author: HUG, Chief Judge:

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Richard J. LESTER, Defendant, and Sheila Lester, Petitioner-Claimant-Appellant.
    Nos. 94-10583, 95-10288.
    United States Court of Appeals, Ninth Circuit.
    Argued and Submitted Feb. 15, 1996.
    Decided June 6, 1996.
    Reid Charles Pixier, Assistant United States Attorney, Phoenix, Arizona, for plaintiff-appellee.
    Edward M. Mansfield, Lewis and Roca, Phoenix, Arizona, for petitioner-appellant.
    Before HUG, Chief Judge, and SNEED and KLEINFELD, Circuit Judges.
   HUG, Chief Judge:

Sheila Lester appeals the district court’s order forfeiting her interest in certain real property located at 100 Indianola Road in Eureka, California (the “Indianola property”). Mrs. Lester’s interest in the Indianola property was forfeited, pursuant to 21 U.S.C. § 853(p), in connection with the conviction of her husband, Richard Lester.' We have jurisdiction under 28 U.S.C. § 1291, and we reverse and remand.

I

Background

In September . 1992, the Government filed an indictment charging Mr. Lester and others with conspiracy to possess with intent to distribute marijuana. Mrs. Lester was not indicted, and there is no allegation that she was involved in any wrongdoing. On December 2,1993, the Government filed a superseding indictment which added a criminal forfeiture count under 21 U.S.C. § 853. The count alleged that $2.5 million was forfeitable by Mr. Lester as proceeds of the conspiracy. On March 30, 1994, the jury found Mr. Lester guilty and returned a special verdict in favor of the Government on the forfeiture count.

At the sentencing hearing, the Government chose not to seek forfeiture of Mr. Lester’s property, pursuant to 21 U.S.C. § 853(a), as property linked to his criminal activities. Instead, the Government elected to proceed under the “substitute property” provisions contained in 21 U.S.C. § 853(p), whereby, if any of a defendant’s forfeitable assets are unavailable due to an enumerated act or omission of the defendant, the court can “order the forfeiture of any other property of the defendant.” Pursuant to this section, the district court entered a preliminary order of forfeiture of various properties which Mr. Lester owned or had an interest in, including the Indianola property.

The Lesters’ interest in the Indianola property can be summarized as follows. Mr. and Mrs. Lester were sole owners of a California corporation, Active Investments, Inc. Active Investments owned 3/8 of the limited partnership known as “Indianola Road Properties” or “Indianola Properties,” and this partnership in turn owned the Indianola property. Thus, Mr. and Mrs., Lester, through Active Investments’ interest in the limited partnership, owned 3/8 of the Indianola property.

On June 23, 1994, Mrs. Lester filed a petition alleging an interest in the Indianola property and seeking a hearing on the matter pursuant to 21 U.S.C. § 853(n). At the hearing, Mrs. Lester argued that, through her 50% ownership interest in Active Investments, she was entitled to a 3/16 interest in the Indianola property and that her interest was not subject to forfeiture under section 853(p).

The Government acknowledged that Mrs. Lester had a community property interest in Active Investments, but argued that, under California law, both spouses’ interests in the community property could be forfeited to satisfy Mr. Lester’s $2.5 million “debt” to the United States. The district court agreed and denied Mrs. Lester’s petition and upheld the forfeiture of the Lesters’ entire 3/8 interest in the Indianola property. Mrs. Lester timely appeals.

II

Standard of Review

We review the district court’s findings of fact for clear error, and its legal conclusions de novo. Brooker v. Desert Hosp. Corp., 947 F.2d 412, 415 (9th Cir.1991); see also United States v. Ripinsky, 20 F.3d 359, 361 (9th Cir.1994) (“[t]he interpretation of a statute is a question of law reviewed de novo”).

Ill

Discussion

In this appeal, we are required to determine whether the Government can use the “substitute property” provision in the criminal forfeiture statute, 21 U.S.C. § 853(p), to seize an innocent spouse’s interest in community property to satisfy the forfeiture obligations of the guilty spouse.

The criminal forfeiture statute, 21 U.S.C. § 853, provides:

(a) Property subject to criminal forfeiture
Any person convicted of a violation of this subchapter or subchapter II of this chapter punishable by imprisonment for more than one year shall forfeit to the United States, irrespective of any provision of State law-
(1) any property constituting, or derived from, any proceeds the person obtained, directly or indirectly, as the result of such violation;
(2) any of the person’s property used, or
intended to be used, in any manner or part, to commit, or to facilitate the commission of, such violation____
(p) Forfeiture of substitute property
If any of the property described in subsection (a) of this section, as a result of any act or omission of the defendant-
(1) cannot be located upon the exercise of due diligence;
(2) has been transferred or sold to, or deposited with, a third party;
(3) has been placed beyond the jurisdiction of the court;
(4) has been substantially diminished in value; or
(5) has been commingled with other property which cannot be divided without difficulty;
the court shall order the forfeiture of any other property of the defendant up to the value of any property described in paragraphs (1) through (5).

21 U.S.C. §§ 853(a) and (p) (emphasis added).

When an order of forfeiture has been entered under section 853, a third party claiming an interest in the property may petition the court for a hearing to adjudicate his or her legal interest in the property pursuant to 21 U.S.C. § 853(n). Section 853(n) provides, in relevant part,

(1) Following the entry of an order of forfeiture under this section, ...
(2) Any person, other than the defendant, asserting a legal interest in property which has been ordered forfeited to the United States pursuant to this section may ... petition the court for a hearing to adjudicate the validity of his alleged interest in the property____

(6)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.

21 U.S.C. § 853(n).

“In drug forfeiture actions, ownership of property is determined by state law.” See United States v. Ranch Located in Young, Arizona, 50 F.3d 630, 632 (9th Cir.1995); see also United States v. Yazell, 382 U.S. 341, 352-53, 86 S.Ct. 500, 506-07, 15 L.Ed.2d 404 (1965); United States v. Smith, 966 F.2d 1045, 1054 n. 10 (6th Cir.1992) (“because forfeiture proceedings implicate property rights which have traditionally been measured in terms of state law, and because section 853 contains no rule ..., it is appropriate to refer to state law”); United States v. Certain Real Property at 2525 Leroy Lane, 910 F.2d 343, 348 (6th Cir.1990) (observing that “[p]roperty interests have long been acquired and defined by state law”), cert denied, 499 U.S. 947, 111 S.Ct. 1414, 113 L.Ed.2d 467 (1991). Once the ownership interests are defined under state law, however, the federal forfeiture statutes determine whether those property interests must be forfeited to the Government.

Here, the parties agree that the law of California, where the Indianola property is located and where the Lesters resided during the relevant time period, applies. Under California law, “[e]xcept as otherwise provided by statute, all property, real or personal ... acquired by a married person during the marriage while domiciled in [California] is community property.” Cal. Fam.Code § 760 (West 1994). Thus, “[property acquired by purchase during a marriage is presumed to be community property.” In re Marriage of Marsden, 130 Cal.App.3d 426, 181 Cal.Rptr. 910, 918 (1982). Accordingly, the Lesters’ 3/8 interest in the Indianola property, acquired during the marriage while the Lesters were domiciled in California, is presumed to be community property.

Under California law, “each spouse has a vested undivided one-half interest in the community property.” See Estate of Wilson, 183 Cal.App.3d 67, 227 Cal.Rptr. 794, 798 (1986); Cal. Fam.Code § 751 (West 1994) (“[t]he respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing, and equal interests”). Thus, under California law, both Mr. Lester and Mrs. Lester have an undivided one-half ownership interest in their 3/8 interest in the Indianola property.

Having established the ownership interests, under state law, of both relevant parties — Mr. Lester, the defendant, and Mrs. Lester, the third party claiming an interest in the forfeited property — we can now look to federal law to determine whether Mrs. Lester’s ownership interest in the Indianola property may be forfeited pursuant to section 853(p).

The plain language of section 853 provides instructive guidance. Section 853(p) states that only the substitute “property of the defendant ” may be forfeited to the Government. 21 U.S.C. § 853(p) (emphasis added). Moreover, section 853(n)(6)(A) provides that a third party claiming an interest in the property may “render[ ] the order of forfeiture invalid in whole or in part [if] the right, title, or interest [in the forfeited property] was vested in the [third party] rather than the defendant at the time of the commission of the acts which gave rise to the forfeiture of the property under this section----” As stated above, under California law, Mrs. Lester has “a vested undivided one-half interest in the community property.” Estate of Wilson, 227 Cal.Rptr. at 798. Thus, under the plain language of section 853(p) and section 853(n)(6)(A), the defendant, Mr. Lester, owns an undivided one-half interest in the Lesters’ 3/8 interest in the Indianola property which is subject to forfeiture, and Mrs. Lester owns a vested undivided one-half interest in the Lesters’ 3/8 interest in the Indianola property which is not subject to forfeiture. See id.; 21 U.S.C. §§ 853(n)(6)(A) and (p).

