CONSTRUCTIVE TRUSTS

Question 1

What are constructive trusts?

Answer 1

• Express trusts are made by the settlor themselves when they effectively exercise their power of ownership to create a trust
  
  • They are justified in that they respect the autonomy of settlors by recognising their intention to create a property right that is different from the limited set of property rights found in the LPA
• Trusts operated by law – the law itself creates the equitable title
  
  • Constructive trusts are a kind of TOBL
  • Beyond this, very little binds the categories of CT

Question 2

Categories of constructive trusts

Answer 2

Anticipatory

Recipients of trust property transferred in breach of trust

Common intention

Residual category

Question 3

Anticipatory constructive trust

Answer 3

1. Re Rose: once a legal owner has done everything she is required to do to transfer the property, she holds it on trust for the transferee
2. Application of the maxim equity looks upon that as done which ought to be done to contracts for sale; specific performance
   
   • Applies to contracts that the parties on a path of transfer of property rights, but they will do so in two stages
     i. Binding contract – exchange contracts
     ii. Execution of documents that transfer the title – completion of the transferring of the title

Question 4

Recipients of trust property transferred in breach of trust

Answer 4

• Dealing with recipients who are not bona fide purchasers (because they knew or should have known about the trust or because they got the trust property free). Equity pursues this kind of recipient, and there are proprietary and personal remedies against them
  
  • Constructive trust is the name of the proprietary remedies that the beneficiary has against the recipient of trust property in breach of trust
  • Not referring to a bona fide purchaser for value, who will get good title to the property (as they came with clean hands). When a trust is being breached so that the trustee transfers trust property into the hands of a third party against the terms of the trust, we have a recipient of trust property. The beneficiary can only try to get compensation or the payment from the trustee. The recipient is not going to be subject to any action in equity

Question 5

Common intention

Answer 5

• Mainly family homes
• A response by equity to a common intention that a certain property will belong to both of them
• A better vehicle for achieving justice between cohabitants when the registration does not reflect the contribution made when building the home

Question 6

Nature of the constructive trust

Answer 6

• It is not true that whenever there is a constructive trust the owner of the legal title will be the constructive trustee
• With every type of constructive trust, the duties of the owner of the legal title are going to be different, and the case law says different things
  
  • Statutes have a lot to say about where the beneficial interest is and what the owner of the legal title has
• Sometimes, the CT is so empty that you cannot say that there is one
• If the beneficiary manages to show that there should be a constructive trust, they will be able to enjoy a set of remedies that are available only in equity (mostly tracing)

Question 7

Is it true that whenever there is a constructive trust the owner of the legal title will be the constructive trustee?

Answer 7

NO

• Trustee – a trustee comes under fiduciary duties of the beneficiary; a fiduciary is not allowed to take care of their own interests
• The active duties of trustees do not come with constructive trusts
• Whoever owns the legal interest is not a trustee in the sense of an express trustee because they are not under any positive duty to take care of the property. They do not even have a fiduciary duty to only take decisions about the property in light of the interests of the beneficiary. They can promote their own interests when they make decisions
• The owner of the legal title is not the constructive trustee

Question 8

Trusteeship and empty constructive trusts

Answer 8

Sometimes, the CT is so empty that you cannot say that there is one

Recipients of trust property à there is a parallel category of third parties who intervene in the trust (assistant to a breach of trust, with whom equity will pursue if they knew or ought to have known about the trust)

Question 9

What happens if the beneficiary manages to show that there should be a constructive trust?

Answer 9

If the beneficiary manages to show that there should be a constructive trust, they will be able to enjoy a set of remedies that are available only in equity (mostly tracing)

• Will be crucial in insolvency situations
• The remedies equity is giving the beneficiary exceed the remedies that the common law would give someone in a parallel situation
• The law is less generous to victims of theft than to beneficiaries who have had their trust property taken away from them – generosity of equity makes the finding of a constructive trust desirable

Question 10

Anticipatory constructive trust

What happens between signing and completion?

Answer 10

• It is not the case that the vendor holds the property on trust for the buyer – they can protect their own interests, possess and keep rents and profit
• Location of the equitable interest
  
  • Lord Walker in Jerome v Kelly: “neither the seller nor the buyer has unqualified beneficial ownership. Beneficial ownership of the land is in a sense split between the seller and buyer … the seller is entitled to enjoyment of the land or its rental income” – the interest is split between the seller and the buyer for all kinds of purposes
  • Kern Corp (Australian High Court): the vendor himself maintains a continuing beneficial interest in the land and is hence entitled to possession and use
    
    • But there are all kinds of rights and drawbacks to being the buyer – there is only the property right that the title will be transferred to you on completion (even if the seller goes bankrupt)
    • Beneficial interest should be with one person, although it could be conceptualised as split for the purpose of tax

Question 11

is there an anticipatory constructive trust at all?

