Opinion ID: 199303
Heading Depth: 2
Heading Rank: 2

Heading: Claims to CFI's Constructive Trust

Text: 28 We turn next to Fisher's claim to a portion of CFI's constructive trust. Fisher's claim is two-pronged. First, he argues that as an equal partner in the Biopure venture, he is entitled to share in the fruits of the venture, namely, the Biopure contract rights. This is so, Fisher maintains, even to the extent that the rights were acquired with funds Trainor defrauded from CFI, because Fisher was at all relevant times innocent of the fraud. Second, Fisher raises the argument he earlier waived: even assuming he has no claim to the fruits of the joint venture insofar as they are tainted by Trainor's fraud, he still has a claim to any untainted portion, i.e., he still has a claim to the extent that they were acquired through his own sweat equity. 29 As to Fisher's first argument, the applicable legal principles are clear when each is taken in isolation; what is difficult to see at first blush is how those principles intersect. First, it is clear that if Trainor had never defrauded CFI, but rather had only defrauded Fisher by cutting him out of the Biopure contract, then Fisher would be entitled to impose a constructive trust on the contract rights on behalf of the joint venture, securing his fifty-percent share in the rights. For where a partner usurps a benefit properly belonging to the partnership, he holds it in trust for the partnership, so that any innocent partner is put as nearly as possible in the same position which he would have occupied if there had been no wrongdoing. Meehan v. Shaughnessy, 535 N.E.2d 1255, 1270 (Mass. 1989) (quoting Shulkin v. Shulkin, 16 N.E.2d 644, 651 (Mass. 1938)). 30 Second, it is clear that if Trainor had never been Fisher's co-venturer, but rather had only defrauded CFI and later entered the Biopure venture wholly on his own, then CFI would be entitled to impose a constructive trust on the Biopure contract rights in their entirety. For where one person wrongfully takes the property of another and exchanges it for other property, the wronged party is generally entitled to assert a constructive trust over the property received in exchange. See 5 Austin W. Scott & William F. Fratcher, Scott on Trusts § 508.1, at 561 (4th ed. 1989). Moreover, it is undisputed that all of Trainor's contributions to the Biopure venture consisted of funds tainted by his fraud on CFI; so Trainor could have no claim to any untainted portion of the Biopure contract rights. Cf. id. § 516, at 610-11 (explaining that where wrongdoer acquires property with both tainted and untainted funds, wronged party is entitled only to a share of the property proportional to taint and may impose a constructive trust on the property only to that extent). 31 In short, had Trainor only defrauded the joint venture, the joint venture would be entitled to the Biopure contract rights. Likewise, had Trainor only defrauded CFI and never entered the joint venture, CFI would be entitled to the Biopure contract rights. The question that we must decide is if, as we assume arguendo, Trainor acquired the Biopure contract rights through frauds on both CFI and the joint venture, whose claim to the rights has priority? 32 In arguing this question, the parties have embarked on something of a wild goose chase. CFI argues that Fisher cannot claim any proceeds from the funds Trainor defrauded from CFI because, under Massachusetts partnership law, Fisher is vicariously liable for Trainor's actions as his co-venturer. The district court took the same position, holding that even the most innocent joint venturer cannot escape liability for the acts of another principal carried out on behalf of the joint venture. Fisher answers that he cannot be held vicariously liable for Trainor's fraud on CFI because it occurred prior to the formation (and therefore outside the scope) of the joint venture. CFI replies that, while Fisher may not be liable for Trainor's fraud on CFI prior to the formation of the joint venture, he is nonetheless liable for Trainor's fraudulent use of CFI's funds, which did occur in the scope of the joint venture; however, CFI fails to explain how the mere use of CFI's funds in the Biopure venture constitutes an independent fraud on CFI. 33 This debate, however, is simply irrelevant to the question at hand. CFI need not establish vicarious liability in order to succeed on its constructive trust claim. A constructive trust claim is grounded in the law of unjust enrichment; thus, in order to impose a constructive trust on the joint venture's holdings, CFI need not prove that the joint venture vicariously wronged CFI, but rather it need only prove that the joint venture holds what does not rightfully belong to it. SeeHiggins v. Shenango Pottery Co., 256 F.2d 504, 508 (3d Cir. 1958) (distinguishing between recovery against partnership on vicarious liability theory and constructive trust theory); see also 1 Alan R. Bromberg & Larry E. Ribstein, Bromberg & Ribstein on Partnership § 4.07(a) n.8 (1991 & Supp. 1999) (noting that although partnership is vicariously liable for partner's acts only if committed during partnership, a court might impose a constructive trust on property or funds received by a partnership as a result of a partner's wrongful pre-formation act). 