Chapter 55 - § 55.5 • CONSTRUCTIVE TRUSTS

• Jurisdiction: Colorado

§ 55.5 • CONSTRUCTIVE TRUSTS

§ 55.5.1—Generally

Broadly, a constructive trust is an equitable remedy imposed for the purpose of placing title to property in the hands of the party to whom it "rightly" belongs. If a party holds title to property and it would be inequitable for that party to continue holding title to the property, a constructive trust may be imposed in favor of the rightful owner. Page, 592 P.2d at 797-98. Constructive trusts are often described generally as a remedy to prevent unjust enrichment. Mancuso, 818 P.2d at 737. They have been even more broadly defined as being "the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." Beatty v. Guggenheim Exp. Co., 122 N.E. 378, 380 (N.Y. 1919).

As with resulting trusts, a constructive trust is a remedy and not a cause of action. Bryant, 160 P.3d at 276. Nevertheless, many practitioners fashion pleadings that appear to treat a claim for the imposition of a constructive trust as a separate cause of action. Practitioners should be cautious in using this approach, as courts have dismissed these claims if they are not properly asserted. Id.; see also Gagne v. Gagne, 338 P.3d 1152 (Colo. App. 2014).

Constructive trusts, as is true of resulting trusts, are usually imposed directly on the property at issue. The general rule is that a constructive trust on the property is inappropriate if the property has been sold to a bona fide purchaser for value. The rationale for this rule is that the purchaser paid fair consideration for the property without notice, and therefore the continued retention of the property by the bona fide purchaser is not inequitable. In such cases, the remedy is monetary damages. However, if fair consideration was not paid, or if the purchaser took title with notice, a constructive trust on the property may still be appropriate. In situations where the property has been transferred to a bona fide purchaser for value or the property is otherwise no longer available, a constructive trust may be imposed in favor of the party who rightfully should have title to the property on the proceeds of the transfer or on property purchased with the proceeds of the transfer. See Loring & Rounds § 7.2.3.1.6; see also In re Marriage of Allen, 724 P.2d 651, 657 (Colo. 1986) (en banc); but see also In re Estate of Feldman, 443 P.3d 66 (Colo. 2019) (equitable remedy of constructive trust over life insurance proceeds could not be used to override slayer statute's protection of third party who received proceeds in satisfaction of legally enforceable obligation from having to return or be liable for such payment). Similarly, a successful claimant can obtain an in personam judgment that will require the defendant to transfer property of like value to the claimant or receive damages. Lyons v. Jefferson Bank & Trust, 793 F. Supp. 981, 986 (D. Colo. 1992), aff'd in part, rev'd in part on other grounds, 994 F.2d 716 (10th Cir. 1993).

When a constructive trust is imposed, the party holding title to the property is converted into a "constructive trustee," who then must deliver title to the party in whose favor the constructive trust arose. The constructive trustee does not necessarily have fiduciary duties with respect to the property at issue, but the existence of a fiduciary relationship giving rise to a presumption of undue influence may be a basis for the imposition of a constructive trust. Bogert's Trusts and Trustees § 471.

§ 55.5.2—Requirements for Imposition of Constructive Trust

Precisely defining the necessary elements required for the imposition of a constructive trust is particularly challenging. Court decisions have lacked clarity in this regard. The Restatement (Third) of Restitution and Unjust Enrichment § 55 cmt. a (2011) describes an appropriate case for the imposition of a constructive trust as a situation in which (1) the defending party has been unjustly enriched; (2) by obtaining legal title to property; (3) either at the expense of the claiming party or in violation of the claiming party's rights.

As to the first element listed in the Restatement, it is relatively clear that a primary purpose for application of the constructive trust remedy is the prevention of unjust enrichment. Colorado courts have acknowledged this purpose by describing the doctrine as "an equitable remedy devised to prevent unjust enrichment and compel restitution of property that in equity and good conscience does not belong to the Defendant." In re Specialized Installers, Inc., 12 B.R. 546, 553 (Bankr. D. Colo. 1981). Different courts have expressed this concept in various ways, but the idea is the same.

Many of the cases in which constructive trusts are imposed assume unjust enrichment exists and focus on the element concerning whether title was obtained at the expense of the claiming party or in violation of the claiming party's rights. It is not clear that unjust enrichment itself is a separate element that must be shown. However, it is also not clear whether a constructive trust would be an appropriate remedy if unjust enrichment were not present. As a practical matter, the very act of obtaining title at the expense of the claiming party or in violation of his or her rights results in the unjust enrichment of the defending party.

Regarding the Restatement's second element, it is also relatively clear that the defending party must possess, or at some point must have possessed, legal title to the property at issue. As noted previously, constructive trusts can be imposed directly on the property at issue, on the proceeds from the sale of the property, or on property purchased with proceeds from the sale of the property at issue, if the property has been transferred to a bona fide purchaser for value. Damages may be the only available remedy if the property's proceeds have been...