The “Ades” and “Berg” groups of investors (the “Ades Berg Group”), were parties who joined in the bankruptcy proceedings of the Bennett Funding Group, Inc. and related companies (the “Bennett Group”), based on claims that, among other things, the Bennett Group had defrauded them in an investment scheme. The Bennett Group was insured under a reinsurance contract issued by Sphere Drake Insurance PLC (“Sphere Drake”). A settlement was reached in the course of the bankruptcy proceedings between some groups of investors and Sphere Drake. As part of the settlement, Sphere Drake made some payments to certain parties, and held remaining policy proceeds for distribution to remaining parties in the bankruptcy.
Richard Breeden, as bankruptcy Trustee of the Bennett Group, asserted declaratory claims within the context of the bankruptcy proceeding against Sphere Drake and the Ades Berg Group pertaining to the distribution of unallocated policy proceeds. The Ades Berg Group asserted a counterclaim against Mr. Breeden, seeking the imposition of a constructive trust over any remaining insurance proceeds. Mr. Breeden sought dismissal of the counterclaim, arguing that the imposition of a constructive trust would inequitably interfere with his duties as Trustee to distribute proceeds to remaining debtors in accordance with applicable federal bankruptcy law. The bankruptcy court agreed, dismissing the counterclaim, with prejudice, based in part on principles embodied in the federal bankruptcy laws. The Second Circuit Court of Appeals affirmed, finding that the New York state law equitable principles urged by The Ades Berg Group did not conflict with the purposes of the federal bankruptcy laws, and that the bankruptcy court’s ruling thus did not run afoul of recent U.S. Supreme Court precedent cited by the Ades Berg Group, which reaffirmed the principle that constructive trusts should be determined with reference to state law. In re Ades and Berg Group Investors, No. 07-3464 (2d Cir. Dec. 16, 2008).