Court Opinion

ID: 2964664
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:29:07.273659+00
Date Added: 2024-06-11T11:42:58.650949
License: Public Domain

USCA1 Opinion

	

                            United States Court of Appeals
                                For the First Circuit
                                 ____________________

        No. 96-1582

                                  ARNOLD W. VINICK,

                                Plaintiff - Appellant,

                                          v.

                          COMMISSIONER OF INTERNAL REVENUE,

                                Defendant - Appellee.

                                 ___________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                       [Hon. Mark L. Wolf, U.S. District Judge]
                                           ___________________

                                  __________________

                                        Before

                           Stahl and Lynch, Circuit Judges,
                                            ______________
                            and Woodlock,* District Judge.
                                           ______________
                                 ____________________

            Howard R. Palmer with whom Lawrence F. O'Donnell and O'Donnell,
            ________________           _____________________     __________
        O'Donnell & O'Donnell were on brief for appellant.
        _____________________
            Theresa E. McLaughlin, Assistant United States Attorney, with
            _____________________
        whom Loretta C. Argrett, Assistant Attorney General, Donald K. Stern,
             __________________                              _______________
        United States Attorney, and Sarah K. Knutson, Attorney, Tax Division,
                                    ________________
        Department of Justice, were on brief for appellee.
                                 ____________________

                                    April 8, 1997
                                 ____________________

        _____________________
        *Of the District of Massachusetts, sitting by designation.
                      STAHL, Circuit Judge.  Plaintiff-Appellant   Arnold
                      STAHL, Circuit Judge.
                             _____________

            W. Vinick ("Vinick") appeals the grant of summary judgment in

            favor of Defendant-Appellee, Commissioner of Internal Revenue

            ("IRS") with  respect to  the IRS' claim  for unpaid  federal

            withholding  taxes.   We  reverse, in  part,  and remand  for

            further proceedings.

                                      Background
                                      Background
                                      __________

            A.  Statutory Background
            ________________________

                      By  way of  legal context,  we begin  with  a brief

            discussion  of  26  U.S.C.     6672(a),  which  governs  this

            dispute, drawing  primarily from  our decision in  Thomsen v.
                                                               _______

            United States, 887 F.2d 12, 14 (1st Cir. 1989).  The Internal
            _____________

            Revenue  Code  ("the Code")  requires  employers to  withhold

            federal taxes from  employees' wages, see 26  U.S.C.    3102,
                                                  ___

            3402,  and to  hold  such amounts  in  trust for  the  United

            States. See 26 U.S.C.   7501.   Once an employer has withheld
                    ___

            the  taxes, the IRS has  no recourse against  the employee in

            the event of nonpayment.  When an employer fails to remit the

            withheld taxes, the IRS is not without recourse, for the Code

            allows the IRS  to look  beyond the corporate  form and  hold

            certain  agents and  officers of  the  corporation personally

            liable for  any taxes withheld but not paid.  See 26 U.S.C.  
                                                          ___

            6672(a).

                      Title 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 . .  . pay over such  tax . .  .
                      shall,  in  addition  to other  penalties
                      provided by law,  be liable to a  penalty

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                                          3

                      equal  to  the total  amount  of  the tax
                      evaded,   or   not   collected,  or   not
                      accounted for and paid over.

            Section  6672(a) thus  permits the  IRS to  recover the  full

            amount  of delinquent  withholding tax from  any "responsible

            person," i.e., one  required to collect, account  for and pay

            over the taxes, if that individual acted willfully within the

            meaning of the section.  See Thomsen, 887 F.2d at 14.  
                                     ___ _______

            B.  Factual Background 
            ______________________

                      We state the facts  in the light most favorable  to

            Vinick, the party opposing  summary judgment. See Hoeppner v.
                                                          ___ ________

            Crotched  Mountain Rehabilitation  Ctr., 31  F.3d 9,  14 (1st
            _______________________________________

            Cir. 1994).

