Is There A Place for Rough Justice In The Law of Constructive Trust?

Written by litigator and mediator Irvin Schein and originally published at irvinschein.com.​

The recent case of Palkowski v. Ivancic provides an excellent illustration of the extent to which the court will strive to use all the tools at its disposal to create a result that is fair, even when neither party to the dispute deserves favourable treatment. 

In this case, the trial judge was required to decide between two parties, “neither of whom has demonstrated high moral fibre”.  The Court found that the parties “worked together to create a sham transaction that was intended to defeat at least one of the plaintiffs’ creditors…”.  He observed that he “must decide between two parties to a decidedly dishonorable transaction in order to settle the equities as between them”.  Accordingly, the judge concluded that he would choose “the least unjust remedy that [I] believe the authorities enable me to fashion…Justice, even rough justice, is better than none at all”.

Mr. Polkowski and Mr. Ivancic had both been involved in the construction industry and were retired.  By the date of trial, Mr. Polkowski was 68 years old and Mr. Ivancic was 80.  They had been friends for many years, until shortly before this action had begun.  By the time it reached trial, the lawsuit had gone on for almost 10 years.

By 1996, Mr. Polkowski was in financial trouble.  He and his wife owned a home which they had purchased for $600,000 in 1988.  This was his only significant asset by 1996.  He had lost money in two real estate transactions and he had significant debts.  He had debts of over $500,000 with three creditors, one of which had obtained a judgment against him.

Mr. Polkowski realized that he had to do something.  He did not want to sell the family home.  So he made a deal with Mr. Ivancic.

Their plan was to make it appear as though Mr. Polkowski had sold the home to Mr. Ivancic.  Mr. Ivancic would pay some money and take title to the house, although no keys would be handed over, and the Polkowski family would never move out of the house.

Mr. Polkowski obtained a valuation of the home at the time of about $600,000.  He then went ahead and sold it to Mr. Ivancic on paper, for $350,000.  While the two men cooked up some paper work that looked like there had been an offer, a counter-offer, and further negotiations before the final purchase price was set, the judge found that none of this was real and that it was always intended that the transaction take place at $350,000.

Mr. Polkowski then presented the apparent situation to his creditors and succeeded in settling with each of them at amounts far less than the actual debts.  In fact, out of $350,000 actually paid by Mr. Ivancic so that Mr. Polkowski could satisfy these debts, there was some money left over for Mr. Polkowski.

Mr. Ivancic had borrowed the money to make that advance.  Over the ensuing decades, Mr. Polkowski paid Mr. Ivancic $1500 per month to keep Mr. Ivancic’s loan in good standing.  He also made improvements on the house and generally behaved as if he was the owner all along. 

In 2004, Mr. Ivancic evidently decided that he wanted it all.  He insisted that Mr.Polkowski stop renovating the house.  In 2005, the parties met to try and straighten things out.  They were unable to do so.  Mr. Polkowski demanded that the title to the property be given back to him.  Mr. Ivancic refused.  Mr. Polkowski made a number of offers to make Mr.Ivancic financially whole.  They were declined.

Mr. Polkowski then sued, claiming that Mr. Ivancic would be unjustly enriched if he was able to retain title to the house, and alternatively that Mr. Ivancic’s interest in the house was subject to a constructive trust in favour of Mr. Polkowski.

At trial, the Court had no hesitation in finding that the transaction had been a sham.  Everyone knew that the property was worth at least $250,000 more than Mr. Ivancic had paid, that the intention was to change legal ownership without changing beneficial ownership (although the lack of anything written made this legally impossible), and that the whole scheme was designed to deceive Mr. Polkowski’s creditors. 

So in essence, the Court was faced with a situation in which it would have to either allow Mr.Ivancic to have the title, for much less than the house was worth, or devise some way for Mr. Polkowski to get the title back subject to some type of compensation – in circumstances in which both parties had been completely dishonourable.

In the end, the trial judge found a creative way to accomplish what he wanted, which was to allow Mr. Polkowski and his family to remain in the home subject to compensation.  He did that through the Conveyancing and Law of Property Act, which provides that where a person makes lasting improvements on land thinking that it is his own, he is entitled to a lien on it to the extent of the enhancement of its value or, in the right circumstances, to retain the land subject to providing compensation.

This enormous discretion gave the judge the opportunity to fashion the desired remedy.  He ordered that the title be transferred back to Mr. Polkowski upon payment by Mr. Polkowski of a sum which he calculated as being not less than $506,000, made up of credits for the amount that Mr. Ivancic had been unjustly enriched by having acquired title to a $600,000 house for $350,000, together with interest and a further credit in respect of the value of the improvements made by Mr. Polkowski over the years.

This sensible result brought 10 years of acrimonious and probably very expensive litigation to a close.  The judge specifically commented that he found this task to be distasteful.  But he was able to arrive at fair result using a novel and imaginative strategy to get there.