Present: All the Justices
LORETTA W. FAULKNIER
v. Record No. 012006 OPINION BY JUSTICE CYNTHIA D. KINSER
JUNE 7, 2002
LINDA D. SHAFER
FROM THE CIRCUIT COURT OF PRINCE GEORGE COUNTY
Robert G. O’Hara, Jr., Judge
This appeal involves a dispute over the proceeds of a
life insurance policy that were paid to Linda D. Shafer,
the named beneficiary on the policy, allegedly in
contravention of a separation agreement between the
decedent and his former wife, Loretta W. Faulknier.
Because we conclude that Faulknier alleged sufficient facts
to state a cause of action for the imposition of a
constructive trust on the insurance proceeds, we will
reverse the circuit court’s judgment sustaining a demurrer.
FACTS AND MATERIAL PROCEEDINGS
The circuit court decided this case on demurrer.
Therefore, we “recite as true the well-pleaded facts.”
Thompson v. Skate America, Inc., 261 Va. 121, 125, 540
S.E.2d 123, 124 (2001). In doing so, we look solely at
Faulknier’s allegations in her bill of complaint, see Perk
v. Vector Resources Group, Ltd., 253 Va. 310, 312, 485
S.E.2d 140, 142 (1997), and any exhibits mentioned in the
challenged pleading, Rule 1:4(i); Flippo v. F & L Land Co.,
241 Va. 15, 17, 400 S.E.2d 156, 156 (1991). 1
The marriage between Faulknier and the decedent was
dissolved by a decree of divorce entered in June 1989. A
separation agreement that Faulknier and the decedent had
previously executed was filed with that decree. 2 As
pertinent to this appeal, the separation agreement provided
that “[Faulknier] shall remain as beneficiary on [the
decedent’s] Civil Service Life Insurance[.]” However, in
1996, the decedent designated Shafer as beneficiary of that
policy.
After the decedent’s death in 1997, Faulknier filed a
claim for the proceeds of that life insurance policy. The
Office of Federal Employees’ Group Life Insurance denied
the claim because “THE LATEST DESIGNATION OF BENEFICIARY ON
FILE THAT WAS COMPLETED BY THE INSURED ON 02/20/96 NAME[D]
SOMEONE OTHER THAN [FAULKNIER] AS BENEFICIARY.”
Faulknier then filed a bill of complaint against
Shafer to recover the proceeds of the decedent’s life
1
Faulknier attached two exhibits to her bill of
complaint: a separation agreement and a letter from the
Office of Federal Employees’ Group Life Insurance.
2
The decree of divorce did not “affirm, ratify and
incorporate by reference” the separation agreement. Code
§ 20-109.1.
2
insurance policy. Faulknier alleged that the decedent
changed the beneficiary designation on his life insurance
policy in contravention of the separation agreement.
Continuing, she asserted that Shafer received those
insurance proceeds upon the decedent’s death because she
was the named beneficiary at that time and that, either
before or upon receipt of the funds, Shafer “knew or
expected, or reasonably should have known or expected, that
her designation as beneficiary of the Insurance Plan
violated the terms of the Separation Agreement.” Faulknier
alleged that Shafer, therefore, has been unjustly enriched
and “wrongfully has obtained payment of benefits” under the
decedent’s life insurance policy that “rightfully belong to
Faulknier” under the terms of the separation agreement.
Faulknier asked the court, among other things, to impose a
constructive trust on those funds.
In response, Shafer filed a demurrer asserting that
Faulknier must seek redress against the decedent’s estate
before pursuing an equitable remedy. 3 Shafer argued that,
because the decedent’s estate had sufficient assets to
satisfy Faulknier’s claim, Faulknier could proceed against
the estate either in an action for breach of contract, see
3
Code § 64.1-144, or by requesting a “debts and demands”
hearing before the commissioner of accounts pursuant to
Code § 64.1-171. Therefore, according to Shafer, Faulknier
had an adequate remedy at law and was not entitled to the
imposition of a constructive trust upon the life insurance
proceeds paid to Shafer.
Faulknier subsequently moved for summary judgment
asserting that the undisputed facts demonstrate that Shafer
had been unjustly enriched at Faulknier’s expense. Thus,
Faulknier claimed that a constructive trust should be
imposed on the life insurance proceeds, even if Shafer was
unaware of the terms of the separation agreement and
innocently received payment of those benefits.
After considering the parties’ arguments, the circuit
court granted Shafer’s demurrer and denied Faulknier’s
motion for summary judgment. The court subsequently
entered an order dismissing Faulknier’s suit without
prejudice and she now appeals.
ANALYSIS
On appeal, Faulknier asserts that the circuit court
erred as a matter of law in finding that she must seek
redress against the decedent’s estate in order to recover
3
Shafer also filed an answer denying any indebtedness
to Faulknier and a cross-bill seeking indemnification from
4
the proceeds of the life insurance policy. She also
assigns error to the court’s conclusion that she was not
entitled to summary judgment since the uncontroverted
evidence, according to Faulknier, demonstrates that Shafer
was not entitled to the proceeds of the life insurance
policy and will be unjustly enriched if she is allowed to
retain those funds. We will first decide whether the
circuit court erred in sustaining Shafer’s demurrer and
then consider whether the court also erred in denying
summary judgment to Faulknier.
