TX Comptroller of Public Accts v. Vincent Liuzza ( 2010 )

  •      Case: 09-50544    Document: 00511164393   Page: 1   Date Filed: 07/06/2010
                      FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                      Fifth Circuit
                                                                      July 6, 2010
                                      No. 09-50544
                                                                     Lyle W. Cayce
    In the Matter of: TEXAS PIG STANDS, INC.
    VINCENT J. LIUZZA, JR., Trustee of Texas Pig Stands, Inc.
                      Appeal from the United States District Court
                           for the Western District of Texas
    Before JONES, Chief Judge, and BENAVIDES and PRADO, Circuit Judges.
    EDITH H. JONES, Chief Judge:
            Vincent J. Liuzza, Jr. served as the bankruptcy trustee for Texas Pig
    Stands, a venerable San Antonio, Texas, restaurant company. In an attempt to
    keep the restaurants afloat after a plan of reorganization had been confirmed,
    Liuzza failed to remit state sales taxes to the Texas Comptroller. The issue
    posed in this appeal is whether Liuzza may be held personally liable for the
    deficiency. T EX. T AX. C ODE A NN. § 111.016(b) (Vernon 2007). The bankruptcy
    court found that Liuzza could not be held liable absent a showing of “gross
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                                         No. 09-50544
    negligence.”      The district court disagreed.          We affirm the district court’s
    judgment imposing liability.
                                          I. Background
           Pig Stands, home of the legendary “pig sandwich,” 1 owned several
    restaurants throughout Texas. In April 2005, Pig Stands filed for Chapter 11
    bankruptcy and continued to face serious cash flow problems. While the debtor-
    in-possession ran the estate, Pig Stands failed to remit state sales taxes
    for October and November 2005.2              On March 14, 2006, the court appointed
    Liuzza as trustee. As part of the appointment, the bankruptcy court’s order
    (“March Order”) explicitly required Liuzza to remit state sales taxes as they
    became due.
           Liuzza believed the best way to maximize the estate’s value was to sell the
    restaurants as going concerns instead of liquidating their assets piecemeal.
    Bidders would be far more interested in open restaurants, even unprofitable
    ones, than in liquidation sales. Accordingly, Liuzza attempted to keep the
    restaurants in business to attract bidders. Insufficient cash flow made this
    difficult, so Liuzza again fell behind in remitting sales taxes.                  When the
    Comptroller moved to convert the bankruptcy to Chapter 7, however, the
    bankruptcy court denied the motion. In June 2006, Liuzza remitted the taxes
    for April and May 2006, and payments stayed timely until September.
           On September 13, 2006, the bankruptcy court approved a reorganization
    plan (the “Plan”), which provided for orderly sales of the restaurants as going
    concerns and distribution of the proceeds to the creditors. The Plan created a
    liquidation trust (the “Trust Agreement”) and appointed Liuzza trustee. In
               See Texas Pig Stands, Inc. v. Hardrock Café Int’l, 
    951 F.2d 684
     (5th Cir. 1992).
              Pig Stands collected tax from customers for each sale. Under Texas law, those
    collected sales taxes are held in trust until remitted to the Texas Comptroller. TEX . TAX CODE
    ANN . § 111.016 (Vernon 2007). These”trust-fund taxes” must be remitted timely to the state.
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    language similar to that of the March Order, the Plan required Pig Stands to
    stay current and timely remit state sales taxes held in trust. Specifically,
    Section 5.02 of the Plan provided that “the Trustee shall remain current with all
    post-confirmation expenses of the Debtor.”        An addendum to Section 8.06
    included “default language” on behalf of the State of Texas:
          (a) A failure by the Trustee to remain current on its
          postconfirmation Texas sales . . . taxes or to make a payment to the
          Texas Comptroller . . . pursuant to the terms of the Plan shall be an
          Event of Default. If the reorganized Debtor fails to cure an Event
          of Default as to tax payments . . . the taxing entity issuing the notice
          of default may (a) enforce the entire amount of all of its claims,
          (b) exercise any and all rights and remedies under applicable
          nonbankruptcy law, and (c) seek such relief as may be appropriate
          in this court.
