Garwood v. State

• Citation: 77 N.E.3d 204
• Decision Date: 05 June 2017
• Docket Number: Court of Appeals Case No. 31A01-1603-CT-679
• Parties: Virginia GARWOOD and Kristen Garwood, Appellants-Plaintiffs, v. STATE of Indiana, et al., Appellees-Defendants.
• Court: Court of Appeals of Indiana

77 N.E.3d 204

Virginia GARWOOD and Kristen Garwood, Appellants-Plaintiffs,

v.STATE of Indiana, et al., Appellees-Defendants.

Court of Appeals Case No. 31A01-1603-CT-679

Court of Appeals of Indiana.

June 5, 2017

Attorneys for Appellant : James D. Johnson, Blair M. Gardner, Jackson Kelly PLLC, Evansville, Indiana

Attorneys for Appellee : Curtis T. Hill, Jr., Attorney General of Indiana, David L. Steiner, Frances Barrow, Deputy Attorney General, Indianapolis, Indiana

Mathias, Judge.

[1] Mother and daughter Virginia and Kristen Garwood ("Virginia," "Kristen," collectively, "the Garwoods") ran a dog-breeding business from their Harrison County, Indiana, dairy farm. On June 2, 2009, the Indiana Department of Revenue ("DOR"), in concert with the Office of the Indiana Attorney General ("OAG") and the Indiana State Police (collectively, "the State"), raided the Garwoods' farm and seized and immediately sold more than two hundred dogs in partial satisfaction of the Garwoods' unpaid sales and income tax liability.

[2] The Garwoods sued a large number of public and private defendants in Harrison Circuit Court for federal constitutional and state-law torts arising from the raid. The Garwoods found success against only one: Andrew Swain ("Swain") in his personal capacity, then chief counsel for tax litigation in OAG, against whom a Harrison County jury entered a $15,000 verdict. The Garwoods now appeal and seek a new trial. The State cross-appeals and seeks reversal of the judgment against Swain.

[3] We reverse the judgment against Swain as unsupported by sufficient evidence. We affirm the trial court in other respects.

Facts and Procedural Posture

I. The Raid of June 2, 2009, and Events Leading to It

[4] Stated in the terms most favorable to the Garwoods and the judgment against Swain, and incorporating a decision of the Indiana Tax Court regarding the principals of this case, the events of and leading to June 2, 2009, may be summarized as follows. In 2007, dairy prices fell, and the Garwoods' dairy farm became less profitable. The Garwoods started breeding dogs for retail sale to make up the lost income. Without malicious intent, they did not register with the Indiana Secretary of State or DOR as retail merchants. They did not collect sales tax on the dog sales or remit sales tax to DOR, and they incompletely or incorrectly reported their income from the sales. They cared for their dogs properly and sold them responsibly.

[5] In February 2009, the Harrison County animal control officer told Swain he thought the Garwoods' dog-breeding business was unregistered and did not collect or remit sales tax. The officer had received a complaint from one of the Garwoods' alleged customers about a sick dog. Swain relayed the message to OAG's investigations section and asked DOR to investigate the Garwoods' tax status.

[6] It was determined that the Garwoods were in fact selling dogs through advertisements in local newspapers but had not registered as retail merchants or remitted sales tax. OAG investigators incognito purchased two puppies from the Garwoods using funds supplied by the Humane Society of the United States ("the Humane Society"), a private animal-rights organization. Swain had first worked with the Humane Society while pursuing another unregistered, non-remitting dog-breeder for unpaid tax liability. The Garwoods did not collect sales tax on the sale to the investigators.

[7] A meeting was held of staff from DOR, OAG, and the Indiana Office of Management and Budget ("OMB"), the final decision-maker with respect to the State's enforcement actions in this context. Swain and then-Attorney General Greg Zoeller ("Zoeller") advocated or counseled pursuing the same approach used against the other unregistered, non-remitting dog breeder, and against certain other such businesses: issuing jeopardy assessments and jeopardy tax warrants in conjunction with criminal prosecution for tax crimes.

[8] A jeopardy assessment, as summarized by Swain,

is an extraordinary tax remedy. Normally when ... [DOR] ... says that you owe tax, ... what's called a proposed assessment [is issued. The proposed assessment may go through several stages of administrative and judicial review before it becomes a final, collectible judgment.] ... What a jeopardy assessment is designed to do is that if various criteria are satisfied to the Commissioner's satisfaction, [DOR] ... can issue an immediate tax warrant that turns automatically into a tax judgment which is immediately collectible.

