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A constructive trust is a legal device used by courts sitting in equity to resolve claims raised by a plaintiff whose property has been converted to a profitable use by the defendant. In such a case, the court will trace the benefits accruing to the defendant through the use of the plaintiff's property, and by operation of law will deem all benefits resulting from the conversion to be held by the defendant in trust for the plaintiff, so long as they have not become intermingled with the defendant's own funds.
For example, if the defendant steals $100,000 from the plaintiff and uses that money to buy a house, the court can trace the house back to the plaintiff's money, and can deem the house to be held in trust for the plaintiff; the defendant must then convey title to the house to the plaintiff - even if rising property values had appreciated the value of the house to $120,000 by the time the transaction occurred. If the value of the house had instead depreciated to $80,000, the plaintiff could demand a remedy at law (money damages equal to the amount stolen) instead of an equitable remedy.
The situation would be different if the defendant had mixed his own property with that of the plaintiff, for example adding $50,000 of his own money to the $100,000 stolen from the plaintiff and buying a $150,000 house; or using plaintiff's $100,000 to add a room to defendant's existing house. Then, the constructive trust would no longer be available. Instead, the court would create an equitable lien on the house by operation of law. Thus, the plaintiff would be in the position as if he had loaned the defendant the money with the house as collateral, and the defendant now owed it in return. Under an equitable lien, therefore, the plaintiff does not get the actual property purchased with his stolen funds, but only the option of foreclosing on the property if the defendant is unable or unwilling to repay what he had stolen initially.
Because a constructive trust is an equitable device, the defendant can raise all of the available equitable defenses against it - including unclean hands, laches, detrimental reliance, and undue hardship.
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