USA v. Real Property at 2659 Roundhill DR., Alamo, CA, 98-15836

• Decision Date: 15 October 1999
• Docket Number: N,No. 98-15836,98-15836
• Citation: 194 F.3d 1020
• Parties: (9th Cir. 1999) UNITED STATES OF AMERICA, Plaintiff-Appellee, v. REAL PROPERTY AT 2659 ROUNDHILL DR., ALAMO, CA, Defendant, ROBERT FITZSTEPHENS; WILSON YOUNG; KEITH SLIPPER; JOSEPH IPPOLITO; MICHAEL THALER; MARK SCHWAB, Claimants-Appellants, and KATHRYN PAYTON; GREGG PAYTON; ANTHONY GREGG PAYTON, Claimants. UNITED STATES OF AMERICA, Plaintiff-Appellee, v. REAL PROPERTY AT 2659 ROUNDHILL DR., ALAMO, CA, Defendant, WORLD SAVINGS & LOAN ASSOCIATION, Intervenor-Appellant, o. 98-16207
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1020

194 F.3d 1020 (9th Cir. 1999)

UNITED STATES OF AMERICA, Plaintiff-Appellee, v. REAL PROPERTY AT 2659 ROUNDHILL DR., ALAMO, CA, Defendant ROBERT FITZSTEPHENS; WILSON YOUNG; KEITH SLIPPER; JOSEPH IPPOLITO; MICHAEL THALER; MARK SCHWAB, Claimants-Appellants and KATHRYN PAYTON; GREGG PAYTON; ANTHONY GREGG PAYTON, Claimants.

UNITED STATES OF AMERICA, Plaintiff-Appellee, v. REAL PROPERTY AT 2659 ROUNDHILL DR., ALAMO, CA, Defendant WORLD SAVINGS & LOAN ASSOCIATION, Intervenor-Appellant,

No. 98-15836, No. 98-16207

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted May 11, 1999

Filed October 15, 1999

[Copyrighted Material Omitted] Dena R. Thaler, Oakland, California, for the claimants appellants.

Barry D. Hovis, Hovis, Smith, Larson, Lipscomb & Cross, San Francisco, California, for the intervenor-appellant.

Robert D. Ward, Assistant United States Attorney, San Francisco, California, for the plaintiff-appellee.

Appeals from the United States District Court for the Northern District of California; D. Lowell Jensen, District Judge, Presiding. D.C. No. CV-94-03525-DLJ, D.C. No. CV-94-03525-DLJ

Before: Donald P. Lay,¹ District Judge, Harry Pregerson and Michael Daly Hawkins, Circuit Judges.

HAWKINS, Circuit Judge:

The appellants are claimants (Robert Fitzstephens et al., hereinafter "purchasers") and intervenors (World Savings and Loan Association, hereinafter "World") in an in rem forfeiture suit brought by the government against real property. They appeal the district court's summary judgment order in favor of the government. For the reasons set forth below, we reverse.

I. Facts and Procedural History

In 1990, Anthony and Kathryn Payton purchased real property located at 2659 Roundhill Drive, Alamo, California (hereinafter "the property") for $682,500. The Paytons paid $558,310 and financed the remainder through a loan from World. The loan, which was for $300,000, was secured by a mortgage and deed of trust recorded on January 24, 1993.

The government alleges that the Paytons used the proceeds of Anthony Payton's illegal drug trafficking activity, which took place beginning in 1974, to make their down payment on the property. On October 5, 1994, the government filed a complaint for forfeiture pursuant to 21 U.S.C. S 881(a)(6),² naming the real property as the defendant res . On October 19, 1994, the government arrested the property and recorded a notice of lis pendens in the Contra Costa County Recorder's Office.

World filed a claim in the forfeiture action asserting an innocent lienholder interest worth $340,000 -the amount owed World by the Paytons, consisting of the $300,000 loan plus interest. The government did not dispute that World had a non-forfeitable $340,000 interest in the property. In settlement negotiations, the government offered to pay off World's interest as soon as the government obtained a judgment of forfeiture and successfully marketed the property. World refused. Instead, as the Paytons had made no loan repayments to World since October of 1993, World began immediate foreclosure proceedings.

The Paytons petitioned the court to stay the foreclosure. Both World and the United States opposed the Paytons' motion, and the motion was denied. In February of 1995, the court stayed the foreclosure proceedings because of a pending bankruptcy proceeding against the Paytons, but lifted the stay on April 28, 1995.

World sold the property in May of 1995. The value of World's interest at the time was $340,000. According to appraisers, the property's actual value was between $590,000 and $625,000; thus, the Paytons' equity in the property was somewhere between $250,000 and $285,000. World sold the property for $354,000 to six persons (the appellants) who had formed a partnership on the morning of the sale for that purpose. World subsequently withdrew its claim in the forfeiture action, and the purchasers entered theirs. World kept the $340,000 it was owed and placed the remainder of the sale proceeds ($14,000) in interpleader in the Paytons' bankruptcy case.

