United States v. Patrick Mire ( 2016 )

Case: 15-50128 Document: 00513700653 Page: 1 Date Filed: 09/30/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
No. 15-50128
Fifth Circuit
FILED
September 30, 2016
UNITED STATES OF AMERICA, Lyle W. Cayce
Clerk
Plaintiff - Appellee
v.
PATRICK G. MIRE,
Defendant - Appellee
v.
HARBOR AMERICA CENTRAL, INCORPORATED,
Garnishee - Appellant
------------------------------------------------------------------------------------------
UNITED STATES OF AMERICA,
Plaintiff - Appellee
v.
PATRICK G. MIRE,
Defendant - Appellee
v.
HARBOR AMERICA CENTRAL, INCORPORATED,
Defendant - Appellant
Case: 15-50128 Document: 00513700653 Page: 2 Date Filed: 09/30/2016
No. 15-50128
Appeal from the United States District Court
for the Western District of Texas
Before WIENER, CLEMENT, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
Harbor America Central appeals the district court’s denial of its motions
to release money paid into the court registry and to terminate garnishment.
Patrick Mire, a convicted fraudster, is subject to a $10 million restitution order.
Harbor America, which had contracted with Mire and his fraudulently run
businesses, is subject to a writ of garnishment for that debt, but it asserts that
it no longer holds Mire’s property as it has terminated the contracts under
which it owed him regular payments. Harbor America alleges it was entitled
to terminate the contracts based on Mire’s fraud and did so by obtaining a
judgment in a Texas state court declaring its right to terminate.
We hold that the state court ruling is not binding because the
government was not allowed to participate in the proceeding. Considering the
question of termination in the first instance, we conclude that Harbor America
has lawfully terminated one of the contracts but may or may not have been
entitled to terminate the other. We thus remand to the district court for
further fact finding on the termination question and to determine any
compensation Harbor America owes under any terminated contracts.
I.
Mire pleaded guilty to conspiracy to commit mail fraud and conspiracy
to commit money laundering. United States v. Mire, 619 F. App’x 330, 331 (5th
Cir. 2015). The convictions resulted from Mire’s involvement in companies
that contracted to administer payroll and insurance programs for employers.
Mire’s companies withheld employment taxes from payroll checks issued to the
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clients’ employees but failed to deliver the withheld taxes to the IRS and kept
them instead. Mire was sentenced to 36 months in prison and ordered to pay
$10 million in restitution. Id. at 331.
After entry of final judgment, the government notified Harbor America
that the government had “a federal tax type lien” on all of Mire’s property. See
18 U.S.C. § 3613. The government next applied to the district court for a writ
of garnishment directed to Harbor America as garnishee, asserting that
Harbor America was indebted to Mire or “in possession of [substantial
nonexempt] property” of his. See 28 U.S.C. § 3205; 18 U.S.C. § 3613. The court
issued the writ.
Harbor America answered the writ and acknowledged that it owed
“commission payments” to Mire based on two contracts. In the Independent
Representative Agreement (IRA), CenterPoint Employee Management LLC, a
company Mire owned and used in his frauds, agreed to represent Harbor
America on a commission basis in selling and marketing staff leasing services.
Through an Asset Purchase Agreement (APA), Harbor America acquired the
payroll service contracts held by Centerpoint Outsourcing, LLC, another
company Mire owned and used to perpetrate his frauds. In exchange for these
agreements, Harbor America agreed to make regular payments as a
percentage of its earnings from the clients. The APA generated more income
for Mire than the IRA. Taking the month of April 2014 as an example, Harbor
America reported that it withheld $5,610.66 in bi-weekly payments due under
the IRA and $37,683.85 in monthly payments due under the APA.
The IRA provided that it could “be terminated immediately and all
compensation shall cease if [CenterPoint] engages in any clearly illegal
business practices.” In the APA, Centerpoint represented that it conducted its
activities lawfully.
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In its answer, Harbor America advised that it had initiated a state court
declaratory judgment proceeding to terminate the IRA and the APA because of
Mire’s criminal conviction. Harbor America did not join the government as a
party in the state court action, but the government intervened on the basis of
its restitution lien. The government then removed the state proceeding to
federal district court, but that court remanded. 1 Following remand, the state
court granted Harbor America’s motion to dismiss the government’s
intervention.
