Summary of a Recent
Judicial Development in
Estate Planning & Taxation

Reversal of Court Order Imposing Constructive Trust
and Awarding Sanctions

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Rawlings v. Rawlings, 200 P.3d 662 (Utah Ct. App. 2008), the Utah Court of Appeals held that the district court erred in imposing an equitable constructive trust on farm property because a grantor had not intended to create an express trust and the grantees had not committed a wrongful act. It also held that the district court erred in imposing sanctions on the grantees for lack of good faith in mediation because the Utah rules governing mediation only provided for sanctions in the event that a party failed to appear at the mediation conference.

Background

A grantor transferred title to his farm to his oldest son and the son's wife in 1967, believing that if he held title to the farm he would be unable to obtain state-provided cancer treatments. Id. at 664. The grantor and his wife continued to live and work on the farm until their death as if no transfer had occurred. Id. In 1993, the grantees asserted that they owned the farm free and clear and were not holding it in trust for the other siblings, and the siblings brought suit against the grantees in their individual capacities and as trustees of an alleged trust, asserting a constructive trust over the farm property. Id. The district court ordered the parties to mediate their disputes, but the grantees informed the siblings before mediation that they had no intent of considering any settlement of the matter, and later told the mediator the same thing. Id. at 665. The siblings sought sanctions against the grantees, alleging that they did not participate in mediation in good faith, and the district court agreed and ordered the grantees to pay the mediation costs. Id. The court also imposed a constructive trust, holding that it could impose a trust relying solely on equitable principles and without regard to the grantor's intent or relationship to the grantees, and the grantees appealed. Id.

Arguments

The grantees argued that no trust was created unless the grantor intended to transfer the farm property into trust and he and the grantees were in a confidential relationship at the time of the transfer. Id. at 665-66. They also argued that the district court erred when it imposed sanctions against them based on their alleged lack of good faith participation in court-ordered mediation. Id. at 666.

The siblings argued that the district court could simply employ its equitable powers to impose a constructive trust if it felt the circumstances warranted it. Id.

Analysis and Holdings

Constructive trust
The court explained that courts have the power to impose an equitable constructive trust where there has been: (1) a wrongful act, (2) unjust enrichment, and (3) specific property that can be traced to the wrongful behavior. Id. The problem with the siblings' argument was that the only wrongful act they alleged was the grantees' failure to comply with the grantor's expressed intentions at the time of the transfer; therefore, in order for the grantees' conduct to have been wrongful, the grantor would have needed to express his intent to transfer the farm property into trust (i.e., attempted to create an express trust), which would trigger the application of the various legal rules governing the creation and enforcement of express trusts. Id. Thus there were two possible outcomes- the grantees acted in violation of the grantor's expressed intent (thereby implicating the law of express trusts), or they committed no wrongful act at all-and either possibility precluded the imposition of an equitable constructive trust. Id. at 667. The court concluded that there was no enforceable unwritten express trust because there was no indication of the grantor's manifestation of intent to create one. Id. at 667-68.

Lack of good faith participation in mediation
Utah R. Ct. ADR 101(c), which provides the circumstances under which sanctions may be imposed against a party, states that "[u]pon written recommendation by the mediator or motion by any party, the court may order absent parties to show cause why they failed to attend the mediation conference and, if appropriate, why sanctions should not be imposed." Id. at 669. The court noted that the rule contemplates sanctions only when a party fails to attend a mediation conference, not when a party's actions at the conference fail to lead to a settlement. Id. The court also disagreed that the grantees acted in bad faith, and stated, "it appears that they merely held a firm belief, vindicated by our decision today, in the validity of their claims such that they had no interest in a compromised settlement." Id. The court therefore quashed the sanctions imposed on the grantees and ordered all parties to bear their own costs arising from the mediation. Id. at 669-70.

The case was decided on December 26, 2008.