Collins v. United States of America
Filing
71
Enter MEMORANDUM Opinion and Order Signed by the Honorable Elaine E. Bucklo on 9/12/2012: Mailed notice (jdh)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
)
)
Plaintiff and Counterclaim )
)
Defendant,
)
)
v.
)
)
UNITED STATES OF AMERICA,
)
)
Defendants and
)
Counterclaim Plaintiff,
)
)
v.
)
)
MICHAEL L. BAKER, VIJAY K. GUPTA,
)
THOMAS MCDERMOTT, ALFRED SHARP,
)
LEROY WRIGHT, and JEFFREY YESSENOW
)
)
Counterclaim Defendants.
)
------------------------------------ )
)
)
JEFFREY YESSENOW,
)
)
Counterclaim Plaintiff,
)
)
v.
)
)
UNITED STATES OF AMERICA,
)
)
Counterclaim Defendant.
)
)
HAROLD E. COLLINS,
No. 10 C 6705
MEMORANDUM OPINION AND ORDER
This case began as a lawsuit filed by Harold Collins against
the United States of America (“the government”) for erroneous or
illegal assessment or collection of tax.
The government filed a
counterclaim against Thomas McDermott, among others, alleging that
the counterclaim defendants were liable for an unpaid federal tax
assessment attributable to the counterclaim defendants’ failure to
pay over to the Internal Revenue Service (“IRS”) the trust fund
portion of income taxes and Federal Insurance Contribution Act
(“FICA”) taxes that had been withheld from wages paid to the
employees of Heartland Memorial Hospital (“Heartland”) during the
second and third quarters of 2005.
McDermott and the government
filed cross-motions for summary judgment.
For the reasons set
forth below, McDermott’s motion is denied and the government’s
motion is granted.1
I.
McDermott first became involved with Heartland when he was
hired as a consultant in 2003.
Beginning in March 2004, McDermott
made a series of loans to Heartland, eventually totaling around $3
million.
McDermott also asked Neil Fribley, a personal friend, to
work on financial issues for Heartland and Heartland agreed to take
on Fribley.
On March 17, 2004, Fribley was confirmed as vice
president of finance and real estate development and McDermott was
elected to the board of directors.
In the summer of 2004,
Heartland hired McDermott and Fribley as consultants to work on
Heartland’s financial activities relating to day-to-day operations
1
The government’s unopposed motion to withdraw admission
is also granted.
2
and on the reorganization of Heartland’s accounting department and
revenue cycle management.
According to Fribley, he and McDermott
were in daily communication about, among other things, financial
issues, including payment of bills.
On June 9, 2004, McDermott was named chairman of the executive
committee.
The committee had the primary responsibility for
handling day-to-day business transactions, including payment of
payroll and related tax liabilities.
of
the
executive
requiring
that
all
committee,
Along with the establishment
Heartland
transactions
over
established
$10,000
be
a
policy
approved
by
McDermott.
On August 18, 2004, the Heartland board approved a saleleaseback transaction in which Heartland was to sell its hospital
building to Munster Medical Holdings (“MMH”) and lease the building
back.
McDermott and Fribley were each 50% co-owners of MMH, and
after
the
transaction
shareholder.
closed
McDermott
remained
the
largest
At the same board meeting, the board approved new
consulting contracts for McDermott and Fribley.
Though Heartland
made some payments to MMH, MMH sent Heartland a notice of default
on June 13, 2005.
Later that month MMH and Heartland reached a
forbearance agreement rescinding the notice of default, though
McDermott refused to sign the agreement.
From July through
October, after the forbearance agreement was executed, Heartland
3
paid significantly more rent to MMH than it had during the first
half of 2005.
At the start of 2005, Michael Baker was hired as Chief
Operating Officer of Heartland, and during his interview, Baker was
advised that McDermott was not to be trusted.
After Baker was
hired, McDermott’s relationship with Heartland began to turn sour.
He and Fribley were removed from the executive management committee
on March 5, 2005, though McDermott continued to serve as a board
member after that date.
executive
management
McDermott also continued to serve on the
committee
of
Heartland’s
Merrillville
location, where he maintained an office. McDermott retained checksigning authority, along with other board members, on behalf of
Heartland. During the second and third quarters of 2005, McDermott
signed 4,327 checks totaling over $8 million. These check included
at least three checks to himself for $50,000; $20,000; and $25,000.
McDermott also signed at least four checks to MMH, each for amounts
between $100,000 and $298,723.
McDermott
continued
to
have
other
responsibilities
at
Heartland. In April 2005, McDermott was included in correspondence
regarding Heartland operations that other board members did not
receive.
