Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-87-01931/USCOURTS-ca10-87-01931-0/pdf.json

Parties Involved:
John R. Hays
Not Party
James F. Manley
Appellant
United States of America
Appellee

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

UNITED STATES OF AMERICA, 

Plaintiff-Appellee, 

FILED 

United States Court of Appeals 'I'enth Cireuit 

JUN 141989 

ROBERT L. HOECKER 

Clerk 

v. 

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No. 87-1931 

JOHN R. HAYS, individually, and 

as former partner of J & Sons, 

Defendant, 

and 

JAMES F. MANLEY, individually, and) 

as former partner of J & Sons and ) 

dba J & Sons Construction Co., ) 

Defendant-Appellant. 

) 

) 

Appeal from the United States District Court 

for the District of Colorado 

(D.C. No. 85-M-1937) 

Thomas F. Quinn, and Frederic L. Coldwell with him on the briefs, 

Quinn & Associates, Denver; Colorado, for Defendant-Appellant. 

Williams. Rose, Assistant Attorney General (Gary R. Allen, 

Williams. Estabrook, and Howard M. Soloman with him on the 

brief), Washington, D.C., for Plaintiff-Appellee. 

Before McKAY, SEYMOUR, and EBEL, Circuit Judges. 

EBEL, Circuit Judge. 

Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 1 
\. ______ _ 

This case concerns the effect of a state partnership statute 

on a retired partner's liability for federal employment taxes owed 

by a dissolved partnership. The precise issue is whether, under 

the Uniform Partnership Act as adopted by Colorado, one partner's 

agreement with the Internal Revenue Service ("IRS") to pay the 

dissolved partnership's past-due employment taxes serves to 

discharge the other partner from liability for those taxes. The 

district court held that the second partner remains liable, and we 

affirm. 1 

The facts are not in dispute. John R. Hays and appellant 

James F. Manley formed a Colorado general partnership to engage in 

the construction business. The partnership failed to pay various 

employment-related taxes owed to the IRS. The partnership later 

dissolved, and its business and assets were turned over to a sole 

proprietorship owned by Hays. As part of the dissolution, Hays 

agreed to assume all of the partnership's liabilities. 

The IRS received notice of Hays' agreement to assume the 

liabilities and entered into negotiations with him concerning the 

partnership's back taxes. The IRS and Hays eventually reached an 

agreement whereby Hays would pay the taxes in installments from 

the receipts of his sole proprietorship. However, the IRS never 

purported to release its claims against Manley by that agreement. 

In fact, the IRS during this period continued to send delinquent 

1 After examining the briefs and appellate record, this panel has 

determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); 10th Cir. R. 34.1.9. Therefore, the cause is ordered 

submitted without oral argument. 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 2 
tax notices to both Manley and Hays. (Tr. at 15-17, 34-37, 46-47; 

Manley Br. at 6.) 

Pursuant to the agreement with the IRS, Hays made a few 

payments to the IRS but quickly fell behind. The government then 

sued Manley, Hays, and the dissolved partnership for the back 

taxes. This appeal concerns only the claims against Manley. 

In the district court, Manley argued that Section 36(3) of 

the Uniform Partnership Act, as adopted by Colorado, discharged 

his liability for the partnership's tax obligations. 2 Manley 

asserted that the IRS's payment agreement with Hays constituted a 

"material alteration in the nature or time of payment" of the .. partnership's obligations which were assumed by Hays. Manley 

contended that the agreement consequently acted to discharge 

Manley's liability, much like a surety's liability is discharged 

when the creditor and principal materially change the und€rlying 

obligation. After a bench trial, the district court rejected 

Manley's contention, holding that the IRS merely was "forbearing 

from •.• collection" on its tax liens when it entered into the 

agreement with Hays: "[T]he forbearance from collection on those 

items is not an alteration of the time for payment • [H)ow 

has anything been changed here? There simply was an agreement to 

2 Colo. Rev. Stat. § 7-60-136(3), which adopts Section 36(3) of 

the Uniform Partnership Act, provides: 

Where a person agrees to assume the existing obligations 

of a dissolved partnership, the partners whose 

obligations have been assumed shall be discharged from 

any liability to any creditor of the partnership who, 

knowing of the agreement, consents to a material 

alteration in the nature or time of payment of his 

obligations. 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 3 
pay out of the [sole proprietorship's] draws. The obligations 

remain the same as they are in the federal law." (Tr. at 52-54.) 

On appeal, Manley asserts that the district court's 

interpretation of Section 36(3) was erroneous and that the IRS's 

payment agreement operated to discharge him. The government 

argues that the district court was correct in holding that Section 

36(3) does not discharge Manley's tax liability. 3 

Manley has not cited any cases holding that a forbearance 

agreement between a creditor and a former partner who has assumed 

the partnership's obligations constitutes a "material alteration" 

under Section 36(3). Our research has not revealed any either. 

