In re Leal, BAP No. CC-06-1207-MoDK.

• Decision Date: 16 March 2007
• Docket Number: Bankruptcy No. LA 04-31307 EC.,BAP No. CC-06-1207-MoDK.
• Citation: 366 B.R. 77
• Parties: In re Ernest LEAL and Maria Leal, Debtors. State Board of Equalization, an agency of the State of California, Appellant, v. Ernest Leal, Maria Leal, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

366 B.R. 77

In re Ernest LEAL and Maria Leal, Debtors State Board of Equalization, an agency of the State of California, Appellant, v. Ernest Leal, Maria Leal, Appellees.

BAP No. CC-06-1207-MoDK.

Bankruptcy No. LA 04-31307 EC.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on February 22, 2007.

Filed March 16, 2007.

Brian D. Wesley, Office of the Attorney General, Los Angeles, CA, for State Board of Equalization.

Norman J. Kreisman, Los Angeles, CA, for Ernest and Marie Leal.

Before: MONTALI, DUNN and KLEIN, Bankruptcy Judges.

OPINION

MONTALI, Bankruptcy Judge.

The bankruptcy court ruled that debtors Ernest and Maria Leal ("Debtors") have no personal liability for unpaid sales taxes from a retail shoe business, even assuming that they were partners in the business, because there was no evidence that they were responsible for or willfully failed to pay the sales taxes. We hold that nothing in Cal. Rev. & Tax Code section 6829¹ operates as a shield against the joint and several liability of general partners. Accordingly, we REVERSE and REMAND.

I. FACTS

In 2002 Debtors were approached by long time acquaintances (the "Stanleys") regarding an investment opportunity in a new retail shoe store located at Rancho Mirage, California. Debtors were asked to provide what they characterize as a "loan/investment" to be repaid from future profits generated by the business. The Stanleys promised that all operational and business management would be handled by Mr. Stanley, who had experience managing retail shoe businesses. The store opened around October of 2002 and was known as Desert Shoes.

Each of the Debtors and the Stanleys signed a lease identifying all of them collectively as the tenant doing business under the trade name of Desert Shoes. Debtor Maria Leal and Ms. Stanley signed a Business License Tax Application that was filed with the City of Rancho Mirage. Next to Debtor Maria Leal's signature in what appears to be her handwriting is the word, "co-owner."

Debtor Maria Leal alleges that she visited the Desert Shoes store approximately three times after it opened and that Debtors "invested/loaned over $50,000.00 in capital and credit for the benefit of the Stanleys" but that Debtors never were involved in any operational aspects of the business and signed no checks from its accounts. Several months after the store opened the Stanleys started avoiding contact with Debtors. Debtors eventually were told by Mr. Stanley that he had closed the store because its lease was in default.

Meanwhile, some creditors of Desert Shoes brought actions against Debtor Maria Leal as a partner of or d/b/a Desert Shoes. At least one default judgment was entered against her.

Debtors filed their voluntary Chapter 7 petition on October 6, 2004 (the "Petition Date"). Their bankruptcy Schedule E states that they have no priority debts. They do not list the State Board of Equalization, an agency of the State of California (the "SBE"), among their creditors. Nevertheless, most of their debts appear to be business debts related to Desert Shoes, their bankruptcy Schedule G lists the Desert Shoes lease, and their Statement of Financial Affairs, item 18, lists Desert Shoes as a business "in which the debtor was an officer, director, partner, or managing executive." Debtors received their discharge and their bankruptcy case was closed.

Thereafter Debtors began to receive correspondence and telephone calls from the SBE regarding Desert Shoes' unpaid sales taxes in the amount of approximately $20,000. The SBE alleges that in the course of its calls with Debtor Maria Leal she admitted that she `was a "silent partner" in Desert Shoes.

Debtors filed a motion to reopen their Chapter 7 case, which the bankruptcy court granted, and a motion to determine the validity of the alleged sales tax debts and tax liens against them, which the SBE opposed. The latter motion came on for hearing on May 31, 2006.

