Second Circuit Upholds Lump Sum Garnishment Order as Restitution for Tax Crimes

(Parker Tax Publishing April 2021)

The Second Circuit upheld a district court's order directing an individual's former employer to pay to the court the cash surrender value of two retirement accounts held on the individual's behalf under a restitution order imposed by the court in connection with the individual's conviction on four counts of federal income tax misdemeanors under Code Sec. 7203. The court found that the lump sum garnishment order did not violate an installment payment plan in the criminal judgment because the installment plan called for payments of at least $500 but did not rule out payments above that amount. U.S. v. O'Brien, 2021 PTC 71 (2d Cir. 2021).

John O'Brien worked at Sullivan & Cromwell LLP (S&C) first as an associate and then as a partner from 1992 until 2009. In 2011, O'Brien pled guilty to violating Code Sec. 7203 by willfully failing to pay tax, make a return, or keep records and supply information. The district court sentenced O'Brien to a 28-month term of imprisonment and one year of supervised release, and ordered a restitution payment of $2,866,839.

The criminal judgment provided that O'Brien was to pay restitution in monthly installments of at least $500 over a period of supervision to begin 30 days after his release from custody. Following his release, O'Brien began making irregular restitution payments, ranging from $200 to $1,000. The restitution payments ceased entirely in 2017, and he made no further payments through July 2018. O'Brien paid less than $5,000 in restitution.

In 2018, the United States Attorney's Office for the Southern District of New York filed an application for a writ of garnishment on O'Brien's property under the Federal Debt Collection Procedures Act (FDCPA) (28 U.S.C. Sec. 3205(a)). The application asserted that O'Brien had a nonexempt interest in two retirement accounts held by S&C on his behalf that could be garnished to satisfy a portion of the remaining restitution owed under the criminal judgment. The district court issued the writ, requiring S&C to retain the property pending further order of the court. In 2019, the district court issued the garnishment order directing S&C to pay to the clerk of the court the cash surrender value of O'Brien's interest in the two retirement plans, plus any accrued interest.

O'Brien appealed the entry of the garnishment order to the Second Circuit. O'Brien challenged the order on procedural grounds, arguing that the district court erred in denying his motion to transfer venue and by declining to hold a hearing on the writ of garnishment. In addition to his procedural challenges, O'Brien also argued that the garnishment order was improper because the existence of an installment payment plan in the criminal judgment precluded the government from seeking a lump sum garnishment. According to O'Brien, the district court did not have the authority to grant a lump sum garnishment order because the amount of the garnishment was well above the specified payment plan in the criminal judgment.

The Second Circuit rejected O'Brien's procedural challenges and affirmed the district court's garnishment order. The court found that O'Brien's motions to transfer venue and for a hearing were both untimely. The court further found that the installment payment plan did not preclude the lump sum garnishment order.

According to the Second Circuit, it is well settled that the government can enforce restitution orders arising from criminal convictions using the procedures for the enforcement of a civil judgment as set forth in the FDCPA, and that among the post-judgment remedies available to the government for enforcement under the FDCPA is garnishment. Further, the court noted that the garnishment order called for O'Brien to pay "at least" $500 per month. The court therefore found that neither the payment plan nor any other part of the criminal judgment indefinitely limited the government's collection efforts on this substantial restitution order of over $2.8 million to merely $500 per month. Moreover, the court noted that O'Brien's plea agreement with the government explicitly stated that the parties agreed that the existence of a payment plan set by the court did not bar the IRS and other governmental collection efforts against any of O'Brien's available assets. Accordingly, as confirmed by O'Brien's plea agreement with the government, the court concluded that the payment plan presented no legal barrier to the issuance of a garnishment order under the circumstances of this case and provided no basis to disturb the district court's issuance of such an order.

For a discussion of the misdemeanor offense of willful failure to file a return, supply, information, or pay tax, see Parker Tax ¶265,116.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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