Godfrey v. U.S.

• Decision Date: 30 November 1984
• Docket Number: Nos. 84-801,84-831,s. 84-801
• Citation: 748 F.2d 1568
• Parties: -409, 84-2 USTC P 9974 Dudley J. GODFREY, Jr., Appellant/Cross-Appellee, v. UNITED STATES, Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1568

748 F.2d 1568

55 A.F.T.R.2d 85-409, 84-2 USTC P 9974

Dudley J. GODFREY, Jr., Appellant/Cross-Appellee, v. UNITED STATES, Appellee/Cross-Appellant.

Nos. 84-801, 84-831.

United States Court of Appeals Federal Circuit.

Nov. 30, 1984.

Richard S. Marcus, Godfrey & Kahn, Milwaukee, Wis., argued for appellant/cross-appellee.

James Urdan, Quarles & Brady, Milwaukee, Wis., was also counsel for appellant/cross-appellee.

Richard Perkins, Washington, D.C., argued for appellee/cross-appellant. With him on brief were Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup and Lisa A. Prager, Washington, D.C.

Before MARKEY, Chief Judge, and NIES and NEWMAN, Circuit Judges.

MARKEY, Chief Judge.

Appeal from a judgment of the United States Claims Court, 3 Cl.Ct. 595 (1983), holding Dudley J. Godfrey, Jr. (Godfrey) liable for $159,361.26 of unpaid accrued taxes of Career Academies, Inc. (Career) pursuant to Internal Revenue Code section 6672, the 100 percent tax penalty provision. ¹ We reverse in part and vacate in part.

Background

This case arises from the bankruptcy of Career Academies, Inc., a Delaware corporation headquartered in Milwaukee, Wisconsin, and authorized to provide home-study and resident vocational training in such fields as radio broadcasting, medical and dental assisting, architectural and engineering drafting, hotel/motel training, and airline personnel and travel.

Career's shares were listed on the American Stock Exchange until August 14, 1972, after which they were traded in the over-the-counter market. On May 18, 1974, Career had 6,992 stockholders and 4,646,099 shares outstanding.

Dudley Godfrey was and is a partner in Godfrey and Kahn, S.C., a business law firm in Milwaukee with special tax expertise. ² Godfrey was elected to Career's Board of Directors on August 18, 1970, and became Chairman on June 30, 1972. He was also made Chairman of the executive committee, which held no meetings after May 1973. In his testimony before the Claims Court, Godfrey said he accepted the Chairmanship to provide consultation and advice concerning Career's financial and personnel problems. He received no salary as Chairman and was not officed at any Career facility.

As Chairman of the Board, Godfrey never signed, and was never authorized to sign, the checks of Career or its subsidiaries. The Claims Court found that Godfrey never "signed any IRS 941 Forms submitted by the corporation or other payroll or tax returns of Career and [never] participated in any way in the preparation of such returns or in the preparation of any payrolls for Career." 3 Cl.Ct. at 598.

As a Director, Godfrey exercised the authority given him by the bylaws. He participated in electing officers, hired or approved the hiring of top level consultants, delegated authority to establish bank accounts, and designated signatories for those accounts. He also authorized borrowing by officers on behalf of the corporation, authorized major sales programs, ratified and approved settlements made by officers, and approved loan agreements made with various banks. Godfrey was also instrumental in negotiating a critical (but ultimately unsuccessful) recapitalization agreement with a potential investor. Finally, Godfrey authorized the filing of Career's Chapter XI bankruptcy petition.

Career had sustained substantial operating losses in each of the years 1967-1972. In November 1972, it defaulted on semiannual interest payments on a total of $12,000,000 of 5 1/2 and 6-percent convertible subordinated notes. Responding to this desperate situation, Godfrey and other members of Career's management entered financing negotiations with lenders, potential lenders, prospective buyers, and potential investors. Those efforts led to negotiation of a loan and recapitalization agreement with American Management Services, Inc. (AMS). Brian Gordon (Gordon), a financier/investor in the Washington, D.C., area, was the principal of AMS.

On August 30, 1973, Career executed a letter of intent with AMS, the Chemical Bank, and the United States Trust Company of New York. As part of the package, Gordon insisted on his choice of management to run the "new" Career. Godfrey agreed, and got the Career Board to select Gordon's candidates, Joseph P. Maher (Maher) as president and Joseph L. Ferrare (Ferrare) as executive vice-president on September 10, 1973.

Throughout the entire period in which the AMS package was being negotiated, and after Maher and Ferrare had been installed, Career had serious financial difficulties. Its banks threatened foreclosure, student enrollments declined, and bills were paid late. On March 1, 1974, Maher resigned as president and was replaced by Ferrare.

