CONSTRUCTIVE TRUSTS
Another reason for your client to put that deal with his brother in writing
By J. Timothy Nardell
We all know that the statute of frauds requires that transactions involving real property must be in writing. But is that always so? Many lawyers, even many real estate practitioners, may be surprised to learn that oral agreements or implied agreements involving real property may be enforceable against a title holder as constructive or resulting trusts.
California law provides that a constructive trust is created where a defendant takes a property by fraud, accident, mistake, undue influence, the violation of a trust or other wrongful act. Civil Code §§ 2223, 2224. Courts have found that oral agreements or even implied agreements, under appropriate facts, may form the basis for the creation of a constructive trust for ownership of real property. “A constructive trust is a remedial device primarily created to prevent unjust enrichment; equity compels the restoration to another of property to which the holder thereof is not justly entitled.” Martin v. Kehl (1983) 145 Cal.App.3d 228, 237.
Furthermore, even where there is no fraud or wrongdoing, courts can enforce an oral or implied agreement regarding the ownership of real property under the resulting trust doctrine. A resulting trust arises “from a transfer of property under circumstances showing that the transferee was not intended to take the beneficial interest.” Lloyds Bank California v. Wells Fargo Bank (1986) 187 Cal.App.3d 1038, 1042. A resulting trust can defeat record title, and an oral or implied agreement may be enough to demonstrate the existence of a resulting trust. For instance, in one classic case, the court allowed a father to reclaim ownership of a house against his adult children who had purchased the property out of foreclosure. The court disregarded the children’s title and testimony that they owned the house, and found that the father’s testimony of ownership with evidence that the father continued to reside at the house and pay the mortgage, taxes, and insurance was enough to show that the children held title in trust for their father. Novak v. Novak (1967) 249 Cal.App.2d 438, at 441-43.
In places, like our fair county, where property values have quadrupled over the past twenty years, constructive trust claims can give rise to expensive litigation. I worked on one case where parents and their son agreed that the son had saved the family home out of foreclosure in the 1980’s, but memories and understanding of the ownership of the house differed radically from that point. The son understood that the house was his: He had the credit and came up with the down payment to buy the property out of foreclosure. The son allowed the parents to make the mortgage and tax payments directly, in lieu of rent, to protect their pride. The son had no intention to ever evict his parents as tenants, but he expected that when his parents died, he would keep the house himself. After all, he held title to the property in his own name, and had extended his credit over the years to keep the house. The parents understood that the house was theirs: The son had saved the house from foreclosure, sure, at a time when the parents were battling creditors and had to declare bankruptcy, but they remembered an oral agreement worked out at a coffee shop at the courthouse steps that the son would be the “owner in name only” on the title to protect the house from creditors. They did not think it was “fair” that their most successful son, who put down only a small down payment twenty years before, should reap the reward of all the equity that the parents “earned” over the years. The parents intended to leave the house to all of their children, as their inheritance.
Family members can live for decades with such diametrically opposed “understandings.” But flash forward 20 years, through multiple real estate booms and hazily recalled Thanksgiving dinner conversations, and you have all the ingredients for a messy constructive trust case. The parents sue their son and claim with straight faces that they paid the mortgage all these years with an understanding that their son was merely holding title of the house in trust for them. Notwithstanding the title, the parents claim that they are still the equitable owners of the property, which was, after all, “the family home.” It is, the parents contend, a textbook constructive trust case. The result, after significant attorneys’ fees are spent, is a settlement that satisfies no one and leaves scars on both sides.
So where is the practice point here? In today’s challenging real estate climate, we will see lots of families pulling together to protect their homes and investments from creditors. Oftentimes in such transactions, clients think that they can avoid the legal expense and embarrassment of putting deals with their family members in writing. But clients doing real estate transactions with anyone, even close family members, are well advised to put their agreements in writing. In the example above, a relatively small amount of money spent to prepare a simple loan agreement (from the parents’ perspective) or a rental agreement (from the son’s perspective) could have headed off misunderstandings, protected family relationships, and saved many thousands of dollars in litigation expenses down the road. Stories like these provide a strong incentive for clients to make smart investments in written agreements from the outset.
J. Timothy Nardell specializes in commercial and real estate litigation. He is a member of the law firm of Nardell Chitzaz & Alden LLP in San Rafael, CA.
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