Hudak et al v. The United States of America Internal Revenue Service

Filing 110

MEMORANDUM AND ORDER denying 100 Motion of USA for Summary Judgment. Signed by Judge Marvin J. Garbis on 7/15/13. (jnls, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
TIMOTHY J. HUDAK, et ux.

*

Plaintiffs

*

vs.

*

THE UNITED STATES OF AMERICA

CIVIL ACTION NO. MJG-11-1271

*
*

*

*

Defendant
*
*
*
*
*
*
MEMORANDUM AND ORDER RE: SUMMARY JUDGMENT

*

The Court has before it the United States' Motion for
Summary Judgment Against Timothy Hudak [Document 100] and the
materials submitted relating thereto.

The Court has held a

hearing and has had the benefit of the arguments of counsel.

I.

SUMMARY INTRODUCTION
At all times relevant hereto, Timothy Hudak ("Hudak") was

the owner and president of related companies, referred to as
"the Hudak Companies".

The Hudak Companies failed to comply

with their withholding and employment tax obligations for the
quarterly tax periods ending on the following dates: 12/31/07,
9/30/08, 12/31/08, 3/31/09, 6/30/09, 9/30/09, 12/31/09,
3/31/10/, and 12/31/10.

In due course, the Internal Revenue

Service made an assessment pursuant to § 6672 of the Internal

Revenue Code1 against Hudak.2

According to the Government, as of

May 27, 2013, the § 6672 trust fund recovery penalties assessed
against Hudak totaled approximately $2,338,248.91, which
includes interest and costs that continue to accrue.

Hudak made

partial payment of the assessment3 against him, filed a claim for
refund, and then brought the instant lawsuit.

The Government

has duly counterclaimed for the unpaid balance of the
assessment.
By the instant motion, the Government seeks summary
judgment against Hudak, rendering him liable for the amount due
on the assessment with interest and costs.

II. SUMMARY JUDGMENT STANDARD
A motion for summary judgment shall be granted if the
pleadings and supporting documents show "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 well-established principles pertinent to summary
judgment motions can be distilled to a simple statement: The
court may look at the evidence presented in regard to a motion
1

All Section references herein are to Title 26 of the United
States Code, the Internal Revenue Code.
2
And Dwight C. Mules, the chief financial officer of the
Hudak Companies. While Mules is a party to this lawsuit, he is
not a party to the instant motion.
3
For a detailed procedural background see the Memorandum and
Order [Document 25].
2

for summary judgment through the non-movant's rose-colored
glasses, but must view it realistically.

After so doing, the

essential question is whether a reasonable fact finder could
return a verdict for the non-movant or whether the movant would,
at trial, be entitled to judgment as a matter of law.

See,

e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Shealy
v. Winston, 929 F.2d 1009, 1012 (4th Cir. 1991).
When evaluating a motion for summary judgment, the court
must bear in mind that the "summary judgment procedure is
properly regarded not as a disfavored procedural shortcut, but
rather as an integral part of the Federal Rules as a whole,
which are designed 'to secure the just, speedy and inexpensive
determination of every action.'"

Celotex, 477 U.S. at 327

(quoting Rule 1 of the Federal Rules of Civil Procedure).

III. DISCUSSION
Section 6672 provides, in pertinent part:
Any person required to collect, truthfully
account for, and pay over any tax imposed by
this title who willfully fails to collect
such tax, . . . shall, in addition to other
penalties provided by law, be liable to a
penalty equal to the total amount of the tax
evaded, or not collected, or not accounted
for and paid over.
26 U.S.C. § 6672 (a).
Thus, for Hudak to be liable pursuant to § 6672 he must, as
3

to each period for which liability is asserted4, have been a
"responsible person" as well as "willfully" failed to collect
and pay over the taxes at issue.
In the summary judgment context, Hudak as the non-moving
party, is entitled to have "the credibility of his evidence as
forecast assumed, his version of all that is in dispute
accepted, all internal conflicts in it resolved favorably to
him, the most favorable of possible alternative inferences from
it drawn in his behalf; and finally, to be given the benefit of
all favorable legal theories invoked by the evidence so
considered."

