United States v. Andrews

FILED
United States Court of Appeals
Tenth Circuit

July 1, 2008
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff - Appellee,
v. No. 07-6092
BOBBIE STACY ANDREWS,

Defendant,
___________________________

RICHARD LATHROP; CAMELA
LATHROP; JOE LAUMER,

Claimants - Appellants.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
(D.C. NO. 06-CR-208-T)

Philip O. Watts (Beverley Q. Watts with him on the brief), of Watts & Watts,
Oklahoma City, Oklahoma, for Claimants - Appellants.

Stefan D. Cassella, Special Assistant United States Attorney, Eastern District of
Virginia, Alexandria, Virginia, (John C. Richter, United States Attorney, Susan
Dickerson Cox and Debra Paull, Assistant United States Attorneys, Western
District of Oklahoma, Oklahoma City, Oklahoma, with him on the brief), for
Plaintiff - Appellee.

Before BRISCOE, SEYMOUR, and HARTZ, Circuit Judges.

HARTZ, Circuit Judge.
 Bobbie Stacy Andrews pleaded guilty to federal charges of wire fraud and

money laundering in the United States District Court for the Western District of

Oklahoma. She had defrauded her victims of millions of dollars by diverting

funds that they believed were being invested in mortgages. By the time the

government seized her bank accounts, she had spent all but a fraction of that

money. As a condition of her guilty plea, she forfeited the remaining money—a

mere $61,427.14—to the government, which agreed to ask the court to divide the

proceeds among her victims. Richard Lathrop, Camela Lathrop, and Joe Laumer

(collectively, the Lathrops), who were the last of her victims, opposed this

arrangement. They contended that they were entitled to all the seized funds

because the money in the bank accounts could be traced back to them. They

asked the court to impose a constructive trust that would grant them priority to

the money over Andrews’s other victims. The court denied the request as unfair

to the other victims.

We hold that the district court did not abuse its discretion in deciding that

the traditional purpose of a constructive trust—avoiding unjust

enrichment—would not be served here, because the true parties in opposition to

the Lathrops are the other fraud victims, who would not be unjustly enriched by

receiving appropriate shares of Andrews’s remaining loot. Accordingly, we

affirm.

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I. BACKGROUND

Andrews was charged in a two-count information on September 13, 2006.

The first count accused Andrews of wire fraud in violation of 18 U.S.C. § 1343.

It alleged that from May 10, 2004, through November 18, 2005, Andrews

“devised and intended to devise a scheme and artifice to materially defraud and

for obtaining money by means of materially false and fraudulent pretenses,

representations, and promises.” Aplt. App. at 9–10. The object of the scheme

was “to obtain money from investors, reportedly to purchase mortgages for

investment,” id., but which was instead used for Andrews’s own benefit. The

information also alleged that as part of the scheme (1) Andrews told investors that

she had the ability to purchase mortgages from certain banks at discounted prices

and then resell the mortgages at a profit, (2) she instructed investors to wire funds

to accounts that were deceptively named to suggest that they were under the

control of the banks selling the mortgages, and (3) she provided investors with

fraudulent assignments of mortgages and fraudulent title reports. The predicate

jurisdictional act was a wire transfer on June 22, 2004, from the account of one of

Andrews’s victims in California to an Oklahoma account controlled by Andrews.

The second count of the information charged Andrews with money

laundering on July 14, 2004, in violation of 18 U.S.C. § 1957—specifically, a

$13,956.35 payment to Washington Mutual using funds obtained through her

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wire-fraud violation. The information also alleged that $61,427.14 in two

accounts at the Arvest Bank was forfeitable to the government.

Andrews pleaded guilty to the information on October 2, 2006. As part of

her plea agreement, she agreed to forfeit the money in the Arvest accounts to the

government, which committed to distributing the proceeds as restitution to the

victims. The government then moved for a preliminary order of forfeiture. The

district court entered the order, finding that the plea agreement had established

the requisite nexus between the property and the offenses, and that the property

was subject to forfeiture under 18 U.S.C. §§ 981(a)(1)(C) and 982, and 28 U.S.C.

