Document Sample
Restitution Powered By Docstoc
					Equity & Remedies – Outline

o Substance and Remedy thoroughly integrated. o Unjust enrichment as the cause of action. o Δ’s gains as the measure of recovery. Unjust Enrichment available in: o Intentional tort o Breach of fiduciary duty o Statutory torts (e.g. IP infringement) o Breach of K. Unjust Enrichment: Enrichment that is legally unjustified. o A transfer that lacks a legal basis. Restitution is not normally available to one that should’ve made a K but didn’t. Applications o Mistake: Δ receives $/benefit by mistake.  Pay more than owe o

Examples / Notes


Restitution and unjust enrichment developed through: o Quasi-K, constructive trust, accounting for profits, recission, equitable lien, subrogation, indemnity, contribution, replevin, ejectment, etc.

o o o

Enrichment may be hard to measure –but that has not precluded restitution where it was though appropriate. Ex: П ships unordered goods to Δ and expects to be paid.

Ex: teller confuses “old pesos” with “new pesos” and gives $15K instead of $500. Ex: I write a check for $200 instead of $20. Ex: П partly performs, then breaches and asks for credit for what he paid or the value of work Ex: Suicidal mental patient was involuntarily committed – has to pay for his treatment. Ex: П rescues a person from danger or provides medical emergency services to unconscious Δ o The measure of recovery is not that Δ owes П his life Ex: П says more than her share of rent or utility bills.

Quantum Meruit - Actual or supposed Ks: no binding K but that is not discovered until after П partially or fully performs. o Judgments: if vacated or reversed, П must refund to Δ. o Emergencies: One who reasonably provides essential goods or services in an emergency is execused from not securing a promise to pay in advance and may sue for unjust enrichment. o Joint Obligations: One who pays more than her share of a joint obligation is entitled to restitution.  Contribution; indemnity; subrogation o Wrongful acts: Δ acquires a benedit from П through an unlawful act.  When Tort, П may ask for damages or restitution. Disgorging Profits The very essence of the nature of property is the right to its exclusive use. In a Tort action, П can elect to waive his action it tort and sue in Quasi-K (for unjust enrichment): Restatement of Restitution (1937): o If Δ was tortious in his acquisition of the benefit  he is required to pay for what the other has lost o Although that is more than the recipient benefited.

Fraud, extortion; breach of fiduciary duty;

Ex: (Orwell): Δ was supposed to just keep П’s machine in storage but instead Δ, and without П’s knowledge or consent, used the machine to his benefit for 3 years. П sought to recover the reasonable value of Δ’s use (rental value) of the machine. (П offered to sell machine to Δ for $1,200; Δ countered with $50). o П can recover the amount of the unjust enrichment o A person who has been unjustly enriched at the expense of another is required to make restitution to the other.
Page 1 of 15

Equity & Remedies – Outline

o o

If he was consciously tortious in acquiring the benefit,  he is also deprived of any profit derived from his subsequent dealing with it. If he was no more at fault than the claimant,  he is not required to pay for losses in excess of benefit received by him and he is permitted to retain gains which result from his dealing with the property

Measure of restitution depends on Δ’s culpability: o A conscious wrongdoer is liable for all his profits, including those that result from putting П’s property to Δ’s more profitable use. o A Δ who acted negligently, or illegally but in good faith, is liable only for the FMV of the thing taken.

Re Election: “No tort, no unjust enrichment” Wrongdoer shall not be permitted to make a profit from his own wrong. Disgorgement: Nearly always refers to an award of profits that exceeds the market value of what was taken from П. Δ’s enrichment must be at П’s expense. o (Orwell, Edwards) Δ used П’s property to earn profits o (Beck) П would’ve earned the same profits. Negligence is not sufficiently wrongful to support disgorgement. Disgorgement has generally been unavailable for beach of K. o But there are exceptions (ex: Snepp) o K for sale of land.  CT is a corollary of the right of Spec Perf. Skimped Performance: Δ withholds some portion of what of what he promised under K, w/o inflicting significant damage. o Disgorgement has been awarded in some cases. Quasi-K o Both law and equity developed remedies for granting restitution o CL: law implied a fictional promise to pay o Quasi-K writs o $ had and received: Recovery for $ paid o Quantum Meruit Value for services rendered o Quantum Valebant: Value for goods delivered. Ex: Careless but not a conscious wrongdoer would not be require to disgorge. Breach viewed as not sufficiently wrongful to require disgorgement; otherwise we’d have to distinguish wrongful from unintentional breaches. Ex: land value $10K. Seller breached and sold at $15K. Constructive trust on the $5K. П, land buyer, was the equitable owner form the moment K signed. Seller held the land in trust for the buyer. So, it followed easily that the trust attached to the proceeds of the sale. Should unjust enrichment be measured by the full profits Δ earned from the wrongful transaction, including consequential gains OR by some measure of market value?

