Wednesday, August 25, 2004
Ninth Circuit Rules:
Fraud Victims Had Standing to Join Government Forfeiture Action
By DAVID WATSON, Staff Writer
The proceeds of a fraud recovered by federal authorities from a foreign bank account are impressed with a constructive trust in favor of the victims under California law, giving them standing to join a civil action by the government for forfeiture, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
U.S. District Judge A. Howard Matz of the Central District of California erred in rejecting claims to seized funds by 23 alleged victims of a investment scam. The scam, allegedly operated by James Carroll Sexton in 1998 and 1999, involved persuading the victims to send him money to “invest” on their behalf.
According to prosecutors, Sexton shuffled the money he collected through various bank accounts in Liechtenstein, violating mail fraud, wire fraud and money laundering statutes in the process. Some of the victims recovered a total of about $1.5 million after the Liechtenstein government launched a criminal investigation into Sexton’s activities, and federal authorities persuaded a Liechtenstein court to transfer the remaining funds—over $4.2 million—to them.
Though U.S. authorities told the Liechtenstein court they planned to return the recovered money to the victims, they did not serve notice of the forfeiture action on the victims. Days after being told by an attorney that the victims were “thinking of” filing claims in the forfeiture action, the assistant U.S. attorney handling the case obtained a default judgment.
When the victims filed their claims, they were rejected because judgment had already been entered, and when they sought to have the default set aside, Matz ruled they lacked standing. The judge said they were “unsecured creditors” and ruled that the “facts of this case do not warrant imposition of a constructive trust” in their favor.
Writing for the appellate panel, Senior Judge John T. Noonan Jr. said that ruling was wrong.
“It is hornbook law” in California, Noonan explained, “that, when a fraudster acquires property from a victim by fraud, the fraudster holds the property in constructive trust for his victim....It is an elementary mistake to suppose that a court creates the trust.... The obligation on the fraudster is imposed by law and arises immediately with his acquisition of the proceeds of the fraud.”
“The transferee of the fraudster who gives no value for the property is in no better position than the fraudster; a fortiori, that is the case when the transferee is aware of the fraud....In the present case, the money fraudulently collected by Sexton was impressed with a constructive trust. The United States, acquiring this property by alleging Sexton’s fraud, acquired it with the same trust imposed.”
Noonan rejected the government’s argument that the victims lacked standing because the money came from a bank account and bank depositors are general creditors of the bank who have no interest in particular funds.
“[T]he Appellants are not in competition with other creditors of the bank,” Noonan declared. “That a bank depositor is only a general creditor is meaningful when the bank holding the account is insolvent and there is not enough to go around. In that situation, a depositor does not stand in front of other creditors. But that is not the situation here. The money from the Liechtenstein bank accounts has already been given over to the control of the United States government. The issue here is whether the Appellants have a claim against these ‘Sexton’ funds. From that perspective, the Appellants are far from being depositors in a failed bank of general unsecured creditors.”
Lack of Notice
The government’s failure to provide notice of the forfeiture action to known victims required that the default be set aside, Noonan said.
Though the record contained some indications that the government feared a particular group of claimants was trying to obtain preferential restitution, those concerns could be addressed by Matz in the context of the forfeiture action, the appellate jurist reasoned.
“Now that the government has bought the res to the court, the government’s role is that of a stakeholder,” Noonan observed. “It has no interest in the property. It is not a party. The district court is now to administer that trust, giving notice to all potential claimants and taking steps to assure that no claimant obtains more than his or her fair share.”
The case is United States v. Boylan, 03-56681.
Copyright 2004, Metropolitan News Company