In re Branagan, Jr.

• Decision Date: 12 May 2006
• Docket Number: No. 02-19355bif.,02-19355bif.
• Citation: 345 B.R. 144
• Parties: In re Francis B.J. BRANAGAN, JR. and Maureen T. Branagan, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

345 B.R. 144

In re Francis B.J. BRANAGAN, JR. and Maureen T. Branagan, Debtors.

No. 02-19355bif.

United States Bankruptcy Court, E.D. Pennsylvania.

May 12, 2006.

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Ashely M. Chan, Matthew A. Hamermesh, James M. Matour, Hangley Aronchick Segal & Pudlin, Philadelphia, PA, for Debtors.

OPINION

BRUCE FOX, Bankruptcy Judge.

Presently before me is an objection by the chapter 11 debtors to an amended unsecured, priority claim filed by the United States, through its agency the Internal Revenue Service. Proof of claim # 27, dated May 5, 2003 — which amended an earlier claim filed on January 30, 2003 — asserts that the debtors owe the United States $302,115.20. Furthermore, the United States contends that its debt holds priority status pursuant to 11 U.S.C. § 507(a)(8).

As will be discussed, this claim is based upon the failure of a corporation known as Pennsbury Excavating and Landscaping, Inc. ("Pennsbury") to remit to the United States taxes withheld from its employees' wages during the third and fourth quarters of 2001, as well as the employer's social security and medicare tax contributions. The United States maintains that the individual debtors are "responsible persons" within the meaning of 26 U.S.C. § 6672, who willfully failed to tender these so-called "trust fund" taxes, and thus are liable for this employment tax liability. The debtors do not challenge the amount asserted in this claim, nor the priority status of the claim were it allowed; however, they do contest their individual liability as responsible persons. Accordingly, they seek to have the amended claim disallowed in its entirety.

Before considering this objection, I note that on June 27, 2002, Mr. and Mrs. Branagan filed a joint chapter 11 bankruptcy petition under section 302 of the Bankruptcy Code. Although the filing of a joint case by spouses does not, by itself, consolidate their respective bankruptcy estates, see, e.g., In re Feltman, 285 B.R. 82, 86 n. 9 (Bankr.D.D.C.2002), on August 4, 2003, the debtors confirmed a joint chapter 11 plan of reorganization. This confirmed plan provided in paragraph 2.3 that all allowed priority tax claims would be repaid in full, with interest, within six years of confirmation (unless the claimant agreed to different terms). The plan does not distinguish between priority tax claims solely against one debtor and claims against both debtors.¹ Accordingly, if either debtor is liable for this tax obligation, it represents a priority claim that must be repaid in full under the binding terms of their joint second amended confirmed plan. 11 U.S.C. § 1141(a). Conversely, if neither debtor is responsible for this claim, then the claim shall be disallowed and need not be paid under the approved plan.

Given the amount of the disputed claim, its potential priority status and entitlement to full repayment under the plan, and given the numerous exhibits and witnesses involved in this objection, the parties elected to treat this dispute as though it were an adversary proceeding for purposes of trial and trial preparation. Extensive discovery was taken, a joint pretrial statement was filed, and evidence was offered over three days of trial. The parties were then afforded ample opportunity to submit post-trial memoranda and proposed findings. All of the admitted evidence has been considered and these submissions have been reviewed.

The debtors' objection to claim # 27 is now ripe for resolution.

I. Upon consideration of the testimony and documents offered into evidence, I make the following findings of fact. Because any determination of responsible person liability under section 6672 is, by necessity, factually intensive, these findings are purposefully numerous and detailed:

1. In the 1980s, the husband/debtor, Mr. Francis B.J. Branagan, Jr. (hereinafter "FBII"), started a business called Branagan Builders. He was also involved in various real estate endeavors. 1 N.T. at 37-39.² FBII, who was a Wharton School graduate, 1 N.T. at 36, was already a successful businessman when he established Branagan Builders.

2. In the early 1990s, FBII formed an entity called Pennwood Lawn and Garden, which operated a landscaping and maintenance company. Id. at 39.

3. In early 1992, the name of the company was changed to Pennsbury Landscaping, Inc. and it was incorporated in Pennsylvania. Ex. PPP, ¶ 2; see Ex. Y. Later, the company's focus changed to include commercial excavating, paving and road construction, and it amended its articles of incorporation to rename itself Pennsbury Excavating and Landscaping, Inc. (hereinafter "Pennsbury") in 1994. Ex. PPP, ¶ 3. Pennsbury performed work as a contractor or subcontractor at various projects in southeastern Pennsylvania and southern New Jersey. Id. ¶ 4. FBII and wife/debtor, Maureen Branagan, were the sole shareholders of Pennsbury. FBII served as its president. 1 N.T. at 45, 47, 56-7.

