Henricks v. United States, No. 17-2383 (7th Cir. 2018)

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Justia Opinion Summary

Henricks owned a towing business, an auto body shop, and a vehicle dealership, which he used to defraud insurance companies by filing fraudulent claims. Henricks’s wife, Catherine, worked at the companies sporadically and was an officer of two of them and a member of the other. She opened bank accounts and signed loan documents on behalf of the companies. Henricks pleaded guilty to mail fraud and immediately began to hide assets. He was sentenced to imprisonment and ordered to pay restitution of $1,306,608.72. Catherine filed for divorce and for bankruptcy. Catherine entered an appearance as an interested person in Henricks’s criminal case. The district court found that Henricks had defaulted on his restitution payments and that the divorce was a sham, then determined the parties’ interests in properties so that Henricks’s property could be directed toward restitution. The Seventh Circuit vacated. The court had jurisdiction under the Fair Debt Collection Procedures Act to decide the parties’ property interests in Henricks’s criminal case and did not violate Catherine’s due process rights. The court, however, improperly relied upon post‐judgment conduct instead of determining the parties’ property interests as of the date of the judgment lien. Whether the divorce was a sham was relevant to whether Henricks’s defaulted on restitution, but is irrelevant to the parties’ ownership interests on the judgment date.

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In the United States Court of Appeals For the Seventh Circuit ____________________ No. 17 2383 UNITED STATES OF AMERICA, Plaintiff Appellee, v. JOHN E. HENRICKS, III, Defendant, APPEAL OF: CATHERINE HENRICKS. ____________________ Appeal from the United States District Court for the Western District of Wisconsin. No. 13 cr 00083 — Barbara B. Crabb, Judge. ____________________ ARGUED FEBRUARY 8, 2018 — DECIDED MARCH 27, 2018 ____________________ Before FLAUM, EASTERBROOK, and MANION, Circuit Judges. MANION, Circuit Judge. John Henricks (Henricks) pleaded guilty to mail fraud and was sentenced to imprisonment and ordered to pay restitution. Henricks’s wife, Catherine, (Ms. Henricks) entered an appearance as an interested person in Henricks’s criminal case. The district court determined the parties’ interests in various property so that Henricks’s prop erty could be directed toward restitution to his victims. 2 No. 17 2383 Ms. Henricks appeals, arguing that the district court did not have jurisdiction to decide the parties’ property interests in Henricks’s criminal case, violated her due process rights by not allowing her an opportunity to present her case, and im properly determined the parties’ interests in particular prop erty. In so far as the district court had jurisdiction to determine the parties’ property interests in the criminal case and did not violate Ms. Henricks’s due process rights, we affirm. How ever, because the district court relied upon post judgment conduct instead of determining the parties’ property interests as of the date of the judgment lien, we vacate the district court’s property interest determination and remand for fur ther proceedings. I. Background John Henricks owned a towing business, an auto body shop (Custom Collision), and a recreational vehicle dealer ship. He used those businesses to defraud insurance compa nies by filing fraudulent claims. Henricks’s wife, Catherine, worked at some of these companies sporadically and was an officer of two of them and a member of the other. Ms. Hen ricks also opened bank accounts, applied for credit cards, and signed loan documents on behalf of the companies. On August 14, 2013, Henricks pleaded guilty to one count of mail fraud. Instead of immediately beginning to make res titution as required by his plea agreement, Henricks began to hide assets. Because of these activities, the district court de nied Henricks a sentencing reduction for acceptance of re sponsibility. On January 9, 2014, he was sentenced to 121 months’ imprisonment and ordered to pay $1,306,608.72 in No. 17 2383 3 restitution. The judgment was entered the next day.1 Less than two weeks later, Ms. Henricks filed for divorce. On May 2, 2014, a writ of execution was issued directing the U.S. Marshals Service to take possession of personal prop erty at the couple’s home and at AJ’s Auto Body, a business that the couple set up in Ms. Henricks’s name after Henricks was indicted. Four days later, Ms. Henricks filed a voluntary Chapter 7 bankruptcy petition. On May 