United States v. Compean ( 2007 )

REVISED August 13, 2007
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
F I L E D
June 27, 2007
No. 06-20619
Charles R. Fulbruge III
Clerk
UNITED STATES OF AMERICA
Plaintiff - Appellee
v.
FRANCISCO CORPUS; MARIA CASTILLO
Movants - Appellants
Appeal from the United States District Court
for the Southern District of Texas, Houston
Before KING, DAVIS, and BARKSDALE, Circuit Judges.
KING, Circuit Judge:
Movants-appellants Francisco Corpus and Maria Castillo intervened in a
criminal forfeiture proceeding pursuant to 21 U.S.C. § 853(n), asserting that
they had an interest in real property subject to forfeiture and that their interest
was superior to that of the defendant. They now appeal the district court’s final
judgment of forfeiture, contending that the district court erred in concluding that
their alleged interest in the real property was not superior to that of the
defendant. For the reasons that follow, we AFFIRM.
No. 06-20619
I. FACTUAL AND PROCEDURAL BACKGROUND
The instant dispute arises in the context of the government’s criminal
forfeiture action against Leonardo Compean. On April 1, 2004, a federal grand
jury indicted Compean on several counts, including conspiracy to possess with
intent to distribute marijuana and other drug trafficking crimes. The indictment
contained a notice of the government’s intent to forfeit real property located at
1413 and 1315 Cottonwood Church Road in Fort Bend County, Texas (the
“Cottonwood property”) because it was allegedly acquired by Compean with the
proceeds of drug trafficking crimes. On April 8, 2004, the government filed a
notice of lis pendens in Fort Bend County giving notice of its intent to take the
Cottonwood property by forfeiture. On December 20, 2004, Compean pleaded
guilty to three drug-related charges and agreed to forfeit the Cottonwood
property to the government. The government moved for, and the trial court
ordered, forfeiture of the Cottonwood property on August 22, 2005.
This appeal concerns the interests of movants-appellants Francisco Corpus
and Maria Castillo (collectively, “the Corpuses”), a husband and wife, in the
Cottonwood property. The Corpuses assert that they have an interest in the
Cottonwood property superior to that of Compean, and thus superior to that of
the government, and they seek to have the forfeiture set aside.
The following time line of events is critical to addressing the Corpuses’
asserted interest in the Cottonwood property. The Corpuses entered into a
business arrangement in 1996 with Modesto and Felicita Arriaga (collectively,
“the Arriagas”) to build a dance hall on the Cottonwood property. The Arriagas
had purchased the Cottonwood property in 1996 and held a vendor’s lien deed.
After business dealings between the Corpuses and the Arriagas failed, the
Corpuses filed a breach of contract claim in January 1999 against the Arriagas
in Texas state court. However, in September 1999 the Arriagas filed for Chapter
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No. 06-20619
13 bankruptcy in the Southern District of Texas and the Corpuses were
prohibited from pursuing their state-court suit by the automatic stay that
accompanies bankruptcy filings. On April 17, 2003, the Arriagas’ Chapter 13
bankruptcy was converted to a Chapter 7 bankruptcy. The bankruptcy court
dismissed the Arriagas’ bankruptcy case on September 15, 2003, whereupon the
automatic stay was lifted.
On March 25, 2003, while the Arriagas’ Chapter 13 bankruptcy case was
still pending, the Arriagas sold the Cottonwood property in two parts to
Compean and Alberto Falcon for approximately $88,000. The money used to
purchase the Cottonwood property was proceeds of drug trafficking crimes. The
Arriagas deeded both parts of the Cottonwood property to Hugo and Dora
Barrera (collectively, “the Barreras”), relatives of Falcon. The bankruptcy court,
the trustee, and the Corpuses had no knowledge of the transfer of the
Cottonwood property.
