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PLATT v. UNITED STATES

June 12, 1981

JOHN H. PLATT, JR., PLAINTIFF AND COUNTERCLAIM DEFENDANT,
v.
UNITED STATES OF AMERICA, DEFENDANT AND COUNTERCLAIM PLAINTIFF, V. MARTIN H. ROEFER, ADDITIONAL COUNTERCLAIM DEFENDANT. MARTIN H. ROEFER, PLAINTIFF AND COUNTERCLAIM DEFENDANT, V. UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Aspen, District Judge:

MEMORANDUM OPINION AND ORDER

This is a consolidation of separate tax refund suits brought by Martin H. Roefer ("Roefer") and John H. Platt, Jr. ("Platt"). The United States has filed counterclaims against both Roefer and Platt for the payment of additional amounts. This case arises due to the failure of Dot Engravers, Inc. ("Dot") to pay federal employment taxes for calendar quarters ending September 30, 1975, and December 31, 1975. At all relevant times, Platt was the president and a 30 percent shareholder of Dot and Roefer was chairman of the Dot board of directors and a 70 percent shareholder. This matter is currently before the Court on plaintiffs' motions for summary judgment with respect both to their claims and the government's counterclaims.

The following facts are undisputed. Dot was an Illinois corporation engaged in the graphics arts business. In 1972, Dot borrowed large sums of money from Associates Capital, Inc. ("Associates"), an Indiana finance company. Associates required extensive collateral for the loan, including all of Dot's accounts receivable. As a consequence of this accounts receivable and financing agreement, employees of Dot were in regular contact with representatives of Associates to make sure that funds were available to cover the checks written by Dot.

In mid-1974, Dot negotiated with Color Associates, ("Color"), a Missouri graphics company, for the sale of its stock. Representatives of Associates met with Aron Katzman ("Katzman"), who was then vice-president of Color. Katzman told Associates that Color was interested in purchasing Dot and that Color desired Associates to continue the financing after the purchase.

Dot then entered into two contracts with Color, both dated September 15, 1974. The first was a Loan and Security Agreement wherein Color loaned Dot $50,000. One of the conditions of the loan was that Dot enter into an exclusive management agreement with a manager approved by Color, "pursuant to which the manager will have complete control of and management responsibilities for [Dot's] business, including complete control over [Dot's] bank accounts, business records and responsibility for supervision of [Dot's] sales and payment of salaries, commissions, and business expenses." As additional consideration for the loan, Platt and Roefer granted to Color an exclusive one-year option to purchase all of their outstanding capital stock for the sum of $10,000.

The second contract entered into between Dot and Color and dated September 15, 1974, was a Management Agreement. Under the terms of that Agreement, Color was to serve as the "manager" referred to in the Loan Agreement described above. As manager, Color was "to operate Dot's business" for three years or until the loan was repaid. Specifically, the Management Agreement provided that Color was to "provide sole and exclusive supervision of the operation of the business." In addition to a myriad of other responsibilities delegated to Color under the contract,*fn1 paragraph 3(e) of the Management Agreement provided Color with sole responsibility for payment of all wage taxes under the following provisions:

  (e) Manager [Color] shall have exclusive
  responsibility for issuing checks in payment for all
  wages of Dot's employees, as well as the payment of
  all federal and state withholding taxes attributable
  to said wages. . . .

Furthermore, the Agreement stated that Color was to have "full power and authority to do all things necessary or reasonably proper in Manager's [Color's] sole judgment to bring about the efficient operation of the business and its maintenance and operation. . . ."

The Management Agreement further provided that Color was to take exclusive possession of all Dot's bank accounts. Withdrawals from these accounts to cover all operating expenses were to be made by Color in its sole discretion.*fn2 The record indicates, however, that Dot's bank accounts never were transferred to Color. Color also was responsible for maintaining the books and records of Dot pertaining to the operation of the business.*fn3

Thus, as of September 15, 1974, Dot contractually turned full management responsibility over to Color. Color exercised its responsibilities under the Management Agreement primarily through Aron Katzman, although other representatives of Color also made occasional visits to Dot. From September 15, 1975, until the end of October, 1975, Katzman, on behalf of Color, basically directed the affairs of Dot. For the first year of the arrangement, Katzman spent several days per week in Dot's offices, though during August, September and October, 1975, Katzman's appearances in Dot's offices were somewhat curtailed. During this period, any decisions made with respect to money had to be approved by Katzman or Color. The only constraint that Katzman faced as he directed Dot's business was provided by Associates, not by Platt, Roefer, or any of the Dot employees.*fn4 Indeed, from September 15, 1974, until the end of October, 1975, Platt and Roefer rarely were consulted by Katzman with respect to management of Dot, although Katzman frequently discussed management of Dot with representatives of Associates. Associates did not deal with Roefer or Platt or look to them to make any decisions after the execution of the Management Agreement.

From the time Color assumed responsibility for managing Dot's business, it required that Dot's corporate tax returns be prepared by a firm of accountants which also serviced Color. Although Dot's federal employment tax returns were prepared by Dot's bookkeeper, Mary Andres, Katzman reviewed the returns. Katzman did not discuss the returns with Platt or Roefer.

During the calendar quarter ending September 30, 1975, Dot failed to pay its federal employment taxes. This decision was made by Katzman after discussions with representatives of Associates and the owners of Color. Katzman felt that he had no alternative but to refrain from paying the taxes because he believed that Associates would not have allowed him to put the checks through to the government. Katzman did not consult with Platt or Roefer about his decision regarding the non-payment of employee taxes.*fn5

When Color's one-year option to purchase the stock of Dot was about to expire on September 15, 1975, Color requested and received a one-month extension, which was extended once again until October 25, 1975. Throughout this period, Platt and Roefer believed that Color intended to exercise its option to purchase Dot. Color, however, did not exercise its option.

In fact, when the last option period expired, Color abandoned its interest in Dot. Although the Management Agreement technically remained in full force, by the end of October, 1975, Katzman stopped coming to Dot, and Color ceased its active role in the management of Dot. With Color no longer involved in Dot's management, Platt and Roefer, along with Mary Andres and David Roefer performed the functions that Color had ...


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