1 2 3 UNITED STATES DISTRICT COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 JAMES PREIMESBERGER, CASE NO. 1:19-CV-1441 AWI SAB 7 Plaintiff ORDER ON DEFENDANT’S MOTION 8 v. FOR JUDGMENT ON THE PLEADINGS 9 UNITED STATES, (Doc. No. 22) 10 Defendant 11 12 13 This is a tax refund case filed by Plaintiff James Preimesberger (“Preimesberger”) against 14 the United States. Specifically, Preimesberger seeks to recover $6,601.41 that he alleges was 15 improperly assessed against him through the Internal Revenue Service’s (“IRS”) invocation of 26 16 U.S.C. § 6672 (“§ 6672”). The United States has responded to the Complaint through the IRS, 17 and the IRS now moves for judgment on the pleadings under Rule 12(c). For the reasons that 18 follow, the motion will be denied. 19 20 RULE 12(c) FRAMEWORK 21 Under Federal Rule of Civil Procedure 12(c), “[a]fter the pleadings are closed but within 22 such time as not to delay the trial, any party may move for judgment on the pleadings.” Fed. R. 23 Civ. Pro. 12(c). Because the motions are functionally identical, the same standard of review 24 applicable to a Rule 12(b)(6) motion applies to a Rule 12(c) motion. Gregg v. Department of 25 Public Safety, 870 F.3d 883, 887 (9th Cir. 2017). The non-moving party’s allegations are 26 accepted as true and all reasonable inferences are drawn in the non-moving party’s favor. See 27 Herrera v. Zumiez, Inc., 953 F.3d 1063, 1068 (9th Cir. 2020); Hines v. Youseff, 914 F.3d 1218, 28 1227 (9th Cir. 2019). Any allegations made by the moving party that have been denied or 1 contradicted are assumed to be false. See MacDonald v. Grace Church Seattle, 457 F.3d 1079, 2 1081 (9th Cir. 2006); Hal Roach Studios v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1550 (9th 3 Cir. 1989). However, the Court is “not required to accept as true allegations that contradict 4 exhibits attached to the Complaint, or matters properly subject to judicial notice, or allegations 5 that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Seven 6 Arts Filmed Entm’t, Ltd. v. Content Media Corp. PLC, 733 F.3d 1251, 1254 (9th Cir. 2013). To 7 avoid judgment, “a complaint must contain sufficient factual matter, accepted as true, to state a 8 claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S 662, 678 (2009); Harris v. 9 County of Orange, 682 F.3d 1126, 1131 (9th Cir. 2012). “A claim has facial plausibility when the 10 plaintiff pleads factual content that allows the court to draw the reasonable inference that the 11 defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678; see Harris, 682 F.3d at 12 1131. “Plausibility” means “more than a sheer possibility,” but less than a probability, and facts 13 that are “merely consistent” with liability fall short of “plausibility.” Iqbal, 556 U.S. at 678. 14 Although Rule 12(c) does not mention leave to amend, courts may grant a Rule 12(c) motion with 15 leave to amend. See Gregg, 870 F.3d at 887, 889; Pacific W. Grp. v. Real Time Solutions, 321 F. 16 App’x. 566, 569 (9th Cir. 2008). The court need not grant leave to amend when doing so would 17 be futile and the deficiencies in the complaint could not be cured by amendment. See Deveraturda 18 v. Globe Aviation Sec. Servs., 454 F.3d 1043, 1046 (9th Cir. 2006); see also Gregg, 870 F.3d at 19 887. 20 21 BACKGROUND 22 As relevant to the tax periods at issue, Meridian Health Services Holdings, Inc. 23 (“Meridian”) owned and operated five skilled nursing home facilities in California (“the 24 Facilities”). Preimesberger owned less than 10% of Meridian’s stock and was employed by each 25 of the Facilities to operate their skilled nursing activities. 26 The overwhelming majority of each Facility’s revenues were derived from patients 27 covered by Medicare and/or Medi-Cal, which meant that each Facility’s cashflow was dependent 28 on timely reimbursement payments from Medicare and Medi-Cal. Beginning in 2010 and 1 worsening over time through 2015, the Facilities experienced serious cashflow problems primarily 2 as a result of delays and disruptions in Medicare and Medi-Cal reimbursement payments. From 3 2010 through 2015, the Facilities accrued substantial Medicare and Medi-Cal receivables due from 4 the United States. Eventually the cashflow problem became so acute that the Facilities could not 5 meet all of their operational expenses. 6 At first, Preimesberger caused Meridian to bridge each Facility’s cashflow gap by drawing 7 on a line of credit from Capital Finance, Inc. (“CFI”). Every time Meridian drew on the line of 8 credit, Meridian was required to provide CFI with the nature and amount of each Facility’s 9 obligations for which funds were requested. Meridian requested that the funds be used to pay all 10 of the wages of the Facility’s employees, i.e. net wages and withholding taxes, but CFI only 11 authorized and provided funds for the payment of net wages. As a result, the Facilities were 12 unable to pay all or a portion of their withholding tax obligations. 