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An Examination Of Constructive Trusts In The Insolvency Context.

Article Excerpt
Third Annual Pan-Canadian Conference On Bankruptcy And Insolvency

Introduction

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.

Background

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.

Problems arise in the insolvency context where parties may be unaware of someone's subsequent claim of constructive trust, which may reorder the priorities in a bankruptcy. In the relatively certain distribution scheme set out in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the "BIA") this can wreak havoc with other creditors' expected recovery. Constructive trusts can also cause problems in restructurings under the BIA or Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the "CCAA"), where proposals or plans can be affected or even unsuccessful if based on a scenario that changes as a result of a successful constructive trust claim.

The Evolution Of Canadian Constructive Trust Cases

The starting point with respect to an examination of constructive trusts in Canada must start with Pettkus v. Becker, [1980] S.C.J. No. 103.

As an aside, there has been much scholarly debate as to whether this case clarified the use of constructive trusts generally in Canada, or whether it simply addressed remedial constructive trusts. Such a discussion is outside the scope of this paper.

In any event, in Pettkus, Pettkus and Becker had a successful bee keeping business which operated on two Ontario properties. Although unmarried, the parties lived together as husband and wife for almost 20 years. When the relationship terminated, Ms. Becker brought an application alleging a constructive trust, seeking an entitlement to one-half interest in lands owned by Mr. Pettkus, and a share in the bee keeping business. The Supreme Court of Canada held that Mr. Pettkus held the property on constructive trust for Ms. Becker. The Court held that a constructive trust can be applied in the cases of unjust enrichment, and that unjust enrichment can be established if there is an enrichment of one party and a corresponding deprivation of the other...