Opinion ID: 2831465
Heading Depth: 2
Heading Rank: 5

Heading: Constructive Trust and Fraudulent Transfer

Text: Under the terms of the 1960 deeds, Bradshaw presently holds a one-sixteenth non-participating royalty interest because the deeds reserve one-half of the royalty provided in the mineral lease, which is one-eighth.13 Bradshaw contends, however, that she has been shorted an additional one-sixteenth royalty interest because Steadfast should have procured a one-fourth royalty. Applying the reserved fraction of a royalty (one-half) to the royalty Bradshaw contends Steadfast should have procured (one-fourth), she contends that she is actually entitled to a one-eighth royalty and has therefore been dispossessed of the additional one-sixteenth royalty. Bradshaw maintains that, to rectify the alleged loss, she is entitled to proceeds from the entire royalty provided in the mineral lease, notwithstanding the reservation in the 1960 deeds of only half of such royalty. In effect, Bradshaw lays claim to the unreserved royalty interest Bradshaw’s parents conveyed with the mineral estate, which Steadfast (1) acquired as owner of the mineral estate, (2) reserved as a one-sixteenth royalty when the mineral rights were conveyed to Range by mineral lease, and (3) subsequently transferred to the Royalty Owners.14 13 In the deeds, the grantor reserved “an undivided one-half (1/2) Royalty” of “not less than an undivided one sixteenty [sic] (1/16)” and authorized the grantee, his heirs and assigns “to lease said land for oil, gas and other minerals provided, however, that all such leases shall provide for Royalty of not less than one-eight [sic] (1/8).” 14 Bradshaw initially claimed an interest in the portion of Steadfast’s royalty interest that was transferred to Bennis and Korb, but has since abandoned that claim. Accordingly, she now seeks something less than an additional one-sixteenth interest, but the precise figures are not germane to our analysis. 24 Bradshaw seeks a constructive trust on Range’s royalty payments to the Royalty Owners so that she may be placed in essentially the same position she would have occupied but for Steadfast’s alleged breach. Bradshaw also claims, in the alternative, that the royalty-interest transfers should be set aside as fraudulent transfers. See TEX . BUS. & COM . CODE §§ 24.001–.013 (Texas Uniform Fraudulent Transfer Act or TUFTA). We address these claims in turn.15 A constructive trust is an equitable, court-created remedy designed to prevent unjust enrichment. Meadows v. Bierschwale, 516 S.W.2d 125, 131 (Tex. 1974) (“Constructive trusts, being remedial in character, have the very broad function of redressing wrong or unjust enrichment in keeping with basic principles of equity and justice.”). They have historically been applied to remedy or ameliorate harm arising from a wide variety of misfeasance. POMEROY ’S EQUITY JURISPRUDENCE , 5th Ed., Vol. 4, p. 97, § 1045, quoted in Pope v. Garrett, 211 S.W.2d 559, 560 (Tex. 1948) (“It has been said that ‘The specific instances in which equity impresses a constructive trust are numberless—as numberless as the modes by which property may be obtained through bad faith and unconscientious acts.’”). But the reach of a constructive trust is not unlimited. Three elements are generally required for a constructive trust to be imposed under Texas law. The party requesting a constructive trust must establish the following: (1) breach of a special trust or fiduciary relationship or actual or constructive fraud; (2) unjust enrichment of the wrongdoer; and (3) an identifiable res that 15 The court of appeals reversed summary judgment on Bradshaw’s constructive-trust and fraudulent-transfer claims as follows: “As we have concluded that Steadfast owed a fiduciary duty to Bradshaw and that there is a genuine issue of material fact with regard to whether Steadfast breached that duty by engaging in self-dealing and conspiring with others to Bradshaw’s detriment–one of the bases for Bradshaw’s constructive trust and UFTA claims against the Royalty Holders–we cannot say that they were entitled to summary judgment as a matter of law. Therefore we sustain Bradshaw’s third issue in part, and we sustain her fourth issue. On remand, if the factfinder concludes that no breach occurred, then these constructive trust and UFTA issues will be moot.” 395 S.W .3d 348, 376. 25 can be traced back to the original property. Matter of Haber Oil Co., Inc., 12 F.3d 426, 437 (5th Cir. 1994) (applying Texas law); see also Meadows, 516 S.W.2d at 128-31. In weighing the imposition of a constructive trust, a court will identify whether a wrongful taking has occurred. See, e.g., Wheeler v. Blacklands Prod. Credit Ass’n, 627 S.W.2d 846, 851 (Tex. App.—Fort Worth 1982, no writ) (“The very nature of a constructive trust presupposes a wrongful taking by B of property owned equitably or legally by A, or to which A has some claim of right.”); Thompson v. Mayes, 707 S.W.2d 951, 954 (Tex. App.—Eastland 1986, writ ref’d n.r.e.) (noting a suit to impose a constructive trust “is an action in equity to prevent unjust enrichment of a person who has wrongfully acquired property”). A resultant constructive trust may be placed on the property wrongfully taken or the proceeds or revenues generated from the property. Wheeler, 627 S.W.2d at 851. “In order to fasten a constructive trust on property owned by the defendant, some particular property must be identified as to which plaintiff has an equity.” Id. “Definitive, designated property, wrongfully withheld from another, is the very heart and soul of the constructive trust theory.” Id. The theory underlying the constructive-trust remedy is the equitable notion that the “acquisition or retention of the property is wrongful and that [the possessor of the property] would be unjustly enriched if [the possessor] were permitted to retain the property.” Baker Botts, L.L.P. v. Cailloux, 224 S.W.3d 723, 736 (Tex. App.