7, the Marshals se cured property associated with the Henrickses’ businesses in accordance with the writ of execution. On May 20, Ms. Henricks filed an appearance as an inter ested person in her husband’s criminal case because she claimed an interest in various property that was potentially subject to Henricks’s restitution order. Ms. Henricks also filed a notice of the bankruptcy automatic stay, a response to the clerk’s notice of execution, and a motion for a stay of execu tion. A little over two weeks later, the district court ordered the parties to brief whether the bankruptcy stay halted the government’s restitution collection efforts, whether the mari tal estate had been unjustly enriched by Henricks’s criminal activities, and, if so, whether Ms. Henricks was entitled to a full half of the marital assets. On November 20, 2014, the government filed a motion for a default finding for relief pursuant to 18 U.S.C. § 3613A and resentencing pursuant to 18 U.S.C. § 3614 on the grounds that Henricks willfully defaulted on his restitution payments. In its motion, the government requested that the district court 1 The government perfected its lien against Henricks’s property and rights to property by filing lien notices in Portage and Oneida counties in Wisconsin on February 7, 2014, and February 10, 2014, respectively. 4 No. 17 2383 order Henricks to pay restitution using various property, in cluding the assets of AJ’s Auto Body, Ms. Henricks’s retire ment account, and the Henrickses’ 2013 federal income tax re fund. Ms. Henricks filed an objection to the government’s mo tion for restitution default and resentencing, specifically ob jecting to the property the government sought to apply to Henricks’s restitution, and requested a hearing on the motion. On January 7, 2015, the district court granted Ms. Henricks’s motion for a stay of the writ of execution stating that “it would be premature to decide the extent to which the government is entitled to seize Ms. Henricks’s property” until the bank ruptcy court lifted the automatic stay. United States v. Henricks, 2015 WL 106160, at *1 (W.D. Wis. Jan. 7, 2015). In that same order, the district court scheduled an evidentiary hearing on the government’s restitution default and resentencing motion for April 16, 2015. Also on January 7, Ms. Henricks received her discharge from the bankruptcy court. She then filed a complaint for an adversary proceeding in the bankruptcy court, alleging that the government violated the automatic stay by continuing to keep property it locked in buildings on AJ’s Auto Body prop erty on May 7, 2014. On April 16, 2015, the district court held a hearing on the government’s motion for default and resentencing. Because neither Ms. Henricks nor her attorney was present, the district court deferred resolving the government’s property claims for restitution. The district court found Henricks defaulted on his restitution payments. It found that Henricks and Ms. Hen ricks worked together before and after Henricks’s January 9, 2014 sentencing to hide or shelter assets from restitution. The No. 17 2383 5 court also found that the couple’s divorce, the property settle ment of which was entered on February 10, 2015, was a sham to divert assets from restitution. In making this finding, in ad dition to the divorce property settlement, the district court cited recorded prison phone calls and e mails between the couple. To call the divorce property settlement lopsided would be an understatement: Combined, the assets allocated to Henricks were worth minus $93,000. Add to that the more than $1.6 million in marital debt allocated to Henricks, and he was left with a debt of more than $1.76 million, not counting the $1.3 million he owes in restitution. Henricks’s wife, on the other hand, was allocated $167,000 in marital as sets, including a $18,537 federal tax refund. (She had previously spent the couple’s $8,000 state tax refund.) In addition, she was allocated a new home in Amherst Junction, Wisconsin and the new auto body business[, AJ’s Auto Body]. The only debt she was allocated was that pertaining to the new auto body business, roughly $220,000. United States v. Henricks, 658 F. App’x 813, 815 (7th Cir. 2016). In concluding that Henricks willfully failed to pay restitution, the district court also cited Henricks’s failing to turn over to the government for restitution the income tax refunds and laundering of auto body shop tools through A.J.’s Auto Body.2 2 In a previous appeal, we affirmed Henricks’s judgment and convic tion, holding that the “district court did not clearly err either in finding 6 No. 17 2383 The district