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Constructive Trust

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Other People’s Property in Bankruptcy

July 14, 2021

Authors

Brian Walsh

Other People’s Property in Bankruptcy

July 14, 2021

by: Brian Walsh

Nearly sixty years ago, Justice Hugo Black wrote that the Bankruptcy Act of 1898 “simply does not authorize a trustee to distribute other people’s property among a bankrupt’s creditors.”  Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36 (1962).  Though the bankruptcy statutes have been modernized and amended on a number of occasions since, Justice Black’s observation remains true today.[1]

This article summarizes the courts’ approaches to three situations in which a debtor in bankruptcy may be in possession of property that legally or equitably belongs to someone else.  What do the courts do when the third party’s rights arise or are recognized only after a bankruptcy case is underway?  Well, that’s not that simple.

  • Constructive trust.  The Bankruptcy Code’s treatment of express trusts is straightforward:  if the debtor holds “only legal title and not an equitable interest” in an asset, then the
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  • Florida Proves Safe Haven for Individuals Liable for Breach of the PACA Trust (bonus: form complaint attached)

    August 14, 2018

    Authors

    Leah Fiorenza McNeill and Mark Duedall

    Florida Proves Safe Haven for Individuals Liable for Breach of the PACA Trust (bonus: form complaint attached)

    August 14, 2018

    by: Leah Fiorenza McNeill and Mark Duedall

    Editors’ Note:  For those of you who like to get something you can use from blog posts, attached here is a Form PACA Nondischargeability Complaint for a PACA seller against a party that controlled a PACA buyer, where such controlling party later files for bankruptcy.  Although, in light of the case discussed below, there is an open legal question of whether violations of the PACA trust by an individual in control of a PACA buyer result in a non-dischargeable debt under Section 523(a)(4) of the Bankruptcy Code.  To see some of our other coverage of PACA issues, a personal favorite of Leah’s and Mark’s, see here and here.

    In Coosemans Miami v. Arthur (In re Arthur), the Bankruptcy Court for the Southern District of Florida held last week that individuals in control of a PACA trust may still receive a bankruptcy discharge of debts arising from their breach

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    What’s Yours is Mine and What’s Mine is For the Benefit of My Creditors: Bankruptcy Courts Remain Reluctant to Impose Constructive Trusts on Debtor Property

    February 27, 2017

    Authors

    Laith Hamdan

    What’s Yours is Mine and What’s Mine is For the Benefit of My Creditors: Bankruptcy Courts Remain Reluctant to Impose Constructive Trusts on Debtor Property

    February 27, 2017

    by: Laith Hamdan

    There is an inherent tension between the goals of bankruptcy law and the state law doctrine of constructive trust.  A central tenet of bankruptcy policy is that similarly situated creditors should be treated equally: because an insolvent business or individual will not be able to pay all creditors in full, a proper bankruptcy system must provide as equitable a distribution to each of them as possible.  Constructive trust law, on the other hand, works to the advantage of a single creditor – which always means the detriment of the others when everyone is competing for limited funds.

    Constructive trusts are imposed when “property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest.”  Beatty v Guggenheim_Exploration_Co, 225 N.Y. 380, 386 (1919) (Cardozo, J.).  When a creditor in a bankruptcy case alleges that the debtor is

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