On appeal from the Superior Court, Appellate Division.
This appeal considers whether a constructive trust is the appropriate remedy where the decedent entered into a property settlement agreement under which she agreed to name her children as irrevocable beneficiaries of any life insurance policies obtained through employment, but she failed to name beneficiaries for those policies.
In 1980, Lori Flanigan (decedent) married John E. Titus, Jr. Two children were born before the couple divorced in 1989. The divorce judgment included a property settlement agreement that contained a provision regarding life insurance. The provision states that "the parties warrant and agree that each will name the children as the irrevocable beneficiaries (until emancipation) on any life insurance policies either of them avail themselves of through employment." The agreement also provides that it "shall be binding upon [the parties'] respective heirs, next of kin, executors and administrators."
In 1989, the decedent began working at Exxon Company, which provided her with a life insurance policy in the amount of $34,000, representing her annual salary. Five years later, the decedent married the defendant. A few months later, the decedent purchased a contributory life insurance policy in the amount of $183,600 through Exxon's employee benefits program. Exxon withheld money from the decedent's paychecks to finance the premiums on the second policy. The decedent did not designate a beneficiary on either of the two policies.
Decedent died on June 16, 1995. The children's grandparents initiated a custody action against Titus. A consent judgment awarded joint legal custody to the grandparents and to Titus, and residential custody to the grandparents.
Because the decedent had not named a beneficiary in either life insurance policy, Exxon distributed the proceeds to defendant. Defendant qualified as administrator of the decedent's estate shortly after her death. After the divorce judgment and property settlement agreement were found among the decedent's papers, defendant orally agreed with the decedent's sister, Lis a Salberg, that he would extinguish his home mortgage, satisfy other debts, and turn over the balance of the insurance proceeds to the children. Salberg testified that defendant also promised to reimburse the children the full amount of the insurance proceeds when he sold the house or when they were ready to enter college. Defendant paid off his mortgage and other expenses, leaving an approximate balance of $111,000. The parties agreed that this sum should be held in trust for the children. They asked an attorney to prepare an agreement.
The parties signed the trust agreement in August 1995. Defendant is the named trustor, and Salberg and her mother are named trustees. In part, the trust agreement specifically described the earlier property settlement agreement as applying only to "employer provided" insurance.
In April 1996, Salberg discovered that defendant had listed his house for sale. Salberg reminded defendant of his agreement to forward the balance of monies owed to the children. Defendant refused. The grandparents commenced this litigation in October 1996 as legal custodians of the children.
Following a bench trial, the court concluded that the trust agreement had relieved defendant of any obligations other than those set forth in that agreement and that the rights established for the children under the property settlement agreement did not supercede the limitations found in the trust agreement.
The Appellate Division reversed in an unreported decision with one member of the panel dissenting. The court found the children's asserted right to the insurance proceeds paramount to any contrary claim of defendant. The court remanded the matter to the trial court to determine the extent to which the insurance proceeds could be traced for purposes of imposing a constructive trust in favor of the children.
HELD: A constructive trust is the appropriate remedy under the facts of this case, where a property settlement agreement between the children's biological parents unambiguously established the children's right to insurance proceeds and the agreement expressly stated that it bound others, including executors and administrators.
1. Courts recognize property settlement agreements as falling within the category of contracts enforceable in equity. The law also is well settled that children of a marriage are third-party beneficiaries of a settlement agreement between their parents. In that regard, a court in a matrimonial matter is authorized to direct parents to maintain life insurance naming their minor children as beneficiaries to secure the parents' continued support obligations. Based on these principles, the children in this matter are beneficiaries of the property settlement agreement and have standing to enforce that agreement, including its insurance provision. (Pp. 10 to 11).
2. In respect of the insurance provision of the property settlement agreement, the parties do not dispute that the smaller employer-provided policy falls within its purview. The Court concludes that the provision's mandate to the decedent and Titus to designate their children as beneficiaries "on any life insurance policies either of them avail themselves of through employment" encompasses also the larger employee-purchased policy. In addition to relying on an everyday, common-sense construction of the provision's terms, the Court relies on the fact that the agreement uses "any" to describe the contemplated insurance policies. Once that language was incorporated in her divorce judgment, the decedent could not have modified it unilaterally without applying to the trial court. Absent that application, the agreement's existing terms govern. (Pp. 11 to 12).
3. Courts may impose a constructive trust whenever specific restitution in equity is appropriate on the facts. Such a trust is designed to prevent unjust enrichment and force a restitution to the plaintiff of something that in equity and good conscience does not belong to the defendant. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee. Courts employ a two-pronged test when determining whether a constructive trust is warranted. First, a court must find that a party has committed a wrongful act. A mere mistake is sufficient for these purposes. Second, the wrongful act must result in a transfer or diversion of property that unjustly enriches the recipient. (Pp. 12 to 13).
4. The decedent breached the property settlement agreement by failing to name her children as beneficiaries on the two policies. This satisfies the first prong of the test for equitable relief. The Court disagrees with defendant's argument that the trust agreement's reference to "employer provided" life insurance is relevant to interpreting the property settlement agreement. Neither party to the settlement agreement signed the trust agreement. The trust agreement cannot trump or curtail the unambiguous language of the property settlement agreement. (Pp. 13 to 14).
5. In respect of the second prong, defendant has been enriched unjustly by his receipt of the insurance proceeds. The policies did not list defendant as beneficiary. The Court acknowledges that the payroll deductions used to fund the premiums for the second policy reduced the decedent's and defendant's joint household income, but that is insufficient to vest defendant with an interest in the insurance proceeds superior to that of the children. The Court rejects the notion that the facts surrounding the purchase of the second policy transformed the defendant into a bona fide purchaser for value for purposes of defeating a constructive trust. (Pp. 14 to 16).
The judgment of the Appellate Division is AFFIRMED, and the matter is REMANDED to the trial court for further proceedings consistent with this opinion.
CHIEF JUSTICE PORITZ and JUSTICES COLEMAN, LONG, LaVECCHIA, ZAZZALI and ALBIN join in ...