U.S. v. Kehoe

• Decision Date: 22 May 1978
• Docket Number: No. 76-4346,76-4346
• Citation: 573 F.2d 335
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Cornelius J. KEHOE and Ray K. Bullock, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 335

573 F.2d 335

UNITED STATES of America, Plaintiff-Appellee, v. Cornelius J. KEHOE and Ray K. Bullock, Defendants-Appellants.

No. 76-4346.

United States Court of Appeals, Fifth Circuit.

May 22, 1978.

James J. Hippard, Houston, Tex., for Kehoe.

Randy L. Schaffer, Jr., Houston, Tex., for Bullock.

J. A. Canales, U. S. Atty., Mary L. Sinderson, Asst. U. S. Atty., Houston, Tex., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before GOLDBERG and MORGAN, Circuit Judges, and WYZANSKI, District Judge. ^*

LEWIS R. MORGAN, Circuit Judge:

Defendants Kehoe and Bullock allege several errors that they argue require reversal of their conviction for violation of 18 U.S.C. § 1006. ¹ The facts allegedly constituting this criminal violation are extremely complex. From 1969-1971, defendants Bullock and Kehoe were directors of the Surety Savings Association, a federally insured corporation. Surety owned a 7.2 acre tract of land in Houston on which it wanted to build an office building, but state savings and loan regulations limited the amount of money that such institutions could invest in office real estate and, therefore, these regulations prevented Surety from developing the property. Consequently, the directors of Surety formed "Fondren Square," a limited partnership, to do that which Surety could not do: develop the property. Kehoe and Bullock were general partners in Fondren (both together held a 52% Interest in the partnership) with five limited partners. Surety divided the 7.2 acre tract into two sections: a 2.5 acre tract (hereinafter referred to as Phase I) and a 4.7 acre tract (hereinafter called Phase II). Surety then conveyed Phase I to Fondren Square for a profit of $28,000, after which the latter built an office building and shopping center on the property. When the parking lot for this Phase I property was paved, however, .3 acre of Phase II, mistakenly thought to be part of Phase I, was also paved. This .3 acre figures prominently in the alleged criminal activity.

At this point Trans-Houston Corporation enters the picture. Trans-Houston was a wholly-owned subsidiary of Surety, chartered as a separate corporation and intended to act as an investment vehicle for real property. In September, 1969 Surety transferred the Phase II property to Trans-Houston at cost in exchange for $395,000 in Trans-Houston stock. Surety intended Trans-Houston to enter a joint venture with Fondren Square on the Phase II tract, with Trans-Houston supplying the property and Fondren assuming all liabilities for developing the property. In November, 1969, Surety made an entry in its books transferring Phase II from it asset column to the account of Trans-Houston; the latter made the same notation in its books. Title, however, was never formally deeded to Trans-Houston. Of course, the .3 acre discussed above was included in this Phase II property, although all parties presumably thought that it was part of Phase I.

By 1970, Phase I was losing money and the Fondren partners decided to sell it. A real estate broker advised them that Phase I was not very attractive unless the undeveloped Phase II property could be sold with it. Fondren consulted with its joint venturer Trans-Houston, who decided that it would be more profitable to sell Phase II than to expend more money developing it. Thus, both phases were to be sold together.

A problem in selling the property existed, however, with regard to Phase I. That is, Phase I and another property (Hedwig property) owned by Fondren were the subjects of a cross-collateral agreement that ran in favor of Gibralter Savings and Loan Association. This meant that if a buyer bought one of the two properties (Hedwig or Phase I), his property would still be encumbered by the debts of the other. Obviously, this cross-collateral agreement impaired the marketability of Phase I. To alleviate this problem, Fondren got Gibralter to release the two properties Phase I and Hedwig from the cross-collateral agreement in return for a $35,000 note executed by the limited partnership. Defendants Kehoe and Bullock signed the note individually and as general partners.