13 Unlike a typical business, the Facilities could not simply cease operations when they could 14 no longer pay their employees’ net wages and the necessary withholding taxes. Under state and 15 federal regulations, nursing homes/skilled nursing facilities must follow what Preimesberger 16 describes as a lengthy and detailed procedure for closure that includes notification to the residents 17 of the Facilities and appropriate governmental agencies and transferring residents to other 18 appropriate care facilities. In the interim, a nursing home/skilled nursing facility is required to 19 remain open and maintain the existing standard of care for all residents. Failure to follow these 20 regulations are punishable through civil and criminal penalties. 21 Preimesberger alleges that as a result of the applicable regulations, each Facility was 22 required to first apply funds that were necessary to maintain the appropriate standard of care for 23 each Facility’s residents. Of necessity, this meant that property rent, utility bills, and payment of 24 wages to employees all had to be paid. Because of the backlog of Medicare and Medi-Cal 25 payments, as well as the restrictions placed on funds provided by CFI, the Facilities could only 26 pay their employees net wages and not the withholding taxes. Preimesberger alleges that it was 27 not possible for the Facilities to meet both their withholding obligations and their regulatory 28 obligations to remain open and maintain the standard of care. 1 Aware of this untenable situation, Preimesberger negotiated the sale of the Facilities to 2 Providence Health Group (“Providence”) in the Summer of 2014. Providence agreed to close the 3 sale no later than November 1, 2014 and agreed to satisfy each of the Facility’s outstanding 4 withholding tax liability through Medicare and Medi-Cal receivables. Preimesberger believed that 5 the sale would maintain the standard of care and provide sufficient funds to satisfy any 6 outstanding withholding taxes. However, the sale did not close until March 1, 2015, and, contrary 7 to the contract, Providence did not satisfy the outstanding withholding tax liabilities. 8 Pursuant to § 6672, the IRS has assessed Preimesberger with penalties regarding each of 9 the Facility’s unpaid withholding tax liabilities for the tax periods ending June 30, 2014, 10 September 30, 2014, December 31, 2014, March 31, 2015, and June 30, 2015. On information 11 and belief, the total amount assessed is not less than $2.4 million. 12 On August 5, 2020, the Court granted in part and denied in part the IRS’s motion for Rule 13 12(b)(6) motion to dismiss. See Doc. No. 17. In relevant part, the Court dismissed theories of 14 equitable estoppel and set-off. See Doc. No. 17. The Court declined to dismiss Preimesberger’s 15 theory that he did not act willfully because he was attempting to comply with federal and state 16 regulations. See id. 17 18 DEFEENDANT’S MOTION 19 Defendant’s Argument 20 The IRS argues that judgment is appropriate. Although Preimesberger relies on state and 21 federal regulations relating to nursing homes, the Complaint does not actually allege that he 22 provided a 60 day closure notice to residents or otherwise took steps to wind up the nursing 23 homes. Instead, Preimesberger waited five quarters, 450 days, before completing the sale of the 24 nursing homes and without paying withholding taxes. Further, courts, including the Ninth Circuit, 25 hold that a taxpayer cannot prefer other creditors to the United States with respect to withholding 26 taxes, and as long as there is a voluntary intentional act to prefer other creditors, there is willful 27 conduct under § 6672. Three cases, United States v. Hodges, 684 F. App’x 722 (10th Cir. 2017), 28 Hochstein v. United States, 900 F.2d 543 (2d Cir. 1990), and Cook v. United States, 52 Fed. Cl. 62 1 (2002), show that attempting to follow other regulations, particularly state regulations, does not 2 justify the failure to pay withholding taxes or defeat liability under § 6672. Additionally, 3 Preimesberger’s argument that he could not pay withholding taxes because of lender restrictions 4 fails because there are no allegations that he attempted to prorate scarce resources between the 5 United States and the nursing home employees as required by Sorrenson v. United States, 521 6 F.2d 325 (9th Cir. 1975). Therefore, because Preimesberger’s justifications for not paying the 7 withholding taxes have been rejected, judgment on the pleadings should be granted. 8 Plaintiff’s Opposition 9 Preimesberger argues that judgment on the pleadings is not appropriate. First, 10 Preimesberger contends that this motion is really a disguised motion for reconsideration. The IRS 11 makes the same general arguments it made in its unsuccessful Rule 12(b)(6) motion, only it cites 12 new cases that could have been cited in the original motion. Instead of following Local Rule 13 230(j), the IRS is improperly utilizing Rule 12(c). Second, the cases cited by the IRS are all non- 14 binding and distinguishable. None of the cases involve federal regulations or federalized state 15 regulations that affect how money is expended in connection with a nursing home. Further, unlike 16 the situation in Cook, the Facilities were never in bankruptcy. Therefore, the Court’s original 17 analysis that found a plausible claim was correct and should remain in place. 