Restitution in Bankruptcy: Why All Involuntary Creditors Should be Preferred
Traditional doctrine allows a restitution claimant to bypass the Bankruptcy Code’s system of ratable distribution by asserting a constructive trust over a piece of property in the hands of the debtor if this property was wrongfully obtained from the claimant or if it has a transactional lineage to a piece of property which was tainted in such a way. This role of constructive trust of bankruptcy has recently split the circuit courts and is the subject of a fierce academic debate. This Article studies the claims of the doctrine’s detractors as well as its supporters and finds them both lacking. Critics too hastily mock the role of constructive trusts in bankruptcy and are too zealous to banish the doctrine from our legal landscape. They ignore the important normative intuition which propels constructive trusts law, namely the idea that involuntary creditors should not be pooled together with voluntary ones. And yet, the traditional defenses offered for the preferred status given to constructive trusts are also hopelessly unsatisfying because they fail to account for its inconsistency with the entrenched denial of priority to garden-variety tort victims. I conclude that the contemporary debate regarding the status of restitution claimants in bankruptcy presents an opportunity to seriously consider a statutory intervention that applies the normative lesson of the traditional role of constructive trusts in bankruptcy: the idea that involuntary claimants should constitute a preferred class.
Bankruptcy Law | Contracts | Remedies
Date of this Version
, "Restitution in Bankruptcy: Why All Involuntary Creditors Should be Preferred" (February 2005). Tel Aviv University Law Faculty Papers. Working Paper 17.
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