Wednesday, February 2, 2011

Alter Ego and Constructive Trusts

[This is Part 3 of a four part series concerning advanced collection techniques. The introductory post can be found HERE.]

The Rogan children claim error with respect to the district court's imposition of constructive trusts on assets that formerly belonged to their father.  Under Illinois law, a constructive trust is imposed to prevent unjust enrichment by imposing a duty on the person receiving the benefit to convey the property back to the person from whom it was received. Martin v. Heinold Commodities, Inc., 643 N.E.2d 734, 745 (Ill. 1994).  It is a restitutionary remedy which arises by operation of law, and is imposed by a court . . . in situations where a person holding money or property would profit by a wrong or be unjustly enriched at the expense of another if he were permitted to retain it." People ex rel. Daley for Use of Cook County v. Warren Motors, Inc., 483 N.E.2d 427, 430 (Ill. App. Ct. 1985)

A party seeking a constructive trust must establish "the existence of identifiable property to serve as the res upon which a trust can be imposed and possession of that res or its product by the person who is to be charged as the constructive trustee." People ex rel. Hartigan v. Candy Club, 501 N.E.2d 188, 191 (Ill. App. Ct. 1986).  But the Dexia Court did not give much guidance on what exactly the plaintiff had to prove to obtain the constructive trust.  Along those lines, the Court noted that particular circumstances in which equity will impress a constructive trust are as numberless as the modes by which property may be obtained through bad faith and unconscientious acts.

Also, the Court made brief mentions to the theory of alter ego, although the specific issue was not examined on appeal.  So, just to give you a little background, I did a quick Westlaw search.   The alter ego theory would be used when you cannot identify specific property to serve as the res of a constructive trust.  In order to prevail on an alter ego theory in a third party citation, the plaintiff must show a high  degree of control  by the debtor through "evidence of misrepresentation; commingling of funds, assets, or identities; undercapitalization; failure to operate at arm's length; and failure to comply with corporate formalities."  In addition, the plaintiff must show that adherence to the corporate form would give rise to fraud or injustice.  See Main Bank v. Baker, 86 Ill.2d 188 (1981). 

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