U.S. v. Fidelity and Deposit Co.

• Decision Date: 07 January 1994
• Docket Number: No. 92-2807,92-2807
• Citation: 10 F.3d 1150
• Parties: -2416 UNITED STATES of America, Plaintiff-Appellee, v. FIDELITY AND DEPOSIT COMPANY, etc., et al., Defendants, Fidelity and Deposit Company of Maryland, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1150

10 F.3d 1150

73 A.F.T.R.2d 94-2416

UNITED STATES of America, Plaintiff-Appellee, v. FIDELITY AND DEPOSIT COMPANY, etc., et al., Defendants Fidelity and Deposit Company of Maryland, Defendant-Appellant.

No. 92-2807.

United States Court of Appeals Fifth Circuit.

Jan. 7, 1994.

Rehearing Denied Feb. 7, 1994.

Stephen W. Schueler, Linda D. King, Winstead, Sechrest & Minick, Houston, TX, for defendant-appellant.

Thomas M. Herrin, U.S. Dept. of Justice, Tax Div., Dallas, TX, Gary R. Allen, Chief Appellate Sect., John A. Dudeck, Jr., Jonathan S. Cohen, Linda E. Mosakowski, Tax Div., Dept. of Justice, Washington, DC, for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Texas.

Before JOHNSON, WIENER, and DeMOSS, Circuit Judges.

WIENER, Circuit Judge:

Plaintiff-Appellee the United States of America (the government) sued Defendant-Appellant Fidelity and Deposit Co. of Maryland ("Fidelity") to collect on two bonds issued by Fidelity, one of which was issued in 1984 and the other in 1986. These bonds provided, inter alia, that Fidelity was surety for the payment of excise taxes by a distillery, the Bay River Company ("Bay River"). After the United States moved for summary judgment Fidelity argued that the 1984 bond was ambiguous, thus precluding summary judgment on it, and that governmental neglect should estop the government from collecting on the 1986 bond. The district court disagreed with both contentions and entered summary judgment for the government. Finding no reversible error, we affirm.

I FACTS AND PROCEEDINGS

The federal government taxes the manufacturing of distilled spirits and requires the operator of a distillery to secure the payment of excise and operational taxes with various surety bonds. To ensure payment of operational taxes, the distiller must obtain an "operations bond" prior to commencing operations. If the distiller intends to remove any product from the distillery prior to payment of excise taxes, the distiller must likewise obtain a "withdrawal bond" to secure payment of any excise taxes due. The distiller has the option to acquire a "unit bond," which provides coverage from the surety for both operational and removal excise taxes.

In 1984 Bay River began operating a distillery and obtained a surety bond from Fidelity. The top right portion of the face of this bond instructs the signers to indicate which type of bond is being issued, namely, an operations, a withdrawal, or a unit bond. On the 1984 bond, the box marked "operations" was left unchecked, whereas the box marked "withdrawal" and the box marked "unit" were both checked. The face of the bond also contained a box in which to insert the amount of the bond; on this 1984 bond the box was filled in to reflect the sum of $350,000. The back of the bond contained boxes for use in allocating coverage. Of the $350,000 face amount of the 1984 bond, $250,000 was allocated for operations coverage and $100,000 for withdrawal coverage.

Within its first year of operations, Bay River began to issue checks made payable to the IRS for excise taxes that were returned for insufficient funds ("NSF"). In February 1986, after Bay River had issued three NSF checks for excise taxes totalling $441,346.91, the Bureau of Alcohol, Tobacco, and Firearms ("ATF") placed Bay River on prepayment status. ¹ This status meant that Bay River was required to pay by cash or cashier's check before withdrawing any spirits from its plant; ATF nevertheless agreed orally to continue to accept company checks.

In April 1986, ATF conducted the first of three audits of Bay River. The auditors concluded that Bay River was underpaying taxes, financially unstable, and exceeding the withdrawal coverage provided by the 1984 Bond. A second audit in May 1986 disclosed the same essential facts. Meanwhile, company checks issued by Bay River continued to be returned NSF. In addition, by the summer of 1986, ATF became aware that Bay River was "floating" its funds, that is, Bay River was using unpaid accounts as collateral for cash loans to prepay excise taxes.