Quasi-K is not a K and has nothing to do with enforcing agreements.

Simpler way to think of Quasi-K: Quasi-K is a remedy for tort. o Instead of suing for her own losses from conversion or Fraud, П sues for Δ’s gains from the conversion or fraud.


Page 2 of 15

Equity & Remedies – Outline

Accounting for Profits Trademark Infrigement Lanham Act – § 1117 o trade-mark registrant shall be entitled, upon the finding of an infringement and "subject to the principles of equity", o Δ’s profits  П has BoP to prove Δ’s sales only  Δ has BoP to prove all elements of cost or deduction claimed. o any damages sustained by П o the costs of the action Where the infringement is innocent, an injunction satisfies the policy of the Act and the equities of the case. the purposes of the Lanham Act can be accomplished by making acts of deliberate trade-mark infringement unprofitable. o Where there is direct competition between the parties, this can be accomplished by an accounting of profits based on the rationale of a returning of diverted profits. o Where there is infringement, but no direct competition, this can be accomplished by the use of an accounting of profits based on unjust enrichment rationale The Lanham act confers wide scope of discretion upon J. o Discretion used to distinguish degrees of culpability. Accounting for profits is based on the equitable concepts of restitution and unjust enrichment. Direct competition is not required for Accounting for profits. Constructive Trust o When the gov cannot secure a remedy w/o unwarranted risks, it has no remedy at all. o A constructive trust is the natural and customary consequences of breach of trust. o The trust remedy requires Δ to disgorge the benefits of his faithlessness.

Ex (Maier): П sells scotch under the trademarked name Black and White. Δ beer brewery sold beer under the label Black and White at other Δ’s Grocery Co. Court granted Accounting of profits by the Δs.

There is no violation of TM law if there is no confusion.

Δ’s profits are rarely a close match to П’s losses. Market measure of П’s damage + Δ’s gain = cost of a license to use the TM.

Mostly willful or deliberate infringers who must disgorge.

Ex (Snepp): Former CIA agent published a book about non-classified CIA activity in Vietnam without pre-CIA pre-clearance in violation of his employment agreement. o Gov sought: o a declaration that he breached K o that he be enjoined from publishing w/o pre-clearing o imposing a constructive trust on all profits.

Ex(Blake-British Spy): Willful breach of K in the context of fiduciary duty supports disgorging of profits from book. Δ has acquired legal ownership in a way that the court considers unjust. Court then declares him the trustee.


A trust is a device for separating the legal ownership and control of property from its beneficial enjoyment.


Page 3 of 15

Equity & Remedies – Outline


Constructive trust: when a trustee sells trust assets to buyer who knew that the sale was a breach of trust, courts hold that the buyer took title as a constructive trust. Constructive trust is not confined to the borders of real fiduciary relationships; it has become a generalized remedy for wrongdoing. Accounting for Profits: Beneficiaries of an express trust or other fiduciary relationship could sue in equity for an accounting of the trustee’s profits, and this became a natural part of the constructive trust remedy as it developed. Constructive trust is the common label for preference in insolvency. Disgorgement of consequential gains = constructive trust Restitution limited to market value = Quasi-K Avoids litigation about market value.


Most often use is to restore ownership of property in disputes w/in families. 1) AFiction created by the courts. 2) Used to trace the proceeds of specific assets through a series of exchanges. 3) Has important advantages when Δ is insolvent: o Judgment against a thief would be uncollectible o But the constructive trust remedy let П reach assets in the hands of 3 rd parties  Identifiable assets of the trust are thought of as equitably belonging to the beneficiary – the П. “Equity constructs a trust out of the transaction.” Courts sometimes orders accounting for profits w/o first going through the constructive fiction. o But here, the П gets no preferential treatment if Δ is insolvent.


o o o o o

Irreparable Harm o Constructive trust and accounting for profits are equitable remedies and are, in theory subject to irreparable injury rule. o Not unusual for IH to be ignored in constructive trust cases

When П seeks recovery from a solvent Δ, quasi-K yields the same recovery as CT. When there are no profits other than the value of the thing taken, damages will work as well. Ex: thief stole from П and sold to Δ. Δ resold for profits. Court: equity would always order a trustee to account; it made no difference whether the trust were actual or constructive.

