Asset Protection: Creditor Remedy – Constructive Trust

A constructive trust is a remedy that arises against one who holds legal rights to property but, which in “equity and good conscience should belong to another.”  There does not need to be a showing that the property was acquired by fraud. The creditor does not need to prove an intent to defraud.

The creditor has to prove only that it is unfair for the entity to prevent the creditor from accessing the entity’s property.

One case has been cited in which a constructive trust was used to defeat charging order protection (See: Delta Development and Investment Co. v. Hsiyuen, 2002 WL 3174, 8937 (Wash.App. Div. 1, 12/9/2002).

In this case, the facts showed significant fraud by the debtor, including use of company assets to fund personal ventures/opportunities, commingling of personal funds with company funds, use of the company’s funds/credit to entice a bank to extend credit, and transforming company funds into a personal account.

The court in Delta determined that the constructive trust could defeat the charging order limitation because it is not a monetary judgment and charging order limitation statutes protect the debtor only against monetary judgments.

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