US v. Brown, No. 01-4229.
| Decision Date | 08 July 2003 |
| Docket Number | No. 01-4229. |
| Citation | 334 F.3d 1197 |
| Parties | UNITED STATES of America, Plaintiff-Appellant, v. Douglas E. BROWN, Hans H. Kuhlen, Wellshire Securities (Deutschland) GMBH, Wellshire Securities, Inc., Wellshire Securities Bahamas, Ltd., Wellshire Services, Inc., and Benetix, A.G., Defendants-Appellees, Steven W. Call, Receiver-Appellee, Group 2 Claimants, Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
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Joel McElvain, Attorney, Department of Justice, Washington, DC (Eileen J. O'Connor, Assistant Attorney General, Thomas J. Clark, Attorney, Department of Justice, Washington, DC, with him on the briefs, Paul M. Warner, United States Attorney, Salt Lake City, UT, of counsel), for Plaintiff-Appellant.
Steven W. Call (Herschel J. Saperstein, Bruce L. Olson, and Steven H. Gunn, with him on the brief), of Ray, Quinney & Nebeker, Salt Lake City, UT, for Receiver-Appellee.
Matthew C. Barneck (Diana G. Matkin, with him on the brief), of Richards, Brandt, Miller & Nelson, Salt Lake City, UT, for Appellees.
Before MURPHY, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and HARTZ, Circuit Judge.
A number of German citizens were defrauded when they attempted to invest in United States securities. Assets were obtained from the perpetrators of the fraud to create a receivership estate to compensate the victims. The United States has claimed that the estate is a Qualified Settlement Fund (QSF) that is liable for income taxes on its earnings. The district court ruled that the fund did not satisfy the criteria to be a QSF, and the United States appealed. We reverse.
Hans H. Kuhlen and Douglas E. Brown managed or controlled various businesses (the businesses) that were involved in a scheme to market securities to investors. The businesses contracted with hundreds of German citizens for the purchase of securities in the United States. An FBI investigation produced evidence that Brown, Kuhlen, and several of the businesses had wrongfully represented that the securities they offered were (1) regulated and insured by the National Association of Securities Dealers and the Securities Investor Protection Corporation, (2) freely transferable, and (3) traded on recognized exchanges. The FBI also found evidence that some of the businesses were dealing in securities without obtaining the appropriate broker/dealer registrations, were misleading their clients as to the history of one of the businesses, and were falsely representing one of the businesses as a "world-leading" investment bank.
The FBI obtained a search warrant for the premises of one of the businesses, Wellshire Services, Inc. (Wellshire), and seized a number of stock certificates. Wellshire then moved under Rule 41(e) of the Federal Rules of Criminal Procedure for return of some of the seized property, including stock certificates that belonged to German investors. The court initially allowed stock certificates to be released to Wellshire upon proof that its customers were entitled to possession. But the court halted release of the stock when it suspected that Wellshire had fabricated claims and did not own or control as many shares of stock as it had sold.
Brown, Kuhlen, and five of the businesses were later indicted for securities fraud and related offenses. The indictment sought forfeiture of "any and all property, real and personal, involved in the ... offenses, and any and all property traceable to such property." Aplt.App. at 32. Both Brown and Wellshire entered into stipulations with the United States whereby they released their claims to certain property and placed that property in a fund designed to provide restitution to the defrauded investors. Two other businesses entered into similar stipulations: Desert Mountain Properties, Inc. stipulated to the sale of a residence and its furnishings; and the D.E. Brown Family Trust relinquished its claims to the proceeds of a sale of stock seized by the United States. The proceeds of the sales were added to the restitutionary fund.
To make a claim on the fund, a Wellshire customer needed to complete a form that asked the customer to "identify each stock or security purchased, the number of shares purchased, the purchase price per share, the date of purchase, the amount ... paid for the shares, and whether the investor ... had received the shares purchased." Id. at 73. The form announced a deadline for submitting claims.