After the bankruptcy case was dismissed and the automatic stay was
lifted, the Corpuses pursued their state-court breach of contract suit against the
Arriagas. On March 2, 2004, the Corpuses were awarded a final judgment in the
amount of $66,000, plus fees, interest, and costs. The Corpuses filed an abstract
of judgment on March 26, 2004, in the Fort Bend County deed records. Then on
April 28, 2004—twenty days after the government filed its notice of lis
pendens—the Corpuses filed suit against the Barreras in Texas state court,
alleging that the transfer of the Cottonwood property from the Arriagas violated
the Texas Uniform Fraudulent Transfer Act (“TUFTA”). The Texas court
entered a default judgment against the Barreras ordering that the transfers of
the Cottonwood property from the Arriagas to Compean and then to the
Barreras were void under TUFTA. But the Corpuses concede that the default
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No. 06-20619
judgment is itself void under 21 U.S.C. § 853(k)(2) because the state court action
was commenced after the government filed a lis pendens.1
On January 5, 2006, the Corpuses intervened in the district court’s
forfeiture proceedings pursuant to 21 U.S.C. § 853(n) and filed a petition to set
aside the forfeiture of the Cottonwood property. The Corpuses asserted that
they had an interest in the Cottonwood property superior to that of Compean,
and thus the government, based on, inter alia, TUFTA and the U.S. Bankruptcy
Code. The Corpuses and the government filed cross-motions for summary
judgment. The district court rejected the Corpuses’ asserted interest in the
Cottonwood property, granted summary judgment in favor of the government,
and entered a final judgment of forfeiture providing that the Corpuses take
nothing and that the government be granted all right, title, and interest in the
Cottonwood property.
The Corpuses now appeal, asserting generally the same arguments as they
did below.
II. STANDARD OF REVIEW
When a third party files a petition asserting an interest in property that
the government seeks to forfeit, the district court is required to conduct an
“ancillary proceeding.” FED. R. CRIM. P. 32.2. Although this ancillary proceeding
arises in the context of criminal forfeiture, it closely resembles a civil proceeding
in that the court “may permit the parties to conduct discovery in accordance with
the Federal Rules of Civil Procedure,” after which “a party may move for
1
Title 21 U.S.C. § 853(k)(2) provides that a third party claiming an interest in property
subject to forfeiture may only adjudicate that interest as provided for by § 853(n). See 21
U.S.C. § 853(k)(2), (n). Accordingly, a third party may not attempt to establish an interest in
property subject to forfeiture until a final order of forfeiture is entered. See generally United
States v. Kennedy, 201 F.3d 1324, 1327 n.6 (11th Cir. 2000). Moreover, a third party “may not
initiate a civil action to adjudicate the validity of [his] interest once an indictment or
information has been filed.” Id.
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No. 06-20619
summary judgment under Federal Rule of Civil Procedure 56.” FED. R. CRIM. P.
32.2(c)(1)(B). Because this case comes to us on the district court’s grant of the
government’s Rule 56 motion for summary judgment (and the denial of the
Corpuses’ cross-motion), we apply the standard of review for grants or denials
of summary judgment under Federal Rule of Civil Procedure 56. See FED. R.
CRIM. P. 32.2 advisory committee’s note to subdivision (c) (noting that where the
Federal Rules of Civil Procedure are applicable, prevailing case law on the issue
applies); see also Pacheco v. Serendensky, 393 F.3d 348, 352 (2d Cir. 2004)
(evaluating motion to dismiss in ancillary proceeding according to the legal
standards of the Federal Rules of Civil Procedure).
This court reviews grants and denials of summary judgment de novo,
applying the same standards as the district court. Armstrong v. Am. Home
Shield Corp., 333 F.3d 566, 568 (5th Cir. 2003). Summary judgment is proper
when there is no genuine issue regarding any material fact and the moving party
is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c). Facts are
material if they might affect the outcome of the lawsuit under the governing law.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). All facts and inferences
must be viewed in the light most favorable to the nonmoving party. Armstrong,
333 F.3d at 568.
III. DISCUSSION
The resolution of the Corpuses’ claim is governed by 21 U.S.C. § 853(n)
(the “forfeiture statute”). Under § 853(n), a third party “asserting a legal
interest in property which has been ordered forfeited to the United States” may
“petition the court for a hearing to adjudicate the validity of his alleged interest
in the property.” 21 U.S.C. § 853(n)(2). Section 853(n)(6) further provides the
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No. 06-20619
legal framework through which a third party may establish an interest in
forfeited property:
If, after the hearing, the court determines that the
petitioner has established by a preponderance of the
evidence that (A) the petitioner has a legal right, title,
or interest in the property, and such right, title, or
interest renders the order of forfeiture invalid in whole
or in part because the right, title, or interest was vested
in the petitioner rather than the defendant or was
superior to any right, title, or interest of the defendant
at the time of the commission of the acts which gave
rise to the forfeiture of the property under this section
. . . the court shall amend the order of forfeiture in
accordance with its determination.2
Id. § 853(n)(6). Finally, § 853(c) contains a “relation back” provision under which
“[a]ll right, title, and interest in [forfeited] property . . . vests in the United
States upon the commission of the act giving rise to forfeiture.” Id. § 853(c).
