson tries to schedule a closing. Grandfather refuses.
In defense to Grandson’s claim that a constructive trust should be imposed, Grandfather argues that the third element — actual transfer of the real estate — never happened.
NY Courts will impose a constructive trust in the interests
of justice even in the absence of an actual transfer:
Instead of an actual transfer, however, New York Courts have imposed a trust where one party invests money, time and effort that is “unequivocally referable” to the agreement between the parties. Therefore, in our example, one would expect a Court to impose a constructive trust since Grandson’s expenditure of considerable time, money, and effort would be unequivocally referable to Grandfather’s promise to convey the house to Grandson for $100,000.
While the examples discussed above involve real estate, a constructive trust can also be imposed on personal property where the interests of justice demand. The constructive trust is an important remedy that can force people to live up to an oral promise.