Monday, March 17, 2014

distinction between a resulting trust and a constructive trust

resulting trust n. a trust implied by law (as determined by a court) that a person who holds title or possession was intended by agreement (implied by the circumstances) with the intended owner to hold the property for the intended owner. Thus, the holder is considered a trustee of a resulting trust for the proper owner as beneficiary. Although a legal fiction, the resulting trust forces the holder to honor the intention and prevents unjust enrichment. Example: Mahalia leaves $100,000 with her friend, Albert, while she is on a trip to Europe, asking him "to buy the old Barsallo place if it comes on the market." Albert buys the property, but has title put in his own name, which the court will find is held in a resulting trust for Mahalia.

Distinguish a resulting trust from a constructive trust
 A resulting trust differs from a "constructive trust" which comes about when someone comes into possession by accident, misunderstanding or dishonesty of property belonging to another

What is a resulting trust? Give an example

 Resulting Trust
An arrangement whereby one person holds property for the benefit of another, which is implied by a court in certain cases where a person transfers property to another and gives him or her legal title to it but does not intend him or her to have an equitable or beneficial interest in the property.
Since this beneficial interest is not given to anyone else, it is said to "result" to the person who transferred the property.
A resulting trust arises when an express trust fails. A settlor, one who creates a trust, transfers his property to a trustee, one appointed, or required by law, to execute a trust, to hold in trust for a beneficiary, one who profits from the act of another. If, without the settlor's knowledge, the beneficiary died before the trust was created, the express trust would fail for want of a beneficiary. The trustee holds the property in resulting trust for the settlor.
When an express trust does not use or exhaust all the trust property, a resulting trust arises. For example, the settlor transfers $200,000 in trust to pay the beneficiary during her lifetime $2,000 a month from principal, trust property, as opposed to income generated by investment of the principal. No other disposition is specified. The beneficiary dies after having received $20,000. The trustee holds the unexpended funds in a resulting trust for the settlor.
A purchase money resulting trust arises when one person purchases and pays for property and the name of another person is on the title. For example, a person purchases a farm for $100,000 and directs the seller to make the deed out to a third person. Nothing further appears concerning the purchaser's intention, and no relationship exists between the purchaser and the third person. In this situation, a resulting trust is created. The purchaser's intention is inferred from the absence of expressed intention that she intends the third person to have an interest in the farm. This occurs because a person usually does not intend to dispose of property without receiving something in return for it, unless she makes an express statement to the contrary, such as announcing an intention to make a gift or loan. If the purchaser is the spouse or parent of the third person, which is not the case here, it is presumed that a gift is intended. In this case, the third person holds a purchase money resulting trust for the purchaser.
A purchase money resulting trust does not arise, however, if the person who pays the purchase price manifests an intention that no resulting trust should arise. Purchase money resulting trusts have been abolished or restricted in a number of states.
The resulting trust attempts to dispose of the property in the manner the person who transferred it would have wanted if he had anticipated the situation. The court will order that the person with legal title to the trust property hold it in a resulting trust for the person who transferred it. When a charitable trust—a trust designed for the benefit of a class or the public generally—fails, a resulting trust will be invoked only if the doctrine of Cy Pres is deemed not to apply. This doctrine implements the intention of a person as nearly as possible when giving the intent literal effect would be illegal or impossible.

 WHAT IS A CONSTRUCTIVE TRUST?

 A constructive trust is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference


In a constructive trust the defendant breaches a duty owed to the plaintiff. The most common such breach is a breach of fiduciary duty. A controversial example is the case of Attorney-General for Hong Kong v Reid,[3] in which a senior prosecutor took bribes not to prosecute certain offenders. With the bribe money, he purchased property in New Zealand. His employer, the Attorney-General, sought a declaration that the property was held on constructive trust for it, on the basis of breach of fiduciary duty. The Privy Council awarded a constructive trust. The case is different from Regal (Hastings) because there was no interference with a profit-making opportunity that properly belonged to the prosecutor.
This area is highly controversial and may not represent the law in England because of the previous Court of Appeal case of Lister v Stubbs[4] which held the opposite, partially because a trust is a very strong remedy that gives proprietary rights to the claimant not enjoyed by the defendant's other creditors. In the event of the defendant's insolvency, the trust assets are untouchable by the general creditors. Supporters of Lister v Stubbs suggest that there is no good reason to put the victim of wrongdoing ahead of other creditors of the estate. However, being a Privy Council decision Reid's case did not overrule the decision in Lister v Stubbs, which is still good law in England and Wales, but not in some of its former colonies, such as Australia. There is a tension in English law between Lister and Reid which has been highlighted in the recent cases such as Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd.[5]


