UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

JOHN GLUDE,

Plaintiff-Appellee,

v.

MARTIN STERENBUCH,

Defendant-Appellant, No. 97-1026

and

SABANA GRANDE PRAWN FARMS,

LIMITED,

Defendant.

Appeal from the United States District Court

for the District of Maryland, at Baltimore.

J. Frederick Motz, Chief District Judge.

(CA-95-2-JFM)

Argued: October 30, 1997

Decided: January 13, 1998

Before MURNAGHAN, HAMILTON, and LUTTIG,

Circuit Judges.

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Affirmed by unpublished per curiam opinion.

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COUNSEL

ARGUED: Matthew Anthony Rizzo, Washington, D.C., for Appellant. James Joseph Nolan, Jr., PIERSON, PIERSON & NOLAN, Baltimore, Maryland, for Appellee.
Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

_________________________________________________________________

OPINION

PER CURIAM:

Appellant, Martin Sterenbuch (Sterenbuch), entered into a business

venture with Appellee, John Glude (Glude). The company, known as

Aquaculture Enterprises, Inc. (AEI), was apparently not profitable,

and AEI failed for several years to pay its federal withholding taxes.

Following an Internal Revenue Service (IRS) investigation, Glude

was determined to be solely responsible for AEI's debt, and was

thereafter required under 26 U.S.C. § 6672 (1988) to pay the debt

himself. Glude filed suit against Sterenbuch in federal court, seeking

to recover Sterenbuch's share of the IRS tax debt on a theory of contribution or breach of contract. Following a bench trial, the district

court found for Glude on both counts. On appeal, Sterenbuch challenges various aspects of the bench trial, including the verdict in favor

of Glude.

We find none of Sterenbuch's arguments convincing. We hold that

Glude and Sterenbuch had an enforceable contract to share in all corporate debts, and that Sterenbuch breached the contract by failing to

share in the payment of the IRS tax debt. This holding makes it

unnecessary to determine if, in the alternative, Maryland state courts

would recognize a statutory right of contribution for federal tax debts

imposed under § 6672.

I.

Appellant, Sterenbuch, is a Washington, D.C. lawyer who in 1981

approached Appellee, Glude, a marine biologist, concerning the feasibility of raising fresh water prawns in Puerto Rico. In 1983, after

lengthy discussions and the preparation of a feasibility study, the parties incorporated AEI under the laws of Maryland to carry out the

prawn farming enterprise. Under the terms of the parties' agreement,

Sterenbuch was to be president and Glude vice-president of the corpo-

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ration. In addition, Sterenbuch and Glude were to sit as directors of

AEI, making them "responsible for the control and management of

the affairs, property, and interest of the Corporation."

Also in 1983, Sterenbuch and Glude formed Sabana Grande Prawn

Farms (SGPF), of which they appointed themselves general partners.

They entered into a written partnership agreement which was updated

in September 1988. Under the terms of the partners' agreements,

SGPF was to own all of the stock of AEI; Glude was to operate as

a "technical manager;" and Sterenbuch was to provide "business/financial and legal management services." Additionally, SGPF

was to "provide all necessary capital and operating funds," and AEI

was to "manage and account to the partnership for such funds."

SGPF and AEI eventually leased land in Puerto Rico and began the

fresh-water prawn farming operation. The firm's prospectus listed

Sterenbuch as "President of AEI and as general partner in the parent

company [SGPF]." All necessary funds raised through SGPF were

transferred to AEI as needed for development. The funds, which

totaled more than $5,000,000, were raised from a combination of

investments and loans. Although Glude was a general partner of

SGPF, he was not authorized to sign checks on behalf of the company.

In July 1990, Glude became concerned with the fact that employee

withholding taxes were regularly not being paid by AEI. He sent a

memorandum to Sterenbuch explaining that, as corporate officers, he

and Sterenbuch could be held responsible by the IRS for any unpaid

taxes, and proposing that the partners share equally in AEI's liabilities. Sterenbuch wrote back, expressing his consent to Glude's proposal and noting that, in his view, the agreement simply confirmed

"what was always [the parties'] implicit understanding."