Trade Secrets: Breach of K to keep info confidential o Disgorgement of consequential gains + reasonable royalty for use of the secret. Covenant not to compete: Sale of business. Δ to account for profits. Measuring Profits - Apportionment Profits will be apportioned where it is clear that all the profits are not due to the use of copyrighted material. - Mathematical exactness is not required in apportionment. o Reasonable approximation to gain through testimony. Where there is a commingling of gains, a copyright infringer must abide the consequences, o unless he can make a separation of the profits so as to assure to the injured party all that justly belongs to him. Equity is concerned with making a fair apportionment so that neither party will have what justly belongs to the other.

Copyright act: Copyright proprietor gets: o actual damages suffered due to infringement + profits made from infringement, or o In lieu of actual damages as the court shall appear to be just Ex (Sheldon): MGM’s very profitable movie deliberately infringed Sheldon’s copyrighted play. Can apportion: success of movies is due to stars’s talent and direction. o Allocating profits to factors of production. Ex (Mishawaka): Allocating profits to sales: Δ need not account for profits from sales to consumers who are not confused by mislabeling. Ex: Bolton infringed on a song by Isely Brothers. The song accounted for 28% of CD profits and infringing elements accounted for 66% of profits from song. 66% of 28% came to
Page 4 of 15

Equity & Remedies – Outline

$5.4Mil. Determining gross receipts from infringing sales and subtracting expenses of producing those sales. - Profits could then be apportioned between infringing and noninfringing parts of the product. П BoP: Gross Receipts from infringing product (not whole enterprise) Δ BoP: proving expenses (Sheldon court) Δ can exclude items “brought and paid for.” Whenever you see profits far in excess of the market value of the thing taken, it is prudent to ask whether profits from some other factor of production have been included. Olwell: measures profit by the incremental contribution of the machine Sheldon: apportioned profit by some pro rata measure. Measuring Profits – Excluding Expenses Copyright owner BoP: infringer’s gross revenue Infringer BoP: o deductible expenses and o elements of profits attributable To factors other than the copyrighted work. Infringer's profits = gross sales of infringing goods – costs the infringer proves are attributable to the production and sales of those goods. Overhead, which does not assist in the production of the infringement should not be credited to the infringer; that which does, should be. Certain categories of general overhead expenses, relating to creating and maintaining a supervising staff and organization, should appropriately be deducted from a gross revenue. 2 step procedure for deducting overhead expenses from infringer’s profits: 1. Determine what overhead expense categories are actually implicated by the production of the infringing product. o Sufficient nexus b/w the category and production o Single items within category will not be singled out. o Rule to be applied with particular rigor in cases of willful infringement. i. Extra scrutiny (Strong nexus) is given to the categories: each category is directly and validly connected to sale and production.

Ex (Rubber): allowing salaries to corporate officers - but disallowing excessive salaries that looked like disguised profits Ex (Callaghan): Disallowed salaries for partners. (probably b/c more like profits) This standard excludes value of Δ’s labor. o П should not have to pay for that time defendants spent infringing his copyright

Ex (Hamil): GFI copied Hamil’s copyrighted floral pattern and sold it at a much cheaper price to some common customers (like JC Penny). Hamil submitted proof of gross revenue. GFI submitted schedule of its deductible expenses (including country club dues). o GFI added no substantial value to what they copied. o So, no need to apportion profits from the pattern to infringing to noninfringing elements.  But still necessary to separate sales from the patterns from other sales

Courts have partly divided, and partly hedged, on overhead. o 9th Circuit: overhead is deductible in calculating profits “at least where the infringement was not willful, conscious, or deliberate.”

Page 5 of 15

Equity & Remedies – Outline


Fair, accurate, and practical method of allocating the implicating overhead to the infringement. (Infringer has BoP) o Presumptions drawn against infringer.

Restitution and damages are alternate measures of monetary recovery. Hamil = Pro rata or factors of production method Sheldon = incremental change or actual profit method. Conscious wrongdoers get no credit for the taxes paid on the profits they disgorge. Δ liable for gross receipts if it has no records sufficient to support an allocation of expenses. o But some cases allowed jury to estimate the minimum amount Δs in all likelihood spent. Difficulties of allocating costs and expenses in the calculation of profits also arise in calculating П’s lost profits as damages when Δ disrupts only part of П’s operation. Restitution on the K – Rescission A misrepresentation is material if knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer. Trying to measure profits that would have been earned from sales that never happened.