With the Phase I and Phase II properties now marketable, the real estate agent found a buyer, Triton Ventures. Triton Ventures offered to buy Phase I and take a one year option to buy Phase II. Yet, upon viewing a survey plat of the entire tract, Triton discovered that the .3 acre thought to belong to Fondren Square in Phase I was actually a part of Phase II. Triton insisted, however, that the .3 acre be included in the Phase I conveyance since it would need this area for parking at Phase I. Fondren agreed to this and in March, 1971, Fondren and Triton entered into an earnest money contract whereby Triton was to acquire Phase I and the .3 acre by paying $35,000 in cash, assuming the $900,000 note owed by Fondren on the property, and by assuming the $35,000 note owed by Fondren and defendants to Gibralter. In addition, Triton had an option to buy Phase II. The earnest money contract was signed by Kehoe and Bullock on behalf of Fondren Square. Surety, which still held the deed on Phase II, deeded the .3 acre to Triton, with Kehoe signing for Surety. Triton gave back Kehoe a deed of trust on the .3 acre to secure payment of the note to Gibralter. Thus, if Triton did not pay the $35,000 note, it would lose the .3 acre which would revert to Gibralter Savings and Loan Association.

The contentions advanced by the Government at trial were that Surety owned the .3 acre in question. ² Yet, Surety received no compensation for the .3 acre in that this .3 acre was conveyed to Triton in return for Triton paying off a note owed to Gibralter by Fondren and, in particular, by Kehoe and Bullock, Fondren's general partners. Accordingly, the Government contended that Kehoe, by making the unauthorized conveyance, and Bullock, by aiding and abetting in this transaction, fraudulently reaped the benefit on a sale of property that was owned by a federally insured institution. Further, the Government contended that since the minutes of Surety and Trans-Houston were silent as to the deed from Surety to Triton for the .3 acre, this meant that the Surety Board of Directors did not know of the conveyance. Accordingly, Kehoe's signature was an unauthorized conveyance made with the intent to defraud the federally insured institution and, thus, a violation of 18 U.S.C. § 1006. The Government further contended that Bullock aided and abetted this fraudulent conveyance.

We have no difficulty rejecting defendants' allegations of error concerning the merits of the conviction, itself. First, defendants argue that, even assuming they committed the acts enumerated by the Government, the jurisdictional limits of 18 U.S.C. § 1006 prevent conviction. That is, defendants contend that if they defrauded anyone through their receipt of the $35,000 note from Triton Ventures it was Trans-Houston Corporation, the owner of the .3 acre in question and an entity not protected by § 1006. Thus, while defendants concede that record title of the .3 acre remained with Surety, they argue that Trans-Houston held equitable title, which under Texas law gives one "the present right to legal title." ³ Without exploring Texas real property law, we deem it sufficient that record title, no matter how inferior it is to equitable title, contains some value, of which value defendants' dealings with Trans-Houston deprived Surety, an entity covered by § 1006. Even assuming that Trans-Houston bore all title to the land, we cannot ignore the fact that Surety owned one hundred percent of Trans-Houston's stock or that the 4.7 acres of land were the latter's sole asset. Congress intended that § 1006, in accordance with the maxim that a servant cannot serve two masters, should prohibit a conflict of interests situation such as that which occurred here. See Beaudine v. United States, 368 F.2d 417 (5th Cir. 1966). Accordingly, it is difficult to assail the Government's contention that defendants contravened § 1006 because, by diminishing the value of Trans-Houston's sole asset, the defendants were necessarily decreasing the value of its stock and, accordingly, the value of a Surety asset.

Defendants cite Cartwright v. United States, 146 F.2d 133 (5th Cir. 1944) in rebuttal of the Government's position on this issue. In Cartwright, the Government sought to convict the defendant for a violation of what was then 18 U.S.C. § 82, which made illegal the theft of any property of the United States Government or of a corporation in which the United States owned stock. The Government had alleged in the indictment that the defendant stole property owned by the Government, although its evidence at trial indicated that the stolen property was owned by a corporation in which the United States owned stock. This court held that the Government having chosen to allege in the indictment that the stolen property was owned by the United States, itself, could not discharge its burden of proof by showing that another entity owned the property. Cartwright v. United States, 146 F.2d at 135. Clearly then Cartwright does not in any way support defendants' argument that Trans-Houston Corporation's alleged "equitable" ownership of the .3 acre deprives § 1006 of jurisdiction over the conduct in question. Cartwright is potentially significant for this case only through its disapproval of the introduction of evidence that varies from that evidence anticipated by the indictment. Yet, even on this limited ground, Cartwright is distinguishable from the present case. In this case the indictment charged that defendants " conveyed three-tenths ( 3/10) of an acre of land belonging to and in the care, custody and control of Surety Savings Association." ⁴ Therefore, one could argue first that the allegations contained in the indictment did not vary from those proved at trial. That is, the...