          In the order confirming the Plan, a new provision specified that:
          The [Texas] administrative claim for October and November 2005
          sales taxes and all accrued penalty and interest thereon will be paid
          on the Effective Date [October 13, 2006].           Any additional
          administrative expense tax claims owed to the Texas Comptroller
          will also be paid on the Effective Date.
          Liuzza paid only a small portion of the taxes that became due on the
    Effective Date. This default, he asserts, resulted from the unexpected inability
    to consummate a post-confirmation loan. On October 25, more than a month
    after Liuzza defaulted in paying the August 2006 taxes and twelve days after the
    Effective Date defaults, the Comptroller issued notices of deficiency.
    On November 8, the Comptroller froze the company bank accounts and collected
    money directly from restaurant cash registers. A week later, the Comptroller
    revoked Pig Stands’ license to collect sales taxes, effectively ending the
    company’s ability to function. The bankruptcy case was eventually converted to
    Chapter 7.
          The Comptroller then filed an adversary proceeding to impose personal
    liability on Liuzza for the sales tax deficiency under T EX. T AX C ODE A NN.
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    § 111.016(b) (Vernon 2007).3 The bankruptcy court denied liability, finding that
    the Trust Agreement limited Liuzza’s liability to “gross negligence.” The district
    court reversed, holding that under the Trust Agreement, Liuzza remained liable
    for and had committed willful misconduct in failing to pay trust fund taxes. The
    district court entered judgment against Liuzza and he has appealed.
                                         II. Discussion
           This court reviews the decision of a district court, sitting as an appellate
    court in bankruptcy, by applying the same standards of review to the bankruptcy
    court’s findings of fact and conclusions of law. In re Jack/Wade Drilling, Inc.,
    258 F.3d 385
    , 387 (5th Cir. 2001). Generally, a bankruptcy court’s findings of
    fact are reviewed for clear error and conclusions of law are reviewed de novo. In
    re Williams, 
    337 F.3d 504
    , 508 (5th Cir. 2003).4
           Liuzza raises myriad challenges to a judgment that will cost him more
    than a hundred thousand dollars. He denies that he violated applicable state
    tax law. He relies upon exculpatory provisions in the Trust Agreement that
    accompanied the Plan. He asserts that the mere “deferral” of tax payments was
    implicitly or explicitly authorized under bankruptcy law, which allegedly
    supersedes state tax law in this respect.
            TEX . TAX CODE ANN . § 111.016(b)(Vernon 2007) states:
          With respect to tax or other money subject to the provisions of Subsection (a),
          an individual who controls or supervises the collection of tax or money from
          another person, or an individual who controls or supervises the accounting for
          and paying over of the tax or money, and who willfully fails to pay or cause to
          be paid the tax or money is liable as a responsible individual for an amount
          equal to the tax or money not paid or caused to be paid. The liability imposed
          by this subsection is in addition to any other penalty provided by law. The
          dissolution of a corporation, association, limited liability company, or
          partnership does not affect a responsible individual’s liability under this
    (emphasis added).
              Because Liuzza is proceeding pro se, we interpret his brief liberally to afford all
    reasonable inferences which can be drawn from them. See Oliver v. Scott, 
    276 F.3d 736
    , 740
    (5th Cir. 2000).
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           Because Liuzza appears pro se and because a tax collector’s imposition of
    personal liability on a bankruptcy trustee is an unusual, if not wholly
    unprecedented occurrence,5 we have carefully reviewed the record before
    deciding to affirm the district court. We are also cognizant that although Liuzza
    transgressed Texas tax law, he did not enrich himself from Pig Stands’ estate.
    We address his interrelated arguments in an orderly fashion.