A year and a half later, on February 23, 1992, the Internal Revenue

Service (IRS) sent Glude a letter proposing to assess a "100 Percent

Penalty" against him pursuant to the Internal Revenue Code, 26

U.S.C. § 6672, for AEI's unpaid withholding taxes for the years

1988-1991. The assessment totaled $137,744.36.

After receiving the IRS notice, Glude contacted Sterenbuch, who

referred Glude to attorney Julian Spirer, a friend of Sterenbuch's who

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practiced law in the District of Columbia and who had previously performed various legal tasks for AEI and SGPF. Glude took Sterenbuch's advice and supplied Spirer with background information

regarding the case. Spirer then authorized his legal assistant, Jeff, to

draft an appeal to the IRS on behalf of Glude. The appeal was unsuccessful. Glude later learned that although he had advised Spirer of

Sterenbuch's role in the nonpayment of AEI's withholding taxes, the

appeal drafted by Jeff did not contain any reference or suggestion that

Sterenbuch might be equally responsible for the IRS debt.

After losing his appeal with the IRS, Glude drafted a letter to the

agency informing them that Sterenbuch and he were both general

partners of AEI and shared various management functions. Perhaps as

a result of that prodding, a short time later Sterenbuch himself

received a proposed "100 Percent Penalty" assessment (also in the

amount of $137,744.36) from the IRS. Sterenbuch responded by writing to the IRS and informing them, among other things, that he had

no management responsibilities over AEI; that he had never been

involved in the day-to-day operation of the company; and that he had

no control over AEI bank accounts. Thus, he contended, he was not

equally responsible with Glude for any of AEI's delinquent taxes. On

July 1, 1992, apparently in response to some of the information

Sterenbuch had supplied, the IRS determined that Sterenbuch was not

responsible for AEI's tax debt and removed its $137,744.36 assessment against him.

Because the IRS continued to consider Glude fully responsible for

AEI's debt, in January 1995 Glude filed suit against Sterenbuch in the

United States District Court for the District of Maryland. Glude's

complaint sought relief for Sterenbuch's portion of the IRS debt,

based on either (1) a common law right of contribution, or (2) the parties' agreement to share equally in all AEI liabilities.

Glude's case proceeded to trial before the Honorable J. Frederick

Motz. In response to a pretrial motion by Glude, the court issued an

order freezing the partnership accounts of SGPF pending the outcome

of the litigation. The court did not require Glude to post bond as

security for the order. The parties later reached a tentative settlement

agreement, and pursuant to Local Rule 111.11 they requested and, on

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1 Local Rule 111.1 allows a court to dismiss a case in which the parties

have notified the court that a settlement has been reached. An order

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January 20, 1995, the district court granted, an order dismissing

Glude's action and vacating the temporary restraining order. The

order was issued "without prejudice to the right of a party to move

for good cause within thirty days" to reopen the case. Glude's attorney wrote the district court a letter within several days of that order

explaining that all of Glude's claims were not supposed to have been

dismissed pursuant to the settlement.

Although neither party filed to reopen the case within the thirty day

period, the parties' settlement was never consummated and, on March

7, 1995, Glude filed an amended complaint and his original case was

reopened. Sterenbuch moved to dismiss pursuant to Fed. R. Civ. P.

12(b)(6), on the grounds that Glude's case was time-barred and failed

to state a claim on which relief could be granted. The district court

denied those motions, as well as a similarly based motion by Sterenbuch for summary judgment at a later date.

The case ultimately proceeded to a bench trial on October 1-2,

1996. Among other evidence introduced at trial, Glude offered the

testimony of Dennis DeLong, who had worked as Assistant General

Manager of AEI in Puerto Rico from early 1984 until the middle of

1990. While serving in that position, DeLong maintained communications with Sterenbuch, speaking with him by telephone at least once

a week, and also communicating by way of mail and FAX. During the

course of those activities, DeLong became familiar with Sterenbuch's

role in the operation of AEI, which he described as providing financial and legal expertise, and managing the financial affairs of AEI.

