United States v. 2006-02-13 | 05-10060 | USA VRUTLEDGE | precedential | opinion |

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 UNITED STATES OF AMERICA,
Plaintiff-Appellee, No. 05-10060
v. D.C. No.
 AARON A. RUTLEDGE; ANTHONY CR-02-00438-DAE
RUTLEDGE, aka “Tony” Rutledge, OPINION
Star-Beachboys, Inc.,
Defendants-Appellants. 
Appeal from the United States District Court
for the District of Hawaii
David A. Ezra, District Judge, Presiding
Argued and Submitted
June 15, 2005—San Francisco, California
Filed February 14, 2006
Before: Mary M. Schroeder, Chief Judge,
William C. Canby, Jr., Circuit Judge, and
Kevin Thomas Duffy* Senior Judge.
Opinion by Judge Canby
*The Honorable Kevin Thomas Duffy, Senior Judge for the Southern
District of New York, sitting by designation.
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COUNSEL
John D. Cline, Jones Day, San Francisco, California, for the
appellant.
Patrick T. Murphy, Assistant United States Attorney, Depart-
ment of Justice, Washington, D.C., for the appellee.
Keith K. Hiraoka, Roeca, Louie & Hiraoka, Honolulu,
Hawaii, for the amicus curiae.
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OPINION
CANBY, Circuit Judge:
Anthony Rutledge, Sr., was indicted for mail and wire
fraud, among other crimes. The district court, on motion of
the government, issued a preliminary injunction seizing the
assets of, and imposing a receivership on a nonprofit corpora-
tion Rutledge allegedly controlled, on the ground that the cor-
poration’s assets would be subject to criminal forfeiture if
Rutledge were convicted. Rutledge appeals the preliminary
injunction.
We conclude that the corporation’s assets would not be
subject to criminal forfeiture if Rutledge were convicted,
because those assets do not qualify as “proceeds” that were
“obtained” by Rutledge as a result of his crimes, within the
meaning of 18 U.S.C. § 981(a)(2)(A). We accordingly vacate
the district court’s injunction.
BACKGROUND
Rutledge was the president and chairman of the board of a
large non-profit corporation, Unity House, Inc., incorporated
under the laws of Hawaii. Unity House was originally funded
by members of two labor unions. Over the years, the corpora-
tion made various investments that permitted it to continue to
offer support services to its members.1 At the time of the dis-
trict court’s injunction, Unity House had listed assets of
approximately $42,000,000. Unity House has board members,
1The articles of incorporation adopted in 1951 stated the corporation’s
purpose to be that of assisting “union members . . . or friends of Labor in
the State of Hawaii[,] . . . by seeking to enhance the quality and quantity
of jobs in the State of Hawaii, . . . by promoting benevolent and fraternal
relationships between all members, past members, and friends of Labor[,]
. . . by assisting Workers and their families . . . when in trouble and need
or in distress, [and] by providing suitable quarters for the meeting, assem-
bling, recreation, and education of the Beneficiaries.”
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officers, and a corporate counsel and provides various legiti-
mate services.
A grand jury indicted Rutledge for mail and wire fraud
(among other crimes), relating to his position with Unity
House. The government’s theory, which it supported by dec-
laration in the district court, is that Rutledge, through fraud,
gained control over the entire corporation in violation of the
rights of its members. The government made a showing that
Rutledge, in his control of Unity House, engaged in self-
dealing transactions, such as loans by Unity House to corpora-
tions in which Rutledge had a stake. For the most part, he did
not seek approval of these self-dealing transactions from the
board of directors, but instead he “conceal[ed]” material
information from the board or “intentionally fail[ed] to dis-
close” the information.
