Mountain's Shadow Inn, Inc. v. Colorado Dept. of Labor and Employment, Div. of Employment and Training

• Court: Colorado Supreme Court
• Writing for the Court: LOHR
• Citation: Mountain's Shadow Inn, Inc. v. Colorado Dept. of Labor and Employment, Div. of Employment and Training, 672 P.2d 522 (Colo. 1983)
• Decision Date: 29 November 1983
• Docket Number: No. 81SA394,81SA394
• Parties: The MOUNTAIN'S SHADOW INN, INC., Plaintiff-Appellant, v. COLORADO DEPARTMENT OF LABOR AND EMPLOYMENT, DIVISION OF EMPLOYMENT AND TRAINING; Burton L. Carlson, Director of Division of Employment and Training, Defendants-Appellees.

Page 522

672 P.2d 522

The MOUNTAIN'S SHADOW INN, INC., Plaintiff-Appellant, v. COLORADO DEPARTMENT OF LABOR AND EMPLOYMENT, DIVISION OF EMPLOYMENT AND TRAINING; Burton L. Carlson Director of Division of Employment and Training, Defendants-Appellees.

No. 81SA394.

Supreme Court of Colorado En Banc.

Nov. 29, 1983.

Robert L. Harris, Denver, for plaintiff-appellant.

J.D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Mary J. Mullarkey, Sol. Gen., William Levis, Asst. Atty. Gen., Denver, for defendants-appellees.

LOHR, Justice.

This is an appeal by The Mountain's Shadow Inn, Inc. (Inn) from a trial court judgment denying the Inn's request for a refund of monies levied and collected from its bank account by the Colorado Department of Labor and Employment, Division of Employment and Training (Division). We reverse.

The plaintiff Inn owned premises containing a bar and restaurant in Lakewood, Colorado. The Inn operated the bar, but the restaurant was run by Dee Swain under an oral lease that was terminable at will. Swain was solely responsible for management of the restaurant for several years until he disappeared on October 20, 1975. After Swain abandoned the premises without notice, the Inn operated both the bar and the restaurant until arrangements were made for a new lessee to take over the restaurant.

Shortly before Swain's disappearance, the Division audited the restaurant's unemployment insurance contributions account and determined that Swain had failed to pay $4,235.62 in unemployment insurance contribution taxes. After efforts to locate Swain and collect the deficiency from him proved unsuccessful, the Division determined that the Inn was liable for the unpaid unemployment contributions and assessed the deficiency against the Inn as Swain's successor, relying upon section 8-79-103(1), C.R.S.1973, of the Colorado Employment Security Act, articles 70 to 82 of title 8, C.R.S.1973 (Act). ¹ Even before Swain's disappearance, the Division had treated Swain and the Inn as separate employers and had assigned each a separate account number.

When the Inn continued to refuse to pay the deficiency after an extended period of discussion, the Division levied on the Inn's bank account and seized $5,194.36, the amount of the unpaid unemployment contributions plus interest. The Inn applied to the Division for a refund, was refused, and then brought this action for a refund in the District Court for the City and County of Denver. See section 8-79-108(1), C.R.S.1973. After a trial without a jury, the court entered judgment for the Division, ruling that the Inn had acquired Swain's trade, assets, business, good will and equipment, and thus was a successor to Swain under section 8-70-103(8)(d), C.R.S.1973. ² The Inn then appealed to this court. ³

The Inn's central contentions are that the district court erroneously concluded that it was a successor to Swain under section 8-70-103(8)(d), that the Division denied it due process of law in levying against its bank account, and that the Act is unconstitutionally vague in its definition and treatment of successors. We hold that section 8-79-103(1) imposes no personal liability upon the Inn to pay Swain's delinquent unemployment contributions, and that the district court erred in ruling to the contrary. Therefore, it is unnecessary to address the other issues raised by the Inn.

Section 8-79-103(1) seeks to ensure the collection of unemployment contribution deficiencies in two distinct ways. First, the contributions are declared to be a lien upon the real and personal property of the employer. This lien attaches to the employer's property whenever there is an unpaid obligation for unemployment contributions. In the event the contributions remain unpaid after disposition of the employer's business, the Division can foreclose this lien and apply the proceeds to satisfy the employer's unemployment contributions deficiencies. So far as the record discloses, the Division did not pursue that remedy in the present case. ⁴ Second, in certain circumstances the employer's successor is declared to be personally liable for the unpaid contributions. The Act, however, limits the settings in which such personal liability arises.

As a condition to personal liability of a successor, the statute specifically contemplates a disposition involving an exchange of "purchase money" and imposes a duty on the buyer to "withhold sufficient of the purchase money to cover the amount of [the unemployment] contribution due and unpaid until such time as the former owner shall produce a receipt from the division showing that such contributions have been paid, or a certificate that no contributions are due." Section 8-79-103(1). Any successor who does not comply "shall be personally liable for the payment of any contributions due and unpaid." Id.

Section 8-79-103(1) protects the governmental interest in collection of unemployment contributions while assuring that a person who acquires a business in a transaction not involving a purchase will not be personally obligated to pay the prior owner's unemployment contribution deficiency. Although acquisitions not involving "purchase money" in some form may not be common, the collection remedies prescribed in section 8-79-103(1) are designed to achieve a fair result in such circumstances. Recognizing that the value of the business assets could be less than the amount of the former owner's unpaid unemployment contributions, the legislature has determined that where no "purchase money" is involved personal liability for the delinquent contributions should not be imposed on the new owner.

As another court has said in construing a similar statute, "[t]he secondary liability for the tax which is imposed by [the successor liability statute] arises from a definite act or omission, that is, the failure to withhold the amount of the tax from the purchase price as required by [that statute]." Knudsen Dairy Products Co. v. State Board of Equalization, 12 Cal.App.3d 47, 53, 90 Cal.Rptr. 533, 537 (1970). Accord, Richards v. Blackmon, 233 Ga. 739, 213 S.E.2d 638 (1975); Sterling Title Co. of Taos v. Commissioner of Revenue, 85 N.M. 279, 511 P.2d 765 (1973); Lunceford v. King, 633 S.W.2d 761 (Tenn.1982); "[W]here the seller did not receive a purchase price from which a withholding could be made, the purchaser cannot protect the state's interests and therefore cannot be held liable." Knudsen Dairy Products Co. v. State Board of Equalization, supra, 12 Cal.App.3d at 54, 90 Cal.Rptr. at 538. See Bank of Commerce v. Woods, 585 S.W.2d 577, 581 (Tenn.1979). Under section 8-79-103(1), in the absence of a payment of "purchase money" the Department is left to its remedy of foreclosure of its lien on the real and personal property acquired. ⁵

In summary, the employer's property is encumbered by a lien for unpaid unemployment contributions; any successor takes that property subject to the burden of the lien. Thus, the property owned by an employer who has failed to satisfy unemployment contribution obligations is subject to foreclosure before or after the employer transfers the business, and the foreclosure proceeds can be applied to those obligations. However, only when a successor pays for the business and fails to withhold from the purchase price enough money to satisfy unpaid unemployment contributions is that successor personally liable for the contributions.

The reasonableness of this legislative scheme is illustrated by its operation in the present case. As the trial court found, the Inn was compelled by business necessity to continue operation of the restaurant in order to maintain the Inn's hotel and restaurant liquor license. ⁶ The Inn paid nothing to Swain either directly or indirectly. As applied to these circumstances, the statute avoids the injustice of imposing personal liability on the Inn that might exceed the value of Swain's...