18 Legal Standard 19 Employers are required to withhold federal income and social security taxes from the 20 wages of their employees. Buffalow v. United States, 109 F.3d 570, 572 (9th Cir. 1997); Klotz v. 21 United States, 602 F.2d 920, 923 (9th Cir. 1979). The withheld taxes are held by the employer in 22 a trust fund for the United States and paid to the United States quarterly. See Buffalow, 109 F.3d 23 at 572; see also Klotz, 602 F.2d at 923. The withheld taxes, known as “trust fund taxes,” are 24 credited to the employee, even if the employer never remits the trust fund taxes to the United 25 States. See Buffalow, 109 F.3d at 572-73; Klotz, 602 F.2d at 923. One of the tools available to 26 the United States to ensure the payment of trust fund taxes is § 6672. Purcell v. United States, 1 27 F.3d 932, 936 (9th Cir. 1993); Klotz, 602 F.2d at 923. Section 6672 provides in relevant part: 28 Any person required to collect, truthfully account for, and pay over any tax 1 and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by 2 law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. 3 26 U.S.C. § 6672(a). Section § 6672 is a penalty against a responsible person that creates “an 4 obligation, separate and distinct from the underlying tax obligation.” In re J.J. Re-Bar Corp., 644 5 F.3d 952, 957 (9th Cir. 2011). To impose liability against a party under § 6672, two requirements 6 must be met: (1) the party must have been a “responsible person,” that is, one required to collect, 7 truthfully account for, and pay over the tax; and (2) the party must have “willfully” failed to pay 8 the tax. Nakano v. United States, 742 F.3d 1208, 1211 (9th Cir. 2014); Rykoff v. United States, 9 40 F.3d 305, 307 (9th Cir. 1994). “Willfulness, within the meaning of § 6672, has been defined as 10 a voluntary, conscious and intentional act to prefer other creditors over the United States.” 11 Nakano, 742 F.3d at 1211; Rykoff, 40 F.3d at 307; Klotz, 602 F.2d at 923. Neither an evil motive 12 nor an intent to defraud the United States is necessary to demonstrate “willfulness.” Rykoff, 40 13 F.3d at 307; Klotz, 602 F.2d at 923. While a reckless disregard of whether trust fund taxes being 14 paid is sufficient to establish willfulness, mere negligence does not establish willfulness. Phillips 15 v. United States, 73 F.3d 939, 942 (9th Cir. 1996); see also Klotz, 602 F.2d at 924 (mere 16 negligence does not show willfulness). A lack of willfulness may be shown if the responsible 17 person did not disregard his duties and undertook all reasonable efforts to see that the trust fund 18 taxes would be paid. See Turpin v. United States, 970 F.2d 1344, 1350 (4th Cir. 1992); Feist v. 19 United States, 607 F.2d 954, 961 (Ct. Cl. 1979). Also, a failure to use “encumbered funds” to pay 20 trust fund taxes will not support a finding of willfulness. See Nakano, 742 F.3d at 1211-12; 21 Purcell, 1 F.3d at 938. Funds are “encumbered” “only where the taxpayer is legally obligated to 22 use the funds for a purpose other than satisfying the preexisting employment tax liability and if 23 that legal obligation is superior to the interest of the IRS in the funds.” Nakano, 742 F.3d at 1212. 24 Generally, whether a party acted “willfully” for purposes of § 6672 is a question of fact. Rykoff, 25 40 F.3d at 307; Klotz, 602 F.2d at 923; Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976). 26 A party challenging liability under § 6672 has the burden of demonstrating that his conduct was 27 not willfully done. Rykoff, 40 F.3d at 307. 28 1 Discussion 2 1. Procedural Propriety of the IRS’s Motion 3 The Court agrees that the IRS’s Rule 12(c) motion is more or less a motion for 4 reconsideration. Cf. Kimmel & Silverman, P.C. v. Porro, 969 F.Supp.2d 49, 50 (D. Mass. 2013) 5 (holding that a Rule 12(c) motion was in actuality a motion for reconsideration and that the 6 defendant had failed to show that reconsideration was warranted). Since the Court issued its 7 ruling on the IRS’s Rule 12(b)(6) motion, the IRS filed an answer, but Preimesberger did not file 8 an amended complaint. Therefore, at least in terms of the allegations appearing in the Complaint, 9 nothing has changed that would cause the Court to alter its previous analysis that the Complaint 10 pled a plausible claim. The IRS is relying on additional cases that were not cited in its Rule 11 12(b)(6) motion to dismiss. The IRS’s citation to new cases can be viewed as a variation of the 12 argument that clear error was committed, which is a valid basis for reconsideration. Nevertheless, 13 for two reasons