A common method of purchasing goods is to put the item on layaway for a future date, or to place a deposit on a customized purchase.
In each of these situations the intent is to create a trust between you and the business wherein the business promises to deliver a specific and identifiable product to you and, pending completion of the transaction, undertakes to hold your deposit in trust. You have in effect entered into trust relationship with the vendor.
By definition, a valid trust must have three certainties —intent, subject matter and object.
Certainty of intent refers to the intention that the subject matter of the trust will be held exclusively for the benefit of the beneficiary. Certainty of subject matter refers to the description of the item held in trust (cash in the case of a deposit; television or other item placed on layaway). Certainty of object refers to the persons who are the beneficiaries of the trust and the manner in which the subject matter is to be applied.
When a consumer enters into a transaction described above, the vendor should be segregating the funds received as a deposit or the goods purchased on layaway from the other assets of the business. This does not always happen. In some cases, the vendor will co-mingle the deposit monies with the general operating funds of the business. This may not be a problem for you as long as the vendor remains in business.
What happens when the business goes bankrupt?
In a bankruptcy, all property of the bankrupt is divisible among the creditors, except property held in trust for another person.
If the business goes into bankruptcy, the trustee in bankruptcy will review the business affairs to determine if there is any property held in trust. If there is not a clear segregation of the deposits (separate bank account) or the goods placed on layaway from the other assets of the bankrupt, the certainty of subject matter is not present and therefore a valid trust does not exist. This means that you may find yourself in the unfortunate position of being an unsecured creditor for the amount of your deposit and unable to obtain possession of your layaway item.
Gift cards are used quite often for special occasions. The cards do not create a trust relationship notwithstanding that the purchaser of the gift card has tendered cash to the issuer because the certainties of a trust are not present. Gift cards are a form of promissory note wherein the issuer of the gift card promises to deliver a product or service up to the face amount of the gift card to the holder of the card. The product or service is not defined or identifiable nor is the beneficiary.
Should the issuer of the gift card go into bankruptcy, the holder of the gift card will have to file an unsecured claim in the bankruptcy.
The above is meant to provide some insight into a familiar situation where a trust may or may not exist and define the elements needed to create a valid trust. The issues regarding trust property are not clear cut. If you find yourself in a situation where you have a trust relationship with another party, you may wish to consult with legal counsel to ensure you are protected.
» Wayne K. Palmer is a senior manager in BDO’s Brandon office. He is responsible for both the consumer and commercial practices in Brandon and surrounding areas, including Boissevain, Minnedosa, Neepawa and Dauphin. Wayne has more than 25 years experience in the financial recovery services field.