As president, Ferrare was in daily contact with Terrence J. Metzdorff (Metzdorff), Career's vice president/treasurer, concerning issuance of checks to creditors, including the Internal Revenue Service (IRS). Ferrare and Metzdorff ran the day-to-day operations of Career. Both were authorized to sign checks, including those in payment of withheld taxes, and to prepare Career's Form 941 (withholding tax returns). Unlike Ferrare, who was an inside director, Metzdorff was never elected to the Board, but did regularly attend its meetings as an advisor. Neither Ferrare nor Metzdorff owned stock, directly or beneficially.

In October 1973, in a meeting attended by Godfrey, Ferrare and Andrew Lauritzen (Lauritzen) (an attorney with Godfrey & Kahn and Career's outside legal counsel), Metzdorff expressed concern about unpaid withholding taxes (income and FICA) and threatened to resign unless relieved of responsibility for paying them. Ferrare gave Metzdorff an October 5, 1973 letter relieving him of that responsibility. Metzdorff testified that Godfrey met his concern with "no one ever goes to jail for not paying taxes, so I wouldn't be too concerned about that." 3 Cl.Ct. at 601.

Federal tax problems continued. Monthly reports prepared in Metzdorff's office showed that in October 1973 withholding taxes were accruing and were being paid late. The December 1973 report showed $9,095 (FICA) and $30,689 (income tax withholding) accrued and unpaid. Metzdorff distributed the reports to all corporate officers and the Board.

In the spring of 1974, Arthur Anderson & Company was asked to audit Career's books for the two fiscal years ending January 31, 1974, in connection with the proposed AMS recapitalization. In a general representation letter connected with the audit, Godfrey, Ferrare, and Metzdorff stated: "[t]he Company is presently past due in the remittance of Federal and State withholding taxes in the amount of approximately $250,000 as of May 31, 1974." 3 Cl.Ct. at 601. Though Godfrey stated at trial that when he signed that letter he knew of that delinquency, he also said he directed outside counsel Lauritzen to insure that the taxes were paid. The trial court concluded that, "aside from his comments to Mr. Lauritzen, Mr. Godfrey appears to have taken no subsequent affirmative action to investigate further and rectify the situation." 3 Cl.Ct. at 601.

On July 11, 1974, Arthur Anderson & Company sent Career's consolidated financial statements for 1973 and 1974 and their audit to Metzdorff, who distributed them to Career's executive officers and the Board. The financial statements included:

The Company is also in default of its notes payable to bank, certain other notes payable and the notes payable under a credit agreement and is unable to pay all current obligations, including social security taxes and income taxes withheld from employees. At January 31, 1974, such tax deficiency approximated $80,000. The Company has not made any payment subsequent to year end and at June 1, 1974, the deficiency approximates $250,000; certain monetary penalties can be levied. [Emphasis added.]

3 Cl.Ct. at 601.

IRS's Milwaukee office well knew of the deficiency and, in September, 1974, threatened to close the corporation down unless it paid withholding taxes for the first and second quarters of 1974. In the same month, Metzdorff contacted Ferrare, who called on the AMS revolving credit line for the required $250,000 and Metzdorff paid IRS the first and second quarter 1974 withholding taxes in full.

Career was walking a financial tightrope. Metzdorff paid only those bills authorized for payment by Ferrare. The Claims Court found that "[i]t was the practice during this time for Mr. Metzdorff and Mr. Ferrare to get together approximately once each week to decide which creditors would be paid and which bills would be deferred. Only those bills that absolutely had to be paid to keep the operation going (payroll, rent, utilities, etc.) would be paid. Mr. Ferrare ran this part of the operation with an iron hand and completely dominated Mr. Metzdorff in this regard." 3 Cl.Ct. at 601-02.

The Board met every two months. Ferrare would normally go over the financial picture and Metzdorff would fill in details when asked. In the September 1974 meeting, Ferrare presented an upbeat financial picture, indicating that the corporation would shortly turn the corner on profitability because of increased student enrollment contemplated with the start of the school year and the pending AMS recapitalization.

Ferrare's optimism proved to be unfounded. On or about November 12, 1974, Metzdorff resigned, precipitating a meeting of the Board on November 19, 1974, at which it directed a thorough review of the beleaguered corporation's assets. In late November, AMS withdrew from the proposed recapitalization. Godfrey sought other loans or sale of Career's subsidiary schools, without success.

On December 5, 1974, Godfrey wrote the IRS, seeking to forestall collection efforts on the delinquent third and fourth quarter withholding taxes. He said it would be advisable for all creditors (including the United States) to keep Career alive, and requested deferral of IRS enforcement action until December 11, 1974.

At Career's December 9 Board...