Opinion ID: 423929
Heading Depth: 1
Heading Rank: 2

Heading: Constructive Trusts--Generally

Text: 15 The controlling law is that of Texas. Under Texas law, a contract to convey real property normally is subject to the statute of frauds and requires a writing in order to be enforceable. Tex.Bus. & Com.Code Ann. § 26.01 (Vernon 1968). Similarly, the creation of most trusts requires a written instrument to be effective. Texas Trust Act, Tex.Rev.Civ.Stat.Ann. art. 7425b-1 et seq. (Vernon 1960). Certain trusts, though, can be imposed as an equitable judicial remedy without a formal writing. These are recognized as constructive trusts. 16 A constructive trust is an equitable tool in a court's power that can infer a fiduciary-like relationship within a transaction for the purpose of promoting justice. Gordy v. Alexander, 550 S.W.2d 146 (Tex.Civ.App.--Amarillo 1977, writ ref'd n.r.e.). Resort is had to it in order that a statute enacted for the purpose of preventing fraud [, the statute of frauds,] may not be used as an instrument for perpetrating or protecting a fraud. Pope v. Garrett, 147 Tex. 18, 23, 211 S.W.2d 559, 561 (1948). 17 In recognizing a constructive trust, the critical requirement for purposes of this case is that the parties have a confidential or fiduciary relationship prior to and apart from the transaction in question. Rankin v. Naftalis, 557 S.W.2d 940 (Tex.1977); Karnei v. Davis, 409 S.W.2d 439 (Tex.Civ.App.--Corpus Christi 1966, no writ). This relationship may be established through prior joint business ventures, e.g. Gaines v. Hamman, 163 Tex. 618, 358 S.W.2d 557 (1962), family relationships, Mills v. Gray, 147 Tex. 33, 210 S.W.2d 985 (Tex.1948); Ellisor v. Ellisor, 630 S.W.2d 746 (Tex.App.--Houston [1st Dist.] 1982, no writ), or other types of close, confidence-inducing relationships. It need not arise from a strict, formal fiduciary relationship. Meadows v. Bierschwale, 516 S.W.2d 125, 128 (Tex.1974); Holland v. Lesesne, 350 S.W.2d 859 (Tex.Civ.App.--San Antonio 1961, writ ref'd n.r.e.). However, mere subjective confidence among business associates or the like is insufficient to support a constructive trust. Consolidated Gas & Equip. Co. v. Thompson, 405 S.W.2d 333 (Tex.1966). 18 The distinction between an actual trust and a constructive trust is critical. An actual trust is established by the express will of the parties, while a constructive trust is an equitable remedy based on the court's interest in preventing unjust enrichment rather than on any legally-enforceable fiduciary relationships. A constructive trust is actually not a fiduciary relationship at all but rather an equitable duty. As explained in the Restatement of Restitution § 160, adopted by the Supreme Court of Texas in Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256 (1951), a constructive trust arises when a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it. It is imposed without regard to, and even despite, the intentions of the parties. 19 A constructive trust must also be distinguished from a resulting trust. A resulting trust is an actual, binding trust that can develop where the parties intended a confidential or fiduciary relationship to develop and acted accordingly, but failed to create a valid actual trust agreement. A resulting trust can occur, for example, where one party buys real property with the funds of another with the understanding that the property is being held for the party that provided the money. The resulting trust analysis does not apply to this case, however, because it requires evidence of a shared intent to establish a strict fiduciary relationship. No shared intent to establish such a relationship is claimed in this case. The issue of resulting trust is not raised by any party. 20 The doctrine of constructive trust cuts through the requirements of the statute of frauds or the parol evidence rule that otherwise could prevent recovery in a case. Palmer v. Fuqua, 641 F.2d 1146, 1155 (5th Cir.1981). Yet, since this is an equitable remedy rather than a legal instrument there is no unyielding formula for determining whether a constructive trust exists on the facts of a particular case. Meadows v. Bierschwale, 516 S.W.2d 125, 131 (Tex.1974). Prior Texas cases, however, serve as important guideposts in analyzing the principal factors. 