In the

United States Court of Appeals

For the Seventh Circuit

No. 10-3718

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

PETER G. ROGAN,

Defendant.

410 MONTGOMERY, LLC, et al.,

Garnishees.

DIANE WHITLOW and

ESTATE OF JERRY WHITLOW,

Claimants-Appellants.

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 02 C 3310—John W. Darrah, Judge.

ARGUED APRIL 14, 2011—DECIDED MAY 12, 2011

Before EASTERBROOK, Chief Judge, and ROVNER and

SYKES, Circuit Judges.

EASTERBROOK, Chief Judge. The United States has a

judgment for more than $60 million against Peter Rogan,
2 No. 10-3718

who defrauded the Medicare and Medicaid programs.

See United States v. Rogan, 517 F.3d 449 (7th Cir. 2008).

Rogan, who has fled the country, concealed his wealth

in an attempt to frustrate his many creditors. See, e.g.,

Dexia Crédit Local v. Rogan, 629 F.3d 612 (7th Cir. 2010).

By tracing Rogan’s assets, the United States discovered

that he had invested in 410 Montgomery LLC, a firm

that built housing in Georgia. (Rogan made these investments through foreign trusts, some nominally owned by

his relatives. We disregard the trusts and treat Rogan

as the investor.)

The United States served 410 Montgomery with a writ

of garnishment against Rogan’s membership interest in

the business venture. See 28 U.S.C. §3205. The company

sold its holdings, paid its secured creditors, liquidated,

and placed the money in escrow. The district court approved distributions for closing costs. The residue came

to a little more than $4 million, and the United States

asked for all of it.

Jerry Whitlow and Diane Whitlow filed claims to about

$175,000 of the amount on deposit. (Jerry Whitlow has

since died, and his estate has been substituted as a

party. We refer to Diane Whitlow and the estate as the

Whitlows.) The Whitlows say that they own a onethird interest in Taylor Row LLC, to which 410 Montgomery LLC owes about $475,000. The United States

opposed the Whitlows’ claims, relying on §3205(c)(8),

which provides that a writ of garnishment under §3205

“shall have priority over writs which are issued later

in time.” The Whitlows replied that their entitlement
No. 10-3718 3

does not depend on a writ but on Georgia law, which

establishes that creditors must be paid before equity

investors. Taylor Row is a creditor of 410 Montgomery,

while the United States stepped into the shoes of

Rogan, an equity investor. (If 410 Montgomery had been

a corporation, Rogan would have been a shareholder;

because 410 Montgomery was a limited liability company, he held membership units. These are functionally

similar to shares of stock.) The district court held

that §3205 displaces Georgia law. Because the United

States obtained a writ of garnishment, while Taylor

Row never obtained a writ of any kind, all of the money

belongs to the United States, the court concluded.

The disputed funds remain in the escrow pending

this appeal.

The Whitlows contend, and the United States concedes,

that, if Georgia law governs, any debt to Taylor Row

must be paid before funds can be disbursed to 410 Montgomery’s equity investors. Normally state law prescribes

what the United States can attach or collect as a creditor.

United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979). The

United States contends that §3205 displaces state law

once the national government obtains a writ of garnishment. That is not what §3205 says, however. Subsection

3205(c)(8), on which the United States relies, establishes

priority among competing writs. If the Whitlows were

trying to collect from Rogan’s assets, then §3205(c)(8)

would give priority to the United States. See United

States v. Kollintzas, 501 F.3d 796, 802–03 (7th Cir. 2007),

which we discuss later. But the Whitlows have not made
4 No. 10-3718

a claim against Rogan’s assets; their claim is against

410 Montgomery’s assets (represented by the funds in

escrow).

Subsection 3205(c)(8) does not specify what a writ

covers. Does the writ of garnishment give the United

States rights directly in 410 Montgomery’s assets, or only

in Rogan’s equity interest in that firm? Although the

question is a novel one—no appellate decision discusses

it—novelty does not imply difficulty. Section 3205(a)

supplies the answer. It reads:

A court may issue a writ of garnishment

against property (including nonexempt disposable earnings) in which the debtor has a substantial nonexempt interest and which is in the possession, custody, or control of a person other

than the debtor, in order to satisfy the judgment

against the debtor. Co-owned property shall be

subject to garnishment to the same extent as coowned property is subject to garnishment under

the law of the State in which such property is

located. A court may issue simultaneous separate

writs of garnishment to several garnishees. A writ

of garnishment issued under this subsection shall

be continuing and shall terminate only as provided in subsection (c)(10).

This tells us two things. First, the writ covers the property

“in which the debtor has a substantial nonexempt

interest”—which is to say, Rogan’s membership units in

410 Montgomery LLC, not the real estate that 410 Montgomery developed. Investors in corporations and LLCs
No. 10-3718 5

own tradable shares or units; they do not own the company’s assets. The separation of investment interests

from operating assets is a fundamental premise of

business law. See Landreth Timber Co. v. Landreth, 471 U.S.