                      Vinick  is a  certified  public  accountant and  is

            currently  a  partner in  his own  accounting  firm.   He has

            practiced public  accounting for  over thirty years.   Vinick

            became  acquainted with Richard  Letterman, then a practicing

            attorney,  in the early  1970's.  Around  1980 Letterman told

            Vinick  about   the  Jefferson  Bronze   Company  ("Jefferson

            Bronze"), a foundry in  Salem, Massachusetts, and despite its

            less than  stellar financial performance, persuaded  him that

            it would make a good investment.

                       In 1981, Vinick, Letterman and Peter Mayer1 agreed

            to  purchase  the  assets  of   Jefferson  Bronze.    In  the

            transaction, each investor acquired one-third of the company,

                                
            ____________________

            1.  Peter Mayer is Letterman's brother-in-law.

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                                          4

            and pledged the equity in his house as part  of the financing

            package.  Although the record is unclear as to how, Letterman

            became  president, Vinick  had  the title  of treasurer,  and

            Mayer  was given responsibility for the day-to-day management

            of the foundry.

                      Vinick,  a busy  accountant, desired  only to  be a

            passive investor  in Jefferson  Bronze.  Despite  his nominal

            position as treasurer, Vinick  neither saw the company bylaws

            nor  participated  in  any  way  in  the  fiscal  or  general

            management of Jefferson  Bronze.   From 1981  to 1983,  Mayer

            oversaw  the day to  day operations of  Jefferson Bronze, and

            Vinick  did  nothing other  than  prepare  the quarterly  tax

            returns.

                      By  1983, the  company, under  Mayer's stewardship,

            was  performing   poorly  and   losing  money.     That  poor

            performance led  to  several changes  in  Jefferson  Bronze's

            structure.   Mayer "was  dismissed," and Vinick  asked Ronald

            Ouellette, a Jefferson  Bronze employee, to  assume oversight

            of  the  day-to-day operations  of the  foundry.   Vinick and

            Letterman, in  exchange for obtaining the  release of Mayer's

            house  from  the   financing  arrangement,  acquired  Mayer's

            interest in Jefferson Bronze and each became a fifty  percent

            owner.   As part of  the restructuring, Vinick  and Letterman

            secured new  financing in the  amount of  $300,000 which  was

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                                          5

            used  to pay off the  original loan and  for working capital,

            once again pledging each of their houses as collateral.

                      Between 1983  and 1987, Ouellette  continued to run

            Jefferson   Bronze  and  Vinick's  involvement  continued  to

            consist, with  a few  exceptions, of preparing  the quarterly

            tax  returns.   During 1985,  Ouellette informed  Vinick that

            Jefferson  Bronze had  become delinquent  in its  withholding

            taxes.   Vinick  informed Letterman  of the  problem and  all

            three shareholders  agreed to attend a meeting with a revenue

            officer  to resolve  the situation.   Upon  arrival, however,

            Letterman  and Ouellette refused to attend the meeting.  They

            waited outside in  the car  while Vinick alone  met with  the

            revenue  agent and  negotiated  a  payment  plan.   "On  rare

            occasion" during this period,  Vinick also reported Jefferson

            Bronze's poor performance to Letterman and sought suggestions

            for  ways to improve the company's operations.  At some point

            between 1983  and 1987,  apparently because of  the continued

            poor   performance  of  the  company,  Letterman  and  Vinick

            borrowed  $35,000  from  the former  owner.    That debt  was

            secured with personal guarantees.

                      In 1987,  Letterman decided to assume  oversight of

            the  daily operations  of the foundry.   Vinick  continued to

            prepare the quarterly tax returns.   He and Letterman secured

            an additional  $300,000 of  financing, this time  by pledging

            the  assets of the company and their personal guarantees.  As

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                                          6

            a condition of the loan, the  lending bank required Jefferson

            Bronze to  transfer  its checking  account  to the  bank  and

            insisted that both Letterman and Vinick become signatories on

            the  account.   Vinick,  however, never  exercised his  check

            signing authority  nor did  he have  access to  the corporate

            checkbook.   His involvement  in the management  of Jefferson

            Bronze remained minimal.

                      After Letterman took over active  management of the

            company, Vinick  spoke with either Letterman or his wife (who

            served  as bookkeeper)  once every  four to  five weeks.   On

            occasion he would  discuss "the problem of unpaid  taxes" and

            would   urge   the   Lettermans   to   remit   these   taxes.