DeLong also testified that whenever insufficient funds existed to

cover the payment of AEI's outstanding bills, he would contact

Sterenbuch in Washington, D.C., because Sterenbuch was able to disburse funds, make bank or wire transfers, or send a check to cover the

payables.

In his Washington, D.C. office, Sterenbuch had available to him

AEI's computer printout of payables, including federal payroll taxes

_________________________________________________________________

issued pursuant to Rule 111.1 results in the dismissal of all claims, counterclaims, cross-claims, and third-party claims, unless otherwise stated in

the order. See Local Rule 111.1.

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owed to the government. DeLong testified that he and Sterenbuch

occasionally discussed the payment of federal payroll taxes and, on

"many occasions," when there was not enough money to go around,

Sterenbuch directed that DeLong pay other creditors instead of the

U.S. government.

At the conclusion of the evidence, the court found in favor of

Glude on his contribution and breach of contract claims, ordering

Sterenbuch to share equally in the payment of the IRS debt. Sterenbuch filed, and the court denied, a post-trial motion for reconsideration or a new trial.

II.

The district court entered a verdict in favor of Glude on his alternative breach of contract or contribution claims. On appeal, Sterenbuch

raises two issues with respect to this verdict. First, as to the breach

of contract claim, whether the district court erred in concluding that

the parties had an enforceable contract to share responsibility for

AEI's debts. Second, with regards to the contribution claim, whether

the district court erred in concluding that Maryland courts would recognize a state law right of contribution for federal tax debts arising

under § 6672. Because we answer the first question in the affirmative

-- and therefore hold that Sterenbuch is contractually bound to share

in the IRS tax debt -- we have no occasion to address the second.

Our analysis of Glude's contract claim requires, as an initial matter,

a determination as to which forum's law is to be applied. A federal

court exercising diversity jurisdiction, as in the present case, must

apply the substantive law of the state in which it sits. See Erie R.R.

v. Tompkins, 304 U.S. 64, 78-79 (1938). This includes applying the

forum state's choice of law rules. See Klaxon Co. v. Stentor Elec.

Mfg., 313 U.S. 487, 496 (1941).

Under Maryland law, questions regarding the validity, effect, and

interpretation of a contract are resolved according to the principle of

lex loci contractus, meaning the law of the state where the contract

was made. See Mallinckrodt v. Whittaker M.A. Bioproducts, Inc., 566

A.2d 1113, 1116 (Md. 1989) (citation omitted). The place of contracting is defined by Maryland law as "the place where the last act neces-

 6
sary to complete the contract was performed." Id. (citing Grain

Dealers Mutual Insurance Co. v. Van Buskirk, 215 A.2d 467 (Md.

1965)); see also Continental Cablevision of New England, Inc. v.

United Broadcasting Co., 873 F.2d 717, 720 (4th Cir. 1989) (applying

Maryland choice of law rules). In the present case, the district court

apparently made no findings as to the locus of the contract. Nevertheless, because the parties have not contested the district court's application of Maryland law, see Philip Bilancia v. General Motors Corp.,

538 F.2d 621, 623 (4th Cir. 1976) (per curiam), we assume for purposes of appeal that such application was appropriate.

Glude's breach of contract claim is based on an exchange of letters

between the parties in July of 1990. At that time, Glude had become

concerned about the possibility of AEI's corporate officers being held

personally accountable by the IRS for any taxes the company had

failed to pay. He wrote Sterenbuch to express his concern and to propose an agreement in which the parties would share equally in all of

AEI's liabilities:

[W]e as officers of AEI are personally responsible for payment of IRS . . . taxes withheld from employees salary. As

of the first of July, AEI owed IRS a total of $129,531 of

which about $60,000 was withheld employees salary for

Social Security (FICA). . . . [This is troublesome] since . . .

[the IRS] can call on us for payment of the amounts due if

AEI can not or does not pay these amounts.