In June 2014, the government moved in the ongoing garnishment
proceeding for an order disposing of the garnished property held by Harbor
America. See 28 U.S.C. § 3205(c)(7). Harbor America opposed the motion,
contending that a determination of its rights and obligations with regard to
Mire was properly at issue in the state court declaratory judgment action. The
district court ruled in favor of the government. It determined that Harbor
America had retained $43,294.51 due Mire under the IRA and the APA as of
the date of the writ and that all commissions were nonexempt property of
Mire’s that the government was entitled to garnish. Consequently, Harbor
America was ordered to pay the government all property in its possession
belonging to Mire. The clerk was ordered to retain the monies collected
pending disposition of Mire’s appeal of his conviction. The court also ordered
that the garnishment continue until terminated. See 28 U.S.C. § 3205(c)(10).
The state court granted summary judgment in favor of Harbor America
on its claim for a declaration that it had the right to terminate the IRA and the
APA. Afterward, in November 2014, Harbor America notified Mire in writing
1The action was removed to the District Court for the Southern District of Texas, not
the District Court for the Western District—the court where Mire was convicted, the
garnishment proceedings were ongoing, and this appeal originates.
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of its termination of the IRA and the APA, “[p]ursuant to the IRA, the APA,
the Texas Declaratory Judgment Act, and the [state] court’s rulings.”
In December 2014, Harbor America moved the federal court to release to
it $312,838.37 that it had deposited in the court registry under protest as
garnishee. The district court denied the motion and ordered Harbor America
to comply with the writ of garnishment and the disposition order. Harbor
America moved to quash the disposition order on the basis that a condition to
quash had been met, namely that the IRA and the APA had been terminated.
See 28 U.S.C. § 3205(c)(10)(B) (providing for expiration of a writ when the
debtor’s property in the garnishee’s possession is exhausted). The district court
did not rule on this motion but ordered Harbor America to show cause why it
should not be held in contempt and again directed it to comply with the writ of
garnishment and the disposition order. Harbor America appealed.
II.
A.
We review garnishment orders and ancillary decisions for abuse of
discretion. United States v. Elashi, 789 F.3d 547, 548 (5th Cir. 2015); United
States v. Clayton, 613 F.3d 592, 595 (5th Cir. 2010). Supporting findings of
fact are reviewed for clear error, and supporting conclusions of law are
reviewed de novo. Af-Cap, Inc. v. Republic of Congo, 462 F.3d 417, 423 (5th
Cir. 2006).
Federal law makes “a restitution order enforceable to the same extent as
a tax lien.” United States v. Loftis, 607 F.3d 173, 179 n.7 (5th Cir. 2010) (citing
18 U.S.C. § 3613(c)). The government may use the garnishment provisions of
the Federal Debt Collection Procedures Act, 28 U.S.C. §§ 3001–3308, to collect
a restitution obligation imposed by a judgment of conviction. United States v.
Phillips, 303 F.3d 548, 550–51 (5th Cir. 2002). Under the Act, a court may
garnish “property (including nonexempt disposable earnings) in which the
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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.” 28 U.S.C. § 3205(a). “Property” for these
purposes includes the present and future right to receive payments under a
contract. See 28 U.S.C. § 3002(12).
Although federal law thus creates a lien on property, it is state law that
“defines the property interests to which the lien attaches.” Elashi, 789 F.3d at
548–49. In this context, federal law “creates no property rights but merely
attaches consequences, federally defined, to rights created under state law.”
United States v. Craft, 535 U.S. 277, 278 (2002).
B.
Harbor America argues that it terminated both the IRA and the APA on
April 22, 2014 (when it filed the state court action), that Texas contract law
entitled it to terminate those agreements when it did, and that the state
declaratory judgment conclusively decided this issue in its favor. It reasons
that because state law undoubtedly defines the property interest that is subject
to the government’s lien (in this case a right to receive payments under two
contracts), Mire’s property evaporated on April 22, 2014, when the contracts
were allegedly terminated.
We first consider the effect of the state court judgment. The government
contends that it is not bound by the state court’s determination that Harbor
America could terminate the IRA and APA because that court refused to allow
it to intervene. It relies on the following provision of the Internal Revenue
Code:
If the United States is not a party to a civil action or suit, the
United States may intervene in such action or suit to assert any
lien arising under this title [the Internal Revenue Code] on the
property which is the subject of such action or suit . . . . In any case
in which the application of the United States to intervene is
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denied, the adjudication in such civil action or suit shall have no
effect upon such lien.