He was re-elected to the board of directors in August
2005, and at a joint shareholders and members meeting in September
2005,
he
was
identified
administrative concerns.
as
a
resource
for
staff
regarding
In an August 18, 2005, news article,
4
McDermott
was
Heartland.
quoted
commenting
on
the
financial
status
of
And when Heartland was acquired by Wright Capital
Partners (“Wright”) in September 2005, McDermott was announced as
the president of the post-acquisition company.
As a result of the
acquisition, McDermott received approximately $143,000 of the
proceeds from the sale of the hospital building.
Ultimately,
though, McDermott declined to serve as president of the new company
and resigned as officer, director, and consultant in December 2005.
McDermott was aware of the unpaid payroll taxes, and on July,
2005, attended a board meeting at which the board established
payroll
and
taxes
as
the
top
priority
for
“cash
payments.”
McDermott claimed that he was assured that the payroll taxes would
be
paid
in
full
after
Wright
acquired
Heartland.
However,
McDermott never asked for a check to be cut to pay the payroll
taxes, and during the relevant periods he continued to sign checks
to pay other creditors after he was aware that the payroll taxes
were not being paid.
The issue of the unpaid payroll taxes was
also discussed at a meeting held at McDermott’s home between June
and October of 2005.
Additionally, board members were presented
with financial statements showing unpaid payroll taxes.
Fred
Smith, Heartland’s comptroller, resigned on August 22, 2005, citing
the unpaid payroll taxes as one of the reasons.
II.
5
A court may grant summary judgment only when “there is no
genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.”
Fed. R. Civ. P. 56(a). The party
seeking summary judgment has the initial burden of demonstrating
that there is no genuine issue of material fact.
Catrett, 477 U.S. 317, 323 (1986).
Celotex Corp. v.
If it does so, to survive a
motion for summary judgment, the non-moving party must come forward
with specific facts establishing that there is a genuine issue for
trial.
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986).
On summary judgment “facts must be
viewed in the light most favorable to the nonmoving party only if
there is a ‘genuine’ dispute as to those facts.”
550 U.S. 372, 380 (2007).
Scott v. Harris,
“Where the record taken as a whole
could not lead a rational trier of fact to find for the nonmoving
party, there is no genuine issue for trial.”
quotation marks and citation omitted).
evidence”
is
Id. (internal
The existence of “a mere
scintilla
of
insufficient
to
stave
off
summary
judgment.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52
(1986).
The Internal Revenue Code (“I.R.C.”) requires employers to
withhold income taxes, FICA taxes, and medicare taxes from the
wages of employees.
I.R.C. §§ 3102(a), 3402(a).
Employers hold
the collected taxes in trust for the United States and must pay
them over to the IRS quarterly.
See United States v. Kim, 111 F.3d
6
1351, 1356.
Under I.R.C. § 6672, every responsible person who
willfully fails to collect, account for, or pay over the withheld
taxes may be held personally responsible for any unpaid amount.
“Once the government presents an assessment of liability, the
taxpayer bears the burdens of production and persuasion.”
Ruth v.
United States, 823 F.2d 1091, 1093 (7th Cir. 1987).
III.
As an initial matter, I must note that McDermott did not
comply with Local Rule 56.1 with respect to either motion for
summary judgment. Rule 56.1 requires a party opposing a motion for
summary judgment to file “a concise response to the movant’s
statement that shall contain . . . a response to each numbered
paragraph in the moving party’s statement.”
L.R. 56.1(b)(3).
In
addition, Rule 56.1 provides that “[i]f additional material facts
are submitted by the opposing party . . . the moving party may
submit a concise reply in the form prescribed in that section for
a response.
All material facts set forth in the statement filed
pursuant to section (b)(3)(C) will be deemed admitted unless
controverted by the statement of the moving party.”
L.R. 56.1(a).
First, McDermott did not sufficiently reply to the government’s
statement of facts and instead filed excerpts from the deposition
testimony of four individuals and purported to incorporate his own
statement of facts filed in support of his motion for summary
7
judgment.
McDermott also laid out his own version of the facts in
his memorandum in response to the government’s motion.
insufficient to comply with the Rule 56.1.
This is
To the extent that
McDermott’s statement of facts submitted in support of his own
motion for summary judgment are supported by the record evidence
and conflict with the government’s statement of facts submitted in
support of its motion, I have considered McDermott to have disputed
the government’s statement of fact. Similarly, where a dispute has
been raised in the “facts”
section of McDermott’s response
memorandum, and it is supported, I have interpreted McDermott to
have denied the government’s statement.
However, where a dispute
was not apparent from McDermott’s statement of facts, I have deemed
the
government’s
McDermott
did
statements
not
respond
of
to
fact
the
admitted.
government’s
Additionally,
statement
of
additional facts filed in opposition to McDermott’s motion for
summary
judgment.
I
have
deemed
admitted
the
government’s
statement of additional facts where those facts are supported by
the record.
