Restitution via return of specific property – constructive trusts

1. Restitution via return of specific property – constructive trusts • Constructive Trust can be used to get disgorgement of profits (money judgment) • Nothing special about a constructive trust in this context – like quasi-contract 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. • 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)

2. Mechanics of a Constructive Trust • Actual trust • Separates legal ownership (Trustee) and equitable ownership (Beneficiary). Trustee has the fiduciary obligation to manage the trust appropriately, including (1) accounting for trust profits, & (2) eventual return of trust assets to beneficiary. • Constructive Trust • Courts will declare D a constructive trustee in situations where D is unjustly enriched at P’s expense. D must account for profits from misappropriated property and return property/profits to P. • When P wants specific property returned in certain situations without a contract, the constructive trust is the restitution device that must be used.

3. 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 in Ruffin? • Paolini – D defrauds Ps and places $ in sham corporate accounts (created for purpose of hiding/dissipating $). D disburses $137K from those accounts to the Iglesias Family Trust. The Trust then purchases a condo. Court imposes a constructive trust on condo to be held for Ps. • Ruffin – Court ordered D to pay spousal/child support to P ($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.

4. Results of imposing constructive trust : • P who obtains a constructive trust is treated like the TRUE owner of the property • Paolini Ps - can successfully keep track of their property through a series of exchanges - thus they have an identifiable asset & grounds for a constructive trust (fraud) • P without a constructive trust is just 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

5. 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 then 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 Rulere 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

6. What is an “identifiable” asset (in any of these cases)? • If one has to identify specific assets in order to get a constructive trust – why do so many of these Ps call cash (usually thought of as fungible) an identifiable asset? • AND why are they able to point to cash/things that have been exchanged for something else? See next slide • General definition of identifiable asset (including cash): • It’s relatively 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 – next slide

7. 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 and get a constructive trust on the cash proceeds resulting from the sale 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: • D spends his own money first • New $ lawfully acquired is Ds unless he manifests an intent to replenish P’s money • 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.

8. Some possible limits on P’s recovery when using tracing • If D is not bankrupt and P traces into assets that worth more than P lost, P can keep the asset of increased value. • BUT 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 • Court will impose an equitable lien instead of a constructive trust • 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 D to sell and have the proceeds of the sale applied to pay off the security interest. • If several Ps who victims of the same fraud, they generally cannot race to the courthouse door to try to get priority over one another. • They can get priority over unsecured creditors to the extent they meet the requirements for imposition of a constructive trust. • But they share equally with each other to the extent that they must rely on tracing fictions in order to recover their property (Cunningham v. Brown p. 723)