§ 2461(c). As required by 21 U.S.C. § 853(n), the government published notice

of the order.

The Lathrops then filed a timely petition under § 853(n) asserting an

interest in the property. They alleged the following facts: In June 2004 Andrews

fraudulently obtained money from an investor, Very Fund, LLC. The following

month she used $13,956.35 of this money to pay Washington Mutual on a

delinquent mortgage on 1929 Guilford Court, Norman, Oklahoma. (This is the

act alleged in count two of the information). Approximately a year later, in June

2005, Andrews solicited money from the Lathrops to purchase a mortgage on the

same Guilford property. The Lathrops wired $112,292.41 to the holder of the

mortgage, B & B Funding, LLC, which executed an assignment of the mortgage

to the Lathrops. Before filing the assignment with the county clerk, however,

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Andrews switched the name of the assignee—the Lathrops’ investment

company—to that of her own company, Andrews Group Investments, Inc. In late

November 2005, Andrews acquired title to the Guilford property and then

obtained a new mortgage on the property, the proceeds of which she used to pay

off the former B & B mortgage (then held by Andrews Group Investments). She

deposited the $101,000 paid to Andrews Group Investments in two bank accounts

at Arvest Bank.

Based on these facts, the Lathrops asserted that Andrews’s fraud on them

was entirely separate from the fraud described in the information. They pointed

out that they transferred funds directly to a third party, B & B Funding, rather

than depositing them into a deceptively named account controlled by Andrews,

the practice referred to in the information. The government, they contended, had

not established the requisite nexus between the seized funds and the crimes of

conviction, so the funds could not be forfeited. They further argued that they

were entitled to the imposition of a constructive trust on the Arvest funds because

those funds were traceable to the specific fraud against them.

In its final forfeiture order the district court reaffirmed its earlier finding

that the government had established the requisite nexus between the crimes

charged in the information and the property to be forfeited. The court also denied

the Lathrops’ request for a constructive trust. It emphasized that a constructive

trust is an equitable remedy and stated that “[t]o impose a constructive trust in

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their favor would elevate their position on the basis of Andrews’ conduct, to the

detriment of her other victims,” which the court concluded would be inequitable.

Instead, the court ordered that their share and that of the other victims “be

determined according to the governing principles designed to treat all of

Andrews’ victims equitably.” Aplt. Appx. at 119–120. The Lathrops appeal.

II. DISCUSSION

In issuing a preliminary order of criminal forfeiture, the district court must

determine that the property at issue is forfeitable under an applicable statute.

Fed. R. Crim. P. 32.2(b)(1). At this stage the court does not—and, indeed, may

not—determine the rights of any third parties who assert an interest in the

property. Id. at 32.2(b)(2). Third parties then have an opportunity to assert their

rights to the property in an “ancillary proceeding,” id. 32.2(c), governed here by

21 U.S.C. § 853(n), which permits those who assert an interest in the property to

file a petition seeking amendment of the preliminary forfeiture order to exclude

their interest. Section 853(n)(6) recognizes two situations in which the forfeiture

order must be amended: when the petitioner has shown, by a preponderance of

the evidence, that

(A) the petitioner has a legal right, title, or interest in the property,
and such right, title, or interest renders the order of forfeiture invalid
in whole or in part because the right, title, or interest was vested in
the petitioner rather than the defendant or was superior to any right,
title, or interest of the defendant at the time of the commission of the
acts which gave rise to the forfeiture of the property under this
section; or

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 (B) the petitioner is a bona fide purchaser for value of the right, title,
or interest in the property and was at the time of purchase reasonably
without cause to believe that the property was subject to forfeiture
under this section[.]

