In re Major Dynamics, Inc.
| Decision Date | 07 April 1986 |
| Docket Number | Adv. No. C82-2348-P11,Related No. 81-00821-P11. |
| Citation | 59 BR 697 |
| Court | U.S. Bankruptcy Court — Southern District of California |
| Parties | In re MAJOR DYNAMICS, INC., a California corporation, Debtor. OFFICIAL CREDITORS COMMITTEE, Plaintiff, v. Herbert TUCHINSKY, Defendant and Third-Party Plaintiff, v. Martin GOLDBERG, Trustee of the Estate of Major Dynamics, Inc., Debtor, Third-Party Defendant. |
Estes & Hoyt, San Diego, Cal., for trustee.
Solomon, Ward, Seidenwurm & Smith, San Diego, Cal., for defendant and third party plaintiff.
Defendant and Third-Party Plaintiff, Herbert Tuchinsky (hereinafter "Tuchinsky") filed a Third-Party Complaint for Declaratory Relief, Indemnity and Contribution on November 22, 1982. Martin Goldberg, the Defendant in this action, is the trustee of the estate of Major Dynamics, Inc. (hereinafter "Trustee"). Tuchinsky filed a Motion for Specification of Facts and Issues Without Substantial Controversy; Partial Summary Judgment; and Summary Judgment. The Trustee also requested this Court grant Summary Judgment in his favor. Oral argument was heard on December 17, 1985. The Motion for Specification of Facts and Issues Without Substantial Controversy, Partial Summary Judgment and Summary Judgment was taken under submission and this Opinion sets forth the decision of the Court.
On March 16, 1981, Major Dynamics, Inc., d/b/a Sunstone Energy Systems, Inc., S & S Solar Energy Systems, Inc. and Helios Distributing Company (hereinafter "Debtor") filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. The Debtor continued operations under the control of Tuchinsky as president and chief executive officer until April 1, 1982, when the Court appointed the Trustee herein.
During the period of time that Tuchinsky operated the debtor-in-possession, he properly withheld taxes from the employees' payroll checks as required by State and Federal Tax Laws. However, Tuchinsky maintains that he was unaware that the tax monies were to be segregated and, accordingly, the withheld taxes were not deposited in segregated accounts or in a depository bank. Rather, the monies were placed in the Debtor's general operating account. Apparently, in late 1981, Tuchinsky drafted checks payable to the Internal Revenue Service (hereinafter "IRS") for accrued taxes. However, due to the Debtor's cash flow problem, the checks were later voided.
Shortly before a hearing scheduled for April 1, 1982, Tuchinsky stated that he received a call from the Debtor's attorney advising him that the Creditors Committee demanded that he not pay out any of the Debtor's funds. Further, the Debtor's attorney instructed him to comply with the demands of the Creditors Committee.
On April 2, 1982, the Court ordered Tuchinsky's removal and appointed Martin Goldberg as Trustee. At that time, approximately $77,000.00 in cash in the Debtor's general account was turned over to the Trustee.
The Trustee maintains that during the end of April, 1982, while in the process of preparing the Employer Quarterly Tax Return (Form 941), he became aware that Tuchinsky had failed to pay the required withholding taxes for the first quarter of 1982. Apparently, by that time, the $77,000.00 in the Debtor's general account, which had been turned over to the Trustee, had been spent by the Trustee in operating the Debtor's business. Thereafter, the Trustee decided not to pay the unpaid withholding taxes and, instead, continued the Debtor's operations. The Trustee indicated that he opted to operate the Debtor's business because it appeared to the Trustee that the business could be made viable and that if he applied most of the Debtor's cash receipts to pay the unpaid withholding taxes he would have had to cease business operations.
The Trustee generated approximately $1,500,000.00 in gross revenues. However, almost all the revenues were paid out as operating expenses. The Trustee has not paid the taxes that accrued during Tuchinsky's tenure. All subsequent taxes have been paid.
Presently, the Trustee is operating the Debtor's business under Chapter 11 of the United States Bankruptcy Code. There is approximately $100,000 cash on hand. The Trustee has not decided whether to convert this case to a Chapter 7 proceeding.
The United States has assessed a 100% penalty against Tuchinsky for the unpaid taxes of Debtor totalling $72,014.12.
Tuchinsky and the Trustee have raised several evidentiary objections to the Declarations on file. The parties were informed that the Court would consider the evidence and then render a ruling on such objections. The following is a summary of the objections.
