Constructive trusts can be court imposed to ensure equity

A recent case demonstrates that, sometimes, the law recognizes equity.

A constructive trust is a remedy and not a cause of action in which a trust is created on behalf of someone who has essentially been wronged. Under California Civil Code Section 2224, three conditions are necessary to create a constructive trust: property or an interest in property; one person's right to that property; and another person's gain of that property by "fraud, accident, undue influence, violation of the trust or other wrongful act." This concept crosses civil and probate courts, also finding its way into bankruptcy proceedings. Constructive trusts can be easier to impose over real property, as opposed to cash assets, due to tracing issues inherent in the latter.

In Higgins v. Higgins, 2017 DJDAR 4354 (May 9, 2017), the 2nd District Court of Appeal upheld a constructive trust on a few disputed bank accounts. This verdict overturned the finding of the lower court. The appellate court found a revocable trust to be an irrevocable one, thus creating a constructive trust when the trustee repudiated the trust. Despite the form of the bank accounts, when "clear and convincing evidence shows funds were transferred to an account holder to hold in an irrevocable trust for a third party beneficiary and the trustee repudiates the trust, a constructive trust may be imposed on the funds for the beneficiary's estate to prevent unjust enrichment."

Essentially, a husband (Clive) and his wife (Lupe) transferred funds belonging to his stepmother (Maria), who was rapidly losing her mental capacity. The funds were used to establish new accounts at a bank in the husband and wife's name, in trust for the stepmother. These funds were intended for the care of Maria and came from her assets. Her Social Security checks and other ongoing payments were deposited into these accounts. Clive was actively involved in seeing to her wellbeing until he died in 2012.

Lupe had diligently signed signature cards and other documents related to the accounts held in trust for Maria. She seemed to clearly understand that these accounts were for Maria's care, yet upon Clive's death Lupe changed the title to the accounts to Maria Lupe Higgins, an individual.

Maria died a few months later. Her funeral expenses and certain bequests were paid by Lupe from the accounts in question. Lupe then once again changed the account names (from Maria Lupe Higgins to Lupe Higgins) and began using the accounts for her own personal expenses.

Arthur Higgins brought action against Lupe as executor of Maria's estate and successor trustee of the family trust. At issue were whether Clive had the right to transfer the assets along with undue influence, lack of capacity and violation of trust.

The court found "an action to impose a constructive trust is a suit in equity to compel a person holding property wrongfully to transfer the property interest to the person to whom it rightfully belongs." Any action to impose a constructive trust is subject to the statute of limitations which attaches to the underlying right. But the court also recognized that constructive trusts can be "applied to diverse factual situations where fairness and justice dictated recovery but the actionable facts did not fit into the more readily recognizable modes." Thus they can basically be used whenever there is a wrongful taking or holding of another's property.

Multiple party bank accounts are governed under Probate Code Sections 5100 and 5132. Various restrictions attach, but the practical reality is that tracing of funds can be difficult, thus making remedies harder to craft. Essentially, while account holders are living, the account belongs to those who have a present right to payment and in proportion to their contributions. In the Higgins' case, only Maria's funds were used in creating and maintaining the accounts in question.

While the accounts created were revocable, the court found that there was "clear and convincing" evidence that Clive and Lupe had intended to create irrevocable trust accounts with Maria as the beneficiary and holding a present beneficial interest. They also added that no particular language is required to create a trust and that the trustee has an equitable "obligation to manage the property for the benefit of another - the beneficiary".

Thus even though no express trust was created with the establishment of the bank accounts, a constructive trust was created, with all of the related obligations. The court also went so far as to say that if an express trust was found to be unenforceable a constructive trust could still exist. In Higgins, unjust enrichment was a factor in the holding.

Higgins is an interesting case for a number of reasons. Under Civil Code 2223 "one who wrongfully detains a thing is an involuntary trustee thereof, for the benefit of the owner." Thus fraud isn't a requirement, rather only unjust enrichment must be shown: "the wrongful act giving rise to a constructive trust need not amount to fraud or intentional misrepresentation. All that must be shown is that the acquisition of the property by the defendant would constitute unjust enrichment." Calistoga Civic Club v. Calistoga, 143 Cal. App. 3d 111, 116, 191 (1983). Lupe wasn't entitled to the money held in trust in Maria's accounts, even after death. Lupe began as a joint tenant but ended up not benefitting as such due to the constructive trust. Given how joint tenancy accounts are used to shift assets at death, this result is important.

Essentially, the court looked to the substance of the transactions and the source of funds more than the actual account designations at Maria's death. It looked at Lupe's extrinsic behavior, such as calling the funds Maria's during testimony and paying out sums as per Maria's testamentary wishes. The fiduciary relationship also impacted the obligations owed.

Moreover, the tracing in this case was easy since only Maria's funds were used to create the accounts. But, arguably, this precedent could carry over to accounts with more intermingling. What seems to be key is the relationship between the constructive trustee and the beneficiary. While elder abuse was not alleged in this case, the ruling does detail Maria's progressive descent into dementia. Lupe testified that she saw little evidence of Maria's declining capacity yet Maria's doctor testified otherwise.

Constructive trusts are used to protect individuals when other remedies won't apply. In Higgins it was paired with a Probate Code Section 850 petition, another catch all that transfers property back to one who has an equitable right to it but no possession. While money is easily "taken" from those who cannot look out for their own interests, the courts offer numerous remedies to return it to the rightful holder.

Higgins allowed for an attachment of cash accounts. Cash can be harder to identify than an actual piece of property but nonetheless was here returned as a remedy for unjust enrichment. Constructive trusts are not dependent on there being no other legal remedy. Where a preexisting fiduciary relationship exists, as in Higgins, greater "solicitude" attaches to protect someone whose property has been taken. Thus, constructive trusts work across a broad spectrum of circumstances and assets, ensuring that sometimes the law recognizes equity.