Constructive Trusts

Chapter 21 fixes the constructive trust at foundational depth. It develops the American doctrinal architecture of Restatement (Third) of Restitution and Unjust Enrichment § 55, which treats the constructive trust as a proprietary restitutionary remedy imposed to prevent unjust enrichment; contrasts this account with the Commonwealth substantive-institution characterization; catalogues the classical triggering categories (fraud, undue influence, duress, breach of fiduciary duty) and the modern American generalization to unjust enrichment; introduces the tracing and following machinery that enforces the remedy at foundational depth; and identifies the doctrinal significance of the remedy's proprietary character for priority in the defendant's insolvency and for the reach of the plaintiff's claim into substitutes, appreciated proceeds, and hostile hands. Operational tracing rules and the doctrinal treatment of bona fide purchaser defense are reserved to Volume II.

Master Research Dossier v1.0, §4 (Doctrinal Research: Non-Express Trusts; Equitable Remedies; Tracing); §2 (Authority Analysis of Restatement (Third) of Restitution §§ 43, 55, 58, 59, 66 and Restatement (Third) of Trusts § 7); §7 (Treatise Analysis — Scott & Ascher §§ 39.1–39.6; Bogert §§ 471–479; Palmer, Law of Restitution); §10 (Authority Matrix — constructive-trust category); §11 (Discrepancy Register — American remedial vs. Commonwealth substantive characterizations).

• Restatement (Third) of Restitution and Unjust Enrichment §§ 43, 55, 58, 59, 66
• Restatement (Third) of Trusts § 7 (comment); § 20 cmt. a; § 78
• 11 U.S.C. § 541(d) (property held on constructive trust and the bankruptcy estate)
• Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378 (1919)
• Latham v. Father Divine, 299 N.Y. 22, 85 N.E.2d 168 (1949)
• Simonds v. Simonds, 45 N.Y.2d 233, 380 N.E.2d 189 (1978)
• Foskett v. McKeown, [2001] 1 A.C. 102 (H.L.)
• Keech v. Sandford, Sel. Cas. Ch. 61 (1726)
• Scott & Ascher, The Law of Trusts (5th ed.), §§ 39.1–39.6
• Bogert, Bogert & Hess, The Law of Trusts and Trustees (3d ed.), §§ 471–479
• Palmer, The Law of Restitution (1978), ch. 2

• Chapter 3 — The Equitable Foundations of the Trust (equitable remedies in general)
• Chapter 9 — Manifestation of Intent (fraud as a ground for setting aside express-trust intent)
• Chapter 15 — Formalities for Testamentary Trusts (constructive-trust rescue of secret and semi-secret trusts)
• Chapter 20 — Resulting Trusts (the other operation-of-law trust category)
• Chapter 22 — The Trust–Fiduciary Relationship (breach of fiduciary duty as constructive-trust trigger)

Chapter 21 is a classificatory-doctrinal chapter that also introduces at foundational depth an equitable remedy elaborated at operational depth in Volume II. It applies Parts I (Foundations), II (Legal Nature), III (Creation, in the operation-of-law sense), VIII (Enforcement, at foundational depth), and X (Related Doctrines).

• Parts IV–VII, IX, XI — omitted. Operational tracing rules, procedural machinery, and the doctrinal treatment of bona fide purchaser defense are reserved to Volume II.

A reader completing this chapter should be able to state the American doctrinal architecture of the constructive trust as a restitutionary remedy under Restatement (Third) of Restitution § 55; explain the significance of the remedial/substantive characterization debate for priority and intervening interests; catalogue the classical and modern triggers; explain the doctrinal engine of tracing and following as it operates in constructive-trust enforcement; and understand the practical significance of the remedy's proprietary character in the defendant's insolvency. Operational tracing computations, the treatment of commingled funds, and the bona fide purchaser defense are reserved to Volume II.

A constructive trust is an equitable device by which the holder of legal title to property is treated as trustee for a person unjustly deprived of the property by the holder's wrongful conduct or the operation of principles of restitution. Restatement (Third) of Restitution and Unjust Enrichment § 55. The doctrine has become the principal remedial vehicle by which equity redresses unjust enrichment in a property form.

The constructive trust is a remedial device rather than a category of ownership. Restatement (Third) of Trusts § 7 comment a distinguishes it sharply from the express and resulting varieties: the constructive trust does not depend on any intent, real or presumed, of any party; it is imposed by a court of equity to prevent a defendant from retaining property that in good conscience the defendant should not retain. The label "trust" signifies only that the defendant is treated as holding legal title subject to a duty to convey to the plaintiff; the constructive-trust defendant owes no duties of loyalty or prudence, administers no res, and is a fiduciary only in the attenuated sense that a duty to convey is owed. Restatement (Third) of Restitution § 55 cmt. b.