           As noted above, Texas Tax Code Section 111.016(b), imposes personal
    liability on a controlling person for any tax deficiency if that person “willfully”
    fails to remit sales taxes held in trust. Liuzza was a controlling party. He
    initially asserts that a trustee can be held liable only for gross negligence or
    willful or wanton misconduct, and that the trustee’s standard is a different —
    and higher — standard than is imposed under state tax law.
           State v. Crawford explains when a party is liable under § 111.016.
    262 S.W.3d 532
     (Tex. App.–Austin 2008, no pet.).                   Crawford noted that
    § 111.016(b) was modeled after Section 6672 of the Internal Revenue Code,
    26 U.S.C. § 6672, and adopted the federal statute’s construction of the term
    “willfully”. Id. at 538-39. Citing cases analyzing Section 6672, the court held
    that “willfully not paying taxes” is established “by evidence that the responsible
    person had knowledge that taxes were due . . . and yet paid other creditors.” Id.
    at 538 (citing Barnett v. I.R.S., 
    988 F.2d 1449
    , 1457 (5th Cir. 1993)).
    “Willfulness . . . requires only a voluntary, conscious, and intentional act, not a
    bad motive or evil intent.” Barnett, 988 F.2d at 1458. Liuzza admits that he
    knew that the sales taxes were due and used the money to pay other creditors
             See e.g. King v. United States, 
    85 S. Ct. 427
     (1964); In re Dolard, 
    519 F.2d 282
    Cir. 1975); United States v. Kaplan, 
    74 F.2d 664
     (2d Cir. 1935). Some modern cases discuss
    that a trustee might be liable for failing to pay withholding taxes. See e.g. In re San Juan
    Hotel Corp., 
    847 F.2d 931
    , 947 (1st Cir. 1988); In re Equipment Fabricators, No. 91-16748,
    1993 WL 83498
    , *1 (9th Cir. Mar. 23, 1993); In re Thurman, 
    163 B.R. 95
    , 100 n.6 (Bankr. W.D.
    Tex. 1994).
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    (suppliers, staff, etc.). Accordingly, absent special protection of some sort, he is
    exposed to liability under § 111.016(b). Liuzza has not identified, and we have
    not found, any different definition of willfulness that pertains to bankruptcy
          Liuzza believes that his duty as a trustee to “maximize the estate’s value”
    superseded his duty to pay the taxes timely and should absolve him of liability.
    Essentially, Liuzza argues his “good intentions” of maximizing the estate’s value
    preclude liability. Good intentions are irrelevant: a party is liable for willfully
    failing to remit trust-fund taxes irrespective of why he failed to do so. Crawford,
    262 S.W.3d at 544 (“Willfulness does not require a bad motive or evil intent, but
    rather a ‘voluntary, conscious, and intentional act.’”) (quoting Barnett, 988 F.2d
    at 1457).     In the analogous federal tax statute, 26 U.S.C. § 6672(a), good
    intentions are not exculpatory. See, e.g., High v. United States, 
    506 F.2d 755
    756 (5th Cir. 1975); Collins v. United States, 
    848 F.2d 740
    , 741-42 (6th Cir. 1988)
    (“It is no excuse that, as a matter of sound business judgment, the money was
    paid to suppliers and for wages in order to keep the corporation operating as a
    going concern — the government cannot be made an unwilling partner in a
    floundering business.”).
          Moreover, a trustee’s failure to pay taxes is not judged by a gross
    negligence standard. Liuzza mistakenly relies on a case that discusses the
    standard of care owed by a trustee to the estate when he acts as its agent. See
    In re Smyth, 
    207 F.3d 758
    , 761 (5th Cir. 2000). That a trustee is only liable to
    the estate for acts of gross negligence, Id. at 761-62, has nothing to do with a
    statutory duty to the state to pay taxes held in trust. Liuzza is comparing apples
    to oranges.
