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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