Couple Can't Claim Equitable Interest in Debtor's Property

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April 26 — A couple whose company is in bankruptcy can't claim an equitable interest in property that they built their house on and claim they hold as a “constructive trust,” a district court in Michigan held April 22.

Judge Thomas L. Ludington of the U.S. District Court for the Eastern District of Michigan affirmed the bankruptcy court's judgment in favor of liquidating Chapter 11 trustee Kelly Hagan.

The court didn't find that the appellants held a constructive trust in the property in question.

“A constructive trust is a restitutionary remedy [intended] to give relief against unjust enrichment,” according to , pt. II, ch. 63 (D. Michael Lynn et al. eds., 2016). “The imposition of a constructive trust is an equitable remedy that does not depend on the parties' intent,” the treatise explains.

Constructive Trust in Property?

Appellants Brian and Trudy Carrick claimed a constructive trust on a portion of property owned by debtor Carrick Trucking, Inc. They based their claim on shareholder meeting minutes in which Brian's parents, Dean and Gail, as shareholders stated their intent to split the property in question and give 3.65 acres to Brian and Trudy. Brian and Trudy also built their three-bedroom home on the property.

According to the appellants, a constructive trust would have a senior interest to the interests of any other creditor in bankruptcy.

Brian is the owner and a shareholder of the debtor and his wife is an employee.

Trustee Hagan filed an adversary proceeding in the bankruptcy court against Brian and Trudy after the debtor filed for Chapter 11 bankruptcy. Chapter 11 is for businesses or individuals whose debts exceed the statutory thresholds for Chapter 13.

The trustee wanted the court to rule that the appellants didn't have an equitable interest in the property and that the house and sub-parcel of land were property of the debtor's estate.

The bankruptcy court ruled in the trustee's favor, concluding that the appellants were simply “claimants” under the Bankruptcy Code.

Law in Michigan

The appellants appealed to the district court, which agreed with the bankruptcy court's ruling.

Under Michigan law, a constructive trust can only be recognized by a court and doesn't exist before such recognition, the district court said, citing Blachy v. Butcher, 221 F.3d 896 (6th Cir. 2000). Because the appellants didn't have a “constructive trust” imposed by a court of law in advance of the debtor seeking bankruptcy, they don't hold a valid constructive trust and can't claim the property, the court said.

“The Michigan Supreme Court has held that ‘a constructive trust is strictly not a trust at all, but merely a remedy administered in certain fraudulent breaches of trusts,'” the court said, citing Metropolitan Life Ins. Co. v. Mulligan, 210 F. Supp. 894 (E.D. Mich. 2002). “A constructive trust may be imposed upon a finding of fraud, concealment, misrepresentation, or any other circumstances that would render an unconscionable outcome or when an inequitable outcome would result,” the court said.

The appellants couldn't provide any authority for the claim that Michigan law doesn't require a court of law to impose a constructive trust before one is recognized, the court said. Further, the appellants couldn't provide any authority for the bankruptcy court imposing a constructive trust in favor of the appellants, the court concluded.

Corey David Grandmaison, Grandmaison Legal, Bay City, Mich., represented the appellants Brian and Trudy Carrick; Kevin M. Smith, Beadle Smith, PLC, Rochester Hills, Mich., represented the liquidating trustee/appellee Kelly N. Hagen.

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