Our holding not only comports with the plain language of section 853, but it also is consistent with the underlying legal proposition that “[a] criminal forfeiture is an in personam judgment against a person convicted of a crime.” United States v. $814,254.76 in United States Currency, 51 F.3d 207, 210-11 (9th Cir.1995) (emphasis added); see also Certain Real Property at 2525 Leroy Lane, 910 F.2d at 346 (section 853 “authorize[s] an in personam action against a defendant in a criminal case, and forfeiture in such a case is imposed as a sanction against the defendant upon his conviction.” (emphasis added)); In re Moffitt, Zwerling & Kemler, P.C., 875 F.Supp. 1152, 1162 (E.D.Va.1995) (“criminal forfeiture of substitute assets is available against a defendant, but not against a third party”). Our decision also heeds the Supreme Court’s recent admonition that “[improperly used, forfeiture could become more like a roulette wheel employed to raise revenues from innocent but hapless owners ..., or a tool wielded to punish those who associate with criminals, [rather] than a component of a system of justice.” Bennis v. Michigan, — U.S. -, -, 116 S.Ct. 994, 1003, 134 L.Ed.2d 68 (U.S.Mich 1996) (Thomas, J., concurring); see also Certain Real Property at 2525 Leroy Lane, 910 F.2d at 349 (“[t]he protection of the interest of an innocent owner ... is not inconsistent with federal forfeiture policy”); United States v. Tanner, 853 F.Supp. 190, 197 (W.D.Va.1994) (“The court understands that the purpose of 21 U.S.C. § 853(e), vesting in the United States title to forfeited property, is not to divest innocent persons of their legitimate interests in property.”).

Unfortunately, instead of looking to the statute and federal law to determine whether Mrs. Lester’s interest in the Indianola property could be forfeited, both the Government and the district court mistakenly rely on California state law. Having done so, they easily, albeit erroneously, come to the conclusion that (1) under California law, the marital community “is liable for a debt incurred by either spouse ... during marriage;” (2) a “debt,” under California law, is “an obligation incurred by a married person before or during marriage, whether based on contract, tort, or otherwise;” and (3) this definition of “debt” subject to community liability encompasses the obligations which arises from a criminal forfeiture action against a spouse. While the legal analysis may be sound, the underlying premise — that we look to state law rather than to the statute and federal law to determine this issue — is not. As discussed above, the federal statute and case law determines the permissible reach of section 853 and makes clear that that reach does not extend to the community property interest of an innocent spouse in substitute property.

Other courts also have considered whether an innocent spouse’s interest in marital property can be forfeited under the criminal forfeiture statute, 21 U.S.C. § 853. In those cases, the courts have held or simply assumed without elaboration that the innocent spouse’s one-half interest in the property was not forfeitable. See, e.g., United States v. Jimerson, 5 F.3d 1453, 1454 (11th Cir.1993); Certain Real Property at 2525 Leroy Lane, 910 F.2d at 347-49. In Jimerson, the defendant husband and his wife owned a family residence jointly as tenants by the entirety under state law. 5 F.3d at 1454. The Government sought to forfeit the residence, pursuant to 21 U.S.C. § 853(a), because the defendant husband had used the house “to facilitate the commission of the drug offense for which he was convicted.” Id. The court held that “[t]he judgment of forfeiture did not affect [the innocent spouse’s] interest in the residence. Rather, she continues to hold an indivisible one-half interest in the entire residence property. Thus, the only property interest taken by the Government is the interest held by [the defendant husband].” Id. 1454 & n. 1; see also Certain Real Property at 2525 Leroy Lane, 910 F.2d at 347-49.

In addition, where the property subject to forfeiture is not connected in any way to the guilty spouse’s criminal activities, but rather is “substitute property,” it is even clearer that only the property interest of the defendant, Mr. Lester, is subject to forfeiture. See 21 U.S.C. § 853(p) (only the “property of the defendant” may be forfeited as “substitute property”); Jimerson, 5 F.3d at 1454 (innocent spouse’s “interest in the property is unaffected by her husband’s forfeiture to the Government” even though property was used to “facilitate” criminal activity); see also Certain Real Property at 2525 Leroy Lane, 910 F.2d at 349 (“forfeiture statutes are intended to impose a penalty only upon those who are significantly involved in a criminal enterprise”); Tanner, 853 F.Supp. at 197 (the purpose of section 853 “is not to divest innocent persons of their legitimate interests in property”).

IV

Conclusion

Given that the plain language of section 853(p) clearly provides that only the substitute “property of the defendant” may be forfeited to the Government and that section 853(n)(6)(A) provides that a third party claiming an interest in the forfeited property may “render! ] the order of forfeiture invalid in whole or in part [if] the right, title, or interest [in the forfeited property] was vested in the [third party] rather than the defendant,” we hold that Mrs. Lester’s vested community property interest in the Indianola property is not subject to criminal forfeiture as “substitute property.” See 21 U.S.C. §§ 853(n)(6)(A) and (p); Estate of Wilson, 227 Cal.Rptr. at 798.

REVERSED and REMANDED.

      . The Lesters owned 100% of the stock in a corporation, the corporation owned a 3/8 interest in a partnership, and the partnership owned real estate, so it appears that the Lesters owned no interest in the real estate whatsoever. They owned shares of stock in a corporation. The Government sought forfeiture of the real estate, in which neither of the Lesters owned any interest, instead of seeking forfeiture of their stock, which they did own. No evidence has been brought to our attention which established that the corporation or the partnership was a sham or alter ego, or that the corporate veil should be pierced. But the parties have not raised this issue, on either side, and both sides have litigated on the assumption that what the Lesters owned was a 3/8 interest in the real estate, so we proceed on that basis.

      . Mrs. Lester initially asserted an interest in other property subject to forfeiture. These claims, however were abandoned during the proceedings below and thus are not involved in this appeal.

      . At the onset, we note that this case does not involve the Government’s right to forfeiture of community property which is directly or indirectly linked to the criminal activity of the guilty spouse. See 21 U.S.C. § 853(a). Instead, this appeal involves "substitute property,” which by its very nature is “not connected to the underlying crime.” Ripinsky, 20 F.3d at 362, 21 U.S.C. § 853(p).

      . On appeal, Mrs. Lester contends that her ownership interest in Active Investments should be considered her separate property, and thus, not subject to criminal forfeiture based on her husband’s conviction. This argument may have merit.
      At the time Active Investments was formed, 50% of the shares of stock in the corporation was issued solely in Mrs. Lester's name and the other 50% in Mr. Lester’s name. This demarcation of the shares as the separate property of each spouse may be sufficient to rebut the presumption that the shares in Active Investments are community property. See Cal. Fam.Code § 770(a)(2) ("[sjeparate property of a married person includes ... [a]ll property acquired by the person after marriage by gift ... ”); Johnson v. Johnson, 214 Cal.App.2d 29, 29 Cal.Rptr. 179, 182 (1963) ("if a husband transfers his community property to his wife, the mere fact of transfer raises a presumption that he intended the transfer to be a gift"); but cf., Cal. Fam.Code § 852(a) (requiring that transmutations of property from community to separate property be accompanied by an express declaration “made, joined in, consented to, or accepted by the spouse whose interest in the property is adversely affected”).
      Nevertheless, because we hold that Mrs. Lester’s community property interest is not subject to forfeiture and because this interest is identical to her alleged separate property interest in the shares of Active Investments, we need not resolve the issue of whether the issuance of the shares would suffice to transmute the shares into separate property or whether the provision in the California Family Code requiring an express declaration is even applicable given that neither Mr. nor Mrs. Lester were "adversely affected.”

      . In Bennis, the Court held that there was no federal constitutional violation when an innocent wife’s joint ownership interest in an automobile was forfeited under a state nuisance abatement statute because the husband had used the vehicle as the setting for a sexual liaison with a prostitute. — U.S. -, 116 S.Ct. 994, 134 L.Ed.2d 68 (U.S.Mich. 1996). Because the case involves a state statute and property forfeited as a result of its use in a criminal activity, its holding does not control in this case.

      . See Cal. Fam.Code § 910 (West 1994).

      . Our decision in In re Soderling is not inconsistent with our holding today. See 998 F.2d 730, 733 (9th Cir.1993). In In re Soderling, we determined that for purposes of dischargeablity in bankruptcy, a criminal restitution order was a "debt.” Id. We did so by reviewing the relevant federal bankruptcy statute and case law. Once we had determined, under federal law, that the criminal restitution order was "debt," we then looked to state law to determine whether the "debt” could be satisfied from community property assets. Id, at 733-34.

      . In the related context of civil forfeiture, under 21 U.S.C. § 881(a)(6), cotuts also have found that the marital property of an innocent spouse is not subject to forfeiture. See, e.g., United States v. South 23.19 Acres of Land, 694 F.Supp. 1252 (E.D.La.1988) (Government acknowledged that wife entitled to one half of residence as "innocent owner” because under Louisiana law, each spouse owns an undivided one-half interest in the community property; cotut ordered profits from sale of house split between Government and wife, even though Government was a "creditor” and community property subject to spouse's debts); United States v. Property Entitled in the Names of Alexander Morio Toki & Elizabeth Mila Toki, 779 F.Supp. 1272 (D.Haw.1991) (property held jointly by innocent spouse and by guilty spouse as tenants by the entirety cannot be forfeited to Government).
      On appeal, the Government argues that these civil forfeiture cases are distinguishable from criminal forfeiture cases because the civil forfeiture statute provides an “innocent owner" exception while the criminal forfeiture statute does not. Compare 21 U.S.C. § 881 with § 853. From this omission, the Government reasons that there is no protection for the community property of an innocent spouse under section 853. This conclusion ignores the fundamental distinction between civil and criminal forfeiture actions.
      A criminal forfeiture is an in personam judgment against a person convicted of a crime, while a civil forfeiture is an in rem proceeding in which liability attaches to particular property and not particular institutions or individuals. Thus, the defendant in a criminal forfeiture proceeding is the person, and the defendant in a civil forfeiture proceeding is the particular property.

