Trustees behaving badly

From time to time we publish summaries of interesting trust and estate cases.

In today’s post we discuss a recent Oregon Appeals Court case that addressed the availability of a constructive trust to remedy a breach of duty by a successor trustee. The case is a good illustration of the legal remedies available to beneficiaries who pursue claims against trustees behaving badly.

Olson v. Howard, 237 Or App 256, 239 P.3d 510, (2010)

Background: Plaintiff, the beneficiary of a trust, brought an action against the trustee and the purchaser of land from the trust, alleging that the purchase was the result of self-dealing by the trustee. The settlor of the trust had named himself trustee and appointed Howard as successor trustee. Howard, purporting to act as successor trustee, sold the property to his son, the defendant, for $55,000. Plaintiff contended that the fair market value of the property was actually $122,760. Moreover, defendant borrowed the money to purchase the property from his father, Howard. Seven years after the sale, plaintiff filed claims against both defendant and Howard, alleging that Howard acted unlawfully when he essentially sold the trust property to himself for grossly inadequate consideration, and that defendant knowingly and willfully acted as a strawman in the transaction. Plaintiff then sought return of the property to the trust, a resale of the land, and distribution of the proceeds of that sale to the trust beneficiaries. The trial court dismissed the case after finding that plaintiff failed to provide an “objectively reasonable” basis for his claim. 


Holding: The trial court erred in determining that plaintiff’s contentions were devoid of factual and legal support. Plaintiff’s claim sought the imposition of a constructive trust, which would be available to him upon showing that the defendant possessed property that should belong to the trust as a result of the property being transferred without authority, by a self-interested party, and without sufficient consideration. Moreover, the fact that plaintiff had signed a release as a trust beneficiary relinquishing all claims against the trustee or trust did not prohibit his claim, as the release did not bar claims against the defendant. The case was remanded to the lower court.

Claims Against the Estate: Oregon public policy favors constructive trust

From time to time we publish summaries of interesting trust and estate related cases:

McIntire v. Lang, Oregon Court of Appeals, March 16, 2011

Prior to her death, McIntire and her ex-husband entered into a stipulated dissolution judgment, the terms of which stated each party must immediately purchase a life insurance policy on his or her life in the amount of $250,000 and name the other party as trustee for the benefit of their child and for the purpose of securing the payment of their support obligations. The judgment further stated that, in the event that either party violated the insurance provision, a constructive trust would be imposed over that party’s estate. McIntire obtained an insurance policy shortly after the judgment; however, she later allowed the policy to lapse. McIntire died without a will, and under the laws of intestate succession, her surviving husband was to inherit 50% of her estate, and her two children were each to inherit 25%.

The respondent, McIntire’s ex-husband, notified McIntire’s personal representative that he had a $250,000 claim against the estate based upon the dissolution judgment. The petitioner, McIntire’s surviving husband, objected to the respondent’s claim, arguing that under the terms of the dissolution judgment, McIntire was required to buy life insurance only “for the purpose of securing the payment of support obligations.” Because the judgment did not provide for child or spousal support, he asserted that there were no support obligations to secure, and thus McIntire was not required to obtain the insurance. The lower court issued a limited judgment in favor of the respondent and imposed a constructive trust over the assets of McIntire’s estate in order to secure payment of the life insurance obligation.

On appeal, the petitioner assigned error to the probate court’s imposition of a constructive trust on the basis that the respondent lacked a property interest in McIntire’s estate because the dissolution judgment did not require McIntire to obtain life insurance. The court began by recognizing that, when a constructive trust is imposed, the doctrine of unjust enrichment governs the rights of the parties, and order to prevail on this type of claim, a party seeking a constructive trust must show that: 1) a property interest rightfully belonging to him was taken by someone else under circumstances that were wrongful or inequitable, 2) the person who now possesses the property is not a bona fide purchaser for value without notice of the claimant’s interest in the property, and 3) the property in the hands of the person is the very property that belongs to the claimant or is a substitute for that property.

The first issue the court considered was whether the respondent had a property interest in McIntire’s estate. Prior case law had already established that, when a settlement agreement incorporated in a dissolution judgment provides for a constructive trust in the event that one of the parties fails to abide by an obligation to maintain life insurance naming the other party as the beneficiary, the agreement vests a property interest in the object of the constructive trust to the other party. Based on this prior ruling, McIntire’s estate was one of the objects of the constructive trust.

The remaining issue was whether the dissolution judgment obligated McIntire to obtain life insurance. According to the court, the insurance requirement was not intended to secure support obligations imposed in the dissolution judgment, but rather to secure the general obligation that all parents have to their children. In support of this determination was the fact that the judgment specifically provided that neither party would pay child or spousal support, and thus the insurance provision would have no effect if interpreted to secure only payment of support ordered in the judgment.

Finally, the petitioner argued that the respondent had failed to protect his rights, as he did not comply with the terms of the dissolution judgment, which required that he deliver a copy of the judgment to the insurance company that issued McIntyre’s policy. The court determined that, while “equity does not favor those who sleep on their rights,” this equitable defense did not apply, as it was contrary to public policy. That is, Oregon law furthers a policy of ensuring that divorced parents provide financial support for their minor children. It would be contrary to public policy to refuse to enforce a dissolution judgment in this circumstance.