Central to the government’s forfeiture claim were its alle-
gation and supporting declaration that Rutledge schemed to
gain control of the entire corporation by eliminating the mem-
bers’ rights in it. He allegedly sent out solicitations for voting
proxies to the corporation’s 12,000 members. These solicita-
tions, according to the government, contained materially false
statements, in order to convince the members to sign over
their voting rights. After Rutledge had accumulated nearly
7,000 proxies, the board of directors convened and approved
an amendment to the articles of incorporation that changed
the corporation from a “member” to a “non-member” corpora-
tion. The government asserted that this change allowed Rut-
ledge to control the corporation because it enabled Rutledge
to answer only to the board of directors, of which Rutledge
was the “controlling” member. The government contended
that because Rutledge schemed to gain control of the entire
corporation and its assets, those assets are the “proceeds” of
Rutledge’s alleged mail and wire fraud and are thus subject to
forfeiture under 28 U.S.C. § 2461(c) and 18 U.S.C.
§ 981(a)(1)(C).
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The district court, after an adversary hearing in which the
government presented its probable cause evidence, accepted
the government’s contentions. It concluded that because “De-
fendants are alleged to have converted Unity House into an
‘alter ego’ entity, the government has established probable
cause to believe that [all the assets of Unity House] will be
subject to forfeiture.” The district court accordingly entered a
preliminary injunction freezing the assets of Unity House and
appointing a receiver to take control of its operations.2 The
district court noted that there was an avenue for any innocent
parties, such as Unity House’s members, who claim a right to
the property subject to forfeiture to assert those claims. See 21
U.S.C. § 853(n). Rutledge now appeals the interlocutory
injunction pursuant to 28 U.S.C. § 1292(a).
DISCUSSION
1. Criminal Forfeiture is Authorized for Proceeds of the
Alleged Mail and Wire Fraud.
Rutledge’s threshold argument is that criminal forfeiture is
not authorized by statute for the mail and wire fraud crimes
with which he is charged.3 Prior to the year 2000, Rutledge
clearly would have been correct. The mail and wire fraud stat-
ute by itself provides for criminal forfeiture only for mail and
wire fraud that affects a financial institution or involves tele-
marketing. See 18 U.S.C. § 982(a)(2)(A), (a)(3)(E) & (F),
(a)(8). Rutledge is not accused of committing this type of
fraud.
[1] The law of criminal forfeiture was greatly changed,
2The district court had initially entered an ex parte restraining order
freezing Unity House’s assets and appointing a receiver. The district
court’s later order, which is the subject of this appeal, converted the
restraining order into a preliminary injunction.
3We review de novo the issues of statutory interpretation. See United
States v. Ripinksy, 20 F.3d 359, 361 (9th Cir. 1994).
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however, by one of the provisions of the Civil Asset Forfei-
ture Reform Act of 2000 (“CAFRA”), 28 U.S.C. § 2461(c).
Section 2461(c) increased the government’s authority to seek
criminal forfeiture by providing:
If a forfeiture of property is authorized in connection
with a violation of an Act of Congress, and any per-
son is charged in an indictment or information with
such violation but no specific statutory provision is
made for criminal forfeiture upon conviction, the
Government may include the forfeiture in the indict-
ment or information.
By authorizing criminal forfeiture when civil forfeiture is
available, this provision permits the government to avoid the
frequent necessity of parallel civil and criminal proceedings.
See H.R. Rep. No. 105-358(I), at 62 (1997). For purposes of
our analysis, section 2461(c) can be divided into two require-
ments: criminal forfeiture is authorized in connection with a
particular offense whenever (1) civil forfeiture of the property
in issue is authorized, and (2) there is “no specific statutory
provision” allowing criminal forfeiture for the charged
offense.
In this case, both requirements are satisfied. First, civil for-
feiture is available for “proceeds” of mail and wire fraud
under 18 U.S.C. § 981(a)(1)(C).4 Rutledge does not dispute
this general proposition (although he vigorously denies that
Unity House’s assets are “proceeds” of his fraud).
