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Date: 01-20-2013

Case Style: Victor J. Shattuck v. Donna Mae Peck

Case Number: 2013 VT 1

Judge: Burgess

Court: Supreme Court of Vermont on appeal from the Superior Court, Windsor Unit, Civil Division

Plaintiff's Attorney: Patricia G. Benelli and Amanda T. Rundle of Dakin & Benelli, P.C., Chester, for Plaintiff-Appellee.

Defendant's Attorney: Melvin Fink, Ludlow, and Michael Rose (On the Brief), St. Albans, for Defendant-Appellant.

Description: ¶ 1. BURGESS, J. Defendant Donna Mae Peck appeals from a superior court judgment granting plaintiff Victor J. Shattuck a writ of possession for the parties’ former residence in Cavendish and denying defendant’s counterclaim for an equitable interest in the Cavendish property and another former residence in Springfield. We affirm.

¶ 2. The facts as found by the trial court may be summarized as follows. The parties lived together for several years in defendant’s mobile home located in Springfield, Vermont on a three-acre plot that defendant had purchased from her mother in 1988. The mobile home was purchased by defendant in 1994 with a $37,000 loan secured by the property. In 1999, some time after she was laid off from her job, defendant began to receive Social Security disability benefits of approximately $700 per month. Plaintiff worked during this time at a variety of jobs, although his primary employment was as a sub-contractor installing cable services.

¶ 3. Between December 1997 and June 1999, plaintiff purchased two adjoining parcels of land in Cavendish for $8500 each. Plaintiff made most of the payments for the first parcel, but defendant made a significant financial contribution toward payment of the second parcel. In 2001, plaintiff conveyed the Cavendish properties to himself and defendant as joint tenants with rights of survivorship, and defendant conveyed the Springfield property to herself and plaintiff as joint tenants with rights of survivorship. The court found that the conveyances were made for estate planning purposes, and were “entirely donative in nature.”

¶ 4. In 2004, plaintiff invested approximately $50,000 and significant “sweat equity” in the construction of a home on the Cavendish property. Defendant contributed by cooking meals for construction crews, picking out decorative items, and doing some painting and finishing work. In July 2005, plaintiff signed a promissory note for a $90,000 loan to continue work on the house, and both plaintiff and defendant signed a mortgage as co-owners. The following month, the parties moved into the home’s finished walk-out basement and rented the Springfield property to tenants. In August 2006, plaintiff obtained an additional $50,000 loan to complete construction of the residence. A month later, plaintiff took out a sizable loan that allowed him to pay off the previous two loans and provided him with an additional $30,000 in proceeds. He was the sole signer of the note and mortgage. The parties moved into the upstairs of the completed Cavendish house sometime in 2006.

¶ 5. On September 15, 2006, the same day that plaintiff signed the new loan and mortgage, defendant transferred her interests in both the Cavendish and Springfield properties to plaintiff, and the following month she quitclaimed her interest in the mobile home to him. Defendant claimed at trial that she was induced to make these transfers by plaintiff’s fraudulent misrepresentation that she would lose her disability benefits if she retained title to the properties. The trial court found, however, that both parties believed that “it would be to their mutual financial advantage to transfer all of their real estate into the plaintiff’s name,” as both “believed that these arrangements were likely to protect the defendant from any risk of losing her federal benefits because of having too many assets or too much income,” particularly from the rented Springfield property.

¶ 6. After the parties moved into the Cavendish property, defendant began to pay plaintiff between $600 and $700 in rent. The trial court found that, like the real estate transfers, the parties believed that the rental arrangement would benefit defendant financially by allowing her to claim a renter’s rebate. Shortly after the move, plaintiff used a portion of the remaining proceeds from the loan to pay off the outstanding mortgage balance on the Springfield property, approximately $20,000. In February 2007, the parties executed wills that named each other as the residuary beneficiary of their respective estates.

¶ 7. The parties lived together in Cavendish until June 2010, when plaintiff decided to end their relationship. Following an angry confrontation, defendant obtained a relief-from-abuse order against plaintiff and was awarded sole possession of the Cavendish property. Plaintiff evicted the tenants and moved into the mobile home in Springfield.

