Court Opinion

ID: 6929540
Source: CourtListenerOpinion
Date Created: 2022-07-23 23:50:54.930059+00
Date Added: 2024-06-11T16:07:05.776419
License: Public Domain

CARNES, Circuit Judge,
concurring in part and dissenting in part:
I concur in part II of the majority opinion concerning our jurisdiction over this appeal. However, I dissent from parts III and IV of the majority opinion, because Georgia law does permit the imposition of a constructive trust as an equitable remedy for fraud in cases such as this one, and because the district court has the power to enter a preliminary injunction freezing the defendants’ assets to preserve that equitable remedy. The first part of this opinion takes issue with the majority’s holding that if Mitsubishi prevails, it is not entitled to a constructive trust under Georgia law; the second part takes issue with the majority’s holding that a district court in Georgia lacks the authority to enter a preliminary injunction freezing a defendants’ assets in a fraud ease.
I. AVAILABILITY OF A CONSTRUCTIVE TRUST UNDER GEORGIA LAW
The majority, in part III of its opinion, asserts that a constructive trust is not ordinarily available under Georgia law in an action to recover money damages for fraud. The Supreme Court of Georgia has held to the contrary. In Watkins v. Watkins, 256 Ga. 58, 344 S.E.2d 220, 221 (1986), the court explained that:
This court in Middlebrooks v. Lonas, 246 Ga. 720(2), 272 S.E.2d 687 (1980), held that a constructive trust or equitable lien can be imposed to obtain repayment of a loan when the loan was fraudulently procured and no adequate remedy is available at law. The court relied on OCGA § 53-12-26(2), which provides a trust will be implied “[wjhere, from any fraud, one person obtains the title to property which rightly belongs to another.” The court further held a promise made without a present intent to perform is a misrepresentation of material fact and is sufficient to support a claim of fraud. Middlebrooks, supra at 721, 272 S.E.2d 687. See also Restatement of Torts, Second, § 530(1), p. 64 (1977).
The principle announced in Middlebrooks was also reaffirmed in Eason v. Farmer, 261 Ga. 675, 409 S.E.2d 509, 511 (1991). The Supreme Court of Georgia — not Pomeroy, or Scott, or anyone who ever sat on a wool-sack — is the ultimate arbiter of Georgia law and equity.
Bank of Dade v. Reeves, 257 Ga. 51, 354 S.E.2d 131 (1987), which the majority cites for the proposition that a constructive trust cannot be imposed for failure to fulfill contractual obligations, is inapposite. In that case, the Supreme Court reversed a trial court’s decision to impose a constructive trust because there was no fraud:
In imposing a constructive trust on the residential property in favor of the Reeves the trial court found there was a confidential relationship between the bank and the Reeves and the bank’s action, considering *1524the relationship, amounted to innocent or constructive fraud. In our view there is no evidence in the record to support this finding. At most, there was a breach of contract by the bank.
Id. 354 S.E.2d at 133. Because the present case does involve fraud, it is unlike Reeves — where the court set aside a constructive trust — and is like Middlebrooks and Ea-son — where the availability of constructive trusts as a remedy for fraud was confirmed.
Middlebrooks involved a loan which the borrower had no intention to repay. According to the majority’s own account of this case, Mitsubishi’s situation is the same: as one part of the alleged scheme, Charles Jones and Robert Lee, who owned and managed Cardinal and General, respectively, filed false bills of lading to get Mitsubishi to extend them credit to buy yarn that did not exist; when they took out the loans, Jones and Lee had no intention of repaying the debt. The district court found that the
Defendants concealed from Mitsubishi that the carpet yarn which Mitsubishi paid for was nonexistent in 93 percent of the transactions. Defendants misrepresented through documents, particularly invoices and packing lists, that yarn existed for every transaction with Mitsubishi.... The Jones and Lee defendants misrepresented to Mitsubishi who their final customers were and the fact that the Jones and Lee Defendants were making some payments to Mitsubishi for yarn which did not exist.
In short, the court found that there was an elaborate scheme to defraud Mitsubishi. Under Georgia law, the victim of a fraud is entitled to have a constructive trust imposed on the defendants’ ill-gotten gain, if there is no adequate remedy at law. Middlebrooks, 272 S.E.2d at 689.