the Court will not deny the IRS’s motion as substantively the equivalent of a 14 motion for reconsideration. First, the only procedural limitations on a Rule 12(c) motion is that 15 the motion be made after the pleadings are closed but not so late as to delay trial. See Fed. R. Civ. 16 P. 12(c). Neither of those limitations are violated by the IRS’s motion. Second, if the IRS is 17 correct and the new cases are sufficient to defeat Preimesberger’s case, in other words, if the law 18 is such that the Court erred in finding a plausible claim, then it is better to correct that error now 19 before any further resources (private or judicial) are consumed. Cf. In re Apple IPhone Litig., 20 846 F.3d 313, 319 (9th Cir. 2017). Therefore, the Court declines to deny the IRS’s motion on the 21 procedural basis argued by Preimesberger. 22 2. Sufficiency of Preimesberger’s Pleading 23 Each of the five Facilities at issue participated in the Medicare program. Skilled nursing 24 facilities that participate in Medicare/Medicaid programs are regulated by state and federal 25 governments. Greenbrier Nursing & Rehab. Ctr. v. United States HHS, 686 F.3d 521, 523 (8th 26 Cir. 2012); United States v. Anderson, 605 F.3d 404, 407 (6th Cir. 2010); Boykin v. 1 Prospect 27 Park ALF, LLC, 293 F.R.D. 308, 313 (E.D. N.Y. 2013); United States ex rel. Swan v. Covenant 28 Care, Inc., 279 F.Supp.2d 1212, 1220 (E.D. Cal. 2002). Preimesberger’s opposition identifies a 1 number of such regulations that allegedly impacted his actions. Specifically, federal 2 law/regulations require skilled nursing facilities to: (1) provide “the highest practicable physical, 3 mental and psychological well-being of each resident [per a written plan],” 42 U.S.C. § 1395i- 4 3(b)(2); (2) provide services by a sufficient number of nurses and nursing personnel on a 24-hour 5 basis so as to provide nursing care in accordance with each resident’s care plan; see 42 C.F.R. § 6 483.30(a)(1);1 see also 42 U.S.C. § 1395i-3(b)(4); (3) employ a qualified dietician and sufficient 7 support staff to provide a “nourishing, palatable, well-balanced diet that meets the daily nutritional 8 and special dietary needs of each resident,” 42 C.F.R. § 483.35(a), (b); see also 42 U.S.C. § 1395i- 9 3(b)(4); (4) provide or arrange for physician services 24-hours a day in case of an emergency, see 10 42 C.F.R. § 483.40(d); see also 42 U.S.C. § 1395i-3(b); (5) provide pharmaceutical services to 11 meet the needs of each resident, see 42 C.F.R. 483.60; see also 42 U.S.C. § 1395i-3(b)(4); (6) 12 establish and maintain an infection control program that ensures the provision of a safe, sanitary, 13 and comfortable environment and to prevent the development and spread of disease, see 42 C.F.R. 14 § 483.65; (7) be maintained to protect the health and safety of residents, personnel, and the public, 15 see 42 C.F.R. § 483.70; and (8) “be administered in a manner that enables it to use its resources 16 effectively and efficiently to attain or maintain the highest practicable physical, mental, and 17 psychological well-being of each resident,” 42 U.S.C. § 1395i-3(d)(1). Importantly, federal law 18 also required that a skilled nursing facility “must operate and provide services in compliance with 19 all applicable Federal, State, and local laws and regulations . . . and with accepted professional 20 standards and principles which apply to professionals providing services in such a facility.” 42 21 U.S.C. § 1395i-3(d)(4). Through the plain language of this regulation, state laws are incorporated 22 into the federal regulatory scheme, thereby turning the relevant state laws into federal laws. See 23 Sunshine Haven Nursing Operations, LLC v. United States HHS, 742 F.3d 1239, 1244 (10th Cir. 24 2014) (stating that federal law requires skilled nursing facilities to provide services in compliance 25 with all applicable federal, state, and local laws and regulations and with accepted professional 26 standards); Swan, 279 F.Supp.2d at 1220 (holding that he Social Security Act requires skilled 27
28 1 All references to the C.F.R. refer to federal regulations that were in place at the relevant time period, April 2014 to 1 nursing facilities to inter alia “conform to professional standards of care, and comply with all 2 applicable federal and state regulation.”); cf. Bragg v. West Va. Coal Ass’n, 248 F.3d 275, 294 3 (4th Cir. 2001) (holding that the Clean Water Act effectively incorporates state laws thereby 4 making the relevant state law a federal law); Cook Inlet Region, Inc. v. Rude, 2011 U.S. Dist. 5 LEXIS 159009, *4-*5 (D. Alaska Mar. 22, 2011) (“When federal law incorporates state law, such 6 state law becomes federal . . . .”). 