United States v. Rutledge

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA, 

Plaintiff-Appellee,

No. 05-10060

v.

AARON A. RUTLEDGE; ANTHONY  D.C. No.

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.

1657

UNITED STATES v. RUTLEDGE 1659

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.

1660 UNITED STATES v. RUTLEDGE

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,

1

The 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.”

UNITED STATES v. RUTLEDGE 1661

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).

1662 UNITED STATES v. RUTLEDGE

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,

2

The 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.

3

We review de novo the issues of statutory interpretation. See United

States v. Ripinksy, 20 F.3d 359, 361 (9th Cir. 1994).

UNITED STATES v. RUTLEDGE 1663

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).

4

Section 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.

1664 UNITED STATES v. RUTLEDGE

[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

5

We review de novo the district court’s probable cause determination.

United States v. Roth, 912 F.2d 1131, 1134 (9th Cir. 1990).

UNITED STATES v. RUTLEDGE 1665

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

6

We have found no precedent of this court or the courts of appeals of

the other circuits addressing this precise theory raised by the government.

1666 UNITED STATES v. RUTLEDGE

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

7

The government’s probable cause showing referred to some incidents

of improper payment or self-dealing on the part of the Rutledge.

8

The 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.

UNITED STATES v. RUTLEDGE 1667

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).

9

Rutledge 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.

1668 UNITED STATES v. RUTLEDGE

The preliminary injunction entered by the district court is

VACATED.