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Kirch and Rounds, P.C., Attorneys at Law – The Imposition of Constructive Trusts and Other Concepts at Probate—Part II
Emily L. Bowman, Partner
Gerard F.B. Deffenbaugh, Associate Attorney
The Imposition of Constructive Trusts and Other Concepts at Probate—Part II
By admin|2015-04-16T14:11:54+00:00April 16th, 2015|Articles|Comments Off on The Imposition of Constructive Trusts and Other Concepts at Probate—Part II
Reproduced by permission. ©1999 Colorado Bar Association,
28 The Colorado Lawyer 49 (January 1999). All rights reserved.
This is the second part of a two-part article on recovery of joint tenancy property and other lifetime transfers through the imposition of constructive trusts and other tools. Part I, which appeared in the December 1998 issue at page 41, analyzed generally how constructive trusts and other concepts operate in the probate context. This Part II discusses the outer limits of the concept, causes of action that support it, and some tactical aspects of constructive trust litigation.
As noted in Part I of this article, availability of the remedy of imposition of a constructive trust is not limited to the transferor. A constructive trust may be imposed in favor of an individual who would have been the donee or devisee of the property against a person who obtains the property by undue influence, thus preventing the gift to the intended donee from being accomplished. A constructive trust arises in favor of one who, but for the undue influence of the transferee (the constructive trustee), would have received the property.1 However, the courts may be more willing to impose a constructive trust on grounds of unjust enrichment (without findings of fraud, confidential relationship, or duress) if it is the original owner of the property who will recover, as opposed to third-party intended beneficiaries.
Outer Limits of the Concept
The doctrine should be applicable to the wide variety of nonprobate transfers taking effect at death or coming into question after death, because of their impact on third parties (for example, life insurance and pension benefits, beneficiary designations, P.O.D. accounts, any assets held in joint tenancy, transfers into inter vivos trusts, and lifetime outright transfers). The doctrine can even be used to attack a subsequent will.
As an example of the concept’s potentially limitless utility (in situations attorneys frequently view as otherwise hopeless), a constructive trust has been imposed on life insurance proceeds paid in violation of a separation agreement, regardless of the fact that the designated recipient was innocent and without notice.2 In certain instances, this may certainly be a better remedy than a claim against the probate estate (which may be insolvent).
The ability to impose a constructive trust on assets of a decedent held by a party as a matter of convenience when the transferee does not dispute the rights of other parties can produce tax benefits. It should result in an increased tax basis in the assets at death. Further, the transfer of assets from the original transferee to the third parties should not be a taxable gift, even if in excess of the $10,000 annual exclusion.
There appears to be a general consensus supporting the view that a constructive trust should be impressed, even though the wrongful conduct by which the title was acquired was that of a third party and not the donee (deemed trustor).3 In Seidlitz v. Eames,4 the Colorado Court of Appeals awarded life insurance proceeds to the children of the murderer (mistress) of the insured, on the basis that they were the successor-owners of the policies. As an alternative to the argument made by the dissenting judge—that under CRS § 15-11-803(3), the children should not receive the proceeds because this was a “benefit” to the insured’s murderer—the question is whether the decedent’s estate or spouse could have asked for the imposition of a constructive trust on the proceeds.
The devisees of an earlier will might seek to impress a constructive trust on a decedent’s estate even when the assertion of traditional grounds for invalidation of the most recent will and its revocation of the earlier will (incapacity and undue influence) appear not to be appropriate or likely to be successful.5 On the other hand, the courts should consider the importance of protecting the recipient of the property from potentially unfounded or tenuous claims. It is certainly debatable that the courts should draw the line in using the doctrine to grant relief in cases where the intended beneficiary’s rights were defeated because of the “transferor’s” own failure to get the job done right by a completed gift or formal documentation. The concept should not be used to remedy every injustice or “botched” inter vivos gift or testamentary disposition.6
Causes of Action Supporting The Doctrine
The imposition of a constructive trust is an equitable remedy, not a separate cause of action itself, although the court opinions applying the concept have lacked clarity and precision in this regard. In cases involving the imposition of a constructive trust, a number of different causes of action can be (and have been) asserted. These include undue influence, breach of fiduciary duty, failure to lodge a will, fraudulent and negligent misrepresentation, tortious interference with inheritance rights, abuse of process, tortious misfeasance and nonfeasance, and conspiracy. Such causes of action also will support a claim for punitive damages.