681 (1985). Equity investors are residual claimants; they

get only what is left after debts have been paid. Second,

if we were nonetheless to treat 410 Montgomery’s assets

as property that Rogan “co-owned” with other investors (including the banks and Taylor Row), then the

law of the state in which the property is located determines how far the writ of garnishment reaches. That’s

Georgia law—and the parties agree that a writ under

Georgia law would not vault equity investor Rogan

(and hence would not promote the United States) over

creditors’ interests.

An example may help. Suppose Rogan invested

$2 million in 410 Montgomery LLC and the Whitlows

$2 million; each thus would have 50% of the membership interests, and each would be entitled to 50% of any

liquidating distribution. Both interests in this example

are equity. Neither Rogan nor the Whitlows could have

obtained a judgment or lien against 410 Montgomery’s

assets; their interest is in the firm, not the assets it owned.

The United States gets a judgment against Rogan, garnishes his equity interest, and causes 410 Montgomery

to liquidate so that Rogan’s stake can be paid over. Let

us suppose that the condos sell for $6 million (in other

words, that the real estate venture made a $2 million

profit). What the United States argues here is that it

would receive the entire $6 million and the Whitlows

nothing. This is the only possible outcome, the United
6 No. 10-3718

States contends, because the Whitlows did not have a

writ against 410 Montgomery. But why should the

United States be entitled to the Whitlows’ half of the

business, when §3205(a) says that the writ applies only

to Rogan’s assets? We should not impute to Congress

a plan to confiscate private property without just compensation (or, indeed, any compensation). And if the

Whitlows keep their interest when they are equity investors, they assuredly keep it as debt investors (creditors), for debt has higher priority than equity.

The United States relies heavily on Kollintzas. Frank

Kollintzas was ordered to pay some $25 million in restitution. He absconded, and the United States obtained a

lien against some of his assets, such as pension plans,

checking accounts, and the cash surrender value of his

life insurance policies. See 18 U.S.C. §3613(c). Frank’s

wife Joanna filed for divorce and made a claim to some

of Frank’s assets; she contended that the divorce court

should determine her share. We held that the right

forum is the federal court, which issued the judgment

that created the lien, and that the United States had an

interest in Frank’s assets senior to Joanna’s. This decision

rested on two conclusions: first, that Joanna was making

a claim to some of Frank’s assets (rather than, say, to

a marital share in jointly owned assets such as a residence); second, that Indiana law would give Joanna’s

claim a priority date as of the divorce decree, which

came after the lien had been perfected. 501 F.3d at 803.

Kollintzas does not help the United States, because the

Whitlows are not claiming any of Rogan’s assets. As

we have emphasized, what Rogan owned was a mem-
No. 10-3718 7

bership interest in 410 Montgomery LLC. The Whitlows

don’t want any part of that equity interest; their claim

is against the LLC’s own assets, in which creditors

have entitlements senior to those of equity investors.

Our conclusion that §3205 does not seize third-party

interests recognized by state law leaves several questions

unanswered. Did 410 Montgomery LLC owe a debt to

Taylor Row LLC? If so, how much? If it owed money

to Taylor Row LLC, why are the Whitlows the right

parties to receive that money? Just as Rogan’s investment

in 410 Montgomery LLC did not give Rogan a property

interest in the firm’s assets (Rogan owned only his membership interests), so the Whitlows’ investment in Taylor

Row LLC did not give them an interest in that firm’s

assets. Georgia law allows investors in limited liability

companies, as in corporations, to pursue derivative

actions, see Ga. Code §14-11-801; Uniform Limited

Liability Company Act §902 (rev. 2006), but the

Whitlows have not followed that route. Instead they

bypassed Taylor Row and asserted a claim directly

against 410 Montgomery. A direct claim would cut out

other equity investors in, and creditors of, Taylor Row.

The potential to undermine such interests is one reason

why investors can’t pierce their own firm’s structure

and assert its rights directly. See Mid-State Fertilizer Co.

v. Exchange National Bank, 877 F.2d 1333 (7th Cir. 1989).

Georgia does not appear to permit a suit of this nature;

direct actions are proper only with respect to an

investor’s own rights against the LLC or its other members. Southwest Health & Wellness, L.L.C. v. Work, 282 Ga.

App. 619, 639 S.E.2d 570 (2006); see also Uniform Limited
8 No. 10-3718

Liability Company Act §901. Does some other provision

of Georgia law permit the sort of direct claim that the

Whitlows have presented? Has the United States forfeited any objection to the direct nature of this claim?

These and any other material issues are open on remand.

The judgment is vacated, and the case is remanded

for proceedings consistent with this opinion.

5-12-11