With regard to the first issue, the procedural posture
of this case is important because the function of a
demurrer is to test only whether the challenged pleading
states a cause of action upon which relief can be granted
if all the allegations are admitted as true. Bellamy v.
Gates, 214 Va. 314, 315-16, 200 S.E.2d 533, 534 (1973).
See also Votsis v. Ward’s Coffee Shop, 217 Va. 652, 654,
231 S.E.2d 236, 237 (1977). In ruling on the demurrer, the
circuit court “was required to consider all reasonable
inferences of fact which fairly and justly could be drawn
from the facts alleged.” Ryland Group, Inc. v. Wills, 229
Va. 459, 461, 331 S.E.2d 399, 401 (1985) (citing Chippenham
Manor, Inc. v. Dervishian, 214 Va. 448, 450, 201 S.E.2d
the decedent’s estate for any sum owed by her to Faulknier.
5
794, 796 (1974)). “[A] plaintiff challenging on appeal the
sustaining of a defendant’s demurrer by the trial court
need show only that the trial court erred in finding that
the pleading failed to state a cause of action, and not
that the plaintiff would have prevailed on the merits of
that cause.” Thompson, 261 Va. at 128, 540 S.E.2d at 127.
These same principles guide our review of the allegations
in Faulknier’s bill of complaint.
In deciding whether those allegations are sufficient,
as a matter of law, to state a cause of action upon which
the requested relief could be granted, we must also
consider well-established principles regarding the
imposition of constructive trusts.
Constructive trusts arise, independently of the
intention of the parties, by construction of law;
being fastened upon the conscience of him who has the
legal estate, in order to prevent what otherwise would
be a fraud. They occur not only where property has
been acquired by fraud or improper means, but also
where it has been fairly and properly acquired, but it
is contrary to the principles of equity that it should
be retained, at least for the acquirer’s own benefit.
Leonard v. Counts, 221 Va. 582, 589, 272 S.E.2d 190, 195
(1980) (quoting 1 Minor on Real Property § 462 at 616 (2d
ed. Ribble 1928)). Courts of equity may impose
constructive trusts whenever necessary to prevent a failure
of justice. Richardson v. Richardson, 242 Va. 242, 245,
6
409 S.E.2d 148, 150 (1991) (citing Patterson’s Ex’rs v.
Patterson, 144 Va. 113, 123, 131 S.E. 217, 220 (1926)).
When property is given or devised to a defendant in
breach of a donor’s or testator’s contract with a
plaintiff, equity will impose a constructive trust
upon that property in the hands of the recipient even
though (1) the transfer is not the result of breach of
a fiduciary duty or an actual or constructive fraud
practiced upon the plaintiff, and (2) the donee or
devisee had no knowledge of the wrongdoing or breach
of contract.
Jones v. Harrison, 250 Va. 64, 69, 458 S.E.2d 766, 769
(1995).
Shafer argues, however, as she did before the circuit
court, that Faulknier has an adequate remedy at law because
the decedent’s estate is solvent and contains sufficient
assets to satisfy Faulknier’s claim. Relying on Jones,
Shafer contends that Faulknier must therefore pursue her
contractual claim against the estate pursuant to either
Code § 64.1-144 or § 64.1-171 before she can seek the
equitable remedy of imposing a constructive trust on the
life insurance proceeds. We are not persuaded by this
argument and conclude that our decision in Jones is not
controlling authority because of the procedural posture of
the present case vis-à-vis that in Jones.
This Court held in Jones that the provisions of a
property settlement and support agreement entitled the
children of a decedent’s former marriage to a constructive
7
trust on the proceeds of life insurance policies payable to
the decedent’s second wife, even though there was no
evidence that the second wife had done anything improper,
had participated in the decedent’s breach of the support
agreement, or had knowledge of that breach. 250 Va. at 69-
70, 458 S.E.2d at 769-70. See also Richardson, 242 Va. at
246-47, 409 S.E.2d at 151 (constructive trust imposed where
transferee, who had not engaged in any wrongdoing and had
furnished no consideration for the transfer, was unjustly
enriched). Thus, we concluded that “because the other
elements necessary to establish a constructive trust [were]
present, the [second wife’s] gratuitous receipt of a
portion of the insurance proceeds forms the basis for
imposing a constructive trust on that property.” Jones,
250 Va. at 70, 458 S.E.2d at 770. In a footnote, we
explained that the children had a contractual claim against
the decedent’s estate, but because the estate was
insolvent, the children could claim a constructive trust in
a portion of the proceeds of the insurance policies. Id.
at 70 n.3, 458 S.E.2d at 770 n.3.
