STATE OF WISCONSIN
LABOR AND INDUSTRY REVIEW COMMISSION

In the matter of the contribution liability,
or status, under Chapter 108, Stats., of

MORTGAGE SPECIALISTS INC, Appellant

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Account No. 297815, Hearing No. S9200409MW


On May 7, 1992, the Department of Industry, Labor and Human Relations (the department) issued an initial determination which determined that Ardell Kreuser (the appellant) was personally liable for the delinquent unemployment contributions, including late fees and interest, of Mortgage Specialists, Inc., account no. 297815-000-2, in the amount of $18,849.19.

The appellant filed a timely request for hearing, and a hearing was held before an appeal tribunal on November 17, 1992, and January 13, 1993. The presiding appeal tribunal reversed the initial determination, and issued a decision on October 11, 1993 which found that the appellant was not personally liable for payments to the department and was not required to pay the amounts set out in the initial determination. The department then filed a timely petition for commission review under secs. 108.09 (6) and 108.10 (2), Stats.

Based on the applicable law, records and evidence in this case, the commission makes the following:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

1. Facts and procedural history.

The appellant in this case, Ardell Kreuser, started working for Mortgage Specialists, Inc., in the fall of 1986. He was president until he was "discharged" in March 1989. Mr. Kreuser became involved with Mortgage Specialists after entering into an agreement with the then-100 percent shareholder, Richard Glass. Under the agreement, Mr. Kreuser was appointed president and agreed to buy 49 percent of the stock of Mortgage Specialists from Mr. Glass for $20,000. As part of the arrangement, Mr. Glass gave 2 percent of his remaining stock to a third person, Donna Gagnon, a secretary and bookkeeper, to serve as "tie-breaker."

In addition to his duties as president, Mr. Kreuser served as board member, and became actively involved in the management of the business. Nonetheless, he testified that he never paid Mr. Glass for the stock and never received any actual certificates. Ms. Gagnon testified that, although Mr. Kreuser never received certificates for his 49 percent of the stock, it was (like her 2 percent) kept "on the books." Mr. Kreuser received two stock dividends, but most of his compensation was salary and commission. In addition, when the corporation borrowed $20,000 from a bank in the late 1980s, Messrs. Glass and Kreuser personally guaranteed it.

In March of 1989, Mr. Glass "fired" Mr. Kreuser as president in a tumultuous meeting which ended by Mr. Kreuser and Ms. Gagnon summoning the police. Mr. Glass and Mr. Kreuser differed on whether to keep operating after the corporation fell on hard times as a result of problems with the Nashville operations Mr. Glass was running. Mr. Glass apparently wanted to keep the Wisconsin operations going after closing the Nashville operations, but Mr. Kreuser wanted to end operations. After he was "fired," Mr. Kreuser kept operating the business long enough to serve its existing customers. He and Ms. Gagnon then "voted" to shut Mortgage Specialists down. Ms. Gagnon testified her vote was necessary because the principals were deadlocked on the issue.

About this time, Mr. Glass disappeared and allegedly declared personal bankruptcy. Mr. Kreuser liquidated Mortgage Specialists in June of 1989, using part of the funds to pay the bank loan to the business which he had guaranteed. It is unlikely he could have applied the funds otherwise, since the bank secured its loan with the corporation's assets. Some of the assets were bought by AIM, a business incorporated by Mr. Kreuser, but which apparently is now owned by other former employes of Mortgage Specialists.

After closing the business, Mr. Kreuser unsuccessfully filed for unemployment compensation benefits, blaming the closing of business on Mr. Glass. Significantly, during the investigation of his benefits claim, Mr. Kreuser stated he owned and controlled 49 percent of the Mortgage Specialists. See Exhibit 2. At the hearing in this case, though, he testified that this information was inaccurate.

Meanwhile, the department began to attempt to delinquent unemployment tax attributable to individuals worked for Mortgage Specialists as loan originators. An initial determination was mailed to Mortgage Specialists on May 27, 1988, assessing over $12,000 in delinquent tax and penalties, from the first quarter of 1986 through the first quarter of 1988., Mortgage Specialists appealed the initial determination.

Mr. Kreuser testified at his hearing in this matter that he did not know if Mortgage Specialists could have paid the tax assessment in June 1988, or if Mortgage Specialists appealed the May 1988 initial determination it couldn't pay the taxes it assessed. Ms. Gagnon testified that Mortgage Specialists had just enough money to pay its normal hills at that time and probably could not have paid the tax assessment. She also testified that Messrs. Kreuser and Glass would have had to authorize payment of a check large enough to cover the tax assessment.