An equitable remedy is not foreclosed merely because “ ‘there is a remedy at law. It must be plain and adequate, or, in other words, as practical and as efficient to the ends of justice and its prompt administration as the remedy in equity.’ ” Ward v. Walker, 222 Ga. 451, 151 S.E.2d 228, 230 (1966) (quoting Atlantic Coast Line R.R. Co. v. Gunn, 185 Ga. 108, 194 S.E. 365, 367 (1937)). In addition to holding, erroneously, that a constructive trust is not an available remedy for fraud in Georgia, the majority also holds that Mitsubishi is not entitled to a constructive trust because it has an adequate remedy at law — namely, the availability of a suit for damages and all of the rights of a judgment creditor in the state of Georgia. The majority’s position — that the rights of a judgment creditor in Georgia are necessarily adequate and therefore foreclose the imposition of a constructive trust — has already been rejected by the Georgia Supreme Court. In Middle-brooks, the court held that, because a judgment creditor takes subject to the rights of a previous mortgagee, while a plaintiff who establishes a constructive trust or an equitable lien does not, the legal remedy is inadequate. 272 S.E.2d at 689. In this case, the district court found, and the majority does not dispute, that the defendants had been dissipating Mitsubishi’s funds, thereby threatening Mitsubishi’s ability to recover its losses should it prevail at trial. The Georgia Supreme Court, whose holdings we cannot question, has held that there is no adequate legal remedy where the defendant threatens to dissipate its assets. Southern Land, Timber, & Pulp Corp. v. Eunice, 219 Ga. 338, 133 S.E.2d 345, 349 (1963) (holding that equity jurisdiction is properly invoked when plaintiff produces evidence that defendant may dissipate its assets). Mitsubishi’s remedy at law is therefore inadequate, and an equitable remedy is appropriate.
The majority opinion, citing Brown v. Techdata Corp., Inc., 238 Ga. 622, 234 S.E .2d 787, 791 (1977), also holds that in order to sue for damages for fraud, Mitsubishi should have sought to avoid the contract by tendering the consideration that it received (the evidence of indebtedness) and demanding restitution. However, a recent Georgia appellate decision emphasized that “[affir-mance of the contract by the defrauded party does not necessarily deprive him of the right to sue for damages for fraud.” Carpenter v. Curtis, 196 Ga.App. 234, 395 S.E.2d 653, 655 (1990) (emphasis added). The majority has equated the remedy of restitution with that of money damages or a constructive trust. While Georgia law requires that a plaintiff *1525seeking restitution (such as the plaintiff in Brown) rescind the contract, there is no such requirement for those seeking a constructive trust. Middlebrooks and Farmer do not mention rescission or a tender requirement, and Watkins is flatly inconsistent with the idea. In Watkins, the Supreme Court of Georgia allowed the plaintiff to go forward with a fraud claim despite the fact that she was still holding a note evidencing the debt in question, which, under the majority’s theory, would have defeated the claim. 344 S.E.2d at 221-22.
Furthermore, even if the rescission requirement did apply to this suit, a constructive trust would still be available. The majority has overlooked an important condition in Brown. Brown held that “ ‘[a] contract may be rescinded at the instance of the party defrauded; but, in order to rescind he must promptly, upon discovery of the fraud, restore or offer to restore to the other whatever he has received by virtue of the contract if it be of any value.’ ” Brown, 234 S.E.2d at 791 (quoting Ga.Code § 20-906, recodified at OCGA § 13-4-60) (emphasis added). Mitsubishi does not hold anything of value as a result of the fraudulent transactions that victimized it, so there is nothing of value to restore to the defendants.
Therefore, the majority is wrong: if Mitsubishi prevails at trial on its fraud claim, it will be entitled to the imposition of a constructive trust under Georgia law. For the reasons that follow, the majority is also wrong in concluding that a federal district court in Georgia lacks the power to enter a pretrial injunction freezing the defendants’ assets in a fraud case.
II. AUTHORITY OF THE DISTRICT COURT TO ENTER THE PRELIMINARY INJUNCTION FREEZING DEFENDANTS’ ASSETS
The majority, expressing its willingness “to call a duck a duck,” contends that the remedy Mitsubishi implicitly sought when it opposed the applications for counsel fees by various defendants was equivalent to a writ of attachment. Admittedly, under Fed. R.Civ.P. 64 and the Georgia attachment statute, the court could not have attached the money in question. However, one should not be quick to lend the majority a retriever the next time it goes duck-hunting; what the majority insists on calling an unauthorized writ of attachment is in fact a permissible preliminary injunction.