Tr. pp. 283-84. In particular, Swain's interpretation of the jeopardy assessment statute's criteria hinged on the argument that the Garwoods' failure to register, collect, and remit in itself constituted an "act that would jeopardize the collection of ... taxes." Ind. Code § 6-8.1-5-3. The Garwoods' conduct did not satisfy the jeopardy assessment criteria, as our tax court would later hold, and Swain's and DOR's interpretation of the statute was in excess of their authority. Nevertheless, before the tax court so held, drawing in part on his experience in the Garwoods' case, Swain would later author an article for a state tax law publication, "Tax Ills Behind the Mills¹ —The Advancement of Puppy Protection," Ex. Vol. I, Pls.'s Ex. 2, about "combatting puppy mills" and other participants in the unregistered, non-remitting "underground economy" with "civil and criminal tax enforcement techniques." Id. He would also later give a presentation to the animal law section of the Indiana State Bar Association on the same topic.

[9] The State's investigation prior to this extraordinary enforcement action was not as thorough as it could have been and gave the Garwoods little or no benefit of the doubt. In estimating the Garwoods' tax liability by the "Best Information Available" ("BIA") assessment procedure, DOR staff used the least conservative estimate of the Garwoods' sales and income, and assessed the maximum penalty for delinquency. The State never sought the Garwoods' co-operation with its investigation.

[10] DOR and OAG arrived at the Garwoods' farm early on the morning of June 2, 2009, and demanded payment of the assessed liabilities. When the Garwoods said they could or would not pay, State officers seized around 240 dogs, including several family pets, in a dramatically staged raid involving a large media presence, a state legislator, and a group of volunteers enlisted and directed by the Humane Societies of the United States and of Missouri. The dogs were sold to the Humane Society the next day for $300, less than $2 per dog, a negligible amount relative to the nearly $300,000 figure alleged by DOR as the Garwoods' outstanding tax liability.

[11] Zoeller trumpeted the success of the raid, giving several media interviews and congratulating his staff and DOR for closing an alleged "puppy mill." That evening, Swain and two OAG law student interns met Zoeller for a celebratory toast at a hotel in nearby Louisville, Kentucky. Zoeller and Swain would later be honored by the Humane Society in Washington, D.C., for their work.

II. Proceedings in Harrison Circuit Court

[12] On June 2, 2009, the morning of the raid, a DOR investigator presented the jeopardy assessments to the Garwoods, Ex. Vol. II, Defs.'s Ex. B., pp. 312-27, and demanded immediate payment of the amounts assessed. When the Garwoods said they could or would not pay, jeopardy tax warrants² in those amounts were filed in Harrison Circuit Court, id. pp. 328-337, and then presented to the Garwoods before seizure of the dogs. Tr. p. 296.

[13] The same day, DOR petitioned Harrison Circuit Court for temporary and permanent restraining orders and an injunction against the Garwoods continuing to do business in the state. See I.C. § 6-8.1-8-5 (authorizing such orders). On June 4, 2009, DOR and the Garwoods entered an agreed order in the circuit court stipulating that the Garwoods "ha[d] done a cash-and-carry business of selling dogs at retail" without reporting their income from that business, collecting or remitting sales tax on the dog sales, or registering as retail merchants. Ex. Vol. II, Defs.'s Ex. F, p. 353. The parties further stipulated that the Garwoods' "unlawful acts ha[d] made it prejudicially difficult" for DOR to collect the taxes owed by them and that the injunction should therefore issue. Id. The injunction was issued accordingly.

[14] On June 8, 2009, DOR filed in the circuit court a petition for proceedings supplemental, presumably to collect on the outstanding balance of the judgment created by the tax warrants. See I.C. § 6-8.1-8-8.5(b) (authorizing DOR to initiate); Ind. Trial Rule 69(E) ("Proceedings supplemental to execution"). Soon after, see infra Part IV, the Garwoods sought judicial review of the jeopardy assessments in the tax court and petitioned that court to enjoin further collection efforts by DOR. See I.C. § 33-26-6-2 (authorizing such injunction). On August 12, 2009, Harrison Circuit Court enjoined DOR from collecting on the judgment pending the Garwoods' tax court appeal.

[15] The complaint in the instant case was filed in the circuit court on May 16, 2011, the procedural history of which is detailed below. See infra Part V.

III. Proceedings in Marion Superior Court

[16] On May 29, 2009, three days before the raid, the OAG sought a search warrant in Marion Superior Court for the Garwoods' property to investigate criminal tax law violations. An investigator from that office submitted a probable cause affidavit detailing the Garwoods' business activities and their failures to pay income and sales tax and to register as retail merchants. Ex. Vol. II, Defs.'s Ex. C. The warrant issued the same day, authorizing search and seizure of inter alia "[a]ny and all ... canines, or other inventory ... found." Ex. Vol. I, Pls.'s Ex. 9, p. 81.

[17] On June 22, 2009, the State charged the Garwoods with eight counts of tax evasion by information filed in Marion Superior Court. Ex. Vol. II, Defs.'s Ex. I. On May 18, 2010, Virginia...