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Real Estate

Resulting and Constructive Trusts: A Case in Point

Constructive Trusts Without Unjust Enrichment

In a majority judgment in Soulos v. Korkontzilas, the Supreme Court of Canada noted that a constructive trust arose in the absence of a finding of unjust enrichment to the benefit of the appellant real estate broker. In 1984, Mr. Soulos selected a building where his banker was a tenant and asked Mr. Korkonztilas to enter into negotiations on his behalf.  The vendor rejected Mr. Soulos’ initial offer of $250,000 and instead, made and tendered a counter-offer of $275,000. Mr. Soulos rejected this offer, but “signed it back” with an offer of either $260,000 or $265,000. The vendor accepted the higher price of $265,000, which Mr. Korkonztilas did not convey to his client. The property was instead purchased for his wife under her maiden name where she later transferred it to her and her husband jointly. Mr. Korkontzilas, however, told Mr. Soulos to “forget about” the property as the vendor was no longer interested in selling and added that he would find him a better property. The matter came to light in 1987 when Mr. Soulos learned that Mr. Korkontzilas had purchased the property for himself . Thereafter, Mr. Soulos brought an action, alleging breach of fiduciary duty giving rise to a constructive trust.  As a further reason for his action, Mr. Soulos said that the property held a special value to him because his banker would be his tenant.  Since having one’s banker as a tenant was a source of prestige within the Greek community to which he belonged, Mr. Soulos wanted it desperately.

As the market value of the property had decreased from the time of the purchase by Mr. Koskontzilas, Mr. Soulos dropped his claim for damages at the trial. Though the judge found that the broker had breached a duty of loyalty to his client, he said that a constructive trust was not an appropriate remedy because the broker had not been “enriched”. This judgment was reversed by the Court of Appeal in a majority decision, and it was ordered that the property be conveyed to the client subject to appropriate adjustments. Then, Mr. Korkonztilas appealed the decision, which was rejected.

MacLaughlin J., writing for the majority of the Court dismissed the appeal and upheld the broader interpretation of unjust enrichment. He wrote in paragraph 14 that… “The other view, while not denying that the constructive trust may appropriately apply to prevent unjust enrichment, does not confine it to that role. On this view, the constructive trust may apply absent an established loss to condemn a wrongful act and maintain the integrity of the relationships of trust which underlie many of our industries and institutions.”

Therefore, according to the Court, the constructive trust not only remedies unjust enrichment, but holds persons in different situations to high standards of trust and probity. It also prevents them from retaining property which in “good conscience” they should not be permitted to retain. Under the broad concept of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment. As cases often involve both a wrongful act and unjust enrichment, constructive trusts could be imposed on either ground.  That is why the Court supporting the Court of Appeal stated in paragraph 50, “…a constructive trust is required in cases such as this to ensure that agents and others in positions of trust remain faithful to their duty of loyalty… If real estate agents are permitted to retain properties which they acquire for themselves in breach of a duty of loyalty to their clients provided they pay market value, the trust and confidence which underpin the institution of real estate brokerage will be undermined. The message will be clear: real estate agents may breach their duties to their clients and the courts will do nothing about it, unless the client can show that the real estate agent made a profit this will not do. Courts of equity have always been concerned to keep the person who acts on behalf of others to his ethical mark; this Court should continue in the same path.”

The Court found that Mr. Korkontzilas’ breach of his duty of loyalty is grave enough to bestir the conscience of the court and points to a constructive trust. By using information obtained on his client’s behalf to purchase the property instead for himself, he committed a “flagrant and inexcusable breach” of his equitable duty of loyalty.

Summing Up

The case histories discussed earlier and the one to follow, clearly show that registered ownership would not always mean beneficial ownership. The legal counsellor acting for either transferor or transferee could be required to give evidence to rebut a presumption and answer queries, like, was the transfer a gift, the reasons for the transfer and so on. While acting on a transfer between husband and wife, parent and child, or siblings, it is imperative that the client is aware of the rights, obligations and the effects of the transfer. It is also necessary to take into account the client’s mental and even physical state of health along with the nature of the relationship between the client and the proposed transferee.

For more information about constructive and resulting trusts and how they may affect you, as well as the legal rights and responsibilities of trustees, contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario.