constructive trust – Paul Porvaznik

No Fraud, No Problem – Unjust Enrichment Enough of ‘Hook’ For Constructive Trust – IL 4th Dist.

Tummelson v. White, a 2015 4th District appellate case, considers the inconvenient topic of what rights a former cohabitant has to funds he contributed to a home after he gets ousted from it by an ex-.

The parties lived together for several years in two different homes and paid mortgage and household expenses from a joint account which each party periodically funded. When the couple broke up and plaintiff was kicked out of the (second) house, he sued to recover damages for equity from the sale of the first home and to recoup mortgage payments and a down payment he made on the second home. The trial court entered judgment for the plaintiff after an evidentiary hearing and assessed a constructive trust on about $17,000 of the equity gained from the sale of the first home. Defendant appealed.

In partially affirming the trial court, the Fourth District examines the nature of the constructive trust remedy, the legal status of joint checking account funds, and whether fiduciary duties apply to live-in partners.

Two essential elements of a constructive trust include (1) an identifiable property to serve as the basis (or “thing”) for the constructive trust, and (2) possession of that property by the person to be deemed the “constructive trustee.”

A constructive trust can generally apply in one of two situations: where there is actual fraud or where a fiduciary abuses his authority over a more vulnerable counterpart. The fiduciary relationship question itself distils to whether there is a fiduciary relationship (1) as a matter of law, or (2) as a matter of fact. A “matter of fact” fiduciary relationship applies where one reposes special trust and confidence in another, who, as a result of the trust and confidence, is able to gain a position of dominance and influence over the weaker party.

Critically, though, the superiority and influence must result specifically from the plaintiff’s trust and confidence placed in the defendant. It isn’t enough to say one party has influence over another in a vacuum.

The Court rejected plaintiff’s argument that defendant stood in a dominant position because the homes were titled in defendant’s name who could kick plaintiff out at any time. The Court found that a licensor’s (here, the defendant) control over a licensee (plaintiff) wasn’t the kind of control required to establish a fiduciary-in-fact relationship. Since there was no evidence that the defendant ever influenced the plaintiff to do anything involving the homes against his will (plaintiff paid the mortgage and household bills voluntarily), there was no abuse of fiduciary relationship.

Still, the Court affirmed the constructive trust finding. While fraud and breach of fiduciary duty are the usual constructive trust grounds, the device also applies to remedy unjust enrichment. That is, even though there is no wrongdoing a court can still impose a constructive trust to avoid unjust enrichment.

Citing secondary authority (American Law Institute and Restatement (Third) of Restitution), the Court noted that an established basis for unjust enrichment is where one party to a relationship resembling marriage makes tangible uncompensated contributions in the form of property or services and the other party enjoys the benefits of those contributions. In such a case, the person making the contributions has a restitution claim for the value of the property or services if and when the relationship fails.

The court disagreed that the plaintiff’s mortgage and home expense payments from the couple’s joint account were ‘contributions’ that could support an unjust enrichment finding. This is because under the law money deposited to a joint account is presumed a gift from one account “tenant” to the other.

Once plaintiff deposited funds into the joint account from which the mortgages were paid, those funds were no longer “plaintiff’s money.” Instead, the money deposited into the account became a gift to the defendant – the other account holder. As a result, no constructive trust could attach to plaintiff’s mortgage payments on the two homes.

The Court did agree with the trial court that the plaintiff should be able to recoup some of the money he put into the homes. It attached a constructive trust on the plaintiff’s $7,000 down payment towards the second home’s purchase price.

Afterwords:

This case provides a useful summary of the factors involved in assessing fiduciary relationships and the constructive trust remedy. This court squarely held that actual wrongdoing is not required and all that’s necessary is unjust enrichment for a court to impose a constructive trust. Another key lesson is that deposits to a joint bank account are deemed gifts from one party to the other and that household expenses paid out of a joint account likely won’t be deemed a recoverable contribution by only one of the joint account holders.

Stipulation In Earlier Case Subjects LLC Member to Unjust Enrichment and Constructive Trust Judgment in Check Cashing Dispute – IL 1st Dist.

In a densely fact-packed case that contains an exhausting procedural history, the First District recently provided guidance on the chief elements of the equitable unjust enrichment and constructive trust remedies.

National Union v. DiMucci’s (2015 IL App (1^st) 122725) back story centers around an anchor commercial tenant’s (Montgomery Ward) bankruptcy filing and its corporate landlord’s allowed claim for about $640K in defaulted lease payments. In the bankruptcy case, the landlord assigned its approved claim by written stipulation to its lender whom it owed approximately $16M under a defaulted development loan.

The bankruptcy court paid $640K to the landlord who, instead of assigning it to the lender, pocketed the check. The lender’s insurer then filed a state court action against the landlord’s officer (who deposited the funds in his personal account) to recover the $640K paid to the landlord in the Montgomery Ward bankruptcy. After the trial court granted summary judgment for the plaintiff on its unjust enrichment and constructive trust counts, the defendant appealed.

Affirming the trial court’s judgment for the plaintiff, the First District first focused on the importance of the stipulation signed by the landlord in the prior bankruptcy case. The court rejected the landlord’s argument that his attorney in the bankruptcy case lacked authority to stipulate that the landlord would assign its $640K claim to the plaintiff’s insured (the lender).

A stipulation is considered a judicial admission that cannot be contradicted by a party. But it is only considered a judicial admission in the case in which it’s filed. In a later case, the earlier stipulation is an evidentiary admission that can be explained away.

