Constructive Trust The Most Flexible Remedy

How naïve is a person entitled to be and still expect a remedy in court? That limit is defined by the law of constructive trusts, and the inconsistency and uncertainty of that law presents an opportunity for creative lawyering.

A. Equitable Remedy

A constructive trust is an equitable remedy. It arises from the doctrines of assumpsit and restitution. “Assumpsit has its origin in relief anciently afforded by chancery in respect to an implied obligation arising by operation of law, and is grounded in equitable principle.”1

“Restitution is founded upon the doctrine of unjust enrichment. . . . Unjust enrichment is an equitable doctrine.”2

A constructive trust is known by various labels, including quasi or constructive contract. Implied trusts include constructive trusts, trusts ex malefico, and resulting trusts.3 The labels tend to be used interchangeably. For this article, the term “constructive trust” applies to all of the equitable remedies based upon the concept of unjust enrichment, because the same requirements and opportunities apply to all.

Constructive trusts are often discussed in the context of equitable liens, but an equitable lien is a more specific remedy. “Ordinarily, an equitable lien arises from an express or implied agreement to create a lien on property, real or personal, as security for an obligation. A loan or advancement of money, in and of itself, does not give rise to a lien unless there is trickery or fraud involved in the procurement.”4 A test for whether an equitable lien can be requested in a matter involving real estate is whether there is a valid reason to file a lis pendens notice along with the complaint.

The flexibility of the constructive trust as an equitable remedy arises from the fact that there is no set formula by which the existence of the elements of a constructive trust may be determined, because each case is factually different.5 Although unjust enrichment cannot be defined, most judges, like Potter Stewart, “know it when they see it.” Thus, the constructive trust remains the most flexible remedy and offers the most opportunity for creative lawyering.

B. Elements

1. Fault

Early forms of constructive trust were based on the fault of the person on whom the trust was to be imposed. “[T]o establish a trust ex maleficio, there must be an element of positive fraud accompanying the promise, by means of which the acquisition of the legal title is wrongfully obtained.”6 Thus, a constructive trust may arise through fraud, duress, undue influence or mistake, breach of a fiduciary duty, or wrongful disposition of another’s property.7

As late as 2014, the Arkansas Court of Appeals held that “a constructive trust arises in favor of persons entitled to a beneficial interest against one who secured legal title either by an intentional false oral promise to hold the title for a specified purpose, or by a violation of a confidential or fiduciary duty, or is guilty of any other unconscionable conduct that amounts to a constructive fraud.”8 The decisions have not been consistent, however, as to the requirement of fault of the recipient.

2. Confidential Relationship

As an alternative to fault of the recipient, the courts have imposed constructive trusts where there is a confidential relationship.

[P]roof of fraud is not necessary for the imposition of a constructive trust. This court has often held that although a grantee’s oral promise to hold the title to land for a third person is unenforceable, a constructive trust will be imposed if it is shown by clear, cogent and convincing evidence that the grantee’s promise was intentionally fraudulent, or that the parties were in a confidential relationship.9

There is no set definition of a confidential relationship, but here is a common one seen in case law:

A confidential relation exists between two persons when one has gained the confidence of the other and purports to act or to advise with the other’s interest in mind. Relationships deemed to be confidential are not limited to those involving legal control; they also arise whenever there is a relation of dependence or confidence, especially confidence that springs from affection on one side and a trust in reciprocal affection on the other. A confidential relationship, however, is not established simply because the parties are related or live in the same household. . . . There is no set formula by which the existence of a confidential relationship may be determined, for each case is factually different and involves different individuals.

. . . Whether two individuals have a confidential relationship is a question of fact.10

“While a confidential or fiduciary relationship does not in itself give rise to a constructive trust, an abuse of confidence rendering the acquisition or retention of property by one person unconscionable against the other suffices generally to ground equitable relief in the form of the declaration and enforcement of a constructive trust.”11

3. Unjust Enrichment

As an alternative ground for imposing a constructive trust, the courts have inconsistently applied the theory of unjust enrichment without regard to the recipient’s fault. On one hand, courts have suggested that fault is unnecessary:

It is not necessary, in order to create an obligation to make restitution, that the party unjustly enriched should have been guilty of any tortious or fraudulent acts; the question is: Did he, to the detriment of someone else, obtain something of value to which he was not entitled? In such cases the simple, but comprehensive, question is whether the circumstances are such that equitably defendant should restore to plaintiff what he has received.12

On the other hand, courts have suggested that fault is necessary:

To find unjust enrichment, a party must have received something of value to which he was not entitled and which he should restore. However, there must be some operative act, intent, or situation to make the enrichment unjust and compensable. The courts will imply a promise to pay for services only where they were rendered in such circumstances as authorized the party performing them to entertain a reasonable expectation of their payment by the party beneficiary. One who is free from fault cannot be held to be unjustly enriched merely because he has chosen to exercise a legal or contract right.13

C. Defenses

1.