Charbonnages de France v. Smith, 597 F.2d 406, 414

(4th Cir. 1979).

Therefore, despite the Government's vigorous

denial of Hudak's assertions, for purposes of the instant
discussion, the Court must accept the version of the facts most
favorable to Hudak.

On this basis, the Court cannot case aside

the fact that a reasonable jury could find that:
1 -

Prior to February 17, 2010, Hudak had reasonably
delegated to Mules – the chief financial officer - the
responsibility for compliance with employment tax
obligations;

2 -

Mules, and not Hudak, made decisions regarding whether

4

As discussed herein, under established Fourth Circuit
precedent, Hudak would have § 6672 liability if he was a
responsible person for periods prior to February 17, 2010, first
learned of the tax deficiency on that date and then failed to
use unencumbered funds available to the Hudak Companies to pay
the back taxes. See Erwin v. United States, 591 F.3d 313, 326
(4th Cir. 2010).
4

to pay the Internal Revenue Service or other creditors
with available funds and Hudak merely signed checks
after the decision to pay (and in what amount) was
made by Mules;
3 -

Mules misled Hudak into believing that the Hudak
Companies were compliant with their employment tax
obligations;

4 -

Hudak reasonably, not recklessly, relied upon Mules'
representations;

5 -

On February 17, 2010, Hudak became aware that the
Hudak Companies were not, and had not been, compliant
with their employment tax obligations; and

6 -

Thereafter, Hudak commenced to seek to have the Hudak
Companies comply with their employment tax obligations
on a going forward basis.

A.

Responsible Person Status

The United States Court of Appeals for the Fourth Circuit
has stated that
To determine who within a company is a
"responsible
person"
under
§
6672,
we
undertake a pragmatic, substance-over-form
inquiry into whether an officer or employee
so participate[d] in decisions concerning
payment of creditors and disbursement of
funds that he effectively had the authorityand hence a duty-to ensure payment of the
corporation's payroll taxes. . . . Stated
differently, the crucial inquiry is whether
the person had the "effective power" to pay
the taxes-that is, whether he had the actual
authority or ability, in view of his status
within the corporation, to pay the taxes
owed.
Plett v. United States, 185 F.3d 216, 219 (4th Cir. 1999)
(internal citations and quotations omitted).

5

The Fourth Circuit has developed a "non-exhaustive list of
factors to consider in determining whether 'the substance of the
circumstances' establishes responsible person status under §
6672."

Erwin v. United States, 591 F.3d 313, 320 (4th Cir.

2010).

Those factors include whether the person at issue:
(1) served as an officer or director of the
company;
(2) controlled the company's payroll;
(3) determined which creditors to pay and
when to pay them;
(4) participated in the corporation's dayto-day management;
(5) had the ability to hire and fire
employees; and
(6) possessed the power to write checks.

Id.

No one factor is determinative; the court is to assess the

totality of the circumstances.

Id.

While the Government may well prevail at trial, the
evidence can be viewed as favoring Hudak as to at least one – if
not more – of these factors.

For example, on Hudak's version of

the "facts", it was Mules and not he who determined which
creditors to pay, when to pay them, and the amount they were to
be paid.

On Hudak's version, any check signing he did was

perfunctory.

Of course, the jury will make the ultimate

determination of whether to accept Hudak's version of the facts.
6

The Government asserts that as the president and sole owner
of the Hudak Companies, Hudak had the authority to pay the taxes
owed and cannot escape responsible person status by claiming to
have delegated that authority to Mules.

However, that status

does not necessarily make him a responsible person for § 6672
purposes.

"[A] party cannot be presumed to be a responsible

person merely from titular authority . . . The focus must
instead be on substance rather than form."

O'Connor v. United

States, 956 F.2d 48, 51 (4th Cir. 1992) (reversing district
court grant of summary judgment to government in § 6672 case
where O'Connor, vice president and half owner of company,
claimed he did not perform officer-related duties and did not
exercise authority that "his status as equity holder and vice
president may have bestowed upon him").

