When Bankruptcy And Equity Collide

The constructive trust, an equitable remedy designed to prevent unjust enrichment, is a vestige of a U.S. legal system that was originally comprised of separate courts of law and equity. The remedy survived the merger of courts of equity and law in the late 19th century and remains today an important part of the common law of restitution. However, its vitality in the bankruptcy context is unclear, fueling an enduring debate that has evolved during the 30 years since the Bankruptcy Code was enacted in 1978 to polarize and confuse courts and practitioners alike on the question. A ruling recently handed down by the Second Circuit Court of Appeals indicates that the controversy is far from over. In Ades and Berg Group Investors v. Breeden (In re Ades and Berg Group Investors), 550 F.3d 240 (2d Cir. 2008), the court of appeals affirmed a decision below refusing to impose a constructive trust on proceeds from a settlement of reinsurance claims that were paid to a Chapter 11 debtor. According to the Second Circuit, “retention by the bankruptcy estate of assets that, absent bankruptcy, would go to a particular creditor is not inherently unjust.”