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United States v. Kim

April 21, 1997

UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE,

v.

MOON H. KIM, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 93 C 330 James T. Moody, Judge.

Before COFFEY, MANION and KANNE, Circuit Judges.

COFFEY, Circuit Judge.

ARGUED JUNE 5, 1996

DECIDED APRIL 21, 1997

Defendant Moon H. Kim (Kim) was one of three co-owners of a corporation that failed to pay federal employee withholding taxes during certain segments of the years 1989 to 1991. Kim was assessed a penalty by the IRS and he refused to pay the same, forcing the government to commence this civil action to reduce the assessment to a judgment. In its complaint, the government alleged that the three co-owners were personally liable for the taxes the corporation had failed to pay. One of the co-owners, Thomas Ryan (Ryan), consented to judgment against him, and the case proceeded to trial against the other two owners, Kim and Billy Joe Marquess (Marquess). Following a jury trial, the district judge granted the government's renewed motion for judgment as a matter of law as to Kim's liability for the periods assessed. Kim moved for a new trial, requesting reversal of the trial court's grant of judgment, and asserting two more errors. He appeals from the denial of that motion. *fn1 We affirm.

I. BACKGROUND

In August 1986, Kim, Ryan and Marquess purchased Guildcrest Furniture Industries, Inc., a furniture manufacturer located in Peru, Indiana. The three formed a corporation, known as Guildcrest Associates, Inc. (Guildcrest), and each owned one-third of the stock. To finance the initial investment, Kim, Ryan and Marquess each individually contributed $30,000 and all three co-signed an installment note, in the total amount of $394,954.93, making each of them, Ryan, Marquess and Kim individually responsible for the entire $394,954.93.

Under the corporate structure established at the time of purchase, Kim, Ryan and Marquess comprised Guildcrest's board of directors. Ryan was installed as the company's president, Marquess as the vice-president of manufacturing, and Kim the vice-president for finance. Kim, who resided in Oak Brook, Illinois, commuted to the company's headquarters in Peru, Indiana, an average of two or three days a week for approximately the first two years of the company's operations (August 1986 through September 1988). During this time, Kim handled all of the company's accounting matters, prepared and signed the company's tax forms, participated in the company's management and decision making process, and was also an authorized signatory on the payroll and general checking accounts that Guildcrest maintained at Wabash Valley Bank and Trust Company (WVBT). *fn2

After September 1988, Kim began to spend less time at Guildcrest's headquarters in Peru, primarily because his other business interests began to expand rapidly and required more of his time. Thus, the three owners agreed in late 1988 to hire another full-time person, Allen Fowler (Fowler), to undertake a variety of the day-to-day accounting responsibilities formerly handled by Kim. Kim no longer had responsibility for federal withholding taxes, and Fowler was made an authorized signatory on the company's checking accounts. During 1989, Kim only visited the company's headquarters about once per month, and during 1990, he visited the headquarters only five times. However, during that period, Kim continued his interest as an owner, officer, and member of the board of directors of Guildcrest. Ryan testified that all significant financial decisions were still handled by the three owners in concert, and Kim was not excluded from those matters. Ryan also testified that he spoke with Kim over the phone approximately once per week regarding financial matters throughout 1989.

During 1989 and 1990, Kim also participated in a variety of other activities on behalf of Guildcrest. He handled matters related to moneys due and owing Guildcrest from Sibilano Furniture, one of Guildcrest's largest customers. He also dealt with certain of Guildcrest's suppliers located in the Chicago area, and served as the company's contact person with a bank (other than WVBT) which provided credit to Guildcrest for overseas purchases of supplies. Finally, Kim travelled to Korea in 1990 in an attempt to secure investors and sales for Guildcrest.

Neither did Kim's activities with the check writing and financial management of Guildcrest cease entirely in 1988, as he remained an authorized signatory on the company's checking accounts, and signed twelve checks to one of Guildcrest's suppliers in October 1989. Kim also authorized payment of a check to himself in March 1990 in the amount of $1,311.23.

According to the testimony of Ryan, Guildcrest began to experience cash shortfalls in late 1987 or early 1988, largely due to its inability to continue to obtain the fabric and wood carvings necessary for the manufacture of its furniture. Guildcrest sought alternative sources, but was unsuccessful. To address the cash shortfall problem, the company sought additional financing from a variety of sources, including WVBT. WVBT had provided Guildcrest with a $200,000 revolving line of credit in 1986 when the company began operations, and at that time, Kim, Ryan and Marquess signed a security agreement granting WVBT a secured interest in Guildcrest's accounts receivable, inventory, furniture and fixtures. Under the terms of the security agreement, Guildcrest's assets were to serve as security for "the payment and performance of each and every debt, liability and obligation of every type and description which [Guildcrest] may now owe or at any time hereafter owe to [WVBT] (whether such debt, liability or obligation now exists or is hereafter created)." Gov't Ex. 137. The security agreement also went so far as to include a provision that Guildcrest's customers were to send their payment checks to the company "lock box," which was a post office box exclusively under the control of WVBT. The parties agreed that WVBT would apply fifty percent of the proceeds to the debt, and deposit the remaining fifty percent balance of the customer's check into Guildcrest's operations checking account.