Although a person

cannot avoid "responsible person status" by delegating much of
his or her authority to others, the practical realities of the
substance of a business arrangement cannot be ignored.

See

Erwin, 591 F.3d at 322-23 (explaining delegation of authority
would not relieve Erwin of responsible person status but
assessing evidence of how Erwin actually exercised his authority
within the company).5

While Hudak does not claim to be a mere

passive investor in the Hudak Companies, the evidence and
5

Though in Erwin, the delegation of authority with respect
to financial matters appeared to include hiring an independent
accountant. See Erwin, 591 F.3d at 318.
7

inferences reasonably drawn from the record present genuine
issues of material fact preventing summary judgment establishing
Hudak's responsible person status for the entire period at
issue.6

B.

Willfulness

In the § 6672 context, the word "willful" means that the
responsible person had "knowledge of nonpayment or reckless
disregard of whether the payments were being made."

Turpin v.

United States, 970 F.2d 1344, 1347 (4th Cir. 1992) (internal
quotation marks omitted).

A responsible person's intentional

preference of other creditors over the Internal Revenue Service
will establish willfulness. See United States v. Pomponio, 635
F.2d 293, 298 n.5 (4th Cir. 1980).

Such an intentional

preference will exist if the responsible person "[knew] of or
recklessly disregard[ed] the existence of an unpaid deficiency."
Turpin, 970 F.2d at 1347.
The Government contends that Hudak had actual knowledge of,
or recklessly disregarded, the Hudak Companies' employment tax
noncompliance at all relevant times.

If Hudak is unable to

prove that the Government is wrong in this assertion, his

6

Government counsel declined, although invited to do so at
argument, to seek partial summary judgment establishing
responsible officer status for the period after February 17,
2010.
8

willfulness will be established.
Hudak admits to having actual knowledge of the Hudak
Companies' prior employment tax noncompliance as of February 17,
2010.

As the Fourth Circuit has stated:
. . . [F]ollowing the lead of every other
circuit to consider the question, we adopt
the rule that when a responsible person
learns that withholding taxes have gone
unpaid in past quarters for which he was
responsible, he has a duty to use all
current
and
future
unencumbered
funds
available to the corporation to pay those
back taxes.

Erwin, 591 F.3d at 326.
Therefore, if Hudak is found to have been a responsible
person for a period prior to February 17, 2010, he would be
required thereafter to use all unencumbered funds available to
the Hudak Companies to reduce the Hudak Companies' withholding
tax liabilities from the prior periods.
Hudak bears the burden of proving that no unencumbered
funds were available to satisfy the delinquency, as this inquiry
is part of the larger inquiry into the willfulness question.
See United States v. Kim, 111 F.3d 1351, 1359 (7th Cir. 1997).
While the Fourth Circuit has yet to formally adopt a definition
for "encumbered funds", other Circuits have considered funds
encumbered, for purposes of § 6672 if "'the taxpayer is legally
obligated to use the funds for a purpose other than satisfying
the preexisting employment tax liability and if that legal
9

obligation is superior to the interest of the IRS in the
funds.'"7

Id. (quoting Honey v. United States, 963 F.2d 1083,

1090 (8th Cir. 1992); Conway v. United States, 647 F.3d 228, 237
(5th Cir. 2011); Huizinga v. United States, 68 F.3d 139, 145
(6th Cir. 1995).
Hudak contends, among other things, that the funds in
question were encumbered by virtue of a Maryland statute
imposing a trust on funds obtained for certain purposes.8

See

Huizinga, 68 F.3d at 142 (finding Michigan Builders Trust Fund
Act encumbered use of available funds for purposes of
"willfulness" inquiry).