The law is also clear that a party is normally bound by his attorney’s entry into a stipulation on the party’s behalf. This holds true even where the attorney makes a mistake or is negligent. Where an attorney lacks a client’s express authority, a client is still bound by his attorney’s conduct where the client fails to promptly seek relief from the stipulation. To undo a stipulation entered into by its attorney, a party must make a clear showing that the stipulated matter was untrue. Since the landlord failed to meet this elevated burden of invalidating the stipulation, the court held the landlord to the terms of the stipulation and ruled that it should have turned over the $640K to the plaintiff.

Unjust Enrichment and LLC Act

Next, the court examined the plaintiff’s unjust enrichment count. Unjust enrichment requires a plaintiff to show a defendant retained a benefit to plaintiff’s detriment and that the retention of the benefit violates basic principles of fairness. Where an unjust enrichment claim is based on a benefit being conferred on a defendant by an intermediary (here, the bankruptcy agent responsible for paying claims), the plaintiff must show (1) the benefit should have been given to the plaintiff but was mistakenly given to the defendant, (2) the defendant obtained the benefit from the third party via wrongful conduct, or (3) where plaintiff has a better claim to the benefit than does the defendant. (¶ 67)

Scenario (1) – benefit mistakenly given to defendant – clearly applied here. The bankruptcy court agent paid the landlord’s agent by mistake when the payment should have gone to the plaintiff pursuant to the stipulation.

The court also rejected defendant’s claim that he wasn’t liable under the Illinois LLC Act which immunizes LLC members from company obligations. 805 ILCS 180/10-10. However, since plaintiff sued the defendant in his individual capacity for his own wrongful conduct (depositing a check in his personal account), the LLC Act didn’t protect the defendant from unjust enrichment liability.

Constructive Trust

The First District then affirmed the trial court’s imposition of a constructive trust on the $640K check. A constructive trust is an equitable remedy applied to correct unjust enrichment. A constructive trust is generally created where there is fraudulent conduct by a defendant, a breach of fiduciary duty or when duress, coercion or mistake is present. While a defendant’s wrongful conduct is usually required for a court to impose a constructive trust, this isn’t always so. The key inquiry is whether it is unfair to allow a party to retain possession of property – regardless of whether the party has possession based on wrongful conduct or by mistake.

Here, the defendant failed to offer any evidence other than his own affidavit to dispute the fact that he wrongfully deposited funds that should have gone to the plaintiff; the court noting that under Supreme Court Rule 191, self-serving and conclusory affidavits aren’t enough to defeat summary judgment. (¶¶ 75-77)

Take-aways:

This case offers a useful synopsis of two fairly common equitable remedies – unjust enrichment and the constructive trust device – in a complex fact pattern involving multiple parties and diffuse legal proceedings.

The case makes clear that a party will be bound by his attorney’s conduct in signing a stipulation on the party’s behalf and that if a litigant wishes to nullify unauthorized attorney conduct, he carries a heavy burden of proof.

Real Estate Not Subject To Conversion Claim – IL 2nd Dist.

The Illinois Second District recently reversed a trial court’s imposition of a constructive trust and assessment of punitive damages in a conversion case involving the transfer of real property.

In In re Estate of Yanni, 2015 IL App (2d) 150108, the Public Guardian filed suit on behalf of a disabled property owner (the “Ward”) for conversion and undue influence seeking to recover real estate – the Ward’s home – from the Ward’s son who deeded the home to himself without the Ward’s permission.

The trial court imposed a constructive trust on the property, awarded damages of $150K (the amount the Ward had contributed to the home through the years) and assessed punitive damages against the defendant for wrongful conduct. Defendant appealed.

Reversing, the appeals court held that the trial court should have granted the defendant’s Section 2-615 motion to dismiss since a claim for conversion, by definition, only applies to personal property (i.e. something moveable); not to real estate.

The court first addressed the procedural impact of the defendant answering the complaint after his prior motion to dismiss was denied. Normally, where a party answers a complaint after a court denies his motion to dismiss, he waives any defects in the complaint.

An exception to this rule is where the complaint altogether fails to state a recognized cause of action. If this is the case, the complaint can be attacked at any time and by any means. This is so because “a complaint that fails to state a [recognized] cause of action cannot support a judgment.”

However, this exception allowing complaint attacks at any time doesn’t apply to an incomplete or deficiently pled complaint – such as where a complaint alleges only bare conclusions instead of specific facts in a fraud claim. For a defendant to challenge a complaint after he answers it, the complaint must fail to state a recognized theory of recovery.

Here, the trial court erred because it allowed a judgment for the guardian on a conversion claim where the subject of the action was real property. In Illinois, there is no recognized cause of action for conversion of real property. A conversion claim only applies to personal property.

Conversion is the wrongful and unauthorized deprivation of personal property from the person entitled to its immediate possession. The conversion plaintiff’s right to possess the property must be “absolute” and “unconditional” and he must make a demand for possession as a precondition to suing for conversion. (¶¶ 20-21)

The court rejected the guardian’s argument that the complaint alleged the defendant’s conversion of funds instead of physical realty. The court noted that in the complaint, the guardian requested that the home be returned to the Ward’s estate and the Ward be given immediate possession of it.

The court also pointed to the fact that the defendant didn’t receive any funds or sales proceeds from the transfer that could be attached by a conversion claim. All that was alleged was that the defendant deeded the house to himself and his wife without the Ward’s permission. Since there were no liquid funds traceable to the defendant’s conduct, a conversion claim wasn’t a cognizable theory of recovery.

Afterwords:

This case provides some useful reminders about the nature of conversion and the proper timing to attack a complaint.

Conversion only applies to personal property. In an action involving real estate – unless there are specific funds that can be tied to a transfer of the property – conversion is not the right theory of recovery.

In hindsight, if in the plaintiff guardian’s shoes, I think I’d pursue a constructive trust based on equitable claims like a declaratory judgment (that the defendant’s deeding the home to himself is invalid), unjust enrichment and a partition action.

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