RECOVERING THE PROCEEDS OF FRAUD World Headquarters the gregor building 716 West Ave Austin, TX 78701-2727 USA
TABLE OF CONTENTS PART ONE: THE LAW IN A FRAUD RECOVERY CASE I. LEGAL CAUSES OF ACTION IN GENERAL Bringing Multiple Claims in a Single Legal Action... 1 State Versus Federal Offenses... 2 Civil Wrongs Versus Crimes... 3 Essential Elements of a Cause of Action... 4 Vicarious Liability... 5 Criminal Conspiracy... 7 Review Questions... 8 II. STATE COMMON LAW AND STATUTORY OFFENSES APPLICABLE TO FRAUD Misrepresentation Fraud... 11 Essential Elements... 11 Facts, Not Opinions... 12 Concealment of Material Facts... 13 Negligent Misrepresentation... 14 False and Fraudulent Statements... 15 Breach of Fiduciary Duty (Constructive Fraud)... 15 Duty of Loyalty... 16 Duty of Care... 17 Bribery Schemes and Illegal Gratuities... 18 Bribery... 18 Illegal Gratuity... 20 Federal Corruption Statutes... 20 Economic Extortion... 21 Theft of Money and Property... 22 Conversion... 22 Larceny... 23 Larceny by Trick/False Pretenses... 24 Embezzlement... 24 Misappropriation of Trade Secrets... 25 Forgery... 28 Uniform Commercial Code Articles Relating to Forged and Altered Checks... 29 Civil Negligence... 31 Defenses to Negligence... 31 Remedies in Negligence Cases... 32 Breach of Contract... 34 General Remedies for Breach of Contract... 36 Quasi-Contract (Assumpsit)... 37 i
II. STATE COMMON LAW AND STATUTORY OFFENSES APPLICABLE TO FRAUD (CONT.) Other State Statutory Actions... 38 Review Questions... 39 III. FEDERAL OFFENSES APPLICABLE IN A FRAUD RECOVERY CASE Mail Fraud and Wire Fraud... 41 Mail Fraud (18, U.S.C., 1341)... 41 Wire Fraud (18, U.S.C., 1343)... 43 Honest Services Fraud (Title 18, U.S. Code, 1346)... 43 Interstate Transportation of Stolen Property (Title 18, U.S. Code, 2314)... 45 Racketeer Influenced and Corrupt Organizations Act (18, U.S.C., 1961, et seq.)... 45 RICO Violations Under Section 1962(c)... 46 Civil RICO Actions... 47 Federal Securities Laws... 48 Private Right of Action... 49 Jurisdiction... 49 Liability... 49 The Intent Requirement... 50 Federal Securities Law Provisions with a Private Right of Action... 50 False Claims and Statements... 52 Federal Statutes Relating to False Claims and Statements... 52 No Private Right of Action... 55 Common Actions That Violate Federal False Claim Statutes... 55 Other Federal Statutes... 55 The Clayton Antitrust Act (15, U.S.C., 12 27, 52 53)... 56 The Lanham Act (15, U.S.C., 1125(a))... 56 Fraudulent Use of Credit Cards (15, U.S.C., 1644)... 56 Electronic Funds Transfer Act (15, U.S.C., 1693n)... 56 Theft, Embezzlement, and Misapplication of Bank Funds (18, U.S.C., 656, et seq.)... 57 Theft or Embezzlement in Connection with Health Care (18, U.S.C., 669)... 57 Computer Fraud (18, U.S.C., 1030(a)(4))... 57 Review Questions... 58 PART TWO: REMEDIES IN A FRAUD RECOVERY CASE IV. REMEDIES TO PREVENT UNJUST ENRICHMENT Introduction to Remedies... 59 Legal Versus Equitable Remedies... 59 Availability of Litigation-Related Remedies... 59 Types of Civil Remedies... 60 Chapter Overview... 60 ii
IV. REMEDIES TO PREVENT UNJUST ENRICHMENT (CONT.) Rescission... 61 Fraudulent Inducement... 62 Mutual Mistake... 64 Duress... 64 Undue Influence... 64 Failure of Consideration... 65 Unlawful Contract... 65 Other Grounds for Rescission... 65 Restitution... 65 Restitution in Civil Law... 65 Restitution in Criminal Law... 67 Constructive Trusts... 67 Equitable Liens... 68 Replevin... 70 Injunctions and Temporary Restraining Orders... 71 Review Questions... 72 V. REMEDIES IN CIVIL LITIGATION FOR THE RECOVERY OF COMPENSATORY DAMAGES Introduction... 75 Two Kinds of Damages... 75 The Law Varies Among Jurisdictions... 76 Fair Market Value Used To Measure Compensatory Damages... 