It has been noted that constructive trusts may arise under a multitude of circumstances, including those situations in which a confidential relationship arises by virtue of one party having justifiably reposed confidence in another. They are generally found where a transferor of property is justified in his or her belief that the transferee will act in the transferor’s best interest.7 A fiduciary relationship exists when “there is special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to interests of one reposing the confidence.”8
Because the imposition of a constructive trust is not necessarily dependent on proof of the “intention of the decedent at the time the account was created,” the clear and convincing evidence standard9 will usually not be applicable to a constructive trust action to set aside joint tenancy. The Colorado Supreme Court cases of Judkins v. Carpenter10 and Page v. Clark11 demonstrate that the burden of proof on the part of a plaintiff is a preponderance of evidence. The Denver Probate Court has rejected the clear and convincing evidence standard in a constructive trust action.12
No precise rule exists for determining the amount of a plaintiff’s recovery under a constructive trust, because the circumstances can vary so significantly.13 In post-death situations, the courts have awarded the disputed assets to the heirs14 and the devisees15 of the decedent. Damages also can be recovered.16 An accounting of income or proceeds from sales of assets in a case founded on breach of fiduciary duty is frequently appropriate.
Questions that remain include the following: Would recovery of a nonprobate asset claimed by the residuary devisees of an estate be subject to administration expenses and claims of the decedent’s estate? What if the defendant did not file a formal claim against the estate? Should the court recognize equitable offsets available to the defendant (such as services rendered by the defendant in caring for a sick transferor) or in managing the property?17 Finally, would a spouse’s elective share or the family and exempt property allowances be valid offsets to a constructive claim against a surviving spouse by children of a prior marriage? The decree establishing the constructive trust can require the defendant to deliver possession of the property, as well as to pay the plaintiffs the profits received after taking an accounting.18
Punitive damages can be awarded based on the existence of a fiduciary relationship in a constructive trust action. Punitive damages have been awarded for a breach of fiduciary duty.19 The breach of a fiduciary obligation, which includes the elements of malice, oppression, fraud, or similar reprehensible conduct, will support an award of exemplary damages.20 However, punitive damages have generally been denied in Colorado in actions in equity. A constructive trust action is an equitable remedy, although breach of fiduciary duty or fraud causes of action, on which a constructive trust claim can be based, are legal rather than equitable claims.21
In connection with the imposition of a constructive trust, the court can hold a defendant liable for damages for breach of fiduciary duty, as well as entering an order for the transfer of specific property.22 In defense of an eviction action, the Denver Probate Court imposed a constructive trust on property, in effect recognizing the right of a third party to a life estate in property transferred during lifetime by the parent of the third party.23
Page24 also was an eviction action.