court resentenced him to an additional thirty months’ imprisonment resulting in a sentence of 151 months’ imprisonment and $1,306,608.72 in restitution, which was un changed from his initial sentencing. Ten months later, on February 11, 2016, the bankruptcy court entered an order modifying the automatic stay so that the district court or a court of competent jurisdiction might make a determination about Ms. Henricks’s property interest in the sequestered property.3 Accordingly, on March 30, 2016, the government filed a motion in Henricks’s criminal case to determine Ms. Henricks’s property interests and the amount of restitution that the government could recover from the as sets at issue. Afterwards, Ms. Henricks filed a timely opposi tion brief and a motion for abatement, but never requested a hearing on either motion. While the government’s motion for property determina tion and Ms. Henricks’s motion for abatement were still pend ing, the district court issued what is docketed as a “memoran dum” on October 12, 2016, noting that it would assume that these motions were ready for decision unless it heard from that Henricks’s failure to pay restitution was willful or in resentencing Henricks while he was in custody.” Henricks, 658 F. App’x at 814. 3 Following the bankruptcy’s court’s order, Ms. Henricks filed a de claratory judgment action in Wisconsin state court seeking a determina tion of her property interests. The government removed the case to fed eral court and filed a motion to dismiss for lack of jurisdiction. Henricks v. United States, 16 cv 101 bbc (W.D. Wis. Feb. 23, 2016). The district court granted the government’s motion on August 31, 2016. Ms. Henricks did not appeal the dismissal of that case, and, thus, we do not have jurisdiction over her argument that the district court erred in dismissing it. No. 17 2383 7 either party before October 19, 2016. The government re sponded that the issues were fully briefed; Ms. Henricks did not file any response. On January 9, 2017, three years to the day after Henricks was first sentenced, the district court ruled on Ms. Henricks’s property rights. The district court concluded that it had juris diction to make its determination under the Mandatory Vic tim Restitution Act (MVRA) and the Fair Debt Collection Pro cedures Act (FDCPA), and applied Wisconsin law to deter mine the parties’ interests. Ms. Henricks argued that the as sets assigned to her as part of the divorce settlement were her property and not subject to Henricks’s restitution order, and that her discharge in bankruptcy protected her property rights. In response, the district court found that the divorce was a sham and held that Ms. Henricks was not entitled to retain most of the disputed assets because she was not an “in nocent spouse” under Wisconsin law. In so concluding, the district court cited Ms. Henricks’s involvement with Hen ricks’s various companies that served as the vehicles for his fraud as well as her degrees in accounting and management and her work in those fields. The district court also relied upon factual findings it made at the April 2015 resentencing hearing and discussed extensively the parties’ conduct after Henricks’s judgment was entered on January 10, 2014, partic ularly the parties’ sham divorce. These factual findings served as the basis for the district court’s determinations about the parties’ ownership interests in Ms. Henricks’s retirement ac count, AJ’s Auto Body, and the couple’s 2013 federal income tax refund. Ms. Henricks established her retirement account through her employment with a pet care company, Foster & Smith, 8 No. 17 2383 where she worked from 2001–2013. This account had over $100,000 in it, all of which came from Ms. Henricks’s wages. The government argued that Ms. Henricks would not have been able to contribute as much as she did to her retirement account had it not been for her husband’s fraud. The district court rejected this argument, noting that the government had not stated what the amount would be absent Henricks’s fraud and concluded that the government was not entitled to any part of Ms. Henricks’s retirement account. Regarding the cou ple’s 2013 income tax refund, the district court held that the government was entitled to the part of the refund that ex ceeded the amount of wages attributable to Ms. Henricks’s Foster & Smith earnings and ordered the parties to provide additional briefing on what those amounts were. Finally, the district court held that the government was entitled to the funds from AJ’s Auto Body because the couple used the di vorce as a means to protect ill gotten gains and the govern ment