When there is sufficient data, courts try to calculate directly how much profit came from the infringing product.

Ex (Mutual): Insured lied on his insurance application: he said that he wasn’t a smoker and Mutual issued a policy at the non-smoker’s rate. But it turned out he smoked a pack and a half per every day. Mutual Benefit sought rescission of the K. Policy O gets its $ back with interest; insurer is released of all obligations. Ex (termites case): П got all their $ back and Δ got the house back o Each side had to pay in cash for benefits that could not be returned: o Rent for the time П lived in the house o Cost of paint and other minor improvements Пs added.

Rescission cancels the transaction and reverses all benefits that have been exchanged. Instead of speculating about what might have been, rescission simply o undoes the transaction and o restores everyone to their original position Rescission in kind restores the values exactly. П gets to choose whether to rescind or sue for damages. o May choose rescission b/c of its simplicity, personal preference, or lost confidence in Δ. o Would choose rescission if П would lose $ from performance. o Reliance expectancy is limited by negative expectancy.  Expectancy is not a cap on restitution. Grounds for rescission must be substantial. o Right to rescission for fraud. (Securities Fraud)

Otherwise, would choose expectancy damages if she would make $ from performance. П is bailed out of losing Ks by the other side’s breach.

Courts resist Пs using a minor dispute or technicality to get out of a bad deal. Listing as a material fact that might make the difference in a decision to invest.
Page 6 of 15

Equity & Remedies – Outline

o o o o

Substantial breach of K: can sue for damages or can rescind. o Deny rescission and grant damages when breach no sufficient enough Mutual mistake of fact: the mistake must go to the basic assumptions and defeat the purpose of the K. Unilateral mistake: not relied on. Duress

Rescission is fully available for the sale of unregistered securities. Ex: rescind sale of K b/c of serious foundation problems.

Ex: rescinded a purchase of land where both sides mistakenly believed that the land included water rights sufficient to irrigate 4 acres. Ex: offer to settle make = $215K instead of $115K. offer and acceptance. Can’t rescind. Ex: L coerced C into agreeing to an excessive fee by refusing to release docs.

All or nothing: П can’t rescind losing parts of a K and affirm profitable parts. o Rescind whole K; or o The entirety of some identifiably separate exchange w/in the K. Modern trend is to treat rescission as equitable – but it was often available at law. The more time has gone by, the more difficult rescission is to implement. o П cannot knowingly speculate at Δ’s expense. o П who want rescission must demand it promptly upon learning of their grounds. Rescission is mostly used in K cases.

Ex: stated price per cabinet. Rescind wrt the undelivered cabinets. Modern cases ignore the distinctions. o The distinction creates the possibility of demanding jury trial or avoiding discussion of irreparable injury.

Basic idea of most Restitutionary remedies is to restore to П whatever Δ received at П’s expense. o The transaction is reversed in kind. o If not feasible, Δ is required to pay the market value of the benefit received. o Consequential gains and losses and generally ignored. o П’s loss = Δ’s gain. o Disgorgement of consequential gains confined to cases of conscious wrongdoing. Ex (Farash): П completed renovation in a building he owned in preparation of Δ moving in. But there was no written agreement between them and Δ never moved in. П sued, among other things, to recover the value of the work performed in reliance on whatever agreement there was between the parties. The doctrine of promissory estoppel may not be used to preclude the raising of the SoF. Solutions to the problem of an invalid K: o Doctrine in Equity that part performance takes the case our of SoF and makes the K specifically enforceable. o The part perf must generally have been accepted by party invoking SoF. o Promissory Estoppel: Enforcing an otherwise unenforceable promise if there has
Page 7 of 15

Quasi-K – Part Perf in reliance – Promissory Estoppel, etc That Δ did not benefit from П’s efforts is not grounds for dismissal. o П may recover for those efforts that were to his detriment and that placed him in a worse position. o Quasi-K recovery: If a K is declared void, П can recover the value of his services. An injured party who has not conferred a benefit may not obtain restitution, o But he may have an action for damages, including one for recovery based on reliance. Unless specific restitution is obtained in equity, П’s recovery is for the reasonable value of services rendered, goods delivered, or property