            Specifically, each time he prepared a quarterly tax return he

            discussed the withholding taxes  with the Lettermans, learned

            whether  or not  the taxes  had been  deposited, and  if not,

            urged  the Lettermans  to make  the deposits.   Each  time he

            raised  the issue with  the Lettermans, they  promised to pay

            the taxes,  and Vinick relied on their assurances.  Beginning

            in  April  1989, Jefferson  Bronze again  fell behind  in its

            withholding tax obligations.

                      In  December  1990,  the  IRS  made  an  assessment

            against Vinick  and Letterman, each in the  amount of $49,129

            for unpaid withholding  taxes for the last  three quarters of

            1989  and the  first two quarters  of 1990.   Vinick paid one

            quarter's worth  of  the  assessment, filed  a  claim  for  a

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                                          7

            refund,  and  upon  IRS  denial,  brought a  refund  suit  in

            district  court.  The  IRS counterclaimed for  the balance of

            the assessment  and moved  for summary judgment  against both

            Letterman and  Vinick.   The district court,  concluding that

            both Vinick and Letterman  were responsible persons who acted

            willfully under    6672(a), granted summary  judgment for the

            IRS.  Vinick alone now appeals.2

                                  Standard of Review
                                  Standard of Review
                                  __________________

                      We review  the award  of summary judgment  de novo.
                                                                 _______

            See Ortiz-Pinero v.  Rivera-Arroyo, 84 F.3d  7, 11 (1st  Cir.
            ___ ____________     _____________

            1996).  Summary judgment  is appropriate in the absence  of a

            genuine  issue of  material fact,  when the  moving party  is

            entitled to judgment as a matter of law.  See Fed. R. Civ. P.
                                                      ___

            56(c).   A  fact is  material when  it has  the potential  to

            affect the outcome of the suit.   See  J. Geils Band Employee
                                              ___  ______________________

            Benefit Plan v.  Smith Barney Shearson,  Inc., 76 F.3d  1245,
            ____________     ____________________________

            1250-51 (1st  Cir.),  cert. denied,  117  S. Ct.  81  (1996).
                                  _____ ______

            Neither   party  may   rely  on  conclusory   allegations  or

            unsubstantiated  denials,  but must  identify  specific facts

            derived  from   the   pleadings,  depositions,   answers   to

            interrogatories,  admissions  and  affidavits to  demonstrate

                                
            ____________________

            2.  The record reflects that in 1992, Letterman was disbarred
            after he pled guilty to four counts of larceny and  one count
            of  embezzlement by  a  fiduciary, charges  all unrelated  to
            Jefferson Bronze.  He received a two-year prison sentence.  

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                                          8

            either the  existence or absence  of an issue  of fact.   See
                                                                      ___

            Fed. R. Civ. P. 56(c) and (e).

                      As in other tax litigation, the person  challenging

            an  assessment under    6672(a) bears  the burden  of proving

            that he is  not a responsible person.  See Caterino v. United
                                                   ___ ________    ______

            States, 794 F.2d 1, 5 (1st Cir. 1986).  Vinick thus bears the
            ______

            ultimate burden  of proving  that    6672(a) does not  impose

            liability on him  for Jefferson  Bronze's unpaid  withholding

            taxes.  See id.  At the summary  judgment stage, however, the
                    ___ ___

            IRS, as the moving party, has the burden of demonstrating the

            absence of a  genuine issue of material fact as  to whether  

            6672(a)  applies and that it deserves judgment as a matter of

            law.    Vinick's  burden,   as  the  party  opposing  summary

            judgment,  remains the same as  any opposing party:   he must

            demonstrate  that disputed  facts preclude  summary judgment.

            See  O'Connor v.  United States,  956 F.2d  48, 50  (4th Cir.
            ___  ________     _____________

            1992).

                                      Discussion
                                      Discussion
                                      __________

                      In granting  summary judgment in favor  of the IRS,

            the  district  court  determined   both  that  Vinick  was  a

            responsible person and that he acted willfully as a matter of

            law.  We consider each of these issues in turn.

