Introduction. In the fraud case of Pettit*v. Tabor, Marilyn Eileen Pettit Tabor (Lyn) ‘conveyed her interest in the family farm to her brother, Robert York Pettit (Bob), based upon Bob’s promise to protect the property and to reconvey it to Lyn. However, when it came time for Bob to reconvey the farm to Lyn, Bob refused to do so. The Court of Appeals upheld the Trial Court’s judgment which included the imposition of a constructive trust upon the farm in favor of Lyn based upon Bob’s fraudulent conduct. Pettit v. Tabor, 06-19-00002-CV, 2020 WL 216025, at *1 (Tex. App.—Texarkana Jan. 15, 2020, pet. filed). This article primarily addresses the appellate court’s opinion addressing the constructive trust.
Background and Court’s Holding. In 2006, Lyn’s and Bob’s mother conveyed the family farm to Lyn and Bob. In March 2013, Lyn received notice about a lawsuit that had been filed against a company she owned–Pettit Mortgage, Inc. At that time, Lyn was already contemplating conveying her interest in the family farm to her children, as a result of her health problems. The lawsuit made her feel a greater sense of urgency to complete this transfer. Lyn called her brother, Bob, to let him know that she was going to convey her interest in the farm to her children. However, Bob convinced Lyn that, while the lawsuit was pending, a better way to protect the farm would be to transfer it to Bob. When the lawsuit was over, he would reconvey it to Lyn. Within a few days, Bob prepared warranty deeds that Lyn signed conveying her interest in the farm to Bob.
In May of 2013, Lyn settled the lawsuit that had been filed against her company. Lyn then contacted Bob to let him know that the lawsuit was settled and asked him to start the paperwork reconveying her interest in the farm back to her. Bob initially said he would take care of it but later told Lyn that he was not going to reconvey the interest in the farm to her. Lyn eventually discovered that Bob, through a series of transfers, conveyed all of the farm and related mineral interests to his son Jeffery, as Trustee for the Big Horn Phalanx Trust, to protect it from Lyn.
Lyn sued Bob and his children, including Bob’s son, Jeffrey, as Trustee of the Big Horn Phalanx Trust. Lyn sought a judgment for fraud, breach of fiduciary duty, the imposition of a constructive trust, damages and other relief. After a bench trial, the Trial Court:
- Declared that the transfer of Lyn’s interest in the family farm to Bob was void because of fraud by Bob;
- Imposed a constructive trust upon Lyn’s 50% undivided interest in the family farm;
- Awarded Lyn $50,000 in punitive damages for Bob’s conduct;
- Awarded Lyn reasonable attorney fees and costs; and
- Awarded Lyn other relief.
Bob and his children (Defendants) appealed on the grounds including that the court should have found they prevailed on their affirmative defense of illegality and because the imposition of a constructive trust was not supported by the evidence.
The Court of Appeals first discussed the equitable remedy of a constructive trust and stated:
A constructive trust is “a creation of equity to prevent a wrongdoer from profiting from her wrongful acts.” Gray v. Sangrey, 428 S.W.3d 311, 315 (Tex. App.—Texarkana 2014, pet. denied) (citing Procom Energy, L.L.A. v. Roach, 16 S.W.3d 377, 381 (Tex. App.—Tyler 2000, pet. denied)). A constructive trust subjects the person who holds title to property “to an equitable duty to convey it to another, on the ground that his acquisition or retention of the property is wrongful and that he would be unjustly enriched if he were permitted to retain the property.” Cailloux, 224 S.W.3d at 736 (quoting Talley v. Howsley, 176 S.W.2d 158, 160 (Tex. 1943)). “To obtain a constructive trust, the proponent must prove (1) the breach of a special trust, fiduciary relationship, or actual fraud, (2) unjust enrichment of the wrongdoer, and (3) tracing to an identifiable res.” Gray, 428 S.W.3d at 315 (citing Troxel v. Bishop, 201 S.W.3d 290, 297 (Tex. App.—Dallas 2006, no pet.)).”
Pettit v. Tabor, supra, at *5.
Next, the Court of Appeals discussed the Defendants’ contention that their affirmative defense of illegality barred Lyn from recovering this equitable relief. The court stated that this affirmative defense is applicable when:
A grantor who conveys his property for the purpose of shielding the property from liability to future creditors, when the purpose of such a conveyance is not to divest the grantor of beneficial interest, should not receive the aid of the courts against his grantee. Public policy considerations demand that we refuse equitable relief and leave the parties where they have placed themselves.
Pettit v. Tabor, supra, at *6.
Defendants contended that this defense was available because Lyn conveyed her interest to Bob to defraud her creditor in the lawsuit filed against the company she owned, Pettit Mortgage, Inc. However, the Court of Appeals found that since the Plaintiff sued Pettit Mortgage, Inc. and not Lyn, individually, the Plaintiff was never Lyn’s creditor. Therefore the affirmative defense did not apply.
The court went on to hold that there was sufficient evidence to support the imposition of a constructive trust, in Lyn’s favor, upon the interest in the farm she had conveyed to Bob. The court stated:
To obtain a constructive trust, the proponent must prove (1) the breach of a special trust, fiduciary relationship, or actual fraud, (2) unjust enrichment of the wrongdoer, and (3) tracing to an identifiable res.” Gray, 428 S.W.3d at 315 (citing Troxel v. Bishop, 201 S.W.3d 290, 297 (Tex. App.—Dallas 2006, no pet.)). Thus, the imposition of a constructive trust may be based either on the breach of a special trust or a fiduciary relationship, or on actual fraud. “Where the grantor voluntarily conveys to the grantee on a false oral promise that the grantee will reconvey, there is actual fraud justifying the imposition of a constructive trust.” In re Marriage of Braddock, 64 S.W.3d 581, 587 (Tex. App.—Texarkana 2001, no pet.) (citing Thigpen v. Locke, 363 S.W.2d 247, 250 (Tex. 1962)).
Pettit v. Tabor, supra, at *13.
The Court of Appeals found that there was evidence to support the Trial Court’s findings that Bob had committed actual fraud. Thus, the Trial Court did not abuse its discretion in imposing a constructive trust. The Court of Appeals went on to uphold the Trial Court’s judgment in its entirety including the award of punitive damages and attorney fees.
Lessons Learned. It appears that Lyn’s mistake was trusting her brother. Of course, it is hard to call trusting one’s sibling a mistake. Unfortunately, family businesses often result in sticky situations. Lyn would have been better served by consulting with an experienced estate planning attorney to devise a succession plan that would have passed Lyn’s interest in the family farm to her children and helped protect it from Lyn’s creditors. In turn, Lyn could have preserved her relationship with her brother and avoided costly litigation.