Alten v. Ellin & Tucker, Chartered

• Decision Date: 06 June 1994
• Docket Number: Civ. A. No. 92-516-JLL.
• Parties: Steven R. ALTEN, Plaintiff, v. ELLIN & TUCKER, CHARTERED and Joel Kaye, Defendants.
• Court: U.S. District Court — District of Delaware

854 F. Supp. 283

Steven R. ALTEN, Plaintiff, v. ELLIN & TUCKER, CHARTERED and Joel Kaye, Defendants.

Civ. A. No. 92-516-JLL.

United States District Court, D. Delaware.

June 6, 1994.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Gerald P. Egan, Dion G. Rassias, and Mark J. Schwemler of Elliott, Reihner, Siedzikowski, North & Egan, Blue Bell, PA, for plaintiff.

Paul Cottrell of Tighe, Cottrell & Logan, Wilmington, DE, for defendants.

MEMORANDUM OPINION

LATCHUM, Senior District Judge.

I. INTRODUCTION

Defendants, Ellin & Tucker, Chartered ("Ellin & Tucker") and Joel Kaye ("Kaye"), have moved for summary judgment, (Docket Item "D.I." 37), against plaintiff Steven R. Alten ("Alten"), pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiff filed this suit to recover over $140,000.00 of tax penalties imposed upon him personally by the Internal Revenue Service, pursuant to 26 U.S.C. § 6672(a), as a "responsible person" who "willfully" failed to pay federal employee withholding taxes. Plaintiff alleges that this imposition of taxes resulted directly from the defendants' breach of contract for accounting services, accountant malpractice, and breach of fiduciary duty.

Defendants move for summary judgment on the theories that: (1) plaintiff is collaterally estopped from bringing this action in light of the IRS proceedings; (2) plaintiff's action is essentially a claim for indemnity and such a claim is against public policy and prohibited by case law; and (3) the doctrine of economic loss bars recovery in this case. In addition, defendants argue that even if plaintiff was able to maintain this action, they could not be liable for damages incurred after the termination of their engagement with plaintiff's company.

For the reasons set forth below, this Court finds that this action is essentially an action for indemnification, and therefore, plaintiff, as a party who "willfully" failed to ensure that the IRS was paid employee withholding taxes, is not entitled to recovery from the defendants. Accordingly, this Court will grant defendants' motion for summary judgment.

Plaintiff, Steven R. Alten, is a citizen of Florida. Defendant Ellin & Tucker is an accounting firm headquartered in Baltimore, Maryland, which carries on a regular course of business in Delaware. Defendant Kaye is a principal in the firm of Ellin & Tucker, and at all times was acting as a principal and agent of and on behalf of Ellin & Tucker. The amount in controversy exceeds, exclusive of interest and costs, fifty thousand dollars. The Court's jurisdiction is based on diversity of citizenship in accordance with 28 U.S.C. § 1332. (D.I. 1.)

II. FACTS

Because this summary judgment motion, in large part, raises only legal issues and this Court will grant the summary judgment motion solely on legal issues, only a short summary of the facts in the light most favorable to the plaintiff follows. In July of 1988, Alten, along with R. Griggs Levy, formed a corporation known as Delawater, Inc. ("Delawater"). (D.I. 1, ¶ 7.) Delawater was a factory direct distributorship of whole house water treatment systems in the State of Delaware. (Id., ¶ 8.) Because of its success and resultant expansion, Alten actively sought experts to oversee all accounting, tax, and other business needs of Delawater, and in April of 1989, Alten hired the defendant Kaye. (Id., ¶¶ 11, 19.) According to Alten, Kaye had agreed to provide "expert financial consulting and tax advice and supervision over Delawater's accounting beginning in April of 1989." (Id., ¶ 18.) It was understood that Kaye had a duty to "ensure compliance with all state and federal tax laws." (Id., ¶ 16.)

Prior to retaining Kaye, Delawater had treated its sales force as independent contractors who were individually responsible for payment of their own federal taxes. Kaye recommended that the sales force be treated as employees instead, and emphasized the importance of Delawater's withholding and payment of federal employee withholding taxes. (Id., ¶¶ 20-22.) Kaye had assured Alten that these taxes would be paid every month, and indeed starting around April of 1989 and each month thereafter, Alten was presented, for his signature, with a check for federal employee withholding taxes. (Id., ¶¶ 22, 24.)

In late September of 1989, Alten discovered that these checks had never been forwarded to the IRS. (Id., ¶¶ 27, 28.) Although there were sufficient funds to cover these checks during the months they were written, by the time Alten discovered them in September, 1989, there were insufficient funds to pay them. (Id., ¶¶ 29, 30.) As soon as Alten discovered these checks, he contacted the IRS and asked Kaye to accompany him to the meeting with the IRS. Kaye refused to do so. (Id., ¶ 31.) In addition, although Alten requested Delawater's financial documentation from Kaye, Kaye did not provide it until January of 1990. (Id., ¶ 32.) When Alten received the documentation, he discovered that Kaye had failed to monitor Delawater's finances as promised. (Id., ¶ 34.)