The United States asked that a receiver be appointed "because of the complex nature of the interests involved" and the fact that "the interests of the investors could potentially conflict with respect to some assets." Id. at 78. The district court granted the United States' request, appointing Steven W. Call (the Receiver). At the same time, the court identified the receivership estate (the Estate) as "all property then held by the United States of America and/or its agencies or employees in connection with the ... case, including but not limited to the assets of Wellshire Securities and/or its principles sic or affiliated entities which were seized." Id. at 81. The court authorized the Receiver "to endorse, sell and/or transfer all of the securities in his possession for the benefit of the estate, and ... to liquidate any securities belonging to the estate that are in the possession of other brokers." Id. at 94.
The Receiver proceeded to gather and liquidate the Estate's assets, which included not only cash, stocks, and real estate, but also art, wine, and furniture. Ultimately, the Receiver was successful in converting most of the Estate's assets to cash. At one point the Estate's value exceeded $10,000,000. Nevertheless, the Receiver reported that "the total assets held in the ... Estate are worth less than one-fourth of the total claims filed against the ... Estate." Rec. Br. at 23.
Although some claimants suggested that the Receiver distribute the seized stock certificates (or the proceeds of their sale) directly to the owners of each particular certificate, the Receiver rejected this suggestion as contrary to the court's earlier order directing him "to sell and not return stock." Aplt.App. at 108. Instead, the Receiver suggested that the claimants "share pro-ratably based upon the amount of their allowed claim." Id.
Almost two years after the Estate was established, the IRS submitted a proof of claim stating that the Estate owed taxes in the amount of $1,288,932.05 (plus interest). The original proof of claim identified the Estate as a Designated Settlement Fund (DSF), but an amended version identified it as a Qualified Settlement Fund (QSF). The Receiver objected to the proof of claim on the ground that the Estate was not taxable as either a DSF or QSF.
The court then ordered appointment of a special master (the Master) to recommend a final resolution of all claims asserted against the Estate, including the tax claim. After briefing and argument the Master issued a report concluding that the Estate was not a QSF and recommending denial of the tax claim. The district court adopted the Master's report and recommendation.
The United States appeals. Appellees are the Receiver and the Group 2 Claimants (Claimants), a set of claimants for whom the district court appointed counsel. (The Group 1 Claimants, who had separate counsel, have settled and are not parties on appeal.)
In the order being appealed, the district court addressed the IRS's tax claim without addressing the individual claims of the investors. We entered a show-cause order directing the parties to file memoranda regarding the appealability of the district court's order, because only final orders are appealable as of right, and, in general, an order is not final unless it disposes of all remaining claims, see Ashley Creek Phosphate Co. v. Chevron USA, Inc., 315 F.3d 1245, 1263 (10th Cir.2003). In their memoranda the parties agreed that immediate appeal was available under the collateral order doctrine. See Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). The jurisdictional issue was then referred to the merits panel. Before we heard oral argument, however, the parties asked the district court to certify its order as final and appealable under Federal Rule of Civil Procedure 54(b). The district court, by order dated May 17, 2002, issued the requested certification.
On appeal neither party questions our jurisdiction. Nor do we. If the district court's original order was not a final order under the collateral order doctrine, it became a final order when the district court properly certified it under Rule 54(b). After obtaining certification under Rule 54(b), a party need not file a second notice of appeal. "We will deem the notice of appeal to ripen as of the date of certification and will accept jurisdiction pursuant to the savings provision of Fed. R.App. P. 4(a)(2)." Lewis v. B.F. Goodrich Co., 850 F.2d 641, 645 (10th Cir.1988) (en banc). Our jurisdiction being secure, no further discussion is necessary.
The United States claims that the Estate is a taxable entity, subject to tax as a QSF on any income generated by assets in the Estate. Appellees, on the other hand, dispute that the Estate is a QSF, arguing, in essence, that the Estate's assets should be treated as if owned by the claimants to whom those assets will ultimately be distributed. Because those claimants are German citizens, a treaty exempts them from United States taxes on capital gains and other investment income. Thus, the stakes are high.
Treasury Regulation § 1.468B-1, entitled "Qualified settlement funds," and accompanying regulations (§§ 1.468B-2, -3, and -4) constitute an effort to deal with the various tax questions that arise when an independent settlement fund is created to pay a debtor's liabilities. The proper approach to taxation of financial transactions involving such a...
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