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Chaim Saiman
Tue, 4 Dec 2007 09:12:14 -0500
Restitution, tracing and judicial discretion


Dear RDG Friends.

There is a line of American cases, stemming from the Supreme Court's decision in the original Ponzi scheme case, Cunningham v. Brown, 265 U.S. 1, 11 (1924), which teach that when it comes to tracing money into and out of common funds, either because of commercial fraud, or when the assets are placed in receivership, courts are allowed to disregard the rules of restitution and tracing and arrive at some at some "equitable" answer.

My sense is that as compared to the commonwealth courts, American courts are disinterested in working through these sorts of questions and are happy to allow the district court to sort it out under a very deferential standard of review. They reach this result through a syllogism as shown in the following language of US v. Durham, 86 F.3d 70 (5th Cir. 1996).

When fashioning a restitution order or imposing a constructive trust, the district court is acting pursuant to its inherent equitable powers. See United States v. Brown, 988 F.2d 658, 661 (6th Cir. 1993); United States v. Cen-Card Agency/C.C.A.C., 724 F.Supp. 313, 318 (D.N.J. 1989). In entering a restitution order, adherence to specific equitable principles, including rules concerning tracing analysis are "subject to the equitable discretion of the court." In re Intermountain Porta Storage, Inc., 74 B.R. 1011, 1016 (D.C.Colo. 1987). Accordingly, we will review the lower court's imposition of an equitable remedy for abuse of discretion. S.E.C. v. AMX, International, Inc., 7 F.3d 71, 73 (5th Cir. 1993).

Based on these premises, the Durham court concluded:

Sitting in equity, the district court is a "court of conscience." Wilson v. Wall, 73 U.S. (6 Wall.) 83, 90, 18 L.Ed. 727 (1867). Acting on that conscience, the lower court in the instant case rationally considered the positions of the victims and held that following the tracing principle would be inequitable. Claremont's frustration with the lower court's ruling is understandable but the court was not required to impose a constructive trust in Claremont's favor. Because the court used its discretion in a logical way to divide the money, the court committed no error requiring our intervention.

Much the same arguments are made regarding a courts distribution of funds under receivership proceedings. Some of the most baroque language I have come across comes from a recent district court decision, Quilling v. Trade Partners, Inc., 2007 WL 107669, *1 (W.D.Mich. Jan 09, 2007), which held

District courts sit as courts of equity in federal receivership proceedings. As courts of equity, district courts have broad powers and wide discretion to fashion appropriate relief in federal receivership proceedings. In ruling on a plan of distribution, the standard is simply that the district court must use its discretion in a logical way to divide the money. It is well within the district court's discretion to reject equitable principles of tracing, restitution, reclamation, etc. and order a pro rata distribution to treat all defrauded investors equally in proportion to their losses. (Citations and internal quotation marks omitted).

My sense is that commonwealth courts are: (i) more interested in the technical and conceptual details of such cases (ii) more sophisticated as to the principles restitution/unjust enrichment the restitution, and (iii) have a more grounded notion of what "equity" means, would never make such statements. I was wondering whether anyone can point me to any decisions or discussions that might confirm or deny this hypothesis.


Thanks and warmest regards,
Chaim Saiman

Chaim Saiman
Assistant Professor
Villanova Law School

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