A trust in mid-course is declared void ab initio by the equity court: What now happens to the property?

Charles E. Rounds, Jr. - Suffolk University Law School
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Assume an irrevocable inter vivos trust has been up and running for some time now, at least it has the outward trappings of a trust. It was ostensibly created not via declaration but via a transfer of property from the settlor to someone other than the settlor. Finding that the property owner had been induced by, say, fraud to make the transfer, the equity court declares the trust void as of the time of transfer. What then is the fate of the property that is currently in the hands of the transferee?

First, let it be said that a trust, qua trust, is not a contract, the former being a creature of equity, the latter a creature of law. Most trusts in the noncommercial space will arise via donative transfer rather than via an exchange of consideration. One may acquire enforceable equitable property rights incident to a trust relationship although one lacks the competency, whether due to minority, mental incapacity, or current non-existence, to contract. A trust shall not fail for want of a trustee. One could go on and on. The trust relationship is sui generis. See generally §8.22 of Loring and Rounds: A Trustee’s Handbook (2022) for more on why this is the case.

Thus, the fate of the property in the hands of the transferee-who-never-was-a-trustee is in the hands of equity, which has been in the business of dealing with such situations for centuries. See §8.15.78 of the Handbook (2022). We have here a clear case of unjust enrichment. The beneficiaries of the property transfer, whether innocent or not, have been unjustly enriched by the fraud. The subject property needs to be secured for the victims of the fraud. That is where the constructive trust comes it. The equity court issues a decree, personal to the transferee, that he/she is now a constructive trustee of the property. The practical consequence of the imposition of a constructive trust is that the property is now frozen in place. The equity court then issues an in personam specific-performance restitution order to the constructive trustee to transfer the legal title back to the transferor, to his personal representative, or to whomever now is lawfully entitled to the title.

Now, one may ask, what then was the state of the legal title in the interim between the unjust enrichment event and the issuance of the restitution order. That very question is addressed in §3.3 of the Handbook (2022), the relevant part of which section is set forth in the appendix below. The Handbook is available for purchase at: https://law-store.wolterskluwer.com/s/product/loring-rounds-a-trustees-handbook-2022e-misb/01t4R00000OVWE4QAP.

There are consequences to the marginalization of all this critical equity doctrine by the law schools. Take the recent case of Regan Stempniewicz Barbetti & another vs. Edward Stempniewicz, 189 N.E.3d 264 (Mass. 2022). Applying contract law by analogy, the Supreme Judicial Court of Massachusetts, in a case involving an inter vivos trust that had been held void ab initio, actually took issue with the trial court’s imposition of a constructive trust on the orphaned property, though the voidance itself was upheld.

Court’s rationale: “When a trust is declared void ab initio, or void from the beginning, the courts act as though the trust never existed. See Massachusetts Mun. Wholesale Elec. Co., 411 Mass at 55 (when contract is void ab initio, ‘courts treat the contract as if it had never been made’). Assets transferred into the trust are therefore returned to the sources from which they came, as if the transfer of those assets to the trust never occurred in the first instance…Cf. Services Employees Int’l Union, Local 509 v. Department of Mental Health (476 Mass. 51, 58 (2016) (where privatization contracts were void ab initio, renewal contracts based thereon also were void ab initio)…”

Yes, but a trust, qua trust, is sui generis, it is not a type of contract. Equity has a box of procedural tools that it has developed over time to get legal title into the hands of the victims of an unjust enrichment, or into the hands of their successors in interest. See §8.15.77 of the Handbook (2022). The constructive trust is an indispensable tool in that toolbox in that it facilitates the securing of the property for those victims. See generally §7.2.3.1.6 of the Handbook (2022). It also facilitates the orderly administration of justice in such situations. See §7.2.3.1.8 of the Handbook (2022). The maxim “equity looks on that as done which ought to be done” at best does not tell the whole story. “When something ought to be done but has not been done, a court of equity, so far from regarding it as having been done, proceeds to order it to be done.” 1 Scott on Trusts §131 (1939).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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