Accordingly, to prevail on appeal, the Corpuses must establish that they
have a legal right, title, or interest in the Cottonwood property that was vested
or superior to that of Compean when he purchased the Cottonwood property
with proceeds of illegal drug activity on March 25, 2003. The Corpuses do not
assert a vested interest in the Cottonwood property but instead assert that they
have a right or interest superior to Compean, and thus the government, arising
from TUFTA and the Bankruptcy Code.
A. Interest Under TUFTA
The Corpuses first argue that they have an interest in the Cottonwood
property superior to that of Compean under TUFTA because they were creditors
of the Arriagas and the transfer of the property to Compean was fraudulent as
2
Because the Corpuses do not seek to establish an interest in the Cottonwood property
as bona fide purchasers, we do not discuss § 853(n)(6)(B).
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No. 06-20619
a matter of law. The Corpuses assert a claim under § 24.006(a) of TUFTA which
provides that a
transfer made or obligation incurred by a debtor is
fraudulent as to a creditor whose claim arose before the
transfer was made or the obligation was incurred if the
debtor made the transfer or incurred the obligation
without receiving reasonably equivalent value in
exchange for the transfer or obligation and the debtor
was insolvent at that time or the debtor became
insolvent as a result of the transfer or obligation.
TEX. BUS. & COM. CODE ANN. § 24.006(a) (Vernon 2002) (emphases added).
The district court granted the government’s motion for summary
judgment, focusing incorrectly on § 24.005 of TUFTA and concluding that the
Corpuses did not provide evidence from which it could be determined that the
Arriagas did not receive reasonably equivalent value for the Cottonwood
property or evidence of the Arriagas’ intent to hinder, delay, or defraud the
Corpuses.
As an initial matter, we agree with the Corpuses that the district court
committed two errors when it granted the government’s motion for summary
judgment on their TUFTA claim. First, the district court erred by requiring the
Corpuses to bring forward evidence of the Arriagas’ intent to defraud when the
Corpuses brought a § 24.006(a) claim. As § 24.006(a) makes plain, the provision
contains no intent requirement. See id. Second, although both § 24.005 and
§ 24.006(a) of TUFTA share as an element of a fraudulent transfer a
requirement that it be made “without receiving reasonably equivalent value in
exchange for the transfer,” the district court erred by requiring the Corpuses to
submit the appraisal value of the Cottonwood property to establish that the
Arriagas did not receive reasonably equivalent value. The Corpuses and the
government stipulated that the “debtors did not receive a reasonably equivalent
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No. 06-20619
value from Defendant [Compean] in exchange for the transfer of the Cottonwood
property.” This stipulation obviates the need for the appraisal the district court
required.
These two errors do not end the instant inquiry. Assuming that the
transfer of the Cottonwood property was fraudulent under § 24.006(a), we turn
to the question whether the fraudulent transfer gave the Corpuses a “legal right,
title, or interest in [the Cottonwood] property” superior to any “right, title, or
interest” of Compean at the time of the transfer. 21 U.S.C. § 853(n)(6). The
Corpuses assert that the fraudulent transfer gave them an equitable interest in
the Cottonwood property at the time of the transfer. They assert in particular
that their claim involving the Cottonwood property is superior to the rights of
Compean because under TUFTA, Compean’s right to the property is subject to
their own claim to set aside the transfer. The government argues that even if
the transfer was fraudulent, TUFTA does not give the Corpuses an equitable
interest—let alone a superior interest—in the Cottonwood property because a
defrauded creditor does not take legal or equitable title to property fraudulently
conveyed. The government further argues that the Corpuses have only a claim,
not a judgment, that the transfer was fraudulent and that a mere claim does not
establish an equitable or legal interest in property.