In November 1986, Fidelity issued Bay River a second bond, this one for $600,000, which provided coverage if Bay River defaulted on payment of its excise taxes. At the time of issuance, the government was aware that Bay River: 1) had issued 14 NSF checks totalling $821,221.64; 2) had violated prepayment requirements; 3) had filed untimely tax returns; 4) had been floating funds; and 5) generally was in poor financial health. When it accepted the 1986 bond, the government did not provide any of this information ATF conducted its third audit in September 1987 and informed Bay River in February 1988 of violations discovered by that audit. In June 1988, the ATF met with Bay River after which the ATF issued a joint demand on Bay River and Fidelity for unpaid taxes. Fidelity tendered $100,000 on the 1984 bond, but denied any further liability on that bond and all liability on the 1986 bond. Fidelity argued that the 1984 bond provided only $100,000 coverage for excise taxes and that neglect in collecting excise taxes estopped the government from collecting on the 1986 Bond. ²

to Fidelity. In addition, the government had not yet sought recovery on the 1984 bond. Fidelity, for its part, did not contact the government prior to issuing the 1986 Bond and instead relied on financial statements furnished by Bay River, which later proved to be inaccurate.

In August 1989, the government sued Fidelity and Bay River to collect $1,572,714 in unpaid excise taxes. The government acquired a default judgment against Bay River in June 1990. The government moved for summary judgment against Fidelity as surety on the 1984 and 1986 bonds, which judgment was granted by the district court in September 1992. The district court first determined that the 1984 bond was actually two bonds: a $100,000 withdrawal bond and a $250,000 unit bond. The court thus concluded that the 1984 bond provided $350,000 coverage. Next, the court determined that any governmental neglect in collecting excise taxes did not estop the government from collecting on the 1986 bond. Accordingly, the district court entered summary judgment in favor of the government for $850,000, which reflected the aggregate face amount of the two bonds: $950,000, less the $100,000 payment that Fidelity had tendered. Fidelity timely appealed.

II DISCUSSION

A. Construing the 1984 Bond

We review a summary judgment de novo, applying the same standard as the district court. ³ Summary judgment is appropriate when there is "no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." ⁴ Summary judgment is appropriate here regarding the coverage provided by the 1984 bond if that bond is unambiguous. ⁵ And whether an instrument is ambiguous is a question of law that turns on whether the instrument "can be given a certain or definite legal meaning or interpretation." ⁶

1. The Regulatory Scheme

The regulatory scheme regarding excise tax bonds provides the appropriate starting point to determine whether the 1984 bond is ambiguous. Section 5173 of the Internal Revenue Code provides that no person can commence operations at a distillery unless such person has obtained an operations bond, and that no distilled spirits may be withdrawn from a distillery without payment of excise taxes due unless the distiller has obtained a withdrawal bond. ⁷ Section 5173 further provides that the Secretary of the Treasury may promulgate regulations allowing The regulations promulgated by the Secretary provide that the total amount of a unit bond shall be available for satisfaction of any liability--irrespective of whether liability arises from operational or excise taxes--incurred under the terms and conditions of such bond. ⁹ The regulations further provide that the unit bond must allocate the total sum into "penal sums" for operations and withdrawals. ¹⁰ Although the surety remains liable up to the total amount of the unit bond, the "penal sum" for withdrawals sets the limit for such withdrawals from the distillery. ¹¹

for a unit bond to cover both operations at, and withdrawals from, a distillery. ⁸

2. Application to the 1984 Bond

The provisions in the 1984 bond may be construed together in conformity with applicable federal statutes and regulations only if that bond is construed as a $350,000 unit bond. ¹² The back of the 1984 bond contains the allocation ($100,000 for withdrawal coverage and $250,000 for operations coverage) mandated by the regulatory scheme for unit bonds. The face contains a check in the unit bond box, which, in addition to being consistent with the allocation of coverage contained on the back, also indicates that the parties intended that the 1984 bond provide coverage for both operational and excise taxes to the full amount of that bond. The additional check in the withdrawal box is not inconsistent with unit bond status as such coverage is subsumed within that status under the federal regulations. This check is thus properly characterized as harmless surplusage under the applicable regulations.

In contrast, the construction offered by Fidelity conflicts with the intent of the parties as manifested by the face of the 1984 bond. Fidelity posits that the 1984 bond represents two separate bonds: an operations bond for $250,000 and a withdrawal bond for $100,000. Yet the face of the 1984 bond contains checks in only the unit and withdrawal bond boxes. Thus, Fidelity's construction would have us ignore the check of the unit bond box--which imposes liability for both operational and excise taxes to the full amount of the bond--and would require us to deem the existence of a check in the operations box, which is totally blank. We are unwilling to take either step.

The district court's construction--that the bond is a $250,000 unit bond and a $100,000 withdrawal bond--likewise fails for it...