Justice Cardozo's formulation in Beatty v. Guggenheim Exploration Co. has become the canonical American statement:

The formulation captures three features of the doctrine: its remedial character, its dependence on conscience rather than consent, and its operation by conversion of the defendant into a trustee for the plaintiff. Its rhetorical elevation notwithstanding, the substance of the doctrine is a body of enforceable rules — specific-restitution remedy, tracing, priority in insolvency, subject to defenses of bona fide purchaser and laches — that the Restatement (Third) of Restitution collects and refines.

American doctrine treats the constructive trust primarily as a remedy: it is imposed by decree of the court to redress unjust enrichment and does not exist as a legal relationship independent of the decree. Restatement (Third) of Restitution and Unjust Enrichment § 55. Commonwealth doctrine — particularly in England and Australia — treats the constructive trust more as a substantive institution: it arises by operation of law on the occurrence of the facts that trigger it, and the court's decree merely recognizes what has already come into existence.

The characterization matters doctrinally. Under the remedial view, the constructive trust dates from the court's decree, giving priority to intervening interests; under the substantive view, it dates from the triggering event, defeating intervening interests. American practice is not fully consistent in its application, and much of the constructive-trust jurisprudence is best read as an evolving reconciliation of the two accounts. The Restatement (Third) of Restitution § 55 comment e attempts a synthesis by recognizing the substantive-institution force of the remedy where necessary to protect the plaintiff against the defendant's intervening dispositions or insolvency, while treating the remedy as remedial for other purposes.

The constructive trust is doctrinally located at the intersection of substantive trust law and equitable remedy. On one view, dominant in the traditional American treatises and in the First and Second Restatements, the constructive trust is a substantive trust — a fiduciary relationship imposed on the defendant, with all the attendant duties of loyalty, care, and information. On the modern view, dominant in the Restatement (Third) of Restitution § 55, the constructive trust is exclusively a restitutionary remedy — a device by which the plaintiff obtains title to specific property held by a defendant who has been unjustly enriched. The competing characterizations produce practically identical results in the ordinary case; the doctrinal difference is one of theoretical framing whose operational significance is confined to a narrow class of edge cases.

The constructive trust differs from the express trust in that it arises by operation of law without a settlor's manifestation. It differs from the resulting trust in that it operates on wrongful conduct or unjust enrichment rather than on a presumed intent. The three categories share the name "trust" for institutional and remedial purposes and share several important features — the imposition of fiduciary duties, the availability of tracing — but they rest on distinct doctrinal foundations. Restatement (Third) of Trusts § 7.

The three categories are functionally distinct and doctrinally separate: express trusts are consensual; resulting trusts are presumptive; constructive trusts are imposed. The remedial machinery — accountings, tracing, subrogation, equitable lien — is common to all three but arises from different doctrinal predicates. Some courts blur the resulting/constructive distinction in practice, particularly in family-property cases; the Restatement (Third) of Trusts § 7 preserves the distinction, and careful pleading follows the Restatement.

The traditional core of the constructive-trust doctrine is the impression of a trust on property acquired by fraud, undue influence, or duress. Restatement (Third) of Restitution §§ 13–15. A person who has obtained property by any of these wrongful means is held to have acquired it in the character of trustee for the person defrauded, unduly influenced, or coerced. Beatty v. Guggenheim Exploration Co. remains the paradigmatic American case for the general formulation.

The doctrine's operation in the will-contest and inter-family-transfer contexts is particularly rich. In Latham v. Father Divine, 299 N.Y. 22, 85 N.E.2d 168 (1949), the New York Court of Appeals held that a person who had, by fraud and undue influence, prevented a testator from executing a new will in favor of another was chargeable as a constructive trustee for the intended beneficiary. The decision extended the doctrine beyond property acquired directly by the wrongdoer to property retained by the wrongdoer's beneficiaries, on the ground that permitting them to retain what fraud had procured for them would be unjust enrichment. Latham remains one of the widest American extensions of the constructive-trust remedy and is a leading authority for the modern view that the constructive trust operates upon the property regardless of who ultimately holds it.

Property acquired by a fiduciary in breach of duty — bribes, secret commissions, profits from self-dealing, business opportunities diverted from the beneficiary — is held on constructive trust for the beneficiary. Restatement (Third) of Trusts § 78; Restatement (Third) of Restitution § 43. The doctrine ensures that the fiduciary does not retain the gains of a breach and that the beneficiary may reach the property (and its traceable substitutes) in the fiduciary's hands or in the hands of persons who took with notice.