¶ 8. Plaintiff then filed a complaint in superior court seeking to evict defendant from the Cavendish property. Defendant answered and counterclaimed, alleging that the Cavendish and Springfield properties were the subject of a partnership agreement between the parties, and requested a dissolution and accounting. Alleging that she had been induced to convey the Springfield properties by plaintiff’s fraudulent misrepresentations, she also sought equitable relief through imposition of a resulting or constructive trust. She later claimed that the Cavendish property was also held in a constructive trust for her benefit.

¶ 9. Following a two-day evidentiary hearing in November 2010 and February 2011, the trial court issued a written ruling in favor of plaintiff. The court found no persuasive evidence that the parties had entered into a partnership concerning the properties. Nor did the court find any basis to support the imposition of a resulting trust. Nor, finally, did the court credit defendant’s claim that plaintiff had fraudulently induced the transfers, or her contention that plaintiff owed the defendant a “special fiduciary duty.” Accordingly, the court found no basis for imposition of a constructive trust. Consistent with these findings, the court issued a final judgment order granting plaintiff a writ of possession for the Cavendish property, requiring defendant to pay plaintiff rent of $560 per month until she left or was removed from the property, and denying defendant’s counterclaims. This appeal followed.

¶ 10. On appeal, defendant contends that the trial court erroneously denied her request for equitable relief.[1] Our review is limited. “We review equitable remedies, like the creation of a constructive trust, for a trial court’s abuse of discretion.” Weed v. Weed, 2008 VT 121, ¶ 16, 185 Vt. 83, 968 A.2d 310. This standard requires a showing that the court withheld its discretion entirely or exercised it on “clearly untenable” grounds. Id. (quotation omitted).

¶ 11. The circumstances under which a court may impose a constructive trust are broad and highly contextual. As we explained in Weed: “A court may impose a constructive trust when a party obtains some benefit that they cannot, in good conscience, retain. . . . Courts may employ constructive trusts to avoid unconscionable results and to prevent unjust enrichment.” Id. ¶ 17. Unjust enrichment, in turn, rests on the principle that one should “not be allowed to enrich himself unjustly at the expense of another.” Id. (quotation omitted). “[T]he inquiry is whether, in light of the totality of circumstances, it is against equity and good conscience to allow [a party] to retain what is sought to be recovered. . . . It must be a realistic determination based on a broad view of the human setting involved.” Id. (quotation omitted).

¶ 12. While not always clearly articulated, defendant’s argument here is that the trial court abused its discretion in declining to impose a constructive trust in several respects. She asserts that the properties were conveyed to plaintiff without the requisite “donative” intent, or actual present intent to convey title, and therefore should be held in a constructive trust for her benefit. See Brousseau v. Brousseau, 2007 VT 77, ¶ 6, 182 Vt. 533, 927 A.2d 773 (mem.) (noting that the two essential elements of an inter vivos gift of property are “donative intent” and delivery). Although it is unclear whether this precise argument was expressly raised below, the trial court implicitly rejected it in finding no evidence—nor indeed any claim—of an agreement or understanding between the parties that the property would ultimately be reconveyed to defendant.

¶ 13. Defendant principally contends that the trial court failed to properly credit her “significant contributions” to the acquisition and development of the properties. While acknowledging that defendant made some contributions over the years, the court—as noted—found no grounds for the imposition of a constructive trust absent a showing that plaintiff committed fraud or owed defendant a special fiduciary duty. The court’s inquiry in this regard was—arguably—unduly narrow. The parties’ purpose in effectuating a transfer, their respective contributions, and the existence of a confidential relationship could all theoretically be considered a part of the totality of the circumstances in determining whether in equity and good conscience the legal titleholder should be allowed to retain the property. See, e.g., Lester v. Zimmer, 542 N.Y.S.2d 855, 857 (App. Div. 1989) (holding that plaintiff’s participation, support, and financial contributions to construction of vacation home during ten-year relationship with defendant were relevant considerations in action for imposition of constructive trust); Rhue v. Rhue, 658 S.E.2d 52, 58-59 (N.C. Ct. App. 2008) (upholding imposition of constructive trust on properties that parties bought and renovated together during long-term relationship). See generally, Restatement (Third) of Restitution & Unjust Enrichment § 28(1) (2011) (providing that party to relationship resembling marriage who contributes to asset may have claim for restitution to prevent unjust enrichment).

