CHRISTINE M. ARGUELLO, District Judge.
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.
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.)
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:
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% ownership
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.
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 the distribution 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, "We can 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:
Hopkins, 859 F.Supp. at 212 (citing Rodgers, 461 U.S. at 710-11). The Rodgers Court further emphasized that "the limited discretion accorded by § 7403 should be exercised rigorously and sparingly, keeping in mind the [g]overnment's paramount interest in prompt and certain collection of delinquent taxes." Rodgers, 461 at 711; See United States v. Winsper, 680 F.3d 482, 489 (6th Cir. 2012) ("[T]he Rodgers factors . . . address the scope of . . . the district court's discretion not to foreclose" and are only required if the sale would cause undue hardship to an innocent third-party).
Pursuant to the reasoning in Rodgers and its progeny, the Court concludes that the Government may indeed seek a decree of sale for AFC in its entirety, rather than only Mr. Wilhite's ownership interest. Because Mrs. Wilhite also has an interest in the company, the Court turns to the Rodgers balancing test ensure that a sale is appropriate in these circumstances.
First, the Court finds that the Government's financial interest would be prejudiced if sale of the entire company was denied and the Government was limited to selling only Mr. Wilhite's interest. Potential purchasers of the company would not be likely to buy, or at least to pay fair market value for, the majority interest in a company where a minority interest member — who is the wife of the majority interest owner and who, on paper, appears very involved in the company — would continue to participate. Having to sell Mr. Wilhite's individual interest at a discounted price, or not being able to sell it at all, would mitigate the Government's recovery of Mr. Wilhite's significant unpaid restitution. This factor therefore weighs in favor of a forced sale.
Second, the Court finds that the Government has shown that Mrs. Wilhite has not and cannot show any legal expectation that the subject property would be protected from a forced sale. The restitution order creating a lien on all property Mr. Wilhite owns or in which he has an interest was entered in 2001, and the Government publicly recorded its lien that same year. Mrs. Wilhite has therefore been aware of her husband's lien since at least that date. She has also been substantially involved in the present litigation, where, as mentioned, the Government has openly pursued enforcement of its lien on Mr. Wilhite's interest in AFC since at least 2015. Indeed, as this Court set forth in its order denying Mrs. Wilhite's Motion to Quash, she and Mr. Wilhite were well-aware of Mr. Wilhite's prior significant tax debt to the IRS when they started AFC and their conduct related to AFC was done with the intent to hide Mr. Wilhite's assets and defraud the Government. Considering Mr. Wilhite's active involvement in AFC, the Wilhites' joint efforts to hide his involvement, and the established law in Colorado that "the district court generally has the discretion to foreclose the lien on the entire property, on only the taxpayer's interest, or not at all," United States v. Morgan, 554 F.Supp. 582, 587-88 (D. Colo. 1982), Mrs. Wilhite can hardly claim surprise about a sale. This factor weighs heavily in favor of a sale.
Third, the Court acknowledges that Mrs. Wilhite may suffer some prejudice but still finds that the third factor weighs in favor of a sale. See Rodgers, 461 U.S. at 711. Mrs. Wilhite has invested time and energy into AFC and a sale may affect or halt her monthly income. However, under the specific circumstances of this case, those setbacks do not outweigh the Government's right to force the sale and recover what it can of Mr. Wilhite's significant outstanding restitution obligation. Following the sale, Mrs. Wilhite will be compensated in proportion to her interest in AFC (26.1%), or in the alternative, Mrs. Wilhite may bid at the foreclosure sale to protect her interest and avoid foreclosure. With these protections in place, the prejudice to Mrs. Wilhite is minimal.
Finally, for the reasons previously articulated, Mrs. Wilhite's minority interest in AFC favors a forced sale. As this Court articulated in previous orders, Mrs. Wilhite, while declaring significant involvement in AFC, served merely as a "nominee" for Mr. Wilhite, the evident owner and operator of the company since 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.").
Accordingly, having considered the totality of circumstances in this case and the applicable law, the Court concludes that a forced sale of AFC is warranted.
In addition to the Government's lien flowing from Mr. Wilhite's criminal restitution obligation, Kubota Credit Corporation also has an outstanding lien on equipment owned by AFC. (Doc. # 182-1.) The Government argues that its lien is superior to Kubota's lien because it was perfected earlier in time. The Wilhites, however, contend that Kubota's lien is superior because, under Colorado law, if AFC is sold, the proceeds must be used to pay all AFC's debts before any proceeds are distributed to AFC's members.
The Wilhites' argument is misplaced. Federal law, not state law, determines the priority of competing liens asserted against Mr. Wilhite's property or rights to property. United States v. Vorreiter, 355 U.S. 15. Indeed, "It is beyond dispute that the `effect of a lien in relation to a provision of federal law for the collection of debts owing the United States is always a federal question." United States v. Security Trust & Savings Bank, 340 U.S. 47, 49 (1950). "The application of . . . federal law in reconciling the claims of competing lienors is based both upon logic and sound legal principles." Aquilino v. United States, 363 U.S. 509, 513-14 (1960). It promotes "the necessity for a uniform administration of the federal revenue statutes." Id. In accordance with 26 U.S.C. § 6323, where a "third party also claims interest in taxpayer's property, basic priority rule of first in time, first in right controls priority of tax lien versus third-party claim, unless Congress has created different priority rule to govern particular situation."
Because the Government's restitution lien was "first in time," it shall be satisfied before Kubota's equipment lien.
Federal courts have an inherent equitable power to appoint a receiver to manage a defendant's assets during the pendency of litigation. See, e.g., Tanzer v. Huffines, 408 F.2d 42, 43 (3rd Cir. 1969); Levin v. Garfinkle, 514 F.Supp. 1160, 1163 (E. D. Pa. 1981). More pointedly here, the Internal Revenue Code specifically provides that, at the Government's request, a court may "appoint a receiver to enforce the lien, or, upon certification by the Secretary during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity." I.R.C. § 7403(d).
The Government requests the appointment of a receiver and has provided the requisite proof of necessity. When a request is made for an appointment of a receiver under § 7403(d), the Government needs only to make a prima facie showing that a substantial tax liability probably exists and that the Government's collection efforts may be jeopardized if a receiver is not appointed. See United States v. O'Connor, 291 F.2d 520, 525 (2d Cir. 1961); Florida v. United States, 285 F.2d 596, 598 (8th Cir.1960). The appointment of a receiver is an especially appropriate remedy in cases involving fraud and the possible dissipation of assets since the primary consideration in determining whether to appoint a receiver is the necessity to protect, conserve and administer property pending final disposition of a suit. See, e.g., Consolidated Rail Corp. v. Fore River Ry. Co., 861 F.2d 322, 326-27 (1st Cir. 1988).
Considering the history of this case, Mr. Wilhite's underlying criminal offense, his substantial restitution obligations, and the Wilhites' persistent attempts to conceal Mr. Wilhite's involvement and ownership interest in AFC, the Court has no trouble concluding that the appointment of a receiver is appropriate. The Court therefore appoints Mr. Edward B. Cordes
For the foregoing reasons, the Court ORDERS as follows:
