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In re Gagleard

United States District Court, D. Arizona

October 25, 2017

IN THE MATTER OF Alan N. Gagleard, Nancy D. Gagleard, Debtors.
v.
United States of America, Appellee. Nancy D. Gagleard, et al., Appellants, ADV NO. 2:14-ap-00338-BKM BAP NO. BAP No. AZ-16-1329 Prev. Court. Nos. 2:12-cv-709, 2:15-cv-290

          ORDER

          James A. Teilborg Senior United States District Judge

         Pending before the Court is the appeal of Alan Gagleard and Nancy Gagleard (the “Appellants”) from the Bankruptcy Court for the District of Arizona (the “bankruptcy court”). The United States (“Appellee”) has filed its response, (Doc. 12), to which Appellants have filed their Reply, (Doc. 13). Having considered the parties' filing, the Court now rules on the appeal.

         I. BACKGROUND

         Bankruptcy Judge Martin found the facts as follows, annotated for brevity and relevancy to the issues on appeal:

“Alan and Nancy Gagleard owned and operated various professional employer organizations (collectively “PEOs”) beginning in the early 1990s, including:
• Power PEO of Florida, Inc. (“PEO Florida”) (formed in September 2001);
• Power PEO of Florida I, Inc. (“PEO Florida I”) (formed in September 2001);
• Way To Go PEO, LLC (“Way to Go”) (formed December 2003); and
• Texas Star Team, LLC (“Texas Star Team”) (formed August 2004).

         The Debtors were: the sole officers, directors and shareholders of PEO Florida and PEO Florida I; the sole officers, directors, and 75% shareholders of Way to Go; and the sole officers and 75% owners of Texas Star. In all the PEOs, Alan served as the company's president, treasurer, and general counsel; Nancy served as the vice president and secretary. Among other obligations of the PEOs, each was required to withhold federal income, FICA, and Medicare taxes from employees' salaries and pay over those withholding taxes to the IRS. There is no dispute that the Debtors were “responsible parties” for paying taxes under the Tax Code.

         Under the authority of 26 U.S.C. § 6672, the IRS made the following assessments against the Debtors separately for their willful failure to collect, truthfully account for, and pay over the withheld income, FICA, and Medicare taxes for the PEOs:

Assessment Date

Entity

Period

Amount

6/4/2010

Power PEO of Florida

4th quarter 2002

$113, 637.60

6/4/2010

Power PEO of Florida

2nd quarter 2003

$59, 524.43

6/4/2010

Power PEO of Florida

3rd quarter 2003

$15, 594.73

6/4/2010

Power PEO of Florida

1st quarter 2004

$58, 965.94

6/4/2010

Power PEO of Florida

4th quarter 2004

$122, 132.02

6/4/2010

Texas Star Team

2d quarter 2005

$12, 310.90

6/4/2010

Power PEO of Florida I

3rd quarter 2005

$81, 682.91

6/4/2010

Power PEO of Florida I

4th quarter 2005

$3, 366.25

6/4/2010

Power PEO of Florida I

1st quarter 2006

$486, 594.45

6/4/2010

Way To Go PEO

4th quarter 2004

$22, 296.94

6/4/2010

Way To Go PEO

1st quarter 2005

$55, 002.16

Total

$1, 030, 908.33

         Interest continues to compound daily on these amounts.

For each of the PEOs, the Debtors had authority to decide which bills the PEOs would pay. The Debtors used two bank accounts, one at Wachovia and one at Wells Fargo, for their PEOs. The Debtors opened the Wachovia accounts under PEO of Florida (account number ending in 8272) and the Wells Fargo account under Way to Go (account number ending in 4584). The Debtors used the Wachovia account for receivables, issuing paychecks, and making tax deposits for PEO Florida and PEO Florida I. They used the Way to Go Wells Fargo account as a general account for all their PEOs. From the Wells Fargo account, the Debtors paid the PEOs' operating expenses. The Debtors regularly intermingled funds between the Wachovia PEO Florida account and the Wells Fargo Way To Go account. To wit, from December 31, 2006, through September 1, 2007, $2, 250, 508 was transferred from the PEO Florida account at Wachovia to the Way to Go account at Wells Fargo, and $813, 849.80 was transferred from the Way To Go account to the PEO Florida account. In roughly the same time period, the Debtors caused payments from the accounts as follows: almost $70, 000 to landlord Double A Investments for rent (Ex. TT); almost $20, 000 to Inter-Tel Leasing for telephone and data services (Ex. UU); and well over $600, 000 to American Express for both business and personal credit card expenses. (Ex. VV-BBB).
Little about how the Debtors operated their businesses appears to have changed after April 15, 2007. Payments to key creditors remained consistent after April 15, 2017, in which time Way to Go issued· a significant number of checks to three creditors: over $50, 000 to landlord Double A Investments for rent (Ex. TT); just over $10, 000 to Inter-Tel Leasing for telephone and data services (Ex. UU); and almost $400, 000 to American Express for both business and personal credit card expenses (Ex. VV-BBB). Significant cash was flowing in and out of the PEOs; from May 2007 to September 2007 there was roughly $2, 000, 000 in deposits into the Wachovia account and over $2, 000, 000 in withdrawals and checks. The transfers between the Wachovia and Wells Fargo accounts continued as well, with just over $1, 300, 000 transferred from Wachovia to Wells Fargo, and just over $575, 000 going from Wells Fargo to Wachovia (Ex. WW).
On December 15, 2006, Officer Jensen from the IRS (unexpectedly) paid the Debtors a visit to discuss the IRS' assessments for unpaid taxes for PEO Florida 4th quarter 2004; PEO Florida I 3rd quarter 2005; PEO Florida I 4th quarter 2005; PEO Florida I 1st quarter 2006; Way To Go 4th quarter 2004; and Way To Go 1st quarter 2005. The Debtors assert this was how they first became aware of the assessments.
The Debtors, however, claim that even though they were notified of the IRS' position, they had reason to believe it was in error, because 1) they had had miscommunications and misapplication issues in the past with the IRS and 2) their long-term, trusted controller, Sandra Atteberry, quickly assured them all was in order. Immediately after the meeting with Officer Jensen, according to Alan, he met with Ms. Atteberry who told him that the taxes had been paid. He then directed her to send the information to Mr. Dietrich who would deal directly with the IRS. Both Debtors testified that Ms. Atteberry provided the documents to the accountant, but they did not review the documents. . . . Though Alan admits that he became suspicious that the tax(es) weren't paid within a few weeks of the meeting with Officer Jensen, Alan and Nancy both testified that they didn't learn until April of 2007 that the reports (including bank statements) that Ms. Atteberry had provided Mr. Dietrich and which showed the tax payments, were fabricated.
Both Alan and Nancy testified that Ms. Atteberry pled guilty to embezzlement in March 2010. . . .
Nancy testified that they closed the PEOs in May 2006 (six months before Officer Jensen's visit), after finding out that the PEO's insurance carrier would not renew the PEOs workers' compensation coverage. The lack of insurance, the Debtors claim, caused them to enter into a marketing agreement ("Marketing Agreement"; Ex. 65) with AMS Staff Leasing ("AMS"). Nancy testified that the Debtors transferred the PEOs' books of business to AMS as part of the consideration for the Marketing Agreement. According to Nancy, AMS requested that the Debtors use the PEOs' software to process the payroll for the AMS client company employees, explaining why payroll payments were processed through the Way To Go LLC operating account at Wells Fargo.”

