An Examination Of Constructive Trusts In The Insolvency Context

Constructive trusts. The mere thought can make secured creditors and their lawyers shudder. After all, imagine having valid, perfected, first-ranking security defeated by a claim that the debtor holds the secured property in trust for another person, absent any formal trust arrangements! The horror! But it does happen. It could happen to your clients. And although not preventable, understanding what constructive trusts are, and how they could be claimed, will help you advise your clients in the event they do arise.

The constructive trust is a judicial construct that is often used as a remedy in cases of unjust enrichment. In the circumstances where it is employed, specific property that is owned or possessed by the defendant is alleged to be impressed with a trust in favour of the constructive beneficiary, thereby removing that property from the defendant’s estate.