TUFTA “creates a statutory cause of action through which a creditor may
seek recourse for a fraudulent transfer.” Blackthorne v. Bellush, 61 S.W.3d 439,
443 (Tex. App.—San Antonio 2001). If a transfer is determined to be fraudulent
under TUFTA, an unsecured creditor may obtain, subject to the statutory
defenses and protections of a transferee:
(1) avoidance of the transfer or obligation to the extent
necessary to satisfy the creditor’s claim;
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No. 06-20619
(2) an attachment or other provisional remedy against
the asset transferred or other property of the transferee
in accordance with the applicable Texas Rules of Civil
Procedure and the Civil Practice and Remedies Code
relating to ancillary proceedings; or
(3) subject to applicable principles of equity and in
accordance with applicable rules of civil procedure:
(A) an injunction against further disposition by
the debtor or a transferee, or both, of the asset
transferred or of other property;
(B) appointment of a receiver to take charge of
the asset transferred or of other property of the
transferee; or
(C) any other relief the circumstances may
require.
TEX. BUS. & COM. CODE ANN. § 24.008(a) (Vernon 2002).
We note at the outset that on March 25, 2003, the time of the transfer to
Compean, the Corpuses were not judgment creditors of the Arriagas, nor were
they lien creditors.3 Instead, the Corpuses were at most unsecured creditors of
the Arriagas by virtue of their pending breach of contract claim. While
recognizing that an unsecured creditor has an interest in the debtor’s estate,
other circuits have recognized the often fatal hurdle an unsecured creditor faces
in establishing an interest in any particular piece of property. See United States
v. Reckmeyer, 836 F.2d 200, 205-06 (4th Cir. 1987) (“Although general creditors
can claim an interest in their debtor’s estates, they cannot claim an interest in
any particular asset that makes up that estate.”); see also United States v.
Campos, 859 F.2d 1233, 1239 (6th Cir. 1988) (adopting Reckmeyer’s proposition
3
Under TUFTA, a judgment creditor may “levy execution on the asset transferred or
its proceeds” if a court so orders. TEX. BUS. & COM. CODE ANN. § 24.008(b) (Vernon 2002).
Because this case involves an unsecured creditor, we express no opinion as to whether a
judgment creditor has rights superior to a transferee in fraudulently transferred property.
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No. 06-20619
that “one must assert something more than being a general creditor”). “Section
853 requires more than a showing of a legal interest in the debtor’s property. It
requires that the interest exist in the property subject to forfeiture.” Reckmeyer,
836 F.2d at 205. And even where an unsecured creditor has an interest in a
debtor’s property, the type of interest asserted is critical. The forfeiture statute
mandates a superior interest in that property. See generally Campos, 859 F.2d
at 1239 (“Such a superior interest would clearly be one in the nature of a lien,
mortgage, recorded security device, constructive trust, valid assignment, or the
like.”).
We conclude that the Corpuses, as unsecured creditors, did not have a
legal interest, right, or title in the Cottonwood property superior to that of
Compean. Despite the Corpuses’ reliance on Blackthorne, 61 S.W.3d at 444, for
the proposition that creditors have an equitable interest in assets that are
fraudulently transferred, the most that the Corpuses—along with all other
unsecured creditors of the Arriagas—can claim is a right to set aside the transfer
to Compean to satisfy the debt owed to them. But the Corpuses have no right
or interest superior to that of Compean to the Cottonwood property itself under
TUFTA. As between a transferor (the Arriagas in this case) and a transferee
(here, Compean), the transferee holds title to fraudulently conveyed property
and a transferor may assert no right, title, or interest in the property. See
generally 17 TEX. JUR. 3D Creditor’s Rights and Remedies § 634 (2007) (collecting
cases). Even where a defrauded creditor sets aside a transfer as fraudulent, the
defrauded creditor does not take legal or equitable title to the fraudulently
transferred property. Instead, legal and equitable title remain with the debtor
relative to a defrauded creditor. See Mladenka v. Mladenka, 130 S.W.3d 397,
400-01 (Tex. App.—Houston 2004) (collecting cases); see also 17 TEX. JUR. 3D
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No. 06-20619
Creditor’s Rights and Remedies § 635 (2007). As such, even if the transfer to
Compean is set aside under TUFTA, the Corpuses would not obtain a legal right
or interest in the Cottonwood property.
