Tracing

An equitable remedy that allows persons to track their assets after they have been taken by FRAUD, misappropriation, or mistake. The remedy is also used in BANKRUPTCY, commercial transactions, and property disputes in marital dissolution cases.

Persons who have been victims of fraud, misappropriation, or mistake may reclaim their property through the equitable remedy called tracing. Tracing makes such victims secured creditors in bankruptcy claims, which means by law they are the first to claim their share of a bankrupt's assets. Tracing can be invoked only if two requirements are met: victims must be able to identify their property and must show that they have a claim of restitution in kind. This means a victim must prove that he has interest in a specific property and that he is not simply someone to whom the defendant owed a debt. Once an individual satisfies these requirements a bankruptcy court will declare that the property never belonged to the person in bankruptcy, so it does not belong to the bankruptcy trustee, who distributes the proceeds to the bankrupt's creditors.

The tracing of assets can be difficult once money is moved into bank accounts or property is sold and the proceeds used to purchase other property. However, there are many tracing rules that aid courts in determining if and how much a person can recover. For example, if a person is defrauded of real estate and the perpetrator of the fraud sells the property and invests the proceeds in corporate stock, the victim may be able to claim the stock. The victim could not use tracing to recover the real estate from a third person who was a GOOD FAITH purchaser (i.e., the individual did not know that the seller had defrauded the victim) and had paid a reasonably equivalent value.

The UNIFORM COMMERCIAL CODE (UCC) gives secured creditors the right to trace their collateral into proceeds of its sale and to trace these proceeds through commingled bank accounts. Therefore, if a business pledges their fleet of trucks to secure a loan, the creditor is entitled to the proceeds of the sale of the trucks by the debtor.

Tracing is also used in FAMILY LAW where a divorcing HUSBAND AND WIFE had separate assets before and during the marriage. Tracing can be used to determine if these assets have been commingled, such as joint contributions toward the purchase of a home. In this area, as in other fields covered by tracing, the rules can become very complex and require the testimony of expert witnesses versed in accounting and sophisticated financial transactions.