United States: D.C. Circuit Limits Government's Ability To Collect On Personal Debt By Garnishing Assets Of Closely Held Corporation, Reverses $2.1 Million Judgment Against Womble Carlyle Client

Last Friday, July 8, 2016, the D.C. Circuit clarified the limits of the Federal Debt Collection Procedures Act (FDCPA). The Court held under D.C. and federal law that the government cannot satisfy a judgment against a co-owner and director of a corporation by seizing corporate assets. This ruling highlights the importance of distinguishing between corporate and personal assets when defending (or anticipating) FDCPA actions.

Background

The appeal arose from the government's efforts to collect on a $1.3 million judgment entered against T. Conrad Monts in 2001. Beginning in 2008, the government attempted to execute that judgment by garnishing funds owed to Washington Development Group (the "Group"), a company that Monts and his wife co-owned. The government argued that under the FDCPA it could garnish those funds because Monts was a shareholder and director of the Group.

The FDCPA permits the government to garnish "property . . . in which the debtor has a substantial nonexempt interest." 28 U.S.C. § 3205(a). The term property is further defined to include "any present or future interest, whether legal or equitable . . . , vested or contingent, . . . and however held." Id. § 3002(12).

The district court held that Monts had a substantial property interest in the Group's assets. It therefore ordered that the judgment against Monts—which by this point had grown to $2.1 million—could be satisfied with money owed to the Group.

The Group appealed and hired Womble Carlyle attorney David Hamilton to present its position to the D.C. Circuit.

The D.C. Circuit's Ruling

The Court of Appeals agreed with the Group that Monts had no property interest in the Group's assets for the purposes of the FDCPA. Senior Judge Ginsburg explained that this analysis should proceed in two steps: first, the court determines under state law what rights the judgment debtor has in the property; and then second, it decides as a matter of federal law whether those state-law rights amount to a substantial property interest.

The panel held that Monts lacked a substantial interest in the Group's assets. Under D.C. law, Monts' shares entitled him to a portion of the Group's profits and to some of its assets on liquidation. But this interest, the panel ruled, was insufficient under the FDCPA because Monts had no interest in any specific asset. To the contrary, the Group could use any of its assets to satisfy creditors or engage in business. Accordingly, the government could not seize the Group's assets to satisfy the judgment against Monts.

In coming to this conclusion, the D.C. Circuit rejected the government's argument that Monts had a present interest in the Group's assets because it was a closely held S corporation. While the shareholders of an S corporation may claim corporate gains and losses as their own for income tax purposes, this tax treatment does not permit a shareholder any access to corporate assets. The Court also rejected the government's claim that Monts had an "equitable" interest in the assets sufficient to support garnishment. Regardless of the label attached to Monts' interest, he lacked any actual property interest in or right to the corporate assets.

The case is now returning to the district court for consideration of the government's alternate argument that the court should disregard the corporate form and treat the Group's assets as belonging to Monts.

The D.C. Circuit's opinion in United States v. TDC Management Corp., No. 15-5030 (D.C. Cir. July 8, 2016), can found here.

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