Prejudgment Interest for Wrongful Withholding in Constructive Trust Remedy Actions
| Publication year | 1994 |
| Pages | 351 |
| Citation | Vol. 23 No. 2 Pg. 351 |
1994, February, Pg. 351. Prejudgment Interest for Wrongful Withholding in Constructive Trust Remedy Actions
Colorado's prejudgment interest statute, CRS § 5-12-102,(fn1) applies expansively to all legal and equitable claims for the wrongful withholding of money or other property, including an equitable claim for imposition of a constructive trust. This article discusses the constructive trust remedy and recent case law holding that a constructive trust claimant can secure statutory prejudgment interest as part of the remedy. The article also discusses the timing for accrual of prejudgment interest in a constructive trust remedy action.
In an equitable action seeking a constructive trust, Colorado law allows the claimant to secure an injunctive judgment in the amount of the trust res, plus the profits earned thereon while held by the constructive trustee.(fn2) In most respects,(fn3) proving profits attributable to a constructive trust res is similar to asserting a claim either for common law moratory interest(fn4) or for moratory interest pursuant to CRS § 5-12-102(1)(a). The common law and § 5-12-102(1)(a) allow recovery of the actual gain or benefit realized by a wrongful withholder of money or property.
Frequently, it is unduly expensive and difficult---if not impossible---for a claimant to prove the amount of the profits attributable to a constructive trust res in the hands of a constructive trustee. Further, there may be no profits, or the provable profits may be extremely low. Thus, the common law constructive trust remedy can leave the claimant with a judgment that includes little, if any, appreciation in value of the trust res.
The U.S. Circuit Court of Appeals for the Tenth Circuit recently held in Lyons v. Jefferson Bank & Trust that a constructive trust claimant is entitled to 8 percent per annum prejudgment interest pursuant to CRS § 5-12-102(1)(b).(fn5) Lyons involved an equitable claim for the imposition of a constructive trust on $42.8 million. The claimant alleged that an investment advisor had wrongfully removed and transferred money from an Iowa client to Jefferson Bank & Trust in Colorado.
At trial, the plaintiff elected to seek 8 percent prejudgment interest pursuant to CRS § 5-12-102(1)(b). In so doing, the plaintiff chose not to seek either a common law award in the amount of the profits attributable to the trust res or moratory interest in the amount of the actual gain or benefit realized by the wrongful withholder, pursuant to common law or CRS § 5-12-102(1)(a).
The Lyons trial court imposed a $42.8 million constructive trust on the bank but denied the plaintiff's claim for 8 percent prejudgment interest pursuant to § 5-12-102(1)(b). Citing language from In re Marriage of Allen,(fn6) the trial court found that the bank was an "innocent donee" of the funds. The trial court held that "a constructive trust award may not include statutory interest because to do so would provide a windfall to the beneficiary of the constructive trust at the expense of the innocent donee."(fn7)
Rejecting both the "windfall" and the "innocent donee" principles, the Tenth Circuit reversed the trial court's refusal to include 8 percent prejudgment interest as part of its constructive trust judgment. The court held that the inclusion of prejudgment interest in a constructive trust judgment is consistent with the Colorado Supreme Court's mandate that § 5-12-102 must be liberally construed.(fn8) In reaching this decision, the Tenth Circuit relied heavily on Mesa Sand & Gravel Co. v. Landfill, Inc.,(fn9) one of the leading Colorado Supreme Court cases regarding prejudgment interest. In Mesa, the Supreme Court held that the "comprehensive
scope" of CRS § 5-12-102 "was not designed to distinguish between classes of prevailing parties in permitting recovery of prejudgment interest."(fn10)
Quoting from Mesa, the Lyons court explained as follows:
[T]he purpose of section 5-12-102 is to discourage a person responsible for payment of a claim to stall...
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