26 U.S.C. § 7424.
The order of restitution in this case arises under Title 18. On its face,
section 7424 applies only to liens arising under Title 26, the Internal Revenue
Code. An order of restitution, however, “is a lien in favor of the United States
on all property and rights to property of the person fined as if the liability of
the person fined were a liability for a tax assessed under the Internal Revenue
Code . . . .” 18 U.S.C. § 3613(c). No circuit has addressed the interaction of
these two sections, but we read them together to require that the government
be allowed to intervene in an action directed at property that is subject to an
order of restitution. If the government is not allowed to intervene, the
subsequent adjudication cannot prevent the government from contesting the
status of the subject property in a collateral proceeding.
Our conclusion follows from the language of the text: section 3613 says
that an order of restitution is to be treated as if it were a tax lien; section 7424
gives the government a right to intervene in any action directed at property
against which it holds a tax lien; and section 7424 further provides that when
that right is violated, the resulting adjudication has “no effect upon such lien.”
The statute reflects that the government’s status as a lienholder makes it the
party with an interest in contesting any dispute about the property subject to
the lien. United States v. Nat’l Bank of Commerce, 472 U.S. 713, 725 (1985).
Because the government was not permitted to intervene in the Texas
action that produced the declaratory judgment upon which Harbor America
relies, Harbor America cannot use it to forestall the government from litigating
as an original matter whether Harbor America was entitled to terminate the
contracts. Harbor America protests that this holding is at odds with the
principle that state law defines property interests that are subject to federal
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liens. But 26 U.S.C. § 7424 does not displace state law, it merely provides that
the government’s interest as a lienholder allows it a say in disputes deciding
the extent of those interests under state law. We thus proceed to determine,
in light of the governing state law, whether Harbor America could—and if it
could, when it did—terminate the agreements it had with Mire’s companies.
C.
The IRA states that it “may be terminated immediately and all
compensation shall cease if [Centerpoint] engages in any clearly illegal
business practices.” It is undisputed that Centerpoint was engaged in criminal
business practices. Under Texas contract law, termination provisions such as
this are generally given effect without regard to questions of material breach.
See Woodard v. Gen. Motors Corp., 298 F.2d 121, 126 (5th Cir. 1962); Capcor
at KirbyMain, L.L.C. v. Moody Nat. Kirby Houston S, L.L.C, 2014 WL 982858,
at *10 (Tex. App.—Houston [1st Dist.] Mar. 13, 2014, no pet.) (holding that
jury instruction on material breach was not necessary when contract contained
termination provision); Home Reader Serv., Inc. v. Grappi, 446 S.W.2d 95, 99
(Tex. Civ. App.—Dallas 1969, writ ref’d n.r.e.) (“A contract provision for
termination by either party when fairly entered into, will be enforced if not
contrary to equity and good conscience.” (internal quotation marks omitted)).
It follows that Harbor America had the right to terminate the IRA because of
Centerpoint’s criminal activities.
Harbor America asserts that it terminated the IRA on April 22, 2014, the
date it filed its state court action. Its state court petition, however, did not
attempt to terminate the IRA and APA but sought a declaration that the
contracts permitted it to do so. It was only on November 24, 2014, that Harbor
America sent a termination letter to Mire. The record does not indicate that
Harbor America took any action to terminate the IRA, as opposed to seeking a
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declaration that it could terminate it, until it sent that letter. Harbor America
thus did not terminate the IRA until November 24, 2014.
Because Harbor America can and did terminate the IRA, it no longer
owed commission payments under that services agreement to Mire as of
November 24, 2014. Successful termination of the IRA halted accumulation of
Mire’s property interest in the commission payments and thus in the property
available for garnishment. The district court erred in denying Harbor
America’s motion to quash and motion to release funds without taking into
account the effect of the termination letter on Mire’s interest in the IRA. On
remand, it will be necessary for the court to calculate the sum of commission
payments that accrued prior to November 24, 2014, to ascertain the correct
amount owed to the government.
D.
Both the question of termination and, in the event of termination,
compensation are more difficult when it comes to the APA. Unlike the IRA,
the APA does not authorize Harbor America to terminate the agreement for
illegal business practices. The APA does, however, include a warranty that
Mire’s company had “conducted its operations in accordance with all applicable
law.”
