Someone (Langlie) gets into a business deal with an old friend, Farr; Farr will contruct a residential home, on spec, which Langlie will fund and the two plan to split the proceeds upon sale of the property. Langlie is to fund the project, with Farr calling him periodically for cash draws to fund construction.
Unfortunately for Langlie, it appears that his banker inadvertently transferred $123,000 from Langlie’s account to Farr’s account for a $23,000 draw — just before Farr went into Chapter 7 bankruptcy. Thereafter, once the error was identified, Farr gave Langlie the money back. The bankruptcy trustee sought to “claw back” the money into Farr the debtor’s estate as a preferential or fraudulent transfer.
The Bankruptcy Court was apparently sympathetic to Langlie and imposed a “constructive trust” on the funds when they were in Farr’s account, essentially a means by which the Court could hold that the money never was part of the debtor’s estate and therefore could not be clawed back into it.
The US Bankruptcy Appellate Panel (BAP) reversed finding that, under Minnesota law, a mistake, by itself, without wrongful, illegal, or unjust conduct was an insufficient basis for a constructive trust.
From a brief review of the opinion, it seems that there was enough ambiguity in Minnesota case law for the court to have decided either way. Clarity and efficiency are of paramount importance in the swift discharge of bankruptcies, however; rules that are less clear, that include a larger subset of exceptions to bright-line rules, or that raise the prospect of messy factual inquiry, as the trial court’s holding might have caused, are disfavored.