United States v. Solco I, LLC

962 F.3d 1244

UNITED STATES of America, Plaintiff,

v.SOLCO I, LLC; XSun Energy, LLC; N.P. Johnson Family, L.P.; Solstice Enterprises, Inc.; Black Night Enterprises, Inc. ; Starlight Holdings, Inc., Defendants - Appellants,andRaPower-3, LLC; International Automated Systems, Inc.; LTB1, LLC; R. Gregory Shepard; Neldon Johnson, Defendants.

R. Wayne Klein, Receiver - Appellee.

No. 19-4089

United States Court of Appeals, Tenth Circuit.

FILED June 22, 2020

Denver C. Snuffer, Jr. (Steven R. Paul, with him on the briefs) Nelson, Snuffer, Dahle & Poulsen, P.C., Sandy, Utah, for the Defendants – Appellants.

Michael S. Lehr, (Jonathan O. Hafen and Jeffery A. Balls, with him on the brief), Parr Brown Gee & Loveless, Salt Lake City, Utah, for the Receiver – Appellee.

Before MATHESON, KELLY, and PHILLIPS, Circuit Judges.

MATHESON, Circuit Judge.

In 2015, the Government filed a civil action against Neldon Johnson, Gregory Shepard, and Mr. Johnson's three companies, RaPower-3 LLC ("RaPower"), International Automated Systems, Inc. ("IAS"), and LTB1, LLC ("LTB") (collectively, "Defendants"). The complaint alleged the Defendants promoted an abusive tax scheme in violation of 26 U.S.C. § 6700. Following a bench trial, the district court found for the Government, enjoined the Defendants from further promoting their scheme, and ordered disgorgement of ill-gotten gains.

In 2018, the district court appointed Appellee R. Wayne Klein as receiver ("Receiver") to take control of the Defendants’ assets and to investigate whether their affiliated entities possessed proceeds from the illicit tax scheme. On the Receiver's recommendation, the court added 13 nonparty affiliated entities to the Receivership.

Six of the added entities ("Appellant Entities") appeal, arguing the district court included them in the Receivership without providing sufficient due process. We dismiss the appeal for lack of jurisdiction.

I. BACKGROUND

A. Legal Background – Receivership

A district court may appoint a receiver "to take the control, custody[,] or management of property ... involved in litigation, to preserve the property, and to receive the rents, issues[,] and profits thereof pending the ultimate determination of such litigation." Comm'r v. Owens , 78 F.2d 768, 773 (10th Cir. 1935) ; see 12 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure: Civil § 2981 (3d ed., Apr. 2020 update) ("Wright & Miller"). "When a district court creates a receivership, its focus is to safeguard the assets, administer the property as suitable, and to assist the district court in achieving a final, equitable distribution of the assets if necessary." S.E.C. v. Vescor Capital Corp ., 599 F.3d 1189, 1194 (10th Cir. 2010) (quotations omitted).

Once appointed, a receiver is "vested with complete jurisdiction and control of [the] property with the right to take possession thereof." 28 U.S.C. § 754 ; see Wright & Miller § 2985 (" Section 754 of Title 28 gives the appointing court and the receiver exclusive jurisdiction and control over all of defendant's property in whatever district it may be situated ...."). A receiver "is an officer ... of the court," not the parties’ agent. Zacarias v. Stanford Int'l Bank, Ltd ., 945 F.3d 883, 896 (5th Cir. 2019) (quotations omitted).

B. Factual Background – The Abusive Tax Scheme

Mr. Johnson and Mr. Shepard, through RaPower, IAS, and LTB, marketed to the public the opportunity to participate in a solar energy leasing program in exchange for certain tax benefits. Mr. Johnson claimed to have invented a solar energy technology that used solar lenses placed on towers. Under the advertised scheme, customers would buy or lease a solar lens that purportedly would be installed at a site in Utah. Customers then would lease the lens to LTB to produce electricity. Defendants told customers they could claim personal tax credits and deductions because they would be in the "trade or business" of leasing solar energy. See 26 U.S.C. §§ 48, 167(a).

Defendants sold nearly 50,000 solar lenses and collected approximately $50 million in gross receipts. But contrary to their representations, they did not install most of the purchased solar lenses or use them to generate electricity. Meanwhile, customers claimed unwarranted tax deductions and credits on personal tax returns.¹

C. Procedural Background

1. Complaint, Bench Trial, and Injunction

In 2015, the Government sued the Defendants, alleging promotion of an abusive tax scheme in violation of 26 U.S.C. § 6700. The Government sought injunctive relief and disgorgement of ill-gotten gains. See 26 U.S.C. §§ 7402(a), 7408(a).

Following a 12-day bench trial, the district court found for the Government and enjoined the Defendants from making further false or fraudulent statements about their solar energy technology and its supposed tax benefits. See United States v. RaPower-3 , LLC , 343 F. Supp. 3d 1115 (D. Utah 2018). It also held the Defendants jointly and severally liable for $50,025,480 in equitable disgorgement. The court entered a final judgment on these rulings.