Equity & Remedies – Outline

conveyed less the reasonable value of any counter-performance received by him. o П recovers the reasonable value of his performance whether or not Δ in any economic sense benefits from the performance. o If what the П has done is part of the agreed exchange, it is deemed to be received by the Δ. A PEE who partially performs at a POR’s request should be allowed to recover the fair and reasonable value of the performance rendered, regardless of the enforceability of the original agreement. Mere preparation can be reliance damages. o But most courts remain unwilling to say that mere prep is a benefit. o Cases of mere prep force courts to choose b/w reliance explanations and benefit explanations. Restitution for breach meant something must closer to literal restoration than unjust enrichment, and certainly not disgorgement. If there is a K, П can affirm or rescind. o Affirmance irrevocable. o If П sued on K, orally affirmed, delayed in claiming rescission, restitution becomes unavailable. o A decision to rescind can be revoked until Δ relied on it. Election Doctrine (Olwell): Waive a tort and sue in quasi-K. o Once П waives the tort, cannot change his mind and sue for tort damages. Loosing Ks where Benefit cannot be returned o For material breach, П can rescind and sue for the value of the benefits he had conferred. o Exception: If П has fully performed and Δ owes only $, П is limited to the K price and cannot recover restitution. o П seeking restitution rescinds the K and sues in quantum meruit. o Can’t demand payment for something different from what Δ ordered. o In standard rescission cases, each side returns what it received from the other. o Rest: Restitution of the value of part perf as an alternate remedy on the K. o Once we abandon the K price, valuing the benefit to Δ makes sense if

been detrimental reliance. o Used in cases:  Promises w/o consideration  Promises that are un-enforceable for many other reasons. П could concede that there was no K and sue in restitution for the benefit conferred by part perf. Is there an enforceable K Yes No П may sue on K П may sue for restitution П may sue on K Farash

Is there a non-fictional benefit? Yes No

Unjust enrichment is a clear source of substantive liability off the K. Promissory Estoppel. Courts sometimes say the implied promise in restitution is to pay for the benefit to Δ, there is no benefit here, and П cannot recover. o Courts are more likely to reach this result when П is undeserving. o Ex: $120K to rent a pump that was never used. This was a waste. No revovery

A П claiming restitution may have incidental or consequential damages that are not compensated by recovery of what he gave Δ. o Ex: shipping costs; repair of goods, defective goods that damaged П’s other property. Increasingly cases hold П to an initial election only when Δ would be prejudiced by change in theories.

Quantum Meruit: Value of services rendered. K price is admissible evidence on the value of the benefit. Measure the value of П’s performance by the reasonable cost of performance. o This is consistent with restoring П to his pre-K position.

Page 8 of 15

Equity & Remedies – Outline


the real concern is unjust enrichment. Rest: Restitution based on either o cost to П, or o amount by which Δ’s property has been increased in value or his interests advanced. Barter Transactions Ex: B promises cotton to C’s flour. B delivers cotton; but C fails to deliver corn. o If B sues for spec perf, he gets flour o If B sues for damages, he gets the value of the floyr o If B rescinds, he gets his cotton back. o If the cotton has been resold, B gets restitution of the proceeds. o What if the cotton was destroyed? What would B get back?


Principle of restitution: One should not gain by one’s own wrong. Whether profits are awarded to a non-breaching party shall be determined w/in the discretion of the trial court on a case by case basis. Rescission may be granted if (treating it as equitable) o Substantial breach o Injury caused is irreparable o Damages are inadequate, difficult or impossible to asses. Rescission is accompanied by restitution on both sides. o Restitution measures the remedy by the Δ’s gain and seeks to force disgorgement of that gain to prevent unjust enrichment. o The party seeking rescission must return the opposite party to the status quo ante. o Uncertainties resolved against the party committing the material breach. Restitution of profits realized is a case-by-case: resorting to considerations of fairness and the nature of Δ’s wrong o The more culpable, the more direct the connection b/w the profits and the wrongdoing and the more likely П can recover all Δ’s profits. o Mere breach will not make Δ accountable for benefits obtained. o Profit recovery as a measure of restitution is extraordinary. Apportionment must be made b/w those profits attributable to П’s property and those earned by Δ’s efforts and investment. o Even a willful wrongdoer should not be made to give up that which is its own.
Measurement of the benefit conferred: o Increased assets o Market value of services provided o The use value of any benefit received o Gains realized by Δ upon sale or transfer of any asset received from П o Collateral or secondary profits earned by Δ by use of an asset received from П or saving effected by use of such assets.

Ex (Earthinfo): Hydrosphere developed software for Earthinfo for which it was supposed to get royalties. Earthinfo refused to pay royalties on derivative products and stopped paying royalties altogether.

