Lead Opinion
Gail McClendon appeals the district court's summary judgment determining that her late husband, Dr. Robert McClendon ("McClendon"), was personally liable under
I.
In 1979, McClendon founded Family Practice Associates of Houston ("FPA"), a professional medical association. By 1995, FPA employed five doctors, numerous nurses, and related support staff. During that year, the board of directors of FPA hired Richard Stephen, a certified public accountant, to serve as FPA's chief financial officer. From 1995 to 2009, Stephen informed the board that FPA was doing well financially and that all of FPA's tax obligations were being met.
On or about May 11, 2009, however, FPA learned from the Internal Revenue Service ("IRS") that Stephen's representations were false. Specifically, the IRS had no record of any payroll tax deposits on behalf of FPA for several of the previous years. FPA subsequently discovered that Stephen failed to remit FPA's federal withholding taxes for twenty-one consecutive quarters, from the third quarter of 2003 to the third quarter of 2008, and that he had been stealing money from FPA for many years. The consequences were disastrous: FPA accrued an unpaid withholding tax balance of over $11 million.
According to McClendon's deposition testimony and affidavit, as soon as the board discovered that the payroll taxes were unpaid, FPA stopped paying its creditors and vendors, as advised by counsel. To avoid using any of FPA's existing or future funds, and to ensure that FPA's staff employees received their payroll checks in May 2009, McClendon and his wife loaned FPA $100,000. In addition, McClendon and his two fellow board members created a separate company, MST Interests, L.L.C., to use their own personal funds to pay FPA's non-IRS creditors. FPA remitted all existing receivables and any new receivables it subsequently received *778directly to the IRS. The amount of receivables FPA paid the IRS totaled over $400,000. FPA also turned over to the IRS $250,000 in insurance proceeds it received on the insurance claim it filed for employee theft.
McClendon and the other board members filed a criminal complaint against Stephen. In 2013, Stephen pleaded guilty in Texas state court to first-degree felony theft of property over $200,000. He was sentenced to ten years in prison.
II.
On August 27, 2012, the IRS assessed approximately $4.3 million in penalties against McClendon personally, pursuant to
In response, the Government filed a counterclaim against McClendon, seeking to convert the penalties into a $4.3 million judgment. The Government also filed a counterclaim against Stephen, adding him as a party to the action. The Government maintained that joining Stephen was proper because both Stephen and McClendon had been assessed § 6672 penalties for FPA's unpaid withholding taxes for the same time periods. The Government further contended that, under the jurisprudence interpreting § 6672, Stephen and McClendon were jointly and severally liable for the penalties.
The Government thereafter filed a motion seeking summary judgment against McClendon only. The Government argued that it was entitled to summary judgment because the evidence established the two requirements necessary for liability under § 6672 : (1) McClendon was a "responsible person" for payment of FPA's payroll taxes; and (2) McClendon "willfully failed" to pay the taxes to the IRS. The Government contended that McClendon's failure was willful because he admitted to using FPA funds to pay creditors other than the IRS after he learned of the unpaid payroll taxes. In particular, McClendon admitted that he loaned FPA $100,000 to cover the May 2009 payroll for FPA's staff employees; that he paid Dr. Trippett $1,840; and that he paid John Hancock Insurance Company $2000. The Government additionally asserted that McClendon was grossly negligent in delegating, with no oversight, the responsibility of paying payroll taxes to *779Stephen for years and that such conduct also constituted willfulness under § 6672. Therefore, the Government asserted that summary judgment should be granted in its favor for the $4.3 million in assessed penalties, less any payments or credits to which McClendon was entitled.
In his opposition to the Government's motion, McClendon conceded that he was a responsible person under § 6672. He contested, however, that he willfully failed to pay FPA's payroll taxes after learning of the unpaid taxes. McClendon asserted that the $2,000 payment to John Hancock Insurance Company and the $1,840 payment to Dr. Trippett involved funds relating to FPA's 401(k) plan and did not involve any funds belonging to FPA that could have been used to pay the IRS. He further asserted that his $100,000 loan to FPA also could not have been used to pay the IRS because those funds were "encumbered." Specifically, he asserted that he loaned FPA the money with the restriction and agreement that the funds would only be used to cover the May 2009 payroll for FPA's staff employees. He also asserted that his loan constituted "reasonable cause," absolving him of § 6672 liability under the jurisprudence. Finally, McClendon contended that he was not grossly negligent by relying on Stephen to handle FPA's payroll taxes.
