Zarate v. United States

• Decision Date: 04 March 2013
• Docket Number: CIVIL ACTION NO. M-12-18,CIVIL ACTION NO. M-11-210
• Parties: FRANCISCO G ZARATE, Plaintiff/Counter-Defendant, v. UNITED STATES OF AMERICA, Defendant/Counter-Plaintiff/ Third-Party Plaintiff, v. JUAN CANTU, et al., Third-Party Defendants. COMMUNITY ACTION COUNCIL OF SOUTH TEXAS, Plaintiff, v. FRANCISCO ZARATE, et al., Defendants/Third-Party Plaintiff/Cross-Plaintiffs, v. DAVID FLORES, Third-Party Defendant/Cross-Defendant, and UNITED STATES OF AMERICA, Defendant.
• Court: U.S. District Court — Southern District of Texas

FRANCISCO G ZARATE, Plaintiff/Counter-Defendant,

v.UNITED STATES OF AMERICA, Defendant/Counter-Plaintiff/ Third-Party Plaintiff,

v.JUAN CANTU, et al., Third-Party Defendants.

COMMUNITY ACTION COUNCIL OF SOUTH TEXAS, Plaintiff,

v.FRANCISCO ZARATE, et al., Defendants/Third-Party Plaintiff/Cross-Plaintiffs,

v.DAVID FLORES, Third-Party Defendant/Cross-Defendant,and UNITED STATES OF AMERICA, Defendant.

CIVIL ACTION NO. M-11-210

CIVIL ACTION NO. M-12-18

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS MCALLEN DIVISION

Dated: March 4, 2013

Consolidated into

Civil Action No. M-11-210

ORDER DENYING DEFENDANT ZARATE'S SECOND MOTION

FOR SUMMARY JUDGMENT

I. Factual and Procedural Background

Now before the Court is Defendant Francisco Zarate's Second Motion for Summary Judgment on the negligence claims asserted against him by Plaintiff Community Action Council of South Texas ("CAC"). (Doc. 100-1).¹ The central issues presented by this consolidated case are who caused CAC's failure to timely pay its payroll taxes, resulting in Internal Revenue Service ("IRS") penalties and interest, and who may be assessed the amounts owed. CAC alleges that it is a nonprofit organization formed over 30 years ago for the purpose of providing a variety of services to low-income residents of Starr, Jim Hogg, and Zapata Counties in Texas. 12cv18 at (Doc. 6-2 at ¶ 3). CAC has since expanded to Duval and Brooks Counties and now concentrates on providing basic health and transportation services to this five-county area. Id. Zarate is CAC's former Executive Director who resigned on April 14, 2007. Id. at ¶ 4. According to CAC, beginning on or before 2004, Zarate began a practice of failing to submit full payment of quarterly payroll taxes to the IRS as required by law. Id. at ¶ 5. Such payments consisted of "FICA" amounts withheld from employees' wages and matching payments from CAC. Id. The practice continued until November 29, 2006, when CAC's Board of Directors (hereinafter "Board") was informed that CAC owed over $2 million in unpaid taxes. Id. at ¶ 6. As a result, CAC has undergone "drastic changes" consisting of a substantial reduction in staff and the termination of contracts for operating various programs. Id. at ¶ 7. CAC has experienced "great difficulty in keeping its doors open to provide services to the community" and in "get[ting] control of the financial aspects of its operations." Id. By the end of 2007, CAC owed more than $3 million in delinquent payroll taxes. Id. On the basis of these allegations,CAC asserts that the failure to timely pay its payroll taxes and the resulting damages were proximately caused by the negligent conduct of Zarate in one or more of the following respects:

a. failing to use the care that a person of ordinary prudence would have used in operating CAC and in timely paying CAC's payroll taxes;

b. failing to disclose to the Board the decision not to timely pay CAC's payroll taxes;

c. failing to perform the duties imposed on each Defendant by the position of trust which each held with respect to CAC;

d. instructing employees not to disclose the decision to not timely pay CAC's payroll taxes; and

e. failing to properly supervise the work done by their employees with respect to CAC's financial affairs.

Id. at ¶ 9. CAC generally alleges that it suffered damages as a result of Zarate's negligence. Id. at ¶ 10. Further, CAC asserts that Zarate was grossly negligent in failing to disclose the existence of the delinquent payroll taxes. Id. at ¶ 11.²

