[snip]

So to my mind the closest analogies are found in that rich vein of cases involving "restitution between consecutive victims of the same fraud," the classic facts being successive borrowings on forged security, with proceeds of the subsequent borrowing being used, in part, to repay the prior lender;

I am looking forward to reading those cases. On the other hand, it sounds as though they are all cases in which the defendant extended credit to the rogue, and thus they are not directly applicable to whether an unknowing victim of a breach of trust can claim bfp when he gets trust funds belonging to another trust. One who has extended credit is not under a misapprehension that he is getting back something he has always owned.

Of course, in many comparable situations there is an effective loss-splitting mechanism in the form of bankruptcy. For me the important rule of Cunningham v. Brown (the original Ponzi case), 265 U.S. 1 (1923), is that we do not allow b.f.p. defense to an earlier fraud victim who was lucky enough to get his money out ahead of the general crash because bankruptcy, and equity generally, seek to give similar treatment to persons similarly situated.

I don't read it quite that way. The court denied that those who got money out could show that the money they got out was traceably theirs. The primary holding was that the defendants were creditors who were uncontroversially preferred. The secondary holding was that even if they were not creditors because they had rescinded their contracts, they could not claim to have recovered "their" money because they had not adequately traced. A victim of breach of trust who recovers money other than that held in trust for her is just a preferred creditor.

This means that you can neither resist nor assert constructive trust in bankruptcy where the result is to afford preferential treatment to a claimant who cannot adequately distinguish his situation vis-a-vis the debtor from that of the other creditors. I think this reasoning supports, in a general way, finding the means to split the $45 million between the bank and the investment fund in Lyons v. Jefferson. US doctrine about constructive trust is sufficiently liberal (i.e. loose) that a US court would have no difficulty finding that the bank (or a bankruptcy trustee, if it comes to that) held the disputed funds in CT for the two fraud victims (assuming for simplicity two victims identically situated), in proportion to their losses from the embezzlement.

But I would say that the function of bfp is exactly to distinguish one's situation from another's. If a thief steals my car and sells it to you, I can take it away from you, and I don't think the loss can be split even if there is a bankruptcy. On the other hand, if I bail it to a rogue with instructions to sell for no less than $5,000 and he sells it to you for $3,500, I can't take it away from you (in every jurisdiction I know of) and there is no way to split the loss even if the rogue has absconded or is bankrupt and so I have no way to get my $3,500. Rules about how property behaves operate to allocate losses, and are (with narrow exceptions) not affected by the supervention of bankruptcy. That is why we need a rational set of rules.

Lionel