76 General Compensatory Damages for Conversion and Fraud... 77 Benefit of the Bargain Damages... 78 Out of Pocket Damages... 78 Damages for Emotional Distress... 79 Special (Consequential Damages) for Conversion or Fraud... 79 General Compensatory Damages for Breach of Contract... 80 Special or Consequential Damages for Breach of Contract... 81 Standard Measure of Damages for Breach of Quasi-Contractual Duty... 81 Standard Measure of Damages for Negligence... 82 Duty to Mitigate... 82 Damages Under Statutorily-Created Causes of Action... 82 Racketeer Influenced and Corrupt Organizations Act (18, U.S.C., 1961, et seq.)... 83 Securities Statutes... 84 Deceptive Advertising and Unfair Competition Statutes... 86 Clayton Antitrust Act (15, U.S.C., 12 27 and 29, U.S.C., 52 53)... 87 Qui Tam Action Under the Civil False Claims Act (31, U.S.C., 3729 3731)... 87 Whistleblower Statutes... 88 Uniform Commercial Code Articles Relating to Forged and Altered Checks... 91 Review Questions... 93 iii
VI. REMEDIES IN CIVIL LITIGATION FOR THE RECOVERY OF PUNITIVE DAMAGES Introduction... 95 Punitive Damages in a Tort Case... 95 Proving the Defendant s Mental State... 96 Standard of Proof... 96 Vicarious Liability for Punitive Damages... 97 Punitive Liability Insurance... 97 Additional Statutory Punitive Damages Provisions... 98 Racketeer Influenced and Corrupt Organizations Act... 98 Deceptive Advertising and Unfair Competition Statutes... 98 Clayton Antitrust Act (15, U.S.C., 13(c) and (d))... 98 Securities Statutes... 98 Review Questions... 99 VII. REMEDIES TO RESTRAIN OR MANDATE CONDUCT INJUNCTIONS AND TEMPORARY RESTRAINING ORDERS Equitable Remedies... 101 Injunctions and Temporary Restraining Orders Under Statutorily Created Causes of Action... 102 Racketeer Influenced and Corrupt Organizations Act... 103 Securities Statutes... 103 Deceptive Advertising and Unfair Competition Statutes... 103 Trade Secret Legislation... 104 Review Questions... 105 VIII. REMEDIES ARISING FROM CRIMINAL PROSECUTIONS Introduction... 107 Criminal Restitution Orders... 107 Criminal Restitution as a Condition of Probation... 107 Direct Restitution Orders in Criminal Cases... 108 Sentencing Guidelines... 110 Recovery from Victim s Compensation Funds... 110 Recovery Under Forfeiture Statutes... 110 Criminal Forfeiture... 111 Civil Forfeiture... 112 Review Questions... 115 IX. RECOVERING DAMAGES WITHOUT LITIGATION Insurance Policies... 117 Fidelity Insurance... 117 Liability Insurance... 119 The Federal Trade Commission... 120 Negotiated Agreements or Settlements... 121 iv
IX. RECOVERING DAMAGES WITHOUT LITIGATION (CONT.) Consent Judgments... 123 Default Judgments... 124 Foreclosures on Security Interests... 125 Real Property... 125 Personal Property... 125 Review Questions... 128 PART THREE: PLANNING AND PROCEDURES IN A FRAUD RECOVERY CASE X. STRATEGIC CONSIDERATIONS FOR PLANNING A FRAUD RECOVERY CASE How Have You Been Injured?... 129 What Is Your Recovery Goal?... 132 What Conduct Can You Prove and Against Whom?... 133 What Damages Can You Prove?... 135 What Damages Can You Recover?... 135 Can Your Target Defendants Satisfy a Judgment?... 135 Can You Recover Costs of Litigation?... 136 Is the Action Barred by the Statute of Limitations?... 139 Where Should You Pursue Your Remedy?... 140 Choosing Between Criminal and Civil Court... 141 Choosing Between Federal or State Court... 145 Choosing Between Courts of Different States... 150 Choosing Between Courts of the Same State... 150 Review Questions... 154 XI. ENFORCING YOUR JUDGMENT: THE SEARCH FOR PROPERTY OR PROCEEDS Start Enforcement Efforts Early... 157 Trace and Locate Property and Assets... 158 Determine Whether Assets or Property Are Hidden... 159 Interview Suspects and Other Witnesses... 161 Analyze Financial Records and Documents... 163 Search Public Records... 165 Suspect s Privacy Rights and Legal Limits of Your Investigation... 168 Common Law Rights... 169 Constitutional Rights... 170 Federal Statutes... 173 Use Court Powers to Compel Production of Information... 175 Time for Making Use of Court Processes... 176 Limitations on the Scope of Discovery... 177 Jurisdictional Limitations... 178 Review Questions... 179 v
