## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it

N o. 10

- 3718 U NI T ED S TATE SOF A MERI CA, P la intif f-A pp ellee, v. P ETER G. R OGAN, D e f e ndan t
. 410 M O NTG O M ERY, LLC , e tal ., G a rnish ees . D IANE W H I T L OWa nd E S TATE OF J ERRY W H I T L OW, C laim ants-A ppell ants
.

A pp eal from the United S t ates Di strictC our t fo r the N o rthernDi stricto f Illino is, Eas tern Div isi on. No . 02 C3310

—Jo hn W. Darrah, Ju dge

.
A RG UE D A PRI L 14, 2011

— D ECI DE D M AY 12, 2011

Befo re E A S T ER B R OO K, Chi e f Judg e, a nd R OV NERa nd S YKES, C ircu it Judges . E A S T E RBR OO K, Chi e

f Judg e . The U ni ted S tat es has a j udg m en t f o rmor e th an$ 60 mil l i o n a g ainst P eter Ro g an,2 N o. 10

- 3718

w ho defra ud ed the M edi car e a nd M edic aid prog ra m s. S e e U nited St at e s v. Rogan , 517 F.3d 449 ( 7th Cir. 2008). Rogan, wh o has fl ed the countr y, co nceal ed hi s weal th inan at te m p t t o fru st ra te h is m a n y c re d ito rs . See , e.g., D exi a Crédi tLo ca l v. Rogan , 629 F. 3d 612 ( 7th C ir. 2 0 1 0). By tr aci ng Rog an’ s as se ts, the U ni ted S tat es disc ove re d th at he had i nv ested i n 41 0 M ont gom ery L L C , a firm that bui l t housi ng i n Georg i a. ( Rogan m ade thes e in vest
m ents thro ugh f or ei gn trusts, so m e no m i nal l y o w ned by his rel ati ves. W e di sr ega rd the tr usts and tre at Rogan as th e in ve st or .) T h e U n ite d Sta te s s e r v e d 4 10 M on tg om er y w ith a w rit of ga rn ish m en t a ga in st R og an ’s m em b er sh ip int er es t in th e bus i ne ss v en tu r e. S ee 2 8 U

. S

. C. § 32 05

. The c o m pan y s o l d i t s h o l d i n g s , p a i d i t s s e c u r e d c r e d i t o r s , l i qu i d a t e d, a nd p l a c e d the m oney ine s c r o w. T he di s t r i c tc o ur ta pp r o v e d d i s t r ib u t i o n s f o rc l o s i n gc o s t s . T h e r e s i d u e c a me to a l i ttl e m or e than $ 4 m i l l i on, and the U ni ted S tat es ask ed f oral lo fi t. J er r y W hi tl o w and Di an e W hi tl o w fi l ed cl ai m s to abo ut $175,00 0 o fthe am ount o n deposi t. (J er ryW hi tl ow has si nce di ed, and hi s e sta te h as b een s ubsti tuted as a pa r t y . We r e fe r t o Di a n e Whi t l o w a n d th e e s t a t e a s t he W hi t l o ws . ) Th e W hi t l o ws s a y tha t the y o wn a o nethi r d int e r e s ti n Ta y l o rR o w LL C, t o wh i c h 4 1 0 Mo nt
gom er y LLC o w es about $475 , 000. T h e U ni ted S tat es op p osed the W hitlow s’ cl aim s, relyi n g on §32 05(c)(8), w hi ch p ro vi des thata w ri t o fga rni shm ent under §320 5 “shal lhave prio ri ty ove r w ri ts w hi ch ar e i ssued l ate r i n t i m e. ” The W hi tl o ws r epl i ed th atthe i re nt i tl ementN o. 10