The purchasers and the United States filed cross-motions for summary judgment. The purchasers contended that the government had abandoned the property by consenting to the foreclosure sale. They also claimed that the district court lacked in rem jurisdiction over the Roundhill property because a foreclosure sale extinguishes any claims arising after the purchaser's interest vests, and the interest of a purchaser at foreclosure vests at the time the trustee (in this case, World) recorded its deed of trust. Finally, the purchasers argued that they were "innocent owners" and thus immune from forfeiture proceedings under S 881(a)(6).

The district court found that the government's acquiescence in the foreclosure sale did not constitute a release of its forfeiture interest in the property; that the government's interest vested prior to the purchasers' by virtue of 21 U.S.C. S 881(h), the statute's "relation back" provision; and that the purchasers could not qualify as "innocent owners " since the notice of lis pendens was sufficient to alert them to the nature of the property. Based on these findings, the court tentatively awarded summary judgment to the United States. The court ordered the government to submit a proposed judgment along with a statement of how forfeiture would be executed, and invited the purchasers to respond. In its statement, the government suggested that the purchasers might have a cause of action against World. World accordingly petitioned for and received the court's permission to intervene.

In 1997, the purchasers, wishing to sell the property, applied to the court for an order of sale. The court acquiesced, ordering that the proceeds be deposited into an interestbearing escrow account subject to the jurisdiction and further order of the district court. The property was sold for $432,363.79.

In January of 1998, the court granted summary judgment to the United States for the reasons expressed in its tentative ruling. Since the government was entitled only to the Paytons' interest, and since the Paytons' interest had been defined throughout the proceedings as the value of the property minus World's $340,000 interest, the court found that the government was entitled to $432,363.79 minus $340,000 -approximately $92,000. The purchasers were left with $340,000, or $14,000 less than they had paid for the property. World and the purchasers appeal.

II. Standing

The government claims that the purchasers lack standing because they failed to file timely claims and answers in accordance with Supplemental Rule C(6) of the Rules of Admiralty.³ That rule provides that claims must be filed within ten days of service of process "or within such additional time as may be allowed by the court," and answers must be filed within twenty days of filing the claim.

At least two of the purchasers were served through their attorney on May 22, 1995. At that time, they argued that they were not required to file claims in order to contest the forfeiture. This issue was litigated, and on November 13, 1995, the court held that the purchasers were obligated to file claims and answers in accordance with Rule C(6). Although two purchasers filed claims within ten days of the court's order, the other four did not file claims for several months. Moreover, none of the purchasers filed answers until May of 1996.

It is clear that at least some of the purchasers failed to file timely answers in compliance with Rule C(6). While such claimants may be held to lack standing to contest the forfeiture, see, e.g., United States v. $288,914, 722 F. Supp. 267, 270 (E.D. La. 1989), the district court also has discretion to allow late filing. Although a formal extension request is surely envisioned, the district court has "discretion to overlook the failure to conform to the requirements of Rule C(6)." United States v. 2930 Greenleaf Street, 920 F. Supp. 639, 644 (E.D. Penn. 1996). This is what appears to have occurred here, given that the government raised the issue in its motion for summary judgment and the district court chose not to address it. Claimants have standing.

III. Jurisdiction

We next address appellants' argument that, following the foreclosure sale, the district court lacked in rem jurisdiction over Roundhill. In response to this argument, the government asserts that actual possession of the res, while necessary to establish the court's jurisdiction originally, is not necessary for the continuance of jurisdiction. Moreover, under Supplemental Rule E(5) of the Rules of Admiralty, the steps necessary for the release of arrested property were not taken⁴.

The government is correct that a court does not lose properly acquired jurisdiction over the subject res simply because there is a shift in its control or possession. See Republic Nat'l Bank v. United States, 506 U.S. 80 (1992). As we understand the appellants' argument, however, they do not claim that the court lost jurisdiction over the property because the government no longer controls or possesses it. Rather, they claim that the court lost jurisdiction over the property because the government no longer has a cognizable legal interest in it. As stated in their brief: "While the court retains subject matter jurisdiction over the forfeiture, the real property passes to the foreclosure sale purchaser and the excess sale proceeds become the new res. The real property is no longer involved in the forfeiture."

As a jurisdictional claim, the appellants' argument founders on Rule E(5). It is true that the subject matter of a forfeiture action generally shifts to the sales proceeds after foreclosure. Importantly, however, this transaction is effected by an order of the court releasing the real property for foreclosure and declaring the sales proceeds the new res. See, e.g., id., 506 U.S. at 83; United States v. One Single Family Residence Located at 6960 Miaflores...