21 In Consolidated Gas & Equip. Co. v. Thompson, 405 S.W.2d 333 (Tex.1966), the Supreme Court of Texas found that the dealings between the parties failed to establish a constructive trust but showed at most either an oral contract to convey real property or an oral trust, neither of which was enforceable under the Texas Statute of Frauds or the Texas Trust Act. The case involved attempts to secure drilling rights to certain Texas oil and gas properties. The Griffiths made an agreement that they would receive a 1/16th overriding royalty from Consolidated Gas if they obtained the needed land. The Griffiths, finding that they could not secure the property in time, enlisted the aid of H.M. Thompson. They evidently promised Thompson 1/3 of their 1/16th interest. However, when Thompson obtained the rights directly for Consolidated Gas, Consolidated Gas refused to recognize any obligation to the Griffiths. The agreement between Consolidated Gas and the Griffiths was entirely oral. The Griffiths sued on a theory of constructive trust. 22 The Supreme Court of Texas held that no constructive trust was created under Texas law. There had been prior business dealings and the payment of finders fees between Consolidated Gas and the Griffiths. However, the court found the nature of these contracts to be sporatic. They did not meet a requirement of dealings over a long period of time, [where] the parties had worked together for the joint acquisition and development of property previous to the particular agreement sought to be enforced. 405 S.W.2d at 337. Stating that there was no prior fiduciary relationship between the parties, the court refused to invoke the remedy of a constructive trust. The court found that the Griffiths acquiesced in the oral nature of the agreement for the simple reason that they trusted the Consolidated Gas official. However, the court recognized the fact that one businessman trusts another, and relies upon his promise to carry out a contract, does not create a constructive trust. To hold otherwise would render the Statute of Frauds meaningless. Id. at 336. 23 Again in Rankin v. Naftalis, 557 S.W.2d 940 (Tex.1977), the Supreme Court of Texas refused to impose a constructive trust on oil and gas lease transactions. The court noted that the parties had been involved in a joint venture. It also recognized that confidential relationships such as partnerships could impose a broader reach for a constructive trust than simple business dealings. However, the court found that the transactions in question were not based upon the joint venture between the parties. It refused to extend a fiduciary duty to cover the business dealings, saying: [s]ubjective business trust, cordiality and the trust which prevails between businessmen which is the foundation of ordinary contract law could not be a basis for imposing a trust that would thwart the statute of frauds. 557 S.W.2d at 944. 24 In Panama-Williams, Inc. v. Lipsey, 576 S.W.2d 426 (Tex.Civ.App.--Houston [1st Dist.] 1978), aff'd after remand, 611 S.W.2d 917 (Tex.Civ.App.--Houston [14th Dist.] 1981, writ ref'd n.r.e.), a pipeline contractor entered into an oral joint venture agreement with another contractor to bid on a major job. When the other contractor backed out of the joint venture, Panama-Williams brought suit seeking, inter alia, imposition of a constructive trust. The trial court gave summary judgment to the defendant, but the appellate court reversed and remanded for trial. 25 The appellate court recognized that a constructive trust requires actual fraud or strict proof of a prior confidential relationship and unfair conduct or unjust enrichment on the part of the wrongdoer. 576 S.W.2d at 432. The court was unwilling to find a prior fiduciary business relationship because the only business relationship was that of the joint venture made the subject of the suit. Since the business dealings were no more long-lived than the contract in question, the court refused to find a constructive trust on that ground. 26 However, the court then considered the long-standing friendship between Panama Shiflett, one of the principals of Panama-Williams, and defendant Lipsey. The court found a long-standing personal relationship apart from the business dealings that influenced the scope of their business contacts. It held that the requisite fiduciary relationship could be satisfied on the basis of moral, social, domestic, or personal relationships. It did not, however, change the established Texas requirement that a claim of such a prior relationship demands strict proof in order to defeat the workings of the statute of frauds. Id. at 432-33. 27 In sum, then, the Texas case law imposes two general prerequisites to the imposition of a constructive trust. The first is a prior, unrelated history of close and trusted dealings of the same general nature or scope as the subject transactions. The second is a finding that unjust enrichment would result if the remedy of constructive trust were not imposed. It is to these two inquiries that we now turn.