Unique issues arise in a constructive trust action with respect to the operation of the statute of limitations. One question is whether the statute of limitations begins to run at the time of the original transfer. The time of accrual of a constructive trust claim, based on breach of fiduciary duty and fraud, has consistently been recognized to be a question to be resolved by the trier of fact.25
In Eads v. Dearing,26 the court held that a constructive trust claim accrues at the time of discovery of the defendant’s breach of trust, not the initial transfer. As recognized in Lucas v. Abbott27 and Johnston v. CIGNA,28 in the context of a fiduciary relationship:
. . . facts which would ordinarily require investigation may not excite suspicion, and the same degree of diligence is not required. [Citations omitted.] Justified reliance on representations made within the ambit of such a fiduciary relationship lessens the duty or reasonable inquiry imposed on the claimant under the constructive trust as to the facts which underlie his claim. [Citations omitted.]29
Application of the doctrine of equitable estoppel as a bar to assertion of the statute of limitations defense in a constructive trust claim action may be particularly appropriate. Frequently, a plaintiff is dissuaded from commencing a legal action to protect his or her rights to assert a constructive trust claim because of assurances by the transferee of his or her intention to recognize the rights of the transferee (or the transferee’s beneficiaries) in the property. Such assurances not only can form the factual basis for the imposition of a constructive trust in the first instance, they can be held to estop the transferee from asserting the statute of limitations as a defense.30
It has been held that the statute of limitations does not begin to run on a resulting trust action until there is repudiation of the trust.31 Practically, this may operate no differently than the rule stated with respect to constructive trusts.
Application of the Dead Man’s Statute
The plaintiff will be faced with a tough tactical decision with respect to the Dead Man’s Statute, CRS § 13-90-102. The self-serving testimony of the defendant as to statements by the decedent regarding the intention to make a gift may be necessary to satisfy the shifted burden of proof on the part of the defendant. The defendant may not be able to satisfy this burden if the Dead Man’s Statute is applicable.
The focus of the Dead Man’s Statute is on the relationship to the decedent of the party seeking the protection of the statute. Thus, the Colorado Supreme Court in Askins v. Easterling32 held that the Dead Man’s Statute did not apply where the parties were sued or defended as grantor and grantee and not as heirs, which is frequently the case in constructive trust litigation.
Income tax records can be an extremely helpful source of evidence, particularly if the defendant has not reported income from assets that the defendant is now claiming were transferred as a gift or the income was reported on the transferor’s return. Most of the records regarding the assets transferred (such as bank accounts) will be in the defendant’s possession and control. Thus, to prove damages, carefully worded Requests for Production may be necessary.
Defendants frequently will claim not to have any records essential to the plaintiff’s case, requiring the plaintiff to obtain releases of information directed to financial institutions, providers of medical services (regarding the transferor’s physical and mental condition), and other third parties from the plaintiff. With the passage of time, those records will be difficult, if not impossible, to obtain.
Existing estate planning documents should be reviewed for inconsistency between the transferee and the intended beneficiaries of the transferor on the transferor’s death. In one instance, a child claimed rights of survivorship in a joint tenancy bank account. When it was revealed that the child had been given a power of attorney and had sometimes added “PoA” after her signature on checks from the account, the case was quickly settled on terms favorable to the other child. Shared income from the assets with the transferor or a deceased transferor’s other beneficiaries also is strong evidence supporting imposition of a constructive trust.
Because the imposition of a constructive trust is an equitable remedy, it might be assumed that there would be no right to a jury trial under the “basic thrust” doctrine of Miller v. Carnation Co.33 However, where the primary purpose of an action is to recover compensatory damages for tortious breach of fiduciary duty, it has been held that a defendant’s claim is legal, rather than equitable. A plaintiff was found to be entitled to punitive damages when the breach of fiduciary duty was attended by wanton and willful conduct.34 Fraud has been held to be a claim triable by a jury.35 Thus, the cause of action asserted as the basis for imposition of a constructive trust may justify a jury trial (as well as punitive damages, as discussed above).
As a practical matter, to avoid reversal on appeal (because it is not clear if there is a right to a jury trial in constructive trust cases), the trial court can exercise its discretion on its own initiative under C.R.C.P. 39(c) to try any issue with an advisory jury. The court can have the jury hear the entire case but treat the jury’s verdict as to equitable issues as advisory only, with the jury answering special interrogatories as to all issues. A jury trial is more complicated and expensive, and provides more grounds for appeal, while a judge may be better able to sort out the complicated legal concepts involved.
