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United States v. Wilhite

United States District Court, D. Colorado

October 13, 2017

UNITED STATES OF AMERICA, Plaintiff,
v.
MICHAEL DAVID WILHITE, Defendant.

          ORDER ADDRESSING MR. WILHITE'S OWNERSHIP INTEREST IN ADVANCED FLOOR CONCEPTS AND THE ASSETS OF THE YAHAB FOUNDATION AND PERMITTING FEDERAL GARNISHMENT OF THAT INTEREST

          CHRISTINE M. ARGUELLO, UNITED STATES DISTRICT JUDGE.

         This matter is before the Court to determine the percentage of Mr. Michael David Wilhite's ownership interest in Advanced Floor Concepts, LLC (AFC) and in the assets of the Yahab Foundation. Having thoroughly considered the parties' arguments, expert testimony, and relevant legal authority, the Court concludes that Mr. Wilhite has a 73.9% interest in AFC and a 72.4% interest in the $200, 000 that AFC transferred to Yahab in 2014. The Court further concludes that this interest constitutes property that is subject to garnishment under federal law.

         I. RELEVANT BACKGROUND[1]

         On June 23, 2016, this Court issued an Order concluding that, under the Colorado Uniform Trust Act (CUFTA) and Holman v. United States, 505 F.3d 1060 (10th Cir. 2007), Mr. Wilhite holds a property interest in AFC and any assets stemming from AFC, even though his wife is listed as the sole founder and owner of the company. (Doc. # 121, p. 27-28.) The Court specifically found that the circumstances surrounding the creation of AFC (and the transfer of funds to the Yahab Foundation) demonstrate Mr. Wilhite's “actual intent to hinder, delay, or defraud” his creditors. (Id.)

         The Court then asked the parties to brief the best method for determining the percentage of Mr. Wilhite's interest in the companies. (Id. at 28.) Finding the written briefing lacking, the Court set the matter for a hearing, which occurred over the course of two days, March 23, 2017, and April 14, 2017. (Doc. ## 151, 154.) Following the hearing, the parties submitted to the Court proposed findings of fact and conclusions of law on the issue. (Doc. ## 155, 156.) The parties propose as follows:

• The Government alleges that Mr. Wilhite has a 73.9% interest in AFC and a 72.4% interest in Yahab. The Government's figures are supported by the expert testimony of Michael Petron, a certified public accountant and certified fraud examiner.
• The Wilhites contend that Mr. Wilhite has a 10.45% interest in AFC and no interest in Yahab. The Wilhite's proposal is supported by the expert testimony of William Callison, an attorney with extensive experience in handling limited liability company matters.

         For the reasons set forth below, the Court finds the Government's expert's conclusions more credible and the Government's position more persuasive.

         II. LAW

         In conducting the instant analysis, the Court sits in equity. Miller v. Kaiser, 433 P.2d 772, 775 (1967); Double Oak Const., L.L.C. v. Cornerstone Dev. Int'l, L.L.C., 97 P.3d 140, 147 (Colo.App. 2003). The purpose of a court sitting in equity is to promote and achieve justice with some degree of flexibility; to this end, the court is to examine substance over form. Garrett v. Arrowhead Imp. Ass'n, 826 P.2d 850, 855 (Colo. 1992). “Equity . . . has to do with the substance and reality of a transaction-not the form and appearance which it may be made to assume . . . . [I]t is the real intention of the parties, and the true nature of the transaction that concern equity; . . . . no matter how many papers may have been executed to cover up the real purpose and give to the transaction an appearance other than the true one.” Rocky Mountain Gold Mines v. Gold, Silver, & Tungsten, 93 P.2d 973, 982 (Colo. 1939).

         The Court looks partly to the Colorado Limited Liability Company Act (CLLCA), which governs the interests and contributions of LLC members, to assess Mr. Wilhite's membership interest[2] in AFC. Colo. Rev. Stat. §§ 7-80-101, et seq. Colorado Revised Statute § 7-80-102(9) defines “member” as “a person with an ownership interest in a limited liability company with the rights and obligations specified under this article.” A member's financial interest in a LLC, i.e. his ownership interest, is based on the value of contributions that member has made to the company. See Colo. Rev. Stat. §§ 7-80-503, -504; see also Nicholas Karambelas, 1 Ltd. Liab. Co.: L., Prac. and Forms § 7:3 (2016) (The interest percentage is expressed as a percentage of the whole and “bears a mathematical relationship to the type and value of the contribution made.”). This value is also used to determine an individual's share in “the profits and losses” and the distribution of cash or other assets of the LLC. Colo. Rev. Stat. §§ 7-80-503, -504.