In its reply memorandum, the Government reasserted that McClendon's admission that he loaned FPA $100,000 to pay its employees instead of the IRS after learning of the unpaid taxes established that McClendon acted willfully under § 6672. The Government further maintained that, contrary to McClendon's contentions, his $100,000 loan to FPA was not "encumbered" under the relevant jurisprudence and, thus, could have been used to pay the IRS. Finally, the Government asserted that McClendon's actions did not constitute "reasonable cause."
The district court granted the Government's motion for summary judgment against McClendon. It determined that McClendon acted willfully under § 6672 because, after learning of the unpaid taxes, he loaned FPA $100,000, which FPA then used to make payroll instead of paying the IRS. The district court further determined that although McClendon contended that the loan's use was restricted to payment of the May 2009 payroll, the funds were not encumbered for purposes of § 6672 liability. Relying on cases from other circuits,
III.
McClendon thereafter filed a motion for reconsideration under Federal Rule of Civil Procedure 54(b), or in the alternative, to *780alter or amend the judgment under Rules 52(b) and 59(e). In the motion, McClendon raised a new argument. He asserted that under this Court's precedent, even if he were a responsible person and acted willfully, his liability under § 6672 was limited to the amount of unencumbered funds FPA had available after he learned of the unpaid taxes. Pointing to his deposition testimony, his affidavit in support of summary judgment, and copies of checks, he asserted that the evidence submitted at the summary judgment level reflected that all of FPA's available unencumbered funds were paid over to the IRS after his discovery of the unpaid taxes. He contended that the only evidence of funds not paid over to the IRS was the $100,000 loan he made to FPA to cover the May 2009 payroll. McClendon asserted that, therefore, he could be liable to the Government for, at most, $100,000.
In its opposition to McClendon's motion for reconsideration, the Government acknowledged the jurisprudence providing for a cap on § 6672 liability. The Government asserted, however, that McClendon was not entitled to this limitation on his liability because he "failed to meet his burden of proving what the universe of available funds were, whether they were unencumbered, and if so [whether] they were paid to the IRS." Pertinent to the issues on appeal, the Government further contended that entitlement to the limitation on his liability "necessarily require[d] a full accounting of all of the company's available funds after the given date that knowledge was acquired." The Government pointed out that McClendon had not introduced any of FPA's bank records to show how much was deposited after his discovery of the unpaid taxes.
Additionally, the Government argued that even if the cap were available, the district court would still need to address the Government's alternative argument on willfulness: that McClendon was grossly negligent with regard to the risk that FPA's withholding taxes would go unpaid. The Government asserted that, in that case, McClendon would not be entitled to a limit on his § 6672 liability equal to the amount of available unencumbered funds after discovery of the unpaid taxes. Furthermore, the Government argued that the district court's summary judgment was a final judgment which should not be reconsidered.
In reply, McClendon provided a copy of an additional check which he asserted showed that FPA's closing balance in July 2009 of $296,722.28 had all been turned over to the IRS. McClendon further contended that any determination regarding his alleged gross negligence was "rife with genuine issues of material fact."
The district court denied McClendon's motion for reconsideration "for two independent reasons." First, applying the standard for Rule 59(e) motions, the district court determined that McClendon should have raised his limitation of liability argument in the summary judgment briefing and that he could not raise the argument for the first time in his motion to reconsider. Second, the district court concluded that, even if the argument were properly before it, McClendon's argument failed on the merits. Specifically, the district court determined that "McClendon had the burden of proof on the issue of the availability of the funds" and that he failed "to submit or identify record evidence" satisfying his burden. The district court then certified its grant of summary judgment in favor of the Government and its denial of McClendon's motion for reconsideration for immediate interlocutory appeal under Rule 54(b). McClendon timely appealed.