4Section 981(a)(1)(C) provides for forfeiture of “[a]ny property, real or
personal, which constitutes or is derived from proceeds traceable to . . .
any offense constituting ‘specified unlawful activity’ (as defined in section
1956(c)(7) of this title), or a conspiracy to commit such offense.” Section
1956(c)(7) defines “specified unlawful activity” as “any act or activity
constituting an offense listed in section 1961(1).” Section 1961(1) includes
violations of 18 U.S.C. §§ 1341 and 1343, under which Rutledge has been
charged.
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[2] Rutledge contends, however, that the second require-
ment is not met because there is a “specific statutory provi-
sion” for criminal forfeiture for mail and wire fraud, even
though that specific provision does not encompass his particu-
lar mail and wire fraud charges. We conclude, as did the dis-
trict court, that Rutledge’s interpretation of section 2461(c)
strains its plain words and is inconsistent with the manifest
intent of Congress to eliminate the necessity of parallel civil
and criminal proceedings. Section 2461(c) permits criminal
forfeiture when civil forfeiture is authorized for violation of
a criminal statute and “any person is charged in an indictment
or information with such violation but no specific statutory
provision is made for criminal forfeiture upon conviction.
. . .” The most natural meaning of this language is that crimi-
nal forfeiture is authorized under section 2461(c) when no
criminal forfeiture provision applies to the charges made
against the particular charged individual. There is no reason
why Congress would choose to make criminal forfeiture
almost universally available for property subject to civil for-
feiture but would exempt proceeds from particular kinds of
mail and wire fraud. We accordingly reject Rutledge’s con-
tention and agree with the district court that section 2461(c)
authorizes criminal forfeiture of proceeds of the mail or wire
fraud crimes with which Rutledge is charged.
2. Unity House’s Assets Do Not Qualify as “Proceeds” of
Rutledge’s Mail or Wire Fraud.
Although we conclude that the proceeds of mail or wire
fraud are subject to criminal forfeiture, we agree with Rut-
ledge that the government has failed to make the requisite
showing of probable cause to believe that the assets of Unity
House were “proceeds” of Rutledge’s alleged mail or wire
fraud.5 18 U.S.C. § 981(a)(1)(C), (a)(2)(A); see United States
v. Roth, 912 F.2d 1131, 1134 (9th Cir. 1990) (noting that the
5We review de novo the district court’s probable cause determination.
United States v. Roth, 912 F.2d 1131, 1134 (9th Cir. 1990).
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government must show probable cause that the assets will be
subject to forfeiture). The district court accordingly erred in
granting the injunction, and we reverse its decree.
[3] Section 981(a)(1)(C) allows forfeiture of “any property,
real or personal, which constitutes or is derived from proceeds
traceable to” mail or wire fraud. Section 981(a)(2)(A) defines
“proceeds” as “property of any kind obtained directly or indi-
rectly, as the result of the commission of the offense giving
rise to forfeiture, and any property traceable thereto, and is
not limited to the net gain or profit realized from the offense.”
The government has shown, at most, that Rutledge
“ ‘scheme[d] to gain control of [Unity House] assets for his
personal use.’ ” The government has not, and apparently
could not, show that assets as they were acquired and held by
Unity House were derived from mail or wire fraud charged in
the indictment. The government also did not show that Rut-
ledge deposited any ill-gotten gains in Unity House. Instead,
the government takes the position that, because Rutledge was
able to exercise “control” over the actions of Unity House’s
board of directors, or took some actions without notifying the
board, all of the assets of Unity House become forfeitable.6
[4] The government’s position goes well beyond the statu-
tory language, which authorizes forfeiture of “proceeds” that
were “obtained” by Rutledge as a consequence of his mail or
wire fraud. 18 U.S.C. § 981(a)(1)(C), (a)(2)(A). The assets
that have been seized do not fit the usual description of “pro-
ceeds,” nor have they been “obtained” by Rutledge. All of the
assets that have been seized, and remain seized, under the dis-
trict court’s injunction were owned by Unity House, which
continued to be a nonprofit corporation operating under a
state charter. The bank accounts that were seized were in the
name of Unity House. The title to the real property that was
6We have found no precedent of this court or the courts of appeals of
the other circuits addressing this precise theory raised by the government.
