Restitution via return of specific property –
constructive trusts & return of specific property
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Constructive Trust can be used to get disgorgement of profits
(money judgment)
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Nothing special about a constructive trust in this context – like quasicontract or accounting for profits, it’s just a remedy P asks for to get
disgorgement (e.g., Snepp).
Sometimes P doesn’t want a money judgment. P wants return of
the very thing that was taken.
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Replevin achieves this result if there is identifiable personalty involved
Rescission also achieves this result if a contract is involved
Constructive Trust does as well if a contract isn’t involved (with some
added perks)
Imposing a constructive trust to obtain return of
property
• Imposition of Constructive Trust requires:
• Identifiable Asset – The ability to point to property or identifiable
money & say “that thing” is mine
• Grounds for Imposition – When D has acquired legal title at P’s expense
(Misrepresentation, Conversion, Duress, Undue Influence, Breach of
Fiduciary Duty, Mistake)
• Why does court impose constructive trust in Paolini but not Ruffin?
• Paolini – D defrauds Ps; places $ in sham corporate accounts (created for
purpose of hiding/dissipating $). D disburses $137K from those accounts to the
Iglesias Family Trust; which purchases a condo. Court imposes a constructive
trust on condo to be held for Ps.
• Ruffin – Court ordered D to pay P spousal/child support ($200/week) beginning
9/20/96. D doesn’t pay until 1997. On 9/28/96, D was 2 payments in arrears
and had purchased a winning lottery ticket for $2 w/ his very limited funds.
Court refuses to impose constructive trust in P’s favor on lottery proceeds.
Results of imposing constructive trust :
• P who obtains a constructive trust is treated like TRUE owner of the
property
• Paolini Ps - can successfully keep track of their property through a series of
exchanges - they have an identifiable asset & grounds for a constructive trust
(fraud)
• P without a constructive trust is a judgment creditor who must settle for a
money judgment
• Ruffin P is merely a creditor - can’t claim to be true owner of any identifiable
asset in D’s hands even if D’s failure to pay P’s support is the but for cause of his
purchase of the lottery ticket
• D owed P money. But that is true of many debtor/creditor relationships. D
did not take anything specific from P. Nor did P pay D by mistake.
• Thus, P has neither of the requirements for constructive trust – no
identifiable asset nor any acquisition of legal title at expense of P
Adding bankruptcy into the mix
• In re Leitner – D/Leitner embezzled money while performing legal &
accounting services for P/Wetherill. D used the funds to buy a home. P
discovered the embezzlement and brought state court action seeking
constructive trust on home. D declared bankruptcy before state court
could declare constructive trust.
• The act of embezzlement and fact that funds from it were used to buy home are
uncontested. But Bankruptcy Trustee contests the imposition of a constructive
trust on the home since D is now in bankruptcy.
• General Rule re constructive trusts when D is bankrupt:
• Because P is treated as the true owner of the property, bankruptcy
court will honor the constructive trust
• BUT P must meet 2 requirements
• Identifiable asset
• Conscious wrongdoing (fraud, theft) or mistake by P
What is an “identifiable” asset (in any of these
cases)?
• If one must identify specific assets to get a constructive trust – why do so
many Ps call cash an identifiable asset?
• AND why are they able to point to cash/things that have been
exchanged for something else?
• General definition of identifiable asset (including cash):
• It’s easy to identify specific things (land, house, teapot, wallet) as
identifiable assets because they are relatively unique
• But even cash can be unique if it is placed into identifiable separate
accounts
• Paolini – special corporate accounts into which fraud proceeds
placed
• Even D’s cash/bank accounts can be identifiable assets if money
attributable to P can be traced into them
• Need to use tracing fictions/presumptions for this
Tracing through exchanges
• Direct Exchange
• In re Leitner – Wetherill’s money was stolen and used to buy Leitner’s house,
which Trustee sold. Wetherill can trace through two direct exchanges – stolen
cash to buy house & house sold for cash. He gets a constructive trust on the
cash proceeds resulting from the sale that is now in the hands of the bankruptcy
trustee (who holds for D).
• This kind of tracing is relatively simple although there can be many
exchanges to keep track of
• Exchanges & Commingling
• What happens if D commingles P’s stolen cash with his own (Erie Trust)? Must
use the tracing fictions/presumptions in Erie Trust & notes. They are:
1. D spends his own $ first
2. New $ lawfully acquired is Ds unless he manifests an intent to replenish P’s
money
3. D invests P’s money first
1 & 3 can be used at P’s election to maximize P’s recovery. 2 must be used as it
is stated.
Tracing into swelled assets
• If D is bankrupt & P can trace into assets that are now worth more that
what P lost, court will limit P to amount that she actually lost
• Equitable lien – device that secures a monetary judgment in the
amount of loss by creating a security interest in specific property. Gives
holder of the lien the right to force a sale and have the proceeds of the
sale applied to pay off the security interest.
• P can force D to sell the property and give her the amount of her
losses. The remainder goes back into the bankruptcy estate for
unsecured creditors.
• Can be especially useful even absent bankruptcy if there is one
property (real estate) and multiple victims (Paolini)
• If D is NOT bankrupt P can trace into swelled assets with constructive trust
and keep the entire amount.
Facts common to all Tracing problems
• Scum manages a trust fund for his mother which contains the
following:
• 100 shares Microsoft at $30/share
• 100 shares of Exxon at $50/share
• 100 shares of Walmart at $60/share
• Scum embezzles from Mom in each problem so we know that there
are GROUNDS for a constructive trust. The key is to find out whether
there is an identifiable asset.
• Scum maintains his own checking account which, at the beginning of
each problem, has $10,000 in it.
• Due to financial difficulties, after the actions identified in each
problem, Scum eventually goes bankrupt making a damage judgment
essentially not worth it.
• Each transaction in each problem occurs in chronological order on a
different day with the balance immediately being recorded.
On an exam
•
It is fine to use a ledger to illustrate your work on an essay question
(assuming a bank account is involved).
•
You don’t need to use columns with lines (you can simply create
rows of numbers with tabs if you are working on computer).
Alternatively, computer users can just use a bluebook for a problem
like this if it makes them more comfortable.
•
Show your work out to the side of the ledger – i.e., indicate the purpose
of the deposits/withdrawals and the presumptions you use.
•
Don’t just write “presumption #1” without telling me what that
means somewhere in the answer. That doesn’t let me know that
you understand what is going on.
•
On a multiple choice question, you simply have to do the work and see
which answer it matches with