D.C. Circuit Poised To Consider Major About-Face On Constructive Trust Precedent

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...