6th Circuit Rules LLC’s Not Customers under Financial Privacy Act

In an issue of first impression at the Circuit Court level, the Sixth Circuit issued its opinion in Hohman, et al. v. Eadie, et al. on July 5, 2018, affirming the decision of the District Court in the Eastern District of Michigan that limited liability companies (“LLCs”) are not “customers” as defined under the Right to Financial Privacy Act (“Act”) and are therefore not entitled to the waiver of sovereign immunity provided by the Act.

In Hohman, the IRS issued “John Doe” summonses to two separate banks for records related to three different accounts without first obtaining approval from the federal district court, as required by I.R.C. § 7609(f).  After receiving notice of the summonses from their banks, Plaintiffs initially sought to quash the subpoenas, but that petition was later withdrawn.  Limited discovery determined that the subpoenas sought records from Plaintiff Jodi Hohman’s individual bank account, Plaintiff JHohman, LLC’s bank account, and the bank account of Plaintiff You Got Busted By Me, LLC.  After withdrawing their petition to quash, Plaintiffs subsequently filed suit against the United States, the two IRS employees involved in the issuances of the John Doe summonses at issue, and unnamed John Does, alleging violation of the Right to Financial Privacy Act, violations of the Fourth and Fifth Amendments of the U.S. Constitution, and the Internal Revenue Code’s prohibition of the unauthorized disclosure of tax return information.

At issue on appeal was the district court’s determination that it lacked subject matter jurisdiction because sovereign immunity barred the Plaintiff’s claims under the Act.  Specifically, although the district court determined that the IRS had violated I.R.C. § 7609(f), it found that the private cause of action created under § 3417 of the Act waiving sovereign immunity did not apply to LLCs because LLCs were not “plainly within the plain meaning of the words ‘individual or partnership of less than five individuals’” as set forth in 12 U.S.C. § 3401(4).  For reasons outside the Sixth Circuit’s analysis, the district court had determined that Hohman, individually, had failed to state a claim.  What remained on appeal were the claims of the two LLCs.

In affirming the district court’s decision, the Sixth Circuit focused on the liability component of an LLC as opposed to the tax structure, specifically highlighting the fact that unlike an individual or partnership, an LLC does not have any member that remains liable for the company’s debts.  While individuals, sole proprietorships, partnerships, and limited partnerships have all been found to qualify as a “customer” for purposes of the Act, the Sixth Circuit agreed with the two district courts that have addressed this issue and found that, like corporations, LLCs were not intended to be included within the definition of “customer” under the Act (Flatt v. U.S. SEC, 2010 WL 1524328, at *3 (S.D. Fla. Apr. 14, 2010) and Exchange Point, LLC v. U.S. SEC, 100 F. Supp. 2d 172, 176 (S.D.N.Y. 1999)).

The Sixth Circuit’s complete opinion can be accessed here.