When Does Money Used to Buy Real Estate Create a Constructive Trust in New York?

Disputes over real estate often arise when one person provides money that is later used by another person to purchase property. This frequently occurs among family members, romantic partners, and business associates, where money may change hands without a formal written agreement.

If the property is ultimately titled in only one person's name, the person who supplied the money may claim that he or she nevertheless owns an equitable interest in the property through a constructive trust. Under New York law, however, providing money that is eventually used to purchase real estate does not, by itself, create an ownership interest in that property.

What Is a Constructive Trust?

A constructive trust is an equitable remedy that allows a court to recognize an interest in property even though the claimant does not hold legal title. New York courts generally look for four elements:

1. A confidential or fiduciary relationship;

2. A promise, either express or implied;

3. A transfer made in reliance on that promise; and

4. Unjust enrichment.

See Sharp v. Kosmalski, 40 N.Y.2d 119 (1976).

The doctrine is flexible, but it has limits. The Court of Appeals has explained that a constructive trust is intended to be a "fraud-rectifying" remedy rather than an "intent-enforcing" one. In other words, a court will not ordinarily impose a constructive trust merely because someone believes that an informal promise or family understanding was not honored. See Bankers Sec. Life Ins. Soc'y v. Shakerdge, 49 N.Y.2d 939 (1980)

Providing the Purchase Money May Not Be Enough

A particularly important issue is whether the alleged promise and transfer actually concerned the specific property over which the constructive trust is sought.

For example, in Mazzei v. Kyriacou, 139 A.D.3d 823 (2d Dep't 2016), the plaintiff loaned substantial funds to his nephew, and some of those funds were later used to purchase residential property. The court nevertheless rejected the constructive-trust claim because the plaintiff had not alleged a promise concerning the particular property or a transfer made in reliance on such a promise. At most, the plaintiff had a claim for repayment of money, rather than an equitable ownership interest in the real estate.

The First Department has applied a similar principle. In Meehan v. Meehan, 227 A.D.2d 268 (1st Dep't 1996), the court rejected a constructive trust where the underlying dispute concerned money advanced for a real estate project but there was no sufficient allegation that the transfer was made in reliance upon a promise concerning title to the property. Where the dispute is fundamentally about repayment of money, ordinary money damages may be the appropriate remedy instead.

The Timing of the Promise and the Property Matters

This distinction can become especially important where money is transferred before the property has even been identified.

A general understanding that money will someday be used to purchase real estate is different from a promise concerning ownership of a particular property. If the claimant transferred money before anyone had selected or contemplated the property ultimately purchased, it may be difficult to establish that the transfer was made in reliance upon a promise concerning that property.

By contrast, constructive-trust claims are stronger where the parties already had a relationship to the particular property and the claimant took property-specific actions in reliance upon the alleged promise, such as residing there, paying taxes and carrying costs, or making substantial improvements. See, e.g., Marini v. Lombardo, 39 A.D.3d 824 (2d Dep't 2007).

Thompson & Skrabanek's Experience With Constructive Trust Claims

Thompson & Skrabanek recently obtained full dismissal of a constructive-trust action involving precisely this issue. A plaintiff alleged that he transferred approximately $1 million to his son pursuant to an agreement that the money would be used to purchase a Manhattan apartment in both of their names. The apartment at issue, however, had not yet been identified when the funds were transferred and was not selected until approximately ten months later. The New York County Supreme Court dismissed the action, holding that the plaintiff could not establish a constructive trust over property that was unknown to the parties when the alleged promise and transfer occurred. The Court also vacated the Notice of Pendency that had been filed against the apartment, clearing the encumbrance on our client's property.

Are you considering bringing a constructive trust claim, or facing such a calim involving real estate or other property? Contact Thompson & Skrabanek to schedule a free consultation and discuss your options.