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
Authored 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 holding certain property in constructive trust, it is saying that the debtor does not really own the property; the debtor is simply holding on to it for the creditor. Because only the debtor’s property can be used to pay its creditors, any property held in constructive trust for one creditor is