Hartung v. State, Department of Labor

22 P.3d 1, 2001 Alas. LEXIS 47, 2001 WL 429130

• Court: Alaska Supreme Court
• Decided: April 27, 2001
• Docket: S-8352
• Status: Published

Opinions

OPINION

FABE, Justice.

I. INTRODUCTION

Alaska law allows the state, under certain circumstances, to collect a corporation's unpaid unemployment taxes from the officers of the delinquent corporation. A corporate officer is liable for all payments that become due during a period in which the officer is in a position to behave strategically and effectuate the payments. But where bankruptey intervenes and removes the corporate officer's power to make the required payments on behalf of the corporation, that officer is not liable for payments that become due during the post-petition period and that the officer could not make because of bankruptcy.

II. FACTS AND PROCEEDINGS

MarkAir was an air carrier serving Alaska and the West with hubs in Anchorage and Denver. Steven Hartung was MarkAir's chief financial officer during the period relevant to this appeal.

Pursuant to the Alaska Employment Security Act (the AESA)¹, MarkAir accrued $135,026 in unemployment insurance taxes owed during the first quarter of 1995 (January 1 through March 31). Of this amount, MarkAir withheld $26,578 from its employees' wages. The $108,438 remainder was MarkAir's employer contribution.

MarkAir filed a bankruptcy petition in federal court on April 14, 1995, shortly after the end of the first quarter of the year. Accordingly, all of MarkAir's "cash collateral" was subject to a security interest in favor of Seattle First National Bank (SeaFirst) after April 14.² As a result, MarkAir could no longer disburse any funds without SeaFirst's permission.

During a meeting that took place in the period between April 14 and April 28, Har-tung and other corporate officers learned that the first quarter taxes had not been paid. This discovery occurred while they were preparing a budget detailing the cash disbursements they thought MarkAir should make. Their proposed budget, which was subject to SeaFirst's approval, included $216,200 in "payroll taxes." Hartung testified that this budget item likely included the $135,026 in unemployment taxes at issue here.

SeaFirst categorically refused to consider any pre-petition payments or obligations. This refusal was reflected in the bankruptcy court's April 28 order (apparently drafted by SeaFirst). The order allowed MarkAir to pay certain business expenses, but specifically excluded payment of "any pre-petition debts, including but not limited to state or federal excise, withholding or other tax obligations, except as expressly authorized by the Bankruptey Court."

Because SeaFirst did not allow MarkAir to pay these tax obligations, the taxes remained unpaid. When the state did not receive Mar-kAir's scheduled tax payment, it attempted to recover this debt by filing a "proof of claim" in MarkAir's bankruptcy action. Additionally, the Alaska Employment Service issued a notice of assessment against Har-tung on October 25, 1995, stating that the Department of Labor had determined that Hartung was "responsible to pay" the $135,026.

Hartung appealed the assessment, but the Department of Labor upheld it after a hearing. Hartung then appealed the Department's decision to the superior court. Har-tung filed this appeal after the superior court affirmed the Department's decision.

III. DISCUSSION

A. Standard Of Review

In this case, the superior court sat as an appellate court reviewing the administrative decision of the Department of Labor³ In such cases, we independently review the merits of the administrative determination.⁴

This case requires us to interpret the statutory language of AS 28.20.240. We have stated that "[the interpretation of a statute presents a question of law."⁵ We review questions of law that do not involve agency expertise under the substitution of judgment test.⁶ When interpreting a statute we "adopt the rule of law that is most persuasive in light of precedent, reason, and policy."⁷

B. Because Bankruptcy Removed Har-tung's Power to Compel Payments, He Is Not Liable for MarkAir's Unpaid Taxes Which Became Due in the Post Petition-Period.

When a corporation liable for unemployment taxes becomes delinquent, the state may institute collection proceedings under AS 23.20.240. That statute both establishes the collection procedure and broadly defines the persons or entities against whom it may be used:

(a) If after notice an employer defaults in the payment of contribution or interest, the amount due may be collected by a person authorized by law and authorized by the department, by civil action in the name of the state, or by both methods.

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(£) In this section, "employer" as defined in AS 28.20.520 also includes, but is not limited to, an officer or employee of a corporation or a member or employee of a partnership who, as an officer, employee, or member, is under a duty to pay the contributions as required by (a) of this section.

The statute provides for collection from persons other than the delinquent corporation itself. By defining the term "employer" to include certain officers and employees of a corporation, AS 28.20.240(f) allows the state to seek delinquent taxes from those individuals in the corporation who, as a condition of their position, are "under a duty to pay the contributions as required by (a) of this seetion."

