CHRISTINE M. ARGUELLO, District Judge.
This matter is before the Court to determine the percentage of Mr. Michael David Wilhite's ownership interest in Advanced Floor Concepts, LLC (AFC) and in the assets of the Yahab Foundation. Having thoroughly considered the parties' arguments, expert testimony, and relevant legal authority, the Court concludes that Mr. Wilhite has a 73.9% interest in AFC and a 72.4% interest in the $200,000 that AFC transferred to Yahab in 2014. The Court further concludes that this interest constitutes property that is subject to garnishment under federal law.
On June 23, 2016, this Court issued an Order concluding that, under the Colorado Uniform Trust Act (CUFTA) and Holman v. United States, 505 F.3d 1060 (10th Cir. 2007), Mr. Wilhite holds a property interest in AFC and any assets stemming from AFC, even though his wife is listed as the sole founder and owner of the company. (Doc. # 121, p. 27-28.) The Court specifically found that the circumstances surrounding the creation of AFC (and the transfer of funds to the Yahab Foundation) demonstrate Mr. Wilhite's "actual intent to hinder, delay, or defraud" his creditors. (Id.)
The Court then asked the parties to brief the best method for determining the percentage of Mr. Wilhite's interest in the companies. (Id. at 28.) Finding the written briefing lacking, the Court set the matter for a hearing, which occurred over the course of two days, March 23, 2017, and April 14, 2017. (Doc. ## 151, 154.) Following the hearing, the parties submitted to the Court proposed findings of fact and conclusions of law on the issue. (Doc. ## 155, 156.) The parties propose as follows:
For the reasons set forth below, the Court finds the Government's expert's conclusions more credible and the Government's position more persuasive.
In conducting the instant analysis, the Court sits in equity. Miller v. Kaiser, 433 P.2d 772, 775 (1967); Double Oak Const., L.L.C. v. Cornerstone Dev. Int'l, L.L.C., 97 P.3d 140, 147 (Colo. App. 2003). The purpose of a court sitting in equity is to promote and achieve justice with some degree of flexibility; to this end, the court is to examine substance over form. Garrett v. Arrowhead Imp. Ass'n, 826 P.2d 850, 855 (Colo. 1992). "Equity . . . has to do with the substance and reality of a transaction — not the form and appearance which it may be made to assume. . . . [I]t is the real intention of the parties, and the true nature of the transaction that concern equity; . . . .no matter how many papers may have been executed to cover up the real purpose and give to the transaction an appearance other than the true one." Rocky Mountain Gold Mines v. Gold, Silver, & Tungsten, 93 P.2d 973, 982 (Colo. 1939).
The Court looks partly to the Colorado Limited Liability Company Act (CLLCA), which governs the interests and contributions of LLC members, to assess Mr. Wilhite's membership interest
In addition, § 7-80-108 binds members of an LLC to its operating agreement and requires that this Court give that agreement "maximum effect." Weinstein v. Colborn Foodbotics, LLC, 302 P.3d 263, 266 (Colo. 2013). The Court therefore also looks to AFC's Operating Agreement when assessing Mr. Wilhite's membership interest.
Although AFC did not maintain these accounts, the Court nonetheless finds that these provisions demonstrate the company's intent and understanding behind membership interests. That Mr. Wilhite, the CEO, did not sign the Operating Agreement does not mean that it is inapplicable to him. Indeed, Mr. Wilhite's signature is missing from numerous AFC documents despite his clear involvement in the company from its inception. The Court also rejects the Wilhites' argument that the Operating Agreement does not apply because Mrs. Wilhite began AFC as a single-member LLC. The Operating Agreement clearly contemplates a multi-member organization and this Court has already concluded that Mr. Wilhite is considered a member, and indeed owner, of the Company. The 1997 Operating Agreement even concludes with Mrs. Wilhite certifying "that the Company's members have adopted the terms of this document." (Def. Ex. D.) The Wilhites' continued characterization of the company as a single-member entity is merely an attempt to further conceal the realities of AFC from the Court. Even Mr. Callison, the Wilhites' expert agreed that an LLC's operating agreement is "typically where [he] would go" to determine a member's interest in the company. (Doc. # 151, p. 162.)
Synthesizing the principles set forth in the CLLCA and AFC's Operating Agreement, the Court's finds it appropriate to conduct a two-part analysis. The Court's first task is to determine the value of Mr. Wilhite's contributions to AFC. Next, the Court must factor in any profits, losses, or distributions applicable to Mr. Wilhite and determine how they may affect or drive his overall interest in AFC. The figures resulting from these two steps will dictate the ultimate percentage of interest in AFC attributable to Mr. Wilhite.
AFC's Operating Agreement states that a member's contributions may be in the form of "cash, property, or services." (Def. Ex. 4, p. 3, ¶ 1.) Section 7-80-501 similarly provides, "[t]he contribution of a member [of a limited liability company] may be in cash, property, or services rendered or a promissory note or other obligation to contribute cash or property or to perform services." All parties and both experts agree that Mr. Wilhite's contributions fall into two categories: (1) service contributions and (2) financial or cash contributions. (Doc. # 151, p. 19 (Mr. Petron), 170 (Mr. Callison).)