Breach of fiduciary duty is a distinct predicate for the constructive trust. Where a fiduciary — a trustee, an agent, a corporate officer, a partner — acquires property in breach of the duty of loyalty, the fiduciary holds the property on a constructive trust for the beneficiary. The classical case is the fiduciary who acquires a business opportunity or asset that belonged to the principal in fiduciary right; the constructive trust returns the opportunity or asset to the principal notwithstanding the fiduciary's personal outlay to acquire it. Keech v. Sandford, Sel. Cas. Ch. 61 (1726), remains the fixed point: the trustee-guardian was required to hold on constructive trust a renewal lease he obtained personally after the landlord refused to renew for the ward, even though the renewal was fair to the ward and the trustee acted in good faith. Chapter 22 develops the fiduciary-loyalty rules whose breach triggers this remedy.

The modern American constructive-trust doctrine, as restated in the Restatement (Third) of Restitution and Unjust Enrichment § 55, treats unjust enrichment as the general basis for the remedy. The constructive trust arises where the defendant has been unjustly enriched at the plaintiff's expense in a manner that a property remedy — as against a money judgment — is necessary or appropriate to redress. The classical categories (fraud, undue influence, breach of fiduciary duty) are instances of the general principle rather than a closed list.

The elements of a constructive-trust claim, on the Restatement (Third) analysis, are: (i) an equitable claim by the plaintiff — a claim arising from breach of fiduciary duty, fraud, mistake, duress, undue influence, or another ground of restitutionary liability; (ii) identifiable property (or its traceable substitutes) in the defendant's hands to which the plaintiff's claim can be attached; and (iii) circumstances making retention by the defendant inequitable. Restatement (Third) of Restitution § 55; Scott & Ascher §§ 39.1–39.6.

The mutual-mistake constructive trust is a representative modern extension. Where property has been transferred under a mutual mistake as to a basic assumption of the transaction, the transferee holds the property on constructive trust for the transferor. Restatement (Third) of Restitution § 5. Simonds v. Simonds, 45 N.Y.2d 233 (1978), extends the doctrine further outside the traditional categories: a first wife whose promised interest in her husband's life-insurance policies was defeated by the husband's later change of beneficiary was held entitled to a constructive trust on the proceeds against the second wife, on grounds of unjust enrichment. Simonds is a leading American authority for the proposition that unjust enrichment supplies a general predicate reaching beyond the traditional categories.

Modern American case law has extended the constructive trust to a wide range of circumstances: misappropriated corporate opportunities, misappropriated ideas, breach of confidential relationships, and property acquired through fraud on the elderly or infirm. Restatement (Third) of Restitution collects the modern American case law comprehensively. Constructive trusts may be imposed on real property notwithstanding the Statute of Frauds and on personal property notwithstanding rules against parol trusts; because the constructive trust arises by operation of law to prevent unjust enrichment, no writing is required. Restatement (Third) of Trusts § 20 cmt. a.

The constructive-trust remedy is enforced by tracing and following the property in the defendant's hands and in the hands of those who took from the defendant with notice or without value. Restatement (Third) of Restitution §§ 58, 59. The plaintiff must show that the specific property held by the defendant is identifiable to the plaintiff's original claim; equitable tracing rules extend the plaintiff's reach through substitutions, commingling, and (up to a limit) hostile hands.

The Restatement (Third) of Restitution distinguishes tracing (the process of identifying the plaintiff's property as it moves through substitutions) from following (the process of identifying the property as it moves through hands). Both are essential to the operation of the remedy. Where the defendant has commingled the plaintiff's property with the defendant's own, equitable tracing rules apply: the lowest-intermediate-balance rule (a commingled account is treated as containing the plaintiff's property up to the account's lowest balance since commingling); the presumption that a wrongdoer draws first from wrongdoer's own funds (Restatement (Third) of Restitution § 59); the pari passu rule for competing claims among innocent commingled contributors; and the option, at the plaintiff's election, to trace into property acquired with commingled funds or to claim a proportionate share of the residue. Restatement (Third) of Restitution §§ 58–59 collect the American rules; Foskett v. McKeown, [2001] 1 A.C. 102 (H.L.), is the leading modern English case and articulates the same fundamental principles in the Commonwealth setting.

The plaintiff who traces successfully may elect the property or its proceeds. Where the substitute has appreciated, the plaintiff captures the appreciation; where it has depreciated, the plaintiff may claim an equitable lien on the substitute for the value of the original, with a money claim against the defendant for the shortfall. Restatement (Third) of Restitution § 55 cmt. c. This election is one of the constructive trust's principal practical advantages over a money judgment and is treated at doctrinal depth in Volume II.