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seized is in the name of Unity House. Unity House continued
to engage in substantial operations not affected by any mail
or wire fraud alleged to have been committed by Rutledge.
[5] The government’s view is that, because Rutledge
acquired effective “control” over the operations of Unity
House by fraud, all of its assets became subject to forfeiture
as proceeds that he obtained by his fraud. “Control” is an elas-
tic concept, however, and we decline to accept it as a determi-
nant of the meaning of “proceeds” that were “obtained” by
Rutledge. Cf. Scheidler v. Nat’l Org. for Women, Inc., 537
U.S. 393, 403 n.8 (“Surely if the rule of lenity . . . means any-
thing, it means that the familiar meaning of the word ‘obtain’
—to gain possession of—should be preferred to the vague and
obscure ‘to attain regulation of the fate of.’ ”). Unity House
still exists as a corporation, and we see no justification for dis-
regarding its independent existence in assessing whether all of
its assets become “proceeds” that were “obtained” by Rut-
ledge. See Copperweld Corp. v. Independence Tube Corp.,
467 U.S. 752, 786 (1984) (“The well-settled rule is that a cor-
poration is a separate legal entity.”).
It is true that Rutledge’s control of Unity House may have
enabled him to misappropriate some of its assets,7 but the
government is not pursuing any such assets in Rutledge’s
hands, where they could qualify as “proceeds” that he “ob-
tained.” It is also true that Rutledge may have mismanaged
Unity House to its detriment and that of its former members.
The remedy for mismanagement, however, does not extend to
forfeiting all of the assets of the mismanaged corporation to
the United States.8 State regulation and private suit provide
7The government’s probable cause showing referred to some incidents
of improper payment or self-dealing on the part of the Rutledge.
8The government asserts that third-party interests, presumably those of
the defrauded former members of Unity House, would be protected if all
of the assets were ordered forfeited. Those third parties, however, would
have to meet the requirements of 21 U.S.C. § 853(n) to establish their
superior right to the assets.
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more appropriate avenues of relief.9 Cf. United States v. Riley,
78 F.3d 367, 370-72 (8th Cir. 1996) (overturning pre-
conviction restraint on entire enterprise through which defen-
dants violated RICO, and observing that RICO prosecutors
are not proper persons to run insurance business, the regula-
tion of which “is the prerogative of the States”).
[6] We conclude, therefore, that the government has failed
to sustain its burden of showing probable cause to believe that
the assets of Unity House are subject to criminal forfeiture as
“proceeds” that were “obtained” by Rutledge as a result of his
mail or wire fraud.
CONCLUSION
Congress in 28 U.S.C. § 2461(c) has authorized criminal
forfeiture for the proceeds of the mail and wire fraud crimes
with which Rutledge was charged. The district court erred,
however, in holding that there was probable cause to believe
that all of the assets of Unity House were subject to forfeiture;
those assets in the hands of Unity House did not constitute
“proceeds” that were “obtained” by Rutledge as a result of his
alleged fraud. See 18 U.S.C. § 981(a)(1)(C), (a)(2)(A). We
therefore vacate the preliminary injunction of the district
court.
Our disposition of this appeal makes it unnecessary for us
to consider Rutledge’s additional contention that section
2461(c) does not authorize pre-conviction seizure of assets.
See United States v. Razmilovic, 419 F.3d 134, 138 (2d Cir.
2005) (holding that section 2461(c) does not authorize pretrial
restraint of forfeitable assets).
9Rutledge is unlikely to commit any further acts of mismanagement of
Unity House during the pendency of his criminal proceedings. The district
court as a condition of his pretrial release required that he or his agents
have nothing to do with the affairs of Unity House.
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The preliminary injunction entered by the district court is
VACATED.
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