Constructive trust reversed

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A widow will get the opportunity to show she was a “bona fide purchaser” of her late husband’s life insurance policy, by giving consideration in exchange for being named the beneficiary.

If she can do so, the Wisconsin Court of Appeals held on Oct. 8, then she can defeat the claim of the husband’s daughter to the proceeds, even though the divorce agreement from his first marriage required him to maintain the daughter as the beneficiary.

When Gerald Pluemer and his first wife, Lisa, divorced, the marital settlement agreement provided that each would name their daughter, Jessica, as the primary beneficiary on their insurance policies.

Gerald remarried Patricia in 2004. Gerald owned a business that lost money, and Patricia supported the family, including Jessica when she lived with them.

In July 2007, Patricia took out a second mortgage on her house for more than $32,000, which she used to pay off some of Gerald’s business debts. According to Patricia, she did this in exchange for being named the beneficiary on Gerald’s life insurance policy. Patricia also maintains she did not know about the marital settlement agreement.

In August, Gerald changed the named beneficiary from Jessica to Patricia, and in September, he died.

The insurer paid Patricia pursuant to the policy, and Jessica brought suit to recover the proceeds. Grant County Circuit Court Judge Michael Kirchman granted summary judgment in favor of Jessica, imposing a constructive trust over the money.

Patricia appealed, and the Court of Appeals reversed in an opinion by Judge Charles P. Dykman, using the standard set forth in Richards v. Richards, 58 Wis.2d 290, 206 N.W.2d 134 (1973).

As in the case at bar, the marital settlement agreement in Richards required the husband to maintain his children as beneficiaries, but he remarried and made his new wife the beneficiary.

The court in Richards imposed a constructive trust for the benefit of the children. Quoting 5 Scott, Law of Trusts sec. 470, at 3444 (3d ed.1967), the court held, “Where a person holding property transfers it to another in violation of his duty to a third person, the third person can reach the property in the hands of the transferee [by means of a constructive trust] unless the transferee is a bona fide purchaser.”

The relevant issue, the court thus concluded, is whether or not Patricia met the requirements to be a bona fide purchaser – one who purchases in good faith, without notice, and for a valuable consideration.

The court found that a fact question was present on that issue, rendering summary judgment inappropriate.

Patricia testified at her deposition that she did not know about the marital settlement agreement, and that she would not have taken out the second mortgage on her house to satisfy Gerald’s debts unless Gerald made her the beneficiary of his life insurance policy.

However, two facts suggest the contrary: no written contract existed to support that contention; and the policy was not actually changed until two months after Patricia mortgaged her home.

Remand

The court then issued instructions for the trial court on remand.

If it finds that Patricia was a bona fide purchaser, then a constructive trust for Jessica would not be appropriate as to “that amount of the life insurance interest.” However, if Patricia did not mortgage her house in exchange for the life insurance proceeds, then a constructive trust for Jessica would be appropriate for the entire proceeds.

However, the court held that, even if Patricia was not a bona fide purchaser, she could still argue that a constructive trust would be inequitable based on other factors.

Judge Dykman wrote, “The court should take into account relevant factors in this case including: debts incurred during marriage for which Patricia remains responsible; Patricia’s contribution to Jessica’s financial support during the time of her marriage to Gerald; and the welfare of Jessica, who Gerald and Lisa intended to benefit from the proceeds of the policy.”

Analysis

The opinion correctly applies Wisconsin law, save for the final paragraph discussing remand.

Until then, it makes clear that only if Patricia has provided consideration for being named beneficiary can she defeat a constructive trust in favor of Jessica, and only in the amount of the mortgage.

At most then, Patricia would be entitled to roughly $32,000, the amount of the second mortgage she purportedly signed and used to pay Gerald’s debts.

This presents a simple question the trial court is well-equipped to handle on remand – was there consideration?

In the final paragraph, however, the court instructs the circuit court on remand to also consider “debts incurred during marriage for which Patricia remains responsible; Patricia’s contribution to Jessica’s financial support during the time of her marriage to Gerald; and the welfare of Jessica…”

However, it would clearly be inappropriate to consider debts incurred by Patricia and Gerald for which Patricia remains responsible.

It would be a strange anomaly if Patricia can keep the $32,000, only if she incurred that amount in debt as consideration for being named beneficiary, but can keep more based on other debts she gratuitously incurred with Gerald for no particular consideration.

The same holds for contributions to Jessica’s financial support she provided while married to Gerald. As with the debts, any such support would be wholly gratuitous.

As a policy matter, as well, opening the door to such issues would result in expensive factfinding into matters best left closed.

Putting a dollar figure on the financial support any stepparent provides to a child is an almost Herculean task, particularly after the fact.

There would also be other thorny questions to answer on remand. Did Patricia provide support because she regarded Jessica as her own daughter? Or did she do it resentfully, only out of an expectation she would get some return on it later on?

Unlike the question of whether Patricia gave consideration for being named beneficiary, these are questions that are not only better left unasked in the first place, but which would involve expensive litigation to decide.