- 3718 3 does not depend o n a wri t b u t on G eor gi a l aw , wh i ch est abl i shes that cre dit or s m ust be pai d bef or e e quity i nvest or s. Tay lor Row i s a cr edi toro f41 0 M ontg om er y, w hi l e the U ni ted S tat es ste pp ed i nto the s hoes o f R og an , an e quity invest or . ( I f41 0 M ontg om er y had be en a corp o r a t ion, Roga n w ou ld h ave be en a shareh older; b e c a u s e 4 1 0 Mo n t g o me r yw a s a l i mi t e d l i ab i l i t y c o mp an y, h e h e l d m em b er sh ip u n its . Th es e a re fu n c tio n ally sim ilar to sh ar e s o fs to c k.) T h e d ist ric t c ou rth eld that §320 5 di spl aces Geor gi a l aw . Because t h e Un i ted St ate s obt ai ned a w ri t of garni shm ent, w h ile Tayl or Row neve r obt ai ned a wri t o fany ki nd , al lo fthe m oney b e l o ng s t o the Uni t e d S t a t es , the c o ur tc o nc l ud e d. The di spu te d funds r emai n i n th e es cr ow pe ndi ng th is a p p ea l. The W hi tl ows conte nd , and the Un i ted S tat es concedes, that, if G eor gi a l aw go ver ns, any debt t o Tayl orRow m ust be pai d bef or e fund s ca n be disb urse d to 410 M ontg o mer y ’ s e qu i t y i nv e s t o r s . No r mal l y s t a t e l a w pr e s c r ib es w ha t the U nited States can at t a c h o r coll ect as a cred itor. U ni t e d St at e s v. K i m b e l l Fo ods, Inc . , 4 40 U. S

. 7 15 ( 19 79 )

. The U ni ted S tat es conte nd s that §3205 di spl aces st ate l aw o nc e th e na ti o na lg o ve r nm en t o bt ains a wri t o fg arni sh

m ent. That i s no t wh at § 3205 sa ys, however

. S ubsect i on 3205 ( c) ( 8) , on wh i ch the U ni ted S tat es re l i es, es tabl i shes p rior ity am ong com p eting w r its. I f th e W hitlow s w ere tr yi ng to co l l ect fro m Rog an ’s a sse ts, then §320 5( c) ( 8) w oul d gi ve pri or i ty to th e Un i ted S tat es. S ee U nited St at e s v. Kol l i ntzas , 501 F.3d 796 , 802–0 3 (7th C ir. 2007), whi c h we di s c us s l a t e r . Bu tthe Whi t l o ws have no tma de4 N o. 10

- 3718 a cl ai m ag ai nst Ro gan’ s ass ets ; thei r cl ai m i s a gainst 41 0 M on tg om er y’s as se ts (rep re se n te d by th e fu n d s in escrow ). Su b se c tio n 32 05 ( c ) ( 8 ) d oe s n otsp ec ify w h at a w rit cove rs . Does the w rito fga rni shm ent g i ve the Unite d St at es righ ts d ire c tly in 4 10 M on tg om er y’s as se ts , or on ly i n Rog a n ’ s e q u i t y i n t e r e s ti n th a tfi r m? Al th o u g h the que st i o n i s a no ve lo ne

— no a pp el l ate deci si on d iscusses it

— novel ty does not i m plydi ffi cul ty. S ecti on 3 205( a) supp l i es the a nsw er . I t r eads: A co ur t m ayi ss ue a wri t o fg arni sh m en t aga i nst pr op er ty ( i ncl ud i ng nonexe m pt dis posab l e ea r ni ng s) i n whi ch th e deb to r ha s a sub st an ti alnonexem pt i nter estand w hi ch i s in the posses si on, custo dy, o r contr olo fa perso n other th anthe de bt o r, i n o r dert o s at isfy the j udg m en t aga i n st the debtor

. Co- own ed proper ty shal lbe subj ect to g arnis hm ent t o the s am e e xtent a s co own ed proper ty i s s ubj ect to garn ish m ent under th e la w of th e St at e in w h i c h su c h p ro p er ty is l oca ted. A c ourtm ay i ssue si m ult aneous separ ate w rit s o f ga rn ish m en t t o s ev er al g ar n ish ee s. A w rit of ga rn ish m en t is su ed u n d er th is s u b se c tio n sh all be c ontinuing and shal lte rm i nate on ly as pr ovide d i n su bsec tion (c)( 10). This tel l s us tw o thi ngs. Fi rs t, the w ri t co ver s the pro perty

“ i n whi c h the deb t o rh a s a s ub s t a nt i a ln o ne xempt i nter est ”

— w h ich is to sa y, R og an ’s m em b e r s h ip u n its in 410 M ont go m ery LLC , notthe re ales tat e that 4 10 M ontg o mer y de v e l o ped

