January 21st, 2014
When a client goes bankrupt, an unpaid supplier is often left with few remedies. Generally speaking, the unpaid supplier’s recovery is limited to their proportional share of what is left of the proceeds from the bankrupt’s assets after the debts of secured creditors and trust claim have been satisfied. However, a few remedies are available to unpaid suppliers: the “thirty-day rule”, set off, express trusts and consignment.
An express trust exists where one party holds, in trust, money or property for another party with the intention of creating a trust relationship. If an unpaid supplier can demonstrate that it and the bankrupt purchaser intended to create a trust, and the funds and property remain specifically identifiable, it may be entitled to recover the funds or property that is the subject of the trust.
An unpaid supplier may establish the intention of a valid trust by ensuring that the “three certainties” of intention, subject matter, and objects, are met.
In order to meet the certainty of intention, the trustee must administratively hold property for the beneficiary. A trust exists if the trustee is obligated to deal with the property on behalf of the beneficiary. This obligation may be express or implied, but the intention must be clear. Certainty of subject matter requires that the property or funds held in trust be clearly identifiable, while certainty of objects refers to having an identifiable beneficiary.
In addition to the certainty requirements, an unpaid supplier with a valid trust claim must also demonstrate that the trust was properly constituted. This occurs once the trustee has acquired title to the trust property, such that any rights to the property belong to the beneficiary.
Readers are reminded that bankruptcy courts are typically solutions-oriented and that the application of the above-criteria is dependent on the facts of each case. It is recommended that readers consult an insolvency professional.