7 California regulations have similar requirements in terms of staffing and services. See, 8 e.g., 22 Cal. Code Reg. §§ 72305, 72321, 72329, 72335, 72531, 72353, 72385. As relevant to this 9 case, Preimesberger highlights various requirements for a skilled nursing facility to close down. 10 California law requires that a skilled nursing facility must submit a detailed assessment and 11 relocation plan for each resident, including medical and psychological assessments. See Cal. 12 Health & Safety Code § 1336.2. Relocation plans must be approved by the State Department of 13 Public Health. See id. at § 1336.2(g). The Department of Health has 14 working days to accept or 14 reject a relocation plan. See id. Until a relocation plan is finally approved, skilled nursing 15 facilities are required to “maintain an appropriate level of staffing in order to ensure the well-being 16 of all the residents as the continue to reside in the facility.” Id. at § 1336.2(h). Once a relocation 17 plan is approved by the Department of Health, skilled nursing facilities are required to give 18 residents at least 60 days’ notice of an impending closure. See id. at § 1336(a); Cal. Health & 19 Safety Code § 1336.2(a)(4). Additionally, federal regulations require that skilled nursing facilities 20 send notice to residents, the State Survey Agency, and the State LTC Ombudsman of an 21 impending closure at least 60 days prior to the date of closure. See 42 C.F.R. § 483.75(r). The 22 notice must include a copy of the state approved relocation plan. Id. 23 Both federal and state regulations provide penalties for facilities and administrators that 24 fail to comply with regulations. A facility may suffer the termination of a provider agreement, 25 may be denied Medicare/Medicaid payments, and may be subject to penalties ranging from $50 to 26 $10,000 per day or $1,000 to $10,000 per occurrence. See 42 C.F.R. §§ 488.406, 488.438, 488.50. 27 Further, an administrator who fails to comply with the process for closing a facility and 28 transferring patients, or who fails to maintain the appropriate standard of care during the closing 1 process, may be fined not less than $500 for the first offense, $1,500 for the second offense, and 2 $3,000 for subsequent offenses and may be subject to any other penalties that may be prescribed 3 by law. See id. at § 488.446. 4 In the Court’s order on the IRS’s Rule 12(b)(6) motion to dismiss, the Court concluded in 5 relevant part: 6 [Viewing the allegations in the light most favorable to Preimesberger], the Court finds that the Complaint plausibly indicates that Preimesberger did not act 7 “willfully” when he did not pay the trust fund taxes. In essence, the Complaint alleges that Preimesberger could not simply cease operations when the cashflow 8 situation reached its pinnacle. Instead, federal and state regulations required Preimesberger to keep the Facilities operating at the existing standard of care. To 9 accomplish this, Preimesberger had to utilize a line of credit from CFI. The line of credit permitted the Facilities to maintain the standard of care by paying 10 employees, utilities (which powered necessary medical and therapeutic equipment), and landlords. Although Preimesberger attempted to obtain funds from CFI that 11 would cover the withholding taxes, CFI refused to release funds for that purpose. Given the allegations regarding the Facilities’ dire cashflow situation and the 12 allegations that Preimesberger attempted to meet the various competing legal obligations (pay trust fund taxes and maintain the standard of care), the Court will 13 infer that Preimesberger had no other viable funding options other than CFI’s line of credit. That is, the only way that Preimesberger could meet his mandatory 14 regulatory obligations, which carried with them civil and criminal penalties for their violation, was to follow the restrictions of CFI. Additionally, the allegations 15 indicate that the money that was received from CFI was used to pay expenses/creditors that were necessary to maintaining the existing standard of care. 16 There are no allegations that the Facilities used CFI’s funds to pay expenses that were not necessary to maintaining the standard of care. Apart from the restrictions 17 imposed by CFI, federal and state regulation appear to have de facto required that CFI’s loan be spent to maintain the standard of care, which could arguably make 18 the funds expended “encumbered.” Cf. Nakano, 742 F.3d at 1211. Under these circumstances, Preimesberger’s actions may be considered involuntary and thus, 19 not willful. The issue of willfulness is generally a question of fact. See Rykoff, 40 F.3d at 307. The factual allegations in the Complaint are not so clear that the Court 20 can hold that Preimesberger’s actions were “willful” as a matter of law. 21 Preimesberger v. United States, 2020 U.S. 139954, *13-*14 (E.D. Cal. Aug. 5, 2020). 