            A.  Responsible under   6672(a)
            _______________________________

                      As we  have noted, "[c]ourts  have explicitly given

            the  word 'responsible'  a broad interpretation."   Caterino,
                                                                ________

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                                          9

            794  F.2d at 5.  Specifically, responsibility "is a matter of

            status,  duty,  and authority,"    Thomsen,  887  F.2d at  16
                                               _______

            (internal  quotations and  citations  omitted), aimed  at the

            ultimate determination  of "whether the person  had the power

            to  determine whether the taxes should be remitted or paid or

            had 'the final word as to  what bills should or should not be

            paid and when,'"   Caterino, 794 F.2d at  5 (quoting Adams v.
                               ________                          _____

            United States, 504 F.2d 73, 75 (5th Cir. 1974)).
            _____________

                      We   impose  responsibility   on   "all  with   the

            responsibility   and   authority  to   avoid   the  default,"

            Harrington  v. United States,  504 F.2d 1306,  1312 (1st Cir.
            __________     _____________

            1974), but predicate  our definition of who  is a responsible

            person on the function  of the employee in the  business, and

            not the level  of the office held, see Caterino,  794 F.2d at
                                               ___ ________

            5;  see  also O'Connor,  956 F.2d  at  51 (indicating  that  
                ___  ____ ________

            6672(a) liability must  derive from substance, not form).  As

            the Second Circuit recently stated,    6672(a) "is not  meant

            to  ensnare  those who  have  merely  technical authority  or

            titular  designation,"  but instead  encompasses  those close

            enough to the business to prevent the default.  United States
                                                            _____________

            v. Rem, 38 F.3d 634, 642 (2d Cir. 1994).  At bottom, in order
               ___

            to be  responsible, an  individual must have  had significant

            control  over the  financial  affairs of  the  company.   See
                                                                      ___

            Caterino, 794 F.2d at 5; see also Rem, 38 F.3d at 642; United
            ________                 ___ ____ ___                  ______

            States v.  Carrigan, 31 F.3d 130,  133 (3rd Cir. 1994).   The
            ______     ________

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                                          10

            individual assessed either must have  exercised his authority

            over financial  affairs or  general management, or  must have

            had a duty to do so.  See O'Connor, 956 F.2d at 51.
                                  ___ ________

                      In   the   absence   of   uncontroverted   evidence

            establishing an individual's "precise responsibility"  to pay

            withholding taxes, see Barnett v. Internal Revenue Serv., 988
                               ___ _______    ______________________

            F.2d  1449,  1455 (5th  Cir. 1993),  or  of specific  acts of

            management  or financial decision-making  that would manifest

            the  level of control  necessary for  responsibility, various

            indicia may  establish responsibility under    6672(a).  Such

            indicia  include  the   holding  of  corporate   office,  the

            authority to disburse corporate  funds, stock ownership,  and

            the ability to  hire and  fire employees.   See Thomsen,  887
                                                        ___ _______

            F.2d at 16.

                      The  IRS  has offered  no evidence  suggesting that

            Vinick had  the actual responsibility to  pay the withholding

            taxes.  Indeed, that was Letterman's duty.  As to Vinick, the

            IRS   established   some  of   the   recognized  indicia   of

            responsibility.  During the  quarters in controversy,  Vinick

            held the office of treasurer, prepared the quarterly returns,

            spoke  occasionally with  the Lettermans  about the  business

            (including the  problem of  unpaid taxes), had  check signing

            authority, and had pledged  his personal assets and guarantee

            in order to secure company financing.  See Caterino, 794 F.2d
                                                   ___ ________

            at   5-6   (evaluating  individual's   responsibility  during

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                                          11

            delinquent  quarters); see  also  Barnett, 988  F.2d at  1455
                                   ___  ____  _______

            (same).   From  these indicia  alone,  one might  infer  that

            Vinick was a responsible person.  

                      The   record  in  this  case,  however,  permits  a

            competing inference.   Vinick testified that  from the outset

            of their venture he made it clear to Letterman and Mayer that

            his  role was to be no more  than that of a passive investor.