         In addition, § 7-80-108 binds members of an LLC to its operating agreement and requires that this Court give that agreement “maximum effect.” Weinstein v. Colborn Foodbotics, LLC, 302 P.3d 263, 266 (Colo. 2013). The Court therefore also looks to AFC's Operating Agreement when assessing Mr. Wilhite's membership interest.[3] (Def. Ex. D, E.) The Agreement provides that a member's “membership interest” should “be expressed as the percentage equivalent of the number” that results from dividing the total of the member's capital account by the total of all members' capital accounts.[4] (Def. Ex. D, p. 2, ¶ 3; E, p. 1-2.) A capital account “reflects each member's capital contribution to the Company” and is required to “be set up and maintained . . . for each member” of AFC. (Def. Ex. D., p. 4, ¶ 4; E, p. 1.) The capital account should also track each member's distributions based on the profits and losses of the company. (Id.)

         Although AFC did not maintain these accounts, the Court nonetheless finds that these provisions demonstrate the company's intent and understanding behind membership interests. That Mr. Wilhite, the CEO, did not sign the Operating Agreement does not mean that it is inapplicable to him. Indeed, Mr. Wilhite's signature is missing from numerous AFC documents despite his clear involvement in the company from its inception. The Court also rejects the Wilhites' argument that the Operating Agreement does not apply because Mrs. Wilhite began AFC as a single-member LLC. The Operating Agreement clearly contemplates a multi-member organization and this Court has already concluded that Mr. Wilhite is considered a member, and indeed owner, of the Company. The 1997 Operating Agreement even concludes with Mrs. Wilhite certifying “that the Company's members have adopted the terms of this document.” (Def. Ex. D.) The Wilhites' continued characterization of the company as a single-member entity is merely an attempt to further conceal the realities of AFC from the Court. Even Mr. Callison, the Wilhites' expert agreed that an LLC's operating agreement is “typically where [he] would go” to determine a member's interest in the company. (Doc. # 151, p. 162.)

         Synthesizing the principles set forth in the CLLCA and AFC's Operating Agreement, the Court's finds it appropriate to conduct a two-part analysis. The Court's first task is to determine the value of Mr. Wilhite's contributions to AFC. Next, the Court must factor in any profits, losses, or distributions applicable to Mr. Wilhite and determine how they may affect or drive his overall interest in AFC. The figures resulting from these two steps will dictate the ultimate percentage of interest in AFC attributable to Mr. Wilhite.

         III. ANALYSIS

         A. CONTRIBUTIONS

         AFC's Operating Agreement states that a member's contributions may be in the form of “cash, property, or services.” (Def. Ex. 4, p. 3, ¶ 1.) Section 7-80-501 similarly provides, “[t]he contribution of a member [of a limited liability company] may be in cash, property, or services rendered or a promissory note or other obligation to contribute cash or property or to perform services.” All parties and both experts agree that Mr. Wilhite's contributions fall into two categories: (1) service contributions and (2) financial or cash contributions. (Doc. # 151, p. 19 (Mr. Petron), 170 (Mr. Callison).)

         1. Service Contributions

         The parties and experts also agree that Mr. Wilhite's uncompensated services should form the basis for his service contributions. They disagree, however, on the value of Mr. Wilhite's uncompensated services and whether to include services provided after 2008, when he claims to have retired. Having thoroughly reviewed the dueling expert recommendations and supporting evidence, the Court finds Mr. Petron's approach more reasonable and reliable than Mr. Callison's approach.

         First, Mr. Petron queried a nationally-reliable database from the Economic Research Institute (ERI), using data points that were reflective of AFC's size, operation, and location. (See Doc. # 151 at p. 20-21, wherein Mr. Petron explained that although typically used by Fortune 500 companies, the ERI database can also be used to set compensation rates for smaller-sized companies at “different geographic areas across the country”); see also Warren v. Campbell Farming Corp., No. CV 05-441 MV/RLP, 2009 WL 10664916, at *11 (D.N.M. Mar. 30, 2009), aff'd, 461 F. App'x 779 (10th Cir. 2012) (commenting on the reliability of the ERI database). He specifically queried the database using the following categories: 1) Area (Castle Rock, Colorado, AFC's headquarters); 2) Industry: Structural Steel and Precast Concrete Contractors (using North American Industry Classification System (“NAICS”) code 238120); and 3) Organization Size (AFC's revenue by year). (Pl. Ex. 51, ¶ 24.) Mr. Petron also included in his ERI compensation search Mr. Wilhite's position at AFC, which this Court previously classified as CEO. (Id.) Mr. Petron then broke down the fair market value of Mr. and Mrs. Wilhite's uncompensated services by year to account for economic change, inflation, and the like. His expert report is thorough and well-supported and his testimony on this topic was credible.

         Ultimately, Mr. Petron found the fair market value of Mr. Wilhite's uncompensated services between 1997 and 2016 to be $4, 230, 393. He calculated the fair market value of Mrs. Wilhite's uncompensated services between 1997 and 2016 to be $1, 277, 045.

         The Wilhites dispute Mr. Petron's service calculation because the allege:

(1) Mr. Wilhite did not operate as the CEO of the company and therefore Mr. Petron's fair market salary ...

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