As a commercial litigator for over 35 years, I have seen countless scenarios in which people who were once intimate business associates end up suing each other over real or perceived breaches, thefts, or betrayals. Accusations and recriminations get hurled back and forth, and personal relationships are often ruined even as the business disputes are ultimately resolved. This is one of the reasons why this type of litigation is known as “business divorce.”
Most painful for all involved is the subset of lawsuits between family members involving the “family business” or transfers of real property. It is often the case in such family disputes that agreements were made, and understandings reached, but never memorialized in signed documents. Many such transactions go forward based on express or implied promises to do something in the future in consideration for the transfer of the business interests or real property, and when those promises are broken, the person who agreed to the transfer in reliance on those promises is left looking for a way to recover what they lost. In addition to suffering financial harm, the injured party is often rendered brokenhearted by the promissor’s greed, abandonment, or duplicity.
Generally speaking, without a written agreement, the injured party cannot sue the promissor for breach of contract. However, that person may be able to recover ownership of the transferred business interest or real property through the equitable remedy of a constructive trust.
As the courts have explained, a constructive trust is not a trust at all in the substantive sense of the word. It is a remedial device created by the courts to compel a person who holds legal title to property subject to an equitable duty to convey to another, to do so because he would be unjustly enriched if he were permitted to retain the property. As the Fourth Department has succinctly explained, “The defendant is not compelled to convey the property because he is a trustee; he is a trustee because the court determines that he has an equitable duty to convey it.”
In other words, an individual cannot go to an estates lawyer and have a constructive trust prepared to document the transaction after the fact. Rather, that individual must commence an action seeking the imposition of a constructive trust upon the business interest or real property in the hands of the person to whom that business interest or property was transferred.
A constructive trust may be imposed by the court where the plaintiff proves a confidential or fiduciary relationship, a promise (express or implied), a transfer made in reliance on that promise, and unjust enrichment. However, because a constructive trust is an equitable remedy, the courts do not rigidly apply those elements, but instead use them as flexible guidelines. The scope of the constructive trust doctrine is broad, and as the Court of Appeals has held, “the Court does not restrict itself by describing all the specific forms of inequitable holding which will move it to grant relief, but rather reserves freedom to apply this remedy to whatever knavery human ingenuity can invent.”
The key to proving the right to a constructive trust is evidence establishing the confidential relationship, “which triggers the equitable considerations leading to the imposition of a constructive trust.” Where the record evidence indicates that a relationship of trust and confidence existed between the parties, “the defendant must be charged with an obligation not to abuse” that trust and confidence. The New York courts have regularly found that a trusting relationship such as that between a father and daughter qualifies as a confidential relationship under New York law.
Of course, there would be no need for a constructive trust in the absence of a transfer of property, and thus the next question is whether the transfer was made in reliance on an express or implied promise. The case law reveals numerous circumstances in which a parent transferred property to a child, or a spouse transferred property to his spouse, and subsequently sought to recover that property through the imposition of a constructive trust. In such circumstances, the plaintiff often alleges that they made the transfer in reliance on an understanding, or an express or implied promise, that the defendant would, in exchange for the transfer, provide financial assistance to, or care for, the plaintiff, or reconvey the property to the plaintiff upon his request. In most such cases, the defendant is compelled to deny any such understanding or promise, and there is no writing memorializing that understanding or promise. Nevertheless, the courts consistently hold that in such family settings, a promise may be implied or inferred from the transaction itself. In fact, the courts have held that when a transfer of real property is made in the context, and in furtherance of a parent’s confidential and trusting relationship with their child, it is not unnatural that the understanding was not reduced to a writing, and, indeed, that the absence of a formal writing “grew out of that very confidence and trust, and was occasioned by it.”
Lastly, because the purpose of the constructive trust remedy is to prevent unjust enrichment, the plaintiff must prove that the defendant was enriched at the plaintiff’s expense, and that it is against equity and good conscience to permit him to retain that benefit. However, the plaintiff need not prove that they suffered a loss corresponding to the gain received by the defendant. Moreover, a finding of unjust enrichment does not require proof of a wrongful act by the one enriched, and “innocent” parties may frequently be unjustly enriched. A constructive trust will be imposed even if the transferee fully intended to perform his promise at the time of the transfer, because the subsequent abuse of a confidential relationship “constitutes a sufficient fraud to call upon the remedial powers of a court of equity.”
The courts will find unjust enrichment through a realistic determination “based on a broad view of the human setting involved,” and, most importantly, the courts hold that the conveyance or transaction giving rise to the unjust enrichment “should be interpreted ‘not literally or irrespective of its setting, but sensibly and broadly with all its human implications’.” Given these broad maxims, a constructive trust case is often fact-intensive and requires significant pretrial discovery, and, in particular, thorough depositions of the parties.
The imposition of a constructive trust may not fully mend the plaintiff’s broken heart, but it should result in the reversal of the property transfer that led to the defendant’s unjust enrichment and the restoration of that property to the plaintiff.
Thomas F. Knab is a Partner in Underberg & Kessler’s Litigation Practice Group. He focuses his practice on commercial litigation, business and corporate disputes, and construction and real estate litigation. Tom can be reached at tknab@underbergkessler.com.
Reprinted with permission from The Daily Record and available as a PDF file here.