Fiduciary Duty: Agent’s Fraud Cured by Constructive Trust

Let’s discuss “constructive trusts” as a remedy for fraud or disloyal conduct by an agent (agents owe a “fiduciary duty” to their client, which means they must act loyally and in good faith toward their client). If a real estate agent buys for himself a property that he had been negotiating for on behalf of his client, the remedy for that breach of the agent’s fiduciary duty is often monetary (i.e., money). But what if the value of the property has decreased since the agent wrongfully acquired it, so the client has not “lost” anything in the usual sense? Is there still a remedy for the client? Can the real estate agent be ordered to return the property to his client even if the market value of the property has since decreased? That was the situation in Soulos v. Korkontzilas, [1997] 2 S.C.R. 217, where the Supreme Court of Canada ordered an agent who breached his fiduciary duty to convey the wrongfully acquired property to his client, a remedy known as a “constructive trust.”

Breach of agent’s fiduciary duty to client

Fotios Korkontzilas was a real estate broker and Nick Soulos was his client. Fotios acted for Nick in relation to the purchase of a commercial building. Fotios entered into negotiations with the vendor of the building on Nick’s behalf. After offers and counter-offers were exchanged, the vendor told Fotios that it would accept $265,000 for the property. Instead of passing that information on to Nick as he should have, Fotios purchased the property himself and put it in his wife’s name. When Nick asked what had happened to the property, Fotios told him to “forget about it” as the vendor no longer wanted to sell it. Three years later, Nick found out that Fotios had purchased the property for himself. Nick brought proceedings to have the property conveyed to him, alleging breach of fiduciary duty.

Value of the property decreased since the agent’s breach of fiduciary duty

The unusual twist in this case was that by that time Nick commenced his lawsuit, the market value of the property had declined, so it could not be said that Fotios had been “enriched” by his breach of fiduciary duty. Because the property had decreased in value, Nick abandoned his claim for damages, but proceeded with his claim to have the property transferred to him. Nick said that the property held special value to him because its tenant was his banker, and being one’s banker’s landlord was a source of prestige in the Greek community of which he was a member.

Breach of fiduciary’s duty of loyalty

The court found that Fotios breached his duty to loyalty by failing to pass on to his client the information he obtained on his client’s behalf as to the price the vendor would accept for the property and instead using that information to purchase the property himself. By using the information obtained while acting as an agent to acquire the property for himself, Fotios allowed his own interests to conflict with those of his client.

Dispute about constructive trust as the appropriate remedy

At trial, the judge held that although Fotios had breached a duty of loyalty to Nick, a constructive trust was not an appropriate remedy because Fotios had purchased the property at fair market value and so had not been “enriched”. That decision was reversed on appeal. The Supreme Court of Canada stated that a constructive trust can be imposed to prevent a person from keeping property which in “good conscience” they should not be permitted to keep. To return the parties to the position they would have been in had Fotios’ breach of fiduciary duty not occurred, the Supreme Court of Canada imposed a “constructive trust” and ordered Fotios to convey the property to Nick, who was content to make all necessary financial adjustments, including indemnification for the loss Fotios has sustained during the years he has held the property.

Why an agent’s breach of fiduciary duty may warrant constructive trust, despite no financial gain

A constructive trust is required in cases such as this to ensure that agents and others in positions of trust remain faithful to their duty of loyalty. If real estate agents are permitted to retain properties which they acquire for themselves in breach of a duty of loyalty to their clients provided they pay market value, it would undermine the trust and confidence that underpins the institution of real estate brokerage. The message would be that real estate agents can breach their duties to their clients and the courts will do nothing about it, unless the client can show that the real estate agent made a profit.

Take home point on constructive trust as a remedy for agent’s breach of fiduciary duty

The fiduciary duties of an agent would be meaningless if the agent could simply acquire property at market value, and then deny that a constructive trust should be ordered because the client suffered no damages. A constructive trust can be ordered, even without an established loss, to condemn a fiduciary’s wrongful act and maintain the integrity of the relationships of trust which underlie many of our industries and institutions. This is significant in the wills and estates context as there are roles that give rise to fiduciary duties (e.g., estate trustees), the breach of which may call for the imposition of a constructive trust.