22 After considering the allegations and the regulations cited by Preimesberger, the Court 23 does not find that its prior analysis was in error. Viewing the allegations in the light most 24 favorable to Preimesberger as the non-moving party and making all reasonable inferences in his 25 favor, see Herrera, 953 F.3d at 1068; Hines, 914 F.3d at 1227, the Facilities experienced cash flow 26 problems because of the actions of the United States and California in not timely remitting 27 Medicare and Medi-Cal payments. The United States also issued regulations that required the 28 Facilities to be operated at a level that met the applicable standard of care and that met the 1 physical, nutritional, and psychological needs of every resident. Failure to do so would subject the 2 Facilities to various fines and penalties. No exceptions under federal law have been identified that 3 would excuse a skilled nursing facility from not providing staffing, care, and services that met the 4 applicable standard of care and the needs of its residents. Federal law also required the Facilities 5 to pay trust fund taxes. To meet these two on-going federal obligations, the Complaint indicates 6 that Preimesberger attempted to obtain funding from lenders and wait for the United States to 7 remit Medicare payments. Unfortunately, despite Preimesberger’s efforts, no loans were 8 authorized that would include payment of the trust fund taxes. To maintain the standard of care as 9 required by federal regulations, the Facilities accepted the loans and did not pay the trust fund 10 taxes. The Complaint and the opposition show that, unlike a typical business, regulations 11 prevented the Facilities from simply shutting down.2 While taking loans and making payments to 12 entities other than the United States that were necessary to maintain the standard of care, the 13 Complaint indicates that Preimesberger was not idle and continued to search for options. 14 Preimesberger was eventually able to find a buyer for the Facilities in the Summer of 2014. 15 Completing the sale took longer than expected, but as part of the sales agreement, the buyer was 16 obligated to pay all outstanding trust fund taxes.3 17 In a nutshell, the Complaint indicates that Preimesberger attempted to meet two on-going 18 duties that were required by federal law – pay trust fund taxes (a duty that applies to all 19 businesses) and maintain the standard of care at the Facilities (a duty that applies uniquely to 20 nursing homes and skilled nursing facilities) – the best way that he could, through loans that 21 would not authorize payment of trust fund taxes (but would meet the federal obligation to maintain 22 the standard of care) and a sales agreement that provided for the payment of outstanding trust fund 23
24 2 The Court notes that it is unknown whether Preimesberger had the authority/ability to either close the Facilities or begin the regulatory process for closing the Facilities; Meridian had a 90% ownership interest in the Facilities. 25
26 3 The Court notes that the IRS does not dispute the allegation that the sales agreement required Providence to pay all outstanding trust fund taxes. If that allegation is accurate, it is puzzling why the IRS would not attempt to collect the 27 outstanding funds from a solvent entity that expressly agreed to pay those funds and instead choose to invoke § 6672 against a single individual who was attempting to meet the dual federal obligations of maintaining the standard of care 28 and paying the trust fund taxes. 1 taxes and maintaining the standard of care, all the while waiting for untimely Medicare and Medi- 2 Cal payments, knowing that abruptly closing the facilities was not an option, and that failure to 3 meet the regulatory duty to maintain the standard of care would lead to fines and other corrective 4 action. Because willfulness is generally a question of fact, see Rykoff, 40 F.3d at 307, and 5 because the allegations indicate that Preimesberger was not disregarding his federal obligations 6 but was taking reasonable steps to meet two on-going federal obligations, cf. Turpin, 970 F.2d at 7 1350; Feist, 607 F.2d at 961, the Court cannot hold that the allegations in the Complaint 8 demonstrate “willfulness” under § 6672 as a matter of law. 9 The IRS cites three out of circuit cases in support of its motion. While these cases involve 10 similar facts to this case, the Court nevertheless finds these cases to be distinguishable. 11 In Hochstein v. United States, 900 F.2d 543 (2d Cir. 1990), a manufacturing business 12 obtained operating funds from a lender. See Hochstein, 900 F.2d at 545. Although the operating 13 funds were not earmarked for any particular purpose, the loan agreement provided that the 14 manufacturer was responsible for making all tax payments. See id. Eventually, the company 15 requested money to cover both net wages and trust fund taxes. See id. at 546. The lender 16 authorized only enough money to cover net pay. See id. The company shortly thereafter 17 liquidated, with all proceeds going to the lender. See id. The IRS utilized § 6672 against the 18 controller, Hochstein, to recover approximately $32, 000 in trust fund taxes. See id. The Second 19 Circuit held that the lender’s refusal to lend money for the purpose of paying the trust fund taxes 20 still made