However, based upon our own read~ng of the language of 

Section 36(3), we agree with the district court that the IRS's 

attempt to work out a payment schedule with Hays was a simple act 

of forbearance that did not constitute a material alteration in 

the nature or timing of the already-due obligation. The 

3 Alternatively, the government contends that federal law rather 

than state law applies to the issue of a general partner's 

liability for the tax obligations of a dissolved partnership. 

Because we rule against Manley on the state law issue, which is 

the only issue that he has raised, we need not address the 

government's alternative argument for affirmance based upon 

federal law. We do note, however, that in the analogous context 

of limited partnerships, the IRS has looked to state law to 

determine the liability of partners for partnership tax liability. 

Revenue Ruling 54-210, 1954-1 CB 209; Revenue Ruling 54-213, 1954-

1 CB 285. Further, other courts have assumed that the liability 

of a general partner for the tax obligations of the partnership is 

determined by state law rather than federal law. See,~' 

Calvey v. United States, 448 F.2d 177, 180 (6th Cir. 1971) ("[T]he 

federal revenue code makes no specific reference to the liability 

of partners as individuals [for partnership tax obligations]. • • The governing law pertaining to the instant case is 

represented by two sections of the Uniform Partnership Act adopted 

by Michigan in 1922 •••• "); In re McManis, 70 B.R. 171, 173 

(Bankr. E.D. Ky. 1988). 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 4 
underlying obligation arose as a result of the partnership's 

failure to pay certain employment taxes. That obligation was due 

and owing by both Manley and Hays, jointly and severally, months 

before Hays agreed to make payments to the IRS on it. See Colo. 

Rev. Stat. § 7-60-115 ("All partners are liable . jointly and 

severally for all .•. debts and obligations of the partnership 

. . II ) . 

The IRS's agreement with Hays did not purport to change the 

terms of Manley's past-due obligation or to release Manley in any 

way. Manley's obligation to the IRS remained the same at all 

times. The IRS merely agreed to refrain from invoking its 

formidable collection rights so long as Hays made certain 

payments. At any time during that period, Manley could have paid 

the IRS obligation without regard to the agreement between Hays 

and the IRS, and thereby have freed himself from further 

individual liability. 4 

Even if we were to look beyond Section 36(3) 's language to 

general principles of surety law, we would reach the same result. 

Manley argues that under a Colorado Supreme Court case decided 

before Colorado's adoption of Section 36(3), Hays and Manley stand 

4 Cf. Chevron Chemical Co. v. Mecham, 536 F. Supp. 1036, 1045 (D. 

Utahl982) ("The 'extensions' were not extensions of the due date 

on the obligation. Chevron merely extended the period in which 

Great Basin could cure the existing default before Chevron would 

actively pursue its more drastic creditor's remedies. They might 

more aptly be described as 'forbearances.' However they are 

named, they did not effect a discharge of [the guarantor's] 

independent liability based upon his guaranty."). But cf. United 

States v. Ross, 176 F. Supp. 932, 935-36 (D. Neb. 1959)-(retired 

partner was discharged from further tax liability when IRS 

compromised and released tax claim against person who had assumed 

partnership's liabilities). 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 5 
in the position of "principal and surety, the continuing partner 

being the principal, and the withdrawing partner being the 

surety." Faricy v. J.S. Brown Mercantile Co., 288 P. 639 (Colo. 

1930). Quoting Faricy, Manley contends that "[w]here a creditor, 

without the consent of the retired partner, extends the time of 

payment, he thereby deprives the retired partner (the surety) of 

his right to pay the debt at once and sue his former partner (the 

principal) while the latter is solvent." (Manley Br. at 11.) 5 

5 The portion of Faricy on which Manley relies is actually one of 

two hypotheticals discussed by the court. The first hypothetical, 

which is the one on which Manley relies, concerns what happens 

when a retired partner satisfies the partnership's debt but is 

unable to sue the continuing partner immediately for reimbursement 

because of the creditor's extension agreement. As shown below, 

that hypothetical does not apply here because Hays' agreement with 

.the IRS did not prevent Manley from suing Hays immediately for 

reimbursement. Th~ second hypothetical in Faricy concerns 

situations in which a creditor may have a duty to manage 

collateral and security interests in a way that does not prejudice 

the retired partner. The court in Faricy stated that the 

creditor's failure to act properly in those circumstances "would 

release the retired partner to the extent of the damage caused 

thereby." Id. (emphasis added). That hypothetical also does not 

apply here because Manley presented no evidence at trial that the 

partnership had any valuable assets subject to the IRS's liens 

(see Tr. at 55), let alone that Manley was injured in any way by 

the IRS's handling of those assets. The court in Faricy 

ultimately held that the liability of the retired partner in that 

case was not discharged because the retired partner was free to 

pay off the partnership's obligation (or to force his former 

partner to do so) at any time: 

It would not be just •.• to impose on the creditor the 

duty of suing the continuing partner upon demand of the 

retired partner •••• [Faricy] had the legal right, 

without the [creditor] company's consent, to pay the 

debt and thereupon sue [the continuing partner] Davis. 