        United States v. $814,254.76 in United States Currency, 51 F.3d 207, 210-11 (9th Cir.1995) (citations omitted). Thus, in context, it is clear that because a criminal forfeiture is an action against the convicted defendant, who by definition is not "innocent,” there simply was no need to have an innocent-owner exception.

      . These cases arose in the context of forfeited property which is jointly held by the defendant spouse and the innocent spouse as tenants by the entirety. See, e.g., Jimerson, 5 F.3d at 1454 & n. 2; Certain Real Property at 2525 Leroy Lane, 910 F.2d at 346. Typically in this form of property ownership, "[njeither [the] husband nor [the] wife acting alone can alienate any interest in the property, nor can the creditors of one levy upon the property.” Certain Real Property at 2525 Leroy Lane, 910 F.2d at 346. This property interest is different from the property interest created in a community property situation where "the community estate is liable for a debt incurred by either spouse ... during marriage ... regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.” See Cal. Fam.Code § 910.
      To the extent that the Government argues that this difference should dictate a different outcome, it reinforces our position that state law should be determinative of only the ownership interest in the property and that once ownership interests are defined under state law, the federal forfeiture statute and case law should determine what property interests are forfeitable.
      To adopt the position advanced by the Government below would result in the anomalous situation in which an innocent Californian spouse’s one-half interest in the marital property not associated with any criminal activity could be immediately seized and forfeited to the Government to satisfy the criminal forfeiture "debt” of the guilty spouse. While at the same time, the marital property of a guilty spouse actually used in the criminal activity, but held jointly with an innocent spouse as tenants by the entirety could not be seized or forfeited until the dissolution of the marriage, at which point the Government would be entitled to only the guilty spouse's share as a tenant in common, or until the death of one of the spouses in which case the surviving spouse would obtain sole title to the property. Depending on which spouse survived, the property would then either be completely forfeited to the Government (if the surviving spouse is the guilty spouse) or could not be forfeited at all (if the surviving spouse is the innocent spouse). This anomalous result can be avoided by limiting the state law analysis to a determination of the respective property ownership interests of the relevant parties.


source: Caselaw Access Project

author: WILLIAM A. NORRIS, Circuit Judge:

license: Public Domain

text:
    In re ARNOLD & BAKER FARMS, Debtor. ARNOLD & BAKER FARMS, Appellant, v. UNITED STATES of America, on Behalf of the UNITED STATES FARMERS HOME ADMINISTRATION, Appellee. ARNOLD & BAKER FARMS, and Western Cotton Services Corp., Appellants, v. UNITED STATES of America, on Behalf of the UNITED STATES FARMERS HOME ADMINISTRATION, Appellee. ARNOLD & BAKER FARMS, Appellant, v. UNITED STATES of America, on Behalf of the UNITED STATES FARMERS HOME ADMINISTRATION, Western Cotton Services Corp., Appellees.
    Nos. 95-15305, 95-15309, 95-15701.
    United States Court of Appeals, Ninth Circuit.
    Argued and Submitted April 8, 1996.
    Decided June 7, 1996.

      Don A Beskrone, Davis & Lowe, Phoenix, Arizona, for appellant Arnold & Baker Farms.
    Jon S. Musial, Snell & Wilmer, Phoenix, Arizona, for appellant Western Cotton Services Corporation.
    Richard G. Patrick, Assistant United States Attorney, Phoenix, Arizona, for appellee.
    Before: NORRIS and WIGGINS, Circuit Judges, and McKIBBEN, District Judge.

       Honorable Howard D. McKibben, United States District Judge, District of Nevada, sitting by designation.

   WILLIAM A. NORRIS, Circuit Judge:

Debtor Arnold and Baker Farms petitioned for relief under Chapter 11 and filed a plan of reorganization which proposed to satisfy the claims of the creditors by transferring real property to them — colloquially known as a “dirt for debt” plan. When Arnold and Baker’s largest creditor, the Farmers Home Administration (FmHA), objected to the plan, Arnold and Baker invoked the “cram down” provision of the Bankruptcy Code, 11 U.S.C. § 1129(b). The question presented is whether the plan’s proposal to transfer to FmHA a portion of the collateral securing FmHA’s claim will provide FmHA with the “indubitable equivalent” of its secured claim, as required by the “cram down” provision. See 11 U.S.C. § 1129(b)(2)(A)(iii).

I

We adopt and quote verbatim the statement of facts set forth by the Bankruptcy Appellate Panel at United States v. Arnold and Baker Farms (In re Arnold and Baker Farms), 177 B.R. 648, 652-53 (9th Cir. BAP 1994):

The debtor Arnold and Baker Farms is an Arizona general partnership. The partnership was formed ... for the purpose of farming and the sale and lease of farmland. Arnold and Baker purchased 1120 acres from Philip and Dorothy Ladra in 1975 and an additional 320 acres in 1979. The Ladras were given a first deed of trust on the property. In 1977, the farm began to experience financial difficulties.
[FmHA] and Western Cotton Services Corporation, a wholly owned subsidiary of Anderson Clayton Company, financed certain crops for the years 1978 through 1981. Additionally, FmHA lent Arnold and Baker sufficient funds to make the annual payments on the installments due to the Ladras in the years 1979, 1980, and 1983. In return, FmHA held a second deed of trust on Arnold and Baker’s real property____ Western Cotton held a third deed of trust on Arnold and Baker’s real property-
The Ladras ultimately instituted a judicial foreclosure proceeding against Arnold and Baker’s real property. Subsequently, in April 1984, the Bakers individually filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The Ladras obtained relief from the automatic stay and continued their judicial foreclosure proceedings. Arnold and Baker, the partnership, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in April 1986.
In May 1986, the bankruptcy court approved the sale of two pieces of real property free and clear of liens: 360 acres of real property to Cardón Oil Company and 480 acres to the entity known as the Corks. From the net proceeds of the sale and the payment of annual installments, Arnold and Baker satisfied the secured claim of the Ladras in the amount of $1,650,000. FmHA thereafter held a first priority and Western Cotton held a second priority lien in the property.
Arnold and Baker subsequently formulated two plans based on the income generated from the Cardón and Cork sales which proposed to pay in full the allowed claims of all creditors. The first plan was withdrawn when the Corks defaulted on their note and the other, a revised plan, was withdrawn when Cardón Oil defaulted on its note. With respect to the Corks’ default, Arnold and Baker negotiated a settlement pursuant to which the Corks tendered 360 acres to Arnold and Baker in lieu of foreclosure [footnote omitted]. With respect to the Cardón default, Arnold and Baker ultimately purchased the 320 acre parcel at a nonjudicial foreclosure [footnote omitted].
In January 1991, Arnold and Baker filed a second amended plan and disclosure statement. The second amended plan proposed to pay FmHA’s $3,837,618 note and Western Cotton’s $565,044 note in full. The plan proposed to transfer a proportionate fee simple interest in the 635 acre parcel of real property to FmHA and Western Cotton. FmHA was earmarked to receive 515 acres of real property and Western Cotton was earmarked to receive 77 acres. Arnold and Baker was earmarked to retain ownership of 48 of the 640 acres scheduled for distribution. Arnold and Baker proposed to sell the adjoining 360 acre parcel of real property in order to pay the administrative claims, United States Trustee’s fees, attorney fees, accountant fees, postpetition taxes, the real estate commission due and owing to Walter Arnold, and use the remainder to pay the unsecured creditors. Arnold and Baker retained an interest in the property remaining after distribution and sale.
Both FmHA and Western Cotton initially objected to confirmation of Arnold and Baker’s second amended plan. However, during the course of the confirmation hearing, Western Cotton reached a settlement with Arnold and Baker pursuant to which Western Cotton agreed to accept 130 acres of real property in full satisfaction of its debt. Western subsequently withdrew its objection to confirmation and voted to accept the plan.
For purposes of the confirmation hearing, the parties stipulated that the second amended plan met all the requirements of [11 U.S.C.] § 1129(a)(l — 13) with the exception of subsections (a)(3), (7), and (8). Additionally, FmHA objected to being crammed down pursuant to § 1129(b)(2). The principal factual issue concentrated on the fair market value of Arnold and Baker’s 1320 acres of land. Arnold and Baker estimated the per acre value to be $7,322 for the 640 acre lot, $8,300 for the 360 acre lot, and $8,631 for the 320 acre lot. FmHA estimated the per acre value for the entire 1320 acres at $1,381.
On May 5, 1993, the bankruptcy court confirmed the plan finding that the property had an estimated value of $7,300 per acre. However, the bankruptcy court modified the transfer to FmHA in the plan by ordering an additional 10% transfer to FmHA in order to compensate it for the costs associated with a sale [resulting in a total of 566.5 acres].

(End of quote from 177 B.R. at 652-53).

