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United States v. Hall

United States Court of Appeals, Sixth Circuit

December 13, 2017

United States of America, Plaintiff-Appellee,
George Marcus Hall, Defendant, Knox County, Tennessee, Petitioner-Appellant.

         Appeal from the United States District Court for the Eastern District of Tennessee at Knoxville. No. 3:15-cr-00154-1-Pamela Lynn Reeves, District Judge.

         ON BRIEF:

          Daniel A. Sanders, KNOX COUNTY, Knoxville, Tennessee, for Appellant.

          Anne-Marie Svolto, UNITED STATES ATTORNEY'S OFFICE, Knoxville, Tennessee, for Appellee.

          Before: MOORE, WHITE, and DONALD, Circuit Judges.



         In this case, we are called upon to decide whether Knox County, Tennessee has standing to file a claim in district court asserting its undisputed right to collect delinquent property taxes on real property that is subject to criminal forfeiture by the U.S. government and to assess whether the district court abused its discretion in denying Knox County's motion for an interlocutory sale of the seized property. Because Knox County has a legally cognizable interest in the property in the form of a tax lien, the district court erred in dismissing for lack of standing Knox County's claim. This does not mean, however, that Knox County is necessarily entitled to a hearing on the validity of its claim, as the district court may be able to ascertain the scope of Knox County's interest on a motion for summary judgment by the government without holding a hearing. Because the district court must account for Knox County's interest before entering a final order of forfeiture, we VACATE the district court's final order of forfeiture and REMAND this case for proceedings consistent with this decision.

         We further hold that the district court did not abuse its discretion when it denied Knox County's motion for an interlocutory sale of the property. Accordingly, we AFFIRM the district court's denial of the motion for interlocutory sale.

         I. BACKGROUND

         In late 2015, the United States charged George Marcus Hall with running an unlawful gambling operation and money laundering scheme. R. 1 (Information at 1-2) (Page ID #1-2). Pursuant to a plea agreement with the U.S. government, Hall agreed to forfeit all properties that he had acquired with funds derived from his illicit activities. R. 2 (Plea Agreement at 7) (Page ID #22). In December 2015, the United States initiated criminal forfeiture proceedings and obtained a preliminary forfeiture order for eighteen parcels of real property owned by Hall and located in Knox County, Tennessee. R. 12 (Agreed Prelim. Order of Forfeiture at 9-11) (Page ID #78-80). Upon learning of the forfeiture action, "Knox County determined that Hall owed a substantial amount of delinquent real property tax on the properties he [had] agreed to forfeit." Appellant Br. at 9. Under Tennessee law, these back taxes, along with the "penalties, interest, and costs accruing thereon, " gave Knox County a first lien on the property. See Tenn. Code Ann. § 67-5-2101.

         By federal statute, a party asserting an interest in property that is subject to criminal forfeiture may "petition the court for a hearing to adjudicate the validity of his alleged interest in the property" within thirty days of final publication of notice or receipt of direct written notice of an entry of an order of forfeiture, whichever is earlier. 21 U.S.C. § 853(n)(2). Knox County filed a first verified claim and petition for a hearing asserting its interest in the seized property after the thirty-day deadline had passed. R. 79 ([First] Verified Claim at 1-4) (Page ID #711- 14). The district court subsequently amended the preliminary forfeiture order to cover an additional four parcels of property, three of which are located in Knox County, see R. 97 (Am. Agreed Preliminary Order at 8-11) (Page ID #850-53), and Knox County filed a timely second verified claim and petition for hearing in July 2016, R. 104 ([Second] Verified Claim at 1-4) (Page ID #892-95).

         In its second verified claim, Knox County requested "a hearing to adjudicate the validity of Knox County's rights and interests" in the property subject to the amended preliminary forfeiture order, and asked the district court to enter an order "[d]irecting an interlocutory sale of the [subject] Property, " "[d]elaying entry of the final order of forfeiture" until the date of the sale, "[s]evering the Property" until Knox County receives full payment, allowing the current owner to keep the property "subject to a lien in favor of the Government to the extent of the forfeitable interest in the property, " or authorizing some alternative remedy "providing that Knox County will continue to receive annual tax revenues[, ] penalties, interest, and costs that accrue in connection with the Property under state law." Id. at 2-3 (Page ID #893-94). Also on July 12, 2016, Knox County "move[d] for an order directing the interlocutory sale of each parcel of real property subject to this forfeiture proceeding located in Knox County, " R. 106 (Mot. for Interlocutory Sale at 1) (Page ID #899).