Or, without paying the debt and without the company's 

consent, Faricy had the right to bring suit to compel 

Davis to satisfy the debt due the company. 

288 P. at 640. 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 6 
However, Manley's description of common law surety principles 

based on Faricy leaves out one significant point. Under 

traditional surety principles, a creditor's agreement to extend 

the payment time of the principal's obligation does not discharge 

the surety when the creditor reserves the creditor's rights 

against the surety. See generally Restatement of Security§ 129 

(1941) ("[W]here the principal and creditor, without the surety's 

consent, make a binding agreement to extend the time of payment by 

the principal, the surety is discharged unless the creditor in the 

extension agreement reserves his rights against the surety.") 

(emphasis added); L. Simpson, Handbook on the Law of Suretyship 

§ 73 at 351, 362 (1950) (surety is not "discharged ... when the 

creditor reserves his remedies against the surety"). 6 

6 The justification for this principle is as follows. If a 

creditor extends the principal's payment time without reserving 

rights against the surety, then the surety no longer can sue the 

principal immediately upon paying the full debt. The reason is 

that the only way that the surety can recover from the principal 

is through the equitable doctrine of subrogation, and a subrogated 

surety stands in the shoes of the creditor and has no greater 

rights than those of the creditor. Thus, if the surety satisfies 

the debt and tries to sue the principal, the principal can defend 

on the ground that the debt is not yet owing because the creditor 

extended it. In contrast, if the creditor extends the principal's 

payment time while reserving rights against the surety, then the 

principal is on notice that the surety is still liable and that 

the surety may sue the principal immediately for reimbursement if 

the surety satisfies the debt. In other words, if the creditor 

reserves rights against the surety, then the principal knows that 

the extension agreement with the creditor is subject to the 

possibility that the surety will satisfy the debt and sue for 

immediate reimbursement. As a result, a creditor's paymentextension agreement that reserves the creditor's rights against 

the surety cannot be used by the principal to defend against the 

surety's subrogation suit. Accordingly, a payment-extension 

agreement in those circumstances does not discharge the surety. 

See generally Restatement of Security§ 129 Comment d and§ 122 

Comment d; L. Simpson, Handbook on the Law of Suretyship § 73 at 

362-63 (1950); 10 Williston, Contracts§ 1230 at 738-39 (1967). 

[Footnote continued •.• 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 7 
{ Here, the evidence at trial showed that in reaching an 

agreement with Hays, the IRS reserved its rights against Manley. 

Thus, even under traditional surety principles, Manley's liability 

on the obligation was not discharged. 7 

[ •.. footnote continued] 

Colorado courts have applied this principle. See McAllister 

v. People ex rel. Brisbane, 63 P. 308 (Colo. 1900) ("The remedy 

against the surety was expressly reserved by the obligee by taking 

judgment against him, and the surety, therefore, was not 

discharged"); Fisher v. Denver Nat. Bank, 45 P. 440, 443 (Colo. 

1896) ("(I]t is elementary that if ••• time is given by the 

payee to the principal debtor for the payment of the note, without 

••• reserving the right to proceed against [the surety] at any 

time, the surety or accommodation maker is discharged"). In Moss 

v. McDonald, 772 P.2d 626 (Colo. App. 1988), the Colorado Court of 

Appeals held that the sureties in that case were discharged 

because they did not consent to the creditors' extension 

agreement. It is unclear whether the creditors in Moss reserved 

their rights against the sureties. It Moss were construed to hold 

that an extension agreement discharges non-consenting sureties 

despite the reservation of rights against them, then the case 

seemingly would not be in accord with the Colorado Supreme Court 

authorities cited above. 

7 Hays testified at trial that he knew the IRS had not released 

Manley: 

Q. So then you knew that the service was still trying 

to collect the liability from Mr. Manley? 

A. I knew that. 

(Tr. at 37.) Likewise, the IRS official responsible for 

negotiating the agreement with Hays testified that the IRS did not 

intend for the agreement to release Manley: 

Q. And it was not your intent in entering into that 

agreement to relieve Mr. Manley of any obligation that 

he may have for partnership debt, is that correct? 

A. Correct. 

(Tr. at 49.) The IRS's intent not to release Manley is confirmed 

by that fact that the IRS continued to send delinquent tax notices 

to Manley long after entering into the agreement with Hays. (Tr. 

at 15-17, 34-37, 46-47.) Because we conclude that the IRS 

reserved its rights against Manley, we need not address the issue 

[Footnote continued •.• ] 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 8 
( 

Because there was no material change in the underlying debt 

that Manley and Hays owed to the IRS, Section 36(3) of the Uniform 

Partnership Act does not discharge Manley's liability. 

The judgment of the district court is AFFIRMED. 

[ ••• footnote continued] 

of whether the agreement was supported by adequate consideration. 

See L. Simpson, Handbook on the Law of Suretyship § 73 at 362 

(1950) (creditor's promise to extend payment time must be 

supported by consideration before surety can be discharged). 

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Appellate Case: 87-1931 Document: 01019784740 Date Filed: 06/14/1989 Page: 9