December 19, 2003. ת Constructive Trusts and Restitution After Theft.

ת Constructive Trusts and Restitution After Theft. A nifty bit of legal artistry in our Law Lunch yesterday. Professor Heidt brought up a nutty Wisconsin case which went something like this:

John Doe steals two million dollars from Richard Roe, and is caught. Roe sues Doe to get back his money. Doe cites a Wisconsin statute that says that the spouse of the loser of a tort judgement gets to keep half of the family property safe from the judgement. The judge says that Mrs. Doe (still married to Mr. Doe, by the way) gets to keep one of the two millions and doesn't have to sell the summer home they bought with it.

We decided to blame Roe's lawyer, rather than the judge (being smart isn't a judge's job-- we should be happy if he's at least fair and does his best to interpret the law as written). The obvious route of attack on the spouse argument is that the statute in question was not intended to shield stolen goods (and maybe the language doesn't fit either; we didn't have the statute at hand at lunch). A second, similar but more formalist line of attack is that this is a case about restitution, not compensation, so tort law is the wrong place to look. The third line of attack is the artistic and probably best one, related to number two, but approaching this from the angle of property rather than tort or restitution. It was suggested by Professor Stake, the teacher of property law, naturally, and goes like this.

The act of stealing the two million dollars sets up a constructive trust. Doe is the trustee, Roe is the beneficiary, and the two million dollars are the trust assets. Doe has a fiduciary duty to care for the assets, and if he breaches that duty and wastes them, then he must pay compensation out of his own assets (perhaps with punitive damages). Moreover, if he illegally transfers the assets to a third party (such as Mrs. Doe), then Roe can get the assets back from that third party, even if the third party didn't know the transfer was illegal.

This approach is not just a formalist one; it really represents morality, efficiency, and common sense, and it takes care of lots of contingencies. Having stolen the money, what does society want Doe to do? We want him to take good care of the money until he gives it back to Roe, which should happen soon. And we don't want third parties profiting from the theft.

Applied to the case at hand, it means that the stolen money never became family property, and so the Wisconsin statute simply doesn't apply. Either the summer home is an investment of the trust, and so should be returned to Roe, or it is an illegal transfer from the trust to either Mr. Doe, Mrs. Doe, or both jointly, in which case it again is not family property and so should be returned to Roe.

More precisely, money was transferred from the trust to Mr. and Mrs. Doe, who, let us assume now, spent the entire amount on it. Thus, if the summer home's value dropped to 1.5 million dollars because of market fluctuations, it is not enough to just give Roe the summer home-- the Does still owe him an additional .5 million dollars.

A couple of caveats, though, that we didn't discuss at lunch (maybe in 3 weeks when we resume?)

First, if a trust makes an illegal transfer of cash, rather than real property or chattels or individualized securities (I don't know the legal term for them-- this is the sort of thing that "holder in due course" law is about, I think), can the trust really get back the assets? If so, does it have a prior claim, like a secured creditor does on the security, or just a general claim to money compensation?

Second, does Doe owe interest to Roe? If the claim were a tort one, I think Doe would have to pay interest at a statutory legal rate on the 2 million dollars. If the claim is for the dissolution of a trust, though, it seems that the beneficiary only has a right to reasonable investment of the trust assets during the period of its existence, and "reasonable" is interpreted broadly by the law. Thus, I think a trustee who kept 2 million dollars in cash for a year would not be liable for breach of his fiduciary duty, and certainly a trustee who put 2 million dollars in a stock market which happened to decline 5% that year would not. So what kind of return on the trust assets is Roe entitled to here? (I think I would give him whatever return Doe got on his own investments, if he made some, especially if the funds were commingled into a single Doe bank account or broker's account.)

This seems like a great law school exam question. I'm not sure what courses it would go in, though---Trusts and Estates? Property? Commercial Law? Torts? Securities? Criminal Law?

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