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Case involving fraudulent $1.7 million business loan going back to court

ANNIE YAMSON
Special to the Legal News

Published: December 8, 2016

A federal court of appeals recently held that a district court did not engage in the proper analysis when ordering restitution to be paid from a spouse's assets.

A three-judge appellate panel in the 6th U.S. Circuit Court of Appeals ordered the United States District Court for the Southern District of Ohio to hold an evidentiary hearing in the case against Paul Musgrave, who was convicted on four counts relating to a scheme to fraudulently obtain a business loan of more than $1.7 million.

"This appeal concerns which assets may be included in an order governing payment of a criminal defendant's restitution obligations under the Mandatory Victim Restitution Act," Judge Jane Stranch wrote on behalf of the court of appeals.

As a result of his fraud, Musgrave was ordered to pay restitution and a fine totaling nearly $2 million.

The district court imposed a payment schedule under which Musgrave would make monthly payments of $2,000 and quarterly payments of $25,250.

Musgrave was also ordered to submit financial disclosures and a plan for meeting the court's payment schedule.

"Finding Musgrave's initial financial disclosure forms unsatisfactory, the district court ordered Musgrave to supplement his disclosures, specifically noting that the forms' instructions state that 'all assets of defendant's spouse and dependents must be included if defendant enjoys the benefits of or makes occasional contributions towards them,'" court documents state.

In a second disclosure, Musgrave indicated that his gross income was $6,000 per month, that he held partial ownership stakes in two businesses and that he had no savings in his name.

He also noted that his wife owned the half-million dollar home that they lived in along with retirement accounts, an investment account that she created with inherited money, a rental condominium and several cars.

According to the district court, the wife held at least $1.7 million in assets and almost $400,000 in liabilities.

Musgrave's payment plan indicated he would sell his businesses and borrow the necessary funds to meet the court's payment schedule.

But the district court rejected that plan after finding that Musgrave effectively shared ownership of his wife's income and assets, including the home, cars, personal property, rental condo and retirement and investment accounts, despite the fact that those assets were only in her name.

The lower court described the division of the assets as "largely illusory" and ordered Musgrave to make his payments without borrowing money from assets held in his own name, his wife's name or both of their names.

In his appeal, Musgrave challenged that order and the circuit court found that although the district court could order payments from a spouse's assets, it first had to engage in the proper analysis, which the district court in this case did not do.

"The Mandatory Victim Restitution Act mandates restitution for offenses 'committed by fraud or deceit,' such as Musgrave's," Stranch wrote. "A restitution order under the MVRA 'is a lien in favor of the United States on all property and rights to property of the person fined as if the liability of the person fined were a liability for a tax assessed under the Internal Revenue Code of 1986."

Under U.S. Supreme Court precedent, courts must apply the federal tax lien statute in two steps, first looking at state law to determine what rights the taxpayer has in the property that the government seeks to reach, and then looking to federal law in order to determine whether the taxpayer's state-delineated rights qualify as "property" or "rights to property."

"The record on appeal is insufficient to determine whether the government can reach assets held in the name of Musgrave's wife," Stranch wrote.

The appellate panel held that, while the district court was correct in looking at the level of effective control that Musgrave exercised over his wife's assets, it did not identify which specific elements of Musgrave's financial disclosures provided the factual basis for its findings.

"As an initial matter, neither the parties nor the district court discusses which state law applies to determine the rights Musgrave has in any of the assets in his wife's name," Stranch wrote. "For the foregoing reasons, we remand to the district court for an evidentiary hearing to determine which assets the United States can reach to enforce the order of restitution."

Following the evidentiary hearing, the district court may amend the restitution order "as it deems appropriate."

Judges David McKeague and Raymond Kethledge joined Stranch to form the majority.

The case is cited United States v. Musgrave, Case No. 15-3388.

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