Wisconsin Labor and Industry Review Commission --
Summary of Wisconsin Court Decision relating to Unemployment Insurance

Subject: Henry A. Warner v. LIRC, DILHR, and Excalibur Automobile Corporation, Case 93 CV 3157 (Wis. Cir. Ct., Dane Co., May 18, 1994)

Digest Codes: ER 451

Warner was president, treasurer, and 52 % owner of the Excalibur Automobile Corporation (EAC). He had delegated to Larsen, EAC"s controller and executive vice president (but not a stockholder), responsibility for EAC"s accounting and day-to-day financial duties, including payment of unemployment taxes. Warner had also directed that all mail concerning EAC"s financial affairs, including mail from the state and federal governments, go unopened to Larsen.

EAC failed to pay its quarterly unemployment taxes for the second quarter of 1988, all four quarters of 1989, and the first two quarters of 1990. Larsen submitted financial statements and reported to Warner when Warner was present at the corporate offices, but that was not often, and Warner was absent from EAC virtually the entirety of the summer of 1989.

Warner stopped taking a salary in the summer of 1989, because of EAC"s financial condition, and further removed himself from the operation of the company. He still incurred travel expenses of $64,583.68 in 1989 and $37,302.57 in 1990.

A department representative spoke with Warner on February 1, 1990, about EAC"s tax delinquencies. Warner and Larsen made offers to pay off the delinquencies in monthly installments, but never did so. The department attempted a levy upon EAC"s checking account, but that failed to produce any tax payments. EAC eventually declared bankruptcy, but throughout those proceedings made no payments toward the delinquent unemployment taxes. The department then issued an initial determination holding Warner personally liable for $123,110.32 in delinquent unemployment taxes (and interest).

The commission affirmed. It looked to federal precedent interpreting 26 U.S.C. § 6672, which imposes personal liability upon responsible persons for the wilful failure to pay over to the government employees" withheld taxes. First, as president, treasurer, and majority stockholder, Warner was responsible for the payment of the taxes. Responsible persons are those who have power to control the decision-making process by which the corporation allocates funds to other creditors, and those with ultimate authority over the corporation"s expenditure of funds. Responsible persons have a fiduciary duty to properly account for proper management of funds, and may not remove themselves from liability by disregarding that duty and leaving it to someone else to perform. Second, at all times Warner"s failure to pay the taxes was wilful. It was knowing after February 1, 1990. Wilfulness includes reckless disregard of an obvious or known risk, however, and that standard characterizes Warner"s lack of involvement with EAC"s financial affairs before February 1, 1990. Finally, the level of proof when the issue is a responsible person"s reckless disregard of his or her fiduciary duty in this context, is the so-called middle burden, clear, satisfactory, and convincing evidence.

 Held: AFFIRMED. First, the court gave due weight deference to the commission's decision. Although the record in the case did not reveal that the commission had any history of interpreting Wis. Stat. § 108.22(9) in prior cases, the legislature had clearly entrusted enforcement of the statute to the commission. Second, the court deemed it appropriate that the commission had looked to the interpretations of analogous federal statutes when determining whether Warner was a responsible person. The court noted that a responsible person is one who has significant authority to control the financial affairs of the corporation, and that more than one officer in a given corporation can be a responsible person. Warner also could not avoid his responsible person status by delegating the administration of EAC"s finances to Larsen. Third, Warner's failure was wilful. There are two elements to willfulness: 1. actual knowledge of the delinquent taxes or reckless disregard of a known risk that the taxes were going unpaid; and 2. availability of funds to pay the taxes but expenditure of those funds for other purposes. Warner became aware of EAC"s substantial liability no later than February 1, 1990. Thereafter, he discussed the matter one time with Larsen, left it for Larsen to resolve, and took no further steps to verify that Larsen was either paying the delinquent taxes or staying current on the taxes coming due in 1990. Warner"s failure to follow up on the problem he was personally aware of constituted clear reckless disregard for a known risk. Next, EAC had $546,906 in cash assets as of December 31, 1989, and approximately $830,000 as of February 16, 1990. Finally, the department used proper procedures for collection of the delinquent taxes. It issued multiple initial determinations to EAC. It then engaged in extensive collection efforts, including direct contacts with officers of the corporation, the docketing of tax warrants, garnishment and levy of corporate bank accounts, and the filing of a claim with the bankruptcy court after EAC filed for bankruptcy.

Please note that this is a summary prepared by staff of the commission, not a verbatim reproduction of the court decision.

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