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 isRead More