Restitution following rescission normally includes paying interest or rent on what is returned to account for the benefit having had it for a time. o Interest is a market measure and is a normal part of rescission and restitution


Page 9 of 15

Equity & Remedies – Outline

Tracing Δ’s Benefit: Restitution and Insolvency
Equitable Ownership. Where a breach of fiduciary duty occurs, a variety of equitable remedies are available, including imposition of a constructive trust, rescission, and restitution, as well as incidental damages. Discretion should be exercised in accord with the principles and precedents of equity jurisprudence.  Discretion is not whimsy.  Discretion becomes a duty under some circs. Where remedies both legal and equitable are available, the plaintiffs have the right to elect the kind of relief they seek. BK: property that is truly in trust is not property of the BK trustee. Actual Fraud is characterized by a willful intent to deceive.  fraudulent intent -- may be inferred where the debtor conceals his insolvency knowing that his financial situation is so hopeless that he can never meet the obligation he has acquired  If the debtor believes in good faith that he will be able to carry out the transaction, he lacks the deceptive intent necessary for a finding of fraud. Constructive trusts will not be given effect over BK proceedings  unless Fraud has occurred. Commingled and Converted Funds. Where improperly converted assets of a trust estate are traced into the fund for distribution, a preference has always been allowed.  Theory is that such assets never became a part of those of the trustee o at all times have remained, whether in their original or substituted form, the property of the trust beneficiary,  Trustee’s general creditors are not entitled to any share in their distribution. The claim of the trust beneficiary is not for a preference but to reclaim his own property. The beneficiary was entitled to the lowest balance to which the commingled fund at any time became depleted  such minimal residue being considered sufficiently identified as
D:\Docstoc\Working\pdf\4915ffef-7cd9-4508-856d-124f1be5ab1a.doc Page 10 of 15

Ex (Hicks): Clayton was the Hicks’s L. He took their RE in exchange for worthless stocks and a promissory note on which he never paid and so the Hickses had to continue to pay on 3 mortgages and an enormous tax lien was put on the property. Clayton was found guilty of fraud and gross abuse of fiduciary duty. An award of damages treats them as creditors; but an award of rescission or constructive trust recognizes their status as O.  Clayton’s creditors have no claims to the property. Equitable O works against general creditors and against trustee in BK.  But would not work against a BFP for value w/o notice of Hickses’ claims.

Ex (North American Coin): Unless SHs put in more $ at the following week’s SH meeting, the co. was at risk of going under. To protect new investors, the principles established a Special trust account where they deposited new funds. Пs placed oders for $600K which the co. deposited in the special account. This is a fight b/w the BK trustee and the Пs.  No Fraud; so no constructive trust over BK.

Ex (Erie Trust): Erie Trust converted and commingled $25K of Gingrich’s funds with other funds.Gingrich’s executor sought preference over BK Bank’s trustee. The min value reached by the Co. was about $2K.

Equity & Remedies – Outline

constituting trust fund. Trust beneficiary must identify the trust res (thing) by tracing it into some specific funds or assets of the trustee.  Not sufficient to show that the general assets of trustee have been increased by an unauthorized appropriation of trust property. o Must identify the trust res (thing) by tracing it into some specific property, funds, or assets. o Deposits of the trustee in other banks are to be considered, together with the cash on hand ad the cash items, as constituting a single fund.  If can’t trace, then entitled to the lowest level of cash, cash items, and funds of the co. reached b/w conversion and BK. Rest of trust: Where the trustee wrongfully mingles trust funds with his individual funds in one indistinguishable mass, and subsequently makes withdrawals from the mingled fund, the beneficiary is entitled to  a proportionate share both in the part which remains and in the part which is withdrawn, or,  at his option, he is entitled to an equitable lien upon both parts to secure his claim for reimbursement. Split over whether constructive trust can be enforced in BK. Uncodified exception to BK law: Victims of  Fraud, misappropriation, and mistake  who can still identify their property are preferred over unsecured creditors.  Dispossessed O; not mere creditors.  Bright line distinction b/w defrauded consumers and ordinary creditors. Restitution towards the profits of conscious wrongdoers to their victims  even when those profits exceed the victims losses  Equitable lien rather than constructive trust: almost as a matter of course, courts award no more than the victims actual losses in other creditors remain unpaid. Uncodified exception to BK law: Victims of  Fraud, misappropriation, and mistake  who can still identify their property are preferred over unsecured creditors.  Dispossessed O; not mere creditors.  Bright line distinction b/w defrauded consumers and ordinary creditors. o Other creditors would get a windfall at the expense of fraud victims if the other creditors were allowed to share in the proceeds of the fraud. North American Coin: A constructive trust claimant must o first show a right to constructive true under state law, and o then the BK estate can try to show that enforcement of this trust would be inequitable as a matter of BK law. Ex Mistake: A paid B $2Mil. Later the same day paid it again. B BK 1 month later.  A could recover mistaken payment if B were solvent  But, since B was not solvent, A could recover only if it can identify the payment or its proceeds in B’s hands.