At any rate, Mortgage Specialists argued in its appeal of the May 1988 initial determination that the loan originators were independent contractors, not employes, and that their employment was excluded as real estate salespeople. Mr. Kreuser testified at the hearing held before an administrative law judge on that issue in November 1988. The administrative law judge who presided at that hearing did not accept Mortgage Specialists' position and affirmed the May 1988 initial determination on September 5, 1989, but directed the department to recalculate the liability. Mortgage Specialists appealed that decision, and this commission affirmed it on July 19, 1990. An appeal to court was dismissed, apparently in late 1990 or early 1991. The department took no further collection action against Mortgage Specialists.

Over one year later, on May 7, 1992, the department issued an initial determination against Mr. Kreuser referred to above in the preliminary recitals of this decision. Mr. Kreuser requested a hearing, and the presiding appeal tribunal issued a decision finding that Mr. Kreuser probably would be liable personally for the delinquent contributions, but that the department failed to take "proper proceedings for the collection" of the amount from Mortgage Specialists first. Since taking such action against the corporation is a statutory prerequisite to imposing personal liability against a principal, the appeal tribunal dismissed the department's claim against Mr. Kreuser.

2. Issues, the law and precedent.

The issues before the commission are: (1) has the department taken "proper" collection proceedings to allow it to proceed against Mr. Kreuser? (2) If so, should Mr. Kreuser be held personally liable? The commission answers both questions in the affirmative and therefore reverses the appeal tribunal decision.

Section 108.22 (9), Stats., provides in relevant part:

108.22 (9) Any officer or any employe holding at least 20 percent of the ownership interest of a corporation subject to this chapter, who has control or supervision of or responsibility for filing contribution reports or making payment of contributions, and who willfully fails to file such reports or to make such payments to the department, may be found personally liable for such amounts, including interest, tardy payment of filing fees, costs and other fees, in the event that after proper proceedings for the collection of such amounts, as provided in this chapter, the corporation is unable to pay such amounts to the department.

The department's petition admits that no collection actions were taken against Mortgage Specialists after the judicial review was dismissed, but contends that none are necessary. The department cites Thaddeus Black and Pamela Black, hearing no. 7698, S (LIRC 2/14/90) and Charles A. Harvey, hearing no. 59100691 (LIRC 12/18/92) for the proposition that it need not resort to the most drastic collection measures, but must have flexibility to use its resources in what it believes is the most productive way. Charles Harvey involved a case where the department released a levy issued against the employer corporation to allow the corporation to attract capital in the hope it could meet its obligations. Thaddeus Black involved a case where the department did not to file a tax warrant before the employer-corporation went bankrupt. In both cases, the commission held the department could nonetheless proceed against the individual officers personally.

Thaddeus Black cites with approval a decision by the Tax Appeals Commission (TAC) involving interpretation of a statute similar to sec. 108.22 (9), Stats., which also uses the "after proper proceedings" language. In Lepp v. DOR, Tax Appeals Commission docket no. 87-S-56 (January 8, 1990), TAC wrote that the statute did not require endless attempts to collect and what specific efforts were necessary couldn't be determined with precision. Even if additional efforts might yield additional funds, those efforts were not necessarily required. Rather the test was whether:

". . . the hypothetically reasonable collection officer, weighing the costs of additional efforts against the potential gains, would have deemed it reasonable to proceed."

The commission in Thaddeus Black found this test to be useful in evaluating whether the department had undertaken "proper proceedings" against a corporate employer before proceeding against the principals under sec. 108.22 (9), Stats.

3. Analysis.

a. Proper collection proceedings.

The commission concludes that the undertook "proper proceedings for collection" against Mortgage Specialists before proceeding against Mr. Kreuser. First, the department issued the May 1988 initial determination assessing a delinquency against Mortgage Specialists and defended against all of that corporation's appeals. This in itself is part of the collection proceedings; the term need not be restricted to post-judgment lien filings. See: Henry Warner v. LIRC, Dane County circuit court case no. 93CV31572 (May 18, 1994). Even if the term were restricted to post-judgment proceedings, such action here would be futile. The record establishes that Mr. Kreuser had liquidated Mortgage Specialists before the September 1989 appeal tribunal decision affirming the delinquency assessed against Mortgage Specialists was even issued. Under these circumstances, it is hard to believe further collection proceedings against the corporation would have yielded any money, let alone enough money to justify the costs under the Lepp test. (1)

Mr. Kreuser argues that the statute requires some collection action, such as a lien filing, even if futile, be taken against the corporation before the department may proceed against shareholders. The commission does not conclude the statute imposes that an absolute requirement. The statute only requires "proper" collection proceedings, not futile ones. Finally, as noted above, the department's actions in obtaining the administrative decision on which it may seek collection as a type of collection proceeding, assuming there is an absolute requirement for some such action, even if futile.

b Personal liability general: ownership, responsibility and willfulness.

