18 April 2018

A Constructive Trust in Bankruptcy: Federal Policy Trumps Lack of InJustice

Go here to read an opinion of the United States Bankruptcy Court for the District of Delaware concluding that a constructive trust existed in favor of a subcontractor with respect to payments made by the federal Department of Energy to the general contractor. Sounds boring? Well, sure, unless you're the subcontractor who stands to get a sweet $365,292---payment in full--in a bankruptcy case.

Unlike an express trust or resulting trust, a constructive trust is not a trust in the historic sense of the term. Instead a constructive trust is a remedy by which courts can "freeze" some of the assets of one who has them by virtue of an unjust transaction. For the details of what sorts of transaction are sufficiently unjust to warrant a claim against property you can read my article Third Time's the Charm: The Coming Impact of the Restatement (Third) Restitution and Unjust Enrichment (download here or here). But to cut to the chase, there was no injustice raised in the facts of this case. So, one might ask, why did Judge Gross decide to recognize a constructive trust?

Because of a 1993 case (Columbia Gas Systems) decided by the Third Circuit Court of Appeals which, as a matter of federal law, concluded that a constructive trust can arise without wrongdoing or injustice if it is "consistent with federal policy." Many folks think that the Third Circuit got it wrong in Columbia Gas and I don't know that Judge Gross should have applied it here, when the case involved a different federal statute. But this is the bottom line for practitioners: learn the law of unjust enrichment (by, oh, I don't know, reading my article) and paying attention to statutes, particularly federal ones, that might give your client an additional leg to stand on.

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