 

6th Circuit: “constructive trusts will no longer be recognized in BKs” other: enforcing in BK a CT over $ paid to the debtor for the sole purpose of distributing refunds to customers.

BK debtors cannot pay their debts with other people’s property.  That’s what the fraud, misappropriation, mistake cases are about.

Victims get a judgment for the amount of their loss and a lien on the traced asset to secure the judgment.

 tracing thru co-mingled accounts - lowest intermediate balance o a presumption that the wrongdoer spend his own money 1st. o Bank conscious of its fiduciary duties intended to spend its own money first. o If the balance and account falls below the amount of misappropriated funds, whatever is left belongs to Пs o new money lawfully acquired not treated as replacing

Fiction applied even when the wrongdoer said explicitly that it is withdrawing $ to keep П from getting it.


Page 11 of 15

Equity & Remedies – Outline

earlier withdrawals of the tracing plaintiff's money  unless the wrongdoer actually so intended. o intermediate:  between the last deposit of Пs’ $ and BK  between two deposits of П’s $  tracing through co-mingled accounts – Invest П’s $ first o Rule used when money withdrawn is dissipated o Tracing Пs cannot claim investments that were purchased before their funds were deposited into account o lowest intermediate balance rule limits Пs claims to any subsequent investments.  Pro Rata: Пs can claim a share of investment equal to the fraction that could have been purchased with the lowest intermediate balance o Wrongdoer is presumed to dissipate his own money and preserve the tracing П’s $. o Commingled assets that can still be found, in or out of the commingled account, belong to Пs.  tracing exchanges of identifiable property o plaintiffs can trace through as many exchanges as have occurred  so long as they can identify the property at each step  defining legal mingled accounts o treat all bank’s cash accounts as one. o Historically, most cases relied on closing daily balances Restitution from Third Parties A constructive trust may be imposed in favor of one who transfers property in reliance on a promise originating in a confidential relationship where the transfer results in the unjust enrichment of the holder.  one who possesses equity in an asset is entitled to restitution of the asset by a o subsequent title holder who o paid no value o even if the latter had no knowledge of the predecessor's equitable interest.  In general, it is necessary to trace one's equitable interest to identifiable property in the hands of the purported constructive trustee. o But in view of equity's goal of softening where appropriate the harsh consequences of legal formalisms, in limited situations the tracing requirement may be relaxed. A promise in a separation agreement to maintain an insurance policy

Erie: Пs get to claim the bonds and the mortgage as their property

Ex: thousand dollars of plaintiff's money remained; investment cost $3000; plaintiffs can claim one third of the investment.

Prob: if the cache is not traced into an account, there is no opportunity to apply the fictions about withdrawals from the account Ex (Rogers): In a separation agreement, husband promised to maintain a life insurance policy designating the 1st wife and children as beneficiaries. The policy lapsed when he left his job. At another job he was given a new insurance policy but he named his 2 nd wife as beneficiary. When he died, there was a dispute over who should get the proceeds: 1 st or 2nd wife. Family law cases examples of constructive trusts impose on property in the hands of third parties. Constructive trust continues on the property so long as it is  identifiable in the hands of whoever might come to own it  Not acquired by a good-faith purchaser  For value  Without notice of П’s claims.

Page 12 of 15

Equity & Remedies – Outline

designating a spouse as beneficiary vests in the spouse an equitable interest in the policy specified, and that spouse will prevail over a person in whose favor the decedent executed a gratuitous change in beneficiary.  1st wife will win even if: o change in policies; o change in insurance companies; or o change in beneficiaries. A constructive trust arises when  a person holding title to property  is subject to an equitable duty  to convey it to another o on the ground that he would be unjustly enriched  if he were permitted to retain it. Constructive trust continues on the property so long as it is  identifiable in the hands of whoever might come to own it  Not acquired by a good-faith purchaser  For value  Without notice of П’s claims. Ex: L knew C stole property to pay. So, L knew the source. So, L not good-faith purchaser. Ex: Purchaser should’ve suspected that he was being paid with proceeds of fraud. No GFP.

