Marsh v. Coles

Citations: 238 Ariz. 398; 361 P.3d 383; 726 Ariz. Adv. Rep. 29; 2015 Ariz. App. LEXIS 278Docket: No. 1 CA-CV 14-0407

Court: Court of Appeals of Arizona; November 10, 2015; Arizona; State Appellate Court

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Investors sought a constructive trust on life insurance proceeds paid to beneficiaries following the death of Scott Coles, who allegedly financed the policies with funds obtained from an illegal enterprise involving the unlawful sale of real estate-backed securities and money laundering, depriving investors of over $127 million. The beneficiaries included Coles' widow, ex-wife, daughter, and a trust for his children, collectively referred to as the Coles Defendants. The Investors did not allege any wrongdoing by the Coles Defendants but claimed the life insurance proceeds were tainted by the illegal activities. They filed a civil racketeering (RICO) claim under Arizona statutes, arguing that A.R.S. 13-2314.04(D)(6) warranted a constructive trust on the proceeds. However, the Coles Defendants successfully argued for dismissal based on A.R.S. 13-2314.04(L), which protects certain innocent parties from liability, leading to the superior court affirming the dismissal in their favor.

The Lawyer Defendants settled with the Investors prior to the superior court's ruling, resulting in a stipulated order that dismissed all claims against them with prejudice, releasing them from any further claims. The court dismissed the Investors’ RICO claims against Hirsch, Shah, and the Auditor Defendants but did not dismiss other claims against them. The Investors then settled their remaining claims with these parties. Following the dismissal of the RICO claims, the superior court granted the Coles Defendants' motions to dismiss the Investors' request for a constructive trust on life insurance proceeds, reasoning that without a viable RICO claim, the request lacked a legal basis under A.R.S. 13-2314.04(D)(6). The court did not address the Coles Defendants' argument that A.R.S. 13-2314.04(L) barred the request for a constructive trust. The court awarded the Coles Defendants attorneys’ fees and costs under A.R.S. 13-2314.04(A).

The Investors contended they could still pursue a constructive trust despite the dismissal of their RICO claims. In response, the Coles Defendants argued that A.R.S. 13-2314.04(L) barred this request, leading to a de novo review of statutory interpretation. The appellate court concurred that the statute indeed barred the Investors’ claim for a constructive trust, citing that a natural person cannot be held liable based on another's conduct unless there is evidence that they authorized or tolerated the unlawful conduct. Since the Investors did not allege such conduct, a fact finder could not reach a conclusion in their favor. The statutory language was deemed plain and unambiguous, necessitating adherence to its text.

The Investors contend that A.R.S. 13-2314.04(L) does not apply to their request for a constructive trust on life insurance proceeds, arguing that a constructive trust recognizes their superior beneficial interest in the property without necessitating wrongdoing by the transferee. They cite Tucson Estates Residents Ass’n v. Mobilife Corp. and Simonds v. Simonds to support that a constructive trust can be enforced against a third-party transferee without holding that party liable for the actions of the original wrongdoer. However, the Investors' interpretation conflicts with the statutory language of A.R.S. 13-2314.04(L), which defines "liable" as being legally responsible, suggesting that the Investors are seeking to hold the Coles Defendants accountable for the life insurance proceeds under this statute. Furthermore, the Investors argue that their interpretation would render the exception for bona fide purchasers in A.R.S. 13-2314.04(D)(6) superfluous, as such construction could negate the protections for those who innocently acquire property without knowledge of its unlawful origins. A bona fide purchaser cannot be held as an involuntary trustee if they were unaware of illegal conduct, aligning with definitions and precedents indicating that a bona fide purchaser is protected under A.R.S. 13-2314.04(L).

Both A.R.S. 13-2314.04(L) and (D)(6) are recognized as offering protection to bona fide purchasers, with the understanding that overlapping effects in statutes do not render interpretations improper. Redundancies in legislative drafting are common, and courts should enforce both provisions unless they are in direct conflict. The legislature’s intent, historical context, and purpose of the RICO statutes enacted in Arizona in 1978 and amended in subsequent years indicate that while both subsections protect bona fide purchasers, they serve distinct functions. Specifically, A.R.S. 13-2314.04(D)(6) allows recovery of unlawful proceeds unless these are held by a bona fide purchaser without notice of the unlawful activity, whereas A.R.S. 13-2314.04(L) protects individuals not involved in the unlawful conduct from private RICO claims. Notably, A.R.S. 13-2314.04(L) provides broader protection than (D)(6), as it shields individuals with some awareness of the unlawful activity, contrasting with (D)(6)'s protection for completely ignorant bona fide purchasers. Both provisions can coexist without contradiction, and A.R.S. 13-2314.04(L) effectively barred the Investors' claim for a constructive trust on life insurance proceeds.

Regarding attorneys' fees, the Investors contended that the superior court improperly awarded fees to the Coles Defendants under A.R.S. 13-2314.04(A) since they did not bring a racketeering claim against them. However, upon de novo review, this argument was rejected, affirming the award of attorneys' fees.

Section 13-2314.04(A) enables superior courts to award costs and reasonable attorneys' fees to defendants who prevail against racketeering claims. Racketeering, as defined in Section 13-2301(D)(4), includes any indictable act punishable by over one year of imprisonment under Arizona law, involving specified offenses. A claim can assert any existing right, including rights to payment or equitable remedies, regardless of their contingent nature. The Investors' request for a constructive trust on life insurance proceeds constituted a racketeering claim, seeking an equitable remedy against the Coles Defendants. Granting the Investors’ interpretation could result in allowing defendants who participated in racketeering to recover fees while denying similar recovery to uninvolved defendants, which would contradict legislative intent. The court affirms the superior court's judgment favoring the Coles Defendants and awards them taxable costs and reasonable attorneys' fees on appeal, provided they comply with procedural rules. The court assumes the truth of the alleged facts in the Investors' complaint due to their appeal from a dismissal for failure to state a claim. Amendments to related statutes after the events of this case are noted as irrelevant to the current resolution, and the ruling cites the current statute versions.

The Coles Defendants contended that A.R.S. 20-1131(A) prevents a constructive trust for lawful beneficiaries of life insurance from claims by a decedent’s creditors. However, the case's resolution relies on A.R.S. 13-2314.04(L), rendering A.R.S. 20-1131(A) irrelevant to the decision. The court refrains from opining on whether a constructive trust can be imposed on property held by an innocent third party in a private RICO action without the involvement of those accused of wrongdoing, referencing Stout v. Taylor. The Investors noted that A.R.S. 13-2314.04(D)(6) and (L) were enacted simultaneously, but the court finds this interpretation of legislative history narrow. The language of (D)(6) dates back to 1985, while (L) was introduced in 1993 as part of a statute governing private RICO actions. Legislative history, such as Senate fact sheets, can shed light on legislative intent, especially when sponsors and committees articulate their goals concerning specific bill provisions, as highlighted in relevant case law.