Priority in the defendant's insolvency is the constructive trust's most consequential practical feature. Where the trust is imposed on identifiable property (or its traceable substitutes), the plaintiff recovers the property in specie, ahead of the defendant's unsecured creditors. Bankruptcy Code § 541(d) recognizes pre-petition constructive trusts, though the doctrinal treatment varies among circuits; the Second, Fifth, and Ninth Circuits recognize constructive trusts imposed pre-petition, while the Seventh Circuit is more skeptical. The bona-fide-purchaser rule cuts off the constructive-trust claim as against the purchaser (Restatement (Third) of Restitution § 66); the plaintiff's remedy is then reduced to a money claim against the defendant and against any traceable proceeds.

The Restatement (Third) of Restitution and Unjust Enrichment adopts a broad, general unjust-enrichment approach to the constructive trust. Commonwealth doctrine remains more categorical, treating specific triggers (breach of fiduciary duty, express intent to hold on trust, receipt of property with notice) as the doctrinal cores and applying the doctrine more sparingly outside those cores. The divergence has been the subject of substantial comparative literature and is important for comparative work; it is reserved for detailed treatment in a comparative volume.

The United States and Commonwealth doctrines on constructive trusts have diverged in modern practice. American doctrine, particularly under the Restatement (Third) of Restitution, treats the constructive trust as a restitutionary remedy applied broadly wherever unjust enrichment can be shown. Commonwealth doctrine — as in English, Australian, Canadian, and New Zealand cases — has retained a narrower conception, treating the constructive trust as tied more closely to specific traditional categories and resisting a general remedial constructive trust for unjust enrichment. Australian law, following Muschinski v. Dodds (1985) 160 C.L.R. 583, and Canadian law, following Pettkus v. Becker, [1980] 2 S.C.R. 834, have accepted a modest form of the remedial constructive trust; English law, following Westdeutsche Landesbank v. Islington L.B.C., [1996] A.C. 669, remains the most cautious.

1. The constructive trust is a device by which the holder of legal title is treated as trustee for a person unjustly deprived. Restatement (Third) of Restitution § 55.
2. American doctrine treats it primarily as a remedy; Commonwealth doctrine treats it more as a substantive institution. The characterization affects the date of imposition and the treatment of intervening interests.
3. The classical triggers are fraud, undue influence, duress, and breach of fiduciary duty (Restatement §§ 13–15, 43); the modern American doctrine generalizes to unjust enrichment (§ 55).
4. Tracing and following (Restatement §§ 58–59; Foskett v. McKeown) enforce the constructive-trust remedy against the defendant and persons taking with notice or without value; the bona-fide-purchaser rule cuts off the claim (§ 66).
5. The remedy's proprietary character gives priority in the defendant's insolvency (11 U.S.C. § 541(d)) and permits capture of appreciated substitutes; U.S. and Commonwealth doctrine diverge on the breadth and analytic structure of the doctrine.

• Restatement (Third) of Restitution and Unjust Enrichment §§ 5, 13–15, 43, 55, 58, 59, 66
• Restatement (Third) of Trusts §§ 7, 20 cmt. a, 78
• 11 U.S.C. § 541(d)
• Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378 (1919)
• Latham v. Father Divine, 299 N.Y. 22, 85 N.E.2d 168 (1949)
• Simonds v. Simonds, 45 N.Y.2d 233, 380 N.E.2d 189 (1978)
• Foskett v. McKeown, [2001] 1 A.C. 102 (H.L.)
• Keech v. Sandford, Sel. Cas. Ch. 61 (1726)
• Muschinski v. Dodds (1985) 160 C.L.R. 583; Pettkus v. Becker, [1980] 2 S.C.R. 834; Westdeutsche Landesbank v. Islington L.B.C., [1996] A.C. 669

• Scott & Ascher, The Law of Trusts (5th ed.) §§ 39.1–39.6
• Bogert, Bogert & Hess, The Law of Trusts and Trustees (3d ed.) §§ 471–479
• Palmer, The Law of Restitution (1978), ch. 2

Backward, within Volume I.

• §21.01–21.02 → Chapter 3 (Equitable Foundations of the Trust)
• §21.04 → Chapter 9 (Manifestation of Intent); Chapter 15 (Secret and Semi-Secret Trusts)
• §21.03 → Chapter 20 (Resulting Trusts)

Forward, within Volume I.

• §21.05 → Chapter 22 (The Trust–Fiduciary Relationship; loyalty as constructive-trust predicate)

Forward, to Volume II. Operational tracing rules, treatment of commingled funds, priority in insolvency and the bankruptcy estate under 11 U.S.C. § 541(d), the bona fide purchaser defense, equitable liens, subrogation, and the interaction with statutes of limitation.

Chapter 21 closes Part Seven. The reader now has both the express-trust classificatory framework (Chapters 16–19) and the non-express foundational categories (Chapters 20–21). Part Eight takes up the trust–fiduciary interface: the trust as the paradigmatic fiduciary relationship and the broader family of fiduciary institutions that Volume II and later volumes develop.