Unjust enrichment

In Chase Manhattan Bank NA v Israel-British Bank (London) Ltd[7] one bank paid another bank a large sum of money by mistake (note that the recipient Bank did not do anything wrong - it just received money not owed to it). Goulding J held that the money was held on (constructive) trust for the first bank. The reasoning in this case has been doubted, and in Westdeutsche Landesbank Girozentrale v Islington London Borough Council the House of Lords distanced itself from the idea that unjust enrichment raises trusts in the claimant's favour. This remains an area of intense controversy.
These type of trusts are called '"institutional" constructive trusts'. They arise the moment the relevant conduct (breach of duty, unjust enrichment etc.) occurs. They can be contrasted with '"remedial" constructive trusts', which arise on the date of judgment as a remedy awarded by the court to do justice in the particular case.
An example is the Australian case Muschinski v Dodds.[8] A de facto couple lived in a house owned by the man. They agreed to make improvements to the property by building a pottery shed for the woman to do arts and crafts work in. The woman paid for part of this. They then broke up. The High Court held that the man held the property on constructive trust for himself and the woman in the proportions in which they had contributed to the improvements to the land. This trust did not arise the moment the woman commenced improvements - that conduct did not involve a breach of duty or an unjust enrichment etc. The trust arose at the date of judgment, to do justice in the case.
Remedial constructive trusts do not exist in England and Wales, and the High Court of Australia has also distanced itself from Muschinski v Dodds in the later case of Bathurst City Council v PWC Properties.[9]

Usefulness of constructive trusts


For example, if the defendant steals $100,000 from the plaintiff and uses that money to buy a house, the court can trace the house back to the plaintiff's money and deem the house to be held in trust for the plaintiff. The defendant must then convey title to the house to the plaintiff, even if rising property values had appreciated the value of the house to $120,000 by the time the transaction occurred. If the value of the house had instead depreciated to $80,000, the plaintiff could demand a remedy at law (money damages equal to the amount stolen) instead of an equitable remedy.
The situation would be different if the defendant had mixed his own property with that of the plaintiff, for example, adding $50,000 of his own money to the $100,000 stolen from the plaintiff and buying a $150,000 house or using plaintiff's $100,000 to add a room to defendant's existing house. The constructive trust would still be available but in proportion to the contributions, not wholly in the claimant's favour. Alternatively, the claimant could elect for an equitable lien instead, which is like a mortgage over the asset to secure repayment.
Because a constructive trust is an equitable device, the defendant can raise all of the available equitable defenses against it, including unclean hands, laches, detrimental reliance, and undue hardship.


sale of whole property made by a co-owner

Petitioners herein filed a case for recovery of property and damages against the defendant and herein private respondent, Celestino Afable.
Rosalia Bailon and Gaudencio Bailon sold a portion of the said land consisting of 16,283 square meters to Donato Delgado. On May 13, 1949, Rosalia Bailon alone sold the remainder of the land consisting of 32,566 square meters to Ponciana V. Aresgado de Lanuza. On the same date, Lanuza acquired from Delgado the 16,283 square meters of land which the latter had earlier acquired from Rosalia and gaudencio. On December 3, 1975, John Lanuza, acting under a special power of attorney given by his wife, Ponciana V. Aresgado de Lanuza, sold the two parcels of land to Celestino Afable, Sr. In all these transfers, it was stated in the deeds of sale that the land was not registered.
Afable claimed that he had acquired the land in question through prescription and contended that the petitioners were guilty of laches.
Issue:
What is the effect of a sale by one or more co-owners of the entire property held in common without the consent of all the co-owners and of the appropriate remedy of the aggrieved co-owners?
Held:
The Court has ruled that even if a co-owner sells the whole property as his, the sale will affect only his own share but not those of the other co-owners who did not consent to the sale. The sale or other disposition affects only what would correspond to his grantor in the partition of the thing owned in common. Consequently, by virtue of the sales made by Rosalia and Gaudencio Bailon which are valid with respect to their proportionate shares, and the subsequent transfers which culminated in the sale to private respondent Celestino Afable thereby became a co-owner of the disputed parcel of land as correctly held by the lower court since the sales produced the effect of substituting the buyers in the enjoyment thereof.
It may be deduced that since a co-owner is entitled to sell his undivided share, a sale of the entire property by one co-owner without the consent of the other co-owner is not null and void. However, only the rights of the co-owner-seller are transferred, thereby making the buyer a co-owner of the property.
The proper action in cases like this is not for the nullification of the sale or for the recovery of possession of the thing owned in common from the third person who substituted the co-owner or co-owners who alienated their shares, but the DIVISION of the common property as if it continued to remain in the possession of the co-owners who possessed and administered it.
The action to demand partition is imprescriptible or cannot be barred by laches, absent a clear repudiation of the co-ownership by a co-owner clearly communicated to the other co-owners.