. Inv e s t o r s i n c o r po r a t i o ns a nd LL CsN o. 10

- 3718 5

o wnt r a d ab l e s h a r e s o ru ni t s ; th e y d o n o to wnth e c o mpany’s as set s. The se parat i on o fi nvest m ent in te re sts f ro m o pe r a t i nga s s e t s i s a fun da men t a lp r e mi s e o f busi ness l aw . S ee Land re th Tim be r C o. v. Land re th , 471 U

. S. 681 ( 1985 )

. Equityi nvest or s a re r esi du alcl ai m ants; they g e to nl y w hati s l e fta ft e rdeb t s h a v e b e e n pa i d. S e c o nd , i fwe w er e no nethel ess to tr eat41 0 M on tgom er y’ s a sse ts as pr o per tytha t Ro g an“ co - o wned” with o th eri nve st o r s ( i nc l udi ngthe b an k s an d T aylor R o w), the n the law of th e state in w h ich th e prop erty is located de term ines how far th e w rit of garn ishm en t reach e s . Th at’s Georg i a l aw

— and th e par ti es agr ee that a wri t under Georg i a l aw would n ot vaul t e quity invest orRoga n ( and hence would notpro m ote the U ni ted S tat es) o ver cre dit or s’ i nter est s. A n exam ple m ay hel p. S up pose Rogan i nvest ed $ 2 mi l l i o n i n 4 1 0 Mo n t g o me r y L L C a n d th e Wh i tl o ws $2 m il li on; each thu s w ou ld hav e 50% of th e m em bersh i p i nt er es ts , a nd e ac h wo ul d b e en ti tl ed to 5 0% o fa ny liqu id at in g d ist ri b u tio n . B ot h int er es ts in t h is e x am p le ar e e quity. N ei therRoga n northe W hi tl ows coul d have obta ined a j ud gm en t or l ien agains t 410 M ont gom ery’s a s s e t s ; the i ri nt e r e s ti s i n the fi r m, no t the a s s e t s i to wne d. T he U nited States get s a j ud gm en t against Roga n, garnish es his eq uity interest, and cau ses 410 M ont gom ery to l i quid ate so thatRoga n’s st ake can be pai d over

. Let us suppose that the co nd os s ell f or$6 m i l l i on ( i n other w or ds, t hat the r eales tat e v enture m ade a $2 m i l l i on p ro fit). W h at th e U n ite d Sta te s a rg u es h er e is th at it wo u l d r e c e i v e th e e nt i r e $ 6 mi l l i o n a n d th e Wh i t l o ws nothing . Thi s i s the o nl y pos sibl e o utcom e, the U ni ted6 N o. 10

- 3718 St ate s co ntends, bec ause t h e W hi tl ows did not have a wri t ag ains t 41 0 M o nt g o m ery . But why sh o uld the Uni te d S ta te s b e e nt i tl ed to the W hi tl o ws’ ha l fo fthe b u sin es s, w h en §3 20 5(a ) sa ys th at th e w ritap p lies on ly to Rogan’ s a sse ts? W e s houl d no t im p ute t o Congre ss a p l a n t o c o n f i s c a t e p r i v a t e p r o p e r t y w i th o u tj u s tc o mpen sa ti o n ( o r, i nd eed , a ny c o m pen sa ti o n)

. And i fthe W hi tl o ws k ee p the i ri nt er est w he n the y a r e equi tyi nve st or s, th ey as su re d ly ke ep it as d eb t in ve st or s (c re d itor s) , f ordebt has hi gherpri or i ty than equi ty. The Uni te d S ta te s r el i es he av i l y o n Kolli ntzas . F r an k K ol l i ntzas w as or dered to pay som e $25 m i l l i on i n re st it ut i on . He ab s c o nd e d, a nd the Uni t e d S t a t e s o b t a i ne d a l i ena g a i ns ts o me o fh i s a s s e t s , s uc h a s p e ns i o n pl a ns, checking acco unts, and the cash surr ender val ue of h is li fe in s u ran ce p oli cies. See 18 U

