For 20 years, the District of Columbia has been the sole Circuit that fails to recognize the imposition of a constructive trust to benefit victims of fraud. See United States v. BCCI Holdings (Luxemborg), S.A., 46 F.3d 1185, 1190 (D.C. Cir. 1995).
Under a constructive trust theory, “whenever a party has obtained property which does not belong to him, and which he cannot in good conscience withhold from another who is beneficially entitled to it,” either through theft, embezzlement, larceny, trickery, etc., that property is held in a constructive trust for the true owner, and that constructive trust preserves the true owner’s legal entitlement to the property. Blake Constr. Co. v. American Vocational Assoc., 419 F.2d 308, 311 (D.C. Cir. 1969). The legal entitlement preserved through a constructive trust is the mechanism by which the true owner can seek return of his property from the Government after it has been seized by law enforcement as the proceeds of criminal activity. Under BCCI, however, victims of fraud were relegated to the status of general creditors, and the Government kept the property out of which those victims had been defrauded. BCCI, 46 F.3d at 1190.
Scholars have lambasted BCCI’s constructive trust analysis as “tortured and wrong,” “a truly appalling display,” and a “mischaracteriz[ation]” of the RICO statute and constructive trust theory itself. Rossbacher, Henry H. and Young, Tracy W., BCCI: The Priority of Kings, or What’s More Dangerous, the Cavalry or the Indians? 5 J. Financial Crime 365, 365-66 (May 1998) (citing cases and law review articles); Blakey, G. Robert and Roddy, Kevin P.,Reflections on Reves v. Ernst & Young: Its Meaning and Impact on Substantive, Accessory, Aiding Abetting and Conspiracy Liability under RICO, 33 Am. Crim. L. Rev. 1345 (1996). Nonetheless, the D.C. Circuit persisted in its outlier position.
Criticisms of the reasoning and holding in BCCI arise not only from scholars. The constructive trust portion of the opinion in that case has also been directly criticized and rejected by every circuit court opinion to consider the issue since BCCI was handed down.See, e.g., Willis Mgmt. (Vermont), Ltd. v. U.S., 652 F.3d 236, 244 (2d Cir. 2011) (rejecting the analysis, logic, and statutory interpretation of BCCI); United States v. Salti, 579 F.3d 656, 670-71 (6th Cir. 2009) (rejecting BCCI and noting that its reasoning has been subject to criticism); United States v. Shefton, 548 F.3d 1360, 1366 (11th Cir. 2008) (rejecting BCCIbecause “[o]ne of its premises is incorrect. . .”); United States v. $4,224,958.57, 392 F.3d 1002, 1004 (9th Cir. 2004) (characterizing the holding in BCCI as an “elementary mistake.”) Nonetheless, the D.C. Circuit persisted in its outlier position.
Until, perhaps, now. The D.C. Circuit could be on the brink of a major about-face, following some strong signaling in the panel opinion in the criminal forfeiture ancillary proceedingUnited States v. SunRise Academy, No. 13-3071 (Slip. Op. May 5, 2015). In this proceeding, SunRise Academy, a private school for special needs children in the District of Columbia, was swindled out of over $2 million by its own founder and director. The Government arrested the director for embezzlement and wire fraud, and seized the money from the director’s bank account. SunRise first attempted to intervene in the criminal proceeding to get its money back, but was precluded as a non-party. SunRise then attempted to get its money back via an ancillary civil proceeding, but was again precluded, in part, under BCCI. Several financially-strapped years later, SunRise finally had its day in court on appeal to the D.C. Circuit.
In its opinion, the panel observed that overturning BCCI Holdings “would have support,” as “[e]very circuit to consider the constructive trust question in the context of criminal forfeiture has rejected the analysis in BCCI Holdings,” but nonetheless found that it was bound by that precedent until an en banc rehearing presented the opportunity to change it. Slip Op. at 21 (collecting cases). Such a clear call to action for an en banc rehearing is rare among appellate opinions.
Accordingly, the panel reversed-in-part the district court decision precluding SunRise’s claim on other grounds, affirmed-in-part the portion of the lower court opinion dismissing SunRise’s constructive trust theory, and remanded the case for a hearing on the merits. As though the panel’s call for en banc was not loud enough, the panel issued along with the opinion an order delaying issuance of the mandate for a week beyond the expiration of time in which the parties could file petitions for rehearing—presumably to allow the panel to take an en banc vote sua sponte.
Not surprisingly, SunRise Academy took the not-so-subtle hint and filed a petition for rehearing en banc regarding the constructive trust issue. The petition was filed on July 20, 2015, and raises the expected arguments regarding the resounding rejection of BCCIamong the regional circuits, and the need to bring D.C.’s heavily-criticized opinion in line with the strong consensus regarding constructive trust jurisprudence.
The Government was invited to respond within 15 days on July 27, 2015. Responses to en banc petitions are not invited often, and indicate that at least one judge is in favor of granting the petition. Such an invitation is a prerequisite for granting rehearing en banc. Keep your eyes peeled for the next few weeks to see if the D.C. Circuit finally changes course and joins the rest of the circuits in providing for constructive trusts as a legal theory under which victims can petition the Government for the return of their fraudulently taken property.