United States v. Wilhite

• Decision Date: 14 March 2018
• Docket Number: Criminal Case No. 00-cr-00504-CMA
• Parties: UNITED STATES OF AMERICA, Plaintiff, v. MICHAEL DAVID WILHITE, Defendant.
• Court: U.S. District Court — District of Colorado

UNITED STATES OF AMERICA, Plaintiff, v. MICHAEL DAVID WILHITE, Defendant.

Criminal Case No. 00-cr-00504-CMA

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

March 14, 2018

Judge Christine M. Arguello

ORDER GRANTING THE GOVERNMENT'S MOTION FOR ENTRY OF DECREE OF SALE AND TO APPOINT A RECEIVER TO ENFORCE LIEN

This matter is before the Court on the Government's Motion for Entry of Decree of Sale and to Appoint a Receiver to Enforce Lien, wherein the Government argues that Advanced Floor Concepts (AFC) should be sold pursuant to 28 U.S.C. § 7403(c) to satisfy Defendant Michael Wilhite's long-outstanding restitution obligations. (Doc. # 168.) Mr. Wilhite and his wife Darla Wilhite (the Wilhites, collectively) challenge the motion (Doc. # 177), and for the following reasons, the Court grants it.

I. BACKGROUND

Mr. Wilhite owes the Government at least $1,714,708.79 in restitution. In 2015, the Government filed an Application for Writ of Execution upon "the personal property of [Mr. Wilhite], which his wife, Darla Wilhite . . . , holds as a nominee." (Doc. # 30.) The Clerk issued the Writ of Execution to the United States Marshal, commanding, as pertinent here, the sale of Mr. Wilhite's interest in AFC. (Doc. # 31.) Mrs. Wilhite filed a motion to quash the Writ, reasoning that Mr. Wilhite has no ownership interest in AFC because it is solely owned and operated by Mrs. Wilhite. (Doc. # 36 at ¶ 5.) In 2016, the Court denied the motion to quash and determined that Mr. Wilhite does, indeed, have an equitable interest in AFC. (Doc. ## 121, 159.) On October 13, 2017, this Court specifically concluded that Mr. Wilhite has a 73.9% interest in AFC and Mrs. Wilhite has a 26.1% interest. (Ownership Order) (Doc. # 159.) The Court also concluded that Mr. Wilhite's 73.9% interest constitutes property under the federal tax lien statute and the Federal Debt Collection Procedures Act (FDCPA) and that such 73.9% interest may be subject to levy or collection by the Government to satisfy Mr. Wilhite's substantial and long-outstanding restitution obligations. (Id.)

In the instant motion, the Government, seeking to levy on that 73.9% interest, argues that a forced sale of AFC is the most appropriate mechanism for doing so. (Doc. # 168 at 1.) The Government also requests that a receiver be appointed to manage the sale. (Doc. # 168 at 1.)

The Wilhites object to the sale of AFC, arguing primarily that the Government only has the right to seize Mr. Wilhite's individual interest in AFC, not to sell the entire company. For the same reasons, the Wilhites also contend that there is no justification or authority for appointing a receiver in this case. (Id. at 11-15.)

II. SALE OF AFC

Mr. Wilhite's restitution obligation was imposed under the Mandatory Victim's Restitution Act (MVRA) and created a lien in favor of the Government. 18 U.S.C. 3613(a). The Government's action to enforce its lien in this case is therefore "in every real sense a proceeding in court to collect a tax." United States v. Holmes, 727 F.3d 1230, 1235 (10th Cir. 2013).

The reach of a federal tax lien is broad. It provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal¹, belonging to such person.

26 U.S.C. § 6321 (emphasis added.) Congress intended the lien "to reach every interest in property that a taxpayer may have." United States v. National Bank of Commerce, 472 U.S. 713, 719-20 (1985). "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." U.S. v. Craft, 535 U.S. 274 (2002).

Although broad, a federal tax lien may only reach a debtor's "property or rights to property" to the extent that state law recognizes the subject interest as property. Id. at 722. In other words, the government "steps into the shoes of the [debtor] and acquires whatever rights to the property the [debtor] possessed" under state law. Kane v. Captical Guardian Trust Co, 145 F.3d 1218, 1221 (10th Cir. 1998.) In looking to state law, courts consider "the substance of the rights state law provides, not merely the labels the State gives these rights or the conclusions it draws from them." Craft, 535 U.S. at 279.