Hochstein’s conduct in paying only net wages a willful act. See id. at 548. Citing 21 Sorenson v. United States, 521 F.2d 325, 328 (9th Cir. 1975), the Second Circuit held that 22 Hochstein’s duty was to prorate such funds as were available between the IRS (for payment of 23 trust fund taxes) and employees (for payment of net wages). Id. Also, the Second Circuit held 24 that Hochstein’s reliance on a New York law that criminalized the failure to pay wages was 25 misplaced. See id. at 549. The Second Circuit observed that good faith reliance on New York law 26 was irrelevant because § 6672 does not consider a responsible party’s good faith, New York law 27 expressly authorized the withholding of federal taxes, and, to the extent that the New York law 28 conflicted with § 6672, then § 6672 would preempt the New York law. See id. 1 The Court appreciates that there are a number of relevant concepts in Hochstein. 2 Hochstein can be said to stand for the proposition that the mere failure of a lender to authorize a 3 loan to include the payment of trust fund taxes will not defeat “willfulness” under § 6672. 4 Further, Hochstein’s holding that § 6672 preempts any conflicting state criminal laws may answer 5 Preimesberger’s concerns over California laws that carry with them a criminal penalty. However, 6 unlike this case, Hochstein does not involve a separate and specific on-going federal regulatory 7 duty to maintain the standard of care for nursing home residents. Relatedly, Hochstein (and 8 Sorenson) does not explain whether a nursing home must pro-rate funds between the IRS and the 9 expenses necessary to meet the standard of care when federal regulations require the standard to 10 be maintained.4 Further, Hochstein did not discuss any additional efforts that the controller had 11 taken to meet the trust fund payment obligations. Finally, unlike the manufacturing business in 12 Hochstein, the Facilities could not simply close down or immediately liquidate. Therefore, 13 Hochstein does not require a finding that Preimesberger engaged in “willful” conduct. 14 In Cook v. United States, 52 Fed. Cl. 62 (2002), Mr. Cook was an officer of a bankrupt 15 engineering firm who had paid other creditors before the United States, but did not prorate any of 16 the available funds between the United States (for trust fund taxes) and other creditors (such as 17 employees), and apparently concealed the outstanding trust fund taxes from the bankruptcy court. 18 See Cook, 52 Fed. Cl. at 71-74. Mr. Cook argued in part that his conduct was not willful because 19 the company was under bankruptcy orders that “effectively” compelled the payment of funds for 20 the purposes of curing environmental problems. See id. at 71. The Court of Federal Claims 21 rejected this argument. The Cook Court found that the bankruptcy court made no orders regarding 22 the payment of trust fund taxes, the bankruptcy court was not informed of any outstanding trust 23 fund tax obligations, Mr. Cook took no actions to get clarification of the bankruptcy court’s 24 orders, and, while some funds were encumbered by the bankruptcy orders, the bankruptcy court 25 did not encumber all funds because it left Mr. Cook with discretion to pay the company’s 26
27 4 There is no indication in the Complaint that the Facilities paid material expenses that were not necessary to maintaining the standard of care and meeting the physical, psychological, and nutritional needs of its residents. 28 Therefore, the Court will view the Complaint as reasonably inferring that if some form of proration had occurred, then 1 operating costs. Id. at 71-74. Therefore, the Court of Federal Claims held that Mr. Cook was 2 “willful” under § 6672. See id. 3 Like Hochstein, Cook does not involve a skilled nursing facility/nursing home or specific 4 on-going federal regulations that required the maintaining of the standard of care and meeting the 5 physical, psychological, and nutritional needs of the elderly residents. Moreover, Cook did not 6 involve any conflict between government imposed duties. The Court of Federal Claims rejected 7 the argument that the bankruptcy court either expressly or impliedly had encumbered all of the 8 company’s funds, had limited how all funds were to be spent, or had ordered that the trust fund 9 taxes could not be paid. Here, because this is a Rule 12(c) motion, the Court accepts that, in order 10 to meet the applicable standard of care and the physical, psychological, and nutritional needs of 11 the Facilities’ residents, all of the available funds had to be spent to meet these federally mandated 12 care obligations. Further, unlike Mr. Cook, there is no indication that Preimesberger engaged in 13 any kind of deceptive conduct with respect to outstanding trust fund taxes or that he recklessly hid 14 or ignored the trust fund taxes. Finally, Cook did not discuss any efforts that had been made to 15 meet the trust fund tax obligations.5 On the other hand, Preimesberger actively sought funding 16 and an eventual buyer for the Facilities in order for the Facilities to maintain the standard of care 17 and pay outstanding trust fund taxes. 