¶ 14. This is not an issue that we must address and resolve here, however, as it is well settled that “one who seeks relief in equity must come to the court with clean hands.” Savage v. Walker, 2009 VT 8, ¶ 10, 185 Vt. 603, 969 A.2d 121 (mem.). See generally C. Yzenbrand, et al., Bogert’s Trusts and Trustees § 472, at 74 (2012) (“A plaintiff seeking the establishment of a constructive trust is subject to the ordinary rules of equity, including that he or she must come into court with clean hands.”). As we explained in Walker, a party requesting a constructive trust on property “transfer[red] . . . to avoid his creditors . . . would not appear to meet this requirement.” 2009 VT 8, ¶ 10. The same principle applies when the object of the conveyance is not to defraud a private creditor but to mislead the government. See, e.g., In re Estate of Bruner, 338 F.3d 1172, 1177 (10th Cir. 2003) (“Under the maxim, [h]e who comes into equity must come with clean hands, a court . . . will not lend its aid . . . to one who has been a participant in a transaction the purpose of which was to defraud a third person, to defraud creditors, or to defraud the government.” (quotation omitted)); McMichael v. Flynn, 686 So. 2d 254, 256 (Ala. Civ. App. 1995) (noting that “a party seeking to set aside a deed . . . is not entitled to have that deed set aside if the reason behind the transfer was to defraud a third party, such as a creditor or a governmental entity”).

¶ 15. Courts have thus refused to impose a constructive trust in a variety of circumstances where the original transfer was to avoid a governmental penalty or obtain an unwarranted governmental benefit. See, e.g., Bruner, 338 F.3d at 1173 (holding that clean hands doctrine barred resulting or constructive trust on property which plaintiff induced his parents to purchase with his funds so that he could “avoid[] certain taxes and obtain[] other advantages”); Hardy v. Hardy, 910 N.E.2d 851, 853 (Ind. Ct. App. 2009) (invoking unclean hands doctrine to reject father’s request to impose constructive trust on property that he transferred to his children to avoid possible excise tax, forfeiture, and fine). The facts in McMichael present a case in point. There, the defendant invoked the unclean hands doctrine in an action to set aside a deed, claiming that the plaintiff—her mother—had “conveyed the property to her in order to defraud a governmental entity into considering her to be eligible for Medicaid and other governmental benefits.” 686 So. 2d at 256. The court acknowledged that the claim, if proven, would be sufficient to bar the action, but ultimately concluded that the evidence failed to support it. Id.

¶ 16. Here, in contrast, the court expressly found—and indeed defendant readily admitted—that the 2006 property transfers were intended to circumvent governmental regulations that jeopardized her continued eligibility to receive Social Security disability benefits. She would have the courts become complicit in that effort by requiring that the properties be held for her benefit, utilizing an equitable remedy designed to accomplish justice where enforcement of legal title would otherwise be intolerable to equity and good conscience. As the foregoing decisions make clear, however, a court will not lend its aid to any scheme designed to mislead or defraud the government. And the fact that both parties were involved in the effort does not alter this conclusion. See Cook v. Cook, 116 Vt. 374, 381, 76 A.2d 593, 598 (1950) (“Ordinarily, where parties are in pari delicto, a court of equity will not afford relief . . . .” (quotation omitted)), rev’d on other grounds, 342 U.S. 126 (1951); see also Bruner, 338 F.3d at 1178 (holding that, under in pari delicto doctrine, “a party may not obtain equitable relief by proving inequitable conduct in which he participated”); Eline Realty Co. v. Foeman, 252 S.W.2d 15, 19 (Ky. Ct. App. 1952) (fact that defendant induced plaintiff to enter transaction to defraud government did not absolve plaintiff of unclean hands, as “[e]quity will not relieve one party against another where both are in pari delicto”).

¶ 17. Although the trial court here did not rule on this issue, there is no factual dispute concerning the intended purpose of the property transfers. The undisputed evidence demonstrates that defendant lacked the “clean hands” necessary for an award of equitable relief. Accordingly, we affirm the judgment on that basis. See Samplid Enters., Inc. v. First Vt. Bank, 165 Vt. 22, 28, 676 A.2d 774, 778 (1996) (we may affirm judgment on rationale different from trial court where result was otherwise correct).

¶ 18. The dissent here argues that a fraudulent intent, or “ ‘guilty mind’ ,” is insufficient to support a finding of unclean hands absent an additional finding that defendant “actually benefitted from the arrangement.” Post, ¶ 21. The dissent maintains that defendant’s concern about her rental income and ownership of real property was unfounded because Social Security disability income is not means-tested. Thus, defendant’s “potentially nefarious but ultimately ill-founded motives” provide, in the dissent’s view, a weak basis for the denial of equitable relief. Post, ¶ 24.