This Court has already concluded that Mr. Wilhite has a 73.9% ownership² interest in AFC under Colorado state law, and that this 73.9% interest constitutes property orrights to property under the federal tax lien statute. (Doc. # 159 at 16.) See Craft, 535 U.S. at 286 (The federal tax lien attaches to "an individual partner's interest in the partnership, that is, to the fair market value of his or her share in the partnership assets."); LaFond v. Sweeney, 345 P.3d 932, 939 (Colo. App. 2012); aff'd, 343 P.3d 939 (Colo. 2015) (partnership law principles provide guidance when examining LLCs because they share many important characteristics and the language of the acts are similar).

As a holder of this lien, the Government, stepping into Mr. Wilhite's shoes, is entitled to, at a minimum, a "share of the profits and losses," the "right to receive distributions" of AFC's assets, including any proceeds from dissolution, and many other rights set forth in AFC's Operating Agreement. Colo. Rev. Stat. §§ 7-80-102 (9-10); 7-80-108(1)(a); see United States v. Triangle Oil, 277 F.3d 1251, 1255 (10th Cir. 2002) (a partner's interest generally consists of the "right to a proportionate share of the distribution of partnership profits or surplus after the payment of partnership debts").

Having determined state-created property interests to which the Government's tax lien attaches, the Court looks to federal law to determine what consequences attach to those interests.³ Here, the Government is seeking to use its foreclosure power to enforcecollection of its lien.⁴ Specifically, the Government seeks to foreclose on Mr. Wilhite's 73.9% ownership interest in AFC and force a sale of AFC pursuant to 26 U.S.C. § 7403, which provides:

The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States.

Having thoroughly reviewed the law applicable to foreclosure suits, the Court finds that the Government is entitled to foreclose on Mr. Wilhite's 73.9% ownership interest in AFC under § 7403. Craft, 535 U.S. at 286 ("The Federal Government may not compel the sale of partnership assets (although it may foreclose on the partner's interest, 1 Bromberg & Ribstein § 3.05(d)(3)(iv))."). Unlike administrative levy actions, a judicial foreclosure suit under § 7403 is a plenary action in which the court "adjudicate[s] all matters involved" and "finally determine[s] the merits of all claims to and liens upon the property." See Triangle Oil, 277 F.3d at 1255 (the government's administrative "levy power" does not "transfer ownership of the property" to the government, unless the government institutes "a foreclosure or similar action.") In adjudicating a foreclosure suit, the Court, sitting in equity, may broadly decree the sale of property and order thedistribution of proceeds—just as the Government requests that the Court do in this case. See United States v. Schmidt, 206 F. Supp. 806, 810 (E.D. Mo. 1962) (concluding that the government had a valid lien on a debtor's 258 shares of stock in a company that could be foreclosed and sold under § 7403); United States v. Rodgers, 461 U.S. 677, 696 (1983) (comparing the government's limited administrative levy power under § 6321 to its broad foreclosure power under § 7403).

The issue then becomes whether the Government, foreclosing on Mr. Wilhite's 73.9 % interest in AFC, may force a sale of the entire company. In Rodgers, the Supreme Court made clear that § 7403(c), "contemplate[s], not merely the sale of the [debtor's] own interest, but the sale of the entire property (as long as the United States has any "claim or interest" in it)." 461 U.S. at 693-94. The Rodgers Court distinguished between government actions to collect taxes under § 6321, which cannot extend beyond the debtor's property interests and government foreclosure actions under § 7403, which can. Id. at 690-91 (approving of Mansfield v. Excelsior Refining Co., 135 U.S. 326, 339-341 (1890), where the Court upheld the foreclosure of an easement held by a delinquent taxpayer against the underlying landholder's interest, but allowing only the sale of the debtor's leasehold interest rather than the entire fee because (1) it was owned by the landholder and (2) the sale was by administrative levy; the Court also concluded, however, that the government could seek a judicial sale of the entire property under the predecessor of § 7403.)). The Rodgers Court also highlighted the expansive language of § 7403, particularly the section allowing the government to "enforce [its] lien" and seek to "subject any property; [of] whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." Id. at 692. The Court added, "Wecan think of virtually no circumstances . . . in which it would be permissible to refuse to authorize a sale simply to protect the interests of the [debtor]. . . . And even when the interests of third parties are involved, we think that a certain fairly limited set of considerations will almost always be paramount." Id. at 709-10. Those considerations are:

(1) the extent

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