Marsh v. Coles (11/12/2015)

November 20, 2015

Arizona Court of Appeals Division One holds that investors may not obtain a constructive trust on life insurance proceeds when the insured paid for insurance policy with funds from an illegal enterprise.

Arizona’s civil racketeering statutes provide a private cause of action to recover damages arising from racketeering activity.  Among other remedies, the statute permits the court to impose a constructive trust on the illegally-acquired property.  The Court of Appeals here confronted the question of whether the statute permits the imposition of a constructive trust on the proceeds of a life insurance policy purchased with funds illegally acquired from a racketeering activity when the beneficiary of the proceeds is not a wrongdoer.

From about 2003 until his death in 2008, Scott Coles conducted an illegal racketeering activity.  With funds acquired from this activity, he purchased a life insurance policy for himself.  After his death, proceeds from the life insurance policy were disbursed to his wife and children.  Plaintiffs, investors who had been wrongfully deprived of property by Coles, sued these beneficiaries and asked the court to impose a constructive trust on the proceeds.  The trial court declined to do so and the Plaintiffs appealed.

The Court of Appeals held that, although one subsection of the civil racketeering statute, A.R.S. § 13-2314.04(D)(6), permitted the trial court to impose a constructive trust on illegally-acquired proceeds, another subsection, A.R.S. § 13-2314.04(L), prevented the court from doing so in this case.  Under the statute, a person may not “be held liable in damages or for other relief” unless that person “authorized, requested, commanded, ratified or recklessly tolerated the unlawful conduct of another.”  Although a constructive trust is generally available as a remedy against a third-party transferee who is not a wrongdoer, the Court read the plain language of section 13-2314.04(L) to bar the imposition of a constructive trust on life insurance proceeds where the beneficiaries had not participated in, encouraged, or knew about the racketeering activity.

The Court of Appeals also upheld the award of Defendants’ attorneys’ fees and costs against the Plaintiffs pursuant to A.R.S. § 13-214(A).  That statute allows the Court to award fees and costs to “the person against whom a racketeering claim has been asserted.”  Although all agreed that the Defendants, in this case, were not participants in the racketeering activity, the claim nonetheless arose out of racketeering and was thus a racketeering claim against the Defendants.

Judge Norris delivered the unanimous opinion.  Judges Kessler and Gould concurred.