General creditors who do not take an interest in any specific assets are not GFPs. Constructive trust prevailed over the trustee in BK, who represents General creditors. Lender who takes a mortgage on property subject to constructive trust is a GFP.  If she gives new value and has no reason to know of plaintiff's claim

Fraudulent Transfers (FT)  Tracing to pursue property in the hands of 3rd parties is closely related to the law of fraudulent transfers.  Fair to say fraudulent transfer law provides a form of restitution.  Fraudulent transfers: o Give property away. o Sell property for less than reasonably equivalent value. o Transfer property on any terms with actual intent to hinder creditors.  cases of insolvent wrongdoers giving away misappropriated property can be reached by either o fraudulent transfer or o constructive trust. FT does not reach gifts or sales for inadequate value o Unless, at the time of the transfer, It was at least foreseeable that the debtor would become insolvent. o Constructive trust or equitable lien can trace was appropriate property FT does not require П to trace the specific property she lost. Creditors can to cover only the amount of their loss.

Prejudiced Creditors can undo the tx: recovering the transferred property from the 3rd party.


 

She can get the money judgment for the value off what was fraudulently transferred constructive trust: enables creditors to claim more valuable assets acquired with their loss property
Page 13 of 15


Equity & Remedies – Outline

 Not a FT for a bankrupt to disclaim inheritance. Equitable Liens A person who has been unjustly enriched at the expense of another is required to make restitution to the other.  A person is enriched if he has received a benefit.  A person is unjustly enriched if the retention of the benefit would be unjust.  A person obtains restitution when he is restored to the position he formerly occupied either o by the return of something he formerly had or o by the receipt of its equivalent in $. In equity, however, if the owner stands by and permits another to expend money in improving his land he may be compelled to  surrender his rights to the land upon receiving compensation therefor, or  to pay for the improvements A remedy that subjects the O to a forced exchange will be qualified or limited to avoid undue prejudice to the O.  Allow Restitution for mistaken improvements more liberally: case-by case. An equitable lien is the right to have property subjected in a court of equity to payment of a claim. When one builds a house on another’s land, measures of restitution:  Objective o Objective value of labor and materials (cost of improve) o Increased value of the land o Right to buy the premises if O elects to sell  Subjective o Personal value to Δ landowner for his particular purposes. Equitable lien is a remedy and not a property right: right to have property subjected, in a court of equity to the payment of a claim  Cannot create a lien upon an equitable lien. General principle in restitution that Δs need not pay for benefits they never requested and might not want.  Problems of valuation, liquidity, and autonomy.

B/c Debtor never acquired the property, he did not transfer it. Created by the court, w/o regard to the intentions of the parties. Protects against the risk of Δ’s insolvency. It is a tracing remedy:  court cannot grant a EL on anything;  the lien attaches to the specific property in which П had an interest of which she has been deprived.

Use of EL to save bungled transactions that were intended to create a lien.  Ex: POR gives mortgage but parties forgot to sign or improperly filed. POR would be unjustly enriched. One who built on the land of another had no remedy except when O knew and did nothing. If you pay the same bill twice, you are in BK only as long as you can identify the cash.

Equitable lien is $ judgment secured by a lien on specific property.

Ex (Robinson): Ann and Wylie, husband and wife, built a house on Wylie’s parents’ land with their consent. Ann and Wylie got a divorce and the fight is about what should Ann get in the house? Ann said they intended to convey the land as a gift. Every body else said: NO, just allowed them to build house and no conveying the land.  Constructive trust would treat Ann as a O: entitled to share of any appreciation until her interest was sold, and exposed her to the risk of depreciation.  An EL treats her as a lienholder: entitled to specific $ recovery w/o regard to change in value.

Aggressive sellers cannot send you unordered products and then demand payment.


Page 14 of 15

Equity & Remedies – Outline

Mistaken Improver:  bldg attaches and cannot be removed at reasonable cost  Either granting or denying relief can be harsh.  Δ offered choice of remedy: can choose  Buy the bldg from П  Sell the land to П o Value assessed by the court. Strongest remedy courts can give П is a choice b/w constructive trust and equitable lien.  Choice generally available o Conscious wrongdoing o Misappropriating Fiduciary.  CT If П can trace into property worth more than she lost  EL if П can trace into property worth less. o She will seek $ judgment for the full amount of the loss and an EL on the traceable property to secure the judgment.


Page 15 of 15

Shared By:
Tags: Equirty