Courts of probate jurisdiction have been held to have jurisdiction over constructive trust actions.36 Most probate attorneys would probably prefer to have a court of probate jurisdiction hear a constructive trust case. Such an approach can avoid the more cumbersome procedures of C.R.C.P. Rule 16 and is likely to place the case on a faster track. The defendant, on the other hand, may prefer that the case be tried in district court as a civil, nonprobate matter.37
If a decedent’s estate has been opened, it may make sense to commence an action in the estate proceeding to recover property that the decedent had transferred during lifetime or had set up to pass as nonprobate property (such as in joint tenancy with right of survivorship). If the case is deemed a probate matter, and an estate is opened, it may be initiated by a petition or complaint. The petitioner may want to request that an answer be filed to the petition (not otherwise mandatory) and that the parties exchange witness and exhibit lists forty-five days prior to trial, as useful case management tools and to avoid a “trial by ambush,” if C.R.C.P. 16 and 26 are otherwise not made applicable. Limited discovery may be requested. The action may be brought by either the estate or a beneficiary.38
CRS § 15-12-723 may be used to require a transferee to appear before the court to testify as to the decedent’s assets. Such a proceeding can be an expedited and less expensive substitute for discovery in constructive trust litigation to assess the strength of a constructive trust claim, educate the court, and gather evidence. Such a proceeding may be tied to an action to recover assets transferred during lifetime into the decedent’s probate estate. It is advisable to see whether (1) the court will allow counsel to address their own questions to the witness, (2) the court will even be present during the questioning, and (3) the answers will be on the record. If a record is desired, counsel should probably arrange for the reporter to be present.
An award of attorney fees is appropriate generally in cases of breach of fiduciary duty, regardless of the capacity in which the fiduciary is acting and regardless of whether the fiduciary is an individual or corporation.39 The right to fees is not limited to actions involving express trusts.40 Generally, the action must relate to a breach of trust involving property held for another in a fiduciary capacity.
A person acting in a fiduciary capacity who denies that capacity, should not be entitled to any offset for compensation for services.41 A contingent fee agreement, which includes attorney fees in the calculation of the recovery, is an appropriate basis for calculating the awarded attorney fees.42 Fees based on time, if more, also may be appropriate.43
Protecting the Asset During Litigation
Procedurally, when dealing with assets such as bank accounts and life insurance proceeds, the bank or insurance company might be named as a party or might be convinced to institute an interpleader action, as a means of protecting the “res” while the matter is litigated.44 A lis pendens should be filed on transferred real estate. It may be possible to arrange for a deposit of funds or other personalty, subject to imposition of a constructive trust, into the registry of the court.
Court decisions in this area suffer from a lack of analytical precision in distinguishing the various concepts at work, as well as in distinguishing the imposition of a constructive trust as a remedy, versus its operation as a separate cause of action. Because a constructive trust is a remedial institution, its application in the probate area is probably limited only by the imagination of counsel. It certainly should be considered in those not infrequent cases with which the courts struggle to avoid an obviously unfair or unjust result which the statutes or burden of proof under the case law otherwise seem to compel.
Restatement of Restitution § 169, Comment (1937); Restatement (Second) of Trusts
Rogers v. Rogers, 473 N.W.2d 226 (N.Y. 1984).
See illustrations 17b and 18, under Restatement of the Law of Restitution, § 784 at 754.
4. 753 P.2d 775 (Colo.App. 1987).
Pope v. Garrett, 211 S.W.2d 559 (Tex. 1948).
Timothy C. Wirt, M.D. v. Proutt, 754 P.2d 429 (Colo.App. 1988), involving funds paid to a decedent’s estate by a medical reimbursement plan where the court held that there must be some evidence of wrongdoing, not merely an unfair result occasioned by the nonclaim statute.
Page v. Clark, 592 P.2d 792 (Colo. 1979); Alexander Co. v. Packard, 754 P.2d 780 (Colo. App. 1988).
