In re Quattrone Accountants, Inc.
| Decision Date | 02 May 1989 |
| Docket Number | Civ. A. No. 88-2065. |
| Citation | 100 BR 235 |
| Parties | In re QUATTRONE ACCOUNTANTS, INC., et al., Bankruptcy Appellants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Paul Yagelski, Pittsburgh, Pa. for debtors, Quattrone Accountants, Inc.
William S. Rose, Jr., Tax Div., U.S. Dept. of Justice, Washington, D.C.I.R.S.
Craig R. McKay, Asst. U.S. Atty.
We consider an appeal filed by a debtor from an order of the bankruptcy court which held that the debtor, Quattrone accountants, Inc., (debtor) was a "responsible person", pursuant to the Internal Revenue Code, 26 U.S.C. § 6672, such that it was liable for delinquent federal employment taxes incurred by the United Dairy Farmers Cooperative Association (UDF). The bankruptcy court also held that it did not have jurisdiction to determine the tax liability of a principal of the debtor, Phillip P. Quattrone, an individual who was not in bankruptcy, 88 B.R. 713.
As determined by the bankruptcy court, UDF was a farmers' cooperative corporation which had been engaged in the production and marketing of milk and cheese products in western Pennsylvania and surrounding areas. It was formed in 1965 and was owned and operated by member-volunteers. UDF essentially collected raw milk from farms, processed the milk for consumption by the public and marketed the processed milk in its own stores. As UDF prospered, it found the need for professional accounting services, and hired the debtor, a corporation, in the late 1960's to perform such services.
UDF's president, Ernest Hayes, ran the day-to-day operations from the inception of the cooperative through 1981. Hayes' responsibilities were delegated to him by the UDF Board of Directors. Hayes and Phillip Quattrone, part owner and principal officer of Quattrone Accountants, Inc., had frequent contact to discuss UDF's finances, as debtor handled all of the accounting and financial affairs of UDF. Debtor was responsible for calculating payroll and distributing paychecks in all of the UDF retail outlets. All of UDF's bills were sent directly to debtor's office and debtor automatically paid all of the monthly bills by use of a signature facsimile stamp. For special debts, outside the standard monthly payments, the decision to pay and when was made by debtor and Hayes jointly. Debtor was also responsible for the preparation and filing of UDF's federal, state, and local tax returns, and was authorized to procure and manage all of UDF's loans.
UDF's Board of Directors held monthly meetings at which the debtor made complete financial presentations. The Board was advised of the previous month's financial position, revenues and expenses. Further, the Board was advised of bills which debtor determined to pay and debts it left outstanding.
UDF operated with three checking accounts. One was a milk account which was used for the payment to milk producers. One account was a petty-cash account used for disbursements of less than $1,000. The third account was used for deposits of revenues and to pay monthly expenses and the check book for this account was kept by debtor at its offices. The checks which were used for the monthly expenses were not signed by debtor, rather they were signed by a facsimile stamp of the signature of Hayes and the treasurer, Helen Zitney.
During 1980, UDF encountered problems with the Department of Agriculture (USDA). A dispute developed over the dates of payment by UDF to its milk suppliers. UDF was required to modify its payment plan to the milk suppliers, which caused many payments to other creditors to be untimely. Shortly thereafter, Pittsburgh National Bank "called" an $800,000.00 loan and froze UDF's assets. Debtor advised the members that the loan could be paid if UDF borrowed two-thirds of one month's milk receipts from the members. The members agreed to the loan arrangement, seeing no other means to obtain release of their accounts. The USDA advised UDF that the members' loan would be characterized as an assessment. This resulted in a lawsuit brought against UDF by the USDA in which the USDA obtained a $1.2 million judgment.