The SBE argued that both Debtors were in a general partnership with the Stanleys and as such they have joint and several liability for sales taxes. The SBE sought an evidentiary hearing on whether or not a partnership existed. The bankruptcy court assumed for the sake of discussion that there was a partnership but ruled that under Cal. Rev. & Tax Code section 6829 "the person that you want to have be responsible for these taxes has to have control or supervision or be charged with responsibility for filing tax returns and paying taxes" and must have "willfully failed to pay the taxes," and there was "absolutely no evidence" of either of these things. Transcript, May 31, 2006, p. 15:311. The bankruptcy court granted Debtors' motion to determine tax liability and ordered that any assessments for taxes, interest, and penalties for "all tax periods commencing March 1, 2002, through May 31, 2006,² inclusive, shall be expunged and disallowed in its entirety." The bankruptcy court also directed the SBE to "cause to release or withdraw any tax lien filed against the Debtors for [Desert Shoes'] tax debts" to the SBE incurred during the same period. The SBE filed a timely notice of appeal.

II. ISSUE

Does Cal. Rev. & Tax Code section 6829 shield debtors from whatever joint and several liability they may have as, general partners with the Stanleys in the Desert Shoes business?

III. STANDARD OF REVIEW

We review the bankruptcy court's interpretation of state law de novo. Conestoga Servs. Corp. v. Exec. Risk Indem., Inc., 312. F.3d 976, 981 (9th Cir.2002).

IV. DISCUSSION

Most tax claims are nondischargeable in bankruptcy. See 11 U.S.C. §§ 523(a)(1) and 507(a)(8). Debtors argue that they have no sales tax liability at all.

We assume without deciding that neither Debtor had responsibility for paying sales taxes or any other involvement in operating the Desert Shoes business. That is not enough to excuse one or both of them from joint and several liability for the nonpayment of sales taxes, if in fact one or both are liable as general partners. Under the Revised Uniform Partnership Act as enacted in California, "all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law." Cal. Corp.Code § 16306(a). See also Young v. Riddell, 283 F.2d 909, 910 (9th Cir.1960) (even secret or dormant partner was still subject to joint and several liability, including for tax debts of bankrupt partnership).

There are some exceptions within Cal. Corp.Code section 16306(a) itself. Partners are not liable for obligations incurred before their admission as a partner, and partners in a limited partnership are not personally liable for the limited partnership's debts. Cal. Corp.Code § 16306(b), (c). Debtors argue that there is another exception for any sales tax liability, established by Cal. Rev. & Tax Code section 6829. That section provides in relevant part:

(a) Notwithstanding Section 16306, 16307, 17101, 17158, 17355, 17450, or 17456 of the Corporations Code, upon termination, dissolution, or abandonment of a partnership, a registered or foreign limited liability partnership or a domestic or foreign corporate or limited liability company business, any officer, member, manager, partner, or other person having control or supervision of or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation, partnership, limited liability partnership, or limited liability company in complying with any requirement of this part, shall be personally liable for any unpaid taxes and interest and penalties on those taxes, if the officer, member, manager, or other person willfully fails to pay or to cause to be paid any taxes due from the corporation, partnership, limited liability partnership, or limited liability company pursuant to this part. Cal. Rev. & Tax Code § 6829(a) (emphasis added).

The bankruptcy court agreed with Debtors. It read the introductory clause in the above quote — "[n]otwithstanding Section 16306 ... of the Corporations Code" — to mean that Cal. Rev. & Tax Code section 6829 supplants Cal. Corp.Code section 16306 on the issue of sales tax liability. We disagree.

As Debtors' counsel conceded at oral argument before us, "notwithstanding" generally means "despite." Cal. Rev. & Tax Code section 6829 provides for liability despite various statutes that would otherwise exonerate a person " from liability. This makes sense. Persons who are responsible for filing returns or paying sales taxes are liable if they willfully fail to remit sales taxes to the SBE, notwithstanding that some persons such as limited partners are not liable for most partnership debts under Cal. Corp.Code section 16306.³

The same reasoning applies to the other statutes listed in the "notwithstanding" clause of Cal. Rev. & Tax Code section 6829. All of those statutes include potential protections from liability. See, e.g., Cal. Corp.Code § 17101(a) (in general, "no member of a limited liability company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the limited liability company"). Notwithstanding such protections, section 6829 imposes liability on persons who are responsible for sales taxes but willfully fail to remit those taxes to the SBE.⁴

We conclude that Cal. Rev. & Tax Code section 6829 does not protect Debtors from any liability they may have as general partners under Cal. Corp.Code section 16306(a). The bankruptcy court should have granted the SBE's request for an evidentiary hearing to determine whether Debtors were general partners in Desert Shoes.

Our conclusion is supported by the existence of Cal. Rev. & Tax `Code section 6487.2(b), which protects general partners from personal liability after expiration of a limitations period.⁵ The statute of limitations itself is irrelevant to this appeal — nobody argues that it is a...