United States v. Compean

Court Case Details
Court Case Opinion

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

1

was commenced after the government filed a lis pendens.

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.” F

. R. C

. P. 32.2. Although this ancillary proceeding

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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.” F

. R. C

. P.

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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 F

. R.

ED

C

. P. 32.2 advisory committee’s note to subdivision (c) (noting that where the

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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. F

. R. C

. P. 56(c). Facts are

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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.

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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.

T

. B

. & C

. C

A

. § 24.006(a) (Vernon 2002) (emphases added).

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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.

T

. B

. & C

. C

A

. § 24.008(a) (Vernon 2002).

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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

3

they lien creditors.

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. T

. B

. & C

. C

A

. § 24.008(b) (Vernon 2002).

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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 T

. J

. 3

Creditor’s Rights and Remedies § 634 (2007) (collecting

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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 T

. J

. 3

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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

4

required by 11 U.S.C. § 363(b)(1).

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

5

Corpuses with notice of the sale,

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

6

transfer before that date.

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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