Laches

Because a constructive trust is an equitable remedy, the applicable defense is not limitation of actions, but laches. In Arkansas, this distinction has not been universally followed, at either the trial or appellate level.14

The doctrine of laches is based on a number of equitable principles that are premised on some detrimental change in position made in reliance on the action or inaction of the other party. Laches or estoppel does not arise merely by delay, but by delay that works a disadvantage to the other. . . . So long as the parties are in the same position, it matters little whether one presses a right promptly or slowly.15

In Andres v. Andres, 16 the siblings of Adolph Andres waited 38 years from the date of the deed to attempt to impose a resulting trust upon their brother. In Castleberry v. Castleberry, 17 the siblings of Arthur Castleberry waited 20 years to attempt to impose a resulting trust on their brother. In both cases, the plaintiffs had their day in court and their cases reached the Supreme Court and Court of Appeals, respectively.18

2. Unclean Hands

Because a constructive trust is an equitable remedy, the doctrine of unclean hands applies. It is often discussed interchangeably with equitable estoppel. In

Steve Davis has practiced law in the same building in Harrison since 1982. No one has ever challenged his claim to be the only State Supreme Court Special Associate Justice ever to win a national motorcycle road race.

Henry v. Goodwin, 19 Mrs. Goodwin deeded land to her niece to denude herself of assets so that she could qualify for Social Security (SSI). The niece executed a deed to reconvey the land, but the deed was not recorded. Although the niece was younger, she died sooner. Mrs. Goodwin then recorded the niece’s deed, and the niece’s children claimed the land as their own. They claimed that Mrs. Goodwin was barred from an equitable remedy by estoppel or the unclean hands doctrine because she had misrepresented her position to SSI. The Supreme Court held:

[W]here the owner of property transfers it upon an intended trust which fails for illegality, “a resulting trust does not arise if the policy against permitting unjust enrichment of the transferee is outweighed by the policy against giving relief to a person who has entered into an illegal transaction.”

. . . It is thus a matter of balancing conflicting principles of public policy. Among the factors to be considered are (1) whether the grantor’s conduct involves moral turpitude, (2) the extent of the policy making the transaction illegal, (3) whether the enforcement of a trust would tend to prevent the accomplishment of the illegal purpose, (4) whether the transferee was more at fault than the transferor, and (5) whether the transferor was ignorant of the law or of the facts making the trust illegal.20

The Arkansas Supreme Court found that Mrs. Goodwin was not barred from an equitable remedy by estoppel or the unclean hands doctrine, but noted that its decision was not binding on the Social Security Administration.

A different result was reached in Lucas v. Grant. 21 Mr. Lucas conveyed property to his wife to conceal it from the IRS and from a judgment his ex-wife recently obtained. When the new wife predeceased him, he attempted to impose a constructive or resulting trust or equitable lien against the property, which the new wife’s children claimed. The chancellor held that an equitable remedy was barred by the doctrine of estoppel and unclean hands, and it was affirmed on appeal:

It has long been recognized that the clean-hands maxim bars relief to those guilty of improper conduct in the matter to which they seek relief. The purpose of involving the clean- hands doctrine is to protect the interest of the public on the grounds of public policy and to protect the integrity of the court. It is within the chancellor’s discretion to determine whether the interests of equity and justice require application of the doctrine.22

D. Jurisdiction

Because a constructive trust was consistently viewed as an equitable remedy, the cases were normally heard in chancery court. Probate court had no jurisdiction. Amendment 80 combined the courts of law and equity, but recognized the procedural distinctions between equitable and purely legal remedies.23

In a historic revision of centuries of equitable jurisprudence, the Arkansas Supreme Court in Dawson v. StonerSellers24 abolished the equitable cleanup doctrine. What this means is that, should you add purely legal claims to your equitable remedies, or should your opponent assert purely legal defenses, you may be facing a bifurcated trial, with a jury deciding the purely legal issues. In addition, the doctrine of laches will no longer apply to the purely legal issues.