FmHA appealed to the Bankruptcy Appellate Panel (“BAP”), which reversed the bankruptcy court’s order confirming the plan. In consolidated appeals, Arnold and Baker and Western Cotton appeal the BAP’s reversal.

II

We first consider the issue of mootness. Appellant Western Cotton argues that the BAP lacked jurisdiction to consider the appeal from the bankruptcy court insofar as the appeal related to the transfer of the 130 acres to Western Cotton, because the transfer was carried out before FmHA obtained a stay of the order confirming the plan. The Bankruptcy Court confirmed the plan on May 5, 1993, and FmHA filed its timely notice of appeal on May 14, one day before the expiration of the automatic stay provided in Bankruptcy Rule 7062. Three days later, on May 17, FmHA filed an emergency motion for a stay of plan confirmation pending appeal. The bankruptcy court held a preliminary hearing on the stay motion on May 20 and issued a temporary stay. However, 36 minutes before that hearing, Arnold and Baker quitclaimed the property to Western Cotton. In a motion for rehearing filed with the BAP, Western Cotton argued that the BAP lacked jurisdiction over the appeal because the appeal was moot as to Western Cotton. The BAP denied the motion.

Mootness is a jurisdictional issue which we review de novo. Baker & Drake, Inc. v. Public Serv. Comm’n (In re Baker & Drake, Inc.), 35 F.3d 1348, 1351 (9th Cir.1994). Western Cotton argues that FmHA’s failure to obtain a stay until after the property was quitclaimed to Western Cotton rendered the appeal moot because the transfer extinguished or modified rights to the extent that a court would be unable to fashion effective judicial relief if FmHA prevailed on appeal.

However, this case presents neither of the two situations in which a dismissal for mootness is warranted. First, a court can dismiss an appeal as moot “if a party opposing a reorganization plan has failed to obtain a stay pending appeal, and the plan has been carried out to ‘substantial [culmination].’” Baker & Drake, 35 F.3d at 1351 (quoting In re Public Serv. Co. (Rochman v. Northeast Utils. Serv. Group), 963 F.2d 469, 473 n. 13 (1st Cir.1992)) (alteration in original). For example, in Trone v. Roberts Farms Inc., (In re Roberts Farms, Inc.), 652 F.2d 793 (9th Cir.1981), the court affirmed a dismissal for mootness of an appeal from an order confirming a plan of reorganization, because “the many intricate and involved transactions” called for by the plan had been “so far implemented that it [was] impossible to fashion effective relief for all concerned.” Id. at 797. Here, in contrast, only a single transaction has been carried out. Fashioning effective judicial relief would hardly require “putting Humpty Dumpty together again.” Baker & Drake, 35 F.3d at 1352.

The other situation in which a court can dismiss an appeal on the ground of mootness is “when an appellant neglected to obtain a stay pending appeal and the rights of third parties have intervened.” In re Spirtos (Spirtos v. Moreno), 992 F.2d 1004, 1006 (9th Cir.1993). “The classic example of mootness in the bankruptcy context is a case in which the debtor has failed to seek a stay of foreclosure and the debtor’s property has been sold. The transfer to a third party precludes meaningful relief.” Baker & Drake, 35 F.3d at 1351. See also Matter of Combined Metals Reduction Co., 557 F.2d 179, 189 (9th Cir.1977) (dismissing as moot appeals from orders approving and confirming sales and leases made to third parties not before the court). This case does not present such a situation because both Arnold and Baker and Western Cotton are parties to the appeal. The bankruptcy court could fashion effective relief simply by ordering Western Cotton to return the 130 acres to Arnold and Baker. Accordingly, we hold that the appeal is not moot as to Western Cotton.

III

We now turn to the merits. Appellant Arnold and Baker argues that the BAP erred in reversing the confirmation of the plan on the ground that the proposed transfer of 566.5 acres to FmHA would not provide “for the realization by [FmHA] of the indubitable equivalent” of its secured claim, as required by § 1129(b)(2)(A)(iii).

Because FmHA objected to confirmation of the plan, Arnold and Baker invoked the “cram down” provision of Chapter 11, which provides that the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the objection of an impaired creditor “if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1). To be “fair and equitable” the plan must satisfy, with respect to secured claims, one of the following three tests:

(1) The creditor is to retain the lien securing its claim and is to receive deferred cash payments with a present value at least equal to the claim;
(2) The property securing the claim is to be sold and the lien is to attach to the proceeds of the sale; the lien on the proceeds is then to be treated as described in test (1) or (3);
(3) The creditor is to realize the indubitable equivalent of its secured claim.

See 11 U.S.C. § 1129(b)(2)(A).

The bankruptcy court confirmed the plan on the ground that the plan satisfied the third requirement. After an evidentiary hearing on the issue of valuation, the court found that the property was worth $7,300 per acre. It then concluded that the receipt of 566.5 acres at $7,300 per acre would provide for FmHA to realize the indubitable equivalent of its secured claim.

As an initial matter, we must address the appropriate standard of review of such a determination. Arnold and Baker argues that the question of indubitable equivalence is a question of fact to be reviewed under the clearly erroneous standard. We disagree. Although the value of the land is a finding of fact which we review for clear error, the ultimate conclusion of indubitable equivalence is a question of law which we review de novo because it requires analysis of the meaning of the statutory language in the context of the Bankruptcy Code’s “cram down” scheme. See Woods v. Pine Mountain, Ltd. (In re Pine Mountain), 80 B.R. 171, 172 (9th Cir. BAP 1987) (‘Whether a plan provides a secured creditor with the indubitable equivalent of its claim is ... a mixed question of law and fact. Although the facts underlying such a determination are reviewed under the clearly erroneous standard, the question of whether the legal standard has been satisfied is reviewed de novo.”) (citing United States v. McConney, 728 F.2d 1195, 1201-03 (9th Cir.1984) (en banc)). But see Matter of James Wilson Assocs., 965 F.2d 160, 172 (7th Cir.1992) (holding that indubitable equivalence is a question of fact reviewed for clear error).

The BAP reviewed de novo the bankruptcy court’s determination that the proposed transfer would provide FmHA with the indubitable equivalent of its secured claim, and reversed. Stressing that “[t]he determination of whether a partial dirt for debt distribution will provide the creditor with the indubitable equivalence of its secured claim must be made on a case-by-case basis,” Arnold and Baker Farms, 177 B.R. at 662, the BAP reasoned that the bankruptcy court’s valuation of the property was an insufficient basis on which to conclude that the property was the indubitable equivalent of FmHA’s secured claim. Again, we adopt and quote verbatim from the BAP’s opinion at 177 B.R. at 661-62:

The finding of a trial court of a particular value of real property ... will not necessarily determine whether the creditor will receive the indubitable equivalent of its secured claim. Experience has taught us that determining the value of real property at any given time is not an exact science. Because each parcel of real property is unique, the precise value of land is difficult, if not impossible, to determine until it is actually sold. Nevertheless, bankruptcy courts have traditionally been requested, out of necessity, to determine the value of various types of property, including real property, and yet courts have recognized the difficulty of being able to determine accurately the value of land. For instance, in In re Walat Farms Inc., 70 B.R. 330 (Bankr.E.D.Mich.1987), the court stated:
Similarly, we concede to doubts about our ability to fix the “value” of the land in question. We need not make a pronouncement that no plan proposing the surrender of a portion of mortgaged land to a mortgagee in return for a compelled release of the lien on the remainder of the property will ever be confirmed. Suffice it to say, however, that no matter how hot the market for real estate may become in the future, the market for farm real estate here and now is not such which would permit us to hold that the value of the land being offered is the indubitable equivalent of [the mortgagee]’s claim. “Indubitable” means “too evident to be doubted.” Webster’s Ninth New Collegiate Dictionary (1985). We profess doubt on the facts of this case.
Walat Farms, 70 B.R. at 334 (footnote omitted)....
[T]he determination of whether a dirt for debt distribution provides a secured creditor with the indubitable equivalent of its secured claim must be madé on a case-by-case basis, and we must decide whether the bankruptcy court’s finding with respect to the value of the real property for the purpose of determining the amount of the creditor’s secured claim provided the secured creditor with the indubitable equivalent of its claim. In addition, we conclude that in order for a partial distribution to constitute the most “indubitable equivalence,” the partial distribution must insure the safety of or prevent jeopardy to the principal.
Although we conclude that the bankruptcy court’s valuation in this case is not clearly erroneous, we are not convinced that its finding regarding the value of the real property provided the indubitable equivalence of the particular secured claim in question, nor are we convinced that the partial distribution of 566.5 acres to FmHA will insure the safety of or prevent jeopardy to the principal, [citation omitted].
The evidence at trial demonstrated that the value of the real property was far from certain. The Arnold and Baker appraisal admitted that due to unfavorable market conditions, including the fact that the [Resolution Trust Company had acquired 19,-000 acres near Arnold and Baker’s property and was considering bulk sale offers at no more than $2,105 per acre], the normal one year marketing period for the property would be extended by another two years [by which time the appraisal estimated that the Resolution Trust Company’s activities would have ceased affecting the market].
The bankruptcy court agreed with Arnold and Baker’s valuation of $7,300 per acre. FmHA, however, proffered a valuation of $1,381 per acre.[] The large disparity in the parties’ valuation of the same property illustrates the obvious uncertainty in attempting to forecast the price at which real property will sell at some uncertain future date.
The bankruptcy court found the value of each acre to be $7,300, and thus the value of the 566.5 acres to be transferred to FmHA to be $4,135,450 ($7,300 x 566.5). We must decide, therefore, whether a distribution of land with an estimated value of $4,135,450 constitutes the indubitable equivalent of a $3,837,618 claim secured by 1,320 acres. Under the circumstances of this case, we conclude that it does not.
The partial distribution of 566.5 acres to FmHA will not insure the safety of or prevent jeopardy to the principal. FmHA originally lent funds to Arnold and Baker secured by 1320 acres of land. If Arnold and Baker defaulted on the terms of the note, FmHA bargained for the right to foreclose on the entire 1320 acres of land in order to satisfy the outstanding obligation. In this situation, the principal is protected to the extent of the entire 1320 acres held as security....
If FmHA subsequently sells the property for less than the value calculated by the bankruptcy court, FmHA has no recourse to the remaining collateral to satisfy the deficiency. As a result, the distribution to FmHA may not be “completely compensatory.” See In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir.1935) (Learned Hand, J.).[] FmHA is forced to assume the risk of receiving less on the sale without being able to look to the remaining undistributed collateral for security. “[T]o the extent a debtor seeks to alter the collateral securing a creditor’s loan, providing the ‘indubitable equivalent’ requires that the substitute collateral not increase the creditor’s risk exposure.” In re Keller, 157 B.R. 680, 683-84 (Bankr.E.D.Wash.1993); see also Aetna Realty Investors, Inc., v. Monarch Beach Venture, Ltd. (In re Monarch Beach), 166 B.R. 428, 436 (C.D.Cal.1993) (fair and equitable prohibits a plan from unfairly shifting risk of plan failure to the creditor).