The parties and experts also agree that Mr. Wilhite's uncompensated services should form the basis for his service contributions. They disagree, however, on the value of Mr. Wilhite's uncompensated services and whether to include services provided after 2008, when he claims to have retired. Having thoroughly reviewed the dueling expert recommendations and supporting evidence, the Court finds Mr. Petron's approach more reasonable and reliable than Mr. Callison's approach.
First, Mr. Petron queried a nationally-reliable database from the Economic Research Institute (ERI), using data points that were reflective of AFC's size, operation, and location. (See Doc. # 151 at p. 20-21, wherein Mr. Petron explained that although typically used by Fortune 500 companies, the ERI database can also be used to set compensation rates for smaller-sized companies at "different geographic areas across the country"); see also Warren v. Campbell Farming Corp., No. CV 05-441 MV/RLP, 2009 WL 10664916, at *11 (D.N.M. Mar. 30, 2009), aff'd, 461 F. App'x 779 (10th Cir. 2012) (commenting on the reliability of the ERI database). He specifically queried the database using the following categories: 1) Area (Castle Rock, Colorado, AFC's headquarters); 2) Industry: Structural Steel and Precast Concrete Contractors (using North American Industry Classification System ("NAICS") code 238120); and 3) Organization Size (AFC's revenue by year). (Pl. Ex. 51, ¶ 24.) Mr. Petron also included in his ERI compensation search Mr. Wilhite's position at AFC, which this Court previously classified as CEO. (Id.) Mr. Petron then broke down the fair market value of Mr. and Mrs. Wilhite's uncompensated services by year to account for economic change, inflation, and the like. His expert report is thorough and well-supported and his testimony on this topic was credible.
Ultimately, Mr. Petron found the fair market value of Mr. Wilhite's uncompensated services between 1997 and 2016 to be $4,230,393. He calculated the fair market value of Mrs. Wilhite's uncompensated services between 1997 and 2016 to be $1,277,045.
The Wilhites dispute Mr. Petron's service calculation because the allege:
On these points, the Wilhites appear utterly divorced from reality. Indeed, the distance they occupy from the veracity of the facts in this case places them on the outskirts of Dante's Eighth Circle.
First, despite all the denials and smoke and mirrors information submitted by Mr. and Mrs. Wilhite, the credible evidence shows that Mr. Wilhite operated as the CEO of AFC from its inception. See Rocky Mountain Gold Mines v. Gold, Silver, & Tungsten, 93 P.2d 973, 982 (Colo. 1939) (the court's goal is to determine "the real intention of the parties and the true nature of the transaction . . . no matter how many papers may have been executed to cover up the real purpose and give to the transaction an appearance other than the true one.").
The following evidence supports this conclusion:
Thus, to base Mr. Wilhite's "services-rendered" contribution on anything less than CEO or owner status would not only inaccurately reflect the fair market value of his contributions to AFC, it would also legitimize and perpetuate a fraudulent scheme.
Second, this Court remains unconvinced that Mr. WIlhite "retired" in 2008. The only evidence supporting the Wilhites' claim that Mr. Wilhite retired in August of 2008 due to transient ischemic attacks or mini-strokes and sleep apnea is their self-serving testimony, which this Court found to be non-credible. In fact, substantial evidence in this case shows Mr. Wilhite's testimony under oath to the Court that he "retired" in 2008 is blatantly false:
Accordingly, the Court finds Mr. Petron's service calculation to be reasonable and accurate and rejects the Wilhites' contentions to the contrary. In so concluding, the Court also rejects Mr. Callison's opinion that Mr. Wilhite contributed $110,121 in uncompensated services and Mrs. Wilhite contributed $57,750 in uncompensated services. Mr. Callison's totals are based on two primary assumptions: (1) that Mr. and Mrs. Wilhite provided an equal amount of services and that the value of their time was equal; and (2) that no services after 2008 should be attributable to Mr. Wilhite because they occurred ten years after AFC's inception. Pursuant to the above-listed facts and analysis, this Court finds these assumptions to be faulty and Mr. Callison's findings on this issue unreliable and unsupported.
Next, the Court examines the Wilhites' financial contributions to AFC.
The parties and experts agree that financial contributions may include any cash paid to the company with the exception of loans, particularly ones like those in this case that have been repaid. Although this Court previously determined that Mr. Wilhite contributed at least $28,500 to AFC at its inception, the Court has reconsidered the issue and does not now consider those loans to be interest-earning contributions. Because no other evidence or testimony has been presented suggesting that Mr. Wilhite provided any cash or financial support to AFC, the Court agrees with Mr. Petron that he should be credited with zero financial contributions. The Court also agrees with Mr. Petron that Mrs. Wilhite should be credited with a cash contribution of $159,862 based on her contributions to AFC in 2009, 2010, 2013, and 2016 as recorded by AFC and reflected in Mr. Petron's condensed balance sheets. (Pl. Ex. 58, 70.) Ultimately, the Court finds Mr. Petron's breakdown of the Wilhites' cash contributions to be reasonable and adequately supported by the evidence and testimony presented at the hearing.
