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Rescission What is it: A restitution remedy used to reverse transactions resulting in a contract. Grounds for rescission: Fraud, substantial breach of.

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Presentation on theme: "Rescission What is it: A restitution remedy used to reverse transactions resulting in a contract. Grounds for rescission: Fraud, substantial breach of."— Presentation transcript:

1 Rescission What is it: A restitution remedy used to reverse transactions resulting in a contract. Grounds for rescission: Fraud, substantial breach of K, mutual mistake, duress, certain unilateral mistakes, undue influence. How it works: Court reverses the transaction (disaffirms the K) & requires the parties to return any benefit conferred on them by the other party. Example - B & S contract for B to buy house for $150,000. After closing, B learns that the house has a reputation of being haunted, which S deliberately hid from B.

2 Rescission where there has been additional benefit After buying house from D, Ps move in and build an addition. Ps live in house for six months and then discover it is haunted, which D fraudulently concealed from them. Upon rescission, P/D must return house/purchase price. Upon rescission, what do we do with the addition (how do we value it)? P can’t keep addition; D must compensate P for it in some way. Three commonly used valuations: (1) Difference in market value before and after addition, (2) P’s cost of improvement, or (3) Value of improvement to D Upon rescission, what do we do Ps having lived in the house for six months? Haven’t P’s lived in D’s house rent free for 6 months once P’s return the purchase price? Courts often require Ps to compensate D with rent.

3 Restitution via return of specific property – constructive trusts Constructive Trust can be used to get disgorgement of profits (money judgment) Nothing special about a constructive trust in this context – like quasi- contract or accounting for profits, it’s just a remedy P asks for to get disgorgement (e.g., Snepp). Sometimes P doesn’t want a money judgment. P wants return of the very thing that was taken. Replevin achieves this result if there is identifiable personalty involved Rescission also achieves this result if a contract is involved Constructive Trust does as well if a contract isn’t involved (with some added perks)

4 Mechanics of a Constructive Trust Actual trust Separates legal ownership (Trustee) and equitable ownership (Beneficiary). Trustee has the fiduciary obligation to manage the trust appropriately, including (1) accounting for trust profits, & (2) eventual return of trust assets to beneficiary. Constructive Trust Courts will declare D a constructive trustee in situations where D is unjustly enriched at P’s expense. D must account for profits from misappropriated property and return property/profits to P. When P wants specific property returned in certain situations without a contract, the constructive trust is the restitution device that must be used.

5 Imposing a constructive trust to obtain return of property Imposition of Constructive Trust requires: Identifiable Asset – The ability to point to property or identifiable money & say “that thing” is mine Grounds for Imposition – When D has acquired legal title at P’s expense (Misrepresentation, Conversion, Duress, Undue Influence, Breach of Fiduciary Duty, Mistake) Why does court impose constructive trust in Paolini but not Ruffin? Paolini – D defrauds Ps; places $ in sham corporate accounts (created for purpose of hiding/dissipating $). D disburses $137K from those accounts to the Iglesias Family Trust; which purchases a condo. Court imposes a constructive trust on condo to be held for Ps. Ruffin – Court ordered D to pay P spousal/child support ($200/week) beginning 9/20/96. D doesn’t pay until On 9/28/96, D was 2 payments in arrears and had purchased a winning lottery ticket for $2 w/ his very limited funds. Court refuses to impose constructive trust in P’s favor on lottery proceeds.

6 Results of imposing constructive trust : P who obtains a constructive trust is treated like TRUE owner of the property Paolini Ps - can successfully keep track of their property through a series of exchanges - they have an identifiable asset & grounds for a constructive trust (fraud) P without a constructive trust is a judgment creditor who must settle for a money judgment Ruffin P is merely a creditor - can’t claim to be true owner of any identifiable asset in D’s hands even if D’s failure to pay P’s support is the but for cause of his purchase of the lottery ticket D owed P money. But that is true of many debtor/creditor relationships. D did not take anything specific from P. Nor did P pay D by mistake. Thus, P has neither of the requirements for constructive trust – no identifiable asset nor any acquisition of legal title at expense of P

