Opinion
No. 4:02-CV-40449.
May 18, 2004
ORDER ON MOTION FOR SUMMARY JUDGMENT
This matter is before the Court on Motion by Plaintiff/Counterclaim Defendant Donald Ferguson for Summary Judgment against Defendant/Counterclaim Plaintiff USA. Hearing was not held on the motion and the matter is fully submitted for review. This motion was originally filed on October 29, 2003, but was supplemented on April 8, 2004. Following resistance on the basis that Ferguson had not obtained leave to supplement the motion, Ferguson filed a motion to supplement the record on April 30, 2004. On May 6, 2004 the Court granted leave to supplement the motion and granted additional time for resistance. After a further request by the United States for additional time, the matter was not fully submitted until May 17, 2004, with trial set to commence on May 24, 2004.
A detailed account of the relevant facts in this case and discussion of the applicable law can be found in the Court's May 6, 2004 Order which denied Counterclaim Defendant Nicholas Miller's Motion for Summary Judgment, denied Defendant/Counterclaim Plaintiff USA's Cross-Motion for Summary Judgment against Counterclaim Defendant Nicholas Miller, and granted Defendant/Counterclaim Plaintiff USA's Cross-Motion for Summary Judgment against Counterclaim Defendant Richard Musal. For the reasons discussed below, Plaintiff/Counterclaim Defendant Donald Ferguson's Motion for Summary Judgment is denied.
I. Applicable Law and Discussion
A. "Responsible Person"
Ferguson asserts that he was not a responsible person because he had a reasonable and certain belief that he lacked authority over any department of Access Air. A mistaken belief is no defense to Section 6672 liability. See Hochstein v. United States, 900 F.2d 543, 549 (2nd Cir. 1990), cert. denied, 504 U.S. 985 (1992) ("Hochstein's good faith belief that New York law required him to prefer Safelon's employees over the federal government is not a defense to liability under section 6672.");Thomsen v. United States, 887 F.2d 12, 17-18 (1st Cir. 1989) (a plaintiff may be found willful "even though the payments to the other creditors may have been made in good faith or even in the mistaken belief that the payments were required to be made in preference to payments to the government"); Teel v. United States, 529 F.2d 903, 906 (9th Cir. 1976) ("A mistaken belief on the part of the responsible person that the tax need not or cannot be paid over does not suffice to render the failure to pay nonwillful."). Further, to the extent Ferguson's mistaken belief constitutes a reasonable cause defense, as noted in the Court's May 6, 2004 Order, the Eighth Circuit has held that reasonable cause is no part of the definition of willfulness. See Keller v. United States, 46 F.3d 851, 855 (8th Cir. 1995); Olsen v. United States, 952 F.2d 236, 241 (8th Cir. 1991); United States v. Strebler, 313 F.2d 402, 403 n. 2 (8th Cir. 1963).
Ferguson also argues he was not a responsible person during the third and fourth quarters of 1999 because he was relieved of his duties and stripped of all authority on July 2, 1999 after a massive customer service disaster. Ferguson claims that after this date, he had no employees working for him, possessed no operating authority, and had no authority to pay the excise taxes, asserting that Richard Musal ("Musal") was running the company from July 2, 1999 forward and that only Musal and Nicholas Miller ("Miller") would have been capable of developing a plan to pay the federal excise taxes.
A contract aircraft failed to show up and hundreds of customers were left stranded at their gates.
The government disputes Ferguson's contention that he was not a responsible party, asserting that Ferguson was the CEO of Holdings and Chairman of its Board of Directors during the second, third and a portion of the fourth quarter of 1999. The government also asserts that as CEO Ferguson exercised authority in all of Access Air's matters, including finance, legal and human relations and marketing, claiming that Ferguson had significant decision making authority regarding Access Air's financial matters. In support of its position, the government contends Ferguson had the authority to sign Access Air's bank checks and that he exercised that authority, that he borrowed funds on behalf of Access Air for operational use in his capacity as President and during the fourth quarter of 1999 in his capacity as chairman and CEO, that he directed that certain debts of Access Air were to be paid, that he was sent information regarding the creditors of Access Air which Musal and Miller felt had to be paid, and that he communicated with Access Air's creditors about Access Air's past due debts.
The government also asserts that Ferguson had significant decision-making authority regarding Access Air's federal excise tax matters. The government claims that Ferguson admitted that he had the authority to direct that Access Air's excise taxes for the first quarter of 1999 be paid, and that he hired and supervised Musal, who had the authority to pay Access Air's excise taxes.
