Chapter 8-5 Constructive Trust

• Jurisdiction: United States

8-5 Constructive Trust

8-5:1 Overview

A constructive trust is an equitable remedy which a plaintiff may utilize when he has been wrongfully deprived of property. The remedy is available when a plaintiff proves that he was wrongfully deprived of property, the defendant was unjustly enriched because of the wrongdoing, and the plaintiff can trace back to the identifiable property which was wrongfully taken from her. The most difficult aspect of obtaining a constructive trust is the element which requires traceability to identifiable property. The law will not impose a constructive trust upon any property which is not wrongfully acquired or commingled with the defendant's own property.

8-5:1.1 Related Causes of Action

Unjust Enrichment, Money had and received, Common Law Fraud, Statutory Fraud, Fraud by Non-disclosure, Breach of Partnership Duty, Officer and Director Liability: Breach of the Duty of Loyalty, Usurpation of Business Opportunity, Attorney Breach of Fiduciary Duty, Breach of Formal Fiduciary Duty, Breach of Informal Fiduciary Duty from Confidential Relationship, Oil and Gas Litigation: Breach of Fiduciary Duty

MUST READ CASES

Wilz v. Flournoy, 228 S.W.3d 674 (Tex. 2007)

KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70 (Tex. 2015)

8-5:2 Elements

(1) A wrong done to the plaintiff¹⁴³

• The defendant must wrong the plaintiff by "breach of a special trust or fiduciary relationship or actual or constructive fraud,"¹⁴⁴ i.e.:

• Breaching a formal fiduciary duty;¹⁴⁵
• Breaching a confidential relationship;¹⁴⁶
• Committing actual fraud;¹⁴⁷or
• Committing constructive fraud¹⁴⁸

• A constructive trust may be sought by a plaintiff in any instance where property has been obtained through bad faith.¹⁴⁹ Including, but not limited to the following causes of action:

• Unjust enrichment;
• Money had and received;
• Common Law Fraud, Statutory Fraud;
• Fraud by Non-disclosure;
• Breach of Partnership Duty;
• Officer and Director Liability: Breach of the Duty of Loyalty;
• Usurpation of Business Opportunity;
• Attorney Breach of Fiduciary Duty;
• Breach of Formal Fiduciary Duty;
• Breach of Informal Fiduciary Duty from Confidential Relationship; and
• Oil and Gas Litigation: Breach of Fiduciary Duty.

(2) Which results in the unjust enrichment of the wrongdoer¹⁵⁰

• The defendant must be unjustly enriched because of the wrong done to the plaintiff.¹⁵¹

(3) Traceable to identifiable property¹⁵²

• The plaintiff must be able to identify and trace the property which is to be subject to the constructive trust.¹⁵³
• The plaintiff may recover from the defendant:

• The very same property which the plaintiff was wrongfully parted from;¹⁵⁴ or
• Property which was acquired with the property the plaintiff was wrongfully parted from.¹⁵⁵

• In order to impose a constructive trust on property which was acquired with the property the plaintiff was wrongfully parted from, the plaintiff must trace such property to the wrongfully acquired property.¹⁵⁶
• If the plaintiff proves that the defendant commingled its own property with wrongfully acquired property, the plaintiff may impose a constructive trust on either the commingled funds or property acquired with the commingled funds.¹⁵⁷

• The defendant may then put on proof that distinguishes between wrongfully acquired property and the defendant's own property.¹⁵⁸

• If the defendant sells the wrongfully acquired property to a bona fide purchaser, the plaintiff's only option is to seek to impose a constructive trust on the proceeds of the sale.¹⁵⁹
• If a third party is a knowing or unknowing participant in the defendant's wrongful conduct, the third party is not entitled to retain ownership of the property if the third party is unjustly enriched.¹⁶⁰

8-5:3 Damages and Remedies

8-5:3.1 Imposition of Constructive Trust

The imposition of a constructive trust generally requires the defendant to convey the wrongfully acquired property to the plaintiff.¹⁶¹

The imposition of a constructive trust may also result in:

• The plaintiff and defendant being awarded joint ownership of the property in proportion to the amount of consideration each provided;¹⁶² or
• Imposition of an equitable lien.¹⁶³

8-5:3.2 Scope of Constructive Trust

Generally, the scope of the constructive trust is left to the discretion of the court.¹⁶⁴ However, a constructive trust must not place the plaintiff in a more advantageous position than he would have been if the plaintiff had not been wronged.¹⁶⁵ A constructive trust must not be used as a means of completely defeating the statute of frauds.¹⁶⁶

8-5:3.3 Exemplary...