The majority’s position was examined and rejected by the Sixth Circuit in USACO Coal Co. v. Carbomin Energy, Inc., 689 F.2d 94, 97 (6th Cir.1982). The USACO court, affirming a district court’s preliminary injunction freezing the defendants’ assets, explained that attachment under Rule 64 is a process used to protect damage remedies, and does not apply to injunctions used to protect equitable remedies. Id. Because the district court in that case acted to preserve the plaintiff’s equitable remedy, “defendants’ arguments based on DeBeers ” (which the majority also cites) “and [Fed.R.Civ.P.] 64 concerning the court’s power to sequester assets as security for a potential damage award are inapposite. The injunction here preserves assets for which the defendants may be accountable under a constructive trust.” Id. Exactly the same is true in this case. The Sixth Circuit’s holding in USACO was endorsed by the Fifth Circuit in FSLIC v. Dixon, 835 F.2d 554, 560 (5th Cir.1987):
[A]n injunction is not permissible to secure post-judgment legal relief in the form of damages. Such an injunction to secure future payment of possible money damages would be in the nature of a “prejudgment attachment” subject to Federal Rule of Civil Procedure 64, and through that rule to the strictures of state law.
Nevertheless, case law does allow a district court to exercise its equitable power in ordering a preliminary injunction to secure an equitable remedy....
(internal citations and footnote omitted).
Under Fed.R.Civ.P. 65, federal law, rather than Georgia law, governs the grant of a preliminary injunction to preserve the relative positions of the parties until a trial on the merits can be held. Ferrero v. Associated Materials, Inc., 923 F.2d 1441, 1448 (11th Cir.1991); 11 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 2943, at 390 (1973). This Circuit has al*1526ready held that a district court has the power under Rule 65 to freeze a corporation’s assets in order to preserve the status quo and future equitable remedies. Meis v. Sanitas Serv. Corp., 511 F.2d 655 (5th Cir.1975). We, of course, are bound by that decision. E.g., Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc) (cases from the former Fifth Circuit are binding precedent in the Eleventh Circuit).
Our prior holding in Meis is entirely consistent with that of the other circuits that have considered the question. As the Sixth Circuit explained in its USACO opinion:
The power of the district court to preserve a fund or property which may be the subject of a final decree is well established. We believe this rule is applicable in the present case where the district court found that the defendants’ property was likely to be the subject of a constructive trust imposed for the benefit of the plaintiffs. As the Supreme Court stated in DeBeers, “A preliminary injunction is always appropriate to grant intermediate relief of the same character as that which may be granted finally. ” In DeBeers an injunction was held not to grant relief “of the same character” which might be granted finally because the injunction dealt “with property which in no circumstances can be dealt with in any final injunction that may be entered”, and thus only served to secure a potential money judgment. Id. By way of contrast, in the present case the property subject to the injunction may well be dealt with by a final decree in equity requiring an accounting by the defendants as constructive trustees for the plaintiffs.
689 F.2d at 97-98 (emphasis added) (internal citations omitted) (quoting DeBeers Consol. Mines, Ltd. v. United States, 325 U.S. 212, 220, 65 S.Ct. 1130, 1134, 89 L.Ed. 1566 (1945)). See also Dixon, 835 F.2d at 560; FTC v. H.N. Singer, Inc., 668 F.2d 1107, 1112 (9th Cir.1982); Lynch Corp. v. Omaha Nat’l Bank, 666 F.2d 1208, 1211-13 (8th Cir. 1981).
III. CONCLUSION
Because the district court has the power under Georgia law to impose a constructive trust, it has the power under Rule 65 to grant a preliminary injunction, freezing the defendants’ assets in order to preserve that remedy. No one suggested otherwise in this appeal until this Court pointedly raised the question in a request for supplemental briefing that came months after oral argument. The majority says that when the correct point of view is discovered, the problem is mostly solved, but we should question the correctness of a point of view that remained hidden for so long.
The district court found that there is a substantial likelihood that Mitsubishi will prevail at trial. But what good will that do it? Because of today’s decision, Mitsubishi’s ultimate victory is likely to be an empty one. The district court was convinced that an injunction was necessary, because the defendants in this case “have dissipated Mitsubishi’s funds and engaged in artifices and deceits designed to conceal misappropriated funds rightfully belonging to Mitsubishi.” Now, this Court has given the defendants a license to plunder and dissipate what is left of the equitable estate, and the district court will be powerless to stop it. If that result were required by law, it would be bad enough. Coming as it does when the law provides a means to prevent it, the result is worse still.
I dissent from the majority’s holding that the district court lacked the power to impose a constructive trust on the defendants’ assets in these circumstances, and I would have the Court proceed to decide the sole issue initially raised and argued by the parties in this appeal: whether the district court abused its discretion in permitting some constructive trust funds to be paid out for legal representation of the defendants.