. S. C

. §3613 (c). Frank’s wi fe J o a n n a fi l e d f o rd i v o r c e a n d ma d e a c l a i m t o s o me of Frank’s assets ; s h e con ten d ed that the d ivorce cou rt sh ou ld det er m i ne he rs ha r e. W e he l d tha t th e r i g ht f o r um i s th e fede r alc o ur t, whi chi ssu ed the j udg m en t that cre ate d the l i en, and that the U n ite d Sta tes had an i nter esti n Fr ank’ s a sse ts seni orto J oanna’ s. Thi s deci si on r es te d o n two con cl us i o ns : fi r st, tha t J o anna was making a cl ai m to so m e o fFr an k’s a ss ets ( ra therthan, sa y, to a m ar ita l sh ar e in j oin tly ow n ed as se ts su c h as a re sid en ce); secon d , that Ind ia n a l aw w ou ld give Joann a’s cl ai m a pri or i ty date a s o fthe divo rce decr ee, wh i ch cam e a fterthe l i en had bee n perfecte d. 501 F .3d at80 3. Koll i ntzas d o es no t he l p the Uni te d S ta te s, b ec au se the Whi t l o ws a r e n o t c l a i mi n g a n y o f R o g a n ’ s a s s e ts
. As we h a v e e mp h a s i z e d , w h a tR o g a n o wn e d w a s a me m-N o. 10

- 3718 7 b e r s h i p i n t e r e s ti n 4 1 0 M o n t g o me r y L L C

. T h e Wh i t l o ws d on ’ t want any part ofthatequi ty i nter est; thei r c laim is against th e L L C ’s ow n ass ets, in w hich cred itors have enti tl em ents seni orto tho se ofequi ty i nvest or s. Ou r concl usi on th at §320 5 does notse i ze thi rd- party i nt er es ts r ec o g ni ze d b y s ta te l aw l ea ve s se ve r alques ti o ns una n sw er ed. Did 4 10 M ontg om er y LLC o w e a debt to Tayl orR ow L L C ? I fso , how m uch? I fi t o w ed m oney to Ta y l o rRo w LLC, why ar e th e W hi tl o ws the r i g ht par ti es t o r ec ei ve tha t m o ne y ? J us t as Ro g an ’ s i nv es tment i n 410 M ontg om er y LLC di d not g i ve Rogan a pro perty i n t e r e s ti n th e fi r m’ s a s s e t s ( R o g a n o wn e d o n l y h i s me mber shi p i nter est s) , so the W hi tl ows’ i nvest m en t in Tayl or R ow LL C did not give the m an interes t in that firm ’s ass ets
. Geor gi a l aw a l l ows i nvest or s in l i m i ted l i abi l i ty com panie s, as i n cor p or at i ons, to pursue deri vati ve acti ons, see Ga. Code §14- 11- 801; U ni f or m Li m i ted Li ab i l i tyCo m pan y Act§ 90 2 ( r ev . 2 00 6) , b utthe W hi tl ows have not f ol l owed thatr oute. Instea d they b yp as se d T ay lor Ro w an d as se rt ed a cl a i m d ire c tly agai ns t 41 0 M o nt g o m ery . A di r ec t cl ai m woul d c uto ut o th e r e q u i t y i n v e s t o r s i n, a n d c r e d i t o r s o f, T a y l o r R o w. Th e potenti alto underm i ne such inter est s i s o ne r eas on w hy i nv estors ca n’t p ie rce th eir ow n fir m ’s struct ure and asse rti ts ri ghts dir ectly. S ee M i d- St at eFertiliz e rCo. v. Exch angeNat i onal Bank, 877 F.2d 133 3 (7th C ir. 1989). Georg i a does notappear to p er m it a sui t o fthi s nature; dir ect acti ons ar e pr opero nl y with re spect to an i n v e s t o r ’ s o wn r i g h t s a g a i n s tth e L L C o ri t s o th e rme mb er s. So uth w est Heal th & Wellness, L.L.C . v. Wo rk, 28 2 Ga. A pp . 61 9, 63 9 S

. E.2 d 570 ( 2006 ) ; se e also U ni f or m Li m i ted8 N o. 10

- 3718 Liab i l i ty Com pany A ct §901. Does som e o therpro vi si on o f Geo r g i a l aw per m i t th e so r t o f di r ec t cl ai m th at th e W hitlow s hav e pre sen ted ? H as t h e U nited States forfe i t e d a n y o bj e c t i o n t o th e d i r e c tn a t u r e o fth i s c l a i m? Th e s e a nd a nyo the rma t e r i a li s s ue s a r e o pe n o n r e man d. The j ud gm ent i s v acat ed, and the case i s r em an ded f o rpr o ce eding s co ns i st en t wi ththi s o pi ni o n.

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