         In response, the United States "aver[ed] that any taxes and interest that are owed as of the date of the entry of a final order of forfeiture in this case will be honored." R. 112 (Response to Motions at 8) (Page ID #937). The United States expressly offered to pay "whatever taxes, plus interest" are owed to Knox County "up until the time of the final order of forfeiture, " regardless of whether Knox County received notice of the forfeiture or filed a claim. R. 80 (Hr'g Tr. at 18) (Page ID #732). The United States later clarified that its offer to pay the "present value of all of the County's taxes that have accrued" included "interest on taxes assessed prior to entry of a final order of forfeiture [that had] . . . continue[d] to accrue up until the date of the sale." R. 114 (Opp'n to Objections to Magistrate Judge's R & R at 3-4) (Page ID #951-52). And the United States' promise is backed by its "pattern of practice of always paying" such sums on forfeited properties, regardless of whether a taxing authority files a claim asserting its interest under 21 U.S.C. § 853(n). See, e.g., R. 80 (Hr'g Tr. at 19) (Page ID #733) ("We have done it in every case [in] at least the last ten years.").

         But while the United States had "no opposition to recognizing Knox County's property tax interest that have [sic] accrued up through the date of entry of the final order of forfeiture, " R. 112 (Response to Motions at 8) (Page ID #937), the United States argued that Knox County has no legally cognizable interest in accruing taxes on the seized property once title passes to the United States because, under the Supremacy Clause, local governments may not levy taxes on federal properties. See id. The U.S. government therefore "object[ed] to Knox County's attempts to avoid application of the Supremacy Clause" by seeking to delay entry of a final order of forfeiture until the date of sale or to force an interlocutory sale of the properties in an effort to generate additional tax revenue. Id.

         The district court denied Knox County's first and second verified claims on September 20, 2016. R. 119 (Dist. Ct. Op.) (Page ID #993-1019). The district court rejected Knox County's first claim as untimely, id. at 15-18) (Page ID #1007-10), which Knox County does not now challenge on appeal, Appellant Br. at 10 n.1. The district court then denied Knox County's second claim for lack of standing.[1] As the district court reasoned, Knox County "has no legally cognizable interest" in taxes, or the interest, penalties, and costs that would accrue on those taxes, after the final entry of the forfeiture order because as soon as the district court enters a final order of forfeiture, "the U.S. Government owns the properties, " R. 119 (Dist. Ct. Op. at 19) (Page ID #1011), and Tennessee law recognizes that U.S. property is "exempt from taxation, " id. (quoting Tenn. Code Ann. § 67-5-203(a)(1)). Therefore, the district court determined that Knox County "has suffered no injury-in-fact as to this revenue." Id.

         In addition, the district court held that Knox County lacks standing to pursue a claim for taxes accrued before forfeiture and the interest, penalties, and costs on those taxes that would accrue after forfeiture through the date of sale. The district court reasoned that "[t]he Government has already agreed to hand these funds over to the County. . . . As a result, no redress is possible as to this revenue. Redressability exists only where a court order 'would amount to a significant increase in the likelihood that the plaintiff would obtain the relief that directly redresses the injury suffered.'" Id. at 20 (Page ID #1012) (quoting Hamdi ex rel. Hamdi v. Napolitano, 620 F.3d 615, 628 n.15 (6th Cir. 2010)). The district court further held that Knox County "lacks standing to contest its right to receive any penalties whatsoever" because, under Tennessee state law, penalties accrue on tax defaults "[u]pon the filing of suits to enforce [a] tax lien against real or personal property, " id. at 22 (Page ID #1014) (quoting Tenn. Code Ann. § 67-5-2410(a)(1)(A), and "[n]o tax suit has been filed in this case, " id. Therefore, "the County's injury-its inability to collect penalties on back taxes-is not fairly traceable to the ...

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