showed that AJ’s only existed because, as the district court found at Henricks’s resentencing, Ms. Henricks allowed a shady tool dealer to take assets belonging to Custom Colli sion, in return for cash and new tools. Both the government and Ms. Henricks filed motions for reconsideration. The government argued that because the di vorce was a sham, the retirement account was a marital asset. As a result, Henricks had a half interest in the account, thereby making it subject to his restitution order. The district court agreed and reversed its prior ruling about Ms. Hen ricks’s retirement account. Specifically, the district court held that because the Henrickses’ divorce was a sham, Wisconsin marital property law should be applied as if there was no di vorce, thereby entitling the government to one half interest in No. 17 2383 9 Ms. Henricks’s retirement account because it is marital prop erty. In her motion for reconsideration, Ms. Henricks asserted that the district court lacked jurisdiction and had no authority to determine her property rights and that she had no oppor tunity to be heard regarding the legitimacy of the divorce. She also argued that the district court erred in holding that she had no property interest in AJ’s Auto Body. In support of her motion, Ms. Henricks submitted for the first time various ex hibits, including her own affidavit detailing her position on the events of the case and the property at issue, receipts, and loan and other documents. The district court denied Ms. Hen ricks’s motion holding that it had jurisdiction to determine her property claims, that she failed to rebut extensive evidence that the divorce was a sham, and that she had no interest in A.J.’s Auto Body because it was created from Henricks’s fraudulent conduct and funds. Finally, regarding the 2013 federal tax refund, the parties submitted supplemental briefing on the refund amount and sources. The total refund was $18,537; $5,416.93 of the refund was withheld from Ms. Henricks’s wages from Foster & Smith and Communication Logistics, Inc., and $12,120 was withheld from Henricks’s wages from Custom Collision and AJ’s Auto Body. The parties also claimed a $1,000 child tax credit. The district court held that Ms. Henricks was entitled to $5,917 as her portion of the 2013 federal tax refund and child tax credit, with the remainder to be applied to restitution. The district court also corrected the clerical error in its January 9, 2017 or der that the refund was from the couple’s federal and not state income tax refund. 10 No. 17 2383 Ms. Henricks now appeals. On appeal, Ms. Henricks con tends that the district court did not have jurisdiction to deter mine her property rights in Henricks’s criminal case, and those determinations should have been made in a separate civil case. Ms. Henricks also asserts that the district court vio lated her due process rights by not allowing her the oppor tunity to present her case in the criminal proceedings. Finally, Ms. Henricks argues that the district court erred in its appli cation of Wisconsin law in determining the parties’ property interests. We address each argument in turn. II. Discussion On appeal, we review a district court’s factual determina tions for clear error and questions of law de novo. See generally United States v. Stadfeld, 689 F.3d 705, 709 (7th Cir. 2012). Ms. Henricks argues that her property rights should not have been determined in Henricks’s criminal case, but instead should have been decided in a separate civil action. We disa gree. As we have previously held, “the government’s initia tion of civil garnishment proceedings within the criminal case was procedurally appropriate under the MVRA and the FDCPA, and there is no concern about the district court’s ju risdiction.” United States v. Kollintzas, 501 F.3d 796, 801 (7th Cir. 2007). Such proceedings are appropriate in the criminal case even in cases in which a spouse asserts a property inter est. See id. at 800–01. The district court determined Henricks’s property rights so the government could collect on his restitution obligation to his fraud victims. Because the property was marital prop erty, it necessarily implicated Ms. Henricks’s property rights, No. 17 2383 11 and the district court was within its statutory authority to de termine Henricks’s ownership interests in the property so that it could be applied to his restitution. Moreover, Ms. Henricks submitted to the district court’s jurisdiction by entering an ap pearance as an interested party, filing motions of her own and responding to the government’s motions. See id. at 801–02 (holding that the court had jurisdiction to