Zarate initiated Civil Action No. 11cv210 on July 15, 2011, when he filed a complaint against the United States seeking refund and abatement of the IRS assessments against him for "trust fund" penalties owed by CAC for three quarterly tax periods,³ claiming that the failure to pay was not attributable to him but to CAC's Chief Financial Officer, David Flores. (Doc. 1). The United States counterclaimed against Zarate seeking payment of the balance due. (Doc. 5).⁴ On January 18, 2012, the United States removed Civil Action No. 12cv18 to this Court after Zarate filed a complaint in that action requesting relief identical to that sought in Civil Action No. 11cv210. 12cv18 at (Docs. 1, 1-2 at ¶¶ 50, 57, 64); see 28 U.S.C. §§ 1340, 1346(a)(1), 1441(a), 1446. CAC had initially filed Civil Action No. 12cv18 on November 17, 2008 in the 229th Judicial District Court, Starr County, Texas, for the purpose of asserting its negligence claims against Zarate arising from the tax assessments at issue. 12cv18 at (Doc. 6-2). In addition to his complaint against the United States, Zarate brought a third-party complaint against Flores for his negligence in failing to submit full payment of CAC's quarterly payroll taxes to the IRS. 12cv18 at (Doc. 1-2). The Court consolidated the original and removed actions and denied CAC's request to sever and remand its claims against Zarate, over which the Court has supplemental jurisdiction. See (Docs. 22, 24); 02/17/12 Minute Entry; 28 U.S.C. § 1367(a).

On September 26, 2012, the Court denied Zarate's initial Motion for Summary Judgment. (Doc. 85).⁵ Specifically, the Court rejected Zarate's appeal to the protections from liability afforded to an "officer" or "governing person" under Texas Business Organizations Code §§ 22.235, 3.102, and 3.105. Id. Further, and as discussed more fully infra, the Court determined that Zarate had not established as a matter of law that CAC's claims against him were barred by the applicable two-year statute of limitations. Id. The Court also rejected, as a basis for summary judgment, Zarate's argument that CAC had not suffered damages recoverable against Zarate because it had not yet paid its tax liabilities. Id. Finally, the Court found that some evidence existed to support the breach and damages elements of CAC's negligence action— namely, evidence that Zarate directed Flores to pay CAC's expenses first and its payroll taxes asfunds became available, and that Zarate had knowledge of Flores's practice of failing to timely pay the taxes, and the resulting liabilities, and failed to inform the Board. Id.

Zarate's Second Motion for Summary Judgment offers one argument that he could not have made in the previous Motion—that due to the Agreed Final Judgment entered in favor of the United States and against Zarate on October 11, 2012, CAC has suffered no damages for which it can recover from Zarate. (Doc. 100-1). Zarate also renews his request for summary judgment on the grounds that the statute of limitations bars the claims against him, but offers new arguments in support of this position. Id. Upon review of the Motion, CAC's response, and the summary judgment record, in light of the relevant law, the Court finds that Zarate's Second Motion must be denied for the following reasons.

II. Summary Judgment Standard of Review

A district court must grant summary judgment when there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(a). A fact is material if it might affect the outcome of the lawsuit under the governing law, and a fact is genuinely in dispute only if a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A party moving for summary judgment has the initial responsibility of informing the court of the basis for its motion and identifying those portions of the pleadings and materials in the record, if any, which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); FED. R. CIV. P. 56(a), (c). Where the movant bears the burden of proof because it is asserting an affirmative defense, it must establish "'beyond peradventure all of the essential elements of the...defense to warrant judgment in [its] favor.'" Chaplin v. NationsCredit Corp., 307 F.3d 368, 372 (5th Cir. 2002) (quoting Fontenot v. Upjohn Co., 780F.2d 1190, 1194 (5th Cir. 1986)) (emphasis in original). Once the moving party carries its burden, the burden shifts to the nonmovant to go beyond the pleadings and provide specific facts showing the existence of a genuine issue for trial. Celotex, 477 U.S. at 324; FED. R. CIV. P. 56(c). In conducting its review of the summary judgment record, the court "may not make credibility determinations or weigh the evidence" and must resolve doubts and reasonable inferences regarding the facts in favor of the nonmoving party. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000); Anderson, 477 U.S. at 255; Dean v. City of Shreveport, 438 F.3d 448, 454 (5th Cir. 2006). However, the nonmovant cannot satisfy its burden with "conclusory allegations, speculation, and unsubstantiated assertions which are either entirely unsupported, or supported by a mere scintilla of evidence." Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 229 (5th Cir. 2010); see also Brown v. City of Houston, 337 F.3d 539, 541 (5th Cir. 2003) ("Unsubstantiated assertions, improbable inferences, and unsupported speculation are not sufficient to defeat a motion for summary judgment.").

III. Zarate's Second Motion for Summary Judgment

A. Effect of Agreed Final Judgment on CAC's Request for Damages

The Agreed Final Judgment entered on October 11, 2012 provides that Zarate "was assessed pursuant to 26 U.S.C. § 6672 as a responsible person of Community Action Council of South Texas for withholding taxes for the first quarter and fourth quarters of 2006 and the first quarter of 2007," and that he "agrees that he is liable for these assessments in the amount of $1,258,931.35 as of October 8, 2010, plus interest until paid." (Doc. 93). In support of the argument that the Judgment precludes CAC's claims against him, Zarate points to the following statement in CAC's responses to Zarate's requests for disclosure:

The amount and method of calculating economic damages.

[CAC] has been penalized by the Internal Revenue Service in the sum of $1,795,417.69 for

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