This week we present two Eleventh Circuit cases. The first upholds stiff prison sentences for participants in a tax refund scheme and second holds that a dissolved Alabama LLC may collect debts, which existed when the LLC was dissolved without violating federal consumer protection law.
United States v. Clum, Nos. 13–10602, 13–10606, 13–10717, 13–10719 (11th Cir., April 13, 2015) (upholding criminal convictions of participants in tax fraud conspiracy)
The Eleventh Circuit affirmed the convictions of appellants for their involvement in a tax fraud conspiracy resulting in prison sentences of 15 years and longer. The appellants met at a seminar promoting the theory that the federal government maintains secret accounts for every citizen that can be accessed by falsely reporting income and tax withholding to the IRS, thereby creating a tax refund that allows the taxpayer to draw on his or her secret account.
Appellants organized their own seminars to attract clients and assured seminar participants of the legality of the refund scheme. Clients were required to pay a fee of $750 plus 10% of any refund received by participating in the appellants' scheme. The IRS repeatedly contacted these clients, but the appellants convinced their clients that the threats were part of the government's attempt to keep citizens from legally accessing their secret accounts.
For the scheme, the appellants were charged with conspiracy to defraud the United States by obtaining the payment of fraudulent claims and making fraudulent claims to an agency of the United States. The appellants were sentenced to prison sentences of 15 years and longer.
The appellants challenged their convictions on the basis that they held a sincere belief that the scheme was legal, that the conviction violated their First Amendment right to counsel taxpayers, and that the refund scheme used “sophisticated means,” a determination that resulted in enhanced sentencing. The Eleventh Circuit dismissed each of these challenges. Although the appellants testified to their sincere belief in the refund scheme, the jury did not believe their testimony, a choice the court was unwilling to challenge. Regarding the alleged First Amendment violation, the court wrote that certain speech can be punished, such as criminal speech. Finally, the court upheld the determination that the refund scheme involved “sophisticated means” and warranted enhanced criminal sentences; the appellants counseled clients on concealing their refunds through hidden accounts and money-laundering techniques. Accordingly, the convictions were upheld.
Thomas v. Clinton, No. 14–14308 (11th Cir., April 9, 2015) (no reasonableness limitation imposed on time for dissolved LLC to prosecute actions pending at dissolution).
Thomas appealed a judgment in favor of a group which represented Credit Services of Mobile, LLC (“Credit Services”). Credit Servicers was organized for the purpose of collecting consumer debts.
Upon the death of one of its members, Credit Services dissolved in 2007. The sole remaining member began the process of winding up Credit Services, which included collecting on judgments obtained prior to dissolution. After the dissolution, Credit Services filed writs of garnishment against Thomas to collect a judgment obtained in 2006. In response, Thomas filed suit claiming that the appellees violated the Fair Debt Collection Practice Act by filing a garnishment proceeding on behalf of an entity that was dissolved.
On appeal, the Eleventh Circuit reviewed Alabama law to determine whether Credit Services was authorized to collect judgments after dissolution. According to Alabama law, a dissolved LLC may take actions necessary to wind up its affairs. Alabama law further provides that dissolution does not affect proceedings by or against the LLC pending at dissolution. Accordingly, Credit Services was authorized to file writs of garnishment against Thomas as part of winding up. The dissolution in 2007 did not terminate the proceeding Credit Services initiated in 2006. The garnishment proceedings were not new actions but, instead, were ancillary to the original action filed in 2006.
The court held that a garnishment is not a new proceeding but was the continuation of the proceeding, which was filed prior to the LLC's dissolution. The court also rejected Thomas' claim that the garnishment was not brought within a reasonable time after the dissolution.