U.S. v. Fred A. Arnold, Inc.

• Decision Date: 13 April 1978
• Docket Number: No. 75-3048,75-3048
• Parties: 78-1 USTC P 9384 UNITED STATES of America, Plaintiff-Appellee, v. FRED A. ARNOLD, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 605

573 F.2d 605

78-1 USTC P 9384

UNITED STATES of America, Plaintiff-Appellee, v. FRED A. ARNOLD, INC., Defendant-Appellant.

No. 75-3048.

United States Court of Appeals, Ninth Circuit.

April 13, 1978.

Barbara Ashley Phillips (argued), San Francisco, Cal., for defendant-appellant.

William S. Estabrook (argued), Dept. of Justice, Washington, D. C., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California.

Before WRIGHT and TANG, Circuit Judges, and THOMPSON, ^* District Judge.

PER CURIAM:

The United States brought this action under § 3505(a) of the Internal Revenue Code, seeking to collect from Fred A. Arnold, Inc., a general contractor, the withholding and F.I.C.A. taxes which its subcontractor, Pannell Brothers Construction Co., failed to pay on behalf of its employees. Arnold appeals from the district court's grant of the government's motion for summary judgment. 400 F.Supp. 1118. This court has jurisdiction under 28 U.S.C. § 1291.

The defendant demanded a trial by jury, to which it was entitled in this kind of action. United States v. J. B. Williams Co., 498 F.2d 414 (2d Cir. 1974); Damsky v. Zavatt, 289 F.2d 46 (2d Cir. 1961). After substantial discovery, the United States filed a motion for summary judgment on the day the trial was to begin. The court heard oral argument that afternoon, and gave appellant twenty-four hours to file a response. Appellant responded and filed a cross-motion for summary judgment. The district court aborted the jury trial when it granted the government's motion.

We question whether this case was an appropriate one for summary judgment. It is well-settled in this circuit and others that the filing of cross-motions for summary judgment, both parties asserting that there are no uncontested issues of material fact, does not vitiate the court's responsibility to determine whether disputed issues of material fact are present. A summary judgment cannot be granted if a genuine issue as to any material fact exists. Fed.R.Civ.P. 56(c); Eby v. Reb Realty, Inc., 495 F.2d 646 (9th Cir. 1974); Brawner v. Pearl Assurance Co., 267 F.2d 45 (9th Cir. 1956); Hycon Mfg. Co. v. H. Koch & Sons, 219 F.2d 353 (9th Cir. 1955), cert. denied, 349 U.S. 953, 75 S.Ct. 881, 99 L.Ed. 1278 (1955); Wright & Miller, Federal Practice and Procedure: Civil § 2720.

The record supporting the cross-motions for summary judgment was very complete. It consisted of stipulated facts in the pre-trial order, depositions of every principal witness, answers to written interrogatories, and responses to requests for admission and exhibits (including the business records relating to and effectuating the transactions alleged in the complaint). Under proper circumstances a hearing on a complete record under cross-motions for summary judgment may amount to a stipulation of the parties to a court trial on an agreed written record. Starsky v. Williams 512 F.2d 109 (9th Cir. 1975). In the instant case, however, neither party, explicitly or inferentially, stipulated to a court trial. To the contrary, defendant demanded a jury trial. Indeed, the jury had already been empaneled when the government moved for summary judgment. We cannot find a waiver of the right to jury trial under these circumstances.

This case presents a situation surely not uncommon in the construction industry. On a contract for the United States Navy, Arnold subcontracted the framing work to Pannell. Pannell eventually requested that progress payments be made weekly so as to alleviate cash flow problems, rather than biweekly or monthly, as had been the case up to that point. Arnold agreed to the proposed payment schedule, provided the funds were expended on Arnold's project rather than on other Pannell jobs. A special checking account was set up in the name of Pannell Brothers. ¹ The funds advanced were to be deposited to this account and an Arnold supervisor was to cosign all withdrawals to ensure that the funds were not diverted to other Pannell jobs. Arnold paid amounts sufficient to cover more than the net payroll. Pannell drew on the account for purposes other than payroll, including the partnership draw. Arnold's supervisors apparently never refused to countersign a withdrawal.

Eventually, Pannell defaulted on the contract and went into bankruptcy. At that point Arnold learned that the bank signature card permitted funds to be withdrawn on the signature of the two Arnold supervisors. They withdrew $4,400, using it to pay wages to Pannell employees for the payroll period ending on the day of default. The taxes owing on those wages were paid, and from that point on, Arnold paid workers to finish the subcontract work, remitting withholding and F.I.C.A. taxes to the government on the wages it paid. The only taxes in question are those related to the wages paid out of the special account prior to Pannell's default.

Before 1966 only "employers" were liable for withholding taxes. This lead to problems, especially in the construction industry. A financially-strapped subcontractor would go to a lender, often his general contractor, for interim financing. The lender, wishing to minimize costs, would supply only the net payroll funds. The employees received credit as if the withholding taxes had been paid. The subcontractor-employer remained liable under 26 U.S.C. §§ 3102(b) and 3402, but recourse against him frequently proved fruitless. See generally 9 Merten's Law of Federal Income Taxation § 54.66.20; United States v. Algernon Blair, Inc., 441 F.2d 1379, 1381 (5th Cir. 1971).

In 1966, Congress enacted § 3505 of the Code. ² It provides that a surety, lender, or other person who directly or indirectly pays another's employees is secondarily liable for F.I.C.A. and withholding taxes.

Under § 3505(b), when a surety, lender, or other person advances funds to the employer, he is liable for the employer's withholding taxes if he knows that the funds are to be used specifically for the payment of wages and if he has actual notice or knowledge that the employer does not intend to, or will not be able to, make payment of the withholding taxes.

In contrast, under § 3505(a), a person is automatically liable, whatever his knowledge or notice, if he "directly" pays the employees. The intention of Congress was to prevent sureties, lenders, or other persons from assuming responsibility for net wages, excluding taxes. If payroll responsibility is assumed, it must include responsibility for the...