"A corporate officer is responsible if he has significant, albeit not necessarily exclusive, authority in the field of corporate decision making and action where taxes due the federal government are concerned." Jenson v. United States, 23 F.3d 1393, 1394 (8th Cir. 1994) (quoting Hartman v. United States, 538 F.2d 1336, 1340 (8th Cir. 1976)) (quotations omitted). The corporate officer does not need to be an actual disbursing officer. Id. Ferguson claims that after July 2, 1999, even though he retained the title of CEO of Holdings, he had no authority at Access Air. "Ordinarily, a responsible person is an officer of the corporation." Barton v. United States, 988 F.2d 58, 59 (8th Cir. 1993).
Officers who lack tax-paying authority, however, cannot be held liable under § 6672 because of their position alone. See Godfrey, 748 F.2d at 1575-76. Thus, when deciding to bring a § 6672 claim against a corporate officer, the government cannot reasonably rely on the officer's corporate status and mechanical functions if it is beyond dispute that the officer lacks tax-paying authority. Kenagy, 942 F.2d at 464; Godfrey, 748 F.2d at 1575-76.Id. "The IRS's position that a corporate officer is a responsible person solely because of his title and status is not reasonable where the agency is possessed of evidence indicating that the officer had no authority to pay taxes." United States v. Bisbee, 245 F.3d 1001, 1007 (8th Cir. 2001) (citing Barton, 988 F.2d at 60).
In a memo dated July 1, 1999, three members of the Board (Tom Gibson, Jim Davis, and Fred Weitz) explained that a new management structure was being put into place. The memo stated that Ferguson would retain the CEO title and serve as Chairman of the Board of Directors of the airline and be responsible for strategic planning, governmental, investor, and public relations. The memo further stated that Musal would assume the position of acting President and COO, would run the airline, and was held to be accountable to the Board. Musal confirmed through his own deposition testimony that Ferguson was removed from his official duties as COO at some point in July, that Musal took over as COO and President at this time, and that Ferguson remained Chairman of the Board and CEO of the company. The evidence the government highlights in support of its position that Ferguson was indeed a responsible person is not helpful in ascertaining what level of authority Ferguson possessed during the third and fourth quarters. All of the promissory notes provided by the government to demonstrate Ferguson's authority to borrow funds on behalf of the corporation were signed by Ferguson and dated prior to July 1, 1999, and there is no evidence that the promissory note dated for October 25, 1999 was ever actually signed by Ferguson.
The promissory notes to Ruan Center were dated April 13, 1999, May 26, 1999 and May 27, 1999; the loan agreement from Northwest Bank was dated June 11, 1999.
There is also no evidence demonstrating that after July 1, 1999 Ferguson exercised his authority to hire or fire employees, and the government has not provided any bank checks that were signed by Ferguson after July 1, 1999. While Ferguson may have admitted that during the second quarter he had the authority to direct that Access Air's excise taxes for the first quarter be paid, there is evidence in the record which indicates his position in the corporation during the second quarter was different than his position during the third and fourth quarters.
The government argues that as a result of Ferguson's supervision over Musal, he possessed the same decision making authority over Access Air's tax matters as Musal possessed; however, the evidence in the record fails to provide adequate clarity for the Court to make this determination as a matter of law. The nature of Ferguson's authority at any material point in time is subject to a factual determination.
In addition, Musal's deposition testimony suggests that Ferguson stepped down from his positions with the corporation on October 26, 1999. If Ferguson was no longer employed with the company after this date, he may not be held liable for excise taxes which were collected after his professional relationship with Access Air ended. Other than Musal's brief deposition testimony on the subject, the record lacks information regarding what took place on October 26, 1999, if anything. A genuine issue of material fact exists regarding whether Ferguson indeed stepped down from his positions with the company in October of 1999, and if so, how this affected his status with the company.
Although Ferguson asserts that he was stripped of all authority in July of 1999, viewing the facts in the light most favorable to the government, as CEO and Chairman Ferguson would most likely have retained some authority; on the current record however the Court cannot not make an adequate finding regarding the precise nature of Ferguson's authority during the third and fourth quarters of 1999. A motion for summary judgment shall be granted only if there are no genuine issues as to any material facts and the moving party is entitled to judgment as a matter of law. See Winthrop Resources Corp. v. Eaton Hydraulics, Inc., 361 F.3d 465, 468 (8th Cir. 2004). A genuine issue of material fact exists regarding what corporate decision making authority Ferguson possessed as Chairman and CEO after July 1, 1999, and Ferguson's status with the company after October 26, 1999. The Court cannot determine as a matter of law that Ferguson was not a "responsible person" under the statute.
