Is Homestead Subject To A Constructive Trust Remedy?
A man is appointed trustee of a trust for the benefit of himself and another, younger beneficiary. The trust agreement provides that the trustee should use the assets for his own benefit only if his other resources are depleted. Nevertheless, at a time when the trustee has significant other financial resources he uses the trust assets to purchase a primary residence in California for himself and his spouse, as joint owners with survivorship. The trustee dies. Title to the home passes to the surviving spouse. The surviving spouse sells the home, moves to Florida, and invests the proceeds in a Florida homestead. The other beneficiary sues to recover proceeds invested in the California house. A California court finds that the trustee wrongfully appopriated trust property in violation of California statutes and his general fiduciary duty, and as remedy, holds that the surviving spouse holds her Florida house in a constructive trust for the surviving beneficiary. Can the beneficiary enforce the California court order in Florida so as to force conveyance of the spouse's Florida homestead to the California beneficiary?
This is a complicated and interesting question which I have just begun to research. Generally, a California court cannot determine title to Florida property. On the other hand, Florida courts have found that imposition of a constructive trust is not the same as determining title ownership such as the case in a quiet title action. A constructive trust is an equitable remedy to make right what is otherwise inequitable. The other issue is whether a California court, or a Florida court, could impose a constructive trust on a Florida homestead to remedy the deceased's trustee's wrongdoing. The Florida Supreme Court has held that a court can place an equitable lien on a homestead to remedy a fraud or other egregious circumstance. However, an equitable lien is similar to , yet different from a constructive trust. A constructive trust calls for the immediate transfer of title back to the complainant, whereas an equitable lien does not give the complainant the right to force a sale or conveyance. The Trustee's breach of his fiduciary duty is not the same as common law fraud, and there is no case in Florida holding that breach of duty calls for an equitable remedy against homestead property. Also, one Florida case says that a constructive trust cannot be placed on a house unless there was fraud by the beneficiary of the homestead protection, in this case, the innocent surviving spouse.
As of know, I think the Florida homestead would survive absent showing of fraud or other really bad facts in the California case.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
The following Florida bankruptcy case may be of some interest re: constructive trusts in the Florida Homestead context:
Kozyak v. Levy (In re Fin. Federated Title & Trust, Inc.), 273 B.R. 706 (S.D. Fla. 2001).
I've copied & pasted the following excerpt from the above case that might be interesting:
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(beginning of excerpt)
F. Imposition of a Constructive Trust
[HN19] The doctrine of constructive trusts is a recognized tool of equity designed in certain situations to right a wrong committed and to prevent unjust enrichment of one person at the expense of [*718] another either as a result of fraud, undue influence, abuse of confidence or mistake in the transaction. In re Powe, 75 B.R. 387, 393 (Bankr. M.D. Fla. 1987). In In re First Fidelity Fin. Serv., Inc., [**30] 36 B.R. 508 (Bankr. S.D. Fla. 1983), the Bankruptcy Court held that:
[HN20] The reason for imposing a constructive trust is to avoid unjust enrichment to the recipient of the windfall, and to do equity for the party whose property has been misused. But a desire to do equity alone is not enough. The essence of the equitable remedy of imposing a constructive trust, as opposed to the legal remedy of damages, is the concept that the very property in question can be returned to its rightful owner. The law gradually broadened so that the proceeds of the original property may be pursued, but the basic requirement of tracing the original property, albeit in its various forms, remains an element of proof for constructive trusts.
Id. at 511 (citation omitted).
[HN21] Before one can successfully impress a constructive trust, there must be an identifiable res on which the trust can be impressed. If the original res no longer remains, but is transformed into a different form, it is the burden of the party seeking to impress a constructive trust to trace the property to specific funds before it can prevail. In re Powe, 75 B.R. at 393. Traceable proceeds from prior [**31] fraudulent transfers, which are used to acquire a homestead, may also be subject to a constructive trust. In re Lapes, 254 B.R. 501 (S.D. Fla. 2000).
Despite the Defendants' conversion of the fraudulently obtained funds into the El Caballo Property, Kozyak can nonetheless trace the amount he seeks in order to impose a constructive trust on this property.
In In re Mart, 106 B.R. 309 (Bankr. S.D. Fla. 1989) Judge Britton had before him a creditor's attempt to impose a constructive trust upon homestead property. In analyzing the legal principles applicable to the case Judge Britton stated:
I agree with Chicago Title that if it had proved that these properties were financed to any significant extent with money traceable to the funds embezzled by [the Debtor's brother] and if it had proved that [the Debtor] furnished no consideration for those funds . . . a resulting trust would be appropriate.
Id. at 311 (emphasis added).
Although Judge Britton ultimately determined that the debtor in Mart proved that the funds to purchase the property came from an independent third source unrelated to the debtor or the debtor's [**32] brother, his statement regarding the tracing of the funds is applicable here. Kozyak can trace directly or indirectly over 90% of the funds used to purchase the El Caballo Property to the Debtor's fraud. Clearly, all but a fraction of the funds First R&R used to purchase the El Caballo Property originated with the Debtor. It is undisputed that the vast majority of the funds transferred to R&R and U.S. Benefits originated with the Debtor. As all of the elements necessary to establish a constructive trust are present in this case, Kozyak is entitled to the imposition of a constructive trust on the El Caballo Property.
(end of excerpt)
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The above case was affirmed, per curiam, by Court of Appeals at:
Levy v. Kozyak (In re Fin. Federated Title & Trust), 347 F.3d 880 (CA-11, 2003)
The appellate court did not issue an original opinion, rather, it expressly adopted the Bankruptcy court decision, in its entirety, as its decision.
P.S. I recognize that this case is not a case that was decided by a Florida state court and accordingly, not binding precedent in a Florida state court; if there is a Florida Supreme Ct case or a Florida DCA case saying differently, a decision by said courts probably would constitute the binding precedent.