            During the relevant quarters,  Vinick neither hired nor fired

            anyone, nor  inserted  himself into  the  company  structure,

            initiated change  or made  strategic decisions.   Although he

            technically  possessed  check  writing  authority,  he  never

            possessed  the checkbook, nor did he write any checks.  While

            Vinick did  approach Ouellette to run the  company when Mayer

            was dismissed  and negotiated  a settlement  with the  IRS in

            1985  for  delinquent  withholding  taxes, neither  of  those

            incidents   occurred   during  the   quarters   in  question.

            Letterman, in his deposition, claimed that previous  managers

            had indicated  that Vinick had more  than minimal involvement

            in management.   Letterman  admitted, however, that  after he

            took over Vinick's involvement was minimal.3

                                
            ____________________

            3.  Vinick's situation resembles that of the plaintiff in the
            Fourth  Circuit case O'Connor  v. United States,  956 F.2d 48
                                 ________     _____________
            (4th Cir. 1991).   In O'Connor,  the Fourth Circuit  reversed
                                  ________
            the award of summary judgment for the IRS against a corporate
            vice president who, like Vinick,  averred that the record did
            not establish his responsibility as a matter of law.  See id.
                                                                  ___ ___
            at  52.  The district  court granted summary  judgment on the
            basis that  O'Connor demonstrated  many of the  indicia of  a
            responsible  person:  he was  a founder, fifty percent owner,

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                                          12

                      In short, while the record in this case may contain

            sufficient  evidence  from  which  one  could infer  Vinick's

            responsibility as a matter of fact, "[t]he sufficiency of the

            government's evidence was not the proper test on a motion for

            summary judgment."   Rem, 38 F.3d at  645.  In  reversing the
                                 ___

            district court on this issue we by no means absolve Vinick or

            in any way pass on whether he is or is  not responsible under

              6672(a).4   We  simply conclude  that on  the basis of  the

            evidence before  us, a reasonable jury could find that Vinick

            was not a responsible person.

             C.  Willfulness under   6672(a)
             _______________________________

                      Assuming a jury finds  Vinick a responsible  person

            under   6672(a), a predicate to the question of  willfulness,

            we affirm the district court's conclusion that the undisputed

                                
            ____________________

            officer  and director of the company; he had the authority to
            sign checks; he  had a general familiarity with the financial
            affairs  of the company.  See O'Connor v. United States, 1991
                                      ___ ________    _____________
            WL  64479, at *4 (D. Md.).   In reversing, the Fourth Circuit
            concluded  that  the  absence  of  evidence  suggesting  that
            O'Connor  either  exercised   any  authority  over  financial
            affairs or general management, or was under a duty to  do so,
            precluded the entry  of summary judgment  and left for  trial
            the issue  of O'Connor's actual  level of involvement  in the
            company.  Id. at 50-52.   
                      ___

            4.  Unlike Thomsen,  where we  affirmed the  district court's
                       _______
            grant of a judgment as a matter of law for the IRS, this case
            presents a very different  factual scenario.  In Thomsen,  in
                                                             _______
            addition to  various indicia of responsibility, we identified
            "concrete  indications of Thomsen's  actual authority."   887
            F.2d at  16-17.  Thomsen  affirmatively made the  decision to
            close  the  business and  took  possession  of the  corporate
            books, records and remaining inventory.  See id. at 17.
                                                     ___ ___

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                                          13

            facts establish that  Vinick acted willfully  as a matter  of

            law.