In so concluding, the Court rejects Mr. Callison's opinions that the following items should also be treated as financial contributions: (1) foregone interest on loans provided to AFC, and (2) Mrs. Wilhite's personal guarantees on those loans. With respect to the first, the Court finds that Mr. Callison's foregone interest calculations on loans that were either repaid or provided by someone other than the Wilhites are speculative and unsupported. The calculations result in negligible figures that are ultimately irrelevant to this Court's analysis. (Doc. # 151, p. 173-74.)
With regard to the second, the Court likewise finds Mr. Callison's guarantee-based contribution figures to be unsupported and declines to include them. The guarantees are tied to loans — loans which this Court and the parties have already determined do not qualify as contributions. Moreover, the guarantees were never called on and the risk never tempted. It makes little sense to this Court to tie a contribution credit to a guarantee because it is "risky" but not to a loan that is much riskier because the money was actually expended. Further, Mr. Callison assigned arbitrary percentages to Mrs. Wilhite's guarantees based on his subjective perception of the risk involved. He drew a 33% contribution credit from the 1.8 million dollar loan and a 10% credit from the $500,000 supplier loan without reference to applicable legal authority or practice standards.
Ultimately, the Court finds that Mr. Wilhite's service and financial contributions total $4,230,393 and Ms. Wilhite's contributions total $1,436,907. As mentioned, to best ascertain Mr. Wilhite's ownership percentage, the Court must next factor in AFC's profits, losses, and distributions.
AFC's Operating Agreement provides for the creation of capital accounts that not only reflect each member's contributions to the LLC, but also "each member's share of profits in [the company], decreased by each member's share of losses and expenses." (Def. Ex. D, p. 4, ¶ 4; E, p. 1.)
Mr. Callison did not create capital accounts for the Wilhites; it does not appear that he considered AFC's profits, losses, and distributions in his assessment at all. Mr. Petron, however, determined capital accounts to be the best mechanism for folding AFC's profits, losses, and distributions into its member's contribution totals, and he therefore conducted a lengthy and comprehensive analysis to formulate such accounts for the Wilhites. After reviewing AFC's financial documents, Mr. Petron apportioned AFC's yearly profits, losses, and distributions between the Wilhites.
Ultimately, as of 2016, Mr. Petron attributed to Mr. Wilhite a 73.9% interest in AFC and a 26.1% interest to Mrs. Wilhite. (Pl. Ex. 70.)
Mrs. Wilhite created Yahab in 2014 and funded it with approximately $200,000 from AFC's operating account. (Doc. # 121 at 10.) This Court previously concluded that Mr. Wilhite's ownership percentage in AFC also applies to this $200,000. (Doc. ## 121, 136). Neither party has provided this Court with any reason to reconsider that ruling or trace more of Yahab's assets to AFC, and the Court declines to do so.
Because the funds were transferred in 2014, the Court applies Mr. Wilhite's ownership interest percentage from that year. Relying again on Mr. Petron's calculations, which this Court has already deemed reasonable and reliable, the Court imputes to Mr. Wilhite 72.4%, or $144,800, of the $200,000 that were transferred to Yahab in 2014.
Having resolved the value Mr. Wilhite's membership interest in AFC and funds transferred to Yahab, the only remaining issue before the Court is whether the Government may garnish that interest and the related funds. The Court therefore turns to the determination of whether the interest and funds qualify as property under federal law. Holman, 505 F.3d at 1067.
To satisfy a tax deficiency, the Government may impose a lien on any "property" or "rights to property" belonging to the taxpayer.
The Federal Debt Collection Practices Act (FDCPA) provides another avenue for the "the United States . . . to recover a judgment on a debt," including criminal restitution.
The FDCPA provides that "the United States may levy `[a]ll property in which the judgment debtor has a substantial nonexempt interest.'" United States v. Duran, 701 F.3d 912, 915 (11th Cir. 2012) (citing 28 U.S.C. §§ 3202(a), 3203). "The United States may levy `property which is co-owned by a debtor and any other person only to the extent allowed by the law of the State where the property is located.'" Id. (quoting § 3010(a)).
Applying these legal principles, the Court has no trouble concluding that Mr. Wilhite's 73.9% membership interest in AFC and his 72.4% interest in the $200,000 transferred to Yahab constitute "property" under the federal tax lien statute and the FDCPA such that it is subject to levy by writ of execution.
For the foregoing reasons, the Court concludes that Mr. Wilhite has a 73.9% interest in AFC and a 72.4% interest in the $200,000 in funds transferred from AFC to Yahab. The Court also concludes that this interest constitutes property that may be garnished by the Government to satisfy Mr. Wilhite's substantial and long-outstanding restitution obligations.