Thus, although the preliminary order of forfeiture does not take into account the

interests of third parties, the final order must be amended to exempt their

qualifying interests. Because the Lathrops do not argue that they are bona fide

purchasers for value, only § 853(n)(6)(A) is at issue here.

In their brief on appeal the Lathrops reiterated their argument in district

court that the government did not meet its burden of proving the requisite nexus

between the funds to be forfeited and the crimes of conviction. But, as set forth

above and as stated by the government in its response, a third party has no right

to challenge the preliminary order’s finding of forfeitability; rather, the third

party is given an opportunity during the ancillary proceeding to assert any

ownership interest that would require amendment of the order. We agree with the

government’s explanation: “[I]f the property really belongs to the third party[,] .

. . he will prevail and recover his property whether there were defects in the

criminal trial or the forfeiture process or not; and if the property does not belong

to the third party, such defects in the finding of forfeitability are no concern of

his.” Aplee. Br. at 18–19 (emphasis and footnote omitted). Thus, at oral

argument the Lathrops modified their position. We now understand them to be

challenging not the determination of forfeitability made in the preliminary order

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but rather the district court’s determination in the ancillary proceeding that they,

Very Fund, and the other investors were so similarly situated as victims that it

would be inequitable to impose a constructive trust for their benefit.

It is the government’s position that a constructive trust can never support a

claim under § 853(n)(6)(A) because the trust does not exist until imposed by the

district court, and therefore an interest created by a constructive trust cannot exist

“at the time of the commission of the acts which gave rise to the forfeiture,” as

§ 853(n)(6)(A) requires. We have previously held in the bankruptcy context,

however, that “the effective date of the constructive trust is the date the wrongful

act occurred.” U.S. Dep’t of Energy v. Seneca Oil Co. (In re Seneca Oil Co.), 906

F.2d 1445, 1453 (10th Cir. 1990) (emphasis omitted). In any event, it is

unnecessary for us to decide this issue, because even if a constructive trust can

satisfy the requirements of § 853(n)(6)(A), the district court did not abuse its

discretion in ruling that the Lathrops had not established their entitlement to a

constructive trust.

A constructive trust is a legal fiction, “an equitable remedy devised to

prevent unjust enrichment and compel restitution of property that in equity and

good conscience does not belong to the Defendant.” Amdura Nat’l Distrib. Co. v.

Amdura Corp., Inc. (In re Amdura Corp.), 75 F.3d 1447, 1451–52 (10th Cir.

1996) (internal quotation marks omitted). It is a proper remedy when a recipient

acquired property by defrauding the claimant. See Tenneco Oil Co. v. Joiner, 696

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F.2d 768, 776 (10th Cir. 1982) (applying Oklahoma law). The recipient of the

property, the constructive trustee, is deemed to hold legal title to the property for

the benefit of the claimant, and it is the obligation of the constructive trustee to

surrender the property to the claimant. See Restatement (Third) of Restitution

and Unjust Enrichment, § 55(1)-(2) (Tentative Draft No. 6, 2008). A constructive

trust can serve different purposes depending on whether the recipient, the debtor,

is solvent. A claimant facing a solvent defendant may prefer the remedy of a

constructive trust over money damages in a number of situations, such as “when

the property in question has special value for the claimant; when it has

appreciated in value; when its value might be difficult to establish; or when

recovery of a specific thing is merely less costly than proof and recovery of its

value.” Id. at § 55 cmt. c. When the claimant faces an insolvent recipient, the

remedy retains these advantages but its principal advantage—and one crucial to

this case—is that it gives the claimant priority over other creditors. See id. In

this context, “the claimant . . . must argue—in effect—that restitution [and

imposition of a constructive trust] is justified by the unjust enrichment of the

recipient’s creditors at the claimant’s expense.” Id.

Typically, a claimant who otherwise establishes the requirements for

imposition of a constructive trust can demonstrate that the recipient’s other

creditors would be unjustly enriched at the claimant’s expense because the other

creditors voluntarily took on the recipient’s debt. “The intuitive objection is that

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a debtor should not be allowed to rob Peter to pay Paul.” Id. § 55 cmt. d.