2. Receivership Order

The Government moved to freeze the Defendants’ assets and appoint a receiver.

The district court granted the motion, froze the Defendants’ assets, and appointed Mr. Klein as Receiver ("Receivership Order").

The Receivership Order

• established the district court's "exclusive jurisdiction and possession of all [the Defendants’] assets" and any "assets proven to be proceeds of [the Defendants’] activities ... in possession of any and all subsidiaries and affiliated entities," App. at 93;

• imposed a 120-day asset freeze on 12 of the Defendants’ "subsidiaries and affiliated entities," including the six Appellant Entities here: Solco I, LLC ("Solco"), XSun Energy, LLC ("XSun"), N.P. Johnson Family, L.P. ("NPJFLP"), Solstice Enterprises, Inc. ("Solstice"), Black Night Enterprises, Inc. ("Black Night"), and Starlight Holdings, Inc. ("Starlight"), id . at 93-95;

• directed the Receiver "to investigate all subsidiaries and affiliated entities ... to determine whether the assets, property, property rights, or interests of the subsidiaries and affiliated entities derive from the abusive solar energy scheme at issue," id . at 94-95;

• gave the Receiver 120 days to notify the court "whether the Receivership should extend to any of the investigated subsidiaries or affiliated entities or specific property of those entities," id . at 95;

• dismissed "[t]he directors, officers, managers, employees, trustees, investment advisors, accountants, attorneys, and other agents of RaPower-3 LLC, IAS, and LTB[ ]," id . at 96; and

• provided that "[n]either [Mr.] Johnson nor [Mr.] Shepard, nor anyone acting on their behalf, shall make any court filings ... on behalf of [any entities in the Receivership] other than in this case or in the pending appeal of an order in this case," id . at 97. The order said this provision would apply to any later-added affiliated entities as of "the date the [c]ourt agree[d] with the Receiver's recommendation" to add them to the Receivership. Id . at 96.

3. Appeal of Injunction, Disgorgement Award, and Receivership Order

The Defendants appealed the injunction and disgorgement award, invoking appellate jurisdiction under 28 U.S.C. § 1291. See United States v. RaPower-3, LLC , No. 18-4150. They argued the Government provided insufficient evidence of a fraudulent tax scheme and challenged the district court's disgorgement calculation. The Defendants separately appealed the Receivership Order, relying on 28 U.S.C. § 1292(a)(2) for this court's jurisdiction. See United States v. RaPower-3, LLC , No. 18-4119. They contended only that the district court violated Solco's and XSun's due process rights by freezing their assets before affording them an opportunity to be heard. We consolidated the appeals.

On June 2, 2020, we affirmed the district court. See United States v. RaPower-3 LLC , 960 F.3d 1240, 1248–55 (10th Cir. 2020). We held that the Defendants failed to adequately raise their insufficient-evidence challenge on appeal, id . at 1250–51, and that the disgorgement award was a reasonable approximation of the wrongful gains, id . at 1250–54. We also concluded the Defendants lacked standing to challenge the Receivership Order on Solco's and XSun's behalf. Id . at 1248–50.

4. Receiver's Report and Motion to Expand Receivership

On February 25, 2019, while the foregoing appeals were pending, the Receiver submitted a report to the district court recommending that the Receivership extend to the 12 entities identified in the Receivership Order, plus one more ("Affiliated Entities").

The report detailed each entity's relationship to the Defendants and the fraudulent scheme. As to the Appellant Entities, it stated:

• "Solco's only business was marketing lenses on behalf of IAS." Supp. App. at 152. Mr. Johnson managed Solco and signed contracts on its behalf. Id . The company is now delinquent. Id .

• XSun "had a contractual relationship with IAS to sell lenses for IAS." Id . at 154. Mr. Johnson is XSun's manager and sole decision maker. Id . XSun hired the Defendants’ counsel, Nelson Snuffer, to appeal the disgorgement award and injunction on the Defendants’ behalf. Id .

• "Solstice is the sole owner of XSun." Id . at 170. RaPower assigned 81.3% of its revenue to Solstice. Id . Solstice shares the same corporate office as RaPower and IAS and employs both Mr. Johnson and his relatives. Id . at 169-70.

• Starlight and Black Night owned the patents for Mr. Johnson's purported solar energy technology and licensed them to IAS and RaPower. Id . at 172-74. Mr. Johnson signed the licensing agreements on behalf of Starlight and Black Night and received royalties from both companies. Id . at 171, 173.

• NPJFLP "was the epicenter of fraudulent transfers and sham transactions" between Mr. Johnson, the other Defendants, and Mr. Johnson's relatives. Id . at 189-90; seeid . at 165. Mr. Johnson transferred his solar energy technology patents, shares in IAS, and properties

...