A mid-term trust is declared void ab initio by the court of equity: what now happens to the property? | Charles E. Rounds, Jr. – Suffolk University School of Law
Suppose an irrevocable living trust has been in existence for some time now, it has at least the outward appearances of a trust. It was apparently created not by declaration but by a transfer of ownership from the settlor to someone other than the settlor. Finding that the owner had been induced, for example, by fraud to make the transfer, the court of equity declares the trust void at the time of the transfer. What then is the fate of the property currently in the hands of the assignee?
First, let us say that a trust, qua trust, is not a contract, the first being a creature of equity, the second a creature of law. Most trusts in the non-commercial space will arise via a gifted transfer rather than a counterparty exchange. A person can acquire enforceable equitable property rights in a relationship of trust, even if he lacks jurisdiction, whether due to minority, mental incapacity or non-existence. current, to contract. A trust must not fail for lack of a trustee. We could go on and on. The relationship of trust is sui generis. See generally §8.22 of Loring and Rounds: A Trustee’s Handbook (2022) for more on why this is the case.
Thus, the fate of property in the hands of the assignee-who-was-never-a-trustee is in the hands of equity, which has been dealing with such situations for centuries. See §8.15.78 of the Manual (2022). Here we have a clear case of unjust enrichment. The beneficiaries of the transfer of property, whether innocent or not, have been unjustly enriched by the fraud. The property in question must be secure for victims of fraud. This is where constructive trust comes from. The court of equity makes an order, personal to the assignee, that he/she is now a constructive trustee of the property. The practical consequence of imposing a constructive trust is that the property is now frozen in place. The court of equity then issues a specific performance restitution order in person to the interpretative trustee to transfer legal title to the assignor, its personal representative, or whoever is now legally entitled to title.
Now, one wonders what the state of legal title was then between the event of unjust enrichment and the issuance of the restitution order. This same issue is dealt with in §3.3 of the Handbook (2022), the relevant part of which is presented in the appendix below. The handbook is available for purchase at: https://law-store.wolterskluwer.com/s/product/loring-rounds-a-trustees-handbook-2022e-misb/01t4R00000OVWE4QAP.
There are consequences to the marginalization of all this critical fairness doctrine by law schools. Consider the recent case of Regan Stempniewicz Barbetti & another v Edward Stempniewicz, 189 NE3d 264 (Mass. 2022). Applying contract law by analogy, the Massachusetts Supreme Judicial Court, in a case involving an inter vivos trust that had been found void ab initio, effectively challenged the trial court’s imposition of a constructive trust. on the orphan property, although the cancellation itself was maintained.
Court rationale: “When a trust is declared void ab initio, or void from the beginning, the courts act as if the trust never existed. See Massachusetts Mun. Big Electr. Co., 411 Mass at 55 (where the contract is void ab initio, “the courts treat the contract as if it had never been made”). The assets transferred to the trust are therefore returned to the sources from which they came, as if the transfer of these assets to the trust had never taken place in the first place…Cf. Services Employees Int’l Union, Local 509 v. Department of Mental Health (476 Mass. 51, 58 (2016) (where privatization contracts were void ab initio, renewal contracts based on them were also void ab initio)…”
Yes, but a trust, as a trust, is sui generis, it is not a type of contract. Equity has a box of procedural tools it has developed over time to get title to property through the hands of victims of unjust enrichment, or into the hands of their heirs. See §8.15.77 of the Manual (2022). Constructive trust is an indispensable tool in this toolbox in that it makes it easier to secure property for these victims. See generally §22.214.171.124.6 of the Handbook (2022). It also facilitates the orderly administration of justice in such situations. See §126.96.36.199.8 of the Handbook (2022). The maxim “equity considers as done what must be done” does not at most say everything. “When something should be done but has not been done, a court of equity, far from deeming it to have been done, proceeds to order it to be done.” 1 Scott on Trusts §131 (1939).