Around November of 1989, Alten hired Mark Rosenman as Delawater's new accountant. (D.I. 38, Ex. D, p. 42.) In 1990, Delawater declared bankruptcy. (D.I. 1, ¶ 35.) In a letter dated November 15, 1990, the IRS recommended a 100% penalty against Alten under 26 U.S.C. § 6672. (D.I. 38, Ex. A.) Alten, with the help of Mark Rosenman and legal counsel, appealed within the IRS arguing that Alten was not a responsible party and did not act willfully. (Id.) In 1992, the IRS assessed a 100% penalty under 26 U.S.C. § 6672 against Alten for approximately $140,000.00 in past due federal employee withholding taxes for quarters ending: June 30, 1989; December 31, 1989; March 31, 1990; and June 30, 1990. (D.I. 38, Ex. B.) Alten did not appeal this determination.

III. CHOICE OF LAW

A federal district court sitting in diversity must apply the choice-of-law rules of the state in which it sits to determine which state's substantive law governs the controversy before it. Day & Zimmermann, Inc. v. Challoner, 423 U.S. 3, 96 S.Ct. 167, 46 L.Ed.2d 3 (1975). Therefore, this Court must apply the State of Delaware's choice-of-law rules. The plaintiff in the present case brings this action under both contract and tort claims. Under Delaware law, the "most significant relationship test" of the Restatement (Second) of Conflicts §§ 6, 145, 146, and 188, applies to both contract and tort actions. Travelers Indemnity Co. v. Lake, 594 A.2d 38, 44-47 (Del.1991).

In applying the "most significant relationship test" in tort cases, Delaware courts place considerable emphasis on "the place where the injury occurred." Id. at 47. Moreover, the Delaware Supreme Court has directed Delaware courts to apply the law of the state where the injury occurred unless another state has a more significant relationship to the occurrence and the parties. Id. Since the injury occurred in Delaware, application of the "most significant relationship test" to the present case indicates that Delaware law would govern. In addition, none of the parties have argued, nor does this Court suggest, that any other state might have a more significant relationship to the occurrence than Delaware. Thus, Delaware's choice-of-law rules mandate that Delaware substantive law governs the tort claims in this case.

In applying the "most significant relationship test" in contract cases, Delaware courts place considerable emphasis upon "(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location and subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties." Playtex Family Products, Inc. v. St. Paul Surplus Lines Ins. Co., 564 A.2d 681, 688-89 (Del.Super.1989). In the present case, although there is no indication in the record as to where the contracting and place of negotiation were, the contract involved the financial affairs of Delawater which was located in Delaware. In addition, all parties have operated under the assumption that Delaware law applies. Therefore this Court assumes Delaware has the most significant relationship to the contract, and thus, this Court finds that Delaware substantive law would be applicable to any contract claims in this case.

IV. DISCUSSION

The defendants argue that the plaintiff's action is essentially an action for indemnity¹ and as such should be dismissed. This Court agrees. The plaintiff bases this action on three alternate theories: breach of contract, accounting malpractice, and breach of fiduciary duty. However, as the plaintiff's attorney admitted at oral argument on May 18, 1994, the plaintiff is in essence seeking to shift the responsibility to the defendants to pay the IRS. This shifting of responsibility is the crux of the concept of indemnification. W. Page Keeton et al., Prosser & Keeton on Torts § 51, at 344 (5th ed. 1984) ("indemnity is a shifting of responsibility from the shoulders of one person to another ..."); 41 Am.Jur.2d Indemnity § 1, at 687 ("indemnity is a right which inures to a person who has discharged a duty which is owed by him but which, as between himself and another, should have been discharged by the other.")

A. Claim For Indemnification Under 26 U.S.C. § 6672²

It is well established that there is no private federal right of contribution or indemnity under 26 U.S.C. § 6672. Sinder v. United States, 655 F.2d 729, 732 (6th Cir.1981); Swift v. Levesque, 614 F.Supp. 172, 173 (D.Conn.1985); DiBenedetto v. United States, 75-1 U.S.T.C. ¶ 9503, 1974 WL 791 (D.R.I.1974). However, courts have held that a person found liable under § 6672 has a right to bring an action for contribution or indemnity if the right is asserted under state law.³ Schoot v. United States, 664 F.Supp. 293, 298 (N.D.Ill.1987); Swift, 614 F.Supp. at 177. Since this action consists of state claims brought under diversity jurisdiction, this Court...