(End of quote from 177 B.R. at 661-62).

Arnold and Baker challenges the BAP’s decision on the ground that it conflicts with Matter of Sandy Ridge Development Corp., 881 F.2d 1346 (5th Cir.1989), in which the Fifth Circuit held that a “dirt for debt” plan satisfied the indubitable equivalence standard. The BAP distinguished Sandy Ridge on the ground that the plan in that case provided for the transfer of all of the secured creditor’s collateral, rather than only a portion of the collateral as in the present ease. Arnold and Baker argues that even in the Sandy Ridge situation, the court’s valuation of the collateral is critical to the creditor’s substantive rights because the valuation directly impacts the creditor’s rights regarding an unsecured deficiency claim, as was the case in Sandy Ridge.

However, this argument misapprehends the indubitable equivalence analysis. Section 1129(b)(2)(A)(iii) does not require that a creditor receive the indubitable equivalent of its entire claim, but only of its secured claim. See Sandy Ridge, 881 F.2d at 1350; 11 U.S.C. § 1129(b)(2)(A)(iii) (“With respect to a class of secured claims, the plan provides ... (iii) for the realization by such holders of the indubitable equivalent of such claims.”) (emphasis added). Sandy Ridge explained that, in the case of an undersecured creditor,

[s]ection 506(a) of the Bankruptcy Code bifurcates ... [the] total claim into secured and unsecured portions____ In situations involving only one creditor and one debtor, the value of the undersecured creditor’s secured claim is simply the value of the underlying collateral. The difference between the collateral’s value and the amount of the debt becomes an unsecured claim and is added to the existing pool of unsecured claims.

Sandy Ridge, 881 F.2d at 1349 (citations omitted). In other words, the value of the secured portion of an undersecured creditor’s total claim is by definition equal to the value of the collateral securing it. Therefore, a creditor necessarily receives the indubitable equivalent of its secured claim when it receives the collateral securing that claim, regardless of how the court values the collateral. For this reason, the Sandy Ridge court did not need a judicial determination of value, explaining that “for the present analysis, the exact value of [the collateral] is unimportant.” Id. at 1349. The court’s valuation of the collateral does, as Arnold and Baker observes, determine the amount of any remaining unsecured claim, but the Code requires only that the creditor receive the indubitable equivalent of its secured claim.

In this case, in contrast, the amount of collateral deemed to be the indubitable equivalent of FmHA’s secured claim depends entirely on the court’s valuation of the collateral. If the court had found that the land was worth more than $7,300 per acre, FmHA would receive correspondingly less land, and if the court had found that the land was worth less, FmHA would receive correspondingly more. Our holding that this plan does not satisfy the indubitable equivalent requirement is therefore entirely consistent with Sandy Ridge’s holding that the plan in that ease did.

CONCLUSION

In conclusion, while we do not hold that the indubitable equivalent standard can never as a matter of law be satisfied when a creditor receives less than the full amount of the collateral originally bargained for, we do hold, as did the BAP, that the Arnold and Baker plan does not provide FmHA with the indubitable equivalent of its secured claim as required by the Bankruptcy Code.

The judgment of the BAP reversing the bankruptcy court’s order confirming the plan is AFFIRMED.

      . Western Cotton is now known as Anderson Clayton Financial Services Corporation. We use its former name for the sake of consistency with the BAP opinion.

      . Western Cotton also appeals the BAP’s denial of Western Cotton's motion for an extension of time for filing the motion for rehearing. Because the BAP addressed the motion for rehearing on the merits notwithstanding its denial of the extension, we do not address this issue.

      .The BAP based its denial of the motion on Western Cotton’s concession at oral argument that the appeal was not moot. However, Western Cotton correctly points out that mootness is a jurisdictional issue, which this court must consider despite Western Cotton’s apparent concession. Baker & Drake, Inc. v. Public Serv. Comm’n (In re Baker & Drake, Inc.), 35 F.3d 1348, 1351 (9th Cir.1994).

      . Western Cotton responds that the transfer did affect the rights of others who are not parties to the appeal, namely, certain other entities who are co-liable on the indebtedness. However, Western Cotton cites nothing in the record identifying any such entities or evidencing any co-liability on their part.

      . Appellee FmHA, in addition to addressing this issue, also raises a number of other issues apparently as alternative grounds for denying confirmation of the plan. FmHA argues that the bankruptcy court's valuation of the land was clearly erroneous and that the bankruptcy court erred in holding that the plan satisfied the "best interests of the creditors” test provided in § 1129(a)(7) and the requirement of good faith provided in § 1129(a)(3). Because we affirm the BAP on the issue of indubitable equivalence, we need not address the other issues raised by FmHA.

      . The full text of the statute provides, in relevant part:
      (2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
      (A) With respect to a class of secured claims, the plan provides—
      (i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
      (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate's interest in such property;
      (ii) for the sale, subject to section 363(k) of this title, pf any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or
      (iii) of this subparagraph; or
      (iii) for the realization by such holders of the indubitable equivalent of such claims. 11 U.S.C. § 1129(b)(2)(A).

      . The disparity was due in part to the parties' disagreement about the highest and best use of the property. Arnold and Baker argued that it was for land development, whereas FmHA maintained that it was for an irrigated farm. See Arnold and Baker Farms, 177 B.R. at 655.

      . The legislative history of § 1129 indicates that Murel Holding was the source of the "indubitable equivalence” standard. See Matter of Sandy Ridge Development Corp., 881 F.2d 1346, 1350 (5th Cir.1989); 124 Cong.Rec. H 11089 (daily ed. September 28, 1978) (statement of Rep. Edwards), reprinted in 1978 U.S.Code Cong. & Admin.News 6436 at 6475.

      . Arnold and Baker also cites a number of decisions from bankruptcy courts approving dirt for debt plans. See Matter of Atlanta Southern Business Park, Ltd., 173 B.R. 444 (Bankr.N.D.Ga.1994) (plan called for part of collateral plus sum of cash to be transferred to creditor in full satisfaction of creditor's claim); In re Simons, 113 B.R. 942 (Bankr.W.D.Tex.1990) (plan called for part of collateral to be transferred in exchange for credit against claim; balance of claim to be paid off by deferred payments and secured by lien on remaining collateral); In re Elm Creek Joint Venture, 93 B.R. 105 (Bankr.W.D.Tex.1988) (same); In re Bernard, 70 B.R. 181, 185 (Bankr.E.D.Ark.1986) (same); In re Shorten, 49 B.R. 722, 724 (Bankr.W.D.Mo.1985) (same).
      However, none of the plans in these cases required a secured creditor to accept part of its collateral in full satisfaction of its secured claim.

      . A subsequent opinion denying the petition for rehearing clarifies that this was the holding of Sandy Ridge. See Matter of Sandy Ridge Development Corp., 889 F.2d 663, 663 (5th Cir.1989) (Sandy Ridge II) (“In denying the petition for rehearing, we observe that we have held that ... the plan in question meets the requirements of 11 U.S.C. § 1129(b)(2)(A)(iii)....”).


author: D.W. NELSON, Circuit Judge: FERNANDEZ, Circuit Judge,

text:
    John MAGNUSON, d/b/a John Magnuson Associates, Plaintiff-Appellee-Cross-Appellant, v. VIDEO YESTERYEAR, Defendant-Appellant-Cross-Appellee.
    Nos. 94-16787, 94-17019 and 95-15369.
    United States Court of Appeals, Ninth Circuit.
    Argued and Submitted April 9, 1996.
    Decided June 11, 1996.