In Breck v. State, Department of Labor, we interpreted the scope of AS 28.20.240 in a consolidated appeal of two collection actions by the state against the officers of two corporations.⁸ In those actions, the state sought to collect unpaid unemployment insurance taxes from the officers of two corporations that had failed to pay their respective unemployment taxes.⁹ We addressed the cireumstances under which corporate officers could properly be held liable for the entire amount of their corporations' unemployment taxes. We held in Breck that "personal liability will attach under AS 28.20.240 only to those corporate officers or employees who have significant control over a corporation's finances and who are in a position to see that the corporation pays the taxes owed." ¹⁰

In this case, MarkAir's bankruptcy filing intervened before the taxes became due and before Hartung received notice of default. By the time the taxes became due, the bank-ruptey had removed Hartung from being in a position, as CFO, to see that MarkAir paid taxes it owed out of its corporate assets. Because SeaFirst controlled the dispensation of all of MarkAir's assets, and MarkAir could not use any corporate assets to pay debts or obligations without SeaFirst's consent, Har-tung no longer had the power to compel MarkAir to pay its tax liability from these assets. Thus, to the extent that Hartung did not have authority to direct MarkAir to pay the taxes it owed, he did not meet the second requirement of the Breck test and may not be held liable for MarkAir's unemployment taxes.

The conclusion we reach here rests on a narrow exception to officer lability and should not be construed to absolve corporate officers from liability whenever those officers lack the power to cure a default. We hold today that a corporate officer is not liable for payments that become due during the post-petition period and which bankruptcy prevents the officer from effectuating. But the corporate officer is still liable for all payments that become due during a period in which the officer is in a position to behave strategically. Thus, when the officer is in a position to see that the corporation pays its taxes but fails to do so, that officer is liable for those particular obligations. And if the corporate officer fails to compel payments prior to the bankruptey petition even though he is in a position to do so, he cannot escape personal liability for those pre-petition obligations.

In other words, if the officer exhausts corporate funds during the pre-petition period and fails to effect payment of the withholding taxes, that officer is liable for those obligations even if bankruptey subsequently prevents payment. But the corporate officer is not liable for payments that become due after the corporation has filed for bankruptcy, and for which bankruptcy law prohibits payment.¹¹

Thus, courts should examine whether the corporate officer has compelled payments during the period in which the officer was capable of doing so. The corporate officer is not liable for obligations that become due during the post-petition period and for which the bankruptey court prohibits payment. But the corporate officer is liable for obligations that become due during the pre-petition period which the officer is in a position to effectuate, regardless of whether bankruptcy later prevents the officer from compelling payment.

Applying these standards here, we conclude that Hartung is not personally lable for the $108,488 portion of unemployment insurance taxes that represented MarkAir's employer contribution for the first quarter of 1995. The employer contributions would have to be paid out of corporate assets, they became due during the post-petition period, and the bankruptey court had prohibited such payments without SeaFirst's express authorization. By the time MarkAir's taxes became due, then, Hartung was not in a position to see that the employer contributions were paid.

But the same conclusion does not necessarily hold true for the $26,578 portion of taxes representing employee contributions. Alaska Statute 28.20.165(c) treats these contributions as employee assets, not corporate assets, and expressly exempts them from being considered as assets of the employer in bankruptcy. It would thus seem to follow that, despite the bankruptcy order barring unapproved payment of corporate assets, Hartung might have remained in a position to behave strategically to effectuate payment of the employee contributions. Since the Department's decision did not distinguish between employer and employee contributions, however, and because the parties have not adequately addressed this issue in their briefing, we decline to decide it here. Instead, we remand the issue to the Department for further consideration in light of this opinion.

IV. CONCLUSION

Because the bankruptcy order prevented Hartung from compelling payment of Mar-kAir's first quarter 1995 unemployment taxes after MarkAir filed for bankruptcy, and because Hartung was not in a position to see that MarkAir paid employer contributions that became due in the post-petition period, Hartung was not a party against whom the tax liability for these contributions could properly be assessed. Nevertheless, Har-tung might remain liable for employee contributions under AS 28.20.165(c); but this issue has not been adequately addressed by the parties or the Department. Accordingly, we REVERSE the decision of the Department of Labor and REMAND for further proceedings consistent with this opinion.

1 . AS 23.20.005-.535.

2 . Although MarkAir had previously filed for protection under federal bankruptcy law in 1992, it appears that this earlier bankruptcy did not affect MarkAir's ability to pay the taxes at issue in this case.

3 . See AS 23.20.220(c), .445.

4 . See Bruner v. Petersen, 944 P.2d 43, 47 n. 5 (Alaska 1997) (citing Handley v. State, Dep't of Revenue, 838 P.2d 1231, 1233 (Alaska 1992).

5 . Gossman v. Greatland Directional Drilling, Inc., 973 P.2d 93, 95 (Alaska 1999) (citing Aetna Cas. & Sur. Co. v. Marion Equip. Co., 894 P.2d 664, 666 (Alaska 1995)).

6 . See Boyd v. State, Dep't of Commerce & Econ. Dev., Div. of Occupational Licensing, 977 P.2d 113, 115 (Alaska 1999) (citing Nyberg v. University of Alaska, 954 P.2d 1376, 1378 (Alaska 1998)).

7 . Guin v. Ha, 591 P.2d 1281, 1284 n. 6 (Alaska 1979).

8 . 862 P.2d 854 (Alaska 1993).

9 . See id. at 855-56.

10 . Id. at 857.

11 . See accord, Belcufine v. Aloe, 112 F.3d 633, 634-35, 640 (3d Cir.1997) (where bankruptcy workout prevented corporate managers from having discretion over payment of benefits, they could not be held liable for not making payments because liability applies "in only those contexts in which the managers have room to behave strategically").