         Bankruptcy Court Under Advisement Order at 2-7 (hereinafter the “Order”).

         On April 3, 2012, Appellants brought an action in this Court requesting a refund of amounts they had paid toward the IRS's § 6672 assessments against them. Four months later, on August 3, 2012, the United States answered and counterclaimed for the outstanding balance on these assessments. After the parties had completed discovery, including a deposition of Appellant Alan Gagleard on November 12, 2013, the United States moved for summary judgment on February 14, 2014. On February 27, 2014, Appellants filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, which stayed the action pursuant to 11 U.S.C. § 362(a). Given the stay, this Court denied Appellee's motion for summary judgment without prejudice on May 12, 2014.

         On April 18, 2014, Appellants filed an adversary proceeding in the bankruptcy court under 11 U.S.C. § 505. The adversary complaint sought a determination of Appellants' liability for the § 6672 assessments as well as additional assessments related to Way To Go PEO. The parties completed another round of discovery, which included a second deposition of Alan Gagleard on March 17, 2015. The United States again moved for summary judgment on May 21, 2015. The bankruptcy court granted summary judgment for the United States on the issue of “responsible persons, ” ruling that under § 6672, Appellants were responsible for the trust fund payments at issue.

         The parties agreed to schedule the trial for February 2016 in a stipulation filed on October 2, 2015. At what was supposed to be the final pretrial hearing on January 12, 2016, Appellants requested additional discovery before trial commenced. The bankruptcy court allowed Appellants to brief their request to reopen discovery, and placed a February 10, 2016 hearing on the calendar to discuss the issue and to set a new trial date.

         Additionally, prior to the January 12, 2016 hearing Appellants had filed an affidavit to the bankruptcy court detailing Mr. Gagleard's medical conditions. In response, at the January 12 hearing the bankruptcy court directed Appellants to make alternative arrangements for Mr. Gagleard to testify at trial if any health condition would prevent him from taking the stand. The bankruptcy court also offered that if Mr. Gagleard was unable to testify in person, the parties could submit testimony from one or both of his previous depositions or he could submit a declaration.

         At the February 10, 2016 hearing, the Appellants informed the bankruptcy court that they would not be moving to reopen discovery. The parties and the bankruptcy court agreed on a trial date of May 11, 2016. However, a little over a month later, Appellants moved for a six-month continuance of the trial. Appellants claimed that the continuance was needed because Mr. Gagleard, due to his medical condition, was unable to testify in person. The Appellants, in support of their motion, submitted a letter from one of Mr. Gagleard's treating physicians, Dr. Joshua A. Tobin. (Letter from Dr. Joshua Tobin to the Honorable Brenda K. Martin (Mar. 23 2016)). The letter described Mr. Gagleard's condition as debilitating, and in it Dr. Tobin stated that “there is no possible way on earth [Mr. Gagleard] can take part in a deposition or trial in any meaningful way.” Id. The United States opposed the motion, and on April 25, 2016, the bankruptcy court denied Appellants' motion for a continuance.

         The trial began on May 11, 2016. Appellants brought their case primarily using Nancy Gagleard's testimony. Appellants did not call any other witnesses, including Alan Gagleard, and they did not submit Mr. Gagleard's deposition testimony or any other testimony by Mr. Gagleard. The United States did enter into the trial record excerpts from Mr. Gagleard's testimony from both of his depositions. At the conclusion of the trial, the bankruptcy court directed the parties to file post-trial briefs, at Appellants' request. The parties submitted their briefs on June 3, 2016. After review of the final briefs, on September 14, 2016 the bankruptcy court issued its ...


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