Tuchinsky's Objections
Declaration of Martin Goldberg
Page and Line Reference: Objections
Page 2, lines 10-13. Irrelevant.
Page 2, lines 14-16. Hearsay.
Page 2, lines 16 through
Page 4, line 28. Irrelevant; Best Evidence Rule.
Memorandum of Points and Authorities in Opposition to Motion:
Page and Line Reference: Objections:
Page 2, lines 10-13; The facts are not supported by evidence and are
Page 2, lines 24-25; therefore hearsay. The issues asserted were raised
Page 5, lines 7-26; in the Complaint filed by the Creditors Committee.
Page 6, lines 5-9. That Complaint was dismissed by the Court for
failure to prosecute. That dismissal constituted a
decision in Tuchinsky's favor on the merits.
Trustee's Objections
Supplemental Declaration of Herbert Tuchinsky:
Page and Line Reference: Objections:
Page 2, lines 23-24. Irrelevant.
Page 3, line 12. Irrelevant.
Page 4, lines 11-12. Irrelevant; Opinion evidence.
This Court overrules each of the foregoing objections.
Tuchinsky has requested that the Court specify facts that are without substantial controversy. Based upon the pleadings that were submitted and oral argument presented, this Court finds that only the following facts are without substantial controversy:
1. $77,370.77 in cash in the Debtor's general account was turned over to the Trustee on April 1, 1982.
2. During his term in office Tuchinsky, as controlling officer of the Debtor, properly withheld funds from the checks of the Debtor's employees, did not place such withheld funds in a segregated account or in a depository bank, but commingled the tax withhold funds in the Debtor's general operating account.
3. The United States claims unpaid withholding taxes against the Debtor and Tuchinsky in the total sum of $72,014.12, the accuracy of which sum is not being litigated in this proceeding and is disputed by Tuchinsky.
4. The Trustee filed a tax return for the first quarter of 1982 for the Debtor, but did not pay the taxes.
5. The Trustee has collected in excess of $1,500,000 during his tenure, has expended approximately $1,500,000 during his tenure, and still has in his possession cash in excess of $100,000.
Tuchinsky has also requested that the Court specify issues that are without substantial controversy. Tuchinsky has set forth a number of issues in his Motion. Based upon the pleadings that were submitted and oral argument presented, this Court finds that only the following issues are without substantial controversy:
1. The Court has jurisdiction to hear the Third-Party Complaint pursuant to 28 U.S.C. § 1471 and 28 U.S.C. § 2201.
2. The withheld funds which the IRS seeks to recover from Tuchinsky under 26 U.S.C. § 6672, are costs of administration which should be acknowledged and paid by the Debtor.
3. The withheld funds are property of the Debtor's estate and are not subject to an impressed trust in accordance with 26 U.S.C. § 7501(a).
4. The Trustee does not have a duty to pay the taxes out of funds collected by him after his appointment.
5. Tuchinsky is not entitled to have the claims of the IRS paid from the estate prior to the closing of the Chapter 11 proceeding or a subsequent conversion of the Chapter 11 proceeding to a Chapter 7 proceeding.
6. In the event the Chapter 11 proceeding is converted to a proceeding under Chapter 7, the Trustee is not jointly liable for the payment of any post petition Chapter 11 IRS tax claims accruing prior to the appointment of the Trustee.
Additionally, this Court finds that a material triable controversy exists as to Tuchinsky's claim for indemnification against the estate for any amounts paid to the IRS by him.
The Court's rationale for these findings will be discussed in the following section entitled Summary Judgment.
This Court has jurisdiction to render a judgment in this action pursuant to 28 U.S.C. § 1471 and 28 U.S.C. § 2201.
Summary judgment is proper if the affidavits and other material demonstrate that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. In re Zupancic, 38 B.R. 754, 757 (9th Cir. BAP 1984). See also Bankruptcy Rule 7056; Fed.R.Civ.P. 56(c); In re Sarner, 22 B.R. 63, 64 (9th Cir. BAP 1982). Further, summary judgment may be granted to a nonmoving party. See, In re Independent Clearing House, 41 B.R. 985, 996 (Bkrtcy. D.Utah 1984).
Tuchinsky contends that the cash on hand at the time of the Trustee's appointment was subject to an impressed trust in accordance with 26 U.S.C. § 7501(a) (hereinafter "§ 7501 Trust").1 Accordingly, Tuchinsky argues,...
To continue reading
Request your trial