Eriem Surgical, Inc. v. USA, et al

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Filed opinion of the court by Judge Easterbrook. AFFIRMED. Frank H. Easterbrook, Circuit Judge; Ilana Diamond Rovner, Circuit Judge and Diane S. Sykes, Circuit Judge. [6805004-1] [6805004] [14-3540]

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Case: 14-3540 Document: 32 Filed: 12/16/2016 Pages: 4 In the United States Court of Appeals For the Seventh Circuit ____________________ No. 14‐3540 ERIEM SURGICAL, INC., Plaintiff‐Appellant, v. UNITED STATES OF AMERICA and JOHN KOSKINEN, Commis‐ sioner of Internal Revenue, Defendants‐Appellees. ____________________ Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 12 C 8268 — James B. Zagel, Judge. ____________________ ARGUED NOVEMBER 1, 2016 — DECIDED DECEMBER 16, 2016 ____________________ Before EASTERBROOK, ROVNER, and SYKES, Circuit Judges. EASTERBROOK, Circuit Judge. Micrins Surgical, Inc., went out of business on March 13, 2009, without paying all of its taxes. Eriem Surgical, Inc., was incorporated the same day, purchased Micrins’ inventory, took over its oﬃce space, hired its employees, used its website and phone number, and pursued the same line of business: the sale of surgical Case: 14-3540 2 Document: 32 Filed: 12/16/2016 Pages: 4 No. 14‐3540 instruments. Bernhard Teitz, the president and 40% owner of Micrins, continued to play a leading role in Eriem, though its sole stockholder is Carol Teitz, Bernhard’s wife. Eriem uses “Micrins” as a trademark. (Bernhard asserts that he owns this mark and licensed it to Eriem.) The Internal Revenue Service treated Eriem as a continuation of Micrins and col‐ lected almost $400,000 of Micrins’ taxes from Eriem’s bank accounts and receivables. Eriem responded with this wrong‐ ful levy suit under 26 U.S.C. §7426(a)(1). After a bench trial, the district judge concluded that Eriem is indeed a continua‐ tion of Micrins and that the levy therefore is valid. The Supreme Court has never decided whether state or federal law governs corporate successorship when the dis‐ pute concerns debts to the national government. One might infer from United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), that federal law controls but generally absorbs state law, unless it is hostile to national interests. But, a generation after Kimbell Foods, the Supreme Court noted a conﬂict among the circuits on the subject and postponed its resolu‐ tion, in an opinion that did not cite Kimbell Foods. See United States v. Bestfoods, 524 U.S. 51, 63 n.9 (1998). The next year the Court held in Drye v. United States, 528 U.S. 49 (1999), that in tax cases state law determines the taxpayer’s rights in prop‐ erty that the IRS seeks to reach, while federal law determines which of those rights the IRS can collect on. Neither Eriem nor the IRS contends that the Internal Revenue Code says anything about corporate successorship, so it seems best to apply state law. (Eriem has not contended that it would fare better under federal law—if there is any on this subject.) The district court concluded that Bernhard has been run‐ ning Eriem, which is conducting the same business as Case: 14-3540 No. 14‐3540 Document: 32 Filed: 12/16/2016 Pages: 4 3 Micrins notwithstanding Carol’s ostensible ownership and the change of focus from instruments used in health care to instruments used by cosmetic surgeons. Eriem insists that Carol is the real as well as the ostensible owner, that the switch to instruments for cosmetic surgery marks a substan‐ tial change of business, and that it is irrelevant that Eriem bought all of Micrins’ assets, hired its workers, occupies the same premises, and uses the Micrins trademark, website, phone number, and email address. But under Illinois law, which uses a multi‐factor balancing standard to determine successorship, see Steel Co. v. Morgan Marshall Industries, Inc., 278 Ill. App. 3d 241 (1st Dist. 1996), these contentions are matters for the trier of fact. The district court’s conclusion that Eriem is still conducting the Micrins business is not clearly erroneous. That successorship is the “ultimate issue” does not make it less a ﬁnding of fact. See, e.g., Pullman‐ Standard v. Swint, 456 U.S. 273 (1982); Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709 (1986). According to Eriem, the district judge made a legal error by failing to give dispositive signiﬁcance to the change of ownership. Bernhard owned only 40% of Micrins’ stock; he claims to own none of Eriem’s, but even if all of his wife’s shares are imputed to him the diﬀerence between 40% own‐ ership of Micrins and 100% of Eriem means that they just cannot be the same business. Eriem contends that under Vernon v. Schuster, 179 Ill. 2d 338 (1997), any change in own‐ ership prevents treating one ﬁrm as another’s successor. But that’s not what Vernon said and is not how it has been un‐ derstood. There was a substantial change of ownership in Steel Co., in addition to the fact that a former stockholder was replaced Case: 14-3540 4 Document: 32 Filed: 12/16/2016 Pages: 4 No. 14‐3540 by his spouse as stockholder of the new ﬁrm, and the court held that this did not prevent treating the new ﬁrm as the old one’s successor when all other considerations pointed that way. We read Vernon (as did Steel Co.) as holding that a complete change of ownership prevents a ﬁnding of succes‐ sorship, not that complete identity of ownership is essential to successorship. The district court’s conclusion that Carol Teitz serves as a proxy for her husband means that there has not been a complete change of ownership; this, too, was a conclusion of Steel Co. We could imagine an argument that, because Bernhard owned only 40% of Micrins’ stock, Eriem should be liable for only 40% of its taxes. But Eriem has taken an all‐or‐none stance; it is unwilling to concede owing the Treasury a pen‐ ny. Given a choice between all and none, the district court did not commit either a legal or a factual error in electing “all.” AFFIRMED

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