IV.
This court reviews a grant of summary judgment de novo, applying the same *781standard as the district court.
We typically review the denial of a motion for reconsideration, whether under Rule 54(b) or Rule 59(e), for abuse of discretion.
A.
In our decision in Austin v. Kroger Texas, L.P.,
In this case, the district court's summary judgment against McClendon was interlocutory because it did not end the action, as the Government's counterclaim against Stephen remained pending.
When the district court denies a motion to reconsider a grant of summary judgment, but considers the evidence attached to the motion in doing so and still grants summary judgment, our review is de novo.
B.
The Internal Revenue Code requires businesses to withhold from their employees' paychecks their employees' federal income taxes and social security contributions.
As stated above, this case concerns the penalty provision set forth in
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, 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.21
Importantly, § 6672 does not penalize the business entity itself; it penalizes the business's "officers or employees" who were (1) "responsible for effectuating the collection and payment of trust-fund taxes" but who (2) "willfully fail[ed] to do so."
In cases under § 6672, "once the Government offers an assessment into evidence, the burden of proof is on the taxpayer *783to disprove his responsible-person status or willfulness."
This Court "generally takes a broad view of who is a responsible person" in a § 6672 case.
"Willfulness under § 6672 requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent."
Willfulness may also be proved by evidence that "the responsible person act[ed] with a reckless disregard of a known or obvious risk that trust funds [would] not be remitted to the Government."
C.
On appeal, McClendon reasserts the argument he raised in his motion for reconsideration. He argues that the district court, at most, could have granted summary judgment in the amount of $100,000 because that was the amount of available, unencumbered funds paid to non-IRS creditors after he became aware of the unpaid taxes. Although McClendon *784also reasserts his contention that his $100,000 loan to FPA was encumbered because its use was restricted to the May 2009 payroll, McClendon fails to challenge the district court's reasons, which we find persuasive, for concluding that the funds were not encumbered under the jurisprudence interpreting § 6672. Because McClendon fails to identify any error in the district court's legal analysis on this issue, it "is the same as if he had not appealed that [part of the] judgment."
As detailed above, in moving for summary judgment, the Government submitted certified copies of the IRS's § 6672 assessments against McClendon for all twenty-one quarters at issue, which amounted to approximately $4.3 million. The burden of proof then shifted to McClendon to come forward with competent summary judgment evidence establishing an issue of material fact warranting trial
McClendon testified in his deposition and in his affidavit that, as soon as the board of directors of FPA discovered that the payroll taxes were unpaid, FPA stopped paying its creditors and vendors. He testified that, to avoid using any of FPA's existing or future funds, and to ensure that FPA's staff employees received their payroll checks in May 2009, he and his wife loaned FPA $100,000.
The district court's decision indicates that it believed that McClendon was required to provide an "accounting for Family Practice's funds" in order to satisfy his burden on summary judgment. A recent decision from the Eleventh Circuit, United States v. Stein ,
We can find no such corroboration requirement under § 6672. Although, as the Government acknowledged during oral argument, § 6672 provides for a harsh remedy against taxpayers such as McClendon, who was just as much a victim of Stephen's criminality as the Government, the statute does not supplant the evidentiary burdens applicable in a summary judgment proceeding. We conclude that McClendon came forward with competent summary judgment evidence establishing an issue of material fact warranting trial regarding whether the amount of available, unencumbered funds was sufficient to cover FPA's tax obligation. Therefore, the district court's summary judgment imposing over $4.3 million in penalties must be vacated.
The Government asserts that this Court may affirm the district court's summary judgment on an alternative basis. It contends that it is entitled to summary judgment on its claim that McClendon evidenced willfulness through "reckless disregard of a known or obvious risk that trust funds may not be remitted to the Government." However, the district court did not reach the merits of this argument in granting summary judgment. The district court should have an opportunity to consider the merits of the Government's reckless disregard argument in the first instance, and it will have that opportunity upon remand.