The next issue is personal liability generally. In order to hold Mr. Kreuser personally liable for Mortgage Specialists delinquent contributions, the department must show: (1) that Kreuser held at least 20 percent of the ownership interest of Mortgage Specialists; (2) that he had direct or supervisory responsibility for filing contribution reports or making contribution payments; and (3) that he willfully failed to make the payments or file the reports.

Although he may never have paid for them, Mr. Kreuser certainly acted as if he had ownership and control of the 49 percent shares of stock that were entered in his favor in Mortgage Specialists' books. He personally guaranteed money lent to the corporation, accepted two stock dividends, and continued to run the business after he was "fired." Together with Ms. Gagnon, he voted his shares to override Mr. Glass' wishes about liquidating the corporation and oversaw the liquidation.

The record also establishes that he, as president, had control or supervision over paying the delinquent contributions. True, Ms. Gagnon testified that she would have had to ask Mr. Glass and Mr. Kreuser before writing the check to pay the unemployment tax delinquency. However, Mr. Kreuser could have raised the question with Mr. Glass himself, or forced the issue to a vote if Mr. Glass refused to pay. Given his substantial activities in the liquidation, it is difficult to conclude Mr. Kreuser did not have control over payment of debts. Further, the commission has typically interpreted the term "responsibility" broadly in these cases. Henry Warner, supra.

Finally, the commission must decide whether Mr. Kreuser willfully failed to make the payments. Willfulness does not require bad faith or evil design, but simply means that there was an intentional choice to pay available funds to a creditor other than the department. Thaddeus Black, supra slip opinion at page 4, Charles Harvey page 2, Ronald J. Krueger v. LIRC, (Jefferson County circuit court, case no. 88-CV-211 (June 27, 1990). In Henry A. Warner, supra., slip opinion at page 13, the court noted that there were two elements of willfulness: actual knowledge of the debt and available funds that went elsewhere.

Mr. Kreuser testified he did not really know how the case arising from the May 1988 initial determination assessing the tax delinquency was handled. However, Mr. Kreuser personally appeared and testified at the November 1988 hearing held on Mortgage Specialists' appeal of that initial determination. The commission believes that Mr. Kreuser had actual knowledge of the delinquency even earlier when the initial determination assessing the delinquent contributions was issued in May 1988. Indeed, he does not deny such knowledge.

The existence of available funds that went elsewhere is also established. Ms. Gagnon testified that Mortgage Specialists had funds available for all its normal bills and paid those in 1988.

4. Remand.

In his brief, Mr. Kreuser raises the possibility of reversing on the "proper collections proceedings" issue, but remanding the case for resolution of the more general liability issue. However, the commission has the authority to proceed to the liability issue as part of its review. Mr. Kreuser had notice that the personal liability issue would be heard, and the record is more than sufficient for resolution of the question. Further, the "general" liability requirement is in fact just a series of additional conditions of the same statute requiring "proper collection proceedings" as a condition of personal liability. Remand is not necessary or required in this case.

5. Conclusion.

The commission therefore finds that the appellant, Ardell Kreuser, is personally liable for the delinquent unemployment taxes, interest and penalties of Mortgage Specialist, Inc., in the amount of $18,849.19 (with interest computed to April 30, 1992) pursuant to sec. 108.22 (9), Stats. DECISION

The Appeal Tribunal Decision is reversed. Accordingly, Ardell Kreuser is personally liable to the department for the delinquent unemployment taxes, interest, and penalties of Mortgage Specialists, Inc., as determined by the department in its May 7, 1992 initial determination.

Dated and mailed August 31, 1994
101 : CD8000    ER 451

/s/ Pamela I. Anderson, Chairman

Richard T. Kreul, Commissioner

/s/ James R. Meier, Commissioner

MEMORANDUM OPINION

The commission did not confer about witness credibility and demeanor with the administrative law judge who presided at the hearing, because witness credibility and demeanor were not at issue. Transamerica Ins. Co. v. ILHR Department, 54 Wis. 2d 272, 283-84 (1972). Rather, the commission reached a different legal conclusion, on basically undisputed facts in the record, concerning the "proper collection proceedings" issue discussed above. The commission notes that the appeal tribunal indicated in his decision that he would have resolved the other issues arising under sec. 108.22 (9), Stats., against the appellant.

cc:
Ardell P Kreuser

Attorney William G Ladewig

Attorney David Jenkins
Enforcements Section



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Footnotes:

(1)( Back ) Indeed, although the document was not introduced as an exhibit at the hearing in this case, the complaint by Mortgage Specialist's attorneys to initiate judicial review of the commission decision affirming that appeal tribunal decision stated that the company was defunct, was in bad standing and had no officers.

 


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