In view of this possibility, and in view of the basic tenet of

our partnership to share equally in all aspects, I suggest the

following actions.

1. Develop a legally binding agreement that each of us

will be responsible for 50% of any payments due because of

our personal guarantees or our roles as officers of the Corporation.

In response to Glude's letter, Sterenbuch wrote back as follows:

 In response to your memorandum of July 22 and as per

our telephone conversation, this is to confirm our agreement

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that to the extent that either of us is called upon to pay personally any liabilities of [AEI], in cases where we are

equally liable for such indebtedness . . . that we will share

equally in all such payments.

 John, I think this confirms what was always our implicit

understanding.

Under Maryland law, there is no question that Glude's letter constituted a valid offer, and that Sterenbuch accepted the offer during the

referenced telephone conversation or by writing his return letter. Nor

is there any doubt that the parties traded valuable consideration, as

each received from the other a promise to be personally responsible

for one-half of AEI's liabilities.

Sterenbuch raises several arguments in an effort to avoid his obligations under the parties' agreement. First, he contends that the district court erred in "second-guessing" the IRS's determination that he

was not responsible for AEI's tax debt. We disagree. The IRS's determination of Sterenbuch's responsibility to the government, although

relevant, is not controlling of our determination of Sterenbuch's obligations to Glude. In any event, we agree with the district court's decision to deviate from the IRS's findings, since the court need not

"accept without question administrative pronouncements clearly at

variance with established facts." National Labor Rel. Bd. v. Morganton Full Fash. Hos. Co., 241 F.2d 913, 915-16 (4th Cir. 1957); see

Bedford County Mem. Hosp. v. Health & Hum. Servs. , 769 F.2d 1017,

1022 (4th Cir. 1985) (citation omitted) ("Agency action is arbitrary

and capricious if the agency . . . reaches a decision that is so implausible that it cannot be ascribed to a difference in view.").

In reaching the conclusion that Sterenbuch was equally responsible

for AEI's tax liabilities, the district court was mindful of our opinion

in O'Connor v. United States, 956 F.2d 48 (4th Cir. 1992), where we

explained some of the various factors that militate toward labeling an

individual a responsible person for purposes of§ 6672. We held that

the inquiry must focus on "substance rather than form," and that the

key issue is the person's "authority over an enterprise's finances or

general decision making." Id. at 51."The substance of the circumstances must be such that the officer exercises and uses his authority

 8
over financial affairs and general management . . . ." Id. This can be

determined by reference to other factors, such as control over payroll

and decisions over which bills to pay or not to pay. See id.

With these factors in mind, the district court concluded that Sterenbuch had wide-ranging management responsibilities at AEI, and that

as CEO of AEI's parent company, SGPF, he controlled the "spigot"

of funds on which AEI relied for its survival. The court also concluded, based on the testimony of DeLong, that Sterenbuch had on

occasion directed that certain creditors be paid rather than the IRS.

In light of this evidence, the district court concluded, and we agree,

that the IRS's decision to remove Sterenbuch's status as a responsible

person was based on an incomplete factual record and was poisoned

by Sterenbuch's intentional misrepresentation of the scope of his

management role at AEI. We agree with the district court that Glude

and Sterenbuch were equally responsible for the creation of AEI's tax

debt and that sharing equally in the payment of that debt was squarely

within the terms of the parties' July 1990 agreement.

Sterenbuch next argues that the parties agreement is unenforceable

as a matter of public policy. This argument is based on the language

of § 6672, which allows for the imposition of liability for "willfully"

failing to pay withholding taxes.2 Sterenbuch reads this willfulness

language to require a showing of egregious conduct or evil intent on

the part of the delinquent taxpayer. Therefore, he argues, § 6672 was

intended to punish wrongdoers, and it violates public policy for a

court to enforce a contract in which Sterenbuch shares in Glude's

punishment.