decide the wife’s appeal of a criminal garnishment proceeding when the wife participated in the criminal proceeding as an interested per son). While Ms. Henricks tries to make much of the fact that the FDCPA sets forth civil procedures, this argument ignores the fact that “[t]he FDCPA is a procedural vehicle … for the enforcement” of a restitution order in a criminal case. Id. at 801. Therefore, the district court properly employed the FDCPA in Henricks’s criminal case. In addition to her jurisdictional challenge, Ms. Henricks asserts that the district court violated her due process rights because she never had an opportunity to present her position about her divorce or “to provide testimony about the genesis of A.J.’s [Auto Body]” in the criminal proceedings. (Appel lant’s Brief at 24.) The record belies Ms. Henricks’s claim. Ms. Henricks actively participated in the case, filing motions, briefs, and responses to the government’s motions after she entered an appearance in May 2014. And Ms. Henricks squan dered her other opportunities to present her case. Despite re questing a hearing on the government’s motion for default and resentencing, neither Ms. Henricks nor her attorney at tended that hearing. Also, Ms. Henricks provided no re sponse to the district court’s October 12, 2016 memorandum, which essentially invited the parties to alert it to additional evidence or briefing on the government’s motion to determine her property rights and on her motion for abatement. Further, 12 No. 17 2383 Ms. Henricks only presented rebuttal evidence about AJ’s Auto Body in her motion for reconsideration, rather than in her original brief, when that evidence was available before the district court issued its January 9, 2017 order. See generally Fed. R. Civ. P. 60(b) (requiring that evidence must be newly discov ered to serve as a basis for relief from a judgment or an order). Ms. Henricks cannot cry foul when she failed to take ad vantage of ample opportunities to present her case. Finally, the record shows that not only did Ms. Henricks have an op portunity to participate in the criminal case, but the district court considered Ms. Henricks’s arguments when ruling. Therefore, Ms. Henricks’s contention that she never had an opportunity to participate in the criminal proceedings is with out merit, and her due process rights were not violated. Turning now to the district court’s determination of the couple’s ownership interests, “[a]n order for payment of res titution becomes a lien on all property and rights to property of the defendant upon entry of judgment[.]” Kollintzas, 501 F.3d at 802 (citing 18 U.S.C. § 3613(c)). In this case, the govern ment’s lien attached to Henricks’s property and rights to prop erty on January 10, 2014, the date of his criminal judgment. Liens resulting from restitution judgments are treated like federal tax liens. Id. (citing 18 U.S.C. § 3613, 26 U.S.C. § 6321). To determine the property to which the lien will attach, ‘‘[w]e look initially to state law to determine what rights the tax payer [or in this case, the criminal defendant] has in the prop erty the Government seeks to reach, then to federal law to de termine whether the taxpayer’s [or defendant’s] state deline ated rights qualify as ‘property’ or ‘rights to property’ within the compass of the federal tax lien legislation.’’ Id. (first alter ation in original) (quoting Drye v. United States, 528 U.S. 49, 58 No. 17 2383 13 (1999)). The FDCPA also allows the government to take action against property as allowed under the law of the state where the property is located. 28 U.S.C. § 3010(a). State law is used only to determine the parties’ property rights, and federal law is applied to determine whether the property could be liqui dated for restitution payments. See Kollintzas, 501 F.3d at 802. Under Wisconsin marital property law, a spouse’s interest in property is, in relevant part, a “present undivided one half interest in each item of marital property.” Wis. Stat. § 766.31(3). Any obligations incurred during the marriage are presumed to be incurred for the benefit of the family, and therefore can be satisfied by all of the marital property as well as property held by the obligated spouse. Wis. Stat. §§ 766.55(1), (2)(a)–(b). There is an exception to this general rule for “an obligation incurred by a spouse during marriage, resulting from a tort committed by that spouse during mar riage.” Wis. Stat. § 766.55(2)(cm). Such an obligation “may be satisfied from the property of that spouse that is not marital property and from that spouse’s interest in marital property.” Id. A “tort,” as the word is used in the