In the absence of a clause authorizing Harbor America to terminate the
APA for breach of the lawful-conduct warranty, its ability to terminate hinges
on whether the breach was material. See Lennar Corp. v. Markel Am. Ins. Co.,
413 S.W.3d 750, 755 (Tex. 2013) (“Generally, one party’s breach does not excuse
the other’s performance unless the breach is material.”). Texas courts follow
the framework outlined in the Restatement to determine whether a breach is
material. Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 199
(Tex. 2004) (per curiam) (citing RESTATEMENT (SECOND) OF CONTRACTS §241
(1981)). The analysis prescribed by the Restatement includes consideration of
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factors outside the text of the contract that bear on the real expectations,
benefits, and injuries to the parties. For example, courts are to consider “the
extent to which the injured party will be deprived of the benefit which he
reasonably expected.” RESTATEMENT, supra, § 241(a). Materiality is
accordingly an issue of fact under Texas law. Briargrove Shopping Ctr. Joint
Venture v. Vilar, Inc., 647 S.W.2d 329, 333 (Tex. App.—Houston [1st Dist.]
1982, no writ).
There is another important difference between the APA and IRA that
affects the question of compensation in the event Harbor America was entitled
to terminate the APA. As their titles disclose, the APA is a sales agreement
and the IRA is a representation agreement for ongoing services. That makes
the question of compensation straightforward for the IRA: as of the date of
termination, Harbor America owes nothing else on the contract as it no longer
receives any services under the contract. Under the APA, however, Harbor
America has already received everything it was due: the valuable contracts
Mire’s company had with employers to provide payroll services. But Mire has
not. The APA gives him a right to ongoing payments—fifty percent of Harbor
America’s monthly earnings from the book of business it received. Given this
feature of the APA, we requested supplemental briefing from the parties
regarding the fate of these assets should Harbor America terminate the APA.
In the event of a material breach, Harbor America can of course undo the
entire relationship created by the contract by no longer providing services for
the clients it obtained. That is not, however, its current plan. Harbor America
contends that a termination would allow it to keep the clients but no longer
have to pay any compensation to Mire. Harbor America’s desire for a windfall
from Mire’s criminality ignores the principles of restitution expressed in the
Restatement that govern the issue:
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[I]f a party justifiably refuses to perform on the ground that his
remaining duties of performance have been discharged by the
other party’s breach, the party in breach is entitled to restitution
for any benefit that he has conferred by way of part performance
or reliance in excess of the loss that he has caused by his own
breach.
RESTATEMENT, supra, § 374(1). The Restatement accurately reflects the law in
Texas on this point. See, e.g., Lipscomb v. Fuqua, 131 S.W. 1061, 1064 (Tex.
1910); Grant v. Sherwood Shores, Inc., 477 S.W.2d 667, 671–72 (Tex. Civ.
App.—Austin 1972, no writ); De Leon v. Aldrete, 398 S.W.2d 160, 162–63 (Tex.
Civ. App.—San Antonio 1965, writ ref’d n.r.e.). Under a terminated APA in
which Harbor America retains the clients that agreement gave it, Mire (in
whose shoes the government now stands) would be entitled to restitution. A
court would calculate that amount by comparing the benefit conferred and the
loss caused by the breaching party.
Given the absence of relevant evidence and the fact–intensive nature of
the materiality and restitution inquiries, we are unable to determine whether
Harbor America continues to hold Mire’s garnished property under the APA.
Although the district court correctly reasoned that the state court decision
obtained by Harbor America had no effect on the government’s lien, it thus
should also have considered whether the APA was nonetheless lawfully
terminated under Texas law when Harbor America sent the November 2014
letter purporting to terminate the agreement. Accordingly, remand is
necessary so that the district court may receive and consider evidence bearing
on materiality of breach and, if need be, the propriety of restitution.
***
In summary, we hold that Harbor America rightly terminated the IRA
on November 24, 2014. On remand, the district court must calculate the
amount of commission payments accruing to Mire before this date; these
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payments were properly garnished and are now due to the government. Any
payments that Harbor America would have made to Mire under the IRA
subsequent to that date are no longer owed to him, subject to garnishment, or
due to the government.
We reach no conclusion regarding whether Harbor America has rightly
terminated the APA. The district court on remand should allow the parties to
present evidence concerning whether violation of the warranty of lawful
conduct was a material breach and Mire’s right to restitution of the client
service agreements should the breach be deemed material. Any right Mire has
to restitution is of course subject to garnishment along with the rest of his
nonexempt property.
The judgment is VACATED and the case REMANDED for further
proceedings consistent with this opinion.
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