We find no merit to this argument. To our knowledge, no court has

ever held that egregious conduct or evil intent is required for the

imposition of liability under § 6672. In fact, this Court has expressly

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2 Internal Revenue Code, 26 U.S.C.§ 6672(a) provides that "[a]ny person required to collect, truthfully account for, and pay over any tax

imposed by this title who willfully fails to collect such tax, or truthfully

account for and pay over such tax . . . shall, in addition to other penalties

provided by law, be liable to a penalty equal to the total amount of the

tax evaded . . . ."

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held the opposite. In Turpin v. United States , 970 F.2d 1344 (4th Cir.

1992), we held that a finding of willfulness under§ 6672 merely

requires the taxpayer to have knowingly or recklessly failed to pay the

required taxes:

One must act "intentionally . . . and voluntarily." . . . The

failure to pay . . . taxes cannot be willful unless there is

either "knowledge of nonpayment or reckless disregard of

whether the payments were being made." . . . The"intentional preference of other creditors" over the United States

is "sufficient to establish the element of willfulness" . . . .

Id. at 1347 (citations omitted); see also O'Connor, 956 F.2d at 52 n.*;

United States v. Pomponio, 635 F.2d 293, 298 n.5 (4th Cir. 1980). We

therefore reject Sterenbuch's contention that § 6672's requirement of

willful conduct necessarily demonstrates a punitive purpose.

Sterenbuch also maintains that the statute is punitive because, in

addition to requiring payment of the tax bill, the statute imposes a fine

on the delinquent taxpayer amounting to 100% of the total tax bill.

This is simply incorrect. Although nothing in the language of § 6672

would prevent the IRS from using the statute in such a manner, as a

matter of official policy the IRS does not utilize§ 6672 to collect payments over and above the amount of taxes owed. See Pomponio, 635

F.2d at 298 n.6 ("[I]t is IRS policy that the amount of the tax will be

collected only once. After the tax liability is satisfied, no [further] collection action is taken . . . .") (quoting United States v. Sotelo, 436

U.S. 268, 279-80 n.12 (1978) (quoting statement from Comptroller

General)); see also Gens v. United States, 615 F.2d 1335, 1339 (Ct.

Cl. 1980) (citations omitted) ("The Government can enforce [§ 6672]

assessments until it has collected successfully an amount equal to the

payroll tax liability which has given rise to the penalty assessments.");

I.R. Manual, Policy Statement P-5-60, MT 1218-56 (Feb. 25, 1976)

("The 100-percent penalty . . . will be used only as a collection device

. . . [where] such taxes cannot be collected from the corporation

itself.").

In light of all this, it is clear that, contrary to Sterenbuch's contentions, § 6672 is used not as a means of punishment, but merely as a

tax collection device to ensure the payment of delinquent taxes where,

 10
as here, the corporation itself cannot afford to pay. See Pomponio,

635 F.2d at 298 n.6 ("IRS uses the 100-percent penalty only when all

other means of securing the delinquent taxes have been exhausted.")

(quoting Sotelo, 436 U.S. at 279-80 n.12)); O'Connor, 956 F.2d at 50.

The record of the instant case is consistent with IRS policy. The

assessment sheets in which the IRS kept track of AEI's growing tax

liability demonstrate in no uncertain terms that the penalty of

$137,744.36 assessed against Glude represented nothing more than

the total amount of taxes AEI had failed to pay for the years in question. Because Glude was not required to pay an amount over and

above AEI's total tax bill, there is no merit to Sterenbuch's suggestion

that Glude was subjected to a punitive measure.

We are confident that the contract in question is enforceable under

Maryland law. Maryland courts have long recognized"the general

rule that there is contribution among parties to a contract . . . ." See

Baker v. Miles & Stockbridge, 620 A.2d 356, 379 (Md. 1993). This

includes, of course, situations like the case sub judice, where "the parties are bound [to a joint obligation] by a statute [or] by an instrument

. . . ." Id. (citations omitted). Therefore, in Maryland, a right of contribution arises among parties to a contract where such a right was

agreed to by the parties in an instrument, or where a common obligation is imposed by statute.