Answer 11

• Many think the answer is no (Swadling, Penner)
  
  • The contract is binding in insolvency because it is specifically enforceable and not because there is a trust
  • There is no fiduciary relationship because the seller is still benefiting from the property
  • The sub purchaser can only sue the purchaser to force him to use
• Others (Peter Turner, Chambers) think that a trust which comprises of several equities responds to the plurality of events that may take place during the transitory stage
  
  • The trust is describing a process – a series of equitable rights starting from contract and going down the path to completion where equity is ensuring that the buyer will hold the beneficiary and legal title

Question 12

Pallant v Morgan Equity

FACTS

Answer 12

two neighbouring landowners orally agreed in the auction room that the plaintiff’s agent would refrain from bidding at auction and that the defendant, if his agent’s bid was successful, would divide the land according to an agreed formula. After acquiring the property, he refused to transfer the title

Question 13

Pallant v Morgan

HELD

Answer 13

The agreement was incomplete in its detail and too uncertain to be specifically enforceable. But the plaintiff holds the property for both of them as a constructive trustee

Equity intervened because if two people have a common intention to a property and one party relied on the understanding of the common intention to their detriment, equity will assist them

Even though the agreement cannot be enforced, the disruption will not be seen as serious enough to get the parties off the path

The legal owner of the land holds the land on trust for the other party because they relief to their detriment

Question 14

Pallant v Morgan

Possible justification

Answer 14

The plaintiff relied to his detriment on the defendant’s word – common intention

The joint venture agreement created fiduciary relationship

Question 15

Common intention + joint ventures

Answer 15

The interpretation of the intervention of equity is much different

Question 16

Fraud

Answer 16

• Common law remedy – rescission
  
  • Rescission is also available in equity
• The defrauded party has a right to rescind
• When K is rescinded, only from that moment onwards will there be ramifications at law because the contract is voidable and not void. From the moment is rescinded, equity steps in and the value that has passed fraudulently is held on constructive trust
• The fraudster holds the value received on constructive trust for the victim of fraud; the fraudster only holds the property on CT once the contract is rescinded
• If there is a breach of trust, and the trustee transfers property that is the subject matter of the trust to third parties, the beneficiary has a right to trace the property if it has been exchanged for value
  
  • Tracing in equity is more generous, especially if the trust property was mixed with other property

Question 17

Westdeutsche

Answer 17

Stolen money is traceable in equity and is held on constructive trust for the victim [per Lord Browne-Wilkinson]

This is problematic. When the thief takes property, they do not get the legal title, but just a possessory title. To say that the thief is a trustee over this money is problematic because a trustee is supposed to be legal owner of the property.

Not about fiduciary duties – a constructive trust functions as a gateway to the remedies that you get in equity

When there is a constructive trust, there is a party claiming that they want the other party to benefit from the remedies that only equity gives

Question 18

Remedial constructive trust

Answer 18

• A property right that is created by the court and has retroactive effects on the parties and third parties
  
  • You can declare trusts that are not the automatic conclusion from the dealing between the parties in European courts
• A remedial equitable interest is awarded by the court following a trial of legal action, and does not pre-exist the court award
• Distinction between the court powers and duties: is CT shaped by the court power to make an award, or is it more ‘institutional’ – following from the rules
• The more power the court takes to itself, the more it will approve of remedial constructive trusts
• The RCT is understood to come into existence from the moment the court declares it, but has effect retroactively to the time of the occasion that gave rise to it
  
  • English judges are adamant that remedial trusts are not a thing – the dealings between the parties must be shown to establish that someone is a beneficiary; it must be a natural conclusion that x wants to be a beneficiary of a trust

Question 19

Constructive trust for proceeds of theft

Possible analyses

Answer 19

The thief holds the proceeds for the owner on purchase money RT [Chambers]

The thief holds his frail title on CT for the owner, owner can trace to proceeds

Question 20

Construtive trust for proceeds of theft

Chambers analysis

Answer 20

The thief holds the proceeds for the owner on purchase money RT

• The owner paid the shop owner to give something to the thief. He transferred the property to the shop owner
• If you pay a third party to transfer something to someone else, equity assumes that you are doing so for the trustee
• The thief is transferring a possessory title, which is not the right to the property. Here, the important thing that is passing is the title (the actual property comes with the title). The transfer is not of the legal title thus it cannot be a resulting trust

Question 21

Constructive trust for proceeds of theft

The thief holds his frail title on CT for the owner

Answer 21

• The thief holds his frail title on CT for the owner, owner can trace to proceeds
• If the thief stole money from the owner, and transferred it to the shop owner to buy a necklace, they are simply transferring the possessory title to the money to the owner. The possessory title, because it is money (this is only the case for money), is elevated by statute to a good full title
• This doesn’t mean the transfer between the owner and the thief is a transfer of good title, it is only of possessory title because the thief does not have title to the money
• The moment the owner receives the money, they get good title; the source is the statute and not the thief (for ease of commerce)
• The thief holds the possessory title of the money on trust for the owner, here the trust is over a title (it does not need to be over property). Then, because he exchanges the possessory title with the proceeds, the owner can trace their property through the transfer to the proceeds
• When the thief transfers the money, they are in breach of trust. The exchange can be traced, which is how the thief holds the proceeds for the owner on trust