The statement in that footnote forms the basis of
Shafer’s contention that Faulknier must first seek redress
from the decedent’s estate. However, we decided Jones by
reviewing the findings of a commissioner in chancery who
8
had heard evidence. Id. at 67, 458 S.E.2d at 768. In
contrast, the present case comes to us on a judgment
sustaining a demurrer. Shafer’s assertion that the estate
in the present case is solvent is based solely upon
documents that she appended to her memorandum in support of
the demurrer. Those documents were not mentioned in
Faulknier’s bill of complaint. See Rule 1:4(i). Thus, we
will not consider them in deciding whether the allegations
in the bill of complaint state a cause of action. See
Flippo, 241 Va. at 17, 400 S.E.2d at 156.
Relying on Overby v. White, 245 Va. 446, 449, 429
S.E.2d 17, 19 (1993), Shafer also argues that the
imposition of a constructive trust is warranted only when
the recipient of funds obtained them in some wrongful way.
She asserts that she had no knowledge of the decedent’s
beneficiary designation or separation agreement before he
died. Based on that assertion and because there is no
allegation that she colluded with the decedent, induced him
to change his beneficiary designation, or otherwise acted
with the intention of depriving Faulknier of the insurance
proceeds, Shafer contends that impressing a constructive
trust in this case in inappropriate.
Our decision in Overby is not dispositive of the issue
before us. There, the plaintiff sought to have the court
9
impress a constructive trust on an interest in property
that the defendant had properly acquired before the conduct
warranting a constructive trust had occurred. Id. at 447-
48, 429 S.E.2d at 18. In contrast, Shafer did not acquire
the life insurance proceeds before the decedent breached
the terms of his separation agreement with Faulknier. We
noted this same distinction in our decision in Jones. 250
Va. at 69, 458 S.E.2d at 769. Furthermore, our decision in
Overby was not premised solely on the fact that the
defendant had not engaged in any wrongdoing. Overby, 245
Va. at 450, 429 S.E.2d at 19. We have repeatedly stated
that constructive trusts can arise even when property has
been acquired fairly and without any improper means. See,
e.g., Jones, 250 Va. at 70, 458 S.E.2d at 770; Nedrich v.
Jones, 245 Va. 465, 474, 429 S.E.2d 201, 206 (1993);
Richardson, 242 Va. at 245, 409 S.E.2d at 150; Leonard, 221
Va. at 589, 272 S.E.2d at 195.
Thus, we conclude that the circuit court erred in
sustaining Shafer’s demurrer. Faulknier pled facts which,
if taken as true, are sufficient to state a cause of action
for the imposition of a constructive trust on the basis
that Shafer has been unjustly enriched. “A constructive
trust is appropriately imposed to avoid unjust enrichment
of a party.” Cooper v. Cooper, 249 Va. 511, 517, 457
10
S.E.2d 88, 92 (1995) (citing Leonard, 221 Va. at 589-90,
272 S.E.2d at 195-96); see also Restatement of Restitution
§ 160 (1937).
Issues such as whether the decedent’s estate has
sufficient assets to satisfy Faulknier’s claim, and if so,
whose share of the estate would be depleted by such a
payment; 4 whether Shafer was a gratuitous recipient of the
life insurance proceeds; 5 when she learned about the
decedent’s beneficiary designation on his life insurance
policy; and whether she knew about the terms of the
separation agreement between the decedent and Faulknier are
matters to be considered in determining whether, on remand,
Faulknier establishes by clear and convincing evidence her
entitlement to a constructive trust on the life insurance
proceeds. 6 See Cooper, 249 Va. at 517, 457 S.E.2d at 92
4
See Green v. Green, 433 N.E.2d 92, 93 (Mass. App. Ct.
1982) (trial court’s ruling that estate was primarily
liable exhausted plaintiffs’ share of estate in partial
satisfaction of their claim to insurance proceeds).
5
We note that Shafer admitted, in response to
Faulknier’s request for admissions, that she provided no
monetary consideration for the decedent’s designation of
her as the beneficiary of his life insurance policy. As
with the documents disclosing the estate’s assets, we do
not consider this admission when reviewing the judgment
sustaining the demurrer.
6
On brief, Shafer asserted that Code § 38.2-3122
allows her to receive the life insurance proceeds free of
any claim by a creditor, such as Faulknier. In her
11
(“constructive trust must be established by clear and
convincing evidence”); Ogden v. Halliday, 235 Va. 639, 643,
369 S.E.2d 417, 419 (1988)(same). Because proof of these
issues has a bearing on whether Shafer has been unjustly
enriched and whether a constructive trust is appropriate in
this case, we also conclude that the circuit court did not
err in denying Faulknier’s motion for summary judgment.
For these reasons, we will affirm in part and reverse
in part the judgment of the circuit court and remand this
case for further proceedings in accordance with this
opinion. 7
Affirmed in part,
reversed in part,
and remanded.
demurrer before the circuit court, Shafer did not argue
that this Code section bars Faulknier’s claim. Pursuant to
the provisions of Rule 5:25, we do not consider arguments
raised for the first time on appeal.
7
Neither party addressed whether any provision of
federal law, including 5 C.F.R. §§ 870.801 or 870.802,
affects the validity of the decedent’s beneficiary
designation for his life insurance proceeds or the
imposition of a constructive trust on those proceeds.
12