Constructive Trusts in Insolvency: A Canadian Perspective

Abstract

In Canada and the United States, the constructive trust is a proprietary remedy awarded mainly to prevent unjust enrichment or to deter wrongdoing; the remedy gives the plaintiff an equitable proprietary interest in the disputed asset, as opposed to simply a money claim for the value of the asset. This feature of the constructive trust is particularly important if the defendant is insolvent or, by extension, if there is a substantial risk that the defendant may become insolvent before the judgment is satisfied. A constructive trust in insolvency is analogous to a security interest: it allows the plaintiff to take the disputed asset out of the defendant's estate, with the result that the plaintiff recovers in full on its claim. This is at the expense of the estate, which is correspondingly depleted, and the claims of the defendant's unsecured creditors which are, as a result, diminished. The Canadian case law on the availability of constructive trust relief in the defendant's insolvency is unsettled and there is confusion in both the case law and the literature as to the doctrinal basis of the remedy and the relevant policy considerations. It is commonly argued that a key policy consideration is, or should be, whether the plaintiff voluntarily accepted the risk of the defendant's insolvency. But, while popular in restitution circles, this approach is deeply problematic from a bankruptcy perspective. This paper examines the current state of the case law in Canada, identifies and critically analyzes the main theoretical arguments in the literature and suggests the basis on which the courts should approach cases of this kind.

Keywords: constructive trusts, equity, trusts, bankruptcy, remedies

JEL Classification: K20, K29, K30, K39