Although there may be every reason to believe that Maryland

courts would recognize a statutorily imposed right of contribution,

under state law, for federal tax obligations arising under § 6672, see

Lyon v. Campbell, 596 A.2d 1012 (Md. 1991) (recognizing a right of

contribution for state-imposed corporate tax debts arising from a state

tax statute analogous to § 6672), we find it unnecessary to reach that

conclusion. Instead, we hold that, in the case at bar, a right of contribution exists under Maryland law, not by virtue of a statutorily

imposed obligation, but as a result of a signed instrument in which the

parties agreed to share equally in certain liabilities. Because Maryland

courts approve of such contracts, and because we conclude that obligations imposed pursuant to § 6672 are not punitive, we have no diffi-

 11
culty concluding that the parties' contract is enforceable as a matter

of public policy.3

III.

Sterenbuch's appeal raises four additional charges of error, only

two of which merit discussion. For the reasons stated below, we

affirm the district court on both matters.

A. Reinstatement of Time-Barred Action

Sterenbuch argues that Glude's entire cause of action was timebarred and should not have been heard by the district court. That contention is based on the fact that Glude, in filing to reopen his suit in

March of 1995, failed to do so within the thirty day period specified

in the district court's Rule 111.1 dismissal order. Sterenbuch raised

this same argument before the district court pursuant to his motion to

dismiss under Rule 12(b)(6), and the district court rejected it, stating

that "Plaintiff's counsel properly informed the court, five days after

the Rule 111.1 order, that the entire action should not have been dismissed . . . . That notice was entirely sufficient."

Although we are not necessarily persuaded by the district court's

reasoning, a prior decision of this Court provides that Glude's claim

was not time-barred. In Choice Hotels Int'l, Inc. v. Goodwin &

Boone, 11 F.3d 469 (4th Cir. 1993), we held that a dismissal pursuant

to Local Rule 111.1 and its FRCP counterpart, Rule 41(a)(2), is presumed to be without prejudice unless the court's order is "explicit and

clear" in warning the parties that a failure to meet conditions stated

in the order will result in dismissal with prejudice. See id. at 471.

Applying that rule, we held that a Rule 111.1 dismissal subject to the

right of a party to refile "without prejudice . .. within thirty days" was

not sufficient to put a party on notice that a dismissal with prejudice

would result from a failure to refile within the designated time period.

See id. at 471-73. Because the district court's order in Choice Hotels

contained language identical to that used by the court in the present

case, we conclude that any dismissal resulting from Glude's failure

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3 Indeed, we believe public policy is served by requiring Sterenbuch to

share equally in the payment of a debt he helped to create.

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to meet the 30-day refiling deadline was a dismissal without prejudice

only.

B. Issuance of TRO Without Bond

After filing his complaint at the outset of this litigation, Glude

made an application on December 15, 1994, pursuant to Fed. R. Civ.

P. 65, for a temporary restraining order (TRO) to freeze all partnership bank accounts at AEI's parent corporation, SGPF. The district

court granted the TRO on January 9, 1995, without requiring Glude

to post bond as required by Rule 65(c). Sterenbuch argues that the

court's failure to require the posting of bond is reversible error.

We disagree. Although there is no question that the district court's

failure to require the posting of bond was in error, see Md. Dept.

Human Resources v. U.S. Dep't Agric., 976 F.2d 1462, 1483 & n.21

(4th Cir. 1992), Sterenbuch's claim on this issue was mooted by the

district court's order of January 19, 1995, which dismissed Glude's

cause of action pursuant to a tentative settlement agreement and

vacated the TRO. Although Glude's case was eventually reopened,

the record reveals that the TRO was never reissued, and Sterenbuch's

appeal of this issue is moot.

IV.

In summary, we reject all of Sterenbuch's challenges to the district

court's judgment, and affirm the verdict in favor of Glude on his

breach of contract claim. We take no position as to whether Maryland

state courts would recognize a statutory right of contribution for federal tax obligations imposed pursuant to § 6672.

AFFIRMED

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