Restitution Basic Premise: In cases where D has been unjustly enriched at P’s expense, D must return the amount of his/her unjust enrichment One of the biggest issues – How to measure unjust enrichment. When is it appropriate to make D disgorge profits as opposed to simply give back value of what received at P’s expense?

Disgorging profits & breach of contract – Snepp Snepp, former CIA agent, published book about CIA activities in Vietnam w/out submitting it for prepublication review per his employment contract.SCT said appropriate remedy was imposition of a constructive trust, which requires disgorgement of all profits received from the book. Of what did Snepp wrongfully deprive the CIA? Does that justify an award of full profits? Wouldn’t he have earned those profits anyway if he had just submitted the book for review? Is there a justification for the award of full profits?

Disgorging profits & breach of contract – May S&B enter into contract for sale of land. Before closing, S sold fill to X for $240K significantly damaging the land and diminishing its value. Contract between S&B was then executed after which B discovers S’s perfidy. What are B’s damages if sues for breach of contract? What does the court award instead? Under what theory?

Disgorging profits & breach of contract – a summary Conventional Wisdom – NO disgorgement of profits for routine profitable breach of contract. Rule has broken down some; exceptions explain Snepp & May Exceptions Breach of non-compete or confidential information clause Snepp is similar to these cases Breach of contract for sale of land (May) Equitable conversion - doctrine holding that Buyer of land becomes the equitable owner the minute the contract is signed. Allows both specific performance and imposition of constructive trust Opportunistic Breach (?) – attempt by Rstmt (3d) to make law? Deliberate breach resulting in profit to breachor where available remedy affords inadequate protection to P’s contractual entitlement (p. 545)

Restitution mechanisms up to this point We have seen several mechanisms allowing P to force D to return unjust gain. All have resulted in a simple money judgment measured by the amount of D’s gain (although the measurement of that gain may differ depending on the culpability of D or P). Mechanisms include: Quasi-Contact (Sauer, Olwell) Accounting For Profits (Maier Brewing p. 520 (not assigned)) Constructive Trust (Snepp)

Restitution mechanism specifics: Quasi-contract - court implies a promise by D to return benefit in situations where D “in good conscience” should not keep it. Mainly used when (1) underlying action is a tort or (2) P needs a substantive theory of restitution Legal remedy Accounting for Profits - court implies a duty to account for and disgorge profits made from “improper use of P’s property/entitlement.” Mainly used w/ (1) breach of fiduciary duty cases, (2) statutory claims (e.g., trademark & copyright infringement) Equitable remedy Constructive Trust - court declares D a constructive trustee who must disgorge any unjustly gained benefit. Mainly used w/ (1) breach of fiduciary duty, (2) fraud & (3) theft Equitable remedy

Rescission What is it: A restitution remedy used to reverse transactions resulting in a contract. Modern trend – courts treat as an equitable remedy 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. What are B’s remedies? Damages: Rescission:

Rescission & changed circumstances – Mobil Oil Mobil entered into K w/ US where it paid $156 million in exchange for leases to explore/develop OCS off N.C. coast (conditional upon Mobil getting further gov’t permission). Due to later federal law, US w/held permission. SCT says US repudiated the contract. Rescission is a hugely important remedy for Mobil: Prior to the change in federal law, Mobil never secured drilling rights – it had only a CHANCE to get them given N.C.’s veto power under old law. But that chance was worth paying for. After the law forced US to breach, Mobil’s chance plummeted to zero. Mobil’s expectancy damages are $0 because court found that N.C. likely would have denied Mobil rights under the old law anyway BUT rescission undoes the contract and gets Mobil its money back in exchange for its return of exploration rights to the US

Rescission & election of remedies Rescission can be very attractive if circumstances have changed (or simply because it’s so easy to unwind a particular contract). BUT it has costs. Rescission is inconsistent with damages – i.e., P cannot seek both rescission & compensatory damages on a contract so she must ELECT one or the other An aside about timing and election: Modern trend allows P election between rescission or affirmation of the contract up to entry of judgment as long as P’s choice does not prejudice D BUT some jurisdictions require “notice” of rescission so choice should be made as early as possible Consequences of electing rescission: If P chooses rescission, she should lose her right to ALL damages – even punitive and consequential damages – because she has disaffirmed the contract.

Rescission & punitive or consequential damages What are the court trends? Trend with punitive damages – courts still reluctant to allow punitive damages Trend with consequential damages – majority of courts willing to allow consequentials if they don’t duplicate the unwinding of the contract Hypo re consequentials & rescission: P (a resident of Missouri) buys a house from D located in New York state. P moves to NY only to find that D lied about the house’s habitability – it’s haunted and nobody has able to spend the night in the house without going crazy. P is forced to stay in a motel for 2 weeks until he can find another house to purchase. P can seek rescission and to recover consequential damages for hotel expenses in such circumstances even though damages look to P’s loss from the contract.

Rescission where there has been additional benefit Ps buy a house from D. After K is executed, Ps move in and build an addition. After living in the house for six months, Ps discover that it is haunted, which D fraudulently concealed from them. Upon rescission, P/D will have to return the house and purchase price to each other. Upon rescission of the contract, what do we do with the addition (how do we value it)? P can’t keep addition so D will have to compensate Ps 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 about the fact that Ps have lived in the house for six months? Haven’t Ps lived in D’s house rent free for 6 months? Courts often require Ps in these situations to compensate D with rent.

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)

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.

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.

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

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

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