18 Finally, in United States v. Hodges, 684 F. App’x 722 (10th Cir. 2017), Mr. Hodges had 19 been appointed as the temporary manager of a nursing home by the Oklahoma Department of 20 Health. Hodges failed to pay the trust fund taxes of the nursing home’s employees. See Hodges, 21 684 F. App’x at 724. Hodges contended that his conduct was not “willful” under § 6672 because 22 he needed to use the payroll taxes to “rescue residents from the horrific conditions,” and that if he 23 had closed the nursing home then hundreds of employees would have been fired. See id. at 729. 24 5 Cook held that a responsible party cannot view his withholding responsibilities through a combination of blinders 25 and rose-colored glasses. See Cook, 52 Fed. Cl. at 72. The IRS argues that Preimesberger is wearing blinders and ignoring his obligations under § 6672. While the Court agrees with the sentiment in Cook, the Court disagrees that 26 this is what Preimesberger was doing. In the context of Rule 12(c), the allegations indicate that Preimesberger was aware of two on-going federal obligations, one of which required the Facilities to meet the standard of care at all 27 times. Because both obligations could not be met, Preimesberger did what he could to meet both mandated obligations. His efforts led to always fulfilling the standard of care obligation and attempting to meet the tax 28 obligation through loans and a contractual agreement with the purchaser of the Facilities. Based on the allegations in 1 The Tenth Circuit rejected Hodges’s arguments and found that a business’s financial straits are 2 almost always at issue in § 6672 cases, and that under the Circuit’s “reasonable cause” exception 3 to willfulness, Hodges had failed to make any effort to protect the trust fund taxes. See id. 4 Admittedly, Hodges is much closer to the facts of this case than either Cook or Hochstein 5 in that Hodges actually involves a nursing home and a similar argument to that of Preimesberger: 6 Mr. Hodges argued that he was trying to care for the residents. However, the Court does not find 7 that Hodges is dispositive. First, Preimesberger is not contending either that his conduct meets the 8 Tenth Circuit’s reasonable cause exception or that this exception has any application to this case. 9 Second, and more importantly, the argument that was made in Hodges is not the same argument 10 being made in this case. Hodges did not cite to or address the federal laws and regulations that 11 required the applicable standard of care to be met at all times. Hodges does not explain what to do 12 when faced with competing federal obligations or explain why § 6672 requires a responsible party 13 to violate other duties imposed by federal law and regulation, particularly when the physical and 14 psychological well-being of vulnerable individuals is at stake.6 That is, Hodges does not expressly 15 address how a responsible person is to navigate competing federal obligations when both 16 obligations cannot be met, and the business cannot simply be shuttered. Third, Hodges does not 17 discuss what efforts were undertaken to address the obligation to pay trust fund taxes. In contrast, 18 Preimesberger waited on Medicare and Medi-Cal to remit late payments owed to the Facilities, 19 attempted to get loans, sought out a buyer for the Facilities, and negotiated the sale of the 20 Facilities to a buyer who agreed to pay the outstanding trust fund taxes, all while meeting the 21 federal obligation to maintain the standard of care. Therefore, the Court declines to hold that the 22 unpublished Hodges opinion dictates a finding that Preimesberger acted “willfully” under § 6672. 23 In sum, the allegations do not demonstrate “willfulness” as a matter of law. Therefore, 24 judgment on the pleadings in favor of the IRS is not appropriate. 25 6 The Court is not suggesting that Preimesberger and the Facilities could indefinitely fail to pay trust fund taxes, nor 26 does the Court believe that Preimesberger is making this suggestion. Preimesberger recognized the obligation to pay the trust fund taxes and attempted to meet that obligation through loans and the sale of the Facilities. The Court 27 merely holds that the allegations are sufficient under Rule 12(c) to plausibly allege that his conduct was not “willful.” While the allegations could be more detailed to answer some of the IRS’s criticisms of Preimesberger’s conduct, that 28 level of pleading is unnecessary in the context of Rule 12(c). Of course, the Court’s holding does not address all other 1 ORDER 2 Accordingly, IT IS HEREBY ORDERED that Defendant’s Rule 12(c) motion for 3 | judgment on the pleadings (Doc. No. 22) is DENIED. 4 5 IT IS SO ORDERED. | Dated: _May 25, 2021 7 □□ 7 Cb Led _-SENIOR DISTRICT JUDGE 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28