B. "Willfully failed to pay"
Although Ferguson does not contest that he was a responsible person during the second quarter of 1999, he argues he lacked knowledge that the federal taxes for the second quarter were unpaid, and that without actual knowledge of the tax situation at a time when he was a responsible person, he can not be liable under Section 6672. With respect to the third and fourth quarter taxes, Ferguson claims he is not liable under Section 6672 because he was no longer a responsible person under the statute and possessed no authority to pay the taxes.
The United States disputes that Ferguson did not know about the delinquent excise taxes until after July 3, 1999, asserting that Ferguson was provided Access Air's monthly financial statements in 1999, including the balance sheets reflecting Access Air's unpaid excise taxes, and that he was provided with a copy of Access Air's "pro forma" balance sheet and income statement by Miller, which detailed Access Air's excise taxes. The government claims that Ferguson and Musal engaged in principle discussions regarding the financial decisions of Access Air, and that Ferguson was always well informed about Access Air's financial conditions because of the continuous discussions that were held on that topic during the second through fourth quarters of 1999, particularly regarding Access Air's inability to pay its debts. The government claims that in late August or early September of 1999, Musal specifically told Ferguson that Access Air's excise tax return for the second quarter of 1999 had not been filed and that excise taxes were due. Ferguson maintains that he did not know about the delinquency of the excise taxes until November of 1999.
The government further asserts that it is irrelevant whether Ferguson did not learn until September or November of 1999 that Access Air's second quarter excise taxes were not paid. The government contends that Ferguson knew that Access Air was responsible for paying its excise taxes to the IRS, that Access Air had problems paying its debts, that Access Air's balance sheets showed its accrued excise taxes and that these excise taxes were due, yet despite this knowledge he never inquired about whether Access Air's excise taxes had been paid and he never took steps to ensure that those taxes would get paid. Rather, according to the government, he continued to receive compensation from Access Air during the first through the fourth quarters of 1999, thereby proceeding with a reckless disregard of a known or obvious risk that Access Air's excise taxes for the second and third quarters and a portion of the fourth quarter of 1999 may not get paid.
"A responsible person acts willfully within the meaning of § 6672 whenever he acts or fails to act consciously and voluntarily and with knowledge or intent that as a result of his action or inaction trust funds belonging to the government will not be paid over but will be used for other purposes." Olsen, 952 F.2d at 240 (quoting Hartman, 538 F.2d at 1341) (quotations omitted). "A responsible person also acts willfully by proceeding with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the government." Id. (quoting Wood v. United States, 808 F.2d 411, 415 (5th Cir. 1987)) (quotations omitted).
Musal stated in his deposition that prior to June 7, 1999, Ferguson, as Chairman of the Board of Directors knew that there was a problem paying vendors and that he and Ferguson had daily conversations regarding the corporate finances. The record is not clear whether these conversations included discussions specifically pertaining to the delinquent excise taxes. Musal did state in his deposition that he discussed the federal excise tax problem with Ferguson in late August/early September of 1999, but it is unclear whether the tax situation was discussed by Ferguson and Musal prior to this time.
A review of the balance sheets demonstrates that any person who read them would have been aware that excise taxes were owing. The balance sheets are easy to read and clearly list the excise taxes as a liability of the company. However, merely listing the excise taxes as a liability on a balance sheet that was allegedly given to and read by Ferguson is insufficient to determine as a matter of law that Ferguson was aware that the excise taxes were not being paid over to the IRS or that he proceeded with a reckless disregard of a known or obvious risk that the excise taxes may not be remitted to the government.
The current record simply does not adequately define when Ferguson became aware of the excise tax situation, to what extent he was made aware of the nature of the delinquency, or whether the risk that the excise taxes may not be remitted to the government was known or obvious to him. The record demonstrates that even if Ferguson is ultimately found to be a responsible person, a genuine issue of material fact exists regarding whether he willfully failed to pay the excise taxes. Summary judgment is therefore not appropriate.
C. Presence of Bankruptcy Court
Finally, Ferguson claims that in addition to his asserted lack of authority, he could not be considered a responsible party because of the presence of the Bankruptcy Court, claiming that after Access Air filed for bankruptcy, the assets of the company were governed by the Bankruptcy Court, and that even if he had the authority and power to pay the excise taxes in the fourth quarter, he could not have paid them because of the bankruptcy filing. The government maintains that the fact that Access Air filed for bankruptcy on November 29, 1999 is irrelevant in determining whether Ferguson had the status, duty, and authority to pay those taxes during the third and a portion of the fourth quarter of 1999. For the same reasons as discussed in the Court's May 6, 2004 Order pertaining to Miller and Musal, if Ferguson is found to be a responsible person during the relevant time periods, the presence of the Bankruptcy Court is irrelevant in determining whether he acted willfully in failing to pay the excise taxes.