¶ 19. The argument is unpersuasive for two reasons. First, on the record before us we need not accept the dissent’s assertion that defendant made a mistake in acting on her belief that income from the Springfield property and her ownership interest in both the Springfield and Cavendish properties could affect her eligibility for government benefits or the amount of benefits. There were no findings on this issue either way, but as the dissent notes, there was evidence that defendant was a beneficiary of Medicaid, a needs-based program, and her disability may also entitle her to Social Security Insurance (SSI), also a needs based program that is often confused with Social Security Disability Insurance (SSDI). The trial court did find that defendant “had a case manager to assist her with her benefits, and also had the assistance of an attorney in obtaining SSDI. She would have called on these people for reliable information as to the steps necessary to retain eligibility for the programs she needed.” The record and findings thus do not clearly support the mistake theory advanced by the dissent.

¶ 20. Even assuming, moreover, that defendant acted on a mistake, sound public policy—and ample authority—support the principle that a party forfeits any claim to equitable relief when a conveyance is rendered with the intent to defraud, even if the reason for the conveyance proves to be unfounded or mistaken. This general principle is expressed in the annotation cited by the dissent as follows: “[I]t has been held that the particular grantor’s motive in conveying the property barred his recovery even though the purported claim was never asserted or was never established.” D. Harrison, Annotation, Rule Denying Recovery of Property to One Who Conveyed to Defraud Creditors as Applicable Where the Claim Which Motivated the Conveyance Was Never Established, 6 A.L.R.4th 862, 867 (1981). As the court explained in Bishop v. Bishop, rejecting a claim that the grantor’s fraudulent conveyance was mitigated by the fact that it was induced by misrepresentations, “it is the moral intent of a person in such a case as this, rather than any actual injury done, which determines whether he has come into court with clean hands.” 257 F.2d 495, 501 (3d Cir. 1958) (emphasis added). Indeed, as the court in MacRae v. MacRae explained, “[t]o hold that equity only applies the [unclean hands] maxim . . . when the attempted fraud actually succeeds” would immunize the fraud “if it prove[d] in the end to have been unnecessary.” 294 P. 280, 284 (Ariz. 1930). The court categorically rejected this approach, holding instead that the “requisite in determining . . . whether a party comes into court with clean hands is the moral intent, and not the actual injury done.” Id. Numerous courts are in agreement. See, e.g., Fakhri v. United States, 507 F. Supp. 2d 1305, 1320 (Ct. Int’l Trade 2007) (“The moral intent, and not the actual injury incurred, is the fundamental inquiry in determining whether a party has unclean hands.”); Menard v. Menard, 294 N.W. 106, 107 (Mich. 1940) (holding that unclean hands doctrine barred equitable relief where plaintiff’s conveyance was intended to defraud creditor, even where plaintiff “later discovered there was no such actual liability”); Hyde Park Amusement Co. v. Mogler, 214 S.W.2d 541, 545 (Mo. 1948) (“[T]he fundamental requisite in determining whether a party comes into court with clean hands is the moral intent, and not the actual injury done.” (quotation omitted)); Blaine v. Krysowaty, 38 A.2d 859, 860-61 (N.J. Ch. 1944) (“The rights of fraud doers are not looked at in the light of the wrong they accomplish, but of the wrong they plan.” (quotation omitted)). Accordingly, we are not persuaded that defendant is entitled to equitable relief because her admittedly improper purpose in effectuating the transfer was based on a mistake. Nor, as noted, does the fact that plaintiff and defendant both mistakenly believed the transfer would enhance plaintiff’s eligibility for benefits alter this conclusion. Cook, 116 Vt. at 381, 76 A.2d at 598. Nor, finally, does the trial court’s failure to specifically address this issue compel a remand where, as here, the evidence and findings concerning the intent of the transfers are clear and undisputed. See Bishop, 257 F.2d at 500 (holding that court may apply unclean hands doctrine, even where not set up as defense, where “the unconscionable character of a transaction” is plain).

* * *

See: http://info.libraries.vermont.gov/supct/current/op2011-145.html

Outcome: Affirmed.

Plaintiff's Experts:

Defendant's Experts:

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