WVBT ultimately agreed to provide a variety of additional financial assistance to Guildcrest throughout 1987 and 1988, which included increasing the already-existing line of credit, and also included making loans directly to Kim, Ryan and Marquess personally, and each was individually responsible for the total amount of the new loans. At this same time WVBT's security interest was reaffirmed with the extension of the additional credit, and the lock box arrangement was continued, and would in fact continue throughout Guildcrest's existence. An official from WVBT testified that, absent the personal written guarantees of Kim, Ryan and Marquess, the bank would not have been willing to renew Guildcrest's line of credit nor extend credit to any of the owners individually.

Despite WVBT's continuous advances to Guildcrest, the company continued to struggle financially throughout the latter part of 1989, thus causing the owners to discuss the possibility of liquidating the company. To that end, Kim, Ryan and Marquess met with representatives of WVBT on November 16, 1989, for the purpose of proposing a liquidation plan, and to seek an additional $20,000 from WVBT in order that they might be able to purchase supplies for completion of the work on inventory, which would in turn be sold at liquidation. WVBT ultimately approved the proposed liquidation plan and agreed to extend the latest $20,000 to Guildcrest, on the condition that each of the owners again agree to sign a promissory note assuming joint and several liability for the full $20,000. The liquidation plan was put into effect in December of 1989, but was not entirely successful, as not all of the furniture was completed. Guildcrest filed for bankruptcy in April 1990, and ceased operations in February 1991.

Beginning in 1989, Guildcrest failed to pay the federal income and social security taxes withheld from its employees' wages for certain specific taxable periods; namely all four quarters of 1989, the first and second quarters of 1990, as well as the first quarter of 1991. Instead, the company applied these funds to payment of the company's operating expenses. Kim testified that he became aware of the problem when he was initially informed about the company's withholding tax problem in September 1989, when Ryan informed him by phone of the shortfall of a few thousand dollars. Kim stated that he first became aware of the magnitude of the shortfall at the November 16, 1989 meeting in which the liquidation plan was proposed to WVBT, and at this time the company's unpaid tax liability exceeded $70,000. Kim finally testified that, as payment of the back taxes was a part of the proposed liquidation plan, and Ryan had prepared the plan, he believed that the taxes would be paid as the plan was executed.

The $70,000 in unpaid withholding taxes were not paid as the liquidation plan was executed after the November 1989 meeting; indeed, unpaid withholding taxes continued to accrue while the company continued operating throughout 1990 and until February 1991, when the company ceased doing business. Ultimately, the IRS assessed each of the owners personally for the unpaid withholding taxes. According to the terms of the assessments, each owner was liable for the full amount of unpaid withholding taxes, as opposed to a pro rata share. Kim was assessed for all four quarters of 1989, along with the second quarter of 1990 and the first quarter of 1991, while Ryan and Marquess were assessed for each of those quarters as well as for the first quarter of 1990. The assessments for the 1989 quarters totaled approximately $86,000. On November 22, 1993, the government brought a civil action pursuant to 26 U.S.C. sec. 7401 in the federal district court against Kim and Marquess *fn3 seeking to reduce the assessments to judgment. Guildcrest's bank records were introduced at trial, and they helped establish that, in the fourth quarter of 1989, Guildcrest disbursed over $500,000 from its payroll and general checking accounts for payment of various operating expenses. These disbursements did not represent monies designated for WVBT under the terms of the security agreement, but represented payments to various unsecured creditors. During December 1989, by which time the parties agree that Kim was aware of the full extent of Guildcrest's unpaid tax liability, such payments totaled almost $200,000.

Kim sought to introduce in evidence a letter he received from the IRS stating that Kim was not responsible for Guildcrest's failure to pay withholding taxes during the first quarter of 1990. The trial judge refused to permit Kim to introduce the letter, ruling that, since the government was not seeking to recover from Kim for the first quarter of 1990, the letter was not relevant; he did, however, permit the government to introduce evidence of Kim's involvement in Guildcrest's affairs during the first quarter of 1990. Kim did introduce a letter signed by Ryan and Marquess which stated that, from 1989 through February 1991, Kim was not active in the daily business affairs of Guildcrest, and furthermore that he (Kim) neither prepared nor signed any tax forms during those periods.

After presentation of all the evidence, the government moved for judgment as a matter of law against Kim, arguing that he was liable for Guildcrest's unpaid withholding taxes for the six quarters for which he had been assessed. The district court denied the motion. The case went to the jury, and the jury found that Kim was liable for only the fourth quarter of 1989, the second quarter of 1990, and the first quarter of 1991; and furthermore it returned a verdict finding that Kim was not liable for the first three quarters of 1989. The government then renewed its motion for judgment as a matter of law against Kim with respect to the first three quarters of 1989, and the trial judge this time granted the motion. Kim subsequently filed a motion for a new trial, arguing that the trial court erred in granting the government's renewed motion for judgment as a matter of law, asserting that the jury's finding of liability with respect to the latter three quarters for which he was assessed was against the weight of the evidence, and further claiming that ...


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