      Allen Hyman, Law Offices of Allen Hyman, Studio City, California, for defendant-appellant-eross-appellee.

      Thomas A. Cohen, Law Offices of Thomas A. Cohen, San Francisco, California, for plaintiff-appellee-eross-appellant.
    Before: FERGUSON, D.W. NELSON, and FERNANDEZ, Circuit Judges.
   Opinion by Judge D.W. NELSON; Dissent by Judge FERNANDEZ.

D.W. NELSON, Circuit Judge:

OVERVIEW

Video Yesteryear (“VY’) appeals the district court’s holding in favor of John Magnuson d/b/a John Magnuson Associates for copyright infringement under the Copyright Act of 1909. Act of March 4, 1909, ch. 320, 35 Stat. 1075 (codified as amended at 17 U.S.C. § 1 et seq.). VY contends that Magnuson lacks standing to sue for copyright infringement because he does not own the rights to the work at issue, a film entitled “Lenny Bruce.” VY also argues that the district court erred in refusing to award attorney’s fees as part of post-offer costs under Fed.R.Civ.P. 68. Under Rule 68, a party that rejects a settlement offer made at least ten days prior to trial must pay post-offer costs of the offeror if damages awarded do not exceed the amount of the offer. Magnuson cross-appeals the district court’s refusal to award him attorney’s fees under 17 U.S.C. § 505, which permits the district court to award costs and attorney’s fees “in its discretion.” He also asserts that VY is not entitled to costs under Rule 68 because the offer was defectively served.

We affirm the decision of the district court with respect to Magnuson’s copyright infringement claim and the denial of VYs request for attorney’s fees pursuant to Rule 68. We reverse the district court’s award of VYs costs. We remand for reconsideration on the question of whether Magnuson should have been awarded attorney’s fees pursuant to 17 U.S.C. § 505.

FACTUAL AND PROCEDURAL BACKGROUND

This appeal involves the rights to “Lenny Bruce,” a black-and-white film created by John Magnuson and the American satirist Lenny Bruce. In the film, which was shot in a New York night club in 1965, Magnuson and Bruce sought to convey Bruce’s version of the events that gave rise to his arrest and conviction for obscenity. The film was produced by the California corporation, Imagination, Inc. (“Imagination”), of which Magnuson was the chief executive officer. Imagination paid the production and post-production expenses and employed the camera and sound crews for the film, while Bruce was the sole author of the material used in the film. There is no existing written agreement between Bruce, Magnuson or Imagination concerning rights to the film.

Following a suggestion made by Bruce, Magnuson set up a corporation, Columbus Productions, Inc. (“Columbus”), for the purpose of owning the film. Columbus was created on October 10,1966, subsequent to Lenny Bruce’s death. At the time of its creation, Magnuson was sole shareholder and chief executive officer of Columbus. On October 17, 1966, Magnuson held a public screening of the film in San Francisco in order to secure copyright protection -under the Copyright Act of 1909. Columbus then applied for copyright registration for the film, listing itself as the “author” and “owner” of the film, and secured copyright registration in March, 1968.

The district court found that Columbus often performed business as John Magnuson Associates and that Magnuson changed the name of Columbus to John Magnuson Associates in the 1970s. Aside from Magnuson, Columbus never had any regular employees. In the seventies, Magnuson licensed the Lenny Bruce film to a number of distributors, including Times/Life Films, Kino International, Virgin Video, EEN and Rhino Home Video. He also made an agreement concerning the division of royalties with the Bruce estate in 1975. These agreements were made under the name of John Magnuson Associates. On October 1, 1979, Columbus was suspended for failure to pay California corporate franchise taxes. On March 3,1993, a Memorandum of Assignment of Rights from Columbus Productions, Inc. to John Magnuson was recorded with the U.S. Copyright Office.

In 1979, VY purchased a copy of the Lenny Bruce film which did not include a copyright notice. VY conducted a search with the U.S. Copyright Office to determine whether any film entitled “Lenny Bruce in Concert” had been registered, although the film in question has never gone by that title. The search produced no results, and VY, concluding that the Lenny Bruce film was in the public domain, began marketing the film on video tape in 1979. The video was not authorized by Magnuson and contains a copyright notice claiming a 1983 copyright belonging to VY.

Magnuson filed an action for copyright infringement against VY and trial was scheduled to begin on March 7, 1994, with a pretrial conference set for March 2, 1994. On February 22, 1994, VY sent by Federal Express and by facsimile (“fax”) an offer of judgment pursuant to Fed.R.Civ.P. 68 for $3,000. Magnuson’s attorney rejected the offer because it was untimely, having been served less than ten court days before the scheduled trial date. The district court held in favor of Magnuson on the copyright claim and awarded $375 in damages. It rejected Magnuson’s request for attorney’s fees pursuant to 17 U.S.C. § 505. It also rejected VY’s request for attorney’s fees pursuant to Fed.R.Civ.P. 68, but awarded costs under that rule, finding that the offer had been timely. VY appeals the district court’s holding with respect to copyright infringement and its denial of VY’s request for attorney’s fees. On cross-appeal, Magnuson challenges the district court’s award of costs to VY and the denial of its request for attorney’s fees.

STANDARD OF REVIEW

We review the district court’s findings of fact following a bench trial for clear error and its conclusions of law de novo. Fed.R.Civ.P. 52(a); Price v. United States Navy, 39 F.3d 1011, 1021 (9th Cir.1994). We review de novo the district court’s construction of Rule 68. Herrington v. County of Sonoma, 12 F.3d 901, 906 (9th Cir.1993). The district court’s decision as to whether to award attorney’s fees under the Copyright Act is reviewed for abuse of discretion. Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1532 (9th Cir.1993), rev’d on other grounds, 510 U.S. 517, 114 S.Ct. 1023, 127 L.Ed.2d 455 (1994).

ANALYSIS

I. Magnuson’s Right to Sue for Copyright Infringement

VY argues that the district court erred in finding that Magnuson is the owner of the copyright to the Lenny Bruce film and that he therefore has standing to sue for copyright infringement. VY contends that (1) there was not a valid transfer of copyright from Lenny Bruce to Columbus; and (2) even if there was a valid transfer from Lenny Bruce to Columbus, there was not a valid transfer from Columbus to John Magnuson Associates. VY’s argument is without merit.

A. Transfer from Lenny Bruce to Columbus

VY argues that Lenny Bruce alone was the author of the Lenny Bruce film and that Imagination never shared ownership of the copyright to the film as a coauthor. Even if Imagination did hold a copyright to the film, VY asserts, it did not transfer that copyright to Columbus prior to the film’s publication on October 17,1966.

The district court correctly held that the Copyright Act of 1909 is the applicable law in this case because the copyright was secured in 1968, prior to the adoption of the 1976 Act. See Lone Ranger Television v. Program Radio Corp., 740 F.2d 718, 719-20 (9th Cir.1984) (applying the 1909 Act where the original copyright dated back to 1954 and the alleged infringement took place in 1979). Under the 1909 Act, a common law copyright vested in the author or authors of a work at the time of its creation. Copyright Act of 1909, § 2, reprinted in 5 Nimmer on Copyright (hereinafter Nimmer) Appendix 6; see 1 Nimmer § 2.02 at 2-18.1. A party that commissioned and paid for the production of the work was considered an author and held common law copyright to the work. Lin- Brook Builders Hardware v. Gertler, 352 F.2d 298, 300 (9th Cir.1965).

Here, the district court found that Imagination and Bruce made a mutual decision to create the film, that Bruce took “clear initiative in directing and undertaking” the filming, and that Magnuson (the owner of Imagination) produced the film and paid for the crews and equipment used in its production. Because these findings are not clearly erroneous, the district court properly held that both Bruce and Imagination held the original common law copyright in the film as commissioning parties.

The district court also found that Lenny Bruce transferred his interest in the film to Imagination and that subsequently, Imagination transferred the common law copyright to Columbus. “Common law copyrights could be transferred either orally, or by implication from the conduct of the parties.” 1 Nimmer § 5.03[B] at 5-46 (citing Real Estate Data, Inc. v. Sidwell Co., 809 F.2d 366, 374 (7th Cir.1987)). The district court concluded that in suggesting that Magnuson create a new corporation for the purpose of owning the film, Bruce indicated his intent to transfer his rights to Imagination. In addition, it held that by creating such a corporation (Columbus) and transferring the film to the books of the new corporate entity, Imagination effected a valid transfer of the common law copyright to Columbus.

The district court found that after the transfer to Columbus of ownership rights in the Lenny Bruce film, Columbus published the work, thereby losing its common law copyright. Under the 1909 Act, common law copyright terminated when a work was published, at which point the work became eligible for federal statutory copyright. See 1 Nimmer § 2.02 at 2-18.1. Columbus then applied for and received in 1968 a statutory copyright, registered in the name of Columbus. VY has offered no evidence that indicates the district court’s findings on these transfers were clearly erroneous or that Columbus did not hold a valid statutory copyright as of 1968.

