Chicago partner Wade Kennedy, who leads McGuireWoods’ Asset Based Lending Group, wrote an article for the April 2019 issue of The Secured Lender that assesses potential constructive trust claims that lenders may face in trucking finance transactions. Secured lenders often finance commercial trucking and other transportation companies by taking liens on accounts receivable and cash as security and constructive trust claims have the potential to essentially prime those liens and, on occasion, require the return of cash that may have been applied to the loans.
The article titled “Whose Cash Is This Cash?” provides a summary of the federal common-law origins of constructive trust claims, as well as fact patterns and case law establishing the basis for such claims. Finally, the article suggests certain operational requirements of borrowers and best practices for legal documentation to avoid the successful assertion of constructive trust claims.
As noted in the article, “when the winds of a bankruptcy filing stop blowing,” it would be a rude awakening for the lender to find that cash swept by the lender was not the borrower’s cash at all but actually cash of third-party carriers, held in trust and deemed outside the estate of the borrower.