                      Section  6672(a) contemplates  a civil  penalty the

            purpose  of which  is to protect  governmental revenue.   See
                                                                      ___

            Thomsen,  887  F.2d at  17.    Willfulness under     6672(a),
            _______

            therefore, does not depend on the presence of either criminal

            motive or the specific intent to defraud the government.  See
                                                                      ___

            id.    Instead,  an  individual  who  acts with  a  "reckless
            ___

            disregard" of  a known  or obvious  risk  of nonpayment  acts

            willfully.   See id. at 18.  We have recognized three factual
                         ___ ___

            scenarios that  meet this  standard:  (1)  reliance upon  the

            statements  of a person in  control of the  finances when the

            circumstances  show  that  the responsible  person  knew  the

            person to  be unreliable;  (2) failure  to investigate  or to

            correct mismanagement after  having notice  of nonpayment  of

            withholding taxes; and  (3) knowing that  the business is  in

            financial  trouble  and  continuing  to  pay  other creditors

            without  making reasonable  inquiry as  to the status  of the

            withholding taxes.  See id. at 18-19 (internal quotations and
                                ___ ___

            citations omitted).      With respect to the  first scenario,

            a  responsible person  acts with  reckless disregard  when he

            "had knowledge  that the  other  individual had  in the  past

            failed  to perform  adequately with  regard to  the financial

            affairs  of  the  taxpayer  entity."    Id.  at 18  (internal
                                                    ___

            quotation        and        citation        omitted).        
                      Once a 'responsible person' has had clear

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                                          14

                      notice  that  the person  to whom  he has
                      delegated  responsibility for  paying the
                      taxes  has wrongfully failed  to pay them
                      in  the  past, he  continues  to delegate
                      that  responsibility  at  his own  peril.
                      Should the  "responsible person" continue
                      to  delegate, without  taking appropriate
                      measures  to  assure  that the  delegated
                      person will not repeat the dereliction in
                      the future, the subsequent willfulness of
                      the delegatee in once more failing to pay
                      the   taxes  will   be  imputed   to  the
                      "responsible person."  

            Id. at 19.  
            ___

                      The undisputed  facts  establish that  as early  as

            1985 Vinick knew of Letterman's unreliability with respect to

            the  withholding  taxes.    Vinick  admitted  that  Letterman

            refused  to accompany him to  a meeting with  a revenue agent

            after the first delinquency.   Letterman and Ouellette waited

            in the car while Vinick negotiated a payment plan.

                      Vinick also admitted that after Letterman took over

            day-to-day management of Jefferson Bronze, he had discussions

            with  either  Letterman  or  Letterman's  wife  whenever   he

            prepared  a quarterly  return.   On  those occasions,  Vinick

            urged  the Lettermans to pay the taxes and they promised they

            would.   Vinick asserted that  while he had  knowledge of the

            unpaid  taxes, his  absolute  lack of  any  control over  the

            disbursement of funds rendered that knowledge meaningless.

                      While  such knowledge  may not  bear on  Vinick's  

            6672(a) responsibility,  should a jury  find him responsible,

            it  relates directly  to a  proper evaluation  of  whether he

                                         -15-
                                          15

            acted willfully.  Vinick concedes that he knew of Letterman's

            delinquency.   Yet Vinick  relied on Letterman's  promises of

            future payment  without further investigation  even though he

            realized that  the  delinquency  continued.5    Thus,  should

            Vinick be  found to be  a responsible party,  the willfulness

            prong has been met.

                                      Conclusion
                                      Conclusion
                                      __________

                      We reverse the district court's  determination that

            Vinick  was  a responsible  person as  a  matter of  law, but

            affirm the  court's conclusion that  Vinick acted  willfully.

            We remand  this  case  to  the  district  court  for  further

            proceedings  on the  issue of  responsibility, and  note that

            should a jury find Vinick responsible, he acted willfully  as

            a matter of law.  

                      Affirmed in part, reversed in part and remanded.
                      Affirmed in part, reversed in part and remanded.
                      ________________________________________________

                                
            ____________________

            5.  Although Vinick made no arguments, either in his brief or
            at  oral  argument,  specific to  willfulness  separate  from
            responsibility, he could argue that  he did not act willfully
            at least during the first  quarter in which Jefferson  Bronze
            went delinquent.   The  previous events, such  as Letterman's
            1985  refusal  to  meet with  a  revenue  agent  and Vinick's
            knowledge that Letterman, on occasion, subsequently failed to
            pay, necessarily gave Vinick the "knowledge  that [Letterman]
            had in the past  failed to perform adequately with  regard to
            the  financial affairs"  of Jefferson  Bronze.   Thomsen, 887
                                                             _______
            F.2d at 18.  

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