E. Burden of Proof

The party proposing a constructive trust bears the highest level of proof required in a civil case. It has been variously expressed, generally requiring “clear” plus some other adjective.

The general rule, as well as the established rule in this state, seems to be well settled that in order for one to establish by parol evidence either a resulting or constructive trust, the evidence must be “full, clear and convincing,” “full, clear and conclusive,” “of so positive a character as to leave no doubt of the fact,” and “of such clearness and certainty of purpose as to leave no well founded doubt upon the subject.” These requirements run through a long line of cases from this court.25

Bramlett v. Selman, 26 among many other cases, also stands for the proposition that constructive trusts may be established by parol evidence. “However, where one of the parties alleges the existence of an implied or constructive trust, as here, it is well-settled that parol evidence is admissible to establish its existence.”27 This is hardly surprising, because, if there were a written document, a different remedy would be sought.

The Arkansas Statute of Frauds pertaining to trusts28 contains a specific exemption from the writing requirement for trusts which may arise or result by implication of law.

Conclusion

An action for constructive trust is less restricted and fettered by technical rules and formalities than any other form of action.29 The long and inconsistent history of the jurisprudence of constructive trusts, as well as the ambiguity of the language employed, means that research should reveal a case which stands for the proposition that your client, on whichever side, should win. It is then up to the creative lawyer to present the facts at trial in such a manner that the trial judge will know unjust enrichment when he or she sees it.

Endnotes:

1. First Nat'l Bank v. Cruthis, 360 Ark. 528, 535–36, 203 S.W.3d 88, 93 (2005) (quoting Import Motors v. Luker, 268 Ark. 1045, 599 S.W.2d 398 (1980)).

2. Id. at 535, 203 S.W.3d at 93.

3. Edwards v. Edwards, 311 Ark. 339, 843 S.W.2d 846 (1992).

4. Mitchell v. Mitchell, 28 Ark. App. 295, 773 S.W.2d 853 (1989).

5. Lucas v. Grant, 61 Ark. App. 29, 962 S.W.2d 388 (1998).

6. Phillips v. Phillips, 178 Ark. 1056, 14

S.W.2d 219, 221 (1929).

7. Betts v. Betts, 326 Ark. 544, 932 S.W.2d 336 (1996).

8. McNeill v. Robbins, 2014 Ark. App. 222, at 3.

9. Bramlett v. Selman, 268 Ark. 457, 462, 597 S.W.2d 80, 83–84 (1980).

10. Lucas v. Grant, 61 Ark. App. 29, 33–34, 962 S.W.2d 388, 390 (1998).

11. Hall v. Superior Federal Bank, 303 Ark. 125, 134, 794 S.W.2d 611, 616–17 (1990).

12. Frigillana v. Frigillana, 266 Ark. 296, 306, 584 S.W.2d 30, 34 (1979).

13. Sparks Regional Medical Center v. Blatt, 55 Ark. App. 311, 317, 935 S.W.2d 304, 307 (1997).

14. Razorback Rides, LLC v. Birdsong, 2022 Ark. App. 113, 643 S.W. 3d 59 (2022).

15. Higgins v. Higgins, 2010 Ark. App. 71, at 10, 374 S.W.3d 56, 61.

16. 1 Ark. App. 75, 613 S.W.2d 404 (1981).

17. 202 Ark. 1039, 155 S.W.2d 44 (1941).

18. But see Razorback Rides, LLC v. Birdsong, 2022 Ark. App. 113, 643 S.W.3d 59, where the author failed to persuade both the trial court and the Arkansas Court of Appeals not to apply legal statutes of limitations to this equitable remedy.

19. 266 Ark. 95, 583 S.W.2d 29 (1979).

20. Id. at 99, 583 S.W.2d at 31.

21. 61 Ark. App. 29, 962 S.W.2d 388 (1998).

22. Id. at 34, 962 S.W.2d at 390.

23. First National Bank v. Cruthis, 360 Ark. 528, 203 S.W.3d 88 (2005).

24. 2019 Ark. 410, 591 S.W. 3d 299.

25. Waller v. Waller, 15 Ark. App. 336, 339, 693 S.W.2d 61, 63 (1985), citing Nelson v. Wood, 199 Ark. 1019, 137 S.W.2d 929 (1940).

26. 268 Ark. 457, 597 S.W.2d 80 (1980).

27. Id. at 461, 597 S.W.2d at 83.

28. Ark. Code Ann. § 4-59-103.

29. Import Motors, Inc. v. Luker, 268 Ark. 1045, 599 S.W.2d 398 (1980). ■