—San Antonio 2007, pet. denied). Bradshaw’s constructive-trust claim fails because the undisputed summary-judgment evidence affirmatively negates at least one element required for the imposition of a constructive trust. Although Bradshaw asserts otherwise, the Royalty Owners’ interests originate in the one-half royalty interest transferred to the mineral-interest owner by the Driskills as part of the bundle of property 26 rights conveyed by the 1960 deeds. The later execution of the mineral lease with Range, even if wrongful, did not convert the unreserved one-half interest into Bradshaw’s property. A constructive trust is not merely a vehicle for collecting assets as a form of damages. “Unless the tracing requirement is observed with reasonable strictness, any suit on a debt or obligation could be used to impress a constructive trust on the assets of the defendant.” Peirce v. Sheldon Petroleum Co., 589 S.W.2d 849, 853 (Tex. Civ. App.—Amarillo 1979, no writ). Furthermore, a constructive trust may not be imposed simply because doing so will, from an accounting perspective, make Bradshaw whole or close to whole. By seeking a constructive trust on the proceeds otherwise payable to the Royalty Owners, Bradshaw is, in essence, seeking a whole share of the royalty, which contravenes the express terms of the 1960 deeds. The Royalty Owners’ property cannot be taken to remedy an alleged wrong simply because it would harmonize Bradshaw’s ledger.16 Bradshaw’s constructive-trust claim falls short because the undisputed evidence in the record conclusively establishes that she has no interest in the royalty interest sold by her parents and held by Steadfast as part of the bundle of property rights it obtained as mineral owner. The royalty payments on which Bradshaw seeks a constructive trust emanate from that interest, which Steadfast retained when it conveyed the mineral rights to Range, and not from the one-half of royalty interest reserved by the Driskills in the 1960 deeds. As an alternative claim for relief, Bradshaw asserted in her live petition that the 16 Bennis made this point before the trial court during the summary-judgment hearing: “As a matter of convenience, [Bradshaw] wants an additional one-sixteenth, and she would like that one-sixteenth out of what Steadfast had left over, which would necessarily include Mr. Bennis’[s] interest, but that is, again, just a mere math issue where she would be basically using a constructive trust like a— like a writ of attachment to satisfy a judgment claim she has.” 27 royalty-interest transfers should be set aside as fraudulent because (1) Steadfast received less than a reasonably equivalent value in exchange for the transfers and (2) Steadfast was either insolvent at the time such transfers were made or became insolvent as a result of the transfers. See TEX . BUS. & COM . CODE §§ 24.005(a)(2), .006. Under TUFTA, a “debtor,” defined as a “person who is liable on a claim,” is prohibited from transferring its assets for less than reasonably equivalent value if it is insolvent or would become insolvent by virtue of the transfer.17 Id. §§ 24.002(6), .003, .005(a)(2), .006. Under the Act, a debtor is insolvent “if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.” Id. § 24.003(a). If the debtor “is generally not paying the debtor’s debts as they become due,” insolvency is presumed. Id. § 24.003(b); see also id. § 24.005(a)(2) (making transfer fraudulent as to present or future creditor when debtor lacked sufficient assets or would reasonably be unable to pay debts as they became due at the time of the transfer). The Act is designed to protect creditors from being defrauded or left without recourse due to the actions of unscrupulous debtors.18 “The purpose of TUFTA is to prevent debtors from defrauding creditors by placing assets beyond their reach.” Corpus v. Arriaga, 294 S.W.3d 629, 634 (Tex. App.—Houston [1st Dist.] 2009, no pet.). Other than surmise and speculation, there is no evidence that Steadfast was insolvent at the time it assigned its one-half of royalty interest to the Royalty Owners or otherwise lacked sufficient assets. See TEX . BUS . & COM . CODE § 24.002(6), .003, 17 Insolvency is not required to sustain a claim under section 24.005(a)(1) of TUFTA, which prohibits a transfer made “with actual intent to hinder, delay, or defraud any creditor of the debtor”; however, Bradshaw did not allege a fraudulent-transfer claim on that basis in the trial court. 18 The Act operates to prevent or mitigate fraudulent transfers that place a debtor’s property outside of a creditor’s reach. Flores v. Robinson Roofing & Constr. Co., Inc., 161 S.W .3d 750, 754 (Tex. App.— Fort W orth 2005, pet. denied) (describing a “fraudulent transfer” as “a transfer by a debtor with the intent to hinder, delay, or defraud his creditors by placing the debtor’s property beyond the creditor’s reach”). 28 .005(a)(2), .006. Nor is there evidence that it was rendered insolvent by the same. Accordingly, Bradshaw’s fraudulent-transfer claim fails as a matter of law.