Extending Constructive Trusts Through Controlled Entities: Ruff v. Destination Development Partners

Introduction

Ruff v. Destination Development Partners, decided May 23, 2025 by the Fifth Circuit, clarifies how arbitration awards imposing constructive trusts on a debtor’s assets must be applied to property held indirectly through entities the debtor controls. The dispute arose when Suzann Ruff prevailed in arbitration against her son, Michael Ruff, for breach of fiduciary duty and fraud, and the panel imposed a constructive trust on “any real property belonging to or originating from property belonging to Suzann Ruff … relating in any way to the Palo Pinto County properties.” Years of collateral attacks followed, culminating in a bankruptcy adversary proceeding. The Fifth Circuit reversed the lower courts and held that the arbitration award’s constructive trust covers the 5,000-acre Palo Pinto Property (the “PPP”) now held by corporations and partnerships Michael manages.

Summary of the Judgment

1. The Court held that under the Full Faith and Credit Act, 28 U.S.C. § 1738, federal courts must afford the Texas probate court’s confirmed arbitration award the same effect it would have in Texas state court.

2. The panel found the Final Award’s property description (generic acreage listings) ambiguous, so it examined the entire arbitration record, which showed that Suzann had one 5,000-acre ranch in Palo Pinto County, transferred first to a partnership Michael controlled (Icarus) and ultimately to the debtor-entities.

3. Because Michael exercises total control over the debtor-entities and the award covers property held by him “in any capacity,” the constructive trust extends to the PPP now owned by those entities.

4. The Fifth Circuit reversed the district court’s narrow reading that limited the trust to property titled in Michael’s personal name and remanded for enforcement of the trust against the entities.

Analysis

Precedents Cited

Full Faith and Credit Act (28 U.S.C. § 1738): Requires federal courts to treat state-court judgments as they would be treated in state court (In re Brady Mun. Gas Corp., 936 F.2d 212 (5th Cir. 1991)).
Hagen v. Hagen, 282 S.W.3d 899 (Tex. 2009): Interpreting unambiguous judgments by their literal language; ambiguous judgments require reference to the whole record.
Coker v. Coker, 650 S.W.2d 391 (Tex. 1983): Defines ambiguity in judgments as “reasonably susceptible to more than one meaning.”
Meadows v. Bierschwale, 516 S.W.2d 125 (Tex. 1974): Establishes that constructive trusts are remedial equity devices with broad scope to redress wrongs and prevent unjust enrichment.

Legal Reasoning

The court began by determining whether the arbitration panel’s award was ambiguous. The descriptive subsections in Exhibit A listed only acreage amounts, not specific parcel identifiers. Under Texas law, a judgment referring to generic acreage is ambiguous and must be read against the evidentiary record that produced it.

The arbitration record clearly established that:

Suzann owned a single ranch (approximately 5,000 acres) in Palo Pinto County.
She transferred that ranch to Icarus Investments IV Limited, managed by Michael.
Michael then shuffled title through multiple entities he controlled, ultimately vesting in the Debtors.

Because all factual threads pointed to one singular asset, the 5,000-acre ranch, the court concluded the Final Award’s constructive trust must cover it wherever it sat. The plain language “in any capacity” could not be read down to exclude property held through Michael-controlled shells.

Impact

Ruff v. Destination Development Partners sets an important precedent in two respects:

It reinforces that arbitration awards confirmed as state-court judgments demand full faith and credit in federal proceedings, even in bankruptcy adversaries.
It confirms that constructive trusts reach assets held by judgment debtors indirectly, through entities they control, preventing debtors from evading equitable remedies via shell corporations.

Future debtors will find it harder to shield misappropriated assets by interposing controlled entities, and creditors will gain assurance that remedies follow assets, not just title labels.

Complex Concepts Simplified

Constructive Trust: An equitable remedy that treats property as held in trust for the victim when one party has wrongfully obtained or retained title.
Full Faith and Credit Act: A federal statute requiring courts to honor the judgments of other courts—state judgments in federal court, and vice versa.
Ambiguous Judgment: A court order whose language is unclear or susceptible to more than one interpretation, permitting reference to the underlying record to clarify its scope.
Core Proceeding in Bankruptcy: A matter arising under Title 11 or arising in a bankruptcy case, over which the bankruptcy court may enter final orders.

Conclusion

Ruff v. Destination Development Partners crystallizes a robust principle: equitable remedies confirmed in arbitration cannot be thwarted by mere changes of title through debtor-controlled entities. By applying the Full Faith and Credit Act and Texas principles of judgment interpretation, the Fifth Circuit ensures that constructive trusts attach to the substance of assets, not just their nominal ownership. This decision will guide courts in confirming arbitration awards, enforcing constructive trusts, and preserving the integrity of equitable relief against sophisticated asset-shuffling schemes.