XII. ENFORCING YOUR JUDGMENT: ENSURING THAT PROCEEDS, PROPERTY, AND ASSETS WILL BE THERE TO SATISFY A JUDGMENT Securing Property Through Prejudgment Attachment... 181 Legal Actions in Which Prejudgment Attachment Is Available... 182 Property Subject to Prejudgment Attachment... 183 Procedures for Obtaining a Prejudgment Attachment... 183 Seeking Prejudgment Attachment Against Out-of-State Defendants or Property... 185 Procedures for Levying on Property Pursuant to a Writ of Attachment... 186 Real Property and Real Property Interests... 187 Termination of the Attachment Lien... 188 Protecting the Interests of Third Parties... 189 Disposition of Attached Property After Judgment... 190 Securing Possession of Property with a Prejudgment Writ of Possession (Replevin)... 190 Securing Property with a Creditor s Suit Against Third Parties... 191 Preventing Transfers of Property with Temporary Restraining Orders and Preliminary Injunctions... 191 Protecting Claims to Real Property with a Notice of Lis Pendens... 192 Voiding Fraudulent Transfers to Protect Assets from Creditors... 193 Common Law Remedies for Fraudulent Transfers... 194 Uniform Fraudulent Conveyance Act... 195 Uniform Fraudulent Transfer Act... 196 The Bankruptcy Code... 196 Avoiding the Wrongdoer s Discharge in Bankruptcy... 196 Reaching a Defendant s Property Behind the Corporate Veil... 198 Review Questions... 201 XIII. ENFORCING YOUR JUDGMENT: EXECUTING AND LEVYING AGAINST PROPERTY IN SATISFACTION OF THE JUDGMENT Enforcement of Money Judgments by Writ of Execution... 204 Determining What Is Leviable Property... 205 Property That Is Subject to Enforcement of Judgment... 205 Property of a Spouse Who Is Not a Judgment Debtor... 206 Property That Is Exempt from Enforcement by Law... 206 Methods of Levying on Property with a Writ of Execution... 207 Enforcement of Money Judgments by Judgment Liens... 210 Enforcement of Money Judgments Using Miscellaneous Remedies... 212 Enforcement of Non-Money Judgments... 212 Writs for the Possession or Sale of Real Property... 212 Writs of Possession or Sale of Personal Property... 213 Enforcement of Judgments Involving Out-of-State Property... 213 Renewing Judgments... 214 Supersedeas Bond... 214 Review Questions... 215 vi
CONCLUSION... 217 PRACTICAL EXERCISE... 219 SOLUTIONS TO REVIEW QUESTIONS I. Legal Causes of Action in General... 225 II. State Common Law and Statutory Offenses Applicable to Fraud... 227 III. Federal Offenses Applicable in a Fraud Recovery Case... 230 IV. Remedies to Prevent Unjust Enrichment... 232 V. Remedies in Civil Litigation for the Recovery of Compensatory Damages... 236 VI. Remedies in Civil Litigation for the Recovery of Punitive Damages... 239 VII. Remedies to Restrain or Mandate Conduct: Injunctions and Temporary Restraining Orders... 241 VIII. Remedies Arising from Criminal Prosecutions... 242 IX. Recovering Damages Without Litigation... 244 X. Strategic Considerations for Planning a Fraud Recovery Case... 246 XI. Enforcing Your Judgment: The Search for Property or Proceeds... 249 XII. Enforcing Your Judgment: Ensuring That Proceeds, Property, and Assets Will Be There to Satisfy a Judgment... 252 XIII. Enforcing Your Judgment: Executing and Levying Against Property in Satisfaction of the Judgment... 254 SOLUTIONS TO PRACTICAL EXERCISE... 257 FINAL EXAMINATION... E-1 vii