INVOLUNTARY TRUSTS AND LIENS
[The following article was excerpted from John T. Blanchard's law school textbook,
California Remedies: Commentary, Materials and Problems (3d ed. ©1997)]
The general concept of involuntary trusts - that a wrongdoer should be
forced to disgorge "unjust enrichment" - is quite simple. However, the
application of this seemingly simple principle can be very elusive in
practice. Understanding basic nomenclature is essential to comprehending
the theoretical complexity of these remedies.
"Understanding basic nomenclature is essential to comprehending
the theoretical complexity of these remedies."
To begin with, there are two types of "trusts", voluntary and involuntary. Voluntary trusts are commonly used in modern estate planning; they are not considered in this article (other than to the extent they supply - perhaps unfortunately - other terms used regarding involuntary trusts). Similarly, there are two types of "involuntary trusts": "constructive" and "resulting". Actually, the historic background of these related remedies was the other way around; the terms "constructive trust" and "resulting trust" were in common use long before the "catch-all" term "involuntary trust" came into common use to cover both of the previous terms. Indeed, the term "involuntary trust" came into common use precisely because if was so difficult to distinguish between "constructive trusts" and "resulting trusts". The theoretical distinction between the two trusts is simple. A "constructive trust" is a judicially imposed remedy for a tortfeasor's exercise of control over another's property; that is, it is imposed notwithstanding the absence of an intent to create a trust relationship. A "resulting trust" is ordered to enforce an intent (albeit often judicially inferred) on the part of the person exercising control over another's property to do so for the benefit of (that is, in trust for) the other party; that is, equity imposes it to enforce what has been found to be prior, but actual, intent.
As is the case with voluntary trusts, the person who exercises control over another's property is commonly known as the "trustee" (often as "involuntary trustee" or the "constructive trustee"). The person for whom the property is held is known as the "trustor". The property is often known as the "res". As comforting as the linguistic parallels between voluntary and involuntary trusts may seem initially, those same parallels are misleading because a "constructive trust" is not a trust at all; instead, it is only an equitable remedy. Because it is imposed in spite of, rather than because of, the trustor's intent, it cannot, by definition, be a true trust. Because in theory a resulting trust does enforce a judicially inferred intent (often in the face of vigorous denials of such inferred intent by the trustee), a resulting trust is closer to being a true trust.
"These remedies are, of course, imposed only in cases of 'unjust
enrichment.' Thus, both presuppose - and, therefore, have as
their initial element - an act of wrongdoing."
These remedies are, of course, imposed only in cases of "unjust enrichment". Thus, both presuppose - and, therefore, have as their initial element - an act of wrongdoing. The wrongful act underlying a constructive trust is always a tort. The tort is often a variety of fraud (including Breach of Fiduciary Duty a.k.a. Constructive Fraud). However, the underlying tort can almost always be characterized as a Conversion. A criminal is surely guilty of a civil Conversion when stealing another's property; though less commonly known, a person who comes into possession legally (by permission, entrustment, etc.) but who refuses to relinquish possession after demand for return of the property has also committed a Conversion; the refusal to comply with a proper demand is the wrongful act.
The wrongful act underlying a resulting trust is more difficult. It is often said, consonant with its fundamental (intent enforcing) thesis, that the underlying act of misconduct supporting a resulting trust is a Breach of Contract (e.g., a failure to comply with prior contractual -- express or implied -- promises). The practical problem with this formulation is that the step from a breached promise to a "false promise" (a variety of fraud, a tortclaim) or a "fraudulent inducement" of entry into the contract is very small. Thus, the same set of circumstances could, and often did, lead courts to construe virtually identical fact patterns as either constructive trusts (taking the tortclaim view) or resulting trusts (taking the breach of implied contract view). This led to understandable confusion as to which was which and, ultimately, led to the consolidated term, "involuntary trust". Unfortunately, this commonsensical merger did not come until many cases using the older terms were already a part of California jurisprudence. Thus, it is necessary to understand the differences in order to understand prior precedent.
Having noted that an act of misconduct underlies both varieties of involuntary trust, the next step is the definition of the relief available under these remedies. In general, the beneficiary (who is often the trustor, too) may seek enforcement of a trust in either  the original "res" of the trust and/or the "fruit" or "product" of the trust property or  by personal judgment against the trustee for the value of the "res". The relief is usually optional, with the claimant-beneficiary having the right to determine which of the optional remedies will be enforced. However, the beneficiary may not proceed against the trust property or its product if the original property (and any "product", profit or other gain derived from, for example, investment of the original property) cannot be "traced" to the existing property on which the trust is sought. Where a trustee, in violation of is "trust" duties, invests the trust property or its proceeds in any other property, and the beneficiary-claimant is able to "trace" the original "res" to its current state, the claimant may elect either to hold the substituted property subject to the trust or to hold the trustee personally liable (that is, to obtain a personal Judgment against the trustee). However, if the original "res" has been invested, commingled with other (non-trust) property, or otherwise transformed so that "tracing" is not possible, the claimant cannot elect to impose a trust on specific property (because the inability to "trace" means, by definition, that the court would be unable to determine which specific property is the trustee's and which is the product of the trust property). Under such circumstances the claimant is not left without a remedy; however, such a claimant's remedy is limited to the second of the two options: seeking a personal Judgment against the trustee.
The ability to "trace" the trust property from its original form to its
present form is assisted by what are commonly known as tracing "fictions".
Use of the term "fictions" is unfortunate because it indicates that they
are something different from, not connected to, any other principles of
law. They are nothing of the sort. Instead, they are generally presumptions
- a well known legal concept - based on such "maxims of jurisprudence" as
"[P]rivate transactions are fair and regular" [Civil Code § 3545], "[T]he
law has been obeyed" [Civil Code § 3548] and simple common sense. In short,
laughable as many such maxims surely are when not considered in context,
they embody the notion that if a plaintiff claims actionable damage or
loss the plaintiff must prove that claim, it will not be assumed. Thus,
for example, if the "trust" was formed by accident, mistake or other
non-willful tortious conduct, the trustee is solvent, has commingled trust assets (usually money) with personal assets, and has invested a part of the commingled, fungible fund in a venture, it is presumed that the trustee invested the trustee's own money; that is, if the trustee's conduct is not willfully tortious (for example, the trustee had a good faith, but mistaken, belief that he was entitled to control the trust property), the trustee's secondary wrongdoing (investing trust funds in another venture) is not presumed. Of course, if the trustee has been demonstrated to have been engaged in intentionally tortious conduct then there is no reason to shield such a person with a presumption of proper conduct (after such a trustee's primary, and intentional, wrongdoing, e.g., commingling trust funds and personal funds).
"Use of the term 'fictions' is unfortunate because it
indicates that they are something different from, not
connected to, any other principles of law."
Further, regardless of the nature or quality of the initial act of wrongdoing, if the trustee is insolvent it follows, as a matter of logic, that trust funds were invested in the secondary venture. The logic of the insolvent trustee situation is clear (there were at least two breaches of duty and the trust "res" was improperly invested in a subsequent venture). However, identification of the portion of whatever is left of the unsuccessful secondary investment (and to which the beneficiary-claimant is entitled) is not at all clear; moreover, there is no apparent reason to favor the beneficiary-claimant over the involuntary trustee's other creditors. Thus, in the insolvent trustee situation the beneficiary-claimant is still left only with a claim to a personal Judgment against the trustee, just like the trustee's other "creditors". The personal Judgment to which the claimant would be entitled is still termed a "Judgment Establishing and Enforcing Constructive Trust", but it is effectively a Money Judgment.