The Difference Between a Constructive Trust and an Equitable Lien

By Erika Johansen

Constructive trusts and equitable liens are two types of remedies designed to prevent one person from unjustly benefiting from the money or property of another. These legal remedies require a court order, and procedures vary from state to state. In many jurisdictions, you will need an attorney to seek a constructive trust or equitable lien.

Constructive Trust

A court imposes a constructive trust when a defendant is reaping benefit from property that he acquired unfairly. The constructive trust effectively turns the defendant into a trustee, charged with holding and managing the property, but unable to reap any benefit from the property. All benefit goes to the plaintiff, who is effectively a secured creditor for the trust. For instance, if John steals money from Tom and then invests the money in a life insurance policy, a constructive trust will give Tom all right to the benefits from the policy. In cases like this, Tom will usually need to "trace" the funds, meaning he will need to present accounting evidence to the court to prove that his money was used to purchase the insurance policy.

Equitable Lien

Equitable liens are used when the defendant has either wrongfully acquired someone else's property, or has made improvements to a piece of property using funds he obtained unfairly. When this happens, the defendant owes a debt to the plaintiff. The equitable lien uses the property to secure the debt. For instance, Annie leads Sally to believe that they jointly own a piece of property. Sally spends a considerable amount of her own money to improve the property, but then finds out Annie deceived her and Annie owns the property outright. At this point, a court might give Sally an equitable lien on the property to make sure that Annie pays her back.

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Which Remedy Applies?

Both equitable liens and constructive trusts are usually applied when the defendant has somehow taken advantage of a relationship of trust or confidence, for instance, when the defendant has used undue influence, fraud, or abuse of confidence. But a constructive trust only applies when the defendant owns the property at issue. If the defendant has only used his unjust gains to improve other property which he doesn't own, then an equitable lien is the only way for the plaintiff to lay claim to the improved property.

Bona Fide Purchasers

Depending on state law, the holder of a constructive trust or equitable lien usually has first rights to the property, ahead of other creditors. In the future, if someone buys the property, the buyer takes the property "subject to" the trust or lien, meaning that the holder of the trust or lien still has the first rights. But one party will have priority over both a constructive trust and an equitable lien: the bona fide purchaser, or BFP. The BFP is someone who has purchased the property with no knowledge of the lien or the trust. BFP ownership will trump both a constructive trust and an equitable lien, leaving the trust or lienholder with no rights to the property.

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What Is Diversion of Property From a Trust?
 

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