4. In the early 1990s, FBII's son, Mr. Francis B.J. Branagan III (hereinafter "FBIII"), and stepson Mr. Robert Callahan, became Pennsbury employees. Ex. PPP, ¶ 8; 1 N.T. at 205. FBIII probably became a corporate vice-president in 1997. Ex. PPP, ¶ 8; 2 N.T. at 61-62 5. Pennsbury's offices, at all times relevant to this dispute, were located at 1442 Bristol Pike, Morrisville, Pennsylvania. Ex. PPP, ¶ 4. At that address were also the offices of Branagan Builders and Morrisville Supply, another company owned by FBII. 1 N.T. at 39-42, 53. This office complex was owned by the debtors: FBII and Mrs. Branagan. Id. at 52-53. Pennsbury did not pay rent to the debtors for the use of the office complex. Id. at 53.

6. FBII maintained his own office at 1442 Bristol Pike, in the same building as many Pennsbury employees. Id. at 41-43, 52. At all times relevant to this contested matter, FBII came into his office on a regular basis. See id. at 149.

7. Branagan Builders lent money to Pennsbury on numerous occasions. Id. at 44-45, 69, 226. Additionally, Branagan Builders and Pennsbury shared a common employee, Mr. Jay Ferraro, who was paid directly by Pennsbury. Branagan Builders reimbursed Pennsbury for a portion of his wages. Id. at 43-44; 3 N.T. at 44-45.

8. FBII served as the president of Pennsbury from its incorporation until 1993, when he resigned. He resigned so he could establish a 401(k) retirement saving account for himself without having to offer that benefit to Pennsbury employees. 1 N.T. at 47-48. FBII continued to serve as a director of Pennsbury until December of 2000. Id. at 48.

9. After resigning as president, FBII remained involved with the operations of Pennsbury. Indeed, he acknowledged that "[a]t all times right up to the day the place closed, I assisted Pennsbury in trying to get the business because of my relationship with people in the community." Id. at 48.

10. Subsequent to FBII's resignation as president, Mrs. Branagan became president of Pennsbury. Id. at 51-52. However, she was president in name only and was not involved in Pennsbury's daily operations. Id. at 52, 2 N.T. at 60. Although he was no longer an officer of Pennsbury, FBII continued to exercise many of the functions of the president and chief executive officer of Pennsbury. Ex. PPP, ¶ 7.

11. Although Mrs. Branagan was not involved with company operations, she was present at Pennsbury's offices once or twice per week. When at Pennsbury, she would sometimes sign payroll checks and attend company meetings. Ex. III at 13-14; 1 N.T. at 132, 187; 3 N.T. at 145-46. Mrs. Branagan signed most of the payroll checks that were issued by Pennsbury in the third and fourth quarters of 2001. Exs. MM, NN, LL, KK, JJ, HH, GG, PPP, ¶ 6. Mrs. Branagan, however, did not decide who to pay or how much the payee would receive. 1 N.T. at 131-32; 2 N.T. at 49; 3 N.T. at 157-58.

12. While corporate president, Mrs. Branagan did not review Pennsbury's financial records. 3 N.T. at 161.

13. After FBII resigned as president in 1993, he continued to receive certain benefits from Pennsbury including a car with gasoline reimbursement, health insurance, and reimbursement for business lunches. 1 N.T. at 79-80; 3 N.T. at 88-89. However, he did not receive any salary from Pennsbury. 1 N.T. at 48. Pennsbury also compensated Mrs. Branagan for use of an automobile as well as health insurance. 3 N.T. at 154. During 2000-2001 (and perhaps earlier), she also received annual compensation in the amount of $30,000. Ex. PP; 3 N.T. at 79, 154. The debtors considered this compensation as offsetting Pennsbury's use of the Bristol Pike property without payment of rent. 3 N.T. at 88-89.

14. The debtors acknowledge that they were Pennsbury's sole shareholders until 1999. 1 N.T. at 56-57; 3 N.T. at 69.³ FBII asserts that in 1999, he and his wife transferred by gift a 20 percent interest in Pennsbury's stock to both FBIII and Mr. Callahan. 1 N.T. at 56-57. Additionally, he contends that in December 2000, they transferred by gift the remaining shares to FBIII and Mr. Callahan, resulting in a 51% interest owned by FBIII and a 49% interest owned by Mr. Callahan. Id.

15. However, there was no evidence presented in the form of stock certificates, corporate minutes, or corporate business records, that stock was ever transferred by the debtors to FBIII or Mr. Callahan. Furthermore, FBII never reported such gifts on his federal tax returns. Id. at 59-61. He also did not recall ever executing a formal transfer of shares in the corporate stock register. Id. at 62-63. In addition, Mrs. Branagan executed a will dated February 28, 2001, which stated in part that she bequeathed 51% of her stock interest in Pennsbury to FBIII and 49% to Mr. Callahan. This bequest would have been unnecessary if those two individuals had already become the sole shareholders of Pennsbury in December 2000.

16. FBIII denies ever receiving Pennsbury shares from the debtors. Id. at 220. However, FBIII and Mr. Callahan did sign a...