Circle T Corp. v. Deerfield, 444 P.2d 404 (Colo. 1968); Breeden v. Daily, 574 P.2d 508, 510 (Colo.App. 1977).
9. CRS § 15-15-104.
10. 537 P.2d 737 (Colo.App. 1975).
Montaño v. Mora, Case No. 95P42061 (Denver Probate Court 1995).
Weeks v. Esch, 568 P.2d 494, 496 (Colo. App. 1977).
See, Judkins, supra, note 10.
See, Weeks, supra, note 13.
Eads v. Dearing, 874 P.2d 474 (Colo. App. 1993); In re Marriage of Allen, 724 P.2d 651 (Colo. 1986); Alexander, supra, note 7.
Pollard v. Lathrop, 12 Colo. 171, 20 P. 251 (1888).
Dietz v. Nietz, 70 N.W.2d 281 (Minn. 1955); Bogert, Trusts (6th ed. 1987) at 259.
Gould v. Starr, 558 S.W.2d 755 (Mo. App. 1977) ($50,000); Glusman v. Lieberman, 293 P.2d 834 (Cal.App. 1956); Devers v. Greenwood, 293 P.2d 834 (Cal.App. 1956); Werschkull v. United California Bank, 149 Cal. Rptr. 829 (Cal.App. 1978) ($550,000); Vale v. Union Bank,151 Cal. Rptr. 784 (Cal.App. 1979); Adam v. Harris, 564 S.W.2d 152 (Tex.Civ.App. 1978) ($20,000).
20. Smith, “Surcharge Litigation and How to Avoid It,” Real Property, Probate and Trust Law Journal 783 (Winter 1981).
Kaitz v. District Court, 650 P.2d 553 (Colo. 1982).
Alexander, supra, note 7.
Montano, supra, note 12.
24. 197 Colo. 306, 592 P.2d 792 (1979).
Eads, supra, note 16; Lucas v. Abbott, 601 P.2d 1376 (Colo. 1979); Johnston v. CIGNA, 916 P.2d 643 (Colo.App. 1996).
Ralston Oil & Gas Co. v. July Corp., 719 P.2d 334 (Colo.App. 1985); Irwin v. West End Development Co., 481 F.2d 34 (10th Cir. 1973). See also, Johnston, supra, note 25.
First Nat’l Bank of Denver v. Harry W. Rabb Found., 479 P.2d 986 (Colo.App. 1970).
32. 347 P.2d 126 (Colo. 1959).
33. 516 P.2d 661 (Colo.App. 1973).
Virdanco, Inc. v. MTS Int’l, 820 P.2d 352 (Colo.App. 1991).
Citicorp Acceptance Co. Inc. v. Sittner, 772 P.2d 655 (Colo.App. 1989).
Mitchem v. First Interstate Bank of Denver, 802 P.2d 1141 (Colo.App. 1990).
37. In Montaño, supra, note 12, an eviction action was removed from county court to the Denver Probate Court because the imposition of a constructive trust was raised as a defense to the eviction action, creating an issue of title to real estate (which is beyond a county court’s jurisdiction).
38. Wade and Parks, Colorado Law of Wills, Trusts and Fiduciary Administration, § 18.8. CRS § 15-15-215 provides limited rights for creditors to recover multi-party bank accounts. Estate of Van Winkle, 757 P.2d 1134 (Colo.App. 1988).
In re Conservatorship of Roth, 804 P.2d 265 (Colo.App. 1990); Buder v. Sartore, 774 P.2d 1383 (Colo. 1989); Stevens v. Moore and Co. Realtor, 874 P.2d 495 (Colo.App. 1994).
Heller v. First Nat’l Bank, 657 P.2d 992 (Colo.App. 1982).
Pollard, supra, note 17.
Spensieri v. Farmers Alliance Mutual Ins., 804 P.2d 268 (Colo.App. 1990).
Blanchard v. Bergeron, 489 U.S. 87 (1989).
Judkins, supra, note 10.