“Underlying this intuition is the distinction between [the creditor]’s voluntary

extension of credit and the defective transaction that underlies [the claimant]’s

claim in restitution.” Id. See generally Andrew Kull, Restitution in Bankruptcy:

Reclamation and Constructive Trust, 72 Am. Bankr. L.J. 265, 277–290 (1998);

Emily L. Sherwin, Constructive Trusts in Bankruptcy, 1989 U. Ill. L. Rev. 297,

335–337, 350–55 (1989). The rationale for imposing a constructive trust in favor

of one creditor may not, however, apply when the competing creditors were also

“involuntary” creditors.

With these concepts in mind, we return to the specifics of this case.

Because imposition of a constructive trust is an equitable remedy, we review the

district court’s decision for abuse of discretion. See Clark v. State Farm Mut.

Auto. Ins. Co., 433 F.3d 703, 709 (10th Cir. 2005). We hold that there was no

such abuse here. The Lathrops and Andrews’s other creditors were all victims of

her fraud. The district court could properly decide that none deserved priority

over the others. All the victims, including the Lathrops, were fraudulently

induced to part with their money, believing themselves to be investing in valid

mortgage assignments. None voluntarily became creditors of Andrews. They

thought that they were becoming secured creditors of property owners.

The Lathrops contend that they are distinguishable from the other victims

because Andrews’s fraud on them was not part of the scheme of which she was

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convicted. We are inclined to disagree with this contention; the scheme alleged

in the information appears to encompass the Lathrops’ transaction, in both time

and content. But we need not rely on that being the case. Even if the Lathrops

are correct that their fraud was not part of the scheme alleged in the information,

this does not necessarily distinguish them from the other fraud victims, who also

became involuntary creditors of Andrews. The district court acted within the

boundaries of sound discretion in deciding that the other victims would not be

unjustly enriched by sharing in the money recovered from their defrauder. That

Andrews spent their money first does not make their share of the recovery unjust.

As we have previously recognized, a court should not employ an equitable fiction

“to elevate [one] claim over the claims of other creditors if those creditors are

similarly situated.” Hill v. Kinzler (In re Foster), 275 F.3d 924, 928 (10th Cir.

2001) (addressing lowest-intermediate-balance rule).

We also reject the Lathrops’ argument that they meet the requirements

under Oklahoma law for the imposition of a constructive trust and that we must

therefore instruct the district court to impose one. We recognize that in federal

forfeiture proceedings, ownership interests (including constructive trusts) are

defined by state law. See United States v. 9844 S. Titan Court, Unit 9, Littleton,

Colo., 75 F.3d 1470, 1478 (10th Cir. 1996); United States v. Tracts 10 & 11 of

Lakeview Heights, Canyon Lake, Comal County, Tex., 51 F.3d 117, 121 (8th Cir.

1995). But we see no conflict between the district court’s decision and Oklahoma

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law. Oklahoma recognizes that a constructive trust is an equitable device, the

primary purpose of which is avoiding unjust enrichment. Easterling v. Ferris,

651 P.2d 677, 680 (Okla. 1982). When a constructive trust would not serve to

prevent unjust enrichment, and would instead deliver inequitable results,

declining to impose one is not inconsistent with Oklahoma law. Other courts

have recognized that when a district court determines that granting relief upon an

equitable theory such as constructive trust would lead to an inequitable result, it

may in its discretion decline to do so. See United States v. Durham, 86 F.3d 70,

73 (5th Cir. 1996); SEC v. Elliott, 953 F.2d 1560, 1569 (11th Cir. 1992). Cf.

Foster, 275 F.3d at 928 (remanding for district court to consider whether

constructive trust would be equitable).

III. CONCLUSION

The district court did not abuse its discretion in refusing the Lathrops’

request for a constructive trust. We AFFIRM.

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