          Although the Bankruptcy Code does not discuss trustee liability, federal
    law directly incorporates state law when a bankruptcy trustee manages property
    and expressly requires the timely payment of taxes. See 28 U.S.C. §§ 959(b),
    960. Section 959(b) requires a trustee to operate the property “according to the
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    requirements of the valid laws of the State in which such property is situated,
    in the same manner that the owner or possessor thereof would be bound to do
    if in possession thereof.” Section 960(a) states that a trustee “shall be subject to
    all Federal, State and local taxes applicable to such business to the same extent
    as if it were conducted by an individual or corporation.”                        Finally,
    Section 959(a) authorizes suits against trustees “with respect to any of their acts
    or transactions in carrying on business connected with such property.” Taken
    together, these provisions do not expressly address trustees’ personal liability,
    but in confirming trustees’ responsibility to “comply with tax laws,” they are
    fully consistent with holding trustees personally responsible for their
    professional conduct to the same extent as any other actors under the law.
          Further, the United States’ published materials for bankruptcy trustees
    warns trustees of their responsibilities to remit taxes.           The United States
    Trustee Manual states:
          Failure to remit taxes is also a breach of the debtor’s statutory
          obligations and fiduciary duties. See 11 U.S.C. [§ 346(h)]; 28 U.S.C.
          §§ 959 and 960. A debtor is presumed to be aware of the withholding
          requirements of federal and state law. See In re WPAS, Inc., 
    6 B.R. 40
    , 44 (Bankr. M.D. Fla. 1980).6
    Similarly, the U.S. Trustee’s Chapter 11 Trustee Handbook specifically informs
    trustees of the risk of not paying taxes:
          The trustee must file appropriate returns and pay tax liabilities on
          behalf of the estate. A trustee who fails to comply with the federal
          withholding tax provisions runs the risk of being held personally
          liable for the trust fund taxes not collected and paid over to the
          government. Similarly, the trustee may be held personally liable
          when an estate does not have sufficient funds to pay the taxes due
          from the sale of estate assets.
    3 - 9 . 4 . 5    ( O c t o b e r       1 9 9 8 )   a v a i l a b l e a t
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    (emphasis added).7 While the provision discusses federal withholding taxes, it
    certainly puts the reader on notice that he is responsible for remitting trust-fund
    taxes in a timely manner. The Chapter 11 Trustee Handbook also refers to
    § 959. Liuzza testified to reading the handbook and should have been aware of
    its warnings.
          Liuzza next asserts that the Trust Agreement limits his liability. The
    Comptroller is bound to any liability limitations imposed by the Plan, which
    included the Trust Agreement.         11 U.S.C. § 1141(a).       The Plan and Trust
    Agreement are contracts that must be read in their entirety to be given full
    meaning. In re Texas Commercial Energy, 
    607 F.3d 153
    , 158 (5th Cir. 2010);
    J.M. Davidson, Inc. v. Webster, 
    128 S.W.3d 223
    , 235 (Tex. 2003) (“Contracts are
    to be read as a whole, and an interpretation that gives effect to every part of the
    agreement is favored so that no provision is rendered meaningless or as
    surplusage.”). Further, under the governing law of Texas, “exculpatory clauses
    are strictly construed, and the trustee is relieved of liability only to the extent
    to which it is clearly provided that he shall be excused.” Jewett v. Capital Nat.
    618 S.W.2d 109
    , 112 (Tex. Civ. App.– Waco 1981, writ ref’d n.r.e.)
          Liuzza relies on Sections 3.13 and 5.4 of the Trust Agreement to limit his
    liability. Under Section 3.13, the trust will indemnify the trustee “from all loss,
    liability, expense (including counsel fees) or damages which he or they may incur
    or sustain in good faith and without fraud, willful misconduct, or negligence in
    the exercise and performance of his or their powers[.]”             This provision is
    inapposite. This is not an indemnification case, and Liuzza is ineligible for
    indemnification because he committed willful misconduct by willfully failing to
            U.S. DEP ’T . OF JUSTICE , CHAPTER 11 TRUSTEE HANDBOOK 52 (May 2004) available at
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    pay taxes.8 Section 3.13 also provides that “The Trustee shall not be personally
    liable for the payment of any Trust expense or claim or other liability of the
    Trust, and no person shall look to the Trustee for payment of any such expense
    of liability.” This provision also does not shield Liuzza from liability. Section
    111.016(b) is not shifting a liability from the trust to Liuzza, but imposing a
    personal liability onto Liuzza for failing to remit taxes as a controlling person of
    the trust.
