Brief Fact Summary. The Appellant, Osin (Appellant), agreed to sell a parcel of land to the Appellee, Johnson (Appellee) and to that end executed and delivered a deed, taking back a note for $30,000 representing the purchase price. The Appellee fraudulently represented to the Appellant that he would prepare, execute and record a trust on the property to secure the Appellee’s purchase money note, which the Appellee failed to do. The Appellee later borrowed $11,000 against the property by executing deeds of trust on the property to Perpetual Building Association (Perpetual), which Perpetual took without notice of the prior debt to the Appellant.
Synopsis of Rule of Law. A constructive trust is a purely equitable device, which can be applied with great flexibility. It arises by operation of law from the occurrence of an unconscionable act for which no traditional relief is available. The acquisition of property through the fraudulent misrepresentation of a material fact has been held sufficient grounds to fasten a constructive trust on the property.
Issue. There are two basic issues:
Is the Appellant’s unrecorded claim (based on constructive trust) superior to the trust holders (who were bona fide purchasers for value without notice)?
Is the Appellant’s unrecorded claim superior to the judgment creditors?
Held. No to a. and yes to b. Judgment affirmed as to the trust holders and reversed and remanded as to the judgment creditors.
A constructive trust is a purely equitable device, which can be applied with great flexibility. It arises by operation of law from the occurrence of an unconscionable act for which no traditional relief is available. The acquisition of property through the fraudulent misrepresentation of a material fact has been held sufficient grounds to fasten a constructive trust on the property.
The holders of the trust deeds were innocent purchasers for value without notice of the Appellant’s prior equity and thus they clearly fall within the protection offered by the D.C. recording act, which protects bona fide purchasers against unrecorded conveyances. As between the two innocent parties (the Appellant and the trust holders) the Appellant must yield to those who in good faith relied on the state of the record which Appellant’s negligence allowed to exist.
A judgment creditor, however, does not occupy a position equivalent to that of a purchaser for value and thus “if the land of the debtor is subject to equities, the judgment creditor’s lien is subject to such equities.” [3 Scott, Trusts Section:308.1, p.2276 (2nd Ed. 1956)]. The “equity” in this case being the constructive trust, which was placed upon the land of Johnson. The judgment creditors, who took liens based on statute, took such liens subject to existing equities.
If a judgment creditor can show the lower court on remand that, like the trust holders, he extended credit to the Appellee on reliance of the record title, he should be entitled to the same priority enjoyed by other bona fide purchasers, unless when the debt arose he had actual notice of the Appellee’s fraud on the Appellant. In this case, the judgment creditor’s claims arose from auto loans, which likely were not made in reliance on the title to the real estate.
Discussion. It is important to understand why trust holders would be treated differently than judgment creditors. In the facts here, the trust holders loaned money and presumably, took the steps to check the record of title. Thus, the trust holders were acting in the ordinary course of business. The judgment creditors, on the other hand, made loans for the purchase of autos and would have had no reason to examine the status of the debtor’s title to real estate.