B. Transfer from Columbus to Magnuson

VY argues next that even if Columbus held a valid copyright, it did not transfer ownership of the copyright to Magnuson before Columbus was suspended in 1979. Thus, it asserts, the true owner of the copyright is Columbus, which, as a suspended corporation, does not have the capacity to sue. Cal. Bus. & Tax.C. § 23301. VY challenges testimony offered by Magnuson that “[a]t the time of dissolution, Columbus Productions, Inc. assigned all right, title and interest in the copyright [to the Lenny Bruce film] to John Magnuson d/b/a John Magnuson and Associates.” It also contests the validity of a Memorandum of Assignment dated February 1, 1993, and registered with the United States Copyright Office in which the transfer from Columbus to John Magnuson is documented. VY argues that there is no evidence that Columbus ever dissolved and therefore, that the transfer could not have occurred.

Like the 1976 Copyright Act, the Copyright Act of 1909 provided that assignment of a copyright had to be made in writing. Copyright Act of 1909 § 28. However, case law holds that under some circumstances a prior oral grant that is confirmed by a later writing becomes valid as of the time of the oral grant, even if the writing is subsequent to the initiation of litigation on the copyright infringement. See 3 Nimmer § 10.03[A] at 10-39; Valente-Kritzer Video v. Pinckney, 881 F.2d 772, 775 (9th Cir.1989); Eden Toys, Inc. v. Florelee Undergarment Co., 697 F.2d 27, 36 (2d Cir.1982).

In Eden Toys, the court addressed a provision in the 1976 Act analogous to the one at issue here, which provides that an exclusive copyright license can only be conveyed in writing. 697 F.2d at 36. The purpose of the requirement that a transfer be in writing, the court explained, was to protect the copyright holder from persons fraudulently claiming to hold licenses. However, it pointed out, where “the copyright holder appears to have little dispute with its licensee on this matter, it would be anomalous to permit a third party infringer to invoke this provision against the licensee.” Id. Thus, the court held, an oral transfer was valid where it was affirmed by a subsequent memorandum of transfer executed by the copyright owner. Id.

The logic of Eden Toys is particularly compelling in this case, where the conveyance is between John Magnuson as CEO of Columbus, and John Magnuson as owner of John Magnuson Associates. Thus, we find that the memorandum of conveyance satisfied the writing requirement of the 1909 Copyright Act, even though it was not executed at the time of the transfer. Further, the district court made several factual findings that are not clearly erroneous indicating that Columbus did, in fact, transfer its copyright to John Magnuson Associates in the seventies. In particular, the district court found that Magnuson changed the name of Columbus to John Magnuson Associates in the seventies, making several licensing agreements and concluding an agreement in 1975 with the Bruce estate under that name. Thus, regardless of whether Columbus dissolved in the seventies, the district court did not clearly err when it found that Columbus transferred the copyright to John Magnuson Associates. As a result, Magnuson is the real party in interest and is entitled to sue for copyright infringement.

II. Service of VY’s Rule 68 Offer

Magnuson contends that VY’s Rule 68 offer was defectively served,' and therefore, that neither costs nor attorney’s fees should be awarded to VY. We agree.

The district court held that while service by fax was inadequate, service of the offer by Federal Express was acceptable because of “the reality that the offer was received more than ten days prior to the [actual] commencement of the trial.” However, the district court declined to take a position as to whether service by Federal Express is permitted by federal or local rules of civil procedure and how such service might affect the computation of the date by which the offer should have been served. It also failed to cite any case law in support of the proposition that actual notice suffices where service of process is defective.

In cases involving Rule 68 offers, service of process must comply with Fed.R.Civ.P. 5(b). Grosvenor v. Brienen, 801 F.2d 944, 948 (7th Cir.1986) (holding that an oral offer does not satisfy service requirements of Rule 5(b) in the context of Rule 68); Stewart v. County of Sonoma, 634 F.Supp. 773, 775 (N.D.Cal.1986). Service by fax does not satisfy Fed.R.Civ.P. 5(b). Mushroom Assocs. v. Monterey Mushrooms, Inc., 25 U.S.P.Q.2d 1304 (N.D.Cal.1992), 1992 WL 442898 *4; Salley v. Board of Governors, Univ. of N.C., 136 F.R.D. 417, 419 (M.D.N.C.1991). Thus, the district court correctly held that service of process by fax of the Rule 68 offer was inadequate, even though Magnuson apparently did receive a faxed copy of the offer. The district court erred, however, in holding that service of the offer by Federal Express was adequate. The handful of eases that have addressed the issue of service by Federal Express come almost entirely from district courts outside of this circuit, and they are not consistent. Therefore, we will provide a brief overview of the scant law that exists in this area.

Under the Federal Rules of Civil Procedure, manner of service of process is addressed in both Rule 4 and Rule 5. Rule 4 addresses the procedure to be followed when serving a complaint. Rule 5 specifies the procedure to be followed when serving other papers, including offers of judgments. Both rules contain provisions for service by mail. However, Rule 4, unlike Rule 5, allows a litigant to opt for state law procedures in serving a complaint instead of the federal procedure. Fed.R.Civ.P. 4(c)(2)(C)(i). The serviee-by-mail provisions of Rule 4 are a relatively recent innovation, adopted in a 1983 amendment. In contrast, Rule 5 has permitted service by mail since its adoption, in 1937.

The Seventh Circuit has held that delivery by Federal Express is not “mail” for the purposes of Rule 4. Audio Enterprises, Inc. v. B & W Loudspeakers, 957 F.2d 406, 409 (7th Cir.1992). In Audio Enterprises, the court reasoned that “Rule 4(e)(2)(C)(ii) specifies first class mail, postage prepaid. Federal Express is not first class mail.” Id. Similarly, the Fifth Circuit has held that Federal Express is not mail for purposes of Fed.R.App.P. 25(a). Prince v. Poulos, 876 F.2d 30, 32 n. 1 (5th Cir.1989). The Prince court rejected the appellant’s argument that the appellee’s brief should have been delivered by Federal Express to satisfy the requirement of Rule 25(a) that the most “expeditious form of delivery by mail” be utilized. The court relied upon the definition of “mail” in Webster’s New Collegiate Dictionary (1973), which defines mail as “letters ... conveyed under public authority.” Id. at 32 n. 1. Because Federal Express delivery service is not public authority, the court reasoned, it is not mail.

On the basis of these two cases, the authors of the practice guide Federal Civil Procedure Before Trial make the general statement that “[d]elivery by Federal Express or other private overnight delivery service does not constitute ‘service by mail’ under the Federal Rules.” William W. Sehwarzer et al., Federal Civil Procedure Before Trial, § 12:84 (1996). However, as late as 1993, the practice guide stated that “[o]vemight delivery services (e.g. Federal Express) should probably be treated as the equivalent of mailing for purposes of service.” Id., § 12:84 (1993). This reversal reflects the degree of uncertainty that characterizes this area of the law.

In fact, two district court cases have held that Rule 5 allows service by Federal Express. In Edmond v. U.S. Postal Service, 727 F.Supp. 7, 11 (D.D.C.1989), the court held that a plaintiff had been validly served by Federal Express under Rule 5(b). The court cited no authority and provided no explanation of its reasoning. In another case, United States v. Certain Real Property and Premises Knoum as 63-29 Trimble Road, 812 F.Supp. 332, 334 (E.D.N.Y.1992), the court followed Edmond, finding that service by Federal Express satisfied Fed.R.Civ.P. 5(b). The court in Trimble Road explained that Rule 5, in contrast to Rule 4, does not prohibit service by Federal Express because it does not specify that service must be made by first class mail, postage prepaid, as does Rule 4. Id. It also distinguishes Prince v. Poulos by noting that that case involved Fed.R.App.P. 25 and whether service by Federal Express was required, rather than permitted. Id.

If there is any question of whether the term “mail” encompasses private delivery services today, there is little doubt that “mail” meant “U.S. mail” in 1937, when Rule 5 was adopted. The suggestion that in failing to specify that mail must be “first class, postage prepaid” Rule 5 was intended to authorize service by private delivery service in' an era that predates modern overnight delivery services makes little sense. Thus, the distinction drawn by the Trimble Road court does not withstand scrutiny, and this panel declines to adopt the rule of Trimble Road and Edmond.

Nor, on a practical level, does it make sense to adopt an approach that interprets the term “mail” differently for the purposes of different rules within the Federal Rules of Civil Procedure. If we were to hold that Federal Express is “mail” for the purposes of Rule 5 (even though it is not for Rule 4), we would then have to address whether Federal Express is “mail” under Rule 6(e), which adds three days to computations of time where service is by mail. Given that Federal Express is generally used for overnight delivery, one could argue that Congress did not intend that Rule 6(e) apply to service by Federal Express, i.e., that Federal Express is not mail under Rule 6. It seems clear that in interpreting the term “mail” differently for the purposes of different rules within the Federal Rules of Civil Procedure, courts are likely to cause great confusion. Thus, we hold that Federal Express does not satisfy the requirements of Rule 5(b).

Furthermore, the local rules for district courts in the Northern District of California that were applicable at the time of service in this case also did not permit service by Federal Express. Prior to their amendment in 1995, these rules allowed service by mail but did not explicitly define “mail.” However, they did specify that “[a]ll papers required to be served shall, when served by mail, be served by first class or priority mail....” Local Rules of Practice for the United States District Court for the Northern District of California, Rule 210-2 (1994). As the court stated in Audio Enterprises, “Federal Express is not first class mail.” 957 F.2d at 409. Neither is it priority mail. (In 1995, the local rules for the Northern District of California added a provision allowing service by private delivery service or fax with the written consent of the receiving party. See Local Rule 5-3.)