However, the legal and factual issues

surrounding this matter were not adequately presented to enable
a definitive decision on the instant summary judgment motion.
7

While not explicitly adopting the definition of "encumbered
funds" in Kim and Honey, the Fourth Circuit has signaled
approval of this definition. See Erwin, 591 F.3d at 326
(relying on Honey to conclude "willfulness" where the undisputed
evidence showed Erwin had paid rent and food vendors instead of
paying the IRS and there was no contention that any "creditor
held a security interest in these funds superior to the IRS's
interest").
8
That is Md. Code Ann., Real Prop. § 9-201, which provides
in pertinent part that any "moneys paid . . . by the owner or
contractor to a subcontractor for work done or materials
furnished, or both, for or about a building by any
subcontractor, shall be held in trust by the contractor or
subcontractor, as trustee, for those subcontractors who did work
or furnished materials, or both, or about the building, for
purposes of paying those subcontractors." See Selby v. Williams
Constr. Servs., 948 A.2d 132, 137 (Md. Ct. Spec. App. 2008)
(explaining purpose of Maryland trust statute is to protect
subcontractors from dishonest practices by general contractors
and other subcontractors).
10

These matters will be addressed, in due course, at trial.
The "bottom line" is that the Government is not entitled to
summary judgment with regard to Hudak's willfulness.

C.

The "Complete Defense"

Hudak asserts that he has a "complete defense" to any
liability for the § 6672 trust fund assessment.

The specifics

of this "complete defense" have yet to be clarified.
As best the Court can now understand it, the "complete
defense" is based upon the contention that the Hudak Companies'
failure to comply with their withholding tax obligations was
caused by the Government.

The factual basis – which the

Government denies can be established – is that the Hudak
Companies were subcontractors on a Government contract, the
Government wrongfully delayed making certain payments to the
general contractor, causing delays in payments to the Hudak
Companies, which in turn caused financial distress to the Hudak
Companies that resulted in the tax noncompliance.
Hudak has not presented, to date, authority or argument
that the Court finds persuasive supporting the "complete
defense."

Hudak refers to the district court decision in Iraci

v. Scanlon, 202 F. Supp. 42 (E.D.N.Y. 1961), adhered to on

11

reargument, 61-C-187, 1962 WL 13062 (E.D.N.Y. Jan. 30, 1962).
The Court seriously questions whether the Iraci district court
decision, particularly in light of the procedural issues9 and
"history" of the case10, is at all pertinent.

In any event, even

if the district court in Iraci can be said to have decided that
there could be a "complete defense" as articulated by Hudak, the
Court finds the decision unpersuasive.
The Court will not foreclose Hudak from seeking to present,
and preserve for appeal if necessary, his "complete defense"
theory.

Inasmuch as the Government contends that Hudak cannot

establish the factual basis on which the theory depends, Hudak
must obtain a verdict establishing the necessary facts.

Thus,

Hudak must present an appropriate verdict question with any
necessary instructions relating thereto.
It appears at argument, that Hudak's counsel, may have been
seeking a verdict question such as:
Has Timothy Hudak proven, by a preponderance
of the evidence, that, without any fault on
the part of the Grunley Company or the Hudak
9

The decision on re-argument was based upon the view that
the assessment was not subject to the prohibition against tax
injunctions because the Government was seeking to hold the
plaintiff liable for the tax of another. This intriguing
concept does not appear to have taken "traction" in the last
fifty years.
10
See Botta v. Scanlon, 288 F.2d 504 (2d Cir. 1961).

12

Companies, the Government wrongfully delayed
paying Grunley on change orders, causing
Grunley to delay paying the Hudak Companies,
which delay then caused the Hudak Companies
to be unable to meet their employment tax
and withholding obligations for any of the
taxable periods at issue?

The Court is not suggesting that the foregoing question is
appropriate or even that there can be any appropriate question
to preserve the "complete defense" theory.

However, the Court

will give Hudak the opportunity to provide a verdict question
with instructions so as to seek to preserve the "complete
defense" theory for appellate review.

If Hudak makes such a

submission, the Court will consider whether to include the
question in the verdict sheet if the evidence at trial is
adequate to warrant the question.

13

IV.

CONCLUSION
For the foregoing reasons,
1.

The United States' Motion for Summary Judgment
Against Timothy Hudak [Document 100] is DENIED.

2.

The case shall proceed to jury trial.

SO ORDERED on Monday, July 15, 2013.

/s/________
Marvin J. Garbis
United States District Judge

14