34 Thus, even if Trainor's fraud against Fisher is remedied, Fisher still cannot shield himself from CFI's constructive trust claim. Remedying Trainor's fraud against Fisher merely undoes Trainor's switch, restoring the joint venture as the party to the Biopure contract. Even with the Biopure contract rights restored to the joint venture, however, the joint venture must in turn hand over the contract rights to CFI, because they were acquired with CFI's funds. The only way the joint venture could stave off this result is if it were a bona fide purchaser of CFI's funds. See generally Restatement (First) of Restitution § 168 cmt. b (1937 & Supp. 1997); Scott & Fratcher, supra, at § 507. But clearly it is not. In no sense did the joint venture give value for the funds; rather, the funds were simply Trainor's contribution of equity to the venture. 7 35 So Fisher has no claim to the Biopure contract rights superior to that of CFI, insofar as the rights were acquired with CFI's funds. The next question, then, is whether the Biopure contract rights were acquired to any extent through independent, untainted contributions to the joint venture by Fisher, in which case Fisher would be entitled to keep that portion of the contract rights corresponding to such contributions. See Provencher v. Berman, 699 F.2d 568, 570-571 (1st Cir. 1983). Fisher concedes that all the financial contributions to the venture were made by Trainor, and that he can claim to have made only sweat equity contributions to the venture. As we held in CFI v. Bio-Vita, because Fisher waived any sweat equity argument in the earlier proceedings before the district court, he could raise it later only if, first, the argument were so compelling as virtually to insure his success, and second, failing to address it would result in a gross miscarriage of justice -- in particular, a windfall to CFI grossly disproportionate to its losses. See 78 F.3d at 709-10. 36 Fisher has proven neither proposition, as the district court correctly held. He has not put forward compelling evidence that a significant portion of the value of the Biopure contract rights is attributable to his sweat equity. It appears that his most significant sweat equity contribution was merely recruiting to the joint venture a business associate who vaguely alleges that he helped cut through red tape in order to expedite the Guatemalan clinical trials of Biopure's product. As for Fisher's claim that he was strongly involved in all the coordination of the studies, Fisher conceded in the 1992 trial that he himself spent only five days in Guatemala during the trials and that his personal involvement was very superficial. Suffice it to say that, compared to the approximately $3 million in capital Trainor contributed to the joint venture, Fisher's evidence of his sweat equity is not so compelling as virtually to insure his success. 8 37 Even more clear is that Fisher cannot demonstrate that failure to award him a portion of CFI's constructive trust will yield a gross windfall to CFI. In settling with Biopure, CFI has liquidated the trust, for an amount roughly equivalent to the funds used in the Biopure venture, plus interest. 9 We presume that settlement fairly represents the value of the underlying claims. Cf. City Partnership Co. v. Atlantic Acquisition Ltd. P'ship, 100 F.3d 1041, 1043-44 (1st Cir. 1996). There is no evidence, sufficient to rebut that presumption, that CFI intentionally settled for less than the trust was worth in order to sidestep the concerns about a gross windfall we voiced in our earlier opinion. In fact, before our earlier opinion, CFI and Biopure had reached a tentative settlement for a lesser amount than they agreed upon subsequently. 38 Fisher disputes that the settlement accurately represents the value of the Biopure contract rights; he claims that the rights are worth hundreds of millions, based on the current value of Biopure stock. His valuation is flawed for a number of reasons, but most importantly because it assumes that the joint venture's contract with Biopure is valid, even though Biopure rescinded the contract in 1990. In settling with Biopure, CFI had to anticipate the likelihood that, were it to try the joint venture's claims against Biopure for breaching the contract, Biopure might succeed in proving the contract void for fraud and its recission effective. This factor alone could account for any discrepancy between the amount of the Biopure-CFI settlement and Fisher's valuation of the contract rights. 39 Hence, because Fisher's sweat equity argument is neither compelling nor necessary to consider in order to avoid a gross miscarriage of justice, the district court was correct not to relieve Fisher of his waiver. CFI thus was entitled to a constructive trust over the Bio-Vita contract rights in their entirety, and its settlement with Biopure is entitled to remain intact.