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The US federal courts claim a jurisdiction in bankruptcy which they call "equitable subordination." It is a kind of reverse constructive trust: a jurisdiction to lower somebody's priority in the bankruptcy rather than to raise it, when the court thinks there is some abuse of the principles of insolvency.

As to whether this is transplantable to other jurisdictions, there is an excellent and comprehensive recent study of whether it might travel to Canada: Thomas G.W. Telfer, "Transplanting equitable subordination: the new free-wheeling equitable discretion in Canadian insolvency law?" (2001) 36 Can. Bus. L.J. 36-88.

Stout traditionalists will of course dismiss this as rubbish. It is the usual dispute as to how quickly the law can be developed by judges vs. what properly belongs to the legislature.

L

If there isn't a proprietary interest at the time of receivership (whichever theory one uses to reach this conclusion), this 2nd Cir. decision is hardly novel. I suppose the novelty in this decision lies in the fact that the court was willing to convert an existing proprietary claim into a personal claim when insolvency intervenes. Had those shares been transferred pursuant to an express trust, the court was even prepared to "confront the issue of whether the equitable interests of the settlor of an inter vivos trust may be adjusted by a pro rata distribution ordered by a district court, exercising its equitable jurisdiction in an SEC-initiated receivership proceeding, to remedy fraud perpetrated upon the settlor and other victims."

Can the courts in other jurisdictions exercise this sort of "expropriatory" power to further the goals of insolvency distribution?