“Clearing” the constructive trustee’s legal title: The doctrinal and practical considerations

Charles E. Rounds, Jr. - Suffolk University Law School

The court in Freeport-McMoRan Oil & Gas LLC v. 1776 Energy Partners, LLC, 672 S.W.3d 391 (Tex. 2023) explained that “constructive trusts, being remedial in character, have the very broad function of redressing wrong or unjust enrichment in keeping with basic principles of equity and justice.” In other words, the constructive trust is a procedural equitable remedy available to the equity court for freezing property that is the subject of someone’s wrong-doing or unjust enrichment. Whoever has title to the property is declared by the court a constructive trustee of that property and then ordered to convey title to its rightful owner. Equity acts in personam. “By imposing a constructive trust, a court concludes that the…[current title holder]…should not be holding the property at all, which makes the party’s title anything but ‘clear.’” Id. Upon conveyance to the rightful owner title “clears.” The constructive trust is covered in §§3.3 & of Loring and Rounds: A Trustee’s Handbook (2024).

While as between the constructive trustee and the rightful title-holder, the former’s title is anything but “clear,” this is not necessarily so as between a third-party transferee of the title who has paid full value for the property in good faith (BFP) and the rightful title-holder. Both the constructive trustee and the BFP are creatures of equity. BFP doctrine is a by-product of the equity maxim that where there is equal equity, the law shall prevail. There were no BFPs in the Freeport fact pattern.

Not only in commercial settings does the intersection of constructive-trust jurisprudence and BFP doctrine have application; it has application in the administration of express trusts as well. For example, trustee in breach of trust conveys legal title to trust property to a third party who has neither actual nor constructive knowledge of the trust’s existence and who pays full value in exchange. The trust’s beneficiary and the third party are equally innocent. Equities being equal, third party may keep property. No constructive trust of transferred property. The beneficiary, of course, has an equitable action against trustee personally for breach of trust and trustee owes beneficiary a fiduciary duty to administer sale proceeds for beneficiary’s benefit. Sale proceeds themselves may even end up being the subject of a constructive trust. All this having been said, equity’s unjust enrichment doctrine would trump the maxim’s application had the property been fraudulently conveyed/transferred to trustee in the first place. See my 2/14/2023 JDSUPRA posting: https://www.jdsupra.com/legalnews/intersection-of-fraudulent conveyance-do-62907/.

The constructive trust and the purchase-money resulting trust are easily confused. Take the transferee of land who has not furnished consideration for it. A third party has. The transferor of the legal title is merely the vendor. If the third party did not consent to his/her money being used in this way, or did not consent to transfer itself, then a constructive trust, not a purchase money resulting trust, is imposed on the property for the benefit of the third party. Had the third party, however, intended that transferee take the legal title but not the beneficial interest, we would have a resulting-trust fact pattern. Had the third party been induced by fraud or undue influence to purchase the land in the name of the transferee with the understanding that the property would be held for the benefit of the third party, then there are grounds for imposing either a resulting trust or a constructive trust on the property for the third party’s benefit. The trustee of a purchase-money resulting trust of land may pass good title to a good-faith purchaser for value (BFP) and in so doing cut off the rights of the payor to the land.

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Charles E. Rounds, Jr. - Suffolk University Law School

Charles E. Rounds, Jr. - Suffolk University Law School on:

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