7 Adding bankruptcy into the mix In re Leitner – D/Leitner embezzled money while performing legal & accounting services for P/Wetherill. D used the funds to buy a home. P discovered the embezzlement and brought state court action seeking constructive trust on home. D declared bankruptcy before state court could declare constructive trust. The act of embezzlement and fact that funds from it were used to buy home are uncontested. But Bankruptcy Trustee contests the imposition of a constructive trust on the home since D is now in bankruptcy. General Rule re constructive trusts when D is bankrupt: Because P is treated as the true owner of the property, bankruptcy court will honor the constructive trust BUT P must meet 2 requirements Identifiable asset Conscious wrongdoing (fraud, theft) or mistake by P

8 What is an “identifiable” asset (in any of these cases)? If one must identify specific assets to get a constructive trust – why do so many Ps call cash an identifiable asset? AND why are they able to point to cash/things that have been exchanged for something else? General definition of identifiable asset (including cash): It’s easy to identify specific things (land, house, teapot, wallet) as identifiable assets because they are relatively unique But even cash can be unique if it is placed into identifiable separate accounts Paolini – special corporate accounts into which fraud proceeds placed Even D’s cash/bank accounts can be identifiable assets if money attributable to P can be traced into them Need to use tracing fictions/presumptions for this

9 Tracing through exchanges Direct Exchange In re Leitner – Wetherill’s money was stolen and used to buy Leitner’s house, which Trustee sold. Wetherill can trace through two direct exchanges – stolen cash to buy house & house sold for cash. He gets a constructive trust on the cash proceeds resulting from the sale that is now in the hands of the bankruptcy trustee (who holds for D). This kind of tracing is relatively simple although there can be many exchanges to keep track of Exchanges & Commingling What happens if D commingles P’s stolen cash with his own (Erie Trust)? Must use the tracing fictions/presumptions in Erie Trust & notes. They are: 1.D spends his own $ first 2.New $ lawfully acquired is Ds unless he manifests an intent to replenish P’s money 3.D invests P’s money first 1 & 3 can be used at P’s election to maximize P’s recovery. 2 must be used as it is stated.

10 Some possible limits on P’s recovery when using tracing If D is not bankrupt and P traces into assets worth more than P lost, P can keep the assets of increased value. BUT if D is bankrupt & P can trace into assets that are now worth more that what P lost, court will limit P to amount that she actually lost Court will impose an equitable lien instead of a constructive trust Equitable lien – device that secures a monetary judgment in the amount of loss by creating a security interest in specific property. Gives holder of the lien the right to force D to sell object and have the proceeds of the sale applied to pay off the security interest. If several Ps are victims of the same fraud, they generally cannot race to the courthouse door to try to get priority over one another. They can get priority over unsecured creditors to the extent they meet the requirements for imposition of a constructive trust. But they share equally with each other to the extent that they must rely on tracing fictions in order to recover their property (Cunningham v. Brown)

11 Facts common to all Tracing problems Scum manages a trust fund for his mother which contains the following: 100 shares Microsoft at $30/share 100 shares of Exxon at $50/share 100 shares of Walmart at $60/share Scum embezzles from Mom in each problem so we know that there are GROUNDS for a constructive trust. The key is to find out whether there is an identifiable asset. Scum maintains his own checking account which, at the beginning of each problem, has $10,000 in it. Due to financial difficulties, after the actions identified in each problem, Scum eventually goes bankrupt making a damage judgment essentially not worth it. Each transaction in each problem occurs in chronological order on a different day with the balance immediately being recorded.

12 On an exam It is fine to use a ledger to illustrate your work on an essay question (assuming a bank account is involved). You don’t need to use columns with lines (you can simply create rows of numbers with tabs if you are working on computer). Alternatively, computer users can just use a bluebook for a problem like this if it makes them more comfortable. Show your work out to the side of the ledger – i.e., indicate the purpose of the deposits/withdrawals and the presumptions you use. Don’t just write “presumption #1” without telling me what that means somewhere in the answer. That doesn’t let me know that you understand what is going on. On a multiple choice question, you simply have to do the work and see which answer it matches with


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