Appeal from the United States District Court for the Eastern District of California Lawrence K. Karlton, District Judge, Presiding D.C. No. 2:08-CR-00114- LKK
The opinion of the court was delivered by: Mills, Senior District Judge:
Argued and Submitted September 15, 2010-San Francisco, California
Before: J. Clifford Wallace and Sidney R. Thomas, Circuit Judges, and Richard Mills,*fn1 Senior District Judge.
Petitioner-Appellants Richard A. Gray, Jr., Gray Investment Partners, and Cumberland Hill Capital Fund, L.P.,*fn2 (collectively "Gray") appeal the district court's order dismissing their third-party petition to adjudicate property interests in forfeited property. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse and remand.
Stefan Wilson operated a fraudulent investment fund. His Ponzi scheme took almost $13 million from over 50 investors. Gray was among the investors.
By January 2008, the Government had been investigating Wilson for some time. Unaware of the investigation, Gray executed a standard subscription agreement in Wilson's fund on January 28, 2008. Gray wired a total of $2.3 million to Wilson's account at Washington Mutual Bank on February 2, 2008.
On February 2 and February 5, 2008, Wilson transferred the entirety of Gray's funds to an Ameritrade brokerage account, which Wilson had been using to carry out his fraud. Prior to the transfer of Gray's funds, the account balance was allegedly $324.43.
On February 12, 2008, an FBI agent met with Nell Johnson, another victim of the Ponzi scheme. Following the inter- view, Johnson demanded that Wilson return her investment. Wilson transferred $425,000 from the Ameritrade account to an account held by Johnson.
On February 15, 2008, Wilson was arrested, and the balance of the Ameritrade account-$1,490,418.57-was seized. The Government also seized the $425,000 that Wilson had transferred to Johnson. Wilson was indicted on March 13, 2008, and entered into a plea agreement with the Government.
Gray argues that he can trace all of the $425,000 that ended up in Johnson's account to his investment. Gray further argues that all but $324.43 of the funds seized from the Ameritrade account are traceable to Gray's investment.
The remainder of Gray's investment-$384,905.86-was diffused via lulling payments, trading losses, and margin calls during the two weeks that Wilson held the investment.
Pursuant to the plea agreement, the district court entered its preliminary order of forfeiture on April 21, 2009, forfeiting to the Government the $1,490,418.57 balance in the Ameritrade account and the $425,000 in Johnson's account. Gray filed his petition on June 2, 2009.
Gray's petition, filed under 21 U.S.C. § 853(n)(2), alleged that Gray had an interest in $1,915,094.14 of the forfeited funds, and that his interest was superior to that of Wilson and that of the Government.
The Government filed a motion to dismiss the petition, and, after the issue was fully briefed and a hearing was held, the district court granted the motion to dismiss.
In its published order, the district court began by reviewing the applicable standards in forfeiture proceedings. The district court stated that "[p]ersons who have been convicted of specified crimes must forfeit to the government property derived from or obtained as a result of the crime or used to commit or facilitate the crime." United States v. Wilson, 640 F. Supp. 2d 1257, 1259 (E.D. Cal. 2009). The district court noted that under § 853(c), the "government's interest in the property vests at the moment the crime occurs." Id. The district court explained that "certain narrow classes of owners of the property have interests in the property superior to the government. Such asserted interests are adjudicated at a hearing, which the statute describes, as well as when a third-party's interest is superior to that of the government." Id. (citation omitted).
The district court started its analysis by examining whether a constructive trust arose upon Gray's transfer of funds to Wilson. The district court and the parties assumed that California law applied to this question.
The district court explained that in United States v. $4,224,958.57 ("Boylan"), 392 F.3d 1002, 1004 (9th Cir. 2004), we "held unequivocally that [under California law] a constructive trust arises by operation of law as soon as the fraudster obtains the victim's property." Wilson, 640 F. Supp. 2d at 1259-60.
The district court noted, though, that in Davies v. Krasna, 14 Cal. 3d 502, 515-16 (1975), the California Supreme Court adopted the view that constructive trusts had to be created by a court. Wilson, 640 F. Supp. 2d at 1260.
The district court aired its misgivings about Boylan's fidelity to California law, but recognized that it had to follow the precedent of this Court. The district court found that Gray, pursuant to Boylan, "obtained a constructive trust in the property that was the subject of the defendant's fraud by operation of law at the moment the fraud occurred." Id.
After reviewing Gray's claim against the property under § 835(n), the district court found that "[w]hile it seems clear that under Boylan the [Gray] petitioners do have an interest superior to the defendant it also appears that interest is not superior to the government." Id. at 1261.
Next, the district court examined the case of United States v. Hooper, 229 F.3d 818 (9th Cir. 2000), where the wives of two drug dealers tried to lay claim against forfeited drug proceeds under the theory that, pursuant to California law, they had an automatic community property interest in these proceeds. The district court noted that, in Hooper, we "held that the government has interest in the property, except where a third party was a bona ...