Thirty years ago a law professor stood before my class and made the following comment:
You know what “constructive” is when used by a court? It’s a lie. It’s the court saying that something that did not happen did happen…so that the court can do what it wants to do for the sake of fairness.
You are viewing: What Is Constructive Fraud
Not a bad definition, actually. Such concepts as “constructive fraud” “constructive knowledge,” or “constructive discharge” are simply efforts by the court to impose upon a fact situation a presumption that is necessary if the court’s desired “just” end is to be attained. This article shall briefly describe typical “constructive” concepts and consider situations in which the courts have imposed them.
The Typical “Constructive” Situation:
Common law and statutes often require a set criteria to impose legal rights or remedies. For example, a contract must have a “meeting of the minds,” consideration exchanged by the parties, and other criteria to impose contractual duties. See our article on contracts.
At times, the court decides that justice, from an equitable point of view, requires a result that is not in strict conformity with the facts before the court. Typically, one of the parties cannot develop evidence to prove a vital fact or an event did not quite occur as the court would require to impose the typical statutory or common law remedy. In such events, the courts have turned to the notion of “constructive” development of facts or events so as to allow the appropriate relief.
It is not common and it normally requires extreme action by a party before the “constructive” methodology will be used…or it requires the court concluding that such an unfair result will occur that some relief must be granted. But it does happen.
CONSTRUCTIVE FRAUD:
Fraud is typically defined at law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading. Fraud allows a cause of action against the perpetrator that will make the victim whole.
Constructive fraud is considered fraud under the law although deceptive intent is missing because it has the same consequences as an actual fraud would have. It is a finding imposed in the interest of fairness and justice, such as to prevent violation of a public or private trust or confidence, the breach of a fiduciary duty, or the use of undue influence.
Black’s law dictionary defines constructive fraud as “all acts, omissions, and concealments involving breach of equitable or legal duty, trust or confidence, and resulting in damage to another, 38 Cal Rptr. 148, 157; i.e. no scienter (intent to defraud) is required. Thus the party who makes the misrepresentation need not know that it is false.”
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CONSTRUCTIVE FIRING OR DISCHARGE
Constructive discharge is demonstrated when an employee’s working conditions are so difficult to become intolerable and thus amount to a firing, despite a lack of a formal termination notice. Unemployment benefits are typically unavailable when an employee quits, but may still be available to a former employee when a constructive discharge can be proven. The following is a typical state statute (Arizona) governing constructive discharge. Local laws may differ and you should check your local statutes:
A. In any action under the statutes of this state or under common law, constructive discharge may only be established by either of the following:
1. Evidence of objectively difficult or unpleasant working conditions to the extent that a reasonable employee would feel compelled to resign, if the employer has been given at least fifteen days’ notice by the employee that the employee intends to resign because of these conditions and the employer fails to respond to the employee’s concerns.
2. Evidence of outrageous conduct by the employer or a managing agent of the employer, including sexual assault, threats of violence directed at the employee, a continuous pattern of discriminatory harassment by the employer or by a managing agent of the employer or other similar kinds of conduct, if the conduct would cause a reasonable employee to feel compelled to resign…
F. Notwithstanding any other requirements of this section, an employee may bring a constructive discharge claim without prior written notice in the event of outrageous conduct by the employer or by a managing agent of the employer including sexual assault, threats of violence directed at the employee, a continuous pattern of discriminatory harassment by the employer or by a managing agent of the employer or other conduct if the conduct would cause a reasonable employee to feel compelled to resign.
CONSTRUCTIVE TAKING OF PROPERTY
Constructive taking is a term used in property law to refer to actions that amount to depriving an owner of the use and enjoyment of his/her property. The legal term “takings” refers to the physical acquisition of private property by governmental bodies. It also applies when government regulation removes all economically viable use of private property in what the courts describe as a “regulatory” or “constructive” taking. The Constitution of the United States requires that private property cannot be taken for public use unless there is” just compensation.”
A constructive taking falls short of physical seizure or possession. It is a legal fiction, based on fairness principles, to apply to a situation that is tantamount to physical deprivation of useful possession. For example, a zoning regulation that deprives the land owner of the economic value of the property can be challenged as constructive taking.
CONSTRUCTIVE TRUST
A constructive trust is a legal concept created by the courts against one who, by fraud, wrongdoing, or any other unconscionable conduct, either has obtained or holds legal right to property which he/she ought not to, in good conscience, retain. A constructive trust is used to prevent unjust enrichment. Unjust enrichment is present in nearly every case where a constructive trust is imposed. However, it is not necessary for the court to find that the person whose property is subjected to it has acted wrongly in order to impose a constructive trust, but the finding may be based upon a finding of unjust enrichment arising from other circumstances that “render it inequitable for the party holding the title to retain it.”
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The basis for creating a constructive trust is to prevent unjust enrichment. (Restatement of Restitution § 160, comment c.) “Where a person wrongfully disposes of property of another knowing that the disposition is wrongful and acquires in exchange other property, the other is entitled to enforce a constructive trust of the property so acquired.” If the property so acquired is or becomes more valuable than the property used in acquiring it, the profit thus made by the wrongdoer cannot be retained by him; the person whose property was used in making the profit is entitled to it.” (Restatement Restitution § 202.) When property is given or devised to a defendant in breach of a donor’s or testator’s contract with a plaintiff, equity will impose a constructive trust upon that property being held by another even though (1) the transfer is not the result of breach of a fiduciary duty or an actual or constructive fraud practiced upon the plaintiff, and (2) the donee or devisee had no knowledge of the wrongdoing or breach of contract.
CONSTRUCTIVE KNOWLEDGE
By application of reasonable care or diligence if a person should have known a fact, he or she is deemed to have constructive knowledge of that fact. Generally, a person is presumed by law to have constructive knowledge about specific fact or condition.
And…there are more “constructive” theories advanced by the courts in myriad other situations.
The Common Theme:
The courts are not acting at random in making these constructs.
What the courts are doing is seeking to justify an equitable result by inferring a fact that, if not strictly true, may be considered as effectively true to achieve an equitable result. For example, a constructive trust imposes the theory that someone is holding property in trust for another with all the applicable fiduciary duties adhering to trusts…because the court concludes that the way the property was obtained, a trust should be imposed on the person holding the property. A typical example is that I steal a piece of property and transfer it to my brother who may not have had knowledge that the property was stolen. Plaintiffs sue not just me (since I no longer have title to the property and may be judgment proof) but my brother who received the property and seek the “imposition of a constructive trust” stating that since the brother knew or should have known that the property was not rightfully the property of his brother, a trust should be imposed upon the property so that he is “holding it” for the plaintiffs as a fiduciary.
Most such relief has to be sought with particularity in the pleadings. Thus, one seeks to impose a constructive trust or claims constructive fraud so that the responding party is on notice that this is a claim.
The court can not normally suddenly abandon all law or due process and create theories of constructive events or holdings without the argument being existent in the pleadings. The parties normally receive notice that some type of constructive application is being considered.
But the ethos of constructive creations is to achieve the “right” result and not let legal niceties result in inequitable results to the parties. More often than not, courts are loathe to freely use the constructive methodology and only when the result would be egregious in the extreme is it likely the court will impose constructive theories.
Nevertheless, the party relying on pure legal technicalities to avoid clearly unjust results would do well to remember that courts do have some leeway in developing appropriate theories of recovery. The more extreme the injustice, the more likely the court will “construct” its way around the result.
Source: https://t-tees.com
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