High Court case of J v E concerning the establishment of a constructive trust.
Ms J and Mr E had been in a de facto relationship for 5 years, followed by a marriage and subsequent separation. E had a family trust (J is not a trustee) which held all assets including a home which the parties built together in the last years of their relationship. He took the position that J is only entitled to any ‘loans’ made to the trust and had never made any demand for interest on those loans, thus is not entitled to interest either.
Establishing a Constructive Trust
J made a constructive trust claim against E’s family trust. There are 4 requirements for a successful constructive trust claim under the leading Court of Appeal case, Lankow v Rose:
- Direct or indirect contributions to the property
- Expectation of an interest in the property
- That expectation is reasonable
- The trust should reasonably expect to yield her an interest in the trust property
In the present case the High Court accepted that there was no dispute that the first three prerequisites had been made out. J had contributed both directly and indirectly to property owned by the trust from the outset of the relationship, including $53,564 from the sale of her home from an earlier relationship. The expectation that she had an interest in this property was clearly reasonable.
With regard to the final requirement, the High Court held that the contributions made by J were made with the knowledge and approval of the trustees in circumstances where their collective conscience must recognise the validity of her claim. A valid claim having been established, the next question to be determined is what the value of the interest in the trust should be.
Determining the Value of the Interest in the Trust
The Court of Appeal in Lankow v Rose made clear that the starting point for constructive trust claim is not the presumption of equal sharing. A claiming party’s share in a trust must reflect their contributions to it. In this case the court started at the initial contribution made to the trust by J and then took into account:
- Further direct contributions by Johnstone less any repayments she received
- Easterbrook’s direct contribution in the form of forgiveness of a debt of $297,000. This contribution was tempered because he used the trust to meet his own personal debts
With regard to these factors, the judge ruled the trust holds on constructive trust for Ms Johnstone a 35% share of house built by the parties and owned by the trust.
- Establishing a constructive trust is difficult, it has a high threshold
- The starting point when determining a party’s interest in a trust is not the presumption of equal sharing. In this case the judge started at the initial contribution made to the trust
- Where contributions are made to a trust with knowledge and approval of all trustees then it could be shown that in the circumstances the trust should reasonably be expect to yield an interest.
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