A. Responsible Person
A party is a “responsible person” for purposes of § 6672 if he
has “significant control or authority over an enterprise’s finances
or general decision-making.”
Ruth, 823 F.2d at 1094.
“Having
significant control does not mean having exclusive control over the
8
disbursal of funds or the final say over whether taxes or bills are
paid.”
Thomas v. United States, 41 F.3d 1109, 1113 (7th Cir. 1994)
(citing Bowlen v. United States, 956 F.2d 723, 728 (7th Cir.
1992)).
Analysis of a taxpayer’s responsibility “focuses on
whether the taxpayer could have impeded the flow of business to the
extent necessary to prevent the corporation from squandering the
taxes
it
withheld
from
its
employees.”
Id.
“Indicia
of
‘responsible person’ status include: holding corporate office,
owning stock in the company, serving on the board of directors,
possessing authority to sign checks, and control over corporate
financial affairs.”
Kim, 111 F.3d at 1362-63 (7th Cir. 1997)
(citations omitted).
McDermott meets four of the five indicia of a responsible
person enumerated in Kim (he did not hold corporate office during
the relevant time period), strongly suggesting that he was a
responsible person.
He owned stock in the company, served on the
board of directors, possessed authority to sign or co-sign checks,
and had significant control over corporate affairs.
McDermott
protests that he was not involved in the day-to-day affairs of
Heartland
and
that
his
role
within
the
organization
was
so
diminished after he was removed from the executive management
committee in March 2005 that he had no influence over Heartland’s
financial decisions or priorities.
these arguments.
The record evidence belies
In addition to the stock McDermott owned, he had
9
a significant financial stake in Heartland, as a major lender and,
through MMH, Heartland’s landlord. McDermott had authority to sign
or co-sign checks and this was an authority that he exercised on
behalf of Heartland.
It is undisputed that he signed over 4,000
checks, totaling more than $8 million, during the second and third
quarters of 2005.
Not only did McDermott sign checks to other
creditors, he signed checks to himself and to MMH, of which he was
the largest owner.
the
flow
of
McDermott may not have had the power to stop
business
entirely,
but
the
undisputed
evidence
demonstrates that he unquestionably had the power to impede it.
Further, the power play between MMH and Heartland indicates that
McDermott had significant control over Heartland’s finances.
The
letter of default MMH sent to Heartland during the relevant time
period
and
the
subsequent
forbearance
agreement
ensured
that
Heartland kept paying rent to MMH, and indirectly to McDermott,
even at a time when Heartland was not paying its payroll taxes.
McDermott’s refusal to sign the forbearance agreement is further
indication of the power struggle over the priority of rent payments
to MMH.
Finally, it is undisputed that at the end of the third
quarter of 2005, McDermott was announced as the president of the
new company to be formed after Heartland’s acquisition by Wright.
Though McDermott claims that he had been stripped of all power
after March 2005, he remained significantly involved in Heartland’s
financial and general decision-making.
10
Because the undisputed evidence shows that McDermott exercised
significant control over Heartland’s finances, I conclude that
McDermott
had
squandering
sufficient
the
authority
withheld
taxes.
to
prevent
As
such,
Heartland
McDermott
from
is
a
“responsible person” for purposes of I.R.C. § 6672.
B.
Willfulness
A responsible person acts willfully in failing to remit
withheld taxes “if he pays other creditors after he knows of the
employer’s failure to pay the withheld funds to the government.”
Thomas, 41 F.3d at 1114 (citing Garsky v. United States, 600 F.2d
86, 91 (7th Cir. 1979)).
“Willful in this civil context does not
mean possessing a specific fraudulent intent or evil motive.”
(citations omitted).
Id.
Instead, a “responsible person” is liable if
he “(1) clearly ought to have known that (2) there was a grave risk
that withholding taxes were not being paid and if (3) he was in a
position to find out for certain very easily.”
Wright v. United
States, 809 F.2d 425, at 427 (7th Cir. 1987).
McDermott does not raise a colorable argument on the issue of
willfulness.
In fact, McDermott does not dispute that he knew
during the summer of 2005 that the withheld taxes were not being
paid.
He also does not dispute that during the same time period,
he continued to sign checks to other creditors, including himself
and
MMH.
The
uncontested
facts
11
therefore
demonstrate
that
McDermott
knew
that
Heartland
was
withholding
taxes
and
not
remitting them to the IRS but instead using the funds to pay other
creditors.
As a result, McDermott is a responsible person who
acted willfully in failing to pay withheld taxes to the IRS.
IV.
For the foregoing reasons, McDermott’s motion for summary
judgment is denied and the government’s cross-motion is granted.
Judgment is entered for the United States and against Thomas
McDermott.
ENTER ORDER:
____________________________
Elaine E. Bucklo
United States District Judge
Dated: September 12, 2012
12
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