Thus, the next question we must address is whether actual notice in this case suffices. We hold that it does not. In Salley, the court stated that

actual notice by a means other than that authorized by Rule 5(b) does not constitute valid service and is not an exception to the rule. Therefore, a party must advance some other compelling circumstance, in addition to actual notice in order to have the Court excuse noncompliance with Rule 5(b).

136 F.R.D. at 420. In that case, the plaintiff alleged that service of a discovery request by fax was invalid. Id. at 420. The court found “exceptional good cause” because the receiving party had explicitly consented to service of discovery requests by fax on several previous occasions. Id. We adopt the rule of Salley and require that a party demonstrate exceptional good cause for failing to comply with Rule 5(b).

Here, there is no indication of good cause. VY declined to address Magnuson’s argument that the offer was not validly served, or alternatively, untimely, in either its opening or reply briefs. It has not explained why it eould not have served Magnuson personally and has not presented evidence that Magnuson consented to service by fax or by Federal Express. Because VY did not serve its Rule 68 offer in compliance with Fed.R.Civ.P. 5(b) and did not offer good cause for its failure to validly serve the offer, we reverse the district court’s award of costs to VY pursuant to Rule 68.

III.- Denial of Magnuson’s Request for Attorney’s Fees under 17 U.S.C. § 505

Magnuson asserts that the district court should have awarded him attorney’s fees under 17 U.S.C. § 505. He argues that while it is in the discretion of the district court to award attorney’s fees, the court should have considered the factors listed in Fogerty v. Fantasy, 510 U.S. 517, - n. 19, 114 S.Ct. 1023, 1033 n. 19, 127 L.Ed.2d 455 (1994) in making its determination. Instead, he contends, the district court considered only whether VY acted in bad faith in denying his request for attorney’s fees.

This court has emphasized that in considering motions for attorney’s fees under § 505 of the Copyright Act, the district court should “seek to promote the Copyright Act’s objectives.” Historical Research v. Cabral, 80 F.3d 377, 378-79 (9th Cir.1996) (remanding for reconsideration the denial of attorney’s fees under § 505 where the district court correctly recited the Fogerty factors but erroneously stated that Fogerty prohibits an award of fees absent “exceptional circumstances”). Relying on Fogerty, this court has enumerated several factors which the district court should consider, including “the degree of success obtained; frivolousness; motivation; objective unreasonableness ... and the need in particular circumstances to advance considerations of compensation and deterrence.” Jackson v. Axton, 25 F.3d 884, 890 (9th Cir.1994); see also Fogerty, 510 U.S. at - n. 19, 114 S.Ct. at 1033 n. 19.

In this case, we are particularly concerned that the small award for damages in this case is insufficient to deter future copyright infringements such as the one at issue here. The district court concluded that “Video Yesteryear should have suspected the film print it bought was unauthorized.” Moreover, VY’s entire defense rested upon the fortuitous fact that Columbus’s corporate status had lapsed, a fact of which VY was not aware until this litigation commenced and which in no way contributed to VY’s copyright infringement. Because it is not apparent from the district court’s decision that it considered the factors listed in Fogerty, particularly the goal of deterring future copyright infringements, we remand for reconsideration of this issue.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

FERNANDEZ, Circuit Judge,

dissenting:

Video Yesteryear’s behavior is far from appealing, and a finding that the late writing was sufficient does help Magnuson. It does not help authors in general. I believe that the decision of this case is controlled by Konigsberg Int'l, Inc. v. Rice, 16 F.3d 355 (9th Cir.1994). I recognize that there are factual differences between this case and that one, but there are always factual differences between cases. In this instance, I do not think that those differences distinguish the principles involved.

Konigsberg is not just about direct conflicts between apparent copyright holders and those who claim to have rights in the copyright. Indeed, it hardly could be. It is also about marketability and protecting third parties who want to deal with the true owner. Under Magnuson’s theory, third parties cannot know who really owns a copyright. They can be dragged through litigation by a person who does not have any apparent ownership rights, but who might eventually be able to obtain some kind of memorandum which may confirm an earlier transfer. For that matter, they might deal with an apparent owner, who later writes something that might be called a memorandum of an earlier agreement. They might be plunged into litigation, and it might turn out that the apparent owner, to his surprise, had no rights at all. None of that advances Congress’s goal of enhancing “predictability and certainty of copyright ownership....” Effects Assocs., Inc. v. Cohen, 908 F.2d 555, 557 (9th Cir.1990), cert. denied, 498 U.S. 1103, 111 S.Ct. 1003, 112 L.Ed.2d 1086 (1991). Instead, it leaves the matter open until a time far in the future — here 17 years in the future. It advances the goals of those who “do lunch, not contracts.” Id. at 556.

I do agree that Congress wanted to protect authors. Perhaps that was Congress’s primary goal. However, the rule that Magnuson has argued for does not do that at all. Indeed, both of our prior cases which touched on this subject were attempts to take away the author’s rights. See Konigs berg, 16 F.3d at 356 (attempt to claim that a letter written three and a half years later was the requisite writing); Valente-Kritzer Video v. Pinckney, 881 F.2d 772, 774-75 (9th Cir.1989), cert. denied, 493 U.S. 1062, 110 S.Ct. 879, 107 L.Ed.2d 962 (1990) (claim that a letter from a lawyer was the requisite writing). The rule that requires a writing— Congress’s rule and Konigsberg’s rule — protects authors. What is the worst thing that can happen if an essentially contemporaneous writing is required? Well, in the absence of that writing the prior owner will be deemed to have the copyright; he will be protected. Not only that, he will not be subjected to claims that some stray writing of his confirms an ancient oral agreement which transferred the copyright to someone else. By the same token, third parties will be protected.

Only in a case as unusual as this one can it seem that there is less protection for the author. And even here, all the Konigsberg rule would provide is that the record owner, Columbia, is still the owner. That is not so terrible. If Magnuson does have absolute control over Columbia, he can exercise that control and obtain a proper contemporaneous transfer. Perhaps that will require corporate revitalization or dissolution. See, e.g., Cal.Rev.Tax Code §§ 23301, 23301.5, 23302 and 23304.1. Even that would not be so bad; it would take the corporate form seriously and would enforce the rules of California law regarding corporations. The corporate form is one upon which much of our economy rests. I see nothing bad about requiring Magnuson to follow state corporation principles as he goes about his business.

In short, the difficulties that uncertainty causes to authors and to third parties supply the reason for Congress’s requirement of a writing and supply a reason for us to embrace Konigsberg rather than finding ways to undermine the statute. Again, in the long run the alternative approach presents a severe danger to authors, who can be subjected to inventive claims that they somehow lost their copyright protections by some oral agreement made years earlier. Therefore, I agree with Konigsberg’s doubts about Eden Toys, Inc. v. Florelee Undergarment Co., Inc., 697 F.2d 27, 36 (2d Cir.1982), and similar cases. Those cases point the way toward destabilization of this area of the law. Konigsberg was right and should be followed. The contrary course could create copyright’s cockatrice.

Thus, I respectfully dissent.

      . Konigsberg Int'l, Inc. v. Rice, 16 F.3d 355 (9th Cir.1994) is distinguishable from this case. There, the alleged transfer was between the author and another party, where the author and the other party disputed whether the transfer had occurred and the terms on which it occurred, if it did. The subsequent writing on which the plaintiffs relied did not directly acknowledge that a transfer had occurred or indicate any specific terms. Thus, the problem with the writing in that case was not so much that it was not contemporaneous with the agreement but that it was "not the type of writing contemplated by section 204" because it “came far too late to provide any reference point for the parties’ license disputes.” 16 F.3d at 357. Here, there is no dispute between the transferor and the transferee conceming whether the transfer actually occurred, or the terms on which it occurred. Further, to the extent that some language in Konigsberg might be interpreted as requiring a contemporaneous writing even under the facts of this case, it is clearly dicta.

      . Fed.RXiv.P. 5(b) provides in relevant part:
      Service upon the attorney or upon a party shall be made by delivering a copy to the attorney or party or mailing it to the attorney or party at the attorney’s or party’s last known address, or, if no address is known, by leaving it with the clerk of the court.... Service by mail is complete upon mailing.

      . Fed.R.Civ.P. 4(c)(2)(C) provides in relevant part:
      (C) A summons and complaint may be served upon a defendant ...
      (ii) by mailing a copy of the summons and of the complaint (by first-class mail, postage prepaid) to the person to be served, together with two copies of a notice and acknowledgment conforming substantially to form 18-A and a return envelope, postage prepaid, addressed to the sender. If no acknowledgment of service under this subdivision of this rule is received by the sender within 20 days after the date of mailing, service of such summons and complaint shall be made under subparagraph (A) or (B) of this paragraph in the manner prescribed by (d)(1) or (d)(3).

      . Fed.R.App.P. 25(a) provides, in relevant part, that “briefs ... shall be deemed filed on the day of mailing if the most expeditious form of delivery by mail, excepting special delivery, is utilized.”

      . 17 U.S.C. § 505 provides:
      In any civil action under [the Copyright Act], the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney's fee to the prevailing party as part of the costs.