statute, may include a criminal act if the conduct constituting the criminal act would also constitute a tort. Curda Derickson v. Derickson, 668 N.W.2d 736, 742 (Wis. Ct. App. 2003). Wisconsin courts have con cluded that § 766.55(2)(cm) protects an “innocent spouse,” i.e., one who did not take part in the tort, from personal liabil ity for torts committed by the other spouse. Curda Derickson, 668 N.W.2d at 742–43 (holding that a restitution order was not a marital debt where a spouse was an “innocent spouse” be cause she “had no active part” in taking money for which her husband was found guilty of conspiracy to defraud an Indian gaming establishment and money laundering); Bothe by Gross 14 No. 17 2383 v. Am. Family Ins. Co., 464 N.W.2d 109, 110 (Wis. Ct. App. 1990). Ms. Henricks insists that the couple’s divorce property set tlement changed the couple’s ownership interests and, thus, should have been considered by the district court when mak ing its property rights determinations. This argument ignores the timeline of events in this case and the basic legal principles regarding the priority of judgments. The government’s lien against Henricks’s property and interests in property attached on January 10, 2014, the date of the judgment. See Kollintzas, 501 F.3d at 802 (”An order for payment of restitution becomes a lien on all property and rights to property of the defendant upon entry of judgment[.]” (emphasis added)). Ms. Henricks did not file for divorce until after Henricks was sentenced, and the couple’s marital property agreement was not entered until February 10, 2015, thereby making it secondary to the government’s lien. See United States v. McDermott, 507 U.S. 447, 449 (1993) (noting in a dispute about the priority of a federal tax lien that “[a]bsent provision to the contrary, priority for purposes of federal law is governed by the common law prin ciple that ‘“the first in time is the first in right.’” ” (quoting United States v. City of New Britain, 347 U.S. 81, 85 (1954))). Therefore, the proper inquiry regarding the parties’ property rights in cases such as these is, “What were the parties’ own ership interests on the date of the judgment?” State law is em ployed to ascertain who owned what property, and then fed eral law is employed to determine whether the lien, as of the date of the judgment, attaches to the relevant property and rights in property. Unfortunately, in this case, no one, not the government, not Ms. Henricks, nor even the district court, stated what the No. 17 2383 15 temporal point was for determining the parties’ ownership in terests, much less that it was the date of the judgement. Per haps the district court was responding to the parties’ argu ments that the couple’s divorce impacted the property deter mination, but the district court erred by basing its decision on the divorce and other events that occurred after January 10, 2014. Whether the divorce was a sham was relevant to whether Henricks’s defaulted on his restitution payments, but it is irrelevant to what the parties’ ownership interests were on the date of the judgment.4 Assuming they are supported by the record, we find no fault in the district court’s reliance on factual findings it made at Henricks’s April 2015 re sen tencing hearing in so far as those facts took place on or before January 10, 2014. But we cannot review the district court’s le gal conclusions because they are based on factual findings that include events that occurred after the restitution judg ment was entered and the government’s lien attached. There fore, we vacate the district court’s property determinations and remand for the district court to determine the parties’ property interests as of January 10, 2014, and then determine what property is subject to the government’s restitution order. 4Citing the Rooker Feldman doctrine, Ms. Henricks also argues that the district court erred by ruling that her divorce was a ruse and improperly undermined her divorce by making determinations about property settled in the divorce. Because the district court improperly considered the di vorce in making the property determination, we need not address this ar gument. 16 No. 17 2383 III. Conclusion For the foregoing reasons, the judgment of the district court is AFFIRMED in part and VACATED in part, and the case is REMANDED for further proceedings.

Primary Holding

Court, imposing an order of restitution, had jurisdiction to determine that the defendant's divorce was a sham and to determine the property interests of the defendant and his wife as of the date of the judgment lien.

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