Imposition of Constructive Trusts in Bankruptcy
Until recently it was unclear whether a Bankruptcy Trustee could bring a claim under the doctrine of Constructive Trust to bring assets into the Bankruptcy Estate. It was unclear due to a 6th Circuit Court ruling in XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir. 1994), and subsequent rulings from the 6th Circuit.
OSIPOV BIGELMAN, P.C. brought an Adversary Proceeding on behalf of a Bankruptcy Trustee client seeking to impose a Constructive Trust on the Debtor’s interest in property that was titled to his wife. We argued that the relief was justified because the Debtor’s financial contribution to repairs and improvements substantially increased the value of the property. The Defendants moved to dismiss the claim, arguing that XL/Datacomp barred the Trustee from bringing a claim under the doctrine of Constructive Trust and that under Michigan law a constructive trust was not available absent a showing of fraudulent conduct.
The Court agreed with our arguments, distinguished XL/Datacomp, and found that a:
(1) Bankruptcy Trustee could seek imposition of a constructive trust for the benefit of the bankruptcy estate if the requirements for such a constructive trust are met under applicable law; and
(2) Constructive trust could be based on either fraud or unjust enrichment.
This monumental decision gives Bankruptcy Trustees additional tools to bring assets into the Bankruptcy Estate. The importance of the decision cannot be understated as it (1) broadens assets that can be brought into the estate, and (2) requires substantial due diligence on the part of debtor counsel to make sure that they are not exposing their clients or their family to potential liability.
This decision was published and can be found at Miller v. Short (In re Short), Nos. 18-45299, 19-4448, 2021 Bankr. LEXIS 355, at *1 (Bankr. E.D. Mich. Feb. 16, 2021).