For the foregoing reasons, we REVERSE the denial of the motion for reconsideration, AFFIRM IN PART and VACATE IN PART the summary judgment, and REMAND the case for further proceedings consistent with this opinion.
FPA also issued a check for $2,000 to its 401(k) plan manager (John Hancock Insurance Company) and a check for $1,840.42 to Dr. James Trippett. McClendon contended that these funds did not belong to FPA, but related to FPA's 401(k) plan and were erroneously deposited into FPA's account.
Section 6672 provides that "[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails" to do so shall "be liable to a penalty equal to the total amount of the tax ... not accounted for and paid over."
Section 7422 allows for a civil action against the United States for any internal revenue tax "erroneously or illegally assessed" after "a claim for refund or credit has been duly filed with the Secretary [of the Treasury]."
The district court noted that in our decision in Barnett , we adopted the Eighth Circuit's definition of unencumbered funds as stated in Honey v. United States ,
In re La. Crawfish Producers ,
Fed. R. Civ. P. 56(a).
In re La. Crawfish Producers ,
See Fed. R. Civ. P. 54(b) ("[A]ny order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action as to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities.").
See Austin ,
In re La. Crawfish Producers ,
See
Slodov v. United States ,
See
Slodov ,
Barnett ,
See Morgan v. United States ,
Barnett ,
Mazo , 591 F.2d at 1155 (citations omitted).
Brinkmann v. Dallas County Deputy Abner ,
In re La. Crawfish Producers ,
Barnett ,
In addition, McClendon and his two fellow board members created a separate company, MST Interests, L.L.C., to use their own personal funds to pay FPA's non-IRS creditors. Whether such funds should be considered as part of FPA's available, unencumbered funds was not addressed by the district court.
FPA also issued a check for $2,000 to its 401(k) plan manager (John Hancock Insurance Company) and a check for $1,840.42 to Dr. James Trippett. McClendon contended that these funds did not belong to FPA, but related to FPA's 401(k) plan and were erroneously deposited into FPA's account. Whether these funds should be considered as part of FPA's available, unencumbered funds was also not addressed by the district court.
The amount of this check was just under the closing balance of $137,314.88 available in FPA's account at the end of August 2009.
Concurrence Opinion
I am pleased to concur in Judge Davis's opinion. I add two observations. First, I don't see how, under the circumstances before us, the district court could rule on now-deceased Dr. McClendon's "reckless" disregard of his tax duties as a matter of law. Given that he and his partners employed Stephen for a decade before the *786CPA started embezzling, their reliance on his handling of their business affairs seems at least plausible. Second, it takes some chutzpah for the IRS, which submitted 285 pages of exhibits including FPA business records in support of summary judgment, now to assert McClendon did not bear "his" burden to articulate precisely how those records demonstrated whether there were insufficient funds to cover the unpaid withholding taxes and whether all available receipts were in fact paid to the IRS. Is it too much to assume the tax collectors can read bank and financial records adeptly, and that ethically, they wouldn't make claims without factual foundations of which they ought to be aware? To challenge the legal consequences of McClendon's $100,000 cash infusion is one thing; to claim, in the face of his sworn affidavit and documents, and their own access to corroborative financial records, that this isn't enough to raise a fact issue is irresponsible at best.
STEPHEN A. HIGGINSON, Circuit Judge, dissenting:
I fail to see how the majority opinion's analysis justifies its chosen disposition of the appeal. The majority opinion affirms the primary legal ground the district court gave for granting summary judgment in the Government's favor, and takes no issue with the district court's (correct) alternative holding. Compare McClendon v. United States , No. 4:15-cv-2664,
The majority opinion also "reverses" the district court's order denying reconsideration, apparently because that order applied the wrong legal standard. Ante at 781-82, 785. I agree that under Austin v. Kroger Texas, L.P. ,
I would affirm the district court's grant of summary judgment, vacate the district court's denial of reconsideration, and remand for the district court to apply the correct Rule 54(b) standard. Because the majority takes a different path, I respectfully dissent.