UDF evidently attempted to continue operations despite a serious cash flow problem. At this same time, the IRS began an investigation because UDF was $50,000.00 overdue on its federal withholding taxes, Federal Insurance Contribution Act taxes, and Federal Unemployment Tax Act taxes. The UDF Board of Directors called a special meeting to determine how to proceed. The farmers could not use their milk receipts to assist in paying the delinquent taxes and UDF was without sufficient funds. UDF could not get bank financing due to the outstanding $1.2 million judgment. The Board turned to debtor for assistance and guidance. Debtor formed a group of investors, called Professional Associates, who loaned $250,000.00 to UDF specifically to pay presently due taxes and to pay withholding taxes anticipated for the following year. In return for this loan, UDF gave Professional Associates $3.5 million of equipment as collateral, while continuing to use the equipment under a leaseback agreement. Debtor was responsible for payment of these taxes, and the UDF Board of Directors relied on debtor's expertise in clearing up the tax delinquency.
During the course of the next year the debtor was continuously questioned about the tax deficiency and whether payments were being made to satisfy it. Debtor consistently reassured the Board that the required payments had been made. In the fall of 1981, the Board directed debtor to produce documents which verified the tax payments. When debtor's deposit receipts did not correspond to the amounts due, debtor was fired. In October of 1982, UDF filed a voluntary petition in bankruptcy under Chapter 11 of the 1978 Bankruptcy Code, and listed, in its schedule of debts, outstanding withholding taxes for the periods ending June 30, 1981 and September 9, 1981.
In an effort to collect at least a portion of the unpaid federal employment taxes of UDF, the IRS proposed and made assessments against several entities pursuant to 26 U.S.C. § 6672. Included among the individuals so assessed were Hayes and Phillip Quattrone.1 In addition to these individuals, the IRS also assessed the debtor as a person responsible for collecting, accounting for, and paying over UDF's employment taxes pursuant to 26 U.S.C. § 6672. Debtor subsequently filed its own petition for reorganization under Chapter 11. The assessments now total $85,368.82, plus interest.
On May 23, 1988, a hearing was held before the bankruptcy court. On July 12, 1988, the court filed its memorandum opinion and order holding that debtor was a responsible person under § 6672 and that it did not have jurisdiction to determine the personal tax liability of Phillip Quattrone, who was not in bankruptcy. For the reasons stated herein, we will affirm the order of the bankruptcy court in all respects.
It is well settled that the proper standard of review applied to findings of fact of the bankruptcy court is the clearly erroneous standard. In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.1989). Because we conclude that the bankruptcy court's findings of fact are not clearly erroneous, we will adopt those findings. We must conduct plenary review of conclusions of law and break down mixed questions of law and fact, applying the appropriate standard to each component. Id. (citing Resyn Corp. v. United States, 851 F.2d 660, 664 (3d Cir.1988); In re Jersey City Medical Center, 817 F.2d 1055, 1059 (3d Cir.1987); Ram Constr. Co. Inc. v. American States Insurance Co., 749 F.2d 1049, 1052-53 (3d Cir.1984); University Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 101-02 (3d Cir.1981)).
The first issue we address is whether the bankruptcy court had subject matter jurisdiction to determine the tax liability of Phillip P. Quattrone, a non-debtor third party. The bankruptcy court examined the legislative history of § 505(a)(1) of the Bankruptcy Code in holding that its jurisdiction was limited to tax determinations involving the debtor or the bankruptcy estate. Section 505(a)(1) provides:
Quattrone argues on appeal that the bankruptcy court failed to take into consideration the provisions of 28 U.S.C. § 1334(b), which provides:
Notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district court, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under Title 11, or arising in or related to cases under Title 11. (Emphasis added).
Quattrone argues that § 1334 gives the bankruptcy court derivative jurisdiction over non-debtor tax questions which are related to the bankruptcy estate. Thus, our inquiry is whether or not Quattrone's individual tax liability is related to the bankruptcy estate.
Our Court of Appeals for the Third Circuit has held that the test for determining whether or not a civil proceeding is related to a bankruptcy estate is whether the outcome of that proceeding could have any conceivable effect on the administration of the bankruptcy estate. In re Bobroff, 766 F.2d 797, 802 (3d Cir.1985). An action is related to the bankruptcy if the outcome could have any impact upon the handling and administration of the bankruptcy estate, and if the outcome could "alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively)," Id. The fact that there may be common issues of fact between a civil...
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