B. Interest Under the Bankruptcy Code
The Corpuses next assert an interest in the Cottonwood property superior
to that of Compean, and thus the government, under the Bankruptcy Code. The
Corpuses contend that the sale of the Cottonwood property to Compean is void
under the Bankruptcy Code because they were creditors of the Arriagas, the
Cottonwood property was part of the Arriagas’ bankruptcy estate at the time of
its transfer to Compean, and the Arriagas gave them no notice of the sale as
required by 11 U.S.C. § 363(b)(1).4 The district court concluded that the
Arriagas “arguably were not obliged to tell the [Corpuses] that they planned to
sell the Cottonwood property” under the particular terms of the Arriagas’
Chapter 13 bankruptcy plan, and further determined that even if notice was
required, the Corpuses’ right to assert an interest under the Bankruptcy Code
was time-barred under the two-year statute of limitations provided in 11 U.S.C.
§ 549(d).
Although the Corpuses re-urge on appeal that the sale to Compean is void
because the Arriagas failed to give them notice of the sale, the Corpuses do not
explain how the district court erred by barring their claim under § 549(d).
Assuming arguendo that the Arriagas were required by § 363(b) to provide the
Corpuses with notice of the sale,5 we agree with the district court that the
4
Title 11 U.S.C. § 363(b)(1) provides: “The trustee, after notice and a hearing, may use,
sell, or lease, other than in the ordinary course of business, property of the estate . . . .” 11
U.S.C. § 363(b)(1).
5
The district court’s conclusion that notice was not required rested on facts concerning
the bankruptcy proceeding, including how the Cottonwood property was scheduled, the
participation of the Corpuses in the proceeding, and the bankruptcy court’s confirmation order.
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No. 06-20619
statute of limitations bars the Corpuses from asserting an interest in the
Cottonwood property under the Bankruptcy Code.
Section 549(a) provides that “the trustee may avoid a transfer of property
of the estate (1) that occurs after the commencement of the case; and
. . . (2)(b) that is not authorized under this title or by the court.” 11 U.S.C.
§ 549(a); see generally In re Photo Promotion Assocs., Inc., 881 F.2d 6, 8 (2d Cir.
1989) (noting “the broad discretion a bankruptcy judge has in applying
§ 549(a)”). Section 549(d) further provides that “[a]n action or proceeding under
this section may not be commenced after the earlier of (1) two years after the
date of the transfer sought to be avoided; or (2) the time the case is closed or
dismissed.” Id. § 549(d). The Corpuses stipulated that the Arriagas transferred
the Cottonwood property to Compean on March 25, 2003. And the Arriagas’
petition for bankruptcy was dismissed on September 15, 2003. Consequently,
under § 549(d), the time allowed for the Corpuses to petition the bankruptcy
trustee to avoid the transfer expired on March 25, 2005. The Corpuses did not
bring any action seeking to have the bankruptcy estate’s trustee avoid the
transfer before that date.6 The earliest date upon which it can be said that the
Corpuses invoked an interest under the Bankruptcy Code is January 5, 2006,
when they intervened in the government’s forfeiture action. Accordingly, the
Although the Corpuses do not challenge the district court’s reliance on these facts, we do not
rely on them to determine whether notice was required because the record on appeal does not
include documents establishing these facts. We may assume without deciding that notice was
required because we reject the Corpuses’ asserted interest on other grounds.
6
In the district court’s discussion of the statute of limitations, the court stated that the
Corpuses “waited until April 2004 to complain to another court.” We note that the Corpuses’
April 28, 2004, action against the Barreras—although technically brought within the two-year
statute of limitations—does not save their bankruptcy claim because the Barrera action was
based entirely on the Corpuses’ rights under TUFTA. Moreover, all parties agree that the
judgment resulting from that action is void.
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No. 06-20619
district court did not err in determining that the Corpuses have no interest
superior to that of the government in the Cottonwood property under the
Bankruptcy Code.
IV. CONCLUSION
For the foregoing reasons, the district court’s final judgment of
forfeiture is AFFIRMED.
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