           Of more interest, Section 5.4 states that individual creditors cannot pursue
    the trustee to satisfy the trust’s liabilities:
           No Personal Obligation for Trust Liabilities. Persons dealing with
           the Trustee in matters relating to the Trustee have recourse only
           against the Trust Assets to satisfy any liability incurred by the
           Trustee to such person in carrying out the terms of this Agreement
           or the Plan, and the Trustee shall have no personal or individual
           obligation to satisfy such liability. . . .
    (emphasis added). Nevertheless, Section 5.4 does not protect him from liability.
    Section 5.1 explains more precisely when the trustee faces liability:
           Standard of Care. Except in the case of fraud, willful misconduct or
           gross negligence, the Trustee shall not be liable for any loss or
           damage by reason of any action taken or omitted by him pursuant
           to the discretion, power and authority conferred on him by this
           Agreement or the Plan.
    (emphasis added). Read in conjunction with Section 5.1, Section 5.4 absolves the
    trustee from any personal liability if he follows the Plan and does not commit
    fraud or willful misconduct. Liuzza exceeded his authority, violated the Plan,
    and committed willful misconduct. Accordingly, the Trust Agreement does not
    limit his liability.
              Liuzza argues that he did not commit “misconduct.” However, even by his own
    definition, he committed misconduct. Liuzza uses BLACK LAW DICTIONARY ’s definition: “A
    dereliction of duty; unlawful or improper behavior.” As discussed previously, Liuzza’s behavior
    was unlawful.
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          Liuzza emphatically disagrees that the mere “deferral” of tax payments
    while he awaited an opportune sale of the restaurants should amount to “willful
    misconduct.” But the Plan plainly required timely payment of these taxes, and
    the Trust Agreement forbade him to “attempt to modify the plan” (Section 4.3).
    Nonetheless, he was authorized to seek alterations to the Trust Agreement on
    written submission to and approval of the bankruptcy court (Section 11.1).
    Liuzza paid no heed to these strictures, nor did he avail himself of recourse to
    the bankruptcy court before unabashedly defaulting on the taxes.
          Another source of fundamental misunderstanding by Liuzza is that, acting
    for the estate, he could pick and choose when to pay taxes as opposed to other
    priority claims. First, the timing of tax payments was determined by the Plan,
    a court order binding on Liuzza. Second, because state sales taxes are held in
    trust by an entity until paid to the Comptroller, they became property of the
    debtor’s estate, and then of the reorganized debtor, only to the extent of legal
    title, In re Al Copeland Enterprises, Inc., 
    991 F.2d 233
    , 235 (5th Cir. 1993), thus
    limiting Liuzza’s ability freely to dispose of those sums.           Third, cases
    determining by what priority scheme administrative creditors may divide up the
    debtor’s assets in a liquidation, see e.g. United States v. Randall 
    401 U.S. 513
    91 S. Ct. 991
     (1971) superseded by statute, Bankruptcy Reform Act of 1978, Pub.
    L. No. 95-598, Stat. 2549, as recognized in Begier v. IRS, 
    496 U.S. 53
    110 S. Ct. 2258
     (1990), are irrelevant to determining the liability of non-debtor
    parties, like Liuzza, for priority taxes.
          Finally, Liuzza raises the defenses of in pari delicto and reliance on advice
    of counsel. As he failed to raise these issues in the courts below, we do not
    consider them here. Little v. Liquid Air Corp., 
    37 F.3d 1069
    , 1071 n.1 (5th Cir.
    1994) (en banc).
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                                  III. Conclusion
         The Comptroller’s motions to strike Liuzza’s brief and assess sanctions are
    denied.   For the reasons discussed above, the district court’s judgment is