Constructive trusts are sometimes used by a court to impose a remedy for a party who was deprived of their rights to property via the wrongful or fraudulent conduct of a third party. This is an equitable remedy created through the common law to make the situation right, as though the wrongful conduct had not occured.

What is a ‘Constructive Trust’?

A constructive trust is defined as a trust created by law, which deems that the party who obtained the property through improper means held the property in trust for the rightful owner of the property. Therefore, the property should be returned to the rightful owner in order to make them whole again.

When can a Court Impose a Constructive Trust? 

The four conditions required to be met before a court can impose a constructive trust are as follows:

1.  There must be an equitable obligation on the defendant of the type that the courts of equity have typically enforced, related to the defendant’s behaviour which led to the property being owned by them;
2. The property must have been received by the defendant through their deemed, or actual, behaviour or actions which are a breach of those equitable obligations (such as a breach of fiduciary duty); 
3. The plaintiff must also demonstrate a good reason for seeking a proprietary or ownership remedy. This can be a personal reason or to deter others from breaching their equitable obligations; and,
4. There cannot be any factual circumstances that would lead to the imposition of a trust being unjust under the circumstances. This would include the position of any other claimants to the money.

Business Partner Breaches Fiduciary Duty

The Ontario Court of Appeal (ONCA) recently decided an appeal from the imposition of a constructive trust.

Two men owned and operated a dairy farm together as equal partners. In 1995 they incorporated their business. They were equal shareholders, both were directors and officers. They made the wife of one partner the Treasurer. The value of the enterprise was just under $200,000. One partner was a retired dentist and businessman. The other was a dairy farmer with a grade ten education.

The company did well. In 1999 the milk quota was sold for over 1 million dollars. The proceeds of the sale were used to buy more land (25,000 acres) known as the Boundary Lake Property. 

The ownership of the land, however, was placed into an investment company owned solely by the Treasurer wife. This was explained to the excluded partner as being the result of their mutual company owing him personally in excess of what the quota was sold for. He had set off the debts with the purchase of the property, and “loaned” the property to his wife’s company.

To back up his claim that the company owed him money in excess of the value of the milk quota, the partner produced a promissory note payable to him personally from the dairy enterprise. He also produced an assistant who testified that the note was in fact signed by both parties. The other partner denied he had signed such a note.

Constructive Trust was Appropriate Remedy: Court of Appeal

The constructive trust was properly granted.

In the first place, the property was clearly an identifiable asset, having been purchased with corporate funds of the dairy company. Secondly, the imposition of a constructive trust did not prejudice the wife’s investment company. When the property is sold, her company will receive its proportionate share of the proceeds based on its contributions to acquiring or maintaining the property.

Thirdly, there was no windfall for the excluded partner as a result of imposing the trust. The claim was by and for the dairy company, and the excluded partner would receive no more than the fair market value of his shares in the company.

Finally, the court agreed with the trial judge that a monetary damage award was not the appropriate remedy in these circumstances. Such orders are appropriate when dealing with the goal of deterring others and ensuring that all fiduciaries remain observation of their obligations.

At Milosevic & Associates, our team of Toronto corporate commercial lawyers regularly represent clients in commercial litigation matters including partnership and shareholder disputes. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself.  Call us at 416-916-1387 or contact us online to schedule a consultation.