Richards Layton & Finger
 

Tracing Del. Bankruptcy Court's Unclear Tracing Rules

May 22, 2013

An inherent tension exists between the Bankruptcy Code and the common-law doctrine of constructive trust. On the one hand, the Bankruptcy Code provides a broad scheme for ratable distribution among creditors. On the other hand, constructive trust law allows a creditor to recover from outside that scheme — and often in full — while its peers receive cents on the dollar. Yet, unlike an express or "real" trust, a constructive trust is a mere fiction, a remedy that courts invent after the fact to redress cases of unjust enrichment. From a creditor's perspective, constructive trusts are a tantalizing remedy, so it is important for both debtors and creditors to know when this remedy can be imposed.