Third Time's the Charm: The Coming Impact of the Restatement (Third) Restitution and Unjust Enrichment in Bankruptcy

Abstract

Bankruptcy courts have frequently been characterized as courts of equity. Often this characterization has accompanied unusually relaxed interpretation or application of a provision of the Bankruptcy Code. However, this understanding does not exhaust the meaning of equity in bankruptcy.Historically, equity covered a large range of topics – trusts and estates, injunction, contracts, specific performance, unjust enrichment, restitution, and disgorgement. In addition, equity was not limited to particular remedies. Equity’s remedies certainly included money damages but recognized many more. The law of equity was substantive as well as remedial; it recognized primary rights as well as secondary rights of rectification. Among equity's primary rights were equitable interests in property. And section 541(a) of Bankruptcy Code includes such equitable interests in its definition of property of the estate.If equity once boasted a substantial substantive content, what was it? The answer is found in the title of the Restatement Third, Restitution and Unjust Enrichment (R3RUE). Unjust (or unjustifiable) enrichment provides the conceptual core of this body of law. As the converse of tort law, which identifies unjustified harms to another, unjust enrichment recognizes unjustified benefits to another, at least to the extent they come at the claimant’s expense. Notwithstanding the merger of law and equity, in the mid-1990’s the American Law Institute appointed Andrew Kull as the reporter for the R3RUE. With final approval in 2010, we can expect to see the R3RUE affect the legal landscape in the near future. It is that impending impact in bankruptcy that constitutes the burden of this article.Part I briefly summarizes the substantive law of equity as expressed in the R3RUE. It addresses the substantive core of law of equity. Distinct categories of operative facts such as benefits conferred by mistake or without request, pursuant to a voidable contract, or as a result of wrongful interference with the rights of a claimant ground unjust enrichment.Part II surveys the remedial aspects of the R3RUE comprising the four so-called proprietary remedies–constructive trust, equitable lien, subrogation, and the paired set of rescission and restitution. These proprietary remedies are the equitable interests in property that are part of the property of the estate.Finally, Parts III–VI focus on these four remedies in greater depth and examine how courts operating under the Bankruptcy Code have (mis)applied them. I conclude with specific observations about how the R3RUE can and indeed should affect the development of equitable interests by firmly recognizing their place as property of the estate.